Omni Metals Brief on Merits 10-0381 - Supreme Court of Texas

NO. 10-0381
IN THE SUPREME COURT OF TEXAS
______________________________________________________________________________
OMNI METALS, INC.
Petitioner,
VS.
TRANSCONTINENTAL INS. CO. and
BROWN & BROWN OF TEXAS, INC.
Respondents.
ON APPEAL FROM THE FIRST COURT OF APPEALS
HARRIS COUNTY, TEXAS
OMNI METAL INC.'S BRIEF ON THE MERITS
OF COUNSEL: Mark C. Harwell
Attorney-in-Charge
Cotham, Harwell & Evans SBA No. 09191700
A Professional Corporation 1616 S. Voss, Suite 200
1616 S. Voss, Suite 200 Houston, Texas 77057
Houston, Texas 77057 Telephone: (713) 647-7511
Telephone: (713) 647-7511 Fax: (713) 647-7512
Fax: (713) 647-7512
ATTORNEYS FOR PETITIONER
OMNI METALS, INC.

PETITIONER: OMNI METALS, INC.
COUNSEL:
IDENTITY OF THE PARTIES
Mark C. Harwell
W. Mark Cotham
COTHAM, HARWELL & EVANS, A PROFESSIONAL CORP.
1616 S. Voss, Suite 200
Houston, Texas 77057
(713) 647-7511
(713) 647-7512 fax
mharwell@chetexas.com
RESPONDENT: TRANSCONTINENTAL INS. CO.
COUNSEL:
Russell Bowman
BOWMAN & STELLA
3131 McKinney Ave., Suite 220
Dallas, Texas 75204
(214) 922-0220
(214) 922-0225 fax
David H. Timmins
Stacy R. Obenhaus
Gardere Wynne Sewell LLP
3000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201
(214) 999-3000
(214) 999-4667 fax
ii

RESPONDENT: BROWN & BROWN OF TEXAS, INC. f/k/a POE & BROWN
OF TEXAS, INC.
COUNSEL:
Trial: Melvin L. Smith Appellate: C. Kelvin Adams
DOMINGUE & SMITH Jeffrey T. Nobles
4201 FM 1960 West Kristen W. Kelly
Suite 235 Henry S. Platts, Jr.
Houston, Texas 77068 BEIRNE, MAYNARD & PARSONS LLP
(281) 893-4284 1300 Post Oak Blvd., Suite 2500
(281) 893-3204 fax Houston, Texas 77056
(713) 623-0887
(713) 960-1527 fax
iii

TABLE OF CONTENTS
iv
PAGE
IDENTITY OF THE PARTIES ............................................................................ ii
TABLE OF CONTENTS ....................................................................................... iv
INDEX OF AUTHORITIES ................................................................................... v
STATEMENT OF THE CASE ........................................................................... xiii
STATEMENT OF JURISDICTION ................................................................... xiv
ISSUES PRESENTED .......................................................................................... xvi
STATEMENT OF FACTS ...................................................................................... 1
SUMMARY OF ARGUMENT ............................................................................... 1
ARGUMENT ............................................................................................................ 2
I. THE COURT OF APPEALS HAS MADE A MISTAKE
AS TO THE TIMING AND ANTECEDENT
NATURE OF THE LITIGATION DAMAGES ......................................... 2
II. IN ORDER FOR OMNI METALS TO BE MADE
WHOLE, ITS PRIOR LITIGATION EXPENSES
MUST BE RESTORED ................................................................................ 3
PRAYER ................................................................................................................. 14
CERTIFICATE OF SERVICE ............................................................................ 15

CASES:
INDEX OF AUTHORITIES
v
PAGE
Akin Gump Strauss Hauer & Feld LLP v.
National Development & Research Corp.,
299 S.W.3d 106 (Tex. 2009) ............................................................. xvi, 4, 14
Baja Energy, Inc. v. Ball,
669 S.W.2d 836, 839
(Tex. App.--Eastland 1984, no writ).............................................................. xv
Burnside Air Conditioning and Heating, Inc. v. T.S. Young Corp.,
113 S.W.3d 889,898 (Tex. App.—Dallas 2003, no pet.) .............................. xv
Cupples Coiled Pipe, Inc. v. Esco Supply Co.,
591 S.W.2d 615
(Tex. Civ. App.—El Paso 1979, writ ref‘d n.r.e.) ......................................... xv
Dalton S.S. Corp. v. W.R. Zanes & Co.,
354 S.W.2d 621, 624
(Tex. Civ. App.—Fort Worth 1962, no writ) ................................................ xv
Ed Rachal Foundation v. D’Unger,
117 S. W.3d 348, 357-58
(Tex. App.—Corpus Christi 2003)
rev’d on other grounds, 207 S.W.3d 330 (2006) .......................................... xv
Estate of Arlitt v. Paterson,
995 S.W.2d 713, 721
(Tex. App.--San Antonio 1999, pet. denied) ................................................ xiv
Grossenbacher v. Burket,
427 S.W.2d 595, 597 (Tex. 1968) ................................................................... 3
GXG, Inc. v. Texacal Oil & Gas,
977 S.W.2d 403, 424
(Tex. App.--Corpus Christi 1998, pet. denied) ............................................. xiv

vi
PAGE
In re Koehn,
86 S.W.3d 363, 366
(Tex. App.--Texarkana 2002, orig. proceeding).............................................. 3
Lesikar v. Rappeport,
33 S.W.3d 282, 317
(Tex. App.--Texarkana 2000, pet. denied) ................................................... xiv
Martin-Simon v. Womack,
68 S.W.3d 793, 798-99
(Tex. App. -- Houston [14th Dist.] 2001, pet. denied) .............................. xv, 4
Massey v. Columbus State Bank,
35 S.W.3d 697, 701
(Tex. App.--Houston [1st Dist.] 2000, pet. denied) ..................................... xiv
McCall v. Tana Oil & Gas Corp.,
82 S.W.3d 337, 344 (Tex. App. – Austin, 2001)
(citing Findley), rev’d on other grounds,
104 S.W.3d 80 ............................................................................................. xiv
Nationwide Mut. Ins. Co. v. Holmes,
842 S.W.2d 335, 342
(Tex. App.--San Antonio 1992, writ denied) ............................................... xiv
Peterson v. Dean Witter Reynolds, Inc.,
805 S.W.2d 541, 549
(Tex. App.—Dallas 1991, no writ) ................................................................ xv
Qwest Communications Int'l, Inc. v. AT&T Corp.,
114 S.W.3d 15, 32-33 (Tex. App.--Austin 2003, pet. filed),
rev'd on other grounds, 167 S.W.3d 324 (Tex. 2005) .................................. xiv
Seminole Pipeline Co. v. Broad Leaf Partners, Inc.,
979 S.W.2d 730, 754
(Tex. App.—Houston [14 th Dist] 1998, no pet.) ............................................. 5

vii
PAGE
Standard Fire Ins. Co. v. Stephenson,
963 S.W.2d 81, 90 (Tex. App.--Beaumont 1997, no pet.) ........................... xiv
Texas Beef Cattle Co. v. Green,
883 S.W.2d 415, 430 (Tex. App.--Beaumont 1994),
rev'd on other grounds, 921 S.W.2d 203 (Tex. 1996) .................................. xiv
Transcontinental Ins. Co. v. <strong>Omni</strong> <strong>Metals</strong>, Inc.,
317 S.W.3d 361
(Tex. App. –Houston [1 st Dist.] 2010) ........................................................ xiii
Transp. Ins. Co. v. Moriel,
879 S.W.2d 10, 16 (Tex. 1994) ....................................................................... 5
Van Dyke v. Boswell, O’Toole, Davis & Pickering,
697 S.W.2d 381, 383 (Tex. 1985) ................................................................... 3
OUT OF STATE CASES:
Addy v. Bolton,
257 S.C. 28, 183 S.E.2d 708, 710 (S.C. 1971) .............................................. 12
Atlanta Woman’s Club, Inc. v. Washburne,
215 Ga. App. 201, 450 S.E.2d 239, 241
(Ga. Ct. App. 1994) ......................................................................................... 7
Birkenshaw v. City of Detroit,
110 Mich. App. 500, 313 N.W.2d 334, 338
(Mich. Ct. App. 1981) ..................................................................................... 9
Blair v. Boulger,
336 N.W.2d 337, 340 (N.D. 1983) ................................................................ 11

viii
PAGE
Brochner v. W. Ins. Co.,
724 P.2d 1293, 1300 (Colo. 1986)................................................................... 6
Campus Sweater & Sportswear v. M. B. Kahn Constr. Co.,
515 F. Supp. 64, 110-113 (D.S.C. 1979)
(applying South Carolina law),
aff'd without op., 644 F.2d 877 (4th Cir. 1981) ............................................. 12
Collins v. First Fin. Servs., Inc.,
168 Ariz. 484, 815 P.2d 411, 413-14 (Ariz. App. 1991) ................................. 6
Coopers & Lybrand v. Levitt,
52 A.D.2d 493, 384 N.Y.S.2d 804, 807 (N.Y. App. Div. 1976) ................... 11
Dinkle v. Denton,
68 N.M. 108, 359 P.2d 345, 349-50 (N.M. 1961) ......................................... 11
DuPratt v. Black Hills Land & Abstract Co.,
81 S.D. 637, 140 N.W.2d 386, 389 (S.D. 1966)............................................ 12
Elijah v. Fender,
674 P.2d 946, 951 (Colo. 1984)....................................................................... 7
Fidelity & Cas. Co. of New York v. J.D. Pittman Tractor Co.,
244 Ala. 354, 13 So. 2d 669, 672 (1943) ........................................................ 6
Field v. Jones,
8 So. 2d 711, 714 (La. Ct. App. 1942) ............................................................ 8
Fleck v. KDI Sylvan Pools, Inc.,
981 F.2d 107, 117 (3 rd Cir. 1992) (Pennsylvania law) .................................. 12
Gagnon v. Turgeon,
271 A.2d 634, 635 (Me. 1970) ........................................................................ 8

ix
PAGE
George v. Farmers Ins. Co. of Washington,
106 Wa. App. 430, 23 P.3d 552, 560 (Wash. Ct. App. 2001) ....................... 13
Goldberg v. Mallinckrodt, Inc.,
792 F.2d 305, 309 (2d Cir. 1986) .................................................................. 11
Highlands Underwriters Ins. Co. v. Elegante Inns, Inc.,
361 So. 2d 1060, 1066 (Ala. 1978).................................................................. 6
Hoiness-LaBar Ins. v. Julien Constr. Co.,
743 P.2d 1262, 1274 (Wyo. 1987)................................................................. 13
Hubbard v, Gould,
74 N.H. 25, 64 A.668, 670 (N.H. 1906) ........................................................ 10
In re State Farm Mut. Auto. Ins. Co.,
50 Mich. App. 71, 212 N.W.2d 821, 825
(Mich. Ct. App. 1973) ..................................................................................... 9
Indiana National Life Ins. Co. v. Butler,
186 Ky. 81, 215 S.W. 949, 950 (1919) ............................................................ 8
Jacques v. Manchester Coal & Ice Co.,
78 N.H. 248, 100 A. 47, 48 (N.H. 1916) ....................................................... 10
Jean-Pierre, M.D. v. Plantation Homes of Crittenden Co., Inc.,
350 Ark. 569, 89 S.W.3d 337, 343 (2002) ...................................................... 6
Johnson v. Mercantile Trust Co. Nat’l. Ass’n,
510 S.W.2d 33, 40 (Mo. 1974) ...................................................................... 10
Kadlec Med. Ctr. v. Lakeview Anesthesia Assoc.,
527 F.3d 412 (5 th Cir. 2008) ............................................................................ 8
Langeland v. Farmers State Bank of Trimont,
319 N.W.2d 26, 33 (Minn. 1982) .................................................................... 9

x
PAGE
Lee v. Aiu,
85 Hawaii 19, 936 P.2d 655, 669 (1997)
citing and approving RESTATEMENT § 914(2) ................................................. 7
Liles v. Liles,
289 Ark. 159, 711 S.W.2d 447, 456-57 (1986) ............................................... 6
Macris & Assoc., Inc. v. Neways, Inc.,
2002 Utah App. 406, 60 P.3d 1176, 1179
(Utah Ct. App. 2002) ..................................................................................... 12
Marvel Eng’g Co. v. Matson Driscoll & D’Amico,
150 Ill. App.3d 787, 501 N.E.2d 948, 951
(Ill. App. Ct. 1986) .......................................................................................... 7
Mcosker v. Fed. Ins. Co.,
115 Kan. 626, 224 P. 53, 55 (1924) ................................................................. 8
Meas v. Young,
142 Wis. 2d 95, 417 N.W.2d 55, 57
(Wis. Ct. App. 1987)...................................................................................... 13
Moore v. Morant,
266 S.W.2d 723, 727 (Mo. Ct. App. 1954) .................................................... 10
Nepera Chem., Inc. v. Sea-Land Serv., Inc.,
794 F.2d 688, 697 (D.C. Cir. 1986) ................................................................. 7
Nilson-Newey and Co. v. Ballou,
839 F.2d 1171 (6 th Cir. 1988) .......................................................................... 8
O’Brien v. New England Telephone & Telegraph Co.,
422 Mass. 686, 664 N.E.2d 843 (Mass. 1996) ................................................ 9
Osborne v. Hay,
284 Ore. 133, 585 P.2d 674, 679 (Or. 1978) ................................................. 11

xi
PAGE
Pacific Coast Title Ins. Co. v. Hartford Accident & Indem. Co.,
7 Utah 2d 377, 325 P.2d 906, 907 (Utah 1958) ............................................. 12
Patel v. Anand,
264 Va. 81, 564 S.E.2d 140,144 (Va. 2002) ................................................. 12
Phil Crowley Steel Corp. v. Sharon Steel Corp.,
702 F.2d 719, 721 (8 th Cir. 1983) .................................................................... 9
Prentice v. N. Am. Title Guar. Corp.,
59 Cal. 2d 618, 621, 381 P.2d 645,
30 Cal. Rptr. 821 (1963) .................................................................................. 6
Pullman Standard, Inc. v. Abex Corp.,
693 S.W.2d 336, 340 (Tenn. 1985) ............................................................... 12
Reiner v. Kelley,
8 Ohio App. 3d 390, 457 N.E.2d 946, 952
(Ohio Ct. App. 1983) ..................................................................................... 11
Ritter v. Ritter,
381 Ill. 549, 46 N.E.2d 41 (1943) .................................................................... 7
Sandy Valley Ass’n, Ltd. v. Sky Ranch Owners Ass’n,
117 Nev. 948, 35 P.3d 964, 970 (Nev. 2001) ................................................ 10
Sec. State Bank v. W. R. Johnston & Co.,
204 Okla. 160, 228 P.2d 169, 173 (Okla. 1951) ............................................ 11
St. Luke Evangelical Lutheran Church, Inc. v. Smith,
318 Md. 337, 568 A.2d 35, 39 (1990) ............................................................. 9
State, Dep't of Envtl. Prot. v. Ventron Corp.,
94 N.J. 473, 468 A.2d 150, 166-67 (N.J. 1983) ............................................ 10
State Farm Fire & Cas. Co. v. Pritcher,
546 So. 2d 1060, 1061 n.2 (Fla. 3d DCA 1989) .............................................. 7

xii
PAGE
Stiles v. Morse,
233 Mass. 174, 123 N.E. 615, 617 (Mass. 1919) ............................................ 9
Suitts v. First Sec. Bank of Idaho,
110 Idaho 15, 713 P.2d 1374, 1378 (1985) ..................................................... 7
Tetherow v. Wolfe,
223 Neb. 631, 392 N.W.2d 374, 379 (Neb. 1986) ........................................ 10
Thomason v. Mosrie,
134 W.Va. 634, 60 S.E.2d 699, 706 (W. Va. 1950) ...................................... 13
Turner v. Zip Motors,
245 Iowa 1091, 65 N.W.2d 427, 431 (1954) .............................................. 5, 8
Willard v. Paracelsus Health Care Corp.,
681 So. 2d 539, 544 (Miss. 1996) ................................................................. 10
Wilshire Oil Co. of Texas v. Riffe,
409 F.2d 1277, 1285 (10 th Cir. 1969) .............................................................. 8
STATUTE:
TEX. GOV‘T. CODE § 22.001(a)(2) .......................................................................... xiv
SECONDARY AUTHORITIES:
RESTATEMENT OF TORTS §914 ................................................................................... 5

STATEMENT OF THE CASE
(1) This is a case seeking damages for violations of the Texas Insurance
Code and negligent misrepresentation.
(2) Judge John Donovan signed the judgment.
(3) Judge Donovan presided at the 61 st Judicial District in Harris County.
(4) Petitioner prevailed at the trial.
(5) The parties in the appeal were Transcontinental Ins. Co. and Brown &
Brown of Texas, Inc., Appellants, and <strong>Omni</strong> <strong>Metals</strong>, Inc., Appellee.
(6) The First Court of Appeals presided over the appeal.
(7) The panel consisted of Justices Evelyn Keyes, Laura Higley, and Sam
Nuchia. Justice Keyes wrote for the majority. Justice Nuchia wrote a dissent.
(8) The Court of Appeals‘ decision may be found at: Transcontinental
Ins. Co. v. <strong>Omni</strong> <strong>Metals</strong>, Inc., 317 S.W.3d 361 (Tex. App. –Houston [1 st Dist.]
2010) and is attached to both Transcontinental‘s and Brown & Brown‘s petitions
for review.
(9) On March 20, 2008 a split panel reversed and rendered the judgment
against Petitioner. Petitioner filed a motion for rehearing en banc. On December
17, 2009, the split panel granted a rehearing, withdrew its prior opinion, and issued
a new opinion modifying the judgment and affirmed as modified. Justice Keyes
authored the majority opinion. Justice Nuchia authored a dissent.
xiii

Transcontinental Ins. Co. and Brown & Brown of Texas, Inc. filed motions for
rehearing. The split panel granted the motions and issued a modified opinion on
March 25, 2010. No other motions for rehearing are pending.
STATEMENT OF THE JURISDICTION
Jurisdiction exists pursuant to TEX. GOV‘T. CODE § 22.001(a)(2). This
Petition concerns a legal issue on which the various courts of appeals have issued
conflicting opinions: whether a plaintiff may recover damages for attorney‘s fees
incurred in previous litigation caused by a defendant. Cf. (cases allowing) Qwest
Communications Int'l, Inc. v. AT&T Corp., 114 S.W.3d 15, 32-33 (Tex. App.--
Austin 2003, pet. filed), rev'd on other grounds, 167 S.W.3d 324 (Tex. 2005);
McCall v. Tana Oil & Gas Corp., 82 S.W.3d 337, 344 (Tex. App. – Austin, 2001)
(citing Findley), rev’d on other grounds, 104 S.W.3d 80; Lesikar v. Rappeport, 33
S.W.3d 282, 317 (Tex. App.--Texarkana 2000, pet. denied); Massey v. Columbus
State Bank, 35 S.W.3d 697, 701 (Tex. App.--Houston [1st Dist.] 2000, pet.
denied); Estate of Arlitt v. Paterson, 995 S.W.2d 713, 721 (Tex. App.--San
Antonio 1999, pet. denied); GXG, Inc. v. Texacal Oil & Gas, 977 S.W.2d 403, 424
(Tex. App.--Corpus Christi 1998, pet. denied); Standard Fire Ins. Co. v.
Stephenson, 963 S.W.2d 81, 90 (Tex. App.--Beaumont 1997, no pet.); Texas Beef
Cattle Co. v. Green, 883 S.W.2d 415, 430 (Tex. App.--Beaumont 1994), rev'd on
other grounds, 921 S.W.2d 203 (Tex. 1996); Nationwide Mut. Ins. Co. v. Holmes,
xiv

842 S.W.2d 335, 342 (Tex. App.--San Antonio 1992, writ denied); and Baja
Energy, Inc. v. Ball, 669 S.W.2d 836, 839 (Tex. App.--Eastland 1984, no writ) with
(cases denying) Ed Rachal Foundation v. D’Unger, 117 S. W.3d 348, 357-58 (Tex.
App.—Corpus Christi 2003) rev’d on other grounds, 207 S.W.3d 330 (2006);
Burnside Air Conditioning and Heating, Inc. v. T.S. Young Corp., 113 S.W.3d
889,898 Tex. App.—Dallas 2003, no pet.); Martin-Simon v. Womack, 68 S.W.3d
793, 798-99 (Tex. App. -- Houston [14th Dist.] 2001, pet. denied); Peterson v.
Dean Witter Reynolds, Inc., 805 S.W.2d 541, 549 (Tex. App.—Dallas 1991, no
writ); Cupples Coiled Pipe, Inc. v. Esco Supply Co., 591 S.W.2d 615 (Tex. Civ.
App.—El Paso 1979, writ ref‘d n.r.e.); and Dalton S.S. Corp. v. W.R. Zanes & Co.,
354 S.W.2d 621, 624 (Tex. Civ. App.—Fort Worth 1962, no writ).
xv

ISSUES PRESENTED
<strong>Omni</strong> filed its petition for review conditionally. <strong>Omni</strong> only sought review in
the event that this Court grants either or both of the petitions for review filed by
Brown & Brown of Texas or Transcontinental Insurance Co.
Issue One:
Did the Court of Appeals err by modifying the judgment and deleting the
award of $740,000 of damages that the jury and trial court awarded to Petitioner as
having been caused by Respondents for: ―the reasonable and necessary attorneys‘
fees and expenses incurred by <strong>Omni</strong> in a previous suit if and to the extent that
<strong>Omni</strong> was required to prosecute the previous suit as a consequence of Defendants‘
wrongful conduct?‖
Issue Two:
Did the Court of Appeals err by its holding that attorney‘s fees incurred in a
previously severed case were barred from recovery because they were incurred in
the same case rather than a prior case, which would be inconsistent with this
Court‘s recent decision in Akin, Gump, and the overwhelming weight of American
jurisprudence?
xvi

STATEMENT OF FACTS
The Court of Appeals correctly states the nature and the facts of the case
with one exception. On page 77 the Court of Appeals wrote: ―After the settlement
of <strong>Omni</strong>‘s claims against the other defendants, <strong>Omni</strong>‘s suit against Poe & Brown
and Transcontinental was severed into a separate cause of action and tried ….‖
Actually the trial court severed the cases in 1998. (CR 72, 246). The prior case
settled at the trial on April 13, 1999. (CR 71, PX-67 at Exh. D). Thus, the trial
court severed the cases before the settlement.
SUMMARY OF ARGUMENT
The trial court severed the original suit into the ―fire case‖ (only involving
the non-insurance defendants alleged to have caused or contributed to the fire), and
the ―insurance case‖ (this case), establishing two separate and entirely independent
cases. The jury found that $740,000 of litigation expenses that <strong>Omni</strong> <strong>Metals</strong>
incurred in the prior fire case were caused by Transcontinental and Brown &
Brown. Accordingly, the trial court correctly awarded damages of $740,000. The
Court of Appeals deleted this award apparently under the mistaken belief that the
settlement of the non-insurance case preceded the severance of the cases.
Although there is a split among Texas courts of appeals on the subject of attorneys‘
fees as damages, the majority, and the better reasoned rule of law is that attorneys‘
1

fees caused in prior litigation as a result of a defendant‘s malfeasance are
recoverable as damages.
ARGUMENT
I. THE COURT OF APPEALS HAS MADE A MISTAKE AS TO THE
TIMING AND ANTECEDENT NATURE OF THE LITIGATION
DAMAGES.
The ratio decidendi of the Court of Appeals on this subject was as follows:
Here, the trial court awarded <strong>Omni</strong> its attorney‘s fees
incurred in an earlier stage of the instant litigation, which
was brought initially against the parties allegedly
responsible for the fire and to which appellants were
added. After the settlement of <strong>Omni</strong>‘s claims against the
other defendants, <strong>Omni</strong>‘s suit against Poe & Brown and
Transcontinental was severed into a separate cause of
action and tried and is now the subject of this appeal. The
litigation for which fees were awarded can thus not
properly be styled ―prior litigation.‖ Rather, it is a suit for
recovery of fees incurred in the original cause of action
from which this suit was severed after settlement of the
causes of action brought against the other parties. Thus,
the award violates the prerequisites for recovery of
attorney‘s fees in the absence of a contractual or statutory
provision set out in Turner, namely that the plaintiff must
have incurred attorney‘s fees in the prosecution or
defense of a prior action and that the litigation must have
involved a third party and must not have been brought
against the defendant in the same action in which the fees
are sought. Turner, 385 S.W.2d at 234. We hold that,
under the circumstances of this case, the general rule that
attorney‘s fees may not be recovered unless such
recovery is provided for by statute or by contract between
the parties applies. See Mayfield, 923 S.W.2d at 593.
317 S.W.3d at 400 (emphasis added).
2

The Record plainly shows that the settlement occurred on April 13, 1999.
(PX-67 at Exh. D). The trial court severed the cases in 1998. (CR at 71-72, and 246
―by which it severed all actions against Poe & Brown and Transcontinental from
the actions against the fire-starters.‖) Thus, the Court of Appeals has made a
factual error leading it to an incorrect result. The cases were settled before the
settlement.
Once severed, the severed cases were separate, independent cases.
A severance splits a single suit into two or more independent
actions, each of which can terminate in a separate judgment
that is final and appealable. Van Dyke v. Boswell, O’Toole,
Davis & Pickering, 697 S.W.2d 381, 383 (Tex. 1985). The
parties or claims go out of the original case. Grossenbacher v.
Burket, 427 S.W.2d 595, 597 (Tex. 1968).
In re Koehn, 86 S.W.3d 363, 366 (Tex. App.--Texarkana 2002, orig. proceeding).
Thus, the litigation damages were, by definition, incurred in a ―prior suit‖—not the
same case.
II. IN ORDER FOR OMNI METALS TO BE MADE WHOLE, ITS
PRIOR LITIGATION EXPENSES MUST BE RESTORED.
If the Court agrees that the Court of Appeals made a factual error, this Court
must still decide whether or not litigation expenses are awardable. This is the issue
upon which the various courts of appeals are divided as already detailed in the
Statement of Jurisdiction.
3

Recently, this Court addressed the almost identical issue in Akin Gump
Strauss Hauer & Feld LLP v. National Development & Research Corp., 299
S.W.3d 106 (Tex. 2009). Akin Gump involved the issue of whether prior litigation
expenses could be recovered by a plaintiff in a legal malpractice action. This
Court reversed the Fifth Court of Appeals‘ decision, which had denied the fees on
the authority of Martin-Simon v. Womack, 68 S.W.3d 793, 798-99 (Tex. App. --
Houston [14th Dist.] 2001, pet. denied). Instead, this Court awarded the litigation
expenses on the following basis:
We see little difference between damages measured by
the amount the malpractice plaintiff would have, but did
not, recover and collect in an underlying suit and
damages measured by attorney‘s fees it paid for
representation in the underlying suit, if it was the
defendant attorney‘s negligence that proximately caused
the fees. In both instances, the attorney‘s negligence
caused identifiable economic harm to the malpractice
plaintiff. The better rule, and the rule we adopt, is that a
malpractice plaintiff may recover damages for attorney‘s
fees paid in the underlying case to the extent the fees
were proximately caused by the defendant attorney‘s
negligence.
Akin Gump, 299 S.W.3d at 122.
The Court‘s reasoning in Akin Gump should not be limited to legal
malpractice causes of action. The Court did not make a special rule just targeting
lawyer defendants. Rather the recovery of antecedent litigation expenses is
consistent with the foundational policy of American jurisprudence to ―make the
4

plaintiff whole.‖ Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 16 (Tex. 1994)
(―Compensatory damages are intended to make the plaintiff ‗whole‘ for any losses
resulting from the defendant's interference with the plaintiff's rights.‖) (emphasis
added); Seminole Pipeline Co. v. Broad Leaf Partners, Inc., 979 S.W.2d 730, 754
(Tex. App.—Houston [14 th Dist] 1998, no pet.)(― the object of the law is to make
the plaintiff whole, that is to restore to him fully all that was wrongfully taken,
damaged, or destroyed.‖).
By restoring the award of $740,000 in this case, this Court will not only
correct a factual error, and make <strong>Omni</strong> whole, but it will also bring Texas law fully
in line with the overwhelming weight of American jurisprudence. In 1954, the
Iowa Supreme Court reviewed this subject and wrote, ―there is an abundance of
authority in other jurisdictions, all pointing in the same direction.‖ Turner v. Zip
Motors, 245 Iowa 1091, 65 N.W.2d 427, 431 (1954). This observation is
obviously shared by the American Law Institute, which compiled § 914 of the
RESTATEMENT OF TORTS in an effort to present an unbiased statement of American
jurisprudence confirming that such litigation expenses are appropriate.
<strong>Omni</strong> has reviewed the law of the other states without finding any state that
holds otherwise. Out of 50 states reviewed, <strong>Omni</strong> found no specific authority in 8
states, with the remaining 41 states, and the District of Columbia, all following
expressly or in substance the RESTATEMENT‘S rule. The authorities are: Alabama-
5

-Highlands Underwriters Ins. Co. v. Elegante Inns, Inc., 361 So. 2d 1060, 1066
(Ala. 1978) (Where the insurance broker mistakenly endorsed insurance policy to a
third party, the broker was liable for attorney‘s fees incurred by plaintiff in
reformation action against the insurance company); Fidelity & Cas. Co. of New
York v. J.D. Pittman Tractor Co., 244 Ala. 354, 13 So. 2d 669, 672 (1943)
(Defendant insurance company misrepresented that plaintiff had insurance
coverage. Plaintiff may recover attorneys‘ fees incurred in defending a wrongful
death suit that should have been covered but for the misrepresentation); Arizona--
Collins v. First Fin. Servs., Inc., 168 Ariz. 484, 815 P.2d 411, 413-14 (Ariz. App.
1991) (Recognizes fees recoverable as damages under tort of another exception);
Arkansas--Liles v. Liles, 289 Ark. 159, 711 S.W.2d 447, 456-57 (1986)
(recognizes application of § 914(2) of RESTATEMENT) but cf., Jean-Pierre, M.D. v.
Plantation Homes of Crittenden Co., Inc., 350 Ark. 569, 89 S.W.3d 337, 343
(2002) (not applying Liles to indemnity/contribution claim of medical facility
against physician); California--Prentice v. N. Am. Title Guar. Corp., 59 Cal. 2d
618, 621, 381 P.2d 645, 30 Cal. Rptr. 821 (1963) (recognizing tort of another
exception in allowing plaintiff to recover attorney‘s fees incurred in third party
quiet title action caused by negligent escrow agent); Colorado--Brochner v. W.
Ins. Co., 724 P.2d 1293, 1300 (Colo. 1986) (recognizing tort of another exception
if the party seeking such attorney fees was without fault as to the underlying
6

action); Elijah v. Fender, 674 P.2d 946, 951 (Colo. 1984) (recognizing recovery
for attorney‘s fees when the natural and probable consequence of a wrongful act
has been to involve the plaintiff in litigation with others); District of Columbia--
Nepera Chem., Inc. v. Sea-Land Serv., Inc., 794 F.2d 688, 697 (D.C. Cir. 1986)
(―The District allows a plaintiff in a tort action to recover, as damages, reasonable
attorneys‘ fees incurred in earlier litigation with a third person . . . .‖); Florida--
State Farm Fire & Cas. Co. v. Pritcher, 546 So. 2d 1060, 1061 n.2 (Fla. 3d DCA
1989) (―We believe the Florida cases generally conform to this pattern [referring to
the rule].‖); Georgia--Atlanta Woman’s Club, Inc. v. Washburne, 215 Ga. App.
201, 450 S.E.2d 239, 241 (Ga. Ct. App. 1994) (―The effect of this exception is to
put a plaintiff in the same position he would have occupied had the plaintiff not
been forced to litigate with a third party.‖); Hawaii--Lee v. Aiu, 85 Hawaii 19, 936
P.2d 655, 669 (1997) citing and approving RESTATEMENT § 914(2); Idaho--Suitts
v. First Sec. Bank of Idaho, 110 Idaho 15, 713 P.2d 1374, 1378 (1985) (―It is
generally held that where the wrongful act of the defendant has involved the
plaintiff in litigation with others or placed him in such relation with others as
makes it necessary to incur expenses to protect his interest, such costs and
expenses, including attorney's fees, should be treated as the legal consequences of
the original wrongful act and may be recovered as damages.‖); Illinois--Ritter v.
Ritter, 381 Ill. 549, 46 N.E.2d 41 (1943); Marvel Eng’g Co. v. Matson Driscoll &
7

D’Amico, 150 Ill. App.3d 787, 501 N.E.2d 948, 951 (Ill. App. Ct. 1986) (―Where
the wrongful acts of a defendant involve the plaintiff in litigation with third parties,
plaintiff may recover damages against the wrongdoer, measured by the reasonable
expenses of such litigation, including attorney fees.‖); Iowa--Turner v. Zip Motors,
245 Iowa 1091, 65 N.W.2d 427, 431 (1954) (Follows the RESTATEMENT noting:
―there is an abundance of authority in other jurisdictions, all pointing in the same
direction.‖); Kansas--Mcosker v. Fed. Ins. Co., 115 Kan. 626, 224 P. 53, 55 (1924)
(―Attorneys‘ fees and expenses incurred in good faith by a bank in saving itself
from loss occasioned by fraud . . . may be recovered in an action against the
wrongdoer.‖); Wilshire Oil Co. of Texas v. Riffe, 409 F.2d 1277, 1285 (10 th Cir.
1969) (―where a party was involved in previous litigation with others because of
some wrongful act of the defendant, reasonable compensation for expenses
attributable to the former suit is recoverable where such expenses are the natural
consequences of the defendant‘s wrongful act.‖); Kentucky--Indiana National Life
Ins. Co. v. Butler, 186 Ky. 81, 215 S.W. 949, 950 (1919) (involving attorneys‘ fees
paid in third party litigation resulting from fraud of insurance agent); see also
Nilson-Newey and Co. v. Ballou, 839 F.2d 1171 (6 th Cir. 1988); Louisiana--Kadlec
Med. Ctr. v. Lakeview Anesthesia Assoc., 527 F.3d 412 (5 th Cir. 2008); and Field v.
Jones, 8 So. 2d 711, 714 (La. Ct. App. 1942) (allowing attorneys‘ fees paid in
defense of another suit); Maine--Gagnon v. Turgeon, 271 A.2d 634, 635 (Me.
8

1970) (―Where the wrongful act of a defendant has involved the plaintiff in
litigation with others . . .such costs and expenses, including attorneys‘ fees, must
be treated as the legal consequence of a wrongful action and may be recovered as
damages.‖); Maryland--St. Luke Evangelical Lutheran Church, Inc. v. Smith, 318
Md. 337, 568 A.2d 35, 39 (1990) (―attorney‘s fees may be awarded when . . .the
wrongful conduct of a defendant forces a plaintiff into litigation with a third
party.‖); Massachusetts--O’Brien v. New England Telephone & Telegraph Co.,
422 Mass. 686, 664 N.E.2d 843 (Mass. 1996); Stiles v. Morse, 233 Mass. 174, 123
N.E. 615, 617 (Mass. 1919) (―when the plaintiff has, in consequence of the
wrongful conduct of the defendant, been put to expense in the employment of
counsel, the amount so paid is an element of damage . . . .‖); Michigan--
Birkenshaw v. City of Detroit, 110 Mich. App. 500, 313 N.W.2d 334, 338(Mich.
Ct. App. 1981) (―Michigan courts have recognized that attorney fees incurred in
prior litigation are recoverable as damages . . .‖); In re State Farm Mut. Auto. Ins.
Co., 50 Mich. App. 71, 212 N.W.2d 821, 825 (Mich. Ct. App. 1973) (―reasonable
attorneys‘ fees incurred in prior litigation with ‗a third party—not with the
defendant‘ may be recoverable.‖); Minnesota--Langeland v. Farmers State Bank
of Trimont, 319 N.W.2d 26, 33 (Minn. 1982) (―An exception to this rule arises in
situations in which the defendant‘s wrongful act thrusts the plaintiff into litigation
with a third person.‖); Missouri--Phil Crowley Steel Corp. v. Sharon Steel Corp.,
9

702 F.2d 719, 721 (8 th Cir. 1983) (―this general rule is not applicable when the
attorneys' fees were incurred in collateral litigation: ‗Where . . . the natural and
proximate result of a wrong . . . is to involve the wronged party in collateral
litigation, reasonable attorneys' fees . . . are proper items of damages. ‘‖ citing
Johnson v. Mercantile Trust Co. Nat’l. Ass’n, 510 S.W.2d 33, 40 (Mo. 1974)
quoting State ex. rel. Moore v. Morant, 266 S.W.2d 723, 727 (Mo. Ct. App. 1954);
Mississippi--Willard v. Paracelsus Health Care Corp., 681 So. 2d 539, 544 (Miss.
1996) (―Other than those cases in which the American rule is applicable, we have
allowed attorney's fees only where the wrongful act of the defendant has involved
the plaintiff in litigation with others.‖); Nebraska--Tetherow v. Wolfe, 223 Neb.
631, 392 N.W.2d 374, 379 (Neb. 1986) citing and approving RESTATEMENT §
914(2); Nevada--Sandy Valley Ass’n, Ltd. v. Sky Ranch Owners Ass’n, 117 Nev.
948, 35 P.3d 964, 970 (Nev. 2001) citing and approving RESTATEMENT § 914(2);
New Hampshire--Jacques v. Manchester Coal & Ice Co., 78 N.H. 248, 100 A. 47,
48 (N.H. 1916) (―the plaintiff can recover all the expense of the first litigation from
the defendants, provided carrying on the litigation was under the circumstances the
reasonable thing to do . . . .‖); Hubbard v, Gould, 74 N.H. 25, 64 A.668, 670 (N.H.
1906) (―the expenses reasonably incurred in good faith by Hubbard in litigating the
questions raised by Rogers' claim are a part of his damages, as well as the amount
of his property taken . . . .‖); New Jersey—State, Dep't of Envtl. Prot. v. Ventron
10

Corp., 94 N.J. 473, 468 A.2d 150, 166-67 (N.J. 1983) (Supreme Court held that the
Wolfs could recover from Ventron that portion of their legal expenses that was
incurred as a proximate result of Ventron's fraud pursuant to the "tort of another"
theory); New Mexico--Dinkle v. Denton, 68 N.M. 108, 359 P.2d 345, 349-50
(N.M. 1961); New York--Goldberg v. Mallinckrodt, Inc., 792 F.2d 305, 309 (2d
Cir. 1986) (―under New York law, where the litigation is caused by the wrongful
act of a third party, the person ‗is entitled to recover [from the third party] the
reasonable value of attorneys' fees and other expenses thereby suffered or
incurred.‘") (quoting Coopers & Lybrand v. Levitt, 52 A.D.2d 493, 384 N.Y.S.2d
804, 807 (N.Y. App. Div. 1976)); North Dakota--Blair v. Boulger, 336 N.W.2d
337, 340 (N.D. 1983) (―we believe that sound reasoning as well as sound judgment
supports recognition of some form of the third-party exception. The formulation of
the exception, relevant to the particular facts of this case, which we adopt occurs in
Section 914 of 4 RESTATEMENT OF TORTS 2d.‖); Ohio--Reiner v. Kelley, 8 Ohio
App. 3d 390, 457 N.E.2d 946, 952 (Ohio Ct. App. 1983) (―Restatement of the Law,
Torts 2d, Section 914, correctly states the rule for the award of attorney fees . . .
.‖); Oklahoma—Sec. State Bank v. W. R. Johnston & Co., 204 Okla. 160, 228
P.2d 169, 173 (Okla. 1951); Oregon--Osborne v. Hay, 284 Ore. 133, 585 P.2d
674, 679 (Or. 1978) (―the plaintiff was entitled to recover the expenses incurred in
such previous litigation with a third party . . . as special damages ‗suffered as a
11

consequence‘ of plaintiff's reliance upon the truth of the misrepresentations.‖);
Pennsylvania--Fleck v. KDI Sylvan Pools, Inc., 981 F.2d 107, 117 (3 rd Cir. 1992)
(Pennsylvania law); South Carolina--Campus Sweater & Sportswear v. M. B.
Kahn Constr. Co., 515 F. Supp. 64, 110-113 (D.S.C. 1979) (applying South
Carolina law), aff'd without op., 644 F.2d 877 (4th Cir. 1981); Addy v. Bolton, 257
S.C. 28, 183 S.E.2d 708, 710 (S.C. 1971) (―we conclude that in actions of
indemnity, brought where the duty to indemnify is either implied by law or arises
under contract, and no personal fault of the indemnitee has joined in causing the
injury, reasonable attorneys' fees incurred in resisting the claim indemnified
against may be recovered as part of the damages and expenses.‖); South Dakota--
DuPratt v. Black Hills Land & Abstract Co., 81 S.D. 637, 140 N.W.2d 386, 389
(S.D. 1966); Tennessee--Pullman Standard, Inc. v. Abex Corp., 693 S.W.2d 336,
340 (Tenn. 1985) (―We adopt the prevailing rule . . .‖); Utah--Pacific Coast Title
Ins. Co. v. Hartford Accident & Indem. Co., 7 Utah 2d 377, 325 P.2d 906, 907
(Utah 1958); Macris & Assoc., Inc. v. Neways, Inc., 2002 Utah App. 406, 60 P.3d
1176, 1179 (Utah Ct. App. 2002) (―A well-established exception to this general
rule allows recovery of attorney fees as consequential damages, but only in the
limited situation where the defendant's [wrongful conduct] foreseeably causes the
plaintiff to incur attorney fees through litigation with a third party.‖); Virginia--
Patel v. Anand, 264 Va. 81, 564 S.E.2d 140,144 (Va. 2002) (―a party, required to
12

act in the protection of his interests by bringing or defending an action against a
third person, may recover attorney's fees incurred in that action against the original
entity or person who breached a duty owed . . . .); Washington--George v.
Farmers Ins. Co. of Washington, 106 Wa. App. 430, 23 P.3d 552, 560 (Wash. Ct.
App. 2001) (―allows a plaintiff to recover damages for reasonable expenses
incurred in a prior litigation against a third party when that action was a natural and
proximate consequence of the defendant's wrongful act or omission.‖); West
Virginia--Thomason v. Mosrie, 134 W.Va. 634, 60 S.E.2d 699, 706 (W. Va. 1950)
(―Though expenses of litigation and attorney fees incurred in a tort action for fraud
generally are not recoverable, costs and expenses incurred in collateral litigation
may be recovered when they are a proximate result of the fraud.‖); Wisconsin--
Meas v. Young, 142 Wis. 2d 95, 417 N.W.2d 55, 57 (Wis. Ct. App. 1987) (―where
the wrongful acts of the defendant have involved the plaintiff in litigation with
others, or placed him in such relation with others as to make it necessary to incur
expense to protect his interest, such costs and expense should be treated as the
legal consequences of the original wrongful act.‖); Wyoming--Hoiness-LaBar Ins.
v. Julien Constr. Co., 743 P.2d 1262, 1274 (Wyo. 1987) (―where negligent failure
to provide the agreed bond coverage invoked litigation . . . we find the damages
proximately resulting properly include attorney‘s fees incurred.‖).
Based upon this impressive list of authorities, and this Court‘s endorsement
13

of attorney‘s fees as damages in Akin, Gump, <strong>Omni</strong>‘s award of attorney‘s fees was
incorrectly deleted by the Court of Appeals.
PRAYER
<strong>Omni</strong> respectfully prays for the Supreme Court to grant this petition for
review, and upon review that the judgment be modified to restore the $740,000,
plus interest deleted by the Court of Appeals. Otherwise the Court of Appeals
decision is correct and should be affirmed.
14
Respectfully submitted,
Cotham, Harwell & Evans
A Professional Corporation
/S/Mark C. Harwell
Mark C. Harwell
Texas Bar No. 09191700
1616 S. Voss, Suite 200
Houston, TX 77057
(713) 647-7511
(713) 647-7512 facsimile
Attorneys for <strong>Omni</strong> <strong>Metals</strong>, Inc.

CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing has been
forwarded to the attorneys of record, via U.S. certified mail, return receipt
requested on this ___ th day of December 2010:
Mr. Henry S. Platts, Jr.
Beirne, Maynard & Parsons, L.L.P.
1300 Post Oak Boulevard, 25 th floor
Houston, Texas 77056
Attorney for Brown & Brown of Texas fka
Poe & Brown of Texas, Inc.
Mr. Russell Bowman
Bowman & Stella, PC
3131 McKinney Ave.
Suite 220
Dallas, TX 75204
David H. Timmins
Stacy R. Obenhaus
Gardere Wynne Sewell LLP
3000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201
Attorneys for Transcontinental Ins. Co.
15
/S/Mark C. Harwell
Mark C. Harwell

CASE SUMMARY:
103 F. 841, *; 1900 U.S. App. LEXIS 4699, **
LEXSEE 103 F 841
BANK OF PALO ALTO v. PACIFIC POSTAL TEL. CABLE CO.
PROCEDURAL POSTURE: Plaintiff bank brought
suit against defendant telegram company to recover
money paid out by the bank on a false telegram issued by
the telegram company through the criminal conspiracy of
a bank employee and a telegram employee. The bank
sought compensatory and punitive damages. The telegram
company removed the case to federal court.
OVERVIEW: The bank sought to recover actual damages,
including costs and attorney fees, from the telegraph
company for its employee's wrongful and criminal
act. The court held the company was responsible for the
fraudulent acts of its employee. The court reasoned that
even though the act of the employee exceeded the scope
of his employment, it was an act that would have been
lawful if it had been honest and was committed while he
was engaged in the business assigned to him. The court
further held that it was by reason of such assignment and
the character of the duties he was required to perform
that he was enabled, with the assistance of a confederate,
to commit the fraud upon the bank. The business with
which he was entrusted involved a duty owed by the telegraph
company to the public, a duty that third persons
dealing with the telegraph company in good faith were
warranted in presuming would be faithfully performed.
Although the employee acted in violation of this duty
and his authority, defendant would be held responsible,
on account of its own obligation to the parties dealing
with it.
OUTCOME: The court held that the employer was liable
to the bank.
LexisNexis(R) Headnotes
Torts > Vicarious Liability > Respondeat Superior
No. 12,760
Circuit Court, N.D. California
103 F. 841; 1900 U.S. App. LEXIS 4699
July 11, 1900
Page 1
Torts > Vicarious Liability > Agents
Labor & Employment Law > Employer Liability > Tort
Liability > Direct & Vicarious Liability
[HN1] Liability arises not upon the rule that an agent
acted for the principal in a particular transaction, but
because he is employed by the principal in that character
of business, and is so held out as a person authorized and
fully to be trusted therein. When the agent in such case
does an act which is apparently within the general scope
of his authority, although not so in fact, if the principal
were not held liable for the act, a third person, who had
reason to believe that the agent was reliable, and possessed
authority in the particular matter, from the general
character of his employment, might suffer loss. Hence
the law holds the principal liable, upon the ground that
he, rather than a third person equally innocent, should
suffer.
Torts > Vicarious Liability > Respondeat Superior
Torts > Vicarious Liability > Agents
Labor & Employment Law > Employer Liability > Tort
Liability > Direct & Vicarious Liability
[HN2] The test of a master's responsibility is not the motive
of the servant, but whether that which he did was
something his employment contemplated, and something
which, if he should do it lawfully, he might do in the
employer's name.
Torts > Vicarious Liability > Agents
Business & Corporate Entities > Agency > Authority to
Act
Labor & Employment Law > Employer Liability > Tort
Liability > Direct & Vicarious Liability
[HN3] Where an agent has been clothed by his principal
with power to do an act, in case of the existence of some
fact peculiarly within the knowledge of the agent, and
where the doing of the act is in itself a representation of
the existence of that fact, the principal is estopped from
denying its existence, as against third parties dealing

with the agent in good faith, and in reliance upon the
representation.
Business & Corporate Entities > Agency > Causes of
Action & Remedies > Punitive Damages
Civil Procedure > Remedies > Damages
Torts > Damages > Punitive Damages
[HN4] Exemplary or punitive damages are always penal
in theory, and are only imposed for the sake of punishment,
or by way of example, in addition to compensatory
damages, where the defendant has acted with malice or
guilty intention.
Business & Corporate Entities > Agency > Causes of
Action & Remedies > Punitive Damages
Civil Procedure > Remedies > Damages
Torts > Damages > Punitive Damages
[HN5] Exemplary or punitive damages, being awarded,
not by way of compensation to the sufferer, but by way
of punishment of the offender and as a warning to others,
can only be awarded against one who has participated in
the offense. A principal, therefore, though, of course,
liable to make compensation for injuries done by his
agent within the scope of his employment, cannot be
held liable for exemplary or punitive damages, merely by
reason of wanton, oppressive, or malicious intent on the
part of the agent. Juries sometimes very properly give
what is called "smart money." They are often warranted
in giving vindictive damages as a punishment inflicted
for outrageous conduct. But this is only justifiable in an
action against the wrongdoer, and not against persons
who, on account of their relation to the offender, are only
consequentially liable for his acts, as the principal is responsible
for the acts of his factor or agent.
Business & Corporate Entities > Agency > Causes of
Action & Remedies > Punitive Damages
Civil Procedure > Remedies > Damages
Torts > Damages > Punitive Damages
[HN6] In cases where punitive or exemplary damages
have been assessed, it has been done upon evidence of
such willfulness, recklessness, or wickedness on the part
of the party at fault, as amounted to criminality, which,
for the good of society and warning to the individual,
ought to be punished. If in such cases, or in any case of a
civil nature, it is the policy of the law to visit upon the
offender such exemplary damages as will operate as
punishment, and teach the lesson of caution to prevent a
repetition of criminality, yet damages can not be allowed
where the principal is prosecuted for the tortious act of
his servant, unless there is proof in the cause to implicate
the principal, and make him particeps criminis of his
agent's act. No man should be punished for that of which
he is not guilty. Where the proof does not implicate the
principal, and, however wicked the servant may have
103 F. 841, *; 1900 U.S. App. LEXIS 4699, **
Page 2
been, the principal neither expressly nor impliedly authorizes
or ratifies the act, and the criminality of it is as
much against him as against any other member of society,
it is quite enough that he shall be liable in compensatory
damages for the injury sustained in consequence of
the wrongful act of a person acting as his servant.
Torts > Damages > Compensatory Damages
Torts > Damages > Costs & Attorney Fees
[HN7] Cal. Civ. Code § 3336 (2), providing the measure
of damages for detriment caused by the wrongful
conversion of personal property, includes a fair compensation
for the time and money properly expended in pursuit
of the property.
Torts > Damages > Compensatory Damages
Torts > Damages > Costs & Attorney Fees
[HN8] The principle is not only just in equity, however,
but sound in law, that all the actual damages to which a
party may be put by the fraud of another should be recoverable.
COUNSEL: [**1]
Joseph Hutchinson, for plaintiff.
Lloyd & Wood, for defendant.
OPINIONBY:
MORROW
OPINION:
[*841] MORROW, Circuit Judge. This is an action
at law brought by a California corporation, as plaintiff,
to recover from a New York corporation, as defendant,
(1) a sum of money paid out by the plaintiff upon a
fraudulent telegraphic order sent over the defendant's
wires by an employe of the defendant; (2) the amount
expended by the plaintiff in counsel fees and sundry expenses
incurred in the endeavor to recover the money;
and (3) to obtain punitive damages. The suit was first
brought in the superior court of the state of California for
the county of Santa Clara. Thereafter the cause was
removed to this court upon the petition of the defendant,
stating the diverse citizenship of the parties and the jurisdictional
amount in controversy. The suit was the
outgrowth, as disclosed by the pleadings and proofs, of
the following circumstances: On December 27, 1898, the
plaintiff was carrying on a banking business in the town
of Palo Alto, in this state; and the defendant was conducting
the business of a telegraph company in California,
with offices at Los Angeles, San Francisco, and Palo
Alto, and [**2] other cities and towns. At about noon
of the day mentioned, a telegram was received by the
plaintiff, through the agent of the defendant at Palo Alto,

dated at Los Angeles, Cal., December 27, 1898, [*842]
and reading: "To Bank of Palo Alto: Please pay Harry L.
Cator eight hundred and forty dollars. Waive identification.
We remit to-day. Farmers' and Merchants' Bank."
Several times during the morning a man giving the name
of Harry L. Cator had called at the bank and asked if a
telegraphic order in his favor had been received; and he
had at one time exhibited to the cashier of the defendant
bank a telegram, written upon one of the ordinary blanks
of the defendant, and in the handwriting of the agent of
the defendant at Palo Alto, dated at Los Angeles, Cal.,
December 27, 1898, in these words: "To Harry L. Cator:
Money sent through bank to-day. J. H. Fisher." A few
minutes after the receipt by the defendant of the aforesaid
telegraphic order, the man representing himself as
Cator called at the bank, and was, without further identification,
paid the amount specified in the telegram. The
evidence shows that Cator, after receiving the $840, went
at once to San Francisco, and there [**3] acted in such
a manner as to attract the attention of the police department,
with the result that he was arrested that evening.
On the following day his arrest was reported to the plaintiff.
The plaintiff then made inquiry of the Farmers' &
Merchants' Bank of Los Angeles, and learned that the
telegraphic order on which the money had been paid was
forged. It then instructed its attorney in San Francisco
to take such steps as were necessary to recover the money,
if it could be recovered. The attorney, acting with
the police department, gave considerable attention to the
matter, with the result that a confession was obtained
from Cator that the money had been fraudulently secured
by him, through a conspiracy between himself and one
Minkler, a telegraph operator in the employ of the defendant
at San Francisco. Cator then made an assignment
of the amount still in his possession, some $788, to
the plaintiff. This assignment and the $788 were left in
the hands of the chief of police of San Francisco for
some five or six months, pending a settlement between
the parties. In June, 1899, by agreement, the amount
was turned over to the plaintiff. Various other services
were rendered by [**4] the plaintiff's said attorney in
the endeavor to recover the entire $840, for all of which
services he was paid by the plaintiff the sum of $250.
Plaintiff now seeks to recover the entire sum of $840
paid out upon the fraudulent telegram, with interest; the
sum of $250, counsel fees, as aforesaid; and the further
sum of $28.34, alleged to have been expended in the
pursuit of said money; also, $1,000 by way of punitive
damages, -- aggregating $2,118.34.
The first question to be determined is whether, under
the facts of the case, the telegraph company is responsible
for the wrongful act of its employe in sending the
false telegram. It appears that the defendant was holding
itself out to the public as a telegraph company, and that
the plaintiff bank had dealt with it in that capacity; that a
103 F. 841, *; 1900 U.S. App. LEXIS 4699, **
Page 3
part of its transactions with the defendant consisted in the
paying out by the bank of money upon telegraphic orders
received through the agent of the defendant at Palo Alto.
In the San Francisco office of the defendant one Minkler
was employed as an operator, and, among his duties, he
was authorized to transmit the telegraphic money orders
to operators employed by the defendant in other towns,
[**5] including the one at Palo Alto; these operators
having no knowledge of the origin [*843] of the telegrams,
other than that received from the operators in the
San Francisco office. To the mind of Minkler, an opportunity
was thus presented for fraudulently obtaining
money. He concocted the message with which this suit
is concerned, in simulation of those often passing
through his hands, and transmitted it to the operator at
Palo Alto as a genuine telegram from the Farmers' &
Merchants' Bank of Los Angeles. There was nothing in
the message or in the manner of its transmission to indicate
to the operator there that it was not genuine, and it
was therefore delivered to the plaintiff in the customary
manner. Minkler's accomplice, a man representing
himself as the payee mentioned in the telegram, presented
himself at the bank to receive the money, exhibiting to
the bank officials another telegram, purporting to come
from Los Angeles over the defendant's wires, saying that
the money had been sent that day. Although the telegraphic
order particularly waived identification of the
payee, the cashier of the bank took the precaution to
make inquiries of the telegraph operator at Palo [**6]
Alto as to whether the telegram was all right, and received
a reply in the affirmative. He then paid the
money to the supposed payee mentioned in the telegram.
Plaintiff contends that the defendant is responsible for
these acts of Minkler, under the law as contained in section
2338 of the Civil Code of California. This section
provides that:
"Unless required by or under the authority of law to
employ that particular agent, a principal is responsible to
third persons for the negligence of his agent in the transaction
of the business of the agency, including wrongful
acts committed by such agent in and as a part of the
transaction of such business."
In support of this principle, plaintiff cites the cases
of Bank of California v. W.U. Tel. Co., 52 Cal. 280;
McCord v. Telegraph Co., 39 Minn. 181, 39 N.W. 315, 1
L.R.A. 143; and Elwood v. Telegraph Co., 45 N.Y. 549, 6
Am. Rep. 140. The first of these cases presents a state of
facts very similar to those involved in the case at bar.
The regularly appointed agent of the telegraph company
at Colusa, Cal., employed a man by the name of Crowell
to assist him in his duties. Crowell frequently received
and transmitted dispatches over the [**7] wires of the
company in the place of the regular agent. During the
absence of the agent he sent a false telegram to the Bank

of California, in San Francisco, to pay Charles H. Crowley
$1,200 in gold, signing the telegram, "W. P. Harrington,
Cashier." Harrington was then cashier of the
Colusa County Bank, and frequently sent similar messages
to the Bank of California. Crowell then went to
San Francisco, procured a resident of San Francisco, who
had made his acquaintance in Colusa, to go with him to
the bank and identify him, and secured the money; the
friend identifying him not noticing the difference between
the names Crowley and Crowell. The court held
that, if the fraudulent acts committed by Crowell had
been done by the regularly appointed agent of the company,
the company would have been liable, and that the
principal was equally responsible, whether the placing of
Crowell in charge by the agent was a wrongful act committed
as a part of the transaction of the business, or was
mere negligence, under the requirements of public policy.
[*844] The next case ( McCord v. Telegraph Co.,
39 Minn. 181, 39 N.W. 315, 1 L.R.A. 143) follows the
same rule. There the regularly appointed [**8] telegraph
operator himself forged the telegram and secured
the money. The court held the telegraph company responsible,
under the rule that:
"Where the business with which the agent is intrusted
involves a duty owed by the master to the public or
third persons, if the agent, while so employed, by his
own wrongful act occasions a violation of that duty, or
an injury to the person interested in its faithful performance
by or on behalf of the master, the master is liable
for the breach of it, whether it be founded in contract, or
be a common-law duty growing out of the relations of
the parties.1 Shear. & R. Neg. (4th Ed.) § § 149, 150,
154; Tayl. Corp. (2d Ed.) § 145. And it is immaterial
in such case that the wrongful act of the servant is in
itself willful, malicious, or fraudulent."
The third case ( Elwood v. Telegraph Co., 45 N.Y.
549) was a suit brought to recover damages against the
telegraph company for having paid $10,000 on the faith
of a fraudulent message transmitted to the plaintiffs. It
was not determined as a fact that the operator of the defendant
company was a party to the fraud; it being
claimed by the telegraph company that the wires had
been used by some ouside [**9] party unknown to the
agent, and the fraud thus accomplished. But the court
held that:
"The act was done in the direct course of the employment
of the agent. The agent was placed in the office,
and in the control of the instruments, to use them in
transmitting messages for a compensation. If the agent
performed that duty in a negligent manner, whereby the
plaintiff was injured, the principal is clearly liable.
Transactions of the most important character are daily
103 F. 841, *; 1900 U.S. App. LEXIS 4699, **
Page 4
carried on by means of telegraphic communication, and
the confidence which the public is invited to and does
repose in the care with which the proprietors of these
lines conduct the business is a source of large remuneration
to such proprietors. They incur a corresponding
degree of responsibility, and must be held to the exercise
of such care and caution as it is in their power to employ,
in order to avoid being made the instruments of deception
and fraud."
It is contended by the defendant, on the other hand,
that the act of Minkler was willful, wanton, and criminal,
not committed in the service of the defendant, and not
within the line of Minkler's duty or the scope of his employment,
and therefore that the defendant [**10]
should not be held liable. It is claimed that the California
case cited by plaintiff ( Bank of California v. W.U.
Tel. Co., 52 Cal. 280) is distinguished from the one at
bar, in that the negligence of the regular agent of the telegraph
company in allowing another to transact the
business of the company was the underlying basis of the
action, and that anything said by the court as to the liability
of the company if the fraudulent act had been
committed by the regular agent was wholly outside of the
case, and must be considered as dictum. In support of
this contention the defendant cites a later decision by the
same court, in the case of Stephenson v. Southern Pac.
Co., 93 Cal. 558, 29 Pac. 234, 15 L.R.A. 475, in which it
claims a different rule of law is announced, as follows:
"The rule is, of course, well settled that the master is
civilly liable for the wrongful or negligent act of the
servant committed while in his service, and within the
scope of his employment; that is, in the transaction of the
master's business. And the converse of the rule is
equally well settled, -- [*845] that when a servant acts
without any reference to the service for which he is employed,
and not [**11] for the purpose of performing
the work of his employer, but to effect some independent
purpose of his own, the master is not responsible in that
case for either the act or omission of the servant."
And in substantiation of this statement the court
says:
"The rule of law which makes the master liable to
respond in damages for the act or omission of the servant
'implies that the master will not in any case be liable for
wrongs committed by the servant while not acting within
the scope of his authority. This rule is so reasonable
that the grounds on which it rests need scarcely be suggested.
In all the affairs of life, men are constantly
obliged to act by others, but no one could venture to so
act if the mere circumstance that he employed another to
act for him about any general or particular business made
him an insurer against all wrongs which such person
might possibly commit during the period of such em-

ployment. * * * In other words, if the servant steps
aside from his master's business, for how short a time
soever, to commit a wrong not connected with such
business, the relation of master and servant will be for
the time suspended. 2 Thomp. Neg. 885, 886.'"
Upon the state [**12] of facts presented in that
case, the court decided that the employe committed a
wanton act, entirely without the scope of his authority.
Having reached that decision upon the facts, the application
of the rule of law just quoted was undoubtedly correct.
And, following that order of investigation in the
case at bar, the question arises, was the employe, Minkler,
acting within the scope of his authority when he
committed the act complained of? In the case of Reynolds
v. Witte, 13 S.C. 5, 36 Am. Rep. 678, an agent had
fraudulently misappropriated negotiable collaterals deposited
with him on a loan of his principal's money; and
it was argued that, while masters are responsible for injuries
done by the negligence of their servants while acting
within the scope of their employment, they are never
liable for injuries willfully committed, where the agents
have other purposes than executing their masters' orders.
The court, in discussing the question of the "scope of
agency," said:
"It is difficult to understand upon what ground the
principal should be held liable for the negligence of his
agent, and not for his fraud, where the act is done or
omitted to be done to the very property as [**13] to
which the agency exists, and in the course of the agency.
Fraud by which the property is lost is generally considered
one of the forms of gross negligence. What is the
proper understanding of the phrase 'within the scope of
the agency'? Does 'the scope' include negligence and
exclude fraud? It cannot properly be restricted to what
the parties intended in the creation of the agency; for that
would also exclude negligence, as no agent is appointed
for the purpose of being negligent, any more than for the
purpose of acting fraudulently. The question cannot be
determined by the authority intended to be conferred by
the principal. We must distinguish between the authority
to commit a fraudulent act, and the authority to transact
the business in the course of which the fraudulent act
was committed. Tested by reference to the intention of
the principal neither negligence nor fraud is within 'the
scope of the agency'; but, tested by the connection of the
act with the property and business of the agency, fraud in
taking the very property is as much 'within the scope of
the agency' as negligence in allowing others to take it.
The proper inquiry is whether the act was done in the
course [**14] of the agency, and by virtue of the authority
as agent. If it was, then the principal is responsible,
whether the act was merely negligent or fraudulent."
[*846] The same reasoning is followed in the case
of Dougherty v. Wells, Fargo & Co., 7 Nev. 368, 373,
103 F. 841, *; 1900 U.S. App. LEXIS 4699, **
Page 5
where the plaintiff delivered an old certificate of deposit
to the agent of the express company for the purpose of
having it sent to San Francisco to be renewed, and the
agent fraudulently procured it to be cashed, and appropriated
the money to his own use. The court held that
the express company was liable, for the following reasons:
[HN1] "The liability, however, in such case arises
not upon the rule that the agent acted for the principal in
that particular transaction, but because he is employed by
the principal in that character of business, and is so held
out as a person authorized and fully to be trusted therein.
When the agent in such case does an act which is apparently
within the general scope of his authority, although
not so in fact, if the principal were not held liable for the
act, a third person, who had reason to believe that the
agent was reliable, and possessed authority in the particular
matter, from the [**15] general character of his
employment, might suffer loss. Hence the law holds the
principal liable, upon the ground that he, rather than a
third person equally innocent, should suffer."
Cooley, in his work on Torts (2d Ed.), very tersely
states the rule governing this class of cases, on page 629,
as follows:
[HN2] "The test of the master's responsibility is not
the motive of the servant, but whether that which he did
was something his employment contemplated, and
something which, if he should do it lawfully, he might do
in the employer's name."
Viewing the facts of the case at bar in the light of the
doctrines above enunciated, it is apparent that, although
the act of Minkler in reality exceeded the scope of his
employment, as contemplated by his employer, it was an
act which would have been lawful if it had been honest.
It was committed while he was engaged in and about the
business assigned to him, and it was by reason of such
assignment, and the character of the duties he was required
to perform, that he was enabled, with the assistance
of a confederate, to commit the fraud upon the
plaintiff. The business with which he was intrusted involved
a duty owed by the telegraph company [**16] to
the public, -- a duty which third persons dealing with the
telegraph company in good faith were warranted in presuming
would be faithfully performed. And, although
the defendant's employe acted in violation of this duty
and of his authority, yet the defendant would be held
responsible, on account of its own obligation to the parties
dealing with it. This principle is well stated in Bank
of Batavia v. New York, L.E. & W.R. Co., 106 N.Y. 195,
12 N.E. 433, and cases cited, -- [HN3] that, where an
agent has been clothed by his principal with power to do
an act, in case of the existence of some fact peculiarly
within the knowledge of the agent, and where the doing

of the act is in itself a representation of the existence of
that fact, the principal is estopped from denying its existence,
as against third parties dealing with the agent in
good faith, and in reliance upon the representation. In
the present case the plaintiff bank took the precaution to
make special inquiry of the defendant's agent at Palo
Alto as to the correctness of the telegraphic order in controversy,
and, upon receiving an affirmative reply, relied
upon such representation, [*847] and acted accordingly.
No further [**17] care or caution was obligatory
upon it. If it had telegraphed to the purported sender
of the message at Los Angeles, the telegram would
probably have passed through the hands of the same operator
in San Francisco, and the fraud could have been
repeated. If inquiry by mail had been resorted to, the
acknowledged object of the telegraphic service would be
defeated, as no saving of time would be accomplished.
Under such circumstances as these, if the principal could
secure immunity from the fraudulent acts of its agent, the
confidence and security necessarily reposed in the operations
of telegraph companies would be utterly destroyed,
and their service in transactions of importance be rendered
worthless, as public corporations of that character
would serve as a too ready means of subterfuge for the
weak and criminal minded. Minkler was acting within
the line of his known powers, and any loss arising from
his dishonesty, when acting within the apparent scope of
his agency, should be borne by those who enabled him to
perpetrate the fraud, rather than by those who innocently
suffered. Warren-Scharf Asphalt Pav. Co. v. Commercial
Nat. Bank, 38 C.C.A. 108, 97 Fed. 181, 186.
The next [**18] question relates to the measure of
damages. The plaintiff claims that, in addition to compensation
for the actual loss suffered, it should be
awarded punitive damages. [HN4] Exemplary or punitive
damages are always penal in theory, and are only imposed
for the sake of punishment, or by way of example,
in addition to compensatory damages, where the defendant
has acted with malice or guilty intention. While
the employe of the defendant in the present case is
shown to have acted with intent to defraud in sending the
forged telegram, he is personally punishable for that
crime; and there the punishment must cease, as the defendant
neither authorized nor ratified the employe's act,
and cannot be held liable in exemplary damages, upon
the principle that no person should be punished for that
of which he is not guilty. This question is thoroughly
discussed in the case of Railway Co. v. Prentice, 147
U.S. 101, 107, 13 Sup. Ct. 261, 37 L. Ed. 97, and the rule
there announced has been unvaryingly followed in the
consideration of similar cases. Railway Co. v. Russ, 6
C.C.A. 597, 57 Fed. 822; McGehee v. McCarley, 33
C.C.A. 629, 91 Fed. 462. Mr. Justice Gray said:
103 F. 841, *; 1900 U.S. App. LEXIS 4699, **
Page 6
[HN5] "Exemplary or punitive damages, [**19]
being awarded, not by way of compensation to the sufferer,
but by way of punishment of the offender and as a
warning to others, can only be awarded against one who
has participated in the offense. A principal, therefore,
though, of course, liable to make compensation for injuries
done by his agent within the scope of his employment,
cannot be held liable for exemplary or punitive
damages, merely by reason of wanton, oppressive, or
malicious intent on the part of the agent. * * * In Keene
v. Lizardi, 8 La. 26, 33, Judge Martin said: 'It is true,
juries sometimes very properly give what is called "smart
money." They are often warranted in giving vindictive
damages as a punishment inflicted for outrageous conduct.
But this is only justifiable in an action against the
wrongdoer, and not against persons who, on account of
their relation to the offender, are only consequentially
liable for his acts, as the principal is responsible for the
acts of his factor or agent.'"
Many cases from the various state courts are cited to
the same effect. And, applying this rule to corporations
as well as to individuals, [*848] the early case of Hagan
v. Railroad Co., 3 R.I. 88, 91, is cited, [**20] as
follows:
[HN6] "In cases where punitive or exemplary damages
have been assessed, it has been done upon evidence
of such willfulness, recklessness, or wickedness on the
part of the party at fault, as amounted to criminality,
which, for the good of society and warning to the individual,
ought to be punished. If in such cases, or in any
case of a civil nature, it is the policy of the law to visit
upon the offender such exemplary damages as will operate
as punishment, and teach the lesson of caution to
prevent a repetition of criminality, yet we do not see how
such damages can be allowed where the principal is
prosecuted for the tortious act of his servant, unless there
is proof in the cause to implicate the principal, and make
him particeps criminis of his agent's act. No man should
be punished for that of which he is not guilty. * * *
Where the proof does not implicate the principal, and,
however wicked the servant may have been, the principal
neither expressly nor impliedly authorizes or ratifies the
act, and the criminality of it is as much against him as
against any other member of society, we think it is quite
enough that he shall be liable in compensatory damages
for the injury [**21] sustained in consequence of the
wrongful act of a person acting as his servant."
The only injury that plaintiff, in its banking business,
can have suffered by reason of the detention of its
property, is the expense incurred in its recovery, and the
loss of interest on the amount detained; and therefore the
only damages that could be awarded would be in the
nature of compensatory damages, comprising in amount
the money originally paid out on the fraudulent tele-

graphic order, interest thereon until recovery, and the
outlays in the pursuit of the recovery of the property.
Civ. Code Cal. § 3336. In the latter class of expenditure
the plaintiff includes $250 paid out to its attorney as
compensation for his services in the endeavor to recover
the lost money prior to the commencement of this action.
[HN7] Section 3336, subd. 2, of the Civil Code of California,
providing the measure of damages for detriment
caused by the wrongful conversion of personal property,
includes "a fair compensation for the time and money
properly expended in pursuit of the property." The question
whether this "compensation" may include counsel
fees has not been clearly decided by the state court in its
interpretation [**22] of this section, though in some
instances such fees have been allowed as proper and
necessary expenditures ( McDonald v. McConkey, 57
Cal. 325; Greenbaum v. Martinez, 86 Cal. 459, 25 Pac.
12), even where expended in the prosecution of the ac-
103 F. 841, *; 1900 U.S. App. LEXIS 4699, **
Page 7
tion for damages. [HN8] The principle is not only just
in equity, however, but sound in law, that all the actual
damages to which a party may be put by the fraud of
another should be recoverable. From the evidence in the
case at bar, it is clear that the attorney rendered services
to the plaintiff of the reasonable value of $250; that these
services were largely instrumental in establishing the
guilt of defendant's employe, and in saving the greater
portion of the stolen money for the rightful owner, whoever
that might be adjudged to be. The necessity for
paying such counsel fees arose from the fraud of the defendant,
through its employe, and the payment thereof is
an actual damage the plaintiff has sustained. Under
these circumstances, it is certainly "money properly expended
in pursuit of the property," and recoverable, under
section [**23] 3336 of the Civil Code. Let a
judgment be entered in accordance with this opinion.

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CASE SUMMARY:
106 Wn. App. 430, *; 23 P.3d 552, **;
2001 Wash. App. LEXIS 1151, ***
LEXSEE 106 WASH APP 430
PATRICK J. GEORGE, ET AL., Appellants, v. FARMERS INSURANCE COM-
PANY OF WASHINGTON, Respondent.
No. 46238-5-I
COURT OF APPEALS OF WASHINGTON, DIVISION ONE
PROCEDURAL POSTURE: The Superior Court of
King County (Washington) granted summary judgment
in favor of respondent insurer on appellants' claim seeking
a declaratory judgment that they were entitled to
coverage for a neighbor's injuries under a homeowner's
policy. The appeal followed.
OVERVIEW: Appellants claimed their homeowners'
policy provided liability coverage for injuries sustained
by their neighbor while working on appellants' motor
home. The motor home was used only on an insured location
within the meaning of the policy. The motor home
was not subject to registration during the coverage period
because it was not being driven on the public highways.
Respondent incorrectly denied appellants' claim of coverage,
for the motor home was not a motor vehicle as
defined by the policy. The doctrine of collateral estoppel
did not operate to preclude appellants from arguing that
the vehicle was not subject to motor vehicle registration.
Respondent failed to show as a matter of law that the
ABC rule could not properly be applied in this case. Bad
faith claim was not considered by the lower court, so that
claim was remanded.
OUTCOME: Judgment was reversed. Homeowners'
policy provided appellants with liability coverage for
neighbor's injury. Motor home was not moved from the
insured location and was not subject to registration. Bad
faith claim was remanded. Appellants were not precluded
from seeking extra-contractual damages.
LexisNexis(R) Headnotes
Civil Procedure > Summary Judgment > Summary
Judgment Standard
[HN1] An appellate court may affirm an order granting
summary judgment if there are no genuine issues of ma-
106 Wn. App. 430; 23 P.3d 552; 2001 Wash. App. LEXIS 1151
May 29, 2001, Filed
Page 1
terial fact and the moving party is entitled to judgment as
a matter of law. Wash. Super. Ct. Civ. R. 56(c).
Civil Procedure > Summary Judgment > Summary
Judgment Standard
[HN2] All facts and reasonable inferences must be considered
in the light most favorable to the party resisting
summary judgment.
Civil Procedure > Summary Judgment > Summary
Judgment Standard
[HN3] In reviewing the trial court's decision regarding a
motion for summary judgment, the appellate court must
engage in the same inquiry as the trial court.
Civil Procedure > Summary Judgment > Summary
Judgment Standard
[HN4] A summary judgment may not be granted unless
there is no genuine issue as to any material fact.
Insurance Law > Claims & Contracts > Policy Interpretation
[HN5] The interpretation of an insurance policy is a
question of law, which is reviewed de novo.
Insurance Law > Claims & Contracts > Policy Interpretation
> Reasonable Expectations
[HN6] In construing the language of an insurance policy,
the policy should be given a fair, reasonable, and sensible
construction as would be given to the contract by the
average person purchasing insurance.
Insurance Law > Claims & Contracts > Policy Interpretation
> Contract Interpretation Rules
[HN7] Exclusionary clauses are narrowly construed for
the purpose of providing maximum coverage for the insured.
Insurance Law > Claims & Contracts > Policy Interpretation
> Ambiguous Terms

[HN8] Ambiguous insurance clauses should be construed
against the drafter, particularly when the insurer is attempting
to exclude coverage. Where policy language is
clear and unambiguous and not fairly susceptible to two
different reasonable interpretations, however, courts may
not create an ambiguity.
Insurance Law > Claims & Contracts > Policy Interpretation
> Contract Interpretation Rules
[HN9] The purpose of insurance is to give protection and
it can be presumed that such was the intent of the parties.
Exclusions are contrary to this basic intent, and thus
should not be extended beyond their clear and unequivocal
meaning.
Insurance Law > Claims & Contracts > Policy Interpretation
> Usual & Ordinary Meaning
[HN10] Where terms in an insurance contract are undefined,
they must be given their plain, ordinary, and popular
meaning.
Insurance Law > Claims & Contracts > Policy Interpretation
> Usual & Ordinary Meaning
[HN11] The verb form of "subject" means to put under,
to bring under control or dominion, to make liable, to
cause to undergo or submit to. These are terms of requirement,
obligation and necessity. "Subjectable," on
the other hand, is defined as capable of being made subject.
The term "subject to registration" is, therefore, most
logically construed to mean that, under the law, the vehicle
owner must register the vehicle--not that the owner
could register the vehicle or that the vehicle could be
used in such a way that registration would be required.
Criminal Law & Procedure > Criminal Offenses > Vehicular
Crimes > Unlicensed Operation
[HN12] See Wash. Rev. Code § 46.16.010.
Criminal Law & Procedure > Criminal Offenses > Vehicular
Crimes > Unlicensed Operation
[HN13] Failure to renew an expired registration before
operation on the highways of Washington is a traffic
infraction.
Criminal Law & Procedure > Criminal Offenses > Vehicular
Crimes > Unlicensed Operation
[HN14] Wash. Rev. Code § 46.29.060, the financial
responsibility act, requires a driver of any vehicle of a
type subject to registration under the motor vehicle laws
of this state to provide proof of insurance or financial
security after an injury accident has occurred, failing
which the driver's license will be suspended.
Civil Procedure > Preclusion & Effect of Judgments >
Collateral Estoppel
106 Wn. App. 430, *; 23 P.3d 552, **;
2001 Wash. App. LEXIS 1151, ***
Page 2
[HN15] The elements of collateral estoppel are: (1) identical
issues; (2) a final judgment on the merits; (3) the
party against whom the plea is asserted must have been a
party to or in privity with a party to the prior adjudication;
and (4) application of the doctrine must not work an
injustice on the party against whom the doctrine is to be
applied. The burden of establishing these elements is on
the party asserting the doctrine. All of the elements must
be shown; therefore, if any one element fails the doctrine
does not apply.
Civil Procedure > Preclusion & Effect of Judgments >
Collateral Estoppel
[HN16] Decisions of administrative tribunals may have
preclusive effect under Washington law. When an administrative
agency is acting in a judicial capacity and
resolves disputed issues of fact properly before it which
the parties have had an adequate opportunity to litigate,
the courts have not hesitated to apply res judicata to enforce
repose.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN17] The ABC rule is a rule of equity that allows a
plaintiff to recover damages for reasonable expenses
incurred in a prior litigation against a third party when
that action was a natural and proximate consequence of
the defendant's wrongful act or omission.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN18] The plaintiff must satisfy three elements to establish
this equitable right to attorney fees: (1) a wrongful
act or omission by A toward B; (2) such act or omission
exposed or involved B in litigation with C; and (3)
C was not connected with the wrongful act or omission
of A toward B.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN19] To demonstrate proximate cause under the ABC
rule, the expense of the prior litigation must have been
reasonably incurred, that is, the prior litigation must have
been conducted in good faith and with reasonable
grounds to believe that it would have a successful outcome.
COUNSEL: Steven W. Klug (of Lundberg Kristof Klug
& Torrance), for appellants.
Sidney R. Snyder, Jr. (of Merrick, Hofstedt & Lindsey,
P.S.), for respondent.
JUDGES: Written by: Kennedy. Concurred by: Ellington.
Dissent by: Grosse.

OPINIONBY: KENNEDY
OPINION:
[*433] [**555]
Kennedy, J. -- Patrick and Kolleen George appeal
the summary judgment dismissing their claims against
Farmers Insurance Company of Washington. The
Georges sought a declaratory judgment that their homeowners
policy provided liability coverage for injuries
sustained by their neighbor while doing repairs on the
Georges' motor home, alleged that Farmers denied coverage
in bad faith, and requested attorney fees, costs and
extracontractual damages arising from the denial of coverage.
The Georges' policy excluded coverage for bodily
injuries that arise out of [*434] the "ownership,
maintenance, use, loading or unloading of" a motor vehicle
owned by an insured. But the policy further provided
that [***2] a motorized land vehicle that is "used only
on an insured location and not subject to motor vehicle
registration" is not a "motor vehicle" for purposes of the
exclusion from coverage. During the coverage period,
the Georges' motor home was not moved from the insured
location, and we conclude that it was not subject to
registration during the coverage period because it had not
been driven on the public highways of this state during
that period. Accordingly, the Georges are entitled to a
declaratory judgment that their homeowners policy provided
them with liability coverage for the injury to their
neighbor. The trial court appears not to have reached the
bad faith claim, in view of its dismissal on other grounds.
Accordingly, the summary judgment is reversed and that
claim is remanded for initial consideration by the trial
court. The Georges are not precluded as a matter of law
from seeking extra-contractual damages as a result of the
denial of coverage. In sum, we reverse the entire summary
judgment and remand for such further proceedings
as shall be consistent with this opinion. The Georges are
entitled to reasonable attorney fees incurred below and
for this appeal with respect to [***3] their claim of
coverage.
FACTS
The Georges purchased a homeowners insurance
policy from Farmers Insurance Company of Washington
(Farmers) that was in effect from June 9, 1997 through
June 9, 1998. The policy specifies that bodily injuries
and property damages are not covered if they arise out of
the "ownership, maintenance, use, loading or unloading
of a motor vehicle owned by an insured." Under the policy,
a "motor vehicle" is "a motorized land vehicle, including
a trailer . . . designed for travel on public roads."
However, a motorized land vehicle that is "used only on
an insured location and not subject to motor vehicle reg-
106 Wn. App. 430, *; 23 P.3d 552, **;
2001 Wash. App. LEXIS 1151, ***
Page 3
istration" is not a "motor vehicle" under the policy. Thus,
the policy insured the Georges [*435] against liability
arising out of the ownership, use, or operation of motor
vehicles that were "used only on the insured property and
not subject to registration."
In 1995, prior to obtaining the homeowners policy
from Farmers, the Georges purchased a 1972 Dodge
Sundi motor home. The motor home was not registered
for operation on the public highways at that time, and
had not been registered since 1993. The Georges obtained
a permit from the Department of Licensing [***4]
to move the vehicle from its point of purchase to their
residence. On two occasions, in December of 1995 and
January of 1996, during a period of flooding, the
Georges moved the motor home from their property to a
nearby bridge, without a permit, to protect it from flood
damage. The Georges did not register the motor home at
any time.
It is undisputed that the motor home was not moved
from the Georges' residence after the flooding in January
of 1996, through November 1997, when the accident
underlying this claim occurred.
On November 2, 1997, Mr. George attempted to do
some repair work on the motor home with the aid of his
neighbor, Harvey Howard. Mr. George and Mr. Howard
worked on the engine compartment of the motor home
while the motor home remained at the insured location.
While Mr. Howard stood in front of the motor home, Mr.
George turned the starter switch key and the motor home
lurched forward, injuring Mr. Howard.
Mr. George reported the incident to Farmers, contending
that his homeowners policy provided liability
coverage for Mr. Howard's injuries. According to Mr.
George, Farmers' [**556] adjuster, Shannon Hayes,
advised him that there was "no coverage for any motor
vehicle [***5] accident under [the] policy." Mr. George
claims that Ms. Hayes did not acknowledge that the motor
vehicle exclusion contained in the policy did not pertain
to any "motorized land vehicle used only on an insured
location and not subject to motor vehicle registration."
Ms. Hayes informed Mr. George that she had told
Mr. Howard that the Georges did not have coverage for
the [*436] accident, and that she had instructed Mr.
Howard to file an uninsured motorist claim with his own
automobile insurance company.
Farmers' denial of coverage was confirmed in a letter
dated December 17, 1997, on the asserted basis that
the policy did not apply to "an auto accident" and did not
cover a "motor vehicle owned or operated by . . . an insured."
In January of 1998, after the Georges retained legal
counsel, Farmers agreed to conduct an investigation into

the facts relevant to whether the motor home was included
or excluded from the policy definition of a "motor
vehicle." Farmers' investigation allegedly consisted
solely of obtaining a sworn statement from Mr. George.
In his subsequent deposition, Mr. George testified that
the motor home was never driven away from the
Georges' residence--the insured location--from [***6]
the inception of the one-year coverage period until and
including the date on which Mr. Howard was injured.
Mr. George also disclosed that the motor home had been
driven elsewhere than at the insured location three times
prior to the coverage period: once in 1995, when the
Georges transported it from the point of purchase under a
permit from the Department of Licensing, and twice
without a permit during two floods, once in December
1995, and once in January 1996.
On June 9, 1999, Mr. George received a notice of an
order of suspension from the Department of Licensing.
The notice stated that the Department had received information
that he was the driver of an uninsured vehicle
involved in an accident on November 2, 1997. The notice
further informed Mr. George that his driver's license
would be suspended on August 8, 1999, unless he could
prove, among other things, that he had liability insurance
that was in effect for the involved vehicle.
Mr. George was granted an informal administrative
interview regarding the suspension, which took place on
August 18, 1999. The purpose of the informal interview
was to determine whether the license suspension proceeding
would continue. On September 8, 1999, Department
[***7] of [*437] Licensing hearing officer
L.R. English sent Mr. George's attorney a letter stating,
"It is my belief that Mr. George's motor home is subject
to registration under the motor vehicle laws of this state
(RCW 46.29.060)[.]" The letter further informed Mr.
George, that a "new Order of Suspension with a new
effective date" would be mailed to him, and that he could
request a formal hearing with the Department of Licensing
if he chose to challenge the hearing officer's decision.
Mr. George maintains that, as of the time of this appeal,
the Department of Licensing has not issued a new order
of suspension, and has not afforded him a formal hearing.
On September 14, 1999, the Georges filed a complaint
for declaratory relief in King County Superior
Court, seeking a judgment declaring (1) that their Farmers
homeowners policy provided coverage for Mr. Howard's
injuries, and (2) that Farmers was liable for all
foreseeable damages suffered by the Georges, including
legal expenses incurred enforcing the policy and resisting
the Department of Licensing's license suspension action.
The Georges also averred that they had been denied coverage
in bad faith.
106 Wn. App. 430, *; 23 P.3d 552, **;
2001 Wash. App. LEXIS 1151, ***
Page 4
On January 7, 2000, Farmers [***8] moved for
summary judgment dismissing the Georges' complaint,
contending that the Georges were not entitled to coverage
for Mr. Howard's injuries under the policy. Farmers
argued two grounds in support of their denial of coverage:
(1) the fact that the Georges had driven the motor
home away from the insured location on three occasions
prior to the coverage period meant that it had not been
used "only on the insured location" and was "subject to
motor vehicle registration" and, thus, was not covered
under the policy, and (2) the Georges were collaterally
estopped from claiming that the motor home was not
"subject to motor vehicle registration" within [**557]
the meaning of the policy because the Department of
Licensing hearing examiner issued a "final judgment" to
the contrary, or, in the alternative, that the court should
defer to the hearing examiner's conclusion on the matter.
Farmers also argued that the Georges' bad faith claim
[*438] should be dismissed on summary judgment,
contending that Farmers' conduct had been reasonable.
On February 4, 2000, the trial court dismissed the
Georges' complaint with prejudice and without costs.
The Georges timely appealed the order.
DISCUSSION
Standard [***9] of Review
[HN1] We may affirm an order granting summary
judgment if there are no genuine issues of material fact
and the moving party is entitled to judgment as a matter
of law. CR 56(c); Hutchins v. 1001 Fourth Ave. Assocs.,
116 Wn.2d 217, 802 P.2d 1360 (1991). [HN2] All facts
and reasonable inferences must be considered in the light
most favorable to the nonmoving party. Hansen v.
Friend, 118 Wn.2d 476, 485, 824 P.2d 483 (1992).
[HN3] In reviewing the trial court's decision regarding a
motion for summary judgment, this court must engage in
the same inquiry as the trial court. Wendle v. Farrow,
102 Wn.2d 380, 383, 686 P.2d 480 (1984). [HN4] A
summary judgment may not be granted unless there is no
genuine issue as to any material fact. Id..
Motor Vehicle Exclusion
The policy at issue here excludes bodily injury or
property damage arising out of the use of a motor vehicle
owned or operated by or rented or loaned to an insured.
The policy defines a motor vehicle as:
8. Motor vehicle means:
a. a motorized land vehicle, including
a trailer, semitrailer or motorized bicycle,
designed for travel on public [***10]
roads.

. any other motorized land vehicle
designed for recreational use off public
roads.
c. any vehicle while being towed by
or carried on a vehicle described in 8a.
None of the following is a motor vehicle:
d. a motorized golf cart while used
for golfing purposes.
e. a motorized land vehicle used only
on an insured [*439] location and not
subject to motor vehicle registration.
f. a watercraft, camp, home or utility
trailer not being towed or carried on a vehicle
described in 8a.
Clerk's Papers at 27 (Homeowners Policy).
The parties agree that the only definition relevant
here is 8(e)--"a motorized land vehicle used only on an
insured location and not subject to motor vehicle registration."
We first consider whether the language "used only
on an insured location and not subject to motor vehicle
registration" is ambiguous. Farmers argues that it is not
ambiguous and that it clearly pertains to uses of the vehicle
prior to the period in which the policy was in effect.
Conversely, the Georges argue that the term is ambiguous
and that it would be ordinarily understood to pertain
only to uses of the vehicle during the coverage [***11]
period.
[1, 2][HN5] The interpretation of an insurance policy
is a question of law, which we review de novo. Pub.
Util. Dist. 1 v. Int'l Ins. Co., 124 Wn.2d 789, 797, 881
P.2d 1020 (1994). [HN6] In construing the language of
an insurance policy, the policy should be given a fair,
reasonable, and sensible construction as would be given
to the contract by the average person purchasing insurance.
E-Z Loader Boat Trailers, Inc. v. Travelers Indem.
Co., 106 Wn.2d 901, 907, 726 P.2d 439 (1986) (citing
Morgan v. Prudential Ins. Co. of Am., 86 Wn.2d 432, 545
P.2d 1193 (1976)).
[3-5][HN7] ] Exclusionary clauses are narrowly
construed for the purpose of providing maximum coverage
for the insured. McDonald Indus., Inc. v. Rollins
Leasing Corp., 95 Wn.2d 909, 914-15, 631 P.2d 947
(1981) (quoting 12 GEORGE J. COUCH, CYCLOPE-
DIA OF INSURANCE LAW § 45:125 (2d ed. 1964)).
[HN8] Ambiguous insurance clauses should be construed
against the drafter, particularly when [**558] the insurer
is attempting to exclude coverage. Nationwide Mut.
106 Wn. App. 430, *; 23 P.3d 552, **;
2001 Wash. App. LEXIS 1151, ***
Page 5
Ins. Co. v. Kelleher, 22 Wn. App. 712, 715, 591 P.2d 859
(1979). Where policy language is "clear and unambiguous"
and [***12] not fairly susceptible to two different
reasonable interpretations, however, courts may not create
an ambiguity. Kitsap [*440] County v. Allstate Ins.
Co., 136 Wn.2d 567, 576, 964 P.2d 1173 (1998). (citing
Am. Star Ins. Co. v. Grice, 121 Wn.2d 869, 874, 854
P.2d 622 (1993)). [HN9] But the purpose of insurance is
to give protection and it can be presumed that such was
the intent of the parties. Exclusions are contrary to this
basic intent, and thus should not be extended beyond
their clear and unequivocal meaning. McDonald Indus.,
Inc., 95 Wn.2d 909 at 915, 631 P.2d 947 (citing COUCH
§ 15:80).
[6][HN10] Where terms are undefined, they "must
be given their 'plain, ordinary, and popular' meaning."
Kitsap County, 136 Wn.2d at 576 (quoting Boeing Co. v.
Aetna Cas. & Sur. Co., 113 Wn.2d 869, 877, 784 P.2d
507, 87 A.L.R.4th 405 (1990)).
[7] We conclude that the portion of the definition
here at issue that reads "used only on an insured location"
can only mean during the period of coverage, for
until there is coverage, there can be no "insured location"
for purposes of the policy. Thus we conclude [***13]
that under the plain language of this policy, the Georges'
motor home was used only on an insured location within
the meaning of the policy because it was used only at the
insured location during the policy period. But to be excluded
from the definition of "motor vehicle" a motorized
land vehicle must be both "used only on an insured
location" and "not subject to motor vehicle registration."
And so we examine that clause, as well.
[8] The purpose of the "motor vehicle" exclusion in
the policy is to limit the risks to Farmers during the relevant
coverage period. The policy is silent regarding the
precoverage use or registration status of a "motorized
land vehicle." Indeed, there is no logical or apparent
connection between use or registration status of a motorized
land vehicle before the relevant coverage period and
the risks faced by Farmers during the relevant coverage
period. Because neither precoverage use nor precoverage
registration of a vehicle has any bearing on the risks
borne by the insurer, the average purchaser of insurance
would have no reason to understand the policy to refer to
precoverage use and registration; rather, such a purchaser
of insurance [*441] would fairly and reasonably
[***14] construe the definition to mean use and registration
during the period the policy is in effect. We thus
conclude that both phrases contained in the definition of
what is not a motor vehicle refer to the period of coverage
and not to any earlier time.
[9] That still leaves the inquiry of whether the term
"subject to registration" means "capable" of being regis-

tered, as Farmers contends, or "required" to be registered,
as the Georges contend. According to Webster's
Third New International Dictionary 2275 (1969),
[HN11] the verb form of "subject" means "to put under[,]
. . . to bring under control or dominion[,] . . . to make
liable[,] . . . to cause to undergo or submit to[.]" These
are terms of requirement, obligation and necessity.
"Subjectable," on the other hand, is defined as "capable
of being made subject." Id. The term "subject to registration"
is, therefore, most logically construed to mean that,
under the law, the vehicle owner must register the vehicle--not
that the owner could register the vehicle or that
the vehicle could be used in such a way that registration
would be required. Moreover, to the extent that the
phrase is reasonably susceptible to either meaning,
[***15] it is ambiguous and must be construed against
Farmers.
[10] The parties agree that the Georges' motor home
never left their insured premises during the relevant coverage
period. And, for the reasons stated in the section of
this opinion dealing with Farmers' claim of collateral
estoppel, we conclude that the motor home was not subject
to registration during the coverage period because it
was not being driven on the public highways of this state
during the coverage period. Therefore, Farmers incorrectly
denied the Georges' claim of coverage, for the
Georges' motor home was not a "motor vehicle" as defined
by [**559] the policy. The trial court erred in
granting summary judgment on this issue to Farmers and
in denying the Georges' request for a declaratory judgment
that their homeowners policy provided coverage for
the injury to their neighbor.
Collateral Estoppel
Farmers nevertheless contends that the doctrine of
collateral [*442] estoppel operates to preclude the
Georges from arguing that the vehicle was not subject to
motor vehicle registration under RCW 46.16.010(1), for
the purpose of determining coverage under their insurance
policy because the hearing examiner [***16] concluded
that the Georges' motor home was subject to registration
under RCW 46.29.060.
[HN12] RCW 46.16.010 states,
(1) It is unlawful for a person to operate
any vehicle over and along a public
highway of this state without first having
obtained and having in full force and effect
a current and proper vehicle license
and display vehicle license number plates
therefor as by this chapter provided. Failure
to make initial registration before operation
on the highways of this state is a
misdemeanor, and any person convicted
thereof must be punished by a fine of no
106 Wn. App. 430, *; 23 P.3d 552, **;
2001 Wash. App. LEXIS 1151, ***
less than three hundred thirty dollars, no
part of which may be suspended or deferred.
[HN13] Failure to renew an expired
registration before operation on the highways
of this state is a traffic infraction.
[n1]
Page 6
n1 RCW 46.16.010 has recently been
amended to increase the monetary penalty for a
violation, and the section above quoted has been
reworded slightly. None of the amendments affect
the issue on appeal.
[***17] [11][HN14] RCW 46.29.060, the financial
responsibility act, requires a driver of "any vehicle of
a type subject to registration under the motor vehicle
laws of this state" to provide proof of insurance or financial
security after an injury accident has occurred, failing
which the driver's license will be suspended. The Legislature
intended the financial responsibility act to give
monetary protection to persons injured through the negligent
use of the highways or by the negligent use of the
highways by others. Mut. of Enumclaw Ins. Co. v. Wiscomb,
97 Wn.2d 203, 206, 643 P.2d 441 (1982) (citing
LaPoint v. Richards, 66 Wn.2d 585, 590, 403 P.2d 889
(1965)).
[12, 13][HN15] The elements of collateral estoppel
are well known: (1) identical issues; (2) a final judgment
on the merits; (3) the party against whom the plea is asserted
must have been a party to or in privity with a party
to the prior adjudication; and (4) application of the doctrine
must [*443] not work an injustice on the party
against whom the doctrine is to be applied. Southcenter
Joint Venture v. Nat'l Democratic Policy Comm., 113
Wn.2d 413, 418, 780 P.2d 1282 (1989) [***18] (quoting
Shoemaker v. City of Bremerton, 109 Wn.2d 504,
507, 745 P.2d 858 (1987)). The burden of establishing
these elements is on the party asserting the doctrine. Luisi
Truck Lines v. Util. & Transp. Comm'n, 72 Wn.2d 887,
894, 435 P.2d 654 (1967). All of the elements must be
shown; therefore, if any one element fails the doctrine
does not apply. Southcenter, 113 Wn.2d at 418.
[14][HN16] Decisions of administrative tribunals
may have preclusive effect under Washington law. Luisi
Truck Lines, 72 Wn.2d at 894. "When an administrative
agency is acting in a judicial capacity and resolves disputed
issues of fact properly before it which the parties
have had an adequate opportunity to litigate, the courts
have not hesitated to apply res judicata to enforce repose."
United States v. Utah Constr. & Mining Co., 384

U.S. 394, 422, 86 S. Ct. 1545, 1560, 16 L. Ed. 2d 642,
176 Ct. Cl. 1391 (1966), accord Stevedoring Servs. of
Am., Inc. v. Eggert, 129 Wn.2d 17, 40, 914 P.2d 737
(1996); State v. Dupard, 93 Wn.2d 268, 274, 609 P.2d
961 (1980).
[15] The hearing examiner's opinion [***19] letter
cannot be given collateral estoppel effect because all the
requisite elements of estoppel are not satisfied. First, it is
not at all clear that the hearing examiner addressed the
same issue that is before this court, and that is whether
the motor home was subject to registration, that is, was
required to be registered, even though it was not being
driven on the public highways of this state during the
[**560] relevant time period, that being the period of
coverage under the policy. The vehicle was not required
to be registered under RCW 46.16.010 because it was not
being operated on the highways of this state, and Farmers
has pointed to no other statute that requires a vehicle
to be registered if it is not being operated on our highways.
The hearing examiner was construing a different
statute, RCW 46.29.060, the financial responsibility statute,
under which the driver's license of the driver and
owner of a vehicle "of a type subject to [*444] registration"
under the motor vehicle laws can be suspended if
the vehicle is involved in an injury accident, unless the
vehicle is covered by liability insurance or there is other
proof of sufficient [***20] financial security. Without
so holding, we think it within reason that a vehicle could
be subject to the financial security laws because it is "of
a type subject to registration" insofar as it is designed for
operation on the public highways, and yet not actually be
subject to registration under RCW 46.16.010, and within
the meaning of the homeowners policy here at issue,
because it is not, in fact, being driven on the public
highways at the relevant time. Farmers' policy does not
exclude from the definition of motor vehicles those motorized
land vehicles that are "of a type" subject to registration
but rather those that are in fact subject to registration.
[16] Even if the issues were identical, however, collateral
estoppel still would not be applicable because the
hearing examiner made no final judgment on the merits.
Instead, Mr. George participated in an informal interview
with the hearing examiner who thereafter rendered an
opinion that the license suspension proceeding should go
forward because the financial responsibility laws were
applicable to this accident, and who stated in the opinion
letter that the Department of Licensing would send Mr.
George [***21] a new order of suspension with a new
effective date, and that he could request a formal hearing
with the Department of Licensing. If that formal hearing
has ever taken place, it is not of record in this appeal.
This being so, we need not examine the issue of collateral
estoppel further. Farmers' contention fails.
106 Wn. App. 430, *; 23 P.3d 552, **;
2001 Wash. App. LEXIS 1151, ***
Page 7
Neither are we inclined to give deference to the
hearing examiner's opinion. The examiner's letter contains
a bare legal conclusion that is unsupported by any
legal analysis whatsoever. Moreover, not only is it unclear
whether the examiner was dealing with the same
issue as is before us, but if the examiner was dealing
with the same issue, we disagree with his conclusion for
the reasons stated in this opinion--the Georges' motor
home was not required to be [*445] registered within
the meaning of the Georges' homeowners insurance policy
because it was not being driven on the public highways
of this state during the policy period. Finally, as a
legal conclusion, the hearing examiner's letter is not
properly in evidence for purposes of summary judgment.
Attorney Fees and Extra-Contractual Damages
The Georges contend that the trial court erred in
dismissing their claim for [***22] attorney fees that
they incurred in resisting the license suspension action.
The parties disagree about whether such an action is allowable
under traditional equitable principles, i.e.,
Washington's so-called "ABC rule."
[17, 18][HN17] The ABC rule is a rule of equity
that allows a plaintiff to recover damages for reasonable
expenses incurred in a prior litigation against a third
party when that action was a natural and proximate consequence
of the defendant's wrongful act or omission.
Woodley v. Benson & McLaughlin, P.S., 79 Wn. App.
242, 246, 901 P.2d 1070 (1995). [HN18] The plaintiff
must satisfy three elements to establish this equitable
right to attorney fees: (1) a wrongful act or omission by
A toward B; (2) such act or omission exposed or involved
B in litigation with C; and (3) C was not connected
with the wrongful act or omission of A toward B.
Id. (quoting Manning v. Loidhamer, 13 Wn. App. 766,
769, 538 P.2d 136 (1975)). [HN19] To demonstrate
proximate cause under the ABC rule, the expense of the
prior litigation must have been reasonably incurred, that
is, the prior litigation must have been conducted in good
faith and with reasonable grounds to believe [***23]
that it would have a successful outcome. 22 AM. JUR.
2D Damages § 620 (1988).
[**561] Contrary to Farmers' assertion, the ABC
rule has been applied in the insurance context before. See
Aldrich & Hedman, Inc. v. Blakely, 31 Wn. App. 16, 639
P.2d 235 (1982). Farmers fails to show as a matter of law
that the rule cannot properly be applied in this case. Accordingly,
summary judgment on this issue was improper.
We therefore reverse the trial court's dismissal of the
Georges' claim [*446] for equitable recovery of expenses
incurred in resisting the licensing revocation action.
[19] In addition, as the prevailing party with respect
to the coverage issue, the Georges are entitled to attorney

fees and costs below, as well as on appeal pursuant to
RAP 18.1. Olympic S.S. Co., Inc. v. Centennial Ins. Co.,
117 Wn.2d 37, 53, 811 P.2d 673 (1991).
Finally, the Georges assign error to the trial court's
dismissal of their claim that Farmers improperly conducted
its investigation of their claim of coverage and
ultimately denied coverage in bad faith. It is not clear
from the record whether the trial court ever reached this
claim. We think it likely that it did not, in that the
[***24] court erroneously concluded that there was no
coverage, and the duty to indemnify (as opposed to the
duty to defend) hinges on the insurer's actual liability to
the insured. Hayden v. Mut. of Enumclaw Ins. Co., 141
Wn.2d 55, 64, 1 P.3d 1167 (2000). Accordingly, we reverse
and remand the summary judgment on this claim
and remand for consideration by the trial court.
In sum, the order granting summary judgment to
Farmers dismissing the Georges' complaint is reversed
and remanded for such further proceedings as shall be
consistent with this opinion. The Georges are awarded
their reasonable attorney fees for their appeal of the coverage
issue, in accord with the applicable Rules of Appellate
Procedure.
Ellington, J., concurs.
DISSENTBY: GROSSE
DISSENT:
Grosse, J. (dissenting) --I must part company with
the majority over its interpretation of the phrase "subject
to motor vehicle registration." I see no ambiguity in this
phrase whatsoever. It means that under the law the vehicle
can and must be registered if it is to be used in the
jurisdiction. In the context of legal drafting, the phrase
"subject to" is used to mean that a thing or subject matter
is governed by or predicated on [***25] some other
thing or subject [*447] matter, usually a law, rule, or
provision. And, while a leading legal lexicographer considers
it a redundancy and its use an example of poor
draftsmanship that does not mean it is ambiguous. n2
Moreover, in the context of this insurance policy it is
clear that the phrase is intended to refer to motor vehicles
106 Wn. App. 430, *; 23 P.3d 552, **;
2001 Wash. App. LEXIS 1151, ***
Page 8
of a class and kind that must be registered. This motor
home was such a vehicle.
n2 BRYAN A. GARNER, A DICTIONARY
OF MODERN LEGAL USAGE 840 (2D ED.
1995).
That the owners chose not to register it is of little
moment in the context of this case. What is clear is that
Farmers Insurance Company did not intend to extend
homeowners coverage to motor vehicles of any kind unless,
and only unless, the specific exceptions applied.
Coverage extends only to those vehicles not of the class
and kind that can be registered, and only if they are used
on the insured location. In the State of Washington the
best example might be that of farm vehicles. They are
not subject to motor vehicle [***26] registration. If
they are used only on the insured location they would
appear to be covered. This is a perfectly rational limitation
on exposure by the underwriters. The range of possible
activities is limited, as is the scope of the population
put at risk by that operation. As the facts of this case
illustrate, there is a greater risk with regard to motor vehicles
subject to registration. They are of the kind that
can be and normally are used on the public highways.
Frequently they are used even if not registered. And their
use entails greater risk given their nature.
From my perspective the above analysis would end
this case. There is no need to discuss potential problems
with the second part of the exception limiting coverage
to [**562] vehicles used only on the insured location.
However, I will note my agreement with the majority
that at the very least this means use during the policy
period. However, I might go even further and not allow
this restriction to bar incidental use off the insured premises
in case of an emergency putting the property at issue
at risk, such as a flood, or a use necessary to the principal
use such as operating the [*448] farm tractor on a
neighbor's land for purposes [***27] of accessing the
insured premises. But that is not this case.
I would affirm.

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110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
55 of 179 DOCUMENTS
Richard O. SUITTS and Kathryn W. Suitts, husband and wife, Plaintiffs-Appellants,
v. FIRST SECURITY BANK OF IDAHO, N.A., W.E. McMurtrey and Pauline M.
McMurtrey, husband and wife, Defendants-Respondents
SUBSEQUENT HISTORY: [***1]
As Modified on Denial of Rehearing December 20,
1985.
PRIOR HISTORY:
Appeal from the District Court of the Fourth Judicial
District, Elmore County. Honorable Jesse R. Walters,
District Judge, and John R. Sellman, Magistrate Judge.
Appeal from a district court decision granting partial
summary judgment and from a jury verdict in magistrate
court in favor of defendants.
DISPOSITION: Reversed and remanded.
LexisNexis(R) Headnotes
COUNSEL:
James A. Bevis of Manweiler, Bevis & Cameron,
Boise, for plaintiffs-appellants.
Perce Hall and Jay Friedly argued, of Hall & Friedly,
Mountain Home, for defendant-respondent First Sec.
Bank of Idaho, N.A.
Loren C. Ipsen of Moffatt, Thomas, Barrett & Blanton,
Chartered, Boise, for defendants-respondents
McMurtreys.
JUDGES:
Bistline, Justice. Donaldson, C.J., and Huntley, J.,
concur. Bakes, Justice, dissenting. Shepard, J., concurs.
OPINIONBY:
BISTLINE
OPINION:
No. 14707
Supreme Court of Idaho
110 Idaho 15; 713 P.2d 1374; 1985 Ida. LEXIS 538
September 27, 1985
[*16] [**1375]
Page 1
The present case finds its way to this Court through
a long and circuitous route. Historical data as to the
parties and much of the facts herein are found in Suitts v.
First Security Bank of Idaho, N.A., 100 Idaho 555, 602
P.2d 53 (1979) (Suitts I), and need not be repeated here.
In Suitts I, in reversing [***2] a summary judgment
granted in favor of defendants McMurtreys, the
Court stated the following:
We conclude that the trial court erroneously
granted summary judgment to the
McMurtreys on the ground that the operation
of the escrow was stayed pursuant to
I.C. § § 13-208 and 13-211 during the
pendency of the appeal. The
McMurtreys, absent a statutory stay,
could have protected themselves against
transfer of the property in question to a
bona fide purchaser during the pendency
of the appeal by filing a lis pendens.
Suitts I, supra, at 559, 602 P.2d at 57.
As to the defendant Bank, in reversing summary
judgment, the Court stated the following:
We are persuaded that the bringing of an
interpleader or similar affirmative action
by the escrow holder was necessary to
invoke the protection of the exculpatory
clause in question. The scant record before
us at this stage indicates there were
not sufficient affirmative steps taken by
the bank as escrow holder to actuate the
clause. Summary judgment therefore

should not have been granted. Suitts I,
supra, at 561, 602 P.2d at 59.
Following remand to the district court, Judge Walters
framed the issues to be litigated [***3] as follows:
[Suitts v. First Security Bank, supra] reversed
the trial court's prior award of
summary judgment to the defendants on
the issue of liability. The case is now
pending for trial upon the issue of the nature
and amount of damages allegedly
[*17] [**1376] suffered by the plaintiffs
as a result of the failure of the defendants
McMurtreys to file a lis pendens
to protect their interest in the subject
property, and the failure of the Bank to
file an interpleader action or take some
other similar affirmative course of action
for its own protection, while the matter
was in litigation on appeal. See Suitts v.
First Security Bank, supra. Memorandum
Decision, Judge Walters, September 4,
1980, pp. 1-2.
In that Memorandum Decision also granted was the
defendants' motion for partial summary judgment as to
the Suitts' claim for loss of profits and emotional distress,
and denied was the Suitts' motion to amend their complaint
to include a new cause of action sounding in tort
and to allege punitive damages. The Suitts prior to trial
dismissed their attorney and continued pro se.
Trial of the remaining issues was remanded to the
magistrate's division. [***4] The reason for this is set
forth in Part IV below. The primary issue to be tried
was limited to a determination of damages incurred by
the Suitts in litigation due to the allegedly wrongful act
of respondents in placing the appellants in litigation with
others, and causing them to incur expenses for the protection
of their interests. See Memorandum Decision, p.
3. The jury returned a verdict against the Suitts, finding
in favor of both defendants First Security Bank and
McMurtreys. In addition, Judge Sellman awarded First
Security Bank costs and attorney's fees in the sum of $
5,982.43. This appeal followed.
The Suitts have alleged error on appeal with regard
to the following issues: (1) the jury instructions given by
Judge Sellman; (2) the summary judgment granted by
Judge Walters on the issues of lost profits and emotional
harm; (3) Judge Walters' denial of leave to the Suitts to
file a supplemental complaint; and (4) Judge Sellman's
award of costs and attorney's fees to First Security Bank.
We consider these issues in turn.
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
I.
Page 2
The Suitts first allege that the partial summary
judgment entered by Judge Walters on October 9, 1980,
was improper and should be reversed. [***5] It is, of
course, axiomatic that the appellant is entitled to have the
summary judgment reversed if there exists any genuine
issue of material fact as to a question upon which the
summary judgment was initially awarded. I.R.C.P.
56(c). We consider, then, in turn the issues upon which
the district court awarded summary judgment.
A.
Suitts first complains of the district court's award of
summary judgment on the question of lost profits. It is
well-established that "[d]amages for loss of earnings or
profits must be shown with reasonable certainty and that
compensatory awards based upon speculation or conjecture
will not be allowed." Rindlislaker v. Wilson, 95
Idaho 752, 761, 519 P.2d 421, 430 (1974). In its finding
that an award of summary judgment was proper on this
issue, the district court stated the following:
Counsel have also briefed and argued
the issue of whether the plaintiff can recover
damages for 'lost profits' due to the
unavailability of the property being purchased,
for resale. It would appear appropriate
at this time for the Court to dispose
of that issue also, pursuant to Rule 56(d)
I.R.C.P.
In response to a searching and exhaustive
inquiry by the defendant's [***6]
counsel, the plaintiff Richard O. Suitts
was able to testify in his deposition that
he did not lose any sales or prospective
sales of the subject property from which
he could have made a profit during the 14
month delay in releasing the documents
from escrow. Neither the contract between
the buyer and the seller, nor the affidavits,
answers to interrogatories, or
answers to pleadings in this matter establish
that either the plaintiff or the defendants
contemplated at the time the contract
was entered into, that the plaintiff expected
to realize any profits or [*18]
[**1377] income as a result of the consummation
or satisfaction of the contract.
Absent such a contemplation, loss of
profits are not recoverable. Traylor v.
Henkles [Henkels] and McCoy, Inc., 99
Idaho 560, 585 P.2d 970 (1978); Clark v.
International Harvester Co., 99 Idaho
326, 581 P.2d 784 (1978). 22 Am.Jur.2d
Damages, Sec. 174, pg. 246-248.

This is especially so where the alleged
loss of profits occur out of collateral
or subordinate agreements arising or entered
into subsequent to the primary contract
in question. 22 Am.Jur.2d Damages,
Sec. 61-62, pg. 93-97. It further appears
that because [***7] the plaintiff
did not in fact have any firm contracts to
resell the property to gain the alleged lost
profits about which he now complains
(even if such resales had been contemplated
by the parties) the absence of such
contracts would allow any compensatory
award therefor to be made solely upon
speculation and conjecture, which is improper.
Rindlisbaker v. Wilson, 95 Idaho
752, 519 P.2d 421 (1974); Patino v.
Grigg and Anderson Farms, 97 Idaho
251, 542 P.2d 1170 (1975).
The deposition of the plaintiff leaves
no genuine issue of material fact in dispute
regarding his right to recover damages
assessable as lost profits and summary
judgment will therefore be granted
on that issue. Memorandum Decision,
R., pp. 243-44.
Based upon our review of Mr. Suitts' deposition, n1
we agree with the district court that the requisite reasonable
certainty was not shown and that any conceivable
jury verdict would have been based solely upon impermissible
conjecture. Accordingly, we affirm the district
court's award of summary judgment on the issue of lost
profits.
[***8]
B.
n1 See Appendix A.
Suitts next alleges error in the district court's award
of summary judgment against his claim for damages for
mental suffering, anxiety, anguish, or emotional distress.
His claim for emotional distress was asserted as part of
the general damages flowing from the alleged breach of
contract rather than in connection with the independent
torts of negligent or intentional infliction of emotional
distress.
This issue is controlled by our recent decision in
Brown v. Fritz, 108 Idaho 357, 699 P.2d 1371 (1985),
wherein this Court held that "when damages are sought
for breach of a contractual relationship, there can be no
recovery for emotional distress suffered by a plaintiff.
If the conduct of a defendant has been sufficiently out-
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
Page 3
rageous, we view the proper remedy to be in the realm of
punitive damages." Id., at 363, 699 P.2d at 1377. Accordingly,
we affirm the district court.
II.A.
We next focus our examination on the instructions
submitted to the jury by Judge Sellman. In the present
case, Mr. Suitts, acting pro se, objected only to Instruction
No. 14 -- and then only on the basis that it was difficult
for the jury to understand. Instruction No. 14 provided
as follows: [***9]
If it was reasonably foreseeable to the
defendants at the time that the
Suitts/McMurtrey contract was made that
failure to timely deliver the documents
from escrow would involve the plaintiffs
in litigation with purchasers such as Porter
and Clydean Criner, then the plaintiffs
are entitled to recover the attorney's fees
and costs they incurred in the
Criner/Suitts lawsuit. However, if it was
not reasonably foreseeable to the defendants
at the time the Suitts/McMurtrey
contract was made that failure to timely
deliver the documents from escrow would
involve the plaintiffs in litigation with
purchasers such as Mr. and Mrs. Criner,
then the plaintiffs are not entitled to recover
damages.
The gravamen of appellants' objection to the foregoing
instruction was that, as stated, [*19] [**1378] the
instruction may cause confusion among the jurors.
Judge Sellman, however, overruled appellants' objection,
pointing out that Instruction No. 14 was not only
a correct statement of the law as written, but that when
read in conjunction with Instruction No. 13, it could not
realistically be misunderstood. If the court's instructions,
considered as a whole, fairly and adequately
[***10] present the issues and state the applicable law,
then no error is committed. See McBride v. Ford Motor
Co., 105 Idaho 753, 673 P.2d 55 (1983); Pacific Northwest
Pipeline Corp. v. Waller, 80 Idaho 105, 326 P.2d
388 (1958).
The trial court's jury Instruction No. 13 provided as
follows:
It is generally held that where the
wrongful act of the defendant has involved
the plaintiff in litigation with others
or placed him in such relation with
others as makes it necessary to incur expenses
to protect his interest, such costs

and expenses, including attorney's fees,
should be treated as the legal consequences
of the original wrongful act and
may be recovered as damages.
It is our view that Instruction No. 14 is clear and not
confusing, both when considered alone and in conjunction
with Instruction No. 13. Though appellants argue
that the instruction incorrectly limited the question of
foreseeability to that of litigation with the Criners, rather
than foreseeability of litigation involving the resale of
the land in question, we must disagree. Instruction No.
13 speaks of "litigation with purchasers such as Porter
and Clydean Criner." The clear import of such language
[***11] is to draw the jurors' attention to the possibility
of foreseeable litigation with potential purchasers of the
land -- persons such as the Criners -- with whom appellants
may have agreed to deal but were prevented from
so doing by the alleged breach of defendants. It is our
view that Instruction No. 14, especially when considered
with Instruction No. 13, which delineates the nature and
extent of such litigation expenses, provided the jurors a
clear picture of the damages which they were to consider
awarding appellants.
B.
Appellants also allege error with the trial court's preliminary
instruction and Instruction Nos. 6, 7, 8, and 12.
However, as these instructions were not objected to at
the time they were given by the trial judge, we must first
consider respondents' contention that a failure to object
operated as a waiver of appellants' right to raise the correctness
of these instructions as an issue on appeal.
The history of I.R.C.P. Rule 51(a)(1) began with its
adoption in 1958. At that time, it was not necessary to
object to jury instructions in order to raise an error with
regard to such instructions on appeal. However, the rule
was amended by order dated October 24, 1974, [***12]
and made effective January 1, 1975, so as to require a
party to object to the giving of an instruction or the failure
to give an instruction, with the failure to timely object
resulting in waiver of the right to raise any such error
on appeal. Though the rule was again amended by order
dated January 8, 1976, and made effective March 1,
1976, the above-stated requirement was retained.
However, I.R.C.P. Rule 51(a) was amended again by
order dated July 2, 1976, and made effective October 1,
1976. At this time, the requirement that a party must
object to jury instructions in order to preserve error for
the purposes of appellate review was clearly and intentionally
deleted from Rule 51(a). The trial bench and
bar are reminded of our recent decision in Country Insurance
Co. v. Agricultural Development, Inc., 107 Idaho
961, 695 P.2d 346 (1984), where the history of the
rule was reviewed at length. And though the rule was
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
Page 4
amended yet another time by order dated May 25, 1977,
and made effective July 1, 1977, to require that any objections
made concerning jury instructions either given
or refused be made a part of the record, no affirmative
obligation whatsoever was placed upon counsel [***13]
to object in [*20] [**1379] order to preserve order.
This, then, remains the current status of the rule, i.e., that
a party may object either to jury instructions given, or
requested but not given, and that such objections, when
proffered, must be made part of the record, but that
counsel is nonetheless not required to object to instructions
in order to preserve error on appeal. As our opinion
in Country Insurance stated, trial counsel presumably
are first interested in arriving at a set of error-free instructions
-- which hopefully will result from the exchanges
of thought by trial counsel in colloquy with the
court.
Country Insurance, however, was not our first consideration
of this problem. In Stoddard v. Nelson, 99
Idaho 293, 581 P.2d 339 (1978), we observed, and
properly so, that, under I.R.C.P. 51(a)(1), as it read prior
to its October, 1976 amendment, "challenges to rulings
on requested jury instructions must be raised prior to
submission of the case to the jury. Appellants failed to
timely object to the district court's ruling. Appellants
are, therefore, precluded from raising this issue on appeal."
Stoddard, supra, at 298, 581 P.2d 339. [***14]
As counsel for Country Insurance Co. complained in
their petition for rehearing, there has been some confusion
attendant to the history and status of the rule, both in
the district courts, in the court of appeals, and perhaps in
this Court -- occasioned by those instances, such as in
Country Insurance, where all counsel involved have labored
under the belief that an objection has been necessary
in order to preserve error -- notwithstanding the
1976 amendment. Hopefully, that confusion has now
been put to rest.
We therefore proceed to a consideration of the jury
instructions challenged by appellants Suitts.
C.
The Suitts initially allege error in the trial court's
Given Instruction Nos. 6, 7, and 8. Instruction No. 6
read as follows:
The plaintiffs have the burden of
proving each of the following propositions:
1. That the defendants acted wrongfully
in failing to deliver to the plaintiffs
the documents held in escrow upon tender
of the remaining balance of the purchase
price on January 2, 1975.

2. If the failure of the defendants to
deliver such documents was wrongful,
that the plaintiffs sustained monetary
damages as the foreseeable result of the
failure to possess [***15] the documents
held in escrow during the period from
January 2, 1975, to March 4, 1976.
3. That any monetary damages sustained
by the plaintiffs can be calculated
with reasonable certainty.
4. That any monetary damages sustained
by the plaintiffs were not the result
of the actions of the plaintiffs themselves.
If you find from your consideration
of all of the evidence that each of these
propositions has been proved, then your
verdict should be for the plaintiffs; but, if
you find from your consideration of the
evidence that any of these propositions
has not been proved, then your verdict
should be for the defendants.
Instruction No. 7 read as follows:
You are instructed that the duties of
the First Security Bank, as escrow holder,
are those set out in the escrow agreement.
If you find that in holding possession of
the escrowed documents until the dispute
between Suitts and McMurtreys was resolved,
the bank was exercising a right
which it had under the escrow agreement,
then the bank would not be liable to anyone
for executing that right and your verdict
should be in favor of the bank.
Instruction No. 8 read as follows:
If you find that in holding possession
[***16] of the escrowed documents until
the dispute between Suitts and
McMurtreys was resolved, the Bank was
required, under the Escrow Agreement, to
initiate a legal action to clarify its position
in relationship to the two parties, and
failed to do so, and the plaintiff suffered
any damages as a consequence of such
inaction, [*21] [**1380] then your
verdict should be in favor of the plaintiffs.
The gravamen of the Suitts' objection to these instructions
is that the trial court neglected to adequately in-
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
Page 5
struct the jury as to the legal consequences of this Court's
decision in Suitts I, but rather left the jury to decide for
itself legal issues which the Idaho Supreme Court had
already settled. Specifically, Instruction Nos. 7 and 8
left to the jury the question of whether First Security
Bank was acting properly by retaining the escrowed
documents rather than releasing them or "initiating legal
action to clarify its position in relationship to the two
parties." In addition, Instruction No. 6 allocated to the
Suitts the burden of proving that "defendants acted
wrongfully in failing to deliver to the plaintiffs the documents
held in escrow upon tender of the remaining balance
[***17] of the purchase price on January 2, 1975."
We agree with appellants Suitts that the trial court erred
in giving these instructions to the jury; we therefore reverse
and remand for a new trial.
In Suitts I, this Court stated the following:
The operation of the escrow contract
was not stayed by the appeal perfected by
the McMurtreys since the judgment of the
trial court was self-executing. Upon
completion of the terms of the escrow
contract the Suitts had a right to the escrowed
documents, notwithstanding the
appeal. Suitts I, supra, 100 Idaho at 559,
602 P.2d 53.
In addition, our decision specifically and definitively
answered the very questions posed to the jury by the trial
court. As Justice Donaldson wrote for a four-to-one
Court in Suitts I:
The escrow term providing for clarification
by the second means clearly contemplates
an action brought by the escrow
holder for a judicial determination of its
rights, powers and duties under the escrow
agreement. The responsibility of
the escrow holder to seek clarification of
its duties under the terms of the escrow
was not satisfied by merely holding the
escrow in limbo while it awaited the outcome
of [***18] an appeal in an action
brought by the parties to determine their
rights and duties under the sale contract.
. . . As we previously held in this opinion,
the appeal of the original action did not
stay the operation of the escrow contract.
Therefore, the Suitts had a right to the escrowed
documents upon fulfillment of the
terms of the purchase agreement, notwithstanding
the pendency of the appeal
concerning whether there had been a default.
The approach adopted by First

Security Bank was not in accordance with
the contract provision to deliver the escrowed
documents upon fulfillment of the
Suitts' duty to pay the purchase price.
Suitts I, supra, at 560-61, 602 P.2d 53
(emphasis added).
The above-quoted language stated the law of the case,
and clearly conflicted with the trial court's Instruction
No. 8, which allowed the jurors to determine for themselves
whether the Bank was required to initiate legal
action to clarify its rights and duties; conflicted also with
Instruction No. 7, where the trial court instructed the jury
to find for itself whether the Bank was justified in withholding
possession of the escrowed documents; and conflicted
with Instruction No. [***19] 6, where the trial
court instructed the jurors to determine whether defendants
acted wrongfully in failing to deliver the escrowed
documents.
As a decision on a former appeal in this case, it is
clear that our opinion in Suitts I represents the law of the
case herein and, as such, was binding upon the trial court
on remand. The Montana Supreme Court has explained
the doctrine of the "law of the case" as follows:
"The rule is well established and long
adhered to in this state that where, upon
an appeal, the Supreme Court, in deciding
a case presented states in its opinion a
principle or rule of law necessary to the
decision, such pronouncement becomes
the law of the case, and must be adhered
to throughout its subsequent progress,
both in the trial court and upon subsequent
appeal. . . ." Fiscus v. Beartooth
[*22] [**1381] Electric Cooperative,
Inc., 180 Mont. 434, 591 P.2d 196, 197
(1979) (quoting from Carlson v. Northern
Pac. R. Co., 86 Mont. 78, 281 P. 913, 914
(1929)).
In addition, we note that the doctrine of law of the case
has long been the rule in this jurisdiction. See, e.g.,
Kerns v. Morgan, 11 Idaho 572, 83 P. 954 (1905); Unfried
[***20] v. Libert, 23 Idaho 603, 131 P. 660
(1913); Richards v. Jarvis, 44 Idaho 403, 258 P. 370
(1927); Creem v. Northwestern Mutual Fire Ass'n of
Seattle, Washington, 58 Idaho 349, 74 P.2d 702 (1938).
Therefore, because the trial court neglected to follow the
law of the case as set forth in our opinion in Suitts I, we
remand for a new trial where the instructions will be
consistent.
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
D.
Page 6
Having determined that we must remand the present
case for a new trial, we must now proceed to determine
all questions of law which will arise at that trial. Messmer
v. Ker, 96 Idaho 75, 78, 524 P.2d 536, 539 (1974).
n2 We therefore continue with our examination of the
issues raised on appeal.
n2 See also I.C. § 1-205, requiring that the
Supreme Court, when remanding a case for further
proceedings, "pass upon and determine all
the questions of law involved in the case presented
upon such appeal. . . ."
The Suitts conclude their objection to the trial court's
jury instructions by alleging error in Instruction [***21]
No. 12. Instruction No. 12 stated the following: "Damages
are not recoverable for loss that the defendants did
not have reason to foresee as a probable result of the
breach when the contract was made." The Suitts argue
that Instruction No. 12, when considered in conjunction
with Instruction No. 14, amounted to a directed verdict
for the defendants. However, we have previously considered
and affirmed Instruction No. 14. See discussion
supra, at p. 1378-1379. It is our view that Instruction
No. 12 is naught but a general statement of the accepted
rule that "the damages to which one party to a contract is
entitled because of a breach thereof by the other are such
as arise naturally from the breach itself, or such as may
reasonably be supposed to have been within the contemplation
of the parties at the time of making the contract
as a probable result of a breach thereof, or, as sometimes
stated, such as were reasonably foreseeable and within
the contemplation of the parties at the time they made the
contract." C.J.S., Damages, § 24, pp. 662-66. Or, as
this Court has previously stated:
As otherwise expressed, the damages
which are recoverable must be incidental
to [***22] the contract and be caused by
its breach; such as may reasonably be
supposed to have been in the contemplation
of the parties at the time the contract
was entered into. Direct damages are
always recoverable, and consequential
losses must be compensated if it can be
determined that the parties contracted
with them in view. Lockwood Graders of
Idaho v. Neibaur, 80 Idaho 12, 127, 326
P.2d 675 (1958), quoting from Sutherland
on Damages by Berryman, Fourth Edition,
vol. 1, sec. 45, p. 170.

See also Olson v. Quality-Pak Co., 93 Idaho 607, 610,
469 P.2d 45 (1970). The damages for which compensation
is sought need not have been precisely and specifically
foreseeable, but only "such as were reasonably
foreseeable and within the contemplation of the parties at
the time they made the contract." Though the jury instructions
perhaps should have clarified the general nature
of this foreseeability requirement, this small problem
can readily be accommodated on remand.
III.A.
The Suitts next contend that the trial court erred in
denying their motion to amend their complaint. The
Suitts had sought leave to amend in order to introduce a
new claim for punitive damages and a tort [***23] theory
of recovery.
I.R.C.P. 15(a), dealing with amended and supplemented
pleadings, states the following:
[*23] [**1382] party may amend
his pleading once as a matter of course at
any time before a responsive pleading is
served or, if the pleading is one to which
no responsive pleading is permitted and
the action has not been placed upon the
trial calendar, he may so amend it at any
time within twenty (20) days after it is
served. Otherwise a party may amend
his pleading only by leave of the court or
by written consent of the adverse party;
and leave shall be freely given when justice
so requires, and the court may make
such order for the payment of costs as it
deems proper. . . .
In denying the Suitts' motion to amend their complaint to
allege that First Security Bank did willfully or with gross
negligence attempt to deprive the Suitts of the benefit of
their Real Estate Purchase Agreement, Judge Walters
stated the following:
The rule has been long settled in
Idaho that the statute of limitations may
be asserted in opposition to an attempt to
amend pleadings by insertion of new or
different causes of action. Denton v.
Detweiler, 48 Idaho 369, [***24] 282
P. 82 (1929). Here the plaintiffs are attempting
to amend their complaint to recover
on a tort theory more than five and
a half years after the original complaint
was filed for breach of contract, relying
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
upon the same conduct as being tortious
as is asserted for the breach of contract
claim. The proposed amendment is
clearly barred by the statute of limitations,
and the motion to file the Supplemental
Complaint in that regard will be denied.
See also Just' s Inc. v. Arrington Construction
Co. Inc., 99 Idaho 462, 583 P.2d
997 (1978); Wright & Miller, Federal
Practice and Procedure, Rule 15(a), Section
1474, p. 384.
Page 7
Although it is indeed true, as respondents argue, that
"[t]he decision of whether to permit amendment of a
pleading is vested in the sound discretion of the trial
court," Idaho First National Bank v. Wells, 100 Idaho
256, 261, 596 P.2d 429 (1979), we view the present ruling
as a conclusion of law and hence reviewable and
non-binding on this Court. Harding v. Home Investment
and Savings Co., 49 Idaho 64, 286 P. 920 (1930). We
agree with appellant that, in relying upon the statute of
limitations to bar the requested amendment, the district
court [***25] apparently overlooked I.R.C.P. 15(c), and
therefore we reverse the judgment of the district court on
this issue and remand with instructions to reconsider
appellant's motion in light of Rule 15(c).
I.R.C.P. 15(c) states the following:
Whenever the claim or defense asserted
in the amended pleading arose out
of the conduct, transaction, or occurrence
set forth or attempted to be set forth in the
original pleading, the amendment relates
back to the date of the original pleading . .
. .
In the present case, as noted, supra, the district court
specifically stated that the tort theory with regard to
which the Suitts sought to amend their complaint "relied
upon the same conduct as being tortious as is asserted for
the breach of contract claim." It is thus clear that it was
the underlying conduct, transaction, or occurrence of
refusing to deliver the escrow documents which comprised
the gravamen of both the contract claim and the
asserted tort claim. Therefore, the statute of limitations
standing alone was not an adequate reason for denying
the Suitts' motion to amend as the amended cause of action
would have related back and would thus not have
violated the statute. n3
n3 In remanding the issue of amendment
back to the district court, we express no opinion

[***26]
B.
on whether the district court should grant or deny
the Suitts' motion on any other grounds. We
merely hold that, in this case, the statute of limitations
was not an adequate ground for denying
the motion.
The Suitts also contend that the district court erred
in denying their motion to amend their complaint to introduce
a new claim for punitive damages. In so ruling,
the district court stated the following:
Plaintiffs also seek to amend their
complaint to recover punitive or exemplary
[*24] [**1383] damages. Applying
the guidelines recently set forth by
the Supreme Court in Hatfield v. Max
Rouse and Sons Northwest, 100 Idaho
840, 606 P.2d 944 (1980) and Linscott v.
Rainier Nat. Life Insurance Co., 100 Idaho
854, 606 P.2d 958 (1980) to the case at
bar, I find that a claim for punitive damages
would not be warranted and that it
would be an abuse of discretion under
I.R.C.P. 15(c) to allow such an amendment.
In the recent case of Cheney v. Palos Verdes Investment
Corp., 104 Idaho 897, 665 P.2d 661 (1983),
which decision was not available to the trial court, we
stated the following with regard to punitive or exemplary
damages, in backing away from the main precepts of Cox
v. Stolworthy, Jolley v. Puregro, and their progeny, of
which Hatfield was near the end of the line:
We hold that punitive damage awards
are in the first instance a jury decision,
[***27] subject to the trial court's authority
to modify or overturn that jury
verdict as a matter of law. Such is no
novel approach to the appellate treatment
of a damage issue. See Boise Dodge, supra;
Checketts v. Bowman, 70 Idaho 463,
220 P.2d 682 (1950); Horn v. Boise City
Canal Co., 7 Idaho 640, 65 P. 145
(1901); I.R.C.P. 59(a)(5). We have consistently
held that "[p]unitive damages are
by their very nature incapable of definite
ascertainment and cannot be governed or
measured by any precise standards." Cox
v. Stolworthy, supra, 94 Idaho at 688, 496
P.2d at 687; Prudential Federal Savings
& Loan Ass'n v. Johnson, 93 Idaho 850,
476 P.2d 786 (1970). "Thus, the true basis
for an award of one amount of punitive
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
damages as opposed to another amount
lies in an overall appraisal of the circumstances
of the case." Boise Dodge, supra,
92 Idaho at 908, 453 P.2d at 557. Cheney,
supra, at 904, 665 P.2d at 668.
Page 8
In addition, as we noted supra, leave to amend or
supplement a pleading shall be "freely given when justice
so requires." In construing the substantially identical
federal rule, n4 the United States Supreme Court stated
the following general standard to be [***28] employed
by federal district courts:
Rule 15(a) declares that leave to
amend "shall be freely given when justice
so requires"; this mandate is to be heeded.
See generally, 3 Moore, Federal Practice
(2d ed. 1948), paragraphs 15.08, 15.10.
If the underlying facts or circumstances
relied upon by a plaintiff may be a proper
subject of relief, he ought to be afforded
an opportunity to test his claim on the
merits. In the absence of any apparent or
declared reason -- such as undue delay,
bad faith or dilatory motive on the part of
the movant, repeated failure to cure deficiencies
by amendments previously
[*25] [**1384] allowed, undue prejudice
to the opposing party by virtue of allowance
of the amendment, futility of
amendment, etc. -- the leave sought
should, as the rules require, be "freely
given." Of course, the grant or denial of
an opportunity to amend is within the discretion
of the District Court, but outright
refusal to grant the leave without any justifying
reason appearing for the denial is
not an exercise of discretion; it is merely
abuse of that discretion and inconsistent
with the spirit of the Federal Rules. Foman
v. Davis, 371 U.S. 178, 182, 83 S.Ct.
227, [***29] 230, 9 L.Ed.2d 222
(1962).
In commenting on this standard, Professors Charles
Wright and Arthur Miller noted the following:
Perhaps the most important factor
listed by the Court and the most frequent
reason for denying leave to amend is that
the opposing party will be prejudiced if
the movant is permitted to alter his pleading.
Conversely, if the court is persuaded
that no prejudice will accrue, the amendment
should be allowed. Thus, the facts
of each case must be examined to deter-

mine if the threat of prejudice is sufficient
to justify denying leave to amend. In order
to reach a decision on this point, the
court will consider the position of both
parties and the effect the request will have
on them. This entails an inquiry into the
hardship to the moving party if leave to
amend is denied, the reasons for the moving
party failing to include the material to
be added in the original pleading, and the
injustice resulting to the party opposing
the motion should it be granted. Wright
& Miller, Federal Practice and Procedure:
Civil § 1487, p. 428.
Therefore, the essential question, not considered by the
district court, is whether the proposed amendment to the
[***30] pleading will result in unjustifiable prejudice to
the nonmoving party. Because the district court did not
consider the prejudicial impact of allowing the Suitts to
amend their complaint to include a prayer for punitive or
exemplary damages, we reverse and remand for further
proceedings consistent with this opinion. n5
n4 Rule 15(a) of the Federal Rules of Civil
Procedure states the following:
(a) Amendments. A party
may amend his pleading once as a
matter of course at any time before
a responsive pleading is served or,
if the pleading is one to which no
responsive pleading is permitted
and the action has not been placed
upon the trial calendar, he may so
amend it at any time within 20
days after it is served. Otherwise
a party may amend his pleading
only by leave of court or by written
consent of the adverse party;
and leave shall be freely given
when justice so requires. A party
shall plead in response to an
amended pleading within the time
remaining for response to the
original pleading or within 10 days
after service of the amended
pleading, whichever period may
be the longer, unless the court
otherwise orders.
Rule 15(a) of the Idaho Rules of Civil Procedure
states the following:
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
Page 9
Amended and supplemental pleadings --
Amendments. -- A party may amend his pleading
once as a matter of course at any time before
a responsive pleading is served, or, if the pleading
is one to which no responsive pleading is
permitted and the action has not been placed upon
the trial calendar, he may so amend it at any
time within twenty (20) days after it is served.
Otherwise a party may amend his pleading only
by leave of court or by written consent of the adverse
party; and leave shall be freely given when
justice so requires, and the court may make such
order for the payment of costs as it deems proper.
A party shall plead in response to an amended
pleading within the time remaining for response
to the original pleading or within ten (10) days
after service of the amended pleading, whichever
period may be the longer, unless the court otherwise
orders.
[***31]
[***32]
IV.
n5 Although it is often held that the substantive
merits of a claim or defense may be considered
if the proposed change clearly is frivolous or
advances a claim or defense that is legally insufficient
on its face, see, e.g., Wright & Miller, supra,
at p. 432, such is not the case here. The
Suitts requested exemplary damages on the basis
of their allegations that First Security Bank, as
escrow holder, and the McMurtreys, as vendors,
"willfully or with gross negligence attempted to
deprive plaintiffs of the benefits of their real estate
purchase contract," and that First Security
willfully or with gross negligence breached its
fiduciary duty to plaintiffs. It is our view that
these allegations, if proven, could possibly fall
within the "harmful state of mind" and "extreme
deviation from reasonable standards of conduct"
cited by this Court in Cheney v. Palos Verdes,
supra, 104 Idaho at 905, 665 P.2d 661, as justifying
such an award. We therefore reiterate our
holding, supra, in the absence of demonstrated
prejudice to defendants, the Suitts should have
been permitted to amend their complaint and offer
proof as to its allegations.
This case was originally filed in district court, but
assigned to the magistrate court by District Judge
Schwartzman. The reason for Judge Schwartzman's
remand was the order of Judge Walters, which limited
plaintiffs' claims for damages to the jurisdictional

amount of the magistrate division of the district court,
and also because a conflict in trial calendar scheduling
had arisen. Where we now reverse Judge Walters' decision
denying the Suitts leave to amend their complaint,
we direct that the new trial be had in district court.
V.
The Suitts also appeal the award of attorney's fees to
First Security Bank for its expenses in defending the
present action. However, in view of our holding today
reversing and remanding the case for further proceedings
consistent with this opinion -- a holding which necessarily
vacates such an award of attorney's fees -- we need
not and do not reach this issue. [*26] [**1385]
Reversed and remanded. No costs or attorney's fees
awarded on appeal.
APPENDIX A
DEPOSITION OF RICHARD O. SUITTS
Q. [By Mr. Ipsen:] Do you have any specific
agreement with Mr. Cresto?
A. Specific agreement?
Q. Yes. Had he agreed to [***33] buy
some of the land?
A. Yes. He wanted to buy some of the
land but when we couldn't get this litigation
and everything resolved why he purchased
other land.
Q. Did Mr. Cresto make you an offer?
A. I don't even remember that.
Q. Do you recall what price you were
talking about with Mr. Cresto?
A. I don't.
Q. Okay. How about Mr. Wilson? Did
you have an offer from him?
A. Nope.
Q. Did you have any other offers?
A. You mean cash offers?
Q. Yes. Did people get to the point
where they offered you money for the
land?
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
A. No, that I recall, no.
Q. Have you done any calculations to determine
what the amount of the income
you alleged you lost?
A. From what?
Q. As a result of litigation pending the
McMurtrey's?
A. Oh, God. That's -- that will take quite
a bit of -- you mean covering all aspects
of this?
Q. Let's just limit it to sales and prospective
sales of land. Are you alleging that
you've lost any income because of sales
which were not consummated because of
the litigation with the McMurtreys?
A. No, I'm not alleging that I've lost income
as such. What I'm saying is, I was
deprived of my right to sell [***34] the
land at the times when I really needed the
money.
Q. Alright.
A. I'm not speaking of future income or
anything. And as far as discussing with
people when I was in one lawsuit, the
chance of selling them a piece of property
that was in litigation, my nerves or nothing
else could take that. So, I didn't even
discuss this with most of them.
Q. Okay. Are you alleging any damages
because you didn't sell land to Mr.
Cresto?
A. No, not specific damages.
Q. Okay. How about Mr. Wilson?
A. Not specific damages, no. What I'm
alleging in all of these now, and I'll repeat
it again is the fact that I was denied the
opportunity and the right to sell it to anybody
at the time that I really needed to
sell it because I needed the money.
Page 10

Deposition of Richard O. Suitts, p. 33, L. 9 through p.
35, L. 7.
Q. But, you didn't have any specific sales
agreed to? Is that right?
A. Did I have any offers drawn up that
would commit me to give them the title
for X number of dollars? No, I didn't.
Q. Did you have any specific offers that
you would have taken had you had title?
A. No.
Deposition of Richard O. Suitts, p. 36, L. 3-9. [***35]
Q. Did Mr. Campbell make you an offer
on the land?
A. I don't think he ever did. I don't think
it ever got that far.
Q. Did you make him any kind of offer?
A. I don't think so.
[*27] [**1386] Q. I take it there was
no agreement?
A. No.
Q. Did you discuss price with Mr. Campbell?
A. I think, Mr. Ipsen, I answered. I said
that at no time did I get any written offers,
or did I make any written offers, or any
offers of any kind to anybody on any of
that land at any time.
Q. I think -- well, my question was did
you discuss the price with Mr. Campbell.
A. No, I don't think I did.
Q. Okay. So, do you have any idea
whether Mr. Campbell would have been
willing to pay the price you wanted?
A. I would assume he was.
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
Q. Do you have any positive indication
that he would have?
A. Well, he bought property.
Q. Well, did he give you any indication
that if he -- that he would pay the price
you wanted?
A. Never asked.
Q. And would that be true of other people
too?
A. That's exactly right.
Page 11
Deposition of Richard O. Suitts, p. 50, L. 4 through p.
51, L. 4.
DISSENTBY:
BAKES
DISSENT:
BAKES, Justice, [***36] dissenting:
The majority's holding that the jury instructions Nos.
6, 7 and 8 are contrary to the "law of the case," as established
in Suitts I, is in contravention of our standards of
appellate review. Therefore, for the reasons set forth in
my initial dissent in Suitts I, 100 Idaho at 562, 602 P.2d
53, and for the additional reasons set forth below, I respectfully
dissent.
It is important, at the outset, to note the posture of
the case before the Court in Suitts I. In Suitts I appeal
was taken from summary judgment entered in favor of
defendant respondents McMurtreys and First Security
Bank. Therefore, our review was limited to a determination
of whether or not there were no genuine issues of
material fact such that the respondents were entitled to
judgment as a matter of law. I.R.C.P. 56(c). The Court
was not called upon, and therefore did not determine
whether or not appellants, Suitts, were themselves entitled
to summary judgment.
Implicit in the holding of Suitts I that summary
judgment was improper as to First Security Bank (the
escrowholder) is the concomitant holding that material
issues of fact existed as to the escrowholder's duty under
the circumstances [***37] to release the escrow documents
in its possession.
The majority now would convert that holding into an
award of summary judgment in favor of Suitts as to First
Security Bank, i.e., a de facto award of summary judg-

ment on appeal, without that issue being raised either in
the trial court or on appeal. I fail to see how the Court
may do so and at the same time maintain the integrity of
traditional standards of appellate review.
110 Idaho 15, *; 713 P.2d 1374, **;
1985 Ida. LEXIS 538, ***
Page 12
Since the law of the case is not as the majority contends
(indeed, the only law of the case in Suitts I is that
material issues of fact did exist), the issues of fact treated
in jury instructions 6, 7 and 8 were properly entrusted to
the jury for resolution and their findings should be upheld
on appeal.

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110 Mich. App. 500, *; 313 N.W.2d 334, **;
1981 Mich. App. LEXIS 3351, ***
LEXSEE 313 NW 2D 334
ROBERT BIRKENSHAW, d/b/a BISCO'S LOUNGE, Plaintiff-Appellee, and JOAN
HALMAGHI, GEORGE DAVID, DIANA HUGGINS AND CHRISTOPHER
MAGNES, et al, Plaintiffs-Appellees, v. CITY OF DETROIT, a Michigan municipal
corporation, Defendant-Appellant, and PHILIP TANNIAN, Police Commissioner of
the City of Detroit, DONALD SHOFF, ALBERT SANDERS and THOMAS De-
LORE, jointly and severally, Defendants
SUBSEQUENT HISTORY: [***1]
Leave to appeal applied for.
DISPOSITION:
Docket Nos. 48654, 49989, 49990, 49991, 49992, 49993, 49994
Court of Appeals of Michigan
110 Mich. App. 500; 313 N.W.2d 334; 1981 Mich. App. LEXIS 3351
The convictions for criminal contempt are affirmed.
The order of the trial court is affirmed in part and reversed
in part. The order of suppression of evidence is
reversed.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant city sought
review of a judgment from a trial court (Michigan),
which found defendant city guilty of criminal contempt
of court for violating certain restraining orders that restricted
the police from entering into a lounge owned by
plaintiff owner.
OVERVIEW: The owner had filed a petition seeking
criminal contempt citations against the city for entering,
arresting and harassing the owner and his employees in
violation of the restraining orders. The trial court found
the city had violated the restraining orders, and found it
guilty of criminal contempt of court. On appeal, the court
affirmed the city's conviction of criminal contempt of
court because there was sufficient evidence supporting
such a conviction. The owner had established beyond a
reasonable doubt that the city had knowledge of the contents
and existence of the restraining orders, and had
willfully and intentionally violated the orders. Next, the
restraining orders had minimally complied with the requirements
of Mich. Gen. Ct. R. 517.1 (1963), and sufficiently
notified the city of the contents of the restraining
June 8, 1981, Submitted
October 20, 1981, Decided
Page 1
orders. However, the court reversed the award of $ 3,600
in exemplary damages because they were actually punitive
damages intended to punish the city, and reversed
the order granting suppression of evidence because the
exclusionary rule had no application to police violations
of a court order.
OUTCOME: The court affirmed the trial court's judgment,
and affirmed the city's conviction of criminal contempt
of court for violating a court order that restricted
the police from entering a lounged owned by the owner.
LexisNexis(R) Headnotes
Civil Procedure > Appeals > Reviewability > Preservation
for Review
Civil Procedure > Pleading & Practice > Defenses, Objections
& Demurrers > Affirmative Defenses
[HN1] When the defense of laches is not raised in the
trial court below, the issue cannot be considered on appeal.
Civil Procedure > Entry of Judgments > Specific Acts
[HN2] An essential element of the crime of criminal
contempt is that defendant acts culpably, in wilful disregard
or disobedience of the authority or orders of the
court.
Civil Procedure > Relief From Judgment > Relief Generally
Civil Procedure > Appeals > Standards of Review >
Clearly Erroneous Review
[HN3] Under Mich. Gen. Ct. R. 517.1 (1963), an appellate
court will set aside the findings of fact of a trial

judge sitting without a jury only when such findings are
clearly erroneous. A finding is clearly erroneous when,
although there is evidence to support it, the reviewing
court on the entire evidence is left with the definite and
firm conviction that a mistake is committed.
Civil Procedure > Trials > Bench Trials
[HN4] Mich. Gen. Ct. R. 1517.1 (1963) provides that a
court's findings are sufficient if the court makes a brief,
definite, and pertinent findings and conclusions upon the
contested matters without over elaboration of the detail
or particularization of facts. Minimal compliance with
the court rule is satisfactory, provided it reveals the factual
basis for the court's ultimate conclusions. Brevity
alone is not fatal to a trial court's opinion.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN5] Attorney fees incurred in a prior litigation are
recoverable as damages if proximately caused by a defendant's
wrongful conduct.
Torts > Damages > Punitive Damages
[HN6] Exemplary damages are recoverable as compensation
to plaintiff, and not as punishment of defendant.
An award of exemplary damages is considered proper if
it compensates a plaintiff for the humiliation, sense of
outrage, and indignity resulting from injuries maliciously,
willfully and wantonly inflicted by defendant. The
reprehensibility of defendant's conduct both intensifies
the injury and justifies the award of exemplary damages
as compensation for the harm done to plaintiff's feelings.
Punitive damages, on the other hand, are not recoverable.
Constitutional Law > Search & Seizure > Exclusionary
Rule
[HN7] The per se exclusionary rule is applicable to a
constitutionally defective search and seizure.
Constitutional Law > Search & Seizure > Exclusionary
Rule
[HN8] The exclusionary rule has a dual purpose: (1)
protection of the right to privacy, and (2) deterrence of
police misconduct.
Constitutional Law > Search & Seizure > Scope of
Protection
[HN9] A search, for U.S. Const. amend. IV purposes,
occurs only when a person has a reasonable expectation
of privacy. What a person knowingly exposes to the public,
even in his own home or office, is not a subject of
U.S. Const. amend. IV protection.
COUNSEL:
Durant & Durant, P.C., for plaintiffs.
110 Mich. App. 500, *; 313 N.W.2d 334, **;
1981 Mich. App. LEXIS 3351, ***
Page 2
George W. Crockett, Jr., Acting Corporation Counsel,
and Robert Horvath, Assistant [***9] Corporation
Counsel, for defendant.
JUDGES:
JJ.
D. C. Riley, P.J., and W. P. Cynar and H. R. Gage, *
* Circuit Court judge, sitting on the Court of
Appeals by assignment.
OPINIONBY:
GAGE
OPINION:
[*505] [**336] Six consolidated cases are involved
in this appeal, all of which arose from the trial
court's finding defendant City of Detroit guilty of criminal
contempt of court.
Bisco's Lounge is an establishment which features
sexually oriented entertainment. It is owned and operated
by plaintiff Birkenshaw. Plaintiffs Halmaghi, David,
Magnes and Huggins were employees of Bisco's
who were individually charged with fostering or participating
in various acts of lewd and lascivious behavior.
In 1974, plaintiff Birkenshaw sued the City of Detroit,
the Police Commissioner, the Detroit Police Department
and certain police officers individually for alleged
unwarranted arrest and harassment of the plaintiff
himself and his customers and employees. On November
14, 1974, the trial court issued the first of three restraining
orders restricting police entry into Bisco's
Lounge. On April 16, 1975, the trial court issued an ex
parte restraining order barring police entry except pursuant
[***10] to a valid warrant or to a complaint that a
felony was taking place therein. At a show-cause hearing
on May 5, 1975, the trial court indicated a willingness
to modify the ex parte order of April 16, 1975.
However, a third restraining order, dissolving both the
November 14, 1974, and the April 16, 1975, orders, was
not entered until July 1, 1977.
In January 1978, Birkenshaw doing business as
Bisco's Lounge filed a petition seeking criminal contempt
citations against the City of Detroit, the Detroit
Police Department and various individual police officers
for entering, arresting and harassing the petitioner and
his employees in violation of the restraining orders.
Plaintiff alleged that defendants violated the ex parte
order of [**337] April 16, 1975, [*506] on ten separate
occasions. Plaintiff also alleged that on July 20,
1977, defendants violated the temporary restraining order

of July 1, 1977. After lengthy contempt hearings, the
trial court issued an opinion on June 30, 1978, in which it
concluded that although the individual police officers
had not acted in contempt of court, the Detroit Police
Department had wilfully and intentionally violated the
restraining [***11] orders then in effect. On August
15, 1978, the trial court entered an order against the city
awarding plaintiff Birkenshaw $ 15,000 for loss of time,
reasonable attorney fees and other expenses, and an additional
$ 3,600 plus court costs for reasonable attorney
fees in the contempt proceedings.
Plaintiff then filed a motion for reconsideration and
defendant City of Detroit filed a motion for a new trial
or, alternatively, to modify, alter or amend the judgment.
On November 15, 1978, plaintiff's motion was granted.
The trial court awarded plaintiff Birkenshaw $ 70,784.49
for attorney fees and costs generated from defending
cases resulting from police entry into Bisco's in violation
of the temporary restraining orders. The court also
awarded $ 3,600 for exemplary damages. Further, the
court ordered that "all evidence, whether tangible or intangible,
emanating from observations by defendant City
of Detroit 'in violation of the temporary restraining order'
shall be suppressed".
Defendant City of Detroit raises seven issues on this
appeal. First, defendant argues that the trial court erred
in ruling that the ex parte order of April 16, 1975, was
not dissolved until July 1, 1977. [***12] In support,
defendant posits an argument of equitable substance over
form. Since the trial judge expressed his dissatisfaction
with the extent and scope of the temporary restraining
order and [*507] a desire for its modification on May
5, 1975, defendant submits that the order was de facto
dissolved on that date. We do not agree. "The rule is
well established that courts speak through their judgments
and decrees, not their oral statements or written
opinions." Tiedman v Tiedman, 400 Mich 571, 576; 255
NW2d 632 (1977), accord, Hosner v Brown, 40 Mich
App 515; 199 NW2d 295 (1972), LeTarte v LeTarte, 32
Mich App 289; 188 NW2d 673 (1971). The trial court did
not err in finding that the ex parte order of April 16,
1975, was not dissolved by oral pronouncement of the
court on May 5, 1975. The order remained in effect
until modified by a subsequent written order.
Second, defendant argues that the plaintiff's contempt
action was barred by the equitable doctrine of
laches. Without reaching the merits of this contention,
we note that [HN1] since the defense of laches was not
raised in the trial court below, the issue cannot now be
considered on appeal. American Electrical [***13]
Steel Co v Scarpace, 399 Mich 306, 309; 249 NW2d 70
(1976), Boden v Renihan, 299 Mich 226; 300 NW 53
(1941).
110 Mich. App. 500, *; 313 N.W.2d 334, **;
1981 Mich. App. LEXIS 3351, ***
Page 3
Defendant next contends that the trial court erred in
finding that the City of Detroit wilfully and intentionally
violated the temporary restraining orders of April 16,
1975, and July 1, 1977. The city avers that insufficient
evidence was set forth to support the trial court's finding.
Further, defendant argues that the trial court did not
comply with GCR 1963, 517 in setting forth adequate
findings of fact with respect to the alleged violation of
the July 1, 1977, order.
[HN2] An essential element of the crime of criminal
contempt is that the defendant acted culpably, in "wilful
disregard or disobedience of the authority or orders of
the court". People v Matish, 384 Mich 568, 572;
[*508] 184 NW2d 915 (1971). The question presented
is whether there was sufficient evidence of that element
from which a rational trier of fact could find defendant
guilty of such beyond a reasonable doubt.
At the contempt hearings, the city argued that it
could not have acted in wilful violation of the ex parte
order of April 16 because its attorney had advised it as of
May 5, [***14] 1975, that the order was no longer in
effect. The trial court below specifically noted defendant's
argument but after examination of "the overall
proof, testimony [**338] and exhibits" concluded that
the defendant City of Detroit wilfully and intentionally
violated the restraining orders in effect. The court specifically
found that plaintiff had established beyond a
reasonable doubt that defendant "had knowledge of the
contents and existence of the temporary restraining orders
and their injunctive nature".
[HN3] Under GCR 1963, 517.1, an appellate court
will set aside the findings of fact of a trial judge sitting
without a jury only when such findings are clearly erroneous.
Tuttle v Dep't of State Highways, 397 Mich 44,
46; 243 NW2d 244 (1976). A finding is "clearly erroneous"
when, although there is evidence to support it, the
reviewing court on the entire evidence is left with the
definite and firm conviction that a mistake has been
committed. Id. We are not left with such a conviction
and thus find no error.
We further find unpersuasive defendant's argument
that there was insufficient evidence that on July 20,
1977, defendant violated the order of July 1, 1977. The
[***15] July 1, 1977, order provided in part that "defendants,
their agents, servants and employees, shall be
and hereby are restrained from harassing the plaintiff, his
employees, or patrons". [*509] A definition of harassment
was attached to the order and was apparently
read into the record. Defendant argues that since the
definition of harassment was not part of the order, the
city could not be cited for contempt for violating such.
Defendant has neither cited authority nor presented policy
arguments in support of this contention. It is there-

fore abandoned. People v Sullivan, 97 Mich App 488,
491; 296 NW2d 81 (1980).
Defendant also argues that any injunction against
"harassment" is void for vagueness. Citation to Morgan
v Detroit, 389 F Supp 922 (ED Mich, 1975), and People
v Howell, 396 Mich 16; 238 NW2d 148 (1976), is inapposite
since both cases address statutory due process
challenges.
Defendant argues that the trial court's failure to set
forth specific findings of fact on the alleged violation of
the July 1, 1977, order constituted a violation of GCR
1963, 517. [HN4] Rule 517.1 specifically provides that
a court's findings "will be sufficient if the court makes
brief, [***16] definite, and pertinent findings and
conclusions upon the contested matters without over
elaboration of detail or particularization of facts".
Minimal compliance with the court rule is satisfactory,
provided it reveals the factual basis for the court's ultimate
conclusions. Brevity alone is not fatal to a trial
court's opinion. Powell v Collias, 59 Mich App 709,
714; 229 NW2d 897 (1975), citing Commercial Construction
Co v Elsman Enterprises, Inc, 22 Mich App
238, 241; 177 NW2d 447 (1970). The trial court's opinion
in this case reveals the factual basis for its ultimate
conclusions. We find that the opinion of June 30, 1978,
at least minimally complies with the requirements of
GCR 1963, 517.1 with respect to defendant's violation of
the July 1, 1977, temporary restraining order.
[*510] The city next challenges the award of $
70,734.49 in costs and attorney fees, contending that the
costs were not proximately caused by defendant's actions
and, further, that the trial court erred in failing to consider
plaintiff's failure to mitigate damages. A hearing
apparently was held on the issue of damages on October
30, 1978, after plaintiff filed its motion for reconsideration.
[***17] The trial court awarded the costs of defense
in the actions which resulted from the arrests made
on the date defendant was found to be in contempt of
court as damages proximately caused by defendant's actions.
Michigan courts have recognized that [HN5] attorney
fees incurred in prior litigation are recoverable as
damages if proximately caused by a defendant's wrongful
conduct. Dassance v Nienhuis, 57 Mich App 422,
436-437; 225 NW2d 789 (1975). Also see State Farm
Mutual Automobile Ins Co v Allen, 50 Mich App 71,
78-79; 212 NW2d 821 (1973). The court properly applied
the legal measure of damages in tort as enunciated in 4
Restatement Torts, § 914, pp 591-593. The only damages
recoverable were those damages proximately
caused by defendant's conduct. See Woodyard v Barnett,
335 Mich 352, 358; 56 NW2d 214 [**339]
(1953). We find that the court did not err in finding the
damages imposed to be proximately caused by defendant's
wrongful acts.
110 Mich. App. 500, *; 313 N.W.2d 334, **;
1981 Mich. App. LEXIS 3351, ***
Page 4
Defendant also claims that the trial court failed to
consider plaintiff's failure to mitigate damages. We do
not agree. The trial court stated that special consideration
must be given to "the nature and extent of the violations,
the [***18] convictions and dismissals of the
citations and arrests, the expense in appeals and litigation,
along with the good faith of the parties, their motives
and intent". In light of this statement, defendant
has failed to show error on the part of the trial court.
[*511] In addition, defendant asserts that the lower
court erred in awarding $ 3,600 in exemplary damages.
In Michigan, [HN6] exemplary damages are recoverable
as compensation to the plaintiff, not as punishment
of the defendant. Kewin v Massachusetts Mutual Life
Ins Co, 409 Mich 401, 419; 295 NW2d 50 (1980). "An
award of exemplary damages is considered proper if it
compensates a plaintiff for the 'humiliation, sense of
outrage, and indignity' resulting from injuries 'maliciously,
wilfully and wantonly' inflicted by the defendant.
* * * [The] reprehensibility of the defendant's conduct
both intensifies the injury and justifies the award of
exemplary damages as compensation for the harm done
the plaintiff's feelings." Id. Punitive damages, on the
other hand, are not recoverable. Ray v Detroit, 67 Mich
App 702, 704; 242 NW2d 494 (1976). The lower court
awarded exemplary damages for "willful and intentional
regard [***19] [sic] or disobedience of the temporary
restraining order issued by this court against defendant".
While evidence in the record below indicates that defendant
wilfully and wantonly violated the restraining
orders, there was no evidence presented as to any damage
to the plaintiff's feelings or some other indignity or
humiliation. We believe that the "exemplary" damages
awarded below were actually punitive damages intended
to punish the defendant for, and to discourage the defendant
from, continuing its intentional illegal acts.
Accordingly, the exemplary damage award is vacated.
The defendant next challenges the trial court's suppression
of evidence obtained in violation of the ex parte
order. Defendant contends that the lower court erred in
suppressing "all evidence, whether tangible or intangible,
emanating from observations by defendant City of Detroit
'in violation of [*512] the temporary restraining
order'". We agree. [HN7] The per se exclusionary rule
is applicable to constitutionally defective searches and
seizures. People v Livingston, 64 Mich App 247, 255;
236 NW2d 63 (1975). Under the facts of this case, there
is no reason to exclude the evidence in question.
[***20] Examination of the exclusionary rule itself
dictates this result. [HN8] "The exclusionary rule has a
dual purpose: (1) protection of the right to privacy, and
(2) deterrence of police misconduct." People v Warner,
401 Mich 186, 209; 258 NW2d 385 (1977). Neither of

these purposes would be served by an extension of the
rule in this case.
[HN9] A search, for Fourth Amendment purposes,
occurs only when a person has a reasonable expectation
of privacy. Katz v United States, 389 U.S. 347, 360-361;
88 S Ct 507; 19 L Ed 2d 576 (1967) (Harlan, J., concurring),
People v Whalen, 390 Mich 672; 213 NW2d 116
(1973). "What a person knowingly exposes to the public,
even in his own home or office, is not a subject of Fourth
Amendment protection." Katz, supra, 351, People v
Whalen, supra, 677. We believe that none of the plaintiffs
in the instant case, including plaintiff Birkenshaw,
had a reasonable expectation of privacy during business
hours in Bisco's Lounge, a business open to the general
public.
Extension of the exclusionary rule to violations of
court orders is unwarranted. We note that statutory violations
do not merit the imposition of the exclusionary
rule. People v Livingston, [***21] supra, 255 (violation
of MCL 750.539a et seq.; MSA 28.807[1] [**340]
et seq.), People v Burdo, 56 Mich App 48, 52; 223 NW2d
358 (1974) (violation of MCL 764.15[a]; MSA
28.874[a]). Also see People v Green, 405 Mich 273;
274 NW2d 448 (1979) (ethical violations of Code of
Professional Responsibility). The [*513] deterrent
110 Mich. App. 500, *; 313 N.W.2d 334, **;
1981 Mich. App. LEXIS 3351, ***
Page 5
aim of the rule would in no way be served by holding it
applicable to this particular case. We believe that deterrence
of police misconduct is best achieved by the
threat of civil and criminal contempt citations. Thus we
find that the exclusionary rule has no application to police
violations of a court order per se. The trial court
erred in ordering the evidence suppressed.
Finally, defendant claims that the trial court erred in
granting the temporary restraining orders in violation of
the equitable "clean hands doctrine". While it is true
that "one who seeks the aid of equity must come in with
clean hands", Stachnik v Winkel, 394 Mich 375, 382; 230
NW2d 529 (1975), it is also true that even an improperly
granted restraining order or injunction must be complied
with until it has been judicially vacated. Cross Co v
UAW Local [***22] No 155 (AFL-CIO), 371 Mich
184, 195; 123 NW2d 215 (1963), Berry Pontiac, Inc v
Burke, 19 Mich App 648, 652; 173 NW2d 243 (1969).
Defendant's equitable arguments are, therefore, without
merit.
The convictions for criminal contempt are affirmed.
The November 15, 1979, order of the trial court is affirmed
in part and reversed in part. The order of suppression
of evidence is reversed.

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115 Kan. 626, *; 224 P. 53, **;
1924 Kan. LEXIS 315, ***
LEXSEE 115 KAN. 626
CLARK MCOSKER, Appellee, v. THE FEDERAL INSURANCE COMPANY, Appellant.
C. H. ADAIR, Appellee, v. THE FEDERAL INSURANCE COMPANY,
Appellant. BERT WHELCHEL, Appellee, v. THE FEDERAL INSURANCE
COMPANY, Appellant.
PRIOR HISTORY: [***1] Appeal from Stafford
district court; CLYDE R. DOUGLASS, judge. Opinion
filed March 8, 1924. Affirmed.
DISPOSITION: Judgment affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant insurer appealed
from the judgments of the Stafford District Court
(Kansas), which rendered judgment in favor of plaintiff
insureds in the insureds' actions to recover damages allegedly
sustained by them through the misrepresentations
of fraud by the insurer's agents.
OVERVIEW: The insureds commenced proceedings
against the insurer after they discovered that the insurance
policies issued to them differed materially from that
represented by the agents. The court affirmed the judgments
rendered in the insureds' favor. The court found
ample evidence of misrepresentation. The insured's evidence
and testimony amply supported their contentions
of misrepresentation. Further, the insurer met with the
insureds after they had refused to accept the materially
different policies and agreed to place in the bank that had
issued the insureds' notes the certificates of deposit that
the bank had issued in payment of the notes; however,
the certificates were not returned in accordance with that
agreement. The court found that such action reinforced to
some extent the insurer's fraudulent behavior. The court
found that the award of attorneys fees was proper because
any expense incurred in recovering notes obtained
through fraud could be recovered in an honest effort to
defeat the fraud.
OUTCOME: The court affirmed the trial court's judgments.
No. 25,093. No. 25,094. No. 25,095.
SUPREME COURT OF KANSAS
115 Kan. 626; 224 P. 53; 1924 Kan. LEXIS 315
January, 1924, Decided
March 8, 1924, Filed
LexisNexis(R) Headnotes
Page 1
Contracts Law > Defenses > Fraud & Misrepresentation
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN1] If a party through its fraud procures the giving of
notes, any necessary expense incurred in an honest effort
to defeat the fraud or limit the extent of the damages may
be recovered.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] Attorneys' fees and expenses incurred in good
faith by a bank in saving itself from loss occasioned by
the fraud of a party who obtained from it a draft, and
then caused the same to be cashed, may be recovered in
an action against the wrong-doer. Ordinarily a party can
recover beyond the amount of his actual damages only
the costs allowed by statute, but such fees and expenses
may be recovered as actual damages from a wrongdoer
who has been guilty of fraud, malice or oppression.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] If one's property is taken, injured or put in jeopardy
by another's neglect of duty imposed by contract, or
by his wrongful act, any necessary expense incurred for
its recovery, repair or protection is an element of the
injury. It is often the legal duty of the injured party to
incur such expense to prevent or limit the damages; and
if it is judicious and made in good faith, it is recoverable,
though abortive.
COUNSEL: Ray H. Beals, of St. John, and W. T.
Thompson, of Lincoln, Neb., for the appellant.

Paul R. Nagle, Robert Garvin, and Evart Garvin, all of
St. John, for the appellees.
JUDGES: Johnston, C. J.
OPINIONBY: JOHNSTON
OPINION:
[*626] [**54] The opinion of the court was delivered
by
JOHNSTON, C. J.: These actions were brought by
the plaintiffs against the Federal Insurance Company to
recover damages alleged to have been sustained by each
of them through the misrepresentations [*627] and
fraud of the agents of the insurance company. Each recovered
a judgment against the defendant from which
appeals have been taken.
The issues in the three cases and the evidence given
in support of them are substantially the same and therefore
they are considered together and will be disposed of
in a single opinion.
The plaintiffs alleged and offered testimony to show
that the agents of the defendant solicited them to contract
for insurance representing that the policies when issued
would contain provisions [***3] insuring the plaintiffs
against death from any cause, another insuring the beneficiary,
the wife of the insured, against sickness and accident,
another to pay the insured a weekly indemnity in
case of confinement to the house on account of sickness
or accident or if he should be quarantined by reason of
the illness of a member of his family, another that the
company would pay an annual dividend on the amount of
the premium for which a note was given, and still another
that the company would pay the insured all doctor
bills for himself and any member of his family, covering
a period of six months, and in case of death from any
cause, pay the beneficiary an amount from $ 2,500 to $
5,000. It was claimed that a sample copy of the insurance
policy to be issued was shown or read to the plaintiffs,
but when the policy was delivered it did not contain material
provisions of the sample copy or that were represented
to be included in it. Believing the representations
the plaintiffs say they were induced to sign an application
for insurance and notes for the premiums were
made, although one of the plaintiffs denied that he had
actually signed a note. Afterwards, and before the notes
matured, [***4] they were indorsed and transferred
from the First State Bank of Stafford, which was subsequently
held to be a holder in due course and without
notice of the fraud of the defendant. Actions were
brought upon the notes by the holder, which were resisted
by the plaintiffs, but at the end of the suits it was de-
115 Kan. 626, *; 224 P. 53, **;
1924 Kan. LEXIS 315, ***
Page 2
termined that the plaintiffs were liable on the notes, and
judgments against them were rendered thereon. As stated,
when the policies were received they were found not
to contain some of the provisions mentioned, and plaintiffs
refused to accept them and asked for the return of
the notes. The agents of the defendant first agreed to
procure a surrender of the notes or reimburse the bank
for the amounts of the same, but this was not done. It
was further alleged and shown that plaintiffs had employed
counsel to resist the collection [*628] of the
notes so transferred and they asked for the recovery of
counsel fees and the costs and expenses incurred in their
resistance to the collection of the notes.
The defense alleged was a denial of the misrepresentations
and allegations to the effect that the plaintiffs
had signed the applications, had read or heard read the
sample copy of [***5] the policy to be issued, and that
the policies which were subsequently delivered were in
accordance with the applications and the sample copy so
read by the plaintiffs.
The first contention is that the verdict of the jury and
the judgment of the court are not supported by sufficient
evidence. There is testimony to the effect that the representations
as to the character of insurance they were obtaining
differed materially from that provided in the policy
which was subsequently delivered to them. The
averments of the plaintiffs as to the misrepresentations of
the agents of the insurance company were well supported
by the plaintiff's evidence and it also appears that the
policies which the insurance company undertook to deliver
fell far short of those agreed to be given. Plaintiff's
testimony as to the misrepresentations was reenforced to
some extent by the action of the company after plaintiffs
had refused to accept the policies. It appears that the
secretary of the company and its agent visited the plaintiffs,
at which time they agreed for the company to place
in the bank which had purchased the plaintiff's notes, the
policies, the certificates of deposit which the bank had
issued [***6] in payment of the notes, and that when
the certificates were delivered the bank was to return the
notes to plaintiffs. The certificates, however, were not
returned in accordance with the agreement and neither
were the notes returned to plaintiffs. The agents of the
company appear to have largely confined their operations
to persons engaged in farming, and five farmers other
than plaintiffs testified that the same agents had misrepresented
the kinds of insurance they were writing and as
to what was included in the sample policy exhibited by
the agents. Their testimony in this respect was substantially
the same as that of plaintiffs. When plaintiffs asked
the agents for copies of the sample policy the latter declined
to leave them, giving as an excuse that the policies
might [**55] fall into the hands of the agents of rival
companies. Portions of the sample policies were read and

explained by these agents, but it appears that what was
read did not correspond with the provisions of the policies
which the company [*629] undertook to deliver
to plaintiffs. There was no lack of evidence as to the
fraud of the defendant. It is true that a written statement
signed by plaintiff Whelchel [***7] was introduced in
evidence, and it was to the effect that no misrepresentations
had been made by the agent Burns, that Whelchel
was disappointed to find that the policy did not cover
natural death, but that it was as much his fault as that of
anyone else. His explanation of the writing was that
when it was presented he objected to certain words found
in it and the agent agreed to erase these words, but it was
done with a lead pencil. He also said that the statement
had been changed after it was signed. He further testified
that the paper was signed too on the consideration that
the parties would return his notes, and that this had never
been done. Even if the writing had not been changed or if
he was induced to give it in order to secure the return of
his note, it was not conclusive evidence as to the fraud
charged by Whelchel. He testified at the trial that the
false representations were in fact made, and it devolved
on the jury to determine what were the facts in that respect.
As to the attorney fees and expenses recovered, it is
contended that manifestly there was no defense to the
notes and that there could have been no good faith in
contesting their validity. [HN1] If the party through
[***8] its fraud procured the giving of the notes, any
necessary expense incurred in an honest effort to defeat
the fraud or limit the extent of the damages may be recovered.
In Bank v. Williams, 62 Kan. 431, 63 P. 744, it
was held that--
[HN2] "Attorneys' fees and expenses incurred in
good faith by a bank in saving itself from loss occasioned
by the fraud of a party who obtained from it a
draft, and then caused the same to be cashed, may be
recovered in an action against the wrong-doer." (Syl. P
1.)
In that case it was held that ordinarily a party can recover
beyond the amount of his actual damages only the costs
allowed by statute, but that such fees and expenses may
be recovered as actual damages from a wrongdoer who
has been guilty of fraud, malice or oppression. In the
decision the court quoted from 1 Sutherland on Damages,
2d ed., § 58, as follows:
[HN3] "If one's property is taken, injured or put in
jeopardy by another's neglect of duty imposed by contract,
or by his wrongful act, any necessary expense in-
115 Kan. 626, *; 224 P. 53, **;
1924 Kan. LEXIS 315, ***
Page 3
curred for its recovery, repair or protection is an element
of the injury. It is often the legal duty of the injured party
to incur such expense to prevent or limit the damages;
and [***9] if it is judicious and made in good faith, it is
recoverable, though abortive."
[*630] See, also, Bourke v. Spaight, 80 Kan. 387,
102 P. 253; City of Topeka v. Brooks, 99 Kan. 643, 164
P. 285; Ireland v. Bank, 103 Kan. 618, 176 P. 103. Was
there good faith in the defenses made? A part of the
fraud charged was the securing of the notes with the
purpose of transferring them at once to an innocent holder.
It was not unreasonable, and in fact, the defendant
perpetrating the wrong must have contemplated that the
plaintiffs, when they learned of the fraud, would use
every reasonable effort to defeat the scheme and avoid
loss to themselves. The notes had been transferred to a
bank which, instead of paying cash for them, had issued
certificates of deposit, which the insurance company still
holds. The agents of the company were often in the bank,
and when the ineffectual compromise was made these
agents arranged that the bank should act as stakeholder.
It may also be added that when the facts and circumstances
of the fraud had been laid before a reputable attorney
it was decided that a defense was warranted and it
was their legal duty to resist the payment of the notes.
Although [***10] the defense made was fruitless we
cannot say that there was a lack of good faith in making
it.
It is contended that error was committed in giving an
instruction in which the court, after stating the issues and
the rules for determining whether fraud had been committed,
advised the jury that if they found for plaintiff on
this issue, and further found that the defense to the notes
had been made in good faith, certain attorneys fees, costs
and expenses in making the defense might be allowed.
As to good faith, they were further instructed that these
fees and expenses could not be recovered unless the
plaintiffs believed they had a good defense to the notes
against the bank, but that the mere fact that the defense
failed did not warrant a finding of bad faith. The instruction
is deemed to be correct and is not open to the interpretation
claimed to the effect that the court assumed that
fraud had been shown or that a right to recovery of the
fees and expenses had been established by the evidence.
It appears that counsel for defense requested an instruction
that good faith was an essential element of such a
recovery. The instructions given fairly covered the cases,
and finding no material [***11] error in the records the
judgments are affirmed.

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117 Nev. 948, *; 35 P.3d 964, **;
2001 Nev. LEXIS 82, ***; 117 Nev. Adv. Rep. 78
LEXSEE 117 NEV 948
SANDY VALLEY ASSOCIATES, A NEVADA LIMITED PARTNERSHIP, Appellant,
vs. SKY RANCH ESTATES OWNERS ASSOCIATION, A NEVADA
NON-PROFIT CORPORATION; RICHARD L. CLARK, WILLIS EICHEL,
CARMEN EICHEL, THOMAS ELLIOTT, NORA ELLIOTT, DALE ENGEL,
LOUISE ENGEL, EDWARD GRIMM, CHRISTOPHER HUKILL, ELAINE
MARTIN, SAMUEL K. MCCAULEY, FE NANCY, JORDAN MCCAULEY, PAUL
MUSKAT, ROBERT NEAD, MARY NEAD, ROBERT SPURLOCK, JAN (WIL-
SON) SPURLOCK, HAROLD THOMPSON, BARBARA THOMPSON, LOYD
TOWN, ALVIN GLANTZ, ESTELLE GLANTZ, ELAINE (HARKEY) CLARK,
CLARK COUNTY, CLARK COUNTY BOARD OF COUNTY COMMISSIONERS,
CLARK COUNTY PLANNING COMMISSION, CLARK COUNTY DEPART-
MENT OF COMPREHENSIVE PLANNING, AND CLARK COUNTY DISTRICT
ATTORNEY, Respondents.
No. 33021
SUPREME COURT OF NEVADA
117 Nev. 948; 35 P.3d 964; 2001 Nev. LEXIS 82; 117 Nev. Adv. Rep. 78
PRIOR HISTORY: [***1] Appeal from a judgment
entered after a bench trial in an action for declaratory
relief. Eighth Judicial District Court, Clark County;
Kathy A. Hardcastle, Judge.
DISPOSITION: Affirmed in part, reversed in part, and
remanded.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant, a developer,
sought review of a judgment entered by the Eighth Judicial
District Court, Clark County, Nevada, after a bench
trial in an action for declaratory relief.
OVERVIEW: A developer and a homeowner's association,
as well as the individually named homeowners,
became involved in a dispute over the ownership of certain
parcels of real property within a residential subdivision
located outside of Las Vegas, Nevada. The association
and the homeowners commenced an action to compel
the developer to convey certain lots to the association.
The district court entered judgment in favor of the
association and the homeowners. The district court also
awarded the association and the homeowners attorney
fees. On appeal, the developer contended that the district
court erred by ordering the conveyance of the lots and
landing strip to the association and by awarding attorney
fees as damages. The appellate court concluded that sub-
December 10, 2001, Decided
Page 1
stantial evidence supported the district court's decision
concerning the ownership of the lots and landing strip.
However, the district court erred in awarding attorney
fees as damages without an evidentiary hearing.
OUTCOME: The appellate court affirmed that portion
of the district court's judgment that related to property
ownership and reversed that portion of the judgment that
pertained to attorney fees.
LexisNexis(R) Headnotes
Contracts Law > Contract Interpretation > Parol Evidence
Rule
[HN1] When a contract is clear on its face, it will be
construed from the written language and enforced as
written. Parol evidence is not admissible to vary or contradict
the clear and unambiguous terms of a written
agreement. However, parol evidence is admissible to
determine the true intent of the parties when a contract is
ambiguous. Thus, the circumstances surrounding the
execution of a contract and the subsequent acts or declarations
of the parties may be considered to interpret unclear
contractual provisions.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] Attorney fees cannot be recovered as a cost of
litigation unless authorized by agreement, statute or rule.

When authorized, a district court's award of attorney fees
as costs will not be overturned on appeal absent a manifest
abuse of discretion.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] Procedurally, when parties seek attorney fees as a
cost of litigation, documentary evidence of the fees is
presented to the trial court, generally in a post-trial motion.
Opposing parties have an opportunity to contest the
request for attorney fees, and the trial court must determine
if any agreement, statute or rule authorizes fees. If
the fees are authorized, the trial court examines the reasonableness
of the fees requested and the amount of any
award. Thus, when a court is requested to award attorney
fees as a cost of litigation, the matter is decided based
upon pleadings, affidavits and exhibits. On rare occasions,
a court may even determine the amount of the attorney
fees based upon the court's personal observation
of the time the attorney spent in hearings and the quantity
and quality of pleadings filed by the attorney.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN4] When a party claims it has incurred attorney fees
as foreseeable damages arising from tortious conduct or
a breach of contract, such fees are considered special
damages. They must be pleaded as special damages in
the complaint pursuant to Nev. R. Civ. P. 9(g) and
proved by competent evidence just as any other element
of damages. The mention of attorney fees in a complaint's
general prayer for relief is insufficient to meet
this requirement. Finally, when attorney fees are considered
as an element of damages, they must be the natural
and proximate consequence of the injurious conduct. If
more than one claim is presented in a complaint, the
party claiming fees as damages must prove the fees as to
each claim.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN5] As a practical matter, attorney fees are rarely
awarded as damages simply because parties have a difficult
time demonstrating that the fees were proximately
and necessarily caused by the actions of the opposing
party and that the fees were a reasonably foreseeable
consequence of the breach or conduct. Because parties
always know lawsuits are possible when disputes arise,
the mere fact that a party was forced to file or defend a
lawsuit is insufficient to support an award of attorney
fees as damages.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
117 Nev. 948, *; 35 P.3d 964, **;
2001 Nev. LEXIS 82, ***; 117 Nev. Adv. Rep. 78
Page 2
[HN6] Attorney fees may be an element of damage in
cases when a plaintiff becomes involved in a third-party
legal dispute as a result of a breach of contract or tortious
conduct by the defendant. The fees incurred in defending
or prosecuting the third-party action could be damages in
the proceeding between the plaintiff and the defendant.
This type of action could arise from claims against title
insurance or bonds and breaches of duty to defend clauses
in insurance or indemnity actions.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN7] Attorney fees may also be awarded as damages in
those cases in which a party incurred the fees in recovering
real or personal property acquired through the
wrongful conduct of the defendant or in clarifying or
removing a cloud upon the title to property. Finally, actions
for declaratory or injunctive relief may involve
claims for attorney fees as damages when the actions
were necessitated by the opposing party's bad faith conduct.
COUNSEL: Simon & Berman, Las Vegas, for Appellant.
Stewart L. Bell, District Attorney, and Mark E. Wood,
Deputy District Attorney, Clark County, for Respondents
Clark County and all county-affiliated respondents.
Kummer Kaempfer Bonner & Renshaw and John A.
Curtas, Las Vegas; Deaner, Deaner, Scann, Malan &
Larsen, Las Vegas, for Respondents Sky Ranch Estates
Owners Association.
JUDGES: BEFORE MAUPIN, C.J., YOUNG and
BECKER, JJ.
OPINION:
[**966] [*951] PER CURIAM:
This case involves a dispute between appellant
Sandy Valley Associates (SVA), a developer, and respondents
Sky Ranch Estates Owners Association, as
well as the individually named homeowners, over the
ownership of certain parcels of real property within a
residential subdivision located outside of Las Vegas. The
Association and the homeowners commenced the underlying
action in this case to compel SVA to convey certain
lots to the Association. Following a bench trial, the
district court entered judgment in favor of the Association
[***2] and the homeowners, finding that the lots at
issue were always intended to be a part of the landing
strip and common areas owned by the Association. In
post-trial proceedings, the district court awarded the Association
and the homeowners attorney fees as damages.

On appeal, SVA contends that the district court
erred by ordering the conveyance of the lots and landing
strip to the Association and by awarding attorney fees as
damages. We conclude that substantial evidence supports
the district court's decision concerning the ownership of
the lots and landing strip. However, we also conclude
that the district court erred in awarding attorney fees as
damages. We therefore affirm that portion of the district
court's judgment that relates to property ownership and
reverse that portion of the judgment that pertains to attorney
fees.
FACTS
In the late 1970s, SVA developed Sky Ranch Estates
I and Sky Ranch Estates II, a remote, fly-in community
located approximately fifty miles outside of Las Vegas in
Sandy Valley. Sky Ranch Estates I and Sky Ranch Estates
II occupy one-half of a quarter section of land with
a single landing strip transecting the development from
the northeast corner [***3] to the southwest corner.
SVA created the Association to administer and maintain
the common areas, and recorded a declaration of covenants,
conditions and restrictions (CC&Rs) in 1978,
which required SVA to convey all [*952] "common
properties" within Sky Ranch Estates, including the recreational
areas, streets, landing strip, and all other areas
not a part of the residential lots, to the Association.
SVA conveyed title to a landing strip and lots designated
as "common areas" on the recorded final plat
map within Sky Ranch Estates I to the Association. Later,
although a declaration of annexation was executed in
1982 that annexed Sky Ranch Estates II to Sky Ranch
Estates I, SVA did not convey title to the common area
lots or the landing strip within Sky Ranch Estates II to
the Association.
In 1992, the Association and the homeowners filed a
complaint for declaratory relief, specific performance,
breach of fiduciary duty, and enforcement of land use
conditions against SVA, seeking to compel SVA to convey
five common area lots within Sky Ranch Estates II,
as well as a second landing strip, parallel to the first, on
the easterly 150 feet of lot 39, to the Association. n1 In
its answer, [**967] SVA asserted [***4] that the plat
maps were approved by the County Commissioners
without reflecting changes made to the easterly half of
lot 39 and that, instead of re-mapping the parcel, SVA
modified the plans for the parcel by expressly reserving
the easterly 150 feet of lot 39 in the CC&Rs, thereby
preventing its use as a parallel landing strip. SVA also
disputed that the five triangular lots designated in the
Association's complaint were part of the common areas
required to be conveyed to the Association.
117 Nev. 948, *; 35 P.3d 964, **;
2001 Nev. LEXIS 82, ***; 117 Nev. Adv. Rep. 78
[***5]
Page 3
n1 In September 1996, the Association filed
(under a separate district court case number) a
petition for a writ of mandamus against Clark
County seeking to compel Clark County to enforce
the conditions imposed upon SVA when the
final maps for Sky Ranch Estates I and Sky
Ranch Estates II were approved by the Board of
County Commissioners in the early 1980s. The
two cases were consolidated by the district court
in October of 1997, and Clark County filed a
cross-claim against SVA for specific performance.
SVA responded with a cross-claim
against Clark County for specific performance
based on a waiver request application SVA filed
with Clark County in 1996 while this action was
pending in district court. All parties later stipulated
that Clark County would remain a named
defendant only for purposes of naming all indispensable
parties and that Clark County would not
actively participate in the trial nor would any adverse
judgment be entered against it without its
consent.
At a two-day bench trial, the Association presented
evidence that the designation "common area reserved for
landing strip" on the plat map referred to the entire
300-foot width, including the easterly 150 feet of lot 39.
The evidence included SVA's representation to the
County Commissioners in its plat map for Sky Ranch
Estates II that the easterly 150 feet of lot 39 would be a
second, parallel landing strip, and that SVA did not express
any intent to reserve the easterly 150 feet of lot 39
during the approval process before the County Commissioners.
The Association also introduced evidence that a
condition of the County [*953] Commissioners' approval
of the final plat map for Sky Ranch Estates II was
that the Association own and maintain the runways and
taxiways. The homeowners' testimony indicated that
SVA represented to them that the easterly 150 feet of lot
39 would be developed as a second landing strip, parallel
to the runway occupying the westerly 150 feet of lot 39
and that, if the parallel landing strip was not developed,
pilots would be forced to use a nearby unpaved Bureau
of Land Management runway which, because of its location,
frequently experiences cross winds, making plane
[***6] operation difficult and dangerous.
The Association also presented evidence that the
five triangular lots, initially designated as "recreational
areas" on the tentative plat map and as "open areas" on
the final plat map, did not conform to applicable county
codes for development due to their dimensions or size.
Development was not feasible on two of the lots because,
in addition to their dimensions, one contained a commu-

nity well and the other was at the end of a landing strip.
Witness testimony indicated that these five undevelopable
lots had been reserved for badminton courts, tennis
courts, and/or a swimming pool, and that these areas
were intended to be part of the common areas to be conveyed
to the Association under the CC&Rs.
The district court entered judgment for the Association,
finding that the easterly 150 feet of lot 39 as well as
the five triangular lots designated as "open areas" on the
final plat map of Sky Ranch Estates II were always intended
to be a part of the common areas owned by the
Association, and ordered that title to the property be
conveyed to the Association. In addition, based upon a
post-trial motion, the district court concluded that the
Association [***7] was entitled to attorney fees as
damages resulting from its action to determine title to
real property. Thereafter, the district court signed written
findings of fact and conclusions of law reflecting its decision,
and ordering SVA to pay the Association $
74,567.00 in attorney fees as damages. SVA timely appealed.
DISCUSSION
1. The easterly 150 feet of lot 39 within Sky Ranch
Estates II
SVA contends that the district court erred by granting
the Association title to the easterly 150 feet of lot 39
within Sky Ranch Estates II, arguing that SVA is the
legal owner of the property because SVA reserved title to
the property in the amended CC&Rs.
[HN1] When a contract is clear on its face, it will be
construed from [*954] the written language and enforced
as written. n2 Parol evidence is not admissible to
vary or contradict the clear and unambiguous terms of a
written agreement. However, parol evidence is admissible
to determine the true intent of the parties when a
contract is ambiguous. n3 [**968] Thus, the circumstances
surrounding the execution of a contract and the
subsequent acts or declarations of the parties may be
considered to interpret unclear contractual provisions. n4
n2 See Ellison v. C.S.A.A., 106 Nev. 601,
603, 797 P.2d 975, 977 (1990).
[***8]
n3 See Trans Western Leasing v. Corrao
Constr. Co., 98 Nev. 445, 447, 652 P.2d 1181,
1183 (1982).
n4 See Glenbrook Homeowners v. Glenbrook
Co., 111 Nev. 909, 916, 901 P.2d 132, 137
(1995).
117 Nev. 948, *; 35 P.3d 964, **;
2001 Nev. LEXIS 82, ***; 117 Nev. Adv. Rep. 78
Page 4
In this case, the CC&Rs constituted a written contract
to convey land, but the covenant "excepting the
easterly 150 feet of the designated landing strip" created
an ambiguity as to the identity of the designated landing
strip in light of the recorded plat maps for the subdivision.
These plat maps contained a designated landing
strip 300 feet wide and were referenced in the CC&Rs.
Thus, the district court properly considered parol evidence
to resolve the ambiguity.
Additionally, this court will not set aside a district
court's findings of fact unless they are clearly erroneous
or not supported by substantial evidence. n5 The record
reveals substantial evidence from which the district court
could find that SVA intended to convey the easterly 150
feet of lot 39 to the Association. In particular, the Association
presented various documents, including recorded
tentative [***9] and final plat maps for Sky Ranch Estates
and promotional materials, all of which depicted the
entire width of lot 39 as a landing strip. Testimony from
the individuals involved in the process of seeking approval
of the subdivision before Clark County, including
the engineer and a Clark County official, indicated that
the County Commissioners conditioned approval of the
final plat map upon the Association's ownership of the
"common area reserved for a landing strip," including the
easterly 150 feet of lot 39. The purchasers of residential
lots also testified that SVA orally represented to them
that the easterly 150 feet of lot 39 would be used as a
parallel landing strip. Accordingly, we conclude that the
district court's decision was supported by substantial
evidence and was not clearly erroneous.
n5 See Young v. Nevada Title Co., 103 Nev.
436, 438, 744 P.2d 902, 903 (1987).
[*955] II. The five triangular "open area" lots
within Sky Ranch II
SVA contends that the district court improperly relied
[***10] upon the tentative plat map for Sky Ranch
Estates II, which designated some of the five lots as
"recreational areas," in granting the Association title to
the property. We disagree and conclude that the district
court's decision was supported by substantial evidence.
In particular, the record reveals that the definition of
common properties within Article II of the CC&Rs includes
recreational areas and that the five lots were designated
as "recreational areas" on the recorded tentative
plat map for Sky Ranch Estates II, which the County
Commissioners used in approving the final plat map and
which the district court properly considered in determining
the intent of the parties in this case. Although the lots

were designated as "open areas" on the recorded final
plat map for Sky Ranch Estates II, the evidence presented
at trial indicates that the five lots were not developable
and that the County Commissioners approved the
final plat map for the subdivision with the five lots designated
as "open areas" for that reason. Additionally, the
evidence indicated that the five lots were always intended
to be used for swimming pools and tennis courts. Accordingly,
we conclude that the district [***11] court's
decision was supported by substantial evidence and was
not clearly erroneous.
III. Attorney fees
SVA contends that the district court erred in its
award of attorney fees because attorney fees cannot be
recovered unless authorized by agreement, statute or
rule, none of which exists or applies in this case. The
Association and the homeowners assert that the attorney
fees were not awarded as costs, but rather as recoverable
damages in the underlying action. They contend that the
prohibition against fees absent an agreement, statute or
rule does not apply to attorney fee awards as damages.
This case presents an opportunity for this court to clarify
its jurisprudence regarding the difference between attorney
fees as a cost of litigation n6 and [**969] attorney
fees as an element of damage. n7
n6 The following cases involved the award
of attorney fees as a cost of litigation pursuant to
a rule, statute or agreement. Any language suggesting
the fees were awarded as damages is
hereby disapproved. James Hardie Gypsum,
Inc. v. Inquipco, 112 Nev. 1397, 929 P.2d 903
(1996); Artistic Hairdressers, Inc. v. Levy, 87
Nev. 313, 486 P.2d 482 (1971); Glens Falls Ins.
v. First Nat'l Bank, 83 Nev. 196, 427 P.2d 1
(1967).
[***12]
n7 The following cases involved issues relating
to attorney fees as an element of damage.
Any language in these cases that suggests attorney
fees were considered pursuant to a rule, statute
or agreement is disapproved. Clark County
Sch. Dist. v. Rolling Plains, 117 Nev. , 16
P.3d 1079 (2001); Southern Nev. Homebuilders
v. N. Las Vegas, 112 Nev. 297, 913 P.2d 1276
(1996); Michelsen v. Harvey, 110 Nev. 27, 866
P.2d 1141 (1994); Works v. Kuhn, 103 Nev. 65,
732 P.2d 1373 (1987); Summa Corp. v.
Greenspun, 96 Nev. 247, 607 P.2d 569 (1980),
opinion on reh'g, 98 Nev. 528, 655 P.2d 513
(1982); International Indus. v. United Mtg. Co.,
117 Nev. 948, *; 35 P.3d 964, **;
2001 Nev. LEXIS 82, ***; 117 Nev. Adv. Rep. 78
[***13]
Page 5
96 Nev. 150, 606 P.2d 163 (1980); City of Las
Vegas v. Cragin Industries, 86 Nev. 933, 478
P.2d 585 (1970); American Fed. Musicians v.
Reno's Riverside, 86 Nev. 695, 475 P.2d 220
(1970); Peterson v. Wiesner, 62 Nev. 184, 146
P.2d 789 (1944); McIntosh v. Knox, 40 Nev. 403,
165 P. 337 (1917); Brown v. Jones, 5 Nev. 374
(1870).
[*956] In Young, n8 we held that [HN2] attorney
fees cannot be recovered as a cost of litigation unless
authorized by agreement, statute or rule. When authorized,
a district court's award of attorney fees as costs will
not be overturned on appeal absent a manifest abuse of
discretion. n9
n8 103 Nev. at 442, 744 P.2d at 905.
n9 Nelson v. Peckham Plaza Partnerships,
110 Nev. 23, 26, 866 P.2d 1138, 1139-40 (1994).
[HN3]
Procedurally, when parties seek attorney fees as a
cost of litigation, documentary evidence of the fees is
presented to the trial court, generally in a post-trial motion.
Opposing parties have an opportunity to contest the
request for attorney fees, and the trial court must determine
if any agreement, statute or rule authorizes fees. If
the fees are authorized, the trial court examines the reasonableness
of the fees requested and the amount of any
award. Thus, when a court is requested to award attorney
fees as a cost of litigation, the matter is decided based
upon pleadings, [***14] affidavits and exhibits. n10
On rare occasions, a court may even determine the
amount of the attorney fees based upon the court's personal
observation of the time the attorney spent in hearings
and the quantity and quality of pleadings filed by
the attorney. n11
n10 James Hardie Gypsum, Inc. v. Inquipco,
112 Nev. 1397, 929 P.2d 903 (1996) (attorney
fees were awarded pursuant to agreement and
properly proven by affidavit pursuant to NRCP
43(c)).
n11 Artistic Hairdressers, Inc. v. Levy, 87
Nev. 313, 316, 486 P.2d 482, 484 (1971).
In contrast, [HN4] when a party claims it has incurred
attorney fees as foreseeable damages arising from
tortious conduct or a breach of contract, such fees are

considered special damages. They must be pleaded as
special damages in the complaint pursuant to NRCP 9(g)
and proved by competent evidence just as any other element
of damages. n12 The mention of attorney fees in a
complaint's general [*957] prayer for relief is insufficient
to meet this requirement. [***15] n13 Finally,
when attorney fees are considered as an element of
damages, they must be the natural and proximate consequence
of the injurious conduct. If more than one claim
is presented in a complaint, the party claiming fees as
damages must prove the fees as to each claim. n14
n12 International Indus. v. United Mtg. Co.,
96 Nev. 150, 606 P.2d 163 (1980) (failure to
plead damages precluded recovery); City of Las
Vegas v. Cragin Industries, 86 Nev. 933, 478
P.2d 585 (1970) (fees not properly pleaded in the
complaint); Brown v. Jones, 5 Nev. 374 (1870)
(complaint must allege with distinctness fees resulting
only from dissolution of injunction).
n13 Young, 103 Nev. 436, 744 P.2d 902.
n14 Peterson v. Wiesner, 62 Nev. 184, 146
P.2d 789 (1944) (failure to distinguish fees incurred
in wrongful attachment action from fees
incurred in collateral criminal case resulted in
denial of fees as damages).
[HN5]
As a practical matter, [***16] attorney fees are
rarely awarded as damages simply because parties have a
difficult time demonstrating that the fees were proximately
and necessarily caused by the actions of the opposing
party and that the fees were a reasonably foreseeable
consequence of the breach [**970] or conduct.
Because parties always know lawsuits are possible when
disputes arise, the mere fact that a party was forced to
file or defend a lawsuit is insufficient to support an
award of attorney fees as damages. n15
n15 Flamingo Realty v. Midwest Development,
110 Nev. 984, 991-92, 879 P.2d 69, 73-74
(1994) (fees awarded as damages for filing a
frivolous lawsuit vacated as fees were not damages
tied to any cause of action and the action
was not frivolous pursuant to NRS 18.010(2)(b)).
[HN6]
Attorney fees may be an element of damage in cases
when a plaintiff becomes involved in a third-party legal
dispute as a result of a breach of contract or tortious
117 Nev. 948, *; 35 P.3d 964, **;
2001 Nev. LEXIS 82, ***; 117 Nev. Adv. Rep. 78
Page 6
conduct by the defendant. n16 The fees incurred in defending
[***17] or prosecuting the third-party action
could be damages in the proceeding between the plaintiff
and the defendant. This type of action could arise from
claims against title insurance or bonds and breaches of
duty to defend clauses in insurance or indemnity actions.
n17
n16 Clark County Sch. Dist. v. Rolling
Plains, 117 Nev. , 16 P.3d 1079 (2001); see
Restatement (Second) of Torts § 914(2) (1979);
Robert L. Rossi, Attorneys' Fees § 8:3 (2d ed.
1995).
[HN7]
n17 Rossi, § 8:4-8:11.
Attorney fees may also be awarded as damages in
those cases in which a party incurred the fees in recovering
real or personal property acquired through the
wrongful conduct of the defendant or in clarifying or
removing a cloud upon the title to property. n18 [*958]
Finally, actions for declaratory or injunctive relief may
involve claims for attorney fees as damages when the
actions were necessitated by the opposing party's bad
faith conduct. n19
n18 Michelsen v. Harvey, 110 Nev. 27,
29-30, 866 P.2d 1141, 1142 (1994) (attorney fees
permissible as an element of damages in slander
of title action); Peterson v. Wiesner, 62 Nev. 184,
146 P.2d 789 (1944); McIntosh v. Knox, 40 Nev.
403, 165 P. 337 (1917) (award of attorney fees
allowed as damages in wrongful attachment actions);
Rossi, § 8:12.
[***18]
n19 City of Las Vegas v. Cragin Industries,
86 Nev. 933, 478 P.2d 585 (1970); American
Fed. Musicians v. Reno's Riverside, 86 Nev. 695,
475 P.2d 220 (1970).
Although this action involved the clarification of title
to real property, the Association and homeowners did
not allege attorney fees as special damages caused by
SVA's conduct. The complaint merely mentions attorney
fees as a part of the general prayer for relief. Nor was
evidence of attorney fees presented and litigated at trial.
Instead, after receiving affidavits from counsel for the
Association and homeowners, the district court, in its
findings of fact and conclusions of law, simply stated

that attorney fees were awarded as damages. SVA then
moved to amend the findings of fact and conclusions of
law and opposed the attorney fee award. The Association
and homeowners asserted that they were entitled to attorney
fees as damages pursuant to a statute, NRS
116.4117. In supplemental points and authorities, the
Association and homeowners argued alternatively that
they were entitled [***19] to attorney fees as damages
pursuant to Summa Corp. v. Greenspun. n20 Because the
district court denied SVA's motion to amend the findings
of fact and conclusions of law as to the attorney fee
award without explanation, it is unclear whether the district
court awarded the attorney fees under NRS 116.4117
or as damages under Summa Corp.
n20 96 Nev. 247, 607 P.2d 569 (1980),
opinion on reh'g, 98 Nev. 528, 655 P.2d 513
(1982).
On appeal, the Association and homeowners have
abandoned their argument that NRS 116.4117 supports
the award of attorney fees. The Association and homeowners
only assert that the district court properly
awarded attorney fees as damages pursuant to our holding
in Summa Corp.
In Summa Corp., Summa was sued for slander of title
and breach of contract. A judgment was entered
against Summa that included an award of attorney fees as
damages even though no claim for damages was contained
in the [***20] complaint. This court affirmed the
award of attorney fees as damages based upon NRCP
54(c), which commands the district court to "grant the
relief to which the party in whose favor it is rendered is
entitled, even if the party has not demanded such relief in
his pleadings."
[**971] Although attorney fees as damages were
not pleaded in the complaint, evidence regarding attorney
fees as damages was [*959] introduced and litigated
at trial. We reasoned that the failure to plead special
damages under NRCP 9(g) did not deprive the district
court of its power to award attorney fees as damages
because the matter had been tried, without objection, and
NRCP 54(c) was an appropriate vehicle for conforming
the judgment to the proof. n21 We then concluded that
there was sufficient evidence to support the award and
the reasonableness of the fee.
n21 Id., 96 Nev. at 250-55, 607 P.2d at
571-74.
117 Nev. 948, *; 35 P.3d 964, **;
2001 Nev. LEXIS 82, ***; 117 Nev. Adv. Rep. 78
Page 7
Summa Corp. merely stands for the proposition that
failure to properly plead special damages pursuant to
NRCP 9(g) does not [***21] necessarily bar an award
of attorney fees when evidence of attorney fees as damages
has been litigated at trial. In such a case, motions
under NRCP 54(c) or NRCP 15(b) may be appropriate
mechanisms for resolving a conflict between the pleadings
and the trial evidence. Summa Corp. does not,
however, permit the award of post-trial attorney fees in
contravention of Young.
This case is distinguishable from Summa Corp.
Here, the Association did not introduce or proffer any
evidence supporting a claim for attorney fees as damages
during trial. Instead, the Association originally asserted
that it was entitled to attorney fees, not as an element of
damages, but pursuant to statute. Thus, unlike Summa
Corp., there is no basis for the post-trial award of fees to
conform to the evidence.
In addition to Summa Corp., the Association and the
homeowners contend that the district court may have
based its decision to award attorney fee damages on Artistic
Hairdressers, Inc. v. Levy. n22 Artistic involved an
award of attorney fees for the issuance of a wrongful
injunction. Although the language of the case speaks of
attorney fees as damages, the actual basis for the award
of [***22] fees was a rule, NRCP 65. We held that an
evidentiary hearing regarding the amount of attorney fees
was not required under the rule, because the amount of
the fees was small and the district court's observations of
the length of the hearings and pleadings was enough to
support the fee award under the facts and circumstances
of that case. Artistic does not authorize a court to award
attorney fees as damages when damages have not been
pleaded or proven at trial.
n22 Artistic Hairdressers, Inc. v. Levy, 87
Nev. 313, 316, 486 P.2d 482, 484 (1971).
We recognize, however, that the language in Summa
Corp. and Artistic may have misled the Association and
the district court into believing that the issue of attorney
fees as special damages could be raised in a post-trial
proceeding. Thus, although the district court erred in this
case by considering the issue of attorney fees as damages
after trial, the error is understandable. In light of the
confusion in our case law, a post-trial evidentiary hearing
on the [*960] attorney-fees-as-damages [***23] issue
is appropriate in this case. Accordingly, we reverse
that portion of the district court's judgment awarding
attorney fees and remand this case to the district court to
conduct an evidentiary hearing. Nonetheless, we reiterate

that in future cases, this method is not appropriate for
litigating attorney fees as damages. When attorney fees
are alleged as damages, they must be specifically pleaded
and proven by competent evidence at trial, just as any
other element of damages.
CONCLUSION
The record contains substantial evidence supporting
the district court's decision concerning title to the easterly
150 feet of lot 39 and the five "open area" lots within
Sky Ranch Estates II. However, the district court erred in
117 Nev. 948, *; 35 P.3d 964, **;
2001 Nev. LEXIS 82, ***; 117 Nev. Adv. Rep. 78
Page 8
awarding attorney fees as damages without an evidentiary
hearing. Accordingly, we affirm that portion of the
district court's judgment concerning title to the real
property, we reverse that portion of the judgment awarding
$ 74,567.00 in attorney fees, and we remand this case
to the district court to conduct a hearing to determine
whether attorney fees were proximately caused by the
conduct of SVA, and if so, the amount of attorney fees
incurred incident to obtaining [***24] title to the real
property in this case.

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134 W. Va. 634, *; 60 S.E.2d 699, **;
1950 W. Va. LEXIS 63, ***
LEXSEE 134 W VA 634
INA THOMASON AND SHEDRICK BEGGS v. G. S. MOSRIE
PRIOR HISTORY: [***1] Ina Thomason and
Shedrick Beggs brought action of trespass on the case
against G. S. Mosrie to recover damages because of alleged
fraud and deceit of defendant in misrepresenting to
plaintiffs in connection with the sale to plaintiffs of a
lease and fixtures and supplies in leased building, that
lessor would not terminate the lease under provision that
if lessor should sell the property, possession thereof
should be surrendered within a reasonable time to the
lessor or his purchaser. The Circuit Court of Mercer
County, rendered judgment for the plaintiffs, and the
defendant brought error.
Judgment reversed; verdict set aside; new trial awarded.
DISPOSITION: Judgment reversed; verdict set aside;
new trial awarded.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant lessor appealed
from a judgment of the Circuit Court of Mercer
County (West Virginia) in favor of plaintiff restaurant
owners in their action to recover damages because of
alleged fraud and deceit of the lessor in connection with
the sale of a lease and fixtures and supplies in a leased
building.
OVERVIEW: The lessor fraudulently represented to the
restaurant owners that they could take over the lease on
the building. However, in actuality the premises had
been rented to another who eventually brought an ejectment
action to remover the restaurant owners. The owners
sued the lessor for damages suffered as a result of the
loss of the lease and for having to sell the restaurant
equipment because they were not able to rent another
space. A trial was had and a verdict was rendered in favor
of the owners. The lessor appealed. The court found
that the allegations of damages set forth in both counts of
the declaration, except the special damages alleged rela-
No. 10205
SUPREME COURT OF APPEALS OF WEST VIRGINIA
134 W. Va. 634; 60 S.E.2d 699; 1950 W. Va. LEXIS 63
April 18, 1950, Submitted
July 15, 1950, Decided
Page 1
tive to costs, attorney fees and other sums paid and incurred
by the plaintiffs in defense of the ejectment action,
were insufficient. The special damages were not
plead with the required particularity. Further, the allegations
that the owners were deprived of profits which
would have accrued from the restaurant during the residue
of the lease was purely speculative and failed to
show that any profit from the operation of the business
was definite. The loss due to the owners having to sell
the equipment at a great loss were recoverable.
OUTCOME: The judgment was reversed, the verdict
was set aside, and a new trial was awarded.
LexisNexis(R) Headnotes
Torts > Business & Employment Torts > Deceit &
Fraud
[HN1] An action for fraud and deceit may be maintained
against a person who makes a false representation of a
fact, with knowledge of its falsity, to a person who is
ignorant of its falsity, with intent that it shall be acted
upon, if the person to whom it is made acts upon it and
by so acting suffers injury.
Torts > Business & Employment Torts > Deceit &
Fraud
Civil Procedure > Pleading & Practice > Pleadings >
Heightened Pleading Requirements
[HN2] Where damages sought to be recovered for an
injury which results from fraud and deceit or other cause
are the natural but not the necessary result of the facts
alleged in the declaration, such damages must be specifically
alleged; and in a case involving such damages a
declaration which contains only a general allegation of
damages is insufficient on demurrer.
Civil Procedure > Pleading & Practice > Pleadings >
Heightened Pleading Requirements

[HN3] In discussing the rule which requires special
damages which are the natural but not the necessary result
of the injury complained of to be specifically alleged,
it is said that when the law does not necessarily
imply that plaintiff sustained damage by the act complained
of, it is essential to the validity of the declaration
that the resulting damage should be shown with particularity.
And whenever the damages sustained have not
necessarily accrued from the act complained of, and
consequently are not implied by law, then, in order to
prevent the surprise on defendant which might otherwise
ensue on the trial, plaintiff must in general state the particular
damage which he has sustained, or he will not be
permitted to give evidence of it. Special damages, which
are the natural but not necessary result of the injury
complained of, must be specifically alleged. Such injuries
do not necessarily result from defendant's wrongful
act, but flow from it as a natural and proximate consequence;
hence they must be specially alleged in order
that defendant may have notice thereof and be prepared
to meet the same upon trial.
Torts > Damages > Damages Generally
Real & Personal Property Law > Landlord & Tenant >
Commercial Leases
[HN4] In an action for damages for the failure of the
landlord to give possession of the property, which has
been leased, or from which he has ejected the tenant,
where the gist of the action is the deprivation of the benefit
of the lease, whether the action be covenant or tort,
the general rule is, that the plaintiff is entitled as the
measure of his damages to the difference between the
rent reserved and the value of the premises for the term.
Torts > Business & Employment Torts > Deceit &
Fraud
Torts > Damages > Damages Generally
[HN5] In an action for fraud and deceit the plaintiff can
not recover speculative damages.
Torts > Damages > Damages Generally
Real & Personal Property Law > Landlord & Tenant >
Eviction Actions
[HN6] In an action for damages for the failure of a landlord
to give possession of the leased property, or for
ejecting a tenant, where the gist of the action is the deprivation
of the benefit of the lease, the plaintiff can not
recover for loss sustained in selling his stock for less
than their value.
Torts > Damages > Damages Generally
[HN7] Usually the measure of damages where personal
property is damaged, is the fair market value of that
property before the damage from which is subtracted the
134 W. Va. 634, *; 60 S.E.2d 699, **;
1950 W. Va. LEXIS 63, ***
Page 2
fair market value of the same property immediately after
the damage.
Civil Procedure > Relief From Judgment > Relief Generally
[HN8] A verdict in excess of the amount which the evidence
shows a plaintiff is justly entitled to recover
should be set aside. If it clearly appear to the court, that
the verdict was made excessive by the admission of illegal
evidence, the court should set aside the verdict and
grant a new trial; and, if the evidence or facts are certified
on writ of error, and the verdict clearly appears to
the appellate court to be excessive because of the admission
of such illegal evidence, said court will disregard
such evidence, reverse the judgment and set aside the
verdict.
Civil Procedure > Discovery Methods
[HN9] In any action or motion, if good cause be shown
or appear, the court or the judge in vacation may order
the plaintiff to file a more particular statement, in any
respect, of the nature of his claim and may stay the action
until a reasonable time after such order is complied
with.
Civil Procedure > Discovery Methods
[HN10] W. Va. Code § 56-4-23 (1931) provides that
when a plaintiff fails to comply with an order to file a
statement of the particulars of his claim the court, at the
trial, may exclude the evidence offered by the party in
default as to any matter which he has so failed to state or
has insufficiently stated, and which is not described in
the notice, declaration or other pleading of such party so
plainly as to give the adverse party notice of its character.
Civil Procedure > Relief From Judgment > Relief Generally
Civil Procedure > Trials > Judgment as Matter of Law
[HN11] A judgment non obstante veredicto must be
based upon the merits of the case as disclosed by the
pleadings, not in any sense upon the evidence adduced
thereunder. It may be applied to defeat a judgment upon
a verdict predicated upon a declaration that does not state
a cause of action entitling the plaintiff to recover. But in
no event can it serve the purpose of a demurrer to reach a
merely formally defective declaration, which but for the
informality or irregularity states a good cause of action.
COUNSEL: Clark M. Thornton, James S. Kahle, for
plaintiff in error.
Ajax T. Smith, Robert Carr, for defendants in error.
JUDGES: HAYMOND, JUDGE.

OPINIONBY: HAYMOND
OPINION: [*634] [**701] HAYMOND, JUDGE:
This action of trespass on the case was instituted in
the Circuit Court of Mercer County by the plaintiffs, Ina
Thomason, formerly Ina Thomason Cornett, and
Shedrick Beggs, as partners, to recover from the defendant
G. S. [*635] Mosrie damages alleged to have resulted
from [***2] fraud and deceit practiced by him in
the sale of a lease upon a building and a restaurant, including
fixtures and food supplies in the leased building,
in the City of Princeton. The declaration contains two
counts and the damages claimed by the plaintiffs and
stated generally in the declaration were in the sum of $
5,000.00. An attachment was issued and levied upon
certain real estate of the defendant. The court overruled
the demurrer of the defendant to the declaration and each
of its counts and, upon the issues raised by the declaration
and the defendant's plea of not guilty and the evidence
introduced in behalf of the respective parties, the
jury returned a verdict in favor of the plaintiffs for $
3,750.00. By its order of April 5, 1949, the trial court
overruled the separate motions of the defendant to set
aside the verdict and to enter judgment in favor of the
defendant notwithstanding the verdict, and rendered
judgment in favor of the plaintiffs for the amount of the
verdict with interest and costs. The order also directed a
sale of the real estate of the defendant under the levy of
the attachment. To the final judgment this Court granted
this writ of error upon the petition [***3] of the defendant.
Each of the two counts of the declaration contained,
in substance, these allegations:
On September 11, 1944, J. M. Mosrie was the owner
of a lot of land on Mercer Street in the City of Princeton,
on which was located a one story building suitable for
use as a restaurant and a dwelling. On that day, by instrument
in writing, he leased the foregoing property to
the defendant G. S. Mosrie for a term of five years from
February 1, 1945, at a rental of $ 47.50 per month. The
lease provided that if J. M. Mosrie should sell or build
upon the property, G. S. Mosrie should, within a reasonable
time thereafter, surrender possession of the property
to J. M. Mosrie or his vendee. The defendant G. S.
Mosrie took possession of the leased premises and operated
a restaurant in the building until he assigned his
rights under the lease to the plaintiff, Ina Thomason. By
deed dated March 19, 1946, and duly recorded in the
office of [*636] the Clerk of the County Court of
Mercer County, J. M. Mosrie and his wife sold and conveyed
the property occupied by the defendant to Chahin
El Mosrie. By written notice given to the defendant G. S.
Mosrie on March 26, 1946, J. M. Mosrie and [***4]
134 W. Va. 634, *; 60 S.E.2d 699, **;
1950 W. Va. LEXIS 63, ***
Page 3
Chahin El Mosrie informed him of the sale and the conveyance
of the property to Chahin El Mosrie and notified
G. S. Mosrie that, by virtue of the sale and the conveyance,
the lease was terminated, and that he was required
to deliver possession of the property to Chahin El Mosrie
on or before June 1, 1946.
G. S. Mosrie failed to comply with the requirement
of the notice to deliver possession [**702] to Chahin El
Mosrie, and on a day prior to October 24, 1946, told the
plaintiff, Ina Thomason, in the building on the leased
premises, that he would sell her the restaurant, its stock
of goods and provisions, the equipment and the fixtures
then in the building, and the lease for the sum of $
5,000.00, and at that time, with intent to deceive and
defraud the plaintiff, Ina Thomason, and to induce her to
accept his offer of sale, falsely and fraudulently concealed
from her the sale and the conveyance of the property
by J. M. Mosrie to Chahin El Mosrie and the notice
to him of the termination of the lease. At the time of the
offer of the defendant G. S. Mosrie to sell to the plaintiff,
Ina Thomason, the restaurant, the stock of goods and
provisions, the equipment and the fixtures, and the
[***5] lease, she called to the attention of the defendant
G. S. Mosrie the provision of the lease relating to its termination
in the event J. M. Mosrie should sell the property
or build upon it within the five year term and requiring
G. S. Mosrie to deliver possession of the property
to J. M. Mosrie or his vendee within a reasonable time
after such sale of such building; and the defendant G. S.
Mosrie, with intent to deceive and defraud the plantiff,
Ina Thomason, and to induce her to accept his offer of
sale, then falsely and fraudulently warranted and represented
to her that, if she accepted his offer, she need not
worry about a termination of the lease during its five
year term because of the foregoing provision, that J. M.
Mosrie still owned the leased property, that he [*637]
would not want possession of the property during the
term of the lease, and that, if she accepted the offer of
sale, she could retain possession of the premises during
the remainder of the five year term of the lease.
After this conversation with the defendant G. S.
Mosrie, the plaintiff, Ina Thomason, on October 24,
1946, informed the plaintiff, Shedrick Beggs, of the
foregoing offer, representations and [***6] statements
of the defendant, G. S. Mosrie, to her, and she and the
plaintiff, Shedrick Beggs, then formed a partnership for
the purpose of purchasing the restaurant, the stock of
goods and provisions, the equipment and the fixtures,
and the lease from the defendant, and she and Beggs
agreed that Beggs should furnish $ 1,000.00 of the purchase
price and receive a one fifth interest and that she
should furnish the remainder of the purchase price and
receive a four fifths interest in the partnership.

Subsequently, on October 24, 1946, the plaintiff, Ina
Thomason, in accordance with the foregoing partnership
agreement, relying upon the false and fraudulent representations
and statements of the defendant G. S. Mosrie,
and believing them to be true, purchased from him, in
behalf of the plaintiffs, as partners, the restaurant, the
stock of goods and provisions, the equipment and the
fixtures, and the lease, for the sum of $ 5,000.00, of
which sum she paid the defendant $ 1,000.00 in cash and
$ 3,600.00 by her conveyance to him of her residence
property. She also assumed the payment of a lien upon a
cash register, part of the property purchased, in the
amount of $ 236.05, and agreed to pay [***7] the residue
of the purchase price of $ 163.95 within four months
from the date of the sale of the property to her. All of the
purchase price was paid by her before the institution of
this action except a small portion of the lien upon the
cash register, which was not due at that time and which
is payable in installments of $ 22.50 per month. Upon the
conclusion of the sale, the defendant G. S. Mosrie assigned
all his rights under the lease to the plaintiff, Ina
Thomason, by an instrument in writing dated October 24,
1946.
[*638] Neither of the plaintiffs had any notice or
knowledge, prior to the purchase of the property from the
defendant, of the sale and the conveyance of the leased
property by J. M. Mosrie and wife to Chahin El Mosrie,
or of the notice to G. S. Mosrie to deliver possession of
the property to Chahin El Mosrie, or of any intention
upon the part of J. M. Mosrie or Chahin El Mosrie to
take possession of the leased premises during the remainder
of the five year term of the lease; and at the time
of their purchase from the defendant G. S. Mosrie both
plaintiffs believed and relied upon his false and fraudulent
representations and statements and made such
[**703] [***8] purchase because of and in reliance
upon such representations and statements.
The plaintiffs operated the restaurant on the leased
premises from the date of their purchase until they were
obliged to vacate the premises in June, 1947. After a
notice given by J. M. Mosrie and Chahin El Mosrie to
the defendant, G. S. Mosrie, and the plaintiff, Ina Thomason,
requiring her to vacate the leased premises on or
before January 1, 1947, J. M. Mosrie and Chahin El
Mosrie, on March 15, 1947, recovered a judgment
against them for possession of the premises and damages
for their detention, with interest and costs, in an action of
unlawful detainer before a justice of Mercer County. The
plaintiff, Ina Thomason, appealed from the judgment of
the justice to the Circuit Court of Mercer County and, on
June 2, 1947, that court rendered judgment in favor of
Chahin El Mosrie against the plaintiff, Ina Thomason,
for possession of the premises and $ 142.50 damages and
costs, including a statutory attorney fee of $ 10.00. Since
134 W. Va. 634, *; 60 S.E.2d 699, **;
1950 W. Va. LEXIS 63, ***
Page 4
the entry of the foregoing judgment the plaintiffs have
been unable to rent or procure suitable premises in which
to operate the restaurant purchased by them and for that
reason were [***9] obliged to sell the restaurant goods,
equipment and fixtures at a great loss and quit the restaurant
business.
Both counts of the declaration charge, as damages,
that by reason of the false, fraudulent, deceitful and
wrongful conduct of the defendant, the plaintiffs have
been deprived of all their rights under the lease and of all
profits [*639] and advantages which would have accrued
to them if the false, fraudulent and deceitful statements
of the defendant had been true, have been obliged
to sell the goods, the equipment and the fixtures at a
great loss, and have been required to pay moneys for
costs and attorney fees in defense of the action before the
justice and on appeal and have become liable for other
sums of money. Neither count, however, states or specifies
the amount of the loss or the amount of money paid
by the plaintiffs or for which they have become obligated.
The declaration was filed at July Rules, 1947, and
on August 19, 1947, the defendant moved the trial court
to require the plaintiffs to furnish counsel for the defendant
"a bill of particulars showing the particulars of
their claim". The court granted the motion and required
the plaintiffs to file "a bill [***10] of particulars of
their claim" on or before August 20, 1947. The plaintiffs
failed to file the "bill of particulars" and, several days
before the beginning of the trial on December 16, 1947,
counsel for the plaintiffs informed counsel for the defendant
that they believed the declaration furnished all
the information desired by counsel for the defendant but
that if it did not do so, counsel for the plaintiffs would
furnish any particular information which counsel for the
defendant should desire. No request for any particular
information, in response to the foregoing offer, was
made by counsel for the defendant and, after the court
overruled the demurrer to the declaration, the defendant
entered his plea of not guilty and issue was joined upon
the plea.
Upon the trial the plaintiff introduced evidence, in
support of the allegations of the declaration of the fraudulent
acts of the defendant. The evidence in behalf of the
plaintiffs showed that the defendant, prior to the sale by
him of the lease and the restaurant to the plaintiff, Ina
Thomason, in behalf of the partnership on October 24,
1946, knew that J. M. Mosrie and wife had sold and
conveyed the leased property to Chahin El Mosrie
[***11] and that the rights of the defendant in the lease
for the residue of the five year term had terminated under
the provisions [*640] of the lease; that he did not disclose
the true situation to the plaintiff, Ina Thomason,
who did not know that the leased property had been sold,

that the lease had been terminated, or that the defendant
had been notified to deliver possession of the property to
the purchaser Chahin El Mosrie; that the defendant
falsely and fraudulently represented to the plaintiff, Ina
Thomason, that he had the right to sell the lease and that
she would be protected in her right to occupy the premises
under the lease for the residue of the five year term;
that she believed and relied upon the false representations
of the defendant in purchasing the restaurant,
[**704] the goods and the provisions, the equipment
and the fixtures, and the lease, and was induced to purchase
them by reason of the false representations and
statements of the defendant; that she paid the purchase
price of $ 5,000.00 on October 24, 1946, the date of the
sale, by a payment of $ 1,165.95, in cash to the defendant,
which was furnished by the plaintiff, Shedrick
Beggs, who borrowed $ 1,200.00 [***12] and contributed
that amount in connection with the purchase, the
execution and the delivery of a deed for a residence
property owned by her in Princeton of the value of $
3,600.00 and the assumption of a lien existing on a cash
register, part of the property purchased, amounting to $
236.05; that the plaintiffs were unable to obtain any other
premises in which to operate the restaurant or to use the
fixtures and the equipment; that the plaintiffs kept possession
of the leased premises, which consisted of the
portion in which the restaurant had been operated by the
defendant prior to its sale by him and adjoining living
quarters which were occupied by the plaintiffs, until June
10, 1947, when, because of a judgment of the Circuit
Court of Mercer County against Ina Thomason awarding
possession of the property to the purchaser, Chahin El
Mosrie, and damages of $ 142.50 and costs, including an
attorney fee of $ 10.00, the plaintiffs were required to
vacate the premises.
The defendant, in his testimony, denied that he had
misrepresented the situation with respect to the lease, but
he admitted that he had not told the plaintiff, Ina Thomason,
that the leased property had been sold and
[***13] [*641] conveyed by J. M. Mosrie or that he
had been notified to give possession of the property, for
the reason that he did not believe that there had been an
actual sale of the property or that either J. M. Mosrie or
Chahin El Mosrie intended or desired to take possession
of the property during the residue of the five year term of
the lease. He denied that he assured the plaintiff, Ina
Thomason, that he would protect her in her possession of
the premises under the lease. He also testified that when
she learned of the sale of the leased property to Chahin
El Mosrie, shortly after he sold her the restaurant and the
lease, she told him that she was satisfied with the sale,
even though the property had been sold and the lease
terminated under its provisions, and that he offered to
rescind the sale of the property purchased by her from
him, repay her the money paid, reconvey the residence
134 W. Va. 634, *; 60 S.E.2d 699, **;
1950 W. Va. LEXIS 63, ***
Page 5
property which she had conveyed to him, and take back
the restaurant and the lease if she was not satisfied with
the sale. This testimony of the defendant that the plaintiff,
Ina Thomason, was satisfied with the sale and that
he offered to rescind it was denied by her and controverted
by testimony [***14] introduced by the plaintiffs.
The evidence shows that the owner, Chahin El
Mosrie, shortly after the sale of the restaurant and the
lease by the defendant, told the plaintiff, Ina Thomason,
that she did not have any lease on the building; that she
could stay until he wanted it, which might be a day, a
week, two weeks or a month, but that when he wanted
"the building, he wanted it"; that Chahin El Mosrie did
not want possession of part of the premises; that he was
unable to get possession of the whole until after the
plaintiff, Ina Thomason, had been convicted of committing
adultery with the plaintiff, Shedrick Beggs; and that
the basis of the action of unlawful detainer, in which
judgment for possession of the property was rendered,
was that the plaintiff, Ina Thomason, used the premises
for an immoral or illegal purpose. It also appears from
the evidence that the judgment for $ 142.50 damages
represented three months' rent under the lease at $ 47.50
[*642] per month during the time the plaintiffs occupied
the premises.
It is clear that the gist of this action, as well as the
principal element of damage, is the loss of the lease by
the plaintiffs which resulted from the fraudulent [***15]
conduct of the defendant. The declaration, however,
contains no allegation of special damages resulting from
the loss of the lease, and there is no evidence of the value
of the lease or the amount of loss in its value sustained
by the plaintiffs because of its termination before the
expiration of the residue of the five year term remaining
after October 24, 1946. The period of the lease [**705]
was five years from February 1, 1945, subject to termination
within a reasonable time after J. M. Mosrie, the
owner and the lessor, should sell or build on the leased
property. At the time the plaintiffs took possession, on
October 24, 1946, the remaining period was approximately
three years and four months and the plaintiffs had
possession of the premises for approximately seven and
one half months, from October 24, 1946, to June 10,
1947, when they were required to and did vacate the
property. Though the declaration alleges that the plaintiffs
were deprived of profits by reason of the fraudulent
conduct of the defendant, there is no evidence that the
plaintiffs operated or could have operated the restaurant
at a profit or that the loss of the lease caused them any
loss of profits in any [***16] definite or reasonable
amount. The declaration alleges that on account of the
fraudulent, deceitful and wrongful conduct of the defendant
the plaintiffs, being unable to obtain suitable

premises in which to operate their restaurant, have been
obliged to sell the goods, the equipment and the fixtures
at a great loss, have been required to pay moneys for
costs and attorney fees in defense of the action of unlawful
detainer before the justice and on appeal, and
have become obligated for other sums of money, but the
plaintiffs introduced no evidence to show that they had
paid or become liable for any sum of money for attorney
fees or costs in the defense of the action either before the
justice or on appeal except the item of $ 10.00 as a statutory
attorney fee included in the costs of [*643] the
action. The only other evidence of any loss sustained by
the plaintiffs relates to the goods and the stock of provisions
and the equipment and the fixtures.
Under the above recited allegations in each count of
the declaration that by reason of the false, fraudulent,
deceitful and wrongful conduct of the defendant, the
plaintiffs have been deprived of all benefits, advantages
and profits which, [***17] if the false and fraudulent
representations and statements of the defendant had been
true, would have accrued to the plaintiffs from continuing
their restaurant business during the residue of the five
year term of the lease after the premises were vacated by
them, and that they were required to sell the stock of
goods and the equipment and the fixtures at a great loss
and to quit the restaurant business, the plaintiffs introduced
evidence to the effect that the stock of goods and
provisions was worth $ 250.00 and the equipment and
the fixtures were sold at a fair price for a total of $
753.55. The bill of sale introduced in evidence shows
that the purchase price of the stock of goods and provisions
and the equipment and the fixtures was the conveyance
of the residence property of Ina Thomason,
which she and the defendant valued at $ 3,600.00, and
the additional sum of $ 400.00, or the total sum of $
4,000.00. The defendant testified that the value of the
stock of goods and provisions was $ 1,800.00, based
upon an inventory introduced in evidence, and that the
price of the equipment and the fixtures, as shown by the
inventory, was $ 3,390.00 at the time of the sale. The
plaintiff, Ina [***18] Thomason, testified that she sold
the equipment and the fixtures for $ 753.55, and that the
price at which she sold them was a fair price. A witness
produced in behalf of the plaintiffs testified that the
equipment was worth $ 800.00 in December, 1945. The
plaintiffs do not charge that the defendant misrepresented
either the quantity or the value of the stock of goods and
provisions or the equipment and the fixtures, and the
proof with respect to them is that the plaintiff, Ina
Thomason, saw and examined those articles and agreed
to purchase them as they were in the restaurant at the
time of the sale, along with the lease, for the sum of $
5,000.00. [*644] The evidence also indicates that the
plaintiffs used, consumed, or sold the stock of goods and
134 W. Va. 634, *; 60 S.E.2d 699, **;
1950 W. Va. LEXIS 63, ***
Page 6
provisions in their operation of the restaurant after the
sale was concluded.
At the conclusion of the evidence the plaintiffs offered
one instruction which was objected to by the defendant,
and the defendant offered seven instructions, to
each of which the plaintiffs objected. The trial court sustained
each of the objections and refused to give any of
the offered instructions; and the case was submitted to
the jury without instructions. [***19] After the jury
[**706] returned a verdict in favor of the plaintiffs, the
defendant moved the court to set aside the verdict and
grant the defendant a new trial and to enter judgment in
favor of the defendant notwithstanding the verdict. By
order entered April 5, 1949, the court overruled both
motions of the defendant and entered the judgment
which the defendant seeks to reverse on this writ of error.
The principal questions presented by the numerous
errors assigned by the defendant are: (1) Whether the
declaration is sufficient and its allegations adequate to
permit the introduction of the evidence offered by the
plaintiffs; and (2), whether the verdict is supported by
the evidence.
The allegations of the declaration of the false and
fraudulent representations and statements of the defendant
to the plaintiff, Ina Thompson, with respect to the
lease and her right to the possession of the leased premises
during the residue of the five year term, and of his
willful failure to disclose to her, prior to his sale of the
restaurant and the lease, that the lease had been terminated,
by the sale of the leased property by J. M. Mosrie
to Chahin El Mosrie, within a reasonable time after
[***20] such sale, and that notice to the defendant requiring
him to deliver possession of the property on or
before June 1, 1946, had been received by him on March
26, 1946, sufficiently charge fraud and deceit upon the
part of the defendant. [HN1] An action for fraud and
deceit may be maintained against a person who makes a
false representation of a fact, with [*645] knowledge
of its falsity, to a person who is ignorant of its falsity,
with intent that it shall be acted upon, if the person to
whom it is made acts upon it and by so acting suffers
injury. Horton v. Tyree, 102 W. Va. 475, 135 S.E. 597.
With respect to the damages which resulted from the
fraud of the defendant, the allegations of both counts of
the declaration are general except the allegations that by
reason of the false, fraudulent, deceitful and wrongful
conduct of the defendant, the plaintiffs have been obliged
to sell the goods, the equipment and the fixtures at a
great loss, have been required to pay money for costs and
attorney fees, and have been obligated for other sums of
money in the defense of an action for possession of the
leased property before a justice and on appeal. Though
expenses of litigation [***21] and attorney fees incurred
in a tort action for fraud generally are not recov-

erable, costs and expenses incurred in collateral litigation
may be recovered when they are a proximate result of the
fraud. 37 C. J. S., Fraud, Section 141e(2). The allegations
in each count relating to damages to the plaintiffs in
paying costs and attorney fees, and in incurring liability
for other sums of money in defense of the action for
possession of the leased property, caused by the fraud of
the defendant, constitute sufficient averments of special
damages and render the declaration good on demurrer.
[HN2] Where damages sought to be recovered for an
injury which results from fraud and deceit or other cause
are the natural but not the necessary result of the facts
alleged in the declaration, such damages must be specifically
alleged; and in a case involving such damages a
declaration which contains only a general allegation of
damages is insufficient on demurrer. Morrison v. Allen,
106 W. Va. 224, 145 S.E. 277. In the opinion in the Morrison
case, [HN3] in discussing the rule which requires
special damages which are the natural but not the necessary
result of the injury complained of to [***22] be
specifically alleged, this Court says: "In such cases the
law of pleading is very well settled. Chitty on Pleading
(16 Am. Ed.), Vol. 1, p. 516, concisely states the rule of
pleading in such [*646] instances as follows: 'But
when the law does not necessarily imply that the plaintiff
sustained damage by the act complained of, it is essential
to the validity of the declaration that the resulting damage
should be shown with particularity. * * * And
whenever the damages sustained have not necessarily
accrued from the act complained of, and consequently
are not implied by law, then, in order to prevent the surprise
on the defendant which might otherwise ensue on
the trial, the plaintiff must in general state the particular
damage which he has sustained, or he will not be [**707]
permitted to give evidence of it.' To the same effect is
Ency. of Pl. & Pr., Vol. 5, p. 719, which says: 'Special
damages, which are the natural but not necessary result
of the injury complained of, must be specifically alleged.
Such injuries do not necessarily result from the defendant's
wrongful act, but flow from it as a natural and
proximate consequence; hence they must be specially
alleged in [***23] order that the defendant may have
notice thereof and be prepared to meet the same upon
trial.' The text is sustained by citations from nearly all of
the states, including the case of Cunningham v. Smith, 51
Va. 255, 10 Gratt. 255, 60 Am. Dec. 333, which latter
case is as binding upon this Court as if it had been rendered
by this Court. The same principle is laid down in
our own case of Pegram v. Stortz, 31 W. Va. 220, 6 S.E.
485, and discussed on pages 339 and 340. 8 R. C. L., p.
612, paragraph 157, reiterates the rule and cites very
many modern cases in its support. That great work says:
'Special damages, that is damages which do not necessarily
result from the injury complained of, must be specially
pleaded, except where they are conclusively pre-
134 W. Va. 634, *; 60 S.E.2d 699, **;
1950 W. Va. LEXIS 63, ***
Page 7
sumed from the facts stated. The purpose of the rule is to
advise the defendant of the case he is expected to meet
and thus prevent surprise at the trial.'" Application of the
foregoing rule renders insufficient the allegations of
damages set forth in both counts of the declaration, except
the special damages alleged relative to costs, attorney
fees and other sums paid and incurred by the plaintiffs
[***24] in defense of the action before the justice
and on appeal which caused them to vacate the leased
premises in June, 1947. In consequence [*647] the
general allegations of damages are insufficient to permit
the plaintiffs to introduce proof of any such general allegations.
The declaration contains no allegation of special
damages resulting to the plaintiffs from the loss of the
lease for the residue of the five year term, and no evidence
of such loss was, or properly could have been,
introduced upon the trial, although damages resulting
from the loss of the lease constitute the gist of the action
and are the principal result of the fraud of which the
plaintiffs complain.
The measure of damages in this case for deprivation
of the benefit of the lease is the difference between the
rent reserved of $ 47.50 per month and the value of the
leased premises for the residue of the five year term after
October 24, 1946. [HN4] "In an action for damages for
the failure of the landlord to give possession of the property,
which has been leased, or from which he has ejected
the tenant, where the gist of the action is the deprivation
of the benefit of the lease, whether the action be
covenant or tort, [***25] the general rule is, that the
plaintiff is entitled as the measure of his damages to the
difference between the rent reserved and the value of the
premises for the term. * * *." See Point 4, Syllabus,
Robrecht v. Marling's Adm'r., 29 W. Va. 765, 2 S.E. 827;
Huntington Easy Payment Company v. Parsons, 62 W.
Va. 26, 57 S.E. 253, 9 L. R. A., N. S., 1130, 125 Am. St.
Rep. 954.
The allegations that the plaintiffs have been deprived
of all profits and advantages which would have
accrued to them from their operation of the restaurant
during the residue of the five year term is purely speculative
and fails to show that any profit from the operation
of the business was definite, certain, or reasonably probable,
and no evidence of loss of profits was, or properly
could have been, offered upon the trial. [HN5] In an action
for fraud and deceit the plaintiff can not recover
speculative damages. Laing v. Crichton, 110 W. Va. 3,
156 S.E. 746; 37 C. J. S., Fraud, Section 141d. As to the
allegations that the plaintiffs have been required to pay
money for costs and attorney fees and have become obligated
for other sums of [*648] [***26] money in
defense of the action before the justice and on appeal,
there is no evidence to establish any item of damages of
that character except an item of $ 10.00 as a statutory

attorney fee, included in the costs of the action on appeal.
With regard to the allegations that judgment was
rendered on appeal against the plaintiff, Ina Thomason,
for $ 142.50 and costs, including a statutory attorney fee
of $ 10.00, the evidence, as stipulated [**708] by the
attorneys for the respective parties, is that the judgment
was for three months' rent owed by the plaintiff, Ina
Thomason, which accrued during the time the plaintiffs
occupied the premises, and that she offered to pay, and
the owner of the property refused to accept, the amount
of the judgment. As the plaintiffs had possession of the
property under the lease for more than that period, received
the benefit of such possession, and owed the
amount of the judgment, they can not recover for that
item.
As already indicated, other than the item of $ 10.00,
statutory attorney fee included in the judgment for costs
on the appeal of the action for possession of the leased
property, the only evidence of damages sustained by the
plaintiffs [***27] related to the stock of goods and provisions
and the equipment and the fixtures. As to the
stock of goods and provisions, the plaintiff, Ina Thomason,
testified that those articles were worth $ 250.00.
According to the inventory introduced in evidence in
behalf of the defendant they were worth $ 1,800.00 and
the defendant in testifying on cross-examination indicated
that their value while the plaintiffs had them was $
1,500.00. Whatever may have been their value, however,
is not important, as the allegations of the declaration as
to them are insufficient and the evidence shows that the
plaintiffs used, consumed or sold them and, in consequence,
they can not recover anything on account of
those items. As to the equipment and the fixtures, the
testimony of the plaintiff, Ina Thomason, is that she was
required to sell them because she was obliged to vacate
the premises and that she sold them for a total of $
753.55 which she said was a fair price for those articles.
Neither she nor the purchaser was acquainted with their
market value. One witness for the plaintiffs [*649]
testified that the equipment and the fixtures in the restaurant
in December, 1945, which was before the defendant
[***28] sold them, were worth $ 800.00. According
to the evidence in behalf of the defendant they
were worth the inventory price at which he sold them of
$ 3,390.00. The difference between these figures of $
3,390.00 and $ 753.55 or $ 800.00 is $ 2,636.50 or $
2,590.00. Even if the evidence of these amounts were
admissible the difference shown by them is approximately
$ 1100.00 less than the amount of the verdict. In
Robrecht v. Marling's Adm'r., 29 W. Va. 765, 2 S.E. 827,
this Court held that [HN6] in an action for damages for
the failure of a landlord to give possession of the leased
property, or for ejecting a tenant, where the gist of the
action is the deprivation of the benefit of the lease, the
plaintiff can not recover for loss sustained in selling his
134 W. Va. 634, *; 60 S.E.2d 699, **;
1950 W. Va. LEXIS 63, ***
Page 8
stock or agricultural implements for less than their value,
and Point 4 of the syllabus relating to such items is
quoted with approval in Huntington Easy Payment
Company v. Parsons, 62 W. Va. 26, 57 S.E. 253, 9 L. R.
A., N. S. 1130, 125 Am. St. Rep. 954. Under the rule of
those cases, the allegations of the declaration that the
plaintiffs were obliged to sell the equipment, the goods,
and [***29] the fixtures at a great loss and to quit the
restaurant business, are insufficient and, under such allegations
and because such loss is not recoverable, evidence
of the price at which the plaintiffs sold the equipment
and the fixtures to show the difference between the
purchase price and the price at which the plaintiffs sold
them was improper and should not have been admitted at
the trial. This Court has said that [HN7] usually "the
measure of damages where personal property is damaged,
is the fair market value of that property before the
damage from which is subtracted the fair market value of
the same property immediately after the damage."
Biederman, Inc. v. Henderson, 115 W. Va. 374, 176 S.E.
433; Agsten and Sons v. United Fuel Gas Company, 117
W. Va. 515, 186 S.E. 126. See also 17 C. J., Damages,
Section 183, Page 877; 15 Am. Jur., Damages, Section
124. Though the plaintiffs, under a proper allegation,
could have shown the amount of the depreciation in the
market value of the equipment and the fixtures which
[*650] resulted from the fraud of the defendant, they
have not done so. Instead of alleging and proving depreciation
in the market [***30] value of the equipment
and the fixtures [**709] caused by the fraud of the defendant
they have undertaken to allege and prove the loss
sustained by the sale of those articles. This they may not
do under the holdings of this Court in Robrecht v. Marling's
Adm'r., 29 W. Va. 765, 2 S.E. 827, and Huntington
Easy Payment Company v. Parsons, 62 W. Va. 26, 57
S.E. 253, 9 L. R. A., N. S., 1130, 125 Am. St. Rep. 954.
The verdict of the jury of $ 3,750.00 in favor of the
plaintiffs is not supported in that amount by the evidence
in the case. The only item of damages resulting from the
fraud of the defendant, provable and recoverable under
the allegations of the declaration, as to which there is any
proper evidence, is the statutory attorney fee of $ 10.00.
It is evident that the jury, upon the improper evidence
relating to the purchase price and the selling price of the
equipment and the fixtures, allowed a substantial amount
for the loss sustained by the plaintiffs in selling those
articles and, without any proof as a basis, made some
allowance in favor of the plaintiffs for their loss of the
lease during the residue of the five year [***31] term
after they were deprived of the possession of the premises
on June 10, 1947. [HN8] A verdict in excess of the
amount which the evidence shows a plaintiff is justly
entitled to recover should be set aside. Welty v. Baer,
107 W. Va. 226, 148 S.E. 193. See also Huntington Easy
Payment Company v. Parsons, 62 W. Va. 26, 57 S.E.

253, 9 L. R. A., N. S., 1130, 125 Am. St. Rep. 954;
Robrecht v. Marling's Adm'r., 29 W. Va. 765, 2 S.E. 827.
In Point 3 of the syllabus in the Robrecht case this Court
used this language which is directly applicable in this
case: "* * * if it clearly appear to the court, that the verdict
was made excessive by the admission of such illegal
evidence, the court should set aside the verdict and grant
a new trial; and, if the evidence or facts are certified on
writ of error, and the verdict clearly appears to the appellate
court to be excessive because of the admission of
such illegal evidence, said court will disregard such evidence,
reverse the judgment and set aside the verdict."
The verdict, being greatly in [*651] excess of any
amount warranted by the evidence, should have been set
[***32] aside by the trial court, and its action in overruling
the motion of the defendant to set aside the verdict
and grant a new trial constituted reversible error.
The defendant complains of the action of the plaintiffs
in failing or refusing to file a statement of the particulars
of their claim and contends that the trial court
erred in permitting such failure or refusal upon the part
of the plaintiffs after it had by order entered of record
required them to file "a bill of particulars of their claim"
on or before August 20, 1947. This contention is devoid
of merit. The statute relating to a statement of the particulars
of the claim of a plaintiff, Code, 1931, 56-4-19, is
declaratory of the common law with respect to the inherent
power of a court in the conduct of a trial to require
a bill of particulars or a statement of the particulars of a
claim or a defense, 3 Michie's Jurisprudence, Bill of
Particulars, Section 2, and provides in part that [HN9] in
any action or motion, if good cause be shown or appear,
the court or the judge in vacation may order the plaintiff
to file a more particular statement, in any respect, of the
nature of his claim and may stay the action until a reasonable
time [***33] after such order is complied with.
After the trial court, on motion of the defendant, by order
entered August 19, 1947, had required the plaintiffs to
furnish to counsel for the defendant "a bill of particulars
showing the particulars of their claim", on or before August
20, 1947, and the plaintiffs had failed to file such
bill of particulars or statement, the defendant on December
16, 1947, without moving the court, for that reason,
to stay the trial of the action and without replying to the
offer of the attorneys for the plaintiffs to furnish any particular
information which the attorneys for the defendant
should desire, entered his plea of not guilty to the declaration
and each of its counts and, without objection, proceeded
with the trial of the case. By so doing the defendant
waived his right to a particular statement of the
plaintiffs' claim and can not now complain of the failure
134 W. Va. 634, *; 60 S.E.2d 699, **;
1950 W. Va. LEXIS 63, ***
Page 9
of the plaintiffs to comply with the order of the trial court
which required them to file such statement. There was no
[**710] imperative duty in the [*652] trial court to
enforce compliance with its order and no request for such
enforcement was made by the defendant at any time.
Code, 1931, [***34] 56-4-23, provides that [HN10]
when a plaintiff fails to comply with an order to file a
statement of the particulars of his claim the court, at the
trial, may exclude "the evidence offered by the party in
default as to any matter which he has so failed to state or
has insufficiently stated, and which is not described in
the notice, declaration or other pleading of such party so
plainly as to give the adverse party notice of its character."
See also 3 Michie's Jurisprudence, Bill of Particulars,
Section 17; Rinehart v. Pirkey, 126 Va. 346, 101
S.E. 353.
The defendant also complains of the action of the
trial court in refusing all the instructions offered by the
defendant. Careful consideration of the refused instructions
discloses that each instruction contained incorrect
statements of law or statements which were not based
upon the evidence. In consequence each of the instructions
was properly refused.
The defendant assigns as error the action of the trial
court in overruling the motion of the defendant for
judgment in favor of the defendant notwithstanding the
verdict. In Shafer v. Security Trust Company, 82 W. Va.
618, 97 S.E. 290, in dealing with [***35] the function
of a motion for judgment notwithstanding the verdict,
this Court said in Point 5 of the syllabus: [HN11] "A
judgment non obstante veredicto must be based upon the
merits of the case as disclosed by the pleadings, not in
any sense upon the evidence adduced thereunder. It may
be applied to defeat a judgment upon a verdict predicated
upon a declaration that does not state a cause of action
entitling the plaintiff to recover. But in no event can it
serve the purpose of a demurrer to reach a merely formally
defective declaration, which but for the informality
or irregularity states a good cause of action." As the declaration
in this case, for the reasons heretofore set forth,
states a good cause of action and is sufficient on demurrer,
the ruling of the trial court in denying the motion
was correct.
[*653] The judgment of the trial court is reversed,
the verdict is set aside, and a new trial is awarded the
defendant.
Judgment reversed; verdict set aside; new trial
awarded.

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142 Wis. 2d 95, *; 417 N.W.2d 55, **;
1987 Wisc. App. LEXIS 4202, ***
LEXSEE 142 WIS2D 95
Edward M. MEAS, Sr. and Noreen L. Meas, his wife, Plaintiffs, v. Thomas G.
YOUNG, Peter G. Bushman, James S. Gabrielsen and James F. Fox, Defendants-Third-Party
Plaintiffs-Appellants, Edward CECHVALA and Marcella Cechvala,
Third-Party Defendants-Respondents
PRIOR HISTORY: [***1]
Appeal from a judgment of the circuit court for Price
county: Gary Carlson, Judge.
DISPOSITION:
By the Court. -- Judgment affirmed in part, reversed
in part, and cause remanded. Costs are awarded
to the Cechvalas.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant realtors sought
review of the decision of the Circuit Court for Price
County (Wisconsin), which entered judgment awarding
attorney's fees to respondent sellers based on the wrongful
acts of the realtors.
OVERVIEW: The realtors purchased the sellers' property
in order to resell it to the buyers. The buyers insisted
on an express acreage warranty, which the realtors procured
from the sellers without explaining its significance.
When the acreage was less than warranted, the buyers
filed an action against the realtors. The realtors filed a
third party complaint against the sellers. After dismissing
the buyers' action, the trial court awarded attorney's fees
to the sellers. On appeal, the court affirmed in part and
reversed in part and held that the attorney's fees necessarily
incurred in the sellers' defense of the realtors'
wrongful acts were properly allowable. The court further
held that the trial court erred when it failed to confine its
award to only those attorney fees arising from the defense
of the initial litigation. The court found that the
realtors negligently breached their duty to independently
verify or discover adverse material facts that a reasonably
diligent investigation would have disclosed. The
court concluded that the wrongful acts of the realtors
No. 86-1835
Court of Appeals of Wisconsin
142 Wis. 2d 95; 417 N.W.2d 55; 1987 Wisc. App. LEXIS 4202
September 8, 1987, Orally Argued
October 23, 1987, Decided
Page 1
placed the sellers in such a relation with the buyers so as
to make it necessary to incur expenses to protect their
interests.
OUTCOME: The court affirmed the trial court's judgment
to the extent that it awarded attorney's fees to the
sellers based on the realtors' wrongful acts. The court
reversed the trial court's judgment to the extent that it
failed to confine its award to only those attorney's fees
arising from the defense of the initial litigation. The
court remanded the cause.
LexisNexis(R) Headnotes
Civil Procedure > Appeals > Standards of Review >
Standards Generally
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN1] Whether the Weinhagen rule is applicable is a
mixed question of fact and law. An appellate court upholds
the factual findings of the trial court unless clearly
erroneous. The conclusion of law on the facts is independently
reviewed.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] Attorney fees are not allowable unless a statute or
an agreement of the parties provides otherwise. A judicially
created equitable exception to this "American rule"
is the Weinhagen rule.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] The Weinhagen rule provides that costs and expenses
of litigation, other than the usual and ordinary
court costs, are not recoverable in an action for damages,
nor are such costs even recoverable in a subsequent ac-

tion; but, where the wrongful acts of the defendant have
involved the plaintiff in litigation with others, or placed
him in such relation with others as to make it necessary
to incur expense to protect his interest, such costs and
expense should be treated as the legal consequences of
the original wrongful act.
COUNSEL:
For the defendants-third-party plaintiffs-appellants,
there were briefs by Thomas Terwilliger and Jeffrey J.
Strande and oral argument by Thomas Terwilliger of
Terwilliger, Wakeen, Piehler & Conway, S.C., of
Wausau.
For the third-party defendants-respondents, there
was a brief and oral argument by Robert Rusch of Rusch
& Rusch Law Office, S.C., of Medford.
JUDGES:
Cane, P.J., LaRocque and Myse, JJ.
OPINIONBY:
CANE
OPINION:
[*98] [**56] This is an appeal from an amended
judgment awarding attorney fees to Edward and Marcella
Cechvala based on the wrongful acts of their realtors. We
conclude that the attorney fees necessarily incurred in the
Cechvalas' defense of these wrongful acts are properly
allowable under the facts of this case. That portion of
the judgment is affirmed. However, because the trial
court did not confine its award to only those attorney
fees arising from the defense of the initial litigation, we
reverse and remand the cause [***2] for a redetermination
of recoverable attorney fees.
[*99] The Cechvalas are an elderly rural couple
with eighth grade educations who desired to sell their
farm. They had never hired a realtor or broker, nor sold a
parcel of real estate prior to entering into a standard form
listing contract with Young, Bushman, Gabrielsen and
Fox (the realtors). The realtors located the Meases.
The Meases directly negotiated two price reductions with
the Cechvalas but, after a third attempt to reduce the
price, the Cechvalas developed a mistrust in the Meases
and indicated to the realtors that they did not want to
have any future dealings or problems concerning the
Meases. In order to salvage the deal, the realtors proposed
to buy the farm from the Cechvalas and negotiate
the sale to the Meases themselves.
The Cechvalas, as agreed, sold their farm to the
realtors. Several days later, the realtors attempted to
close their sale of the farm to the Meases. At the clos-
142 Wis. 2d 95, *; 417 N.W.2d 55, **;
1987 Wisc. App. LEXIS 4202, ***
Page 2
ing, the Meases' attorney insisted that the deed contain an
express acreage warranty. The realtors discussed the situation
and determined that the only method by which
they would supply such a statement on their deed would
be [***3] if a similar clause were inserted in the deed
from the Cechvalas to themselves so that they would be
able to expressly hold the Cechvalas responsible.
The realtors telephoned the Cechvalas and, in a
one-minute conversation, indicated to Mrs. Cechvala that
the Meases were insisting that the deed contain the language
"containing 123 acres." The realtors asked Mrs.
Cechvala if "she had any problems with that?" Mrs.
Cechvala answered, "No." The realtors did not explain
the significance of this language to Mrs. Cechvala in
terms of a guarantee or warranty. Nor did the realtors
advise Mrs. Cechvala that this [*100] might be a matter
about which she would wish to consult with an attorney.
After this conversation with Mrs. Cechvala, the
realtors inserted "containing 123 acres" into the deeds
from the Cechvalas to the realtors and from the realtors
to the Meases. The deeds as originally drafted contained
no expression of acreage following the description
of the land. The Meases then agreed to buy the farm.
[**57] Later, the Meases sued the realtors for rescission
and monetary damages, claiming that the land
consisted of only 108, not 123 acres. They further alleged
intentional [***4] misrepresentations concerning
the well, water, roof, cleanliness and other problems with
the house. One year after commencement of the suit,
the realtors impleaded the Cechvalas for indemnification
and contribution. The Cechvalas counterclaimed, seeking
dismissal of the realtors' third-party complaint, as
well as actual attorney fees pursuant to Weinhagen v.
Hayes, 179 Wis. 62, 65, 190 N.W. 1002, 1003 (1922),
and the Wisconsin Consumer Act, chs. 421 to 428, Stats.
At the conclusion of the Meases' case, the trial court
dismissed the Meases' claim for monetary damages based
on a failure of proof. After the realtors' case, the trial
court also granted a motion to dismiss the rescission action
brought by the Meases. n1 The realtors and the
Cechvalas then stipulated that the matter of attorney fees
would be tried without a jury on the basis of the evidence
already received, an additional deposition, and legal
memoranda.
[***5]
n1 The Meases appealed this dismissal, and
in Meas v. Young, 138 Wis. 2d 89, 405 N.W.2d
697 (Ct. App. 1987), we remanded the case for
retrial on the issue of rescission.

[*101] The trial court ruled in favor of the Cechvalas,
finding the realtors, as the Cechvalas' brokers, had
seriously breached numerous duties that resulted in the
Cechvalas being drawn into the Meas litigation. The
court further determined that the Cechvalas were innocent
of any wrongdoing. The trial court awarded the
Cechvalas attorney fees pursuant to both Weinhagen and
the Wisconsin Consumer Act. From this decision and an
amended judgment, the realtors appeal.
We first consider whether the attorney fees were
properly allowed under the Weinhagen rule. [HN1]
Whether the Weinhagen rule is applicable is a mixed
question of fact and law. We uphold the factual findings
of the trial court unless clearly erroneous. The
conclusion of law on the facts is independently reviewed.
See Department of Revenue v. Exxon Corp., 90 Wis. 2d
700, 713, 281 N.W.2d 94, 101 (1979), aff'd, 447 U.S. 207
(1980).
As a general proposition, [HN2] attorney fees are
not allowable unless a statute or an agreement of the parties
provides otherwise. Baker v. Northwestern Nat'l
Cas. Co., 26 Wis. 2d 306, 318, 132 N.W.2d 493, 500
(1965). A judicially created equitable exception to this
"American [***6] rule," on which the Cechvalas
ground their claim for recovery, was recognized in Wisconsin
in Weinhagen, 179 Wis. at 65, 190 N.W. at 1003.
n2 As formulated by the Weinhagen court, the correct
rule is as follows:
[*102] The general rule is that
[HN3] costs and expenses of litigation,
other than the usual and ordinary court
costs, are not recoverable in an action for
damages, nor are such costs even recoverable
in a subsequent action; but, where
the wrongful acts of the defendant have
involved the plaintiff in litigation with
others, or placed him in such relation
with others as to make it necessary to incur
expense to protect his interest, such
costs and expense should be treated as the
legal consequences of the original
wrongful act.
Id. (emphasis supplied).
n2 Accord 22 Am. Jur. 2d Damages, sec. 166
at 235 (1965); 25 C.J.S. Damages, sec. 50e at
787-89 (1966); Restatement (Second) of Torts,
sec. 914 (1982).
The initial question is whether the realtors engaged
in wrongful [***7] acts. The trial court's findings spe-
142 Wis. 2d 95, *; 417 N.W.2d 55, **;
1987 Wisc. App. LEXIS 4202, ***
Page 3
cifically provide numerous examples of wrongful conduct
on the part of the realtors. For example, the realtors
took advantage of the lack of sophistication and understanding
of the Cechvalas for their own financial benefit.
The realtors sought a warranty from the Cechvalas that
would in effect hold the realtors harmless, despite
knowing that the inexperienced Cechvalas were expressing
a mere opinion based only on tax receipts and a plat
book. The realtors further failed to fully advise the
Cechvalas concerning all aspects of the transaction between
the realtors and the Meases, particularly the significance
of the Meases' demand for a warranty [**58]
of acreage. In this way, the realtors breached their fiduciary
duty to the Cechvalas. See Hilboldt v. Wisconsin
Real Estate Brokers' Bd., 28 Wis. 2d 474, 485-86, 137
N.W.2d 482, 487-88 (1965).
Additionally, the realtors failed to independently
verify numerous representations made by them to the
[*103] Meases, including the warranty of 123 acres.
The realtors failed to ascertain the proper acreage despite
knowing the Cechvalas had limited knowledge regarding
real estate transactions. [***8] They also failed to ask
the Cechvalas basic questions regarding other representations
the realtors made to the Meases. The realtors
thus negligently breached their duty to independently
verify or discover adverse material facts that a reasonably
competent and diligent investigation would have
disclosed. Wis. Admin. Code, sec. RL 24.07 (1987); see
also Stevenson v. Barwineck, 8 Wis. 2d 557, 564, 99
N.W.2d 690, 694 (1959).
Nevertheless, the realtors insist they engaged in no
wrongful acts. We reject the realtors' argument that the
dismissal of the Meas action established the absence of
wrongful acts on their part. It is not dispositive for our
purposes whether the realtors engaged in wrongful acts
as to the Meases. The trial court's findings of fact
clearly reveal numerous wrongful acts as to the Cechvalas.
These findings are not clearly erroneous. See
sec. 805.17(2), Stats.
We also reject the realtors' contention that the trial
court erroneously made findings of fact which the parties
never had the opportunity to argue. The realtors stipulated
that the attorney fees matter would be tried to the
court on the basis of all the evidence already adduced at
the Meas trial, [***9] together with legal memoranda.
The realtors cannot now be heard to complain that they
had no opportunity to try their case. The trial court
necessarily drew findings of fact and conclusions of law
from the agreed upon evidence. Id. Our review of the
record discloses ample support for the trial court's findings
of fact.
[*104] The next question concerns whether the
realtors' wrongful acts involved the Cechvalas in litiga-

tion with others, or placed them in such relation with
others so as to make it necessary to incur expenses to
protect their interests. The realtors principally argue
that attorney fees are proper only when litigation involves
the wronged party directly with a third party. The
realtors suggest that because the present litigation does
not involve the Cechvalas directly with the Meases,
Weinhagen is inapplicable.
We disagree. Significantly, Weinhagen does not
require the Cechvalas to be involved in litigation directly
with the Meases. Although the facts of Weinhagen involved
a lawsuit directly with a third party, the reasoning
supporting the doctrine applies to the present facts.
Here, the Cechvalas were defending their interests in a
suit [***10] initiated by the Meases that was the sole
result of the realtors' wrongful conduct. The realtors were
in reality third parties whose misconduct caused the subsequent
litigation. The realtors should not be relieved of
liability merely because they became a conduit through
which any liability between the Meases and the Cechvalas
would flow. By virtue of the realtors' wrongful
acts, the Cechvalas were placed in a relation with the
Meases such that they were required to expend a considerable
amount of money protecting their interests. Thus,
the reasoning of Weinhagen is satisfied.
The realtors next argue that under Weinhagen, there
must be a prior litigation before attorney fees are recoverable.
According to the realtors, the Cechvalas' counterclaim
is not seeking attorney fees resulting from prior
litigation, but rather is seeking fees [*105] from the
same case. We are not persuaded. The mere fact that
the attorney fees were incurred in the same action rather
than in a prior one may not preclude a party from recovering
in every case. See Prentice v. North Amer. Title
Guar. Corp., 381 P.2d 645, 647 (Cal. 1963); see also 25
C.J.S., supra, at 789.
We acknowledge [***11] that Baker, 26 Wis. 2d at
319-20, 132 N.W.2d at 501, contains language perhaps
suggesting that only attorney fees incurred in a prior action
are [**59] allowable. However, we feel the better
language is that expressed in Hilgendorf v. Schuman,
232 Wis. 625, 629, 288 N.W. 184, 186 (1939), quoted
with approval in Baker, 26 Wis. 2d at 318-19, 132
N.W.2d at 500, to the effect that: "If plaintiff incurred
such expenditures and costs in collateral litigation as a
necessary and proximate result of the deceit, they are
recoverable as part of the damages sustained by him."
(Emphasis supplied.) Indeed, to deprive the Cechvalas of
their attorney fees merely because they brought one
lawsuit instead of two would be contrary to modern
joinder rules, the purpose of which is to encourage the
adjudication of the rights and claims of all parties in one
proceeding. See, e.g., M.F. Roach Co. v. Town of Provincetown,
247 N.E.2d 377, 378 (Mass. 1969); Wells v.
142 Wis. 2d 95, *; 417 N.W.2d 55, **;
1987 Wisc. App. LEXIS 4202, ***
Page 4
Aetna Ins. Co., 376 P.2d 644, 645 (Wash. 1962). Accordingly,
we conclude that the wrongful acts of the
realtors placed the Cechvalas in such a relation with the
Meases so as to make it necessary to incur expenses to
protect [***12] their interests.
Finally, we recognize that the Weinhagen rule was
not meant to be applied in every case in which the
wrongdoer's actions cause another to be placed in such a
relation with a third party as to make it necessary to incur
expenses to protect their interests. Obviously, if
[*106] applied broadly, this equitable exception would
swallow up the traditional rule that each party must pay
for its own attorney fees. We therefore explicitly limit
our holding to the exceptional circumstances of this case.
As established by the trial court, the realtors directly
breached their fiduciary duty by taking advantage of the
lack of sophistication and understanding of the Cechvalas
for their own financial benefit. The realtors engaged
in these wrongful acts despite knowing the Cechvalas
were expressing mere opinions. The realtors further
breached their duty of special care to the Cechvalas
by failing to advise the unsophisticated Cechvalas concerning
all aspects of the transaction between the realtors
and the Meases. The realtors knew, or should have
known, that the Cechvalas were innocent of wrongful
acts. Regardless, the realtors wrongfully devised a
scheme attempting [***13] to hold the Cechvalas responsible
for the realtors' acts, and placed the Cechvalas
in a relationship with the Meases for the realtors' sole
benefit. For this, the Cechvalas are entitled to attorney
fees.
Of course, they can be allowed only those attorney
fees incurred in protecting their interests caused by the
failures of the realtors. The expenses incurred in prosecuting
the suit against the realtors are provided by statute.
Weinhagen, 179 Wis. at 65-66, 190 N.W. at 1003;
see also Donnelly v. Young, 471 S.W.2d 888, 897 (Tex.
Civ. App. 1971). To illustrate, the attorney fees that the
Cechvalas incurred defending their interests in what we
might treat as the "prior" Meas litigation are recoverable.
However, Weinhagen disallows the recovery of attorney
fees expended in the "separate" [*107] proceeding
against the realtors to actually recover those fees incurred
in the "prior" litigation. It appears from the record
that the trial court did not confine its award to those
attorney fees arising from the "prior" litigation. We
therefore remand the cause for a determination of the
portion of the attorney fees attributable to the Cechvalas'
defense of their interests, [***14] brought about by
the Meas litigation.
Having determined that certain attorney fees are
proper under the Weinhagen rule, we now turn to the
issue of whether all the attorney fees are properly allow-

able under the Wisconsin Consumer Act. Because we
characterize the transaction as the sale of the Cechvala
real estate to the realtors, the $ 25,000 limitation on
transactions covered by the Consumer Act defeats the
claim in this regard. Section 421.202(6), Stats. Ac-
142 Wis. 2d 95, *; 417 N.W.2d 55, **;
1987 Wisc. App. LEXIS 4202, ***
Page 5
cordingly, we reverse that part of the judgment awarding
fees under the Wisconsin Consumer Act.
By the Court. -- Judgment affirmed in part, reversed
in part, and cause remanded. Costs are awarded
to the Cechvalas.

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PRIOR HISTORY: [***1]
150 Ill. App. 3d 787, *; 501 N.E.2d 948, **;
1986 Ill. App. LEXIS 3245, ***; 103 Ill. Dec. 631
LEXSEE 150 ILL APP 3D 787
MARVEL ENGINEERING COMPANY, Plaintiff-Appellant, v. MATSON, DRIS-
COLL & D'AMICO et al., Defendants-Appellees
No. 2-85-0780
Appellate Court of Illinois, Second District
150 Ill. App. 3d 787; 501 N.E.2d 948; 1986 Ill. App. LEXIS 3245; 103 Ill. Dec. 631
Appeal from the Circuit Court of Du Page County;
the Hon. Helen C. Kinney, Judge, presiding.
DISPOSITION:
Order affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff company filed a
claim against defendant auditors in tort and contract. The
Circuit Court of Du Page County (Illinois) dismissed the
complaint and held that the claims were barred by the
statute of limitations. The company appealed.
OVERVIEW: The company was a manufacturer, assembler,
and seller of hydraulics filter systems. A fire
completely destroyed a plant and the company was insured
by a $ 4.3 million dollar policy. The insurance
company hired the auditors to audit the company's books
and records. Based on the audit, the insurance company
notified the company that its claim was denied. The insurance
company claimed that the policy was void because
the company had fraudulently misstated the
amount of loss and had deliberately underestimated the
value of its inventory so as to avoid the coinsurance
clause that would have resulted in a reduction of coverage.
After a trial, judgment was entered in favor of the
company and against the insurance company. Eight
years, the company filed this action against the auditors.
The court held that the claim was barred by the five-year
statute of limitations. The court further held that the
company should have known that the claim arose back in
1976, and thus that was when the statute of limitations
began to run.
OUTCOME: The court affirmed the lower court.
LexisNexis(R) Headnotes
December 8, 1986, Filed
Page 1
Civil Procedure > Pleading & Practice > Defenses, Objections
& Demurrers > Affirmative Defenses
[HN1] The statute of limitations is an affirmative defense
which cannot be raised by a motion unless it affirmatively
appears from the pleading attacked that the cause
of action is barred as untimely.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] Where the wrongful acts of a defendant involve
the plaintiff in litigation with third parties, plaintiff may
recover damages against the wrongdoer, measured by the
reasonable expenses of such litigation, including attorney
fees.
Governments > Legislation > Statutes of Limitations >
Statutes of Limitations Generally
[HN3] Where a party's success in one action is a prerequisite
to his right to maintain a new action, the statute of
limitations does not run as to the new action until the
determination of the pending suit, which decides whether
the new right exists.
Torts > Procedure > Statutes of Limitations
[HN4] Where a tort involves repeated injury, the limitations
period begins to run from the date of the last injury
or when the tortious acts cease.
Governments > Legislation > Statutes of Limitations >
Statutes of Limitations Generally
[HN5] If a person liable to an action fraudulently conceals
the cause of such action from the knowledge of the
person entitled thereto, the action may be commenced at
any time within five years after the person entitled to
bring the same discovers that he has such cause of action,
and not afterwards.
Civil Procedure > Pleading & Practice > Defenses, Objections
& Demurrers > Motions to Dismiss

[HN6] A motion to dismiss should not be allowed if material
facts are controverted and, in ruling upon a motion
to dismiss, the trial court may not weigh the evidence.
COUNSEL:
Christopher A. Hansen and Robert Meyer, both of
Seyfarth, Shaw, Fair-weather & Geraldson, of Chicago,
for appellant.
Steven H. Mora, of Karon, Morrison & Savikas, and
David L. Liebman III, both of Chicago, for appellees.
JUDGES:
PRESIDING JUSTICE NASH delivered the opinion
of the court. UNVERZAGT and WOODWARD, JJ.,
concur.
OPINIONBY:
NASH
OPINION:
[*790] [**949] Plaintiff, Marvel Engineering
Company, appeals from an order of the circuit court dismissing
its complaint against the defendants, Matson,
Driscoll & D'Amico; Norman Matson; and Johnson Atwater
& Company, as barred by the statute of limitations.
Plaintiff contends that: (1) amendment of the original
complaint nullified the motion to dismiss and order of
dismissal; (2) defendants' motion to dismiss under section
2 -- 619 of the Code of Civil Procedure (Ill. Rev.
Stat. 1983, ch. 110, par. 2 -- 619) was improper because
the limitations bar is not apparent from the face of the
complaint; (3) plaintiff's suit was timely filed; and (4) the
circuit court erred in weighing the evidence in ruling on
[***2] the motion to dismiss.
Plaintiff manufactures, assembles, and sells hydraulic
filter systems, and on December 11, 1974, a fire completely
destroyed plaintiff's Skokie plant. At the time of
the fire, plaintiff was insured by Commercial Union Insurance
Company for $ 4.3 million by a policy covering
building, inventory, machinery, equipment, and business-interruption
losses. Commercial Union retained
the accounting firm of Johnson, Atwater & Company
(JACO) to verify plaintiff's claims, and during 1975 and
1976, JACO audited plaintiff's books and records. At
some point in time, the firm of Matson, Driscoll and
D'Amico acquired JACO's accounting practice and assumed
the audit under the direction of defendant Norman
Matson.
Plaintiff filed claims with Commercial Union for
building, machinery, inventory, and business-interruption
losses, of which Commercial Union paid only part of the
claimed inventory loss and refused to pay any of the
150 Ill. App. 3d 787, *; 501 N.E.2d 948, **;
1986 Ill. App. LEXIS 3245, ***; 103 Ill. Dec. 631
Page 2
claimed business-interruption loss. Commercial Union
notified [*791] plaintiff [**950] of its claim denials
by letter dated October 7, 1976, and in November
1976, plaintiff filed a complaint for breach of contract
against the insurance [***3] company. As a defense,
Commercial Union alleged that the insurance policy was
void because plaintiff had fraudulently misstated the
amount of loss and had deliberately underestimated the
value of its inventory so as to avoid the coinsurance
clause which would have resulted in a reduction of coverage.
In January 1982, after a jury trial, judgment was
entered in favor of plaintiff and against Commercial Union
in the amount of $ 2,124,623.79. On appeal, this
court affirmed the judgment. Marvel Engineering Co. v.
Commercial Union Insurance Co. (1983), 118 Ill. App.
3d 844, 455 N.E.2d 545.
In January 1984, Marvel filed a six-count complaint
against the present defendants, sounding in tort and contract,
alleging essentially that defendants did not properly
exercise their duties in the performance of accounting
services in connection with their review of plaintiff's
claim. On June 21, 1984, defendants filed motions to
dismiss the complaint pursuant to sections 2 -- 615 and 2
-- 619 of the Code of Civil Procedure (Ill. Rev. Stat.
1983, ch. 110, pars. 2 -- 615, 2 -- 619). Defendants'
section 2 -- 619 motion alleged that the action was barred
by the statute of limitations. In December [***4] 1984,
the circuit court granted the section 2 -- 615 motion as to
counts II, IV, V, and VI, and on January 18, 1985, plaintiff
filed an amended six-count complaint. On May 30,
1985, the circuit court granted defendants' section 2 --
619 motion to dismiss as to all the counts on the statute
of limitations ground.
First we address plaintiff's contention that the order
of dismissal is void because defendants' section 2 -- 619
motion was directed to plaintiff's original complaint,
which was subsequently amended. This argument rests
on the principle that an amended pleading which neither
refers to nor adopts the prior pleading ordinarily supersedes
it ( Bowman v. County of Lake (1963), 29 Ill. 2d
268, 272, 193 N.E.2d 833; Field Surgical Associates,
Ltd. v. Shadab (1978), 59 Ill. App. 3d 991, 994, 376
N.E.2d 660), so that subsequent proceedings in the case
are regarded as based upon the amended pleading. (
Claude Southern Corp. v. Henry's Drive-In, Inc. (1964),
51 Ill. App. 2d 289, 296, 201 N.E.2d 127, appeal denied
(1965), 31 Ill. 2d 629; Wright v. Risser (1937), 290 Ill.
App. 576, 581, 8 N.E.2d 966.) Plaintiff concludes that its
amended complaint was thus not subject [***5] to the
motion to dismiss directed to its original complaint and
could not be dismissed on the grounds there urged.
Although defendants' motion to dismiss was followed
by an amendment of the complaint, it is apparent
that the court treated the [*792] motion as directed to

plaintiff's amended complaint. First, we note that the
statute of limitations defense was based on the fact that
the insurance claim was denied in 1976 and suit was not
filed until 1984, and the amended complaint did not differ
from the original in this respect. Second, the fact
that the complaint had been amended was not raised until
plaintiff moved for reconsideration of the order of dismissal.
Implicit in the trial court's denial of the motion to
reconsider is the conclusion that the motion to dismiss
was considered to be addressed to the amended complaint,
and we conclude the order of dismissal is not
void.
Plaintiff next contends that the limitations defense
was raised improperly by way of a section 2 -- 619 motion
because the limitations bar was not apparent on the
face of the complaint. [HN1] The statute of limitations
is an affirmative defense which cannot be raised by a
section 2 -- 619 motion unless [***6] it affirmatively
appears from the pleading attacked that the cause of action
is barred as untimely. Burnett v. West Madison
State Bank (1940), 375 Ill. 402, 408, 31 N.E.2d 776;
Pumala v. Sipos (1985), 131 Ill. App. 3d 845, 847, 476
N.E.2d 462.
Plaintiff's amended complaint, which sounds in tort
and unwritten contract, is governed by the five-year statute
of limitations. (Ill. Rev. Stat. 1983, ch. 110, par. 13 --
205.) Commencing at paragraph 14 of the [**951]
amended complaint, plaintiff alleges that defendant accountants
reviewed plaintiff's books and records in 1975
and 1976 and reported evidence of fraud to Commercial
Union; that the report resulted in the denial of plaintiff's
claims; and that thereafter plaintiff was required to file
suit against Commercial Union in a case numbered 76 L
1019. Although the complaint does not allege the precise
dates, it may be reasonably inferred that plaintiff's
claims were denied in 1976 and its action against the
insurer filed sometime in 1976, as indicated by the case
number. Since defendants' conduct in recommending
denial of the claims occurred no later than 1976, and the
present suit was commenced in 1984, [***7] the limitations
bar was apparent from the face of the complaint
and was properly raised in a section 2 -- 619 motion.
In granting the motion to dismiss, the circuit court
found that the alleged injury to the plaintiff occurred on
or about October 7, 1976, the date plaintiff's claims were
denied by Commercial Union, and that the statute of limitations
began to run on that date or on November 8,
1976, the date plaintiff filed its suit against the insurer.
Plaintiff advances several arguments why its suit against
the defendants was not barred by the statute of limitations.
In the present action, plaintiff seeks damages against
defendants [*793] for attorney fees and costs it in-
150 Ill. App. 3d 787, *; 501 N.E.2d 948, **;
1986 Ill. App. LEXIS 3245, ***; 103 Ill. Dec. 631
Page 3
curred in bringing the suit against Commercial Union.
It argues that the cause of action against the defendants
did not arise until the conclusion of its suit against
Commercial Union, which would be either when the
judgment was entered or was affirmed on appeal.
[HN2] Where the wrongful acts of a defendant involve
the plaintiff in litigation with third parties, plaintiff
may recover damages against the wrongdoer, measured
by the reasonable expenses of such litigation, including
attorney fees. ( Ritter v. [***8] Ritter (1943), 381
Ill. 549, 554, 46 N.E.2d 41; Philpot v. Taylor (1874), 75
Ill. 309, 311; Nalivaika v. Murphy (1983), 120 Ill. App.
3d 773, 776, 458 N.E.2d 995.) Plaintiff asserts that the
prior and present actions could not have been brought
jointly as plaintiff's success in the prior action was determinative
of its rights against the present defendants.
Plaintiff relies on the case of Kelly v. Chicago Park District
(1951), 409 Ill. 91, 98 N.E.2d 738, in which city
employees brought consecutive actions for reinstatement
and back pay. On appeal, the court held:
[HN3]
"Where a party's success in one action is a
prerequisite to his right to maintain a new
action, the Statute of Limitations does not
run as to the new action until the determination
of the pending suit, which decides
whether the new right exists." 409
Ill. 91, 95-96, 98 N.E.2d 738.
We do not consider that the rule stated in Kelly applies
to the facts of the present case. It is permissible to
join an action against a third party for the expenses of
suit with the main action as was done in the cases of National
Wrecking Co. v. Coleman (1985), 139 Ill. App. 3d
979, 487 N.E.2d 1164; Bartsch v. [***9] Gordon N.
Plumb, Inc. (1985), 138 Ill. App. 3d 188, 485 N.E.2d
1105, appeal denied (1986), 111 Ill. 2d 31; and Nalivaika
v. Murphy (1983), 120 Ill. App. 3d 773, 458 N.E.2d
995. Plaintiff's argument that its cause of action for fees
could not have been commenced until after he prevailed
in his action against the insurance company is not persuasive.
Plaintiff also contends that defendants continued to
render Commercial Union accounting advice relating to
plaintiff's claim throughout the earlier litigation, and argues
that the statute of limitations did not begin to run
until the conclusion of that suit. [HN4] Where a tort
involves repeated injury, the limitations period begins to
run from the date of the last injury or when the tortious
acts cease. ( Starcevich v. City of Farmington (1982),
110 Ill. App. 3d 1074, 1079, 443 N.E.2d 737.) In its
amended complaint, plaintiff alleges that defendants
misrepresented the existence of fraud in the proofs of

loss, that defendants' misrepresentation caused Commercial
Union to deny plaintiff's [*794] claims, and that
defendants [**952] failed to observe certain accounting
standards in reporting fraud to the insurer.
[***10] It is apparent that the wrongful conduct of
which plaintiff complains occurred prior to the denial of
plaintiff's claim and did not constitute a continuing
wrong.
Plaintiff also argues the applicability of the discovery
rule which provides that the statute of limitations
starts to run when a person knows or reasonably should
have known of his injury and that it was wrongfully
caused. ( Knox College v. Celotex Corp. (1981), 88 Ill.
2d 407, 415, 430 N.E.2d 976; Nelligan v. Tom Chaney
Motors, Inc. (1985), 133 Ill. App. 3d 798, 804, 479
N.E.2d 439; Tucek v. Grant (1984), 129 Ill. App. 3d 236,
241, 472 N.E.2d 563, appeal denied (1984), 102 Ill. 2d
559.) A party is obligated to inquire further to determine
whether an actionable wrong was committed. ( Nolan v.
Johns-Manville Asbestos (1981), 85 Ill. 2d 161, 171, 421
N.E.2d 864; Aspegren v. Howmedica, Inc. (1984), 129
Ill. App. 3d 402, 403, 472 N.E.2d 822.) The purpose of a
statute of limitations is not to shield a wrongdoer but to
discourage the presentation of stale claims and to encourage
diligence in the bringing of actions. Tom
Olesker's Exciting World of Fashion, Inc. v. Dun &
Bradstreet, Inc. (1975), 61 [***11] Ill. 2d 129, 137, 334
N.E.2d 160; People ex rel. La Salle National Bank v.
Hoffman Estates Park District (1985), 134 Ill. App. 3d
571, 577, 481 N.E.2d 12, appeal denied (1985), 108 Ill.
2d 567.
Plaintiff asserts that prior to 1981, it was unaware
and unable to determine that the claim denials were
based on defendants' misrepresentations of fraud. Defendants
argue that plaintiff should have known of defendants'
involvement in the claims process when its
claims were denied on October 7, 1976, but that plaintiff
was not diligent in inquiring into a possible cause of action
against them. The record shows that for an entire
year the auditors worked closely with the plaintiff in
reviewing the fire loss and examining plaintiff's books
and records. Commercial Union denied plaintiff's
claims on October 7, 1976, and a month later plaintiff
filed suit against it. Commercial Union initiated discovery
in March 1978, but plaintiff did not conduct any
discovery until February 1981, when it submitted interrogatories
to Commercial Union. In its answers to the
interrogatories, Commercial Union stated that the auditors
had knowledge pertaining to the claim denials and
referred to a report [***12] submitted by them dated
January 28, 1977. In April 1981 plaintiff deposed Norman
Matson and learned of defendants' preparation of
reports submitted to Commercial Union upon which the
insurer based its denials of the claims.
150 Ill. App. 3d 787, *; 501 N.E.2d 948, **;
1986 Ill. App. LEXIS 3245, ***; 103 Ill. Dec. 631
Page 4
It is apparent that from the day the audit was commenced,
plaintiff knew of the defendants' involvement in
the review of its [*795] claim and should have known
that defendants were involved in connection with the
claims denials. Plaintiff should have inquired into the
reasons for the claims denials but delayed such inquiry
until nearly four years after filing suit against the insurer.
Even when plaintiff learned of the basis for the denials, it
waited nearly three more years before filing suit against
the present defendants. Under the discovery rule, plaintiff
knew it was injured when its claim was denied and,
knowing that the defendants were involved in evaluation
of the claim, should have inquired into whether it had a
cause of action against them. We conclude that plaintiff's
lack of diligence precludes application of the discovery
rule in its favor.
Plaintiff also contends that defendants' fraudulent
concealment of their involvement in the claim [***13]
denial tolled the running of the statute of limitations under
section 22 of the Limitations Act (Ill. Rev. Stat.
1977, ch. 83, par. 23), which is now section 13 -- 215 of
the Code of Civil Procedure (Ill. Rev. Stat. 1985, ch.
110, par. 13 -- 215). Section 22 provided:
[HN5] "If a person liable to an action
fraudulently conceals the cause of such
action from the knowledge of the person
entitled thereto, the action may be commenced
at any time within five years after
the person entitled to bring the same
[**953] discovers that he has such
cause of action, and not afterwards."
The record shows that during the course of the audit
and subsequent lawsuit against Commercial Union, the
parties disagreed over the production of records by the
plaintiff. Commercial Union sought access to records
which the accountants stated they required in order to
state an opinion; plaintiff refused to produce the documents.
From 1978 to 1980, defendants continued to
advise plaintiffs that they had not reached a final opinion,
although defendants had submitted oral reports to
Commercial Union from 1975 to 1977 and had submitted
a written report on January 28, 1977.
Section 13 -- 215 requires [***14] that a party affected
by the fraud use ordinary diligence in discovering
it. ( Zagar v. Health & Hospitals Governing Com.
(1980), 83 Ill. App. 3d 894, 898, 404 N.E.2d 496; Solt v.
McDowell (1971), 132 Ill. App. 2d 864, 867, 272 N.E.2d
53.) Assuming the defendants' representations that they
had not reached a final opinion were false, plaintiff still
had an adequate opportunity in the litigation with Commercial
Union to discover the existence of the defendants'
reports but did not seek to do so. Having failed to

act diligently, plaintiff cannot now avail itself of the
tolling provision of section 13 -- 215.
Nor are defendants estopped by their representations
[*796] from raising the statute of limitations. An estoppel
arises if a party induces his adversary into delaying
bringing a cause of action within the limitation period.
( Witherell v. Weimer (1981), 85 Ill. 2d 146, 159,
421 N.E.2d 869; Beynon Building Corp. v. National
Guardian Life Insurance Co. (1983), 118 Ill. App. 3d
754, 763, 455 N.E.2d 246, appeal denied (1983), 96 Ill.
2d 566.) The "lulling" period must not have expired before
the limitations period. ( Beynon Building Corp. v.
National Guardian [***15] Life Insurance Co.
(1983), 118 Ill. App. 3d 754, 763, 455 N.E.2d 246, appeal
denied (1983), 96 Ill. 2d 566; Reat v. Illinois Central
R.R. Co. (1964), 47 Ill. App. 2d 267, 274-75, 197
N.E.2d 860.) In the present case, the statute of limitations
expired on or about October 7, 1981. Since the alleged
misrepresentations were made between 1978 and 1980,
plaintiff still had sufficient opportunity to bring suit
against the defendants after the "lulling" period expired.
Last, plaintiff contends the circuit court erred in
weighing the evidence in ruling on defendants' motion to
dismiss. [HN6] A motion to dismiss should not be allowed
if material facts are controverted ( Premier Electrical
Construction Co. v. La Salle National Bank (1984),
132 Ill. App. 3d 485, 493, 477 N.E.2d 1249; Meyer v.
Murray (1979), 70 Ill. App. 3d 106, 114, 387 N.E.2d
878; Pennington v. Jones (1977), 46 Ill. App. 3d 65, 67,
360 N.E.2d 566), and, in ruling upon a motion to dismiss,
the trial court may not weigh the evidence ( Meyer v.
Murray (1979), 70 Ill. App. 3d 106, 114, 387 N.E.2d
878; Greenstein v. Nogle (1972), 5 Ill. App. 3d 594, 599,
283 N.E.2d 492). Based upon the trial judge's remarks
[***16] in granting the motion to dismiss, plaintiff ar-
150 Ill. App. 3d 787, *; 501 N.E.2d 948, **;
1986 Ill. App. LEXIS 3245, ***; 103 Ill. Dec. 631
Page 5
gues that the judge weighed the evidence in considering
the application of the discovery rule and the doctrine of
fraudulent concealment.
The record disclosed the following undisputed material
facts. When a fire destroyed plaintiff's Skokie plant
in December 1974, plaintiff submitted loss claims to its
insurer, Commercial Union. For one year defendant
accountants audited plaintiff's books and records related
to the claim. In October 1976, Commercial Union denied
the claim for business interruption loss and part of
the claim for inventory loss, whereupon in November
1976, plaintiff sued Commercial Union. In January
1977, defendants set forth their findings of fraud in a
letter to Commercial Union. In February 1981, plaintiff
commenced discovery in its suit against Commercial
Union. In January 1984, plaintiff filed suit against the
present defendants. Based on these facts, there remained
no question whether the discovery rule applied;
plaintiff knew or should have known of a cause of action
against the defendants when its [**954] claim was
denied in 1976. There also remained no question as to
the defense of fraudulent [***17] concealment; [*797]
plaintiff was not diligent in seeking the reasons for the
claims denials even though it had available to it the vehicle
of discovery in the litigation with Commercial Union.
Plaintiff had ample time within which to learn of its
cause of action against defendants and file suit within the
limitations period. We conclude that the trial judge did
not weigh the evidence and properly granted the motion
to dismiss.
Accordingly, the judgment of the circuit court is affirmed.
Affirmed.

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PRIOR HISTORY: [***1]
168 Ariz. 484, *; 815 P.2d 411, **;
1991 Ariz. App. LEXIS 173, ***; 91 Ariz. Adv. Rep. 82
LEXSEE 168 ARIZ 484
MICHAEL COLLINS, an unmarried man, Plaintiff-Appellee, CHRYSLER
FIRST CREDIT CORPORATION, a Delaware corporation, Defendant, Cross Defendant-Appellee,
v. FIRST FINANCIAL SERVICES, INC., an Arizona corporation,
Defendant, Cross Claimant-Appellant
No. 1 CA-CV 89-507
Court of Appeals of Arizona, Division One, Department A
168 Ariz. 484; 815 P.2d 411; 1991 Ariz. App. LEXIS 173; 91 Ariz. Adv. Rep. 82
Appeal from the Superior Court of Maricopa County;
Cause No. CV 87-05007; The Honorable Jeffrey A.
Hotham, Judge.
DISPOSITION:
REVERSED AND REMANDED WITH DIREC-
TIONS
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant financial company
challenged an order from the Superior Court of
Maricopa County (Arizona), which ruled that the company
was not entitled to attorney fees from appellee
credit corporation as part of its conversion damages
against the corporation. The attorney fees were accrued
while the company was defending itself in a quiet title
action brought by a third party.
OVERVIEW: A third party purchaser filed a quiet title
action against the financial company, seeking clear title
to a mobile home that he purchased from the credit corporation.
The financial company was a senior lienholder
on the mobile home at the time of the sale, and the company
was awarded summary judgment on its conversion
claim against the corporation. On appeal from the trial
court's denial of the attorney fees incurred by the company
in defense of the quiet title action, the court ruled
that the company was entitled to the fees. The court
found that the "tort of another" exception applied to the
general American rule that litigants are responsible for
their own attorney fees. The court ruled that the attorney
fees were the natural consequences of the conversion by
July 25, 1991, Filed
Page 1
the corporation of the mobile home and that the defense
of the quiet title action was necessary to protect the
company's interest in the mobile home. Finally, the court
ruled that the company was not required to prove that the
corporation's actions were vexatious, wanton, or oppressive
in order to prevail under the "tort of another" exception.
OUTCOME: The court reversed the order from the
lower court, ruling that the financial company was entitled
to attorney fees from the credit corporation. The
court remanded to the lower court for a determination as
to a reasonable fee amount.
LexisNexis(R) Headnotes
Torts > Intentional Torts > Conversion
Torts > Damages
[HN1] The measure of conversion damages includes not
only the value of the property taken, but also other damage
suffered because of the wrongful detention or deprivation
of the property, such as damages for loss of use.
Damages for conversion include the amount of any further
pecuniary loss of which the deprivation has been a
legal cause.
Torts > Intentional Torts > Conversion
Torts > Damages > Costs & Attorney Fees
[HN2] Attorneys' fees and costs are not recoverable in a
conversion action.
Torts > Damages > Costs & Attorney Fees
[HN3] It is generally held that where the wrongful act of
the defendant has involved the plaintiff in litigation with
others or placed him in such relation with others as
makes it necessary to incur expenses to protect his inter-

est, such costs and expenses, including attorneys' fees,
should be treated as the legal consequences of the original
wrongful act and may be recovered as damages.
Torts > Damages > Costs & Attorney Fees
[HN4] One who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover reasonable compensation for loss of time,
attorney fees and other expenditures thereby suffered or
incurred in the earlier action.
Torts > Damages > Costs & Attorney Fees
[HN5] In order to recover attorneys' fees under the "tort
of another" exception to the American rule that litigants
are generally not entitled to their attorney fees, the plaintiff
must show that: (1) he became involved in a legal
dispute because of the defendant's tortious conduct; (2)
the dispute was with a third party; (3) the plaintiff incurred
attorneys' fees in connection with that suit; (4) the
expenditure of attorneys' fees was a foreseeable or necessary
result of the tortious conduct; and (5) the claimed
fees are reasonable.
Torts > Damages > Costs & Attorney Fees
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN6] The general rule is that each party to a lawsuit
must pay his own way. Exceptions are few: (1) Where
contracting parties provide otherwise; (2) where a statute
allows the award; (3) where the losing party has been
guilty of vexatious litigation or (4) where the defendant
has generated litigation between the plaintiff and a third
party.
Torts > Damages > Costs & Attorney Fees
[HN7] A litigant need not prove that the conduct of the
tortfeasor was vexatious, wanton or oppressive in order
for the "tort of another" exception to apply to the American
rule that each litigant is responsible for his own attorney
fees.
COUNSEL:
Stanley M. Hammerman, P.C., by Stanley M.
Hammerman, Jon R. Hultgren, Phoenix, Arizona, Attorneys
for Defendant, Cross Defendant-Appellee.
Robbins & Green, P.A., by Janet B. Hutchison, Sally
C. Shanley, Phoenix, Arizona, Attorneys for Defendant,
Cross Claimant-Appellant.
JUDGES:
Joe W. Contreras, Judge. John F. Taylor, Presiding
Judge, Jefferson L. Lankford, Judge, concurring.
168 Ariz. 484, *; 815 P.2d 411, **;
1991 Ariz. App. LEXIS 173, ***; 91 Ariz. Adv. Rep. 82
OPINIONBY:
CONTRERAS
OPINION:
[*485] [**412] OPINION
Page 2
Appellant, First Financial Services, Inc. ("First Financial"),
appeals from the trial court's ruling that it is
not entitled to recover as part of its conversion damages
against appellee, Chrysler First Credit Corporation
("Chrysler"), attorneys' fees incurred in a quiet title action
brought against First Financial by a third party, Michael
Collins ("Collins"). The issue on appeal is whether
First Financial, which obtained a judgment against
Chrysler for conversion, is entitled to recover these attorneys'
fees as an element of its conversion damages.
We conclude that because First [***2] Financial'sdefense
against the third party's quiet title action was necessitated
by Chrysler's conversion, First Financial is
entitled to recover its reasonable attorneys' fees under the
"tort of another" exception to the general rule against
awarding attorneys' fees in the absence of a statute or
agreement of the parties providing for such an award.
We therefore reverse and remand for further proceedings
to determine the amount First Financial is entitled to
recover.
FACTS AND PROCEDURES BACKGROUND
This case arises from a quiet title action filed on
February 23, 1987, by Collins against First Financial
seeking to clear title to a mobile home that Collins
claimed to have previously purchased, together with real
property, at a trustee's sale held by T.D. Service Company
of Arizona ("T.D."). The trustee's sale was held by
T.D. on behalf of Chrysler, which was the beneficiary
under a deed of trust encumbering the mobile home and
certain real property. First Financial claims to have held
a lien on the mobile home senior to the lien of Chrysler's
deed of trust, which Collins acquired. Although First
Financial committed various errors in properly recording
its lien, n1 there was [***3] evidencethat Chrysler was
aware of First Financial's senior lien on the mobile home
and acknowledged that First Financial had a superior
interest regarding the mobile home.
n1 First Financial's UCC-1 Financing Statement
was recorded in Maricopa County, as opposed
to Yavapai County, where the mobile
home was located, and referred in its property
description section only to fixtures, furniture, appliances
and accessories attached to the mobile
home, rather than the mobile home itself. Additionally,
the Affidavit of Affixture recorded by
First Financial in Yavapai County was recorded

168 Ariz. 484, *; 815 P.2d 411, **;
1991 Ariz. App. LEXIS 173, ***; 91 Ariz. Adv. Rep. 82
over two months after the recordation of Chrysler's
deed of trust.
After the trustee's sale, disagreements arose between
T.D., Collins, First Financial and Chrysler as to whether
the mobile home had been included in the sale. The initial
trustee's deed granting the property to Collins did not
contain a legal description of the mobile home. T.D. and
Chrysler both initially denied that the mobile home had
been included in the sale. However, [***4] upon the
request of Collins' attorney, T.D. later recorded another
trustee's deed that did contain a description of the mobile
home. Collins then instituted the quiet title action against
First Financial. First Financial added Chrysler as an additional
defendant and cross-claimed against Chrysler for
conversion damages. Subsequently, the trial court granted
Collins' motion for partial summary judgment against
First Financial on the issue of title to the mobile home.
The trial court also granted First Financial's motion for
summary judgment against Chrysler on the issue of liability
for conversion. The court reserved the issue of the
amount of conversion damages. In granting both of the
motions, the trial court ruled that Collins was a bona fide
purchaser of the mobile home and held a [*486]
[**413] clear title to it. The court later awarded Collins
$ 10,000.00 in attorneys' fees against First Financial.
First Financial and Chrysler stipulated that the value
of First Financial's converted interest in the mobile home
was $ 20,169.61. The parties also agreed to submit
briefs to the court on the issue of whether First Financial
was entitled to recover from Chrysler as partof [***5]
its conversion damages the attorneys' fees assessed
against it in connection with Collins' quiet title action, as
well as its own attorneys' fees expended in that action.
After First Financial and Chrysler submitted their briefs
on this issue, the trial court ruled that First Financial was
not entitled to such fees as part of its conversion damages.
CONVERSION DAMAGES
The Arizona courts have stated that [HN1] the
measure of conversion damages includes not only the
value of the property taken, but also other damage suffered
because of the wrongful detention or deprivation of
the property, such as damages for loss of use. See Phelps
v. Melton, 14 Ariz. App. 296, 297, 482 P.2d 905, 906
(1971). This statement of the law is consistent with the
Restatement (Second) of Torts, which states that damages
for conversion include "the amount of any further pecuniary
loss of which the deprivation has been a legal
cause[.]" Restatement (Second) of Torts § 927(2)(b)
(1979). First Financial acknowledges that the attorneys'
fees it incurred in its conversion action against Chrysler
[***6] are not recoverable. n2 However, First Financial
Page 3
argues that Chrysler's conversion of its interestin the mobile
home (i.e. the sale to Collins) caused First Financial
to have to defend itself in the quiet title action and,
therefore, the expenses that First Financial incurred in
connection with the quiet title action are part of its conversion
damages. Chrysler points out, however, that this
contention is in apparent conflict with the "American
Rule" that litigants are generally not entitled to recover
their attorneys' fees in either the same or a subsequent
suit unless provided by statute or by agreement of the
parties. See United States Fidelity & Guaranty Co. v.
Frohmiller, 71 Ariz. 377, 379, 227 P.2d 1007, 1008
(1951). However, the Arizona courts have recognized
certain exceptions to this general rule.
[***7]
n2 The Arizona Supreme Court ruled in
Jones v. Stanley, 27 Ariz. 381, 233 P. 598 (1925)
that [HN2] attorneys' fees and costs are not recoverable
in a conversion action.
The Arizona Supreme Court has described one of
the exceptions to the general rule prohibiting awards of
attorneys' fees as follows:
[HN3]
Itis generally held that where the wrongful act of the
defendant has involved the plaintiff in litigation with
others or placed him in such relation with others as
makes it necessary to incur expenses to protect his interest,
such costs and expenses, including attorneys' fees,
should be treated as the legal consequences of the original
wrongful act and may be recovered as damages.
United States Fidelity & Guaranty Co. v. Frohmiller, 71
Ariz. 377, 380, 227 P.2d 1007, 1009 (1951) (quoting 15
Am. Jur. Damages § 144) (1938)).
This exception is also embodied in the Restatement
(Second) of Torts § 914(2) (1979), which states:
[HN4] One who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover reasonable compensation for loss of
[***8] time, attorney fees and other expenditures
thereby suffered or incurred in the earlier action.
The foregoing exception, known as the "tort of another"
exception, has been widely recognized in other
jurisdictions. See Annot., 45 A.L.R. 2d 1183 (1956); 22
Am. Jur. 2d Damages § 618 (1988). As generally applied,
[HN5] in order to recoverattorneys' fees under this
exception, the plaintiff must show that: (1) he became
involved in a legal dispute because of the defendant's
tortious conduct; (2) the dispute was with a third party;

(3) the plaintiff incurred attorneys' fees in connection
with that suit; (4) the expenditure of attorneys' fees was a
[*487] [**414] foreseeable or necessary result of the
tortious conduct; and (5) the claimed fees are reasonable.
22 Am. Jur. 2d Damages § 621 (1988).
First Financial claims that all of the above elements
n3 have been satisfied here because Chrysler's conversion
of the mobile home by its sale to Collins caused
First Financial to have to defend itself against Collins'
quiet title action in order to protect its interest in the
[***9] mobile home, and First Financial incurred attorneys'
fees in that action n4 in addition to the attorneys'
fees that were awarded to Collins.
168 Ariz. 484, *; 815 P.2d 411, **;
1991 Ariz. App. LEXIS 173, ***; 91 Ariz. Adv. Rep. 82
n3 Although Chrysler failed to raise this issue,
we note that the fact that the quiet title action
was technically part of the same action as the
conversion claim should have no significance
with respect to the applicability of this exception.
Addressing this issue, the California Supreme
Court stated: "There is no reason why recovery of
such fees should be denied simply because the
two causes (the one against the third person and
the one against the party whose breach of duty
made it necessary for the plaintiff to sue the third
person) are tried in the same court at the same
time." Prentice v. North American Title Guaranty
Corporation, 59 Cal. 2d 618, 621, 381 P.2d 645,
647, 30 Cal. Rptr. 821, 823 (1963).
n4 The reasonableness of First Financial's
attorneys' fees will need to be considered by the
trial court upon remand.
Chrysler asserts that First [***10] Financial should
not be able to recover the attorneys' fees under the "tort
of another" exception because First Financial's involvement
in the quiet title action was the result of its own
"unfounded assertion of ownership or lienhold status
superior to [Collins'] interest" and because Collins' success
in that action was due to First Financial's own failure
to properly record its lien so that record notice would
be provided to any purchaser and First Financial's failure
to attend the trustee's sale, despite receiving notice of
that sale. In support of its position, Chrysler relies on
Brochner v. Western Insurance Company, 724 P.2d 1293
(Colo. 1986), in which the Colorado Supreme Court
stated that the "tort of another" exception to the general
rule prohibiting attorneys' fees awards applied "only if
the party seeking such attorney fees was without fault as
to the underlying action." 724 P.2d at 1300. Chrysler
also relies on State Department of Enviornmental Pro-
Page 4
tection v. Ventron Corporation, 94 N.J. 473, 468 A.2d
150 (1983) and Conrad v. Suhr, 274 N.W. 2d 571 (N.D.
1979) to support this proposition.
Brochner [***11] and Conrad are not analogous to
the present case because both of those cases involved
claims for indemnity and contribution among joint tortfeasors.
In both of those cases, there was a prior lawsuit
in which a plaintiff sued multiple defendants on various
claims, but the defendants seeking attorneys' fees had not
been found liable. The exonerated defendants then
sought indemnity against the "guilty" defendants for attorneys'
fees and costs incurred in connection with the
lawsuits. Both courts declined to allow these
co-defendants to recover attorneys' fees from the others
because, in the prior lawsuits, both were defending at
least partially against allegations of their own independent
acts.
In Ventron, also relied upon by Chrysler, the State
of New Jersey Department of Environmental Protection
sued various parties for the cost of cleanup and removal
of mercury pollutants from certain real property. Two of
the defendants were Ventron, which allegedly caused the
contamination, and the Wolfs, whohad purchased a portion
of the property from Ventron and had possibly contributed
to the contamination by using mercury-contaminated
water in their demolition of a mercury
processing [***12] plant located on the property. Under
the New Jersey statutes, liability for cleanup costs could
be imposed based merely on ownership of the contaminated
property. The Wolfs cross-claimed against Ventron
for fraudulent nondisclosure of mercury pollution in the
sale of the property. The trial resulted in a ruling that the
Wolfs were not liable for the costs of cleanup and that
Ventron was liable to the Wolfs for fraudulent nondisclosure.
Although the issue of damages on the fraudulent
nondisclosure claim was set aside for a separate trial, the
lower court did hold that Ventron [*488] [**415]
would be required to reimburse the Wolfs for their attorneys'
fees incurred in the defense of the DEP suit, relying
on the theory that the contamination constituted a breach
by Ventron of the covenant against encumbrances in its
deed to the Wolfs.
The New Jersey Supreme Court held that the Wolfs
could recover from Ventron that portion of their legal
expenses that was incurred as a proximate result of Ventron'sfraud
pursuant to the "tort of another" theory.
Ventron, 94 N.J. at 505, 468 A.2d at 167. However, because
the lower court had not expressly found that Ventron's
[***13] fraud was the proximate cause of the
DEP action against the Wolfs, the court remanded, stating
that it was an "open question whether it was Ventron's
fraud or the Wolfs' own acts, or both, that caused
the Wolfs to incur counsel fees in defense of the DEP
action." Id. The court further stated that "the Wolfs may

not recover the part of their counsel fees attributable to
defending their own acts. Nor may they recover the portion
of the counsel fees incurred in prosecuting their own
claim against Ventron." Id.
The ruling in Ventron supports the position that First
Financial should be entitled to recover its attorneys' fees
and expenses incurred in defending against Collins' quiet
title action if such expenses were incurred as a proximate
result of Chrysler's conversion of the mobile home. We
conclude that they were. The trial court in this case ruled
that First Financial was entitled to judgment as a matter
of law against Chrysler when the court granted First Financial's
motion for summary judgment against Chryslerbased
on First Financial's superior lien on the mobile
home which Chrysler extinguished by selling to Collins,
a bona fide purchaser. Such action on Chrysler's [***14]
part constituted a conversion of the mobile home.
It was Chrysler's conversion of the mobile home that
forced First Financial to assert its interest in the home
and that resulted in the filing of a quiet title action by
Collins against First Financial. First Financial's errors in
properly recording its lien on the mobile home and its
failure to attend the trustee's sale n5 were not the reasons
for the filing of the quiet title action and were relevant
only as to the issue of whether First Financial did have a
superior lien to Chrysler, an issue the trial court decided
in First Financial's favor and which has not been appealed.
In addition, given the fact that Chrysler's argument
before the trial court in defense of the conversion
claim was that the mobile home was not included in the
trustee's sale, First Financial could not have just given a
quit claim deed to Collins and then sought conversion
damages against Chrysler without risking the possibility
that Chrysler would prevail in its argument. In that case,
First Financialwould have conveyed away its interest in
the property and would not have been able to recover
conversion damages from Chrysler.
[***15]
168 Ariz. 484, *; 815 P.2d 411, **;
1991 Ariz. App. LEXIS 173, ***; 91 Ariz. Adv. Rep. 82
n5 Regarding First Financial's attendance at
the trustee's sale, there was some evidence that,
prior to the sale, a First Financial official was told
by employees of Chrysler that the mobile home
was not to be included in the sale.
The fact that First Financial did not prevail in the
quiet title action does not affect its entitlement to the
attorneys' fees. See Elijah v. Fender, 674 P.2d 946, 951
(Colo. 1984). It was Chrysler's conversion of the mobile
home that was the very cause of First Financial's defeat
in the quiet title action.
Page 5
Chrysler also argues that the "tort of another" exception
should not apply in this case, because First Financial
failed to prove that Chrysler acted in bad faith, vexatiously,
wantonly or for oppressive reasons. In support of
its argument that the application of the "tort of another"
exception requires such a finding, Chrysler relies on two
Arizonacases, McKesson Chemical Co. v. Van Waters &
Rogers, 153 Ariz. 557, 739 P.2d 211 (App. 1987) and
Taylor v. Southern Pacific Transportation Company, 130
Ariz. 516, 637 P.2d 726 (1981). However, these decisions
are distinguishable from the present case.
In Taylor, the plaintiff had prevailed against the
Southern Pacific Transportation [*489] [**416]
Company on a wrongful death claim. After the verdict
was rendered, the trial court granted a new trial to the
plaintiff on the [***16] grounds that the defendants'
attorneys had engaged in misconduct and the verdict was
insufficient and the result of passion and prejudice on the
part of the jury. Southern Pacific appealed the order
granting a new trial and the plaintiff cross-appealed from
the trial court's failure to impose sanctions for misconduct
on the part of Southern Pacific's counsel. The plaintiff
conceded that there was no statutory authority that
would allow the court to impose sanctions and grant attorneys'
fees under the circumstances of that case. The
court then noted that one exception to the general rule
prohibiting awards of attorneys' fees was the "tort of another"
exception as stated in United States Fidelity &
Guaranty Co. v. Frohmiller, 71 Ariz. at 380, 277 P.2d at
1009 (quoting 15 Am. Jur. Damages § 144 (1938)). The
court went on to say that the plaintiff could not recover
against the defendants under that exception because
"there must be more than a mere lack of good faith. The
plaintiff must show that the defendants acted vexatiously,
wantonly, or for oppressive reasons." Taylor, 130
Ariz. at 523, 637 P.2d at 733. Because the plaintiff had
not met [***17] the burden of proving that the defendants'
conduct was egregious enough, the supreme court
held that the trial court's failure to award the attorneys'
fees as sanctions was not an abuse of discretion. Id.
Although the Taylor court discussed the "tort of another"
exception, the exception as contemplated by the
Restatement (Second) of Torts § 914(2) (1979) and described
in 22 Am. Jur. 2d Damages § 618 (1988) does
not apply to the facts of that case because it did not involve
a plaintiff's attempt to recover attorneys' fees incurred
in litigation with a third party. Rather, Taylor involved
a plaintiff who was seeking attorneys' fees incurred
in a single action as sanctions against a defendant.
Therefore, it appears that the court's ruling was based on
the application of a separate exception to the general rule
prohibiting awards of attorneys' fees which has sometimes
been applied. This separate exception provides that
a court may award counsel fees to a successful party

when his opponent has acted in bad faith, vexatiously,
wantonly, or for oppressive reasons. n6 The authority
cited by the Taylor court for the requirement that the
plaintiff must show that [***18] the defendant acted
vexatiously, Hall v. Cole, 412 U.S. 1, 93 S.Ct. 1943, 36
L.Ed.2d 702 (1973), dealt not with the "tort of another"
exception, but with this separate "vexatious litigation" or
"bad faith" exception, and noted that the underlying rationale
of cases applying such exception is punitive.
[***19]
168 Ariz. 484, *; 815 P.2d 411, **;
1991 Ariz. App. LEXIS 173, ***; 91 Ariz. Adv. Rep. 82
n6 This court recognized the "bad faith" exception
to the general rule regarding the unavailability
of attorneys' fees to the prevailing party
absent statute or contract in London v. Green
Acres Trust, 159 Ariz. 136, 765 P.2d 538 (App.
1988). The court in London cited Taylor as suggesting
that the supreme court recognizes this
"bad faith" exception. London, 159 Ariz. at 146,
765 P.2d at 548. The London court, however,
seemed to confuse the "bad faith" exception,
which requires vexatious conduct on the defendant's
part, with the "tort of another" exception.
See id. In any event, London was not a "tort of
another" case and therefore any statements the
court made (or may have made) regarding the
"tort of another" exception were merely dicta.
In fact, an Arizona court has recognized that the
"vexatious litigation" exception to the rule prohibiting
awards of attorneys' fees is separate and distinct from the
"tort of another" exception. In Wichita v. Pima County,
131 Ariz. 576, 643 P.2d 21 (App. 1982), Division Two of
this court stated:
[HN6]
The general rule is that each party to a lawsuit must pay
his own way. Exceptions are few: (1) Where contracting
parties provide otherwise; (2) where a statute allows the
award; (3) where the losing party has been guilty of vexatious
litigation or (4) where the defendant has generated
litigation between the plaintiff and a third party.
Id. at 577, 643 P.2d at 22 (emphasis added).
The second case relied on by Chrysler for the proposition
that the "tort of another" exception requires that
the plaintiff prove the defendant acted vexatiously is
McKesson Chemical v. Van Waters & Rogers, 153 Ariz.
577, [*490] [**417] 739 P.2d 211 (App. 1987).
However, McKesson, like Taylor, also involved the application
of the separate "vexatious [***20] litigation"
or "bad faith" exception. In McKesson, Van Waters intervened
as a defendant in a lawsuit by OEM Repro
Products, Inc. against McKesson for the sale of certain
Page 6
contaminated chemicals. Van Waters also filed a
cross-claim against McKesson, seeking indemnity, attorneys'
fees and costs. Van Waters intervened in the
lawsuit after it had received a letter from McKesson
stating that if Van Waters did not voluntarily enter into
the lawsuit, McKesson might stipulate with OEM to facts
designed to allow the jury to find that the defective
chemicals came from barrels which Van Waters had sold
to McKesson. At the close of OEM's case, the court
found that there was no evidence that the contaminated
chemicals came from Van Waters and so granted a directed
verdict for Van Waters against OEM and a partial
summary judgment for Van Waters against McKesson,
reserving the issue of attorneys' fees.
After the conclusion of trial, the trial court denied
Van Waters' request for attorneys' fees against
McKesson. Van Waters appealed, claiming entitlement
to the attorneys' fees incurred in the action under A.R.S. §
§ 12-341.01(C), 12-341.01(A) and the "tort of another"
[***21] exception as described in United states Fidelity
& Guaranty Co. v. Frohmiller, 71 Ariz. 377, 277 P.2d
1007 (1951). This court held that Van Waters couldonly
recover its fees under A.R.S. § 12-341.01(A). With respect
to the "tort of another" exception, the court cited
Taylor v. Southern Pacific Transportation Company, 130
Ariz. 516, 637 P.2d 726 (1981), stating: "For a defendant's
conduct to fall within this exception, however, it
must be shown that the defendant acted vexatiously,
wantonly or for oppressive reasons." Taylor, 153 Ariz. at
561, 739 P.2d at 215. Again, the court felt that Van Waters
had not met this burden.
Like Taylor, McKesson does not involve the typical
fact scenario to which the "tort of another" exception
applies, i.e., when, because of the tort of A, B is required
to bring or defend against an action involving C in order
to protect its interests. See Restatement (Second) of Torts
§ 914(2) comment b, illustrations 1-3 (1979). Although
Van Waters technically intervened in the case as a defendant
against OEM, the plaintiff, it appears that the
court viewed Van Waters' involvement [***22] in the
lawsuit as solely against McKesson. The court stated
that, although the pleadings had been inartfully drafted in
that Van Waters' cross-claim sought indemnity from
McKesson in the event that Van Waters was foundliable
to OEM, what Van Waters was really seeking, and what
the trial court granted, was a declaratory judgment that
Van Waters owed no indemnity to McKesson, whether
or not McKesson was liable to OEM. McKesson, 153
Ariz. at 562-563, 739 P.2d at 216-217. OEM, the plaintiff,
never sought to bring Van Waters into the action
and, in fact, opposed the motion to intervene. Id. at 564,
739 P.2d at 218. In addition, the fact that the court held
that any fees awarded to Van Waters would have to be
borne solely by McKesson, rather than apportioned be-

tween both OEM and McKesson, supports the position
that the court viewed Van Waters' action as being solely
against McKesson. The court noted that "even though the
trial court stated that it was granting relief to Van Waters
against both plaintiff and McKesson, Van Waters' only
meaningful success was on its cross-claim against
McKesson." Id. Therefore, although technically Van
Waters had defended [***23] in the lawsuit against
OEM, in reality the only party adverse to Van Waters
was McKesson. As a result, Van Waters was attempting
to collect from McKesson attorneys' fees incurred in litigation
against McKesson rather than a third party, andthe
"tort of another" exception was inapplicable. In short,
Taylor, like McKesson, involved an attempt to obtain an
award of attorneys' fees as a sanction pursuant to the
"vexatious litigation" or "bad faith" exception. Therefore,
the court imposed the requirement that the defendant
must have acted vexatiously, wantonly or for oppressive
reasons.
Although the "tort of another" exception has been
recognized in various Arizona [*491] [**418] cases,
the present case marks the first time in this jurisdiction
that a plaintiff has relied on the exception in attempting
to recover attorneys' fees incurred in an action
with a third party from a tortfeasor as conversion damages.
n7 This, we believe, is the scenario contemplated
by the Restatement (Second) of Torts § 914(2) (1979).
We specifically note that § 914(2) does not require that
the defendant acted vexatiously. In the absence of Arizona
law to the contrary, this court will [***24] follow
the law of the Restatement. Jesik v. Maricopa County
Community College District, 125 Ariz. 543, 546, 611
P.2d 547, 550 (1980). As mentioned earlier, no Arizona
decision has expressly declined to adopt § 914(2) under
the circumstancesof the present case. In addition, those
other jurisdictions that have adopted the "tort of another"
exception have not imposed a requirement that the defendant
acted vexatiously, wantonly or for oppressive
reasons. See, e.g., Tetherow v. Wolfe, 223 Neb. 631, 392
N.W.2d 374 (1986); Gray v. Don Miller & Associates,
Inc., 35 Cal. 3d 498, 674 P.2d 253, 198 Cal. Rptr. 551
(1984); Elijah v. Fender, 674 P.2d 946 (Colo. 1984);
Nalivaika v. Murphy, 120 Ill. App. 3d 773, 458 N.E.2d
995 (1983). Therefore, we reject Chrysler's argument that
First Financial [HN7] must prove that Chrysler's conduct
168 Ariz. 484, *; 815 P.2d 411, **;
1991 Ariz. App. LEXIS 173, ***; 91 Ariz. Adv. Rep. 82
Page 7
was vaxatious, wanton or oppressive in order for the "tort
of another" exception to apply and thereby permit First
Financial to recover the attorneys' fees incurred in the
quiet title action.
[***25]
n7 In Treat v. Nowell, 37 Ariz. 290, 294 P.
273 (1930), the court permitted a purchaser of real
property and improvements who had obtained
a judgment against the seller for false representations
that there were no liens on the property other
than certain mortgages, to recover attorneys'
fees paid in defending an action by the holders of
the liens. The court did not elaborate on the basis
for such award, merely stating that the attorneys'
fees paid were in the same category as the payments
of the judgments to the lienholders. 37
Ariz. at 298, 294 P. at 276. In addition, in Earven
v. Smith, 127 Ariz. 354, 621 P.2d 41 (App. 1980),
Division Two of this court held that "when a paid
escrow holder has negligently made it necessary
for a vendor to file an action against his vendee,
attorney's fees incurred by the vendor in prosecuting
his action are recoverable as an item of the
vendor's damages in an action against the escrow
holder." 127 Ariz. at 357, 621 P.2d at 44.
Accordingly, and by way of summarization, we hold
that, because the defense of Collins' quiet title action was
necessary to protect First Financial's interest in the mobile
home and because the quiet title action and First
Financial's defense in that action were the natural consequences
of Chrysler's conversion of the mobile home,
First Financial, in accordance with the "tort of another"
exception, is entitled to recover, as part of its conversion
damages, its reasonable attorneys' fees incurred in its
defense of the quiet title action, as well as the attorneys'
fees and costs assessed against it in that action. We remand
to the trial court for its determination the amount
First Financial is entitled to recover as damages.
We deny Chrysler's request for attorneys' fees on
appeal.

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PRIOR HISTORY: [***1] Appeal from Grant Circuit
Court.
DISPOSITION: Appeal granted and judgment reversed
and cause remanded for new trial.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant insurer sought
review of a decision of the Grant Circuit Court (Kentucky),
which entered a verdict in favor of plaintiff beneficiary
in the beneficiary's action to recover the amount
he had paid to a bank on a promissory note.
OVERVIEW: The bank recovered a judgment against
the beneficiary after the beneficiary had refused to pay a
promissory note that he had executed and the insurer's
agent had given to the bank. The beneficiary brought an
action against the insurer to recover the amount he had
paid to the bank and the attorney fees he had incurred.
The beneficiary alleged that the insurer's agent fraudulently
represented the amount of a policy's surrender
value and that the agent fraudulently induced him to sign
the note. The trial court found in favor of the beneficiary,
and the insurer sought review of the trial court's judgment.
On appeal, the court reversed the trial court's decision,
finding that the insurer's demurrer to the beneficiary's
claim regarding the value of the policy should
have been sustained because the beneficiary had not alleged
that he had been induced to execute the promissory
note by the agent's representations as to the value of the
policy. The court ordered a new trial, directing the trial
court to incorporate into an instruction on the measure of
damages the question whether the beneficiary acted in
good faith in employing counsel to defend the action
brought against him by the bank.
OUTCOME: The court granted the insurer's appeal,
reversed the trial court's judgment that had been in favor
of the beneficiary, and remanded the cause for a new
trial.
186 Ky. 81, *; 215 S.W. 949, **;
1919 Ky. LEXIS 154, ***
LEXSEE 186 KY 81
Indiana National Life Insurance Co. v. Butler
[NO NUMBER IN ORIGINAL]
COURT OF APPEALS OF KENTUCKY
186 Ky. 81; 215 S.W. 949; 1919 Ky. LEXIS 154
November 28, 1919, Decided
LexisNexis(R) Headnotes
Page 1
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN1] The reasonable expenses of prior litigation caused
by the wrongful act of another, including compensation
for attorneys' fees, may be recovered where the party
incurring them acted in good faith in bringing his action
or making defense.
COUNSEL: C. C. ADAMS for appellant.
DE JARNETTE & HARRISON for appellee.
JUDGES: WILLIAM ROGERS CLAY, COMMIS-
SIONER.
OPINIONBY: WILLIAM ROGERS CLAY
OPINION:
[*81] [**949] OPINION OF THE COURT BY
WILLIAM ROGERS CLAY, COMMISSION-
ER--Reversing.
On July 17, 1916, S.W. Butler, at the instance of an
agent for the Indiana National Life Insurance Company,
[*82] consented that his infant son, R. S. Butler, might
apply for insurance to the amount of $ 2,500.00, payable
in the event of his death to his mother, Susan Simpson
Butler. The annual premium was $ 108.98, for which
S.W. Butler, and his son executed their note payable to
themselves, which they then endorsed and delivered to
the agent. The agent discounted the note at the Grant
County Deposit Bank. S.W. Butler having refused to pay
it, the bank brought suit. After three trials the bank recovered
a judgment for the principal, interest and costs,
then amounting to $ 244.00. Butler also paid his attorneys
a fee of $ 50.00.

This suit was brought by S.W. Butler against the Indiana
National Life Insurance Company to recover
[***2] the amount paid by him. It was charged in the
first paragraph of the petition that defendant's agent
fraudulently represented that the surrender value of the
policy would be $ 2,772.00 at the end of eleven years,
that when the policy was delivered it was ascertained that
this representation was false and that the policy was returned
to the defendant; that had it not been for the false
representations of the defendant's agent he would not
have given his consent for his son to enter into the contract,
and that he gave his consent to his son's taking out
the insurance in the belief that the representations were
true. In the second paragraph, plaintiff pleaded in substance
that he was induced to sign the note sued on by
the fraudulent representation that his son was merely
signing his name to an application for insurance. The
case was submitted to the jury under both issues and the
jury returned a verdict in favor of plaintiff for $ 294.00.
The defendant prays an appeal.
Defendant's demurrer to the first paragraph of the
petition should have been sustained. Even if it be conceded
that the agent misrepresented the surrender value
of the policy at the end of the eleventh year, and plaintiff
[***3] was thereby induced to give his consent to his
son's taking out the insurance, plaintiff was not injured
unless he was thereby induced to execute the note.
Hence, in order that the first paragraph might state a
cause of action it was necessary for plaintiff to allege
that he was induced by the fraudulent representations of
the agent as to the surrender value of the policy to execute
the premium note. This he failed to do, and could
not have done consistently [*83] with the second paragraph
of his petition, for the gist of the defense in the
latter paragraph is that he signed the note in reliance upon
the false statement of the agent that it was something
186 Ky. 81, *; 215 S.W. 949, **;
1919 Ky. LEXIS 154, ***
Page 2
else. Manifestly, if that be true, he could not have been
induced to sign it by any misrepresentation as to the surrender
value of the policy. For the same reason, it was
error to instruct the jury that if the facts relied on in the
first paragraph of the petition were true, they should find
for plaintiff.
Another contention of defendant is that [**950]
the court erred in authorizing the jury to find as an element
of damages the attorneys' fees expended by plaintiff
in defense of the suit brought by the bank. In
Hutchinson First Nat. Bank v. Williams, 62 Kan. 431, 63
P. 744, [***4] it was held that attorneys' fees and expenses
incurred in good faith by a bank in saving itself
from loss by the fraud of a party who obtained from it a
draft, and then caused the same to be cashed, are compensatory
and not exemplary, and may be recovered in
an action against the wrongdoer. Indeed, the prevailing
rule seems to be that [HN1] the reasonable expenses of
prior litigation caused by the wrongful act of another,
including compensation for attorneys' fees, may be recovered
where the party incurring them acted in good
faith in bringing his action or making defense. 17 C. J.
809; Peoples B. L. & S. Ass'n v. Pickell, 56 S.W. 500.
On the other hand, if the prior litigation was unnecessary,
there can be no recovery for expenses therein. On
another trial the court will incorporate in the instruction
on the measure of damages the question whether plaintiff
acted in good faith in employing counsel to defend the
suit brought against him by the bank.
Other errors are relied on, but we do not deem them
of sufficient importance to merit discussion.
Wherefore the appeal is granted and [***5] the
judgment reversed and cause remanded for new trial
consistent with this opinion.

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204 Okla. 160, *; 228 P.2d 169, **;
1951 Okla. LEXIS 408, ***
LEXSEE 204 OKLA. 160
SECURITY STATE BANK OF COMANCHE v. W. R. JOHNSTON & CO., Inc., et
al.
PRIOR HISTORY: [***1]
Appeal from District Court, Stephens County; Arthur L.
Marmaduke, Judge.
Actions by H. H. Thompson and others against N. E.
Taylor and others, wherein defendants W. R. Johnston &
Company, Inc., and J. P. Branch and Home Lumber
Company, by cross-actions, recover judgments against
Security State Bank of Comanche, Oklahoma, another
defendant, who appeals therefrom.
DISPOSITION:
Affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant bank appealed
the decision of the District Court of Stephens County
(Oklahoma), which entered a judgment in favor of plaintiffs,
individual claimants and a lumber company, in
plaintiffs' action to recover funds wrongfully setoff by
the bank.
OVERVIEW: When the bank deposited checks without
the knowledge or permission of the plaintiffs and then
refused to surrender all of the funds, plaintiffs were
thrown into litigation over the contractors who were
owed money for the construction of a residence. In their
subsequent action against the bank to recover their losses,
the trial court awarded to each plaintiff a judgment
for the amount of his claim with interest and for costs
including attorney's fee in a fixed amount. On appeal, the
court affirmed the judgment of the trial court. The court
rejected the bank's argument that a deposit account
placed the bank in the relationship of creditor with the
account holders as debtors. The court ruled that such a
debtor-creditor relationship was contractual. Here the
bank deposited the funds without the knowledge of
plaintiffs. The fact that the bank had knowledge of the
No. 33986
Supreme Court of Oklahoma
204 Okla. 160; 228 P.2d 169; 1951 Okla. LEXIS 408
February 20, 1951, Decided
Page 1
trust character of the fund afforded even greater reason
for the application of the rule herein.
OUTCOME: The court affirmed the judgment of the
trial court, which awarded plaintiffs a monetary judgment
and their attorney's fees in an action to recover
money wrongfully withheld by the bank.
LexisNexis(R) Headnotes
Banking Law > Bank Activities > Bank Accounts >
Deposit Accounts
Banking Law > Banker's Lien & Right of Setoff
[HN1] A prerequisite to the existence of such a right of
setoff in the bank is that such deposit must give rise to a
relation of debtor and creditor between the depositor and
the bank. Where the bank makes a deposit without the
knowledge or consent of the party to whom the check is
payable and without authority of anyone acting by or on
his behalf, no such relationship accrues.
Banking Law > Bank Activities > Bank Accounts >
Deposit Accounts
[HN2] The relation of debtor and creditor between the
bank and the depositor is contractual, and no one can
create this relation between the bank and depositor
without authority from the depositor, express or implied,
and, where a deposit is made in the bank by a third person
to the credit of another without his knowledge or
consent, and without authority, the relation of debtor and
creditor does not exist.
Banking Law > Bank Activities > Bank Accounts >
Trust Accounts
[HN3] Where a trustee deposits money, belonging to his
cestui que trust, in a bank and no credit is extended on
account of such deposit and the bank in no way changes
its position by reason thereof, a lack of notice of the trust
character of such deposit is immaterial and the true owner
may recover the amount thereof from such bank.

Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN4] Where the natural and proximate consequence of
a wrongful act has been to involve plaintiff in litigation
with others, there may as a general rule, be a recovery in
damages against the author of such act of the reasonable
expenses incurred in such litigation, together with compensation
for attorney's fees.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN5] The general rule is that costs and expenses of litigation,
other than the usual and ordinary court costs, are
not recoverable in an action for damages, nor are such
costs even recoverable in a subsequent action; but where
the wrongful acts of the defendant have involved the
plaintiff in litigation with others, or placed him in such
relations with others as make it necessary to incur expense
to protect his interest, such costs and expense
should be treated as legal consequences of the original
wrongful act.
COUNSEL:
Bond & Bond, Duncan, for plaintiff in error.
Jerome Sullivan, Duncan, for defendant in error W.
R. Johnston & Co., Inc.
J. P. Speer, Duncan, for defendants in error J. P.
Branch and Home Lumber Company.
JUDGES:
GIBSON, J.
OPINIONBY:
GIBSON
OPINION:
[*161] [**170] GIBSON, J. The facts necessary
to a decision of the case may be summarized as follows:
Home Lumber Company, a copartnership, composed
of J. P. Branch and A. N. Harley, Jr., was the owner of
real property described as lot eight (8), in block two (2)
of Branch Subdivision of Wilson Addition to the town of
Comanche, Oklahoma. In order to facilitate the handling
thereof during the absence of Harley, who was in
military service, the title thereto was held in the name of
Branch. In September, 1946, Branch, by parol contract,
204 Okla. 160, *; 228 P.2d 169, **;
1951 Okla. LEXIS 408, ***
Page 2
sold the lot to [***2] N. E. Taylor for a consideration of
$ 350 and agreed to convey the lot, by deed of general
warranty, upon payment of the consideration. It was
understood at the time that Taylor intended to erect a
dwelling thereon and to undertake to sell same as improved
property. On March 10, 1947, at which time the
erection of the improvements was near completion, Taylor
informed Branch that he had sold the premises to one
James H. Hobson and requested that the deed to the
premises be made to Hobson as grantee. Branch executed
the deed accordingly and on that day deposited
same as an escrow with Security National Bank of Comanche,
Oklahoma, to be delivered upon the payment to
said bank of said sum of $ 350, the purchase price, and
the further sum of $ 4,214, owing said lumber company
for materials theretofore furnished in the construction of
the improvement. On March 15th following, said Taylor
and Hobson executed in writing a contract for the sale
of the premises at the price of $ 6,800, which was also
deposited in said bank. Under the terms thereof the
purchase was conditioned upon Hobson being able to
secure a loan upon the premises. If so, the said deed and
abstract showing merchantable [***3] title were to be
delivered to Hobson upon payment to the bank of said $
6,800. Hobson obtained from W. R. Johnston & Company,
Inc., a loan in the amount of $ 6,300 and he, together
with his wife, executed a mortgage upon the
premises to secure the same. At that time, the period
within which mechanics' or other liens could be filed had
not expired. The loan company was well acquainted
with Branch and believing that he by reason of his warranty
of the title to the lot would be as interested as it, the
company, was in protecting the property from such liens,
made its check payable to Branch and transmitted same
to him for disposition of the proceeds. On receipt
thereof Branch withdrew said deed from the bank and
got in touch with Taylor with a view of satisfying all
claims, that could become liens, before delivery of said
deed. At that time no liens had been filed but the following
amounts were owing for which the [*162] claimants
were entitled to file liens: H. H. Thompson, $
523.75; Cunningham and Coggins Hardware Company,
$ 781.74; Stanley J. Box, $ 170.50, and said Home
Lumber Company, the further sum of $ 70 for materials
furnished since March 10th. It was agreed between
[***4] Branch and Taylor that Branch by his endorsement
should make the check payable to the order of the
lumber company and that the latter should negotiate the
same through said bank and on doing so have the bank
credit the account of the Home Lumber Company with
[**171] $ 4,564.04, representing the total of the
amounts for which the deed was held as escrow, and pay
the remainder thereof in cash to the lumber company
who, in conjunction with Taylor, would with that sum
and other moneys to be provided by Taylor, discharge

said remaining indebtedness. A written memorandum of
the plan was made. The plan was pursued and the lumber
company through its bookkeeper presented the check
and memorandum to said bank which accepted the same.
By reason of the revenue stamps required the value of
the check was reduced to $ 6,292.30. The bank placed
to the credit of the lumber company $ 4,564.04, as requested,
but declined to pay in cash the remainder thereof,
$ 1,728.26. As reason therefor the president of the
bank declared that removing the money in cash was an
unbusinesslike way of handling an escrow and that the
balance should be deposited to the credit of Taylor and
by him checked on in making [***5] the payments.
Upon being informed thereof Branch and Taylor, each
acting on the belief that the bank was acting in good faith
and that checks drawn by Taylor would be honored,
agreed that the matter be so handled, and in pursuance
thereof Taylor drew separate checks thereon payable to
said named claimants, other than the lumber company,
and delivered same in payment of their respective claims.
All of said checks were dishonored by the bank when
presented for payment by the payees. The bank treated
the balance as a deposit to credit of Taylor and applied
same as a credit upon past due indebtedness of Taylor to
the bank which was evidenced by his note. Branch and
Taylor each remonstrated with the president of the bank
against the dishonor of the checks and requested and
demanded that the checks be honored or that said balance
be made available to the lumber company, and at the
same time advised him of the factual situation and that
expensive litigation would necessarily ensue on default
of compliance. The bank refused to alter the situation.
Thereafter each of said claimants, other than the lumber
company, perfected liens upon the property and filed
actions for judgment and foreclosure [***6] of his lien,
the action of H. H. Thompson being docketed as cause
No. 14326, that of Cunningham and Coggins Hardware
Company as No. 14327 and that of Stanley J. Box as No.
14328. The parties defendant and the questions at issue
were the same in each case and they were consolidated
for trial under No. 14326. The original parties defendant
are J. P. Branch, N. E. Taylor, James H. Hobson and
wife, Dora Mae Hobson, and W. R. Johnston & Company,
Inc. On the issues joined between the plaintiffs and
said defendants each plaintiff was awarded judgment for
the amount of his claim with interest and for costs including
attorney's fee in a fixed amount. It was further
adjudged that each had a valid and subsisting lien against
said premises which liens were co-equal and consolidated
first liens, superior to any lien or interest claimed by
defendants, and that the premises be sold to satisfy said
judgments. The correctness of these judgments is not
involved on the appeal. Upon motion of defendant W.
R. Johnston & Company, Inc., said Security State Bank
was made a party defendant in the cause and defendant
204 Okla. 160, *; 228 P.2d 169, **;
1951 Okla. LEXIS 408, ***
Page 3
to the cross-petition of said W. R. Johnston & Company,
Inc., filed therein. In said [***7] cross-petition there
was sought a judgment against said bank in the sum of $
2,500 for damages sustained by reason of the wrongful
act of the bank in misapplying said balance. And mentioned
as items [*163] of such damage was the sum of
$ 300 expended for attorney's fee in defending against
the actions of said plaintiffs and the sum of $ 125 for
expenses incurred therein. Upon the issues joined the
court awarded cross-petitioner judgment for the sum of $
455, the aggregate of said attorney's fee and said expense
item and $ 30, by it deposited as costs, and further judgment
for so much of the amounts adjudged owing the
plaintiffs as cross-petitioner may pay in protection of its
mortgagee lien upon the premises. This judgment is
challenged here. Upon its motion the Home Lumber
Company was made a party defendant and thereafter it,
joined by defendant Branch, filed a cross-petition against
said bank. Upon the issues joined thereon the court
awarded said Branch and Lumber Company judgment
for $ 300 attorney's [**172] fee expended by them in
defense of said actions and for $ 20 which was by it deposited
as costs, and judgment for such amounts adjudged
owing plaintiffs as they [***8] be required to
pay. This judgment is also challenged.
The assignments of error are grouped under the
proposition that the judgment of the court is against the
clear weight of the evidence and contrary to law. Two
grounds are urged in support thereof and they are applied
in common to both of the judgments. The first ground is
that under the facts the bank was liable to neither of the
judgment creditors and the other that the damages
awarded are contrary to law.
In support of the first ground it is contended that
under the terms of the escrow, the bank was without authority
to do otherwise than to deposit said balance to the
credit of Taylor, and, when so deposited, the bank was
entitled to apply same as a credit upon the indebtedness
of Taylor to the bank. As authority there is cited 42 O.
S. 1941 § 32, which affords banks a lien upon property
of a customer for the balance due it by the customer in
the course of business, and First State Bank v. Hunt, 77
Okla. 4, 185 P. 1089, and other cases, which recognize
the right of the bank in such cases to appropriate the
customer's deposit to the satisfaction of his obligation to
the bank, are relied on. The contention is without merit.
[***9] The vice in the argument lies in the fact that the
deposit was not and, under the facts, could not have become
such a deposit as that contemplated by said law.
[HN1] A prerequisite to the existence of such right in the
bank is that such deposit must give rise to a relation of
debtor and creditor between the depositor and the bank.
In the instant case the bank made the deposit without the
knowledge or consent of Taylor and without authority of

anyone acting by or on his behalf. In Gillette v. Liberty
National Bank of Tulsa, 95 Okla. 76, 218 P. 1057, we
held:
[HN2] "The relation of debtor and creditor between
the bank and the depositor is contractual, and no one can
create this relation between the bank and depositor
without authority from the depositor, express or implied,
and, where a deposit is made in the bank by a third person
to the credit of another without his knowledge or
consent, and without authority, the relation of debtor and
creditor does not exist."
Furthermore, the trial court properly found that in
the hands of the Home Lumber Company the check evidenced
a fund held in trust and that the bank was advised
of such fact. Pertinent thereto we held, in Fidelity Nat.
Bank of Oklahoma [***10] City v. Copeland, 138 Okla.
19, 280 P. 273:
[HN3] "Where a trustee deposits money, belonging
to his cestui que trust, in a bank and no credit is extended
on account of such deposit and the bank in no way
changes its position by reason thereof, a lack of notice of
the trust character of such deposit is immaterial and the
true owner may recover the amount thereof from such
bank. Brady v. American Nat. Bank of Oklahoma City,
120 Okla. 159, 250 P. 1006."
The fact that the bank had knowledge of the trust
character of the fund affords even greater reason for the
application of the rule herein.
[*164] The second ground challenges the authority
of the court to award damages for the two items, attorney's
fees and expense, expended in defending against
the actions of the plaintiffs. There is said in the brief:
"We know of no Oklahoma authority allowing recovery
of attorneys' fees in defending an action except under
contract or where fixed by statute." As supporting the
contention there are cited Hertzel v. Weber, 118 Okla.
82, 246 P. 839, and Prager's Paris Fashion et al. v. Seidenbach
et al., 113 Okla. 271, 242 P. 260, and from the
latter case a paragraph of the syllabus is quoted which
[***11] is to the effect that a corporation, like an individual,
cannot recover for time expended in matters pertaining
to its own litigation. Herein the trial court
properly found that it was by reason of the wrong of the
bank that the plaintiffs filed their liens and instituted the
204 Okla. 160, *; 228 P.2d 169, **;
1951 Okla. LEXIS 408, ***
Page 4
actions which the cross-petitioners were required to defend
[**173] in the protection of their rights. Such
situation is not within the purview of the rule so declared.
The rule invoked by the cross-petitioners and
applied by the court is thus stated in 17 C. J. 809:
[HN4] "Where the natural and proximate consequence
of a wrongful act has been to involve plaintiff in
litigation with others, there may as a general rule, be a
recovery in damages against the author of such act of the
reasonable expenses incurred in such litigation, together
with compensation for attorney's fees. . . ."
The quoted rule was invoked in Hertzel v. Weber,
supra. We there recognized the soundness of the rule but
held the same inapplicable therein. In distinguishing the
rule we said:
". . . It is not contended that Hertzel by any wrongful
act involved the plaintiff Weber in litigation with others.
The litigation for which Weber seeks [***12] to recover
attorney's fees was with Hertzel, and not with any
third party. It may be said that there is no apparent distinction
in principle and that the detriment suffered
would be the same where the wrongful act resulted in
litigation with the wrongdoer or with other parties, but
here the wrongful act complained of is bringing and
maintaining a suit against the plaintiff Weber."
We deem it clear that the facts bring the instant case
within the quoted rule. In McGaw v. Acker, etc., Co.,
111 Md. 153, 73 Atl. 731, 134 A.S.R. 592, there is the
following clear statement of the general rule relied on
and the qualification thereof which is applicable and
controlling here:
[HN5] "The general rule is that costs and expenses
of litigation, other than the usual and ordinary court
costs, are not recoverable in an action for damages, nor
are such costs even recoverable in a subsequent action;
but where the wrongful acts of the defendant have involved
the plaintiff in litigation with others, or placed
him in such relations with others as make it necessary to
incur expense to protect his interest, such costs and expense
should be treated as legal consequences of the
original wrongful act."
The judgments [***13] are affirmed.

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SUBSEQUENT HISTORY: [***1]
215 Ga. App. 201, *; 450 S.E.2d 239, **;
1994 Ga. App. LEXIS 1164, ***; 94 Fulton County D. Rep. 3433
LEXSEE 215 GAAPP 201
ATLANTA WOMAN'S CLUB, INC. v. WASHBURNE et al.
A94A1326.
COURT OF APPEALS OF GEORGIA
215 Ga. App. 201; 450 S.E.2d 239; 1994 Ga. App. LEXIS 1164; 94 Fulton County
D. Rep. 3433
Reconsideration Denied November 14, 1994. Certiorari
Applied for.
PRIOR HISTORY:
Action for damages. Fulton Superior Court. Before
Judge Eldridge.
DISPOSITION:
Judgment affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant club sought
review from the judgment of the Fulton Superior Court
(Georgia), which granted partial summary judgment to
appellee insurance agencies in appellant's request for
attorney fees and costs of litigation in connection with an
underlying action for coverage against an insurer. Appellant
contended that it had shown proximate cause that
appellees' action had caused the underlying action, for
which the expenses were incurred.
OVERVIEW: Appellant club filed an action against
appellees, insurance agencies and insurer, to recover
damages sustained as a result of a fire on appellant's
rental property, based upon appellee agencies' failure to
procure proper insurance, and upon the denial of coverage
by appellee insurer. Appellee insurer settled, and
appellant requested attorney fees and expenses from appellee
agencies for having to bring the underlying action
against appellee insurer. The trial court granted partial
summary judgment to appellee agencies and review was
sought. On appeal, the court affirmed and held that the
claim for fees and costs was based solely in tort as a
foreseeable consequence of appellee agencies' wrongdoing,
under Ga. Code Ann. § 51-12-7. As such, appellant
was required to prove that the underlying action and ex-
October 18, 1994, Decided
Page 1
penses in maintaining same were proximately caused by
appellee agencies' wrongdoing. However, the court concluded
that such a causal link between the alleged breach
of duty and the claimed loss was not proved and as such,
partial summary judgment was proper.
OUTCOME: The court affirmed a partial summary
judgment to appellee insurance agencies in appellant
club's request to impose attorney fees and costs from an
underlying action against appellee insurer upon appellee
agencies. The court held that appellant had failed to
show that there was proximate cause between appellee
agencies' alleged breach of duty and the claimed loss to
appellant in having to bring the underlying action.
LexisNexis(R) Headnotes
Civil Procedure > Costs & Attorney Fees
Torts > Damages > Costs & Attorney Fees
[HN1] See Ga. Code Ann. § 51-12-7.
Civil Procedure > Costs & Attorney Fees
Torts > Damages > Costs & Attorney Fees
[HN2] Attorney fees and expenses of litigation are allowed
only where authorized by statute or contract.
However, attorney fees and expenses of litigation in an
underlying action are recoverable as real damages incurred
as the result of defendants' malfeasance or misfeasance.
The effect of this exception is to put a plaintiff
in the same position he would have occupied had the
plaintiff not been forced to litigate with a third party. The
exception permits a plaintiff to recover all losses flowing
from a defendant's alleged misfeasance or malfeasance,
except in cases where expenses accrued in the cause of
action where recovery is sought.
Civil Procedure > Costs & Attorney Fees
[HN3] There is no requirement of a showing of fraud to
justify an award of attorney fees and expenses of litigation
where the natural and proximate consequence of a

215 Ga. App. 201, *; 450 S.E.2d 239, **;
1994 Ga. App. LEXIS 1164, ***; 94 Fulton County D. Rep. 3433
wrongful act has been to involve a plaintiff in costly litigation
with another. In such cases, the plaintiff may recover
from the defendant the reasonable and necessary
expenses incurred in such litigation, but only where legal
cause, as opposed to cause in fact, exists between these
damages and defendant's alleged breach of duty.
Torts > Causation > Proximate Cause
[HN4] There can be no proximate cause where there has
intervened between the act of defendant and the injury to
plaintiff an independent act of someone other than defendant,
which was not foreseeable by defendant, was
not triggered by defendant's act, and which was sufficient
to cause the injury. While the question of proximate
cause is usually submitted to the jury as a question of
fact, it may be decided as a matter of law where the evidence
shows clearly and palpably that the jury could
reasonably draw but one conclusion, that the defendant's
alleged omissions were not the proximate cause of the
injury. A prior and remote cause can not be made the
basis of an action if such remote cause did nothing more
than furnish the condition, or give rise to the occasion by
which the injury was made possible, if there intervened
between such prior or remote cause and the injury a distinct,
unrelated efficient cause of the injury. If no danger
existed in the condition except because of the independent
cause, such condition was not a proximate cause.
COUNSEL:
Savell & Williams, Edward L. Savell, for appellant.
Lokey & Bowden, Charles M. Lokey, Malcolm Smith,
Ralph W. Ellis, for appellees.
JUDGES: MCMURRAY, Presiding Judge. Pope, C. J.,
and Smith, J., concur.
OPINIONBY: MCMURRAY
OPINION:
[*201] [**240] MCMURRAY, Presiding
Judge.
The Atlanta Woman's Club, Inc. ("the Woman's
Club") brought an action against Harry E. Washburne,
insurance agencies through which Washburne worked
("the agencies") and Interstate Fire & Casualty Company
("Interstate") to recover damages allegedly sustained
after rental property owned by the Woman's Club ("the
premises") and covered by an Interstate policy of insurance
was damaged by fire. The Woman's Club claims
that Washburne was negligent in fulfilling his promise to
procure a contract of insurance for the premises, alleging
that he promised to replace an existing insurance policy
with a policy providing the same amount of coverage;
Page 2
that Washburne acquired a replacement policy through
Interstate; but that the Interstate policy was not comparable
because it did not include an endorsement negating a
co-insurance [***2] clause reducing the amount of
coverage if the premises is insured for less than 80 percent
of its value. The Woman's Club pressed a claim
against Interstate to recover under the replacement policy,
alleging the 80 percent co-insurance clause was not
triggered because a separate policy of insurance acquired
by the Woman's Club's tenant (providing 2.4 million
dollars in coverage for improvements on the premises)
resulted in at least 80 percent coverage of the adjusted
value of the premises.
The trial court granted summary judgment in favor
of Washburne and the agencies, but this court reversed in
Atlanta Women's Club v. Washburne, 207 Ga. App. 3, 5
(427 S.E.2d 18), holding that genuine issues of material
fact remained for jury resolution. In the meantime, the
claim asserted by the Woman's Club against Interstate
proceeded in the trial court and was eventually resolved
when Interstate (apparently) agreed to pay the Woman's
Club $ 710,869.45 on its property loss claims and $
51,834.85 for lost business profits. The settlement was
reduced to judgment via a "CONSENT ORDER" and
memorialized in a "STIPULATION AND SETTLE-
MENT AGREEMENT," providing [***3] (in pertinent
part) that Interstate "defended this action on the sole basis
that the Woman's Club property was grossly underinsured
and that the 80% co-insurance clause was applicable
to [the Woman's Club's) claim, thereby reducing the
total value of its claim to less than 50%." The Woman's
Club later amended its complaint pursuant to O.C.G.A. §
9-11-15 (d) and pressed a claim against Washburne and
the agencies for attorney fees and expenses of litigation,
alleging that prosecution of its claim against Interstate
cost the Woman's Club over $ 178,051 and inferring that
this expense was the result of the failure of Washburne
and the agencies to provide an adequate replacement
policy in violation of their fiduciary responsibility
[*202] to the Woman's Club.
Upon motion for summary judgment, the trial court
found that the Woman's Club's claim for attorney fees
and expenses of litigation was not recoverable under
O.C.G.A. § 13-6-11 or any other statutory authority and
concluded that "the cases cited by [the Woman's Club]
are distinguishable and do not afford it relief from the
traditional rule prohibiting attorney's fees as an item of
damages unless they are statutorily or contractually authorized."
[***4] This appeal followed. Held:
At the outset, it should be noted that the Woman's
Club does not assert a claim for attorney fees and expenses
of litigation pursuant to O.C.G.A. § 13-6-11 or
any other statute specifically authorizing such awards.
Further, the Woman's Club does not seek recovery based

215 Ga. App. 201, *; 450 S.E.2d 239, **;
1994 Ga. App. LEXIS 1164, ***; 94 Fulton County D. Rep. 3433
on theories of actual or implied indemnity. Compare
Alterman Foods [**241] v. G. C. C. Beverages, 168
Ga. App. 921, 924 (310 S.E.2d 755). The claim asserted
by the Woman's Club for attorney fees and expenses of
litigation is based solely in tort, arguing that the expenses
it incurred in pressing its claim against Interstate were a
natural and foreseeable consequence of the wrongdoing
of Washburne and the agencies. The Woman's Club reasons
that recovery of these costs is an element of damages
authorized by [HN1] O.C.G.A. § 51-12-7, which
provides as follows: "In all cases, necessary expenses
consequent upon an injury are a legitimate item in the
estimate of damages."
Generally, [HN2] attorney fees and expenses of litigation
are allowed only where authorized by statute or
contract. See Glynn County Fed. Employees Credit Union
v. Peagler, 256 Ga. 342, 344 (3) (348 S.E.2d 628).
[***5] However, "attorney fees and expenses of litigation
in an underlying action are recoverable as real damages
incurred as the result of defendants' malfeasance or
misfeasance (see Hamilton v. Powell, Goldstein, Frazer
& Murphy, 167 Ga. App 411, 412 (306 S.E.2d 340))."
(Emphasis supplied.) Marcoux v. Fields, 195 Ga. App.
573, 574 (394 S.E.2d 361). See Rogers v. Hurt, Richardson,
Garner, Todd & Cadenhead, 203 Ga. App. 412,
415 (2) (417 S.E.2d 29); Alston v. Stubbs, 170 Ga. App.
417, 419 (3) (317 S.E.2d 272); Alterman Foods, v. G. C.
C. Beverages, 168 Ga. App. 921, 924, 310 S.E.2d 755,
supra. The effect of this exception is to put a plaintiff in
the same position he would have occupied had the plaintiff
not been forced to litigate with a third party. The exception
permits a plaintiff to recover all losses flowing
from a defendant's alleged misfeasance or malfeasance,
except in cases where expenses accrued in the cause of
action where recovery is sought. See Nepera Chemical v.
Sea-Land, Svc., 253 U.S. App. D.C. 394, 794 F2d 688,
696-697 (D.C. Cir. 1988), [***6] and Restatement,
Second, Torts § 914(2). n1
n1 Alternatively, the Woman's Club contends
attorney fees and expenses of litigation are
justified in tort because Washburne fraudulently
induced the Woman's Club to accept a deficient
policy of insurance by failing to advise his principal
(the Woman's Club) that a comparable replacement
policy could not be found. This logic
is inapposite. [HN3] Neither the Restatement,
Second, Torts § 914 (2), nor any of the cases
cited in this opinion (or by the parties) require a
showing of fraud where the natural and proximate
consequence of a wrongful act has been to involve
a plaintiff in costly litigation with another.
In such cases, the plaintiff may recover from the
defendant the reasonable and necessary expenses
Page 3
incurred in such litigation, but only where legal
cause (as opposed to cause in fact) exists between
these damages and defendant's alleged breach of
duty. Kamyr, v. Boise Cascade Corp., 268 Ore.
130, 519 P2d 1031, 1034 (1974).
[*203] In the case sub judice, Washburne [***7]
and the agencies argue that the Woman's Club's claim
against Interstate is not an "underlying" action against a
third-party because the parties are joined in the same
suit, reasoning that the general rule prohibiting an award
of attorney fees and expenses of litigation in such cases
applies. This argument is without merit. The Woman's
Club's claim against Interstate is an action to recover
under a contract of insurance and is therefore independent
of the tort, breach of agency contract and respondeat
superior claims against Washburne and the agencies. Just
as Interstate is not jointly and severally liable for the
alleged wrongful acts of Washburne and the agencies,
Washburne and the agencies are not liable under the insurance
contract issued by Interstate. The actions are
separate and could have been sustained separately, but
the independent claims were instead permissively joined
pursuant to O.C.G.A. § 9-11-20 (a). Under these circumstances,
we cannot say the Woman's Club's claim
against Interstate is not an "underlying" action and
therefore outside the exception to the general rule prohibiting
attorney fees and expenses of litigation absent
specific statutory or contractual authority. [***8]
However, this holding does not mean the trial court erred
in granting partial summary judgment in favor of Washburne
and the insurance agencies. The Woman's Club
must show that genuine issues of material fact remain as
to a causal link between the alleged breach of duty and
the claimed loss. See Lovett v. Estate of Ruth K. Lovett,
250 N.J. Super. 79, 593 A2d 382, 389-393 (1991). This
means the Woman's Club must, at the very least, allege
circumstances indicating that Washburne's wrongdoing
was a natural and proximate cause of the attorney fees
and expenses of litigation the Woman's Club (purportedly)
incurred in pressing its claim against Interstate.
[**242] With this in mind, we favorably construe the
allegation of the Woman's Club's amended complaint
and strain to consider Interstate's stipulation that it "defended
this action on the sole basis that the Woman's
Club property was grossly underinsured and that the 80%
co-insurance clause was applicable to the (Woman's
Club's) claim, thereby reducing the total value of its
claim to less than 50%." n2 Nonetheless, we [*204]
find the Woman's Club's claim for attorney fees and expenses
of litigation lacking.
n2 The Woman's Club characterizes this
stipulation as a solemn admission in judicio

[***9]
215 Ga. App. 201, *; 450 S.E.2d 239, **;
1994 Ga. App. LEXIS 1164, ***; 94 Fulton County D. Rep. 3433
binding against Washburne and the agencies.
This is an erroneous conclusion because (among
other reasons) the Woman's Club was not a party
to Interstate's stipulation. See Walker v. Jack
Eckerd Corp., 209 Ga. App. 517 (1) (434 S.E.2d
63). However, for purposes of this opinion, we
assume (without deciding) that Interstate's unverified
stipulation constitutes proof of the statements
asserted therein.
"'"It is well settled that [HN4] there can be no
proximate cause where there has intervened between the
act of the defendant and the injury to the plaintiff, an
independent[,] . . . act (or omission) of someone other
than the defendant, which was not foreseeable by defendant,
was not triggered by defendant's act, and which
was sufficient of itself to cause the injury. (Cits.) While
the question of proximate cause is usually submitted to
the jury as a question of fact, it may be decided as a matter
of law where the evidence shows clearly and palpably
that the jury could reasonably draw but one conclusion,
that the defendant's (alleged omissions) were not the
proximate cause of the injury. (Cits.)" (Cit.)' Powell v.
Harsco Corp., 209 Ga. App. 348, 350-351 (2) (433
S.E.2d 608) (1993)." McQuaig v. McLaughlin, 211 Ga.
App. 723, 724 (1), 726 (b) (440 S.E.2d 499). "'"'"A prior
and remote cause can not be made the basis of an action
if such remote cause did nothing more than furnish the
condition, or give rise to the occasion by which the injury
was made possible, if there intervened between such
[***10] prior or remote cause and the injury a distinct,
Page 4
successive, unrelated, efficient cause of the injury. If no
danger existed in the condition except because of the
independent cause, such condition was not the proximate
cause." (Cit.)'" (Cit.)' Wanless v. Winner's Corp., 177 Ga.
App. 783, 785 (3) (341 S.E.2d 250) (1986)." Beamon v.
Ga. Power Co., 199 Ga. App. 309, 312 (404 S.E.2d 463).
In the case sub judice, Washburne's wrongful act
may have given rise to Interstate's involvement with the
Woman's Club, but it was not the reason Interstate denied
the claims asserted by the Woman's Club under the
replacement policy of insurance. This decision was Interstate's
alone and was (apparently) based on terms of a
standard contract of insurance and upon facts which existed
at the time the premises was destroyed by fire.
Moreover, the circumstances reflected from the records
now before this court indicate that the only natural
(foreseeable) harm flowing from Washburne's alleged
wrongdoing (if any there be) would be the difference in
coverage between the Interstate policy of insurance and
the policy of insurance [***11] it replaced. Under these
circumstances, we cannot say the trial court erred in
granting partial summary judgment in favor of Washburne
and the agencies. Genuine issues of material fact
simply do not exist as to legal causation between the
alleged wrongdoing of Washburne and the agencies and
the expenses and attorney fees the Woman's Club (purportedly)
expended in pressing its claims against Interstate.
[*205] Judgment affirmed. Pope, C. J., and Smith,
J., concur.

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223 Neb. 631, *; 392 N.W.2d 374, **;
1986 Neb. LEXIS 1040, ***
LEXSEE 223 NEB. 631
Douglas R. Tetherow and Mary Ann Tetherow, Personal Representative of the Estate
of Donald R. Tetherow, deceased, appellees and cross-appellants, v. E. Dean
Wolfe, doing business as Century 21, Wolfe & Associates, appellant and
cross-appellee
PRIOR HISTORY: [***1]
Appeal from the District Court for Cherry County: Edward
E. Hannon, Judge.
DISPOSITION:
Affirmed in part, and in part reversed and remanded
with directions.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant real estate
broker appealed from the District Court for Cherry
County (Nebraska), which entered a judgment for damages
in favor of plaintiff real estate sellers. The sellers'
action alleged that they sustained damages because of the
broker's negligence. The sellers cross-appealed a partial
reduction of the verdict by the trial court.
OVERVIEW: The sellers intended an all cash sale. The
broker used a sales contract that called for the buyer to
obtain a loan. The broker assured the sellers that it was
an all cash sale and that a revised contract form could be
completed at any time. The buyer was unable to obtain a
loan and successfully sued for the return of his deposit in
accordance with the contract. The sellers then obtained a
judgment against the broker for negligence, including
damages measured as of the time of the breach, and attorney's
fees for defending the buyer's lawsuit. The trial
court credited the broker with half of the interest earned
on the buyer's deposit. Both parties appealed. The court
affirmed as to the measure of damages, holding that the
doctrine of avoidable consequences did not apply because
the sellers' damages were properly measured as of
the time that the anticipated sale would have occurred.
Later changes in market value were irrelevant. Attorney's
fees were also recoverable from the first action involving
the buyer, but not in this action with the broker. Credit-
No. 84-892
SUPREME COURT OF NEBRASKA
223 Neb. 631; 392 N.W.2d 374; 1986 Neb. LEXIS 1040
August 15, 1986, Filed
Page 1
ing the broker with interest earned on the deposit was
reversed because it violated the collateral source rule.
OUTCOME: The court affirmed the judgment in favor
of the sellers against the broker; the court reversed that
part of the judgment that credited the broker with half of
the interest earned on the buyer's deposit.
LexisNexis(R) Headnotes
Civil Procedure > Trials > Judgment as Matter of Law
[HN1] The standard governing a trial judge in assessing
a motion for a directed verdict is well established. The
judge must resolve every controverted fact in favor of the
party against whom the verdict is sought, and must also
give that party the benefit of every reasonable inference
that can be drawn from the facts in evidence. If there is
any evidence which will sustain a finding for the party
against whom the motion is made, the case may not be
decided as a matter of law. This standard of review applies
equally to negligence cases. Therefore, unless the
evidence viewed most favorably for the party against
whom the motion is directed nevertheless results in a
finding that the party moving is entitled to judgment as a
matter of law, the motion for directed verdict must be
overruled.
Real & Personal Property Law > Brokers > Broker Relationships
[HN2] A real estate broker owes a duty to his employer,
the property owner, to use reasonable care, skill, and
diligence to bring about the desires of the property owner.
Torts > Damages > Compensatory Damages
Torts > Damages > Damages Generally
[HN3] In a negligence action a party injured may recover
for gains prevented as well as for losses sustained when

such damages not only are certain but are the natural and
probable result of the wrong suffered.
Torts > Damages > Mitigated Damages
Contracts Law > Remedies > Avoidable Consequences
[HN4] It is not technically correct to talk about mitigation
of damages in negligence. Rather, it is the doctrine
of avoidable consequences. However, where the measure
of damages is determined at the moment the gain was
lost, there is no doctrine of avoidable consequences applicable.
Torts > Damages > Costs & Attorney Fees
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN5] One who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover reasonable compensation for loss of time,
attorney fees and other expenditures thereby suffered or
incurred in the earlier action.
Torts > Damages > Collateral Source Rule
[HN6] In tort cases, a plaintiff may receive benefits from
a third party who is in no way connected with the defendant,
and receipt of these benefits from the source
collateral to the defendant has the effect of lessening the
financial losses which the plaintiff would otherwise have
suffered. Thus, if the basic goal of tort law is only that of
compensating plaintiff for his losses, evidence of these
benefits should be admitted to reduce the total damages
assessed against the defendant. At the same time, however,
reducing recovery by the amount of the benefits
received by the plaintiff would be, according to most
courts, granting a "windfall" to the defendant by allowing
him a credit for the reasonable value of those benefits.
Such a credit would result in the benefits being effectively
directed to the tortfeasor and from the intended
party -- the injured plaintiff. In balancing these conflicting
principles of tort law, courts generally have held that
benefits received by the plaintiff from a source wholly
independent of and collateral to the wrongdoer will not
diminish the damages otherwise recoverable from the
wrongdoer. This is known as the "collateral source rule."
COUNSEL:
D. Steven Leininger of Luebs, Dowding, Beltzer,
Leininger, Smith & Busick, for appellant.
Alan H. Kirshen, for appellees.
JUDGES:
Krivosha, C.J., Boslaugh, White, Hastings, Caporale,
Shanahan, and Grant, JJ. Boslaugh, J., concurs in the
result.
223 Neb. 631, *; 392 N.W.2d 374, **;
1986 Neb. LEXIS 1040, ***
OPINIONBY:
PER CURIAM
OPINION:
Page 2
[*632] [**376] Douglas R. and Donald R.
Tetherow commenced this action in the district court for
Cherry County, Nebraska, against the appellant, E. Dean
Wolfe, doing business as Century 21, Wolfe & Associates.
The cause of action originally owned by Tetherow
Bros. & Sons, Inc., a Nebraska corporation, had been
assigned to the Tetherows individually as part of the
dissolution of the corporation. By the action, Tetherows
sought money damages from Wolfe for the alleged negligent
action of one of Wolfe's agents in preparing a
purchase agreement for the sale of land owned by
Tetherow Bros. During the proceedings, Donald
Tetherow, one of the brothers, died, and his wife, as personal
representative, was substituted as a party plaintiff.
In their petition Tetherows alleged that Tetherow
Bros. had retained Wolfe for the purpose of obtaining a
buyer of property owned by Tetherow [***3] Bros., on
condition that the sale be for cash only; that, in fact,
Wolfe's agent negligently prepared a contract which was
conditioned upon the purchaser's obtaining a loan.
Tetherows alleged that it had been specifically inquired
of Wolfe's agent whether the contract was not subject to
the buyer's obtaining a loan, and were advised by Wolfe's
agent that although the form was not the correct form for
a cash sale, the contract nevertheless did obligate the
purchaser to complete the sale without regard to whether
a loan could be obtained and that a correct form could be
prepared at a later time. Tetherows further allege that as
a result of the statements made to them by Wolfe's agent,
they executed the agreement. The petition also alleged
that, subsequently, the purchaser refused to complete the
purchase on the basis that he could not obtain a loan and
therefore demanded return of his downpayment.
Tetherows allege that Wolfe's agent was negligent in that
he used the wrong form, that he assured the sellers that
the form was nevertheless appropriate for the transaction,
and that, as a result of the negligence of Wolfe's agent,
sellers were injured by reason of the loss of the sale
[***4] in the amount of $ 180,906.12, that being the
difference between the sale price to E. Max Schmitz of
Schmitz, [*633] Inc., and the fair market value of the
property at the time the sale should have been completed.
Wolfe filed an answer in which he generally admitted
the transaction but denied that he or his agent was in
any manner negligent, and denied that the sellers had
sustained any damages. He further alleged that "the
Plaintiffs failed to mitigate their damages." No facts were
alleged to support the conclusion. Furthermore, no af-

firmative defenses such as contributory negligence were
pled.
Following trial to a jury, a verdict was returned in
favor of Tetherows and against Wolfe in the amount of $
95,809.30. On motion by Wolfe, the district court
granted Wolfe credit on the judgment in the amount of $
12,431.25, that being one-half the amount of the interest
earned on the downpayment in the amount of $ 116,250
held in escrow from the time that the contract of purchase
was signed until Tetherows were ordered by the
district court for Hall County, Nebraska, to return the
downpayment to the purchaser.
[**377] The evidence regarding the transaction is
virtually without [***5] dispute and is established principally
by the testimony of Douglas Tetherow. He testified
that in 1978 he and his brother, through their corporation,
owned certain ranch land on which they conducted
a cow-calf operation. The ranch was divided into
eight separate tracts. Because of health reasons, the
brothers determined that the corporation should sell the
property and entered into a listing contract with Wolfe.
When the property did not sell under the listing contract,
Tetherows arranged to have the property sold at auction.
The sale bill provided that the sale was to be a cash sale.
The auction was held on December 11, 1979. Seven of
the eight tracts sold. Tracts 1, 2, 4, 5, 6, and 7 were bid
in by Schmitz for a total price of $ 775,000. Tract 3 was
sold to another party and is not involved in this lawsuit.
Wolfe's agent proceeded to draw up a contract, using
a prepared, printed form. The contract specifically provides
that it is subject to Schmitz' obtaining a loan from
the federal land bank. Douglas Tetherow testified that
when the contract was submitted to the Tetherows for
their signatures, he questioned whether the contract reflected
the understanding of the parties [***6] [*634]
and whether the contract provided unconditionally for a
cash sale. Wolfe's agent assured Tetherows that while the
form was not the correct form, the sale was an unconditional
cash sale and that a proper form could be prepared
at a later time. The purchaser paid over $ 116,250 as a
downpayment, which was deposited in an interest-bearing
account. Under the terms of the agreement,
the interest earned was to be divided equally between the
purchaser and sellers.
As already indicated, the purchaser later, being unable
to obtain a loan from the federal land bank, refused to
complete the sale and filed suit for the return of the
downpayment. Following a trial, Tetherows were ordered
to return to the purchaser his downpayment. In
defending the suit, Tetherows incurred legal expenses in
the sum of $ 7,906.12. During the time that the downpayment
was on deposit, it earned interest in the amount
of $ 24,862.50. Although the trial court, in the case
223 Neb. 631, *; 392 N.W.2d 374, **;
1986 Neb. LEXIS 1040, ***
Page 3
between the purchaser, Wolfe, and Tetherows, did not
order the payment of interest, Tetherows nevertheless
paid one-half of the interest to the purchaser in accordance
with their previous agreement. Tetherows then
commenced this [***7] action against Wolfe for damages
allegedly caused by reason of Wolfe's agent's failing
to prepare a contract requiring the purchaser to proceed
unconditionally and for cash.
Wolfe assigns, essentially, the following errors allegedly
committed by the district court: (1) That the evidence
was insufficient to sustain the verdict; (2) That the
district court erred in failing to instruct on the proper
measure of damages, in that the district court refused to
instruct the jury on Tetherows' obligation to mitigate
damages; (3) That the district court erred in permitting
the jury to consider, as an element of damages in the suit
against Wolfe, the attorney fees incurred by Tetherows in
the earlier suit brought by the purchaser; and (4) That the
district court erred in failing to credit Wolfe with all of
the interest earned on the downpayment, rather than just
half of the interest. Tetherows cross-appealed, maintaining
that the district court erred in granting Wolfe any
credit for the interest earned.
Our review of the record leads us to the conclusion
that the assignments of error raised by Wolfe are without
merit and that [*635] the verdict, as rendered by the
jury, should in all [***8] respects be upheld. We further
find that the district court erred in granting Wolfe
any credit on the interest earned on the downpayment,
and must reverse that portion of the judgment.
Turning first to the question of the sufficiency of the
evidence, we believe that the evidence was sufficient to
raise a question of fact which had to be submitted to the
jury. For that reason the district court did not err in refusing
to sustain Wolfe's motion for directed verdict. As
we recently have held in Sierks v. Delk, 222 Neb. 360,
363, 383 N.W.2d 778, 779 (1986):
[**378] [HN1] The standard governing
a trial judge in assessing a motion
for a directed verdict is well established.
The judge must resolve every controverted
fact in favor of the party against whom
the verdict is sought, and must also give
that party the benefit of every reasonable
inference that can be drawn from the facts
in evidence. If there is any evidence
which will sustain a finding for the party
against whom the motion is made, the
case may not be decided as a matter of
law.
This standard of review applies equally to negligence
cases. See, Kahrhoff v. Kohl, 219 Neb. 742, 366 N.W.2d

128 (1985); Krug v. [***9] Laughlin, 208 Neb. 367,
303 N.W.2d 311 (1981). Therefore, unless the evidence
viewed most favorably for the party against whom the
motion is directed nevertheless results in a finding that
the party moving is entitled to judgment as a matter of
law, the motion for directed verdict must be overruled.
The evidence in the instant case is without dispute
that the sale was to be an unconditional cash sale. The
evidence is further without dispute that the contract does
not provide for an unconditional cash sale but, rather,
clearly provides that the sale is subject to the purchaser's
obtaining a loan from the federal land bank. The jury
could, as it did, reasonably find that Wolfe's agent, as a
realtor, was negligent in using a form which did not reflect
everyone's understanding of the sale and was further
negligent in assuring Tetherows that, notwithstanding the
language of the agreement, an unconditional cash sale
was provided for by contract or could be further provided
for by later form. [HN2] A real estate broker owes a
duty to his employer, the property owner, to use reasonable
[*636] care, skill, and diligence to bring about the
desires of the property owner. See, Vogt v. [***10]
Town & Country Realty of Lincoln, Inc., 194 Neb. 308,
231 N.W.2d 496 (1975); Schepers v. Lautenschlager, 173
Neb. 107, 112 N.W.2d 767 (1962). The evidence was
sufficient for the jury to find that Wolfe's agent was negligent
both in preparing the contract and in representing
to Tetherows that the contract nevertheless permitted
Tetherows to hold the purchaser to an unconditional cash
sale. There was no error, therefore, in overruling the motion
for directed verdict or in submitting the case to the
jury.
Wolfe further argues that the district court erred in
submitting to the jury the measure of damages as being
the difference between the contract price and the fair
market value on the date performance was required, plus
expenses of litigation in defending the earlier lawsuit.
Instead, Wolfe argues that the proper measure of damages
is the difference between the contract price and the
price the tracts were eventually sold for prior to trial.
While there does appear to be a split of authority in this
regard, see, Ashurst v. Rosser, 275 Ala. 163, 153 So. 2d
240 (1963), and Barboza v. Dellota, 130 Cal. App. 2d
890, 279 P.2d 219 (1955), the rule in Nebraska seems
clear and [***11] is as given by the district judge.
This was an action against Wolfe for negligence.
By finding for the Tetherows and against Wolfe, the jury
determined that but for Wolfe's agent's negligence, the
purchaser could not have been released from the contract
with Tetherows and would have been liable in damages
to Tetherows for breach of contract. What Tetherows
lost by reason of Wolfe's agent's negligence was the
benefit of the sale which would otherwise have been
realized but for the fact that the purchaser was not obli-
223 Neb. 631, *; 392 N.W.2d 374, **;
1986 Neb. LEXIS 1040, ***
Page 4
gated to complete the purchase. We have long held that
[HN3] in a negligence action a party injured may recover
for gains prevented as well as for losses sustained when
such damages not only are certain but are the natural and
probable result of the wrong suffered. See Kunkel v.
Cohagen, 151 Neb. 774, 39 N.W.2d 609 (1949). In this
case the gains prevented are both certain and the natural
and probable result of the wrong suffered. By reason of
Wolfe's agent's negligence, Tetherows lost their right to
require the purchaser [**379] to complete the purchase
and therefore were entitled [*637] to recover by
way of damages what they would have realized "but for"
the [***12] negligence of Wolfe's agent. In this case
that was loss of the benefit of the bargain or the difference
between what the property was worth in the market
and what they would have realized if the contract had
been carried out. It is that difference which constitutes
the "gain" lost by reason of Wolfe's agent's negligence.
That lost "gain" is determined as of the time the sale
should have been completed. Were we to accept
Wolfe's argument, we would be further obligated to hold
that if the market price fell subsequent to the date upon
which the sale was to occur, further damages should
flow. Damages in a case such as this are determined as
of the date upon which the event should have occurred
and did not occur.
Further, Wolfe's contention that Tetherows were obligated
in this case to mitigate their damages is not correct.
In the first instance [HN4] it is not technically
correct to talk about mitigation of damages in negligence.
Rather, it is the doctrine of avoidable consequences.
See 22 Am. Jur. 2d Damages § 30 (1965). In
the instant case, however, due to the fact that the measure
of damages is determined at the moment the gain was
lost, there is no doctrine of avoidable consequences
[***13] applicable. Therefore, evidence regarding
avoidance of consequence was not relevant and the district
court was correct in not admitting it into evidence.
To the same extent, the district court was correct in
not admitting evidence regarding actual and potential
income received on the land during the period after the
date on which the sale was to close. While it is true that
Tetherows did realize some income, it is likewise true
that had the sale been completed when required, they
would have had the cash from the sale available for investment.
What they realized on the land after the date
on which the sale was to have closed was not relevant to
this litigation nor any part of the damages realized as a
result of the purchaser's refusal to close and Tetherows'
inability to hold the purchaser liable in damages by reason
of Wolfe's agent's negligence.
The district court was, however, correct in permitting
the jury to consider legal fees incurred by Tetherows
in defending the suit brought by the purchaser. Wolfe

argues that attorney [*638] fees are recoverable only
when provided for by statute or allowed in the uniform
course of procedure. Generally, this is true. See,
Quinn [***14] v. Godfather's Investments, 217 Neb.
441, 348 N.W.2d 893 (1984); City of Gering v. Smith
Co., 215 Neb. 174, 337 N.W.2d 747 (1983). That rule
applies, however, only where the party to litigation is
attempting to recover attorney fees in the very case being
litigated. Such is not what is involved herein. In the
instant case Tetherows were not attempting to recover
attorney fees in their suit against Wolfe but, rather, were
attempting to recover attorney fees as damages resulting
from expenses incurred in a suit brought by the purchaser,
which suit Tetherows ultimately lost because of
Wolfe's agent's negligence in preparing the contract.
Those attorney fees are recoverable.
[HN5] One who through the tort of
another has been required to act in the
protection of his interests by bringing or
defending an action against a third person
is entitled to recover reasonable compensation
for loss of time, attorney fees and
other expenditures thereby suffered or incurred
in the earlier action.
Restatement (Second) of Torts § 914(2) (1979). See,
also, Brezina v. Hill, 202 Neb. 773, 277 N.W.2d 224
(1979).
The district court was correct in permitting the jury
to consider the attorney [***15] fees incurred by
Tetherows in defending the earlier action as part of their
damages in the instant action.
That leaves us with only the issue of the interest.
As earlier indicated, the downpayment, while in escrow,
earned interest in the amount of $ 24,862.50. The district
court allowed Wolfe a credit of [**380] $
12,431.25 because, apparently, Tetherows paid to the
purchaser one-half of the interest earned, as agreed to
between the parties, and retained one-half of the interest.
We believe that Wolfe was not entitled to credit for any
of the interest. The dividing of the interest on the
downpayment which ultimately was ordered repaid to the
purchaser was a matter of an agreement between
Tetherows and the purchaser. Interest earned on the
downpayment was a matter of contract between
Tetherows and the purchaser and wholly outside of the
damages suffered by Tetherows as a result of the negli-
223 Neb. 631, *; 392 N.W.2d 374, **;
1986 Neb. LEXIS 1040, ***
Page 5
gence of Wolfe's agent. To allow Wolfe credit would be
in violation of the "collateral source rule." The essence of
the rule is set out in 22 [*639] Am. Jur. 2d, supra §
206 at 286-87, and provides:
[HN6] In tort cases, the plaintiff may
receive benefits from a third party who is
[***16] in no way connected with the
defendant, and receipt of these benefits
from the source collateral to the defendant
has the effect of lessening the financial
losses which the plaintiff would otherwise
have suffered. Thus, if the basic goal of
tort law is only that of compensating
plaintiff for his losses, evidence of these
benefits should be admitted to reduce the
total damages assessed against the defendant.
At the same time, however, reducing
recovery by the amount of the
benefits received by the plaintiff would
be, according to most courts, granting a
"windfall" to the defendant by allowing
him a credit for the reasonable value of
those benefits. Such a credit would result
in the benefits being effectively directed
to the tortfeasor and from the intended
party -- the injured plaintiff. In balancing
these conflicting principles of tort law,
courts generally have held that benefits
received by the plaintiff from a source
wholly independent of and collateral to
the wrongdoer will not diminish the
damages otherwise recoverable from the
wrongdoer. This is known as the "collateral
source rule."
See, also, Huenink v. Collins, 181 Neb. 195, 147 N.W.2d
508 (1966).
The trial court [***17] should not have given
Wolfe any credit for the interest, and, to that extent, the
judgment entered by the district court should be modified
and the award of the jury in the amount of $ 95,809.30
should be reinstated. The judgment of the district court,
therefore, is in part affirmed and in part reversed and
remanded with directions.
Affirmed in part, and in part reversed and remanded
with directions.

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CASE SUMMARY:
233 Mass. 174, *; 123 N.E. 615, **;
1919 Mass. LEXIS 911, ***; 4 A.L.R. 1365
LEXSEE 233 MASS 174
STILES v. MORSE et al. (two cases)
[NO NUMBER IN ORIGINAL]
Supreme Judicial Court of Massachusetts, Middlesex
233 Mass. 174; 123 N.E. 615; 1919 Mass. LEXIS 911; 4 A.L.R. 1365
PROCEDURAL POSTURE: Defendant council members
sought review of their exceptions to the verdicts of a
trial court of Middlesex County (Massachusetts), which
were entered in favor of plaintiff treasurer in two separate
actions for tortious interference with his public office.
OVERVIEW: The council members were a majority of
the members of the municipal council. Within a few
months time they attempted twice to remove the treasurer
from office. In neither attempt did they comply with
the Civil Service Act, 1911 Mass. Acts ch. 645, § 40,
which required them to provide a written statement of
charges and a hearing before they could remove an official
covered by the act. The court held that the council
never acquired jurisdiction in their quasi-judicial attempts
to remove the treasurer from office. The individual
council members were therefore liable, regardless of
good faith, for their actions that were not authorized by
law. The court held that the treasurer's attorney fees incurred
in defending the council members' actions were
proper elements of damages. It also held that the treasurer
could recover for embarrassment or mental suffering
that was the natural consequence of the council members'
wrongful acts. The court found no error in the rulings of
the trial court.
OUTCOME: The court overruled the council members'
exceptions.
LexisNexis(R) Headnotes
Governments > Local Governments > Duties & Powers
Governments > Local Governments > Employees &
Officials
[HN1] The municipal council of Lowell, Mass. is clothed
with authority to remove the city treasurer from office
for such cause as it deems sufficient, provided it pro-
June 23, 1919
Page 1
ceeds in accordance with the law regulating the civil
service. 1911 Mass. Acts ch. 645, § 40.
Governments > Local Governments > Employees &
Officials
[HN2] The provisions of the civil service law require as
essential preliminaries to the removal of a city officer
that reasons be specifically given in writing and that the
person sought to be removed should be notified of the
proposed action and furnished with a copy of the reasons
claimed to constitute just cause of removal.
Governments > Local Governments > Duties & Powers
Governments > Local Governments > Employees &
Officials
[HN3] The power to remove an officer in the public service
is in its nature executive, when considered by itself
alone. When, as essential prerequisites to the exercise of
that power, there must be a formulation of specific
charges as grounds for removal, notice of those charges
to the person to be removed, opportunity to him for a
hearing, followed by a hearing and decision, then the
hearing and decision partake also of the nature of a judicial
investigation. Speaking with accuracy, the removal
by a municipal council under these circumstances is still
an executive or administrative act which must be performed
in this particular in a judicial manner.
Governments > Local Governments > Employees &
Officials
Torts > Public Entity Liability > Liability
[HN4] Personal liability attaches to executive or administrative
officers who interfere with rights of individuals
in ways not authorized by law. The cloak of office is no
protection to them even when acting in good faith.
Governments > Courts > Court Personnel & Judges
Torts > Public Entity Liability > Liability
[HN5] All inferior tribunals and magistrates if they act
without jurisdiction over the subject-matter or if they are
guilty of excess of jurisdiction are liable in damages to
the party injured by such unauthorized acts.

Administrative Law > Separation & Delegation of
Power > Jurisdiction
Governments > Local Governments > Employees &
Officials
[HN6] The full performance of all conditions established
by the statute are essential prerequisites to the jurisdiction
of the municipal council over the subject-matter of
the removal of an officer.
Governments > Local Governments > Duties & Powers
Constitutional Law > Separation of Powers
[HN7] There is no delegation of judicial power to the
municipal council. That hardly could be done under the
Massachusetts Constitution, which sharply separates the
three departments of government.
Governments > Local Governments > Employees &
Officials
Torts > Public Entity Liability > Liability
[HN8] The municipal council is clothed with the power
of removal of city officers so long as there is conformity
to the requirements of the law. When the members cease
to comply with the law they are acting outside their official
capacity and are subjected to responsibility as individuals.
Torts > Damages > Compensatory Damages
[HN9] When the plaintiff has, in consequence of the
wrongful conduct of the defendant, been put to expense
in the employment of counsel, the amount so paid is an
element of damage in an action against the defendant
arising out of such wrongful conduct.
Torts > Damages > Pain & Suffering
[HN10] The plaintiff is entitled to have the jury consider
in assessing his damages the mental suffering which he
sustained so far as it was the natural and proximate result
of the unlawful conduct of the defendants.
Torts > Damages > Pain & Suffering
[HN11] If the natural consequence of the wrongful act,
done willfully or with gross negligence, is mental suffering
to the plaintiff, then that element may be considered
in assessing damages.
COUNSEL: [***1]
Qua, Howard & Rogers, of Lowell, for plaintiff.
M. L. Sullivan and J. J. Ronan, both of Salem, for
defendant Warnock.
James J. Kerwin and James C. Reilly, both of Lowell,
for defendant Morse.
William D. Regan, of Lowell, for defendant Brown.
233 Mass. 174, *; 123 N.E. 615, **;
1919 Mass. LEXIS 911, ***; 4 A.L.R. 1365
OPINIONBY:
RUGG
OPINION:
[*180] [**615]
Page 2
RUGG, C. J. These are two actions of tort brought to
recover damages for two attempted removals of the
plaintiff, the first in January, 1917, and the second in
February and March, 1917, from the office of city treasurer
and collector of taxes of the city of Lowell. The defendants
on those dates were three of the five members
constituting the municipal council of Lowell. [HN1] The
municipal council of Lowell was clothed with authority
to remove the city treasurer from office for such cause as
it deemed sufficient, provided it proceeded in accordance
with the law regulating the civil service. St. 1911, c. 645,
§ 40. It had no power in that regard except by following
the terms of that law. [HN2] The provisions of the civil
service law required as essential preliminaries that reasons
be specifically given in writing and that the person
sought to be removed should be notified of the proposed
action and furnished with [***2] a copy of the reasons
claimed to constitute just cause of removal. The defendants,
being a majority of the municipal council, joined in
going through the form of adopting orders removing the
plaintiff from the office of [*181] city treasurer without
notifying him of the proposed action and without giving
him copy of reasons for removal. Therefore it has been
held expressly that the orders 'were a nullity [**616]
and were wholly ineffectual' as attempts to remove the
plaintiff from office. Thomas v. Municipal Council of
Lowell, 227 Mass. 116, 119, 116 N. E. 497; Stiles v. Municipal
Council of Lowell, 229 Mass. 208, 210, 118 N. E.
347. The duty of the defendants to give the notice and
hearing to the plaintiff was certain and specific. The statute
covered the ground completely, and left nothing to
the exercise of discretion. Ransom v. Boston, 193 Mass.
537, 540, 79 N. E. 823.
The defendants, in passing upon the question of the
removal of a city officer under civil service rules, were
executive or administrative officers. If they had followed
the requirements of the civil service laws in making the
removal, they then would have been performing functions
to some extent judicial. [***3] [HN3] The power
to remove an officer in the public service is in its nature
executive, when considered by itself alone. Murphy v.
Webster, 131 Mass. 482. When, as essential prerequisites
to the exercise of that power, there must be a formulation
of specific charges as grounds for removal, notice of
those charges to the person to be removed, opportunity to
him for a hearing, followed by a hearing and decision,
then the hearing and decision partake also of the 'nature

of a judicial investigation.' McCarthy v. Emerson, 202
Mass. 352, 354, 88 N. E. 668, 669 (132 Am. St. Rep. 484,
16 Ann. Cas. 500); Driscoll v. Mayor of Somerville, 213
Mass. 493, 494, 100 N. E. 640; Swan v. Justices of Superior
Court, 222 Mass. 542, 548, 111 N. E. 386; State v.
Common Council of City of Superior, 90 Wis. 612, 619,
64 N. W. 304. The functions of the members of the municipal
council are like those of selectmen in deciding
upon the qualifications of voters, which, as was said by
Chief Justice Shaw, are 'in this respect to some extent
judicial.' Blanchard v. Stearns, 5 Metc. 298, 300. Speaking
with accuracy, the removal by a municipal council
under these circumstances is still an executive or administrative
act which [***4] must be performed in this
particular in a judicial manner. See Levangie's Case, 228
Mass. 213, 117 N. E. 200. Treating the liability of the
defendants in its executive or administrative aspect, they
are bound to act in accordance with the law. They acquire
no authority in the premises except such as the law
confers. The plaintiff had an interest in remaining in office,
of which he could not be deprived except in accordance
with law. [*182] Continuance in office was
valuable to him both as a means of support and as matter
of reputation. Ham v. Boston Board of Police, 142 Mass.
90, 95, 7 N. E. 540; Hill v. Boston, 193 Mass. 569, 575,
79 N. E. 825. The incumbent of an office carrying
emolument has rights protected from assault by third
persons, although as against the state itself his relation
may be of a different nature. Ashley v. Three Justices of
the Superior Court, 228 Mass. 63, 73, 116 N. E. 961.
[HN4] Personal liability attaches to executive or administrative
officers who interfere with rights of individuals
in ways not authorized by law. The cloak of office is no
protection to them even when acting in good faith. The
principle by which personal liability is fixed on field
drivers [***5] for taking stray cattle except as provided
by the statute ( Coffin v. Field, 7 Cush. 355), on members
of the board of health for killing a well horse honestly
but mistakenly supposed to have glanders ( Miller v.
Horton, 152 Mass. 540, 26 N. E. 100, 10 L. R. A. 116, 23
Am. St. Rep. 850), on selectmen and other officers when
acting as members of an election or registration board in
refusing to put on the voting list and to permit to vote a
man entitled to vote ( Larned v. Wheeler, 140 Mass. 390,
5 N. E. 290, 54 Am. Rep. 483), on assessors for making
an illegal assessment ( Stetson v. Kempton, 13 Mass. 272,
283, 7 Am. Dec. 145), and in general on municipal officers
for acts of personal misfeasance in performance of
public duty ( Moynihan v. Todd, 188 Mass. 301, 74 N. E.
367, 108 Am. St. Rep. 473), is controlling when the position
of the defendants is considered as executive or administrative.
If their position is approached from the
viewpoint of exercising the judicial faculty, the same
result follows. [HN5] 'All inferior tribunals and magistrates
* * * if they act without jurisdiction over the sub-
233 Mass. 174, *; 123 N.E. 615, **;
1919 Mass. LEXIS 911, ***; 4 A.L.R. 1365
Page 3
ject-matter or * * * if they are guilty of excess of jurisdiction
* * * are liable in damages to the [***6] party
injured by such unauthorized acts.' Piper v. Pearson, 2
Gray, 120, 122, 61 Am. Dec. 438; Doggett v. Cook, 11
Cush. 262; Clark v. May, 2 Gray, 410, 61 Am. Dec. 470;
Sullivan v. Jones, 2 Gray, 570; Kelly v. Bemis, 4 Gray,
83, 64 Am. Dec. 50; Kendall v. Powers, 4 Metc. 553;
Brewer v. Casey, 196 Mass. 384, 387, 82 N. E. 45; Von
Arx v. Shafer, 241 Fed. 650, 154 C. C. A. 407, L. R. A.
1917F, 427. Although there are contrary decisions on
this point, to the effect that good faith may be a defense
or that there is liability only if there is malice, the weight
of authority is in favor of the absolute liability established
so firmly in our jurisprudence by the decisions
already cited as not to be open further to discussion. The
case at bar is indistinguishable in essence from the established
[*183] liability of election officers for a well
intentioned mistake of judgment in refusing registration
and in denying the right to vote to one duly qualified.
Lincoln v. Hapgood, 11 Mass. 350; Blanchard v.
Stearns, 5 Metc. 298, 300; Kinneen v. Wells, 144 Mass.
497, 504, 11 N. E. 916, 59 Am. Rep. 105.
It is plain that the defendants never acquired a jurisdiction
to exercise their quasi judicial [***7] functions
respecting the removal [**617] from office of the
plaintiff, because they never notified him and never gave
him a copy of the charges against him and he did not
voluntarily submit himself to their action, but has resisted
and asserted the invalidity of their procedure at every
point. [HN6] The full performance of all conditions established
by the statute are essential prerequisites to the
jurisdiction of the municipal council over the subject-matter
of the removal of an officer. [HN7] There is
no delegation of judicial power to the municipal council.
Holcombe v. Creamer, 231 Mass. 99, and cases collected
at 111, 120 N. E. 354, 359. That hardly could be done
under our Constitution, which sharply separates the three
departments of government. Boston v. Chelsea, 212
Mass. 127, 98 N. E. 620.
[HN8] The municipal council was clothed with the
power of removal of city officers so long as there was
conformity to the requirements of the law. When the
members ceased to comply with the law they were acting
outside their official capacity and were subjected to responsibility
as individuals.
It follows that the court rightly ordered verdicts for
the plaintiff for at least nominal damages. Ransom v.
[***8] Boston, 196 Mass. 248, 81 N. E. 998.
The plaintiff was entitled to have considered as an
element of his damages the amounts reasonably paid for
counsel fees in procuring reinstatement in office. He was
obliged to resort to the court for redress and to employ
counsel to that end. Those proceedings were rendered

imperative, in order that he might protect his rights, by
the tortious conduct of the defendants. The plaintiff was
not obliged to incur these expenses through any misfeasance
or contract of his own, but wholly by reason of the
wrongdoing of the defendants, of which these expenses
were the immediate and direct result. As was said in
Wheeler v. Hanson, 161 Mass. 376, 37 N. E. 386, 42 Am.
St. Rep. 408:
'It has been held more than once in this state, that
[HN9] when the plaintiff has, in consequence of the
wrongful conduct of the defendant, been put to expense
in the employment [*184] of counsel, the amount so
paid is an element of damage in an action against the
defendant arising out of such wrongful conduct.' Berry v.
Ingalls, 199 Mass. 77, 85 N. E. 191; Maguire v.
Pan-American Amusement Co., 205 Mass. 64, and cases
collected at 68, 91 N. E. 135, 136, 137 Am. St. Rep. 422,
18 [***9] Ann. Cas. 110; Sears v. Nahant, 215 Mass.
234, 239, 240, 102 N. E. 491, Ann. Cas. 1914C, 1296.
The case at bar is within this principle. It is quite
different from those decisions where the taxable costs are
held, so far as concerns a particular proceeding, to be full
compensation for expenses in conducting litigation, such
as Newton Rubber Works v. De Las Casas, 182 Mass.
436, and cases cited at 438, 65 N. E. 816, 817, and McIntire
v. Mower, 204 Mass. 233, 237, 90 N. E. 567. See
Fitzgerald v. Heady, 225 Mass. 75, 113 N. E. 844.
There was no error in permitting the jury to consider
the damages caused to the plaintiff by being obliged to
resign his office. It might have been found that the plaintiff's
inability to secure the required surety on his bond
was due directly to the illegal conduct of the defendants
and flowed from it as a natural consequence. See Ransom
v. Boston, 192 Mass. 299, 307, 78 N. E. 481, 7 Ann.
Cas. 733. It is not an answer in this connection that the
plaintiff was restored to his office by mandamus proceedings
and was ultimately paid his salary up to the
time of his resignation. With respect to the conduct of the
defendants here in issue, the plaintiff had a [***10]
legal right to remain in office unmolested. If the unlawful
efforts of the defendants to remove him from office
so injured his standing and reputation in the community
and with bonding companies that he could no longer
secure surety on his bond and thereby was compelled to
resign, that would constitute an element of damage provided
he was unable to get more lucrative employment
elsewhere.
Testimony as to the reasons given by agents of the
bonding companies for refusal to become surety on the
plaintiff's bond was competent. Weston v. Barnicoat,
175 Mass. 454, 56 N. E. 619, 49 L. R. A. 612; Hubbard
v. Allyn, 200 Mass. 166, 174, 86 N. E. 356.
233 Mass. 174, *; 123 N.E. 615, **;
1919 Mass. LEXIS 911, ***; 4 A.L.R. 1365
Page 4
[HN10] The plaintiff was entitled to have the jury
consider in assessing his damages the mental suffering
which he sustained so far as it was the natural and proximate
result of the unlawful conduct of the defendants. It
might have been found that a feeling of humiliation and a
sense of degradation would ensue to the ordinary person
as the normal and direct consequence of the illegal expulsion
from office. Mental suffering ordinarily has been
held not [*185] to be an independent cause of action.
The reason for this in large part, as was said by Lurton,
[***11] J., in a dissenting opinion in Wadsworth v.
Western Union Telegraph Co., 86 Tenn. 695, 8 S. W.
574, 6 Am. St. Rep. 864, 'is found in the remoteness of
such damages and in the metaphysical character of such
an injury. * * * Such injuries are generally more sentimental
than substantial.' Summerfield v. Western Union
Telegraph Co., 87 Wis. 1, 57 N. W. 973, 41 Am. St. Rep.
17. The rule is well settled, however, that [HN11] if the
natural consequence of the wrongful act, done willfully
or with gross negligence, is mental suffering to the plaintiff,
then that element may be considered in assessing
damages. Meagher v. Driscoll, 99 Mass. 281, 96 Am.
Dec. 759; Fillebrown v. Hoar, 124 Mass. 580, 585. In
the application of this rule [**618] it has been held
that one, acting on the erroneous but honest belief that
the plaintiff was an apprentice in his employ, who made
a false statement to that effect, the expected result being
the discharge of the plaintiff, was liable in damages including
mental suffering. Lombard v. Lennox, 155 Mass.
70, 28 N. E. 1125, 31 Am. St. Rep. 538. It also has been
held that the jury, in assessing the damages to a boy
'unlawfully excluded' from a public school might consider
[***12] the indignity or disgrace which followed
the expulsion. In that case as reported there is shown no
malice or want of good faith, and nothing more than
honest mistake of their legal duty as to giving hearing on
the part of the school committee. Morrison v. Lawrence,
181 Mass. 127, 63 N. E. 400. The case at bar falls within
the principle applied in these two decisions and is indistinguishable
from them in any essential particular. Good
faith and absence of malice in the perpetration of such a
palpable wrong to the plaintiff constitute no defense to
the defendants against the almost inevitable effect of
their acts. In Bishop v. Rowley, 165 Mass. 460, 43 N. E.
191, liability was established although apparently the
school committee acted in entire good faith in refusing to
grant a hearing to the scholar excluded from school. See
Austro-American Steamship Co. v. Thomas, 248 Fed.
234, 160 C. C. A. 309, L. R. A. 1918D, 873. The case at
bar is distinguishable from White v. Dresser, 135 Mass.
150, 46 Am. Rep. 454; Burton v. Scherpf, 1 Allen, 133,
79 Am. Dec. 717; Lopes v. Connolly, 210 Mass. 487, 97
N. E. 80, 38 L. R. A. (N. S.) 986; Spade v. Lynn & Boston
R. R., 168 Mass. 285, 289, 47 N. E. [***13] 88, 38 L.
R. A. 512, 60 Am. St. Rep. 393; and kindred decisions.

Evidence of the plaintiff's narrating a conversation
with the defendant Brown, wherein the latter stated in
effect that he would get even with the Lowell Trust
Company because its [*186] president had refused to
honor his note, was admissible as tending to show malice
toward the plaintiff on the part of Brown, then an issue
although subsequently waived, and also as tending to
eliminate that charge as a cause of worry to the plaintiff.
On cross-examination of the plaintiff it had been developed,
that in the spring of 1917 after the illegal removals,
action had been brought against him and the sureties on
his bond by the city of Lowell, for failure to collect interest
on deposits of city money from the Lowell Trust
Company. It was pertinent, in reply to the natural effect
of this evidence, for the plaintiff to testify that he had
233 Mass. 174, *; 123 N.E. 615, **;
1919 Mass. LEXIS 911, ***; 4 A.L.R. 1365
Page 5
been informed from various sources that there was no
ground for that action, in order to rebut the inference that
his mental distress came from that cause. It is not necessary
to go through the exceptions to evidence in further
detail. A careful examination of them satisfies us that
there [***14] was no reversible error in these particulars.
The defendants' requests for rulings need not be reviewed
one by one. It follows from what has been said
that there was no error in the denial of these requests,
and that the instructions given are not open to just criticism
in law.
Exceptions overruled.

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120CQJ

244 Ala. 354, *; 13 So. 2d 669, **;
1943 Ala. LEXIS 209, ***
LEXSEE 244 ALA. 354
FIDELITY & CASUALTY CO. OF NEW YORK v. J. D. PITTMAN TRACTOR
CO.
PRIOR HISTORY: [***1] Appeal from Circuit
Court, Jefferson County; Richard V. Evans, Judge.
Action in deceit and on the common counts by J. D.
Pittman Tractor Company against the Fidelity & Casualty
Company of New York. From a judgment for plaintiff,
defendant appeals.
Reversed and remanded.
DISPOSITION: Reversed and remanded.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant insurer appealed
from the order of the Jefferson County Circuit
Court (Alabama), which awarded judgment to plaintiff
insured in the insured's action in deceit under Ala. Code
§ 8049 (1923) and on common-law counts, which resulted
when the insurer told the insured that the policy
provided coverage for the rental of the insured's earth
moving machines, when in fact the policy specifically
exempted such coverage.
OVERVIEW: The insured sold earth-moving machines,
and it had a business liability policy with the insurer.
Prior to going into the earth moving machine rental
business, the insured requested additional insurance from
the insurer, but was told it was unnecessary. A rental
user was killed and the insured was found liable. The
insurer denied coverage, and the insured brought suit
against the insurer. The circuit court awarded judgment
to the insured and the insurer appealed. The court reversed
and remanded. The court rejected the insurer's
assertion that it lacked the required benefit under §
8049 for liability for deceit because if the insured had
obtained the coverage sought, the insurer would have
been liable, and the lack of liability was a benefit. The
court rejected the insurer's assertion that only an opinion
and not a material misrepresentation had occurred be-
6 Div. 899.
SUPREME COURT OF ALABAMA
244 Ala. 354; 13 So. 2d 669; 1943 Ala. LEXIS 209
May 20, 1943, Decided
Page 1
cause insurance policies were complex legal documents,
and the insurer's representation that the coverage was
provided was a material fact upon which the insured had
the right to rely. However, the court found there was no
evidence to support an oral contract and that the jury
instructions to the contrary were reversible error.
OUTCOME: The court reversed the order of the circuit
court, which awarded judgment to the insured against the
insurer, and it remanded for further proceedings in the
insured's deceit action against the insurer.
LexisNexis(R) Headnotes
Torts > Business & Employment Torts > Deceit &
Fraud
[HN1] Ala. Code § 8049 (1923) provides that misrepresentations
of a material fact, made wilfully to deceive,
or recklessly without knowledge, and acted on by the
opposite party, or if made by mistake and innocently, and
acted on by the opposite party, constitute legal fraud.
Torts > Business & Employment Torts > Deceit &
Fraud
Torts > Business & Employment Torts > Negligent
Misrepresentation
[HN2] In Alabama, in actions for damages for false representations
it is not necessary to allege or prove scienter,
or that the representations were recklessly made in
conscious ignorance of whether they were true or false,
but it is sufficient if the representations were false in fact,
and the representor may be liable for damages because of
them, even though he did not know that they were untrue.
The rule is the same in law and in equity, since an
equitable cause of grievance in no way differs from a
legal one unless a different remedy is needed.
Civil Procedure > Jury Trials > Province of Court &
Jury

Torts > Business & Employment Torts > Deceit &
Fraud
Torts > Business & Employment Torts > Negligent
Misrepresentation
[HN3] Whether a given representation is an expression
of opinion or a statement of fact depends upon all the
circumstances of the particular case, such as the form
and subject matter of the representation and the
knowledge, intelligence and relation of the respective
parties. The mere form of the representation as one of
opinion or fact is not in itself conclusive, and in cases of
doubt the question should be left to the jury.
Insurance Law > Claims & Contracts > Policy Interpretation
> Reasonable Expectations
[HN4] It is a matter of common knowledge that insurance
contracts are embodied in forms skillfully drawn by
experts, and are highly technical; that the insuring public
usually rely on the insurer to draw the contract so as to
protect the insured against loss, and this practice is encouraged
by insurers as a means of building up their
business. The insured have a right to assume that the
policy covers the losses as agreed between the parties.
Torts > Business & Employment Torts > Deceit &
Fraud
Torts > Business & Employment Torts > Negligent
Misrepresentation
[HN5] Whenever a person states a matter which might
otherwise be only an opinion, not as a mere expression of
his own opinion but as an existing fact material to the
transaction, so that the other party may reasonably treat it
as a fact, the statement clearly becomes a statement of
fact.
Torts > Damages > Compensatory Damages
Torts > Business & Employment Torts > Deceit &
Fraud
Torts > Damages > Punitive Damages
[HN6] The general rule as to the measure of damages,
when a person is injured by the false and fraudulent representations
of another is that he is entitled to recover all
the damages which were within the contemplation of the
parties, or which, though not within the contemplation of
the parties, were either the necessary or the natural and
proximate consequences of the fraud; and he can recover
nothing more than this, unless the circumstances were
such as to render the other party liable in exemplary
damages.
Contracts Law > Types of Contracts > Implied-in-Fact
Contracts
Contracts Law > Types of Contracts > Implied-in-Law
Contracts
244 Ala. 354, *; 13 So. 2d 669, **;
1943 Ala. LEXIS 209, ***
Page 2
[HN7] Where there is an express contract, the plaintiff
cannot resort to an implied one. An exception to this
rule, however, is that he may recover on the common
counts, although the evidence discloses a special agreement,
when such agreement has been executed and fully
performed, and no duty remains but the payment of the
price in money by the defendant; but, so long as the contract
continues executory, the plaintiff must declare specially.
Torts > Business & Employment Torts > Deceit &
Fraud
Contracts Law > Remedies > Election of Remedies
Contracts Law > Breach > Causes of Action
[HN8] There is some conflict of authority as to when and
under what circumstances a party may waive a tort and
maintain an action of contract with regard to the same
subject matter, but it is clear that to sustain such a proceeding
there must be some contract either express or
implied. If there is an express contract, and the same act
or transaction constitutes both a tort and a breach of the
contract, the injured party may waive the tort and sue on
the contract; and the same rule obtains where a contract
creates a relation out of which certain duties arise, a
breach of which will constitute a tort, as in case of the
relation between bailor and bailee, principal and agent,
patient and physician, attorney and client, or between a
common carrier and a shipper, or passenger. Even where
there is no express contract, and the cause of action arises
out of tort, the tort may be waived and an action of
contract brought in all cases where the law will imply a
promise on the part of the wrongdoer to reimburse the
party injured by his act; but this can be done only where
such a contract can be implied, so that in cases of this
character the question resolves itself into one of when
and under what circumstances the law will imply such an
agreement.
Torts > Business & Employment Torts > Deceit &
Fraud
Contracts Law > Remedies > Election of Remedies
Contracts Law > Breach > Causes of Action
[HN9] The duty to pay damages for a tort does not necessarily
imply any promise to pay them, and, consequently,
that a party cannot create a cause of action in
contract merely by waiving a tort; but it is now equally
well settled that in some cases such an agreement will be
implied, for the old rule that what was a tort in its inception
could not be made the basis of an implied assumpsit,
has long been relaxed, and the question is to what extent.
Upon this point the authorities are not agreed. Some decisions
have sought to limit the right of waiving a tort
and suing on implied contract to cases where personal
property has been wrongfully taken and converted into
money and the action is for money had and received, and

to cases where the action is against the executor or administrator
of the wrongdoer; but this limitation has been
expressly disapproved, and the right has been extended
to include a large variety of cases. The rule has been
stated that for this purpose an agreement should be implied
wherever one person commits a tort against the
estate of another with the intention of benefiting his own
estate, or wherever justice requires it in consideration of
benefits received; but that no such agreement will be
implied where no benefit to the wrongdoer was received
or expected, or where there is a subsisting express contract
between the parties in regard to the same subject
matter.
COUNSEL: Gerry Cabaniss and Cabaniss & Johnston,
all of Birmingham, for appellant.
A tort action for deceit may be maintained for a misrepresentation,
made without intent to deceive, when, but
only when, a benefit or advantage accrues to the party
making the representation. 26 C.J. 1125; Einstein v.
Marshall, 58 Ala. 153, 154, 29 Am.Rep. 729; Code 1940,
Tit. 7, § § 107, 108, 110; Cartwright v. Braly, 218 Ala.
49, 117 So. 477; Munroe v. Pritchett, 16 Ala. 785, 50
Am.Dec. 203; Harton v. Belcher, 195 Ala. 186, 70 So.
141; Gulf Electric Co. v. Fried, 218 Ala. 684, 119 So.
685; Shepherd v. Kendrick, 236 Ala. 289, 181 So. 782;
23 Am.Jur. 908; Graybill v. Drennen, 150 Ala. 227, 43
So. 568; Montgomery S. R. Co. v. Matthews, 77 Ala.
357, 54 Am.Rep. 60; Juzan v. Toulmin, 9 Ala. 662, 44
Am. Dec. 448; Dunham Lumber Co. v. Holt, 123 Ala.
336, 26 So. 663. Representation that policy of insurance
affords [***2] a certain coverage is an expression of
opinion and will not support an action for deceit in absence
of actual intent to deceive. Shepherd v. Kendrick,
supra; Georgia Home Ins. Co. v. Warten, 113 Ala. 479,
22 So. 288, 59 Am.St.Rep. 129; Rutter & Hendrix v.
Hanover Fire Ins. Co., 138 Ala. 202, 35 So. 33; Corley v.
Vizard, 203 Ala. 564, 83 So. 299; Meacham v. Halley,
C.C.A.5, 103 F.2d 967. Burden is on plaintiff to show
misrepresentation of matter of opinion was made with
intent to deceive. Cartwright v. Braly, supra; Clayton v.
Quiatto, 221 Ala. 677, 130 So. 395. Recovery cannot be
had on common counts for damages resulting from misrepresentation
where no benefit accrued to defendant as
result of representation. Keener, Quasi Contracts 163; 1
C.J.S. 1032, 1131; 3 Street Foundations Legal Liab. 196;
24 Am.Jur. 52. Where plaintiff has failed to make out
case under any count, defendant is entitled to affirmative
charge. McMillan v. Aiken, 205 Ala. 35, 88 So. 135.
Lange, Simpson, Brantley & Robinson, of Birmingham,
for appellee.
244 Ala. 354, *; 13 So. 2d 669, **;
1943 Ala. LEXIS 209, ***
Page 3
A misrepresentation of a material existing fact, although
made innocently and merely through mistake, constitutes
legal fraud on which an action for deceit [***3] may be
predicted. Code 1923, § 8049; Cartwright v. Braly, 218
Ala. 49, 117 So. 477; Einstein v. Marshall, 58 Ala. 153,
29 Am. Rep. 729. The representation here is not a mere
expression of opinion but relates to a material fact, the
terms of a written instrument. Southern Bldg. & Loan
Ass'n v. Dinsmore, 225 Ala. 550, 144 So. 21; Standard
Oil Co. v. Myers, 232 Ala. 662, 169 So. 312; Coleman v.
Night Commander Lighting Co., 218 Ala. 196, 118 So.
377; Tabor v. Peters, 74 Ala. 90, 49 Am.Rep. 804; 5
Ala.Dig., page 41, Contracts 94(4); Commercial Casualty
Ins. Co. v. Hosey, 238 Ala. 335, 191 So. 343. Plaintiff
could have recovered on the common counts as for an
implied contract. Shreve v. McGowin, 143 Ala. 665, 42
So. 94; 27 Am.Jur. 465; Commercial Casualty Ins. Co. v.
Hosey, supra. Also, there was evidence of an oral contract
of insurance.
JUDGES: LIVINGSTON, Justice. GARDNER, C. J.,
and THOMAS and BROWN, JJ., concur.
OPINIONBY: LIVINGSTON
OPINION:
[*356] [**670] LIVINGSTON, Justice.
This is a suit at law by J. D. Pittman Tractor Company,
a corporation, against the Fidelity and Casualty
Company of New York, a corporation.
The cause was submitted to the jury on special
counts B and C, counts [***4] in deceit, and common
counts 1 and D for money paid. There were a verdict and
judgment for plaintiff, and defendant appealed.
The judgment must be reversed, and the cause remanded
for another trial because the trial court misdirected
the jury as to plaintiff's right to recover under the
common counts. We will write only to those questions
likely to arise on another trial.
Appellee's evidence tended to establish the following
facts: Appellee has been engaged in business in Birmingham,
Alabama, [*357] since sometime prior to
the year 1930 as sales agent for caterpillar tractors and
other construction machinery. J. D. Pittman is president
of the corporation. Appellant is an insurance company
engaged in the business of writing public liability, and
other types of insurance. A. A. Adams and Company is
the general agent for appellant, and Arthur Adams, Jr., is
vice-president and treasurer of A. A. Adams and Company.
Beginning in 1932 A. A. Adams and Company
handled all of appellee's insurance business, including
fire, workmen's compensation and other forms of insurance,
and wrote for appellee a policy of liability insur-

ance designed to protect appellee from liability which
might arise [***5] out of its operations as a dealer in
tractors. Some time thereafter appellee commenced renting
equipment to United States Engineers, the Alabama
State Highway Department and others. In some instances
the rented equipment was manned by the employees of
appellee, while in others it was not so manned.
These operations were explained to Mr. Arthur
Adams, Jr., of A. A. Adams and Company for the purpose
of securing insurance coverage against liability
arising out of such operations. Mr. Adams advised appellee
that appellee's policy already [**671] in force
covered such operations. Still later, J. D. Pittman, at the
suggestion of the Caterpillar Tractor Company, manufacturers
of the equipment handled by appellee, acting in
his own behalf as an individual, took over some of the
rental contracts entered into by appellee and made other
rental contracts. Mr. Pittman consulted Mr. Adams with
reference to insurance coverage for himself as an individual
against liability on account of these operations.
For the purpose of protecting Mr. Pittman as an individual
against liability on account of these operations, and
for the purpose of including the individual protection in
the policy covering [***6] the operations of appellee,
Mr. Adams took from appellee its existing policy and
carried it away. Mr. Adams returned the policy sometime
later and advised Mr. Pittman that the policy then protected
both the appellee and Pittman, individually,
against all liability arising out of the rental contracts. Mr.
Pittman relied on the representation of Mr. Adams as to
the coverage of both parties, and did not read the insurance
contract, and, in so far as the record discloses no
other officer or employee of appellee read the contract.
As a matter of fact the rental operations of both appellee
and Pittman were expressly excluded from the coverage
of the policy.
While the policy was in force one John Henry
Chance was killed in the operation of machinery rented
by appellee. Appellant denied liability under the policy
and refused to defend a suit against appellee for the death
of Chance, which suit resulted in a judgment against appellee
for the sum of $ 2,150, and $ 166.05 costs of
court; and which was paid by appellee. Appellee also
paid $ 200 attorney's fee incurred in defense of the
Chance suit.
Is appellee liable in an action of deceit under the
foregoing facts? [HN1] Section 8049, Code of 1923
[***7] (now section 108, Title 7, Code of 1940) is as
follows: "Misrepresentations of a material fact, made
wilfully to deceive, or recklessly without knowledge, and
acted on by the opposite party, or if made by mistake and
innocently, and acted on by the opposite party, constitute
legal fraud."
244 Ala. 354, *; 13 So. 2d 669, **;
1943 Ala. LEXIS 209, ***
Page 4
[HN2] In this State, in actions for damages for false
representations it is not necessary to allege or prove scienter,
or that the representations were recklessly made in
conscious ignorance of whether they were true or false,
but it is sufficient if the representations were false in fact,
and the representor may be liable for damages because of
them, even though he did not know that they were untrue.
Foster v. Kennedy's Adm'r, 38 Ala. 359, 81 Am.
Dec. 56; Cartwright v. Braly, 218 Ala. 49, 117 So. 477.
The rule is the same in law and in equity, since an
equitable cause of grievance in no way differs from a
legal one unless a different remedy is needed. Cartwright
v. Braly, supra.
Appellant insists that in this State a tort action for
deceit may be maintained for a misrepresentation made
without intent to deceive when, but only when, a benefit
accrues to the party [***8] making the representation,
and that no benefit accrued to appellant in the instant
case.
Without deciding whether the principle insisted upon
may find application under other circumstances, we
do not hesitate to say that it has no application under the
circumstances of this case. Most suits to recover damages
arise from a contract. The plaintiff sues to recover
damages because he has been fraudulently induced to
make that contract. The defendant may [*358] be, and
generally is, the other party to the contract. Sometimes,
however, the defendant is a third party, either the agent
of the other party, or perhaps some one having no legal
relation to either party. There is a distinction between
suits brought against a party to the contract and suits
brought against those not parties to it. When one is
fraudulently induced to enter into a contract, it is quite
correct, in a general sense, to say that his loss inures to
the profit of the other party to the contract. In a legal
sense the other party is the beneficiary of the fraud.
True, in the instant case, the misrepresentation did
not result in, nor induce the making of a contract, but it
did result in, or induced inaction on the [***9] part of
appellee to its injury. See 26 Corpus Juris, § 81, page
1173. Had the representation been true, the loss would
have fallen on appellant, and its falsity inured to the benefit
of appellant, in that, no liability was created under
the policy. Einstein, Hirsch & Co. v. Marshall & Conley,
58 Ala. 153, 29 Am.Rep. 729; 12 R.C.L. section 102,
pp. 347, 348; 23 Amer.Jur. section 120, pp. 908, 909;
Aldrich v. Scribner, 154 Mich. 23, 117 N.W. 581, 18
L.R.A., N.S., 379. See, also, Bethea-Starr Packing &
Shipping Co. v. Mayben, 192 Ala. 542, 68 So. 814, 815,
an [**672] action on a contract, where this court said:
"Appellee may have an action against appellant firm for
its declarations made after the agreement of storage, if
they were such as to mislead appellee, and prevented her

from taking insurance for her own protection against loss
by fire. Code 1907, § 4298 [Code 1940, Tit. 7, § 108],
Cozzins v. Whitaker, 3 Stew. & P. 322; Hafer v. Cole,
[176 Ala. 242, 57 So. 757]."
It is further insisted that the evidence discloses no
actionable fraud, no statement of an existing fact, and
shows but an expression of opinion [***10] as to appellee's
coverage under the existing policy contract.
[HN3] Whether a given representation is an expression
of opinion or a statement of fact depends upon all
the circumstances of the particular case, such as the form
and subject matter of the representation and the
knowledge, intelligence and relation of the respective
parties. The mere form of the representation as one of
opinion or fact is not in itself conclusive, and in cases of
doubt the question should be left to the jury. Foster v.
Kennedy's Adm'r, supra; Moses v. Katzenberger, 84 Ala.
95, 4 So. 237; 26 Corpus Juris, § 21, pp. 1083, 1084, 12
R.C.L. section 15, page 247.
In the case of Commercial Casualty Ins. Co. v.
Hosey et al., 238 Ala. 335, 191 So. 343, 344, it was said:
"[HN4] It is a matter of common knowledge that insurance
contracts are embodied in forms skillfully drawn by
experts, and are highly technical; that the insuring public
usually rely on the insurer to draw the contract so as to
protect the insured against loss, and this practice is encouraged
by insurers as a means of building up their
business. The complainants had a right to assume that the
policy covered the losses [***11] as agreed between
the parties."
[HN5] Whenever a person states a matter which
might otherwise be only an opinion, not as a mere expression
of his own opinion but as an existing fact material
to the transaction, so that the other party may reasonably
treat it as a fact, the statement clearly becomes a
statement of fact. Coleman v. Night Commander Lighting
Co., 218 Ala. 196, 118 So. 377; Cartwright v. Braly,
supra; Tillis v. Smith Sons Lumber Co., 188 Ala. 122, 65
So. 1015; Moses v. Katzenberger, supra; Tabor v. Peters,
74 Ala. 90, 49 Am.Rep. 804; Tanner v. Clark, 13
Ky. L. Rep. 922.
Under the circumstances of the instant case the representation
was of a material existing fact, and not mere
opinion, and upon which appellee had the right to rely.
Southern Building & Loan Ass'n v. Dinsmore, 225 Ala.
550, 144 So. 21; Standard Oil Co. v. Myers, 232 Ala.
662, 169 So. 312.
[HN6] The general rule as to the measure of damages,
when a person is injured by the false and fraudulent
representations of another is stated in the case of Kilby
Locomotive & Machine Works v. D. B. Lacy & Son, 12
Ala. App. 464, 67 So. 754, 755, [***12] as follows: "
244 Ala. 354, *; 13 So. 2d 669, **;
1943 Ala. LEXIS 209, ***
Page 5
He is entitled to recover all the damages which were
within the contemplation of the parties, or which, though
not within the contemplation of the parties, were either
the necessary or the natural and proximate consequences
of the fraud; and he can recover nothing more than this,
unless the circumstances were such as to render the other
party liable in exemplary damages.' 14 Am. & Eng. Ency.Law
(2d Ed.) 177-179; 20 Cyc. 130 et seq.; 8 Am. &
Eng.Ency.Law (2d Ed.) 640 et seq.; 13 Cyc. 28 et seq."
[*359] Here, appellee is entitled to recover the
amount paid in satisfaction of the Chance judgment, the
court costs in connection therewith, and attorney's fee
paid for defending that suit, together with interest from
the date of payment: there being no insistence that either
item was excessive. It was not incumbent upon appellee
to prove what might have been the premium on a policy
of insurance covering the operation resulting in the death
of Chance. See 24 Amer.Jur. section 223, page 52.
But as above stated, the cause must be reversed. The
trial court refused the general charge to defendant as to
counts 1 and D, the common counts.
There was no evidence to support a [***13] finding
that an oral contract of insurance existed between the
parties. Had there been such evidence, a recovery under
the common counts could be sustained, for, as stated in
the case of Carbon Hill Coal Co. v. Cunningham, 153
Ala. 573, 44 So. 1016: [HN7] "Where there is an express
contract, the plaintiff cannot resort to an implied one. An
exception to this rule, however, is that he may recover on
the common counts, although the evidence discloses a
special agreement, when such agreement has been executed
and fully performed, and no duty [**673] remains
but the payment of the price in money by the defendant;
but, so long as the contract continues executory,
the plaintiff must declare specially."
Further, appellant reserved exceptions to the following
portion of the trial court's oral charge: "Now,
under these common counts, 1 and D, I think, in addition
to what I have said to you about the false representations,
it would be broad enough to take in this: Did Mr. Adams
make a misstatement of what opinion he held as to the
liability and did he misrepresent knowingly to them what
he actually did think about it, or not? In other words, did
he make a false statement about this [***14] opinion
knowingly?"
The rule relative to the question considered is stated
in 1 Corpus Juris pages 1031, 1032, as follows: [HN8]
"There is some conflict of authority as to when and under
what circumstances a party may waive a tort and maintain
an action of contract with regard to the same subject
matter, but it is clear that to sustain such a proceeding
there must be some contract either express or implied. If
there is an express contract, and the same act or transac-

tion constitutes both a tort and a breach of the contract,
the injured party may waive the tort and sue on the contract;
and the same rule obtains where a contract creates
a relation out of which certain duties arise, a breach of
which will constitute a tort, as in case of the relation between
bailor and bailee, principal and agent, patient and
physician, attorney and client, or between a common
carrier and a shipper, or passenger. Even where there is
no express contract, and the cause of action arises out of
tort, the tort may be waived and an action of contract
brought in all cases where the law will imply a promise
on the part of the wrongdoer to reimburse the party injured
by his act; but this can be done only where such
[***15] a contract can be implied, so that in cases of
this character the question resolves itself into one of
when and under what circumstances the law will imply
such an agreement. In this connection it is to be observed
that [HN9] the duty to pay damages for a tort does not
necessarily imply any promise to pay them, and, consequently,
that a party cannot create a cause of action in
contract merely by waiving a tort; but it is now equally
well settled that in some cases such an agreement will be
implied, for the old rule that what was a tort in its inception
could not be made the basis of an implied assumpsit,
has long been relaxed, and the question is to what extent.
Upon this point the authorities are not agreed. Some decisions
have sought to limit the right of waiving a tort
and suing on implied contract to cases where personal
property has been wrongfully taken and converted into
244 Ala. 354, *; 13 So. 2d 669, **;
1943 Ala. LEXIS 209, ***
Page 6
money and the action is for money had and received, and
to cases where the action is against the executor or administrator
of the wrongdoer; but this limitation has been
expressly disapproved, and the right has been extended
to include a large variety of cases. The rule has been
stated that for this purpose an agreement [***16]
should be implied wherever one person commits a tort
against the estate of another with the intention of benefiting
his own estate, or wherever justice requires it in
consideration of benefits received; but that no such
agreement will be implied where no benefit to the
wrongdoer was received or expected, or where there is a
subsisting express contract between the parties in regard
to the same subject matter." See, also, 1 C.J.S., Actions,
§ 50.
While there are many cases of fraud in which the
tort may be waived and [*360] the action of assumpsit
maintained, the trial court's instruction, here considered,
is an unwarranted enlargement of the principles stated in
these cases. See note 36 L.R.A., N.S., page 602; Steiner
Bros. v. Clisby, 103 Ala. 181, 15 So. 612; Allen v. M.
Mendelsohn & Son, 207 Ala. 527, 93 So. 416, 31 A.L.R.
1063; Teague v. Tennessee Valley Bank, 213 Ala. 21,
104 So. 228.
Reversed and remanded.
GARDNER, C. J., and THOMAS and BROWN, JJ.,
concur.

********** Print Completed **********
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Send To: RAMIREZ, ANNA
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HOUSTON, TX 77057-2638
120CQJ

245 Iowa 1091, *; 65 N.W.2d 427, **;
1954 Iowa Sup. LEXIS 466, ***; 45 A.L.R.2d 1174
LEXSEE 245 IOWA 1091
L. H. Turner, appellee, v. Zip Motors, Inc., appellant
No. 48508
Supreme Court of Iowa
245 Iowa 1091; 65 N.W.2d 427; 1954 Iowa Sup. LEXIS 466; 45 A.L.R.2d 1174
PRIOR HISTORY: [***1]
Appeal from Pottawattamie District Court. -- Charles
Roe, Judge.
Plaintiff's action claimed damages for loss and expense
incurred in defending a suit for replevin of an automobile
brought against him by a third party, which suit
plaintiff alleged was caused by the conversion of the
automobile by defendant's agent. The trial court granted
plaintiff judgment for his attorney fees incurred in defending
the replevin action and denied recovery for all
other alleged damages. Defendant appeals.
DISPOSITION:
Affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant buyer challenged
the judgment of the Pottawattamie District Court
(Iowa), which granted plaintiff seller attorney's fees incurred
in defending its replevin action against a third
party, but denied recovery for all other alleged damages.
OVERVIEW: The seller successfully defended a replevin
suit in a prior case. He then alleged that the litigation
was brought about by the wrongful conversion of an
automobile, which was at all times his property, by the
buyer, acting through its agent. The trial court granted
the seller attorney's fees. The buyer assigned three errors:
1) that the trial court erred in finding that a certain person
was a salesman and agent of the defendant; 2) that the
trial court erred in finding the person was acting within
the apparent scope of his authority in negotiating a purported
sale of plaintiff's automobile to the prior litigant;
and 3) that the attorney's fees incurred in the prior suit
were not a proper item of damage. The court disagreed
with each argument and affirmed. There was ample evidence
to support the trial court's finding that the person
was a salesman, agent, and employee of the buyer. Also,
there was substantial evidence he was acting within the
July 26, 1954
Page 1
apparent scope of his authority in the conversion of the
seller's car by the fraudulent sale. Finally, the attorney's
fees incurred in the prior suit were a proper measure of
damages, but the rule was limited to third party litigation.
OUTCOME: The court affirmed the lower court's
judgment in favor of the seller.
LexisNexis(R) Headnotes
Civil Procedure > Appeals > Standards of Review >
Substantial Evidence
[HN1] In law actions tried to the court without a jury, the
factual findings of the court, if supported by substantial
evidence, have the same effect as a jury verdict and cannot
be disturbed upon appeal.
Business & Corporate Entities > Agency > Duties &
Liabilities > Unlawful Acts of Agents
[HN2] The principal is responsible for the fraud of the
agent if he has entrusted to the agent a matter which puts
the agent in a position to perpetrate the fraud complained
of while the agent is executing the agency transaction
within the scope of his employment.
Business & Corporate Entities > Agency > Duties &
Liabilities > Unlawful Acts of Agents
[HN3] Masters, or principals, rarely authorize their
servants, employees, or agents to commit torts; yet, if in
the scope of his employment the master or principal
places his employee or agent in a position to commit a
fraud or other tort upon an innocent third party, such
master or principal must be held to answer for the damage
done, under the maxim of respondeat superior.
Torts > Damages > Costs & Attorney Fees
[HN4] A person who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover compensation for the reasonably neces-

sary loss of time, attorney fees, and other expenditures
thereby suffered or incurred.
Torts > Damages > Costs & Attorney Fees
[HN5] Attorney's fees are not ordinarily recoverable as
part of the damages against the opposing party in the
litigation.
Torts > Damages > Costs & Attorney Fees
[HN6] Attorney's fees, growing out of prior forcible entry
and detainer litigation between the same parties, forcible
entry and detainer actions being an exception to the
general rule followed in Iowa denying recovery for malicious
prosecution of civil actions, might be recovered
upon a showing of malice.
Torts > Damages > Costs & Attorney Fees
[HN7] If A sues B, generally the successful party cannot
recover his expenses of litigation such as lost time, attorney
fees, and other special items other than court
costs. But if through the tort of A, B is in good faith involved
in litigation with C, the exception comes into
play, and B may then recover the reasonable value of his
expense for employment of counsel, and other proper
items, from A. Many state courts follow this principle.
Torts > Damages > Costs & Attorney Fees
[HN8] Attorney's fees as damages are compensatory
rather than exemplary.
Torts > Damages > Costs & Attorney Fees
[HN9] A litigant who has through the wrongful act of
another been involved in a suit with a third party may in
turn recover his necessary costs and expenses, including
attorney fees, from the wrongdoer whose misdeed
brought about the action.
Torts > Damages > Costs & Attorney Fees
[HN10] In the absence of special statutory provision,
attorney's fees can be recovered by neither the plaintiff
nor the defendant against the other. Iowa Code § 625.1
(1954) provides that costs shall be recovered by the successful
against the losing party. This has always been
held to mean the ordinary costs, not including attorney's
fees.
COUNSEL:
George B. Boland, of Omaha, Nebraska, and J. Leo
Connolly, of Council Bluffs, for appellant.
Ross, Johnson, Northrop, Stuart & Tinley, of Council
Bluffs, for appellee.
JUDGES:
Thompson, J. All Justices concur.
245 Iowa 1091, *; 65 N.W.2d 427, **;
1954 Iowa Sup. LEXIS 466, ***; 45 A.L.R.2d 1174
OPINIONBY:
THOMPSON
OPINION:
Page 2
[*1092] [**428] The instant case is an outgrowth
of A. C. Nelsen Auto Sales, Inc. v. Turner, 241
Iowa 927, 44 N.W.2d 36, a replevin action in which the
plaintiff, an Omaha automobile sales agency, claimed the
right to possession of a Packard car from the defendant,
Turner, who is the plaintiff in the action now before us.
Turner successfully defended the replevin suit [*1093]
both in the trial court and this court. He now alleges
[***2] that the litigation was brought about by the
wrongful conversion of the automobile, which was at all
times his property, by the defendant, Zip Motors, Inc.,
acting through its agent, one O'Brien. The trial court,
sitting as judge of both the facts and the law, granted
Turner a judgment for $ 600, which it found to be the
reasonable value of the attorney fees incurred by Turner
in the defense of the replevin suit, and denied him relief
for any other items of damage which he asked. No
question is made as to the reasonableness of the fees allowed,
and Turner has not appealed from the adverse
judgment refusing to allow him the other claimed damages.
We have, therefore, only the question of the legality
of the allowance of the attorney fees.
In this appeal, the defendant-appellant assigns four
errors relied upon for reversal. The first is that the court
erred in finding Frank O'Brien was a salesman, agent and
employee of the defendant at the time of the transaction
which brought about the litigation with the Nelsen Auto
Sales; the second, that the court was in error in finding
the said O'Brien was acting within the apparent scope of
his authority in negotiating a purported sale of [***3]
plaintiff-appellee's automobile to the Nelsen firm; and
the third, that the attorney fees incurred in the Nelsen suit
were not a proper item of damage and the court erred in
holding they were. The fourth assignment is a general
one and depends upon the correctness of the rulings on
the first three. It need not be separately considered.
I. The first and second assignments will be considered
together. The material facts at this point are thatthe
plaintiff, on September 23, 1948, being desirous of selling
his Packard car, drove to the place of business of the
defendant in Council Bluffs. It is alleged and admitted
in the pleadings that defendant was at all material times a
corporation whose primary purpose was to "buy, sell,
distribute and handle, both at wholesale and retail, motor
vehicles of all kinds", together with parts, accessories,
gas, oils and other petroleum products, and to service,
repair and recondition motor vehicles.

[**429] We of course follow the familiar rule that
[HN1] in law actions tried to the court without a jury, the
fact findings of the court, if supported by substantial evidence,
have the same effect as a [*1094] jury verdict
and cannot be disturbed [***4] upon appeal. Nelsen
Auto Sales, Inc. v. Turner, supra, at page 930 of 241
Iowa, and cases cited. Some of the items of testimony
hereinafter set out were strongly disputed by the defendant;
but it is not our right to weigh the evidence. Since
we must follow the trial court in its supported findings of
fact, it will avail nothing to discuss or even refer to the
defendant's testimony which does no more than deny
substantial evidence for plaintiff.
The plaintiff testified when he went to defendant's
place of business on September 23, he talked to "the girl
at the information desk." He told her he wanted to sell
his car. She said the men were busy. He saw a man
talking to other apparent customers. After a few minutes
this man walked over to him, and the girl at the desk
introduced him to plaintiff as O'Brien and told him to go
out and appraise plaintiff's car. Either the young woman
or O'Brien at this time gave him a card, which appears in
evidence as plaintiff's Exhibit I. The card bore the name
"Zip Motors Inc." printed across the center. In the upper
left-hand corner were the words "Zip for Cars"; in the
upper right-hand corner, "Zip for Trucks." In the lower
left corner was [***5] the address of the company and
in the lower right its phone number. In the center, below
the name of the company, were the printed words
"Ask for" and immediately below these was, in writing,
"Frank O'Brien." After plaintiff had been introduced to
O'Brien and been handed this card, he and O'Brien went
out to look at the automobile. O'Brien said the car
would bring $ 3500, but would not bring that much if it
was put on the company's lot. He said he might sell it to
an elderly couple in Omaha and told plaintiff to clean it
up and bring it back Saturday, the 25th.
On the morning of the 25th, at about 8:30 a.m.,
plaintiff again drove his car to defendant's place of business.
O'Brien was in the office and came out when he
saw plaintiff. He said he would tell the people in defendant's
office what he was going to do, and he and
plaintiff then drove to Omaha. Here O'Brien suggested
to plaintiff he wait for him while he called on his supposed
prospective customers, and arranged to meet him
in about an hour. O'Brien, as it later developed, took the
car and [*1095] sold it fraudulently to the Nelsen Auto
Sales Company and decamped with the money. He
has never been located. Plaintiff, [***6] after waiting
for several hours, reported his loss to the police, who
found his car parked, apparently on the Nelsen sales lot
or on the street near this company's place of business.
They towed it to the police station, where the next day
plaintiff took possession of it. This brought about the
245 Iowa 1091, *; 65 N.W.2d 427, **;
1954 Iowa Sup. LEXIS 466, ***; 45 A.L.R.2d 1174
Page 3
replevin suit in which the Nelsen Company tried unsuccessfully
to regain possession of the automobile, and in
which plaintiff incurred the attorney fees for which he
was granted judgment against the defendant in the case at
bar.
Mrs. Lucille Carmichael testified for plaintiff that
she was employed by defendant as a bookkeeper and
general office worker at the time plaintiff came to attempt
to sell his car. She was also apparently the receptionist,
for she says "I talked to people as they came in."
When plaintiff came in to see about selling his automobile
she referred him to O'Brien, "first salesman on our
staff." She says "O'Brien worked for Zip Motors a short
time." She says O'Brien was there more than three days,
and the company manager, Mundell, told of firing him
after this affair. She says O'Brien was there early on
Saturday morning (September 25) and told her to tell his
wife he had [***7] gone to a dentist.
For defendant, Mundell, the manager, denies O'Brien
was ever employed as a salesman or in any other capacity
by it; and there is other evidence supporting defendant's
case. But it will avail nothing to go further
into detail concerning it; we think the testimony of the
plaintiff and Mrs. Carmichael gives substantial support
[**430] to the trial court's finding that O'Brien was at
the time of the transaction referred to a salesman and
agent of the defendant, and its finding must therefore be
final on this question of fact. Mrs. Carmichael, the
bookkeeper and information clerk or receptionist, says he
was employed as a salesman at that time; and plaintiff
was given a company card in which O'Brien's name had
been filled in in writing so as to make it appear he was in
some manner connected with its business. While Mrs.
Carmichael was not officially labeled as an "information
clerk", the record indicates it was a part of her duty to
meet customers as they came in and refer them to the
[*1096] proper employees or agents of the company.
Her desk was an "information desk" so far as the facts of
this case are concerned. As we said in Northwestern
Mutual Life [***8] Ins. Co. v. Steckel, 216 Iowa 1189,
1196, 1197, 250 N.W. 476, 479, "that individual was
placed there by the appellee company as the person to
whom people coming into the appellee company's home
office should turn to ascertain with whom they should
conduct their business." There was ample evidence to
support the trial court's finding that on September 25,
1948, O'Brien was a salesman, agent and employee of
the defendant.
If he was a salesman for defendant, we think further
there was substantial evidence he was acting within the
apparent scope of his authority in what he did, including
the conversion of plaintiff's car by the fraudulent sale.
Of course, no one claims the defendant had authorized
O'Brien to attempt to defraud the plaintiff by selling his

automobile, pocketing the money and absconding. But
he was within the apparent scope of his authority nevertheless.
The rule is stated thus in 2 Am. Jur., Agency, section
363: [HN2] "* * * the principal * * * is responsible for
the fraud of the agent if he has intrusted to the agent a
matter which puts the agent in a position to perpetrate the
fraud complained of while the agent is executing the
agency transaction within the scope of his [***9] employment."
This court has made several pronouncements upon
the question. In Hopkins v. The Hawkeye Insurance
Co., 57 Iowa 203, 208, 10 N.W. 605, 607, 42 Am. Rep.
41, we said: "It is urged by the appellant that it is not
liable for the fraudulent acts of the agent. * * * What he
did in regard to taking the note was in the direct line of
his employment, and his acts in regard thereto must be
considered as the acts of his principal." In Mankin v.
Mankin, 91 Iowa 406, 407, 59 N.W. 292, is this: "Joseph
W. Mankin was bound by the acts of his agent, John
Mankin, the same as if he had notice of the fraud."
Again, in Wickham v. Evans, 133 Iowa 552, 558, 559,
110 N.W. 1046, 1048, this court said: "Diltz was defendant's
agent * * * and as such he perpetrated or attempted
to perpetrate a fraud either upon plaintiff or upon
his company. * * * This was the fraud of defendant's
own agent, and for it the defendant is responsible."
[*1097] In Wright v. Iowa Power & Light Co., 223 Iowa
1192, 1195, 1196, 274 N.W. 892, we quoted with
approval from 2 C. J., section 733, page 962, a statement
that questions of the nature and scope of the agent's authority
and whether the acts in controversy [***10]
were within the scope of such authority are ordinarily for
the jury.
In fact, the question involved at this point is not so
much whether the agent was acting within the scope of
his authority in converting the plaintiff's automobile, but
whether the principal -- the defendant -- was liable for
the tortious act of its agent or employee. [HN3] Masters,
or principals, rarely authorize their servants, employees
or agents to commit torts; yet, if in the scope of
his employment the master or principal places his employee
or agent in a position to commit a fraud or other
tort upon an innocent third party, such master or principal
must be held to answer for the damage done, under
the maxim of respondeat superior. 2 Am. Jur., Agency,
section 359. Here, if it is once found the defendant was
[**431] the employer of O'Brien, as we have held the
trial court had a right to do under the evidence, there is
clearly further evidence from which the conclusion was
properly drawn that it was liable for his tortious act in
converting plaintiff's car. See Grismore v. Consolidated
Products Co., 232 Iowa 328, 334, 335, 336, 5 N.W.2d
646; White v. International Textbook Co., 173 Iowa 192,
245 Iowa 1091, *; 65 N.W.2d 427, **;
1954 Iowa Sup. LEXIS 466, ***; 45 A.L.R.2d 1174
Page 4
194, 155 N.W. 298; [***11] and Dunshee v. Standard
Oil Co., 165 Iowa 625, 630, 146 N.W. 830.
II. We turn then to the third assignment of error,
under which the defendant urges that attorney fees incurred
in the prior suit are in no event a proper measure
of damages. The question seems never to have been
squarely decided in Iowa, but there is an abundance of
authority in other jurisdictions, all pointing in the same
direction. The rule stated in Restatement of the Law,
Torts, Volume IV, section 914, is this:
[HN4] "A person who through the tort of another
has been required to act in the protection of his interests
by bringing or defending an action against a third person
is entitled to recover compensation for the reasonably
necessary loss of time, attorney fees and other expenditures
thereby suffered or incurred."
[*1098] To the same effect are 15 Am. Jur.,
Damages, section 144, and 25 C. J. S., Damages, section
50(c).
The defendant urges that attorney fees are not ordinarily
allowed, the statutory provisions for costs being
deemed sufficient compensation for the victorious litigant;
and further that it is only in special cases where the
statute specifically authorizes such procedure, or there is
malice [***12] proven, that the reasonable cost of employing
counsel may be taxed against the loser.
Boardman v. The Marshalltown Grocery Co., 105 Iowa
445, 451, 75 N.W. 343, cited by defendant, lays down the
rule that [HN5] attorney fees are not ordinarily recoverable
as part of the damages against the opposing party in
the litigation. This is the general rule; but there are exceptions.
Sometimes they are recoverable under special
statutes; and they are a part of the damages allowable in
certain suits for malicious prosecution.
The present situation comes under none of these exceptions,
however. In Kuiken v. Garrett, 243 Iowa 785,
51 N.W.2d 149, we held that [HN6] attorney fees, growing
out of prior forcible entry and detainer litigation between
the same parties (forcible entry and detainer actions
being an exception to the general rule followed in
Iowa denying recovery for malicious prosecution of civil
actions) might be recovered upon a showing of malice.
From this, defendant argues that, the malice of the agent
O'Brien not being imputed to the principal, and there
being therefore no showing of malice on the part of the
Zip Motors, there can be no recovery.
But defendant overlooks another well-established
[***13] exception to the rule. [HN7] If A sues B,
generally, as noted above, the successful party cannot
recover his expenses of litigation such as lost time, attorney
fees, and other special items other than court
costs. But if through the tort of A, B is in good faith

involved in litigation with C, the exception comes into
play, and B may then recover the reasonable value of his
expense for employment of counsel, and other proper
items, from A. This is the rule laid down in the Restatement
of the Law of Torts, and 15 Am. Jur. and 25 C.
J. S., all supra. Many state courts have followed this
principle.
In Tarnowski v. Resop, 236 Minn. 33, 40, 51 N.W.2d
801, 804, the Minnesota Supreme Court pointed out this
difference [*1099] between an attempt to recover attorney
fees from the other party to the main action and
from one who was not a party to the first action but
whose tortious conduct caused it. We quote from the
opinion: "In this case, defendant was not a party to the
suit against the sellers. * * * the attorneys fees and expenses
of litigation against the sellers [**432] became
necessary because of defendant's tortious conduct."
In Indiana National Life Ins. Co. v. Butler, 186
[***14] Ky. 81, 215 S.W. 949, an agent of the company
had by misrepresentation obtained a promissory note
from Butler, which was sold to a bank. The bank
brought suit upon the note; Butler attempted to defend
upon the ground of the alleged fraud practiced upon him
by the insurance company's agent, but after considerable
litigation was defeated by the holder of the note. He
then brought suit against the insurance company for his
damages, including attorney fees, incurred in his litigation
with the bank. The fees were held recoverable, the
prior litigation having been caused by the wrongful act of
another -- the life insurance company -- through its
agent. The qualification that the prior litigation must
have been undertaken in good faith is pointed out. The
facts in the Kentucky case are very close to those in the
one now before us. There, as here, a fraud committed
by the agent of the defendant, with no evidence of
knowledge on the part of the defendant, brought about
litigation between the plaintiff and a third party. The
defendant was held liable for attorney fees and other
necessary charges and expenses. In First National Bank
of Hutchinson v. Williams, 62 Kan. 431, 63 P. 744, it
[***15] was pointed out that [HN8] such damages are
compensatory rather than exemplary; and with this we
agree.
Other cases following the same rule are Wheeler v.
Hanson, 161 Mass. 370, 37 N.E. 382, 42 Am. St. Rep.
408; Stiles v. Morse, 233 Mass. 174, 123 N.E. 615, 4 A.
L. R. 1365; McGaw v. Acker, Merrall & Condit Co., 111
Md. 153, 73 A. 731, 134 Am. St. Rep. 592; Edwards v.
Beard, 211 Ala. 251, 100 So. 101; and International
State Bank v. Trinidad Bean & Elevator Co., 79 Colo.
286, 245 P. 489. In fact, Harmont v. Sullivan, 128 Iowa
309, 318, 103 N.W. 951, 954, comes close to supporting
the same [*1100] point. It appeared that Sullivan had
been compelled to bring an action to protect his right to
245 Iowa 1091, *; 65 N.W.2d 427, **;
1954 Iowa Sup. LEXIS 466, ***; 45 A.L.R.2d 1174
Page 5
possession of certain real estate which he claimed the
plaintiff had leased to him, from others to whom she had
leased it. He secured possession and when plaintiff sued
for the rent claimed to be due counterclaimed for his
expense of securing possession. We said there was evidence
of plaintiff's connivance in the wrongful attempt of
the third parties to keep Sullivan from possession; and
further: "Defendant herein was compelled to bring action
to protect his possession, and, if the jury found there
[***16] was such connivance, defendant was entitled to
recover the costs and expenses, including attorney's fees,
reasonably expended or incurred as damages for breach
of the implied covenant of seisin."
This holding, although the action involved was one
to establish the right to possession of real estate, is very
close to the rule that [HN9] a litigant who has through
the wrongful act of another been involved in a suit with a
third party may in turn recover his necessary costs and
expenses, including attorney fees, from the wrongdoer
whose misdeed brought about the action. See also Meservey
v. Snell, 94 Iowa 222, 226, 62 N.W. 767, 58 Am.
St. Rep. 391. It may be noted in passing that the same
rule applies to a breach of contract which involves the
aggrieved contractor in litigation with a third party. Verhagen
v. Platt, 1 N. J. 85, 61 A.2d 892, 895, 4 A. L. R.2d
1309; Williston on Contracts, Revised Ed., section 1354,
page 3798; Restatement of the Law, Contracts, section
334.
The rule announced and followed here must be limited
to third party litigation. [HN10] In the absence of
special statutory provision, attorney fees can be recovered
by neither the plaintiff nor the defendant against the
other. [***17] Section 625.1, Iowa Code of 1954,
provides: "Costs shall be recovered by the successful
against the losing party." This has always been held to
mean the ordinary costs, not including attorney fees.
Boardman v. The Marshalltown Grocery Co., supra. The
reason for the distinction between attempts [**433] to
recover attorney fees from the opposing party in a lawsuit,
and from one whose wrongful tort or breach of contract
has brought about third party litigation, has been
said to be that to permit such recovery in the first
[*1101] case would be to open the door to endless litigation,
and further that the statutes providing for taxing
of court costs against the loser by implication limit the
recovery to such costs; while in the second instance the
attorney fees are a natural and direct consequence and
damage of the wrongful act which brings about the suit
with a third party. Stickney v. Goward, 161 Minn. 457,
201 N.W. 630, 631, 39 A. L. R. 1216; Westfield v. Mayo,
122 Mass. 100, 23 Am. Rep. 292; First National Bank of
Hutchinson v. Williams, supra. It matters not whether the
litigation with the third party was prosecuted or defended;
the only qualifications are that it must [***18] have

een caused by a tortious act or breach of contract of the
defendant in the suit for recovery of fees or other proper
expenses and must have been conducted in good faith
and with reasonable ground for belief in a successful
outcome. We agree with the able trial court that the rule
is proper and based on reason and abundant authority.
Appellant urges in argument that it should not be
held liable for the attorney fees of the litigation with the
Nelsen Company because it was not notified thereof and
given an opportunity to defend. There is some authority
245 Iowa 1091, *; 65 N.W.2d 427, **;
1954 Iowa Sup. LEXIS 466, ***; 45 A.L.R.2d 1174
Page 6
for this position, Robert A. Reichard, Inc. v. Ezl Dunwoody
Co., D.C.E.D. Pa., 45 F. Supp. 153, 157. It has
also been criticized as unreasonable, McCormick on
Damages, section 68, page 252. We need not decide it.
There is no showing in the pleadings, the evidence, the
findings of the trial court or elsewhere in the record that
the point was raised below. Under such circumstances
we do not consider it. Green v. Jones County, 235 Iowa
564, 567, 16 N.W.2d 238. -- Affirmed.

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DISPOSITION: [***1]
Reversed and remanded.
CASE SUMMARY:
257 S.C. 28, *; 183 S.E.2d 708, **;
1971 S.C. LEXIS 207, ***
LEXSEE 257 SC 28
Frank L. ADDY, Plaintiff, v. Miss Mary Elise BOLTON et al., Defendants-Appellants,
and C.Y. Thomason Company, Defendant-Respondent
PROCEDURAL POSTURE: Plaintiff tenants filed suit
against defendants, building owners, and a general contractor,
after repairs made by the contractor resulted in a
fire damaging the tenant's merchandise. The Court of
Common Pleas for Greenwood County (South Carolina)
directed a verdict against the owners and contractor, but
a jury returned damages against the contractor only. The
owners' request for costs and fees was denied, and the
owners appealed.
OVERVIEW: The contractor was hired by the owners
to make repairs to the building leased by the tenants who
operated a jewelry store. In doing the repairs, the contractor
started a fire causing damage to the tenants' stock
of merchandise in the building. The trial court directed a
verdict against the owners and the contractor, and the
jury returned a verdict against only the contractor, thus
exonerating the owners. The owners moved for attorney
fees, which the trial court denied. There was no written
contract between the owners and the contractor for the
making of the repairs to the building. The owners contended
that such a contract was created by operation of
law and they were entitled to recover from the contractor
the fees paid their attorneys in the successful defense of
the action. The court concluded that in actions of indemnity,
brought where the duty to indemnify was either
implied by law or arises under contract, and no personal
fault of the owners had joined in causing the injury, reasonable
attorney fees incurred in resisting the claim indemnified
against were recoverable as part of the damages
and expenses.
No. 19291
Supreme Court of South Carolina
257 S.C. 28; 183 S.E.2d 708; 1971 S.C. LEXIS 207
September 27, 1971
Page 1
OUTCOME: The court reversed and remanded the
judgment for a determination of the amount that the
owners were entitled as reasonable attorney fees.
LexisNexis(R) Headnotes
Torts > Damages > Costs & Attorney Fees
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN1] Where the wrongful act of the defendant has involved
the plaintiff in litigation with others or placed him
in such relation with others as makes it necessary to incur
expense to protect his interest, such costs and expenses,
including attorney fees, should be treated as the
legal consequences of the original wrongful act and may
be recovered as damages. In order to recover attorney
fees under this principle, the plaintiff must show: (1) that
the plaintiff had become involved in a legal dispute either
because of a breach of contract by the defendant or
because of defendant's tortious conduct; (2) that the dispute
was with a third party, not with the defendant; and
(3) that the plaintiff incurred attorney fees connected
with that dispute. If the attorney fees were incurred as a
result of a breach of contract between plaintiff and defendant,
the defendant will be deemed to have contemplated
that his breach might cause plaintiff to seek legal
services in his dispute with the third party.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] In actions of indemnity, brought where the duty to
indemnify is either implied by law or arises under a contract,
reasonable attorney fees incurred in resisting the
claim indemnified against may be recovered as part of
the damages and expenses.
Torts > Multiple Defendants > Contribution & Indemnity
Civil Procedure > Costs & Attorney Fees > Attorney
Fees

[HN3] If one person is compelled to pay damages because
of negligence imputed to him as the result of a tort
committed by another, he may maintain an action over
for indemnity against the person whose wrong has thus
been imputed to him; but this is subject to the proviso
that no personal negligence of his own has joined in
causing the injury.
COUNSEL:
William B. Patrick, Jr., Esq., of Burns, McDonald,
Bradford, Erwin & Few, Greenwood, for Appellants,
cites: As to an implied obligation of indemnity from Respondent
to Appellants: 41 Am. Jur. (2d), Indemnity,
Sec. 19, p. 705; American Law Institute, Restatement of
Restitution, Sec. 96; Restatement of Agency, Secs.
219-267; Restatement of Torts, Secs. 409-429; Restatement
Restitution, Sec. 96, Comment a; Notes on Restatement
of Restitution by the Reporters, Warren A.
Seavey and Austin W. Scott, pp. 160-161 (1937); 243
S.C. 61, 132 S.E. (2d) 172; 224 S.C. 79, 135 S.E. (2d)
613, 617; 130 S.C. 180, 125 S.E. 912; 97 A.L.R. (2d)
616; 366 Pa. 322, 77 A. (2d) 368, 24 A.L.R. (2d) 319; 77
A. (2d) 370, 24 A.L.R. (2d) 323; 77 A. (2d), 24 A.L.R.
(2d) 324; Mo. App., 315 W. (2d) 499, 502; 224 S.C. 79,
135 S.E. (2d) 613; 130 S.C. 180, 125 S.E. 912; 129 S.C.
242, 124 S.E. 7; 113 S.C. 91, 101 S.E. 282. As to implied
obligation of indemnity from Respondent to Appellants
including indemnity for reasonable and necessary costs
and attorneys' fees: 42 C.J.S., Indemnity, Sec. 24, p. 602;
198 F. Supp. 484, 488; 27 Am. Jur. Indemnity, Sec. 27;
42 C.J.S., Indemnity, [***2] Sec. 24; 129 F. Supp.
194, 198; 355 S.W. (2d) 788, 95 A.L.R. (2d) 1086, 1095.
As to the Circuit Court's committing reversible error in
denying Appellants' motion for judgment notwithstanding
the verdict: 241 S.C. 557, 129 S.E. (2d) 517.
James D. Jefferies, Esq., of Jefferies, Arnold &
Wise, Greenwood, for Respondent, cites: As to whether
in a circumstance of indemnity created by operation of
law, the expense of employing attorneys in the successful
defense of a suit for damages for tort are allowable as a
part of the costs in the absence of an express agreement
therefor: 50 S.E. (2d) 288; 153 N.C. 275, 69 S.E. 234, 30
L.R.A., N.S., 1105; 212 N.C. 18, 192 S.E. 687; 204 N.C.
437, 168 S.E. 671; 195 N.C. 644, 143 S.E. 254; 170 N.C.
445, 87 S.E. 250; 158 N.C. 128, 73 S.E. 801; 153 N.C.
275, 69 S.E. 234, 30 L.R.A., N.S., 1105; G.S. Sec. 6-21;
42 C.J.S. Indemnity Sec. 13, p. 587; 27 A.J. 474; 211
N.C. 23, 188 S.E. 642; 152 S.E. 772, 773, 156 S.C. 132;
224 S.C. 79, 135 S.E. (2d) 613.
William B. Patrick, Jr., of Burns, McDonald, Bradford,
Erwin & Few, Greenwood, for Appellants, in Reply,
cites: As to the elements of a contract between the Appellants
and [***3] the Respondent being proved: 17
Am. Jur. (2d), Contracts, Sec. 255, pp. 649-650. As to
257 S.C. 28, *; 183 S.E.2d 708, **;
1971 S.C. LEXIS 207, ***
Page 2
Appellants not having to make demand on the Respondent
to defend the claim against the Appellants where
futile: 156 S.C. 132, 152 S.E. 772, 773. As to indemnity
agreement including amounts paid for attorneys' fees: 41
Am. Jur. (2d), Indemnity, Sec. 36, p. 726; 42 C.J.S., Indemnity,
Sec. 13(d). As to attorneys' fees being recoverable
as a part of the costs in the successful defense of a
suit for damages for tort: 22 Am. Jur. (2d), Damages,
Sec. 166, pp. 235-236; 25 C.J.S., Damages, Sec. 50(e)
and 4 A.L.R. (3d) 270, 274; 261 F. (2d) 879; McCormick,
Damages Sec. 66(1935); 261 F. (2d) 879, 881.
JUDGES:
Moss, Chief Justice. Lewis, Bussey, Brailsford and
Littlejohn, JJ., concur.
OPINIONBY:
MOSS
OPINION:
[*31] [**708] Mary Elise Bolton, Mildred B.
Craig and Julian E. Bolton, the appellants herein, are the
owners of a store building located on Main Street in the
City of Greenwood. The appellants leased this building
to Frank L. Addy and Mary P. Addy, wherein they operated
a retail jewelry store. During the existence of the
lease it became necessary that certain repairs be made to
this store [***4] building, and the appellants engaged
the C.Y. Thomason Company, a general contractor, the
respondent herein, to make the needed repairs. In making
the necessary repairs the respondent used an oxygen
acetylene torch for the purpose of welding certain steel
beams in the building. This welding operation started a
fire in said building causing damage to the stock of merchandise
situated therein and owned by Frank L. Addy
and Mary P. Addy.
The Addys instituted this action against the appellants
and the respondent to recover for the damage to and
loss of their stock of merchandise, asserting that such fire
was due to their joint and concurrent negligent, careless
and reckless acts.
[**709] The appellants, by their answer, alleged
that the fire and the damage resulting therefrom was
caused by the sole negligence of the respondent. The
appellants also filed a cross action against the respondent
demanding judgment in an amount equal to any judgment
which may be rendered against them in favor of the
Addys, together with the costs of the action and attorney
fees for defending such. The respondent answered the
cross action and denied any liability [*32] to the appellants
and interposed [***5] a counterclaim demanding
judgment against them in an amount equal to any
judgment obtained against it by the Addys.

This case came on for trial before the Honorable
James Hugh McFaddin, presiding judge, and a jury, at
the 1967 Term of the Court of Common Pleas for
Greenwood County. At the close of all the testimony,
the trial judge directed a verdict against the appellants on
their cross action and the respondent on its counterclaim.
The jury returned a verdict in the amount of $ 18,000.00
actual damages against the respondent, thus exonerating
the appellants of any liability. The appellants moved for
a directed verdict, for judgment non obstante veredicto,
and in the alternative, for a new trial on their cross action
against the respondent. These motions were refused and
this appeal followed.
There was no written contract between the appellants
and the respondent for the making of the repairs to
the building, nor does this record reveal any express
agreement on the part of the respondent to hold the appellants
harmless from any and all claims for damages to
persons or property arising out of or in any way connected
with the repairs to the building. However, the
appellants [***6] contend that even though there was
no express contract of indemnity between themselves
and the respondent, under the facts of this case such a
contract was created by operation of law and under such
an implied contract of indemnity they are entitled to recover
from the respondent the fees paid their attorneys in
the successful defense of this action. We should point
out in this connection that the jury found the respondent
negligent and awarded damages that have now been paid
by it.
We think this appeal can be disposed of by a determination
of the single question of whether the appellants,
in the absence of an express contract of indemnity, are
entitled to recover their costs and attorneys' fees incurred
in the successful defense of this action under an implied
contract, or because they were put to the necessity of
defending themselves [*33] against the lessees' claim
by the tortious conduct of the contractor, or by his breach
of contract.
Here, the lessors seek to recover from the contractor
the attorneys' fees incurred by them in defending themselves
against the claim asserted by the tenants. The
weight of authority sustains their right of recovery, either
on the theory [***7] of an implied contract to indemnify,
or because they were put to the necessity of defending
themselves against the lessees' claim by the tortious
conduct of the contractor, or by his breach of contract.
We quote the following from 22 Am. Jur. (2d),
Damages, Section 166, Pages 235-236.
"It is generally held that [HN1] where the wrongful
act of the defendant has involved the plaintiff in litigation
with others or placed him in such relation with others
as makes it necessary to incur expense to protect his
257 S.C. 28, *; 183 S.E.2d 708, **;
1971 S.C. LEXIS 207, ***
Page 3
interest, such costs and expenses, including attorneys'
fees, should be treated as the legal consequences of the
original wrongful act and may be recovered as damages.
In order to recover attorneys' fees under this principle,
the plaintiff must show: (1) that the plaintiff had become
involved in a legal dispute either because of a breach of
contract by the defendant or because of defendant's tortious
conduct; (2) that the dispute was with a third party
-- not with the defendant; and (3) that the plaintiff incurred
attorneys' [**710] fees connected with that
dispute. If the attorneys' fees were incurred as a result
of a breach of contract between plaintiff and defendant,
the defendant [***8] will be deemed to have contemplated
that his breach might cause plaintiff to seek legal
services in his dispute with the third party.
* * *
[HN2] "In actions of indemnity, brought where the
duty to indemnify is either implied by law or arises under
a contract, reasonable attorney fees incurred in resisting
the claim indemnified against may be recovered as part
of the damages and expenses. * * *."
[*34] In accord with the foregoing rule, we call
attention to 25 C.J.S. Damages § 50e, p. 787; 42 C.J.S.
Indemnity § 24, p. 602; 41 Am. Jur. (2d), Indemnity,
Section 36, P. 725; 45 A.L.R. (2d) 1183 and 4 A.L.R. (3d)
270.
In the case of Atlantic Coast Line R.R. Co. v. Whetstone,
243 S.C. 61, 132 S.E. (2d) 172, we impliedly recognized
the rule above stated by quoting the following
from N.C. Elec. Power Co. v. French Broad Mfg. Co.,
180 N.C. 597, 105 S.E. 394;
"Ordinarily, [HN3] if one person is compelled to pay
damages because of negligence imputed to him as the
result of a tort committed by another, he may maintain an
action over for indemnity against the person whose
wrong has thus been imputed to him; but this is subject
to the proviso that no personal negligence of his own has
[***9] joined in causing the injury."
Based upon the foregoing authorities we conclude
that in actions of indemnity, brought where the duty to
indemnify is either implied by law or arises under contract,
and no personal fault of the indemnitee has joined
in causing the injury, reasonable attorneys' fees incurred
in resisting the claim indemnified against may be recovered
as part of the damages and expenses.
The judgment of the lower court is reversed and this
case remanded thereto for determination of the amount to
which the appellants are entitled as reasonable attorneys'
fees.
Reversed and remanded.

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PRIOR HISTORY: [***1] FROM THE CIRCUIT
COURT OF THE CITY OF VIRGINIA BEACH.
Clifford R. Weckstein, Judge Designate.
DISPOSITION: Affirmed in part, reversed in part,
modified in part, and final judgment.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant corporate
president appealed a judgment entered in the Circuit
Court of the City of Virginia Beach (Virginia) in favor of
plaintiff limited liability corporation (LLC) in an action
for fraud, breach of fiduciary duty, and breach of contract,
in a case arising out of a real estate financing
scheme.
OVERVIEW: The appellate court considered whether
the LLC introduced evidence to establish that it incurred
damage to the value of its ground lease as a result of the
corporate president's conduct. The corporate president
argued the LLC failed to present evidence that would
permit the jury to conclude that the LLC suffered damage
to its interest in the ground lease as a result of the
corporate president's fraudulent acts. Generally, a person
who acquired property by a commercial transaction and
who had been defrauded by false representations was
entitled to recover as damages the difference between the
actual value of the property at the time the contract was
made and the value the property would have possessed
had the representation been true. However, the LLC
failed to present evidence that would permit the jury to
conclude that it suffered damage because it failed to obtain
clear title to the ground lease in the fall of 1996. The
LLC failed to present evidence of the actual value of the
ground lease that it bargained for - a ground lease which
would have had a clear title - and the value of the ground
lease that it actually received - a ground lease with a
cloud on the title.
264 Va. 81, *; 564 S.E.2d 140, **;
2002 Va. LEXIS 79, ***
LEXSEE 264 VA 81
DILIP R. PATEL v. ANAND, L.L.C.
Record No. 011913
SUPREME COURT OF VIRGINIA
264 Va. 81; 564 S.E.2d 140; 2002 Va. LEXIS 79
June 7, 2002, Decided
Page 1
OUTCOME: The judgment was affirmed in part, reversed
in part, and modified in part.
LexisNexis(R) Headnotes
Contracts Law > Defenses > Fraud & Misrepresentation
[HN1] In a case where a fiduciary withheld information
from its principal which, if disclosed, would have caused
the principal to reject the transaction, the measure of
damages is the difference between the value of the item
bargained for and the value of the item actually received.
Contracts Law > Defenses > Fraud & Misrepresentation
[HN2] Generally, a person who acquired property by
virtue of a commercial transaction and who has been
defrauded by false representations is entitled to recover
as damages the difference between the actual value of the
property at the time the contract was made and the value
that the property would have possessed had the representation
been true.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] A party, required to act in the protection of his
interests by bringing or defending an action against a
third person, may recover attorney's fees incurred in that
action against the original entity or person who breached
a duty owed.
COUNSEL: Christopher B. Mead (James T. Zelloe;
London & Mead; Kunnirickal and Zelloe, on briefs), for
appellant.
Carl W. Isbrandtsen for appellee.
JUDGES: OPINION BY JUSTICE LEROY R. HAS-
SELL, SR.
OPINIONBY: LEROY R. HASSELL, SR.

OPINION: [**141]
[*82] Present: All the Justices
OPINION BY JUSTICE LEROY R. HASSELL,
SR.
I.
In this appeal of a judgment entered in favor of a
plaintiff against a defendant in an action for fraud,
breach of fiduciary duty, and breach of contract, we consider
whether the plaintiff introduced evidence [*83]
to establish that it incurred damage to the value of its
ground lease as a result of the defendant's conduct.
II.
Plaintiff, Anand, L.L.C. (Anand), a Virginia limited
liability corporation, filed its amended motion for judgment
against Clifford Kent Allison, Deep Enterprises,
Inc. (Deep Enterprises), and Dilip R. Patel. Nayan K.
Bhatt and Dinesh K. Bhatt, members of Anand, filed a
separate motion for judgment against Allison, alleging
that he committed acts and/or omissions that constituted
legal malpractice. The circuit court consolidated these
actions and during the first day of a jury trial, Anand and
the Bhatts settled their claims against Deep Enterprises.
[***2]
At the conclusion of the trial, the jury returned a
verdict in favor of Anand against Dilip Patel in the
amount of $ 1,250,000 in damages for actual fraud,
breach of fiduciary duty, and breach of contract. The jury
awarded Anand $ 500,000 in punitive damages against
Dilip Patel, and the court reduced that award to $
350,000 as required by Code § 8.01-38.1. The jury returned
a verdict in favor of the Bhatts against Allison for
$ 52,500 in compensatory damages and $ 100,000 in
punitive damages, and that verdict is not challenged in
this appeal.
Dilip Patel filed a petition for appeal and assigned
error to six different rulings of the circuit court. We
awarded Dilip Patel an appeal limited to one assignment
of error. In spite of this Court's order that limited the
issues in this appeal, Dilip Patel has included in his brief,
under the guise of questions presented, assignments of
error that we specifically rejected. We will not consider
these [**142] so-called questions presented, and we
remind counsel for Dilip Patel of their duty to comply
with this Court's order.
III.
Even though the record in this case is voluminous,
we will only discuss those facts that [***3] are relevant
to the narrow issue presented in this appeal. Deep Enter-
264 Va. 81, *; 564 S.E.2d 140, **;
2002 Va. LEXIS 79, ***
Page 2
prises is a Virginia corporation. When Deep Enterprises
was formed, Dilip Patel, president and director of Deep
Enterprises, owned 50% of its stock. Rajesh Patel, who
also owned 50% of the corporation's stock, was the vice
president, secretary, and a director of the corporation.
Deep Enterprises owned, as its only asset, the right
to purchase a long-term ground lease from the Federal
Deposit Insurance Corporation (FDIC). The ground
lease, recorded among the land records in [*84] the
City of Hampton, permitted the owner of the leasehold
estate to use the land and improvements that are the subjects
of the lease for a term of 99 years. An old hotel,
which had been closed, was situated on the property that
was the subject of the leasehold estate.
In late 1994 or sometime in 1995, Rajesh Patel approached
Allison, who at that time was an attorney licensed
to practice law in this Commonwealth. Rajesh
Patel informed Allison that Rajesh Patel had been the
successful bidder at an auction to purchase a ground
lease from the FDIC. * The ground lease was for a period
of 99 years, with 82 or 83 years remaining on the
lease.
[***4]
* Even though initially the Resolution Trust
Corporation acquired ownership of the ground
lease, the FDIC acquired the Resolution Trust
Corporation's interests.
The FDIC required that Deep Enterprises pay $
918,961 to purchase the ground lease, which included an
$ 80,000 deposit that had been paid and an additional
contingency fund for the removal of asbestos from the
hotel situated on the property. Dilip Patel and Rajesh
Patel, purportedly acting on behalf of Deep Enterprises,
were unable to raise this money and, therefore, Deep
Enterprises undertook numerous dilatory efforts, including
the filing of litigation in a federal district court, to
delay the closing on the ground lease. Ultimately, Deep
Enterprises and the FDIC reached a settlement that required
Deep Enterprises to close on the ground lease
contract on or before June 14, 1996, or it would forfeit
the $ 80,000 deposit.
In the fall of 1995, Deep Enterprises caused two appraisals
to be performed on the property. One appraisal,
referred to as the Copeland appraisal, placed a fair market
value on the property subject to the ground lease at $
2,670,000. Another appraisal established the value of the
same property at $ 500,000.
Colonial Downs, L.L.C., an entity that had constructed
a horse race track in New Kent County, Virginia,
had an interest in the acquisition of the ground lease.

[***5] Gilbert D. Short, Colonial Downs' employee,
made an offer to Deep Enterprises to purchase the
ground lease in November 1995 for $ 1,000,000. Subsequently,
Colonial Downs increased its offer to purchase
the ground lease to $ 1,496,000.
In an effort to secure financing to close on the
ground lease, in November 1995, Deep Enterprises sold
30% of its shares to several English investors for $
300,000. However, in late May 1996, Dilip Patel and
Rajesh Patel were anxious because they were still unable
to raise the capital necessary to purchase the ground
lease, and they [*85] were worried that Deep Enterprises
would forfeit the $ 80,000 deposit. They began to
search frantically for additional investors. At the same
time, Allison, Rajesh Patel, and Dilip Patel participated
in a scheme to deceive the English investors and convinced
them to forward an additional $ 300,000 to Deep
Enterprises under the guise that the money was necessary
to obtain an extension of the June 14, 1996 closing date
from the FDIC. As a part of this scheme, Allison created
a fictitious letter to lead the English investors to believe
that Colonial Downs desired to purchase the ground
lease promptly.
During his search for [***6] additional investors,
Dilip Patel met Dinesh K. Bhatt and Nayan K. Bhatt,
brothers who were physicians in Martinsville, Virginia.
Upon Dilip Patel's directions, Allison forwarded a copy
of the [**143] Copeland appraisal that valued the
ground lease at $ 2,670,000 to Dinesh Bhatt and Nayan
Bhatt.
During several conversations, Dilip Patel made the
following representations to Dinesh Bhatt. The value of
the ground lease was between $ 1,500,000 to $
2,000,000. Colonial Downs was willing to purchase the
ground lease for a price in excess of $ 1,000,000. Dilip
Patel had paid most of a sum of $ 200,000 to the FDIC as
a deposit for a contract to purchase the ground lease.
Dilip Patel would contribute $ 200,000, the Bhatts would
contribute $ 700,000, and the sum of $ 900,000 would be
used by Deep Enterprises to acquire the ground lease.
Deep Enterprises, in turn, would immediately transfer the
property to Dinesh Bhatt, Nayan Bhatt, and Dilip Patel.
Even though the Bhatts had only known Dilip Patel
for about three months, Dilip Patel convinced them to
invest $ 700,000 in the plan to obtain ownership of the
ground lease. Dilip Patel and Allison falsely assured
Dinesh Bhatt that the shareholders of [***7] Deep Enterprises
had unanimously agreed with the decision to
transfer the corporation's interest in the ground lease to
Dinesh Bhatt, Nayan Bhatt, and Dilip Patel. The Bhatts
made their $ 700,000 investment, and the closing occurred
on June 14, 1996. Later, Dilip Patel, acting on
behalf of Deep Enterprises, but without the consent or
264 Va. 81, *; 564 S.E.2d 140, **;
2002 Va. LEXIS 79, ***
Page 3
knowledge of the English minority shareholders, conveyed
Deep Enterprises' interest in the ground lease to
Dinesh Bhatt, Nayan Bhatt, and Dilip Patel. Anand, a
limited liability corporation formed by Dilip Patel and
the Bhatts, acquired the ground lease. Subsequently, the
English investors learned that they had been defrauded
and contacted Dinesh Bhatt, who was unaware of their
involvement or the fraudulent acts of Allison, Rajesh
Patel, and Dilip Patel.
[*86] IV.
Dilip Patel argues that Anand failed to present evidence
that would permit the jury to conclude that Anand
suffered damage to its interest in the ground lease as a
result of Patel's fraudulent acts. Patel contends that
Anand failed to prove any loss between the difference in
the value of the ground lease that it bargained for and the
value of the ground lease that it actually received. Responding,
[***8] Anand asserts that it presented evidence
of the amount it paid for the ground lease, $
900,000, and the amount of offers that prospective purchasers
made for the ground lease. Anand also argues
that it presented evidence regarding the renovation costs
for the hotel on the property and the amount it paid in
lease payments and in franchise and application fees.
Anand also says that it presented evidence of the amount
of mechanic's liens that encumbered the property, as well
as evidence of litigation expenses from a separate lawsuit
that challenged its legal interest in the ground lease.
We stated in Carstensen v. Chrisland Corp., 247 Va.
433, 444, 442 S.E.2d 660, 666-67 (1994), the following
principle that is equally pertinent here:
"In Long & Foster Real Estate, Inc. v. Clay, 231 Va.
170, 343 S.E.2d 297 (1986), we considered the measure
of damages in a case where a fiduciary withheld information
from its principal which, if disclosed, would have
caused the principal to reject the transaction. In that case,
we held that [HN1] the measure of damages is the difference
between the value of the item bargained for and
the value of the item actually received. [***9] Id. at
175-76, 343 S.E.2d at 300-01, cited with approval in,
Duvall, Blackburn, Hale & Downey v. Siddiqui, 243 Va.
494, 498, 416 S.E.2d 448, 450 (1992)."
We applied this principle in Prospect Development Co.
v. Bershader, 258 Va. 75, 91, 515 S.E.2d 291, 300
(1999):
[HN2] "Generally, a person who acquired property
by virtue of a commercial transaction and who has been
defrauded by false representations is entitled to recover
as damages the difference between the actual value of the
property at the time the contract was made and the value

that the property would have possessed had the representation
been true."
[*87] Applying this established principle, we hold
that Anand failed to present evidence that would permit
the jury to conclude that Anand suffered damage because
it failed to [**144] obtain clear title to the ground
lease in the fall of 1996. Anand failed to present evidence
of the actual value of the ground lease that it bargained
for - a ground lease which would have had a clear
title - and the value of the ground lease that it actually
received - a ground lease with a cloud on the title. The
record simply does not contain this [***10] evidence.
Upon our review of the record, we hold that the only
legally cognizable item of compensatory damage that
Anand presented at trial was the sum of $ 23,148.77 that
it incurred in litigation expenses related to a lawsuit that
Deep Enterprises filed against Anand in the Circuit Court
of the City of Hampton. In that lawsuit, Deep Enterprises
challenged Anand's legal interest in the ground lease. We
observe that [HN3] a party, required to act in the protection
of his interests by bringing or defending an action
against a third person, may recover attorney's fees incurred
in that action against the original entity or person
who breached a duty owed, in this instance, Dilip Patel.
Prospect Development Co., 258 Va. 75 at 92, 515 Va.
291 at 301; Fidelity Nat'l Ins. Co. v. Southern Heritage
Ins., 257 Va. 246, 253-54, 512 S.E.2d 553, 557-58
(1999); Owen v. Shelton, 221 Va. 1051, 1055-56, 277
S.E.2d 189, 192 (1981); Hiss v. Friedberg, 201 Va. 572,
577-78, 112 S.E.2d 871, 875-76 (1960); see Restatement
(Second) of Torts § 914 (1977). And, we note that Dilip
Patel did not challenge this element of damage in the
circuit court. [***11]
264 Va. 81, *; 564 S.E.2d 140, **;
2002 Va. LEXIS 79, ***
Page 4
Anand contends, however, that it incurred the following
compensable damages as a result of Dilip Patel's
acts: costs incurred in the renovation of the hotel, the
costs of the ground lease payments, the costs associated
with franchise and application fees for the hotel, and the
costs of mechanic's liens that encumbered the property.
We disagree. Anand failed to establish that Dilip Patel's
actions were a proximate cause of these costs. See
Murray v. Hadid, 238 Va. 722, 730-31, 385 S.E.2d 898,
903-04 (1989). For example, Anand incurred costs and
expenses associated with the ground lease payments and
fees, as well as renovation expenses, in its attempt to
develop the hotel. Additionally, the mechanic's liens
were not proximately caused by any act committed by
Dilip Patel.
V.
We will reverse that portion of the judgment that included
damages that are not recoverable and we will
reduce the jury's verdict [*88] of compensatory damages
to $ 23,148.77, and we will enter final judgment in
favor of Anand. We will also enter final judgment in
favor of Anand on the punitive damage award because
that award is not the subject of any assignment of error in
this appeal.
Affirmed [***12] in part,
reversed in part,
modified in part,
and final judgment.

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CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff, real property
buyer, sought review of the judgment of the trial court
(Maine), which denied the buyer's request for attorney's
fees in the buyer's action for malicious interference with
contract against defendant doctor after the doctor tortiously
interfered with the contract for the sale of property
between the buyer and the sellers.
OVERVIEW: The doctor tortiously induced a breach of
the contract between the buyer and the sellers. The buyer
instituted a complaint for injunctions against both the
sellers and the doctor and requested specific performance
of the contract from the sellers. The trial court enjoined
the doctor from any action in interfering with the contract.
Later, the buyer filed a complaint against the doctor
for the malicious interference with the contractual relationship
and sought general and punitive damages. The
trial court ordered judgment in favor of the buyer. The
buyer appealed the referee's error in disallowing attorney's
fees damages but did not appeal the amount
awarded as general damages by the referee. On appeal,
the court found that the doctor was liable for all damages
that were the natural and probable consequences of his
actions. The court found that the buyer's attorney's fees
that were incurred were the result of litigation instituted
against the sellers for specific performance of the contract
and against the surgeon for injunctive relief. The
court affirmed the trial court's judgment because the fees
were not recognized as compensable damages.
OUTCOME: The court affirmed the trial court's judgment,
which held that the buyer was not entitled to recover
attorney's fees from the doctor.
LexisNexis(R) Headnotes
Torts > Business & Employment Torts > Interference
With a Contract
271 A.2d 634, *; 1970 Me. LEXIS 323, **
LEXSEE 271 A2D 634
Lionel A. GAGNON v. Raphael TURGEON, M.D.
[NO NUMBER IN ORIGINAL]
Supreme Judicial Court of Maine
271 A.2d 634; 1970 Me. LEXIS 323
December 8, 1970
Page 1
Contracts Law > Remedies > Punitive Damages
[HN1] It is now well established in Maine when one, for
the indirect purpose of benefiting himself at the expense
of the plaintiff, induces a third party by fraud or intimidation
to breach a contract with the plaintiff, he is liable
in damages for such injuries as naturally result therefrom.
Torts > Business & Employment Torts > Interference
With a Contract
Contracts Law > Remedies > Punitive Damages
[HN2] Where the wrongful act of a defendant has involved
the plaintiff in litigation with others, or placed
him in such relation to others as makes it necessary for
him to incur expense to protect his interest, such costs
and expenses, including attorneys' fees, must be treated
as the legal consequence of a wrongful action and may
be recovered as damages. But the rule does not apply to
attorneys' fees incurred in litigation between persons in
privy to the contract agreement or events through which
the litigation arises.
COUNSEL: [**1]
Reef & Mooers by Norman S. Reef, Portland, for
plaintiff.
Hyman Jacobson, Portland, for defendant.
JUDGES:
Dufresne, C.J., and Weatherbee and Pomeroy, JJ.
Marden, J., sat at argument but retired before decision.
Webber, J., did not sit.
OPINIONBY:
POMEROY
OPINION:
[*634] Lionel Gagnon had a valid contract with
Geneva Haskell and Edith Haskell for the purchase of
their property in Westbrook. Doctor Turgeon tortiously

induced a breach of that contract. On April 29, 1964,
Gagnon instituted a complaint for preliminary and permanent
injunction against both Haskells and defendant
Turgeon and prayed for judgment of specific performance
against defendants Haskell. No claim for money
damages was asserted in this suit.
A temporary restraining order was issued on motion.
All the defendants filed answers. Hearing was had on
the complaint and on September 22, 1964, a Single Justice
of the Supreme Judicial Court sitting in the Superior
Court enjoined Turgeon from undertaking any action for
the purpose of receiving from the Haskells their real estate
located at the intersection of Bridge Street and Pierce
Street in Westbrook and ordering specific performance
of the contract to sell by the [*635] [**2] Haskells.
No appeal was taken from this judgment.
On March 16, 1965, plaintiff Gagnon filed a complaint
against Turgeon alleging malicious interference by
Turgeon with the contractual relationship which existed
between Gagnon and the Haskells as a result of the purchase
and sale agreement litigated in 1964. The complaint
sought judgment against the defendant for the sum
of $2,500.00 general damages and $2,500.00 punitive
damages.
By agreement the complaint was referred to a Referee.
Finding was for the defendant. The Referee's report
was offered for acceptance and after hearing, the
Superior Court Justice who heard the motion refused to
accept it. Instead he ordered judgment for the plaintiff
and referred the cause to the Referee to determine the
plaintiff's damage.
This action resulted in a finding by the Referee of
damages in the sum of $287.74. His report was accepted
by the Justice of the Superior Court on motion. Appeal
was seasonably taken by plaintiff, based on a claim
error was made by the Referee and perpetuated by the
Presiding Justice, in disallowing $2,000.00 damages.
Such sum represented the amount of counsel fees paid by
Gagnon in prosecuting the action against [**3] Haskells
and Turgeon, seeking injunctive relief and specific performance.
No appeal was taken by the defendant from the entry
of judgment against him in the sum of $287.74.
We must deny the appeal.
[HN1] It is now well established in Maine when one,
for the indirect purpose of benefiting himself at the expense
of the plaintiff, induces a third party by fraud or
intimidation to breach a contract with the plaintiff, he is
liable in damages for such injuries as naturally result
therefrom. Perkins v. Pendleton, 90 Me. 166, 38 A. 96.
See also: Taylor v. Pratt, 135 Me. 282, 195 A. 205.
271 A.2d 634, *; 1970 Me. LEXIS 323, **
Page 2
By a judgment, from which no appeal was taken, it
was determined this defendant committed that tort.
As the author of such tortious conduct he is liable
for all such damages as are the natural and probable
consequences of his act. The damages for which he is
answerable, of course, are limited to those which are
recognized in law.
[HN2] Where the wrongful act of a defendant has
involved the plaintiff in litigation with others, or placed
him in such relation to others as makes it necessary for
him to incur expense to protect his interest, such costs
and expenses, including attorneys' fees, must be treated
as the [**4] legal consequence of a wrongful action and
may be recovered as damages. n1 Turner v. Zip Motors,
Inc., (1954) 245 Iowa 1091, 65 N.W.2d 427, 45 A.L.R.2d
1174. Stiles v. Municipal Council of Lowell, 233 Mass.
174, 123 N.E. 615.
n1 This is also the rule of Restatement, Torts
§ 914.
But the rule does not apply to attorneys' fees incurred
in litigation between the plaintiff and the defendant,
n2 Seaboard [*636] Surety Company v. Permacrete
Construction Co., (C.C.A. 3 Pa.), 221 F.2d 366,
Tarnowski v. Resop, 236 Minn. 33, 51 N.W.2d 801, or
persons in privy to the contract agreement or events
through which the litigation arises. Armstrong Construction
Co. v. Thomson, 64 Wash.2d 191, 390 P.2d
976. n3
n2 An excellent statement of the rationale for
the rule is found in Osborn v. Moore, 12 La.Ann.
714, where it is said:
"The very nature of judicial proceedings
presupposes that suitors
will be put to some trouble in defending
and prosecuting suits, but
as a general rule these damages
are, in the eyes of the law, supposed
to be covered by the taxed
costs. It is desirable that courts
of justice should be open to all
men, and that suitors should not
be deferred from pursuing their
rights through fear that they
should be compelled to pay for the
loss of time of their adversary, nor
from using, in good faith, the process
of the court and the means of

[**5]
redress prescribed by law, through
apprehensions that they should be
mulct in vindictive damages, if,
from any unforeseen cause, they
should fail in their action."
See also Kolka v. Jones, 6 N.D. 461, 71 N.W.
558.
n3 See 4 A.L.R.3d 261 with annotation
commencing at 270 for collection of cases relating
to attorneys' fees as damages.
271 A.2d 634, *; 1970 Me. LEXIS 323, **
Page 3
In the instant case the attorneys' fees incurred by the
plaintiff were the result of litigation instituted against the
Haskells for specific performance of a contract of sale,
and Turgeon, this defendant, for injunctive relief. Such
fees, then, are not recognized in law as compensable
damage. The referee was correct in so deciding. The
Single Justice properly accepted his report.
The entry must be,
Appeal denied.
MARDEN, J., sat at argument but retired before decision.
WEBBER, J., did not sit.

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284 Ore. 133, *; 585 P.2d 674, **;
1978 Ore. LEXIS 1216, ***
LEXSEE 284 OR. 133
OSBORNE, Respondent/Cross-Appellant, v. HAY et al, Appellants/Cross-Respondents
PRIOR HISTORY: [***1]
Appeal from Circuit Court, Lane County. William A.
Beckett, Judge. TC No. 75-0684.
DISPOSITION:
Affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendants, real estate
brokerage firm and a salesman, sought review of a decision
by the Circuit Court, Lane County (Oregon), which
returned a verdict in favor of plaintiff purchaser in the
purchaser's action for fraud.
OVERVIEW: The purchaser alleged that the brokerage
firm and the salesman misrepresented the income of a
motel on a data sheet. The lower court returned a verdict
in favor of the purchaser. On appeal, the court affirmed,
holding that the purchaser was previously involved in
foreclosure and rescission litigation with the former
owner of the motel as a result of the fraudulent conduct
of the brokerage firm and the salesman. The purchaser
prevailed in the trial court in her rescission action. The
purchaser at least had substantial grounds for believing
that her rescission suit was appropriate. The purchaser
was entitled to recover the expenses incurred in such
previous litigation with a third party. It followed that the
trial court did not err in allowing the jury to consider the
expenses of the prior litigation as special damages suffered
as a consequence of the purchaser's reliance upon
the truth of the misrepresentations.
OUTCOME: The court affirmed the verdict in favor of
the purchaser.
LexisNexis(R) Headnotes
SC No. 25545
SUPREME COURT OF OREGON, Department Two
284 Ore. 133; 585 P.2d 674; 1978 Ore. LEXIS 1216
September 13, 1978, Argued
October 24, 1978
Page 1
Civil Procedure > Costs & Attorney Fees
[HN1] When one by fraud or other actionable misconduct
makes it necessary for another to bring or defend a
suit, the latter in a new action may recover against the
former the expenses of the earlier litigation.
Torts > Vicarious Liability
[HN2] A person who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover compensation for the reasonably necessary
loss of time, attorney fees and other expenditures
thereby suffered or incurred. This rule applies where the
preceding action was brought either by a third person or
by the state and also where the present plaintiff has been
led by the defendant's tort to take legal proceedings
against a third person.
Civil Procedure > Appeals > Reviewability > Preservation
for Review
[HN3] The court will not ordinarily reverse a trial court
for errors not called to its attention by proper objections
or exceptions.
Real & Personal Property Law > Sales, Exchanges &
Remedies
Evidence > Witnesses > Competency
[HN4] Testimony by an owner of property as to its value
is competent evidence of that fact.
COUNSEL:
Glenn H. Prohaska, of Day, Prohaska & Case, P.C.,
Portland, argued the cause and filed the briefs for appellants/cross-respondents.
Keith Rodman, Eugene, argued the cause and filed a
brief for respondent/cross-appellant.
JUDGES:

Tongue, Justice. Denecke, Chief Justice, and
Bryson and Linde, Justices.
OPINIONBY:
TONGUE
OPINION:
[*135] [**675] This is an action for damages
for fraud brought by the purchaser of a motel against the
real estate brokerage firm, individual broker, and the
salesman who sold it to her. Plaintiff alleges that defendants
misrepresented the income of the motel on a
"data sheet" submitted by them to plaintiff.
The case was tried before a jury, which returned a
verdict in favor of plaintiff and against the real estate
brokerage firm and the salesman for $ 38,000 in general
damages, and $ 21,809.91 in special damages. The jury
also awarded a verdict for $ 30,000 in punitive damages
against the real estate brokerage firm and $ 15,000 in
punitive damages against the salesman. These defendants
appeal from the judgment on that verdict. Plaintiff
cross-appeals [***2] from the granting of an involuntary
nonsuit in favor of the individual broker.
Defendants first contend that:
"The jury was improperly instructed
on the correct measure of damages in a
fraud action. Although the jury was instructed
that the measure of damages was
the difference in the fair market value of
the motel and what the plaintiff paid for it,
i.e., the 'out of pocket' measure of damages,
the jury was also allowed to consider
other rescission-type damages under the
guise of 'special damages' which duplicated
the general damages and in effect
permitted double recovery."
The instructions complained of were as follows:
"The damages which you may consider
are as follows:
"* * * [**676] "(b) Special Damages,
which may include any of the following
items of expenditures;
"First, 'Filing fees, trial fees, hearing
fees and Supreme Court fees: $ 367.68'
"Second, 'Process server's fees: $
127.70'
"Third, 'Witness fees: $ 116.60'
"Fourth, 'Deposition fees: $ 173.50'
284 Ore. 133, *; 585 P.2d 674, **;
1978 Ore. LEXIS 1216, ***
"(5) 'Printing of briefs and copies: $
326.78'
"(6) 'Accountant's fees: $ 2,385.00'
[*136] "(7) 'Attorney's fees: $
7,000.00'
"(8) 'Appellate Court costs: $
2,361.78'
"(9) 'Expenses [***3] of moving
into motel: $ 124.84'
"(10) 'Applied to operation of motel:
$ 2,775.00'
"(11) 'Applied to operation of motel:
$ 1,690.80'
"(12) 'Government employment taxes:
$ 356.62'
"(13) 'Gas and heat: $ 103.61'
"(14) 'Management fees for six and
one-half months: $ 3,900.00'
"* * *
"Now, a copy of this summary of issues
will be given to each member of the
jury when you go in to deliberate.
"* * *
"If you find that the Plaintiff was entitled
to a verdict in this case, then you
should determine the amount of general or
compensatory damages for Plaintiff's loss.
Compensatory damages are measured by
the difference between the purchase price
of the property and its fair market value at
the time of sale.
"If you determine and find general
damages, then you may consider special
damages. Special damages may include
any pecuniary loss suffered as a consequence
of the recipient's reliance upon the
truth of the representation."
Page 2
Defendants' exceptions to these instructions were as
follows:
"THE COURT: Now, exceptions for
the Defendant?"
"MR. PROHASKA: Yes. First of
all, Defendant excepts to the Court giving
of the summary of issues as read by the
Court, passed [***4] to the jury. I think

that in accordance with the new statute, it
is not impartial. It emphasizes the damages,
particularly the special damages,
and I think it is improper.
"Secondly, I would -- Defendants
object to the instruction on the special
damages, pecuniary damages, based on
my prior arguments to the effect I don't
think it is a proper measure of damage in
the case, many of them. The Court has
said I do not need to itemize my objection,
but I may object on the whole to
them, and I understand -- you understand
my argument. I just want to make sure
my record is clear."
[*137] "THE COURT: Then it
should be understood on the record that
that was in reference to all 14?"
"MR. PROHASKA: Yes, the 14
items."
"THE COURT: The exception, without
going to each of the 14 specifically on
the record, will be understood to do so."
(Emphasis added)
Defendants' "prior arguments," to which reference
was made in those exceptions, are:
(1) At the conclusion of the testimony defendants
made the following motion:
"MR. PROHASKA: * * * I would
like to move to strike all of those elements
of damages set forth in the Plaintiff's
complaint in paragraph 13, which [***5]
would have to do with the rescission and
foreclosure suit. We have gone into it in
detail. Your Honor has permitted him,
but I renew my motion to strike those elements
of damage." (Emphasis added)
The items set forth in the court's instructions on special
damages were substantially the same as those alleged
in paragraph 13 of plaintiff's complaint.
(2) During the course of the testimony offered on
behalf of the plaintiff, the following objections were
made by defendants:
"MR. PROHASKA: Your Honor, I
presume maybe I am somewhat premature.
I presume counsel is attempting
now to [**677] show the various costs
that are on the final decree of strict fore-
284 Ore. 133, *; 585 P.2d 674, **;
1978 Ore. LEXIS 1216, ***
closure. These are absolutely irrelevant to
this case. They are not proper measure
of damages. The Plaintiff is the one that
has brought all these lawsuits. She is the
one that caused all the hearings. The
damages in the rescission suit, or the
counterclaim in the rescission suit on the
foreclosure are not a proper element of
damages in this fraud action. The cases
are clear. They aren't, even by any
stretch, consequential damages.
"The proper measure of damage, as I
said time and time again, is the difference
[***6] in the market value of the time of
the sale and the amount it would have
been but for the fraud. And I don't know
how she can -- how counsel thinks that
these are proper elements of damages for
the jury to consider. There is simply no
basis for [*138] it. I don't want to
have to get -- every time a figure is mentioned,
it makes me object every five
minutes, and it is in front of the jury. I
think I would request at least a ruling that
applies to all of these type of damages so I
don't have to object every, every time."
"* * *"
"THE COURT: * * * I have concluded
that, from the pleadings, and the
facts that I have listened to thus far, that I
am going to permit the following: In an
effort to, at least, reach some result in this
case, I am going to ultimately instruct the
jury along the lines -- if it gets to the jury,
let's take that first -- if they find a fraud
that first, as far as the general damages are
concerned, they should apply the
out-of-pocket, or the rule that says that it
should be the difference in the value between
what the person actually did agree
to pay, or pay, as opposed to what the
market value is. I will separately instruct
them that they [***7] can also find
those specific damages that might arise or
result from the fraud, and that is more
specifically contained within paragraph
13 of the supplemental and fourth
amended complaint."
"* * *"
"MR. PROHASKA: Your Honor, just
to make sure I understand your ruling,
you will permit the Plaintiff, or any other
Page 3

witness to testify to the damage alleged in
paragraph 13?"
"THE COURT: That's correct."
(Emphasis added)
I. Expenses of previous litigation.
Defendants contend that plaintiff is not entitled to
recover as special damages those items which represent
the expenses incurred by her in previous litigation.
It will be noted that the first eight items of special
damages submitted to the jury related to such litigation
expenses. These expenses were incurred by plaintiff in
previous unsuccessful litigation with the prior owner of
the motel. See Larkin v. Appleton, 274 Or 671, 548 P2d
499 (1976), Larkin being the former name of plaintiff
Genevieve Osborne.
[*139] The litigation in Larkin was precipitated
by plaintiff's failure to make a monthly payment on the
motel after discovering the discrepancies in the income
figures. Two lawsuits [***8] were then filed. Appleton,
the seller, filed a suit for foreclosure against plaintiff.
Plaintiff sued Appleton for rescission of the contract
of sale. Upon learning of plaintiff's suit, Appleton
dismissed her complaint and counterclaimed for foreclosure
in the rescission suit.
Plaintiff's theory at trial of that case was that rescission
was justified either because O'Byrne (the defendant
salesman here) acted as the agent of Appleton in making
the misrepresentations of the motel's income, or because
Appleton ratified O'Byrne's conduct by retention of the
proceeds of the sale.
The trial court concluded:
"Jean Appleton * * * benefited economically
from the deceptions of O'Byrne.
"In equity, Jean Appleton * * * cannot
retain these benefits.
"Genevieve Larkin is entitled to rescission.
* * *."
[**678] On appeal, we reversed. After concluding
that O'Byrne was not acting as the agent of Appleton in
making the misrepresentations, and in considering plaintiff's
contention of ratification (at 677), we noted that:
"* * * Retention will not constitute a
ratification if the principal has changed
her position before becoming aware of all
the relevant facts."
284 Ore. 133, *; 585 P.2d 674, **;
1978 Ore. LEXIS 1216, ***
[***9]
and (at 679) that:
"In the present case, Mrs. Appleton
substantially changed her position before
she learned of O'Byrne's misrepresentations."
Page 4
The "change of position" arose primarily from the fact
that Mrs. Appleton received little, if any, of the $ 36,000
paid by plaintiff on the contract, but merely passed it on
to other parties. As a result, it would have been difficult,
if not impossible, for the "status quo" to [*140]
be restored by a rescission of the sale, as then sought by
plaintiff.
Under these circumstances this court concluded (at
681) as follows:
"Neither plaintiff nor Mrs. Appleton
were personally at fault in this transaction.
However, if the evidence was only that
Mrs. Appleton received substantial benefit
from the fraud of O'Byrne, plaintiff
should prevail. This rule '* * * is based
upon the equitable principle that one
should not benefit from the fraud of another,
at least when the other is, or purports
to be, his agent.' Restatement (Second)
Agency, 564, § 259.
"However, when Mrs. Appleton
changed her position before learning of
O'Byrne's misrepresentation, the equities
shifted. Now it is impossible to place the
parties in [***10] the position they were
in before they entered into the transaction.
If Mrs. Appleton is required to make restitution
to plaintiff, Mrs. Appleton will be
substantially damaged. If plaintiff does
not secure restitution, she will be substantially
damaged. In such circumstances
the law will not intrude to favor either innocent
party."
On remand, a decree of foreclosure was entered on
behalf of Appleton against plaintiff. Plaintiff was apparently
unable to redeem within the period allowed by
the decree. She then filed her complaint in this case.
In Huffstutter v. Lind, 250 Or 295, 301, 442 P2d 227
(1968), we held that:

"* * * [A]ttorney fees are generally
allowable as damages in an action against
a defendant where the defendant's tortious
or wrongful conduct involved the plaintiff
in prior litigation with a third party.
Prentice v. North American Title Guaranty
Corp., Alameda Division, 30 Cal
Rptr 821, 381 P2d 645 (1963); McCormick,
Damages, 247 § 67 (1935); Restatement,
Torts, 591, § 914 (1939). * *
*" (Emphasis added)
In McCormick, Damages, 247, § 67 (1935), cited
with approval in Huffstutter, the following rule is stated:
[HN1] "When one [***11] by fraud
or other actionable misconduct makes it
necessary for another to bring or defend a
suit, [*141] the latter in a new action
may recover against the former the expenses
of the earlier litigation."
McCormick goes on to comment (at 247):
"Fraud is a frequent source of liability
for expenses of litigation. A life insurance
company's agents secured premium
notes from plaintiff by fraudulent statements
falsely describing the policy to be
issued, and the company transferred the
notes to a good-faith holder who sued on
the notes. Plaintiff, having substantial
grounds for believing that the transferee
had conspired with the company to perpetrate
the fraud, defended that suit and lost.
He was allowed to recover the attorney's
fee and expenses incurred in that defense.
* * *" Citing McOsker v. Federal Ins.
Co., 115 Kan. 626, 224 P 53 (1924).
(Emphasis added)
[**679] See also Restatement of Torts 591, § 914
and Comment a (1939), n1 and Annot., 45 ALR2d 1183
(1956). n2
n1 Restatement of Torts 591, § 914 (1939),
states as follows:
[HN2] "A person who through
the tort of another has been required
to act in the protection of
284 Ore. 133, *; 585 P.2d 674, **;
1978 Ore. LEXIS 1216, ***
[***12]
his interests by bringing or defending
an action against a third
person is entitled to recover compensation
for the reasonably necessary
loss of time, attorney fees
and other expenditures thereby
suffered or incurred."
Comment a states that:
"The rule stated in this Section
applies where the preceding
action was brought either by a
third person or by the State and
also where the present plaintiff has
been led by the defendant's tort to
take legal proceedings against a
third person. * * *"
Page 5
n2 Two of the cases cited in the annotation
deserve mention. In Turner v. Zip Motors, 245
Iowa 1091, 65 NW2d 427, 433 (1954), the Supreme
Court of Iowa stated the rule as follows:
"* * * It matters not whether
the litigation with the third party
was prosecuted or defended; the
only qualifications are that it must
have been caused by a tortious act
or breach of contract of the defendant
in the suit for recovery of
fees or other proper expenses and
must have been conducted in good
faith and with reasonable ground
for belief in a successful outcome.
* * *"
In Bergquist v. Kreidler, 158 Minn 187, 196 NW
964 (1924), the Supreme Court of Minnesota held
(at 966) as follows:
"* * * That litigation constituted
a reasonable effort to avoid
or minimize the consequence of
defendant's act. 8 R.C.L. 496.
True, the object of that litigation
was not accomplished. That it
was ineffectual, under the circumstances,
is not persuasive of a contrary
result. 17 C.J. 806. If such
expenditures are 'judicious and

[***13]
made in good faith' they may be
'recoverable, though abortive.' * *
*"
[*142] This plaintiff was previously "involved" in
foreclosure and rescission litigation with the former
owner of the motel as a result of defendants' fraudulent
conduct. Plaintiff prevailed in the trial court in her rescission
suit, and might well have prevailed in this court
as well if the defendant Appleton had not "passed on" to
others most, if not all, of the money received from plaintiff.
Certainly, plaintiff at least had "substantial grounds
for believing" that her rescission suit was appropriate.
As a result of that litigation, however, plaintiff was required
to pay the costs and attorney fees, among other
things, incurred by defendant Appleton in that litigation,
totaling in excess of $ 9,361.78. This represents the
bulk of the $ 12,859.04 sought by plaintiff as the total of
the expenses incurred by her in that prior litigation with
Mrs. Appleton. The remaining $ 3,497.26 included filing
fees and other costs (other than attorney fees) incurred
directly by plaintiff in that litigation. In defendants'
objections, however, no such distinction was made
and the objection was to the allowance of all items of
special damages which "have to do with the rescission
and foreclosure [***14] suit."
We hold that under these facts the plaintiff was entitled
to recover the expenses incurred in such previous
litigation with a third party. It follows that the trial court
did not err in allowing the jury to consider the expenses
of the prior litigation as special damages "suffered as a
consequence" of plaintiff's reliance upon the truth of the
misrepresentations.
II. Expenses incurred in operation of motel.
Defendants also contend on this appeal that plaintiff
is not entitled to recover for the remaining six items of
special damages, which consist primarily of expenses
incurred in the operation of the motel, plus "management
fees" for the period during which plaintiff was in possession
of the motel and that to allow recovery of such items
is, in effect, to allow a "double recovery."
[*143] On the other hand, it may be that such expense
were consequential damages resulting from defendant's
fraud and, as such, were recoverable in addition
to general damages for the difference between the price
paid by plaintiff for the motel and its actual market value.
See McCormick on Damages 458-459, § 122
(1935).
We do not undertake to decide in this case whether
[***15] or not the trial court erred in submitting to the
284 Ore. 133, *; 585 P.2d 674, **;
1978 Ore. LEXIS 1216, ***
Page 6
jury plaintiff's claim for recovery of such expenses because
defendants failed to make a proper objection to the
submission of plaintiff's claim for these six items of special
damages.
As previously noted, the exception by defendants'
counsel to these instructions by [**680] the trial court
was that "based on my prior arguments to the effect I
don't think it is a proper measure of damage in the case,
many of them." As also previously noted, the only "prior
arguments" quoted in defendants' assignments of error
relate to "those elements of damages set forth in the
Plaintiff's complaint in paragraph 13, which would have
to do with the rescission and foreclosure suit" and were
that "[t]he damages in the rescission suit, or the counterclaim
in the rescission suit on the foreclosure are not a
proper element of damages * * *."
Defendants did not, however, make any specific or
proper objection at the time of trial to evidence relating
to any of the other items of special damages as alleged in
plaintiff's complaint or to the submission to the jury of
plaintiff's claim for recovery of such items.
We have repeatedly said that [***16] [HN3] we
will not ordinarily reverse a trial court for errors not
called to its attention by proper objections or exceptions.
Harley-Davidson v. Markley, 279 Or 361, 371-372, 568
P2d 1359 (1977); Lundquist v. West, 248 Or 494, 499,
430 P2d 1013, 435 P2d 309 (1968); and Jones v. Mitchell
Bros., 266 Or 513, 523, 511 P2d 347, 514 P2d 350
(1973), and cases cited therein. On this state of the
[*144] record, we decline to reverse the trial court for
its submission to the jury of the last six items of plaintiff's
claim for special damages.
III. Other assignments of error.
Defendants also assign as error the overruling of defendants'
motion for a directed verdict upon the ground
that by filing a previous suit to rescind the sale plaintiff
had made a binding election of remedies and, as a result,
could not bring an action for damages against these defendants.
When, however, it develops that the remedy
first attempted is not available to the plaintiff, he is not
barred from then seeking another remedy which may be
available to him. Andrysek v. Andrysek, 280 Or 61, 72,
569 P2d 615 (1978); Johnson v. Dave's Auto Center, 257
Or 34, 40, 476 P2d 190 (1970); [***17] Payne v.
Griffin, 239 Or 91, 95, 396 P2d 573 (1964), and cases
cited therein. n3
n3 This is not a case in which it is contended
that a plaintiff who sued one party on one theory
is not barred by an election of remedies from then
suing another party on another theory. In this

case the previous suit for rescission also named
as defendants the same parties named as defendants
in this case, although the former owner of
the motel was also a defendant in that case.
Defendants next assign as error the denial of their
motion for directed verdict on the further ground that the
only testimony of the market value of the motel was that
of the plaintiff, and that her opinion was not competent
evidence as expert testimony was required. Plaintiff's
testimony that, in her opinion, the actual market value of
the motel was only $ 125,000 was received without objection.
Regardless of the absence of an objection,
however, this court has held that [HN4] testimony by an
owner of property as to its value is competent evidence
[***18] of that fact. Moss v. Peoples Calif. Co., 134
Or 227, 237, 293 P 606 (1930); Hanns v. Friedly, 181
Or 631, 641, 184 P2d 855 (1947). See also Lewis v.
Worldwide Imports, Inc., 238 Or 580, 584, 395 P2d 922
(1964). Defendants ask that we reconsider and overrule
these decisions, as applied to commercial real property,
citing Freedman v. Cholick, 233 Or 569, 577, [*145]
379 P2d 575 (1963), in which that rule was criticized.
Assuming, but not deciding, that such a rule may be of
questionable validity, we do not consider this to be a
proper case in which to reconsider that rule. n4
n4 Defendants also complain that "plaintiff's
change of pleading to conform to the proof did
not permit the defendants an opportunity to present
an expert to dispute plaintiff." Defendants do
not, however, assign as error the ruling of the trial
court permitting plaintiff to amend its complaint
to conform to the proof.
Defendants' final assignment of error is that the trial
court erred in denying their motion for a [***19] mistrial
based upon the emotional breakdown of plaintiff on
the witness stand. As previously held by this court, the
284 Ore. 133, *; 585 P.2d 674, **;
1978 Ore. LEXIS 1216, ***
Page 7
consideration of such motions involves matters peculiarly
within the discretion of the trial court. See DeSpain
v. [**681] Bohlke, 259 Or 320, 323-324, 486 P2d 545
(1971), and Hays v. Herman, 213 Or 140, 145, 322 P2d
119 (1958) (overruled on other grounds in Maulding v.
Clackamas County, 278 Or 359, 365, 563 P2d 731
(1977)). In our opinion, the trial court did not abuse its
discretion in denying defendants' motion for a mistrial in
this case.
IV. The cross-appeal.
As previously stated, plaintiff has cross-appealed
from the granting of an involuntary nonsuit in favor of
defendant Bill Hay, the individual real estate broker.
Bill Hay is the owner of Bill Hay, Inc., the real estate
brokerage firm which was the employer of defendant
O'Byrne, the salesman who made the representations
claimed by the plaintiff to be false and fraudulent. Plaintiff
concedes that there was not "sufficient evidence that
[defendant] Bill Hay had guilty, personal knowledge of
the false figures" on the data sheet which is the basis for
plaintiff's claim of fraud, [***20] but contends that
"there was respectable and substantial evidence from
which the jury could have found Hay reckless." As contended
by defendants, however, in order to hold the officer
of a corporation personally liable for fraud by an
agent or employee of the corporation it is necessary to
show that the officer [*146] had knowledge of the
fraud, either actual or imputed, or that he personally participated
in the fraud. See McFarland v. Carlsbad Sanitorium
Co., 68 Or 530, 536-537, 137 P 209 (1914), and
Hoff v. Peninsula Drainage Dist., 172 Or 630, 643, 143
P2d 471 (1943). Plaintiff points to no such evidence in
this case. It follows that plaintiff's cross-appeal is
without merit.
For the reasons previously stated, we hold that the
trial court did not err with respect to any of the various
assignments of error.
Affirmed.

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289 Ark. 159, *; 711 S.W.2d 447, **;
1986 Ark. LEXIS 1930, ***
LEXSEE 289 ARK. 159
Tommy LILES and Dave Wisdom HARROD v. Barbara LILES
PRIOR HISTORY: [***1]
Appeal from Cleburne Chancery Court; Bentley Story,
Chancellor by Assignment.
DISPOSITION:
Affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellants, an
ex-husband and an attorney, sought review of an order
from the Cleburne Chancery Court (Arkansas), which set
aside a property settlement and entered a new property
division order for additional money in favor of appellee
ex-wife.
OVERVIEW: Appellants, an ex-husband and an attorney,
challenged an order that set aside a property settlement
and entered a new property division order in favor
of appellee ex-wife. On appeal, the court affirmed and
held that given the showing that appellant attorney was
having appellee's conduct investigated in preparation for
representing appellant ex-husband in a divorce action
while assuring appellee he was her lawyer, the court
could hardly say evidence of fraud on appellant attorney's
part was lacking. As appellant attorney was acting
as agent of appellant ex-husband, appellant ex-husband
was also liable. Finding that equal division of the property,
with one exception, would result in equality of lifestyles
for the parties despite appellee's continuing ability
to engage in her profession and appellant ex-husband's
probable inability to engage in his likewise was fully
supported by the decree. The award of attorney fees was
appropriate on several grounds including discretion in
domestic relations cases and the authority to hold an officer
of the court liable for injury caused by professional
malfeasance.
OUTCOME: The court affirmed an order that set aside
a property settlement and entered a new property divi-
No. 85-252
Supreme Court of Arkansas
289 Ark. 159; 711 S.W.2d 447; 1986 Ark. LEXIS 1930
June 2, 1986, Opinion delivered
Page 1
sion in favor of appellee ex-wife in her case against appellants,
her ex-husband and an attorney. The court held
that appellant attorney's representation that he was appellee's
lawyer when he was investigating appellee on
behalf of appellant ex-husband was fraud. Appellant
ex-husband was liable because appellant attorney was his
agent.
LexisNexis(R) Headnotes
Civil Procedure > Trials > Bench Trials
[HN1] The court affirms the factual determinations of
the chancellor unless they are clearly erroneous. Ark. R.
Civ. P. 52(a).
Business & Corporate Entities > Agency > Duties &
Liabilities > Authorized Acts of Agents
[HN2] A principal is liable for statements by his attorney
or other agent upon matters concerning which he is employed
or held out to be the spokesman of the principal.
Family Law > Divorce, Dissolution & Spousal Support
> Property Distribution > Marital Property
[HN3] All property acquired by either spouse subsequent
to marriage becomes marital property unless it is specifically
excepted by the statute.
Family Law > Divorce, Dissolution & Spousal Support
> Property Distribution
[HN4] See Ark. Code Ann. 34-1214(A)(1).
Real & Personal Property Law > Fraudulent Transfers
[HN5] See Ark. Code Ann. § 68-1308 (Repl. 1979).
Civil Procedure > Jurisdiction > Equity Jurisdiction
Civil Procedure > Jurisdiction > Subject Matter Jurisdiction
> Jurisdiction Over Action
[HN6] The question of subject matter jurisdiction is always
open and may be raised by the court on appeal.
However, the chancery court can, through exercise of the
equity clean-up doctrine, have subject matter jurisdiction

of a related tort claim. Gorchik v. Gorchik, 663 S.W. 2d
941 (1984), is thus overruled.
Civil Procedure > Appeals > Reviewability > Preservation
for Review
Civil Procedure > Jurisdiction > Subject Matter Jurisdiction
> Jurisdiction Over Action
[HN7] When the issue is whether the chancery court has
jurisdiction because the plaintiff lacks an adequate remedy
at law, the court will not allow it to be raised for the
first time on appeal. Only when the court of equity is
"wholly incompetent" to consider the matter before it
will the court permit the issue of competency to be raised
for the first time on appeal. Unless the chancery court
has no tenable nexus whatever to the claim in question
the court will consider the matter of whether the claim
should have been heard there to be one of propriety rather
than one of subject matter jurisdiction. The court
will not raise the issue itself, and will not permit a party
to raise it unless it was raised in the trial court.
Civil Procedure > Jurisdiction > Subject Matter Jurisdiction
> Jurisdiction Over Action
[HN8] Where the exclusive jurisdiction to adjudicate a
matter is placed by the constitution or by statute in some
other court, such as probate matters in the probate court
or bastardy proceedings in the county court, the question
of subject matter jurisdiction may not be waived and the
chancery court is totally without power.
Torts > Damages > Costs & Attorney Fees
[HN9] A litigant may not recover an attorney fee in a tort
action unless it is authorized specifically by statute or
rule of court.
Torts > Damages > Costs & Attorney Fees
[HN10] One who through the tort of another is required
to act in the protection of his interests by bringing or
defending an action against a third person is entitled to
recover reasonable compensation for loss of time, attorney
fees and other expenditures thereby suffered or incurred
in the earlier action.
Civil Procedure > Appeals > Costs & Attorney Fees
Estate, Gift & Trust Law > Trusts > Trustee Duties &
Powers
[HN11] When an action is brought successfully against a
trustee for breach of his trust, the award of an attorney's
fee to the plaintiff is proper.
COUNSEL:
Junius Bracy Cross, Jr., and Deborah Davis Cross,
for appellant Tommy Liles.
289 Ark. 159, *; 711 S.W.2d 447, **;
1986 Ark. LEXIS 1930, ***
Page 2
Wright, Lindsey & Jennings, for appellant Dave
Wilson Harrod.
Thomas, House & Smith, by: Douglas House, for
appellee.
JUDGES:
David Newbern, Justice. Purtle, J., not participating.
OPINIONBY:
NEWBERN
OPINION:
[*162] [**448] This case involves an action by
a former wife, the appellee, Barbara Liles, to set aside a
property settlement into which she had entered with her
former husband, the appellant, Tommy Liles, in contemplation
of divorce. She sued to set aside the agreement
and to recover her expenses related to the action, including
her attorney's fee. The chancellor set aside the
property settlement and entered a new property division
order. He awarded Barbara Liles an additional amount
of money, which he characterized as both damages and
an attorney's fee, [***7] jointly and severally against
Tommy Liles and attorney Dave Wisdom Harrod, the
other appellant, whose fraudulent conduct the chancellor
determined to have been responsible for the improperly
induced agreement. Both of these remedies were appropriate,
and we affirm.
The following is a summary of the facts as found by
the chancellor: Barbara and Tommy Liles were married
in 1970. She had two children from a previous marriage.
In 1976 Barbara engaged Dave Wisdom Harrod to
represent her in divorce proceedings against Tommy. A
divorce was granted. Barbara and Tommy reconciled,
and the divorce was annulled in 1977.
In 1978, Tommy was injured while working for an
off-shore oil driller, Rowan Drilling Co. His personal
injury claim was covered by the Jones Act, 42 U.S.C. §
688. He and Barbara consulted Harrod about Tommy's
possible personal injury remedies, and they were told by
Harrod of the expertise of a Texas attorney, Benton
Musslewhite, in Jones Act litigation. Harrod [*163]
and Musslewhite associated to bring a claim against Rowan
on behalf of Tommy. When the claim was filed in
the U. S. District Court in Texas, Tommy's workers'
compensation payments ceased, and Musslewhite [***8]
loaned [**449] $ 500 to the Liles. Later, Barbara
learned of the involvement of Newton Schwartz, another
Texas lawyer, when Musslewhite wrote Harrod about
splitting the prospective attorney fee with Schwartz.

Tommy's Jones Act claim against Rowan resulted in
a judgment in Tommy's favor of 2.5 million dollars.
Although it was not stated by the chancellor in his findings,
it is undisputed that Aetna Insurance Co., Rowan's
carrier which handled the litigation, threatened to appeal.
On May 2, 1981, a structured settlement agreement was
reached. The settlement required Aetna to pay Tommy
a lump sum of $ 400,000; $ 2,000 per month for life with
a thirty-year guarantee beginning June 1, 1981; $ 65,000
on June 1, 1986; and $ 35,000 every five years from June
1, 1991 through 2001. The monthly and incremental
lump sum payments were to be made to Harrod as trustee
of the Tommy R. Liles trust.
Returning to the facts found by the chancellor: Marital
problems between Barbara and Tommy arose during
the negotiations with Aetna. Tommy, Harrod, and
Bryce Marler, a private investigator and former bail
bondsman, were making plans to set up a company
called Southern Investment Corporation. [***9] A
purpose of the business was to be the financing of Jones
Act litigation on behalf of injured employees of off-shore
drilling companies. Tommy was to have an airplane so
he could fly up and down the coastal area looking for
potential claimants. Barbara's objection to this scheme
led to further marital difficulties. Barbara decided to
seek a legal separation, and she and Tommy went together
to Harrod's office where Harrod prepared a separation
agreement. Barbara and Tommy again reconciled,
and she accompanied him to Houston, Texas,
where they signed the settlement documents on or about
May 2, 1981.
On May 8, 1981, Tommy was staying at a lake cabin,
away from the marital home in Drasco, Arkansas,
because he was upset over Barbara's objection to the
Southern Investment Corporation plan. On May 10,
1981, Tommy appeared at the house and ran Barbara
away, threatening her with a shovel. Barbara went to a
[*164] nearby store. Harrod appeared there and instructed
Barbara to come to his office the following day.
Barbara spent all day May 11, 1981, in Harrod's office.
She asked him what her rights would be in the
event of a divorce. Harrod told her what Tommy would
give her. [***10] She understood Harrod to be representing
her. Harrod told her that he was her attorney
and would take care of her. He telephoned Tommy
several times that day and ultimately prepared an addendum
to the trust, a property settlement agreement, and an
entry of appearance, all of which were signed by Barbara.
The trust addendum contained a clause stating that if
any party challenged the trust he or she would forfeit his
or her interest in the proceeds. Harrod told Barbara that
the addendum was not valid unless filed and that it
would not be filed unless it was necessary to protect her
interest.
289 Ark. 159, *; 711 S.W.2d 447, **;
1986 Ark. LEXIS 1930, ***
Page 3
As Barbara left Harrod's office on May 11, 1981,
Harrod informed her he would no longer represent her
but would be representing Tommy. He filed Tommy's
divorce petition. Even prior to the May 11, 1981, discussion
between Barbara and Harrod, Harrod had hired
Marler to investigate Barbara's "drug habits" in contemplation
of a contested divorce proceeding. Marler sent
Harrod a bill, dated May 7, 1981, in the amount of $
1,575 for those services.
On June 12, 1981, Barbara returned to Harrod's office
and asked him to delay the divorce. He replied he
could not do so. The divorce was entered [***11] on
June 15, 1981.
The trust addendum named Harrod as trustee. It
was his duty to distribute the $ 2,000 monthly payments
from Aetna. He did so for some five months until he
resigned and appointed Barbara's daughter from her previous
marriage as trustee. The daughter had married
Tommy after Barbara and Tommy were divorced.
Other undisputed facts are that the trust monies were
to be distributed among Barbara, Tommy, and the attorneys
to cover their fee percentage of the award, and
Harrod [**450] was to withhold $ 80 per month as a
fee for handling the trust funds. During the five months
he acted as trustee, Harrod failed to account for $ 20 per
month or $ 100.
[*165] It is also undisputed that of the $ 400,000
initial payment to Tommy from Aetna, the attorneys
were paid $ 355,542.63. Tommy later petitioned the
federal court for a reduction in the amount approved to
be paid to the attorneys, and $ 114,800.43 was remitted
to him. The remission occurred after the divorce.
Harrod charged a $ 10,000 fee for representing
Tommy in the uncontested divorce. Barbara and her son,
James Ezell, testified that when they asked Harrod why
the fee was so high he said it represented [***12] not
only the divorce, which Tommy "could afford," but other
services previously rendered to Tommy and Barbara.
The chancellor reached the following conclusions of
law:
1. On May 11, 1981, Dave Harrod owed a
fiduciary duty to Barbara Liles to represent
and protect her interests in the divorce
action against Tommy Liles.
2. Harrod breached his fiduciary duty to
Barbara Liles by entering into a conspiracy
with Tommy Liles to defraud Barbara
Liles of her marital assets. Specific evi-

dence of fraud includes the following
acts:
(a) Harrod and Tommy
Liles established an attorney-client
relationship before
May 11, 1981
(b) David Harrod attempted
to secure evidence of
drug abuse by Barbara
Liles
(c) Tommy Liles and Harrod
permitted Harrod to
represent Barbara Liles
when both knew that she
trusted and relied upon
Harrod's judgment and advice
(d) Neither Tommy Liles
nor Harrod advised Barbara
Liles of Harrod's representation
of Tommy Liles
in the divorce proceeding
until after the execution of
documents on May 11,
1981
3. Because of the conduct of Tommy
Liles and Harrod, Barbara Liles was not
properly represented in the divorce action
and did not receive [***13] nor have an
opportunity to receive proper consultation
as to her rights in the [*166] proceeding.
4. As a result of the conspiracy to defraud
Barbara Liles of her marital assets, the
property settlement agreement of May 11,
1981, shall be set aside and the marital
property shall be returned to the marital
corpus and distributed in accordance with
the Court's final judgment and decree of
this date.
5. [Here the court discussed the condition
of the parties in the light of the factors
listed in Ark. Stat. Ann. § 34-1214(A)(1)
(Supp. 1985)]
289 Ark. 159, *; 711 S.W.2d 447, **;
1986 Ark. LEXIS 1930, ***
6. For the reasons set forth in paragraph 5
above, the marital corpus shall be divided
equally, except as stated below. The
corpus shall include all proceeds from the
Rowan settlement, including the remitted
attorneys' fees and expenses; all real
property owned by the parties as of May
11, 1981; and all personal property except
personal items, mementos, effects and
clothing, these items being the personal
property of the respective party. In addition
to his personal items, Tommy Liles
shall be credited $ 10,000 as a set-off for
future medical expenses and shall be
credited $ 6,928.63 as a set-off for
amounts paid on behalf of [***14] Barbara
Liles and/or payments of marital
debts since May 11, 1981.
7. The "in terrorem" clause in the addendum
to the trust agreement shall be set
aside because of the conspiratorial and
fraudulent acts of Tommy Liles and Harrod.
8. A court of equity cannot award punitive
damages and, therefore, the punitive
damages claim of Barbara Liles shall be
dismissed.
9. Harrod was not negligent in failing to
calculate the amount of attorneys' fees and
expenses that should have been paid from
the initial $ 400,000 lump sum settlement
payment.
10. Harrod and Tommy Liles did not
commit fraud or enter into a conspiracy
with the intent to defraud Barbara Liles of
her marital assets by consenting to
[**451] the structured settlement on
May 2, 1981.
[*167] 11. Because of his dual representation
and fraudulent conduct, Harrod
shall be required to return to the marital
corpus the $ 10,000 fee he received for
preparing the property settlement agreement,
addendum to trust, and entry of appearance.
12. Because he did not account for $ 20 a
month in disbursed trust proceeds, Harrod
shall be required to return $ 100 to the
marital corpus.
Page 4

13. As a proximate result [***15] of
Tommy Liles and Harrod's conspiratorial
and fraudulent acts, Barbara Liles has
sustained compensatory damages in an
amount equal to her attorney's fees, costs
and expenses in litigating this action.
The court finds that the reasonable
amount of Barbara Liles' fees, costs and
expenses is $ 31,318.09.
14. These findings of fact and conclusions
of law shall be incorporated by reference
into the Court's final judgment and decree
of this date.
1. Tommy Liles's Appeal
Tommy contends the evidence was insufficient to
support the chancellor's finding of fraud by him or Harrod
in the procurement of the property settlement agreement.
He contends it was thus error to set aside the earlier
decree which incorporated the agreement. He also
contends reversal is in order because neither the Jones
Act award, to the extent it represents reparation for a loss
of Tommy's physical health, nor the remitted attorney's
fee is marital property. Even if they are marital property,
he argues, the virtually equal division was inequitable.
He also contends it was error for the chancellor not to
have upheld the forfeiture clause in the trust addendum.
a. Evidence of Fraud
[1] The [***16] appellant, Tommy Liles, misperceives
the standard of review on this issue. [HN1] We
affirm the factual determinations of the chancellor unless
they are clearly erroneous. Ark. R. Civ. P. 52(a).
[2, 3] Given the showing that Harrod was having
Barbara's conduct investigated in preparation for representing
Tommy in a divorce action while assuring Barbara
he was her lawyer, we can [*168] hardly say evidence
of fraud on Harrod's part was lacking. As he was
acting as agent of Tommy, Tommy is liable also. W.
Seavy, Agency, § 91 (1964), notes that [HN2] a principal
is liable for statements by his attorney or other agent
upon matters concerning which he is employed or held
out to be the spokesman of the principal. Providence-Wash.
Ins. Co. v. Owens, 207 S.W. 666 (Tex. Civ.
App. 1918); Chamberlin Co. of America v. Mayes, 101
S.E.2d 728 (Ga. App. 1957); Bituminous Cas. Corp. v. J.
B. Forrest & Sons, 209 S.E.2d 6 (Ga. App. 1974). While
Harrod was not being "held out" as Tommy's agent when
the misrepresentations were committed, the chancellor's
finding that Harrod was representing Tommy was certainly
not clearly erroneous.
b. Forfeiture Clause
289 Ark. 159, *; 711 S.W.2d 447, **;
1986 Ark. LEXIS 1930, ***
Page 5
[4] [***17] We will not address the issue of
whether the forfeiture clause in the trust addendum was
valid. The trust addendum was one of the items agreed
to and signed by Barbara in Harrod's office just before he
informed her he was representing Tommy in the divorce.
The appellant correctly notes that we need not consider
the question whether a chancellor may enforce a forfeiture
clause if we affirm the chancellor's finding of fraud
on the part of Tommy Liles.
c. Jones Act Settlement As Marital Property
The appellant, Tommy Liles, contends that, to the
extent the Jones Act award compensates him for injury
resulting in reparations for his personal, physical loss of
his previously healthy body, it does not constitute marital
property. By phrasing his point in this way, he apparently
concedes that, to the extent the award represents losses
other than to Tommy's physical [**452] health, e.g.,
lost wages or medical expenses incurred, it does constitute
marital property.
[5] The appellant contends we should be guided by
our decision in Lowery v. Lowery, 260 Ark. 128, 538
S.W.2d 36 (1976), in which we held that a Jones Act
claim was not "personal property" and thus was [***18]
not subject to division pursuant to the predecessor of the
current Ark. Stat. Ann. § 34-1214 (Supp. 1985). In
Goode v. Goode, 286 Ark. 463, 692 S.W.2d 757 (1985),
we noted that Lowery v. Lowery, supra, no longer governs
with respect to the question whether a personal injury
judgment could [*169] be marital property, as it
was decided long before the landmark case of Day v.
Day, 281 Ark. 261, 663 S.W.2d 719 (1984), where we
emphasized that [HN3] all property acquired by either
spouse subsequent to marriage becomes marital property
unless it is specifically excepted by the statute. Moreover,
in Lowery v. Lowery, supra, we were considering
whether a wholly unliquidated Jones Act claim was subject
to the marital rights of the spouse of the claimant
upon divorce. Here, the claim is liquidated, but part of
the judgment is to be received in the future pursuant to
the structured settlement. The amount to be received
from Aetna is more "liquidated" than was the workers'
compensation claim we held to have been marital property
in Goode v. Goode, supra.
[6, 7] Nor does it concern us that some of the money
comprising the judgment may have been [***19] to
compensate Tommy for the harm to his body, as opposed
to lost wages and medical expenses. We pointed out in
Goode v. Goode, supra, that the chancellor may take into
consideration the health of the parties in dividing marital
property in accordance with the statute. If we were to
hold, as some jurisdictions, see, e.g., Amato v. Amato,
180 N.J. Super. 212, 434 A.2d 639 (1981), that the portion
of a personal injury damages award specifically at-

tributable to pain and suffering and bodily harm is so
personal to the injured person that it may not be considered
marital property, the chancellor would be faced with
parsing a general, personal injury verdict to determine its
parts, an often impossible task. What if the personal
injury judgment occurred some years before the divorce;
could we reasonably expect the chancellor in the divorce
litigation to trace the portion specifically attributable to
other than lost wages and medical expenses? Should we
hold that an accompanying spousal loss of consortium
recovery is personal to the spouse whose right to consortium
was violated and thus not marital property? To do
these things would effectively create another exception
[***20] to add to the list in § 34-1214(A)(1), and we
are not empowered to do so. In Gan v. Gan, 83 Ill. App.
3d 265, 404 N.E.2d 306 (1980), an Illinois court of appeals
was faced with the same question while interpreting
a statute much like § 34-1214. The court said
"[t]he husband's personal injury settlement does not fit
within any of the exceptions to marital property enumerated
in the Act [404 N.E.2d at 309]." Responding to the
husband's argument that his wife was, in effect, being
allowed to take a part of his "being," the [*170] court
said:
We think the husband misreads the purpose
of the statute. It does not declare, in
this case, that the personal injury settlement
proceeds are to be awarded to the
wife, in whole or in part. It provides
merely that those funds are marital property.
[404 N.E.2d at 309.]
d. Remitted Attorney Fees
Several months after the divorce, Tommy sought
and received a remittitur of attorney fees through the U.
S. District Court in which his Jones Act case was tried.
Although we do not have the federal court order before
us, it is clear from the appellant's brief that the fees were
paid out of the judgment. They, therefore, [***21]
were a part of the judgment to which the attorneys were
mistakenly held to have been entitled until Tommy pursued
the remittitur.
[8] In his initial brief, Tommy cited only Lowery v.
Lowery, supra, as his basis for claiming the returned fees
belonged solely [**453] to him. We need not repeat
what we said above with respect to that case. In his
reply brief, Tommy again argues the fees were no more
than a contingent claim during the marriage and not to be
considered marital property, citing our decision in the
first appeal of Potter v. Potter, 280 Ark. 38, 655 S.W.2d
382 (1983). There we held that fees earned by an attorney
during marriage but not collected by him until after
289 Ark. 159, *; 711 S.W.2d 447, **;
1986 Ark. LEXIS 1930, ***
Page 6
divorce were not marital property. Again that opinion
preceded Day v. Day, supra, and was based on cases
overruled by Day v. Day, supra. Given the same situation,
we might now reach a different decision. However,
we need not make that determination in this case because
the fees remitted here were no more than a part of
the Jones Act judgment which the federal court found
should have been awarded to Tommy while he was still
married to Barbara. The chancellor was thus [***22]
correct to include them in the marital property with the
rest of the judgment proceeds.
e. Almost Equal Division
Tommy Liles contends the chancellor abused his
discretion by dividing the assets between him and Barbara
equally. He cites the chancellor's finding that while
Barbara is able to continue working as a nurse, Tommy
may not be able to return to work as a [*171] seaman.
He contends that, to the extent the chancellor considered
Barbara's contribution in nursing Tommy back to health,
it was not a "factor [which] should entitle her to receive
half his income for the rest of his life."
[HN4] Section 34-1214(A)(1) provides, in part:
All marital property shall be distributed
one-half [1/2] to each party unless
the court finds such a division to be inequitable,
in which event the court shall
make some other division that the court
deems equitable taking into consideration
(1) the length of the marriage; (2) age,
health and station in life of the parties; (3)
occupation of the parties; (4) amount and
sources of income; (5) vocational skills;
(6) employability; (7) estate, liabilities
and needs of each party and opportunity
of each for further acquisition of capital
assets [***23] and income; (8) contribution
of each party in acquisition, preservation
or appreciation of marital property,
including services as a homemaker; and
(9) the federal income tax consequences
of the Court's division of property. When
property is divided pursuant to the foregoing
considerations the court must state
its basis and reasons for not dividing the
marital property equally between the parties
and such basis and reasons should be
recited in the order entered in said matter.
The chancellor did not divide the Jones Act award
precisely equally. He allowed $ 10,000 to be set aside
for Tommy's future medical expenses. The chancellor's
excellent and thorough letter opinion included discussion
of each of the statutory factors to be considered upon

unequal division. One of the statements in the opinion
was as follows:
Age, health, and station in life of the
parties: Barbara Liles was 45 years old
and Tommy Liles was 42 years old at the
time of this hearing. The health of both
appears to be average, although Tommy
Liles may be unable to perform some
manual labor because of his injury.
However, he intended to buy and restore
antique cars, invest in grocery stores, and
pilot [***24] an airplane up and down
the U.S. coast in search of similarly injured
seamen. Barbara Liles is a nurse
and apparently has the health to continue
this type of work. The station in life of
both parties has been enhanced by the
[*172] personal injury award and it appears
that both would enjoy the same station
in life with an equitable division of
the settlement.
[9] The chancellor did not abuse his discretion. His
finding that the equal division of the property, with the
one exception noted, would result in equality of lifestyles
for the parties despite Barbara's continuing ability to engage
in her profession and Tommy's probable inability to
engage in his likewise fully supports the decree, and we
will not [**454] disturb it. See Ford v. Ford, 272
Ark. 506, 616 S.W.2d 3 (1981).
2. Dave Harrod's Appeal
Harrod contends the judgment in Barbara's favor in
the amount of her costs and attorney fee must be set
aside because her claim was a deceit action of which the
chancery court lacked subject matter jurisdiction. He also
argues there was no substantial evidence to show his
actions were the proximate cause of any injury suffered
by Barbara and that, [***25] absent statutory authority,
a tort claimant cannot recover her attorney's fee from
a tortfeasor.
a. Subject Matter Jurisdiction
Harrod suggests that the chancellor lacked jurisdiction
to award damages to Barbara for the fraud he was
found to have perpetrated against her in connection with
the divorce litigation. He made no motion to transfer
the claim to the circuit court and did not demand a trial
by jury. He contends he may nevertheless raise the issue
on appeal because the question is one of subject
matter jurisdiction which may be raised at any time.
For the proposition that a tort claim may not be tried
in chancery court, Harrod cites Spitzer v. Barnhill, 237
Ark. 525, 374 S.W.2d 811 (1964), and Gorchik v.
Gorchik, 10 Ark. App. 331, 663 S.W.2d 941 (1984). In
289 Ark. 159, *; 711 S.W.2d 447, **;
1986 Ark. LEXIS 1930, ***
Page 7
the Spitzer case the plaintiff sued in chancery court, asking
that certain allegedly fraudulent conveyances be set
aside. He also asked the chancellor to adjudicate his tort
claim against the defendant who was apparently trying to
get rid of all his property in anticipation of a judgment in
the tort action favorable to the plaintiff. The chancellor
issued a temporary order restraining the defendant
[***26] [*173] from conveying his property other
than in the normal course of business and then transferred
the tort claim to the circuit court. On appeal, the
plaintiff-appellant contended the chancellor erred in
transferring the tort claim to the circuit court.
Our opinion in the Spitzer case interpreted [HN5]
Ark. Stat. Ann. § 68-1308 (Repl. 1979), which states:
In suits to set aside fraudulent conveyances,
and to obtain equitable garnishments,
it shall not be necessary for the
plaintiff to obtain judgment at law in order
to prove insolvency, but in such cases
insolvency may be proved by any competent
testimony so that only one (1) suit
shall be necessary in order to obtain proper
relief.
The appellant argued the statute required the chancellor
to hear the tort claim, citing Horstmann v. LaFargue,
140 Ark. 558, 215 S.W. 729 (1919), which had so interpreted
the statute. We overruled the Horstmann case in
the Spitzer case and said:
Upon reconsidering the matter we are
convinced that our conclusion in the
Horstmann case was wrong. Before the
adoption of the statute in question it was
necessary for a plaintiff to obtain a judgment
at law before [***27] he could
bring suit in equity to avoid a fraudulent
conveyance. We think it clear that the
statute was concerned only with the
avoidance of fraudulent conveyances and
was intended only to permit the plaintiff
to obtain that relief (described in the act
as "the proper relief") in a single suit. If
the legislature had intended to bring about
such a drastic change in our law as that of
permitting personal injury actions to be
tried in equity as a matter of right, we
think that intention would have been stated
in language too plain to be misunderstood.
It certainly was not so stated.

[237 Ark. at 528, 374 S.W.2d at 813; emphasis
added]
Thus, in the Spitzer case, we were considering whether a
statute made a tort action triable in the chancery court as
a matter of right. That is not the issue before us now.
Here the chancellor took jurisdiction of the fraud claim.
We are not considering whether the plaintiff had a right
to have the claim in chancery rather than the circuit
court; rather the issue is whether the chancellor had the
power to determine the matter.
[*174] [10] [**455] The power issue, i.e., subject
matter jurisdiction, was the issue [***28] in
Gorchik v. Gorchik, supra. In that divorce case, a chancellor
had awarded a sum to the husband which partially
represented his claim against his wife for having shot
him during the pendency of the divorce proceedings.
Neither party raised the issue but the court of appeals, on
its own motion, reversed that part of the decree. The
court correctly cited Hilburn v. 1st State Bank of
Springdale, 259 Ark. 569, 535 S.W.2d 810 (1976), for the
proposition that [HN6] the question of subject matter
jurisdiction is always open and may be raised by the
court on appeal. However, the court then concluded on
the basis of Spitzer v. Barnhill, supra, that the chancery
court could not, through exercise of the equity clean-up
doctrine, have subject matter jurisdiction of a tort claim
as noted above. That was not the holding of Spitzer v.
Barnhill. Gorchik v. Gorchik, supra, is thus overruled.
An ancillary citation in Gorchik v. Gorchik, supra,
was Chamberlain v. Newton County, 266 Ark. 516, 587
S.W.2d 4 (1979). That case was somewhat more on point.
The plaintiff-appellant at first sought to enjoin the county
from using a road it had recently constructed [***29]
on her land without permission from or compensation to
her. She ultimately amended her complaint to ask only
for damages. Our opinion went to some length to point
out that she no longer claimed the right to an equitable
remedy, and thus the chancery court lacked jurisdiction
because she was merely asking for tort (trespass) relief.
There was no equitable relief being sought to which the
tort claim might have been considered incidental for the
purpose of exercising the clean-up doctrine.
With Chamberlain v. Newton County, supra, we
must compare Bierbaum v. City of Hamburg, 262 Ark.
532, 559 S.W.2d 20 (1977). In that case, the appellant
gave the city land on which to build a pumping station,
but the city built it on other land owned by the appellant.
The appellant sought an injunction to prevent the city
from continuing to operate the pumping station. The city
counter-claimed to condemn the land on which the station
had been built. The chancellor denied the injunction
and, recognizing that the only issue was the amount
289 Ark. 159, *; 711 S.W.2d 447, **;
1986 Ark. LEXIS 1930, ***
Page 8
of compensation to which the appellant was entitled,
transferred the case to the circuit court for a determination
of the appellant's damages. The [***30] appellant
contended on appeal that the chancellor should [*175]
have retained the case to determine the damages. We
said:
Normally a landowner should not be
denied the right for a jury to assess damages
in a condemnation case. However,
there are circumstances where a chancery
court may assess damages in a condemnation
case. This is such a case. First, the
landowner filed a proper lawsuit in chancery
court and, therefore, jurisdiction was
properly obtained. Second, the public
condemning authority, in this case the
city, asked the court to condemn the land
and assess damages. There was no objection
by the landowner to the chancellor
setting damages although damages were
not what the landowner wanted. Third,
the court on its own motion transferred
the case to circuit court; the landowner
did not ask for a jury trial on damages.
We feel all these reasons were good cause
for the chancellor to maintain jurisdiction
and decide all issues in the case under the
doctrine that once a chancery court acquires
jurisdiction for one purpose it may
decide all other issues. This doctrine is
commonly referred to as the "clean-up"
doctrine. Selle v. City of Fayetteville,
207 [***31] Ark. 966, 184 S.W.2d 58
(1944). [262 Ark. at 534; 559 S.W.2d at
21 and 22.]
Thus we held that the chancellor not only may determine
the damages, or action-at-law, aspect of the case but
must do so absent any request that the case be transferred,
and must do so despite the prospect of granting
any equitable remedy having long since faded away.
[11] As we pointed out most recently in Crittenden
County v. Williford, 283 Ark. 289, 675 S.W.2d 631
(1984), [HN7] when the issue is whether the chancery
court has jurisdiction because the plaintiff lacks an adequate
[**456] remedy at law, we will not allow it to
be raised for the first time on appeal. We noted it is
only when the court of equity is "wholly incompetent" to
consider the matter before it will we permit the issue of
competency to be raised for the first time on appeal. See
also Whitten Developments, Inc. v. Agee, 256 Ark. 968,
511 S.W.2d 466 (1974).

[12] Viewed together, these cases demonstrate that
we have come to the position that unless the chancery
court has no tenable nexus whatever to the claim in question
we will consider the matter of whether the claim
should have been heard there [***32] to [*176] be
one of propriety rather than one of subject matter jurisdiction.
We will not raise the issue ourselves, and we
will not permit a party to raise it here unless it was raised
in the trial court.
[13] Of course, [HN8] where the exclusive jurisdiction
to adjudicate a matter has been placed by the constitution
or by statute in some other court, such as probate
matters in the probate court or bastardy proceedings in
the county court, the question of subject matter jurisdiction
may not be waived and the chancery court is totally
without power.
[14] Harrod contends the jurisdiction of the chancellor
to set aside the property settlement agreement between
Barbara and Tommy cannot be used to support
hearing the tort claim against him because he was not a
necessary party to that action. While that is so, it overlooks
the other actions taken by the chancellor. The
chancellor set aside the trust addendum and conducted an
accounting of Harrod's actions as trustee. We do not
hold, or even consider, whether the tort claim was so
incidental to these clearly equitable remedies as to fall
within the chancellor's power pursuant to the clean-up
doctrine. See Stolz [***33] v. Franklin, 258 Ark.
999, 531 S.W.2d 1 (1975). We hold that the question is
not one of subject matter jurisdiction, and the failure of
Harrod to move for a transfer of the case or otherwise
question the propriety of the chancellor hearing the case
waived the issue, and it may not be raised for the first
time on appeal.
b. Proximate Cause
Harrod argues that his misconduct, as described by
the chancellor, was not the proximate cause of the expense
to which Barbara was put in having the property
settlement set aside. His contention is that because this
court had not yet decided Day v. Day, supra, Barbara got
a really good deal in the property settlement he had arranged,
as she was to receive $ 20,000 in cash which
came from Tommy's Jones Act settlement to which she
was not entitled.
[15] That argument misses entirely the point that
Harrod's fraud and professional misconduct were the
bases for setting the property settlement agreement aside.
Whether Barbara was getting a good deal, in Harrod's
opinion, under the law as it existed in 1981, is irrelevant
to the setting aside of the agreement [*177] in 1985.
The damages awarded to Barbara were to compensate
[***34] her for the expense she incurred in having the
agreement set aside. The reason for setting aside was
289 Ark. 159, *; 711 S.W.2d 447, **;
1986 Ark. LEXIS 1930, ***
Page 9
the fraud perpetrated by Tommy Liles and Harrod upon
her in the procurement of the agreement. The causal
relationship between the conduct of Harrod and the injury
to Barbara is obvious.
c. Attorney Fee Recovery
In arguing that Barbara may not recover her attorney's
fee against him, Harrod cites cases, e.g., Clawson v.
Rye, 281 Ark. 8, 661 S.W.2d 354 (1983), in which we
have adopted the familiar "American rule" that [HN9] a
litigant may not recover an attorney fee in a tort action
unless it is authorized specifically by statute or rule of
court. In this case, however, Barbara does not seek to
recover her attorney's fee and costs expended to pursue
damages in a tort claim against Harrod. Rather, the attorney
fee and costs sought here comprise the damages
she seeks. Her claim against Harrod results from her
having to sue Tommy as a result of Harrod's misconduct.
[16] The Restatement (Second) of Torts, § 914(2)
(1979), after stating the "American rule" in subsection
(1), provides:
[**457] (2) [HN10] One who through
the tort of another has been required to act
[***35] in the protection of his interests
by bringing or defending an action against
a third person is entitled to recover reasonable
compensation for loss of time,
attorney fees and other expenditures
thereby suffered or incurred in the earlier
action.
We have applied the same principle in breach of warranty
title litigation. Fox v. Pinson, 182 Ark. 936, 34
S.W.2d 459 (1930). Cf. May v. Edwards, 258 Ark. 871,
529 S.W.2d 647 (1975). See also Wilshire Oil Company
of Texas v. Riffle, 409 F.2d 1277 (5th Cir. 1969). Thus, if
the action against Harrod were merely one in tort for
deceit, we would allow Barbara to recover her attorney's
fee and costs incidental to her suit against Tommy made
necessary by Harrod's tortious conduct. In some jurisdictions
it has been held that damages may not be recovered
for costs and attorneys fees unless they are pursued
in a subsequent, separate litigation. See McNeill v. Allen,
534 P.2d 813 (Colo. App. 1975); Powell v. Narried,
463 S.W.2d 43 (Tex. Civ. App. 1971). We see [*178]
no need to apply that requirement here, because, as we
will note below, there are ample reasons for awarding the
amount of the fee [***36] against both Tommy and
Harrod.
[17] There are other reasons to allow the fee even to
the extent it represents the expenditure to which Barbara

was put not just in her suit against Tommy but in suing
Harrod along with Tommy. The chancellor conducted a
fiduciary accounting with respect to Harrod's performance
as trustee of the Tommy Liles trust. [HN11]
When an action is brought successfully against a trustee
for breach of his trust, the award of an attorney's fee to
the plaintiff is proper. McPherson v. McPherson, 258
Ark. 257, 523 S.W.2d 623 (1975).
[18] While it is not relevant to Harrod's appeal, we
note that the effect of Barbara's action to set aside the
property settlement agreement was to reopen the divorce
action against her. The award of her attorney's fee
against Tommy was thus also appropriate, as such an
award is within the chancellor's discretion in a domestic
relations case. Lytle v. Lytle, 266 Ark. 124, 583 S.W.2d
1 (1979).
We find no error in awarding damages in the amount
of Barbara's costs and her attorney's fee against Tommy
and Harrod jointly and severally.
289 Ark. 159, *; 711 S.W.2d 447, **;
1986 Ark. LEXIS 1930, ***
Page 10
[19] Another good reason for subjecting Harrod to
liability is his [***37] departure from the ethical standards
to which the court requires its officers to adhere.
Harrod's attorney informed us during oral argument of
this case that Harrod had been disciplined by our Committee
on Professional Conduct as a result of his actions
in the matter before us. While the letter of reprimand
mentioned by Harrod's attorney hardly seems a sufficient
punishment for Harrod's actions, we do not know the
evidence our committee had before it, and that matter is
not before us now for adjudication. We point out, however,
that if there were no other reason whatever for sustaining
the damages award against Harrod, we would do
so on the basis of the chancellor's inherent authority to
hold an officer of the court liable for an injury caused by
his professional malfeasance.
Affirmed.

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SUBSEQUENT HISTORY:
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
LEXSEE 318 MD. 337
ST. LUKE EVANGELICAL LUTHERAN CHURCH, INC. v. Ginny Ann SMITH
[***1] Motion for Reconsideration Denied February
22, 1990.
PRIOR HISTORY: Certiorari to Court of Special Appeals
(Circuit Court for Montgomery County), Stanley B.
Frosh, JUDGE.
DISPOSITION:
JUDGMENT OF THE COURT OF SPECIAL AP-
PEALS REVERSED. THE CASE IS REMANDED TO
THAT COURT WITH DIRECTIONS TO AFFIRM
THE JUDGMENT OF THE CIRCUIT COURT FOR
MONTGOMERY COUNTY. COSTS IN THIS
COURT AND IN THE COURT OF SPECIAL AP-
PEALS TO BE PAID BY ST. LUKE'S CHURCH.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff individual and
defendant church both appealed from the judgment of the
Court of Special Appeals (Maryland) in an action
brought by plaintiff against defendants, church and pastor,
for defamation of character and invasion of privacy.
Plaintiff challenged the reversal of the trial court's judgment
against defendant church, and defendant church
challenged the inclusion of attorney's fees in the punitive
damage award.
OVERVIEW: After reading plaintiff individual's personal
letters, defendant pastor told people that she was
having an affair with another pastor. Although defendant
pastor retracted his allegations and apologized to plaintiff,
he subsequently told other people of his allegations.
Plaintiff brought an action against defendants, pastor and
church, for defamation of character and invasion of privacy.
The jury awarded plaintiff compensatory damages
and punitive damages against defendant pastor and punitive
damages against defendant church. The lower appellate
court reversed the judgment against defendant
No. 44, September Term, 1988
Court of Appeals of Maryland
318 Md. 337; 568 A.2d 35; 1990 Md. LEXIS 9
January 16, 1990
Page 1
church because plaintiff was erroneously allowed twice
the number of peremptory challenges permitted under
Md. R. Civ. P., Cir. Ct. 2-512(h) but denied defendant
pastor's appeal. The court reversed the lower appellate
court's judgment. The trial record did not indicate the
number of strikes plaintiff actually used. Thus, no prejudice
was demonstrated, and any error was harmless. The
court also held that evidence of reasonable attorney's fees
could be considered by the jury whenever punitive damages
were appropriate and that the jury had sufficient
evidence to award punitive damages.
OUTCOME: The court reversed the lower appellate
court's judgment that plaintiff individual was not entitled
to punitive damages from defendant church in her action
for defamation and invasion of privacy because the trial
court erroneously allowed plaintiff twice the permitted
number of peremptory challenges. No prejudice was
demonstrated, and any error was harmless. The court
affirmed the inclusion of attorney's fees in the punitive
damage awards.
LexisNexis(R) Headnotes
Torts > Damages > Punitive Damages
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN1] In the United States, the prevailing party in a
lawsuit is not ordinarily entitled to recover reasonable
attorney's fees as an element of damages. This "American
Rule," however, refers primarily to compensatory
damages. When punitive damages are involved, the
courts are encouraged to fashion a limited exception to
the rule. Whenever punitive damages are appropriate, the
amount of reasonable attorney's fees incurred in the
pending litigation may be considered by the jury.
Civil Procedure > Jury Trials > Jury Selection
[HN2] Md. R. Civ. P., Cir. Ct. 2-512(h) provides that
each party is permitted four peremptory challenges plus
one peremptory challenge for each group of three or less

alternate jurors to be impaneled. For purposes of this
section, several plaintiffs or several defendants shall be
considered as a single party unless the court determines
that adverse or hostile interests between plaintiffs or between
defendants justify allowing to each of them separate
peremptory challenges not exceeding the number
available to a single party. The parties shall simultaneously
exercise their peremptory challenges by striking
from the list.
Civil Procedure > Jury Trials > Jury Selection
[HN3] A significant deviation from the prescribed procedure
that impairs or denies the full peremptory challenge
privilege would ordinarily require reversal without
the necessity of showing prejudice.
Civil Procedure > Appeals > Standards of Review >
Clearly Erroneous Review
[HN4] In civil cases, the appellate court will not reverse
for an error below unless the error was both manifestly
wrong and substantially injurious, and has a prejudicial
effect on the outcome of the case.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN5] Nevertheless, there are exceptions to the American
Rule. For example, in Maryland, attorney's fees may
be awarded when (1) parties to a contract have an
agreement to that effect; (2) there is a statute which allows
the imposition of such fees; or (3) the wrongful
conduct of a defendant forces a plaintiff into litigation
with a third party. Counsel fees may also be awarded
when a plaintiff is forced to defend against a malicious
prosecution.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN6] In Maryland, an award of attorney's fees serves, in
general, as a legislative tool for punishing wrongful
conduct. A punishment rationale is also found in the federal
courts. There, the courts may award counsel fees to a
successful party when his opponent has acted "in bad
faith, vexatiously, wantonly, or for oppressive reasons."
Torts > Damages > Punitive Damages
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN7] In Maryland, the courts may impose costs and
reasonable attorney's fees on either party when a proceeding
is brought in bad faith or without substantial
justification. Md. R. 1-341. In this class of cases, the
underlying rationale of "fee shifting" is, of course, punitive,
and the essential element in triggering the award of
fees is therefore the existence of "bad faith" on the part
of the unsuccessful litigant. It is this punishment ra-
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
Page 2
tionale that forms a solid basis for allowing the jury to
consider attorney's fees when they are asked to calculate
an award of punitive damages. For, like statutorily-imposed
attorney fee awards, one of the main goals of
punitive damages in Maryland is to punish wrongful
conduct.
Torts > Damages > Punitive Damages
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN8] Damages in a tort action do not ordinarily include
compensation for attorney fees or other expenses of litigation.
However, in awarding punitive damages when
they are otherwise allowable, the trier of fact may consider
the actual or probable expense incurred by the
plaintiff in bringing the action.
Constitutional Law > Cruel & Unusual Punishment
[HN9] The "Excessive Fines Clause" of U.S. Const.
amend. VIII does not apply to punitive damage awards in
cases between private parties.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN10] Many states offer an additional guideline by
allowing a jury -- faced with determining the appropriate
amount of a punitive damage award -- to consider the
amount of reasonable attorney's fees incurred in the
pending litigation. Those states guide the jury by giving
them the aid of one fairly definite factor which they may
take into account in fixing the amount of punitive damages.
While punitive damages imply punishment, and
their assessment is largely a matter of discretion with the
jury, yet a court is not bound to turn the matter over to
them arbitrarily, and without any suggestions as to matters
which they ought to consider in their assessment of
such damages. It may and, indeed, ought to call their
attention to any matters which will tend to prevent any
mere arbitrary and thoughtless award, and to make the
assessment fair and reasonable, considering all of the
circumstances of the case. And attorney's fees as influencing
the amount of smart-money, are eminently proper.
COUNSEL:
H. Patrick Donohue (Armstrong, Donohue & Ceppos,
Chartered, both on brief), both of Rockville, Maryland,
for petitioner and cross-respondent.
Glenn M. Cooper (Mindy G. Farber, Hope B. Eastman,
Paley, Rothman, Goldstein, Rosenberg & Cooper,
Chartered, all on brief), all of Bethesda, Maryland, for
respondent and cross-petitioner.
JUDGES:

Murphy, C.J., and Eldridge, Cole, Rodowsky,
McAuliffe, Adkins and Blackwell, * JJ. Rodowsky, J.,
dissents in opinion in which Murphy, C.J., and
McAuliffe, J., concur.
* Blackwell, J., now retired, participated in
the hearing and conference of this case while an
active member of this Court; after being recalled
pursuant to the Constitution, Article IV, Section
3A, he also participated in the decision and adoption
of this opinion.
[***2]
OPINIONBY:
BLACKWELL
OPINION:
[*338] [**35] The main issue in this appeal is
whether a jury, in calculating an award of punitive damages,
was properly instructed to consider attorney's fees
incurred by the plaintiff in the underlying cause of action.
[HN1] In this country, the prevailing party in a
lawsuit is not ordinarily entitled to recover reasonable
attorney's fees as an element of damages. Alyeska Pipeline
Service Co. v. Wilderness Society, [*339] 421
U.S. 240, 247, 95 S.Ct. 1612, 1616, 44 L.Ed.2d 141, 147
(1975); Empire Realty Co. Inc. v. Fleisher, 269 Md. 278,
305 A.2d 144 (1973). This "American Rule," however,
refers primarily to compensatory damages. See Ehrenzweig,
Reimbursement of Counsel Fees and the Great
Society, 54 Calif.L.Rev. 792 (1966); Note, Theories of
Recovering Attorney's Fees: Exceptions to the American
Rule, 47 UMKC L.Rev. 566 (1979). When punitive
damages are involved, we are encouraged to fashion a
limited exception to the [**36] rule. We hold that
whenever punitive damages are appropriate, the amount
of reasonable attorney's fees incurred in the pending litigation
[***3] may be considered by the jury.
I.
Ms. Ginny Ann Smith (Ms. Smith) grew up in a
home with strong ties to its neighborhood church, St.
Luke Evangelical Lutheran Church, Inc. (St. Luke's).
Over the years, Ms. Smith's mother had been both a volunteer
and an employee at St. Luke's, and Ms. Smith
spent most of her formative years participating in virtually
all of the numerous activities St. Luke's offered its
youth.
As she became older, Ms. Smith volunteered as an
Administrative Assistant for a church youth-group called
Crossroads, and later, for a traveling drama-group called
Tent Troupe. Both groups were directed by the Associate
Pastor of St. Luke's, Pastor David Shaheen (Pastor
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
Page 3
Shaheen). As a result of her duties, Ms. Smith worked
very closely with Pastor Shaheen, including traveling
four months a year as a counselor with him and the other
members of Tent Troupe.
After graduating from college in 1982, Ms. Smith
was hired by the recently promoted Director of Youth
Ministry, Pastor David Buchenroth (Pastor Buchenroth),
to the salaried-position of Associate Director of Youth
Ministry. Because she continued as a volunteer for
Crossroads and Tent Troupe, Ms. Smith then worked for
both [***4] Pastors Shaheen and Buchenroth.
[*340] In February 1984, Ms. Smith went on a
church-sponsored trip to the Holy Land led by Pastor
Shaheen. While she was out of the country, Pastor
Buchenroth entered her office to look for a file he needed
to tend to some church business. n1@ There he discovered
a file marked "DRS-GAS."@ Curious, Pastor
Buchenroth opened the file. He found personal letters
and notes from Pastor Shaheen to Ms. Smith.
n1 This was at least the second time Pastor
Buchenroth entered Ms. Smith's office without
her knowledge. Ms. Smith's mother, who shared
the office with her daughter at the time, testified
that she had discovered Pastor Buchenroth alone
in Ms. Smith's locked office on a prior occasion,
and that he was unable to state why he was there.
The correspondence apparently confirmed for Pastor
Buchenroth his growing suspicions that Pastor Shaheen
and Ms. Smith were engaged in a sexual relationship.
With the avowed purpose of protecting Pastor Shaheen's
wife, Pastor Buchenroth showed the correspondence
[***5] to Mrs. Shaheen, and offered her specific details
of when and where he believed the various rendezvous
had occurred. Before he showed it to her, however, he
showed it to Ms. Joan Patton, the Staff Assistant to the
Senior Pastor of St. Luke's, Raymond Shaheen -- who
also happened to be Pastor Shaheen's father.
A few days after his encounter with Mrs. Shaheen,
he repeated his allegations, but this time to Ms. Smith's
mother. He again offered specific details, as well as his
opinion that Pastor Shaheen and her daughter might not
return from the church excursion.
After viewing the correspondence and talking with
her husband, Mrs. Shaheen told Pastor Buchenroth that
she did not believe that her husband's relationship with
Ms. Smith was sexual in nature. Accepting Mrs. Shaheen's
conclusion, Pastor Buchenroth retracted his accusations.

In addition, at one of a number of group counseling
sessions initiated by the church (in an effort to encourage
"a healing process"), he stated that he no longer believed
[*341] the relationship between Ms. Smith and Pastor
Shaheen was sexual in nature. He also promised at that
time to keep his earlier suspicions confidential, and
apologized to Ms. [***6] Smith and Pastor Shaheen
for the pain he had caused them. Despite his promise,
Pastor Buchenroth again repeated his original allegations,
this time to Mr. and Mrs. Rupert, two members of
the congregation active in Tent Troupe.
It was not long before the members of Tent Troupe
and most of the congregation were made aware of Pastor
Buchenroth's allegations. Soon, Ms. Smith began receiving
unsettling telephone calls and mail [**37]
from members of the congregation. Eventually, a Special
Committee n2 was formed, and Ms. Smith was dismissed.
n2 This Special Committee was formed
without the knowledge of the chairperson of the
Committee on Staff -- the committee normally
responsible for advising the church governing-body
on matters concerning the hiring and
dismissing of personnel.
Subjected to scorn in her church and neighborhood,
and unable to find a job commensurate with her skills,
Ms. Smith sued Pastor Buchenroth in the Circuit Court
for Montgomery County for defamation of character and
invasion of privacy. She joined as [***7] a defendant,
Pastor Buchenroth's employer, St. Luke's, on the
theory that by dismissing her, the church ratified the allegations
made by its agent Pastor Buchenroth. After a
two week trial, the jury awarded Ms. Smith $ 228,904.01
in compensatory damages; $ 2,000 in punitive damages
against Pastor Buchenroth; and $ 105,875.00 in punitive
damages against St. Luke's.
Both defendants appealed. The Court of Special
Appeals reversed the judgment against St. Luke's, holding
that Ms. Smith was erroneously allowed twice the
number of peremptory challenges permitted under Maryland
Rule 2-512(h). It also held that the jury had sufficient
information to conclude that Pastor Buchenroth had
acted with malice, and denied his appeal.
Ms. Smith petitions this Court on the peremptory
strike issue. St. Luke's also petitions this Court, contending
that [*342] the circuit court's ruling admitting
the $ 68,441.01-amount of Ms. Smith's attorney's fees on
the issue of punitive damages was error. n3@ We granted
both petitions for certiorari. St. Luke Church v.
Smith, 74 Md.App. 353, 537 A.2d 1196 (1988).
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
[***8]
I.
Page 4
n3 Defendant Buchenroth did not petition
this Court from the adverse decision of the Court
of Special Appeals. Consequently, judgment
was entered in the Circuit Court for Montgomery
County against his surety under a supersedeas
bond. Ms. Smith filed an order in the circuit
court reflecting that the judgments against Pastor
Buchenroth and the surety were "paid and satisfied."@
Therefore, the compensatory damage
award, and the punitive damages awarded against
Pastor Buchenroth are uncontested. This leaves
as the only damage issue whether Ms. Smith's attorney's
fees were properly considered by the jury
as relating to the punitive damages awarded
against St. Luke's.
Peremptory Strikes
[HN2] Maryland Rule 2-512(h) provides:
Each party is permitted four peremptory
challenges plus one peremptory challenge
for each group of three or less alternate
jurors to be impanelled. For purposes of
this section, several plaintiffs or several
defendants shall be considered as a single
party unless the court determines that adverse
or hostile interests between plaintiffs
or between defendants justify allowing
to each of them separate peremptory
challenges not exceeding the number
available to a single party. The parties
shall simultaneously exercise their peremptory
challenges by striking from the
list.
In other words, coplaintiffs and codefendants are allowed
four peremptory strikes, regardless of the number of coparties.
When there is a single party on one side and
multiple parties on the other, the single party will be entitled
to four peremptory challenges while the coparties
will ordinarily share four strikes. A single party, then,
will have twice as many strikes as each opposing coparty.
If, however, the court rules that the coparties have
adverse or hostile interests, [*343] those parties may
be allowed up to four peremptory strikes each. [***9]
Id.
In this case, the trial judge stated that he saw a "potential"
for conflict between the two codefendants, St.

Luke's Church and Pastor Buchenroth. Not wanting to
"impose" on them "having to agree with" only four challenges
between them, he gave them four strikes each.
He then felt "the only fair thing to do" was to give Ms.
Smith another four as well.
Instead of changing the proportions, and giving four
peremptory challenges to each of the three parties for a
total of twelve strikes -- an allowable remedy when adverse
or hostile interests are found -- the [**38] judge
merely doubled the number on each side. This gave
eight strikes to the plaintiff and eight to the codefendants,
totalling sixteen peremptory strikes. It also had the
effect of keeping the allotment of strikes in the same
proportion they would have been in had the court declined
to act in the first place.
In King v. State Roads Comm'n, 284 Md. 368, 396
A.2d 267 (1979), both the plaintiff and defendant exercised
each of their four peremptory challenges, yet 17
veniremen remained. To obtain a panel of 12, the trial
judge struck five additional jurors. We said that this
gave the trial [***10] judge, with five strikes, "more
to say about who would not sit on the panel than either of
the parties."@ Id. at 372, 396 A.2d at 270. In holding
that this constituted error, we stated that, [HN3] "a significant
deviation from the prescribed procedure that
impairs or denies" the full peremptory challenge privilege
would ordinarily require "reversal without the necessity
of showing prejudice."@ Id. at 371, 396 A.2d at
269. [Emphasis added.]
Here, the trial judge, acting on what he deemed to be
a "potential" for conflict, implicitly found that the codefendants
had hostile interests. The court's response,
however, left the parties in virtually the same position
they would have been in had no such finding been made.
Nevertheless, the court's actions did not influence the
selection of jurors [*344] as did the court in King, and
therefore presented no significant deviation from prescribed
procedure. Thus, a showing of prejudice was
necessary.
[HN4] In civil cases, "this Court will not reverse for
an error below unless the error 'was both manifestly
wrong and substantially injurious,'" and has had a prejudicial
effect on the [***11] outcome of the case.
Beahm v. Shortall, 279 Md. 321, 331, 368 A.2d 1005,
1011 (1977). Because the jury strike list was not submitted,
the trial record affords no evidence of the number of
strikes Ms. Smith actually used. Thus, no prejudice can
be demonstrated. We therefore hold the error, if any,
was harmless, and reverse the holding of the Court of
Special Appeals.
II.
Attorney's Fees as an Element of Punitive Damages
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
Page 5
Any consideration of a common-law standard for
awarding attorney's fees must begin with the prevailing
rule in this country. Known as the American Rule, it
prohibits the prevailing party in a lawsuit from recovering
his attorney's fees as an element of damages.
Alyeska, 421 U.S. at 247, 95 S.Ct. at 1616, 44 L.Ed.2d at
147; Empire, 269 Md. at 285, 305 A.2d at 148. A brief
history of the American Rule reveals that it evolved from
the English Rule, which originated some time before the
reign of Edward I. At that time, a successful plaintiff
could obtain the costs of litigation as an element of
damages. See C. McCormick, Handbook on the Law of
Damages [***12] 234, 235 (1935), relying on 2 F.
Pollock & F. Maitland, The History of English Law 597
(2d ed. 1911).
Beginning with the reign of Henry VIII, this benefit
was also extended to successful defendants. McCormick
at 235. Consequently, the English Rule -- which
allows the successful party in a lawsuit to recover from
the losing party the costs of litigation, including attorney's
fees -- became firmly established in the English
common-law courts. Id.@ The [*345] rule continues
in England today. n4@ Alyeska, 421 U.S. at 245, 95
S.Ct. at 1616, 44 L.Ed.2d at 147-48 (1975); Goodhart,
Costs, 38 Yale L.J. 849, 849 (1929).
n4 Interestingly, the same is true in Alaska,
where the prevailing party is allowed attorney's
fees in most civil cases at the discretion of the
court. Alaska Stat. § 9.60.010 (1986). In Nevada,
the court may award fees in actions involving
$ 10,000 or less. Nev.Rev.Stat. § 18.010
(1967).
The English Rule was popular in America before
[***13] the Revolution. McCormick at 235. Originally,
the pre-colonial statutes which fixed the scale of
recoverable court costs satisfied a substantial portion of
the attorney's fees incurred by a successful litigant. Id.;
Restatement (Second) of Torts § 914, comment a at 492
(1979). This was so even though local statutes rigidly
[**39] limited the amount recoverable as attorney's
fees. n5@ McCormick at 235.
n5 McCormick offers a glimpse of a
pre-colonial Virginia statute which typified the
local statutes of the time, in which "it was enacted
that in county court actions there should be
taxed as costs an attorney's fee of 'fifteen shillings
or one hundred and fifty pounds of tobacco.'"@
McCormick at 235.

Of course, nowhere in this country have statutorily-fixed
attorney's fees been revised to keep pace with
the fall in the value of money. Id. at 236. Such legislative
reluctance to keep pace suggests that the principle of
full compensation for litigation expenses never firmly
took hold in this country. Id. at 235-36. [***14]
This may best be explained by a historic distrust of lawyers
prevalent throughout the colonial era, and a then
growing preference of the organized bar for fee schedules
set by a free market and not hostile legislatures.
Leubsdorf, Toward a History of the American Rule on
Attorney Fee Recovery, 47 Law & Contemp. Probs. 9,
11, 19 (1984).
[HN5] Nevertheless, there are exceptions to the
American Rule. For example, in Maryland, attorney's
fees may be awarded when (1) parties to a contract have
an agreement to that effect, Empire, 269 Md. at 286, 305
A.2d at 148, citing Webster v. People's Loan, Savings &
Deposit Bank, 160 Md. 57, [*346] 152 A. 815 (1931);
(2) there is a statute which allows the imposition of such
fees, Freedman v. Seidler, 233 Md. 39, 47, 194 A.2d 778,
783 (1963); or (3) the wrongful conduct of a defendant
forces a plaintiff into litigation with a third party,
McGaw v. Acker, Merrall & C. Co., 111 Md. 153, 160,
73 A. 731, 734 (1909). See also, Empire, 269 Md. at 286,
305 A.2d at 148; Fowler v. Benton, 245 Md. 540, 550,
226 A.2d 556, 563 (1967). [***15] Counsel fees may
also be awarded when a plaintiff is forced to defend
against a malicious prosecution. Tully v. Dasher, 250
Md. 424, 442, 244 A.2d 207, 217 (1968).
Movement away from a strict application of the
American Rule began in this country as early as the 19th
century, when legislatures launched attacks against it.
Leubsdorf at 25. "Three federal statutes, the voting
rights legislation of 1870, the Interstate Commerce Act
of 1887, and the Sherman Act of 1890, allowed successful
plaintiffs to recover their legal expenses in addition to
liquidated damages, ordinary damages, or a treble damage
award."@ Id., citing Act of May 31, 1870, 16 Stat.
140, § § 2, 3, repealed by Act of February 8, 1894, 28
Stat. 36; Act of February 4, 1887, 24 Stat. 379, § 8;
Sherman Antitrust Act § 7, 26 Stat. 210 (1890).
In Maryland, various statutes permit recovery of attorney's
fees. Attorney-fee recovery provisions are
contained in either the penalty or liability sections of
most of these statutes. n6@ One statute authorizes attorney's
fees in conjunction [*347] with a treble damage
award. Maryland Code (1974, 1988 Repl.Vol.), Real
Property Article, § [***16] 8-203 (attorney's fees
awarded along with treble damages). It is reasonable,
therefore, to conclude that [HN6] in this state, an award
of attorney's fees serves, in general, as a legislative tool
for punishing wrongful conduct.
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
[***17]
Page 6
n6 Maryland Code (1957, 1987 Repl.Vol.),
Article 2B, § 203G; Md.Code (1957, 1986
Repl.Vol.), Art. 48A, § § 354-0 and 490E;
Md.Code (1957, 1988 Repl.Vol.), Art. 56, §
413; Md.Code (1957, 1988 Repl.Vol., 1989
Cum.Supp.), Art. 56 § 637; Md.Code (1957,
1988 Repl.Vol.), Art. 70B, § 19; Md.Code
(1957, 1988 Repl.Vol.), Art. 78, § 28A (referred
to specifically as penalty); Maryland Code (1975,
1985 Repl.Vol.), Corporations and Associations
Article, § 11-703; Md.Code (1974, 1984 Repl.
Vol.), Courts & Judicial Proceedings Art., §
10-410; Md.Code (1975, 1983 Repl.Vol.), Commercial
Law Art., § § 11-109, 11-209, 12-911
and 12-1011; Md.Code (1975, 1983 Repl.Vol.,
1989 Cum.Supp.), Commercial Law Art., § §
11-1001 (in which attorney's fees and costs are
added to actual and punitive damages), 13-408
(not referred to specifically as penalty) and
19-502; Md.Code (1980, 1986 Repl.Vol.), Financial
Institutions Art., § 10-120; Md.Code
(1982), Health-General Art., § § 4-301 (referred
to specifically as penalty) and 7-1103 (in which
attorney's fees are added to punitive damages);
Md.Code (1982, 1987 Repl.Vol.), § 19-346;
Md.Code (1974, 1988 Repl.Vol.), Real Property
Art., § § 8-203 (attorney's fees awarded in treble
damage provision), 8-208 (referred to specifically
as penalty), 8A-1001, 8A-1501 and 11-110;
Md.Code (1977, 1987 Repl.Vol.), Transportation
Art., § 15-213.
A punishment rationale is also found in the federal
courts. There, the courts "may award counsel fees to a
successful party [**40] when his opponent has acted
'in bad faith, vexatiously, wantonly, or for oppressive
reasons.'"@ Hall v. Cole, 412 U.S. 1, 6, 93 S.Ct. 1943,
1946, 36 L.Ed.2d 702, 707 (1973).
The same rule exists [HN7] in Maryland, where the
courts may impose costs and reasonable attorney's fees
on either party when a proceeding is brought in bad faith
or without substantial justification. Maryland Rule
1-341. "In this class of cases, the underlying rationale
of 'fee shifting' is, of course, punitive, and the essential
element in triggering the award of fees is therefore the
existence of 'bad faith' on the part of the unsuccessful
litigant."@ Id.; see also Yamaner v. Orkin, 313 Md. 508,
509, 545 A.2d 1345, 1345 (1988) (in which Judge
Rodowsky, speaking for the Court, characterizes the rule
as a sanction).

It is this punishment rationale that forms a solid basis
for allowing the jury to consider attorney's fees when
they are asked to calculate an award of punitive damages.
For, like statutorily-imposed attorney [***18] fee
awards, one of the main goals of punitive damages in
Maryland is to punish wrongful conduct. Wedeman v.
City Chevrolet Co., 278 Md. 524, 531, 366 A.2d 7, 12
(1976) (action for fraud seeking punitive [*348] damages);
Embrey v. Holly, 293 Md. 128, 142, 442 A.2d 966,
973 (1982) (punitive damages sought in defamation action).
This rationale is consistent with the dictum in
Empire.
In Empire, an action in fraud in which attorney's fees
were sought as an element of incidental damages, we
held:
The general rule is that, other than the
usual and ordinary court costs, the expenses
of litigation -- including legal fees
incurred by the successful party -- are not
recoverable in an action for damages.
Id. at 285, 305 A.2d at 148. See Freedman, 233 Md. at
47, 194 A.2d at 783 (1963); Harry's Thrifty Tavern, Inc.
v. Pitarra, 224 Md. 56, 63, 166 A.2d 908, 912 (1961);
McGaw, 111 Md. at 160, 73 A. at 734.
While we emphasized the American Rule in Empire,
we also remarked in dictum that had the case fallen
within the framework [***19] of punitive damages,
the "allowance of legal fees" would have been vastly
different. Empire, 269 Md. at 288, 305 A.2d at 150.
Because equitable relief was sought in Empire, and because
a court of equity may not award punitive damages,
Prucha v. Weiss, 233 Md. 479, 483-84, 197 A.2d 253,
255 cert. denied, 377 U.S. 992, 84 S.Ct.1916, 12 L.Ed.2d
1045 (1964), we declined to describe exactly what that
difference might be. We now take the opportunity to do
so.
The American Rule reflects a widespread rejection
of both general indemnity for litigants and a
"make-whole" rationale as a basis for awarding attorney's
fees as an element of compensatory damages. Rowe, The
Legal Theory of Attorney Fee Shifting: A Critical Overview,
1982 Duke L.J. 651, 660 (1982). Nevertheless,
this leaves open the possibility of
grounding some fee shifting on a rationale
of punishment for conduct worse than
negligence, breach of contract without
bad faith, or other bases for compensatory
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
Id.
damages. The best example of fee shifting
on such a basis is that in many states
[*349] legal fees constitute [***20] a
proper element of punitive damages.
Page 7
The highest courts of seventeen states have considered
whether to permit a jury calculating an award of
punitive damages to take into account the amount of
reasonable attorney's fees incurred in the pending litigation.
Nine states regularly allow jury consideration of
attorney's fees on the issue of punitive damages. n7@
Two states require [**41] evidence sufficient to sustain
an award of punitive damages as a threshold condition:
once met, attorney's fees may be awarded as an
additional compensatory or special damage item. n8@
Six states deny jury consideration of reasonable [*350]
attorney's fees on the issue of punitive damages, n9 although
one of these states denies recovery of punitive
damages altogether. Thus, the majority of states to consider
the issue, permit the jury to take into account the
amount of reasonable attorney's fees incurred in the
pending litigation when calculating a punitive damage
award.
n7 Markey v. Santangelo, 195 Conn. 76, 485
A.2d 1305 (1985) ("Punitive damages consist of a
reasonable expense properly incurred in the litigation.");
Umphrey v. Sprinkel, 106 Idaho 700,
682 P.2d 1247 (1983) (reasonable attorney's fees
proper element of punitive damages); Newton v.
Hornblower, 224 Kan. 506, 582 P.2d 1136
(1978) ("This court has long recognized that consideration
of attorney's fees . . . may be taken into
consideration in arriving at the amount of punitive
damages in an appropriate case."); Central
Bank of Mississippi v. Butler, 517 So.2d 507
(Miss.1987) (". . . attorney's fees may not be
awarded unless punitive damages are also proper.");
Senn v. Manchester Bank of St. Louis, 583
S.W.2d 119 (Mo.1979) (attorney's fees to be
awarded in context of punitive damages implied);
Hofer v. Lavender, 679 S.W.2d 470 (Tex.1984)
(exemplary damages are to compensate for inconvenience
and attorney's fees); Debry & Hilton
Travel Services, Inc. v. Capitol Intern. Airways,
Inc., 583 P.2d 1181 (Utah 1978) ("Counsel fees .
. . can be considered as an element of damages
only in those cases in which exemplary damages
are or can be awarded."); Kemp v. Miller, 166 Va.
661, 186 S.E. 99 (1936) ("The rule in Virginia as
to the recovery of counsel fees as damages is well
established . . . wherein it is held that except

where the injury is wanton or malicious and exemplary
damages are recoverable, the allowance
of fees paid counsel for defending the original
proceedings is not proper."); Olds v. Hosford, 354
P.2d 947 (Wyo.1960), reh'g denied, 359 P.2d 406
(Wyo.1961) (because there was sufficient willful
conduct to merit punitive damages, attorneys fees
were awarded to prevailing party in replevin action).
[***21]
[***22]
n8 Suss v. Schammel, 375 N.W.2d 252 (Iowa
1985) (where willful and wanton behavior of defendant
merits punitive damages, attorney's fees
are appropriate); Villella v. Waikem Motors, Inc.,
45 Ohio St.3d 36, 543 N.E.2d 464 (1989) ("(i)f
punitive damages are proper, the aggrieved party
may also recover reasonable attorney's fees").
n9 Viner v. Untrecht, 26 Cal.2d 261, 158
P.2d 3 (1945) (punitive damages purely punitive
measure and should rest solely in the discretion
of the jury); Winkler v. Roeder, 23 Neb. 706, 37
N.W. 607 (1888); Kinane v. Fay, 111 N.J.L. 553,
168 A. 724 (1933); International Electronics Co.
v. N.S.T. Metal Products Co., 370 Pa. 213, 88
A.2d 40 (1952); Earl v. Tupper, 45 Vt. 275 (1873)
(taxable costs provided by legislature enough to
recompense this expense); Fairbanks v. Witter,
18 Wis. 287 (1864); although the point seems rather
moot in Nebraska, for as a rule, punitive
damages are never permitted in that state. Miller
v. Kingsley, 194 Neb. 123, 230 N.W.2d 472, 474
(1975).
This is borne out by the Restatement which, while
stating the general rule that, [HN8] "damages in a tort
action do not ordinarily include compensation for attorney
fees or other expenses of litigation," recognizes the
exception that:
[I]n awarding punitive damages when
they are otherwise allowable, the trier of
fact may consider the actual or probable
expense incurred by the plaintiff in bringing
the action.
Restatement (Second) of Torts, § 914 and comment a at
492-93 (1979).
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
Page 8
A minority of courts n10 decline to allow jury consideration
of reasonable attorney's fees on the issue of
punitive damages reasoning (1) that such fees are compensatory
in nature and therefore not a proper consideration
in measuring a punitive damage award; and (2) that
the jury ought to have unfettered discretion in deciding
the amount of punitive damages. See e.g., International
Electronics Co. v. N.S.T. Metal Prod. Co., 370 Pa. 213,
88 A.2d 40, 46 (1952).
n10 See n. 9, supra.
It is true that an [***23] award of attorney's fees
reimburses a plaintiff for his out-of-pocket legal expenses.
When viewed solely in this light such fees may
seem to be wholly compensatory [*351] in function.
Yet, when viewed in the context of the long-standing
prohibition against awarding attorney's fees, and the fact
that when they are awarded, they most often serve as a
statutorily-imposed punitive measure, the need to include
them in compensatory damages diminishes. Under this
view, attorney's fees would seem to be an appropriate
consideration in measuring an award of punitive damages.
The other point advanced by the minority states,
which supports the traditional view that the amount of
attorney's fees rests solely within the discretion of the
jury, has been the subject of substantial attack. Restatement
(Second) Torts, § 908, comment f at 464
(1979). Indeed, a look at the various states reveals that
Connecticut, Georgia, and Michigan, n11 limit punitive
[**42] damages by treating them as a form of compensation
fixed in proportion to the level of aggravation
sustained in an injury; five states n12 either totally or
partially prohibit punitive damages. See 1 J. Ghiardi & J.
Kircher, Punitive [***24] Damages L. & Prac. § §
4.02-.12 (Callaghan 1985, 1989 Cum.Supp.). In still
other states, the appellate courts exert control over the
discretion of the trier of fact, reviewing the amount of a
jury's punitive award. See e.g., Jones v. Fisher, 42
Wis.2d 209, 166 N.W.2d 175, 181 (1969).
n11 Waterbury Petroleum Products, Inc. v.
Canaan Oil & Fuel Co., Inc., 193 Conn. 208, 477
A.2d 988 (1984); Westview Cemetery, Inc. v.
Blanchard, 234 Ga. 540, 216 S.E.2d 776 (1975);
McFadden v. Tate, 350 Mich. 84, 85 N.W.2d 181
(1957).
n12 Killebrew v. Abbott Laboratories, 359
So.2d 1275, 1278 (La.1978); Ashland Oil, Inc. v.
Miller Oil Purchasing Co., 678 F.2d 1293, 1318
(CA 5, 1982); Pine v. Rust, 404 Mass. 411, 535

[***25]
N.E.2d 1247, 1249 (1989); Miller v. Kingsley,
194 Neb. 123, 230 N.W.2d 472, 474 (1975);
N.H.Rev. Stat.Ann. § 507:16, as added by Laws
1986, ch. 227:3, effective July 1, 1986; Stanard v.
Bolin, 88 Wash.2d 614, 565 P.2d 94, 98 (1977).
New Hampshire takes a very dim view of punitive
damages:
The idea is wrong. It is monstrous
heresy. It is an unsightly
and unhealthy excrescence, deforming
the symmetry of the body
of the law.
Fay v. Parker, 53 N.H. 342, 382 (1872).
In Browning-Ferris Industries of Vermont, Inc., v.
Kelco Disposal, Inc., 492 U.S. , 109 S.Ct. 2909, 106
L.Ed.2d 219 (1989), the United States Supreme Court
held that [HN9] the [*352] "Excessive Fines Clause"
of the Eighth Amendment does not apply to punitive
damage awards in cases between private parties. Justice
Brennan, in a concurring opinion, offered cogent lament
over the vague punitive damage instructions currently
given to juries faced with the responsibility of calculating
the amount of a punitive award. He stated that:
Without statutory (or at least common-law)
standards for the determination
of how large an award of punitive damages
is appropriate in a given case, juries
are left largely to themselves in making
this important, and potentially devastating,
decision. Indeed, the jury [in
Browning-Ferris] was sent to the jury
room with nothing more than the following
terse instruction: 'In determining the
amount of punitive damages, you may
take account of the character of the defendants,
their financial standing, and the
nature of their acts.'@ [Cit. omitted.]@
Guidance like this is scarcely better than
no guidance at all.
Browning-Ferris [***26] at , 109 S.Ct. at 2923,
106 L.Ed.2d at 242. Like the jury in Browning-Ferris,
juries in Maryland are left largely to themselves in assessing
the amount of a punitive damage award, considering
predominantly subjective elements such as the
character of the defendant, his wealth, and the severity of
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
Page 9
harm to the plaintiff. D.C. Transit System v. Brooks,
264 Md. 578, 589, 287 A.2d 251, 256-57 (1972), citing
Meibus v. Dodge, 38 Wis. 300 (1875).
The majority in Browning-Ferris left the responsibility
of developing further guidelines to the states when
it held that "the propriety of an award of punitive damages
for the conduct in question, and the factors the jury
may consider in determining their amount, are questions
of state law."@ Browning-Ferris at , 109 S.Ct. at
2922, 106 L.Ed.2d at 240.
We think the majority [HN10] states n13 offer an
additional guideline by allowing a jury -- faced with determining
the appropriate [*353] amount of a punitive
damage award -- to consider the amount of reasonable
attorney's fees incurred in the pending litigation. Those
states guide [***27] the jury by giving them the "aid
of one fairly definite factor which they may take into
account in fixing the amount" of punitive damages.
McCormick at 297. The Kansas Supreme Court has
reached the same conclusion, reasoning that:
While [punitive damages] imply
punishment, and their assessment is
largely a matter of discretion with the jury,
yet a court is not bound to turn the
matter over to them arbitrarily, and without
any suggestions as to matters which
they ought to consider in their assessment
of such damages. It may and, indeed,
ought to call their attention to any
[**43] matters which will tend to prevent
any mere arbitrary and thoughtless
award, and to make the assessment fair
and reasonable, considering all of the
circumstances of the case. . . . [A]nd
[attorney's fees] as influencing the
amount of smart-money, are eminently
proper. [Emphasis added.]
Brewer v. Home-Stake Production Co., 200 Kan. 96,
434 P.2d 828, 831, 30 A.L.R.3d 1435, 1440 (1967),
quoting Titus v. Corkins, 21 Kan. 722 (1879).
[***28]
n13 See n. 7, supra.
Connecticut seems to extend this reasoning even
further. McCormick at 297. There, all punitive damage
"recovery is limited to an amount which will serve to
compensate the plaintiff to the extent of his expenses of
litigation less taxable costs."@ Triangle Sheet Metal
Works, Inc. v. Silver, 154 Conn. 116, 222 A.2d 220, 225

(1966). Thus, while the jury is allowed to consider reasonable
attorney's fees on the issue of punitive damages,
attorney's fees also constitute the limit to which an award
of punitive damages may be had. Markey v. Santangelo,
195 Conn. 76, 485 A.2d 1305, 1308 (1985); McCormick
at 297 (stating that, "[m]uch may be said for the practical
common sense of this restriction, but, so far as discovered,
Connecticut stands alone in this view"). We prefer
the reasoning of the Kansas court.
When a jury determines that punitive damages are
appropriate and has considered reasonable attorney's
fees, two [*354] seemingly disparate goals are satisfied.
First, because the jury will be offered objective
guidance in calculating the amount of its punitive award,
punitive damages will be more accurately measured
[***29] and the potential for abuse decreased. Brewer
[434 P.2d] at 831, 30 A.L.R.3d at 1440; McCormick at
297. Second, the plaintiff can be made truly whole in
precisely those kinds of cases in which the defendant's
wrongful conduct is found to be at its most flagrant, for
only in such cases are punitive damages warranted.
Rowe, The Legal Theory of Attorney Fee Shifting: A
Critical Overview, 1982 Duke L.J. 651, 660 (1982).
Therefore, to aid the jury in calculating an amount of
punitive damages that will deter a party from future
wrongful conduct, evidence of reasonable attorney's fees
may be considered by the jury whenever punitive damages
are appropriate.
Because Pastor Buchenroth retracted his allegations
and apologized to many of the principals, including Ms.
Smith, the jury could easily have found that the subsequent
reiteration of his allegations to the Ruperts was
made with knowing falsity or reckless disregard for the
truth. The jury had sufficient evidence, if believed, to
award punitive damages. As a result, evidence of the
amount of Ms. Smith's attorney's fees was admissible.
JUDGMENT OF THE COURT OF SPECIAL
[***30] APPEALS REVERSED. THE CASE IS
REMANDED TO THAT COURT WITH DIRECTIONS
TO AFFIRM THE JUDGMENT OF THE CIRCUIT
COURT FOR MONTGOMERY COUNTY. COSTS IN
THIS COURT AND IN THE COURT OF SPECIAL
APPEALS TO BE PAID BY ST. LUKE'S CHURCH.
DISSENTBY:
RODOWSKY
DISSENT:
RODOWSKY, Judge, dissenting.
I respectfully dissent because I believe the Court's
holding is unsound, both practically and philosophically.
As a [*355] practical matter this new rule of "punitive
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
Page 10
damages" will not control, but will enlarge, punitive
damage verdicts. Philosophically the Court's new rule,
but for the label attributed to the additional recovery,
does not involve punitive damages at all. Rather, it is a
judicially adopted rule of fee shifting, contrary to this
Court's historic position of viewing fee shifting as the
exercise of legislative or rulemaking power.
I
The August 1986 Report of the Task Force on Litigation
Issues of the American College of Trial Lawyers
(ACTL) said with respect to punitive damages, in part:
"The Task Force unanimously agrees
that one of the greatest problems with the
current tort system is the way in [**44]
which punitive damages are handled.
Awards often bear no relation to deterrence
and reflect a jury's [***31] dissatisfaction
with a defendant and a desire
to punish, often without regard to the true
harm threatened by a defendant's conduct."
Id. at 4. See also Jeffries, A Comment on the Constitutionality
of Punitive Damages, 72 Va.L.Rev. 139 (1986)
("Punitive damages may be inflicted without adequate
procedural safeguards, in the absence of meaningful substantive
standards, and in virtually unlimited amounts.").
The majority of this Court recognizes the problem.
Indeed, one basis on which the majority undertakes to
justify its holding is that, "because the jury will be offered
objective guidance in calculating the amount of its
punitive award, punitive damages will be more accurately
measured and the potential for abuse decreased."@
Opinion at 354. With respect to my colleagues in the
majority, this is nothing but an educated guess, unsupported
by any empirical data. My educated guess is that
the majority's new rule will simply increase punitive
damages in both "little" and "big" cases.
[*356] In the little case the majority's rule gives
the conscientious jury a legitimate basis on which to
make the plaintiff "truly whole" by awarding counsel
fees. Opinion [***32] at 354. n1@ Thus, in those
cases in which the trial court allows the issue of punitive
damages to go to the jury, but in which the jury would
not award any conventional punitive damages based
solely on the defendant's conduct, the majority's new rule
invites the jury to assess at least counsel fees simply for
the sake of making the plaintiff "truly whole."@ In other
words, all that the majority has accomplished is to set a
floor below which punitive damages will not fall. In
Annot., Attorneys' Fees or Other Expenses of Litigation

as Element in Measuring Exemplary or Punitive Damages,
30 A.L.R.3d 1443 (1970), the editor, J.L. Litwin,
suggests the following practice pointer:
Id. at 1446.
[***33]
"If the case is a strong one for a punitive
award, reference to or proof of the specific
expenses may tend to have a limiting
effect, holding down the punitive award.
On the other hand, if the case is not a particularly
strong one on the punitive aspect,
and especially if the compensatory damages
are more or less minimal, proof of
litigation expense may give the jury
something concrete on which to hang a
substantial punitive award."
n1 The second justification by the majority
for its new rule is that "the plaintiff can be made
truly whole in precisely those kinds of cases in
which the defendant's wrongful conduct is found
to be at its most flagrant, for only in such cases
are punitive damages warranted."@ Opinion at
354.
Nor does it seem realistic to predict for the big case
that "punitive damages will be more accurately measured
and the potential for abuse decreased."@ Opinion at 354.
That would surely be true had the majority adopted the
Connecticut approach under which the amount of "punitive"
damages is limited to that which compensates the
plaintiff for the expenses of litigation, less taxable costs.
See Triangle Sheet Metal Works, Inc. v. Silver, 154
Conn. 116, 222 A.2d 220 (1966). But, under the majority's
rule, the basic [*357] standard, such as it is, for
punitive damages remains the same, except that the jury
will hear a number below which it will be encouraged
not to drop. Juries will remain "free to base their decisions
on pre-existing biases or redistributional inclinations,
subject only to the uncertain constraint of judicial
review."@ Ellis, Fairness and Efficiency in the Law of
Punitive Damages, 56 So.Cal.L.Rev. 1, 56 (1982) (footnote
omitted). It is wishful thinking to suggest that
adding counsel fees to punitive damages will overcome
the factors identified by Ellis.
Further, the majority's rule seemingly adds more fuel
to [***34] the fires of litigation in the big case. If
there is a good probability that the plaintiff will get to the
jury on punitive damages, the majority rule practically
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
Page 11
assures a recovery above and beyond traditional compensatory
damages, simply because the plaintiff has a
lawyer. By thus cushioning the downside exposure, the
rule discourages settlements and encourages [**45]
the plaintiff to press on in quest of the bonanza.
II
The evidence which the jury will hear under the
majority's rule, as relevant to the issue of punitive damages,
is the amount of, or manner of calculating, a reasonable
fee for legal services rendered in representing a
prevailing plaintiff in the very case then being tried.
Evidence bearing on punitive damages will be the fee
actually charged to the plaintiff, subject to a limit of reasonableness.
Let us take a hypothetical case. Assume
that the owner of a retail store, as the result of a single
incident, causes the arrest and prosecution of three suspected
shoplifters, A, B and C, under circumstances not
sufficient to constitute probable cause. In a malicious
prosecution suit by A, B and C a jury, under current
Maryland law, could assess punitive damages by inferring
[***35] malice based upon a lack of probable
cause. See Safeway Stores, Inc. v. Barrack, 210 Md.
168, 122 A.2d 457 (1956). Assume further that A has
agreed to a forty percent contingent fee in the event of
trial, and B has [*358] agreed to a thirty-three percent
contingent fee, while C has negotiated a twenty-five
percent contingent fee. The jury would be instructed,
under the majority's rule, to consider different fees in
evaluating the punitive damage claims of each plaintiff,
even if the conduct of the defendant was identical as to
each plaintiff. But the amount which a plaintiff has
agreed to pay as counsel fees has no logical relationship
to the opprobriousness of the defendant's conduct. The
fee agreement between the plaintiff and the plaintiff's
attorney has nothing to do with the extent of the malice,
if any, with which our hypothetical shopkeeper acted.
What was said in Day v. Woodworth, 13 How. 363, 371,
14 L.Ed. 181, 185 (1852) is still true today, namely:
"It must be evident, also, that as [the
amount of 'smart money'] depends upon
the degree of malice, wantonness, oppression,
or outrage of the defendant's
[***36] conduct, the punishment of his
delinquency cannot be measured by the
expenses of the plaintiff in prosecuting his
suit. It is true that damages, assessed by
way of example, may thus indirectly
compensate the plaintiff for money expended
in counsel fees; but the amount of
these fees cannot be taken as the measure
of punishment or a necessary element in
its infliction."

Thus, despite the majority's attempt to label its
product as "punitive damages," the additional recovery is
compensatory. It makes the plaintiff "truly whole" by
shifting to the defendant whose conduct merits punitive
damages the obligation to pay the fee agreed to between
the plaintiff and the plaintiff's attorney for services in the
very action being tried.
Conceptually the question presented here is whether
this Court, as a matter of decisional law, should adopt for
cases in which punitive damages are awarded an exception
to the American rule on counsel fees. For more
than 165 years it has been settled in Maryland that fees
between attorney and client are not, absent statute,
awarded to the prevailing party and are not taxed as costs
in the judgment. Nor are counsel fees awarded as damages,
absent a contract [***37] so [*359] providing,
or special circumstances. See Taylor v. Wahby, 271
Md. 101, 115-16, 314 A.2d 100, 107-08 (1974); Empire
Realty Co. v. Fleisher, 269 Md. 278, 285-86, 305 A.2d
144, 148 (1973); New Carrollton v. Belsinger Signs, Inc.,
266 Md. 229, 238, 292 A.2d 648, 652 (1972); Marney v.
Stack, 261 Md. 78, 81, 273 A.2d 426, 428 (1971);
Freedman v. Seidler, 233 Md. 39, 47, 194 A.2d 778, 783
(1963); Harry's Thrifty Tavern, Inc. v. Pitarra, 224 Md.
56, 63, 166 A.2d 908, 912 (1961); Rice v. Biltmore
Apartments Co., 141 Md. 507, 516-17, 119 A. 364, 367
(1922); McGaw v. Acker, Merrall & Condit Co., 111
Md. 153, 160, 73 A. 731, 734 (1909); Hollander v. Central
Metal & Supply Co., 109 Md. 131, 154-55, 71 A.
442, 446 (1908); Hamilton v. Trundle, 100 Md. 276,
278-79, 59 A. 719, 719-20 (1905); Singer v. Fidelity &
Deposit Co., 96 Md. 221, 224, 54 A. 63 (1903); [***38]
McGraw v. Canton, 74 Md. 554, 558-59, 22 A. 132
(1891); Wood v. State, Use of White, 66 Md. 61, 69-70, 5
A. 476, 478-79 (1886); Corner v. Mackintosh, 48 Md.
374, 390 [**46] (1878); Marshall v. Cooper, 43 Md.
46, 62 (1875); Wallis v. Dilley, 7 Md. 237, 249 (1854);
Kiersted v. Rogers, 6 H. & J. 282, 286-87 (1823); Strike's
Case, 1 Bland 57, 98-99, aff'd Strike v. McDonald &
Son, 2 H. & G. 191 (1826). n2
n2 Illustrations of special circumstances are
cases where the defendant's wrongful conduct has
involved the plaintiff in litigation with others, see
McGaw v. Acker, Merrall & Condit Co., 111 Md.
153, 160, 73 A. 731, 734 (1909), certain implied
indemnity actions, see Jones v. Calvin B. Taylor
Banking Co., 253 Md. 430, 253 A.2d 742 (1969),
and actions resulting in declaratory judgments
that a liability insurer must defend the insured in
a particular action, see Bankers & Shippers Ins.
Co. v. Electro Enterprises, 287 Md. 641, 415
A.2d 278 (1980).
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
[***39]
Page 12
Indeed, one scholar has generalized that "[a]s far
back as one can trace, courts in this country have allowed
winning litigants to recover their litigation costs from
losers only to the extent prescribed by the legislature."@
Leubsdorf, Toward a History of the American Rule on
Attorney Fee Recovery, 47 Law & Contemp. Probs. 9
(1984) (footnote omitted).
While the American rule was being reaffirmed by
this Court over the decades, the General Assembly from
time to [*360] time has made selective exceptions to
the general rule. Statutes enacting specific exceptions
are listed in the majority opinion at page 346 n. 6. I do
not believe those statutes represent "legislative tool[s] for
punishing wrongful conduct."@ Opinion at 347. Many
of the statutes cited by the majority are consumer protection
statutes where provision has been made for fee
shifting in favor of a prevailing plaintiff in order to attempt
to equalize the position of the parties. Rowe, The
Legal Theory of Attorney Fee Shifting: A Critical Overview,
1982 Duke L.J. 651, 663-64 describes the concept:
"When one side in a particular type of
litigation regularly has the advantage of
superior resources, [***40] holding out
the prospect of reimbursement of fees can
improve the position and stiffen the resolve
of the relatively weaker side. In
many types of litigation, of course, no
regular imbalance may occur, regardless
of the disparities that arise in individual
cases. Much general tort and contract
litigation probably falls into this category.
But when a legislature perceives a regular
imbalance, it can seek to match adversaries
more evenly by adopting some
form of fee shifting to prevent disproportionate
advantage in access to and use of
the legal process."
(Footnote omitted). n3
n3 In its note 6, opinion at 346, the majority
cites three statutes which are said specifically to
refer to counsel fees as a penalty. Md.Code
(1974, 1988 Repl.Vol.), § 8-208 of the Real
Property Article deals with prohibited provisions
in residential leases. Section 8-208(c)(2) provides
that, upon a landlord's violation of § 8-208
"the tenant may recover any actual damages incurred
as a reason [sic] thereof, including reasonable
attorney's fees."@ The catchline to subsection
(c) is "[p]enalties for a violation."@ That

[***41]
catchline was included in the legislative bill.
See Ch. 375 of the Acts of 1974. As introduced
the bill would have provided for recovery by the
tenant of "an amount up to $ 500" in addition to
actual damages and reasonable attorneys' fees.
That civil penalty provision was deleted in course
of passage. Id.
Md.Code (1982), § 4-301 of the
Health-General Article prohibits, with exceptions,
the unauthorized disclosure of specific
medical information by a medical care provider.
Under subsection (d), "[a] provider of medical
care who knowingly violates any provision of this
section shall be liable to a plaintiff for any damages
recoverable in law or equity, including reasonable
attorney's fees."@ The catchline to subsection
(d) is "[p]enalty," a catchline which appeared
in the enacting legislative bill, Ch. 21 of
the Acts of 1982. By SECTION 4 of that bill it
was further enacted that "the Revisor's Notes and
catchlines contained in this Act are not law and
may not be considered to have been enacted as a
part of this Act."@ 1982 Md. Laws at 1090.
Md.Code (1957, 1988 Repl.Vol.), Art. 78, §
28A is intended to protect underground facilities
of public service companies. Subsection (g)
imposes a civil penalty of $ 1,000 for each offense,
or ten times the cost of repairing the damage
to an underground facility, on a person who
excavates without first notifying the appropriate
public service company. Actions to recover the
civil penalty may be brought either by the public
service company owning the damaged facilities
or by the Attorney General. The last sentence of
subsection (g) (which appears to be in need of
amendment or construction) literally states: "All
penalties recovered from such action, including
reasonable attorney's fees, shall be paid into the
General Fund of the State Treasury."@ The majority
does not propose that its newly created
form of punitive damages be paid into the public
treasury.
Historically, in Maryland, creation of exceptions to
the American rule has been [**47] allocated to legislative
or rulemaking [*361] action. n4@ The majority's
prediction of the benefits to be achieved in punitive
damage cases by creating an exception to the American
rule for those cases is too tenuous a prediction, in my
view, to justify departing from the historic pattern. If
there is some public support for fee shifting in punitive
damage cases, the General Assembly is in a better position
than this Court to weigh the probability of the ma-
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
Page 13
jority's prediction by taking testimony on how the rule
has worked in the handful of jurisdictions which have
adopted it.
[***42]
n4 The sanction provided by Maryland Rule
1-341 for maintaining or defending a proceeding
in bad faith or without substantial justification is
a product of the constitutional rulemaking power
of this Court. While clearly designed to deter
the objectionable conduct, it is not analogous to
punitive damages. The remedy under Rule 1-341
is to award to the adverse party reasonable expenses,
including reasonable attorneys' fees, incurred
by the adverse party in opposing the objectionable
proceeding. This standard makes the
adverse party whole with respect to the cost of a
proceeding which should not have been endured,
and is, in that sense, compensatory.
[*362] Nor am I persuaded that the prediction of
accurate measurement and of decreased abuse in punitive
damage cases will be realized because ten jurisdictions
now allow counsel fees to be included in an award of
punitive damages. See opinion at 349 nn.7 and 8. n5@
The majority compares that number of states with the
number of states which either do not allow punitive
damages at all or which have expressly rejected the inclusion
of counsel fees as part of punitive damages. I
suggest that the proper comparison on the issue here, that
of fee shifting, is to jurisdictions which apply the American
rule even in cases where punitive damages are
awarded. What the majority has done is to compare the
jurisdictions which award attorneys' fees within or as
punitive damages with those jurisdictions in which there
was an unsuccessful attack on the American rule when
punitive damages were awarded. I suggest that the absence
of a decision on point in a particular jurisdiction
means that the American rule is being applied. Classifying
fifty common law jurisdictions in the United States
(including the District of Columbia and excluding Louisiana)
on that basis would produce a substantial
[***43] majority which do not permit fee shifting in all
punitive damages cases as a matter of common law.
n5 The majority includes Connecticut in its
count of nine states which "regularly allowed jury
consideration of attorney's fees on the issue of
punitive damages."@ Essentially Connecticut allows
only fee shifting, which it calls punitive
damages, but which are not analogous to the unlimited
punitive damages, including attorneys'
fees, which the majority advocates. Thus I count

eight states in the majority's footnote 7 plus two
states in the majority's footnote 8, for a total of
ten jurisdictions.
Even using the majority's basis of comparison, the
count is at least ten to nine. In its note 9 at page 350 the
majority lists six states as rejecting its position (California,
Nebraska, New Jersey, Pennsylvania, Vermont and
Wisconsin). To these must be added Massachusetts and
Washington which do not allow any punitive damages at
all as a matter of common law, but only by statute. See
J. Ghiardi & J. Kircher, Punitive [***44] Damages L.
& Prac. (1985, 1989 [*363] Cum.Supp.), § 4.19, at
37-42 Table 4-1, "Summary of States' Positions on Punitive
Damages."@ In addition, by statute in 1986 New
Hampshire has abolished all punitive damages except
those specifically authorized by statute. Id., § 4.11.5,
at 20.
Further, classifying as punitive damages a recovery
which is in its nature compensatory will confuse possible
legislative attempts to address the problems now prevailing
in punitive damage awards. The March 1989
ACTL Report on Punitive Damages of the Committee on
Special Problems in the Administration of Justice recommended
that, "[p]unitive [a]wards [s]hould [n]ot [b]e
a [s]urrogate for [c]ompensatory [d]amages."@ Id. at 10.
That report gave the following reasons:
"The civil justice system should not
recognize punitive awards for the purpose
of compensating successful plaintiffs.
The common law over time has [**48]
recognized new rights and measures for
compensation and is fully capable of doing
so in the future. Economic and noneconomic
losses are compensable today,
and a clear distinction ought to be maintained
between awards of that nature and
those which are imposed solely to punish
[***45] and deter. The maintenance of
this distinction is important in administering
the rules because there should be
differences in the process for obtaining
the two types of awards."
Id. (footnote omitted). The March 1989 ACTL Report
goes on to recommend, inter alia, a clear and convincing
standard of proof for punitive damages and a flexible cap
on punitive damages of "twice the amount of the compensatory
award or $ 250,000, whichever is greater."@
Id. at 15.
318 Md. 337, *; 568 A.2d 35, **;
1990 Md. LEXIS 9, ***
Page 14
The importance of maintaining clear concepts is illustrated
by statutes which allow both fee shifting and
punitive damages. For example, by Ch. 598 of the Acts
of 1989 the General Assembly enacted the Maryland
Uniform Trade Secrets Act, Md.Code (1975, 1983
Repl.Vol., 1989 Cum. Supp.), § § 11-1201 through
-1209 of the Commercial Law Article. Section
11-1203(a) provides that "a complainant is entitled to
recover damages for misappropriation."@ Subsection
[*364] (b) provides that those damages "may include . .
. the actual loss caused by misappropriation[.]"@ Subsection
(d) permits the court to award "exemplary damages
in an amount not exceeding twice any award made
under subsection (a) of" § 11-1203, "[i]f willful
[***46] and malicious misappropriation exists[.]"@
Section 11-1204(3) allows the court to award reasonable
attorneys' fees to the prevailing party if "[w]illful and
malicious misappropriation exists."
These provisions of the Maryland Uniform Trade
Secrets Act make complete sense under present law.
Counsel fees are not part of traditional actual loss.
Counsel fees are not part of exemplary damages. They
may be awarded by the court pursuant to the terms of the
fee shifting statute. Inasmuch as the majority has today
decided that counsel fees are an element of punitive
damages, if a statute of this type is enacted or amended
in the future, does the plaintiff recover counsel fees
twice, once as part of punitive damages and again under
the express, fee shifting statute? Do present fee shifting
statutes continue to apply if common law punitive damages
are also awarded?
By, in effect, enacting a fee shifting statute for punitive
damage cases the majority has also confused the
functions of court and jury. When the General Assembly
responds to a perceived problem by enacting a fee
shifting statute, it almost always provides that the reasonable
fee allowed is to be set by the court. Providing
[***47] for fee shifting by allowing that form of recovery
within punitive damages permits a jury to consider
evidence of a legal fee in any amount unless the trial
court can exclude the fee as unreasonable under all interpretations
of the evidence. Under the traditional,
statutory approach the court pinpoints and awards the
precise fee. This is simply another way in which the
majority's holding will encourage claims for punitive
damages.
I agree that the law of punitive damages is "broke"
and needs "fixing."@ I cannot agree, however, that
making attorneys' fees part of punitive damages is the
way to fix the break.

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PRIOR HISTORY: [**1]
319 N.W.2d 26, *; 1982 Minn. LEXIS 1561, **
LEXSEE 319 NW 2D 26
Gerald Langeland, et al, Appellants, v. The Farmers State Bank of Trimont, Trimont,
Minnesota, et al, Defendants and Third Party Plaintiffs, Respondents, Arthur
T. Edman, Defendant and Third Party Plaintiff, Respondent, Welcome-Odin Farm
Chemicals, Inc., etc., et al, Respondents, Fred C. Krahmer, Third Party Defendant,
Respondent
Appeal from District Court, Watonwan County; Hon.
Miles B. Zimmerman, Mankato 56001, Judge.
DISPOSITION:
Affirmed in part; reversed in part and remanded.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant farm owners
sought review of an order from the District Court,
Watonwan County (Minnesota), which granted motions
to dismiss claims of interference with contractual relations
and legal malpractice brought against appellees
bank, an attorney, and a judgment creditor by the farm
owners. The farm owners also appealed from a denial of
their request for attorneys fees.
OVERVIEW: The farm of appellant farm owners was
sold at a foreclosure sale. The farm owners decided to try
to redeem the property and entered into an agreement
with the bank in which the bank would lend them money
to redeem. The attorney hired by the bank failed to effectuate
the redemption for the farm owners and title to
the farm was obtained by the judgment creditor. The
farm owners brought suit and were restored as the owners
of the farm, but the trial court granted motions to
dismiss claims of the farm owners for interference with
contractual relations and legal malpractice brought
against the bank, the attorney, and the judgment creditor.
On appeal, the court affirmed the dismissal of the farm
owners' claims for emotional distress because extra-contract
damages were not recoverable for breach of
contract except where the breach was accompanied by an
independent tort. The court also affirmed the dismissal of
No. 81-308
Supreme Court of Minnesota
319 N.W.2d 26; 1982 Minn. LEXIS 1561
May 14, 1982
Page 1
the claims against the judgment creditor because it was
entitled to collect on a debt and redemption was a legal
method. The court reversed and remanded the trial
court's denial of attorneys fees because wrongful acts
forced the farm owners into litigation with a third person.
OUTCOME: The court affirmed the dismissal of the
claims of interference with contractual relations and legal
malpractice brought against the bank, the attorney, and
the judgment creditor by the farm owners. The court reversed
and remanded the denial of the request by farm
owners for attorneys fees.
LexisNexis(R) Headnotes
Torts > Procedure > Attorney-Client Relationship
[HN1] An attorney-client relationship could be established,
under a negligence theory, without any express
agreement. According to this theory, the relationship is
created whenever a person seeks and receives legal advice
from a lawyer under circumstances in which a reasonable
person would rely on the advice.
Contracts Law > Remedies > Punitive Damages
[HN2] In the absence of specific statutory provision,
extra-contract damages are not recoverable for breach of
contract except in exceptional cases where the breach is
accompanied by an independent tort.
Torts > Damages > Pain & Suffering
[HN3] In cases in which physical symptoms occur subsequent
to and because of the plaintiff's emotional disturbance,
many jurisdictions require the plaintiff to have
been in some personal physical danger caused by the
defendant's negligence before awarding damages for
emotional distress. The only exception to this rule occurs
in cases involving a direct invasion of the plaintiff's

ights such as defamation, malicious prosecution, or other
willful or malicious conduct.
Torts > Negligence > Duty > Negligent Infliction of
Emotional Distress
[HN4] No cause of action exists for the negligent infliction
of emotional distress absent either physical injury or
physical danger to the plaintiff.
Torts > Business & Employment Torts > Interference
With a Contract
Torts > Business & Employment Torts > Interference
With Prospective Advantage
[HN5] The general rule is that one has a right to be secure
in his contracts and to pursue his business free from
the interference of others. A defendant may avoid liability,
however, by showing that his actions are justified by
a lawful object that he has a right to pursue.
Torts > Damages > Costs & Attorney Fees
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN6] As a rule, attorneys fees are not recoverable in
litigation absent a specific contract or statutory authorization.
An exception to this rule arises in situations in
which the defendant's wrongful act thrusts the plaintiff
into litigation with a third person.
COUNSEL:
Paul A. Skjervold, Minneapolis, Minnesota, for Appellants.
Erickson, Zierke, Kuderer, Myster & Madsen and
Elton A. Kuderer, Fairmont, [**2] Minnesota, (for
The Farmers State Bank of Trimont, et al).
Gislason, Dosland, Hunter Malecki, C. Allen Dosland
and Steven C. Isaacson, New Ulm, Minnesota, (for
Edman).
Pflueger & Kunz and Robert R. Pflueger, Ortonville,
Minnesota, (for Welcome-Odin Farm Chemicals, Inc.).
Farrish, Johnson, Maschka & Hottinger and Gerald
L. Maschka, Mankato, Minnesota, (for Krahmer), for
Respondents.
JUDGES:
Heard, considered and decided by the court en banc.
Amdahl, Chief Justice.
OPINIONBY:
AMDAHL
OPINION:
319 N.W.2d 26, *; 1982 Minn. LEXIS 1561, **
Page 2
[*28] This is an appeal from an order granting
motions to dismiss claims of interference with contractual
relations and legal malpractice brought against a bank,
an attorney, and a judgment creditor by farm owners who
alleged that they had lost their right to redeem their farm
from foreclosure due to the conduct of these defendants.
Appellants also appeal from a denial of their request for
attorneys fees.
Appellants Gerald and Marian Langeland had owned
and resided upon their 80-acre farm for a number of
years. Marian Langeland also owned a life estate in another
80-acre parcel nearby. The Langelands had suffered
serious losses on their farming operation, and in
1977 asked respondent Leslie W. Peterson, [**3] the
president of respondent Farmers State Bank, for financial
advice. The Langelands and Peterson decided that the
Langelands would rent the farm, and that the bank would
lend them money to pay creditors. However, the Langelands
were already behind in their mortgage payments,
and on September 26, 1977, the Federal Land Bank,
which held a first lien in the amount of $ 21,500, sold the
farm for $ 24,518.77 at a foreclosure sale. Additional
creditors acquired judgments thereafter.
Having decided to try to redeem the property within
the one-year redemption period, the Langelands entered
into an agreement with the Farmers State Bank, mortgagee
on a $ 50,000 mortgage junior to the Federal Land
Bank mortgage, according to which the bank would lend
them additional money to pay off the Federal Land Bank
and other creditors. The Langelands signed another
mortgage for $ 100,000, which was filed on September
18, 1978, and a $ 25,000 note.
The bank hired an attorney, respondent Arthur Edman,
to handle the redemption of the farm. Edman filed a
notice of intention to redeem only with respect to the
bank's first mortgage of $ 50,000. The bank redeemed on
the basis of the first mortgage by paying [**4] $
26,820.26 to the Federal Land Bank, and received a redemption
certificate dated September 27, 1978.
On September 27, 1978, one of the judgment creditors,
Welcome-Odin Farm Chemicals, Inc., which held a
judgment of $ 853.50 against the Langelands, filed a
timely notice of intention to redeem. Edman, misinterpreting
the redemption statute, assumed incorrectly that
each lienholder had five days after the end of the year of
redemption in which to file a notice of intention to redeem.
Consequently, he failed to file a notice for the
bank's junior mortgage of $ 100,000, and Welcome-Odin
became the holder of the Sheriff's Certificate.
Upon learning that Welcome-Odin had filed an intention
to redeem, the bank entered into negotiations
with Welcome-Odin's attorney, respondent Fred
Krahmer. At a meeting at the bank on October 3, 1978,

Krahmer informed Peterson that the bank had lost its
chance to redeem as to the $ 100,000 mortgage. The
bank and Edman claimed that Krahmer had agreed to
accept the principal amount of the judgment and reasonable
attorneys fees in satisfaction of the claim, and that
by doing so, had waived Welcome-Odin's right to redeem.
After Krahmer left his office, Peterson [**5]
called Edman to discuss the matter. Edman advised Peterson
to have the Langelands immediately tender the
money owed on the judgment. On October 5 Marian
Langeland signed a note for the purchase of a cashier's
check for $ 904.71, payable to John Edman (Arthur Edman's
son and law partner), attorney for Gerald Langeland.
John Edman endorsed the check as follows:
[*29] Pay to the order of Fred Krahmer,
Attorney for Odin Farm Chemicals, a division
of Appleton Farm Chemicals, Inc.
in full satisfaction of that judgment in the
original amount of $ 853.50 entered on
October 6, 1977, John Edman, Attorney
for Gerald Langeland.
When John Edman delivered the check to Krahmer on
the same day, Krahmer refused to accept it, stating that
he had just redeemed in favor of Welcome-Odin. By
tendering $ 78,623.23 to the sheriff, Krahmer was able to
obtain for Welcome-Odin title to the Langeland's property,
which was worth approximately $ 200,000.
Peterson claimed to have sent the Langelands a letter
on October 19, 1978 that explained the situation, but the
Langelands denied ever having received the letter. Peterson
stated that he was unable to contact the Langelands
before that time [**6] because he was in the hospital.
The Langelands claimed to have been unaware that
they had lost the property until December 19, when Gerald
Langeland went to the bank to borrow some money
for Christmas. At that time, Peterson informed him that
title to the farm had been lost to a junior judgment creditor.
Although Peterson told Langeland that he would get
back to him some time between Christmas and New
Years Day, the Langelands received no further word
from anyone regarding the matter. The Langelands
claimed that after they lost the title to their farm, they
became ill, had marital problems, incurred difficulty obtaining
credit, and that they and their children were publicly
embarrassed and humiliated. Gerald Langeland
stated that he was unable to work for a few weeks, but
kept no record of this. Neither Gerald nor Marian sought
medical advice or counseling for their problems.
The Langelands commenced suit against the bank,
Peterson, Edman, Welcome-Odin and Krahmer, alleging
319 N.W.2d 26, *; 1982 Minn. LEXIS 1561, **
Page 3
negligent infliction of emotional distress and tortious
interference with contract. The trial court set aside the
certificate of redemption that was issued to Welcome-Odin
because it was discovered that no such [**7]
business entity actually existed; Welcome-Odin proved
to be merely a division of Appleton Farm Chemicals,
Inc., not a separate corporation. Krahmer, who apparently
relied on information provided by Welcome-Odin
representatives, believed incorrectly that Welcome-Odin
was a corporate entity and attempted to redeem in the
name of Welcome-Odin Farm Chemicals, Inc.
After the trial court set aside Welcome-Odin's redemption,
the Langelands were restored to the ownership
of the farm subject to the bank's $ 100,000 mortgage. On
June 2, 1980, the court granted Krahmer's motion for
summary judgment regarding the interference with contractual
relations claim but retained the Langelands'
claim for attorneys fees and expenses.
Prior to the trial, the court ordered the issue of attorneys
fees to be severed from the main claim and heard
by the court alone. The Langelands' attorney contended
that he was entitled to $ 60,000 in fees, 70% payable by
Edman, 20% by Peterson and 10% by Welcome-Odin
and Krahmer. He accepted the case on a contingent fee
basis of one-third of the value of the Langelands' land or
one-third of the land itself. He contended that the issues
raised were novel and complex, and [**8] he estimated
that he spent about 300 hours on the case. The Langelands
had already paid him a retainer of $ 5,500. With
the consent of all parties, the other attorneys involved in
this case testified as to what they believed a reasonable
fee would be for this matter. All concluded that a reasonable
fee would be about $ 5,000; several commented
that $ 60,000 would be unconscionable. The trial court
agreed that a fair fee would be no more than $ 5,000. The
court based this conclusion in part on the fact that the
certificate was set aside as a result of the concerted efforts
of Edman, Peterson, the bank and the Langelands'
attorney, not by the Langelands' attorney acting alone.
The Langelands' motion to recover attorneys fees was
denied.
On November 19, 1980, after jury selection and
opening statements, the District Court granted all defendants'
motions for [*30] dismissal of the Langelands'
claim for damages. The court also denied the motions
of the bank and Peterson for leave to assert a
cross-claim against Edman on the ground that with respect
to services in connection with the setting aside of
the certificate of redemption, Peterson and the bank were
volunteers, and nothing [**9] that Edman did contributed
to any difficulties the bank encountered in that regard.

The record was found to contain no evidence that
Edman's failure to redeem contributed to the expenses
incurred by Peterson and the bank. In addition, the court
denied Welcome-Odin's motion for leave to assert a
cross-claim for attorneys fees against Krahmer, first,
because Krahmer's error in using the incorrect name in
attempting to redeem was due to information given him
by a representative of Welcome-Odin; second, because
agents of Welcome-Odin were aware of the error; and
finally, because the claim, which was made almost two
years after the suit was brought, appeared to the court to
be little more than an afterthought.
This case raises the following issues:
1. May the Langelands recover damages for emotional
distress that allegedly resulted from the failure of
the bank, the bank's attorney, and its president to redeem
the bank's interest in their farm in a timely manner?
2. May the Langelands recover damages from the
judgment creditor, Welcome-Odin, who redeemed the
farm, and its attorney, Fred Krahmer, for alleged interference
with the Langelands' contractual relations with
the bank.
3. May [**10] the Langelands recover attorneys
fees they incurred in conducting litigation to recover
their interest in the farm?
1. The Langelands assert that Edman owed them a
duty to redeem their property in a timely manner. No
such duty may arise, however, unless the existence of an
attorney-client relationship is established. See, e.g.,
Togstad v. Vesely, Otto, Miller & Keefe, 291 N.W.2d
686, 692 (Minn. 1980); Christy v. Saliterman, 288 Minn.
144, 179 N.W.2d 288 (1970). An express attorney-client
relationship does not appear ever to have been established
between the Langelands and Edman. It is clear
from the statements of the parties that none was actually
intended. Edman was hired by the bank to redeem the
farm; he had also done other work for the bank. In fact,
he had never spoken with the Langelands in connection
with this matter.
The Langelands have no cause of action under a
contract theory, which requires either an express or an
implied agreement to hire the lawyer. In Togstad,
however, we indicated that [HN1] an attorney-client relationship
could be established, under a negligence theory,
without any express agreement. 291 N.W.2d at 693
n. 4. According to this theory, the relationship [**11] is
created whenever a person seeks and receives legal advice
from a lawyer under circumstances in which a reasonable
person would rely on the advice. Id.; see 63
Minn. L. Rev. 751, 759 (1979). Here, however, not the
Langelands but the bank sought and relied upon Edman's
advice. The Langelands argue the fact that Peterson and
319 N.W.2d 26, *; 1982 Minn. LEXIS 1561, **
Page 4
the bank hired Edman to do legal work for the benefit of
the Langelands and the bank, made Edman the lawyer
for the Langelands, and that therefore he owed them the
duty of performing legal services competently. Appellants
also argue that further evidence of the attorney-client
relationship was established by the endorsement
by "John Edman, Attorney for Gerald Langeland"
on the check tendered to Krahmer for the Welcome-Odin
judgment. The Langelands were not aware, however, that
John Edman had endorsed the check as their attorney.
Arthur Edman explained that his law firm had never represented
the Langelands, but that the bank, which drew
the check, had given John Edman the authority to act for
the Langelands. The Langelands relied on Peterson and
the bank to save their farm and refinance pursuant to
their agreement; the bank relied on Edman to effect the
redemption. [**12] However, at no time did the
Langelands rely on Edman as their attorney. Edman was
the bank's agent for the purpose [*31] of the redemption,
but because of the lack of reliance on the part of the
Langelands, little basis exists for a finding that Edman
thereby became the Langelands' attorney.
Appellants rely on a New York case, Schwartz v.
Greenfield, 90 Misc. 2d 882, 396 N.Y.S. 2d 582 (1977),
to support their contention that even in the absence of an
attorney-client relationship, when a lawyer gratuitously
undertakes to perform a legal service for a third party, he
is liable if he does so in a negligent manner that injures
the third party. In that case, the attorney for a debtor
agreed to file a security agreement for the creditor. He
filed it in the wrong place, and as a result the creditor lost
the collateral to the bankruptcy trustee. The court, noting
that privity of contract was unnecessary, held that
the transaction in which the defendant's
negligence occurred was intended primarily
for the benefit of the plaintiff. Harm to
the plaintiff from defendant's negligence
in failing diligently to file and perfect the
security agreement was clearly foreseeable.
[**13]
The plaintiff dealt with the defendant face
to face. The attorney, though in fact engaged
by the defendant corporation, undertook
a duty to the plaintiff personally.
No longer is there a problem of privity of
contract. No longer is there the relationship
of a third party beneficiary. Granted,
that it was initially the duty of the plaintiff
to file the papers in order to preserve his
position as a secured creditor. Once the
defendant voluntarily assumed the duty to

file these papers, he had a positive duty to
do so.
Id. at 885-86, 396 N.Y.S.2d at 584. The instant case
differs in several important respects. Although harm to
the Langelands was a foreseeable result of Edman's failure
to effect a timely redemption, Edman did not deal
with them directly, and, more importantly, he did not act
gratuitously on their behalf. Instead, he was retained by
the bank to protect its interests by redeeming the property.
The protection of the Langelands' interest in the
property was a secondary matter. The Langelands relied
on the bank, not on Edman, to take care of the problem.
Edman's duty of due care was owed only to his client, the
bank.
Furthermore, no contractual relationship, [**14]
express or implied, was established between Edman and
the Langelands. Even if such a relationship had been
established, "we have consistently held, [HN2] in the
absence of specific statutory provision therefor, that extra-contract
damages are not recoverable for breach of
contract except in exceptional cases where the breach is
accompanied by an independent tort." Haagenson v. National
Farmers Union Property & Casualty Co., 277
N.W. 2d 648, 652 (Minn. 1979); see, e.g., Olson v. Rugloski,
277 N.W. 2d 385 (Minn. 1979); Moore v. John E.
Blomquist, Inc., 256 N.W. 2d 518 (Minn. 1977); Wild v.
Rarig, 302 Minn. 419, 234 N.W. 2d 775 (1975), cert.
denied, 424 U.S. 902, 47 L. Ed. 2d 307, 96 S. Ct. 1093
(1976); Independent Grocery Co. v. Sun Insurance Co.,
146 Minn. 214, 178 N.W. 582 (1920); Beaulieu v. Great
Northern Railway, 103 Minn. 47, 114 N.W. 353 (1907).
2. The Langelands' claim against Peterson and the
bank has more merit. However, the general rule regarding
the negligent infliction of emotional distress has
been that there can be no recovery absent some accompanying
physical injury. See W. Prosser, Handbook of
the Law of Torts § 54, at 328-29 (4th ed. [**15]
1971). [HN3] In cases in which physical symptoms occur
subsequent to and because of the plaintiff's emotional
disturbance, many jurisdictions, including this one, require
the plaintiff to have been in some personal physical
danger caused by the defendant's negligence before
awarding damages for emotional distress. See Stadler v.
Cross, 295 N.W. 2d 552, 553-54 (Minn. 1980); Sanderson
v. Northern Pacific Railway, 88 Minn. 162, 92 N.W.
542 (1902); Bucknam v. Great Northern Railway, 76
Minn. 373, 79 N.W. 98 (1899). The only exception to this
rule occurs in cases involving a direct invasion of the
plaintiff's rights such as defamation, malicious prosecution,
or other willful or malicious conduct. See State
Farm Mutual Automobile Insurance [*32] Co. v. Village
of Isle, 265 Minn. 360, 122 N.W. 2d 36 (1963).
319 N.W.2d 26, *; 1982 Minn. LEXIS 1561, **
Page 5
The Langelands urge this court to adopt the rule set
out in Jarchow v. Transamerica Title Insurance Co., 48
Cal. App. 3d 917, 122 Cal. Rptr. 470 (1975). In that case,
the court held that the plaintiffs were entitled to recover
damages for emotional distress that resulted from a title
insurance company's negligent failure to discover two
easements on their property. [**16] This act of negligence
subjected the plaintiffs to considerable litigation
and financial hardship. The court held that "courts may
adjudicate negligence claims for mental distress when
sufficient guarantees of genuinness (sic) are found in the
facts of the case -- e.g., when the plaintiff has suffered
substantial damage apart from the alleged emotional
injury." Id. at 937, 122 Cal. Rptr. at 484 (emphasis in
original).
The Langelands' only injury beyond their claimed
emotional distress is attorneys fees expended in having
the certificate set aside. Were we to adopt the Jarchow
rule, it is possible that this expense could constitute
"substantial damage" sufficient to sustain the additional
claim for emotional distress. However, we decline to do
so. We have consistently held that [HN4] no cause of
action exists for the negligent infliction of emotional
distress absent either physical injury or physical danger
to the plaintiff. See, e.g., Bjordahl v. Bjordahl, 308 N.W.
2d 817 (Minn. 1981); Stadler v. Cross, 295 N.W. 2d 552
(Minn. 1980); Haagenson v. National Farmers Union
Property and Casualty Co, 277 N.W. 2d 648 (Minn.
1979); Okrina v. Midwestern Corp., 282 Minn. [**17]
400, 165 N.W. 2d 259 (1969).
It would appear that the bank was, in fact, negligent.
The Langelands dealt directly with Peterson, the bank's
agent, with the reasonable expectation that the difficulties
in question would be resolved. Edman, acting not as
the Langelands' attorney but as the bank's agent, misread
a statute and as a result failed to accomplish a timely
redemption of the Langelands' property. Peterson failed
to notify the Langelands of the status of the redemption.
Nevertheless, the Langelands have not established that
the bank's negligence caused them any quantifiable injury.
Their interest in their land has been restored to
them, subject to the financing arrangements to which
they had originally agreed. They have not been forced to
leave the community, as they had feared, and their
neighbors are now aware of the reason for the temporary
loss of the property. Some of their credit, which they
admit that they seldom use, also appears to have been
restored. We therefore must hold that lacking a showing
of injury beyond that allegedly arising from their emotional
distress, the Langelands may not recover damages
from either the bank or from its president.
3. The cause of [**18] action asserted against
Krahmer and Welcome-Odin is tortious interference with
contractual relations; the act complained of is Krahmer's

edeeming the property on behalf of his client, Welcome-Odin.
[HN5] The general rule is that one has a
right to be secure in his contracts and to pursue his business
free from the interference of others. See Bennett v.
Storz Broadcasting Co., 270 Minn. 525, 134 N.W.2d 892
(1965). A defendant may avoid liability, however, by
showing that his actions were justified by a lawful object
that he had a right to pursue. Id. The Langelands argue
that Krahmer and Welcome-Odin had no right to redeem
the property because both Krahmer and Welcome-Odin
were aware that the Langelands and the bank had entered
into a new financing arrangement and because Krahmer
had told Peterson that he was interested only in collecting
the amount of the judgment, which Krahmer and
Welcome-Odin knew to be void because it was in the
name of a nonexistent corporation. n1 The trial court
found no merit to this claim. For [*33] Krahmer to
have told Peterson that all he wanted was the amount of
the judgment and then immediately to redeem the property
with the sheriff was ethically [**19] and morally
questionable. Nevertheless, the Langelands owed Welcome-Odin
a debt that it was entitled to collect, and the
redemption of real property is an entirely legal method of
collecting a debt. Since Krahmer and Welcome-Odin
acted in furtherance of a superior legal right, the Langelands
have no claim against them for wrongful interference.
Bennett v. Storz Broadcasting Co., 270 Minn. at
532, 134 N.W.2d at 897. Furthermore, it is apparent that
any injuries that the Langelands suffered would have
been proximately caused by Edman's failure to redeem
the bank's interest on time, not by Krahmer's attempted
redemption, since the bank's interest would have had
priority over that of Welcome-Odin, a junior judgment
creditor, if Edman had redeemed in a timely manner.
N1 The fact that Welcome-Odin was not an
actual corporation apparently was known to
Krahmer by the time he drew the affidavit of
identification, but Krahmer denied having drawn
the affidavit to avoid an assignment of the judgment.
Instead, he claims that he was "attempting
to tie the record together so there would be no
confusion as to why there were different names."
319 N.W.2d 26, *; 1982 Minn. LEXIS 1561, **
[**20]
Page 6
4. We hold that the Langelands are entitled to recover
from the bank reasonable attorneys fees that they
incurred in having the certificate of redemption set aside.
[HN6] As a rule attorneys fees are not recoverable in
litigation absent a specific contract or statutory authorization.
See Jacobs v. Rosemount Dodge-Winnebago
South, 310 N.W.2d 71 (Minn. 1981); Fownes v. Hubbard
Broadcasting, Inc., 310 Minn. 540, 246 N.W.2d 700
(1976). The United States Supreme Court has held that
"it is not for us to invade the legislature's province" by
awarding attorneys fees without statutory authorization.
Alyeska Pipeline Service Co. v. Wilderness Society, 421
U.S. 240, 271, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975).
An exception to this rule arises in situations in which the
defendant's wrongful act thrusts the plaintiff into litigation
with a third person. See First Fiduciary Corp. v.
Blanco, 276 N.W.2d 30, 34 (Minn. 1979); Dworsky v.
Vermes Credit Jewelry, Inc., 244 Minn. 62, 70, 69
N.W.2d 118, 124 (1955). The district court held that the
Langelands were not entitled to an award of attorneys
fees on the ground that Krahmer and Welcome-Odin,
who had procured the certificate and judgment, [**21]
were not third parties. We disagree. Edman redeemed on
the bank's first mortgage; Krahmer then redeemed on
behalf of Welcome-Odin. Because Edman failed to redeem
with respect to the bank's superseding second
mortgage, Welcome-Odin was able to take the property.
If Edman had redeemed on time, Welcome-Odin would
not have been able to obtain an interest in the property
and the Langelands would not have been forced to enter
into litigation to have Welcome-Odin's certificate set
aside. Edman's misinterpretation of the redemption statute
was the direct and proximate cause of the Langelands
being forced to incur attorneys fees to protect their interest
in the property; they would have had no litigation
with Welcome-Odin otherwise. Although the district
court held that the Langelands were not entitled to attorneys
fees, it stated that a fair charge for services in connection
with setting aside the certificate would not exceed
$ 5,000.00. We remand this matter for a determination
of a proper award of attorneys fees payable by the
bank.
Affirmed in part, reversed in part and remanded.

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DISPOSITION: [**1]
336 N.W.2d 337, *; 1983 N.D. LEXIS 425, **
LEXSEE 336 NW2D 337
Alpha BLAIR, a Widow, Plaintiff, and Richard Blair, Plaintiff and Appellant, v.
Larry BOULGER, Defendant and Appellee
The judgment is affirmed as modified.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant son sought
review of a judgment from the trial court (North Dakota),
which found for appellee buyer in an action by the son to
rescind a contract between the buyer and the mother, the
seller, to sell the buyer a house. The buyer counterclaimed
against the son for interference with a contract.
OVERVIEW: The mother and the buyer discussed a
contract in which the mother was to sell the house to the
buyer while remaining as a tenant on the first floor for a
term of years. The son was present at the talks. Subsequent
to the talks, the mother executed a warrant deed,
subject to the contract, conveying to herself and her son
as joint tenants whatever interest she still held in the
house. The mother and son brought an action to void the
contract. The trial court found for the buyer on his counterclaim
against the son for interference with the contract.
The son appealed the award of attorney's fees to the
buyer as being inappropriate. On appeal, the court affirmed
judgment, holding that while generally attorney's
fees could not be awarded in the absence of contractual
or statutory authority, the third-party exception applied.
The court held that the buyer had to defend an action
brought by the son who was not a party to the contract,
and therefore, he was entitled to recover attorney's fees
from the son.
OUTCOME: The court affirmed judgment for the buyer
but modified the award to eliminate interest on the
judgment.
LexisNexis(R) Headnotes
Civil No. 10299
Supreme Court of North Dakota
336 N.W.2d 337; 1983 N.D. LEXIS 425
June 30, 1983
Page 1
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN1] In the absence of any contractual or statutory liability,
attorneys' fees incurred by a plaintiff in the litigation
of his claim are not recoverable as an item of damages,
either in an action ex contractu or an action ex delicto.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] The "third party" exception, states that where the
wrongful acts of one party, (A), cause another, (B), to
bring or defend an action against a third party, (C), then
(B) in a later action against (A) may recover the costs of
litigation, including attorney fees, incurred by (B) in
bringing or defending the earlier action against (C)
which was the direct result of (A)'s wrongful act.
Torts > Damages > Costs & Attorney Fees
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] Attorney fees may not be awarded as an element
of damages in the absence of contractual or statutory
authority. However, sound reasoning as well as sound
judgment supports recognition of some form of the
third-party exception. The formulation of the exception
states: One who through the tort of another has been required
to act in the protection of his interests by bringing
or defending an action against a third person is entitled to
recover reasonable compensation for loss of time, attorney
fees and other expenditures thereby suffered or incurred
in the earlier action. This statement, in conformity
with the third-party exception, requires that the person
seeking to recover attorney fees must have been forced to
bring or defend an earlier action against a third party.
Torts > Damages > Costs & Attorney Fees
Civil Procedure > Costs & Attorney Fees > Attorney
Fees

[HN4] So long as the wrongful acts of a person cause
another to become involved in litigation with a third
party, the expense of litigating against the third party
may be recovered from the wrongdoer who caused the
litigation regardless of whether the action to recover attorney
fees is brought in the same proceeding or in a
subsequent proceeding.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN5] Expenses incurred in litigation with the wrongdoer
to recover attorney fees for having to litigate against a
third party are not recoverable, however. Thus in a claim
by (A) to recover from (B) expenses incurred in an earlier
action, the earlier action which (A) was forced to bring
or defend cannot have been against (B), the wrongful
party. The reason usually given for requiring the earlier
action to be against a third party is that permitting (A) to
recover from (B) expenses of litigation incurred in an
earlier action against (B) may discourage the legitimate
use of the courts to resolve controversies. Provided that a
claim or defense of a losing party is not frivolous, the
prevailing party in a lawsuit should not be allowed to
recover attorney fees resulting from litigation against the
losing party.
Torts > Damages > Compensatory Damages
Torts > Damages > Punitive Damages
[HN6] An award of punitive damages is improper in the
absence of an award of actual compensatory damages.
Torts > Business & Employment Torts > Interference
With a Contract
[HN7] The concept of "justification" is not clearly defined
in the law of interference with contractual relations.
The motive of the defendant in interfering with contractual
relations is highly determinative of the issue whether
or not his actions were without justification. Where interference
with contractual rights is done for the indirect
purpose of injuring the plaintiff or benefiting the defendant
at the plaintiff's expense, it is unjustifiable.
Civil Procedure > Jury Trials > Province of Court &
Jury
Torts > Business & Employment Torts > Interference
With a Contract
Civil Procedure > Appeals > Standards of Review >
Clearly Erroneous Review
[HN8] Whether or not interference with contractual relations
is justified is basically a question of fact, and the
trial court's resolution of the question will not be set
aside unless it is clearly erroneous. N.D. R. Civ. P. 52(a).
336 N.W.2d 337, *; 1983 N.D. LEXIS 425, **
Page 2
Civil Procedure > Appeals > Standards of Review >
Substantial Evidence
Civil Procedure > Costs & Attorney Fees > Judgment
Interest
[HN9] A judgment must be supported by and conform to
the decision with respect to the allowance of interest.
COUNSEL:
Michael C. O'Neel, Fargo, for Plaintiff and Appellant.
John V. Boulger, of Solberg, Stewart, Boulger &
Miller, Fargo, for Defendant and Appellee.
JUDGES:
VandeWalle, J. Erickstad, C.J., and Pederson, Sand
and Paulson, JJ., concur.
OPINIONBY:
VANDEWALLE
OPINION:
[*338] Richard Blair appealed from a judgment
awarding Larry Boulger $2,500 compensatory damages
and $5,000 exemplary damages for Blair's intentionally
interfering with contractual relations between Boulger
and Alpha Blair, Richard Blair's mother. We modify and
affirm the judgment.
I
On January 8, 1974, Alpha Blair and her attorney
met with Boulger to discuss the terms for the purchase
by Boulger of a house owned by Mrs. Blair. The meeting
took place at the office of Alpha's attorney and concluded
with the execution of a contract for deed in which
Mrs. Blair agreed to sell the house to Larry Boulger. A
condition to the sale of the house was that Mrs. Boulger
would continue to occupy the main floor of the house at
a rental cost of $100 per month which would be offset
against the monthly payments on the principal made by
Boulger to Mrs. Blair.
Mrs. Blair's son Donald, who was present [**2]
during preliminary negotiations between his mother and
Boulger for the sale of the house, encouraged her to sell.
According to the testimony of Mrs. Blair, Donald, and
another son, Bruce, Richard was upset when he learned
the house had been sold. Richard's testimony is that he
was not upset. Nevertheless, on June 10, 1974, several
[*339] months after performance on the contract for
deed had begun, Mrs. Blair executed a warranty deed,
subject to the contract for deed, conveying to herself and
Richard as joint tenants whatever interest she then had in
the house.

A few months later, Richard, purportedly acting in
his mother's behalf, called Boulger and said his mother
wished to repurchase the house. Following an unfavorable
response from Boulger, Richard, again purportedly
acting at his mother's request, contacted an attorney to
assist Mrs. Blair and Richard in getting the contract set
aside.
The Blairs' attorney sent several letters to Boulger
stating a number of bases for rescinding the contract.
Boulger's attorney replied that the Blairs' claims were
without merit and that Boulger considered Richard's
conduct to constitute intentional interference with the
contract between [**3] himself and Richard's mother.
Richard later acknowledged he had received copies of
the letters from Boulger's attorney.
The next correspondence between the parties was a
letter from Boulger to Richard Blair in which he demanded
rent from Blair for the periods of time Richard
lived with his mother after the sale of the house. In consequence,
Richard and his mother instituted an action
against Boulger to have the contract for deed cancelled.
They claimed that Boulger induced Mrs. Blair to enter
into the contract by fraudulently representing that Richard
could occupy the first-floor apartment with his
mother at no additional expense. Boulger counterclaimed,
alleging (1) Richard owed Boulger rent for the
time he lived with his mother after execution of the contract
for deed; (2) Richard intentionally interfered with
rights under the contract between Boulger and Mrs.
Blair; and (3) Mrs. Blair, and Richard, breached the contract
for deed. A trial to the court was set for February
20, 1980.
Prior to the commencement of trial, Richard Blair
moved to have the complaint dismissed without prejudice.
Mrs. Blair joined Richard in the motion. The court
denied the motion, whereupon Richard and [**4] Mrs.
Blair sought to have their complaint dismissed with
prejudice. They were aware that if the court granted the
motion it would amount to a determination that there
were no fraudulent representations made by Boulger to
Mrs. Blair which induced her to enter into the contract
for the sale of her house. The court granted the motion,
and the trial proceeded on Boulger's counterclaim.
In its memorandum opinion following trial, the court
(1) dismissed the first count of the counterclaim for back
rent, (2) found on the second count that Richard Blair
had intentionally and maliciously interfered with the
contractual relations between Boulger and Mrs. Blair, for
which the court awarded Boulger $2,500 compensatory
damages and $5,000 exemplary damages, and (3) found
on the third count that Mrs. Blair had breached the contract
with Boulger but awarded no damages. Blair ap-
336 N.W.2d 337, *; 1983 N.D. LEXIS 425, **
Page 3
pealed only from the trial court's decision on the second
count of the counterclaim.
II
Blair contends that the court's award of $2,500 as
compensatory damages represents compensation for attorney
fees and, as such, is improper. He cites our decision
in Hoge v. Burleigh Cty. Water Management Dist.,
311 N.W.2d 23, 31 [**5] (N.D.1981), for the general
rule:
[HN1] "In the absence of any contractual
or statutory liability, attorneys' fees incurred
by a plaintiff in the litigation of his
claim are not recoverable as an item of
damages, either in an action ex contractu
or an action ex delicto."
Boulger counter-argues that the $2,500 awarded as
damages does not necessarily represent an award of attorney
fees, and even if it does, the award is proper under
an exception to the general rule cited above. The exception,
sometimes called [HN2] the "third party" exception,
states that where the wrongful acts of one party, (A),
cause another, (B), to bring or defend an action against a
third party, (C), then (B) in a later action against (A) may
recover the costs of litigation, including attorney fees,
incurred by (B) in bringing or defending the earlier
[*340] action against (C) which was the direct result of
(A)'s wrongful act. E.g., Campus Sweater & Sportswear
v. M.B. Kahn Constr., 515 F. Supp. 64 (D.S.C.1979);
Roberts v. Ball, Hunt, Hart, Brown & Baerwitz, 57
Cal.App.3d 104, 128 Cal.Rptr. 901 (1976); Warren v.
McLouth Steel Corp., 111 Mich. App. 496, 314 N.W.2d
666 (1981).
Blair's response to [**6] this argument is that
whether or not North Dakota recognizes a third-party
exception, the facts of this case do not satisfy the requirements
of the exception because, first, there was not
an earlier action, and, second, if there was an earlier action,
it was not against a third party.
Blair is correct in his assertion that, generally,
[HN3] attorney fees may not be awarded as an element
of damages in the absence of contractual or statutory
authority. However, we believe that sound reasoning as
well as sound judgment supports recognition of some
form of the third-party exception. The formulation of the
exception, relevant to the particular facts of this case,
which we adopt occurs in Section 914 of 4 Restatement
of Torts 2d, p. 492, and states:

"(2) One who through the tort of another
has been required to act in the protection
of his interests by bringing or defending
an action against a third person is entitled
to recover reasonable compensation for
loss of time, attorney fees and other expenditures
thereby suffered or incurred in
the earlier action."
This statement, in conformity with the third-party
exception, requires that the person seeking to recover
attorney fees [**7] must have been forced to bring or
defend an earlier action against a third party. Hence, we
must examine the facts to determine whether or not these
requirements are satisfied in the instant case. Contrary to
Blair's contention, we decide they are.
According to Blair, because the proceeding in which
Boulger defended against a third party was the same
proceeding in which he sought to recover attorney fees
from Blair through a counterclaim, the wrongful acts he
allegedly committed did not cause Boulger to defend
against a third party in an "earlier" action. The principal
distinction upon which this argument rests is between a
present and a prior proceeding.
The critical distinction as we see it is not between
present and prior proceedings, but rather between litigation
against a third party caused by the wrongful acts of
another and litigation against the wrongdoer to recover
attorney fees for having to defend against a third party.
[HN4] So long as the wrongful acts of a person cause
another to become involved in litigation with a third
party, the expense of litigating against the third party
may be recovered from the wrongdoer who caused the
litigation regardless of [**8] whether the action to recover
attorney fees is brought in the same proceeding or
in a subsequent proceeding. E.g., Warren, supra, 314
N.W.2d at 672. But cf. G & D Co. v. Durand Milling
Co., Inc., 67 Mich.App. 253, 240 N.W.2d 765 (1976).
[HN5] Expenses incurred in litigation with the
wrongdoer to recover attorney fees for having to litigate
against a third party are not recoverable, however. Thus
in a claim by (A) to recover from (B) expenses incurred
in an earlier action, the earlier action which (A) was
forced to bring or defend cannot have been against (B),
the wrongful party. Dassance v. Nienhuis, 57
Mich.App. 422, 225 N.W.2d 789 (1975). The reason usually
given for requiring the earlier action to be against a
third party is that permitting (A) to recover from (B) expenses
of litigation incurred in an earlier action against
(B) may discourage the legitimate use of the courts to
resolve controversies. See D. Dobbs, Handbook on the
Law of Remedies, § 3.8, p. 201. Provided that a claim or
defense of a losing party is not frivolous, the prevailing
party in a lawsuit should not be allowed to recover attor-
336 N.W.2d 337, *; 1983 N.D. LEXIS 425, **
Page 4
ney fees resulting from litigation against the losing party.
See Sec. [**9] 28-26-01, N.D.C.C.; see also Dobbs,
supra, at 201.
Blair maintains that since he was a party to the original
action brought against Boulger, the requirement of
the third-party exception [*341] that the earlier action
be one against a third party is not satisfied.
Blair's name appeared with his mother's on the complaint
against Boulger, but the question whether or not he
was a proper party to the action never was resolved by
the trial court because the Blairs moved to dismiss their
complaint with prejudice.
The complaint in question sought relief from Boulger
for allegedly fraudulently inducing Alpha Blair to enter
into the contract for deed. Richard Blair was not a
party to the contract, nor did he acquire an interest in any
of the proceeds his mother was to receive under the
terms of the contract by the "interest" she conveyed to
him on June 10, 1974. While Alpha Blair is alive,
Richard has no independent, actionable interest to support
a lawsuit against Boulger for misrepresentation of
facts in the formation of the contract for deed between
his mother and Boulger. If Richard had not interfered
with the contractual relation between his mother and
Boulger, the action [**10] against Boulger in all likelihood
never would have arisen.
In its findings of fact, conclusions of law, and order
for judgment, the trial court specially found that "the
lawsuit [against Boulger] was instituted at the specific
request of Plaintiff Richard Blair and Plaintiff Richard
Blair agreed to pay the legal costs of such action."
A correct application of the third-party exception to
the facts as determined by the trial court leads us to the
conclusion that but for Richard's wrongful act of interference,
the action for fraudulent representation would
not have been brought against Boulger, and Boulger
would not have had to defend against Mrs. Blair, a third
party, who was the real party in interest. Consequently,
Boulger is entitled to recover attorney fees for defending
against the claim for relief instituted by the Blairs; he is
not, however, entitled to recover attorney fees for litigating
his counterclaim against Alpha and Richard Blair.
Whether the court's award of $2,500 as compensating
damages was intended to represent attorney fees or
actual damages, there is sufficient evidence in the record
to support the award under either interpretation of the
court's intention. [**11]
This determination forecloses discussion of Blair's
next issue, which is "Whether the failure to prove actual
damages precludes allowing punitive damages." Although
it is true that [HN6] an award of punitive damages
is improper in the absence of an award of actual com-

pensatory damages [Riebe v. Riebe, 252 N.W.2d 175
(N.D. 1977)], because we have decided that actual damages
have been satisfactorily proved, Blair's question as
to the propriety of awarding punitive damages no longer
exists. See Sec. 32-03-07, N.D.C.C.
III
The final two issues we consider are:
(1) Whether or not the trial court's determination that
Blair's acts of interference were without justification is
clearly erroneous; and
(2) Whether or not the provision in the judgment and
decree giving interest on the damages award before the
date of the entry of judgment is improper.
In our consideration of the first of these issues, we
note that [HN7] the concept of "justification" is not
clearly defined in the law of interference with contractual
relations. See Seven D. Enterprises Ltd. v. Fonzi, 438 F.
Supp. 161 (E.D.Mich.1977); 45 Am.Jur.2d, Interference,
§ 27. Yet it is generally conceded that the motive of
the [**12] defendant in interfering with contractual
relations is highly determinative of the issue whether or
not his actions were without justification. See Stephenson
v. Plastics Corporation of America, 276 Minn. 400,
150 N.W.2d 668 (1967); W. Prosser, 2 Restatement of
Torts 2d, 4th Ed., § 129, pp. 942-943; 45 Am.Jur.2d,
Interference, § 28.
We adopt the view that where interference with contractual
rights is done for the indirect purpose of injuring
the plaintiff or benefiting the defendant at the plaintiff's
expense, it is unjustifiable. Seven [*342] D., supra,
438 F. Supp. at 163; Stephenson, supra, 150 N.W.2d at
680.
With respect to Blair's actions, the trial court determined
that
(1) Blair was acting in his own interest to benefit
himself at Boulger's expense;
(2) Blair intended to directly or indirectly injure
Boulger; and
(3) Blair's actions were (i) not in good faith, (ii) with
malice, and (iii) without justification.
[HN8] Whether or not interference with contractual
relations is justified is basically a question of fact [Seven
D., supra, 438 F. Supp. at 163; Bennett v. Storz Broadcasting
Co., 270 Minn. 525, 134 N.W.2d 892 (1965)],
and the trial [**13] court's resolution of the question
336 N.W.2d 337, *; 1983 N.D. LEXIS 425, **
Page 5
will not be set aside unless it is clearly erroneous [Rule
52(a), N.D.R.Civ.P.]. Consequently, we will not reverse
the trial court's finding that Blair's actions were without
justification unless we are definitely and firmly convinced
that the trial court made a mistake. E.g., McGuire
v. Gaffney, 314 N.W.2d 851 (N.D.1982). Our review of
the record reveals adequate evidence to support the trial
court's finding; accordingly, it is affirmed.
Blair's final argument is that the judgment and decree
incorrectly permits Boulger to receive interest on
the judgment of $8,463.25 from January 29, 1982, the
date of the memorandum opinion, rather than from August
25, 1982, which is the date judgment was entered.
Blair accurately points out that the trial court did not
grant interest on damages in its memorandum opinion
nor in the findings of fact, conclusions of law, and order
for judgment. The award of interest appears for the first
time in the judgment and decree, which was not signed
by the trial court judge but by the clerk of the district
court. Nowhere in the record do we find a manifestation
of the trial court's intention to award interest from the
[**14] date of the memorandum opinion.
In Braaten v. Grabinski, 77 N.D. 422, 43 N.W.2d
381, 384 (N.D.1950), a case in which the trial court
awarded $350 damages, but the clerk of court in entering
judgment included interest on the damages, this court
held:
[HN9] "[A] judgment must be supported
by and conform to the decision with respect
to the allowance of interest."
In the present case, because the judgment in specifying
that interest is to be paid on damages from January
29, 1982, does not conform to the memorandum opinion
or findings of fact, conclusions of law, and order for
judgment, we modify the judgment to eliminate interest
on the damages awarded from January 29, 1982. As a
consequence, interest on the $8,463.25 shall be payable
from the date the judgment was entered, i.e., August 25,
1982. See Sec. 28-20-34, N.D.C.C.
For the reasons given, the judgment is affirmed as
modified.
ERICKSTAD, C.J., and PEDERSON, SAND and
PAULSON, JJ., concur.

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350 Ark. 569, *; 89 S.W.3d 337, **;
2002 Ark. LEXIS 573, ***
LEXSEE 350 ARK 569
Antoine JEAN-PIERRE. M.D., APPELLANT v. PLANTATION HOMES OF
CRITTENDEN COUNTY, INC., d/b/a Southwoods Long Term Residential Care
Facility, APPELLEE
SUBSEQUENT HISTORY: [***1] As Corrected.
PRIOR HISTORY: APPEAL FROM THE CIRCUIT
COURT OF CRITTENDEN COUNTY, ARKANSAS,
NO. CIV-96-504, Honorable Victor Hill, Circuit Judge.
DISPOSITION: Affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff mental health
facility filed a third-party complaint against defendant
psychiatrist alleging the psychiatrist was negligent in his
treatment of a patient. The psychiatrist never answered
the third-party complaint, but filed a motion to dismiss
the third-party complaint 10 days after his answer was
due. The Circuit Court of Crittenden County (Arkansas)
granted a default judgment against the psychiatrist. The
psychiatrist appealed.
OVERVIEW: A patient under the treatment of the psychiatrist,
escaped, stole a car, and crashed into another
vehicle, killing the driver. The estate of the deceased
driver sued the mental health facility. The mental health
facility's third-party complaint sought indemnity and
contribution from the psychiatrist. The mental health
facility settled the claims filed by the estate of the deceased
driver, and the trial court concluded the mental
health facility was entitled to recover from the psychiatrist
the amount of $ 775,000. The psychiatrist argued
that the trial court erred in awarding the mental health
facility default damages, when the mental health facility
failed to prove it was liable to the deceased driver's estate.
The appellate court held that by defaulting, the psychiatrist
admitted the truth of the mental health facility's
allegations, and therefore, admitted that he was liable.
The appellate court rejected the psychiatrist's argument
that the mental health facility settled its suit voluntarily,
and therefore, could not seek indemnification. The set-
02-217
SUPREME COURT OF ARKANSAS
350 Ark. 569; 89 S.W.3d 337; 2002 Ark. LEXIS 573
November 14, 2002, Opinion Delivered
Page 1
tlement was not "voluntary," because the mental health
facility faced a tremendous amount of exposure in the
event of a trial.
OUTCOME: The judgment of the trial court awarding
the mental health facility $ 775,000 for indemnification
pursuant to the default judgment was affirmed. However,
because the trial court's order offered no statutory authority
for awarding attorneys' fees to the mental health
facility, and because that award was contrary to the general
rule against awarding such fees in the absence of a
statute or rule, that portion of the trial court's order was
reversed.
LexisNexis(R) Headnotes
Civil Procedure > Appeals > Reviewability > Preservation
for Review
[HN1] The appellate court will not consider arguments
raised for the first time on appeal.
Civil Procedure > Early Pretrial Judgments > Default >
Entry of Default & Default Judgment
[HN2] A default judgment establishes liability, although
not the extent of damages. Under Ark. R. Civ. P. 8(d),
averments in a pleading to which a responsive pleading
is required, other than those as to the amount of damage,
are admitted when not denied.
Civil Procedure > Early Pretrial Judgments > Default >
Entry of Default & Default Judgment
Evidence > Procedural Considerations > Preliminary
Questions
[HN3] A defaulting defendant may not introduce evidence
to defeat the plaintiff's cause of action.
Torts > Multiple Defendants > Contribution & Indemnity

[HN4] One cannot recover from an indemnitor upon a
mere showing that the indemnitee has incurred liability,
but he must show that he has suffered actual loss by
payment or satisfaction of a judgment or by other payment
under compulsion.
Torts > Multiple Defendants > Contribution & Indemnity
Evidence > Procedural Considerations > Burdens of
Proof
[HN5] A person legally liable for damages who is entitled
to indemnity may settle the claim and recover over
against the indemnitor, even though he is not compelled
by judgment to pay the loss. The fact of voluntary payment
does not negative the right to indemnity since a
person confronted with an obligation that he cannot legally
resist is not obligated to wait to be sued and to lose
a reasonable opportunity for compromise. Such recovery
is subject to proof of liability and the reasonableness of
the amount of the settlement.
Civil Procedure > Early Pretrial Judgments > Default >
Entry of Default & Default Judgment
Evidence > Procedural Considerations > Preliminary
Questions
[HN6] After a default judgment is entered, proof is still
required to establish the amount of damages, and the
defendant has the right to cross-examine the plaintiff's
witnesses, to introduce evidence in mitigation of damages,
and to question on appeal the sufficiency of the evidence
to support the amount of damages awarded. The
defaulting defendant may not, however, introduce evidence
to defeat the plaintiff's cause of action.
Civil Procedure > Appeals > Reviewability > Preservation
for Review
[HN7] Failure to object at trial precludes review of an
argument on appeal.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN8] Attorneys' fees cannot be awarded unless specifically
provided for by statute or rule. Arkansas follows
the American Rule that attorneys' fees are not chargeable
as costs in litigation unless permitted by statute.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN9] The statute on attorneys' fees in certain civil actions
is Ark. Code Ann. § 16-22-308 (Repl. 1999).
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN10] See Ark. Code Ann. § 16-22-308 (Repl. 1999).
350 Ark. 569, *; 89 S.W.3d 337, **;
2002 Ark. LEXIS 573, ***
Page 2
COUNSEL: Thomason, Hendrix, Harvey, Johnson &
Mitchell, by: Bruce A. McMullen and Robert L. Moore,
for appellant.
Shackleford, Phillips, Wineland & Ratcliff, P.A., by:
Dennis L. Shackleford, for appellee.
JUDGES: Tom Glaze, Justice. ARNOLD, C.J., not participating.
OPINIONBY: Tom Glaze
OPINION: [**338] [*572]
Tom Glaze, Justice. Southwoods Residential Care
Facility is a long-term residential care facility for the
treatment and housing of mentally handicapped patients.
The estate of Mary Mills (hereinafter Mills) sued
Southwoods after a patient, Haywood Wilder, left the
facility on January 12, 1996, stole a car, and crashed into
Mills's vehicle head-on, killing her. After a number of
amended complaints, Mills also sued Behavioral Health
Services n1 ("BHS"), the company that provided doctors
and psychiatric treatment to Southwoods' patients.
Mills's complaint [**339] alleged that BHS was negligent
for failing to take appropriate steps to control
Wilder, despite its recognition that he posed a high risk
for dangerous actions, and that Southwoods was negligent
in failing to maintain control over Wilder and in
admitting him to its facility without adequately evaluating
[***2] the degree of risk he posed.
n1 Mills actually sued Frontier Insurance
Company, the liability carrier for BHS, under the
direct-action statute, Ark. Code Ann. §
23-79-210 .
Southwoods subsequently filed a third-party complaint
against Dr. Antoine Jean-Pierre, the psychiatrist
who had been treating Wilder, alleging that he failed to
take necessary steps to have Wilder placed in a more
appropriate care facility. Further, Southwoods alleged
that Dr. Jean-Pierre was negligent in his care and treatment
of Wilder, and that any damages or injuries suffered
by Mills were caused by the negligence or breach
of contract by Dr. Jean-Pierre. The complaint sought
indemnity and contribution from Dr. Jean-Pierre, in the
event Southwoods was determined to have any liability
to Mills's estate. Southwoods also filed a cross-claim
against BHS, alleging that BHS had been negligent and
that Southwoods was also entitled to indemnification
from BHS. BHS filed a timely answer to Southwoods'
cross-claim. [***3]

Dr. Jean-Pierre, however, never filed an answer to
Southwoods' third-party complaint against him. Instead,
he filed a motion to dismiss the third-party complaint ten
days after his [*573] answer would have been due.
Southwoods filed a motion for default judgment against
Dr. Jean-Pierre, seeking an order that the doctor was
liable for contribution and indemnity to Southwoods for
any and all losses or judgments rendered against Southwoods,
and deeming all allegations of the third-party
complaint admitted and true for all purposes. The trial
court granted Southwoods' motion for default judgment.
Dr. Jean-Pierre filed a motion to set aside the default
judgment. In support of his motion, he argued that
Southwoods' third-party complaint filed against Dr.
Jean-Pierre contained the same allegations of negligence
as incorporated in Mills's original complaint. "Clearly,"
he stated, "Southwoods' third-party complaint is simply
an extension of [Mills's] complaint in that, if Southwoods
is found liable, Southwoods claims that any liability was
caused by the negligence of Dr. Jean-Pierre. Therefore,
the same allegations are contained in [Mills's] complaint
and Southwoods' third-party complaint. Southwoods'
[***4] answer to [Mills's] complaint contains a general
denial of negligence, which inures to the benefit of Dr.
Jean-Pierre."
Southwoods eventually settled the claims filed by
Mills, agreeing to pay the estate $ 775,000.00. Subsequently,
the trial court held a bench trial to determine
whether the settlement was made in good faith and for a
reasonable amount under the circumstances. The court
made a ruling prior to trial that Dr. Jean-Pierre was limited
to challenging the amount of damages and was foreclosed
from presenting evidence intended to defeat
Southwoods' cause of action, because Dr. Jean-Pierre's
liability had already been established by the default
judgment. At the conclusion of the trial, the court entered
an order finding that the settlement was based on
good-faith negotiations, was made at arm's length, and
was reasonable, based upon the potential exposure.
Therefore, the trial court concluded that Southwoods was
entitled to recover from Dr. Jean-Pierre the amount of
[*574] $ 775,000.00, n2 plus attorneys' fees and costs
amounting to $ 191,678.19.
[***5]
n2 Although Dr. Jean-Pierre consistently refers
in his brief to the award as being in the
amount of $ 750,000.00, the trial court's order, as
found in Dr. Jean-Pierre's addendum, states that
the amount is actually $ 775,000.00.
[**340] For his first point on appeal, Dr.
Jean-Pierre asserts that the trial court erred in entering a
350 Ark. 569, *; 89 S.W.3d 337, **;
2002 Ark. LEXIS 573, ***
Page 3
default judgment against him, because the answer filed
by BHS to Southwoods' cross-claim inured to his benefit.
However, we conclude that this issue is not preserved for
appeal. At trial, in his motion to set aside the default
judgment, Dr. Jean-Pierre raised a different argument. In
that motion, the doctor argued that he should be able to
rely on the "common defense doctrine" because Southwoods
had filed an answer to the original complaint,
filed by Mills. Specifically, the doctor stated as follows:
In the case at bar, the defendant, Southwoods,
answered the complaint of the
plaintiff by asserting a general denial of
all allegations contained in the complaint.
Southwoods' third-party complaint filed
against Dr. Jean-Pierre contained the
same allegations of negligence as incorporated
in the plaintiff's complaint.
Clearly, Southwoods' third-party complaint
is simply an extension of the plaintiff's
complaint in that, if Southwoods is
found liable, Southwoods claims that any
liability was caused by the negligence of
Dr. Jean-Pierre. Therefore, the same allegations
are contained [***6] in the
plaintiff's complaint and Southwoods'
third-party complaint. Southwoods' answer
to [Mills's] complaint contains a
general denial of negligence, which inures
to the benefit of Dr. Jean-Pierre.
(Emphasis added.)
On appeal, however, Dr. Jean-Pierre argues that
Behavioral Health Services filed an answer to Southwoods'
cross-claim against it, and because the allegations
of negligence raised in that cross-claim were "virtually
identical" to the allegations raised in the third-party
complaint, BHS's answer should inure to his benefit.
Clearly, the argument raised on appeal was not raised
below. It is well-settled that [HN1] this court will not
consider arguments raised for the first time on appeal.
See, e.g., Laird v. Shelnut, 348 Ark. 632, 74 S.W.3d 206
(2002); Hurst v. Holland, 347 Ark. 235, 61 [*575]
S.W.3d 180 (2001); Ghegan & Ghegan, Inc. v. Barclay,
345 Ark. 514, 49 S.W.3d 652 (2001); B.A.R. Enterprises,
Inc. v. Palin Mfg. Co., 312 Ark. 500, 850 S.W.2d 322
(1993).
For his second point on appeal, Dr. Jean-Pierre argues
that the trial court erred in awarding Southwoods
the amount of $ [***7] 775,000 for default damages
when Southwoods failed to prove it was liable to the
original plaintiff. Particularly, he maintains that South-

woods had the burden of proving its liability to the original
plaintiff, Mills, and that Southwoods failed to meet
this burden.
This court has repeatedly held that [HN2] a default
judgment establishes liability, although not the extent of
damages. Tharp v. Smith, 326 Ark. 260, 930 S.W.2d 350
(1996); Byrd v. Dark, 322 Ark. 640, 911 S.W.2d 572
(1995); B&F Engineering v. Cotroneo, 309 Ark. 175,
830 S.W.2d 835 (1992). Under Ark. R. Civ. P. 8(d),
averments in a pleading to which a responsive pleading
is required, other than those as to the amount of damage,
are admitted when not denied. Clark v. Michael Motor
Co., 322 Ark. 570, 910 S.W.2d 697 (1995).
Here, Southwoods' third-party complaint alleged that
Dr. Jean-Pierre was negligent, and it also alleged that
Southwoods was entitled to indemnification from the
doctor. Thus, by defaulting, Dr. Jean-Pierre admitted the
truth of Southwoods' allegations and therefore admitted
that he was liable to Southwoods, because the default
judgment established [***8] liability. [**341] Stated
another way, Dr. Jean-Pierre's admission of liability to
indemnify Southwoods for the damages it incurred as a
result of Dr. Jean-Pierre's conduct is the liability that was
established by default judgment. Further, although Dr.
Jean-Pierre asserts that he proffered evidence that he
adhered to the applicable standard of care in treating
Haywood Wilder, this court has held that [HN3] a defaulting
defendant may not introduce evidence to defeat
the plaintiff's cause of action. See Polselli v. Aulgur,
328 Ark. 111, 942 S.W.2d 832 (1997); B & F Engineering,
Inc. v. Cotroneo, 309 Ark. 175, 830 S.W.2d 835
(1992).
Dr. Jean-Pierre also argues that Southwoods settled
its suit voluntarily, and that one cannot seek indemnification
for [*576] sums paid voluntarily. However, it is
clear that Southwoods' settlement with Mills was not
"voluntary," because Southwoods faced a tremendous
amount of exposure in the event the matter went to trial.
It is true that [HN4] one cannot recover from an indemnitor
"upon a mere showing that the indemnitee has incurred
liability, but he must show that he has suffered
actual loss by payment or satisfaction of a judgment or
by other [***9] payment under compulsion." Carpetland
of Northwest Arkansas, Inc. v. Howard, 304 Ark.
420, 803 S.W.2d 512 (1991) (quoting Larson Machine v.
Wallace, 268 Ark. 192, 600 S.W.2d 1 (1980)). However,
the Carpetland court further stated that "compulsion to
pay is not confined to a judgment or court order," noting
as follows:
[HN5] [A] person legally liable for damages
who is entitled to indemnity may set-
350 Ark. 569, *; 89 S.W.3d 337, **;
2002 Ark. LEXIS 573, ***
tle the claim and recover over against the
indemnitor, even though he has not been
compelled by judgment to pay the loss.
The fact of voluntary payment does not
negative the right to indemnity since a
person confronted with an obligation that
he cannot legally resist is not obligated to
wait to be sued and to lose a reasonable
opportunity for compromise. Such recovery
is subject to proof of liability and the
reasonableness of the amount of the settlement.
Page 4
Id 304 Ark. at 423. In that case, this court noted that
Carpetland had failed to make any showing on the question
of its exposure to a judgment, the advisability of
reaching a settlement, or the reasonableness of the
amount. Here, on the other hand, Southwoods offered
proof of these elements and [***10] its entitlement to
indemnification.
Dr. Jean-Pierre's third point on appeal is that the trial
court erred in awarding Southwoods $ 775,000 for indemnification
when Southwoods failed to provide competent
proof of the original plaintiff Mills's damages.
Particularly, he claims that Southwoods provided no
proof that the settlement was reasonable. This argument
is without merit.
As stated above, [HN6] after a default judgment has
been entered, proof is still required to establish the
amount of damages, and the defendant has the right to
cross-examine the plaintiff's witnesses, to introduce evidence
in mitigation of damages, and to question on appeal
the sufficiency of the evidence to support the
amount of damages awarded. The defaulting defendant
may not, [*577] however, introduce evidence to defeat
the plaintiff's cause of action. See B & F Eng'g, Inc. v.
Cotroneo, 309 Ark. 175, 830 S.W.2d 835 (1992) (quoting
H. Brill, Ark. Law of Damages (2d ed.) § 8-1 (1990)).
Here, Southwoods introduced testimony from an
economist, who valued the economic loss caused by
Mills's death at $ 455,000.00. Family members also testified
that Mills worked at three jobs and was very much
loved by [***11] her family. Attorneys handling Mills's
case testified that Southwoods was facing a large degree
of [**342] exposure -- upwards of $ 2,000,000 -and
that the settlement was reasonable under the circumstances.
Claims representatives handling the case also
testified that the settlement was made in good faith and
that the amount was reasonable, given the potential exposure.
On appeal, Dr. Jean-Pierre argues that Southwoods
must present competent testimony to support an award of

wrongful death damages, and, citing Byrd v. Dark, supra,
he asserts that the trial court erred in allowing the attorneys
for the Mills estate to testify about the reasonableness
of the damages. However, the transcript reflects that
Dr. Jean-Pierre never objected to the attorneys' testimony
about the reasonableness of the settlement, and such
[HN7] failure to object at trial precludes review of an
argument on appeal. See Garrett v. Brown, 319 Ark.
662, 893 S.W.2d 784 (1995); McDonald v. Wilcox, 300
Ark. 445, 780 S.W.2d 17 (1989).
Finally, Dr. Jean-Pierre argues that the trial court
erred in awarding attorneys' fees to Southwoods. The
long-standing rule in Arkansas is that [***12] [HN8]
attorney's fees cannot be awarded unless specifically
provided for by statute or rule. St. Francis County v.
Joshaway, 346 Ark. 496, 58 S.W.3d 361 (2001); Furman
v. Second Injury Fund, 336 Ark. 10, 983 S.W.2d 923
(1999); Arkansas Oklahoma Gas Corp. v. Waelder Oil &
Gas, Inc., 332 Ark. 548, 966 S.W.2d 259 (1998); State ex
rel. Bryant v. McLeod, 318 Ark. 781, 888 S.W.2d 639
(1994). Arkansas follows the American Rule that attorney's
fees are not chargeable as costs in litigation unless
permitted by statute. Lakeview School District No. 25 of
Lake View Sch. Dist. No. 25 v. Huckabee, 340 Ark. 481,
10 S.W.3d 892 (2000); Love v. Smackover School Dist.,
329 Ark. 4, 946 S.W.2d 676 (1997); see [*578] also
Cotten v. Fooks, 346 Ark. 130, 55 S.W.3d 290 (2001)
(Glaze, J., concurring).
[HN9] The statute on attorneys' fees in certain civil actions
is Ark. Code Ann. § 16-22-308 (Repl. 1999),
which provides as follows:
[HN10] In any civil action to recover on
an open account, statement of account,
account stated, promissory note, bill, negotiable
instrument, or contract [***13]
350 Ark. 569, *; 89 S.W.3d 337, **;
2002 Ark. LEXIS 573, ***
relating to the purchase or sale of goods,
wares, or merchandise, or for labor or
services, or breach of contract, unless
otherwise provided by law or the contract
which is the subject matter of the action,
the prevailing party may be allowed a
reasonable attorney fee to be assessed by
the court and collected as costs.
Page 5
Southwoods has not cited this statute, nor has it offered
any Arkansas case law on the question of whether attorneys'
fees may be allowed in cases of implied indemnification.
Southwoods does allude to the case of Liles v.
Liles, 289 Ark. 159, 711 S.W.2d 447 (1986), wherein this
court cited the Restatement (Second) of Torts, § 914(2),
for the principle that one who, through the tort of another,
has been required to defend his own interests against
a third person "is entitled to recover reasonable compensation
for the loss of time, attorney fees and other expenditures
thereby suffered or incurred in the earlier action."
Liles, however, is the only Arkansas case that cites
this provision, but the Liles court also set out numerous
other reasons to justify the attorney's fees awarded in that
case. We do not find the Liles case to [***14] be controlling.
Because the trial court's order here offered no statutory
authority for awarding attorneys' fees to Southwoods,
and because that award was contrary to the general
rule against awarding such fees in the absence of a
statute or rule, we reverse that portion of the trial court's
order.
[**343] For the above reasons, we affirm the trial
court's holdings, but reverse as to the attorneys' fees.
ARNOLD, C.J., not participating.

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DISPOSITION: [**1]
361 So. 2d 1060, *; 1978 Ala. LEXIS 1933, **
LEXSEE 361 SO2D 1060
HIGHLANDS UNDERWRITERS INSURANCE COMPANY, a corporation, et al. v.
ELEGANTE INNS, INC., a corporation
AFFIRMED IN PART, REVERSED IN PART,
AND REMANDED WITH DIRECTIONS.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendants appealed
from an order of the circuit court (Alabama), reforming a
contract for insurance and awarding damages to plaintiff
for negligence by the defendant in the procuring of insurance.
OVERVIEW: Plaintiff instituted an action seeking
reformation of an insurance contract. The action was
consolidated with a related action, and the court entered
judgment reforming the policy and finding defendant
guilty of negligence. On review, the court determined
that the evidence supported the findings of negligence
and award of damages. The court also found that the
record supported reformation of the contract because
there was undisputed evidence that the parties intended
to insure the property owner. The court further found that
the award of attorney fees was erroneously calculated
and reversed the award, remanding it to be recalculated.
OUTCOME: Order granting reformation and damages
affirmed because it was negligent for the plaintiff to fail
to comply with the intentions of both parties, but award
of attorney fees reversed and remanded because the court
did not properly calculate them.
LexisNexis(R) Headnotes
Contracts Law > Remedies > Reformation
Contracts Law > Formation > Ambiguity & Mistake
[HN1] In general, a written instrument may be reformed
so as to make it conform to the intention of the parties
Nos. 77-73, 77-74
Supreme Court of Alabama
361 So. 2d 1060; 1978 Ala. LEXIS 1933
September 1, 1978
Page 1
where, through mutual mistake, their intention is not so
expressed.
Insurance Law > Claims & Contracts > Contract Formation
[HN2] An insurance policy may be reformed as other
instruments.
Contracts Law > Remedies > Reformation
[HN3] It is axiomatic that the remedy of reformation is
available to establish and perpetuate the true agreement
between parties by making the instrument express the
real intent of the parties. Reformation is not available to
make a new agreement.
Torts > Negligence > Duty > Misfeasance & Nonfeasance
[HN4] When an insurance agent or broker, with a view
to compensation, undertakes to procure insurance for a
client, and unjustifiably or negligently fails to do so, he
becomes liable for any damage resulting therefrom.
Torts > Negligence > Duty > Misfeasance & Nonfeasance
Insurance Law > Claims & Contracts
[HN5] Once the parties have come to an agreement on
the procurement of insurance, the agent or broker must
exercise reasonable skill, care, and diligence in effecting
coverage. When the agent or broker has failed in the duty
he assumes, the principal may sue either for breach of the
contract or, in tort, for breach of the duty imposed on the
agent or broker.
Civil Procedure > Appeals > Standards of Review >
Substantial Evidence
[HN6] The court reviews the record in accordance with
the rule that appellate courts will presume that the trial
court made such findings as would support the decree
rendered.

Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN7] In Alabama and most other jurisdictions, the general
rule is that attorneys' fees or expenses of litigation
are not recoverable as damages, in absence of a contractual
or statutory duty, other than a few recognized
grounds of equity principles.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN8] It is generally recognized that where the natural
and proximate consequences of the defendant's wrongful
act causes the plaintiff to become involved in litigation
with a third person, attorneys' fees and other expenses
incurred in such litigation may be recovered as damages.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN9] In order to recover attorneys' fees against a defendant
in a tort suit, the following elements are necessary:
(1) The plaintiff must have incurred attorneys' fees
in the prosecution or defense of a prior action; (2) The
litigation must have been against a third party and not
against the defendant in the present action; and (3) The
plaintiff must have become involved in such litigation
because of some tortious act of the defendant.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN10] A perty may be entitled to recover all the damages
which were within the contemplation of the parties,
or which, though not within the contemplation of the
parties, were either the necessary or the natural and
proximate consequences of the fraud.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN11] When attorneys' fees or other expenses of litigation
are recoverable as damages, they can be recovered
only to the extent that they are necessarily incurred and
reasonable in amount.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN12] The fee charge by counsel is not conclusive on
the court of the reasonableness of the fee to be awarded
as damages. Such fees must be based, not upon evidence
showing the service rendered and the reasonable value
thereof.
361 So. 2d 1060, *; 1978 Ala. LEXIS 1933, **
COUNSEL:
Page 2
Max Hudson of London, Yancey, Clark & Allen,
Birmingham, and Clayton H. Farnham of Swift, Currie,
McGhee & Hiers, Atlanta, Georgia for Appellant, Highlands
Underwriters Ins. Co.
W. Michael Atchison, Birmingham, for Appellants,
Southern American of Alabama, Inc., et al.
Thomas C. Najjar, Jr., Jack H. Harrison, Birmingham,
for Appellee.
JUDGES:
Torbert, C. J., and Bloodworth, Faulkner, Almon
and Embry, JJ., concur.
OPINIONBY:
PER CURIAM
OPINION:
[*1062] Elegante Inns, Inc., instituted a declaratory
action against Highlands Underwriters Insurance
Company seeking reformation of a policy of insurance.
In a separate action, Elegante Inns sued Southern American
of Alabama, Inc., and Bobby Thornell for negligently
endorsing the Highlands' policy over a third party
and for causing Elegante Inns to be under-insured. The
two suits were consolidated and tried without a jury.
Respectively, the defendants appeal from the judgment
of the circuit court reforming the policy and adjudging
Southern American and Thornell guilty of negligence
and awarding damages.
Elegante Inns was the owner-operator of a restaurant
known as "The [**2] Elegante" which was located in
suburban Birmingham and began operation in 1971.
The corporation's business affairs were handled primarily
by its President, Gus Gulas. In July, 1973, Thornell,
Vice-President of Southern American, visited Gulas at
"The Elegante" restaurant to solicit the insurance account
of Elegante Inns. The meeting between Gulas and
Thornell was arranged by Oscar Harper who was a
stockholder and director of Elegante Inns and a stockholder
and President of Southern American.
The meeting between Gulas and Thornell was brief.
Gulas turned over to Thornell Elegante Inns' existing
insurance policies. As a result of the meeting, Thornell
placed a multi-peril insurance policy covering fire, liability,
business interruption and workmen's compensation
for Elegante Inns with Highlands. The policy contained
a 90% co-insurance clause and a provision for loss of
earnings totaling $55,000.00.

In May, 1974, Elegante Inns leased the restaurant
premises to Jack Nichols under a written lease agreement
which provided for a five year term during which the
premises were to be used for the operation of a restaurant
known as "Ceasar's IV." The lease provided that Elegante
Inns [**3] would insure the premises from loss
due to fire and that Nichols would have no interest in the
proceeds of the insurance. The lease contained a provision
for the abatement of rent and a surrender clause in
the event the building was destroyed by fire.
Gulas informed Thornell of the lease arrangement.
Thereafter, Thornell met with Nichols and as a result the
Highlands policy was endorsed over to Nichols; Elegante
Inns was removed as the named insured. Elegante Inns
learned of the change only after a loss to the building by
fire.
It is undisputed that the change in the named insured
on the Highlands policy was a mistake. In addition, it is
undisputed that Thornell made a further mistake by not
substituting the loss of earnings provision with a loss of
rental income provision to reflect Elegante Inns new position
as owner-lessor. n1
n1 On cross examination of counsel for Elegante
Inns, Thornell testified as follows:
"Q. Is there any distinction between coverage
known as loss of earnings and loss of rents?
"A. Yes, sir, it is.
"Q. Are they two different types of coverage?
"A. Yes, sir.
"Q. Do they have different wording?
"A. Yes, sir.
"Q. Is it not true that loss of rents coverage
is designed to protect a landlord or one who is
renting a building to someone else?
"A. Rental coverage is to protect, yes.
"Q. That is what it's for, isn't it?
"A. Yes.
"Q. In May of 1974 when Mr. Nichols
leased this premises would it not have been proper
at that time to have changed Mr. Gulas' loss of
earnings coverage to loss of rents coverage?
"A. Yes.
"Q. All right, sir. Isn't it correct that what
should have been done is that the Elegant Inns
361 So. 2d 1060, *; 1978 Ala. LEXIS 1933, **
[**4]
Page 3
policy should have only had one change, and that
is change the loss of earnings coverage to loss of
rents coverage?
"A. Yes, sir. "
[*1063] The building and its contents were destroyed
by fire on November 24, 1974. Highlands denied
coverage to Elegante Inns.
Highlands appeals from that part of the decree and
judgment reforming the insurance policy to show Elegante
Inns as the named insured and awarding damages
against Highlands for $109,100.77 representing the
amount due to Elegante Inns for the coverage on the
building n2 and $60,000.00 representing the full amount
of policy coverage insuring the contents. The court did
not reform the loss of earnings provision to provide for
loss of rental income.
n2 The $109,100.77 award for the coverage
on the building was determined by computation
under the 90% co-insurance clause. The policy
limit on the coverage of the building was
$150,000.00. The actual damages to the building
as a result of the fire were $140,289.00. The
actual value of the building prior to the fire was
$225,000.00.
The policy was reformed on the basis of mutual
mistake. [HN1] In general, a written instrument may be
[**5] reformed so as to make it conform to the intention
of the parties where, through mutual mistake, their
intention is not so expressed. [HN2] Original Church
of God, Inc., v. Perkins, 292 Ala. 283, 293 So.2d 292
(1974). An insurance policy may be reformed as other
instruments. North Carolina Mut. Life Ins. Co. v. Martin,
223 Ala. 104, 134 So. 850 (1931).
Highlands argues that there is no mutuality of mistake
unless Thornell is the agent of Highlands, and that
the evidence is clear that Thornell was a broker and the
agent of Elegante Inns only.
We disagree. It is immaterial whether Thornell was
the agent of Highlands because the evidence is undisputed
that the intention of the parties was to insure the
owner of the property.
Norris E. Krieg, Vice President of the Property Underwriting
Department for Highlands, testified as follows:
"REDIRECT EXAMINATION:

"Q. (BY MR. HARRISON:) Mr.
Krieg, just a couple of quick questions.
"Had you been in your present position
when that endorsement came in
changing the named insured from the Elegante
Inn to Jack Nichols d/b/a Ceasars'
IV, what would that have indicated to you
as an underwriter?
"A. It would have indicated a [**6]
new ownership.
"Q. New ownership of this physical
property, is that correct?
"A. True.
"Q. Had Highlands been advised
that this was a lease and not a transfer of
ownership to Mr. Nichols, would the policy
have been endorsed the way it was?
"A. No, sir.
"Q. What would Highlands have
done?
"A. I don't think the Highlands
would have-well, rephrase your question,
please.
"Q. Assuming Highlands had been
given information that this was a lease arrangement
between the Elegante Inns and
Jack Nichols d/b/a Ceasars' IV, then what
would have been the appropriate action to
take with regard to the policy?
"A. Well, it certainly wouldn't have
been endorsed to a new insured.
"Q. All right, sir. There really
wouldn't have had to be any change in it,
would there?
[*1064] "A. That is correct.
"Q. It would have been appropriate
to change the loss of earnings to a loss of
RIT coverage, would that not be true?
"A. If it was leased, yes, it would
be."
The above clearly demonstrates that Highlands intended
to insure the owner of property and thought that,
in fact, it had. The judgment of the court reforming the
policy was correct.
361 So. 2d 1060, *; 1978 Ala. LEXIS 1933, **
Page 4
In regard to Thornell [**7] and Southern American,
the court found that they owed a duty to Elegante
Inns to exercise the degree of skill and care required of a
reasonable and prudent insurance agent in the community
and that they had breached the duty in the following
respects:
(1) They had negligently and mistakenly endorsed
Elegante Inns insurance policy to Jack Nichols and as a
consequence of which, Highlands refused to pay Elegante
Inns the proceeds of its policy. The court further
found that Highlands' action in denying coverage was not
arbitrary or capricious.
(2) They had failed to make any inquiry or investigation
of the extent, amount and form of the insurance
which should have been written for Elegante Inns at any
time throughout some eighteen months of dealings with
Elegante Inns prior to the loss. As a consequence, Elegante
Inns was grossly under-insured and in addition
became subject to the provisions of the 90%
co-insurance clause.
As a proximate result of their breach of duty, the
following damages were awarded to Elegante Inns:
(a) $33,000.00 representing the loss of rents.
(b) $31,188.23 representing the loss incurred by virtue
of the applicability of the 90% co-insurance clause
[**8] in the policy.
(c) $56,366.92 representing attorneys' fees incurred
by Elegante Inns in its successful efforts to reform the
Highlands policy and collect the proceeds.
(d) $31,283.65 representing interest due on the proceeds
of the Highlands' policy.
Thornell and Southern American make several contentions
which we will consider in turn. First, we note
that there is no dispute about the $31,283.65 interest
award.
Thornell and Southern American contend the court
should have reformed the Highlands policy to include
and substitute a loss of rental income provision for the
loss of earnings provision. We disagree.
[HN3] It is axiomatic that the remedy of reformation
is available to establish and perpetuate the true agreement
between parties by making the instrument express
the real intent of the parties. Reformation is not available
to make a new agreement. Springdale Gayfer's
Store Co. v. D. H. Holmes Co., 281 Ala. 267, 201 So.2d
855 (1967).
Reforming the policy to replace Nichols with Elegante
Inns as the named insured does not necessarily
require that the policy be reformed to reflect Elegante

Inns' position as owner-lessor. The loss of rental income
and loss of earnings [**9] provisions are separate and
distinct, and are designed to insure against different
risks. Under the facts of this case, the loss of earnings
provision insures the operator of the restaurant, which
could have been either Elegante Inns as owner-operator,
or Nichols as lessee-operator. In contrast, the loss of
rental income provisions can only insure Elegante Inns,
as the owner-lessee.
The unreformed loss of earnings provision in the
policy is consistent with the evidence that Highlands
intended to insure the property owner. The policy can
be reformed to include a loss of rental income provision
only if the evidence shows an intention by Highlands to
insure the property owner as lessor of the property, rather
than as operator of the business. The evidence is
consistent that Highlands thought it was insuring the
restaurant owner-operator.
The common intentions of the parties were to insure
Elegante Inns as owner-operator [*1065] and the policy
was reformed to conform to such intentions. The
mistake of Thornell in not insuring Elegante Inns as
owner-lessor is a unilateral one, unless the actions of
Thornell are imputed to Highlands through principles of
agency [**10] law. The court made no such finding
and the presumption accorded the trial court on findings
of fact requires that the judgment on this matter be affirmed.
As an alternative, Thornell and Southern American
argue that Nichols has an insurable interest in the property
and the court erred in not requiring Highlands to pay
the proceeds from the loss of earnings provision to Nichols,
as trustee for Elegante Inns. This issue was not
raised below nor decided by the trial court, and, therefore,
will not be reviewed on appeal. McWhorter v.
Clark, 342 So.2d 903 (Ala., 1977).
Thornell and Southern American contend they were
not guilty of any breach of duty owed to Elegante Inns
because their agreement was only to "duplicate" the existing
coverage at a cheaper rate.
The law in regard to the duty that insurance agents
or brokers owe to their principals, the insureds, is stated
as follows:
". . . [HN4] when an insurance agent or
broker, with a view to compensation, undertakes
to procure insurance for a client,
and unjustifiably or negligently fails to do
so, he becomes liable for any damage resulting
therefrom. (See annotation at 29
A.L.R.2d 171.)" [HN5] Timmerman Ins.
361 So. 2d 1060, *; 1978 Ala. LEXIS 1933, **
Agency, Inc., [**11] v. Miller, 285
Ala. 82, 85, 229 So.2d 475, 477 (1969).
Page 5
Once the parties have come to an agreement on the
procurement of insurance, the agent or broker must exercise
reasonable skill, care, and diligence in effecting
coverage. Crump v. Geer Brothers, Inc., 336 So.2d 1091
(Ala., 1976); Waldon v. Commercial Bank, 50 Ala.App.
567, 281 So.2d 279 (1973). When the agent or broker has
failed in the duty he assumes, the principal may sue either
for breach of the contract or, in tort, for breach of
the duty imposed on the agent or broker. Waldon v.
Commercial Bank, supra.
Does the evidence support the court's finding? We
[HN6] review the record in accordance with the rule that
appellate courts will presume that the trial court made
such findings as would support the decree rendered.
Orton v. Gay, 285 Ala. 270, 231 So.2d 305 (1970).
In regard to the agreement between Thornell and
Gulas, Thornell testified that he was only to "duplicate"
the coverage Elegante Inns already had, but at a cheaper
rate. Gulas' testimony confirms that the agreement was
to get a better rate. However, Gulas also maintained
that there was no agreement to merely "duplicate" the
coverage. [**12] In Gulas' words, "I just told him
[Thornell] that I wanted-what insurance I needed." A
question of fact was presented as to the exact terms of
the agreement and the trial court's finding is not plainly
and palpably erroneous.
Thornell and Southern American also argue that Elegante
Inns was, as a matter of law, guilty of contributory
negligence. At best this was a factual issue also resolved
against the defendants.
Lastly, Thornell and Southern American contest the
award of attorneys' fees as unauthorized by either contract,
statute, or by special equity.
Elegante Inns maintains the attorneys' fees were
properly awarded as damages incurred by it in litigating
against Highlands for the reformation of the insurance
policy. Elegante Inns claims Alabama recognizes the
exception to the general rule that attorneys' fees can be
awarded as damages when the natural and proximate
consequence of the defendant's tortious act is to involve
plaintiff in litigation with a third person.
[HN7] In Alabama and most other jurisdictions, the
general rule is that attorneys' fees or expenses of litigation
are not recoverable [*1066] as damages, in absence
of a contractual or statutory duty, other [**13]
than a few recognized grounds of equity principles.
State v. Alabama Public Service Commission, 293 Ala.

553, 307 So.2d 521 (1975); Hartford Accident & Indemnity
Co. v. Cosby, 277 Ala. 596, 173 So.2d 585 (1965);
22 Am.Jur.2d, Damages, § 165, p. 235. The reason of
the rule disallowing attorneys' fees is that they are a remote
loss. 1 Sedgwick on Damages (9th ed.), § 239m o,
464.
However, [HN8] it is generally recognized that
where the natural and proximate consequences of the
defendant's wrongful act causes the plaintiff to become
involved in litigation with a third person, attorneys' fees
and other expenses incurred in such litigation may be
recovered as damages. 22 Am.Jur.2d, Damages, § 166,
p. 235; 25 C.J.S. Damages § 50, p. 787.
[HN9] In order to recover attorneys' fees against a
defendant in a tort suit, the following elements are necessary:
(1) The plaintiff must have incurred attorneys' fees
in the prosecution or defense of a prior action.
(2) The litigation must have been against a third
party and not against the defendant in the present action.
(3) The plaintiff must have become involved in such
litigation because of some tortious act of the defendant.
45 A.L.R. [**14] 2d 1183.
In Fidelity & Casualty Co. v. J. D. Pittman Tractor
Co., 244 Ala. 354, 13 So.2d 669 (1943), Pittman sued
Fidelity & Casualty for falsely representing to Pittman
that it had liability coverage for certain business operations
and sought to recover as damages the judgment,
court costs, and attorneys' fees incurred in defending a
prior suit by a third party. Citing the general rule on recoverable
damages, the court states that Pittman was:
". . [HN10] . entitled to recover all the
damages which were within the contemplation
of the parties, or which, though
not within the contemplation of the parties,
were either the necessary or the natural
and proximate consequences of the
fraud; . . ."
"Here, appellee is entitled to recover the
amount paid in satisfaction of the Chance
judgment, the court costs in connection
therewith, and attorneys' fees paid for defending
that suit, together with interest
361 So. 2d 1060, *; 1978 Ala. LEXIS 1933, **
from the date of payment . . ." 244 Ala. at
358-359, 13 So.2d at 672.
Page 6
The Pittman case was properly distinguished on the
facts in Hartford Accident & Indemnity Co. v. Cosby,
supra, but neither that case nor any other, as far as we
can ascertain, have overruled [**15] its precedent. On
different facts, but under the same principle the court in
First National Bank of Birmingham v. First National
Bank of Newport, 116 Ala. 520, 22 So. 976 (1897), allowed
as damages court costs and attorneys' fees incurred
in prior litigation necessitated by the defendant's
breach of duty.
We are clear to the conclusion that the facts of this
case are within the ambit of Pittman and attorneys' fees
incurred by Elegante Inns in reforming the insurance
policy are recoverable as damages against Thornell and
Southern American.
The court award of $56,366.92 for attorneys' fees is
apparently based solely on Gus Gulas' testimony that he
agreed with his attorneys to pay them 1/3 of any amounts
recovered as attorneys' fees.
[HN11] When attorneys' fees or other expenses of
litigation are recoverable as damages, they can be recovered
only to the extent that they are necessarily incurred
and reasonable in amount. 25 C.J.S. Damages § 91(2),
p. 981. [HN12] The fee charge by counsel for plaintiff
is not conclusive on the court of the reasonableness of
the fee to be awarded as damages. Such fees must be
based, not upon evidence showing the service rendered
and the reasonable value [**16] thereof. United
Bonding Ins. Co. v. Presidential Ins. Co., 155 So.2d 635
(Fla.App.1963). Therefore, the award of the attorneys'
fees must be reversed and the cause remanded for the
circuit court to re-determine the award in accordance
with applicable principles.
[*1067] The judgment of the court is hereby affirmed
in part, reversed in part, and the cause is remanded
with directions.
AFFIRMED IN PART, REVERSED IN PART,
AND REMANDED WITH DIRECTIONS.
TORBERT, C. J., and BLOODWORTH, FAULK-
NER, ALMON and EMBRY, JJ., concur.

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PRIOR HISTORY: [***1]
381 Ill. 549, *; 46 N.E.2d 41, **;
1943 Ill. LEXIS 675, ***
LEXSEE 381 ILL. 549
AMANDA RITTER et al., Appellees, vs. LOUIS G. RITTER, Appellant.
APPEAL from the Appellate Court for the Fourth
District; -- heard in that court on appeal from the Circuit
Court of Monroe county; the Hon. MAURICE V.
JOYCE, Judge, presiding.
DISPOSITION:
Judgments reversed.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiffs, widow and
daughter, filed an action against defendant relative for
the attorney fees that the widow and daughter expended
in a prior successful suit against the relative. The Appellate
Court for the Fourth District (Illinois) affirmed a
judgment that awarded the widow and daughter attorney
fees and costs. The relative appealed.
OVERVIEW: A widow and daughter brought suit
against a relative for wrongful procurement of a deed to
property in the estate of the deceased. The widow and
daughter prevailed and brought a separate action against
the relative for attorney fees and costs. The trial court
awarded fees and costs to the widow and daughter, and
an appellate court affirmed. The relative appealed. The
widow and daughter argued that they were entitled to
recover in a separate action because the wrongful conduct
of the relative caused them to engage in litigation.
On appeal, the court reversed and held that there was
neither common law nor statutory authority for the widow
and daughter's cause of action. Attorneys fees and
expenses of litigation were not recoverable in a subsequent
suit as damages by the successful widow and
daughter, whom had been forced into litigation by reason
of the relative's wrongful conduct. In some jurisdictions
where an award of exemplary damages was authorized,
the expenses and attorney fees could have been consid-
No. 26717.
Supreme Court of Illinois
381 Ill. 549; 46 N.E.2d 41; 1943 Ill. LEXIS 675
January 19, 1943.
Page 1
ered in estimating the amount of damages, but fees were
not allowed in addition to the sum assessed as damages,
and recovery was never permitted in a separate action.
OUTCOME: The court reversed the judgments of the
trial court, which awarded the widow and daughter attorney
fees and costs, and appellate court, which affirmed
the trial court's judgment.
LexisNexis(R) Headnotes
Governments > Courts > Common Law
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN1] There is no principle of the common law that
permits a successful litigant to recover from his losing
adversary the costs and expenses of the litigation. At
common law costs are never recoverable, nor is the successful
plaintiff entitled to recover from the unsuccessful
defendant his attorney fees or expenses of litigation as
damages. There are no costs at common law; but if the
plaintiff does not prevail he is amerced pro falso
clamore; if he does prevail, then the defendant is in misericordia
for his unjust detention of the plaintiff's right,
and therefore is not punished with the expensa litis under
that title.
Governments > Courts > Authority to Adjudicate
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
[HN2] In Illinois, the allowance and recovery of costs
rests entirely upon statutory provisions and no liability
for costs exists in the absence of statutory authorization.
Any party to an action, claiming the right to recover
costs from his adversary, must found his right upon some
provision of a statute. A court of chancery may be vested
with a power to exercise a discretion in awarding costs

ut the power to act must come from a statute and the
discretion must be confined to that which is authorized
by legislative enactment.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Governments > Legislation > Statutory Remedies &
Rights
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] The rule is well established that attorney fees and
the ordinary expenses and burdens of litigation are not
allowable to the successful party in the absence of a statute,
or in the absence of some agreement or stipulation
specially authorizing the allowance thereof, and this rule
applies equally in courts of law and in courts of equity.
Illinois statutes authorize the taxation of solicitor's fees
as costs in partition cases but prior to the act authorizing
it, the law is that they cannot be so taxed.
Governments > Legislation > Interpretation
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
[HN4] It may be that the statutory costs awarded to a
successful plaintiff are inadequate to compensate him for
the injury caused by the defendant's wrongful conduct,
but the question of the amount of costs which are to be
allowed the successful party and the items of expense to
be included therein is a question to be determined by the
legislature and not by the courts.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN5] In Illinois, a defendant has the right to resist a
plaintiff's claim and if the plaintiffs wish to establish
their right it is necessary for them to resort to litigation.
If, in the process of the procedure necessary to the establishment
of plaintiffs' claim, they are compelled to employ
the services of lawyers and incur other expenses it
is but an incident attached to the asserting and enforcement
of their right to have their property conveyed to
them, and defendant's conduct in withholding a title until
compelled by litigation to surrender does not constitute a
breach of any duty he owes to plaintiffs for which a separate
action can be maintained.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN6] Where an action based on the same wrongful act
is prosecuted by a plaintiff against a defendant to a successful
issue, the plaintiff cannot in a subsequent action
381 Ill. 549, *; 46 N.E.2d 41, **;
1943 Ill. LEXIS 675, ***
Page 2
recover, as damages, his costs and expenses in the former
action.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN7] Under Illinois jurisprudence, a defendant may
present any defense to such an action that he may have or
that he may deem expedient, and in so doing he will not
be subjecting himself to a second suit by the plaintiff
based on the wrongful conduct of the defendant in causing
the plaintiff to sue him or in defending the action.
The rule is the same even though the wrongful conduct
of the defendant is willful, intentional, malicious or
fraudulent.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN8] In some jurisdictions where an award of exemplary
damages is authorized, the expenses and attorney
fees may be considered in estimating the amount of
damages, but these attorney fees are not allowed in addition
to the sum assessed as exemplary damages, and recovery
is never permitted in a separate action.
Torts > Intentional Torts > Abuse of Process & Malicious
Prosecution
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN9] It must be remembered that Illinois courts are
open to every citizen. Every man has a right to come into
a court of justice and claim what he deems to be his right
without fear of being prosecuted for heavy damages. If
such actions were allowed, it might often times happen
that an honest suitor would be deterred from ascertaining
his legal rights through fear of being obliged to defend a
subsequent suit, charging him with malicious prosecution.
Such ordinary trouble and expense as arise from the
ordinary forms of legal controversy should be endured
by the law-abiding citizen as one of the inevitable burdens,
which men must sustain under civil government.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN10] Attorneys fees and expenses of litigation can not
be recovered in a subsequent suit as damages by a successful
plaintiff who has been forced into litigation by
reason of the defendant's wrongful conduct.
COUNSEL:

KRAMER, CAMPBELL, COSTELLO &
WIECHERT, for appellant.
ELMER C. WEIHL, PHILIP G. LISTEMAN, and
JOSIAH WHITNEL, (WHITNEL, BROWNING,
LISTEMAN & WALKER, of counsel,) for appellees.
OPINIONBY:
MURPHY
OPINION:
[*550] [**42] Mr. JUSTICE MURPHY delivered
the opinion of the court:
Leave to appeal was granted in this case to review a
judgment of the Appellate Court which affirmed a judgment
entered in the circuit court of Monroe county.
(313 Ill. App. 407.) The question for decision is as to the
right of a plaintiff who is successful in a prior suit to
recover [*551] damages from the defendant in the
former suit, the measure of which is for time expended,
attorney fees and items paid out in prosecuting the prior
litigation, the claim being exclusive of costs which may
be taxed in the first action pursuant to statutory authorization.
It is alleged in the complaint in this case that plaintiffs-appellees
are the widow and daughter of Joseph
Ritter, deceased, and the sole [***2] beneficiaries in his
estate, and that prior to his death Joseph Ritter entered
into an agreement with the defendant Louis G. Ritter, a
relative, to purchase certain real estate that was to be sold
in a foreclosure sale; that pursuant to such agreement a
certificate of purchase was issued to Joseph Ritter and
Louis G. Ritter, as joint tenants; that two pieces of real
estate were involved and it was agreed between the two
Ritters that if there was no redemption from this certificate
Joseph Ritter would take the property known as the
"Nixon property" and defendant the property known as
the "brick building;" that subsequent to the issuance of
the certificate of purchase Joseph Ritter became critically
ill and that during his fatal illness he asked defendant
whether, in the event of his (Joseph Ritter's) death, his
wife and daughter would have any difficulty in securing
their part of the property [**43] purchased and that
the defendant assured him that their agreement would be
carried out; that subsequent to the death of Joseph Ritter,
there being no redemption from the certificate, the defendant
wrongfully, fraudulently and, with the intent to
cheat and defraud the plaintiffs, procured [***3] a
master's deed to be issued in his own name including
both properties therein, and that as a result of the defendant's
wrongful conduct it was necessary for the
plaintiffs to start a chancery action against him to recover
title to the Nixon property; that this litigation resulted in
a decree in favor of plaintiffs; that the court found that
381 Ill. 549, *; 46 N.E.2d 41, **;
1943 Ill. LEXIS 675, ***
Page 3
defendant held title to the Nixon property as constructive
trustee for the plaintiffs and ordered it conveyed to them;
that as a [*552] result of the defendant's wrongful
conduct necessitating suit by plaintiffs to establish a constructive
trust and recover their property, the plaintiffs
were required to spend a large amount of time in conferences
with their lawyers and in attending court, and to
expend large sums of money for lawyers' fees, investigation
charges and other expenses, wherefor damages were
demanded. The trial court sustained defendant's motion
to dismiss the complaint on the ground that it did not
state a cause of action, but this judgment was reversed by
the Appellate Court. (308 Ill. App. 337.) The cause was
remanded and, after a hearing of evidence without a jury,
judgment was entered in favor of plaintiffs for $2007 and
[***4] costs, which amount represented the $2000 paid
by plaintiffs as attorneys fees in the former suit, plus $7
expended by them for a transcript of testimony in that
suit.[HN1]
There is no principle of the common law that permits
a successful litigant to recover from his losing adversary
the costs and expenses of the litigation. At
common law costs were never recoverable, nor was the
successful plaintiff entitled to recover from the unsuccessful
defendant his attorney fees or expenses of litigation
as damages. See Bacon's Abridgment, Vol. 2, title
Costs, page 33, where the author says: "There were no
costs at common law; but if the plaintiff did not prevail
he was amerced pro falso clamore; if he did prevail, then
the defendant was in misericordia for his unjust detention
of the plaintiff's right, and therefore was not punished
with the expensa litis under that title." The first
statute allowing costs to be assessed against an unsuccessful
party was the statute of Clouchester, 6 Ed. I, c.
1.[HN2]
The allowance and recovery of costs rests entirely
upon statutory provisions and no liability for costs exists
in the absence of statutory authorization. Any party to an
action, claiming [***5] the right to recover costs from
his adversary, must found his right upon some provision
of a statute. This [*553] has been the law in this
State from the earliest time. ( Adams v. Payson, 11 Ill.
26; Chase v. De Wolf, 69 id. 47; Smith v. McLaughlin,
77 id. 596; Byers v. First Nat. Bank, 85 id. 423; Dixon v.
People, 168 id. 179; Rieker v. City of Danville, 204 id.
191; Patterson v. Northern Trust Co. 286 id. 564.) A
court of chancery may be vested with a power to exercise
a discretion in awarding costs but the power to act must
come from a statute and the discretion must be confined
to that which is authorized by legislative enactment.
Constant v. Matteson, 22 Ill. 546; Conwell v. McCowan,
53 id. 363; Hutchinson v. Hutchinson, 152 id. 347; Wilson
v. Clayburgh, 215 id. 506; Metropolitan Life Ins. Co.

v. Kinsley, 269 id. 529; Goudy v. Mayberry, 272 id.
54.[HN3]
The rule is also well established that attorney fees
and the ordinary expenses and burdens of litigation are
not allowable to the successful party in the absence of a
statute, or in the absence of some agreement or stipulation
[***6] specially authorizing the allowance thereof,
and this rule applies equally in courts of law and in
courts of equity. ( Constant v. Matteson, supra; Conwell
v. McCowan, supra; Hutchinson v. Hutchinson,
supra; Rasch v. Rasch, 278 Ill. 261; Kinane v. Fay, 168
Atl. (N.J.) 724; Weinhagen v. Hayes, 190 N.W. (Wis.)
1002; Day v. Woodworth, 14 L. ed. 181.) Our statutes
authorize the taxation of solicitor's fees as costs in partition
cases but prior to the act authorizing it, the law was
that they could not be so taxed. Wilhite v. Pearce, 47 Ill.
413; Eimer v. Eimer, id. 373; Strawn v. Strawn, 46 Ill.
412; Campbell v. Campbell, 63 id. 502.
[HN4] It may be that the statutory costs awarded to a
successful plaintiff are inadequate to compensate him for
the injury caused by the defendant's wrongful conduct,
but the question of the amount of [**44] costs which
are to be allowed the successful party and the items of
expense to be included therein is a question to be determined
by the legislature [*554] and not by the courts.
Smith v. Michigan Buggy Co. 175 Ill. 619; Potts v. Imlay,
4 N.J.L. 330.
The [***7] plaintiffs argue that they are entitled to
recover in a separate action because the wrongful conduct
of the defendant caused them to engage in litigation
with him to secure a return of their property and that as a
proximate result of the defendant's wrongful conduct
they were damaged to the extent of the loss of time, attorney
fees and other expenses expended by them in the
first litigation. This reasoning is based on the concept
that the wrongful acts of the defendant created a liability
over and above his liability in the original action, i.e., a
tort liability to pay the expenses of the plaintiffs in enforcing
their rights in the first suit. [HN5] The defendant
had the right to resist their claim and if plaintiffs
wished to establish their right it was necessary for them
to resort to litigation. If, in the process of the procedure
necessary to the establishment of plaintiffs' claim, they
were compelled to employ the services of lawyers and
incur other expenses it was but an incident attached to
the asserting and enforcement of their right to have their
property conveyed to them, and defendant's conduct in
withholding the title until compelled by litigation to surrender
does not [***8] constitute a breach of any duty
he owed plaintiffs for which a separate action can be
maintained.
Plaintiffs rely on cases which support the general
rule that where the wrongful acts of a defendant involve
381 Ill. 549, *; 46 N.E.2d 41, **;
1943 Ill. LEXIS 675, ***
Page 4
the plaintiff in litigation with third parties or place him in
such relation with others as to make it necessary to incur
expense to protect his interest, the plaintiff can then recover
damages against such wrongdoer, measured by the
reasonable expenses of such litigation, including attorney
fees. ( Philpot v. Taylor, 75 Ill. 309; McEwen v. Kerfoot,
37 id. 530; Himes v. Keighblingher, 14 id. 469.)
These cases are not in point and the situation is dissimilar.
While it is recognized that where the natural and
proximate consequences of a wrongful act have been to
involve the plaintiff [*555] in litigation with others,
there may be a recovery in damages against the author of
such act, measured by the reasonable expenses incurred
in such litigation, ( Choukas v. Severyns, 99 Pac. (2d)
942, 3 Wash. (2d) 91,) yet the rule is equally well established
that [HN6] where an action based on the same
wrongful act has been prosecuted by the plaintiff against
the [***9] defendant to a successful issue, he can not in
a subsequent action recover, as damages, his costs and
expenses in the former action. 25 C.J.S. sec. 50, (c) p.
535; Martin v. Prentice, 94 N.Y. 295.
The policy of the rule is obvious. If the wrongful
conduct of a defendant causing the plaintiff to sue him
would give rise to an independent tort and a separate
cause of action, there would be no end to the litigation,
for immediately upon the entry of judgment the plaintiff
would start another action against the defendant for his
attorney fees and expenses incurred in obtaining the preceding
judgment. The rule contended for by the plaintiffs
could not be limited to cases of constructive trust,
for in many other classes of suits the action is necessitated
by the defendant's wrongful conduct. If the plaintiff
is successful in the suit, the probability is that the conduct
of the defendant causing the suit was wrongful.
When a defendant breaches a lease, violates the terms of
a contract, commits a tort, misrepresents goods sold,
unlawfully retains the personal property of the plaintiff,
or remains in possession of real estate after the expiration
of his tenancy, necessitating [***10] proceedings, his
conduct is wrongful and may require a suit against him
by the plaintiff. [HN7] Under our jurisprudence the
defendant may present any defense to such an action that
he may have or that he may deem expedient, and in so
doing he will not be subjecting himself to a second suit
by the plaintiff based on the wrongful conduct of the
defendant in causing the plaintiff to sue him or in defending
the action. The rule is the same even though the
wrongful conduct of the defendant is willful, intentional,
malicious or fraudulent. Lovell v. House of Good
[*556] Shepherd, 14 Wash. 211, 44 Pac. 253; Henry v.
Davis, 123 Mass. 345; Textile Leather Corp. v. American
Mutual Liability Co. 166 Atl. (N.J.) 214; Perlus v. Silver,
71 Wash. 338, 128 Pac. 661.

[HN8] In some jurisdictions where an award of exemplary
damages is authorized, the expenses and attorney
fees may be considered in estimating the amount of
damages, but these attorney fees are not allowed in addition
to the sum assessed as [**45] exemplary damages,
and recovery is never permitted in a separate action.
Atchison, Topeka and Sante Fe Railway Co. v. Stewart,
55 Kan. 667, 41 Pac. [***11] 961; Sedgwick on
Damages, (9 ed) vol. 1, p. 470.
In Smith v. Michigan Buggy Co. supra, we held that
an action for the malicious prosecution of a civil suit
without probable cause would not lie unless accompanied
by the arrest of the person, the seizure of property or
other special injury. It was there urged that when a civil
suit is maliciously prosecuted without probable cause,
the defendant undergoes expenses, pays attorney fees,
and suffers injury from loss of time and often from loss
of credit, and that for the wrongful suit by the plaintiff,
resulting in injury to the defendant, the law should furnish
a remedy, but in answering such contention it was
said: [HN9] "It must be remembered that the courts are
open to every citizen; and every man has a right to come
into a court of justice and claim what he deems to be his
right without fear of being prosecuted for heavy damages.
If such actions are allowed, it might often times
happen that an honest suitor would be deterred from ascertaining
his legal rights through fear of being obliged
to defend a subsequent suit, charging him with malicious
prosecution * * *. Such ordinary trouble and expense as
arise from the ordinary forms [***12] of legal controversy
should be endured by the law-abiding citizen as
one of the inevitable burdens, which men must sustain
under civil government." It is obvious that if the defendant
in the Smith case, supra, could not maintain an action
for damages which he had suffered by an unfounded
[*557] prosecution, the converse of the proposition
381 Ill. 549, *; 46 N.E.2d 41, **;
1943 Ill. LEXIS 675, ***
Page 5
would be true, that is, a plaintiff can not bring an action
against a defendant who has made a groundless and
causeless defense. Equal justice forbids treating one
party to a suit more generously than the other.
We find no case in which a recovery such as the
plaintiffs seek here has been allowed. The cases all
confirm the rule that [HN10] attorneys fees and expenses
of litigation can not be recovered in a subsequent suit as
damages by a successful plaintiff who has been forced
into litigation by reason of the defendant's wrongful
conduct. ( Stickney v. Goward, 161 Minn. 457, 201 N.W.
630, 29 A.L.R. 1216; Toop v. Palmer, 108 Neb. 850, 189
N.W. 394; Flanders v. Tweed, 15 Wall, 450, 21 L. ed.
203; Bull v. Keenan, 100 Iowa, 144, 69 N.W. 433;
McGaw v. Acker M. & C. Co. 111 Md. 153, 73 Atl. 731;
Baxter [***13] v. Brown, 83 Kan. 302, 111 Pac. 430;
Van Horne v. Treadwell, 164 Cal. 620, 130 Pac. 5;
Leslie v. Carter, 268 Mo. 420, 187 S.W. 1196; Armentrout
v. Lambert, 83 W. Va. 569, 98 S.E. 731; Wagner v.
Hatcher, 137 Ky. 406, 125 S.W. 1063; Harris v. Eldred,
42 Vt. 39; Osborn v. Moore, 12 La. Ann. 714; Kolka v.
Jones, 6 N.D. 461, 71 N.W. 558; Storley v. Armour &
Co. 107 Fed. (2d) 499; Stapley & Co. v. Rogers, 25 Ariz.
308, 216 Pac. 1072; Farmers State Bank of Kramer v.
Aksamit, 199 N.W. 733, 112 Neb. 365; Sonker-Galamba
Corp. v. Atchison, Topeka and Sante Fe Railroad Co. 28
Fed. Supp. 456; Corinth Bank & Trust Co. v. Security
National Bank, 252 S.W. 1001, 148 Tenn. 136; Juel v.
Kundert, 192 N.W. 753, 46 S.D. 314; McKay v. Wishert,
152 S.W. 508 (Tex. Civ. Appeals); Williams v. Morris,
263 S.W. (Mo. App.) 859); State ex rel. Stanley v. Lugen,
93 Pac. (2d) 1002.) [***14] There being neither
common law nor statutory authority for maintaining the
cause of action in the instant case the judgments of the
circuit and Appellate courts are reversed.

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CASE SUMMARY:
409 F.2d 1277, *; 1969 U.S. App. LEXIS 12823, **;
1969 Trade Cas. (CCH) P72,770; 37 A.L.R.3d 1341
LEXSEE 409 F2D 1277
Wilshire Oil Co. of Texas v. L.E. Riffe, O. Homer Riffe, and Thomas J. Masterson
No. 35-68
UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT
409 F.2d 1277; 1969 U.S. App. LEXIS 12823; 1969 Trade Cas. (CCH) P72,770; 37
A.L.R.3d 1341
PROCEDURAL POSTURE: Appellant sought review
of a decision of the United States District Court for the
District of Kansas, which sustained appellees' motions to
dismiss the complaint for lack of personal jurisdiction
and for failure to state a claim in an action by appellant
seeking to recover fines, penalties, and other expenditures
it had incurred or would incur as the result of its
involvement in various state and federal antitrust violations.
OVERVIEW: Appellant obtained a company formerly
owned by appellees. Following the merger, appellant was
charged with violating federal antitrust laws, and appellant
brought an action against appellees seeking to recover
damages it had incurred or would incur as the result
of its involvement in various state and federal antitrust
violations. Appellees' motions to dismiss for lack of
personal jurisdiction and for failure to state a claim were
granted. The court ruled that an attempt to ascertain the
applicability of the state long-arm statute involved two
questions: (1) did appellees transact any business, commit
a tortious act, or own, use, or possess any realty
within the state, and (2) did the cause of action that was
the basis of the suit arise from the performance of any of
those activities? The court held that there was a lack of
personal jurisdiction because the minimum contacts either
did not take place within the forum, or if they did,
they did not give rise to the cause of action asserted.
Further, the court found that it was inappropriate to dismiss
the complaint for failure to state a claim because
appellant could demonstrate that it was damaged by appellees'
unlawful conduct.
OUTCOME: Decision was affirmed in part and reversed
in part, where dismissal of the complaint for lack
of personal jurisdiction was appropriate because a cause
of action did not arise out of the contacts with the forum
which could provide a basis for an exercise of personal
April 15, 1969,
Page 1
jurisdiction, but dismissal of the complaint for failure to
state a claim was inappropriate because appellant could
demonstrate that it was damaged by appellees' unlawful
conduct.
LexisNexis(R) Headnotes
Civil Procedure > Jurisdiction > Personal Jurisdiction
& In Rem Actions > Personal Jurisdiction
[HN1] Any attempt to ascertain the applicability of a
state long-arm statute must necessarily resolve two questions:
(1) did the defendant transact any business, commit
a tortious act, or own, use or possess any realty
within the state; and (2) does the cause of action that is
the basis of the suit arise from the performance of any of
those activities?
Civil Procedure > Summary Judgment > Summary
Judgment Standard
[HN2] On a motion to dismiss the allegations of the
complaint and all supporting affidavits are accepted as
true.
Civil Procedure > Summary Judgment > Summary
Judgment Standard
[HN3] A complaint may be dismissed only when it appears
beyond doubt that the plaintiff can prove no set of
facts in support of his claim which would entitle him to
relief.
JUDGES: [**1]
Murrah, Chief Judge, and Hill and Seth, United
States Circuit Judges.
OPINIONBY:
HILL
OPINION:

[*1278] HILL, Circuit Judge.
This action for damages was filed in the United
States District Court for the District of Kansas by the
appellant, Wilshire Oil Company of Texas, a Delaware
corporation, against its former employees, [*1279]
L.E. Riffe and O. Homer Riffe, citizens of Oklahoma,
and Thomas J. Masterson, a citizen of Kansas. The appellant
seeks to recover certain fines, penalties and other
expenditures it has incurred or will incur as the result of
its involvement in various state and federal antitrust violations.
Jurisdiction being based upon diversity, and process
having been served upon the Riffes in Oklahoma, their
motion to dismiss the complaint for lack of personal jurisdiction
was sustained because of the failure to meet
the requirements of the Kansas long -arm statute. n1 A
similar motion to dismiss as to Masterson was granted on
the ground that the complaint failed to state a claim i.e.,
antitrust fines and penalties cannot be recouped by a
corporate violator from its employees. This appeal
challenges the propriety of those rulings.
[**2]
n1 In diversity suits it is now well established
that a federal court can obtain personal jurisdiction
over nonresidents by complying with
the long-arm statute of the state in which it sits.
Rule 4(d)(7) and (e), F.R. Civ. P.; 2 Moore's
Federal Practice para. 4.41 p. 1291 (2d ed. 1967).
As the result of a merger consummated on December
31, 1960, Wilshire obtained the Riffe Petroleum
Company, an Oklahoma corporation formerly owned by
its president, L.E. Riffe. n2 Following the merger, the
corporation became an unincorporated division of Wilshire
with its management and employees continuing
essentially as before. L.E. Riffe, having become a vice
president and director of Wilshire, was placed in charge
of the new division. Thomas Masterson and Homer
Riffe, brother of L.E. Riffe, continued in their capacity as
asphalt salesmen in the States of Kansas and Missouri,
respectively.
n2 Many of the essential facts are set forth in
Wilshire Oil Company of Texas v. Riffe, 381 F.2d
646 (10th Cir. 1967), cert. den. 389 U.S. 822, 19
L. Ed. 2d 75, 88 S. Ct. 50.
Thereafter, and pursuant to indictments returned in
the federal district courts of Missouri and Kansas, Wilshire
was charged with violating the federal antitrust
409 F.2d 1277, *; 1969 U.S. App. LEXIS 12823, **;
1969 Trade Cas. (CCH) P72,770; 37 A.L.R.3d 1341
Page 2
laws in that from December 31, 1960, until about August
9, 1963, its [**3] Riffe Division conspired to fix the
price of asphalt sold to the States of Kansas and Missouri.
Wilshire pleaded nolo contendere in the Missouri
court and was tried and convicted in the Kansas district
court. In addition, a civil action by the State of Missouri
involving the same conduct was settled out of court and a
similar civil suit brought by the State of Kansas is still
pending.
Wilshire contends that its payment of, and contingent
liability for the payment of, certain sums as criminal
fines, civil damages, settlements, expenses and attorneys'
fees in the aforementioned suits, is due solely to the unauthorized
activity of the three appellees and that it is
therefore entitled to recover from them all of the amounts
it has expended or may be required to expend as a result
of their "faithless conduct." n3 To this end it was alleged
in counts one and two of the complaint that all three appellees
participated in the Missouri conspiracy and were
thus liable for the expenses absorbed by Wilshire in
connection with the civil and criminal litigation in that
state. As to the fines and other sums expended with
regard to the Kansas conspiracy, counts three, four and
five sought [**4] indemnification from Masterson and
L.E. Riffe but did not seek to recover from Homer Riffe.
n3 The total amount of damages sought is
approximately $563,116.00. This consists of a
$10,000 fine paid in the Missouri district court;
$11,900 in "damages" and $4,727 in attorneys'
fees paid to settle the suit by the State of Missouri;
a potential $50,000 fine in the Kansas district
court and $26,648 in legal fees and expenses;
and a potential $441,630 in damages and $18,211
in legal fees and expenses in connection with the
suit by the State of Kansas.
The first issue presented for our consideration requires
a review of the trial court's determination that it
lacked in personam jurisdiction over the Riffes because
they did not have sufficient contacts with the forum state
to satisfy the [*1280] Kansas long-arm statute. It is
conceded that the only basis for personal jurisdiction is
the long-arm statute which provides, in pertinent part, for
service of process upon nonresidents who transact "any
business, [**5] " commit "a tortious act," or own, use
or possess "any real estate" within the state. n4 The statute
further provides that in suits in which jurisdiction is
based thereon, "only causes of action arising from acts
enumerated [therein] may be asserted against a defendant.
. . ." Accordingly, [HN1] any attempt to ascertain the
applicability of the statute must necessarily resolve two
questions: (1) did the defendant transact any business,

commit a tortious act, or own, use or possess any realty
within the state; and (2) does the cause of action that is
the basis of the suit arise from the performance of any of
those activities? National Bank of America at Salina v.
Calhoun, 253 F.Supp 346, 349 (D. Kan. 1966).
[**6]
n4 K.S.A. § 60-308. It is obvious that in
determining the propriety of service of process
under the long-arm statute, state law rather than
federal law is controlling. Walker v. General
Features Corp., 319 F.2d 583 (10th Cir. 1963).
In answering the first of these two questions, the
"minimum contacts test" of International Shoe and its
progeny n5 come to the fore. This is a result of the fact
that even though International Shoe was concerned with
whether nonresident personal service satisfied the requirements
of due process, "'essentially the same factors
which enter into a determination that . . . [the long-arm
statute] authorizes the exercise of jurisdiction are involved
in deciding whether the exercise of jurisdiction is
constitutionally valid.'" Woodring v. Hall, 200 Kan. 597,
438 P.2d 135, 141 (1968). Hence, "it is essential in each
case that there be some act by which the defendant purposefully
avails itself of the privilege of conducting activities
within the forum State, thus invoking the benefits
and protections of its laws." Hanson v. Denckla, 357 U.S.
235, 253, 2 L. Ed. 2d 1283, 78 S. Ct. 1228 (1958).
[**7]
n5 International Shoe Co. v. Washington,
326 U.S. 310, 90 L. Ed. 95, 66 S. Ct. 154 (1945);
Perkins v. Benguet Consol. Min. Co., 342 U.S.
437, 96 L. Ed. 485, 72 S. Ct. 413 (1952); McGee
v. International Life Ins. Co., 355 U.S. 220, 78 S.
Ct. 199, 2 L. Ed. 2d 223 (1957); and Hanson v.
Denckla, 357 U.S. 235, 2 L. Ed. 2d 1283, 78 S.
Ct. 1228 (1958).
It was demonstrated on the basis of the uncontradicted
allegations in the complaint, certain affidavits, and
other documents submitted on the question of jurisdiction,
n6 that the Riffes conducted the following activities
within the forum state. Homer Riffe, in his capacity as an
employee of Wilshire, attended maintenance lettings in
Topeka, Kansas, during the year 1962, and as an officer
of Riffe Petroleum Company (not to be confused with
the Riffe Division of Wilshire), submitted a signed bid
form to the State of Kansas in 1964. L.E. Riffe signed
several bid forms submitted to the State of Kansas between
the years 1962 and 1967. Some of the forms
409 F.2d 1277, *; 1969 U.S. App. LEXIS 12823, **;
1969 Trade Cas. (CCH) P72,770; 37 A.L.R.3d 1341
Page 3
were executed by him in his capacity as an officer of
Wilshire, while others were submitted on behalf of a
corporation organized in September, 1963, to wit: the
Riffe Petroleum Company. L.E. Riffe also owned an
interest in the Reserve Pipe Line Company which transported
oil to the Century Refining Company which, in
turn, was the Kansas manufacturer of the asphalt Wilshire
sold in that state. Finally, L.E. Riffe loaned a substantial
sum of money to Thomas Masterson. This
money was purportedly used to finance the latter's conspiratorial
[**8] acts in the State of Missouri.
n6 In view of the complexity of the activities
upon which the issue of jurisdiction rests, the
holding of a hearing would have provided a more
satisfactory basis for decision. See United States
v. Montreal Trust Co., 35 F.R.D. 216 (S.D.N.Y.
1964), and United States v. Montreal Trust Co.,
235 F. Supp. 345 (S.D.N.Y. 1964) rev'd on other
grounds, 358 F.2d 239 (2d Cir. 1966).
The foregoing activities were, for the most part,
conducted by Homer Riffe and L.E. Riffe in their capacity
as [*1281] agents and employees of Wilshire.
This led the district court to conclude that these agents,
in performing these acts for their corporate principal, did
not thereby render themselves personally amenable to
service of process under the Kansas statute, i.e., they
were not individually transacting business in Kansas in
the sense specified in the statute. The court found with
respect to the other alleged minimum contacts, that the
contacts either did [**9] not take place within the forum,
or if they did, they did not give rise to the cause of
action asserted. We agree with this conclusion of the
district court.
When Homer Riffe attended the maintenance lettings
n7 in Kansas, he was there merely to represent his
employer. There has been nothing to indicate that his
attendance at those meetings related to Wilshire's cause
of action against him for his participation in the Missouri
price-fixing conspiracy. Admittedly, the Kansas maintenance
lettings may have been indicative of conspiratorial
activity in Kansas. Wilshire has not, however, sought to
charge Homer Riffe with liability for its Kansas expenditures.
We therefore conclude that the cause of action
against Homer Riffe did not arise out of these contacts
which cannot provide a basis for the exercise of personal
jurisdiction.
n7 Maintenance lettings are meetings in
which state officials formally announce the winners
of bids submitted for state contracts.

With regard to the 1964 bid signed by Homer Riffe
[**10] as an officer of Riffe Petroleum Company, it is
difficult to envision the relationship of that act to Wilshire's
claim which is based upon activity occurring during
the years 1961 through 1963. Additionally, there
has been no showing that Wilshire was in any way involved
with this bid submitted by the Riffe Petroleum
Company. Furthermore, the signing of the bid form,
and for that matter the attendance at the various maintenance
lettings, were the acts of Homer Riffe as a corporate
employee. As such they were not his personal acts
and seemingly cannot constitute the transaction of business
by Homer Riffe as an individual. n8 Yet introduction
of the fact that it is alleged that the acts were perpetrated
in violation of the agent's fiduciary duty, militates
against the utilization of this fiduciary shield. n9 In any
event, it is clear that Wilshire has failed to prove a sufficient
nexus between the submission of the bid and its
claim against Homer Riffe. Consequently, the district
court correctly declined to exercise in personam jurisdiction
over Homer Riffe.
n8 It has been held that while a foreign corporation
is amenable to service when it transacts
business through agents operating in the forum
state, unless the agents transact business on their
own account and not on behalf of the corporation,
the agents are not engaged in business so as to
sustain an application of the long-arm statute to
them as individuals. Boas & Associates v. Vernier,
22 A.D.2d 561, 257 N.Y.S. 2d 487 (1st Dept.
1965); Schenin v. Micro Copper Corp., 272 F.
Supp. 523 (S.D.N.Y. 1967); Unicon Management
Corp. v. Koppers Co., 250 F. Supp. 850 (S.D.N.Y.
1966); Willner v. Thompson, 285 F. Supp. 394
(E.D.N.Y. 1968). Eisman v. Martin, 174 Kan.
726, 258 P. 2d 296 (1953), cited by appellant involved
an application of a nonresident motorist
statute to a negligence action predicated upon an
agent's faulty driving. The court merely determined
that the statute was not restricted to situations
where a defendant was driving his own vehicle.
The case is thus inapposite.
[**11]
n9 United States v. Montreal Trust Co., 358
F.2d 239 (2d Cir. 1966); Krause v. Hauser, 272
F. Supp. 549 (E.D.N.Y. 1967); Maternity Trousseau,
Inc. v. Maternity Mart of Baltimore, 196 F.
Supp. 456 (D. Md. 1961).
409 F.2d 1277, *; 1969 U.S. App. LEXIS 12823, **;
1969 Trade Cas. (CCH) P72,770; 37 A.L.R.3d 1341
Page 4
As to the appellee, L.E. Riffe, it was shown that he
owns, in his individual capacity, an interest in a pipeline
company which operates within Kansas. n10 This pipeline
transported oil to the Century Refining Company
which manufactured the asphalt purchased by Wilshire
for later sale to the State of [*1282] Kansas. Assuming
that this is a sufficient contact to vindicate the exercise
of personal jurisdiction, n11 it is hard to understand
how Wilshire's claim against L.E. Riffe arises from the
activity engaged in by the pipeline company. Wilshire
points to the fact that its action is based upon the sale of
asphalt and the pipeline is a supplier of the basic ingredient.
Yet this explanation falls short of indicating a
causal connection between ownership of the pipeline and
participation in the asphalt conspiracy. The right of Wilshire
to [**12] recover its antitrust damages has simply
not been shown to relate in any way to the operation of
the pipeline within the state.
n10 This it is urged, not only constitutes the
transaction of business, but also involves the
ownership and use of real estate as specified in
the Kansas statute.
n11 There is certainly room to question the
assertion of jurisdiction over an individual merely
because he owns stock in a corporation transacting
business within the state.
Alternatively, Wilshire points to the fact that L.E.
Riffe loaned money to Masterson which the latter used to
finance the operations of his Universal Asphalt Company.
n12 Universal Asphalt Company was involved in the
Missouri conspiracy, thus it is asserted that because the
loan was undertaken in Kansas, the claim against L. E.
Riffe arises from this contact with the forum state.
Again, we are not convinced that the action against L. E.
Riffe can be said to arise from this loan of money to
Masterson. Wilshire, as the party invoking the jurisdiction
[**13] of the court, has the burden of pleading and
proving the existence of jurisdiction. n13 The bold assertion
that the loaning of money to a company involved in
a conspiracy thereby connects the creditor with that conspiracy
is not persuasive. The fact that the creditor may
have been connected in some other way with the conspiracy
does not bridge the gap of causal connection between
that particular contact with the forum and the otherwise
unrelated claim against the creditor.
n12 This arrangement is discussed in Wilshire
Oil Company of Texas v. Riffe, 381 F.2d
646, 653 (10th Cir. 1967), cert. den. 389 U.S.
822, 19 L. Ed. 2d 75, 88 S. Ct. 50.

n13 Tetco Metal Products, Inc. v. Langham,
387 F.2d 721 (5th Cir. 1968); Taylor v. Portland
Paramount Corp., 383 F.2d 634 (9th Cir. 1967);
Unicon Management Corp. v. Koppers Co., 250
F. Supp. 850 (S.D.N.Y. 1966).
Finally, it is argued that the signing of the bid forms
submitted by Wilshire to the [**14] State of Kansas,
constitutes the transacting of business within the forum
state. As indicated by the district court, when L. E. Riffe
signed the form as an officer of Wilshire, he was performing
a purely ministerial function in his capacity as a
corporate agent. The terms and conditions of the bids
were prepared by other corporate employees. The signature
of an officer of the company was affixed solely to
conform to the requirements of the bid recipient. Thus,
our previous discussion of the fiduciary shield precluding
an exercise of personal jurisdiction over a corporate
agent applies with equal force here. Nonetheless, we do
not deem it necessary to decide the matter solely on that
basis. The interaction of the inherent weakness of the
contacts and the strained causal connection with the underlying
cause of action, operates in conjunction with the
fact of the agency relationship to require, in conformity
with notions of fair play and substantial justice, n14 that
this court refrain from compelling [*1283] a corporate
officer to answer in courts located in a state foreign to
both the agent and his corporation. n15
n14 Throughout our discussion of the various
contacts relied upon by Wilshire, there has been
no attempt to relate the issues presented here with
the specific fact situations presented in other cases
dealing with long-arm statutes. While the
underlying reasoning of related cases is helpful,
"it cannot be stated with exactitude what constitutes
the 'transaction of any business,' but it may
be stated that each case must turn on its own fact
pattern." Woodring v. Hall, 200 Kan. 597, 438
P.2d 135, 144 (1968). Our task is to determine
whether in each instance the exercise of jurisdiction
comports with "traditional notions of fair
play and substantial justice." Tilley v. Keller
Truck and Implement Corp., 200 Kan. 641, 438
P.2d 128 (1968).
[**15]
n15 It is also urged that this conduct
amounted to the commission of a tortious act
within the state. Our discussion of whether this
conduct constituted the transaction of business
sufficient to warrant an assertion of jurisdiction is
409 F.2d 1277, *; 1969 U.S. App. LEXIS 12823, **;
1969 Trade Cas. (CCH) P72,770; 37 A.L.R.3d 1341
Page 5
also relevant to this contention. In either situation
the pertinent consideration is whether the
contact is one which is substantial enough to provide
a sound basis for compelling the appellee to
defend against the specific claim asserted.
Coming then to consider the contention that the district
court incorrectly sustained the motion to dismiss as
to appellee Masterson, it is first appropriate to determine
the correct law to be applied. Because this is a diversity
action, this court must apply the conflict of laws principles
of the forum State of Kansas. Haury v. Allstate Ins.
Co., 384 F.2d 32 (10th Cir. 1967). Having found nothing
to the contrary, we conclude that Kansas would follow
the traditional rule and look to the state of incorporation,
Delaware. n16 The liability asserted against Masterson
as an employee of a foreign corporation is based [**16]
upon the theory that his unauthorized violation of the
antitrust laws constitutes a violation of the fiduciary duty
owed to the corporation. As such, this is a claim involving
the internal affairs of a foreign corporation and
clearly justifies the utilization of the concomitant
choice-of-law rule.
n16 "Beneficial is a Delaware corporation.
The law of Delaware is, of course, determinative
of the liability of the officers and directors to the
corporation and that of the corporation to its officers."
Beneficial Indus. Loan Corp. v. Smith,
170 F.2d 44, 50 (3d Cir. 1948), aff'd, Cohen v.
Beneficial Indus. Loan Corp., 337 U.S. 541, 93 L.
Ed. 1528, 69 S. Ct. 1221 (1949); Hausman v.
Buckley, 299 F.2d 696, 703 (2d Cir. 1962); Upson
v. Otis, 155 F.2d 606, 610 (2d Cir. 1946).
The district court predicated the dismissal of the
complaint upon the ground that it would violate general
public policy and frustrate the purpose of the antitrust
laws to allow a corporation [**17] to recoup criminal
fines imposed for violations of those laws. That disposition
of the matter was incomplete. Wilshire seeks indemnification
not only for criminal penalties but also for
civil damages and related litigation expenses. Hence,
although it may be proper to dismiss the complaint when
it is clear that legally cognizable damages cannot be
shown, it is still necessary to examine each separate element
of the total damages sought before deciding that the
claim has failed.
Taking first the $10,000 fine paid after a plea of nolo
contendere in the federal district court of Missouri, we
cannot agree that recovery of that amount should be denied
to the corporation in this situation. The public policy
against allowing a claim premised upon the wrongful

conduct of the claimant is of ancient origin, akin to the
"unclean hands doctrine" in equity. It has been invoked,
inter alia, to preclude a suit based on a contract violative
of the antitrust laws, Continental Wall Paper Co. v. Louis
Voight & Sons Co., 212 U.S. 227, 53 L. Ed. 486, 29 S.
Ct. 280 (1909); to defeat an action upon a constructive
trust arising from an illegal pooling arrangement, Warner
Bros. Theatres v. Cooper Foundation, 189 F.2d 825
(10th Cir. 1951); [**18] and to deny a claim for losses
suffered in a check kiting operation, Falconi v. F.D.I.C.,
257 F.2d 287 (3d Cir. 1958). Stated generally, the rule is
that "where the plaintiff's conduct in connection with the
transaction upon which his claim is based was illegal and
criminal the courts will deny him relief." 257 F.2d at
291. It is apparent that the principle can have no application
in the case at bar. Here the criminal liability of the
corporation is purely vicarious. It results solely from
the activity of the corporate employees. To allow those
employees to assert that their own unlawful conduct operates
to defeat the right of their corporation to recover
for the injury caused by that same conduct, is an exercise
in circuitous reasoning. See Restatement (Second),
Agency § 401, comment d (1958).
[*1284] In disposing of the contention that to allow
this action would frustrate the policy underlying the
antitrust laws, the alternative ground relied upon by the
trial court, it is essential to appreciate the specific theory
upon which this claim is based. The liability of the employee
is premised upon a breach of the fiduciary duty
owed to the [**19] corporation. The fact that this
breach of duty is sought to be demonstrated by referring
to an antitrust violation does not operate to convert the
suit into one arising under the antitrust laws. Meyer v.
Kansas City So. Ry., Co., 84 F.2d 411 (2d Cir. 1936)
cert. den. 299 U.S. 607, 81 L. Ed. 448, 57 S. Ct. 233.
Thus even assuming that the remedies provided by the
antitrust laws for enforcing the rights created therein are
exclusive, it does not preclude this action. Wilshire is
not seeking to enforce a right created by those statutes.
On the contrary, Wilshire is merely attempting to redress
an injury which was inflicted as a result of an effort on
the part of certain of its employees to commit a public
wrong. There is therefore no occasion to gauge appellant's
remedial rights by the statutory penalties either in
the sense of being concerned with treble damages or with
the exclusivity or presumption of those rights by the antitrust
laws. n17 It follows that the fact that antitrust
remedies have been provided by statute does not deprive
Wilshire of its traditional common law right to recover
for injuries occasioned by errant employees.
n17 Hand v. Kansas City So. Ry. Co., 55
F.2d 712, 714 (S.D.N.Y. 1931); Guiterman v.
Pennsylvania R. Co., 48 F.2d 851 (E.D.N.Y.
409 F.2d 1277, *; 1969 U.S. App. LEXIS 12823, **;
1969 Trade Cas. (CCH) P72,770; 37 A.L.R.3d 1341
[**20]
Page 6
1931); Clayton v. Farish, 191 Misc. 136, 73
N.Y.S. 2d 727, 745 (Sup. Ct. 1947).
Wilshire's attempt to recoup the $11,900 paid to the
State of Missouri presents difficulties of a different nature.
When the allegations of the complaint relating to
the Missouri settlement are contrasted with the contents
of the Covenant Not To Sue, the latter constituting the
tangible evidence indicating the circumstances in which
the settlement was made, an inconsistency appears.
Although it is alleged that the money was paid as damages
in settlement of a civil suit, the covenant states that
payment was "received solely as an adjustment of the
aggregate purchase price paid by Covenantor for asphaltic
products manufactured or sold by Covenantee [Wilshire]
and not as damages." Thus, the contention is made
that Wilshire cannot now claim the payment as damages,
and certainly cannot do so against Masterson who had no
connection with the Missouri conspiracy.
It is, of course, elementary that [HN2] on a motion
to dismiss the allegations of the complaint and all supporting
affidavits are accepted as true. Gardner v. Toilet
Goods Assn., Inc., 387 U.S. 167, 172, 18 L. Ed. 2d
704, 87 S. Ct. 1526 (1967). [**21] Accordingly, the
matter is not before us in the proper posture required to
definitively determine whether this particular item of
damages will stand the test of causation. n18 With regard
to the fact that the averments in the complaint seem to be
contradicted by the formal language of the Covenant Not
To Sue, it must be remembered that the archaic pleading
technicalities of the past have not survived in the federal
courts. [HN3] A complaint may be dismissed only
when "it appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim which would
entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45,
2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Because it would be
open to Wilshire to go beyond the language of the covenant
in order to demonstrate that the sum expended was
nonetheless caused by the employees' unlawful conduct,
a dismissal of that part of the complaint is inappropriate.
[**22]
n18 It was alleged that Masterson participated
in the Missouri antitrust violations. This allegation
cannot be challenged at this time.
In resisting Wilshire's attempt to recover attorneys'
fees incurred in connection with the aforementioned antitrust
litigation, Masterson points to the [*1285] well
established rule that in the absence of any contractual or
statutory liability therefor, counsel fees and related expenses
are not recoverable as an element of damages.

There can be no quarrel with that general rule in those
instances where fees and expenses incurred in prosecuting
a suit are sought to be recovered in that same suit.
Similarly, the rule appears to be generally accepted in
cases where an attempt is made to recoup the expenses
absorbed in a previous suit between the same party litigants.
Nevertheless, where a party was involved in previous
litigation with others because of some wrongful act
of the defendant, reasonable compensation for expenses
attributable to the former suit is recoverable where such
expenses are the natural consequences of the defendant's
wrongful act. n19 Clearly then there appears little reason
to distinguish counsel fees from the other financial outlays
suffered by Wilshire as a result of its involvement in
antitrust litigation.
[**23]
n19 Safway Rental & Sales Co. v. Albina
Engine & Machine Works, 343 F.2d 129 (10th
Cir. 1965); Chittim v. Texas Pac. Coal and Oil
Co., 317 F.2d 81 (10th Cir. 1963). See generally,
Annot., 45 A.L.R. 2d 1183 (1956) and Annot., 4
A.L.R. 3d 270 (1965).
With regard to the criminal and civil suits arising
from the price-fixing activity in Kansas, it is alleged that
Wilshire may be required to pay a fine in the amount of
$50,000, may be required to respond in damages in excess
of $400,000, and may be required to expend additional
sums as litigation expenses. The damages as thus
alleged reflect that they do not amount to present and
existing damages, but are merely anticipated and conclusory.
Absent an allegation that the suits in Kansas
have been finally concluded and an award assessed
against Wilshire, the damages are remote and speculative,
a matter of pure guesswork, and cannot presently be
considered. n20 In short, the inclusion of such damages
in the complaint is premature until such time as Wilshire's
obligation and resultant loss has definitely been
established.
[**24]
n20 Borden v. Cohen, 231 N.Y.S. 2d 902
(Sup. Ct. 1962). Cf. T. F. Scholes, Inc. v. United
States ex rel. H.W. Moore Equip. Co., 295 F.2d
366 (10th Cir. 1961); Delaware ex rel. General
Crushed Stone Co. v. Massachusetts Bonding &
Ins. Co., 49 F. Supp. 467 (D. Del. 1943). Certain
attorneys' fees and connected expenses have already
been expended and are not subject to this
criticism.
409 F.2d 1277, *; 1969 U.S. App. LEXIS 12823, **;
1969 Trade Cas. (CCH) P72,770; 37 A.L.R.3d 1341
Page 7
What has been said up to this point adequately responds
to the narrow basis relied upon by the district
court in improvidently granting the motion to dismiss. It
is quite clear, however, that there would be no need to
belabor each distinct item of damage unless the basic
theory of Wilshire's claim, the existence of employee
liability, can be said to provide a legal basis for requiring
Masterson to respond for those damages. There thus
remains for consideration the question of whether Wilshire's
claim is so novel and ill conceived as to warrant a
dismissal upon that basis alone.
To reiterate, Wilshire is here attempting to invoke
the law of fiduciary duty in order to affix liability upon
employees whose antitrust violations have subjected the
corporation to civil and criminal liability. This type of
contest between corporation and employee is unusual
because generally the wrongdoing employees also possess
a control over the corporation that allows them to
suppress any attempt to rectify the wrong done. Koster
v. (American) Lumbermen's Mutual Cas. Co., 330 U.S.
518, 522, 67 S. Ct. 828, 91 L. Ed. 1067 (1947). Accordingly,
the corporate loss is traditionally remedied [**25]
in these situations through the employment of the device
of a stockholder's derivative action. But the right asserted
in such action belongs to the corporation, with the
result that derivative suits involving these same issues
are clearly analogous here. 330 U.S. at 522; 13 Fletcher,
Cyclopedia of Corporations § 5939 (1961).
Graham v. Allis-Chalmers Mfg. Co., 40 Del. Ch.
335, 182 A. 2d 328 (1962), aff'd, 41 Del. Ch. 78, 188 A.
2d 125 (1963), [*1286] was one such derivative suit
that indicates that the Delaware courts would allow this
action between a corporation and its employees. There
the court was faced with a suit against director and
non-director employees based upon their failure to discover
that other employees were violating the antitrust
laws. The damages as alleged consisted of fines and penalties,
possible treble damage judgments, and injury to
the corporate reputation. In dismissing the complaint
because of an absence of evidence to indicate that the
defendants knew or should have known of the
price-fixing, the court implicitly recognized the right of
the corporation to recover for injury caused by employee
participation [**26] in antitrust violations. In a similar
vein the New York court in Simon v. Socony-Vacuum
Oil Co., n21 dismissed the complaint because the employees
had not acted fraudulently, corruptly or in bad
faith. The court noted that the defendants would be held
personally liable if they knew or had reason to know that
their conduct violated the antitrust provisions. Other
New York decisions have likewise recognized that a
cause of action can be predicated upon a breach of fiduciary
duty occurring upon a violation of the antitrust
laws, n22 but have had difficulty determining the kind of

damages that must be shown, whether the benefit to the
corporation offsets its injury, n23 and the like. n24
n21 179 Misc. 202, 38 N.Y.S. 2d 270 (Sup.
Ct. 1942), aff'd mem., 267 A.D. 890, 47 N.Y.S. 2d
589 (1st Dept. 1944).
n22 "If that wrongful act has the additional
vice of violating the Federal Anti-Trust Laws as
the result of which Standard [the corporation] is
required to forfeit its rights to royalties which
could otherwise be collected or to pay damages
or fines, those losses to Standard are the direct
result of defendants' acts which this court may
redress. Any other conclusion would leave
Standard remediless for these losses caused by
defendants' wrongful acts . . ." Clayton v. Farish,
191 Misc. 136, 73 N.Y.S. 2d 727, 745 (Sup. Ct.
1947). The court went on to point out that the
mere violation of the antitrust laws is not enough
unless that violation can be said to breach the
employees' fiduciary duty.
[**27]
n23 Borden v. Cohen, 231 N.Y.S. 2d 902
(Sup. Ct. 1962).
409 F.2d 1277, *; 1969 U.S. App. LEXIS 12823, **;
1969 Trade Cas. (CCH) P72,770; 37 A.L.R.3d 1341
Page 8
n24 Knopfler v. Bohen, 15 A.D.2d 922, 225
N.Y.S. 2d 609 (2d Dept. 1962); Smiles v. Elfred,
149 N.Y.L.J. 14 col. 6 (N.Y. Sup. Ct. 1963);
Premselaar v. Chenery, Civil No. 6151, N.Y.
Sup. Ct., N.Y. County, Feb. 13, 1963; Spinella v.
Heights Ice Corp., 186 Misc. 996, 62 N.Y.S. 2d
263 (Sup. Ct. 1946). See generally, Forte, Liabilities
of Corporate Officers for Violations of Fiduciary
Duties concerning the Antitrust Laws, 40
Indiana L.J. 313 (1965); Comment, 59 Michigan
L.R. 904 (1961).
A resolution of all of the incidental problems that
may arise cannot be made until such time as the particular
problem is directly before the court. As we have
indicated, this case is before us on a motion to dismiss,
we merely conclude that it cannot be said that it is beyond
doubt that Wilshire can prove no set of facts in
support of this claim. We cannot and do not attempt to
anticipate or preclude any defense that may be raised as
the facts begin to unfold at a later stage of the proceedings.
[**28]
The dismissal of the action by the trial court as to
the appellees, O. Homer Riffe and L. E. Riffe, for want
of jurisdiction over the parties, is Affirmed. The dismissal
of the action against appellee, Masterson, for failure
to state a cause of action is set aside and the case is
Remanded for further proceedings consistent herewith.

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PRIOR HISTORY: [***1]
422 Mass. 686, *; 664 N.E.2d 843, **;
1996 Mass. LEXIS 121, ***; 11 I.E.R. Cas. (BNA) 1221
LEXSEE 422 MASS 686
MARY C. O'BRIEN vs. NEW ENGLAND TELEPHONE & TELEGRAPH COM-
PANY & another. n1
n1 Edwin H. Hurley, Jr.
SJC-06825
SUPREME JUDICIAL COURT OF MASSACHUSETTS
422 Mass. 686; 664 N.E.2d 843; 1996 Mass. LEXIS 121; 11 I.E.R. Cas. (BNA)
1221; 132 Lab. Cas. (CCH) P58,150
Hampden. Civil action commenced in the Superior
Court Department on March 2, 1990. The case was tried
before Constance M. Sweeney, J. The Supreme Judicial
Court granted an application for direct appellate review.
DISPOSITION:
Verdict against the defendant New England Telephone
& Telegraph Company is vacated, and judgment
shall be entered for it. The judgment against Edwin H.
Hurley, Jr., is modified by deleting the award of attorney's
fees and expenses and, as so modified, is affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff employee
brought an action against defendants, supervisor and
employer, for intentional interference with her contractual
relations with her employer and for wrongful termination
of her implied contract of employment. The Superior
Court Department (Massachusetts) awarded judgment in
favor of the employee against both the supervisor and the
employer. The supervisor and the employer sought review.
OVERVIEW: The supervisor argued that the evidence
did not support a finding that he unlawfully and intentionally
interfered with the employee's employment relationship.
The employer argued that the employee was an
at-will employee and could be discharged without cause.
The court found that screaming at an employee repeatedly
to humiliate her in front of other employees, calling
her names, and denying her work to do when work was
available could be found to constitute malicious conduct
unrelated to an employer's legitimate business interests.
December 5, 1995, Argued
May 17, 1996, Decided
Page 1
The court found that the employer's personal manual
granted the employee rights beyond those of an at-will
employee, and that the manual gave each employee the
right to expect that she would be treated fairly, and that,
except in the case of certain gross violations of rules and
other offenses, any shortcomings would not be grounds
for immediate discharge. The court concluded that the
employee's omission in not following the grievance procedure
contained in the manual was, as a matter of law,
fatal to her claim that the employer violated the terms of
her employment.
OUTCOME: The court vacated the verdict against the
employer and entered judgment in favor of it. The court
modified the judgment against the supervisor by deleting
the award of attorney's fees and expenses and, as modified,
affirmed that judgment.
LexisNexis(R) Headnotes
Labor & Employment Law > Employment Relationships
> At-Will Employment
[HN1] The principle that promises made in a personnel
manual may be binding on an employer is accepted in a
clear majority of American jurisdictions. There are differences
among the states as to the theory of liability,
unilateral contract or promissory estoppel, and there are
differences as to what circumstances justify a finding
that the provisions of a personnel manual are binding on
an employer.
Labor & Employment Law > Employment Relationships
[HN2] A personnel manual may form the basis for an
express contract. Surely, if the parties agree in advance
of employment that a personnel manual will set forth

elative rights and obligations of employer and employee,
the manual becomes part of the employment contract.
A similar result would be obtained if, during the course
of at-will employment, the parties agree, orally or in
writing, that thereafter their rights and obligations would
include the provisions of an employee manual. An employee
remaining with the employer after receiving a
manual provides the consideration necessary to support
the contract. It is also apparent that the circumstances of
a particular employment relationship could warrant a
finding of an implied contract that includes the terms of a
personnel manual. If an employer adheres to the procedures
set forth in its manual, that would be some evidence
that the terms of the manual were part of the employment
contract.
Labor & Employment Law > Employment Relationships
[HN3] Negotiation of the terms of a company-wide
manual for nonunion employees is not an essential precondition
of the enforceability of the employer's obligations
stated in the manual.
Labor & Employment Law > Employment Relationships
[HN4] If the employer retains the right unilaterally to
modify the terms of the manual, that makes any offer in
the manual illusory. On the other hand, if an employee
reasonably believes that the employer is offering to continue
the employee's employment on the terms stated in
the manual, the employee's continuing to work after receipt
of the manual would be in the nature of an acceptance
of an offer of a unilateral contract, and the
promise would not be illusory. The fact that the employer
did not intend to make such an offer, and that there
was no explicitly bargained-for exchange, does not matter
if employees in general would reasonably conclude
that the employer was presenting the manual as a statement
of the conditions under which employment would
continue.
Labor & Employment Law > Collective Bargaining &
Labor Relations > Arbitration > Exhaustion of Remedies
[HN5] When a collective bargaining agreement provides
a grievance procedure, the general rule is that the remedies
specified in the agreement must be exhausted before
an employee may resort to the courts. The Supreme Judicial
Court of Massachusetts sees no justification for
treating differently an employee asserting rights under a
personnel manual that contains a grievance procedure.
Torts > Damages > Costs & Attorney Fees
[HN6] There is no authority allowing a plaintiff in an
action for interference with a contractual relationship to
422 Mass. 686, *; 664 N.E.2d 843, **;
1996 Mass. LEXIS 121, ***; 11 I.E.R. Cas. (BNA) 1221
Page 2
recover counsel fees incurred in pressing that claim. That
conclusion is consistent with the general rule that each
litigant bears the cost of her own litigation.
Torts > Damages > Costs & Attorney Fees
[HN7] There are limited circumstances in which counsel
fees are properly awarded. Where a defendant has intentionally
interfered with a plaintiff's contractual relations,
the plaintiff may, as a result, incur attorney's fees in
dealing with third parties, when, for example, as a result
of the wrong, the plaintiff is sued by some third party.
Also, when the plaintiff is forced to sue a third party to
hold it to the bargain with which a defendant intentionally
and wrongfully interfered, attorney's fees in that
action may properly be awarded against the tortfeasor.
Of course, if the plaintiff had no rights against the third
party, she would not be entitled to counsel fees incurred
in asserting those nonexistent rights.
COUNSEL:
Pamela A. Smith for the defendants.
Edward J. McDonough, Jr. (William C. Flanagan with
him) for the plaintiff.
Stephen S. Ostrach, for New England Legal Foundation,
amicus curiae, submitted a brief.
JUDGES: Present: Liacos, C.J., Wilkins, Abrams,
Lynch, O'Connor, & Fried, JJ.
OPINIONBY: WILKINS
OPINION:
[*687] [**844] WILKINS, J. Mary C. O'Brien
was awarded judgment against Edwin H. Hurley, Jr., for
intentional interference with her contractual relations
with her employer, New England Telephone [***2] &
Telegraph Company (NET). She was also awarded
judgment against NET for wrongful termination of her
implied contract of employment. [**845] We allowed
the defendants' application for direct appellate review.
Hurley, who was O'Brien's supervisor in NET's
marketing department in Springfield, argues that the
judge should not have submitted the claim against him to
the jury. We shall determine that the jury could reasonably
have concluded that Hurley's treatment of O'Brien
maliciously interfered with O'Brien's rights and precipitated
her discharge.
Although NET contends that O'Brien was only an
at-will employee and, therefore, could be discharged
without cause, we shall conclude that NET's personnel
manual granted O'Brien rights beyond those of an at-will

employee. Those rights, however, had to be asserted first
through the grievance procedure set forth in the manual.
Because O'Brien did not pursue that course, she lost
whatever rights that the personnel manual provided her.
Judgment must be entered in favor of NET.
We shall first explain why the verdict against Hurley
for intentional interference with contractual relations
should be upheld. Next, we shall explain why O'Brien
may not recover [***3] against NET.
1. We reject Hurley's argument that the evidence did
not warrant a finding that he unlawfully and intentionally
interfered with O'Brien's employment relationship. We
have little difficulty in concluding that the jury were
warranted in finding that Hurley's conduct toward
O'Brien was motivated by "actual malice" and was not
related to NET's legitimate corporate interests. See
Wright v. Shriners Hosp. for Crippled [*688] Children,
412 Mass. 469, 476, 589 N.E.2d 1241 (1992);
Gram v. Liberty Mut. Ins. Co., 384 Mass. 659, 663-664,
429 N.E.2d 21 (1981), S.C., 391 Mass. 333 (1984). Although
the question is a closer one, the jury were also
warranted in finding that Hurley's treatment of O'Brien
caused her to commit the misconduct that led to her discharge.
The jury could have found the following facts.
O'Brien first went to work for NET in 1956 as a general
clerk in the division traffic office in Springfield, where
she worked for twenty-two years, had a good relationship
with fellow workers, and was never reprimanded or disciplined.
Thereafter she worked in two other NET departments
without adverse incident. In December, 1982,
she joined the marketing department [***4] headed by
Hurley. In 1983, Hurley rated O'Brien's performance as
satisfactory in an evaluation, although he indicated that
she could use her time more effectively. In 1984, Hurley
asked O'Brien to fill out a transfer form because there
was a surplus of clerks in the department, and he wanted
her to be transferred. O'Brien, who believed that her
seniority would protect her from being transferred
against her will, refused Hurley's request and filed a
grievance. A NET personnel manager upheld the grievance
on the basis that the terms of NET's personnel
manual protected O'Brien from involuntary transfer in
the circumstances.
After O'Brien's grievance was upheld, Hurley became
very hostile toward O'Brien. He screamed and
yelled at her over small things every day, often in front
of other people in the office. He called her stupid, the
"nitwit in the north end," "the Blessed Mother," and
"loony tunes." A witness heard Hurley scream at O'Brien
and call her a "whore," "prostitute," and "slut." He described
Hurley's outbursts toward O'Brien as temper tantrums.
One could hear Hurley yelling at her all over the
422 Mass. 686, *; 664 N.E.2d 843, **;
1996 Mass. LEXIS 121, ***; 11 I.E.R. Cas. (BNA) 1221
Page 3
building. Hurley would persist until O'Brien started
shaking and crying. When Hurley [***5] made O'Brien
cry, "that was like his victory."
Hurley wanted O'Brien out of the department. He
gave her work to other people and refused to let her do
work that she had been trained to do. He also refused to
give her a key to the supply closet to obtain supplies,
although the junior clerk was given a key, and, in the
past, O'Brien always had been given access. Hurley refused
to discuss with O'Brien why he had ceased to give
her work. In his performance evaluation of [*689]
O'Brien in 1985, after she had successfully grieved the
attempted transfer, Hurley reported that O'Brien's performance
was "unsatisfactory" and that she "has been
told of her deficiencies. Her overall skills do not let her
perform in a satisfactory manner." He also reported that
"she procrastinates, is unable [**846] to prioritize,
needs constant direction, and is much too deliberate in
her duties." O'Brien refused to sign this evaluation.
One day in October, 1985, while O'Brien was typing
her notes regarding her relationship with Hurley, pursuant
to a direction by a NET personnel manager, Hurley
came out of his office, took her notes (which she seized
back), and told her to leave and to leave everything on
her desk. Hurley suspended [***6] O'Brien for three
days without pay. Upon her grievance of the suspension,
a NET personnel manager rescinded the three-day suspension;
changed the discipline to one day off without
pay; ordered that the discipline letter be rewritten to
eliminate any reference to a suspension; and promised
O'Brien that all memos and correspondence regarding the
suspension would be removed from her file.
In 1987, after O'Brien had obtained payroll training,
Hurley refused to give her any opportunity to practice
doing the payroll work. One time when he asked her to
do the payroll he yelled at her because she expressed
some concern about her lack of practice. When she
grieved this issue, Hurley was directed to allow O'Brien
to do the payroll occasionally so she could get some
practice. Hurley did not fully comply with this directive.
Hurley's harassment of O'Brien continued. Some
days O'Brien had no work to do. Hurley gave secretarial
work to a salesperson in the department who was not a
clerk. Toward the end of 1989, O'Brien believed that
Hurley and the salesperson were spending time together
and confirmed her suspicions by making telephone calls
to Hurley's office, to his home, to the salesperson's
[***7] office, and once to her home. O'Brien never said
anything during any of the telephone calls. She simply
hung up. O'Brien was concerned that the salesperson was
taking over her job. At Hurley's request, NET traced the
"hang-up calls" to O'Brien. She admitted making them
and that it was wrong to do so. She was immediately

suspended. About one week later, NET terminated her
employment on the stated ground that annoyance calls
[*690] were a violation of criminal laws and a violation
of NET's Code of Business Conduct. O'Brien did not file
a grievance concerning her termination.
Although Hurley argues that his treatment of O'Brien
was consistent with his supervisory responsibilities,
the jury were warranted in finding that Hurley's conduct
exceeded his rightful role as O'Brien's supervisor and
was prompted by his resentment of O'Brien's successful
challenges to his decisions and her refusal to transfer out
of his department. Screaming at an employee repeatedly
to humiliate her in front of other employees, calling her
names, and denying her work to do when work is available
could be found both to exceed the protected conduct
of a supervisor and to constitute malicious conduct unrelated
to an employer's [***8] legitimate business interests.
Hurley has suggested in his brief that the jury could
not reasonably have found that his treatment of O'Brien
caused her to make the "hang-up" telephone calls that
caused NET to discharge her. Certainly a finding was
warranted that O'Brien would not have made the
"hang-up" telephone calls if Hurley had not treated her as
he did. n2
422 Mass. 686, *; 664 N.E.2d 843, **;
1996 Mass. LEXIS 121, ***; 11 I.E.R. Cas. (BNA) 1221
n2 The evidence might not warrant a finding
that O'Brien violated G. L. c. 269, § 14A (1994
ed.). A conviction of making repeated harassing
or annoying telephone calls requires proof that
the "sole purpose" of the calls was to harass or
annoy. In any event, O'Brien's conduct, particularly
for a telephone company employee who had
signed NET's Code of Business Conduct, was
particularly inappropriate.
2. Next, we come to O'Brien's claim that NET violated
her contract of employment by discharging her
without cause. O'Brien, who had no written contract, was
an at-will employee unless the provisions of NET's personnel
manual, entitled "Personnel Practices," [***9]
altered her status. There was nothing in O'Brien's other
dealings with NET that gave her greater rights than those
that we conclude she had under NET's personnel manual.
O'Brien contended at trial that NET's personnel manual
provided her protection from dismissal without cause.
NET, in turn, argued that, because the manual granted
O'Brien no enforceable rights, there was no jury issue as
to whether NET had cause to discharge O'Brien. NET
also contended [**847] that, even if the manual did
grant O'Brien contractual rights, O'Brien's claim also
failed because (1) she did not pursue the grievance procedures
of the personnel [*691] manual and (2) in any
Page 4
event, O'Brien's admittedly improper conduct provided
just cause for her discharge. We conclude that NET's
motion for a directed verdict (or at least its motion for
judgment notwithstanding the verdict) should have been
allowed.
[HN1] The principle that promises made in a personnel
manual may be binding on an employer is accepted
in a clear majority of American jurisdictions. See
Comment, Unilateral Modification of Employment
Handbooks: Further Encroachments on the Employment-at-Will
Doctrine, 139 U. Pa. L. Rev. 197, 208-209
n.76 (1990) (citing cases from [***10] thirty-three
States and the District of Columbia). There are differences
among the States as to the theory of liability (unilateral
contract or promissory estoppel), id. at 209, and
there are differences as to what circumstances justify a
finding that the provisions of a personnel manual are
binding on an employer. The idea that an employer may
ignore promises made in a personnel manual is in increasing
disfavor in this country. See Small v. Springs
Indus., Inc., 292 S.C. 481, 485-486, 357 S.E.2d 452
(1987).
Since our opinion in Jackson v. Action for Boston
Community Development, Inc., 403 Mass. 8, 525 N.E.2d
411 (1988), in which we last considered the question of
personnel manuals, some confusion has arisen. In that
opinion, we held that the summary judgment evidence
demonstrated that the parties had not entered into an implied
contract on the basis of a personnel manual that the
defendant employer had distributed to its employees.
Id. at 14.
Principles stated in the Jackson opinion remain
sound. [HN2] A personnel manual may form the basis
for an express contract. Id. at 13. Surely, if the parties
agree in advance of employment that a personnel manual
will [***11] set forth relative rights and obligations of
employer and employee, the manual becomes part of the
employment contract. A similar result would be obtained
if, during the course of at-will employment, the parties
agree, orally or in writing, that thereafter their rights and
obligations would include the provisions of an employee
manual. An employee remaining with the employer after
receiving a manual provides the consideration necessary
to support the contract. Id. at 14. It is also apparent that
the circumstances of a particular employment relationship
could warrant a finding of an implied contract that
includes the terms of a personnel manual. Id. If an employer
[*692] adheres to the procedures set forth in its
manual, that would be some evidence that the terms of
the manual were part of the employment contract. Id.
The Jackson opinion has led to confusion because
certain facts that were stated to be present or not present
in that case ( id. at 14-15) have been viewed as consti-

tuting a list of conditions that must exist in order to justify
a ruling that the terms of a personnel manual are part
of an express or implied employment contract. See
Pearson v. John Hancock [***12] Mut. Life Ins. Co.,
979 F.2d 254, 256-257 (1st Cir. 1992); Biggins v. Hazen
Paper Co., 953 F.2d 1405, 1423-1424 (1st Cir. 1992),
vacated on other grounds, 507 U.S. 604 (1993); Cadrin
v. New England Tel. & Tel. Co., 828 F. Supp. 120, 122
(D. Mass. 1993). Cf. O'Brien v. Analog Devices, Inc.,
34 Mass. App. Ct. 905, 906, 606 N.E.2d 937 (1993)
(manual played no part in employment agreement because
employee did not read manual until after she began
her employment); Mullen v. Ludlow Hosp. Soc'y, 32
Mass. App. Ct. 968, 969, 592 N.E.2d 1342 (1992) (no
contract because terms of manual were not negotiated,
manual was received after employee began working,
employer could change manual unilaterally, and manual
said it was not a contract).
The various circumstances discussed in the Jackson
opinion are not a rigid list of prerequisites, but rather
explain factors that would make a difference or might
make a difference in deciding whether the terms of a
personnel manual were at least impliedly part of an employment
contract. For example, one of the Jackson factors
is whether there had been negotiations over the
terms of the personnel manual. Jackson, [**848] supra
[***13] at 15. If there had been negotiations leading
to an agreement, that fact alone would justify the
conclusion that more than an at-will employment contract
existed. The fact that the NET manual was not the
subject of negotiation is neither significant nor surprising.
[HN3] Negotiation of the terms of a company-wide
manual for nonunion employees is not likely and is not
an essential precondition of the enforceability of the employer's
obligations stated in the manual. Of course, if a
manual furnished to an employee stated a term of employment,
the employee would not be an at-will employee.
Id.
The Jackson opinion thought significant, in support
of its result, that [HN4] the employer retained the right
unilaterally to modify the terms of the manual because
that made any offer in the manual illusory. Id. at 14-15.
On the other hand, if an employee reasonably believed
that the employer was offering [*693] to continue the
employee's employment on the terms stated in the manual,
the employee's continuing to work after receipt of the
manual would be in the nature of an acceptance of an
offer of a unilateral contract (see Pine River State Bank
v. Mettille, 333 N.W.2d 622, 626-627 [Minn. 1983]),
[***14] and the promise would not be illusory. The fact
that the employer did not intend to make such an offer,
and that there was no explicitly bargained-for exchange,
does not matter if employees in general would reasonably
conclude that the employer was presenting the man-
422 Mass. 686, *; 664 N.E.2d 843, **;
1996 Mass. LEXIS 121, ***; 11 I.E.R. Cas. (BNA) 1221
Page 5
ual as a statement of the conditions under which employment
would continue. See Restatement (Second) of
Contracts § 24 (1979) ("An offer is the manifestation of
willingness to enter into a bargain, so made as to justify
another person in understanding that his assent to that
bargain is invited and will conclude it").
The Jackson opinion also indicates that a finding
that the terms of a personnel manual are part of an employee's
contract would be supported if the employee
signed the manual, manifested assent to it, or acknowledged
understanding of its terms, or if the employer
called special attention to the manual. Jackson, supra at
15. Although O'Brien did not sign the personnel manual
(the document that contains whatever contractual rights
that she may have beyond those of an at-will employee),
there was evidence that she received a new copy of the
manual annually.
Of course, the provisions of a personnel manual
[***15] on analysis may grant no rights. The Jackson
opinion noted that, if the manual states that it provides
only guidance as to the employer's policies (id.), it may
not create any enforceable rights. Other language in the
manual or employment practices may demonstrate otherwise.
The NET manual of personnel practices states
that it applies to all nonmanagement employees not covered
by collective bargaining agreements. In no place
does it state that NET reserves the right unilaterally to
change the provisions of the manual or to discharge any
employee without cause. n3 It does, however, provide
more than general guidance as to the employer's policies.
[***16]
n3 As to amendments, the manual states that
"any changes, revisions and additions to these
practices must be authorized in writing by the
Managing Director - Labor Relations and Safety."
This language does not assert a unilateral
right to change the manual that employees would
reasonably understand to exist. The annual distribution
of new manuals, however, may support
the view that there was a right unilaterally to
amend the manual.
[*694] Management distributes personnel manuals
because it is thought to be in its best interests to do so.
Such a practice encourages employee security, satisfaction,
and loyalty and a sense that every employee will be
treated fairly and equally. See Toussaint v. Blue Cross &
Blue Shield of Mich., 408 Mich. 579, 613, 292 N.W.2d
880 (1980). Management expects that employees will
adhere to the obligations that the manual sets forth.
Courts recently have been reluctant to permit management
to reap the benefits of a personnel manual and at

the same time avoid promises freely made in the manual
that employees reasonably believed were part of their
arrangement with the employer. Management voluntarily
offers, and defines the terms of, any benefit set forth in
its unbargained for personnel manual. The employees
may have a reasonable expectancy that management will
adhere to a manual's provisions. [**849] "Without
minimizing the importance of its specific provisions, the
context of the manual's preparation and distribution is, to
us, the most persuasive proof that it would be almost
inevitable for an employee to regard it as a binding
commitment, legally enforceable, concerning the terms
and conditions [***17] of his employment." Woolley v.
Hoffmann-La Roche, Inc., 99 N.J. 284, 299, 491 A.2d
1257, modified on other grounds, 101 N.J. 10 (1985). In
the circumstances of this case, an affected employee's
reliance on the manual would be reasonable, and O'Brien,
as one of those employees, is entitled to whatever
rights that the manual sets forth.
We need not now define the extent to which management
may effectively reserve its right to change or
withdraw a manual, or some part of it, or the extent to
which management may successfully provide that the
manual from its inception or by its amendment creates no
rights at all. See Befort, Employee Handbooks and the
Legal Effect of Disclaimers, 13 Indus. Rel. L. J. 326,
348-349, 369-370 (1991/1992). NET did not explicitly
purport to retain the right unilaterally to modify the personnel
manual. See note 3, above. The personnel manual,
distributed to employees and amended from time to time,
contained no reservation of rights or disclaimer of obligations.
Indeed, NET appears to have followed the manual's
procedures as a regular administrative practice and
did so specifically in regard to O'Brien's grievances.
[*695] NET's personnel manual does not provide
[***18] that an employee may be discharged only for
cause, but it does give each employee the right to expect
that she will be treated fairly, and that, except in the case
of "certain gross violations of rules and other offenses,"
any shortcomings would not be grounds for immediate
discharge. Rather, discipline was generally promised to
be progressive. n4 The manual provides a grievance
procedure involving "a complaint that an employee has,
in any manner, been unfairly treated." The stated procedure,
which provides for four steps (if suspension or termination
is involved), requires that "grievances must be
presented initially within thirty (30) calendar days of the
occurrence which gave rise to the grievance."
422 Mass. 686, *; 664 N.E.2d 843, **;
1996 Mass. LEXIS 121, ***; 11 I.E.R. Cas. (BNA) 1221
n4 Section 5.02 of the manual provides as
follows: "Consideration will be given to the question
of retaining any employee who is unsuitable
or deficient. The Company will attempt to warn
[***19]
Page 6
employees and help them overcome any shortcomings.
Generally entries will be made on the
employee's service record of such warnings and
efforts, and the employee should be notified at
that time. At the same time, certain gross violations
of rules and other offenses may be considered
as cause for immediate discharge. In such
cases progressive discipline will not be given; the
employee, however, may be suspended pending a
review of facts for a final determination."
O'Brien did not follow the grievance procedure, and
that omission, as a matter of law, is fatal to her claim that
NET violated the terms of her employment. O'Brien
knew of the grievance procedure (she had notice of it in
any event) and had used it successfully. She cannot assert
a right against unfair treatment under one part of her
employment contract and fail to follow procedures set
forth in another part of that contract that could provide
relief from that unfair treatment. The grievance procedure
was not optional in the sense that O'Brien could
assert a violation of rights under the personnel manual
without following the grievance procedure. It was an
optional procedure only in that an employee with a
grievance could decide not to pursue the grievance.
[HN5] When a collective bargaining agreement provides
a grievance procedure, the general rule is that the
remedies specified in the agreement must be exhausted
before an employee may resort to the courts. See Vaca v.
Sipes, 386 U.S. 171, 184, 17 L. Ed. 2d 842, 87 S. Ct. 903
(1967); Balsavich v. Local 170, Int'l Bhd. of Teamsters,
371 Mass. 283, 286, 356 N.E.2d 1217 (1976) ("Employees
may not simply disregard the grievance [***20]
procedures set out in a collective labor contract [*696]
and go direct to court for redress against the employer");
Norton v. Massachusetts Bay Transp. Auth., 369 Mass. 1,
2, 336 N.E.2d 854 (1975). We see no justification for
treating differently an employee asserting rights under a
personnel manual that contains a grievance procedure
where none of the limited exceptions to the exhaustion
requirement, noted in the cited cases, applies. [**850]
See also Glover v. St. Louis-San Francisco Ry., 393 U.S.
324, 329-331, 21 L. Ed. 2d 519, 89 S. Ct. 548 (1969).
The grievance procedure provided a ready means by
which O'Brien could have brought to the attention of
management Hurley's unfair treatment of her and the
reason why she made the "hang-up" telephone calls.
Pursuit of this available process might have demonstrated
sufficient mitigating circumstances to rebut what
management might otherwise have perceived as "gross
violations" of rules or law that were "cause for immediate
discharge." Because O'Brien failed to pursue the
grievance procedure, we need not decide whether, as a

matter of law, her improper conduct justified her discharge
on some standard that the personnel manual
might be [***21] read to prescribe (fair treatment, existence
of a gross violation, or otherwise)
3. The trial judge ruled that Hurley was liable to
O'Brien for all her counsel fees and expenses in this action.
The trial judge did not distinguish between counsel
fees that O'Brien incurred in pursuing her tort claim
against Hurley and counsel fees that she incurred in pursuing
her contract claim against NET.
[HN6] There is no authority allowing a plaintiff in
an action for interference with a contractual relationship
to recover counsel fees incurred in pressing that claim.
That conclusion is consistent with the general rule that
each litigant bears the cost of her own litigation. See
Linthicum v. Archambault, 379 Mass. 381, 389, 398
N.E.2d 482 (1979). O'Brien is not, therefore, entitled to
an award of counsel fees with respect to her claim
against Hurley. Cf. M.F. Roach Co. v. Provincetown,
355 Mass. 731, 733, 247 N.E.2d 377 (1969) (plaintiff
"can be allowed only those counsel fees incurred in suing
the third party").
[HN7] There are limited circumstances in which
counsel fees are properly awarded. See Bournewood
Hosp., Inc. v. Massachusetts Comm'n Against Discrimination,
371 Mass. 303, [***22] 311-312, 358 N.E.2d
235 (1976). Where a defendant has intentionally interfered
with a plaintiff's contractual relations, the plaintiff
may, as a [*697] result, incur attorney's fees in dealing
with third parties, when, for example, as a result of the
wrong, the plaintiff is sued by some third party. See
Mailhoit v. Liberty Bank & Trust Co., 24 Mass. App. Ct.
525, 531, 510 N.E.2d 773 (1987). Also, when the plaintiff
is forced to sue a third party to hold it to the bargain
422 Mass. 686, *; 664 N.E.2d 843, **;
1996 Mass. LEXIS 121, ***; 11 I.E.R. Cas. (BNA) 1221
Page 7
with which a defendant intentionally and wrongfully
interfered, attorney's fees in that action may properly be
awarded against the tortfeasor. Id. at 532. M.F. Roach
Co. v. Provincetown, supra at 732. Of course, if the
plaintiff had no rights against the third party, she would
not be entitled to counsel fees incurred in asserting those
nonexistent rights. Id.
If O'Brien had prevailed in her action brought
against NET to protect those interests with which Hurley
wrongly interfered, Hurley would be liable for O'Brien's
attorney's fees and expenses incurred in pursuing NET. It
may be that a tort defendant in Hurley's position would
be liable for attorney's fees and expenses that the
wronged party incurred [***23] as an unsuccessful
plaintiff in an action reasonably prompted by the tortfeasor's
misconduct. The rule is, however, that to recover
attorney's fees and expenses the wrongful party must
have been required by the wrongdoer's conduct to bring
the action against the third party. See Restatement (Second)
of Torts § 914 (2) (1979). Because O'Brien could
have, and should have, followed the grievance procedure
set forth in the manual, she was not required to maintain
an action against NET to protect her rights. She had successfully
pursued grievances at NET in the past and
made no showing that it would have been futile to do so
again.
4. The verdict against the defendant New England
Telephone & Telegraph Company is vacated, and judgment
shall be entered for it. The judgment against Edwin
H. Hurley, Jr., is modified by deleting the award of attorney's
fees and expenses and, as so modified, is affirmed.
So ordered.

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PRIOR HISTORY: [***1]
50 Mich. App. 71, *; 212 N.W.2d 821, **;
1973 Mich. App. LEXIS 886, ***
LEXSEE 50 MICH. APP. 71
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY v. ALLEN
Appeal from Washtenaw, Ross W. Campbell, J.
DISPOSITION:
Affirmed in part, reversed in part, and remanded.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendants automobile
dealership and insurance agency appealed the order of
trial court (Michigan) awarding attorneys' fees to plaintiff,
defendant driver, defendant owner and defendants
other driver and passenger in an action seeking declaration
of rights regarding plaintiff's duty to defend under
defendant owner's policy.
OVERVIEW: Defendants other driver and passenger
instituted action against defendants driver and owner
after automobile collision. Plaintiff, assigned under
owner's policy to defend driver and owner in the action,
commenced action seeking a declaration of rights for its
duty to defend driver and owner. Plaintiff sought rescission
of the insurance contract. Defendants driver and
owner asserted that if plaintiff was not liable, then defendants
automobile dealership and insurance agency
were responsible for the cost of defense as a result of
their alleged fraud and forgery. A jury verdict cancelled
the policy and awarded attorneys' fees to defendants
driver and owners, defendants other driver and passenger,
and plaintiff. Driver, owner and plaintiff were entitled
to recover attorneys' fees as element of damage for
cost of prior litigation. Costs incurred by other driver and
passenger were not attributable to the wrongful conduct
of automobile dealership and insurance agency and not
recoverable.
OUTCOME: Attorneys' fees for defendants driver and
owner and plaintiff affirmed since costs incurred by them
Docket Nos. 12457, 12458
Court of Appeals of Michigan
50 Mich. App. 71; 212 N.W.2d 821; 1973 Mich. App. LEXIS 886
November 16, 1972, Submitted Division Two
September 27, 1973, Decided
Page 1
were recoverable as an element of damage in present
proceeding; attorneys' fees for defendants other driver
and passenger denied since their costs were not attributable
to wrongful conduct of defendants automobile dealer
and insurance agency.
LexisNexis(R) Headnotes
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN1] As a general rule, courts have refused to allow
recovery of attorneys' fees, either as an element of the
costs of the suit or as an item of damages, unless allowance
of a fee is expressly authorized by statute or court
rule.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] By statute or court rule, Michigan has provided
for the recovery of attorneys' fees in special classes of
litigation.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] No Michigan statute or court rule provides for an
allowance of attorneys' fees in a declaration of rights
proceeding.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN4] Where the prevailing party has created or protected
a common fund for the benefit of others as well as
himself, a court of equity may allow that party reasonable
attorneys' fees to be paid from the fund.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN5] Michigan cases recognize another exception and
allow, despite the absence of statutory authority, the

award of attorneys' fees in actions for false imprisonment
or malicious prosecution.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN6] Reasonable attorneys' fees incurred in prior litigation
with a third party, not with the defendant, may be
recoverable.
Civil Procedure > Appeals > Standards of Review >
Abuse of Discretion
[HN7] The granting of continuances is a matter that rests
largely in the trial judge's discretion.
Governments > Legislation > Interpretation
[HN8] Mich. Comp. Law § 500.3220, restricting an
insurer's power to cancel a policy of insurance, does not
limit the court's power to declare a policy inoperative
because of fraud or forgery.
COUNSEL:
DeVine & DeVine, for plaintiff.
Douvan, Harrington & Carpenter, for defendants
Carl L. Allen and Bobby E. Ross.
Thompson, Bishop, Tryand & Thompson (by L. Ray
Bishop), for defendants Richard S. Cygan and Rose M.
Cygan.
Ralph H. Adams, for defendant Bruce G. Kendall,
Inc.
Leroy M. Ogle, for defendant Wayne Hall Dodds
Company.
JUDGES:
Levin, P. J., and V. J. Brennan and O'Hara, * JJ.
* Former Supreme Court Justice, sitting on
the Court of Appeals by assignment pursuant to
Const 1963, art 6, § 23 as amended in 1968.
OPINIONBY:
PER CURIAM
OPINION:
[*72] [**823] After an automobile collision,
Richard Cygan and his wife commenced an action
against the driver of the other automobile, Bobby Ross,
and the owner, Ross's brother-in-law Carl [***3] Allen.
State Farm, which had been assigned Allen's policy under
the assigned risk plan, was called upon to defend
Ross and Allen.
50 Mich. App. 71, *; 212 N.W.2d 821, **;
1973 Mich. App. LEXIS 886, ***
Page 2
State Farm commenced this action against the Cygans,
Ross, and Allen seeking a declaration of rights.
Count 1 sought rescission of the insurance contract for
Allen's alleged failure to provide accurate [*73] information
in the insurance application. Count 2 alleged
that State Farm was exculpated from liability because
Ross intentionally injured Cygan.
In their answers, Ross and Allen asserted that if
State Farm was not liable then the dealership which sold
Allen the automobile, Wayne Hall Dodds Company, or
the insurance agency through whom the insurance was
obtained, Bruce G. Kendall, Inc., was responsible for the
cost of defense. State Farm, after extensive discovery,
was granted leave to file an amended complaint adding a
third count stating a cause of action against Dodds and
Kendall for fraud and forgery.
A consent judgment for $ 3,000 was entered in favor
of the Cygans in their action against Ross and Allen.
All the parties to this action subsequently stipulated that
this amount was reasonable.
At the trial, State Farm withdrew counts [***4] 1
and 2 of its complaint. Motions by Dodds and Kendall
for dismissal of equitable jurisdiction of the third count
for fraud and forgery on the ground that the action had
become one of law for damages, and subsequent motions
for a directed verdict on the same basis, were denied.
Testimony at trial established that, although the automobile
had been purchased for Ross's use, the insurance
application did not name Ross as the principal driver;
Allen was the only operator listed. The question
whether the operator's license of any "usual" driver of the
automobile had been suspended was checked "no" although
Ross's license was then under suspension.
Handwriting experts testified that Allen's signature on
the application was forged. Three experts attributed the
forgery to the president of the Dodds dealership. [*74]
Another testified that it was in the handwriting of an
agent for Kendall.
A jury, by special verdict, found that Dodds and
Kendall, acting in concert, committed the "fraud alleged"
(as it was termed in the jury verdict), on State Farm,
Ross, and Allen. A judgment was entered cancelling the
insurance policy, awarding State Farm $ 12,258.53, and
Ross and Allen $ 5,690 [***5] against Dodds and
Kendall for the cost of litigation, including attorneys'
fees, and requiring Dodds and Kendall to pay the Cygans
$ 4,450 for attorney fees and $ 3,000 for the consent
judgment.
The judge had previously ruled that although "attorney
fees cannot be taxed as costs in the absence of statute
or court rule", they "can be charged as an element of
damages where the party claiming them can show that he

has been forced to expend money as a direct result of the
unlawful acts of the other party".
In England, attorneys' fees are taxable as "costs" of
litigation in all civil suits. But American courts have
stepped to the beat of a different drummer. [HN1] As a
general rule, our courts have refused to allow recovery of
attorneys' fees, either as an element of the costs of the
suit or as an item of damages, unless allowance of a fee
is expressly authorized by statute or court rule. See 20
Am Jur 2d, Costs, § 72, pp 58-59, and 22 Am Jur 2d,
Damages, § 165, pp 234-235. The rule has persisted
despite the vigorous attack of commentators advocating
adoption of the English rule. n1
n1 See McCormick, Counsel Fees and Other
Expenses of Litigation as an Element of Damages,
15 Minn L Rev 619 (1931); McCormick,
Damages, § 71, p 255; Ehrenzweig, Reimbursement
of Counsel Fees and the Great Society,
54 Cal L Rev 792 (1966); Stoebuck, Counsel
Fees Included in Costs: A Logical Development,
38 Colo L Rev 202 (1966); Greenberger, The
Cost of Justice: An American Problem; An English
Solution, 9 Vill L Rev 400 (1964); Kuenzel,
The Attorney's Fee: Why Not a Cost of Litigation?,
49 Iowa L Rev 75 (1963); Cosway, Attorneys
Fees as an Element of Damages, 15 Cinn L
Rev 313 (1941); Lyman, Our Obsolete System of
Taxable Costs, 25 Conn B J 148 (1951);
Goodhart, Costs, 38 Yale L J 849 (1929).
- - - - - - - - - - - - - - - - -End Footnotes- - - - - - - -
- - - - - - - - -[HN2]
[***6]
[*75] [**824] By statute or court rule, Michigan
has provided for the recovery of attorneys' fees in
special classes of litigation e.g., GCR 1963, 726 (divorce
or separate maintenance); GCR 1963, 749.4, 750.4 (partition);
MCLA 451.810(a)(2); MSA 19.776(410)(a)(2)
(Blue Sky Law suits for rescission); MCLA 570.12; MSA
26.292 (mechanic's liens); MCLA 600.2431(2); MSA
27A.2431(2) (foreclosure by advertisement); MCLA
600.2435; MSA 27A.2435 (judgment creditor proceedings);
MCLA 600.2425(1); MSA 27A.2425(1) (action to
abate a nuisance commenced without reasonable ground
or cause; "attorneys' fees are proper costs"); GCR 1963,
526.7, 116.5, 117.3 (filing an affidavit opposing a motion
for summary or accelerated judgment without good faith
and for purposes of delay); GCR 1963, 306.7 (failure of
moving party to subpoena witness to be deposed or to
attend and proceed with deposition); and GCR 1963,
313.1(3) (refusal to admit facts and genuineness of
50 Mich. App. 71, *; 212 N.W.2d 821, **;
1973 Mich. App. LEXIS 886, ***
Page 3
documents); GCR 1963, 111.6 (unwarranted allegations
and denials); n2 GCR 1963, 816.5 (vexatious appeals).
n2 It appears that State Farm, et al, might
have sought on the basis of this rule an allowance
of reasonable expenses, including reasonable attorneys'
fees, incurred in proving or preparing to
prove or disprove facts in this case. However,
they did not seek relief on this ground, and there
is no finding by the judge that allegations or denials
of Dodds and Kendall "ought not to have
been so alleged or denied" and were "unreasonable".
In the only cases where such allowances
have been sustained, there were appropriate findings
of the judge in accordance with the criteria
spelled out in the court rule. See Fredal v Forster,
9 Mich App 215, 238; 156 NW2d 606, 617
(1967); Harvey v Lewis (In re Disqualification of
Judge), 10 Mich App 23, 30-33; 158 NW2d 809,
813-814 (1968).
- - - - - - - - - - - - - - - - -End Footnotes- - - - - - - -
- - - - - - - - -[HN3]
[***7]
No Michigan statute or court rule provides for an
allowance of attorneys' fees in a declaration of rights
proceeding. On this basis, the plaintiffs in a Connecticut
case, Peterson v City of Norwalk, 152 Conn 77,
80-81; [*76] 203 A2d, 294, 296 (1964), were denied
attorney fees.
State Farm, et al, contend that the chancellor in equity
proceedings has broad discretionary powers regarding
remedies and, therefore, may grant relief which includes
an award of attorney fees as damages. Michigan
case law does not support this contention. In Kittermaster
v Brossard, 105 Mich 219, 221; 63 NW 75, 76
(1895), the Supreme Court rejected the argument that "a
court of equity may impose a reasonable solicitor's fee".
In Nordberg v Todd, 254 Mich 440, 446; 236 NW 826,
828 (1931), an action for construction of a deed, the
Court found that the trial judge had exceeded his authority
in awarding plaintiffs an attorney fee in excess of the
amount fixed by the court rule. In Roberts v Michigan
Trust Co, 273 Mich 91, 122, 123; 262 NW 744, 755
(1935), a suit against trustees for unlawful diversion of
funds, the Court reversed an award of "reasonable counsel
fees and costs of the suit": [***8] "In taxing costs
in the lower court, plaintiffs will not be allowed attorney
fees in excess of the amount fixed by Court Rule No 5, §
6 (1933)". In Peisner v Lowman, 363 Mich 320, 323;
109 NW2d 923, 925 (1961), a guardian's action to set
aside a deed, the trial judge's order granting the prevail-

ing party a $ 500 legal fee was modified to $ 30, the
amount authorized by court rule.
There is dicta in one case, Merkel v Long (On Rehearing),
375 Mich 214, 218; 134 NW2d 179, 183
(1965), that "to avoid 'an inequitable result', equity
would have inherent power to require payment of such
fees out of the funds of these trusts". (Emphasis supplied.)
This case is referred [**825] to in Gundersen v
Village of Bingham Farms, 1 Mich App 647; 137 NW2d
763 (1965). However, in both cases an award of attorneys'
fees was denied; similarly [*77] Fleischer v
Buccilli, 13 Mich App 135, 139; 163 NW2d 637, 639
(1968) (see fn 4), also relied on by State Farm et al, set
aside an award of attorneys' fees. In Merkel the Court
expressly went on to state that the cases do not stand "for
the proposition that a chancellor may award such attorney
fees whenever failure to do so [***9] might 'produce
an inequitable result.'"
There are, indeed, recognized exceptions. [HN4]
Where the prevailing party has created or protected a
common fund for the benefit of others as well as himself,
a court of equity may allow that party reasonable attorneys'
fees to be paid from the fund. See McCormick,
Damages, § 62, p 237; 20 Am Jur 2d, Costs, § § 83,
84, pp 68-69; Sant v Perronville Shingle Co, 179 Mich
42, 57-59; 146 NW 212, 217-218 (1914); McLaughlin v
McLaughlin, Ward & Co, 277 Mich 419, 428; 269 NW
218, 222 (1936) (stockholders' actions); Mann v Day,
199 Mich 88, 97; 165 NW 643, 646-647 (1917) (trust
estate).
Some jurisdictions allow attorneys' fees to be taken
into consideration in determining the amount of exemplary
damages. See 22 Am Jur 2d, Damages, § 167, p
168; Anno: Attorneys Fees or Other Expenses of Litigation
as Element in Measuring Exemplary or Punitive
Damages, 30 ALR3d 1443. n3 One Michigan case affirmed
an award of exemplary damages in apparent
recognition of this [*78] principle, Oppenhuizen v
Wennersten, 2 Mich App 288, 299; 139 NW2d 765, 771
(1966). However, exemplary damages were neither
sought nor awarded in the case now before us. [***10]
n3 Schlein v Smith, 82 U.S. App DC 42; 160
F2d 22 (1947), cited by State Farm, appears to
rest on this principle. To the extent the language
of Schlein goes further, it is not part of our jurisprudence
or, it would appear, that of any other jurisdiction.
The statement in Schlein urged upon us is a
quotation from Ballard v Spruill, 64 U.S. App DC
60, 62; 74 F2d 464, 466 (1934). The Court there,
in setting aside the trial court's allowance of an
50 Mich. App. 71, *; 212 N.W.2d 821, **;
1973 Mich. App. LEXIS 886, ***
Page 4
attorney's fee, stated that the "allowance of counsel
fees in this case, therefore, can be sustained, if
at all, only upon the ground that it is part of an
award of punitive damages granted to the plaintiff
in the case". (Emphasis supplied.) While Schlein
has been referred to in subsequent cases, in none
was a counsel fee awarded.
[HN5] Michigan cases recognize another exception
and allow, despite the absence of statutory authority, the
award of attorneys' fees in actions for false imprisonment
or malicious prosecution. See Bates v Kitchel, 166
[***11] Mich 695, 701; 132 NW 459, 462 (1911); Tutton
v Olsen & Ebann, 251 Mich 642, 650; 232 NW 399,
402 (1930); Anno: Attorneys Fees as Element of Damages
in Action for False Imprisonment or Arrest, or for
Malicious Prosecution, 21 ALR3d 1068.
Finally, [HN6] reasonable attorneys' fees incurred in
prior litigation with "a third party -- not with the defendant"
may be recoverable. See 22 Am Jur 2d, Damages, §
166, pp 235-236. Reference was made to this exception
in Brillhart v Danneffel, 36 Mich App 359, 366; 194
NW2d 63, 66-67 (1971). Cagney v Wattles, 121 Mich
469; 80 NW 245 (1899), cited in Fleischer v Buccilli,
supra, appears to rest on this principle. n4 As explained
by McCormick, Damages, § 66, p 246:
"For the expense incurred in the present
litigation, we have found that our law
generally gives the successful party no
recompense beyond the taxable costs
which ordinarily include only a portion of
his expense. This is the case, however
wrongful the suit or groundless the defense.
On the other hand, where the present
defendant has by his wrongful conduct,
be it tort or breach of contract,
caused the present plaintiff to defend or
prosecute previous legal [***12] proceedings,
the law reverses its restrictive
attitude and allows the plaintiff to recover
[*79] all the expense, including counsel
fees, [**826] reasonably incurred by
him in the prior litigation." (Emphasis by
author.)
See, also, Anno: Right to Recover as Damages Attorneys'
Fees Incurred in Earlier Litigation with a Third Person
Because of Involvement Therein Through a Tortious Act
of Present Adversary, 45 ALR2d 1183, 1184-1185. Similarly,
see Restatement, Torts, § 914, referred to as supporting
authority in Oppenhuizen v Wennersten, supra.

n4 Bates v Kitchel, 166 Mich 695; 132 NW
459 (1911), also cited in Fleischer, although involving
expenses incurred in prior litigation, is
based on the exception permitting allowances of
attorney fees in actions for false imprisonment.
The action commenced by the Cygans was prior litigation
within the meaning of this exception. Accordingly,
any costs of litigation, including attorneys' fees,
incurred by Ross and Allen in defending against [***13]
the claim of the Cygans, or incurred by State Farm in
defending Ross and Allen in that lawsuit, are recoverable
as an element of damage in this proceeding. But for the
wrongful conduct of Dodds and Kendall, neither Ross
and Allen nor State Farm would have been put to any
expense in defending against the Cygans' claims -- the
former because their legitimate expectation of insurance
coverage would have been realized, the latter because the
falsely-induced policy would not have issued. However,
the costs incurred by the Cygans in commencing,
prosecuting and ultimately settling their action against
Ross and Allen were not attributable to wrongful conduct
of Dodds and Kendall. The Cygans, therefore, may not
recover the expense of their prior action in this proceeding.
The expenses, including attorneys' fees, incurred by
State Farm in protecting itself from the "fraud alleged"
were incurred in the prosecution of the present, not a
prior, action and are not recoverable.
Accordingly, the provisions of the judgment [*80]
awarding attorneys' fees and other litigation expense are
set aside. We remand for a determination of the fees
and expense incurred by Ross, Allen, and State [***14]
Farm in defending the action commenced by the Cygans.
As set forth in footnote 2, State Farm, et al, might
have sought under GCR 1963, 111.6 recovery of ex-
50 Mich. App. 71, *; 212 N.W.2d 821, **;
1973 Mich. App. LEXIS 886, ***
Page 5
penses, including attorneys' fees, but they have not invoked
that rule and there are no trial judge findings in
accordance with the criteria of the rule.
On consideration of the other issues, we find no reversible
error. Dodds and Kendall had the benefit of trial
by jury. Cf. Kahoun v Metropolitan Life Insurance Co,
12 Mich App 441, 445; 162 NW2d 922, 924-925 (1968).
The attorney of record for Kendall, because of a
last-minute adjournment of his conflicting trial, was
available on the date of trial, May 10, 1971. [HN7] The
granting of continuances is a matter that rests largely in
the trial judge's discretion; we find no abuse of that discretion
here.
Nor do we find reversible error in the trial judge's
ruling that Dodds' attorney could not impeach Allen on
the basis of alleged inconsistent statements made in an
answer filed in the Cygan case. Dodds does not raise
this issue on appeal; it is raised only in Kendall's brief.
Dodds and Kendall contend that the trial judge erred
in denying their motions asserting that under MCLA
[***15] 500.3220; MSA 24.13220 State Farm could not
cancel its insurance policy with Allen. [HN8] This statute,
restricting an insurer's power to cancel a policy of
insurance, does not limit the court's power to declare a
policy inoperative because of fraud or forgery.
Finally, error is assigned as to the portion of the
judgment requiring Dodds and Kendall to pay the [*81]
$ 3,000 judgment obtained by the Cygans against Ross
and Allen. The courts should not be burdened with a
retrial of facts already established, the amount of the
Cygans' damages (stipulated to by all parties) and the
fraud of Dodds and Kendall (determined in this action).
Affirmed in part and reversed in part. Remanded
for the entry of a judgment consistent with this opinion.
No costs on this appeal, no party having fully prevailed.

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CASE SUMMARY:
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
LEXSEE 515 FSUPP 64
CAMPUS SWEATER AND SPORTSWEAR COMPANY, Plaintiff, v. M. B. KAHN
CONSTRUCTION COMPANY: Fort Roofing and Sheet Metal Works, Inc., and
Celotex Corporation, Defendants
Civ. A. No. 76-0292-5
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF SOUTH CARO-
LINA, COLUMBIA DIVISION
515 F. Supp. 64; 1979 U.S. Dist. LEXIS 9493; 33 U.C.C. Rep. Serv. (Callaghan)
547
PROCEDURAL POSTURE: Defendant roofing corporation
filed motions for judgment notwithstanding the
verdict, or in the alternative, for an order for a new trial.
Plaintiff company instituted a product liability diversity
action in the United States District Court for the District
of South Carolina and was awarded actual and punitive
damages.
OVERVIEW: The company instituted a product liability
diversity action alleging fraud and gross negligence
on the part of the roofing corporation in marketing commercial
roofing materials. The district court awarded
actual and punitive damages to the company. On appeal,
the roofing corporation contended that the evidence was
insufficient to support the verdict, the award of punitive
damages was error, and a mistrial should have been declared.
The court held that (1) the jury could have reasonably
concluded that the manufacturer anticipated the
contested use of the product, that it failed to adequately
test the product, that the product was directly attributable
to the failure of the company's roof, and that there was
substantial evidence of negligence, (2) any error in jury
instructions given was harmless, the prejudice of statements
was removed by jury instructions, and that there
was evidence of fraud and failure to warn to justify the
instructions given, but that (3) due to a clear error in the
record the jury's award for compensatory damages must
have been reduced or a new trial granted. The court denied
the motions for j.n.o.v. and a new trial and affirmed
the award of punitive damages.
OUTCOME: The court affirmed the order from the district
court awarding punitive damages, but reduced the
award of actual damages due to an error in the record.
September 28, 1979
LexisNexis(R) Headnotes
Page 1
Civil Procedure > Jurisdiction > Diversity Jurisdiction
> Amount in Controversy
[HN1] See 28 U.S.C.S. § 1332(a).
Civil Procedure > Jurisdiction > Subject Matter Jurisdiction
> Federal Question Jurisdiction
[HN2] 28 U.S.C.S. § 1331(a).
Civil Procedure > Trials > Judgment as Matter of Law
[HN3] Since the question presented by a motion for
judgment n. o. v. is whether there are any reasonable
grounds to support the jury's verdict, the evidence must
be viewed in the light most favorable to the non-moving
parties. Furthermore, those parties are entitled to the
benefit of all inferences which the evidence reasonably
supports, even though contrary inferences might reasonably
be drawn.
Civil Procedure > Trials > Judgment as Matter of Law
[HN4] Fed. R. Civ. P. 50(b) states that whenever a motion
for a directed verdict made at the close of all the
evidence is denied or for any reason is not granted, the
court is deemed to have submitted the action to the jury
subject to a later determination of the legal questions
raised by the motion.
Civil Procedure > Trials > Judgment as Matter of Law
[HN5] Fed. R. Civ. P. 50(b) states that not later than 10
days after entry of judgment, a party who has moved for
a directed verdict may move to have the verdict and any
judgment entered thereon set aside and to have judgment
entered in accordance with his motion for a directed verdict;
or if a verdict was not returned such party, within
10 days after the jury has been discharged, may move for
judgment in accordance with his motion for a directed

verdict. A motion for a new trial may be joined with this
motion, or a new trial may be prayed for in the alternative.
If a verdict was returned the court may allow the
judgment to stand or may reopen the judgment and either
order a new trial or direct the entry of judgment as if the
requested verdict had been directed. If no verdict was
returned the court may direct the entry of judgment as if
the requested verdict had been directed or may order a
new trial.
Civil Procedure > Relief From Judgment > Motions for
New Trial
[HN6] A new trial may be ordered if the trial court believes
that the verdict is contrary to the clear weight of
the evidence, or that a new trial is necessary to prevent a
miscarriage of justice.
Civil Procedure > Relief From Judgment > Motions for
New Trial
[HN7] Fed. R. Civ. P. 59(a) states that a new trial may
be granted to all or any of the parties and on all or part of
the issues (1) in an action in which there has been a trial
by jury, for any of the reasons for which new trials have
heretofore been granted in actions at law in the courts of
the United States; and (2) in an action tried without a
jury, for any of the reasons for which rehearings have
heretofore been granted in suits in equity in the courts of
the United States. On a motion for a new trial in an action
tried without a jury, the court may open the judgment
if one has been entered, take additional testimony,
amend findings of fact and conclusions of law or make
new findings and conclusions, and direct the entry of a
new judgment.
Civil Procedure > Relief From Judgment > Motions for
New Trial
[HN8] A district court may in its discretion consider the
issues raised in the amended motion for a new trial even
though it was not filed within the time provided for by
the rule, where the original motion for a new trial was
filed within the 10 day rule time period.
Governments > Legislation > Statutes of Limitations >
Time Limitations
[HN9] See S.C. Code Ann § 15-3-530(7) (1976).
Governments > Legislation > Statutes of Limitations >
Time Limitations
[HN10] See S.C. Code Ann. § 15-3-530(5).
Torts > Malpractice Liability > Healthcare Providers
Governments > Legislation > Statutes of Limitations >
Time Limitations
[HN11] See S.C. Code Ann. § 15-3-545.
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Torts > Intentional Torts > Conversion
[HN12] See S.C. Code Ann. § 15-3-530(3).
Torts > Intentional Torts > Conversion
[HN13] See S.C. Code Ann. § 15-3-530(4).
Page 2
Contracts Law > Contract Conditions & Provisions >
Express Warranties
Contracts Law > Contract Conditions & Provisions >
Implied Warranties
[HN14] See S.C. Code Ann. § 36-2-725(2).
Contracts Law > Contract Conditions & Provisions >
Express Warranties
Contracts Law > Contract Conditions & Provisions >
Implied Warranties
[HN15] See S.C. Code Ann. § 36-2-318, official comment
3.
Contracts Law > Contract Conditions & Provisions >
Express Warranties
Contracts Law > Contract Conditions & Provisions >
Implied Warranties
[HN16] See S.C. Code Ann. § 36-2-318.
Contracts Law > Contract Conditions & Provisions >
Express Warranties
Contracts Law > Contract Conditions & Provisions >
Implied Warranties
[HN17] See S.C. Code Ann. § 36-2-313 official comment
2.
Torts > Damages > Damages Generally
Torts > Products Liability > Misrepresentation
[HN18] Since the rule of caveat emptor was first formulated,
vast changes have taken place in the economic
structures of the English speaking peoples. Methods of
doing business have undergone a great transition. Radio,
billboards, and the products of the printing press have
become the means of creating a large part of the demand
that causes goods to depart from factories to the ultimate
consumer. It would be unjust to recognize a rule that
would permit manufacturers of goods to create a demand
for their products, by representing that they possess qualities
which they, in fact, do not possess, and then, because
there is no privity of contract existing between the
consumer and manufacturer, deny the consumer the right
to recover damages resulting from the absence of those
qualities, when such absence is not readily noticeable.
Torts > Products Liability > Misrepresentation
[HN19] Liability can be imposed on the maker of false
statements and may be enforced by the ultimate consumer
of the product to whom the statements are directed.

Contracts Law > Contract Conditions & Provisions >
Express Warranties
Contracts Law > Contract Conditions & Provisions >
Implied Warranties
[HN20] In an implied warranty there is no express representation
as to the quality of a product, but the warranty
is implied as a matter of law. Expanded liability to
third persons had been limited to recovery resting upon
negligence, but that when proceeding on the contractual
of implied warranty, the injured party must be able to
establish privity with the manufacturer. On the other
hand, express warranty arises from the representations
which the manufacturer uses to induce purchase of his
products, although not directly from the manufacturer.
Civil Procedure > Joinder of Claims & Parties > Capacity
of Parties
[HN21] Fed. R. Civ. P. 17(a) provides that every action
shall be prosecuted in the name of the real party in interest.
No action shall be dismissed on the ground that it is
not prosecuted in the name of the real party in interest
until a reasonable time has been allowed after objection
for ratification of commencement of the action by, or
joinder or substitution of, the real party in interest; and
such ratification, joinder, or substitution shall have the
same effect as if the action had been commenced in the
name of the real party in interest.
Civil Procedure > Joinder of Claims & Parties > Capacity
of Parties
[HN22] Fed. R. Civ. P. 17(a) in part provides that no
action shall be dismissed on the ground that it is not
prosecuted by the real party in interest until a reasonable
time has been allowed after objection for ratification of
commencement of the action by, or joinder or substitution
of the real party in interest. The rule further provides
that such ratification, joinder or substitution shall have
the same effect as if the action had been commenced in
the name of the real party in interest.
Civil Procedure > Joinder of Claims & Parties > Capacity
of Parties
[HN23] Although Fed. R. Civ. P. 17(a) does not explicitly
address the issue of the timeliness of an assignment,
courts in construing the rule have held that even when
the claim is not assigned until after the action has been
instituted the assignee is the real party in interest and can
maintain the action.
Civil Procedure > Jury Trials > Province of Court &
Jury
[HN24] It is not the duty of this court to usurp the function
of the jury.
Evidence > Relevance > Prior Acts, Crimes & Wrongs
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 3
[HN25] Fed. R. Evid. 404(b), which governs the admissibility
of evidence on these issues, states that evidence
of other crimes, wrongs, or acts is not admissible to
prove the character of a person in order to show that he
acted in conformity therewith. It may, however, be admissible
for other purposes, such as proof of motive,
opportunity, intent, preparation, plan, knowledge, identity,
or absence of mistake or accident.
Evidence > Hearsay Rule & Exceptions > State of Mind
[HN26] Courts have refined certain common law rules,
which Fed. R. Evid. 404 may be read to incorporate,
governing admissibility of evidence to prove intent and
knowledge. It is the common law rules which have
drawn the distinctions between "intent" and
"knowledge". While "knowledge signifies a being
aware," intent frequently signifies "merely the absence of
accident, inadvertence or casualty."
Evidence > Relevance > Prior Acts, Crimes & Wrongs
[HN27] In using prior acts to prove knowledge, the process
of thought is that the other act will probably have
resulted in some sort of warning or knowledge; this
warning or knowledge must probably have led to the
knowledge in question. Intent, on the other hand, involves
the doctrine of chances the instinctive recognition
of that logical process which eliminates the element of
innocent intent by multiplying instances of the same result
until it is perceived that this element cannot explain
them all.
Evidence > Hearsay Rule & Exceptions > Statement
Against Interest
Evidence > Hearsay Rule & Exceptions > State of Mind
[HN28] Guidelines required for admission to show
knowledge have not been precisely defined. Some courts
have spoken in terms of "sufficient similarity," Basically,
the evidence must be judged by the power of prior complaints
to give notice of problems relating to the defective
condition, and is a matter resting largely in the trial
court's discretion. Realizing that hundreds of potentially
different factors are present in every situation, courts
have also held that perfect similarity is not required, but
that dissimilarities brought out on cross examination go
to the weight of the evidence, not its admissibility.
Evidence > Relevance > Confusion, Prejudice & Waste
of Time
[HN29] Fed. R. Evid. 403 requires the trial court to balance
the probative value of the evidence against its prejudicial
character.
Evidence > Relevance > Confusion, Prejudice & Waste
of Time

[HN30] Fed. R. Evid. 403 states that although relevant,
evidence may be excluded if its probative value is substantially
outweighed by the danger of unfair prejudice,
confusion of the issues, or misleading the jury, or by
considerations of undue delay, waste of time, or needless
presentation of cumulative evidence.
Evidence > Procedural Considerations > Limited Admissibility
Civil Procedure > Jury Trials > Jury Instructions
[HN31] Where one party makes a timely request for instructions
limiting the evidence to its proper scope, such
an instruction must be given.
Evidence > Procedural Considerations > Limited Admissibility
Civil Procedure > Jury Trials > Jury Instructions
[HN32] The rule requiring counsel to request the limiting
instruction is a sound one, because the court cannot ascertain
the meaning of an attorney's silence. An attorney
may conclude that his client would be best served by
silence on the matter, rather than by bringing emphasis to
bear on the evidence.
Evidence > Hearsay Rule & Exceptions > Statement
Against Interest
Evidence > Hearsay Rule & Exceptions > State of Mind
[HN33] The standard governing the admissibility of evidence
to show "intent" differs from that governing
"knowledge." Since similar acts are being used to minimize
the possibility of inadvertence, or in other words, to
show that the odds are that repeated acts of the same
nature are not accidental, the prior acts must be "substantially
similar" to that one in question. Nor do acts have to
constitute a crime to be admissible to prove "intent."
Evidence > Hearsay Rule & Exceptions > State of Mind
[HN34] Evidence of similar acts used to prove "intent"
may postdate the event in question since the purpose is to
prove lack of inadvertence. The more times something is
repeated, whether before or after an event, tends to negate
the event's inadvertence.
Evidence > Relevance > Subsequent Remedial
Measures
[HN35] Fed. R. Evid. 407 states that when, after an
event, measures are taken which, if taken previously
would have made the event less likely to occur, evidence
of the subsequent measures if not admissible to prove
negligence or culpable conduct in connection with the
event. This rule does not require the exclusion of evidence
of subsequent measures when offered for another
purpose, such as proving ownership, control, or feasibility
of precautionary measures, if controverted, or impeachment.
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 4
Contracts Law > Contract Conditions & Provisions >
Express Warranties
[HN36] S.C. Code Ann. § 36-2-316(1) (1976) states that
if the agreement creates an express warranty words disclaiming
it are inoperative. In order to protect buyers
from hidden disclaimers, any disclaimers in conflict with
an express warranty are ineffective.
Contracts Law > Contract Conditions & Provisions >
Express Warranties
[HN37] See S.C. Code Ann. § 36-2-316.
Contracts Law > Contract Conditions & Provisions >
Express Warranties
[HN38] Under the Uniform Sales Act, § 12, the plaintiff
can recover on express warranty if the buyer purchases
the goods relying thereon. U.C.C. § 36-2-313(1)
requires only that the promise or affirmation become part
of the basis of the bargain. Official Comment No. 3 to §
36-2-313 states that in actual practice affirmations of fact
made by the seller about the goods during a bargain are
regarded as part of the description of those goods; hence
no particular reliance on such statements need to be
shown in order to weave them into the fabric of the
agreement.
Civil Procedure > Relief From Judgment > Motions for
New Trial
[HN39] The defendant is not entitled to a perfect trial but
only a fair trial. Hardly any case is completed without
some flaw. If a new trial was required every time a flaw
or a mere possibility of prejudice occurred, litigation
would be unduly prolonged. The court has held many
times that such matters are basically for the sound discretion
of the trial judge.
Contracts Law > Remedies > Punitive Damages
[HN40] South Carolina, as do most other jurisdictions,
requires misconduct above and beyond mere negligence
or gross negligence to entitle a plaintiff to punitive damages.
There must be malice, ill will, a conscious indifference
to the rights of others, or a reckless disregard
thereof to justify an award of punitive damages. A party
may be entitled to punitive damages when he proves
wanton, willful or malicious invasion of one's rights.
Contracts Law > Remedies > Punitive Damages
[HN41] While punitive damages will not be awarded for
mere gross negligence, negligence which is so gross or
reckless of consequences as to imply or assume the nature
of a wantonness, willfulness, or recklessness will
support an award of punitive damages.
Torts > Vicarious Liability > Agents

[HN42] A corporation is liable to respond in exemplary
damages for the misconduct of an agent.
Torts > Damages > Compensatory Damages
Torts > Damages > Punitive Damages
[HN43] Compensatory damages relate mainly to the situation
of the injured party. Exemplary damages have
relation to the injured party in only one respect, to vindicate
his right, recklessly, willfully, maliciously, or wantonly
invaded. One of the chief purposes in awarding
damages of this class is to punish the wrongdoer, not
only to prevent by him a recurrence of the wrongful act,
but to deter others from conduct of the same or similar
kind. They are not intended for the sole good of the injured
party.
Torts > Damages > Punitive Damages
[HN44] Punitive damages also serve to compensate the
victim for his attorneys' fees, which are normally taken
out of his compensatory damage verdict, and for other
expenses for which the jury does not award compensatories.
Torts > Damages > Punitive Damages
[HN45] In the ascertainment of punitive damages, there
is no exact monetary standard which can be used as a
measure. There is no formula for punitives as the amount
to be awarded is peculiarly within the judgment and discretion
of the jury, subject to the supervisory power of
the trial judge over jury verdicts. The main things to be
considered are the character of the tort committed, the
punishment which should be meted out therefor, and the
ability of the wrongdoer to pay.
Civil Procedure > Relief From Judgment > Additurs &
Remittiturs
[HN46] For a verdict to be excessive it must be so much
so as to strike mankind, at first blush as being beyond all
measure, unreasonable, outrageous or extravagant for the
court to undertake to draw the line for it has no standard
by which to ascertain the excessiveness.
Civil Procedure > Relief From Judgment > Motions for
New Trial
[HN47] A new trial should not be granted on the basis of
a theory which was not urged at trial although it could
have been.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN48] It is generally held that where the wrongful act
of one party has involved another in litigation with a
third party, or placed them in such relation to a third
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 5
party as to make it necessary for him to incur legal expenses
to protect his interest, such should be treated as
the legal consequences of the original wrongful act and
may be recovered as damages. Specifically, in actions of
indemnity, where the duty to indemnify is either implied
by law or arises under contract, reasonable attorneys' fees
incurred in resisting the claim indemnified against may
be recovered as part of the damages and expenses.
Contracts Law > Contract Conditions & Provisions >
Indemnity
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN49] To recover attorneys' fees and costs, a party
must meet three requirements: (1) that it became involved
in a legal dispute either because of the other party's
breach of contract or its tortious conduct; (2) that the
dispute was with a third party; and, (3) that attorneys'
fees were incurred. In actions of indemnity, brought
when the duty to indemnify is either implied by law or
arises under contract, and no personal fault of the indemnitee
has joined in causing the injury, reasonable attorneys'
fees incurred in resisting the claim indemnified
against may be recovered as part of the damages and
expenses.
COUNSEL: [**1]
G. Thomas Cooper, Jr., West, Bendorf, Cooper &
Bowen, Camden, S. C., Terrell Glenn, C. Alan Runyon,
McNair, Glenn, Konduros, Corley, Singletary, Porter &
Dibble, P. A., Columbia, S. C., for Campus Sweater and
Sportswear Co.
Harry C. Wilson, Jr., Nash & Chappell, Sumter, S.
C., Donald V. Richardson, Richardson, Plowden, Grier
& Howser, Columbia, S. C., for Fort Roofing & Sheet
Metal Works, Inc.
Robert W. Herlong, Barnes, Austin & Ellison,
Charles E. Hill, Turner, Padget, Graham & Laney, Columbia,
S. C., for M. B. Kahn Construction Co.
John Gregg McMaster, Tompkins, McMaster &
Thomas, Columbia, S. C., James A. Eichelberger, John
D. Jones, Greene, Buckley, DeRieux & Jones, Atlanta,
Ga., for Celotex Corp.
OPINIONBY:
HEMPHILL
OPINION:
[*69] ORDER

This court has before it for decision the motions of
defendant Celotex Corporation ("Celotex") for judgment
notwithstanding the verdict (n. o. v.) or, in the alternative,
for an order for a new trial. The motions arise out of
a "products liability" action brought by plaintiff which
alleged, among other causes of action, fraud and gross
negligence on the part of Celotex in marketing commercial
roofing materials. After 12 days of testimony,
[**2] a jury awarded Campus Sweater and Sportswear
Company ("Campus") $ 208,000.00 in actual damages
and $ 500,000.00 in punitive damages on the claims
against Celotex. The jury also awarded defendant Fort
Roofing ("Fort") $ 125,000.00 in punitive damages on
Fort's cross claim against Celotex for fraud and gross
negligence. n1 Celotex claims the evidence does not
support the verdict, that punitive damages should not
have been awarded, and that a mistrial should have been
declared. For the reasons which will appear at length in
this opinion, the motions for judgment n. o. v. and a new
trial are denied and the jury awards of punitive damages
against Celotex are affirmed in toto. However, the
award of compensatory (actual) damages to Campus
must be reduced as hereinafter explained.
[**3]
n1. The use of the term "gross negligence"
throughout this order is merely one of convenience.
The jury was carefully instructed on the
appropriate conduct necessary before punitive
damages could be assessed that of "conscious indifference"
to or "gross disregard" of the rights of
another. Transcript at 2461-62. Hicks v.
McCandlish, 221 S.C. 410, 415, 70 S.E.2d 629,
631 (1952). Accord, Stonehocker v. General Motors,
587 F.2d 151, 158 (4th Cir. 1978).
INTRODUCTION AND BACKGROUND
Plaintiff instituted this action in the United States
District Court for the District of South Carolina on February
17, 1976. n2 The original complaint alleged and
the answers admitted the complete diversity of the parties
under 28 U.S.C. § 1332(a). n3 Although the parties
have raised some issues which arise under the Constitution
of the United States, jurisdiction will not lie under
28 U.S.C. § 1331 n4 since no federal question appears
on the face of the well-pleaded complaint in this action.
Louisville & N. R. Co. v. Mottley, 211 U.S. 149, 29 S. Ct.
42, 53 L. Ed. 126 (1908); Gold-Washing & Water Co. v.
Keyes, 96 U.S. 199, 24 L. Ed. 656 (1877). It appears that
Campus is an Ohio corporation with its principal office
located in Cleveland, Ohio. Defendant M. B. Kahn
Construction Co. ("Kahn") is a South Carolina corporation
with its principal office in Columbia, South Caroli-
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 6
na; defendant Fort is a South Carolina corporation, with
its principal office in Sumter, South Carolina; while defendant
Celotex is a Florida corporation doing business
in the State of South Carolina.
[**4]
n2. An amended complaint was filed February
28, 1977 introducing new causes of action.
n3. [HN1] 28 U.S.C. § 1332(a) provides:
Diversity of Citizenship
(a) The district courts shall
have original jurisdiction of all
civil actions where the matter in
controversy exceeds the sum or
value of $ 10,000, exclusive of interest
and costs, and is between
...
(1) citizens of different states;
n4. [HN2] 28 U.S.C. § 1331(a) provides:
Federal Question; Amount in Controversy; Costs
(a) The district courts shall
have original jurisdiction of all
civil actions wherein the matter in
controversy exceeds the sum or
value of $ 10,000, exclusive of interest
and costs, and arises under
the Constitution, laws, or treaties
of the United States except that no
such sum or value shall be required
in any such action brought
against the United States, any
agency thereof, or any officer or
employee thereof in his official
capacity.
Due to the number and complexity of the issues
raised in these motions, it will be necessary to postpone a
full discussion of the facts until such time as each issue is
treated separately. However, the testimony will confirm
that this action revolves around the development [**5]
and sale of a Bond Ply roofing system, and a brief history
of the context in which this action arose may be helpful
as an introduction.
At some undisclosed point in time, but well before
1963, the Barrett Company, a [*70] long respected
member of the roofing manufacturing community, in

usiness since the 1850s, was purchased by Allied
Chemical Company and thereafter became known as the
Barrett Division of Allied Chemical Company. As such,
it continued to manufacture roofing products. During
1963, Barrett began making certain tests n5 to determine
whether two plies of coated saturated felt material might
be successfully employed as a built-up roof membrane
instead of the then-traditional four-ply roof membrane.
n6
[**6]
n5. Deposition of Erskine Franklin, an executive
of Celotex, was read into the record, Transcript
at 2006-08. The exact nature of these tests
is discussed infra at 87.
n6. The term "membrane" is used to designate,
collectively, all the felt plies of a roof together
with a mopping coat of asphalt directly
beneath and between them, and the flood coating
of asphalt or tar applied on top. The term "coated
felt" designates a sheet of roofing felt saturated
with asphalt, to the top and bottom of which a
uniform thickness of asphalt coating is applied at
the factory. Hence, in a "coated felt" as the term
is used herein, the asphalt-saturated felt is sandwiched
between a factory-applied coating of asphalt.
Deposition of Erskine Franklin, Transcript
at 2028-29.
In 1963, coated felts had been used for many years
as a "base sheet", i. e., the very first sheet applied in the
construction of certain types of commonly used roofing
membranes. Hence, there was nothing new or unique
about the use of a coated felt as a part of a roofing system.
What was to be new or unique, however, was the
use of two of these coated sheets instead of the traditional
four unsaturated felt sheets in installing the new system,
as it was envisioned in 1963. In 1963, three test
roofs were built n7 whose significance is disputed. Celotex
admits the primary purpose was to determine how
well the system "plied", that is, how easily it could be
applied to the roof. n8 Campus and Fort contend these
tests had nothing to do with the life expectancy of the
roof, n9 while Celotex contends that the roofs performed
well insofar as the roofers were concerned. n10 After
approximately one year of such testing, the Barrett Division
decided to market a roofing system to consist of two
plies of coated sheets, which it would specify and offer
to bond for a term of 20 years just as it had the four-ply
system. The coated sheets employed in this new system,
while essentially the same [**7] as the coated base
sheets which had been marketed for years, were given
the name "Bond Ply". The two-ply membrane to be
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 7
specified, which consisted of two Bond Ply sheets, was
known as the "Bond Ply System".
n7. Testimony of Robert S. Dugger (Barrett's
Regional Manager of Built-up Roofing who handled
the technical aspects such as application, issuing
bonds, and handling complaints), Transcript
at 2103-2104.
n8. Id., Transcript at 2104-2105.
n9. Id., Transcript at 2155.
n10. Testimony of Dugger, Transcript at
2105.
Inasmuch as the two-ply roofing system constituted
a major deviation from roofing tradition, opinions were
not unanimous, even within Barrett, as to the merits of
the system. Upon assurance from the Research Department
that the system was workable, Barrett decided
to market the Bond Ply system as a 20-year roof. Yet, the
head of research, Mr. Donegan, cautioned, "We have no
service basis on which to recommend a construction as
simple as this for a 20-year period". n11 Barrett also
[**8] knew at this time, that the tensile strength of the
Bond Ply system was one-half as strong as a conventional
roofing system. n12 However, no standards as to felt
strength existed at the time and the importance of felt
strength was uncertain. In early 1963, when Barrett
decided to market the system, one of Barrett's largest
competitors, Johns-Manville, [*71] was rejecting a
two-ply system as being unsound. n13
n11. Plaintiff's exhibit 126, Inter-office
memo, dated October 22, 1963, from Donegan
(head of research) to E. N. Franklin of the Marketing
Department, also said, "As to the more
important criterion, anticipated life, we have no
service basis on which to recommend a construction
as simple as this for a 20 year period."
n12. Plaintiff's exhibit 114, Inter-office
memo, dated September 13, 1965, from Rissmiller
(technical-research) to Donegan (research)
reports confusing figures.
n13. Testimony of Robert M. Stafford, former
employee of Johns-Manville Transcript at
1252-3, 1278-80.
After [**9] one year of testing the ease of application
of the "Bond Ply System", Barrett decided to place
the system on the market without determining if the

Bond Ply roof would last 20 years. There was in existence
at that time a device known as a "weatherometer"
whose function was to test the weatherability of a roof,
and thus its longevity, by "weathering" it in an exaggerated
fashion to simulate extended periods of time. n14 It
is possible this device could have been used to test the
Bond Ply life expectancy, although some witnesses were
not sure of its applicability to commercial roofs. Either
this test was not made or its results were unreported.
Once on the market, Bond Ply became the most profitable
roofing system in Barrett's line, and as a result,
salesmen were awarded bonus points for selling this system
in lieu of others. n15
[**10]
n14. Testimony of E. N. Franklin, at that
time in charge of stimulating the introduction of
new products into the market, Transcript at
2078-9.
n15. Testimony of Rissmiller of Celotex,
Transcript at 621; Deposition of Erskine Franklin,
Celotex director of marketing, Transcript at
2022-2024.
The two-ply system, which was included in the Barrett
Roofing Manual of Specifications for 1964, was
promoted as the functional equivalent of a four-ply uncoated
saturated felt roof system. Barrett offered a
20-year bond upon such a roof n16 built in accordance
with its specifications. In advertisements and brochures,
n17 Barrett pointed out that such a roof would be more
economical to install, that a roof constructed of coated
felt sheets would be more weather-tight as the individual
sheets were going on, that a coated sheet would withstand
foot traffic better than a saturated felt sheet before
the top flood coating was applied, and that a roofer
would have a greater margin for error by using the two
coated sheets.
N16. Testimony of Walter Butterfield (Barrett-Celotex
Research), Transcript at 1075.
n17. This statement was on Page 5 of defendant's
brief (which was not annotated to the
Transcript).
As sales began to climb, complaints of roof problems
also started coming into Celotex, n18 which had
purchased [**11] the Barrett Division of Allied Chemical
in 1967. Mr. Rissmiller, a researcher, was assigned
full time to investigate Bond Ply complaints. As early
as 1965, Mr. Franklin had predicted that unless the prob-
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 8
lems of Bond Ply were solved, sales would slowly diminish
to insignificance. n19 Celotex knew of these
problems and plaintiff and Fort theorized that Celotex
attempted to solve the problems without letting its customers
know of them n20 in order to maintain its sales,
profit and market advantages. Whether this was a case
of isolated complaints arising from the use of thousands
of roofs, or whether there were sufficient complaints that
warnings should have issued, was a matter in dispute.
At the same time that Celotex (Barrett) issued a brochure,
received by Fort, implying that the performance of
a Bond Ply system was as good as that of a four-ply system,
n21 Franklin was asking research to make a comparison
of the two systems.
n18. Proof was allowed under the directions
of Gardner v. Q.H.S., 448 F.2d 238 (4th Cir.
1971); see discussion infra at 46-55.
n19. Plaintiff's Exhibit 162, Inter-office
memo from Franklin to Donegan, dated December
22, 1965.
[**12]
n20. Testimony of John J. McClellan, Celotex
salesman, Transcript at 1827.
n21. The brochure was referred to as, "One
Plus One Equals Four" which implied that two
sheets of Bond Ply were the equivalent of a
Four-Ply system. It was introduced as Fort Exhibit
SSS.
Meanwhile, Campus had been developing a manufacturing
and distribution center in Chester, South Carolina,
with the assistance of the Chester County Development
Authority. In 1968, Campus decided to erect
[*72] an addition to its warehouse facilities in Chester.
Pursuant to an arrangement worked out for bookkeeping
and tax reasons, the Chester County Development Authority
was the actual signatory on the contract with the
general contractor, Kahn. n22 In actuality, it was the
intention of Campus and the Development Authority that
the building was to be built for Campus and in accordance
with the specifications submitted by Campus. The
contract was signed by Campus' chief engineer, Bernard
Zuckerman, on behalf of the Development Authority.
However, under the contract, Campus had an option to
buy the building after 10 years. [**13]

n22. Testimony of Bernard Zuckerman, Vice
President of Engineering and Chief Engineer of
Campus, Transcript at 87-8.
The roof specified in the original contract was never
built. The contract with Kahn called for "a four-ply coal
tar pitch and gravel, 20-year roof over insulation." However,
Kahn's Vice President, Mr. Strauss, was contacted
about this time by a Celotex sales representative, Mr.
McClellan, who brought "data" to him concerning a
proposed change from a four-ply, tar-and-gravel roof to a
two-ply, Bond Ply roof. n23 This information was forwarded
by letter to Mr. Zuckerman of Campus, n24 who
then instructed his assistant, Mr. Heppert, to investigate
what the Celotex catalog said about the Bond Ply roof.
n25 Mr. Heppert was initially dubious of the existence of
a two-ply 20-year roof, but his inspection of the Celotex
catalog revealed that there was a 20-year bondable roof
made of two plies. n26 Heppert then made some calculations
concerning the amount of asphalt or tar in the roof
and came to the [**14] conclusion that the amount of
asphalt or tar used was roughly comparable to that in a
conventional four-ply roof. Based on the catalog, his
investigations, and the good reputation of the Barrett
Company, Mr. Heppert reported to Mr. Zuckerman that
"sure enough, there is such a roof". Having reached the
conclusion that the Bond Ply roof apparently met Campus'
specifications, Mr. Zuckerman authorized the
change from a four-ply to a Bond Ply roof.
n23. Testimony of Werner Strauss, Vice
President of Kahn, Transcript at 1626-7.
n24. Testimony of Marion Heppert, Zuckerman's
assistant, Transcript at 403-5.
n25. Id., Transcript at 405.
n26. Id., Transcript at 406-8.
Kahn subcontracted with Fort who built the roof using
the material sold to them by Celotex. Fort was an
approved roofer for Barrett and Celotex, who were very
selective about roofing contractors. However, there was
no evidence that Fort as an "approved roofer" was ever
told of the complaints or possible limitations of the Bond
Ply system. [**15] In 1972, Celotex removed the
Bond Ply product from most of its markets, and in 1973
Celotex did not list Bond Ply in the roofers' manual. n27
n27. Deposition of Franklin, Transcript at
2040, 2074-75.
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 9
The roof in question began to leak in 1973, n28 and
the leaks became progressively more numerous and more
serious. In 1974, Campus purchased the building in
question from the Chester County Development Authority,
and in February, 1976, filed the instant lawsuit,
shortly before it replaced the roof in question.
n28. Testimony of Zuckerman, Transcript at
120.
In its lawsuit, Campus charged negligence on Kahn's
part in not having properly supervised subcontractor Fort
thereby permitting the latter to indulge in certain specified
negligent practices which allegedly contributed to
the roof failure. Kahn was further charged with breach
[**16] of implied warranty and breach of express warranty.
During the course of the trial, on motion properly
made, this court dismissed Campus' negligence and express
warranty claims against Kahn and at the conclusion
of all evidence, Campus voluntarily suffered a dismissal
of its implied warranty claim against Kahn.
Campus alleged that Fort was negligent in leaving
roofing materials exposed to the [*73] elements, in
failing to apply roofing materials in accordance with the
Celotex specification, and in allowing insulation to become
wet by exposure overnight. Upon conclusion of
plaintiff's evidence, this court dismissed Campus' complaint
against Fort, but left intact Fort's cross-claim
against Celotex.
Campus charged that Celotex was guilty of negligence
in placing its Bond Ply system on the market in
1964 without previously having conducted adequate
tests. Campus further alleged that Celotex was on notice
that problems, such as were experienced by Campus,
should have been anticipated because Celotex had allegedly
received similar prior complaints. Hence, it was
charged that Celotex had a duty to warn Campus, which
it failed to do. Campus also alleged fraud in that Celotex
allegedly [**17] made representations which it
knew or should have known were false, and that Campus
was entitled to punitive damages as a result. Further
contentions by Campus were that Celotex had breached
its express warranty of longevity and implied warranties
as to the suitability of the roof. The implied warranty
action was dismissed at the close of the evidence. n29
n29. Although alleged, no action under ?
402A of the Restatement of Torts, Second, codified
as § 15-73-10 et seq. of the Code of Laws
of South Carolina, 1976, was prosecuted due to
this court's ruling in a previous action, Cox v.
Harley-Davidson Motor Co., Civil Action No.

75-0320 (filed April 14, 1975), that § 15-73-10
was not retroactive.
Kahn filed an indemnity cross-claim against Fort alleging
that, if Kahn were held liable, its liability would
have to be predicated upon Fort's errors and omissions.
The Kahn cross-claim became moot when Kahn and Fort
were relieved of any liability to plaintiff.
In its answer Fort also incorporated a cross-claim
[**18] against Celotex, contending that Celotex was
liable for fraud in that it had represented to Fort that the
Bond Ply system was better than others used by Fort and
that Fort had relied upon such representation. Fort
claimed that Celotex had not properly tested the system,
that those tests which were conducted had given poor
results and that Celotex had maintained poor quality
control.
Celotex denied substantially all of the material allegations
of Campus' complaint and of Fort's cross-claim.
It additionally asserted affirmative defenses which included
the statute of limitations and a motion to dismiss
premised upon the contention that plaintiff was not the
real party in interest.
The trial was a mammoth and complex event. The
transcript of 12 days of testimony runs 2500 pages, hundreds
of exhibits were introduced or identified, and the
number of objections raised were more than this court
has ever experienced in over 40 years of law practice and
service on the bench. Aware that the attorneys were
trying to protect their clients and also aware of the effect
which numerous objections may have on a jury, this
court attempted to protect advocates and their clients by
hearing most objections [**19] out of the presence of
the jury. Furthermore, the parties were allowed to interject
general objections, rather than to argue in front of
the jury each time something they perceived as objectionable
was sought to be introduced into evidence.
This court feels this technique was especially effective in
light of Celotex's numerous objections to the introduction
of documents relating to similar complaints. Instead of
having to remove the jury every five minutes when evidence
was sought to be introduced, this court took note
of Celotex's general objection and allowed Celotex's attorneys
to interject any specific objections which they
might have at that time. As a result, this court perceives
that any distractions and irritations to the jury were held
to a minimum.
The verdicts were returned by the jury after a day of
deliberation. The jury found that Celotex had breached
an express warranty to Campus, that it had perpetrated a
fraud on defendant Fort, that Celotex was negligent in
testing or failing to test its product before putting it on
the market, that Celotex was guilty of a conscious disre-
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 10
gard [*74] of a duty in testing or failing to test its
product before putting it on [**20] the market, and that
Celotex had perpetrated a fraud on Campus. The jury
found the plaintiff damaged in the amount of $
208,000.00 and proceeded in addition to award the plaintiff
$ 500,000.00 in punitive damages. Fort Roofing and
Celotex had previously stipulated that Fort need not
prove actual damages. Therefore, the jury was instructed
that it might find actual damages in any amount and that
punitive damages could be assessed regardless of the
amount of actual damages found. The jury proceeded to
award no actual damages and $ 125,000.00 in punitive
damages. This court entered judgment in accordance
with the jury verdict and the motions which are the subject
matter of this opinion followed.
STANDARDS FOR CONSIDERATION OF MO-
TION(S) FOR A JUDGMENT NOTWITHSTANDING
THE VERDICT (N.O.V.), OR, IN THE ALTERNA-
TIVE, FOR A NEW TRIAL
Defendant Celotex's motion for judgment n. o. v.
under Rule 50(b), Federal Rules of Civil Procedure, has
the effect of renewing its motion for a directed verdict
made during trial. n30 The standards for granting the
motions are identical, as Celotex is simply asking this
court to reconsider its decision not to direct a verdict in
favor of Celotex. See Wright [**21] & Miller, Federal
Practice and Procedure, § 2537 (West Publishing Co.,
1978). [HN3] Since the question presented by a motion
for judgment n. o. v. is whether there are any reasonable
grounds to support the jury's verdict, the evidence must
be viewed in the light most favorable to the non-moving
parties (Campus and Fort). Furthermore, those parties
are entitled to the benefit of all inferences which the evidence
reasonably supports, even though contrary inferences
might reasonably be drawn. Scavens v. Macks
Stores, Inc., 577 F.2d 870, 873 (4th Cir. 1978); Butler v.
O/Y Finnlines, Ltd., 537 F.2d 1205, 1206-07 (4th Cir.),
cert. denied, 429 U.S. 897, 97 S. Ct. 260, 50 L. Ed. 2d
180 (1976); Howard v. McCrory, 601 F.2d 133 (4th Cir.
1979).
n30. [HN4] Fed.R.Civ.P. 50(b) reads as follows:
Whenever a motion for a directed verdict
made at the close of all the evidence is denied or
for any reason is not granted, the court is deemed
to have submitted the action to the jury subject to
a later determination of the legal questions raised
by the motion. [HN5] Not later than 10 days after
entry of judgment, a party who has moved for a
directed verdict may move to have the verdict
and any judgment entered thereon set aside and to
have judgment entered in accordance with his

[**22]
motion for a directed verdict; or if a verdict was
not returned such party, within 10 days after the
jury has been discharged, may move for judgment
in accordance with his motion for a directed
verdict. A motion for a new trial may be joined
with this motion, or a new trial may be prayed for
in the alternative. If a verdict was returned the
court may allow the judgment to stand or may
reopen the judgment and either order a new trial
or direct the entry of judgment as if the requested
verdict had been directed. If no verdict was returned
the court may direct the entry of judgment
as if the requested verdict had been directed or
may order a new trial.
The alternative motion for a new trial is apparently
based upon Rule 59(a), which employs a less rigorous
standard than Rule 50(b) since the finality intrinsic to a
judgment is not found in Rule 59(a). n31 Judge John J.
Parker, speaking for the Fourth Circuit in 1932, drew the
distinction between these two motions in an oft-quoted
passage:
There seems to be some confusion on
the part of counsel as to the difference
between the duty to direct a verdict and
the duty to grant a new trial after verdict;
[*75] and the contention is frequently
made that the judge should direct a verdict
whenever the evidence is such that he
would be justified in setting the verdict
aside. The distinction, however, is clear.
Where there is substantial evidence in
support of plaintiff's case, the judge may
not direct a verdict against him, even
though he may not believe his evidence or
may think that the weight of the evidence
is on the other side; for, under the constitutional
guaranty of trial by jury, it is for
the jury to weigh the evidence and pass
upon its credibility. He may, however,
set aside a verdict supported by substantial
evidence where in his opinion it is
contrary to the clear [**23] weight of the
evidence, or is based upon evidence
which is false; for, even though the evidence
be sufficient to preclude the direction
of a verdict, it is still his duty to exercise
his power over the proceedings before
him to prevent a miscarriage of justice...
A verdict can be directed only
where there is no substantial evidence to
support recovery by the party against
whom it is directed or where the evidence
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
is all against him or so overwhelming so
as to leave no room to doubt what the fact
is... Verdict may be set aside and new trial
granted, when the verdict is contrary to
the clear weight of the evidence, or
whenever in the exercise of a sound discretion
the trial judge thinks this action
necessary to prevent a miscarriage of justice.
Page 11
Garrison v. United States, 62 F.2d 41, 42 (4th Cir.
1932). To emphasize, [HN6] a new trial may be ordered
if the trial court believes that the verdict "is contrary to
the clear weight of the evidence," or that a new trial is
"necessary to prevent a miscarriage of justice."
[**24]
n31. [HN7] Fed.R.Civ.P. 59(a) reads as follows:
A new trial may be granted to all or any of
the parties and on all or part of the issues (1) in
an action in which there has been a trial by jury,
for any of the reasons for which new trials have
heretofore been granted in actions at law in the
courts of the United States; and (2) in an action
tried without a jury, for any of the reasons for
which rehearings have heretofore been granted in
suits in equity in the courts of the United States.
On a motion for a new trial in an action tried
without a jury, the court may open the judgment
if one has been entered, take additional testimony,
amend findings of fact and conclusions of law
or make new findings and conclusions, and direct
the entry of a new judgment.
Campus objects to this court entertaining those issues
which were not asserted at trial or within the ten
days allowed by Rules 59(b) and 50(b). Although the
motions were filed in a timely manner, Celotex has
raised additional issues which were not included in the
original motion. The objection, as it relates to Rule
50(b) is well taken. Celotex is barred from raising new
grounds not included in its motion for a directed verdict.
Sulmeyer v. Coca Cola Co., 515 F.2d 835, 846 (5th Cir.
1975), cert. denied 424 U.S. 934, 96 S. Ct. 1148, 47 L.
Ed. 2d 341 (1975); Moran v. Raymond Corp., 484 F.2d
1008, 1014 (7th Cir.), cert. denied 415 U.S. 932, 94 S.
Ct. 1445, 39 L. Ed. 2d 490 (1973).
The courts have been more liberal, however, in allowing
additional grounds to a motion for a new trial
under Rule 59, due to the language of Rule 59(d), which
reads:

The court may grant a motion for a
new trial, timely served, for a reason not
stated in the motion.
This amendment has been interpreted by the courts to
permit the movant to supplement the grounds for his
motion for a new trial, so long as the opposing party has
an adequate opportunity to respond to movant's contentions.
See [**25] Moore's Federal Practice, §
59.09(2). The Sixth Circuit advanced this very point in
Pogue v. International Industries, Inc., 524 F.2d 342,
344 (6th Cir. 1975):
We conclude that [HN8] a district
court may in its discretion consider the
issues raised in the amended motion for a
new trial even though it was not filed
within the time provided for by the rule,
where as here, the original motion for a
new trial was filed within the ten (10) day
rule time period.
Indicative of the Fourth Circuit's liberality as to the
requirements of Rule 59 is the case of Witt v. Merrill,
208 F.2d 285 (4th Cir. 1953), which holds that the Federal
Rules of Civil Procedure should not be transformed
into technical traps for the unwary. Witt cited the decision
in Fishbaugh v. Armour & Co., 185 F.2d 541, 542
(4th Cir. 1950) where it was stated that, "(t)he rule
should be liberally construed and review should not be
denied on mere technicalities where this can be avoided."
The Witt court went on to conclude that,
To hold that the motion for a new trial
was a nullity because the grounds were
not stated, even though the trial judge entertained
it ... would be to deny review on
a technicality in contravention [**26] of
the spirit of the rules.
[*76] Fairness requires that the additional
grounds posed by Celotex be considered. The lack of a
transcript may delay a party who must take considerable
time to review its trial notes to determine more specific
grounds for its motions, especially in a long and complex
case such as the present litigation. Alcaro v. Jean
Jordeau, Inc., 3 F.R.D. 61 (D.N.J.1942), rev'd on other
grounds, 138 F.2d 767 (3rd Cir. 1943); Williamson v.
Williamson Pulp and Paper Co., 8 F.R.D. Serv. 7b 2,
Case 1 (M.D.Pa.1944). Further, in a case as significant
as this one, this court feels it should take every opportunity
to study and pass on the questions raised by the
motions. The issues are complex and the trial court
should be given the opportunity to clear up the confusion
of the issues and to insure that no party becomes the victim
of a miscarriage of justice. Finally, since Campus
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 12
has had sufficient notice and has addressed these issues
in its brief, Campus will suffer no prejudice if the court
considers these issues.
STATUTE OF LIMITATIONS
Celotex urges that the action be dismissed or in the
alternative that judgment be entered in its favor on the
grounds that [**27] the statute of limitations, set forth
in South Carolina Code § 15-3-530, is a bar to the warranty
and negligence claims asserted against it. These
claims, Celotex contends, arose more than six years next
preceding the dates upon which the complaint was filed
in the federal forum. n32
n32. Illustrative of the excellent advocacy on
the part of all counsel in this dispute, is the procedural
skirmishing on the statute of limitations
issue. Campus contends that Celotex cannot
now raise the statute of limitations defense since
it should have been urged at the directed verdict
stage. The transcript indicates this is not a meritorious
objection in that the statute of limitations
defense was raised before trial in a motion to
dismiss, at the directed verdict stage, Transcript
at 1558, and at the close of all the evidence.
Therefore, this matter is properly before the court
at this time.
The facts upon which this defense is based are simple.
In 1968, Celotex sold Bond Ply roofing materials to
Fort, who erected [**28] a roof constructed therefrom
for general contractor Kahn upon premises owned by
Chester County Development Authority. In installing
the roof upon the warehouse in question, Kahn acted as
general contractor, and Fort as its subcontractor. The
roof began to leak in 1973 and the leaks became progressively
more numerous and more serious as time passed.
In 1974, Campus bought the warehouse from the Chester
Development Authority and, in February of 1976, more
than seven years after the roof was installed and three
years after the roof first began to leak, Campus filed suit.
At trial, believing that the South Carolina Supreme
Court would probably apply the "discovery" rule, this
court allowed the negligence count to go to the jury.
Celotex now makes a two-pronged attack upon this ruling,
alleging first, that this ruling was contrary to the
South Carolina cases which hold that the statute of limitations
begins to run when the cause of action arises; and
second, that by the doctrine of "inclusio unius est exclusio
alterius" the legislature has indicated that the "discovery"
rule applies only to medical malpractice actions.
n33

[**29]
n33. The motion for judgment n. o. v. raises
the statute of limitations as a bar only to the negligence
and express warranty causes of action.
Celotex does not raise the statute of limitations as
a bar to plaintiff's cause of action for fraud and
thus waives that ground, apparently recognizing
the applicability of [HN9] § 15-3-530(7), South
Carolina Code of Laws, 1976, which provides as
follows:
Within six years. (7) Any
action for relief on the ground of
fraud in cases which prior to the
adoption of the Code of Civil
Procedure in 1870 were solely
cognizable by the Court of Chancery,
the cause of action in such
case not to be deemed to have accrued
until the discovery by the
aggrieved party of the facts constituting
the fraud; ...
As to the negligence cause of action, Celotex notes
that § 15-3-530 is the applicable six-year statute of limitations.
Since the South Carolina courts have generally
construed that the statute begins to run when the cause of
action arises, Brown v. Finger, 240 S.C. 102, 124 S.E.2d
781 (1962), the crucial question is when does the cause
of action arise in cases involving latent [*77] defects
which cannot reasonably be discovered except with the
passage of time. If any cause of action accrued on the
date of sale, in 1968, it would be barred since the complaint
was not filed until February 17, 1976. However,
if any cause of action accrued on the date of the injury or
on the date plaintiff discovered the injury, it would not
be barred since the roof began to leak in December,
1973.
In 1976, this court concluded that, if faced with the
issue of medical malpractice, the South Carolina Supreme
Court would apply the discovery rule. Gattis v.
Chavez, 413 F. Supp. 33 (D.S.C.1976). Subsequently, in
1977, the South Carolina Legislature ventured into the
area of the statute of limitations for the first time since
1870. In Act No. 182, the legislature provided that an
action for damages [**30] due to personal injury arising
from medical malpractice must be brought within
either two or three years from the date of discovery, depending
on the type of malpractice involved. n34 However,
the legislature did not limit its reforms to medical
malpractice. In Section 5 of the same Act, now codified
as § 15-3-535, the legislature applied the "discovery"
rule to personal injury actions commenced under [HN10]
§ 15-3-530(5):
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Except as to actions initiated under §
15-3-545 of the 1976 Code, all actions initiated
under Item 5 of § 15-3-530, as
amended, shall be commenced within six
years after the person knew or by the exercise
of reasonable diligence should have
known that he had a cause of action.
Looking to § 15-3-530, we find that Item (5) reads:
An action for criminal conversation
or for any other injury to the person or
rights of another, not arising on contract,
not hereinafter enumerated, ...
Page 13
n34. Section 2 of Act No. 182, 1977, is now
codified as [HN11] § 15-3-545 which reads as
follows:
Actions for Medical Malpractice
Any action to recover damages
for injury to the person arising
out of any medical, surgical or
dental treatment, omission or operation
by any licensed health care
provider as defined in Article 2 of
Chapter 59 of Title 38 shall be
commenced within three years
from the date of the treatment,
omission or operation giving rise
to the cause of action or three
years from date of discovery or
when it reasonably ought to have
been discovered, not to exceed six
years from date of occurrence.
When the action is for damages
arising out of the placement and
inadvertent, accidental or unintentional
leaving of a foreign object
in the body or person of any one
or the negligent placement of any
appliance or apparatus in or upon
any such person by any licensed
health care provided by reason of
any medical, surgical or dental
treatment or operation, such action
shall be commenced within two
years from date of discovery or
when it reasonably ought to have
been discovered; ...

[**31]
Since the "discovery" rule in § 15-3-535 applies
only to Item (5), a preliminary issue is whether the present
action comes within the scope of that section. Perhaps
one might argue that the negligence charged in this
case was a failure to warn or a failure to adequately test,
and that the interest involved is the right of the plaintiff
to know about the product or to be protected from unsafe
products. It could also be argued that this constitutes a
personal right under the definition of Item (5) of §
15-3-530. However, Item (5) seems to catch only the
residue of actions not enumerated elsewhere. Section
15-3-530(3) n35 provides for damages to real property,
while § 15-3-530(4) n36 provides for injuries to any
goods or chattels including the specific recovery of personal
property. The injury in this case was to property,
enumerated elsewhere. Therefore the court must conclude
that this cause of action is not covered under Item
(5). Accordingly, the question arises as to the significance
of the legislature's failure to expand the "discovery"
rule to Items (3) and (4), and whether the doctrine of
"inclusio unius est exclusio alterius" bars the negligence
action.
n35. [HN12] § 15-3-530(3) reads:
An action for trespass upon or damage to real
property;
[**32]
n36. [HN13] § 15-3-530(4) reads:
An action for taking, detaining or injuring
any goods or chattels including an action for the
specific recovery of personal property;
Clearly the South Carolina Supreme Court has been
aware of the problems arising [*78] from latent defects
in property cases down through the years. As this
court stated in Gattis v. Chavez, 413 F. Supp. 33
(D.S.C.1976):
On several previous occasions the
Supreme Court has endeavored to soften
the harsh impact which the statute of limitations
might otherwise have had on a
plaintiff's right to proceed. For example,
in a case involving riparian water rights,
the court utilized a "continuing nuisance'
theory to allow the plaintiff to recover the
impairment of his water rights for the six
years immediately preceding, notwith-
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
standing the fact that the tort (polluting
the water) actually had begun many years
earlier. Conestee Mills v. City of Greenville,
160 S.C. 10, 158 S.E. 113 (1931).
See also Sutton v. Catawba Power Co.,
104 S.C. 405, 89 S.E. 353 (1916) where a
dam backed up water onto a plantation but
the full effect of rendering [**33] the
land unfit for cultivation was not ascertained
until three years later, the six-year
limitation was held not to begin to run until
the latter time. King v. United States,
59 F. 9 (C.C.S.C.1893), appeal dismissed,
164 U.S. 703, 17 S. Ct. 1001, 41 L. Ed.
1182. Moreover, where several bales of
cotton were held for safekeeping and destroyed,
it was held that the statute of limitations
began to run from the time of the
loss, or at the latest, from the time the
owner had notice of the loss rather than
from the time demand for the goods was
made. Cohrs v. Fraser, 5 S.C. 351
(1873). These cases are by no means
identical to the present action, but they do
indicate that the Supreme Court has
avoided mere mechanical application of
the statute of limitations in the past and
would probably not be reluctant to do so
again.
413 F. Supp. at 40.
Page 14
Against this seeming willingness on the part of the
courts to mitigate the harshness of the statute of limitations
in this area must be balanced the traditional doctrine
of "inclusio unius est exclusio alterious" the inclusion
of one is the exclusion of another. Since the legislature
had not spoken on the issue of the statute of limitations
[**34] since 1870, this court in Gattis refused to
apply the doctrine in a mechanical manner. As this
court pointed out at that time, there was no indication
that the legislature in 1870 could have foreseen or considered
the problems of latent injury due to medical malpractice.
Pointing to the nationwide trend since 1870,
this court then went on to adopt the "discovery" rule.
However, this court faces a different situation today than
it faced in 1976. Since the legislature considered this
problem in 1977 and acted in reference to personal injury
actions, the inference raised by the traditional doctrine to
the effect that the legislature meant to exclude actions for
injury to property, seems more reasonable at this time.
Although there is no evidence before this court that the
legislature actually did consider property suits, one could
assume that the legislature was aware of the problem in

this area due to the tremendous amount of "products liability"
actions in this country in the last 15 years.
Fortunately this court need not seek to read the
South Carolina legislature's intent since the South Carolina
Supreme Court has implicitly done so in the recent
decision of Mills v. Killian, [**35] S.C., 273 S.C. 66,
254 S.E.2d 556 (1979). Killian was an action to foreclose
a mortgage with a cross claim for professional negligence
by the lending institution against its attorney who
failed to discover the existence of the assignment of a
real estate mortgage in his title search. The trial court
found that plaintiff had a valid second mortgage and ordered
that the debt be recovered from the lending institution.
However, the cross claim against the attorney was
held to be barred by the statute of limitations, even
though there was no notice of the defect until the Killian
action was commenced.
On appeal the Supreme Court reversed the decision
on the cross claim, holding that the statute of limitations
did not begin to run until discovery by the injured party.
Although the ruling is based in part on a carved out exception
where professional negligence is involved, the
ruling derives its real support from the equitable notion
that [*79] a statute of limitations should accrue with
the discovery of the injury. Said the court:
Id. at 558.
We conclude the accrual upon discovery
rule represents the more equitable
and rational view. It would be manifestly
unfair to hold First Carolina [**36] liable
on its general warranty deed but not
permit it to prevail against Oxner when
First Carolina had no knowledge of his
negligence until institution of this foreclosure
action.
The ruling in Killian clearly extends the "discovery"
rule beyond the confines of § 15-3-530(5). While, the
cross-claim in Killian was probably governed by §
15-3-530(1), the case must be interpreted to mean that
the legislature did not intend to limit the discovery rule
to personal injury cases under § 15-3-530(5). Thus the
equitable factors cited in Killian, which freed that case
from the doctrine of exclusion by implication, are operable
in this case. Since no reason appears why property
damage suits should not be treated on a par with other
types of injuries, this court holds that the "discovery"
rule applies to actions brought under § § 15-3-530(3)
and (4).
On its breach of express warranty cause of action,
Campus asserts, the applicable statute is [HN14] §
36-2-725(2):
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
A cause of action accrues for breach
of warranty when the breach is or should
have been discovered.
Page 15
Celotex contends that by its title, "Statutes of limitations
in contracts of sale," this section applies [**37] only to
a breach of warranty by the seller to the buyer in a contract
of sale. Celotex also refers to the South Carolina
Reporters Comments relative to this section for the
proposition that in South Carolina the cause of action
accrues when the breach occurs, rather than upon discovery.
Celotex's first argument is merely a different approach
to the defense of privity which Celotex has raised
to the warranty cause of action. n37 The UCC, as adopted
by South Carolina, has abolished privity as a requirement
to recovery for breach of warranty when the person
injured is a natural person. S.C.Code Ann. § 36-2-318;
n38 Campus of course is not a natural person. However,
[HN15] Official Comment 3, to § 36-2-318 states:
[**38]
This section expressly includes as
beneficiaries within its provisions the
family, household, and guests of the purchaser.
Beyond this, the section is neutral
and is not intended to enlarge or restrict
the developing case law on whether the
seller's warranties, given to his buyer who
resells, extend to other persons in the distributive
chain.
n37. See discussion at 58 infra.
n38. [HN16] § 36-2-318 reads:
A seller's warranty whether express or implied
extends to any natural person who may be
expected to use, consume or be affected by the
goods and whose person or property is damaged
by breach of the warranty. A seller may not exclude
or limit the operation of this section.
By the incorporation of this language, the Legislature
has given the courts a rule of construction to work
with. The most reasonable interpretation to this court of
Official Comment 3 is that the Legislature, by remaining
neutral on the issues left unconfronted by the statute, and
by disavowing any intent to influence the developing

case law, has left to the courts the responsibility for determining
the scope of the privity defense. n39
[**39]
n39. [HN17] Official Comment 2 to §
36-2-313 which reads as follows:
"Although this section is limited in its scope
and direct purpose to warranties made by the
seller to the buyer as part of a contract for sale the
warranty sections of this article are not designed
in any way to disturb those lines of case law
growth which have recognized that warranty need
not be confined either to sales contracts or to the
direct parties to such a contract."
The South Carolina courts have never determined
whether a corporation may recover on express warranty
absent privity. In fact, only one case has discussed the
privity issue as it relates to warranties. In Odom v. Ford
Motor Co., 230 S.C. 320, 95 S.E.2d 601 (1956), the Supreme
Court discussed the possibility of recovery under
express warranty without privity where the [*80] purchaser
had relied upon representations made by the manufacturer
in its brochure. Although the issue of express
warranty was not before the court at that time, Odom
seemed to imply that this state would go along with the
majority line of reasoning. While holding that privity
was necessary in implied warranty cases, the court distinguished
the express warranty situation, implicitly
raising the possibility that privity would not be necessary
under an express warranty.
The traditional approach holds that express warranty
is a contract action, and that to recover on contract one
must either be in privity or be the one for whose benefit
the contract was made. See Lewis v. Terry, 111 Cal. 39,
43 P. 398 (1896); Collum v. Pope & Talbot, Inc., 135
Cal.App.2d 653, 288 P.2d 75 (1955); Altorfer Bros. Co.
v. Green, [**40] 236 Ala. 427, 183 So. 415 (1938);
Holland v. Good Bros., Inc., 318 Mass. 300, 61 N.E.2d
544 (1944); See also Anno., 75 A.L.R.2d 39. This prevalent
but mistaken notion was challenged in Rogers v.
Toni Home Permanent Co., 167 Ohio St. 244, 147
N.E.2d 612 (1958) which noted that the original basis for
warranty recovery was an action for deceit or for a
breach of duty assumed by the seller. Other writers and
cases have since registered their agreement with this position.
See citations in Frumer & Friedman, Products
Liability, § 16.03(1), (3A-52).
But the courts have not been tied down to reaching
an unjust result because of a legal technicality. The first
case to allow recovery absent privity was Baxter v. Ford
Motor Co., 168 Wash. 456, 12 P.2d 409 (1932), 15 P.2d
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 16
1118 (1932), which was an action to recover for a lost
eye which resulted when a pebble shattered a windshield
which had been represented as nonshatterable. Frumer
& Friedman quote the court:
[HN18] Since the rule of caveat
emptor was first formulated, vast changes
have taken place in the economic structures
of the English speaking peoples.
Methods of doing business have undergone
a great transition. Radio, billboards,
and [**41] the products of the
printing press have become the means of
creating a large part of the demand that
causes goods to depart from factories to
the ultimate consumer. It would be unjust
to recognize a rule that would permit
manufacturers of goods to create a demand
for their products, by representing
that they possess qualities which they, in
fact, do not possess, and then, because
there is no privity of contract existing
between the consumer and manufacturer,
deny the consumer the right to recover
damages resulting from the absence of
those qualities, when such absence is not
readily noticeable.
Similar reasoning was employed in Bahlman v.
Hudson Motor Car Co., 290 Mich. 683, 288 N.W. 309
(1939), where the court held [HN19] liability can be imposed
"on the maker of false statements and may be enforced
by the ultimate consumer of the product to whom
the statements are directed." Id. at 313. See also Rogers
v. Toni Home Permanent Co., supra.
In considering the Odom holding on implied warranty,
as a clue to South Carolina's view on privity, one
must recognize that an express warranty stems from a
different footing than implied warranty. [HN20] In an
implied warranty there is no express representation
[**42] as to the quality of a product, but the warranty is
implied as a matter of law. Odom noted that expanded
liability to third persons had been limited to recovery
resting upon negligence, but that when proceeding on the
contractual of implied warranty, the injured party must
be able to establish privity with the manufacturer. On the
other hand, express warranty arises from the representations
which the manufacturer uses to induce purchase of
his products, although not directly from the manufacturer.
This court reads the Odom case as intimating that
privity will be abolished as a requirement in express
warranty. When one considers the liberality of the South
Carolina Supreme Court in products liability matters, the
opinion in Odom, and the greater weight of authority in

this country, the factors are sufficient to convince this
court that a plaintiff who relies on express representations
by a manufacturer will be allowed to recover absent
privity.
[*81] That plaintiff is a corporation should not
change this result. Just as it is unfair to allow a manufacturer
of a defective product to escape from liability
via privity when the plaintiff is an individual, so it is
unfair to [**43] disallow recovery when a corporation
brings suit. Nor is the greater sophistication of a corporation
a guarantee against a corporation being misled by
the manufacturer's claims. The instant case is a perfect
example. The two Campus employees who chose Bond
Ply were much more knowledgeable about roofing than
the average person, yet they too were unaware of the
defects in Bond Ply. Why should they not be protected?
Finally, is there any reason why an innocent corporate
consumer should have to bear the loss when a manufacturer
puts a defective article into commerce from which
it hopes to profit? The same risk allocation policy
should apply to corporate transactions as to consumer
purchases. Why should an innocent party suffer rather
than the one who introduced the product in commerce for
profit? There is no reason, and in the opinion of this
court, lack of privity cannot be asserted as a defense in
an express warranty action against a corporation in South
Carolina.
Celotex further contends that the South Carolina
Reporter's Comments state that a cause of action for
breach of warranty accrues at the time of the breach.
This court is satisfied that the Reporter's Comments,
which [**44] directly contradict the text of §
36-2-725, were written before the legislature passed this
state's version of U.C.C. § 2-725. See 23 S.C.L.Rev.
308, 310, n. 15 (1971). The original U.C.C. § 2-725, in
pertinent part, read, "a cause of action accrues when the
breach occurs regardless of the aggrieved parties' lack of
knowledge of the breach." The Comments are of no assistance
in interpreting South Carolina's version which
reads as set out earlier in this opinion. Clearly the
Comments refer to the original U.C.C. version of the
U.C.C. and not to South Carolina's version.
REAL PARTY IN INTEREST
Every suit in federal court must be prosecuted in the
name of the real party in interest. n40
n40. [HN21] Rule 17(a), Federal Rules of
Civil Procedure, provides:
Every action shall be prosecuted in the name
of the real party in interest.... No action shall be
dismissed on the ground that it is not prosecuted
in the name of the real party in interest until a
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
[**45]
Page 17
reasonable time has been allowed after objection
for ratification of commencement of the action
by, or joinder or substitution of, the real party in
interest; and such ratification, joinder, or substitution
shall have the same effect as if the action
had been commenced in the name of the real
party in interest.
The purpose of the rule mandating that the owner of
the substantive right be the prosecutor of the suit is to
protect defendants from the harassment of suits by persons
who do not have the power to make final and binding
decisions concerning prosecution, compromise and
settlement. Virginia Elec. & Power Co. v. Westinghouse
Elec. Corp., 485 F.2d 78 (4th Cir. 1973), cert.
denied 415 U.S. 935, 94 S. Ct. 1450, 39 L. Ed. 2d 493,
Rackley v. Board of Trustees of Orangeburg Regional
Hospital, 35 F.R.D. 516 (D.S.C.1964).
In a diversity action such as this, the governing substantive
law is the law of South Carolina. The issues of
whether a cause of action exists, whether causes of action
are assignable, and whether they have been successfully
assigned, are matters of substance which require
this court to canvass the law of South Carolina for guidance.
Dixie Portland Flour Mills, Inc. v. Dixie Feed &
Seed Co., 382 F.2d 830 (6th Cir. 1967); Dubuque Stone
Prods. Co. v. Fred L. Gray Co., 356 F.2d 718 (8th Cir.
1966).
The facts pertaining to this issue are undisputed. In
1964, Chester Development Association ("Chester Development")
leased a warehouse located on a site near
Chester, South Carolina, [**46] to Campus. The
lease provided that Campus should have the option to
require the landlord to construct at landlord's cost, additions
to the building provided the aggregate area of such
additions not exceed 500,000 square feet. In connection
[*82] with such additions, the lease directed that the
"tenant shall have the absolute right in its discretion to
select the contractor ... and to negotiate such contract ..."
Campus exercised this option first in 1966, then again in
1968. The lease also included an option to purchase the
building for the amount of the unpaid aggregate rentals
payable under the lease, including those payable with
respect to any additions to said building, less any savings
incurred as a result of the prepayment of the loan out of
the purchase price. n41 The contract for the second addition
was let to Kahn who, in turn, subcontracted with
Fort for the installation of the roof. The roof, which is the
subject matter of the present litigation, was installed
during the summer of 1968.

[**47]
n41. The exact language of the lease reads as
follows:
The purchase price shall be a
sum equal to the unpaid balance of
the aggregate rentals payable under
this Lease, including the aggregate
Additional Rental, if any,
payable with respect to any addition
to said building which may
have been constructed by Landlord,
less the savings in interest on
any loans then outstanding and
incurred by Landlord in connection
with financing the building on
the Demised Premises and any additions
thereto, which savings result
from the prepayment of such
loans out of the purchase price.
Five years later, Campus gave the landlord, Chester
Development, written notice of its intention to exercise
the Tenant's Purchase Option contained in Paragraph 19
of the 1964 Lease. Title was transferred by deed dated
February 4, 1974. The deed, employing traditional language,
included in the conveyance the described property
"together with all and singular the Rights, Members,
Hereditaments, Improvements and Appurtenances to the
said Premises belonging, or in any wise incident or appertaining."
This transfer took place after the leaks had
begun.
In 1976, approximately eight years following the initial
erection of the roof, suit was filed in the name of
Campus. Celotex then filed a motion to dismiss predicated
upon the argument that Campus was not the real
party in interest at the time when suit was filed. No effort
was made to substitute Chester Development for Campus
as the party plaintiff in the case, nor to add Chester Development
as an additional party plaintiff; rather Campus
obtained an assignment n42 of any cause of action which
Chester Development might have had, and continued to
pursue the claims as plaintiff.
n42. In pertinent part, the instrument dated
January 20, 1977, assigns:
"(All) claims and/or causes of
action which the said Chester Development
Association may have
had."
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
[**48]
Page 18
The parties have extensively briefed the issue of
whether Campus acquired the cause of action in the 1974
deed from Chester Development. Celotex argues that a
cause of action does not accompany a conveyance of real
estate unless expressly included. The case of Hi Hat
Elkhorn Coal Co. v. Kelly, 205 F. Supp. 764
(E.D.Ky.1962) is cited by Celotex for the rationale that
Campus is presumed to have obtained the benefit of reduced
value by the amount the prior owner could have
recovered, since Campus acquired the building with
knowledge of the existence of a leaking roof. Campus
responded that it received no diminution of purchase
price due to the leaks, hence the rule of Hi Hat Elkhorn is
inapplicable to this deed. Cook v. Commercial Casualty
Ins. Co., 160 F.2d 490 (4th Cir. 1947); Wise v. Picow,
232 S.C. 237, 101 S.E.2d 651 (1958). Alternatively, if
one accepts the need for an express transfer of the cause
of action, Campus asserts that the word "hereditament"
in the deed is sufficiently broad in meaning to transfer
the cause of action to Campus.
Intriguing as these arguments are, they need not be
resolved in this case: the subsequent assignment in 1977
is sufficient to make Campus [**49] the real party in
interest for Rule 17(a) purposes. n43
n43. Also rendered moot by the subsequent
assignment are the claims of Campus that its interests
in the building are important enough to
entitle it to bring this suit, regardless of the 1974
deed or the 1977 assignment.
Celotex cites two South Carolina cases to support its
argument that the 1977 [*83] assignment is invalid as
a transfer of causes of action for a suit where the suit is
already filed by the assignee at the time of the transfer.
However, Celotex's argument does not attack the validity
of the assignment so much as its timeliness. Despite the
fact that timeliness is a question of federal law governed
by Rule 17(a), and not by South Carolina law, n44 Celotex's
authority is inapposite.
n44. See discussion at 84 infra.
Celotex relies on The Bank of the State [**50] of S.
C. v. The S. C. Mfg. Co., 34 S.C.L. (3 Strob.) 190 (1848)
and Young Receiver v. Peoples Bank, et al., 163 S.C. 57,
161 S.E. 324 (1931), for the position that one who brings
a suit prior to the time he has the right to bring it, will
have judgment rendered against him, even though he
subsequently acquires the right to bring the suit. Young

and The Bank of S. C. dealt with suits filed before a
cause of action was mature, and did not deal with the
issue of whether a party can obtain real party in interest
status by subsequent assignment of a cause of action
which had accrued before suit was commenced. The
Bank of S. C. case was an action for a writ of trespass
commenced before plaintiffs had received title to the
land by the Sheriff. The court held that plaintiffs could
not:
(Demand) the possession of the land
until they were invested with the legal estate,
which can be done only by a conveyance
in writing, signed, sealed and delivered
by the owner, or someone authorized
by law to convey.
34 S.C.L. (3 Strob.) at 193.
Thus the case turned on the fact that plaintiffs' cause
of action had not yet matured.
In Young, suit was brought against the directors of a
bank on [**51] their liability as endorsers of a note on
which the bank was the principal obligee. By contract,
an express condition precedent to the directors' liability
was that the holders of the note must first exhaust the
bank's assets. Although the bank's resources were depleted
subsequent to the filing of the suit, the court dismissed
the suit because the cause of action had not matured
at the time of filing. In its reasoning the court
stated that the rule served to prevent premature suits
which could result in confusion, uncertainties, and complications
in business, and in harassment of defendants.
The court dismissed the suit without prejudice to plaintiff's
refiling.
Here, the cause of action was mature at the time
Campus filed its complaint. Furthermore, neither
Young nor The Bank of S. C. speak to the validity of an
assignment after suit is commenced.
There being no real dispute that the cause of action
could be assigned in 1977, or that the instrument in question
effected a valid assignment, the issue is whether one
can acquire real party in interest status after suit is instituted.
This raises a question of whether this court
should look to federal or state law in deciding the [**52]
issue of timeliness.
The keystone case of Hanna v. Plumer, 380 U.S.
460, 85 S. Ct. 1136, 14 L. Ed. 2d 8 (1965), transformed
the traditional analysis of choice of law in the federal
courts which had developed after the seminal case of
Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82
L. Ed. 1188 (1938). Discarding the "outcome determinative"
test of Guaranty Trust Co. v. York, 326 U.S. 99, 65
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 19
S. Ct. 1464, 89 L. Ed. 2079 (1945), as modified by Byrd
v. Blue Ridge Electric Cooperative, Inc., 356 U.S. 525,
78 S. Ct. 893, 2 L. Ed. 2d 953 (1958), Hanna held that
any federal rule which can reasonably be characterized
as procedural should apply so long as it meets constitutional
muster and comes within the terms of the enabling
act under which the rules were promulgated.
The constitutionality of Rule 17 has apparently been
accepted and is not questioned here. Since Rule 17
clearly relates to the procedural issue of who should be
allowed to prosecute a suit in federal court (once a cause
of action is presumed to exist), the only inquiry for this
court is whether the question of "timeliness" is within the
scope of Rule 17(a). If so, federal law must [*84]
govern whether Campus [**53] can pursue its claim.
[HN22] Rule 17(a) in part provides that no action
shall be dismissed on the ground that it is not prosecuted
by the real party in interest until a reasonable time has
been allowed after objection for ratification of commencement
of the action by, or joinder or substitution of
the real party in interest. The rule further provides that
such ratification, joinder or substitution shall have the
same effect as if the action had been commenced in the
name of the real party in interest. Some courts have interpreted
the word "ratification" to validate an arrangement
by which the real party in interest authorizes the
continuation of an action brought by another and agrees
to be bound by its result, thereby eliminating any risk of
multiple liability. See Wright & Miller, Federal Practice
and Procedure, § 1555 at 709 (West Pub. Co. 1978).
Here, Chester Development went so far as to explicitly
assign its cause of action, thereby eliminating itself as a
real party in interest.
[HN23] Although Rule 17(a) does not explicitly address
the issue of the timeliness of an assignment, courts
in construing the rule have held that even when the claim
is not assigned until after the action has [**54] been
instituted the assignee is the real party in interest and can
maintain the action.
The first case to deal with this issue was Kilbourn v.
Western Surety Co., 187 F.2d 567 (10th Cir. 1951). Kilbourn,
possessing an oral assignment of a claim, had
collected $ 1,625.00 in cash and taken some forged
checks in payment of the balance. He then filed suit to
collect the balance represented by the forged checks.
The trial court apparently dismissed the action on the
basis that the assignee was not the real party in interest.
The Tenth Circuit held that Kilbourn became the real
party in interest in a written assignment of the claim to
him after suit had been commenced. The court made
the telling observation that the then-new rules of federal
procedure were adopted to free the courts from the
straitjacket of technical rules of pleading and procedure.

The purpose of Rule 17(a), according to the court, was to
facilitate a just and speedy adjudication between the interested
parties without regard to the technicalities of the
rules. The court noted that an adjudication by the present
parties would be final, and that there was no danger
of harassment by numerous actions by different claimants.
[**55] Citing the liberal spirit of the new rules
which allow substitution of parties to bring in the real
party in interest even though an action has already been
commenced, the court concluded that justice and the
spirit of the new rules required that Kilbourn be allowed
to bring the suit even though the assignment postdated
the commencement of the action.
Fifteen years later, the Eighth Circuit considered the
same issue in Dubuque Stone Prods. Co. v. Fred L. Gray
Co., 356 F.2d 718 (8th Cir. 1966). The Eighth Circuit
also refused to accept the argument that the assignment
was invalid because it was made after the suit had been
filed. Stressing that the assignment had occurred before
trial and that defendant had suffered no prejudice therefrom,
the court saw no reason to prevent the assignee
from prosecuting the suit. By assigning its cause of
action to Gray, the assignor lost any right to bring a later
suit and the assignment did not affect any defenses which
Dubuque might be able to assert against the first plaintiff.
The court remanded the case for prosecution under
Rule 17(a). See also Petrikin v. Chicago R. I. & P. R.
Co., 15 F.R.D. 346 (W.D.Mo.1954).
To dismiss this judgment [**56] against Celotex
on grounds that Campus was not the real party in interest
would require such a technical approach to the problem
that all common sense and justice would be left strewn in
its path. First, from 1964 on, all actions concerning the
construction and additions to this building had taken
place at the direction and instigation of Campus. The
Chester Development Authority has been a mere "straw
man" throughout, while Campus has been the party directly
benefited by the construction of the building.
Second, this assignment took place a year before the trial,
leaving Celotex with ample time to [*85] prepare a
defense. Furthermore, Celotex was in no way prejudiced
by the assignment since all defenses which were
available to it against Chester Development were also
available to it against Campus. Finally, Chester Development
is effectively precluded from bringing any suit
on the roof in question, thus insuring that the policies of
Rule 17(a) have been protected in this case. For these
reasons, Celotex's motions for a new trial and for judgment
n. o. v. on the grounds that Campus is not the real
party in interest, are denied.
NEGLIGENCE AND GROSS NEGLIGENCE
Celotex makes [**57] several contentions which
pertain to its view of the sufficiency of the evidence to
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 20
support the jury's verdict on the issues of negligence and
gross negligence. It is asserted that the roof was not
applied according to the 220-INS specifications; n45 that
nothing "bridges the gap" between possible inadequate
testing in 1964 and the application of the roof in 1968;
that the pre-marketing testing met the terms of the only
standard which could reasonably be called an industry
standard; that the problem with Bond Ply was an inadequacy
in tensile strength which played no role in the
failure of this roof; and that the proximate causes of the
roof's failure were loose insulation and bonding, which
were not attributable to Celotex.
n45. Plaintiff's Exhibit # 82 is the Allied
Chemical (Barrett Division) "Built-up Roofing
System Manual" (1967) and on page 14 the specifications
are as follows:
BARRETT BOND PLY ROOF
Series 200
1. For details covering application of roof
insulation and vapor barriers, see Roof Insulation
Specification, pages 8 and 9.
2. Starting at low point of roof, mop surface
of insulation with approx. 20 lbs. per 100 sq. ft.
of Barrett BOND PLY Cement into which, while
hot, embed one BOND PLY coated roofing sheet
18 in. wide with ends lapped 6 in. and cemented
for full length. On inclines 1 in. per foot or
greater, nail all edges 12 in. o. c.
3. Lay one full width BOND PLY coated
roofing sheet cemented to underlying coated
sheet and to the roof insulation with approx. 20
lbs. per 100 sq. ft. of Barrett BOND PLY Cement.
Broom each ply to assure complete embedment.
Lap ends 6 in. and cement for full
length of lap.
4. Continue laying full width BOND PLY
coated roofing sheets lapped 19 in. horizontally
and cemented for full width with approx. 20 lbs.
per 100 sq. ft. of BOND PLY Cement. Broom
each ply to assure complete embedment. Extend
all plies up face of cant and cut off evenly at wall
line. If cant strip is not provided turn up all plies
1 in. at walls and curbs.
5. On inclines of 1 in. per foot or greater, nail
each sheet 2 in. and 11 in. from top edge, spacing
nails 12 in. o. c. staggered.
6. Over entire surface pour a uniform top
coating into which, while hot, embed specified
quantity of surfacing material.

[**58]
It is true that the specifications were not followed
precisely in constructing this roof. The 220-INS specification
was a series of instructions for installing a two-ply
Bond Ply roof on all types of decks with preformed roof
insulation and a maximum incline of three inches per
foot. It was proven at trial that the roof in question was
applied by a method known as "phasing" or "one on
one", n46 rather than by the written specified method of
application known as "shingling". In the "shingling"
method both plies, one overlapping the other, would be
applied in one operation, whereas in a "phasing" method
of application, one ply would be applied throughout the
area being roofed before the second ply was applied on
top. The major advantage of shingling is that there is
less danger of rainfall permeating the lower ply before
the roofer has time to complete the entire roofing process.
n47 However, the phasing method, if applied
[*86] the same day, also prevents the danger of water
permeating the lower ply, prevents fishmouths which had
been a serious problem with the application of the new
bond-ply system n48, and had a greater margin of error
in application for the roofer. n49 [**59] Although there
is testimony that rainfall may have reached the lower ply
on at least one occasion, and that the roof may have been
left unprotected overnight on at least one other occasion,
there was evidence to show that the failure to follow the
specification was immaterial insofar as the failure of the
roof was concerned. n50 There was also evidence that
Celotex waived the assertion of this specification as a
defense in that Celotex itself, permitted the application of
the Bond Ply system in a manner contrary to its written
specification. n51 Mr. Dugger and Mr. Rissmiller both
testified that Celotex in fact anticipated the application of
Bond Ply in a manner contrary to the literal requirements
of the specifications. n52 Further, Mr. McClellan recommended
that Fort use the phasing method because of
Fort's past problems. n53 Thus the jury would not be in
error to conclude that Celotex reasonably anticipated that
the product would be applied by such a method. This
court finds no reason to disturb the jury's verdict on this
issue.
n46. Testimony of Mr. Stafford, plaintiff's
expert, Transcript at 1245.
[**60]
n47. A major disadvantage of the shingling
method of applying a two-ply roof is that the
margin for roofer error is less. This diminished
margin assumes greater significance when only
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 21
two plys are present since the gravity of any error
is greater. Testimony of Stafford, Transcript at
1124-27. (Although Mr. Stafford referred to a
greater margin for error, the explanation by him
of that comment indicates that he meant either a
"greater chance of error" or a "small margin of
error." In any event, his explanation indicates that
the chances for roofer error are greater with the
shingling application of a two-ply roof.
n48. Transcript 1648, Watts.
n49. Transcript 1265, Stafford.
n50. Id., Transcript at 1246.
n51. Testimony of Rissmiller, Transcript at
920-922.
n52. Testimony of Dugger, Transcript at
2119, 2120, 2159; Testimony of Rissmiller,
Transcript at 920 and 922.
n53. Testimony of Fort, Transcript at 1704.
The argument that there is no connection between
the 1964 and 1968 specifications, and that, therefore, any
inadequate pre-marketing testing relating to the [**61]
1964 specification is irrelevant to the 1968 specification,
ignores the thrust of plaintiff's negligence theory.
Campus' theory was that there was inadequate testing
both before and after marketing. There is ample evidence
to justify the jury's verdict in favor of the Campus theory.
The only evidence of any testing, other than that which
was done "on an owner's roof," n54 was the three applications
of Bond Ply in 1963-64. It is uncontradicted
that these applications were only for the purpose of determining
the ease of application of Bond Ply, not its
ability to adequately perform its function in a built-up
roof. In answers to plaintiff's first set of interrogatories,
introduced into evidence during Campus' case, Celotex
either denied knowledge of the existence of any tests
concerning Bond Ply or said that they were "not a matter
of record" with Celotex. n55 Celotex never put up any
evidence to show the existence of other testing prior to
1968. There was, therefore, ample evidence from which
the jury could conclude that Celotex was not only negligent
but grossly negligent, in adequately testing its
product both before marketing it and up to the time of
sale in 1968, especially [**62] in view of its being sold
as a 20-year product.
n54. Testimony of Rissmiller, Transcript at
654, 668 and 724.
n55. Published Interrogatories, Transcript at
1443-1445.

Celotex disputes the definition of what constitutes
"adequate testing". Celotex asserts that its Exhibit PPP,
a draft of a study of roofing systems and constituent materials
and components, sets the "standards" which were
complied with by Bond Ply. This exhibit was never admitted
into evidence, thus the document cannot be considered
by this court. n56 Insofar as Celotex seeks to
compare its testing to that recommended in this document,
there can be no comparison since the report does
not exist in this court's eyes.
[**63]
n56. In fact, counsel for Celotex disavowed
any intention of introducing it. Transcript at
1358. It was only after plaintiff's counsel requested
that it be marked for identification that it
was marked as Celotex PPP for identification.
As for those portions contained in the record, the
jury was justified in taking a skeptical view that the industry
standard [*87] for testing is one year. Mr.
Stafford pointed out that one year was an arbitrary time
period, subject to much further discussion. Further, the
"standards" referred to by Celotex were applicable only
to residential roofing. n57 In light of other evidence
which was presented to the jury on the issue of inadequate
testing, including many documents from Celotex
itself, it was reasonable for the jury to believe that Celotex
inadequately tested its product.
n57. Industry standards, written by those
who stand to gain from shorter periods of testing,
may be naturally suspect in a jury's eyes.
Celotex makes a determined attack on the jury's
finding of proximate cause. First, Celotex contends that
the main problem with Bond Ply was its tensile strength
inadequacies and that tensile weakness played no part in
the failure of this roof. Apparently the jury chose to believe
the testimony [**64] of Mr. Stafford who testified
that the failure of the Campus roof was due to the failure
of the coated felts of Bond Ply incorporated into the roof
to function properly which in turn was due to certain
properties inherent in coated felts which make them unsuitable
for use as the principal components of a waterproofing
membrane. n58 Citing many problems with
Bond Ply in addition to tensile strength, Stafford concluded
that a membrane composed of coated felts was
unsuitable since such a membrane would have a relatively
low level of tensile strength, n59 a lower level of
tolerance to flexing than a membrane consisting of four
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 22
plies of uncoated felts, n60 and a greater susceptibility to
moisture penetration due to the lesser quantities of asphalt
present in the felts. n61 When this testimony was
coupled with the evidence that the presence of conditions
on the Campus roof was directly attributable to one or
more of the above deficiencies, the jury clearly had sufficient
evidence to conclude that Celotex's product
caused the failure of the Campus roof.
n58. Testimony of Stafford, Transcript at
1186-87.
[**65]
n59. Id., Transcript at 1214.
n60. Id., Transcript at 1295.
n61. Id., Transcript at 1186-1187.
The second attack on proximate cause is found in
Celotex's allegation that ridging attributable to loose insulation
and ponding caused the failure. Although there
was evidence to that effect, the jury also had before it the
testimony of Mr. Stafford who testified that ridging
could very easily have been attributable to a source other
than loose insulation since the insulation was not loose at
the sites of the ridges found by Mr. Stafford. n62 According
to Mr. Stafford, ridging is also caused by moisture
permeation. n63 Stafford also testified that two plies
of Bond Ply permit water to permeate faster than do four
plies of ordinary felts; n64 that splitting occurs in three-
and four-ply roofs but is more prevalent in two-ply roofs
because they are weaker; n65 and that he had run into
these problems with Bond Ply as early as 1967 and his
views would have been substantially the same then as
now. n66
[**66]
n62. Id., Transcript at 1147, 1172, and 1182.
n63. Testimony of Stafford, Transcript at
1164, 1165.
n64. Id., Transcript at 1186.
n65. Id., Transcript at 1294.
n66. Id., Transcript at 1280.
Although Stafford testified that some of the blistering
was probably due to rain having fallen on the unpro-

tected bottom ply when it was installed, it was not his
opinion that this was the cause of the roof failure. Rather
he felt that the Bond Ply system was insufficient for
protection from water permeation. Stafford testified that
the Bond Ply permitted faster water permeation because
of the nature of the coated felt as opposed to the uncoated
felt. After installation and mopping, the uncoated
felt contains a greater amount of asphalt than a coated
sheet whose coating prevents the absorption of asphalt
during its application on the roof. Since asphalt is the
waterproofing agent, an uncoated felt in a roof [*88]
has greater moisture resistance than a coated felt in a
roof. n67
[**67]
n67. Id., Transcript at 1186-87.
[HN24] It is not the duty of this court to usurp the
function of the jury. Celotex has written a lengthy brief,
arguing in effect, the weight of the evidence. Whether
or not these arguments have merit is for the jury to decide,
not the court. There was certainly substantial evidence
of negligence presented to the jury, therefore the
motion for judgment n. o. v. is denied. Nor is the
weight of the evidence such that this court feels that a
miscarriage of justice took place. Therefore, the motion
for a new trial is denied.
DOCUMENTARY EVIDENCE
Celotex objects to the admission of certain documents
which, it claims, prejudiced the jury to the extent
that a new trial should be granted. Since the documents
can be treated most easily by categories, this court will
deal with them in three groupings: Bond Ply ads, Bond
Ply complaints, and corporate test reports and inter-office
memoranda.
Bond Ply Ads
Defendant's objection to the use of three advertising
items is without merit. Contrary to Celotex's recollection,
the documents were neither introduced nor relied
upon by Campus, but were admitted without objection as
part of Fort's cross-claim against Celotex. The brochure
referred to as [**68] "One Plus One Equals Four" was
proven to have been given to Fort and relied upon by
them, and was properly admitted to prove Fort's
cross-claim. n68 The record album distributed by Celotex,
entitled "Smash Hits," publicized some of the benefits
of using Bond Ply roofing. Celotex does not object
to its introduction by Fort, therefore this issue need not
be explored. n69 Finally, the trade journal advertisements
(Fort's Exhibits GGG through LLL) objected to by
Celotex in its motion for a new trial were not admitted.
n70
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
[**69]
Page 23
n68. Testimony of Richard O. Watts, estimator
for Fort, Transcript at 1642. In addition,
when Mr. Dugger was testifying for Celotex,
Transcript at 1092-2160, his company's own
counsel opened the door as to advertising in the
"On Top Publication," an "official publication" of
Barrett and Celotex, Transcript at 2166-2167.
n69. There was evidence in the record that
Fort Roofing and Sheet Metal Works had received
a copy of this album. Testimony of
Watts, Transcript at 1642-1643.
n70. The records of the Clerk of Court indicate
these exhibits were not offered.
Bond Ply Complaints
Celotex objected to the introduction of evidence
concerning complaints by persons who encountered
problems with the use of Bond Ply on roofs located
throughout the country. n71 The attack on the admissibility
of these documents is three-fold. First, Celotex
argues Campus and Fort failed to connect the subject
matter of these complaints to the Campus roof, since
they failed to show "substantial similarity" between this
roof and the previous roofs. Second, Celotex submits that
evidence to the effect that the Campus roof was in a
"substantially similar" condition to that of the roofs mentioned
in the complaints, is lacking. Third, Celotex says
the documents should have been excluded, under Rule
403, Federal Rules of Evidence, because of the great
danger of prejudice and confusion arising from them.
[**70]
n71. Defendant's assertion that Campus introduced
evidence of other lawsuits is in error;
the only mention of other suits came from one of
Fort's witnesses. This improper evidence was
immediately excluded by the court, and the injury
to Celotex was cured, as discussed infra at 102.
See Transcript at 1712, 1717 et seq.
Initially, it must be stated that the evidence of prior
complaints was not introduced to show that the Bond Ply
on Campus' roof was defective nor was it used to indicate
that the causes of problems on previous roofs were
related to the causes of the problems on this roof (other
than on the issue of notice), as Celotex's arguments seem
to assume. At the point when plaintiff [*89] introduced
these documents subsequent to Mr. Rissmiller's
identification of them, the record reflects that the purpose

of their introduction was to prove Celotex's knowledge
of defects which gave rise to a duty to warn. n72 On
plaintiff's express warranty and fraud causes of action,
the evidence of prior complaints was also relevant to
Celotex's state of mind insofar as the representation is
concerned and Celotex's knowledge of its truth or falsity
or its reckless disregard of its truth or falsity.
[**71]
n72. It was upon this issue that the court directed
the jury to consider the evidence of prior
complaints. In the jury charge this court stated:
In determining whether one
has knowledge of defects or
should have knowledge of defects,
if any, in his product, you may
consider prior complaints describing
substantially similar experiences.
Not as to others, but substantially
similar experiences, provided
those experiences were
brought to the attention of the
manufacturer prior to placing the
product on the market, particularly
the product for which defects are
claimed in this case and not any
other case.
Transcript at 2450.
Thus the question really boils down to the admissibility
of these documents to prove "knowledge" and "intent"
on the part of Celotex. There is a distinction between
these two terms, and the difference affects the
requirements for admissibility.
[HN25] Rule 404(b), Federal Rules of Evidence,
which governs the admissibility of evidence on these
issues, reads:
(b) Evidence of other crimes, wrongs,
or acts is not admissible to prove the
character of a person in order to show that
he acted in conformity therewith. It may,
however, be admissible for other purposes,
such as proof of motive, opportunity,
intent, preparation, plan, knowledge,
identity, or absence of mistake or accident.
The [HN26] courts have refined certain common
law rules, which Rule 404 may be read to incorporate,
governing admissibility of evidence to prove intent and
knowledge. It is the common law rules which have
drawn the distinctions between "intent" and
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 24
"knowledge". While "knowledge signifies a being
aware," intent frequently signifies "merely the absence of
accident, inadvertence or casualty." Wigmore on Evidence,
§ 300 at 192 (3rd ed. 1940). [HN27] In using
prior acts to prove knowledge, Wigmore states "the process
[**72] of thought is: The other act will probably
have resulted in some sort of warning or knowledge; this
warning or knowledge must probably have led to the
knowledge in question." Id. § 301 at 194. See United
States v. Brand, 79 F.2d 605 (2d Cir. 1935). Intent, on
the other hand, involves the doctrine of chances "the instinctive
recognition of that logical process which eliminates
the element of innocent intent by multiplying instances
of the same result until it is perceived that this
element cannot explain them all." Wigmore, § 302 at
196. See Penn Mutual Life Ins. Co. v. M. L. B. & T.
Co., 72 F. 413 (6th Cir. 1896); State v. Lapage, 57 N.H.
245, 294 (1876).
The Fourth Circuit has permitted the introduction of
evidence of prior complaints and tests for the purpose of
showing knowledge and inadequate testing. In an action
for negligence and breach of implied warranty, the court
in Gardner v. Q.H.S., Inc., 448 F.2d 238 (4th Cir. 1971),
stated:
Where the issue is one of foreseeability,
evidence of what has actually been
experienced in the same or comparable
situations constitutes proof of the greatest
probative value. The only other way
foreseeability can be proved is by expert
[**73] testimony and in most instances
it, too, will depend upon actual experience
developed by laboratory or everyday experience.
In our view, depositions of
other users of the product who had experiences
similar or identical to that of Miss
Runge were clearly admissible to show
defendants' knowledge of the harm their
product could inflict, provided only that
those experiences were brought to the attention
of the defendants, or either of
them, prior to the incident involved here.
Spruill v. Boyle-Midway, Inc., 308 F.2d
(79) at 88-89 (4 Cir.). See, 1 Frumer &
Friedman, Products Liability, § 1201(2),
and cases cited therein.
...
[*90] We think also that the testimony
of the professor of chemistry who
conducted flammability tests should have
been admitted, even where those tests

Id. at 244.
were not confined to precisely the same
conditions under which the rollers sought
to be used by Miss Runge caught fire.
See, 1 Frumer & Friedman, Products Liability,
§ 12.02(2), and cases cited
therein. Defendant, and especially
Q.H.S., were chargeable with knowledge
that the rollers could and probably would
be used under a variety of conditions, and
the district judge should have been [**74]
liberal in admitting testimony of this nature
for its probative value on the issue of
whether Q.H.S. conducted proper tests
and whether Q.H.S. had knowledge that
its warning was deficient.
Clearly the complaints presented here are admissible
if not too dissimilar in nature from the Campus problems
nor too prejudicial. See also Julander v. Ford Motor Co.,
488 F.2d 839 (10th Cir. 1973); Kieffer v. Blue Seal
Chemical Co., 196 F.2d 614 (3rd Cir. 1952); New York
Life Ins. Co. v. Seighman, 140 F.2d 930 (6th Cir. 1944).
The [HN28] guidelines required for admission to
show knowledge have not been precisely defined. Some
courts have spoken in terms of "sufficient similarity,"
United States v. Beaver, 524 F.2d 963 (5th Cir. 1975),
cert. denied 425 U.S. 905, 96 S. Ct. 1498, 47 L. Ed. 2d
756; Shively v. United States, 210 F.2d 131 (4th Cir.
1954). Basically, as stated earlier, the evidence must be
judged by the power of prior complaints to give notice of
problems relating to the defective condition, 2 Weinstein
& Berger, Weinstein's Evidence, § 404(11) at 404-76
(1977); McCormick, Evidence, § 200 at 475 (2d Ed.
1972), and is a matter resting largely in the trial court's
discretion. [**75] United States v. Feldman, 136 F.2d
394, 399 (2d Cir. 1943). Realizing that hundreds of potentially
different factors are present in every situation,
courts have also held that perfect similarity is not required,
but that dissimilarities brought out on cross examination
go to the weight of the evidence, not its admissibility.
Ramseyer v. General Motors Corp., 417
F.2d 859 (8th Cir. 1969); Jones & Laughlin Steel Corp.
v. Matherne, 348 F.2d 394, 400 (5th Cir. 1965); Lever
Bros. Co. v. Atlas Assurance Co., Ltd., 131 F.2d 770 (7th
Cir. 1942).
One indication of the warning of possible defects
which these complaints carried, is the testimony that all
of the problems mentioned in the complaints admitted
into evidence were present on the Campus roof. Problems
with tensile strength and tensile splits, n73 with wet
rolls, n74 with excess blocking agents which prevented
adhesion, n75 and with moleruns n76 were all proved to
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 25
be present, either by direct evidence or through inference.
n73. Campus' expert, Mr. Stafford, testified
to the presence of a wall-to-wall tensile split.
Transcript at 1138 and 1141.
[**76]
n74. Campus introduced evidence that blisters
on the roof were due to wetness from two
possible causes, one of them being wet rolls.
Transcript at 1206, 1160 and 1256. Later evidence
that wet rolls were not a problem would
constitute hindsight on already admitted evidence.
Transcript at 1207, 1210 and 1159.
n75. Celotex's witness, Mr. Dugger, admitted
that adhesion problems could be due to faulty
material (excess blocking agent) or poor mopping
(whereby the plies are not adequately pressed into
the asphalt during application. Transcript at
2162, 1920 and 1940. Fort's testimony, if believed,
would eliminate the second possibility.
n76. Mr. Heppert, an experienced roofer, testified
to the existence of one, while Mr. Haynes
pointed out several. Celotex's claim that these
people were confusing moleruns with blisters and
ridges is not supported by the testimony of its
own witnesses who equated moleruns with blisters
or ridges.
An additional factor favoring their admissibility is
that all of the complaints concerned Bond Ply roofs.
Although Celotex made much of the fact at trial that
[**77] the roofs were dissimilar in type of decks, climate,
geography, and mode of application, it is interesting
to note that while Celotex's correspondence discussed
these factors, in the final analysis Celotex perceived the
problems to be related to Bond Ply roofs in general.
The problem referred to in the [*91] Bi-monthly Report
for August 15 October 15, 1967 (plaintiff's exhibit
112) was the "high incidense (sic) of splitting of Bond
Ply roofs." An inter-office memo from Donegan in early
1966 (plaintiff's exhibit 165) discussed Bond Ply problems
and stated that the major performance problem
(moleruns) had not been associated with particular product
characteristics or installation conditions; an inter-office
memo from Franklin to Donegan (plaintiff's
exhibit 162) in 1965 warned that Bond Ply problems
would have to be solved if the product was to continue to
sell. A memo from Rissmiller to Dingler mentioned
attempts to improve Bond Ply tensile strength (plaintiff's

exhibit 203). And in 1964, Rissmiller suggested the
cause of buckling of Bond Ply sheets "was moisture absorption"
a problem with the product, not with environmental
factors. (Plaintiff's exhibit 129). If the Celotex
[**78] roofing experts did not bother to differentiate,
then the distinctions cited at trial were probably sufficiently
minor to allow admission of the evidence with the
alleged differences being brought out on cross examination.
Next, Celotex submits that the documents were more
prejudicial than probative and thus should have been
excluded under Rule 403. n77 [HN29] Rule 403 requires
the trial court to balance the probative value of the evidence
against its prejudicial character. United States v.
Bowdach, 501 F.2d 220 (5th Cir. 1974); United States v.
Byrd, 352 F.2d 570 (2d Cir. 1965).
n77. [HN30] Rule 403, Federal
Rules of Evidence, reads:
Although relevant, evidence
may be excluded if its probative
value is substantially outweighed
by the danger of unfair prejudice,
confusion of the issues, or misleading
the jury, or by considerations
of undue delay, waste of
time, or needless presentation of
cumulative evidence.
On the one hand is the probative force of these
documents with regard to questions of knowledge, inadequate
[**79] testing, and fraudulent state of mind.
Some examples of the materials offered will illustrate
their probativeness. Relating to fraudulent intent,
Dingler suggested in a memo that adhesion problems be
examined "if this can be done without being overt." n78
Another Dingler memo, directed to Rissmiller, stated in
reference to a roof complaint: "As usual this is a messy
situation and will become even more so. Please exercise
your usual diplomacy and avoid any unnecessary direct
replies where possible." n79 Finally, on a 1964 letter
purporting to reply to a memo which raised many disturbing
problems concerning Bond Ply, there is stamped
in large, bold letters, "Sell Bond Ply." n80 On the issues
of knowledge and testing, the documents are replete with
the pinpointing of problems, possible solutions, the lack
of adequate test data, and suggested testing which was
never conducted. Without a doubt, the documents are
susceptible of jury persuasion on these issues.
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 26
n78. Plaintiff's Exhibit 171 is a memo from
the desk of Dingler, March 23, 1966, reporting a
problem. Initials on the exhibit indicate that
Rissmiller read the communication.
[**80]
n79. Plaintiff's Exhibit 187, an inter-office
memo from Dingler to Rissmiller, October 7,
1966.
n80. Plaintiff's Exhibit 136. This most interesting
inter-office memo, dated October 27,
1964, indicates a plethora of problems with Bond
Ply.
Another factor to be considered in evaluating "probativeness"
is whether the evidence was necessary to
plaintiff's case. The question is whether the documents
"sharpened" plaintiff's proof of intent and knowledge or
were merely redundant. United States v. Byrd, 352 F.2d
570 (2d Cir. 1965). Without the introduction of these
documents, Campus' causes of action for fraud and gross
negligence might well have failed. Not only were these
documents important for their literal contents but they
were also crucial in eliciting testimony and in challenging
the statements of Celotex's witnesses.
The main danger of prejudice from these documents
lay in the possibility that the jury would consider the
causes of the problems mentioned therein, to be causative
of the failure of the Campus roof, which is a danger
inherent in any of the exceptions enumerated under Rule
[**81] 404(b). If the evidence [*92] of prior complaints
had not been limited to the issues of knowledge
and intent, the danger would have been much greater for
one might easily suspect that the jury would apply the
evidence of these problems to the wrong issues. But
plaintiff did not argue that the moleruns, wet rolls adhesion,
and tensile strength were the cause of the failure.
Campus' primary theory was that Bond Ply was so inadequately
saturated with asphalt, that moisture penetration
resulted, thereby causing the failure. These complaints,
which were symptomatic of Bond Ply's unsuitability for
use as a roofing system, put Celotex on notice of an inherent
problem with its product. Since the causation argument
of plaintiff was unrelated to the problems mentioned
in the documents, the danger of prejudice resulting
from confusion of the issues was minimized. Accordingly,
the documents were properly admitted.
At this point it would be proper to consider Celotex's
argument that the jury should have been instructed to
limit their consideration of these documents solely to
their determination of intent and knowledge. The general
rule is that [HN31] where one party makes a timely

equest [**82] for instructions limiting the evidence to
its proper scope, such an instruction must be given.
Gross v. United States, 394 F.2d 216, 222 (8th Cir.
1968), cert. denied 397 U.S. 1013, 90 S. Ct. 1245, 25 L.
Ed. 2d 427 (1970). Had Celotex requested such an instruction,
this court would have gladly so instructed the
jury at the time of the admission of the evidence, and
once again in its jury charge after the close of the evidence.
Nevertheless, despite Celotex's failure to request
such an instruction, this court did instruct the jury to
consider the evidence for purposes of the knowledge of a
defect.
Celotex sought to exclude the evidence entirely
through a general objection and failed to call the attention
of this court to any specific limitation which it believed
should be imposed upon the jury in applying the
evidence to the issues. In a similar situation in American
Medical Association v. United States, 76 U.S. App.
D.C. 70, 130 F.2d 233 (D.C.Cir.1942), aff'd 317 U.S.
519, 63 S. Ct. 326, 87 L. Ed. 434 (1943), it was stated:
Even assuming that this evidence
may have been relevant only in respect of
the American Medical Association and
that it was introduced for that purpose
[**83] by the government, nevertheless,
as appellant sought only to exclude it entirely,
rather than merely to limit it to
probative force, there was, consequently,
no error in admitting it, in any event.
See also Malatkofski v. United States, 179 F.2d 905, 914
(1st Cir. 1950).
[HN32] The rule requiring counsel to request the
limiting instruction is a sound one, because the court
cannot ascertain the meaning of an attorney's silence.
An attorney may conclude that his client would be best
served by silence on the matter, rather than by bringing
emphasis to bear on the evidence. Malatkofski v. United
States, supra; Sica v. United States, 325 F.2d 831, 836
(9th Cir. 1963), cert. denied 376 U.S. 952, 84 S. Ct. 970,
11 L. Ed. 2d 972 (1964). Furthermore, in a long and
complex trial, it is entirely possible for the court unintentionally
to neglect to give the instruction. Since the jury
was instructed in part as to its use of the evidence, and
since counsel failed to request an instruction, and since
plaintiff's theory of causation was so different that the
potential for prejudice is minimized, this court is of the
opinion that the failure to instruct at most constitutes
"harmless error." [**84]
[HN33] The standard governing the admissibility of
evidence to show "intent" differs from that already discussed
governing "knowledge." Since similar acts are
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 27
being used to minimize the possibility of inadvertence, or
in other words, to show that the odds are that repeated
acts of the same nature are not accidental, the prior acts
must be "substantially similar" to that one in question.
n81 Whiting v. United States, [*93] 296 F.2d 512, 516
(1st Cir. 1961); 1 Wigmore, Evidence, § 302 at 200 (3d
ed. 1940). Nor do acts have to constitute a crime to be
admissible to prove "intent". United States v. Senak,
527 F.2d 129 (7th Cir. 1975), cert. denied 425 U.S. 907,
96 S. Ct. 1500, 47 L. Ed. 2d 758. See also 1 Wigmore,
Evidence, § 216 at 712-18 (3d ed. 1940).
n81. The South Carolina cases cited by Celotex
are irrelevant since under Hanna v. Plumer,
380 U.S. 460, 85 S. Ct. 1136, 14 L. Ed. 2d 8
(1965), the Federal Rules of Evidence and federal
law controls.
With regard to intent, Celotex raises the same issues
of [**85] probativeness and prejudice that it raised on
the issue of knowledge. As previously pointed out, the
evidence was highly probative of the "intent" of Celotex
to protect its market position in spite of its knowledge of
severe problems with Bond Ply.
Finally, it is noteworthy that the inter-office memos
themselves point out that the problems were with Bond
Ply rather than with types of decks, geography, etc. For
this reason, the evidence was admissible on the issue of
"intent".
da
Corporate Test Reports And Inter-Office Memoran-
In support of its position that certain test reports and
Celotex memoranda should have been excluded for lack
of "substantial similarity," defendant relies heavily on the
case of Renfro v. National Cash Register Co., 552 F.2d
1061 (4th Cir. 1977). Defendant Renfro prosecuted a
counter-claim against NCR for breach of express and
implied warranties and for fraud. The issues arose from
negotiations which culminated in the leasing by Renfro
of a data processing system from NCR. During negotiations,
NCR was testing prototypes and production models
of the unit which was eventually leased by Renfro.
There were problems experienced with both types of
models during [**86] testing, and Renfro sought to
introduce this evidence to prove breach of the warranties
and NCR's knowledge that the computer was not "reliable"
as represented to Renfro. Renfro also sought to introduce
into evidence "performance goals" set by NCR to
show that the systems had not met the company standard
for reliability and certain reports on post-marketing tests
known as "C" tests.

The trial judge in Renfro excluded the evidence of
testing difficulties with the models insofar as it was to be
used for proving that the leased system was "unreliable."
Noting the substantial differences between the prototype
and the model leased to Renfro and the vastly different
environmental conditions under which the testing took
place, the Fourth Circuit found that the exclusion was not
an abuse of discretion. Said the court:
There was no error in the finding of
the Court that the Appellant had failed to
meet this burden. The Final Report on
the "B Test" emphasized that "(the)
615-100 System (tested) greatly deviates
from a production system." Report at 1.
Numerous deviations between the prototype
and production model were listed for
every major component tested; in some
instances, the dissimilarities [**87] were
so great that major units could be tested
only for interface capability. Id. at 22.
Furthermore, the conditions under which
the prototype was tested differed drastically
from an operational environment;
see, e.g., Final Test Report at 10 (tests on
processor). Plainly, under these circumstances,
this Court cannot say that the trial
judge was erroneous in concluding that
Appellant had failed to show similarity
between the test conditions and conditions
at Renfro's facility.
552 F.2d at 1066.
This court perceives two substantial differences between
this suit and the Renfro "B" tests. First, the differences
involved in the Bond Ply roofs were much less
substantial than those in the computers. Second, the
evidence in this case was not introduced to prove "cause"
as in Renfro : a lower standard of "similarity" is required
where mere knowledge is in dispute. See Weinstein &
Burger, Weinstein's Evidence, § 404(11) at 404-76.
(This is also implicit in part IV of Renfro ).
Celotex contends that Renfro is authority for excluding
evidence of the failure to meet certain performance
guidelines. While Celotex does not specify what
performance guidelines should be excluded, [**88]
[*94] presumably it is referring to the evidence that
Bond Ply did not measure up to the tensile strength
standards for built-up roofing. In Renfro, the evidence
was excluded because the goals were merely a target,
were set artificially high, and were related not to an industry
standard but to NCR's concern for quality control.
Id. at 1067. None of these factors was present here; Ce-
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 28
lotex's documents reflect a concern over meeting the
level of tensile strength generally prevalent in its industry.
Of even greater importance, the goals were not introduced
to prove a "defect", as in Renfro.
Post-marketing test results may also be admitted to
prove knowledge and intent. Celotex's reliance on Renfro
is misplaced since the "C" test results were admitted
for precisely this purpose in Renfro. Id. at 1067.
Celotex's final argument that these documents constitute
subsequent remedial measures under Rule 407,
n82 is groundless for two reasons. First, [HN34] evidence
of similar acts used to prove "intent" may postdate
the event in question since the purpose is to prove lack of
inadvertence. The more times something is repeated,
whether before or after an event, tends to negate the
event's [**89] inadvertence. Roe v. United States, 316
F.2d 617, 621 (5th Cir. 1963); Shreve v. United States,
103 F.2d 796, 803 (9th Cir. 1939). Second, the "event"
and the "remedial measures" to which Rule 407 addresses
itself, pertain to the failure of the roof, not to the marketing
of the product. Thus those documents from 1964
through 1968 would not be "subsequent" in this case.
n82. [HN35] Rule 407, Federal Rules of Evidence,
reads as follows:
SUBSEQUENT REMEDIAL
MEASURES
When, after an event,
measures are taken which, if taken
previously would have made the
event less likely to occur, evidence
of the subsequent measures if not
admissible to prove negligence or
culpable conduct in connection
with the event. This rule does not
require the exclusion of evidence
of subsequent measures when offered
for another purpose, such as
proving ownership, control, or
feasibility of precautionary
measures, if controverted, or impeachment.
EXPRESS WARRANTY
Celotex objected to the submission of the issue of an
express warranty [**90] to the jury arguing that there
was no express warranty, that there was no privity between
Celotex and Campus, and that there was no reliance
upon the warranty.

Celotex advertised its Bond Ply 220 INS roof as a
"20-year bond" roof. n83 Campus' express warranty theory
is that Celotex represented the Bond Ply roof as being
one which could be expected to last 20 years, the
same length of time a four-ply roof would be expected to
last. n84 Celotex argues that the term "20-year bond"
signifies nothing more than a willingness to issue a bond
on the roof for 20 years provided certain construction
specifications are met. However reasonable one considers
the interpretation presented by Celotex, there was
certainly sufficient evidence for the jury to conclude that
Celotex and its customers understood the roof was being
represented as having an approximate life expectancy of
20 years. Mr. Heppert, an engineer for Campus who
recommended to Mr. Zuckerman that Bond Ply be used,
testified that "20-year bond" led him to believe the roof
would last 20 years:
Q. What is this, what's the language
right above the heading, the blue heading
on the specifications?
A. That says specification [**91]
number 220 INS, which I have since
learned is the Barrett designation of this
roof. Obviously, I do not remember that
for 9 years, but I knew it was a bond-ply
roof. And it says under that "incline
maximum is 3 inches per foot."
[*95] Q. Read on, the blue language.
It's written in blue right there?
A. It says, "20-year bond."
Q. Twenty-year bond. Now as an
experienced roofer, what did that mean to
you, Mr. Heppert?
A. It meant to me that it was a roof
that I could normally expect to last 20
years.
Q. Is that contrary to what you earlier
expected?
A. I expected to find a 10-year roof.
Q. Did you believe that statement
20-year bond?
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
[**92]
A. Yes, I did. n85
Page 29
n83. The Series 200 Barrett Bond Ply Roof is
shown in Plaintiff's Exhibit 82 at page 14. The
specifications are set forth at page 38 n. 46 supra.
n84. There has never been any contention by
Campus that it relied upon the brochure known as
"One Plus One Equals Four." This document is
relevant only to Fort's cross-claim for fraud.
n85. Testimony of Heppert, Transcript at
407.
Mr. Stafford, Campus' expert on roofing, testified
that "20-year bond" has an ambiguous meaning in the
roofing industry, with some people attaching a greater
significance to this term than Celotex would. Although
some use the term "20-year roof" to mean only a roof
bondable for 20 years, Stafford said, "it would certainly
indicate to me that this was a roof that could be expected
to last sometime around the range of 20 years, but not
specifically necessarily 20 years." n86 He added, "If
someone used that term to me, it would indicate to me
that they were anticipating in a range of 20 years. n87
n86. Testimony of Stafford, Transcript at
1370.
n87. Id., Transcript at 1372.
The Campus employee who was responsible for the
decision to substitute the Bond Ply roof, Mr. Zuckerman,
testified that the roof was sold to him as a 20-year,
four-ply, tar-and-gravel roof. He expected it to last 20
years. n88
[**93]
n88. Testimony of Zuckerman, Transcript at
290.
Moreover, Celotex's own witnesses testified that the
company interpreted the term as meaning the roof should
last 20 years. Mr. McClellan, Celotex's salesman, stated
that a 20-year bond roof means "... it should last 20
years; it is more or less a standard in the industry." n89
The product manager at Celotex, Mr. Brasher admitted in
his deposition published at trial, "that we were to sell it
as a 20-year system competitive to a four-ply system."

n90 According to Mr. Butterfield, Bond Ply "should give
you the 20-year period that we allowed for it at that
time." n91 Finally, Mr. Franklin indicated that Celotex
expected the roof to last twenty years. n92
n89. Testimony of McClellan, Transcript at
1795.
n90. Testimony of Brasher, Transcript at
1442.
n91. Testimony of Butterfield, Transcript at
1082.
n92. Testimony of Franklin, Transcript at
1062.
Without doubt, the question of whether one could
reasonably believe that Celotex was warranting that
Bond-Ply would last 20 years more or less, is a [**94]
difficult one which bears on a crucial issue. Fortunately,
it is not the function of this court to decide that issue,
for in their wisdom, the architects of our judicial system
have left that question to a jury of twelve persons. n93
Certainly this court makes no claim to greater insight
than that derived from the deliberations of 12 jurors. n94
The only matter which this court must decide is whether
the jury's conclusion that an express warranty was made,
was a fair and reasonable one supported by the evidence.
[**95]
n93. The experience in the District Court of
South Carolina has been that the six-man jury,
product of random selection, is more often than
not a "one-man" or "two-man" jury.
n94. On whether twelve heads are better than
one, Justice Holmes wrote:
... the meaning of leaving nice
questions to the jury is that while
if a question of law is pretty clear
we can decide it, as it is our duty
to do, if it is difficult it can be decided
better by twelve men taken
at random from the street.
Holmes, Law in Science and Science in Law,
12 Harv.L.Rev. 457.
The jury heard testimony that Barrett (Celotex) expected
the roof to last 20 years; that it would be reasonable
in the roofing industry to interpret "20-year bond" as
an assertion that the roof would last for that period; and
that Campus so interpreted this term. An express asser-
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 30
tion which becomes [*96] a basis of the bargain is a
warranty, and that is what the jury found in this case.
While this court finds itself unable to say with any certainty
that there was or was not an express warranty by
Celotex, there nonetheless was ample evidence from
which a jury could reach the conclusion that there was
such a warranty. Even were this court to lean in favor of
Celotex's argument, a mere "leaning" is not sufficient to
overturn the jury's verdict. This is precisely the situation
where "one head" must defer to the greater wisdom
of "twelve."
Assuming the existence of a warranty, Celotex contends
that a paragraph in the Barrett catalog acts as a
disclaimer of warranty. n95 The disclaimer language on
which Celotex relies, appears some 12 pages away from
the express warranty upon which Campus bases its action.
There is no device used to draw attention to this
disclaimer, and, although [**96] "conspicuousness" is
not an issue with an attempted disclaimer under the
UCC, this hidden disclaimer does underscore one of the
policy reasons for the UCC position that express warranties
cannot be disclaimed.
n95. Plaintiff's Exhibit 82, Barrett's
"Build-up Roofing Systems Manual 1967, at 2
states:
Barrett will not issue, in lieu
of such guaranty bond, letters of
certification or any other guaranties
or warranties whatever on
Built-up Roofing jobs.
South Carolina has rejected the modified version of
disclaimers in the 1962 Uniform Commercial Code revision,
n96 opting for the strict 1952 provision entitled
"Exclusion or Modification of Warranties." [HN36] Section
36-2-316(1), Code of Laws, 1976, reads as follows:
"If the agreement creates an express warranty words disclaiming
it are inoperative." Under this approach, words
creating an express warranty must be read in isolation
from the other language and cannot be effectively disclaimed
in any other part of the contract. See S. C. Reporter's
Comments, § [**97] 36-2-316. The South
Carolina courts have yet to face this particular issue.
However, the statutory language seems clear. In order
to protect buyers from hidden disclaimers, any disclaimers
in conflict with an express warranty are ineffective.
See Walsh v. Ford Motor Co., 59 Misc.2d 241, 298
N.Y.S.2d 538 (Sup.Ct.1969). The jury, having read the
words "20-year bond" in isolation from the disclaimer
language under § 36-2-316(1), found an express warranty
which could not be disclaimed.

n96. The 1962 approach, set forth here, looks
to the entire contract to construe disclaimer-type
language: [HN37] § 2-316 provides:
Words or conduct relevant to
the creation of an express warranty
and words or conduct tending to
negate or limit warranty shall be
construed wherever reasonable as
consistent with each other; but
subject to the provisions of this
Article on parol or extrinsic evidence
(s 2-202) negation or limitation
is inoperative to the extent
that such construction is unreasonable.
The privity argument advanced [**98] by Celotex
need not be addressed further as this court has already
held in the Statute of Limitations section that privity is
not required in South Carolina for an express warranty.
n97 Celotex's final argument on express warranty alleges
a lack of reliance by Campus on the representations of
Celotex.
n97. See discussion at 80-82 supra.
Initially, this argument assumes that reliance is required
in South Carolina for recovery on express warranty.
[HN38] Under the Uniform Sales Act, § 12, the
plaintiff could recover on express warranty if "the buyer
purchases the goods relying thereon (referring to the
warranty) ...." The Uniform Commercial Code, §
36-2-313(1), requires only that the promise or affirmation
become "part of the basis of the bargain." Furthermore,
Official Comment No. 3 to § 36-2-313 reads:
In actual practice affirmations of fact
made by the seller about the goods during
a bargain are regarded as part of the description
of those goods; hence no particular
reliance on such statements need to
be [**99] shown in order to weave them
into the fabric of the agreement.
This is an open question in this state, and this court has
no desire to usurp the function of the South Carolina
Supreme Court [*97] to interpret South Carolina statutes.
Since there was ample evidence from which the
jury could conclude that Campus relied upon the war-
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 31
ranty made by Celotex, n98 there is no reason for this
court to address this issue.
n98. Testimony of Heppert, Transcript at
403-09; Testimony of Zuckerman, Transcript at
110.
Celotex correctly points out that the man who made
the decision to buy Bond Ply, Mr. Zuckerman, had no
direct contact with Celotex or its representatives.
However, he did receive from Celotex the Barrett catalog
which he gave to Mr. Heppert to use in preparing his
recommendation about the roof. He also had the letter
from Kahn suggesting Bond Ply, which was sent as a
result of assertions by Celotex's salesman, Mr. McClellan,
that Bond Ply was suitable for this job.
Heppert was the man who actually [**100] relied
on the term "20-year bond." He testified that he looked
up the 220 INS specification n99 in the Barrett catalog
since he was dubious about the existence of a two-ply
roof which was the equivalent of a four-ply roof. n100
He found that there was a Bond Ply roof, consisting of
two plies of coated felt, bondable for a term of 20 years.
n101 Heppert testified that he took the term "20-year
bond" to mean the roof would last 20 years. n102 As a
matter of curiosity he checked the comparative weights
of the two systems and found that they were comparable.
Based on these calculations, on the assertion that the roof
would last 20 years, and on the reputation of Barrett,
Heppert recommended the roof to Zuckerman; and based
on that recommendation, Zuckerman ordered the roof.
n103 Thus, there was ample evidence of reliance by
Campus.
[**101]
n99. See discussion supra at 97.
n100. Testimony of Heppert, Transcript at
406-408.
n101. Id., Transcript at 406-407.
n102. Id., Transcript at 407.
n103. Testimony of Zuckerman, Transcript
at 110; Testimony of Heppert, Transcript at
403-409.
FRAUD
The issues which are raised in defendant's brief on
this subject need be addressed only briefly. Campus and
Fort's theory in the fraud action was that Celotex made a
representation as to the longevity of its product, Bond

Ply, that it was either actually aware that Bond Ply would
not perform to its representation or that it acted in reckless
disregard of whether it would or would not so perform.
As to Fort, which was a second generation roofer,
the only evidence is that Celotex never intimated any of
the multitude of problems associated with bond-ply or
that it had no knowledge of the life expectancy of the
roof system. Indeed Fort maintains Celotex made a
conscious effort to keep this information from it, and
deliberately continued to promote its product. This theory
was supported by much testimony and documentary
evidence on the representation and on the defendant's
knowledge thereof as well as on defendant's intent. n104
In its defense, Celotex argues [*98] that new products
have developmental problems, that to apprise the potential
purchaser of all problems would discourage sales
unnecessarily, and that these problems in any case were
not present on the Campus [**102] roof. Obviously, the
jury chose to believe Campus and Fort.
n104. See discussion under express warranty,
supra at 96. Of particular import is plaintiff's
exhibit 126, an inter-office memo from Donegan
to Franklin dated October 22, 1963. Its contents
are so telling that it bears reproducing in part:
As to the more important criterion,
anticipated life, we have no
service basis on which to recommend
a construction as simple as
this for a 20-year period. As you
are aware, we installed such a roof
on the office building at Frays
Ferry this summer and application
proceeded without difficulty.
This roof was over a wood deck
and comprised one rosin, one # 15
asphalt felt nailed dry and two
"VAPORBAR's" stuck. All
moppings and the top pouring
were of "ANCHORBOND" asphalt
and top finish was slag. No
two-ply construction over insulation
or concrete has been tried.
Practically speaking, the
question becomes simply that of
whether or not a two-ply roof can
be expected to last 20 years. If
we consider the top pour and slag
as the primary barrier against
weathering, then there is no difference
between this proposed
construction and a conventional
5-ply job. Resistance to structural
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
[**103]
movement and other stresses to
which the roof is subjected is provided
by the felts, and herein we
become deficient according to accepted
standards. Are these
standards correct? How were
they arrived at? I suspect witchcraft
and tradition rather than
sound technology and am inclined
to waive these requirements in the
interests of furthering development
of this two-ply proposal.
Page 32
Although the document refers to a "Two-Ply
"Vapor Bar' Roof", Mr. Rissmiller indicated it to
be the same as Bond Ply. Transcript at 668, 670.
Further evidence expanding upon the
knowledge of Celotex is found in the following:
A. Exhibit 135 shows that in
September of 1966, Celotex questioned
its written specification as
to the bond-ply system due to the
inherent weakness therein and
states Celotex knowledge that they
"had better find out".
B. In 1967, Celotex knew that
its bond-ply system must have
greater strength to overcome its
field problems. Exhibits 112 and
112-A.
C. Particularly as to the intent
and attitude toward its approved
roofers, exhibit 149, is of course
the scapegoat memorandum.
D. Exhibit 191 indicated that
Celotex knew its bond-ply system
was not time proven and from a
technical point of view the old
four-ply system was far better and
until it knew more about its new
system that making a buck should
not be the sole criteria of what
they were to do.
The admissibility of documents to prove fraudulent
intent has already been fully discussed. All that need be
repeated here is that the South Carolina cases cited by
Celotex in support of excluding these documents are
irrelevant, since the admission of these documents is a
question of federal law under Hanna v. Plumer, 380 U.S.
460, 85 S. Ct. 1136, 14 L. Ed. 2d 8 (1965).

Celotex also states that the previous acts were not
shown to be fraudulent and that there was no showing of
"preparation" as required under Rule 404. First, acts do
not have to constitute a crime, to show intent. United
States v. Senak, 527 F.2d 129 (7th Cir. 1975), cert. denied
425 U.S. 907, 96 S. Ct. 1500, 47 L. Ed. 2d 758. Second,
the cases requiring "preparation" relate to the use
of similar acts to prove the commission of the crime
charged. This was not the purpose here.
MOTIONS FOR MISTRIAL
Celotex moved for a mistrial during the trial on the
basis of the introduction of documents previously discussed.
For reasons which have been expressed at
length earlier in this opinion, the facts fail to support that
portion of their post-trial motion. Additionally, Celotex
has moved for a new trial on the basis of [**104] two
events which occurred at trial which prompted it to move
for a mistrial.
During the course of his testimony, Mr. Stafford indicated
that, some years earlier while working for
Johns-Manville Roofing Company, he had concluded
that the company should not market a system such as
Bond Ply because he felt it was not an effective roofing
system. When it became the turn of counsel for defendant
Fort to cross examine this witness, counsel immediately
walked up to the witness stand, and stuck out
his hand, which the witness took. While shaking the
witness' hand, Fort's counsel said:
Mr. Stafford, good morning, sir, and
congratulations, it may not be readily apparent
to you at this moment as to why I
did that, but I want to go back in history a
little bit with you, if I may. Congratulations
is for all the consumers and roofers
in the world that no longer have to deal
with Bond Ply. n105
105. Transcript at 1248.
Counsel for Celotex immediately moved for a mistrial
claiming that the exchange was highly prejudicial
[**105] to his client's case.
The valuation of this conduct and the assessment of
its impact upon the jury in passing upon a motion for
mistrial is peculiarly the function of the trial court.
Slade v. Slade, 439 F.2d 130, 131 (9th Cir. 1971); Zeigler
v. Seaboard Coastline R. R., 437 F.2d 80 (5th Cir.
1971); Arkwright Mutual Insurance Co. v. Philadelphia
Electric Co., 427 F.2d 1273, 1277 (3rd Cir. 1970). In
this situation, this court rebuked counsel and admonished
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 33
the jury to disregard his remarks. [*99] n106 Even
assuming that the comments of Fort's counsel were prejudicial,
this court adequately removed any prejudice by
its instruction to the jury. See Standard Oil of California
v. Perkins, 347 F.2d 379 (9th Cir. 1965); Nevels v.
Ford Motor Co., 439 F.2d 251 (5th Cir. 1971); Pasotex
Pipe Line Co. v. Murray, 168 F.2d 661 (5th Cir. 1948).
n106. Transcript at 1250. The court inquired
of the jury if any juror would have difficulty
disregarding the statement. There was no
response. Id.
When this court analyzes [**106] the effect of this
act upon the jury, it becomes apparent that minimal
prejudice resulted. Nothing new was introduced into the
trial by way of the attorney's comments, his message
being simply that he thought Bond Ply was a bad product.
Of course, that is the whole point of Fort's case and
is a fact of which the jury was fully aware. Any comments
by counsel would have been taken with a grain of
salt by the jury panel. This court is adequately assured
that the curative instruction was sufficient in this case.
Well into the second week of the trial, the following
exchange took place during the examination of the president
of Fort by his counsel:
Q. Now, Mr. Fort, as far as your
cross-claim against the Celotex Company
is concerned, are you limiting what you
are asking these ladies and gentlemen of
the jury for in damages to this one particular
job?
A. Yes, sir.
Q. All right, and why are you doing
that?
A. I don't have any idea what they are
going to be. As I said, we've got eight to
ten jobs that are potential failures, and I
don't know. There is no way of telling.
n107
Celotex immediately objected to this exchange. It
is the contention of Celotex [**107] that this was an
intentional and calculated act designed "to elicit sympathy
for Fort and create in the minds of the jurors the
thought that if they did not do something for Fort in the
instant case it might well have adverse repercussion in
the ten other ones." <strong>Brief</strong> of Celotex at 201. At the time
of this remark, this court was not of the opinion that it

was an intentional device. After examining the transcript,
this court continues in that opinion. Furthermore,
the conclusions which can be inferred from the last
statement of Mr. Fort are ambiguous. One might infer,
as Celotex does, that something needs to be done in this
case. Or one might infer that Mr. Fort was simply informing
the jury that they should consider only this lawsuit
and not any others which might be brought in the
future. Although the remark was improper, this court
does not feel any prejudice was done which would require
a retrial of the two weeks' experience. The court
immediately instructed the jury to disregard the statement
and to confine their deliberations to the present
action. Since this was a two-week trial, since the inferences
from the remark did not inevitably lead to a prejudicial
conclusion, [**108] and since this court went to
some effort to cure the mistake, the motion for mistrial
was not granted.
n107. Transcript at 1712, exchange between
Mr. Fort and Mr. Chappell.
Of further consideration is the fact that the jury
found no actual damages on Fort's behalf, a conclusion
tending to negate any inference that the jury was concerned
about his damages from other cases. The Supreme
Court of South Carolina adequately summed up
this court's attitude toward this problem in the case of
Smoak v. Seaboard Coastline R. R., 259 S.C. 632, 640,
193 S.E.2d 594 (1972), where it stated:
[HN39] The defendant is not entitled
to a perfect trial but only a fair trial.
Hardly any case is completed without
some flaw. If a new trial was required
everytime a flaw or a mere possibility of
prejudice occurred, litigation would be
unduly prolonged. Our court has held
many times that such matters are basically
for the sound discretion of the trial judge.
CHARGES TO THE JURY
During its charge to the jury on fraud, this court
made the [**109] following statement [*100] relating
to the methods by which fraud can be proved:
Fraud may be deduced not only from
the deception or false representation, but
from facts, incidents and circumstances,
which may be trivial in themselves, but
decisive in a given case of fraudulent design.
n108
Celotex contends that this charge was in error in that
it related solely to a fraudulent breach of contract action
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 34
and not one for fraud and deceit. The prejudice, Celotex
asserts, is that the standard of proof for a fraudulent
breach of contract action is different from the standard of
proof for a fraud action, and that this court charged the
jury with both. n109
n108. Transcript at 2457-58.
n109. Contrary to the claim of Campus, Celotex
did make a timely objection to this charge.
Therefore this court will consider the issue.
Transcript at 2479.
The charge set forth was taken from the case of
Henderson v. Capital Life & Health Ins. Co., 199 S.C.
100, 18 S.E.2d 605 (1942). Henderson was an action for
breach [**110] of contract accompanied by a fraudulent
act. However, the language in Henderson which this
court charged was a direct quotation from Cook v. Metropolitan
Life Ins. Co., 186 S.C. 77, 194 S.E. 636 (1938),
an action for fraud and deceit.
It is quite obvious that the meaning of the language
charged by this court is that fraud can and almost always
must be demonstrated by a succession of events or by
circumstances any one of which standing alone would
appear innocuous this is the very nature of proof by circumstantial
evidence. Cook, in fact, has been referred
to as authority for that statement. Gary v. Jordan, 236
S.C. 144, 113 S.E.2d 730 (1960). Celotex, for another
proposition of law, cites as authority Carter v. Boyd
Construction Co., 255 S.C. 274, 178 S.E.2d 536 (1971).
The first phrase of this opinion by Mr. Justice Bussey
states: "In this action for fraud and deceit ...." The exact
language to which Celotex objects, is quoted by Mr. Justice
Bussey at 178 S.E.2d at 539. Further, that language
is used in the Carter case in exactly the same context as it
was in this case, i. e., to determine the state of mind of
the defendant.
The contentions of Celotex are totally without merit.
[**111] First, this charge to the jury did not set out a
new standard of proof but simply stated a manner in
which fraud might be proved. The correct standard of
proof, that of clear, cogent, and convincing evidence,
was charged to the jury in the initial charge, and was
repeated at the time the jury requested further instructions.
n110 Second, the nine elements required to prove
fraud in South Carolina were repeated to the jury twice
in the initial charge, and at the jury's request were repeated
by the court three times after their deliberations
had begun. There is no doubt in this court's mind that
the jury was aware of the elements of fraud, and of the
high standard of proof applicable to that cause of action.

n110. Transcript at 2487.
Celotex argues that Plaintiff's Request to Charge No.
2 was not "adjusted to the evidence." This court instructed
the jury as follows:
Also, the manufacturer has a duty to
adequately warn of foreseeable and latent
defects known, or which in the exercise of
ordinary care could [**112] have been
known, to exist in the product which
could result in damages to the person or
corporation who used the product for the
purpose for which it was intended. n111
n111. Transcript at 2448-49.
Celotex's argument is framed in the alternative: If
the 220 INS system was "the product," it was not used,
and thus there was no relationship between the "product"
and the evidence; if the "product" is considered to be the
Bond Ply coated felt, these were not shown to be defective.
Finally, the argument is that, even if there was a
defect in this roof, the defect related only to flexural
strength and consequent fatigue which it is contended
was never known to Celotex.
[*101] This argument is not persuasive for several
reasons. The uncontradicted testimony shows that
the bid for constructing the roof was for Barrett's 220
INS specification and that it was so accepted. However,
it is also uncontradicted that there was a deviation from
that specification. The only area of controversy concerned
the materiality [**113] of that deviation. Mr.
Stafford testified that this deviation was not material to
the failure of the roof. n112 Celotex attempted to controvert
this testimony. However, the jury chose to believe
Mr. Stafford. More importantly, it should be remembered
that Fort's employee testified, without contradiction,
that Mr. McClellan, the local representative of
Celotex allowed him to use the one-on-one application
since Fort had been experiencing trouble with the shingle-type
application on previous jobs. n113 The contention
that the sheets were not defective is not supported by
the evidence. While the evidence showed that the sheets
of Bond Ply were physically as the manufacturer had
intended them to be and thus not "defective" in that
sense, Mr. Stafford testified that these sheets had inherent
and latent properties which made them unsuitable for
use as a waterproofing membrane. n114 Thus, although
the sheets were properly made, the jury found that they
were inherently defective.
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 35
n112. Testimony of Stafford, Transcript at
1246.
n113. Testimony of Watts, estimator for
Fort, Transcript at 1704 and 1648. McClellan
does not deny this, Transcript at 1831.
[**114]
n114. Testimony of Stafford, Transcript at
1186.
Celotex maintains that the court charged a duty to
give warning "when a defect which makes a product
hazardous to users becomes known to the manufacturer
after the product has been put on the market." The true
quotation, as borne out by the transcript, is: "The duty to
give prompt warning arises when a defect which makes a
product hazardous to use becomes known to the manufacturer
after the product has been put on the market."
n115 The phrase "hazardous to users" might suggest
some danger to those who use the product, but the
phrase, "hazardous to use," as employed by this court, is
simply synonymous with defective for the purpose for
which the product is designed and manufactured. The
case of Carolina Home Builders v. Armstrong Furnace
Co., 259 S.C. 346, 191 S.E.2d 774 (1972) is precisely on
point. In that case, which involved only property damage
due to a defective product, the court strongly stated
that a manufacturer has a duty to warn of foreseeable and
latent defects in the product which would cause damages
to a person using the product [**115] for the purpose
for which it was intended. Since the charge in question
goes to this point, the objection is without merit.
n115. Transcript at 2449.
The final objection by Celotex to the jury charge
concerns the following charge taken from Gardner v. Q.
H. S., Inc., 448 F.2d 238 (4th Cir. 1971):
In determining whether one has
knowledge of defects or should have
knowledge of defects, if any, in his product,
you may consider prior complaints
describing substantially similar experiences.
Not as to others, but substantially
similar experiences, provided those experiences
were brought to the attention of
the manufacturer prior to placing a product
on the market, particularly the product

for which defects were claimed in this
case and not in any other case. n116
116. Transcript at 2450-51.
Celotex contends that Gardner dealt only with
[**116] the issue of foreseeability of harm in view of a
product's intended use and that it is not authority for the
use of evidence in this case to prove Celotex's knowledge
of prior complaints.
Basically, Celotex contends that its knowledge of
prior complaints is not relevant to any issue in this case.
This court has already discussed that issue, holding that
the jury's consideration of the prior complaints could
have led to its finding that Celotex had knowledge of
these problems and failed to warn Campus and Fort of
them or failed to take action to correct the [*102]
problems. Moreover, Celotex's reasoning that Gardner
is limited to foreseeability of intended use is misguided.
Gardner specifically stated that complaints or experiences
were admissible to show the defendant's knowledge of
these problems. 443 F.2d at 244.
As stated in Gardner, the key issue to be resolved by
the proof of knowledge is whether the manufacturer
knew or should have known that a product was or was
not likely to be dangerous for the use for which it was
supplied. Since there was evidence that the problems
complained of were present on the Campus roof, the
charge was relevant to the issue of knowledge [**117]
as it relates to the duty to warn. Furthermore, whether
these same experiences should have been known by Celotex
prior to 1968 is relevant as to the issue of fraud
bearing on the representation made, as to the falsity of
the representation or to Celotex's reckless disregard of its
truth or falsity, and as to the intent that the representation
be acted upon. The contention that the documents dating
from the 1970s (after plaintiff's roof had been constructed)
cannot support a finding of fraud in 1968, is
erroneous. The proof of intent is dependent upon the
doctrine of chances eliminating the possibility of innocent
intent by multiplying instances of the same result
until it is perceived that this element cannot explain them
all. 2 Wigmore on Evidence, § 302 (3rd Ed. 1940).
Because it is based on the doctrine of chances, proof of
intent is relevant whether it occurs before or after the
event in question. The crucial issue is the negating of
inadvertence or any other innocent explanation.
The final contention of Celotex is that the charges
given, coupled with the action of the jury, indicate that
the jury was obviously confused. The court does not
agree that this conclusion necessarily [**118] follows
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 36
from the facts. It is obviously difficult for anyone, especially
lay persons, to remember a list of nine elements.
The jury's request that the court charge the nine elements
of fraud three times after beginning their deliberations, is
also indicative of conscientiousness, rather than confusion.
Celotex seems to find an element of confusion in
the jury's request that the court charge them concerning
"direct and indirect fraud." This court is of the opinion
that the concern of the jury most probably lay in the area
of proof of fraud by circumstantial evidence and, in the
absence of the actual knowledge of the falsity of representation,
defendant's action in reckless disregard of the
truth or falsity of the representation. Those areas were
recharged as were the nine elements of fraud. This
court also twice instructed the jury that there was no
charge on direct and indirect fraud. n117
n117. Transcript at 2488 and 2489.
COMPENSATORY DAMAGES
Celotex takes issue in several particulars with the
amount [**119] of compensatory damages awarded,
and assigns to this court as error the allowance of same.
Celotex asserts error in this court's "permitting the
jury to base damages upon plaintiff's evidence of its
purchase of the installation of approximately 50 additional
roof drains of a cost in excess of $ 10,000." Campus
contends that these expenses were incurred in a good
faith attempt by plaintiff to mitigate its damages, which
if believed by the jury, would be a recoverable expense.
Celotex claims that the drains were not installed to remedy
a defect caused by the Bond Ply system. In examining
the transcript, one should note that Campus originally
asked for compensatory damages of $ 219,574.97,
n118 while the jury award was $ 208,000. It is arguable,
although by no means certain, that the jury did not
include the drains in their verdict for actual damages.
This court will not presume to go behind the jury's verdict
where they may have already excluded the amount
of the drains.
n118. Transcript at 2304.
The amount [**120] of compensatory damages included
the sum of $ 105,653.37, which was [*103] the
cost of the new four-ply roof which had been installed in
place of the defective Bond Ply roof. Celotex contends
that to allow the entire amount as compensatory damages
would not realize the goal of making a person "whole";
rather it would have the effect of making Campus "well
off". There was evidence in the form of testimony by

Stafford, which was not contradicted, that the cost of a
four-ply roof should be between $ 4.00 and $ 4.50 more
per square (100 square feet) than the cost of a two-ply
system. Celotex argues that Campus, having purchased
the cheaper system, is not entitled to be reimbursed for
the complete cost for a new, different and much more
expensive system than the one initially purchased.
This argument fails to focus on what was actually
purchased in 1968. Campus did not originally specify a
two-ply roof, but rather a four-ply roof which would
keep its warehouse dry for some 20 years. It was only
upon the urging of its contractor (who acted at the urging
of Celotex's salesman) that Campus changed its specification
to a two-ply system. When the Bond Ply system
failed, Campus installed [**121] a system which would
perform according to its original specification. Since
Campus was seeking a 20-year roof, rather than a
two-ply system originally, the jury did not err in awarding
damages to Campus for the amount which it cost to
purchase a replacement system which offers the same
protection which Campus originally sought.
Finally, Celotex contends that it is due a discount
because the roof in question gave five years of satisfactory
service, or in other words, performed satisfactorily
for 25 per cent of its estimated life. After examining the
amount of the jury verdict, this court finds that Celotex is
entitled to relief. There is no dispute in the record that
Campus received satisfactory performance from its roof
for a number of years. In other words, the dispute is as
to the cost of the new roof. The roof in question was
found by the jury to have been represented as a 20-year
roof, more or less. It would not prejudice either party for
this court to conclude for the purposes of this issue that
the roof could reasonably be expected to last 20 years.
The exact length of satisfactory service is also incapable
of precise determination. Mr. Zuckerman testified that
the problem [**122] started with the leaking in 1973.
By December of 1973, Mr. Zuckerman had been called
down to inspect the situation. n119 The roof and building
were completed some time in 1968. It is reasonable to
assume that leaks were occurring for some time prior to
December, 1973. A reasonable estimate of the time of
satisfactory service is five years. Thus it appears that
Campus received the benefits of the Bond Ply roof for
approximately 25 per cent of its useful life.
n119. Testimony of Zuckerman, Transcript
at 120.
In order to accomplish justice, it is necessary that the
judgment for actual damages be reduced by 25% of the
cost of the roof, or $ 26,413.34. The practice of remittitur,
long accepted by the Supreme Court, n120 allows a
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 37
court to condition denial of a motion for a new trial upon
plaintiff filing a remittitur in a stated amount. See 11
Wright & Miller, Fed. Pract. & Proc. § 2815. Since
the jury award clearly exceeds that amount which the
jury could legally award, this court directs plaintiff to
[**123] file a remittitur in the amount of $ 26,413.34,
or in the alternative, this court will be forced to grant the
motion for a new trial. Furthermore, by limiting the remittitur
to that amount which is "clearly excessive,"
plaintiff is not deprived of his right to a jury trial.
Dimick v. Schiedt, 293 U.S. 474, 55 S. Ct. 296, 79 L. Ed.
603 (1935).
n120. E. g. Northern Pac. R. Co. v. Herbert,
116 U.S. 642, 646, 6 S. Ct. 590, 592, 29 L.
Ed. 755 (1886); Arkansas Valley Land & Cattle
Co. v. Mann, 130 U.S. 69, 72, 9 S. Ct. 458, 32 L.
Ed. 854 (1889); Linn v. United Plant Guard
Workers of America, Local 114, 383 U.S. 53, 65,
86 S. Ct. 657, 664, 15 L. Ed. 2d 582 (1956).
PUNITIVE DAMAGES
The existence of two punitive damage verdicts in
this case raises the controversial [*104] issue of the
wisdom of awarding punitive damages where there exists
the possibility that multiple plaintiffs may recover multiple
punitive damages verdicts against the same defendant
in the future. Against the need for punitive damages to
[**124] deter proscribed behavior, manufacturers have
raised the specter of "overkill" where a mass manufacturer
suddenly faces continuing liability in punitive
damages for a management decision which affected
hundreds or thousands of potential plaintiffs. The court
has been fully briefed on the policy issues and constitutional
problems involved with the award of multiple punitive
damages.
Punitive Damages In South Carolina
That the State of South Carolina approves of punitive
damages is beyond dispute. Recognition of the
doctrine in South Carolina dates back to the 18th century,
when exemplary damages were awarded in the case
of Genay v. Norris, 1 S.C.L. (1 Bay) 6 (1784). n121 In
the more recent case of Rogers v. Florence Printing Co.,
233 S.C. 567, 106 S.E.2d 258 (1958), the Supreme Court
scanned 200 years of case law in this state before concluding
that punitive damages are part of the public policy
of South Carolina. 233 S.C. at 574, 106 S.E.2d 258.
n121. Genay, in which the plaintiff became
ill after consuming a glass of wine containing a
large quantity of Spanish fly that the defendant

[**125]
had added as a practical joke, appears to be the
first reported punitive damages decision in this
country.
[HN40] South Carolina, as do most other jurisdictions,
requires misconduct above and beyond mere negligence
or gross negligence to entitle a plaintiff to punitive
damages. In the case of Cox v. Coleman, 189 S.C.
218, 200 S.E. 762 (1938), the Supreme Court stated:
"There must be malice, ill will, a conscious indifference
to the rights of others, or a reckless disregard thereof to
justify an award of punitive damages." Id. at 221, 200
S.E. 762. Accord, Stonehocker v. General Motors Corporation,
587 F.2d 151, 158 (4th Cir. 1978). In later
cases, the Supreme Court declared that a party may be
entitled to punitive damages when he proves: "Wanton,
willful or malicious invasion of one's rights." Gilbert v.
Duke Power Co., 255 S.C. 495, 179 S.E.2d 720 (1971);
Hinds v. United Ins. Co., 248 S.C. 285, 149 S.E.2d 771
(1966).
[HN41] While punitive damages will not be awarded
for mere gross negligence, negligence which is "so
gross or reckless of consequences as to imply or assume
the nature of a wantonness, willfulness, or recklessness"
will support an award of punitive damages. Hicks v.
McCandlish, 221 S.C. 410, 415, 70 S.E.2d 629, 631
(1952).
Celotex contends that Campus and Fort failed to
meet the burden [**126] of proof for punitive damages.
The jury disagreed with Celotex, and so does this court.
In South Carolina, "[HN42] a corporation is liable to
respond in exemplary damages for the misconduct of an
agent ...". Palmer v. Railroad, 3 S.C. 580, 597-600
(1872); Johnson v. Atlantic Coastline R.R., 142 S.C. 125,
140 S.E. 443 (1927). The evidence is capable of the inference
that the corporation, through the acts of its
agents, knew of the defective nature of Bond Ply yet
continued to sell the material because of its profitability.
The evidence presented at the trial also established that
Celotex engaged in fraudulent misconduct, failed to test
its product adequately, represented Bond Ply to have a
given longevity even though Celotex knew it did not, and
failed to warn consumers of product defects. Furthermore,
the jury found Celotex guilty of a conscious disregard
of its duty by failing to test Bond Ply before putting
it on the market. This finding of gross negligence imposed
upon the jury a duty to return a verdict of punitive
damages. Sample v. Gulf Refining Co., 183 S.C. 399, 191
S.E. 209 (1937); Dagnall v. Southern Ry., 69 S.C. 110,
48 S.E. 97 (1903); Beaudrot v. Southern Ry., 69 S.C.
160, [**127] 48 S.E. 106 (1904). In light of the above,
this court finds that punitive damages were proper in this
case.
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 38
This conclusion is supported by the traditionally
high standard to which the South Carolina Supreme
Court has held sellers. As the Fourth Circuit Court of
Appeals has commented:
[*105] . . . The pronouncements
on products liability emanating from the
highest court of (South Carolina) clearly
demonstrated a desire to protect consumers
and correspondingly to impose stringent
duties on sellers.
Smith v. Regina Mfg. Corp., 396 F.2d 826, 827-9 (4th
Cir. 1968).
Assuming that the standard for punitive damages
was met, Celotex contends that the verdicts are so grossly
excessive as to show that the jury was motivated by
passion, partiality, or prejudice, and that this requires a
new trial. Aaron v. Hampton Mtrs., Inc., 240 S.C. 26, 124
S.E.2d 585 (1962); Mork v. Atlantic Coastline Ry. Co.,
227 S.C. 245, 87 S.E.2d 830 (1955); Vernon v. Atlantic
Coastline Ry. Co., 221 S.C. 376, 70 S.E.2d 862 (1952).
In deciding whether or not the awards of $ 500,000 and $
125,000 are excessive, this court must inquire into the
function which punitive damages are intended to serve.
[**128]
Probably the classic analysis of punitive damages
was undertaken by Professor Clarence Morris almost
fifty years ago in his law review article entitled, "Punitive
Damages in Tort Cases." n122 Morris stated that one
of the principal reasons for extracting compensatory
damages from the defendant is to admonish him and others
not to engage in similar conduct in the future. Since
the admonishment is only effective where the conduct is
capable of being corrected, damages are only awarded
where there has been negligence or fault, rather than
reasonable conduct which had an unforeseeable result.
n123 However, as the name indicates, compensatory
damages simply compensate: they do not take the defendant's
wealth or other factors into consideration.
Therefore, the advent of exemplary damages provided a
much better tool for fine tuning the proper admonition
which a particular defendant needs.
n122. 44 Harv.L.Rev. 1173 (1931).
n123. Of course, with the advent of strict liability
in tort, Restatement 2d, Torts, § 402a, the
modern function of damages has been expanded
to cover the fairer loss distribution by an innocent
manufacturer as compared to an innocent consumer
or victim. See S.C.Code Ann. § §
15-73-10 et seq. (1976).

[**129]
It must be noted that deterrence and warnings to
others are not the only purposes which punitive damages
serve in South Carolina. The cases speak in terms of
vindicating a private right. In other words, punitive
damages serve as a type of private revenge which is carried
out in the courts rather than through duels or in back
alleys. Watts v. South Bound R. Co., 60 S.C. 67, 38 S.E.
240 (1900); Beaudrot v. Southern R. Co., 69 S.C. 160, 48
S.E. 106 (1904); Davenport v. Woodside Cotton Mills
Co., 225 S.C. 52, 80 S.E.2d 740 (1954). In Johnson v.
Atlantic Coast Line Railroad Co., et al., 142 S.C. 125,
140 S.E. 443, 447 (1927), the South Carolina Supreme
Court said:
[HN43] Compensatory damages relate
mainly to the situation of the injured
party. * * * Exemplary damages have
relation to the injured party in only one
respect, to vindicate his right, recklessly,
willfully, maliciously, or wantonly invaded.
* * * One of the chief purposes in
awarding damages of this class is to punish
the wrongdoer, not only to prevent by
him a recurrence of the wrongful act, but
to deter others from conduct of the same
or similar kind. They are not intended for
the sole good of the injured party.
[HN44] Punitive [**130] damages also serve to
compensate the victim for his attorneys' fees, which are
normally taken out of his compensatory damage verdict,
and for other expenses for which the jury does not award
compensatories. See, Mock v. Atlantic Coastline R. Co.,
227 S.C. 245, 267, 87 S.E.2d 830, 840 (1955); Owen,
Punitive Damages in Products Liability and Litigation,
74 Mich.L.Rev. 1258, 1295 (1976).
[HN45] In the ascertainment of punitive damages,
there is no exact monetary standard which can be used as
a measure. Johnson v. Atlantic Coast Line Railroad
Co., et al., 142 S.C. 125, 140 S.E. 443 (1927). There is
no formula for punitives as the amount to be awarded is
peculiarly within the judgment and discretion of the jury,
subject to [*106] the supervisory power of the trial
judge over jury verdicts. Gilbert v. Duke Power Co.,
255 S.C. 495, 179 S.E.2d 720, 723 (1971). The main
things to be considered are the character of the tort
committed, the punishment which should be meted out
therefor, and the ability of the wrongdoer to pay. Johnson,
140 S.E. at 453.
In the instant case, the verdict certainly does not indicate
prejudice, caprice or passion. Nor does it indicate
undue liberality on the part [**131] of the jury. Nowhere
in the action was there any evidence of undue
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 39
haste or submission to passion or prejudice. The verdicts
which the jury brought in, although large when seen in a
vacuum, were much smaller than the liberal South Carolina
approach to products liability might have allowed as
a deterrent against future proscribed actions on the part
of Celotex and other corporations like it. Clearly, Jim
Walter Corporation (Celotex) is in no danger of bankruptcy.
The admonitory function of punitive damages does
not lend itself to formulation. For one thing, a survey of
South Carolina cases indicates that there has never been
an agreement on ratios. There is no definite mathematical
rule as to the proportion which punitive damages should
bear to actual damages. Eaddy v. Greensboro-Fayetteville
Bus Lines, 191 S.C. 538, 5 S.E.2d 281,
283 (1939). In the case of Perry v. United Ins. Co. of
America, 262 S.C. 351, 204 S.E.2d 573 (1974), the Supreme
Court affirmed the jury verdict awarding $ 86.10
actual damages and $ 5,000.00 punitive damages in a
fraudulent conversion case. In a case where South Carolina
specifically rejected the application of a ratio rule
which would require limitation [**132] upon the
amount of punitive damages, the ratio of actual damages
to the punitive damage award was approximately 1:4,
greater than in this suit. See, e.g., Rogers v. Florence
Printing Co., 233 S.C. 567, 106 S.E.2d 258 (1958). On
the other hand, nothing would prevent a jury from giving
greater actual damages than punitive damages. See, e.g.,
Cammer v. Atlantic Coast Line Ry. Co., 214 S.C. 71, 51
S.E.2d 174 (1948) ($ 25,000 actuals; $ 5,000 punitives).
The refusal to specify a ratio is due to the need to
individualize punitive damage verdicts. One must look
to behavior, not to results, to determine the need to admonish,
and one must look to the wealth of the defendant
to determine the amount which must be awarded to accomplish
that result. Patterson v. Bogan, 261 S.C. 87,
198 S.E.2d 586, 590 (1973).
Although the many purposes punitive damages serve
are very relevant to the public policy issue of punitive
damages in multiple plaintiff cases, the deterrence function
serves as the basis for limiting damages. n124 If one
were to award punitive damages solely on the basis of
revenge, there would be no limit on the amount of punitives
which could justifiably be awarded. However, it is
[**133] well-known that the purpose of punitives is not
to "bankrupt" a defendant, but simply to deter him and
others from similar conduct in the future. Collins v.
Brown, 268 F. Supp. 198 (D.C.D.C.1967); Herman v.
Hess Oil Virgin Islands Corp., 379 F. Supp. 1268
(Vir.Is.Dist.1974); Wynn Oil Co. v. Purolator Chem.
Corp., 403 F. Supp. 226 (M.D.Fla.1974); Holmes v. Hollingsworth,
234 Ark. 347, 352 S.W.2d 96 (1961); Levine
v. Mills, 114 A.2d 546 (D.C.Mun.App.1955); Miller v.
Schnitzer, 78 Nev. 301, 371 P.2d 824 (1962); Town of

Jackson v. Shaw, 569 P.2d 1246 (Wyo.1977). Thus the
extent of the defendant's wealth constitutes a limit on the
amount of damages which can be awarded. Patterson v.
Bogan, 261 S.C. 87, 198 S.E.2d 586, 590 (1973). Further,
lowering the award of damages depends on the type of
conduct involved. Patterson, supra. Certainly the conduct
of an automobile manufacturer who calculates that
it is more profitable to pay off wrongful death and personal
injury claims than to modify a fuel compartment
which is known to be defective, is more heinous than the
conduct involved here which did not threaten [*107]
the lives of anyone involved, nor did it reach the coldblooded
calculation [**134] of the automobile manufacturer's
accountants and engineers. Nonetheless, there
are many decisions which have awarded punitive damages
for property damage. See e.g., Boehm v. Fox, 473
F.2d 445 (10th Cir. 1973); Standard Oil Co. v. Gunn,
234 Ala. 598, 176 So. 332 (1937); Boise Dodge, Inc. v.
Clark, 92 Idaho 902, 453 P.2d 551 (1969); Johnson v.
Allen, 448 S.W.2d 265 (Mo.App.1969); and Craig v.
Spitzer Motors, 109 Ohio App. 376, 160 N.E.2d 537
(1959).
n124. See "Developments in the Law Corporate
Crime; Regulating Corporate Behavior
Through Criminal Sanction," 92 Harv.L.Rev.
1227, 1370 (1979).
What incentives are there in the marketing situation
which would motivate Celotex to change its behavior?
Of course, there are none now, because Celotex has taken
Bond Ply off the market. However, it may be that the
jury felt it necessary that Celotex and others know that
marketing decisions of the type made here will not be
tolerated in the future.
The evidence indicates that from 1964 through 1972
and 1973 when the [**135] product was taken out of its
manual, Celotex produced almost two billion square feet
of Bond Ply. n125 The profitability of this product was,
in a ball park figure, approximately twice that of the regular
four-ply system of which it was sold as the equivalent.
n126 It does not take much imagination to realize
that accountants would have little trouble in justifying
the continued marketing of this product if the only deterrent
were to be compensatory damages. For one thing,
many consumers would never file a suit even if their
roofs were defective. For another, many of the suits
filed would never reach the verdict stage but would be
settled for a compromised figure.
n125. Transcript, page 1014.
n126. Transcript, page 2023.
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 40
Until the product acquired a reputation which forced
it to be removed from the market, there would be little or
no incentive to prevent the marketing of defective products.
It is in precisely this situation, where market conditions
and compensatory damages are inadequate to
deter [**136] the marketing of a defective product, that
punitive damages serve their greatest function. Doralee
Estates v. Cities Service Oil Co., 569 F.2d 716, 723 (2d
Cir. 1977).
Punitive damages add an "open-ended" factor to the
equation which company officials must take into consideration.
n127 A manufacturer will be aware of the profitability
of his product but will be unable to determine
whether his potential liability will range from thousands
to millions to even tens of millions of dollars. Logically,
this forces a prudent manufacturer intent on maximizing
profits to hesitate before marketing a known defective
product, or an untested product. Furthermore, by
absorbing many of the profits which were made from
producing products with less testing and fewer safety
measures, punitive damages help to prevent decisions
which dilute safety measures.
n127. Doralee Estates v. Cities Service Oil
Co., 569 F.2d 716, 723 (2d Cir. 1977).
Thus, it becomes clear in this situation that the inclination
on the part of a manufacturer [**137] to
change his behavior is largely determined by the prospect
of punitive damages. Were the $ 500,000 and $
125,000 verdicts greater than those which were needed to
accomplish this purpose? This court thinks not. At the
trial, attorneys for defendant stipulated that the net worth
of Jim Walter Corporation, of which Celotex is a wholly
owned subsidiary, was $ 1,500,000,000.00 ($ 1.5 billion).
n128
n128. Plaintiff originally requested financial
data on Celotex Corporation. However, attorneys
for defendant were unable to provide this
information. Therefore, it was stipulated that the
net worth of the Jim Walter Corporation would
serve as a basis for punitives. Transcript at
2260.
After subtracting the liabilities from this gross asset
figure, the parties stipulated that the net worth was $
538,115,000.00 based on the most recent annual report of
the Jim Walter Corporation available in the courtroom.
The comparison of the verdict of $ 500,000 with the net

worth of the defendant, produces a ratio of 1:1,000
[**138] or 1/10th of 1 per cent of that net worth. The
$ 125,000 [*108] verdict produces a ratio of 1:4,000
or 1/40th of 1 per cent of the net worth. If a verdict of
similar proportion were rendered against a financially
well-to-do citizen with a net worth of $ 100,000, the
amount of punitive damages to Campus would be $ 100,
and the amount to Fort would be $ 25.
The frequently quoted rule is "that [HN46] for a
verdict to be excessive it must be so much so as to strike
mankind, at first blush as being beyond all measure, unreasonable,
outrageous ... or extravagant for the court to
undertake to draw the line for it has no standard by
which to ascertain the excessiveness." Haselden v. Atlantic
Coastline R. Co., 214 S.C. 410, 53 S.E.2d 60, 66
(1949). These verdicts hardly reach the level which
would make mankind blush. The jury deliberated two
days before bringing in these verdicts, and this court
would note that during the trial the jurors were unusually
attentive.
Punitive Damages In Products Liability Litigation
Initially, Celotex challenges the punitive damages
award under the Commerce Clause, the Due Process
Clause, the Cruel and Unusual Punishment Clause of the
Eighth and Fourteenth [**139] Amendments, and the
Double Jeopardy Clause of the Fifth and Fourteenth
Amendments. None of these arguments were raised at
the directed verdict stage of trial; consequently, none can
be raised by motion for judgment n. o. v. which is but a
renewal of a motion for directed verdict. House of
Koscot Development Corp. v. American Line Cosmetics,
Inc., 468 F.2d 64 (5th Cir. 1972). Glazer v. Glazer, 374
F.2d 390 (5th Cir. 1967), cert. denied, 389 U.S. 831, 88
S. Ct. 100, 19 L. Ed. 2d 90 (1967). Moreover, none of
Celotex's grounds in its new trial motion is sufficiently
specific. Harkins v. Ford Motor Co., 437 F.2d 276 (3d
Cir. 1970). Celotex's assignments of error in its motion
for a new trial make no mention of any constitutional
issues arising out of the award of punitive damages; rather
these issues were raised for the first time by brief,
more than three months after service of the motion for
new trial. In any event, the contentions of a constitutional
nature which are now being raised by memorandum constitute
new grounds. They were not embodied in the
form of any request to charge; nor were they presented as
an objection to the charge given to the jury. In short,
they are now appearing [**140] for the first time.
[HN47] A new trial should not be granted on the basis of
a theory which was not urged at trial although it could
have been. Palmer v. Stokely, 259 F. Supp. 776
(D.C.Okl.1966). The purported constitutional bases
should not be permitted as grounds at this stage for the
motion for a judgment n. o. v. or, in the alternative, for
the motion for a new trial. n129
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 41
n129. In any event, this court is not persuaded
by the constitutional principles which Celotex
draws upon: that its business in interstate commerce
should not be subjected to a risk not imposed
on intrastate commerce; that the doctrine of
punitive damages suffers from an unconstitutional
"vagueness" in that it does not have notice of
the proscribed conduct; that multiple punitive
damage awards constitute "cruel and unusual"
punishment; and that it is placed in double jeopardy
by the prospect of multiple awards.
Assuming, arguendo, that the Commerce
Clause, multiple taxation cases relied upon by
Celotex can be used to test punitive damage
awards, the awards were, as noted earlier, were in
no way proven to be oppressive or unreasonable
or a burden on interstate commerce. Bibb v.
Navajo Freight Lines, Inc., 359 U.S. 520, 79 S.
Ct. 962, 3 L. Ed. 2d 1003 (1959) Pike v. Bruce
Church, Inc., 397 U.S. 137, 90 S. Ct. 844, 25 L.
Ed. 2d 174 (1970).
Nor does Celotex's due process claim possess
merit. The imposition of punitive damage
awards, though penal in nature, does not approach
the severity of criminal sanctions. See
Friendly, Criminal Safeguards and the Punitive
Damage Defendant, -- - U.Chi.L.Rev. 408
(1966). Indeed, the act of awarding compensatory
damages is also somewhat penal in nature.
Punitive Damages, 41 N.Y.U.L.Rev. 1158, 1178
(1966). Finally, Celotex has had the benefit of
200 years of South Carolina decisions detailing
standards of behavior which will give rise to punitive
damages.
In arguing that successive punitive damage
verdicts subject it to cruel and unusual punishment,
Celotex relied upon a suggestion in a concurring
opinion by Justice Frankfurter that the
Eighth Amendment could protect a defendant
against multiple civil penalties. United States v.
Hess, 317 U.S. 537, 556, 63 S. Ct. 379, 390, 87 L.
Ed. 443 (1942). However, the Supreme Court has
recently ruled that the Eighth Amendment is generally
limited to the conditions of a criminal sentence.
Ingraham v. Wright, 430 U.S. 651, 97 S.
Ct. 1401, 51 L. Ed. 2d 711 (1977). Therefore, this
court finds that the Eighth Amendment would not
apply here.
Finally, Celotex is not subjected to double
jeopardy since each event would constitute a separate
"offense."

[**141]
[*109] This court is convinced of the efficacy of
punitive damage awards in products liability cases.
However, this is not to say that there have not been concerns
voiced with this approach. Celotex has discussed
at length the "overkill" argument.
In one of the early cases to deal with this subject,
Roginsky v. Richardson-Merrell, Inc., 378 F.2d 832 (2d
Cir. 1967), Judge Friendly in some very perceptive
obiter dicta raised many of the fears of using punitive
damages in this area. Roginsky was one of several hundred
cases brought against a drug manufacturer for personal
injuries, including cataracts, attributed to defendant's
anti-cholesterol drug MER/29. Evidence at the
trial revealed grievous misconduct on the part of defendant
in the marketing of this drug, including inadequate
testing, suppression of unfavorable test results,
intentional misrepresentations to the FDA, and continued
marketing of the drug in spite of known serious and injurious
side effects. Judge Friendly discussed the impracticability
of limiting the amount of punitive damage recoveries
where hundreds of plaintiffs sue a defendant
with each plaintiff claiming punitive damages in his different
case. [**142] Also, Judge Friendly noted that
products liability insurance blunts the deterrent effect of
damages, thus undercutting the rationale for punitives in
the first place. He also raised the question of whether
the innocent shareholder should suffer for the sins of
management. Finally, Judge Friendly noted that the
court should be careful not to chill the development of
new products.
Roginsky has indeed pointed out many of the problems
which accompany awards of punitive damages
where there are multiple plaintiffs. However, it should
be remembered that Judge Friendly was a pioneer in this
area, looking ahead to an uncertain future, which contained
uncertain fears. n130 Twelve years have now
passed, and many of the fears expressed by Judge
Friendly have simply not been realized. Based on the
wisdom of experience, a court which might have been
hesitant to assess punitive damages in 1967, might well
be willing to do so in 1979. In fact, the Second Circuit,
in an opinion joined by Judge Friendly some 10 years
later, affirmed an award of $ 200,000 punitive damages
against an oil company arising out of a large oil spill, a
situation which might result in multiple plaintiffs.
Doralee Estates [**143] v. Cities Service Oil Co., 569
F.2d 716 (2d Cir. 1977). Other cases allowing punitive
damages in a potential multiple plaintiff situation are:
Gillham v. Admiral Corp., 523 F.2d 102 (6th Cir. 1975)
($ 100,000 punitive and $ 50,000 attorney's fees); Hoffman
v. Sterling Drug, Inc., 485 F.2d 132 (3rd Cir. 1973)
(reversing lower court which refused to submit punitive
damage issue to the jury); Drake v. Wham-O Mfg. Co.,
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 42
373 F. Supp. 608 (E.D.Wis.1974) (trial court refused to
strike request for punitive damages).
n130. Two months after the Roginsky decision
setting aside punitive damage in that the evidence
was insufficient to warrant a finding of
recklessness required under New York law for
such an award, the California courts, upon the
same set of facts concerning the development of
MER/29, approved an award of $ 250,000 punitive
damages under California law. Toole v.
Richardson-Merrell, Inc., 251 Cal.App.2d 689,
60 Cal.Rptr. 398, 29 A.L.R.3d 988 (1967).
This court is unconvinced that the "specter of overkill"
[**144] is anything more than just that an unrealized
phantom or mental image. Moreover, the supervisory
power of trial courts over jury verdicts would be
sufficient in any event to prevent such an occurrence.
Many suggestions have been advanced to avoid this
theoretical fear. n131 However, the [*110] problem
with these suggestions is that the legal principles do not
exist to require that all cases be treated in the suggested
manners. While it may be that Congress and the State
legislature should address the situation, the suggested
procedures are neither necessary nor available to this
court in this case.
n131. One suggestion has been that each
plaintiff be apportioned his proper share of the
total amount of punitive damages which should
be awarded. This approach has the support of
taxation cases decided on the basis of the Commerce
Clause, involving the wrongful taxation of
property of interstate companies. There states
were allowed to apportion the amount of property
within their state and to tax their portion. Pullman's
Palace Car Co. v. Commonwealth of Pa.,
141 U.S. 18, 11 S. Ct. 876, 35 L. Ed. 613 (1891).
However, the problem with this approach to punitive
damages is that there is no given amount
from which to apportion the shares. Also, there
is the interest of society in striking the defendant
hard with the first bite, since later cases may not
reach a verdict.
Suggestions have come from many sources
that punitive damages and multiple claims cases
should be handled in class actions, but the complexities
of this approach are no less than the ordinary
complexities of Rule 23, Federal Rules of
Civil Procedure, as they now exist. Another
suggestion is that plaintiffs should be forcibly

[**145]
joined in one action in order that the jury might
consider the proper amount of total damages, thus
avoiding the danger of "overkill" in successive
suits. Yet another proposal has been to have a
double trial whereby, after liability is found
which would give rise to punitive damages, the
jury is given further facts such as the wealth of
the company, preceding verdicts, and other information
which is necessary to a fair assessment
of punitive damages. Perhaps the well-accepted
double trial in a death penalty case could act as a
prototype.
MOTIONS FOR COSTS AND ATTORNEYS'
FEES
Defendants Kahn and Fort have pending motions
before this court, seeking a determination of their entitlement
to attorneys' fees and costs in connection with
the defense of this action. Kahn filed a cross-claim
against Celotex seeking indemnity for any money owed
to Campus. n132 According to Kahn, included in this
indemnity action were damages in the form of attorneys'
fees. Fort successfully prosecuted a cross-action against
Celotex for fraud and specifically sought attorneys' fees
incurred as a result of this action. n133 Counsel for Fort,
Kahn, and Celotex agreed to remove this issue from the
province of the jury, preferring that the court decide the
issues of entitlement and amount. A review of the briefs
and the law pertaining to this issue has convinced this
court that Kahn and Fort are, in fact, entitled to partial
reimbursement for their costs and attorneys' fees.
However, due to the lack of information before this court
concerning the amount of such costs and fees, the parties
will be requested to submit affidavits of costs, expenses
and fees to the court for approval, subject to the objection
of defendant Celotex as to the amount. [**146]
n132. Kahn's "Answer to Amended Complaint
and Amended Crossclaim," filed March 22,
1977, stated "... and if this Defendant (Kahn)
should be found liable to plaintiff therefor, then
this defendant is entitled to indemnification
against the defendant Celotex Corporation in the
amount of such judgment, if any; together with
this defendant's costs and attorneys' fees in defending
this action.
n133. In its cross-claim for fraud, filed
March 15, 1977, Fort states in paragraph 14,
"That due to the failure of the Campus Sweater
and Sportswear roof, this defendant has incurred
substantial injury to its reputation as a quality
roofer, has lost time in investigating and defend-
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 43
ing this law suit, has incurred expense to undertake
an investigation of the cause of this roof
failure and substantial attorneys' fees and expense.
[HN48] It is generally held that where the wrongful
act of one party has involved another in litigation with a
third party, or placed them in such relation to a third
party as to make it necessary for [**147] him to incur
legal expenses to protect his interest, such should be
treated as the legal consequences of the original wrongful
act and may be recovered as damages. 45 A.L.R.2d
1183, 1187 (1956). Specifically, in actions of indemnity,
where the duty to indemnify is either implied by law or
arises under contract, reasonable attorneys' fees incurred
in resisting the claim indemnified against may be recovered
as part of the damages and expenses. 22 Am.Jur.2d
Damages § 166 (1965).
In this diversity case, the parties rely principally
upon Addy v. Bolton, 257 S.C. 28, 183 S.E.2d 708
(1971), which is the leading South Carolina case concerning
the right to attorneys' fees for defending an action
where a third party is held responsible. [*111]
Bolton and others owned a building in Greenwood which
they leased to Addy to operate as a jewelry store. Bolton
hired C. Y. Thomason Co., a general contractor, to
make repairs to the building. During the course of the
repairs, and allegedly due to Thomason's negligence, a
fire was started which damaged the merchandise of the
lessees. The lessees then brought suit against both the
owner/lessor and the general contractor, alleging their
joint [**148] negligent, careless and reckless acts. In
his answer, the owner alleged the sole negligence of the
contractor and filed a cross-action against the contractor
for indemnification, costs and attorneys' fees. A trial
court directed a verdict against the owner on its cross
complaint, and the jury returned a verdict against the
contractor only, thereby exonerating the owner from liability.
On appeal, the issue was whether the owner was
entitled to recover his costs and attorneys' fees incurred
in the successful defense of the action because they were
put to the necessity of defending themselves against the
lessee's claim by the tortious conduct of the contractor,
or by his breach of contract. The South Carolina Supreme
Court answered the question in the affirmative.
Quoting from the Am.Jur.2d article on damages cited
above, the Addy court said [HN49] to recover attorneys'
fees and costs, a party must meet three requirements:
(1) that it became involved in a legal dispute either
because of the other party's breach of contract or its
tortious conduct; (2) that the dispute was with a third
party; and, (3) that attorneys' fees were incurred. The
court stated, "We conclude that in actions of [**149]
indemnity, brought when the duty to indemnify is either

implied by law or arises under contract, and no personal
fault of the indemnitee has joined in causing the injury,
reasonable attorneys' fees incurred in resisting the claim
indemnified against may be recovered as part of the
damages and expenses." 183 S.E.2d at 710.
Celotex interprets Addy as embracing the minority
view that where a defendant has been initially charged
with his own independent acts of negligence, he is not
entitled to recover his attorneys' fees incurred in the defense
of such charge from the co-defendant ultimately
held liable to the plaintiff for all damages sustained.
Leingang v. Bottled Gas Corp., 332 F.2d 959 (7th Cir.
1974), n134 Krug v. Sterling Drug, Inc., 416 S.W.2d 143
(Mo.1967). n135 However the facts of Addy indicate that
the court intended to adopt the majority view. The
complaint in that action alleged independent acts of negligence
on behalf of both the defendant owner/lessor and
the defendant contractor. Paragraph 8 of their complaint,
alleged that plaintiff's damages were caused by
the "joint and concurrent" negligence of the defendants.
Paragraph 8 then goes on to allege negligence in "employing
[**150] and/or engaging unskillful agents,
servants and employees to undertake making said repairs
...."; and "employing agents and servants to undertake
said repairs that were inherently dangerous ...". These
allegations were sufficient to charge the owner [*112]
with negligence in hiring an alleged incompetent contractor,
which would constitute an independent act of
negligence alleged against the owner. n136 In spite of
this, the court allowed recovery of the costs and attorneys'
fees.
n134. Leingang was a personal injury action
brought against an installer of liquid petroleum
cylinders for failure to odorize the gas, resulting
in plaintiff's injuries. Defendant installer
brought a third party action against the supplier
of the gas. Upon settlement of the case, the installer
petitioned the court for assessment of attorneys'
fees against the supplier, and the court
did so. In reversing the court's award of such
counsel fees against the supplier, the Seventh
Circuit concluded that so long as the installer was
defending a part of its own alleged tort, it would
not be entitled to attorneys' fees against the supposedly
solely corporable co-defendant. 332
F.2d at 963.
[**151]
n135. In Krug, plaintiff brought an action
against a pharmacist and drug manufacturer for
injuries to her eyes caused by a defective eye
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
[**152]
Page 44
wash. At the conclusion of the evidence, the trial
court directed a verdict for the pharmacist and
a judgment was entered against the manufacturer
for the full amount of damages. The pharmacist
appealed as to the denial of its cross-claim for attorneys'
fees and the expenses of litigation, and
the Missouri Supreme Court affirmed the denial
of counsel fees. The Court noted that plaintiff
alleged a specific independent act of negligence
against the pharmacist and that it would be unjust
and unwarranted to require the co-defendant
manufacturer to bear the costs of the pharmacist
defending its own alleged actions of negligence.
416 S.W.2d at 156.
n136. Unfortunately, Addy seems to make
entitlement a jury question, subject to a ruling by
the trial court that the damages are too remote, as
a matter of law, to be caused by defendant's tortious
conduct. The parties in this case probably
followed the wiser course by removing these
technical and confusing issues from consideration
by the jury.
The basic theory of Addy was that attorneys' fees
should be treated as legal consequences of the original
act and therefore could be recovered as damages, provided
three requirements were met. However, a close
reading of Addy reveals certain additional requirements
which are basically procedural in nature. Because attorneys'
fees are treated as damages resulting from the
original wrongful act, Addy requires that the amount of
attorneys' fees be proved in court, a procedure which is
entirely different from that of requiring the trial judge to
award attorneys' fees. Thus, instead of the judge
awarding fees according to statutory formulas, as in civil
rights actions, the injured party must come forward with
proof as to the amount of damages he is entitled to. A
consequence of this approach is that there must be an
action existing in which attorneys' fees have been
claimed. But this court does not read Addy as requiring
the injured party to bring an indemnity action in a different
court at a different time, since to do so would be
an inefficient use of judicial time and energy, as well as a
burden on the parties. It seems clear that damages in the
form of attorneys' fees can be [**153] awarded in a
cross-claim which is joined with the original action.
South Carolina law is also clear in refusing attorneys'
fees to a party who occupies a plaintiff's position.
Townsend v. Singleton, 257 S.C. 1, 183 S.E.2d 893
(1971); Rimer v. State Farm Mut. Auto. Ins. Co., 248
S.C. 18, 148 S.E.2d 742 (1966); First National Bank of
Chillicothe v. McSwain, 93 S.C. 30, 75 S.E. 1106 (1912).
While it is just to recompense one for expenses which

are imposed upon an innocent party by the action of another
party in prosecuting a suit, a party who chooses to
bring a suit stands on entirely different footing. Finally,
the Addy court added the proviso from the case of Atlantic
Coast Line R.R. Co. v. Whetstone, 243 S.C. 61, 132
S.E.2d 172, that no personal negligence of the claiming
party may have joined in causing the injury.
Applying the above principles to this case requires
breaking Fort's involvement down into three separate
actions. First, plaintiff Campus prosecuted an action
against Fort which was dismissed at the close of plaintiff's
case. Although Celotex argues that the nonsuit
awarded against plaintiff means that Campus simply
failed to prove its case, this court is of the opinion
[**154] that Fort is entitled to the attorneys' fees incurred
in the defense of this action. The final verdict of
the jury found Celotex to be the cause of the roof failure,
not Fort. Thus the nonsuit in combination with the jury
verdict is sufficient evidence that Fort's negligence did
not contribute to the damages. In the second action,
Fort prosecuted a cross-claim against Celotex in which
Fort occupied the position of plaintiff. The expenses
incurred as a result of that action, of course, would not be
compensable under South Carolina law. Finally, defendant
Kahn prosecuted a cross-claim for indemnity
against Fort for which Fort incurred expenses in defending.
This court finds costs and attorneys' fees to be the
proximate result of Celotex's actions which should be
recoverable. In light of Fort's specifically seeking attorneys'
fees in its fraud action against Celotex, Fort was
in a proper procedural position to allege and prove its
damages.
Due to the joinder of the various claims, defendant
Kahn occupied the position of defendant in one action
and plaintiff in another. Those expenses which were
incurred as a result of the defense of the implied warranty
action by plaintiff, which [**155] was dismissed at
the end of all of the evidence, represent recoverable
costs. The same finding must be made in regard to the
515 F. Supp. 64, *; 1979 U.S. Dist. LEXIS 9493, **;
33 U.C.C. Rep. Serv. (Callaghan) 547
Page 45
[*113] negligence and express warranty actions prosecuted
by Campus against Kahn, since the jury's final verdict
found that Celotex was at fault, thus negating the
possibility of negligence on the part of Kahn. However,
as in the case of Fort, Kahn may not recover damages for
the prosecution of its indemnity action against Fort and
Celotex where it occupied the position of plaintiff. Finally,
although Kahn's indemnity cross-claim did not
expressly mention attorneys' fees, it did seek indemnity
for damages incurred as a result of Celotex's tortious and
wrongful conduct, of which attorneys' fees are a part.
As such, the procedural requirements for prosecuting an
indemnity action for attorneys' fees have been met, and
an award is proper in this case.
In summary, it is the conclusion of this court that
defendants Fort and Kahn are entitled to costs and attorneys'
fees as a result of defending their actions in this
case. The parties are hereby directed to provide this
court with affidavits of costs, expenses and fees, upon
which this court will act, subsequent [**156] to the
filing of any objections as to the amount by defendant
Celotex.
CONCLUSION
This court finds that the evidence at trial was sufficient
to support the findings of the jury. Any errors
which occurred, as they always will at trial, were not so
great as to prejudice Celotex's right to a fair trial. Due
to a clear error on the record, the jury's award to Campus
for actual damages must be reduced by $ 26,413.34 or a
new trial granted. Plaintiff is directed to file a remittitur
in the appropriate amount. If this remittitur is not filed
with the court, a new trial will be granted. In that the
two punitive damage awards were neither excessive nor
unconstitutional, the motions as to these verdicts are denied.
AND IT IS SO ORDERED.

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PRIOR HISTORY: [***1]
52 A.D.2d 493, *; 384 N.Y.S.2d 804, **;
1976 N.Y. App. Div. LEXIS 12037, ***
LEXSEE 52 A.D.2D 493
Coopers & Lybrand, Respondent, v. Samuel Levitt et al., Appellants
[NO NUMBER IN ORIGINAL]
Supreme Court of New York, Appellate Division, First Department
52 A.D.2d 493; 384 N.Y.S.2d 804; 1976 N.Y. App. Div. LEXIS 12037
Appeal from an order of the Supreme Court at Special
Term (Thomas J. Hughes, J.) entered February 26,
1976 in New York County, which denied a motion by
defendants to dismiss the action.
DISPOSITION:
Order, Supreme Court, New York County, entered
on February 26, 1976, unanimously reversed, on the law,
and the motion to dismiss the complaint granted. Appellants
shall recover of respondent $ 60 costs and disbursements
of this appeal.
LexisNexis(R) Headnotes
COUNSEL:
Martin R. Gold of counsel (Charles [***4] B.
Ortner with him on the brief; Gold, Farrell & Marks,
attorneys), for appellants.
William M. Barron of counsel (Powell Pierpoint
with him on the brief; Hughes Hubbard & Reed, attorneys),
for respondent.
JUDGES:
Stevens, P. J. Markewich, Kupferman, Murphy and
Capozzoli, JJ., concur.
OPINIONBY:
STEVENS
OPINION:
[*494] [**805] This is an appeal by defendants
from an order of the Supreme Court entered February 26,
1976, in New York County (Hughes, J.), which denied
their motion to dismiss the complaint. The complaint
alleges five causes of action containing four theories
upon which the plaintiff seeks recovery, viz. fraud, mali-
June 22, 1976
Page 1
cious prosecution, champerty and prima facie tort. Defendants
moved to dismiss on the grounds of insufficiency,
another action pending in the Federal court between
the same parties for the same causes, Statute of
Limitations, res judicata, collateral estoppel, forum non
conveniens, lack of jurisdiction over the defendants, and
that pursuant to Illinois law, which the defendants claim
governs, the release of one tort-feasor released all.
In order to understand this case, a brief background
of facts is essential. The defendants Levitt [***5]
were the stockholders and officers of Levitt Manufacturing
Corporation (LMC), a New York corporation engaged
in the manufacture and sale of [*495] lawn
mowers, with its principal place of business in the State
of Indiana. By the terms of an agreement dated October
27, 1967, they undertook to sell LMC to Poloron Products,
[**806] Inc. (Poloron), a New York corporation.
The sale was consummated December 1, 1967. The
price agreed upon was $ 11,200, plus an amount of
Poloron stock to be determined on the basis of future
earnings of LMC plus payment of a personal debt of
Samuel Levitt in the amount of $ 109,000, and the assumption
of certain personal liabilities of the Levitts.
After the purchase by Poloron of LMC, the name of
LMC, its new subsidiary, was changed to Poloron Products
of Indiana, Inc. (Poloron-Indiana). Samuel Levitt
entered into a sales representative agreement with
Poloron-Indiana, which agreement was assigned to Dynamark
Corp. (Dynamark) which was formed by the
Levitts. At the time of the sale of LMC to Poloron, the
balance sheet for the sale of LMC was prepared by
Coopers & Lybrand (Lybrand), the plaintiff herein.
Thereafter, it was allegedly discovered [***6] that the
balance sheet prepared by Lybrand overstated the net
worth of LMC.
Poloron then brought suit in the Supreme Court of
the State of New York against the Levitts and withheld
or caused to be withheld certain commissions due Dynamark,
whereupon Dynamark, represented by defendant
George Feiwell, an Illinois attorney, sued
Poloron-Indiana in the United States District Court for

the Northern District of Indiana to recover the withheld
commissions. Dynamark's complaint was later amended
to add Lybrand as a party defendant and
Poloron-Indiana's motion to transfer the suit to the United
States District Court for the Southern District of New
York was granted in 1971. Thereafter, all parties except
Lybrand settled their differences. In the settlement
agreement, it was agreed that Poloron and
Poloron-Indiana would pay Dynamark one half of the
commissions which had been withheld and the claims of
Dynamark were assigned to Poloron. Poloron undertook
to sue Lybrand on the claims assigned to it and to
pay 75% of the proceeds of any recovery to Dynamark
which agreed to bear 75% of the cost of the prosecution
of the suit. The State action was discontinued and a
stipulation of voluntary [***7] dismissal was signed by
all parties in the Federal action including Lybrand,
whose signing was without prejudice.
Subsequently, Poloron sued Lybrand in the United
States District Court for the Northern District of Illinois,
but before an answer could be served, Poloron filed a
notice of voluntary [*496] dismissal without prejudice.
In that action Feiwell was the attorney for
Poloron.
Some nine months later, Poloron, with Feiwell acting
as counsel for the attorneys of record, brought a third
suit in the United States District Court for the Southern
District of New York virtually identical to the second
suit and Lybrand, as defendant, filed a third-party complaint
against Dynamark, the Levitts and Feiwell seeking
actual and exemplary damages. Lybrand's motion to
dismiss this third suit upon the grounds of res judicata
was granted and the court declined further jurisdiction
over Lybrand's third-party action. Lybrand then commenced
the present action in the Supreme Court, New
York County, seeking actual and exemplary damages
upon the grounds heretofore stated.
In its first cause of action for fraud, Lybrand claims
that defendants falsified and inflated the books and records
[***8] of LMC, thereby deceiving Lybrand in its
examination of the financial statements and deceiving
Poloron in the sale. Lybrand asserts that the fraud and
deceitful acts of defendants caused it to be subjected to a
series of groundless suits, resulting in a loss to it of valuable
personnel time and the incurrence of substantial
attorneys' fees and other expenses in defending itself.
Counsel fees and the legal expenses necessarily incurred
in carrying on a lawsuit are not generally considered
items of expense recoverable as general or special
damages ( Miss Susan, Inc. v Enterprise & Century Undergarment
Co., 270 App Div 747, 748, affd 297 NY
512). This is true in the absence of statutory liability or
contractual provision so providing whether the action be
52 A.D.2d 493, *; 384 N.Y.S.2d 804, **;
1976 N.Y. App. Div. LEXIS 12037, ***
Page 2
in contract ( Rollin v Grand Store Fixture Co., 231 App
Div 47, 50) [**807] or in tort where the action does
not involve elements of malice ( Lurman v Jarvie, 82
App Div 37, 46, affd 178 NY 559). A well-recognized
exception to the rule holds: "If, through the wrongful act
of his present adversary, a person is involved in earlier
litigation with a third person in bringing or defending an
action to protect his interests, [***9] he is entitled to
recover the reasonable value of attorneys' fees and other
expenses thereby suffered or incurred [citations omitted]"
( Shindler v Lamb, 25 Misc 2d 810, 812, affd 10
AD2d 826, affd 9 NY2d 621). Such expenses should be
reasonable and the natural and necessary consequences
of the defendant's acts.
In the case before us, Lybrand asserts that these defendants
[*497] instituted or prosecuted the three suits
against it. However, this obviously is not an instance of
litigation with a third party and Lybrand fails to demonstrate
that it falls within the exception to the general rule.
Thus, the first cause of action based on fraud should not
stand since no cognizable claim for damages is alleged.
Turning now to the second cause of action based on
malicious prosecution, that cause should be dismissed
also since there is no allegation that the proceeding complained
of was finally determined in Lybrand's favor (
Hauser v Bartow, 273 NY 370, 375; see, also, Burt v
Smith, 181 NY 1, 5). The recent determination of the
United States Circuit Court of Appeals, Second Circuit,
dated May 18, 1976 (Docket No. 75-7271), to which our
attention was directed, denied a [***10] petition for a
rehearing of its earlier reversal of the dismissal of the
complaint in the pending Federal court action against
Lybrand. Such reversal does not seem to negate the
earlier observation of the United States District Court to
the effect that Lybrand failed to establish that the suit
was brought vexatiously or in bad faith. Nor is there
stated a cause of action for abuse of process, since it is
not demonstrated that there was a perversion of process
after issuance for an illegal or improper purpose (
Metromedia, Inc. v Mandel, 21 AD2d 219, 222-223, affd
15 NY2d 616).
In its third and fourth causes of action, Lybrand asserts
that the assignment of the Levitts' and Dynamark's
purported claim against it under the circumstances set
forth in paragraph 23 of its complaint (which included
the retention of Feiwell to file a new suit, and the agreed
division of any recovery) was champertous, unlawful,
and in violation of section 489 of the Judiciary Law.
Section 489 deals with the purchase of claims by corporations
or collection agencies with the intent and for the
purpose of bringing an action thereon. The section does
not create a private claim for damages. Champerty is
[***11] a species of the common-law generic offense
of maintenance. It involves the unlawful maintenance

of a suit in consideration of a bargain for some part of
the thing involved. The gist of the offense consists in
the mode of compensation. The doctrine of champerty
does not prevail in this State except as provided by statute
( Sedgwick v Stanton, 14 NY 289, 294-295; Irwin v
Curie, 171 NY 409, 411). Both Dynamark and Poloron
asserted a claim by reason of the alleged misstatements
of Lybrand. The fact that they agreed [*498] to proceed
by one party instead of asserting two separate
claims does not make the assignment champertous. Since
Dynamark continuously asserted a right of recovery, the
reassignment to it of its claim, when Lybrand elected not
to proceed further with the appeal from an adverse determination,
does not bring such assignment or reassignment
within the statutory prohibition. The recovery
sought was compensation for an alleged wrong and was
not merely intended to stir up litigation which, apparently,
was already underway. Nor does the fact that Feiwell
was retained as counsel constitute champerty.
Lybrand, in its fifth cause of action, next alleges that
[***12] the wrongful acts of the Levitts, Dynamark and
Feiwell, heretofore adverted to, constitute a prima facie
tort. As [**808] in the other causes, the damages
claimed are substantial loss of valuable personnel time,
substantial attorneys' fees and other expenses.
"The key to the prima facie tort is the infliction of
intentional harm, resulting in damage, without excuse or
justification, by an act or a series of acts which would
otherwise be lawful." "Where specific acts, recognized as
tortious in the law, are asserted, the remedies lie only in
52 A.D.2d 493, *; 384 N.Y.S.2d 804, **;
1976 N.Y. App. Div. LEXIS 12037, ***
Page 3
the classic categories of tort." ( Ruza v Ruza, 286 App
Div 767, 769; Metromedia, Inc. v Mandel, 21 AD2d 219,
222, supra.) There must be an intention to harm, which
intent is the motivating factor in instituting the action,
and the action must have caused injury to Lybrand without
excuse or justification. In the instant case, the actions
against Lybrand resulted from an allegedly incorrect
financial report which caused financial loss to the
parties suing Lybrand. Moreover, the alleged damages
suffered by Lybrand as a result of the several suits are
not such as are generally recoverable, nor are any special
damages alleged. Therefore, [***13] this cause of
action should also be dismissed.
Finally, defendant Feiwell, as an attorney, had an
obligation to represent his clients fairly and to the best of
his ability (3 NY Jur, Attorney and Client, § 78) and
there is no factual support for the charges of conspiracy
to injure Lybrand. However, defendants' assertion that
the complaint should be dismissed on the ground of forum
non conveniens is clearly without merit.
Accordingly, the order appealed from should be reversed
on the law and the defendants' motion to dismiss
the complaint should be granted, with costs.
[*499] Order, Supreme Court, New York County,
entered on February 26, 1976, unanimously reversed, on
the law, and the motion to dismiss the complaint granted.
Appellants shall recover of respondent $ 60 costs and
disbursements of this appeal.

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LEXSEE
KADLEC MEDICAL CENTER; WESTERN PROFESSIONAL INSURANCE
COMPANY Plaintiffs-Appellees - Cross-Appellants v. LAKEVIEW ANESTHESIA
ASSOCIATES, A Professional Medical Corporation; LAKEVIEW MEDICAL
CENTER LLC, doing business as Lakeview Regional Medical Center; DR MARK
DENNIS; DR WILLIAM J PREAU, III Defendants-Appellants- Cross-Appellees DR
DAVID BALDONE; DR ALLAN PARR Defendants-Cross-Appellees
No. 06-30745
UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
SUBSEQUENT HISTORY: US Supreme Court certiorari
denied by Anesthesia v. Kadlec Med. Ctr., 2008 U.S.
LEXIS 8786 (U.S., Dec. 1, 2008)
PRIOR HISTORY: [**1]
Appeal from the United States District Court for the
Eastern District of Louisiana.
COUNSEL: For KADLEC MEDICAL CENTER,
WESTERN PROFESSIONAL INSURANCE COM-
PANY, Plaintiffs - Appellees - Cross-Appellants: Robert
Emmett Kerrigan, Jr, Isaac H Ryan, Deutsch, Kerrigan &
Stiles, New Orleans, LA; Brian George Cahill, Beth Ermatinger
Hanan, James Ric Gass, Gass Weber Mullins,
Milwaukee, WI.
For LAKEVIEW MEDICAL CENTER LLC, dba Lakeview
Regional Medical Center, Defendant - Appellant -
Cross-Appellee: Deborah Ann Pearce, Powell & Pearce,
New Orleans, LA; Sidney Katherine Powell, Law Offices
of Sidney Powell, Asheville, NC.
JUDGES: Before REAVLEY, BENAVIDES, and EL-
ROD, Circuit Judges.
OPINION BY: REAVLEY
OPINION
[*415] REAVLEY, Circuit Judge:
Kadlec Medical Center and its insurer, Western
Professional Insurance Company, filed this diversity
527 F.3d 412; 2008 U.S. App. LEXIS 10267
May 8, 2008, Filed
Page 1
action in Louisiana district court against Louisiana Anesthesia
Associates (LAA), its shareholders, and Lakeview
Regional Medical Center (Lakeview Medical). The
LAA shareholders worked with Dr. Robert Berry--an
anesthesiologist and former LAA shareholder--at Lakeview
Medical, where the defendants discovered his
on-duty use of narcotics. In referral letters written by the
defendants and relied on by Kadlec, [**2] his future
employer, the defendants did not disclose Dr. Berry's
drug use.
While under the influence of Demerol at Kadlec, Dr.
Berry's negligent performance led to the near-death of a
patient, resulting in a lawsuit against Kadlec. Plaintiffs
claim here that the defendants' misleading referral letters
were a legal cause of plaintiffs' financial injury, i.e.,
having to pay over $ 8 million to defend and settle the
lawsuit. The jury found in favor of the plaintiffs and
judgment followed. We reverse the judgment against
Lakeview Medical, vacate the remainder of the judgment,
and remand.
I. Factual Background
Dr. Berry was a licensed anesthesiologist in Louisiana
and practiced with Drs. William Preau, Mark Dennis,
David Baldone, and Allan Parr at LAA. From November
2000 until his termination on March 13, 2001, Dr. Berry
was a shareholder of LAA, the exclusive provider of
anesthesia services to Lakeview Medical (a Louisiana
hospital).
In November 2000, a small management team at
Lakeview Medical investigated Dr. Berry after nurses

expressed concern about his undocumented and suspicious
withdrawals of Demerol. The investigative team
found excessive Demerol withdrawals by Dr. Berry and a
lack [**3] of documentation for the withdrawals.
Lakeview Medical CEO Max Lauderdale discussed
the team's findings with Dr. Berry and Dr. Dennis. Dr.
Dennis then discussed Dr. Berry's situation with his
partners. They all agreed that Dr. Berry's use of Demerol
had to be controlled and monitored. But Dr. Berry did
not follow the agreement or account for his continued
Demerol withdrawals. Three months later, Dr. Berry
failed to answer a page while on-duty at Lakeview Medical.
He was discovered in the call-room, asleep, groggy,
and unfit to work. Personnel immediately called Dr.
Dennis, who found Dr. Berry not communicating well
and unable to work. Dr. Dennis had Dr. Berry taken
away after Dr. Berry said that he had taken prescription
medications.
Lauderdale, Lakeview Medical's CEO, decided that
it was in the best interest of patient safety that Dr. Berry
not practice at the hospital. Dr. Dennis and his three
partners at LAA fired Dr. Berry and signed his termination
letter on March 27, 2001, which explained that he
was fired "for cause":
[You have been fired for cause because]
you have reported to work in an
impaired physical, mental, and emotional
state. Your impaired condition has prevented
you [**4] from properly performing
your duties and puts our patients
at significant risk. . . . [P]lease consider
your termination effective March 13,
2001.
[*416] At Lakeview Medical, Lauderdale ordered the
Chief Nursing Officer to notify the administration if Dr.
Berry returned.
Despite recognizing Dr. Berry's drug problem and
the danger he posed to patients, neither Dr. Dennis nor
Lauderdale reported Dr. Berry's impairment to the hospital's
Medical Executive Committee, eventually noting
only that Dr. Berry was "no longer employed by LAA."
Neither one reported Dr. Berry's impairment to Lakeview
Medical's Board of Trustees, and no one on behalf of
Lakeview Medical reported Dr. Berry's impairment or
discipline to the Louisiana Board of Medical Examiners
or to the National Practitioner's Data Bank. In fact, at
some point Lauderdale took the unusual step of locking
away in his office all files, audits, plans, and notes concerning
Dr. Berry and the investigation.
527 F.3d 412, *; 2008 U.S. App. LEXIS 10267, **
Page 2
After leaving LAA and Lakeview Medical, Dr. Berry
briefly obtained work as a locum tenens (traveling
physician) at a hospital in Shreveport, Louisiana. In October
2001, he applied through Staff Care, a leading locum
tenens staffing firm, for locum [**5] tenens privileges
at Kadlec Medical Center in Washington State.
After receiving his application, Kadlec began its credentialing
process. Kadlec examined a variety of materials,
including referral letters from LAA and Lakeview Medical.
LAA's Dr. Preau and Dr. Dennis, two months after
firing Dr. Berry for his on-the-job drug use, submitted
referral letters for Dr. Berry to Staff Care, with the intention
that they be provided to future employers. The letter
from Dr. Dennis stated that he had worked with Dr. Berry
for four years, that he was an excellent clinician, and
that he would be an asset to any anesthesia service. Dr.
Preau's letter said that he worked with Berry at Lakeview
Medical and that he recommended him highly as an anesthesiologist.
Dr. Preau's and Dr. Dennis's letters were
submitted on June 3, 2001, only sixty-eight days after
they fired him for using narcotics while on-duty and
stating in his termination letter that Dr. Berry's behavior
put "patients at significant risk."
On October 17, 2001, Kadlec sent Lakeview Medical
a request for credentialing information about Berry.
The request included a detailed confidential questionnaire,
a delineation of privileges, and a signed [**6]
consent for release of information. The interrogatories on
the questionnaire asked whether "[Dr. Berry] has been
subject to any disciplinary action," if "[Dr. Berry has] the
ability (health status) to perform the privileges requested,"
whether "[Dr. Berry has] shown any signs of behavior/personality
problems or impairments," and whether
Dr. Berry has satisfactory "judgement."
Nine days later, Lakeview Medical responded to the
requests for credentialing information about fourteen
different physicians. In thirteen cases, it responded fully
and completely to the request, filling out forms with all
the information asked for by the requesting health care
provider. The fourteenth request, from Kadlec concerning
Berry, was handled differently. Instead of completing
the multi-part forms, Lakeview Medical staff drafted a
short letter. In its entirety, it read:
This letter is written in response to
your inquiry regarding [Dr. Berry]. Due to
the large volume of inquiries received in
this office, the following information is
provided.
Our records indicate that Dr. Robert
L. Berry was on the Active Medical Staff
of Lakeview Regional Medical Center in

the field of Anesthesiology from March
04, 1997 [**7] through September 04,
2001.
If I can be of further assistance, you
may contact me at (504) 867-4076.
[*417] The letter did not disclose LAA's termination
of Dr. Berry; his on-duty drug use; the investigation
into Dr. Berry's undocumented and suspicious withdrawals
of Demerol that "violated the standard of care"; or
any other negative information. The employee who
drafted the letter said at trial that she just followed a form
letter, which is one of many that Lakeview Medical used.
Kadlec then credentialed Dr. Berry, and he began
working there. After working at Kadlec without incident
for a number of months, he moved temporarily to Montana
where he worked at Benefis Hospital. During his
stay in Montana, he was in a car accident and suffered a
back injury. Kadlec's head of anesthesiology and the
credentialing department all knew of Dr. Berry's accident
and back injury, but they did not investigate whether it
would impair his work.
After Dr. Berry returned to Kadlec, some nurses
thought that he appeared sick and exhibited mood
swings. One nurse thought that Dr. Berry's entire demeanor
had changed and that he should be watched
closely. In mid-September 2002, Dr. Berry gave a patient
too much morphine [**8] during surgery, and she had
to be revived using Narcan. The neurosurgeon was irate
about the incident.
On November 12, 2002, Dr. Berry was assigned to
the operating room beginning at 6:30 a.m. He worked
with three different surgeons and multiple nurses well
into the afternoon. According to one nurse, Dr. Berry
was "screwing up all day" and several of his patients
suffered adverse affects from not being properly anesthetized.
He had a hacking cough and multiple nurses
thought he looked sick. During one procedure, he apparently
almost passed out.
Kimberley Jones was Dr. Berry's fifth patient that
morning. She was in for what should have been a routine,
fifteen minute tubal ligation. When they moved her
into the recovery room, one nurse noticed that her fingernails
were blue, and she was not breathing. Dr. Berry
failed to resuscitate her, and she is now in a permanent
vegetative state.
Dr. Berry's nurse went directly to her supervisor the
next morning and expressed concern that Dr. Berry had a
narcotics problem. Dr. Berry later admitted to Kadlec
staff that he had been diverting and using Demerol since
his June car accident in Montana and that he had become
527 F.3d 412, *; 2008 U.S. App. LEXIS 10267, **
Page 3
addicted to Demerol. Dr. Berry [**9] wrote a confession,
and he immediately admitted himself into a drug
rehabilitation program.
Jones's family sued Dr. Berry and Kadlec in Washington.
Dr. Berry's insurer settled the claim against him.
After the Washington court ruled that Kadlec would be
responsible for Dr. Berry's conduct under respondeat
superior, Western, Kadlec's insurer, settled the claim
against Kadlec.
II. Procedural History
Kadlec and Western filed this suit in Louisiana district
court against LAA, Dr. Dennis, Dr. Preau, Dr. Baldone,
Dr. Parr, and Lakeview Medical, asserting Louisiana
state law claims for intentional misrepresentation,
negligent misrepresentation, strict responsibility misrepresentation,
and general negligence. Plaintiffs alleged
that defendants' tortious activity led to Kadlec's hiring of
Dr. Berry and the resulting millions of dollars it had to
expend settling the Jones lawsuit. Plaintiffs' claim
against LAA for negligence, based on a negligent monitoring
and investigation theory, was dismissed before
trial.
Plaintiffs' surviving claims for intentional and negligent
misrepresentation arise out of the alleged misrepresentations
in, [*418] and omissions from, the defendants'
referral letters for Dr. [**10] Berry. These
claims were tried to a jury, which returned a verdict in
favor of the plaintiffs on both claims. The jury awarded
plaintiffs $ 8.24 million, which is approximately equivalent
to the amount Western spent settling the Jones lawsuit
($ 7.5 million) plus the amount it spent on attorneys
fees, costs, and expenses (approximately $ 744,000) associated
with the Jones lawsuit. The jury also found
Kadlec and Dr. Berry negligent. The jury apportioned
fault as follows: Dr. Dennis 20%; Dr. Preau 5%; Lakeview
Medical 25%; Kadlec 17%; and Dr. Berry 33%.
The judgments against Dr. Dennis and Dr. Preau were in
solido with LAA. Because defendants were found liable
for intentional misrepresentation, plaintiffs' recovery was
not reduced by the percentage of fault ascribed to
Kadlec. 1 But the amount was reduced to $ 5.52 million
to account for Dr. Berry's 33% of the fault. 2 The district
court entered judgment against Lakeview Medical and
LAA.
1 LA. CIV. CODE art. 2323(C).
2 No complaint has been made, in the district
court or to this court, about allocating fault to Dr.
Berry in this case.
III. Discussion

A. The Intentional and Negligent Misrepresentation
Claims
The plaintiffs allege that the defendants [**11]
committed two torts: intentional misrepresentation and
negligent misrepresentation. 3 The elements of a claim
for intentional misrepresentation in Louisiana are: (1) a
misrepresentation of a material fact; (2) made with intent
to deceive; and (3) causing justifiable reliance with resultant
injury. 4 To establish a claim for intentional misrepresentation
when it is by silence or inaction, plaintiffs
also must show that the defendant owed a duty to the
plaintiff to disclose the information. 5 To make out a negligent
misrepresentation claim in Louisiana: (1) there
must be a legal duty on the part of the defendant to supply
correct information; (2) there must be a breach of
that duty, which can occur by omission as well as by
affirmative misrepresentation; and (3) the breach must
have caused damages to the plaintiff based on the plaintiff's
reasonable reliance on the misrepresentation. 6
3 Plaintiffs contend that the defendants' torts
caused them an economic loss, which is a cognizable
claim in Louisiana, "a jurisdiction which
allows recovery in tort for purely economic loss."
Barrie v. V.P. Exterminators, Inc., 625 So. 2d
1007, 1014 (La. 1993).
4 Guidry v. United States Tobacco Co., 188
F.3d 619, 627 (5th Cir. 1999).
5 See [**12] Greene v. Gulf Coast Bank, 593
So. 2d 630, 632 (La. 1992).
6 Brown v. Forest Oil Corp., 29 F.3d 966, 969
(5th Cir. 1994); In re Ward, 894 F.2d 771, 776
(5th Cir. 1990); Pastor v. Lafayette Bldg. Ass'n,
567 So. 2d 793, 796 (La. Ct. App. 1990); Cypress
Oilfield Contractors, Inc. v. McGoldrick Oil Co.,
525 So. 2d 1157, 1162 (La. Ct. App. 1988).
The defendants argue that any representations in, or
omissions from, the referral letters cannot establish liability.
We begin our analysis below by holding that after
choosing to write referral letters, the defendants assumed
a duty not to make affirmative misrepresentations in the
letters. We next analyze whether the letters were misleading,
and we conclude that the LAA defendants' letters
were misleading, but the letter from Lakeview Medical
was not. We also examine whether the defendants
had an affirmative duty to disclose negative information
about Dr. Berry in their referral letters, and we conclude
that there was not an affirmative duty to disclose. Based
on these holdings, Lakeview Medical did not breach any
duty owed to [*419] Kadlec, and therefore the judgment
against it is reversed. Finally, we examine other
challenges to the LAA defendants' [**13] liability, and
we conclude that they are without merit.
527 F.3d 412, *; 2008 U.S. App. LEXIS 10267, **
1. The Affirmative Misrepresentations
Page 4
The defendants owed a duty to Kadlec to avoid affirmative
misrepresentations in the referral letters. In
Louisiana, "[a]lthough a party may keep absolute silence
and violate no rule of law or equity, . . . if he volunteers
to speak and to convey information which may influence
the conduct of the other party, he is bound to [disclose]
the whole truth." 7 In negligent misrepresentation cases,
Louisiana courts have held that even when there is no
initial duty to disclose information, "once [a party] volunteer[s]
information, it assume[s] a duty to insure that
the information volunteered [is] correct." 8
7 American Guaranty Co. v. Sunset Realty &
Planting Co., 23 So. 2d 409, 455-56 (La. 1944).
8 See, e.g., Pastor, 567 So. 2d at 796; accord
Leon v. Moore, 896 So. 2d 1073, 1076 (La. Ct.
App. 2004) (holding that "[t]here is no general
duty to speak, but if one does speak, he may be
liable for any intentional misrepresentation
(fraud) or any negligent misrepresentation"); Cypress
Oilfield Contractors, Inc., 525 So. 2d at
1162 (holding that although a bank did not owe a
duty of disclosure to the plaintiff, a
non-customer, [**14] the bank "assumed a duty
to insure that the information volunteered was
correct").
Consistent with these cases, the defendants had a
legal duty not to make affirmative misrepresentations in
their referral letters. A party does not incur liability every
time it casually makes an incorrect statement. But if an
employer makes a misleading statement in a referral letter
about the performance of its former employee, the
former employer may be liable for its statements if the
facts and circumstances warrant. Here, defendants were
recommending an anesthesiologist, who held the lives of
patients in his hands every day. Policy considerations
dictate that the defendants had a duty to avoid misrepresentations
in their referral letters if they misled plaintiffs
into thinking that Dr. Berry was an "excellent" anesthesiologist,
when they had information that he was a drug
addict. Indeed, if defendants' statements created a misapprehension
about Dr. Berry's suitability to work as an
anesthesiologist, then by "volunteer[ing] to speak and to
convey information which . . . influence[d] the conduct
of [Kadlec], [they were] bound to [disclose] the whole
truth." 9 In other words, if they created a misapprehension
[**15] about Dr. Berry due to their own statements,
they incurred a duty to disclose information about
his drug use and for-cause firing to complete the whole
picture.
9 Sunset Realty, 23 So. 2d at 455-56.

We now review whether there is evidence that the
defendants' letters were misleading. We start with the
LAA defendants. The letter from Dr. Preau stated that
Dr. Berry was an "excellent anesthesiologist" and that he
"recommend[ed] him highly." Dr. Dennis's letter said
that Dr. Berry was "an excellent physician" who "he is
sure will be an asset to [his future employer's] anesthesia
service." These letters are false on their face and materially
misleading. Notably, these letters came only sixty-eight
days after Drs. Dennis and Preau, on behalf of
LAA, signed a letter terminating Dr. Berry for using
narcotics while on-duty and stating that Dr. Berry's behavior
put "patients at significant risk." Furthermore,
because of the misleading statements in the letters, Dr.
Dennis and Dr. Preau incurred a duty to cure these misleading
statements by disclosing to [*420] Kadlec that
Dr. Berry had been fired for on-the-job drug use.
The question as to whether Lakeview Medical's letter
was misleading is more difficult. [**16] The letter
does not comment on Dr. Berry's proficiency as an anesthesiologist,
and it does not recommend him to Kadlec.
Kadlec says that the letter is misleading because Lakeview
Medical stated that it could not reply to Kadlec's
detailed inquiry in full "[d]ue to the large volume of inquiries
received." But whatever the real reason that Lakeview
Medical did not respond in full to Kadlec's inquiry,
Kadlec did not present evidence that this could
have affirmatively misled it into thinking that Dr. Berry
had an uncheckered history at Lakeview Medical.
Kadlec also says that the letter was misleading because
it erroneously reported that Dr. Berry was on Lakeview
Medical's active medical staff until September 4,
2001. Kadlec presented testimony that had it known that
Dr. Berry never returned to Lakeview Medical after
March 13, 2001, it would have been suspicious about the
apparently large gap in his employment. While it is true
that Dr. Berry did not return to Lakeview Medical after
March 13, this did not terminate his privileges at the
hospital, or mean that he was not on "active medical
staff." In fact, it appears that Dr. Berry submitted a formal
resignation letter on October 1, 2001, [**17] weeks
after September 4. Therefore, while the September 4 date
does not accurately reflect when Dr. Berry was no longer
on Lakeview Medical's active medical staff, it did not
mislead Kadlec into thinking that he had less of a gap in
employment than he actually had.
In sum, we hold that the letters from the LAA defendants
were affirmatively misleading, but the letter
from Lakeview Medical was not. Therefore, Lakeview
Medical cannot be held liable based on its alleged affirmative
misrepresentations. It can only be liable if it
had an affirmative duty to disclose information about Dr.
Berry. We now examine the theory that, even assuming
that there were no misleading statements in the referral
527 F.3d 412, *; 2008 U.S. App. LEXIS 10267, **
Page 5
letters, the defendants had an affirmative duty to disclose.
We discuss this theory with regard to both defendants
for reasons that will be clear by the end of the
opinion.
2. The Duty to Disclose
In Louisiana, a duty to disclose does not exist absent
special circumstances, such as a fiduciary or confidential
relationship between the parties, which, under the circumstances,
justifies the imposition of the duty. 10 Louisiana
cases suggest that before a duty to disclose is imposed
the defendant must have [**18] had a pecuniary
interest in the transaction. 11 In [*421] Louisiana, the
existence of a duty is a question of law, 12 and we review
the duty issue here de novo. 13
10 See Wilson v. Mobil Oil Corp., 940 F. Supp.
944, 955 (E.D. La. 1996) (citing Greene v. Gulf
Coast Bank, 593 So. 2d 630, 632 (La. 1992) and
First Downtown Dev. v. Cimochowski, 613 So. 2d
671, 677 (La. Ct. App. 1993)); Bunge Corp. v.
GATX Corp., 557 So. 2d 1376, 1383-84 (La.
1990).
11 See Barrie, 625 So. 2d at 1017 ("due to
V.P.'s pecuniary interest in supplying the information,
the duty arose to exercise reasonable
care"). In McLachlan v. New York Life Ins. Co.,
488 F.3d 624 (5th Cir. 2007), relied on by the
defendants, this court said in the middle of one
paragraph that under Louisiana law a duty to disclose
exists only where there is privity of contract
or a fiduciary relationship between the parties. Id.
at 628. But later in the same paragraph the court
acknowledged that the Louisiana Supreme Court
has imposed a duty to disclose where there was
no privity or fiduciary relationship. Id. Our review
of Louisiana cases confirms that there does
not need to be privity of contract or a fiduciary
relationship for there to be a duty to [**19] disclose.
See, e.g., Barrie, 625 So. 2d. at 1014
(holding that "Louisiana is a jurisdiction which
allows recovery in tort for . . . negligent misrepresentation
where privity of contract is absent").
The Louisiana Supreme Court has said elsewhere
that "[i]t has long been held that the duty to disclose
exists" where the parties have a confidential
relationship with each other, and the court explained
that "[t]he confidential relationship is not
restricted to any specific association of the parties,"
but exists between "generally all persons
who are associated by any relation of trust and
confidence." Bunge, 557 So. 2d at 1383-84 & n.4
(internal quotation marks omitted). Therefore, we
must look carefully at the facts of this case to determine
whether there was a duty to disclose. See

Barrie, 625 So. 2d at 1016 ("Louisiana's case by
case development of the tort of negligent misrepresentation
has not been restricted to a set theory.
. . . Adopting one of the common law standards
as the sole method for determining liability for
this tort is not necessary. The case by case application
of the duty/risk analysis, presently employed
by our courts, adequately protects the
misinformer and the [**20] misinformed because
the initial inquiry is whether, as a matter of
law, a duty is owed to this particular plaintiff to
protect him from this particular harm.").
12 Bunge, 557 So. 2d at 1384.
13 Bursztajn v. United States, 367 F.3d 485,
489 (5th Cir. 2004).
Plaintiffs assert that Lakeview Medical and the LAA
doctors had a pecuniary interest in the referral letters
supplied to Kadlec. The plaintiffs rely on the pecuniary
interest definition in the Second Restatement of Torts.
Section 552, comment d of the Restatement, provides
(with emphasis added):
The defendant's pecuniary interest in
supplying the information will normally
lie in a consideration paid to him for it or
paid in a transaction in the course of and
as a part of which it is supplied. It may,
however, be of a more indirect character. .
. .
The fact that the information is
given in the course of the defendant's
business, profession or employment is a
sufficient indication that he has a pecuniary
interest in it, even though he receives
no consideration for it at the
time. It is not, however, conclusive. . . .
The "course of business" definition of pecuniary interest
has been endorsed by Louisiana appellate courts.
In Anderson v. Heck, [**21] the court defined the "pecuniary
interest" of the defendant by directly quoting and
applying the portion of the Restatement comment highlighted
above. 14 The court in Dousson v. South Central
Bell held that the fact that information is given in the
course of a party's business or profession is a sufficient
indication of pecuniary interest even though the party
receives no consideration for it at the time. 15
14 554 So. 2d 695, 705 (La. Ct. App. 1989).
The court also held that the "pecuniary interest"
necessary to establish a duty "need not be direct
or immediate." Id.
15 429 So. 2d 466, 468 (La. Ct. App. 1983).
527 F.3d 412, *; 2008 U.S. App. LEXIS 10267, **
Page 6
The defendants argue that, even assuming the Restatement
governs, they did not have a pecuniary interest
in providing reference information. They contend that
any information provided to future employers about Dr.
Berry was gratuitous, and they point out that the Restatement's
comments say that a party will not be considered
to have a pecuniary interest in a transaction where
the information is given "purely gratuitously." 16
16 RESTATEMENT (SECOND) OF TORTS §
552 cmt. c.
The defendants have the better argument on the lack
of pecuniary interest and, in addition, the requisite "special
[**22] relationship" between the defendants and
Kadlec, necessary to impose a duty to disclose, is
[*422] lacking. 17
17 See Barrie, 625 So. 2d at 1016 (determining
whether there is a duty to disclose must be made
on a case-by-case basis); see also Wilson, 940 F.
Supp. at 955; Greene, 593 So. 2d at 632; First
Downtown, 613 So. 2d at 677 (all emphasizing
the need to find a special relationship between the
parties before imposition of a duty to disclose).
Plaintiffs argue that policy considerations weigh in
favor of recognizing a duty to disclose. They contend
that imposing a duty on health care employers to disclose
that a physician's drug dependence could pose a serious
threat to patient safety promotes important policy goals
recognized by Louisiana courts. Plaintiffs point to the
decision in Dornak v. Lafayette General Hospital, where
the Louisiana Supreme Court imposed on a hospital the
duty to disclose to its employee the results of a
pre-employment physical which showed tuberculosis,
"especially considering the fact that . . . [her] duties
plac[ed] her in contact with co-employees and hospital
patients." 18 The Louisiana legislature recently adopted
legislation that requires health care entities [**23] to
"report [to the appropriate professional licensing board]
each instance in which the health care entity . . . [t]akes
an adverse action against a health care professional due
to impairment or possible impairment." 19 This shows
that the legislature has recognized the importance of reporting
possible impairments that could affect patient
safety.
18 399 So. 2d 168, 170 (La. 1981).
19 LA. REV. STAT. § 37:1745.14.
Despite these compelling policy arguments, we do
not predict that courts in Louisiana--absent misleading
statements such as those made by the LAA defendants--would
impose an affirmative duty to disclose. The
defendants did not have a fiduciary or contractual duty to
disclose what it knew to Kadlec. And although the de-

fendants might have had an ethical obligation to disclose
their knowledge of Dr. Berry's drug problems, they were
also rightly concerned about a possible defamation claim
if they communicated negative information about Dr.
Berry. 20 As a general policy matter, even if an employer
believes that its disclosure is protected because of the
truth of the matter communicated, it would be burdensome
to impose a duty on employers, upon receipt of a
employment referral request, [**24] to investigate
whether the negative information it has about an employee
fits within the courts' description of which negative
information must be disclosed to the future employer.
Finally, concerns about protecting employee privacy
weigh in favor of not mandating a potentially broad duty
to disclose.
20 See Louviere v. Louviere, 839 So. 2d 57, 64
(La. Ct. App. 2002) ("[I]f a former employer
gives negative information about an employee to
a prospective employer, this can result in exposure
to a defamation claim.").
The Louisiana court in Louviere recognized that no
court in Louisiana has imposed on an employer a duty to
disclose information about a former employee to a future
employer. 21 Furthermore, we have not found a single
case outside of Louisiana [*423] where a court imposed
an affirmative duty on an employer to disclose
negative information about a former employee. 22 Some
courts have held that employers have a legal duty to disclose
negative information about former employees who
later cause foreseeable physical harm in their new jobs,
at least when there are misleading statements made by
the former employer. 23 But each of these cases based its
conclusion on the fact that the former [**25] employer
had made affirmative misrepresentations in its referral,
and none imposed a duty based on the employer's mere
nondisclosure. 24 These cases reinforce our conclusion
that the defendants had a duty to avoid misleading statements
in their referral letters, but they do not support
plaintiffs' duty to disclose theory. In fact, one court explicitly
held that a hospital did not have an affirmative
duty to disclose a nurse's past sexual misconduct toward
patients when asked for an evaluation by a prospective
employer, but that "[the defendant did] not challenge the
proposition that, in undertaking to provide . . . a reference,
and in volunteering information about [the employee's]
qualities as a nurse, it incurred a duty to use
reasonable care to avoid disclosing factually misleading
information." 25
21 Id. at 62. The court also said that it did not
believe that under Louisiana law there is a duty of
a former employer to disclose information about
a former employee. Id. We do not simply rely on
this statement alone because we must follow the
527 F.3d 412, *; 2008 U.S. App. LEXIS 10267, **
Page 7
Louisiana Supreme Court and engage in a careful
case specific analysis, guided by the policy considerations
discussed by the Louisiana Supreme
[**26] Court, to determine whether there was a
duty to disclose under the facts here. We also
note that the Louviere court itself engaged in an
intensive fact analysis to see if there was liability.
Id. at 62-67.
22 Louisiana courts look to other jurisdictions
for help when deciding legal duty questions.
Posecai v. Wal-Mart Stores, Inc., 752 So. 2d 762,
766 (La. 1999).
23 See, e.g., Gutzan v. Altair Airlines, Inc., 766
F.2d 135, 137 (3d Cir. 1985); Randi W. v. Muroc
Joint Unified Sch. Dist., 14 Cal. 4th 1066, 60 Cal.
Rptr. 2d 263, 929 P.2d 582 (Cal. 1997); Davis v.
Bd. of County Commr's of Dona Ana County,
1999 NMCA 110, 127 N.M. 785, 987 P.2d 1172
(N.M. Ct. App. 1999).
24 Gutzan, 766 F.2d at 139, 140-41; Randi W.,
929 P.2d at 591-93 ("[H]aving volunteered . . .
information, defendants were obliged to complete
the picture by disclosing material facts regarding
charges and complaints of [the employee's] sexual
improprieties."); Davis, 987 P.2d at 1177-80.
25 Grozdanich v. Leisure Hills Health Ctr.,
Inc., 25 F. Supp. 2d 953, 989-90 (D. Minn. 1998).
The court continued: "It is well-settled that, even
if one has no duty to disclose a particular fact, if
one chooses to speak he must say enough to prevent
the words from misleading the other party."
Id. at 990 (internal [**27] quotation marks
omitted).
3. Legal Cause
LAA contends that even if it breached a legal duty to
Kadlec, the plaintiffs' claims fail for lack of legal causation.
LAA argues that legal cause is not met here because
Kadlec's and Dr. Berry's intervening negligence precludes
concluding that it is a legal cause of plaintiffs'
injuries. Because legal cause is a legal question under
Louisiana law, 26 we review the district court's conclusion
as to legal cause de novo. 27
26 Todd v. State ex rel. Department of Social
Servs., Office of Community Servs., 699 So. 2d
35, 39 (La. 1997).
27 Lifemark Hospitals, Inc. v. Liljeberg Enters.
(In re Liljeberg Enters.), 304 F.3d 410, 423 (5th
Cir. 2002).
The leading case on legal cause in Louisiana is
Roberts v. Benoit. 28 There, the Louisiana Supreme Court
held that "[t]he critical test in Louisiana . . . is phrased in
terms of 'the ease of association' which melds policy and

foreseeability into one inquiry: Is the harm which befell
the plaintiff easily associated with the type of conduct
engaged in by the defendant?" 29 Under Louisiana law,
and with the jury's factual findings in mind, 30 the LAA
defendants' [*424] actions and omissions were a legal
cause of Kadlec's liability. Following the Louisiana Supreme
Court, we ask ourselves whether [**28] the harm
to plaintiffs is easily associated with the type of conduct
engaged in by the defendant. Here, Dr. Dennis and Dr.
Preau gave Dr. Berry favorable recommendations, when
they knew that Dr. Berry had used narcotic drugs while
on duty at a hospital. LAA even fired Dr. Berry for cause
for "report[ing] to work in an impaired physical, mental,
and emotional state, which prevented [him] from
properly performing [his] duties and put[] [his] patients
at significant risk." The harm to Jones and the plaintiffs
that resulted from the LAA defendants' breaches are
"easily associated" with Kadlec's liability. In fact, harm
stemming from Dr. Berry's use of narcotic drugs while
on-duty is the type of harm we would expect.
28 605 So. 2d 1032 (La. 1992).
29 Id. at 1054.
30 This court reviews legal conclusions independently,
but reviews findings of fact, as well as
mixed questions of law and fact, under the less
stringent clear error standard. In re Liljeberg Enterprises,
304 F.3d at 423-24. We review the legal
causation question independently. But we
must consider the facts relevant to our legal cause
analysis consistent with the jury's verdict.
The LAA defendants' argument that the intervening
negligence [**29] of Dr. Berry and Kadlec absolves
them of liability is not accepted. Roberts held that "[i]t is
well settled in Louisiana law that an intervening act does
not automatically absolve a prior negligent party from
liability." 31 Whether an intervening act absolves a prior
negligent actor from liability depends on the foreseeability
of the act from the perspective of the original tortfeasor
and whether the intervening act is "easily associated"
with the risk of harm brought about by the breach of the
original duty. 32 Dr. Berry's hiring and his subsequent
negligent use of narcotics while on-duty was foreseeable
and "easily associated" with the LAA defendants' actions.
He had used narcotics while on-duty in the past,
and the LAA defendants could foresee that he would do
so again if they misled a future employer about his drug
problem.
31 605 So. 2d at 1055.
32 Id. at 1055-56 (citing Jones v. Robbins, 289
So. 2d 104 (La. 1974) and LeJeune v. Allstate Ins.
Co., 365 So. 2d 471 (La. 1978)).
527 F.3d 412, *; 2008 U.S. App. LEXIS 10267, **
Page 8
The LAA defendants focus on Kadlec's negligence
and claim that it was a superseding cause of plaintiffs'
injuries. They argue that Kadlec had multiple warning
signs that Dr. Berry was using drugs, and had it responded
[**30] with an investigation, plaintiffs' injuries
would have been avoided. The LAA defendants focus on
Dr. Berry's erratic behavior after his return from Montana,
his over-anesthetization of a patient in September
2002, and the signs that he was ill on the day of Jones's
surgery. The jury found that Kadlec's own negligence
was a cause of plaintiffs' financial injury. But this does
not relieve the defendants of liability. The jury also reasonably
concluded that the LAA defendants negligently
and intentionally misled Kadlec about Dr. Berry's drug
addiction. By intentionally covering up Dr. Berry's drug
addiction in communications with a future employer,
they should have foreseen that the future employer might
miss the warning signs of Dr. Berry's addiction. This was
within the scope of the risk they took.
Indeed, both plaintiffs' and defendants' witnesses
agreed at trial that narcotics addiction is a disease, that
addicts try to hide their disease from their co-workers,
and that particularly in the case of narcotics-addicted
anesthesiologists, for whom livelihood and drug supply
are in the same place, colleagues may be the last to know
about their addiction and impairment. This is not a case
[**31] where a future tortious act is so unforeseeable that
it should relieve the earlier tortfeasor of liability. In
[*425] fact, this case illustrates why the comparative
fault system was developed--so, as here, multiple actors
can share fault for an injury based on their respective
degrees of responsibility. 33
33 See Mendoza v. Mashburn, 747 So. 2d
1159, 1168, 1173 (La. Ct. App. 1999) (holding
that "[a]n initial tortfeaser will not be relieved of
the consequences of his negligence unless the intervening
cause superceded the original negligence
and alone produced the injury," and reinstating
a jury's findings of comparative fault).
4. Tort Indemnity and Contribution
Defendants claim that the district court should have
dismissed this action because Louisiana does not allow
contribution or indemnity claims, and this suit, properly
characterized, is one for contribution or indemnity. The
defendants have not provided this court with any relevant
legal authority for the proposition that this is a contribution
or indemnity suit in disguise. Moreover, defendants'
argument fails because plaintiffs sued based on the theory
that Lakeview Medical and the LAA defendants
breached a duty to Kadlec by making intentional [**32]
and negligent misrepresentations about Dr. Berry in the
referral letters supplied to Kadlec. As a result of these

misrepresentations, plaintiffs suffered a foreseeable financial
injury in excess of $ 8 million. This is not a lawsuit
asking for contribution or indemnity. It is a lawsuit
that alleges breaches of duties owed to Kadlec. Therefore,
defendants' argument is rejected.
We are not convinced by defendants' other challenges
to plaintiffs' intentional and negligent misrepresentation
claims. In particular, LAA complains that there
was insufficient evidence that Kadlec reasonably relied
on the letters from Dr. Preau and Dr. Dennis. We disagree.
B. Evidence of Western's Reinsurance
The defendants argue that the district court erred
when it granted plaintiffs in limine request under the
collateral source rule to exclude evidence of Western's
reinsurance. After Western expended $ 744,000 on litigation
costs and settled the Jones lawsuit against Kadlec
for $ 7.5 million, it received payment for a portion of its
expenditures from its reinsurers. The defendants sought
unsuccessfully to introduce this reinsurance information
to the jury. We review the district court's evidentiary
ruling for [**33] an abuse of discretion. 34
34 United States v. Sumlin, 489 F.3d 683, 688
(5th Cir. 2007).
As adopted by the Louisiana Supreme Court, the
collateral source rule is a rule of evidence and damages.
The rule provides that payments made to or benefits
conferred upon an injured party from sources other than
the tortfeasor, notwithstanding that such payments or
benefits cover all or a part of the harm for which the
tortfeasor is liable, are not credited against the tortfeasor's
liability. 35 The policy driving the rule is the belief
that a tortfeasor should not benefit because a plaintiff had
the foresight to obtain insurance. 36 Here, although the
plaintiffs incurred damages in excess of $ 8 million as a
result of defendants' torts (and Dr. Berry's and Kadlec's
own tortious behavior, which the jury considered), defendants
wanted to introduce evidence of Western's reinsurance
to show plaintiffs' "real injury." But [*426]
this is nothing more than a classic argument against the
collateral source rule, and it would effectively penalize
Western for having the foresight to obtain reinsurance.
While there are exceptions to the collateral source rule
that allow a party to introduce evidence of reinsurance,
[**34] 37 they are inapplicable here.
35 See Bozeman v. State, 879 So. 2d 692, 697
(La. 2004) (noting that the common law collateral
source rule has its source in the Restatement of
Torts and that it has been embraced by Louisiana
courts).
36 Id. at 698.
527 F.3d 412, *; 2008 U.S. App. LEXIS 10267, **
Page 9
37 For example, in Am. Fidelity & Cas. Co. v.
Greyhound Corp., 258 F.2d 709 (5th Cir. 1958),
we held that evidence of reinsurance was admissible
to show an insurer's good faith in settling or
not settling underlying litigation against its insured
for a certain amount. Defendants' reliance
on American Fidelity is misplaced because that
case was about whether the insurer showed bad
faith in choosing whether or not to settle the underlying
lawsuit because of its reinsurance limits.
Id. at 712. By contrast, the defendants want to introduce
evidence of Western's reinsurance to
show plaintiffs' "real injury," i.e., the amount that
defendants' tortious activities truly harmed plaintiffs.
C. Plaintiffs' Attorney's Fees in the Jones Litigation
The district court denied defendants' motion in
limine to keep from the jury evidence of the money
plaintiffs were forced to spend to defend the Jones's
lawsuit. The jury verdict included these costs and attorney's
[**35] fees. Defendants argue that plaintiffs
should not have been allowed to recover attorney's fees
spent defending the underling lawsuit. We review this
evidentiary ruling for an abuse of discretion. 38
38 Sumlin, 489 F.3d at 688.
We hold that the district court properly denied defendants'
motion. While there is no Louisiana case directly
on point, this conclusion is consistent with the rule
found in Section 914(2) of the Second Restatement of
Torts:
One who through the tort of another
has been required to act in the protection
of his interests by bringing or defending
an action against a third person is entitled
to recover reasonable compensation for
loss of time, attorney fees and other expenditures
thereby suffered or incurred in
the earlier action.
Plaintiffs, due to the torts of the defendants, were required
to expend costs and attorney's fees defending the
Jones lawsuit. They also had to pay to settle the Jones
action. In this lawsuit, plaintiffs proved that defendants
were legally responsible for their financial damages,
which included costs and attorney's fees. Under the jury's
apportionment of fault, the defendants appropriately
were required to pay for a portion, but not all, of these
[**36] costs and attorney's fees.
Defendants argue that this case is governed by
Sea-Land Service, Inc. v. Crescent Towing & Salvage

Co. 39 In Sea-Land, we held in a contribution action that
the plaintiffs could not recover attorney's fees expended
defending the underlying suit. 40 We have already held
that this suit is not a contribution action, but rather a
lawsuit claiming that defendants breached independent
duties owed to Kadlec; therefore, Sea-Land is inapposite.
39 42 F.3d 960 (5th Cir. 1995).
40 Id. at 963.
D. Negligent Monitoring and Investigation
In its lone point on cross-appeal, the plaintiffs contend
that the district court erred when it dismissed their
claim against the defendants for negligent monitoring
and investigation. 41 Plaintiffs argue that [*427] their
complaint stated a claim under general Louisiana negligence
law, while the district court mistakenly viewed the
complaint as only asking the court to impose a duty under
the Health Care Quality Improvement Act (HCQIA)
and certain Louisiana regulations. We agree with the
district court that the complaint states a claim based only
on alleged duties under the HCQIA and Louisiana regulations.
In any case, to the extent that plaintiffs [**37]
alleged a claim under general Louisiana negligence law,
the district court considered this argument in a motion to
reconsider and correctly concluded that this claim should
be dismissed because any duty the law imposes does not
reach these plaintiffs.
41 Because this was the only claim against Drs.
Parr and Baldone, dismissal of this claim led the
district court to dismiss them from the suit with
prejudice. These doctors are, however, shareholders
of LAA.
E. Summary and Remand Instructions
The district court properly instructed the jury to find
for the plaintiffs on their intentional and negligent misrepresentation
claims if the jury concluded that the defendants'
letters to Kadlec were intentionally and negligently
misleading in a manner that caused injury to the
plaintiffs. But the district court's instructions also improperly
enabled the jury to find for the plaintiffs on
these claims if the defendants intentionally and negligently
did not disclose their knowledge of Dr. Berry's
drug problems, irrespective of whether the letters to
Kadlec were false or misleading. Because the verdict
form only inquired as to whether the plaintiffs' claims for
intentional and negligent misrepresentation, [**38] in
527 F.3d 412, *; 2008 U.S. App. LEXIS 10267, **
Page 10
separate interrogatories, were met as to each defendant,
but did not request special findings of fact as to each of
the separate possible theories, we cannot know whether
the jury's verdict was based on the proper or improper
theory. But the fact that the jury instructions stated both a
valid and invalid theory of recovery for plaintiffs' claims
does not require a new trial because the error here was
harmless. The letters from Dr. Dennis and Dr. Preau
were false on their face and patently misleading. There is
no question about the purpose or effect of the letters.
Because no reasonable juror could find otherwise, we
uphold the finding of liability against Dr. Dennis and Dr.
Preau. 42 But because Lakeview Medical's letter was not
materially misleading, and because the hospital did not
have a legal duty to disclose its investigation of Dr. Berry
and its knowledge of his drug problems, the judgment
against Lakeview Medical must be reversed.
42 See Carbalan v. Vaughn, 760 F.2d 662, 665
(5th Cir. 1985) ("Because a verdict for [the plaintiff]
against the [defendant] would have been impermissible
as a matter of law, any error in the
jury charge on . . . liability was harmless.").
The district [**39] court entered judgment consistent
with how the jury allocated fault among the entities
it found to be legally responsible for the plaintiffs'
injuries. The jury's allocation was as follows: Dr. Dennis
20%; Dr. Preau 5%; Lakeview Medical 25%; Kadlec
17%; and Dr. Berry 33%. We have affirmed the liability
finding of the jury against the LAA defendants. But now
that we have reversed the judgment against Lakeview
Medical, the question arises whether there must be a reapportionment
of fault with a corresponding change to
damages assessed against the LAA defendants. It is possible
that this is unnecessary, if under Louisiana law we
can simply compare the fault percentages of the remaining
parties. But Louisiana law might also require a reapportionment
of fault and, therefore, a fresh determination
of damages. Because there was no briefing on this issue,
we vacate the judgment against the LAA defendants and
remand the case to the district court to determine what, if
anything, needs to be redone on the apportionment and
damages [*428] issues, and then to enter judgment
against the LAA defendants accordingly.
IV. Conclusion
The judgment of the district court is REVERSED in
part, VACATED in part, and [**40] REMANDED for
proceedings consistent with this opinion.

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SUBSEQUENT HISTORY:
546 So. 2d 1060, *; 1989 Fla. App. LEXIS 1702, **;
14 Fla. L. Weekly 847
LEXSEE 546 SO2D 1060
STATE FARM FIRE & CASUALTY COMPANY, Appellant, v. NATHAN
PRITCHER and CARL SPATZ, Appellees
Rehearing Denied August 10, 1989.
Case Nos. 88-1019, 88-1238
Court of Appeal of Florida, Third District
546 So. 2d 1060; 1989 Fla. App. LEXIS 1702; 14 Fla. L. Weekly 847
PRIOR HISTORY: [**1] Appeals from the Circuit
Court for Dade County, Edward N. Moore, Judge.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant insurer sought
review of a decision from the Circuit Court of Dade
County (Florida), which awarded appellee lawyer attorney's
fees under the "wrongful act" doctrine on its
cross-claim against appellant for declaratory relief regarding
whether there had been a valid assignment in
appellee client's suit to recover on a policy issued by
appellant on a parcel of real estate, which appellee lawyer
had sold to appellee client.
OVERVIEW: On review, the appellate court reversed
the decision awarding appellee lawyer attorney's fees
under the "wrongful act" doctrine, holding that appellee
lawyer was not the wronged party under the insurance
policy in question. The appellate court noted that, but for
the failure to appellee lawyer to close the real estate
purchase properly by not obtaining the requisite written
approval from appellant insurer regarding an assignment
of the policy, appellant never would have denied appellee
client's claim, which had resulted in the underlying
lawsuit to enforce the policy. The appellate court further
found that it was inappropriate to allow appellee lawyer
to recover fees which he had suffered because of his own
failure to close the transaction properly. The appellate
court concluded by ordering that, on remand, the relief
sought by appellee lawyer was to be denied, noting that
appellee lawyer's failure to represent appellee client
properly was not excused by the trial court's ultimate
finding that appellant had to recognize the assignment
equitably and to honor appellee client's claim.
April 4, 1989, Filed
Page 1
OUTCOME: The appellate court reversed the award of
attorney's fees to appellee lawyer because he was not
entitled to recover under the "wrongful act" doctrine for
appellant insurer's failure to recognize appellee client's
claim under the policy on the real estate sold by appellee
lawyer; it was appellee lawyer's failure to obtain written
approval regarding the policy's assignment which had
resulted in appellant's failure to honor appellee client's
claim.
LexisNexis(R) Headnotes
Torts > Damages > Costs & Attorney Fees
Insurance Law > Claims & Contracts > Attorney Fees
[HN1] Where a defendant has committed a wrong toward
the plaintiff, and the wrongful act has caused the
plaintiff to litigate with third persons, the wrongful act
doctrine permits the plaintiff to recover, as an additional
element of damages, plaintiff's third party litigation expense.
The wrongful act doctrine does not create an independent
cause of action; instead, it allows a claim for
attorney's fees as special damages in the circumstances
just stated.
COUNSEL:
Walton, Lantaff, Schroeder & Carson and Robert L.
Teitler, for appellant.
Stephens, Lynn, Klein & McNicholas and Philip D.
Parrish, for Appellees.
JUDGES:
Schwartz, C.J., and Barkdull and Cope, JJ., concur,
Schwartz, Chief Judge (specially concurring).
OPINIONBY:
PER CURIAM

OPINION:
[*1061] The appellee Pritcher, a client of attorney
Spatz, contracted to purchase a property owned by parties
named Kauffman, and insured by State Farm Fire &
Casualty Company. The policy had a provision that no
assignment would be valid unless State Farm gave written
approval. At the time of closing Spatz gave notice of
an assignment of the policy to Pritcher, to State Farm,
but received no written approval. Subsequently, Pritcher
suffered a loss, filed a claim with State Farm, which was
denied because of no valid assignment. Pritcher then
brought an action against State Farm on the policy and
against Spatz for negligence. In this action, Spatz
cross-claimed against State Farm seeking a declaratory
decree that there was, in fact, a valid assignment. The
trial court proceeded to try the issues, and held that there
was an equitable assignment and rendered relief [**2]
against State Farm, in favor of Pritcher. Subsequently,
Pritcher dismissed his action against Spatz. Spatz sought
attorney's fees against State Farm under the "wrongful
act" doctrine pronounced in F & R Builders, Inc. v.
United States Fidelity and Guaranty Company, 490
So.2d 1022 (Fla. 3d DCA 1986); n1 Canadian Universal
Insurance Company v. Employers Surplus Lines Insurance
Company, 325 So.2d 29 (Fla. 3d DCA 1976); and
Milohnich v. First National Bank of Miami Springs, 224
So.2d 759 (Fla. 3d DCA 1969). The trial court awarded
same to Spatz in the amount of $ 37,850.00. Thereafter
this appeal ensued. We reverse.
n1 On appeal Spatz relies heavily on F & R
Builders, Inc. v. United States Fidelity and
Guaranty Company, supra. We find this case to
be distinguishable for the following reasons.
Pritcher's action against Spatz could be based
only upon the independent negligence of Spatz,
and neither Spatz or his insurer stood in the shoes
of an excess insurer as they could only become
responsible to Pritcher based upon the negligent
conduct of Spatz.
Spatz was not the wronged party. Under the
"wrongful act" doctrine that would have been Pritcher,
except for the finding of [**3] an equitable assignment.
See and compare Behar v. Jefferson National Bank
at Sunny Isles, 519 So.2d 641 (Fla. 3d DCA 1988);
Glace & Radcliffe, Inc. v. City of Live Oak, 471 So.2d
144 (Fla. 1st DCA 1985); Milohnich v. First National
Bank of Miami Springs, supra. [HN1] Where a defendant
has committed a wrong toward the plaintiff, and the
wrongful act has caused the plaintiff to litigate with third
persons, the wrongful act doctrine permits the plaintiff to
546 So. 2d 1060, *; 1989 Fla. App. LEXIS 1702, **;
14 Fla. L. Weekly 847
Page 2
recover, as an additional element of damages, plaintiff's
third party litigation expense. See Canadian Universal
Ins. Co. v. Employers Surplus Lines Ins. Co., supra; Restatement
of Torts 2d § 914; see also Manning v. Loidhamer,
13 Wash. App. 766, 538 P.2d 136, 138 (1975).
The wrongful act doctrine does not create an independent
cause of action; instead, it allows a claim for attorney's
fees as special damages in the circumstances just stated.
n2 [*1062] But for the failure of Spatz to properly
close the real estate purchase by failing to get written
approval of assignment of the policy, State Farm would
never have denied Pritcher's claim. He should not be
permitted to recover fees which he suffered because of
his failure to properly [**4] close the transaction. The
fact that the trial court ultimately held that State Farm
had to equitably recognize the assignment of its policy
and honor Pritcher's claim does not excuse Spatz' failure
to properly represent Pritcher in the first instance and see
that the assignment of the policy was in accordance with
its terms. Therefore, the order awarding fees under review
be and the same is hereby reversed with directions
to deny the relief sought by Spatz.
[**5]
n2 We believe the Florida cases generally
conform to this pattern. For example, in Canadian
Universal the primary insurer wrongfully refused
to settle within the primary limits and
thereby "committed a wrongful act toward [the
excess insurer]," 325 So.2d at 31, which caused
the excess insurer to incur attorney's fees to defend
the primary insured. Alternatively, the decision
can also be seen as a wrong by the primary
insurer toward its insured, to whose rights the
excess carrier became subrogated after the excess
carrier paid the defense costs of the primary insured.
The same analysis applies to F & R Builders,
supra.
We acknowledge a possible conflict with
Auto-Owners Insurance Co. v. Hooks, 463 So.2d
468 (Fla. 1st DCA 1985), which by its reasoning
can be interpreted to extend the wrongful act
doctrine to allow an independent basis of recovery
to a third party litigant, in that case, Var Heyl.
Id. at 477. Auto-Owners can be reconciled with
the view we take, since in that case Auto-Owners
was found to have breached duties to both Hooks
and Var Heyl, thus allowing both to recoup their
respective third party litigation expenses.
Reversed and remanded with directions.
Schwartz, C.J., and Barkdull and Cope, JJ., concur.

Schwartz, Chief Judge (specially concurring).
CONCURBY:
SCHWARTZ
CONCUR:
SCHWARTZ, Chief Judge (specially concurring).
I entirely agree with the court's decision and underlying
reasoning. I write separately only to note that the
result is not dependent upon an endorsement of F & R
Builders, Inc. v. United States Fidelity & Guaranty Co.,
490 So.2d 1022 (Fla. 3d DCA 1986), and to indicate my
views that, even on its own facts, F & R was wrongly
decided insofar as it approves the recovery of attorney's
fees expended in pursuing the action by the excess carrier
against the primary insurer. Such a holding is contrary
to what was previously a unanimity of authority on this
546 So. 2d 1060, *; 1989 Fla. App. LEXIS 1702, **;
14 Fla. L. Weekly 847
Page 3
point. See United States Auto. Ass'n v. Hartford Ins. Co.,
468 So.2d 545 (Fla. 5th DCA 1985), pet. for review denied,
476 So.2d 676 (Fla. 1985); American Foreign Ins.
Co. v. Avis Rent-A-Car Sys., 401 So.2d 855 (Fla. 1st
DCA 1981); American Home Assurance Co. v. City of
Opa Locka, 368 So.2d 416 (Fla. 3d DCA 1979). Specifically,
I disagree with the majority's hypothesis at note 2
that this portion of F & R may be rationalized on the
theory that the excess carrier is subrogated to the rights
of the insured to attorney's fees under section [**6]
627.428, Florida Statutes (1987). The fees to which I
refer here were not expended by or on behalf of the insured
in defending the primary action, but rather by the
excess company itself in its separate case against the
primary insurer which, as such, should have initially
borne the defense expenses. Since there is nothing to be
subrogated to in this respect and the excess carrier is
plainly not itself an insured of the primary carrier, the
statute does not apply.

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PRIOR HISTORY:
59 Cal. 2d 618, *; 381 P.2d 645, **;
30 Cal. Rptr. 821, ***; 1963 Cal. LEXIS 191
LEXSEE 59 CAL2D 618
JOHN J. PRENTICE et al., Plaintiffs and Respondents, v. NORTH AMERICAN
TITLE GUARANTY CORPORATION, ALAMEDA DIVISION, Defendant and
Appellant
S. F. No. 20954
Supreme Court of California
59 Cal. 2d 618; 381 P.2d 645; 30 Cal. Rptr. 821; 1963 Cal. LEXIS 191
APPEAL from a judgment of the Superior Court of Contra
Costa County. Martin E. Rothenberg, Judge.
Action to recover damages for negligence in the
closing of a sale of real property.
DISPOSITION:
Affirmed. Judgment for plaintiffs affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant escrow agent
appealed from a judgment entered by the Superior Court
of Contra Costa County (California), which found in
favor of plaintiff sellers in their negligence action against
the escrow agent.
OVERVIEW: The buyers agreed to purchase certain
land from the sellers, who agreed to subordinate their
deed of trust to a loan that the buyers obtained for the
purpose of building an apartment. However, the buyers
never built the apartment, and the sellers filed an action
against the buyers, the lender, and the escrow agent. The
trial court entered a decree quieting the sellers' title
against the buyers and the lender. As to the escrow agent,
the trial court awarded damages to the sellers in the
amount of attorney's fees incurred by them in the prosecution
of their claims against the buyers and the lender.
On appeal, the court held that the sellers were entitled to
recover the attorney's fees as damages because the natural
and proximate cause of the escrow agent's negligence
was to require the sellers to file the quiet title action
against the buyers and the lender. The court found that
the escrow agent was not prejudiced by the sellers' failure
to plead the matter of attorney's fees because the issue
was thoroughly tried and understood by counsel and
the court.
May 21, 1963
Page 1
OUTCOME: The court affirmed the judgment of the
trial court in favor of the sellers.
LexisNexis(R) Headnotes
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN1] In the absence of some special agreement, statutory
provision, or exceptional circumstances, attorney's
fees are to be paid by the party employing the attorney.
Cal. Civ. Proc. Code § 1021.
Torts > Damages > Compensatory Damages
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] A person who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover compensation for the reasonably necessary
loss of time, attorney's fees, and other expenditures
thereby suffered or incurred.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] See Cal. Civ. Proc. Code § 1021.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN4] Cal. Civ. Proc. Code § 1021 prohibits the allowance
of attorney fees against a defendant in an ordinary
two-party lawsuit. Section 1021 is merely a statement
of the general rule. The section is not applicable to
cases where a defendant has wrongfully made it necessary
for a plaintiff to sue a third person.

Real & Personal Property Law > Quieting Title & Determining
Adverse Claims
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN5] When a paid escrow holder has negligently made
it necessary for the vendor of land to file a quiet title
action against a third person, attorney's fees incurred by
the vendor in prosecuting such action are recoverable as
an item of the vendor's damages in an action against the
escrow holder.
COUNSEL:
Sidney L. Weinstock, Harold J. Chase and Weinstock,
Anderson, Maloney & Chase for Defendant and
Appellant.
John R. Forde, Jr., and Robert T. Eshleman for
Plaintiffs and Respondents.
JUDGES:
In Bank. McComb, J. Gibson, C.J., Traynor, J.,
Schauer, J., Peters, J., Tobriner, J., and Peek, J., concurred.
OPINIONBY:
McCOMB
OPINION:
[*619] [**646] [***822] Defendant appeals
from a judgment in favor of plaintiffs in an action to recover
damages for negligence in the closing of a sale of
real property.
Facts: Plaintiffs agreed to sell certain land to Robert
J. Horton and Mary R. Horton, to accept the Hortons'
deed of trust for most of the purchase price, and to subordinate
their interest to any loan the Hortons might obtain
for the purpose of constructing an apartment building
on the land.
The Hortons obtained a loan from Blanche Pope
Neal and gave their note in the amount of the loan, secured
by a first deed of trust on the property.
Defendant acted as escrow holder and closed the
transaction pursuant to written instructions from the parties.
Upon completion of the sale, the Hortons had title to
the land, subject to a first deed of trust in favor of Neal
and a second deed of trust in favor of plaintiffs for the
balance due on the purchase price.
The Hortons did not use the proceeds of the loan
from Neal to construct an apartment house, but devoted
59 Cal. 2d 618, *; 381 P.2d 645, **;
30 Cal. Rptr. 821, ***; 1963 Cal. LEXIS 191
Page 2
the money to other purposes, later filing a petition in
bankruptcy.
Plaintiffs then brought this action against the Hortons,
Neal, and defendant.
[*620] Plaintiffs' complaint contained various
counts against defendants Horton and Neal, and the trial
court granted relief against these defendants by a decree
quieting plaintiffs' title against their claims.
The counts against defendant were based purely on
the ground of negligence. The trial court found that
defendant had been negligent in closing the sale and
awarded plaintiffs as damages the amount of attorney's
fees incurred by them in the prosecution of the counts in
the complaint against defendants Horton and Neal.
Questions: (1) First. When a vendor of land has
been required, because of the negligence of a paid
escrow holder, to protect his interests by bringing a successful
quiet title action against the purchaser and the
holder of a first deed of trust, may he recover from the
escrow holder the amount of attorney's fees paid in the
quiet title action?
Yes.
[**647] [***823]
(2) General rule: [HN1] In the absence of some special
agreement, statutory provision, or exceptional circumstances,
attorney's fees are to be paid by the party
employing the attorney. ( Code Civ. Proc., § 1021;
Reid v. Valley Restaurants, Inc., 48 Cal.2d 606, 610 [5]
[311 P.2d 473]; Estate of Reade, 31 Cal.2d 669, 671 [2]
[191 P.2d 745]; Estate of Williamson, 150 Cal.App.2d
334, 341 [8] [310 P.2d 77].)
(3) Exception: [HN2] A person who through the
tort of another has been required to act in the protection
of his interests by bringing or defending an action against
a third person is entitled to recover compensation for the
reasonably necessary loss of time, attorney's fees, and
other expenditures thereby suffered or incurred. ( Stevens
v. Chisholm, 179 Cal. 557, 564 [178 P. 128]; Nelson
v. Kellogg, 162 Cal. 621, 623 [123 P. 1115,
Ann.Cas. 1913D 759]; Contra Costa County Title Co.
v. Waloff, 184 Cal.App.2d 59, 67 [9a] [7 Cal.Rptr. 358];
Rest., Torts (1939) § 914; 15 Am.Jur. (1938) Damages,
§ 144, p. 552; 25 C.J.S. (1941) Damages, § 50c, p.
534; cf. Estate of Williamson, supra, 150 Cal.App.2d
334, 341.)
(4) It is urged that this exception is not applicable
in this case because of the provisions of section 1021 of
the Code of Civil Procedure. That section provides:
[HN3] "Except as attorney's fees are specifically provided
for by statute, the measure and mode of compensation

of attorneys . . . is left to the agreement . . . of the parties.
. . ."
[HN4] This section undoubtedly prohibits the allowance
of attorney fees against a defendant in an ordinary
two-party lawsuit. [*621] ( Reid v. Valley Restaurants,
Inc., supra; American Aero. Corp. v. Grand
Cen. Aircraft Co., 155 Cal.App.2d 69, 83 [9] [317 P.2d
694].) Section 1021 is merely a statement of the general
rule. (See Rest., Torts (1939) § 914, com. c.)
The section is not applicable to cases where a defendant
has wrongfully made it necessary for a plaintiff
to sue a third person. ( Stevens v. Chisholm, supra; Nelson
v. Kellogg, supra; Contra Costa County Title Co. v.
Waloff, supra; Peebler v. Olds, 71 Cal.App.2d 382, 389
[8] [162 P.2d 953].) In this case we are not dealing with
"the measure and mode of compensation of attorneys"
but with damages wrongfully caused by defendant's improper
actions.
(5) [HN5] When a paid escrow holder has, as in
this case, negligently made it necessary for the vendor of
land to file a quiet title action against a third person, attorney's
fees incurred by the vendor in prosecuting such
action are recoverable as an item of the vendor's damages
in an action against the escrow holder.
Here the natural and proximate consequence of defendant's
negligence was to require plaintiffs to file an
action seeking to quiet their title against claims by either
the Hortons or Neal. Accordingly, under the rules hereinabove
set forth, plaintiffs were entitled to recover from
defendant as damages reasonable compensation for attorney's
fees incurred by them in their litigation with
such third parties.
59 Cal. 2d 618, *; 381 P.2d 645, **;
30 Cal. Rptr. 821, ***; 1963 Cal. LEXIS 191
Page 3
(6) In the usual case, the attorney's fees will have
been incurred in connection with a prior action; but there
is no reason why recovery of such fees should be denied
simply because the two causes (the one against the third
person and the one against the party whose breach of
duty made it necessary for the plaintiff to sue the third
person) are tried in the same court at the same time.
(Contra Costa County Title Co. v. Waloff, supra, 184
Cal.App.2d 59, 68 [9b].)
There was no disadvantage to defendant in the fact
that the causes, although separate, were concurrently
tried. Because a judgment quieting title was obtained by
plaintiffs against the Hortons and Neal, defendant incurred
no liability for damages other than for costs and
attorney's fees.
(7) Second. Was the damage which was caused
by the incurring of attorney's fees properly pleaded?
No. The pleadings contain no allegation that attorney's
fees had been, or would be, incurred in the clearing
of title. [**648] [***824] However, the issue was
thoroughly tried and understood by counsel and by the
court, and no prejudice has resulted to [*622] defendant
from a failure to allege the damage more specifically
in the complaint. Therefore, since there was not a miscarriage
of justice, under article VI, section 4 1/2, of the
Constitution this error must be disregarded.
In view of the foregoing conclusions, it is unnecessary
to discuss other questions argued by counsel.
The judgment is affirmed.

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2002 UT App 406, *; 60 P.3d 1176, **;
462 Utah Adv. Rep. 3; 2002 Utah App. LEXIS 119, ***
LEXSEE 60 P3D 1176
Macris & Associates, Inc., Plaintiff and Appellant, v. Neways, Inc.; Thomas E.
Mower; and Leslie D. Mower, Defendants and Appellees.
Case No. 20010755-CA
COURT OF APPEALS OF UTAH
2002 UT App 406; 60 P.3d 1176; 462 Utah Adv. Rep. 3; 2002 Utah App. LEXIS
119
PRIOR HISTORY: [***1] Fourth District, Provo
Department. The Honorable Anthony W. Schofield.
DISPOSITION: Reversed and remanded.
CASE SUMMARY:
PROCEDURAL POSTURE: The Fourth District
Court, Provo Department, Utah, granted summary judgment
in favor of defendants, corporation and individuals,
in plaintiff company's suit for breach of contract. The
company appealed.
OVERVIEW: The company argued that the trial court
erred in granting defendants summary judgment. The
appellate court found that the cause of action for fraudulent
transfer was not created by the Uniform Fraudulent
Transfer Act (UFTA), Utah Code Ann. § § 25-6-1 to
-13 (1998 & Supp. 2002). There was no reason why a
plaintiff in a fraudulent transfer case, who would have
had a claim for attorney fees under the third-party litigation
exception before UFTA was enacted, should be denied
attorney fees. To obtain attorney fees under the
third-party litigation exception, the company could seek
attorney fees from the original corporation, which was
not a current party. If the company could establish that
the original corporation was the alter ego of the current
corporation, then the trial court could hold the current
corporation liable for the original corporation's actions. If
the company could establish that the corporation was the
alter ego of the individuals, then it could seek attorney
fees from the individuals. The company was entitled to
seek punitive damages only if it was awarded attorney
fees as consequential damages. These were questions of
fact inappropriate for summary judgment.
OUTCOME: The judgment was reversed.
LexisNexis(R) Headnotes
November 29, 2002, Filed
Page 1
Civil Procedure > Summary Judgment > Summary
Judgment Standard
[HN1] In reviewing a grant of summary judgment, the
appellate court views the facts and all reasonable inferences
drawn therefrom in the light most favorable to the
nonmoving party.
Civil Procedure > Appeals > Standards of Review > De
Novo Review
Civil Procedure > Summary Judgment > Summary
Judgment Standard
[HN2] Summary judgment is appropriate only when no
genuine issues of material fact exist and the moving party
is entitled to judgment as a matter of law. Utah R. Civ.
P. 56(c). Because entitlement to summary judgment is a
question of law, the appellate court accords no deference
to the trial court's resolution of the legal issues presented.
The appellate court determines only whether the trial
court erred in applying the governing law and whether
the trial court correctly held that there were no disputed
issues of material fact.
Torts > Damages > Costs & Attorney Fees
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] The long-standing rule in Utah is that attorney
fees cannot be recovered unless provided for by statute
or contract. However, this general rule is not without
exception. A well-established exception to this general
rule allows recovery of attorney fees as consequential
damages, but only in the limited situation where the defendant's
wrongful conduct foreseeably causes the plaintiff
to incur attorney fees through litigation with a third
party.
Torts > Damages > Costs & Attorney Fees
Civil Procedure > Costs & Attorney Fees > Attorney
Fees

[HN4] Utah courts have applied the third-party litigation
exception only to breach of contract and tort cases.
Mergers & Acquisitions Law > General Business Considerations
> Fraudulent Transfers
[HN5] The law has long held that transfers of property
designed to place a debtor's assets beyond the reach of
the debtor's creditors are void as to the creditors. The
Uniform Fraudulent Transfer Act (UFTA), Utah Code
Ann. § § 25-6-1 to -13 (1998 & Supp. 2002), is simply a
codification of the common law that provided a remedy
against debtors who sought to conceal their assets from
creditors. Accordingly, unless displaced by UFTA, the
principles of law and equity, including merchant law and
the law relating to principal and agent, equitable subordination,
estoppel, laches, fraud, misrepresentation, duress,
coercion, mistake, insolvency, or other validating or
invalidating cause, supplement UFTA's provisions.
Utah Code Ann. § 25-6-11. Furthermore, because
UFTA is remedial in nature, it should be liberally construed.
Mergers & Acquisitions Law > General Business Considerations
> Fraudulent Transfers
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN6] There is no reason why a plaintiff in a fraudulent
transfer case who would have had a claim for attorney
fees under the third-party litigation exception before the
Uniform Fraudulent Transfer Act (UFTA), Utah Code
Ann. § § 25-6-1 to -13 (1998 & Supp. 2002), was enacted
should now be denied attorney fees. UFTA does
not expressly address attorney fees. Instead, it expressly
grants courts the authority to employ a full array of remedial
measures insofar as they are warranted under the
particular facts of the case. Utah Code Ann. §
25-6-8(1)(c)(iii). Therefore, since UFTA is silent as to
the common law third-party litigation exception, the
third-party litigation exception is retained from the
common law and may be applied to causes of action that
arise under UFTA.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN7] To recover under the third-party litigation exception,
the plaintiff must seek attorney fees from the defendant
whose action caused the third-party litigation.
Mergers & Acquisitions Law > General Business Considerations
> Successor Liabilities
[HN8] Under successor liability, where one company
sells or otherwise transfers all its assets to another company,
the purchaser is liable for the seller's debts and
liabilities if: (1) the purchaser expressly or impliedly
agrees to assume such debts; (2) the transaction amounts
2002 UT App 406, *; 60 P.3d 1176, **;
462 Utah Adv. Rep. 3; 2002 Utah App. LEXIS 119, ***
Page 2
to a consolidation or merger of the seller and purchaser;
(3) the purchasing corporation is merely a continuation
of the selling corporation; or (4) the transaction is entered
into by the seller and the purchaser fraudulently in
order to escape liability for such debts.
Business & Corporate Entities > Corporations >
Shareholders & Other Constituents > Disregard of
Corporate Entity
[HN9] Under the alter ego doctrine, the trial court may
disregard the corporate entity and hold an individual liable
if: (1) there is such unity of interest and ownership
that the separate personalities of the corporation and the
individual no longer exist, viz., the corporation is, in fact,
the alter ego of one or a few individuals; and (2) the observance
of the corporate form would sanction a fraud,
promote injustice, or an inequitable result would follow.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN10] Under the third-party litigation exception, only
the fees incurred in litigation with the third party are recoverable
as consequential damages.
Torts > Damages > Punitive Damages
[HN11] Punitive damages are the exception rather than
the rule and should be imposed cautiously. Accordingly,
except as otherwise provided by statute, a trial court may
award punitive damages only if: (1) compensatory or
general damages are awarded; and (2) it is established by
clear and convincing evidence that the acts or omissions
of the tortfeasor are the result of willful and malicious or
intentionally fraudulent conduct, or conduct that manifests
a knowing and reckless indifference toward, and a
disregard of, the rights of others. Utah Code Ann. §
78-18-1(1)(a) (Supp. 2002).
COUNSEL: M. David Eckersley, Salt Lake City, for
Appellant.
Wade S. Winegar, Christopher S. Crump, Scott T.
Temby, and Bruce R. Murdock, Salem, for Appellees.
JUDGES: Before Judges Davis, Greenwood, and
Thorne.
OPINIONBY: DAVIS
OPINION: [**1177]
DAVIS, Judge:
[*P1] Plaintiff Macris & Associates, Inc. (Macris)
appeals from the trial court's decision to grant summary
judgment for Defendants Neways, Inc. (Neways),

Thomas E. Mower, and Leslie D. Mower. n1 The trial
court granted Neways and Mowers's motion for summary
judgment, ruling Neways and Mowers were not liable to
Macris for consequential or punitive damages. We reverse
and remand.
2002 UT App 406, *; 60 P.3d 1176, **;
462 Utah Adv. Rep. 3; 2002 Utah App. LEXIS 119, ***
n1 We refer to Thomas E. Mower and Leslie
D. Mower collectively as Mowers.
BACKGROUND n2
n2 It is well established that [HN1] "in reviewing
a grant of summary judgment, we view
the facts and all reasonable inferences drawn
therefrom in the light most favorable to the nonmoving
party." Higgins v. Salt Lake County, 855
P.2d 231, 233 (Utah 1993). We recite the facts of
this case accordingly.
[***2]
[*P2] On April 17, 1991, Macris filed suit against Images
and Attitude, Inc. (Images), owned by Mowers,
claiming breach of contract. n3
n3 We refer to this action as Macris I.
[*P3] On September 1, 1992, Images sold its assets to
Neways. Consequently, on February 14, 1995, Macris
filed suit against Neways and Mowers, claiming fraudulent
conveyance, successor liability, and alter ego, asserting
that the transfer of assets from Images to Neways
left Images without sufficient assets to cover any judgment
rendered against it in Macris I. n4
n4 We refer to this action as Macris II.
[*P4] Macris I went to trial on February 16, 1995. On
September 15, 1995, the trial court [**1178] ruled in
favor of Macris and rendered a judgment against Images
for $ 360,681.20.
[*P5] On October 19, 1995, Neways and [***3]
Mowers motioned for summary judgment in Macris II,
contending that Macris's claims were barred by res judicata.
The trial court granted Neways and Mowers's mo-
Page 3
tion, holding res judicata barred Macris from recovering
further contract damages.
[*P6] Macris appealed and we reversed. See Macris
& Assocs., Inc. v. Neways, Inc., 1999 UT App 230,P17,
986 P.2d 748. The Utah Supreme Court granted certiorari
to Neways and Mowers and affirmed, holding that
Macris's claims of alter ego, fraudulent conveyance, and
successor liability were not barred by res judicata. See
Macris & Assocs., Inc. v. Neways, Inc., 2000 UT 93,
P47, 16 P.3d 1214. However, the supreme court further
held that issue preclusion barred Macris from seeking
additional contract damages from Neways and Mowers
in Macris II. n5 See id.
n5 The parties on appeal do not argue that
consequential and punitive damages are additional
contract damages.
[*P7] On February 1, 2001, Macris filed a demand
[***4] for payment of the Macris I judgment. On February
16, 2001, Neways International, Inc. (Neways International)
n6 paid Macris $ 746,356.97, which covered
the entire Macris I judgment and interest.
n6 Neways International is a corporation
owned by Mowers separate from both Images and
Neways and is not a party to either Macris I or
Macris II.
[*P8] Following payment, Neways and Mowers again
moved for summary judgment in Macris II, alleging that
Macris II was moot because the Macris I judgment was
paid and Macris was barred from seeking further contract
damages in Macris II. In response, Macris asserted that
the attorney fees incurred in Macris II were recoverable
under the third-party litigation exception to the general
rule that fees are not recoverable in a contract or tort action
unless provided for in the contract or by statute because
the fees were a consequence of the transfer of assets
precipitated by the breach and subsequent litigation
in Macris I. n7
n7 Although Macris's complaint in Macris II
asserts a direct claim against Mowers and
Neways under the Uniform Fraudulent Transfer
Act, it makes no specific claim for attorney fees
under the statute or pursuant to the third-party
litigation exception. Instead, in response to

2002 UT App 406, *; 60 P.3d 1176, **;
462 Utah Adv. Rep. 3; 2002 Utah App. LEXIS 119, ***
Mowers and Neways's motion for summary
judgment, Macris argued it was entitled to fees
under the exception because only a consequential
damage award would support a claim for punitive
damages, and the fact that the third-party litigation
was a claim under the fraudulent transfer act
was not a bar to recovery of fees. This is Macris's
argument on appeal, and we conduct our analysis
accordingly.
[***5]
[*P9] In an order dated August 2, 2001, the trial court
granted Mowers and Neways's motion for summary
judgment, holding Macris could not recover consequential
or punitive damages. First, the trial court ruled that
Macris could not recover consequential damages because
"attorney[] fees are not recoverable in a contract action
unless provided by statute or by contract," see, e.g., Collier
v. Heinz, 827 P.2d 982, 983 (Utah Ct. App. 1992),
and "neither of these exist." The trial court also determined
that the third-party litigation exception proposed
by Macris did not alter this outcome because, although
the "third party litigation exception may apply in contract
actions," Macris's case "arose under statute--the fraudulent
transfer act[]," and the plain language of the fraudulent
transfer act "did not provide an attorney's fee remedy."
Second, the trial court ruled that Macris could not
recover punitive damages because punitive damages
"may be awarded only if compensatory or general damages
are awarded," Utah Code Ann. § 78-18-1(1)(a)
(Supp. 2002), and Macris received "no award of general
or compensatory damages" in Macris [***6] II. Furthermore,
the trial court declined to "allow punitive
damages as an element of recovery in a fraudulent transfer
action," because it "declined to find a remedy in a
statute which the legislature did not see fit to include."
[*P10] Macris appeals the trial court's decision to
grant summary judgment in favor of Mowers and
Neways.
ISSUE AND STANDARD OF REVIEW
[*P11] The issue on appeal is whether the trial court
correctly granted Mowers and Neways's motion for
summary judgment, ruling [**1179] that Mowers and
Neways were not liable to Macris for consequential or
punitive damages. [HN2] "Summary judgment is appropriate
only when no genuine issues of material fact exist
and the moving party is entitled to judgment as a matter
of law." Jones v. ERA Brokers Consol., 2000 UT 61, P8,
6 P.3d 1129; see also Utah R. Civ. P. 56(c). "Because
entitlement to summary judgment is a question of law,
we accord no deference to the trial court's resolution of
Page 4
the legal issues presented." K & T, Inc. v. Koroulis, 888
P.2d 623, 627 (Utah 1994). "We determine only whether
the trial court erred in applying the governing law and
whether the trial court correctly [***7] held that there
were no disputed issues of material fact." Berenda v.
Langford, 914 P.2d 45, 50 (Utah 1996) (citations and
quotations omitted).
ANALYSIS
I. Attorney Fees
[*P12] Macris claims the trial court erred in granting
Mowers and Neways's motion for summary judgment on
the basis that Macris was not entitled to attorney fees.
[*P13] [HN3] "The long-standing rule in Utah is that
attorney fees cannot be recovered unless provided for by
statute or contract." Collier v. Heinz, 827 P.2d 982, 983
(Utah Ct. App. 1992). "However, this general rule is not
without exception." n8 South Sanpitch Co. v. Pack, 765
P.2d 1279, 1282 (Utah Ct. App. 1988). "A
well-established exception to this general rule allows
recovery of attorney fees as consequential damages, but
only in the limited situation where the defendant's
[wrongful conduct] foreseeably causes the plaintiff to
incur attorney fees through litigation with a third party."
Collier, 827 P.2d at 983.
n8 There are numerous exceptions to the
general attorney fees rule because "a court has
inherent equitable power to award reasonable attorney
fees when it deems it appropriate in the
interest of justice and equity." Stewart v. Utah
Pub. Serv. Comm'n, 885 P.2d 759, 782 (Utah
1994). Exceptions include: "when a party acts 'in
bad faith, vexatiously, wantonly, or for oppressive
reasons,'" id. (citation omitted); "when nonparty
class members [in a class action case] are
financially benefitted as a result of the efforts of a
few litigants who successfully create a fund that
benefits the entire class," id.; "when a beneficiary
sues a trustee for violation of the trust and obtains
a recovery for all other beneficiaries whose rights
were also violated by the trustee," id. at 783;
when a party acts as a "'private attorney general'"
and vindicates "'a strong or societally important
public policy,'" id. (citation omitted); "when a
plaintiff's litigation confers 'a substantial benefit
on the members of an ascertainable class,'" id. at
782 n.18 (citation omitted); and when an insurer
breaches an insurance contract, see Collier v.
Heinz, 827 P.2d 982, 984 (Utah Ct. App. 1992).
[***8]

[*P14] Thus far, [HN4] Utah courts have applied the
third-party litigation exception only to breach of contract
and tort cases. See, e.g., id. at 983-84 (holding the
third-party litigation exception applies "where the defendant's
breach of contract foreseeably caused the plaintiff
to incur attorney fees through litigation with a third
party"); South Sanpitch Co., 765 P.2d at 1282-83 (holding
that "when the natural consequence of one's negligence
is another's involvement in a dispute with a third
party, attorney fees reasonably incurred in resolving the
dispute are recoverable from the negligent party as an
element of damages").
[*P15] In this case, the trial court acknowledged the
existence of the third-party litigation exception but refused
to apply it because this case was brought under the
Uniform Fraudulent Transfer Act (UFTA). See Utah
Code Ann. § § 25-6-1 to -13 (1998 & Supp. 2002). n9
The trial court reasoned that UFTA is statutory law, not
tort or contract law, so the exception does not apply. We
disagree.
2002 UT App 406, *; 60 P.3d 1176, **;
462 Utah Adv. Rep. 3; 2002 Utah App. LEXIS 119, ***
n9 For convenience, we cite to the most recent
version of the Utah Code. There has been no
significant change to UFTA that would affect our
analysis.
[***9]
[*P16] The cause of action for fraudulent transfer was
not created by UFTA. [HN5] Rather, "'the law has long
held that transfers of property designed to place a debtor's
assets beyond the reach of the debtor's creditors are
void as to the creditors.'" National Loan Investors, L.P. v.
Givens, 952 P.2d 1067, 1069 (Utah 1998) (citation
omitted); see also Butler v. Wilkinson, 740 P.2d 1244,
1260 (Utah 1987) (citing early common law cases).
UFTA is simply "a codification of the common law that
provided a remedy against debtors who sought to conceal
their assets [**1180] from creditors." Givens, 952
P.2d at 1069. Accordingly, "unless displaced by
[UFTA], the principles of law and equity, including
merchant law and the law relating to principal and agent,
equitable subordination, estoppel, laches, fraud, misrepresentation,
duress, coercion, mistake, insolvency, or
other validating or invalidating cause, supplement
[UFTA]'s provisions." Utah Code Ann. § 25-6-11. Furthermore,
"because [UFTA] is remedial in nature, it
should be liberally construed." Givens, 952 P.2d at 1069.
[*P17] [HN6] We see [***10] no reason why a
plaintiff in a fraudulent transfer case who would have
had a claim for attorney fees under the third-party litiga-
Page 5
tion exception before UFTA was enacted should now be
denied attorney fees. UFTA does not expressly address
attorney fees. Instead, it expressly grants courts the authority
to employ a full array of remedial measures insofar
as they are warranted under the particular facts of the
case. See Utah Code Ann. § 25-6-8(1)(c)(iii) ("In an
action for relief against a transfer or obligation under this
chapter, a creditor . . . may obtain . . . subject to applicable
principles of equity and in accordance with applicable
rules of civil procedure . . . any other relief the circumstances
may require."); Volk Constr. Co. v. Wilmescherr
Drusch Roofing Co., 58 S.W.3d 897, 900 (Mo.
Ct. App. 2001). Therefore, since UFTA is silent as to the
common law third-party litigation exception, we hold the
third-party litigation exception is retained from the
common law n10 and may be applied to causes of action
that arise under UFTA. n11
n10 We do not decide whether attorney fees
are recoverable under UFTA in a direct claim
against the transferor or transferee.
[***11]
n11 Mowers and Neways rely on Selvage v.
J.J. Johnson & Assocs., 910 P.2d 1252 (Utah Ct.
App. 1996), to support their argument that this
court has previously determined UFTA does not
allow attorney fees. However, in Selvage, this
court was interpreting Utah Code Ann. §
25-6-9(2) (1995), a section of UFTA that discusses
the remedies available to a creditor following
a debtor's good faith transfer of assets.
Selvage, 910 P.2d at 1263-64. Under this section,
a creditor is entitled to recover "the amount necessary
to satisfy the creditor's claim." Utah Code
Ann. § 25-6-9(2). The Selvage court determined
a creditor's claim does not include attorney fees.
Id. at 1264. Here, Macris does not allege that
Mowers and Neways were involved in a good
faith transfer, but a fraudulent transfer governed
by Utah Code Ann. § 25-6-8.
[*P18] However, in this case, even though Macris is
entitled to seek attorney fees incurred in pursuing a
UFTA claim using the third-party [***12] litigation
exception, it is limited by the requirements of the exception.
[*P19] [HN7] To recover under the third-party litigation
exception, the plaintiff must seek attorney fees from
the defendant whose action caused the third-party litiga-

tion. See South Sanpitch Co., 765 P.2d at 1283 (holding
the third-party litigation exception applies where the
plaintiff "seeks only those fees incurred in litigation
against others to undo the problem [the defendant] negligently
caused"). In this case, Images is the defendant
whose action caused Macris to bring Macris II. Thus, to
obtain attorney fees under the third-party litigation exception,
Macris may seek attorney fees from Images.
However, Images is not a party to the present proceeding.
[*P20] Instead, Macris alleges successor liability and
alter ego in its complaint. [HN8] Under successor liability,
"'where one company sells or otherwise transfers all
its assets to another company,'" the purchaser is liable for
the seller's debts and liabilities if:
(1) the purchaser expressly or impliedly agrees to
assume such debts; (2) the transaction amounts to a consolidation
or merger of the seller and purchaser; (3)
[***13] the purchasing corporation is merely a continuation
of the selling corporation; or (4) the transaction is
entered into [by the seller and the purchaser] fraudulently
in order to escape liability for such debts.
Macris & Assocs., Inc. v. Neways, Inc., 1999 UT App
230, P15, 986 P.2d 748 (citation omitted), aff'd, 2000 UT
93, 16 P.3d 1214. Accordingly, if Macris is successful in
its claim that Neways is liable to Macris "for all amounts
due or to become due from Images to Macris" because
"Neways is the successor corporation to Images," then
Macris may seek attorney fees from Neways under the
third-party litigation exception.
[**1181] [*P21] Similarly, [HN9] under the alter
ego doctrine, the trial court may "disregard the corporate
entity" and hold an individual liable if: (1) there is "such
unity of interest and ownership that the separate personalities
of the corporation and the individual no longer
exist, viz., the corporation is, in fact, the alter ego of one
or a few individuals;" and (2) "the observance of the
corporate form would sanction a fraud, promote injustice,
or an inequitable result would follow." Norman v.
Murray First Thrift & Loan Co., 596 P.2d 1028, 1030
(Utah 1979). [***14] Thus, based upon the way Macris's
complaint is framed, if Macris can establish that
Images is the alter ego of Neways, then the trial court
may hold Neways liable for Images's actions. n12 If
Macris can then establish that Neways is the alter ego of
Mowers, then Macris may seek attorney fees from Mowers.
Whether successor liability and alter ego exist involve
questions of fact inappropriate for summary judgment.
n13
2002 UT App 406, *; 60 P.3d 1176, **;
462 Utah Adv. Rep. 3; 2002 Utah App. LEXIS 119, ***
Page 6
n12 . In its complaint, Macris does not claim
that Images is the alter ego of Mowers. Instead, it
asserts that "Neways is the alter ego of Images
and vice versa," and Mowers are "the alter ego of
Neways, and vice versa." The third-party litigation
exception does not support a direct claim for
attorney fees against Mowers and Neways.
n13 We note that Macris may not use its
successor liability and alter ego claims to seek
additional contract damages resulting from Images's
breach of contract. See Macris & Assocs.,
Inc. v. Neways, Inc., 2000 UT 93, P47, 16 P.3d
1214.
[*P22] [***15] Furthermore, in order to recover
attorney fees under the third-party litigation exception,
Macris must also show that Macris II was a natural consequence
of Images's breach and that it was necessary to
bring the action. See South Sanpitch Co., 765 P.2d at
1282. This is also a question of fact inappropriate for
summary judgment.
[*P23] Even if Macris is awarded attorney fees under
the third-party litigation exception, such fees are limited
to those incurred before the contract claim against Images
was satisfied. [HN10] "Under the third-party [litigation]
exception, only the fees incurred in litigation with
the third party are recoverable as consequential damages."
Collier, 827 P.2d at 983-84. Macris cannot recover
attorney fees incurred after Macris I was satisfied because
these fees were incurred not in litigation with a
third party to recover its contract damages, but in pursuit
of Macris's claim for attorney fees as consequential
damages, which would amount to a fee upon a fee.
Therefore, if Macris is entitled to attorney fees under the
third-party litigation exception, it is only entitled to fees
incurred in the third party litigation [***16] before
Neways International paid the Macris I judgment.
II. Punitive Damages
[*P24] Macris claims the trial court erred by granting
summary judgment for Mowers and Neways because
Macris was not entitled to punitive damages.
[*P25] [HN11] "Punitive damages are the exception
rather than the rule and should be imposed cautiously."
Von Hake v. Thomas, 705 P.2d 766, 771 (Utah 1985);
see also First Sec. Bank of Utah, N.A. v. J.B.J.
Feedyards, Inc., 653 P.2d 591, 598 (Utah 1982) ("Punitive
damages constitute 'an extraordinary remedy . . .
outside the field of usual redressful remedies' which
'should be applied with caution lest, engendered by pas-

sion or prejudice because of defendant's wrongdoing, the
award becomes unrealistic or unreasonable.'" (Citation
and footnote omitted.)).
[*P26] Accordingly, "except as otherwise provided by
statute," a trial court may award punitive damages only
if: (1) "compensatory or general damages are awarded,"
and (2) "it is established by clear and convincing evidence
that the acts or omissions of the tortfeasor are the
result of willful and malicious or intentionally fraudulent
conduct, or conduct [***17] that manifests a knowing
and reckless indifference toward, and a disregard of, the
rights of others." Utah Code Ann. § 78-18-1(1)(a)
(Supp. 2002).
[*P27] Therefore, in this case, Macris is entitled to
seek punitive damages only if it is awarded attorney fees
as consequential damages in accordance with our decision
and is otherwise entitled to punitive damages. These
2002 UT App 406, *; 60 P.3d 1176, **;
462 Utah Adv. Rep. 3; 2002 Utah App. LEXIS 119, ***
Page 7
are questions of fact inappropriate for summary judgment.
[**1182] CONCLUSION
[*P28] We conclude that the trial court erred in granting
summary judgment for Mowers and Neways. Summary
judgment is inappropriate because issues of fact
exist as to whether Macris
is entitled to attorney fees under the third-party litigation
exception and whether Macris is entitled to punitive
damages.
James Z. Davis, Judge
[*P29] WE CONCUR:
Pamela T. Greenwood, Judge
William A. Thorne Jr., Judge

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PRIOR HISTORY: [**1]
674 P.2d 946, *; 1984 Colo. LEXIS 461, **
LEXSEE 674 P2D 946
James H. ELIJAH and June A. Elijah, Petitioners, v. George S. FENDER, Respondent;
George S. FENDER, Petitioner, v. James H. ELIJAH and June A. Elijah,
Respondents
Certiorari to the Colorado Court of Appeals.
DISPOSITION: Affirmed in Part, Reversed in Part.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff real estate broker
filed an action against defendant clients to recover his
commission due from an underlying trade transaction.
The clients filed a counterclaim against the broker. The
broker filed a motion for leave to file a third party complaint
against his closing attorney. The district court denied
the broker's motion. The court of appeal (Colorado)
reduced the award to the clients. Both parties appealed.
OVERVIEW: The court concentrated on the issues of
whether the district court erred in rejecting the broker's
third-party complaint and whether the court of appeals
correctly assessed the damages for the clients' breach of
fiduciary duty claim. The court held that the district court
did not abuse its discretion in denying the brokers leave
to file a third-party complaint against his attorney because
the third-party claims may have unduly complicated
the case to the prejudice of the clients. Further, the
court held that it was clear that the broker was not entitled
to a commission because he breached his fiduciary
duties to the clients. Additionally, the court held that the
court of appeals erred when it remanded for a determination
of the amount owed on the property that the clients
received in trade. The broker did not dispute the amount
owed at trial and therefore, the clients were entitled to
recover the amount awarded by the trial court because
the broker's breach of fiduciary duty was a direct cause
of the client's loss. Finally, the clients were entitled to
recover attorneys' fees that it incurred in an underlying
foreclosure sale related to their real estate trade transaction.
Nos. 82SC135, 82SC147
Supreme Court of Colorado
674 P.2d 946; 1984 Colo. LEXIS 461
January 9, 1984
Page 1
OUTCOME: The court affirmed the award in favor of
the clients for the amount of commissions that were
owed to the broker. However, the court reversed and
remanded the appellate court's instruction to deduct $
15,000 from the total indebtedness on the property the
clients received in trade and the denial of attorneys' fees
to the clients. The court ordered that the district court's
judgment be reinstated.
LexisNexis(R) Headnotes
Civil Procedure > Pleading & Practice > Service of
Process
Civil Procedure > Pleading & Practice > Pleadings >
Counterclaims & Cross-Claims
[HN1] Colo. R. Civ. P. 14(b) allows a plaintiff who has
had a counterclaim asserted against him to bring in a
third party under the provisions of Colo. R. Civ. P. 14(a).
Rule 14(a) provides that a party may cause a summons
and complaint to be served upon a person not a party to
the action who is or may be liable to him for all or part of
the counter-claimant's claim against him.
Civil Procedure > Pleading & Practice > Pleadings >
Impleader
[HN2] Matters relating to the filing of third-party complaints
under Colo. R. Civ. P. 14(a) are within the sound
discretion of the trial court. A denial of a party's motion
to implead a third party affects no substantive rights. The
court may properly deny leave to file a third-party complaint
if the claim for liability by the defendant against
the third party is doubtful or if the introduction of the
third-party claim would unduly complicate the case to
the prejudice of the plaintiff.
Business & Corporate Entities > Agency > Duties &
Liabilities > Care, Skill & Good Conduct

Real & Personal Property Law > Brokers > Commissions
[HN3] An agent is liable for the loss caused to the principal
by any breach of duty. A broker whose breach of
duty results in a client's loss cannot require that his
commission be paid.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
[HN4] When the natural and probable consequence of a
wrongful act has been to involve plaintiff in litigation
with others, the general rule is that the reasonable expenses
of the litigation may be recovered from the
wrongdoer.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
[HN5] Recovery of litigation costs is permitted only
where the party seeking the costs had to defend his rights
against third parties in separate litigation.
COUNSEL:
83SC135 Ralph B. Harden, Harden, Schmidt &
Haas, P.C., Fort Collins, Colorado, Attorneys for Petitioners.
Steven G. Francis, Fischer & Wilmarth, Fort Collins,
Colorado, Attorney for Respondent.
82SC147 Steven G. Francis, Fischer & Wilmarth,
Fort Collins, Colorado, Attorney for Petitioner.
Ralph B. Harden, Harden, Schmidt & Haas, P.C.,
Fort Collins, Colorado, Attorney for Respondents.
JUDGES:
En Banc. Justice Dubofsky.
OPINIONBY:
DUBOFSKY
OPINION:
[*947] JUSTICE DUBOFSKY delivered the
Opinion of the Court.
We granted cross-petitions for certiorari to review
the unpublished opinion of the Court of Appeals in
Fender v. Elijah, No. 80CA0509 (February 18, 1982),
which modified a district court judgment awarding damages
to the Elijahs for Fender's breach of fiduciary duty.
We affirm in part and reverse in part, with directions to
the Court of Appeals to reinstate the district court judgment.
I.
674 P.2d 946, *; 1984 Colo. LEXIS 461, **
Page 2
The defendants, James and June Elijah, entered into
a contract with George and [*948] Rachel Morgan for
the trade of the Elijahs' Park Terrace Motel (motel) for
two trailer parks owned by the [**2] Morgans. The
plaintiff, George Fender, acted as real estate broker for
the Elijahs and the Morgans. The motel was subject to
two outstanding deeds of trust, and the trailer parks were
subject to various encumbrances. The net value of the
motel was $80,000 greater than the net value of the trailer
parks. To make up the difference, the Morgans agreed
to transfer to the Elijahs property located in Berthoud
(Berthoud property) which the parties agreed was worth
$80,000. The Morgans initially claimed that the
Berthoud property was subject to a $15,000 debt, and
agreed to pay that debt within one year of the closing on
the trade transaction. At that time, the deed to the
Berthoud property was to be delivered from escrow to
the Elijahs free and clear of encumbrances.
Prior to the closing, the Morgans informed Fender
that the indebtedness on the Berthoud property was more
than $15,000. Fender's attorney, Russell Pugh, called
the Berthoud National Bank, holder of the deed of trust
on the Berthoud property, and was told that the Bank
would release the deed of trust for $36,889.76, adding
$16.78 interest per day. Computing the interest that
would accrue if the Morgans paid the indebtedness [**3]
one year from closing, Pugh determined that the actual
indebtedness on the Berthoud property was $43,014.46,
not $15,000.00. Fender did not tell the Elijahs about this
additional indebtedness. Instead, he told the Morgans
that they would have to produce collateral for the
$43,000 debt, and to remain silent about it. The Morgans
indicated that they owned another trailer park in
Deer Trail, Colorado. Before the closing Fender had
Pugh prepare a note for $43,000 payable to the Elijahs
and signed by the Morgans and a deed of trust on the
Deer Trail property. This action was not revealed to the
Elijahs. The record indicates that the Morgans had purchased
the Deer Trail property for $30,000 and had paid
no money down. The property later was conveyed back
to the original owner without consideration because of
the Morgans' inability to pay for the property. The
Morgans subsequently failed to pay any of the indebtedness
on the Berthoud property, and the Elijahs did not
receive the deed on the property until they had paid the
debt owed to the Berthoud National Bank.
The trade contract provided that each party pay
Fender a 6% commission. Subsequent agreements were
made in which the Morgans [**4] agreed to pay Fender
$20,000, a 3% commission. The amount of the Elijahs'
fee was disputed at trial, but the district court found that
the Elijahs had agreed to pay Fender $5,000. To protect
the $20,000 Morgan commission, Fender, without informing
the Elijahs, had the Morgans execute to him a

deed of trust on the motel to secure a $20,000 note.
This action was directly adverse to the security interest in
the motel taken by the Elijahs. The security interest was
created by the trade contract which provided that a warranty
deed from the Elijahs to the Morgans would be
executed and placed in escrow until the two outstanding
deeds of trust on the motel were paid or refinanced. The
Morgans were to pay the Elijahs, who would pay the
mortgagees, the amounts owing on the deeds of trust.
The Morgans also executed a quitclaim deed to the Elijahs
which was placed in escrow, to be delivered to the
Elijahs if the Morgans failed to meet their obligations.
Subsequent to the closing, Fender assigned his deed of
trust and note for his commission from the Morgans to
Donald Miller for its full value of $20,000. The Morgans
defaulted on the note and Miller instituted foreclosure
proceedings on [**5] the motel. The day before the
foreclosure sale, the Elijahs, having received the Morgan
quitclaim deed from escrow, instituted a quiet title action
to protect their interest in the motel, claiming that the
Morgans were unable to convey an interest in the motel
to Miller through Fender because of the escrow arrangement.
The district court agreed with the Elijahs,
but the Court of Appeals, in the unpublished opinion of
Elijah v. Miller, No. 77-068 (July 20, 1978), reversed,
holding that the Morgans became equitable owners of the
property when they took possession of the motel, and
therefore, [*949] were able to convey their interest.
Miller was given possession of the motel as the purchaser
at the foreclosure sale. An important factor to the
Court of Appeals was that Miller had agreed to pay the
indebtedness on the motel's two outstanding deeds of
trust. The Elijahs spent $9,140 in attorneys' fees in Elijah
v. Miller.
The present action was instituted by Fender, suing
for the balance of his commission from the Elijahs which
he alleged to be $14,250. n1 The Elijahs counterclaimed
for fraud, breach of contract and breach of fiduciary duties.
Russell Pugh, Fender's attorney [**6] at the closing,
was the Elijahs' attorney when the counterclaims
were first asserted. He subsequently moved the district
court to dismiss the counterclaims but no order was entered
on the motion. Pugh then withdrew as counsel,
and the Elijahs' new attorneys moved the district court to
withdraw the motion to dismiss the counterclaims. This
motion was granted. At this time, Fender moved for
leave to file a third-party complaint against Pugh under
C.R.C.P. 14(b). Fender asserted that Pugh was negligent
in handling the closing of the trade transaction, and
in failing to obtain a dismissal of the counterclaims in the
present action, making Pugh liable for any damages
Fender would be required to pay the Elijahs. The district
court denied leave to file the third-party complaint.
674 P.2d 946, *; 1984 Colo. LEXIS 461, **
[**7]
Page 3
n1 At the closing Fender presented the Elijahs
an agreement setting his commission at
$14,250. When the Elijahs protested, Fender
told them to sign and that the amount would be
determined later. The district court found that
Fender and the Elijahs subsequently agreed to a
$5,000 commission.
After trial the district court ruled that Fender had
clearly breached his fiduciary duty as the Elijahs' real
estate broker by closing a transaction that had not been
agreed upon by the Elijahs, by concealing the additional
indebtedness on the Berthoud property, by concealing
the fact that worthless collateral on the Deer Trail property
was given to the Elijahs to secure payment of the
indebtedness on the Berthoud property, by taking a secured
interest in property being transferred by the Elijahs
with a retained security interest, and by concealing his
self-dealing throughout the transaction. The court ruled
that Fender was not entitled to a commission, and
awarded damages to the Elijahs in the amount of the
commission paid by them -- $5,540. The court also
awarded the Elijahs $43,014.46 for their loss caused by
the extra indebtedness on the Berthoud property; $9,410
in attorneys' fees expended in Elijah v. Miller; and
$20,000 for the loss of their security interest in the motel.
The judgment was amended to exclude the $20,000 after
the Elijahs confessed error to the award. They admitted
that because Miller had assumed the outstanding indebtedness
on the motel, they suffered [**8] no actual
damage.
The Court of Appeals modified the damage award.
It agreed that the Elijahs were entitled to a refund of the
amount paid on the commission, but held that the award
of attorneys' fees was improper. The case was remanded
for a determination of what amount was owing on the
Berthoud property at the time of the closing, because in
the court's opinion there was "conflicting evidence in the
record as to the actual amount owed . . . ." The Court of
Appeals instructed the district court to deduct $15,000
from the amount owing on the property in determining
the amount of damages because the Elijahs closed the
transaction on the assumption that the amount of the indebtedness
on the Berthoud property was $15,000, and
the Elijahs retained the property and did not attempt to
rescind the transaction after discovering the larger debt.
The issues presented to this court for review are
whether the district court erred in rejecting Fender's
third-party complaint against his attorney, Russell Pugh;
and whether the Court of Appeals was correct in its assessment
of damages for breach of fiduciary duty. We
hold that the district court did not abuse its discretion in
refusing to permit [**9] the filing of the third party

complaint. We affirm the Court of Appeals' award in
the amount paid on Fender's commission, but reverse the
remand to determine the amount owing on the Berthoud
[*950] property, the instructions to deduct $15,000
from that amount, and the denial of attorneys' fees incurred
in Elijah v. Miller.
II.
After Russell Pugh withdrew from his representation
of the Elijahs in this action, Fender moved under
C.R.C.P. 14(b) for leave to file a third-party complaint
against Pugh, his former attorney. The district court
denied the motion, stating that the complaint asserted a
claim that arose after the action was filed, the motion
was not seasonably made, and the complaint did not constitute
proper third-party practice under C.R.C.P. 14(b).
[HN1] C.R.C.P. 14(b) allows a plaintiff who has had
a counterclaim asserted against him to bring in a third
party under the provisions of C.R.C.P. 14(a). Rule 14(a)
provides that a party "may cause a summons and complaint
to be served upon a person not a party to the action
who is or may be liable to him for all or part of the
[counter-claimant's] claim against him."
[HN2] "Matters relating to the filing of third-party
complaints [**10] under C.R.C.P. 14(a) are within the
sound discretion of the trial court." Public Service Company
of Colorado v. District Court, 638 P.2d 772, 774
(Colo. 1981). This court has held that "a denial of a party's
motion to implead a third party affects no substantive
rights." Id. at 774. "The court . . . . may properly deny
leave to file a third-party complaint . . . . if the claim for
liability by the defendant against the third party is
doubtful or if the introduction of the third-party claim
would 'unduly complicate the case to the prejudice of the
plaintiff.'" Id. at 775 (quoting 3 J. Moore, Federal Practice
para. 14.05[1] at 14-32 (2d ed. 1983) (footnote
omitted)).
We hold that the district court did not abuse its discretion
in denying Fender leave to file a third-party complaint
against Pugh. Pugh had represented the Elijahs in
this action and one claim in the third-party complaint
asserted Pugh's negligence in not obtaining dismissal of
the Elijahs' counterclaim. The other claim basically alleged
that Pugh's representation of Fender at the closing
of the trade transaction constituted malpractice. These
factors indicate that the third-party claims may have unduly
[**11] complicated the case to the prejudice of the
Elijahs. The district court committed no abuse of discretion
in concluding that Fender's claim against Pugh
would be better handled in a separate action. n2
n2 Fender asserts that he has suffered prejudice
because of the district court's rejection of the
674 P.2d 946, *; 1984 Colo. LEXIS 461, **
III.
Page 4
third-party complaint in that he may be collaterally
estopped in his independent action against
Pugh as a result of findings made in this case.
His argument is basically that Pugh should have
been joined under C.R.C.P. 19(a), providing for
the joinder of persons needed for a just adjudication,
or C.R.C.P. 20(a), permitting joinder of
persons if there is a right to relief against them
arising out of the same transaction or occurrence.
Fender requested the district court to grant impleader
under C.R.C.P. 14(b); he did not request
joinder under C.R.C.P. 19(a) or C.R.C.P. 20(a).
The district court's ruling is properly analyzed
only under the standards of C.R.C.P. 14(b).
We next address the Court of Appeals' [**12] decision
modifying the damages awarded by the district
court.
The Court of Appeals affirmed the district court ruling
that the Elijahs were entitled to a refund of the
amount paid on the commission. [HN3] An agent is
liable for the loss caused to the principal by any breach
of duty. Restatement (Second) of Agency § 401 (1958);
White v. Brock, 41 Colo.App. 156, 159, 584 P.2d 1224,
1227 (1978). A broker whose breach of duty results in a
client's loss cannot require that his commission be paid.
White v. Brock, supra. It is clear that Fender is not entitled
to a commission. The judgment in the amount of
$5,540 is affirmed.
The Court of Appeals erred in remanding the case
for a determination of the amount owing on the Berthoud
property. The evidence plainly shows that the Berthoud
National Bank informed Pugh that it would release its
deed of trust on the Berthoud property for $36,889.76
plus $16.78 per day [*951] in interest. Based on the
Morgans' agreement to pay the indebtedness one year
from the closing of the trade transaction, Pugh and
Fender determined that the total indebtedness was
$43,014.46. This figure is supported by Fender's telling
the Morgans that they [**13] would have to produce
$43,000 in collateral. The $43,014.46 was not disputed
by Fender at the trial, and he assumed the correctness of
that figure in his briefs to the Court of Appeals.
The Court of Appeals also erred in its instruction to
deduct $15,000 from the total indebtedness on the
Berthoud property based on the fact that the Elijahs had
closed the transaction on the assumption that the amount
of the indebtedness was $15,000, and had retained the
property without seeking a rescission of the transaction
after discovering the larger debt. The Morgans agreed
that they would deliver to the Elijahs the deed to the
Berthoud property, valued at $80,000, free and clear of

any encumbrances. $80,000 was the difference between
the net value of the motel and the two trailer parks, and
the transfer of property worth $80,000 was essential to
the original agreement. If Fender had disclosed the
$43,014.46 debt, the Elijahs most likely would have required
other arrangements. In any event, Fender's concealment
precluded the Elijahs from making these decisions.
That Fender arranged what amounted to worthless
collateral for the indebtedness does not improve his
position. It is instructive [**14] to note that the Elijahs
were personally required to pay the Berthoud National
Bank $46,644.71 before receiving the deed to the
Berthoud property. n3 The fact that the Elijahs did not
attempt to rescind the transaction after discovering the
larger indebtedness is irrelevant. While a rescission suit
may have been an option, cf. H & K Automotive Supply
Co. v. Moore & Co., 657 P.2d 986 (Colo.App. 1982), the
Elijahs had a cause of action against their broker for
breach of fiduciary duty. Therefore, we hold that the
Elijahs incurred damages in the amount of the
$43,014.46 indebtedness on the Berthoud property and
that Fender's breach of fiduciary duty was a direct cause
of the loss.
n3 The amount over $43,014.46 represents
additional interest paid by the Elijahs.
The final issue is whether the Elijahs were entitled
to damages for the attorneys' fees incurred in Elijah v.
Miller. The Court of Appeals held that there were no
grounds for awarding those fees. We disagree. [HN4]
"When the natural and probable consequence [**15] of
a wrongful act has been to involve plaintiff in litigation
with others, the general rule is that the reasonable expenses
of the litigation may be recovered from the
wrongdoer." International State Bank of Trinidad v.
Trinidad Bean & Elevator Co., 79 Colo. 286, 245 P. 489,
674 P.2d 946, *; 1984 Colo. LEXIS 461, **
Page 5
489 (1926). See also Sun Indemnity Co. of New York v.
Landis, 119 Colo. 191, 201 P.2d 602 (1948). Were it not
for Fender's actions in taking a security interest in the
motel and subsequently assigning that interest, the Elijahs
would have retained ownership of the motel. The
Court of Appeals apparently read its own case of McNeill
v. Allen, 35 Colo.App. 317, 534 P.2d 813 (1975) as requiring
that a party be a defendant in the litigation before
being entitled to attorneys' fees. The pertinent language
of McNeill provides:
[International State Bank of Trinidad v.
Trinidad Bean & Elevator Co., supra; and
Sun Indemnity Co. v. Landis, supra]
[HN5] permit recovery of litigation costs
only where the party seeking the costs had
to defend his rights against third parties in
separate litigation.
534 P.2d at 819. The rule stated in McNeill is correct.
It does not require, however, [**16] that a party be a
defendant in prior litigation to recover costs. A party
may be placed in a position of having to bring suit as
plaintiff to defend his rights. A quiet title action is an
obvious example. It is also not mandatory that the party
prevail in the earlier litigation. In this case, Fender's
actions were the very cause of the Elijahs' defeat in Elijah
v. Miller. Because the suit brought by the Elijahs in
Elijah v. Miller was not spurious, we hold that damages
[*952] should be awarded for attorneys' fees incurred in
that case in the amount of $9,410.
The judgment of the Court of Appeals is affirmed in
part and reversed in part, and returned to the Court of
Appeals with directions to reinstate the district court
judgment.

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68 N.M. 108, *; 359 P.2d 345, **;
1961 N.M. LEXIS 1502, ***
LEXSEE 68 N.M. 108
C. E. DINKLE, as Trustee in Bankruptcy of J. Earl Denton and Raymond Griggs,
d/b/a Denton and Griggs, a partnership, No. 2512 in Bankruptcy in the United States
District Court for the District of New Mexico, Plaintiff-Appellee, v. Edwin T. DEN-
TON, Defendant-Appellant
SUBSEQUENT HISTORY: [***1]
February 1, 1961
PRIOR HISTORY: Action by trustee in bankruptcy to
recover sum allegedly due bankrupt partnership under
contract with defendant. The District Court, Curry
County, E. T. Hensley, Jr., D. J., entered judgment adverse
to defendant who appealed. The Supreme Court,
Frank B. Zinn, District Judge, held that release by one
co-obligee releasing its interest in contract and agreeing
not to maintain any action thereon in consideration of
sum paid by obligor did not bar enforcement of claim on
behalf of bankrupt co-obligee.
DISPOSITION:
Reversed and remanded.
LexisNexis(R) Headnotes
COUNSEL:
Reese, McCormick, Lusk & Paine, Carlsbad, for
appellant.
Dee C. Blythe, Clovis, George T. Harris, Jr., Daniel
A. Sisk, Albuquerque, for appellee.
JUDGES:
Frank B. Zinn, District Judge. Compton, C. J., and
Carmody and Moise, JJ., concur. Chavez and Noble,
JJ., not participating.
OPINIONBY:
ZINN
OPINION:
No. 6615
SUPREME COURT OF NEW MEXICO
68 N.M. 108; 359 P.2d 345; 1961 N.M. LEXIS 1502
February 1, 1961
Page 1
[*110] [**346] This is an appeal from a judgment
in the amount of $ 6,000 against appellant, who
seeks reversal on several grounds: 1. that the judgment
was excessive; 2. that the claim was released by a
co-obligor; 3. denial of a tender of parol testimony to
support a different construction of the contract; 4. that
tender of proof [***2] of a set-off was refused.
Appellant, Edwin T. Denton, defendant in the District
Court was sued by appellee, Dinkle, trustee in
bankruptcy of Denton and Griggs, building contractors, a
partnership.
The relief sought by the appellee in his case below
was recovery of $ 6,000 which he claimed was paid by
the now bankrupt partnership to the appellant, Denton.
The payment was made as a part of the purchase price of
a New Mexico liquor license, the terms of sale of the
license being set forth in a written agreement.
The Associated Federal Hotels, Inc. was also a party
to this agreement. Appellant effected a settlement with
Associated Federal Hotels, Inc. by paying to that hotel
corporation the sum of $ 5,000 and taking from them a
release. The terms of that release and its relationship to
this action are detailed elsewhere in this opinion.
The contract called for a sale of the liquor license
and after identifying the parties and the subject of the
sale stated in its pertinent paragraphs, as follows:
"1. The sale price for said New Mexico
Liquor License No. 1442 is the sum of
$ 10,000.00 and First Party hereby
acknowledges that he has received from
Second Parties said sum in cash. [***3]
"2. In addition to the payment of said
cash consideration, Second Parties covenant
and agree to immediately move from
its present location to 2609 North Main

Street, adjacent to the City of Roswell,
New Mexico, the building and all equipment,
fixtures and inventory used in connection
with the said Oasis Bar and to
place the same in operating condition at
the new location at their sole expense.
[*111] "3. The date on which said
New Mexico Liquor License No. 1442
shall be transferred to Second Parties shall
be the date of completion by Denton and
Griggs of a hotel to be known as L 7 Hotel,
located on land leased from the New
Mexico Military Institute and if said date
shall occur before the expiration of one
year from the date hereof, Second Parties
shall pay to First Party that fraction of the
sum of $ 10,000.00 which is equal to the
fraction of the twelve months period
which has not expired on the date of completion
of said hotel."
The license was never transferred and the contract
never completed. It is clear that Associated Federal
Hotels and the partnership of Denton & Griggs had each
paid their one-half share of the full consideration of $
10,000.
Each of those parties [***4] also paid additional
sums for costs of moving the physical assets of the liquor
business from Caprock into Roswell, to accomplish the
requirements of Paragraph 3 of the contract. The Hotel
Corporation paid appellant $ 1,000 in cash. The partnership
of Denton & Griggs [**347] paid $ 1,125 by
services and materials supplied in the moving of the
business assets and in preparing the new location.
The L 7 Hotel into which the liquor license was expected
to have been integrated never became a reality.
The decision appealed from the court below was one
which rejected a claimed offset and several defenses and
gave judgment to the plaintiff, appellee, in the amount of
$ 6,000 and costs. The court's findings of fact and conclusions
of law supported the award on the grounds of
failure of consideration and of unjust enrichment.
The several defenses raised by defendant-appellant
to the claim of the trustee in bankruptcy for return of
what had been paid by Denton & Griggs, under the
agreement, for the most part, are the same as the points
relied upon for reversal here. He has added here one
additional point, that of the judgment below being excessive.
The first point raised on appeal [***5] contends
that even if the plaintiff below was entitled to recover
judgment that the sum could not be in excess of $ 5,000
68 N.M. 108, *; 359 P.2d 345, **;
1961 N.M. LEXIS 1502, ***
Page 2
since the testimony was that this was all that Denton &
Griggs had paid under the agreement.
The facts, however, are undisputed that Denton &
Griggs did pay a combined total of $ 6,000, this being $
4,875 in cash, plus $ 1,125 in materials and services.
If the appellee is entitled to recover any of the consideration
paid by his predecessors, it would be the full
consideration moving from them to appellant less any
damages suffered by appellant. The services and materials
as well as the money expended by the partners inured
to the benefit of appellant, Denton, and must be
considered [*112] in balancing the parties relative
damages. 5 Williston on Contracts 4126, § 1476; 3
Williston on Sales 319, § 519m; 24 Columbia L.R. 885;
33 Yale L.J. 101; Acme Dist. Co. v. Rorie, 10 Cir., 183
F.2d 694. Accordingly appellant's point challenging the
judgment as being excessive by $ 1,000 will dispose of
itself on retrial when appellant is permitted to offset his
damages.
The second point raised by appellant was that the
release given by Associated Federal Hotels also [***6]
constituted a release of the rights of Denton & Griggs,
the partnership, under the contract. An examination of
portions of that instrument exchanged by Associated
Federal Hotels for the $ 5,000 which it received from
appellant, quickly resolves this point by revealing the
intent of the parties in giving and receiving it.
"Whereas, Denton & Griggs became
insolvent and have been adjudged bankrupt
by the United States District Court
for the District of New Mexico and it has
become impossible for them to build said
hotel, and
"Whereas, Associated Federal Hotels
in connection with said contract paid to
Edwin T. Denton, the sum of $ 6,000.00
and has agreed with him to release its interest
in said contract and never to maintain
any action thereon in consideration of
the payment to it of the sum of $
5,000.00."
The rule that a release of an obligation to him executed
by one co-obligee will also serve to discharge the
obligation owed to another co-obligee is raised by appellant
to support the point. The texts support this as a
general rule of law, but only in cases when the intent of
the one co-obligee executing the release and of the obligor
receiving it to accomplish such an extinguishment
[***7] of the whole obligation exists or is presumed to
exist.

Where a contrary intent is obvious and apparent, the
rule cannot apply. McCallister v. Farmers Development
Co., 47 N.M. 395, 143 P.2d 597.
"* * * the primary rule of construction
of releases is that the intention of the
parties must govern, and they are to be
construed by the same rules of arriving at
the intention of the parties as any other
kind of contracts. This intention must be
gathered from the words used in the instrument
and not from matters dehors the
writing. In accordance with these principles,
it has been held that words [**348]
in a release should not be construed to
extend beyond the express consideration
mentioned, and that such words should
not be construed to operate as a release of
indebtedness which the parties apparently
did not intend * * *." 76 C.J.S. Release §
38, p. 669.
[*113] The "release and covenant not to sue" effected
a release of only the rights of Associated Federal
Hotels and it cannot be a bar to the enforcement of the
claim by the appellee.
Appellant's third and fourth points concern related
problems and will be considered together. The third
point complains of the failure [***8] of the court to
receive parol evidence as to the agreement between the
parties calling for the construction of the hotel. It is contended
that if the court had done so that it would then
have seen the position of the appellee's predecessors was
that of defaulting vendees and thus not entitled to recover
the consideration paid.
The fourth point complains of the failure to permit
the parol testimony about the hotel agreement so as to
then enable him to show damages resulting because of its
breach by Denton & Griggs which damages then would
be available as an offset to the claim asserted by appellee.
Involved in the two points was the question of
whether there had been a legal abandonment of the contract
by the appellant, so as to have entitled the appellee
to a return of the full consideration paid as adjudged by
the court below.
It should be sufficient to point out that when the hotel
was not built defendant was never called on to deliver
the license. He testified that this being true he considered
the contract abandoned. This is entirely different from
an abandonment by a vendor which would give the vendee
a right to rescind. The only support for the trial
court's finding of [***9] fact No. 7 and conclusion of
law No. 6 as to an abandonment of the contract, was the
68 N.M. 108, *; 359 P.2d 345, **;
1961 N.M. LEXIS 1502, ***
Page 3
testimony of the defendant referred to. Such a conclusion
was error. The rule in this regard is as set forth in
the Restatement of the Law of Contracts, § 357.
As stated above, with respect to appellant's points
three and four, they hinge upon the lower court's refusal
to admit testimony tendered relative to the agreement
surrounding the building of the proposed L 7 Hotel. The
offer to prove the details of such an agreement was rejected
as an attempt to vary the terms of a written agreement
by parol testimony.
The agreement between the parties as to the building
of the L 7 Hotel, if such existed, would be something
completely outside the agreement covering the sale of
the liquor license. The proof of such an agreement which
was tendered and rejected, was properly admissible,
since it was not offered to vary, contradict, add to or
substract from the terms of the written contract relating
to the liquor license. Wester v. Trailmobile Company, 59
N.M. 73, 279 P.2d 526; Locke v. Murdoch, 20 N.M. 522,
151 P. 298, L.R.A.1917B, 267.
In addition to being able to prove the separate contract
relating [***10] to the building [*114] of the
Hotel, appellant should be permitted to prove any damages
he has suffered for the failure of appellee's predecessors
to have performed and offset any such damages
against the sums sought by appellee.
The appellant's fifth and final point attempts to establish
as an offset against any sums sought from him a
claim for attorney fees and expenses incurred by appellant,
G. H. Denton out of another dealing with the appellee's
bankrupts, Denton & Griggs. The other relationship
arose when E. H. Denton as an accommodation indemnitor
guaranteed a performance bond for the Denton
& Griggs partnership on a school construction job.
This undertaking has placed the appellant in Federal
Court as codefendant with the partnership in an action by
a surety company on a contractor's performance bond.
They seek to recover against appellant for losses incurred
by them in performing as sureties when Denton & Griggs
failed to perform on a construction contract covered by
the bond and which they also claim was covered by the
indemnity agreement signed by appellant E. H. Denton.
[**349] The offset to which appellant claims to be
entitled is $ 5,100 in attorney fees [***11] and expenses
paid plus additional sums for attorney fees and expenses
to become due. The Federal Court case has not
been terminated. The court below denied the set-off as
being an unliquidated, remote and speculative claim.
Appellant contends that win or lose in the Federal
case, he is entitled to any costs of defending himself on
the indemnity agreement as against the bankrupt partners
whom he accommodated by the agreement. The appel-

lant made an offer of proof of the actual and expected
attorney fees and expenses incurred in the defense of the
Federal Court action. The tender was rejected.
This being a suit by a trustee in bankruptcy to recover
assets of the bankrupt estate, the appellant invokes
the law of the United States regarding bankruptcy to
sustain his claim of an offset. He contends that the attorney
fees and expenses incurred and likely to be incurred
are provable claims under Section 68 of the Bankruptcy
Act, 11 U.S.C.A. § 108 and as such must be allowed
him here as an offset.
In Collier on Bankruptcy, 14th ed. Vol. 4 at page
734, it is stated:
"* * * the right to assert a set-off under
§ 68 may be invoked in a proper
proceeding or action in either the bankruptcy
[***12] court, a district court sitting
at law or in equity, or a state court."
(Page 736) "* * * A debtor of the
bankruptcy estate who also has a claim
against the estate may, if he chooses, assert
the claims as a set-off in the forum in
which his obligation is sought to be enforced."
Collier says further on this subject in the paragraphs
following the above quotation:
[*115] "It is obvious, of course,
that whether or not there is a valid and
enforceable claim or obligation in existence
to be used as a set-off depends on the
applicable substantive law, usually state.
But regardless of where the right is invoked,
whether a set-off of existing obligations
may be effected or sustained in
bankruptcy depends wholly upon the
terms of § 68, and not upon the terms of
state laws or statutes."
The authorities support appellant's contention that
the type of claim he seeks to assert is one properly provable
under Section 68 of the Federal Bankruptcy Act, if it
existed before the date of adjudication. Williams v.
United States Fidelity & G. Co., 236 U.S. 549, 35 S.Ct.
289, 59 L.Ed. 713; St. Paul-Mercury Indemnity Co. of St.
Paul v. Dale, 70 S.D. 137, 15 N.W.2d 577.
The court below [***13] made a finding of fact
(No. 15) to the effect that the bankrupts owed nothing to
appellant on the date of adjudication in bankruptcy, negativing
the provability of the claim if the court was correct.
The stipulated date of the adjudication in bankruptcy
was September or October of 1957. The suit
against the partnership of Denton & Griggs by Fireman's
68 N.M. 108, *; 359 P.2d 345, **;
1961 N.M. LEXIS 1502, ***
Page 4
Fund Indemnity Company was filed in the U. S. District
Court, District of New Mexico, December 11, 1956.
If the claim for attorney fees and expenses was not
an actionable claim under New Mexico law before the
date of adjudication in bankruptcy, then the finding of
the court was correct and the offset not available to appellant.
The nature of the offset is that of a permissive counterclaim
as permitted under Rule 13 (b) of the Rules of
Civil Procedure for the District Courts (21-1-1(13) (b).
The essentials of a separately maintainable cause of action
are necessary to its allowance.
Attorney fees are recoverable as damages in such
cases as this though not allowed as damages recoverable
in the usual suit.
"It is generally held that where the
wrongful act of the defendant has involved
the plaintiff in litigation with others
or placed [***14] him in such relation
with others as makes it necessary to
incur expense to protect his interest, such
costs and expenses, including attorneys'
fees, should be treated as the legal consequences
of the original [**350]
wrongful act and may be recovered as
damages.
"In action of indemnity, brought
where the duty to indemnify is either implied
by law or arises under a contract,
reasonable attorneys' fees incurred in resisting
the claim indemnified against may
be recovered as part of the [*116]
damages and expenses. * * *" 15
Am.Jur. (Damages) § 144, p. 552.
This treatment of attorney fees as an expense or cost
recoverable in damages when occasioned by the defendant's
breach of duty is supported also in Feldmesser v.
Lemberger, 101 N.J.L. 184, 127 A. 815, and note following
in 41 A.L.R. 1156; also in Treat v. Nowell, 37
Ariz. 290, 294 P. 273 and in the annotation at 45
A.L.R.2d 1188.
Whether the $ 5,100 claimed to have been expended
as well as the entire attorney fees incurred in the federal
suit were a proper offset will also depend upon whether
they were actionable as of the time they were asserted.
We are of the opinion that the appellant as an accommodation
indemnitor [***15] who had been called
upon to make good the default of the defunct partnership
was entitled as against the partners, at the time that he
became obligated to defend the suit on the indemnity
agreement, to claim as damages against them the costs of

defending himself as a result of their default. This
would include such attorney fees and costs as are reasonably
ascertainable.
The tender of proof was as to the $ 5,100 claimed to
have been expended as of the time of the trial below plus
a showing that a reasonable attorney fee for the whole
federal case defense would be $ 25,000.
One of the rulings of the trial court, challenged here
by appellant, is that the damages appellant might suffer
in defending the Federal Court action are unliquidated,
remote and speculative (finding No. 14).
There would be nothing remote and speculative
about the $ 5,100 already claimed to have been expended.
The entire attorney fee to be incurred is also as susceptible
of proof and as certain as it needs to be if appel-
68 N.M. 108, *; 359 P.2d 345, **;
1961 N.M. LEXIS 1502, ***
Page 5
lant's obligation to pay it arose before the bankruptcy to
be provable under Section 68 of the Federal Bankruptcy
Act. Davis v. Campbell, 52 N.M. 272, 197 P.2d 430;
Pendergrass v. Lovelace, 57 [***16] N.M. 661, 262
P.2d 231; Rudolph v. Guy, 61 N.M. 284, 299 P.2d 462.
The trial court should have considered the testimony
tendered, and determined the amount of the attorney fees
and costs incurred by appellant in defense of the Federal
Court action. The sum when determined, should be
allowed as an offset to appellee's claim.
For the reasons given, the case will be reversed and
remanded to the district court for further proceedings in
accordance with the views herein expressed.
It is so ordered.

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681 So. 2d 539, *; 1996 Miss. LEXIS 496, **;
12 I.E.R. Cas. (BNA) 142; 132 Lab. Cas. (CCH) P58,171
103 of 179 DOCUMENTS
CAROLYN WILLARD v. PARACELSUS HEALTH CARE CORPORATION,
PARACELSUS SENATOBIA COMMUNITY HOSPITAL, INC., CAROLYN
REVEL AND DANNY SWINDLE CONSOLIDATED WITH BETTIE SUE
SUMNER v. PARACELSUS HEALTH CARE CORPORATION, PARACELSUS
SENATOBIA COMMUNITY HOSPITAL, INC., AND CAROLYN REVEL CON-
SOLIDATED WITH BETTIE SUE SUMNER v. PARACELSUS HEALTH CARE
CORPORATION, PARACELSUS SENATOBIA COMMUNITY HOSPITAL, INC.,
AND CAROLYN REVEL
SUBSEQUENT HISTORY: [**1]
Nos. 92-CA-00996-SCT, 92-CA-01274-SCT, 93-CA-00021-SCT
SUPREME COURT OF MISSISSIPPI
681 So. 2d 539; 1996 Miss. LEXIS 496; 12 I.E.R. Cas. (BNA) 142; 132 Lab. Cas.
(CCH) P58,171
Opinion On Writ of Certiorari November 4, 1999,
Reported at: 1999 Miss. LEXIS 343.
PRIOR HISTORY: Appeal No. CI90203BT from
Judgment dated AUGUST 12, 1992, Andrew Cleveland
Baker RULING JUDGE, Tate County Circuit Court.
Appeal No. CI90274CT from Judgment dated NO-
VEMBER 07, 1992, George C. Carlson Jr. RULING
JUDGE, Tate County Circuit Court.
Appeal No. CI90274CT from Judgment dated NO-
VEMBER 10, 1993, George C. Carlson Jr. RULING
JUDGE, Tate County Circuit Court.
DISPOSITION: REVERSED AND REMANDED FOR
A NEW TRIAL CONSISTENT WITH THIS OPINION.
LexisNexis(R) Headnotes
COUNSEL: FOR APPELLANT - Michael T. Lewis,
LEWIS & LEWIS, Clarksdale, MS; Nancy A. Wegener,
Clarksdale, MS.
FOR APPELLEE - Gerald W. Chatham, Sr., Hernando,
MS.
JUDGES: BEFORE SULLIVAN, P.J., PITTMAN,
AND BANKS, JJ., PITTMAN, JUSTICE, PRATHER
AND SULLIVAN, P.JJ., BANKS, McRAE, ROBERTS,
September 12, 1996, Decided
September 12, 1996, Filed
Page 1
AND SMITH, JJ., CONCUR. LEE, C.J., AND MILLS,
J., NOT PARTICIPATING.
OPINIONBY: PITTMAN
OPINION:
[*540] PITTMAN, JUSTICE, FOR THE
COURT:
Summary of the Case
The Appellants, Carolyn Willard and Bettie Sue Sumner,
were employees of Senatobia Community Hospital, a
wholly owned subsidiary of Paracelsus Health Care
Corporation. n1 Willard and Sumner reported to higher-ups
that a certain number of Paracelsus checks were
made out to hospital administrator Carolyn Revel as well
as signed by Revel and allegedly done so in violation of
hospital policy. Willard, and then Sumner, were subsequently
discharged. The gist of their case at trial was that
they were fired by Revel in retaliation for reporting the
checks. Paracelsus cited other reasons. Willard and
Sumner had separate trials; however, their cases are
consolidated on appeal. Willard and Sumner address the
same issues on similar facts.
[**2]
n1 Throughout this opinion, the Appellees
are collectively referred to as "Paracelsus."

The juries returned a verdict against Paracelsus and
awarded actual damages in the amount of $ 10,000 to
Willard and $ 35,102 to Sumner. Special interrogatories
were submitted to both juries in which they found that
Willard's and Sumner's discharges were in violation of
their contracts with the hospital as supplemented by the
handbook and personal policy and procedure manual.
Neither jury found that the hospital intentionally inflicted
emotional distress upon Willard nor Sumner.
[*541] We are called on to decide whether the trial
courts erred by refusing to give the juries an instruction
on retaliatory discharge, and further, if such error
was committed, whether the juries should have been allowed
to consider an award of punitive damages based
on retaliatory discharge. Additionally, we must determine
whether the lower courts erred by failing to grant a
punitive damages instruction based on tortious breach of
contract. We hold that the trial court erred on both of
these points. Furthermore, the lower courts erred by
denying Willard and Sumner attorney's fees under
M.R.C.P. 37(a)(4), because they succeeded on their motion
to compel discovery.
Summary of the Facts
Willard was hired [**3] on July 27, 1988, and received
a copy of the Senatobia Community Hospital
Employee Handbook. She signed a card acknowledging
the receipt of this handbook and also acknowledging that
she had familiarized herself with it.
Willard was the accounts payable clerk before being
promoted to business office manager. She had the responsibility
of doing the bank reconciliation. After her
promotion and while she was training the new accounts
payable clerk, she continued to do the bank reconciliation.
Most Paracelsus checks were keyed into the computer
and were printed by the computer along with a department
code. Manual checks were typed on the typewriter.
They were used in emergencies only when an
immediate payment was necessary. Copies or backups of
manual checks were retained in the accounts payable
office for two years.
In August 1990 Willard received a copy of the July
bank statement which was faxed from Paracelsus headquarters
in California. When Willard tried to match the
bank statement with the check ledger, there were three
checks on the bank statement which were not in the
ledger nor in the computer system. These amounts were
$ 2,500, $ 3,000 and $ 2,000. Willard searched all files
[**4] and records trying to locate the checks. She could
not locate any of the backup documents. Three weeks
later when the canceled checks arrived, she found the
three unaccounted for checks in the above amounts made
payable to Carolyn Revel and signed by Revel and
681 So. 2d 539, *; 1996 Miss. LEXIS 496, **;
12 I.E.R. Cas. (BNA) 142; 132 Lab. Cas. (CCH) P58,171
Page 2
Clifford Olson. Clifford Olson was the former chief financial
officer for Paracelsus who had left his employment
at the hospital. He testified that he did not sign the
three checks. Willard, Sumner (an administrative secretary
who had authority to sign Paracelsus checks), and
Kiefer (the new accounts payable clerk) confronted Olson.
Willard also reported the conduct to Pete Mistr, the
regional chief financial officer in Nashville. Willard
claimed she was subsequently discharged for these actions.
Willard's personnel file contained no reprimands
and only outstanding evaluations.
Additionally, Sumner reported two checks that arrived
later in August and were made out to Revel. She
testified that these two checks contained Revel's signature
and her (Sumner's) own forged signature.
The evidence at trial showed that all original documents
relevant to the suspicious checks were missing
although they were kept in several different [**5] locations.
The only copies of the five forged checks were
those provided by Willard and Sumner. None of the five
original checks or the yellow and pink copies of the
checks or the accounts payable for that period were produced.
However, Kiefer claimed to have seen these records
and sent them to storage two weeks before the auditors
were to examine them. Not long after, a break-in
occurred at the storage facility in which these records
were purportedly stolen.
Revel and Paracelsus maintained at trial that Willard
was not fired but that she resigned. Revel testified that
she was paged at the hospital on August 22, 1990, by
Danny Swindle, who replaced Olson. At that time Swindle
told Revel that Willard wanted her money and was
leaving. According to Revel, Swindle was trying to discuss
with Willard some complaints they had received
about accounts payable when Willard up and quit.
Revel also testified that she had seen Olson's deposition
wherein he stated he did not sign the three checks
and noted that as soon as it came to her attention she
thought it might be forgery. However, she stated that if
she as hospital administrator signed the check, it was not
necessary that the check be signed [**6] by another
person.
[*542] On September 17 Sumner was terminated
by Revel for, among other things, an incident involving a
woman demanding treatment in the hospital's emergency
room. Sumner maintained at trial that her termination
was a result of her conduct in reporting the checks.
Sumner also testified that she thought she had certain
rights as stated by the handbook. Particularly, she
thought Paracelsus should follow the disciplinary procedures
set out in the handbook for a first offense. Only for
a critical offense could you be terminated on a first offense.
The only critical offenses were theft or dishonesty.

Such a termination required a three-day suspension while
an investigation was undertaken. This procedure was not
followed for Sumner or Willard nor were the procedures
for other types of offenses followed.
Sumner had never received an oral or written reprimand.
Her personnel file revealed no negative reviews.
Chronology
1990
First Week Willard and Sumner report three checks.
in Aug.
Aug. 22 Willard leaves.
Aug. 27 Sumner reports two checks.
Sept. 5 Revel repays Paracelsus for three checks (the two
allegedly co- signed by Sumner and the one co-signed
[**7] by Olson).
Sept. 6 Revel reduces Sumner's job description.
Sept. 14 Emergency room incident.
Sept. 17 Sumner is fired.
Paracelsus maintained from the beginning of the
lawsuits that it did not acknowledge the handbook. Revel
testified at the Willard trial that she did not recognize the
handbook, because it was issued when the hospital was
under the control of someone other than her employer,
Paracelsus. At the Sumner trial, Revel testified that there
was a handbook, but it was undergoing revision.
Discussion of the Law
I. DID THE TRIAL COURT ERR BY REFUSING TO
GIVE A RETALIATORY
DISCHARGE INSTRUCTION?
We addressed this issue in McArn v. Allied
Bruce-Terminix, Inc., 626 So. 2d 603, 607 (Miss. 1993),
where we ruled that there is an action at law based on a
public policy exception to the employment at-will doctrine
in either of the two following circumstances: 1) an
employee refuses to participate in an illegal act; or 2) an
employee is discharged for reporting illegal acts of his
employer to the employer or anyone else. At that time,
we did not address the question of whether or not such
conduct by an employer, if found, is an independent tort
giving [**8] rise to punitive damages.
681 So. 2d 539, *; 1996 Miss. LEXIS 496, **;
12 I.E.R. Cas. (BNA) 142; 132 Lab. Cas. (CCH) P58,171
Page 3
Paracelsus argues that our holding in McArn is not
applicable, because McArn was decided subsequent to
the trial in the case sub judice. Yet, McArn was a case of
first impression, and we applied the employment-at-will
exceptions retroactively by remanding McArn's case.
Therefore, Paracelsus' argument based on the subsequent
determination of McArn is not determinative of whether
or not it was error to deny a retaliatory discharge instruction.
Clearly, the jury should have been given an instruction
on retaliatory discharge. The evidence at trial or,
rather, the lack of evidence suggests that Willard and
Sumner were fired in retaliation for reporting an illegal
act of their employer, i.e., forgery and financial irregularities.
Sumner and Olson both testified that the
co-signatures on the copies of the checks provided by
Willard and Sumner were not theirs. Had the jury been
properly instructed on the theory of retaliatory discharge,
it is quite conceivable that they would have returned a
verdict for Willard and Sumner on this issue. Nevertheless,
the jury should have had that option.
The exception to the employment-at-will doctrine
sounds in [**9] tort, and we recognize, as the majority
of jurisdictions do, that a party is entitled to pursue all
remedies available in tort, including punitive damages.
For example, in Moniodis v. Cook, 64 Md. App. 1, 494
A.2d 212, 218 (Md. App. 1985), an employer terminated
an employee for refusing to take a polygraph test regarding
the amount of inventory in stock. A Maryland
law prohibited the requirement of a polygraph test as a
condition to employment. The court held that the employer
acted with malice, because it knew of the law, and
so ruled that punitive damages were appropriate. Furthermore,
the court stated that such damages "beneficially
served the punitive and deterrent purposes of exemplary
damages." Id. See also McClung v. Marion County
Comm'n, 178 W. Va. 444, [*543] 360 S.E.2d 221, 229
(W.Va. 1987) (punitive damages recoverable for retaliatory
discharge where the defendant's conduct was wanton,
willful or malicious). But see Smith v. Atlas
Off-Shore Boat Service, Inc., 653 F.2d 1057, 1063-1064
(5th Cir. 1981) (where the Fifth Circuit held that punitive
damages could not be recovered by a seaman discharged
for filing a personal injury claim against his employer).
Today, we answer in the affirmative the [**10]
question of whether such conduct, if found, is an independent
tort giving rise to punitive damages. The public
has a legitimate interest in seeing that people are not
discharged for reporting illegal acts or not participating
in illegal acts which may result in harm to the public
interest. Anyone who terminates an employee for such
reasons should be allowed a jury instruction on the issue
of punitive damages in order to deter similar future conduct.
Discharge in retaliation for an employee's good

faith effort to protect the employer from wrongdoing
constitutes an independent tort and may support punitive
damages.
However, a violation of the public policy exception
to the employment at-will doctrine does not per se create
a jury issue on the award of punitive damages. It will
remain within the purview of the trial court to determine
whether this issue should be submitted to the jury. The
trial court must decide if "under the totality of the circumstances
and viewing the defendant's conduct in the
aggregate, a reasonable hypothetical trier of fact could
have found either malice or gross neglect/reckless disregard."
Wirtz v. Switzer, 586 So. 2d 775, 783 (Miss.
1991). On remand the [**11] trial court may consider
the submission of a punitive damages instruction based
on the independent tort of retaliatory discharge.
II. DID THE TRIAL COURT ERR BY REFUSING TO
GRANT AN INSTRUCTION ALLOWING THE JURY
TO AWARD PUNITIVE DAMAGES IF THEY
FOUND A TORTIOUS BREACH OF CONTRACT?
Willard and Sumner contend that it was error for the
trial court to deny an instruction for punitive damages
based on tortious breach of contract. The Court has repeatedly
stated that punitive damages are recoverable for
breach of contract when such breach is attended by intentional
wrong, insult, abuse or such gross negligence as
to consist of an independent tort. Peoples Bank and Trust
Co. v. Cermack, 658 So. 2d 1352, 1361 (Miss. 1995);
Eselin- Bullock & Associates Ins. Agency, Inc. v. National
General Ins. Co., 604 So. 2d 236, 240 (Miss. 1992);
Strickland v. Rossini, 589 So. 2d 1268, 1273 (Miss.
1991); Fought v. Morris, 543 So. 2d 167, 173 (Miss.
1989).
The basis for Willard's and Sumner's contentions is
that Revel breached the hospital's employment handbook
concerning disciplinary procedures. Specifically, they
assert that Revel's refusal to recognize the existence of
the handbook [**12] and its termination procedures
rose to the level of a tortious breach. Paracelsus maintains
that the trial judges' rulings should be upheld because
this is not an extreme case as required by law when
considering an award of punitive damages.
Both trial judges ruled that this was not a punitive
damages case. In the Sumner case, the trial judge recognized
that Revel failed to acknowledge the handbook,
however, upon considering the totality of the circumstances,
he found this not to be a punitive damages case.
The standard of review regarding the refusal of a requested
jury instruction was pronounced in Hill v.
Dunaway, 487 So. 2d 807, 809 (Miss. 1986):
Our rule is this: the refusal of a timely requested and
correctly phrased jury instruction on a genuine issue of
681 So. 2d 539, *; 1996 Miss. LEXIS 496, **;
12 I.E.R. Cas. (BNA) 142; 132 Lab. Cas. (CCH) P58,171
Page 4
material fact is proper only if the trial court - - and this
Court on appeal - - can say, taking the evidence in the
light most favorable to the party requesting the instruction,
and considering all reasonable favorable inference
which may be drawn from the evidence in favor of the
requesting party, that no hypothetical reasonable jury
could find the facts in accordance with the theory of the
requested instruction.
(citations [**13] omitted)
The juries in these cases found that Paracelsus 1)
discharged Willard in violation of [*544] the verbal
contract with her as supplemented by the handbook, and
2) discharged Sumner in violation of her contract as supplemented
by the handbook and the policies and procedural
manual.
Considering the evidence and the jury's special
findings, it is possible that the jury could have found that
this breach of contract was an intentional wrong committed
by Paracelsus. Willard and Sumner had outstanding
personnel files. They were terminated on questionable
grounds, and the policies of the handbook were not
followed in the process. The uncontradicted evidence
indicates that Revel wrote checks out to herself and either
forged co-signatures or had someone else do so. The
backup documents were allegedly stolen and there was
no record of these checks or what purpose they served.
Willard and Sumner reported what they believed were
financial irregularities and were subsequently discharged
or constructively discharged. Paracelsus did not follow
the contractually stated procedures for the corresponding
offenses of Willard and Sumner but even more outrageous
is their subsequent termination in view [**14] of
impeccable personnel records. It is possible that a reasonable
jury could find an intentional wrong here necessitating
the imposition of punitive damages. The trial
courts may reconsider submitting a punitive instruction
to the jury on this basis as well.
III. DID THE TRIAL COURT ERR BY DENYING
WILLARD'S AND SUMNER'S POST TRIAL MO-
TIONS FOR ATTORNEY'S FEES?
Willard and Sumner both filed a motion for award of
attorney's fees in the trial court. The motions set out three
reasons for their entitlement to attorney's fees: 1) Such
fees are a reasonably foreseeable result of Paracelsus'
conduct in breaching the employment contract, 2) Paracelsus
filed a frivolous motion to compel counsel to
withdraw, which was unsupported by any evidence, and
3) Paracelsus needlessly protracted the litigation by failing
to file an answer timely and Willard and Sumner
were successful on their motion to compel under
M.R.C.P. 37. The trial courts denied the respective motions.

Willard's and Sumner's claim that under traditional
tort principles they should be entitled to recover all of
their damages which include attorney's fees is not the law
in Mississippi. Repeatedly, the Court has followed the
American [**15] rule that when there is no contractual
provision or statutory authority providing for attorney's
fees, they may not be awarded as damages unless punitive
damages are proper as well. Stokes v. Board of Directors
of La Cav Imp. Co., 654 So. 2d 524, 529 (Miss.
1995); Century 21 Deep South Properties, Ltd.. v.
Corson, 612 So. 2d 359, 375 (Miss. 1992); Central Bank
of Mississippi v. Butler, 517 So. 2d 507, 512 (Miss.
1987). The Court, though, has held that attorney's fees
are recoverable as an element of damages in a few situations.
See Greenlee v. Mitchell, 607 So. 2d 97, 109 (Miss.
1992); Howard v. Clanton, 481 So. 2d 272, 276 (Miss.
1985) (interpreting Miss. Code Ann. § 89-1-33 to provide
attorney's fees where a purchaser under a warranty
deed incurred expenses adjudicating title). See also Wirtz
v. Switzer, 586 So. 2d 775, 782 (Miss. 1991)(error not to
allow jury to consider attorney's fees against defendant
accountant when his negligence required executrix to
defend against a complaint by heirs). Other than those
cases in which the American rule is applicable, we have
allowed attorney's fees only where the wrongful act of
the defendant has involved the plaintiff [**16] in litigation
with others. That is not the situation here. If we were
to extend an award of attorney's fees as an element of
damages, we would be moving toward the English rule
of awarding counsel fees to successful plaintiffs in litigation.
This rule we have repeatedly resisted. See Grisham
v. Hinton, 490 So. 2d 1201, 1206 (Miss. 1986).
Willard and Sumner argue that the case of Universal
Life Ins. Co. v. Veasley, 610 So. 2d 290 (Miss. 1992),
overrules the limited situations for an award of attorney's
fees. Veasley, the beneficiary of a life insurance policy,
sued Universal Life for failure to pay the claim. The jury
awarded Veasley the balance due on the contract after
funeral expenses had been paid, $ 500 for actual extra-contractual
damages and $ 175,000 in punitive damages.
Universal appealed these awards, [*545] and the
Court reversed and rendered as to the punitive damages
issue. The Court upheld the extra-contractual damages
based on emotional distress. The Court applied the tort
law principle that one is liable for the full measure of the
reasonably foreseeable consequences of her actions.
Further stating that it was foreseeable by an insurer that
failure to pay a valid [**17] claim through the negligence
of its employees may cause an adverse result to
the plaintiff. Id. at 295. The Court went on to say, "additional
inconvenience and expense, attorney's fees and
the like should be expected in an effort to have the oversight
corrected." Id. This is the language relied on by
Willard and Sumner. However, Veasley is addressing a
problem peculiar to the insurance industry, specifically
681 So. 2d 539, *; 1996 Miss. LEXIS 496, **;
12 I.E.R. Cas. (BNA) 142; 132 Lab. Cas. (CCH) P58,171
Page 5
the lack of proper damages when there is a failure to pay
on an insurance contract without an arguable reason, and
the circumstances do not warrant punitive damages. Its
application should be limited.
It was proper to deny attorney's fees in this instance,
because there was no contractual provision or statutory
authority nor was there an award of punitive damages.
Moreover, there was no litigation between the plaintiffs
and a third party. The trial judges did not abuse their
discretion on this issue. However, on remand should the
punitive damages issue be submitted to the jury and an
award granted it follows that attorney's fees should be
awarded as well.
Willard and Sumner also contend they are due attorney's
fees because of Paracelsus' unsuccessful Motion
To Compel [**18] Opposing Counsel's Withdrawal
Due To Conflict Of Interest. Paracelsus apparently attempted
to show that W. O. Luckett, a member of the
former firm of Willard and Sumner's attorney, represented
Paracelsus on a Worker's Compensation claim.
The order of the trial court summarily denied any attorney's
fees without making any findings, and neither party
designated the transcript of the hearing on appeal. In
previous matters, the Court has stated that it will assume
the trial judge made determinations of fact sufficient to
support his verdict where no specific finding of fact is
made. Love v. Barnett, 611 So. 2d 205, 207 (Miss.
1992); Walters v. Patterson, 531 So. 2d 581, 583 (Miss.
1988). Therefore, the Court must presume that the ruling
of the trial courts as to this contention is correct and affirm
the orders, as the record does not support a contrary
view.
Willard and Sumner also claim they are entitled to
attorney's fees because they were successful on their motions
to compel discovery. Apparently, at the hearing on
these motions, Willard and Sumner were successful but
were denied their motions for attorney's fees. In the written
order, the trial courts summarily denied Willard's
[**19] and Sumner's motions for attorney's fees. We
have held that the award of attorney's fees against the
losing party is mandatory under Rule 37(a)(4), unless the
trial court finds that the motion to compel was substantially
justified, and the award was not unjust. Barnes v.
Confidential Party, 628 So. 2d 283, 292 (Miss. 1993).
The standard of review for a trial court's decision on this
issue is the familiar abuse of discretion standard. Id. The
Court will have to assume here that the trial judges made
a sufficient determination of justification in their decision,
because the transcripts of the hearings were not
designated on appeal. Willard and Sumner are appealing
the orders of the lower court and they have the burden of
seeing that the record before the Court contains all data
essential to matters relied upon for reversal. Shelton v.
Kindred, 279 So. 2d 642, 644 (Miss. 1973). As a proce-

dural matter, the better practice for trial courts under
Rule 37(a)(4) would be to specifically state in the written
order why such motions are substantially justified.
However, we will assume in this situation that the trial
judges made determinations of fact sufficient to support
their verdicts [**20] here. See Love, 611 So. 2d at 207.
Accordingly, we affirm the trial judges on this issue.
Conclusion
This case is reversed and remanded for a new trial
consistent with this opinion. Willard and Sumner are
entitled to a retaliatory discharge instruction. Accord-
681 So. 2d 539, *; 1996 Miss. LEXIS 496, **;
12 I.E.R. Cas. (BNA) 142; 132 Lab. Cas. (CCH) P58,171
Page 6
ingly, the trial courts may wish to review their rulings on
the submission of a punitive damages instruction to the
jury.
[*546] REVERSED AND REMANDED FOR A
NEW TRIAL CONSISTENT WITH THIS OPIN-
ION.
PRATHER AND SULLIVAN, P.JJ., BANKS,
McRAE, ROBERTS, AND SMITH, JJ., CONCUR.
LEE, C.J., AND MILLS, J., NOT PARTICIPATING.

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693 S.W.2d 336, *; 1985 Tenn. LEXIS 520, **
LEXSEE 693 SW2D 336
PULLMAN STANDARD, INC., Plaintiff-Appellant, v. ABEX CORPORATION,
Defendant-Appellee
SUBSEQUENT HISTORY: [**1]
Rehearing Denied July 15, 1985.
PRIOR HISTORY: Appeal from the Court of Appeals
ty
[NO NUMBER IN ORIGINAL]
Supreme Court of Tennessee, Middle Section, at Nashville
Appeal from the Circuit Court of Humphreys Coun-
Hon. Leonard W. Martin, Judge
DISPOSITION:
COURT OF APPEALS REVERSED; TRIAL
COURT REINSTATED; CASE REMANDED.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff railroad car
manufacturer appealed a judgment of the Court of Appeals
(Tennessee), which reversed the trial court's denial
of defendant wheel manufacturer's motion to dismiss
plaintiff's action to recover litigation expenses and attorneys'
fees incurred in defending suits brought against
plaintiff by third parties.
OVERVIEW: Plaintiff railroad car manufacturer incorporated
a wheel made by defendant wheel manufacturer
into a railroad car. The wheel failed and caused a derailment,
which, in turn, caused a gas tankcar to explode.
Many cases were brought against plaintiff and defendant
and consolidated in federal court. Defendant settled the
cases at no expense to plaintiff. Plaintiff then brought an
action to recover its attorneys' fees and litigation costs
from defendant. Defendant moved to dismiss for failure
to state a claim upon which relief could be granted. The
trial court denied the motion. The Court of Appeals reversed
and dismissed the case. The court reversed, reinstated
the trial court's order, and remanded. The court
held that attorneys' fees were recoverable under an implied
indemnity agreement and that plaintiff's complaint
made sufficient allegations to state a cause of action for
693 S.W.2d 336; 1985 Tenn. LEXIS 520
May 13, 1985
Page 1
recovery of its attorneys' fees and costs because it was
required to defend itself in the consolidated lawsuits that
arose from the failure of the defective wheel manufactured
by defendant.
OUTCOME: The court reversed the judgment that reversed
the denial of defendant wheel manufacturer's motion
to dismiss plaintiff railroad car manufacturer's action
to recover litigation expenses and attorneys' fees because
costs and attorneys' fees incurred in litigation with a third
party were recoverable under an implied indemnity
agreement.
LexisNexis(R) Headnotes
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN1] Costs and attorneys' fees are recoverable under an
express indemnity contract if the language of the agreement
is broad enough to cover such expenditures.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] Attorneys' fees are not recoverable in Tennessee
in the absence of a statute or contract specifically
providing for such recovery, or a recognized ground of
equity. An exception to that rule is recognized for the
right of indemnity which arises by operation of law,
based upon the relationship of the parties, and includes
the right to recover attorneys' fees and other litigation
costs which have been incurred by the indemnitee in
litigation with a third party.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs

Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] When only litigation expenses are sought it is not
necessary that an indemnitee be forced to pay a judgment
or settlement to a third party in order to recover such
litigation expenses and attorneys' fees from its indemnitor.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Torts > Multiple Defendants > Contribution & Indemnity
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN4] An indemnitee's right to be indemnified for any
judgment or settlement paid in a lawsuit is not destroyed
by the indemnitor's presence in that lawsuit as a
co-defendant. The right to recover attorneys' fees and
other litigation expenses from an indemnitor under an
implied indemnity agreement is likewise not dependent
upon whether or not the indemnitor was sued by the third
party along with the indemnitee.
COUNSEL:
For Plaintiff-Appellant: G. Wynn Smith, Jr., Glen G.
Reid, Jr., Mark Vorder Bruegge, Jr., Memphis.
For Defendant-Appellee: William R. Willis, Jr., Alfred
H. Knight, Nashville.
JUDGES:
Brock, J. wrote the opinion. Cooper, C.J., Fones,
Harbison and Drowota, JJ., concur.
OPINIONBY:
BROCK
OPINION:
[*337] In this action, plaintiff seeks to recover litigation
expenses and attorneys fees incurred in defending
suits brought against it by third parties. Those suits
arose out of the derailment of a train and subsequent explosion
of a gas tankcar in Waverly, Tennessee, in 1978.
Plaintiff, Pullman Standard, Inc. [Pullman], manufactured
the superstructure of a railroad car involved in
the derailment disaster. Defendant, Abex Corporation
[Abex], was manufacturer and designer of a wheel fitted
on the car by Pullman. Pullman and Abex were two of
many defendants in the lawsuits arising from the derailment.
Many of the cases, consolidated in the Federal
District [**2] Court for the Middle District of Tennessee,
were eventually settled by Abex on its behalf and on
693 S.W.2d 336, *; 1985 Tenn. LEXIS 520, **
Page 2
behalf of Pullman. Pullman made no payment to the
plaintiffs in those cases. Pullman then filed this suit.
Abex filed a motion to dismiss for failure to state a
claim upon which relief can be granted under T.R.Civ.P.
Rule 12.02(6). The trial judge denied the motion, but
granted Abex an interlocutory appeal of the order. The
Court of Appeals reversed and dismissed the action. We
granted Pullman's application for review.
Pullman's first theory of recovery of litigation expenses
and attorneys' fees is under an indemnity agreement
implied by law. With regard to this theory, Pullman's
complaint includes the following allegations:
"12. The theories asserted against Plaintiff
in all of said lawsuits were based upon
Plaintiff's sale of LN171228 to the L & N
in 1961 with an allegedly defective wheel
manufactured by Defendant which had
failed causing the initial derailment, train
wreck, explosion and fire which devastated
Waverly.
"13. The wheel that allegedly failed on
LN171228 on or about February 22, 1978
was designed and manufactured by Defendant.
"14. Plaintiff did [**3] not, in any way,
participate in the design or manufacture of
said wheel, and Plaintiff had no contact
with or control over LN171228, or its
wheels, after it was sold to the L & N in
1961.
"15. At no time after the sale of
LN171228 in 1961, did Plaintiff know, or
have reason to know, of any alleged defect
in the design or manufacture of said
wheel or of any problem concerning the
service performance of said wheel or any
similar wheel manufactured by Defendant.
* * *
"7. Subsequent to the train wreck and
rupture and ignition of the car containing
LPG, accident investigations were conducted
by the L & N, the National Transportation
Safety Board, and the Federal
Railroad Administration. Those investigations
drew the conclusion that the cause
of the initial derailment and train wreck

was the failure of a wheel on a gondola
car in the train identified as LN171228.
"8. In 1960 Plaintiff had manufactured
the superstructure of LN171228 for sale
to the L & N and had fitted it with the
aforesaid wheel which had [*338] been
designed and manufactured by Defendant."
As the Court of Appeals correctly noted, we have
held in previous cases that [HN1] costs and attorneys'
fees [**4] are recoverable under an express indemnity
contract if the language of the agreement is broad enough
to cover such expenditures, see Harpeth Valley Utilities
District v. Due, 225 Tenn. 181, 465 S.W.2d 353 (1971);
41 Am. Jur. 2d Indemnity § 36 (1968). However, the
issue raised in this case, the recovery of litigation expenses
and attorneys' fees under an implied indemnity
contract, is apparently one of first impression in this
state.
We have examined the law in other jurisdictions on
this issue. It appears that a majority of courts which
have considered the issue allow the recovery of attorneys'
fees under an implied indemnity contract in an appropriate
case. See, e.g., Heritage v. Pioneer Brokerage
& Sales, Inc., 604 P.2d 1059 (Alaska 1979); Sendroff v.
Food Mart of Connecticut, Inc., 34 Conn. Supp. 624, 381
A.2d 565 (1977); Addy v. Bolton, 257 S.C. 28, 183
S.E.2d 708 (1971). See also, Frumer & Friedman Products
Liability § 44.10[1] (1984); 22 Am. Jur. 2d Damages
§ 166 (1965); 42 C.J.S. Indemnity § 24 (1944).
Other jurisdictions disallow the recovery of such expenses
by relying upon the general rule that attorneys'
fees are not recoverable, [**5] absent a statute or contract
specifically providing for such recovery. See
Kerns v. Engelke, 76 Ill.2d 154, 390 N.E.2d 859, 865, 28
Ill. Dec. 500 (1979). The latter rule was followed by the
Court of Appeals in this case.
We are in agreement with the majority view that attorneys'
fees are recoverable under an implied indemnity
agreement in appropriate cases. We continue to adhere
to [HN2] the rule in Tennessee that attorneys' fees are
not recoverable in the absence of a statute or contract
specifically providing for such recovery, or a recognized
ground of equity; however, we recognize an exception to
that rule and hold that the right of indemnity which arises
by operation of law, based upon the relationship of the
parties, see Cohen v. Noel, 165 Tenn. [1 Beel.] 600, 56
S.W.2d 744 (1933), includes the right to recover attorneys'
fees and other litigation costs which have been incurred
by the indemnitee in litigation with a third party.
Pullman's complaint alleges that, even though no act
or omission of its own contributed to the derailment, it
693 S.W.2d 336, *; 1985 Tenn. LEXIS 520, **
Page 3
was required to defend itself in the consolidated lawsuits
because the Abex wheel was defective and caused the
damages complained of [**6] in those suits. Taken in
the light most favorable to Pullman, the complaint makes
sufficient allegations to state a cause of action for recovery
of attorneys' fees and litigation expenses incurred by
Pullman in the prior lawsuits. Vallejos v. C.E. Glass Co.,
583 F.2d 507 (10th Cir. 1978); Ranger Const. Co. v.
Prince William County, 605 F.2d 1298 (4th Cir. 1979);
Davison v. Parker, 50 Ore. App. 129, 622 P.2d 1113
(1981); Anderson, U.C.C.: Text-Cases-Commentary, §
2-314:16, "Seller v. Mfgr" at 125, 126.
Abex argues that Pullman's complaint states no
cause of action because it contains no allegation that
Pullman was required to pay a judgment or settlement to
the plaintiffs in the prior lawsuits. We disagree. [HN3]
When only litigation expenses are sought it is not necessary
that an indemnitee be forced to pay a judgment or
settlement to a third party in order to recover such litigation
expenses and attorneys' fees from its indemnitor.
Such a requirement would, as noted in Pender v. Skillcraft
Industries, Inc., 358 So. 2d 45, 47 (Fla. App. 1978),
penalize a party for successfully defending the allegations
against it. See also, Heritage v. Pioneer Brokerage
& Sales, [**7] Inc., 604 P.2d at 1067. Finding no
justification for such a requirement, we reject it.
Abex also argues that recovery should not be allowed
when the party incurred the attorneys' fees and
litigation expenses in a suit in which he was required to
defend against allegations of his own negligence. It
seeks to limit recovery to cases in which the indemnitee
was held [*339] constructively liable for the actual
default of its indemnitor. Because Pullman's complaint
does not specifically state that it was forced to defend
allegations that it was constructively liable for the
wrongdoing of Abex, Abex argues that its motion to
dismiss should have been granted. Some jurisdictions
follow the rule which Abex would have us adopt. See,
e.g., Weston v. Globe Slicing Mach. Co., 621 F.2d 344
(9th Cir. 1980) (applying Idaho law); Davis v. Air Tech.
Industries, Inc., 22 Cal.3d 1, 148 Cal. Rptr. 419, 582
P.2d 1010 (1978); Sawka v. Prokopowycz, 104 Mich.
App. 829, 306 N.W.2d 354 (1981); Farr v. Armstrong
Rubber Company, 288 Minn. 83, 179 N.W.2d 64 (1970);
Conrad v. Suhr, 274 N.W.2d 571 (N.D. 1979); Shaffer v.
Honeywell, Inc., 249 N.W.2d 251 (S.D. 1976). The rationale
[**8] of those cases is that where an indemnitee
is defending a charge that he is constructively liable for
the wrongdoing of its indemnitor, he is put in the position
of defending the indemnitor's conduct and the indemnitee
is entitled to recover the cost of his defense
from the indemnitor because the defense is essentially
conducted for the indemnitor's benefit. See, Davis, supra;
Conrad, supra. Other jurisdictions, however, hold

that it is the indemnitee's actual wrongdoing rather than
allegations of wrongdoing that should determine the indemnitee's
rights and that a mere allegation of active
negligence should not deprive a potential indemnitee of
its indemnification, including attorney's fees. Insurance
Co. of North America v. King, 340 So. 2d 1175, 1176
(Fla. App. 1976).
We find the latter rule to be in accord with the basis
for our recognition of the right to recover attorneys' fees
and expenses under implied indemnity agreements. The
right is not based upon the failure of the indemnitor to
fulfill an obligation to take over the indemnitee's defense
or upon the existence of some benefit to the indemnitor
arising from the defense conducted by the indemnitee.
Instead, it [**9] is, like the right of the indemnitee to be
indemnified for any judgment or settlement it pays,
based upon the relationship between the parties and their
respective degrees of fault.
Abex contends that recovery should not be allowed
if the indemnitor was a defendant in the prior suit along
with the indemnitee. We disagree. We know of no reason
why the action of third parties in naming both Pullman
and Abex as defendants in the underlying cases
should deprive Pullman of its right to be indemnified for
the cost of its attorneys' fees and litigation expenses
which it incurred in those suits. [HN4] An indemnitee's
right to be indemnified for any judgment or settlement
paid in a lawsuit is not destroyed by the indemnitor's
presence in that lawsuit as a co-defendant. The right to
recover attorneys' fees and other litigation expenses from
an indemnitor under an implied indemnity agreement is
likewise not dependent upon whether or not the indemnitor
was sued by the third party along with the indemnitee.
Abex raises several additional arguments which relate
to Pullman's first theory of recovery. Those arguments
are based upon a pre-trial order filed in the cases
consolidated in the Federal [**10] District Court for the
Middle District of Tennessee which sets forth the allegations
made against Pullman in those cases. The arguments
are prematurely raised on this review of the trial
court's denial of Abex's motion to dismiss the complaint
for failure to state a cause of action, and thus they will
not be considered.
Pullman's second theory of recovery of attorneys'
fees and litigation expenses is based upon the tort of deceit.
Again we are faced with an issue of first impression
in Tennessee. The Court of Appeals refused to
recognize a cause of action for recovery of attorneys' fees
based upon an independent tort because to do so would
allow circumvention of its refusal to permit the recovery
of such damages under an indemnity theory. In view of
our holding that attorneys' fees and litigation expenses
693 S.W.2d 336, *; 1985 Tenn. LEXIS 520, **
Page 4
are recoverable under an implied agreement to indemnify,
the Court of Appeals' justification for refusing to
recognize Pullman's [*340] second theory of recovery
is no longer a concern.
It appears that attorneys' fees and costs are recoverable
under an independent tort theory in most jurisdictions
which have considered the issue. Indeed, we have
been cited to no case, [**11] and have discovered
none in our own research, which has refused to recognize
the theory of recovery. As stated in the annotation to 42
A.L.R.2d 1183 (1956),
"It appears to be well settled that where
the natural and proximate consequence of
a tortious act of defendant has been to involve
plaintiff in litigation with a third
person, reasonable compensation for attorneys'
fees incurred by plaintiff in such
action may be recovered as damages
against the author of the tortious act." Id.
at 1186.
The Restatement (Second) of Torts, § 914(2) (1979),
cites a similar rule:
"One who through the tort of another has
been required to act in the protection of
his interests by bringing or defending an
action against a third person is entitled to
recover reasonable compensation for loss
of time, attorney fees and other expenditures
thereby suffered or incurred in the
earlier action."
See also 22 Am. Jur. 2d Damages § 166 (1965). We
adopt the prevailing rule and recognize the cause of action
set forth above. See: Safway Rental & Sales Co. v.
Albina Engine & Machine Works, 343 F.2d 129 (10th
Cir. 1965).
Pullman alleged in its complaint that Abex was
[**12] aware that its U-1 wheel, the type which was
incorporated into the Pullman car and which allegedly
failed, had developed a dangerous propensity to fracture
and fail under normal railroad operating procedures
which then prevailed, and that Abex nevertheless deliberately
deceived the Association of American Railroads
and the Louisville and Nashville Railroad Company as to
the dangerous propensity of the U-1 wheel. Pullman further
alleged that Abex's deception caused the U-1 wheel
to be retained in service, resulting in the derailment and

the lawsuits which Pullman was forced to defend. We
believe that such allegations are sufficient to state a
cause of action for Pullman's recovery of attorneys' fees
and other litigation expenses incurred in the consolidated
cases.
693 S.W.2d 336, *; 1985 Tenn. LEXIS 520, **
Page 5
The judgment of the Court of Appeals is reversed,
the trial court's order overruling defendant's motion to
dismiss is reinstated, and the case is remanded. Costs of
this appeal are adjudged against defendant-appellee.
Cooper, C.J., Fones, Harbison and Drowota, JJ.,
Concur.

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LEXSEE 7 UTAH 2D 377
PACIFIC COAST TITLE INSURANCE COMPANY, a corporation, Plaintiff and
Respondent, v. HARTFORD ACCIDENT & INDEMNITY COMPANY, a corporation,
Defendant and Appellant
DISPOSITION: [***1] Affirmed.
COUNSEL: Moreton, Christensen & Christensen, Salt
Lake City, for appellant.
Harry Pugsley, Salt Lake City, for respondent.
JUDGES: Crockett, Justice. McDonough, C.J., and
Wade, Worthen and Henriod, JJ., concur.
OPINION BY: CROCKETT
OPINION
[*378] [**907] This case is cognate to Prudential
Federal Savings & Loan Association v. Hartford
Accident & Indemnity Co., 7 Utah 2d 366, 325 P.2d 899,
and the background facts set forth therein are pertinent
here. The plaintiff, Pacific Coast Title Company, was
involved in the transaction because it wrote the policies
of title insurance on the homes constructed in the Morningside
Heights Subdivision. The contract required it to
issue a policy on each home before the mortgage was
accepted and the loan approved by Prudential Federal
Savings Company so money could be advanced under
the progress payment plan. This necessitated the issuance
of policies before the rights of materialmen and
laborers had been concluded. The hazard of such procedure
was obvious to the parties. It was for that reason
that the plaintiff Title Company was made obligee on
Hartford's bond which recited that it would be saved
harmless from defaults on the part of [***2] the contractor,
Cassady Co., Inc., one of whose contractual duties
was to "keep and maintain each lot or building site
free and clear of labor and material liens."
No. 8720
Supreme Court of Utah
7 Utah 2d 377; 325 P.2d 906; 1958 Utah LEXIS 157
May 20, 1958
Page 1
Because of Cassady's failures to meet payments to
its subcontractors, laborers and [*379] materialmen, a
number of them filed and sought to foreclose liens
against the homes. Plaintiff Title Company, in accordance
with its commitment to keep title to the properties
unencumbered, engaged counsel to interpose defenses to
the foreclosure of the liens; eventually settlement was
arranged and they were paid. The basis of the judgment
here is for reimbursement for attorney's fees and costs it
incurred in defending against foreclosure of the liens.
The attack Hartford makes upon the judgment is that
plaintiff's expenses for attorney's fees should not have
been allowed because they are not generally recoverable
unless expressly provided for by contract or authorized
by statute. 1 That such is the general rule we agree. But
it applies to claims for attorney's fees within the action
itself, and not to situations such as the instant one.
1. See Dahl v. Prince, 119 Utah 556, 230
P.2d 328; St. Joseph Stock Yards Co. v. Love, 57
Utah 450, 195 P. 305, 25 A.L.R. 569; United
States Fidelity & Guaranty Co. v. Frohmiller, 71
Ariz. 377, 227 P.2d 1007; 15 Am.Jur. p. 550; and
25 C.J.S. Damages § 50, p. 531.
[***3] The rule as to what damages are recoverable
for breach of contract is based upon the concept of
reasonable foreseeability that loss of such general character
would result from the breach. Therefore, to be
compensable, the loss must result from the breach in the
natural and usual course of events, so that it can fairly
and reasonably be said that if the minds of the parties had
adverted to breach when the contract was made, loss of
such character would have been within their contemplation.
2

2. See Hadley v. Baxendale, 9 Exch. 341,
156 Eng.Rep. (1854); see also, Sprague v. Boyles
Bros. Drilling Co., 4 Utah 2d 344, 294 P.2d 689;
Restatement of Contracts Sec. 330; 25 C.J.S.
Damages § 23, p. 480, and 15 Am.Jur. 451.
[**908] Applying the above rule to this case: it
could reasonably be foreseen that the natural and usual
consequence of Cassady's failure to pay the laborers and
materialmen would bring about the series of events
7 Utah 2d 377, *; 325 P.2d 906, **;
1958 Utah LEXIS 157, ***
Page 2
which occurred: that liens would be filed and legal proceedings
instituted to enforce [***4] them; that plaintiff
Title Company, having the duty to keep the titles clear,
would interpose defenses and attend to some disposition
of the claims, which would require the services of attorneys
and court costs incidental thereto. That is the type
of loss for which Hartford's bond was given to guard
against.
Affirmed. Costs to plaintiff.

PRIOR HISTORY: [**1]
702 F.2d 719, *; 1983 U.S. App. LEXIS 29484, **
LEXSEE 702 F2D 719
Phil Crowley Steel Corporation, Appellant, v. Sharon Steel Corporation and NVF
Company, Appellees
No. 82-1473
UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT
Appeal from the United States District Court for the
Eastern District of Missouri
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant promisee challenged
the order of the United States District Court for
the Eastern District of Missouri, which dismissed the
promisee's claim against appellees, grandparent corporation
and parent corporation of the promisor, for tortious
interference with the promisee's contractual relations
with the promisor and denied the promisee its attorney's
fees as actual damages.
OVERVIEW: The promisee brought a tortious interference
with contractual relation's action against the grandparent
and parent corporations of the promisor. The district
court dismissed the actions because the grandparent
and parent corporations were not third parties due to collateral
litigation based on their corporate relationships
and dismissed the promisee's claim for punitive damages
because the only actual damages were attorneys' fees.
The promisee appealed. The court reversed and remanded
and held that the grandparent and parent corporations
were third parties to the breach because they were separate
legal entities from the promisor. The grandparent
and parent corporations' full ownership of the promisor
was inadequate evidence to pierce the grandparent and
parent corporations' corporate veils and to find them to
be alter egos of the promisor. Attorneys' fees were actual
damages for tortious interference with a contract. The
grandparent and parent corporations were not entitled to
summary judgment, and the case was remanded for further
proceedings. Because of the court's reversal, the
punitive damages claim was not addressed.
702 F.2d 719; 1983 U.S. App. LEXIS 29484
January 11, 1983, Submitted
March 22, 1983, Decided
Page 1
OUTCOME: The court reversed the judgment of the
district court, which awarded summary judgment to the
grandparent and parent corporations of the promisor in
the promisee's tortious interference with contractual relation's
action. The court remanded the case for further
proceedings.
LexisNexis(R) Headnotes
Torts > Damages > Compensatory Damages
Torts > Business & Employment Torts > Interference
With a Contract
[HN1] One element of tortious interference with a contract
is actual damages.
Torts > Damages > Costs & Attorney Fees
[HN2] Attorneys' fees cannot be recovered as damages.
However, the general rule is not applicable when the
attorneys' fees were incurred in collateral litigation.
Where the natural and proximate result of a wrong or
breach of duty is to involve the wronged party in collateral
litigation, reasonable attorneys' fees necessarily and
in good faith incurred in protecting himself from the injurious
consequence thereof are proper items of damages.
Torts > Business & Employment Torts > Interference
With a Contract
Torts > Damages > Costs & Attorney Fees
[HN3] In a suit for tortious interference with contractual
relations, even if the tortfeasor and the breaching party
are sued in one lawsuit, attorneys' fees expended against
the breaching party are recoverable from the tortfeasor.
Contracts Law > Remedies > Compensatory Damages
Contracts Law > Third Parties > Beneficiaries >
Claims & Enforcement
[HN4] One who, through the tort of another, has been
required to act in the protection of his interests by bring-

ing or defending an action against a third person is entitled
to recover reasonable compensation for loss of time,
attorney fees and other expenditures thereby suffered or
incurred in the earlier action.
Civil Procedure > Joinder of Claims & Parties > Capacity
of Parties
[HN5] "Privity" is a term with different meanings in different
contexts; for example, the concept of "privity of
parties" for res judicata purposes is not the same as the
concept of "privity of contract." However, all the meanings
are merely variations involving some aspect of identity.
If parties are identical and have identical interests,
they may be subject to the same responsibilities, make
use of the same benefits, and be shielded by the same
protections.
Business & Corporate Entities > Corporations >
Shareholders & Other Constituents > Disregard of
Corporate Entity
Torts > Vicarious Liability > Subsidiary Corporations
[HN6] Corporations are separate legal entities and ordinarily
are to be regarded as such. They are often formed
specifically because they are distinct from their owners.
In cases where a creditor seeks to recover from a parent
corporation for its subsidiary's debts, 100 percent ownership
and control does not of itself authorize piercing
the corporate veil. Thus, full ownership is not enough to
find a parent corporation identical to its subsidiary. Even
if a party seeking to pierce the corporate veil establishes
that a subsidiary is no more than a parent's "alter ego,"
the party must establish that equity requires that the two
corporations be treated as one. The party seeking to
prove that the corporation was a sham must not only
show lack of separate identities, but some equitable
ground for piercing the corporate veil.
Torts > Business & Employment Torts > Interference
With a Contract
Torts > Vicarious Liability > Subsidiary Corporations
Torts > Damages > Costs & Attorney Fees
[HN7] One of the elements of tortious interference with
contractual relations is the absence of legal justification.
A corporation with a financial interest in another corporation
is deemed to be justified unless it is shown that the
parent employed wrongful means or acted with an improper
purpose. The rule provides a parent with a great
deal of protection from liability for directing its subsidiary's
actions. There is no need to give further protection
merely because the damages sought are attorneys' fees.
Torts > Business & Employment Torts > Interference
With a Contract
Torts > Vicarious Liability > Subsidiary Corporations
702 F.2d 719, *; 1983 U.S. App. LEXIS 29484, **
Page 2
[HN8] Missouri law allows recovery from a parent for
tortious interference if wrongful means are shown, and
Missouri presumes a corporation to be a separate entity.
COUNSEL:
Kohn, Shands, Elbert, Gianoulakis & Giljum, Alan
C. Kohn, Thomas J. Frawley, St. Louis, Missouri for
Plaintiff-Appellant.
Lewis, Rice, Tucker, Allen & Chubb, William G.
Ohlhausen, John J. Moellering, St. Louis, Missouri for
Defendants-Appellees.
JUDGES:
Heaney, Circuit Judge, Floyd R. Gibson, Senior
Circuit Judge, and McMillian, Circuit Judge.
OPINIONBY:
McMILLIAN
OPINION:
[*720] McMILLIAN, Circuit Judge.
Phil Crowley Steel Corp. (Crowley) appeals from a
final judgment entered in the District Court for the Eastern
District of Missouri dismissing its claim against NVF
Co. and Sharon Steel Corp. (Sharon), a subsidiary of
NVF, n1 for tortious interference with Crowley's contractual
relations with Macomber, Inc., a wholly-owned
subsidiary of Sharon. For reversal Crowley argues that
the district court erred in holding that Crowley could not
recover as actual damages attorneys' fees incurred in
litigation against Macomber for breach of contract because
NVF and Sharon were not third parties to the collateral
litigation due to their corporate relationships.
Crowley also argues that even if actual [**2] damages
are not recoverable, the district court should not have
dismissed the claim for punitive damages. For the reasons
discussed below, we reverse the judgment of the
district court and remand for further proceedings.
n1 NVF owns 86 percent of Sharon's stock.
Crowley filed suit against NVF and Sharon for tortious
interference with Crowley's contract with Macomber.
[HN1] One element of tortious interference is
actual damages. The only damages Crowley alleged were
the attorneys' fees incurred when it successfully sued
Macomber for breach of contract. The district court, applying
Missouri law, noted that attorneys' fees are available
as damages when they are incurred in collateral litigation
required by the defendant's wrong or breach of
duty. The district court limited this rule to apply only

when the collateral litigation is with a third party, i.e.,
someone not a party, or in privity with a party, to the
litigation in which the attorneys' fees are sought. Applying
this limitation, the district court held [**3] that
because Sharon and NVF owned Macomber, they were
in privity with Macomber and thus attorneys' fees were
not recoverable. n2 Because attorneys' fees were the only
actual damages alleged and they were unavailable, the
district court dismissed Crowley's claim. n3 Crowley's
claim for punitive damages was also dismissed because
under Missouri [*721] law punitive damages are unavailable
absent actual damages. Landum v. Livingston,
394 S.W.2d 573, 578 (Mo.App. 1965).
n2 Phil Crowley Steel Corp. v. Sharon Steel
Corp., 536 F. Supp. 429 (E.D. Mo. 1982).
n3 Actual damages are an element of tortious
interference with contractual relations. Juengel
Constr. Co. v. Mt. Etna, Inc., 622 S.W.2d 510,
515 (Mo. App. 1981).
Crowley argues for reversal that the district court
misapplied Missouri law on recovery of attorneys' fees.
The general rule in Missouri, as in many states, is that
[HN2] attorneys' fees cannot be recovered as damages.
Johnson v. Mercantile Trust Co. National Ass'n, 510
S.W.2d 33, [**4] 40 (Mo. 1974) (Johnson); Rook v.
John F. Oliver Trucking Co., 505 S.W.2d 157, 161 (Mo.
App. 1973). However, this general rule is not applicable
when the attorneys' fees were incurred in collateral litigation:
"'Where . . . the natural and proximate result of a
wrong or breach of duty is to involve the wronged party
in collateral litigation, reasonable attorneys' fees necessarily
and in good faith incurred in protecting himself
from the injurious consequence thereof are proper items
of damages. '" Johnson, 510 S.W.2d at 40, quoting State
ex rel. Moore v. Morant, 266 S.W.2d 723, 727 (Mo. App.
1954).
While the issue has not arisen in Missouri, other
states have allowed the recovery of attorneys' fees incurred
in a breach of contract action from one whose
tortious interference caused the breach. E.g., M. F.
Roach Co. v. Town of Provincetown, 355 Mass. 731, 247
N.E.2d 377, 379 (Mass. 1969); Dassance v. Nienhuis, 57
Mich. App. 422, 225 N.W.2d 789, 797 (Mich. 1975); see
Kvenild v. Taylor, 594 P.2d 972, 978 (Wyo. 1979). Were
it not for the tort-feasor's unjustified interference, there
would have been no litigation required because probably
there would have been no [**5] breach. We believe
that Missouri would apply the collateral litigation exception
in these circumstances. n4
702 F.2d 719, *; 1983 U.S. App. LEXIS 29484, **
Page 3
n4 We note that [HN3] even if the tortfeasor
and the breaching party are sued in one lawsuit,
attorneys' fees expended against the breaching
party have been held recoverable from the
tort-feasor. Prentice v. North Am. Title Guar.
Corp., 59 Cal. 2d 618, 621, 30 Cal. Rptr. 821,
823, 381 P.2d 645, 647 (1963); M. F. Roach Co.
v. Town of Provincetown, 355 Mass. 731, 247
N.E.2d 377, 379 (Mass. 1969); Dassance v.
Nienhuis, 57 Mich. App. 422, 225 N.W.2d 789,
797 (Mich. 1975); Hoage v. Westlund, 43 Or.
App. 435, 602 P.2d 1147, 1149 n.2 (1979). Thus
in situations like Ross v. Holton, 640 S.W.2d 166
(Mo. App. 1982), there would be no inconsistent
result just because of the order in which an innocent
party sued its malefactors.
The Missouri cases have not explicitly required that
the collateral litigation be with a third party. The Restatement
of Torts, which the Missouri Supreme Court
has followed [**6] in many cases, e.g., Ross v. Clouser,
637 S.W.2d 11, 14 (Mo. 1982) (banc); Kendall v. Sears,
Roebuck & Co., 634 S.W.2d 176, 180 (Mo. 1982) (banc),
does impose a third party requirement.
[HN4]
One who through the tort of another has
been required to act in the protection of
his interests by bringing or defending an
action against a third person is entitled to
recover reasonable compensation for loss
of time, attorney fees and other expenditures
thereby suffered or incurred in the
earlier action.
Restatement (Second) of Torts § 914(2) (1979) (emphasis
added). Without a third party rule of some sort,
plaintiffs would be encouraged to sue a defendant in one
action (the "collateral action") for the wrong and in a
second for attorneys' fees. This would vitiate the general
rule that attorneys' fees are unavailable. n5
n5 The district court also cited two Washington
state cases which applied a third party
rule. Armstrong Constr. Co. v. Thomson, 64
Wash. 2d 191, 390 P.2d 976 (Wash. 1964); Haner
v. Quincy Farm Chems., Inc., 29 Wash. App.
93, 627 P.2d 571 (Wash. App. 1981). These cases
were merely cited as support for application of a
third party rule; the district court did not go into
the detailed holdings of the cases. Both Crowley
and Sharon/NVF have taken considerable time in

[**7]
distinguishing, harmonizing and interpreting these
cases. We note that Haner was recently reversed
by the Washington Supreme Court, Haner
v. Quincy Farms Chems., Inc., 97 Wash. 2d 753,
649 P.2d 828 (Wash. 1982), and find it unnecessary
to go into the intricacies of Washington law.
The more troublesome question is whether Sharon
and NVF are third parties. The district court held that
because of their full ownership of Macomber, Sharon
and NVF were "in privity" with Macomber and thus,
[*722] for purposes of recovery of attorneys' fees, could
not be third parties. n6
n6 The Restatement does not refer to privity.
[HN5] "Privity" is a term with different meanings in
different contexts; for example, the concept of "privity of
parties" for res judicata purposes is not the same as the
concept of "privity of contract." However, all the meanings
are merely variations involving some aspect of identity.
If parties are identical and have identical interests,
they may be subject to the same responsibilities, make
use of the same benefits, and be shielded by the same
protections.
In this case, Sharon and NVF argue that in effect
they are the same as their wholly-owned subsidiary, and
because attorneys' fees cannot be recovered from their
subsidiary, neither can the fees be recovered from them.
[**8] [HN6]
Corporations are separate legal entities and ordinarily
are to be regarded as such. Lawton-Byrne-Bruner
Insurance Agency Co. v. Stiers Bros. Construction Co.,
186 S.W.2d 480, 484 (Mo. App.), rev'd on other grounds,
354 Mo. 659, 190 S.W.2d 880 (Mo. 1945). They are often
formed specifically because they are distinct from their
owners. In cases where a creditor seeks to recover from
a parent corporation for its subsidiary's debts, 100 percent
ownership and control "does not of itself authorize
piercing the corporate veil." C. C. Dillon Co. v. Robinson,
636 S.W.2d 380, 383 (Mo. App. 1982) (emphasis
added); see Phelps v. Missouri-Kansas-Texas R.R., 438
S.W.2d 181, 185 (Mo. 1968) (Phelps), cert. dismissed,
394 U.S. 955, 89 S. Ct. 1298, 22 L. Ed. 2d 494 (1969).
Thus full ownership is not enough to find a parent corporation
identical to its subsidiary. It would be incongruous
to protect a corporate parent in one situation with
a rule that 100 percent ownership is not enough to find a
702 F.2d 719, *; 1983 U.S. App. LEXIS 29484, **
Page 4
parent and subsidiary identical and to protect a corporate
parent in another situation -- that here -- with a rule that
100 percent is enough to find a parent and subsidiary
[**9] identical.
Further, even if a party seeking to pierce the corporate
veil establishes that a subsidiary is no more than a
parent's "alter ego," the party must establish that equity
requires that the two corporations be treated as one.
Phelps, 438 S.W. 2d at 185. This rule has also been applied
in a case in which the widow of a corporation executive
and majority shareholder sought workmen's
compensation. The court held that the party seeking to
prove that the corporation was a sham (in this case the
corporation itself), and thus that the shareholder could
not be an employee, must not only show lack of separate
identities, but some equitable ground for piercing the
corporate veil. Lynn v. Lloyd A. Lynn, Inc., 493 S.W.2d
363, 366-67 (Mo. App. 1973); see Phelps, 438 S.W.2d at
185.
In this case, even if there were evidence supporting a
finding that Macomber was the "alter ego" of Sharon and
NVF, there have been no equitable grounds advanced for
treating the corporations as identical. In fact, Sharon
and NVF are already substantially protected. [HN7]
One of the elements of tortious interference with contractual
relations is the absence of legal justification. A
corporation [**10] with a financial interest in another
corporation is deemed to be justified unless it is shown
that the parent employed wrongful means or acted with
an improper purpose. Restatement (Second) of Torts §
769; Pillow v. General American Life Insurance Co., 564
S.W.2d 276, 282 (Mo. App. 1978) (Pillow). This rule
provides a parent with a great deal of protection from
liability for directing its subsidiary's actions. There is
no need to give further protection merely because the
damages sought are attorneys' fees.
The district court in effect found that Sharon's and
NVF's full ownership of Macomber insulated them from
liability for their tortious interference. We believe this
finding is inconsistent with [HN8] Missouri law, which
allows recovery from a parent for tortious interference if
wrongful means are shown, Pillow, 564 S.W.2d at 282,
and which presumes a corporation to be a separate entity.
Phelps, 438 S.W.2d at 185. For this reason, we must reverse.
[*723] Because of our disposition of this issue, we
do not reach the punitive damages issue.
The judgment of the district court is reversed and the
case remanded for further [**11] proceedings.

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724 P.2d 1293, *; 1986 Colo. LEXIS 611, **
LEXSEE 724 P2D 1293
Ruben BROCHNER, Petitioner, v. WESTERN INSURANCE COMPANY, a Kansas
Corporation, and the Community Hospital Association, a Colorado Corporation,
Respondents
SUBSEQUENT HISTORY: [**1]
Rehearing Denied September 29, 1986.
PRIOR HISTORY: Certiorari to the Colorado Court
of Appeals.
DISPOSITION: Judgment Reversed.
CASE SUMMARY:
PROCEDURAL POSTURE: Petitioner doctor challenged
the decision of the appeals court (Colorado),
which upheld a summary judgment in favor of respondent
hospital and insurer in respondent's negligence action
against petitioner.
OVERVIEW: Respondents, hospital and insurer,
brought an action against petitioner doctor for indemnity
alleging that his negligence was the primary cause of a
patient's injuries. The trial court found that petitioner had
breached a pre-existing duty to the hospital to abide by
its rules and regulations and awarded attorney fees. Petitioner
contended on appeal that the adoption of the Uniform
Contribution Among Tortfeasors Act (Act), Colo.
Rev. Stat. § § 13-50.5-101 - 106 (1985), abrogated the
Colorado common law rule of indemnity to the extent
such rule was based upon distinctions between primary
and secondary fault. The court held that neither was entitled
to contribution from the other because a tortfeasor
could not unfairly be forced to pay all or a disproportionate
share of damages suffered by an injured party as
the result of negligent conduct by two or more joint tortfeasors.
As a joint tortfeasor, the hospital had no right to
seek indemnity from petitioner. The court reversed the
award of attorneys' fees. The exception to the general
rule prohibiting attorney fee awards was applicable only
if the party seeking such attorney fees was without fault
as to the underlying action.
No. 84SC55
Supreme Court of Colorado
724 P.2d 1293; 1986 Colo. LEXIS 611
September 2, 1986
Page 1
OUTCOME: The judgment awarding damages to hospital
and insurer was reversed. Respondents, hospital and
insurer, had no right to seek indemnity from petitioner.
In addition, the exception to the general rule prohibiting
attorney fee awards was applicable only if the party
seeking such attorney fees was without fault as to the
underlying action.
LexisNexis(R) Headnotes
Torts > Multiple Defendants > Contribution & Indemnity
[HN1] See Colo. Rev. Stat. § 13-50.5-103.
Torts > Multiple Defendants > Contribution & Indemnity
[HN2] The Uniform Contribution Among Tortfeasors
Act (Act), Colo. Rev. Stat. § § 13-50.5-101 - 106
(1985), recognizes that the remedies of indemnity and
contribution are in theory mutually exclusive.
Torts > Multiple Defendants > Contribution & Indemnity
[HN3] In Colorado, joint tortfeasors are subject to contribution
among themselves based upon their relative
degrees of fault.
Torts > Multiple Defendants > Apportionment of
Damages
[HN4] The Uniform Contribution Among Tortfeasors
Act, Colo. Rev. Stat. § § 13-50.5-101 - 106 (1985),
seeks to apportion responsibility for damages among
joint tortfeasors based upon relative degrees of fault.
Torts > Multiple Defendants > Apportionment of
Damages
Torts > Multiple Defendants > Joint & Several Liability

[HN5] Colo. Rev. Stat. § 13-21-111.5(1), effective July
1, 1986, provides as follows: In an action brought as a
result of a death or an injury to person or property, no
defendant shall be liable for an amount greater than that
represented by the degree or percentage of the negligence
or fault attributable to such defendant that produced
the claimed injury, death, damage, or loss. This
provision extends the principle that liability for negligence
should be based on proportionate fault.
Torts > Multiple Defendants > Apportionment of
Damages
Torts > Multiple Defendants > Contribution & Indemnity
[HN6] In Colorado, a tortfeasor no longer may unfairly
be forced to pay all or a disproportionate share of damages
suffered by an injured party as the result of negligent
conduct by two or more joint tortfeasors.
Torts > Multiple Defendants > Apportionment of
Damages
Torts > Multiple Defendants > Contribution & Indemnity
[HN7] In Colorado, the doctrine of indemnity insofar as
it requires one of two joint tortfeasors to reimburse the
other for the entire amount paid by the other as damages
to a party injured as the result of the negligence of both
joint tortfeasors, is no longer viable, and is abolished.
Torts > Multiple Defendants > Contribution & Indemnity
[HN8] See Colo. Rev. Stat. § 13-50.5-105(1)(b).
Torts > Multiple Defendants > Apportionment of
Damages
Torts > Multiple Defendants > Contribution & Indemnity
Torts > Multiple Defendants > Joint & Several Liability
[HN9] In Colorado, indemnity based on primary and
secondary fault is no longer available among joint tortfeasors.
Torts > Multiple Defendants > Contribution & Indemnity
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN10] One who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover reasonable compensation for loss of time,
attorney fees and other expenditures thereby suffered or
incurred in the earlier action. This exception to the general
rule prohibiting attorney fee awards is applicable,
however, only if the party seeking such attorney fees was
without fault as to the underlying action.
724 P.2d 1293, *; 1986 Colo. LEXIS 611, **
Page 2
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN11] In the absence of some specific rule of law authorizing
the recovery of attorney fees, the general rule is
that attorney fees and expenses of litigation are not recoverable.
COUNSEL:
Steven & Littman, P.C., Andrew C. Littman, for
Petitioner.
Cooper & Kelley, P.C., Paul D. Cooper, Kim B.
Childs, for Respondents.
JUDGES:
En Banc. Justice Kirshbaum delivered the Opinion,
Justice Vollack, dissents in part. Justice Rovira, joins in
partial dissent. Justice Erickson and Justice Dubofsky,
did not participate.
OPINIONBY:
KIRSHBAUM
OPINION:
[*1294] We granted certiorari to review the opinion
of the Colorado Court of Appeals in Western Insurance
Co. v. Brochner, 682 P.2d 1213 (Colo. App. 1983),
in which the Court of Appeals concluded that a joint
tortfeasor whose negligence was the primary cause of a
plaintiff's personal injuries was liable in indemnity to a
second joint tortfeasor. The court also concluded that the
primarily liable tortfeasor was obligated to pay the attorney
fees and costs incurred by the secondarily liable
tortfeasor in defending the original action. We reverse.
The Community Hospital Association (the hospital),
which operates Boulder Community Hospital, granted
staff privileges to Dr. Ruben Brochner in October 1964.
Brochner performed [**2] numerous craniotomies n1 at
the hospital over the next few months. In 1965, after reviews
of those craniotomies indicated that tissue samples
from many of the patients appeared normal, the hospital's
executive committee orally required Brochner to obtain
consultations before performing craniotomies if the relevant
radiographic evidence did not clearly establish pathology.
In 1966, the executive committee recommended
to Brochner that he should obtain additional outside
consultation on surgical pathological specimens.
n1 A craniotomy is a type of brain surgery in
which suspected abnormal or diseased brain tissue
is removed.

In March 1968, the hospital's tissue committee received
a report that fourteen of twenty-eight tissue samples
taken from Brochner's neurosurgery patients were
completely normal and that nine of the remaining fourteen
samples indicated only low grade disease. An expert
testified at trial that one normal tissue of 100 tissue samples
was an acceptable ratio and that two normal tissues
out of twenty-eight [**3] samples would require investigation.
On November 9, 1968, Brochner performed a craniotomy
on Esther Cortez which resulted in injury to Cortez.
Cortez later filed a civil action against Brochner and
the hospital. She alleged that Brochner [*1295] negligently
diagnosed her need for a craniotomy, that the hospital
negligently continued Brochner's staff privileges
when it knew or should have known that he was incompetent,
and that the hospital negligently allowed
Brochner to perform unnecessary surgery. The claim
against Brochner was severed, and trial of the claims
against the hospital commenced April 3, 1978. Prior to
the conclusion of that trial, Cortez and the hospital
agreed to a settlement of $150,000. Some time later,
Cortez reached a settlement of her suit against Brochner,
who was uninsured, for an undisclosed sum.
In 1979, the hospital and its subrogee, Western Insurance
Company (Western), filed this indemnity action
against Brochner, alleging that Brochner's negligence
was the active and primary cause of Cortez' injuries
while the hospital's negligence was passive and secondary.
On September 15, 1982, the trial court entered
judgment for Western and the hospital against [**4]
Brochner as follows: (1) $150,000 as the sum paid by
Western on behalf of the hospital to Cortez in settlement
of her claim against the hospital; and (2) $10,000 to the
hospital for expenses incurred in connection with the
Cortez lawsuit not reimbursed by insurance. The trial
court found that Brochner had breached a pre-existing
duty to the hospital to abide by its rules and regulations,
that Brochner's negligence was the primary cause of
Cortez' injuries, that the hospital was independently negligent
toward the plaintiff, and that the hospital's negligence
was only a secondary cause of those injuries. The
trial court also awarded Western its attorney fees and
costs incurred in defending the original lawsuit. The
Court of Appeals affirmed the trial court's judgment.
I
Brochner first argues that the adoption of the Uniform
Contribution Among Tortfeasors Act, § §
13-50.5-101 to -106, 6 C.R.S. (1985 Supp.) (the Act)
abrogated the Colorado common law rule of indemnity
to the extent such rule is based upon distinctions between
primary and secondary fault. We do not agree that the
724 P.2d 1293, *; 1986 Colo. LEXIS 611, **
Page 3
statute per se altered the common law doctrine of indemnity.
However, we conclude that existence of the
[**5] Act sufficiently undermines the historical basis
for the rule to require its modification.
The common law of Colorado has consistently followed
the majority common law rule prohibiting contribution
among joint tortfeasors. Hamm v. Thompson, 143
Colo. 298, 353 P.2d 73 (1960); see Ringsby Truck Lines,
Inc. v. Bradfield, 193 Colo. 151, 563 P.2d 939 (1977).
Recognizing that strict application of this rule sometimes
produces unjust results, a rule permitting indemnity between
tortfeasors in certain limited circumstances was
also incorporated into this jurisdiction's panoply of
common law principles. Parrish v. DeRemer, 117 Colo.
256, 187 P.2d 597 (1947); Otis Elevator Co. v. Maryland
Casualty Co., 95 Colo. 99, 33 P.2d 974 (1934); Colorado
& Southern Ry. Co. v. Western Light & Power Co., 73
Colo. 107, 214 P. 30 (1923); see Laugesen, Colorado's
Contribution Among Tortfeasors Act, 6 Colo. Law. 1485
(1977).
Contribution and indemnity are analytically quite
distinct concepts. The former is based on the equitable
notion that one tortfeasor should not be required to pay
sums to an injured party in excess of that tortfeasor's
proportionate share of the responsibility [**6] for the
injuries. The latter is grounded in the legal principle that
one joint tortfeasor, as indemnitor, may owe a duty of
care to another joint tortfeasor, which duty is unrelated to
any duty of care owed by the tortfeasors to the injured
party. n2 Ringsby, 193 Colo. 151, 563 P.2d 939. When
such duty is established, the indemnitor tortfeasor may
be liable to the indemnitee tortfeasor for the entire loss
experienced by the latter as the result of payments
[*1296] made to the injured party. See Public Service
Co. v. District Court, 638 P.2d 772 (Colo. 1981).
n2 These concepts do not in theory necessarily
undermine the notion that an injured party
is entitled to be made whole, although as applied
to some cases they may in fact undermine that
notion.
Although the concept of indemnity liability is
grounded in the nature of the relationship between joint
tortfeasors, it is further defined by analysis of the conduct
of such tortfeasors in regard to the damages suffered
by the injured party. As initially [**7] adopted, our rule
required the indemnitor's conduct to be the "sole, proximate
and primary cause" of the damages suffered by the
injured party. Parrish, 117 Colo. at 271, 187 P.2d at
605; see Otis Elevator Co., 95 Colo. 99, 33 P.2d 974;
Colorado & Southern Ry. Co., 73 Colo. 107, 214 P. 30.
However, in Jacobson v. Dahlberg, 171 Colo. 42, 464

P.2d 298 (1970), this court modified the test for indemnity
by eliminating the requirement that the indemnitor's
conduct be the sole cause of the injured party's damages
and adopting a broader standard requiring only that the
indemnitor's conduct be the primary cause of such damages.
In Ringsby, we emphasized the point that this primary/secondary
test of indemnity was not based on the
principle of comparative fault:
The distinction between primary and
secondary negligence does not mean that
the "less negligent" defendant may recover
from the "more negligent" defendant . .
. . It has not been the policy of this state to
distribute the loss between joint tortfeasors
according to their degree of fault.
This would amount to a form of contribution.
Ringsby, 193 Colo. at 155, 563 P.2d at 942 (citations
omitted).
Our [**8] comment in Ringsby was necessary, of
course, because of the historical prohibition of any form
of contribution among joint tortfeasors. However, when
the requirement of sole cause was abolished in Jacobson,
the line separating contribution from indemnity, never
firm in the best of circumstances, became even more
difficult to fix. Indeed, difficulties with definitions and
applications of the concepts of active, passive, primary
and secondary negligence have been the subject of critical
discussion by numerous courts and commentators.
E.g., Tolbert v. Gerber Industries, Inc., 255 N.W.2d 362
(Minn. 1977); Missouri Pacific R.R. Co. v. Whitehead &
Kales Co., 566 S.W.2d 466 (Mo. 1978); Dole v. Dow
Chemical Co., 30 N.Y.2d 143, 331 N.Y.S.2d 382, 282
N.E.2d 288 (1972); Pachowitz v. Milwaukee & Suburban
Transport Corp., 56 Wis. 2d 383, 202 N.W.2d 268
(1972); Jensvold, A Modern Approach to Loss Allocation
Among Tortfeasors in Products Liability Cases, 58 Minn.
L. Rev. 723 (1974); Walkowiak, Implied Indemnity: A
Policy Analysis of the Total Loss Shifting Remedy in a
Partial Loss Shifting Jurisdiction, 30 U. Fla. L. Rev. 501
(1978); Woods, Some Observations on Contribution
[**9] and Indemnity, 38 Ark. L. Rev. 44 (1984); see
Annot., 53 A.L.R. 3d 184 (1973). These difficulties inevitably
have produced great variations in judicial decisions,
resulting in a severe lack of predictability and often
causing as much inequity as the rule was designed to
prevent. As the court in Missouri Pacific R.R. Co., 566
S.W.2d 466, observed:
The elucidation of the distinction
between concurrent tortfeasors as to their
relative fault has spawned a series of
724 P.2d 1293, *; 1986 Colo. LEXIS 611, **
court-coined terms which is "bewildering,
to say the least." Davis, Indemnity Between
Negligent Tortfeasors: A Proposed
Rationale, 37 Iowa L.Rev. 517, 536
(1952). We ourselves have criticized them
as unworkable and unsatisfactory . . . . In
reality, these are all methods of weighing
the degree of negligence . . . . used as the
basis or test determining whether a moving
party may be indemnified. Among
them have been the distinction between
"active and passive" negligence . . . .
"primary and secondary" duty . . . . a
combination of "primary and active" and
"secondary and passive" roles in the "negligent
situation" . . . .
We have worked ourselves into a situation
where indemnity as between tortfeasors is
decided [**10] on the basis of which one
is guilty of "active" and which one guilty
of "passive" negligence. "Passive" wins,
"active" loses, no matter how [*1297]
great the proportion of fault may have
been of the passive tortfeasor. . . .
This is not a sensible way to fix responsibility
in indemnity. It comes about
by attempting to find a formula by which
to excuse one of two joint or concurrent
tortfeasors completely when as a practical
matter they both are to blame, the true
difference between them being only a
matter of degree or relativity of fault.
With a little ingenuity in phrasing, negligence
can be made to be either "active" or
"passive" as suits the writer. For example,
"driving an automobile with bad brakes"
or "running through the stop sign" or "using
a defective crane" might be said to be
"active" negligence, while "omitting
maintenance of brake fluid level" or "neglecting
to apply the brakes" or "failing to
inspect the crane in order to discover its
defectiveness" might be "passive" negligence
-- these are the same acts or omissions,
but the outcome depends not upon
the facts, but upon how someone chooses
to characterize them.
Page 4
Missouri Pacific R.R. Co., 566 S.W.2d [**11] at
470-71 (citations omitted).
Subsequent to this court's decision in Ringsby, 193
Colo. 151, 563 P.2d 939, the General Assembly adopted

the Act, effective July 1, 1977. n3 This statute abolished
the common law prohibition against contribution among
joint tortfeasors and established a rule authorizing such
contribution based on degrees of relative fault. Section
13-50.5-102(6) contains the following provision respecting
common law principles defining rights and responsibilities
among joint tortfeasors:
This article does not impair any right
[of] indemnity under existing law. Where
one tortfeasor is entitled to indemnity
from another, the right of the indemnity
obligee is for indemnity and not contribution,
and the indemnity obligor is not entitled
to contribution from the obligee for
any portion of his indemnity obligation.
In addition, [HN1] section 13-50.5-103 provides as follows:
When there is a disproportion of fault
among joint tortfeasors, the relative degrees
of fault of the joint tortfeasors shall
be used in determining their pro rata
shares solely for the purpose of determining
their rights of contribution among
themselves, each remaining severally liable
[**12] to the injured person for the
whole injury as at common law. n4
[HN2] The statute thus recognizes that the remedies of
indemnity and contribution are in theory mutually exclusive.
See Prosser, Law of Torts § § 50, 51 (4th ed.
1971); Restatement (Second) of Torts § 886A Comment
l (1979). n5 However, as the parties [*1298] here have
recognized, a tortfeasor entitled to indemnity under a
primary/secondary negligence analysis may also be able
to benefit from the rule of comparative contribution established
by the Act. We cannot agree with Brochner's
arguments that the General Assembly intended by its
adoption of the Act to alter the common law of indemnity
as established by this court. The plain language of
section 13-50.5-102(6) refutes such argument. However,
the General Assembly's adoption of the principle of contribution
among joint tortfeasors invites, if it does not
require, reconsideration of the doctrine of indemnity between
joint tortfeasors. n6
n3 With some changes, the Act was based on
the 1955 Model Uniform Contribution Among
Tortfeasors Act.
724 P.2d 1293, *; 1986 Colo. LEXIS 611, **
[**13]
Page 5
n4 Section 13-50.5-103 was amended during
the 1986 legislative session. That section now
provides:
The relative degrees of fault
of the joint tortfeasors shall be
used in determining their pro rata
shares.
n5 In comments to § § 886A and 886B of
the Restatement, drafters discussed the tension
between common law indemnity and statutory
provisions for contribution. Comment l to §
886A of the Restatement (Second) of Torts provides:
Indemnity, which shifts the
entire loss from one tortfeasor to
another, and contribution, which
shifts only a proportionate share of
that loss, are mutually inconsistent
remedies. When there is a right of
indemnity, it controls, and neither
tortfeasor has a right of contribution
against the other.
In a state following comparative
contribution, or contribution
according to the comparative fault
of the parties, contribution may
tend to merge with indemnity, and
the technical distinctions of indemnity
may become less important.
The all-or-nothing approach
of indemnity is likely to
become less desirable and some of
the traditional bases for indemnity
may be absorbed by contribution.
In a similar vein, comment l to § 886B provides:
The law of indemnity developed
at an earlier time when contribution
was not available. Its
all-or-nothing remedy was thus the
only relief available to a joint
tortfeasor who had paid the full
amount of the injury. Courts
therefore were inclined to be ready
to expand the list of situations in
which indemnity might be granted.
The list has come to include many

[**14]
situations in which the indemnitee
was definitely at fault but not to as
great an extent as the indemnitor --
so that a decision between all and
nothing would be made for all rather
than nothing.
With the advent and free
availability of contribution, the
nature of the problem has changed
and the courts may have the opportunity
of apportioning the financial
responsibility between the
parties. This may produce a gradual
expansion of the situations
covered by contribution, at the
expense of indemnity. Indeed, in
the growing number of jurisdictions
that determine the equitable
shares of the obligation for contribution
on the basis of the comparative
fault of the parties, it may
well develop that the two remedies
will merge into each other, and
that proportionate contribution
will be determined by the factfinder
in accordance with the relative
percentages of fault for the
several parties. (See § 886A,
Comment l). This would eliminate
the occasion for some of the highly
technical decisions that have
been rendered in actions for indemnity.
n6 The question of whether our common law
doctrine of indemnity should be preserved or
abolished in situations where the party seeking
indemnity is vicariously liable or is without fault
is not presented by the circumstances of this case.
[HN3] Joint tortfeasors are now subject to contribution
among themselves based upon their relative degrees
of fault. That principle is at odds with the essential characteristic
of our present rule of indemnity that, without
regard to apportionment of fault, a single tortfeasor may
ultimately pay the expense of all injuries sustained by a
third party as the result of negligent conduct by two or
more tortfeasors. There can be no mistake concerning the
intent of the General Assembly to establish the policy of
responsibility related to proportionate fault in the context
724 P.2d 1293, *; 1986 Colo. LEXIS 611, **
Page 6
of personal injury litigation. Section 13-50.5-102(6) is
virtually identical to section 1(f) of the 1955 version of
the Uniform Act. n7 Section 2 of the Uniform Act provides:
In determining the pro rata shares of
tortfeasors in the entire liability (a) their
relative degrees of fault shall not [**15]
be considered; (b) if equity requires the
collective liability of some as a group
shall constitute a single share; and (c)
principles of equity applicable to contribution
generally shall apply.
Unif. Contribution Among Tortfeasors Act § 2, 12
U.L.A. 87 (1975) (emphasis added). The General Assembly's
decision to reject section 2 of the Uniform Act,
while enacting section 13-50.5-103, reinforces the conclusion
that [HN4] the Act seeks to apportion [*1299]
responsibility for damages among joint tortfeasors based
upon relative degrees of fault. More recently, the General
Assembly has abolished the principle of joint and several
liability. [HN5] Section 13-21-111.5(1), effective July 1,
1986, provides as follows:
In an action brought as a result of a
death or an injury to person or property,
no defendant shall be liable for an amount
greater than that represented by the degree
or percentage of the negligence or
fault attributable to such defendant that
produced the claimed injury, death, damage,
or loss.
(emphasis added). This new provision extends the principle
that liability for negligence should be based on
proportionate fault.
n7 An initial version of the Uniform Act was
promulgated in 1939. See Unif. Contribution
Among Tortfeasors Act, 12 U.L.A. 57 (1975).
Eighteen states, including Colorado, have adopted
either the 1939 or 1955 version of the Uniform
Act. Thirteen of these states have by judicial decision
limited indemnity to those situations where
the party seeking indemnity is liable to the third
party only vicariously and was not in any sense
negligent or at fault. In those thirteen states there
is no conflict between the indemnity clause and
the general concept in the Uniform Act of allocating
fault among joint tortfeasors. In the remaining
five states, no cases have discussed the
impact of the model legislation upon former doctrines
of indemnity.

[**16]
Other states, while not adopting the Uniform
Act, have enacted their own comparative negligence
and contribution legislation. In many of
those jurisdictions, judicial decisions have interpreted
the legislation as abrogating the common
law of indemnity in favor of a concept of comparative
negligence or contribution. E.g., Teachers
Ins. Co. v. Smith, 128 Cal. App. 3d 862, 180
Cal. Rptr. 701 (1982); Kennedy v. City of Sawyer,
228 Kan. 439, 618 P.2d 788 (1980); Pettis v.
State, 340 So. 2d 1108 (La. App. 1976); Tolbert
v. Gerber Industries, Inc., 255 N.W.2d 362
(Minn. 1977); Missouri Pacific R.R. Co. v.
Whitehead & Kales Co., 566 S.W.2d 466 (Mo.
1978); Dole v. Dow Chemical Co., 30 N.Y.2d
143, 331 N.Y.S.2d 382, 282 N.E.2d 288 (1972);
New Terminal Warehouse Corp. v. Wilson, 589
S.W.2d 465 (Tex. Civ. App. 1979); Pachowitz v.
Milwaukee & Suburban Transport Corp., 56 Wis.
2d 383, 202 N.W.2d 268 (1972).
In view of these legislative enactments, [HN6] a
tortfeasor no longer may unfairly be forced to pay all or a
disproportionate share of damages suffered by an injured
party as the result of negligent conduct by two or more
joint tortfeasors. The principle of proportionate fault
adopted by the General Assembly represents a rational
and equitable approach to the problem of allocating ultimate
responsibility between or among joint tortfeasors
for the payment of damages to an injured party. Application
of this principle will prove far more certain in varied
factual contexts and will consequently promote more
predictability than any continued effort to perpetuate
ephemeral distinctions based on primary or secondary
negligence concepts. For these reasons we conclude that
[HN7] the doctrine of indemnity insofar as it requires
one of two joint tortfeasors to reimburse the other for the
entire amount paid by the other as damages to a party
injured as the result of the negligence of both joint tortfeasors,
is no longer viable, and is hereby abolished. n8
[**17]
n8 See note 6.
In this case, the trial court found that the hospital
acted negligently and that such negligence was independent
of Brochner's negligence. See Moon v. Mercy
Hospital, 150 Colo. 430, 373 P.2d 944 (1962). As a joint
tortfeasor, the hospital has no right to seek indemnity
from Brochner; its sole remedy lies in contribution pursuant
to the terms of the Act. [HN8] Section
13-50.5-105(1)(b) provides:
724 P.2d 1293, *; 1986 Colo. LEXIS 611, **
When a release or a covenant not to
sue or not to enforce judgment is given in
good faith to one of two or more persons
liable in tort for the same injury or the
same wrongful death: . . .
It discharges the tortfeasor to whom it
is given from all liability for contribution
to any other tortfeasor.
Page 7
In Coniaris v. Vail Associates, Inc., 196 Colo. 392, 586
P.2d 224 (1978), we held that the Act applied to settlements
entered into on and after July 1, 1977. Because
both Brochner and the hospital settled with Cortez after
July 1, 1977, neither is entitled to contribution from the
other.
II
In light of our conclusion that the [HN9] indemnity
based on primary and secondary fault is no longer available
among joint tortfeasors, we need not address
Brochner's contention that the Court of Appeals [**18]
erred in concluding that Brochner owed a duty to the
hospital and was primarily liable for Cortez' injuries.
III
Brochner's final argument is that the Court of Appeals
erred in awarding Western the attorney fees and
costs it incurred in defending against Cortez' original
lawsuit. We agree.
The Court of Appeals based the award of attorney
fees on section 914(2) of the Restatement (Second) of
Torts (1979), which provides:
[HN10] One who through the tort of
another has been required to act in the
protection of his interests by bringing or
defending an action against a third person
is entitled to recover reasonable compensation
for loss of time, attorney fees and
other expenditures thereby suffered or incurred
in the earlier action.
[*1300] Accord Elijah v. Fender, 674 P.2d 946 (Colo.
1984); Sun Indemnity Co. v. Landis, 119 Colo. 191, 201
P.2d 602 (1948); International State Bank of Trinidad v.
Trinidad Bean & Elevator Co., 79 Colo. 286, 245 P. 489
(1926). This exception to the general rule prohibiting
attorney fee awards is applicable, however, only if the
party seeking such attorney fees was without fault as to
the underlying action. See also Elijah, 674 [**19] P.2d
946; International State Bank of Trinidad, 79 Colo. 286,
245 P. 489; Brem v. United States Fidelity & Guaranty

Co., 206 A.2d 404 (D.C. App. 1965); Kamyr, Inc. v. Boise
Cascade Corp., 268 Or. 130, 519 P.2d 1031 (1974).
Western was required to expend sums for attorney fees
and costs in defending the Cortez lawsuit, in part because
of the hospital's independently negligent conduct, and
not solely because of Brochner's negligence. The provisions
of section 914(2) are, therefore, inapplicable to
Western's claim for attorney fees.
[HN11] In the absence of some specific rule of law
authorizing the recovery of attorney fees, the general rule
is that attorney fees and expenses of litigation are not
recoverable. Beebe v. Pierce, 185 Colo. 34, 521 P.2d
1263 (1974); see Taxpayers for the Animas-LaPlata
Referendum v. Animas-LaPlata Water Conservancy District,
739 F.2d 1472 (10th Cir. 1984). Western has not
suggested any basis for its claim for attorney fees and
costs other than section 914(2) of the Restatement. Accordingly,
the general rule prohibiting such award applies.
The judgment of the Court of Appeals is reversed.
Justice Vollack dissents in part, and Justice Rovira
[**20] joins in the partial dissent.
Justice Erickson and Justice Dubofsky do not participate.
DISSENTBY:
VOLLACK
DISSENT:
JUSTICE VOLLACK, dissenting in part:
I agree with Part III of the majority opinion reversing
the award of attorneys fees. I respectfully dissent to
Part I of the opinion which abolishes the common law
doctrine of indemnity.
The majority opinion initially recognizes that contribution
and indemnity are analytically quite distinct
concepts. Slip op. at 1295. Contribution and indemnity
are mutually exclusive remedies. Restatement (Second)
of Torts § 886A(4) (1979). They are universally distinguished.
Neither contribution nor indemnity are tort actions,
but the right to contribution arises from payment
by one joint tortfeasor of more than his proportionate
share of loss, see, e.g., Coniaris v. Vail Associates, Inc.,
196 Colo. 392, 586 P.2d 224 (1978), whereas indemnity
arises out of the existence of a pre-tort duty. See Ringsby
Truck Lines, Inc. v. Bradfield, 193 Colo. 151, 563 P.2d
939 (1977); see generally Restatement (Second) of Torts
§ 886B (1979). Contribution comes into play after a
judgment has been entered against joint tortfeasors in
favor of an injured [**21] party, and requires that each
of the culpable tortfeasors contribute to the total amount
724 P.2d 1293, *; 1986 Colo. LEXIS 611, **
Page 8
of damages that portion which relates to each tortfeasor's
proportionate share of the responsibility. On the other
hand, indemnity arises from a duty of care which one
tortfeasor owes to the other tortfeasor, and that duty is
unrelated to any duty of care owed by the tortfeasors to
the injured party. While both concepts share the common
result of apportioning the responsibility to pay damages
to an injured party among parties who may have each
been negligent, each concept is based upon different theoretical
bases.
Contribution produces more equitable results because
the proportionate share of responsibility for damages
is directly related to each tortfeasor's proportionate
fault in causing the injury. Indemnity, on the other hand,
results in an "all or nothing" determination whereby the
party who is the "primary" cause of the injured party's
damages may be required to carry the burden of the entire
loss. Jacobson v. Dahlberg, 171 Colo. 42, 464 P.2d
298 (1970). Thus, an indemnity analysis fails to take into
account the comparative fault of the joint tortfeasors.
[*1301] While recognizing [**22] the distinction
between the concepts of contribution and indemnity, and
also the sometimes inequitable results of the application
of indemnity principles, the majority then concludes that
the doctrine of contribution can serve the same purpose
as the doctrine of indemnity and, based on that premise,
proceeds to abolish the common law doctrine of indemnity
between joint tortfeasors, except possibly in cases
involving vicarious liability. I disagree with this conclusion.
The General Assembly, by its adoption of the Uniform
Contribution Among Tortfeasors Act, section
13-50.5-101 to -106, 6 C.R.S. (1985 Supp.), obviously
did not intend the result reached by the majority opinion.
The Act specifically preserved rights of indemnity in
section 13-50.5-102(6). n1 I do not agree that the court
should do away with the right of indemnity when the
General Assembly, by the plain language of the statute,
recognized that the Act was not intended to impair any
right of indemnity under existing law.
n1 The statute, 13-50.5-102(6), 6 C.R.S.
(1985 Supp.), provides:
This article does not impair any
right or [sic] indemnity under existing
law. Where one tortfeasor is
entitled to indemnity from another,
the right of the indemnity obligee
is for indemnity and not contribution,
and the indemnity obligor is
not entitled to contribution from

[**23]
the obligee for any portion of his
indemnity obligation.
The question of whether indemnity or contribution
exists as a remedy is governed by the facts of the case. In
the matter at hand, the trial court found the right to indemnity
arose out of a pre-existing duty owed by
Brochner to the hospital. The record reflects that the
hospital's executive committee required Brochner to obtain
consultations before performing craniotomies if the
relevant radiographic evidence did not clearly establish
pathology. The evidence shows that the hospital was
aware of Brochner's performance of needless craniotomies
over a period of at least three years. As a result, the
hospital required Brochner to consult before performing
this surgical procedure. No such consultation took place
in this case. Having agreed to do so, a duty existed between
Brochner and the hospital to follow the required
procedure. Ringsby Truck Lines, Inc. v. Bradfield, 193
Colo. 151, 563 P.2d 939 (1977); Naiman v. Flickinger,
43 Colo. App. 279, 605 P.2d 63 (1980). I would conclude
that under the facts of this case, the prerequisites for the
application of indemnity principles existed. The trial
court's conclusion that Brochner's negligence was active
while the hospital's negligence [**24] was passive or an
error of omission in failing to supervise a staff physician
supports the award of damages in favor of the hospital
and against Brochner. Requiring the physician to bear the
full extent of the loss highlights the result which may
occur in application of indemnity principles as established
by our common law.
724 P.2d 1293, *; 1986 Colo. LEXIS 611, **
Page 9
Furthermore, I disagree with the majority's conclusion
that the adoption of the Uniform Contribution
Among Tortfeasors Act requires a reconsideration of the
doctrine of indemnity. The majority recognizes the difference
between the two concepts, but then concludes
that because contribution acts more equitably in its
treatment of the apportionment of fault, the doctrine of
indemnity should be abolished. Such a result denies the
hospital a remedy to which it is properly entitled. I would
conclude that the doctrine of indemnity is still a viable
concept and should be retained.
The majority, by considering the provisions of section
13-50.5-105(1)(b), which releases a settling tortfeasor
from any liability for contribution to another tortfeasor,
applies rules pertaining to contribution to a situation
where the doctrine of indemnity applies. By the plain
language of [**25] this statute, it only applies to liability
for contribution. However, this is a case involving
indemnity. Application of a contribution analysis at this
stage of the proceedings is inequitable. While I do not
feel the hospital should be held totally free from fault in
this situation, in the absence of legislation by the General
Assembly which would apply a comparative fault treatment
to indemnity [*1302] actions, the physician must
carry the burden of the entire loss.
In light of the plain language of the statutes retaining
the right of indemnity, and only allowing the discharge
of a settling tortfeasor in contribution situations, I cannot
agree with the majority's conclusion that the doctrine of
indemnity need be abrogated.
I would affirm in part and reverse in part.
I am authorized to state that JUSTICE ROVIRA
joins in this partial dissent.

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DISPOSITION: [***1]
Case discharged.
All concurred.
HEADNOTES: One who is notified of pending litigation
and given an opportunity to defend is concluded as
to all questions determined therein which are material in
an action for indemnity brought against him by the defendant
in the original suit.
In an action for indemnity against one who was notified
to defend, parol evidence is admissible to show the matters
actually litigated in the original suit not disclosed by
the record.
The fact that a landowner has paid damages recovered
against him for injuries resulting from an unsuitable
fence does not entitle him to an order of judgment in an
action for indemnity against adjoining owners who were
bound to repair, if the verdict and judgment in the prior
suit fail to establish that the injury was occasioned by
their negligence, without contributing fault on his part.
Where a landowner seeks to recover for an injury caused
by an unsuitable fence which adjoining owners have
agreed to maintain, the ground of his action is not the
breach of the defendants' engagement, but their negligence
in the performance of the assumed duty; and it is
incumbent upon him to show that the injury was occasioned
by such neglect, and was not due to want of care
on his part.
In a suit for indemnity against one who was notified of
pending litigation and failed to defend, the plaintiff may
recover the expenses reasonably incurred in good faith in
the prior action, as well as the amount of his property
taken to satisfy the judgment rendered therein.
A bankrupt may litigate a claim in his favor which his
assignee fails to prosecute after notice.
74 N.H. 25, *; 64 A. 668, **;
1906 N.H. LEXIS 54, ***
LEXSEE 74 NH 25
Hubbard v. Gould & a.
[NO NUMBER IN ORIGINAL]
SUPREME COURT OF NEW HAMPSHIRE
74 N.H. 25; 64 A. 668; 1906 N.H. LEXIS 54
September 4, 1906
Page 1
Case, for negligence, with counts in assumpsit, to recover
the amount paid on a judgment recovered by one
Rogers against the plaintiff and the expense of defending
the suit in which the judgment was rendered. Transferred
from the April term, 1905, of the superior court by Stone,
J.
In 1898, the plaintiff conveyed to the defendants a small
tract of land adjoining his own. The habendum of the
deed began as follows: "To have and to hold... so long as
they make and maintain a line fence separating it from
land of grantor and his heirs." The lands were separated
by a barbed wire fence. In August, 1901, Rogers turned
his horse to pasture on the plaintiff's land adjoining that
of the defendants. At that time the wire fence between
the lands of the parties was out of repair and in such a
condition that Rogers' horse became entangled in the
fence and was injured. The fence was in a suitable condition
on July 4, and the defendants had no knowledge of
any change in its condition. The place of the accident
was about 200 feet from the railway station where Hubbard
was employed and about fifty feet from the bars
where the horse was turned into pasture. Rogers brought
suit against the plaintiff for the injury to his horse and
recovered a judgment which was satisfied by levy upon
the plaintiff's property. The defendants were duly notified
of the pendency of the suit and requested to undertake
its defence, but did not do so. The question tried in
the suit was the negligence of one or both parties. Hubbard,
the present plaintiff, paid counsel and witnesses
and other expenses in defending the action brought by
Rogers.
On the foregoing facts, it was ruled pro forma that the
plaintiff was entitled to judgment for the damages and
costs recovered by Rogers and the costs of the levy, but
not for the expense of defending the suit, and both parties
excepted.
At the October term, 1902, the bankruptcy of Hubbard
was suggested, and it was ordered that his trustee appear

at the next term or there would be judgment for the
plaintiff. The trustee did not appear.
COUNSEL: Burnham, Brown, Jones & Warren, for the
plaintiff.
G. K. & B T. Bartlett, for the defendants.
OPINIONBY: PARSONS
OPINION: [*26]
[**669] As the defendants had notice of and an
opportunity to defend the suit Rogers v. Hubbard, they
are now concluded by the determination therein made of
all facts which are now in controversy. Boston & Maine
R. R. v. Brackett, 71 N.H. 494. The ground upon which
the plaintiff can now recover for the injury to him because
of the accident to Rogers' horse is the same as it
would be if the suit were for injury to his own horse under
similar circumstances. The judgment in Rogers' action
is material only as evidence. Its sole effect is to relieve
the parties of the necessity of proving or disproving
any facts therein determined. Gregg v. Company, 69
N.H. 247. The defendants are concluded as to all matters
which were actually litigated and determined in the suit,
and as to all matters of defence which they might have
set up but did not. If the record does not disclose the
matters actually litigated, the same may be shown by
competent evidence. Hearn v. Railroad, 67 N.H. 320.
It is found [***2] that the questions litigated in that
suit were the negligence of both parties. The verdict and
judgment establish, therefore, that Rogers was not guilty
and the defendant Hubbard was. Hubbard's negligence
for which he was held responsible in [*27] that action
may have been his personal fault, or it may have been the
fault of the defendants, for which, as the owner of the
land and lessor of the pasturage, he was responsible to
Rogers. The declaration in this suit alleges the negligence
established by the verdict and judgment to have
been the negligence of the defendants. To recover for the
damage to him because of an injury caused by the defendants'
negligence in the performance of an assumed
duty to maintain the fence, the plaintiff must show that
the injury arose from the default of the defendants without
the breach of any duty owned by him to them. The
established fact that Hubbard is in fault, as between
himself and Rogers, does not necessarily determine that
he is also in fault as between himself and the defendants.
Boston & Maine R. R. v. Sargent, 72 N.H. 455, 462, 463.
The sole negligence charged against Hubbard may have
been the unsafe condition of the fence, for [***3]
which the defendants may be solely responsible. He may
have been considered negligent, as between himself and
Rogers, for not ascertaining the condition of the fence, or
74 N.H. 25, *; 64 A. 668, **;
1906 N.H. LEXIS 54, ***
Page 2
it may have been shown that he knew the danger before
the horse came to the pasture. Reliance on the defendants
to properly maintain the fence may not be negligence as
between himself and them, and be of an entirely different
character as between himself and Rogers.
Some of these questions may have been determined
by the prior litigation; all of them could not be. The facts
are not found by the case. There is no verdict for the
plaintiff which upon the evidence and allegations might
be considered to include a finding upon the essential
facts in issue. The case is presented upon a pro forma
ruling of law, that upon the facts stated the plaintiff is
entitled to judgment. In the absence of a finding upon the
issues raised by the declaration of the responsible fault of
the defendants as the cause of the injury, without contributing
fault by the plaintiff, the order of judgment
cannot be supported. It is set aside, and the case must
stand for further action in the superior court.
The ground upon which at the trial [***4] the
plaintiff placed his right to recover does not appear upon
the record. It is claimed in the brief for him that the action
is for the breach of the defendants' contract to maintain
a suitable fence, and sounds in contract and not in
tort. If this be so, it would still be necessary for the plaintiff
to show that the injury of which he complains was
not due to his own want of care. In such an action the
damages recoverable would be only such as were fairly
within the contemplation of the parties when the contract
was made, as the possible result of a breach. The parties
could not have contemplated that the plaintiff would
knowingly expose his own or others' beasts to injury.
Cate v. Cate, 50 N.H. 144, 149; Gilman v. Noyes, 57
[*28] N.H. 627, 632; Noyes v. Blodgett, 58 N.H. 502;
Rafferty v. Drew, 64 N.H. 616; Hutt v. Hickey, 67 N.H.
411, 417, 418; Hadley v. Baxendale, 9 Exch. 341.
But according to the declaration, and as matter of
law, the ground of the plaintiff's action is not the breach
of the defendants' engagement to maintain the partition
fence, but is their negligence in the performance
[**670] of the duty. Parties owning adjoining [***5]
lands may have the fence between them divided by legal
proceedings, or may agree upon a division, and of course
may agree that one party shall be bound to maintain the
whole. By statute (P.S., c. 143, s. 15), the party neglecting
to build and keep in repair any partition fence which
he is bound to maintain is liable for all damages resulting
from such neglect. But the partition fence which an adjoining
owner is bound to maintain is one sufficient to
prevent the escape of domestic animals upon the land.
Such a fence the statute defines. P. S., c. 143, s. 5. But
any other fence which prevents the escape of such animals
is sufficient. Rogers' horse did not escape through
the insufficiency of the fence, but was injured by the
character or condition of the fence. In performance of

their fence-building duty, whether imposed by law, or by
contract, or voluntarily undertaken, the common law
imposed upon the defendants the duty of exercising care
not unnecessarily to injure others, i.e., to maintain the
fence they agreed or assumed to maintain, in a condition
reasonably safe and unlikely to injure animals on the
plaintiff's land. Durgin v. Kennett, 67 N.H. 329. As
[***6] the defendants' liability, if it exists, arises from a
breach of this common-law duty, and not from a statute
requiring them to fence against animals rightfully on the
defendants' land, Cressey v. Railroad, 59 N.H. 564, cited
by the plaintiff, is not in point.
The defendants also except to any liability upon the
facts in the case. So far as that exception is based upon
the findings made, it has already been sustained. Whether
the acceptance of the deed reading "To have and to
hold... so long as they make and maintain a line fence"
implies a covenant or agreement to maintain the fence is
not material. It is to be implied from the case that the
defendants assumed to maintain the fence. Whether this
duty resulted from a valid contract imposing the same, or
was voluntarily assumed, they were bound to the exer-
74 N.H. 25, *; 64 A. 668, **;
1906 N.H. LEXIS 54, ***
Page 3
cise of care in what they did. Pittsfield etc. Co. v. Shoe
Co., 71 N.H. 522. If it is established that the defendants
and not the plaintiff are responsible for the injury to
Rogers' horse, the expenses reasonably incurred in good
faith by Hubbard in litigating the questions raised by
Rogers' claim are a part of his damages, as well as the
amount of his property taken [***7] to satisfy the
judgment against him, the defendants having declined
the opportunity to conduct [*29] the defence which
was tendered them. Fairfield v. Day, 71 N.H. 63, 65;
Chase v. Bennett, 59 N.H. 394, 396.
Under the bankrupt act of 1867, it was held that the
bankrupt might litigate a claim which the assignee upon
notice refused to prosecute. Towle v. Rowe, 58 N.H. 394;
Ramsey v. Fellows, 58 N.H. 607; Young v. Kimball, 59
N.H. 446. No provision of the present law requiring a
different conclusion has been called to our attention. The
order of judgment for the plaintiff is set aside.
Case discharged.
All concurred.

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PRIOR HISTORY: [**1]
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
LEXSEE 743 P2D 1262
HOINESS-LaBAR INSURANCE, a Montana corporation, Appellant (Third-Party
Defendant), v. JULIEN CONSTRUCTION COMPANY, a Wyoming corporation,
Appellee (Plaintiff), and Allied Fidelity Insurance Co., an Indiana corporation, Appellee
(Defendant and Cross-Defendant), NIELSEN PLUMBING AND HEATING,
INC., a Wyoming corporation, (Defendant, Cross-Complainant, and Third-Party
Complainant); Allied Fidelity Insurance Co., an Indiana corporation, Appellant
(Defendant and Cross-Defendant), v. JULIEN CONSTRUCTION COMPANY, a
Wyoming corporation, Appellee (Plaintiff), and Hoiness-LaBar Insurance, a Montana
corporation, Appellee (Third-Party Defendant), and Nielsen Plumbing and
Heating, Inc., a Wyoming corporation, Appellee (Defendant, Cross-Complainant,
and Third-Party Complainant); JULIEN CONSTRUCTION COMPANY, a Wyoming
corporation, Appellant (Plaintiff), v. NIELSEN PLUMBING AND HEATING,
INC., a Wyoming corporation, Appellee (Defendant, Cross-Complainant, and
Third-Party Complainant), and Allied Fidelity Insurance Co., an Indiana corporation,
Appellee (Defendant and Cross-Defendant), and Hoiness-LaBar Insurance, a
Montana corporation, Appellee (Third-Party Defendant); NIELSEN PLUMBING
AND HEATING, INC., a Wyoming corporation, Appellant (Defendant,
Cross-Complainant, and Third-Party Complainant), v. JULIEN CONSTRUCTION
COMPANY, a Wyoming corporation, Appellee (Plaintiff), and Allied Fidelity Insurance
Co., an Indiana corporation, Appellee (Defendant and Cross-Defendant),
and Hoiness-LaBar Insurance, a Montana corporation, Appellee (Third-Party Defendant)
Appeals from the District Court of Park County, The
Honorable John T. Dixon, Judge.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant insurance broker
sought review of a decision from the District Court
of Park County (Wyoming), which held that the broker
had breached its subcontract with appellee construction
company in failing to provide a payment bond to appellant
plumbing company and was liable for damages and
attorneys' fees and costs. The broker alleged that the
construction company could not sue it for negligence.
OVERVIEW: A contract between the construction
company and the plumbing company required the
plumbing company to take out a payment and performance
bond. Through an employee's mistake, the broker
Nos. 86-268, 86-269, 86-270, 86-271
Supreme Court of Wyoming
743 P.2d 1262; 1987 Wyo. LEXIS 520
October 8, 1987
Page 1
only requested a performance bond from the insurer. The
plumbing company paid the same amount of premium to
the broker as if it had a payment bond. The mistake was
not discovered until the construction company had to pay
off the plumbing company's creditors. On appeal, the
court disagreed with the trial court, which had reformed
the bond to include a payment provision. However, the
court determined that the construction company could go
against the broker as a third party beneficiary on the
grounds of breach of contract and negligence. The construction
company could also go against the insurer on
the same causes of actions. The construction company
was entitled to attorneys' fees and costs from the broker.
The court acknowledged that Wyoming and Indiana had
both adopted the Uniform Insurers' Liquidation Act,
Wyo. Stat. Ann. § 26-28-101 et seq., but the act only
prohibited actions to collect a judgment. Therefore the
construction company could obtain a judgment against
the insurer from Indiana.

OUTCOME: The court affirmed the decision of the trial
court, which held that that the broker had breached its
subcontract with the construction company in failing to
provide a payment bond to the plumbing company and
was liable for damages and attorneys' fees and costs. The
case was remanded to apportion damages.
LexisNexis(R) Headnotes
Civil Procedure > Appeals > Standards of Review >
Abuse of Discretion
[HN1] The appellate court will reverse a trial court's decision
to grant or deny a Wyo. R. Civ. P. 15(b) motion
only where there has been an abuse of discretion. In determining
the propriety of an amendment subject to this
review, the basic guideline to be followed is whether or
not the allowance of the amendment prejudiced the adverse
party.
Insurance Law > Regulation of Insurance > Insurer
Insolvency
[HN2] Both Wyoming and Indiana have adopted the
uniform insurers' liquidation act, found at Wyo. Stat.
Ann. § 26-28-101, et seq. (1977).
Insurance Law > Regulation of Insurance > Insurer
Insolvency
[HN3] See Wyo. Stat. Ann. § 26-28-118, (1977).
Civil Procedure > Joinder of Claims & Parties > Joinder
of Necessary Parties
[HN4] Under Wyo. R. Civ. P. 19(a), a person who is
subject to service of process shall be joined as a party in
the action. Thus, in order to be an indispensable party,
that party must be subject to service of process.
Contracts Law > Third Parties > Beneficiaries >
Claims & Enforcement
[HN5] Where a person makes a promise to another for
the benefit of a third person, such third person may
maintain an action thereon even though he is a stranger
to the contract and the consideration therefor and had no
knowledge of the contract when it was made and was not
specifically named therein so long as he is otherwise
sufficiently described or designated.
Business & Corporate Entities > Agency > Agency Established
> Estoppel, Necessity & Operation of Law
[HN6] A broker or agent who, with a view to compensation
for his services, undertakes to procure insurance for
another and through fault or neglect fails to do so, will be
held liable for any damage resulting. His liability arises
under the concept that he is agent for the insured in negotiating
for a policy and owes a duty to his principal to
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
Page 2
exercise reasonable skill, care and diligence in causing
the issuance of a policy. His liability may arise either for
breach of contract or negligent default in the performance
of a duty imposed by contract, at the election of
his client.
Contracts Law > Third Parties > Beneficiaries >
Claims & Enforcement
[HN7] Not only the principal, but also a third-party beneficiary
under the insurance policy is entitled to maintain
an action against the agent for breach of his duty to procure
the appropriate coverage.
Insurance Law > Property Insurance > Estoppel &
Waiver
[HN8] Before there can be a waiver, it must be shown
that the party against whom the waiver is asserted had at
that time knowledge, actual or constructive, of the existence
of its rights or of the material facts upon which they
depend.
COUNSEL:
Dan B. Riggs, and Robert W. Brown of Lonabaugh
& Riggs, Sheridan, for Hoiness-LaBar Insurance.
Charles G. Kepler of Simpson & Kepler, Cody, for
Julien Construction Company.
Michael K. Shoumaker of Shoumaker and Murphy,
Sheridan, for Allied Fidelity Insurance Co.
John O. Housel of Housel and Housel, Cody, for
Nielsen Plumbing and Heating, Inc.
JUDGES:
Thomas, Cardine, Urbigkit, and Macy, JJ, and Guthrie,
J., Retired.
OPINIONBY:
URBIGKIT
OPINION:
[*1264] This opinion discusses bond-liability issues
stemming from the subcontractor's default in the
course of the restoration of the Park County Courthouse.
The subcontractor was issued a performance bond, but
not the requested payment bond. We will affirm in part,
reverse in part, and remand.
FACTS
In 1984, Park County contracted with Julien Construction
Company (Julien) to reconstruct and restore the
old County Courthouse. Julien entered into a subcontract
with Nielsen Plumbing and Heating, Inc. (Nielsen), the
mechanical subcontractor. The form written subcontract

provided that Nielsen would obtain both payment and
performance bonds. n1 Thereafter, [**2] Nielsen ordered
the required bond coverages from Hoiness-LaBar
Insurance (Hoiness), an independent insurance broker
writing with Allied Fidelity Insurance Co. (Allied). Representatives
from Hoiness contacted Allied to inquire if
the coverages could be issued, and approval was given.
At that time, Nielsen, Hoiness and Allied all understood
that two bond coverages were desired to insure both contract
performance and bill payment. The memorandum
order written by Nielsen to Hoiness stated:
[**3]
"Please send a bond and certificate of liability
insurance for this job. Enclosed is a
copy of the sub-contract agreement."
(Emphasis added).
n1 The subcontract agreement provided:
"The Subcontractor further agrees
that he will provide the Contractor,
within 30 days following the
execution of this contract, with
100% Payment and Performance
Bonds conditioned for the faithful
performance of this contract in all
its particulars, duly executed with
Surety Company acceptable to the
Contractor as surety, and in the
form and contents acceptable to
the Contractor. If Subcontractor
fails to comply with this provision,
the Contractor, at its option, may
declare this contract in default and
may hold Subcontractor liable for
all additional expenses incurred by
Contractor as a result of Subcontractor's
default."
An employee of Hoiness, intending to issue a bond
with both coverages, used the wrong form, signed pursuant
to a power of attorney, and issued only a performance
bond. These bonds are written either in one document
as a combined payment and [*1265] performance
bond, or separately in two documents with different
coverages and separate provisions. Allied, the record
reflects, had forms for a performance bond, a pay-
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
Page 3
ment bond, and a combination performance and payment
bond. n2
[**4]
n2 The differentiation in bond phraseology is
evidenced by the Allied joint-coverage bond
form, wherein the language provisions include
payment not included in the single form as
demonstrated by the emphasized language.
"NOW, THEREFORE, THE
CONDITION OF THIS OBLI-
GATION IS SUCH, that if the
Principal shall faithfully perform
said contract according to its
terms, covenants and conditions
and shall promptly pay all persons
supplying labor or material to the
Principal for use in the prosecution
of the work under said contract,
then this obligation shall be
void; otherwise it shall remain in
full force and effect." (Emphasis
added).
Nielsen paid the billed premium n3 and received
only the performance bond. None of the parties discovered
the coverage omission until after subcontractor default
problems developed approximately a year later in
the spring and summer of 1985. This information
emerged when Julien became aware that Nielsen's suppliers
were having collection difficulties. After the resulting
claim communications, Hoiness sought to obtain
Allied's permission to issue the payment bond in conjunction
with the already outstanding performance bond,
but Allied refused.
n3 The billed premium was $ 4,211 for the $
350,900 bond coverage. Generally, the Hoiness
evidence reflected that no additional premium
would have been required for issuance of the
joint-coverage instrument.
In midsummer 1985, Nielsen's suppliers and subcontractors
submitted payment claims to Allied which
were rejected because no payment bond had been issued.
Actually, the record reflects that the mechanical subcontract
was essentially completed except for punch-list and
[**5] warranty items. When Nielsen defaulted, Julien,
the general contractor, completed these remaining

ack-charge or punch-list items, and paid suppliers who
would otherwise have the right to make claims against
the payment and performance bond provided by Julien to
Park County, as required by statute. Payment of the bills
and work completed was also necessary for Julien to
secure escrow-fund release from the owner then withheld
because of the outstanding materialmen's claims. After
payment, Julien instituted this litigation against Nielsen
and Allied and, at a later stage, added Hoiness as a
third-party defendant to secure reimbursements of claims
paid and final work-completion costs incurred. In March
1986, Allied went into receivership in Indiana, its state of
domicile.
The Parties' Claims:
All four litigants, Nielsen, Allied, Hoiness and Julien,
became actively involved in the trial litigation, and
separately present appeals.
Julien asserted several claims in initial and supplementary
pleadings. First, Julien sued Nielsen for breaching
the subcontract by failing to complete its work, and
by failure to pay the suppliers and sub-subcontractors.
Second, Julien sued Allied for [**6] Allied's failure to
pay Nielsen's materialmen under the performance bond.
Third, Julien, in amended claims, sued Hoiness claiming
that Julien was a third-party beneficiary of the contract
between Nielsen and Hoiness and that Hoiness breached
its contract with Nielsen by failing to procure the payment
bond. Further, Julien separately claimed that
Hoiness was negligent in failing to obtain the payment-bond
coverage. Julien claimed attorney's fees and
costs from all three defendants.
Nielsen also made multi-defendant claims, first
claiming that Allied was liable to Nielsen for any judgment
against Nielsen by virtue of the performance bond
and payment bond which, though unissued, was requested
and for which the premium was paid. The complaint
also alleged damages for injury to reputation and
bad-faith denial of payment under the bond as a premise
for punitive damages. Nielsen asserted liability of
Hoiness for any judgment obtained by Julien against
Nielsen due to Hoiness' breach of its contract with Nielsen
to obtain the proper coverage under the bonds.
Again, Nielsen included claims against Hoiness for
damage to its reputation, bad faith, and punitive damages.
Nielsen also [*1266] [**7] asked for costs and
attorney's fees from both Allied and Hoiness. Consequently,
we have the contractor suing the subcontractor,
the insurance broker and surety; and the subcontractor
also suing the broker and surety.
Allied asserted a claim against Nielsen for indemnity
in accord with the provisions of the issued performance
bond documents. Allied then claimed indemnity
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
Page 4
from Hoiness, alleging that Hoiness negligently failed to
properly prepare the bonds. Allied also sought to recoup
its attorney's fees and costs from both Nielsen and
Hoiness. Finally, Hoiness asserted an indemnity claim,
including legal fees and costs, against Allied for Allied's
refusal to honor the agency relationship and issue the
payment bond. In summary, Allied sued the broker and
bond principal, and the broker sued the surety.
The Trial Court's Disposition:
Not surprisingly, the trial court found that Nielsen's
failure to pay its suppliers and materialmen constituted a
material breach of its subcontract with Julien, and imposed
liability for all consequent damages. Furthermore,
under the contractual decision, Nielsen was also liable to
Julien for costs and attorney's fees.
Next, the trial court found [**8] that Hoiness
breached its agreement with Nielsen by failing to provide
the payment-bond coverage as ordered, and found "that
Julien was an intended beneficiary of the contract between
Hoiness-LaBar and Nielsen * * * * and the benefit
of the bonds was solely for the protection of Julien."
Thus, Julien had standing to maintain an action for the
breach of the contract between Nielsen and Hoiness.
In defense to Julien's claim, Hoiness asserted that
Julien and Nielsen had waived any rights they may have
had to demand a payment bond by their failure to object
to the absence of payment-bond coverage at the time the
performance bond was issued. Responding to this defense,
the trial court determined that there was no intentional
waiver of a known right, and relied upon the
course of dealing between Nielsen and Hoiness whereby
Nielsen would request a "bond," and by that order
Hoiness would provide both coverages. This course of
dealing excused Nielsen's failure first to discover and
then to object to the omitted coverage, and the
course-of-dealing rationale also inured to the third-party
beneficiary, Julien.
Thus, the trial court found that by the third-party
beneficiary obligation breach, [**9] Hoiness was liable
to Julien for resulting contractual damages. On that
basis, the court granted judgment to Julien against
Hoiness under the contract theory, and denied any award
of attorney's fees in the absence of any contractual or
statutory provision which would allow recovery. No apparent
ruling on the negligence theory was made.
With regard to Julien's claim against Allied, the trial
court found (1) that all the parties intended that both a
performance and a payment bond issue; (2) Nielsen paid
for both bonds; and (3) Allied granted Hoiness the authority
to issue both bonds. Therefore, the trial court reformed
the issued bond to accurately reflect the intentions
of all the parties so that payment-bond coverage

was provided. Under the reformed dual-coverage bond,
the trial court held Allied liable to Julien for the amounts
paid by Julien to Nielsen's suppliers, and additionally for
costs and attorney's fees. The court found Nielsen liable
for any and all amounts Allied may be called to pay
based on a written indemnity agreement, and thus granted
Allied's cross-claim against Nielsen and denied
Nielsen's cross-claim against Allied.
Nielsen's cross-claim against Hoiness was denied
[**10] because the court found that although Hoiness
breached its contract with Nielsen, Nielsen had not suffered
any damages as a result of the breach because of
Nielsen's indemnity obligation to Allied. The court denied
Nielsen attorney's fees from Hoiness by reasoning
that the statute under which recovery was sought applies
only to insurance companies (and sureties), but not insurance
brokers (agents). Finally, the trial court considered
Allied's and Hoiness' claims against each other and
denied both, pointing to the distinct theories [*1267]
under which both parties were separately liable to Julien.
In summary, the trial court granted judgment for Julien
against Nielsen, Hoiness and Allied, and only imposed
liability for Julien's costs and attorney's fees
against Nielsen and Allied. n4 The trial court also granted
Allied's indemnity claim against Nielsen. All other
claims were denied.
[**11]
n4 The award of costs and attorney's fees
from Nielsen and Allied is probably meaningless
because of the insolvency of those entities.
ISSUES
All four parties have appealed the judgment of the
trial court and presented as appellate issues:
Julien:
I. The trial court erred in failing to
find appellee Hoiness negligent in the
nonissuance of payment-bond coverage
(so that attorney's fees were recoverable
in addition to the money judgment).
Hoiness:
I. Julien, as an incidental and not an
intended beneficiary of the contract between
Nielsen and Hoiness, may not sue
for breach of that contract.
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
II. Julien, by its conduct, waived any
right to performance of the contract between
Hoiness and Nielsen.
III. The surety, Allied, is obligated
under its performance bond to pay for all
materials and labor for which Nielsen, the
principal, was unable to pay.
IV. The surety, Allied, is liable under
the terms of the bond, reformed to include
a payment bond, to pay all unpaid laborers
and materialmen.
And responsively to appellate briefs:
V. Julien cannot sue Hoiness for negligence.
Allied:
I. The trial court erred in not granting
Allied a stay or continuance until reorganization
or liquidation could be completed
in Indiana.
a. The requirement of "full
faith and credit" and principles
[**12] of comity
compel the trial court's
deference to the Indiana
proceedings.
b. The Insurance Commissioner
of Indiana, as rehabilitator
of Allied Fidelity
Insurance Company, is an
indispensable party to this
action, and he cannot be
sued herein.
II. The district court judge procedurally
abused his discretion in granting
Hoiness' Rule 15(b), W.R.C.P. motion to
amend the pleadings to conform to the
evidence which reformed the bond to effectuate
a payment-bond coverage.
III. The district court judge erred
substantively in reforming to add the
payment-bond coverage on grounds of
mutual mistake.
And responsively to appellate briefs:
Page 5

IV. Allied should have judgment
against Hoiness.
Nielsen:
I. Hoiness was negligent in its failure
to obtain payment-bond insurance in favor
of Nielsen.
II. Hoiness is responsible to Nielsen
for reasonable attorney's fees and costs
incurred by Nielsen based on statutory
obligation, contract and negligence.
DECISION AND ANALYSIS
Hoiness' Rule 15(b), W.R.C.P. Motion to Amend the
Pleadings:
During the trial but after evidence was closed,
Hoiness moved the court to amend its pleadings to conform
to the evidence. [**13] Hoiness sought only to
amend the pleadings so that it, too, had a claim against
Allied. The trial court's subsequent decision letter indicated
that the court had granted Hoiness' motion, yet
denied Hoiness' cross-claim against Allied. Instead, the
trial court apparently also amended Julien's complaint
premised on the motion of Hoiness to include a claim for
reformation of the performance bond because of mutual
mistake, and allowed Julien recovery against Allied on
that basis. Julien did not support the reformation for the
obvious reason of insolvency of Allied as well as
[*1268] Nielsen and apparent collectability only from
Hoiness.
[HN1] This court will reverse a trial court's decision
to grant or deny a Rule 15(b) motion only where there
has been an abuse of discretion. Rose v. Rose, Wyo.,
576 P.2d 458 (1978); Breazeale v. Radich, Wyo., 500
P.2d 74 (1972); Strahan v. Strahan, Wyo., 400 P.2d 542
(1965). In determining the propriety of an amendment
subject to this review, the basic guideline to be followed
is whether or not the allowance of the amendment prejudiced
the adverse party. Rose v. Rose, supra; Beaudoin
v. Taylor, Wyo., 492 P.2d 966 (1972).
We find no [**14] authority to support the trial
court's procedural actions. As noted, Julien, the party
allowed to recover on the reformed bond, opposed
Hoiness' motion to amend the pleadings to include the
reformation claim. None of the parties had initially
sought reformation of the bond because of mutual mistake,
and that issue was not litigated; it was only urged
upon the trial court by Hoiness in a supplemental brief
filed after all the evidence had been presented. Because
this issue was presented as an after-thought, without the
benefit of any evidence designed to challenge or support
Hoiness' claim, we think that the trial court's Rule 15(b)
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
Page 6
amendment was prejudicial to Allied. The amendment
was probably even more prejudicial to Julien which
sought no new bond from the insolvent surety, but rather,
sought the old liability for the negligent insurance agency.
Allied had no opportunity to present evidence regarding
mutual mistake or reformation. On appeal, Allied
makes several arguments why a payment bond cannot
be created by reformation based on mutual mistake.
Certainly, it should have been allowed to make those
arguments to the trial court. We hold that Allied was
prejudiced by its lack of [**15] opportunity to litigate
the reformation issues below, and, therefore, the trial
court's amendment of the pleadings pursuant to Rule
15(b) was an abuse of discretion. Consequently, it is
necessary to reverse the trial court's judgment for Julien
against Allied based on the reformed payment bond.
Reformation:
With the procedural decision on the motion to
amend, this court has effectively eliminated the issue of
reformation from the case, and substantive discussion
would be academic in context and will not be pursued.
Feeney v. State, Wyo., 714 P.2d 1229 (1986); Reno Livestock
Corporation v. Sun Oil Co., Wyo., 638 P.2d 147
(1981); Chicago & Northwestern Ry. v. City of Riverton,
70 Wyo. 119, 247 P.2d 660 (1952).
The Stay of Litigation Against Allied:
Next, we will address Allied's claim that this action
against Allied should have been stayed because of the
full faith and credit clause of the United States Constitution
and because of principles of comity, and because
Allied's rehabilitator, the Insurance Commissioner of
Indiana, was an indispensable party to the action. [HN2]
Both Wyoming and Indiana have adopted the uniform
insurers' liquidation act, found at [**16] § 26-28-101,
et seq., W.S.1977. [HN3] The relevant portion of the
uniform act provides in part:
"During the pendency of any delinquency
proceedings in this or any reciprocal state,
no action or proceeding in the nature of an
attachment, garnishment or execution
shall be commenced or maintained in the
courts of this state against any delinquent
insurer or its assets." Section 26-28-118,
W.S.1977.
We agree with Allied that under principles of comity and
under the full faith and credit clause of the United States

Constitution, the Wyoming courts should adhere to the
provisions and restrictions contained in the uniform act.
A careful reading of the above-quoted statute reveals
that the uniform act enjoins the enforcement of a judgment
through attachment, garnishment or execution proceedings.
The act does not, however, prohibit a party
from maintaining an action to obtain a judgment, or prohibit
a court from entering a judgment. The act only prohibits
actions to enforce or collect on a judgment. The
receivership proceeding in Indiana is more properly an
issue affecting the collectability and enforceability
[*1269] of any Wyoming judgment. The uniform act
does not contemplate [**17] the discontinuance of an
action to obtain a judgment underway in Wyoming. We
find that the trial court's action was entirely consistent
with the uniform act.
Allied's next contention that Indiana's Insurance
Commissioner was an indispensable party to this action
also fails. [HN4] Under Rule 19(a), W.R.C.P., "[a] person
who is subject to service of process shall be joined as
a party in the action * * * *." Thus, in order to be an indispensable
party, that party must be subject to service of
process. Allied has not shown that the Indiana Insurance
Commissioner was subject to service of process in Wyoming,
and, in fact, asserts that the Commissioner is beyond
the jurisdiction of the Wyoming court. Therefore,
the Commissioner cannot be an indispensable party to
this action, and the trial court did not err in refusing to
make the Commissioner a party. This litigation was
commenced long before Allied became involved in rehabilitation
proceedings in Indiana, and the Wyoming court
was entitled to conclude this case without involving the
Indiana Insurance Commissioner unless the receiver intervened
to assist in actively concluding the pending trial
by liability determination. We do not understand [**18]
the asserted differential between Allied that then and
now continues as a totally involved litigant and the receiver
or conservator which never entered a litigative
appearance in the continuing course of this lawsuit.
Julien's Standing to Sue for Breach of the Contract Between
Nielsen and Hoiness:
Hoiness argues that the contract between Nielsen
and Hoiness was made only for the benefit of Nielsen,
and that Julien was not an intended beneficiary. We do
not find Hoiness' argument persuasive, in concurring
with the trial-court decision that Julien was an intended
third-party beneficiary of the Nielsen-Hoiness payment/performance-bond
contract.
In Peters Grazing Association v. Legerski, Wyo.,
544 P.2d 449, 457 (1975), reh. denied 546 P.2d 189
(1976), we stated:
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
[HN5]
"* * * * Where a person makes a promise
to another for the benefit of a third person,
such third person may maintain an action
thereon even though he is a stranger to the
contract and the consideration therefor
and had no knowledge of the contract
when it was made and was not specifically
named therein so long as he is otherwise
sufficiently described or designated."
Page 7
Nielsen did obtain a benefit from [**19] its contract
with Hoiness in its eligibility to enter into and continue
the construction subcontract with Julien. It was Julien
that required Nielsen to obtain the bonds for the protection
of Julien. This is not disputed by Hoiness which by
brief, however, argues, "The fact that the bonds to be
obtained under the contract were intended to benefit Julien
Construction does not make Julien Construction an
intended beneficiary of the contract." We refuse to follow
the semantic gymnastics urged upon us by Hoiness
and contrarily hold that Julien was an intended beneficiary
of both the contract and the bond which attaches to
Nielsen's agreement with Hoiness to be furnished the
bond. Consequently, Julien has standing to maintain a
breach-of-contract claim against Hoiness.
"It is a well settled rule of law that where
one person agrees with another, on a sufficient
consideration, to do a thing for the
benefit of a third person, the third person
may enforce the agreement * * * *." Peters
Grazing Association v. Legerski, supra,
544 P.2d at 457.
See also Kaiser Engineers, Inc. v. Grinnell Fire Protection
Systems Co., Inc., 173 Cal. App.3d 1050, 219 Cal.
Rptr. 626 [**20] (1985), following the same rule.
The Nature of the Default:
It is apparent from trial exhibits that the project was
substantially completed by Nielsen as mechanical subcontractor.
The Julien back-charge claim, which is the
basis of its money prayer and ultimate award, was $
156,649 for unpaid subcontractors or suppliers to Nielsen
and only $ 1,940 as [*1270] finishing costs. Of the 18
creditors included in the $ 156,649 payment, at least 17
had received identical denial letters from Allied based on
nonissuance of a payment bond as written in July of
1985. Contractor takeover and completion costs were
nominal, essentially including punch-list type final work.
It should also be noted that without regard for the ab-

sence of a litigant's argument or briefing here, this
amount of $ 1,940 was unquestionably due from Allied
to Julien as covered specifically and directly by the performance
bond. Properly at issue were only the $
156,649 unpaid subcontractor bills as a payment obligation.
It should also be noted that the written subcontract
form used by Julien did not include a customary
lien-claim indemnity or bill-paid covenant provision.
Actually, these requirements were [**21] substantially
to have been accomplished by virtue of the subcontractor's
execution as principal of the payment bond for
which Allied, by additionally signing, became surety.
The subcontract agreement provided that the subcontractor:
"* * * * will furnish all materials and labor
* * * *.
* * * *
"* * * * indemnify and save harmless the
Contractor from any and all manner of
claims or suits for infringement of patents
* * * *."
It was a trial argument of Hoiness,
now continued on appeal, that the covenant
to furnish a 100 percent payment and
performance bond meant that the issuance
of the performance bond insured issuance
also of a payment bond by virtue of the
nonperformance-of-the-contract provision.
The default terminology, "If Subcontractor
fails to comply with this provision,
the Contractor, at its option, may
declare this contract in default and may
hold Subcontractor liable for all additional
expenses incurred by Contractor as a result
of Subcontractor's default," does not
necessarily support the convoluted performance-bond
liability arising from neglect
to furnish the payment bond which
inures as a liability to the issuer of the
payment bond who was not aware [**22]
of the dual bond order given to the issuing
agent or the specific premium-payment
purpose.
Performance-Bond Requirement of Payment-Bond Obligation:
The heavily contested and principal substantive issue
of this appeal arises from the contention of Hoiness
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
Page 8
that the performance bond required Allied to pay the
subcontractor claims as a stated bond undertaking, and
that consequently, if it was negligent or in breach of contract
to fail to issue the payment bond, which contendably
had duplicative coverage, no damage was caused
either to Nielsen or Julien. Consequently, we are faced
with the issue whether or not, by interpretation of the
performance bond and the terms of the subcontract, the
payment obligation under suretyship law existed without
the additional execution of a payment bond. The issue
had been heavily debated in pretrial argument by the
litigants with an attendant decision of the trial court that
a payment bond was different from a performance bond.
This resolution was then clouded by the decision to reform
and essentially create a payment bond by acceptance
of Hoiness' Rule 15(b) motion to amend following
trial. No specific decision on this contention was
made [**23] by the court at trial conclusion, although
the judgment granted to Julien against Hoiness essentially
constitutes a denial of the validity of this claimed
defense.
This is the money issue of the appeal, in that
Hoiness, the insurance broker, seeks to avoid damage
liability on the premise that Julien sustained no damages
in contractual breach since Allied should have paid in
any event. Consequently, Hoiness argues that nonissuance
of the payment bond did not adversely affect Julien
who retained identical rights without the requested protection
from the additional payment-bond coverage.
The number of cases that can be found which consider
the obligation of the surety in writing a performance
bond to be responsible for payment defaults is
extensive. n5 [*1271] This court is not now inclined
to base a decision by rule selection, and particularly so
because of the unusual absence of any contractual covenants
of payment or lien-claim, hold-harmless provision
in the subcontract. Consequently, we review the standards
and results from the events of occurrence in that
subcontractor nonpayment occurred in spring and early
summer of 1985, with attendant denial by Allied premised
on the [**24] absence of bond liability, and Allied
did not go into insolvency until March of 1986, nine
months later.
n5 Compare Seaboard Surety Co. v. Standard
Accident Insurance Co., 277 N.Y. 429, 14
N.E.2d 778, 117 A.L.R. 658 (1938) with
Johns-Manville Sales Corp. v. Reliance Insurance
Co., 410 F.2d 277 (9th Cir. 1969); Sun Indemnity
Co. of New York v. American University,
Washington, D.C., 58 A.D.C. 184, 26 F.2d 556
(1928); Annot., 77 A.L.R. 21; Annot., 118 A.L.R.
57; Werbin, Law for Contractors, Architects and

Engineers, 265 (1961); and Hart and Kane, What
Every Real Estate Lawyer Should Know About
Payment and Performance Bonds, 17 Real Property
Probate and Trust J., 674, 675-676 (1982):
"2. Performance Bond. After the
owner accepts the proposal, this
bond, providing security in the
form of a penal sum generally
equal to the contract price, promises
that the contractor will perform
the terms of the contract. The
bond is conditioned to protect the
owner to the extent that the surety
promises that the contract will be
completed as specified. Before the
surety uses its own funds to cure
the default of the contractor or to
pay for the completion of the project,
the owner must make available
to the surety the contract sums
that remain unpaid at the time of
the contractor's default.
"3. Labor and material payment
bond. In addition to the performance
bond, owners generally require
a contractor to give assurance
that all bills submitted by laborers,
materialmen and subcontractors
will be paid. This assurance
permits the owner to take
possession of a lien-free project on
completion protected from third
party claims which can result in
materialmen's or mechanics' liens
against the property. Creditors'
claims on payment bonds have
generated a considerable amount
of litigation. The major areas of
concern are: (1) who are the eligible
claimants; (2) what types of
claims are covered; and (3) have
the requisite notice requirements
been met.
* * * *
"6. Combined performance and
payment bond. Combined performance
and payment bonds may be
required if the contract requires
the contractor to pay bills, as well
as to hold the owner harmless
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
[**25]
from mechanics' liens claims. Under
those circumstances, a combined
payment and performance
bond may be required. However, it
is better to require separate performance
and payment bonds to
assure adequate protection for the
owner and creditors. The combined
bond may not cover every
contract duty required. Moreover,
the bond penalty, under a combined
bond, may not be sufficient
to complete performance and pay
unpaid subcontractors, materialmen,
or suppliers in the event of
default. Separate payment and
performance bonds eliminate the
problem of who should be paid by
providing two penal sums."
Page 9
See Insulation Contracting and Supply v. Kravco,
Inc., 209 N.J.Super. 367, 507 A.2d 754 (1986).
If for no other reason than the benefit of the chance
or opportunity principle, there was a singular business
advantage to Julien if the payment-bond obligation had
clearly existed in 1985 when the unpaid-supplier issues
first arose. Zinnel v. United States Shipping Board
Emergency Fleet Corporation, 10 F.2d 47 (2d Cir.
1925); Action Ads v. Judes, Wyo., 671 P.2d 309 (1983);
Hursh Agency, Inc. v. Wigwam Homes, Inc., Wyo., 664
P.2d 27 (1983).
The record in this case reflects that Park County
would not release retainages until the unpaid claims
against the insolvent subcontractor were paid. Whether
or not the county was properly protected by the surety
bond issued with the contractor has little significance if
by unilateral decision of the owner the contractor cannot
receive final construction contract payments without suit.
The business and financing justification for Julien to pay
to get the retainage and then sue Allied, Nielsen and
Hoiness for repayment rather than Park County for collection
is self-evident.
Consequently, we determine, without regard for the
legal conflict derived from cases where subcontractors
seek to enforce performance-bond provisions to secure
[**26] obligation payment, that the failure of Hoiness
to provide the agreed bond for which Hoiness was paid
caused damage in the amount consequently paid by Julien,
and that any dispute between Hoiness and Allied
can, if they desire, be further pursued in their continued
litigation upon remand. On this record, as an issue not

decided by the trial court by express decision, we do not
have sufficient facts upon which either [*1272] a factual
decision or a determination as a matter of law can be
justified to determine performance-bond obligation for
the supplier, and subcontractor claims under these specific
circumstances where no specific hold-harmless or
payment clause was included in the subcontract. We here
recognize the right of subrogation between the issuing
agency and the insurance carrier, if, in fact, the carrier
has a liability beyond $ 1,920, but do not determine
whether that liability can be established from the four
corners of the performance bond and the written subcontract
terms. Commercial Union Insurance Company v.
Postin, Wyo., 610 P.2d 984 (1980); Criss v. Folger
Drilling Company, 195 Kan. 552, 407 P.2d 497 (1965).
It is clear that both the beneficiaries and [**27] the
aspects of the two forms of surety coverage, performance
and payment, are different, with an obvious example in
the circumstance that a payment-bond obligation can be
enforced by the supplier-creditor, but the performance
bond cannot: "shall promptly and faithfully perform said
subcontract" (performance bond); "shall faithfully perform
said contract according to its terms, covenants and
conditions and shall promptly pay all persons supplying
labor or material to the Principal for use in the prosecution
of the work under said contract" (payment bond).
By this analysis we conclude that Julien did not get
what it desired and contractually requested in the surety
instrument as a guarantee to not only protect against any
lienable obligation of the subcontractor to pay its suppliers
and subcontractors, but also to provide first-person
obligation protection to such suppliers and subcontractors.
Pragmatically, the general contractor was not obligated
to litigate interpretative nuances of a performance
bond to determine whether that coverage included payment-bond
characteristics when the broker's obligation
was to furnish the payment bond which would have obviated
the need for litigation. [**28] We could carry
the analysis further by the supposition that Allied was
financially responsible, but conjectural analysis contrary
to the stated fact does not afford a logical basis for a legal
resolution. We hold that Julien was not obligated to
litigate a performance bond to determine whether payment-bond
characteristics existed, and such an analysis
and determination can be further pursued between the
insurance agency and the insolvent surety if either or
both care to continue that pursuit. A clear payment-bond
protection is economically better than a conjectural performance-bond
repayment right. In substantive conclusion,
this court will recognize a right in the nature of
subrogation to the defaulting insurance agency, but not a
liability defense. Commercial Union Insurance Company
v. Postin, supra, McClintock, J., dissenting; Wyo-
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
Page 10
ming Building & Loan Association v. Mills Construction
Co., 38 Wyo. 515, 269 P. 45, 60 A.L.R. 418 (1928).
Allied's Liability to Julien for Attorney's Fees:
The trial court's award to Julien of its costs and attorney's
fees from Allied was based on Allied's failure to
comply with the payment bond created by reformation.
As reformed, [**29] the bond imposes liability on
Allied to Julien for the amounts Julien paid out, less what
it retained on the contract with Nielsen, plus interest,
costs and attorney's fees. Section 26-15-124(c),
W.S.1977.
We have held that it was error to reform the bond, and no
payment bond existed. We cannot tell whether demand
was made for payment of the completion costs accrued
from final completion requirements. At this time, with
affirmance of the judgment of Julien against Hoiness to
which attorney's fees will be added, we do not know
whether Julien will care to continue in the litigation by
asserting a $ 1,940 claim against Allied with a claim for
attorney's fees implicit therein. These claims can be
properly considered on remand.
Nielsen's Liability to Julien:
The subcontract between Julien and Nielsen provides
at paragraph Fifteenth as quoted in n.1, and at paragraph
Sixteenth:
"If the Contractor is required to prosecute
or defend any legal action as the [*1273]
result of the failure of the Subcontractor
to fully comply with the provisions of this
contract, Subcontractor shall pay all legal
costs and expense, including a reasonable
attorney's fee incurred by the [**30]
Contractor as a result of the prosecution
or defense of said legal action."
Nielsen failed to properly perform the subcontract work,
and failed to obtain the payment bond as required in the
subcontract. We agree with the trial court that Nielsen's
breach entitled Julien to recoup its attorney's fees from
Nielsen. We also agree that Nielsen is liable to Julien for
the consequent damages -- all additional expenses incurred
by Julien as a result of Nielsen's failure to complete
work under the subcontract.
Hoiness' Negligence:
We also agree with the trial court that Hoiness
breached its agreement with Nielsen to obtain a payment
bond for the project. On appeal, Julien asserts that the

trial court also should have found that Hoiness was negligent
in failing to obtain the proper coverage under a
payment bond for Nielsen as principal and Julien as a
third-party beneficiary. Under the negligence theory,
Julien asserts that it is entitled to recovery of its costs and
attorney's fees from Hoiness, a claim which under the
breach of contract finding, the trial court denied.
This court has held:
"The law is clear that [HN6] a broker or
agent who, with a view to compensation
[**31] for his services, undertakes to
procure insurance for another and through
fault or neglect fails to do so, will be held
liable for any damage resulting. His liability
arises under the concept that he is
agent for the insured in negotiating for a
policy and owes a duty to his principal to
exercise reasonable skill, care and diligence
in causing the issuance of a policy.
His liability may arise either for breach of
contract or negligent default in the performance
of a duty imposed by contract,
at the election of his client." Hursh Agency,
Inc. v. Wigwam Homes, Inc., supra,
664 P.2d at 32.
Courts in other jurisdictions have held that [HN7] not
only the principal, but also a third-party beneficiary under
the insurance policy is entitled to maintain an action
against the agent for breach of his duty to procure the
appropriate coverage. Sturcke v. Clark, La. App., 261 So.
2d 717 (1971), app. denied 262 La. 309, 263 So. 2d 47
(1972); Rider v. Lynch, 42 N.J. 465, 201 A.2d 561
(1964). We agree with those courts, and hold that Julien,
as a third-party beneficiary of Hoiness' agreement to obtain
the bond for Nielsen, is entitled to maintain an action
against Hoiness for breach of [**32] contract and for
negligence.
In Count I of Julien's amended complaint against
Hoiness, Julien asserts the breach-of-contract claim. In
Count II, Julien asserts a negligence claim. The trial
court granted judgment for Julien on the
breach-of-contract claim, but did not determine Julien's
claim against Hoiness for negligence in perhaps viewing
that negligence claim as duplicative. While we do not
intimate that Julien could be entitled to recover twice for
Hoiness' failure to procure the bond for Nielsen, we do
recognize the validity of a negligence claim under the
unquestioned facts. On that basis, we conclude that Julien,
in recognition of the negligence of Hoiness, should
be granted attorney's fees as the natural and proximate
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
Page 11
result as injury from the negligent omission. Absence of
the payment bond precipitated the litigation and incurrence
of attorney's fees to pursue repayment by suing
Allied and Nielsen. We do not necessarily say here nor
decide that the right would have occurred if the initial
litigation had only involved Hoiness. See Annot., 45
A.L.R.2d 1183. See also, Safway Rental & Sales Co. v.
Albina Engine & Machine Works, Inc., 343 F.2d 129
(10th Cir. 1965); Hursh [**33] Agency v. Wigwam
Homes, Inc., supra; Kvenild v. Taylor, Wyo., 594 P.2d
972 (1979); Brem v. United States Fidelity & Guaranty
Co., D.C.App., 206 A.2d 404 (1965); Griffin v. Bredouw,
Okla., 420 P.2d 546 (1966). Cf. L.F. Pace & Sons, Inc.
v. Travelers Indemnity Co., 9 Conn. App. 30, 514 A.2d
766, certification denied 201 Conn. 811, 516 A.2d 886
(1986) (attorney's fees included in the punitive-damages
award). [*1274] In this case, where negligent failure
to provide the agreed bond coverage invoked litigation
with the surety and the subcontractor, we find the damages
proximately resulting properly include attorney's
fees incurred.
Hoiness' Liability to Allied:
The trial court correctly ruled that Hoiness' negligence
did not result in its liability to Allied. Allied was
in no way harmed by Hoiness' failure to issue the payment
bond. If the payment bond had been issued, it is fair
to contemplate that Allied, while still solvent, would
have paid the subcontractor debts, and consequently, as a
matter of law, Allied cannot now assert a claim against
the agency in failing to issue a bond which would have
created an additional liability.
Waiver:
In its [**34] decision letter, the trial court comprehensively
considered the evidence and then concluded:
"Hoiness-LaBar asserts that Julien and
Nielsen have both waived any right they
may have had to demand a payment bond
by not objecting sooner to the failure to
issue the payment bond along with the
performance bond, citing 17A C.J.S.
Contracts, § § 490, 491, pp. 688, 699
(1963); Western Transmission Corp. v.
Colorado Mainline, Inc., 376 F.2d 470
(10th Cir. 1967); and Quin Blair Enterprises,
Inc. v. Julien Construction Co.,
597 P.2d 945, 951 (Wyo. 1979). The
Court finds, however, that there was no
intentional waiver of known right in this
instance. 28 Am.Jur.2d Estoppel and
Waiver, § 158, p. 840 (1966). The testi-

mony at trial was that the absence of a
payment bond was not noticed until such
time as payments to Nielsen's suppliers
became a problem in 1985. While there
may be a duty on the part of an insured to
read an insurance policy, State Farm Mutual
Automobile Insurance Co. v. Petsch,
261 F.2d 331 (10th Cir. 1958), the failure
to read the policy does not constitute a
waiver in all instances. Annot. 32
A.L.R.2d 661 (1970); Carlton Lumber Co.
v. Lumber, Insurance Co., [**35] 81 Or.
396, 158 P. 807, 809-810 (1916); Journal
Co. v. General Accidental Fire & Life
Assurance Corp., 188 Wis. 140, 205 N.W.
800, 803 (1925). In this case, there was a
course of dealing between Hoiness-LaBar
and Nielsen in which Nielsen would request
a 'bond' and Hoiness-LaBar would
provide either a combined performance
and payment bond or separate performance
and payment bonds. The course of
dealing between the parties excused the
failure on the part of Nielsen to object to
the absence of the payment bond prior to
June, 1985. This course of dealing, the
Court finds, also inured to the benefit of
the intended third party beneficiary."
This court agrees that under these circumstances the
failure of all participants to observe the omitted coverage
did not constitute a waiver. Cusimano v. St. Paul Fire
and Marine Insurance Co., La. App., 405 So.2d 1382
(1981), writ denied 410 So. 2d 762 (1982); Rider v.
Lynch, supra, 201 A.2d 561.
We agree that Julien correctly states the law.
[HN8]
"Before there can be a waiver, it must be
shown that the party against whom the
waiver is asserted had at that time
knowledge, actual or constructive, of the
existence of its rights or [**36] of the
material facts upon which they depend."
28 Am.Jur.2d Estoppel and Waiver §
158.
CONCLUSION
Where does all of this leave the trial court and the
litigants?
1. The judgment for Julien and against Hoiness is
affirmed, but amended to award Julien attorney's fees
stipulated to be $ 8,500. n6
743 P.2d 1262, *; 1987 Wyo. LEXIS 520, **
[**37]
Page 12
n6 An interesting question is created as to
whether the trial court was in error in its judgment
award of $ 114,853 against Hoiness, in consideration
of the totals involved. The unpaid
claims totaled $ 156,649, and the follow-on work
totaled $ 1,940, a grand total of $ 158,589. An
unpaid retainage existed, which left a balance due
on the subcontract as a difference of $ 114,853.
Obviously the $ 1,940 is not claimable against the
insurance agent, since it is clearly covered by the
performance bond. However, it can be assumed
that the trial court, in recognition of the status,
could apply the retainage first to the completion
costs of $ 1,940, so that there was left remaining
only $ 42,795 retainage to be applied to the $
156,649 unpaid subcontractor claims. Consequently,
based on an election of the application of
funds, we do not find it necessary as a matter of
law to reduce the judgment entered, although at
the same time we recognize that Allied retained a
liability on the performance bond for the completion
expenses. Although no double recovery is
permitted, Julien can recover first wherever it
can.
[*1275] 2. Judgment should be entered in favor of
Julien against Allied in the sum of $ 1,940, and the trial
court should determine under the claims payment provisions
of § 26-15-124(c), W.S.1977 what, if any, part of
the total attorney's fees of $ 8,500 might be a separate
obligation of Allied. Otherwise the judgment in favor of
Julien and against Allied is reversed as constituting Julien's
election of remedies to proceed against Hoiness.
3. The Julien judgment against Nielsen is affirmed.
4. The case is remanded to afford Hoiness an opportunity
to secure a trial-court determination as to what
portion, if any, of the $ 114,853 in excess of the unquestioned
$ 1,940 amount may be subrogated against Allied.
Subrogation can be on the basis that the peculiar status of
the claims, the specific terminology of the subcontract,
and the nature of the Wyoming public contract statute
created a determinable payment obligation for which
Julien had a claim and for which Hoiness may be subrogated
within the performance terminology of the surety
bond as it was actually issued for repayment of supplier
and subcontractor claims.
5. Appeal costs, but no appellate attorney's fees, will
be granted [**38] to Julien against Hoiness and Nielsen.
No other appeal costs will be allowed.
The case is remanded for further proceedings in
conformity herewith.

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DISPOSITION: [***1]
Exception sustained.
All concurred.
HEADNOTES: Incidental to the court's power to enforce
its decrees, is the power to compel payment of all
reasonable counsel fees incurred in procuring enforcement
of a decree wrongfully resisted.
The court has no general power to allow counsel fees as
costs whenever deemed equitable, nor whenever the
plaintiff is compelled to apply for relief because of the
defendant's misconduct.
Expenses, including counsel fees, which a person incurs
who is compelled to prosecute or defend a suit by reason
of another's failure to perform a duty arising from contract
or imposed by law, may be recovered as damages;
but in an action therefor the plaintiff cannot also recover
the additional counsel fees of such action but will be
limited to taxable costs.
Exceptions may be taken in good faith and the case be
properly transferred though the excepting party has no
confidence in them.
SYLLABUS: Bill in Equity. After the decision in this
case, ante, 33, an order was made that the execution
should be paid by Loveren out of the funds in his hands
as agent of the New England Investment Company.
The ice company was insured against the plaintiff's
claim, and, owing to the insurer's insistence that an exception
to the above order should be taken by the assured
and the case carried to the supreme court, the ice company
took the exception.
The superior court found that the situation which necessitated
the bringing of the plaintiff's bill in equity to collect
his judgment against the ice company resulted primarily
from the sale by it of all its property after suit was
78 N.H. 248, *; 100 A. 47, **;
1916 N.H. LEXIS 49, ***
LEXSEE 78 NH 248
George Jacques v. Manchester Coal & Ice Company & a.
[NO NUMBER IN ORIGINAL]
SUPREME COURT OF NEW HAMPSHIRE
78 N.H. 248; 100 A. 47; 1916 N.H. LEXIS 49
October 3, 1916
Page 1
begun, and the payment of the proceeds to the investment
company as its sole stockholder; and that the defendant
Loveren would have taken no exception to the
order of the superior court if the question of insurance
had not been involved, but that the taking of the exception
and its subsequent transfer to the supreme court
were brought about directly by the insurance company
without regard to the probability of the exception being
sustained, but simply to defer [***2] if not avoid final
payment; that under the foregoing circumstances it was
equitable that the plaintiff should be reimbursed for the
extraordinary expenses which the collection of his judgment
involved, and therefore allowed the sum of $ 250 as
attorneys' fees in the bill in equity, in addition to the
costs taxable under P. S., c. 287.
To this order allowing an attorney fee, the defendant
Loveren excepted. Transferred by Branch, J., from the
January term, 1916, of the superior court.
COUNSEL: Taggart, Burroughs, Wyman & McLane
(Mr. Wyman orally), for the plaintiff.
The necessary consequence of defendant's acts was to
compel the plaintiff to resort to an action to obtain his
rights: Leverone v. Leverone, 220 Mass. 149; and damages
are recoverable for time and money spent in
searching for property wrongfully taken. Bennett v.
Lockwood, 20 Wend. 223; Greenfield Bank v. Leavitt, 34
Mass. 1.
OPINIONBY: YOUNG
OPINION: [*249]
[**48] The question raised by the defendant's exception
is as to the court's jurisdiction in respect to the
allowance of costs,--not as to its jurisdiction in respect to
assessing damages that are a proximate result of the defendant's
[***3] misconduct. In other words, not as to
the court's jurisdiction to assess the damages a person
sustains because he is compelled to prosecute or defend a

suit by reason of the defendant's failure to perform a duty
created by contract with him or imposed on them by law
for his benefit. Fowler v. Owen, 68 N.H. 270; Fairfield v.
Day, 71 N.H. 63; Hubbard v. Gould, 74 N.H. 25; Anderson
v. Company, 77 N.H. 275. While these cases hold
that the plaintiff can recover all the expense of the first
litigation from the defendants, provided carrying on the
litigation was under the circumstances the reasonable
thing to do, no one of them holds that he can recover his
reasonable counsel fees in addition to his taxable costs in
the second suit. In a word, while these cases hold that a
person can recover his reasonable counsel fees when his
need to employ counsel is a proximate result of the defendant's
misconduct, they do not hold that he can recover
what he is compelled to pay counsel to collect such
fees from the defendants.
These cases therefore are not in point for, as has already
appeared, [*250] the question raised by the defendant's
exception is as to whether [***4] the court has
power to allow reasonable counsel fees or a counsel fee
of more than one dollar, not as damages but as a part of
the prevailing party's costs whenever it finds that would
be equitable. Most courts hold that their jurisdiction in
respect to the allowance of costs is statutory (11 Cyc.
24), and that is the view that obtains here. State v. Kinne,
41 N.H. 238; Smith v. Boynton, 44 N.H. 529; Moses v.
Craig, 77 N.H. 586. While the statutes authorize the
court to allow costs to the prevailing party (P. S., c. 229,
s. 1), they limit the amount it may allow as counsel fees
to one dollar. There is no statute which in terms or by
implication authorizes the court to allow more than that
sum when it finds that would be equitable. While there
are some cases that seem to be exceptions to the rule that
no more than one dollar can be allowed as counsel fees
in the taxation of costs, it will be found on examination
that in most of these cases the plaintiff was compelled by
reason of the defendant's failure to obey one of the
court's decrees to apply to it for relief. For example, in
Manchester v. Hodge, 75 N.H. 502, after the question of
the defendant's [***5] right to pile lumber in a public
street had been decided in favor of the city, the defendant
still refused to move his lumber, and the city deemed it
wise to apply to the court for relief. It was held that under
these circumstances it could recover all the expenses
of the application including reasonable counsel fees.
While such cases are an authority for the proposition that
the court has power to enforce its decrees, they are not
authority for the proposition that the court may allow
reasonable counsel fees in all cases in which the plaintiff
is compelled to apply to it for relief because of the defendant's
misconduct. If they were, then every successful
plaintiff would be entitled to such counsel fees in addition
to his taxable costs. What these cases hold and all
78 N.H. 248, *; 100 A. 47, **;
1916 N.H. LEXIS 49, ***
Page 2
they hold is, that the court has power to enforce its decrees,
or that it has power to punish for contempt. In other
words, the court's power to compel the defendants to
pay all the expenses the plaintiffs incur in such cases is
incidental to its jurisdiction to enforce its decrees.
The plaintiff also contends, that the court had power
to make the order excepted to because to transfer this
case when and as the defendants [***6] did was to prolong
this litigation unreasonably. One difficulty with this
contention is that there is neither any finding that they
prolonged this litigation unreasonably nor any evidence
that would warrant such a finding. As the court's findings
are understood, it is true the defendants transferred this
case notwithstanding [*251] they had no faith in their
exception, but they transferred it at the request of the
insurance company [**49] liable over to them, if the
plaintiff prevailed, in order to avoid giving that company
an opportunity to contest liability on the ground that the
case should have been transferred, if it became necessary
for them to sue that company to enforce their claim.
There is no statute which either in terms or by implication
makes it illegal to transfer a case when the excepting
party has no faith in his exception; but there is one which
gives him the right to except to any order of the presiding
justice and to transfer the questions of law raised by his
exception to this court. It will be unnecessary to consider
whether this right is limited by the rule that those acts
and those only that are reasonable are legal; for the result
will be the same in this case [***7] whether the right to
transfer is absolute or limited by that rule, for as has already
appeared the defendants transferred this case in
order to avoid trouble if it became necessary for them to
enforce their claims against the insurance company, and
all fair-minded men will agree that in their situation the
ordinary man would have done as they did. If it were true
as the plaintiff contends that the acts of the insurance
company are the acts of the defendants, the result would
be the same in so far as this case is concerned. It is found
that the insurance company had two reasons for insisting
on the transfer of this case,--one a desire to contest liability;
the other a desire "to defer if not avoid final payment."
The first was legal, the second illegal; but the fact
it is illegal to defer the payment of money that is due
would not authorize the order to pay the plaintiff $ 250 in
addition to his taxable costs, for the law limits the damage
that may be recovered for such an illegal act to interest
and taxable costs. Richards v. Whittle, 16 N.H.
259.
Exception sustained.
All concurred.

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PRIOR HISTORY: [**1]
792 F.2d 305, *; 1986 U.S. App. LEXIS 26019, **
LEXSEE 792 F.2D 305
DONALD D. GOLDBERG, M.D., Plaintiff-Appellant, v. MALLINCKRODT, INC.,
Defendant-Appellee
No. 85-7682
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
Appeal from a grant of summary judgment in favor of
defendant Mallinckrodt entered in the United States District
Court for the Eastern District of New York (Henry
Bramwell, Judge). Plaintiff, a doctor, alleged fraud by
the defendant in connection with the sale of a medical
dye that injured two of his patients. The district court
granted summary judgment on the grounds that the
damages claimed were not recoverable under New York
law because they were too remote from the alleged fraud.
DISPOSITION:
Affirmed. Judge Lumbard concurs in part and dissents
in part in a separate opinion.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff doctor appealed
from a decision of the United States District Court for
the Eastern District of New York, which granted summary
judgment in favor of defendant medical product
manufacturer, in plaintiff's action for damages arising out
of defendant's alleged fraudulent misrepresentation regarding
the safety of its product.
OVERVIEW: Plaintiff doctor filed a complaint against
defendant medical product manufacturer for damages
that arose out of defendant's allegedly fraudulent misrepresentations
regarding the safety of its product, a myelogram
dye. Two of plaintiff's patient's were injured in
his use of the product and filed malpractice actions.
Plaintiff sought damages due both to lost income and
litigation costs incurred in defending those lawsuits, and
to emotional distress. The district court granted defendant's
motion for summary judgment and dismissed plaintiff's
claims. On appeal, the court affirmed, and held that
income lost during defense of the malpractice lawsuits
792 F.2d 305; 1986 U.S. App. LEXIS 26019
December 5, 1985
June 9, 1986
Page 1
was not the direct and proximate result of the alleged
misrepresentation. The court found that while plaintiff's
use of the product and the resultant injuries were closely
related to the alleged misrepresentations, plaintiff's time
in defending the lawsuits was not a direct result of the
fraud. Also, plaintiff's emotional distress was not compensable
because, as a bystander to the injury, he was not
an immediate family member and was never in the zone
of danger.
OUTCOME: The court affirmed summary judgment in
favor of defendant medical product manufacturer. Plaintiff
doctor's loss of income during defense of two malpractice
lawsuits was not compensable because it was
not the direct and proximate result of defendant's alleged
misrepresentation concerning its product.
LexisNexis(R) Headnotes
Torts > Negligence > Duty > Negligent Infliction of
Emotional Distress
Torts > Damages > Lost Income
[HN1] Damages for fraud must be the direct, immediate,
and proximate result of the fraudulent misrepresentation.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] Attorney's fees are not recoverable as damages.
However, where the litigation is caused by the wrongful
act of a third party, the person is entitled to recover from
the third party the reasonable value of attorneys' fees and
other expenses thereby suffered or incurred.
Torts > Negligence > Duty > Negligent Infliction of
Emotional Distress
[HN3] Bystanders may recover for emotional distress
damage only under very limited circumstances. The
emotional disturbance suffered must be serious and verifiable,
and must be tied, as a matter of proximate causa-

tion, to the observation of the serious injury or death of
an immediate family member. Finally, the plaintiff must
himself have been in the zone of danger, that is, he must
himself have been exposed to a risk of bodily harm by
the conduct of the defendant.
Torts > Negligence > Duty > Negligent Infliction of
Emotional Distress
[HN4] A physician can not recover for emotional distress
suffered as a result of the death of his patient.
COUNSEL:
Charles L. Bach, Jr., New York, New York (Stewart
A. Cunningham, Law Graduate, Heidell, Pittoni, Murphy
& Bach, P.C., New York, New York, of Counsel) for
Plaintiff-Appellant.
Lawrence V. Senn, Jr., New York, New York (Karen
M. Cullen, Patricia Hayashi, Mudge Rose Guthrie
Alexander & Ferdon, New York, New York, of Counsel),
for Defendant-Appellee.
JUDGES:
Lumbard, Cardamone and Winter, Circuit Judges.
Lumbard, Circuit Judge, concurring and dissenting.
OPINIONBY:
WINTER
OPINION:
[*306] WINTER, Circuit Judge:
Dr. Donald Goldberg appeals from a grant of summary
judgment in favor of Mallinckrodt, [**2] Inc.,
the manufacturer of an allegedly unsafe medical dye. Dr.
Goldberg's complaint alleged that defendant had fraudulently
misrepresented the safety of its product with the
result that two of his patients were injured when he administered
the dye. He claimed damages for his emotional
distress and for his loss of income as a result of
spending time defending malpractice actions. The district
court granted summary judgment with respect to both
claims. We affirm.
BACKGROUND
The facts as alleged are as follows: In October,
1976, Dr. Goldberg, an orthopedic surgeon, attended a
physicians' conference at which he learned for the first
time about "Dimeray," a new product manufactured by
defendant Mallinckrodt. Dimeray is a dye injected into a
patient's spinal cord during a procedure known as a myelogram.
The dye acts as a "contrast medium" that makes
the spinal cord more visible, apparently during an X-ray.
Defendant touted Dimeray as an improvement on the dye
792 F.2d 305, *; 1986 U.S. App. LEXIS 26019, **
Page 2
then in general use, as it provided clearer myelograms
and would pass naturally out of a patient's system. The
ability to pass naturally out of the body was significant,
for the dye then in general use had to be withdrawn from
the [**3] body by needle after it was used. Defendant
represented that more than three thousand tests indicated
that Dimeray had no adverse side effects involving serious
neurological damage. This representation allegedly
was false and known to be so when made.
Impressed by the claims made about Dimeray at the
conference, Dr. Goldberg used the product on a patient,
who shortly thereafter suffered severe pain, paralysis,
and other symptoms of nerve damage. Relying on the
prior assurances of defendant as to Dimeray's safety, the
doctor did not associate this adverse reaction with the
product. One month later he administered the product to
another patient, who also developed severe pain, lower
body paralysis, and other symptoms of nerve damage.
Both reactions are typical of a condition known as "cauda
equina syndrome," allegedly represented by defendant
not to be a side effect of Dimeray. The doctor notified
Mallinckrodt of the adverse reactions. Shortly thereafter,
Mallinckrodt voluntarily withdrew Dimeray from the
market based on reports it had received of similar adverse
reactions associated with use of the product.
[*307] Both of the injured patients brought lawsuits.
In one, the patient [**4] sued Dr. Goldberg, who
impleaded Mallinckrodt as a third-party defendant. In the
other, the patient sued Mallinckrodt, who impleaded
Goldberg.
Dr. Goldberg brought this diversity action in July,
1982. His first complaint did not allege a cause of action
for fraud and was dismissed. An amended complaint
alleged that Mallinckrodt had fraudulently misrepresented
the safety of its product by failing to disclose
knowledge of adverse reactions to Dimeray. Plaintiff
claimed damages for (i) emotional distress, (ii) harm to
reputation, (iii) impairment of earning capacity, (iv) out
of pocket costs incurred defending the malpractice suits,
and (v) the income lost as a result of time spent preparing
a defense of the malpractice claims. During discovery,
the damage claims were narrowed to economic loss
caused by time spent away from his medical practice in
defending the malpractice actions and for economic loss
caused by plaintiff's inability to perform myelograms.
This latter inability allegedly stemmed from Dr. Goldberg's
emotional distress over the adverse reactions suffered
by his patients.
Both sides moved for summary judgment. On June
21, 1985, the district court granted partial summary [**5]
judgment for defendant, dismissing Dr. Goldberg's claim
for "damages based on or arising out of mental and emotional
distress." Subsequently, the court also dismissed

the claim for lost income for time spent defending the
malpractice suits. It concluded that under New York law
damages for fraud must be shown to be a direct result of
the fraudulent misrepresentation and that the lost income
was too remote from the fraud alleged. Because damage
is an essential element of a valid fraud claim, the court
dismissed the action. We affirm.
DISCUSSION
The sole issue on this appeal is whether the damages
claimed are compensable in a fraud action.
1. The Claim for Lost Income Resulting From the
Time Spent Defending Lawsuits
Under New York law, [HN1] damages for fraud
must be the direct, immediate, and proximate result of
the fraudulent misrepresentation. See Bennett v. United
States Trust Co. of New York, 770 F.2d 308, 316 (2d Cir.
1985); Idrees v. American University of the Caribbean,
546 F. Supp. 1342, 1350 (S.D.N.Y. 1982); Deyo v. Hudson,
225 N.Y. 602, 122 N.E. 635 (1919); Mills Studio,
Inc. v. Chenango Valley Realty Corp., 15 A.D.2d 138,
141, 221 N.Y.S.2d 684, 687 (3d Dept. 1961). [**6] Dr.
Goldberg's argument that the time spent away from his
practice was a direct result of defendant's alleged fraud
goes as follows. The misrepresentations about Dimeray
induced him to purchase and use the product, thereby
making plaintiff the "unwitting instrumentality by which
defendant's fraud was extended to the public." <strong>Brief</strong> of
Appellant at 14. As a consequence of Dr. Goldberg's use
of the product, two patients were injured, and they predictably
brought lawsuits. Equally foreseeable, so the
argument goes, was that Dr. Goldberg would be required
to devote time to the defense of that litigation, taking him
away from his medical practice and thereby causing him
economic loss.
We cannot agree that income lost during defense of
the malpractice lawsuits is the direct and proximate result
of the alleged misrepresentation.
In Idrees, plaintiff sought to recover damages based
on fraudulent misrepresentations made by a Caribbean
medical school regarding its educational program and
facilities. After finding fraud, the court held that plaintiff
was entitled to recover his tuition and fees paid, as well
as his round-trip airfare to the school. 546 F. Supp. at
1350. However, [**7] the court denied a claim for
damages based on plaintiff's inability to resume the job
he had left upon enrolling in the medical school, concluding
that this damage was not the direct result of the
medical school's fraudulent conduct. Id.
[*308] Plaintiff's reliance on Kennedy v.
McKesson Co., 58 N.Y.2d 500, 448 N.E.2d 1332, 462
N.Y.S.2d 421 (1983), is misplaced. In Kennedy, a dentist
sued alleging that defendant had negligently repaired an
792 F.2d 305, *; 1986 U.S. App. LEXIS 26019, **
Page 3
anesthetic machine. As a result, plaintiff erroneously
administered nitrous oxide to a patient, which caused the
patient's death. A wrongful death action was brought
against the dentist. The New York Court of Appeals held
that plaintiff could recover for harm to his professional
reputation, but not for alleged emotional damage. The
court stated, "There is no duty to protect from emotional
injury a bystander to whom there is otherwise owed no
duty, and, even as to a participant to whom a duty is
owed, such injury is compensable only when a direct,
rather than a consequential, result of the breach." Id. at
506, 448 N.E.2d at 1335, 462 N.Y.S.2d at 424. No claim
for time spent away from practice defending [**8] the
wrongful death action was made.
Finally, in Williams v. Goldberg, 58 Misc. 210, 109
N.Y.S. 15 (Sup. Ct. 1908), a tenant sued a real estate
agent for fraudulently stating that the ceiling in the tenant's
apartment had been tested and found to be secure.
In fact, no such test had been performed, and the ceiling
collapsed, injuring the tenant. The court held that the
plaintiff could recover for her injuries, since the damages
were proximate to the fraud and were "a natural and
probable effect of the agent's wrongful conduct." Id. at
212, 109 N.Y.S. at 17. The court treated this as a very
close case, however, because the injuries had not been
the immediate result of the deceit, the ceiling collapse
being an intervening cause. Id.
Our review of these cases leads us to conclude that
the damages claimed in the instant case are far more remote
than have previously been allowed under New
York law. Award of such damages would require us to
undertake impermissible innovations in state law. See
Cornellier v. American Casualty Co., 389 F.2d 641,
644-45 (2d Cir. 1968). The clearest and most direct result
of the alleged fraud was Dr. [**9] Goldberg's
purchase of the Dimeray product. The next step, which
follows closely, was his use of the product and resultant
injury to two patients. The initiation of lawsuits against
Dr. Goldberg and his having to spend time defending
them, however, were not a direct result of the fraud. Dr.
Goldberg alleges that he was a totally innocent participant
who had been assured by Mallinckrodt that Dimeray
had no side effects when Mallinckrodt knew otherwise.
If so, the likelihood of his being sued by the patients is
less than he would have us believe. Indeed, his involvement
in one of the two lawsuits in question came only
after Mallinckrodt impleaded him. More importantly, the
likelihood of his having to spend any measurable time
defending such suits is negligible, in light of his clear
innocence and Mallinckrodt's flagrant misconduct. The
time lost would be limited to his giving testimony, which
would also be necessary if the lawsuit were brought
solely against Mallinckrodt. We therefore believe the lost

income is too indirect a result of the fraud to be recoverable
under New York law.
Dr. Goldberg advances two other theories to support
his damage claim. First, he argues that there is [**10]
an alternative, broader standard under New York law that
allows recovery for any damage that is a "consequence"
of the fraud, as opposed to the direct and proximate result
thereof. This argument is based on language in the
Williams decision that damage must be a "'legitimate
consequence of the fraud,'" 58 Misc. at 212, 109 N.Y.S.
at 16 (quoting N.Y. Land Imp. Co. v. Chapman, 118 N.Y.
288, 294, 23 N.E. 187, 189 (1890)), and that the damages
allowed were "consequential to the fraud." Id. at 212,
109 N.Y.S. at 17. We do not believe that this language
signals the creation of a new standard, however, for the
decision also speaks of "proximate" damages and of the
"natural and probable" effects of the fraud -- phrases
smacking of the traditional direct injury rule. Furthermore,
the facts of the case, described supra, clearly reveal
that [*309] the damages claimed were far more
direct than those claimed in the instant case.
Finally, plaintiff argues that his lost time is recoverable
under a rule that allows a person who becomes involved
in litigation because of the wrongful act of a third
party to recover against that third party for attorney's
[**11] fees and other expenses suffered. See Central
Trust Co., Rochester v. Goldman, 70 A.D.2d 767, 417
N.Y.S.2d 359 (4th Dept.), appeal dismissed, 47 N.Y.2d
1008, 394 N.E.2d 290, 420 N.Y.S.2d 221 (1979); Coopers
& Lybrand v. Levitt, 52 A.D.2d 493, 384 N.Y.S.2d
804 (1st Dept. 1976); Fugazy Travel Bureau, Inc. v.
Ernst & Ernst, 31 A.D.2d 924, 298 N.Y.S.2d 519 (1st
Dept. 1969); Shindler v. Lamb, 25 Misc. 2d 810, 211
N.Y.S.2d 762 (Sup. Ct. 1959), aff'd mem., 10 A.D.2d 826,
200 N.Y.S.2d 346 (1st Dept. 1960), aff'd mem., 9 N.Y.2d
621, 172 N.E.2d 79, 210 N.Y.S.2d 226 (1961).
The general rule of course is that [HN2] attorney's
fees are not recoverable as damages. Coopers &
Lybrand, 52 A.D.2d at 496, 384 N.Y.S.2d at 806. However,
under New York law, where the litigation is caused
by the wrongful act of a third party, the person "is entitled
to recover [from the third party] the reasonable value
of attorneys' fees and other expenses thereby suffered or
incurred." Id. at 496, 384 N.Y.S.2d at 807 (quoting Shindler,
25 Misc.2d at 812, 211 N.Y.S.2d at 765). [**12]
Dr. Goldberg asserts that economic loss caused by time
spent defending lawsuits falls within the category of
"other expenses" recoverable under this rule.
Mallinckrodt argues that the exception does not apply
when both parties were parties in the prior litigation,
as is the case here. We agree. With respect to one action,
the expenses incurred by Dr. Goldberg stem from defending
Mallinckrodt's impleader action, whereas the
792 F.2d 305, *; 1986 U.S. App. LEXIS 26019, **
Page 4
exception invoked by Goldberg extends only to recovery
of attorney's fees expended in disputes with third parties.
See Coopers & Lybrand, 52 A.D.2d at 496-97, 384
N.Y.S.2d at 807 (refusing to apply exception where
damage claim was for fees and expenses associated with
defense of actions brought by present defendants, not
third parties). Moreover, all the cases cited involve circumstances
where the first party's wrongful conduct
(here Mallinckrodt's fraud) exposed another (Dr. Goldberg)
to litigation with a third party (the injured patients)
in which the first party was not involved. Where the first
party is actually in the litigation, the applicability of the
exception to the general rule on attorney's fees is very
doubtful. The first party in [**13] such circumstances
will in all probability bear the laboring oar in defending
the claim, and other parties such as Dr. Goldberg are free
to assert whatever claims they have against the former,
thereby disposing of all relevant claims in one action.
We are most reluctant to extend this exception so as to
authorize a second round of litigation over costs between
parties who have already litigated the underlying claims.
Even if the exception did apply, however, the damage
claimed by plaintiff does not fall within the scope of
recovery allowed under the third party exception. Including
personal time spent defending litigation in the
phrase "other expenses" would be an excessively broad
reading of that language. The term "expenses" is more
suggestive of traditional litigation costs such as filing
fees or fees paid to expert witnesses than of lost time
away from one's profession, despite the fact that the latter
certainly has value. None of the New York cases cited
supra with respect to this exception holds that lost personal
time is recoverable. In the absence of such a holding
by the New York courts, we cannot equate litigation
expenses, which are clearly recoverable, with time spent
[**14] away from one's profession. The district court
was thus correct in granting summary judgment for defendant
on this claim.
2. Damages for Emotional Distress
Plaintiff also claims that the district court erred in
dismissing his claim for damages based on the fact that
he no longer performs myelograms. It is not clear
whether the emotional trauma of witnessing [*310]
the serious injuries to his two patients has left plaintiff
emotionally unable to perform the procedure, or whether
plaintiff has simply made a personal decision to refrain
from the procedure because of the inherent danger associated
with it, as illustrated by the Dimeray incidents.
To the extent that plaintiff's lost income is the result
of a personal choice, it is beyond question not a direct
result of defendant's alleged fraud. Moreover, even if he
is disabled by the emotional trauma flowing from the
past incidents, such emotional distress is not compensa-

le under New York law. In Bovsun v. Sanperi, 61
N.Y.2d 219, 461 N.E.2d 843, 473 N.Y.S.2d 357 (1984),
the New York Court of Appeals held that [HN3] bystanders
may recover for emotional distress damage only
under very limited circumstances. [**15] The emotional
disturbance suffered must be "serious and verifiable,"
id. at 231, 461 N.E.2d at 849, 473 N.Y.S.2d at 363,
and "must be tied, as a matter of proximate causation, to
the observation of the serious injury or death of [an immediate]
family member," id. at 232, 461 N.E.2d at 849,
473 N.Y.S.2d at 363. Finally, the plaintiff must himself
have been in the "zone of danger" -- that is, he must
himself have been exposed to a risk of bodily harm by
the conduct of the defendant. Id. at 233, 461 N.E.2d at
849, 473 N.Y.S.2d at 363.
Dr. Goldberg clearly does not meet two of these requirements.
First, the persons whose injuries have allegedly
caused the emotional distress and subsequent refusal
to perform myelograms were patients, not immediate
family members. Second, plaintiff was never himself
exposed to risk of serious bodily injury from Dimeray,
and thus was outside the "zone of danger." Indeed,
Bovsun expressly reaffirmed Kennedy v. McKesson, 58
N.Y.2d 500, 448 N.E.2d 1332, 462 N.Y.S.2d 421, a case
similar to the present one which held that [HN4] a dentist
could not recover for emotional distress suffered [**16]
as a result of the death of his patient. Bovsun, 61 N.Y.2d
at 232, 461 N.E.2d at 849, 473 N.Y.S.2d at 363.
Plaintiff attempts to avoid the Bovsun rule by relying
on several cases involving more intentional or outrageous
conduct in which recovery for emotional distress
has been allowed. See, e.g., Johnson v. State, 37 N.Y.2d
378, 334 N.E.2d 590, 372 N.Y.S.2d 638 (1975) (recovery
for emotional distress allowed where hospital misidentified
body and negligently transmitted telegram announcing
death of plaintiff's mother, who was actually alive
and well in the hospital, with the mistake only being
discovered after plaintiff closely examined the corpse at
the wake). Such cases are factually inapposite. The district
court was thus correct in dismissing the claim for
emotional distress.
Affirmed.
CONCURBY:
LUMBARD
DISSENTBY:
LUMBARD
DISSENT:
LUMBARD, Circuit Judge, concurring and dissenting:
792 F.2d 305, *; 1986 U.S. App. LEXIS 26019, **
Page 5
I agree that Goldberg's claim for damages due to his
unwillingness to perform any more myelograms was
properly rejected under New York law pertaining to
damages for emotional distress. I believe, however, that
the district court erred in holding that Goldberg's damages
[**17] relating to time spent away from his medical
practice defending lawsuits were too remote from the
alleged fraud as a matter of law.
The complaint alleges that Mallinckrodt knew of the
dangers associated with its product, Dimeray, and that it
failed to disclose this information to physicians. Instead,
Mallinckrodt allegedly touted the safety of Dimeray at
physicians' conventions. The manufacturer of a product
such as Dimeray owes a duty of great care in advising all
those who use such a product regarding the dangers and
risks involved. The physician must rely on what the
manufacturer tells him.
If a physician is fraudulently induced to prescribe a
test for a patient, and the patient becomes seriously ill, it
is almost axiomatic that the physician will be involved in
litigation with the patient. Of course, the patient charges
the physician with negligence, or the physician is so
charged when he is impleaded. Where patients believe
[*311] that they have been negligently injured, malpractice
actions against physicians are now as certain as
death and taxes.
I would hold that Goldberg's defense against his patients'
lawsuits and his legal expenses are a "direct result"
of Mallinckrodt's [**18] alleged fraud. Goldberg had
no choice but to take such time from his practice as was
necessary to defend himself adequately. Indeed, his insurance
policy undoubtedly requires that he give reasonable
assistance to counsel provided by his insurer in any
litigation. The fact that Goldberg took time off from his
practice to defend the lawsuits is thus a direct and foreseeable
consequence of the alleged fraud. At any rate,
there is enough of an issue on proximate cause to present
a jury question. Consequently, summary judgment is not
appropriate. See Zeller v. Bogue Electric Manufacturing
Corp., 476 F.2d 795, 803 (2d Cir.), cert. denied, 414
U.S. 908, 94 S. Ct. 217, 38 L. Ed. 2d 146 (1973).
I also believe that Goldberg's lost time is recoverable
under an exception to the general rule against awarding
attorneys' fees and other legal expenses. If a defendant's
wrongful act caused the plaintiff to become involved in
litigation with a third party, the defendant may be liable
for the plaintiff's attorneys' fees and legal expenses incurred
in the earlier litigation. See e.g., Central Trust
Co., Rochester v. Goldman, 70 A.D.2d 767, 417 N.Y.S.2d
359 [**19] (4th Dept.), app. dismissed, 47 N.Y.2d 1008,
394 N.E.2d 290, 420 N.Y.S.2d 221 (1979).
As the majority points out, this exception applies
only to plaintiff's expenses incurred in litigation with

third parties and not to expenses incurred in litigation
with the defendant itself; however, this qualification does
not bar Goldberg's recovery. At least with respect to the
direct action against him, it is clear that Goldberg's legal
expenses resulted proximately from defending a lawsuit
brought by a stranger to the present fraud action, his patient.
See Japcap Establishment Inc. v. Trust for Cultural
Resources, 115 A.D.2d 382, 495 N.Y.S.2d 669, 671 (1st
Dept. 1985) (discussing third-party requirement).
Recovery of legal expenses under the exception is
not thwarted simply because Goldberg impleaded
Mallinckrodt. Goldberg bears the "laboring oar" in the
792 F.2d 305, *; 1986 U.S. App. LEXIS 26019, **
Page 6
direct action, and I see no reason why his bringing an
indemnity claim against Mallinckrodt in that action
should preclude him from seeking his litigation expenses
in a separate fraud action. I disagree with the majority's
holding that time spent by Goldberg to defend the lawsuits
brought by his patients [**20] is not compensable
under the exception as a legal expense. It is inevitable
that a physician would have to take some time off from
his practice in this type of situation. Thus, Goldberg
should be able to recover damages for his lost time, just
as he would with respect to any other necessary litigation
expense.

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PRIOR HISTORY: [**1]
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
LEXSEE 794 F2D 688
NEPERA CHEMICAL, INC., Appellant v. SEA-LAND SERVICE, INC., et al.
No. 81-2388
UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA
CIRCUIT
253 U.S. App. D.C. 394; 794 F.2d 688; 1986 U.S. App. LEXIS 25933; 1988 AMC
1214
Appeal from the United States District Court for the District
of Columbia (Civil Action No. 79-03022).
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant shipper, a
chemical manufacturer and distributor, sought review of
the decision of the United States District Court for the
District of Columbia, which entered a summary judgment
dismissing its action, which asserted negligence on
the part of appellee carrier, an ocean-going common carrier
operating in foreign commerce, subject to the Shipping
Act of 1961, 46 U.S.C.S. § 801 et seq.
OVERVIEW: In anticipation of a new tariff rate for the
shipment of certain chemicals, the carrier informed the
shipper that it would maintain a certain rate. However,
the carrier charged a higher rate and informed the shipper
that it would correct the overcharge by resorting to a
provision of the Act that allowed a carrier to apply to the
Federal Maritime Commission for approval of a refund
to a shipper of a portion of charges collected or a waiver
of collection of charges billed. The Commission denied
the application, but the denial was later overturned.
However, in the meantime, the shipper had filed an action
seeking compensatory damages, measured by the
amount of overcharges and the expenses incurred in
prosecuting the proceeding in which the Commission's
adverse decision was overturned, and punitive damages
as well. On appeal, the court held that the Act did not bar
the shipper's common law action for compensatory
damages and that those damages could include attorney
fees and other expenses incurred by the shipper in its
litigation against the Commission. However, the court
held that the claims for punitive damages and attorney
October 14, 1982, Argued
June 17, 1986
Page 1
fees incurred in the instant case were legally unwarranted.
OUTCOME: The court reversed the district court's
judgment to the extent that it had held that the shipper's
common law action for compensatory damages was
barred by the Act. The court affirmed the district court's
judgment to the extent that it had held that the shipper's
claims for punitive damages and attorneys' fees incurred
in the instant case were not warranted. The court remanded
the case to the district court for further proceedings.
LexisNexis(R) Headnotes
Admiralty Law > Shipping > Shipping Act
[HN1] Section 18(b)(3) of the Shipping Act, 46 U.S.C.S.
§ 817(b)(3), provides that no common carrier by water
in foreign commerce or conference of such carriers shall
charge or demand or collect or receive a greater or less or
different compensation for the transportation of property
or for any service in connection therewith than the rates
and charges which are specified in its tariffs on file with
the Federal Maritime Commission and duly published
and in effect at the time; nor shall any such carrier rebate,
refund, or remit in any manner or by any device any
portion of the rates or charges so specified, nor extend or
deny to any person any privilege or facility, except in
accordance with such tariffs: Provided, however, that the
Federal Maritime Commission may in its discretion and
for good cause shown permit a common carrier by water
in foreign commerce or conference of such carriers to
refund a portion of freight charges collected from a
shipper or waive the collection of a portion of the charges
from a shipper where it appears that there is an error
in a tariff of a clerical or administrative nature or an error
due to inadvertence in failing to file a new tariff and that

such refund or waiver will not result in discrimination
among shippers.
Admiralty Law > Shipping > Shipping Act
[HN2] Section 18(b)(3) of the Shipping Act, 46 U.S.C.S.
§ 817(b)(3), provides that no common carrier by water
in foreign commerce or conference of such carriers shall
charge or demand or collect or receive a greater or less or
different compensation for the transportation of property
or for any service in connection therewith than the rates
and charges which are specified in its tariffs on file with
the Federal Maritime Commission and duly published
and in effect at the time; nor shall any such carrier rebate,
refund, or remit in any manner or by any device any
portion of the rates or charges so specified, nor extend or
deny to any person any privilege or facility, except in
accordance with such tariffs: Provided that the common
carrier by water in foreign commerce or conference of
such carriers has, prior to applying for authority to make
refund, filed a new tariff with the Federal Maritime
Commission which sets forth the rate on which such refund
or waiver would be based.
Admiralty Law > Shipping > Shipping Act
[HN3] Section 18(b)(3) of the Shipping Act, 46 U.S.C.S.
§ 817(b)(3), provides that no common carrier by water
in foreign commerce or conference of such carriers shall
charge or demand or collect or receive a greater or less or
different compensation for the transportation of property
or for any service in connection therewith than the rates
and charges which are specified in its tariffs on file with
the Federal Maritime Commission and duly published
and in effect at the time; nor shall any such carrier rebate,
refund, or remit in any manner or by any device any
portion of the rates or charges so specified, nor extend or
deny to any person any privilege or facility, except in
accordance with such tariffs: Provided that the carrier or
conference agrees that if permission is granted by the
Federal Maritime Commission, an appropriate notice will
be published in the tariff, or such other steps taken as the
Federal Maritime Commission may require, which give
notice of the rate on which such refund or waiver would
be based, and additional refunds or waivers as appropriate
shall be made with respect to other shipments in the
manner prescribed by the Commission in its order approving
the application, and provided further that application
for refund or waiver must be filed with the Commission
within 180 days from the date of shipment.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN4] United States District Court for the District of
Columbia law incorporates the "American Rule," under
which a party may not be awarded attorneys' fees unless
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 2
a statute or enforceable contract provides for an award of
such fees.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN5] An exception to the American Rule, recognized
by many jurisdictions, permits a plaintiff to recover from
the defendant reasonable attorneys' fees incurred in prior
litigation against a third party where they were a natural
consequence of the defendant's wrongful act. This exception
has been applied both where the defendant breached
a contract and where the defendant committed a tort and
thereby compelled the plaintiff to litigate against a third
party. Underlying the exception is recognition that the
plaintiff's expenditures in the earlier suit are logically
indistinguishable from other monetary losses caused by
tortious conduct for which compensatory damages will
lie. The effect of the exception is to put the plaintiff, who
found it necessary to litigate with a third party as a result
of the defendant's wrong, in the same position he would
have occupied had he not been forced to do so. The exception
permits the plaintiff to recover all of his losses
flowing from the defendant's malfeasance - except, generally
speaking, attorneys' fees accruing in the suit in
which the recovery is sought - and treats as a mere fortuity
the fact that the plaintiff's damages arose from the
prior litigation with the third party.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN6] United States District Court for the District of
Columbia law recognizes a cause of action for "wrongful
involvement in litigation," which essentially is an analogue
of the third-party exception to the American Rule.
The district allows a plaintiff in a tort action to recover,
as damages, reasonable attorneys' fees incurred in earlier
litigation with a third person if the natural and proximate
consequences of the defendant's tortious act were to involve
the plaintiff in that litigation. All that is required is
incurrence of the fees in prior litigation with a third party
precipitated by the tortious conduct of the present defendant.
Torts > Damages > Punitive Damages
[HN7] Punitive damages may be assessed to penalize a
defendant for outrageous conduct and to deter him and
others from similar activity in the future. Such damages -
also aptly termed "exemplary" damages - are appropriate
when the defendant's misbehavior demonstrates a particularly
reckless disregard for the rights of another. Under
the law of the District of Columbia, even gross negligence
is insufficient; punitive damages are awardable
only where a defendant's conduct is willful and outrageous,
constitutes gross fraud, or is aggravated by evil
motive, actual malice, deliberate violence or oppression.

Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN8] The "bad faith" exception to the American Rule
allows an assessment of attorneys' fees when the losing
party has acted in bad faith, vexatiously, wantonly, or for
oppressive reasons. Federal courts have applied this exception
both when bad faith occurred in connection with
the litigation and when it was an aspect of the conduct
that gave rise to the lawsuit.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN9] An assessment of attorneys' fees is warranted
when the losing party has acted in bad faith, vexatiously,
wantonly, or for oppressive reasons. Circumstances indicative
of bad faith are present where a party brings or
maintains an unfounded suit or withholds action to which
the opposing party is patently entitled.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN10] Attorneys' fees will be awarded only when extraordinary
circumstances or dominating reasons of fairness
so demand.
COUNSEL:
Martin Sterenbuch, with whom Hugh H. Lewis was
on the brief, for Appellant.
Edward M. Shea, with whom Francis W. Fraser was
on the brief, for Appellee Sea-Land Service, Inc.
C. Jonathan Benner, General Counsel, Federal Maritime
Commission, Clare R. Donelan, Attorney, Federal
Maritime Commission, Stanley S. Harris, United States
Attorney at the time the brief was filed, Lawrence Ledebur,
Attorney, Department of Justice, and John Oliver
Birch, Assistant United States Attorney, were on the
brief for Appellees Federal Maritime Commission, et al.
Gordon M. Shaw, Attorney, Federal Maritime Commission,
Kenneth M. Raisler, Assistant United States Attorney
at the time the brief was filed, Royce C. Lamberth
and R. Craig Lawrence, Assistant United States Attorneys,
also entered appearances for Appellees Federal
Maritime Commission, et al.
JUDGES:
Robinson, Chief Judge, Wald, Circuit Judge, and
Lumbard, * Senior Circuit Judge. Opinion of the Court
filed by Chief Judge Robinson.
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
[**2]
Page 3
* Of the United States Court of Appeals for
the Second Circuit, sitting by designation pursuant
to 28 U.S.C. § 294(d) (1982).
OPINIONBY:
ROBINSON
OPINION:
[*690] ROBINSON, Chief Judge:
This appeal challenges a summary judgment dismissing
an action by Nepera Chemical, Inc., which asserts
negligence on the part of Sea-Land Service, Inc.
Nepera urges reversal on several grounds, some of which
we deem meritorious. So, while we affirm in part, we
also reverse in part and remand for further proceedings.
I. BACKGROUND
The controversy had its inception in an agreement of
sorts between Nepera, a manufacturer and distributor of
chemicals, and Sea-Land, an ocean-going common carrier
operating in foreign commerce, and as such subject
to the Shipping Act of 1916. n1 Prior to 1978,
Sea-Land's published tariff specified a rate of $6.85 per
hundred-weight for overseas transportation of picolines,
a liquid chemical manufactured by Nepera and used in
the production of nicotinic acid. n2 In anticipation of a
new tariff soon to be become effective, n3 Sea-Land informed
Nepera that it would maintain in that tariff a rate
equivalent to $6.85 per hundredweight for carriage of
picolines. n4 Despite this affirmative assurance, however,
Sea-Land's new tariff, when later published, did not
include any reference to that chemical. [**3] n5 As a
result, when, in 1978, Nepera shipped three containers of
picolines from the United States to Spain, Sea-Land was
legally required to calculate its freight charges on the
tariff rate reserved for liquid commodities "not otherwise
specified." n6 That rate was $631.25 per weight-ton --
more than four times the old rate for picolines. n7
n1 Act of Sept. 7, 1916, ch. 451, 39 Stat. 728
(1916) (codified as amended at 46 U.S.C. § §
801 et seq. (1982)) [hereinafter cited as codified].
n2 Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., 527 F. Supp. 136, 138 (D.D.C. 1981). These
rates were published as Sea-Land Freight Tariff
166, FMC-43. Id.
n3 Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., supra note 2, 527 F. Supp. at 138. On December
31, 1977, Sea-Land was to join in United

[**4]
States North Atlantic/Spanish Freight Agreement
10117, which would require Sea-Land to file a
new tariff -- Tariff 232 -- converting its rates to a
"weight-ton" basis. Id.
N4 Id.
n5 Id.
n6 Id. at 138-139. The Shipping Act provides
that "no common carrier by water in foreign
commerce . . . shall charge or demand or collect
or receive a greater or less or different compensation
for the transportation of property or for any
service in connection therewith than the rates and
charges which are specified in its tariffs on file
with the [Federal Maritime] Commission and duly
published and in effect at the time. . . ." 46
U.S.C. § 817(b)(3) (1982). Sea-Land also
charged Nepera at the "not otherwise specified"
rate for a shipment of two containers of picolines
from the United States to The Netherlands. Nepera
Chem., Inc. v. Sea-Land Serv., Inc., supra
note 2, 527 F. Supp. at 139 n.1. This shipment
was not governed by Sea-Land Freight Tariff
232, but instead by a separate tariff which included
a specific rate of $155.00 per weight-ton
for picolines. Id.
n7 Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., supra note 2, 527 F. Supp. at 139.
Sea-Land subsequently informed Nepera, however,
that it would correct the overcharge n8 by resorting to
Section 18(b)(3) of the Act. n9 That section allows a
carrier to apply to the Federal Maritime Commission for
approval of a refund to a shipper of a portion of charges
collected, or a waiver of collection of charges billed,
"where it appears that there is an error in a tariff of a
clerical or administrative nature" and certain other statutory
conditions are met, including the filing of the application
for refund or waiver within 180 days from the date
of shipment. n10 Sea-Land promptly published a new
tariff item designating a weight-ton rate for picolines
which approximated, but was not identical to, the earlier
$6.85 per-hundredweight rate. n11 Later, exactly 180
days after Nepera's shipment, [*691] Sea-Land applied
to the Commission under Section 18(b)(3) for permission
to refund and waive the amount by which
Sea-Land's actual freight bills exceeded charges based on
the [**5] corrected tariff rate for picolines. n12
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
n8 Id.
Page 4
n9 46 U.S.C. § 817(b)(3) (1982), quoted in
full infra note 23.
n10 Id.
n11 Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., supra note 2, 527 F. Supp. at 139.
n12 Id. Nepera had paid Sea-Land at the old
$6.85 rate for shipment of the three containers to
Spain. What the application thus sought was essentially
a waiver of additional charges on that
shipment. Nepera had paid at the unspecified-liquids
rate for shipment of the two containers
to The Netherlands. See note 6 supra. For
that, the application was for a refund of the excess.
The Commission denied Sea-Land's application
simply because the corrected rate for picolines was not
the perfect counterpart of the old $6.85
per-hundredweight rate. n13 In accordance with an established
agency policy requiring absolute equivalence
of the two figures, the Commission ordered Sea-Land to
recoup from Nepera the full amount [**6] of freight
charges computed at the unspecified-liquids rate, a total
of $25,596.51 over the picolines rate in the pre-1978
tariff; n14 and, since none of the statutory 180-day filing
period remained, the Commission's disposition became
administratively final. Thereafter, Sea-Land refused to
request review of the Commission's decision by this
court, thus prompting Nepera to do so. n15 We reversed
the Commission's denial of Sea-Land's application,
holding that relief under Section 18(b)(3) was appropriate
despite the minor rate variation attributable to the
methodology of conversion. n16
n13 Id. In converting the $6.85
per-hundredweight figure to a weight-ton rate,
some "rounding off" was necessary. See Nepera
Chem., Inc. v. FMC, 213 U.S. App. D.C. 173, 175
& n.7, 662 F.2d 18, 20 & n.7 (1981). Sea-Land
arrived at $162.25 per weight-ton, but the administrative
law judge who initially reviewed
Sea-Land's application concluded that the correct
figure was $153.44 per weight-ton and that this
difference was a "fatal" defect. Sea-Land Serv.,
Inc., F.M.C. Special Docket No. 606 (Apr. 23,

[**7]
1979) (initial decision) at 9-10 [hereinafter cited
as ALJ Decision], Joint Appendix (J. App.)
44-45. On Nepera's administrative appeal urging
that the deviation was solely the consequence of
rounding off in the conversion process, the
Commission merely adopted the judge's decision.
Sea-Land Serv., Inc., F.M.C. Special Docket No.
606 (Aug. 8, 1979) (report and order), J. App. 55.
n14 Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., supra note 2, 527 F. Supp. at 139.
n15 See id.
n16 Nepera Chem., Inc. v. FMC, supra note
13, 213 U.S. App. D.C. at 177, 662 F.2d at 22.
In the meantime, Nepera had instituted the present
litigation in the District Court. Charging negligence by
Sea-Land, Nepera sought compensatory damages, measured
by the amount of freight overcharges and the expenses
incurred in prosecuting the proceeding in which
the Commission's adverse decision was overturned, and
punitive damages as well. n17 The District Court granted
summary judgment to Sea-Land, noting that Nepera had
prevailed in this court and thereby had established
Sea-Land's duty and authority to cancel the overcharges,
and on that basis it dismissed Nepera's claim to relief
therefrom as moot. n18 Holding further that Nepera's
sole remedy lay in the proceeding authorized by Section
18 (b)(3), n19 the court rejected Nepera's demands for
punitive damages, n20 for attorneys' fees and other expenses
it incurred in the forerunning [**8] litigation,
n21 and for attorneys' fees in the case at bar. n22 We turn
now to consider Nepera's contentions that the last four
rulings were in error.
n17 Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., supra note 2, 527 F. Supp. at 136. The
Commission and the United States were granted
leave to intervene and join in Sea-Land's motion
for summary judgment. Id. at 137.
n18 Id. at 137. Nepera disavows any intention
of appealing that determination. <strong>Brief</strong> for
Appellant at 5; Reply <strong>Brief</strong> for Appellant at 1.
n19 Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., supra note 2, 527 F. Supp. at 137. On ap-
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 5
peal, the Commission and the United States have
concentrated their arguments primarily on the issue
of the exclusivity of § 18 (b)(3).
n20 Id.
n21 Id. at 138-139.
n22 Id.
[*692] II. EXCLUSIVITY OF SECTION 18(b)(3)
The initial question presented by this appeal is [**9]
whether the rate-correction procedure furnished by Section
18(b)(3) of the Shipping Act n23 is exclusive, and
thus forbids a common-law action against a carrier for
negligence in applying for leave to refund and waive
shipping charges, where the carrier voluntarily represented
that it would seek a specified rate correction.
Persuasive authority leads us to conclude that it is not.
n23 [HN1] Section 18(b)(3) provides in its
entirety:
No common carrier by water
in foreign commerce or conference
of such carriers shall charge
or demand or collect or receive a
greater or less or different compensation
for the transportation of
property or for any service in
connection therewith than the rates
and charges which are specified in
its tariffs on file with the Commission
and duly published and in effect
at the time; nor shall any such
carrier rebate, refund, or remit in
any manner or by any device any
portion of the rates or charges so
specified, nor extend or deny to
any person any privilege or facility,
except in accordance with such
tariffs: Provided, however, That
the Federal Maritime Commission
may in its discretion and for good
cause shown permit a common
carrier by water in foreign commerce
or conference of such carriers
to refund a portion of freight
charges collected from a shipper
or waive the collection of a portion
of the charges from a shipper
where it appears that there is an

[**10]
error in a tariff of a clerical or administrative
nature or an error due
to inadvertence in failing to file a
new tariff and that such refund or
waiver will not result in discrimination
among shippers: [HN2]
Provided further, That the common
carrier by water in foreign
commerce or conference of such
carriers has, prior to applying for
authority to make refund, filed a
new tariff with the Federal Maritime
Commission which sets forth
the rate on which such refund or
waiver would be based: [HN3]
Provided further, That the carrier
or conference agrees that if permission
is granted by the Federal
Maritime Commission, an appropriate
notice will be published in
the tariff, or such other steps taken
as the Federal Maritime Commission
may require, which give notice
of the rate on which such refund
or waiver would be based,
and additional refunds or waivers
as appropriate shall be made with
respect to other shipments in the
manner prescribed by the Commission
in its order approving the
application: And provided further,
That application for refund or
waiver must be filed with the
Commission within one-hundred
and eighty days from the date of
shipment.
46 U.S.C. § 817 (b)(3) (1982).
The Supreme Court has on two occasions been confronted
by strikingly similar issues of exclusivity of federal
statutory provisions. In Hewitt-Robins, Inc. v.
Eastern Freight-Ways, Inc., n24 a shipper challenged a
motor carrier's practice of directing intrastate shipments
over interstate routes in an effort to obtain the higher
interstate rate, and sought to recover the resulting difference
in the carrier's charges. In holding that the common-law
action for refund of freight overcharges had
survived passage of the Motor Carrier Act, n25 the Court
discussed five considerations significant to the case at
bar. First, the shipper did not question the reasonableness
of the tariff rates, but rather the carrier's response to
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 6
its common-law duty to transport over the least expensive
available route. n26 Second, the Motor Carrier Act
provided no procedure by which routing practices, as
opposed to rates, could be contested prior to shipment.
n27 Third, allowance of an action for damages suffered
as a consequence of misrouting would not jeopardize the
stability of either tariffs or routes, and thus would not
hamper the efficient administration of the Act. n28
Fourth, continued recognition [**11] of such an action
would have a "healthy deterrent effect" upon motor
[*693] carriers. n29 And "finally, and not to be overlooked,"
said the Court, "the absence of any judicial
remedy places the shipper entirely at the mercy of the
carrier, contrary to the overriding purpose of the Act.
The allowance of such actions would, on the contrary,
give neither an unfair advantage." n30
n24 371 U.S. 84, 83 S. Ct. 157, 9 L. Ed. 2d
142 (1962).
n25 49 U.S.C.A. § § 301-327 (1963 & 1985
supp.) (repealed).
n26 Hewitt-Robins, Inc. v. Eastern
Freight-Ways, Inc., supra note 24, 371 U.S. at 86,
83 S. Ct. at 159, 9 L. Ed. 2d at 145.
n27 Id. at 87, 83 S. Ct. at 159, 9 L. Ed. 2d at
145.
n28 Id. at 88, 83 S. Ct. at 159, 9 L. Ed. 2d at
146. The Court distinguished T.I.M.E., Inc. v.
United States, 359 U.S. 464, 79 S. Ct. 904, 3 L.
Ed. 2d 952 (1959), where an assault upon the
reasonableness of carrier charges was held to be
foreclosed as inconsistent with the statutory
scheme of regulation because the Motor Carrier
Act was replete with built-in protections for that
very grievance. Id. at 479, 79 S. Ct. at 913, 3 L.
Ed. 2d at 962. The Hewitt-Robins claim of misrouting,
in contrast, did not suffer from that infirmity.
371 U.S. at 87, 83 S. Ct. at 159, 9 L. Ed.
2d at 146.
[**12]
n29 Hewitt-Robins, Inc. v. Eastern
Freight-Ways, Inc., supra note 24, 371 U.S. at 88,
83 S. Ct. at 159, 9 L. Ed. 2d at 146.
n30 Id.

The factors that led the Court to sustain the common-law
action in Hewitt-Robins are equally apposite
and decisive here. Nepera directs its attack, not at the
reasonableness of any rate, but at Sea-Land's alleged
subpar performance of its assumed duty to apply for a
correction utilizing a rate equivalent to the $6.85 per
hundred-weight rate that Sea-Land had previously represented
it would maintain. n31 The Shipping Act supplies
no procedure by which a shipper can challenge a carrier's
activities in this connection prior to shipment. Nepera's
negligence action poses no threat to the sanctity of tariffs
or the efficient administration of the Shipping Act; on the
contrary, by deterring carriers from carelessness in discharging
voluntarily assumed duties, n32 lawsuits of that
nature would assist in achieving important purposes of
Section 18(b)(3) -- "prevent[ion of] injustice in situations
where it would be inequitable to charge [**13] the filed
rate," n33 and avoidance of discriminatory treatment of
shippers. n34 Lastly, "and not to be overlooked," n35
Section 18(b)(3) authorizes the carrier alone to apply to
the Commission for authority to refund or waive transportation
charges, n36 and thus places the shipper "entirely
at the mercy of the carrier." n37 We believe the
overall remedial objectives of the Shipping Act easily
tolerate recognition of common-law tort liability for a
carrier's negligent acts or omissions in filing a Section
18(b)(3) application where the carrier has taken on responsibility
for seeking a refund or waiver based on a
specified rate.
n31 See <strong>Brief</strong> for Appellant at 12, 18.
n32 See Hewitt-Robins, Inc. v. Eastern
Freight-Ways, Inc., supra note 24, 371 U.S. at 88,
83 S. Ct. at 159, 9 L. Ed. 2d at 146.
n33 S. Rep. No. 1078, 90th Cong., 1st Sess.
5, reprinted in [1968] U.S. Code Cong. & Ad.
News 1911, 1914 (report of James L. Parris,
General Counsel, Department of Commerce); see
also Federal Maritime Commission, Legislation
and Activities Report: Hearings Before the Subcomm.
on Merchant Marine of the House Comm.
on Merchant Marine and Fisheries, 90th Cong.,
1st Sess. 87 (1967) [hereinafter cited as House
Hearings] (statement of Rear Admiral John Harllee,
Chairman, Federal Maritime Commission)
(shippers who rely on carriers' statements should
not suffer for carriers' neglect).
[**14]
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
[**15]
Page 7
n34 House Comm. on Merchant Marine and
Fisheries, Report on Steamship Agreements and
Affiliations in American Foreign and Domestic
Trade, H.R. Doc. No. 805, 63d Cong., 2d Sess.
417-418 (1914); House Hearings, supra note 33,
at 11 (statement of Rear Admiral John Harllee,
Chairman, Federal Maritime Commission) ("our
job is to prevent unfairness and unjust discrimination");
see also Consolo v. FMC, 383 U.S. 607,
623, 86 S. Ct. 1018, 1028, 16 L. Ed. 2d 131, 142
(1966) (finding of discrimination central to holding
of violation of Shipping Act); 46 U.S.C. § §
812, 815, 816 (1982) (prohibiting discriminatory
rebates, acts and rates).
n35 Hewitt-Robins, Inc. v. Eastern
Freight-Ways, Inc., supra note 24, 371 U.S. at 88,
83 S. Ct. at 159, 9 L. Ed. 2d at 146, quoted in text
supra at note 30.
n36 See 46 U.S.C. § 817(b)(3)(1982),
quoted supra note 23 (carrier may apply for authority
to make refund).
n37 Hewitt-Robins, Inc. v. Eastern
Freight-Ways, Inc., supra note 24, 371 U.S. at 88,
83 S. Ct. at 159, 9 L. Ed. 2d at 146, quoted in text
supra at note 30.
Moreover, in Nader v. Allegheny Airlines, Inc., n38
the Supreme Court again found nonexclusivity when it
held that the Federal Aviation Act, despite its addressal
of "deceptive practices," did not foreclose common-law
fraudulent-misrepresentation actions against carriers
subject to its provisions. n39 The Court declared that, as
a general rule, "a common-law right, even absent
[*694] a saving clause, n40 is not to be abrogated
'unless it be found that the preexisting right is so repugnant
to the statute that the survival of such right would in
effect deprive the subsequent statute of its efficacy; in
other words, render its provisions nugatory.'" n41 We are
satisfied that the rate and antidiscrimination policies of
the Shipping Act would in no way be impaired by allowance
of a common-law negligence action under the
circumstances presented in this case.
n38 426 U.S. 290, 96 S. Ct. 1978, 48 L. Ed.
2d 643 (1976).
n39 Id. at 292, 96 S. Ct. at 1981, 48 L. Ed.
2d at 648.

n40 Unlike the Federal Aviation Act, the
Shipping Act contains no saving clause. Compare
49 U.S.C. App. § 1506 (1982) with 46
U.S.C. § § 801 et seq. (1982).
[**16]
n41 426 U.S. at 298, 96 S. Ct. at 1984, 48 L.
Ed. 2d at 652 (quoting Texas & P. Ry. v. Abilene
Cotton Oil Co., 204 U.S. 426, 437, 27 S. Ct. 350,
354, 51 L. Ed. 553, 557 (1907)). In the latter case,
the Court refused to recognize as viable a private
damages action seeking reparations on account of
alleged unreasonableness of an established rate
subject to the Interstate Commerce Act, 49 U.S.C.
App. § 27 (1982) (repealed), because such an
action would frustrate a fundamental goal of that
legislation -- promotion of uniformity, and thus
elimination of discrimination in rates. Id. at 446,
27 S. Ct. at 358, 51 L. Ed. at 561.
Important to our holding today is an accurate understanding
of what Nepera assails in this case. The District
Court apparently believed that Nepera's target was
the higher tariff rate for its shipments of picolines. n42
As we read the record, however, Nepera's aim is wholly
different. Nowhere does Nepera assert that either the rate
Sea-Land assured or the rate it charged is unreasonable --
a grievance [**17] that could be remedied only under
the terms of the Shipping Act. Nepera's sole claim is that
Sea-Land's negligence in handling the application for
refund and waiver led to automatic statutory imposition
of a rate that was much higher than it should have been.
That contention calls into question the course of conduct
by which the higher rate became binding, not the validity
of any rate designated for any commodity. No injury
suffered as a result of the negligence averred can be redressed
by resort to the statutory procedure for protesting
rates as unjust now that the time limit for filing such a
protest has expired. n43 We hold that Section 18(b)(3)
does not bar Nepera's negligence suit.
n42 See Nepera Chem., Inc. v. Sea-Land
Serv., Inc., supra note 2, 527 F. Supp. at 137.
n43 See note 66 infra.
III. PRIOR-LITIGATION EXPENSES
The District Court held that Nepera could not recover
excessive overcharges in its lawsuit against Sea-Land
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 8
because the latter was required [**18] to correct them
in a Section 18(b)(3) proceeding. n44 Since Nepera does
not seek review of that ruling, n45 we need not consider
whether the Shipping Act precludes relief of that sort in a
common-law action. Nepera continues, however, to
press the remainder of its demand for compensatory
damages -- for attorneys' fees and other expenses incurred
in obtaining reversal of the Commission's order
denying the application for refund and waiver. n46 The
District Court treated this effort as a run-of-the-mill request
for reimbursement of those items and deemed them
nonrecoverable as a matter of law. n47 We conclude that
the court erred in doing so.
n44 Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., supra note 2, 527 F. Supp. at 137.
n45 See <strong>Brief</strong> for Appellant at 5; Reply <strong>Brief</strong>
for Appellant at 1.
n46 See note 21 supra and accompanying
text.
n47 Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., supra note 2, 527 F. Supp. at 138.
Consideration [**19] of Nepera's damages claim
requires initially an identification of the body of law
controlling. Although the parties have argued the issue
pro and con as one of general federal law, n48 that
treatment is the product of faulty analysis. Nepera invoked
the jurisdiction of the District Court solely on the
ground of diverse citizenship, n49 and no other basis
[*695] of federal-court jurisdiction is apparent. That
means that Nepera's claim is to be measured by local
rather than federal law. As the Supreme Court has said,
in an ordinary diversity case where the
state law does not run counter to a valid
federal statute or rule of court, and usually
it will not, state law denying the right to
attorney's fees or giving a right thereto,
which reflects a substantial policy of the
state, should be followed. n50
Moreover, as the Court has made equally plain, local law
governs irrespective of whether that law is legislatively
or judicially created. n51

n48 See <strong>Brief</strong> for Appellant at 12-14; <strong>Brief</strong>
for Appellee Sea-Land Service, Inc., at 17; Reply
<strong>Brief</strong> for Appellant at 6.
n49 Complaint, Nepera Chem., Inc. v.
Sea-Land Serv., Inc., Civ. No. 79-3022 (D.D.C.)
(filed Nov. 6, 1979) para. 2. Nepera is incorporated
under the laws of New York and maintains
its principal place of business in that state. Id.
Sea-Land is incorporated under the laws of Delaware
and maintains its principal place of business
in New Jersey. Id.
[**20]
n50 Alyeska Pipeline Serv. Co. v. Wilderness
Soc'y, 421 U.S. 240, 259 n.31, 95 S. Ct. 1612,
1622 n.31, 44 L. Ed. 2d 141, 154 n.31 (1975)
(quoting 6 J. Moore, W. Taggart & J. Wicker,
Moore's Federal Practice para. 54.77[2] at
1712-1713 (2d ed. 1974)); see also Sioux County
v. National Sur. Co., 276 U.S. 238, 243, 48 S. Ct.
239, 241, 72 L. Ed. 547, 551 (1928).
n51 Alyeska Pipeline Serv. Co. v. Wilderness
Soc'y, supra note 50, 421 U.S. at 259 n.31, 95 S.
Ct. at 1622 n.31, 44 L. Ed. 2d at 154 n.31.
Our first step, then, is to ascertain the jurisdiction
whose law is controlling, and for that purpose we must
apply the choice-of-law rules of the District of Columbia.
n52 Those rules call for an evaluation and a balancing of
the interests of all jurisdictions having some stake in the
litigation, and for selection of the law of the jurisdiction
bearing the most significant relationship to the tortious
occurrence and the litigants. n53 Applying the criteria
approved by the District's highest court, n54 District law
seems the [**21] choice properly to be made. We
recognize some degree of involvement of the interests of
the states in which the present litigants respectively are
incorporated, maintain their principal places of business,
and normally conduct their operations. But the dominant
factor in the case before us is that the acts and omissions
of Sea-Land allegedly constituting negligence pertained
to a tariff and an application for relief from freight
overcharges, both of which were filed in the District of
Columbia. Given the facts of this case, the District's
interest as the place where the alleged negligence occurred
n55 easily surpasses any interest of the states to
which the one party or the other bore some other kind of
totally unconnected relationship. We thus conclude that
the District's substantive law must govern disposition of
the tort issues in this case.
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 9
n52 Federal courts in the District of Columbia
sitting in diversity cases apply the substantive
law of the forum on outcome-determinative issues.
Lee v. Flintkote Co., 193 U.S. App. D.C.
121, 124 n.14, 593 F.2d 1275, 1278 n.14 (1979)
(adopting analogously the principles of Erie R.R.
v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed.
1188 (1938), for federal courts in the District of
Columbia). Since for Erie purposes the forum's
choice-of-law rules are substantive, Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.
Ct. 1020, 1021, 85 L. Ed. 1477, 1480 (1941);
Steorts v. American Airlines, Inc., 207 U.S. App.
D.C. 369, 372, 647 F.2d 194, 197 (1981), those
of the District of Columbia are determinative.
Stancill v. Potomac Elec. Power Co., 240 U.S.
App. D.C. 237, 240 n.16, 744 F.2d 861, 864 n.16
(1984); Gray v. American Express Co., 240 U.S.
App. D.C. 10, 16-17, 743 F.2d 10, 16-17 (1984);
Byers v. Burleson, 230 U.S. App. D.C. 62, 65 n.4,
713 F.2d 856, 859 n.4 (1983); Anchorage
Hynning & Co. v. Moringiello, 225 U.S. App.
D.C. 114, 118-119, 697 F.2d 356, 360-361
(1983); Steorts v. American Airlines, Inc., supra,
207 U.S. App. D.C. at 372, 647 F.2d at 197; Lee
v. Flintkote Co., supra, 193 U.S. App. D.C. at
124-125 n.14, 593 F.2d at 1278-1279 n.14.
[**22]
n53 See Estrada v. Potomac Elec. Power
Co., 488 A.2d 1359, 1361 & n.2 (D.C. 1985);
Carr v. Bio-Medical Applications, 366 A.2d
1089, 1093 n.3 (D.C. 1976); Myers v. Gaither,
232 A.2d 577, 583-584 (D.C. 1967), aff'd in part
and remanded on other grounds, 131 U.S. App.
D.C. 216, 404 F.2d 216 (1968).
n54 See cases cited supra note 53.
n55 See Webster v. Sun Co., 252 U.S. App.
D.C. 335, 790 F.2d 157, slip op. at 6 (1986) (applying
District of Columbia choice-of-law rules,
District law governs libel action where, inter alia,
allegedly libelous statement was "transmitted (or
'published') only in the District" (emphasis in
original)).

[HN4] District law incorporates the "American
Rule," under which a party may not be awarded attorneys'
fees "unless a statute or enforceable contract provides
for [*696] an award of such fees." n56 Nepera
has not steered us toward any statutory or contractual
provision assisting its effort. Instead, Nepera relies upon
n57 [HN5] an exception to the American [**23]
Rule, recognized by many jurisdictions, permitting a
plaintiff to recover from the defendant reasonable attorneys'
fees incurred in prior litigation against a third party
where they were a natural consequence of the defendant's
wrongful act. n58
n56 Cahn v. Antioch Univ., 482 A.2d 120,
132-133 (D.C. 1984) (quoting Washburn v.
Washburn, 475 A.2d 410, 413 (D.C. 1984)). The
reasons underlying the American Rule lead to the
conclusion normally that litigation expenses other
than attorneys' fees are similarly nonrecoverable.
Since the two seem to go hand-in-hand, what we
say in this opinion about attorneys' fees applies
generally to other suit expenses as well.
n57 <strong>Brief</strong> for Appellant at 11.
n58 See Ranger Constr. Co. v. Prince William
County School Bd., 605 F.2d 1298, 1301
(4th Cir. 1979) (applying Virginia law); Southern
Nat'l. Bank v. Crateo, Inc., 458 F.2d 688, 696
(5th Cir. 1972) (applying Texas law); Phil Crowley
Steel Corp. v. Sharon Steel Corp., 702 F.2d
719, 721 (8th Cir. 1983) (applying Missouri law);
Wilshire Oil Co. v. Riffe, 409 F.2d 1277, 1285
(10th Cir. 1969) (applying Kansas law); Safway
Rental & Sales Co. v. Albina Engine & Mac.
Works, Inc., 343 F.2d 129, 133 (10th Cir. 1965)
(applying Oklahoma law). See generally C.
McCormick Handbook on the Law of Damages §
§ 66-68, at 246-253 (1983). The prior litigation
against the third party distinguishes these cases
from two other types in which the American Rule
precludes recovery: (1) where the party victorious
in a lawsuit attempts to recoup attorneys' fees as
an element of damages in the same suit in which
he triumphs, see, e.g., Savage v. Pinderhughes,
127 U.S. App. D.C. 222, 223, 382 F.2d 171, 172
(1967); Wolf v. Cohen, 126 U.S. App. D.C. 423,
426, 379 F.2d 477, 480 (1967); Wooster Republican
Printing Co. v. Channel 17, Inc., 533 F.
Supp. 601, 623 (W.D. Mo. 1981), aff'd, 682 F.2d
165 (8th Cir. 1982); Artvale, Inc. v. Rugby Fabrics,
Corp., 232 F. Supp. 814, 825-828 (S.D.N.Y.
1964) (applying New York law), aff'd, 363 F.2d
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
[**24]
Page 10
1002, 1008 (2d Cir. 1966); Continental Ins. Co.
v. Lynham, 293 A.2d 481, 521 (D.C. 1972) (applying
District of Columbia law), and (2) where
the prevailing party files a new suit against the
losing party requesting reimbursement of the fees
and costs incurred in the earlier suit, see, e.g.,
Summit Valley Indus. v. Local 112, United Bhd.
of Carpenters, 456 U.S. 717, 726, 102 S. Ct.
2112, 2117, 72 L. Ed. 2d 511, 519 (1982);
Lynchburg Traffic Bureau v. Smith's Transfer
Corp., 339 F.2d 478, 481 (4th Cir. 1964); Landstrom
v. Thorpe, 189 F.2d 46, 54 (8th Cir.), cert.
denied, 342 U.S. 819, 72 S. Ct. 37, 96 L. Ed. 620,
91 U.S.P.Q. (BNA) 383 (1951). Unlike the effort
in cases in these two groups, Nepera does not
seek recoupment from the Commission, Nepera's
opponent in the earlier litigation. Instead, Nepera
endeavors to recover its expenses in the prior
litigation from Sea-Land, which, though not a
party thereto, is alleged to have necessitated,
through its own negligence, Nepera's outlay
therefor.
This exception has been applied both where the defendant
breached a contract n59 and where, as alleged
here, the defendant committed a tort, n60 and thereby
compelled the plaintiff to litigate against a third party.
Underlying the exception is recognition that the plaintiff's
expenditures in the earlier suit are logically indistinguishable
from other monetary losses caused by tortious
conduct for which compensatory [*697] damages
will lie. n61 The effect of the exception is to put the
plaintiff, who found it necessary to litigate with a third
party as a result of the defendant's wrong, in the same
position he would have occupied had he not been forced
to do so. The exception permits the plaintiff to recover
all of his losses flowing from the defendant's malfeasance
-- except, generally speaking, attorneys' fees accruing
in the suit in which the recovery is sought n62 --
and treats as a mere fortuity the fact that the plaintiff's
damages arose from the prior litigation with the third
party.
n59 Ranger Constr. Co. v. Prince William
County School Bd., supra note 58, 605 F.2d at
1301; Southern Nat'l. Bank v. Crateo Inc., supra
note 58, 458 F.2d at 696; Robert A. Reichard,
Inc. v. Ezl. Dunwoody Co., 45 F. Supp. 153, 157
(E.D. Pa. 1942) (discussing New York law). See
generally T. Sedgwick, A Treatise on the Measure
of Damages § 240 at 480-484 (1920).
[**25]

n60 See, e.g., Phil Crowley Steel Corp. v.
Sharon Steel Corp., supra note 58, 702 F.2d at
721; Wilshire Oil Co. v. Riffe, supra note 58, 409
F.2d at 1285; Waldinger Corp. v. Ashbrook-Simon-Hartley,
Inc., 564 F. Supp. 970,
981-982 (C.D. Ill. 1983) (applying Illinois law),
aff'd in part and remanded on other grounds sub
nom. Waldinger Corp. v. CRS Group Eng'rs,
775 F.2d 781 (7th Cir. 1985); Campus Sweater &
Sportswear v. M. B. Kahn Constr. Co., 515 F.
Supp. 64, 110-113 (D.S.C. 1979) (applying South
Carolina law), aff'd without op., 644 F.2d 877
(4th Cir. 1981); Fidelity Cas. Co. v. J. D. Pittman
Tractor Co., 244 Ala. 354, 13 So. 2d 669 (1943);
Murphy v. O'Donnell, 63 A.2d 340, 342 (D.C.
1948); In re State Farm Mut. Auto. Ins. Co., 50
Mich. App. 71, 212 N.W.2d 821 (1973); Security
State Bank v. W. R. Johnston & Co., 204 Okla.
160, 228 P.2d 169 (1951); Addy v. Bolton, 257
S.C. 28, 183 S.E.2d 708 (1971); DuPratt v. Black
Hills Land & Abstract Co., 81 S.D. 637, 140
N.W.2d 386 (1966); Pacific Coast Title Ins. Co.
v. Hartford Accident & Indem. Co., 7 Utah 2d
377, 325 P.2d 906 (1958); Thomason v. Mosrie,
134 W.Va. 634, 60 S.E.2d 699 (1950); see also
Restatement (Second) of Torts § 914(2) (1977)
("one who through the tort of another is required
to [bring] an action against a third person is entitled
to recover reasonable compensation for . . .
attorneys' fees . . . incurred in the earlier action").
See generally Comment, Recovery of Attorney
Fees from Third Party Tortfeasors, 66 Calif. L.
Rev. 94 (1978).
[**26]
n61 C. McCormick, supra note 58, § 66 at
246; T. Sedgwick, supra note 59, § 236 at 473.
n62 The American Rule generally bars an
award of attorneys' fees against the losing party
in the same or a subsequent action. See note 56
supra and accompanying text.
[HN6]
District law recognizes a cause of action for
"wrongful involvement in litigation," which essentially is
an analogue of the third-party exception to the American
Rule. n63 The District allows a plaintiff in a tort action
to recover, as damages, reasonable attorneys' fees incurred
in earlier litigation with a third person "if the natural
and proximate consequences of the defendant's tor-
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 11
tious act were to involve the plaintiff in [that] litigation. .
. ." n64 All that is required is incurrence of the fees in
prior litigation with a third party precipitated by the tortious
conduct of the present defendant. n65
n63 See Answering Serv., Inc. v. Egan, 251
U.S. App. D.C. 396, 785 F.2d 1084, 1086 (1986);
Auxier v. Kraisel, 466 A.2d 416, 420 (D.C.
1983); Safeway Stores, Inc. v. Chamberlain Protective
Servs., Inc., 451 A.2d 66, 68-69 (D.C.
1982); Biddle v. Chatel, 421 A.2d 3, 7 (D.C.
1980).
[**27]
n64 Biddle v. Chatel, supra note 63, 421
A.2d at 7 (quoting Brem v. United States Fidelity
& Guar. Co., 206 A.2d 404, 407 (D.C. 1965)
(footnote omitted)).
n65 The essential elements of the right to
recovery are "(1) the plaintiff must have incurred
the fees in the course of prior litigation, (2) ordinarily
that litigation must have occurred between
the plaintiff and the third party who is not the defendant
in the present action, and (3) the plaintiff
must have become involved in the underlying litigation
as a consequence of the defendant's tortious
act." Auxier v. Kraisel, supra note 63, 466
A.2d at 420.
These principles of District of Columbia law enable
Nepera to pursue its claim against Sea-Land for the attorneys'
fees incurred by Nepera in the litigation with the
Commission respecting the freight overcharges. Nepera
asserts that Sea-Land's conduct -- its refusal to challenge
the Commission's adverse decision -- effectively forced
Nepera to launch and maintain an ultimately successful
proceeding in this [**28] court for review and reversal
of that decision. Had Sea-Land been willing to assume
that burden, Nepera would not have had to pay the fees
amassed in that proceeding. n66 An award to Nepera in
the amount of its financial outlay would merely elevate it
to the position -- except for expenses generated in the
instant case -- that it would have been in had Nepera not
been required to litigate against the Commission.
Summary judgment on this claim was therefore inappropriate,
and Nepera must now be afforded an opportunity
to establish its right to recovery. n67
n66 Indeed, had Sea-Land simply filed the
application for refund and waiver somewhat

sooner, the proceeding for review of the Commission's
decision would probably have been
avoided. As the administrative law judge noted,
"had Sea-Land not waited until the very last day
on which it was permitted by law to file (mail)
the application, it might have been possible to
call Sea-Land's attention to the fatal jurisdictional
defect so that Sea-Land could file a corrected
conforming tariff and a new application before
the statutory 180-day time period expired." ALJ
Decision, supra note 13, at 11 n.8, J. App. 46 n.8.
[**29]
n67 The federal appellees contend that this
court's reversal of the Commission's order denying
Sea-Land's rate-correction application vindicated
Sea-Land's behavior as a matter of law.
<strong>Brief</strong> for Appellees Federal Maritime Commission
and United States at 16. Accordingly, so
the theory goes, the allegation of negligence by
Sea-Land is now moot. Id. We find the argument
unpersuasive. Our reversal of consistent
but erroneous Commission precedent has no
bearing on whether Sea-Land should have prosecuted
a petition for review of the Commission's
decision denying leave to refund and waive. Nepera
must be given a chance to establish a breach
of duty on this score and, if successful, the damages
consequent thereupon.
[*698] IV. PUNITIVE DAMAGES
The District Court granted summary judgment for
Sea-Land on Nepera's demand for punitive damages not
only in the belief that Section 18(b)(3) of the Shipping
Act affords the exclusive remedy for Nepera's grievances,
but also in the view that Nepera had not put forth
facts sufficient to legally support an award of such damages.
n68 We have already [**30] addressed the court's
Section 18(b)(3) theory and found it erroneous. n69 We
affirm dismissal of the claim for punitive damages,
however, on the ground that, as a matter of law, Nepera
failed to establish an adequate factual foundation for
such an award. n70
n68 Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., supra note 2, 527 F. Supp. at 137.
n69 See Part II supra.
n70 Because we affirm the District Court's
punitive-damages ruling on that basis, we need
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 12
not consider Sea-Land's contention that recovery
of such damages would contravene a major objective
of the Shipping Act: prevention of discrimination
among shippers. See <strong>Brief</strong> for Appellee
Sea-Land Serv., Inc., at 20-21 (citing
Keogh v. Chicago & N. Ry., 260 U.S. 156, 43 S.
Ct. 47, 67 L. Ed. 183 (1922); Farr Co. v. Seatrain
Lines, 20 F.M.C. 411, 418 (1978)). But see Carnation
Co. v. Pacific Westbound Conference, 383
U.S. 213, 219 n.3, 86 S. Ct. 781, 785 n.3, 15 L.
Ed. 2d 709, 714 n.3 (1966) (rejecting argument
that treble-damage awards to shippers bringing
antitrust actions would frustrate Shipping Act's
"policy of equality of treatment for shippers").
[**31] [HN7]
Punitive damages may be assessed to penalize a defendant
for outrageous conduct, and to deter him and
others from similar activity in the future. n71 Such damages
-- also aptly termed "exemplary" damages -- are
appropriate when the defendant's misbehavior demonstrates
a particularly reckless disregard for the rights of
another. n72 Under the law of the District of Columbia,
which we are duty bound to accept, n73 "even gross negligence
is insufficient;" n74 punitive damages are
awardable only where a defendant's conduct is "'willful
and outrageous,' constitutes 'gross fraud,' or [is] 'aggravated
by evil motive, actual malice, deliberate violence
or oppression . . .'" n75
n71 E.g., Rieser v. District of Columbia, 183
U.S. App. D.C. 375, 394 n.100, 563 F.2d 462,
481 n.100 (1977) (applying District of Columbia
law), modified on other grounds, 188 U.S. App.
D.C. 384, 385, 580 F.2d 647, 648 (en banc
1978); Knippen v. Ford Motor Co., 178 U.S. App.
D.C. 227, 236, 546 F.2d 993, 1002 (1976)
(same); Harris v. Wagshal, 343 A.2d 283, 289
(D.C. 1975); Franklin Inv. Corp. v. Homburg,
252 A.2d 95, 98 (D.C. 1969).
[**32]
n72 See generally W. Keeton, D. Dobbs, R.
Keeton & D. Owens, Prosser & Keeton on Torts
§ 2 at 9-10 (5th ed. 1984).
n73 See discussion supra text at notes 53-55.
n74 Rieser v. District of Columbia, supra
note 71, 183 U.S. App. D.C. at 394 n.100, 563

F.2d at 481 n.100 (applying District of Columbia
law).
n75 Mariner Water Renaturalization, Inc. v.
Aqua-Purification Sys., Inc., 214 U.S. App. D.C.
248, 253, 665 F.2d 1066, 1071 (1981) (applying
District of Columbia law) (quoting Price v. Griffin,
359 A.2d 582, 589 (D.C. 1976)).
In taking stock of the District Court's grant of summary
judgment, we must determine whether Nepera
raised a genuine issue as to any material fact n76 and
whether [*699] the substantive law was correctly applied.
n77 In determining whether there was such an issue,
we must resolve all inferences following reasonably
from the evidence in favor of Nepera, n78 and we may
not affirm unless the propriety of the summary disposition
is clear. n79 Because an award of summary judgment
reflects [**33] "a determination of law rather than
fact," we do not defer to the District Court's conclusions
but consider the matter de novo. n80
n76 Habib v. Raytheon Co., 199 U.S. App.
D.C. 11, 15, 616 F.2d 1204, 1208 (1980). We
recognize that "where the evidentiary matter in
support of the motion does not establish the absence
of a genuine issue [of material fact], summary
judgment must be denied" even though the
nonmoving party's evidentiary presentation has
not itself raised a factual issue. Fed. R. Civ. P.
56(e) advisory committee note on 1963 amendment,
reprinted in 6 J. Moore, W. Taggart & J.
Wicker, Moore's Federal Practice para. 56.01[14]
at 56-22 (1985). See generally Adickes v. S.H.
Kress & Co., 398 U.S. 144, 160, 90 S. Ct. 1598,
1609, 26 L. Ed. 2d 142, 155-156 (1970); Catrett
v. Johns-Manville Sales Corp., 244 U.S. App.
D.C. 160, 163, 756 F.2d 181, 184, cert. granted
sub nom. Celotex Corp. v. Catrett, 474 U.S. 944,
106 S. Ct. 342, 88 L. Ed. 2d 285 (1985); Weisberg
v. United States Dept. of Justice, 200 U.S.
App. D.C. 312, 315, 627 F.2d 365, 368 (1980)
("settled in federal procedural law that 'the party
seeking summary judgment has the burden of
showing there is no genuine issue of material fact
. . . even if the opponent presents no conflicting
matter'" (citation omitted)). We need not consider
this question, however, as Nepera has not
contended that Sea-Land failed to submit a
properly supported motion. See <strong>Brief</strong> for Appellant
at 21-24; Memorandum of Points and
Authorities in Support of Plaintiff's Opposition to
Defendant's Motion for Summary Judgment and
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 13
Plaintiff's Cross-Motion for Partial Summary
Judgment, Nepera Chem., Inc. v. Sea-Land Serv.,
Inc., Civ. No. 79-3022 (D.D.C.) (filed April 28,
1980) at 12-14 [hereinafter cited as Plaintiff's
Opposition].
[**34]
n77 Fed. R. Civ. P. 56(c); Bloomgarden v.
Coyer, 156 U.S. App. D.C. 109, 114, 479 F.2d
201, 206 (1973).
n78 Edler v. United States, 245 U.S. App.
D.C. 404, 406, 761 F.2d 807, 809 (1985). See
generally Pharo v. Smith, 621 F.2d 656, 664 (5th
Cir.) ("the inferences to be drawn, however, are
limited by a standard of reasonableness"), modified
on other grounds, 625 F.2d 1226 (5th Cir. en
banc 1980); State Bank of St. Charles v. Camic,
712 F.2d 1140, 1144 (7th Cir.), cert. denied, 464
U.S. 995, 104 S. Ct. 491, 78 L. Ed. 2d 686
(1983); Barnes v. Arden Mayfair, Inc., 759 F.2d
676, 680 (9th Cir. 1985) ("[a] party opposing
summary judgment is entitled to the benefit of
only reasonable inferences that may be drawn
from the evidence put forth" (emphasis in original)).
n79 Habib v. Raytheon Co., supra note 76,
199 U.S. App. D.C. at 15, 616 F.2d at 1208;
United States v. General Motors Corp., 171 U.S.
App. D.C. 27, 49, 518 F.2d 420, 442 (1975);
Washington v. Cameron, 133 U.S. App. D.C. 391,
395-396, 411 F.2d 705, 709-710 (1969). Any
doubt must be resolved against summary judgment.
Dewey v. Clark, 86 U.S. App. D.C. 137,
143, 180 F.2d 766, 772 (1950).
[**35]
n80 Liberty Lobby, Inc. v. Anderson, 241
U.S. App. D.C. 246, 254-255, 746 F.2d 1563,
1571-1572 (1984), cert. granted sub nom. Anderson
v. Liberty Lobby, Inc., 471 U.S. 1134, 105
S. Ct. 2672, 86 L. Ed. 2d 691 (1985); see also
Luckett v. Bethlehem Steel Corp., 618 F.2d 1373,
1377 (10th Cir. 1980).
On this appeal, Nepera insists that Sea-Land promised
to "protect" the pre-1978 rate for picolines; that it
knowingly submitted a deficient application for leave to
waive the overcharges; that, by deliberately filing the
application on the last day possible, it foreclosed any

chance of correcting it; that it disavowed any responsibility
for appealing the Commission's adverse decision;
and that this chain of events demonstrated a reckless
disregard for the effects of its actions on Nepera. n81 In
opposing Sea-Land's motion in the District Court, Nepera
relied primarily on an affidavit submitted by Edith
Sorderberg, its Export Traffic Coordinator, n82 to support
these characterizations of Sea-Land's behavior.
Sorderberg averred that prior to any [**36] Commission
action on the Section 18(b)(3) application, William
Eisenlohr, Sea-Land's Manager for Specific Commodities,
told her that Sea-Land was aware that the $162.25
per weight-ton rate that Sea-Land had utilized in connection
with the application did not correspond precisely to
the earlier $6.85 per hundredweight rate. n83 As Sorderberg
recalled the conversation, Eisenlohr "said that the
difference was 'negligible -- just a few cents per 100 lbs.'
and that the difference was probably due to the fact that
the rate was now on a weight-ton basis rather than a 100
lbs. basis." n84 The affidavit also reported that after the
Commission's administrative law judge had denied
Sea-Land's rate-correction application, n85 Sea-Land
representatives conceded that they had "rounded up" n86
in calculating the new rate, and thus had "made mistakes
in [the] handling of this matter before the FMC . . ." n87
On the basis of these purported admissions, and the fact
that Sea-Land was a party to an earlier Commission proceeding
assertedly prohibiting any deviation from a
promised rate in a [*700] Section 18(b)(3) application,
Munoz y Cabrero v. Sea-Land Service, Inc., n88 Nepera
contends that [**37] there was a genuine issue of fact
precluding summary judgment: whether Sea-Land had
utilized the disparity in rates in a deliberate attempt to
secure an adverse Commission decision enabling it to
escape the overcharge relief promised Nepera. n89
n81 <strong>Brief</strong> for Appellant at 22-23.
n82 Affidavit of Edith Sorderberg, Nepera
Chem., Inc. v. Sea-Land Serv., Inc., Civ. No.
79-3022 (D.D.C.) (filed Apr. 28, 1980).
n83 Id. at 3.
n84 Id.
n85 See note 13 supra.
n86 Affidavit of Edith Sorderberg, supra
note 82, at 4.
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
n87 Id.
n88 20 F.M.C. 152 (1977).
n89 <strong>Brief</strong> for Appellant at 22.
Page 14
We reject this tortured attempt to create issues of
fact where none exist. It would not be reasonable n90 to
infer that Sea-Land purposely filed a faulty application
from the bare fact that Sea-Land officials acknowledged
a "negligible" difference resulting from "rounding up."
n91 Any such inference would be especially anomalous
given the fact that this court [**38] itself concluded,
after reviewing Sea-Land's computations, that the very
difference Nepera complains of did "not reflect a failure
to file" the rate that Sea-Land and Nepera had agreed
upon. n92 We think it would be equally unreasonable to
infer an evil motive from Sea-Land's involvement in
Munoz y Cabrero. n93 Because this court has previously
characterized that proceeding as both "legally distinct"
n94 and "factually different" n95 from the one launched
by the application submitted on behalf of Nepera, we do
not see how it aids Nepera's cause. In the absence of
any genuine issue of material fact as to whether the rate
incorporated into the Section 18(b)(3) application was
the product of malicious or atrocious conduct, any claim
for punitive damages predicated upon Sea-Land's
last-day filing of the application n96 or its refusal to seek
reversal of the adverse Commission decision n97 must
be [*701] deemed insufficient as a matter of law. n98
Accordingly, we sustain the District Court's determination
that summary judgment for Sea-Land on Nepera's
punitive-damages claim was warranted.
n90 See note 78 supra and accompanying
text.
[**39]
n91 Nor would it be reasonable to infer a
sinister intent from the statement that "mistakes"
had been made. See text supra at note 87. A
mere mistake in calculation falls far short of the
sort of outrageous behavior required for liability
for punitive damages. See text supra at note 75.
n92 Nepera Chem., Inc. v. FMC, supra note
13, 213 U.S. App. D.C. at 175 n.7, 662 F.2d at 20
n.7.
n93 Supra note 88.

n94 Nepera Chem., Inc. v. FMC, supra note
13, 213 U.S. App. D.C. at 177-178 n.12, 662 F.2d
at 22-23 n.12.
n95 Id. We distinguished that proceeding in
the following manner:
The corrected tariff in the Munoz
case contained a rate "which was
never agreed upon or intended to
be filed." Moreover, because the
new rate was substantially lower
than that intended to be filed, there
was a clear danger of rebate to the
shipper. In addition, no complex
rate conversion of any kind was
involved. The case was a clear
example of a carrier filing a corrective
tariff containing a rate
which had not been agreed upon,
had not been intended, and could
not arguably be deemed to "reflect"
the promised rate. In our
case, on the other hand, the corrected
rate was that agreed upon
and intended, the slight overcharge
eliminates the possibility of rebate,
and the justifiable reasons for the
minor charge variation make it
certain that the new rate reflects
the promised rate.
Nepera Chem., Inc. v. FMC, supra note 13, 213
U.S. App. D.C. at 177-178 n.12, 662 F.2d at
22-23 n.12 (citation omitted).
[**40]
n96 Nepera relies in this regard on the statement
of the Commission's administrative law
judge that the difficulty posed by the rate
Sea-Land utilized could have been obviated had
Sea-Land filed the application early enough to
allow submission of another application after the
adverse administrative decision. <strong>Brief</strong> for Appellant
at 22 n.9; see also note 66 supra.
Sea-Land's action in utilizing the full statutory
period for the filing, if culpable at all, evinces no
more than a lack of caution, and certainly is in-
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 15
capable of generating an issue of fact as to
whether its conduct could be characterized as
outrageous.
n97 Nepera does not contend that Sea-Land
ever represented that its efforts to revise the picolines
rate would extend beyond the Commission.
See Affidavit of Edith Soderberg, supra note 82,
at 3 (Sea-Land represented it "would file an Application
with the Federal Maritime Commission")
& 4 ("Sea-Land would file Exceptions to
the Administrative Law Judge's decision"). Nor
does Nepera argue that Sea-Land attempted to
deprive Nepera of the opportunity to seek review
in this court. Indeed, Nepera concedes that a
Sea-Land official both telephoned and wrote to
Nepera after the Commission issued its decision
"to say that if Nepera wanted to pursue the matter,
it had approximately 30 days remaining in
which to file a petition for review . . ." Id. at 4-5.
[**41]
[**42]
n98 See, e.g., Kahal v. J.W. Wilson & Assocs.,
Inc., 218 U.S. App. D.C. 156, 158, 673
F.2d 547, 549 (1982) (allegation that breach of
contract was motivated by malice insufficient for
punitive damages as a matter of law); Rieser v.
District of Columbia, supra note 71, 183 U.S.
App. D.C. at 395, 563 F.2d at 482; Berroyer v.
Hertz, 672 F.2d 334, 342 (3d Cir. 1982) (though
defendant's conduct was culpable enough to establish
negligence, punitive damages not available);
Peacock v. J.C. Penney Co., 764 F.2d 1012,
1015 (4th Cir. 1985); Gorman v. Southeastern
Fidelity Ins. Co., 775 F.2d 655, 659-660 (5th Cir.
1985); G.M. Brod & Co. v. U.S. Home Corp., 759
F.2d 1526, 1537 (11th Cir. 1985) (conduct did
not "rise to the level of reckless or offensive
character" required for punitive damages); cf.
Pierce v. Capital Cities Communications, Inc.,
576 F.2d 495, 508 n.59 (3d Cir.), cert. denied,
439 U.S. 861, 99 S. Ct. 181, 58 L. Ed. 2d 170
(1978) ("at most, on the facts here, it might be
said that the defendant [] acted carelessly or negligently").
V. ATTORNEYS' FEES IN THIS CASE
One matter remains. Nepera seeks an award of attorneys'
fees incurred in litigating the instant case. n99
Nepera recognizes that this effort falls squarely within
the purview of the American Rule, but argues that

Sea-Land's behavior brings it within the "bad faith" exception
to the rule. [HN8] That exception allows an
assessment of attorneys' fees when the losing party "has
acted in bad faith, vexatiously, wantonly, or for oppressive
reasons. . . ." n100 Federal courts have applied this
exception both when bad faith occurred in connection
with the litigation n101 and when it was an aspect of the
conduct that gave rise to the lawsuit. n102 [*702] Nepera
bases its request for fees on the latter strand of the
bad-faith exception. n103
n99 See <strong>Brief</strong> for Appellant at 20.
n100 F.D. Rich Co. v. United States ex rel.
Indus. Lumber Co., 417 U.S. 116, 129, 94 S. Ct.
2157, 2165, 40 L. Ed. 2d 703, 714 (1974) (dicta);
accord Summit Valley Indus. v. Local 112, United
Bhd. of Carpenters, supra note 58, 456 U.S. at
721, 102 S. Ct. at 2115, 72 L. Ed. 2d at 516;
Roadway Express, Inc. v. Piper, 447 U.S. 752,
766, 100 S. Ct. 2455, 2464, 65 L. Ed. 2d 488
(1980); Alyeska Pipeline Serv. Co. v. Wilderness
Soc'y, supra note 50, 421 U.S. at 258-259, 95 S.
Ct. at 1622, 44 L. Ed. 2d at 154; Hall v. Cole,
412 U.S. 1, 5, 93 S. Ct. 1943, 1946, 36 L. Ed. 2d
702, 707 (1973); Vaughan v. Atkinson, 369 U.S.
527, 82 S. Ct. 997, 8 L. Ed. 2d 88 (1962); American
Employers Ins. Co. v. American Sec. Bank,
241 U.S. App. D.C. 379, 388, 747 F.2d 1493,
1502 (1984); Eureka Inv. Corp. v. Chicago Title
Ins. Co., 240 U.S. App. D.C. 88, 101-102, 743
F.2d 932, 945-946 (1984).
[**43]
n101 This type of bad faith may manifest itself
in a variety of ways, such as in the filing of a
claim or motion, see Lipsig v. National Student
Marketing Corp., 214 U.S. App. D.C. 1, 5, 663
F.2d 178, 182 (1980) (per curiam); Copeland v.
Martinez, 195 U.S. App. D.C. 399, 402-403, 603
F.2d 981, 984-985 (1979); Nemeroff v. Abelson,
620 F.2d 339, 348 (2d Cir. 1980); Browning Debenture
Holders' Comm. v. DASA Corp., 560
F.2d 1078, 1088 (2d Cir. 1977); Perichak v. International
Union of Elec., Radio and Mach.
Workers, 715 F.2d 78, 80 (3d Cir. 1983); Analytica,
Inc. v. NPD Research, Inc., 708 F.2d 1263,
1269-1270 (7th Cir. 1983), or in actions undertaken
during the course of the litigation, see
Lipsig v. National Student Marketing Corp., supra,
214 U.S. App. D.C. at 3, 663 F.2d at 180;
Weinberger v. Kendrick, 698 F.2d 61, 80-81 (2d
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 16
Cir. 1982), cert. denied, 464 U.S. 818, 104 S. Ct.
77, 78 L. Ed. 2d 89 (1983); Browning Debenture
Holders' Comm. v. DASA Corp., supra, 560 F.2d
at 1088-1089; Straub v. Vaisman & Co., 540
F.2d 591, 600 (3d Cir. 1976); Aero Corp. v. Department
of Navy, 558 F. Supp. 404, 418
(D.D.C.1983). See generally Comment, Attorneys'
Fee Awards to Complex Litigation Defendants,
77 Nw. U.L. Rev. 818, 824-826 (1983).
[**44]
n102 See Siegel v. William E. Bookhultz &
Sons, 136 U.S. App. D.C. 138, 143-144, 419 F.2d
720, 725-726 (1969); Schlein v. Smith, 82 U.S.
App. D.C. 42, 44, 160 F.2d 22, 25 (1947); Rolax
v. Atlantic Coast Line R.R., 186 F.2d 473, 481
(4th Cir. 1951); Miller v. Aaacon Auto Transp.,
Inc., 447 F. Supp. 1201, 1206-1207 (S.D. Fla.
1978); Lewis v. Texaco, Inc., 418 F. Supp. 27, 28,
(S.D.N.Y. 1976); Burnaman v. Bay City Indep.
School Dist., 445 F. Supp. 927, 938 (S.D. Tex.
1978); see also Fitzgerald v. Hampton, 545 F.
Supp. 53, 57-58 (D.D.C. 1982) (attorneys' fees
awarded for defendants' bad faith in prelitigation
conduct pursuant to Equal Access to Justice Act,
Pub. L. No. 96-481, tit. II, 94 Stat. 2327 (1981)
(codified at 28 U.S.C. § 2412(b) (1982)), which
authorizes attorneys' fees against the United
States "to the same extent that any other party
would be liable under the common law"). But
see Shimman v. Local 18, Int'l Union of Operating
Eng'rs, 744 F.2d 1226, 1228-1233 (6th Cir.
en banc 1984), cert. denied, 469 U.S. 1215, 105
S. Ct. 1191, 84 L. Ed. 2d 337 (1985) ("bad faith
exception to the American Rule does not allow an
award of attorney fees based only on bad faith in
the conduct giving rise to the underlying claim").
[**45]
n103 <strong>Brief</strong> for Appellant at 23.
The common law of the District of Columbia embraces
these principles. The District of Columbia Court
of Appeals has declared that [HN9] an assessment of
attorneys' fees is warranted "'when the losing party has
acted in bad faith, vexatiously, wantonly, or for oppressive
reasons.'" n104 Circumstances indicative of bad
faith, the court has said, are present "'where a party
brings or maintains an unfounded suit or withholds action
to which the opposing party is patently entitled. . . .'"
n105 Indeed, there appears to be little or no difference

etween District of Columbia and federal common law
on the subject.
n104 In re Antioch Univ., 482 A.2d 133, 136
(D.C. 1984) (quoting Alyeska Pipeline Serv. Co.
v. Wilderness Soc'y, supra note 50, 421 U.S. at
258-259, 95 S. Ct. at 1622, 44 L. Ed. 2d at 154
(citation omitted)); see also Zapata v. Zapata,
499 A.2d 905, 910 (D.C. 1985); Wisconsin Ave.
Assocs. v. 2720 Wis. Ave. Coop. Ass'n., 441 A.2d
956, 968 (D.C.), cert. denied, 459 U.S. 827, 103
S. Ct. 62, 74 L. Ed. 2d 64 (1982); American Fed'n
of State, County & Mun. Employees v. Ball, 439
A.2d 514, 514-515 (D.C. 1981); Bay Gen. Indus.
v. Johnson, 418 A.2d 1050, 1057-1058 & n.20
(D.C. 1980).
[**46]
n105 Cahn v. Antioch Univ., supra note 56,
482 A.2d at 133 (quoting 1901 Wyo. Ave. Coop.
Ass'n. v. Lee, 345 A.2d 456, 464-465 (D.C. 1975)
(citation omitted)); see Wisconsin Ave. Assocs. v.
2720 Wis. Ave. Coop. Ass'n., supra note 104, 441
A.2d at 968; American Fed'n of State, County &
Mun. Employees v. Ball, supra note 104, 439
A.2d at 516; see also F.D. Rich Co. v. United
States ex rel. Indus. Lumber Co., supra note 100,
417 U.S. at 129, 94 S. Ct. at 2165, 40 L. Ed. 2d at
714.
Crucial to evaluation of Nepera's request is the Supreme
Court's admonition, which the District of Columbia
Court of Appeals has cited with approval, n106 that
the underlying rationale of fee-shifting upon a showing
of bad faith is punishment of the wrongdoer rather than
compensation of the victim. n107 For that reason, the
standard for a finding of bad faith is stringent. n108 The
cases, both federal n109 and District of Columbia, n110
hold that [HN10] attorneys' fees will be awarded [**47]
only when extraordinary circumstances or dominating
reasons of fairness so demand.
n106 Kasachkoff v. Ross H. Finn Co., 408
A.2d 993, 995 (D.C. 1979).
n107 Hall v. Cole, supra note 100, 412 U.S.
at 5, 93 S. Ct. at 1946, 36 L. Ed. 2d at 707; see
also Lipsig v. National Student Marketing Corp.,
supra note 101, 214 U.S. App. D.C. at 3, 663
F.2d at 180.
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 17
n108 See Adams v. Carlson, 521 F.2d 168,
170 (7th Cir. 1975); see also Eureka Inv. Corp.,
N.V. v. Chicago Title Ins. Co., supra note 100,
240 U.S. App. D.C. at 102, 743 F.2d at 946 (diversity
case) (bad faith exception "is a narrow
one, . . . to be applied only in exceptional circumstances"
(footnote omitted)).
n109 Fleischmann Corp. v. Maier Brewing
Co., 386 U.S. 714, 718, 87 S. Ct. 1404, 1407, 18
L. Ed. 2d 475, 479 (1967); accord Roadway Express,
Inc. v. Piper, supra note 100, 447 U.S. at
766-767, 100 S. Ct. at 2464, 65 L. Ed. 2d at
501-502; Mills v. Electric Auto-Lite Co., 396 U.S.
375, 391-392, 90 S. Ct. 616, 625, 24 L. Ed. 2d
593, 606 (1970).
[**48]
n110 Launay v. Launay, Inc., 497 A.2d 443,
450 (D.C. 1985); Andrews v. District of Columbia,
443 A.2d 566, 569 (D.C.), cert. denied, 459
U.S. 909, 103 S. Ct. 216, 74 L. Ed. 2d 172
(1982); Kasachkoff v. Ross H. Finn Co., supra
note 106, 408 A.2d at 995.
The considerations underlying the bad-faith exception
do not counsel fee-shifting here. Quite to the contrary,
an award of attorneys' fees to Nepera could actually
work an injustice. Nepera's bad-faith fee claim rests
on the very same behavior n111 we have already held to
be legally insufficient to permit an award of punitive
damages n112 -- damages which, like attorneys' fees in
the present context, are designed to punish certain kinds
of wrongdoing. n113 Just as we find, as a matter of law,
that the record does not furnish an adequate foundation
for punitive damages, we must conclude that it falls short
of establishing Nepera's entitlement to recoupment of its
attorneys' fees in litigating the case at bar.
n111 Plaintiff's Opposition, supra note 76, at
12-14.
[**49]
n112 See text supra at notes 90-98.
n113 Compare text supra at note 71 with text
supra at notes 106-107.

[*703] We thus end our journey through this appeal.
The Shipping Act does not bar Nepera's common-law
action for compensatory damages, and those
damages permissibly may include attorneys' fees and
other expenses incurred by Nepera in its earlier litigation
against the Commission. Accordingly, we reverse the
District Court's judgment to that extent. We affirm,
253 U.S. App. D.C. 394; 794 F.2d 688, *;
1986 U.S. App. LEXIS 25933, **; 1988 AMC 1214
Page 18
however, the District Court's holdings that Nepera's
claim for punitive damages, and its claim for attorneys'
fees incurred in the instant case, are legally unwarranted.
The case is remanded to the District Court for further
proceedings consistent with this opinion.
So ordered.

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DISPOSITION: [***1]
8 Ohio App. 3d 390, *; 457 N.E.2d 946, **;
1983 Ohio App. LEXIS 10975, ***; 8 Ohio B. Rep. 504
LEXSEE 8 OHIO APP.3D 390
REINER, APPELLEE AND CROSS-APPELLANT, v. KELLEY, APPELLEE AND
CROSS-APPELLANT; KELLER ET AL., APPELLANTS; COLUMBIA TITLE
AGENCY, INC. ET AL., APPELLEES. KELLEY, APPELLEE AND
CROSS-APPELLANT, v. KELLEY, APPELLEE AND CROSS-APPELLANT;
KELLER ET AL., APPELLANTS; COLUMBIA TITLE AGENCY, INC. ET AL.,
APPELLEES
Nos. 82AP-319, 82AP-320
Court of Appeals of Ohio, Tenth Appellate District, Franklin County
8 Ohio App. 3d 390; 457 N.E.2d 946; 1983 Ohio App. LEXIS 10975; 8 Ohio B.
Rep. 504
Judgment affirmed in part, reversed in part and
cause remanded with instructions.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff real estate brokers
filed an action against defendant attorney, law partner,
and law firm for fraud and misrepresentation regarding
a sum of money that the attorney placed in an
insolvent trust account. The law firm and partner filed an
appeal of the trial court's decision that they were liable
for the attorney's intentional acts. The attorney sought
review of the decision that he had committed intentional
fraud and misrepresentation.
OVERVIEW: An attorney deposited checks received
from a seller as a real estate transaction fee into an insolvent
trust account. The attorney wrote checks to the
real estate brokers to refund the overstated charges. The
checks were dishonored and the real estate brokers filed
separate actions against the attorney, his law partner, and
the law firm. The actions were consolidated and the trial
court found that the attorney intentionally committed
fraud and misrepresentation while acting within the
scope of his authority as an agent for the law firm, a legal
professional association. The real estate brokers were
awarded damages. On appeal, the court affirmed in part
the judgment because (1) the attorney made the false
representations with the intent to mislead, (2) the real
estate brokers relied upon the misstatement, and (3) the
attorney accepted the real estate brokers' checks for the
purpose of delivering them to his client in the scope of
the partnership. The court reversed the judgment in part
April 7, 1983, Decided
Page 1
because the partner and law firm were entitled to full
indemnity because the partner acted in good faith as a
co-trustee of the funds and exercised due care to prevent
the fraud.
OUTCOME: The court affirmed the circuit court's
judgment holding that an attorney, a partner, and law
firm were liable to real estate brokers for the attorney's
intentional fraud and misrepresentation. The court reversed
that part of the judgment which held that the attorney
was not liable for the attorney fees incurred by the
law firm and partner in connection with the defense of
the action and the prosecution of the cross-claims.
LexisNexis(R) Headnotes
Torts > Business & Employment Torts > Deceit &
Fraud
[HN1] For a finding of fraud, five elements must be
found to exist: (1) a false representation; (2) knowledge
of the falsity on the part of the person making the representation;
(3) intention to mislead others relying upon the
representation; (4) reliance, with a right to do so, upon
the representation by the party claiming injury; and (5)
injury resulting from that reliance.
Business & Corporate Entities > General Partnerships
> Management Duties & Liabilities
[HN2] A legal professional association is a form of corporation
which is permitted to practice law through the
corporate form only by the interaction of two branches of
Ohio government: the legislature, which has permitted
lawyers, as professional persons, to incorporate pursuant
to the Professional Associations Act, Ohio Rev. Code
Ann. § 1785.01 et seq., and the Ohio Supreme Court

which has authorized the corporations thus formed to
practice by Ohio Sup. Ct. R. Gov't. B. III. Whereas partners
are vicariously liable for the torts and contracts of
their copartners committed within the scope of the partnership
business, when attorneys incorporate and form a
legal professional association and become officers,
agents or employees of the association, Oho. Rev. Code
Ann. § § 1785.02, 1785.03, Ohio Sup. Ct. R. Gov't B.
III, § 1, the association, as with any other corporation,
will be liable upon the contracts and for the torts of the
attorneys performed within their actual or apparent authority.
Business & Corporate Entities > General Partnerships
> Management Duties & Liabilities
[HN3] See Ohio Sup. Ct. Prac. R. XVII(B).
Business & Corporate Entities > General Partnerships
> Management Duties & Liabilities
[HN4] All shareholders of a legal professional association
guarantee that all debts of and judgments against the
legal association will be paid.
Business & Corporate Entities > General Partnerships
> Management Duties & Liabilities
Legal Ethics > Professional Conduct
[HN5] A lawyer should not seek, by contract or other
means, to limit his individual liability to his client for his
malpractice. A lawyer who handles the affairs of his client
properly has no need to attempt to limit his liability
for his professional activities and one who does not handle
the affairs of his client properly should not be permitted
to do so. A lawyer who is a stockholder in or is
associated with a professional legal corporation may,
however, limit his liability for malpractice of his associates
in the corporation, but only to the extent permitted
by law.
Business & Corporate Entities > Corporations >
Shareholders & Other Constituents > Shareholder Duties
& Liabilities
[HN6] See Ohio Const. art. XIII, § 3.
Business & Corporate Entities > General Partnerships
> Formation
[HN7] A legal professional association created pursuant
to Ohio Rev. Code Ann. § 1785 is not a corporate entity
contemplated by Ohio Const. art. XIII, § 3.
Business & Corporate Entities > General Partnerships
> Management Duties & Liabilities
[HN8] Ohio Sup. Ct. R. Gov't B. III, § 4 imposes upon
an attorney-shareholder of the legal professional association
a duty to guarantee the financial responsibility of the
association for its breach of any duty. What must be
8 Ohio App. 3d 390, *; 457 N.E.2d 946, **;
1983 Ohio App. LEXIS 10975, ***; 8 Ohio B. Rep. 504
Page 2
"guaranteed" by the attorney-shareholder is the "financial
responsibility" of the association. Thus, there is a duty on
the attorney-shareholder to assure that the association
pays its debts. Rule III, § 4 imposes personal liability
upon the individual members of a professional association,
and permits a direct action by a third party against
such individual members. The rule requires the attorney-shareholder
to become a guarantor. If only a conditional
guaranty be involved, the creditor must first exhaust
means to compel payment by the principal debtor
before proceeding against the guarantor.
Business & Corporate Entities > Agency > Duties &
Liabilities > Negligent Acts of Agents
[HN9] The trustee is not liability for the wrongful acts of
a co-trustee, unless the trustee has failed to exercise reasonable
supervision over the conduct of a co-trustee in
relation to the trust.
Torts > Multiple Defendants > Contribution & Indemnity
[HN10] One who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover reasonable compensation for loss of time,
attorney fees and other expenditures thereby suffered or
incurred in the earlier action.
SYLLABUS:
1. When attorneys incorporate and form a legal
professional association and become officers, agents or
employees of the association, the association, as with any
other corporation, will be liable upon the contracts and
for the torts of the attorneys performed within their actual
or apparent authority.
2. Where the liability of the legal professional association
and its attorney-shareholders was incurred exclusively
by the fraud and misrepresentations of an attorney-member
of the association, the association and its
shareholders are entitled to full indemnity against the
attorney-member, including attorney fees, incurred in
defending the action brought against them and in prosecuting
their cross-claims.
COUNSEL:
Messrs. Lucas, Prendergast, Albright, Gibson,
Newman & Gee, Mr. [***2] James E. Melle and Mr.
Edward T. McClellan, for plaintiffs-appellees.
Mr. Daniel J. Igoe, for defendant-appellee.
Messrs. Knepper, White, Arter & Hadden, Mr. John
A. Carnahan and Ms. Lise K. Jacobson, for defendants-appellants.

JUDGES:
WHITESIDE, P.J. McCORMAC and COOK, JJ.,
concur. COOK, J., of the Eleventh Appellate District,
sitting by assignment in the Tenth Appellate District.
OPINIONBY:
WHITESIDE
OPINION:
[*390] [**948] This case arises from a routine
real estate closing on September 12, 1980, at the law
offices of Kelley & Keller Co., L.P.A., a legal professional
association consisting of two shareholder-attorneys,
Joseph P. Kelley and Mark D. Keller. At
that closing, Joseph P. Kelley, on behalf of the L.P.A.,
was acting as the seller's attorney, while plaintiffs, Donald
W. Kelley and Lois J. Reiner, were acting as the
seller's real estate brokers.
One of the closing statements prepared by plaintiffs
mistakenly stated that the transfer fee on the land involved
in the closing was $ 14,980, an overstatement in
the amount of $ 13,482. This overstated transfer fee
was included along with various realtor fees, fees for title
insurance, recording fees and [***3] escrowed funds in
a check for the amount of $ 37,519.50. At this time,
none of the parties was aware of the error.
Joseph P. Kelley deposited this check in the L.P.A.'s
trust account since he was to be responsible for recording
the deed and paying the various fees.
Plaintiffs became aware of the error in the transfer
fee and contacted Joseph P. Kelley, who informed them
that the erroneous transfer fee had already been paid to
the county recorder but that he would try to get it back.
That representation was false, as Joseph P. Kelley did not
record the deed until a week later, and the correct transfer
fee was paid at that time.
[*391] Relying upon Joseph P. Kelley's false
statement that the erroneous transfer fee had been paid,
plaintiffs each gave Joseph P. Kelley a check for $ 6,741
(for a total of the overstated amount of $ 13,482), payable
to Kelley & Keller Co., L.P.A., so that he could immediately
pay the seller what was due her. Joseph P.
Kelley deposited plaintiffs' [**949] checks in the
L.P.A.'s trust account, which had a negative balance both
before and after the deposit.
The next day, Joseph P. Kelley delivered a $ 13,482
cashier's check to the seller. [***4] He then wrote
checks to each of the plaintiffs for $ 6,741 on the insolvent
L.P.A. trust account and told them not to cash their
checks for about two weeks.
8 Ohio App. 3d 390, *; 457 N.E.2d 946, **;
1983 Ohio App. LEXIS 10975, ***; 8 Ohio B. Rep. 504
Page 3
Two weeks later, the account did not contain enough
funds to cover either check, but Joseph P. Kelley failed
to notify either plaintiff of this fact, and the checks were
dishonored upon presentment. Neither Joseph P. Kelley
nor Kelley & Keller Co., L.P.A., was able to pay or otherwise
satisfy the debt.
Plaintiffs filed separate actions in the Franklin
County Municipal Court naming Joseph P. Kelley, Mark
D. Keller and Kelley & Keller Co., L.P.A., as defendants,
which actions were later consolidated.
Plaintiffs each sought the amount of $ 6,741 plus
returned check charges of $ 10 and incidental and consequential
damages, including attorney fees, in the prosecution
of their suits, as well as punitive damages in the
amount of $ 2,000.
Mark D. Keller and Kelley & Keller Co., L.P.A.,
jointly filed cross-claims against Joseph P. Kelley
charging that any losses suffered by plaintiffs were
caused solely by his defalcations, and seeking judgment
against him in the amount of any judgment rendered
against them in this action and [***5] for any costs,
attorney fees and other expenses they incurred in defending
these actions and prosecuting their cross-claims.
The trial court held that Joseph P. Kelley intentionally
committed a fraud and misrepresentation upon both
plaintiffs while acting within the scope of his authority as
an attorney and agent for Kelley & Keller Co., L.P.A.
The trial court held that Joseph P. Kelley and Kelley &
Keller Co., L.P.A., each owed a duty to each plaintiff to
account for the sum of $ 6,741, which amount had been
placed in Kelley & Keller Co., L.P.A.'s trust account. In
addition, Joseph P. Kelley was ordered to pay $ 1,000 in
punitive damages to both plaintiffs.
The trial court further held that Section 4, Gov. Rule
III, requiring a shareholder in an L.P.A. to "guarantee"
the financial responsibility of the L.P.A., rendered Mark
D. Keller liable to plaintiffs for compensatory damages
in the amount of $ 6,741 each. The court, however,
specifically found that Mark D. Keller was not aware of,
and did not participate in, any of Joseph P. Kelley's acts
of fraud and misrepresentation. Furthermore, the court
found that Mark D. Keller was not liable for any damages
under a theory of co-trusteeship [***6] since he had
acted at all times in good faith as a trustee of the Kelley
& Keller Co., L.P.A. trust account to prevent the events
that occurred.
The court below granted Mark D. Keller and Kelley
& Keller Co., L.P.A.'s cross-claims against Joseph P.
Kelley in the amount of $ 6,741 per plaintiff. However,
their claims for attorney fees were not granted even
though punitive damages were awarded to plaintiffs
against Joseph P. Kelley.

The decision of the trial court was journalized in two
separately filed identical judgment entries, one in each of
the cases originally filed by plaintiffs, and Mark D. Keller
and Kelley & Keller Co., L.P.A., have appealed, raising
three assignments of error, as follows:
[*392] "I. The trial court erred in holding that
under Governing Rule III, Section 4 of the Supreme
Court Rules for the Government of the Bar of Ohio, defendant
Mark D. Keller is liable to plaintiffs for Joseph
P. Kelley's intentional fraud and misrepresentation by
reason of Mark D. Keller's pariticpation [sic] as a shareholder
in Kelley & Keller Co., L.P.A.
"II. The trial court erred in holding that defendant
Kelley & Keller Co., L.P.A. is liable to plaintiffs for Joseph
[***7] P. Kelley's intentional fraud and misrepresentation
by reason of a duty it owed plaintiffs to account
for and return the $ 13,482.00 of plaintiffs' money that
Joseph P. Kelley deposited into the Kelley & Keller Co.,
L.P.A. trust account.
[**950] "III. The trial court erred in failing to
grant the cross-claims of defendants, Mark D. Keller and
Kelley & Keller Co., L.P.A. against Joseph P. Kelley for
attorneys' fees incurred in connection with the defense of
these actions and the prosecution of these cross-claims."
Plaintiffs filed notices of cross-appeal from the
judgments of the trial court, raising a single assignment
of error as follows:
"The trial court erred when it failed to impose liability
upon Mark Keller for his failure to account for and
return trust monies to appellees."
Joseph P. Kelley also filed a notice of cross-appeal
from the judgments of the trial court, raising two assignments
of error, as follows:
"1. The trial court erred in granting judgment
against Joseph P. Kelley on the basis of fraud.
"2. The trial court erred in granting judgment for
punitive damages and attorneys fees."
Joseph P. Kelley asserts upon cross-appeal that the
trial court [***8] erred in granting judgment against
him on the basis of fraud and in awarding plaintiffs punitive
damages and attorney fees.
The trial court found that Joseph P. Kelley engaged
in a fraudulent act by the misuse of funds entrusted to
him as a fiduciary in a real estate closing, and that such
act was with actual malice. This holding is supported
by the record.
[HN1] For a finding of fraud, five elements must be
found to exist: (1) a false representation; (2) knowledge
of the falsity on the part of the person making the repre-
8 Ohio App. 3d 390, *; 457 N.E.2d 946, **;
1983 Ohio App. LEXIS 10975, ***; 8 Ohio B. Rep. 504
Page 4
sentation; (3) intention to mislead others relying upon the
representation; (4) reliance, with a right to do so, upon
the representation by the party claiming injury; and (5)
injury resulting from that reliance. Schwartz v.. Capital
Savings & Loan Co. (1978), 56 Ohio App. 2d 83 [10
O.O.3d 117]. Joseph P. Kelley stipulated that he informed
Donald W. Kelley that he had already filed the
deed with the Recorder's Office and overpaid $ 13,482 to
Franklin County for the transfer fee and that "they took
it, and I will go down and try to get it back." He also
stipulated that "that representation was false."
Joseph P. Kelley knew (and stipulated) that his false
[***9] representations that he had paid the money to
the county auditor and that he would retrieve the money
to reimburse plaintiffs were made with the intent by him
to mislead plaintiffs. Stipulation 15 states that: "Both
plaintiffs relied upon Joseph Kelley's statement that he
had paid the money to the county auditor and was in the
process of getting it back when they gave their checks to
him." The final element of fraud is injury resulting from
reliance upon the false statement, which is obvious in
this instance. The fact that plaintiffs made the initial
error does not detract from Joseph P. Kelley's fraud in
obtaining the two checks from plaintiffs and in later
writing reimbursement checks without sufficient funds.
On the basis of the unrebutted facts, there is sufficient
evidence to support the trial court's finding of fraud
so gross and malicious as to warrant an assessment of
punitive, as well as compensatory, damages and attorney
fees. Therefore, [*393] neither of Joseph P. Kelley's
assignments of error is well-taken.
By their second assignment of error, Mark D. Keller
and Kelley & Keller Co., L.P.A. state that the trial court
erred in holding that the L.P.A. is liable [***10] to
plaintiffs for Joseph P. Kelley's intentional fraud and
misrepresentation. The crucial issue in determining this
assignment of error is whether the fraud and misrepresentation
committed by Joseph P. Kelley upon plaintiffs
falls within the scope of the practice of law, and, therefore,
within the scope of the apparent authority of Joseph
P. Kelley. [HN2] A legal professional association is a
form of corporation which is permitted to practice law
through the corporate form only by the interaction of two
branches of Ohio government: the legislature, which has
permitted lawyers, as professional persons, to incorporate
pursuant to the Professional [**951] Associations
Act ( R.C. 1785.01 et seq.), and the Supreme Court
which has authorized the corporations thus formed to
practice by Rule III of the Supreme Court Rules for the
Government of the Bar of Ohio (Gov. R. III). State, ex
rel. Green, v.. Brown (1962), 173 Ohio St. 114 [18
O.O.3d 361].

Whereas partners are vicariously liable for the torts
and contracts of their copartners committed within the
scope of the partnership business, when attorneys incorporate
and form a legal professional association and become
officers, [***11] agents or employees of the
association ( R.C. 1785.02, 1785.03; Section 1, Gov. R.
III), the association, as with any other corporation, will
be liable upon the contracts and for the torts of the attorneys
performed within their actual or apparent authority.
Lenhart v.. Toledo Urology Assoc., Inc. (1975), 48 Ohio
App. 2d 249 [2 O.O.3d 200]; Connell v.. Hayden (1981),
83 A.D. 2d 30, 443 N.Y.Supp. 2d 383; Zimmerman v..
Hogg & Allen, P.A. (1974), 286 N.C. 24, 209 S.E. 2d
795, 76 A.L.R. 3d 1004.
The trial court found that "* * * Defendant Joseph P.
Kelley was, at all times, acting within the scope of his
authority as an attorney and agent for defendant, Kelley
& Keller Co., L.P.A." The record shows that Joseph P.
Kelley accepted plaintiffs' checks for the purpose of delivering
them to his client, the seller, in a real estate
closing in order to make the seller whole for her overpayment
of a transfer fee at the closing. He deposited
the checks in the Kelley & Keller Co., L.P.A. trust account
and, subsequently, drew checks on the trust account
to repay plaintiffs, which checks were dishonored.
There was sufficient evidence to permit a finding that
plaintiffs [***12] were justified in their belief that Joseph
P. Kelley was acting within the scope of the association's
business at all times. Therefore, the L.P.A. was
properly held liable for Joseph P. Kelley's fraud and
misrepresentation, and Mark D. Keller's and Kelley &
Keller Co., L.P.A.'s second assignment of error is not
well-taken.
Mark D. Keller's and Kelley & Keller Co., L.P.A.'s
first assignment of error relates to the trial court's holding
that Mark D. Keller was also liable to plaintiffs for the
return of their money by reason of his participation as a
shareholder in Kelley & Keller Co., L.P.A., under Section
4, Gov. R. III. This rule governing financial responsibility
of shareholders in a legal professional association
first became effective October 25, 1970, as
[HN3] Rule XVII(B) of the Supreme Court Rules of
Practice (23 Ohio St. 2d xvii), and from its inception has
read as follows:
"Section 4. Financial Responsibility.
"The participation by an individual as a shareholder
of a legal professional association shall be on the condition
that such individual shall, and by such participation
does, guarantee the financial responsibility of the association
for its breach of any duty, whether [***13] or not
arising from the attorney-client relationship. * * *" Id.
at xviii.
8 Ohio App. 3d 390, *; 457 N.E.2d 946, **;
1983 Ohio App. LEXIS 10975, ***; 8 Ohio B. Rep. 504
Page 5
Section 4, Gov. R. III is a rule for the practice of law
whereby [HN4] all shareholders of a legal professional
association [*394] guarantee that all debts of and
judgments against the legal association will be paid. EC
6-6 of the Code of Professional Responsibility, also
adopted by the Ohio Supreme Court on October 5, 1970
(23 Ohio St. 2d), states, as follows:
[HN5] "A lawyer should not seek, by contract or
other means, to limit his individual liability to his client
for his malpractice. A lawyer who handles the affairs of
his client properly has no need to attempt to limit his
liability for his professional activities and one who does
not handle the affairs of his client properly should not be
permitted to do so. A lawyer who is a stockholder in or
is associated with a professional legal corporation may,
however, limit his liability for malpractice of his associates
in the corporation, but only to the extent permitted
by law." (Emphasis added.)
Section 4, Gov. R. III is a rule of professional conduct,
not one determining the substantive rights of parties
arising from [**952] direct or indirect [***14] relationships.
South High Development, Ltd. v.. Weiner,
Lippe & Cromley Co., L.P.A. (1983), 4 Ohio St. 3d 1.
[HN6] Section 3, Article XIII of the Ohio Constitution,
provides that: "* * * in no case shall any stockholder
[of a corporation] be individually liable otherwise than
for the unpaid stock owned by him or her." However, the
Supreme Court has held that [HN7] a legal professional
association created pursuant to R.C. Chapter 1785 is not
a corporate entity contemplated by this constitutional
limitation. South High Development, Ltd., supra.
[HN8] Section 4, Gov. R. III, imposes upon an attorney-shareholder
of the legal professional association a
duty to "guarantee the financial responsibility of the association
for its breach of any duty." What must be
"guaranteed" by the attorney-shareholder is the "financial
responsibility" of the association. Thus, there is a duty
on the attorney-shareholder to assure that the association
pays its debts. The Supreme Court in South High Development,
Ltd., supra, at pages 2-3, held that Section 4,
Gov. R. III imposes "personal liability upon the individual
members of a professional association," and permitted
a direct action by a third party [***15] against such
individual members.
The rule requires the attorney-shareholder to become
a guarantor. If only a conditional guaranty be involved,
the creditor must first exhaust means to compel payment
by the principal debtor before proceeding against the
guarantor. See Stone v.. Rockefeller (1876), 29 Ohio St.
625.
Therefore, Section 4, Gov. R. III apparently supersedes
the statute of frauds, R.C. 1335.05, which provides

that: "No action shall be brought whereby to charge the
defendant, upon a special promise, to answer for the
debt, default, or miscarriage of another person * * * unless
the agreement upon which such action is brought, or
some memorandum or note thereof, is in writing and
signed by the party to be charged therewith * * *."
South High Development, Ltd., supra, mandates
that Mark D. Keller's and Kelley & Keller Co., L.P.A.'s
first assignment of error be overruled.
By their cross-appeal, however, plaintiffs assert that
the trial court erred in holding Mark D. Keller not liable
to plaintiffs as co-trustee of the Kelley & Keller Co.,
L.P.A. trust account.
The general principle is [HN9] the nonliability of a
trustee for the wrongful acts of a co-trustee, [***16]
unless the trustee has failed to exercise reasonable supervision
over the conduct of a co-trustee in relation to the
trust. State v.. Guilford (1849), 18 Ohio 500; Blackmon
v.. Hale (1970), 1 Cal. 3d 548, 83 Cal. Rptr. 194, 463 P.
2d 418. The trial court found that "* * * Defendant Keller
acted in good faith as a co-trustee of the funds in
question and exercised due care to prevent the fraudulent
occurrence that took place." This finding of fact is supported
by evidence. Therefore, plaintiffs' assignment of
error is not well-taken.
[*395] Based on its findings that Mark D. Keller
and Kelley & Keller Co., L.P.A., had neither participated
in, authorized, nor ratified the fraudulent acts of Joseph
P. Kelley, the trial court entered judgment for them on
their cross-claims against Joseph P. Kelley, holding that
they were entitled to indemnity for the judgment for
compensatory damages plaintiffs had obtained against
them. Nevertheless, the trial court made no allowance
for attorney fees Mark D. Keller and Kelley & Keller
Co., L.P.A., had incurred in defending the action and in
prosecuting their cross-claims. Mark D. Keller and Kelley
& Keller Co., L.P.A., raise [***17] this failure to
award them attorney fees as their third assignment of
error.
8 Ohio App. 3d 390, *; 457 N.E.2d 946, **;
1983 Ohio App. LEXIS 10975, ***; 8 Ohio B. Rep. 504
Page 6
Restatement of the Law, Torts 2d, Section 914, correctly
states the rule for the award of attorney fees in an
action for indemnity as follows:
"(2) [HN10] One who through the tort of another has
been required to act in the protection of his interests by
bringing or defending an action against a third person is
entitled to recover reasonable compensation for loss
[**953] of time, attorney fees and other expenditures
thereby suffered or incurred in the earlier action." (Emphasis
added.) Id. at 492.
The evidence in this case establishes that the liability
of Mark D. Keller and Kelley & Keller Co., L.P.A. was
incurred exclusively by the fraud and misrepresentations
of Joseph P. Kelley. Under the principle expressed in
the Restatement of the Law, Torts 2d, supra, it seems
clear that Mark D. Keller is entitled to full indemnity
against Joseph P. Kelley, including the reasonable value
of attorney fees he expended in defending plaintiffs' action
and in prosecuting his cross-claim against Joseph P.
Kelley. 18 Ohio Jurisprudence 3d 403, Contribution,
Indemnity, Etc., Section 50; 30 Ohio Jurisprudence
[***18] 3d 124, Damages, Section 113; O'Connell v..
Jackson (1966), 273 Minn. 91, 140 N.W. 2d 65. Mark D.
Keller's and Kelley & Keller Co., L.P.A.'s third assignment
of error is well-taken, and the trial court should
determine the reasonable amount of such fees upon remand.
For the foregoing reasons, plaintiffs' assignment of
error is overruled, Joseph P. Kelley's assignments of error
are overruled, and Mark D. Keller's and Kelley &
Keller Co., L.P.A.'s third assignment of error is sustained,
but their first and second assignments of error are
overruled; and the judgment of the Franklin County Municipal
Court is reversed in part and the cause is remanded
to that court for further proceedings in accordance
with law consistent with this opinion. The costs
will be assessed against appellants and cross-appellants.
Judgment affirmed in part, reversed in part and
cause remanded with instructions.

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CASE SUMMARY:
PROCEDURAL POSTURE: Defendant seller sought
review of a decision of a trial court (Louisiana), which
entered a judgment in favor of plaintiff contractor when
the contractor brought an action against the seller to recover
from the seller under the warranties that the seller
made to the buyers of a bridge, warranties that were
transferred to the contractor, and the amount of a judgment
that the contractor paid to the owner of the bridge.
OVERVIEW: The buyers purchased a bridge from the
seller. The buyers then made an agreement with the contractor
whereby the contractor was to demolish the
bridge and whereby the buyers were to convey the bridge
material to the contractor. The owner filed a suit to stop
demolition of the bridge, most of which was complete. A
judgment was entered for the owner and against the contractor
and the buyers. The contractor then sued the seller
on the warranties that the seller made to the buyers, who
had transferred those warranties to the contractor. The
trial court entered a judgment in favor of the contractor.
The court held that: (1) the instant action was a right of
action that the buyers had against the seller, and there
was no reason that the buyers could not sell that right of
action to the contractor; (2) there was no sale of such a
litigious right as was reprobated by law; (3) the contractor
had a right to make the seller comply with the warranties
that the seller made to the buyers; and (4) the
seller sold something that did not belong to him, and he
was liable under a special warranty, under La. Civ. Code
Ann. art. 2503, and a general warranty under La. Civ.
Code Ann. art. 2506.
OUTCOME: The court amended the trial court's judgment
by increasing the amount awarded to the contractor
and affirmed the judgment as amended.
LexisNexis(R) Headnotes
8 So. 2d 711, *; 1942 La. App. LEXIS 61, **
LEXSEE 8 SO2D 711
FIELD v. JONES.
No. 2407.
Court of Appeal of Louisiana, First Circuit.
8 So. 2d 711; 1942 La. App. LEXIS 61
June 30, 1942, Decided
Page 1
Real & Personal Property Law > Sales, Exchanges &
Remedies
[HN1] When a vendee purchases a superior title to avoid
dispossession, the vendee can recover the sum thus paid.
COUNSEL: [**1]
D. D. Newman, of Leesville, for appellant.
Cline, Thompson, Lawes & Cavanaugh, of Lake Charles,
for appellee.
JUDGES: DORE, Judge.
OPINION: [*711]
On October 10, 1938, the defendant Jones sold and
transferred, by a written instrument, to J. D. Newman
and L. F. Middleton, for the price and consideration of $
80, cash, a steel or iron tramroad bridge across Anacoco
Creek in Vernon Parish; in the act of sale and transfer,
defendant made the usual warranty of title customarily
recited in cash deeds covering the sale of real estate, and
also made the following special agreement of warranty:
"And I hereby bind and obligate myself, my heirs, executors,
and administrators to defend any suit or action in
law or equity that may be instituted by any person, firm
or corporation, setting up claim to the property hereinabove
described, and in the event should the said purchasers
or myself be unsuccessful in said court proceeding
in such event, I bind myself, my heirs, executors, and
administrators to pay all costs attendant to said suit or
any damages that may be decreed as due and owing to
the said claimants of said property on account of demolishing
or removal of said bridge hereinabove [**2] described
at and when same may be decreed as being the
property of other [*712] persons, and not that of my
own or my said vendees, J. D. Newman and L. F. Middleton."
On October 17, 1938, J. D. Newman and L. F. Middleton
entered into a written contract or agreement with the

plaintiff Field for the latter to demolish and remove the
bridge to Lake Charles, Louisiana, and the latter to purchase
said material at the price and sum of $ 10 per gross
ton of 2,240 lbs. as the material was delivered at Lake
Charles, a certain percentage to be retained for the payment
of the cost of demolishing and removing; with the
further provision that upon fulfillment of the contract and
full payment, the said Newman and Middleton agreed to
convey to Field, his heirs or assigns, by warranty deed,
the said bridge material or property.
Under this contract, Field proceeded to demolish the
bridge and to remove the material to Lake Charles; as he
was proceeding with his work and had demolished about
98% of the bridge and had removed about 50% of the
material to Lake Charles, his operation was stopped by
the filing of a suit against him, Newman and Middleton
by the Kirby Lumber Corporation, it claiming [**3] to
own the bridge and, alleging that they, the present plaintiff,
Newman and Middleton, were trespassers on its
property. The Lumber Corporation sought damages
against the defendants, in solido, in the sum of $ 1,000 as
the value of the bridge. This suit was filed in Calcasieu
Parish as Field, the present plaintiff, one of the alleged
tort-feasors, was a resident of that Parish.
In that suit, Field and the other two defendants answered
setting up the sale of the bridge by Jones, the present
defendant, to Newman and Middleton, and by the latter
to Field, and alleged the warranty under the sales or contracts
and agreements, and all three called the present
defendant in warranty to defend the suit. Jones excepted
to the calls in warranty on the ground that such calls in
warranty were not permissible in actions of trespass or
tort, and also excepted to the jurisdiction of the Court,
contending that he was a resident of the Parish of
Vernon. Jones' exceptions were referred to the merits.
Pending the trial of this suit on the merits, on March 27,
1939, Newman and Middleton, for the price and consideration
of $ 150, sold, transferred, assigned and conveyed
to Field all of their [**4] interest in and to the
bridge as well as all of their right of action of warranty,
including the right to sue Jones for damages occasioned
to them arising out of the purchase of the bridge from
him; in this transfer, Field released the said Newman and
Middleton from any responsibility or liability under the
former agreement between them and also under this act.
On December 21, 1939, after a trial on the merits on October
2, 1939, the trial judge rendered a judgment in favor
of Kirby Lumber Corporation and against Field,
Newman and Middleton, in solido, for the sum of $
1,000, as the value of the bridge demolished and removed
by the defendants, said judgment to bear 5% in-
8 So. 2d 711, *; 1942 La. App. LEXIS 61, **
Page 2
terest from judicial demand, which was December 2,
1938, together with all costs of the suit. The trial judge
dismissed the call in warranty against Jones for the reason
that the defendants were trespassers and could not
call Jones in warranty to defend their trespass. This
judgment was not appealed by any of the parties and
became final.
The present suit was filed by Field against Jones in
which he sets up the various transactions and the suit of
the lumber corporation, and seeks to recover from defendant
[**5] Jones under the warranty which he made
to Newman and Middleton and which the latter transferred
to him, the amount of the judgment, interest and
cost which he paid the lumber corporation, amounting to
the sum of $ 1,152.49, plus certain items of expense
connected with the suit, such as attorneys' fees, travelling
expenses, watchman for the bridge, surveying the properties
of defendant and lumber corporation for the defense
of the suit and loss of materials and profit, the total
amount of his claim being the sum of $ 1,862.49.
Defendant Jones filed an exception of no right or cause
of action, which was referred to the merits. He then filed
a plea of res adjudicata, which was overruled. He then
filed an answer in which he alleged that the bridge which
he sold to Newman and Middleton belonged to him and
was located on his land.
The trial judge, on trial of the merits, rendered a judgment
in favor of the plaintiff and against Jones for the
sum of $ 1,152.49, the alleged amount of the judgment,
interest and costs which plaintiff claimed that he was
forced to pay the Lumber Corporation. Both plaintiff and
defendant appealed, plaintiff seeking an increase to the
amount originally [**6] claimed in his petition and the
defendant insisting that the judgment be reversed in toto.
As defendant does not complain, in this court, of
the overruling of his plea of [*713] res adjudicata, nor
does he present any argument or reason relating thereto,
this plea is considered as abandoned.
The first question presented is whether or not the
plaintiff has a right to take advantage of defendant's
warranty contained in the cash deed to Newman and
Middleton, and particularly that special warranty quoted
in the first part of this opinion. In that special warranty,
Jones bound himself to defend any suit which might be
instituted by any one against his vendees; and in the
event of his vendees being cast, he further obligated
himself to pay all the costs attendant to the suit or all
damages which might be decreed against his vendees.
This is a right of action which his vendees had; his vendees
were defendants in the suit brought by the lumber
corporation. We see no legal reason why Newman and

Middleton could not sell this right of action, together
with all of their interest in the bridge, to their
co-defendants and vendee, Field, and permit Field to take
over the entire defense of [**7] the suit, relieving them
of further responsibility in reference to the bridge and
suit. This was not a sale of such a litigious right as is
reprobated by law, but the sale of a right flowing from a
binding agreement. Field has the same right which his
vendors, Newman and Middleton, had against Jones. The
exception of no right or cause of action was therefore
properly overruled.
The next question presented is the ownership of the
bridge. Jones claims the ownership of this bridge because
he contends that the bridge was located on his land. He
owned a forty-acre tract, being the S. E.1/4 of S. W.1/4
of Sec. 13, Tp. 1, S. R. 10 West. The lumber corporation
owned the adjoining forty acres to the east, being the S.
W.1/4 of S. E.1/4 of the same section, range, etc., and
claimed in its suit that the bridge was on its property,
claiming the ownership by virtue thereof.
The plaintiff offered the testimony of a civil engineer,
and lay witnesses to the effect that the bridge was
located on the lumber corporation tract of land, while the
defendant likewise offered testimony of lay witnesses
and a surveyor who testified that the bridge was located
on defendant's property. The trial judge [**8] being
dissatisfied with the surveys and lay testimony relative to
the division line between the two properties and the location
of the bridge, appointed a disinterested surveyor,
who made a survey for the court. This surveyor found
that the bridge in contest was located on the lumber corporation's
tract of land. The trial judge came to the conclusion
that the bridge did belong to the lumber corporation
and not to the defendant. Such was also the conclusion
of the trial judge in the suit of the lumber corporation
against plaintiff and his vendors. We deem it unnecessary
to go into details with reference to the survey
made by the various surveyors who attempted to locate
the line between the S. W.1/4 of S. E.1/4 and S. E.1/4 of
S. W.1/4 of this section so as to determine on whose land
the bridge was located. Suffice it to say that after a careful
consideration of the evidence, both in this case and in
the lumber corporation case, we find no manifest error in
the conclusion of the trial judges, but to the contrary, we
are of the opinion that the bridge was located on the land
of Kirby Lumber Corporation, as found by the trial
judge.
Since the bridge was located on the land of the
lumber [**9] corporation and belonged to it, Jones sold
something that did not belong to him. He not only gave a
general warranty to his purchasers as contained in all
sales, but, in accordance with Civil Code Article 2503, he
gave a special and additional warranty as quoted supra.
8 So. 2d 711, *; 1942 La. App. LEXIS 61, **
Page 3
Besides being liable under this special warranty, he is
also liable, under Civil Code Article 2506, on his general
warranty, to his purchasers, not only to restore the price,
but also to reimburse the purchasers all losses and damages
sustained by them by reason of being deprived of
the property.
As plaintiff has the right to compel defendant to comply
with the warranties which he made in the deed to Newman
and Middleton, there only remains the question as to
the extent and amount for which defendant is liable.
The trial judge rendered a judgment in the lumber
corporation suit against plaintiff and his co-defendants,
plaintiff's vendors and defendant's vendees, in solido, for
$ 1,000, as the value of the bridge. The plaintiff has conclusively
proven that he paid this amount in satisfaction
of the judgment and retained the material and the remaining
portion of the bridge. It then became his property
in full ownership. [**10] In other words, he was
condemned to pay this amount to be kept from eviction
of the property. In the case of Filhiol v. Cobb, 36 La.
Ann. 792, it was held that [HN1] when a vendee purchases
a superior title to avoid dispossession, [*714]
the vendee can recover the sum thus paid. This case is
very similar to the case at bar.
Plaintiff has also proven that he expended the sum of $
115 as attorney's fees in the defense of the lumber corporation
suit; in addition thereto, he has conclusively
proven the following expenditures incurred by virtue of
the corporation suit: $ 75 as surveyor's fees and helpers
in surveying of the lands; $ 180 in attending court and
looking after the defense of the suit, thus making an aggregate
total of $ 1,370.
He has failed to prove wherein he paid any interest
and/or costs. He is not entitled to any claim for any loss
of part of the material, because this material was in his
possession as owner; the same can be said as to his claim
of $ 90 which he claims to have paid to a watchman; not
only that, but he has failed to definitely prove any definite
loss of material or the payment to a watchman; likewise
he has failed to prove any loss of profits. These
[**11] claims are disallowed.
The lower court having granted plaintiff a judgment of $
1,152.49, and since we are of the opinion that the facts
and the law justify an award of $ 1,370, or an increase in
the said judgment to the extent of $ 217.51, it necessarily
follows that the judgment has to be amended.
For these reasons, the judgment appealed from is
amended by increasing the amount awarded from $
1,152.49 to $ 1,370, and as thus amended the judgment is
affirmed, the defendant to pay all costs.

8 So. 2d 711, *; 1942 La. App. LEXIS 61, **
CONCUR: LE BLANC and OTT, JJ., concur.
Page 4

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SUBSEQUENT HISTORY: [***1]
Rehearing Denied June 16, 1966.
PRIOR HISTORY:
81 S.D. 637, *; 140 N.W.2d 386, **;
1966 S.D. LEXIS 133, ***
LEXSEE 81 SD 637
DuPRATT et al., Respondents v. BLACK HILLS LAND AND ABSTRACT
COMPANY, Appellant
Appeal from Circuit Court, Lawrence County; Hon.
Leslie R. Hersrud, Judge.
DISPOSITION:
Affirmed as modified.
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant, a title abstract
company, appealed a judgment from the Circuit Court,
Lawrence County (South Dakota), which found in favor
of plaintiff sellers in the sellers' action for negligence
concerning an erroneous abstract. The trial court awarded
the sellers attorney fees and other litigation costs involved
in the underlying litigation with the purchasers
plus an additional sum lost as a result of the erroneous
abstract.
OVERVIEW: The sellers entered into a contract of sale
of a motel. In abstracting the recorded conveyance, the
company erroneously included a tract of land not owned
by the sellers. Extended litigation then resulted between
the sellers and the purchasers, which resulted in specific
performance of the contract. However, the sellers were
required pay a sum to offset the mistake in the deed. The
sellers then filed a negligence action against the company.
The trial court awarded the sellers their attorney fees
and litigation costs from the underlying action and required
the company to reimburse the sellers for the offset
payment. On appeal by the company, the court modified
the judgment by only requiring the company to pay the
sellers' attorney fees and costs. The court held that the
No. 10139
Supreme Court of South Dakota
81 S.D. 637; 140 N.W.2d 386; 1966 S.D. LEXIS 133
February 21, 1966, Opinion Filed
Page 1
attorney fees and costs in the underlying action were the
natural and proximate consequence of the error in the
abstract, were incurred in good faith by the sellers, and
were reasonable.However, the court held that the award
of the offset payment was erroneous. The action against
the company was based on contract, and the sellers failed
to prove that they had been damaged for the offset.
OUTCOME: The court modified the judgment by reducing
the award to the sellers to equal the attorney fees
and other litigation costs. As modified, the court affirmed
the judgment.
LexisNexis(R) Headnotes
Evidence > Witnesses > Examination & Presentation of
Evidence
Evidence > Witnesses > Expert Testimony
[HN1] Except where the subject is one for experts or
skilled witnesses alone and concerns a matter of science
or specialized art or other matters of which a layman can
have no knowledge that the opinions of experts are not
necessarily conclusive even when uncontroverted, and all
or part of an opinion may be accepted or rejected as it
appeals to the judgment and conscience of the trier of the
facts.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] Where the natural and proximate consequence of
a wrongful act has been to involve plaintiff in litigation
with others, there may, as a general rule, be a recovery in
damages against the author of such act of the reasonable
expenses incurred in such litigation, together with compensation
for attorneys' fees, and such costs as may have

een awarded against plaintiff; but such expenses must
be the natural and proximate consequence of the injury
complained of, and must have been incurred necessarily
and in good faith, and the amount thereof must be reasonable.
Real & Personal Property Law > Deeds & Recording >
Defective Deeds
[HN3] The liability of abstracters for any and all damages
sustained by any person by reason of any error, deficiency
or mistake in any abstract or certificate of title or
continuation thereof made and issued by such abstracter
is recognized in S.D. Code § 1.0107.
Real & Personal Property Law > Deeds & Recording >
Defective Deeds
[HN4] An action against an abstracter for damages resulting
from an error in an abstract is based upon contract
and not upon tort.
COUNSEL:
Richard Furze, Lead, and Overpeck, Hamblin &
Mueller, Belle Fourche, for defendant and appellant.
Hayes & Richards, Deadwood, for plaintiffs and
respondents.
JUDGES:
Grieves, C.J. All the Judges concur. Grieves,
Circuit Judge, sitting for Rentto, P.J., disqualified.
OPINIONBY:
GRIEVES
OPINION:
[**386] [*638] This action against the defendant
abstract company for damages resulting from
[**387] alleged negligence in the preparation of an
abstract of title was tried to the court without a jury.
The trial court in his decision found as follows:
"FINDINGS OF FACT
"I.
"That an abstract of title prepared for
plaintiffs by defendant abstract company
abstracted a recorded conveyance in such
careless manner as to except or exclude a
certain Lot 8 whereas said abstract should
have shown an area adjacent to said lot as
being excepted or excluded in the conveyance
to plaintiffs' immediate grantors.
81 S.D. 637, *; 140 N.W.2d 386, **;
1966 S.D. LEXIS 133, ***
"II.
"That relying upon such erroneous description
plaintiffs contracted to convey a
tract of land not [***2] owned by them
which resulted in extended litigation between
plaintiffs [*639] and the contracting
purchasers and caused losses to
plaintiffs, to-wit: attorney fees and other
costs of litigation aggregating $ 2,693.32
and the sum of $ 2,250.00 deducted from
the recovery to which plaintiffs were entitled
but for such erroneous abstract.
"CONCLUSION OF LAW
"I.
"That judgment be entered for plaintiffs
in the sum of $ 4,493.32 with interest
at the rate of six percent per annum on $
2250.00 from the 2nd day of January,
1960, and interest at said rate on $
2693.32 from the 6th day of March, 1961,
and costs of this action to be taxed by the
clerk of this Court."
Page 2
Thereafter, judgment was entered against defendant for
the sum of $ 5,842.58 plus costs of $ 51.70. From this
judgment the defendant perfected its appeal to this court.
Appellant first challenges the sufficiency of the evidence
to support the above findings of fact. We have
carefully reviewed all of the evidence including the file
in the case of Arthur DuPratt and Dagmar DuPratt v.
Clayton F. Stangl, Lucille Stangl, Joseph L. Turner and
Mary Turner which was made a part of the records in this
action by [***3] order of the trial judge. We are of the
opinion that such evidence is amply sufficient to sustain
the findings, except as to the finding of alleged damage
of $ 2,250 in findings of fact number II.
On August 28, 1959 the DuPratts and the Stangls
and Turners entered into a contract of sale wherein the
DuPratts agreed to sell their business property known as
DuPratt's Motel and Service in Deadwood, South Dakota,
to the Stangls and Turners for the sum of $ 42,000
payable in installments. The attorney who drafted the
agreement for the parties copied the metes and bounds
description of the real estate involved from a continuation
of abstract of title of the property prepared for the
DuPratts by the defendant Abstract Company. This
description was copied from the abstract of a warranty
deed from Anna Frances [*640] McHugh to M. D.
Hoyt and Frances Hoyt which deed constituted the only
entry in the continuation of abstract at that time. The

abstracter correctly copied the metes and bounds description
from the deed of record until he came to the
metes and bounds exceptions contained at the end of the
deed. Instead of copying said exceptions he undertook to
interpret them by reciting: [***4]
"Excepting from this deed a small portion
of M. S. Nos. 242 and 1054, being Lot 8
in Block A. Swift's Addition and a portion
of Mineral Survey No. 1054."
On November 28, 1959 the DuPratt property, as described
in the McHugh to Hoyt deed of record, was surveyed
and platted [**388] by a registered land surveyor
preparatory to the DuPratts receiving title from the
Hoyts. The plat was recorded in Book 3 of Plats on
page 328. On December 29, 1959 the Hoyts conveyed
the property to plaintiffs by warranty deed which described
the property as platted and contained the following
explanation:
"The premises above described are
formerly known as the McHugh property
and are described by metes and bounds in
that certain deed by Anna Frances
McHugh to the Grantors herein, recorded
in Book 318 at page 355 in the office of
the Register of Deeds of said Lawrence
County."
Lot 8 in Block A of Swift's Addition was owned by John
Rachetto and his wife who operated a motel adjacent to
the DuPratt property. The Rachettos were also selling
their property. In January of 1960 the DuPratts and
Rachettos negotiated a settlement of a long standing dispute
between them [***5] as to the boundary line between
their properties and a release of all claims by
DuPratts against Rachetto for the parking of vehicles on
the DuPratt property by Rachetto. The dispute and
claims were settled on January 27, 1960 by the delivery
of a quitclaim deed from the DuPratts to the Rachettos
for a consideration of $ 2,250 wherein the DuPratts conveyed
all of their interest in "Mineral Surveys bearing
numbers 242 and 1054 and Swift's Addition, all in the
City of Deadwood, except the parts of Mineral Survey
242 and Mineral Survey 1054 as shown in Plat Book 3 at
pages [*641] 328 and 329 in the Office of the Register
of Deeds of said Lawrence County." The contract between
DuPratts and the Stangls and Turners provided for
a payment of $ 30,000 on or before January 2, 1960.
That payment was not made and in February 1960
81 S.D. 637, *; 140 N.W.2d 386, **;
1966 S.D. LEXIS 133, ***
Page 3
DuPratts caused a notice of demand for performance
served upon the Stangls and Turners. On March 22,
1960 the Stangls and Turners through their attorney
served upon the DuPratts a notice to rescind contract.
Said notice contained the following clause:
"The reason and justification for the
rescission is the recent discovery by the
buyers of the sellers' [***6] inability to
convey to the buyers all of the above described
property pursuant to the terms of
the said contract, therefore resulting in a
failure of a substantial part of the consideration,
and fraudulent misrepresentations
of the sellers to the buyers as to the
amount of land available for further expansion
of improvements."
On the same date the DuPratts commenced an action
against the Stangls and Turners for reformation of contract
and for specific performance. The court in that
case reformed the contract to provide for the correct description
of the property and ordered strict performance
of said contract as reformed. The court found as one of
its findings of fact therein:
"That the parcel of ground conveyed
to Rachetto did not represent any substantial
portion of the consideration the plaintiffs
had promised to convey to defendants
under their contract of sale, but does
represent a partial failure of consideration
for which defendants are entitled to an
offset by way of damages in the amount
of Two Thousand Two Hundred Fifty and
No/100 Dollars ($ 2,250.00)."
The court also found as a fact that the abstract of title
contained "An insufficient and [***7] incorrect description
of the premises conveyed to plaintiffs' immediate
grantors, which appears on Pages 118 and 119."
Defendant called Albert B. Mitchell, a registered
land surveyor, as an expert witness. Although his qualifications
as [*642] a surveyor were admitted, he did
not testify that he had personally surveyed the property
but rather drew a rough sketch of a portion of the property
as described in the metes and bounds description.
He [**389] then testified that he had seen the plat of
Swift's Addition in the Register of Deeds office and gave
his opinion that the exception, as abstracted in the
McHugh to Hoyt deed did describe Lot 8 in Swift's Ad-

dition. Defendant contends that the trial court was, as a
matter of law, bound by the uncontroverted opinion of
said expert witness. We do not agree. The rule is that
[HN1] except where the subject is one for experts or
skilled witnesses alone and concerns a matter of science
or specialized art or other matters of which a layman can
have no knowledge that the opinions of experts are not
necessarily conclusive even when uncontroverted, and all
or part of an opinion may be accepted or rejected as it
appeals to the judgment and [***8] conscience of the
trier of the facts. 32 C.J.S. Evidence § 569.
Defendant also contends that attorneys' fees incurred
by plaintiffs in litigating the Stangl case are not proper
damages in this case and are contrary to law and cites
SDC 1960 Supp. 33.1802 and cases thereunder as authority
for its contention. Said statute and the cited cases
govern attorneys' fees allowed as costs in the immediate
action but do not govern attorneys' fees as an item of
damages in a subsequent action.
[HN2] "Where the natural and proximate
consequence of a wrongful act has
been to involve plaintiff in litigation with
others, there may, as a general rule, be a
recovery in damages against the author of
such act of the reasonable expenses incurred
in such litigation, together with
compensation for attorneys' fees, and such
costs as may have been awarded against
plaintiff; but such expenses must be the
natural and proximate consequence of the
injury complained of, and must have been
incurred necessarily and in good faith, and
the amount thereof must be reasonable."
25 C.J.S. Damages § 50, p. 534. See
also Rectenbaugh v. Northwestern Port
Huron Co., 22 S.D. 410, 118 N.W. 697;
Morin v. Divide County [***9] Abstract
Co., 48 N.D. 214, 183 N.W. 1006 and
[*643] Goldberg v. Sisseton Loan & Title
Co., 24 S.D. 49, 123 N.W. 266, 140
Am.St.Rep. 775.
81 S.D. 637, *; 140 N.W.2d 386, **;
1966 S.D. LEXIS 133, ***
Page 4
[HN3] The liability of abstracters for any and all damages
sustained by any person by reason of any error, deficiency
or mistake in any abstract or certificate of title or
continuation thereof made and issued by such abstracter
is recognized in SDC 1.0107. Such liability has also
been considered by this court in Stephenson v. Cone, 24
S.D. 460, 124 N.W. 439, 26 L.R.A., N.S., 1207 and
Goldberg v. Sisseton Loan & Title Co., 24 S.D. 49, 123
N.W. 266. We are of the opinion that the attorney fees
and other costs of litigation in the case of DuPratts v.
Stangls and Turners in the sum of $ 2,693.32 were the
natural and proximate consequence of the error in the
abstract; were incurred in good faith by the DuPratts; that
the amount incurred was reasonable and a proper item of
damages in this case.
Defendant further contends that the trial court erred
in allowing as damages the item of $ 2,250 deducted
from the contract price by the court in the DuPratt v.
Stangl and Turner case. We agree. Plaintiffs contracted
to sell all of their rights in [***10] their motel property
to the Stangls and Turners for $ 42,000. Thereafter,
by quitclaim deed they transferred some of their rights in
said property to Rachetto for $ 2,250. The Stangls and
Turners were required to pay to plaintiffs the balance of
the full purchase price of $ 42,000. Consequently,
plaintiffs could not be damaged the $ 2,250 unless they
are legally bound to refund said amount to Rachetto.
The transaction between Rachettos and plaintiffs took
place over five years ago. No refund had been made
and there is no evidence in either the case of DuPratt v.
the Stangls and Turners or this case that the Rachettos
had demanded or even asked for a refund. [HN4] An
action against an abstracter [**390] for damages resulting
from an error in an abstract is based upon contract
and not upon tort. Commercial Bank of Mott v.
Adams County Abstract Co., 73 N.D. 645, 18 N.W.2d 15.
The burden of proof was upon the plaintiffs to prove that
they had been damaged the $ 2,250. This, we believe
they completely failed to do. This item of damage is
therefore disallowed.
[*644] The judgment of the trial court is modified
by reducing the amount thereof from $ 5,842.58 plus
costs of $ [***11] 51.70 to the sum of $ 2,693.32 plus
interest at the rate of six percent per annum from March
6, 1961 to the date of judgment plus costs of $ 51.70.
As so modified, the judgment is affirmed.

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PRIOR HISTORY: [**1]
839 F.2d 1171, *; 1988 U.S. App. LEXIS 1990, **
LEXSEE 839 F2D 1171
Nilson-Newey and Company, A Utah General Partnership, Plaintiff-Appellee, v. Ray
L. Ballou, Defendant-Appellant
No. 86-5309
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
On Appeal from the United States District Court for the
Eastern District of Kentucky.
DISPOSITION:
The judgment of the district court is in all respects
affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant attorney sought
review of a judgment of the United States District Court
for the Eastern District of Kentucky, which was entered
after a jury rendered a verdict in favor of appellee real
estate investor in appellee's legal malpractice action.
OVERVIEW: Appellee real estate investor filed an action
against appellant attorney for malpractice, alleging
that appellant's negligent title examination and report
resulted in damage to appellee. The district court entered
judgment on a jury's verdict in favor of appellee. Appellant
sought review. On appeal, the court affirmed. The
court held that appellant's claims of unfair surprise and
error in the admission and exclusion of evidence were
without merit. In addition, the difference in the value of
the property and the price paid was a proper method of
calculating damages because appellee showed that it
would not have purchased the property absent appellee's
negligent conduct. Further, the court held that the district
court did not abuse its discretion when it awarded damages
for loss of use of the invested funds and for the expenses
incurred in a quiet title action. The disclaimer in
appellant's title opinion did not insulate him from liability
because he had reasonable grounds to suspect defects
which he failed to disclose to appellee.
839 F.2d 1171; 1988 U.S. App. LEXIS 1990
July 28, 1987, Argued
February 18, 1988, Decided
February 18, 1988, Filed
Page 1
OUTCOME: The court affirmed. The court held that
appellant attorney's claims of unfair surprise and error in
the admission and exclusion of evidence were without
merit. In addition, the court held that the methods of
calculating appellee real estate investor's damages were
proper, and held that the district court properly awarded
damages for loss of use and attorneys fees and costs.
LexisNexis(R) Headnotes
Torts > Negligence > Defenses > Comparative & Contributory
Negligence
[HN1] Contributory negligence is an affirmative defense
under Kentucky law.
Torts > Damages > Mitigated Damages
[HN2] The duty to mitigate arises only after the defendant's
tortious conduct, not before it.
Civil Procedure > Appeals > Standards of Review >
Standards Generally
[HN3] In reviewing the factual findings of a jury in a
diversity case, the courts must apply the standard of review
that the Kentucky courts would use. Kentucky applies
a clearly erroneous standard to the factual findings
of juries.
Torts > Damages > Prejudgment Interest
[HN4] In Kentucky, interest runs as a matter of right on a
liquidated demand, and, in the case of an unliquidated
claim, the allowance of interest rests in the discretion of
the jury or the court trying the case.
Torts > Damages > Costs & Attorney Fees
[HN5] The reasonable expenses of prior litigation caused
by the wrongful act of another, including compensation
for attorneys' fees, may be recovered where the party

incurring them acted in good faith in bringing his action
or making defense.
Torts > Damages > Costs & Attorney Fees
[HN6] One who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover reasonable compensation for loss of time,
attorney fees and other reasonable expenditures thereby
suffered or incurred in the earlier action.
Torts > Malpractice Liability > Attorneys
[HN7] A lawyer certainly may protect himself by reservations
and disclaimers expressly set forth in a certificate
of title, but only if he has no reasonable grounds to suspect
the actual existence of defects not mentioned. The
average layman is not familiar with and ordinarily does
not understand legal descriptions, and if his lawyer, accidentally
or otherwise, receives information that should
reasonably put him on notice of a defect we think it is his
duty to investigate or report it to his client.
COUNSEL:
Robert L. Milby, Hamm, Milby and Ridings, for
Appellant.
Robert Houlihan, Jr., Stoll, Keenon and Park, Perry
M. Bentley, for Appellee.
JUDGES:
Kennedy and Nelson, Circuit Judges, and Weber,
District Judge. *
* The Honorable Herman Weber, United
States District Judge for the Southern District of
Ohio, sitting by designation.
OPINIONBY:
NELSON
OPINION:
[*1172] DAVID A. NELSON, Circuit Judge.
The defendant in this legal malpractice action is a
lawyer who, notwithstanding a glaring conflict of interest,
represented both the purchaser and an interested
middleman in a Kentucky land transaction. When the
lawyer prepared a legal description of the property for
the purchaser, he left out the acreages of the individual
parcels comprising the tract and failed to advise the purchaser
that the parcels seemed to contain only about half
as many acres, in toto, as the purchaser thought. As a
839 F.2d 1171, *; 1988 U.S. App. LEXIS 1990, **
Page 2
result, the purchaser went through with an acquisition
that would not otherwise have been made.
After the acquisition had been [**2] completed, the
purchaser learned of an adverse mineral rights claim that
led to the expenditure of considerable time and money in
an action to quiet title. The purchaser sued the lawyer in
federal court, where jurisdiction existed because of diversity
of citizenship, and the jury rendered a verdict for
the purchaser in the amount of $ 375,000. The defendant
lawyer has appealed.
Finding no merit in the lawyer's assignments of error,
we shall affirm the judgment that was entered for the
plaintiff on the verdict of the jury.
I
During the late 1970s the price of coal escalated
sharply; investor interest in land on which it was thought
coal deposits might be discovered increased correspondingly.
Mr. Darrell Nilson, a principal of the plaintiff
partnership in this case, was an investor who had such an
interest. Learning of a tract of land in Knox County,
[*1173] Kentucky, that he thought might be promising,
Nilson, a resident of Utah, came east to see about buying
it.
Nilson met with a man named Lester Dugger, who
was acquainted with the owner of the land, a Mr. Gambrel.
Dugger told Nilson that he would like to buy the
property himself, but because he lacked the money [**3]
to do so he said he would be willing to arrange for Gambrel
to sell it to Nilson. Dugger suggested that Gambrel
was a suspicious man who would not sell to an outsider,
and Dugger offered to act as a straw, buying the property
on Nilson's behalf. In exchange for his services, Dugger
said he wanted a share of the proceeds of any future coal
mining operations; he represented that this would be his
only compensation.
Dugger and Nilson went out to look at the property,
Dugger describing supposed coal deposits and telling
Nilson that there were between 700 and 1,000 acres of
land in the Gambrel tract. Nilson made no independent
investigation of Dugger's claims.
Nilson returned to Utah, and after discussing the investment
opportunity with his partner, Nilson spoke by
telephone with Dugger and Dugger's lawyer, Defendant
Ray Ballou. In the course of the telephone conversation
the parties worked out an understanding that was then
memorialized in a letter agreement.
On October 18, 1977, Nilson returned to Kentucky,
accompanied by his Utah lawyer, to meet with Dugger
and Ballou. The parties discussed their letter agreement,
in which Dugger had represented to Nilson that there
were 700 acres [**4] in the tract. The Nilson partner-

ship was to pay $ 250,000 for the land, and Dugger was
prohibited from receiving any compensation other than a
prescribed share of the proceeds from future coal mining.
Nilson emphasized two concerns at the meeting: he
wanted to make sure that the tract contained at least 700
acres, and he wanted to make sure that the partnership
was getting clear title to the property.
Ballou told Nilson that he was qualified to do the
necessary title work. Although Nilson and his lawyer
knew that Ballou was also Dugger's attorney, Nilson
entrusted Ballou with the title work and went back to
Utah to raise the money. Some people named Brasher
provided the entire $ 250,000, and the Nilson Partnership
assumed an obligation to repay half that amount.
Meanwhile, Ballou went about his title work. How
deeply he dug into it may be open to question. A competent
search would have revealed that the tract of land
being offered by Gambrel appeared to contain substantially
less than the 700 acres Nilson thought he was getting.
The testimony of Mr. J. T. Cline III, the plaintiff's
expert, indicates that approximate acreage amounts were
set forth in the title documents for the [**5] individual
parcels comprising the Gambrel tract, and that the total
of these amounts was only 357 acres. Ballou either ignored
the acreage amounts set forth in the documents he
had undertaken to examine, or he chose not to inform
Nilson and the Brashers of the discrepancy. His title
opinion stated: "Due to the inaccuracy of the acreage
shown on the deeds, it is impossible to determine the
acreage involved without a survey."
The deed prepared by Ballou omitted any reference
to acreage. Mr. Cline testified that this was not normal:
"Q57. Mr. Cline, Mr. Milby has
pointed out the difference between the
contract that said 700 acres and the deeds
that didn't say anything about acreage.
Now, is it a normal practice, when running
a title from a contract being the point
of departure that you eliminate the acreage
call when you draft a deed?
A. No, it is not.
Q58. Did you notice anything else
unusual about the way in which the descriptions
were translated from the old
source deeds into the deed that Mr. Ballou
prepared?
A. Yes; Mr. Ballou drew up two
deeds. One was the James Gambrel to
Doris Dugger and Doris Dugger to
Brashear [sic]. And the deed from James
Gambrel to Doris [**6] Dugger, that is
where it is described as parcel one, parcel
839 F.2d 1171, *; 1988 U.S. App. LEXIS 1990, **
two, [*1174] parcel three, parcel four,
parcel five, parcel six. In particular, when
you describe parcel five, the reference to
the 152 acres, that deed was, when conveyed
to James by the Commissioner in
1940, had a legal description at the end of
which -- a part of a legal description had
the best boundary description in that it
contained 152 acres. When that description
-- James to Doris Dugger, the boundary
descriptions, and the phrase indicating
152 acres was deleted, taken out."
Page 3
In addition to ignoring or concealing the actual
acreage, Ballou failed to disclose, and presumably failed
to find out, that a purchaser buying the Gambrel tract
with an eye toward coal mining might well be buying a
lawsuit. In 1909 a man named Lincoln Gambrel had
granted the mineral rights to a portion of his land to
McCall Land Company. This grant of mineral rights was
reflected in the land records in such a way that it would
have been impossible, without doing a survey, to determine
whether or not the mineral rights were included in
the tract Nilson intended to buy. Ballou's title opinion
contained no reference to the grant [**7] of mineral
rights to the McCall Land Company.
On October 25, 1977, Nilson returned to Kentucky
for the closing. Concurring in Dugger's judgment that
Gambrel would not deal with an outsider, Ballou left
Nilson in a room in the Knox County courthouse where
Gambrel would not observe him. Ballou then joined
Dugger and witnessed Dugger's purchase of the tract of
land from Gambrel. The purchase price was $ 150,000.
Dugger and Ballou then went to retrieve Nilson, and
Dugger conveyed the land to Nilson. The price Nilson
paid Dugger was $ 250,000. Ballou, who knew the price
terms of both transactions, had been present at the October
18 meeting where it was agreed that Dugger would
make no profit except on production of coal -- yet Ballou
said nothing to his client Nilson about the secret $
100,000 profit that was being pocketed by his client
Dugger.
After acquiring the land, Nilson arranged with Resource
Coal Company to begin prospecting. Resource
was promptly evicted by McCall Land Company, which
claimed that it owned the mineral rights by virtue of the
1909 grant from Lincoln Gambrel. Ultimately a surveyor
named Bob Fentress determined that the McCall mineral
rights did not extend to [**8] Nilson's tract. Nilson also
learned from this survey that his tract contained only
363.25 acres.

McCall disagreed with Fentress' findings as to the
extent of its mineral rights, and the Nilson partnership
brought quiet title litigation that was not completed until
1983, when this court affirmed a district court finding in
favor of the partnership. The partnership incurred substantial
legal expenses in connection with its suit against
McCall.
The action that is the subject of the present appeal
was commenced against the Duggers (husband and wife)
and against the Gambrels (estate and wife of James
Gambrel) on February 26, 1979. Ballou was not named
as a defendant in the original complaint. Ballou suggests
that this was because Nilson wanted to secure his cooperation
in the McCall litigation. Be that as it may, an
amended complaint was filed on August 27, 1979, naming
Ballou as an additional defendant. The McCall case
was pending in the district court at the same time, and
the instant case was not pressed until after the conclusion
of the McCall action.
A bifurcated trial on the liability of Ballou alone was
conducted before a jury in November of 1985. The jury
found that Ballou [**9] was negligent, but after a trial
on the damage phase the jury could not reach a decision
as to how much the partnership was entitled to recover.
A second trial on damages was conducted before a new
jury, and that jury found that the plaintiff partnership was
entitled to $ 375,000. Of this amount $ 213,700 was "the
amount by which the purchase price exceeded the actual
value of the property"; $ 130,000 represented the "loss of
the use of [the $ 213,700] awarded . . . above"; and $
31,300 represented "the cost of defending the title
against the McCall mineral claim."
[*1175] II
On appeal, Ballou complains initially of certain
"procedural errors." He says first that he was unfairly
surprised when the trial court permitted the plaintiff
partnership to make an issue of his failure to discover the
McCall mineral rights claim. If Ballou was surprised,
however, it can only have been because he failed to read
the pleadings. The original complaint stated that while
the sellers told Nilson that they had good, unimpaired
title to the land, "the McCall Land Company has asserted
the rights to any and all minerals located in or on said
real property." The amended complaint said of [**10]
Ballou that
"(i) In the course of examining the title
to said real property, said defendant
discovered or in the exercise of reasonable
skill and care should have discovered
the existence of a claim or of the basis for
a possible claim to the mineral rights to
said real property by the McCall Land
Company.
839 F.2d 1171, *; 1988 U.S. App. LEXIS 1990, **
"(ii) Said defendant failed to disclose
to the plaintiff or the Brashers the existence
of such claim or of the basis for such
possible claim by the McCall Land Company."
Page 4
The second alleged "procedural error" involves the
introduction of evidence tending to show that Ballou
might have been guilty of defrauding Nilson. Whatever
the evidence in question may show as to fraud, all of it
was also relevant to issues other than fraud -- issues such
as Ballou's knowledge of the nature of the transaction,
the standard of conduct normally to be expected of lawyers,
and Ballou's failure to live up to that standard. The
plaintiff was entitled to make the case that had been
pleaded, and this necessarily involved a showing that
Ballou was guilty of unprofessional conduct. Any resultant
"prejudice" was not the result of the evidence per
se, but of Ballou's unprofessional conduct. [**11]
The last of the alleged "procedural errors" was the
refusal of the district court, during the damages phase of
the trial, to let Ballou show that Nilson's loss "was due to
Nilsen's [sic] own folishness [sic] rather than because of
any act or omission by Ballou." It is apparent, however,
that Ballou waived any contributory negligence defense
by failing to plead it and by failing to raise it during the
liability phase of trial. Cf. Mitchell v. United States, 396
F.2d 650 (6th Cir. 1968) (per curiam) ([HN1] contributory
negligence is an affirmative defense under Kentucky
law.)
Ballou counters by arguing that the evidence was
admissible on the issues of causation and mitigation of
damages. The "mitigation of damages" contention must
fail because [HN2] the duty to mitigate arises only after
the defendant's tortious conduct, not before it. The "causation"
contention fails because causation was at issue in
the liability phase of the trial, not the damages phase. Cf.
Hilen v. Hays, 673 S.W.2d 713, 720 (Ky. 1984), where
comparative or contributory negligence seems to have
been regarded as relevant to the issue of proportionate
liability rather than to the issue [**12] of what the total
damage amounted to.
III
The second issue on appeal is whether the damages
were properly calculated. This issue breaks down into
three parts: whether it was appropriate to take as a measure
of damage the amount by which the purchase price
exceeded the value of the property, whether damages
were recoverable for loss of the use of that amount, and
whether Ballou could be taxed with the cost of the
McCall Land Company litigation.

A
The jury was asked to award the plaintiff partnership
the amount by which the purchase price ($ 250,000) exceeded
the value of the property; the jury concluded that
the excess came to $ 213,700. Ballou argues that this is
an incorrect measure because there was no way for him
to have known whether there was any coal on the land,
and the large difference between what the plaintiff paid
and what the land was actually worth reflects, in part, the
difference between the value of land thought potentially
to be coal-bearing and [*1176] the value of land
known to be without coal. Nilson paid $ 250,000 for
what he thought was 700 acres of land on which he
hoped to find coal, in other words, and what he got was
363.25 acres of [**13] land that had no coal on it.
It is not Ballou's fault that the land turned out to
have no coal, but it is Ballou's fault that the plaintiff
bought the land. Had it not been for Ballou's negligence
(i.e., had Ballou told Nilson about the deficiency in
acreage and about the McCall interest), Nilson would not
have bought the land at all. Nilson testified at trial to that
effect, and given the deference that must be accorded the
jury's verdict, we have no basis for thinking otherwise. If
Nilson had not bought the land, he would not have lost
any money on the deal; he would not have lost anything
because of the lack of coal deposits, just as he would not
have lost anything because he got only half the acreage
he bargained for. On these facts, we are inclined to think
the Kentucky courts would have approved the measure
of damages applied by the district court in this case.
Ballou cites Wiedeman v. Brown, 307 Ky. 231, 210
S.W.2d 764 (1948), where a man bought what he thought
was thirty acres of farmland with a few buildings on it.
The thirty acres turned out to be twenty-six. The Kentucky
Court of Appeals approved the use of a measure of
damages different from that [**14] used here; taking
the total amount paid by the buyer and subtracting the
value of the buildings to get the value of the unimproved
land, the Kentucky court divided the latter amount by the
number of acres the buyer thought he had purchased. The
resulting "per acre" price was then multiplied by four,
that being the number of acres by which the buyer had
been shorted, and this was said to be the amount of the
buyer's damage.
If such a method had been used in the case at bar,
the award would have been substantially less. Nilson
paid $ 250,000 for what he thought was approximately
700 acres of unimproved land, so he intended to pay $
357.14 per acre. He only got 363.25 acres, which meant
that he paid $ 357.14 per acre for 336.75 acres that he
did not get. Under the Wiedeman approach, Nilson's
damages would have been not $ 213,700, but 336.75 x $
357.14, or $ 120,267.85.
839 F.2d 1171, *; 1988 U.S. App. LEXIS 1990, **
Page 5
Nilson's partnership seeks to distinguish Wiedeman
on the ground that the instant case "is not a farm land
purchase case like Wiedeman in which the damage to the
buyer occurred because he received fewer acres than he
thought he was buying. Rather, Nilson-Newey was
damaged because it would not have bought [**15] the
Gambrel property at all had it known the facts negligently
omitted from Ballou's title opinion."
We agree. We also observe that the court in
Wiedeman twice noted that the parties had acted in "good
faith." Wiedeman, 210 S.W.2d at 765-66. In the case at
bar, we have an attorney who (if the jury is to be believed)
n1 acted in violation of his professional obligations.
We find no error in the $ 213,700 award.
B
n1 [HN3] In reviewing the factual findings
of the jury in this diversity case, we must apply
the standard of review that the Kentucky courts
would use. Moran v. Johns-Manville Sales
Corp., 691 F.2d 811, 813 (6th Cir. 1982). Kentucky
applies a clearly erroneous standard to the
factual findings of juries. See Moskowitz v.
Peariso, 458 F.2d 240 (6th Cir. 1972). We can
find no clear factual error here.
As to the award of damages for the partnership's loss
of the use of the money tied up in this transaction, there
is a long line of Kentucky [**16] authority leaving the
decision on such questions in the hands of the trial court.
"We have long held [HN4] in Kentucky 'that interest
runs as a matter of right on a liquidated demand, and, in
the case of an unliquidated claim, the allowance of interest
rests in the discretion of the jury or the court trying
the case.' Middleton v. Middleton, 287 Ky. 1, 152 S.W.2d
266 (1941)." City of Henderson Police and Fireman
Pension Board v. Riley, 674 S.W.2d 27, 33 (Ky. App.
1984). The award of pre-judgment interest on the
unliquidated [*1177] claim in the case at bar was not
an abuse of discretion.
C
Ballou also claims that it was improper for the partnership
to be awarded the cost of clearing the title with
respect to the McCall mineral claim. As far as we can
discern, the only pertinent Kentucky authority is that
cited by the partnership, Indiana National Life Insurance
Co. v. Butler, 186 Ky. 81, 215 S.W. 949 (1919). In Butler
the court noted that

"The prevailing rule seems to be that
[HN5] the reasonable expenses of prior
litigation caused by the wrongful act of
another, including compensation for attorneys'
fees, may be [**17] recovered
where the party incurring them acted in
good faith in bringing his action or making
defense." Id. at 83, 215 S.W. at 950.
See also Restatement (Second) of Torts § 914(2) [HN6]
("One who through the tort of another has been required
to act in the protection of his interests by bringing or
defending an action against a third person is entitled to
recover reasonable compensation for loss of time, attorney
fees and other reasonable expenditures thereby suffered
or incurred in the earlier action."). In the present
case the jury was specifically asked to determine whether
the various items of alleged damages were a "direct and
proximate result of the negligence of defendant, Ray
Ballou." By assessing damages against Ballou for the
cost of the McCall litigation, the jury found that this cost
was "caused by the wrongful act" of Ballou. Butler, 215
S.W. at 950. We affirm on this point as well.
IV
Ballou's final contention is that the disclaimer in his
title opinion should serve to insulate him from any liability
for his misconduct. The disclaimer said: "Due to the
inaccuracy of the acreage shown on the deeds, it is impossible
to [**18] determine the acreage involved
without a survey." Ballou would have this phrase exculpate
him even though he examined -- and his client Nilson
did not examine -- title records affirmatively indicating
that the tract contained not 700 acres, but only
about 357 acres.
Ballou's contention is refuted by Owen v. Neely, 471
S.W.2d 705 (Ky. 1971). Land records involved in that
case showed that a piece of property was an isosceles
triangle with one leg 14 poles long and two legs 17 poles
long. A survey on which the Owens relied showed the
short leg to be 17 poles long and the other legs 22 poles
long. As a result of the defective survey, and the failure
of the Owens' attorney, Mr. Neely, to uncover the problem,
the Owens bought a house that encroached upon the
land of a neighbor.
"Among his defenses Mr. Neely
pleaded that the accuracy of the survey
from which the description in his title report
was taken was not a matter concerning
which he made any certification, that
in fact his certificate was made expressly
'subject to any information that would be
839 F.2d 1171, *; 1988 U.S. App. LEXIS 1990, **
revealed by an accurate survey of the real
estate and subject to any information that
would be revealed by a personal [**19]
inspection of the premises,' that the description
was based on a survey made by
John T. Ligon at the request of the plaintiffs,
and that if it was inaccurate they are
estopped." Owen, 471 S.W.2d at 707.
Page 6
The question facing the Kentucky Court of Appeals was
"whether the facts thus far developed show conclusively
that Mr. Neely is protected by the reservation contained
in his title certificate." The court expressed itself on that
question thus:
"We are of the opinion that [HN7] a
lawyer certainly may protect himself by
reservations and disclaimers expressly set
forth in a certificate of title, but only if he
has no reasonable grounds to suspect the
actual existence of defects not mentioned.
The average layman is not familiar with
and ordinarily does not understand legal
descriptions, and if his lawyer, accidentally
or otherwise, receives information
that should reasonably put him on
notice of a defect we think it is his duty to
investigate or report it [*1178] to his
client." Owen, 471 S.W.2d at 708 (emphasis
supplied).
Defendant Ballou had ample grounds to suspect that
the tract his client Dugger was trying to get Nilson
[**20] to buy -- at a price that would yield Dugger a
hidden and unauthorized profit of $ 100,000 -- had nothing
like the acreage Nilson thought it had. Nilson was
Ballou's client too, even if he did hail from Utah, and
Ballou's duty to investigate or report the discrepancy to
Nilson was hardly discharged by telling Nilson that the
acreage could not be determined without a survey because
of a supposed "inaccuracy" in acreage figures, n2
where Ballou had seen the figures, Nilson had not seen
them, and Ballou conveniently omitted the figures from
the title description that Nilson would see.
n2 The "inaccuracy," as it turned out, was
less than 2 %. The survey ultimately showed that
the tract contained 6 1/4 acres more than the 357
acres shown in the underlying title records.

839 F.2d 1171, *; 1988 U.S. App. LEXIS 1990, **
The judgment of the district court is in all respects AFFIRMED.
Page 7

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85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
LEXSEE 85 HAWAI'I 19
ELIZABETH ANN LEE, a single woman, Plaintiff-Appellee/Cross-Appellant, v.
EDWIN I. AIU, a single man, Defendant-Appellee/Cross-Appellee, and STEVEN B.
DIXON and LUCY PEARSON-DIXON, husband and wife, Defendants-Appellants/Cross-Appellees
PRIOR HISTORY: [***1] APPEAL FROM THE
THIRD CIRCUIT COURT. CIV. NO. 90-347
DISPOSITION: Amended judgment vacated and remanded.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff female joint
tenant appealed a judgment of the Third Circuit Court
(Hawaii), which dismissed her claims for reformation of
a deed and breach of settlement agreement. Defendant
male joint tenant cross-appealed the judgment challenging
the ruling in favor of the female joint tenant on her
claims of negligent/intentional infliction of emotional
distress, tortious interference with contract, and malice.
OVERVIEW: A female joint tenant learned that the
male joint tenant whose interest she had agreed to purchase
sold his interest to a couple when she received a
letter from the couple declaring their interest and stating
that the female joint tenant needed to continue paying the
mortgage to prevent foreclosure. A circuit court jury
ruled in favor of the female joint tenant. The circuit court
dismissed the female joint tenant's claims for equitable
reformation of deed and breach of settlement agreement.
On appeal, the court held (1) the party's intention was for
the property to belong solely to the female joint tenant
and therefore the jury's findings regarding reformation
were to be reinstated and the case remanded with instructions
to reform the deed. (2) the jury's findings regarding
the settlement agreement were to be reinstated
because and the case remanded for the circuit court to
enter an order specifically enforcing the agreement because
there had been an agreement, (3) specific performance,
not attorneys fees, was the remedy for the claim
of breach of settlement agreement, (4) the couple's out-
NO. 18761
SUPREME COURT OF HAWAII
85 Haw. 19; 936 P.2d 655; 1997 Haw. LEXIS 34
April 15, 1997, Decided
April 15, 1997, Filed
Page 1
rageous conduct of sending the letter justified the punitive
damages award.
OUTCOME: The court vacated in part and remanded to
the circuit court and affirmed in part.
LexisNexis(R) Headnotes
Civil Procedure > Jury Trials > Right to Jury Trial
Constitutional Law > Trial by Jury in Civil Actions
[HN1] Haw. Const. art. I, § 13 guarantees that in suits
at common law where the value in controversy shall exceed
$ 5000, the right of trial by jury shall be preserved.
Haw. R. Civ. P. 38(a) provides that the right of trial by
jury as given by the Constitution or a statute of Hawaii or
the United States shall be preserved to the parties inviolate.
Civil Procedure > Jury Trials > Right to Jury Trial
[HN2] The right given by the Hawaii Constitution and
preserved by Haw. R. Civ. P. 38(a) is the right to a jury
trial in suits at common law. The test to determine
whether a suit is "at common law" is whether the cause
of action seeks "legal" or "equitable" relief. In other
words, courts look to the nature of the remedy to determine
whether a jury trial is warranted. Historically, actions
in equity we heard by a judge; actions at law were
triable by a jury. Furthermore, it is well settled that a jury
question goes to the particular issue rather than the overall
case.
Civil Procedure > Jurisdiction > Equity Jurisdiction
[HN3] Where legal and equitable claims are present in
the same case, the trial court is precluded from ruling, in
the first instance, on any equitable claims that may determine
the outcome of the legal claims. In the federal
courts, there is no question that, when legal and equitable

issues turn on the same operative facts, a jury must decide
the legal issue first.
Civil Procedure > Jurisdiction > Equity Jurisdiction
[HN4] When a jury is called upon to make findings in
connection with both legal and equitable matters resting
upon the same set of facts, the trial court is bound by the
jury's findings of fact when making its equitable determinations.
Civil Procedure > Jurisdiction > Equity Jurisdiction
[HN5] Where some of the findings regarding a plaintiff's
legal claims would be dispositive of the plaintiff's equitable
claims, the trial court is required to try the legal
matters to the jury first. Once the jury makes factual determinations
regarding the legal claims, the trial court is
bound by those findings in its determination of the equitable
claims.
Civil Procedure > Jury Trials > Province of Court &
Jury
[HN6] In order for a trial court to ignore a jury's findings,
it would necessarily have to determine that such
findings were not supported by the evidence.
Civil Procedure > Trials > Judgment as Matter of Law
Civil Procedure > Appeals > Standards of Review > De
Novo Review
[HN7] A trial court's rulings on directed verdict or judgment
notwithstanding the verdict (JNOV) motions are
reviewed de novo. Verdicts based on conflicting evidence
will not be set aside where there is substantial evidence
to support the jury's findings. "Substantial Evidence"
is credible evidence which is of sufficient quality
and probative value to enable a person of reasonable
caution to support a conclusion. In deciding a motion for
directed verdict or JNOV, the evidence and the inferences
which may be fairly drawn therefrom must be considered
in the light most favorable to the nonmoving
party and either motion may be granted only where there
can be but one reasonable conclusion as to the proper
judgment.
Civil Procedure > Trials > Judgment as Matter of Law
[HN8] Where there is conflicting evidence, or there is
insufficient evidence to make a one-way verdict proper,
judgment notwithstanding the verdict should not be
awarded.
Contracts Law > Remedies > Specific Performance
[HN9] Haw. Rev. Stat. § 607-14 (1993), provides that
the prevailing party, inter alia, in actions in the nature of
assumpsit, shall recover attorney's fees against the losing
party not to exceed 25% of the judgment. A suit to en-
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Page 2
force an agreement is a suit for specific performance and
is not an action in the nature of assumpsit.
Contracts Law > Breach > Nonperformance
[HN10] Assumpsit is a common law form of action for
the recovery of damages for non-performance of a contract.
Torts > Business & Employment Torts > Interference
With a Contract
[HN11] The requisite elements of tortious interference
with contractual/advantageous relationship are: (1) a
contract between the plaintiff and a third party; (2) the
defendant's knowledge of the contract; (3) the defendant's
intentional inducement of the third party to breach
the contract; (4) the absence of justification on the defendant's
part; (5) the subsequent breach of the contract
by the third party; and (6) damages to the plaintiff.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN12] Normally, pursuant to the "American Rule,"
each party is responsible for paying for his or her own
litigation expenses. This general rule, however, is subject
to a number of exceptions: attorney's fees are chargeable
against the opposing party when so authorized by statute,
rule of court, agreement, stipulation, or precedent. Attorney's
fees are chargeable against the wrongdoer in the
context of a tortious interference with contractual/advantageous
relationship. Where the wrongful act of
a defendant has involved the plaintiff in litigation with
another, or placed the plaintiff in such relations with
others as makes it necessary to incur expenses to protect
his or her interest, such expenses, including attorneys'
fees, should be treated as the legal consequences of the
original wrongful act, and may be recovered as damages.
Torts > Business & Employment Torts > Interference
With a Contract
Torts > Damages > Costs & Attorney Fees
[HN13] Where the wrongful act of a defendant causes a
plaintiff to engage in litigation with a third party in order
to protect his or her rights or interests, attorney's fees
incurred may be chargeable against the wrongdoer as an
element of the plaintiff's damages. In order to recover
attorneys' fees, a plaintiff must establish: (1) that the
plaintiff had become involved in a legal dispute either
because of a breach of contract by the defendant, or because
of defendant's tortious conduct, (2) that the litigation
was with a third party, not with the defendant from
whom the fees are sought to be recovered; (3) that the
attorneys' fees were incurred in that third-party litigation;
and (4) whether the fees and expenses were incurred as a
result of defendant's breach of contract or tort, that they
are the natural and necessary consequences of the de-

fendant's act, since remote, uncertain, and contingent
consequences do not afford a basis for recovery.
Torts > Damages > Costs & Attorney Fees
[HN14] Attorneys' fees may be recoverable when an
aggrieved party files separate lawsuits against the contract
breacher and the tortfeasor, or consolidates both
actions into one lawsuit. Where the aggrieved party consolidates
actions, the jury is required to make a determination
as to that portion of attorney's fees incurred by the
plaintiff in the consolidated action that is attributable to
the plaintiff's litigation with the third party.
Torts > Intentional Torts > Intentional Infliction of
Emotional Distress
[HN15] The elements of intentional infliction of emotional
distress are: (1) that the act allegedly causing harm
was intentional; (2) that the act was unreasonable or outrageous;
and (3) that the actor should have recognized
that the act was likely to result in illness.
Torts > Damages > Punitive Damages
[HN16] Punitive damages are not compensatory in nature;
rather, they are designed to punish a defendant for
"aggravated or outrageous misconduct" and to deter that
defendant from similar conduct in the future.
Civil Procedure > Costs & Attorney Fees > Reasonable
Fee Amount
Torts > Damages > Punitive Damages
[HN17] A jury should be allowed to consider a plaintiff's
attorney fees in determining the amount of a punitive
damages award. When considering attorney's fees in
calculating the amount of the punitive damage award, the
fee amount must be reasonable and necessary.
Torts > Damages > Costs & Attorney Fees
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN18] Attorneys' fees cannot be awarded in addition to
exemplary damages; rather, they must constitute the
whole of the punitive damage award or be accounted for
as a portion of the total punitive damage award. Whether
to award punitive damages and the determination of the
amount are within the sound discretion of the trier of
fact, whether judge or jury.
COUNSEL: On the briefs:
Eric A. Seitz for defendants-appellants/cross-appellees
Steven B. Dixon and Lucy Pearson-Dixon.
William J. Rosdil and Paul K. Hamano for plaintiff-appellee/cross-appellant
Elizabeth Ann Lee.
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Page 3
JUDGES: MOON, C.J., KLEIN, LEVINSON, NA-
KAYAMA, AND RAMIL, JJ.
OPINIONBY: Ronald T.Y. Moon
OPINION:
[*22] [**658] OPINION OF THE COURT BY
MOON, C.J.
Following a jury trial, defendants-appellants/cross-appellees
Steven B. Dixon and
Lucy Pearson-Dixon n1 (collectively, the Dixons) appeal
from the third circuit court's February 13, 1995 amended
judgment, awarding plaintiff-appellee/cross-appellant
Elizabeth Ann Lee general and punitive damages. <strong>Brief</strong>ly
stated, this case involves a dispute over the title to real
property located at 702 Keha Place in Hilo, Hawai'i (the
Keha Place property), breach of a purported settlement
agreement entered into between Lee and defendant-appellee
Edwin I. Aiu, n2 claims of tortious interference
with the purported settlement agreement by the
Dixons, intentionally tortious or negligent conduct by
Dixon toward Lee, and Lee's emotional distress claims.
n1 Pearson-Dixon is now known as Lucy
Larkin.
[***2]
n2 We note that Aiu has not made an appearance
in this appeal.
Lee cross appeals from that portion of the amended
judgment entered in favor of the Dixons and Aiu with
respect to reformation of the deed to the Keha Place
property and in favor of Aiu with respect to the settlement
agreement. Lee also cross appeals from the trial
court's denial of her request for attorney's fees.
For the reasons discussed below, we vacate that portion
of the amended judgment with respect to the deed
and the settlement agreement and remand this case to the
trial court with instructions to: (1) equitably reform the
deed to the Keha Place property to reflect Lee as the sole
owner; and (2) specifically enforce the settlement
agreement. We affirm the trial court's denial of Lee's
request for attorney's fees against Aiu. Additionally, we
affirm in part that portion of the amended judgment with
respect to the Dixons' liability to Lee on the tortious interference
with contractual relations claim, but remand
for a new trial on the issue of damages consistent with
our holding that Lee be allowed to introduce, as an element
[***3] of her damages, evidence of those attorney's
fees she incurred in litigation with Aiu that were

caused by the Dixons' tortious interference with the contractual
relation between Lee and Aiu. Additionally, we
affirm the jury's finding that punitive damages are warranted,
but vacate the award and remand for a new trial
to determine the amount of punitive damages consistent
with our holding that Lee be allowed to introduce, as an
element of punitive damages, evidence of those attorney's
fees she incurred in litigation with the Dixons.
Finally, because it appears from the record that
Dixon, a licensed attorney, engaged in conduct that may
not comport with the Hawai'i Rules of Professional
Conduct (HRPC), we refer this matter to the Office of
Disciplinary Counsel (ODC) for review and appropriate
action.
I. BACKGROUND
According to the testimony adduced at trial, Lee met
Aiu approximately one year after [*23] [**659] her
husband, Clifford Lee (Clifford), passed away. By May
1983, Lee and Aiu had become romantically involved,
and Aiu took up residence with Lee and her minor
daughter in Lee's Oxnard, California home a few months
thereafter. Upon moving in, Aiu brought approximately $
5,000.00 into [***4] the relationship and contributed to
the maintenance of the home and living expenses from
his employment earnings and military pension. Aiu
acknowledged during his testimony that he "did not have
. . . ownership in the Oxnard house."
As a result of many conversations Lee had with her
brother-in-law, Wilbert Lee (Wilbert), who resided in
Hawai'i, Lee decided to purchase a home in Hilo with
proceeds from Clifford's life insurance and the sale of her
two homes: the Oxnard residence and another house in
Rhode Island. Aiu decided to move to Hawai'i with Lee,
at least temporarily, until Lee and her daughter were settled
in a new home. Both Lee and Wilbert testified that
Lee had made it clear that, although Aiu was moving
with her, it was her intention that she would finance the
purchase of a new home and that she would be the sole
owner.
The sale of the Oxnard home netted Lee $
62,215.78. Because she was unable to be present at closing
or during the move to Hilo, Lee instructed escrow to
disburse $ 15,000.00 of the net proceeds to Aiu to cover
the moving expenses and to disburse the balance to her.
Upon her subsequent arrival in Hilo, Lee deposited the $
47,215.78 balance into a joint [***5] account with Aiu
(the Merrill-Lynch account). Lee testified that she did
not intend to make a gift to Aiu, but put his name on the
account so that if anything happened to her, Aiu could
carry out her intended purpose: to purchase a home in
Hilo for her daughter. Using the proceeds from Clifford's
life insurance and the sale of the Rhode Island home, Lee
also established a similar account with Wilbert. Lee tes-
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Page 4
tified that she had no intention to make a gift to Wilbert
and put his name on the account for the same reason that
she put Aiu's name on the Merrill-Lynch account. While
looking for a home to purchase in Hilo, Aiu, Lee, and
Lee's daughter [hereinafter, collectively, the threesome]
stayed with Wilbert for a few months and then moved
into a rental home. Eventually, the threesome located a
suitable home at the Keha Place property. By that time,
however, Lee was experiencing credit problems due to a
stolen credit card and general financial difficulty. n3
According to Lee, Aiu offered to assist her in securing
financing by co-signing the mortgage and the note. She
testified that, because Aiu's name would appear on the
mortgage papers, they believed that Aiu's name would
also have [***6] to appear on the deed to the property.
n3 The record indicates that, at the time, the
Merrill-Lynch account balance had declined to
approximately $ 30,000.00.
In February 1986, Lee's offer to purchase the Keha
Place property was accepted. It is undisputed that Lee
made the $ 15,000.00 down payment exclusively from
her own monies. She and Aiu then proceeded to sign all
of the relevant documents as joint tenants with the right
of survivorship. In response to the question whether Aiu
"ever discussed the fact that [Aiu's] involvement in the
purchase of a residence was to allow her to qualify for a
loan[]," Aiu stated, "That was the key purpose."
The threesome moved to the Keha Place property
and lived there together, off and on, until July 1990.
Although Lee and her daughter lived in the home continuously,
Aiu went back and forth between Hawai'i and
California for employment purposes. Between 1985 and
1990, both Lee and Aiu contributed financially to the
cost of the Keha Place property. Although Aiu made
[***7] approximately $ 23,000.00 in mortgage payments,
Lee testified that, during that period, Aiu, in conversations
with various members of Aiu's family, referred
to the Keha Place property as "the nice home that
[Lee] had bought in Hilo."
Sometime in early 1989, the relationship between
Lee and Aiu began to deteriorate. Lee testified that Aiu
expressed a desire to remove his name from the deed and
move back to California permanently. In July 1989, after
a brief reconciliation, Lee testified that Aiu once again
informed her that he was [*24] [**660] leaving
Hawai'i and requested that Lee reimburse him the $
23,000.00 that he had contributed to the mortgage in
exchange for his consent to remove his name from the
deed. Lee refused, reminding Aiu of their agreement that
the house was hers. The matter was dropped for several

months until December 13, 1989, when Lee learned that
she had breast cancer.
Lee underwent a radical mastectomy on December
29, 1989, was released from the hospital on December
31, 1989, and immediately began a nine-month course of
chemotherapy. Toward the end of January 1990, Lee
testified that Aiu again announced that he wanted to
leave Hawai'i. According to Lee, Aiu, on this [***8]
occasion, demanded $ 25,000.00 in exchange for his
agreement to remove his name from the deed. When
asked why he wanted to leave following Lee's surgery,
Aiu testified that "she wouldn't talk to me . . . . So it was
like 180 degrees switch over from loving to . . . a person
that . . . had problems. I told her then that a mastectomy
to me if she loses a breast it doesn't matter if she loses a
breast. . . ." He also testified, however, that "my feelings
were that she had the problems. . . . I respected her very
much but the mastectomy really turned me off to her. I
don't know why."
In January 1990, following Lee's surgery, Aiu
moved out of Lee's bedroom, and their communication
became very limited. Aiu testified that, because Lee
would not talk to him, he began communicating with her
by way of notes. His notes contained, inter alia, repeated
demands for $ 25,000.00 to reimburse him for his share
of the mortgage payments.
Feeling harassed and badgered, Lee turned to Wilbert
for counsel. He advised her that, "if this is a joint
tenancy and you have cancer, whoever predeceases the
other will leave the survivor everything. That means
[your daughter is] out. If he's asking for $ [***9]
25,000.00, the easier of anything may be to give him
what he wants." Lee testified that it was at that point that
she acquiesced and promised to give Aiu $ 25,000.00,
and Aiu, in turn, promised not to pursue joint tenancy
status by agreeing to remove his name from the deed
[hereinafter, the settlement agreement]. Thereafter, Lee
and Aiu discussed the logistics of how Aiu would be
paid, eventually deciding that they would sell the house.
From the net proceeds of the sale, Aiu would be paid $
25,000.00, and the balance would be disbursed to Lee.
With this plan in mind, Lee and Aiu executed a listing
agreement on February 12, 1990.
Aiu, however, decided that he should consult an attorney
and therefore met with Dixon, a licensed attorney,
on March 22, 1990. Aiu and Dixon initially contemplated
that Dixon and his wife, both of whom were realtors,
might take a listing for sale on the house." The fee
agreement between Aiu and Dixon reflects that Aiu paid
Dixon $ 600.00 and that any additional fees would be
paid to Dixon out of Aiu's share of the proceeds of the
sale of the Keha Place property. Dixon characterized the
$ 600.00 as an "attorney/or/broker commission to be
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Page 5
determined by client [***10] Edwin K. Aiu whether
this is an attorney fee retainer or brokerage commission."
Dixon advised Aiu that Aiu's equity in the property
was probably about fifty to fifty-five thousand dollars
and that Aiu would be ill-advised to waive his rights to
it. Although Dixon disavowed any knowledge of the
settlement agreement between Lee and Aiu, Dixon testified
that he advised Aiu not to sell to anyone for $
25,000.00 "because it was worth twice that." Moreover,
Dixon's notes of the March 22, 1990 meeting with Aiu
contain the notation "willing [to] take 25K." Dixon further
testified that Aiu told him: (1) "well, I might take
25,000 from [Lee] just to settle this whole mess"; and (2)
"at one point I was willing to take 25."
Lee testified that sometime after executing the listing
agreement, Aiu suggested that, rather than sell the
house, she could take out a $ 25,000.00 loan to pay to
him. Thus, they canceled the listing agreement, and Lee
applied for a loan; however, she was unable to qualify.
Although Wilbert agreed to co-sign the loan, Aiu objected
to Wilbert's involvement. Consequently, Lee and
Aiu returned to their original plan to sell the house.
Wilbert, who was also a real-estate [***11] broker,
testified that, on May 3, 1990, he spent several [*25]
[**661] hours with Lee and Aiu drafting a new listing
agreement for the sale of the Keha Place property. In the
section marked "special terms" on the listing agreement,
the following statement appears:
(1) upon the successful completion of a
sales transaction, net proceeds to sellers
shall be:
(a) twenty-five thousand dollars to Mr.
Edwin K. Aiu, and
(b) the balance to Elizabeth A. Lee.
Wilbert testified that the information he wrote on the
listing agreement form "was coming from both [Lee and
Aiu] and after they came to an agreement I said, fine . . .
this is what you agreed to . . . . and this is what we put
down." According to Wilbert, Aiu indicated that he
wanted to take the listing agreement to an attorney, "but
he had essentially agreed to everything here. And that's
why it was put down. . . . [Aiu] told me that everything
was acceptable to him." Dixon testified that, on May 4,
1990, Aiu brought the unsigned listing agreement to his
office for review. n4 Dixon, as reflected in his notes,
advised Aiu to "retain [an] independent broker, not talk
to other parties but allow attorney [***12] to handle,
advise Edwin Aiu not to waive any rights." Dixon also

testified that he gave the listing agreement back to Aiu
and understood that Aiu presented it, unsigned, to Lee.
According to Wilbert, Dixon had called him on May 4,
1990, advising that he (Dixon) wished to co-list the
property.
[***13]
n4 Aiu, however, testified that he had never
seen the listing agreement until it was produced
by Lee in discovery, that he was not present when
Wilbert drafted it, and that he never had any intention
of settling with Lee for $ 25,000.00.
However, one of Aiu's signed, handwritten notes
to Lee was introduced at trial. It contained, inter
alia, the following passages:
All I ask is $ 25,000.00 to dissolve
our partnership, or my share of the
partnership, even though it is
worth twice that amount.
There are a couple of ways to do
this:
(1) $ 25,000 and a "quit claim"
deed;
(2) Sell the house, and present me
with $ 25,000 out of the net[.]
If there is friction or hostile occurrence
then:
(1) 50% split of the net on the
house
. . .
I have given you terms to solve
our problems and dissolve our
partnership. I ask for less than half
of what you will net or what it is
worth, and yet you hesitate. There
are other avenues that I could use
but they are harsh and I refrain
from these recourses.
Subsequent to his meeting with Dixon, Aiu informed
Wilbert that his attorney did not agree with the listing
contract and also that Aiu was entitled to fifty percent of
the property. Lee testified that, after Aiu took the listing
agreement to Dixon, he brought it back with the terms
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Page 6
lined out and indicated that the listing agreement was not
acceptable.
On May 16, 1990, after "much discussion between
[them]," Wilbert drafted a Deposit, Receipt, Offer, and
Acceptance (DROA) pursuant to Lee and Aiu's instructions
"all of which were put in writing here so that it
would be good reference for everybody to see." By its
terms, Lee would pay Aiu $ 25,000 in return for his release
of any interest in the Keha Place property. Aiu
drafted a handwritten note, to be attached to the DROA,
which stated:
[Lee] would like a copy for assurance of
special term of house sale; (To be attached
to DROA).
This offer also includes the following
provision:
On completion of sale, escrow is hereby
instructed to pay directly to Edwin K.
Aiu, $ 25,000, for his partnership to 702
Keha Place house.
Aiu signed the note, leaving a space for the date and took
[***14] the DROA and the note to Dixon. Dixon testified
that, because Aiu did not want to agree to the terms,
Dixon wrote "rejected" across the face of DROA.
On July 3, 1990, Aiu delivered a handwritten note to
Dixon at his office, stating: "[I] would like to sell my
share of house (partnership) for the amount agreed upon
earlier." Dixon testified that he was not aware of any
earlier agreement Aiu had made with anyone and never
asked Aiu what "the amount agreed upon earlier" meant.
Despite his own advice to Aiu that $ 25,000 was a "ridiculous"
offer for his interest, Dixon, along with his
wife, Pearson-Dixon, offered to buy Aiu's interest for $
25,000.00. Aiu accepted. In a [*26] [**662] document
prepared by Dixon for Aiu's signature, dated July
13, 1990, Dixon "worked out the numbers at the top and
showed [Aiu] that his equity was worth about $ 53,500;
and if we paid him $ 25,000 for it, we would, apparently,
have a windfall of $ 28,500." The document further stated
that:
Ed Aiu acknowledges that the purchase
price and interest rate is substantially
below market value, Aiu wants Steve
and Lucy Dixon to buy his interest in
the house and understands that as his
lawyer S. B. Dixon has a [***15]

conflict of interest in this self dealing
transaction and Aiu waives that conflict
of interest and understands that Aiu
has the right to retain independent legal
counsel.
Aiu testified that he did not know, and Dixon did not tell
him, the meaning of the phrases "conflict of interest" and
"self dealing transaction," but he signed the document
anyway because Dixon was his lawyer, Dixon told him
to sign it, and, at the time, he (Aiu) was under stress and
not thinking straight and had communicated that fact to
Dixon. The Dixons gave Aiu $ 4,000.00 and a promissory
note for the balance of $ 21,000.00, to be paid upon
sale of the Keha Place property, and Aiu executed a
warranty deed.
A few days thereafter, without telling Lee what he
had done, Aiu moved to the mainland. Just prior to his
departure, Aiu, in response to Lee's inquiry, advised her
to simply call him when the house was sold to discuss
the payment of his $ 25,000.00. Lee did not learn about
the arrangement between Aiu and the Dixons until Pearson-Dixon
wrote her a letter, declaring the Dixons' ownership
of a one-half undivided interest in her house. The
letter also advised Lee that, because the Dixons had not
[***16] assumed the mortgage, Lee must continue to
pay the mortgage or risk foreclosure. In her letter, Pearson-Dixon
also cautioned Lee not to commit waste and
suggested that Lee consider a lower selling price for the
house in order to achieve a faster sale. Following receipt
of the letter and consulting with her attorneys, Lee filed
the present action against Aiu and the Dixons on September
7, 1990.
After some discovery, Lee filed an amended complaint
on March 25, 1992. The five counts of the
amended complaint alleged the following claims for relief:
I: Equitable Reformation of Deed (reformation);
II: Breach of Settlement Agreement/Judicial
Enforcement of Settlement
Agreement (breach of settlement agreement);
n5
III: Negligent/Intentional Infliction of
Emotional Distress (NIED/IIED);
IV: Tortious Interference with Contractual/Advantageous
Relationship (TICR);
and
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
V: Intentional Tort/Malice, Bad Faith,
Negligent Conduct (malice).
Page 7
All of the aforementioned claims for relief ultimately
survived two motions for summary judgment, as well as
a motion to bifurcate counts I and II from the remaining
counts, and trial was scheduled to commence on March
[***17] 21, 1994.
n5 The First Amended Complaint referred to
the agreement between Lee and Aiu as an "accord
and satisfaction and/or compromise and settlement."
Although sometimes referred to as an accord
and satisfaction, the Lee/Aiu agreement was
characterized throughout the proceedings as a
settlement agreement and, therefore, will be referred
to as such throughout this opinion.
On March 21, 1994, the day jury selection was
scheduled to begin, the Dixons filed a motion to strike
Lee's jury demand and, alternatively, renewed their motion
for bifurcation. The Dixons urged the trial court to
resolve the threshold equitable issues separately, before
any evidence was presented to the jury, because,
if the Court does not rule in her favor
on the equitable claims, Ms. Lee will
have no legal claims, and the litigation
will be over since, if Mr. Aiu was a joint
tenant, and there were [sic] no valid
contract to specifically perform, neither
Mr. Dixon nor Ms. Dixon could be held
liable for interfering with something
[***18] that did not exist.
After hearing argument on the motion, the trial court
orally ruled as follows:
My proposal, as I suggested last
week, was to have the jury give an advisory
opinion to the Court on the two
matters to which they are -- to which
plaintiff's [sic] [*27] [**663] are
not entitled to a jury decision, and that
to take the jury decision as to the remaining
three matters which, in my
opinion, do give rise to jury triable issues.
. . .
I think the best way to proceed is to
allow all of the evidence to come out
and that I'll make a decision on the

matters involving Mr. Aiu, and at the
close of evidence, and then we will decide
on the jury instructions, if appropriate,
and the special verdict form, if
appropriate, and the only matters for
the jury will be the remaining three
against the Dixons. . . .
At the close of evidence we're going
to make a decision on who's going to
decide what as against these -- as to all
these issues. There are five. And also,
that following the decision on that matter,
the Court may immediately thereafter
decide those matters which the
Court feels must be decided by the -- by
the judge.
Jury selection began immediately [***19] following
the hearing. At the close of Lee's case, the Dixons
and Aiu moved for entry of judgment on the equitable
issues in favor of the defendants and alternatively, for a
directed verdict. The court denied the motion, stating:
The Court is going to deny all motions
for directed verdict. The basis of
the denial is that the law is very clear
that I must take this motion in light
most favorable to the non-moving party
and view the evidence in a light, again,
most favorable to the non-moving parties.
And I do so. I believe that there
has been a sufficiency of evidence to
support taking this matter before the
jury and accordingly I deny the motions.
Just to advise the parties, that
pursuant to Rule 39(c) [of the Hawai'i
Rules of Civil Procedure (HRCP)], this
Court will take all issues -- rather,
counts one [(reformation)] and two
[(breach of settlement agreement)] in
an advisory capacity to the jury. But
this court has every intention of making
the decisions on those two counts.
Those are not jury triable issues. And
the court will make the decisions.
The Dixons and Aiu again moved for a directed verdict
at the close of the defendants' portion of the case,
[***20] which was again denied on the same basis.
During closing argument, with respect to the TICR
claim, Lee suggested that the jury award her $ 28,500 in
damages based upon the "windfall" that Dixon had calculated:
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Now the question is what are these
amounts of damages [for TICR]. One of
the exhibits that you're going to see . . .
is a document that was admitted by Mr.
Dixon, he wrote up, and was signed by
Mr. Aiu. And what he shows up here is
that when you sell your undivided interest
to him, Mr. Aiu, and you only
have to pay $ 25,000 as far as his calculations
are concerned based upon a
value of $ 165,000, he's got [about] $
28,500. That's what he's making. That's
his profit. That would have been
[Lee's]. To me this is clearly the
amount of damages.
Page 8
The jury returned its verdict on March 29, 1994. In
answer to the first five questions on the special verdict
form, the jury found that: (1) at the time the Keha Place
property was purchased, Lee and Aiu agreed that Lee
would be the sole owner and that Aiu would be on the
title in name only; (2) there was a binding and enforceable
agreement between Lee and Aiu wherein Aiu agreed
to sell his rights and interests in [***21] the Keha Place
property for $ 25,000.00; (3) Aiu breached that agreement;
(4) Lee suffered damages as a result of the breach;
(5) such damages amounted to $ 15,000.00.
The jury also awarded Lee: (1) $ 10,000.00 in emotional
distress damages; (2) $ 28,500.00 for TICR; (3) $
28,500.00 for "interference with prospective advantage";
(4) $ 28,500.00 for "intentional tortious conduct"; (5) $
25,000.00 in punitive damages against Dixon; and (6) $
15,000.00 in punitive damages against Pearson-Dixon.
Subsequent to receiving the jury's special verdict,
the trial court struck the jury's findings as to the first five
questions on the verdict form dealing with the reformation
and breach of settlement claims, stating:
With respect to count one which is
[Lee's] claim for reformation, the
Court is going to enter judgment in favor
of Defendant for these reasons. It is
clear from the evidence adduced that
all of the documentary evidence supports
the finding of a [*28] [**664]
joint tenancy and not a sole ownership.
This would include the deed, mortgage
documents. Also, payment by -- of the
mortgage by the Defendant Aiu albeit
some made from joint accounts and
joint funds indicate the intent of the
parties, [***22] in my own mind, to

proceed jointly. This of course is consistent
with the documentary evidence
and also consistent with other courses
of conduct testified to by both Miss Lee
and Mr. Aiu. In my own mind the most
persuasive evidence was [Lee's] testimony
in which she the described [sic]
relationship and many of the things
they did together. Most importantly,
looking for a home over the course of
almost one year. Her description was
they looked for a home jointly that they
both agreed on. For these reasons the
Court feels that as to count one [Lee]
has not met her burden.
As to count two, accord and satisfaction
the Court is also entering judgment
in favor of defendant for these
reasons. There is no question in my
mind that there is a bona fide dispute,
which [is] one of the elements of accord
and satisfaction. However, by definition,
accord is the promise to undertake
the payment of an obligation. And the
testimony and the evidence shows that
while the parties agreed to an exchange
of $ 25,000 in consideration of removing
an interest -- Mr. Aiu's interest
from the property, an important and
critical part of accord and satisfaction
would have necessitated the understanding
[***23] and promise to
undertake the payment of the mortgage
as well. And there was testimony by
Miss Lee that such an agreement or
such a discussion never took place.
Furthermore, there was never any performance
on the accord and satisfaction.
And therefore the elements are not
met.
Accordingly, the Court will strike
the jury's responses to questions numbers
one, two, three, four, and five.
On April 5, 1994, the Dixons filed a motion for
judgment notwithstanding the verdict (JNOV), or, in the
alternative, for a new trial as to the claims for TICR,
NIED/IIED, and malice. The Dixons argued that the trial
court, by its rulings on the reformation and breach of
settlement agreement claims, had already concluded that
the jury's verdict was against the weight of the evidence
as to critical elements of Lee's case against the Dixons.
In other words, in order to prevail on the TICR claim,
Lee was required to establish the critical element of the
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Page 9
existence of a contract in the first instance. Because the
court found that there was no binding and enforceable
agreement between Lee and Aiu, the jury's finding regarding
the TICR claim could not stand. Carrying this
argument one step further, [***24] the Dixons also
asserted that, absent a TICR claim, there existed no relationship
between the Dixons and Lee upon which a
NIED/IIED or malice claim could rest. The motion was
denied.
On February 13, 1995, the court entered an amended
judgment dismissing counts I (reformation) and II
(breach of settlement agreement) and awarding Lee
damages in the amount of $ 49,691.35 n6 on the remaining
counts, as well as punitive damages in the amount of
$ 25,000.00 against Dixon and $ 15,000 against Pearson-Dixon.
The Dixons' notice of appeal and Lee's notice
of cross-appeal were timely filed. n7
n6 Although not specifically delineated in
the judgment itself, it appears from the record
that $ 11,357.35 of the $ 49,691.35 was awarded
as costs. Moreover, nowhere in the record is there
any explanation of how the court arrived at the
figure of $ 49,691.35 or $ 38,334.00, if the reference
to $ 11,357.35 in costs is correct. We note
also that damages awarded to Lee by the jury as
indicated on the special verdict form are in excess
of $ 150,000.00. Nevertheless, Lee does not raise
as a point of error on appeal the fact that the
amended judgment awards her a damage amount
inconsistent with that reflected on the special
verdict form.
[***25]
n7 Aiu did not appeal from the judgment of
the trial court.
II. DISCUSSION
Of the many issues raised by the Dixons and Lee,
we address the following issues, which are dispositive of
this case:
1. The Dixons' argument that there was no
basis for awarding TICR, NIED/IIED,
malice, and punitive damages because the
trial court ruled in their favor on the equitable
issues; and
[*29]
[**665] 2. Lee's arguments that the trial
court erroneously (a) contradicted the

factual findings of the jury by ruling
against her on the reformation and breach
of settlement agreement claims, (b) refused
to award attorney's fees against Aiu
and the Dixons, and (c) refused to permit
the jury to consider the amount of her attorney's
fees when determining punitive
damages.
A. Legal Versus Equitable Issues -- General Principles
The Dixons argue that the trial court should have
decided the reformation and breach of settlement agreement
issues first because they were equitable in nature.
The Dixons also argue that the TICR, NIED/IIED, and
malice claims were predicated upon a finding that a settlement
agreement [***26] existed and that, because
the trial court found that no such enforceable agreement
existed, it therefore erred in denying the Dixons' motions
for directed verdict and JNOV or new trial.
Lee, on the other hand, maintains that, in determining
whether to grant the equitable relief sought, the trial
court was required to submit all factual determinations
regarding her legal claims to the jury and that any findings
of fact common to both the equitable and legal
claims were binding on the trial court in its equitable
determinations. Lee therefore submits that the trial court,
having failed to find that the jury's factual determinations
were unsupported by the evidence, erred when it disregarded
the jury's factual findings as to the equitable
reformation and breach of settlement agreement claims.
We begin our analysis by considering (1) which issues
were required to be tried before a jury and (2)
whether the jury's factual findings on those issues were
binding on the trial court in its determination of issues
that were not triable as of right to a jury. Such an inquiry
presents a question of law, which we review de novo.
See Mehau v. Reed, 76 Haw. 101, 869 P.2d 1320 (1994);
[***27] Kimball v. Lincoln, 72 Haw. 117, 809 P.2d
1130 (1991).
[HN1] Article I, section 13 of the Hawai'i Constitution
guarantees that, "in suits at common law where the
value in controversy shall exceed five thousand dollars,
the right of trial by jury shall be preserved." HRCP Rule
38(a) provides that "the right of trial by jury as given by
the Constitution or a statute of the State or the United
States shall be preserved to the parties inviolate."
[HN2] The right given by the Hawai'i Constitution
and preserved by HRCP Rule 38(a) is the right to a jury
trial in suits at common law.
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
The test to determine whether a suit is
"at common law" is . . . whether the
cause of action seeks "legal" or "equitable"
relief. In other words, courts
look to the nature of the remedy to determine
whether a jury trial is warranted.
Historically, actions in equity
we heard by a judge; actions at law
were triable by a jury.
Page 10
Mehau, 76 Haw. at 110, 869 P.2d at 1329 (citations
omitted). Furthermore, "it is well settled that a jury question
goes to the particular issue rather than the overall
case." Id. at 111, 869 P.2d at 1330 (citation omitted)
(emphasis added); see also [***28] HRCP Rule 39.
[HN3] Where legal and equitable claims are present
in the same case, this court has long held that the trial
court is precluded from ruling, in the first instance, on
any equitable claims that may determine the outcome of
the legal claims. Harada v. Burns, 50 Haw. 528, 445
P.2d 376, 50 Haw. 588 (1968). In the federal courts,
there is no question that, when legal and equitable issues
turn on the same operative facts, a jury must decide the
legal issue first. See, e.g., United States v. Williams, 441
F.2d 637 (5th Cir. 1971).
Furthermore, [HN4] when a jury is called upon to
make findings in connection with both legal and equitable
matters resting upon the same set of facts, the trial
court is bound by the jury's findings of fact when making
its equitable determinations. See, e.g., Zions First Nat. v.
Rocky Mountain Irrigation Inc., 795 P.2d 658, 662 (Utah
1990); International Harvester Credit v. Pioneer Tractor,
626 P.2d 418, 421 n.2 (Utah 1981) (citation omitted);
Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 3
L. Ed. 2d 988, 79 S. Ct. 948 (1959); see generally C.
[*30] [**666] Wright & A. Miller, Federal Practice
and Procedure § § 2305, 2306, & 2338 (1971).
B. The Legal and Equitable Issues in this Case
[***29]
Lee sought monetary damages with respect to the
TICR, NIED/IIED, malice, and, as alternative relief,
breach of settlement agreement claims -- all of which
involve legal issues, triable as of right to a jury. And,
because [HN5] some of the findings regarding the legal
claims would be dispositive of the equitable claims, the
trial court was required to try the legal matters to the jury
first. Williams, 441 F.2d at 637. For example: (1) the
existence of a contract/settlement agreement was a factual
determination common to both the breach of settlement
agreement claim and the TICR claim; and (2) the
existence and worth of Aiu's putative joint interest was a

factual determination common to both the equitable
reformation claim and the damages element of the TICR
claim. See Kimball, 72 Haw. at 126, 809 P.2d at 1134-35
(the determination of an interest in land and any damages
incidental thereto is a legal determination for the jury).
Once the jury made factual determinations regarding the
legal claims, the trial court was bound by those findings
in its determination of the equitable claims. Zions First
Nat., 795 P.2d at 662.
In this case, the jury found, inter alia, that: (1)
[***30] Lee and Aiu did not intend to take the property
as joint tenants; (2) Lee and Aiu had entered into a settlement
agreement; n8 (3) Aiu breached that agreement;
(4) Lee suffered monetary damages as a result of the
breach; and (5) such damages totaled $ 15,000.00. [HN6]
In order for the trial court to ignore the jury's findings, as
indeed it did, it would necessarily have had to determine
that such findings were not supported by the evidence.
Kimball, 72 Haw. at 129, 809 P.2d at 1136; see also
Kainea v. Kreuger, 30 Haw. 860, 870 (1929). n9
N8 The Dixons, relying on the statute of
frauds, argue that the settlement agreement was
unenforceable because the agreement involved
the transfer of an interest in land and it was not
evidenced by a sufficient writing. This argument
is without merit. The jury found that Aiu did not
have any such interest in the Keha Place property,
a finding which we hold, infra, must be upheld.
Aiu himself testified that he was simply seeking
reimbursement for his contributions to the mortgage.
The fact that he threatened to disregard the
"key purpose" of placing his name on the deed,
that is, to assist Lee in financing her home, did
not invest him with an interest in the Keha Place
property. And, assuming arguendo that the settlement
agreement was required to be in writing,
because it resolved a dispute regarding real property,
Aiu's handwritten notes to Lee and the listing
agreements were sufficient writings to evidence
the agreement between Lee and Aiu.
[***31]
n9 The Kainea court held that,
where a party is entitled by express
provision of law to a trial by
jury of issues of fact and it is not
discretionary with the court to direct
an issue or refuse it, the verdict
of the jury is generally re-
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
garded in the same light as the
verdict of a jury in a common-law
action, and the chancery court is
bound by it and cannot disregard it
except under the same circumstances
as would justify the judge
in the law court in setting aside a
verdict in a common-law action.
Where a distinct legal issue, on
which a party to an equity suit is
entitled to a jury trial as of right, is
tried by a jury, the verdict will be
given the same force as in ordinary
jury trials, and will not be set
aside but will be regarded as conclusive
between the parties, unless
the court has specified that it is
palpably against the evidence.
Page 11
30 Haw. at 870 (citations omitted) (emphases
added).
Because both the equitable and legal matters in this
case rested upon the same set of operative facts, the trial
court's decision to reverse the jury's verdict was the functional
[***32] equivalent of granting a motion for directed
verdict or for JNOV.
It is well settled that [HN7] a trial court's rulings on
directed verdict or JNOV motions [are
reviewed] de novo. Verdicts based on
conflicting evidence will not be set aside
where there is substantial evidence to
support the jury's findings. We have
defined 'substantial evidence' as credible
evidence which is of sufficient quality
and probative value to enable a
[person] of reasonable caution to support
a conclusion.
In deciding a motion for directed
verdict or JNOV, the evidence and the
inferences which may be fairly drawn
therefrom must be considered in the
light most favorable [*31] [**667]
to the nonmoving party and either motion
may be granted only where there
can be but one reasonable conclusion as
to the proper judgment.

Carr v. Strode, 79 Haw. 475, 486, 904 P.2d 489, 500
(1995) (quoting Richardson v. Sport Shinko (Waikiki
Corp.), 76 Haw. 494, 503, 880 P.2d 169, 178 (1994))
(brackets in original). Thus, "[HN8] where there is conflicting
evidence, or there is insufficient evidence to
make a one-way verdict proper, [JNOV] should not be
awarded." Id. at 487, 904 P.2d at 501 [***33] (internal
quotations and citations omitted).
An examination of the record reveals that the jury
was presented with the following evidence: (1) Lee's
testimony that (a) the property was intended to belong
solely to Lee, (b) Aiu's name appeared on the deed only
because Lee and Aiu had mistakenly believed it to be a
condition precedent to co-signing the note, and (c) in
conversations with various members of his family, Aiu
referred to the Keha Place property as "the nice home
that [Lee] had bought in Hilo"; (2) Aiu's testimony that
Lee attempted to secure a loan, rather than sell the house,
to pay him the $ 25,000.00; (3) Wilbert's testimony regarding
his involvement in working on the special terms
of a listing agreement that reflected Lee and Aiu's
agreement; and (4) Aiu's handwritten notes, as well as
the DROA, reflecting Aiu's promise to vacate the premises
and release any interest he may have had in the Keha
Place property in exchange for $ 25,000.00.
Based upon our review of the record, we believe
there was substantial evidence to support the jury's findings
with respect to Counts I and II. We therefore hold
that the trial court erred when it entered judgment contrary
to such [***34] findings. Consequently, we reinstate
the jury's findings with respect to Count I (reformation)
and remand this case with instructions that the
trial court enter an order equitably reforming the deed to
reflect Lee as the sole owner of the Keha Place property.
See Carman v. Athearn, 77 Cal. App. 2d 585, 175 P.2d
926, 932 (Cal. Ct. App. 1947) (holding that "reforming
the writing by making it conform to what the court was
convinced, and the evidence showed, had been the true
intent of the parties, but which had by mutual mistake or
the fraud of defendant been incorrectly expressed," was
an appropriate remedy). Because Aiu did not have an
interest in the Keha Place property, he had nothing to
transfer to the Dixons; thus, they too have no interest in
the Keha Place property.
We also reinstate the jury's findings with respect to
Count II (breach of settlement agreement) insofar as it
found that an agreement existed wherein Lee would pay
Aiu $ 25,000.00 in return for the removal of his name
from the deed and that Aiu breached that agreement.
Because, on remand, the deed will be equitably reformed
to reflect Lee as the sole owner, the Dixons no longer
stand to gain a "windfall" inasmuch as they have no
[***35] interest in the Keha Place property. Thus, Lee
has suffered no monetary damages as a result of Aiu's
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Page 12
breach, and the appropriate remedy is specific enforcement
of the agreement. Consequently, we instruct the
trial court to enter an order specifically enforcing the
settlement agreement, that is, removal of Aiu's name
from the deed -- an act that will be accomplished through
equitable reformation -- and payment of $ 25,000.00 by
Lee to Aiu.
In conjunction with her breach of settlement agreement
claim, Lee has requested an award of attorney's
fees under [HN9] HRS § 607-14 (1993), which provides
that the prevailing party, inter alia, in actions in the nature
of assumpsit, shall recover attorney's fees against the
losing party not to exceed twenty-five percent of the
judgment. State ex rel. Bronster v. United States Steel
Corp., 82 Haw. 32, 56 n.7, 919 P.2d 294, 318 n.7 (1996).
A suit to enforce an agreement is a suit for specific performance
and is not an action in the nature of assumpsit.
"[HN10] Assumpsit is a common law form of action
for the recovery of damages for non-performance of a
contract." Smothers v. Renander, 2 Haw. App. 400, 401,
633 P.2d 556, 559 (1981). Although [***36] Lee requested
damages as alternative relief, we have determined
that specific performance of the agreement is the
remedy consistent with equitable reformation of the
deed. Hence, because Lee's claim for specific enforcement
is not an action in assumpsit, [*32] [**668]
we affirm the trial court's denial of her request for attorney's
fees against Aiu under HRS § 607-14.
C. The Remaining Legal Issues (The TICR,
NIED/IIED, Malice, and Punitive Damages Claims)
Relying on essentially the same arguments that they
made in their April 5, 1994 motion for JNOV, discussed
supra, the Dixons argue that the trial court erred in accepting
the jury's verdict with respect to the TICR,
NIED/IIED, malice, and punitive damages claims after
having ruled against Lee on the equitable issues. The
Dixons maintain that, once the trial court ruled in Aiu's
favor on the equitable claims, they were entitled to a
directed verdict or JNOV in their favor on the remaining
issues. The Dixons, however, raise other arguments, discussed
infra, directly challenging the jury's verdict on all
of the remaining claims, presumably in anticipation of an
adverse ruling by this court. Having indeed concluded
that the trial court [***37] erred in finding for Aiu on
Counts I and II, we now address the arguments raised by
the Dixons and Lee on the remaining claims, with the
exception of malice. We need not address the malice
claim further as Dixon (to whom Count V applies exclusively)
raises no additional arguments on appeal.
1. The TICR Claim
[HN11] The requisite elements of TICR are:

(1) a contract between the plaintiff and
a third party; (2) the defendant's
knowledge of the contract; (3) the defendant's
intentional inducement of the
third party to breach the contract; (4)
the absence of justification on the defendant's
part; (5) the subsequent
breach of the contract by the third
party; and (6) damages to the plaintiff.
Weinberg v. Mauch, 78 Haw. 40, 50, 890 P.2d 277, 287
(1995).
The existence of a contract/settlement agreement
between Lee and Aiu, and Aiu's breach thereof, are established.
See supra section II.B. Based upon our examination
of the record, we believe that there is substantial
evidence to support the jury's findings that the Dixons
were cognizant of the settlement agreement between Lee
and Aiu and that they intentionally proceeded to encourage
Aiu to breach that [***38] agreement by convincing
him to enter into a new contract with them. The evidence
further supports the finding that the Dixons were
without justification, that is, that they were motivated
only by their own personal gain. This is particularly so in
light of: (1) Dixon's advice to Aiu that $ 25,000.00 for
Aiu's putative interest in the Keha Place property was a
ridiculous sum of money and that Aiu would be
ill-advised to honor it; and (2) the Dixons' subsequent
acquisition of Aiu's putative interest for that same "ridiculous"
sum.
However, because we have directed the trial court to
reform the deed to reflect Lee as the sole owner, Lee
may now sell the property and reap all profits therefrom.
Her damages, which the jury found to be $ 28,500.00
(that is, the amount of the "windfall" that the Dixons'
might have realized as a result of their tortious interference
with the settlement agreement) are therefore negated.
Lee, however, argues that the trial court erred in refusing
to allow her to introduce evidence of her attorney's
fees incurred in litigating with Aiu as an element of
damages in her TICR claim. We agree. [HN12] Normally,
pursuant to the "American Rule," each party is responsible
[***39] for paying for his or her own litigation
expenses. Survivors of Medeiros v. Maui Land &
Pineapple Co., 66 Haw. 290, 296, 660 P.2d 1316, 1320
(1983); Thornley v. Sanchez, 9 Haw. App. 606, 618, 857
P.2d 601, 608 (1993). This general rule, however, is
subject to a number of exceptions: attorney's fees are
chargeable against the opposing party when so authorized
by statute, rule of court, agreement, stipulation, or
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Page 13
precedent. Id. As a matter of precedent, other jurisdictions
have recognized that attorney's fees are chargeable
against the wrongdoer in the context of a TICR claim.
See, e.g., Dassance v. Nienhuis, 57 Mich. App. 422, 225
N.W.2d 789 (Mich. Ct. App. 1975); Prospero Assocs. v.
Redactron Corp., 682 P.2d 1193 (Colo. Ct. App. 1983).
Although not in the context of a TICR claim, this court
has applied the exception where the wrongful act of the
defendant [*33] [**669] causes the plaintiff to litigate
with a third party. In Uyemura v. Wick, 57 Haw.
102, 551 P.2d 171 (1976), we held that,
where the wrongful act of the defendant[,
(in this case, the Dixons' TICR),]
has involved the plaintiff in litigation
with [another, (in this case, Aiu)], or
placed [the plaintiff] in such [***40]
relations with others as makes it necessary
to incur expenses to protect his [or
her] interest, such expenses, including
attorneys' fees, should be treated as the
legal consequences of the original
wrongful act, and may be recovered as
damages.
Id. at 108-09, 551 P.2d at 176 (emphasis added); see
also Restatement (Second) of Torts § 914(2) (1979)
[hereinafter, Restatement]. n10
n10 Section 914 of the Restatement, supra,
entitled "Expense of Litigation," provides:
(1) The damages in a tort action
do not ordinarily include
compensation for attorneys' fees or
other expenses of the litigation.
(2) One who through the tort
of another has been required to act
in the protection of his [or her] interests
by bringing or defending an
action against a third person is entitled
to recover reasonable compensation
for loss of time, attorneys'
fees and other expenditures
thereby suffered or incurred in the
earlier action.
Thus, [HN13] where the wrongful act of a defendant
causes a [***41] plaintiff to engage in litigation with a
third party in order to protect his or her rights or inter-

ests, attorney's fees incurred in litigating with that third
party may be chargeable against the wrongdoer as an
element of the plaintiff's damages. n11 Id. at 110, 551
P.2d at 176.
In order to recover attorneys' fees under
this principle, the plaintiff must establish:
(1) that the plaintiff had become
involved in a legal dispute either
because of a breach of contract by the
defendant, or because of defendant's
tortious conduct, that is, that the party
sought to be charged with the fees was
guilty of a wrongful or negligent act or
breach of agreement; (2) that the litigation
was with a third party, not with the
defendant from whom the fees are
sought to be recovered; (3) that the attorneys'
fees were incurred in that
third-party litigation; and (4) whether
the fees and expenses were incurred as
a result of defendant's breach of contract
or tort, that they are the natural
and necessary consequences of the defendant's
act, since remote, uncertain,
and contingent consequences do not afford
a basis for recovery[.]
Uyemura, 57 Haw. at 109, 551 P.2d at 176 [***42]
(citations omitted).
n11 Lee also argues that the Dixons' are responsible
for the attorney's fees she incurred in
litigating with them. However, we address that
question in connection with our discussion regarding
punitive damages. See infra section
II.C.3.
As previously discussed, Lee became involved in a
legal dispute with Aiu because of the Dixons' tortious
interference with the contractual relation between Lee
and Aiu. As a natural and necessary consequence of the
Dixons' tortious interference, Lee was required to litigate
with Aiu, which in turn caused her to incur attorney's
fees. Although some jurisdictions have held that this
exception to the American Rule does not apply where the
plaintiff consolidates his or her actions against both the
contract breacher (in this case, Aiu) and the tortfeasor (in
this case, the Dixons), we are in accord with those jurisdictions
that hold that it is of no consequence whether
the actions are brought together or separately. As aptly
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Page 14
stated by the Colorado Court of [***43] Appeals, we
see "no reason why [HN14] attorneys' fees should be
recoverable when the aggrieved party files separate lawsuits
against the contract breacher and the tortfeasor, but
should be denied when he [or she] consolidates both into
one law suit." Prospero Assocs., 682 P.2d at 1199.
In such a case, the jury will be required to make a
determination as to that portion of attorney's fees incurred
by the plaintiff in the consolidated action that is
attributable to the plaintiff's litigation with the third party,
that is, Lee's litigation with Aiu. For purposes of clarity,
we note that our holding in this section does not also
entitle Lee to include the attorney's fees she incurred in
litigating with the Dixons as an element of her TICR
damages. In order to recover those attorney's fees from
the Dixons, she must establish an independent exception;
otherwise, the general rule that one is responsible for his
or her [*34] [**670] own litigation expenses applies.
On the facts of this case, Lee has successfully
demonstrated that she is entitled to recover the attorney's
fees she expended in litigating with the Dixons. See infra
section II.C.3.
Accordingly, with regard to the TICR claim, we affirm
[***44] the trial court's finding of liability, but
vacate the damage award and remand with instructions to
retry the issue of damages. On remand, Lee will be permitted
to introduce, as an element of her damages, evidence
of any attorney's fees that she incurred in litigation
with Aiu that were caused by the Dixons' tortious interference
with the contractual relation between Lee and
Aiu.
2. NIED/IIED Claims
The Dixons argue that emotional distress damages
are not sustainable because Lee has failed to prove that
she suffered a physical injury; however, Lee also asserted
a claim for IIED, which does not require proof of
physical injury. [HN15] The elements of IIED are: "(1)
that the act allegedly causing harm was intentional; (2)
that the act was unreasonable [or outrageous n12]; and
(3) that the actor should have recognized that the act was
likely to result in illness." Marshall v. University of Hawaii,
9 Haw. App. 21, 38, 821 P.2d 937, 947 (1991) (citation
omitted) (emphasis added).
[***45]
n12 The terms "unreasonable" and "outrageous"
have been used interchangeably and have
been construed to mean "without just cause or
excuse and beyond all bounds of decency." Chedester
v. Stecker, 64 Haw. 464, 468, 643 P.2d
532, 535 (1982).

As previously discussed, we believe that there was
substantial evidence that the Dixons intentionally interfered
with the settlement agreement. We also believe,
based on our review of the record, that there was substantial
evidence to support the jury's finding that Lee
suffered emotional distress. With respect to the Dixons'
conduct, the jury was presented with the following evidence:
(1) Pearson-Dixon's letter to Lee (a) informing
Lee that the Dixons now owned half of her home, (b)
cautioning Lee to continue paying the mortgage or risk
foreclosure, (c) instructing Lee not to commit waste, and
(d) suggesting that Lee lower her selling price in order to
accomplish a faster sale. The evidence also established
that Aiu had related to Dixon that Aiu wished to leave
Lee because she had changed since having been diagnosed
with breast cancer and undergoing chemotherapy
and that Aiu found it unbearable to live with her. Based
on such evidence, and on the present record, it was reasonable
for the jury to have found that the Dixons' conduct
was "outrageous" and that such conduct "was likely
to result in illness." Id.
3. Punitive Damages
Finally, the Dixons argue that the evidence [***46]
cannot sustain an award of punitive damages against
them. We disagree. [HN16] Punitive damages are not
compensatory in nature; rather, they are designed to
punish a defendant for "aggravated or outrageous misconduct"
and to deter that defendant from similar conduct
in the future. Masaki v. General Motors Corp., 71
Haw. 1, 6, 780 P.2d 566, 569, reconsideration denied, 71
Haw. 664, 833 P.2d 899 (1989). On the facts discussed
in the previous section regarding the IIED claim, we hold
that the present record contains substantial evidence from
which the jury could find that the Dixons engaged in
aggravated or outrageous misconduct. We therefore affirm
the jury's award of punitive damages against both
Dixon and Pearson-Dixon.
On cross-appeal, Lee argues that she should have
been permitted to introduce evidence of attorney's fees
she incurred in litigation with the Dixons because punitive
damages may be used as a method of paying an injured
party's attorney's fees. We note that, in our seminal
decision regarding punitive damages, this court recognized
that other jurisdictions have held that "paying the
plaintiff's attorneys' fees" is one of the purposes of punitive
damages. Masaki, [***47] 71 Haw. at 8, n.2, 780
at 572, n.2. Recently, relying on Masaki and on the trend
in the majority of our sister states, the Intermediate Court
of Appeals held that "we adopt the majority view that
[HN17] a jury should be allowed to consider a plaintiff's
attorney fees in determining the amount of a punitive
damages award." Kunewa v. Joshua, 83 Haw. 65, 77,
924 P.2d 559, 571 (App. 1996); see also [*35]
[**671] Romero v. Hariri, 80 Haw. 450, 911 P.2d 85
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
Page 15
(App. 1996). When considering attorney's fees in calculating
the amount of the punitive damage award, the fee
amount must be "reasonable and necessary." Jolley v.
Puregro Company, 94 Idaho 702, 496 P.2d 939, 947
(Idaho 1972).
[HN18] Attorneys' fees cannot be awarded in addition
to exemplary damages; rather, they must constitute
the whole of the punitive damage award or be accounted
for as a portion of the total punitive damage award. 22
Am. Jur. 2d § 808 (1988); Romero, 80 Haw. at 458-59,
911 P.2d at 83-84 (affirming the trial court's ruling that
"the motion for attorneys' fees is denied inasmuch as the
Court finds that the punitive damages will cover, not
only the punishment and deterrence aspect, but [also
payment of the plaintiff's attorney's [***48] fees]").
And, "whether to award punitive damages and the determination
of the amount are within the sound discretion of
the trier of fact, whether judge or jury." Restatement,
supra, § 908, comment (d).
Therefore, because facilitating payment of a plaintiff's
attorney's fees is one of the purposes of punitive
damages, we hold that the trial court erred in prohibiting
Lee from presenting the jury with evidence of her attorney's
fees incurred in litigating with the Dixons. We
therefore affirm the jury's finding that punitive damages
are warranted, vacate the award of $ 25,000.00 against
Dixon and the award of $ 15,000.00 against Pearson-Dixon,
and remand with instructions to retry the
issue of punitive damages. On remand, Lee will be permitted
to introduce, as an element of punitive damages,
evidence of any attorney's fees that she incurred in litigation
with the Dixons.
III. Referral to the ODC
As previously stated, it appears from the record in
this case that Dixon engaged in conduct that may not
comport with the HRPC. n13 We are therefore compelled
to refer the record of this case to ODC for its review
and appropriate action. See Bettencourt v. Bettencourt,
80 Haw. 225, [***49] 909 P.2d 553 (1995)
(referring record to ODC where it appeared appellate
counsel engaged in conduct prohibited by the HRPC).
n13 See, e.g., HRPC Rules 1.2(a), 1.8(a),
1.8(j), and 8.4(c), which provide in relevant part:
RULE 1.2 SCOPE OF REP-
RESENTATION
(a) . . . A lawyer shall abide
by a client's decision whether to
accept an offer of settlement of a
matter . . . .

RULE 1.8 CONFLICT OF IN-
TEREST: PROHIBITED
TRANSACTIONS
(a) A lawyer shall not enter
into a business transaction with a
client or knowingly acquire an
ownership, possessory, security or
other pecuniary interest adverse to
a client unless:
(1) the transaction and terms
on which the lawyer acquires the
interest are fair and reasonable to
the client and are fully disclosed
and transmitted in writing to the
client in a manner which can be
reasonably understood by the client;
(2) the client is given a reasonable
opportunity to seek the
advice of independent counsel in
the transaction; and
(3) the client consents in
writing thereto.
. . . .
(j) A lawyer shall not acquire
a proprietary interest in the cause
of action or subject matter of litigation
the lawyer is conducting for
a client, except that the lawyer
may:
(1) acquire a lien granted by
law to secure the lawyer's fee or
expenses; and
(2) contract with a client for a
reasonable contingent fee in a civil
case.
RULE 8.4 MISCONDUCT
It is professional misconduct
for a lawyer to:
. . . .
85 Haw. 19, *; 936 P.2d 655, **;
1997 Haw. LEXIS 34, ***
[***50]
(c) engage in conduct involving
dishonesty, fraud, deceit, or
misrepresentation.
(Bold emphasis in original.)
IV. CONCLUSION
Page 16
For the reasons discussed above, we vacate that portion
of the amended judgment with respect to the deed
and the settlement agreement and remand this case to the
trial court with instructions to: (1) equitably reform the
deed to the Keha Place property to reflect Lee as the sole
owner; and (2) specifically enforce the settlement
agreement. We affirm the trial court's denial of Lee's
request for attorney's fees against Aiu. Additionally, we
affirm in part that portion of the amended judgment with
respect to the Dixons' liability to Lee on the tortious interference
with contractual relations claim, but remand
for a new trial on the issue of damages consistent with
our holding that Lee be allowed to introduce, as an element
of her damages, [*36] [**672] evidence of
those attorney's fees she incurred in litigation with Aiu
that were caused by the Dixons' tortious interference
with the contractual relation between Lee and Aiu. Additionally,
we affirm the jury's finding that punitive damages
are warranted, but vacate the award and remand for
a new trial to determine the amount of punitive damages
consistent with our holding that Lee be allowed to introduce,
as an element of punitive [***51] damages, evidence
of those attorney's fees she incurred in litigation
with the Dixons.
Furthermore, in connection with the above-described
conduct of attorney Steven B. Dixon, we refer the matter
of Supreme Court No. 18761 as well as Civil No. 90-347
to the ODC for its review and appropriate action. We
direct the Clerk of the Supreme Court to transmit a certified
copy of this opinion to the ODC. We further direct
all clerks of the several courts of this state to make
available the records of the aforementioned cases for the
ODC's review and to provide certified copies, at no cost,
of any documents requested by the ODC in connection
with its investigation of this matter.
Ronald T.Y. Moon, Robert G. Klein, Steven H.
Levinson, Paula A. Nakayama, Mario R. Ramil

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94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
LEXSEE 94 NJ 473
STATE OF NEW JERSEY, DEPARTMENT OF ENVIRONMENTAL PROTEC-
TION, PLAINTIFF-RESPONDENT, v. VENTRON CORPORATION, A MASSA-
CHUSETTS CORPORATION; WOOD RIDGE CHEMICAL CORPORATION, A
NEVADA CORPORATION AND VELSICOL CHEMICAL CORPORATION,
DEFENDANTS-APPELLANTS, AND ROBERT M. WOLF & RITA W. WOLF,
HIS WIFE, DEFENDANTS-RESPONDENTS, AND UNITED STATES LIFE IN-
SURANCE COMPANY, A NEW YORK CORPORATION AND F.W. BERK AND
COMPANY, INC., DEFENDANTS. and ROVIC CONSTRUCTION CO., INC., A
CORPORATION OF THE STATE OF NEW JERSEY, BY ITS STATUTORY
RECEIVER, JOSEPH KEANE, INTERVENOR-PLAINTIFF, v. VENTRON
CORPORATION, A MASSACHUSETTS CORPORATION; WOOD RIDGE
CHEMICAL CORPORATION, A NEVADA CORPORATION; VELSICOL
CHEMICAL CORPORATION AND F.W. BERK & CO., INC., DEFENDANTS.
and MOBIL OIL CORPORATION, CHEVRON U.S.A., INC., TEXACO, INC. AND
EXXON COMPANY, U.S.A., FOREIGN CORPORATIONS AUTHORIZED TO
DO BUSINESS IN THE STATE OF NEW JERSEY, PLAINTIFFS, v. STATE OF
NEW JERSEY, DEPARTMENT OF ENVIRONMENTAL PROTECTION AND
STATE OF NEW JERSEY, DEPARTMENT OF THE TREASURY, SPILL COM-
PENSATION FUND, DEFENDANTS
A-50/51
Supreme Court of New Jersey
94 N.J. 473; 468 A.2d 150; 1983 N.J. LEXIS 2744; 19 ERC (BNA) 1505; 13 ELR
20837
SUBSEQUENT HISTORY: Related proceeding at
Morton Int'l v. General Accident Ins. Co., 134 N.J. 1,
629 A.2d 831, 1993 N.J. LEXIS 719 (1993)
PRIOR HISTORY: [***1]
On certification to the Superior Court, Appellate Division,
whose opinion is reported at 182 N.J. Super. 210
(1982).
CASE SUMMARY:
PROCEDURAL POSTURE: Defendant corporations
appealed a decision from the Superior Court, Appellate
Division (New Jersey), which held them jointly and severally
liable for environmental cleanup costs and damages
in plaintiff Department of Environmental Protection's
action initiated under the Spill Compensation and Control
Act, N.J. Stat. Ann. § 58:10-23.11 et seq.
January 10, 1983, Argued
July 21, 1983, Decided
Page 1
OVERVIEW: Plaintiff Department of Environmental
Protection discovered a high level of toxic waste, primarily
mercury, in a creek. After investigating the contamination,
it was discovered that it was caused by the
mercury processing operations conducted on a nearby
site for 50 years. Plaintiff initiated an action against defendant
corporations for the cost of clean up and removal
of such pollution under the Spill Compensation and Control
Act, N.J. Stat. Ann. § 58:10-23.11 et seq. The trial
court held that defendant corporations were jointly and
severally liable and imposed retroactive liability under
the Act. On appeal, the court reversed an attorney fees
award to one defendant corporation, but otherwise affirmed
the judgment. The Act was properly applied retroactively
because its provisions specifically allowed
such application when a discharge created a substantial
and imminent threat to the environment. The mercury
discharge created such a threat. Defendant corporations
intentionally permitted the mercury to escape into the
ground, so they were properly held liable.

OUTCOME: The court reversed an attorney fees award
to one defendant corporation, but otherwise affirmed the
judgment. Defendant corporations caused mercury waste
to seep into a nearby creek, so they were properly held
liable under the Spill Compensation and Control Act.
The Act could be applied retroactively because its provisions
provided for such application.
LexisNexis(R) Headnotes
Torts > Strict Liability > Abnormally Dangerous Activities
[HN1] An ultrahazardous activity which introduces an
unusual danger into the community should pay its own
way in the event it actually causes damage to others.
Environmental Law > Hazardous Wastes & Toxic Substances
> Treatment, Storage & Disposal
Torts > Strict Liability > Abnormally Dangerous Activities
[HN2] A landowner is strictly liable to others for harm
caused by toxic wastes that are stored on his property
and flow onto the property of others. The net result is
that those who use, or permit others to use, land for the
conduct of abnormally dangerous activities are strictly
liable for resultant damages.
Torts > Strict Liability > Abnormally Dangerous Activities
[HN3] The person who for his own purposes brings on
his land and collects and keeps there anything likely to
do mischief if it escapes, must keep it at his peril, and if
he does not do so, is prima facie answerable for all damage
which is the natural consequence of its escape.
Torts > Strict Liability > Abnormally Dangerous Activities
[HN4] In determining whether an activity is abnormally
dangerous, the following factors are to be considered: (a)
existence of a high degree of risk of some harm to the
person, land or chattels of others; (b) likelihood that the
harm that results from it will be great; (c) inability to
eliminate the risk by the exercise of reasonable care; (d)
extent to which the activity is not a matter of common
usage; (e) inappropriateness of the activity to the place
where it is carried on; and (f) extent to which its value to
the community is outweighed by its dangerous attributes.
Environmental Law > Hazardous Wastes & Toxic Substances
> Treatment, Storage & Disposal
[HN5] Pollution from toxic wastes that seeps onto the
land of others and into streams necessarily harms the
environment.
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 2
Environmental Law > Hazardous Wastes & Toxic Substances
> Treatment, Storage & Disposal
Environmental Law > Litigation & Administrative
Proceedings > Damages
[HN6] Determination of the magnitude of the environmental
damage includes recognition that the disposal of
toxic waste may cause a variety of harms, including
ground water contamination via leachate, surface water
contamination via runoff or overflow, and poison via the
food chain. Further, the waste dumped may react synergistically
with elements in the environment, or other
waste elements, to form an even more toxic compound.
With respect to the ability to eliminate the risks involved
in disposing of hazardous wastes by the exercise of reasonable
care, no safe way exists to dispose of mercury by
simply dumping it onto land or into water.
Environmental Law > Litigation & Administrative
Proceedings > Toxic Torts
[HN7] The Spill Act expressly provides that its remedies
are in addition to existing common-law or statutory
remedies. N.J. Stat. Ann. § 58:10-23.11v.
Environmental Law > Litigation & Administrative
Proceedings > Nuisances, Trespasses & Strict Liability
[HN8] In a 1979 amendment to the Spill Act, the Legislature
imposed strict liability on any person who has
discharged a hazardous substance or is in any way responsible
for any hazardous substance removed by the
Department of Environmental Protection. N.J. Stat. Ann.
§ 58:10-23.11g(c). That statute is consistent with the
long-standing principle that the Legislature may prohibit
activities that constitute a nuisance.
Environmental Law > Water Quality
Environmental Law > Litigation & Administrative
Proceedings > Nuisances, Trespasses & Strict Liability
[HN9] N.J. Stat. Ann. § 23:5-28 provides that no person
shall put or place into, turn into, drain into, or place
where it can find its way into any of the fresh or tidal
waters within the jurisdiction of New Jersey any deleterious
destructive or poisonous substances of any kind. In
case of pollution of said waters by substances known to
be injurious to fish, birds or mammals, it shall not be
necessary to show that the substances have actually
caused the death of any of these organisms. A 1971
amendment added petroleum products, debris, and other
hazardous substances of any kind to the list of prohibited
substances; it also eliminated the necessity of showing
harm to living organisms as a prerequisite to application
of the statute.
Environmental Law > Water Quality
Environmental Law > Litigation & Administrative
Proceedings > Nuisances, Trespasses & Strict Liability

[HN10] The 1971 amendment to N.J. Stat. Ann. §
23:5-28 is a part of the Water Quality Improvement Act
of 1971, N.J. Stat. Ann. § § 58:10-23.1 to -23.10, which
requires any person responsible for discharging, whether
intentionally or by accident, petroleum and hazardous
substances to undertake immediate removal of those
substances, or to bear the expense of removal authorized
by the Department of Environmental Protection. N.J.
Stat. Ann. § § 58:10-23.3, -23.5, -23.7. Only discharges
caused by acts of war or acts of God do not occasion
strict liability, and even under those circumstances, the
person responsible for the substance discharge is obligated
to mitigate damages to the extent practicable. N.J.
Stat. Ann. § 58:10-23.10.
Environmental Law > Water Quality
Environmental Law > Hazardous Wastes & Toxic Substances
> Toxic Substances
[HN11] Hazardous substances are defined quite broadly
under the Water Quality Improvement Act to include
elements and compounds which, when discharged in any
quantity into, upon, or in any manner which allows flow
and runoff into the waters of New Jersey or adjoining
shorelines, presents a serious danger to the public health
or welfare, including but not limited to, damage to the
environment, fish, shellfish wildlife, vegetation, shorelines,
stream banks, and beaches. N.J. Stat. Ann. §
58:10-23.3(b).
Environmental Law > Hazardous Wastes & Toxic Substances
> Treatment, Storage & Disposal
Environmental Law > Litigation & Administrative
Proceedings > Damages
[HN12] In the Spill Act, the Legislature declared the
storage and transfer of hazardous substances to be a hazardous
undertaking, constituting a threat to both the environment
and economy of the state. N.J. Stat. Ann. §
58:10-23.11a. The Legislature intended to provide liability
for damage sustained within the state as a result of
any discharge of said substances, by requiring the prompt
containment and removal of such pollution and substances,
and to provide a fund for swift and adequate
compensation to resort businesses and other persons
damaged by such discharge. N.J. Stat. Ann. §
58:10-23.11a.
Environmental Law > Water Quality
Environmental Law > Hazardous Wastes & Toxic Substances
> Treatment, Storage & Disposal
[HN13] The Spill Act provides that the discharge of hazardous
substances is prohibited. N.J. Stat. Ann. §
58:10-23.11c. A discharge is statutorily defined as any
intentional or unintentional action or omission resulting
in the release, spilling, leaking, pumping, pouring, emitting,
emptying or dumping of hazardous substance into
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 3
the waters of New Jersey or onto lands from which it
might flow or drain into said waters outside the jurisdiction
of the state. N.J. Stat. Ann. § 58:10-23.11b(h).
Environmental Law > Water Quality
Environmental Law > Hazardous Wastes & Toxic Substances
> Treatment, Storage & Disposal
[HN14] The Spill Act expressly applies to a discharge of
a hazardous substance that occurred prior to May 1,
1977, the effective date of the act, if such discharge poses
a substantial risk of imminent damage to the public
health or safety or imminent and severe damage to the
environment. N.J. Stat. Ann. § 58:10-23.11f(b)(3).
Governments > Legislation > Effect & Operation >
Amendments
[HN15] Under the time of decision rule, when legislation
affecting a cause is amended while a matter is on appeal,
an appellate court should apply the statute in effect at the
time of its decision. An exception to that rule obtains if
the facts change substantially during the pendency of the
appeal.
Governments > Legislation > Effect & Operation >
Prospective & Retrospective Operation
Governments > Legislation > Interpretation
[HN16] When considering whether a statute should be
applied prospectively or retroactively, the court's quest is
to ascertain the intention of the Legislature. In the absence
of an express declaration to the contrary, that
search may lead to the conclusion that a statute should be
given only prospective effect. Conversely, when the
Legislature has clearly indicated that a statute should be
given retroactive effect, the courts will give it that effect
unless it will violate the constitution or result in a manifest
injustice.
Governments > Legislation > Effect & Operation >
Prospective & Retrospective Operation
Constitutional Law > Congressional Duties & Powers >
Ex Post Facto Laws & Bills of Attainder
Environmental Law > Hazardous Wastes & Toxic Substances
> Treatment, Storage & Disposal
[HN17] Retroactivity need not render a statute unconstitutional,
and the Spill Act, N.J. Stat. Ann. § 58:10-23.1
et seq., not being a criminal provision, is not invalid as
an ex post facto law. Furthermore, the due process clause
generally does not prohibit retroactive civil legislation
unless the consequences are particularly harsh and oppressive.
In the exercise of the police power, a state may
enact a statute to promote public health, safety or the
general welfare. Although retroactive application of a
statute may impair private property rights, when protection
of the public interest so clearly predominates over
that impairment, the statute is valid.

Governments > Legislation > Effect & Operation >
Prospective & Retrospective Operation
[HN18] A statute that gives retrospective effect to essentially
remedial changes does not unconstitutionally interfere
with vested rights. On balance, the benefits accorded
to the public by the statute outweigh any burden
imposed on the polluters.
Business & Corporate Entities > Corporations >
Shareholders & Other Constituents > Disregard of
Corporate Entity
[HN19] A corporation is a separate entity from its
shareholders, and that a primary reason for incorporation
is the insulation of shareholders from the liabilities of the
corporate enterprise. Even in the case of a parent corporation
and its wholly-owned subsidiary, limited liability
normally will not be abrogated. Except in cases of fraud,
injustice, or the like, courts will not pierce a corporate
veil. The purpose of the doctrine of piercing the corporate
veil is to prevent an independent corporation from
being used to defeat the ends of justice, to perpetrate
fraud, to accomplish a crime, or otherwise to evade the
law.
Business & Corporate Entities > Corporations >
Shareholders & Other Constituents > Disregard of
Corporate Entity
[HN20] Under certain circumstances, courts may pierce
the corporate veil by finding that a subsidiary was a mere
instrumentality of the parent corporation. Application of
this principle depends on a finding that the parent so
dominated the subsidiary that it had no separate existence
but was merely a conduit for the parent. Even in the
presence of corporate dominance, liability generally is
imposed only when the parent has abused the privilege of
incorporation by using the subsidiary to perpetrate a
fraud or injustice, or otherwise to circumvent the law.
Environmental Law > Hazardous Wastes & Toxic Substances
> Treatment, Storage & Disposal
Environmental Law > Litigation & Administrative
Proceedings > Nuisances, Trespasses & Strict Liability
[HN21] The Spill Act provides that any person who has
discharged a hazardous substance or is in any way responsible
for any hazardous substance shall be strictly
liable, jointly and severally, without regard to fault, for
all clean up and removal costs. N.J. Stat. Ann. §
58:10-23.11g(c).
Environmental Law > Hazardous Wastes & Toxic Substances
> Treatment, Storage & Disposal
Governments > Legislation > Interpretation
[HN22] The Legislature intended the Spill Act to be liberally
construed to effect its purposes. N.J. Stat. Ann. §
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 4
58:10-23.11x. The subsequent acquisition of land on
which hazardous substances have been dumped may be
insufficient to hold the owner responsible. Ownership or
control over the property at the time of the discharge,
however, will suffice.
Real & Personal Property Law > Sales, Exchanges &
Remedies > Duty to Disclose
Torts > Business & Employment Torts > Concealment
[HN23] The elements necessary to prove fraudulent
concealment on the part of a seller in a real estate action
are: the deliberate concealment or nondisclosure by the
seller of a material fact or defect not readily observable
to the purchaser, with the buyer relying upon the seller to
his detriment.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN24] Judicial administration is best advanced if litigants
bear their own counsel fees. Consistent with this
policy, legal expenses, whether for the compensation of
attorneys or otherwise, are not recoverable absent express
authorization by statute, court rule, or contract. A
further exception obtains where counsel fees are awarded
to one who through the tort of another has been required
to act in the protection of his interests by bringing or
defending an action against a third person.
Torts > Business & Employment Torts > Deceit &
Fraud
Torts > Damages > Costs & Attorney Fees
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN25] In a fraud action, if a third party sues one who
has been defrauded, the defrauded party may recover
from the tortfeasor the expenses of that litigation, including
counsel fees, as damages flowing from the tort.
COUNSEL:
Harry R. Hill, Jr., argued the cause for appellants
Ventron Corporation, etc., et al. (Backes, Waldron &
Hill, attorneys; Michael J. Nizolek, on the brief).
Adrian M. Foley, Jr., argued the cause for appellant
Velsicol Chemical Corporation (Connell, Foley &
Geiser, attorneys; Adrian M. Foley, Jr., and John F.
Neary, of counsel; John F. Neary, on the briefs).
Murry D. Brochin argued the cause for respondents
Robert M. Wolf, et al. (Lowenstein, Sandler, Brochin,
Kohl, Fisher & Boylan, attorneys; Deanne Wilson Plank,
on the brief).
Ronald P. Heksch, Deputy Attorney General, argued
the cause for respondent State of New Jersey, etc. (Irwin
I. Kimmelman, Attorney General of New Jersey, attor-

ney; Michael R. Cole, Assistant Attorney General, of
counsel).
Barry H. Evenchick, Special Counsel, submitted a
letter in lieu of brief on behalf of State of New Jersey,
Department of the Treasury, Spill Compensation Fund.
JUDGES:
For affirmance as modified -- Justices Clifford,
Schreiber, Handler, Pollock [***2] and Garibaldi. For
reversal -- None. The opinion of the Court was delivered
by Pollock, J.
OPINIONBY:
POLLOCK
OPINION:
[*481] [**154] This appeal concerns the responsibility
of various corporations for the cost of the
cleanup and removal of mercury pollution seeping from
a forty-acre tract of land into Berry's Creek, a tidal estuary
of the Hackensack River that flows through the
Meadowlands. The plaintiff is the State of New Jersey,
Department of Environmental Protection (DEP); the
primary defendants are Velsicol Chemical Corporation
(Velsicol), its former subsidiary, Wood Ridge Chemical
Corporation (Wood Ridge), and Ventron Corporation
(Ventron), into which Wood Ridge was merged. Other
defendants are F.W. Berk and Company, Inc. (Berk),
which no longer exists, United States Life Insurance
Company, which was dismissed by the lower courts in an
unappealed judgment, and Robert M. and Rita W. Wolf
(the Wolfs), who purchased part of the polluted property
from Ventron.
Beneath its surface, the tract is saturated by an estimated
268 tons of toxic waste, primarily mercury. For a
stretch of several thousand feet, the concentration of
mercury in Berry's Creek is the highest found [***3] in
fresh water sediments in the world. The waters of the
creek are contaminated by the compound methyl mercury,
which continues to be released as the mercury interacts
with other elements. Due to depleted oxygen levels,
fish no [*482] longer inhabit Berry's Creek, but
are present only when swept in by the tide and, thus,
irreversibly toxified.
The contamination at Berry's Creek results from
mercury processing operations carried on at the site for
almost fifty years. In March, 1976, DEP filed a complaint
against Ventron, Wood Ridge, Velsicol, Berk, and
the Wolfs, charging them with violating the "New Jersey
Water Quality Improvement Act of 1971," N.J.S.A.
58:10-23.1 to -23.10, and N.J.S.A. 23:5-28, and further,
with creating or maintaining a nuisance. The defendants
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 5
cross-claimed against each other; Velsicol and Ventron
counterclaimed against DEP, which amended its complaint
to allege the violation of the "Spill Compensation
and Control Act" (Spill Act), N.J.S.A. 58:10-23.11 to
-23.11z (repealing N.J.S.A. 58:10-23.1 to -23.10), enacted
in 1977. The Spill Compensation Fund (Fund), created
by the Spill Act to provide funds to abate toxic nuisances,
N.J.S.A. [***4] 58:10-23.11i, intervened.
Because of issues related to the liability of the Fund,
a number of its contributors (Mobil Oil Corporation;
Chevron U.S.A., Inc.; Texaco, Inc.; and Exxon Company,
U.S.A.) filed a complaint, later consolidated with the
present action, seeking a declaratory judgment that the
Spill Act not be retroactively applied to discharges of
toxic wastes occurring before the effective date of the
act.
After a fifty-five-day trial, the trial court determined
that Berk and Wood Ridge were jointly liable for the
cleanup and removal of the mercury; that Velsicol and
Ventron were severally liable for half of the costs; that
the Wolfs were not liable; and that, while the Spill Act
liability provisions did not apply retroactively, monies
from the Fund should be made available. The trial court
also granted judgment in favor of the Wolfs on their
cross-claim against Ventron for fraudulent nondisclosure
of mercury pollution in the sale of part of the tract. That
judgment included an award of costs and counsel fees
incurred by the Wolfs in their defense of the DEP action.
Following the entry of judgment, the [**155] trial
court entered a "Procedural Order [*483] [***5]
Involving Remedy," which approved for submission to
the United States Army Corps of Engineers the DEP plan
for the cleanup of Berry's Creek.
The Appellate Division substantially affirmed the
judgment, but modified it in several respects, including
the imposition of joint and several liability on Ventron
and Velsicol for all costs incurred in the cleanup and
removal of the mercury pollution in Berry's Creek. 182
N.J. Super. 210, 224-26 (1981). Because of an amendment
to the Spill Act after the trial, the Appellate Division
further modified the judgment by imposing retroactive
liability under the act on Wood Ridge, Velsicol, and
Ventron. Id. at 219-22. Furthermore, the Appellate Division
precluded payments from the Fund if other
sources were available to pay for the cleanup, id. at 228,
and approved the future monitoring of Berry's Creek at
the expense of Velsicol and Ventron. Id. at 229.
We granted certification to consider the retroactive
application of the Spill Act, the liability of Velsicol for
the removal of mercury pollution in Berry's Creek, and
the liability, including costs and counsel fees, of Ventron
to the Wolfs for fraudulent non-disclosure. 91 [***6]
N.J. 195 (1982). Thereafter we denied motions by Wood

Ridge, Velsicol, and Ventron to stay the enforcement of
the judgment. We modify and affirm the judgment of
the Appellate Division.
I
From 1929 to 1960, first as lessee and then as owner
of the entire forty-acre tract, Berk operated a mercury
processing plant, dumping untreated waste material and
allowing mercury-laden effluent to drain on the tract.
Berk continued uninterrupted operations until 1960, at
which time it sold its assets to Wood Ridge and ceased
its corporate existence.
In 1960, Velsicol formed Wood Ridge as a wholly-owned
subsidiary for the sole purpose of purchasing
Berk's assets and operating the mercury processing plant.
In 1967, Wood Ridge [*484] subdivided the tract and
declared a thirty-three-acre land dividend to Velsicol,
which continued to permit Wood Ridge to dump material
on the thirty-three acres. As a Velsicol subsidiary,
Wood Ridge continued to operate the processing plant on
the 7.1-acre tract from 1960 to 1968, when Velsicol sold
Wood Ridge to Ventron.
Although Velsicol created Wood Ridge as a separate
corporate entity, the trial court found that Velsicol treated
it not as an independent [***7] subsidiary, but as a
division. From the time of Wood Ridge's incorporation
until the sale of its capital stock to Ventron, Velsicol
owned 100% of the Wood Ridge stock. All directors of
Wood Ridge were officers of Velsicol, and the Wood
Ridge board of directors met monthly in the Velsicol
offices in Chicago. At the meetings, the board not only
reviewed financial statements, products development,
and public relations, but also the details of the daily operations
of Wood Ridge. For example, the Wood Ridge
board considered in detail personnel practices, sales efforts,
and production. Velsicol arranged for insurance
coverage, accounting, and credit approvals for Wood
Ridge. Without spelling out all the details, we find that
the record amply supports the conclusion of the trial
court that "Velsicol personnel, directors, and officers
were constantly involved in the day-to-day operations of
the business of [Wood Ridge]."
In 1968, Velsicol sold 100% of the Wood Ridge
stock to Ventron, which began to consider a course of
treatment for plant wastes. Until this time, the waste had
been allowed to course over the land through open
drainage ditches. In March 1968, Ventron engaged the
[***8] firm of Metcalf & Eddy to study the effects of
mercury on the land, and three months later, Ventron
constructed a weir to aid in monitoring the effluent.
Ventron's action was consistent with a heightened
sensitivity in the 1960's to pollution [**156] problems.
Starting in the mid-1960's, DEP began testing
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 6
effluent on the tract, but did not take any action against
Wood Ridge. The trial court found, in fact, that [*485]
the defendants were not liable under intentional tort or
negligence theories.
Nonetheless, in 1970, the contamination at Berry's
Creek came to the attention of the United States Environmental
Protection Agency (EPA), which conducted a
test of Wood Ridge's waste water. The tests indicated
that the effluent carried two to four pounds of mercury
into Berry's Creek each day. Later that year, Wood
Ridge installed a waste treatment system that abated, but
did not altogether halt, the flow of mercury into the
creek. The operations of the plant continued until 1974,
at which time Wood Ridge merged into Ventron. Consistent
with N.J.S.A. 14A:10-6(e), the certificate of ownership
and merger provided that Ventron would assume
the liabilities and obligations [***9] of Wood Ridge.
Ventron terminated the plant operations and sold the
movable operating assets to Troy Chemical Company,
not a party to these proceedings.
On February 5, 1974, Wood Ridge granted to Robert
Wolf, a commercial real estate developer, an option to
purchase the 7.1-acre tract on which the plant was located,
and on May 20, 1974, Ventron conveyed the tract to
the Wolfs. The Wolfs planned to demolish the plant and
construct a warehousing facility. In the course of the
demolition, mercury-contaminated water was used to wet
down the structures and allowed to run into the creek.
The problem came to the attention of DEP, which ordered
a halt to the demolition, pending adequate removal
or containment of the contamination. DEP proposed a
containment plan, but the Wolfs implemented another
plan and proceeded with their project. DEP then instituted
this action.
Although Wolf knew he was buying from a chemical
company land that had been the site of a mercury
processing plant, Ventron knew other material facts that
it did not disclose to the Wolfs. Ventron knew that the
site was a man-made mercury mine. From a study conducted
by Metcalf & Eddy at Ventron's request in 1972,
[***10] Ventron knew the mercury content of the soil.
Although the soil and water adjacent to the plant were
still [*486] contaminated in 1974, that fact was not
readily observable to the Wolfs, and Ventron intentionally
failed to advise the Wolfs of the condition of the site
and to provide them with the relevant part of the Metcalf
& Eddy report. Based on these factual findings, the
lower courts concluded that Ventron fraudulently concealed
material facts from the Wolfs to their detriment.
The trial court limited damages, however, to the recovery
of the actual costs of the containment system on the
7.1-acre tract and other costs of abating the pollution. In
affirming, the Appellate Division extended damages to
include diminution in the fair market value of the prem-

ises below the purchase price because of the undisclosed
mercury contamination. Both courts awarded to the
Wolfs those counsel fees and costs incurred in defending
the DEP action.
The trial court concluded that the entire tract and
Berry's Creek are polluted and that additional mercury
from the tract has reached, and may continue to reach,
the creek via ground and surface waters. Every operator
of the mercury processing [***11] plant contributed to
the pollution; while the plant was in operation, the discharge
of effluent resulted in a dangerous and hazardous
mercurial content in Berry's Creek. The trial court
found that from 1960-74 the dangers of mercury were
becoming better known and that Berk, Wood Ridge,
Velsicol, and Ventron knew of those dangers. Furthermore,
the lower courts concluded that Velsicol so dominated
Wood Ridge as to justify disregarding the separate
entity of that corporation and imposing liability on Velsicol
for the acts of Wood Ridge. Those courts also
found that Ventron assumed all of Wood Ridge's liabilities
in their merger. Based on those findings, the lower
courts concluded that Berk, Wood Ridge, Velsicol, and
Ventron were liable for damages [**157] caused by
the creation of a public nuisance and the conduct of an
abnormally dangerous activity. 182 N.J. Super. at 219.
The trial court also determined that the 1977 Spill
Act did not impose retroactive liability for discharges of
mercury into a waterway of the State. After the entry of
the judgment, [*487] however, the Legislature
amended the act to impose retroactive strict liability on
"[a]ny person who has [***12] discharged a hazardous
substance or is in any way responsible for any hazardous
substance" being removed by DEP. See N.J.S.A.
58:10-23.11g(c).
Exercising its original jurisdiction under R. 2:10-5,
the Appellate Division found "overwhelming evidence of
mercury pollution in the sediments and waters of Berry's
Creek and its substantial and imminent threat to the environment,
to marine life and to human health and safety."
182 N.J. Super. at 221. Consequently, the Appellate
Division held Wood Ridge jointly and severally liable
under the 1979 amendment to the Spill Act.
II
The lower courts imposed strict liability on Wood
Ridge under common-law principles for causing a public
nuisance and for "unleashing a dangerous substance during
non-natural use of the land." 182 N.J. Super. at 219.
In imposing strict liability, those courts relied substantially
on the early English decision of Rylands v. Fletcher,
L.R. 1 Ex. 265 (1866), aff'd, L.R. 3 H.L. 330 (1868).
An early decision of the former Supreme Court, Marshall
v. Welwood, 38 N.J.L. 339 (Sup.Ct.1876), however,
rejected Rylands v. Fletcher. But see City of Bridgeton
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 7
v. B.P. Oil, Inc., 146 N.J. [***13] Super. 169, 179
(Law Div.1976) (landowner is liable under Rylands for
an oil spill).
Twenty-one years ago, without referring to either
Marshall v. Welwood or Rylands v. Fletcher, this Court
adopted the proposition that [HN1] "an ultrahazardous
activity which introduces an unusual danger into the
community . . . should pay its own way in the event it
actually causes damage to others." Berg v. Reaction Motors
Div., Thiokol Chem. Corp., 37 N.J. 396, 410 (1962).
Dean Prosser views Berg as accepting a statement of
principle derived from Rylands. W. Prosser, Law of
Torts § 78 at 509 & n. 7 (4th ed. 1971).
In imposing liability on a landowner for an ultrahazardous
activity, Berg adopted the test of the Restatement
of the Law of [*488] Torts (1938). See id., § §
519-20. Since Berg, the Restatement (Second) of the
Law of Torts (1977) has replaced the "ultrahazardous"
standard with one predicated on whether the activity is
"abnormally dangerous." Imposition of liability on a
landowner for "abnormally dangerous" activities incorporates,
in effect, the Rylands test. Restatement (Second)
§ 520, comments (d) & (e).
We believe [***14] it is time to recognize expressly
that the law of liability has evolved so that [HN2]
a landowner is strictly liable to others for harm caused by
toxic wastes that are stored on his property and flow onto
the property of others. Therefore, we overrule Marshall
v. Welwood and adopt the principle of liability originally
declared in Rylands v. Fletcher. The net result is that
those who use, or permit others to use, land for the conduct
of abnormally dangerous activities are strictly liable
for resultant damages. Comprehension of the relevant
legal principles, however, requires a more complete explanation
of their development.
Even in its nascent stages, the English common law
recognized the need to provide a system for redressing
unlawful interference with a landowner's right to the
possession and quiet enjoyment of his land. See 2 W.
Blackstone, Commentaries * 218; 1 F. Harper & F.
James, The Law of Torts, § 1.23 (1956); 2 F. Pollock
and F. Maitland, The History of English Law 53 (1895).
Trespass and nuisance developed as the causes of action
available to a landowner complaining of an unauthorized
intrusion on his lands. See Prosser, supra, § § 13, 86;
[***15] [**158] P. Keeton, "Trespass, Nuisance, and
Strict Liability," 59 Colum.L.Rev. 457 (1959); Note,
"The Rylands v. Fletcher Doctrine in America: Abnormally
Dangerous, Ultrahazardous, or Absolute Nuisance,"
1978 Ariz.St.L.J. 99, 123. In their early forms,
predating the development of negligence as a basis for
liability, neither trespass nor nuisance required a showing
of fault as a prerequisite to liability. See Keeton,

supra, at 462-65; Prosser, supra, § 13, at pp. 63-64.
Historically, any actual invasion that was the direct result
of the defendant's act and that interfered with the [*489]
plaintiff's exclusive possession of his land constituted an
actionable trespass, even in the absence of fault. Keeton,
supra, at 464-65; see 1 Harper & James, supra, § §
1.2-1.3. In contrast, nuisance required only an interference
with the enjoyment and possession of land caused
"by things erected, made, or done, not on the soil possessed
by the complainant but on neighboring soil." 2
Pollock & Maitland, supra, at 53; see W. Seavey, "Nuisance;
Contributory Negligence and Other Mysteries,"
65 Harv.L.Rev. 984 (1952); Prosser, supra, § 86,
[***16] at 571-74. The continuing nature of the interference
was the essence of the harm, and as with trespass,
fault was largely irrelevant. See Prosser, supra, at
576.
Such was the state of the common law in England
when, in 1868, the English courts decided Rylands v.
Fletcher. In that case, defendants, mill owners in a
coal-mining region, constructed a reservoir on their
property. Unknown to them, the land below the reservoir
was riddled with the passages and filled shafts of an
abandoned coal mine. The waters of the reservoir broke
through the old mine shafts and surged through the passages
into the working mine of the plaintiff. Id. As
Dean Prosser explains, the courts were presented with an
unusual situation: "[n]o trespass could be found, since
the flooding was not direct or immediate; nor any nuisance,
as the term was then understood, since there was
nothing offensive to the senses and the damage was not
continuing or recurring." Prosser, supra, § 78, at p. 505.
The Exchequer Chamber, however, held the mill
owners liable, relying on the existing rule of strict liability
for damage done by trespassing cattle. The rationale
was stated:
We think [***17] that the true rule
of law is that [HN3] the person who for
his own purposes brings on his land and
collects and keeps there anything likely to
do mischief if it escapes, must keep it at
his peril, and if he does not do so, is prima
facie answerable for all damage which
is the natural consequence of its escape.
[Rylands v. Fletcher, L.R. 1 Ex. 265,
279-80 (1866), aff'd, L.R. 3 H.L. 330
(1868)].
On appeal, the House of Lords limited the applicability
of this strict liability rule to "nonnatural" uses of land.
Consequently, [*490] if an accumulation of water had
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 8
occurred naturally, or had been created incident to a use
of the land for "any purpose for which it might in the
ordinary course of enjoyment of land be used," strict
liability would not be imposed. Rylands v. Fletcher,
L.R. 3 H.L. 330, 338-39.
Early decisions of this State recognized the doctrine
of nuisance as a basis for imposing liability for damages.
See, e.g., Cuff v. Newark & N.Y.R. Co., 35 N.J.L. 17, 22
(1870) (when the owner of land undertakes to do work
that is, in the ordinary mode of doing it, a nuisance, he is
liable for any injuries to third persons, even when an
independent [***18] contractor is employed to do the
work). The former New Jersey Supreme Court, however,
became one of the first courts to reject the doctrine of
Rylands v. Fletcher. See Marshall v. Welwood, 38
N.J.L. 339 (1876). That Court reached this result by referring
to the Exchequer Chamber's broad formulation of
the rule, which extended liability to anything on the land
"likely to cause mischief," rather than the narrowed version
affirmed by the House of Lords, which limited liability
to "nonnatural" use of the land. Writing for the
Court, Chief Justice Beasley refused to adopt Rylands
because it did not require the challenged activity to be a
nuisance per se. Using the example of an alkalai works,
[**159] however, he distinguished those situations in
which the causes of injury partake "largely of the character
of nuisances," even when they "had been erected
upon the best scientific principles." Marshall v. Welwood,
38 N.J.L. at 342-43; see also Ackerman v. Ellis,
81 N.J.L. 1 (Sup.Ct.1911) (trees whose branches overhang
the premises of another are an actionable nuisance).
The confusion occasioned by the rejection of the
Rylands principle of liability [***19] and the continuing
adherence to the imposition of liability for a "nuisance"
led to divergent results. See Majestic Realty Assocs.,
Inc. v. Toti Contracting Co., 30 N.J. 425, 433-35
(1959); see also McAndrews v. Collerd, 42 N.J.L. 189
(1880) (storing explosives in Jersey City is a nuisance
per se, and one who stores them is liable for all actual
"injuries caused thereby"). In Majestic Realty, this
Court abandoned the term [*491] "nuisance per se,"
30 N.J. at 434-35, and adopted a rule of liability that
distinguished between an "ultrahazardous" activity, for
which liability is absolute, and an "inherently dangerous"
activity, for which liability depends upon proof of negligence.
Id. at 436. In making that distinction, the Court
implicitly adopted the rule of landowner liability advocated
by section 519 of the original Restatement of Torts,
supra.
This rule, while somewhat reducing the confusion
that permeated the law of nuisance, presented the further
difficulty of determining whether an activity is "ultrahazardous"
or "inherently dangerous." See, e.g., Adler's
Quality Bakery, Inc. v. Gaseteria, Inc., 32 N.J. 55 (1960)

(discussing [***20] in dicta whether aviation should be
considered an ultrahazardous activity). Subsequently, in
Berg, this Court confirmed strict liability of landowners
by noting that it was "primarily concerned with the underlying
considerations of reasonableness, fairness and
morality rather than with the formulary labels to be attached
to the plaintiffs' causes of action or the legalistic
classifications in which they are to be placed." 37 N.J. at
405.
More recently, the Restatement (Second) of Torts
reformulated the standard of landowner liability, substituting
"abnormally dangerous" for "ultrahazardous" and
providing a list of elements to consider in applying the
new standard. Id., § § 519-20. As noted, this standard
incorporates the theory developed in Rylands v.
Fletcher. Under the Restatement analysis, whether an
activity is abnormally dangerous is to be determined on a
case-by-case basis, taking all relevant circumstances into
consideration. As set forth in the Restatement:
[HN4] In determining whether an activity
is abnormally dangerous, the following
factors are to be considered:
(a) existence of a high degree
of risk of some harm
to the person, land [***21]
or chattels of others;
(b) likelihood that the harm
that results from it will be
great;
(c) inability to eliminate
the risk by the exercise of
reasonable care;
(d) extent to which the activity
is not a matter of
common usage;
(e) inappropriateness of the
activity to the place where
it is carried on; and
[*492] (f) extent to
which its value to the
community is outweighed
by its dangerous attributes.
[Restatement (Second) of Torts § 520
(1977)].
[HN5] Pollution from toxic wastes that seeps onto
the land of others and into streams necessarily harms the
environment. See Special Report to Congress, Injuries
and Damages from Hazardous Wastes -- Analysis and
Improvement of Legal Remedies in Compliance with
section 301(e) of the Comprehensive Environmental Response
Compensation and Liability Act of 1980 By the
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 9
"Superfund Section 301(c) Study Group" (reprinted as
Comm. Print for the Senate Comm. on Envtl. & Pub.
Works, Serial No. 97-12, 97th Cong., 2d Sess., 1982)
[hereinafter cited as Special Report]. [HN6] Determination
of the magnitude of the damage includes recognition
that the disposal of toxic [**160] waste may cause a
variety of harms, including [***22] ground water contamination
via leachate, surface water contamination via
runoff or overflow, and poison via the food chain. Special
Report, supra, at 27. The lower courts found that
each of those hazards was present as a result of the contamination
of the entire tract. 182 N.J. Super. at 217-18.
Further, as was the case here, the waste dumped may
react synergistically with elements in the environment, or
other waste elements, to form an even more toxic compound.
See W. Stopford & L.J. Goldwater, "Methylmercury
in the Environment, A Review of Current Understanding,"
12 Envtl. Health Persp. 115-18 (1975).
With respect to the ability to eliminate the risks involved
in disposing of hazardous wastes by the exercise of reasonable
care, no safe way exists to dispose of mercury by
simply dumping it onto land or into water.
The disposal of mercury is particularly inappropriate
in the Hackensack Meadowlands, an environmentally
sensitive area where the arterial waterways will disperse
the pollution through the entire ecosystem. Finally, the
dumping of untreated hazardous waste is a critical societal
problem in New Jersey, which the Environmental
Protection Agency estimates [***23] is the source of
more hazardous waste than any other state. J. Zazzali
and F. Grad, "Hazardous Wastes: New Rights and Remedies?,"
13 [*493] Seton Hall L.Rev. 446, 449 n. 12
(1983). From the foregoing, we conclude that mercury
and other toxic wastes are "abnormally dangerous," and
the disposal of them, past or present, is an abnormally
dangerous activity. We recognize that one engaged in
the disposing of toxic waste may be performing an activity
that is of some use to society. Nonetheless, "the unavoidable
risk of harm that is inherent in it requires that
it be carried on at his peril, rather than at the expense of
the innocent person who suffers harm as a result of it."
Restatement (Second), supra, comment h at 39.
[HN7] The Spill Act expressly provides that its
remedies are in addition to existing common-law or statutory
remedies. N.J.S.A. 58:10-23.11v. Our examination
leads to the conclusion, consistent with that of the
lower courts, that defendants have violated long-standing
common-law principles of landowner liability. Wood
Ridge and Berk were at all times engaged in an abnormally
dangerous activity -- dumping toxic mercury.
Ventron remains liable because it [***24] expressly
assumed the liability of Wood Ridge in the merger.
After 1967, Velsicol, as an adjacent landowner, permitted
Wood Ridge to dump mercury onto its land. That

activity has poisoned the land and Berry's Creek. Even
if they did not intend to pollute or adhered to the standards
of the time, all of these parties remain liable.
Those who poison the land must pay for its cure.
We approve the trial court's finding that Berk, Wood
Ridge, Velsicol, and Ventron are liable under common-law
principles for the abatement of the resulting
nuisance and damage. The courts below found that the
Wolfs are not liable for the costs of cleanup and containment.
See 182 N.J. Super. at 227. DEP did not petition
for certification on that issue, and we do not consider
it on this appeal. Berk and Wood Ridge, not Mr. and
Mrs. Wolf, polluted the environment. During their
ownership, the Wolfs have not continued to dump mercury
and they have been responsible for only a minimal
aggravation of the underlying hazardous condition.
[*494] III
In this case, we need not impose liability solely on
common-law principles of nuisance or strict liability.
[HN8] In a 1979 amendment to the Spill Act, the [***25]
Legislature imposed strict liability on any person "who
has discharged a hazardous substance or is in any way
responsible for any hazardous substance" removed by
DEP. N.J.S.A. 58:10-23.11g(c). That statute is consistent
with the long-standing principle that the Legislature
may prohibit activities that constitute a nuisance. See
Mayor of Alpine v. [**161] Brewster, 7 N.J. 42, 49-50
(1957). At all times pertinent to this decision, New Jersey
statutes have regulated or prohibited activities leading
to pollution of the State's waters.
One of the earliest antipollution statutes was "An
Act to secure the purity of the public supplies of potable
waters in this State," enacted in 1899. L.1899, c. 41, p.
73. This provision made punishable the discharge,
whether directly into state waters, or onto the ice or the
banks of any watercourse or tributary thereof, of any
"sewage, drainage, domestic or factory refuse, excremental
or other polluting matter of any kind whatsoever
which, either by itself or in connection with other matter"
was capable of impairing the quality of water that might
find its way into the water supply of any municipality.
Id. [***26]
The Legislature supplemented this protection in
1937, by enacting a much broader provision, now codified
at N.J.S.A. 23:5-28:
No person shall allow any dyestuff,
coal tar, sawdust, tanbark, lime, refuse
from gas houses, or other deleterious or
poisonous substance to be turned into or
allowed to run into any of the waters of
this state in quantities destructive of life
or disturbing the habits of the fish inhab-
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
iting the same, under penalty of two hundred
dollars for each offense. [N.J.S.A.
23:5-28, L.1937, c. 64, § 2, p. 176].
Page 10
The 1937 act imposed strict liability on anyone who
allowed a pollutant to escape into the waters of the State.
State v. Kinsley, 103 N.J. Super. 190, 192-94 (Law
Div.1968), aff'd, 105 N.J. Super. 347 (App.Div.1969)
(landfill operator held liable under the statute, even in the
absence of "guilty knowledge," because the landfill polluted
streams); see Lansco, Inc. v. Department [*495]
of Envtl. Protection, 138 N.J. Super. 275 (Ch.Div.1975)
(insurer held liable under comprehensive liability policy
covering "all sums which the insured shall become legally
obligated to pay as damages . . ." because [***27]
insured, the owner of a tank farm, was strictly liable under
statute for cleaning up oil spill even if the spill was
caused by a third party). But see State v. American Alkyd
Indus., Inc., 32 N.J. Super. 150, 153 (Cty.Ct.1954)
(defendant was not liable under statute when, contrary to
instructions, watchman left his post and allowed fuel oil
to flow into Berry's Creek).
This statute remained in substantially the same form
through 1968 -- thus spanning the majority of the period
during which Berk operated its mercury processing plant,
and the entirety of the period during which Wood Ridge
ran it as a Velsicol subsidiary. n1 We agree with the trial
court's finding that both Berk and Wood Ridge violated
the statute by intentionally permitting mercury-laden
effluent to escape onto the land surrounding Berry's
Creek.
n1 During this time, the Legislature amended
the act once, in 1950. It then read:
No person shall allow any
dyestuff, coal tar, sawdust, tanbark,
lime, refuse from gas houses,
oil tanks or vessels, vitriol or any
of the compounds thereof, or other
deleterious or poisonous substance
to be turned into or allowed to run
into any of the fresh or tidal waters
within the jurisdiction of this State
in quantities destructive of life or
disturbing of the habits of the fish
or birds inhabiting the same, under
a penalty of five hundred dollars
($ 500.00) for the first offense,
and one thousand dollars ($
1000.00) for any subsequent offense.
[N.J.S.A. 23:5-28, as
amended, L. 1950, c. 49, § 1, p.
88].

[***28]
In 1968, the Legislature amended [HN9] N.J.S.A.
23:5-28 so that it read in pertinent part
No person shall put or place into, turn
into, drain into, or place where it can find
its way into any of the fresh or tidal waters
within the jurisdiction of this State
any deleterious destructive or poisonous
substances of any kind . . . . In case of
pollution of said waters by substances
known to be injurious to fish, birds or
mammals, it shall not be necessary to
show that the substances have actually
caused the death of any of these organisms.
[L.1968, c. 329, p. 979-80].
[*496] A 1971 amendment, which is still in effect,
added petroleum products, debris, and [**162] other
hazardous substances of any kind to the list of prohibited
substances; it also eliminated the necessity of showing
harm to living organisms as a prerequisite to application
of the statute. L.1971, c. 173, p. 663, § 11. Ample
evidence supports the trial court's conclusion that, while
operating the plant as a Ventron subsidiary from
1968-74, Wood Ridge violated this version of the statute.
[HN10] The 1971 amendment to N.J.S.A. 23:5-28
was a part of the Water Quality Improvement [***29]
Act of 1971, N.J.S.A. 58:10-23.1 to -23.10 (L.1971, c.
173, pp. 660-63, § § 1-10), which required any person
"responsible" for discharging, whether intentionally or
by accident, petroleum and hazardous substances to undertake
immediate removal of those substances, or to
bear the expense of removal authorized by the Department
of Environmental Protection (DEP). N.J.S.A.
58:10-23.3, -23.5, -23.7. Only discharges caused by
acts of war or acts of God did not occasion strict liability,
and even under those circumstances, the person responsible
for the substance discharge was obligated to mitigate
damages to the extent practicable. N.J.S.A.
58:10-23.10.
[HN11] "Hazardous substances" were defined quite
broadly under the Water Quality Improvement Act to
include
elements and compounds which, when
discharged in any quantity into, upon, or
in any manner which allows flow and
runoff into the waters of this State or adjoining
shorelines, presents a serious
danger to the public health or welfare, including
but not limited to, damage to the
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
environment, fish, shellfish wildlife, vegetation,
shorelines, stream banks, and
beaches. [N.J.S.A. 58:10-23.3(b)].
Page 11
By [***30] discharging mercury-contaminated effluent
from the plant onto the adjacent thirty acres and into
Berry's Creek, Wood Ridge violated the act from the
time of its enactment in 1971 until Wood Ridge merged
into Ventron and ceased operations in 1974.
The Legislature, in 1976, enacted the Spill Compensation
and Control Act of 1977 (Spill Act), N.J.S.A.
58:10-23.11 to -23.11z, as amended, L.1977, c. 346, §
4. The Spill Act, which is quite comprehensive in its
scope, repealed and supplanted the Water [*497]
Quality Improvement Act. L.1976, c. 141, § 28. As a
result, the State amended its complaint, originally filed in
1976, to allege liability under the Spill Act.
[HN12] In the Spill Act, the Legislature declared the
storage and transfer of hazardous substances to be a hazardous
undertaking, constituting a threat to both the environment
and economy of the State. N.J.S.A.
58:10-23.11a. The Legislature intended
to provide liability for damage sustained
within this State as a result of any discharge
of said substances, by requiring the
'prompt containment and removal of such
pollution and substances, and to provide a
fund for swift and adequate compensation
[***31] to resort businesses and other
persons damaged by such discharge.'
[N.J.S.A. 58:10-23.11a].
As most recently amended, [HN13] the Spill Act provides
that "[t]he discharge of hazardous substances is
prohibited." N.J.S.A. 58:10-23.11c.
A discharge is statutorily defined as
. . . any intentional or unintentional action
or omission resulting in the release, spilling,
leaking, pumping, pouring, emitting,
emptying or dumping of hazardous substance
into the waters of the State or onto
lands from which it might flow or drain
into said waters outside the jurisdiction of
the State. [N.J.S.A. 58:10-23.11b(h)].
Further, as a result of a 1979 amendment, [HN14] the
Spill Act expressly applies to a discharge of a hazardous
substance that occurred prior to May 1, 1977, the effective
date of the act, "if such discharge poses a substantial

isk of imminent damage to the public health or safety or
imminent and severe damage to the environment."
N.J.S.A. 58:10-23.11f(b)(3) (as amended, L.1979, c. 346,
§ 4; L.1981, c. 25, § 1).
Not only has the Legislature granted DEP the power
to clean up preexisting [**163] spills, but it has also
established [***32] retroactive strict liability:
Any person who has discharged a
hazardous substance or is in any way responsible
for any hazardous substance
which the department has removed or is
removing pursuant to subsection b. of
section 7 of this act shall be strictly liable,
jointly and severally without regard to
fault, for all cleanup and removal costs.
[N.J.S.A. 58:10-23.11g(c), as amended,
L.1976, c. 141, § 8].
As previously mentioned, the 1979 amendment of
the Spill Act became effective subsequent to the judgment
of the [*498] trial court. [HN15] Under the
"time of decision rule," when legislation affecting a
cause is amended while a matter is on appeal, an appellate
court should apply the statute in effect at the time of
its decision. In re Petition of South Lakewood Water
Co., 61 N.J. 230, 248 (1972); see Kruvant v. Mayor of
Cedar Grove, 82 N.J. 435, 440 (1980). An exception to
that rule obtains if the facts change substantially during
the pendency of the appeal. 61 N.J. at 248. Here, however,
defendants have not made any showing of additional
evidence to support such a change.
In an appropriate exercise of its original jurisdiction
under [***33] R. 2:10-5, the Appellate Division found
that the record overwhelmingly supported the conclusion
that the mercury pollution in Berry's Creek and the surrounding
area presented a substantial and imminent
threat to the environment, thus satisfying the requirement
for a retroactive application of the act. Our independent
analysis leads us to the same conclusion. Thus, we find
Berk, Wood Ridge, and Velsicol liable under the Spill
Act. Ventron is liable because it expressly assumed the
liabilities of Wood Ridge in their merger.
[HN16] When considering whether a statute should
be applied prospectively or retroactively, our quest is to
ascertain the intention of the Legislature. In the absence
of an express declaration to the contrary, that search may
lead to the conclusion that a statute should be given only
prospective effect. Rothman v. Rothman, 65 N.J. 219,
224 (1974). Conversely, when the Legislature has clearly
indicated that a statute should be given retroactive effect,
the courts will give it that effect unless it will violate the
constitution or result in a manifest injustice. Baldwin v.
Newark, 38 N.J.L. 158, 159 (Sup.Ct.1895); see Gibbons
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 12
v. Gibbons, 86 [***34] N.J. 515, 522-23 (1981); Howard
Savings Inst. v. Kielb, 38 N.J. 186, 193 (1962). As
noted, the Legislature has expressly declared that the
Spill Act should be given retroactive effect.
[HN17] Retroactivity need not render a statute unconstitutional,
Rothman v. Rothman, 65 N.J. at 225, and
the Spill Act, not being a criminal provision, is not invalid
as an ex post facto [*499] law. Furthermore, the
due process clause generally does not prohibit retroactive
civil legislation unless the consequences are particularly
harsh and oppressive. United States Trust Co. v. New
Jersey, 431 U.S. 1, 19 n. 13, 97 S.Ct. 1505, 1516 n. 13,
52 L.Ed.2d 92, 106 n. 13 (1977). In the exercise of the
police power, a state may enact a statute to promote public
health, safety or the general welfare. Rothman v.
Rothman, 65 N.J. at 225. Although retroactive application
of a statute may impair private property rights, when
protection of the public interest so clearly predominates
over that impairment, the statute is valid. Id. In this
case, we find that the public interest outweighs any impairment
of private property rights.
Further, the Spill Act does not [***35] so much
change substantive liability as it establishes new remedies
for activities recognized as tortious both under prior
statutes and the common law. Supra at 900-903,
904-905. [HN18] A statute that gives retrospective effect
to essentially remedial changes does not unconstitutionally
interfere with vested rights. Pennsylvania
Greyhound Lines, Inc. v. Rosenthal, 14 N.J. 372, 381
[**164] (1954). On balance, the benefits accorded to
the public by the statute outweigh any burden imposed
on the polluters.
We note further that Ventron contends that the State,
by participating in Ventron's attempt to control pollution
at the site, should be estopped from seeking to hold defendants
liable for the costs of the cleanup and containment
of the mercury. Sometimes by their conduct, public
officials may ratify the action of private parties, and that
ratification can effect an estoppel. Board of Educ. v.
Hock, 38 N.J. 213, 241 (1962). Before ratification will
result in an estoppel of public officials, however, it must
be shown that the officials knew or should have known
of the material facts. Id. That Ventron cooperated with
the State in an unsuccessful effort to curb [***36] the
pollution of the tract can hardly justify foisting on the
public the cost of the cleanup and containment.
The remaining question concerns the propriety of
imposing liability under the Spill Act on Ventron and
Velsicol for the acts [*500] of Wood Ridge. Resolution
of this question involves recognition that the limited
liability generally inherent in the creation of a corporation
presents the potential for avoidance of responsibility
for the dumping of toxic wastes by the creation of a

wholly-owned subsidiary. Implicit in that consideration
is a need to balance the policy in favor of granting limited
liability to investors against the policy of imposing
liability on polluters for environmental torts. The lower
courts struck the balance by piercing Wood Ridge's corporate
veil and holding Velsicol liable for the pollution
caused by its subsidiary. Although we disagree with the
reasoning of those courts, we affirm the finding that Velsicol
is responsible for the cleanup of Berry's Creek under
the 1979 amendment to the Spill Act.
We begin with the fundamental propositions that
[HN19] a corporation is a separate entity from its shareholders,
Lyon v. Barrett, 89 N.J. 294, [***37] 300
(1982), and that a primary reason for incorporation is the
insulation of shareholders from the liabilities of the corporate
enterprise. Berle, "The Theory of Enterprise Entity,"
47 Colum.L.Rev. 343 (1947); Note, "Piercing the
Corporate Veil: The Alter Ego Doctrine Under Federal
Common Law," 95 Harv.L.Rev. 853, 854 (1982); H.
Henn, Law of Corporations § 146, p. 250 (2d ed. 1961).
Even in the case of a parent corporation and its wholly-owned
subsidiary, limited liability normally will not
be abrogated. Muller v. Seaboard Commercial Corp., 5
N.J. 28, 34 (1950).
Except in cases of fraud, injustice, or the like, courts
will not pierce a corporate veil. Lyon v. Barrett, 89 N.J.
at 300. The purpose of the doctrine of piercing the corporate
veil is to prevent an independent corporation from
being used to defeat the ends of justice, Telis v. Telis,
132 N.J.Eq. 25 (E. & A.1942), to perpetrate fraud, to
accomplish a crime, or otherwise to evade the law,
Trachman v. Trugman, 117 N.J.Eq. 167, 170 (Ch.1934).
[HN20] Under certain circumstances, courts may
pierce the corporate veil by finding that a subsidiary was
"a mere instrumentality of the parent [***38] corporation."
Mueller v. Seaboard [*501] Commercial Corp.,
supra, 5 N.J. at 34-35; see generally Note, "Liability of a
Corporation for Acts of a Subsidiary or Affiliate", 71
Harv.L.Rev. 1122 (1958). Application of this principle
depends on a finding that the parent so dominated the
subsidiary that it had no separate existence but was
merely a conduit for the parent. 1 W. Fletcher, Cyclopedia
of the Law of Private Corporations § 41.1 (Perm.
ed. 1974 rev.); see Annot., "Corporations -- Torts of a
Subsidiary," 7 A.L.R.3d 1343, 1355 (1966). Even in the
presence of corporate dominance, liability generally is
imposed only when the parent has abused the privilege of
incorporation by using the subsidiary to perpetrate a
fraud or injustice, or otherwise to circumvent the law.
Mueller v. Seaboard Commercial Corp., 5 N.J. at 34-35;
see generally Note, "Liability of a Parent or [**165]
Affiliate," supra, 71 Harv.L.Rev. at 1123; 1 Fletcher
Corporations, supra, § 41.1.
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 13
In holding that Velsicol is liable for the acts of
Wood Ridge, the lower courts found it "immaterial" that
Wood Ridge was not undercapitalized and that it did not
[***39] engage exclusively in business with Velsicol.
182 N.J. Super. at 225. Those courts found dispositive
the facts that Velsicol created Wood Ridge for the sole
purpose of acquiring and operating Berk's mercury processing
business and that, as the trial court found, "Velsicol
personnel, directors, and officers were constantly
involved in the day-to-day business" of Wood Ridge.
By themselves those conclusions are not sufficient to
support the further conclusion that the intrusion of Velsicol
into Wood Ridge's affairs reached the point of
dominance. Furthermore, it appears that Velsicol incorporated
Wood Ridge for a legitimate business purpose.
Contrary to the implication of the trial court
opinion, it is proper to establish a new corporation for the
sole purpose of acquiring the assets of another corporation
and continuing its business. We cannot conclude
that Velsicol incorporated Wood Ridge for an unlawful
purpose. See Rippel v. Kaplus, 124 N.J.Eq. 303, 304
(Ch.1938).
Although it would be inappropriate to pierce Wood
Ridge's corporate veil by applying the traditional common-law
[*502] doctrine, liability of Velsicol may be
predicated upon the 1979 amendment to [***40] the
Spill Act. As amended, [HN21] the Spill Act provides:
"Any person who has discharged a hazardous substance
or is in any way responsible for any hazardous substance
. . . shall be strictly liable, jointly and severally, without
regard to fault, for all clean up and removal costs."
N.J.S.A. 58:10-23.11g(c) (emphasis added).
The phrase "in any way responsible" is not defined
in the statute. As we have noted previously, however,
[HN22] the Legislature intended the Spill Act to be "liberally
construed to effect its purposes." N.J.S.A.
58:10-23.11x. The subsequent acquisition of land on
which hazardous substances have been dumped may be
insufficient to hold the owner responsible. Ownership
or control over the property at the time of the discharge,
however, will suffice. See State Dep't of Envtl. Protection
v. Exxon Corp., 151 N.J. Super. 464, 470-74
(Ch.Div.1977). From 1967 to 1974, and thereafter, Velsicol
could have controlled the dumping of mercury onto
its own thirty-three-acre tract. By permitting Wood
Ridge, even after it became a Ventron subsidiary in
1968, to use that tract as a mercury dump, Velsicol made
possible the seepage of hazardous wastes into Berry's
Creek. [***41] Furthermore, from 1960 to 1968, Velsicol
was the sole shareholder of Wood Ridge and all
members of the Wood Ridge Board of Directors were
Velsicol employees. Velsicol personnel, officers, and
directors were involved in the day-to-day operation of
Wood Ridge. In addition to constant involvement in

Wood Ridge's activities, Velsicol permitted the dumping
of waste material on the thirty-three-acre tract. When
viewed together, those facts compel a finding that Velsicol
was "responsible" within the meaning of the Spill
Act for the pollution that occurred from 1960 to 1968.
Given the extended liability of the Spill Act, we
conclude that the Legislature intended that the privilege
of incorporation should not, under the circumstances that
obtain here, become a device for avoiding statutory responsibility.
A contrary result [*503] would permit
corporations, merely by creating wholly-owned subsidiaries,
to pollute for profit under circumstances when the
Legislature intended liability to be imposed.
The question remains to what extent Velsicol should
share with Ventron the costs of containing and cleaning
up the contaminated area. Wood Ridge, as a successor
landowner that purchased [***42] all of the assets and
continued the activities of Berk, was liable for the damage
caused by its own operations and those of Berk. See
New Jersey Dep't of Transp. v. PCS Resources, Inc., 175
N.J. Super. 447 (Law Div.1980); State v. Exxon Corp.,
151 N.J. Super. 464 [**166] (Ch.Div.1977); Note,
"Successor Landowner Liability for Environmental
Torts: Robbing Peter to Pay Paul?," 13 Rutgers L.J. 329,
334-42 (1982). Through the merger of Wood Ridge into
Ventron, the latter corporation assumed all of Wood
Ridge's liabilities, including those arising out of the pollution
of Berry's Creek. See N.J.S.A. 14A:10-6(c).
Ventron, however, did not assume Velsicol's liability.
Pursuant to the mandate of the Spill Act, see
N.J.S.A. 58:10-23.11g(c), Berk, Wood Ridge, Velsicol,
and Ventron are jointly and severally liable without regard
to fault. Only Ventron and Velsicol remain in existence,
and we affirm that portion of the Appellate Division
judgment that holds them jointly and severally liable
for the cleanup and removal of mercury from the Berry's
Creek area.
IV
Finally, we consider the issues raised by the Wolfs'
cross-claim against Ventron, in which the [***43]
Wolfs alleged fraudulent nondisclosure in the sale of
realty. As noted by the trial court, [HN23] the elements
necessary to prove fraudulent concealment on the part of
a seller in a real estate action are: the deliberate concealment
or nondisclosure by the seller of a material fact
or defect not readily observable to the purchaser, with
the buyer relying upon the seller to his detriment.
Weintraub v. Krobatsch, 64 N.J. 445, 455 (1974); Berman
v. Gurwicz, 189 N.J. Super. 89 (Ch.Div.1981), aff'd,
189 N.J. Super. 49 (App.Div.1983), [*504] certif. den.,
94 N.J. 549 (1983). The trial court found that Ventron
knew of a latent defect, gross mercury pollution in the
soil, but intentionally failed to disclose that fact to the
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 14
Wolfs. Furthermore, the court found that the contamination
was not readily observable by the Wolfs and that
the Wolfs relied upon the nondisclosure to their detriment.
The Appellate Division determined that those
findings were supported by credible evidence. 182 N.J.
Super. at 227. We agree, and affirm the judgment in favor
of the Wolfs on the cross-claim.
While no proofs on damages had yet been adduced
below, that issue having [***44] been set aside for separate
trial, both lower courts commented upon limitations
and inclusions ultimately applicable to the award. Specifically,
both courts found that "the cost of the containment
system may be recoverable, as well as the legal fees
incurred by the Wolfs in defense of the action brought
against them by DEP." 182 N.J. Super. at 228.
In approving the award of counsel fees, the trial
court relied on the theory that the contamination of the
tract constituted a breach by Ventron of the covenant
against encumbrances in its deed to the Wolfs. Without
addressing the correctness of that theory, the Appellate
Division affirmed the award, apparently because Ventron
had defrauded the Wolfs. Id. Neither court expressly
found that Ventron's fraud was the proximate cause of
the DEP action against the Wolfs.
Our review begins with the general rule that sound
[HN24] judicial administration is best advanced if litigants
bear their own counsel fees. Right to Choose v.
Byrne, 91 N.J. 287, 316 (1982). Consistent with this policy,
legal expenses, whether for the compensation of
attorneys or otherwise, are not recoverable absent express
authorization by statute, court rule, [***45] or
contract. R. 4:42-9; Cohen v. Fair Lawn Dairies, Inc.,
86 N.J. Super. 206 (App.Div.), aff'd 44 N.J. 450 (1965);
Jersey City Sewerage Auth. v. Housing Auth. of Jersey
City, 70 N.J. Super. 576 (Law Div.1961), aff'd 40 N.J.
145 (1963). A further exception obtains where counsel
fees are awarded to "[o]ne who through the tort of another
has been required to act in the protection of his
[*505] interests by bringing or defending an action
against a third person . . . ." Restatement (Second) of
Torts § 914(2); see Dorofee v. Pennsauken Township
Planning Bd., 187 N.J. Super. 141, 144-46
(App.Div.1982); Pressler, [**167] Current N.J. Court
Rules, Comment R. 4:42-9.
Accordingly, [HN25] in a fraud action, such as that
asserted in the Wolfs' cross-claim against Ventron, if a
third party sues one who has been defrauded, as DEP
sued the Wolfs, the defrauded party "may recover from
the tortfeasor the expenses of that litigation, including
counsel fees, as damages flowing from the tort." Dorofee
v. Pennsauken Township Planning Bd., supra, 187 N.J.
Super. at 144; Feldmesser v. Lemberger, 101 N.J.L. 184,
187 (E. & [***46] A.1925); Hagen v. Gallerano, 66

N.J. Super. 319, 333 (App.Div.1961). That is, the Wolfs
may recover from Ventron that portion of their legal expenses
that was incurred as a proximate result of Ventron's
fraud.
Although we have affirmed the findings that Ventron
defrauded the Wolfs and that the Wolfs contributed
minimally to the pollution, it is an open question whether
it was Ventron's fraud or the Wolfs' own acts, or both,
that caused the Wolfs to incur counsel fees in defense of
94 N.J. 473, *; 468 A.2d 150, **;
1983 N.J. LEXIS 2744, ***; 19 ERC (BNA) 1505
Page 15
the DEP action. Consequently, the Wolfs' right to
counsel fees, like the other elements of damages, must be
remanded to the trial court for further proceedings. The
Wolfs may not recover the part of their counsel fees attributable
to defending their own acts. Nor may they
recover the portion of the counsel fees incurred in prosecuting
their own claim against Ventron.
As modified, the judgment of the Appellate Division
is affirmed.

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PRIOR HISTORY: [***1]
95 Cal. App. 3d 886, *; 157 Cal. Rptr. 438, **;
1979 Cal. App. LEXIS 2018, ***
LEXSEE 95 CAL.APP.3D 886
HARBOR CITY DISCOUNT AUTO CENTER, INC., et al., Cross-complainants and
Respondents, v. FIRESTONE TIRE & RUBBER COMPANY, Cross-defendant and
Appellant
Civ. No. 53552
Court of Appeal of California, Second Appellate District, Division Five
95 Cal. App. 3d 886; 157 Cal. Rptr. 438; 1979 Cal. App. LEXIS 2018
Superior Court of Los Angeles County, No. C60452,
Charles H. Older, Judge.
DISPOSITION:
Reversed.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant tire company
sought review of a judgment from the Superior Court of
Los Angeles County (California), which awarded attorney's
fees in favor of respondents, corporation and
wholesaler, on a cross-complaint in a personal injury and
wrongful death action.
OVERVIEW: A driver filed an original complaint for
personal injuries and wrongful death against respondent
corporation and appellant tire company. Respondent
corporation filed cross-complaints for indemnity against
appellant and respondent wholesaler. A trial court
awarded attorney's fees for respondents. Appellant
sought review. The court reversed the trial court's judgment.
The court determined that respondent corporation's
attorney's fees were incurred solely in defense of its own
alleged wrongdoing. The court concluded that respondent
wholesaler was in a peculiar position in that out of all
the parties it had the least opportunity to spot or remedy
any of the defects complained of. Yet, it was liable to its
vendee and was entitled to indemnity from its vendor.
The court found it impossible to distinguish a controlling
case on the degree of involvement or noninvolvement of
a particular entity in the chain of distribution. Respondent
wholesaler was, therefore, as responsible for its legal
expenses as any other California litigant.
August 8, 1979
Page 1
OUTCOME: The court reversed a trial court's award of
attorney's fees for respondents, corporation and wholesaler,
on a cross-complaint against appellant tire company
because respondent corporation's attorney's fees were
incurred solely in defense of its own alleged wrongdoing.
Respondent wholesaler was responsible for its own legal
expenses because a case could not be distinguished on
the degree of involvement of an entity in the distribution
chain.
LexisNexis(R) Headnotes
Torts > Damages > Compensatory Damages
Torts > Causation > Proximate Cause
[HN1] Cal. Civ. Code § 3333 states uncompromisingly
that the measure of damages for the breach of an obligation
not arising from contract is the amount which will
compensate for all the detriment proximately caused
thereby.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN2] See Cal. Civ. Proc. Code § 1021.
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN3] Cal. Civ. Proc. Code § 1021 is not applicable to
cases where a defendant has wrongfully made it necessary
for a plaintiff to sue a third person.
Civil Procedure > Costs & Attorney Fees > Litigation
Costs
Civil Procedure > Costs & Attorney Fees > Attorney
Fees
[HN4] One who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover reasonable compensation for loss of time,

attorney fees and other expenditures thereby suffered or
incurred in the earlier action.
COUNSEL:
Iverson, Yoakum, Papiano & Hatch, Patrick
McAdam and Arnold D. Larson for Cross-defendant and
Appellant.
Stephen J. Grogan, Robert E. Long, Dryden, Harrington
& Swartz, Peter Abrahams, Hagenbaugh &
Murphy, John J. Tary and James B. Sanborn for
Cross-complainants and Respondents.
JUDGES:
Opinion by Kaus, P. J., with Stephens and Hastings,
JJ. concurring.
OPINIONBY:
KAUS
OPINION:
[*888] [**439] This appeal involves the financial
detritus from an accident on July 8, 1972, in El Paso,
Texas in which a new Ford station wagon was involved.
The original complaint for personal injuries and wrongful
death, filed in 1973, named as defendants Ford Motor
Company (Ford), Harbor City Discount Auto Center
(Harbor), Firestone Tire and Rubber Company (Firestone),
as well as Elizabeth Williams, the driver of the
car. n1
[***2]
n1 The driver, Elizabeth Williams, filed a
cross-complaint and in effect became an additional
plaintiff.
The complaint alleged that the accident happened
because the right rear tire of the station wagon blew out,
making the steering mechanism inoperative and causing
the car to lose control; it was also alleged that the car
was negligently designed, manufactured and assembled
in that the tires "and/or" the steering mechanism were
defective. Harbor was alleged to have been negligent in
failing to discover these defects upon inspection. Other
causes of action of the original complaint sounded in
warranty, express and implied, and "strict" products liability.
Ford and Harbor filed cross-complaints for indemnity
against Firestone. Harbor also cross-complained
against Beverly Hills Ford (Beverly Hills) which had
allegedly "wholesaled" the car to Harbor. Beverly Hills,
in turn, cross-complained against Firestone and Ford.
95 Cal. App. 3d 886, *; 157 Cal. Rptr. 438, **;
1979 Cal. App. LEXIS 2018, ***
Page 2
By stipulation the cross-complaints were tried to the
court without a jury after the basic liability trial on plaintiffs'
complaint.
Shortly before that trial the plaintiffs answered interrogatories.
One answer neatly sums up their factual
contentions concerning the station wagon:
"Defendant Ford Motor Company mounted a defective
tire on the vehicle. Defendant Ford [***3] Motor
Company mounted the wrong type of tire on said vehicle.
Defendant Ford Motor Company punctured the
bead of the tire in the process of mounting it. Defendant
Ford Motor Company manufactured a station wagon
with space for occupants up to eight (8) adults and put in
a roof rack to hold extensive luggage, yet the car was
incapable of coping with such load. Defendant Ford
Motor Company did not issue adequate warnings with
respect to the loading of the car. Defendant Ford Motor
Company manufactured defective seat [*889] belts.
Defendant Ford Motor Company manufactured a defective
car with a defective steering wheel, which had to be
repaired many times even when the car was brand new."
A good part of the extensive pretrial discovery conducted
by counsel related to the claim that the station
wagon had a defective steering mechanism. That claim
was maintained by plaintiffs well into the trial. Counsel
mentioned it in a trial brief, [**440] as well as in his
opening statement. At least two of his witnesses gave it
factual support.
Eventually the jury determined by special verdicts
that the sole cause of the accident was the defective tire
and that it was defective when [***4] it left the possession
of Firestone, Ford and Harbor. No special verdicts
concerning any other defect were submitted, nor was the
jury asked to pass on the negligence of any party to this
appeal. The briefs do not explain how these other issues
fell by the wayside.
Firestone settled with all the plaintiffs except the
driver Williams. The cross-complaints were then tried
and resulted in judgments for indemnity in favor of Ford,
Harbor and Beverly Hills and against Firestone. The
judgments included substantial amounts for attorneys'
fees incurred by Ford and Harbor in defending the main
action and by Beverly Hills in defending itself against
Harbor's cross-complaint. n2
n2 Ford: $ 33,731.19; Harbor: $ 10,409.71;
Beverly Hills: $ 14,348.00.
Discussion
(1) The only issue on appeal relates to the propriety
of the award of attorney's fees. The basic premise of the

judgment on the cross-complaint -- that ultimately Firestone
is responsible for the accident and must indemnify
Ford et al., -- is not questioned. [***5]
Since, as will appear, we disagree with the trial
court, it is only fair to state that it acted long before the
filing of the determinative Supreme Court decision --
Davis v. Air Technical Industries, Inc. (1978) 22 Cal.3d
1 [148 Cal.Rptr. 419, 582 P.2d 1010] -- and that it was,
fleetingly, vindicated by the Court of Appeal decision in
that case, filed several months after the judgment appealed
from. n3
n3 Davis was still pending in the Supreme
Court when the parties started to brief this appeal.
With misplaced confidence Beverly Hills' original
brief suggested that we "await the decision in
Davis . . . [which] should be dispositive of the
issue in the instant case." After Davis was filed,
Beverly Hills filed a supplemental brief distinguishing
it.
[*890] Davis, essentially, had to chose between
two statutes which are in irreconcileable conflict where
the tort of one party causes another to incur a liability for
attorney's fees. On the one hand, [HN1] section 3333 of
the Civil Code [***6] states uncompromisingly that the
measure of damages "[for] the breach of an obligation
not arising from contract . . . is the amount which will
compensate for all the detriment proximately caused
thereby. . . ." On the other hand, [HN2] section 1021 of
the Code of Civil Procedure announces with equal inflexibility:
"Except as attorney's fees are specifically
provided for by statute, the measure and mode of compensation
of attorneys . . . is left to the agreement, express
or implied, of the parties; . . ." Where a defect for
which a manufacturer is responsible has exposed a retailer
to expensive litigation by an ultimate consumer,
these two sections are on a collision course: while attorney's
fees are clearly proximately caused by the defect
and should be recoverable under section 3333, section
1021 negatives such recovery in the absence of contract.
Davis was the aftermath of a products liability action
concerning a portable elevator, brought against Davis,
the retailer and Air Technical, the manufacturer. A jury
found both defendants strictly liable after charges of negligence
had been withdrawn. In a separate trial on a
cross-complaint for indemnity, [***7] the court awarded
Davis $ 19,804.77 in attorney's fees.
The Supreme Court noted that certain limited exceptions
to section 1021 had been recognized, but found that
none applied. It rejected what it called a "broad new
exception" which would have authorized attorney's fees
95 Cal. App. 3d 886, *; 157 Cal. Rptr. 438, **;
1979 Cal. App. LEXIS 2018, ***
Page 3
for former defendants who prevailed on claims for implied
indemnity, at least where such fees are incurred
"solely in defense of [the indemnitee's] own alleged
wrongdoing. . . ." ( Id., p. 5.) It left open the possibility
that such fees might be recoverable in cases where the
indemnitee was only constructively liable "'because of
[**441] the actual default of another for whose benefit
the defense [was] really conducted . . . .'" ( C. & O. C.
Co. v. County Comm'rs. (1881) 57 Md. 201, 226, italics
added by Supreme Court.) n4 Davis, however, was not
such a case but "a products liability action of the garden
variety. A manufacturer and retailer were [*891] held
strictly liable for injuries caused by the manufacturer's
defectively designed product." (Id., p. 7.) The court felt
that if in such a "wholly unexceptional case" attorneys
fees were allowed, [***8] the legislative mandate of
section 1021 would be "completely undermined."
n4 There is some doubt just what kind of a
case the Supreme Court had in mind when it cited
C. & O. C. Co., v. County Comm'rs, supra, and
its progenitor Westfield v. Mayo (1877) 122
Mass. 100, 105. The indemnitee's position in both
cases resembles the constructive liability of the
plaintiff in City & County of S. F. v. Ho Sing
(1958) 51 Cal.2d 127, 130 [330 P.2d 802].
Davis could easily have gone the other way. In
Prentice v. North Amer. Title Guar. Corp. (1963) 59
Cal.2d 618, 621 [30 Cal.Rptr. 821, 381 P.2d 645], the
court had had no trouble at all explaining that [HN3]
section 1021 of the Code of Civil Procedure was "not
applicable to cases where a defendant has wrongfully
made it necessary for a plaintiff to sue a third person." In
support the court had cited section 914 of the Restatement
of Torts which applies whether [***9] the party
seeking attorney's fees is wrongfully forced to defend or
to sue. n5 Had the Davis court wanted to impose liability
for attorney's fees on indemnitor/manufacturers, the language
of Prentice would certainly have provided an adequate
starting point. It chose, however, to confine
Prentice to its facts and to make Davis the occasion for a
reaffirmance of the rule that, absent "exceptional circumstances,"
section 1021 means just what it says and litigants
are liable for their own attorney's fees.
n5 The substance of section 914 of the original
Restatement of Torts is retained in section
914, subdivision (2) of the Restatement Second
of Torts, and reads as follows: "(2) [HN4] One
who through the tort of another has been required
to act in the protection of his interests by bringing
or defending an action against a third person is

entitled to recover reasonable compensation for
loss of time, attorney fees and other expenditures
thereby suffered or incurred in the earlier action."
The first post- [***10] Davis brief filed with us is
Ford's. It attempts to distinguish Davis mainly on the
ground that there the two defendants were at each other's
throats while, in comparison, Firestone, Ford and the
dealers were one big happy family, with no defendant
seeking to avoid liability by blaming the other. In fact,
Ford's own expert testified to the lack of a defect in the
tire. n6
n6 There should be no need to state the obvious:
Since Ford was clearly liable for any defect
in Firestone's tire, proof that the tire was not
defective benefited Ford. Ford did, of course,
produce other evidence tending to negative its liability
on other theories, such as the alleged defective
steering mechanism.
While the record does indeed suggest that the trial
strategy of the two principal defendants -- Firestone and
Ford -- was not to throw rocks at each other, the plain
fact remains that Ford's attorney's fees were [*892]
incurred solely in defense of Ford's own alleged wrongdoing.
n7 That, in defending Ford, its counsel [***11]
thought it expedient not to knock the work or product of
any other defendant, makes no difference.
n7 Any suggestion that "wrongdoing" means
"negligence" and does not encompass strict liability
for defective products is negatived by the
Supreme Court's observation, quoted above, that
Davis was "a products liability action of the garden
variety. A manufacturer and retailer were
held strictly liable for injuries caused by the
manufacturer's defectively designed product."
(Davis, p. 7; italics added.)
Recognizing that Davis may preclude it from recovering
its entire fee, Ford suggests a legal compromise:
that it recover only fees incurred in defending "on behalf
of Firestone," but be made to absorb fees necessitated by
plaintiff's various theories directed against Ford only,
such as the steering mechanism charge. It bases its argument
on Hales v. Monroe (8th Cir. [**442] 1976)
544 F.2d 331, a case in which the court, without citation
of authority, made an "equitable adjustment" [***12]
and disallowed the indemnitees' attorney's fees to the
extent that they "asserted separate defenses which became
an integral part of their preparation and trial and
95 Cal. App. 3d 886, *; 157 Cal. Rptr. 438, **;
1979 Cal. App. LEXIS 2018, ***
Page 4
for which the manufacturer [indemnitor] could not be
responsible." n8 ( Id., at p. 332.) Ford claims that a similar
adjustment would comply with the spirit of the doctrine
of comparative equitable indemnity as announced in
American Motorcycle Assn. v. Superior Court (1978) 20
Cal.3d 578, 591-598 [146 Cal.Rptr. 182, 578 P.2d 899].
(See also Safeway Stores, Inc. v. Nest-Kart (1978) 21
Cal.3d 322, 327-332 [146 Cal.Rptr. 550, 579 P.2d 441].)
[***13]
n8 At the oral argument one of respondents
drew our attention to a statement in Peters v. Lyons
(Iowa 1969) 168 N.W.2d 759, 770, that the
measure "of recoverability of attorney fees [is] to
be based [not] on the charges made by the injured
party [but] on the facts as found by the court or
jury." That may be good Iowa law but is definitely
not in tune with Davis where the Supreme
Court repeatedly speaks of the "alleged" wrongdoing
of the party seeking reimbursement for legal
expenses.
We have several problems with this suggestion
which, at first blush, seems quite reasonable. First: the
very assumption that Ford incurred legal expenses in
"defending on behalf of Firestone" amounts to a rejection
of Davis. It is a point which can be made in every
"garden variety" products liability case by every seller
down the line who defends himself by attempting to
show that there was no defect in the product he sold.
The fact that here there were other legal issues which
triggered additional legal efforts does not change the
nature of the legal services in the area where Ford's and
Firestone's interests coincided. Second: Granted that the
doctrine of comparative equitable indemnity announced
[*893] in American Motorcycle is a sound step away
from the "all or nothing" rule which it replaced, it is nevertheless
a doctrine of substantive law and has no logical
impact on the Davis rule that litigants are responsible for
legal costs incurred in vindicating substantive rights, in
whatever area of the law. Third: the question of the
correct portion is, itself a litigable issue. In the Hales
case the court dispensed some "barnyard equity" and
[***14] made the indemnitees absorb 50 percent of
their attorney's fees. In this case Ford suggests that an
award of two-thirds -- in other words, a reduction of the
judgment to about $ 22,500 -- would be equitable, but its
very argument in favor of such an award demonstrates
that adoption of the Hales rule would simply add one
more area for prolix, time-consuming hearings to the
already jammed dockets of our trial courts. Concern for
judicial economy may well have been one of the subliminal
reasons why our Supreme Court in Davis so rigor-

ously adhered to the American rule that basically each
litigant is responsible for his own legal expenses.
There remains for discussion the judgment in favor
of Beverly Hills, the dealership which, it will be recalled,
"wholesaled" the station wagon to Harbor. n9 After
originally predicting that Davis, when filed, "should be
dispositive," (see fn. 3, ante) Beverly Hills now asserts
that it is not adversely affected by Davis because that
case has nothing to do with legal expenses incurred in
defending a claim of strict liability. This surprising
proposition is based on this stray sentence in the opening
paragraph of the Davis opinion: [***15] "The sole
issue before this court is the correctness of the trial
court's order that Air Technical pay the attorney's fees
incurred by Davis in defending against allegations of his
own negligence and breach of warranty." (Id., p. 3, italics
added.) Beverly Hills then goes on to argue that since
it was never sued on any theory except strict liability,
n10 Davis does not affect it.
n9 Harbor settled with Firestone while the
appeal was pending in this court.
n10 Query whether that is so. The original
plaintiffs had sued Harbor on every possible theory,
including negligence and breach of warranty.
Harbor's cross-complaint in effect passes the
blame for all of the plaintiffs' complaints to the
cross-defendants, that is Beverly Hills, Ford and
Firestone.
[**443] The truth is, of course, that the quoted
language from Davis' opening paragraph does not really
95 Cal. App. 3d 886, *; 157 Cal. Rptr. 438, **;
1979 Cal. App. LEXIS 2018, ***
Page 5
describe the holding of the court. The liability case in
Davis went to trial on three theories: negligence, breach
of warranty [***16] and strict liability. After the plaintiff
had suffered a nonsuit on the breach of warranty
cause of action, he voluntarily abandoned the [*894]
negligence theory. (Id., p. 4.) The jury verdict was,
therefore, based on strict liability. Obviously, the legal
fees which were disallowed in toto covered, at least in
part, Davis' defense of a charge of strict liability. The
fact is that when the Supreme Court, in Davis, gets
around to its ultimate holding -- the twice-quoted "garden
variety" paragraph (id., p. 7) -- it speaks of nothing
but strict liability.
Beverly Hills is, of course, in a peculiar position in
that out of all the parties before us it apparently had the
least opportunity to spot or remedy any of the defects
complained of. As noted, the original plaintiffs did not
even name it as a defendant. Yet, as a wholesaler Beverly
Hills was liable to its vendee and was, in turn, entitled
to indemnity from its vendor. ( Barth v. B. F.
Goodrich Tire Co. (1968) 265 Cal.App.2d 228, 251-254
[71 Cal.Rptr. 306]; Canifax v. Hercules Powder Co.
(1965) 237 Cal.App.2d 44, 52-53 [46 Cal.Rptr. 552]; see
also Pearson Ford Co. v. Ford Motor Co. (1969) 273
Cal.App.2d 269, 271-273 [78 Cal.Rptr. 279].) [***17]
Given that a business strictly liable for an unsafe product
is a "wrongdoer," we think it would be impossible to
distinguish Davis on the degree of involvement -- or
noninvolvement -- of a particular entity in the chain of
distribution. Beverly Hills is, therefore, as responsible
for its legal expenses as any other California litigant.
Reversed.

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981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
LEXSEE 981 F2D 107
RICHARD FLECK; DIANE FLECK; V. KDI SYLVAN POOLS, INC., a/k/a SYL-
VAN POOLS; MUSKIN, INC.; NICHOLS SWIM POOLS, INC.; JAMES HUBERT
V. S.K. PLASTICS, INC.; DOUGHBOY RECREATIONAL, INC., a Division of
HOFFINGER INDUSTRIES, INC. V. ATREO MANUFACTURING CO., INC.;
POSEIDON POOLS, INC.; POSEIDON POOLS OF AMERICA, INC.; GIBRAL-
TAR FACTORS CORP.; THE GIBRALTAR CORPORATION; S & V POOLS,
INC.; ESTHER WILLIAMS SWIMMING POOL COMPANY; ESTHER WIL-
LIAMS POOLS, INC.; and ESTHER WILLIAMS ALL ALUMINUM SWIMMING
POOL COMPANY RICHARD FLECK and DIANE FLECK, Appellants RICHARD
FLECK; DIANE FLECK; V. KDI SYLVAN POOLS, INC., a/k/a SYLVAN POOLS;
MUSKIN, INC.; NICHOLS SWIM POOLS, INC.; JAMES HUBERT V. S.K.
PLASTICS, INC.; DOUGHBOY RECREATIONAL, INC., a Division of
HOFFINGER INDUSTRIES, INC. V. ATREO MANUFACTURING CO., INC.;
POSEIDON POOLS, INC.; POSEIDON POOLS OF AMERICA, INC.; GIBRAL-
TAR FACTORS CORP.; THE GIBRALTAR CORPORATION; S & V POOLS,
INC.; ESTHER WILLIAMS SWIMMING POOL COMPANY; ESTHER WIL-
LIAMS POOLS, INC.; and ESTHER WILLIAMS ALL ALUMINUM SWIMMING
POOL COMPANY HOFFINGER INDUSTRIES, INC., (Incorrectly Designated as
Doughboy Recreational, Inc., a Division of Hoffinger Industries, Inc.), Appellant;
RICHARD FLECK; DIANE FLECK; V. KDI SYLVAN POOLS, INC., a/k/a SYL-
VAN POOLS; MUSKIN, INC.; NICHOLS SWIM POOLS, INC.; JAMES HUBERT
V. S.K. PLASTICS, INC.; DOUGHBOY RECREATIONAL, INC., a Division of
HOFFINGER INDUSTRIES, INC. V. ATREO MANUFACTURING CO., INC.;
POSEIDON POOLS, INC.; POSEIDON POOLS OF AMERICA, INC.; GIBRAL-
TAR FACTORS CORP.; THE GIBRALTAR CORPORATION; S & V POOLS,
INC.; ESTHER WILLIAMS SWIMMING POOL COMPANY; ESTHER WIL-
LIAMS POOLS, INC.; and ESTHER WILLIAMS ALL ALUMINUM SWIMMING
POOL COMPANY NICHOLS SWIM POOLS, INC., Appellants RICHARD
FLECK; DIANE FLECK; V. KDI SYLVAN POOLS, INC., a/k/a SYLVAN POOLS;
MUSKIN, INC.; NICHOLS SWIM POOLS, INC.; JAMES HUBERT V. S.K.
PLASTICS, INC.; DOUGHBOY RECREATIONAL, INC., a Division of
HOFFINGER INDUSTRIES, INC. V. ATREO MANUFACTURING CO., INC.;
POSEIDON POOLS, INC.; POSEIDON POOLS OF AMERICA, INC.; GIBRAL-
TAR FACTORS CORP.; THE GIBRALTAR CORPORATION; S & V POOLS,
INC.; ESTHER WILLIAMS SWIMMING POOL COMPANY; ESTHER WIL-
LIAMS POOLS, INC.; and ESTHER WILLIAMS ALL ALUMINUM SWIMMING
POOL COMPANY GIBRALTAR CORPORATION, Appellant; RICHARD
FLECK; DIANE FLECK; V. KDI SYLVAN POOLS, INC., a/k/a SYLVAN POOLS;
MUSKIN, INC.; NICHOLS SWIM POOLS, INC.; JAMES HUBERT V. S.K.
PLASTICS, INC.; DOUGHBOY RECREATIONAL, INC., a Division of
HOFFINGER INDUSTRIES, INC. V. ATREO MANUFACTURING CO., INC.;
POSEIDON POOLS, INC.; POSEIDON POOLS OF AMERICA, INC.; GIBRAL-
TAR FACTORS CORP.; THE GIBRALTAR CORPORATION; S & V POOLS,
INC.; ESTHER WILLIAMS SWIMMING POOL COMPANY; ESTHER WIL-
LIAMS POOLS, INC.; and ESTHER WILLIAMS ALL ALUMINUM SWIMMING
POOL COMPANY S & V POOLS, INC. and POSEIDON POOLS OF AMERICA,
INC., Appellant RICHARD FLECK; DIANE FLECK; V. KDI SYLVAN POOLS,
INC., a/k/a SYLVAN POOLS; MUSKIN, INC.; NICHOLS SWIM POOLS, INC.;
JAMES HUBERT V. S.K. PLASTICS, INC.; DOUGHBOY RECREATIONAL,
INC., a Division of HOFFINGER INDUSTRIES, INC. V. ATREO MANUFAC-
TURING CO., INC.; POSEIDON POOLS, INC.; POSEIDON POOLS OF AMER-
ICA, INC.; GIBRALTAR FACTORS CORP.; THE GIBRALTAR CORPORA-
Page 1

981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
TION; S & V POOLS, INC.; ESTHER WILLIAMS SWIMMING POOL COM-
PANY; ESTHER WILLIAMS POOLS, INC.; and ESTHER WILLIAMS ALL
ALUMINUM SWIMMING POOL COMPANY RICHARD FLECK and DIANE
FLECK, Appellants RICHARD FLECK; DIANE FLECK; V. KDI SYLVAN
POOLS, INC., a/k/a SYLVAN POOLS; MUSKIN, INC.; NICHOLS SWIM POOLS,
INC.; JAMES HUBERT V. S.K. PLASTICS, INC.; DOUGHBOY RECREATION-
AL, INC., a Division of HOFFINGER INDUSTRIES, INC. V. ATREO MANU-
FACTURING CO., INC.; POSEIDON POOLS, INC.; POSEIDON POOLS OF
AMERICA, INC.; GIBRALTAR FACTORS CORP.; THE GIBRALTAR COR-
PORATION; S & V POOLS, INC.; ESTHER WILLIAMS SWIMMING POOL
COMPANY; ESTHER WILLIAMS POOLS, INC.; and ESTHER WILLIAMS ALL
ALUMINUM SWIMMING POOL COMPANY HOFFINGER INDUSTRIES, INC.,
(Incorrectly Designated as Doughboy Recreational, Inc., a Division of Hoffinger Industries,
Inc.), Appellant RICHARD FLECK; DIANE FLECK; V. KDI SYLVAN
POOLS, INC., a/k/a SYLVAN POOLS; MUSKIN, INC.; NICHOLS SWIM POOLS,
INC.; JAMES HUBERT V. S.K. PLASTICS, INC.; DOUGHBOY RECREATION-
AL, INC., a Division of HOFFINGER INDUSTRIES, INC. V. ATREO MANU-
FACTURING CO., INC.; POSEIDON POOLS, INC.; POSEIDON POOLS OF
AMERICA, INC.; GIBRALTAR FACTORS CORP.; THE GIBRALTAR COR-
PORATION; S & V POOLS, INC.; ESTHER WILLIAMS SWIMMING POOL
COMPANY; ESTHER WILLIAMS POOLS, INC.; and ESTHER WILLIAMS ALL
ALUMINUM SWIMMING POOL COMPANY S & V POOLS, INC. and POSEI-
DON POOLS OF AMERICA, INC., Appellant
No. 91-2045, No. 91-2090, No. 92-1001, No. 92-1077, No. 92-1090, No. 92-1137, No.
92-1138, No. 92-1165
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
981 F.2d 107; 1992 U.S. App. LEXIS 32053; CCH Prod. Liab. Rep. P13,380
SUBSEQUENT HISTORY: Petition for Rehearing
Denied December 31, 1992, Reported at 1992 U.S. App.
LEXIS 34159.
PRIOR HISTORY: [**1] ON APPEAL FROM THE
UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF PENNSYLVANIA. (D.C.
Civil Action No. 89-01348).
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant parent corporation
sought review of an order of the United States District
Court for the Eastern District of Pennsylvania,
which found that it was liable for injuries sustained by
appellee swimmer. Appellant subsidiary challenged the
denial of attorney's fees and costs in its indemnification
action. Appellee swimmer challenged the dismissal of
appellee pool manufacturer.
July 31, 1992, Argued
December 4, 1992, Filed
Page 2
OVERVIEW: Appellee swimmer challenged the district
court's dismissal of the action against appellee pool
manufacturer. Appellant parent corporation sought review
of the district court's finding that it was liable. Appellant
subsidiary sought review of the district court's
denial of its request for attorney's fees and costs. On appeal,
the court reversed the denial of attorney's fees and
costs for appellant subsidiary, affirmed the dismissal for
appellee pool manufacturer, and vacated the judgment
entered for appellee swimmer. Appellee pool manufacturer
was entitled to a directed verdict under the statute
of repose because the pool was an improvement to real
property. The court found that appellant parent company
waived any right to contest the district court's directed
verdict against it. The court concluded that the appellant
subsidiary was entitled to attorney's fees and costs incurred
in the indemnification action. The court found that
appellant parent company had a duty to warn of the
depth of the pool and that the danger was not open and
obvious. The court held that the jury verdict should have

een reduced to an amount equal to the insurance proceeds
available to appellant subsidiary.
OUTCOME: The court affirmed the district court's dismissal
of the action against appellee pool manufacturer
because the state of repose had run. The court reversed
the district court's denial of attorney's fees to appellant
subsidiary and awarded the fees incurred in its indemnification
action. The court vacated the judgment for appellee
swimmer and held that the verdict could be no
more than the insurance proceeds available to appellant
subsidiary.
LexisNexis(R) Headnotes
Torts > Procedure > Statutes of Repose
[HN1] See 42 Pa. Cons. Stat. § 5536.
Civil Procedure > Trials > Judgment as Matter of Law
Civil Procedure > Appeals > Standards of Review > De
Novo Review
[HN2] Whether the directed verdict is proper is a question
of Pennsylvania law. The circuit courts exercise
plenary review.
Torts > Procedure > Statutes of Repose
[HN3] For 42 Pa. Cons. Stat. § 5536 to apply, a defendant
must show (1) that 12 years have lapsed since
the construction, (2) that the construction is an improvement
to real property, and (3) that he falls within the
class of persons the statute protects.
Real & Personal Property Law > Zoning & Land Use >
Land Use Planning
[HN4] An "improvement" is a valuable addition made to
property, usually real estate, or an amelioration in its
condition, amounting to more than mere repairs or replacement,
costing labor or capital, and intended to enhance
its value, beauty or utility or to adapt it for new or
further purposes.
Torts > Procedure > Statutes of Repose
[HN5] 42 Pa. Cons. Stat. § 5536 identifies its class not
by the status or occupation of its members, but rather
immunizes from liability any person lawfully performing
or furnishing the activities listed in the statute.
Torts > Procedure > Statutes of Repose
[HN6] 42 Pa. Cons. Stat. § 5536 provides that any person
furnishing the supervision or observation of construction,
or construction of any improvement to real
estate is protected.
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 3
Civil Procedure > Appeals > Reviewability > Preservation
for Review
[HN7] It is axiomatic that a party who fails to object to
errors or to raise issues at trial waives the right to complain
on appeal. This requirement is imposed so that
courts have an opportunity to avoid errors, thus obviating
an appeal. If the trial court grants a motion for directed
verdict, an adverse party who did not object to the lack
of grounds in the trial court may not raise this point in
the appellate court.
Civil Procedure > Remedies > Extraordinary Writs
[HN8] The circuit courts may review a waived issue under
exceptional. Exceptional circumstance have been
recognized where the public interest requires that the
new issue be heard on appeal or when manifest injustice
would result from the failure to consider the new issue,
or where it is apparent that counsel failed to object to a
fundamental and highly prejudicial error resulting in a
miscarriage of justice.
Civil Procedure > Appeals > Reviewability > Preservation
for Review
[HN9] When a litigant takes an unequivocal position at
trial, he cannot on appeal assume a contrary position
simply because the decision in retrospect was a tactical
mistake, or perhaps a candid but regretted concession.
Torts > Multiple Defendants > Contribution & Indemnity
[HN10] An indemnitee may recover attorney's fees and
costs incurred in defense of the liability indemnified
against from the indemnitor.
Torts > Multiple Defendants > Contribution & Indemnity
[HN11] One who through the tort of another has been
required to act in the protection of his interests by bringing
or defending an action against a third person is entitled
to recover reasonable compensation for the loss of
time, attorney fees and other expenditures thereby suffered
or incurred in the earlier action.
Torts > Products Liability > Duty to Warn
[HN12] A "defective condition" includes the lack of adequate
warnings for a product's safe use. If a product is
defective absent such a warning, and the defect is a
proximate cause of the plaintiff's injury, the manufacturer
is strictly liable. If, however, the danger is open and
obvious, there is no duty to warn.
Torts > Products Liability > Duty to Warn
[HN13] Unlike the assumption of the risk defense, which
requires actual subjective knowledge, whether a danger
is open and obvious is an objective inquiry, not depend-

ent upon the actual knowledge of the user or his actual
awareness of the danger. The courts inquire whether
knowledge of the danger would be possessed by the ordinary
consumer who purchases, or uses the product,
with the ordinary knowledge common to the community
as to its characteristics.
Torts > Products Liability > Strict Liability
[HN14] Unlike the law of negligence, product liability
laws do not impose a duty upon the consumer; they instead
encourage manufacturers to make safe products
even for the careless and unreasonable consumer. A
plaintiff cannot be precluded from recovery in a strict
liability case because of his own negligence. The inquiry
is whether the product is defective for ordinary use and
foreseeable misuse.
Torts > Products Liability > Duty to Warn
[HN15] It is true that the determination of a duty to warn
necessarily applies negligence principles, but it is the
defendant's "negligence" that is scrutinized. Moreover,
even if a plaintiff's negligence is in any way relevant to
determine a duty to warn, that does not mean that it is
also relevant to damages.
Civil Procedure > Appeals > Reviewability > Preservation
for Review
[HN16] Where a party assumes a certain position in a
legal proceeding, and succeeds in maintaining that position,
he may not thereafter, simply because his interests
have changed, assume a contrary position, especially if it
be to the prejudice of the party who has acquiesced in the
position formerly taken by him.
Civil Procedure > Preclusion & Effect of Judgments >
Judicial Estoppel
[HN17] Judicial estoppel looks to the connection between
the litigant and the judicial system. It preserves the
integrity of the courts by preventing litigants from playing
fast and loose with the courts. Thus, it is intended to
protect the courts rather than the litigants.
Bankruptcy Law > Chapter 11 (Reorganization) > Automatic
Stay
[HN18] A party who petitions a bankruptcy court to lift a
stay by agreeing to limit the recovery against the protected
debtor cannot later collect in its entirety on a
judgment that exceeds the agreed upon limit.
Torts > Multiple Defendants > Contribution & Indemnity
[HN19] Indemnity is a common law equitable remedy
that shifts the entire loss from one who has been compelled
to pay a judgment to another who should bear it.
The rights and obligations arising from indemnity exist
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 4
between one who discharged the debt and one who
should have discharged it. It is well settled that before
any right of indemnification arises, the indemnitee must
in fact pay damages to a third party. The reason for this
is obvious: since indemnity shifts the loss, no right accrues
until one suffers a loss by paying damages to a
third party.
Torts > Multiple Defendants > Contribution & Indemnity
[HN20] Payment by the indemnitee to the third person
may have been of the entire amount or it may have been
a partial payment. So, where one is entitled to be indemnified,
under Pennsylvania law that person should receive
reimbursement limited to the amount of his net
outlay properly expended because the payor became a
party to the transaction through the fault of the other.
Payment is limited to the amount paid because although
there is no fiduciary relation between the parties, the
relation is one which is regarded as involving mutual
confidence and it would be unfair for the payor to profit
at the expense of the principal obligor.
COUNSEL: DAVID F. BINDER, ESQUIRE, A. ROY
DECARO, ESQUIRE (Argued), Raynes, McCarty,
Binder, Ross & Mundy, 1845 Walnut Street, Suite 2000,
Philadelphia, PA 19103, Attorney for Appellants/Appellees
Richard and Diane Fleck.
GARY B. CUTLER, ESQUIRE, RICHARD A. KRA-
EMER, ESQUIRE (Argued), Margolis, Edelstein, Scherlis,
Sarowitz & Kraemer, Sixth and Walnut Streets, The
Curtis Center, 4th Floor, Philadelphia, PA 19106, Attorneys
for Appellee KDI Sylvan Pools. SAMUEL
GOLDBLATT, ESQUIRE, Saperston and Day, P.C.
1100 Goldome Center, One Fountain Plaza, Buffalo, NY
14203-1486, Attorney for Appellees Poseidon Pools and
Gibraltar.
HARRY G. MAHONEY, ESQUIRE (Argued), Deasey,
Mahoney, Bender & McKenna, 215 South Broad Street,
Suite 700, Philadelphia, PA 19107, Attorney for Appellee/Appellant
Nichols Swim Pools. MARK H. SCO-
BLIONKO, ESQUIRE, Scoblionko, Scoblionko, Muir &
Bartholomew, 40 South 5th Street, Allentown, PA
18105. ERNEST R. BAZZANA, ESQUIRE (Argued),
Plunkett & Cooney, 900 Marquette Building, Detroit, MI
48226, DENNIS J. CLARK, ESQUIRE, Plunkett &
Cooney, 429 Forbes Avenue, [**2] 1212 Allegheny
Building, Pittsburgh, PA 15219, Attorneys for Appellee/Appellant,
Doughboy Recreational, Inc. GEORGE F.
DALE, ESQUIRE (Argued), Dale & Korolishin, 6445
Rising Sun Avenue, Philadelphia, PA 19111, Attorney
for Appellee/Appellant Poseidon Pools America and S &
V Pools. ANGELO L. SCARICAMAZZA, JR. ES-

QUIRE (Argued), Naulty, Scaricamazza & McDevitt,
1617 JFK Boulevard, One Penn Center at Suburban Station,
Philadelphia, PA 19103, Attorney for Appellee/Appellant
Gibraltar Corp.
JUDGES: Before: BECKER, MANSMANN and NY-
GAARD, Circuit Judges.
OPINIONBY: NYGAARD
OPINION: [*111]
OPINION OF THE COURT
NYGAARD, Circuit Judge.
Richard Fleck dove into a three-and-half foot deep
above-ground swimming pool, broke his neck, and was
rendered a quadriplegic. The pool and its replacement
pool liner did not have depth markers or "No Diving"
warnings. The Flecks contended that the homeowner was
negligent and that the sellers of the pool and replacement
liner were stric tly liable for failing to warn under Pennsylvania
law.
I.
FACTS AND PROCEDURE
In 1971, Sylvan sold an above-ground pool for $ 875
to a homeowner. The pool was damaged in a hurricane,
and in 1972 Sylvan replaced it with another. The replacement
was a four foot [**3] [*112] high
above-ground pool with neither depth markers nor diving
warnings. It has never been removed or disassembled.
The pool liner developed a leak; so, it was replaced with
a liner sold by Nichols and manufactured by Doughboy
Recreation Inc., a division of Hoffinger Industries, Inc.
Like the pool itself, the replacement liner did not have
warnings affixed, although it did come with decals
(which were never used). When James Hubert bought the
house in 1984, he built an elaborate, three-tiered deck
system around the pool, which completely obstructed the
view of the pool's side walls.
Hubert decided to throw a large party, referred to as
the "Fourth Annual Hawaiian Blitz." The invitation stated,
"Plenty of beer, wine and frozen drinks on hand." It
indicated that Hubert was going to have athletic events
including swimming. Six kegs of beer and three 5-liter
boxes of wine were available.
Richard Fleck and his wife Diane arrived at Hubert's
home in the early evening. In a two hour period Fleck
consumed four or five 12-ounce cups of beer, smoked
marijuana, and decided to go swimming. He climbed to
the top of the deck system surrounding the pool, dove in
head first, hit his head on the bottom [**4] of the pool,
and broke his neck. Fleck, who had never used this pool,
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 5
testified that the pool looked six feet deep. This was corroborated
by Hubert, who testified that sometimes the
pool looked twelve feet deep. Fleck further testified that
had there been depth markers or warnings he would have
seen them and would have known not to dive into a four
foot deep pool.
The Flecks sued Hubert, alleging negligence. They
also brought strict product liability claims against Sylvan,
the pool seller, and Nichols, the seller of replacement
liner. Sylvan joined Poseidon Pools of America, S
& V Pools Inc., and The Gibraltar Corporation, the alleged
corporate successors of the defunct pool manufacturer
Atreo Manufacturing Company (which is not a
party to this action) as third-party defendants. Nichols
filed a third-party complaint for indemnification against
Hoffinger, the manufacturer of the liner. Hoffinger did
not file cross-claims against the three third-party defendants.
Before trial, the Flecks released Hubert from any liability
for $ 300,000. They further agreed that in any
action in which Hubert is found to be a tortfeasor, the
amount of the verdict would be reduced by the pro rata
or comparative [**5] share of Hubert's fault.
Also before trial, Nichols filed a petition for bankruptcy
under Chapter 11. Its assets were protected by the
automatic stay provision of 11 U.S.C. § 362. To lift the
stay, the Flecks petitioned the bankruptcy court and
agreed that any recovery in their action against Nichols
"will be limited solely to the proceeds of the applicable
insurance of the Debtor Defendant Nichols Swim Pools,
Inc." With this understanding, the bankruptcy court lifted
the stay.
At trial, the district court directed verdicts for Sylvan
and the three third-party defendants, reasoning that
the action was time barred by the statute of repose, 42
Pa. C.S. § 5536. The court also directed a verdict for
Nichols on its third-party indemnification action against
Hoffinger. This was done with Hoffinger's tacit, if not
express, consent. The court, however, denied Nichols'
request for attorney's fees and costs incurred in the defense
of the liability indemnified against.
At the end of the liability trial, the jury answered
special interrogatories. It found both Hubert and Fleck
negligent and that their combined negligence was a substantial
factor in bringing about Fleck's [**6] injury. As
between Hubert and Fleck, the jury apportioned causation
36% to Hubert and 64% to Fleck. Since no liability
attaches to a defendant in a negligence action if his
comparative fault is less than the plaintiff's, 42 Pa. C.S. §
7102(a), even without the settlement Hubert would not
have been liable to the Flecks.

The jury also found that the liner lacked an element
necessary to make it safe for reasonably foreseeable use,
and that the defect was a substantial factor in bringing
about the harm. As between Hubert and Nichols, it apportioned
Hubert's 36% responsibility [*113] for causation,
60% to Hubert and 40% to Nichols.
The jury returned a verdict awarding $ 10 million to
Fleck and $ 250,000 to his wife. The district court entered
judgment in the amount of $ 11,750,000 and $
293,750, representing the verdict and delay damages.
Nichols and the Flecks settled for $ 2,092,513, which the
Flecks contend partially satisfies the judgment.
Since Nichols' liability shifted to Hoffinger by way
of indemnification, and since all other parties have been
found not liable, the money trail ended with Hoffinger.
Hoffinger and Nichols filed post-judgment motions for,
among other things, judgment notwithstanding [**7]
the verdict and for a new trial. Nichols withdrew its motions
for JNOV and new trial, but not its motion requesting
attorney's fees and costs for the indemnification action.
The court denied all motions.
The Flecks, Nichols and Hoffinger appeal. The
Flecks appeal the order directing verdict for Sylvan under
the statute of repose. Nichols appeals the denial of
attorney's fees and costs in its indemnification action
against Hoffinger. The bulk of this appeal belongs to
Hoffinger, which appears to contest all orders and decisions
affecting its liability.
II.
ANALYSIS
We apply Pennsylvania product liability law. The
Pennsylvania Supreme Court has adopted Section 402A
of the Restatement (Second) of Torts. Webb v. Zern, 422
Pa. 424, 220 A.2d 853 (1966). That section imposes
strict liability upon the seller of "any product in a defective
condition unreasonably dangerous to the user or
consumer."
Absent clear guidance from the Pennsylvania Supreme
Court, we must predict how it would decide the
issues and will, when persuasive, rely on decisions of the
intermediate appellate court, unless we are convinced
that the supreme [**8] court would decide otherwise.
West v. American Telephone & Tel. Co., 311 U.S. 223,
237, 61 S.Ct. 179, 183, 85 L. Ed. 139 1 (1940); McKenna
v. Ortho Pharmaceutical Corp., 622 F.2d 657, 662 (3d
Cir. 1980).
We have examined the myriad of issues presented
and conclude that only these merit discussion:
1. Whether directed verdict for defendant Sylvan was
proper under the Pennsylvania statute of repose;
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 6
2. Whether Hoffinger waived its right to appeal the directed
verdict against it in Nichols' third-party indemnification
action;
3. Whether Nichols is entitled to attorney's fees and costs
in its indemnification action;
4. Whether, as a matter of law, a manufacturer of a replacement
pool liner has a duty to warn of the pool depth
or dangers of diving into a shallow above-ground pool;
5. Whether, as a matter of law, the dangers of diving into
this pool of unknown depth was open and obvious, relieving
Hoffinger of a duty to warn;
6. Whether Pennsylvania recognizes a contributory negligence
defense or a comparative negligence scheme of
apportioning damages in a strict liability action for failure
to warn;
7. Whether [**9] the jury verdict should be reduced to
an amount equal to the insurance proceeds available to
Nichols.
A.
Directed Verdict For Sylvan
The district court directed a verdict for Sylvan, the pool
seller, because it believed the Flecks' suit to be
time-barred by the Pennsylvania statute of repose, which
provides:
* * *
[HN1] (a) General Rule. -- Except as provided
in subsection (b), a civil action or
proceeding brought against any person
lawfully performing or furnishing the design,
planning, supervision or observation
of construction, or construction of any
improvement to real property must be
commenced within 12 years after completion
[*114] of construction of such improvement
to recover damages for:
(3) Injury to the person or for wrongful
death arising out of such deficiency.
42 Pa. C.S. § 5536. [HN2] Whether the directed verdict
is proper is a question of Pennsylvania law. We exercise

plenary review. Compagnie des Bauxites de Guinee v.
Insurance Co. of N. America, 724 F.2d 369, 371 (3d Cir.
1983).
[HN3] For the statute to apply, a defendant must show
(1) that 12 years have lapsed since the construction, (2)
that the construction is an "improvement [**10] to real
property," and (3) that he falls within the class of persons
the statute protects. There is no dispute that over 12 years
have elapsed. We consider the latter two issues.
In McCormick v. Columbus Conveyer Co., 522 Pa.
520, 564 A.2d 907 (1989), the Pennsylvania Supreme
Court defined [HN4] "improvement" as:
A valuable addition made to property
(usually real estate) or an amelioration in
its condition, amounting to more than
mere repairs or replacement, costing labor
or capital, and intended to enhance its
value, beauty or utility or to adapt it for
new or further purposes.
564 A.2d at 909, quoting Black's Law Dictionary 682
(5th ed. 1979). The court believed that this definition
comports with the plain and common usage of the term
"improvement." Under this definition, the court rejected
the plaintiff's argument that a coal delivery system, a part
of a powerhouse, which provided heat and hot water for
sixty-eight buildings, was a "product." It held that the
system was an improvement to real property as a matter
of law. Id. at 909-10.
The Pennsylvania courts have consistently applied
[**11] "improvement" with an eye towards giving that
term an ordinary meaning. See Catanzaro v. Wasco
Prod., Inc., 339 Pa. Super. 481, 489 A.2d 262, 265
(1985) (a skydome/skylight is an improvement); Mitchell
v. United Elevator Co., 290 Pa. Super. 476, 434 A.2d
1243, 1249 (1981) (an elevator); Fetterhoff v. Fetterhoff,
354 Pa. Super. 438, 512 A.2d 30, 31 (1986) (same);
Goodrich v. Luzerne Apparel Mfg. Corp., 356 Pa. Super.
148, 514 A.2d 188, 189 (1986) (an electrical panel
board); McConnaughey v. Building Components, Inc.,
401 Pa. Super. 329, 585 A.2d 485, 487 (1990) (a roof
truss), allocatur granted, 593 A.2d 842 (1991); Radvan v.
General Elec. Co., 394 Pa. Super. 501, 576 A.2d 396,
397 (1990) (a weld and side trim machine).
In Ferricks v. Ryan Homes, Inc., 396 Pa. Super. 132,
578 A.2d 441 (1990), the court held that plywood, later
incorporated [**12] into a structure, is not an improvement
to real property. It reasoned, "The plywood
was simply a component part of a wall or floor which
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 7
eventually made up the improvement on the real estate."
578 A.2d at 443. The unreasonable and extreme burden
of imposing liability upon the manufacturers of every
nut, nail or screw is manifest.
In Noll v. Paddock Pool Builders, Inc., Pa. Super.
, 611 A.2d 219 (1992), the court addressed the
issue whether starting blocks bolted to a swimming pool
are an improvement to real property. Borrowing the
analysis the Pennsylvania Commonwealth Court used to
define "real property" for the purposes of sovereign immunity
(see Pa. C.S. § 8541 et seq.), the court categorized
"improvement to real property" into three groups.
Id. at 224. The first includes items that are manifestly
furniture, as distinguished from improvements, and not
affixed to the real property. The second includes items
that are so annexed to the property that they cannot be
removed without materially injuring the items or the real
estate. The third includes items that, albeit [**13]
physically connected to the property, are so affixed as to
be removable without destroying or injuring them or the
real estate; these become part of the realty or remain
personalty, depending on the intention of the annexing
party at the time of annexation. Id. at 224, citing Canon-McMillan
School District v. Bioni, 127 Pa. Commw.
317, 320-21, 561 A.2d 853, 854 (1989). In determining
intent, "it is not so much what a particular party intended
his legal [*115] rights to be, as it is what intended use
of the property was manifested by the conduct of the
party." Id. at 225, quoting Bioni, 561 A.2d at 854-55 (internal
quotation marks omitted).
While these guidelines are an "aid [to] our Court's
analysis of what constitutes an improvement to real
property," id., until adopted by the Pennsylvania Supreme
Court they do not finally define "improvement."
Ultimately, "the determination of what constitutes an
improvement to real property is made on a case-by-case
basis." Id. at 222.
This above-ground swimming pool is an improvement
to real property. If we apply the [**14] Noll
guidelines, the pool fits into category three. That is, the
parties intended to annex the pool as a part of the real
property. While Hoffinger makes much of the fact that
the pool came in a box, the pool has never been moved
or disassembled. Several homeowners have gone to the
trouble of building decks around the pool, including the
defendant Hubert who built an elaborate, three-tiered
deck.
Also, a qualitative examination of the pool's physical
features shows that it is an improvement to real property.
It is a large, stationary object on the land, measuring 15
by 30 feet in length and width and holding thousands of
gallons of water. It has remained on the property for the
past 20 years. It required a permit, land preparation (in-

cluding foundation), adds to the value of the real estate,
and cost $ 875 twenty years ago. It is generally more
akin to a "finished product such as window, skydome, or
elevator [which] is meant for use solely as a fixture, as
an improvement to real estate," see Ferricks, 578 A.2d at
445, than a component material such as plywood. Cf.
Radvan, 576 A.2d at 397 [**15] (weld and side trim
machine is improvement to real property; it had been in
place for more than 30 years, had never been moved, was
bolted to the floor and connected to conduit piping for
power, and was so heavy it would be difficult to dismantle).
The remaining issue is whether Sylvan is a protected
person. [HN5] The statute identifies its class not by the
status or occupation of its members, but rather immunizes
from liability "any" person lawfully performing or
furnishing the activities listed in the statute. McCormick,
564 A.2d at 910. "The word 'any' is generally used
in the sense of 'all' or 'every' and its meaning is most
comprehensive." Id. (quoting Leach v. Philadelphia
Savings Fund Society, 234 Pa. Super. 486, 340 A.2d 491,
493 (1975)).
In Catanzaro the Pennsylvania Superior Court held
that the manufacturer/seller of a skydome fell within the
purview of the statute. The appellant there argued that
the correct test was whether the supplier customized its
product to the real estate and assisted in the installation.
In rejecting this argument, the court noted that it had in
Mitchell [**16] rejected the narrow view that the manufacturer
of a ready-made item, merely incorporated into
the building, was not protected. See Mitchell, 434 A.2d at
1249 ("that the basic design of the elevator may be identical
in different buildings does not render the elevator
any less an improvement to real estate"). The court concluded
that the manufacturer/seller planned, designed
and built the skydome, and therefore was a protected
person. 489 A.2d at 266.
The inquiry is whether Sylvan lawfully furnished or
performed any of the listed activities in the statute.
Leach, 340 A.2d at 493. It is irrelevant whether Sylvan
actually installed the pool, because the Pennsylvania
Superior Court has rejected the notion that the supplier of
a product "had to assist in its installation." Catanzaro,
489 A.2d at 266.
[HN6] The statute provides that any person "furnishing
the . . . supervision or observation of construction,
or construction" of any improvement to real estate
is protected. Sylvan furnished the construction; it sold
the [**17] pool and, according to Fleck, contracted
with someone to construct the pool. One homeowner
testified that he had "left the installation totally up to
KDI Sylvan." Under the plain reading of the statute,
Sylvan is within the class of persons protected by the
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 8
statute. We hold that the claim against Sylvan was
time-barred and [*116] the directed verdict for Sylvan
was proper under the Pennsylvania statute of repose.
Sylvan brought the purported corporate successors
of the pool manufacturers (S & V, Gibraltar, and Poseidon)
into this action. No other party has a claim against
these third-party defendants. So, with Sylvan out of this
case, they are too. Consequently, although the three defendants
appeal the district court's refusal to enter summary
judgment for them, we need not
reach this issue because it is now moot.
B.
Directed Verdict For Nichols
The district court directed verdict for Nichols in its indemnification
action against Hoffinger. In denying a
post-judgment motion for reconsideration, the district
court noted that Hoffinger waived the right to complain.
The parties do not dispute that Hoffinger failed to object
to the entry of directed verdict.
[HN7] It is axiomatic that [**18] a party who
fails to object to errors or to raise issues at trial waives
the right to complain on appeal. This requirement is imposed
so that courts have an opportunity to avoid errors,
thus obviating an appeal. See Wright & Miller, 9 Federal
Practice & Procedure, § 2472 at 454 (1971). If the trial
court grants a motion for directed verdict, "an adverse
party who did not object to the lack of grounds in the
trial court may not raise this point in the appellate court."
Id. § 2533 at 582.
[HN8] We may, however, review a waived issue
under exceptional circumstances. Franki Found Co. v.
Alger-Rau & Assoc., Inc., 513 F.2d 581, 586 (3d Cir.
1975). Exceptional circumstance have been recognized
where the public interest requires that the new issue be
heard on appeal or when manifest injustice would result
from the failure to consider the new issue, Altman v.
Altman, 653 F.2d 755, 758 (3d Cir. 1981), or where it is
apparent that counsel failed to object to a fundamental
and highly prejudicial error resulting in a miscarriage of
justice, Freifield v. Hennessy, 353 F.2d 97, 99 (3d Cir.
1965).
Hoffinger [**19] contends that its counsel's failure
to object was a fundamental and highly prejudicial
error resulting in a miscarriage of justice. The essence of
this argument is that because counsel's error adversely
affected its case, we should consider the merits of the
issue. Many errors by one's counsel prejudice a case; but
few are said to be a miscarriage of justice. Mere prejudice
is insufficient to retrieve an abandoned issue. This
trial colloquy further refutes Hoffinger's argument:

* * *
Mr. Mahoney [counsel for Nichols]: As
such your Honor, putting the issue of indemnity
to the Jury I think would be a
fruitless exercise and I would ask the
Court to direct the Jury to return a verdict
for Nichols in the event that they find the
liner to be defective.
The Court: All right, Mr. Korn?
Mr. Korn [counsel for Hoffinger]: I think
that in terms of the issues raised by Mr.
Mahoney that the Court, as a matter of
law, without having the Jury do it, can, at
the appropriate time, direct a verdict as he
is requested, because I will agree that up
until the time --
The Court: Right.
Mr. Korn: -- there was certainly evidence
to keep his client in the case for a separate
reason. [**20] But it's not a Jury question.
The Court: Then it's appropriate to grant
the directed verdict for Nichols in this
case.
(Emphasis added.) The next day, the district court entered
the directed verdict. Other than correcting the district
court as to the proper business name to be entered,
counsel for Hoffinger did not object.
[HN9] When a litigant takes an unequivocal position
at trial, he cannot on appeal assume a contrary position
simply because the decision in retrospect was a tactical
mistake, or perhaps a candid but regretted concession.
Meiners v. Moriarity, 563 F.2d 343, 352 (7th Cir. 1977);
Alexander v. Town & Country Estates, Inc., 535 F.2d
1081, 1082 & n.1 (8th Cir. 1976). See Childs v. Franco,
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 9
563 F.Supp. 290, 292 [*117] (E.D. Pa. 1983) ("If unequivocal,
an admission of counsel during the course of
trial is binding on the client."); Sule v. Workmen's Compensation
Appeal Bd., 121 Pa. Commw. 242, 550 A.2d
847, 849 (1988) ("It is well settled that an admission of
an attorney during the course of a trial is binding upon
his client."). [**21] We find no miscarriage of justice
or any other exceptional circumstances, and hold that
Hoffinger waived the right to contest the district court's
directed verdict for Nichols. In any event, we have also
reviewed the substance of Hoffinger's arguments and
conclude they are meritless.
C.
Attorney's Fees
Although Nichols was brought into this suit on a strict
liability theory for selling a defective product that
Hoffinger manufactured, and although Hoffinger agreed
to the entry of a directed verdict in Nichols' indemnification
action, the district court denied Nichols' claim for
attorney's fees and costs.
The general rule is that [HN10] an indemnitee may
recover attorney's fees and costs incurred in defense of
the liability indemnified against from the indemnitor.
A.C. Israel Commodity Co. v. American-West African
Line, Inc., 397 F.2d 170, 172 (3d Cir. 1968). Pennsylvania
law is no different. The Pennsylvania Supreme Court
has favorably cited the Restatement (Second) of Torts, §
914(2) (1976), which provides:
[HN11] One who through the tort of another
has been required to act in the protection
of his interests by bringing or defending
an action against [**22] a third
person is entitled to recover reasonable
compensation for the loss of time, attorney
fees and other expenditures thereby
suffered or incurred in the earlier action.
Vattimo v. Lower Bucks Hosp., Inc., 502 Pa. 241, 465
A.2d 1231, 1235 (1983). The court has also held that "an
indemnitee may recover attorney's fees and costs from
the indemnitor notwithstanding the fact that these expenses
have already been paid by the indemnitee's insurance
carrier." Boiler Eng'r & Supply Co. v. General
Controls, Inc., 443 Pa. 44, 277 A.2d 812, 814 (1971).
The court, however, limited these fees to defense litigation
and did not extend them to the indemnification litigation.
Id. Accord Fisher v. United States, 299 F.Supp.
1, 34 (E.D. Pa. 1969), reversed on other grounds, 441
F.2d 1288 (3d Cir. 1971); Papas v. Kohler Co., Inc., 581

F.Supp. 1272, 1273 (M.D. Pa. 1984). Thus, in an indemnification
action under Pennsylvania law, the indemnitee
is entitled to attorney's fees and costs incurred in the underlying
defense [**23] litigation.
The district court erred by denying Nichols' request
for attorney's fees. We will reverse this portion of the
district court's order and judgment and remand the cause
to the district court.
D.
Duty To Warn
The district court submitted to the jury the issue whether
the replacement pool liner was defective because
Hoffinger failed to affix depth markers and warnings
about the dangers of diving. Hoffinger contends that because
a replacement pool liner is a component part that is
later incorporated into a final product, the manufacturer
of a pool liner owes no duty to warn as a matter of law.
In Jacobini v. V. & O. Press Co., 527 Pa. 32, 588
A.2d 476 (1991), a die set lacked warnings to caution
that dies should be used only in areas equipped with barrier
guards. The die set was later incorporated into a
power press whose barrier guard was removed. Plaintiff
was injured when he misaligned the tool holder in the
die, causing parts of the die to be expelled from the
press. Plaintiff sued under a failure to warn theory.
The Pennsylvania Supreme Court held that because
the evidentiary record was insufficient to support submitting
[**24] a failure to warn theory to the jury, the
plaintiff failed to demonstrate the alleged defect proximately
caused the injury. 588 A.2d at 478. The court
added dictum, however, [*118] that a manufacturer's
duty to warn is limited when it supplies a component of a
final product that is later assembled by another party and
the dangers are associated with the use of the finished
product. Id. at 479, citing Wenrick v. Schloemann-Siemag
Aktiengesellschaft, 523 Pa. 1, 564 A.2d
1244 (1989) (manufacturer of an electrical control system
had no duty to guard a switch in the system because
the system was not defective and the danger arose from
the placement of the system in the final product by another
manufacturer). See Berkebile v. Brantly Helicopter
Corp., 462 Pa. 83, 337 A.2d 893, 898 (1975) (manufacturer
is not liable if the product, safe when it leaves the
maker's hands, is made unsafe by subsequent changes in
the stream of commerce). "This is particularly true where
the component itself is not dangerous, and where the
danger arises from the manner in which [**25] the
component is utilized by the assembler of the final product,
this being a matter over which the component manufacturer
has no control." Jacobini, 588 A.2d at 479.
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 10
The Jacobini court explained that the die set manufacturer
"cannot be expected to foresee every possible
risk that might be associated with use of the completed
product, the die, which is manufactured by another party,
and to warn of dangers in using that completed product
in yet another party's finished product, the power press."
Id. at 480. It would be unreasonable and unwarranted to
recognize liability in such a tenuous chain of responsibility.
Id.
The limitation envisioned in Jacobini is inapplicable
here. A replacement pool liner is not the type of component
part that would relieve a manufacturer's duty to
warn: It has but one purpose, to replace an existing pool
liner. Since Hoffinger knew that its liner would ultimately
be incorporated into a pool, and nothing else, it
can then reasonably foresee the potential risk of failing to
affix warning labels.
The replacement liner is not a generic component
part, but is really a separate product with a specific
[**26] purpose and use. Surely if the maker of such
things as brake systems, elevators, and artillery firing
pins, are not immune from liability simply because those
products are later incorporated into something else,
Hoffinger is likewise not immune from liability. See
Walton v. Avco Corp., -- Pa. --, 610 A.2d 454 (1992)
(manufacturer of helicopter engine found liable along
with manufacturer of helicopter).
Furthermore, in Jacobini, unlike here, the component
part was incorporated into a final product made defective
by another manufacturer. The flaw in Hoffinger's
argument is shown by a simple example. Even if we assume
that the pool here was manufactured with warnings,
it is foreseeable that the pool liner will be replaced
some day. If the manufacturer fails to affix warnings, as
here, the pool becomes defective and dangerous. Someone
must bear the risk of injury. To shift the burden to
the manufacturer of the pool, the "finished" product, is
unreasonable because it manufactured and sold a safe
pool.
Since one can foresee that the liner can create a
danger from its inherent condition, the risk should fall on
the manufacturer of the liner and not [**27] the pool
manufacturer. Fairness, economic sense, and policies
underpinning strict liability demand this result. Indeed,
the manufacturer of the pool in this example is no different
than the manufacturer of the component part in
Jacobini and shares the same predicament contemplated
there: "no basis [would exist] for requiring the [pool]
manufacturer . . . to investigate the use of its [pool] . . .
which by itself was inert and safe." See 588 A.2d at 480.
Hoffinger further contends that as a matter of law it
had no duty to warn because "the replacement pool liner,
itself, could [not] cause the injuries complained of" and

ecause "the danger arises when the component is incorporated
into the final product." Br. 12, 13. While it is
true that the danger arises only when incorporated into
the pool and filled with water, when the danger arises is
irrelevant. The only issue is whether the liner was sold in
a defective condition because it had no warnings.
[*119]
Moreover, we are not persuaded by the contention
that a pool liner is an inert, innocuous thing simply because
by itself, it is physically incapable of injuring a
consumer. To hold otherwise implies [**28] that "unreasonably
dangerous" under Section 402A requires that
the product itself actually exert the injury-causing, physical
force. But even dynamite is inert, unless ignited.
Although a replacement pool liner does not explode,
crush, drive, or exert any other physical force, it may
through a chain of not so remarkable events cause serious
injuries.
The jury was asked in special interrogatories: "Do
you find that the replacement vinyl liner sold by Nichols
Swim Pools, Inc. was defective, that is, did it lack any
element necessary to make it safe for its reasonably
foreseeable use?" The jury answered yes. We hold that as
a matter of law Hoffinger is not relieved of a duty to
warn.
E.
Open And Obvious Danger
The district court allowed the jury to consider whether
the pool liner was defective because it lacked depth
markers and warnings about the dangers of diving.
Hoffinger contends that the danger associated with diving
into a body of water of uncertain depth is open and
obvious, in other words, that the axiom "look before you
leap" should be the law applicable to this case. We disagree.
[HN12] A "defective condition" includes the lack of
adequate warnings [**29] for a product's safe use. Id. at
478; Berkebile, 337 A.2d at 902. See Thomas v. Arvon
Products Co., 424 Pa. 365, 227 A.2d 897, 899 (1967)
(failure to warn in a negligence action). If a product is
defective absent such a warning, and the defect is a
proximate cause of the plaintiff's injury, the manufacturer
is strictly liable. Berkebile, 337 A.2d at 902. If,
however, the danger is open and obvious, there is no
duty to warn. Sherk v. Daisy-Heddon, 285 Pa. Super.
320, 427 A.2d 657, 660 (1981), reversed on other
grounds, 498 Pa. 594, 450 A.2d 615 (1982); Ellis v.
Chicago Bridge & Iron Co., 376 Pa. Super. 220, 545
A.2d 906, 911 (1988), quoting Sherk, 427 A.2d at 660.
See Rice v. Kring, 310 Pa. 550, 165 A. 833, 835 (1933)
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 11
(no duty to warn of open and obvious danger in a negligence
action).
[HN13] Unlike the assumption of the risk defense,
[**30] which requires actual subjective knowledge,
Berkebile, 337 A.2d at 901; Berman v. Radnor Rolls,
Inc., 374 Pa. Super. 118, 542 A.2d 525, 533 (1988),
whether a danger is open and obvious is an objective
inquiry, not dependent upon the actual knowledge of the
user or his actual awareness of the danger. Sherk, 427
A.2d at 661 (1981); Ellis, 545 A.2d at 911, quoting
Sherk, 427 A.2d at 661. We inquire whether knowledge
of the danger would be possessed by "the ordinary consumer
who purchases [or uses the product], with the ordinary
knowledge common to the community as to its
characteristics." Sherk, 427 A.2d at 661, quoting Restatement
§ 402A, comment (i). For instance, "if the
product is one customarily used by children, the danger
must be one which children would be likely to recognize
and appreciate in order to prevent them from recovering
for a product related injury on the grounds that [**31]
the danger was open and obvious." Id.
Although prudence mandates that one check the
water's depth, courts gauge the duty to warn not by the
"reasonable consumer," Berkebile, 337 A.2d at 902, but
by the "ordinary consumer." See id. at 899; Lewis v.
Duff-Norton Co., 515 Pa. 334, 340, 528 A.2d 590, 593
(1987); Restatement § 402A, comment (i). [HN14]
Unlike the law of negligence, product liability laws do
not impose a duty upon the consumer; they instead encourage
manufacturers to make safe products even for
the careless and unreasonable consumer. "A plaintiff
cannot be precluded from recovery in a strict liability
case because of his own negligence." Berkebile, 337 A.2d
at 901. The inquiry is whether the product is defective
for ordinary use and foreseeable misuse.
It is clearly foreseeable that consumers, children and
adults alike, would dive into a pool of unknown depth.
Indeed, there was testimony that previous owners of this
pool [*120] maintained a vigil to watch for divers.
One owner testified, "The only thing we ever did [**32]
was, we were always in the pool if someone was there.
And we had, of course, we allowed the children to jump
into the pool, but under no circumstances were they allowed
to dive into the pool." Another owner testified that
on several occasions he saw children dive head first into
this pool. When asked what he did when he saw people
dive, he said, "I told them don't, don't dive in."
Depth markers and warning labels convey crucial
information about the dangers of the pool. They tell one
who might think the pool is deep enough that indeed it is
not. These measures are necessary to avoid grievous
bodily injuries. In Mucowski v. Clark, 404 Pa.Super.
197, 590 A.2d 348 (1991), the pool lacked warnings, but

the plaintiff had used the pool before and knew its depth.
The court held that plaintiff's "foolhardiness," diving into
a pool that he knew was four feet deep, was the legal
cause of the injury. The court cited and discussed these
cases: Hensley v. Muskin Corp., 65 Mich. App. 662, 238
N.W.2d 362 (1975); Dailey v. Major Pool Equip. Corp.,
30 N.Y.2d 846, 335 N.Y.S.2d 89, 286 N.E.2d 471 (1972);
[**33] Colosimo v. May Dep't Store Co., 466 F.2d
1234 (3d Cir. 1972). In each of these cases, plaintiffs
knew that the pool was shallow. Here, of course, Fleck
thought that this pool was six feet deep. Because the pool
was surrounded by elaborate decking, which concealed
its sides, a jury could reasonably have concluded that
Fleck's perception was plausible. Based upon the appearance
of the pool from the photographs in the record,
as surrounded by the elaborate decking, and Hubert's
testimony that sometimes the pool looked twelve feet
deep, a jury could have reasonably concluded that such a
perception was plausible. While Fleck may still have
been imprudent to do what he did, we cannot say that
"foolhardiness" was the cause of the accident. Fleck testified
that had there been warnings about the depth of the
pool or the danger of diving into this pool, he would not
have attempted a dive.
The danger was not open and obvious; so the product
was defective, and there was a duty to warn.
Hoffinger failed to do so, and the district court properly
allowed the jury to consider whether the replacement
pool liner lacked an essential element to make it safe.
F.
Fleck's [**34] Comparative Negligence
The district court refused to bar recovery or reduce
Fleck's verdict although the jury found Fleck to have
been 64% negligent. Since determining whether a duty to
warn exists "necessarily involves negligence principles
such as reasonableness or foreseeability," Ellis, 545 A.2d
at 912-13, Hoffinger reasons that these negligence principles
reduce its liability under the comparative negligence
scheme of damage apportionment, or bar Fleck's
recovery under the Comparative Negligence Act, 42 Pa.
C.S. § 7102(a).
[HN15] It is true that the determination of a duty to
warn necessarily applies negligence principles, but it is
the defendant's "negligence" that is scrutinized. See Ellis,
545 A.2d at 913 (inquiry into duty to warn revolves
around whether "the supplier knew, or . . . should have
known, of the danger, or where the dangerous use . . .
was reasonably foreseeable"). Moreover, even if a plaintiff's
negligence is in any way relevant to determine a
duty to warn, that does not mean that it is also relevant to
damages. The argument that Fleck is barred from recovery
under the [**35] Comparative Negligence Act in
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 12
this strict liability case, where the jury expressly found
that the product sold was defective, is utterly without
merit. Moran v. G. & W.H. Corson, Inc., 402 Pa. Super.
101, 586 A.2d 416, 419 (1991) (the Comparative
Negligence Act does not apply to actions sounding in
strict liability). See Dillinger v. Caterpillar, Inc., 959
F.2d 430, 435-44 (3d Cir. 1992) (concluding, after a
thorough review of Pennsylvania law, that evidence of
plaintiff's negligence is inadmissible in a strict liability
case); McCown v. International Harvester Co., 463 Pa.
13, 342 A.2d 381, 382 (1975) (rejecting both contributory
negligence [*121] as a defense to strict liability and
a comparative negligence scheme of damage apportionment);
Berkebile, 337 A.2d at 901 (plaintiff cannot be
precluded from recovery in a strict liability case due to
his own negligence); Remy v. Michael D's Carpet Outlets,
391 Pa. Super. 436, 444-46, 571 A.2d 446, 451
(1990) (plaintiff's comparative [**36] negligence is
inadmissible in product liability action), allocatur granted,
592 A.2d 1301 (1991).
The argument that the amount of the jury verdict
should be reduced by Fleck's comparative negligence is
equally frivolous. Hoffinger relies on Lewis v. Timco,
Inc., 716 F.2d 1425 (5th Cir. 1983), which held that
notwithstanding the strict liability theory of the case,
comparative fault of the plaintiff is applied to reduce the
liability of the manufacturer of a defective product. This
case is significant, Hoffinger says, because the Pennsylvania
Superior Court in Walton v. Avco Corp., 383 Pa.
Super 518, 557 A.2d 372, 387 (1989), relied on it to hold
that a trier of fact can employ a comparative causation
doctrine when apportioning liability between two strictly
liable defendants.
The problem is that the Pennsylvania Supreme Court
overruled Walton on that precise issue. 610 A.2d at
462. The court believed that introducing concepts of fault
in the damage-apportionment process would not serve
the economic theory of Pennsylvania product liability
laws "to [**37] place inevitable financial burdens on
those best positioned to bear them." Id.
The Pennsylvania Supreme Court "has continually
fortified the theoretical dam between the notions of negligence
and strict 'no fault' liability. It would serve only
to muddy the waters to introduce comparative fault into
an action based solely on strict liability." Id. (citations
omitted). We hold that in a case brought under Pennsylvania
product liability laws, a plaintiff's comparative
negligence is irrelevant either to bar recovery or to reduce
the jury award.
G.
Insurance Proceeds

The Flecks petitioned the bankruptcy court to lift the
automatic stay of 11 U.S.C. § 362 in Nichols' bankruptcy,
representing that any recovery "will be limited
solely to the proceeds of the applicable insurance of"
Nichols. The bankruptcy court lifted the stay, ordering
that any judgment against Nichols "will be limited solely
to the proceeds of applicable insurance available to
Nichols Swim Pools, Inc." After Hoffinger was found
liable, the district court refused to mold the jury verdict
to an amount equal to the insurance proceeds available to
Nichols. We believe the court erred. [**38]
The Flecks' representation to the bankruptcy court
judicially estops them in their action against Nichols
because they cannot assert a position in this proceeding
inconsistent with the one they previously asserted.
Oneida Motor Freight, Inc. v. United Jersey Bank, 848
F.2d 414, 419 (3d Cir. 1988). See generally 18 Wright &
Miller, Federal Practice and Procedure, § 4477 (1981).
It may be laid down as a general proposition
that, [HN16] where a party assumes a
certain position in a legal proceeding, and
succeeds in maintaining that position, he
may not thereafter, simply because his interests
have changed, assume a contrary
position, especially if it be to the prejudice
of the party who has acquiesced in
the position formerly taken by him.
Davis v. Wakelee, 156 U.S. 680, 689, 15 S.Ct. 555, 558,
39 L. Ed. 578 (1895). [HN17] Judicial estoppel looks to
the connection between the litigant and the judicial system.
Oneida, 848 F.2d at 419; Delgrosso v. Spang &
Co., 903 F.2d 234, 241 (3d Cir. 1990). It preserves the
integrity of the courts by preventing litigants from
"playing [**39] fast and loose with the courts."
Scarano v. Central R.R. Co., 203 F.2d 510, 513 (3d Cir.
1953). See Patriot Cinemas, Inc. v. General Cinema
Corp., 834 F.2d 208, 212 (1st Cir. 1987); Teledyne Indus.,
Inc. v. NLRB, 911 F.2d 1214, 1220 (6th Cir. 1990).
Thus, it is intended to protect the courts rather [*122]
than the litigants. In re Cassidy, 892 F.2d 637, 641 (7th
cir. 1990).
The bankruptcy court's order makes clear that that
court lifted the automatic stay because the Flecks represented
that any judgment will be limited to the insurance
proceeds. [HN18] A party who petitions a bankruptcy
court to lift a stay by agreeing to limit the recovery
against the protected debtor cannot later collect in its
entirety on a judgment that exceeds the agreed upon limit.
See Chance v. Board of Examiners, 561 F.2d 1079,
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 13
1092 (2d Cir. 1977) (parties who make an agreement
with the court are bound by their representations).
Although the Flecks cannot collect money in excess
of the insurance amount from Nichols, there remains the
issue of whether they can collect [**40] the difference
between the amounts of the judgment and the insurance
proceeds from Hoffinger by its indemnity to Nichols.
The Flecks contended before the district court that they
have agreed with the bankruptcy court not to execute
upon their judgment against Nichols except insofar as the
judgments can be collected from "amounts which can be
recovered by way of indemnity against Hoffinger or its
insurance carrier, thus preserving the general assets of
Nichols to satisfy the claims of its other creditors." So,
the Flecks believe that they can recover the difference by
way of indemnity from Hoffinger to Nichols. We disagree.
[HN19] Indemnity is a common law equitable remedy
that shifts the entire loss from one who has been
compelled to pay a judgment to another who should bear
it. Builder's Supply Co. v. McCabe, 366 Pa. 322, 77
A.2d 368, 370 (1951). See Restatement of Restitution §
76 (1962). The rights and obligations arising from indemnity
exist between one who discharged the debt and
one who should have discharged it. It is well settled that
before any right of indemnification arises, the indemnitee
must in fact pay damages to a third party. [**41] F.J.
Schindler Equipment Co. v. The Raymond Co., 274 Pa.
Super. 530, 532, 418 A.2d 533, 534 (1980). See National
Liberty Ins. v. Kling Partnership, 350 Pa. Super. 524,
504 A.2d 1273, 1278 (1986). The reason for this is obvious:
since indemnity shifts the loss, no right accrues until
one suffers a loss by paying damages to a third party.
[HN20] Payment by the indemnitee to the third person
"may have been of the entire amount or it may have
been a partial payment." Restatement § 76 comment c.
So, where one is entitled to be indemnified, under Pennsylvania
law that person "should receive reimbursement
limited to the amount of his net outlay properly expended
because the payor became a party to the transaction
through the fault of the other." Aetna Casualty & Surety
Co. v. Nationwide Mut. Ins. Co., 471 F.Supp. 1059, 1067
(M.D. Pa. 1979), affirmed without opinion 620 F.2d 287
(3d Cir. 1980). See Restatement § 80 (the indemnitee
"is entitled to reimbursement, limited to the amount of
his net outlay properly expended"). Payment is limited to
the amount [**42] paid because "although there is no
fiduciary relation between the parties, the relation is one
which is regarded as involving mutual confidence and it
would be unfair for the payor to profit at the expense of
the principal obligor." Restatement § 80 comment (a).
No matter what the Flecks may have intended, they
cannot recover more than what they agreed. The Flecks

did not bring a separate claim against Hoffinger. Nichols
sued to be indemnified for its exposure. Hence,
Hoffinger's liability runs only to Nichols and only to the
extent of Nichols' exposure. Hoffinger thus has no legal
obligation to pay the judgment to the Flecks. To allow
the Flecks to collect the full amount of the judgment by
way of indemnity would allow them to do indirectly that
which they cannot do directly. Nichols' right of indemnity
is to be covered for its actual loss, not the Fleck's.
Hoffinger's liability to Nichols is the amount of money
Nichols was obligated to pay the Flecks, that is, the
amount of insurance proceeds available to Nichols. We
will reverse and remand to mold the jury verdict to the
amount of the available insurance proceeds. [*123]
III.
CONCLUSION
We summarize our decision as follows:
1. The district [**43] court correctly directed verdict
for Sylvan and against Fleck under the statute of repose;
2. Hoffinger has waived any right to contest the district
court's directed verdict against Hoffinger in Nichols' indemnification
action;
981 F.2d 107, *; 1992 U.S. App. LEXIS 32053, **;
CCH Prod. Liab. Rep. P13,380
Page 14
3. The district court erred when it refused to award
Nichols attorney's fees and costs incurred in the underlying
defense litigation in Nichols' indemnification action;
4. A manufacturer of a replacement pool liner has a duty
to warn of the depth of the pool or of the dangers of diving;
5. A manufacturer of a replacement pool liner is not relieved
of a duty to warn because the dangers of diving
into this pool of unknown depth is not open and obvious;
6. Pennsylvania neither recognizes a contributory negligence
defense to bar recovery in a strict liability case nor
authorizes reducing a plaintiff's damages under a comparative
negligence theory;
7. The district court erred when it refused to reduce the
jury verdict to an amount equal to the insurance proceeds
available to Nichols.
We will therefore reverse the denial of attorney's
fees and costs for Nichols and remand for further proceeding,
vacate the judgment entered for the Flecks with
respect [**44] to the damage award and remand with
instructions to mold the jury verdict to an amount equal
to the insurance proceeds available, and affirm the balance
of the district court's order.

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LEXSEE 299 SW 3D 106
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P., PETITIONER, v. NATIONAL
DEVELOPMENT AND RESEARCH CORPORATION, RESPONDENT
SUBSEQUENT HISTORY: Rehearing denied by Akin,
Gump, Strauss, Hauer & Feld, L.L.P. v. Nat'l Dev. &
Research Corp., 2010 Tex. LEXIS 50 (Tex., Jan. 15,
2010)
On remand at, Settled by, Judgment entered by, Appeal
dismissed by Akin, Gump, Strauss, Hauer & Feld, L.L.P.
v. Nat'l Dev. & Research Corp., 2010 Tex. App. LEXIS
3064 (Tex. App. Dallas, Apr. 27, 2010)
PRIOR HISTORY: [**1]
ON PETITION FOR REVIEW FROM THE COURT
OF APPEALS FOR THE FIFTH DISTRICT OF TEX-
AS.
Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. Nat'l Dev.
& Research Corp., 232 S.W.3d 883, 2007 Tex. App.
LEXIS 6954 (Tex. App. Dallas, 2007)
COUNSEL: For Akin Gump Strauss Hauer & Feld,
LLP, Petitioner: Mr. Thomas Fenton Allen Jr., Mr.
Christopher John Scanlan, Carrington, Coleman, Sloman
& Blumenthal, L.L.P. Dallas, TX; Mr. Corbet F. Bryant
Jr., Richardson, TX; Mr. Jeffrey S. Levinger, Hankinson
Levinger LLP, Dallas, TX.
For Akin Gump Strauss Hauer & Feld, LLP, Respondent:
Mr. David W. Shuford, Law Office of David W.
Shuford, Dallas, TX; Mr. Michael L. Jones, Henry &
Jones LLP, Dallas, TX.
For <strong>Omni</strong> <strong>Metals</strong>, Inc., Amicus Curiae: Mr. Mark C.
Harwell, Cotham Harwell & Evans, P.C., Houston, TX.
For Air Measurement Technologies, Inc., Amicus Curiae:
Mr. Luther H. Soules III, Soules & Wallace, San Antonio,
TX.
NO. 07-0818
SUPREME COURT OF TEXAS
299 S.W.3d 106; 2009 Tex. LEXIS 875; 53 Tex. Sup. J. 77
December 9, 2008, Argued
October 30, 2009, Opinion Delivered
Page 1
JUDGES: JUSTICE JOHNSON delivered the opinion
of the Court. JUSTICE GUZMAN did not participate in
the decision. Phil Johnson, Justice.
OPINION BY: Phil Johnson
OPINION
[*109] When a former client sues a lawyer for
improperly prosecuting a prior lawsuit, part of what the
plaintiff must prove is the amount of damages that would
have been collectible from the defendant in the prior suit.
In this legal malpractice case we address the following
issues: (1) what evidence is necessary to prove damages
would have been collectible in the prior case, and (2)
whether a client may recover attorney's fees and expenses
paid for representation in the prior case as damages in
the malpractice case.
We hold that (1) the amount of damages that would
have been collectible in the prior suit is the greater of the
amount of a judgment for damages that would have been
either paid or collected from the underlying defendant's
net assets; and (2) the time at which collectibility is determined
is as of or after the time a judgment was first
signed in the underlying case. We also hold that attorney's
fees and expenses paid for representation in the
underlying lawsuit [**2] may be recovered as damages
to the extent they were proximately caused by the defendant's
negligence.
Because there is legally insufficient evidence in this
case to support a finding that damages in the underlying
suit would have been collectible or that the defendant
attorneys' negligence proximately caused the entire
amount the jury awarded as damages for attorney's fees
and expenses, we reverse the judgment of the court of

appeals. Because there is evidence that the attorneys'
negligence caused some amount of attorney's fees and
expenses in the underlying suit, we remand to the court
of appeals for further proceedings.
I. BACKGROUND
A. The Underlying Suit
At times relevant to this matter, Panda Energy International
Corporation (Panda International) was involved
in developing energy-related projects. Its operations
were conducted, in part, through several subsidiary
corporations and joint ventures. In 1994, National Development
and Research Corporation (NDR) entered into
a Letter Agreement with Panda Energy Corporation
(PEC), one of Panda International's subsidiary corporations,
for NDR to assist PEC in locating and securing
energy-related projects in China. NDR's compensation
was to [**3] be (1) an annual service retainer, (2) stock
grants in a Panda subsidiary corporation, and (3) success
fees for each transaction that closed. To facilitate the
stock grants, NDR and PEC entered into a Shareholders'
Agreement with respect to Pan-Sino Energy Development
Company, L.L.C. (Pan-Sino), the Panda subsidiary
corporation whose shares would be transferred to NDR
as part of its compensation. The Shareholders' Agreement
required NDR to sell its interest in Pan-Sino to
PEC if the Letter Agreement was terminated.
Subsequently, and with NDR's approval, PEC assigned
its interest in and obligations under the Letter
Agreement to Panda International, the parent Panda corporation.
PEC also sold its Pan-Sino stock to Panda
Global Energy Company (Panda Global), another subsidiary
of Panda International. 1
1 NDR, PEC, and Panda International are Texas
corporations. Panda Global and Pan-Sino are
Cayman Island corporations. NDR, PEC, Panda
International, and Panda Global have their principal
offices in Dallas.
[*110] In the spring of 1997, Panda Global, as the
issuing company, closed a $ 155 million Senior Secured
Notes offering (the bonds) from which a project in Luannan
County, China (the Luannan project) [**4] was
funded. NDR assisted with the Luannan project and,
pursuant to the Letter Agreement, received 4 1/2% of
Pan-Sino's stock. After NDR received its stock in
Pan-Sino, and as relevant to this appeal, the corporate
structure of the Panda entities and interests was as follows:
[SEE CHART IN ORIGINAL]
Shortly after funding closed on the Luannan project,
Panda Global notified NDR that it was terminating the
Letter Agreement and exercising its rights under the
Shareholders' Agreement to purchase NDR's Pan-Sino
stock. NDR disputed Panda Global's authority to take
those actions. The dispute resulted in Panda Global filing
a declaratory judgment action (the "underlying" or
"Panda" suit) in Dallas County against NDR and its
President, Robert Tang. NDR and Tang retained Akin
Gump to represent them in the suit and agreed to pay the
firm an hourly fee and a sliding percentage contingency
fee on any recovery they obtained in the suit. NDR and
Tang then, through Akin Gump, counterclaimed for declaratory
judgment and breach of the Letter Agreement
and filed third party claims against Panda International
and Pan-Sino. The Panda entities responded by asserting
claims against NDR and Tang for breach of [**5] contract,
constructive fraud, breach of fiduciary duty, unjust
enrichment, and negligence.
The case was tried to a jury in August 1999. The trial
court held several post-trial hearings and signed, then
modified, four successive judgments, all generally in
favor of the Panda entities. Final judgment was signed on
February 6, 2001, and provided that (1) Panda Global
recover $ 111,043.50 from NDR and Tang as attorney's
fees for obtaining the declaratory judgment; (2) Panda
Global and Pan-Sino recover $ 316,273.50 from NDR as
attorney's fees pursuant to the Shareholders' Agreement;
(3) contingent attorney's fees be awarded in the event of
appeal; and (4) all parties take nothing otherwise. The
court of appeals affirmed the judgment. Nat'l Dev. &
Research Corp. v. Panda [*111] Global Energy Co.,
No. 05-00-00820-CV, 2002 Tex. App. LEXIS 3839, 2002
WL 1060483 (Tex. App.--Dallas May 29, 2002, pet. denied)
(not designated for publication).
B. The Malpractice Suit
NDR 2 later sued Akin Gump for legal malpractice
based on its handling of the Panda suit. NDR asserted, in
part, that Akin Gump negligently failed to request jury
questions asking whether Panda breached the Letter and
Shareholders' Agreements. NDR alleged that because
[**6] there were no jury findings that the agreements
were breached by Panda, the trial court rendered judgment
against NDR despite the verdict having been favorable
to NDR.
2 Tang was initially a party in the suit but was
dismissed in the trial court. He is not a party to
this appeal.
The malpractice jury found Akin Gump's negligence
resulted in damages to NDR as follows: (1) $ 168,667.41
for the judgment paid by NDR in the Panda lawsuit; (2) $
427,777.77 that was owed to NDR for the fair market
value of its Pan-Sino stock; (3) $ 109,596.68 for success
fees owed to NDR; and (4) $ 216,590.00 for attorney's

fees and expenses paid by NDR in the Panda lawsuit.
The trial court rendered judgment in favor of NDR according
to the verdict.
Akin Gump did not appeal the negligence finding or
damages awarded for the $ 168,667.41 NDR paid on the
Panda judgment. 232 S.W.3d 883, 889. However, it appealed
the other damage awards. The court of appeals
reversed that part of the judgment awarding attorney's
fees and expenses and affirmed the remainder of the
judgment. Id. at 887.
We granted petitions for review filed by both Akin
Gump and NDR. Akin Gump urges that the court of appeals
erred in upholding the trial [**7] court's judgment
for the value of NDR's Pan-Sino stock and success fees
because (1) there is legally insufficient evidence to support
the jury's finding that a favorable judgment in the
Panda suit would have been collectible, (2) there is legally
insufficient evidence to support the jury's finding as
to the amount NDR was owed for the value of its
Pan-Sino stock, and (3) the damages should have been
reduced by the amount Akin Gump's contingency fee
would have reduced NDR's net recovery.
NDR challenges the court of appeals' determination
that attorney's fees it paid for representation in the Panda
suit are not recoverable as damages.
We agree with Akin Gump that the evidence is legally
insufficient to support the jury's findings that NDR
would have collected damages awarded in the Panda suit
for the value of NDR's Pan-Sino stock and for success
fees. Absent such evidence, there is no evidence Akin
Gump's negligence proximately caused those damages to
NDR. We do not reach the law firm's issue challenging
the evidentiary support for the damages findings or the
issue of whether NDR's damages should be reduced by
Akin Gump's contingency fee.
We also agree with NDR that it may recover damages
[**8] for attorney's fees it paid 3 to its attorneys in
the underlying suit to the extent the fees were proximately
caused by the defendant attorneys' negligence.
We conclude the evidence is legally sufficient to support
a finding that [*112] some attorney's fees paid by
NDR were proximately caused by Akin Gump's negligence,
but the evidence is legally insufficient to support
the finding of $ 216,590.
3 The jury found and NDR argues that the attorney's
fees paid in the Panda suit are recoverable
as damages. We address only that issue and
express no opinion as to whether attorney's fees
incurred but not paid in an underlying case would
be recoverable as damages.
II. COLLECTIBILITY OF A JUDGMENT IN THE
UNDERLYING SUIT
To prevail on a legal malpractice claim, the plaintiff
must prove the defendant owed the plaintiff a duty, the
defendant breached that duty, the breach proximately
caused the plaintiff's injury, and the plaintiff suffered
damages. Peeler v. Hughes & Luce, 909 S.W.2d 494, 496
(Tex. 1995). When the claim is that lawyers improperly
represented the plaintiff in another case, the plaintiff
must prove and obtain findings as to the amount of
damages that would have been recoverable and collectible
[**9] if the other case had been properly prosecuted.
Cosgrove v. Grimes, 774 S.W.2d 662, 666 (Tex.
1989). In Cosgrove, a lawyer was sued for failing to
properly prosecute an automobile collision case. Id. at
662. The jury was charged to find the amount of damages
the malpractice plaintiff would have "in reasonable
probability recovered" and "in reasonable probability
collected from [the defendant] as a result of the collision."
Id. at 665 n.3 (emphasis added). Addressing the
submission, we said, "The two issues should have inquired
as to the amount of damages recoverable and collectible
[in the prior case] if the suit had been properly
prosecuted." Id. at 666.
The jury in this case was charged to find the amount
of damages that would have been "recovered and collected"
in the prior case. In connection with the damages
question, the jury was instructed:
In determining damages, you are instructed
to only consider the amount of
money NDR actually would have recovered
and collected from [Panda Global
and Panda International].
See COMM. ON PATTERN JURY CHARGES, STATE
BAR OF TEX., TEXAS PATTERN JURY CHARG-
ES--MALPRACTICE, PREMISES, PRODUCTS PJC
84.3 cmt. (2008). Neither party questions whether the
[**10] jury instruction was correct. Cf. Cosgrove, 774
S.W.2d at 665 n.3 (instructing jury to find the amount of
damages the plaintiff would have collected to a reasonable
probability). Because there was no objection to the
charge as submitted, we assume, without deciding, that
the instruction was correct and measure the evidence by
the charge as given. See Osterberg v. Peca, 12 S.W.3d
31, 55 (Tex. 2000).
Akin Gump's argument on the collectibility issue is
twofold. First, it asserts the court of appeals erred in considering
evidence of collectibility as of the time the Panda
suit was filed in 1997, as opposed to evidence of collectibility
on or after the date execution could have issued
on the final judgment. Second, it contends that if a

judgment favorable to NDR had been rendered in the
underlying suit for its Pan-Sino stock values and success
fees, there is legally insufficient evidence that the judgment
would have been collected.
A. When Must Judgment be Collectible
The Panda case was filed in October 1997 and tried
in August 1999. The trial court signed its first judgment
on February 25, 2000, and its final judgment on February
6, 2001. In affirming the trial court judgment for NDR,
the [**11] court of appeals considered evidence of the
Panda entities' financial condition at times before any
judgment was signed. In doing so, the court cited Jackson
v. Urban, Coolidge, Pennington & Scott, 516 S.W.2d
948, 949 (Tex. Civ. App.--Houston [1st Dist.] 1974, writ
ref'd n.r.e.), for the proposition that the time to be considered
in determining whether NDR would have collected
on a [*113] judgment was "on the date the [underlying]
case was filed or anytime thereafter." 232
S.W.3d at 895. Akin Gump asserts collectibility can only
be proved by evidence of the underlying defendant's financial
status as of the time execution could have been
issued--thirty days after the final judgment was signed.
We agree with Akin Gump's position in part.
NDR, citing Texas Civil Practice and Remedies
Code sections 31.002 and 63.001(2)(C), argues that the
court of appeals was correct: evidence of collectibility
prior to the date the judgment was signed is relevant because
some remedies are available to judgment creditors
even before a judgment becomes final. Section 31.002,
commonly referred to as the "turnover statute," allows a
party that has already secured a final judgment to collect
the judgment through a separate [**12] court proceeding.
TEX. CIV. PRAC. & REM. CODE § 31.002; see also
Schultz v. Fifth Judicial Dist. Court of Appeals at Dallas,
810 S.W.2d 738, 739 n.3 (Tex. 1991) (stating that the
"purpose of the turnover statute is to aid the collection of
final money judgments"). Because that section does not
address prejudgment remedies, it does not aid NDR here.
Section 63.001 contemplates the availability of prejudgment
writs of garnishment. But NDR did not attempt
to garnish any Panda assets before judgment nor did it
prove that it would have been entitled to do so. Accordingly,
Section 63.001 does not make evidence of Panda
International's prejudgment financial condition relevant
in determining collectibility of a judgment favorable to
NDR.
We next address Akin Gump's position that a plaintiff
must prove a judgment would have been collectible
when the judgment becomes final or at some later time. 4
Texas Rule of Civil Procedure 627 states that unless an
exception applies, "the clerk of the court or justice of the
peace shall issue the execution upon [a] judgment upon
application of the successful party or his attorney after
the expiration of thirty days from the time a final judgment
is signed." [**13] TEX. R. CIV. P. 627. Depending
on the particular case's circumstances, however, the
thirty-day period may be shortened or extended. See
TEX. R. CIV. P. 628 (allowing a trial court to issue execution
any time before the thirtieth day after the final
judgment is signed if the plaintiff shows that the defendant
may remove personal property subject to execution
out of the county); TEX. R. CIV. P. 627 (extending the
period for which a clerk must wait before issuing execution
when a motion for new trial or a motion in arrest of
judgment is filed). Further, unless the judgment debtor
properly supersedes the judgment, the judgment creditor
is not precluded from immediately filing an abstract of
judgment to aid in seeking satisfaction of its judgment.
See 5 ROY W. MCDONALD & ELAINE A. GRAF-
TON CARLSON, TEXAS CIVIL PRACTICE § 31:2
(2d ed. 1999).
4 To be enforced, an unsatisfied final judgment
must not have become dormant and must not be
preempted by federal law. See TEX. CIV. PRAC.
& REM. CODE § 34.001; 5 ROY W. MCDON-
ALD & ELAINE A. GRAFTON CARLSON,
TEXAS CIVIL PRACTICE § 31:3 (2d ed. 1999).
Here, however, there is no contention that a
judgment in the Panda suit would have been
dormant or preempted [**14] by federal law.
In light of the foregoing, we conclude that evidence
a defendant in the underlying suit could have satisfied a
judgment at times prior to the time a judgment is signed
generally will not be relevant to and will not be probative
of the judgment's collectibility unless, as discussed below,
it is also shown that the defendant's ability to satisfy
a judgment [*114] was not diminished by the passage
of time until judgment was signed. On the other hand,
because a judgment creditor does not have to wait thirty
days past signing of the final judgment to begin procedures
for collecting its judgment, evidence that the
judgment would have been collectible on or after the date
a judgment was first signed will be relevant.
Part of the evidence NDR references predates not
only signing of a judgment in the Panda suit but the suit
itself. We agree that prejudgment or pre-suit evidence of
solvency or other evidence that damages would be collectible
from a defendant could be sufficient to support a
finding that damages were later collectible, provided the
evidence also shows a reasonable probability that the
underlying defendant's financial condition did not change
during the time before a judgment [**15] was signed in
a manner that would have adversely affected collectibility.
Absent such evidence as to the gap time period,
however, a factfinder could only speculate as to how

events during the period affected the judgment debtor's
finances. Findings based on speculation are not based on
legally sufficient evidence. See Leitch v. Hornsby, 935
S.W.2d 114, 119 (Tex. 1996) (noting that proof of causation
cannot rest on speculation or conjecture).
B. Evidence of Collectibility
The court of appeals stated that a legal malpractice
plaintiff must prove the underlying defendant was solvent
in order to prove collectibility of damages that
would have been recovered in the underlying suit. 232
S.W.3d at 895. We agree with the court of appeals, at
least in part. Proving the underlying defendant was solvent
is one way to prove collectibility when "solvent"
means the underlying defendant owned sufficient property
subject to legal process to satisfy all outstanding
debts and have property remaining to satisfy some or all
of the damages the malpractice plaintiff would have recovered.
See BLACK'S LAW DICTIONARY 434 (8th
ed. 2004) (defining a "solvent debtor" as a debtor who
owns enough property to satisfy [**16] all outstanding
debts and against whom a creditor can enforce a judgment).
But collectibility may also be shown in other
ways. For example, some judgment debtors might be
classified as insolvent because they have a balance sheet
showing more debts than assets, or showing liens or
pledges that encumber their property, yet there is insurance
or a surety that will pay some or all of the judgment.
Or an insolvent judgment debtor might have current
income, profits, or access to finances that can be
diverted to satisfy a judgment. Evidence that damages
awarded against the debtor in the underlying suit probably
would have been paid, even though the debtor was
not solvent, would be probative evidence that the damages
were collectible.
Generally, then, the amount that would have been
collectible in regard to an underlying judgment--provided
the judgment is not dormant or
preempted--will be the greater of either (1) the fair market
value of the underlying defendant's net assets that
would have been subject to legal process for satisfaction
of the judgment as of the date the first judgment was
signed or at some point thereafter, or (2) the amount that
would have been paid on the judgment by the [**17]
defendant or another, such as a guarantor or insurer. See
4 RONALD E. MALLEN & JEFFREY M. SMITH,
LEGAL MALPRACTICE § 31.17 (2009); see also
James V. Mazuca & Assocs. v. Schumann, 82 S.W.3d 90,
96 (Tex. App.--San Antonio 2002, pet. denied) (finding
collectibility was adequately shown by a letter recognizing
the defendant in the underlying suit was insured and
the policy would have satisfied a judgment against the
defendant). But [*115] collectibility must be proved;
it is not presumed.
We next consider Akin Gump's contention that the
evidence was legally insufficient to support the jury's
finding that NDR would have collected damages for the
value of its Pan-Sino stock and success fees had they
been awarded in the Panda suit. In doing so, we note
NDR did not claim in the court of appeals that Panda
Global was solvent or that damages would have been
collectible from it. See 232 S.W.3d at 895 (noting that the
parties did not dispute that Panda Global was insolvent).
Nor does it do so here. Accordingly, our focus will be on
whether NDR would have recovered and collected damages
from Panda International.
C. Analysis
In reviewing a legal sufficiency challenge to the evidence,
we credit evidence that [**18] supports the verdict
if reasonable jurors could have done so and disregard
contrary evidence unless reasonable jurors could not
have done so. City of Keller v. Wilson, 168 S.W.3d 802,
827 (Tex. 2005). A legal sufficiency challenge "will be
sustained when (a) there is a complete absence of evidence
of a vital fact, (b) the court is barred by rules of
law or of evidence from giving weight to the only evidence
offered to prove a vital fact, (c) the evidence offered
to prove a vital fact is no more than a scintilla, or
(d) the evidence conclusively establishes the opposite of
the vital fact." Merrell Dow Pharms., Inc. v. Havner, 953
S.W.2d 706, 711 (Tex. 1997). "Evidence does not exceed
a scintilla if it is 'so weak as to do no more than create a
mere surmise or suspicion' that the fact exists." Kroger
Tex. Ltd. P'ship v. Suberu, 216 S.W.3d 788, 793 (Tex.
2006) (quoting Ford Motor Co. v. Ridgway, 135 S.W.3d
598, 601 (Tex. 2004)).
The jury charge instructed that in determining damages
the jury was to consider the amount NDR would
have collected from "Panda." "Panda" was defined as
Panda International and Panda Global. As previously
noted, however, because NDR did not address the collectibility
[**19] of damages from Panda Global in the
court of appeals and does not do so here, our review is
for evidence that damages would have been collectible
from Panda International.
NDR generally contends the evidence showing
Panda International "owned numerous subsidiaries with
hundreds of millions of dollars of assets is evidence that
Panda [International], through its ownership of these
subsidiaries, had sufficient assets to pay" a judgment.
Specifically, NDR points to the following as legally sufficient
evidence of collectibility from Panda International:
(1) May 2001 "Consolidated Financial Statements"
which were attached to a Panda International business
records affidavit and showed over $ 47 million of owner's
equity; (2) Panda International owned 100% of the
stock of Panda Holdings, Inc. (Panda Holdings) and a

May 1999 investor service report showed that Panda
Holdings had $ 70 million on its balance sheet; (3)
Tang's testimony that Panda International and Panda
Global indirectly owned a portion of the Luannan project
as well as several other power projects in the United
States, Latin America, and Asia; (4) the value of
Pan-Sino stock owned by Panda Global (which was
wholly owned by Panda [**20] International) would
have been over $ 8 million based on the jury finding as
to the value of NDR's 4.5% ownership interest in
Pan-Sino; (5) the ability of Panda International and Panda
Global to pay NDR $ 593,000 in success fees in 1997;
and (6) the award of attorney's fees to Panda International
and [*116] Panda Global in the underlying suit as
well as their ability to pay their own attorneys to prosecute
their claims against NDR. We will address the evidence
as it is categorized by NDR.
First, the consolidated financial statements which
NDR refers to as part of Panda International's business
records, and as showing "owner's equity," comprise just
over one page. The document heading states "Consolidated
Financial Statements (JV1-JV4) as of May 2001."
The statements (1) do not purport to represent Panda
International's financial capabilities or access to any asset
shown on the financial statement, and (2) do not expressly
set out which Panda entities were included in the
statement, but imply that only the financial condition of
the four joint ventures is represented. The same group of
business records included a one-page balance sheet from
Pan-Western, the subsidiary through which Panda International's
[**21] interest in the joint ventures flowed. 5
Pan-Western owned 87.92% of the joint ventures. The
Pan-Western balance sheet, however, showed no owner's
equity and indicated that as of May 31, 2001, the Luannan
Project had not commenced commercial operations,
Pan-Western had not yet received any interest on loans it
made to the joint ventures to fund the project, and
Pan-Western had paid no interest on the $ 96.136 million
in loans it received from Panda Global, the issuer of the
$ 155 million in bonds that funded the Luannan project.
5 As we begin our analysis of the evidence, it
is helpful to review the relationships among the
Panda entities. Panda International owned 100%
of Panda Holdings, which owned 100% of Panda
Global. Panda Global owned 95.5% of Pan-Sino
(NDR owned the other 4.5%). Pan-Sino owned
99% of Pan-Western. Pan-Western owned
87.92% of each of the joint ventures, which in
turn owned the Luannan facilities.
To the extent the consolidated financial statement
referenced the joint ventures, the joint ventures were not
parties to the Panda suit, nor did NDR allege that it
would have been entitled to collect a judgment from any
of them. See TEX. BUS. ORGS. CODE § 21.223 (stating
[**22] that any affiliate of a corporation shall be under
no obligation to the corporation or to its obligees with
respect to "any contractual obligation of the corporation
or any matter relating to or arising from the obligation"
unless "the obligee demonstrates that the . . . affiliate
caused the corporation to be used for the purpose of perpetrating
and did perpetrate an actual fraud on the obligee").
Nor does one corporation's ownership of all or the
majority of a second entity affect the second entity's existence
as a distinct, separate legal entity. See BMC
Software Belg., N.V. v. Marchand, 83 S.W.3d 789, 798
(Tex. 2002); Lucas v. Tex. Indus., Inc., 696 S.W.2d 372,
374 (Tex. 1984); Gentry v. Credit Plan Corp. of Houston,
528 S.W.2d 571, 573 (Tex. 1975); Bell Oil & Gas Co. v.
Allied Chem. Corp., 431 S.W.2d 336, 337 (Tex. 1968).
The consolidated financial statements NDR references
are not evidence that a judgment would have been collectible
from Panda International as of or after February
2000.
Next, NDR references a report reflecting that Panda
Holdings's May 1999 balance sheet showed it had "millions
of dollars." To begin with, NDR does not contend
that it would have been entitled to [**23] collect its
damages from Panda Holdings, a separate corporation,
and Panda International's ownership of Panda Holdings
is not, by itself, evidence that NDR would have collected
any amount from Panda International, the parent corporation.
See TEX. BUS. ORGS. CODE § 21.223; BMC
Software, 83 S.W.3d at 798. Further, the report was dated
May 14, 1999, which was more than nine months before
[*117] the first judgment was signed on February 25,
2000. And the May 1999 report itself negates its value as
evidence a judgment would have been collectible from
Panda Holdings, even disregarding the fact Panda Holdings
is a separate corporation from Panda International.
The document is a third party report disclosing that
"Moody's Investors Service has downgraded the bonds of
Panda Global Energy from B2 to B3. The rating outlook
is negative." The report says that Panda Holdings "has up
to $ 70-million available on its balance sheet currently ,"
but "there is no certainty as to how much may be available
both in the short- and medium-term to supply Panda
Global" (emphasis added). To the extent NDR's argument
is that cash held by Panda Holdings implies the
corporation was an asset evidencing Panda International's
[**24] solvency, we disagree with it. The Offering
Memorandum for the $ 155 million bond issue
contains financial data for Panda Holdings, including an
Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1996. The balance sheet showed Panda
Holdings' liabilities exceeded its assets by $ 101.5 million.
There is no evidence that its financial situation improved
even though it sold one of its assets and had $ 70
million in cash as of May 1999. No evidence shows

whether the asset sale was at a loss or profit, how the sale
affected the solvency of Panda Holdings itself, whether
the cash was committed to and used for other projects or
to pay creditors, or other such details. The May 1999
report simply is not evidence that damages would have
been collectible from Panda International.
Third, the fact that success fees were paid to NDR in
May 1997 is no evidence a judgment in the Panda suit
would have been collectible over two years later. There
is no evidence of events between the time the success
fees were paid and the time judgment was signed except
testimony evidencing financial deterioration of the Panda
entities and projects.
NDR argues that collectibility is also shown by
Panda [**25] International's indirect ownership of the
Luannan Project and other power projects and Tang's
testimony as to Panda International's ownership of the
projects. Tang testified that Panda International indirectly
owned multiple projects. But Tang's testimony is no
better evidence a judgment would have been collectible
from Panda International than the financial statement in
Panda International's business records. First, the evidence
was uncontroverted that the joint ventures directly
owned the Luannan project and there were several corporate
entities between the joint ventures and Panda International.
Moreover, there was no evidence the judgment
was collectible from the joint ventures themselves,
and NDR does not contend it would have been. Second,
Tang's testimony did not set out any particular owner's
equity, cash on hand, current assets, or similar details
that would support a conclusion Panda International was
solvent or that NDR could have collected any damages
from it. Third, testimony from the Panda trial of a Panda
International employee with first-hand knowledge of
Panda International's affairs was read into evidence. The
employee's testimony was that he was "trying to save the
[**26] company" because the Luannan project "cannot
meet its debt, and therefore, we are at risk of foreclosure."
Next, the total value of the Pan-Sino stock based on
NDR's ownership interest is not evidence that damages
in the Panda suit would have been collectible. The court
of appeals relied on the jury finding that NDR's interest
in Pan-Sino stock was valued at over $ 400,000 to conclude
that the remaining 94.5% of Pan-Sino stock
[*118] was worth over $ 8 million. The court attributed
that value to Panda International. 232 S.W.3d at 895. But
on April 11, 1997, four years prior to the final judgment
in the Panda suit, PEC had transferred all the Pan-Sino
stock to Panda Global, which NDR does not contend was
solvent. The Chairman of the Board and Chief Executive
Officer of Panda International testified in the Panda trial
that bonds with a face value of over $ 155 million issued
in 1997 to finance the Luannan project were trading at
"30 to 40 cents on the dollar" at the time of the Panda
trial because the "Chinese markets ha[d] deteriorated
dramatically . . . . Banks ha[d] lost all confidence in this
Chinese market." His testimony was introduced as evidence
in the malpractice suit. Further, notes [**27] accompanying
a Balance Sheet for Pan-Western Energy
Corporation LLC (Pan Western) stated that as of May
31, 2001, the Luannan Project had not commenced
commercial operations, Pan-Western had not received
any interest on loans it made to fund the project, and
Pan-Western had not paid any interest on the loans it
received from Panda Global, the issuer of the bonds that
funded the project. The Bond Offering Memorandum
showed that the $ 155 million bonds were secured not
only by the assets of Panda Global, including the
Pan-Sino stock, but by the capital stock of Panda Global
itself. 6 The only interest Panda International had in the
Pan-Sino stock flowed from Panda Global's status as a
subsidiary of Panda International, and any value the
Pan-Sino stock had was subsumed in the uncontested
insolvent financial status of Panda Global.
6 The record shows that Panda Global owned
94.5% of Pan-Sino, which in turn owned 99% of
Pan-Western. The 1997 Bond Offering Memorandum
stated that the bonds were secured by a
pledge of 100% of Panda Global's Capital Stock
as well as by
a security interest in certain assets
of [Panda Global] and its
Subsidiaries, including a pledge of
(i) at least 90% of the Capital
[**28] Stock of Pan-Sino, (ii) 99%
of the Capital Stock of
Pan-Western, (iii) the Issuer Note
and (iv) the Luannan Facility
Notes and the granting of a security
interest in certain funds of
[Panda Global] and its Subsidiaries
maintained by the Senior Secured
Notes trustee.
NDR asserts that the award of attorney's fees Panda
Global incurred in the Panda suit and the fact that Panda
International and Panda Global obtained representation
in the Panda suit are evidence a judgment against them
was collectible. We disagree. First, if judgment in the
Panda suit had been in favor of NDR, then Panda Global
would not have recovered attorney's fees. Therefore, the
fact it recovered fees in the suit has no bearing on
whether a judgment against Panda Global would have
been collectible. See Cosgrove, 774 S.W.2d at 666. Second,
as to NDR's assertion that a judgment would have

een collectible because the Panda parties had sufficient
assets to pay attorneys in the underlying lawsuit, NDR
offered no evidence of (1) the terms by which the attorneys
for the Panda entities were compensated, (2)
whether the attorneys were actually paid, (3) the source
of any funds used to pay the attorneys, even if they were
paid, [**29] or (4) if any funds that might have been
used to pay the Panda attorneys would have been used to
pay NDR's damages.
In sum, none of the evidence NDR cites is legally
sufficient to prove collectibility of damages it would
have been awarded in the Panda suit for its Pan-Sino
stock value and success fees. Accordingly, we need not
and do not reach the issues of whether there was evidence
to support the jury findings as to the amount of
NDR's damages and whether the judgment in favor of
NDR should have been reduced by the [*119] contingency
fee Akin Gump would have collected had NDR
prevailed in the Panda lawsuit.
III. ATTORNEY'S FEES AS DAMAGES
In its petition, NDR argues that the court of appeals
erred in holding the attorney's fees it paid in the Panda
lawsuit are not recoverable. 232 S.W.3d at 897. It says
the fees paid to appeal the judgment in Panda's favor are
economic damages proximately caused by Akin Gump's
negligent failure to properly submit jury questions. 7
7 In its petition for review, NDR claims that
legally sufficient evidence supports the jury finding
it paid attorney's fees to Akin Gump for appeal.
In its reply brief, NDR argues that it also
paid post-trial and appellate attorney's [**30]
fees to two attorneys who were not members of
the firm and the evidence it paid those fees also
supports the jury finding. Akin Gump asserts
NDR did not timely raise the argument about evidence
of fees paid to separate counsel supporting
the jury finding. We believe the argument is fairly
encompassed within the issue framed by NDR.
TEX. R. APP.P. 53.2 (f) ("The statement of an
issue or point [in a petition for review] will be
treated as covering every subsidiary question that
is fairly included.").
Citing Turner v. Turner, 385 S.W.2d 230, 233 (Tex.
1964), NDR acknowledges the general rule that a party
may not recover attorney's fees for the litigation in which
it is involved unless recovery is authorized by statute or
contract. It urges adoption of the "tort of another" exception.
See RESTATEMENT (SECOND) OF TORTS §
914(2) (1977) (allowing a party to recover attorney's fees
when that party must, as a result of some tort committed
by another, bring or defend an action against a third party).
NDR contends that under the exception, it can re-
cover the attorney's fees it had to pay for appealing the
Panda judgment.
As to the jury's finding on attorney's fees, Akin
Gump asserts (1) NDR is [**31] seeking fee disgorgement,
which is available only if the attorneys breached a
fiduciary duty to NDR, but NDR did not plead or request
jury questions on breach of fiduciary duty, see Burrow v.
Arce, 997 S.W.2d 229, 241-43 (Tex. 1999); (2) the "tort
of another" exception to the general rule is not implicated
by facts such as these where the fees being sought were
paid to the defendant attorneys in the underlying suit; (3)
NDR did not prove it paid the appellate fees it seeks to
recover; and (4) to the extent NDR paid the fees, the fees
would have been incurred regardless of the firm's negligence
and therefore were not proximately caused by
Akin Gump's actions. 8
8 Akin Gump does not assert the collectibility
argument in response to NDR's petition seeking
attorney's fees based on the actual jury finding
awarding attorney's fees. The firm makes the collectibility
argument as to attorney's fees only in
response to NDR's argument that if Akin Gump
had not negligently submitted the underlying
case, NDR would have recovered its appellate
attorney's fees under Texas Civil Practice and
Remedies Code § 38.001.
We disagree with Akin Gump that attorney's fees
paid in an underlying suit can only be [**32] recovered
through forfeiture for breach of fiduciary duty. For the
reasons set out below, we conclude the general rule as to
recovery of attorney's fees from an adverse party in litigation
does not bar a malpractice plaintiff from claiming
damages in the malpractice case for fees it paid its attorneys
in the underlying suit. Because the general rule does
not apply to NDR's claim, we need not and do not address
whether the exception set out in section 914(2) of
the Second Restatement should be adopted as Texas law.
[*120] A. The American Rule
It has long been the rule in Texas that attorney's fees
paid to prosecute or defend a lawsuit cannot be recovered
in that suit absent a statute or contract that allows for
their recovery. See Tony Gullo Motors I, L.P. v. Chapa,
212 S.W.3d 299, 310-11 (Tex. 2006) ("Absent a contract
or statute, trial courts do not have inherent authority to
require a losing party to pay the prevailing party's fees.");
Wm. Cameron & Co. v. Am. Sur. Co. of N.Y., 55 S.W.2d
1032, 1035 (Tex. Comm'n App. 1932, judgm't adopted)
("It is settled law in this state that, unless provided for by
statute or by contract between the parties, attorneys' fees
incurred by a party to litigation [**33] are not recoverable
against his adversary either in an action in tort or a
suit upon a contract."); Sherrick v. Wyland, 14 Tex. Civ.

App. 299, 37 S.W. 345, 345 (Tex. Civ. App. 1896) ("It has
often been ruled, in this state and elsewhere, that fees of
counsel, incurred in prosecuting a suit for or defending
against a wrong, are not ordinarily recoverable as actual
damages, because they are not considered proximate
results of such wrong."). The rule is known as the American
Rule. See Buckhannon Bd. & Care Home, Inc. v. W.
Va. Dep't of Health and Human Res., 532 U.S. 598, 602,
121 S. Ct. 1835, 149 L. Ed. 2d 855 (2001) ("[P]arties are
ordinarily required to bear their own attorney's fees--the
prevailing party is not entitled to collect from the loser.");
Fleischmann Distilling Corp. v. Maier Brewing
Co., 386 U.S. 714, 718, 87 S. Ct. 1404, 18 L. Ed. 2d 475
(1967).
The court of appeals in this case concluded that attorney's
fees are not recoverable as damages for legal
malpractice. 232 S.W.3d at 896-97 (citing El Dorado
Motors, Inc. v. Koch, 168 S.W.3d 360, 366 (Tex.
App.--Dallas 2005, no pet.) (noting that attorney's fees
are not recoverable in a legal malpractice suit because
attorney's fees expended in prior litigation are recoverable
only when provided for by contract or agreement
[**34] between the parties)). The court of appeals also
cited Martin-Simon v. Womack, 68 S.W.3d 793, 797-98
(Tex. App.--Houston [14th Dist.] 2001, pet. denied),
where it was held that a plaintiff in an interference-with-contract
case could not recover attorney's fees
as damages when the fees were paid in a prior suit related
to enforcement of the contract. That court relied on
Dallas Central Appraisal District v. Seven Investment
Co., 835 S.W.2d 75, 77 (Tex. 1992), and New Amsterdam
Casualty Co. v. Texas Industries, Inc., 414 S.W.2d 914,
915 (Tex. 1967), for the proposition that attorney's fees
are not recoverable unless provided for by statute or contract.
But those cases should not be read so broadly.
For example, in New Amsterdam Casualty Co., we
considered the appeal of a case in which an unpaid materialman
sued a construction contractor and its surety.
New Amsterdam Cas. Co., 414 S.W.2d at 914. Judgment
was rendered in favor of the materialman for the amount
due on the materials plus attorney's fees for prosecuting
the suit. Id. at 915. The appeal before this Court concerned
only the award of attorney's fees. See id. The
Court reversed the award of attorney's fees and rendered
judgment [**35] in favor of the surety. Id. at 916. In
doing so, we "reaffirmed the rule previously recognized
as settled law . . . that attorney's fees are not recoverable
either in an action in tort or a suit upon a contract unless
provided by statute or by contract between the parties."
Id. at 915. Our statement, considered without reference
to the facts of the case, could be read out of context as
generally precluding recovery of attorney's fees for
prosecuting or defending a suit. It was not intended to
extend so far.
[*121] The situation before us does not involve
the American Rule that prevails in Texas. NDR does not
seek to recover attorney's fees for prosecuting its malpractice
suit against Akin Gump. It seeks damages
measured by the economic harm it suffered from Akin
Gump's breach of its duty of care in prosecuting the
Panda suit. Akin Gump does not contend it did not have
or did not breach a duty of care. Thus, unless there is
some reason not to consider the Panda suit attorney's fees
as damages in the malpractice suit, the question becomes
an evidentiary one: Does evidence support the jury's
finding that $ 216,590 in attorney's fees and expenses
were proximately caused by Akin Gump's negligence?
Akin [**36] Gump, in effect, urges us to exclude
all the Panda suit attorney's fees from being considered
as damages. It says that awarding damages for the fees
would be fee forfeiture by another name, and NDR did
not plead or obtain findings that Akin Gump breached a
duty that would allow fee forfeiture under the holding of
Burrow v. Arce. See Burrow, 997 S.W.2d at 241-43. We
disagree with the proposition.
If an attorney has breached his or her fiduciary duty
to a client, then part or all of the fees the client paid may
be recovered through disgorgement and forfeiture. See
id. at 237. In Burrow , we noted our agreement with the
following forfeiture rule: "A lawyer engaging in clear
and serious violation of duty to a client may be required
to forfeit some or all of the lawyer's compensation for the
matter." Id. at 241-42 (quoting RESTATEMENT
(THIRD) OF THE LAW GOVERNING LAWYERS § 49
(Proposed Final Draft No. 1, 1996)). But because attorney's
fees in an underlying case may be subject to forfeiture
for breach of fiduciary duty, it does not follow that
fees and expenses paid to attorneys who negligently try a
suit should not be recoverable as compensatory damages
in a second suit for malpractice.
In [**37] Burrow, the plaintiffs were injured in explosions
at a Phillips 66 chemical plant. Burrow, 997
S.W.2d at 232. The defendant lawyers represented the
plaintiffs in a suit for their personal injuries. Id. The suit
was settled and the plaintiffs received settlement payments.
Id. They then sued their lawyers for breach of
fiduciary duty, fraud, violations of the Deceptive Trade
Practices-Consumer Protection Act, negligence, and
breach of contract. Id. at 232. The trial court granted
summary judgment for the defendant attorneys on the
basis that the settlement in the underlying case was fair
and reasonable and any misconduct of the lawyers did
not cause damages to the plaintiffs. Id. at 233.
This Court held that the defendants were not entitled
to summary judgment because they did not establish as a
matter of law that the plaintiffs suffered no actual damages.
Id. at 237. As to the breach of fiduciary duty claim,

though, we held that a client need not prove actual damages
as part of the breach of fiduciary duty claim. Id. at
240. We remanded the claim to the trial court for determination
of whether the lawyers breached their fiduciary
duties and if so, the appropriate amount of fee forfeiture.
[**38] Id. at 246. The question of whether the plaintiffs
were precluded from recovering, as damages in a malpractice
case, attorney's fees paid to the defendant lawyers
in the underlying case was not before the Court in
Burrow. As we said, "[t]he main purpose of [fee] forfeiture
is not to compensate an injured principal, even
though it may have that effect. Rather, the central purpose
of the equitable remedy of forfeiture is to protect
relationships of trust by discouraging agents' disloyalty."
Id. at 238.
[*122] A negligence claim, unlike a fee forfeiture
claim for breach of fiduciary duty, is about compensating
an injured party. See Douglas v. Delp, 987 S.W.2d 879,
885 (Tex. 1999) ("[W]hen the injuries caused by an attorney's
negligence are economic, the plaintiff can be
fully recompensed by the recovery of any economic loss.
Restoration of the pecuniary interest suffices to return a
plaintiff to her prior circumstances."); THOMAS D.
MORGAN, LAWYER LAW: COMPARING THE ABA
MODEL RULES AND THE ALI RESTATEMENT
(THIRD) OF THE LAW GOVERNING LAWYERS 98
(2005) ("A key distinction between fee forfeiture and the
malpractice remedy is that the amount forfeited need
have no relation to actual damages suffered [**39] by
the client.") (emphasis omitted); RESTATEMENT (SE-
COND) OF TORTS § 903 cmt. a (1977) ("When there
has been harm only to the pecuniary interests of a person,
compensatory damages are designed to place him in a
position substantially equivalent in a pecuniary way to
that which he would have occupied had no tort been
committed.").
We see little difference between damages measured
by the amount the malpractice plaintiff would have, but
did not, recover and collect in an underlying suit and
damages measured by attorney's fees it paid for representation
in the underlying suit, if it was the defendant
attorney's negligence that proximately caused the fees. In
both instances, the attorney's negligence caused identifiable
economic harm to the malpractice plaintiff. The
better rule, and the rule we adopt, is that a malpractice
plaintiff may recover damages for attorney's fees paid in
the underlying case to the extent the fees were proximately
caused by the defendant attorney's negligence.
See Alexander v. Turtur & Assocs., Inc., 146 S.W.3d 113,
119 (Tex. 2004); Knebel v. Capital Nat'l Bank, 518
S.W.2d 795, 799 (Tex. 1974); 3 RONALD E. MALLEN
& JEFFREY M. SMITH, LEGAL MALPRACTICE §
21:19 [**40] (2009).
B. Analysis
NDR's position is that it incurred damages by paying
attorney's fees to appeal the judgment rendered against it
because Akin Gump negligently failed to request inclusion
of necessary questions in the jury charge. NDR does
not contest its burden to prove that Akin Gump's negligence
proximately caused it to pay the fees and expenses
it seeks to recover.
Proximate cause has two elements: cause in fact and
foreseeabilty. IHS Cedars Treatment Ctr. of Desoto,
Tex., Inc. v. Mason, 143 S.W.3d 794, 798 (Tex. 2004).
Cause in fact must be established by proof that (1) the
negligent act or omission was a substantial factor in
bringing about the harm at issue, and (2) absent the negligent
act or omission ("but for" the act or omission), the
harm would not have occurred. See id. at 799. Causation
must be proved, and conjecture, guess, or speculation
will not suffice as that proof. Leitch, 935 S.W.2d at 119;
Doe v. Boys Clubs of Greater Dallas, Inc., 907 S.W.2d
472, 477 (Tex. 1995).
1. Fees and Expenses Paid to Akin Gump
NDR does not contest the reasoning of the court of
appeals that "even a successful litigant may be forced to
defend its judgment when the losing party appeals." 232
S.W.3d at 896. [**41] Instead, NDR argues that the
court of appeals overlooked Texas Civil Practice and
Remedies Code section 38.001, which allows a successful
litigant on a breach of contract claim to recover its
attorney's fees for appeal. It asserts that NDR would not
have suffered economic loss by paying appellate attorney's
fees because a judgment favorable to NDR would
have included provisions that it recover [*123] appellate
attorney's fees from Panda.
First, we agree with the court of appeals. There is no
evidence that if NDR had recovered a favorable judgment
in the Panda suit, it would not have paid appellate
fees to defend the judgment. The evidence does not show
that if NDR had obtained a favorable judgment, Panda
would not have appealed the case or that NDR would not
have defended its judgment on appeal if Panda appealed.
Thus, the court of appeals was correct in determining
there is legally insufficient evidence to support a finding
that Akin Gump's negligence was a cause in fact of the
appellate attorney's fees and expenses NDR paid to Akin
Gump.
Next, we address NDR's argument that it would
have been entitled to recover in the Panda suit for its
appellate attorney's fees under Texas Civil Practice and
Remedies Code section 38.001. [**42] As Akin Gump
points out, NDR's position in the malpractice suit was
not that it would have recovered and collected a judgment
for additional appellate attorney's fees from Panda

had Akin Gump properly tried the Panda case. The
damages question in the malpractice jury charge asked
about, and NDR argued to the jury that it sought recovery
for, "[a]ttorney's fees and expenses paid by NDR in
the Panda Lawsuit," not about what fees and expenses
would have been recovered and collected from Panda
had Akin Gump properly tried the underlying case.
2. Fees for Separate Counsel
The situation is different as to the fees NDR paid the
separate, additional counsel who were retained post-trial.
Post-trial proceedings focused on whether the jury verdict
entitled NDR to specific performance of the Letter
and Shareholder Agreements calling for NDR's Pan-Sino
stock to be purchased by Panda upon termination of the
agreements, or whether NDR waived its claims by failing
to request jury questions as to breach of the agreements.
NDR at that point retained law Professors William
Dorsaneo and Maureen Armour to help Akin Gump convince
the trial judge to render judgment favorable to
NDR. There was evidence that [**43] Professors
Dorsaneo and Armour were retained to focus on the jury
charge and argue to the trial court that despite the absence
of a jury finding that Panda breached the agreements,
the verdict supported judgment for NDR. The
evidence is legally sufficient to support the jury finding
that Akin Gump's negligence was a cause in fact of
NDR's retaining the professors and, thus, that the firm's
negligence proximately caused NDR to pay the fees and
expenses of the professors.
Akin Gump further argues that even if NDR were
entitled to recover fees and expenses charged by
Dorsaneo and Armour, there was no evidence NDR actually
paid them. However, Professor Armour testified
NDR paid her several thousand dollars for her work on
the case, and Tang testified that Professor Dorsaneo was
paid for his work. Thus, there was more than a scintilla
of evidence that NDR actually paid attorney's fees and
expenses to the professors. See City of Keller, 168
S.W.3d at 810.
But although there is some evidence that the fees
and expenses of Dorsaneo and Armour were paid, the
evidence is undisputed that the total of those payments
was less than half the $ 216,590 awarded by the jury.
NDR only argues that it paid [**44] Armour $ 49,500
and Dorsaneo $ 10,000. Accordingly, although the evidence
is legally sufficient to support a finding of some
amount, it is legally insufficient to support the entire
amount the jury found. Guevara v. Ferrer, 247 S.W.3d
662, 669-70 [*124] (Tex. 2007); see Texarkana Mem'l
Hosp., Inc. v. Murdock, 946 S.W.2d 836, 841 (Tex.
1997).
Ordinarily, we render judgment when we sustain a
no evidence issue. Guevara, 247 S.W.3d at 670; Murdock,
946 S.W.2d at 841. However, when there is some
evidence of damages, but not enough to support the full
amount, it is inappropriate to render judgment. Guevara,
247 S.W.3d at 670. In such a situation, we may either
remand the case to the court of appeals for a suggestion
of remittitur or to the trial court for a new trial. Id. Given
the state of the evidence in this case, it is appropriate to
remand the case to the court of appeals. See id. (remanding
to the court of appeals to consider suggestion of remittitur
rather than remanding for a new trial after determining
the evidence was legally insufficient to support
all of the damages awarded by the jury). If the court of
appeals determines that suggestion of remittitur is not
appropriate or is unable [**45] to successfully suggest
a remittitur, then the part of the case involving liability
and attorney's fees and expenses--including those of both
Akin Gump and separate counsel--should be remanded
for a new trial. See TEX. R. APP. P. 61.2.
IV. CONCLUSION
We reverse the court of appeals' judgment. We render
judgment that NDR take nothing on its claims for the
fair market value of its stock and success fees owed to it.
The claim for attorney's fees and expenses is remanded
to the court of appeals for further proceedings consistent
with this opinion.
Phil Johnson
Justice

995 S.W.2d 713, *; 1999 Tex. App. LEXIS 2807, **
LEXSEE 995 SW2D 713
The ESTATE OF William H. ARLITT; Margie V. Arlitt, Individually and as an
Heir, Beneficiary, and Administratrix/Independent Executrix of the Estate of William
H. Arlitt; and William H. Arlitt, III, Sezanne Zeluff, and Janet Arlitt Individually
and as Heirs and Beneficiaries of the Estate of William H. Arlitt, Appellants v.
Allan G. PATERSON, Jr.; Bayern, Paterson, Aycock & Amen, P.C. (f/k/a Remy,
Bayern & Paterson); and Chilton Maverick, Individually, Appellees
No. 04-97-00750-CV
COURT OF APPEALS OF TEXAS, FOURTH DISTRICT, SAN ANTONIO
SUBSEQUENT HISTORY: [**1] Petition For Review
Denied September 30, 1999.
PRIOR HISTORY: From the Probate Court No. 1 of
Bexar County, Texas. Trial Court No. 91-PC-1539.
Honorable Polly Jackson Spencer, Judge Presiding.
DISPOSITION: AFFIRMED IN PART; REVERSED
AND REMANDED. IN PART.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant heirs challenged
a decision of the Probate Court No. 1 of Bexar
County (Texas), which held that appellants did not have
a viable claim against appellee attorneys. Appellants
claimed that they did have a viable claim against their
deceased father's law firm, appellees, and that their claim
was not barred by the statute of limitations or because of
a lack of privity of contract.
OVERVIEW: Appellant heirs were dissatisfied with the
terms of their deceased father's will and they filed suit
against the attorneys who drafted the will, appellees. The
trial court dismissed appellants' claim, holding that it was
barred because of a lack of privity of contract and that it
was barred by the applicable statute of limitations. On
appeal, the court held that appellants could proceed on a
negligent misrepresentation claim because that claim did
not require privity of contract. The court further held that
appellees did not clearly demonstrate that appellants
were in violation of the statute of limitations, because
appellees did not demonstrate when appellants should
have reasonably discovered the alleged misrepresentation
or malpractice. The court disallowed heirs to proceed on
995 S.W.2d 713; 1999 Tex. App. LEXIS 2807
April 14, 1999, Delivered
April 14, 1999, Filed
Page 1
legal malpractice claims because there was no privity of
contract between appellants and appellees. The deceased's
wife, however, could proceed with her malpractice
action in an individual capacity because the will was
drafted for her benefit as well. Partial summary judgment
was granted on appellant children's malpractice claims
and the case was remanded for further findings.
OUTCOME: Appellant heirs were granted partial relief
on appeal and appellants could proceed on a negligent
misrepresentation claim against appellees, their deceased
father's attorneys. The court also held that the deceased's
wife could sue her husband's law firm in an individual
capacity. Finally, the court held that appellees did not
conclusively demonstrate that appellants were in violation
of the applicable statute of limitations on any claim.
LexisNexis(R) Headnotes
Civil Procedure > Appeals > Standards of Review > De
Novo Review
[HN1] Subject matter jurisdiction and statutory interpretation
present questions of law and are therefore reviewed
de novo.
Legal Ethics > Client Relations > Effective Representation
Torts > Business & Employment Torts > Negligent
Misrepresentation
[HN2] To prevail on a legal malpractice claim, a plaintiff
must show privity in order to prove the attorney owed
her a duty of ordinary care. But a plaintiff need not show
privity in order to establish a duty not to negligently
misrepresent.

Legal Ethics > Client Relations > Effective Representation
[HN3] Legal malpractice claims are governed by the
two-year statute of limitations. However, the statute does
not begin to run until the plaintiff discovers or reasonably
should have discovered the wrongfully caused injury.
Legal Ethics > Client Relations > Effective Representation
Torts > Business & Employment Torts > Negligent
Misrepresentation
[HN4] If the claim is for the negligent performance of a
contractual duty and the loss is solely economic, an attorney
malpractice action in Texas is based on negligence
and sounds solely in tort.
COUNSEL:
FOR APPELLANT: W. Scott Carpenter, CAR-
PENTER & ASSOCIATES, Houston, TX.
FOR APPELLEE: Lewin Plunkett, Cathy J. Sheehan,
PLUNKETT & GIBSON, INC., San Antonio, TX. Joyce
W. Moore, SMITH & MOORE, L.L.P., Dallas, TX.
JUDGES: Opinion by: Sarah B. Duncan, Justice. Sitting:
Tom Rickhoff, Justice Sarah B. Duncan, Justice
Karen Angelini, Justice.
OPINIONBY: SARAH B. DUNCAN
OPINION:
[*717] The principal issue presented in this appeal
is whether Barcelo v. Elliott, 923 S.W.2d 575, 579 (Tex.
1996), precludes a legal malpractice action by a joint
estate planning client. We hold Barcelo does not apply
and therefore reverse the trial court's judgment in part.
FACTUAL AND PROCEDURAL BACKGROUND
On May 6, 1987, William H. Arlitt, Jr. (Mr. Arlitt)
died, leaving a will drafted in 1983 by Allan G. Paterson,
a partner in the firm of Bayern, Paterson, Aycock &
Amen, P.C. Mr. Arlitt also left a codicil drafted in 1985
by Chilton Maverick. Under the 1983 will, Mr. Arlitt left
his firearms and personal jewelry to his son, William H.
Arlitt III (Bill); the remainder of his personal effects and
his share of the household effects to his wife, Margie V.
Arlitt (Mrs. Arlitt); and the remainder of his estate in
equal shares to the Arlitt Grandchildren [**2] Trust and
the Margie V. Arlitt Trust, which was to benefit Mrs.
Arlitt during her lifetime. At Mrs. Arlitt's death, the assets
and accumulated income in her trust were to be distributed
to the Arlitt's four children--Bill, Kristine,
Sezanne, and Janet. However, in the 1985 codicil, Mr.
Arlitt reduced Kristine's share of his estate to $ 50,000 in
995 S.W.2d 713, *; 1999 Tex. App. LEXIS 2807, **
Page 2
cash; the remainder of Kristine's share under Mr. Arlitt's
1983 will was devised to her children in trust.
Because the 1985 codicil substantially disinherited
her, Kristine opposed the application to probate Mr.
Arlitt's 1983 will and 1985 codicil, and this will contest
remained pending for almost six years. As a result, the
1983 will and 1985 codicil were not admitted to probate
until May 1992 and March 1993, respectively. After four
years of the contest litigation, Mrs. Arlitt, individually
and as the personal representative of Mr. Arlitt's Estate,
and Bill, Sezanne, and Janet (collectively, "the Arlitts")
filed this suit against Allan G. Paterson; Bayern, Paterson,
Aycock & Amen, P.C.; and Chilton Maverick (collectively,
"the Attorneys"). The Arlitts alleged Mr. and
Mrs. Arlitt, "on behalf of themselves, and also on behalf
of their children [**3] (and as their children's agents),"
sought and received legal estate planning services from
the Attorneys; the Attorneys negligently advised Mr. and
Mrs. Arlitt regarding their joint estate plan and negligently
drafted Mr. Arlitt's 1983 will and 1985 codicil;
and the Attorneys' negligence "[has] or will cause the
Arlitts to sustain substantial damages by way of (among
other things) will contest(s), construction proceedings,
and estate tax consequences." The Arlitts also alleged
negligent misrepresentation, negligent undertaking, gross
negligence, and breach of express and implied contract.
The Attorneys moved for summary judgment, arguing
all of the Arlitts' claims were, in legal effect, legal
malpractice claims; all were barred by the statute of limitations;
and all suffered a fatal defect--the Arlitts were
not in privity with the Attorneys and thus could not establish
the duty requisite to a legal malpractice claim.
Maverick also contended the trial court lacked subject
matter jurisdiction over the Arlitts' claims because they
were not appertaining or incident to Mr. Arlitt's estate,
and the Arlitts could not as a matter of law establish
agency, injury, or recoverable damages. [**4] The
Arlitts filed a response to each attorney's motion and
supported each response with a separate affidavit from
Mrs. Arlitt. The affidavit offered in response to Paterson's
motion was admitted in its entirety. But large portions
of the affidavit offered in response to Maverick's
motion for summary judgment were stricken as inadmissible
hearsay, parol evidence, conclusory, and argumentative.
The trial court granted the Attorneys' motions
without stating a reason, and the Arlitts appealed.
STANDARD OF REVIEW
[HN1]
Subject matter jurisdiction and statutory interpretation
present questions of law and are therefore reviewed de
novo. Mayhew v. Town of Sunnyvale, 964 S.W.2d 922,
928 (Tex. 1998), petition for cert. filed, 119 S. Ct. 2018,
143 L. Ed. 2d 1030, 67 U.S.L.W. 3149 (U.S. 1998);
Mitchell Energy Corp. v. Ashworth, 943 S.W.2d 436, 437

(Tex. 1997). The de novo standard also governs our review
of summary judgments. Therefore, we will uphold
a traditional summary judgment only if the movant establishes
there is no genuine issue of material fact and he
is entitled to judgment as a matter of law on a ground set
forth in his motion. TEX. R. CIV. P. 166a(c); see Nixon
v. Mr. Property [**5] Management Co., 690 S.W.2d
546, 548 (Tex. 1985). In determining whether a genuine
issue of material fact exists, we view as true all evidence
favorable to the respondent and resolve all doubts in her
favor. Nixon, 690 S.W.2d at 548-49.
SUBJECT MATTER JURISDICTION
Maverick's motion for summary judgment contends
the statutory probate court lacked subject matter jurisdiction
over the Arlitts' claims because they are not "incident
or appertaining to" Mr. Arlitt's estate. We disagree.
Because the Arlitts' claims accrued before the effective
date of the 1989 amendments to the Texas Probate
Code, the 1985 version of the code controls our [*718]
jurisdictional analysis. See Act of May 23, 1989, 71st
Leg., R.S., ch. 1035, § 18(e), 1989 Tex. Gen. Laws
4162, 4170. Under this version of the code, the statutory
probate courts were vested with jurisdiction of matters
"incident to an estate." Act of May 17, 1979, 66th Leg.,
R.S., ch. 713, § 2, 1979 Tex. Gen. Laws 1740, amended
by Act of May 23, 1989, 71st Leg., R.S. ch. 1035, § 2,
1989 Tex. Gen. Laws 4162, 4163. These courts' jurisdiction
thus included "all claims by or against an estate" and
"generally all matters relating to [**6] the settlement,
partition, and distribution of estates of ... deceased persons."
Act of May 17, 1985, 69th Leg., R.S., ch. 875, §
1, 1985 Tex. Gen. Laws 2995, 2996, amended by Act of
May 23, 1989, 71st Leg., R.S., ch. 1035, § 1, 1989 Tex.
Gen. Laws 4162. A matter is "incident to an estate" if a
review of the pleadings indicates it will "directly impact[]
the assimilation, distribution, and settlement of
[the] estate." In re Graham, 971 S.W.2d 56, 59 (Tex.
1998) (citing cases).
As set forth in the Arlitts' petition, Mrs. Arlitt sues in
both her individual and representative capacities. In her
representative capacity, Mrs. Arlitt seeks to recover the
fees and expenses allegedly paid by the estate as a consequence
of the Attorneys' wrongful conduct. If successful,
this claim would directly impact the assimilation of
assets for the estate and was therefore within the statutory
probate court's jurisdiction. See id. We therefore hold
the claims asserted by Mrs. Arlitt in her representative
capacity were within the probate court's subject matter
jurisdiction. We likewise hold the claims asserted by
Mrs. Arlitt, individually, and her children were also
within the statutory [**7] probate court's jurisdiction.
To do otherwise would require the Arlitts to litigate the
same case in two different courts--an absurd interpreta-
995 S.W.2d 713, *; 1999 Tex. App. LEXIS 2807, **
Page 3
tion of the statutes and thus not attributable to the Texas
Legislature. See City of Amarillo v. Martin, 971 S.W.2d
426, 435 n.1 (Tex. 1998); see also TEX. PROB. CODE
ANN. § § 5(d), 5A(c)(4) (Vernon Supp. 1998) (statutory
probate court has concurrent jurisdiction over all
claims involving a testamentary trust); id. § 5A(d) ("A
statutory probate court may exercise the pendent and
ancillary jurisdiction necessary to promote judicial efficiency
and economy.").
NEGLIGENT MISREPRESENTATION
The Arlitts sued the Attorneys for negligence, negligent
misrepresentation, negligent undertaking of representation,
and breach of contract. However, the Attorneys'
motions for summary judgment address only the
Arlitts' negligence claim because, they contend, all of the
Arlitts' claims are legal malpractice claims. We agree the
Arlitts' negligence, negligent undertaking, and breach of
contract claims are, under Texas law, legal malpractice
claims. See Barcelo, 923 S.W.2d at 579. But we do not
reach the same conclusion with respect to the [**8]
Arlitts' negligent misrepresentation claims.
[HN2] As discussed below, to prevail on a legal
malpractice claim, a plaintiff must show privity in order
to prove the attorney owed her a duty of ordinary care.
See id. But a plaintiff need not show privity in order to
establish a duty not to negligently misrepresent. See
Federal Land Bank Ass'n v. Sloane, 825 S.W.2d 439, 442
(Tex. 1991). Accordingly, "[a] negligent misrepresentation
claim is not equivalent to a professional malpractice
claim," and "an attorney can be subject to a negligent
misrepresentation claim in a case in which he is not subject
to a professional malpractice claim." F.E. Appling
Interests v. McCamish, Martin, Brown & Loeffler, 953
S.W.2d 405, 408 (Tex. App.--Texarkana 1997, pet.
granted); see also Safeway Managing Gen. Agency, Inc.
v. Clark & Gamble, 985 S.W.2d 166, 169 (Tex.
App.--San Antonio 1998, no pet.).
Because the Attorneys' motions for summary judgment
do not address the Arlitts' negligent misrepresentation
claims, the trial court erred in rendering judgment
against the Arlitts on these claims, and they must be remanded.
See, e.g., [*719] Bandera Elec. Coop., Inc. v.
Gilchrist, 946 S.W.2d [**9] 336, 337 (Tex. 1997) (per
curiam).
LEGAL MALPRACTICE
The Arlitts contend the trial court erred in rendering
judgment against them on their legal malpractice claims
because the Attorneys did not conclusively establish they
are barred by limitations or a lack of privity. We agree
the Attorneys' summary judgment evidence does not
establish their limitations defense. But we are con-

strained to agree with the Arlitts' privity argument only
in part.
Limitations
[HN3] Legal malpractice claims are governed by the
two-year statute of limitations. Willis v. Maverick, 760
S.W.2d 642, 644 (Tex. 1988). However, the statute does
not begin to run until the plaintiff discovers or reasonably
should have discovered the wrongfully caused injury.
KPMG Peat Marwick v. Harrison Co. Housing Finance
Corp., 988 S.W.2d 746, 42 Tex. Sup. J. 428, 430, 1999
WL 172980, *3 (Mar. 25, 1999). The burden to establish
this accrual date is on the defendant attorney if he seeks a
summary judgment under Rule 166a(c), TEX. R. CIV. P.
Burns v. Thomas, 786 S.W.2d 266, 267 (Tex. 1990).
The Attorneys' motions for summary judgment and their
supporting summary judgment evidence do not attempt
to establish the [**10] date the Arlitts' claims accrued,
i.e., the date they discovered or reasonably should have
discovered the wrongfully caused injury. They instead
argue certain tolling agreements they signed do not apply
to the Arlitts' claims. But whether these tolling agreements
apply to the Arlitts' claims is immaterial unless
and until the Attorneys establish an accrual date more
than two years before the Arlitts filed suit. We therefore
hold the Attorneys failed to conclusively establish their
limitations defense to the Arlitts' legal malpractice
claims.
Privity
The attorney-client relationship is contractual. E.g.,
Parker v. Carnahan, 772 S.W.2d 151, 156 (Tex.
App.--Texarkana 1989, writ denied). As a general rule, if
an express or implied contractual duty is negligently
performed, causing only economic loss, only a breach of
contract action may be maintained; a tort action for negligence
is precluded. See, e.g., Formosa Plastics Corp.
USA v. Presidio Eng'rs and Contractors, Inc., 960
S.W.2d 41, 45-46 (Tex. 1998). But the opposite rule applies
to claims against lawyers. [HN4] Even if the claim
is for the negligent performance of a contractual duty and
the loss is solely [**11] economic, "an attorney malpractice
action in Texas is based on negligence" and
sounds solely in tort. Cosgrove v. Grimes, 774 S.W.2d
662, 664 (Tex. 1989); see Patterson & Wallace v. Frazer,
100 Tex. 103, 94 S.W. 324, 326 (1906); Patterson &
Wallace v. Frazer, 79 S.W. 1077, 1080-81 (Tex. Civ.
App. 1904, no writ). Accordingly, a "plaintiff must prove
that there is a duty owed to him by the defendant, a
breach of that duty, that the breach proximately caused
the plaintiff injury and that damages occurred." Cosgrove,
774 S.W.2d at 665. Whether a duty is owed is a
question of law for the court. Bird v. W.C.W., 868
S.W.2d 767, 769 (Tex. 1994).
995 S.W.2d 713, *; 1999 Tex. App. LEXIS 2807, **
Page 4
As a general rule, we determine whether a duty is owed
by weighing "the risk, foreseeability, and likelihood of
injury" "against the social utility of the actor's conduct,
the magnitude of the burden of guarding against the injury
and the consequences of placing that burden on the
actor." Id. (citing Otis Eng'g Corp. v. Clark, 668 S.W.2d
307, 309 (Tex.1983)). Accordingly, whether the parties
are in privity of contract is immaterial; indeed, "privity
requirements have been dispensed with altogether in
negligence suits." [**12] Cameron v. Terrell & Garrett,
Inc., 618 S.W.2d 535, 541 (Tex. 1981); see, e.g.,
Shatterproof Glass Corp. v. James, 466 S.W.2d 873, 880
(Tex. Civ. App.--Fort Worth 1971, writ ref'd n.r.e.)
(holding "an accountant may be held liable to third parties
who rely upon financial statements, audits, etc., prepared
[*720] by the accountant in cases where the
latter fails to exercise ordinary care in the preparation of
such statements, audits, etc., and the third party because
of such reliance suffers financial loss or damage."). But
privity survives in negligence suits against attorneys.
Accordingly, absent privity of contract, "an attorney retained
by a testator or settlor to draft a will or trust owes
no professional duty of care to persons named as beneficiaries
under the will or trust." Barcelo, 923 S.W.2d at
579; see 923 S.W.2d at 576 ("Because the attorney did
not represent the beneficiaries, we likewise conclude that
he owed no professional duty to them."). Therefore, to
establish the duty element of their legal malpractice
claims, the Arlitts must establish they were in privity of
contract with the Attorneys.
The only summary judgment evidence suggesting
Maverick and Paterson [**13] represented the Arlitts'
children is Mrs. Arlitt's statement that she and her husband
were acting on behalf of their children and as their
agents in consulting with the Attorneys. However, this
assertion is conclusory and thus not competent summary
judgment evidence. See Brownlee v. Brownlee, 665
S.W.2d 111, 112 (Tex. 1984); Watkins v. Hammerman &
Gainer, 814 S.W.2d 867, 870 (Tex. App.--Austin 1991,
no writ). Nor is there any summary judgment evidence
suggesting the Arlitts' children had the legal right to control
their parents' actions in disposing of their estates--an
essential aspect of agency. See Boyd v. Eikenberry, 132
Tex. 408, 122 S.W.2d 1045, 1047 (1939); Walker v. Federal
Kemper Life Assurance Co., 828 S.W.2d 442, 452
(Tex. App.--San Antonio 1992, writ denied). Therefore,
because the summary judgment record does not contain
any competent evidence suggesting Mr. and Mrs. Arlitt
acted as their children's agents or the Attorneys otherwise
represented the Arlitts' children, we hold the Attorneys
were entitled to summary judgment on the Arlitts'
children's legal malpractice claims. See Barcelo, 923
S.W.2d at 578-79. Barcelo requires that we reach the
same [**14] conclusion with respect to the legal mal-

practice claim brought by Mrs. Arlitt in her capacity as
the personal representative of Mr. Arlitt's estate.
Because the injuries to Mr. Arlitt's estate alleged by
Mrs. Arlitt arose after Mr. Arlitt's death, no legal malpractice
cause of action accrued in favor of Mr. Arlitt
before his death. See Felan v. Ramos, 857 S.W.2d 113,
118 (Tex. App.--Corpus Christi 1993, writ denied)
(holding "actionable wrong in a survival action is that
which the decedent suffered before death," and "the
damages recoverable are those which the decedent sustained
while alive"); Deeb v. Johnson, 170 A.D.2d 865,
566 N.Y.S.2d 688, 689 (N.Y. App. Div. 3d Dept. 1991).
Thus, the only legal malpractice cause of action Mrs.
Arlitt might pursue in her capacity as personal representative
is one that accrued in favor of the estate after
Mr. Arlitt's death. However, the summary judgment evidence
conclusively establishes the Attorneys did not
represent Mrs. Arlitt in her capacity as personal representative
of Mr. Arlitt's estate. We thus hold the trial
court correctly rendered judgment against Mrs. Arlitt on
the legal malpractice claim brought by her in her capacity
as [**15] the personal representative of Mr. Arlitt's
estate.
But what of Mrs. Arlitt's claim in her individual capacity?
Mrs. Arlitt contends Barcelo does not apply because,
as stated in her affidavits, she and her husband were represented
jointly by the Attorneys. The Attorneys, on the
other hand, argue they represented only Mr. Arlitt in
drafting his will and codicil, as they state in their affidavits.
Thus, the issue is not whether the summary judgment
evidence raises an issue of fact, because it clearly
does, but whether this fact issue is material in light of
Barcelo.
By its terms, Barcelo precludes a legal malpractice
claim only by an unrepresented beneficiary. Barcelo,
923 S.W.2d at 576 ("Because the attorney did not represent
the beneficiaries, we likewise conclude that he owed
no professional duty to [*721] them."); 923 S.W.2d at
578 ("We believe the greater good is served by preserving
a bright-line privity rule which denies a cause of action
to all beneficiaries whom the attorney did not represent").
The Barcelo rule thus does not deny a cause of
action to one of two joint clients. See 10 ALOYSIUS A.
LEOPOLD & GERRY W. BEYER, TEXAS PRAC-
TICE: TEXAS LAW [**16] OF WILLS § 53.1 (Supp.
1998) ("Beneficiaries and attorneys may act with regard
to each other to such an extent that an attorney-client
relationship actually exists which consequently eliminates
the protection extended by [Barcelo]."); John R.
Price, Duties of Estate Planners to Nonclients: Identifying,
Anticipating and Avoiding the Problems, 37 S. TEX.
L. REV. 1063, 1071 n.28 (1996) (when representing a
husband and wife in estate planning matters, lawyer has
995 S.W.2d 713, *; 1999 Tex. App. LEXIS 2807, **
Page 5
ethical duty not to assist one spouse in a way that would
adversely affect the other spouse); cf. Yaklin v. Glusing,
Sharpe & Krueger, 875 S.W.2d 380, 384 (Tex.
App.--Corpus Christi 1994, no writ) (client can have
attorney-client relationship with attorney with respect to
transaction even if attorney represents another party in
the transaction). Nor is the reasoning underlying the
Barcelo rule persuasive in the joint client context.
According to the supreme court, the rationale necessitating
Barcelo's "bright-line" rule was to avoid "creating a
conflict during the estate planning process, dividing the
attorney's loyalty between his or her client and the
third-party beneficiaries." Barcelo, 923 S.W.2d [**17]
at 578. But this reasoning has no application in the joint
client situation because an attorney may not undertake a
joint representation if a conflict of interest is presented,
and she must withdraw if a conflict subsequently arises.
TEX. DISCIPLINARY R. PROF'L CONDUCT 1.06(b),
(e) & cmt. 15, reprinted in TEX. GOV'T CODE ANN.,
tit. 2, subtit. G app. A (Vernon 1998).
For these reasons, we hold Barcelo does not bar a
joint client's legal malpractice claim. Accordingly,
whether the Attorneys represented both Mr. and Mrs.
Arlitt in their estate planning efforts is a material issue of
fact that precludes summary judgment against Mrs.
Arlitt, in her individual capacity, on her legal malpractice
claim against the Attorneys. See Yaklin, 875 S.W.2d at
383-84 (holding appellant's statements that appellee "was
my lawyer" and "at no time did he hint or suggest in
words or by actions that he was representing the interest
of the bank, and not me" raised genuine issue of material
fact regarding whether appellee represented both appellant
and the bank in the transaction) (brackets in original).
ATTORNEY'S FEES AND COSTS
Mrs. Arlitt contends the trial court erred in rendering
judgment [**18] against her on the ground no contract
or statute permits her to recover the attorney's fees and
costs she incurred individually in the will contest and
will construction proceedings. We agree.
Attorneys' fees, as such, are not recoverable unless
permitted by statute or contract. Turner v. Turner, 385
S.W.2d 230, 233 (Tex. 1964). But contractual or statutory
authorization is not necessary to recover attorneys' fees
and costs as damages. See Nationwide Mut. Ins. Co. v.
Holmes, 842 S.W.2d 335, 341-42 (Tex. App.--San Antonio
1992, writ denied); Baja Energy, Inc. v. Ball, 669
S.W.2d 836, 838-39 (Tex. App.--Eastland 1984, no writ);
RESTATEMENT (SECOND) OF TORTS § 914(2)
(1979). But see City of Garland v. Booth, 895 S.W.2d
766, 771-72 (Tex. App.--Dallas 1995, writ denied); Pe-

terson v. Dean Witter Reynolds, Inc., 805 S.W.2d 541,
549 (Tex. App.--Dallas 1991, no writ).
Because Mrs. Arlitt seeks to recover the attorneys'
fees and costs she incurred in the will contest and construction
proceedings as damages, she need not demonstrate
statutory or contractual authorization. Accordingly,
the trial court erred in rendering a summary judgment
against her on this issue.
[**19] [*722] CONCLUSION
Because the summary judgment record conclusively
establishes the Attorneys did not represent the Arlitts'
children or Mrs. Arlitt in her capacity as the personal
representative of Mr. Arlitt's estate, we affirm the trial
court's summary judgment against Mrs. Arlitt in her representative
capacity, William Arlitt III, Sezanne Zeluff,
and Janet Arlitt on their legal malpractice claims. But we
995 S.W.2d 713, *; 1999 Tex. App. LEXIS 2807, **
Page 6
reverse the trial court's judgment on the legal malpractice
claims brought by Mrs. Arlitt in her individual capacity
because the summary judgment record raises a material
issue of fact as to whether she was a joint client of and
thus represented by the Attorneys as to Mr. Arlitt's will
and codicil. We also reverse the trial court's judgment
against the Arlitts on their negligent misrepresentation
claims because these claims were not addressed in the
motions for summary judgment. The Arlitts' negligent
misrepresentation claims, as well as the legal malpractice
claim brought by Mrs. Arlitt in her individual capacity,
are thus remanded to the trial court for further proceedings
consistent with this opinion.
Sarah B. Duncan, Justice

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PRIOR HISTORY: [**1]
Appeal from Eastland County.
669 S.W.2d 836, *; 1984 Tex. App. LEXIS 5289, **
LEXSEE 669 S.W.2D 836
Baja Energy, Inc., Appellant v. Chris Ball d/b/a Ball Oil Field Service, Appellee
No. 11-83-247-CV
COURT OF APPEALS OF TEXAS, Eleventh District, Eastland
LexisNexis (TM) HEADNOTES - Core Concepts:
JUDGES:
Raleigh Brown, Associate Justice.
OPINIONBY:
BROWN
OPINION:
[*837] This is an appeal from the granting as
damages of third party litigation expenses which
included attorney's fees and loss of time. We reverse and
remand.
Baja Energy, Inc., was the operator of an oil and gas
lease located in Eastland County. The record owner of
the lease was ACR Exploration, Inc. In October 1980,
Baja entered into a letter contract with Chris Ball d/b/a
Ball Oil Field Service to plug the Stephans #1 well on
the subject lease, for which Ball would receive all casing
recovered and the braden head as payment. The contract
contained Baja's warranty that it was the owner of the
well and would defend title to same, and provided no
time limit for completion of the plugging.
In February 1981, ACR assigned the well to Don S.
Schaefer. The assignment was not immediately
recorded. Baja contends that it telephoned Ball's office to
cancel the plugging contract prior to the assignment.
However, Ball denies receiving a call, and contends that
during the time of the alleged calls the location of his
office had been moved, so that any calls made were to
[**2] an incorrect telephone number. Thus, Ball
contends that he had neither constructive nor actual
669 S.W.2d 836; 1984 Tex. App. LEXIS 5289
April 5, 1984
Page 1
notice of the assignment prior to plugging the well. On
April 15, 1981, Ball plugged the well and removed the
personal property and equipment. The next day,
following completion of the plugging, the assignment
from ACR to Schaefer was recorded in the Eastland
County Clerk's Office, and Schaefer contacted Ball to
inform him that he was the owner of the subject lease
and well. Thereafter, Ball contacted Baja at which time
Ball contends that he was first notified by Baja of the
assignment.
Schaefer sued Ball for trespass and conversion, and
sued Baja as co-defendant for breach of warranty due to
the plugging of his well and removal of the personal
property. [*838] Ball filed a third-party action against
Baja for contribution and indemnity for any recovery
Schaefer might have against Ball, as well as for costs and
expenses of defending the suit brought by Schaefer as
damages for Baja's unilateral rescission of the plugging
contract. At the close of evidence by Schaefer, the court
granted Ball's motion for instructed verdict and entered
judgment that Schaefer take nothing against Ball [**3]
and Baja. In addition, the judgment awarded Ball $5,000
in damages against Baja for his litigation expenses,
including attorney's fees and loss of time in defending
the action by Schaefer. The portion of the trial court's
judgment granting Ball and Baja a take-nothing
judgment was not appealed. Only the portion of the
judgment relating to Ball's third-party action against Baja
is before us.
In its only point of error, Baja contends that the trial
court erred in awarding Ball $5,000 as damages for thirdparty
litigation expenses which included attorney's fees
and costs of defending suit. He argues that there is no
authorized basis for such a recovery, and that the
evidence does not support recovery of such amount.
Although such point is multifarious, we shall consider
same. See Fambrough v. Wagley, 140 Tex. 577, 169
S.W.2d 478 (Tex.1943).

In its findings of fact the court found that: (1) Ball
plugged the subject well in compliance with the contract;
(2) ACR Exploration, Inc., through its operator Baja,
assigned the lease and well prior to the plugging; (3) Ball
had neither actual nor constructive notice prior to the
plugging; (4) Ball's expenses as damages of defending
[**4] the lawsuit amounted to $5,000.00; and (5) Ball's
damages were a direct and proximate result of his good
faith compliance with the contract. (Emphasis added) In
its conclusions of law the court stated that: (1) the
contract was legally binding and obligated Ball to plug
the subject well; (2) Ball acted in good faith and with
clean hands in fulfilling the terms of the contract; and (3)
under usages and principles of equity Ball was entitled to
recover $5,000 from Baja, such amount representing the
amount of damages sustained by Ball in defending the
suit.
Baja argues that the record contains no pleading or
proof to support recovery of $5,000 as attorney's fees and
loss of time as part of the expenses of litigation under
either statute or contract. Ball does not assert that he is
entitled to the recovery under statutory or contractual
provisions; rather, he relies upon the "usages and
principles of equity" as support for such recovery.
The general rule in Texas is that expenses incurred
in prosecuting or defending a suit are not recoverable as
costs or damages unless recovery for such items is
expressly provided for by contract or statutory provision.
New Amsterdam Casualty Company [**5] v. Texas
Industries, Inc., 414 S.W.2d 914 (Tex.1967); Whitten v.
Alling & Cory Company, 526 S.W.2d 245 (Tex.Civ.App.
-- Tyler 1975, writ ref'd). A recovery of attorney's fees
based upon equitable principles, however, can exist.
Attorney's fees have been granted based upon the
equitable principle of the common fund doctrine. Knebel
v. Capital National Bank in Austin, 518 S.W.2d 795, 799
(Tex.1974). Knebel, supra, quotes from Hall v. Cole, 412
U.S. 1, 93 S. Ct. 1943, 36 L. Ed. 2d 702 (1973):
Although the traditional American
rule ordinarily disfavors the allowance of
attorneys' fees in the absence of statutory
or contractual authorization, federal
courts, in the exercise of their equitable
powers, may award attorneys' fees when
the interests of justice so require. Indeed
the power to award such fees "is part of
the original authority of the chancellor to
do equity in a particular situation,"
Sprague v. Ticonic National Bank, 307
U.S. 161, 166, 83 L. Ed. 1184, 59 S. Ct.
777 (1939), and federal courts do not
hesitate to exercise this inherent equitable
power whenever "overriding
considerations indicate the need for such a
669 S.W.2d 836, *; 1984 Tex. App. LEXIS 5289, **
recovery." Mills v. Electric [**6] Auto-
Lite Co., 396 U.S. 375, 391-392, 24 L.
Ed. 2d 593, 90 S. Ct. 616 [*839] (1970);
see Fleischmann Distilling Corp. v. Maier
Brewing Co., 386 U.S. 714, 718, 18 L. Ed.
2d 475, 87 S. Ct. 1404 (1967).
Page 2
Courts have also allowed recovery for attorney's fees
and other litigation expenses of a previous suit where a
party was required to prosecute or defend the previous
suit as a consequence of the "wrongful act" of the
defendant. Wilshire Oil Company of Texas v. Riffe, 409
F.2d 1277, 1285 (10th Cir. 1969).
Although we find no Texas case ruling on the
question of third-party litigation expenses as an element
of damages in a breach of contract case, other states have
generally recognized such right of recovery. Fairway
Builders, Inc. v. Malouf Towers Rental Co., 124 Ariz.
242, 603 P.2d 513 (Ariz. App. 1979); Milohnich v. First
Nat. Bank, 224 So. 2d 759 (Fla. App. 1969); Baxter's
Asphalt & Concrete, Inc. v. Liberty County, 406 So. 2d
461 (Fla. App. 1981); Williams v. Struble, 162 Ga. App.
196, 290 S.E.2d 538 (1982); Peters v. Lyons, 168 N.W.2d
759 (Iowa 1969); Wilshire Oil Co. v. Riffe, 409 F.2d
1277 (10th Cir. 1969); Oppenhuizen v. [**7]
Wennersten, 2 Mich. App. 288, 139 N.W.2d 765 (1966);
Morrison v. Swenson, 274 Minn. 127, 142 N.W.2d 640
(1966); Conway v. Samet, 59 Misc. 2d 666, 300 N.Y.S.2d
243 (1969); Safway Rental & Sales Co. v. Albina Engine
& Machine Works, Inc., 343 F.2d 129 (10th Cir. 1965);
Addy v. Bolton, 257 S.C. 28, 183 S.E.2d 708 (S.C. 1971);
Albright v. Fish, 138 Vt. 585, 422 A.2d 250 (1980);
Owen v. Shelton, 221 Va. 1051, 277 S.E.2d 189 (1981);
Cedarburg Light & Water Com. v. Glens Falls Ins. Co.,
42 Wis. 2d 120, 166 N.W.2d 165 (1969).
The other jurisdictions permit the recovery of
attorney's fees and costs of litigation without a specific
contractual or statutory provision by recognizing an
exception to the general rule. The exception applies
when the wrongful act or contractual violation involves
the claimant in litigation with third parties and forces the
claimant to incur expenses to protect his interests. Such
costs and expenses, including attorney's fees, are treated
as the legal consequence of the original wrongful act and
are permitted to be recovered as damages. See 4 ALR3d
270 (1965). Although not specifically ruling on this
issue, the Fifth Circuit [**8] stated in Southern National
Bank of Houston v. Crateo, Inc., 458 F.2d 688, 696 (5th
Cir. 1972):
In the case at bar, we are bound by the
Erie doctrine to apply the substantive law
of the State of Texas. Though no Texas
court has yet faced the question of third
party litigation expenses as an element of

damages in a breach of contract case, the .
. . parties do not dispute the recoverability
of the amounts claimed . . . if such are
properly established as damages.
In the instant case, Ball in good faith fulfilled his
legal obligation to plug the well, with neither actual nor
constructive notice that the subject lease and well had
been assigned to Schaefer prior to the plugging. The trial
court found in its findings of fact, which Baja does not
challenge, that ACR, through its operator Baja, assigned
the lease prior to the plugging. As a direct and proximate
cause of Ball's compliance with the plugging contract,
Ball was forced to defend an action for trespass and
conversion. In the contract between Baja and Ball, Baja
warranted that it was the owner of the well and would
defend title to same. Baja acted wrongfully in
unilaterally rescinding the contract [**9] without notice
to Ball.
In the instant case Ball would not have been forced
to defend the suit for trespass and conversion absent
Baja's wrongful act. We hold that Baja's wrongful act
authorizes a recovery of litigation expenses including
attorney's fees and loss of time upon a basis of usages
and principles of equity.
669 S.W.2d 836, *; 1984 Tex. App. LEXIS 5289, **
Page 3
Appellant further alleges in its point of error that the
evidence does not establish a recovery in the amount of
$5,000. The thrust of this complaint by appellant is that
there is no proof as to the reasonableness of the litigation
expenses. We agree. Ball testified at trial that he [*840]
had to hire an attorney to defend the suit for trespass and
conversion, make telephone calls and travel to the
Railroad Commission office, thus involving a loss of his
time. He further testified that his damages as a result of
the lawsuit brought by Schaefer, resulting from Ball's
contract with Baja, amounted to $5,000. There is no
testimony as to the reasonableness of such.
Texas courts hold that when a party is entitled to
recover attorney's fees but the reasonability of attorney's
fees has not been established, the claim for attorney's
fees may be remanded to the trial [**10] court. Woods
Exploration and Producing Company, Inc. v. Arkla
Equipment Company, 528 S.W.2d 568 (Tex.1975); Great
American Reserve Insurance Company v. Britton, 406
S.W.2d 901 (Tex.1966).
The judgment of the trial court is reversed insofar as
it awarded $5,000 to Chris Ball for litigation expenses,
and that claim is remanded for proper proof as to the
amount of litigation expenses which were reasonable and
necessary.

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HOUSTON, TEXAS 77057-2638

SUBSEQUENT HISTORY: [**1]
Rehearing Denied January 25, 1978.
560 S.W.2d 925, *; 1977 Tex. LEXIS 302, **;
21 Tex. Sup. J. 92
LEXSEE
L. D. Bounds, Petitioner v. Kerry Tyrone Caudle, et al., Respondents
PRIOR HISTORY: From Nueces County, Thirteenth
District.
LexisNexis (TM) HEADNOTES - Core Concepts:
COUNSEL:
Mahoney, Shaffer, Hatch & Layton, Lee Mahoney,
Corpus Christi, for petitioner.
Wood, Burney, Nesbitt & Ryan, James P. Ryan,
Corpus Christi, for respondents.
OPINIONBY:
BARROW
OPINION: [*925]
This is an appeal from two separate judgments
resulting from a consolidated jury trial of an appeal from
a probate proceeding and a tort action. The suits resulted
from the death by gunshot of Mrs. Robbie Bounds. The
children of Mrs. Bounds, Kerry Tyrone Caudle and
Cheryl Kay Caudle, alleged and the jury found that their
stepfather, Dr. L. D. Bounds, intentionally and
wrongfully caused their mother's death. The trial court
rendered judgment in the probate proceeding which
admitted the will [*926] of Mrs. Bounds to probate,
but disqualified Dr. Bounds to serve as Independent
Executor of the estate. Judgment was rendered in the tort
action whereby a constructive trust in favor of the
children was imposed on all of Mrs. Bounds' property
which would have passed to Dr. Bounds under her will,
No. B-6792
SUPREME COURT OF TEXAS
560 S.W.2d 925; 1977 Tex. LEXIS 302; 21 Tex. Sup. J. 92
November 30, 1977
Page 1
and they were granted the proceeds of a life insurance
policy on Mrs. Bounds' life payable to Dr. Bounds.
[**2] The two children were also awarded the damages
found by the jury for their claim under Art. 4651 et seq.
n1 for the wrongful death of their mother. The court of
civil appeals affirmed the judgment in the probate
proceeding, and it upheld the imposition of the
constructive trust and the award of the insurance
proceeds. It reversed and rendered a take-nothing
judgment on the claim for wrongful death. 549 S.W.2d
438. We reverse the judgments of the lower courts and
remand the cause to the trial court for a new trial.
n1. Vernon's Rev.Civ.Stat.Ann.
Robbie Caudle and Dr. Bounds were married in
1962. No children were born of this marriage; however,
both had been married once before and each had two
children by their prior marriages. The shooting ended a
nine-year marriage marked by discord and even some
physical abuse. On the night of March 1, 1971, Mrs.
Bounds was shot twice and killed in the bedroom of the
family home in Corpus Christi. Only the deceased and
Dr. Bounds were present at the time of the shooting.
[**3] The evidence is conflicting about whether Dr.
Bounds intentionally shot her or whether she was
unintentionally shot while he was attempting to wrest the
revolver from her grasp. Dr. Bounds was indicted for
murder, but was permitted to plead nolo contendere and,
upon this plea, he was convicted of negligent homicide
in the first degree, a misdemeanor.
CAUDLE APPLICATION
We granted the application of the Caudle children to
consider whether or not the interspousal tort immunity
doctrine should bar their claims which are based on a
wilful or intentional tort. The children recognize that

they cannot recover in the suit for wrongful death if Mrs.
Bounds' cause of action, had she survived, is barred by
the doctrine. See Tex.Rev.Civ.Stat.Ann. art. 4672. The
doctrine of interspousal tort immunity was adopted in
Texas in the case of Nickerson and Matson v. Nickerson,
65 Tex. 281 (1886), and was last considered and upheld
by this Court in Turner v. Turner, 385 S.W.2d 230
(Tex.1965). It is urged that there has been such a great
change in recent years in Texas laws regarding marital
property and the nature of marital relationship that the
doctrine is no longer valid for wilful or intentional [**4]
torts.
The doctrine of interspousal tort immunity had its
origin in the common law and is based on the legal
fiction that the husband and wife became one person in
law. Under this concept, married women lost their
capacity to sue or be sued without the joinder of the
husband. The wife's personal and property rights as well
as her legal existence were considered suspended during
the marriage. The husband acquired all of his wife's
choses in action and could assert them in his own name,
and he became liable for the torts of his wife. This
concept necessarily made it impossible for one spouse to
maintain an action against the other. Comment,
Intrafamily Immunity, 20 Baylor Law Review 27 (1967).
At one time almost all jurisdictions adopted the rule
that interspousal suits for personal torts were not
permitted. In Nickerson and Matson v. Nickerson, it was
held that torts inflicted upon the wife by her husband and
another gave no right of action to the wife against her
husband. The court said:
The rule at common law, that no
action can be maintained by a wife for a
tort committed upon her person by her
husband, has been often said to rest upon
their entire unity; but it would seem [**5]
to [*927] us to rest rather upon grounds
of public policy.
In Turner v. Turner, this Court held that the husband
had no right of action against his wife to recover for his
attorney's fees incurred in defending an alienation of
affections suit filed against the Turners by the wife of a
friend. The Court said:
The Nickerson case has been
followed by many cases, and an
examination of Shepard's Texas Citations
discloses that the rules of law laid down
as quoted above have never been
questioned. See also Gowin v. Gowin,
Tex.Civ.App., 264 S.W. 529, 1924,
affirmed, Tex.Com.App., 292 S.W. 211,
1927; Latiolais v. Latiolais, 361 S.W.2d
560 S.W.2d 925, *; 1977 Tex. LEXIS 302, **;
21 Tex. Sup. J. 92
252, 253, Tex.Civ.App.1962, writ ref. n. r.
e.; 30 Tex.Jur.2d, p. 234, § 145.
Page 2
There have been major changes in the laws defining
the marital relationship since the Turner decision. The
1967 amendment to what was then Article 4615 (now
Section 5.01(a)(3) of the Family Code) provided that a
wife's recovery for personal injuries other than for loss of
earning capacity is part of her separate estate. See
Graham v. Franco, 488 S.W.2d 390, 396 (Tex.1972).
Section 4.04 of the Family Code now permits a spouse to
sue and be sued without the joinder [**6] of the other
spouse. Under Section 5.21 of the Family Code the wife
has the sole management, control and disposition of her
separate estate. These changes invalidate the common
law rationale for the doctrine, the fictional unity of the
marriage relationship.
Nevertheless, we must determine if the doctrine
should be maintained as a matter of public policy. We
recognize fully the importance of the family unit in our
society and that peace and tranquility in the home are
endowed and inspired by higher authority than statutory
enactments and court decisions. See Felderhoff v.
Felderhoff, 473 S.W.2d 928, 933 (Tex.1971). However,
we do not believe that suits for wilful or intentional torts
would disrupt domestic tranquility. The peace and
harmony of a home which has already been strained to
the point where an intentional physical attack could take
place will not be further impaired by allowing a suit to be
brought to recover damages for the attack.
In recent years the interspousal tort immunity
doctrine has come under severe attack from nearly all
courts that have considered the doctrine. In 1955 the
annotation, Action by One Spouse Against the Other,
was published in 43 A.L.R.2d 632 [**7] and in Section
6 it listed 17 states which to some extent permitted one
spouse to sue the other spouse for personal injuries. The
supplements to this annotation show that there is now a
clear majority of states which have abrogated the
doctrine completely or limited its application. n2 The
doctrine has also been subjected to severe criticism by
most legal writers. See Speer, Marital Rights in Texas, §
317 (4th ed. 1961) and Prosser, Law of Torts, § 122
(4th ed. 1971). Although most authorities recognize a
distinction between a claim based on a negligent act and
one based on an intentional tort, all agree that there is no
sound basis for barring a suit for an intentional tort. We
concur and accordingly we abolish the rule established in
Nickerson to the extent that it would bar all claims for
wilful or intentional torts. This holding shall be
applicable only in the present case and in similar cases in
which the tort occurred on or after March 1, 1971, the
date Mrs. Bounds was shot. The children of Mrs. Bounds
are not barred from asserting a claim for damages against
Dr. Bounds for the wrongful death of their mother.

[**8]
n2. 43 A.L.R.2d, Later Case Service 332
(1969) and June 1977 Pocket Part 147.
BOUNDS APPLICATION
The application of Dr. Bounds urges that there is no
legal basis to support the imposition of the constructive
trust or the forfeiture of the life insurance proceeds. He
also asserts that there were several procedural [*928]
errors in the trial of the case which require a reversal of
the judgment.
Dr. Bounds contends that before a constructive trust
can be imposed there must be a conviction and sentence
for wilfully bringing about the death of the insured. He
urges that since he was convicted only of the offense of
negligent homicide, a constructive trust should not have
been imposed. This contention is largely based on Sec.
41(d) of the Probate Code which provides in part:
[**9]
Convicted Persons and Suicide. No
conviction shall work corruption of blood
or forfeiture of estate, except in the case
of a beneficiary in a life insurance policy
or contract who is convicted and
sentenced as a principal or accomplice, in
wilfully bringing about the death of the
insured, in which case the proceeds of
such insurance policy or contract shall be
paid as provided in the Insurance Code of
this State, as same now exists or is
hereafter amended; . . . (Emphasis added)
Dr. Bounds asserts the Probate Code takes precedence
over Art. 21.23 of the Insurance Code which provides:
The interest of a beneficiary in a life
insurance policy or contract heretofore or
hereafter issued shall be forfeited when
the beneficiary is the principal or an
accomplice in willfully bringing about the
death of the insured. When such is the
case, the nearest relative of the insured
shall receive such insurance. (Emphasis
added)
Although the conviction for negligent homicide
implies that the killing was committed without intent, it
is settled law that the judgment in the criminal case was
not binding upon the court in the civil proceeding. State
v. Benavidez, 365 S.W.2d 638 (Tex.1963); W. O. Hair v.
Penn Life Ins. Co., 533 S.W.2d 387
(Tex.Civ.App.-Beaumont 1975, writ ref'd n. r. e.). This
560 S.W.2d 925, *; 1977 Tex. LEXIS 302, **;
21 Tex. Sup. J. 92
Page 3
rule is particularly applicable here where the conviction
was based upon plea bargaining.
Texas courts have taken the position that the law
will impose a constructive trust upon the property of a
deceased which passed either by inheritance or by will if
the beneficiary wilfully and wrongfully caused the death
of the deceased. Greer v. Franklin Life Ins. Co., 148 Tex.
166, [**10] 221 S.W.2d 857 (1957); Parks v. Dumas,
321 S.W.2d 653 (Tex.Civ.App.-Fort Worth 1959, no
writ); Pritchett v. Henry, 287 S.W.2d 546
(Tex.Civ.App.-Beaumont 1955, writ dism'd). See also
Pope v. Garrett, 147 Tex. 18, 211 S.W.2d 559 (1948).
The trust is a creature of equity and does not contravene
constitutional and statutory prohibitions against
forfeiture because title to the property does actually pass
to the killer. The trust operates to transfer the equitable
title to the trust beneficiaries. Although we have found
no case which considered the relationship of Sec. 41(d)
of the Probate Code to the common law rule which
imposes a constructive trust, it was pointed out in Greer
that Art. 21.23 should be held to restate the common law
rule which would bar the beneficiary of a life insurance
policy from profiting from his own wrong.
We therefore conclude that the imposition of a
common law constructive trust in a situation such as
presented here is not inconsistent with the legislative
intent behind Sec. 41(d) which requires an outright
forfeiture in the case of a convicted killer.
The jury here found: (1) that Dr. Bounds shot and
killed Mrs. Bounds; (2) that the action of Dr. Bounds
[**11] in shooting and killing Mrs. Bounds was
intentional; and (3) that such action was wrongful. These
jury findings fully support the judgment of the trial court
forfeiting his interest in the insurance policy on the life
of Mrs. Bounds and imposing a constructive trust on the
property devised to him under her will.
Dr. Bounds has also complained in his application
for writ of error that the trial court erred in overruling his
objections to the submission of Special Issue No. 3
which reads as follows:
Do you find from a preponderance of
the evidence that the action of the
Defendant, [*929] L. D. Bounds, in
shooting and killing Robbie M. Bounds, if
you have found that he did, was
wrongful?
Dr. Bounds timely objected to the submission of this
issue in that the court failed to define the word
"wrongful" and further that it did not instruct the jury as
to the elements of self-defense. In connection with this
objection, Dr. Bounds submitted a requested instruction
wherein he defined "self-defense" in substantially the

form suggested by this Court in Grieger v. Vega, 153
Tex. 498, 271 S.W.2d 85 (1954). No question has been
raised concerning the correctness of the requested [**12]
instruction, but the court of civil appeals found that there
was no evidence to raise the issue of self-defense. The
court concluded that since Dr. Bounds testified that he
did not "intend" to shoot Mrs. Bounds, the ultimate issue
was accidental death and not self-defense.
In support of its holding that the defense of
accidental death and self-defense cannot co-exist, the
court of civil appeals cited Whitehead v. State, 450
S.W.2d 72 (Tex.Cr.App.1968) and Sias v. State, 495
S.W.2d 890-891 (Tex.Cr.App.1973). n3 The rule in these
two cases is best explained by the description in Sias of
the Whitehead holding as follows:
n3. It is settled that the law of self-defense is
the same in both civil and criminal cases.
Fambrough v. Wagley, 140 Tex. 577, 169 S.W.2d
478 (1943).
In the relatively recent case of
Whitehead v. State, 450 S.W.2d 72, this
Court in an opinion by Judge Morrison on
motion for rehearing held it was not error
to refuse to give a charge on self-defense
where the defendant testified that [**13]
the killing was an accident and he had
nothing to fear from the deceased.
(Emphasis ours)
It is significant that in both Sias and Whitehead the fatal
weapon was in the hands of the accused and there was no
testimony in either case that the defendant was placed in
fear of imminent death or great bodily harm at the hands
of the deceased. It is such fear which is the essential
element of self-defense, not intent to kill. Vernon's Penal
Code Ann. sec. 9.31(a).
Here the testimony of Dr. Bounds is that when he
and Mrs. Bounds arrived home the argument which had
begun at the dinner club was continuing and that when
he came out of the bathroom, she was standing in the
bedroom pointing the revolver at him. He further
testified that he was able to grab the gun and, while
struggling with her for possession of the gun, she was
shot.
He testified:
I told you I don't know where my
hands were at the time that we were
scuffling over the gun. I know I had at
least one hand on the gun, because that's
what I was trying to control, the gun,
560 S.W.2d 925, *; 1977 Tex. LEXIS 302, **;
21 Tex. Sup. J. 92
because I didn't want to get shot. I didn't
want her to get shot, but it happened
anyway.
Also:
Q You said you were going to be able
to handle [**14] him (sic). You pulled
the gun around this way.
A I told you I grabbed the gun and
diverted it away from me. You're doing
this. I'm not doing that.
Q You were pointing the gun at her?
A I was getting it away from me.
That was my main . . .
Q Getting it away from you?
A Yes.
Q And it went towards her?
A It did when it went over.
Q Were you trying to discharge the
gun in her direction?
A I was trying to protect myself.
Page 4
This evidence, although refuted and rebutted by
circumstantial evidence, clearly is some evidence that
Mrs. Bounds was shot during the scuffle which ensued
when Dr. Bounds undertook to disarm her in order to
keep from being shot. This testimony raises the issue of
self-defense as well as that of accidental death. We do
not find the two defenses inconsistent under the facts in
this case. The submission of both have [*930] been
upheld in criminal cases under somewhat similar facts.
See Garcia v. State, 492 S.W.2d 592 (Tex.Cr.App.1973).
We are required to apply the "no evidence" test in
determining whether the requested instruction was
required to be submitted to the jury. Garza v. [**15]
Alviar, 395 S.W.2d 821 (Tex.1965); McDonald v. New
York Central Mutual Fire Ins. Co., 380 S.W.2d 545
(Tex.1964); 3 McDonald, Texas Civil Practice §
12.08C (1970); Tex.R.Civ.P. 279; Calvert, "No
Evidence" and "Insufficient Evidence" Points of Error,
38 Tex.Law Rev. 359 (1960). As a result, we must
consider only the evidence and the inferences that may
be reasonably drawn therefrom which are favorable to
Dr. Bounds' contention that he was acting in
self-defense, and to disregard all of the evidence and
inferences to the contrary. Under this test, the testimony
of Dr. Bounds does raise the issue that he was acting in
self-defense at the time that Mrs. Bounds was shot and
killed. Furthermore, the issue was properly raised by his
trial amendment and was timely requested by him in his

instruction to be given with Special Issue No. 3. The trial
court therefore erred in refusing to give this instruction.
This error mandates a reversal of the judgment and
remand for a new trial.
We have considered the other procedural errors
complained of by Dr. Bounds and we agree with the
disposition made of these points by the court of civil
appeals.
The judgments of the courts below are reversed and
[**16] the consolidated cause is remanded to the trial
court for trial on the merits. The costs of this appeal are
taxed one-half to Dr. Bounds and one-half to the Caudle
children.
ON MOTION FOR REHEARING
560 S.W.2d 925, *; 1977 Tex. LEXIS 302, **;
21 Tex. Sup. J. 92
Page 5
The Caudle children urge that this Court is without
jurisdiction to consider Dr. Bounds' application for writ
of error because he failed to file a Motion for Rehearing
in connection with the final judgment of the court of civil
appeals. See Oil Field Haulers Association v. Railroad
Commission of Texas, 381 S.W.2d 183 (Tex.1964). They
contend the court of civil appeals rendered a second,
final judgment after rendering its original judgment. The
argument is without merit, however, because the record
shows that only one judgment was entered into the
record and that Dr. Bounds timely filed a Motion for
Rehearing.
Accordingly, the Caudles' Motion for Rehearing is
overruled. The Motion for Rehearing cited by Dr.
Bounds is also overruled. No further Motions for
Rehearing will be permitted to be filed in this cause.

********** Print Completed **********
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1 of 5 DOCUMENTS
BROWN & BROWN OF TEXAS, INC. F/K/A POE & BROWN OF TEXAS, INC.
AND TRANSCONTINENTAL INSURANCE COMPANY, Appellants v. OMNI
METALS, INC., Appellee
NO. 01-05-01190-CV
COURT OF APPEALS OF TEXAS, FIRST DISTRICT, HOUSTON
SUBSEQUENT HISTORY: Released for Publication
September 13, 2010.
Petition for review filed by, 07/15/2010
PRIOR HISTORY: [**1]
On Appeal from the 61st District Court, Harris County,
Texas. Trial Court Cause No. 1996-36058A.
Brown & Brown of Tex., Inc. v. <strong>Omni</strong> <strong>Metals</strong>, Inc., 2009
Tex. App. LEXIS 9579 (Tex. App. Houston 1st Dist., Dec.
17, 2009)
COUNSEL: For APPELLANT: Henry S. Platts Jr., Jeffrey
Parsons, Kristen Werner Kelly, Berine, Maynard &
Parsons, L.L.P., Houston, TX; Russell J. Bowman,
Bowman & Stella, P. C., Dallas, TX.
For APPELLEE: Mark C. Harwell, Cotham, Harwell &
Evans, Houston, TX.
JUDGES: Panel consists of Justices Keyes, Higley, and
Nuchia. 7 Justice Nuchia, dissenting.
7 Justice Sam Nuchia, who retired from the
First Court of Appeals on January 1, 2009, continues
to sit by assignment for the disposition of
this case, which was submitted on February 13,
2007.
OPINION BY: Evelyn V. Keyes
OPINION
[*368] OPINION ON REHEARING
317 S.W.3d 361; 2010 Tex. App. LEXIS 2338
March 25, 2010, Opinion Issued
Page 1
146S6F
On March 20, 2008, a panel of this Court reversed
the trial court's judgment and rendered judgment that
appellee <strong>Omni</strong> <strong>Metals</strong>, Inc. take nothing by its claims.
<strong>Omni</strong> did not file a motion for rehearing, but instead
filed a motion for en banc reconsideration. We treated
the motion for en banc reconsideration as a motion for
rehearing, granted rehearing, and withdrew the March
20, 2008 opinion and judgment and issued our December
17, 2009 opinion and judgment in their place. Appellants
Brown & Brown of Texas and Transcontinental Insurance
Company filed [**2] motions for rehearing and
rehearing en banc. We now grant appellants' motions for
rehearing, withdraw our December 17, 2009 opinion and
judgment, and issue this opinion and judgment in their
place, clarifying our December 17, 2009 opinion. Thus,
the appellants' motions for en banc reconsideration are
rendered moot and are dismissed. See Brookshire Bros.,
Inc. v. Smith, 176 S.W.3d 30, 41 & n.4 (Tex.
App.--Houston [1st Dist.] 2004, pet. denied) (supp. op.
on rehearing). We modify the judgment of the trial court
and affirm as modified.
This case is on appeal from a trial court judgment in
favor of <strong>Omni</strong>, a buyer and seller of steel coils. Port
Metal Processing, Inc. (Port Metal) stored steel belonging
to <strong>Omni</strong>, processed that steel into coils, and temporarily
stored the finished coils for <strong>Omni</strong>. Port Metal purchased
insurance from appellant Transcontinental Insurance
Company (Transcontinental), originally through the
Russell Lee Jacobe Insurance Agency (Jacobe). Jacobe
was acquired on November 1, 1994 by Poe & Brown of
Texas, Inc. (Poe & Brown), which is now known as appellant
Brown & Brown of Texas, Inc. (Brown &
Brown).

The underlying proceeding on which this action is
based is a suit for [**3] damages arising from a fire that
occurred on December 5, 1995 damaging <strong>Omni</strong>'s steel
stored in a facility operated by Port Metal. The trial
[*369] court granted Poe & Brown and Transcontinental
summary judgment on <strong>Omni</strong>'s negligent misrepresentation
and DTPA claims arising out of oral and written
representations made by Poe & Brown, Transcontinental's
local agent, to <strong>Omni</strong> and Port Metal, regarding Port
Metal's bailee insurance coverage for <strong>Omni</strong>'s steel stored
at Port Metal. See <strong>Omni</strong> <strong>Metals</strong>, Inc. v. Poe & Brown of
Texas, Inc., No. 14-00-01081-CV, 2002 Tex. App. LEXIS
4334, 2002 WL 1331720 (Tex. App.--Houston [14th
Dist.] June 13, 2002, pet. denied) (not designated for
publication). The Fourteenth Court of Appeals reversed
the summary judgment and remanded the case to the trial
court.
The case was tried against Brown & Brown, Poe &
Brown's successor, and Transcontinental before a jury
beginning on October 11, 2005. It was submitted to the
jury on theories of negligent misrepresentation and unfair
or deceptive acts or practices under former article 21.21
section 16 of the Texas Insurance Code and section
17.46(b) of the Texas Deceptive Trade Practices Act
(DTPA). The trial court rendered judgment on the jury
verdict in favor [**4] of <strong>Omni</strong> on November 28, 2005.
Defendants Transcontinental and Brown & Brown timely
appealed.
On appeal, Brown & Brown raises four issues. It
contends that (1) the evidence is factually and legally
insufficient to establish (a) that it made a negligent misrepresentation
or engaged in unfair or deceptive acts under
the DTPA, (b) that the representation caused <strong>Omni</strong>'s
damages, (c) that <strong>Omni</strong> justifiably relied on Poe &
Brown's misrepresentations, and (d) that Poe & Brown
acted knowingly; (2) the DTPA does not apply to <strong>Omni</strong>
because <strong>Omni</strong> is not a consumer under the DTPA or an
insured or third party beneficiary under Port Metal's
Transcontinental insurance policy; (3) attorney's fees
incurred in another lawsuit and awarded <strong>Omni</strong> in this suit
are not recoverable as damages; and (4) the trial court
erred in not giving it a proper credit for a $ 1,660,000
settlement in the other lawsuit.
Transcontinental raises seven issues. It contends that
(1) Transcontinental could not be liable for representations
made by Poe & Brown (a) when <strong>Omni</strong> presented no
evidence that any representation of Poe & Brown was
made with the actual or apparent authority of Transcontinental
and (b) when <strong>Omni</strong> failed to submit [**5] a
separate issue in the charge on Brown & Brown's actual
or apparent authority and obtain a jury finding; (2) the
evidence establishes as a matter of law that Transcontinental
is not liable for Poe & Brown's actions in sending
certificates of insurance to <strong>Omni</strong>; (3) <strong>Omni</strong>'s misrepre-
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 2
sentation claim is not viable, as a matter of law, because
(a) no one at <strong>Omni</strong> read the certificates of insurance, (b)
the certificates disclaimed any representation regarding
coverage, (c) a statement made by Poe & Brown to Port
Metal's president, Blake McKnight, in 1993 regarding
coverage of <strong>Omni</strong>'s product was not made to <strong>Omni</strong>, and
(d) Port Metal's president had no authority to act for
Transcontinental in representing to <strong>Omni</strong> that its metal
was covered by Port Metal's bailee policy; (4) <strong>Omni</strong> was
not entitled to recover attorney's fees of $ 740,000 for
pursuing a tort action against the starters of the fire; (5)
the jury's award of additional damages of $ 1,080,000
awarded <strong>Omni</strong> on its DTPA claims against Transcontinental
are erroneous because Transcontinental had no
contact with <strong>Omni</strong> and there is no evidence Transcontinental
knew of any wrongful act, as required for recovery
of additional damages; (6) the [**6] trial court erred
in not giving a $ 1,660,000 settlement credit to Transcontinental
that <strong>Omni</strong> received from third parties; and (7)
the trial court erred in not admitting evidence of a prior
federal judgment in Transcontinental's favor. In its own
issues (3) and (4), [*370] Brown & Brown joins in
and adopts Transcontinental's arguments and authorities
with respect to issues (5) and (6).
We modify the judgment of the trial court and, as
modified, affirm.
PROCEDURAL HISTORY
Port Metal's warehouse burned down on December
5, 1995, and <strong>Omni</strong> lost $ 2,600,000 in steel stored at Port
Metal. Transcontinental, Port Metal's insurer, denied
coverage for damages to <strong>Omni</strong>'s steel on the ground that
Port Metal's "all risk" bailee policy was subject to an
exclusion for goods stored at Port Metal for more than
sixty days for which Port Metal received a storage fee.
<strong>Omni</strong> paid storage fees to Port Metal. <strong>Omni</strong> filed suit
against Port Metal and defendants it alleged were responsible
for the fire, namely Electrical Wire & Cable
Company, Inc., Electrical Redesign Company, Lighting
Surplus, Harry Schubeck, Jr., and Textron, Inc. It subsequently
added Poe & Brown, Port Metal's insurance
agent, and Transcontinental, Port [**7] Metal's insurer.
<strong>Omni</strong> settled separately with the original defendants for a
total of $ 1,660,000. <strong>Omni</strong> spent $ 740,000 on attorney's
fees that were not legally recoverable prior to settlement.
<strong>Omni</strong>'s suit against Transcontinental and Poe &
Brown was severed from the claims against the settling
defendants. In the severed suit, <strong>Omni</strong> raised claims
against Transcontinental and Poe & Brown for negligent
misrepresentation and violations of section 17.46(b) of
the DTPA 1 under former article 21.21, section 16 of the
Texas Insurance Code. 2 Transcontinental and Poe &
Brown successfully moved for summary judgment. <strong>Omni</strong>
appealed the summary judgment to the Fourteenth Court

of Appeals, which reversed the judgment by opinion
entered June 13, 2002, and remanded the case for trial.
<strong>Omni</strong> <strong>Metals</strong>, Inc., 2002 Tex. App. LEXIS 4334, 2002 WL
1331720. This appeal follows from the trial on remand
from the Fourteenth Court of Appeals.
1 TEX. BUS. & COM. CODE ANN. § 17.46(b)
(Vernon Supp. 2009).
2 The relevant insurance provisions at issue in
this case are found in former article 21.21 of the
Insurance Code. See Act of April 25, 1957, 55th
Leg., R.S., ch. 198, 1957 Tex. Gen. Laws 401,
401, amended by Act of May 10, 1973, 63rd
Leg., R.S., [**8] ch. 143, § 2, 1973 Tex. Gen.
Laws 322, 335 and Act of June 8, 1995, 74th
Leg., R.S., ch. 414, § 13, 1995 Tex. Gen. Laws
26-27 (hereinafter "former TEX. INS. CODE art.
21.21"). The legislature has since repealed those
provisions and enacted new provisions incorporating
the content of the repealed provisions. See
Act of May 20, 2003, 78th Leg., R.S., ch. 1274,
§§ 2, 26(a)(1), 26(1)(10), 2003 Tex. Gen. Laws
3611, 3641, 4138 (current version at TEX. INS.
CODE ANN. §§ 541.001-.454 (Vernon 2009)).
In the original appeal of this case prior to trial on
remand, the Fourteenth Court of Appeals made a number
of holdings pertinent to the instant appeal. It held that
Poe & Brown voluntarily disclosed to <strong>Omni</strong> that Port
Metal had bailee insurance which covered "all risks,"
and, therefore, that Poe & Brown had a duty to disclose
the storage fee exclusion, of which it was aware but <strong>Omni</strong>
was not. 2002 Tex. App. LEXIS 4334, [WL] at *3-4.
The Court also held that a fact issue existed as to
"whether [Poe & Brown] misrepresented coverage because,
under the circumstances, the 'all risk' certificate of
insurance was false and misleading." 2002 Tex. App.
LEXIS 4334, [WL] at *4-5. The Court further held that a
fact issue existed as to whether Poe & Brown could be
[**9] held liable to <strong>Omni</strong> if it misrepresented coverage to
Port Metal by telling Port Metal's president that the policy
would cover "[p]roduct owned by my customers for
processing in-located in my facility." 2002 Tex. App.
LEXIS 4334, [WL] at *8.
The court also refused Poe & Brown's and Transcontinental's
request that it hold [*371] that disclaimers
in certificates of insurance delivered to <strong>Omni</strong> prevented
the creation of a false impression about coverage
as a matter of law. 2002 Tex. App. LEXIS 4334, [WL] at
*6. Rather, it held that, given the "all risk" designation in
the certificate, "the disclaimers in the certificate present a
conflicting fact that we must disregard in applying the
summary judgment standard of review." 2002 Tex. App.
LEXIS 4334, [WL] at *7. The court also rejected Poe &
Brown's and Transcontinental's argument that it had no
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 3
duty to disclose because it had no duty to explain policy
exclusions to an insured. Id.
In addition, the court refused to hold that <strong>Omni</strong>
could not sue on the basis of its reliance on misrepresentations
made by Poe & Brown to Port Metal and repeated
by Port Metal to <strong>Omni</strong>. Id. Observing that "[c]ertain
persons, other than the direct recipient of a misrepresentation
can sue for negligent misrepresentation," the
Fourteenth Court held that the [**10] evidence raised a
fact issue as to whether Poe & Brown misrepresented
coverage to Port Metal. 2002 Tex. App. LEXIS 4334,
[WL] at *7-8 (citing cases and RESTATEMENT (SE-
COND) OF TORTS § 552(2) (1977)). In response to Poe
& Brown's argument that <strong>Omni</strong> had a duty to read the
policy itself, the court held, "<strong>Omni</strong>'s failure to read the
policy does not support the granting of summary judgment."
2002 Tex. App. LEXIS 4334, [WL] at *8. In other
words, the court held that <strong>Omni</strong> <strong>Metals</strong> had no legal duty
to read the policy. The court further held that <strong>Omni</strong> was
not prevented from bringing its DTPA claims through
article 21.21 section 16(a) of the Insurance Code by lack
of consumer status. 2002 Tex. App. LEXIS 4334, [WL] at
*9.
The court refused to address Transcontinental's argument
that <strong>Omni</strong> could not recover against Transcontinental
and Poe & Brown attorney's fees of $ 740,000 it
had incurred in pursuing a tort action against the third
parties allegedly responsible for starting the fire because
the issue was not included in the motion for summary
judgment. 2002 Tex. App. LEXIS 4334, [WL] at *10. The
court likewise refused to address the issue of Poe &
Brown's actual or apparent authority to act as Transcontinental's
agent because it was not presented in the motion
for summary judgment. Id. The court remanded
[**11] the case for trial. Id.
THE TRIAL
The trial began on October 11, 2005. The evidence
at trial comported with, and elaborated upon, the summary
judgment evidence. It showed that <strong>Omni</strong> was a
customer of Port Metal, a steel processing company; that
<strong>Omni</strong> stored steel coils at the Port Metal warehouse; and
that Port Metal charged <strong>Omni</strong> a storage fee on steel coils
left at the warehouse longer than 60 days.
Blake McKnight, Port Metal's president, testified
that he asked Danny Sparks, then an agent for Jacobe and
later an agent for Poe & Brown, to insure the Port Metal
warehouse and its inventory, including steel that Port
Metal's customers were storing at the warehouse. However,
the original policy, written in 1992, excluded from
coverage property held in storage for which a storage
charge was made, as did the 1993, 1994, and 1995 renewals.
McKnight read the 1992 policy and asked Sparks

about the exclusion for stored property. Sparks told him
the exclusion did not apply to property stored like <strong>Omni</strong>'s
at Port Metal. McKnight testified that he did not read the
1995 insurance policy in effect at the time of the fire.
Sparks testified that, by June 1993, he knew the policy
did not provide the coverage [**12] he promised
because he knew Port Metal was charging a storage fee
to its customers like <strong>Omni</strong>. However, he did not explain
to McKnight, to Port Metal, or to any of Port Metal's
customers that the insurance policy excluded the steel
Port [*372] Metal's customers stored at Port Metal.
Sparks also knew, from at least June 28, 1993, that Port
Metal received revenues from its customers of $ 6,000 a
month for storage fees. He also knew that Port Metal
relied upon him to obtain coverage for all of its customers'
steel. Sparks testified that he made a mistake by
selling a policy that did not provide coverage to all of
Port Metal's customers because of the storage exclusion.
He further testified that he had an obligation to find out
whose steel was being stored, but that he never made
such an inquiry. Nor did he ever inform either McKnight
or <strong>Omni</strong> of the exclusion, despite knowing that there was
a gap in the intended coverage and that he had a duty to
inform McKnight of the exclusion.
<strong>Omni</strong>'s president, Arthur Tomes, spoke on several
occasions with Port Metal's president, McKnight, and
inquired whether <strong>Omni</strong>'s steel at Port Metal's warehouse
was insured. McKnight assured him it was. <strong>Omni</strong> also
requested [**13] and received certificates of insurance
from Jacobe and later from Poe & Brown to document
Port's Metal's insurance coverage for <strong>Omni</strong>'s steel to
provide to <strong>Omni</strong>'s secured lender. Sparks delivered the
certificates to <strong>Omni</strong> knowing that <strong>Omni</strong> wanted the certificates
to make sure that all its steel at Port Metal was
covered. The 1993 certificate sent by Sparks to <strong>Omni</strong>
noted the $ 3,000,000 bailee liability policy issued by
Transcontinental. It also contained the statement, typed
by Sparks, that Port Metal's insurance coverage "IN-
CLUDES PROPERTY OF OTHERS IN CUSTODY OF
INSURED." Sparks admitted at trial that this was "untrue."
In 1994 and 1995, Sparks delivered insurance certificates
to <strong>Omni</strong> containing the representation that the
insurance covered "All Risk." Brown & Brown's expert
testified at trial that the certificates were "misleading."
Each of the certificates contained the following disclaimer:
"THIS CERTIFICATE IS ISSUED AS A
MATTER OF INFORMATION ONLY AND CON-
FERS NO RIGHTS ON THE CERTIFICATE HOLDER.
THIS CERTIFICATE DOES NOT AMEND, EXTEND
OR ALTER THE COVERAGE AFFORDED BY THE
POLICIES DESCRIBED BELOW."
Tomes, <strong>Omni</strong>'s president, testified at trial that he did
not "personally read and [**14] review every single
certificate of insurance that came across to <strong>Omni</strong>" and
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 4
that he did not ask for or "actually receive the insurance
policy rather than the certificate of insurance" because
the company "would think that the certificate of insurance
would be adequate to cover what we needed." He
"just look[ed] at 'all risks.'" The certificates confirmed
what McKnight had told him, and he saw nothing on the
certificates that gave him any reason to doubt what
McKnight had told him. The certificates were also reviewed
by Debbie Hiner at <strong>Omni</strong> and then forwarded to
<strong>Omni</strong>'s secured lender as proof that the steel was insured.
Tomes testified that "they were satisfied too."
On December 5, 1995, the warehouse caught fire
and $ 2,600,000 million worth of <strong>Omni</strong>'s steel was ruined.
The same day, Sparks approached Port Metal's
president, McKnight, and told him, "If anybody asks
you, don't mention the word 'storage.'" Sparks also telephoned
another of <strong>Omni</strong>'s customers, Mike Lykos, and
told him "please do not mention the word 'storage.'"
Following the trial, the jury found the following:
1. Transcontinental and Poe & Brown
made negligent misrepresentations on
which <strong>Omni</strong> justifiably relied.
2. Damages for [**15] the negligent
misrepresentations of $ 704,267 (value of
steel), $ 370,964.72 (expenses incurred
[*373] in selling the steel), and $
740,000 (attorney's fees incurred by <strong>Omni</strong>
in the lawsuit against the parties who
caused the fire).
3. Transcontinental and Poe & Brown
engaged in an unfair or deceptive act that
damaged <strong>Omni</strong>.
4. Damages for the unfair or deceptive
act of $ 704,267 (value of steel), $
370,964.72 (expenses incurred in selling
the steel), and $ 740,000 (attorney's fees
incurred by <strong>Omni</strong> in the lawsuit against
the parties who caused the fire).
5. Transcontinental and Poe & Brown
knowingly engaged in their conduct.
6. Treble damages for the knowing
conduct of $ 1,620,000 for Poe & Brown
and $ 1,080,000 for Transcontinental.
7. Attorney's fees of $ 161,050.07
(preparation and trial), $ 50,000.00 (appeal
to court of appeals), and $ 25,000.00
(appeal to supreme court).
8. Transcontinental's and Poe &
Brown's negligence caused the injury.

9. Transcontinental was 40% responsible
and Poe & Brown 60% responsible.
The trial court entered judgment on the jury verdict
on November 28, 2005. In the judgment, it also awarded
Poe & Brown and Transcontinental a settlement credit
against (1) the $ 704,267 [**16] awarded <strong>Omni</strong> by the
jury for "the value of the loss less any amounts <strong>Omni</strong>
received from the sale of the steel or from Transcontinental"
and (2) the $ 370,964.72 awarded <strong>Omni</strong> by the
jury for "reasonable and necessary expenses incurred in
attempting to sell the steel"; and (3) $ 169,213.61 for
prejudgment interest on the principal of (1) and (2) from
December 13, 1996 through April 13, 1999. The total
amount of the settlement credit was thus $ 1,244,445.33.
The judgment expressly excluded from the settlement
credit the $ 740,000 awarded <strong>Omni</strong> by the jury as economic
damages for "the amount of reasonable and necessary
attorneys' fees and expenses incurred by <strong>Omni</strong> in
a previous suit where <strong>Omni</strong> was required to prosecute the
previous suit as a consequence of Defendants' wrongful
conduct."
The instant appeal follows from the trial court's November
28, 2005 judgment.
DISCUSSION
A. Law of the Case Doctrine
Because this case comes to us on appeal after remand
from reversal of summary judgment by the Fourteenth
Court of Appeals, we consider, as a preliminary
matter, the "law of the case" doctrine. That doctrine is
defined as "that principle under which questions of law
decided on appeal to a court [**17] of last resort will
govern the case throughout its subsequent stages." Loram
Maint., Inc. v. Ianni, 210 S.W.3d 593, 596 (Tex. 2006);
Yazdchi v. San Antonio Fed. Credit Union, No.
01-07-00189-CV, 2009 Tex. App. LEXIS 1185, 2009 WL
417299, at *3-4 (Tex. App.--Houston [1st Dist.] Feb. 19,
2009, no pet.) (not designated for publication). Under
this doctrine, a court of appeals will ordinarily be bound
by its initial decision if there is a subsequent appeal in
the case. Briscoe v. Goodmark Corp., 102 S.W.3d 714,
716 (Tex. 2003). "By narrowing the issues in the successive
stages of the litigation, the law of the case doctrine
is intended to achieve uniformity of decision, judicial
economy, and efficiency." Id. It is based on public policy
and is aimed at bringing finality to litigation. Id. A decision
rendered on an issue by an appellate court does not,
however, absolutely bar reconsideration of the issue on a
second appeal. Id. The application of the doctrine lies
within the discretion of the court, depending on the circumstances
of the case. [*374] Id. It is an exception to
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 5
the law of the case doctrine that the original decision was
clearly erroneous. Id.
Here, the Fourteenth Court of Appeals issued a
number of rulings on [**18] the legal issues presented
by the parties' motions for summary judgment. The case
was subsequently tried in reliance on those rulings and a
verdict rendered from which this appeal is taken. Therefore
we will follow the law of the case established by the
Fourteenth Court of Appeals unless we conclude that, in
some respect, it is clearly erroneous.
B. <strong>Omni</strong>'s Failure to Submit Issue and Obtain Jury
Finding on Poe & Brown's Authority to Act as
Transcontinental's Agent
In its first issue, Transcontinental argues that <strong>Omni</strong>
failed to submit a separate issue on agency in the charge
and failed to obtain a separate jury finding on Poe &
Brown's actual or apparent authority to act as its agent. 3
<strong>Omni</strong> responds that Transcontinental failed to make any
timely objection to the absence of a separate issue and
therefore waived error and that, even if it had preserved
error, the omitted finding was a finding as to an element
of the ground of recovery on <strong>Omni</strong>'s claims, was supported
by evidence, and was therefore deemed found
under Texas Rule of Civil Procedure 279.
3 This issue was raised by Transcontinental in
its briefing on appeal in <strong>Omni</strong> <strong>Metals</strong> v. Poe &
Brown, but it was not addressed by the Fourteenth
[**19] Court of Appeals because it was
not presented in the motion for summary judgment.
<strong>Omni</strong> <strong>Metals</strong>, Inc. v. Poe & Brown of Texas,
Inc., No. 14-00-01081-CV, 2002 Tex. App.
LEXIS 4334, 2002 WL 1331720, at *10 (Tex.
App.--Houston [14th Dist.] June 13, 2002, pet.
denied) (not designated for publication).
The jury charge did not contain a separate issue on
Poe & Brown's status as an agent of Transcontinental.
However, the charge instructed the jury that "[a]uthority
for another to act for a party must arise from the party's
agreement that the other act on behalf and for the benefit
of the party" and that, if so authorized, "that other party
is also authorized to do whatever else is proper, usual,
and necessary to perform the act expressly authorized." It
also instructed the jury that "[a]pparent authority exists if
a party (1) knowingly permits another to hold himself out
as having authority or, (2) through lack of ordinary care,
bestows on another such indications of authority that
lead a reasonably prudent person to rely on the apparent
existence of authority to his detriment. . . ."
Jury questions 1 and 3 then asked the jurors whether
"one or more of the Defendants made a negligent misrepresentation
on which <strong>Omni</strong> <strong>Metals</strong>, [**20] Inc. justi-

fiably relied" or "engage[d] in any unfair or deceptive act
or practice that caused damages to <strong>Omni</strong> <strong>Metals</strong>." The
questions asked the jurors to respond separately for Poe
& Brown and for Transcontinental. The damages questions
similarly requested separate answers for each defendant.
Transcontinental did not object to the instructions,
and it did not object to the failure to submit a separate
agency question. The judgment awarded actual
damages, attorney's fees, and costs jointly and severally
against Poe & Brown and Transcontinental. It also
awarded additional damages of $ 1,620,000 against
Brown & Brown f/k/a Poe & Brown and of $ 1,080,000
against Transcontinental.
1. Waiver
Texas Rule of Civil Procedure 274 requires that "[a]
party objecting to a charge must point out distinctively
the objectionable matter. . . . Any complaint as to a question,
definition, or instruction . . . is waived unless specifically
included in the [*375] objections." TEX. R.
CIV. P. 274; see also Pitman v. Lightfoot, 937 S.W.2d
496, 520 (Tex. App.--San Antonio 1996, writ denied)
(holding that by failing to challenge court's agency instruction
on actual and apparent authority, appellants
waived any complaint [**21] on appeal regarding implied
finding of agency relationship); Shandee Corp. v.
Kemper Group, 880 S.W.2d 409, 412 (Tex.
App.--Houston [14th Dist.] 1994, writ denied) (holding
that appellant waived complaint regarding agent's authority
as imputed by Texas Insurance Code because he
"did not object to the instructions on the ground that they
did not include a definition of the statutory agency requirements").
Because there was no objection to the charge as
submitted, we hold that Transcontinental failed to preserve
error with respect to the inclusion of an instruction
on actual and apparent authority in the jury charge and
that its complaint is waived. Even if the issue were not
waived, however, we would not find error.
2. Omission of an Element of the Charge
Texas Rule of Civil Procedure 279, governing omissions
from the charge, provides, in relevant part:
Upon appeal all independent grounds
of recovery or of defense not conclusively
established under the evidence and no
element of which is submitted or requested
are waived. When a ground of recovery
or defense consists of more than one
element, if one or more of such elements
necessary to sustain such ground of recovery
or defense, and necessarily
[**22] referable thereto, are submitted to
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
and found by the jury, and one or more of
such elements are omitted from the
charge, without request or objection, and
there is factually sufficient evidence to
support a finding thereon, the trial court,
at the request of either party, may after
notice and hearing and at any time before
the judgment is rendered, make and file
written findings on such element or elements
in support of the judgment. If no
such written findings are made, such
omitted element or elements shall be
deemed found by the court in such manner
as to support the judgment. . . .
TEX. R. CIV. P. 279.
Page 6
Under Rule 279, "[w]hen a question is omitted
which constitutes only a part of a ground of recovery,
and other questions referable to that ground are submitted
and answered, the omitted elements are deemed
found in support of the judgment if no objection is made
and they are supported by some evidence." Ins. Co. of N.
Am. v. Morris, 928 S.W.2d 133, 143 (Tex. App.--Houston
[14th Dist.] 1996), rev'd on other grounds, 981 S.W.2d
667 (Tex. 1998) (deeming apparent authority of surety to
make representations about quality of partnership investments
found by acts of participation, knowledge,
[**23] or acquiescence by principal); see also Ramos v.
Frito-Lay, Inc., 784 S.W.2d 667, 668 (Tex. 1990) (stating
that when "issues are omitted which constitute only a
part of a complete and independent ground and other
issues necessarily referable to that ground are submitted
and answered, the omitted elements are deemed found in
support of the judgment if no objection is made and they
are supported by some evidence"); Lexington Ins. Co. v.
Buckingham Gate, Ltd., 993 S.W.2d 185, 197-98 (Tex.
App.--Corpus Christi 1999, pet. denied).
Here, the actual or apparent authority of Poe &
Brown to act as the agent of Transcontinental is one of
the elements of a finding of Transcontinental's liability
for negligent misrepresentation and deceptive trade practices
under the DTPA and the Insurance Code. We hold
that, by [*376] Transcontinental's failure to object to
the omission of a jury question on Poe & Brown's actual
or apparent authority to act as an agent of Transcontinental
in making representations about coverage to clients
and third parties, and by the submission of evidence
that Poe & Brown made representations regarding Port
Metal's bailee policy to Port Metal and to <strong>Omni</strong>, Poe &
Brown's status as an [**24] agent of Transcontinental is
deemed found. See TEX. R. CIV. P. 279.

We overrule Transcontinental's first issue.
C. Poe & Brown's Authority to Act as Transcontinental's
Agent
In its second issue, Transcontinental argues that the
evidence was both legally and factually insufficient to
support the jury's answers to questions number 1, 2, 8,
and 9, finding Transcontinental liable for misrepresentation
and violations of the DTPA. It argues that even if
Poe & Brown's agency status is deemed found, Poe &
Brown was a soliciting agent and that a soliciting agent
"does not have authority to alter the policy via representations,
and thus, the insurer has no liability as a matter
of law where the agent issues a certificate of insurance
that misstates coverage."
1. Standard of Review of Legal and Factual Sufficiency
of the Evidence
In a legal sufficiency, or "no-evidence" review, we
determine whether the evidence would enable reasonable
and fair-minded people to reach the verdict under review.
City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex.
2005). In conducting this review, we credit favorable
evidence if reasonable jurors could, and disregard contrary
evidence unless reasonable jurors could not.
[**25] Id. We consider the evidence in the light most
favorable to the finding under review and indulge every
reasonable inference that would support it. Id. at 822.
We must sustain a no-evidence contention only if (1) the
record reveals a complete absence of evidence of a vital
fact, (2) the court is barred by rules of law or of evidence
from giving weight to the only evidence offered to prove
a vital fact, (3) the evidence offered to prove a vital fact
is no more than a mere scintilla, or (4) the evidence establishes
conclusively the opposite of the vital fact. Id. at
810; Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d
706, 711 (Tex. 1997). When reviewing a no-evidence
point of error, "all the record evidence must be considered
in the light most favorable to the party in whose
favor the verdict has been rendered, and every reasonable
inference deducible from the evidence is to be indulged
in that party's favor." Merrell Dow, 953 S.W.2d at 711.
"Anything more than a scintilla of evidence is legally
sufficient to support the finding." Formosa Plastics
Corp. v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d
41, 48 (Tex. 1998). In reviewing a challenge to the factual
sufficiency of the evidence, [**26] we "must consider
and weigh all the evidence and should set aside the
judgment only if it is so contrary to the overwhelming
weight of the evidence as to be clearly wrong and unjust."
Arias v. Brookstone, L.P., 265 S.W.3d 459, 468
(Tex. App.--Houston [1st Dist.] 2007, pet. denied) (citing
Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986)).
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 7
The jury is the sole judge of witnesses' credibility; it
may choose to believe one witness over another, and a
reviewing court cannot impose its own opinion to the
contrary. Wilson, 168 S.W.3d at 819; Arias, 265 S.W.3d
at 468. Because it is the jury's province to resolve conflicting
evidence, we must assume that jurors resolved all
conflicts in accordance with their verdict if reasonable
human beings [*377] could do so. Wilson, 168 S.W.3d
at 819; Arias, 265 S.W.3d at 468.
2. Evidence of Agency
It is established law that
an insurance company is generally liable
for any misconduct by an agent that is
within the actual or apparent scope of the
agent's authority. This rule is based on notions
of fairness: "since the principal has
selected the agent to act in a venture in
which the principal is interested, it is fair,
as between him and a third person, to impose
upon [**27] him the risk that the
agent may exceed his instructions."
Celtic Life Ins. Co. v. Coats, 885 S.W.2d 96, 98B99 (Tex.
1994) (citations omitted); Lexington Ins. Co. v. Buckingham
Gate, Ltd., 993 S.W.2d 185, 197 (Tex.
App.--Corpus Christi 1999, pet. denied). A local recording
agent is "a person or firm engaged in soliciting and
writing insurance, being authorized by an insurance
company . . . to solicit business and write, sign, execute
and deliver policies of insurance, and to bind companies
on insurance risks." Royal Globe Ins. Co. v. Bar Consultants,
Inc., 577 S.W.2d 688, 692 (Tex. 1979) (citing
Act of May 23, 1951, 52nd Leg., R.S., ch. 491, 1951
Tex. Gen. Laws 1067, repealed by Act of May, 2003,
78th Leg., R.S., ch. 1274, § 26(a)(1), 2003 Tex. Gen.
Laws 3641 ("former TEX. INS. CODE art. 21.14, § 2"));
Lexington Ins., 993 S.W.2d at 198. By necessary implication,
the local recording agent of an insurer has the
authority to represent the coverage afforded by the policies
it sells. Royal Globe, 577 S.W.2d at 694. "If [the]
representations [are] false . . . under the explicit language
of Section 16, Article 21.21 [of the Insurance Code] and
Section 17.46(b)(12) of the DTPA, his actions constitute[]
[**28] a deceptive act or practice for which his
principal is accountable." Id. However, a soliciting agent
is someone "who does not sign and execute policies of
insurance, and who does not maintain company records
of such transactions." Maccabees Mut. Life Ins. Co. v.
McNiel, 836 S.W.2d 229, 232 (Tex. App.--Dallas 1992,
no writ) (citing former TEX. INS. CODE art. 21.14). "It
is the settled law of this State that a soliciting agent of an
insurance company has no power or authority to make a

contract on behalf of the company or to waive the terms
of the policy." Int'l Sec. Life Ins. Co. v. Finck, 496
S.W.2d 544, 546 (Tex. 1973); Lexington Ins., 993 S.W.2d
at 199.
Whether an agency relationship exists is usually a
question of fact, and circumstantial evidence may be
used to establish agency and the extent of the agent's
authority. Pitman, 937 S.W.2d at 521. To determine
whether an agent had apparent authority we look to the
acts of the principal "to see if those acts would lead a
reasonably prudent person using diligence and discretion
to suppose that the agent had the authority he purported
to exercise." Shandee, 880 S.W.2d at 412 (quoting Guthrie
v. Republic Nat'l Ins. Co., 682 S.W.2d 634, 637 (Tex.
App.--Houston [1st Dist.] 1984, writ ref'd n.r.e.)).
Transcontinental [**29] argues that Poe & Brown
was a soliciting agent without power to make a contract
on behalf of Transcontinental. However, the record reflects
that Poe & Brown was Transcontinental's local
recording agent. The High Performance Agency Agreement
(the Agreement) between Transcontinental and Poe
& Brown gave Poe & Brown explicit authority "[t]o
bind, execute and issue the kinds of insurance contracts
and bonds to which this Agreement applies. . . ." In addition,
both Robert Pryor, Transcontinental's "Authorized
Agent," and Sparks testified that Poe & Brown acted as
Transcontinental's agent. The Agreement expressly
grants Poe & Brown [*378] the authority "[t]o countersign
insurance contracts, bonds, certificates and endorsements."
Moreover, Transcontinental represented
that Poe & Brown was its "authorized agent" on the insurance
policy issued to Port Metal. Likewise, the certificates
issued expressly represented that Pryor was
Transcontinental's "authorized representative." Transcontinental
presented no rebuttal evidence.
Reviewing the record evidence in the light most favorable
to <strong>Omni</strong> and indulging every reasonable inference
in its favor, we hold that the evidence is legally
sufficient to show that [**30] Poe & Brown was
Transcontinental's local recording agent and that it
therefore had the actual authority to sell Transcontinental
insurance policies. We further hold that Transcontinental
knowingly permitted Poe & Brown and Poe & Brown's
agents "to hold [themselves] out as having authority" to
provide certificates of insurance for Transcontinental
insurance products to its insureds and third parties and to
make representations about the scope of insurance coverage
to them or, at the very least, that Transcontinental
"bestow[ed] on [Poe & Brown] such indications of authority"
with respect to such actions that would "lead a
reasonably prudent person to rely on the apparent existence
of authority to his detriment." See Merrell Dow,
953 S.W.2d at 711.
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 8
Considering and weighing all the evidence, we hold
that the implied finding that Poe & Brown was Transcontinental's
local recording agent with the authority to
provide certificates of insurance and to make representations
about the scope of insurance coverage is not so
contrary to the overwhelming weight of the evidence as
to be clearly wrong and unjust. Arias, 265 S.W.3d at 468.
We hold, therefore, that the evidence is legally and factually
[**31] sufficient to show that Poe & Brown was
Transcontinental's recording agent and that it had the
actual authority to provide certificates of insurance to its
insureds and third parties and to make representations
about Port Metal's insurance coverage as Transcontinental's
agent.
We overrule Transcontinental's second issue.
D. <strong>Omni</strong>'s Standing to Maintain DTPA--Texas Insurance
Code Claims
In its second issue, Brown & Brown argues that
<strong>Omni</strong> lacked standing to bring a claim under the DTPA,
specifically under subsections 17.46(b)(5) and (12) of the
Texas Business and Commerce Code, under which <strong>Omni</strong>'s
DTPA claims were submitted to the jury in Question
3 of the jury charge. See TEX. BUS. & COM. CODE
ANN. § 17.46(b)(5), (12). Transcontinental argues that
"<strong>Omni</strong> did not purchase or seek to purchase the policy"
and therefore it is not a consumer under the DTPA, as
required for standing under section 17.46(b)(5), nor does
<strong>Omni</strong> fall within the scope of "persons" permitted to
bring DTPA claims under section article 21.21 section
16(a). Brown & Brown acknowledges that consumer
status is not required to bring a claim under subsection
17.46(b)(12).
Former article 21.21 section 16(a) of the Insurance
Code [**32] provided that "any person who has sustained
actual damages caused by another's engaging in an
act or practice declared in Section 4 of this Article to be
unfair methods of competition or unfair or deceptive acts
or practices in the business of insurance or in any practice
specifically enumerated in a subdivision of Section
17.46(b), Business & Commerce Code, as an unlawful
deceptive trade practice may maintain an action against
the person or persons engaging in such acts or practices."
Former TEX. INS. CODE art. 21.21, § 16(a), (b) (emphasis
added). The section required that, "[t]o maintain
an action for [*379] a deceptive act or practice enumerated
in Section 17.46(b), Business & Commerce
Code, a person must show that the person has relied on
the act or practice to the person's detriment." Id. 4
4 Former article 21.21 section 16(a) and (b) of
the Insurance Code provided:

Sec. 16. (a) any person who has
sustained actual damages caused
by another's engaging in an act or
practice declared in Section 4 of
this Article to be unfair methods
of competition or unfair or deceptive
acts or practices in the business
of insurance or in any practice
specifically enumerated in a
subdivision of Section 17.46(b),
Business & Commerce Code,
[**33] as an unlawful deceptive
trade practice may maintain an action
against the person or persons
engaging in such acts or practices.
To maintain an action for a deceptive
act or practice enumerated in
Section 17.46(b), Business &
Commerce Code, a person must
show that the person has relied on
the act or practice to the person's
detriment.
(b) In a suit filed under this
section, any plaintiff who prevails
may obtain:
(1) the amount
of actual damages
plus court costs and
reasonable and
necessary attorneys'
fees. If the trier of
fact finds that the
defendant knowingly
committed
the acts complained
of, the trier of fact
may award not
more than three
times the amount of
actual damages[.]
Former TEX. INS. CODE art.
21.21, § 16 (emphasis added).
Current section 541.151 of the
Insurance Code similarly provides
for a private cause of action for
damages against an insurer for acts
(1) defined by section 541.051
through section 541.061 of the
Code as "an unfair method of
competition or an unfair or deceptive
act or practice in the business
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
of insurance" or (2) "specifically
enumerated in Section 17.46(b),
Business & Commerce Code, as an
unlawful deceptive trade practice
if the person bringing the action
[**34] shows that the person relied
on the act or practice to the
person's detriment." TEX. INS.
CODE ANN. § 541.151 (Vernon
2009). Under current section
541.051 of the Insurance Code, it
is "an unfair method of competition
or an unfair or deceptive act
or practice in the business of insurance
to . . . make, issue, or circulate
or cause to be made, issued,
or circulated [a] . . . statement
misrepresenting with respect to a
policy issued . . . (A) the terms of
the policy [or] (B) the benefits or
advantages promised by the policy.
. . ." TEX. INS. CODE ANN. §
541.051 (Vernon 2009).
Page 9
Former article 21.21, section 4 included among the
actions defined as unfair and deceptive acts or practices
in the business of insurance the "[m]aking, issuing, circulating,
or causing to be made, issued or circulated, any
. . . statement misrepresenting the terms of any policy
issued or to be issued or the benefits or advantages
promised thereby. . ., or using any name or title of any
policy or class of policies misrepresenting the true nature
thereof. . . ." Id. § 4(1).
Section 17.46(b) of the Business and Commerce
Code, which has not been recodified, provides, in relevant
part:
(b) . . . the term "false, misleading,
[**35] or deceptive acts or practices" includes,
but is not limited to, the following
acts:
. . . .
. . . .
(5) representing that
goods or services have
sponsorship, approval,
characteristics, ingredients,
uses, benefits, or quantities
which they do not have. . .

(12) representing that an
agreement confers or involves
rights, remedies, or
obligations which it does
not have or involve, or
which are prohibited by
law[.]
TEX. BUS. & COM. CODE ANN. § 17.46(b) (Vernon
Supp. 2009).
Section 17.50(a) of the DTPA, generally governing
standing to bring a DTPA claim, provides:
(a) A consumer may maintain an action
where any of the following constitute a
producing cause of economic damages or
damages for mental anguish:
[*380] (1) the use
employment by any person
of a false, misleading, or
deceptive act or practice
that is:
(A) specifically enumerated
in a subdivision of
Subsection (b) of Section
17.46 of this subchapter;
and
(B) relied on by a
consumer to the consumer's
detriment[.]
TEX. BUS. & COM. CODE ANN. § 17.50(a) (Vernon
Supp. 2009) (emphasis added).
1. <strong>Omni</strong>'s Consumer Status Under § 17.46(b)(5)
Brown & Brown acknowledges that former article
21.21, section 16(a) of the Insurance Code did not incorporate
the "consumer" [**36] standing requirement
of section 17.50(a) of the DTPA unless the terms of the
specific subsection under which a claim was pled required
consumer status. See former TEX. INS. CODE art.
21.21, § 16(a). However, it argues that, in Crown Life
Insurance Co. v. Casteel, the Texas Supreme Court held
that a plaintiff must prove consumer status to bring a
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 10
DTPA claim for the misrepresentation of "goods or services"
under subsection 17.46(b)(5) and that <strong>Omni</strong> does
not qualify as a consumer under the DTPA, i.e., as one
"who seeks or acquires by purchase or lease, any goods
or services." 22 S.W.3d 378, 386-87 (Tex. 2000); see
TEX. BUS. & COM. CODE ANN. § 17.45(4).
Our disposition of this issue is controlled by the law
of the case. With respect to <strong>Omni</strong>'s consumer status, the
Fourteenth Court of Appeals stated in <strong>Omni</strong> <strong>Metals</strong>:
<strong>Omni</strong> brought its DTPA-based claims
through article 21.21 of the Insurance
Code. TEX. INS. CODE ANN. art. 21.21,
§ 16(a) (Vernon Supp. 2002). Article
21.21, section 16(a), provides a cause of
action for "unlawful deceptive trade practice[s]"
defined under the laundry list of
DTPA section 17.46(b). Article 21.21
does not require consumer status to bring
a DTPA-based cause of action. [**37]
Crown Life Ins. Co. v. Casteel, 22 S.W.3d
378, 386 (Tex. 2000). "But if the terms of
a subsection of DTPA section 17.46(b)
require consumer status, then consumer
status is required to bring an action under
article 21.21 for its violation." Id.
<strong>Omni</strong> pleaded violations of DTPA
section 17.46(b)(5), (7), (12), and (23). By
their terms, subsections (5), (7), and (23)
require consumer status. Id. at 387. However,
subsection (12) does not require
consumer status. Id. Because consumer
status is not required, the trial court erred
in granting summary judgment on <strong>Omni</strong>'s
claim for violation of DTPA section
17.46(b)(12).
For the remaining DTPA provisions
pled by <strong>Omni</strong>, we must determine whether
consumer status requires direct purchase
or lease of services from Poe &
Brown. "Privity of contract with a defendant
is not required for the plaintiff to
be a consumer." Amstadt v. U.S. Brass
Corp., 919 S.W.2d 644, 649 (Tex. 1996).
Further, "[t]he consumer does not have to
be the actual purchaser of the insurance in
order to be classified as a consumer under
the DTPA." How Ins. Co. v. Patriot Fin.
Serv. of Texas, Inc., 786 S.W.2d 533, 539
(Tex. App.--Austin 1990), overruled on
other grounds by Hines v. Hash, 843
S.W.2d 464 (Tex. 1992). [**38] Accordingly,
<strong>Omni</strong> is not denied consumer status
by lack of privity with Poe & Brown. The

trial court erred in granting summary
judgment on this ground. . . .
2002 Tex. App. LEXIS 4334, 2002 WL 1331720, at *9.
We hold that the law of the case controls, and that <strong>Omni</strong>
was entitled to consumer status under section 17.46(b)(5)
and was not required to have consumer status under section
17.46(b)(12). See id.
[*381] 2. <strong>Omni</strong>'s Standing as a "Person" Under
Former Article 21.21, Section 16(a)
Brown & Brown also argues that <strong>Omni</strong> does not
qualify as a "person" entitled to make a claim under former
article 21.21 section 16(a) of the Insurance Code
because <strong>Omni</strong> was not an "insured or third party beneficiary"
of Port Metal's insurance policy. Brown & Brown
acknowledges that "any person" damaged by another's
engaging in a practice specifically enumerated in subsection
17.46(b) as a deceptive practice can bring a cause of
action under that subsection. However, it argues that
"[s]everal Texas courts . . . have construed the term 'any
person' as used in [former Texas Insurance Code article]
21.21 § 16(a) to mean only the insured or a third party
beneficiary and have held that only an insured or third
party beneficiary to a policy have standing [**39] to
bring a [DTPA-Texas Insurance Code] claim."
It is well established that an insurer's misrepresentation
regarding coverage is actionable under the Texas
Insurance Code and the DTPA against agents and companies.
See Mem'l Hosp. Sys. v. Northbrook Life Ins. Co.,
904 F.2d 236, 243-44 (5th Cir. 1990) (recognizing cause
of action in Texas under article 21.21 against insurance
carrier for false representation of coverage by insurance
agent or company acting as ERISA plan agent); Tenner
v. Prudential Ins. Co., 872 F. Supp. 1571, 1573 (E.D.
Tex. 1994) (holding that action could be maintained under
DTPA against insurance agent who allegedly acted
outside scope of authority in misrepresenting that life
policies were paid in full); Royal Globe, 577 S.W.2d at
693 (holding that misrepresentation by local recording
agent as to coverage for damages for vandalism was actionable
under DTPA and Insurance Code); Celtic Life
Ins. Co. v. Coats, 831 S.W.2d 592, 596 (Tex.
App.--Austin 1992) (holding that misrepresentation as to
psychiatric benefits by health insurance agent was actionable
under article 21.21 of the Insurance Code and
under DTPA), aff'd as modified, 885 S.W.2d 96 (Tex.
1994); State Farm Fire & Cas. Co. v. Gros, 818 S.W.2d
908, 912-13(Tex. App.--Austin 1991, no writ) [**40]
(holding that misrepresentation by local recording agent
as to terms or benefits of homeowner's policy was unfair
or deceptive act of principal); Hermann Hosp. v. Nat'l
Standard Ins. Co., 776 S.W.2d 249, 252-53 (Tex.
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 11
App.--Houston [1st Dist.] 1989, writ denied) (recognizing
cause of action by hospital that treated insured under
article 21.21, section 16 against insurers for allegedly
misrepresenting that care and treatment fell within insurance
coverage).
In Aetna Cas. & Sur. Co. v. Marshall, the Texas Supreme
Court held that "[s]ection 16 of article 21.21
makes actionable any violation of [Texas Business and
Commerce Code section] 17.46." 724 S.W.2d 770, 772
(Tex. 1987) (holding that injured worker was entitled to
recover treble damages against insurer in suit under article
21.21, section 16 for "representing to him that it
would provide benefits by the agreement and then failing
to do so"). The court made it clear that contractual privity
or third party beneficiary status is not required for standing
to bring claims against insurers for negligent misrepresentation
and deceptive acts and practices under the
Insurance Code and the DTPA. Id. It emphasized, "The
question is simply whether [**41] Aetna engaged in
conduct prohibited by section 17.46." Id.
This Court, following Marshall, has likewise held
that privity of contract is not required for the imposition
of a legal duty under article 21.21, section 16. Hermann
Hosp., 776 S.W.2d at 252 (recognizing cause of action by
hospital that treated insured against insurers for allegedly
misrepresenting [*382] that care and treatment fell
within insurance coverage). We opined:
Hermann Hospital is not suing on an
insurance policy or for the wrongful denial
of payment under [its patient's] worker's
compensation insurance policy. It is
suing for the damages it suffered by relying
on the representations of coverage allegedly
made by appellees. The supreme
court has held that misrepresentations as
to coverage and benefits are precisely the
sort of conduct that give rise to a course
of action under this section. Aetna, 724
S.W.2d at 772. We find that as a practical
matter, the relationship between insurance
companies and provides of health care is a
direct one, with the health care provider
acting in reliance on the representations of
coverage made by the carriers. Hospitals
and other health care providers must, and
do, rely upon the insurance [**42] carriers
representations of coverage in making
their decision regarding admission of potential
patients. If insurance coverage and
benefits can be verified, the hospital will
usually accept an assignment of benefits
to insure it is paid for any services rendered.
If insurance coverage and benefits

Id.
cannot be verified, or if no coverage exists,
the medical provider can then make
alternative financial arrangements. To insulate
the insurance carriers from liability
leaves the medical care provider without
recourse against the party causing its
damage, if it acts in reliance on the representation
of coverage. Had the insurance
carrier not falsely or negligently provided
information, appellant could have sought
alternative means to ensure that it received
payment for service before rendering
them.
The exact same reasoning applies in this case, in
which <strong>Omni</strong> sought a representation from Poe & Brown
that its steel stored at Port Metal was insured for use in
its business dealings, specifically including reassurance
that its steel was protected by insurance and an assurance
for its lender that the lender's collateral was protected.
Had Poe & Brown not falsely represented that <strong>Omni</strong>'s
steel [**43] was covered by insurance, <strong>Omni</strong> could
have protected its own interests and those of its lenders
either by notifying Port Metal of the gap in the coverage
extended by its bailee policy, so that Port Metal could
cure the defect in coverage, or by procuring coverage of
its own, and it would not have suffered the $ 3,000,000
loss it did suffer as a result of Poe & Brown's false assurance
that "all risks" were covered by the policy.
Brown & Brown, however, cites to a string of authorities
that it contends support its position, including
Tamez v. Certain Underwriters at Lloyd's, London, 999
S.W.2d 12 (Tex. App.--Houston [14th Dist.] 1998, pet.
denied); Pineda v. PMI Mortgage Insurance Co., 843
S.W.2d 660 (Tex. App.--Corpus Christi 1992, writ denied);
and Chaffin v. Transamerica Insurance Co., 731
S.W.2d 728 (Tex. App.--Houston [14th Dist.] 1987, writ
ref'd n.r.e.).
We find these cases distinguishable. Each involved
third party claimants under an insurance policy where the
insurer had not made any representation directly to the
third party upon which that party relied. See Tamez, 999
S.W. 2d at 21-22 (denying standing to third-party claimants
seeking to recover insurance proceeds under policy
[**44] in which they were named neither as insured nor
as beneficiary); Pineda, 843 S.W.2d at 672-73 (denying
standing to mortgagors to bring bad faith, insurance
code, and DTPA counterclaims against mortgage insurer
when mortgagors' claims were "all premised on the spurious
argument that they were 'insureds' under the PMI
policy, in [*383] privity with PMI, or were otherwise
beneficiaries under the policy"); Chaffin, 731 S.W.2d at
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 12
731-32 (denying standing to homeowners claiming to be
intended beneficiaries of subcontractor's insurance policy
to bring fraud claim against insurance company for initial
allegedly wrongful denial of coverage to subcontractor
when there was no evidence that homeowners detrimentally
relied on initial denial and homeowners ultimately
received entire coverage of policy).
Unlike the plaintiffs in each of the foregoing cases,
who brought claims of fraud and deceptive statements
against insurers based on alleged misrepresentations and
bad faith actions under a contract to which they were
neither parties nor third party beneficiaries, <strong>Omni</strong> bases
its claims upon false and misleading representations
about a third party's insurance coverage made to it by the
insurer's agent for [**45] its use in its business relations
and upon which <strong>Omni</strong> detrimentally relied to its pecuniary
loss. <strong>Omni</strong> thus falls squarely within the scope of
persons entitled to sue for damages under the plain language
of former article 21.21, section 16(a).
We overrule Brown & Brown's second issue.
E. Negligent Misrepresentation and Unfair and Deceptive
Acts
In its first issue, Brown & Brown argues that the
evidence is legally and factually insufficient to establish
that (a) Poe & Brown made a negligent misrepresentation
and engaged in an unfair or deceptive act; (b) the
representation caused <strong>Omni</strong>'s damages; (c) <strong>Omni</strong> justifiably
relied on Poe & Brown's misrepresentation; and (d)
Poe & Brown acted knowingly.
In its third issue, Transcontinental similarly argues
that <strong>Omni</strong>'s misrepresentation claim is not viable because
(a) no one at <strong>Omni</strong> read the certificates of insurance; (b)
the certificates disclaimed any representation regarding
coverage; (c) there is no evidence that Sparks's comment
to Port Metal's president, McKnight, regarding the purpose
of the storage charge exclusion was conveyed to
anyone at <strong>Omni</strong>; and (d) McKnight had no authority to
act for Transcontinental when he stated to <strong>Omni</strong>'s president,
[**46] Tomes, that <strong>Omni</strong>'s stored steel was covered
by Port Metal's bailee policy.
The third and fourth of Transcontinental's contentions--that
Sparks's comment to Port Metal regarding the
purpose of the storage charge exclusion and McKnight's
statements to Tomes about coverage are not actionable
against Transcontinental--are not supported by any argument
or authority and are therefore waived. See TEX.
R. APP. P. 38.1(i). We address the remaining issues together
as questions of the legal and factual sufficiency of
the evidence to support <strong>Omni</strong>'s negligent misrepresentation
and deceptive trade practices claims.
1. Appellants' Negligent Misrepresentation

In the first part of its first issue, Brown & Brown
argues that the evidence is legally and factually insufficient
to support <strong>Omni</strong>'s misrepresentation claim and its
claims under former article 21.21 of the Texas Insurance
Code and subsections 17.46(b)(5) and (12) of the DTPA.
Specifically, it contends that the evidence is insufficient
to support the jury's answers to Jury Question 1, in which
the jury was asked whether Poe & Brown made a negligent
misrepresentation, and Jury Question 3, in which
the jury was asked whether Poe & Brown engaged "in
[**47] any unfair or deceptive act or practice that caused
damages to <strong>Omni</strong> <strong>Metals</strong>."
The charge defined "unfair or deceptive act or practice"
to mean "1) representing that goods or services had
or would have [*384] characteristics that they did not
have; or 2) representing that an agreement confers or
involves rights that it did not have or involve." See TEX.
BUS. & COM. CODE ANN. § 17.46(b)(5), (12).
a. Appellants' Duty to Disclose
Brown & Brown argues that, of the four communications
made to <strong>Omni</strong> concerning Port Metal's bailee
insurance, three were made by Jacobe and only one by
Poe & Brown, which subsequently acquired Jacobe and
has itself since been acquired by Brown & Brown. Thus,
it alleges, the only communication between Poe &
Brown and <strong>Omni</strong> was the 1995 certificate of insurance
delivered to <strong>Omni</strong> by Poe & Brown, which stated that
Port Metal had a $ 3,000,000 "All Risk" "Bailee Liability"
policy from Transcontinental. The bailee policy
stated that the insurer, Transcontinental, "will pay for
'loss' . . . from any of the Covered Causes of Loss,"
which it defined as "RISKS OF DIRECT PHYSICAL
'LOSS' . . . except those causes of loss listed in the Exclusions."
Brown & Brown argues that, "[a]s a matter
[**48] of law, Poe & Brown's certificate of insurance
does not make a false representation by accurately describing
the bailee policy as an 'All Risk' policy." It refers
us to State Farm County Mutual Insurance Co. v.
Moran, 809 S.W.2d 613 (Tex. App.--Corpus Christi
1991, writ denied), and North American Ship Building,
Inc. v. Southern Marine & Aviation Underwriting, Inc.,
930 S.W.2d 829 (Tex. App.--Houston [1st Dist.] 1996, no
writ), as support for its argument.
In <strong>Omni</strong> <strong>Metals</strong>, the Fourteenth Court of Appeals
recited the elements of negligent misrepresentation,
namely, that (1) a representation was made by a defendant
in the course of business; (2) the defendant supplied
false information for the guidance of others in their
business; (3) the defendant failed to exercise reasonable
care or competence in obtaining or communicating the
information; and (4) the plaintiff suffered pecuniary loss
by justifiably relying on the representation. 2002 Tex.
App. LEXIS 4334, 2002 WL 1331720, at *4; see also
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 13
Fed. Land Bank Ass'n v. Sloane, 825 S.W.2d 439, 442
(Tex. 1991).
In the prior appeal of this case, the Fourteenth Court
of Appeals pointed out that a misrepresentation need not
be an affirmative misrepresentation of fact. It [**49]
stated, "Where there is a duty to speak, silence may be as
misleading as a positive misrepresentation of existing
facts." <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex. App. LEXIS 4334, 2002
WL 1331720, at *3 (quoting Smith v. Nat'l Resort Cmty.,
Inc., 585 S.W.2d 655, 658 (Tex. 1979)). "Whether a duty
to disclose exists is a question of law." Id. (citing Bradford
v. Vento, 48 S.W.3d 749, 755 (Tex. 2001)). It further
opined, "A duty to disclose may arise in four situations:
(1) when there is a fiduciary relationship; (2) when one
voluntarily discloses information, the whole truth must
be disclosed; (3) when one makes a representation, new
information must be disclosed when that new information
makes the earlier representation misleading or
untrue; and (4) when one makes a partial disclosure and
conveys a false impression." Id. (quoting Hoggett v.
Brown, 971 S.W.2d 472, 487 (Tex. App.--Houston [14th
Dist.] 1997, pet. denied)).
<strong>Omni</strong> argued that Poe & Brown had a duty to disclose
under Hoggett scenarios three and four. 2002 Tex.
App. LEXIS 4334, [WL] at *4. The Fourteenth Court of
Appeals agreed. Id. <strong>Omni</strong> had argued that Poe & Brown
should have revealed the storage fee exclusion to correct
impressions left by earlier certificates of insurance. Id.
The court observed [**50] that the summary judgment
evidence showed that the earliest certificate of insurance
provided to <strong>Omni</strong>, for Port Metal's 1992-93 bailee policy,
stated that "coverage includes property of others in
custody of [*385] insured." Id. Sparks, an insurance
agent employed by Poe & Brown at the time of the fire
loss, sent the certificate to <strong>Omni</strong>. Id. The summary
judgment evidence showed that Sparks was aware of the
storage fee exclusion by May of 1995. Id. He had been
questioned about the storage fee exclusion by Port
Metal's president, who told him Port Metal charged its
customers a storage fee. Id. Nevertheless, Sparks did not
disclose or provide additional information about the
storage exclusion to <strong>Omni</strong>, even when he knew that <strong>Omni</strong>
wanted to make sure that its property was covered by
insurance purchased by Port Metal. Id. The court of appeals
concluded, based on the summary judgment evidence,
that "Sparks never corrected the impression conveyed
by the 1992-93 policy, which was misleading
given facts Sparks later learned." Id. It held that these
circumstances created a fact issue as to whether appellees
breached the duty prescribed under Hoggett scenario
three. Id.
<strong>Omni</strong> also contended that, under [**51] the circumstances,
the "all risk" certificate of insurance was a
partial disclosure that conveyed a false impression and

was therefore false under Hoggett scenario four. Id. The
Fourteenth Court of Appeals again agreed. Id. It stated:
We conclude that the evidence shows
Poe & Brown understood it was answering
<strong>Omni</strong>'s question, "Is my property at
Port Metal's facility covered?" At that
time, Poe & Brown knew that Port Metal
wanted to cover all property of its customers,
was aware of the storage exclusion
in the policy, and knew that Port
Metal was charging its customers a storage
fee. Despite this knowledge, the certificate
of insurance was its only answer, a
partial answer, to <strong>Omni</strong>'s question. The
certificate verified "all risk" bailee liability
coverage with a $ 3,000,000 limit. In
deposition, Poe & Brown's corporate representative
admitted that the term "all
risk" did not really cover all possible risks
and was possibly confusing. Thus, taken
in the light most favorable to <strong>Omni</strong>, the
all risk designation left a false impression
under the circumstances.
Id. The court held, "Accordingly, there is a fact issue
whether appellees met their duty under Hoggett scenario
four." Id.
In its second [**52] issue in <strong>Omni</strong> <strong>Metals</strong>, <strong>Omni</strong>
argued that a fact issue existed as to whether Poe &
Brown had misrepresented coverage "because, under the
circumstances, the 'all risk' certificate of insurance was
false and misleading." Id. Poe & Brown made the same
argument it makes here--that the certificate could not be
considered a misrepresentation as a matter of law--and it
relied upon the same authority, North American Shipbuilding,
in support of its argument. 2002 Tex. App.
LEXIS 4334, [WL] at *5. The Fourteenth Court of Appeals
addressed Poe & Brown's argument at length and
found North American Shipbuilding to be distinguishable
"for several reasons." Id.
The court stated:
First, the "all risks" representation in
that case was found in the insurance policy,
not just in two words on a certificate:
"[this policy] insures against all risks of
physical loss or damage to the Vessel . . .
except as herein provided." 930 S.W.2d at
831. Second, an exclusion for faulty
workmanship was also fully delineated in
the same document. In comparison, the
certificate sent to <strong>Omni</strong> did not set for the
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
storage exclusion. Third, the defendants in
N. Am. Shipbuilding did not communicate
the "all risk" policy clause in response to a
specific inquiry. [**53] In contrast, Poe
& Brown provided the 'all risk" certificate
in response to <strong>Omni</strong>'s inquiry for confirmation
that its steel was covered while at
Port Metal. Fourth, in N. Am. Shipbuilding,
[*386] the insured failed to provide
summary judgment proof that the insurer
misrepresented the coverage to include
faulty workmanship. The summary judgment
proof here reveals that appellees told
Port Metal that the storage exclusion did
not apply.
Page 14
Id. The court followed Black v. Victoria Lloyds Insurance,
797 S.W.2d 20 (Tex. 1990), in holding that a fact
issue existed concerning misrepresentation of liability
insurance coverage for personal use when an insurance
company represents that "complete . . . insurance" has
been provided when it has not. <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex.
App. LEXIS 4334, 2002 WL 1331720, at *5; see Black,
797 S.W.2d at 24 (holding that insurance identification
card provided to driver of leased vehicle by lessor's insurance
company, which stated only that policy complied
with "the compulsory auto laws of the State of Texas,"
but did not indicate that driver of leased vehicle did not
have liability insurance coverage for personal use of vehicle,
raised fact issue concerning misrepresentation of
insurance coverage). The [**54] court concluded that
<strong>Omni</strong> had raised a fact issue with respect to "whether
[Poe & Brown] misrepresented the coverage afforded by
the policy." <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex. App. LEXIS 4334,
2002 WL 1331720, at *5.
We adopt the Fourteenth Court of Appeals' statement
of the law and apply the law of the case.
At trial, the jury was asked in Question 1 whether
Poe & Brown made a negligent misrepresentation. In
Question 3, it was asked whether Poe & Brown had engaged
"in any unfair or deceptive act or practice that
caused damages to <strong>Omni</strong> <strong>Metals</strong>." It responded 'yes' to
both questions. We consider, therefore, whether the evidence
is legally and factually sufficient to support the
jury's findings.
The facts presented to the jury in this case comport
with the facts presented to the Fourteenth Court of Appeals
in the summary judgment evidence. See id. at
*1B2. The unrebutted evidence shows that the bailee
policies issued to Port <strong>Metals</strong> contained an exclusion for
stored goods. Port <strong>Metals</strong> was concerned about insuring
all of the steel stored with it. Its president, McKnight,
read the 1992 policy and asked its insurance agent,

Sparks, about the exclusion. Sparks assured him the exclusion
did not apply to the steel stored at Port Metal,
[**55] and McKnight conveyed this information to <strong>Omni</strong>.
Indeed, <strong>Omni</strong>'s president, Tomes, asked McKnight on
several occasions whether <strong>Omni</strong>'s steel stored at Port
Metal's warehouse was insured and was assured by him
that it was.
<strong>Omni</strong>'s bank required that <strong>Omni</strong> request certificates
of insurance from Jacobe and later Poe & Brown to
document Port's Metal's coverage, and <strong>Omni</strong> did. Sparks
delivered the certificates to <strong>Omni</strong> knowing that <strong>Omni</strong>
wanted the certificates to provide to its secured lender to
show that all of its steel at Port Metal was covered by
insurance. Despite knowing that Port Metal relied upon
him to obtain coverage for all of its customers' steel, as
well as knowing, from at least June 28, 1993, that Port
Metal received revenues from its customers of $ 6,000 a
month for storage fees, and knowing, by at least July of
1993, that Port <strong>Metals</strong>' bailee policy excluded from coverage
goods "for which a storage charge is made," Sparks
did nothing to inform Port Metal or its customers of the
exclusion. Rather, he typed into the 1993 certificate on
Port Metal's $ 3,000,000 bailee policy that he delivered
to <strong>Omni</strong> the statement that Port Metal's bailee policy
"INCLUDES PROPERTY OF OTHERS IN CUSTODY
[**56] OF INSURED," a statement Sparks admitted was
"untrue." He then delivered two more "All Risk" certificates
to <strong>Omni</strong> without mentioning the exclusion.
[*387] Considering the evidence in the light most
favorable to the jury's verdict, we hold that the evidence
would enable reasonable and fair-minded people to conclude
that Poe & Brown, Transcontinental's agent, made
a negligent misrepresentation. Merrell Dow, 953 S.W.2d
at 711. There was no evidence that Poe & Brown did not
make the representations complained of. Therefore, considering
and weighing all the evidence neutrally, we hold
that the jury's finding that Poe & Brown and Transcontinental
made negligent misrepresentations is not so contrary
to the overwhelming weight of the evidence as to
be clearly wrong and unjust. Arias, 265 S.W.3d at 468.
We hold, therefore, that the evidence is both legally and
factually sufficient to support the jury's finding that Poe
& Brown and Transcontinental made negligent misrepresentations
to <strong>Omni</strong>. We further hold that the evidence
was both legally and factually sufficient to support the
jury's finding that Poe & Brown, Transcontinental's
agent, represented to <strong>Omni</strong> that Port Metal's bailee policy
had a characteristic [**57] it did not have, namely the
characteristic of covering <strong>Omni</strong>'s steel coils stored at
Port Metal, and that Poe & Brown and Transcontinental
represented to <strong>Omni</strong> that the bailee policy conferred a
right that it did not confer, namely the right to recover
insurance proceeds for damage to <strong>Omni</strong>'s steel stored at
Port Metal.
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 15
We overrule the first part of Brown & Brown's first
issue.
b. Justifiable Reliance and Causation
In the second and third parts of its first issue, Brown
& Brown argues that the evidence is legally and factually
insufficient to establish that a representation by Poe &
Brown caused <strong>Omni</strong>'s damages. Brown & Brown contends
that there is no evidence that <strong>Omni</strong> read Poe &
Brown's 1995 certificate of insurance before the 1995
fire and that, as a matter of law, <strong>Omni</strong> <strong>Metals</strong> could not
detrimentally rely on the term "all risk" in the certificate
of insurance to mean that its steel coils were covered
under Port Metal's bailee policy or that the policy would
have "no conditions, no terms, no exclusions" limiting
coverage. Transcontinental argues in the first and second
parts of its third issue that no one at <strong>Omni</strong> read the certificates.
Both Brown & Brown and Transcontinental
also argue [**58] that the fact that the certificates contained
a disclaimer is conclusive evidence of a lack of
justifiable reliance.
"Under the DTPA, a consumer may bring an action
when he has relied to his detriment on a false or misleading
representation, and the reliance is a producing
cause of damages." Am. Home Shield, Inc. v. Kortz, No.
01-99-00380-CV, 2000 Tex. App. LEXIS 6125, 2000 WL
1262617, at *3 (Tex. App.--Houston [1st Dist.] 2000,
pet. dism'd) (not designated for publication); see also
Leyendecker & Assocs., Inc. v. Wechter, 683 S.W.2d 369,
373 (Tex. 1984). The plaintiff may recover either "the
value of that which he has received" ("out of pocket"
damages) or "the difference between the value as represented
and the actual value received" ("benefit of the
bargain" damages). Am. Home Shield, 2000 Tex. App.
LEXIS 6125, 2000 WL 1262617, at *3; see also Leyendecker,
683 S.W.2d at 373. Evidence that a misrepresentation
as to the terms or benefits of coverage prevented
an insured from taking steps to prevent a loss is sufficient
to support a jury finding that the misrepresentation
was a producing cause of damages. Gros, 818 S.W.2d at
914 (holding that evidence that insureds could have taken
steps to prevent damage to their home caused by
landslide, [**59] such as re-engineering retaining wall,
had they known retaining wall failure would not be covered
by homeowner's policy, was sufficient to support
jury's finding that insurer's [*388] misrepresentations
regarding coverage were producing cause of insureds'
damage).
In addition, Texas has long recognized the tort of
negligent misrepresentation as described in section 552
of the Restatement (Second) of Torts and its application
to professionals. McCamish, Martin, Brown & Loeffler v.
F.E. Appling Interests, 991 S.W.2d 787, 791 (Tex. 1999).
Section 552(1) provides:

One who, in the course of his business,
profession or employment, or in any
transaction in which he has a pecuniary
interest, supplies false information for the
guidance of others in their business
transactions, is subject to liability for pecuniary
loss caused to them by their justifiable
reliance upon the information, if he
fails to exercise reasonable care or competence
in obtaining or communicating
the information.
Id. at 791 (emphasis added) (quoting RESTATEMENT
(SECOND) OF TORTS § 552 (1977) and applying section
to define scope of duty of attorney to non-client to
whom he has made representation); see Sloane, 825
S.W.2d at 442 (applying [**60] section 552 to define
scope of lender's duty); Stone v. Lawyers Title Ins. Corp.,
554 S.W.2d 183, 188 (Tex. 1977) (holding that title insurer
can be liable for fraud in misrepresenting state of
title); Great Am. Mortgage Investors v. Louisville Title
Ins. Co., 597 S.W.2d 425, 430 (Tex. Civ. App.--Fort
Worth 1980, writ ref'd n.r.e.) (applying tort of negligent
misrepresentation to title insurer).
Under this law, "[i]t is well settled that even though
one does not have a duty to act, if one acts voluntarily,
he must do so with due care and is generally liable for
negligence." Great Am. Mortgage, 597 S.W.2d at 430
(holding that title binder who had no duty to disclose
existence of deed restriction but who "actually represented
that no deed restrictions were in existence . . . is
held to the standard of reasonable care and may under
the proper circumstances be liable in tort for damages
caused by a negligent misrepresentation"). In the context
of title insurance, the law imposes a duty on the title insurer
to know whether a statement he makes to the seller
is true, and it holds him responsible for an affirmative
representation that is the "producing cause" of damages
to the party purchasing [**61] the insurance. First Title
Co. v. Garrett, 860 S.W.2d 74, 76 (Tex. 1993). Similarly,
the theory of negligent misrepresentation permits plaintiffs
who are not parties to a contract for the professional
services of lawyers to recover from the contracting professionals
in situations in which the attorney who provides
the false information is aware of the non-client and
intends that the non-client rely on the information.
McCamish, 991 S.W.2d at 792.
However, liability is limited to the loss suffered
(a) by the person or one of a limited
group of persons for whose benefit and
guidance [one] intends to supply the in-
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
formation or knows that the recipient intends
to supply it; and (b) through reliance
upon it in a transaction that [one] intends
the information to influence or
knows that the recipient so intends or in a
substantially similar transaction.
Page 16
Id. at 794 (quoting RESTATEMENT (SECOND) OF
TORTS § 552(2)) (emphasis added).
In determining whether the justifiable reliance element
of negligent misrepresentation is met, the court
must consider the nature of the relationship between the
professional, his client, and the nonclient. See
McCamish, 991 S.W.2d at 794. The professional must
have invited [**62] reliance. See id. (holding that attorney
owes duty of care to nonclient only if attorney
invites [*389] reliance); see also Sloane, 825 S.W.2d
at 442 (finding evidence sufficient to support borrowers'
claim that bank has duty to use reasonable care whenever
it provides information to its customers or potential customers
which it breached when it allegedly encouraged
borrowers to incur expenses in reliance on false information
provided by bank in relation to their loan application).
The misrepresentation must have been the cause in
fact of the plaintiff's damages. The damages recoverable
for a negligent misrepresentation are those necessary to
compensate the plaintiff for the pecuniary loss to him of
which the misrepresentation is the legal cause, including,
inter alia, "pecuniary loss suffered . . . as a consequence
of the plaintiff's reliance on the misrepresentation."
Sloane, 825 S.W.2d at 442 (quoting RESTATEMENT
(SECOND) OF TORTS § 552B). The two elements of
proximate cause are (1) that an omission or act was a
substantial factor in bringing about the plaintiff's injury,
without which no harm would have occurred, or cause in
fact, and (2) that the actor would have anticipated the
danger [**63] that his negligent act created for others,
or foreseeability. City of Gladewater v. Pike, 727 S.W.2d
514, 517 (Tex. 1987); see also Havner v. E-Z Mart
Stores, 825 S.W.2d 456, 458-59 (Tex. 1992). The act or
omission need not be the sole cause of the plaintiff's
harm, and causation need not be supported by direct evidence;
circumstantial evidence and inferences therefrom
are a sufficient basis for finding causation. Havner, 825
S.W.2d at 459.
(1) Legal Sufficiency of the Evidence of Justifiable
Reliance and Causation
Brown & Brown argues that because Tomes, <strong>Omni</strong>'s
president, testified that he did not specifically recall
reading the certificates of insurance, "the evidence is
legally and factually insufficient to support the cause in

fact and reliance elements of <strong>Omni</strong>'s claims." Brown &
Brown also argues that "<strong>Omni</strong> could not have justifiably
or reasonably relied on the term 'All Risk' to mean that
all of its steel coils were covered under Port Metal's policy
or that the policy would have 'no conditions, no
terms, no exclusions' limiting coverage" because of the
disclaimer in the certificate that "THIS CERTIFICATE
IS ISSUED AS A MATTER OF INFORMATION ON-
LY AND CONFERS NO RIGHTS ON THE CERTIFI-
CATE [**64] HOLDER. THIS CERTIFICATE DOES
NOT AMEND, EXTEND OR ALTER THE COVER-
AGE AFFORDED BY THE POLICIES DESCRIBED
BELOW." Transcontinental likewise argues that the fact
that the certificates contain a disclaimer is conclusive
evidence of a lack of justifiable reliance.
We construe Brown & Brown's and Transcontinental's
argument to be that <strong>Omni</strong> could not justifiably rely
on Poe & Brown's representation that Port Metal had an
"all risk" bailee policy; rather, <strong>Omni</strong> was barred by the
disclaimer as a matter of law from relying on appellants'
representation of coverage of "all risks" in the certificate
of insurance, and it had a legal duty to read the policy
referenced in the certificate of insurance to determine the
scope of any exclusions. Because <strong>Omni</strong> did not ask for
and read the policy, the evidence was legally insufficient
to support its negligent misrepresentation and DTPA
claims under the Insurance Code.
We hold that the law of the case again controls. In
<strong>Omni</strong> <strong>Metals</strong>, in response to <strong>Omni</strong>'s appeal of the summary
judgment entered against it, Poe & Brown and
Transcontinental argued, as they do here, that <strong>Omni</strong> had
a duty to read the policy itself. Reversing the summary
judgment, the Fourteenth Court [**65] of Appeals
pointed out that "[c]ertain persons, other than the direct
recipient of a misrepresentation, [*390] can sue for
negligent misrepresentation." <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex.
App. LEXIS 4334, 2002 WL 1331720, at *7 (citing RE-
STATEMENT (SECOND) OF TORTS § 552(2)) (describing
persons who may sue for negligent misrepresentation
as including person or persons "for whose benefit
and guidance [the defendant] intends to supply the
information or knows that the recipient intends to supply
it" and "through reliance upon it in a transaction that [the
defendant] intends the information to influence or knows
that the recipient so intends or in a substantially similar
transaction"). The court also observed that, in the cases
upon which <strong>Omni</strong> relied, "the failure to read the policy
was no apparent bar to a claim for misrepresentation."
2002 Tex. App. LEXIS 4334, [WL] at *8 (citing Lexington
Ins. Co., 993 S.W.2d at 197-98 (stating that any misconduct
by agent that is within actual or apparent scope
of agent's authority and that insurer's recording agent's
misrepresentation of coverage is considered that of insurer);
Black, 797 S.W.2d at 24B25. It held, "<strong>Omni</strong>'s
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 17
failure to read the policy does not support the granting of
summary judgment." <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex. App.
LEXIS 4334, 2002 WL 1331720, at *8. [**66] In other
words, the court held that <strong>Omni</strong> <strong>Metals</strong> had no legal duty
to read the policy upon which judgment against it could
be based.
The Fourteenth Court of Appeals specifically rejected
the argument that the disclaimer on the certificate
of insurance put <strong>Omni</strong> on notice that there could be exclusions
that would prevent its stored steel from being
covered by Port Metal's "all risk" bailee policy and that it
placed on <strong>Omni</strong> a duty of due diligence to read the bailee
policy to determine the extent of Port Metal's coverage.
The court stated,
[I]ssuance of a certificate of insurance
[the 1993 certificate] without disclosure
of additional information about the storage
fee exclusion and issuance of another
certificate [the 1995 certificate], coupled
with the circumstances under which it was
sent to <strong>Omni</strong> and the assurances of coverage
to Port Metal, give rise to causes of
action for misrepresentation. We reject
appellees' arguments that, as a matter of
law, issuance of an insurance certificate
does not create a duty; presence of disclaimers
precludes the creation of a false
impression; no duty to disclose arises because
there is no duty to explain policy
exclusions to an insured; and the use of
[**67] "all risk" cannot convey a false
impression.
2002 Tex. App. LEXIS 4334, [WL] at *7. Adopting the
law of the case, we hold that <strong>Omni</strong>'s negligent misrepresentation
and DTPA claims were not barred as a matter
of law by the failure of its president to read every word
in the certificate of insurance or to request and read the
policy to determine whether its steel was excluded from
coverage.
Our conclusion is not changed by the cases relied
upon by Brown & Brown to support its claim. In none of
its cases was there a direct misrepresentation to the
plaintiff or any evidence that the plaintiff received and
relied upon a false or misleading representation. See
Rocky Mountain Helicopters, Inc. v. Lubbock County
Hosp. Dist., 987 S.W.2d 50, 53 (Tex. 1998) (stating, "the
record contains no evidence that [the plaintiff] was aware
of the [representation] or that [the defendant] had communicated
its content or existence to anyone outside of
the company"); Sw. Bell Tel. Co. v. Boyce Iron Works,
Inc., 726 S.W.2d 182, 187 (Tex. App.--Austin 1987)

(holding there was no proof that plaintiff had "even heard
of any representations, much less misrepresentations"),
rev'd on other grounds, 747 S.W.2d 785 (Tex. 1988);
Rivera v. Philip Morris, Inc., 395 F.3d 1142, 1155 (9th
Cir. 2005) [**68] (stating there was "no admissible
evidence identifying what statements attributable to [the
defendant] the decedent actually saw, heard, or read and
relied upon").
[*391] Nor is our conclusion changed by Transcontinental's
argument that, as a matter of law, reliance is
never justified when a party receives a disclaimer. Rather,
we agree with <strong>Omni</strong>'s argument that all of the cases
cited by Transcontinental on this point are factually distinguishable
and inapplicable in that "they relate solely to
binding contractually disclaimed reliance." See Coastal
Bank SSB v. Chase Bank of Texas, N.A., 135 S.W.3d 840,
844 (Tex. App.--Houston [1st Dist.] 2004, no pet.);
Bluebonnet Sav. Bank F.S.B. v. Grayridge Apt. Homes,
Inc., 907 S.W.2d 904, 910 (Tex. App.--Houston [1st
Dist.] 1995, writ denied); Airborne Freight Corp. v. C.R.
Lee Enters., 847 S.W.2d 289, 298 (Tex. App.--El Paso
1992, writ denied). Here there was no contract between
<strong>Omni</strong> and Brown & Brown, and there was specifically
no contractually binding agreement by <strong>Omni</strong> not to rely
on the certificate provided to it for use in its business
dealings. Rather, the certificate was delivered to <strong>Omni</strong>
by Poe & Brown for the express purpose of conveying to
[**69] <strong>Omni</strong>'s lender the assurance that <strong>Omni</strong>'s steel
stored at Port Metal was insured and with Poe & Brown's
knowledge that it would be so relied upon. Thus, Poe &
Brown invited <strong>Omni</strong>'s reliance on its representations. See
McCamish, 991 S.W.2d at 794.
Moreover, Poe & Brown's delivery of the requested
certificate to <strong>Omni</strong> and its failure to correct information
regarding coverage that it knew to be incorrect caused
<strong>Omni</strong> not to take other steps to assure the coverage of its
steel stored at Port Metal. This is essentially the same
scenario as in Hermann Hospital, in which we opined,
To insulate the insurance carriers from
liability leaves the [third-party plaintiff to
whom coverage was misrepresented for
use in its business dealings] without recourse
against the party causing its damage,
if it acts in reliance on the representation
of coverage. Had the insurance carrier
not falsely or negligently provided
information, appellant could have sought
alternative means to ensure that it received
payment for service before rendering
them.
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 18
776 S.W.2d at 252. We declined to find that such a suit
was barred as a matter of law in Hermann Hospital, and
we similarly decline to find that a suit for misrepresentation
[**70] is barred in this case.
Finally, our holding that <strong>Omni</strong> justifiably relied on
Poe & Brown's false representations and that those representations
caused it pecuniary damages is not changed
by Brown & Brown's and Transcontinental's reliance on
new authority since <strong>Omni</strong> <strong>Metals</strong> was decided, namely
the Southern District of Texas's construction of Texas
law in TIG Insurance Co. v. Sedgwick James, 184 F.
Supp. 2d 591 (S.D. Tex. 2001) (Via Net I), and the Texas
Supreme Court's subsequent per curiam opinion in a
companion case, Via Net v. TIG Insurance Co., 211
S.W.3d 310 (Tex. 2006) (Via Net II).
In Via Net I, the named insured, Corporate Express,
Inc., purchased two commercial general liability (CGL)
insurance policies from Lumbermens Mutual Casualty
Company for itself and its subsidiaries, Policies 300 00
and 300 01. 184 F. Supp. 2d 591 at 594. The named insureds
on Policy 362 00 were "U.S. Delivery Systems
[USDS] and its subsidiaries, United Transnet, Inc. and its
subsidiaries, and Corporate Express, Inc. [CEI] (the parent
company of [USDS] and united Transnet)." Id. Policy
362 00 contained no provision for additional insured
coverage. Id. Policy 30001's named insured was CEI.
While subsidiaries [**71] of CEI were included on
Policy 300 01, which did provide for additional insureds,
the policy specifically excluded Corporate Express Delivery
Systems, Inc. [*392] (CEDS) and its subsidiaries,
which included USDS, whose Houston subsidiary
was Via Net. Id. Via Net was thus insured only under
Policy 300 00. Id.
One of Via Net's customers was Safety Lights Sales
& Leasing, Inc. (Safety Lights). In March 1996, Safety
Lights demanded that it be added as an additional insured
to Via Net's insurance policy in order for Via Net to remain
a vendor with Safety Lights. See id. As evidence
that it had been added as an additional insured, Safety
Lights requested a certificate of general and auto liability
insurance from Via Net, and it further required that the
certificate "evidence 'waiver of subrogation and additional
insured in favor of Safety Lights Company.'" Id. at
594-95. CEDS's insurance agency, Sedgwick, issued a
certificate to Safety Lights under Policy 362 00 listing
Via Net and USDS as the insureds. Id. The certificate
stated, "Certificate holder is added as additional insured
re: general liability." Id. at 595. The certificate contained
the same disclaimer as in this case. Safety Lights did
[**72] not ask for or seek to read Policy 362 00 to which
the certificate of insurance referred. See id. at 598. Policy
362 00 did not provide for additional insureds.

Subsequently, an employee of Via Net was injured
while delivering a steel plate to Safety Lights. He sued
Safety Lights under various theories, including violations
of the Texas Insurance Code, the DTPA, negligence,
misrepresentation and fraud, claiming that Lumbermens
should provide coverage under Policy 362 00. The United
States District Court rejected Safety Light's claim that
it was entitled to coverage under Policy 362 00. The
court held that a "certificate of insurance will not suffice
to create insurance coverage if such coverage is precluded
by the terms of the policy." Id. at 597 (citing
Wann v. Metropolitan Life Ins. Co.., 41 S.W.2d 50, 52
(Tex. Com. App. 1931) for proposition that "certificate of
insurance does 'not constitute the complete contract of
insurance' and must be construed in connection with underlying
insurance policy"). Observing that under Texas
law, "[a]n insured has a duty to read the insurance policy
and is charged with knowledge of its provisions," the
court concluded that Safety Lights, claiming to [**73]
be an additional insured under Policy 300 01, "should be
held to the same obligation as a named insured to review
a policy of insurance on which it seeks to rely, and its
reliance solely on the agent's certificate of insurance is
not reasonable under the circumstances presented by the
admissible evidence." Id. at 603 (citing Ruiz v. Gov't
Emp. Ins. Co., 4 S.W.3d 838, 841 (Tex. App.--El Paso
1999, no pet.)). It concluded that Safety Lights' reliance
upon the certificate of insurance to provide it additional
insured status was not reasonable. Id. at 604. 5
5 With respect to Safety Lights' Insurance
Code and DTPA claims, the court acknowledged
that "Section 4 of Article 21.21 of the Texas Insurance
Code and Section 17.46 of the DTPA
prohibit the making of any statement misrepresenting
the terms of any insurance policy." TIG
Ins. Co. v. Sedgwick James, 184 F. Supp. 2d 591,
604 (S.D. Tex. 2001) (Via Net I) (citing former
TEX. INS. CODE art. 21.21, § 4(1); TEX. BUS. &
COM. CODE ANN. § 17.46). But it held that
Safety Lights' DTPA and Article 21.21 claims
failed as a matter of law because its damages and
expenses related to its employee's personal injury
suit were entirely borne by TIG, so [**74] that
Safety Lights suffered no economic damages, and
TIG brought suit "only under its rights of subrogation
under the insurance policy it issued to
Safety Lights," and, "a subrogee can have no
greater rights than its subrogor," so that "TIG, as
subrogee, cannot state a claim under the DTPA."
Id. at 605.
After its unsuccessful federal suit to recover as an
additional insured under the Lumbermens policy, Safety
Lights sued Via Net in Texas state court for breaching
[*393] its promise to provide additional insured cover-
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 19
age. Via Net II, 211 S.W.3d 310. The issue when the suit
was eventually appealed to the Texas Supreme Court
was whether the discovery rule applied to Safety Lights'
suit, which arose less than four years after coverage was
denied but more than four years after the promise to provide
coverage was breached. Id. at 311-12. The court
observed that Via Net's policy with Lumbermens "did
not provide for additional-insured coverage and no endorsement
adding it as an insured was ever issued." Id. at
312. It held that, as a contracting party, Safety Lights had
a duty to use ordinary care for the protection of its own
interests and to use due diligence to verify contract performance.
Id. at 314. [**75] Because the breach would
have been easily discoverable merely by Safety Lights'
"asking [its] contract partner for information needed to
verify contractual performance," the Texas Supreme
Court held that, under the circumstances of the case, the
discovery rule did not apply, although it might apply to
contract cases under other circumstances. Id. at 314-15.
The court commented in dicta, "Given the numerous
limitations and exclusions that often encumber such policies,
those who take such certificates at face value do so
at their own risk." Id. at 314.
We decline to extend the reasoning in Via Net I and
Via Net II regarding the due diligence obligations of a
person claiming to be entitled to insurance proceeds as a
party to an insurance contract to persons bringing claims
under the Texas Insurance Code alleging negligent misrepresentation
and violations under the DTPA based on
false representations of the contents of insurance policies
by insurance agents and companies upon which the
plaintiff relied in its business dealings and which caused
the plaintiff to suffer economic damages. In Via Net I,
the relevant holding was that a party claiming to be entitled
to insurance coverage as an [**76] additional insured
under an insurance policy, and therefore claiming
to be in contractual privity with the insurance company,
cannot rely on a certificate of insurance to extend more
coverage than is actually conveyed by the policy itself,
any more than the named insured can. Rather, a party
claiming to be an additional insured is held to the same
burden as the named insured of reading the policy to
ascertain its right to coverage. See Via Net II, 211 S.W.3d
at 314. Here, under a far different set of circumstances,
<strong>Omni</strong> was not an additional insured, but a customer of an
insured, and the question is whether <strong>Omni</strong> could justifiably
rely upon the affirmative misrepresentations of the
insurance agent for a third party, Port Metal, that Port
Metal was insured and, therefore, that <strong>Omni</strong>'s steel was
protected by Port Metal's insurance, which were made
both orally and in certificates of insurance solicited and
relied upon by <strong>Omni</strong> for use in its own business dealings.
It is well established that, unlike a party to an insurance
contract claiming to be an insured and therefore

entitled to recover insurance proceeds, a party to whom a
third party's insurance agent has made misrepresentations
regarding [**77] the extent of the third party's insurance
coverage for use in the business dealings of the recipient
has no duty of due diligence to seek out and read
the third party's insurance policy and to verify its terms
and conditions in order to maintain a suit for misrepresentation
and deceptive acts and practices against the
agent and his principal under the Insurance Code and the
DTPA. See <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex. App. LEXIS 4334,
2002 WL 1331720, at *8 (holding that <strong>Omni</strong>'s failure to
read Port Metal's policy was no bar to claim for misrepresentation
by Port Metal's insurance agent); see also
Royal Globe, 577 S.W.2d at 693 (holding false representations
of local recording agent [*394] regarding coverage
afforded by policy for vandalism actionable under
former article 21.21, section 16 and DTPA section
17.46(b)(12)); Celtic Life Ins. Co., 831 S.W.2d at 596
(holding misrepresentation by health insurance agent as
to benefits actionable under article 21.21, section 16 and
DTPA); Gros, 818 S.W.2d at 912-13 (same with respect
to homeowner's policy); Hermann Hosp., 776 S.W.2d at
253 (same with respect to representation to hospital regarding
coverage of worker's compensation insurance
policy). These cases stand in contrast to contract [**78]
law, where it is equally well established that a contracting
party has a duty of due diligence regarding formation
and performance of the contract. See Via Net II, 211
S.W.3d at 314 (stating, "Due diligence may include asking
a contract partner for information needed to verify
contractual performance"); Coastal Bank SSB, 135
S.W.3d at 843 (holding that contract and circumstances
surrounding its formation determine whether disclaimer
of reliance in contract is binding and bars fraudulent inducement
claim by party to contract).
The only requirement for a party seeking to hold liable
the principal of an insurance agent who made a false
representation about coverage is that the recipient look to
the acts of the principal "to see if those acts would lead a
reasonably prudent person using diligence and discretion
to suppose that the agent had the authority he purported
to exercise." Shandee, 880 S.W.2d at 412 (quoting Guthrie
v. Rep. Nat'l Ins. Co., 682 S.W.2d 634, 637 (Tex.
App.--Houston [1st Dist.] 1984, writ ref'd n.r.e.)). Here,
there was nothing to indicate that Transcontinental had
not authorized Poe & Brown to represent the extent of
Port Metal's insurance coverage to <strong>Omni</strong>. And, as
[**79] Transcontinental's recording agent, Poe & Brown
did, in fact, have such authority. See Royal Globe, 577
S.W.2d at 694 (local recording agent of insurer has authority
to represent coverage afforded by policies it
sells). If representations about the extent of coverage by
an authorized agent are false, "under the explicit language
of Section 16, Article 21.21 and Section
17.46(b)(12) of the DTPA," those actions constitute a
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 20
deceptive act or practice for which not only the agent but
his principal is accountable. See id.
We hold that <strong>Omni</strong> had no legal duty to obtain and
read Port Metal's bailee insurance policy or to verify its
terms in order to maintain its suit for misrepresentation
and violations of the DTPA under article 21.21 of the
Insurance Code. We therefore address whether the evidence
was factually sufficient under the circumstances of
this case to show that <strong>Omni</strong> justifiably relied on Poe &
Brown's misrepresentations.
(2) Factual Sufficiency of the Evidence of Reliance
and Causation
Here, at <strong>Omni</strong>'s request, Sparks, a Poe & Brown insurance
agent, delivered certificates of insurance stating
that <strong>Omni</strong>'s steel stored at Port Metal was covered under
Port Metal's "all risk" bailee insurance [**80] policy.
Sparks knew the request was made so that <strong>Omni</strong> could
provide the certificate to its secured lender to prove that
its steel was insured. Sparks also knew by mid-1993 that
Port Metal charged <strong>Omni</strong> a storage fee for its metal
stored at Port Metal, that goods for which Port Metal
charged a storage fee were excluded by the terms of the
bailee policy, and that that information was not contained
on any of the certificates. Rather, the information on
each of the certificates was, by Sparks' own admission,
"untrue" and, by Poe & Brown's expert's admission
"misleading."
While Tomes, <strong>Omni</strong>'s president, testified at trial that
he did not "personally read [*395] and review every
single certificate of insurance that came across to <strong>Omni</strong>"
and that he did not ask for or "actually receive the insurance
policy rather than the certificate of insurance," he
also testified that he "just look[ed] at 'all risks'" and saw
that the certificates sent him confirmed what McKnight,
Port Metal's president, had told him and that nothing on
the certificates gave him any reason to doubt McKnight.
Tomes testified that the certificates would also have been
reviewed by Debbie Hiner at <strong>Omni</strong>, that they were then
forwarded [**81] to <strong>Omni</strong>'s secured lender as proof that
the steel was insured, and that "they were satisfied too."
He stated that he did not ask for the policy because the
company "would think that the certificate of insurance
would be adequate to cover what we needed." In addition,
<strong>Omni</strong>'s president was assured that its steel was insured
by Port Metal's president, McKnight, who had read
the policy and who received the misinformation directly
from Sparks in response to his question about the exclusion
he saw in the 1992 bailee policy. That misinformation
was never corrected by appellants prior to the fire
that damaged <strong>Omni</strong>'s steel.
Considering the evidence in the light most favorable
to the jury's verdict, we hold that the evidence would
enable reasonable and fair-minded people to find that

<strong>Omni</strong> justifiably relied on Poe & Brown's negligent misrepresentation
and that the negligent misrepresentation
caused <strong>Omni</strong>'s pecuniary damages, and therefore the
evidence in support of these elements of <strong>Omni</strong>'s claim
was legally sufficient. See Wilson, 168 S.W.3d at 827.
Considering and weighing all the evidence neutrally, we
further hold that the evidence on these elements was not
so contrary to the overwhelming weight [**82] of the
evidence as to be clearly wrong and unjust and was thus
factually sufficient. See Arias, 265 S.W.3d at 468.
We overrule the third part of Brown & Brown's first
issue and Transcontinental's third issue.
c. Poe & Brown's Knowledge
Brown & Brown also argues in its first issue that the
evidence is legally and factually insufficient to support
the jury's finding that Poe & Brown "knowingly" engaged
in an unfair or deceptive act or practice, as required
for an award of additional damages of up to three
times actual damages under former article 21.21. See
former TEX. INS. CODE art. 21.21, '16 (b)(1). Brown &
Brown contends that it sends out thousands of certificates
of insurance a week nationwide and that "[o]ther
than Poe & Brown's 1995 certificate sent to <strong>Omni</strong> less
than two (2) months before the December 5, 1995 fire,
there is absolutely no evidence of any other communication
between <strong>Omni</strong> and Poe & Brown."
The charge tracked the language of the DTPA in defining
"knowingly" as
actual awareness, at the time of the
conduct, of the falsity, deception, or unfairness
of the conduct in question or actual
awareness of the conduct constituting
a failure to comply with a warranty. Actual
awareness [**83] may be inferred
where objective manifestations indicate
that a person acted with actual awareness.
See TEX. BUS. & COM. CODE ANN. § 17.45(9). Actual
awareness "means that a person knows that what he is
doing is false, deceptive, or unfair" and does it anyway.
St. Paul Surplus Lines v. Dal-Worth Tank Co., 974
S.W.2d 51, 53B54 (Tex. 1998). The term "knowingly"
lies on a continuum of "gross negligence, 'knowingly,'
'willful' and intentional" with "gross negligence being the
lowest mental state and intentional being the highest." Id.
(quoting Luna v. [*396] N. Star Dodge Sales, Inc.,
667 S.W.2d 115, 118 (Tex. 1984)).
Here, the evidence shows that Sparks, Poe &
Brown's agent, knew by at least July, 1993 that Port
Metal's bailee policy excluded from coverage goods for
which a storage charge was made. He also knew from
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 21
approximately the same time that Port Metal received
revenues from its customers of $ 6,000 a month for storage
fees. He knew that Port Metal relied on him to obtain
coverage for all of its customers' steel. Sparks also knew
that <strong>Omni</strong> stored its steel at Port Metal and that <strong>Omni</strong>'s
request for a certificate of insurance was for the purpose
of providing its secured lender assurance that [**84]
the steel stored at Port Metal was covered by Port Metal's
bailee policy. When Sparks sent the requested certificate
to <strong>Omni</strong> stating that it covered "all risks," Sparks knew
that representation was false and misleading. Indeed, on
the day of the fire two months later, Sparks advised both
Port Metal and one of its customers not to mention the
word "storage" to anyone. None of this evidence is controverted.
Considering the evidence in the light most favorable
to the jury's verdict, we hold that the evidence would
enable reasonable and fair-minded people to find that
Sparks, an insurance agent with Poe & Brown, knew that
his representations to <strong>Omni</strong> that Port Metal's insurance
policy covered "all risks" was false and misleading and
that he knew <strong>Omni</strong> would rely on the false information
to satisfy its own and its secured lender's concerns that
the steel be insured. Thus we hold that the evidence in
support of Poe & Brown's knowledge of its misrepresentation
was legally sufficient to support the jury's finding.
See Wilson, 168 S.W.3d at 827. Considering and weighing
all the evidence neutrally, we further hold that the
evidence regarding Poe & Brown's knowledge of the
misrepresentation was [**85] not so contrary to the
overwhelming weight of the evidence as to be clearly
wrong and unjust, and thus it was factually sufficient.
See Arias, 265 S.W.3d at 468.
We overrule Brown & Brown's first issue and
Transcontinental's third issue.
F. Additional Damages Awarded <strong>Omni</strong>
In its fifth issue, Transcontinental argues that additional
damages of $ 1,080,000 awarded <strong>Omni</strong> against
Transcontinental are erroneous because Transcontinental
had no contact with <strong>Omni</strong> and there is no evidence
Transcontinental knew of any wrongful act, as required
for an award of additional damages. On rehearing,
Transcontinental re-urges and elaborates upon its argument
from its original brief that an agent's knowledge
cannot be attributed to its principal under the DTPA and
the Texas Insurance Code.
Former article 21.21, section 16 of the Insurance
Code permitted an award of additional damages of up to
three times actual damages "[i]f the trier of fact finds that
the defendant knowingly committed the acts complained
of." Former TEX. INS. CODE art. 21.21, § 16(b)(1)
(current version at TEX. INS. CODE ANN. § 541.152(b)).

In its answer to question 3, the jury found that both Poe
& Brown and Transcontinental had committed [**86]
an unfair or deceptive act or practice by either "(1) representing
that goods or services had or would have characteristics
that they did not have; or (2) representing that
an agreement confers or involves rights that it did not
have or involve." In its answer to Question 5, the jury
found that both defendants engaged in this conduct
"knowingly." In its answer to Question 6, the jury found
that <strong>Omni</strong> should be awarded $ 1,620,000 against Poe &
Brown and $ 1,080,000 against Transcontinental because
their conduct was committed knowingly. The issue presented
by [*397] Transcontinental is whether those
damages can be attributed to a principal whose agent has
made the misrepresentation.
The assessment of additional damages under former
article 21.21, section 16 of the Insurance Code is not
dependent on rules of common-law negligence but on the
existence of corporate knowledge and therefore may be
taken against a principal based solely upon the vicarious
or imputed knowledge or intent of its agent. Maryland
Ins. Co. v. Head Indus. Coatings & Servs., Inc., 906
S.W.2d 218, 229-30 (Tex. App. --Texarkana 1995), rev'd
on other grounds, 938 S.W.2d 27 (Tex. 1996). Companies
"are responsible for the knowledge [**87] possessed
by those whom they appoint as agents." See id. at
229 (imputing to insurance company knowledge of terms
of policy that should have been issued that was possessed
by local recording agent).
In Royal Globe, the supreme court addressed
"whether a misrepresentation about coverage afforded by
a policy of insurance, made by the insurance company's
local recording agent, is a deceptive trade practice [and
insurance code violation] under Texas statutes for which
the insurance company as principal is liable for treble
damages." 577 S.W.2d at 689. The court held that an
insurance company that authorizes an agent to sell its
policies may not escape liability for misrepresentations
made by the agent that violate section 17.46 of the DTPA
or former article 21.21 of the Insurance Code merely by
establishing that the agent had no actual authority to
make the misrepresentation. Id. at 693. The insurance
company can be found to have vicariously committed the
deceptive act or practice. Id.
In Celtic, the supreme court reaffirmed the principle
that "[a]n insurance company is generally liable for any
misconduct by an agent that is within the actual or apparent
scope of the agent's authority." 885 S.W.2d at 98.
[**88] It stated that an insurer "cannot escape liability on
the basis that it did not authorize particular representations
concerning the policy." Id. at 99. The proper inquiry
is whether the agent was acting within the scope of
the agency relationship at the time of the wrongful act.
Id. (holding that misrepresentation made by agent in
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 22
course of explaining terms of policy was within scope of
his authority).
In Maryland Ins. Co., the court, applying standard
doctrines of agency under circumstances very similar to
those in this case, held that "[t]he knowledge of the agent
is the knowledge of the company itself" and that, therefore,
the plaintiff "was entitled to a determination as a
matter of law that the violation of the Insurance Code
had been done knowingly." 906 S.W.2d at 228-29; see
also Ins. Co. of N. Am., 928 S.W.2d at 145 (deeming apparent
authority of surety to make representations about
quality of securities knowledge or acquiescence by principal);
Gros, 818 S.W.2d at 913 (stating, "when State
Farm's agent misrepresented coverage, that misrepresentation
made her individually liable . . . and that statement
was also a misrepresentation by State Farm that made it
liable as well"); [**89] Lexington Ins. Co., 993 S.W.2d
at 198 ("When an insurer's recording agent misrepresents
coverage the misrepresentation is considered that of the
insurer.").
Here, Sparks, an agent for Poe & Brown, Transcontinental's
local recording agent, falsely represented that
Port Metal's Transcontinental "All Risks" bailee policy
covered <strong>Omni</strong>'s steel stored at Port Metal. Sparks testified
that he made a mistake by selling a policy that did
not provide coverage to all Port Metal's customers because
of the storage exclusion; he understood that <strong>Omni</strong>
wanted the certificates to make sure that its steel at Port
[*398] Metal was covered; he knew by mid-1993 that
the policy did not provide the coverage he promised because
he know Port Metal charged a storage fee to some
of its customers; he never made an inquiry into whose
steel was being stored, even though he knew that it was
his responsibility; and he never informed either
McKnight or <strong>Omni</strong> of the exclusion despite knowing that
there was a gap in the intended coverage and that he had
a duty to inform McKnight of the exclusion. Sparks's
statements to both Lykos and McKnight immediately
after the fire, "[I]f anybody asks you, don't mention the
word 'storage,'" [**90] confirmed his knowledge of the
falsity of the representations.
We hold that, in knowingly misrepresenting the
scope of Port Metal's bailee coverage, Sparks was acting
within the scope of his duties as a Poe & Brown agent,
and therefore his representations and the knowledge of
their falsity are both attributable to Poe & Brown, his
principal. In turn, Poe & Brown's knowledge of the falsity
can be attributed to Transcontinental, its principal,
which had appointed Poe & Brown as its recording agent
with authority to make representations about the terms of
the insurance policies it sold.
On rehearing, Transcontinental cites as support for
its argument that Sparks's knowledge of the falsity of his

epresentations cannot be attributed to Transcontinental
the Texas Supreme Court's opinion in Dal-Worth Tank
and two intermediate appellate court opinions, The
Woodlands Land Dec. Co., L.P. v. Jenkins, 48 S.W. 3d
415 (Tex. App.--Beaumont 2001, no writ) and Connell
Chevrolet Co. v. Leak, 967 S.W.2d 888 (Tex.
App.--Austin 1998, no pet.). None of these cases are
availing. In each, additional damages were denied because
there was no evidence that the agents knew their
representations were false. That [**91] is not the case
here. Rather, the record affirmatively demonstrates that
Sparks knew that his representations that <strong>Omni</strong>'s metal
stored at Port Metal was covered by Port Metal's "All
Risk" bailee policy were false. Under Dal-Worth Tank,
"objective manifestations [that] indicate that a person
acted with actual awareness" of the falsity of his representations
satisfy the standard for assessing additional
damages under the DTPA and the Insurance Code. 974
S.W.2d at 53-54.
Because both Sparks and Poe & Brown were acting
within the scope of their authority in representing that
Port Metal's "All Risks" bailee policy covered <strong>Omni</strong>'s
stored steel, we hold that both Poe & Brown and Transcontinental
could be held liable to <strong>Omni</strong> for damages
under the DTPA and the Insurance Code. The jury found
that the representations were false and that both Poe &
Brown and Transcontinental acted "knowingly," and we
have held that evidence in the record is sufficient to
support these finding under both legal and factual sufficiency
standards. Therefore, we hold that the trial court
did not err in entering judgment on the verdict finding
Transcontinental liable for additional damages for
knowingly misrepresenting [**92] the coverage provided
by Port Metal's bailee insurance policy in violation
of the Insurance Code and the DTPA.
We overrule Transcontinental's fifth issue.
G. Attorney's Fees and Costs Incurred in Prior Litigation
In its fourth issue, Transcontinental argues that <strong>Omni</strong>
may not recover attorney's fees of $ 740,000 it incurred
in pursuing a separate tort action against the third
parties responsible for starting the fire. In its third issue,
Brown & Brown joins in [*399] and adopts Transcontinental's
arguments as its own. 6
6 Although this issue was raised in <strong>Omni</strong> <strong>Metals</strong>,
it was not addressed by the Fourteenth Court
of Appeals because it was not part of the parties'
motion for summary judgment. 2002 Tex. App.
LEXIS 4334, 2002 WL 1331720 at *10.
After the fire in which its steel at Port Metal was
damaged, <strong>Omni</strong> filed suit against Port Metal and the par-
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 23
ties it alleged were responsible for the fire, Electrical
Wire & Cable Company and others. <strong>Omni</strong> subsequently
amended its pleadings to name Poe & Brown and Transcontinental
as defendants. On January 9, 1998, the trial
court entered its Supplemental Order on Severance, severing
all actions against Poe & Brown and Transcontinental
from the actions against the parties allegedly responsible
[**93] for the fire. The instant appeal is taken
from the severed action against Poe & Brown and
Transcontinental. <strong>Omni</strong> contends that the litigation
against the alleged responsible parties was prior litigation
for which an equitable exception against wrongdoers
applies that permits recovery of its attorney's fees.
<strong>Omni</strong> acknowledges that the general rule in Texas is
that "attorney's fees may not be recovered from an opposing
party unless such recovery is provided for by
statute or by contract between the parties." Travelers
Indem. Co. v. Mayfield, 923 S.W.2d 590, 593 (Tex.
1996); see also Turner v. Turner, 385 S.W.2d 230, 233
(Tex. 1965). However, in Turner, the supreme court recognized,
without adopting, an exception to the general
rule provided for in the Restatement of the Law: Torts,
Vol. 4 § 914. Id. at 234. The exception provides that
"where a plaintiff has been involved in litigation with a
third party as a result of the tortious act of another, the
plaintiff may recover in a separate suit for his reasonable
and necessary expenses of the prior litigation." Id. Certain
prerequisites must, however, be met. Id. These include:
(1) the plaintiff must have incurred attorney's fees
in the prosecution [**94] or defense of a prior action,
and (2) the litigation must have involved a third party
and must not have been brought against the defendant in
the same action in which the fees are sought. Id. (holding
that section 914 did not cover case where, in
cross-action, defendant former husband sought recovery
from former wife of attorney's fees incurred defending
alienation of affections suit brought against both).
Subsequent to Turner, this Court and other Texas
courts of appeals have held that "equitable principles
may allow the recovery of attorney's fees and other litigation
expenses 'where a party was required to prosecute
or defend the previous suit as a consequence of the
"wrongful act" of the defendant.'" Massey v. Columbus
State Bank, 35 S.W.3d 697, 701 (Tex. App.--Houston [1st
Dist.] 2001, no pet.) (awarding bank recovery of attorney's
fees incurred in suit against former director for
damages due to filing of false and defamatory complaints
and groundless grievances with regulatory agencies); see
also Standard Fire Ins. Co. v. Stephenson, 963 S.W.2d
81, 90-91 (Tex. App.--Beaumont 1997, no pet.) (stating
that "fees may be recoverable where the natural and
proximate results and consequences [**95] of prior
wrongful acts have been to involve a plaintiff in litigation
with and against third parties and other parties" and

holding that insured could recover attorney's fees incurred
in prior litigation between insurer and insured as
result of insurer's bad faith claim); Baja Energy, Inc. v.
Ball, 669 S.W.2d 836, 838-39 (Tex. App.--Eastland 1984,
no writ) (in third-party action brought by oil well operator
against assignor lessee for contribution and indemnity,
awarding oil well operator recovery of [*400] attorney's
fees incurred in defense of bad faith action for
trespass to try title and conversion brought by assignee).
However, our sister court, the Fourteenth Court of Appeals,
has refused to adopt an equitable exception to the
general rule. See Martin-Simon v. Womack, 68 S.W.3d
793, 797-98 (Tex. App.--Houston [14th Dist.] 2001, pet.
denied).
Here, the trial court awarded <strong>Omni</strong> its attorney's fees
incurred in an earlier stage of the instant litigation, which
was brought initially against the parties allegedly responsible
for the fire and to which appellants were added.
After the settlement of <strong>Omni</strong>'s claims against the
other defendants, <strong>Omni</strong>'s suit against Poe & Brown and
Transcontinental [**96] was severed into a separate
cause of action and tried and is now the subject of this
appeal. The litigation for which fees were awarded can
thus not properly be styled "prior litigation." Rather, it is
a suit for recovery of fees incurred in the original cause
of action from which this suit was severed after settlement
of the causes of action brought against the other
parties. Thus, the award violates the prerequisites for
recovery of attorney's fees in the absence of a contractual
or statutory provision set out in Turner, namely that the
plaintiff must have incurred attorney's fees in the prosecution
or defense of a prior action and that the litigation
must have involved a third party and must not have been
brought against the defendant in the same action in
which the fees are sought. Turner, 385 S.W.2d at 234.
We hold that, under the circumstances of this case, the
general rule that attorney's fees may not be recovered
unless such recovery is provided for by statute or by
contract between the parties applies. See Mayfield, 923
S.W.2d at 593. It is undisputed that no statute or contract
provided for the recovery of attorney's fees incurred by
<strong>Omni</strong> in the prior stage of this litigation [**97] involving
the settling defendants. We hold, therefore, that the
trial court erred in awarding <strong>Omni</strong> its attorney's fees of $
740,000 under the equitable exception to the general
rule.
We sustain Transcontinental's fourth issue.
H. Settlement Credit
In its sixth issue, Transcontinental argues that the
trial court erred in not giving it the full $ 1,660,000 settlement
credit that <strong>Omni</strong> received from the settling defendants.
In its fourth issue, Brown & Brown joins in and
adopts Transcontinental's argument as its own. Specifi-
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 24
cally, Transcontinental argues that it is entitled to a credit
for the full amount of the settlement under the one satisfaction
rule. <strong>Omni</strong> argues that Transcontinental is not
entitled to the full settlement credit because a
non-settling tort-feasor may claim a credit only for damages
for which all tortfeasors are jointly liable.
The trial court's judgment granted Poe & Brown and
Transcontinental settlement credit against (1) the $
704,267 awarded <strong>Omni</strong> by the jury for "the value of the
loss less any amounts <strong>Omni</strong> received from the sale of the
steel or from Transcontinental"; (2) the $ 370,964.72
awarded <strong>Omni</strong> by the jury for "reasonable and necessary
expenses incurred in attempting [**98] to sell the
Steel"; and (3) $ 169,213.61 for prejudgment interest on
the principal of (1) and (2) from December 13, 1996
through April 13, 1999. The total amount of the settlement
credit granted was $ 1,244,445.33. Transcontinental
argues that it should have been granted a settlement
credit for the entire amount of the settlement, $
1,660,000. It argues that a dollar for dollar settlement
credit is applied first to past damages and prejudgment
interest that have accrued on the damages as of the time
of the settlement. It states that [*401] the damages in
the case prior to settlement amounted to $ 1,075,231.72
for the steel and mitigation costs. The settlements for $
1,660,000 were entered into on April 13, 1999. Using the
7% prejudgment interest rate used by the trial court and
its accrual date of December 13, 1996, it argues that prejudgment
interest that would have accrued on these
damages as of the time of the settlement would be $
175,690.06, or approximately $ 6500 more than the prejudgment
interest credit granted it by the trial court.
Transcontinental argues that <strong>Omni</strong>'s total recovery,
after subtracting the $ 740,000 in attorney's fees damages
and the $ 1,080,000 in additional damages, [**99]
which Transcontinental contends were not properly recoverable
against it, should have been $ 1,412,554.78,
consisting of the $ 1,075,231.72 granted it as a settlement
credit for past damages, plus $ 175,690.06 in accrued
prejudgment interest at the time of the settlement,
plus attorney's fees of $ 161,000 through trial, and costs
of $ 633.00. Transcontinental argues that Poe & Brown
was held jointly liable for these amounts. Therefore,
since the total amount of recoverable damages was $
1,412,554.78 after adjustments for the improper award of
additional damages and past attorneys fees, Transcontinental
argues that it is entitled to a settlement credit for
the entire $ 1,660,000. Since the amount of the credit it
contends it is due exceeds the total amount of the judgment
against it, Transcontinental argues that judgment
should be had in its favor.
<strong>Omni</strong> agrees that Transcontinental was entitled to a
settlement credit for actual damages awarded by the jury
for the loss on its steel inventory and the expenses of

mitigating the damages, together with prejudgment interest
on those amounts calculated through the date of the
original settlements, April 13, 1999. But it contends that
Transcontinental [**100] is not entitled to settlement
credit for the $ 740,000 awarded as damages for litigation
expenses <strong>Omni</strong> incurred in prior litigation due to
Transcontinental's and Poe & Brown's wrongful actions
and that Transcontinental is not entitled to a credit for the
additional damages assessed against it for its knowing
participation in violations of the DTPA and Insurance
Code. It observes that "Texas law does not provide for
such a credit." See TEX. CIV. PRAC. & REM. CODE
ANN. § 33.002 (Vernon 2003).
The Texas Supreme Court has held that "[u]nder the
one satisfaction rule, the nonsettling defendant may only
claim a credit based on the damages for which all tortfeasors
are jointly liable." Crown Life Ins. Co. v. Casteel,
22 S.W.3d 378, 391 (Tex. 2000); Garrett, 860 S.W.2d at
78; Paschall v. Peevey, 813 S.W.2d 710, 712 (Tex.
App.--Austin 1991, writ denied).
Here, Poe & Brown and Transcontinental were
found jointly liable for actual damages of $ 704,267 for
the value of the steel and $ 370,964.72 for mitigation
damages; $ 740,000 in prior litigation attorney's fees; and
$ 161,050.07 in attorney's fees, plus $ 50,000 for appeal
to the Court of Appeals and $ 25,000 for appeal to the
Supreme Court of [**101] Texas. The trial court
awarded Poe & Brown a total settlement credit of $
1,244,445.33, which did not include the $ 740,000 for
prior attorneys fees. We have held that the $ 740,000 was
improperly awarded to <strong>Omni</strong>. We have also held that the
additional damages of $ 1,620,000 and $ 1,080,000
awarded <strong>Omni</strong> for Poe & Brown's and Transcontinental's
violations of the DTPA were properly assessed separately
against Poe & Brown and Transcontinental respectively
and are not subject to settlement credit. See TEX.
CIV. PRAC. & REM. CODE ANN. § 33.002); Maryland
Ins. Co., 906 S.W.2d at 230.
[*402] We hold that the trial court did not err in
awarding settlement credit to appellants. We overrule
Transcontinental's sixth issue and Brown & Brown's
fourth issue.
I. Admissibility of Prior Federal Judgment
In its seventh issue, Transcontinental argues that the
trial court erred in not admitting evidence of a prior federal
judgment in Transcontinental's favor over <strong>Omni</strong>'s
hearsay and irrelevance objections. Transcontinental
states that it "sought to introduce this evidence to show
that it could not have 'knowingly' refused to pay any
amounts <strong>Omni</strong> was claiming, because a federal court had
317 S.W.3d 361, *; 2010 Tex. App. LEXIS 2338, **
Page 25
long ago ruled that it had [**102] no liability, even to
its own insured, Port Metal."
The general rule in Texas is that a judgment in another
cause finding a fact in issue in a case at bar is not
admissible. Davis v. Zapata Petroleum Corp., 351
S.W.2d 916, 922 (Tex. Civ. App.--El Paso 1961, writ
ref'd n.r.e.). "The fact that another jury had theretofore,
in another case, determined the very questions at issue in
the present trial would have had a strong tendency to
induce the jury in the subsequent case to reach the same
conclusion, and would therefore have been very prejudicial.
Such judgment, under well settled rules, could not
have been introduced in evidence to establish the facts on
which it was rendered." Id. While a judgment may be
introduced to show its own existence, a judgment "is not
admissible for the purpose of showing what matters were
adjudicated except where the parties and the subject
matter in each suit are the same, or where the matter determined
was of a public nature (in rem) and from public
considerations should be considered binding upon all
persons." Id.
Here, Transcontinental has failed to show that the
prior federal judgment was admissible. We hold that the
trial court did not err in excluding [**103] it.
We overrule Transcontinental's seventh issue.
CONCLUSION
We modify the judgment to deduct the $ 740,000 in
attorney's fees damages awarded appellee <strong>Omni</strong> <strong>Metals</strong>,
Inc. from appellants Transcontinental Insurance Company
and Brown & Brown of Texas, Inc. We affirm the
judgment of the trial court as modified.
Evelyn V. Keyes
Justice
DISSENT BY: Sam Nuchia
DISSENT
DISSENTING OPINION ON REHEARING
While I vote to grant both motions for rehearing, I
do not agree with the relief granted by the Court. I,
therefore, respectfully dissent from the Court's judgment
for the reasons set out in my December 17, 2009 dissenting
opinion on motion for en banc reconsideration.
Sam Nuchia
Justice

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2003 Tex. App. LEXIS 7529, *
LEXSEE
BURNSIDE AIR CONDITIONING AND HEATING, INC., Appellant v. T.S.
YOUNG CORPORATION AND JIMMY J. SMITH, Appellees
No. 05-02-01332-CV
COURT OF APPEALS OF TEXAS, FIFTH DISTRICT, DALLAS
NOTICE: [*1] PLEASE CONSULT THE TEXAS
RULES OF APPELLATE PROCEDURE FOR
CITATION OF MEMORANDUM OPINIONS AND
UNPUBLISHED OPINIONS.
PRIOR HISTORY: On Appeal from the County Court
at law # 3. Collin County, Texas. Trial Court Cause No.
3-355-01.
DISPOSITION: Affirmed in part; Reversed and
Rendered in part.
LexisNexis (TM) HEADNOTES - Core Concepts:
COUNSEL: For Appellant: Larry R. Boyd, Abernathy,
Roeder, Boyd & Joplin, P.C., McKinney, TX.
For Appellee: John Walter Reeder, Plano, TX. John M.
Gillis, Dallas, TX.
JUDGES: Before Justices Wright, FitzGerald, and Lang.
Opinion By Justice Lang.
OPINIONBY: DOUGLAS S. LANG
OPINION:
Appellant Burnside Air Conditioning, Inc., appeals
the trial court's judgment against it and in favor of
appellees T.S.Young Corporation and Jimmy J. Smith
for the amount of Young's fee for personnel services and
the attorneys' fees of both appellees. Burnside challenges
the trial court's findings of fact and conclusions of law in
four issues as follows: (1) the court's finding that there
was a contract is unsupported by legally and factually
sufficient evidence, does not include the elements
necessary for contract formation, and irreconcilably
conflicts with its finding that there was a valid quantum
2003 Tex. App. LEXIS 7529
August 29, 2003, Opinion Filed
Page 1
meruit claim; (2) the court's finding that there was a valid
claim based on quantum meruit is unsupported by legally
and factually sufficient evidence, does not include the
elements necessary for the existence of quantum [*2]
meruit, and irreconcilably conflicts with the court's
finding that there was a valid contract claim; (3) the
court's finding that Smith was Burnside's agent is
unsupported by legally and factually sufficient evidence;
and finally (4) the trial court's findings regarding the
reasonableness of Young's and Smith's attorneys' fees are
unsupported by legally and factually sufficient evidence,
and there is no basis in law for the award of Smith's
attorney's fees. For the reasons set forth below, we affirm
in part and reverse in part.
FACTUAL AND PROCEDURAL
BACKGROUND
Burnside sought to hire an operations manager and
asked its accountant Smith, for help. Smith contacted
Young, a personnel firm, to conduct the search. Young
referred several candidates to Smith, who conducted
initial screening interviews. Smith recommended one of
these candidates to Burnside for a second interview.
Burnside interviewed and hired this candidate. Young
billed Burnside for its fee for its placement services.
When Burnside refused to pay, this lawsuit followed.
Young eventually sued both Burnside and Smith, and
Smith cross-claimed against Burnside for common law
indemnity and breach of agreement to pay Young's [*3]
placement fee. After a trial to the court, the trial court
found in favor of Young and against Burnside for the
amount of its placement fee and its attorney's fees, and
found in favor of Smith against Burnside in the amount
of its attorney's fees. n1
n1 Because Burnside's issues address, in part,
the sufficiency and alleged conflicts in the court's

[*4]
findings, we will address the precise language
used by the court. Accordingly, we reproduce
below the trial court's Findings of Fact and
Conclusions of Law:
1. T.S.Young and Burnside
Heating had a contract for T.S.
Young's personnel services, and
pursuant to it Burnside Heating
owes T.S.Young $ 18,500 for
services rendered.
2. Even if the contract failed,
Burnside Heating owes T.S.
Young for the reasonable value of
T.S. Young's services that
Burnside Heating sought and
received; the reasonable value of
those services is $ 18,500.
3. T.S.Young's reasonable
attorney fees for enforcing it's [sic]
contract and debt claims against
Burnside Heating are $ 19,000,
that is, $ 18,000 attorney fees
through the first day of trial, plus $
1,000 for the second day of trial.
4. For the purpose of
acquiring an operations manager
through a personnel agency,
Burnside heating became Jay
Smith's principal, and Smith
became Burnside Heating's agent.
5. Sued for what was only his
principal's responsibility, Smith
defended himself and incurred
attorney fees in doing so; his
principal, Burnside Heating, is
responsible to him for those fees
6. Smith's reasonable
attorney's fees are $ 11,350, that is
$ 10,350 attorney fees through the
first day of trial, and $ 1,000 for
the second day of trial.
Judgment was entered by the trial court
based on these findings of fact and conclusions of
law. Burnside appealed the judgment.
EXISTENCE OF CONTRACT OR QUANTUM
MERUIT
In its first issue, Burnside challenges the court's first
finding. Burnside argues that the finding that there was a
contract between Young and Burnside for Young's
2003 Tex. App. LEXIS 7529, *
Page 2
personnel services was unsupported by legally and
factually sufficient evidence, does not include the
necessary elements for contract formation, and
irreconcilably conflicts with the court's finding that
Young had a valid quantum meruit claim.
First, we address Burnside's argument that the
court's findings regarding the existence of a contract is a
conclusion of law which is not supported by any
independent findings of fact and which is therefore
incorrect. In its argument, Burnside anticipates that
Young might argue that the trial court's finding of a
contract "presumes" the finding of the elements of a
contract. In that regard, Burnside cites rule of civil
procedure 299 to us and urges its inapplicability. Rule
299 provides as follows:
The judgment may not be supported
on appeal by a presumed finding upon any
ground of recovery or defense, no element
of which has been included in the findings
of fact; but when one or more elements
thereof have been found by the trial court,
[*5] omitted unrequested elements,
when supported by evidence, will be
supplied by presumption in support of the
judgment."
Tex. R. Civ. P. 299.
In support of its position of inapplicability of
presumed findings, Burnside cites First Coppell Bank v.
Smith, 742 S.W.2d 454, 464-65 (Tex. App.-Dallas 1987,
no writ) for the proposition that Young has waived its
right to complain of omitted findings. In Coppell, this
Court held that a party had waived the affirmative
defense of estoppel by failing to request additional or
amended findings where the trial court's original findings
were silent as to any finding on the issue of estoppel.
Here, the trial court's findings were not silent. The court
explicitly found that there was a contract for personnel
services between Young and Burnside, and that pursuant
to such contract Burnside owed Young $ 18,500.00.
Therefore, we conclude Burnside's argument under rule
299 is without merit. Any findings necessary to the
contract can be presumed in accordance with rule of civil
procedure 299. Accordingly, we move to the task of
determining if the evidence supports such "presumed
findings."
Burnside challenges the legal sufficiency [*6] of
adverse findings on issues regarding which it did not
have the burden of proof. Accordingly, in order to be
successful, it must demonstrate that there is no evidence
to support the findings. Croucher v. Croucher, 660
S.W.2d 55, 58, 27 Tex. Sup. Ct. J. 59 (Tex. 1983). In
reviewing a "no evidence" point, the court must view the
evidence in a light that tends to support the finding of the

disputed fact and disregard all evidence and inferences to
the contrary. Bradford v. Vento, 48 S.W.3d 749, 754, 44
Tex. Sup. Ct. J. 655 (Tex. 2001). Anything more than a
scintilla of evidence is legally sufficient to support the
finding. Cont'l Coffee Prods. Co. v. Cazarez, 937 S.W.2d
444, 450, 40 Tex. Sup. Ct. J. 172 (Tex. 1996).
There was evidence in the record that Burnside
requested Smith to help find an operations manager and
authorized him to use a personnel agency. Smith testified
that Burnside did not want his identity as the employer
known until a good candidate for manager had been
found. Smith contacted the Young employment agency
to actually perform the search. The court found that
Smith acted as Burnside's agent for the purposes of this
search. Young presented several candidates to Smith,
whom Smith interviewed [*7] and referred to Burnside.
Burnside hired one of the candidates initially referred by
Young, and agreed to pay him an annual salary of $
74,000.00. Smith testified that he told Burnside there
would be a fee for the personnel agency's services, but
that he and Burnside had never discussed the amount of
the fee. There was evidence in the record that Smith was
told Young's fee would be 25% of the placement, and
that Smith responded by saying "O.K."
Based upon the foregoing, there is more than a
scintilla of evidence supporting the court's finding that
Burnside had a contract with Young for personnel
services at a price of $ 18,500.00.
Burnside also challenges the factual sufficiency of
the court's finding that there was a contract between
Burnside and Young at a price of $ 18,500.00. This is a
challenge of the factual sufficiency of an adverse finding
on an issue regarding which it did not have the burden of
proof. Accordingly, in order to be successful, it must
show that the trial court's finding is so contrary to the
overwhelming weight of the evidence as to be clearly
wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176, 29
Tex. Sup. Ct. J. 214 (Tex. 1986). In reviewing a factual
sufficiency [*8] challenge, the court considers, weighs,
and examines all the evidence; that which supports and
that which is contrary to the trial court's finding. Id.; see
also Plas-Tex, Inc. v. U.S. Steel Corp., 772 S.W.2d 442,
445, 32 Tex. Sup. Ct. J. 329 (Tex. 1989).
In reviewing the trial court's findings, this Court will
accord them the same deference that it would a jury's
findings. See Anderson v. City of Seven Points, 806
S.W.2d 791, 794, 34 Tex. Sup. Ct. J. 356 (Tex. 1991).
The trial court was entitled to determine the credibility of
the witnesses and we will defer to that determination. See
Ashcraft v. Lookadoo, 952 S.W.2d 907, 910 (Tex.
App.-Dallas 1997, pet. denied).
Burnside testified that he had never dealt directly
with Young and had never authorized Smith to agree to
2003 Tex. App. LEXIS 7529, *
Page 3
pay Young a fee. Smith agreed that Burnside did not deal
directly with Young, but testified that Burnside had
authorized him to use an employment agency knowing
that the agency would charge a fee. Moreover, Smith
testified that after he had interviewed the person who
was ultimately hired, a representative from Young came
by and told Smith the fee would be 25% of the
employee's annual salary. Smith admitted that he [*9]
said "O.K." when the representative of Young told him
of the fee but said that he was on the telephone with a
client at the time and had merely said "O.K." to
acknowledge that he had heard her. Smith's testimony
regarding when this conversation occurred was
conflicting. On one occasion, he testified that the
conversation occurred a few days after his interview with
the candidate. On another occasion, he testified the
conversation occurred a few days after Burnside's
interview with the candidate. However, in either case the
conversation transpired before the candidate reported for
work at Burnside. Smith admitted that he did not contact
Young at any time after this conversation to indicate any
disagreement with the amount of the proposed fee.
Before we conclude whether the evidence was
factually sufficient, we address Burnside's claim that
there can be no finding of a contract unless there is
evidence a price was actually agreed upon, because price
is an essential term of an enforceable contract.
Specifically, Burnside cites us the holding of this court in
Mooney v. Ingram, 547 S.W.2d 314, 317 (Tex. Civ.
App.-Dallas 1977, writ ref'd n.r.e.) which states: "There
is [*10] no enforceable contract where the agreement of
the parties leaves an essential term for later
determination and it is never determined." Also,
Burnside argues that leaving the determination of an
essential term to later negotiations can render a contract
unenforceable for indefiniteness. See Weitzman v.
Steinberg, 638 S.W.2d 171, 175 (Tex. App.-Dallas 1982,
no writ)(concluding that: "courts cannot make contracts
for the parties and an agreement to enter into
negotiations in the future cannot be enforced because the
court has no means to determine what sort of contract the
negotiations would have produced."). Finally, Burnside
asserts that in order to be legally binding, a contract must
be sufficiently definite in its terms so that a court can
understand what the promisor undertook. T.O. Stanley
Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 221, 36
Tex. Sup. Ct. J. 259(citing Bendalin v. Delgado, 406
S.W.2d 897, 899, 10 Tex. Sup. Ct. J. 18 (Tex. 1966)).
We have ascertained from the case law that, contrary
to Burnside's position, the failure to specify a price does
not necessarily render the contract so indefinite as to be
unenforceable. In Bendalin the court concluded:
Where [*11] the parties have done
everything else necessary to make a

inding agreement for the sale of goods or
services, their failure to specify the price
does not leave the contract so incomplete
that it cannot be enforced. In such a case
it will be presumed that a reasonable price
was intended.
Id. at 900. Thus, in Bendalin, the court held that the
absence of an express agreement as to price was not fatal
to the maintenance of an action for specific performance
in the sale of stock. Id. In Bendalin, as here: (1) the
parties had done everything necessary to make a binding
agreement and (2) one of the parties had fully performed
its obligations under the contract. In the case before us,
there was evidence that Smith hired Young to find a
manager, that Young did so, and Burnside indicated his
acceptance of the manager by hiring him. Under the
authority of Bendalin, even if the parties did not
specifically agree on a price, a reasonable price could be
supplied. See also Pennington v. Gurkoff, 899 S.W.2d
767, 770 (Tex. App.-Fort Worth 1995, writ denied)
(holding that where there was an agreement to hire an
expert witness, but no agreement regarding [*12] his
fee, the witness could recover a reasonable fee for his
services). The record reflects testimony that the fees
charged by Young were the usual and customary fees
charged in the industry and were reasonable.
After reviewing all of the evidence, we conclude
that the court's finding of a contract between Burnside
and Young for Young's personnel services, and that the
contract provided an agreement to pay Young a fee
which amounted to $ 18,500.00, was not so contrary to
the overwhelming weight of the evidence as to be clearly
wrong and unjust. See Cain, 709 S.W.2d at 176.
Therefore, we conclude there was factually sufficient
evidence to support the court's finding.
Now, we address Burnside's claim that recovery
under a contract and recovery under a theory of quantum
meruit are mutually exclusive, citing Woodard v.
Southwest States, Inc., 384 S.W.2d 674, 675, 8 Tex. Sup.
Ct. J. 145 (Tex. 1964). In this regard, Burnside argues
that the court's holding regarding quantum meruit
irreconcilably conflicts with its holding regarding the
existence of a contract.
The court's second finding, as to quantum meruit,
begins "Even if the contract failed." It is clearly framed
in the alternative [*13] and is not inconsistent with the
court's finding that there is an enforceable contract.
Burnside has not cited any case law that precludes us
from accepting the court's findings.
Because we conclude that the trial court's finding of
a contract was supported by legally and factually
sufficient evidence, it is not necessary to reach
Burnside's points regarding the legal and factual
2003 Tex. App. LEXIS 7529, *
Page 4
sufficiency of the evidence regarding Young's recovery
based on a theory of quantum meruit. Burnside's first two
issues are resolved against him.
AGENCY
In its third issue, Burnside complains of the trial
court's fourth finding that Smith became Burnside's agent
for the purposes of using a personnel agency to hire an
operations manager. Burnside argues that the evidence is
legally and factually insufficient to support two
particular elements of agency: (1) the principal's right to
assign the agent's task; and (2) the principal's right to
control the means and details of the process used to
accomplish the assigned task.
The party asserting the agency relationship has the
burden of proving its existence. Spangler v. Jones, 861
S.W.2d 392, 396-397 (Tex. App.-Dallas 1993, writ
denied). However, [*14] an agency relationship does
not depend upon express appointment or assent by the
principal; rather, it may be implied from the conduct of
parties under the circumstances. Orozco v. Sander, 824
S.W.2d 555, 556, 35 Tex. Sup. Ct. J. 338 (Tex. 1992).
"An 'agent' is one who is authorized by another to
transact business or manage some affair. Grace Cmty.
Church v. Gonzales, 853 S.W.2d 678, 680 (Tex.
App.-Houston [14th Dist.] 1993, no writ). One of the
elements of an agency relationship is the principal's right
to control the agent in carrying out the assigned task.
Spangler, 861 S.W.2d at 396.
Of course, if there is more than a scintilla of
evidence in support of the finding of agency the legal
sufficiency challenge fails. Cont'l Coffee Prods. Co., 937
S.W.2d at 450. If the finding of agency is not so contrary
to the overwhelming weight of the evidence as to be
clearly wrong and unjust, the factual sufficiency
challenge fails. Cain, 709 S.W.2d at 176. "We may not
substitute our judgment for the fact finder's . . . This is so
because the trial court is the sole judge of the witnesses'
credibility and the weight to be given their [*15]
testimony." Ashcraft, 952 S.W.2d at 910.
The record includes testimony that Burnside
requested Smith to act on his behalf in contacting an
employment agency to help Burnside hire an operations
manager. Smith was to conduct the initial interviews
with any candidates the employment agency referred, but
Burnside retained control by reserving for himself the
final hiring decision.
Burnside cites the testimony of Smith that he
considered his contacts with the employment agency to
be in the nature of a referral for a client, and his own
testimony of Burnside that he never authorized Smith to
engage anyone for a fee to find an operations manager.
Despite Smith's characterization of the transaction, there

is evidence supporting the conclusion that Burnside
authorized Smith to act on his behalf in retaining an
employment agency, and that the only dispute concerned
the amount of the agency's fee.
After reviewing the evidence supporting the court's
finding and the evidence as a whole, we conclude that
there is more than a scintilla of evidence to support the
court's finding that there was an agency relationship and
such finding is not contrary to the overwhelming weight
of [*16] the evidence so as to be clearly wrong or
unjust. Cain, 709 S.W.2d at 176. Burnside's third issue is
resolved against it.
REASONABLENESS OF ATTORNEYS' FEES
In its fourth issue, Burnside challenges the trial
court's findings regarding the amount of the attorneys'
fees for appellees Young and Smith. Specifically,
Burnside claims legal and factual insufficiency of the
evidence to support a finding that Young's attorney's fees
are reasonable. Additionally, in its fourth issue Burnside
claims that findings as to Cross-Plaintiff Smith's
attorney's fees are unsupported by legally and factually
sufficient evidence and there is no statutory basis for the
recovery of Smith's attorney's fees.
A. YOUNG'S ATTORNEY'S FEES
Burnside argues that the evidence supporting
Young's attorney's fees is legally and factually
insufficient because Young failed to address all of the
factors allegedly required in the determination of
whether a fee is reasonable, and because Young failed to
segregate the amount of time spent between the two
defendants. Appellee Young claims entitlement to
attorney's fees pursuant to Sec. 38.001 TEX. CIV. PRAC.
& REM. CODE ANN. § 38.001 [*17] (Vernon 1997)
which provides that a person may recover reasonable
attorney's fees in addition to the amount of a valid claim
if the claim is one of several specifically listed types,
including an oral or written contract.
To determine the reasonableness of an attorney's fee,
the Texas Supreme Court has set out the following
factors which the factfinder should consider:
(1) the time and labor required,. . .
(2) the likelihood . . . that the
acceptance of the particular employment
will preclude other employment by the
lawyer;
(3) the fee customarily charged in the
locality for similar legal services;
(4) the amount involved and the
results obtained;
2003 Tex. App. LEXIS 7529, *
(5) the time limitations imposed by
the client or by the circumstances;
(6) the nature and length of the
professional relationship with the client;
(7) the experience, reputation, and
ability of the lawyer or lawyers
performing the services; and
(8) whether the fee is fixed or
contingent on results obtained or
uncertainty of collection before the legal
services have been rendered.
Page 5
Arthur Andersen v. Perry Equip. Corp., 945 S.W.2d
812, 818, 40 Tex. Sup. Ct. J. 591 (Tex. 1997) citing TEX.
DISCIPLINARY R. PROF. CONDUCT 1.04, reprinted
[*18] in TEX. GOV'T CODE, tit. 2, subtit. G app.
(STATE BAR RULES, art. X, § 9). Burnside argues that
Young's evidence failed to address these enumerated
factors.
In support of its position that the required factors
have not been addressed factually, Burnside cites
Braswell v. Braswell, 476 S.W.2d 444, 446 (Tex. Civ.
App.-Waco 1972, writ dism'd w.o.j.). In Braswell, the
court was presented evidence on each of the factors listed
in Arthur Anderson, and the court observed that these are
the factors, among others, that the fact-finder may
properly consider in deciding the reasonable value of
legal services. Id. at 446. However, we have determined
that the courts of Texas do not unanimously hold that
evidence on each of these factors must be in the record to
uphold an award of attorney's fees. See, e.g. Hagedorn v.
Tisdale, 73 S.W.3d 341, 353 (Tex. App.-Amarillo 2002,
no pet.); n2 Academy Corp. v. Interior Buildout &
Turnkey Const., Inc., 21 S.W.3d 732, 742(Tex.
App.-Houston [14th Dist.] 2000, no pet.)(evaluating
legal sufficiency of evidence of attorneys' fees); see also
Aquila Southwest Pipeline v. Harmony Exploration, Inc.,
48 S.W.3d 225, 240-41 [*19] (Tex. App.-San Antonio
2001, pet. denied) citing Arthur Anderson, 945 S.W.2d at
818.
n2 The court held that the evidence of the
amount of the attorneys' fees was legally and
factually sufficient despite attorney's failure to
offer evidence of time spent defending claims, of
fees customarily charged in the locality for
similar legal services, of time limitations imposed
upon counsel by the client, or evidence that he
was precluded from other employment by the
representation.

The court in Hagedorn stated the longstanding rule
that: "The amount of an award of attorney's fees is within
the discretion of the trial court." Id. at 353. Also, that
court concluded:
While these are factors that may be
considered, the court is not required to
receive evidence on each of those factors.
The court can also look at the entire
record, the evidence presented on
reasonableness, the amount in
controversy, the common knowledge of
the participants as lawyers and judges,
and the relative success of the [*20]
parties.
Id. Accordingly, we conclude that although the
factors outlined in Arthur Anderson are the factors we
take into consideration when reviewing the sufficiency of
the evidence of the reasonableness of attorneys' fees, it is
not mandatory that the record include evidence on each
and every factor described in Arthur Anderson.
The evidence in the record respecting Young's
attorney's fees was limited to the testimony by Young's
attorney. After testifying to his experience and expertise,
Young's attorney testified to the total number of hours he
would have spent on the case before and during trial
assuming that the trial ended at 5:00 that day. He
testified that at a rate of $ 250 per hour for 72 hours, the
total attorney's fee would be $ 18,000.00. Young's
attorney testified further that he was familiar with the
legal services necessary to prepare and try this type of
case, and that this fee was reasonable based upon the
work involved. He also testified that the amount of time
necessary to prepare the case was increased by the fact
that there were two defendants, three summary
judgments, and three deposition sessions.
As part of its attack, Burnside complains of Young's
[*21] failure to itemize separately the amount of fee
attributable to representation against each defendant.
However, the law does not support Burnside's position.
"A party seeking attorney's fees must show that the fees
were incurred on a claim that allows recovery of such
fees, and thus is ordinarily required to segregate fees
incurred on claims allowing recovery of fees from those
that do not." Stewart Title Guar. Co. v. Aiello, 941
S.W.2d 68, 73, 40 Tex. Sup. Ct. J. 290 (Tex. 1997).
However, when the claims are "dependent upon the same
set of facts or circumstances and thus are 'intertwined to
the point of being inseparable,' the party suing for
attorney's fees may recover the entire amount covering
all claims." Id. citing Stewart Title Guar. Co., v. Sterling,
822 S.W.2d 1, 10, 35 Tex. Sup. Ct. J. 206 (Tex. 1991).
Young's attorney testified that he had kept track of his
hours by making notes on the inside of the file folder,
2003 Tex. App. LEXIS 7529, *
Page 6
and further that the work as to the two defendants was
too interrelated to segregate. Although Young's attorney
did not testify to all of the factors listed in Arthur
Anderson, he did testify regarding the amount of time
and labor involved, including the difficulty of the [*22]
questions involved; the customary fee he charges for a
case of this type; and his expertise. We conclude that
there was legally and factually sufficient evidence to
support the court's conclusion that $ 19,000.00 was a
reasonable attorney's fee, and the court's finding was not
clearly wrong and unjust.
B. SMITH'S ATTORNEY'S FEES
Burnside complains that the evidence is legally and
factually insufficient to support the court's award of
Smith's attorney's fees, and that there is no statutory basis
for recovery of such fees. Smith responds that his
entitlement to attorney's fees is premised on equity, or
pursuant to section 38.001 TEX. CIV. PRAC. & REM.
CODE ANN. (Vernon 1997).
The general rule provides that, unless authorized by
contract or statute, attorney's fees are generally not
recoverable. Dallas Cent. Appraisal Dist. v. Seven Inv.
Co., 835 S.W.2d 75, 77, 35 Tex. Sup. Ct. J. 856 (Tex.
1992). However, some courts have allowed recovery of
attorney's fees as damages based on equitable principles.
See, e.g., Lesikar v. Rappeport, 33 S.W.3d 282, 306 (Tex.
App.-Texarkana 2000, pet. denied); Baja Energy, Inc. v.
Ball, 669 S.W.2d 836, 838 [*23] (Tex. App.-Eastland
1984, no writ). The recovery in such a case is based on
equitable grounds because the claimant was required to
prosecute or defend litigation as a consequence of the
wrongful act of the defendant. See Lesikar, 33 S.W.3d at
306. This exception to the general rule applies:
when the wrongful act or contractual
violation involves the claimant in
litigation with third parties and forces the
claimant to incur expenses to protect his
interests. Such costs and expenses,
including attorneys' fees, are treated as the
legal consequence of the original
wrongful act and are permitted to be
recovered as damages.
Baja, 669 S.W.2d at 838. Under this equitable
exception, Smith would be entitled to recover his fees as
damages because he was required to defend himself from
Young because of Burnside's wrongful refusal to pay
Young's fee. However, this Court has declined to follow
this doctrine as expressed in Baja. Peterson v. Dean
Witter Reynolds, 805 S.W.2d 541, 549 (Tex. App.-Dallas
1991, no writ). Therefore, Smith's reliance on this
doctrine is misplaced.

Smith also asserted his right to attorney's fees under
TEX. CIV. PRAC. & REM. CODE ANN. § 38.001(8)
[*24] , (1) and (2) (Vernon 1997). He argues that he
and Burnside had an informal agreement that Burnside
would pay Young's fee. Thus, Smith argues that its claim
against Burnside is an action on an informal agreement
within the meaning of section 38.001(8), or an action on
a claim for services rendered within the meaning of
38.001(1), or labor performed within the meaning of
38.001(2). Section 38.001 provides that a person may
recover reasonable attorney's fees in addition to the
amount of a valid claim and costs.
The court found that Smith was entitled to recover
its attorney's fees from Burnside because he was "sued
for what was only his principal's responsibility."
However, the claim described by the court is not a claim
enumerated in the statute which affords a legal basis for
recovery of attorney's fees. Moreover, Smith's argument
that his action falls within either sections 38.001(1)(2) or
(8) is inconsistent with the trial court's finding. The trial
court's finding, not Smith's argument, is what we must
scrutinize to determine if attorney's fees are statutorily
authorized. Accordingly, we agree with Burnside that
2003 Tex. App. LEXIS 7529, *
Page 7
there is no statutory basis for Smith's recovery of
attorney's fees. [*25]
Burnside's fourth issue on appeal is decided
adversely to it as to Young's attorney's fees. However, as
to Smith's attorney's fees, we conclude that Burnside's
issue should be decided favorably.
CONCLUSION
We have concluded that there was legally and
factually sufficient evidence to support the trial court's
findings that: there was a contract between Burnside and
Young at an agreed price of $ 18,500.00; that Smith was
Burnside's agent for the purposes of entering into such
contract; and that Young's attorney's fees were
recoverable and that the amount of such fees was
reasonable. However, we have concluded that Smith's
attorney's fees were not recoverable. Accordingly, we
reverse the court's Final Judgment solely as to Smith's
attorney's fees, and render judgment that Smith not
recover its attorney's fees from Burnside. The court's
Final Judgment is affirmed in all other respects.
DOUGLAS S. LANG
JUSTICE

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LexisNexis (TM) HEADNOTES - Core Concepts:
COUNSEL: [**1]
J. E. Whitmore and Ira Butler, both of Fort Worth, for
appellants.
E. B. Lewis, of Center, for appellee.
JUDGES: O'QUINN, Justice.
OPINIONBY: O'QUINN
OPINION: [*414]
Appellee filed this suit in the County Court of Shelby
County, Texas, on December 11, 1937, against K. B.
Choate, a Constable of Shelby County, Texas, and Tom
Rogers, Supervisor and Inspector in Shelby County,
Texas, for the Livestock Sanitary Commission of the
State of Texas, to recover for certain damages alleged to
have been suffered by him growing out of stock dipping
acts done by appellants. After pleading conspiracy, want
of authority on the part of appellants to take possession
of his cattle for dipping, unlawful conversion by
appellants of his said cattle, and malice, he alleged his
cause of action as follows (paragraph 5 of his petition):
"V. The unlawful taking of said property of the plaintiff
by the defendants, K. B. Choate and Tom Rogers, forced
and compelled the plaintiff to institute his suit, in the
Justice Court of Precinct No. 1 of Shelby County, Texas,
for the title and possession of said property, and caused a
writ of sequestration to issue, thereby causing the
plaintiff to expend sums of money for attorneys [**2]
fees to defend his property, and the cost and expenses of
making several trips to Center from his home about six
miles from Center. That the said defendants, K. B.
125 S.W.2d 413, *; 1939 Tex. App. LEXIS 182, **
LEXSEE 125 S.W.2D 413,AT 415
CHOATE ET AL. v. MURPHY.
No. 3380
Court of Civil Appeals of Texas, Beaumont
125 S.W.2d 413; 1939 Tex. App. LEXIS 182
Feb. 2, 1939, Decided
Page 1
Choate and Tom Rogers, after unlawfully taking into
their possession the cattle above described, placed the
same in a dry pen; that is one without proper food and
water, causing the said animals to depreciate in value,
because of the unlawful taking, handling, and
transporting from their accustomed range to the place of
confinement, by the defendants K. B. Choate and Tom
Rogers, and that said cattle have been damaged in the
sum of Ten ($ 10.00) Dollars per head, or a total injury
to the said cattle of Twenty ($ 20.00) Dollars; that the
plaintiff was required to expend in attorney's fees to
recover his cattle so unlawfully taken, the sum of Twenty
five ($ 25.00) Dollars, and that he lost time in making
trips to Center, to the amount of Fifteen ($ 15.00)
Dollars, and that the plaintiff has been damaged in actual
sum of Sixty ($ 60.00) Dollars, and because of the
unlawful entry and taking as above alleged, he has
suffered and sustained exemplary damages in the sum of
Five Hundred ($ 500.00) Dollars."
For all of which he [**3] prayed judgment.
Defendants, appellants here, answered by plea in
abatement, plea in bar, general denial and special answer,
all to the effect that by reason of a prior suit in Justice
Court of Shelby County, the instant suit should be
abated; that plaintiff had previously sued appellants for
the recovery of certain cattle alleged to have been
unlawfully taken by appellants (the taking and the same
cattle here involved); that the present suit was an attempt
on the part of appellee to split his cause of action and
subject appellants to another suit arising out of the same
alleged wrongful acts; that it was an attempt on the part
of appellee to recover from the same defendants
possession of property in one suit and to recover
damages in another suit; that appellee was precluded
from recovery by the Justice Court judgment (which was
final and unappealed from) involving the same parties
and arising out of the same alleged unlawful acts

committed by appellants, and so the prior judgment
(Justice Court) was a bar to any further recovery by
appellee. There were other and further pleadings by
appellants relating to Article 1525c of the Vernon's Ann.
Texas Penal Code as to the dipping [**4] of stock, and
the facts pointing to the acts of appellants alleged to have
been done in the premises, as well as to those done by
appellee.
The Court sustained a general demurrer to appellants'
plea in abatement, plea in bar, and special answer, and
also overruled appellants' general demurrer to appellee's
petition. The case was tried to a jury upon special issues
in answer to which they found: (a) that appellee was not
entitled to $ 20 for damages to his cattle while in
possession of appellants; (b) that he was not entitled to $
15 for time lost in attending court; (c) that he was not
entitled to $ 500 as for exemplary damages for the
alleged malicious taking possession of the cattle to dip
them; (d) and that he was entitled to recover $ 25 for
attorney's fees. The jury having found against him for
every thing claimed except the attorney's fees, judgment
was rendered in his favor for $ 25 for such fees. Motion
for a new trial was overruled, and the case is before us
for review.
At the time the first suit (Justice Court suit) was filed
Shelby County, Texas, had been properly designated for
tick eradication [*415] and all premises and cattle
quarantined. Mr. Murphy was [**5] a farmer and cattle
owner living some five miles from Center. About August
17, 1937, he was served with an order to dip his cattle.
125 S.W.2d 413, *; 1939 Tex. App. LEXIS 182, **
Page 2
He failed to do so. Thereupon Rogers, Shelby County
Supervisor and Inspector for the Livestock Sanitary
Commission of Texas, notified Constable Choate of
Murphy's failure to comply with the order to dip, and
requested Choate to gather up Murphy's cattle and dip
them, which he, Choate, did, and retained possession of
two of the seven head for the accrued statutory lien
charges permitted under Sec. 15, Article 1525c of the
Vernon's Ann. Penal Code of the State of Texas. Before
the sale of the two head of cattle thus held, Murphy
instituted suit in the Justice Court for possession of the
two cattle. Judgment in favor of Murphy was had, and
they were surrendered to him. No appeal was taken from
this judgment. January 13, 1938, the instant suit was
filed, and resulted as above stated.
As stated, the jury found against appellee on all of
his items of damage, except that for attorney's fees.
Judgment was accordingly rendered in favor of appellee
and against appellants in the sum of $ 25 and costs of
suit. Costs and expenses of litigation, other than ordinary
[**6] court costs, are not recoverable in an action for
damages, and the court erred in rendering judgment
against appellants for attorney's fees. 13 Tex. Jur. 196,
Sec. 100 (note 13); McKay v. Wishert, Tex. Civ. App.,
152 S.W. 508; Cleveland State Bank v. Lilley, Tex. Civ.
App., 260 S.W. 324; Burlington-Rock Island R. Co. v.
McCartney, Tex. Civ. App., 54 S.W.2d 837; Mathis v.
Wherry, Tex. Civ. App., 45 S.W.2d 700.
The judgment is reversed and here rendered for
appellants.

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SUBSEQUENT HISTORY: [**1]
591 S.W.2d 615, *; 1979 Tex. App. LEXIS 4490, **
LEXSEE 591 S.W.2D 615
Cupples Coiled Pipe, Inc., and Cupples Company, Manufacturers,
Appellants/Appellees v. Esco Supply Company, Appellee/Appellant
Rehearing Denied December 31, 1979.
PRIOR HISTORY: Appeal from the District Court of
Bexar County, Texas
LexisNexis (TM) HEADNOTES - Core Concepts:
COUNSEL:
Kendall, Randle, Finch & Osborn, Terrence Kendall,
Austin, for appellants-appellees.
Philip E. Hamner, San Antonio, for
appellee-appellant.
OPINIONBY:
OSBORN
OPINION:
[*615]
OPINION
Based upon a jury verdict, Esco Supply Company
(Esco) recovered judgment [*616] against Cupples
Coiled Pipe, Inc. (CCP) and Cupples Company,
Manufacturers (CCM) for damages resulting from the
manufacture and sale of defective pipe. Recovery was
denied to Esco for attorney fees and litigation expense
incurred in litigating claims of third parties. All parties
have perfected an appeal from that part of the judgment
which was adverse to them. We affirm.
This case involves three basic issues. The first is
with regard to what caused the pipe to fail. The second
No. 6877
Court of Civil Appeals of Texas, Eighth District, El Paso
591 S.W.2d 615; 1979 Tex. App. LEXIS 4490
December 5, 1979
Page 1
is whether CCM is liable for damages resulting from the
manufacture and sale of pipe by CCP. The third is
whether Esco may recover litigation expense it incurred
in defending the third party claims made against it by
those who purchased pipe. In answer to special issues,
the jury found (1) the pipe manufactured by CCP was
[**2] defective; (2) the defective condition was a
producing cause of the failure of the pipe; (3) the manner
in which the pipe was utilized did not exceed the
operating temperature and pressure for the pipe; (4)
unanswered; (5) the percentage of failure from defective
pipe was 100% And from utilization was 0%; (6) CCP
was in effect the servant of CCM; and (7) the cost to
repair or replace the defective pipe was $ 52,098.10.
DEFECTIVE PIPE
In 1967, CCP began production of poly vinyl
chloride pipe (PVC) which was used primarily for cold
water plumbing systems. Several years later, CCP
began production of chlorinated poly vinyl chloride pipe
(CPVC) which could be used in hot water plumbing
systems. In 1974, CCP filled an order from Esco and
shipped to it approximately $ 10,000.00 worth of various
sizes of CPVC Schedule 40 and Schedule 80 pipe. Esco,
a wholesale plumbing supply company, sold part of such
pipe to various plumbing contractors in San Antonio
including C. R. Blank Plumbing Company and Gibson
Plumbing Company. These contractors installed the
pipe in the plumbing system in several apartment
complexes in San Antonio. For a period of about two
years thereafter, Esco received [**3] numerous
complaints about breaks and leaks in this pipe, and much
of it had to be replaced. Esco eventually paid C. R.
Blank Plumbing Company $ 26,000.00 and Gibson
Plumbing Company $ 26,098.10 to settle their claims
against Esco for the cost of replacing pipe manufactured
by CCP which was claimed to have been defective.

By two points of error, it is asserted that the jury's
answers to special issues 3 and 5 are against the great
weight and preponderance of the evidence and such
answers are manifestly wrong. First, we must note that
there is substantial evidence that the pipe was defective
and the Appellants CCP and CCM do not attack the jury
answer to special issue 1 which found that the pipe was
defective.
Earl Doyle, a plastics consultant, testified
concerning the operating pressure for Schedule 40 CPVC
pipe at various temperatures and noted a safety factor of
over 300%. At a temperature of 150o the maximum
operating pressure would be 131.6 psi, at 160o it would
be 112 psi and at 170o it would be 89.6 psi. There was
evidence that the thermostats at the apartment complexes
had been set at from 145 to 160 or 170o . Tests at the
various complexes indicated a water pressure from [**4]
around 65 to 70 psi. Calculations by the City Director of
Engineering indicated slightly higher pressures in some
instances, but no actual tests were conducted by him.
One professional engineer indicated that there should be
no failure in this pipe at 70 psi and at temperatures less
than 180o . Applying the test in In re King's Estate, 150
Tex. 662, 244 S.W.2d 660 (1951), and considering all the
evidence on the issue, we conclude that the jury findings
in answer to special issues 3 and 5 are not against the
great weight of the evidence. Points of error VI and VII
are overruled.
PARENT COMPANY LIABILITY
Cupples Company, Manufacturers (CCM) was
organized in 1882. In 1965, it owned a substantial
amount of stock in American Polystyrene Corporation
(APC) and Precision [*617] and Scientific Industries,
Inc. (PSI). In January, 1965, CCM caused Cupples
Container Company (CCC) to be formed and about the
same time an agreement was entered into whereby CCC
would acquire the assets of Universal Container
Corporation. In 1966, CCC acquired the remaining
stock in APC and PSI. The following year, CCC
acquired all of the outstanding stock of MagiCup
Corporation. By the end of 1967, [**5] CCM had
advanced funds to CCC totaling more than two million
dollars.
CCP was incorporated as a Texas corporation in
1968. Its initial capitalization was $ 100,000.00 and
CCC owned 85% Of the stock. From 1966 through 1969,
APC lost $ 1,929,650.00. From 1966 through 1970, PSI
lost $ 376,754.00. During the period from 1967 through
1970, MagiCup Corporation lost $ 259,922.00. From
1968 to 1976, CCP lost $ 2,585,959.00. By the end of
1974, CCC had cumulative losses of $ 7,798,514.00. At
that time it was liquidated and its assets transferred to
CCM, including the shares which it was holding of CCP.
591 S.W.2d 615, *; 1979 Tex. App. LEXIS 4490, **
Page 2
By the end of 1974, CCM had paid for stock and
contributed to the capital of CCC the sum of $
2,783,525.00 and in addition had loaned or advanced to
that corporation the sum of $ 7,526,848.00. Almost
one-third of those sums ended up in CCP. The total sum
advanced to CCP was $ 1,305,897.00 and in addition
another $ 1,600,000.00 in advances was converted to
common stock and additional paid-in capital.
At the time the pipe was sold by CCP in 1974,
Marion Stuhl was president of CCM and CCP. Allan
Barton, financial vice president of CCM, was also
secretary-treasurer of CCP. At the time [**6] of its
organization in 1968, three of the six board members of
CCP were also CCM representatives and by 1974 all of
the directors were representatives of CCM. When CCP
went out of business at the end of 1975, its remaining
assets were sold for $ 329,228.00 evidenced by a
promissory note which was assigned to CCP to CCM as
a credit on the debt owed to it by CCP. Thus, this suit
ended up being against only a corporate shell and the
parent company which had received the only valuable
asset of the defunct pipe manufacturer.
An accountant who examined the financial
statements of the various corporations testified that their
relationship was more than just a stockholder
relationship. He described it as a home office-branch
warehouse operation whereby one spoon-fed the other to
keep it alive. He said CCC and CCP were not
adequately capitalized. He concluded the financial
operations and the advancing of funds were not
consistent with independent corporate entities. He also
testified that the advance of money as accounts rather
than loans adequately secured did not reflect a true
stockholder relationship.
The Court in State v. Swift & Co., 187 S.W.2d 127
(Tex.Civ.App. Austin 1945, [**7] writ ref'd), said:
The general rule seems to be that
courts will not because of stock
ownership or interlocking directorship
disregard the separate legal identities of
corporations, unless such relationship is
used to defeat public convenience, justify
wrongs, such as violation of the anti-trust
laws, protect fraud, or defend crime.
State v. Humble Oil & Refining Co.,
Tex.Civ.App., 263 S.W. 319 (writ ref.);
Berkey v. Third Avenue Ry. Co., 244 N.Y.
84, 155 N.E. 58, 50 A.L.R. 599; Cannon
Manufacturing Co. v. Cudahy Packing
Co., 267 U.S. 333, 45 S. Ct. 250, 69 L. Ed.
634; . . .
That decision was cited with approval in Bell Oil &
Gas Company v. Allied Chemical Corporation, 431

S.W.2d 336 (Tex.1968), where the Court discussed the
issue of holding a parent corporation liable for a contract
with a subsidiary. In recognizing the problem involved,
Justice Norvell wrote:
Dean Hildebrand has observed that,
"What circumstances will be required in
order to make one corporation a mere
agent or tool in the hand of another so that
the corporate entity will be disregarded, is
difficult to determine.' 1 Hildebrand,
Texas Corporations 43 (1942). It seems
reasonably certain, however, [**8] that
the corporate arrangement must be one
which is likely to be employed in [*618]
achieving an inequitable result by
bringing into operation a basically unfair
device which in all probability will result
in prejudice to those dealing with one or
more of the units making up the corporate
arrangement, or one which has actually
resulted in the complaining party's having
been placed in a position of disadvantage
by the exercise of inequitable means, of
which the corporate arrangement is a part.
In 1975, the Texas Supreme Court in Gentry v.
Credit Plan Corporation of Houston, 528 S.W.2d 571
(1975), recognized again the general rule noted above,
but sought to relax the rule in tort cases. In its opinion,
the Court said:
Unlike a suit for breach of contract,
the plaintiff in a tort case does not have
the burden of justifying a recovery against
the parent when he willingly contracted
with the subsidiary. The problem in such
a case is essentially one of allocating the
loss. It is not necessary to establish
fraud, and the financial strength or
weakness of the subsidiary is an important
consideration. . . .
Our problem is we are involved in a tort case (strict
liability [**9] for a defective product) but one which
arose out of a contractual arrangement whereby the
purchaser chose the seller and dealt with it alone and not
the parent company. If the problem be one of allocating
the loss, and the financial weakness of the subsidiary is
an important consideration, then the answer is relatively
simple. The subsidiary is for all practicable purposes
broke, it is out of business, and the loss can only be
allocated to the parent company. But, in this case, there
is more. Obviously, CCP was under-capitalized for the
operations it was going to conduct. It could not have
continued doing business except for the continual influx
of substantial amounts of cash from CCM. Even its
591 S.W.2d 615, *; 1979 Tex. App. LEXIS 4490, **
Page 3
payroll was dependent upon weekly deposits of money
supplied by both CCM and CCC and most, if not all, of
the sums were made available upon a telephone call
making known a need, not a negotiated loan with
security to protect the party advancing the money. And,
when the end came, what assets remained were funneled
back to the parent corporation. We conclude Esco was
"placed in a position of disadvantage by the exercise of
inequitable means, of which the corporate arrangement is
a part." [**10] This arrangement was grossly unfair
and could be labeled constructive fraud. Tigrett v.
Pointer, 580 S.W.2d 375 (Tex.Civ.App. Dallas 1978,
writ ref'd n. r. e.). Also see 1 Fletcher, Cyclopedia of
the Law of Private Corporations, sec. 43 at 212 (1974).
Points of error I, II and V are overruled.
A more difficult problem is presented as to whether
special issue 6 is sufficient to support a verdict for the
Appellee. That issue inquires:
Do you find from a preponderance of
the evidence that at the time the CPVC
pipe in question was sold Defendant
Cupples Company Manufacturers so
dominated and controlled the business of
Defendant Cupples Coiled Pipe, Inc., that
Defendant Cupples Coiled Pipe, Inc., was
not a separate and distinct entity in the
conduct of its own business but was in
effect the servant of Defendant Cupples
Company Manufacturers in selling the
CPVC pipe in question?
As used herein, "Servant,' means one
who acts not for himself but on behalf of
or in the interest of one other than
himself.
Answer "We do,' or "We do not.'
We, the Jury, answer We do .
The objections to the form of the issue were primarily
that it did not submit all of [**11] the necessary
elements to establish that one corporation was the alter
ego of the other. But, objections were also made that:
F. Such issue does not establish
criteria by which the jury is to determine
whether or not a relationship of "alter ego'
or "agency' is to be established, but, in
effect, leaves it up to the jury to determine
what those criteria are.
G. Fails to establish a basis upon
which the jury can measure the extent to
which dominion and control could make
one corporation the servant of another.

[*619] We are inclined to agree that the issue
might be defective if liability is to be based solely upon
an alter ego claim. But, it appears to us, the issue was
framed so as to submit to the jury the issue of liability
based upon an agency theory. See: Corporate
Liability-Subsidiary, 38 A.L.R.3d 1102 sec. 4 at 1116
(1971). We conclude the issue is sufficient for that
purpose and the objections made are too general and do
not show reversible error. Points of error III and IV are
overruled.
LITIGATION EXPENSE
Esco has appealed from that part of the judgment
which denied it recovery of third party litigation expense
which was incurred in defending [**12] claims made
by those to whom the defective pipe was furnished. The
parties stipulated and the Court found that $ 22,167.95
was the amount of litigation expense necessarily and
reasonably incurred by Esco as a result of third party
claims arising out of the sale of the defective pipe.
However, the trial Court denied Esco recovery for such
litigation expense.
After Esco filed the original suit against the
manufacturer of the pipe, the two plumbing contractors,
Blank and Gibson, both intervened suing Esco and the
manufacturer. Also, an owner of one of the apartment
complexes also intervened suing Esco and others. All of
these claims were eventually settled and it was agreed
that the claim of Esco for recovery of its litigation
expense would be heard by the Court without a jury. Of
the total expense incurred, $ 21,292.00 was for attorney
fees and $ 875.95 for other litigation expense.
Esco does not cite any Texas authorities to support
its position. It relies upon several text book statements
with regard to litigation expenses arising out of a breach
of contract. See Restatement of the Law, Contracts sec.
334 (1932); 22 Am.Jur.2d Damages sec. 166 at 235
(1965); 5 Corbin on Contracts [**13] sec. 1037 at 225
and 228 (1964). It also relies upon the holding in De La
Hoya v. Slim's Gun Shop, 80 Cal.App.3d Supp. 6, 146
Cal.Rptr. 68 (1978), and the cases cited in that opinion.
First, we must note that Esco's recovery in this case
is based upon strict liability and is a tort theory of
591 S.W.2d 615, *; 1979 Tex. App. LEXIS 4490, **
Page 4
recovery. This is not a case for breach of contract. In
Wm. Cameron & Co. v. American Surety Co. of New
York, 55 S.W.2d 1032 (Tex.Com.App.1932), the Court
considered the question of a right to attorney fees as a
result of litigation by third parties. In denying recovery,
the Court said:
It is settled law in this state that,
unless provided for by statute or by
contract between the parties, attorneys'
fees incurred by a party to litigation are
not recoverable against his adversary
either in an action in tort or a suit upon a
contract. 13 Tex.Jur. p. 196; 11 Tex.Jur.
p. 302. Counsel fees incurred in
prosecuting a suit for or defending against
a wrong are not ordinarily recoverable as
actual damages. Closner v. Chapin
(Tex.Civ.App.) 168 S.W. 370.
This is in harmony with the general
rule in most of the states. 15 C.J. p. 114;
Union Ind. Co. v. Vetter (C.C.A.) 40 F.2d
606.
[**14]
That rule has continued to be followed in this State.
Mundy v. Knutson Construction Company, 156 Tex. 211,
294 S.W.2d 371 (1956); New Amsterdam Casualty
Company v. Texas Industries, Inc., 414 S.W.2d 914
(1967); Mays v. Witt, 387 S.W.2d 688 (Tex.Civ.App.
Amarillo 1965, no writ).
We recognize that there are cases which have made
exceptions and have permitted such recovery. See
Modine Manufacturing Company v. North East
Independent School District, 503 S.W.2d 833
(Tex.Civ.App. Beaumont 1973, writ ref'd n. r. e.); Fisher
Construction Company v. Riggs, 320 S.W.2d 200
(Tex.Civ.App. Houston 1959) rev'd on other grounds, 160
Tex. 23, 325 S.W.2d 126. But, this case does not come
within those exceptions. Inequitable as it may be, the
law does not provide for the recovery of litigation
expense in this case. Esco's points of error 1 and 2 are
overruled. The judgment of the trial Court is affirmed.

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354 S.W.2d 621, *; 1962 Tex. App. LEXIS 2223, **
LEXSEE 354 S.W.2D 621,AT 624
Dalton Steamship Corporation, Appellant, v. W. R. Zanes & Company, Appellee
LexisNexis (TM) HEADNOTES - Core Concepts:
OPINIONBY: [**1]
MASSEY
OPINION:
[*622] MASSEY, Chief Justice.
Plaintiff, W.R. Zanes & Company, brought suit
against defendant, Dalton Steamship Corporation, upon a
cause of action which we believe should properly be
termed breach of contract. Judgment was for plaintiff and
defendant appealed.
Judgment reformed and affirmed.
Plaintiff was a freight forwarder. It was essentially
a factor in view of the services it performed and
obligations it discharged in behalf of its principal. The
principal, as applied to the transaction in question, was a
firm known as CASCO. The property in question as
applied to this case was some 220 drums of tallow which
CASCO had sold or was selling to a firm which may be
referred to as Sovereign. Plaintiff was in some respects
the factor or agent for Sovereign, but as applied to the
situation in this case plaintiff's action in connection with
its agency for Sovereign was never instituted, the time
for any performance having never arisen. At least the
effect of the findings and judgment of the trial court
establishes such as the fact, and [*623] from our
examination of the record the action of the trial court
found adequate support therein and will not [**2] be
disturbed.
Defendant was a steamship agent. For purposes of
this case a steamship agent is a person, firm or
corporation which acts as an agent for ships of its various
principals when in port, making arrangements as
necessary to keep the ships fueled, supplied, and
No. 16287
Court of Civil Appeals of Texas, Fort Worth
354 S.W.2d 621; 1962 Tex. App. LEXIS 2223
February 2, 1962
Page 1
cargoed. Defendant dealt with plaintiff in connection
with the 220 drums of tallow, the objective of the
transaction being for such tallow to be delivered by
plaintiff, in behalf of CASCO, -- to Sovereign, -- to
defendant in behalf of a steamship it represented, with
the objective that the tallow be shipped over the ocean.
At time the tallow was about to arrive in Houston,
Texas, at the port where it was intended that it be taken
on the ship for ocean transport, plaintiff discovered that
CASCO was experiencing financial difficulties.
CASCO was indebted to plaintiff as the result of prior
transactions having similarity to that involving the 220
drums of tallow, in the sum of $1,237.14. CASCO was
or became indebted to plaintiff on account of fees and
expenses paid, commissions, etc., in the further sum of
$306.55. The total of CASCO's indebtedness thereby
became the amount of $1,543.69.
Plaintiff decided that [**3] it would be wise to take
steps to protect itself. It desired to handle matters so
that it would be enabled to collect the full amount owed
it by CASCO. It entered into contract with defendant
with the intent to accomplish such objective and to delay
delivery to Sovereign pending the collection of the
$1,543.69. Obviously the intent was to maintain and
preserve the plaintiff's constructive "possession" of the
tallow. Plaintiff handed its "delivery order" to defendant,
with the following stated on its face: "Note to Dalton SS:
When this deliver is completed a negotiable dock receipt
is to be issued in the name of CASCO Chemicals
Company for the account of the shipper and returned to
W.R. Zanes & Company. No other dock receipt is to be
issued either negotiable or non-negotiable." A Mr. Pruitt,
for defendant, orally agreed with Mr. Wolf, for plaintiff,
that the bill of lading would not be issued without
surrender of the "dock receipt" for the tallow in question,
issued by the defendant upon its receipt of the tallow.
The "dock receipt" issued by the defendant upon arrival
of the tallow bore printed language which read, "Ocean

ill of lading covering this shipment to be issued [**4]
only upon surrender of this Dock Receipt and cargo to be
covered with insurance by shippers."
Defendant, in breach of its agreement with plaintiff,
did release the drums of tallow, and it was taken on
board ship and well out to sea when plaintiff discovered
the fact. Plaintiff's "possession" was defeated no less
than in a case of theft. Although the circumstances were
never explained, Sovereign received "Ocean Bill of
Lading" to the tallow from or through the agency of the
defendant. Plaintiff tried to collect its debt from
CASCO, but by such time CASCO was insolvent and
being operated by a creditor's committee. Plaintiff was
unable to collect.
As applied to the 220 drums of tallow plaintiff had a
common law factor's lien in the amount of $306.55. It is
true that the total owed plaintiff, and which he believed
would have been collected had defendant continued to
hold the tallow as agreed, was $1,543.69, with $1,237.14
of such indebtedness accrued in prior transactions. If
plaintiff had a written agreement with CASCO giving it
the right to assert a lien upon the 220 drums of tallow, it
neither plead nor proved such fact. In such
circumstances plaintiff's lien would have been [**5]
worth $1,543.69 if the tallow was worth that much,
although it was never shown to have had such value,
under provisions of statute. Vernon's Ann.Tex.Civ.St.,
Title 90 "Liens", Art. 5506c, "Lien upon merchandise in
favor of factor advancing money." Having shown no
such agreement with CASCO it will be presumed that
plaintiff's [*624] lien upon the 220 drums of tallow
was a mere common law lien.
At common law the debt must have been incurred
for some service or work rendered by claimant on or in
connection with the property against which the lien is
asserted and cannot extend to and include indebtedness
otherwise accrued between the parties even though it
might have accrued under circumstances which created
the right of common law lien in the claimant as to other
property.
354 S.W.2d 621, *; 1962 Tex. App. LEXIS 2223, **
Page 2
Plaintiff's damages are to be measured by the value
of the thing lost through the breach of contract on the
part of the defendant. The thing lost was the lien, the
value of which was $306.55. The $1,237.14
indebtedness owing to plaintiff by CASCO was an
unsecured debt. Absent any provision of contract
between plaintiff and CASCO the former would have no
right to hold the tallow as against the latter in [**6] any
hypothesized dispute between the parties (plaintiff and
CASCO) and would have been compelled to yield up
possession of the tallow upon a tender of $306.55.
Although it might be that but for the defendant's breach
of contract CASCO would have paid plaintiff its entire
debt, in order to avoid delay and make certain that
delivery of the tallow was made to its purchaser,
nevertheless the law would not take cognizance of that
possibility. Rather must we consider what the law
would have decreed and compelled as fixing the rights of
the parties.
The trial court erred in rendering judgment in favor
of plaintiff and against defendant for attorney's fees.
Plaintiff insists that V.A.T.S., Art. 2226, "Attorney's
fees", entitled it to judgment for such fees as against
CASCO under the theory of "labor done, material
furnished", etc., and that defendant became liable
therefor in the place and stead of CASCO under the
circumstances of the case. Provisions of the Article may
not be so extended. Furthermore, defendant's liability to
plaintiff is for damages for breach of contract of a type
where no existing statute makes provision for any
additional award of attorney's fees.
Judgment is [**7] reformed so as to decree that
W.R. Zanes & Company have and recover of and from
Dalton Steamship Corporation its damages in the amount
of $306.55, with legal interest from the date of the
judgment in the trial court.
As so reformed judgment is affirmed.
Costs of appeal are to be adjudged equally against
the parties.

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353 F.3d 421, *; 2003 U.S. App. LEXIS 26431, **
1 of 179 DOCUMENTS
DP SOLUTIONS, INC., Plaintiff- Counter Defendant- Appellee-Cross-Appellant,
versus ROLLINS, INC.; ET AL, Defendants, ROLLINS, INC., Defendant - Counter
Claimant-Appellant-Cross-Appellee.
No. 02-41357
UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
PRIOR HISTORY: [**1] Appeals from the United
States District Court for the Eastern District of Texas.
9:00-CV-324. John H Hannah, Jr, US District Judge.
DP Solutions, Inc. v. Rollins, Inc., 34 Fed. Appx. 150,
2002 U.S. App. LEXIS 6656 (2002)
DISPOSITION: Affirmed in part, vacated in part; remanded.
LexisNexis(R) Headnotes
COUNSEL: For DP SOLUTIONS INC, Plaintiff -
Counter Defendant - Appellee-Cross-Appellant: Darrin
M Walker, Law Office of Darrin Walker, Kingwood,
TX.
For ROLLINGS INC, Defendant - Counter Claimant -
Appellant-Cross-Appellee: Richard Paul Decker, David
Hulon Woodham, Decker, Hallman, Barber & Briggs,
Atlanta, GA.
JUDGES: Before JOLLY, SMITH, and EMILIO M.
GARZA, Circuit Judges.
OPINIONBY: EMILIO M. GARZA
OPINION: [*425] EMILIO M. GARZA, Circuit
Judge:
Rollins, Inc. appeals from a jury verdict in favor of
DP Solutions, Inc. ("DPS") awarding DPS damages for
breach of contract and tortious interference with contract.
Rollins originally hired DPS to develop a new computer
system. In July 1998 the parties signed the Professional
Services Agreement, the contract governing the overall
relationship between the parties. This contract provided
that the parties would sign engagement agreements at a
later date to govern the actual work that Rollins wanted
DPS to perform. The first phase of the agreement was for
353 F.3d 421; 2003 U.S. App. LEXIS 26431
December 31, 2003, Filed
Page 1
DPS to assess Rollins' business and determine what capabilities
Rollins needed in a new computer system.
After this initial analysis phase, in October 1998,
Rollins engaged DPS to actually develop the new computer
system. Rollins chose not to enter into a fixed price
engagement agreement where specifications for the new
system would be determined before development began.
Instead, Rollins [*426] chose to retain more control
over the development [**2] phase, and signed an engagement
agreement where it would pay DPS a monthly
fee in exchange for the provision of personnel proficient
in the use of a specific software writing tool. The development
of the new system proved more complex than the
parties originally anticipated, and therefore took longer
to complete. The parties signed the final engagement
agreement in June 2000. This agreement named the personnel
DPS would provide and the specific fee for each
remaining month in 2000. The parties deviated from this
written engagement agreement, and the personnel DPS
provided along with the monthly rate it charged remained
at the July 2000 level for the rest of that year.
In the months leading up to December 2000, Rollins
fell behind in its payments to DPS. DPS contacted Rollins
concerning these past due payments. On Friday, December
15, 2000, Rollins informed DPS that Rollins
would make no further payments, but that Rollins expected
DPS to complete the development of the system.
The parties agree that Rollins had paid around seven
million dollars in fees and expenses to DPS up to that
point for the computer system, which was still incomplete.
In response to Rollins's refusal to pay its [**3]
bills, DPS removed its personnel from the project site on
Monday, December 18, 2000. DPS performed no additional
work on the project after that date. DPS then filed
the original complaint in this lawsuit in federal district
court based upon diversity jurisdiction.
After January 18, 2001, Rollins discussed employment
opportunities with two former DPS employees who

had worked on the development project. DPS spent approximately
$ 29,300 in attorneys' fees to prevent these
employees from working for Rollins in violation of the
employees' non-compete agreements with DPS. DPS
then amended its complaint to include a tortious interference
claim against Rollins. Rollins' response to the
amended complaint claimed that DPS breached the contract,
that DPS committed fraud on Rollins, that DPS's
performance under the contract was so deficient that it
excused Rollins from further performance, and that Rollins
was privileged to interfere with DPS's relationship
with its former employees. This case was eventually tried
before a jury.
The jury found that Rollins breached its contract
with DPS and awarded DPS $ 486,000 in damages for
the months of November and December 2000. The jury
also found that [**4] Rollins failed to comply with the
thirty-day notice requirement for termination included in
the contract, and awarded DPS $ 243,000 in damages for
the month of January 2001. The jury awarded DPS $
27,000 in damages for Rollins' tortious interference with
DPS's non-compete agreements. The jury found that DPS
did not breach the contract and that DPS did not commit
fraud. Finally, the jury found that DPS's performance
under the contract did not excuse Rollins from its performance,
and that Rollins was not justified in interfering
with DPS's non-compete agreements with its former employees.
The jury awarded no damages to Rollins.
After the verdict, Rollins renewed its motion for
judgment as a matter of law pursuant to FED. R. CIV. P.
50(b) regarding DPS's breach of contract and tortious
interference claims. Rollins also filed a motion for a new
trial under FED. R. CIV. P. 59 alleging the closing argument
by DPS was prejudicial and invalidated the jury
award. The district court denied both motions. The district
judge then awarded DPS $ 337,073 in attorneys' fees
under state law and $ 9,775.03 in costs, as well [**5] as
pre-judgment interest at ten percent and post-judgment
[*427] interest at 1.75 percent. This appeal followed.
On appeal, Rollins raises eight claims. These claims
break down as follows: four claims concern the sufficiency
of the evidence supporting the jury's breach of
contract damages award; one claim regarding the tortious
interference damage award; one claim that DPS's closing
argument was prejudicial; a claim that the attorneys' fee
award to DPS was improper; and a claim that the award
of costs to DPS was improper. DPS raises four additional
claims on cross-appeal. These claims concern the district
court's interpretation of the pre-trial order; the prejudgment
and postjudgment interest rates awarded by the
district court; the award of attorneys' fees to DPS for this
appeal; and the district court's modification of DPS's
attorneys' fee award to account for the jury's award to
DPS for tortious interference damages.
353 F.3d 421, *; 2003 U.S. App. LEXIS 26431, **
I
Page 2
Rollins raises four issues regarding the sufficiency
of the evidence supporting the breach of contract damages:
1) the documents governing the parties' relationship
terminated by their own terms on December 31, 2000; 2)
the thirty-day notice period included in the contract [**6]
was discretionary rather than mandatory; 3) the judgment
includes an award that exceeds the proper amount for a
thirty-day notice of cancellation provision; and 4) DPS
failed to present legally sufficient evidence regarding the
proper measure for the breach of contract damages. Rollins
claims the proper damage measure for a breach of
contract is net damages and that DPS failed to present
evidence of expenses it avoided.
We review the denial of a motion for judgment as a
matter of law de novo, using the same standard the district
court used. Ford v. Cimarron, 230 F.3d 828, 830
(5th Cir. 2000). "Judgment as a matter of law is proper
after a party has been fully heard by the jury on a given
issue, and 'there is no legally sufficient evidentiary basis
for a reasonable jury to have found for that party with
respect to that issue.'" Foreman v. Babcock & Wilcox
Co., 117 F.3d 800, 804 (5th Cir. 1997) (quoting FED. R.
CIV P. 50(a)). When evaluating the denial of Rollins'
motion for judgment as a matter of law, we must consider
all the evidence in the light most favorable to DPS,
drawing all factual inferences in [**7] favor of DPS,
while "leaving credibility determinations, the weighing
of the evidence, and the drawing of legitimate inferences
from the facts to the jury." Foreman, 117 F.3d at 804
(citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
253-55, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986)).
However, a "mere scintilla of evidence is insufficient to
present a question for the jury" and "there must be a conflict
in substantial evidence to create a jury question."
Foreman, 117 F.3d at 804 (citing Boeing Co. v. Shipman,
411 F.2d 365, 374-75 (5th Cir. 1969) (en banc)).
Federal courts apply state substantive law in diversity
jurisdiction cases, but apply federal procedural law. Hall
v. GE Plastic Pac. PTE Ltd., 327 F.3d 391, 395 (5th Cir.
2003).
Rollins claims that the contract terminated by its
own terms on December 31, 2000. However, the evidence
supported a finding that DPS and Rollins departed
from the written terms of the June 2000 engagement
agreement. Rollins requested, and DPS agreed, to continue
the project staffing levels at the July 2000 level
rather than decreasing them as provided in the agreement.
[**8] The parties also agreed to maintain the
monthly fee at the July 2000 level rather than decreasing
it according to the schedule included in the June 2000
agreement. DPS presented testimony that Rollins agreed
to extend [*428] the duration of the contract at the
ongoing monthly rate into January 2001. The jury could

infer support for this testimony from a voicemail DPS
received from Rollins prior to December 18 where Rollins
arguably assumed the relationship would continue
into January. This is more than "a scintilla of evidence,"
and with all factual inferences drawn in favor of DPS,
the testimony is sufficient to support the jury's determination
that Rollins extended its contract with DPS into
January 2001. Thus, Rollins' first claim fails.
Next, Rollins claims the jury finding that Rollins violated
the thirty-day notice provision in the contract was
improper because this notice period was a discretionary
means for terminating the contract. The language of the
original contract between the parties supports the jury
finding that Rollins violated the notice period. n1 Rollins
contends that the contract language "may terminate . . .
by providing 30 days [] notice" means it is discretionary
[**9] whether notice is given at all. However, another
reasonable inference, supporting the jury's findings, is
that Rollins has the discretion to terminate the contract,
but once Rollins chooses to terminate, it must give thirty
days' notice. When reviewing a judgment as a matter of
law, we must allow the jury to make reasonable inferences.
See Foreman, 117 F.3d at 804. Thus, the jury
finding that Rollins violated the thirty-day notice period
is supported by the evidence, and Rollins' second issue
concerning the breach of contract claim fails.
n1 Paragraph 6 of the Professional Services
Agreement between Rollins and DPS provides:
"[Rollins] may terminate this AGREEMENT or
any Engagement Agreement by providing 30
days written notice . . . of termination."
Rollins' third claim on appeal regarding the breach
of contract damages is that the meeting between Rollins
and DPS on Friday, December 15, 2000 was sufficient to
trigger the start of the notice period, and that any damages
awarded for the period [**10] after January 14,
2001 are not supported by legally sufficient evidence.
However, the jury found that Rollins breached the contract
on or about December 18, 2000. Both parties stipulated
that DPS removed its employees from the Rollins
project on Monday, December 18, 2000 and provided no
further services to Rollins after that date. In light of this
jury finding and the stipulated evidence, we must conclude
that DPS received notice of contract termination
from Rollins no later than December 18, 2000. Because
notice was received by December 18, 2000, any jury
damages for breach of contract after the expiration of the
thirty-day notice period on January 17, 2001 are not
supported by legally sufficient evidence. The portion of
the jury damages award relating to the period from Janu-
353 F.3d 421, *; 2003 U.S. App. LEXIS 26431, **
Page 3
ary 18 until January 31, 2001 should, therefore, be vacated.
Finally, Rollins claims that the jury damage awards
are unsupported by legally sufficient evidence. State
substantive law governs the measure of damages in this
breach of contract diversity case. Kona Tech. Corp. v.
Southern Pac. Transp. Co., 225 F.3d 595, 601-02 (5th
Cir. 2000) (citing Erie R.R. v. Tompkins, 304 U.S. 64,
78-79, 58 S. Ct. 817, 82 L. Ed. 1188 (1938)). [**11]
Neither party disputes that Texas state substantive law
governs this contractual relationship. Under Texas law,
the proper damages award for a breach of contract is the
amount necessary to put the party in "the same economic
position in which it would have been had the contract not
been breached." CDB Software, Inc. v. Kroll, 992 S.W.2d
31, 37 (Tex. App. -- -- Houston [1st Dist.], 1998 pet. denied).
Generally, the measure of damages [*429]
meeting this standard is net profit. Specifically, the gross
amount the non-breaching party would have received if
the contract had been fulfilled should normally be reduced
by any unpaid costs the non-breaching party
would have to incur to complete performance of the contract.
See Farris v. Smith Erectors, Inc., 516 S.W.2d 281,
283-84 (Tex. Civ. App. -- -- Houston [1st Dist.] 1974, no
writ) (holding that a construction contractor is entitled to
recover profits upon breach of a partially performed contract,
but not the same amount as if the contract were
completed because that amount must be reduced by the
cost of completion); V.R. Wattinger Co. v. C.W. Moore,
475 S.W.2d 327, 329 (Tex. Civ. App. -- [**12] -- Austin
1972, no writ) (holding that one method of computing
damages for a breach of contract is "the contract price
less the reasonable cost of completion"). The burden is
on the plaintiff to provide evidence of any costs avoided
to allow the jury to properly calculate net damages. See
Farris, 516 S.W.2d at 283-84. However, this general rule
does not apply in situations where the breach of contract
occurs in such a manner that the non-breaching party
does not have the opportunity to reduce its expenses. See
Houston Chronicle Publ'g Co. v. McNair Trucklease,
Inc., 519 S.W.2d 924, 932 (Tex. Civ. App. -- -- Houston
[1st Dist.] 1975, writ ref'd n.r.e.) (holding that if the defendant's
breach does not permit the plaintiff to reduce its
overhead then defendant is not entitled to a reduction in
the damages awarded against it).
We must analyze the jury award for the breach of
contract claim in three distinct time periods to determine
whether the evidence is legally sufficient: 1) the damages
awarded for November 2000 and the portion of December
prior to the removal of DPS personnel from the Rollins
project on December 18, 2000; 2) the thirty-day period
[**13] from December 18, 2000 until January 17,
2001; and 3) the award for the period from January 18,
2001 through the end of that month. With regard to the

first time period, both parties agree that DPS provided
services under the Rollins contract until December 18,
2000. DPS bore its full costs of performance during this
time frame, and therefore full payment is necessary for
DPS to be in the same economic position as it would be
absent the breach. See CDB Software, 992 S.W.2d at 37.
The jury award of the gross contract amount for this time
period is proper.
Rollins claims the evidence supporting the damage
award for the period after December 18, 2000 is not legally
sufficient. Rollins argues DPS did not fulfill its
burden to provide evidence of the costs that DPS was
able to avoid during this period, thus preventing the jury
from determining the net profit lost by DPS as a result of
the breach. See Farris, 516 S.W.2d at 283-84 (burden is
on non-breaching party to provide evidence from which
net profits can be calculated). For the period from December
18, 2000 until January 17, 2001, there is sufficient
evidence in the record to support the jury award
[**14] of damages to DPS. The jury could reasonably
find that DPS was unable to avoid any of its expenses
during this thirty-day period. When the non-breaching
party cannot avoid its expenses, the general damages rule
does not apply and an award of gross profit and not net
profit is appropriate. Houston Chronicle, 519 S.W.2d at
932.
The jury's gross profit award was appropriate because
the contract itself supports a jury inference that
Rollins was required to reimburse all expenses incurred
by DPS on the project. Paragraph 1 of the Professional
Services Agreement provides: "[Rollins] will be provided
a detailed invoice for services and expenses in
[*430] providing services under this agreement." (emphasis
added). In addition, DPS presented actual invoices
requesting reimbursement of its expenses from Rollins.
Finally, the jury heard testimony that the only expense
DPS bore without reimbursement was the salary cost of
its employees. This testimony also described the thirty-day
notice period included in DPS's contracts with its
employees and that DPS honored these clauses. Therefore,
the jury could reasonably conclude based on the
evidence that DPS was unable to avoid any of [**15]
its costs during the thirty-day notice period. Thus, the
jury award for the gross monthly fee for the period from
December 18, 2000 until January 17, 2001 is proper.
Rollins elicited testimony that DPS was able to
avoid paying salaries to its employees after January 17.
As discussed above, the thirty-day notice period expired
on January 17 terminating the contract, thus we need not
address Rollins' claim regarding the evidence of costs
that DPS avoided from January 18 through January 31,
2001. Rollins' claims regarding the impropriety of a
gross rather than a net damage award fails for the period
from November 2000 until December 18, 2000. This
353 F.3d 421, *; 2003 U.S. App. LEXIS 26431, **
Page 4
claim also fails for the thirty-day notice period ending
January 17, 2000, and is moot for the portion of January
outside the notice period.
II
Rollins' fifth claim is that it is entitled to judgment
as a matter of law with regard to the jury's award for tortious
interference. To prove tortious interference a party
must show an existing contract subject to interference,
the interference was willful or intentional, the interference
was the proximate cause of the damage, and actual
damage or loss resulted from the interference. Holloway
v. Skinner, 898 S.W.2d 793, 795-96, 38 Tex. Sup. Ct. J.
582 (Tex. 1995). [**16] Rollins challenges the jury
award on two grounds. First, Rollins claims the contact
with the DPS employees occurred after they had left the
employ of DPS. However, the evidence established that
these employees still had non-compete agreements with
DPS, therefore the jury could find there was an existing
contract subject to interference.
Second, Rollins argues that DPS did not prove any
actual damages. The only evidence the trial court submitted
to the jury supporting the damage award for tortious
interference was the attorneys' fees DPS incurred to
prevent its former employees from working for Rollins.
Rollins argues that attorneys' fees are legally insufficient
to show actual damages because Texas law does not
permit a party prevailing on a claim of tortious interference
to recover attorneys' fees. See Marcus, Stowell &
Beye Gov't Secs. v. Jefferson Inv. Corp., 797 F.2d 227,
234 (5th Cir. 1986) (discussing Texas rule prohibiting
recovery of attorneys' fees in tortious interference suits).
Although Jefferson Investment represents the general
Texas rule that attorneys' fees are not damages for purposes
of tortious interference, a number of the Texas
courts [**17] of appeals have adopted equitable exceptions
to this general rule. See Martin-Simon v. Womack,
68 S.W.3d 793, 798 n.2 (Tex. App. -- -- Houston [14th
Dist.] 2001, pet. denied) (listing examples of circuits
adopting equitable exceptions to the general rule of
non-recovery of attorneys' fees in tort cases).
When the highest state court is silent on an issue we
must make an Erie guess. McAvey v. Lee, 260 F.3d 359,
365 n.3 (5th Cir. 2001). "We must conscientiously determine
how that court would decide the issue before us,
looking to the sources of law -- -- including the intermediate
appellate court decisions of that state -- -- [*431]
that the highest state court would look to for persuasive
authority." Id. One of the equitable exceptions to the
general rule on attorneys' fees adopted by a Texas court
of appeals allows recovery of attorneys' fees in tortious
interference cases. See Texas Beef Cattle Co. v. Green,
883 S.W.2d 415, 430 (Tex. App. -- -- Beaumont 1994)
rev'd on other grounds, 921 S.W.2d 203, 39 Tex. Sup. Ct.

J. 523 (Tex. 1996); Martin-Simon, 68 S.W.3d at 798 n.2
(including the Texas Beef Cattle allowance [**18] of
recovery of attorneys' fees in tortious interference cases
in its list of equitable exceptions). We hold that Texas
Beef Cattle is the appropriate Texas precedent to apply in
this diversity case. Texas Beef Cattle held "that necessary
and reasonable attorneys' fees and costs even though
expended and incurred in previous litigation can be recovered
as proper damages in a later suit based on tortious
interference of contract." Texas Beef Cattle, 883
S.W.2d at 430. This exception is limited to situations
"where the natural and proximate results and consequences
of prior wrongful acts had been to involve a
plaintiff . . . in litigation with and against third parties
and other parties." Id. DPS presented evidence regarding
the attorneys' fees it incurred to enforce its underlying
non-compete agreements with two former employees
resulting from Rollins' contact with these employees.
The evidence supports the jury's finding of tortious interference,
and under Texas Beef Cattle, the attorneys'
fees from the previous litigation can be recovered as
damages. Rollins is not entitled to judgment as a matter
of law on the tortious interference award.
III
Rollins' [**19] sixth claim is that it is entitled to a
new trial because the jury result was influenced by passion
and prejudice caused by the closing remarks of
DPS's counsel. The district court denied Rollins' motion
for a new trial on this issue. "Review of the denial of a
new trial motion is more limited than when one is granted."
Whitehead v. Food Max of Miss., Inc., 163 F.3d 265,
269 (5th Cir. 1998). Our standard of review in this situation
is "more deferential than our review of the denial of
a motion for a judgment as a matter of law." Hidden
Oaks Ltd. v. City of Austin, 138 F.3d 1036, 1049 (5th
Cir. 1998). We must affirm the district court's denial of
Rollins' motion for a new trial absent a "clear showing of
an abuse of discretion." Id. "The propriety of an argument
is a matter of federal trial procedure . . ., and,
therefore, in a diversity case, subject to federal rather
than state law." Whitehead, 163 F.3d at 275 (internal
citations omitted).
To support this claim, Rollins relies upon Whitehead,
where we held that "awards influenced by passion
and prejudice are the antithesis of a fair trial," and remanded
the case for a new [**20] trial on damages.
Whitehead, 163 F.3d at 276, 278. Although the closing
argument in this case was theatrical and had repeated
references to historical and literary figures associated
with Texas, n2 it simply is not the type of argument addressed
in Whitehead. Whitehead was a civil liability
case stemming from the kidnaping of a mother and her
daughter from the parking lot of a national retail store
and the subsequent rape of the mother. This Court noted
353 F.3d 421, *; 2003 U.S. App. LEXIS 26431, **
Page 5
the emotional nature of that case made it a "fertile
ground" for the bias associated with passion and prejudice.
Id. at 276. Furthermore, the counsel in Whitehead
made repeated arguments designed to inflame [*432]
the passions of the jury in violation of the instructions of
the trial judge. n3 The Whitehead counsel also played to
local prejudice. n4 Finally, unlike this case, the counsel
in Whitehead engaged in a "Golden Rule" argument by
asking the jurors to place themselves in the position of
the rape victim when reaching their verdict. n5
n2 For example, counsel for DPS referred to
the Texan author Larry McMurtry's book, Lonesome
Dove, as well as to the notable Texans Stephen
F. Austin, Benjamin Rush Milam, and
Lyndon Johnson.
[**21]
n3 For example, counsel stated that plaintiff's
"last thought before death would be of the rapists,
and that [her daughter] needed to be compensated
to avoid thoughts, on her wedding night, of her
mother's rape." Whitehead, 163 F.3d at 277.
These statements were made in closing argument
despite the fact that neither person so testified. Id.
See also Edwards v. Sears, Roebuck and Co., 512
F.2d 276, 285-86 (5th Cir. 1975) (finding a closing
argument in a wrongful death case prejudicial
when it evoked images of the deceased's children
crying at their father's grave site and waiting for
their father on the porch steps).
n4 DPS's counsel in this case made reference
to the fact that Rollins is not a Texas corporation,
but Rollins' counsel also mentioned this fact during
their closing argument, claiming DPS's location
in Lufkin, Texas while Rollins was headquartered
in Atlanta, Georgia assisted DPS in
perpetrating the fraud that Rollins alleged at trial.
This case differs from Whitehead in that DPS's
counsel did not ask the jury to find for DPS because
it was headquartered in Texas and Rollins
is not. Cf. Whitehead, 163 F.3d at 276-77 (noting
that plaintiff counsel's repeated emphasis on the
defendant's national rather than local status was
exacerbated by his refusal to abide by the district
court's sustained objections to his repeated comments
that the defendant did not present certain
proof through non-local witnesses).
[**22]

n5 The counsel in Whitehead estimated the
length of time from when the victims were abducted
until their release to be 7,200 seconds, had
the jury wait silently for 10 seconds, and then
asked: "Can you imagine how it would feel to
have a knife in your side or a knife on your leg or
a pistol at your neck for ten seconds." Whitehead,
163 F.3d at 278.
In addition, Rollins never objected to the argument
at trial. But cf. Whitehead, 163 F.3d at 265 (noting that
"at least a few pertinent objections were made during the
[prejudicial] closing argument"). The counsel in Whitehead
twice disregarded the district court's instructions to
avoid certain objectionable arguments, and was eventually
sanctioned by the district court. Whitehead, 163 F.3d
at 276-77, 277 n.3. In contrast, here the district judge
specifically praised the performance of DPS's counsel
during closing argument. n6 We are "most cognizant of
the fact that the trial judge is in a far, far better position
than we to gauge the effect of closing arguments; he is
present and hears the [**23] statements, while we are
limited to the cold record." Whitehead, 163 F.3d at 278
n.4.
n6 The total hours billed by the attorney
making DPS's closing argument were not reduced
when he filed his claim for attorney's fees, and
the district judge found them "reasonable, given
his eleventh hour appearance in the case and his
able representation of [DPS] during trial." In addition
the district judge did not reduce the hourly
rate this attorney requested finding it "reasonable,
given his extensive trial experience and skill,
which he displayed during trial." In contrast, the
district judge decreased the hours and fees for
every other attorney representing DPS.
Finally, this Court has recognized that jury verdicts
improperly influenced by passion and prejudice can be
indicated by their size. Whitehead, 163 F.3d at 278
("Without deciding that the awards are excessive, we
note that, at the very least, they are at the high end of the
spectrum for such damages."); see also Westbrook v.
Gen. Tire & Rubber Co., 754 F.2d 1233, 1240 (5th Cir.
1985) [**24] (finding a large verdict accompanied by a
prejudicial closing argument can lead to the conclusion
that the argument had an influential impact upon the jury's
deliberations). The jury verdict in this case is not
inconsistent with reasonable deliberations on the evidence
of the [*433] contractual relationship presented
to the jury. When considered together, the facts that: 1)
Rollins made no objection at trial; 2) the district court
353 F.3d 421, *; 2003 U.S. App. LEXIS 26431, **
Page 6
judge praised the skill of the closing argument; and 3)
the jury award is not wholly inconsistent with reasonable
deliberation on the evidence buttress this Court's conclusion
that the closing argument by DPS's counsel was not
prejudicial. Rollins' sixth claim fails.
IV
The seventh issue on appeal is a challenge to the
district judge's award of attorneys' fees to DPS. n7 Texas
state law governs the attorneys' fee award in this case,
and the standard of review for an award of attorneys' fees
is whether the trial court abused its discretion in making
the award. Mathis v. Exxon Corp., 302 F.3d 448, 461
(5th Cir. 2002) ("State law controls both the award of
and the reasonableness of fees awarded where state law
supplies the rule of decision."). Under [**25] Texas
law, there is discretion to determine the amount of the
attorneys' fee award, but an award of reasonable fees is
mandatory if a party prevails in a breach of contract case
and there is proof of reasonable fees. Mathis, 302 F.3d at
462 (citing World Help v. Leisure Lifestyles, 977 S.W.2d
662, 683 (Tex. App. -- -- Fort Worth 1998, pet. denied).
A trial court's award is unreasonable "only if the court
acted without reference to any guiding rules and principles."
City of Austin v. Janowski, 825 S.W.2d 786, 788
(Tex. App. -- -- Austin 1992, no writ). Rollins makes two
claims regarding the attorneys' fee award. First, Rollins
claims that the trial court did not adequately scrutinize
the records when calculating the attorneys' fees. Second,
Rollins claims that DPS is not allowed to recover for the
attorneys' time spent defending against Rollins' counterclaims
at trial. See e.g., Ventana Invs. v. 909 Corp., 879
F. Supp. 676, 678 (E.D. Tex. 1995) (finding that the
Texas attorney fee statute does not include a provision
allowing recovery for successful defense of a contractual
lawsuit).
[**26]
n7 Texas state law provides for the award of
attorneys' fees in an action based on a breach of
contract claim. TEX. CIV. PRAC. & REM. CODE
ANN. § 38.001 (Vernon Supp. 2002). The parties
agreed at pretrial conference that the matter
of attorneys' fees would be submitted to the district
court by affidavit.
Rollins' claim that the district court failed to adequately
scrutinize the record fails. The district court
withheld judgment on the attorneys' fees award until it
received all of the billing records from the DPS attorneys.
Rollins challenged a number of the billing entries
of the lead DPS attorney before the district court, claiming
that certain billings represented inefficiency or time
spent on unsuccessful motions. The district court consid-

ered the requirements set forth in Johnson v. Georgia
Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir.
1974), when determining the lodestar amounts. See
Dillard Dep't Stores, Inc. v. Gonzales, 72 S.W.3d 398,
412 (Tex. App. -- -- El Paso 2002, pet. denied) (adopting
the Johnson factors for Texas attorneys' fee calculations
conducted using the lodestar method). In addition, the
claims Rollins raises on appeal are virtually identical to
those made before the district court. The district court
considered those claims and found the hours billed by the
lead DPS attorney reasonable in light of his relative inexperience,
the relative complexity of the case, and the
vigorous defensive hurdles Rollins presented. [**27]
The court took the relative inexperience of the lead DPS
attorney into account when it decreased his billing rate
from the $ 175 [*434] per hour requested to $ 150 per
hour. The trial court also considered the hours billed and
the hourly rate for the rest of the attorneys for DPS, adjusting
both amounts to reflect the levels the court found
reasonable in light of their representation of DPS at trial.
Furthermore, a party may recover for time spent on unsuccessful
motions so long as it succeeds in the overall
claim. See North Am. Corp. v. Allen, 636 S.W.2d 797,
800 (Tex. App. -- -- Corpus Christi 1982, no writ). In
light of this careful consideration of the attorneys' fees by
the district court, the first portion of this claim fails.
Rollins' second complaint requests that the attorneys'
fee award be remanded to the district court because
DPS's attorney did not segregate the hours spent pursuing
DPS's breach of contract claims from the hours spent
defending against Rollins' counterclaims. Rollins claims
that attorneys' fees cannot be recovered under Texas law
for defending against contract claims. See Ventana, 879
F. Supp. at 678; Aetna Cas. & Sur. v. Wild, 944 S.W.2d
37, 41 [**28] (Tex. App. -- -- Amarillo 1997, writ denied)
(holding that unsegregated attorneys' fees must be
remanded). However, Texas law explicitly recognizes
that fees need not be segregated where "the services rendered
relate to (1) multiple claims arising out of the same
facts or transaction and (2) the prosecution or defense
entails proof or denial of the same facts, so as to render
attorney's fees inseparable." Aetna, 944 S.W.2d at 41.
Here the district judge expressly found that DPS's defense
of Rollins' claims was "so intertwined with Plaintiff's
breach of contract claim against Rollins as to constitute
a single claim." In light of these findings, this
Court finds that the district judge did not abuse his discretion
in the award of attorneys' fees to DPS.
V
Rollins' eighth, and final, claim on appeal relates to
the district court's order awarding costs to DPS pursuant
to 28 U.S.C. § 1920. We reverse a district court's award
of a bill of costs "only on a clear showing of abuse of
discretion." Fogleman v. ARAMCO, 920 F.2d 278, 285
353 F.3d 421, *; 2003 U.S. App. LEXIS 26431, **
Page 7
(5th Cir. 1991). Rollins claims the trial court erred by
accepting the affidavit filed by DPS's counsel [**29]
containing a blanket statement that all of the expenses he
claimed were actually and necessarily incurred for trial.
Rollins claims the blanket statement approach is inadequate
to support an award of costs. We do not need to
reach this issue. It is enough to conclude the district court
did not clearly abuse its discretion in this case to note the
disagreement among the district courts as to the level of
specificity necessary to support an award of costs. See
Copeland v. Wasserstein, Perella & Co., 278 F.3d 472,
484 (5th Cir. 2002) (noting that the local rules for the
Eastern District of Louisiana do not mandate itemization
of costs). But see Auto Wax Co. v. Mark V Prods., Inc.,
2002 U.S. Dist. LEXIS 2944, No.
CIV.A.3:99-CV-0982-M, 2002 WL 265091 (N.D. Tex.
Feb. 22, 2002) (disallowing certain costs because the
prevailing party only made a blanket statement regarding
necessity). Furthermore, in addition to the affidavit from
DPS's attorney stating that all of the costs claimed were
necessary, the district court also received copies of the
receipts for the payment of the costs and brief descriptions
of each claimed cost. Rollins fails to clearly show
the district court abused its [**30] discretion, and its
eighth claim fails.
VI
DPS raises four claims on cross-appeal. The first of
these claims is that the district court erred when it interpreted
[*435] the pretrial order n8 to preclude DPS
from presenting evidence relating to its damages from
before November 2000. Alternatively, DPS claims it was
an abuse of discretion for the trial court to refuse to
modify the pre-trial order to allow the introduction of
this evidence. A trial court's interpretation of a pretrial
order is reviewed for abuse of discretion. Hall v. State
Farm Fire & Cas. Co., 937 F.2d 210, 212 (5th Cir.
1991). We cannot conclude that the trial court abused its
discretion when it interpreted the pre-trial order to only
include damage claims for November and December
2000 and January 2001 because, in the pretrial order,
DPS only requests damages for "services rendered in
November and December of 2000, as well as the flat
monthly fee . . . for January 2001."
n8 The relevant language from the pretrial
order is:
In the months prior to December
2000, [Rollins] began to fall behind
on payments owed for
[DPS's] consultants. On December
15, 2000 - in response to [DPS's]

[**31]
request for payment - [Rollins]
suddenly announced that they
would not pay past due invoices.
[DPS] removed its consultants
from the project on December 18,
2000 because of [Rollins's] refusal
to pay for services rendered. [Rollins]
owes for services rendered in
November and December of 2000,
as well as the flat monthly fee of $
243,000 for January 2001.
This conclusion is not dispositive, and we must consider
the district court's refusal to modify the pre-trial
order. A pre-trial order is intended to govern the subsequent
course of the actions and should only be modified
to avoid manifest injustice. FED R. CIV. P. 16(e). "In the
interest of justice and sound judicial administration, an
amendment of a pretrial order should be permitted where
no substantial injury will be occasioned to the opposing
party, the refusal to allow the amendment might result in
injustice to the movant, and the inconvenience to the
court is slight." Sherman v. United States, 462 F.2d 577,
579 (5th Cir. 1972). Based upon the record in this case,
we cannot conclude that there would have been no substantial
injury caused to Rollins or inconvenience to the
district court if DPS had been allowed to modify the
pre-trial order. Thus, it was not an abuse of discretion for
the district judge to refuse to allow DPS to modify the
pre-trial order. DPS's first claim on cross-appeal fails.
VII
DPS's second claim on cross-appeal concerns the
prejudgment and postjudgment interest rates set by the
district court in [**32] its final judgment. The interest
award is a question of law and is reviewed de novo. Harris
v. Mickel, 15 F.3d 428, 429 (5th Cir. 1994). In its
final judgment, the district court awarded DPS a ten percent
prejudgment interest rate, and a 1.75 percent rate for
postjudgment interest. Prejudgment interest is governed
by Texas law, and DPS is entitled to the rate specified in
the contract. See Harris, 15 F.3d at 429 ("State law governs
the award of prejudgment interest in diversity cases.");
Adams v. H&H Meat Prods., Inc., 41 S.W.3d 762,
780 (Tex. App. -- -- Corpus Christi 2001, no pet.) (prejudgment
interest rate is the rate set forth in the contract).
In a diversity case, the federal post-judgment interest
statute applies. Harris, 15 F.3d at 431. Postjudgment
interest accrues at the rate determined under 28 U.S.C. §
353 F.3d 421, *; 2003 U.S. App. LEXIS 26431, **
Page 8
1961(a). DPS filed a motion with the district court to
reform the prejudgment and postjudgment interest
awards to conform with the statutory requirements. The
district court denied the motion because this appeal was
pending. The ten percent prejudgment [*436] interest
and the 1.75 percent [**33] postjudgment interest rates
were not the proper rates specified in the parties' contract
or under federal law, respectively. The prejudgment and
postjudgment interest awards are remanded to the district
court to determine the correct interest rates to be applied
to the judgment.
DPS's third claim on cross-appeal is that the trial
court erred by declining to expressly provide DPS with
attorneys' fees for this appeal. State law governs the
award of attorneys' fees in this case. Mathis, 302 F.3d at
461-62. An award of attorneys' fees is mandatory for a
party prevailing in a breach of contract case. Gunter v.
Bailey, 808 S.W.2d 163, 166 (Tex. App. -- -- El Paso
1991, no writ). Texas law further provides that a party
entitled to recover attorneys' fees at trial is also entitled
to recover them for successfully defending the case on
appeal. Id. at 165-66. Accordingly, DPS is entitled to
attorneys' fees relating to its defense of the district court
judgment in this appeal. This issue is remanded to the
district court to determine the proper amount of attorneys'
fees to award DPS for this appeal.
The final claim DPS raised on cross-appeal [**34]
is that the trial court erred by reducing its attorneys' fee
award by $ 27,000. The district court reduced this fee
award to avoid double recovery for attorneys' fees under
the tortious interference damage claim and the attorneys'
fee award. This decision to prevent double counting fees
was neither arbitrary nor unreasonable, thus the district
court did not abuse its discretion in modifying the attorneys'
fee award in this manner. See Mathis, 302 F.3d at
461-62. The fourth claim DPS raised on cross-appeal
fails.
VIII
For the above reasons, we AFFIRM the judgment of
the district court except as follows. We VACATE the
portion of the breach of contract damage award relating
to January 18 through January 31, 2001. We REMAND
the breach of contract damage award for the period from
January 1 through January 17, 2001; the prejudgment
and postjudgment interest awards; and the appellate attorneys'
fees award to the district court for determination
of the proper amount of these awards consistent with this
opinion.

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120CQJ

LEXSEE 117 SW 3D 348
THE ED RACHAL FOUNDATION AND PAUL ALTHEIDE, Appellants, v.
CLAUDE D'UNGER, Appellee.
NUMBER 13-00-335-CV
COURT OF APPEALS OF TEXAS, THIRTEENTH DISTRICT, CORPUS
CHRISTI
SUBSEQUENT HISTORY: Motion for Limited
Reconsideration Denied October 9, 2003.
Reversed by, in part, Judgment entered by Ed Rachal
Found. v. D'Unger, 207 S.W.3d 330, 2006 Tex. LEXIS
278 (Tex., 2006)
PRIOR HISTORY: [**1] On appeal from the
148th District Court of Nueces County, Texas.
DISPOSITION: Affirmed, in part, and reversed and
rendered, in part.
COUNSEL: For Appellants: Chester Joseph Makowski,
Royston, Rayzor, Vickery And Williams, San Antonio,
TX. Myra K. Morrism Royston, Rayzor, Vickery & Williams,
L.L.P., Corpus Christi, TX. Nathan Wesely,
Royston, Rayzor, Vickery & Williams, Houston, TX.
Ralph F. Meyer, Royston, Rayzor, Vickery & Williams
Corpus Christi, TX.
For Appellee: Andrew M. Greenwell, Harris & Greenwell,
Corpus Christi, TX. James R. Harris, Harris &
Greenwell, Corpus Christi, TX.
JUDGES: Opinion by Justice Rodriguez. Concurring
and Dissenting Opinion by Justice Castillo.
OPINION BY: NELDA V. RODRIGUEZ
OPINION
[*352] Before the Court En Banc
Opinion by Justice Rodriguez
117 S.W.3d 348; 2003 Tex. App. LEXIS 7597
August 29, 2003, Opinion Delivered
August 29, 2003, Filed
Page 1
This is an employment case. Appellee, Claude
D'Unger, filed suit against appellants, the Ed Rachal
Foundation (the Foundation), D'Unger's former employer,
and Paul Altheide, the Foundation's chief executive
officer (CEO). D'Unger claimed [*353] breach of
contract and wrongful termination against the Foundation
and tortious interference with a contract against Altheide.
After a jury verdict and judgment entered in favor
of D'Unger, this appeal ensued. By thirteen issues, appellants
generally contend: (1) the evidence was insufficient
to support the jury's findings of breach of contract,
wrongful termination, tortious interference, and damages;
(2) attorney's fees should not have been awarded; (3)
there was charge error; (4) certain testimony and unproduced
documents were admitted in error; and (5) the trial
subpoena of a non-party was error. We affirm, in part,
and reverse and render, in part.
I. Background
The Foundation, a non-profit [**2] charitable organization,
is an operating foundation. In order to maintain
its tax-exempt status, the Foundation must use its
assets for non-exempt purposes; it is required to distribute
five percent of the market value of its assets each
year to charities. At the time of the incidents that form
the basis of this lawsuit, Altheide was employed by the
Foundation as Chief Financial Officer, and D'Unger had
been hired as Vice-President of Exempt Activities for the
Foundation. In addition to being operation employees,
Altheide and D'Unger were elected officers of the Board,
CEO and secretary, respectively.
The Galvan Ranch (the Ranch) in Webb County,
Texas, is one of the Foundation's assets. The Ranch ex-

tends over 67,000 acres and is bordered along a five-mile
frontage by the Rio Grande River. The crossing of ranch
property by non-United States citizens is a common occurrence.
Corpses of transients who had succumbed to
the harsh environment had been found in the vicinity of
the Ranch.
Beginning in January of 1998, D'Unger reported details
of a September 17, 1997 handcuffing incident on the
Ranch, and his fears for the well-being of three teenage
transient non-United States citizens, to [**3] nine separate
local, state, and federal agencies and officials. In
his communications, D'Unger also expressed his concerns
about Altheide's alleged self-dealing 1 and other
suspect activities of the Foundation. 2 D'Unger's communications
with outside entities regarding the Foundation's
activities were against Altheide's express instructions not
to do so.
1 D'Unger repeated questions asked of the directors
of the Foundation about Altheide's alleged
self-dealing with regard to the Foundation's contracts
with the construction company owned by
Altheide's friend. D'Unger reported his opinion
that the $ 6,000 valuation of Altheide's personal
use of the Ranch was under market. He pointed
out that Altheide was failing to pay even the undervalued
amount set by the Foundation's compensation
committee, since Altheide gave himself
a salary increase to cover the expense.
2 D'Unger also communicated the following
information unrelated to the handcuffing incident
or Altheide's alleged self-dealing: (1) the Foundation's
assistance to one of its employees in avoiding
payment of court-ordered child-support payments;
(2) the feasibility of a receivership for the
Foundation; (3) accounting and tax matters regarding
the Foundation; and (4) internal Foundation
governance issues that centered on D'Unger's
perceptions of Altheide's abuses of authority.
[**4] In April, Altheide learned of D'Unger's actions,
and on April 13, 1998, Altheide suspended
D'Unger's employment with the Foundation. The suspension,
however, did not affect D'Unger's status as a Board
member. His compensation continued. Throughout the
suspension, D'Unger also continued to communicate with
law enforcement and other agencies about the Foundation's
activities, and about what he contended were efforts
to include him in a [*354] conspiracy to cover up
criminal and illegal conduct.
On August 10, 1998, Altheide asked D'Unger to resign.
When D'Unger refused, Altheide fired him.
D'Unger decided not to submit his name for re-election
as a director. The minutes of a special meeting held by
the Board on August 11, 1998, reflect that the Board
unanimously: (1) appointed operating officers, including
Altheide as CEO but not including D'Unger in any capacity;
(2) amended the Foundation's by-laws to decrease
the number of directors from five to four; and (3) ratified
the scope of Altheide's duties as chief executive officer.
D'Unger was no longer a director, officer, or employee of
the Foundation.
II. Employment Contract Claim
In its first issue, the Foundation asserts that [**5]
the evidence is legally insufficient or, in the alternative,
factually insufficient to support the jury's finding that the
Foundation agreed to an employment contract that limited
its right to terminate D'Unger.
A. Standard of Review
1. Legal Sufficiency Challenge
Reviewing a legal sufficiency challenge, we consider
only the evidence and inferences that support the
finding. Lenz v. Lenz, 79 S.W.3d 10, 19, 45 Tex. Sup.
Ct. J. 781 (Tex. 2002); Raw Hide Oil & Gas, Inc. v.
Maxus Exploration Co., 766 S.W.2d 264, 276 (Tex.
App.-Amarillo 1988, writ denied). We disregard all evidence
and inferences to the contrary. Lenz, 79 S.W.3d at
19; Maxus, 766 S.W.2d at 276. Because the Foundation
did not bear the burden of proof at trial on modification
of D'Unger's at-will status, Larson v. Family Violence
& Sexual Assault Prevention Ctr. of S. Tex., 64 S.W.3d
506, 518 (Tex. App-Corpus Christi 2001, pet. denied);
Rios v. Tex. Commerce Bancshares, Inc., 930 S.W.2d
809, 814-15 (Tex. App.-Corpus Christi 1996, writ denied),
we analyze the Foundation's legal-sufficiency
challenge as a no-evidence issue. Gooch v. Am. Sling
Co., 902 S.W.2d 181, 183 [**6] (Tex. App.-Fort Worth
1994, no writ). The Foundation must show that the record
presents no probative evidence to support the adverse
finding. Croucher v. Croucher, 660 S.W.2d 55, 58, 27
Tex. Sup. Ct. J. 59 (Tex. 1983)
The evidence is no more than a scintilla and, in legal
effect, is no evidence "when the evidence offered to
prove a vital fact is so weak as to do no more than create
a mere surmise or suspicion of its existence." Kindred
v. Con/Chem., Inc., 650 S.W.2d 61, 63, 26 Tex. Sup. Ct.
J. 383 (Tex. 1983). Conversely, more than a scintilla
exists when the evidence "rises to a level that would enable
reasonable and fair-minded people to differ in their
conclusions." Transp. Ins. Co. v. Moriel, 879 S.W.2d
10, 25, 37 Tex. Sup. Ct. J. 883 (Tex. 1994). We reverse
and render judgment when we sustain a legal-sufficiency
point. Vista Chevrolet, Inc. v. Lewis, 709 S.W.2d 176,
177, 29 Tex. Sup. Ct. J. 255 (Tex. 1986) (per curiam);
Heritage Res., Inc. v. Hill, 104 S.W.3d 612, 619 (Tex.
App.-El Paso 2003, no pet. h.).

2. Factual Sufficiency Challenge
Unlike legal-sufficiency challenges, factual-sufficiency
issues concede that the record presents
conflicting evidence on an issue. Maxus, 766 S.W.2d at
275. [**7] Like legal-sufficiency challenges, the standard
of review on factual-sufficiency issues depends on
the burden of proof at trial. Id. at 275. The party attacking
a finding on which an adverse party bore the
burden of proof must show that the record presents "insufficient
evidence" to support the finding. Gooch, 902
S.W.2d at 184. In reviewing an insufficient-evidence
issue, we examine and consider all of the evidence, not
just the evidence that supports the [*355] verdict, to
see whether it supports or undermines the finding. Mar.
Overseas Corp. v. Ellis, 971 S.W.2d 402, 406-07, 41 Tex.
Sup. Ct. J. 683 (Tex.1998). We set aside the finding for
factual insufficiency if the "evidence adduced to support
the vital fact, even if it is the only evidence adduced on
an issue, is factually too weak alone to support it." See
Ritchey v. Crawford, 734 S.W.2d 85, 86-87 n.1 (Tex.
App.-Houston [1st Dist.] 1987, no writ) (quoting Robert
W. Calvert, "No Evidence" and "Insufficient Evidence"
Points of Error, 38 TEX. L. REV. 361, 366 (1960)).
In attacking for factual insufficiency an adverse
finding on which it bore the burden of proof at trial, a
[**8] party must show that the finding is against the
"great weight and preponderance of the evidence."
Maxus, 766 S.W.2d at 275; Ritchey, 734 S.W.2d at
86-87 n.1. In that event, we set aside a finding so against
the overwhelming weight of the evidence as to be manifestly
unjust and clearly wrong. Ortiz v. Jones, 917
S.W.2d 770, 772, 39 Tex. Sup. Ct. J. 294 (Tex. 1996) (per
curiam).
If we reverse a trial court's judgment on factual-sufficiency
grounds, we detail all of the evidence relevant
to the issue and articulate why the finding is factually
insufficient. Mar. Overseas Corp., 971 S.W.2d at
407. We reverse and remand for a new trial when we
sustain a factual-sufficiency point. Glover v. Tex. Gen.
Indem. Co., 619 S.W.2d 400, 401, 24 Tex. Sup. Ct. J. 482
(Tex. 1981) (per curiam); Heritage Res., 104 S.W.3d at
619
B. Analysis
All employment relationships in Texas are presumed
at will. Montgomery County Hosp. Dist. v. Brown, 965
S.W.2d 501, 502, 41 Tex. Sup. Ct. J. 537 (Tex. 1998).
"Absent a specific agreement to the contrary, employment
may be terminated by the employer or employee,
for good cause, bad cause, or no cause at all." [**9]
Id. Any modification of at-will employment must be
based on an unequivocal statement by the employer not
to terminate the employee except under clearly specified
circumstances. Byars v. City of Austin, 910 S.W.2d 520,
523 (Tex. App.-Austin 1995, writ denied). One cannot
imply the modification; it must be express. Midland
Judicial Dist. Cmty. Supervision & Corr. Dep't v. Jones,
92 S.W.3d 486, 487, 45 Tex. Sup. Ct. J. 965 (Tex.
2002)(per curiam); Brown, 965 S.W.2d at 503-04. The
agreement must directly limit, in a "meaningful and special
way," the employer's right to discharge the employee
without cause. Larson, 64 S.W.3d at 518. It is the burden
of the discharged employee who asserts that the parties
have contractually agreed to limit the employer's
right to terminate the employee to prove an express
agreement or written representation to that effect. Id. at
518; Rios, 930 S.W.2d at 814-15.
As with all contracts, the parties to an employment
agreement must negotiate and agree to its essential terms
for the agreement to be enforced. See Larson, 64
S.W.3d at 519; see also Smith v. SCI Mgmt. Corp., 29
S.W.3d 264, 268 [**10] (Tex. App.-Houston [14th
Dist.] 2000, no pet.) ("We find that such a general discussion
about an employee's annual compensation does
not raise a fact issue as to whether the parties agreed to
limit in a 'meaningful and special way' the employer's
prerogative to discharge the employee without cause.").
Similarly, if an essential term of employment is open for
future negotiation, no binding contract is created. Mann
v. Trend Exploration Co., 934 S.W.2d 709, 713 (Tex.
App.-El Paso 1996, writ denied).
D'Unger testified that the Foundation entered into a
renewable one-year employment agreement with him
that the [*356] Board ratified in 1996 and renewed in
1997. He pointed to by-laws and corporate minutes as
evidence of the parties' oral agreement. The Foundation's
by-laws permitted employment of directors for the term
of the director, which was annual, and the corporate
minutes recorded that D'Unger was hired at a salary of $
80,000.00 per year. D'Unger testified that the agreement
to compensate him was for a term of a year, and that
removal required an action of the Board. D'Unger's
statement of subjective belief that he entered into a contract
with the Foundation is not evidence. [**11] See
Cont'l Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444,
452, 40 Tex. Sup. Ct. J. 172 (Tex. 1996); see also In re
Jones, 974 S.W.2d 766, 769 (Tex. App.-San Antonio
1998, orig. proceeding); see generally Calvert, "No Evidence"
and "Insufficient Evidence" Points of Error, 38
TEX. L. REV. 361, 362-63 (1960).
Furthermore, Scott Turner, a certified public accountant
and D'Unger's expert witness, testified that the
existence of an annual renewable employment agreement
between the Foundation and D'Unger was consistent with
generally accepted accounting practices and corporate
governance standards regarding how corporate officers
are employed and compensated. This testimony, that is

consistent with D'Unger's understanding, did not provide
what D'Unger's testimony lacked: evidence of a specific,
unambiguous agreement. A conclusory statement,
whether by a lay or expert witness, is not evidence.
Wadewitz v. Montgomery Hosp. Dist., 951 S.W.2d 464,
466, 40 Tex. Sup. Ct. J. 894 (Tex. 1997). The courts have
considered evidence of the prior practices of an employer
with regard to a customary term of employment sufficient
to support a finding of the existence of an employment
[**12] agreement:
It is true that it was not expressly stipulated that the
appellee should remain in the service one year, or for any
definite length of time; but the evidence shows that it
was the custom of the corporation to employ a manager
annually, and to require of him a bond conditioned for
the faithful performance of his duty. The jury had a right
to conclude that, with a full knowledge of this custom,
the parties had it in mind and contracted with reference
to that term of service.
Farmers' Union Co-Op. Clearance House of Rusk
v. Guinn, 208 S.W. 362, 363 (Tex. Civ. App.-Texarkana
1919, no writ); see Hoffrichter v. Brookhaven Country
Club Corp., 448 S.W.2d 843, 846 (Tex. Civ. App.-Dallas
1969, writ ref'd n.r.e.). Turner, however, did not testify
about the Foundation's specific custom or its practices in
particular. He testified only that D'Unger's understanding
of the agreement between the parties was consistent with
standard corporate practices. "Expert opinions must be
supported by facts in evidence, not conjecture." Marathon
Corp. v. Pitzner, 106 S.W.3d 724, 729, 46 Tex. Sup.
Ct. J. 689 (Tex.2003).
D'Unger also argues that the Board's approval
[**13] of his compensation based on an annual salary
supplies the requisite specificity to meet his burden of
showing that the Foundation modified his at-will status.
D'Unger asks this Court to apply the "English Rule" that
provides, "hiring at a stated sum per week, month, or
year, is a definite employment for the period named and
may not be arbitrarily concluded." Winograd v. Willis,
789 S.W.2d 307, 310 (Tex. App.--Houston [14th Dist.]
1990, writ denied).
The English Rule, however, is no longer viable. See
Jones, 92 S.W.3d at 487. An agreement for an annual
salary does not modify an employee's at-will status. Id. A
hiring based on an agreement of an annual salary does
not limit the employer's prerogative to discharge the employee
during the dictated period of [*357] employment.
Id. Thus, evidence that the Board approved
D'Unger's compensation calculated on an annual basis is
not evidence that the Foundation agreed to modify
D'Unger's at-will status. See id.
Stripped of the inference that approval of D'Unger's
annual salary evidenced an agreement to a one-year term
of employment, neither D'Unger's testimony nor his expert's
opinion established that [**14] the Foundation
and D'Unger came to a meeting of the minds that modified
D'Unger's at-will status. See Larson, 64 S.W.3d at
519; see also SCI Mgmt. Corp., 29 S.W.3d at 268. No
evidence in the record establishes that the Foundation
agreed to a specific term of employment, and no evidence
establishes that the Foundation unequivocally indicated
a definite intent to be bound not to terminate
D'Unger's employment except under clearly specific circumstances.
Accordingly, we find that no more than a scintilla of
evidence exists "that would enable reasonable and
fair-minded people to differ in their conclusions" about
the existence of an employment agreement between the
Foundation and D'Unger that modified D'Unger's at-will
status. See Moriel, 879 S.W.2d at 25. Evidence that the
Foundation agreed to an employment contract that limited
its right to terminate D'Unger at will is "so weak as
to do no more than create a mere surmise or suspicion of
its existence." Kindred, 650 S.W.2d at 63. Absent an
express agreement to the contrary, employment relationships
in Texas are presumed at-will. Brown, 965 S.W.2d
at 502. [**15]
Having found that the evidence is legally insufficient
to support the finding, we sustain the Foundation's
first issue.
III. Attorney's Fees
In the second issue, it is argued that D'Unger is not
entitled to attorney's fees if his contract claim fails. We
agree. An award of attorney's fees must be based upon
some statutory or contractual authority. TEX. CIV.
PRAC. & REM. CODE ANN. § 38.001 (Vernon 1997);
Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 95, 42
Tex. Sup. Ct. J. 875 (Tex. 1999); see Dallas Cent. Appraisal
Dist. v. Seven Inv. Co., 835 S.W.2d 75, 77, 35
Tex. Sup. Ct. J. 856 (Tex. 1992) (citing New Amsterdam
Cas. Co. v. Tex. Indus. Inc. 414 S.W.2d 914, 914-16, 10
Tex. Sup. Ct. J. 357 (Tex. 1967)) (attorney's fees may not
be recovered unless provided for by statute or by contract
between parties). To recover attorney's fees under section
38.001 of the civil practice and remedies code, a party
must both prevail on a claim for which attorney's fees are
recoverable and recover damages. Green Int'l v. Solis,
951 S.W.2d 384, 390, 40 Tex. Sup. Ct. J. 610 (Tex.
1997); see TEX. CIV. PRAC. & REM. CODE ANN. §
38.001 [**16] (Vernon 1997) (reasonable attorney's
fees recoverable if claim is for, inter alia, an oral or
written contract). D'Unger's claim for attorney's fees
against the Foundation is based on his breach-of-contract
claim. However, he failed to recover damages on that
claim, and, thus, is not entitled to recover attorney's fees
that basis. See Green Int'l, 951 S.W.2d at 390.

Furthermore, "attorney's fees are not recoverable either
in an action in tort or a suit upon a contract unless
expressly provided by statute or by contract between the
parties." Knebel v. Capital Nat'l Bank in Austin, 518
S.W.2d 795, 803-04, 18 Tex. Sup. Ct. J. 120 (Tex. 1974)
(emphasis added); see Martin-Simon v. Womack, 68
S.W.3d 793, 797 & n.2 (Tex. App.-Houston [14th Dist.]
2001, pet. denied) (discussing circumstances where sister
courts of appeals have adopted equitable exception to
general rule of non-recovery of attorney's fees in tort
cases but Houston Court declining to do so). Neither the
Texas Supreme Court nor this Court has adopted any
wrongful-act exception to the general prohibition against
recovery of attorney's fees in a tort [*358] claim, and
we decline to do so in this case. [**17] Martin-Simon,
68 S.W.3d at 797. We find no statutory or
contract basis for recovery of attorney's fees under the
tortious interference claim D'Unger brought against Altheide
or under the wrongful termination claim brought
against the Foundation. Therefore, D'Unger is not entitled
to recover attorney's fees on his remaining claims.
Thus, we sustain the second issue.
IV. Wrongful Termination Claim
In its fifth issue, the Foundation asserts that the evidence
is not legally sufficient or, alternatively, factually
sufficient to support the jury's finding that the Foundation
discharged D'Unger's employment because he refused
to perform an illegal act. 3
3 Question No. 5 in the jury charge read:
Was CLAUDE D'UNGER discharged from
employment with the ED RACHAL FOUNDA-
TION for the sole reason that he refused to perform
an illegal act?
INSTRUCTION
An employee is wrongfully discharged if the
sole reason for his discharge was:
(1) the employee sought to find out from
proper authority if a requested act was illegal.
The requested act need not have been illegal, but
the employee must have had a good faith belief
that the requested act might be illegal, and such
belief must have been reasonable; or
(2) the employee refused to participate in a
criminal conspiracy. A criminal conspiracy occurs
when a person, with intent that a felony be
committed, agrees with one or more persons that
they or one or more of them engage in conduct
that would constitute the offense; and he or one
or more of them performs an overt act in pursuance
of the agreement; or
(3) the employee, having knowledge of two
or more persons conspiring to injure, oppress,
threaten, or intimidate any person in the free exercise
or enjoyment of life or property, refuses to
conceal and not to make known such matter as
soon as possible to some federal authority; or
(4) the employee resists intentional harassment
of his employer to hinder, delay, prevent or
dissuade the employee's reporting to a law enforcement
officer of the United States the commission
or possible commission of a federal offense.
Answer "Yes" or "No":
Answer: Yes
[**18] A. Standard of Review
As set out above, because the Foundation is attacking
the legal sufficiency of a finding on which D'Unger
bore the burden of proof, it must demonstrate, on appeal,
that the record presents no evidence to support the adverse
finding. See Croucher, 660 S.W.2d at 58. Further,
only the evidence and inferences that support the finding
will be considered. See Lenz, 79 S.W.3d at 19; Maxus,
766 S.W.2d at 276. Additionally, as set out above, in the
appeal of its factual sufficiency challenge, because the
Foundation did not bear the burden of proof on this issue
at trial, the Foundation must demonstrate that the record
presents insufficient evidence to support the finding that
D'Unger's discharge was for refusing to perform an illegal
act. Gooch, 902 S.W.2d at 184.
B. Analysis
1. Refusal to Perform an Illegal Act
Discharge of an at-will employee for refusing to
perform an illegal act is one of the exceptions to the doctrine
that an employer may terminate an at-will employee
for a good reason, a bad reason, or no reason at all.
Brown, 965 S.W.2d at 502; see Sabine Pilot Serv., Inc.
v. Hauck, 687 S.W.2d 733, 735, 28 Tex. Sup. Ct. J. 339
(Tex. 1985). [**19] D'Unger bore the burden of proving
that his discharge was for no reason other than an unwillingness
to perform an illegal act. See Sabine Pilot,
687 S.W.2d at 735.
D'Unger relies, in part, on the following evidence to
establish that Altheide [*359] instructed him to perform
an illegal act: (1) Altheide's June 30, 1997 letter
addressed to the Foundation directors, including
D'Unger; (2) an April 13, 1998 memorandum suspending
D'Unger; and (3) D'Unger's discussion with Altheide
about firing Ed DuBose, a foreman at the Ranch. Altheide's
June 30, 1997 letter to Board members informed

them that an unidentified board member was conducting
an independent investigation into the appropriateness of
equipment acquisitions and some of the activities at the
Ranch. Altheide explained that an independent investigation
by an individual board member was totally inappropriate
and that such concerns should have been addressed
to him or to the entire board. The April 13, 1998 memorandum
suspended D'Unger because of "[his] disregard
for appropriate instruction and normal business procedure."
The first paragraph of the April 13 memorandum
specifically referred to a call Altheide received [**20]
from the Mexican Consulate office in Corpus Christi.
According to Altheide, the representative from the Consulate's
office informed him that D'Unger was concerned
about "incidents that took place on the Galvan [Ranch]
where Mexican citizens were detained." In that same
memorandum Altheide indicated surprise that D'Unger
took action without first bringing the matter to the
Board's attention as previously instructed, giving the
Board an opportunity to act. Altheide reminded D'Unger
that he had been cautioned about independent activities
in the past and about using proper channels.
D'Unger also testified he first met DuBose at the
Ranch where D'Unger was discussing research proposals
with Lee Elliot from the Texas Parks and Wildlife Department.
Introductions were made and then, "just bolt
out of the blue," DuBose said, "Well, we chased [undocumented
immigrants] with dogs today . . . and ran
them through the fence and made them lose their food
and water." D'Unger testified this caused him tremendous
concern. He told DuBose he could not be doing
that, he should not be doing that, and to stop. That same
day D'Unger advised the border patrol to "keep your eyes
open for anybody with torn [**21] up clothes or dog
bites." Altheide accused D'Unger of lying to the border
patrol and insisted the event "didn't happen." However,
beginning in January 1997, other visitors to the Ranch
reported to D'Unger that DuBose had made statements to
them that he chased undocumented immigrants with dogs
and fired gunshots over their heads so they would abandon
their food and water when they had to run and climb
through the Ranch's fence line. The record reveals Altheide
noted in his diary that on July 10, 1997, DuBose
had "discharged his pistol in the air when two trespassers
would not move away from the cattle guard area when he
hollered at them."
D'Unger also testified that in September 1997, he
saw a ranch report regarding the apprehension of three
Mexican nationals on the Ranch, young men who had
been handcuffed on the Ranch. He took the negatives of
photographs taken of the men in order to have the photographs
reproduced. D'Unger had information that the
three men had been turned over to the border patrol;
however, the border patrol agents he contacted had no
knowledge of the incident. He was concerned about the
well-being of the three young men. D'Unger could not
confirm what had happened [**22] to the Mexican Nationals
after DuBose handcuffed them on the Ranch. The
border patrol did not know the status of the young men.
DuBose informed D'Unger he had used dogs to chase
other undocumented immigrants through a fence so that
they would lose their food and water. It appeared to
D'Unger as if the transients had disappeared from the
Ranch. He believed [*360] DuBose had lied about the
fate of the boys. It could be inferred that transients were
being harmed by the actions of those on the Ranch.
D'Unger testified he continued to express his alarm
that mistreatment of transient non-United States citizens,
in violation of both the law and the Foundation's mission,
was occurring on the Ranch. Rather than reporting his
concerns to the Foundation or Altheide as requested,
D'Unger contacted, among others, a congressman, a senator,
a judge, sheriffs, the Attorney General's office, the
Internal Revenue Service, and the Mexican Consulate.
Additionally, D'Unger testified that before DuBose's
contract was up, he had a discussion with Altheide about
firing DuBose. It was at that time that Altheide told him
"to drop it, something to that effect, drop it or leave it
alone." It was D'Unger's impression [**23] that he was
not to concern himself with DuBose. D'Unger also testified
that he understood Altheide to mean he was to turn a
blind eye to DuBose's mistreatment of transients on the
Ranch and generally not disclose to anyone any information
about illegal activity involving the Foundation
and, more specifically, that he was not to report to law
enforcement any criminal conduct by DuBose.
DuBose also provided testimony regarding the September
17, 1997 occurrence. He testified that, with the
assistance of a ranch hand, he handcuffed three Hispanic
teenagers who trespassed on the Ranch. The men were
handcuffed together and frisked. DuBose took photographs
of the men and called the border patrol. Approximately
three hours later a border patrol agent arrived
and took the men into custody. A ranch report for September
17 and telephone records presented to the jury
support this testimony. However, this information was
not confirmed by the border patrol until after D'Unger's
involvement with the Foundation had ended. From January
1998 through August 1998, the border patrol agent
reported only that it had no record of Mexican Nationals
apprehended at the Ranch on September 17, 1997. The
agent [**24] informed D'Unger on several occasions
that the Immigration and Naturalization Service could
not locate any paperwork on the incident. This same
agent also informed the jury he had not heard of any
shooting incidents at the Ranch, and did not have any
knowledge of the discovery of any bodies on the Ranch.

Attorney John White, a member of the board of directors
for the Foundation, testified there was an investigation
by the Board regarding the issues raised by
D'Unger. According to White, the results of the investigation
were positive except for complaints about
DuBose's inappropriate comments. Other than these
comments, people were delighted with DuBose's "courtesies."
DuBose testified he might have made statements
attributed to him but denied engaging in the described
conduct. DuBose also testified he treated transients humanely.
A call from the Mexican Consulate office regarding
"incidents that took place on the Galvan [Ranch] where
Mexican citizens were detained," appeared to trigger
D'Unger's suspension. Altheide told Board members that
an investigation by an individual board member was totally
inappropriate and should have been addressed to
him or to the entire board. Altheide [**25] told
D'Unger to leave such matters alone. D'Unger's unwillingness
to do so consisted of his refusal to condone
DuBose's activities on the Ranch. D'Unger's effort to
contact others outside the Foundation was simply a continuation
of this refusal. The June 1997 letter and the
April 1998 suspension memorandum, as well as conversations
[*361] between Altheide and D'Unger, if not
expressly stated, provided inferences that talking with
others about transient activities on the Ranch was inappropriate,
that D'Unger was to agree with the actions
taken by DuBose regarding the transients, and that the
matter was closed. It could be inferred from the evidence
that D'Unger was asked to conspire in those activities. 4
4 The elements of a criminal conspiracy are:
(1) a person; (2) with intent that a felony be
committed; (3) agrees with one or more persons
that they or one or more of them engage in conduct
that would constitute the offense; and (4) he
or one or more of them performs an overt act in
pursuance of the agreement. TEX. PEN. CODE
ANN. § 15.02(a) (Vernon 2003).
[**26] Accordingly, considering only the evidence
and inferences that support the finding and disregarding
all evidence and inferences to the contrary,
Lenz, 79 S.W.3d at 19; Maxus, 766 S.W.2d at 276, we
conclude the evidence is legally sufficient; there is more
than a scintilla of evidence to support the jury's finding
that D'Unger was discharged from employment with the
Foundation because he refused to perform an illegal act.
See Croucher, 660 S.W.2d at 58; Sabine Pilot, 687
S.W.2d at 735.
Furthermore, after examining all of the evidence,
Mar. Overseas, 971 S.W.2d at 406-07, the jury could
have believed D'Unger's testimony regarding DuBose's
treatment of transients on the Ranch, rather than the tes-
timony of the other witnesses, including DuBose, Altheide
and White. Even though it was later established
that the three Mexican Nationals had been detained by
the border patrol and returned to Mexico, the jury could
have concluded D'Unger was unwilling to perform an
illegal act. The jury could have decided Altheide's efforts
were an attempt to include D'Unger in a conspiracy to
cover up criminal and illegal [**27] conduct involving
any Mexican National on the Ranch. Moreover, the
judge could have determined a criminal conspiracy was
involved. See Sabine Pilot, 687 S.W.2d at 736 (Kilgarlin,
J., concurring) (trial judge must determine if statute
with criminal penalty involved). Thus, after a review of
the entire record, we conclude the evidence is also factually
sufficient, to prove the Foundation terminated
D'Unger for being unwilling to perform an illegal act.
See Ritchey, 734 S.W.2d at 86-87 n.1
.2. Sole Reason for Termination
An employer who discharges an employee both for
refusing to perform an illegal act and for a legitimate
reason cannot be liable for wrongful termination. Tex.
Dep't of Human Servs. v. Hinds, 904 S.W.2d 629, 633, 38
Tex. Sup. Ct. J. 711 (Tex. 1995). Therefore, in order to
prevail under this Sabine Pilot exception, D'Unger was
required to prove not only that he refused to perform an
illegal act, but also that his refusal was the only reason
for which he was terminated. See Sabine Pilot, 687
S.W.2d at 735.
Altheide testified that D'Unger, as an operating officer,
was under his direct supervision; D'Unger was to
report [**28] to him and was supervised by him. Altheide
acknowledged D'Unger did a good job in developing
research projects for which grants were issued in
1996. Altheide testified D'Unger started, but did not finish,
the construction work, failed to keep time records,
and failed to complete a plan for the exempt purpose use
of the Foundation's property. Altheide explained
D'Unger completed a preliminary draft, a concept paper
describing different activities in very vague or very general
terms. Altheide testified D'Unger did not develop an
administrative, overall strategy plan on how the Foundation
would conduct the activities outlined by D'Unger.
Altheide also testified D'Unger did not fulfill his [*362]
duties of negotiating and monitoring leases of the surface
estates including cattle and hunting leases, and he only
partially fulfilled his responsibility to assist Altheide
with mineral lease activities.
At trial, Altheide compiled a list outlining why
D'Unger was not a good employee. The list included the
following reasons: (1) D'Unger resisted any supervision
or oversight; (2) D'Unger lacked focus; (3) D'Unger
demonstrated erratic behavior and had an explosive personality;
(4) D'Unger did not perform [**29] his job

duties; (5) D'Unger was not capable of supervising others
or assuming additional responsibilities; and (6) D'Unger
lacked loyalty to the Foundation.
Referring to the above list, Altheide testified
D'Unger would explode or ignore instructions or suggestions
given by individual board members, specifically
Altheide, and would respond that he answered to the
Board. D'Unger focused on individual events and daily
activities, not on the whole program; it was a disjointed
effort. Altheide further testified D'Unger's behavior was
erratic, inconsistent from day to day. D'Unger would
blow up in public and make remarks that were totally
inappropriate. Altheide explained D'Unger could not
perform his job duties and was not capable of supervising
others. Any project D'Unger started would unravel,
and D'Unger could not finish it. In Altheide's opinion,
D'Unger was not capable of assuming the duties of the
president or to act in his absence. Finally, Altheide testified
D'Unger lacked loyalty to the Foundation and was
not concerned about its perpetual existence.
In the letter of suspension, Altheide admonished
D'Unger for taking action regarding his concerns about
an incident on the Ranch [**30] where Mexican citizens
were detained, without first bringing it to the
Board's attention and giving the Board an opportunity to
act. D'Unger testified his employment with the Foundation
was suspended and later terminated because he went
to the authorities regarding this incident, disregarding
instruction and normal business procedure. D'Unger testified
that it was for that reason and no other, including
the reasons Altheide identified at trial.
D'Unger also testified he performed his job duties
including supervising exempt purpose activity. He prepared
a "Proposed Exempt Purpose Activities (Plan)."
D'Unger testified the background section of the Plan was
used to set out the purpose of the Foundation and the
general guideline for instructions that followed. The
methods for achieving the goals of the Foundation were
included in the methodology section. As an operating
foundation, the Foundation was required to use its assets.
The primary assets of the Foundation were the two
ranches. The Plan set out how the ranches could be used
through the areas of biology (range and wildlife management)
and geology (identification, evaluation and use
of waters and minerals), academic research, public
[**31] service research, joint venture research, contract
for services, and commercial research. Other than research,
the Ranch facilities could be opened to various
youth groups. The Plan's public sector and social support
section included concerns about the number of Mexican
Nationals and narcotics smuggling going through both
ranches. D'Unger testified that "we felt like it was consistent
with our mission to support efforts to support the
laws." The Plan also proposed exempt purpose guide-
lines that sought to encourage additional support for its
goals, encourage research, and encourage appropriate
social policies and social activities on the Ranch. Attached
to the Plan was a flowchart showing the interrelationships
between the ideas and the entities [*363]
with which the Foundation dealt. Also attached was a list
of persons D'Unger had contacted in an effort to "get a
feel for what the needs were in the various areas."
D'Unger testified he spent months preparing this draft
Plan. Altheide requested the report. It was presented to
everybody. D'Unger did not know if Altheide approved
it. Altheide did not return it to D'Unger with comments.
D'Unger testified that this draft Plan appeared to be the
[**32] backbone of the "Ed Rachal Foundation Operational
Overview 19[9]8 (Overview)." Only Altheide's
name, as CEO, appeared on the Overview. D'Unger testified
he implemented plans, and reported to the Board for
approval of the plans.
D'Unger further testified he participated in requested
planning and oversight of the Taylor construction project
by getting the microwave tower at no cost to the Foundation.
He was never given an opportunity to act jointly
with Altheide in disbursing funds, another part of his job
description.
In response to other reasons given by Altheide that
would support his termination, D'Unger testified he only
resisted supervision or oversight where conduct was inappropriate.
D'Unger "felt like [he] was focused," and
did not believe he acted erratically. D'Unger testified he
does not have an explosive personality. Again, he testified
that he performed his job well. D'Unger had no opportunity
to supervise others and was not given an opportunity
to assume additional responsibilities. His loyalty
was to the Foundation, not to Altheide. Finally,
D'Unger testified he did keep time records in accordance
with record forms provided and did put in more than
forty hours a [**33] week, usually exceeding six to
seven days a week; working as much as was necessary.
Considering only the evidence and inferences supporting
the finding, D'Unger's testimony was that he
performed his job duties and remained focused. He provided
a plan for exempt purpose activities, a plan that
was used to create the overview of the Foundation.
D'Unger satisfactorily handled the microwave tower
construction project. Altheide acknowledged that
D'Unger did a good job in developing research projects.
He was not given opportunities to take on other responsibilities.
Furthermore, as set out above, we have found
there is evidence that D'Unger was unwilling to perform
an illegal act. Accordingly, this Court concludes the record
presents more than a scintilla of evidence to support
the adverse finding that D'Unger's unwillingness to perform
an illegal act was the sole reason for his termination.
Further, after a review of the entire record, we con-

clude the evidence is factually sufficient to prove the
Foundation terminated D'Unger for the sole reason he
was unwilling to perform an illegal act. The jury could
have believed D'Unger's testimony, rather than that offered
by Altheide. Further, the [**34] jury could have
believed evidence, if any, that D'Unger was an impediment
to Altheide's exercise of control, that he was disruptive
or insubordinate, and that he disclosed information
to third parties, was evidence of D'Unger's continued
refusal to perform an illegal act, the sole reason
for his termination.
We, therefore, hold the evidence is legally and factually
sufficient to support the jury's finding as to the
wrongful termination claim. The Foundation's fifth issue
is overruled.
V. Charge Error
In its sixth issue, the Foundation challenges subsection
(3) of the instruction to Question No. 5 of the jury
charge. It provides:
[*364] An employee is wrongfully discharged if
the sole reason for his discharge was:
* * *
(3) the employee, having knowledge of two or more
persons conspiring to injure, oppress, threaten, or intimidate
any person in the free exercise or enjoyment of life
or property, refuses to conceal and not to make known
such matter as soon as possible to some federal authority.
. . .
A trial court must submit in its charge to the jury
all questions, instructions, and definitions raised by the
pleadings and evidence that will aid the jury in [**35]
reaching a verdict. TEX. R. CIV. P. 278; Hyundai Motor
Co. v. Rodriguez, 995 S.W.2d 661, 663-64, 42 Tex.
Sup. Ct. J. 738 (Tex. 1999). The trial judge is accorded
broad discretion so long as the charge is legally correct.
Rodriguez, 995 S.W.2d at 664. Upon the general principle
that a proper jury instruction is one that assists the
jury and is legally correct, a trial court may personalize
or individualize a charge to the facts of the case so the
jury can understand the law more easily. United States
Sporting Prods., Inc. v. Johnny Stewart Game Calls, Inc.,
865 S.W.2d 214, 220 (Tex. App.-Waco 1993, writ denied).
Trial courts also are given considerably more discretion
in submitting instructions and definitions than in
submitting questions. Harris v. Harris, 765 S.W.2d 798,
801 (Tex. App.-Houston [14th Dist.] 1989, writ denied);
Houston Nat'l Bank v. Biber, 613 S.W.2d 771, 776 (Tex.
Civ. App.-Houston [14th Dist.] 1981, writ ref'd n.r.e.);
see also Ishin Speed Sport, Inc. v. Rutherford, 933
S.W.2d 343, 349-50 (Tex. App.-Fort Worth 1996, no
writ). An explanatory instruction is improper only if it is
a misstatement [**36] of the law as applicable to the
facts. See DeLeon v. Pickens, 933 S.W.2d 286, 292
(Tex. App.-Corpus Christi 1996, writ denied)
Specifically, the Foundation contends that subsection
(3) is an incorrect statement of the law, and, thus, is
immaterial. See Salinas v. Rafati, 948 S.W.2d 286, 288,
40 Tex. Sup. Ct. J. 753 (Tex. 1997); Spencer v. Eagle
Star Ins. Co., 876 S.W.2d 154, 157, 37 Tex. Sup. Ct. J.
519 (Tex. 1994). The Foundation argues that subsection
(3) transforms the wrongful discharge question into a
whistle blower question.
This argument, however, mischaracterizes the trial
court's actions. "The Texas Whistleblower Act provides
that certain public employees discriminated against for
reporting a violation of the law in good faith to an appropriate
law enforcement authority may sue for damages
and other relief." Hinds, 904 S.W.2d at 631 (citing
TEX. GOV'T CODE ANN. §§ 554.001-.009 (Vernon
1994 & Supp. 2003)). Subsection (3) does not instruct
the jury that an employee is wrongfully discharged if the
sole reason for his discharge was for reporting a violation
of the law in good faith to an appropriate law enforcement
[**37] authority. Rather, subsection (3) instructs
the jury that an employee is wrongfully discharged if the
sole reason for his discharge was the employee, having
knowledge of two or more persons conspiring to injure,
oppress, threaten, or intimidate any person in the free
exercise or enjoyment of life or property, refuses to conceal
and not to make known such matter as soon as possible
to some federal authority. The trial court submitted
this instruction based on applicable federal law of misprision,
a statute identified by D'Unger in his petition.
See 18 U.S.C. § 4.
Article 18, section 4 of the Constitution of the United
States provides:
Whoever, having knowledge of the actual commission
of a felony cognizable by a court of the United
States, conceals and does not as soon as possible make
[*365] known the same to some . . . other person in
civil . . . authority under the United States, shall be fined
under this title or imprisoned not more than three years,
or both
Id. We cannot conclude, therefore, that this is an incorrect
statement of law as the Foundation argues.
Moreover, because trial courts are given considerably
more discretion in submitting instructions [**38] and
definitions than in submitting questions, we conclude the
trial court did not abuse its discretion in including this
subsection in the instruction. See Harris, 765 S.W.2d at
801; Houston Nat'l Bank, 613 S.W.2d at 776. The
Foundation's sixth issue is overruled.

The Foundation asserts in its seventh issue that section
(4) of the instruction to Question No. 5 was also
included in error. That section provides:
An employee is wrongfully discharged if the sole
reason for his discharge was:
* * *
(4) the employee resists intentional harassment of
his employer to hinder, delay, prevent or dissuade the
employee's reporting to a law enforcement officer of the
United States the commission or possible commission of
a federal offense.
The Foundation's sole contention is that this instruction
sought to describe the violation of a statute that
D'Unger had not specifically pled; thus, it was error to
include it in the charge. We conclude, however, that the
pleadings were sufficient to support its submission. See
TEX. R. CIV. P. 47(a) (pleading shall contain short
statement of cause of action, sufficient to give fair notice
of claim), 45(b) (pleading [**39] shall consist of statement
in plain and concise language of plaintiff's cause of
action).
D'Unger's petition set out the following:
VI.
Plaintiff's discharge was for the sole reason that
D'Unger refused to perform an illegal act, and/or made a
good faith attempt to determine whether the acts the
Foundation requested him to perform, ratify and/or approve
were illegal.
VII.
It is herein further alleged that Altheide and others
were engaged in a conspiracy in which D'Unger refused
to participate. Due to the fact that D'Unger would not
participate in a cover up, D'Unger was in effect ordered
to make either false statements or conceal information
from a department or agency of the United States of
America and/or the State of Texas. Because D'Unger
refused to be a part of the conspiracy, cover up, and/or
obstruction of justice, D'Unger was "squeezed out" of the
Foundation. D'Unger's refusal to cooperate and participate
in such illegal and unlawful activities creates an
action based on the theory of wrongful termination.
Accordingly, we conclude the court did not abuse its
discretion when it included this instruction in the charge.
See Boyles v. Kerr, 855 S.W.2d 593, 601, 36 Tex. Sup.
Ct. J. 874 (Tex. 1993) [**40] ("A court should uphold
the petition as to a cause of action that may be reasonably
inferred from what is specifically stated, even if an
element of the cause of action is not specifically alleged.");
see also Horizon/CMS Healthcare Corp. v.
Auld, 34 S.W.3d 887, 897, 43 Tex. Sup. Ct. J. 1151 (Tex.
2000) (petition is sufficient if it gives fair and adequate
notice of facts upon which pleader bases claim). The
Foundation's seventh issue is overruled.
VI. Tortious Interference Claim
In issue three, Altheide asserts the evidence is not
legally sufficient or, [*366] alternatively, factually
sufficient, to support the finding that he tortiously interfered
with D'Unger's contractual agreement with the
Foundation. 5 The elements of a cause of action for tortious
interference with a contract are: (1) the existence of
a contract subject to interference; (2) the occurrence of
an act of interference that was willful and intentional; (3)
the act was a proximate cause of the plaintiff's damage;
and (4) actual damage or loss occurred. Holloway v.
Skinner, 898 S.W.2d 793, 795-96, 38 Tex. Sup. Ct. J. 582
(Tex. 1994). The second element is particularly important
when the defendant serves the dual roles of corporate
[**41] agent and the third party who allegedly induces
the corporation's breach. Id. at 796. In that event, to
preserve the logically necessary rule that a party cannot
tortiously interfere with its own contract, the plaintiff
must prove that the corporate agent's alleged interference
was in furtherance of the agent's personal interests, not
the corporation's. Id.
5 Although Altheide captioned issue three,
"The Tortious Interference Claim Fails Because
Paul Altheide Had Legal Justification to Act on
Behalf of the Foundation," it is clear from his argument
that Altheide is not asking for a review of
his defense of legal justification. He argues that
D'Unger failed to establish the elements of the
cause of action. We, therefore, construe his third
issue as a challenge to D'Unger's proof of the
elements of this cause of action.See Surgitek v.
Abel, 997 S.W.2d 598, 601, 42 Tex. Sup. Ct. J.
993 (Tex. 1999) (court looks to substance of motion
to determine relief sought, not merely title);
State Bar v. Heard, 603 S.W.2d 829, 833, 23 Tex.
Sup. Ct. J. 572 (Tex. 1980) (court looks to substance
of plea for relief to determine nature of
pleading, not merely form of title); see also TEX.
R. CIV. P. 71 (when plea or pleading mistakenly
designated, court shall treat it as if had been
properly designated).
[**42] The plaintiff meets this burden by showing
that the agent acted in a fashion so contrary to the corporation's
best interests that only the agent's personal interests
could have motivated the actions. Id. The mere existence
of a personal stake in the outcome cannot alone
constitute proof the corporate agent committed an act of
willful or intentional interference. Id. In other words, the
plaintiff must show that the agent acted solely in fur-

therance of the agent's own interests. Id.; Powell Indus.,
Inc. v. Allen, 985 S.W.2d 455, 457, 42 Tex. Sup. Ct. J.
283 (Tex. 1998) (per curiam). Once the plaintiff meets its
burden, liability for tortious interference with a contract
is established unless the corporate agent proves the affirmative
defense of legal justification. Holloway, 898
S.W.2d at 796; see Kingston v. Helm, 82 S.W.3d 755,
763 n.3 (Tex. App.-Corpus Christi 2002, pet. denied).
In addition, when a party acts through an agent, the
act of an agent for a principal may not subject the agent
to liability for tortious interference with a contract so
long as the agent acts in good faith and believes that the
action is for the best interest of the [**43] principal.
Holloway, 898 S.W.2d at 794-95. We must consider the
principal's evaluation of the agent's action when determining
whether an agent acted against the principal's
interests. Powell Indus., 985 S.W.2d at 457. A principal
is a better judge of its own best interests than a jury or
court. Id. If a principal does not complain about its
agent's actions, the agent cannot be held to have acted
contrary to the principal's interests. Id. "Even such a
corporate complaint is not conclusive evidence that the
agent was acting for his or her personal interests."
Latch v. Gratty, Inc., 107 S.W.3d 543, 546, 46 Tex. Sup.
Ct. J. 470 (Tex. 2003).
The jury found that Altheide intentionally interfered
with D'Unger's contractual agreement with the Foundation
without a good-faith belief that he had a right to do
so. We have held that the evidence is legally and factually
insufficient [*367] to support the finding of an
employment contract between D'Unger and the Foundation
that modified D'Unger's at-will employment status.
However, an at-will employment agreement, such as the
one in this case, can be the subject of a claim of tortious
interference. Sterner v. Marathon Oil, 767 S.W.2d 686,
688, 32 Tex. Sup. Ct. J. 266 (Tex. 1990). [**44]
As we review legal sufficiency, again we consider
only the evidence and inferences that support the finding,
and disregard all evidence and inferences to the contrary.
Lenz, 79 S.W.3d at 19; Maxus, 766 S.W.2d at 276. Altheide
did not bear the burden of proof at trial on the
tortious-interference claim. Holloway, 898 S.W.2d at
795-96; Kingston, 82 S.W.3d at 763 n.3. Therefore, we
analyze Altheide's legal-sufficiency challenge in his third
issue as a no-evidence issue. Gooch, 902 S.W.2d at 183.
Altheide must show that the record presents no evidence
to support the adverse finding. Croucher, 660 S.W.2d at
58. Specifically, Altheide must show that the record presents
no probative evidence to support the essential fact
that his alleged interference was in furtherance of his
own personal interests, not the Foundation's. Holloway,
898 S.W.2d at 795.
D'Unger argues that the evidence, including Turner's
testimony, supports the conclusion that his termination
was not in the Foundation's best interest and thus was
prohibited by the Foundation's by-laws. D'Unger's testimony
[**45] and the opinion of his expert was that
Altheide acted in his own best interests, not the Foundation's,
when he fired D'Unger. D'Unger's statement of
subjective belief of Altheide's motives, however, is not
evidence. See Cont'l Coffee Prods., 937 S.W.2d at 452;
see also In re Jones, 974 S.W.2d at 769. Nor are his
expert's speculations evidence. See Pitzner, 106
S.W.23d at 729; see also Wadewitz, 951 S.W.2d at 467
D'Unger also refers us to evidence of the benefit Altheide
derived from Altheide's personal use of the Ranch
and $ 6,000 salary increase to cover the value of that
usage to the Foundation. Considering only the inference
suggested by D'Unger, that by firing D'Unger Altheide
secured a benefit for himself with regard to continued
use of the Ranch and increased salary, D'Unger had to
prove more than the fact that Altheide benefitted personally
from firing D'Unger. Holloway, 898 S.W.2d at 798.
He had to prove that Altheide acted willfully or intentionally
to serve Altheide's personal interests at the expense
of the Foundation. Id.
D'Unger further asserts that the evidence shows that
the Board did [**46] not ratify his termination as required
by the Foundation's by-laws. However, it is undisputed
that D'Unger did not seek election to a new term
as director of the Foundation. It is also undisputed that
the Board unanimously elected new directors and officers,
a slate that did not include D'Unger. Therefore, we
find as a matter of law that the Board effectively ratified
D'Unger's termination by not re-electing D'Unger but
rather by electing other officers. The Foundation is the
best judge of its own interests. See Powell Indus., 985
S.W.2d at 457.
The evidence is undisputed that the Foundation did
not complain about Altheide's termination of D'Unger.
We cannot find that Altheide acted contrary to the
Foundation's interests. See id. D'Unger failed to introduce
probative evidence tending to prove that firing
D'Unger was so contrary to the Foundation's best interests
that it could only have been motivated by Altheide's
pursuit of his own personal interests. See Holloway,
898 S.W.2d at 798. No more than a scintilla of evidence
exists "that would enable reasonable and fair-minded
people to differ in their conclusions" [*368] about
whether Altheide furthered [**47] his own personal
interests at the expense of the Foundation's in firing
D'Unger. See Moriel, 879 S.W.2d at 25. Accordingly,
we find that D'Unger did not meet his burden of proving
each element of tortious interference. See Holloway,
898 S.W.2d at 795. Because D'Unger did not establish
liability for tortious interference with a contract, we need

not address Altheide's affirmative defense of legal justification.
See id. We hold that the evidence is legally insufficient
to support the finding that Altheide tortiously
interfered with D'Unger's at-will employment agreement
with the Foundation. See id.
Having found that the evidence is legally insufficient
to support the finding, we sustain Altheide's third
issue. 6
6 Because we have sustained Altheide's third
issue, we need not address issue four wherein
Altheide contends the trial court erred in failing
to give the Powell instruction because the Foundation's
ratification established legal justification
as a matter of law, and issue eight wherein he
contends the tortious interference finding is mutually
exclusive of the wrongful discharge finding,
and renders the wrongful discharge finding
immaterial. See TEX. R. APP. P. 47.1. Furthermore,
having sustained issue three, we need not
address the portion of issue nine that addresses
alleged error in the admission of expert testimony
on motivation for D'Unger's tortious interference
claim. See id.
[**48] VII. Evidentiary Issues
A. Motivation Testimony
In its ninth issue, the Foundation contends the trial
court erred in allowing Turner to testify as to the Foundation's
motive for terminating D'Unger's employment
because his testimony is speculative and unreliable. 7 To
support its claim of error, the Foundation relies on an
objection it made to Turner's testimony wherein he provided
his opinion as to why Altheide terminated
D'Unger. This objection was overruled. After examining
the record in this case, however, we conclude appellant
has waived the issue it brings on appeal.
7 We have already discussed and sustained
Altheide's tortious interference with a contract
issue; therefore, we need not address Turner's testimony
as it relates to that cause of action. See
TEX. R. APP. P. 47.1.
A party should object every time inadmissible evidence
is offered. See Duperier v. Texas State Bank, 28
S.W.3d 740, 755 (Tex. App.-Corpus Christi 2000, pet.
dism'd by agr.). The Foundation [**49] failed to object
to Turner's subsequent testimony regarding the sole reason
that the Foundation terminated D'Unger. The Foundation
did not ask the trial court for a running objection
on motivation testimony. Thus, it has waived its objection
to the testimony about which it complains on appeal.
See id.
Moreover, to obtain reversal of a judgment based on
error in the admission or exclusion of evidence, an appellant
must show that the trial court's ruling was in error
and that the error was calculated to cause and probably
did cause "the rendition of an improper judgment." TEX.
R. APP. P. 44.1; Owens-Corning Fiberglas Corp. v.
Malone, 972 S.W.2d 35, 43, 41 Tex. Sup. Ct. J. 877 (Tex.
1998). Therefore, even if we were to conclude the trial
court erred in admitting the complained of testimony, the
Foundation has not shown that the error was calculated
to cause and probably did cause "the rendition of an improper
judgment." TEX. R. APP. P. 44.1; Owens-Corning
Fiberglas Corp., 972 S.W.2d at 43. The
Foundation's ninth issue is overruled.
B. Admission of Exhibits
By the eleventh issue, appellants contend the trial
court erred in admitting [*369] exhibits 34 and 54, 8
evidence [**50] requested by the appellants but withheld
by D'Unger. Each exhibit is a faxed correspondence
from the Foundation's attorney, Carol Bailey, to Altheide.
9
8 Appellants also complain of the admission of
exhibit 31. However, having reviewed the record,
we note exhibit 31 was admitted without objection.
9 Attorney Carol Bailey faxed the following
documents to Altheide for his review: (1) exhibit
31, her June 7, 1998 review of the proposed
minutes for the May 19, 1998 meeting; (2) exhibit
34, her August 10, 1998 proposed resolution
reducing the number of voting directors to four;
and (3) exhibit 54, her August 11, 1998 rough
draft of the minutes of the August 11 special
meeting.
Unless the trial court finds good cause, the failure to
supplement discovery results in the loss of opportunity to
present evidence. Morrow v. HEB, Inc., 714 S.W.2d
297, 297-98, 29 Tex. Sup. Ct. J. 546 (Tex. 1986). The
trial court's determination of whether a party had good
cause for failure to supplement discovery will not be set
aside, however, [**51] unless there is an abuse of discretion.
Id. at 298. Moreover, as set out above, to obtain
reversal of a judgment based on error in the admission of
evidence, an appellant must show that the trial court's
ruling was in error and that the error was calculated to
cause and probably did cause "the rendition of an improper
judgment." TEX. R. APP. P. 44.1; Owens-Corning
Fiberglas Corp., 972 S.W.2d at 43.
Therefore, even if the trial court erred in admitting
the exhibits, the Foundation has not shown that the error
was calculated to cause and probably did cause "the rendition
of an improper judgment." TEX. R. APP. P. 44.1;

Owens-Corning Fiberglas Corp., 972 S.W.2d at 43.
Thus, we overrule the Foundation's eleventh point
VIII. Trial Subpoena of DuBose, a Non-Party Witness
Appellants, by their tenth issue, contend the trial
court erred in issuing the subpoena of DuBose. They
argue that the court erred because DuBose was not a
party to the suit and because he was beyond the range of
proper service under Texas Rules of Civil Procedure
176.3(a) and 176.5(a). TEX. R. CIV. P. 176.3(a),
176.5(a). Appellants also urge error on the basis [**52]
that the subpoena was improperly served on their counsel.
We examine a trial court's decision to quash a subpoena
to determine if the court abused its discretion.
Shannon v. Devine, 917 S.W.2d 465, 467 (Tex. App.--
Houston [1st Dist.] 1996, orig. proceeding). As above,
however, we need not address whether the court abused
its discretion, because, even assuming error, appellants
have not shown what harm resulted from the issuance of
the subpoena. TEX. R. APP. P. 44.1. DuBose was called
as D'Unger's first witness. 10 Appellants were given the
opportunity to cross-examine DuBose. Furthermore,
DuBose has not made any appearance in this appeal, and
did not, himself, challenge the court's ruling on appellants'
motion to quash. Appellants' tenth issue is overruled.
10 D'Unger asserts appellants had agreed to
produce DuBose at trial, but had not agreed as to
when they would produce him.
IX. Damages
In its twelfth issue, the Foundation contends that the
trial court erred in allowing the [**53] recovery of
damages past September 1, 1998, the term of the alleged
contract. Although the contract claim failed, D'Unger has
prevailed on the wrongful termination claim against the
Foundation. Therefore, we review this argument as it
applies to wrongful termination.
[*370] Generally, when the terms of employment
are indefinite, the loss of wages an employee would have
earned in the indefinite future is not a recoverable item
of damages. Town of S. Padre Island v. Jacobs, 736
S.W.2d 134, 137 (Tex. App.-Corpus Christi 1986, writ
denied). However, as set out above, under Sabine Pilot,
an employee may recover damages for the employer's
wrongful termination if the employee proves he was
discharged solely for refusing a request to perform an
illegal act that would subject the employee to criminal
penalties. See Sabine Pilot, 687 S.W.2d at 735. Although
the majority in Sabine Pilot did not address damage
issues, Justice William W. Kilgarlin, in his concurrence,
writes that damages under the Sabine Pilot narrow
exception should parallel those available in a worker's
compensation case where an employee has been wrongfully
discharged. Id. at 736 [**54] (concurrence, Kilgarlin,
J.).
Logically, [Texas Labor Code section 451.001]
(prohibition for filing a worker's compensation claim)
should serve as a guide [in determining plaintiff's measure
of damages when the Sabine Pilot's narrow exception
applies]. If so, damages would include loss of wages,
both past and those reasonably anticipated in the future,
and employee and retirement benefits that would have
accrued had employment continued. It would also include
punitive damages.
Id. (citing Carnation Co. v. Borner, 610 S.W.2d
450, 454, 24 Tex. Sup. Ct. J. 111 (Tex. 1980) (future lost
wages awarded in wrongful discharge worker's compensation
case)); see Borden, Inc. v. Guerra, 860 S.W.2d
515, 524 (Tex. App.-Corpus Christi 1993, writ dism'd by
agr.) (past and future lost wages for wrongful discharge
in worker's compensation case affirmed); see also TEX.
LAB. CODE ANN. § 451.002 (Vernon 1996) (person
violating section 451.001 liable for reasonable damages
incurred by employee as result of violation). We agree
with this reasoning and hold the trial court did not err in
allowing recovery of wages reasonably [**55] anticipated
past September 1, 1998. The Foundation's twelfth
issue is overruled.
In issue thirteen, the Foundation argues the evidence
is legally and factually insufficient to support the jury's
finding of the present value of D'Unger's future lost
wages in the amount of $ 359,332.00. The Foundation
specifically complains that D'Unger's expert, Scott
Turner, a certified public accountant, who provided the
only evidence of damages, did not include a calculation
of the present value of D'Unger's future lost wages.
"The jury has the power to consider as proven any
matter that is of common knowledge in the community."
Mo. Pac. R.R. Co. v. Kimbrell, 160 Tex. 542, 334 S.W.2d
283, 286, 3 Tex. Sup. Ct. J. 281 (1960). While the jury
must assess damages to accrue in the future on the basis
of the present cash value (the amount if paid now in
cash), still no evidence of the earning power of money
must be introduced. Id.; Rendon v. Avance, 67 S.W.3d
303, 310 (Tex. App.-Fort Worth 2001, pet. granted,
w.r.m.); 11 see McIver v. Gloria, 140 Tex. 566, 169
S.W.2d 710, 712 (1943) (amount of plaintiff's loss of
earning capacity is always uncertain and must be left
[**56] largely to jury's sound judgment and discretion).
11 In Rendon, the supreme court granted the
parties' joint motion to grant the petition and to
remand the case to the trial court. See Rendon v.
Avance, 67 S.W.3d 303, 310 (Tex. App.-Fort

Worth 2001, pet. granted, w.r.m.); see also TEX.
R. APP. P. 56.3 (order on petition for review
when case settled by agreement of parties). The
opinion of the Fort Worth Court of Appeals was
not vacated and has the precedential value of a
petition dismissed case. See TEX. R. APP. P.
56.3.
[*371] In the present case, the trial court instructed
the jury to calculate the awards for lost earnings in
terms of a sum of money, "the present cash value." We
must presume that the jury properly followed the trial
court's instructions. See Rendon, 67 S.W.3d at 311 (citing
Turner, Collie & Braden, Inc. v. Brookhollow, Inc.,
642 S.W.2d 160, 167, 25 Tex. Sup. Ct. J. 465 (Tex. 1982)
(appellate court must assume jury properly followed trial
court's instructions)). [**57] As set out in Kimbrell,
we believe the jury was qualified to make the calculation
of the present value of D'Unger's lost wages based on its
common knowledge. See Kimbrell, 334 S.W.2d at 286.
We conclude, therefore, evidence of the earning power
of money, either by way of interest rates or proper discounts,
was not required to be introduced. The Foundation's
thirteenth issue is overruled.
X. Conclusion
Accordingly, we affirm the judgment of the trial
court on D'Unger's wrongful termination claim and the
award of damages against the Foundation. We reverse
and render judgment on the breach-of-contract claim in
favor of the Foundation. We also reverse the trial court's
award of attorney's fees and render judgment that
D'Unger take nothing on his claim for attorney's fees.
Finally, we reverse and render judgment on the tortious
interference with a contract claim in favor of Altheide.
NELDA V. RODRIGUEZ
Justice
DISSENT BY: ERRLINDA CASTILLO
DISSENT
CONCURRING AND DISSENTING OPINION
Before the Court En Banc
Concurring and Dissenting Opinion by Justice Castillo
In this employment termination case, appellee
Claude D'Unger ("D'Unger") filed suit against [**58]
his former employer, the Ed Rachal Foundation (the
"Foundation"), and the Foundation's chief executive officer,
Paul Altheide ("Altheide"), appellants. D'Unger
alleged: (1) the Foundation agreed to limit its right to
terminate him at will when the parties entered into a renewable
one-year employment contract; (2) the Founda-
tion terminated him within one year of the contract's first
renewal for the sole reason that he refused to perform an
illegal act; and (3) Altheide tortiously interfered with
D'Unger's contractual agreement with the Foundation.
After a jury verdict and judgment in D'Unger's favor, this
appeal ensued.
I. THE ISSUES
The Foundation and Altheide present thirteen issues
for our review. In issues one and five, respectively, the
Foundation challenges the legal and factual sufficiency
of the evidence to support the jury's findings of an employment
contract and wrongful termination. In issue
two, the Foundation challenges the award of attorney
fees to D'Unger on his breach-of-contract claim. In issue
three, Altheide challenges the legal and factual sufficiency
of the evidence to support the jury's finding of
tortious interference.
This is a close case. It demands [**59] dispassionate
and rigorous exercise of our legal- and factual-sufficiency
review powers. In particular, the case
highlights the importance of maintaining analytical distinctions
between the two standards of review. I concur
in the majority's reversal of the employment-contract and
tortious-interference issues on legal-sufficiency grounds.
I also concur with the majority's disposition of the attorney-fee
issue. I dissent from the majority's affirmance on
legal- and factual-sufficiency grounds of the wrongful-termination
issue. I write separately to dissent: (1)
from the majority's selective focus on particular facts
rather than the record as a whole in finding the evidence
legally and factually sufficient to sustain the wrongful-termination
finding; [*372] and (2) from the majority's
abdication of our duty as the court of last resort in
resolving factual-sufficiency questions by failing to perform
any factual-sufficiency analysis in reversing the
employment-contract and tortious-interference issues on
legal-sufficiency grounds. I would scrupulously adhere
to the legal-sufficiency scope of review and reverse each
issue on legal-sufficiency grounds. As a matter of judicial
economy in the event [**60] the supreme court
disagrees, I also would analyze and reverse each issue on
factual-sufficiency grounds. I would not reach appellants'
evidentiary and jury-charge issues. See TEX. R. APP. P.
47.1.
II. SUFFICIENCY STANDARDS OF REVIEW
A court of appeals is not a fact finder. Accordingly,
we do not assess witnesses' credibility or substitute our
judgment for that of the jury, even if the evidence supports
a different result. Maritime Overseas Corp. v.
Ellis, 971 S.W.2d 402, 407, 41 Tex. Sup. Ct. J. 683 (Tex.
1998). Nor do we re-weigh the evidence and set aside a
jury verdict because we feel that a different result is

more reasonable. Pool v. Ford Motor Co., 715 S.W.2d
629, 634, 29 Tex. Sup. Ct. J. 301 (Tex. 1986) (op. on
reh'g).
A. Legal Sufficiency
We address legal-sufficiency challenges as either
"no-evidence" or "matter-of-law" issues. Gooch v. Am.
Sling Co., 902 S.W.2d 181, 183-84 (Tex. App.-Fort
Worth 1995, no writ). We analyze the issue as a
"no-evidence" challenge when the party complaining on
appeal did not bear the burden of proof at trial. Gooch,
902 S.W.2d at 183. In challenging the legal sufficiency
of the evidence to support a finding [**61] on which an
adverse party bore the burden of proof, the appellant
must show that the record presents no evidence to support
the adverse finding. Croucher v. Croucher, 660
S.W.2d 55, 58, 27 Tex. Sup. Ct. J. 59 (Tex. 1983).
When the party complaining on appeal of the legal
sufficiency of the evidence to support a finding bore the
burden of proof at trial, we address the issue as a "matter-of-law"
challenge. Dow Chem. Co. v. Francis, 46
S.W.3d 237, 241, 44 Tex. Sup. Ct. J. 664 (Tex. 2001). If,
in reviewing a "matter-of-law" challenge, we conclude
that the record presents no evidence to support the finding,
we then examine the entire record to determine if a
contrary proposition is established as a matter of law.
Holley v. Watts, 629 S.W.2d 694, 696, 25 Tex. Sup. Ct. J.
233 (Tex. 1982); Raw Hide Oil & Gas, Inc. v. Maxus
Exploration Co., 766 S.W.2d 264, 276 (Tex.
App.-Amarillo 1988, writ denied).
In performing a legal-sufficiency review, we consider
only the probative evidence and inferences that
support the challenged finding, disregarding all evidence
and inferences to the contrary. Lenz v. Lenz, 79 S.W.3d
10, 19, 45 Tex. Sup. Ct. J. 781 (Tex. 2002); Maxus, 766
S.W.2d at 276. [**62] 1 We overrule a legal-sufficiency
issue if the record reflects any evidence of probative
force to support the finding. ACS Investors, Inc. v.
McLaughlin, 943 S.W.2d 426, 430, 40 Tex. Sup. Ct. J.
346 (Tex. 1997). We [*373] sustain a legal-sufficiency
challenge when: (1) the record conclusively establishes
the complete absence of evidence of a vital fact; (2) the
court is barred by rules of law or of evidence from giving
weight to the only evidence offered to prove a vital fact;
(3) the evidence offered to prove a vital fact is no more
than a mere scintilla; or (4) the evidence conclusively
establishes the opposite of a vital fact. Marathon Corp.
v. Pitzner, 106 S.W.3d 724, at *7 (Tex. 2003) (per curiam);
Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d
706, 711, 40 Tex. Sup. Ct. J. 846 (Tex. 1997); Hines v.
Comm'n for Lawyer Discipline, 28 S.W.3d 697, 701 (Tex.
App.-Corpus Christi 2000, no pet.). If there is more than
a scintilla of evidence to support the finding, the legal-sufficiency
challenge fails. Formosa Plastics Corp.
USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d
41, 48, 41 Tex. Sup. Ct. J. 289 (Tex. 1998).
1 But see Formosa Plastics Corp. USA v.
Presidio Eng'rs & Contractors, Inc., 960 S.W.2d
41, 48, 41 Tex. Sup. Ct. J. 289 (Tex. 1998) (holding
that legal-sufficiency review is conducted by
considering "all the record evidence" in light
most favorable to prevailing party, indulging
every reasonable inference in that party's favor).
A unanimous supreme court, without discussing
the analytical construct applied in Formosa Plastics,
"reaffirmed the traditional and historical
statement of the scope of review when the court
stated: 'we emphasize . . . that under a legal-sufficiency
review, we must disregard all evidence
and inferences contrary to the jury's finding.'"
W. Wendell Hall, Standards of Review in
Texas, 34 ST. MARY'S L.J. 1, 160 (2002) (quoting
Lenz v. Lenz, 79 S.W.3d 10, 19, 45 Tex. Sup.
Ct. J. 781 (Tex. 2002)). I apply the supreme
court's most recent analytical construct.
[**63] The evidence is no more than a scintilla
and, in legal effect, is no evidence "when the evidence
offered to prove a vital fact is so weak as to do no more
than create a mere surmise or suspicion of its existence."
Kindred v. Con/Chem, Inc., 650 S.W.2d 61, 63, 26 Tex.
Sup. Ct. J. 383 (Tex. 1983). Suspicion linked to other
suspicion produces only more suspicion, not some evidence.
Pitzner,106 S.W.3d 724, at *7; Browning-Ferris,
Inc. v. Reyna, 865 S.W.2d 925, 928, 37 Tex.
Sup. Ct. J. 118 (Tex. 1993). Similarly, an inference
stacked only on other inferences is not legally sufficient
evidence. Pitzner,106 S.W.3d 724, at *7. Conversely,
more than a scintilla exists when the evidence "rises to a
level that would enable reasonable and fair-minded people
to differ in their conclusions." Transp. Ins. Co. v.
Moriel, 879 S.W.2d 10, 25, 37 Tex. Sup. Ct. J. 883 (Tex.
1994). We reverse and render judgment when we sustain
a legal-sufficiency point. Vista Chevrolet, Inc. v. Lewis,
709 S.W.2d 176, 177, 29 Tex. Sup. Ct. J. 255 (Tex. 1986)
(per curiam); Heritage Res., Inc. v. Hill, 104 S.W.3d
612, at *12-*13 (Tex. App.-El Paso 2003, no pet.).
B. Factual Sufficiency
Unlike [**64] legal-sufficiency challenges, factual-sufficiency
issues concede that the record presents
conflicting evidence on an issue. Maxus, 766 S.W.2d at
275. Like legal-sufficiency challenges, the standard of
review on factual-sufficiency issues depends on the burden
of proof at trial. Id. at 275. The party attacking a
finding on which an adverse party bore the burden of
proof must show that the record presents "insufficient
evidence" to support the finding. Gooch, 902 S.W.2d at

184. In reviewing an insufficient-evidence issue, we
examine and consider all of the evidence, not just the
evidence that supports the verdict, to see whether it supports
or undermines the finding. Maritime Overseas,
971 S.W.2d at 406-07. We set aside the finding for factual
insufficiency if the "evidence adduced to support the
vital fact, even if it is the only evidence adduced on an
issue, is factually too weak alone to support it." See
Ritchey v. Crawford, 734 S.W.2d 85, 86-87 n.1 (Tex.
App.-Houston [1st Dist.] 1987, no writ) (quoting Robert
W. Calvert, "No Evidence" and "Insufficient Evidence"
Points of Error, 38 TEX. L. REV. 361, 366 (1960)).
[**65]
In attacking for factual insufficiency an adverse
finding on which it bore the burden of proof at trial, a
party must show that the finding is against the "great
weight and preponderance of the evidence." Maxus, 766
S.W.2d at 275; Ritchey, 734 S.W.2d at 86-87 n.1. In that
event, we set aside a finding so against the overwhelming
weight of the evidence as to be manifestly unjust and
clearly wrong. Ortiz v. Jones, 917 S.W.2d 770, 772, 39
Tex. Sup. Ct. J. 294 (Tex. 1996) (per curiam).
If we reverse a trial court's judgment on factual-sufficiency
grounds, we detail all of the evidence relevant
to the issue and articulate why the finding is factually
insufficient. [*374] Maritime Overseas Corp.,
971 S.W.2d at 407. We reverse and remand for a new
trial when we sustain a factual-sufficiency point. Glover
v. Tex. Gen. Indem. Co., 619 S.W.2d 400, 401, 24 Tex.
Sup. Ct. J. 482 (Tex. 1981) (per curiam); Heritage Res.,
104 S.W.3d 612, at *13.
III. THE APPLICABLE LAW
A. The Employment-Contract Claim:
The At-Will Employment Doctrine
In its first issue, the Foundation asserts that the evidence
is not legally sufficient [**66] or, in the alternative,
factually sufficient to support the jury's finding that
the Foundation agreed to an employment contract that
limited its right to terminate D'Unger. In its second issue,
the Foundation argues that D'Unger is not entitled to
attorney fees if his contract claim fails.
All employment relationships in Texas are presumed
at will. Montgomery County Hosp. Dist. v. Brown, 965
S.W.2d 501, 502, 41 Tex. Sup. Ct. J. 537 (Tex. 1998).
"Absent a specific agreement to the contrary, employment
may be terminated by the employer or employee,
for good cause, bad cause, or no cause at all." Id. Any
modification of at-will employment must be based on an
unequivocal statement by the employer not to terminate
the employee except under clearly specified circumstances.
Byars v. City of Austin, 910 S.W.2d 520, 523
(Tex. App.-Austin 1995, writ denied). One cannot imply
the modification; it must be express. Midland Judicial
Dist. Cmty. Supervision & Corrs. Dep't v. Jones, 92
S.W.3d 486, 487, 45 Tex. Sup. Ct. J. 965 (Tex. 2002)(per
curiam); Montgomery County Hosp. Dist., 965 S.W.2d
at 503-04. The agreement must directly limit, in a
"meaningful and special way," the [**67] employer's
right to discharge the employee without cause. Larson
v. Family Violence & Sexual Assault Prevention Ctr. of
S. Tex., 64 S.W.3d 506, 518 (Tex. App-Corpus Christi
2001, pet. denied). It is the burden of the discharged employee
who asserts that the parties have contractually
agreed to limit the employer's right to terminate the employee
to prove an express agreement or written representation
to that effect. Id. at 518; Rios v. Tex. Commerce
Bancshares, Inc., 930 S.W.2d 809, 814-15 (Tex.
App.-Corpus Christi 1996, writ denied).
As with all contracts, the parties to an employment
agreement must negotiate and agree to its essential terms
for the agreement to be enforced. See Larson, 64
S.W.3d at 519; see also Smith v. SCI Mgmt. Corp., 29
S.W.3d 264, 268 (Tex. App.-Houston [14th Dist.] 2000,
no pet.) ("We find that such a general discussion about
an employee's annual compensation does not raise a fact
issue as to whether the parties agreed to limit in a 'meaningful
and special way' the employer's prerogative to
discharge the employee without cause."). Similarly, if an
essential term of employment [**68] is open for future
negotiation, no binding contract is created. Mann v.
Trend Exploration Co., 934 S.W.2d 709, 713 (Tex.
App.-El Paso 1996, writ denied).
B. The Wrongful-Termination Claim:
Exceptions to the At-Will Employment Doctrine
In its fifth issue, the Foundation asserts that the evidence
is not legally sufficient or, alternatively, factually
sufficient to support the jury's finding that the Foundation
terminated D'Unger's employment for the sole reason
that he refused to perform an illegal act. Texas law
does not provide an exception to the at-will employment
doctrine for a private employee who was discharged for
reporting illegal activities in the workplace. Austin v.
Healthtrust, Inc., 967 S.W.2d 400, 403, 41 Tex. Sup. Ct.
J. 679 (Tex. 1998); Runge v. Raytheon E-Systems, Inc.,
57 S.W.3d 562, 566 (Tex. App.-Waco 2001, no [*375]
pet.). However, Texas law does recognize two related
exceptions to the doctrine that an employer may terminate
an at-will employee for a good reason, a bad reason,
or no reason at all: An employer may not discharge an
at-will employee for refusing to perform an illegal act.
Sabine Pilot Serv., Inc. v. Hauck, 687 S.W.2d 733, 735,
28 Tex. Sup. Ct. J. 339 (Tex. 1985). [**69] Nor may an
employer discharge an at-will employee for investigating
the legality of the requested act. Johnston v. Del Mar

Distrib. Co., Inc., 776 S.W.2d 768, 771 (Tex.
App.-Corpus Christi 1989, writ denied). Sabine Pilot and
its progeny, Del Mar, require a plaintiff relying on their
exceptions to the at-will employment doctrine to bear the
burden of proving that the discharge was for no reason
other than an unwillingness to perform an illegal act or
the instigation of an investigation of illegality. Sabine
Pilot, 687 S.W.2d at 735. An employer who discharges
an employee for investigating the legality of a requested
act ultimately found to be legal cannot be liable for
wrongful discharge. Ran Ken, Inc. v. Schlapper, 963
S.W.2d 102, 105 (Tex. App.-Austin 1998, pet. denied).
Nor can an employer who discharges an employee both
for refusing to perform an illegal act and for a legitimate
reason be liable for wrongful discharge. Tex. Dep't of
Human Servs. v. Hinds, 904 S.W.2d 629, 633, 38 Tex.
Sup. Ct. J. 711 (Tex. 1995).
1. The Wrongful-Termination Claim:
Circumstantial Evidence
Where no direct evidence proves a vital [**70]
fact, we uphold a jury's finding from circumstantial evidence
as long as the jury fairly and reasonably could
infer the finding from the facts. Blount v. Bordens, Inc.,
910 S.W.2d 931, 933, 39 Tex. Sup. Ct. J. 76 (Tex. 1995)
(per curiam). A jury may consider circumstantial evidence,
weigh witnesses' credibility, and make reasonable
inferences from the evidence it chooses to believe. Benoit
v. Wilson, 150 Tex. 273, 239 S.W.2d 792, 796-97
(Tex. 1951). Circumstantial evidence may establish any
material fact. Browning-Ferris, 865 S.W.2d at 928. In
reviewing circumstantial evidence for legal or factual
sufficiency, we do not look at any individual piece of
circumstantial evidence in isolation. Felker v. Petrolon,
Inc., 929 S.W.2d 460, 464 (Tex. App.-Houston [1st Dist.]
1996, writ denied); Brinegar v. Porterfield, 705 S.W.2d
236, 238-39 (Tex. App.-Texarkana), aff'd, 719 S.W.2d
558, 30 Tex. Sup. Ct. J. 66 (Tex. 1986). Rather, we examine
the totality of the known circumstances. Felker,
929 S.W.2d at 464 ; Porterfield, 705 S.W.2d at 238-39.
2. The Wrongful-Termination Claim:
The Equal-Inference [**71] Rule
The "equal-inference rule" provides that a jury reasonably
may not infer an ultimate fact from meager circumstantial
evidence that "could give rise to any number
of inferences, none more probable than another."
Pitzner,106 S.W.3d 724, at *7 (quoting Hammerly
Oaks, Inc. v. Edwards, 958 S.W.2d 387, 392, 41 Tex.
Sup. Ct. J. 187 (Tex. 1997)). Thus, when circumstances
are consistent with either of two facts, and nothing shows
that one is more probable than the other, neither fact can
be inferred. Litton Indus. Prods., Inc. v. Gammage, 668
S.W.2d 319, 324, 27 Tex. Sup. Ct. J. 166 (Tex. 1984).
Further, while a jury may infer a material fact from circumstantial
evidence, the circumstantial evidence "must
transcend mere suspicion." Browning-Ferris, 865
S.W.2d at 928. Finally, "in cases with only slight circumstantial
evidence, something else must be found in the
record to corroborate the probability of the fact's existence
or non-existence." Pitzner, 106 S.W.3d 724, at *13
(quoting Lozano v. Lozano, 52 S.W.3d 141, 148, 44
Tex. Sup. Ct. J. 499 (Tex. 2001)).
C. The Tortious-Interference Claim:
The Personal-Interest Requirement
In issue three, [**72] Altheide asserts: (1) he
conclusively proved the affirmative defense [*376] of
legal justification; and (2) the evidence is not legally
sufficient or, alternatively, factually sufficient to support
the finding that Altheide tortiously interfered with
D'Unger's contractual agreement with the Foundation.
An at-will employment contract can be the subject of a
claim of tortious interference. Sterner v. Marathon Oil
Co., 767 S.W.2d 686, 688, 32 Tex. Sup. Ct. J. 266 (Tex.
1990). The elements of a cause of action for tortious interference
with a contract are: (1) the existence of a contract
subject to interference; (2) the occurrence of an act
of interference that was willful and intentional; (3) the
act was a proximate cause of the plaintiff's damage; and
(4) actual damage or loss occurred. Holloway v. Skinner,
898 S.W.2d 793, 795-96, 38 Tex. Sup. Ct. J. 582
(Tex. 1994). The second element is particularly important
when the defendant serves the dual roles of corporate
agent and the third party who allegedly induces the corporation's
breach. Id. at 796. In that event, to preserve
the logically necessary rule that a party cannot tortiously
interfere with its own contract, the plaintiff must prove
[**73] that the corporate agent's alleged interference
was in furtherance of the agent's personal interests, not
the corporation's. Id.
The plaintiff meets this burden by showing that the
agent acted in a fashion so contrary to the corporation's
best interests that only the agent's personal interests
could have motivated the actions. Id. The mere existence
of a personal stake in the outcome cannot alone constitute
proof the corporate agent committed an act of willful
or intentional interference. Id. In other words, the plaintiff
must show that the agent acted solely in furtherance
of the agent's own interests. Id.; Powell Indus., Inc. v.
Allen, 985 S.W.2d 455, 457, 42 Tex. Sup. Ct. J. 283 (Tex.
1998) (per curiam). Once the plaintiff meets its burden,
liability for tortious interference with a contract is established
unless the corporate agent proves the affirmative
defense of legal justification. Holloway, 898 S.W.2d at
796; see Kingston v. Helm, 82 S.W.3d 755, 763 n.3
(Tex. App.-Corpus Christi 2002, pet. denied).

In addition, when a party acts through an agent, the
act of an agent for a principal may not subject the agent
to liability for [**74] tortious interference with a contract
so long as the agent acts in good faith and believes
that the action is for the best interest of the principal.
Holloway, 898 S.W.2d at 794-95. We must consider the
principal's evaluation of the agent's action when determining
whether an agent acted against the principal's
interests. Powell Indus., 985 S.W.2d at 457. A principal
is a better judge of its own best interests than a jury or
court. Id. If a principal does not complain about its
agent's actions, the agent cannot be held to have acted
contrary to the principal's interests. Id. "Even such a
corporate complaint is not conclusive evidence that the
agent was acting for his or her personal interests."
Latch v. Gratty, Inc., 107 S.W.3d 543, at *8 (Tex. 2003).
With the law in mind, I turn to a more detailed recitation
of the facts than that provided by the majority.
Trial of this case lasted nine days. The clerk's record is
comprised of eight volumes. The court reporter's record
is seventeen volumes long. Twelve witnesses testified
before the jury. The parties introduced almost two hundred
exhibits, many containing multiple documents.
[**75] The complex record and the exacting standards
of review applicable to legal- and factual-sufficiency
challenges require a detailed recitation of the relevant
facts.
IV. REVIEW OF THE RELEVANT EVIDENCE
PRESENTED TO THE JURY
A. The Foundation and Its Assets
The jury learned that the Foundation was formed in
accordance with the testamentary [*377] instructions
of Ed Rachal, a South Texas rancher and philanthropist.
The Foundation is a non-profit charitable organization.
Article four of the Foundation's articles of incorporation
recites the purposes for which it was chartered:
Said corporation is organized exclusively for charitable,
religious, educational, literary, scientific, and for
the prevention of cruelty to children or animals.
In 1996, the Foundation converted from a
non-operating foundation, which invested its assets, to an
operating foundation. Designation as an operating foundation
requires the Foundation to distribute to charities
five percent of the market value of its assets each year.
Otherwise, it cannot maintain tax-exempt status. One of
the Foundation's assets, the jury also learned, is the Galvan
Ranch in Webb County, Texas, north of Laredo. A
unique [**76] but hostile habitat for a variety of wildlife,
the Galvan Ranch extends over 67,000 acres and is
bordered along a five-mile frontage by the Rio Grande
river.
Evidence introduced by both parties suggested that
the crossing of ranch property by non-United States citizens
is a common occurrence. The jury also heard evidence
that the corpses of transients who during their
journey had succumbed to the harsh environment had
been found in the vicinity of the ranch.
B. The Principal Witnesses
Altheide and D'Unger, neighbors and formerly
friends since 1985, each told the jury he was employed
by the Foundation after first having served as a paid
consultant. For a time, the two men served together as
members of the Foundation's Board of Directors (the
"Board"). Altheide continues to serve as an officer and
member of the Board. John White ("White"), an attorney,
also served as a member of the Board during D'Unger's
tenure. White testified both as a fact witness and as an
expert on corporate governance practices. Scott Turner
("Turner"), a certified public accountant, testified as an
expert witness on damages and corporate governance
practices, including self-dealing and the employment
[**77] and compensation of corporate officers. Ed
DuBose ("DuBose"), a former law enforcement officer,
truck driver, and bouncer, was first a contract security
guard for the Foundation and then acting foreman of the
Galvan Ranch. Alfredo Martinez ("Martinez") was the
border patrol agent-in-charge of the Laredo North Station,
a region that encompasses the Galvan Ranch. Darrin
Matthews ("Matthews") was also a border patrol
agent.
C. Evidence Relevant to the Employer-Employee Relationship
between the Foundation and D'Unger
1. The Foundation-D'Unger Contractual Consultant
Relationship
One of the documents presented to the jury was a
"Consulting Services Agreement," dated April 27, 1995,
signed by the Foundation and D'Unger. The parties
agreed D'Unger would be compensated for his consulting
services at the rate of $ 75 per hour, to be invoiced
monthly by D'Unger. The consulting contract did not
recite a definite duration. Rather, the agreement expressly
stated that "either party shall have the right to terminate
this agreement upon notice to the other."
2. The Foundation-D'Unger Director Relationship
Corporate documents presented to the jury showed
that an amendment to [**78] the Foundation's by-laws,
adopted by the Board on October 17, 1995, provided for
five directors. D'Unger was elected as [*378] one of
those five directors effective June 1, 1996. At the time of
D'Unger's election, directors of the Foundation volunteered
their time. They did not receive compensation. As

a result, D'Unger testified, a perception arose it would be
a conflict of interest for him to act as a paid consultant to
the Foundation after his election as director. Accordingly,
D'Unger notified the Foundation in writing of his
termination of his consulting contract. From June 1, 1996
through September 1, 1996, D'Unger performed the same
work for the Foundation, without compensation, he had
performed as a paid consultant.
The Foundation's by-laws also provide for four regularly
called Board meetings each year, once every three
months, and for special board meetings that may be
called on proper notice as issues arise that require Board
decision. With regard to compensation of directors who
also are employed by the Foundation, the Foundation's
by-laws contain the following provision:
2.10 Directors may receive salaries or other compensation
for personal services actually rendered. The
[**79] Board of Directors may adopt a resolution
providing for payment to directors of a fixed sum and
expenses, if any, for attendance at each meeting of the
Board of Directors. A director may also serve the Foundation
in any other capacity and receive compensation
for those services. Such compensation (whether payment
or reimbursement of expenses, including reasonable advances
for expenses anticipated in the immediate future)
must be in return for a director's performance of personal
services which are reasonable and necessary to carry out
the exempt purposes of the Foundation. Such compensation
may not exceed what is reasonable under all the circumstances
and must not be in excess of compensation
ordinarily paid for similar services by organizations like
the Foundation and under like circumstances. The compensation
and scope of services provided by such a director
shall be approved by an affirmative vote of a majority
of the voting directors other than the director
whose services and compensation are the subjects of the
vote, even though the number of disinterested voting
directors may be less than a quorum.
Also, article nine of the Foundation's articles of incorporation
provide that [**80] "no part of the net
earnings of the corporation shall enure to the benefit of
or be distributed to its directors, officers or other private
persons, except that the corporation shall be authorized
and empowered to pay reasonable compensation for services
rendered . . . ." The articles of incorporation also
prohibit the Foundation from engaging in "self-dealing."
Further, the jury learned that article 4.01 of the
Foundation's by-laws authorizes the Board to elect not
only officers of the Foundation but "other officers, assistant
officers, agents, consultants and/or advisors, define
the authority and duties of each such position, and elect
or appoint persons to fill the positions as they deem advisable
from time to time." The jury also heard that Al-
theide and D'Unger were elected officers of the Board
(president and secretary, respectively) in addition to their
operational offices. Altheide testified that D'Unger refused
to recognize any distinction between the scope of
duties and authority of elected directors, officers of the
Board, and the Foundation's appointed operating officers.
D'Unger testified that the roles were "intertwined" and
charged that Altheide wanted to run the Foundation
[**81] as a "one-man show."
3. The Foundation-D'Unger Operating Officer Relationship
Minutes of a Board meeting held on October 22,
1996 recited as follows with [*379] regard to
D'Unger's appointment as an operating officer of the
Foundation:
Thereafter, reasonable compensation for the services
of Claude D'Unger was considered. Claude left the
meeting so his compensation could be discussed. After
considering all the relevant factors, including Claude's
qualifications and the scope of his duties as well as the
recommendations of counsel for a salary range for
Claude's position, John White moved to set his salary at
80,000 per annum for full time employment effective
September 1, '96, reduced proportionately to reflect the
actual time Claude devoted to the Foundation. The motion
was seconded by Marianne Warner and unanimously
approved by those members present, including the two
uncompensated Board members present and voting. The
board approved paying up to 400 per month for medical
insurance premiums for his medical insurance coverage
as Claude is the only paid officer or employee of the
Foundation who does not have current access to medical
insurance through other employment, [**82] along
with a benefit package which would be set after further
consideration at such time as Claude is able to devote
full-time to the Foundation activities. Claude was invited
back to the meeting and his salary was announced. (Emphasis
added.)
Also presented to the jury were minutes of an annual
meeting of the Board held August 12, 1997. Those
minutes reflected:
The next order of business was the ratification of the
current operating officers. By unanimous consent of the
board the following operating officer positions were ratified:
Paul Altheide, Chief Executive Officer; Claude
D'Unger, Vice-President of Exempt Purposes; and Marianne
Roberts, Vice-President of Grants.
The purpose of ratifying the operating officers' titles
and positions, Altheide told the jury, was to clarify the
lines of authority between himself and D'Unger.
D'Unger, on the other hand, testified that the purpose of
the ratification was to renew his employment as an oper-

ating officer of the Foundation for another year. The
Foundation's officers were supposed to work as a team,
D'Unger told the jury, not in direct lines of authority, one
to the other. This divergence in corporate governance
philosophy, [**83] the jury learned, ultimately lead to
a complete disintegration of the personal and working
relationships between Altheide and D'Unger.
4. The Foundation-D'Unger Employment Relationship
D'Unger acknowledged to the jury that no written
employment agreement evidenced the employer-employee
relationship between the Foundation and
him. However, he indicated in the following testimony
they did have an agreement:
Q. Now, what kind of employment agreement did
you have with the Foundation as of October 22, 1996?
A. I had an agreement to work with the Foundation.
They would compensate me, and the agreement was for
the term of a year.
Q. Okay. Now, we've heard some testimony about
that you were a consultant?
A. Yes.
Q. What was the difference between the agreement
you had as a consultant and the agreement you had that's
reflected at the minutes of October 22, 1996?
A. The agreement I had as a consultant had an indefinite
term, and it had a provision that it could be terminated
at any time by either party. The - the employment
agreement with the Foundation [*380] was for a
specific period of one year, and it required an action of
the Board of Directors to remove me.
D'Unger testified [**84] that his role as a compensated
employee of the Foundation (that is, not as a consultant
and not as a volunteer director) was effective
September 1, 1996. He told the jury he believed that an
employment agreement was "spelled out" in the Board
minutes of the October 22, 1996 meeting. He "had an
agreement with them," D'Unger testified. "They liked
what I could do and offered to pay me for it. I came in. I
did it, and they compensated me. There was an agreement
there." D'Unger further testified that the Foundation
renewed his employment agreement for an additional
year (through August 31, 1998) at the annual meeting of
the Board on August 12, 1997 when the Board ratified
the Foundation's current operational officers.
Turner, as D'Unger's expert on corporate governance,
testified he believed that the by-laws of the Foundation
required officers not be terminated unless the ter-
mination was in the best interests of the Foundation. Also
presented to the jury was article 4.03 of the by-laws:
4.03 Any officer elected or appointed may be removed
by the voting members of the Board of Directors
whenever in their judgment the best interests of the
Foundation will be served thereby. The removal [**85]
of an officer shall be without prejudice to the contract
rights, if any, of the officer so removed. Election or appointment
of an officer or agent shall not of itself create
contract rights. (Emphasis added.)
White, an attorney and Board member, testified that
Altheide, as chief executive officer of the Foundation,
had the absolute authority to terminate D'Unger's employment.
He told the jury:
There was no employment contract in place. It was
an at-will relationship, which is true of all the employees,
including Mr. Altheide. No one has a contract that guarantees
them a time of employment nor that there were
certain standards that have to be met for us to terminate
someone. And there was absolutely no question that
given the circumstances, given his authority, given the
relationship of Mr. D'Unger and the Board that he had
the absolute right to terminate him for no reason at all or
for a reason.
White testified that the Board discussed Altheide
and D'Unger's salaries at the Foundation's October 22,
1996 annual Board meeting. White recounted for the
jury: "We were conferring that they would be paid to do
those tasks for that amount of money. . . . There was no
negotiated contract [**86] entered into."
Similarly, Altheide testified that the Foundation did
not enter into any employment agreement with D'Unger.
He also told the jury the Board did not hire D'Unger for
any specific term of employment when it set D'Unger's
annual salary at $ 80,000.00.
In his expert opinion as a certified public accountant
and consultant to corporations, Turner told the jury, it is
not "unusual for officers [of a company] to be hired on
an annual basis" under "general auditing principles."
While laborers are usually hired on an hourly, weekly, or
monthly wage, Turner further testified, corporate officers
usually are hired on an annual salary.
D. Evidence Relevant to the Rift between Altheide
and D'Unger
1. The First Fissure
After D'Unger's employment, both parties told the
jury, Altheide, as chief executive [*381] officer, directed
D'Unger, as vice president of exempt purposes, to
develop a long-range plan for the use of Foundation assets
for exempt purposes, including the Galvan Ranch.

Completion of this assignment was necessary for the
Foundation to be recognized as an operating foundation
for tax purposes. In January of 1997, the jury learned,
D'Unger visited the Galvan Ranch [**87] as part of his
duties. He introduced himself to DuBose, the contract
security guard and acting ranch foreman. D'Unger told
the jury that during this initial meeting, DuBose casually
mentioned to D'Unger he had "chased [undocumented
immigrants] with dogs today." Shocked by this admission
and the racist attitude of the Galvan Ranch's acting
foreman, D'Unger told DuBose he should not mistreat
transients who came on the ranch and instructed him to
stop. That same day, from the Galvan Ranch, D'Unger
informed the border patrol that a Galvan Ranch employee
had bragged to him about chasing non-United States
citizens with dogs. He advised the border patrol to "keep
your eye open for anybody with torn up clothes or dog
bites." D'Unger then received a telephone call from Altheide,
who criticized D'Unger for getting into a disagreement
with DuBose. Altheide accused D'Unger of
lying to the border patrol. Altheide insisted, D'Unger told
the jury, the event "didn't happen."
Thereafter, beginning in January of 1997, other visitors
to the Galvan Ranch reported to D'Unger that
DuBose had made statements to them he chased undocumented
immigrants with dogs and fired gunshots over
their heads so they [**88] would abandon their food
and water when they had to run and climb through the
ranch's fence line. The visitors did not report DuBose's
comments to Altheide, but rather informed D'Unger, who
had been their primary contact within the Foundation.
D'Unger testified that he did not report DuBose's other
alleged comments to Altheide, either. "The impression
was the door was shut," D'Unger told the jury.
DuBose testified that he might have made the statements
attributed to him but denied actually ever engaging
in the described conduct. He also swore he always
humanely treated transients who appeared on ranch
property. Altheide, in a detailed diary that was introduced
to the jury, recorded his discovery that at about
3:30 a.m. on July 10, 1997, DuBose had "discharged his
pistol in the air when two trespassers would not move
away from the cattle guard area when he hollered at
them."
D'Unger testified that he continued to express his
alarm that mistreatment of transient non-United States
citizens, in violation of both the law and the Foundation's
mission, was occurring on the Galvan Ranch. The visitors
to the ranch who reported DuBose's alleged comments
to D'Unger told the jury D'Unger appeared [**89]
to have a good-faith concern about DuBose's treatment
of transient non-United States citizens. Altheide's response
to D'Unger's concern, D'Unger testified, was to
instruct D'Unger verbally not to concern himself with
DuBose. D'Unger understood Altheide's instruction to
mean he was to look the other way with regard to
DuBose's treatment of transients on the ranch. Altheide
testified he meant that the management of ranch personnel,
including DuBose, was Altheide's responsibility as
chief executive officer, not D'Unger's as vice president of
exempt purposes.
2. The Widening Gap
Meanwhile, D'Unger also began to object to two
other circumstances involving the Foundation's chief
executive officer: (1) the Foundation's contracts with a
[*382] construction company owned by a close personal
friend of Altheide; and (2) Altheide's use of the Galvan
Ranch for personal recreational purposes. Both,
D'Unger told the jury, involved "self-dealing" by Altheide.
D'Unger admitted to the jury he had no
knowledge, at the time he questioned Altheide's relationship
with the construction company, whether Altheide
received any financial benefit from the company.
However, D'Unger testified, he believed that [**90]
Altheide's use of a close friend to perform services for
the Foundation "looked bad" and was part of a larger
pattern of mismanagement by Altheide. D'Unger particularly
objected to hunting parties Altheide arranged for
friends and family on wildlife preserves on the ranch,
explaining that the hunting parties proved Altheide's inadequate
wildlife management experience for his job as
chief executive officer of the Foundation. At a minimum,
D'Unger continued, Altheide should have paid fair market
value for his personal use of the Galvan Ranch.
By interoffice memorandum dated January 15, 1997
to Altheide and copied to the other three board members,
D'Unger discussed and made recommendations regarding
several other issues in connection with the Galvan
Ranch: (1) the existence of and potential for Foundation
liability associated with a cess pool on the ranch; (2) the
disposal of trash and scrap metal from the ranch; (3) the
pending expiration of DuBose's security guard contract;
and (4) the relationship between the Foundation and another
charitable institute. As to renewing DuBose's contract
as security guard at the ranch, D'Unger recommended
in the memorandum that "it would probably be
[**91] appropriate to start considering qualified people
to work full-time for the Foundation at the ranch."
In response, by memorandum dated January 20,
1997, Altheide informed D'Unger:
Your memo does not follow proper channels. All of
the subjects mentioned should have been discussed with
me in person prior to any correspondence with the board
as a whole or more specifically John White and Robert
Walker. If you are not aware, note that volunteer directors
have a different level of liability than do paid offic-

ers and directors. Involving them beyond policy and
budgetary levels exposes them to additional liability.
D'Unger replied by memorandum, also dated January
20, 1997: "It is neither proper nor appropriate for any
party to attempt to stifle a flow of information among
directors."
During a Board meeting following this exchange of
memoranda, D'Unger voted "no" to a resolution to ratify
two contracts between the Foundation and the construction
company with which D'Unger charged Altheide was
affiliated. "It's a conflict for you," D'Unger told Altheide.
As a director, Altheide testified, D'Unger had the
right to vote against the resolution. Pursuant to the
Foundation's by-laws, [**92] Altheide further explained,
"an individual director has the right to bring any
matter relating to the organization to the attention of a
duly called meeting of the board of directors." If the
matter was "so urgent that it couldn't wait for a regular
Board meeting," he added, "all they had to do was take it
to one other Board member. Two Board members can
immediately require a Board meeting, so that's the proper
way to do it." Accordingly, in a specially called Board
meeting held February 11, 1997, D'Unger presented his
questions regarding Altheide's "self-dealing."
In response to D'Unger's expressed concerns, the
Board adopted a conflict-of-interest [*383] policy.
Minutes of the Board meeting held February 11, 1997
were presented to the jury. The minutes showed that Altheide
disclosed to the Board he was a personal friend of
the owner of the construction company as well as partners
with the owner in an unrelated business venture.
Altheide represented he had no business interest in and
derived no financial benefit from the construction company.
The minutes reflected that the Board confirmed
that Altheide had fully disclosed the nature of his relationship
with the construction company and [**93] its
owner. The minutes recited that the work performed for
the amount charged was fair to the Foundation. The
Board approved and ratified the Foundation's contracts
with the construction company. Altheide abstained from
the vote.
Also in response to D'Unger's concerns, this time
with regard to Altheide's personal use of the Galvan
Ranch, Altheide proposed personnel policies for the
Board's consideration. Included was a proposed policy
for "Facility and Asset Use":
The deminimus use of any Foundation facility or
asset by staff members will be considered part of their
compensation. This use will be coordinated and controlled
by the CEO. Under no circumstances will staff
use interfere with the normal operation of the Founda-
tion. Such use will be conducted so as to cost the Foundation
no additional expense.
The CEO will pay $ annually for the privilege of inviting
guests to the ranches. This payment is made solely
for the purpose of insuring that the CEO obtains no improper
personal benefit and complies with Internal Revenue
Service rules.
Minutes of a Board meeting held May 13, 1997 reflected
that D'Unger objected to the "Facility and Asset
Use" policy proposed by Altheide. The [**94] "Facility
and Asset Use" policy was not adopted. Instead, the
proposal was to "be considered at a later time."
The Board did adopt other personnel policies proposed
by Altheide. Included was the following:
All items of the CEO's benefits and compensation
will be determined by a special committee of the board
of directors. The committee will be made up of all
non-salaried members and ex-officio members. Their
decisions will be communicated to the CEO by letter and
incorporated in the minutes of the next meeting of the
board.
Based on a report from one of White's law partners,
the compensation committee formed as a result of this
policy set the value of Altheide's personal use of the
Galvan Ranch at $ 6,000 a year.
Next, by memorandum dated June 30, 1997 addressed
jointly to D'Unger and the other Foundation directors,
Altheide informed the Board:
On Thursday I was told an unidentified member of
the board was conducting an "investigation" into the appropriateness
of our equipment acquisitions and some of
the activities on the ranch. This news had a demoralizing
effect on the ranch staff.
No board member has contacted me regarding
equipment acquisitions or ranch activities. [**95] All
equipment has been acquired pursuant to board authorization
and I am aware of no unauthorized ranch activities.
An independent investigation by an individual board
member is totally inappropriate. Questions of policy,
procedure or activity should be addressed to me. If a
board member feels uncomfortable addressing the question
to me then they should call for a board meeting and
discuss the matter there.
[*384] Meanwhile, Altheide told the jury,
D'Unger gave him a preliminary draft of a long-range
plan for development of the Foundation's assets for exempt
purposes. However, Altheide testified, D'Unger
never completed the operational details necessary for the
Foundation to implement the plan. D'Unger admitted to

the jury he had not finished the plan, but charged that
Altheide did nothing with the preliminary draft D'Unger
had given him.
Soon, another encounter between DuBose and transient
non-United States citizens came to D'Unger's attention.
At the time of the incident, DuBose was a contract
worker and not an employee of the Foundation. DuBose
told the jury that about 6:00 a.m. on September 17, 1997,
three Hispanic teenagers trespassed on the Galvan
Ranch. They approached DuBose's [**96] living quarters.
For the trespassers' own safety and the security of
ranch employees and DuBose's family, DuBose said, a
ranch hand helped him handcuff the three trespassers
together and frisk them. DuBose estimated the boys were
between fifteen and sixteen years old. In compliance
with Altheide's instructions that morning, which were
consistent with the way similar incidents in the past were
handled, DuBose took photographs of the intruders. He
called the border patrol. The transients remained in
DuBose's custody about three hours before the border
patrol arrived and took them into official custody. Telephone
records presented to the jury showed calls from
DuBose's telephone at the Galvan Ranch to the border
patrol the morning of September 17, 1997.
Border patrol agent Matthews testified that on September
17, 1997, he picked up three teenagers who were
being detained in handcuffs by DuBose on the Galvan
Ranch. They were not abused or injured in any way, the
agent told the jury. In his opinion, there was nothing
wrong with handcuffing trespassers on private property
until authorities arrived to take custody of them. Had
Matthews detected any abuse or injury of the three teenagers,
[**97] he would have reported it to local law
enforcement. Similarly, he would have reported to his
agency, and ultimately to the Federal Bureau of Investigation,
had he received any complaint someone was
chasing transients with dogs.
DuBose forwarded the photographs he had taken of
the three teenagers to the Foundation's office. Shortly
thereafter, D'Unger testified, he reviewed DuBose's report
to the Foundation of the September 17 encounter
with the three young transients. Although the handcuffing
incident troubled him, D'Unger took no action at that
time. His concern over DuBose's treatment of transients
on the Galvan Ranch grew.
By October 28, 1997, Altheide had recorded in his
diary that "D'Unger must go, the sooner the better." In
December of 1997, Altheide and White met and discussed
D'Unger's termination. Also in December of
1997, Altheide increased his own compensation by $
6,000, the amount determined by the compensation
committee Altheide was to pay the Foundation annually
for his personal use of the Galvan Ranch. Through the
end of 1997, the jury learned, the growing disaffection
between Altheide and D'Unger was confined to clashes
stemming from their conflicting philosophies [**98]
about how the Foundation should be managed and by
whom. Unfortunately, events then took a more ominous
turn.
3. The Unbridgeable Chasm
D'Unger told the jury he received a telephone call
from the Webb County game warden in January of 1998.
The record does not reflect who or what event precipitated
the call. The game warden [*385] told D'Unger
that Martinez (the border patrol agent-in-charge for the
region) had no idea three teenagers had been detained by
DuBose at the ranch the previous September and picked
up by the border patrol. D'Unger then personally spoke
with Martinez, who confirmed there was no record of the
incident.
The jury learned that the paperwork ultimately was
re-discovered in response to a request under the Freedom
of Information Act ("FOIA") submitted after D'Unger's
termination. Reports filed by border patrol agents of the
Immigration and Naturalization Service ("INS") did confirm
that the border patrol had taken custody of the three
young trespassers from DuBose that morning. One report
indicated that the INS had determined that the teenagers
were in this country illegally and permitted them to return
to Mexico. Nonetheless, Martinez confirmed to the
jury, from [**99] January of 1998 through the cessation
of D'Unger's involvement with the Foundation in August
of 1998, the agent informed D'Unger on several occasions
the INS could not locate any paperwork on the incident.
2 Martinez also told the jury he had not heard of
any shooting incidents at the Galvan Ranch, nor did he
have any knowledge of the discovery of any bodies on
the ranch.
2 The incident date on the reports Martinez testified
about was not correct.
D'Unger testified that it appeared to him the transients
detained by DuBose in September had disappeared
from the ranch. He said he believed that DuBose had lied
to him about the boys' fate. At the same time, the jury
learned, news sources began to report stories about the
mistreatment by local landowners of transient
non-United States citizens, including rumors of torture
and murder. The reports fueled D'Unger's belief DuBose
had mistreated transients on the Galvan Ranch. D'Unger
contacted law enforcement authorities and other agencies.
Beginning in January of 1998, [**100] D'Unger
reported to nine separate local, state, and federal agencies
and officials with details of the September 17, 1997
handcuffing incident and his fears for the well-being of
the three teenagers.

In fact, D'Unger introduced documents to the jury
that showed that his reports were not confined to allegations
of mistreatment on the Galvan Ranch of transient
non-United States citizens. He repeated the questions he
already had expressed to the other directors of the Foundation
about Altheide's "self-dealing" with regard to the
Foundation's contracts with the construction company
owned by Altheide's friend. D'Unger reported his opinion
that the $ 6,000 valuation of Altheide's personal use of
the Galvan Ranch was under market. He pointed out that
Altheide was failing to pay even the undervalued amount
set by the Foundation's compensation committee, since
Altheide gave himself a salary increase to cover the expense.
D'Unger then went on to communicate with outside
agencies information unrelated to the handcuffing incident
or Altheide's "self-dealing": (1) the Foundation's
assistance of one of its employees in avoiding payment
of court-ordered child-support payments; (2) the feasibility
[**101] of a receivership for the Foundation; (3)
accounting and tax matters regarding the Foundation;
and (4) internal Foundation governance issues that centered
on D'Unger's perceptions of Altheide's abuses of
authority.
D'Unger testified he believed that the prohibition in
the corporation's by-laws against self-dealing and the
requirement that compensation paid to officers be reasonable
required him as director and officer [*386] to
correct the problems he perceived with Altheide. However,
D'Unger told the jury, his communications with
outside entities regarding the Foundation's activities violated
Altheide's express instructions. Meanwhile, the
Board convened a regular meeting on February 19, 1998.
One of the agenda items for the meeting was a proposed
organizational chart and accompanying job descriptions.
Altheide testified that the purpose of the organizational
chart and job descriptions was to clarify for D'Unger the
lines and scope of authority within the Foundation's operational
management. The proposed organizational
chart reflected that: (1) Altheide, as chief executive officer,
reported directly to the Board; and (2) as vice
president of exempt activities, D'Unger reported to Altheide.
[**102] The position of "vice president - exempt
purpose activities" was described as follows:
1. Reports to and is supervised by the Chief Executive
Officer.
2. Responsible for developing comprehensive plan
recommendations for exempt purpose activities.
3. Responsible for developing recommendations for
policies and procedures for the implementation of the
exempt purpose plan and activities. Policies are to be
channeled through the Chief Executive Officer for Approval
by the Board of Directors; procedures are to be
channeled through and approved by the Chief Executive
Officer.
4. Coordinates all exempt purpose activities.
5. Responsible for developing budget recommendations
for exempt purpose activities and monitoring the
approved exempt purpose activities budget.
6. Supervises all Foundation employees who report
to him.
7. Performs such other duties assigned by the Chief
Executive Officer.
The minutes of the February 19, 1998 regular Board
meeting also were introduced to the jury. Those minutes
reflected:
The CEO presented his report. Items in the CEO's
presentation included a proposed organizational chart for
the foundation. At the request of Claude D'Unger the
organizational chart [**103] was tabled to allow more
time to review the document and allow staff time to provide
input.
Another item presented by the CEO was a proposed
set of job descriptions for foundation staff employees. At
the request of Claude D'Unger, consideration of the proposed
job descriptions was tabled to allow more time to
review the document and allow staff time to provide input.
In addition, the February 19 minutes reflected, by a
vote of four to one:
The board approved a policy entitled ED RACHAL
FOUNDATION LAW ENFORCEMENT ACCESS
POLICY providing for law enforcement access to the
ranches. The policy provides for the CEO to be the only
person to have the authority to allow law enforcement
personnel to enter foundation property.
The jury learned that D'Unger voted in favor of
adoption of the law enforcement access policy.
In April of 1998, Altheide learned of D'Unger's disclosures
to law enforcement and other agencies of the
September 17, 1997 handcuffing incident. Any surviving
personal or working connection between D'Unger and
Altheide disintegrated completely at that time. On April
13, 1998, Altheide suspended D'Unger's employment
with the Foundation. The jury learned from a memorandum
[**104] of that date [*387] that Altheide informed
D'Unger of the following:
I received a call from a representative in the Mexican
Consulate office in Corpus Christi. This person
asked for you and then finding you not here asked if I
could provide some information about the Foundation. I
provided him the information he requested and then in-

quired as to the purpose of his inquiry. He responded that
he was trying to gather more information so that he could
respond to the statements and concerns you expressed
during your visit to the consulate. He indicated that you
were concerned about incidents that took place on the
Galvan where Mexican citizens were detained.
I and the Board have tried to respond to your concerns
in the past. It is my belief that all appropriate action
has been taken by myself and the Board on each
occasion that you have raised concerns of any type. I am
surprised that you would take it upon yourself take [sic]
such action without first bringing it to the Board's attention
and giving the Board an opportunity to act.
You have been cautioned about independent activities
in the past. You have also been informed and cautioned
about the use of proper channels. You have also
received [**105] information and instruction about
using your title and position to imply authority to act on
behalf of the Foundation when in fact you have no such
authority. I consider this incident a direct violation of all
these previous instructions and advise [sic].
Due to your disregard for appropriate instruction and
normal business procedures your employment with the
Ed Rachal Foundation is hereby suspended until such
further time as the Board reviews this situation and
makes a determination regarding your employment status.
You are further instructed not to discuss Foundation
business with any inappropriate party.
You are further instructed to provide the Board with
a narrative describing all contact with all authorities with
regards to any Foundation business or activity.
You are further instructed to suspend all activities on
behalf of the Foundation until further notice.
These instructions are effective immediately. I will
notify you when the Board will meet. The meeting will
be set in such a manner as to get full participation.
The jury learned that the suspension did not affect
D'Unger's status as a member of the Board. Both his
compensation and his communications with outside
[**106] entities regarding the Foundation's activities
continued. On April 17, 1998, at a special meeting of the
Board, D'Unger presented his concerns regarding activities
at the Galvan Ranch. The Board met again at a regular
meeting in May of 1998. It formed a committee to
investigate D'Unger's allegations. Neither D'Unger nor
Altheide was appointed to the investigating committee.
Ultimately, the jury learned, members of the committee
investigated D'Unger's allegation that DuBose mistreated
transient non-United States citizens on the Galvan
Ranch.
Throughout his suspension, D'Unger continued to
communicate with law enforcement and other agencies
regarding the Foundation's activities and what he perceived
as Altheide's efforts to include him in a conspiracy
to cover up criminal and illegal conduct. Documents
introduced to the jury showed that D'Unger met with the
Consulate General of Mexico on June 8, 1998. He provided
to law enforcement and other agencies copies of
[*388] documents as well as information, including
attorney-client confidential information regarding litigation
in which the Foundation was involved.
At long last, the jury learned, in June of 1998 one of
the agencies contacted by [**107] D'Unger (the Office
of the Texas Attorney General) visited the Foundation's
office and reviewed the Foundation's books and operations.
The investigators recommended how the Foundation's
operations could be improved but took no action
against the Foundation. Also, documents presented to the
jury showed that the Attorney General's office concluded
that the Foundation had not engaged in any illegality
with regard to the employee with unpaid child-support
obligations.
"Working conditions at the office," D'Unger wrote
in a letter introduced to the jury, "are impossible and are
about a breath away from a major brawl." On August 10,
1998, Altheide asked D'Unger to resign. When D'Unger
refused, Altheide fired him. The next day, August 11,
1998, D'Unger decided not to submit his name for
re-election as a director at the Board's annual meeting. A
new slate of directors was proposed and unanimously
elected. At that point, D'Unger testified, a special meeting
of the new Board was convened. D'Unger, as a former
director, was excluded. Minutes of the August 11,
1998 special meeting, introduced to the jury, reflected
that the Board unanimously: (1) appointed operating
officers, including Altheide [**108] as chief executive
officer but not including D'Unger in any capacity; (2)
amended the Foundation's by-laws to decrease the number
of directors from five to four; and (3) ratified the
scope of Altheide's duties as chief executive officer.
D'Unger was no longer a director, officer, or employee of
the Foundation.
Undeterred, in a letter dated August 12, 1998 to the
Consulate General of Mexico, D'Unger complained again
about the three teenagers he still thought of as missing.
From the letter, the jury learned that D'Unger alleged that
the Office of the Texas Attorney General "either suffers
from a severe ineptitude or the integrity of the office has
been compromised." The next day, August 13, 1998,
D'Unger complained in a letter to his congressman's office
of the "lack of interest and candor" of the INS and
that "the response to the Mexican Government inquiry on
the matter by a ranking border patrolman on the matter
was interesting if not outright deceitful."

D'Unger explained his actions to the jury by noting
that the Foundation's chartered purpose and moral mission
included the prevention of cruelty to children. The
Corporation's charter, D'Unger added, supported his
pursuit of information [**109] regarding the fate of the
three juveniles detained by DuBose as well as his complaint
to the Office of the Texas Attorney General that
the Foundation was assisting an employee to evade
child-support obligations.
Altheide's response to D'Unger's efforts, D'Unger
testified, was first to suspend and ultimately to terminate
him for "going to the authorities." The Foundation and
Altheide responded to D'Unger's allegation with a litany
of reasons why D'Unger was terminated. The list included
D'Unger's failure to follow proper lines of authority,
his volatility, his irrational behavior and, among other
job-performance deficiencies, his failure to finalize a
long-term exempt use plan for the ranch. D'Unger countered
by charging that Altheide acted solely in Altheide's
own interest in terminating D'Unger, solidifying Altheide's
control over the Foundation and rendering its
assets ripe for plundering. Since his termination, D'Unger
pointed out to the jury, the Foundation's charitable contributions
[*389] have shrunk, while the compensation
paid to officers and directors has grown.
V. ANALYSIS
A. The Employment-Contract Claim:
Application of the At-Will Employment Doctrine
to the [**110] Facts
(First and Second Issues Presented)
1. Legal-Sufficiency Analysis
The jury found that the Foundation agreed to an employment
contract that limited its right to terminate
D'Unger. 3 In this section of my analysis, I would consider
only the evidence and inferences that support the
finding. Lenz, 79 S.W.3d at 19; Maxus, 766 S.W.2d at
276. I would disregard all evidence and inferences to the
contrary. Lenz, 79 S.W.3d at 19; Maxus, 766 S.W.2d at
276. The Foundation did not bear the burden of proof at
trial on modification of D'Unger's at-will status. Larson,
64 S.W.3d at 518; Rios, 930 S.W.2d at 814-15.
Rather, D'Unger was required to prove that the Foundation
unequivocally indicated a definite intent not to terminate
him except under clearly specified circumstances.
Jones, 92 S.W.3d at 487. Therefore, I would analyze the
legal-sufficiency challenge in the Foundation's first issue
as a no-evidence issue. Gooch, 902 S.W.2d at 183. The
Foundation must show that the record presents no probative
evidence to support the adverse finding. [**111]
See Croucher, 660 S.W.2d at 58.
3 Question No. 3 in the jury charge read:
Did CLAUDE D'UNGER and the ED RA-
CHAL FOUNDATION agree to an employment
contract that limited the employer's right to terminate
the employee?
Answer "Yes" or "No"
Answer: Yes
INSTRUCTION
An employer may limit its right to terminate
the employee if it agrees to a specific term of
employment.
For such a contract to exist, the employer
must unequivocally indicate a definite intent to be
bound not to terminate the employee except under
clearly specific circumstances.
I have reviewed the record. D'Unger testified that
the Foundation entered into a renewable one-year employment
agreement with him that the Board ratified in
1996 and renewed in 1997. He pointed to the Foundation's
by-laws and corporate minutes as evidence of the
parties' oral agreement. Turner, D'Unger's expert witness,
testified that the existence of an annual renewable employment
agreement between the Foundation and
D'Unger was consistent with generally [**112] accepted
accounting practices and corporate governance standards
regarding how corporate officers are employed and
compensated.
The Foundation's by-laws provide that "election or
appointment of an officer or agent shall not of itself create
contract rights." In light of that evidence, D'Unger's
testimony about his understanding of the one-year, renewable
term of his employment with the Foundation,
standing alone, will not support a finding that the Foundation
agreed to an employment contract that limited its
right to terminate D'Unger. See Williams v. First Tenn.
Nat'l Corp., 97 S.W.3d 798, 804 (Tex. App.-Dallas 2003,
no pet.) (holding, where employee handbook and employment
offer letter disclaimed creation of employment
contract, that employee's testimony of his "understanding"
of terms of agreement did not raise fact issue of
"specific, express, and clear agreement contradicting the
express provisions of the personnel manual and the employment
offer letter."). D'Unger was required to present
probative evidence to the jury of a specific, unambiguous
agreement that contradicted the express provision of the
Foundation's by-laws that his appointment by the Board
[*390] as [**113] vice president of exempt purposes
did not create any employment contract rights. See id. He
did not. I agree with the majority that his statement of
subjective belief is not evidence. See Cont'l Coffee
Prods. Co. v. Cazarez, 937 S.W.2d 444, 452, 40 Tex.

Sup. Ct. J. 172 (Tex. 1996); see also In re Jones, 974
S.W.2d 766, 769 (Tex. App.-San Antonio 1998, orig.
proceeding); see generally Calvert, 38 TEX. L. REV. at
362-63.
I also concur that Turner's expert testimony that
D'Unger's understanding was consistent with corporate
practices with which Turner was familiar did not provide
what D'Unger's testimony lacked: evidence of a specific,
unambiguous agreement. I agree with the majority that a
conclusory statement, whether by a lay or expert witness,
is not evidence. Wadewitz v. Montgomery, 951 S.W.2d
464, 466, 40 Tex. Sup. Ct. J. 894 (Tex. 1997). Certainly,
courts long have considered evidence of the prior practices
of an employer with regard to a customary term of
employment sufficient to support a finding of the existence
of an employment agreement:
It is true that it was not expressly stipulated that the
appellee should remain in the service one year, or
[**114] for any definite length of time; but the evidence
shows that it was the custom of the corporation to
employ a manager annually, and to require of him a bond
conditioned for the faithful performance of his duty. The
jury had a right to conclude that, with a full knowledge
of this custom, the parties had it in mind and contracted
with reference to that term of service.
Farmers' Union Co-Op. Clearance House of Rusk
v. Guinn, 208 S.W. 362, 363 (Tex. Civ. App.-Texarkana
1919, no writ); see Hoffrichter v. Brookhaven Country
Club Corp., 448 S.W.2d 843, 846 (Tex. Civ. App.-Dallas
1969, writ ref'd n.r.e.). However, Turner did not testify
about the Foundation's specific custom or its practices in
particular. He only testified that D'Unger's understanding
of the agreement between the parties was consistent with
standard corporate practices. "Expert opinions must be
supported by facts in evidence, not conjecture."
Pitzner,106 S.W.3d 724, at *12. Like the majority, I find
that Turner's opinion testimony carries no more probative
weight than D'Unger's testimony of his subjective understanding
of the term of his employment.
D'Unger argues, [**115] under the so-called
"English Rule," that the Board's approval of his compensation
based on an annual salary supplies the requisite
specificity to meet his burden of showing that the
Foundation modified his at-will status. He points to section
2.10 of the by-laws, which gives the Foundation the
authority to employ and reasonably compensate its directors,
as providing for compensation of employee-directors
co-extensive with the term of office for the
Foundation's directors, which is one year. I have examined
the by-laws and find no support for D'Unger's contention
in this regard. D'Unger also points to the 1996
annual meeting minutes, which reflect that the Board
approved an annual salary of $ 80,000.
The Foundation responds that the English Rule did
not survive Montgomery County Hospital District, 965
S.W.2d at 503-04. While this case was pending on appeal,
the Texas Supreme Court eliminated any lingering
doubt; the English Rule is no longer viable. Jones, 92
S.W.3d at 487. An agreement for an annual salary does
not modify an employee's at-will status. Id. A hiring
based on an agreement of an annual salary does not limit
the employer's prerogative [**116] to discharge the
employee during the dictated period of employment. Id.
Evidence that the Board approved D'Unger's compensation
calculated on an annual basis is not evidence
[*391] that the Foundation agreed to modify D'Unger's
at-will status. See id.
Like the majority, I conclude that evidence that the
Foundation agreed to an employment contract that limited
its right to terminate D'Unger at will is "so weak as
to do no more than create a mere surmise or suspicion of
its existence." Kindred, 650 S.W.2d at 63. Stripped of
the inference that approval of D'Unger's annual salary
evidenced an agreement to a one-year term of employment,
neither D'Unger's testimony nor his expert's opinion
established that the Foundation and D'Unger came to
a meeting of the minds that modified D'Unger's at-will
status. See Larson, 64 S.W.3d at 519; see also SCI
Mgmt. Corp., 29 S.W.3d at 268. No evidence in the record
establishes that the Foundation agreed to a specific
term of employment, and no evidence establishes that the
Foundation unequivocally indicated a definite intent to
be bound not to terminate D'Unger's employment except
under clearly specific [**117] circumstances.
Accordingly, like the majority, I would find that no
more than a scintilla of evidence exists "that would enable
reasonable and fair-minded people to differ in their
conclusions" about the existence of an employment
agreement between the Foundation and D'Unger that
modified D'Unger's at-will status. See Moriel, 879
S.W.2d at 25. I also would hold that the evidence is legally
insufficient to support the finding that the Foundation
agreed to an employment contract that limited its
right to terminate D'Unger.
However, I then would perform a factual-sufficiency
analysis as well. In the event of reversal of our disposition
of an appeal on legal-sufficiency grounds, the supreme
court must remand to this Court for our consideration
of properly preserved factual-sufficiency issues. See,
e.g., Anderson v. Seven Points, 806 S.W.2d 791, 795, 34
Tex. Sup. Ct. J. 356 (Tex. 1991). Given the factual complexity
of this record and the closeness of the legal questions
presented, I would be mindful of the long-term interest
of judicial economy and address appellants' factual-sufficiency
challenges.
2. Factual-Sufficiency Analysis

In this section of my analysis, [**118] I would
examine and consider all of the evidence, not only the
evidence that supports the employment-contract finding.
See Maritime Overseas Corp., 971 S.W.2d at 406-07;
see also Maxus, 766 S.W.2d at 275. In reviewing the
evidence, I would keep in mind that it is the jury's role,
not an appellate court's, to judge the credibility of the
evidence, assign the weight to be given to testimony, and
resolve inconsistencies within or conflicts among the
witnesses' testimony. Corpus Christi Area Teachers
Credit Union v. Hernandez, 814 S.W.2d 195, 197 (Tex.
App.-San Antonio 1991, no writ) (quoting Tex. Employers'
Ins. Ass'n v. Jackson, 719 S.W.2d 245, 249-50
(Tex. App.-El Paso 1986, writ ref'd n.r.e.)). Since the
Foundation did not bear the burden of proof at trial on
modification of D'Unger's at-will status, I would analyze
the factual-sufficiency challenge in the Foundation's first
issue as an insufficient-evidence issue. See Rios, 930
S.W.2d at 814-15. Specifically, the Foundation must
show that the record presents insufficient evidence to
support the finding that the Foundation agreed to an employment
contract [**119] that limited its right to terminate
D'Unger. See Gooch, 902 S.W.2d at 184.
Without assessing the witnesses' credibility or substituting
my judgment for that of the jury, I would hold
that the evidence that the Foundation agreed to an employment
contract that limited its right to terminate
D'Unger at will is factually too weak to support the finding.
See Ritchey, 734 S.W.2d at 86-87 n.1. As instructed
by [*392] the supreme court, I would then detail all of
the evidence relevant to the employment-contract issue
and articulate why the finding is factually insufficient.
See Maritime Overseas Corp., 971 S.W.2d at 407.
In addition to the English Rule, D'Unger relies on
Accubanc Mortgage Corp. v. Drummonds, 938 S.W.2d
135 (Tex. App.-Fort Worth 1996, writ denied). In Accubanc,
minutes of the employer bank expressly appointed
the plaintiff employee as bank president and chief executive
officer for a specified term of twelve months, in addition
to approving an annual salary. Id. at 142. The
bank terminated him a month later. Id. at 152. A jury
found for the bank president on a
breach-of-employment-contract [**120] claim. Id. at
141-42. The court of appeals affirmed on both legal- and
factual-sufficiency grounds. Id. at 143. In this case,
however, the minutes of the October 22, 1996 Board
meeting did not expressly recite that the Board agreed to
employ D'Unger for one year. The only reference in the
1996 board minutes to any time period is the annual
character of the compensation approved by the Board.
Similarly, the minutes of the Board meeting of August
12, 1997 recited only that the Board ratified D'Unger's
position as vice president of exempt purposes. The
minutes did not recite that the Board renewed D'Unger's
employment agreement for another year or for any other
time period, either directly or by inference.
D'Unger acknowledged that no written agreement
existed between the Foundation and him. He admitted
that in the October 22, 1996 meeting no one promised
him a job. He admitted that the Board merely hired him
as an employee and set his salary. White and Altheide,
both directors and both present at the 1996 annual meeting
in which D'Unger's salary was approved, testified
that the Board had no intention of modifying D'Unger's
at-will status by setting [**121] an annual salary. The
record presents no evidence, either direct or inferential,
of any probative force that the Foundation agreed to a
renewable one-year employment term in 1996 and to its
renewal in 1997. See Jones, 92 S.W.3d at 487.
Further, the undisputed evidence reveals significant
ambiguities in the terms of the employment arrangement
between the Foundation and D'Unger. A close reading of
the 1996 annual meeting minutes on which D'Unger relies
reveals two conditions: (1) the Board approved
"80,000 per annum for full time employment effective
September 1, '96, reduced proportionately to reflect the
actual time Claude devoted to the Foundation"; (2)
"along with a benefit package which would be set after
further consideration at such time as Claude is able to
devote full-time to the Foundation activities." (Emphasis
added.) D'Unger does not claim on appeal that the Board
minutes constituted a written contract, only that the
minutes corroborated the oral employment agreement
between the parties. Accordingly, I would not address
whether the minutes themselves formed an enforceable
contract. However, the same minutes on which D'Unger
relies to evidence [**122] modification of his at-will
status conclusively prove that the parties had not agreed
to two essential terms at the time the Board approved
D'Unger's salary and benefits: (1) when D'Unger would
begin to work for the Foundation full time; and (2) the
additional benefits he would receive after he did start full
time. See Trend Exploration, 934 S.W.2d at 713; see
also Stinger v. Stewart & Stevenson Servs., Inc., 830
S.W.2d 715, 720 (Tex. App.-Houston [14th Dist.] 1992,
writ denied) ("Since the time frame of approval could
have been at any time in the future and for any amount of
time, it was too indefinite to be a binding contract.").
[*393] Moreover, D'Unger testified his written
Consulting Services Agreement with the Foundation
reflected an agreed $ 75.00 hourly rate. As to his salary
as an employee, however, the record presents no direct
evidence that D'Unger requested a specific salary, nor is
there evidence from which the jury could have inferred
that he did so. To the contrary, the minutes of the October
22, 1996 annual Board meeting recited that White
recommended D'Unger's salary of $ 80,000, and the
Board accepted it based in part on "the recommendations

[**123] of counsel for a salary range for Claude's position."
In fact, the 1996 annual minutes recited that
D'Unger left the room while the other Board members
discussed his salary and employment, as required by the
Foundation's by-laws, and that his salary was announced
when he returned to the meeting. Thus, the 1996 annual
minutes affirmatively showed that no negotiation took
place during the board meeting itself. Also, White testified
that D'Unger's salary was not negotiated. Therefore,
in addition to the ambiguities raised about when D'Unger
would start full time and the benefits he would receive in
the future, the evidence conclusively showed that a third
significant term of his employment was not negotiated:
his salary. See Larson, 64 S.W.3d at 519; see also SCI
Mgmt., 29 S.W.3d at 268.
Finally, as reflected in the written Consulting Services
Agreement between D'Unger and the Foundation,
the jury also had before it evidence that the course of
prior contractual dealings between the parties recognized
that the parties had the right to terminate their earlier
contract at any time. Thus, the jury learned that D'Unger
was an experienced businessman who [**124] understood
the importance of written contracts, knew about the
at-will doctrine before his employment by the Foundation,
and yet did not commit to a written contract what he
testified was a significant limitation: that the Foundation
agreed to a renewable one-year employment term. Also,
as evidenced by the written Consulting Services Agreement,
the jury learned that the Foundation executed a
written document when it intended to contract on a matter.
Altheide and White testified that the Foundation had
no employment agreement with any employee during the
time the Foundation employed D'Unger. Consistent with
that testimony, no written employment agreement between
the Foundation and any other employee appears in
the record. Altheide and White reiterated to the jury that
all employee relationships with the Foundation, including
Altheide and D'Unger's, were at will. Significantly,
as noted above, the Foundation's by-laws provide that
"election or appointment of an officer or agent shall not
of itself create contract rights."
Thus, even according probative value to D'Unger's
subjective belief and his expert's conclusory opinion as
supporting the finding that the Foundation agreed to an
[**125] employment contract that limited its right to
terminate D'Unger, I would conclude that the finding is
undermined by the following evidence: (1) express recitations,
described above, in the 1996 and 1997 annual
Board meeting minutes as well as in the Foundation's
by-laws; (2) undisputed evidence that the parties did not
come to an agreement, at the time D'Unger was hired,
about his full-time start date or the benefits he was to
receive in the future; (3) undisputed evidence that the
amount of D'Unger's annual compensation was not the
subject of negotiation by the parties; (4) White and Altheide's
testimony that the Foundation did not modify the
at-will status of any of its employees; (5) undisputed
evidence that the Foundation did not enter into written
employment agreements with any of its other employees;
and (6) in light of the parties' prior contractual dealings,
[*394] the absence of a written contract between
D'Unger and the Foundation. After a thorough review of
the entire record, I would hold that the evidence is factually
insufficient to support the finding that D'Unger and
the Foundation agreed to an employment contract that
limited the Foundation's right to terminate its employee.
[**126] Only after having found the evidence
both legally and factually insufficient to support the jury's
finding of an employment contract would I sustain
the Foundation's first issue. Accordingly, I also concur
with the majority's disposition of the Foundation's second
issue with regard to the award of attorney fees on
D'Unger's breach-of-contract claim. See TEX. CIV.
PRAC. & REM. CODE ANN. § 38.001 (Vernon 1997).
B. The Wrongful-Termination Claim:
Application of the Exceptions to the At-Will Employment
Doctrine to the Facts
(Fifth Issue Presented)
1. Legal-Sufficiency Analysis
The jury also found that the Foundation terminated
D'Unger's employment for the sole reason that he refused
to perform an illegal act. 4 I again would consider only
the evidence and inferences that support the finding. See
Lenz, 79 S.W.3d at 19; see also Maxus, 766 S.W.2d at
276. I would disregard all evidence and inferences to the
contrary. See Sabine Pilot, 687 S.W.2d at 735. The
Foundation did not bear the burden of proof at trial on
the wrongful-termination issue. See id. Rather, D'Unger
[**127] was required to prove that his termination was
for no reason other than his unwillingness to perform an
illegal act or his investigation of the legality of the requested
act. Id.; see Del Mar, 776 S.W.2d at 771.
Therefore, I would analyze the legal-sufficiency challenge
in the Foundation's fifth issue as a no-evidence
issue. See Gooch, 902 S.W.2d at 183. The Foundation
must show that the record presents no probative evidence
to support the adverse finding. See Croucher, 660
S.W.2d at 58. Texas law does not provide D'Unger, as a
private employee, a remedy if the Foundation terminated
him for reporting illegal activities in his workplace.
Healthtrust, 967 S.W.2d at 403; Runge, 57 S.W.3d at
566. Instead, parsed into its essential elements, D'Unger's
[*395] wrongful-termination action placed the burden
on D'Unger to prove that: (1) he was terminated; (2) for
the sole reason; (3) that he refused to commit; (4) an

unlawful act. See Allen v. Powell, 989 S.W.2d 776, 778
(Tex. App.-Amarillo 1998), aff'd in part and rev'd in part
sub nom., Powell Indus., 985 S.W.2d at 457 (affirmed
[**128] on Sabine Pilot grounds, reversed on tortious-interference
grounds). Similarly, the elements of
the Del Mar investigative corollary to Sabine Pilot
placed the burden on D'Unger to prove that: (1) he was
terminated; (2) for the sole reason; (3) that he investigated
the legality; (4) of a requested act. See Del Mar,
776 S.W.2d at 771. For purposes of analyzing the Foundation's
legal-sufficiency complaint to the finding that
the Foundation wrongfully terminated D'Unger's employment,
I would focus on the third, or "refusal," element
of D'Unger's Sabine Pilot wrongful-termination
claim and the fourth, or "requested act," element of his
Del Mar wrongful-termination claim.
4 Question No. 5 in the jury charge read:
Was CLAUDE D'UNGER discharged from
employment with the ED RACHAL FOUNDA-
TION for the sole reason that he refused to perform
an illegal act?
INSTRUCTION
An employee is wrongfully discharged if the
sole reason for his discharge was:
(1) the employee sought to find out from
proper authority if a requested act was illegal.
The requested act need not have been illegal, but
the employee must have had a good faith belief
that the requested act might be illegal, and such
belief must have been reasonable; or
(2) the employee refused to participate in a
criminal conspiracy. A criminal conspiracy occurs
when a person, with intent that a felony be
committed, agrees with one or more persons that
they or one or more of them engage in conduct
that would constitute the offense; and he or one
or more of them performs an overt act in pursuance
of the agreement; or
(3) the employee, having knowledge of two
or more persons conspiring to injure, oppress,
threaten, or intimidate any person in the free exercise
or enjoyment of life or property, refuses to
conceal and not to make known such matter as
soon as possible to some federal authority; or
(4) the employee resists intentional harassment
of his employer to hinder, delay, prevent or
dissuade the employee's reporting to a law enforcement
officer of the United States the commission
or possible commission of a federal offense.
Answer "Yes" or "No":
Answer: Yes
[**129] I note that the word "refusal" is defined as
"rejection of something demanded, solicited, or offered
for acceptance." WEBSTER'S THIRD NEW INT'L
DICTIONARY (1993), p. 1910. I would conclude that
proof of the "refusal" element of a Sabine Pilot wrongful-termination
claim requires both probative evidence
that the employer demanded, solicited, or offered for
acceptance that the employee commit an illegal act as
well as probative evidence that the employee refused.
See Sabine Pilot, 687 S.W.2d at 735. Similarly, I would
conclude that proof of the "requested act" element of a
claim brought under the Del Mar corollary to Sabine
Pilot requires both probative evidence that the employer
demanded, solicited, or offered for acceptance that the
employee commit an illegal act and probative evidence
that the employee investigated in good faith the legality
of the requested act. See Del Mar, 776 S.W.2d at 771.
Therefore, the element common to D'Unger's Sabine
Pilot and Del Mar claims is evidence of the Foundation's
demand, solicitation, or offer for acceptance by D'Unger
that he commit an illegal act.
I have reviewed the record. The parties [**130] do
not dispute that D'Unger was terminated. D'Unger did
not present any direct evidence to the jury that the Foundation
demanded, solicited, or offered for acceptance by
D'Unger that he commit an illegal act. Rather, D'Unger
relies on inferences drawn from the circumstances surrounding
three communications from Altheide, the
Foundation's agent.
a. The Circumstantial Evidence
D'Unger first cites Altheide's June 30, 1997 memorandum
advising the Board that an unidentified board
member was conducting an "investigation" into activities
at the ranch. 5 The memorandum instructed the directors
not to discuss Foundation business with any "inappropriate"
party. The same instruction appeared in Altheide's
April 13, 1998 memorandum suspending D'Unger, on
which D'Unger also relies. D'Unger also testified he had
a discussion with Altheide about firing DuBose in which
Altheide instructed him not to concern himself with
DuBose, which D'Unger understood to mean he was to
turn a blind eye to DuBose's mistreatment of transients
on the ranch. 6 D'Unger told the jury that he interpreted
Altheide's directions generally as instructions that he was
not to disclose to anyone any information about [**131]
illegal activity involving the Foundation and specifically
as instructions [*396] that he was not to report to law
enforcement any criminal conduct by DuBose.
5 D'Unger testified he was not the Board
member who conducted that investigation.

6 The record does not reflect when this conversation
took place.
b. The Equal Inferences from the Circumstances
If it reasonably may be inferred from the circumstantial
evidence presented to the jury that Altheide demanded,
solicited, or offered for acceptance by D'Unger
that he commit an illegal act, there is some evidence to
support the jury's finding of wrongful termination. See
Lozano, 52 S.W.3d at 149. Viewing the circumstances in
their totality, I would find that Altheide's instructions not
to discuss Foundation business with any "inappropriate"
party and that D'Unger was not to concern himself with
DuBose are as consistent with Altheide's legitimate exercise
of his duties as chief executive officer of the Foundation
as they are with D'Unger's [**132] subjective
belief that he was being asked to commit or conceal an
illegal act. Thus, the circumstantial evidence D'Unger
presented to the jury is at best consistent with either of
two inferences, and nothing shows that one is more
probable than the other. See Pitzner, 106 S.W.3d 724, at
*12; see also Litton Indus., 668 S.W.2d at 324.
In Pitzner, a premises-liability case, the supreme
court recently reaffirmed the continued viability of the
equal-inference rule articulated in Lozano, Hammerly
Oaks, Continental Coffee, and Litton Industries.
Pitzner,106 S.W.3d 724, at *7. This Court had examined
the circumstances under which a worker was injured and
found that conclusions reached by the worker's experts
that the worker "reeled backward and off the roof because
he had received an electric shock is not speculative."
Marathon Corp. v. Pitzner, 55 S.W.3d 114, 135
(Tex. App.-Corpus Christi 2001), rev'd, 106 S.W.3d
724, 46 Tex. Sup. Ct. J. 689 (Tex. 2003) (per curiam). In
reversing on legal-sufficiency grounds, the supreme
court held the evidence legally insufficient to support the
jury's finding that the condition [**133] of the premises
proximately caused the worker's injuries. Pitzner, 106
S.W.3d 724, at *13.
The chain of equal inferences in Pitzner included
whether the worker fell from the roof or was assaulted on
the premises, whether he came into contact with a
high-voltage wire or not, and, completing the chain,
whether or not the condition of the premises was a substantial
factor in causing the worker's injuries. Id. at
*12. The supreme court concluded that corroboration of
"the probability of the fact's existence or non-existence"
as required by the equal-inference rule was absent. Id.
at *13.
Here, D'Unger presented no direct evidence that Altheide
demanded, solicited, or offered for acceptance by
D'Unger that he commit an illegal act. Rather, the
wrongful-termination finding is dependent on inferences
drawn from the surrounding circumstances. While a fact-
finder properly may assess credibility and believe or
disbelieve all or part of the evidence presented, it is not
free to choose between equally probable inferences. See
2003 Tex. LEXIS 65, at *7. If the jury reasonably could
have inferred from the circumstances that DuBose's
treatment of undocumented immigrants on the [**134]
Galvan Ranch was illegal, it also could have inferred that
DuBose's conduct was racist but not illegal. Continuing
with the chain of inferences, if the jury reasonably could
have inferred from the circumstances that the acrimony
in the workplace between Altheide and D'Unger was a
result of D'Unger's refusal to conspire with Altheide in
concealing DuBose's illegal conduct, it also could have
inferred that the discord resulted from D'Unger's divergent
views on Foundation governance issues and his repeated
refusal to accede to Altheide's authority, even on
matters that had nothing to do with DuBose. Completing
[*397] the inferential chain, if the jury could have inferred
that Altheide's instructions not to discuss Foundation
business with any "inappropriate" party and that
D'Unger was not to concern himself with DuBose were
demands, solicitations, or offers for acceptance by
D'Unger that he commit or conceal an illegal act, it also
could have inferred that the instructions were consistent
with Altheide's legitimate exercise of his duties as chief
executive officer of the Foundation.
Like the circumstances surrounding the worker's injuries
in Pitzner, corroboration independent of inference
[**135] is missing in this case. See id. For example,
evidence that DuBose had been charged with or convicted
of assaulting or kidnapping the three young transients,
or that Altheide and DuBose had been charged
with or convicted of conspiring to violate the rights of
transient non-United States citizens, would have supplied
the required corroboration. However, there is no evidence
that any of the circumstances investigated by
D'Unger were ever found to be illegal. See Schlapper,
963 S.W.2d at 105 (refusing to extend Sabine Pilot exception
to termination of employee for investigating legality
of requested act ultimately found to be legal). To
the contrary, the undisputed evidence showed that none
of D'Unger's complaints resulted in any action by any
law enforcement or other agency at any time against either
the Foundation or against DuBose or Altheide personally.
Nothing in the record corroborates D'Unger's
suspicions. See Pitzner,106 S.W.3d 724, at *13. In the
absence of corroborating evidence, the circumstantial
evidence in this case does not "transcend mere suspicion."
See Browning-Ferris, 865 S.W.2d at 928. However
distasteful the [**136] facts, our obligation as an
appellate court is to dispassionately and rigorously apply
the appropriate standards of review, within the scope
defined by those standards, in determining the sufficiency
of the evidence.

Accordingly, I would find that D'Unger did not meet
his burden of proving the essential fact that the Foundation,
through its agent Altheide, demanded, solicited, or
offered for acceptance by D'Unger that he commit an
illegal act. The only evidence I find in support of the
jury's wrongful-termination finding is D'Unger's testimony
of his subjective interpretation of Altheide's instructions.
As with D'Unger's testimony regarding the
term of his employment, D'Unger's statement of subjective
belief is not evidence. See Cont'l Coffee Prods.,
937 S.W.2d at 452; see also In re Jones, 974 S.W.2d at
769
"Where there is real evidence, we must uphold the
jury verdict, but in cases such as this where there is only
real suspicion, we must overturn it." Browning-Ferris,
865 S.W.2d at 928. D'Unger's subjective opinion piles
"speculation on speculation and inference on inference."
Pitzner, 106 S.W.3d 724, at *11. [**137] No more
than a scintilla of evidence exists "that would enable
reasonable and fair-minded people to differ in their conclusions"
about whether Altheide demanded, solicited, or
offered for acceptance by D'Unger that he commit an
illegal act. See Moriel, 879 S.W.2d at 25.
The Sabine Pilot and Del Mar exceptions to at-will
employment are narrowly drawn. Sabine Pilot, 687
S.W.2d at 735; Del Mar, 776 S.W.2d at 771. I would
conclude that the exceptions to termination-at-will, based
on an employee's refusal to perform an illegal act or investigation
of the legality of the requested act, are not
broad enough to encompass D'Unger's conjectures about
Altheide's instructions not to discuss Foundation business
with any "inappropriate" party and not to concern
himself with DuBose. Accordingly, I would find that the
evidence supporting the finding of wrongful termination
is [*398] no more than a scintilla. See Formosa
Plastics, 960 S.W.2d at 48. I would find that evidence of
the vital fact that the Foundation demanded, solicited, or
offered for acceptance by D'Unger that he commit an
illegal act is "so weak as to do no more [**138] than
create a mere surmise or suspicion of its existence." See
Kindred, 650 S.W.2d at 63. I dissent from the majority's
affirmance of the wrongful-termination finding on legal-sufficiency
grounds. I would hold that the evidence is
legally insufficient to support the finding of wrongful
termination.
b. Factual-Sufficiency Analysis
In this section of my analysis, I would examine and
consider all of the evidence, not only the evidence that
supports the wrongful-termination finding. See Maritime
Overseas Corp., 971 S.W.2d at 406-07. Since the
Foundation did not bear the burden of proof on the
wrongful-discharge issue at trial, I would analyze the
factual-sufficiency challenge in the Foundation's fifth
issue as an insufficient-evidence issue. See Sabine Pilot,
687 S.W.2d at 735. Specifically, the Foundation must
show that the record presents insufficient evidence to
support the finding that D'Unger's discharge was for no
reason other than his unwillingness to perform an illegal
act or his investigation of the legality of the requested
act. See Gooch, 902 S.W.2d at 184.
The Foundation's fifth issue on appeal asserts
[**139] insufficiency of the evidence to support the
wrongful-discharge finding only on the ground that
"D'Unger was not asked to commit an illegal act by the
Foundation." The Foundation argues, however, in support
of its fifth issue, that "D'Unger was a disgruntled
employee who rejected authority." The argument details
the Foundation's complaints regarding D'Unger's job
performance. The supreme court instructs that we must
consider a party's arguments supporting each issue on
appeal, not just the wording of the issue itself. Anderson
v. Gilbert, 897 S.W.2d 783, 784, 38 Tex. Sup. Ct. J.
622 (Tex. 1995) (per curiam). Further, this Court long
has applied a liberal briefing policy. Ottis v. Haas, 569
S.W.2d 508, 511 (Tex. App.-Corpus Christi 1978, writ
ref'd n.r.e.). We construe each issue on appeal in light of
our understanding of the arguments made and authorities
cited by the appellant. Id. Accordingly, for purposes of
analyzing the Foundation's factual-sufficiency complaint
to the finding that the Foundation terminated D'Unger's
employment for the sole reason that he refused to perform
an illegal act, I would focus on the second element
of both D'Unger's Sabine Pilot wrongful-termination
[**140] claim and his Del Mar wrongful-termination
claim: the sole reason for D'Unger's termination was his
refusal to perform, or his investigation of the legality of,
the requested act. See Allen, 989 S.W.2d at 778; see
also Del Mar, 776 S.W.2d at 771. Under Texas law, the
Foundation did not wrongfully terminate D'Unger if it
discharged him for a legitimate reason as well as for his
refusal to perform an illegal act or his investigation of
the legality of the requested act. See Hinds, 904 S.W.2d
at 633. In reviewing the evidence, I again keep in mind
that it is the jury's role, not an appellate court's, to judge
the credibility of the evidence, assign the weight to be
given to testimony, and resolve inconsistencies within or
conflicts among the witnesses' testimony. Hernandez,
814 S.W.2d at 197. Without assessing the witnesses'
credibility or substituting my judgment for that of the
jury, I would hold that D'Unger's testimony of his subjective
belief that the Foundation's sole reason for terminating
him was because he "went to the authorities" is
factually too weak to support the finding of wrongful
termination. [**141] See Ritchey, 734 S.W.2d at 86-87
n.1. I would then detail all of the evidence relevant to the
wrongful-termination issue [*399] and articulate why
the finding is factually insufficient. See Maritime
Overseas Corp., 971 S.W.2d at 407.

Even if the evidence is legally sufficient that Altheide,
as the Foundation's agent, had demanded, solicited,
or offered for acceptance by D'Unger that he commit
an illegal act, the record contains no evidence, other than
D'Unger's unsubstantiated conviction, that his refusal to
do so or his investigation of the legality of the requested
act was the sole reason he was fired. See Sabine Pilot,
687 S.W.2d at 735; see also Del Mar, 776 S.W.2d at
768. To the contrary, D'Unger himself testified that he
was terminated because he "went to the authorities," a
claim for which Texas law provides no remedy to
D'Unger as a private employee. See Hinds, 904 S.W.2d
at 633. Further, D'Unger also testified to his subjective
belief that Altheide's motivation for terminating D'Unger
was to permit Altheide to treat the assets of the Foundation
as his own. D'Unger's expert concluded that the
[**142] termination was to eliminate D'Unger's challenge
to Altheide's authority. That Altheide had other
motives for terminating D'Unger is evidenced by Altheide's
diary entry on October 18, 1997, well before
Altheide learned in April of 1998 that D'Unger had been
reporting to the authorities: "D'Unger must go, the sooner
the better." Also, Altheide and White met to discuss
D'Unger's termination as early as December of 1997,
again well before Altheide learned of D'Unger's reports
to outside agencies.
Moreover, the evidence is undisputed that D'Unger
pursued complaints to nine separate local, state, and federal
officials and agencies about Foundation and Altheide
activities he surmised were illegal, immoral, in
violation of the purposes for which the Foundation was
chartered, or in violation of the Foundation's by-laws.
The evidence is undisputed that at least three of
D'Unger's charges had no basis in fact. First, D'Unger's
fears for the welfare of the three transient juveniles detained
by DuBose in September of 1997 proved to be
unfounded. The true facts showed that the border patrol
had taken the three young men into custody, just as reported
by DuBose. D'Unger could have corroborated
[**143] DuBose's account of the incident at the time
D'Unger reported his concerns to the authorities by
checking the ranch's phone records or by filing a FOIA
request. He did not. Not until after D'Unger's relationship
with the Foundation terminated did he seek to verify his
suspicions. Second, D'Unger's accusations regarding
Altheide's "self-dealing" with regard to the Foundation's
contract with Altheide's colleague's construction company
also proved unfounded. The true facts showed that
Altheide held no business interest and derived no financial
benefit from his friend's construction company.
Moreover, the Foundation's board concluded that the
work done and amounts charged by the construction
company were fair to the Foundation. Third, D'Unger's
reporting of the Foundation's "assistance" of an employee
in avoiding payment of his child-support obligations
also proved to be unfounded. The Office of the Attorney
General rejected the complaint. Finally, once again, there
is no evidence that these or any of D'Unger's other complaints
resulted in any action by any law enforcement or
other agency at any time against either the Foundation or
against DuBose or Altheide personally.
Similarly, the [**144] evidence is undisputed that
D'Unger, without authorization and in violation of Altheide's
instructions, disclosed to third parties Foundation
confidential documents and information, including privileged
attorney-client communications regarding pending
litigation unrelated to D'Unger's complaints about Altheide
and DuBose. Further, D'Unger admitted he ignored
Altheide's instructions. [*400] He admitted he
did not consider Altheide his superior in the Foundation's
hierarchy. D'Unger's own words proved that the level of
acrimony in the workplace between the two men was
severe: "Working conditions at the office are impossible
and are about a breath away from a major brawl."
Finally, on February 19, 1998, well after D'Unger
secretly began divulging to investigative agencies that
Altheide was instructing him to conspire to cover up
criminal activity at the ranch, D'Unger voted for a corporate
resolution that gave Altheide unfettered authority
to permit access to the ranch by law enforcement.
D'Unger did not, at that time, suggest to the Board he
was being pressured to conspire with Altheide to conceal
DuBose's illegal conduct. Both his vote for the resolution
and his silence before the Board [**145] at the February
19, 1998 meeting were inexplicably inconsistent with
D'Unger's charges that Altheide was covering up criminal
activity on the Galvan Ranch at that very moment.
Each of the four possible bases for the jury's affirmative
finding that the Foundation terminated D'Unger for
his refusal to perform an illegal act is predicated on the
vital fact that D'Unger's refusal was the sole reason. 7
Thus, even according probative value to inferences
drawn from the circumstances and to D'Unger's subjective
belief as supporting the finding that the Foundation
terminated D'Unger's employment for the sole reason
that he refused to perform an illegal act, I would conclude
that the finding is undermined by undisputed evidence
of other reasons for D'Unger's termination unrelated
to D'Unger's disagreements with Altheide regarding
DuBose's conduct: (1) Altheide's motivation to remove
an impediment to his exercise of control within the
Foundation; (2) D'Unger's disruptive and insubordinate
conduct in other matters of corporate governance and
philosophy; and (3) D'Unger's unauthorized disclosure to
third parties of information regarding the Foundation in
other matters, particularly privileged [**146] communications
between the Foundation and its attorneys.
7 See note 4.

At most, the evidence shows that the Foundation
discharged D'Unger for a legitimate reason as well as for
his refusal to perform an illegal act or his investigation of
the legality of the requested act. See Hinds, 904 S.W.2d
at 633. Accordingly, the Foundation cannot be liable for
wrongful discharge. See id. Also, D'Unger's approval of
a board resolution conferring on Altheide the sole authority
to permit law enforcement access to the Galvan
Ranch was inconsistent with his assertion later that Altheide
was pressuring him during that same time to
commit an illegal act or to participate in a conspiracy to
conceal DuBose's illegal activities at the Galvan Ranch. I
dissent from the majority's affirmance of the wrongful-termination
finding on factual-sufficiency grounds.
After a thorough review of the entire record, I would
hold that the evidence is factually insufficient to sustain
the finding that the Foundation terminated [**147]
D'Unger's employment for the sole reason that he refused
to perform an illegal act. See id. Having found the evidence
both legally and factually insufficient to support
the jury's wrongful-termination finding, I would sustain
the Foundation's fifth issue.
C. The Tortious-Interference Claim:
Application of the Personal-Interest Requirement
to the Facts
(Third Issue Presented)
1. Legal-Sufficiency Analysis
The jury found that Altheide tortiously interfered
with D'Unger's contractual [*401] agreement with the
Foundation 8 without a good-faith belief that he had a
right to do so. 9 I would hold that the evidence is both
legally and factually insufficient to support the finding of
an employment contract between D'Unger and the
Foundation that modified D'Unger's at-will employment
status, but I agree with the majority that an at-will employment
agreement can be the subject of a claim of tortious
interference. Marathon Oil, 767 S.W.2d at 688. I
again would consider only the evidence and inferences
that support the finding. See Lenz, 79 S.W.3d at 19; see
also Maxus, 766 S.W.2d at 276. I would disregard
[**148] all evidence and inferences to the contrary. See
Lenz, 79 S.W.3d at 19; see also Maxus, 766 S.W.2d at
276. Altheide did not bear the burden of proof at trial on
the tortious-interference claim. See Holloway, 898
S.W.2d at 795-96; see also Kingston, 82 S.W.3d at 763
n.3. Therefore, I would analyze Altheide's legal-sufficiency
challenge in his third issue as a
no-evidence issue. See Gooch, 902 S.W.2d at 183. Altheide
must show that the record presents no evidence to
support the adverse finding. See Croucher, 660 S.W.2d
at 58. Specifically, Altheide must show that the record
presents no probative evidence to support the essential
fact that his alleged interference was in furtherance of his
own personal interests, not the Foundation's. See Holloway,
898 S.W.2d at 795.
8 Question No. 1 in the jury charge read:
Did PAUL ALTHEIDE intentionally interfere
with CLAUDE D'UNGER'S employment
agreement with the ED RACHAL FOUNDA-
TION?
INSTRUCTION
You are instructed that interference is intentional
if committed with the desire to interfere
with the agreement or with the belief that interference
is substantially certain to result.
Answer "Yes" or "No"
Answer: Yes
[**149]
9 Question No. 2 in the jury charge submitted
Altheide's affirmative defensive issue on good
faith:
Did PAUL ALTHEIDE interfere because he
had a good faith belief that he had a right to do
so?
Answer "Yes" or "No"
Answer: No
I have reviewed the record. D'Unger argues that the
evidence supports the conclusion that his termination
was not in the Foundation's best interest and thus was
prohibited by the Foundation's by-laws. D'Unger's testimony
and the opinion of his expert was that Altheide
acted in his own best interests, not the Foundation's,
when he fired D'Unger. As with D'Unger's testimony
regarding the term of his employment and his belief he
was terminated for going to the authorities, I agree with
the majority that D'Unger's statement of subjective belief
of Altheide's motives is not evidence. See Cont'l Coffee
Prods., 937 S.W.2d at 452; see also In re Jones, 974
S.W.2d at 769. I also agree that his expert's conclusions
are not evidence. See Pitzner,106 S.W.3d 724, at *12;
see also Wadewitz, 951 S.W.2d at 467
However, [**150] D'Unger also cites to evidence
of the benefit Altheide derived from Altheide's personal
use of the Galvan Ranch and $ 6,000 salary increase to
cover the value of that usage to the Foundation. Considering
only the inference suggested by D'Unger, that by
firing D'Unger Altheide secured a benefit for himself
with regard to continued use of the Galvan Ranch and
increased salary, D'Unger had to prove more than the
fact that Altheide benefitted personally from firing
D'Unger. See Holloway, 898 S.W.2d at 798. He had to

prove that Altheide acted willfully or intentionally to
serve Altheide's personal interests at the expense of the
Foundation. See id.
[*402] D'Unger further asserts that the evidence
shows that the Board did not ratify his termination as
required by the Foundation's by-laws. He argues that the
Board's failure to ratify his termination is further evidence
that Altheide acted in his own personal interest in
terminating D'Unger. Altheide responds that the Board
ratified D'Unger's termination when it ratified Altheide's
acts as chief executive officer as reflected in the August
11, 1998 special meeting minutes. I read no ratification
in the minutes of Altheide's [**151] actions in firing
D'Unger, only ratification of Altheide's position as chief
executive officer, a different proposition from ratifying
the acts that Altheide had taken as chief executive officer.
Nonetheless, the evidence is undisputed that
D'Unger did not seek election to a new term as director
of the Foundation. It is undisputed that the Board unanimously
elected new directors and officers, a slate that
did not include D'Unger.
Like the majority, I would find as a matter of law
that the Board effectively ratified D'Unger's termination
by not re-electing D'Unger but rather electing other officers.
The Foundation is the best judge of its own interests.
See Powell Indus., 985 S.W.2d at 457. The evidence
is undisputed that the Foundation did not complain
about Altheide's termination of D'Unger. Like the majority,
I would not find that Altheide acted contrary to the
Foundation's interests. See id. D'Unger failed to introduce
probative evidence tending to prove that firing
D'Unger was so contrary to the Foundation's best interests
that it could only have been motivated by Altheide's
pursuit of his own personal interests. See Holloway,
898 S.W.2d at 798. [**152] No more than a scintilla of
evidence exists "that would enable reasonable and
fair-minded people to differ in their conclusions" about
whether Altheide furthered his own personal interests at
the expense of the Foundation's in firing D'Unger. See
Moriel, 879 S.W.2d at 25. Accordingly, I also would find
that D'Unger did not meet his burden of proving each
element of tortious interference. See Holloway, 898
S.W.2d at 795. Nor would I address Altheide's affirmative
defense of legal justification. See id. I would hold
that the evidence is legally insufficient to support the
finding that Altheide tortiously interfered with D'Unger's
at-will employment agreement with the Foundation. See
id.
2. Factual-Sufficiency Analysis
In this section of my analysis, I again would examine
and consider all of the evidence, not only the evidence
that supports the tortious-interference finding. See
Maritime Overseas Corp., 971 S.W.2d at 406-07. Since
Altheide did not bear the burden of proof on the tortious-interference
issue at trial, I would analyze the factual-sufficiency
challenge in Altheide's third issue as an
insufficient-evidence [**153] issue. See Holloway,
898 S.W.2d at 795-96; see also Kingston, 82 S.W.3d at
763 n.3. Specifically, Altheide must show that the record
presents insufficient evidence to support the vital fact
that his alleged interference was in furtherance of his
own personal interests, not the Foundation's. See Holloway,
898 S.W.2d at 795.
In reviewing the evidence, I again would keep in
mind that it is the jury's role, not an appellate court's, to
judge the credibility of the evidence, assign the weight to
be given to testimony, and resolve inconsistencies within
or conflicts among the witnesses' testimony. See Hernandez,
814 S.W.2d at 197. Without assessing the witnesses'
credibility or substituting my judgment for that of
the jury, I would hold that evidence of: (1) D'Unger's
subjective belief and his expert's conclusory opinion that
Altheide furthered his own interests when he fired
D'Unger; and (2) Altheide's [*403] personal benefit in
the form of a higher salary and continued use of the
Galvan Ranch, is factually too weak to support the finding
of the vital fact that Altheide, in firing D'Unger, acted
so contrary to the Foundation's [**154] best interests
that the jury could infer that Altheide's personal interests
motivated his actions. See Holloway, 898 S.W.2d at
795. I would then detail all of the evidence relevant to
the tortious-interference issue and articulate why the
finding is factually insufficient. See Maritime Overseas
Corp., 971 S.W.2d at 407.
I already have concluded that evidence of other reasons
for D'Unger's termination undermined the finding
that the sole reason for D'Unger's termination was that he
refused to perform an illegal act: (1) Altheide's motivation
to remove an impediment to his exercise of control
within the Foundation unrelated to D'Unger's disagreements
with Altheide regarding DuBose's conduct; (2)
D'Unger's disruptive and insubordinate conduct in other
matters of corporate governance and philosophy; and (3)
D'Unger's unauthorized disclosure to third parties of information
regarding the Foundation in other matters,
particularly privileged communications between the
Foundation and its attorneys. Similarly, even according
probative value to D'Unger's subjective belief and his
expert's conclusory opinion about Altheide's motives and
to an inference that [**155] Altheide benefitted personally
from firing D'Unger, I would conclude that the finding
that Altheide tortiously interfered with D'Unger's
at-will employment agreement with the Foundation is
undermined by: (1) evidence that Altheide's act in firing
D'Unger was not contrary to the Foundation's best interests
because of the existence of other reasons for
D'Unger's termination unrelated to DuBose's conduct; (2)

the Foundation's ratification of Altheide's termination of
D'Unger by its election of other officers; (3) the absence
of any evidence that Altheide's compensation, including
his use of the Galvan Ranch and increased salary to cover
that expense, was unreasonable; and (4) the absence of
any evidence that the Foundation had complained about
either Altheide's compensation or his termination of
D'Unger. At best the evidence proves that Altheide had
"mixed motives" to benefit himself as well as the Foundation
when he fired D'Unger, an insufficient basis for
imposing liability for tortious interference. See Holloway,
898 S.W.2d at 796. I would not find that Altheide
acted contrary to the Foundation's wishes. See Powell
Indus., 985 S.W.2d at 457. To hold [**156] Altheide
liable for events about which the Foundation has not
complained subverts "the basic principle that 'the person
who induces the breach cannot be a contracting party.'"
Id. In any event, even if the Foundation had complained
about Altheide's compensation or D'Unger's termination,
its complaints would not be conclusive evidence that
Altheide acted to further his personal interests by firing
D'Unger. See Latch, 107 S.W.3d 543, at *8. After a
thorough review of the entire record, I would hold that
the evidence is factually insufficient to prove that Altheide
tortiously interfered with D'Unger's at-will employment
agreement with the Foundation. See id. Only
after having found the evidence both legally and factually
insufficient to support the jury's finding of tortious
interference would I sustain Altheide's third issue.
VI. CONCLUSION
To summarize, I concur with the majority's disposition
of the employment-contract and tortious-interference
issues but would hold that the evidence is factually as
well as legally insufficient to support the findings that:
(1) the Foundation agreed to an [*404] employment
contract that limited its right to terminate D'Unger;
[**157] and (2) Altheide tortiously interfered with the
at-will employment agreement between D'Unger and the
Foundation. I concur that D'Unger is not entitled to attorney
fees. I dissent from the majority's affirmance and
would hold that the evidence is both legally and factually
insufficient to support the wrongful-termination finding.
I would not reach appellants' evidentiary and jury-charge
issues. Accordingly, I would reverse and render a
take-nothing judgment in favor of both appellants.
ERRLINDA CASTILLO
Justice

PRIOR HISTORY: [**1]
742 S.W.2d 482, *; 1987 Tex. App. LEXIS 9202, **
LEXSEE 742 SW 2D 482
Dayton Hudson Corporation, d/b/a Target Stores, Appellant, v. Pete Eldridge, Appellee
FROM A DISTRICT COURT OF COLLIN COUNTY,
TEXAS.
COUNSEL:
Linda G. Moore, Charles Michael Gray, for Plaintiff.
Ernest E. Figari, Jr., Donald Collelouri, Andrew G.
Jubinsky, for Defendant.
JUDGES:
Justices Whitham, Stewart and McClung.
OPINIONBY:
WHITHAM
OPINION:
[*483] A policeman brought this action against a
corporate citizen who responded to a police request for
information in apprehending a suspect. The citizen-appellant,
Dayton Hudson Corporation, doing business
as Target Stores, appeals from a portion of a judgment
rendered on the jury's verdict in favor of the policeman-appellee,
Pete Eldridge. In its sixth point of error,
Target contends that the trial court erred in rendering
judgment for Eldridge against Target because Target
breached no duty to Eldridge as a matter of law. We
agree. Moreover, we find no merit in Eldridge's claim for
indemnity. Accordingly, we reverse and render.
On November 26, 1984, at about 8:30 a.m., Officer
Patrick Hussy of the Plano Police Department investigated
a burglary of a motor vehicle. The victim, Ms.
Hatti Price, told Hussy that her car had been burglarized
while parked in front of her house and that the burglar
had taken certain property, [**2] including a Texas
Instruments calculator, Model No. 5040 II. Price in-
No. 05-87-00078-CV
COURT OF APPEALS OF TEXAS, Fifth District, Dallas
742 S.W.2d 482; 1987 Tex. App. LEXIS 9202
December 1, 1987, Decided
Page 1
formed Hussy that she purchased the calculator at the
Target store on Parker Road in Plano and that she had
intended to return it to Target because it had a broken
printer. Price told Hussy that the receipt for the calculator
was taped to the calculator when it was stolen. Anticipating
that the thief might attempt to return her calculator
to Target and having been advised by Hussy that
it might be two to three days before the police could
process the paperwork on her report, Price told Hussy
that she would go to Target herself to report that the calculator
had been stolen. At approximately 9:30 a.m. that
same day, Price went to the Target store on Parker Road
and spoke with Ms. Marie Shoemaker, one of the employees
at the customer service desk. Price advised
Shoemaker that (1) a Texas Instruments 5040 II calculator
had been stolen from her car, (2) the receipt for the
calculator was with it when it was stolen, and (3) she
suspected the thief might try to return it. Price showed
Shoemaker a cancelled check in the amount of $ 52.99,
dated January 19, 1984, which she used to pay for the
calculator and which bore her [**3] driver's license
number. Attached to Price's check was a police information
form she received from Hussy earlier that morning.
Price also told Shoemaker that the amount of the
cancelled check represented the total amount of the purchase.
Price explained to Shoemaker that the receipt that
was with the calculator might contain certain coding
numbers, either 350/621 or 350/622, that were used in
Price's business to earmark the expenditure. Upon receiving
this information from Price, Shoemaker called
the store's security department and spoke with Kathy
Laws, the security manager. Laws was busy at the time,
but she told Shoemaker to make a photocopy of the
check and the police form provided by Price so that it
could be posted at the customer service desk. Shoemaker
did so and then wrote on the letter-size copy, "Target
receipt for $ 52.99 will have the circled coding # 's above
on it -- Its for a TI 5040 II calculator." The "circled coding
# 's" referred to in Shoemaker's notation (i.e.,
350/622) were written on the cancelled check. Shoemaker
showed this notice -- consisting of the cancelled

check, the police form, and her handwritten notation -- to
both Laws and a co-worker, Katheryn [**4] Stageberg,
and then posted it between the two cash registers at the
customer service desk. Later that day, Hussy also visited
the Target store and spoke with Laws. Hussy told Laws
that a Texas Instruments 5040 II calculator, with a receipt
attached, had been stolen from a vehicle. Hussy
reiterated much of the information that Price had already
given to Target, including the fact that the stolen calculator
had a broken printer and that the receipt would have
some numbers written on the top. Hussy asked Laws to
call the Plano Police Department if anyone came into the
store to return the calculator.
[*484] Shortly before noon on the following day,
November 27, 1984, Michael Brett Corson and his family
went to the Target store on Parker Road to return a
calculator they purchased at Target and to shop for
Christmas gifts. Upon entering the store, Corson approached
the customer service desk to return the calculator
while his wife and two daughters started shopping.
At the customer service desk, Stageberg assisted Corson.
Corson told Stageberg that he wanted to exchange a calculator
that had a defective printer, and he gave her his
receipt for it, along with his driver's license. Corson's
[**5] calculator was also a Texas Instruments Model
No. 5040 II. The receipt Corson gave Stageberg was
dated June 5, 1984, and was in the amount of $ 90.96.
After taking the calculator and receipt from Corson,
Stageberg walked to the room behind the customer service
desk and called security. Stageberg spoke with
Leslie Jones, one of Target's security officers, and told
her that a man was returning a Model 5040 II calculator
and that they were supposed to inform the police. Since
Jones was unfamiliar with the notice that was posted at
the customer service desk, Stageberg explained it to her
and told her that Corson had a "receipt with the same
numbers on top." Although Stageberg denied having ever
seen the written notice that was posted at the customer
service desk or having explained it to Jones, her testimony
was contradicted by both Jones and Shoemaker, as
well as by the incident report prepared by Jones just
hours afterwards. After Jones asked Stageberg if she was
sure the numbers matched, and Stageberg assured her
that she had checked them, Jones called the Plano Police
Department and reported that someone was trying to
return a calculator that matched the one Target had been
notified [**6] to watch out for.
In response to Jones' telephone call, the Plano Police
Department dispatched Eldridge to the Target store. The
police dispatcher advised Eldridge that a burglary suspect
was returning stolen property. While Eldridge was
en route to the store, Eldridge spoke with Hussy by radio,
and Hussy gave him some background information
about the stolen calculator. When Eldridge arrived at the
742 S.W.2d 482, *; 1987 Tex. App. LEXIS 9202, **
Page 2
store, Jones approached Eldridge, identifying herself as a
Target security officer. Eldridge asked Jones what she
had, and Jones identified Corson and stated that he was
returning a stolen item at the customer service desk.
When Eldridge asked how Jones knew it was stolen,
Jones told him that Target had information from the
Plano Police Department in the form of a notice of some
type. Jones told Eldridge that Target had the returned
calculator and receipts and that the numbers matched
with the stolen calculator. Based on the information that
he received from Jones, whom, as a Target security officer,
he believed to be a credible person, Eldridge approached
Corson, informed him that he was a suspect in
a burglary, and placed him under arrest. In this connection,
Eldridge testified that if [**7] Jones had told him
only that Corson was returning a Texas Instruments 5040
II calculator with a broken printer, he would not have
placed Corson under arrest on the basis of that information
alone. After handcuffing Corson, Eldridge asked
Jones if a private area was available to them, and Jones
led them to the security office. Once there, Eldridge unhandcuffed
Corson and asked Jones to get the calculator
and receipts that they had as evidence. Jones returned
with those items, and, several minutes later, Eldridge
also received the notice that had been posted at the customer
service desk. Eldridge compared the information
on the notice with the receipt Corson had presented and
concluded that they did not match up and that Corson
had been misidentified as a burglary suspect by Target.
Eldridge noted, among other things, that both the date
and the amount of Corson's receipt were different than
the cancelled check that Price had provided to Target.
Eldridge released Corson from custody and informed the
acting store manager of the mistake.
Corson brought this action against Eldridge and
Target claiming that he was falsely imprisoned. Thereafter,
Eldridge filed a cross-claim against Target, [**8]
seeking indemnity and recovery of the attorney's [*485]
fees that he was forced to incur in the defense of the
claim asserted against him by Corson. Target likewise
filed its own cross-claim against Eldridge for contribution
or indemnity. The trial court submitted the case to
the jury on special issues. The jury found that Target, but
not Eldridge, was liable for falsely imprisoning Corson.
Moreover, the jury found (1) that Target failed to convey,
or failed to accurately convey, all of the relevant
information it had about Corson to Eldridge; (2) that
such failure was negligence; (3) that Target's negligence
was the proximate cause of the arrest of Corson; and (4)
that Eldridge arrested Corson solely as a natural and
proximate consequence of the conduct of Target. The
jury also found that Corson was entitled to actual damages
in the sum of $ 25,000.00. The jury found that a
reasonable and necessary attorneys' fee for the services
rendered to Eldridge by his attorneys was (1) $ 20,000.00

in the trial court, (2) $ 10,000.00 in the event of an appeal
to the Court of Appeals, and (3) $ 5,000.00 in the
event of an appeal to the Texas Supreme Court. Based on
the jury's findings, the [**9] trial court rendered judgment
awarding Corson and Eldridge their damages as
found by the jury and denied Target any relief on its
cross-claim against Eldridge.
In answer to special issue number three, the jury
found that Target failed to convey all of the relevant information
it knew, or failed to convey accurately the
relevant information it knew, to Eldridge regarding
Corson on the occasion in question. In answer to special
issue number eight, the jury found that Eldridge arrested
Corson on the occasion in question solely as a natural
and proximate consequence of the conduct of Target.
Under its sixth point of error, Target argues that Target
owed no duty to Eldridge as a matter of law and that Eldridge
has no cause of action against it. Moreover, Target
insists that there is no evidence that Target breached
a duty to Eldridge. Thus, Target maintains that since
Target did not commit a tort against Eldridge, as a matter
of law a judgment cannot be rendered in favor of Eldridge
against Target.
Duty
At no time did Target ask or direct Eldridge to arrest
Corson, nor did any Target employee tell Eldridge how
to handle the situation. The undisputed evidence shows
that on November [**10] 27, 1984, Corson was not
detained by Target, but rather by Eldridge. Prior to the
arrival of Eldridge at the Target store, Corson testified
that he was not detained by any Target employee and
that he was free to walk away from the customer service
desk. Clearly, Corson could have left the store at any
time prior to being handcuffed and detained by Eldridge.
Eldridge testified that Jones did not tell or request him to
arrest Corson. Jones pointed Corson out to Eldridge, and
Eldridge approached Corson and made the determination
to handcuff Corson. At Eldridge's request, Jones led Eldridge,
Corson and Officer Hussy to the Target security
office so that the officers could continue their investigation.
Eldridge and Hussy detained Corson in the Target
security office for about fifteen minutes, and then they
released him. Thus, we reach the question of the nature
of the duty owed the police by a citizen attempting to
comply with a police request for information leading to
the apprehension of a person committing a criminal offense.
Here, the police sought information from Target in
order to locate the person stealing from Price a Texas
Instruments Model No. 5040 II calculator with a broken
[**11] printer. Target acted to provide that information.
With this background we turn to consider whether
Target owed a duty to Eldridge. In the context of the
present case, we must determine whether Target had a
742 S.W.2d 482, *; 1987 Tex. App. LEXIS 9202, **
Page 3
duty to Eldridge to convey all the relevant information it
knew or to convey accurately the relevant information it
knew. A duty is an obligation to perform some act.
Taylor v. White, 113 S.W. 554, 556 (Tex. Civ. App.
1908, no writ). In the field of negligence, "duty" signifies
conformance to the legal standard of reasonable conduct
in the light of apparent risk; the essential question is
whether the plaintiff's interests are entitled to legal protection
against the defendant's [*486] conduct. Wytupeck
v. City of Camden, 25 N.J. 450, 136 A.2d 887,
893 (1957). In negligence law, "duty" is nothing more
than a set of policy considerations which lead the law to
say that the particular plaintiff is entitled to protection.
See Keenan v. Smith, 149 Cal. App.3d 576, 197 Cal.
Rptr. 32, 35 (Ct. App. 1983). In negligence law, "duty" is
simply an expression of the sum total of those considerations
of policy which lead the law to say that the particular
plaintiff is entitled [**12] to protection. Brennen v.
City of Eugene, 285 Or. 401, 591 P.2d 719, 722 (1979).
The concept of "duty" is simply a shorthand way of expressing
whether the plaintiff's interests are entitled to
protection against the defendant's conduct. Earp v.
Nobmann, 122 Cal.App.3d 270, 175 Cal. Rptr. 767, 778
(Ct. App. 1981). Legal "duty" is an expression of the sum
total of those considerations of policy which lead the law
to say that the particular plaintiff is entitled to protection.
See Johnson v. County of Los Angeles, 143 Cal.App.3d
298, 191 Cal. Rptr. 704, 709-10 (Ct. App. 1983). "Duty"
is a conclusory statement which reflects the sum total of
policy considerations which leads the law to say a particular
plaintiff is entitled to protection against a specific
harm. Bartell v. Palos Verdes Peninsula School District,
83 C.A.3d 492, 147 Cal. Rptr. 898, 901 (Ct. App.
1978). "Duty" must be distinguished from "authority";
the term "duty" denotes an obligation and is compulsory
while "authority" denotes capacity and is permissive. See
Kerrigan v. Errett, 256 N.W.2d 394, 399 (Iowa 1977).
The common law test of "duty" is the probability or the
foreseeability of injury to [**13] the plaintiff. Vogt
v. Johnson, 278 Minn. 153, 153 N.W.2d 247, 251 (1967).
In negligence cases, the "duty" is to conform to the legal
standard of reasonable conduct in light of the apparent
risk. Karrar v. Board of Road Commissioners of Barry,
127 Mich. App. 821, 339 N.W.2d 653, 657 (Ct. App.
1983). "Duty" refers to an affirmative obligation imposed
by law to do a particular thing, to perform a particular
act; it is a requirement of specific conduct. Walker v.
Bignell, 100 Wis. 2d 256, 301 N.W.2d 447, 452 (1981). A
"duty" is an obligation imposed by law which requires
one to conform to a certain standard of conduct for the
protection of another against an unreasonable risk. Ortiz
v. City of Chicago, 79 Ill. App. 3d 902, 398 N.E.2d 1007,
1012, 35 Ill. Dec. 57 (App. Ct. 1979). A "duty" is an obligation
imposed by the law upon a person which requires
that a person conform to a certain standard of

conduct for the protection of another against an unreasonable
risk. Laflin v. Estate of Mills, 53 Ill. App. 3d 29,
368 N.E.2d 522, 526, 10 Ill. Dec. 927 (App. Ct. 1977).
The question of "duty," the legal obligation imposed upon
one for the benefit of another, is [**14] a question of
law to be determined by the court. Fancil v. Q.S.E.
Foods, Inc., 60 Ill. 2d 552, 328 N.E.2d 538, 540 (1975).
A "duty" in negligence law is an obligation imposed by
the law upon a person which requires that person to conform
to a certain standard of conduct for the protection
of another against an unreasonable risk. The determination
of the question of duty, whether the parties stood in
such a relationship to one another that the law will impose
upon one an obligation of reasonable conduct for
the other's benefit, is an issue of law to be resolved by
the court. Walsh v. A.D. Conner, Inc., 99 Ill. App. 3d
427, 425 N.E.2d 1153, 1156, 54 Ill. Dec. 936 (App. Ct.
1981). "Duty" indicates a mandatory obligation to perform.
See Huey v. King, 220 Tenn. 189, 415 S.W.2d 136,
138 (1967). "Duty" is a question of whether the defendant
is under any obligation for the benefit of the particular
plaintiff. Kay v. Ludwick, 87 Ill. App. 2d 114, 230
N.E.2d 494, 497 (App. Ct. 1967). A "duty" is an obligation
recognized by the law, requiring the actor to conform
to a certain standard of conduct, for the protection
of others against unreasonable risks. Samson v. Saginaw
[**15] Professional Building., Inc., 44 Mich.
App. 658, 205 N.W.2d 833, 835 (Ct. App. 1973), aff'd,
393 Mich. 393, 224 N.W.2d 843 (1975).
From these cases, we glean that "duty" is a question
of law to be determined by the court, that "duty" indicates
a mandatory obligation to protect a particular plaintiff,
that "duty" suggests foreseeability of injury to the
plaintiff, that "duty" acts to protect another against an
unreasonable [*487] risk and that policy considerations
lead the law to say that a particular plaintiff is entitled
to protection against a specific harm caused by a
specific defendant. Quoting Prosser, one of our sister
courts of appeal put the matter of duty this way:
A preeminent scholar-philosopher in the
tort field said:
"* * * The problem of duty
is as broad as the whole
law of negligence, and * *
* no universal test for it
ever has been formulated *
* *. It is imbedded far too
firmly in our law to be
discarded, and no satisfactory
substitute for it, by
which the defendant's re-
742 S.W.2d 482, *; 1987 Tex. App. LEXIS 9202, **
sponsibility may be limited,
has been devised. But
it should be recognized
that duty * * * is not sacrosanct
in itself but only an
expression of the sum total
of those [**16] considerations
of policy which lead
the law to say that the particular
plaintiff is entitled
to protection. * * * No
better general statement
can be made, than that the
courts will find a duty
where, in general, reasonable
men would recognize it
and agree that it exists."
William L. Prosser, Law of Torts, Sec. 53,
3d Ed. 1964.
Page 4
Childs v. Greenville Hospital Authority, 479 S.W.2d
399, 401-02 (Tex. Civ. App. -- Texarkana 1972, writ
ref'd n.r.e.).
Guided by these principles, we decline to impose
upon Target the duty to undertake the entire criminal
investigation necessary to determine if the person presenting
a Texas Instruments Model No. 5040 II calculator
with a broken printer is, indeed, the person sought by
the police for committing a criminal offense. Indeed, we
conclude that the emphasis Eldridge places on full attention
by Target of the minute details of the information in
Target's possession could result in failure to apprehend
the person who stole Price's calculator. Assume that the
culprit removed the all-important receipt from the calculator
before attempting return of the calculator to Target
and sought orally to persuade Target that the calculator
had [**17] been purchased at Target. In that case, with
Target's attention focused upon a calculator with a certain
receipt attached and the amount and date of purchase
showing, Target might not call the police, enabling a
possible criminal to escape arrest. We fail to see how the
all-important police-citizen cooperation necessary in our
society can be enhanced if the citizen agreeing to cooperate
is burdened with a legal duty encompassing an exacting
attention to detail.
It follows, and we so hold, that Target had no duty
to Eldridge to convey all the relevant information it knew
or to convey accurately the relevant information it knew.
Considerations of policy forbid the law to say that Eldridge
is entitled to protection. See Childs, 479 S.W.2d at
401, quoting Prosser. We reason that the investigation

necessary to connect the information provided to Target
with the person presenting the defective calculator was
police work -- not citizens' work. "Investigation" is the
process by which the police acquire the probable cause to
justify the arrest and prosecution of one suspected of
having committed a crime. People v. Orr, 26
Cal.App.3d 849, 103 Cal. Rptr. 266, 272 (Ct. App. 1972).
"Investigate" [**18] means the process of inquiring
into or tracking down through inquiry. Mason v. Peaslee,
173 Cal.App.2d 587, 343 P.2d 805, 808 n.1 (Ct.
App. 1959). "Investigate" means to follow up by patient
inquiry or observation; to inquire and examine with systematic
attention to detail and relation. Mason v. Peaslee,
343 P.2d at 808 n.2.
In the present case, Eldridge did not obtain from
Jones and examine the Corson calculator and receipts
before arresting Corson. Instead, Eldridge asked Jones to
get the calculator and receipts Target had in its possession
and examined the calculator and receipts after he
had arrested Corson. Hence, we conclude that Eldridge
did not follow up by patient inquiry and inquire and examine
with systematic attention to detail and relation.
We conclude further that it was that failure that caused
Eldridge to find himself in the courthouse, not any
breach of a duty owed Eldridge by Target. In this land of
freedom and liberty, with all of its concomitant constitutional
rights and protections, if [*488] we wish to
have our citizen population continue to respect the authority
of police personnel performing their duties in a
lawful manner, it is incumbent [**19] upon law enforcement
officials to make a thorough investigation
and exercise reasonable judgment before invoking the
awesome power of arrest and detention. Moore v. Marketplace
Restaurant, Inc., 754 F.2d 1336, 1346 (7th Cir.
1985). Moreover, in connection with arrests, liability
should be determined on whether or not the defendant
requested or directed the arrest. J. C. Penney Company v.
Reynolds, 329 S.W.2d 104, 106 (Tex. Civ. App. -- El
Paso 1959, writ ref'd n.r.e.). Hence, we conclude further
that the trial court erred in rendering judgment for Eldridge
against Target because Target breached no duty to
Eldridge as a matter of law. We sustain Target's sixth
point of error. As argued, we treat Target's sixth point as
a "no evidence" point. If a no evidence point is sustained,
we render judgment for the appellant. See Garza v. Alviar,
395 S.W.2d 821, 823 (Tex. 1965). In his sole
cross-point, Eldridge contends that the trial court erred in
striking his negligent misrepresentation claim against
Target because Target breached its duty to Eldridge by
failing to accurately convey to him all of the information
it had about Corson. We have held that Target had no
such [**20] duty. Hence, we overrule Eldridge's
cross-point.
742 S.W.2d 482, *; 1987 Tex. App. LEXIS 9202, **
Eldridge's Claim for Indemnity
Page 5
In his cross-claim, Eldridge sought to recover from
Target the attorneys' fees incurred in defending against
Corson's claim. Eldridge contended that he was a "wholly
innocent party" who was brought into this action solely
as a result of the tortious conduct of Target and that he
was, therefore, entitled to judgment over and against
Target, the culpable party, for any recovery against him,
as well as for his expenses of litigation. Thus, in essence,
Eldridge urges a species of indemnity. Hence, Eldridge
insists that after the return of the jury's verdict, which
wholly exonerated Eldridge and found that Target's tortious
conduct was the sole and proximate cause of the
arrest of Corson, the trial court correctly rendered judgment
in Eldridge's favor against Target for the reasonable
attorneys' fees found by the jury.
We conclude, however, that the jury's verdict is not
dispositive of the question of whether Eldridge was a
wholly innocent party who was brought into this action
solely as a result of Target's conduct. The undisputed
evidence reflects that Eldridge was brought into this action
as the [**21] result of Target's attempt to comply
with a police request for information leading to the apprehension
of a person committing a criminal offense.
Here, the police sought information from Target in order
to locate the person stealing from Price a Texas Instruments
calculator, Model No. 5040 II, with a broken
printer. Target acted to provide that information when it
called the police. Consequently, we conclude that Eldridge
was not a wholly innocent party. Instead, we conclude
that Eldridge was brought into this action as a result
of police efforts to arrest a person committing a
criminal offense. Indeed, in the final analysis, Eldridge
came into this action as a result of his failure to make a
thorough investigation before invoking the awesome
power of arrest and detention. See Moore, 754 F.2d at
1346. Therefore, in the present case, Eldridge is not an
innocent party forced to incur costs and expenses, including
attorneys' fees, to be treated as the legal consequences
of some original wrongful act of another and
permitted to be recovered as damages. See Baja Energy,
Inc. v. Ball, 669 S.W.2d 836, 839 (Tex. App. -- Eastland
1984, no writ). (Ball, the innocent party, plugged [**22]
an oil and gas well pursuant to his contract with the operator
of the well. However, the operator failed to notify
Ball that the well had been assigned and that the plugging
contract was, therefore, terminated. The new lessee
then sued the operator and Ball for trespass and conversion.)
Since Eldridge is not a wholly innocent party, we
find no merit in his claim for indemnity.
Reversed and rendered.

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860 S.W.2d 74, *; 1993 Tex. LEXIS 71, **;
36 Tex. Sup. J. 980
LEXSEE 860 SW 2D 74
FIRST TITLE COMPANY OF WACO AND ALAMO TITLE INSURANCE OF
TEXAS, PETITIONERS v. CHARLES GARRETT AND DORINDA GARRETT,
RESPONDENTS
PRIOR HISTORY: [**1] ON APPLICATION
FOR WRIT OF ERROR TO THE COURT OF AP-
PEALS FOR THE TENTH DISTRICT OF TEXAS.
COUNSEL: For PETITIONER: Huddleston, Mr. Michael
W., ATT 010148415, 214/999-2200, Northup, Mr.
R. Michael, ATT 015103250, 214/999-2200, Cooper &
Huddleston, P.C., 2300 Olympia & York Tower, 1999
Bryan Street, Dallas, TX 75201.
For RESPONDENT: White, Mr. Greg, ATT 021329050,
817/753-1777, McGregor, White & Malesovas, P. O.
Box 1709, 425 Austin Avenue, Alico Center, Waco, TX
76703-1709. McSwain, Mr. Andy, ATT 013861100,
817/776-600, Fulbright, Winniford, Bice & Marable,
P.O. Box 7575, Waco, TX 76714-7575.
JUDGES: Spector, Hecht, Phillips, Cornyn, Enoch
OPINIONBY: ROSE SPECTOR
OPINION:
[*75] OPINION
In this cause we consider the circumstances in which
a non-settling defendant, faced with an adverse judgment,
may claim a credit for amounts received by the
plaintiff in settlement of a separate lawsuit. Applying the
"one satisfaction" rule, this court has held that a
non-settling defendant may reduce its liability by the
amount of a settlement entered into by a settling defendant
in the same lawsuit. Stewart Title Guaranty Co. v.
Sterling, 822 S.W.2d 1, 8 (Tex. 1991). Here, the court of
appeals [**2] affirmed a trial court judgment which (1)
found two title companies liable under the Texas Deceptive
Trade Practices -- Consumer Protection Act
("DTPA"), TEX. BUS. & COM. CODE § § 17.41-.63,
and (2) disallowed a settlement credit because these
non-settling defendants had not supplied any evidence
NO. D-0621
SUPREME COURT OF TEXAS
860 S.W.2d 74; 1993 Tex. LEXIS 71; 36 Tex. Sup. J. 980
June 9, 1993, Delivered
Page 1
that the settling parties in a separate lawsuit were joint
tortfeasors. 802 S.W.2d 254, 263. We agree that the defendants
were properly found liable under the DTPA.
However, we also conclude that the record establishes, as
a matter of law, that the settlement payments compensated
a common indivisible injury. Accordingly, we reverse
the judgment of the court of appeals and remand
this cause to the trial court for proceedings consistent
with this opinion.
I.
In September of 1986, Charles and Dorinda Garrett
contracted to purchase nine acres of land from Raymond
Jenkins and James Dameron for use as an automobile
salvage yard. Just over one year earlier, Jenkins and
Dameron had obtained the land by a deed containing a
restrictive covenant; the covenant provided that the land
could not be used for any "noxious or offensive activity,
which by example only, would include junk yard or auto
salvage [**3] yard and all similar activities . . . ."
The Garretts were never told of this covenant, which
clearly prohibited the use for which they intended the
property. The Garretts relied on the representations of
First Title Company of Waco and Alamo Title Insurance
of Texas in finalizing the purchase. First Title Co. conducted
a title search, but failed to discover the restrictive
covenant that was actually listed within their files; Alamo
Title issued a title commitment affirmatively representing
that no restrictive covenants appeared in the
county deed records.
The Garretts finalized the purchase, and began to
prepare the property for use as an auto salvage yard. Alice
Faye Heitkamp Landry, who sold the tract to Jenkins
and Dameron, and out of whose larger holdings the tract
was carved, objected and successfully obtained an injunction
prohibiting the [*76] Garretts from using the
land as an auto salvage yard in violation of the restrictive
covenant.

The Garretts then sued Jenkins and Dameron for
their misrepresentations, and subsequently received $
69,000 in settlement of the claims. n1 On July 19, 1988,
the Garretts filed a separate lawsuit, the one that is the
basis of this appeal, [**4] charging First Title Co. and
Alamo Title with negligence and breach of the DTPA.
The jury found that First Title Co. and Alamo Title
proximately caused injuries to the Garretts, and returned
a verdict in favor of the Garretts for $ 85,500; the jury
was never asked to make any findings with regard to
Jenkins and Dameron, or to make any apportionment of
comparative negligence. In a motion for judgment notwithstanding
the verdict, First Title Co. and Alamo Title
requested that the $ 69,000 settlement with Jenkins and
Dameron be credited against the amount of the judgment.
The trial court overruled the motion.
n1 The terms of the settlement provided that
the Garretts would receive $ 62,000 in cash plus
forgiveness of a $ 7,000 promissory note which
was executed by the Garretts and payable to Jenkins
and Dameron.
After calculating prejudgment interest, the trial court
rendered judgment against First Title Co. and Alamo
Title for $ 101,952.84 plus attorney's fees; there was an
additional award of $ 13,460.85 rendered [**5] against
Alamo Title only. The court of appeals affirmed the trial
court's decisions in all respects. 802 S.W.2d 254. On
motion for rehearing, the court of appeals issued a supplemental
opinion holding that First Title Co. and Alamo
Title were not entitled to a credit based on the collateral
settlement, because they had not met their burden of establishing
that Jenkins and Dameron were joint tortfeasors.
802 S.W.2d at 262-63.
II.
Initially, apart from the settlement credit issue, the
title companies contest the jury's underlying finding of
DTPA liability. The title companies argue that the contract
entered into with the Garretts was one of indemnity,
not of guaranty; so, any incorrect representation as to the
status of the property should subject them to liquidated
damages under the insurance policy, not damages for
misrepresentation under the DTPA. We disagree.
Under Texas law, when a seller makes an affirmative
representation, the law imposes a duty to know
whether that statement is true. See, e.g., Robinson v.
Preston Chrysler-Plymouth, Inc., 633 S.W.2d 500, 502
(Tex. 1982) (discussing the relationship of seller and
buyer). In the context of title insurance, this principle
[**6] requires that a title insurer be held responsible for
an affirmative representation that is the "producing
860 S.W.2d 74, *; 1993 Tex. LEXIS 71, **;
36 Tex. Sup. J. 980
Page 2
cause" of damages to the party purchasing the insurance.
TEX. BUS. & COM. CODE § 17.50(a); see also Weitzel
v. Barnes, 691 S.W.2d 598, 600 (Tex. 1985).
The title commitment contains the following representation
as to the state of the title:
THE POLICY WILL BE SUBJECT TO .
. . THE FOLLOWING MATTERS
WHICH WILL BE ADDITIONAL EX-
CEPTIONS FROM THE COVERAGE
OF THE POLICY:
THE FOLLOWING RESTRICTIVE
COVENANTS OF RECORD ITEMIZED
BELOW . . . (INSERT SPECIFIC RE-
CORDING DATA OR STATE "NONE
OF RECORD"): NONE OF RECORD.
(Emphasis added.) The italicized language clearly represents
that there were no restrictive covenants in the
county deed records. Significantly, this language was
included as part of the title commitment, for the purpose
of making some representation to the parties involved in
the transaction. Indeed, the record includes testimony
from officials in the title companies acknowledging that
purchasers often rely on title companies' assessments of
the state of the title. n2 There is [*77] further testimony
from the Garretts indicating [**7] that they had
expressed their interest in "something in writing" verifying
clear title before purchasing the property. Based on
the evidence in the record, we believe the jury could
properly have found that the Garretts acted reasonably in
viewing the quoted paragraph as a representation of the
state of the property's title, thereby causing the damages
they suffered. n3 The title companies' argument that
there is no evidence to support the jury's findings is
without merit. n4
n2 For example, the direct examination of
John Hugh Johnson, President and Manager of
First Title Co., includes the following exchange:
Q: . . . The commitment also
serves to show the parties to the
transaction what the status of the
public record is with regard to that
property, doesn't it?

[**8]
A: Yes, sir.
Q: And you know that at the time
that you send it out, that people
are going to rely on it?
A: We assume that they could or
they couldn't. You know, they can.
Q: But you know that it's customary
and usual for them to do so,
don't you?
A: Yes.
n3 The dissenting opinion argues that the
policy language amounts to no more than a
promise that "I will pay you damages if there is a
restrictive covenant on your property." ___
S.W.2d at ___. Effectively, however, First Title's
assurance that there were "none of record" was
tantamount to an additional promise: "And further,
there are no restrictive covenants of record
on your property."
n4 Our decision today also comports with the
factually similar case of Great Am. Mortgage Investors
v. Louisville Title Ins. Co., 597 S.W.2d
425 (Tex. Civ. App. -- Fort Worth 1980, writ
ref'd n.r.e.). In that case, the title insurer erroneously
wrote "none" in the space reserved for the
listing of restrictive covenants in the county deed
records. Id. at 428. The court of appeals noted
that these were the appropriate circumstances for
finding an actionable misrepresentation. However,
there was evidence that the party alleging
fraud had actual prior knowledge of the unrevealed
restrictive covenant, and therefore was
held not to be entitled to recovery based on any
alleged reliance on the title insurer's statements.
Nevertheless, the court made clear that "under the
proper circumstances the tort of negligent mis-
860 S.W.2d 74, *; 1993 Tex. LEXIS 71, **;
36 Tex. Sup. J. 980
III.
Page 3
representation can apply to title insurers." Id. at
430.
The title companies also claim relief from liability
because a clause in the title commitment allegedly protects
them from claims such as the Garretts'. The language
of the disclaimer is as follows:
The [**9] policy to be issued pursuant to
this commitment does not guarantee that
the insured property has adequate title to
allow it to be used, sold, transferred,
leased, or mortgaged for any purpose intended
by the purchaser nor will it provide
coverage for possible loss of opportunity
or economic expectation.
In support of their argument, the title
companies analogize the present case to
Stewart Title Guaranty Co. v. Cheatham,
764 S.W.2d 315 (Tex. App.--Texarkana
1988, writ denied), a case also involving a
title company and its ability to disclaim
liability for any reliance by the consumer.
We disagree that Cheatham can be read to
relieve First Title Co. and Alamo Title
from liability.
In Cheatham, the court of appeals
focused on the fact that the title insurance
policy contained specific language explaining
the limited purpose for which the
results of the title company's search efforts
could be used. A portion of the policy
stated:
It is to facilitate preparation
of the necessary instruments,
to point out curative
requirements, if any,
and to show the results of
the Company's title search
(upon which only the
Company may rely). None
of the information contained
[**10] herein,
or the absence of other information,
constitutes a
representation to any party,
other than the Compa-

ny, as to the status of the
title.
Cheatham, 764 S.W.2d at 320 (emphasis
added). Given such clear language, the
court of appeals concluded that the title
report could not serve as the basis of an
actionable representation. The court also
noted that, irrespective of the contractual
language, the evidence in the record established
that the property purchasers had
not even relied on the statements in the title
report. Id. Unlike the title report in
Cheatham, the title report in the present
case contains misrepresentations actually
causing the damages suffered; and neither
First Title Co. nor Alamo Title defined
the title reports as being for a limited
purpose.
As implied by its name, the DTPA's
purpose is "to protect consumers against
false, misleading, and deceptive business
practices." TEX. BUS. & COM. CODE
§ 17.44. Although we decline to disapprove
all contractual caveats against reliance,
we agree with the court of appeals
that when representations are made, a
consumer cannot waive DTPA protection.
See id. § 17.42(a) (stating [*78] that,
absent [**11] affirmative proof by a defendant
that a consumer is not in a significantly
disparate bargaining position, "any
waiver by a consumer of the provisions of
this subchapter is contrary to public policy
and is unenforceable and void"); see
also Hycel, Inc. v. Wittstruck, 690 S.W.2d
914, 922 (Tex. App. -- Waco 1985, writ
dism'd by agr.) (noting that § 17.42 reflects
"the legislature's disapproval of efforts
or ruses designed to avoid liability
under the DTPA"). Accordingly, we hold
that the clause purporting to waive the
Garretts' DTPA protection from affirmative
misrepresentations is invalid.
Absent a valid disclaimer, the Garretts
were entitled to seek damages based
on the title companies' affirmative misrepresentations.
Because there is evidence
supporting the jury's findings that such
representations proximately caused damages
to the Garretts, we will not disturb
the lower courts' rulings on the title companies'
liability.
860 S.W.2d 74, *; 1993 Tex. LEXIS 71, **;
36 Tex. Sup. J. 980
[**13]
IV.
Having determined that the courts
below properly imposed liability on the title
companies, we now address the settlement
credit issue. Texas has four different
contribution schemes; the appropriate
scheme is determined by referring to
the theories of [**12] liability by which
a tortfeasor has been found culpable.
Sterling, 822 S.W.2d at 5 (citing Beech
Aircraft Corp. v. Jinkins, 739 S.W.2d 19,
20 (Tex. 1987)). Because the petitioners
were found to have been negligent and liable
under the DTPA, this cause is governed
by the basic statutory provisions for
contribution, Texas Civil Practice and
Remedies Code sections 32.001-.003, as
expanded by the common law. n5 The
statutes alone do not address the effects of
a partial settlement on the contribution
rights between joint tortfeasors.
n5 The former comparative
negligence statute, Tex. Civ. Prac.
& Rem. Code § § 33.001-.017
(Vernon 1986), amended by Acts
1987, 70th Leg., 1st C.S., ch. 2, §
2.04, applies only to "pure negligence"
cases filed before September
2, 1987. The current comparative
responsibility statute, Tex.
Civ. Prac. & Rem. Code § §
33.001-.016 (Vernon 1992), applies
primarily to cases filed on or
after September 2, 1987, that involve
"pure negligence," strict liability,
and breach of warranty; the
limited exceptions do not apply to
the present case. The common-law
comparative-causation scheme
enunciated by this court in Duncan
v. Cessna Aircraft Co., 665 S.W.2d
414 (Tex. 1984), applies in cases
of strict products liability and
breach of warranty, and does not
apply to DTPA cases. See Sterling,
822 S.W.2d at 6 & nn. 6, 7.
Page 4
As we noted in Sterling, a prevailing party is entitled
to only "one satisfaction" for an injury. Sterling, 822
S.W.2d at 5 (quoting Bradshaw v. Baylor Univ., 84

S.W.2d 703, 705 (Tex. 1935)). That is, when a plaintiff
files suit alleging that multiple tortfeasors are responsible
for the plaintiff's injury, any settlements are to be credited
against the amount for which the liable parties as a
whole are found responsible, but for which only the
non-settling defendant remains in court. The rationale for
this doctrine is that the plaintiff should not receive a
windfall by recovering an amount in court that covers the
plaintiff's entire damages, but to which a settling defendant
has already partially contributed. The plaintiff
would otherwise be recovering an amount greater than
the trier of fact has determined would fully compensate
for the injury. Bradshaw, 84 S.W.2d at 705.
V.
The title companies contend that the lower courts
erred in not recognizing that the Garretts' injury was "indivisible,"
that is, an injury that may have been caused
by distinct actors but is so singular in character as to
render apportionment of fault impossible; each tortfeasor
is said [**14] to have contributed to the whole. The
significance that the title companies attach to such indivisibility
is that if the settling parties are partially responsible
for such an injury, then as a matter of law the
judgment should be reduced by the amount of any settlements
so as to prevent double recovery by the prevailing
plaintiff. See Sterling, 822 S.W.2d at 7-8 (holding
that a settlement credit was appropriate when the settling
parties had contributed to a single indivisible injury suffered
by the plaintiff).
Any party seeking the benefit of a settlement credit
has the burden of establishing that it is entitled to such a
reduction in [*79] the amount of the judgment. See,
e.g., Howard v. General Cable Corp., 674 F.2d 351, 358
(5th Cir. 1982); Hill v. Budget Fin. & Thrift Co., 383
S.W.2d 79, 82 (Tex. Civ. App.--Dallas 1964, no writ).
Here, the title companies have placed into the record the
settlement agreement from the lawsuit involving Jenkins
and Dameron, and the order of dismissal from that case.
The settlement agreement shows that all parties denied
any liability, but there are other statements addressing
the merits of that lawsuit and what the settlement
[**15] was intended to remedy. The agreement establishes
that the Garretts made claims based on "alleged
misrespresentations made by Jenkins and Dameron when
they sold land to the Garretts," whereby the Garretts
sought to recover "money, rescission of the sale of land
and . . . attorney's fees . . . ."
By its terms, the settlement agreement covers the
same injury for which the title companies were found
liable in the present lawsuit: the Garretts obtained a parcel
of land worth less than it was represented to be
worth, and sustained both immediate and consequential
damages stemming from this purchase. Although not
860 S.W.2d 74, *; 1993 Tex. LEXIS 71, **;
36 Tex. Sup. J. 980
Page 5
adjudicated to be joint tortfeasors, the title companies
and the sellers cannot reasonably be said to have caused
separate injuries. Accordingly, because the present cause
and the settlement of the related lawsuit both compensate
an indivisible injury, the title companies are entitled to
offset the final judgment by the amount of the settlement.
Today we reaffirm that the "one satisfaction" rule of
Bradshaw and Sterling prohibits a plaintiff from recovering
twice for a single injury. We therefore reverse the
judgment of the court of appeals and hold that the title
companies [**16] are entitled to a credit of $ 69,000
against the judgment. We remand this cause to the trial
court for proceedings consistent with this opinion.
Rose Spector
Justice
Dissenting opinion by Justice Hecht joined by Chief Justice
Phillips, Justice Cornyn, and Justice Enoch.
OPINION DELIVERED: June 9, 1993
DISSENTBY: NATHAN L. HECHT
DISSENT:
DISSENTING OPINION
If someone says, "there is no restrictive covenant on
your property," when actually there is, the statement is a
misrepresentation. It asserts as fact what is demonstrably
false. But if someone says, "I will pay you damages if
there is a restrictive covenant on your property," that
statement is not a representation that no such covenant
exists; rather, it is a promise that if a covenant does exist,
any resulting harm will be paid for. And if the promise is
kept, the statement was not false but true. The Court does
not appear to grasp the distinction between these two
statements. It treats the promise of insurance as the
equivalent of a statement that no restrictive covenants
exist. Because the distinction is important in the law as
well as this case, I dissent.
In this case, Charles and Dorinda Garrett paid $
[**17] 46,318.20 for a 9.081-acre tract of land on
which they intended to operate an auto wrecking and
salvage yard. The Garretts sought and received from
their sellers assurances that no restrictive covenant on the
property prevented their intended operation. One of the
sellers obtained from First Title Company of Waco the
commitment of its principal, Alamo Title Insurance of
Texas, to issue a policy of title insurance. That commitment
stated:

SCHEDULE B OF THE POLICY OR
POLICIES TO BE ISSUED WILL ALSO
CONTAIN THE FOLLOWING EX-
CLUSIONS AND EXCEPTIONS:
THE POLICY WILL BE SUBJECT TO .
. . THE FOLLOWING MATTERS
WHICH WILL BE ADDITIONAL EX-
CEPTIONS FROM THE COVERAGE
OF THE POLICY:
1. THE FOLLOWING RESTRICTIVE
COVENANTS OF RECORD ITEMIZED
BELOW . . . : NONE OF RECORD
The commitment does not say that there are no restrictive
covenants of record on the property the Garretts proposed
to buy. It says that a title policy will issue which
will not except any restrictive covenants of record. The
statement was true: at the closing of the sale, Alamo Title
issued the Garretts its title insurance policy in accordance
with [*80] its commitment. The Garretts paid
[**18] the premium for the policy.
Documents in First Title's files, which it overlooked,
showed that the Garretts' property was subject to a restrictive
covenant prohibiting the operation of an auto
salvage yard on the property. Shortly after the Garretts
opened their business, a neighboring landowner complained
and eventually obtained an injunction against
their operation. The Garretts sued their sellers and obtained
$ 69,000.00 in settlement of their claims. The
Garretts then brought this suit against Alamo Title and its
agent, First Title. In addition to their claim against Alamo
Title under its policy for the reduction in market value
of the property due to the restrictive covenant, which
the parties stipulate to be $ 4,618.00, the Garretts assert
two other causes of action against both defendants. The
Garretts allege that the title insurance commitment misrepresented
that there were no restrictive covenants on
the property, and that defendants are liable under the
Texas Deceptive Trade Practices and Consumer Protection
Act, TEX. BUS. & COM. CODE § § 17.41-.63
("DTPA"), for damages caused by this misrepresentation.
The Garretts also allege that defendants were negligent
in failing to [**19] disclose the existence of the restrictive
covenant.
Trial was to a jury, which found that the title insurance
commitment represented that the Garretts' property
"had approval, characteristics, uses, benefits, or qualities
860 S.W.2d 74, *; 1993 Tex. LEXIS 71, **;
36 Tex. Sup. J. 980
Page 6
that it did not have", and "was of a particular standard,
quality, or grade, if it was of another". See id. §
17.46(5), (7). The jury also found that First Title was
negligent in failing to discover the restrictive covenant
and disclose it in the commitment. The jury found that
the misrepresentations and negligence caused the Garretts
to sustain damages totaling $ 85,500.00: $ 8,000.00
interest, $ 8,000.00 past mental anguish, $ 30,000.00 lost
profits, and $ 39,500.00 for "the difference between the
current fair market value of the property as improved and
the reasonable amount paid for the property and any
necessary improvements." The trial court rendered
judgment for the Garretts for $ 200,413.69: $ 85,500.00
awarded by the jury, $ 2,000.00 statutory damages under
the DTPA, $ 4,618.00 on the policy, $ 15,000.00 attorney
fees in the suit against the sellers, $ 50,000.00 attorney
fees for trial of this suit, $ 35,000.00 attorney fees
for appeal of this suit, [**20] and $ 16,295.69 prejudgment
interest, less $ 8,000.00 previously paid by
defendants. In sum, for a title defect which reduced the
value of their property by $ 4,618.00, the Garretts recovered
damages, attorney fees, interest and a settlement
totaling $ 277,413.69.
On appeal, defendants contend not only that they are
entitled to a credit on the Garretts' judgment against them
for the $ 69,000.00 recovered from the sellers, but that
they are not liable at all under the DTPA or in negligence.
The court of appeals rejected all defendants' arguments.
Regarding liability for negligence, the court
acknowledged: "Ordinarily, a title insurance company
does not owe a duty to the insured to discover and disclose
a title defect. Stewart Title Guar. Co. v.
Cheatham, 764 S.W.2d 315, 319 (Tex. App.--Texarkana
1988, writ denied)." 802 S.W.2d at 257. Nevertheless, the
court held that a State Board of Insurance rule "places a
duty on the insurer to discover and disclose restrictive
covenants, and creates an exception to the general rule of
no duty to disclose." Id. The court also held that the general
rule does not preclude liability for misrepresentations
under the DTPA:
Thus, a [**21] title insurer can be liable
under the DTPA for affirmatively misrepresenting
that a title defect does not
exist, even if it owes no duty to discover
and disclose the defect. . . . Alamo Title's
misrepresentation, that no restrictive covenants
appeared of record, was actionable
under the DTPA regardless of whether it
owed a duty to disclose the defect to the
Garretts.

Id. at 257-58 (citations omitted). The appeals court affirmed
the trial court's judgment.
I agree with the Court that defendants are entitled to
a credit for the $ 69,000.00 which the Garretts' sellers
paid in settlement. I would also hold, however, that the
Garretts may recover only on their title insurance policy
and not under the DTPA or for negligence.
[*81] The Garretts' DTPA action is based upon
their assertion that the language in the title insurance
commitment which I have quoted above misrepresents
the state of the title to their property. It quite plainly does
not. In fact, it says nothing at all about title to the property.
It contains the words, "none of record" in the same
sentence with the words "restrictive covenants", but the
mere physical proximity of these phrases does not say
that [**22] there are no restrictive covenants of record.
One must read the rest of the sentence. The quoted language
says that a title policy will issue excepting and
excluding no restrictive covenants of record. This statement
(about a future event) was absolutely true: a policy
did issue which excepted no restrictive covenants. The
statement in the commitment misrepresents nothing; to
the contrary, it states exactly what occurred.
The Garretts assert that they were very concerned
about the existence of restrictive covenants on the property,
and that they took from the statement in the title
insurance commitment that no such covenants existed.
There is no reason to question these assertions, but the
Garretts' anxieties and expectations cannot transform a
statement about what will be excluded from a title policy
into a statement about the title of property. The Garretts
may have misunderstood the commitment, but they could
not have been misled by it.
The Court cites testimony of First Title's president to
the effect that it is customary and usual for people to rely
upon a title policy commitment to state the public record
of title. From this testimony the Court concludes that the
purpose of [**23] the commitment is to represent the
status of title to the parties to a transaction. This conclusion
does not follow from the testimony on which it is
based. The reason one may suppose that a title policy
commitment lists restrictions or defects in the title to
property is that the title company has a financial interest
in not insuring against certain contingencies. Since it is
in the title company's interest to list all the exceptions it
will not insure against, one may usually suppose the list
to be complete. That supposition, although entirely reasonable
in most instances, does not transform a statement
about what the title insurance will cover to one about
what the status of title is.
The existence of a restrictive covenant on the Garretts'
property which defendants did not acknowledge
when they issued the title policy does not violate the
860 S.W.2d 74, *; 1993 Tex. LEXIS 71, **;
36 Tex. Sup. J. 980
Page 7
DTPA. If it did, every claim against a title policy would
also be a DTPA claim against the insurer. The purpose of
the policy is to indemnify the insured against the possibility
that there are title defects unrecognized at the time
the policy issues. The policy does not represent that no
defects exist, only that if they do, the insurer will pay
[**24] specified damages. The issuance of a policy that
may require payment of a claim is the purpose of title
insurance; it is not a violation of the DTPA. See
Cheatham, 764 S.W.2d at 318-20.
Of course, this does not mean that title insurers are
immune from liability under the DTPA. They may be
liable under that statute as any other person. Had defendants
told the Garretts that there were no restrictive
covenants of record, they could be liable under the
DTPA for that misrepresentation. But the commitment
does not make that representation, and it is the only
communication the Garretts claim to have had with defendants.
In the circumstances of this case, there is no
evidence that defendants violated the DTPA.
The Garretts also contend, and the jury found, that
defendants were negligent in failing to discover and disclose
the existence of the restrictive covenant. The Court
does not address this contention, which is without merit.
Before the Garretts can recover for negligence, they must
demonstrate that defendants had a duty to discover and
disclose defects in title, which they breached. As the
court of appeals recognized, as a rule, title insurers have
no such duty. There is no reported [**25] decision in
Texas to the contrary. Most recently, in Martinka v.
Commonwealth Land Title Ins. Co. 836 S.W.2d 773,
777-78 (Tex. App.--Houston [1st Dist.] 1992, writ denied),
the court summarized the several cases which have
addressed the issue as follows:
Title insurance is a contract of indemnity.
[Southern Title Guar. Co. v. Prendergast],
494 S.W.2d 154, 158 (Tex. 1973),
aff'g 454 S.W.2d 803 [*82] (Tex. Civ.
App.--Houston [14th Dist.] 1970)]; Tamburine
v. Center Sav. Ass'n, 583 S.W.2d
942, 947 (Tex. Civ. App.--Tyler 1979,
writ ref'd n.r.e.). The relationship between
the parties to the contract is basically limited
to that of indemnitor and indemnitee.
Houston Title Co. v. Ojeda De Toca, 733
S.W.2d 325, 327 (Tex. App.--Houston
[14th Dist.] 1987), rev'd on other grounds
[sub nom. Ojeda de Toca v. Wise], 748
S.W.2d 449 (Tex. 1988), aff'd as modified,
761 S.W.2d 467 (Tex. App. --Houston
[14th Dist.] 1988, no writ); Tamburine,
583 S.W.2d at 947.

A title insurance company is not a title
abstractor and owes no duty to examine
title. See Tamburine, 583 S.W.2d at
947. Further, the only duty a title insurance
company [**26] has to its insured
is to indemnify him against loss suffered
by defects in title; the title insurance
company owes no duty to point out any
outstanding encumbrances. Ojeda De
Toca, 733 S.W.2d at 327, citing Wolff v.
Commercial Standard Ins. Co., 345
S.W.2d 565, 569 (Tex. Civ.
App.--Houston 1961, writ ref'd n.r.e.);
Tamburine, 583 S.W.2d at 947. In other
words, the title insurance company is not
employed to examine title, rather it is employed
only to guarantee the status of title
and to insure against existing defects.
Ojeda De Toca, 733 S.W.2d at 327. As
the court in Tamburine correctly stated:
[The title insurance] company, before issuing
a policy of title insurance, must
necessarily take steps to inform itself of
the status of the title to be insured. In the
search for the information upon which
must depend the decision to either issue or
decline to commit itself to a policy, the
insurance company obviously investigates
the title for its own use and benefit to determine
whether it will undertake the risk.
The title information on which the company
bases its decision relates to the condition
of the title held by the grantor and
is not made [**27] for the prospective
grantee or lienholder to whom the policy
will finally issue.
Tamburine, 583 S.W.2d at 948-49.
Similarly, the court stated in Stone v. Lawyers Title Ins.
Corp., 537 S.W.2d 55, 65 (Tex. Civ. App.--Corpus
Christi 1976), rev'd on other grounds, 554 S.W.2d 183
(Tex. 1977): "No cause of action for negligence exists
against a title company for failure to discover defects in
title prior to the issuance of the title policy. The very
nature of the relationship between the parties precludes
any recovery for negligence."
860 S.W.2d 74, *; 1993 Tex. LEXIS 71, **;
36 Tex. Sup. J. 980
Page 8
Notwithstanding the general rule that title insurers
have no duty to discover and disclose title defects, the
court of appeals found an exception for restrictive covenants
under Rule P-4 of the "Procedural Rules and Definitions"
adopted by the State Board of Insurance pursuant
to 28 TEX. ADMIN. CODE § 9.1 (West 1988). That
rule states in pertinent part: "When the examination [i.e.,
title examination] does not disclose that restrictive covenants
affect the applicable land, lien or estate, the [title
insurance] Company shall indicate "None of Record"
after the restrictive covenant exception prescribed in
policy forms." [**28] This rule imposes no duty of
discovery on title insurers. No examination is mandated,
and no standards for any examination conducted are set.
The rule does require disclosure, but only of the results
of the examination, not of the state of the title. It does not
require the title insurer to state that it has determined that
there are no restrictive covenants of record, only that its
examination has not disclosed such covenants. The court
of appeals' conclusion that Rule P-4 creates a general
duty of discovery and disclosure simply has no support
in the language of the rule. Moreover, defendants in this
case fully complied with Rule P-4. Their examination did
not disclose a restrictive covenant, and accordingly they
indicated "None of Record" after the restrictive covenant
exception in the commitment form, just as the rule required.
Although the law imposes no duty on title insurers
to discover and disclose title defects, they may undertake
such a duty, just as abstractors do. Thus, in Great American
Mortgage Investors v. Louisville Title Ins. Co., 597
S.W.2d 425 (Tex. Civ. App.--Fort Worth 1980, writ ref'd
n.r.e.), the court determined that a title insurer had not
merely failed [**29] to except a deed restriction from
the title policy, but had erroneously stated that [*83]
no restrictions existed. Assuming the accuracy of that
determination (the basis of which is not disclosed in the
court's opinion), the court correctly concluded that the
title company could be liable for its misstatement:
It is well settled that even though one
does not have a duty to act, if one acts
voluntarily, he must do so with due care
and is generally liable for negligence. In
our case whether the title insurer had the
duty to disclose the existence of the deed
restrictions is immaterial because the
[mortgage information letter] and the title
binder actually represented that no deed
restrictions were in existence. Having
made the representation the title insurer is
held to the standard of reasonable care
and may under the proper circumstances

e liable in tort for damages caused by a
negligent misrepresentation. In other
words, under the proper circumstances the
tort of negligent misrepresentation can
apply to title insurers.
Id. at 430. By contrast, defendants in this case made no
such representations.
Persons who undertake to represent the state of title
[**30] to property may be liable for their misrepresentations.
Title abstractors accept this undertaking regularly.
Title insurance companies do not. The purpose of title
insurance is not to describe the state of title but to insure
against a loss in value due to undisclosed defects. To
impose upon title insurers the same responsibility undertaken
by abstractors would be to render title insurance
860 S.W.2d 74, *; 1993 Tex. LEXIS 71, **;
36 Tex. Sup. J. 980
Page 9
useless. Having chosen a title policy, one cannot impose
upon the insurer the same duty an abstractor would have
assumed.
For these reasons, I would reverse the judgment
against First Title and Alamo Title awarding damages for
negligence and under the DTPA. I therefore dissent.
Nathan L. Hecht
Justice
Chief Justice Phillips, Justice Cornyn,
and Justice Enoch join in this Dissenting Opinion
Opinion delivered: June 9, 1993

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LEXSEE 427 SW 2D 595
J. C. Grossenbacher, Jr., Guardian of the Person and Estate of Lillian Bell,
N.C.M., Petitioner v. Maxwell Burket et al., Respondents
PRIOR HISTORY: [**1] From Ward County,
Eighth District
JUDGES: Jack Pope, Associate Justice.
OPINION BY: POPE
OPINION
[*595] The court of civil appeals, on its own motion,
dismissed the appeal because it regarded the judgment
of the trial court as interlocutory in nature rather
than a final judgment. Burket v. Delaware Drilling
[*596] Corp. 419 S.W.2d 229. We reverse that court's
judgment of dismissal and remand the cause to the intermediate
court for reinstatement upon the docket and
for disposition upon the merits of the appeal.
Delaware Drilling Corporation and others instituted
this action against Maxwell Burket and others in the nature
of a trespass to try title action to establish the ownership
of the working interest in an oil and gas lease upon
a twenty-acre tract of land in Loving County. As disclosed
by the opinion of the court of civil appeals, there
were extensive pleadings, a number of additional parties
plaintiff and defendant were added by amended pleadings,
and several parties intervened. The trial court rendered
a judgment upon a jury verdict that title to the disputed
property was vested in the estate of Lillian Bell,
non compos mentis, one of the intervenors. The court of
civil [**2] appeals was of the opinion that the judgment
was not final and appealable. Art. 2249, Vern. Tex. Civ.
Stats. Both petitioners and respondents, by motions for
rehearing in that court, urged that the claims of all parties
were adjudicated by the judgment. We need to discuss
No. B-565
Supreme Court of Texas
427 S.W.2d 595; 1968 Tex. LEXIS 268; 11 Tex. Sup. J. 387
April 24, 1968
Page 1
only those parties the court of civil appeals thought were
not disposed of by the trial court's judgment.
The estate of Lillian Bell, non compos mentis,
through Marion J. Borchers, as guardian ad litem, intervened
to establish its ownership of the property in suit. It
asserted ownership against both the plaintiffs and the
defendants. Borchers was succeeded as the representative
of that estate by J. C. Grossenbacher, Jr., who intervened
as guardian of the person and estate of Lillian Bell, non
compos mentis. The opinion of the intermediate court
suggests that this is one of the intervenors who was not
disposed of by the judgment. It arrives at that conclusion
because Grossenbacher, on behalf of the estate, moved
for a separate trial of certain issues which the Lillian Bell
estate asserted against both the plaintiffs and the defendants.
The trial court judgment contains recitals that
there was a severance of the issues [**3] between the
plaintiffs and intervenors, but then specifically states that
the Lillian Bell estate effected a settlement with named
parties, which settlement the court approved as being in
the best interest of the parties. The intermediate court
overlooked the decretal portions of the judgment which,
after describing the land in dispute, adjudged legal title
to "be and such title is here ordered vested in and to the
Estate of Lillian Bell, N.C.M. to the exclusion of all other
persons, firms or corporations." The judgment fully
adjudicated this intervenor's rights against all the parties.
Lorene Offer intervened as next friend of her minor
son, Russell Bell, Jr., and Russell A. Bell, Sr. intervened
on his own behalf. The intermediate court also overlooked
the portions of the trial court's judgment which
adjudicated their rights in these words: "And it further
appearing that the claims of Russell Bell, Jr., by and
through Lorene Offer, as next friend; and Russell Bell,
Sr. . . . in and to the hereinabove described properties,

have been compromised, settled and agreed upon . . . .
And the Court having been apprised of such settlement
agreement and being of the opinion that it is to the [**4]
best interest of the parties and should be in all things
approved. It is further ordered, adjudged and decreed that
Russell Bell, Jr., (by and through Lorene Offer as next
friend) . . . and Russell Bell, Sr., shall take nothing by
virtue of this judgment." Hence, the judgment finally
disposed of the claims of those two intervenors.
The intermediate court says that Russell Wine, receiver
of the plaintiff Delaware Drilling Corporation,
also intervened. We are unable to find either a plea or an
order for such an intervention. We do find that after
Delaware Drilling Corporation sued as plaintiff, one of
the cross-plaintiffs named defendant Delaware Drilling
Corporation, as well as "pro forma [*597] its Receiver,
Russell Wine," as cross-defendants. The trial court
disposed of Delaware and its receiver by its judgment
that Delaware take nothing in its action; its judgment that
the cross-plaintiffs, naming each of them, take nothing;
and its judgment in favor of the estate of Lillian Bell that
it recover title to the property in suit "to the exclusion of
all other persons, firms or corporations."
The trial court's judgment shows that each of the interventions
was separately tried or [**5] settled, and
each one was finally disposed of by one final judgment.
Sterett v. Dyer, 230 S.W.2d 461 (Tex. Civ. App. 1950,
writ ref.) is cited and relied upon by the intermediate
court for its order of dismissal. In that case a number of
issues remained for trial, and the judgment was interlocutory.
All of the parties and issues were disposed of by
the trial court in this case.
The intermediate court mentions three other parties
in its opinion, and may have been under the impression
that the judgment should have made some adjudication
of their rights. James Wheat, Eloise Wheat Moorhead
and R. C. Moorhead were named as defendants, but the
trial court severed the cause asserted against them and
gave that action a separate docket number. Those parties
and their claims went out of the case because of the order
of severance. We construe the trial court's judgment as
one which adjudicated the rights of all the parties and all
of the issues which the court had ordered to be tried separately.
Pan American Petroleum Corp. v. Texas Pacific
Coal & Oil Co., 159 Tex. 550, 324 S.W.2d 200 (1959);
Hall, Severance and Separate Trials in Texas, 36 Tex. L.
Rev. 339.
The trial court's judgment was final [**6] as to all
parties and issues and was appealable. The judgment of
the court of civil appeals is reversed and the cause is
ordered reinstated upon the docket of that court for disposition
upon its merits. North East Independent School
District v. Aldridge, 400 S.W.2d 893, 898 (Tex. 1966).

LEXSEE 977 SW 2D 403
GXG, INC., Appellant, v. TEXACAL OIL & GAS AND TED O'CONNOR, Appellees.
NUMBER 13-96-368-CV
COURT OF APPEALS OF TEXAS, THIRTEENTH DISTRICT, CORPUS
CHRISTI
977 S.W.2d 403; 1998 Tex. App. LEXIS 3754; 140 Oil & Gas Rep. 278
SUBSEQUENT HISTORY: [**1] Rehearing
Denied August 27, 1998.
PRIOR HISTORY: On appeal from the 36th District
Court of San Patricio County, Texas.
DISPOSITION: As reformed and modified, judgment
affirmed.
COUNSEL: FOR APPELLANT: Craig P. Henerson,
William L. Wolf, P.C., William L. Wolf, Attorney at
Law, Michael A. Dover, Attorney at Law, Dallas, TX.
FOR APPELLEES: Robert L. Joseph, Joseph & Whatley,
Attorneys at Law, Sinton, TX.
JUDGES: Before Chief Justice Seerden and Justices
Hinojosa and Chavez. Opinion by Justice Hinojosa.
OPINION BY: FEDERICO G. HINOJOSA
OPINION
[*406] OPINION
Opinion by Justice Hinojosa
This dispute arose from a conveyance of real and
personal property interests. After appellee, Texacal Oil &
Gas ("Texacal"), failed to make scheduled payments on a
promissory note, appellant, GXG, Inc. ("GXG"), sought
to foreclose on the properties. Texacal sued, seeking to
block foreclosure on the properties, cancellation of the
deed of trust and promissory note, abatement of the purchase
price, quieting of title, and damages. GXG coun-
June 18, 1998, Opinion Delivered
June 18, 1998, Opinion Filed
Page 1
terclaimed against Texacal and instituted a third-party
action against appellee, Ted O'Connor ("O'Connor"),
Texacal's president. GXG sought damages for Texacal's
non-payment of the promissory note, fraud, and civil
conspiracy. GXG also asked the trial court to impose a
constructive trust and reform the note and deed of trust.
A jury found that: (1) GXG did not convey the properties
it promised to convey to Texacal, thereby excusing
Texacal's performance, (2) Texacal [**2] sustained
damages, (3) appellees did not commit or conspire to
commit fraud on GXG, (4) Texacal owed $ 13,200 to
GXG on the outstanding promissory note, and (5) there
was no mistake necessitating reformation of the deed of
trust.
The trial court disregarded the jury's findings on the
balance due on the promissory note, some of Texacal's
damages, and no mistake necessitating reformation of the
deed of trust. The trial court rendered judgment in favor
of GXG for $ 81,284.34 for the unpaid promissory note,
reformed the deed of trust to include all of the properties
conveyed, imposed an implied vendor's lien on all of the
properties, and ordered foreclosure on the properties. The
trial court ordered that GXG take-nothing against
O'Connor.
By thirteen points of error, GXG complains the trial
court erred by overruling its motions for judgment non
obstante veredicto and new trial, by refusing to allow it
to present relevant evidence, and by improperly calculating
the balance due on the promissory note. By two
cross-points, appellees, Texacal and O'Connor, contend
the trial court erred in disregarding the jury's findings
because there is sufficient legal and factual evidence to

support [**3] them. We reform and modify the judgment
and, as reformed and modified, affirm.
1. Background Facts
GXG, Inc., a Texas corporation formed in 1988,
owned and operated various oil and gas properties in
south Texas ("South Texas properties"). The company is
owned by [*407] Gwen Knox and her two daughters.
Knox is GXG's president. Brad Gatlin was Knox's financial
advisor and an officer of GXG.
Besides the GXG properties, Knox also had legal
and beneficial ownership interests in other oil and gas
properties held in family trusts. She individually held an
interest in the Yates Petroleum Company ("Yates properties")
in New Mexico and was sole beneficiary of a family
trust, the Gwendolyn Knox Schmaling Trust (the
"Schmaling Trust"), containing oil and gas interests. She
shared an equal beneficiary interest with her brother,
Jack Knox, and sister, T.K. Helm, in two other family
trusts, the T.B. Knox Trust ("the TBK Trust") and the
E.D. Dill Trust ("the Dill Trust"), comprised of several
types of property, including stocks and oil and gas interests.
In 1991, all of the trusts were terminated and the
assets distributed to the beneficiaries. Knox received
100% of the oil and gas properties of the [**4] Schmaling
Trust. Knox, her brother, and sister each received
one-third of the oil and gas properties in the TBK Trust
and Dill Trust. Knox's share of the Schmaling, TBK, and
Dill Trusts will hereafter be referred to collectively as the
"Knox trust properties."
Ted O'Connor was a mortgage broker in Newport
Beach, California. Gatlin and O'Connor had been acquainted
since 1980, but were not frequently or regularly
in touch. In late 1990 or early 1991, Gatlin contacted
O'Connor to discuss a business proposition. Gatlin informed
O'Connor that he "ran GXG," and that GXG's
owners wanted to sell their oil and gas interests. Gatlin
told O'Connor that, in addition to the GXG properties,
Knox would be receiving oil and gas leases from the
settlements of family trusts in 1991, and that these would
also be included in the sale. Gatlin and O'Connor agreed
that the price of the GXG lands would be $ 500,000, and
the Knox trust properties $ 550,000. After reaching
agreement on the price, O'Connor decided to form a
company, Texacal Oil & Gas, Inc., which would acquire
both GXG's and Knox's properties. Gatlin became a director,
vice-president in charge of managing production,
and registered agent of [**5] Texacal. Gatlin also became
a shareholder with a 20% interest in Texacal. The
shares had no par value and Gatlin did not invest any
capital in exchange for the shares.
During negotiations for the sale of GXG's properties
to Texacal, Gatlin informed Texacal that he was a
vice-president of GXG and ran all of the company's operations.
He also disclosed his continuing status as
Knox's financial advisor. However, Gatlin did not inform
Texacal that some of the oil and gas leases and equipment
involved in the negotiations were, in fact, his property
rather than GXG's or Knox's. Gatlin did not inform
GXG or Knox of his status as an officer, director, and
registered agent of Texacal.
Prior to the closing of the transaction, Texacal engaged
Robert Dougherty to perform a study on the oil
and gas reserves of the properties Texacal expected to
receive. Dougherty, who had previously performed work
for GXG, was designated as Texacal's production superintendent
when Texacal was first formed.
On April 9, 1991, GXG agreed to sell Texacal the
South Texas properties and
Knox's trust interests. The purchase price for all of
the properties was $ 1,050,000. The written, executed
agreement provided [**6] for Texacal to pay $ 500,000
in cash and to execute a promissory note for $ 550,000,
secured by a deed of trust which encumbered selected
portions, but not all, of the Knox trust and South Texas
properties.
At the closing, Texacal received the assignment for
the South Texas properties. As Knox did not yet have
possession of the Knox trust properties, the note and
deed of trust were placed in escrow with Equitable Bank
in Dallas, until the balance of the properties was conveyed.
Upon notification, in July 1991, that the remaining
assignments had been prepared, Texacal authorized
Equitable Bank to release the note and deed of trust to
GXG.
After receiving the assignment papers, Texacal discovered
that only a one-third interest in the Knox trust
properties had been conveyed. This discovery led to a
falling out between Gatlin and O'Connor, when Gatlin
failed to explain why GXG's conveyance was deficient.
Gatlin resigned as a director and officer of Texacal and
declared his intention [*408] to tender his shares in
October 1991. Texacal never paid Gatlin compensation
for his services as vice-president or director and the
shares had no redeemable value. Because Gatlin never
returned the stock [**7] certificate, he remained a
stockholder until early 1994, when Texacal's board of
directors struck the shares off the company's books.
Knox discovered that Gatlin, who had been her personal
financial manager since 1987, had misrepresented
his qualifications as a financial advisor, committed numerous
acts of fraud in managing her personal and business
affairs, and had been rifling her bank accounts, including
misappropriating the cash paid by Texacal. She
sued Gatlin in Dallas, and the case was settled for $

500,000. Gatlin is not a party to the instant suit and did
not appear as a witness.
2. Choice of Law: Texas or California
At the trial on the matters before us, GXG elicited
from Texacal's witnesses and from O'Connor a significant
amount of testimony concerning the provisions and
effects of California law on the issues. In its appellate
brief, GXG emphasizes portions of this testimony in
support of its arguments. Because the contract does not
specify which state's law controls, Texas courts must
look to the principles enunciated in the Restatement
(Second) of Conflict of Laws (1971) to decide which
state's law should govern contractual rights and obligations.
Maxus Exploration [**8] Co. v. Moran Bros.,
Inc., 817 S.W.2d 50, 53 (Tex. 1991). The general rule of
section 188 of the Restatement 1 controls our analysis.
See id.; see also DeSantis v. Wackenhut Corp., 793
S.W.2d 670, 677-78 (Tex. 1990). Under that rule, "the
rights and duties of the parties with respect to an issue in
contract are determined by the local law of the state
which, with respect to that issue, has the most significant
relationship to the transaction and the parties under the
principles stated in § 6." 2 RESTATEMENT (SECOND)
OF CONFLICTS OF LAWS § 188(1) (1971).
[**9]
1 Section 188 provides, in relevant part, as follows:
In the absence of an effective choice of law
by the parties . . ., the contacts to be taken into
account in applying the principles of § 6 to determine
the law applicable to an issue include:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the
contract, and
(e) the domicile, residence, nationality, place
of incorporation and place of business of the parties.
RESTATEMENT (SECOND) OF CON-
FLICTS OF LAWS § 188(2) (1971).
2 Section 6, entitled "Choice-of-Law Principles,"
provides:
(1) A court, subject to constitutional restrictions,
will follow a statutory directive of its
own state on choice of law.
(2) When there is no such directive, the factors
relevant to the choice of the applicable rule
of law include:
(a) the needs of the interstate and international
systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested
states and the relative interests of those states in
the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular
field of law,
(f) certainty, predictability and uniformity of
result, and
(g) ease in the determination and application
of the law to be applied.
Id. § 6.
We conclude this case has only tenuous ties to California.
Ted O'Connor is a resident of California. Most, if
not all, of Texacal's investors reside in California. However,
Texacal is a corporation organized under Texas
law, registered and operating in Texas. It has a Texas
[**10] mailing address, and its registered agent, Henry
Harding, is a Texas resident. GXG is also a Texas corporation.
Knox is a Texas resident. The bulk of negotiations
took place either in Texas or by telephone between
Texas and California. Although there is a dispute as to
where the contract, note, and deed of trust at issue were
drafted, they were executed in Texas, and performance
was to take place in Texas. Almost all of the oil and gas
properties concerned, with the exception of a field in
New Mexico, are located in Texas.
We hold that California law is neither controlling
nor guiding in this case. Evidence and arguments based
on what would be appropriate [*409] or legal under
California law will not be considered.
3. Denial of Motion for Judgment Non Obstante Veredicto
By its first and second points of error, GXG contends
the trial court erred in denying its motion for
judgment non obstante veredicto because its counterclaims
and third-party claims were established as a matter
of law. A judgment non obstante veredicto is proper
only if there is no evidence to support the jury's findings
and if the issue is conclusively established as a matter of
law. Mancorp, Inc. v. Culpepper, [**11] 802 S.W.2d
226, 227 (Tex. 1990); Burns v. Resolution Trust Corp.,
880 S.W.2d 149, 151 (Tex. App.--Houston [14th Dist.]

1994, no writ); Crosbyton Seed Co. v. Mechura Farms,
875 S.W.2d 353, 363 (Tex. App.--Corpus Christi 1994,
no writ). Usually, in reviewing the denial of such a motion,
we use a "no evidence" standard with respect to the
jury's findings and view the evidence in the light most
favorable to the nonmovant, rejecting unfavorable evidence
and inferences. Crosbyton Seed Co., 875 S.W.2d
at 363; see Navarette v. Temple Indep. Sch. Dist., 706
S.W.2d 308, 309 (Tex. 1986); Gregorcyk v. Al Hogan
Builder, Inc., 884 S.W.2d 523, 525 (Tex. App.--Corpus
Christi 1994, writ denied); Kelly v. Diocese of Corpus
Christi, 832 S.W.2d 88, 90 (Tex. App.--Corpus Christi
1992, writ dism'd w.o.j.). In a situation such as this,
where the moving party contends that its counterclaims
and third-party claims are established as a matter of law,
we review the record for evidence which, if believed,
negates an element of the counterclaim or establishes the
complete absence of proof of an element. If there is some
probative evidence supporting the verdict, we must affirm
the trial [**12] court's denial of the motion.
Crosbyton Seed Co., 875 S.W.2d at 363.
GXG contends it was entitled to judgment non obstante
veredicto because it proved Texacal committed
fraud upon GXG, and O'Connor committed or conspired
with Gatlin to commit fraud upon GXG.
The questions submitted to the jury asked simply,
"Did Texacal Oil & Gas, Inc. commit fraud against
GXG, Inc.?" and "Did Ted O'Connor commit fraud or
conspire to commit fraud with Brad Gatlin against GXG,
Inc.?" The jury was given several definitions of fraud.
One definition covered a situation where a party knowingly
misrepresented a past or existing material fact or
recklessly made a positive assertion without any
knowledge of the truth with the intention of inducing
reliance which resulted in damage to the other party.
DeSantis, 793 S.W.2d at 688; Stone v. Lawyers Title Ins.
Corp., 554 S.W.2d 183, 185 (Tex. 1977); Garner v. Corpus
Christi Nat. Bank, 944 S.W.2d 469, 477 (Tex.
App.--Corpus Christi 1997, writ denied). Another definition
encompassed a situation where a party conceals or
fails to disclose a material fact with the intent to induce
another party to take some action, and the party knows
the relying [**13] party is both ignorant of the concealed
fact and lacks an equal opportunity to discover the
truth. Formosa Plastics Corp., USA v. Presidio Eng'rs
& Contractors, Inc., 941 S.W.2d 138, 144 (Tex.
App.--Corpus Christi 1995), rev'd on other grounds,
1997 Tex. LEXIS 65, 1997 WL 378129 (Tex. 1997); New
Process Steel Corp. v. Steel Corp., 703 S.W.2d 209, 214
(Tex. App.--Houston [1st Dist.] 1985, writ ref'd n.r.e.);
see also Custom Leasing, Inc. v. Texas Bank & Trust
Co., 516 S.W.2d 138, 142 (Tex. 1974). The jury charge
also defined fraud as falsely promising to act without
intention of keeping the promise in order to induce a
party relying on the promise to enter into a contract.
TEX. BUS. & COM. CODE ANN. § 27.01(a) (Vernon
1987) (fraudulent misrepresentations made in real estate
and stock transactions). The definitions were identical
for each question. No instructions or definitions concerning
the relationship between principal and agent
were provided. The jury found that neither Texacal nor
O'Connor committed fraud.
GXG alleged Gatlin acted as a dual agent, and
Texacal and O'Connor fraudulently concealed the dual
agency and Gatlin's interest in Texacal as a shareholder,
director, officer, [**14] and registered agent. In this
case, Gatlin was expressly authorized to act as an agent
for GXG. Texacal never denied GXG's assertions that
Gatlin was its agent as well. There is no dispute that Gatlin
made misrepresentations [*410] and failed to disclose
information to GXG. GXG claims that it has the
right to recover from Texacal and O'Connor for those
misrepresentations.
Double agency normally requires the fully informed
consent of both principals. Armstrong v. O'Brien, 83
Tex. 635, 19 S.W. 268, 274 (1892); Grundmeyer v.
McFadin, 537 S.W.2d 764, 772 (Tex. Civ. App.--Tyler
1976, writ ref'd n.r.e.). However, a principal may not
generally recover from another on the basis of a misrepresentation
made to him by his own agent. Traylor v.
Gray, 547 S.W.2d 644, 651 (Tex. Civ. App.--Corpus
Christi 1977, writ ref'd n.r.e.); Kunkel v. Poe Land &
Devel. Co., 393 S.W.2d 191, 196 (Tex. Civ.
App.--Corpus Christi 1965, no writ). One principal of a
dual agent may be liable to the other principal for the
tortious acts of the dual agent only if he or she is in some
manner directly connected with the agent's wrongdoing.
See Rich v. McMullan, 506 S.W.2d 745, 749 (Tex. Civ.
App.--San Antonio [**15] 1974, writ ref'd n.r.e.); see
also United Ass'n of Journeymen & Apprentices of
Plumbing & Pipe Fitting Indus. of U.S. & Canada v.
Borden, 160 Tex. 203, 328 S.W.2d 739, 744 (1959). A
third person who knowingly participates in an agent's
breach of his duty of a fiduciary, becomes a joint tortfeasor
and is equally liable with the agent. See Kinzbach
Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160
S.W.2d 509, 514 (1942). Based on these precedents, we
conclude that knowledge of a dual agent's fraudulent
conduct towards one principal is not automatically imputed
to the other principal. The evidence must demonstrate
an affirmative link, not mere suspicion.
A review of the record reveals no evidence of any
misrepresentations or omissions chargeable to Texacal or
O'Connor. Knox recited numerous acts of fraud perpetrated
by Gatlin as her financial advisor. Lengthy
tape-recorded conversations between Knox and Gatlin
were played for the jury. In talking with Knox, Gatlin
never once implicated Texacal or O'Connor in any of his

activities. Tape-recorded conversations with O'Connor
likewise reveal no knowledge of or participation in any
misrepresentations made by Gatlin. On the contrary,
[**16] they reveal that Gatlin made material misrepresentations
to O'Connor. 3
3 Excerpts from several telephone conversations
between Ted O'Connor and Gwen Knox,
tape recorded by Knox without O'Connor's
knowledge, contain statements and queries by
O'Connor concerning Brad Gatlin's misrepresentations
to O'Connor. In one conversation,
O'Connor and Knox are apparently discussing
assembling evidence of Gatlin's frauds upon both
parties for presentation to the District Attorney.
Knox repeatedly admitted having no knowledge
whatsoever of any involvement on the part of Texacal or
O'Connor in Gatlin's shenanigans. She was unable to cite
even one instance of wrongdoing by O'Connor or
Texacal. GXG presented no evidence showing that
Texacal or O'Connor were aware of or encouraged any of
Gatlin's misrepresentations or failures to make disclosures.
Knox simply maintained that because O'Connor
and Gatlin were associated, O'Connor must have known
of and participated in Gatlin's schemes.
Knox acknowledged that Texacal and O'Connor
[**17] had not prevented her or GXG from having legal
counsel draft or approve any of the documents or represent
her at the closing. O'Connor testified that the contract,
promissory note, and deed of trust had been drafted
by Knox's attorneys in Dallas then forwarded to him for
review. Knox could not say who prepared them, only that
she believed it had been done in California by Texacal's
lawyers.
Knox further admitted that she trusted Gatlin to
handle all negotiations for GXG and figure out a good
price for the properties. Although she saw the contract
and possibly other papers before the closing, she did not
bother to read them thoroughly or ask many questions
about them. Knox never testified that Gatlin prevented
her from reading the contract, the note, or the deed of
trust. As a rule, she said, she signed documents presented
by Gatlin without reading them and, thus, could not testify
as to the contents. Knox was present at the closing
and signed the documents but admittedly did not take
time to read them.
[*411] We have previously held that a party who
signs a contract is charged with notice of its contents as a
matter of law. D. Wilson Const. Co., Inc. v. McAllen Indep.
Sch. Dist., 848 [**18] S.W.2d 226, 229-30 (Tex.
App.--Corpus Christi 1992, writ dism'd w.o.j.); Estate of
Degley v. Vega, 797 S.W.2d 299, 304 (Tex.
App.--Corpus Christi 1990, no writ); see also G-W-L,
Inc. v. Robichaux, 643 S.W.2d 392, 393 (Tex. 1982) (parties
to a contract have an obligation to protect themselves
by reading what they sign), overruled on other grounds,
Melody Home Mfg. Co. v. Barnes, 741 S.W.2d 349 (Tex.
1982); Thigpen v. Locke, 363 S.W.2d 247, 254 (Tex.
1962).
GXG points to the disclosure paragraph in the contract
as the fundamental evidence of fraud. GXG claims
this proves it had no knowledge of the agency or Gatlin's
conflict of interests and, "as a matter of law [proved] that
Knox relied upon Texacal's and O'Connor's representations
as to Gatlin's relationship with Texacal." Paragraph
V (A)(3) of the contract states as follows:
Buyer and Seller hereby acknowledge a pre-existing
relationship by and between the President of GXG, Inc.
(Gwen Knox), the President of Texacal Oil & Gas, Inc.
(Ted O'Connor), and Brad Gatlin. Buyer and Seller agree
that the purchase of mineral interest contemplated herein
is for the mutual benefits of each corporation. Buyer and
Seller [**19] acknowledge no commissions or finders'
fee, or any cash settlement has been or will be incurred
for Brad Gatlin. Buyer and Seller shall hereby defend,
indemnify, save and hold harmless Brad Gatlin for the
transactions contemplated herein, past, present and future.
Seller further acknowledges its understanding of
Buyer's intent to employ Brad Gatlin in connection with
the management and/or operation of all, or a portion of
the lease interests conveyed hereunder and expressly
waives any and all claim(s) Seller may have as against
Buyer or Brad Gatlin in any way connected with such
employment.
The paragraph does not detail the nature and the extent
of the relationships between the people and entities
named. GXG complains that it fails to mention Gatlin's
status as officer, director, registered agent, and shareholder
of Texacal and further fails to disclose that Gatlin
acted as a dual agent. We note that it likewise fails to
mention Gatlin's status as an officer of GXG and as
Knox's financial advisor. Knox's testimony does not reflect
that she informed Texacal or O'Connor of Gatlin's
status or knew whether Gatlin had made such disclosures.
Knox admitted seeing the disclosure paragraph
[**20] before the closing. The paragraph clearly reveals
that Gatlin had accepted an offer of employment with
Texacal, impliedly contingent on the successful closing
of the deal. This produces an obvious conflict of interest
on the part of Gatlin, GXG's agent. Despite knowing of
the conflict of interest, GXG did not terminate the agency
and failed to oversee or review Gatlin's actions, disregarding
the temptation of self-interest and opportunity
for disloyalty.

Dennis Delahanty, a California attorney who was
present at the closing, recalled a discussion in Knox's
presence about Gatlin's interests in Texacal, including
ownership and management interests. Although Delahanty
could not remember the specifics, he stated unequivocally
that no attempt was made to keep the information
from Knox. Knox, on the other hand, insisted she
had no knowledge of Gatlin's interests. No other witnesses
testified about what was discussed concerning
Gatlin at the closing.
As the trier of fact, the jury is the sole judge of the
credibility of witnesses and the weight to be given their
testimony. L & F Distrib. v. Cruz, 941 S.W.2d 274, 281
(Tex. App.--Corpus Christi 1996, writ denied); Silva v.
Enz, 853 [**21] S.W.2d 815, 817 (Tex. App.--Corpus
Christi 1993, writ denied). In resolving contradictions
and conflicts, the jury may choose to believe all, part, or
none of the testimony of any witness in arriving at the
finding which it concludes is the most reasonable under
the evidence. L & F Distrib., 941 S.W.2d at 281; Silva,
853 S.W.2d at 817. The jury reasonably may have chosen
to believe Knox learned of Gatlin's interests from the
conversation among those present at the closing.
Knox certainly knew that Gatlin had an ownership
interest in Texacal sometime [*412] before June 1992.
4 She also knew that some of the properties included in
the conveyance to Texacal belonged to Gatlin rather than
herself or GXG. Despite this knowledge, she accepted a
payment directly from Texacal in May 1992, and from
January to July 1993, accepted payments from Mesa Oil,
which were assigned to GXG by Texacal. By continuing
to accept funds after learning of her former agent's interest
in Texacal, and the properties Texacal acquired,
GXG, as a matter of law, affirmed the contract and
waived any recovery under a theory of fraud. Daniel v.
Goesl, 161 Tex. 490, 341 S.W.2d 892, 895 (Tex. 1960)
(party who became [**22] aware of fraudulent inducement
after entering into contract but received and accepted
benefits in spite of knowledge acquired, thereby
affirmed contract and was bound by its terms); Wise v.
Pena, 552 S.W.2d 196, 200 (Tex. Civ. App.--Corpus
Christi 1977, writ dism'd w.o.j.) (if defrauded party ratifies
agreement, any right of recission or damages is
waived); see Rosenbaum v. Texas Bldg. & Mortgage Co.,
140 Tex. 325, 167 S.W.2d 506, 508 (1943); Newsom v.
Starkey, 541 S.W.2d 468, 472 (Tex. Civ. App.--Dallas,
writ ref'd n.r.e.) (acceptance of payments after learning
agent was a principal resulted in waiver).
4 In a tape-recorded conversation with Ted
O'Connor on June 3, 1992, Gwen Knox brings up
the subject of Gatlin's interest in Texacal. The
precise date she acquired this knowledge is unknown.
GXG also contends that O'Connor conspired with
Gatlin to defraud GXG. The jury was not instructed on
the elements of conspiracy to commit fraud. When a
party does not submit to the trial court requested definitions
[**23] and instructions in substantially correct
form, the party waives error. Downen v. Texas Gulf
Shrimp Co., 846 S.W.2d 506, 508 (Tex. App.--Corpus
Christi 1993, writ denied); National Fire Ins. Co. v.
Valero Energy Corp., 777 S.W.2d 501, 507-08 (Tex.
App.--Corpus Christi 1989, writ denied); see TEX. R.
CIV. P. 274. GXG raised no objections to the submission
of the question despite the omission, thereby waiving the
error. See TEX. R. CIV. P. 273, 274, 278; see also Russell
v. City of Bryan, 919 S.W.2d 698, 707 (Tex.
App.--Houston [14th Dist.] 1996, writ denied).
After reviewing the record, we conclude there is
ample evidence to support the jury's finding that neither
Texacal nor O'Connor committed fraud. We hold the trial
court properly denied GXG's motion for judgment non
obstante veredicto. Accordingly, GXG's first and second
points of error are overruled.
4. Denial of Motion for New Trial
By its third and fourth points of error, GXG contends
the trial court erred in overruling its motion for
new trial because the jury's findings that Texacal did not
commit fraud upon GXG and that O'Connor did not
commit or conspire to commit fraud upon GXG were
against [**24] the great weight and preponderance of
the evidence.
A trial court has broad discretion to deny a motion
for new trial, and this denial will not be disturbed on
appeal absent an abuse of that discretion. Strackbein v.
Prewitt, 671 S.W.2d 37, 38 (Tex. 1984); Moya v. Lozano,
921 S.W.2d 296, 298 (Tex. App.--Corpus Christi 1996,
no writ). An appellate court may reverse a trial court for
abuse of discretion only if, after searching the record, it
is clear that the trial court's decision was arbitrary and
unreasonable. Simon v. York Crane & Rigging Co., 739
S.W.2d 793, 795 (Tex. 1987); Brown v. Hopkins, 921
S.W.2d 306, 311 (Tex. App.--Corpus Christi 1996, no
writ).
GXG's arguments do not focus on the trial court's
exercise of its discretion, instead they focus on the factual
sufficiency of the evidence. When a party with the
burden of proof attacks the factual sufficiency of a jury
finding, his point of error on appeal should be that the
jury finding is "against the great weight and preponderance
of the evidence," instead of complaining that the
trial court erred in not granting a motion for new trial.
See Heard v. Roos, 885 S.W.2d 592, 594 (Tex.
App.--Corpus Christi [**25] 1994, writ denied); Lopez
v. Salazar, 878 S.W.2d 662, 662-63 (Tex. App.--Corpus

Christi 1994, no writ). When we review a point of error
that a jury finding is against the great weight and preponderance
[*413] of the evidence, we examine the
entire record and set aside the verdict only if it is so contrary
to the overwhelming weight and preponderance of
the evidence as to be clearly wrong and manifestly unjust.
See Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986);
Dyson v. Olin Corp., 692 S.W.2d 456, 457 (Tex. 1985);
Hickey v. Couchman, 797 S.W.2d 103, 110 (Tex.
App.--Corpus Christi 1990, writ denied).
After reviewing the evidence in addition to that discussed
under points one and two above, it is patently
clear that the jury's findings against GXG's counterclaims
of fraud are not against the great weight and preponderance
of the evidence.
When he first approached O'Connor, Gatlin told him
one of the reasons GXG and Knox wished to sell their oil
and gas interests was to raise cash to meet a million dollar
tax liability. Gatlin represented that the $ 1,050,000
asking price was low because of the urgent need to raise
money. Gatlin suggested to O'Connor that some attorneys,
possibly [**26] Knox's own attorneys, had expressed
interest in buying the property at a price of $ 1.5
million, cash. The evidence of Knox's awareness of the
alleged cash offer is conflicting. According to Delahanty,
Knox was present when Gatlin repeated the representation
at the closing.
Knox contends the story of the tax liability is false.
Knox admits learning of the purported $ 1.5 million cash
offer at some unspecified time, but asserts that Texacal's
interest in closing the deal for $ 1,050,000 was intended
to take advantage of her ignorance of the counter-offer.
We find no evidence in the record that a $ 1.5 million
cash offer was actually made by another party at any
time.
It is unclear who drafted the contract, promissory
note, and deed of trust. O'Connor testified that Gatlin had
obtained the documents from Knox's attorneys in Dallas.
O'Connor's California attorney, William Bissell, added
disclosure language, although it is uncertain whether
Bissell's addition to the draft was reflected verbatim in
the final contract. Knox contended O'Connor's attorneys
in California had prepared the documents. There is no
positive evidence from which we can determine who
drafted the contract, note, or [**27] deed of trust.
GXG complains the parties agreed that Gatlin would
not receive a "finder's fee" for arranging the transaction.
Later, when Knox discovered Gatlin's 20% interest in
Texacal, O'Connor explained that it was "like a finder's
fee," and that Gatlin had demanded it as part of his compensation
for managing Texacal's properties in Texas.
Even if we were to assume that Gatlin's interest in
Texacal was a finder's fee, we find no evidence in the
record that GXG relied on the statement (that no finder's
fee would be involved) or that the statement had any
effect on GXG's decision to enter into the contract. The
record reflects that Gatlin never received any pecuniary
compensation from Texacal for his services, in the form
of a finder's fee or anything else.
GXG contends the promissory note contains a "bizarre
term" which, in essence, resulted in some of Knox's
own funds being used to pay the note. The promissory
note required Texacal to perform legal work necessary to
clear a title problem on the Yates properties conveyed to
it by GXG. The income generated prior to the conveyance
was to be held in suspense until the title was
cleared, at which time the funds would be released to
[**28] Knox and then applied to Texacal's note. Although
the term may be atypical, there is no evidence as
to how or why it came to be included in the promissory
note. GXG does not contend it had no opportunity to
review the note's terms before the closing. Nearly two
years after receiving the Yates property, Texacal succeeded
in clearing the title as agreed.
The same is true of the deed of trust, which encumbers
some but not all of the properties conveyed to
Texacal. GXG was not prevented from examining the
deed of trust before the closing. In fact, the evidence
suggests that Knox did review it. We note that the list of
the Knox trust properties to be conveyed, names without
descriptions, fills almost two pages; and that the descriptions
of the properties encumbered by the deed of trust is
also only two pages long. A cursory glance would have
revealed the fact that only certain properties were encumbered
[*414] by the deed of trust. O'Connor testified
that the properties covered by the deed of trust were
all valuable, producing properties, while those excluded
were non-producing or otherwise undesirable properties.
Knox did not refute this contention, except to state that
she had expected all [**29] of the properties conveyed
to be encumbered, including those sold outright for cash.
GXG argued that Texacal and O'Connor failed to
exercise due diligence in approaching the transaction as
they did not request title work be done on the properties
to be conveyed nor retain Texas counsel to represent
them in negotiating and drafting of documents. Pointing
to O'Connor's experience in California real estate transactions
and knowledge of California real estate law,
GXG contends Texacal's less than meticulous approach
to the deal with GXG is evidence it actively participated
in the fraud perpetrated by Gatlin. O'Connor freely admitted
he had no experience in oil and gas properties and
no knowledge of Texas oil and gas law. He relied totally
on Gatlin, whom he believed to be highly experienced
and knowledgeable, to advise him and to handle the necessary
investigations and preparations. GXG acknowledges
that O'Connor "trusted" Gatlin to do right by him,

just as GXG likewise trusted Gatlin. The misplacement
of trust and reluctance to attempt its own investigation
may reflect poorly on Texacal's business acumen, but it
is not per se indicative of fraud. As for Texacal's failure
to retain [**30] Texas counsel, GXG emphasized that
O'Connor is a Californian. O'Connor testified that, in
California, lawyers are not routinely engaged for property
transactions.
During negotiations, O'Connor contacted a woman
he believed was Knox and asked her to authorize the
release of information concerning the cash flows on
some of the properties to be included in the sale. Although
Knox denied ever speaking with O'Connor before
the closing, Knox tape recorded a telephone conversation
she had with O'Connor concerning the cash flows sometime
after the closing. The conversation suggests Knox
may have had knowledge of O'Connor's pre-sale request
for cash flow information.
It appears both parties trusted Gatlin to make fair
disclosures. Gatlin informed Knox prior to the closing
that some oil and gas interests and equipment owned by
persons other than Knox and GXG, including property
Gatlin owned, would be included in the sale to Texacal. 5
Texacal did not learn of this until just before closing; the
revelation was not made by Knox or GXG.
5 Knox's testimony is inconsistent as to when
she acquired this knowledge and the extent of her
knowledge. It is reasonably clear, however, she
knew prior to closing that interests other than
those owned by Knox or GXG were to be included
in the sale to Texacal.
[**31] After the sale to Texacal closed, Knox
sued Gatlin for fraud, misappropriation of funds, and
breach of fiduciary duty. The case was settled for $
500,000. The action against Gatlin produced literally
rooms full of evidence. Despite this extensive discovery,
Knox acknowledged there was no evidence linking
Texacal or O'Connor to Gatlin's misconduct. Knox
nonetheless insisted that she knew, "he and [Gatlin] were
orchestrating the entire transaction," and "I assume
[fraud]" because O'Connor and Gatlin worked together
and "all the things in drawing up the Texacal transaction
was very much for them, not for me." A motion for new
trial cannot rest on a subjective presumption of "guilt by
association." Moreover, the contract provided for Knox
to receive $ 1.05 million for properties actually worth
less.
Finally, GXG urges "the most telling aspect of the
fraud upon GXG" is that Texacal has not attempted to
rescind the contract and "is obviously happy with what
they received." However, the record reflects Texacal
brought this action against GXG, accusing GXG of defi-
ciencies in the conveyance and seeking abatement of the
purchase price, cancellation of the note and deed of trust,
quieting [**32] of title, and damages for breach of contract.
After reviewing the record, we find no evidence of
fraudulent conduct by either Texacal or O'Connor. We
hold the trial court did not abuse its discretion in denying
GXG's motion for new trial. GXG's third and fourth
points of error are overruled.
[*415] 5. Estoppel of Texacal's Breach of Contract
Claims
By its fifth, sixth, and seventh points of error, GXG
contends that Texacal is estopped as a matter of law from
asserting a breach of contract offset claim and that GXG
is excused from its failure to comply with the sale and
purchase contract because Texacal engaged in wrongful
conduct and collusion with GXG's agent and is, thus,
estopped from asserting any breach of contract claim
against GXG.
Because we have concluded the jury correctly determined
that neither Texacal nor O'Connor committed
fraud, and that they were not participants in any fraud
perpetrated by Gatlin, we overrule GXG's fifth, sixth,
and seventh points of error.
6. Doctrine of Merger
By its eighth point of error, GXG complains the trial
court erred in denying its motion for judgment non obstante
veredicto on GXG's note claims because Texacal's
breach of contract [**33] claim is barred as a matter of
law by the doctrine of merger by deed. Although Texacal
contends this theory was not pleaded by GXG, we find
that it is clearly included as an affirmative defense in
GXG's third amended answer and counterclaim.
The merger doctrine is an analogue of the parol evidence
rule and functions to prevent enforcement of prior
or contemporaneous transactions on the assumption that
all agreements merged into the final executed contract.
Hallmark v. Port/Cooper-T. Smith Stevedoring Co., 907
S.W.2d 586, 590 (Tex. App.--Corpus Christi 1995, no
writ); Watkins v. Hammerman & Gainer, 814 S.W.2d
867, 870 (Tex. App.--Austin 1991, no writ). The doctrine
of merger by deed operates to merge all prior transactions
between the parties into the deed. Turberville v.
Upper Valley Farms, Inc., 616 S.W.2d 676, 678 (Tex.
Civ. App.--Corpus Christi 1981, no writ). Although a
review of the denial of a motion for judgment non obstante
veredicto usually requires a "no evidence" standard
with respect to the jury's findings and a review of the
evidence in the light most favorable to the nonmovant,
Crosbyton Seed Co., 875 S.W.2d at 363, the applicability
of the doctrine [**34] of merger is a question of law

ecause it is the court, not the jury, that interprets an
unambiguous deed. French v. Chevron U.S.A. Inc., 896
S.W.2d 795, 796 (Tex. 1995); State v. Brazos River Harbor
Nav. Dist., 831 S.W.2d 539, 542 (Tex. App.--Corpus
Christi 1992, writ denied). It is also for the trial court to
determine if the agreement at issue is free of ambiguity.
See Sage Street Assoc. v. Northdale Const. Co., 863
S.W.2d 438, 445 (Tex. 1993) (even if neither party pleads
ambiguity, a trial judge may conclude a contract is ambiguous).
If an agreement is ambiguous, extrinsic evidence
becomes admissible to clarify its meaning.
Kauffman v. Deignan, 227 S.W.2d 271, 275 (Tex. Civ.
App.--Galveston 1949, writ ref'd n.r.e.).
Evidently the trial court found the deed to be ambiguous.
Sage Street Assoc., 863 S.W.2d at 445 (despite
absence of pleading, court may conclude an ambiguity is
present and allow submission of the issue to the jury);
Neece v. A.A.A. Realty Co., 159 Tex. 403, 322 S.W.2d
597, 599 (1959) (by submitting issues to the jury designed
to ascertain the parties' agreement, "the trial judge
evidently considered that the written instrument was ambiguous.").
[**35] Since no findings of fact or conclusions
of law were filed, the judgment of the trial court
must be affirmed if it can be upheld on any legal theory
that finds support in the evidence. Zac Smith & Co. v.
Otis Elevator Co., 734 S.W.2d 662, 666 (Tex. 1987);
Commercial Union Ins. Co. v. La Villa Indep. Sch. Dist.,
779 S.W.2d 102, 104 (Tex. App.--Corpus Christi 1989,
no writ); Turberville, 616 S.W.2d at 678. This Court's
duty is to presume that every fact issue supported by the
evidence was resolved in the appellee's favor. Turberville,
616 S.W.2d at 678; Plata v. Guzman, 571 S.W.2d
408, 410 (Tex. Civ. App.--Corpus Christi 1978, writ ref'd
n.r.e.).
The assignment of the properties conveyed to
Texacal by GXG, executed by Knox on June 1, 1991,
states, in relevant part, as follows:
GXG . . . does GRANT, SELL, CONVEY,
TRANSFER, and ASSIGN unto TEXACAL OIL AND
GAS, INC. . . . all of the [*416] interest conveyed to
Assignor's [GXG's] predecessor in title, Gwendolyn
Knox, et al., from the T.B. Knox Trust to Gwendolyn
Knox, et al., and including but not limited to an undivided
one third (1/3) interest in and to the leases, lands,
property and interests described in the attached [**36]
Exhibit "A".
All of the T.B. Knox trust properties are included in
Exhibit "A."
Looking within the four corners of the deed does not
clarify the meaning of the phrase "including but not limited
to" as placed in the assignment. On the attachments,
the phrase precedes the description of the interests and is
coupled with a cite to a referencing document that sup-
plements the description, 6 leading to the reasonable construction
that the phrase "including but not limited to"
means the equivalent of "more or less." This covers errors
in calculations, be they large or small. Such errors
are determinable by examining the referenced documents.
However, if we apply the interpretation of "more
or less" to the assignment, then examine the referenced
documents, we are unable to determine the limits of
"more or less." Although the assignment recites that
conveyance is made to Gwen Knox "and others," there is
no other language in the assignment or in any of the attached
pages to suggest that any other parties have
claims to the interests conveyed, much less identify such
persons. "More" could then be interpreted to mean as
much as 100%. "Less" could be interpreted as low as 0%.
We cannot discern [**37] the limits from the four corners
of the assignment or the attachments.
6 The following excerpt from a deed for property
in Lea County, New Mexico illustrates its
usage: "including but not limited to a .0019530
royalty interest in the Lee Lease/Well/Unit as
described in Warren Petroleum Company Division
Order No. 6110 in property nos.
W161000455, W161000020 dated February 7,
1969 credited to Assignor under owner no.
W179467150."
Moreover, the clauses conflict. The first clause conveys
"all" of the interests in the T.B. Knox Trust to
Texacal, whereas the second purports to convey only a
one-third interest in the properties described in the attachments
which include descriptions of the T.B. Knox
trust properties. If we harmonize the two clauses, the
placement of the phrase "including but not limited to"
could be interpreted as meaning a three-thirds conveyance
is contemplated with a one-third conveyance presently
achieved.
Because the phrase "including but not limited to" as used
is indefinite and results [**38] in more than one interpretation,
it is ambiguous. See Brown v. Havard, 593
S.W.2d 939, 941-42 (Tex. 1980) (explaining test for ambiguity).
Although the few cases discussing the doctrine of
merger by deed mention that the doctrine is subject to
avoidance when there is an allegation and proof of fraud
or mistake in the execution of the deed, Turberville, 616
S.W.2d at 678; Forister v. Coleman, 418 S.W.2d 550,
563 (Tex. Civ. App.--Austin 1967), writ ref'd n.r.e., 431
S.W.2d 2 (Tex. 1968), a written deed is a type of contract.
Orbeck v. Alfei, 276 S.W. 947, 947 (Tex. Civ.
App.--Waco 1925, no writ). The doctrine of merger is
inapplicable where there is an allegation of fraud, mistake,
or accident, or an ambiguity in the contract.

Swanson v. Schlumberger Tech. Corp., 895 S.W.2d 719,
729 (Tex. App.--Texarkana 1994, no writ) (citing Commercial
Bank, Unincorporated, of Mason, Tex. v. Satterwhite,
413 S.W.2d 905, 909 (Tex. 1967)); Kauffman,
227 S.W.2d at 275 (principles of law permit referral to
agreement upon which deed is founded to explain an
ambiguity in deed); see Boy Scouts of Am. v. Responsive
Terminal Sys., Inc., 790 S.W.2d 738, 745 (Tex.
App.--Dallas [**39] 1990, writ denied) (in absence of
fraud, mistake, accident, or ambiguity, presumption is
that all prior agreements merged in final written instrument);
Davis v. Andrews, 361 S.W.2d 419, 423 (Tex.
Civ. App.--Dallas 1962, writ ref'd n.r.e.) (in absence of
ambiguity, deed is enforced as written).
Because the doctrine of merger is not applicable, we
hold the trial court did not err in denying GXG's motion
for judgment non obstante veredicto on this ground. Appellant's
eighth point of error is overruled.
[*417] 7. Factually Sufficient Evidence of Interest
Conveyed
The jury found that the agreement between the parties
was for the conveyance of a three-thirds interest in
the Knox trust properties, not the one-third interest actually
conveyed. The jury also found that the difference
between the value of the properties contracted for and the
value of the properties actually received was $ 330,000.
The trial court accepted the jury's findings and adjusted
the initial balance of the promissory note from $ 550,000
to $ 220,000, then used the $ 220,000 as its starting point
in reaching its judgment award for GXG of $ 81,284.34.
By its ninth point of error, GXG contends the trial
court [**40] erred in overruling its motion for new trial
because the jury's finding that GXG agreed to convey
three-thirds of the trust properties to Texacal was not
supported by factually sufficient evidence.
The grantor's intent is a question of fact, thus a question
for the jury. Viscardi v. Pajestka, 576 S.W.2d 16,
19 (Tex. 1978). Because of the ambiguity in the deed, the
jury could look to the Purchase and Sale Agreement to
determine the parties' intentions as to the assignment.
Kauffman, 227 S.W.2d at 275. The Purchase and Sale
Agreement contains an integration clause and is not ambiguous.
Therefore, parol evidence regarding its terms
could be properly disregarded. Texarkana & Ft. S. Ry.
Co. v. Brass, 260 S.W. 828, 830 (Tex. Comm'n App.
1924, judgm't adopted) (inadmissible parol evidence,
objected to or not, is "without probative force and will
not support any finding"); Smith v. Smith, 794 S.W.2d
823, 828 (Tex. App.--Dallas 1990, no writ) (an integration
clause is in essence the merger doctrine memorialized);
see also Sun Oil Co. v. Madeley, 626 S.W.2d 726,
731 (Tex. 1981) (effect should be given parties' intention
as expressed or apparent in the writing); Trinity [**41]
Universal Ins. Co. v. Ponsford Brothers, 423 S.W.2d 571,
575 (Tex. 1968).
The Purchase and Sale Agreement states, in relevant
part, as follows: 7
7 All mistakes of spelling and grammar are in
the original.
I. PURCHASE AND SALE
Seller agrees to sell and convey and Buyer agrees to
purchase and pay for all oil and gas properties more particularly
described in Exhibit A and B, subject to the
terms and conditions set forth herein, including the following:
(A) All right, title and interest of Seller as disclosed
by Seller to Buyer in, to and under all agreements, product
purchase, and sale contracts, leases, permits,
rights-of-way, easements, licenses, options and orders in
any way relating thereto.
(B) Identical undivided interest in and to all of the
personal property, fixtures and improvements on the
Land, appurtenant thereto or used or obtained in connection
therewith or with the production, treatment, sale or
disposal of hydrocarbons or water produced therefrom or
attributable thereto and all other appurtenances [**42]
belonging thereto.
(C) As indicated above, this sale includes all personal
property, fixtures, and improvements ("Personal
Property"). All personal property is to be sold on an "as
is" and "where is" basis with all faults, if any and title to
which shall be transferred to Buyer by Seller free and
clear of any and all liens, claims or liability.
(D) Also conveyed by Seller is all right, title and interest
in and to the entire estate created by leases, licenses,
permits and other agreements. All mineral interest,
working interest, overriding royalties and production
equipment are conveyed with Special Warranty, in
through and to Buyer. Seller shall furnish to Buyer for
Buyer's inspection and approval prior to the close hereof
all agreements, oil production contracts, product purchase
and sale contracts, permits, licenses, options or
orders in any way pertaining to the leases to be conveyed
hereunder.
* * * * * *
III. REPRESENTATIONS AND WARRANTIES
(A) Representations and Warranties of Seller. Seller
represents and warrants to Buyer as follows: . . . .
[*418] * * * * * * *

(6) All interests to be conveyed hereunder are free
and clear of any claim, priority, lien, assessment,
[**43] or secured interest and Seller shall provide Buyer
at Seller's own cost, at or before the closing hereof,
assignment of such clear title . . . .
* * * * * * *
(9) Seller warrants it has contractual agreement to
purchase all Knox Trust Working Interest, Royalty Interest,
Net Revenue Interest and Production Equipment
as evidence by Exhibit "A". Seller shall and hereby
agrees to apply all net income accruing, commencing
April 1, 1991, attributable to the properties listed as Exhibit
"A" to principal and interest due under the note
refered [above].
IV. CLOSING
* * * * * * *
(4) Seller shall deliver to Buyer exclusive possession
of the interests.
(5) Seller shall deliver to Buyer all files and records
relating to the interests including all agreements, oil
production contracts, product purchase and sale contracts,
permits, licenses, options or orders relating to the
interests.
The contract is short, less than seven pages, and
contains no fine print. The first page sets out that "all
right, title and interest of Seller as disclosed by Seller to
Buyer" is to be conveyed. Because no fractions are mentioned
anywhere in the agreement, "all" is given its ordinary
meaning. [**44] Heritage Resources, Inc. v. NationsBank,
939 S.W.2d 118, 121 (Tex. 1996); Garner,
944 S.W.2d at 475; see CAMBRIDGE INT'L DIC-
TIONARY OF ENGLISH 33 (defining pronoun form of
"all" as "the complete amount or number (of), or the
whole (of)"). No other beneficiaries of the Knox trust or
persons with interests in the property, other than Gwen
Knox or GXG, are identified or alluded to. No clause
reserves any portion of the properties being conveyed.
The attached exhibits, listing and describing the properties
contained in the Knox trust properties, disclose fractional
interests in working interests, net revenue interests,
royalty interests, and overriding royalty interests, but
reveal no fractional interests in the leases, lands, or
properties, nor do they mention other trust beneficiaries.
The language of paragraph III, section (A)(9) suggests
that GXG actually had less than a 100% interest to convey
on the date of signing but encompasses a promise to
after-acquire the remaining interests in the property and
apply all accrued income from the properties to Buyer's
obligation in the meantime. When considered in light of
this paragraph's promise, the interpretation of the assignment
[**45] as intending a present one-third con-
veyance, with a future conveyance anticipated, becomes
more apparent. The Purchase and Sale Agreement was
executed April 9, 1991.
On June 1, 1991, and again on July 3, 1991, Knox,
as GXG President, executed an Assignment of Oil, Gas,
and Mineral Leases, Royalties and Overriding Royalties,
and Bill of Sale. The ambiguity in the language of the
assignments has been discussed under point eight. The
property descriptions attached to the assignments describe
the properties that are on the list attached to the
Purchase and Sale Agreement as Exhibit "A."
The proper construction of the deed was a matter for
the jury to decide, due to the ambiguity. El Paso Land
Improvement Co. v. Crawford, 292 S.W. 518, 520 (Tex.
Comm'n App. 1927, holding approved) (citing Kingston
v. Pickins, 46 Tex. 99, 101 (1876) and Camley v. Stanfield,
10 Tex. 546, 550 (1853)); Capps v. Terry, 75 Tex.
391, 13 S.W. 52, 56 (1889); Linney v. Wood, 66 Tex. 22,
17 S.W. 244, 245 (1886); see Havard, 593 S.W.2d at 940
& 942 (approving court of appeals' affirmation of jury's
findings on ambiguous deed); Humble Oil & Ref. Co. v.
Fantham, 268 S.W.2d 239, 241 (Tex. [**46] Civ.
App.--Galveston 1954, writ dism'd w.o.j.) (intention of
grantor in ambiguous deed decided by jury). The jury's
finding can be set aside only if it is "so contrary to the
overwhelming weight of the evidence as to be clearly
wrong and unjust." Cain, 709 S.W.2d at 176; University
Prep. Sch. v. Huitt, 941 S.W.2d 177, 180 (Tex.
App.--Corpus Christi 1996, writ denied).
The record supports the jury's conclusion that GXG
promised, then failed, to convey a [*419] three-thirds
interest in the Knox trust properties. The ambiguity centers
on the question of whether the deed was final, conveying
only a one-third interest, or a partial conveyance
pending the grantor's purchase of the remaining interests.
If there is ambiguity in the deed, the construction most
favorable to the grantee is to be adopted. Rettig v. Houston
West End Realty Co., 254 S.W. 765, 768 (Tex.
Comm'n App. 1923, judgm't adopted); Cartwright v.
Trueblood, 90 Tex. 535, 39 S.W. 930, 931 (1897); see
also Bumpass v. Bond, 131 Tex. 266, 114 S.W.2d 1172,
1174 (1938) (if there is doubt about the parties' intention,
due to the language of the deed, such doubt should be
resolved against the grantor); Farmers Canal [**47]
Co. v. Potthast, 587 S.W.2d 805, 808 (Tex. Civ.
App.--Corpus Christi 1979, writ ref'd n.r.e.).
The jury's resolution of the ambiguity by finding that
GXG and Texacal intended to convey a three-thirds interest
from GXG to Texacal is firmly supported by the
terms of the contract which can be construed in a way
that does not clash with the deed. We, therefore, overrule
GXG's ninth point of error.

8. Legal and Factual Sufficiency to Support Damages on
Property Value
By its tenth and eleventh points of error, GXG contends
the jury's finding that Texacal was damaged in the
amount of $ 330,000 is not supported by legally or factually
sufficient evidence.
When we review a "no evidence" or legal sufficiency
of the evidence point, we consider only the evidence
and reasonable inferences that tend to support the jury's
finding, and we disregard all evidence and inferences to
the contrary. Responsive Terminal Sys. Inc. v. Boy
Scouts of Am., 774 S.W.2d 666, 668 (Tex. 1989). If there
is more than a scintilla of evidence to support the finding,
the legal sufficiency challenge fails. Stafford v.
Stafford, 726 S.W.2d 14, 16 (Tex. 1987).
When we review an "insufficient evidence" or
[**48] factual sufficiency of the evidence point, we
consider, weigh and examine all of the evidence which
supports or undermines the jury's finding. Plas-Tex,
Inc. v. United States Steel Corp., 772 S.W.2d 442, 445
(Tex. 1989). We review the evidence, keeping in mind
that it is the jury's role, not ours, to judge the credibility
of the evidence, to assign the weight to be given to testimony,
and to resolve inconsistencies within or conflicts
among the witnesses' testimony. Corpus Christi Teachers
Credit Union v. Hernandez, 814 S.W.2d 195, 197
(Tex. App.--San Antonio 1991, no writ). We then set
aside the verdict only when we find that the evidence
standing alone is too weak to support the finding or that
the finding is so against the overwhelming weight of the
evidence that it is manifestly unjust and clearly wrong.
Garza v. Alviar, 395 S.W.2d 821, 823 (Tex. 1965).
The jury was asked to determine the difference between
the value of the properties GXG agreed to convey
to Texacal and the value of the properties actually received
by Texacal. GXG contends Texacal presented no
evidence of the market value of the properties. GXG also
contends the Purchase and Sale Agreement does not
[**49] specify which properties the cash payment and
promissory note apply to.
Although the contract does not specify that the
promissory note for $ 550,000 is to be applied to the
purchase of the Knox trust properties, the note itself
states that the "first payment is due and payable 30 days
subsequent to Texacal receiving assignment of property
and interest on Exhibit 'A'." [sic] There is no dispute that
only the Knox trust properties are described in the Exhibit
"A" attached to the promissory note.
It is not necessary for Texacal to prove the market
value of the properties as the deficiency in the conveyance
is not the result of fraud or mutual mistake. See,
e.g., George v. Hesse, 100 Tex. 44, 93 S.W. 107, 107-08
(1906) (measure of damages in fraudulent conveyance is
difference between contract price and reasonable market
value); Cox v. Barton, 212 S.W. 652, 654 (Tex. Comm'n
App. 1919, judgm't adopted) (applying measure of damages
for fraud to case of mutual mistake). The nearest
parallel to the instant situation is one where a vendor
contracts to convey a full interest to a buyer and a price
for the full interest is agreed upon, but the [*420]
vendor is capable of conveying only [**50] a fractional
interest. See Atkin v. Cobb, 663 S.W.2d 48, 50 (Tex.
App.--San Antonio 1983, writ dism'd w.o.j.). The buyer
may elect to accept partial specific performance with
abatement in the purchase price proportionate to the deficiency
or defect. Id. at 51 (citing Fant v. Howell, 547
S.W.2d 261, 265 (Tex. 1977)). It makes no difference
whether the buyer is aware that the vendor does not have
full title at the time of the agreement and may be unable
to convey full title. See English v. Jones, 154 Tex. 132,
274 S.W.2d 666, 669 (1955).
O'Connor, Texacal's president, testified that the total
price of the Knox trust properties was $ 550,000, of
which he estimated the Schmaling Trust comprised 10%.
GXG did not deny or refute that the Schmaling Trust
comprised 10% of the total properties. Texacal indisputably
received three-thirds of the Schmaling Trust properties,
but only one-third of the remaining properties instead
of the three-thirds contracted for. Texacal does not
deny its obligation for the Schmaling Trust properties,
valued at $ 55,000 (10% of $ 550,000). The disputed
amount of the note is, therefore, 90% of $ 550,000, or $
495,000. This price was agreed upon [**51] for a
three-thirds interest. Texacal received a one-third interest.
The $ 495,000 price requires a proportionate abatement
of two-thirds, or $ 330,000. This is exactly the
amount of damages the jury found.
Furthermore, equity requires relief. The jury found
that GXG represented it would convey a three-thirds
interest in the Knox trust properties, but delivered nearly
two-thirds less. Qualifying the conveyance with a phrase
in the deed that could mean "more or less" does not prevent
a material deficiency from arising. See Maddox v.
Worsham, 415 S.W.2d 222, 227 (Tex. Civ.
App.--Amarillo 1967, writ ref'd n.r.e.); Arrott v. Smith,
225 S.W.2d 639, 642 (Tex. Civ. App.--Austin 1949, no
writ). The general rule is that when a misrepresentation,
however innocent, is made as to the size of the conveyance,
the right of the purchaser is to have what the vendor
can convey, with an abatement of the purchase price
proportionate to the shortfall between the representation
and the reality. Mitchell v. Zimmerman, 4 Tex. 75, 81
(1849). Because the properties were priced by GXG as a
package, rather than valued as separate lots, it is appropriate
to abate the package price.

We hold the evidence [**52] legally and factually
sufficient to support the jury's findings. GXG's tenth and
eleventh points of error are overruled.
9. Hearsay and Exception
By its twelfth point of error, GXG complains the trial
court erred by refusing to admit the deposition testimony
of Robert Dougherty. GXG contends Dougherty's
testimony falls within the hearsay exception of admission
of a party opponent.
GXG attempted to offer into evidence the deposition
testimony of Robert Dougherty which was given in a
different proceeding in which neither Dougherty,
Texacal, nor O'Connor was a party. The subject of
Dougherty's testimony was information he claimed was
known to O'Connor prior to the closing. Texacal objected
on the basis of hearsay. The trial court found it to be
hearsay and refused to allow it into evidence.
RULE 801(e)(2) provides, in relevant part, "[a]
statement is not hearsay if the statement is offered
against a party and is his own statement." TEX. R. CIV.
EVID. 801(e)(2); Reviea v. Marine Drilling Co., 800
S.W.2d 252, 257 (Tex. App.--Corpus Christi 1990, writ
denied). A statement by an agent or servant concerning a
matter within the scope of his agency or employment and
made during [**53] the existence of the relationship
may be offered as an admission by the party opponent.
TEX. R. CIV. EVID. 801(e)(2)(D).
GXG claims Dougherty was either an agent or an
employee of Texacal. The fact of agency must be established
before a declaration can be admitted. Texas Gen.
Indem. v. Scott, 152 Tex. 1, 253 S.W.2d 651, 655-56
(1952); see also Buchoz v. Klein, 143 Tex. 284, 184
S.W.2d 271, 271 (1944) (agency relationship cannot be
presumed; it must be proved). An agent is a person who
consents to act on behalf of and subject to the control of
another, the principal, who has manifested consent that
the agent shall so [*421] act. Herschbach v. City of
Corpus Christi, 883 S.W.2d 720, 732 (Tex. App.--Corpus
Christi 1994, writ denied). Agency may be established
by circumstances, such as the relation of the parties and
their conduct concerning the transaction in controversy.
Cherokee Water Co. v. Forderhause, 727 S.W.2d 605,
612 (Tex. App.--Texarkana), rev'd on other grounds, 741
S.W.2d 377 (Tex. 1987).
Dougherty was employed as Texacal's production superintendent
and was authorized to perform a study on the
oil and gas reserves of the South Texas properties. He
did not [**54] serve as an officer or director of Texacal.
He delivered a report to O'Connor. Beyond that, there is
no evidence he contributed any input or preparation to
the Purchase and Sale Agreement. There is no indication
that Dougherty acted in any capacity as the sole representative
of Texacal. See Wellington Oil Co. of Del. v.
Maffi, 136 Tex. 201, 150 S.W.2d 60, 63 (1941); Mays v.
First State Bank of Keller, 247 S.W. 845, 846 (Tex.
Comm'n App.1923, judgm't adopted) (principal is
charged with knowledge possessed by agent in those
cases in which the officer or agent is the sole representative
of a corporation in the transaction in question).
Dougherty never testified to any participatory acts or
input nor did he claim to have a role in the purchase and
sale negotiations. GXG offered no evidence to show that
the scope of Dougherty's duties as production superintendent
authorized him to participate in negotiations, and
we find no evidence in the record that he did. He had no
role in the execution of the Purchase and Sale Agreement.
GXG does not explain how Dougherty's deposition
testimony concerned anything within the scope of his
employment as production supervisor, nor is there any
[**55] indication that he acquired relevant knowledge
while acting on behalf of Texacal. See Taylor v. Taylor,
88 Tex. 47, 29 S.W. 1057, 1058 (1895) ("the knowledge
of an agent is not imputed to the principal under circumstances
where the agent does not acquire his knowledge
in the transaction of his principal's business."). These
facts do not establish that Dougherty was a Texacal
agent. Therefore, any knowledge he may have had cannot
be imputed to Texacal.
Furthermore, although GXG argues that the contents
of Dougherty's deposition amount to an opposing party's
admission, Dougherty did not testify as to what O'Connor
said; he does not quote O'Connor nor does he assert
that O'Connor made a statement. Cf. Herzing v. Metropolitan
Life Ins. Co., 907 S.W.2d 574, 580 (Tex.
App.--Corpus Christi 1995, writ denied) (witness recounted
declarant's affirmative statements); Fojtik v.
First Nat. Bank of Beeville, 752 S.W.2d 669, 671 (Tex.
App.--Corpus Christi 1988) (witness quoted speaker),
writ denied per curiam, 775 S.W.2d 632 (Tex. 1989).
Dougherty only states his personal belief, formed as a
result of what O'Connor "indicated." Without knowing
what O'Connor said, the accuracy of [**56]
Dougherty's perception is impossible to ascertain.
We hold the trial court properly excluded the evidence
as hearsay. See Turner, Collie & Braden, Inc. v.
Brookhollow, Inc., 642 S.W.2d 160, 167 (Tex. 1982) (defining
hearsay). GXG's twelfth point of error is overruled.
10. Balance Due on the Promissory Note
By its thirteenth point of error, GXG asserts the trial
court properly disregarded the jury's finding that the outstanding
balance due on the promissory note was $
13,200, but erred in recalculating the note's balance as $
81,284.34. GXG contends the trial judge failed to refer to

the evidence in making his computations. GXG argues
that the calculations it offered, which result in a balance
of $ 558,889.43, are the only calculations which should
be adopted. Any offsets allowed, GXG asserts, should be
applied against the final balance of $ 558,889.43.
In a cross-point, Texacal agrees that the trial court
erred in computing the balance of the note and urges us
to reinstate the jury's finding of $ 13,200.
GXG does not state or explain the rationale for its
calculations. Its arguments and calculations ignore fundamental
generally accepted principles of accounting. 8
GXG [**57] [*422] argues, without citing authority,
that the $ 330,000 difference in the values contracted for
and received should be credited as of August 21, 1995,
rather than to the beginning balance of the note. We disagree.
As discussed under points ten and eleven, the
remedy for a situation where less land is conveyed than
contracted for and the buyer accepts partial performance
is an abatement in the purchase price proportionate to the
deficiency. Therefore, the $ 330,000 credit is properly
applied against the beginning balance of the promissory
note.
8 The Financial Accounting Standards Board, a
private entity, establishes generally accepted accounting
principles.
GXG's calculations also fail to apply payments to
the balance as they were received, waiting instead to
deduct them as a lump sum on August 21, 1995. Basic
accounting principles require that payments on a debt be
credited against the balance on the day they are received.
Interest then accrues on the new balance. Over time,
payments erode the debt until, on [**58] the final due
date, it is paid in full. If this were not so, retirement of
debt would be impossible. The accrual of interest on the
balance of a debt would result in an outstanding balance
yet due on the "payoff date" when all of the debtor's
payments are applied as a single sum. Equity is not
served by utilizing GXG's unexplained method of accounting.
We conclude there is sufficient evidence in the record
to allow us to determine the correct balance due on
the note. 9 The promissory note, dated April 9, 1991,
provides the beginning balance of $ 550,000 and the
simple interest rate of ten percent per annum, to begin
accruing as of April 1, 1991. The note also recites that
the funds from the Yates property, when released from
suspense, are to be applied to the principal of the note. In
January 1993, the parties agreed to an order granting
Texacal a temporary injunction against GXG's foreclosure
attempts. The terms of the agreed order provide that,
when received by GXG, the Yates funds are to be applied
"to accrued and unpaid interest through and in-
cluding August 1, 1991, then to outstanding and unpaid
principal." We interpret the order as meaning that a credit
was to be posted against [**59] the interest accrued
as of August 1, 1991, and then the remainder of the
Yates money was to be posted against the note's balance
as of the date of the order, February 23, 1993. 10 GXG
used these dates in its calculations and Texacal has not
shown that other dates are applicable. We have determined
that Texacal is entitled to an abatement of $
330,000 on the initial balance. The calculations provided
by GXG recite the dates on which payments from, or on
behalf of Texacal, were received. Using this data, we
performed the following calculations:
9 Only figures that are documented in the record
or calculable are utilized. For example,
O'Connor testified that Texacal had assigned income
to GXG totaling some $ 50,000, but there is
no corroborating evidence for this figure and it is
not taken into consideration in our own calculations.
Also, in early 1992 GXG sent letters to
pipeline owners informing them of GXG's plans
to foreclose on Texacal's holdings and directing
them to send monies due to Texacal to GXG instead.
There is no evidence any of the recipients
complied with GXG's request and no allowance is
made in our calculations.
[**60]
10 A total of $ 163,487.21 was received for the
Yates property. A credit of $ 7,413.70 is applied
to the interest accrued from April 1, 1991 to August
1, 1991; the remaining amount of $
156,073.51 is applied to the note's balance as of
the date of the order.
Balance as of 4-1-91 $ 550,000.00
Less price abatement found by jury - 330,000.00
Balance after abatement 220,000.00
Plus interest (4-1-91 to 8-1-91)
[220,000 X 10% X (123/365)] 11 + 7,413.70
11 Balance X interest rate X days accrued/365.
Less Yates funds (per Agreed Order)
Amount applied to Interest - 7,413.70
Balance as of 8-1-91 220,000.00
Plus interest (8-2-91 to 1-13-92)
[220,000 X 10% X (165/365)] + 9,945.21
Less payment from Texacal - 10,000.00
Balance as of 1-13-92 219,945.21

Plus interest (1-14-92 to 3-13-92)
[219,945.21 X 10% X (60/365)] + 3,615.54
Less payment from Texacal - 10,000.00
Balance [**61] as of 3-13-92 213,560.74
Plus interest (3-14-92 to 5-25-92) 12
12 The exact date of the May 1992 payment is
not in the record. However, a tape recorded conversation
between Brad Gatlin and Gwen Knox
on May 20, 1992, indicates that the payment had
not yet been received as of that date. We selected
Monday, May 25, 1992 as a compromise date
between May 21, 1992 and May 30, 1992. May
31, 1992, a Sunday, was excluded as mail is not
delivered on Sundays. The choice of an earlier or
later date has a negligible effect on calculations.
[213,560.75 X 10% X (73/365)] + 4,271.21
Less payment from Texacal - 2,800.00
Balance as of 5-25-92 215,031.96
Plus interest (5-26-92 to 1-22-93
[215,031.96 X 10% X (242/365)] + 14,256.91
Less payment from Mesa 13 - 1,434.80
13 Mesa paid $ 10,043.61 to GXG between
January 22, 1993 and July 22, 1993. GXG's calculations
do not note the precise dates or amounts
of each payment, but the evidence suggests a
stream of payments. In the interest of equity and
for purposes of our calculations, we presume
equal payments of $ 1,434.80 were made on the
twenty-second day of each month from January
to June 1993 with a final payment of $ 1,434.81
in July 1993.
[**62] Balance as of 1-22-93 227,854.07
Plus interest (1-23-93 to 2-22-93)
[227, 854.08 X 10% X (31/365)] + 1,935.20
Less payment from Mesa - 1,434.80
Balance as of 2-22-93 228,354.47
Plus interest for 2-23-93
[228,354.48 X 10% X (1/365)] + 62.56
Less Yates funds (per Agreed Order)
Amount applied to note's balance - 156,073.51
Balance as of 2-23-93 72,343.52
Plus interest (2-24-93 to 3-22-93)
[72,343.54 X 10% X (27/365)] + 535.14
Less payment from Mesa - 1,434.80
Balance as of 3-22-93 71,443.87
Plus interest (3-23-93 to 4-22-93)
[71,443.88 X 10% X (31/365)] + 606.78
Less payment from Mesa - 1,434.80
Balance as of 4-22-93 70,615.85
Plus interest (4-23-93 to 5-22-93)
[70,615.87 X 10% X (30/365)] + 580.40
Less payment from Mesa - 1,434.80
Balance as of 5-22-93 69,761.45
Plus interest (5-23-93 to 6-22-93)
[69,761.47 X 10% X (31/365)] + 592.49
Less payment from Mesa - 1,434.80
Balance as of 6-22-93 68,919.15
Plus interest (6-23-93 to 7-22-93)
[68,919.16 X 10% X (30/365)] + 566.46
Less payment from Mesa - 1,434.81
Balance as of 7-22-93 68,050.80
Plus interest [**63] (7-23-93 to 8-21-95) 14
14 GXG used August 21, 1995 as the ending
date in its calculations. It is also the date the jury
returned its verdict.
[68,050.81 X 10% X (760/365)] + 14,169.48
Balance as of 8-21-95 $ 82,220.28
[*423] The difference between our calculations and
that of the trial court is almost $ 1,000. Where the trial
court erred in computing damages, we may reform the
amount of damages. Atlas Chem. Indus., Inc. v. Anderson,
514 S.W.2d 309, 319 (Tex. Civ. App.--Texarkana
1974), aff'd, 524 S.W.2d 681 (Tex. 1975).
We sustain GXG's thirteenth point of error.
Texacal's cross-point is overruled.
11. Texacal's Cross-Points
By two additional cross-points of error, Texacal
complains the trial court erred in disregarding the jury's
answers to questions three (second part only), four, five,
six, eleven, and twelve. Texacal contends there was legally
and factually sufficient evidence to support the
jury's findings.

A court cannot disregard a jury finding unless the
issue is immaterial or [**64] the finding is unsupported
by the evidence. Spencer v. Eagle Star Ins. Co. of Am.,
876 S.W.2d 154, 157 (Tex. 1994); L & F Distrib., 941
S.W.2d at 279. We review the evidence in the light most
favorable to the jury finding, considering only the evidence
and inferences tending to support that finding.
Dowling v. NADW Mktg., Inc., 631 S.W.2d 726, 728
(Tex. 1982); Dodd v. Texas Farm Prod. Co., 576 S.W.2d
812, 814-15 (Tex. 1979). If we find more than a scintilla
of evidence to support the jury's determination of the
issue, we must reinstate that portion of the jury's verdict
that was disregarded and enter an appropriate judgment.
Dowling, 631 S.W.2d at 728; James v. Vigilant Ins. Co.,
674 S.W.2d 925, 926 (Tex. App.--Amarillo 1984, writ
ref'd n.r.e.); Tubb v. Bartlett, 862 S.W.2d 740, 744-45
(Tex. App.--El Paso 1993, writ denied). However, undisputed
evidence that allows only one logical inference,
even though contrary to the jury's finding, is not disregarded.
Universe Life Ins. Co. v. Giles, 950 S.W.2d 48,
51 n.1 (Tex. 1997); see Wininger v. Ft. Worth & D.C. Ry.
Co., 105 Tex. 56, 143 S.W. 1150, 1152 (1912); Texas &
N.O. Ry. Co. v. Rooks, 293 S.W. [**65] 554, 556-57
(Tex.Comm'n.App.1927) [*424] (overruling motion
for rehearing).
Whether the findings are supported by the evidence
is resolved under the standard of review for challenges to
the legal sufficiency of the evidence. L & F Distrib.,
941 S.W.2d at 279; McAlpin v. Sanchez, 858 S.W.2d 501,
508 (Tex. App.--Corpus Christi 1993, writ denied). A
question is immaterial when it 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 question which calls for a finding
beyond the province of the jury, such as a question of
law, may be deemed immaterial. Id. If jury findings render
other findings immaterial, then the trial court may
properly disregard them; otherwise, the trial court has no
authority to disregard them and commits reversible error
in so doing. Thedford v. Missouri Pac. R.R. Co., 929
S.W.2d 39, 45 (Tex. App.--Corpus Christi 1996, writ
denied). We consider only evidence and inferences supporting
the findings and disregard all contrary evidence
and inferences. Burroughs Wellcome Co. v. Crye, 907
S.W.2d 497, 499 (Tex. 1995); Cantu v. Butron, 921
S.W.2d 344, 348 [**66] (Tex. App.--Corpus Christi
1996, writ denied). There must be more than a scintilla
of evidence to support the jury's answers in order to establish
that the trial court erred in disregarding the jury's
findings. See Holloway v. Skinner, 898 S.W.2d 793, 796
(Tex. 1995); L & F Distrib., 941 S.W.2d at 279. There is
more than a scintilla of evidence "where the evidence
supporting the finding, as a whole, 'rises to a level that
would enable reasonable and fair-minded people to differ
in their conclusions.'" Burroughs Wellcome, 907 S.W.2d
at 499 (quoting Transportation Ins. Co. v. Moriel, 879
S.W.2d 10, 25 (Tex. 1994)).
The second part of question three directed the jury to
decide what "other damages," in addition to the abatement
in the purchase price, Texacal was entitled to as a
result of GXG's failure to convey all of the property
promised. The jury found damages totaling $ 49,500.
The basis for these "other damages" is found in the
testimony of Ted O'Connor who stated that Texacal was
forced to defend itself in multiple lawsuits against royalty
owners, lessors, and other operators, including two
against Knox's brother, because the deficient conveyance
had greatly reduced [**67] its anticipated income and
led to problems meeting operating expenses and payments
to royalty owners. The attorney's fees totaled approximately
$ 49,500. Texacal expressly sought recovery
of these costs. GXG did not dispute Texacal's incurrence
of these costs; but argues only that Texacal is not entitled
to reimbursement.
In Texas, attorney's fees expended in litigation with
third parties are not generally recoverable as damages if
not provided for by statute or by agreement between the
parties. City of Garland v. Booth, 895 S.W.2d 766, 771
(Tex. App.--Dallas 1995, writ denied). There is no
agreement between the parties, and no statute authorizing
recovery of attorney's fees incurred in litigation with
third parties arising from breach of the original parties'
contract. However, under principles of equity, when a
party incurs expenses in defending a lawsuit that would
not have arisen but for the actions of the other party to
the original contract, attorney's fees related to that prior
lawsuit involving a third person can be recovered. See
e.g., Hartford Cas. Ins. Co. v. Walker County Agency,
Inc., 808 S.W.2d 681, 689 (Tex. App.--Corpus Christi
1991, no writ); Baja Energy, [**68] Inc. v. Ball, 669
S.W.2d 836, 838-39 (Tex. App.--Eastland 1984, no writ)
(discussing at length equitable foundations of recovery of
attorney's fees in breach of contract case). Additionally, a
party can recover exemplary damages in the form of attorney's
fees from another party when they are for expenses
incurred in defending a lawsuit in which the first
party would not have been required to participate but for
the actions of the other party. See Hartford Cas. Ins. Co.,
808 S.W.2d at 689; Baja Energy, Inc., 669 S.W.2d at
838-89.
The jury decided that GXG promised to convey
100% of the properties to Texacal, instead made a grossly
deficient conveyance to Texacal, and was not excused
from performing on its promise to convey more property.
Texacal's legal problems clearly stem [*425] from and
are a direct consequence of GXG's breach of the sale and
purchase agreement which resulted in diminished income

to Texacal and an inability to meet its obligations to other
interest holders.
The jury is empowered to compute damages, Srite v.
Owens-Illinois, Inc., 870 S.W.2d 556, 563 (Tex.
App.--Houston [1st Dist.] 1993), rev'd on other grounds,
Owens-Illinois, Inc., v. Burt, [**69] 897 S.W.2d 765
(Tex. 1995), and the undisputed evidence supports the
award of $ 49,500 for attorney's fees. An appellate court
cannot substitute its judgment for that of the jury, even if
the court would have decided the issue differently, where
the jury determination is supported by some evidence.
Herbert v. Herbert, 754 S.W.2d 141, 144 (Tex. 1988). By
the same token, a trial court cannot disregard a finding of
the jury where the evidence supports the jury's award.
We conclude the trial court erred (1) by disregarding the
jury's answer to the second part of question three and (2)
by failing to award Texacal an offset of $ 49,500 for
other damages caused by GXG's breach of the sale and
purchase agreement.
Question four asked the jury whether Texacal's failure,
if any, to comply with the agreement was excused.
The jury was instructed: (1) that failure to comply is delaying
compliance beyond a reasonable period, and (2)
such failure would be excused by GXG's previous failure
to comply with a material obligation of the same agreement.
The jury found that Texacal was excused from
complying with the agreement.
GXG's failure to comply with a material obligation
of the Purchase and [**70] Sale Agreement arose from
the deficient conveyance. Under the agreement, Texacal
was obliged to fund the promissory note. The jury answered
in the first part of question three that the difference
in value between the properties promised and the
properties conveyed was $ 330,000. Texacal was excused
from performing to this extent, i.e., Texacal did
not have to pay for the properties contracted for and not
received.
The trial court did not disregard the jury's answer to
Question four. The $ 330,000 was credited to the initial
balance of the promissory note. Texacal is not excused
from its obligation to pay accrued interest on the adjusted
initial balance of the promissory note ($ 220,000), calculated
from the date agreed upon. Even though the terms
of the promissory note provide that payments need not be
made until thirty days after the Knox trust properties
have been conveyed, the note expressly states that interest
would start accruing on April 1, 1991. GXG's failure
to perform completely did not stop the accrual of interest
from that day. Likewise, the term for recovery of attorney's
fees expended in efforts to collect on the note is not
lost to GXG because GXG's collection efforts [**71]
arose from Texacal's failure to make scheduled payments
on the note, even after Texacal accepted, in October
1992, that GXG would not convey the remaining
two-thirds of the Knox trust properties. 15
15 Texacal's original petition in this suit, filed
October 30, 1992, seeks, inter alia, abatement of
the purchase price to reflect the deficiency in the
conveyance.
Question five, regarding the balance of the promissory
note, has been largely addressed under GXG's thirteenth
point of error. Texacal explained the basis of the
jury's findings: after deducting the $ 330,000 deficiency
from the $ 550,000 balance, the note's beginning balance
was $ 220,000. From that, the jury deducted $ 160,000
for the Yates Funds and $ 49,500 for third-party litigation
costs, then added back approximately $ 2,500 as
interest from May 1993 through August 1995 to arrive at
the final figure of $ 13,200.
As our own calculations establish, the jury's finding
of a balance of $ 13,200 is incorrect. Furthermore, the
finding of $ 13,200 is [**72] not supported by the evidence
because Texacal's and Mesa's payments are not
accounted for, and over two years accrued interest is
excluded. The trial judge did not err in disregarding the
jury's answer to Question five.
In its answer to Question six, the jury found that
there was no excuse for GXG's failure to comply with
the Purchase and Sale Agreement. In accordance with the
instructions and definitions provided with the [*426]
question, the jury's answer reflects that Texacal did not
defraud GXG, nor was the Purchase and Sale Agreement
entered into as a result of a mutual mistake. In its petition,
Texacal sought abatement of the purchase price,
and cancellation of the note and deed of trust, mutually
exclusive remedies.
Texacal claims the trial court disregarded the jury's
answer, but it fails to explain how this is reflected in the
judgment. As discussed under GXG's ninth through
eleventh points, the jury found that GXG failed to convey
a promised three-thirds interest and the failure
amounted to $ 330,000 in damages. The trial court abated
the purchase price by that amount and then utilized
the recomputed price in its calculations of the note's balance.
Texacal clearly does not want [**73] to rescind
the deal and is, therefore, not entitled to be relieved of
paying for the properties it received. We do not see a
disregard for this finding in the trial court's judgment.
Texacal's first cross-point is partially sustained and partially
overruled. The judgment will be corrected to reflect
the jury's finding of other damages incurred by Texacal
in the amount of $ 49,500.
In its second cross-point, Texacal complains the trial
court disregarded the jury's answers to Questions eleven
and twelve. Questions 11 and 12 concern the deed of

trust which listed some, but not all, of the properties. A
one-third interest in ninety-percent of the properties in
Exhibit A were conveyed. A three-thirds interest in all of
the properties in Exhibit B were conveyed. Some, but not
all, of the properties from each exhibit were listed on the
deed of trust.
The questions are identical, except the substitution
of "B" for "A" in Question 12. Question 11 reads, in relevant
part, as follows:
Other than the properties listed on the Deed of Trust
. . . did the parties intend that all of the other Exhibit "A"
Trust properties be listed on the Deed of Trust? Answer
"Yes" or "No."
The omission [**74] of properties on the Deed of
Trust may have resulted from mutual mistake. A mutual
mistake results from a mistake of fact common to both
parties if both parties had the same misconception concerning
the fact in question. A mistake by one party but
not the other is not a mutual mistake. A mutual mistake
may also arise when the parties to an agreement have
identical intent and understanding of the terms to be
embodied in a proposed written agreement, but, in the
effort to reduce the agreement to writing, a mistake was
made so that the writing does not present the intended
agreement.
The omission of properties on the Deed of Trust
may have resulted from the unilateral mistake of one
party, but not the other, coupled with fraudulent or inequitable
conduct of the other party.
Answer: No
In answer to both Questions eleven and twelve, the
jury found that the parties had not intended to include all
of the properties on the deed of trust. The trial court disregarded
both answers, decreed that "GXG, INC. has a
contractual deed of trust lien upon all properties sold,
transferred and conveyed by GXG, INC. to TEXACAL
OIL & GAS, INC., . . . including, but not limited to, the
properties [**75] [described on the attached pages]."
The trial court further declared that the promissory note
was secured by an implied vendor's lien and that such
lien applied to all of the properties. Finally, the trial court
ordered foreclosure of the properties.
The jury found, and we agree, that there was no
"fraudulent or inequitable conduct." Clearly this cannot
be the basis of the trial court's disregard for the jury's
answer. Nor can we discern a mutual mistake. O'Connor
testified that he had expected only the Knox trust properties
to be security for the promissory note, although he
later agreed to the inclusion of some of the South Texas
properties as additional collateral. Knox testified that
Gatlin told her all of the properties, both in the Knox
Trust and South Texas, would be included on the deed of
trust. The three pages attached to the contract which
name, but do not describe, the properties conveyed include
fifty-nine listings. The list attached to the deed of
trust which names and describes the properties securing
the note is two pages long. Even a cursory inspection
[*427] would have immediately revealed that far fewer
than fifty-nine properties were covered by the deed of
trust. Knox [**76] was not prevented from inspecting
the attached pages to either document. There is no mutual
mistake.
The trial court gave no reason for declaring that the
deed of trust applied to all of the properties conveyed by
GXG, and we can find no basis for the court's action. If
the parties had agreed and intended to encumber all of
the properties, they could have easily memorialized such
an agreement. It appears the parties intended to include
only selected properties on the deed of trust.
The trial court also decreed that GXG retained an
implied vendor's lien on all of the properties. The function
of an implied equitable lien is to enforce a purchase
money obligation not otherwise secured. White v.
Downs, 40 Tex. 225, 226, 231 (1874). The fact that the
note was secured by a deed of trust affirmatively shows
the parties' intention to rely solely upon the security provided
by the deed of trust. Numerous authorities support
the rule that where the vendor takes a mortgage on the
land sold or on other property to secure part of the purchase
money, he is presumed to have waived his equitable
lien in the absence of affirmative evidence that he
intended to retain it, since it is reasonable [**77] to
suppose that where the parties specify the security by
express agreement, they must have intended to exclude
an implied lien. Cresap v. Manor, 63 Tex. 485, 486-87
(1885); Flanagan v. Cushman, 48 Tex. 241, 244 (1877)
(where land is sold for debt and the debt is contractually
secured by other collateral, equity does not infer that the
vendor is entitled to a different and additional security
from that contracted for); Zapata v. Torres, 464 S.W.2d
926, 930 (Tex. Civ. App.--Dallas 1971, no writ); Dyson
v. Dysart, 250 S.W. 716, 717 (Tex. Civ. App.--Amarillo
1923, no writ); Noblett v. Harper, 136 S.W. 519, 520
(Tex. Civ. Texarkana 1911, no writ).
Texacal's second cross-point challenging the trial
court's disregard for the jury's answers to Questions
eleven and twelve is sustained.
The courts of appeals are empowered to affirm,
modify, correct, reform, reverse and dismiss, or reverse
and render the judgment that the court below should have
rendered. TEX. R. APP. P. 43.2.
Accordingly, we reform the judgment to delete the
trial court's (1) reformation of the deed of trust and (2)
imposition of an implied vendor's lien. We modify the
order of judicial foreclosure to [**78] apply only to the

properties on the deed of trust. We modify the judgment
to reflect the correct balance of the promissory note due
GXG to be $ 82,220.28, and we grant Texacal an offset
of $ 49,500.00 on that amount for other damages the jury
found Texacal suffered. As reformed and modified, the
judgment is affirmed.
FEDERICO G. HINOJOSA
Justice
Opinion delivered and filed this the 18th day of
June, 1998.

101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
130 of 179 DOCUMENTS
IBP, INC., APPELLANT v. STEVEN M. KLUMPE AND JEFF BLACKBURN,
APPELLEES
NO. 07-00-0221-CV
COURT OF APPEALS OF TEXAS, SEVENTH DISTRICT, AMARILLO
SUBSEQUENT HISTORY: Petition for Review Denied.
PRIOR HISTORY: [**1] FROM THE 181ST DIS-
TRICT COURT OF POTTER COUNTY; NO. 84,777-B;
HONORABLE SAMUEL KISER, JUDGE.
IBP, Inc. v. Klumpe, 2001 Tex. App. LEXIS 6219 (Tex.
App. Amarillo Sept. 11, 2001)
DISPOSITION: Affirmed in part, reversed and remanded
in part.
LexisNexis(R) Headnotes
COUNSEL: Keith A. Langley, Gregory M. Weinstein,
WINSTEAD, SECHREST & MINICK, P.C., Dallas, TX.
David Mullin, MULLIN, HOARD & BROWN, L.L.P.,
Amarillo, TX.
JUDGES: PANEL A, Before BOYD, C.J., and REAVIS
and JOHNSON, JJ.
OPINIONBY: Petition for Review Denied April 2,
2003.Phil Johnson
OPINION:
[*465] The Motion for Rehearing of appellees
Klumpe and Blackburn is denied. Our opinion dated
September 11, 2001, is withdrawn and the following
opinion is issued in its place.
Appellant IBP, Inc., appeals from an adverse summary
judgment in its suit based upon actions of appellee
Steven M. Klumpe in obtaining and furnishing documents
containing alleged trade secrets to Klumpe's attorney,
appellee Jeff Blackburn, who then provided them
in discovery to attorneys who represented Klumpe's
stepson in a personal injury suit against IBP. IBP urges,
101 S.W.3d 461; 2001 Tex. App. LEXIS 7729
November 16, 2001, Decided
Page 1
as to the summary judgment in favor of Klumpe and
Blackburn that the combined affirmative-evidence and
no-evidence motions for summary judgment were erroneously
granted because Klumpe and Blackburn did not
seek summary judgment on all of the causes of action
alleged by IBP, and because, as to the grounds Klumpe
and Blackburn presented in seeking summary judgment,
(1) IBP presented evidence creating genuine material fact
issues on each element of its claims challenged by the
[**2] no-evidence parts of the motions, including
damages, (2) affidavits supporting the affirmative-evidence
parts of Klumpe and Blackburn's motions
were defective, and (3) the actions of Klumpe and
Blackburn were not privileged.
We affirm in part and reverse and remand in part.
I. BACKGROUND
In April, 1997, Klumpe and his stepson, Chris Escamilla,
were employed by IBP at its Amarillo, Texas,
meat processing facility. Escamilla was a laborer in the
slaughter department; Klumpe was a superintendent in
the department.
[*466] On April 3, 1997, Escamilla suffered injuries
to his hand while operating a meat cutting machine
called the "hock-cutter machine." Escamilla consulted
Blackburn in regard to his injury. Blackburn referred
Escamilla to attorneys at the law firm of Fadduol and
Glasheen, P.C. ("Fadduol & Glasheen," or "the law
firm"). n1 Fadduol & Glasheen filed suit for damages
against IBP and Escamilla's supervisor based on Escamilla's
injury ("the Escamilla suit"). n2 Pleadings in the
Escamilla suit included allegations of inadequate staffing
and negligent production procedures on the part of IBP.
n1 IBP originally sued Klumpe and Blackburn
and attorneys Kevin Glasheen, Sam Fadduol
and Fadduol & Glasheen, P.C. Summary judgment
was granted by the trial court in favor of all

[**3]
the defendants. IBP appealed as to all defendants.
Subsequent to oral submission IBP settled with
Glasheen, Fadduol and Fadduol & Glasheen, P.C.
Accordingly, we address only those matters presented
by the summary judgment motions of
Blackburn and Klumpe and IBP's appellate issues
as to those motions.
n2 IBP did not provide worker's compensation
insurance. See TEX. LAB. CODE ANN. §
406.001, et. seq. (Vernon 1996 & Supp. 2001).
Before Escamilla's injury, IBP had promulgated
guidelines for various aspects of its production processes.
The guidelines were incorporated into documents
called "Crewing Guides." The Crewing Guides ("the
Guides") were developed from time-motion studies of
IBP's production employees and processes. IBP spent
considerable sums n3 to develop the Guides as part of
attempts to reduce its costs of production. According to
the affidavit of James Crow, the personnel manager of
IBP's Amarillo plant, the information contained in the
Guides gave IBP a competitive advantage over competitors
who had no knowledge of the Guides or did not use
the Guides in their business. Crow's affidavit set out that
(1) IBP considered the Guides a trade secret and protected
the Guides' contents by way of various security
procedures, such as limiting the number of hard copies of
the Guides and by limiting the number of employees
allowed access to the Guides; (2) [**4] all of IBP's
employees were required to sign agreements not to disclose
IBP's trade secrets and confidential and proprietary
information; (3) part of the measures taken to prevent
unauthorized disclosure was to limit access to the
Guides; (4) employees signed non-disclosure agreements
in regard to "trade secret, technical information or business
information" of IBP not available to the public; and
(5) Klumpe did not have authorization to remove the
Guides from IBP's facility. As a superintendent, Klumpe
had access to the Guides and signed a non- disclosure
agreement. Klumpe also signed Conflict of Interest
commitments whereby he agreed that he would not, for
his or anyone else's gain, make use of or disclose confidential
information learned as a result of his employment
with IBP.
n3 IBP provided evidence that it spent several
million dollars to develop the Guides.
As part of the discovery process in the Escamilla
suit, Fadduol & Glasheen n4 noticed the deposition of
101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
Page 2
Klumpe. The deposition notice directed Klumpe [**5]
to produce certain documents and tangible things at his
deposition. One of the 13 itemized requests was "Any
and all documents which show the crewing guidelines
for. . ." the hock-cutter machine being operated by Escamilla
at the time of his injury. The deposition notice
was served on attorney Ken Muncy, counsel for IBP, and
on Blackburn, who was Klumpe's personal attorney.
[*467] Blackburn had previously notified Muncy that
Blackburn represented Klumpe and that contacts with
Klumpe about the Escamilla suit should include Blackburn.
Muncy, therefore, advised Fadduol & Glasheen
that Klumpe's deposition should be arranged through
Blackburn.
n4 Various aspects of the Escamilla case
were handled by different attorneys with the law
firm. Discovery was primarily conducted by attorney
Chris Carver.
After service of the deposition notice, Klumpe delivered
certain documents to Blackburn, including a copy
of the Guides which Klumpe took from his office at
IBP's plant. The copy of the Guides furnished to Blackburn
contained 18 [**6] pages of crewing information
as to the job on which Escamilla was injured and other
jobs at IBP's plant.
IBP filed objections and a motion for protective order
in regard to certain of the documents which Klumpe
had been directed to produce at his deposition, including
the Guides. A copy of the motion was faxed to Blackburn.
Muncy advised Klumpe via telephone call that IBP
considered certain of the documents requested by Fadduol
& Glasheen to be confidential IBP materials. Attorneys
Muncy and Blackburn scheduled a meeting for
Monday, June 30th, to review documents Klumpe possessed
which would be responsive to the deposition notice.
On Sunday, June 29th, in response to a letter request
from Faddoul & Glasheen for "informal discovery" of all
documents provided to Blackburn by Klumpe, Blackburn
faxed copies of documents, including all the Guides, to
Fadduol & Glasheen. On June 30th, Muncy learned that
Blackburn had faxed copies of documents including the
Guides to Fadduol & Glasheen, and contacted Fadduol &
Glasheen. A Rule 11 agreement was reached whereby
the faxed documents were to be kept confidential by
Fadduol & Glasheen until a hearing could be held to determine
the privileged nature [**7] of the documents.
An amended motion for protective order was then
filed by IBP seeking (1) determination by the trial court
in the Escamilla suit that certain of the documents faxed
by Blackburn, including the Guides, were privileged
under TEX. R. EVID. 507 (trade secrets) and (2) an order

protecting the confidential nature of the documents. Following
hearing on IBP's Motion for Protective Order, the
trial court ordered that the Guides faxed by Blackburn to
Fadduol & Glasheen were not to be disclosed to any
third parties other than witnesses or consulting experts as
necessary for prosecution of the Escamilla suit.
The Escamilla suit settled during trial. Final judgment
was entered on May 21, 1998. The previously-entered
protective order was not specifically addressed
by the judgment, although the judgment provided
that all relief "not expressly granted herein is denied."
n5
[**8]
n5 The parties do not discuss and we do not
address the trial court's continuing power
post-judgment, if any, to inquire into pre- and
post-judgment compliance with its September 29,
1997 protective order and to enforce the order.
See TEX. GOV'T CODE ANN. § 21.001(a), (b)
(Vernon Supp. 2001); Sutphin v. Tom Arnold
Drilling Contractor, Inc., 17 S.W.3d 765, 772-73
(Tex.App.--Austin 2000, no pet.); Garcia v.
General Motors Corp., 786 S.W.2d 12
(Tex.App.--San Antonio 1990, no writ). At the
July 28, 1997, hearing on IBP's Motion for Protective
Order, the trial judge instructed counsel
for Escamilla that information in the Guides was
not to be used or revealed to parties or witnesses
in other cases against IBP until a request to do so
was presented to the trial judge.
While the Escamilla suit was pending, IBP sued
Klumpe and Blackburn and Fadduol & Glasheen in the
suit now before us ("the IBP suit"), seeking injunctive
relief, damages, an accounting and attorney's fees. The
underlying basis for the suit was that the Guides were
trade secrets of IBP and Klumpe had contractual, common-law
[*468] and statutory obligations not to take
the Guides, disclose the Guides or use the Guides for
either personal gain or gain of any other person. Based
on the trade secret status of the Guides, Klumpe's obligations
and the taking of and production of the Guides by
Klumpe and Blackburn, IBP asserted causes of action for
(1) misappropriation of trade secrets; (2) theft of trade
secrets; n6 (3) tortious interference by all the lawyers
with contractual and confidential relationships between
Klumpe and IBP; (4) conversion of the Crewing Guides;
(5) civil conspiracy to commit the matters set out in (1),
(2), (3) and (4); (6) Klumpe's breach of his employment
contract; and (7) Klumpe's breach of the confidential
relationship between IBP and Klumpe.
101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
[**9]
Page 3
n6 See TEX. PENAL CODE ANN. §
31.05(b) (Vernon 1994). Further references to the
Penal Code will be by reference to "Penal Code §
_."
Klumpe and Blackburn filed a joint motion for
summary judgment. The motion asserted both affirmative-evidence
(traditional) and no-evidence bases. The
ground presented in the motion as an affirmative-evidence
motion was the affirmative defense of litigation
privilege. The no-evidence part of the motion asserted
that IBP presented no evidence that (1) the Guides
contained trade secrets, (2) the Guides were misappropriated
for a commercial use, (3) IBP suffered damages
as a result of the conduct of Klumpe and Blackburn, or
(4) Klumpe breached his employment agreement. The
trial court granted the motion without specifying reasons
for its ruling.
IBP asserts n7 that the trial court erred in granting
summary judgment because (1) IBP presented evidence
creating genuine issues of material fact as to each element
of its causes of action challenged by Klumpe and
Blackburn's motion for summary judgment, including
whether it suffered damages; (2) Klumpe and Blackburn
failed to challenge IBP's causes of action for tortious
interference with contract, civil damages for theft of
trade secrets, conversion, and request for injunctive relief
and return of trade secret information; (3) the litigation
[**10] privilege does not protect the wrongful conduct
of Klumpe and Blackburn; and (4) Klumpe and Blackburn
presented defective summary judgment evidence in
support of their motion.
n7 IBP denominates its challenges to the
judgment as points of error. We will refer to them
as issues. See TEX. R. APP. P. 38.1(e). Further
references to a Rule of Appellate Procedure will
be by reference to "TRAP_."
II. SUMMARY JUDGMENT STANDARDS
AND PROCEDURES FOR REVIEW
A. Procedure
If the trial court does not specify the basis on which it
granted summary judgment, the judgment will be affirmed
if any of the grounds in the motion are meritorious.
State Farm Fire & Cas. Co. v. S.S., 858 S.W.2d
374, 380-81 (Tex. 1993). Issues not expressly presented

to the trial court in writing shall not be considered on
appeal as grounds for reversal. TEX. R. CIV. P. 166a(c).
n8 All theories in support of or in opposition to a motion
for summary judgment must be presented to the trial
court in writing. Casso v. Brand, 776 S.W.2d 551, 553
(Tex. 1989). [**11] If a final summary judgment was
rendered which included more relief than was requested
in the motion, i.e., if some causes of action were not expressly
presented to the trial court in the motion but a
final judgment as to all parties and issues was nevertheless
rendered, then the judgment will be reversed as to all
causes of action and issues [*469] not expressly urged
in the motion for summary judgment and those matters
will be remanded for further proceedings. See Bandera
Elec. Coop., Inc. v. Gilchrist, 946 S.W.2d 336, 337 (Tex.
1997); Chessher v. Southwestern Bell Tel. Co., 658
S.W.2d 563, 564 (Tex. 1983); Ross v. Arkwright Mut. Ins.
Co., 892 S.W.2d 119, 123-24, 134 (Tex.App.--Houston
[14th Dist.] 1994, no writ).
n8 Further reference to a Rule of Civil Procedure
will by reference to "TRCP_."
B. Affirmative-Evidence (Traditional) Motion for Summary
Judgment
A party may prevail on a summary judgment motion by
conclusively establishing the absence of [**12] any
genuine issue of a material fact and that the party is entitled
to judgment as a matter of law. TRCP 166a(c). A
fact is material if it affects the outcome of the suit under
the substantive law governing the suit. See TRCP
166a(i); Isbell v. Ryan, 983 S.W.2d 335, 338
(Tex.App.--Houston [14th Dist.] 1998, no pet.). There is
a genuine issue as to a material fact if the evidence is
such that a reasonable jury could find the fact in favor of
the non-moving party. Id. We review the granting of
such a conclusively- established summary judgment using
the standards set out in Nixon v. Mr. Property Management
Co., 690 S.W.2d 546, 548-49 (Tex. 1985):
1. The movant for summary judgment has the burden
of showing that there is no genuine issue of material
fact and that it is entitled to judgment as a matter of law.
2. In determining whether there is a disputed issue of
material fact precluding summary judgment, evidence
favorable to the non-movant will be taken as true.
3. Every reasonable inference must be indulged in
favor of the non-movant and any doubts resolved in its
favor.
101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
Page 4
If the movant for summary judgment is a defendant,
then in order [**13] to be entitled to summary judgment
the movant must disprove at least one of the elements
of the non- movant's cause of action, or, alternatively,
the movant must prove each element of an affirmative
defense. Randall's Food Mkts., Inc. v. Johnson,
891 S.W.2d 640, 644 (Tex. 1995).
C. No-evidence Motion for Summary Judgment
After adequate time for discovery, a party may move for
a summary judgment as to all or any part of a lawsuit on
the basis that there is no evidence of one or more essential
elements of a claim or defense on which an adverse
party would have the burden of proof at trial. TRCP
166a(a), (b), (i). A no-evidence summary judgment is
essentially a pretrial directed verdict, and we apply the
same legal sufficiency standard in reviewing a no- evidence
summary judgment as we apply in reviewing a
directed verdict. Aguirre v. South Texas Blood & Tissue
Ctr., 2 S.W.3d 454, 456 (Tex.App.--San Antonio 1999,
pet. denied); Roth v. FFP Operating Partners, L.P., 994
S.W.2d 190, 195 (Tex.App.--Amarillo 1999, pet. denied).
We review the evidence in the light most favorable to the
respondent against whom the no-evidence summary
[**14] judgment was rendered, disregarding all contrary
evidence and inferences. Merrell Dow Pharms., Inc.
v. Havner, 953 S.W.2d 706, 711 (Tex. 1997); Roth, 994
S.W.2d at 195. A no-evidence summary judgment is improperly
granted if the non-movant presents more than a
scintilla of probative evidence to raise a genuine issue of
material fact as to the element on which the motion is
based. Id.
III. ANALYSIS
A. Affirmative-evidence summary judgment:
Privilege
Klumpe and Blackburn urged in the trial court that what
they generally referred [*470] to as a "litigation privilege"
bars any liability of either of them as to all of IBP's
causes of action. Encompassed within their Motion for
Summary Judgment were arguments to the trial court
asserting that actions taken in the course of civil litigation
are privileged, and communications made during the
course of litigation are privileged.
Klumpe and Blackburn's Motion for Summary
Judgment stated that the undisputed facts show Klumpe
was served with a subpoena duces tecum to produce certain
IBP documents in the Escamilla suit, that he took the
subpoenaed documents to his attorney Blackburn and
that Blackburn [**15] provided copies to attorneys for
Escamilla and IBP. The motion then urged, in part, that

IBP's entire suit was barred by the litigation privilege
because Klumpe and Blackburn's actions were "allegedly
wrongful communications made during the course of a
judicial proceeding . . ., [and] were part of the Escamilla
litigation. Accordingly, those disclosures are absolutely
privileged from a later civil action." Several authorities
cited in the brief of Klumpe and Blackburn, such as
James v. Brown, 637 S.W.2d 914 (Tex. 1982); Hernandez
v. Hayes, 931 S.W.2d 648 (Tex.App.--San Antonio 1996,
writ denied); and Leigh v. Parker, 740 S.W.2d 101
(Tex.App.--Austin 1987, writ denied), address the absolute
privilege accorded to communications made during
judicial or quasi-judicial proceedings. Klumpe and
Blackburn also cite Ross v. Arkwright Mut. Ins. Co., 933
S.W.2d 302 (Tex.App.--Houston [14th Dist.] 1996, writ
denied), for the proposition that a client cannot be held
liable for improper actions of his attorney absent the client's
participation in the allegedly wrongful actions of
the attorney. Klumpe and Blackburn refer us to [**16]
Levin, Middlebrooks, Mabie, Thomas, Mayes & Mitchell
v. U.S. Fire Ins. Co., 639 So. 2d 606 (Fla. 1994), for the
proposition that absolute immunity must be afforded to
any act occurring during the course of any judicial proceeding,
regardless of whether the act is a defamatory
communication "or other tortious behavior" so long as
the act has some relation to the proceeding.
As a general rule, neither a party in a lawsuit nor an
attorney representing a party in a lawsuit has a right of
recovery under any cause of action against another attorney
arising from conduct the second attorney engaged
in as part of discharging duties in representing a party in
that lawsuit. See Chapman Children's Trust v. Porter &
Hedges, L.L.P., 32 S.W.3d 429, 440 (Tex.App.--Houston
[14th Dist.] 2000, pet. denied); Bradt v. West, 892
S.W.2d 56, 71-72 (Tex.App.--Houston [1st Dist.] 1994,
writ denied). Not every action taken by an attorney during
the litigation process is privileged, however, and determining
whether specific actions taken by an attorney
in the litigation context are privileged is a fact-intensive
question. See Querner v. Rindfuss, 966 S.W.2d 661, 666
[**17] (Tex.App.--San Antonio 1998, pet. denied). A
lawyer is protected from liability claims only as to actions
which are "within the bounds of the law." See
Renfroe v. Jones & Assocs., 947 S.W.2d 285, 288
(Tex.App.--Fort Worth 1997, writ denied); Bradt, 892
S.W.2d at 71.
Communications made in connection with and related
to judicial proceedings are absolutely privileged
and cannot serve as the basis of a civil action for damages
for libel or slander. See James, 637 S.W.2d at
916-17; Bennett v. Computer Assoc. Int'l Inc., 932
S.W.2d 197, 201 (Tex.App.--Amarillo 1996, writ denied).
Nor can such communications in connection with
judicial proceedings be the basis for any other tort action
101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
Page 5
based upon disclosure of the contents of the communications,
even if the legislature has statutorily [*471]
provided that the contents are privileged and that civil
damages are recoverable in the event of unauthorized
disclosure of the contents. See Leigh, 740 S.W.2d at
103-04.
Klumpe and Blackburn cite Mitchell v. Chapman, 10
S.W.3d 810 (Tex.App.--Dallas 2000, pet. denied), to
support the claim that all their [**18] actions, including
Klumpe's taking of the Guides from IBP's plant, are absolutely
privileged from either tort or contractual liability.
We disagree with Klumpe and Blackburn's interpretation
of Mitchell. In Mitchell, defendant Chapman was
an attorney representing defendants sued by Mitchell in
two prior suits. Chapman did not produce documents
requested by Mitchell during discovery in the two prior
suits. After Mitchell lost the suits he sued Chapman and
alleged that Chapman had possession of the requested
documents all along, but either negligently or willfully
misrepresented that the documents did not exist. In affirming
a summary judgment for Chapman, the appellate
court noted that the only issue presented was whether
Mitchell had a cause of action against Chapman. The
court concluded that he did not, because the relationship
between the two in the prior suits was adversarial and
Chapman owed no duty to Mitchell. Id. at 811. The
Dallas court did not base its decision on the question of
privilege.
We do not consider Mitchell controlling of our decision.
Pleading and asserting that an act is privileged is
not the same as asserting that no cause of action [**19]
exists in favor of the plaintiff on the basis that the defendant
owed no duty to the plaintiff. The burden is on
the plaintiff to prove the existence and violation of a legal
duty owed by the defendant in order to establish tort
liability. See Coleman v. Hudson Gas & Oil Corp., 455
S.W.2d 701, 702 (Tex. 1970). The conclusion that a defendant
owes no duty to a plaintiff leads to the further
conclusion that no cause of action exists in favor of the
plaintiff, as was held by the Mitchell court. Privilege,
however, is an affirmative defense to be proved and is in
the nature of confession and avoidance. See Denton
Pub. Co. v. Boyd, 460 S.W.2d 881, 884 (Tex. 1970). Except
where the plaintiff's petition shows on its face that
the alleged wrongful action is protected by a privilege,
the defendant has the burden of proving that the act in
question is privileged. See id. Moreover, in Mitchell, no
assertion was made that Mitchell had a property right in
the documents withheld by Chapman. In the matter we
consider, Klumpe and Blackburn do not dispute that the
Guides were IBP's property. The motion of Klumpe and
Blackburn did not present a no-duty question [**20] to
the trial court, and Mitchell is not determinative of their
privilege defense.

Certain actions by non-lawyers should be privileged
when taken during the course of and in connection with
litigation, just as certain such actions of lawyers are privileged.
The absolute privilege from civil liability for
damages based on the content of communications made
by counsel, parties or witnesses in pre-trial and trial proceedings
is well established. See James, 637 S.W.2d at
916-17; Bennett, 932 S.W.2d at 201; Leigh, 740 S.W.2d
at 103-04. We do not agree, however, with the positions
of Klumpe and Blackburn that Texas law does, or
should, grant absolute immunity from civil liability for
all acts by any party, witness or other person so long as
the acts have some relation to a judicial proceeding. See
Bennett, 932 S.W.2d at 204-05. We conclude that the
Querner court's approach to the litigation privilege of
lawyers is appropriate to the privileges accorded both
lawyers and non-lawyers: the issue must be determined
[*472] according to the facts of each case. Querner,
966 S.W.2d at 666.
Trade secrets are rights [**21] in the nature of
property rights which the law protects through both tort
and contract principles. See Hyde Corp. v. Huffines,
158 Tex. 566, 314 S.W.2d 763, 769-70 (Tex. 1958). Generally,
such principles provide that one who either discloses
or uses another's trade secret, without a privilege
to do so, is liable for such disclosure or use if the disclosure
or use constitutes a breach of confidence reposed in
the party disclosing or using the trade secret by the owner
of the trade secret. See id. To be actionable, the disclosure
or use of the trade secret ordinarily must be to the
competitive disadvantage of the owner of the trade secret.
See Atlantic Richfield Co. v. Misty Prods., Inc.,
820 S.W.2d 414, 422 (Tex.App.--Houston [14th Dist.]
1991, writ denied). Relief granted in an action by the
owner of the trade secret may include damages, injunctive
relief, or both. See Huffines, 314 S.W.2d at 765.
Also, the legislature has provided statutory trade secret
protection. Penal Code § 31.05 provides that a
person commits a felony offense if, without the owner's
effective consent, the person knowingly: (1) [**22]
steals a trade secret; (2) communicates a copy of an article
representing a trade secret; or (3) communicates or
transmits a trade secret. "Trade secret" is defined, in part,
as all or part of any design, process, procedure or improvement
that has value and which the owner has taken
measures to prevent from becoming available to persons
other than those persons selected by the owner to have
access for limited purposes. See Penal Code §
31.05(a)(4). The statutory definition of trade secret
comports with the definition used when tort and contract
trade secret law is considered. See Huffines, 314 S.W.2d
at 776.
The legislature has also provided statutory civil liability
for, among other actions, unlawfully appropriating
101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
Page 6
property as described by Penal Code § 31.05. See TEX.
CIV. PRAC. & REM. CODE § 134 (Vernon 1997 &
Supp. 2001). n9 A person who sustains damages resulting
from the unlawful appropriation of property addressed
by Penal Code § 31.05 may recover actual
damages as well as additional damages not to exceed $
1,000. If a person prevails in a suit [**23] under section
134, the person shall be awarded court costs and reasonable
and necessary attorney's fees. See id. § 134.005.
n9 Further references to a section of the code
will be by reference to "Civil Practice & Remedies
Code § _."
The affidavit of IBP's personnel manager Crow provided
summary judgment evidence that (1) the information
contained in the Guides gave IBP an advantage
over its competitors who had no knowledge of the
Guides or did not use the Guides in their business; (2)
IBP considered the Guides a trade secret and protected
the Guides' contents by way of various security procedures,
such as limiting the number of hard copies of the
Guides and by limiting the number of employees with
access to the Guides; (3) employees, including Klumpe,
signed non-disclosure agreements in regard to "trade
secret, technical information or business information" of
IBP which was not available to the public; and (4)
Klumpe did not have authorization to remove the Guides
from IBP's facility.
1. Klumpe's privilege [**24] defense
Some of the documents requested from Klumpe were
crewing guidelines for [*473] the machine on which
Escamilla was injured, if they were within his possession,
custody or control. See TRCP 205. Assuming, arguendo,
proper service on Klumpe of a subpoena to produce
documents listed on the Notice of Deposition,
summary judgment evidence created a material fact
question as to whether (1) the access granted to Klumpe
was sufficient grant of possession, custody or control that
Klumpe's taking of the Guides was merely a privileged
communication of documents described by the subpoena,
or (2) the access granted to Klumpe was not a grant of
such possession, custody or control of the Guides, and
Klumpe's taking of the Guides was, therefore, an unprivileged
"stealing" or taking of documents followed by the
privileged communication of the documents. See GTE
Comm. Sys. Corp. v. Tanner, 856 S.W.2d 725, 729 (Tex.
1993) (right to possession is a legal right based upon the
relationship between party or person from whom a document
is sought and the person who has actual possession).

In regard to the taking of the documents, Klumpe
argues that any confidentiality agreements [**25] he
entered into with IBP cannot bar him from producing a
relevant document in response to a subpoena duces tecum.
He quotes language from McMann v. Securities
and Exchange Commission, 87 F.2d 377 (2d Cir. 1937),
in support of his position: "It hardly needs to be said that
nobody by contract, express or implied, can abridge public
duties." 87 F.2d at 378-79. Based on McMann and
similar authorities, Klumpe argues that the Guides, in the
final analysis, were discoverable and that his actions,
therefore, cannot be the basis for liability.
Both Klumpe's argument and the quote from
McMann address the issue of whether a person may be
barred from producing discoverable evidence; they do
not address the issue of whether a person may be held
liable for the method by which the evidence was obtained.
Nor do similar authorities cited in Klumpe and
Blackburn's brief support the proposition that a person
may, with privilege from civil liability, obtain evidence
in an unlawful manner. As the McMann opinion further
stated, "Though the information was not itself protected,
it does not follow that all means of extracting it were
lawful." Id. at 379. [**26]
The legislature specifically proscribed stealing of
trade secrets by Penal Code § 31.05(b)(1) and provided
for recovery of damages resulting from violation of that
provision of the criminal law. See Civil Practice &
Remedies Code, § 134. A subpoena duces tecum n10
does not authorize a witness to illegally seize and remove
property of another simply because the property is listed
in the subpoena. See McMann, 87 F.2d at 379. Although
an absolute privilege from civil liability is accorded
as to claims based on communications by participants
in the discovery process, a privilege is not accorded
as to claims based on acquiring information or
documents illegally. See id.; Renfroe, 947 S.W.2d at 288;
Bennett, 932 S.W.2d at 204-05; Bradt, 892 S.W.2d at 71.
n10 We again assume, arguendo, proper service
of a subpoena duces tecum.
We conclude that summary judgment evidence presented
a material [**27] question of fact as to (1)
whether Klumpe obtained the Guides illegally, and (2)
Klumpe's civil liability for his actions. Summary judgment
was proper as to any claim against Klumpe for furnishing
the Guides to Blackburn and Blackburn's faxing
of the Guides to Fadduol & Glasheen, including claims
that such actions were in violation of Penal Code § §
31.05(b)(2) or (3). The furnishing and faxing of documents
were communications of and disclosures of information
by a [*474] witness under subpoena in litiga-
101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
Page 7
tion and were subject to Klumpe's claim of absolute privilege.
See Leigh, 740 S.W.2d at 103-04. Summary
judgment could not have properly been granted on IBP's
causes of action based on Klumpe's actions in taking the
Guides because such actions were not conclusively established
to have been mere privileged communication of
documents over which Klumpe had lawful possession,
custody or control within the meaning of the Texas Rules
of Civil Procedure concerning discovery of documents or
tangible things. See TRCP 205; Bennett, 932 S.W.2d at
204-05.
2. Blackburn's privilege defense
Blackburn was acting as Klumpe's personal attorney
[**28] in regard to the Escamilla suit even before the
notice for Klumpe's deposition was served in June, 1997.
By an affidavit n11 in support of his motion for summary
judgment, Klumpe disclosed that when he was served
with the notice and subpoena in regard to his deposition,
he "gathered the documents requested by the subpoena
duces tecum, and took the documents to my attorney,
Jeff Blackburn."
n11 By issue 4, IBP challenges the competency
of Klumpe's affidavit. Because of our disposition
of IBP's other issues we need not and do
not address the question. See TEX. R. APP. P.
47.1.
Before Blackburn faxed the Guides to Fadduol &
Glasheen on Sunday, June 29th, he received a copy of
IBP's objections to production of certain categories of
documents listed in the notice for Klumpe's deposition.
The objections specifically referenced objection to production
of "any IBP, inc. [sic] generated, produced or
prepared documents or documents which are the property
of IBP . . . ." The objection specifically addressed the
requested [**29] production of documents showing the
crewing guidelines for the hock-cutter which injured
Escamilla. The objection, in part, stated that the request
"seeks disclosure of sensitive proprietary business information
and trade secrets which are exempt and privileged
from discovery under TEX. R. CIV. EVID. 507."
Blackburn testified in his deposition that he was
aware of IBP's claim that certain of the documents requested
by Fadduol & Glasheen were IBP's documents
and allegedly contained confidential information.
Blackburn further testified that he would not voluntarily
give the documents in his possession back to IBP.
Blackburn was representing his client Klumpe in
connection with the Escamilla suit, although Klumpe
was not a party to the suit. n12 Blackburn is protected by
a privilege from civil liability claims based on his com-

munication of the Guides as part of the discovery process,
and as to any other actions in such representation
"within the bounds of the law." See McMann, 87 F.2d
at 379; Renfroe, 947 S.W.2d at 288; Bradt, 892 S.W.2d
at 71. As to the latter issue, IBP urges, in part, that
Blackburn's actions were not within the [**30] bounds
of the law because he directly violated Penal Code §
31.05 by faxing the Guides to Fadduol & Glasheen; and
also because he conspired with Klumpe and Fadduol &
Glasheen to have Klumpe take the Guides in violation of
Penal Code § 31.05.
n12 Blackburn does not claim that he was an
attorney in the Escamilla suit representing a party
adverse to IBP, even though he was to receive a
referral fee from Fadduol & Glasheen if the Escamilla
suit was successful.
A civil conspiracy is a combination by two or more
persons to accomplish an unlawful purpose or to accomplish
a lawful purpose by unlawful means. See Massey
v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex. 1983);
Carroll v. Timmers [*475] Chevrolet, Inc., 592 S.W.2d
922, 925 (Tex. 1979). Basically, the defining characteristic
is that either the object to be accomplished, or the
means by which the object is accomplished, is unlawful.
Massey, 652 S.W.2d at 934.
IBP asserts [**31] that its allegations of a conspiracy
to have Klumpe illegally take the Guides is supported
by evidence creating a question of material fact, including
evidence that (1) Blackburn referred Escamilla to
Fadduol & Glasheen in regard to Escamilla's injury, (2)
Blackburn was to receive a referral fee if Escamilla's
claim against IBP was successful, (3) members of the
Fadduol & Glasheen law firm knew of the Guides and
had previously unsuccessfully attempted to obtain discovery
of the Guides in other lawsuits, (4) members of
the law firm met with Blackburn and Klumpe on various
occasions between Escamilla's injury in April, 1997, and
the June 29th faxing of the Guides by Blackburn, (5) at
least one of the meetings included Klumpe's stepson,
Escamilla, (6) the law firm requested "informal" discovery
of all documents Klumpe had delivered to Blackburn
after the firm and Blackburn had been served with IBP's
objections to production of crewing guidelines for the
hock- cutter machine causing Escamilla's injury, n13 and
(7) Blackburn subsequently faxed all 18 pages of the
Guides on the evening before Blackburn was to meet
with IBP's attorney to review documents in the possession
of Blackburn [**32] and Klumpe which might be
responsive to the deposition notice.
101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
Page 8
n13 Fadduol & Glasheen attorney Carver
denied having seen IBP's objections to the documents
subpoenaed for production at Klumpe's
deposition prior to his letter to Blackburn requesting
informal discovery of all documents
Klumpe had furnished to Blackburn. Carver denied
having had telephone contact with Blackburn
on June 27th, 28th, or 29th.
We take note of the concept that the law should not
encourage one suit breeding twenty. Bradt, 892 S.W.2d
at 60. The Bradt court went on to state that an attorney
may make use of any right on behalf of a client which
the attorney deems necessary or proper without making
the attorney liable in damages. Id. See also Texas Beef
Cattle Co., 921 S.W.2d 203, 211 (Tex. 1996); Montgomery
v. Phillips Petroleum Co., 49 S.W.2d 967, 972
(Tex.Civ.App.--Amarillo 1932, writ ref'd). We do not
disagree with such proposition. But, as previously noted,
we do not agree [**33] that a person under subpoena
has a privilege to violate a provision of the penal code in
obtaining evidence merely because that evidence is listed
in a subpoena duces tecum. Nor do we agree that, except
as to communications in connection with the litigation
process as previously discussed, an attorney representing
a client in connection with litigation has a duty to a client
or a categorical privilege to (1) violate a provision of the
penal code or (2) conspire to have another do so. See
Poole v. Houston & T.C. Ry., 58 Tex. 134, 137-38 (1882)
(where a lawyer acting for his client participates in
wrongful activities, his action in doing so is foreign to
the duties of an attorney); Querner, 966 S.W.2d at 666.
The claim against Blackburn for faxing the Guides
to Fadduol & Glasheen is based on his communication
and disclosure of the alleged trade secret contents of the
Guides. As against a claim for civil liability, Blackburn
was absolutely privileged to make such disclosure because
he made the disclosure as part of discovery proceedings
in pending litigation, even if he transmitted the
Guides in violation of Penal Code § 31.05. [**34]
See James, 637 S.W.2d at 916-17; Bennett, 932 S.W.2d
at 201; Leigh, 740 S.W.2d at 103-04.
[*476] The claim against Blackburn for conspiring
to have Klumpe take a copy of IBP's Guides, however,
is not a claim based on the content of a communication
in connection with judicial proceedings because
Klumpe's access to the documents was not conclusively
established to have been such lawful possession, custody
or control within the meaning of the Texas Rules of Civil
Procedure that his taking of them was merely an integral
part of privileged disclosure of documents. See TRCP
205; Bennett, 932 S.W.2d at 204-05. The summary
judgment record before us evidences an unusual set of
facts. We agree with IBP that, under the record presented

and summary judgment standards, a reasonable jury
could infer that Blackburn conspired to have Klumpe
illegally take a copy of IBP's Guides. See Penal Code § §
31.05(a)(4),(b)(1).
Blackburn's assertion of privilege was a proper
ground for the trial court to grant his motion for summary
judgment as to any cause of action based on allegations
that he faxed the Guides in [**35] violation of
law. Summary judgment could not have properly been
granted to Blackburn, however, as to causes of action
based upon Klumpe's allegedly illegal taking of the
Guides and Blackburn's alleged complicity in that action.
B. No-Evidence Motion
1. Misappropriation of trade secrets:
"use" of the Guides
Klumpe and Blackburn sought summary judgment as to
IBP's claim for misappropriation of trade secrets on the
basis that IBP presented no evidence that the Guides
were misappropriated for a commercial use. Klumpe and
Blackburn cite Taco Cabana Int'l v. Two Pesos, Inc., 932
F.2d 1113, 1123 (5th Cir. 1991), for the elements of a
misappropriation cause of action being: (1) existence of a
trade secret; (2) breach of a confidential relationship or
improper discovery of a trade secret; (3) use of the trade
secret; and (4) damages. Klumpe and Blackburn then cite
Misty Products, Inc., 820 S.W.2d at 422, for authority
that the third element of the cause of action requires a
commercial use of the trade secret by which the offending
party seeks to profit.
One aspect of IBP's issue on appeal is that a cause of
action for misappropriation [**36] of trade secrets requires
only unauthorized disclosure of the trade secret by
the offending party, as noted in Huffines. See Huffines,
314 S.W.2d at 769-70. But, even assuming that merely
disclosing a trade secret satisfies the disclosure or use
element of the cause of action, we have previously determined
that the disclosures which IBP claims were
made by Klumpe and Blackburn were absolutely privileged.
Because the disclosures complained of were privileged,
they cannot form the basis of civil liability for
damages. See James, 637 S.W.2d at 916-17; Bennett,
932 S.W.2d at 201; Leigh, 740 S.W.2d at 103-04.
IBP next references Garth v. Staktek Corp.,876
S.W.2d 545 (Tex.App.--Austin 1994, writ dism'd w.o.j.)
as authority for the proposition that if proof of a commercial
use is required, merely exercising dominion and
control over the trade secret is such a commercial use.
See id. at 548. In Garth, however, the party charged
with misappropriation of trade secrets used the trade secret
to complete a basic design for a competing device,
101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
Page 9
consulted a patent attorney about protection [**37] of
the competing device, and sought financing for the competing
product from investors. The appellate court approved
the trial court's holding that using a trade secret to
design a competing product for which a patent application
was then submitted comprised a "commercial use."
The appellate court [*477] also noted that using the
product designed through use of the trade secret to procure
financing for development of the product was a
"commercial use" of the trade secret. Id.
IBP offered no proof that the Guides were used in
any manner which would be or was intended to be in
competition with IBP's business or which would impair
the value of the Guides commercially. The facts of the
Garth case do not correspond with those before us. We
conclude that IBP did not present summary judgment
evidence of either a proscribed commercial use of the
Guides or of a non-privileged disclosure of the Guides
encompassed within meaning of those terms as used in
connection with a cause of action for misappropriation of
trade secrets. See id; Misty Products, Inc., 820 S.W.2d at
422. Summary judgment was properly granted as to
IBP's cause of action for misappropriation of trade
[**38] secrets.
2. Damages
IBP asserts that it segregated and presented evidence of
attorney's fees incurred in the Escamilla suit which were
a natural and proximate consequence of the wrongful
conduct of Klumpe and Blackburn. IBP urges that such
evidence is sufficient to create a material issue of fact.
IBP also asserts that Klumpe and Blackburn's motion for
summary judgment did not address its request for injunctive
relief, and for that reason, also, the summary judgment
could not properly have been granted on the basis
that there was no evidence of damages.
Klumpe and Blackburn assert that IBP's attorney's
fees incurred in filing an amended motion for protective
order in the Escamilla suit are not recoverable as damages
in a separate suit, and that IBP, therefore, has offered
no evidence of the damages element of its cause of action.
In making their assertion, Klumpe and Blackburn
cite authority for the general rule that a litigant cannot
recover attorney's fees from an adverse party in litigation,
absent a contract or statutory authority. They reference
Nationwide Mutual Ins. Co. v. Holmes, 842 S.W.2d
335 (Tex.App.--San Antonio 1992, writ denied), also
cited [**39] by IBP, for the proposition that the general
rule prevents attorney's fees incurred in prior litigation
from being recovered as damages in a subsequent suit.
Generally, attorney's fees incurred by a party to litigation
are not recoverable from an adversary in that litigation
unless provided for by statute or contract. See

Travelers Indem. Co. v. Mayfield, 923 S.W.2d 590, 593
(Tex. 1996); Turner v. Turner, 385 S.W.2d 230, 233
(Tex. 1964); City of Amarillo v. Glick, 991 S.W.2d 14, 16
(Tex.App.--Amarillo 1997, no pet.); In re Striegler, 915
S.W.2d 629, 640 (Tex.App.--Amarillo 1996, writ denied).
One reason for such rule is the potential for skewing
of the litigation process and potential for abuse of the
process that allowing recovery of attorney's fees from an
adversary would engender. See Mayfield, 923 S.W.2d at
595. Recovery of reasonable and necessary attorney's
fees incurred in litigation-related matters has been allowed,
however, in certain instances, absent statutory or
contractual basis. For example, to recover in a suit alleging
that an adversary maliciously prosecuted a civil
claim, the plaintiff [**40] must establish that special
damages were suffered. See Texas Beef Cattle Co., 921
S.W.2d at 207). Ordinary losses incident to defending a
civil suit, such as inconvenience and attorney's fees do
not qualify as special damages, but once the special injury
hurdle has been cleared, that injury serves as a
threshold for recovery of the full range of damages incurred
as a result of the malicious litigation. 921 S.W.2d
at 208-09. And, when a defendant [*478] has caused
attorneys fees to be incurred in defense of a criminal
charge which was maliciously prosecuted, attorney's fees
in defending the prior criminal charge are recoverable in
the malicious prosecution suit as damages. See J. C.
Penney Co., Inc. v. Ruth, 982 S.W.2d 586, 587
(Tex.App.--Texarkana 1998, no pet.) ($ 20,000 in actual
damages, $ 5,000 in attorney's fees, and $ 50,000 in exemplary
damages awarded); Eans v. Grocer Supply Co.,
Inc., 580 S.W.2d 17, 23 (Tex.Civ.App.--Houston [1st
Dist.] 1979, no writ). Attorney's fees incurred in attempting
to persuade an insurance company to indemnify
an insured have been held to be recoverable as actual
damages under the Deceptive Trade Practices Act [**41]
n14 in a subsequent suit. See Holmes, 842 S.W.2d at
341-42. In Powell v. Narried, 463 S.W.2d 43
(Tex.Civ.App.--El Paso 1971, writ ref'd n.r.e.), defendant
sought by a cross- action [sic] to recover attorney's fees
for defense of the original suit. The court of appeals did
not allow recovery of attorney's fees for defending the
original suit, although the general rule as to recovery of
such fees was stated to be:
n14 See TEX. BUS & COM. CODE ANN. § §
17.45 et.seq. (Vernon 1987 & Supp. 2001).
Where the natural and proximate consequence of a
wrongful act has been to involve a plaintiff in litigation
with others, there may, as a general rule, be a recovery in
damages of the reasonable expenses incurred in such
prior litigation, against the author of such act, including
the compensation for attorney's fees; but such expenses
101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
Page 10
must be the natural and proximate consequence of the
injury complained of and must have been incurred necessarily
[**42] and in good faith, and the amount
thereof must be reasonable.
Id. The trial court's award for attorney's fees was reversed
for (1) failure of the plaintiff- appellee to segregate
fees for defense of the original claim from fees resulting
from the actions of appellee's attorneys in prosecuting
the third party claim, (2) failure of plaintiff- appellee
to prove the reasonableness and necessity of the
fees, and (3) the cross-action did not qualify as a "prior
suit." Id. See also Estate of Arlitt v. Paterson, 995
S.W.2d 713, 721 (Tex.App.-San Antonio 1999, pet. denied);
Standard Fire Ins. Co. v. Stephenson, 963 S.W.2d
81, 90 (Tex.App.--Beaumont 1997, no pet.); Texas Beef
Cattle Co. v. Green, 883 S.W.2d 415, 430
(Tex.App.--Beaumont 1994), rev'd on other grounds,
921 S.W.2d 203 (Tex. 1996); Baja Energy, Inc. v. Ball,
669 S.W.2d 836, 839 (Tex.App.--Eastland 1984, no writ).
Promptly after he learned that the Guides had been
taken by Klumpe and faxed to Fadduol & Glasheen,
IBP's attorney in the Escamilla suit filed an amended
motion for protective order seeking to limit further disclosure
and [**43] use of the Guides and their content.
The evidence segregated attorney's fees for that motion
from fees for other discovery matters in and defense of
the Escamilla suit. Klumpe was not an adversary to IBP
in the Escamilla suit; he was not a party to the suit. The
fees sought as damages are not fees incurred in prosecution
of or defense of the IBP suit before us. We conclude
that the summary judgment evidence created a material
fact issue as to whether Klumpe's actions in taking the
Guides resulted in damages to IBP in the nature of additional
attorney's fees. See Penal Code § 31.05(b); Civil
Practice & Remedies Code § § 134.003(a), 134.005(a);
Holmes, 842 S.W.2d at 341-42; Powell, 463 S.W.2d at
46. Final summary judgment could not have been
properly granted on Klumpe and Blackburn's assertion
that IBP presented no evidence of damages resulting
[*479] from the taking of the Guides by Klumpe. See
Gilchrist, 946 S.W.2d at 337; Ross, 892 S.W.2d at
123-24, 134.
Furthermore, we agree with IBP that the
no-evidence motion did not expressly [**44] address
IBP's request for equitable relief. The trial court could
not have granted summary judgment as to IBP's equitable
relief claims because Klumpe and Blackburn did not
present those to the trial court in writing as a basis for the
summary judgment being sought. See Cincinnati Life
Ins. Co. v. Cates, 927 S.W.2d 623, 625 (Tex. 1996).
C. Breach of contract

IBP contends that the summary judgment evidence created
a material fact issue as to Klumpe's breach of his
employment agreements. In response to Klumpe's motion
for summary judgment, IBP provided a copy of an employment
agreement signed by Klumpe. The agreement
states that:
I, [Steven Klumpe], in consideration of either (a) the
continuation of my employment by Employer (which
shall mean IBP, inc.[sic], herein called the Company, or
any corporation or company of which the Company
owns, directly or indirectly, more than half the voting
stock or other ownership interest, herein called Subsidiary)
for a period of time not less than one month from
the date hereof or (b) my employment by Employer as a
new employee, and in consideration of the salary or
wages received by me during such employment, hereby
[**45] agree as follows:
1. Other than as required in my duties to Employer, I
shall not disclose to anyone or use either during or after
my employment, except with written consent of Employer,
any trade secret, technical information or business
information of Employer which information is not
available to the public. This same obligation shall apply
to trade secrets of any third party as learned by me during
my employment and with respect to which Employer
has an obligation to maintain secrecy. Technical and
business information of any previous employer or other
third party which I may disclose to Employer shall be
limited to that which was acquired legitimately and disclosed
to me without restriction as to secrecy.
2. ...
The affidavit of James Crow averred that Klumpe
did not have authorization to remove the Guides from
IBP's Amarillo facility. We have already determined that
IBP's evidence raised a material issue of fact as to the
Guides' trade secret status. The evidence raised a genuine
issue of material fact as to whether (1) Klumpe had a
contractual obligation not to remove the Guides without
authorization, and whether (2) Klumpe breached such an
obligation by a non-privileged [**46] taking of the
Guides, as opposed to the privileged communication of
documents pursuant to subpoena if he had been in pos-
101 S.W.3d 461, *; 2001 Tex. App. LEXIS 7729, **
Page 11
session, custody or control of the documents within the
purview of discovery rules. See TRCP 205. Summary
judgment could not have been properly granted on the
express ground that IBP presented no evidence that
Klumpe breached his employment agreement by taking
the Guides. Summary judgment was properly granted as
to IBP's claim that Klumpe breached his employment
agreement by disclosing the Guides and content of the
Guides to Blackburn. Such disclosure was privileged.
See Leigh, 740 S.W.2d at 103-04.
C. Causes of action not expressly presented to trial
court by Motion for Summary Judgment
Klumpe and Blackburn's motion for summary judgment
did not expressly [*480] present grounds to the trial
court for summary judgment as to IBP's claims for theft
of trade secrets in violation of Penal Code § 31.05 and
civil liability for such theft, intentional interference with
contract, conversion or promissory estoppel, except to
the extent such causes would be barred had we sustained
Klumpe and Blackburn's claims of privilege to all [**47]
of the causes of action. We have not done so. Accordingly,
we reverse the summary judgment in favor of both
Klumpe and Blackburn as to the causes of action not
expressly presented to the trial court and remand those
causes for further proceedings. See Gilchrist, 946
S.W.2d at 337; Chessher, 658 S.W.2d at 564; Ross, 892
S.W.2d at 123-24, 134.
CONCLUSION
The summary judgment in favor of both Klumpe and
Blackburn is affirmed as to those parts of IBP's causes of
action based upon Klumpe's disclosure of the Guides to
Blackburn and Blackburn's faxing of the Guides to Fadduol
& Glasheen. The summary judgment is also affirmed
as to IBP's cause of action for misappropriation of
trade secrets. The summary judgment is reversed as to all
other claims and causes of action pled by IBP, and the
cause is remanded for further proceedings in accordance
with this opinion. TRAP 43.2(d).
Phil Johnson
Justice

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NOTICE: [**1] PUBLISH
LEXSEE 86 SW 3D 363
IN RE: CHAD KOEHN
No. 06-02-00039-CV
COURT OF APPEALS OF TEXAS, SIXTH DISTRICT, TEXARKANA
DISPOSITION: Sever cause of action against
Koehn, writ of mandamus pending.
COUNSEL: Hon. Larry S. Kaplan, Tarron L. Gartner
and Associates, Dallas, TX.
Hon. Michael V. Brophy, The Brophy Law Firm, PC,
Sugar Land, TX.
Hon. R. Michael Beene, Law Offices of R. Michael
Beene, Dallas, TX.
Hon. Rex A. Nichols Jr., Nichols & Nichols, PC,
Longview, TX.
Hon. Stephen W. Howard, Law Offices of Stephen W.
Howard, Longview, TX.
JUDGES: Before Grant, Ross, and Cornelius,* JJ.
Opinion by Justice Grant.
UNKNOWN *William J. Cornelius, Chief Justice,
Retired, Sitting by Assignment.
OPINION BY: Ben Z. Grant
OPINION
[*365] Original Mandamus Proceeding
Opinion by Justice Grant
Relator, Chad Koehn, petitions for a writ of mandamus
to the Honorable Joe D. Clayton, serving as a
visiting judge in the 124th Judicial District Court of
Gregg County. Koehn requests this court to order Judge
86 S.W.3d 363; 2002 Tex. App. LEXIS 6745
September 18, 2002, Submitted
September 19, 2002, Decided
Page 1
Clayton to vacate his order denying Koehn's Motion for
Severance from a suit filed by the real parties in interest,
Elaine and Greg Shadowens, against Koehn and the
Shadowenses' insurers, Progressive County Mutual Insurance
Company and Travelers Insurance Company.
In the underlying suit, the Shadowenses' alleged that
Koehn's negligence caused his vehicle to collide with the
Shadowenses' vehicle and that Progressive and Travelers
owed them compensation for their losses under the "uninsured/underinsured
motorist" provisions of their insurance
policies. Koehn filed a Motion to Transfer Venue
from Gregg County to either Washington County, where
the collision occurred, or Wharton County, where Koehn
lives. 1 Change of venue is not before this court. [**2]
Koehn later filed a motion requesting the claims against
him be severed. 2 The district court denied the Motion to
Sever stating, "After due consideration of all relevant
factors, the Court finds that any prejudice to Chad Koehn
can be alleviated by conducting separate trials."
1 In accordance with TEX. INS. CODE ANN.
art. 5.06-1(8) (Vernon Supp. 2002), venue
against an insurer in an action to enforce uninsured
or underinsured coverage is the county in
which the policyholder or beneficiary instituting
the suit resided at the time of the accident, or in
the county in which the accident involving the
uninsured or underinsured motor vehicle occurred.
2 The Motion to Transfer Venue was filed first,
as required by Rule 86(1). See TEX. R. CIV. P.
86(1). The Motion to Sever is not contained in
the record provided to this court.
Mandamus issues only to correct a clear abuse of
discretion or a violation of a duty imposed by law when
there is no adequate remedy at law. Walker v. Packer,

827 S.W.2d 833, 839 (Tex. 1992); [**3] In re Ramsey,
28 S.W.3d 58, 60 (Tex. App.-Texarkana 2000, orig. proceeding).
We therefore must determine (1) whether the
district court abused its discretion in refusing to sever
Koehn from the underlying suit, and (2) whether Koehn
has an adequate remedy by appeal. See Ramsey, 28
S.W.3d at 60-61.
With respect to the resolution of factual issues or
matters committed to the district court's discretion, we
may not substitute our judgment for that of the district
court. Brady v. Fourteenth Court of Appeals, 795
S.W.2d 712, 714 (Tex. 1990); Ramsey, 28 S.W.3d at 61.
Koehn must establish that the district court could reasonably
have reached only one decision. Walker, 827
S.W.2d at 840; Ramsey, 28 S.W.3d at 61.
Our review is much less deferential with respect to
the district court's determination of the legal principles
controlling its ruling because "[a] trial court has no 'discretion'
in determining what the law is or applying the
law to the facts." Huie v. DeShazo, 922 S.W.2d 920, 927,
39 Tex. Sup. Ct. J. 288 [*366] (Tex. 1996); Walker,
827 S.W.2d at 840. Consequently, a district [**4]
court's erroneous legal conclusion, even in an unsettled
area of law, is an abuse of discretion. See Huie, 922
S.W.2d at 927-28.
A severance splits a single suit into two or more independent
actions, each of which can terminate in a separate
judgment that is final and appealable. Van Dyke v.
Boswell, O'Toole, Davis & Pickering, 697 S.W.2d 381,
383 (Tex. 1985). The parties or claims go out of the
original case. Grossenbacher v. Burket, 427 S.W.2d
595, 597 (Tex. 1968).
An order for separate trials leaves the lawsuit intact,
but enables the trial court to determine one or more issues
without trying all controverted issues at the same
hearing. Hall v. City of Austin, 450 S.W.2d 836, 837-38
(Tex. 1970). An issue that is tried separately need not
constitute a complete lawsuit in itself. Kan. Univ. Endowment
Ass'n v. King, 162 Tex. 599, 350 S.W.2d 11, 19
(1961). A separate trial results in an interlocutory order
determining the claims or issues tried, but there is only
one final judgment entered after all claims and issues
involved in the lawsuit have been tried. Id.
A trial court has broad discretion [**5] in deciding
whether to sever. Guar. Fed. Sav. Bank v. Horseshoe
Operating Co., 793 S.W.2d 652, 658 (Tex. 1990) (op. on
reh'g). We will reverse a trial court's determination regarding
severance only if we find an abuse of discretion.
Id. Nevertheless, when all the facts and circumstances of
the case unquestionably require a severance to prevent
manifest injustice, there is no fact or circumstance supporting
or tending to support a contrary conclusion, and
the legal rights of the parties will not be prejudiced, there
is no room for the exercise of discretion. In that situation,
the trial court has a duty to order a severance. See Allstate
Ins. Co. v. Hunter, 865 S.W.2d 189, 191 (Tex.
App.-Corpus Christi 1993, orig. proceeding); United
States Fire Ins. Co. v. Millard, 847 S.W.2d 668, 671-72
(Tex. App.-Houston [1st Dist.] 1993, orig. proceeding);
see also Womack v. Berry, 156 Tex. 44, 291 S.W.2d
677, 682 (1956) (orig. proceeding).
Severance is proper when (1) the controversy involves
more than one cause of action, (2) the severed
claim is one that would be the proper subject of a lawsuit
if independently asserted, [**6] and (3) the severed
claim is not so interwoven with the remaining action that
it involves the same facts and issues. Id. The controlling
reasons for a severance are to do justice, avoid prejudice,
and further convenience. Id.
In the present case, the Shadowenses' suit involves
more than one cause of action, and the claims against
Koehn would be the proper subject of a suit if independently
asserted. The question is whether the facts
surrounding the claims against Progressive and Travelers
are sufficiently interwoven with the facts surrounding the
claims against Koehn as to warrant the conclusion that
the district court did not abuse its discretion. If the facts
of each case are sufficiently interwoven, then the suit is
not subject to severance absent a showing that Koehn's
rights would otherwise be prejudiced and that such prejudice
could not be removed. See Liberty Nat'l Fire Ins.
Co. v. Akin, 927 S.W.2d 627, 630, 39 Tex. Sup. Ct. J. 934
(Tex. 1996) (orig. proceeding) (holding severance is not
required in the absence of compelling circumstances
such as the existence of evidence admissible to prove one
claim that would prejudice the defense of another claim);
see also Allstate Ins. Co. v. Evins, 894 S.W.2d 847, 850
[**7] (Tex. App.-Corpus Christi 1995, orig. proceeding)
(holding limiting instruction could remove prejudice
to insurer's defense [*367] against plaintiff's contract
cause of action caused by evidence of insurer's settlement
negotiations offered in defense of plaintiff's bad
faith cause of action).
Koehn contends his rights will be prejudiced because
resolution of the claims against Progressive and
Travelers would require the introduction of evidence of
his liability insurance, which is ordinarily not admissible
in a personal injury suit. He cites Black v. Smith, 956
S.W.2d 72, 75 (Tex. App.-Houston [14th Dist.] 1997,
orig. proceeding), in which the plaintiffs sued Black for
personal injuries and breach of contract, and Black's insurance
company for invasion of privacy and intentional
infliction of emotional distress. Id. at 73-74. The claim
against Black's insurer involved the insurer's alleged disclosure
of the plaintiffs' medical and employment records
to a third party. Id. at 74.

The defendants sought a severance, and the trial
court refused. Id. at 73. The court of appeals granted a
conditional writ of mandamus requiring [**8] the trial
court to vacate its order because the plaintiffs' suit involved
more than one cause of action, each of which
could be the subject of an independent suit, because the
claims against Black's insurer involved different facts
from the claims against Black and because the lack of a
severance would result in manifest injustice by introducing
evidence of insurance that would prejudice Black's
defense. Id.
Black is distinguishable from the present case in at
least two respects. First, in Black, the claims against
Black's insurance company did not arise from the events
that gave rise to claims against Black. In the present
case, the Shadowenses' cause of action against Progressive
and Travelers arises out of their purported failure to
pay under the Shadowenses' insurance policies. That
duty arose, if at all, because of the collision between the
Shadowenses and Koehn and is contingent on the
amount of damages, if any, for which Koehn should be
held responsible.
Second, in Black, the plaintiffs/real parties in interest
withdrew their opposition to severance after the trial
court's ruling and after the court of appeals issued a stay
of the proceedings in the trial court. [**9] Id. at 74. In
the present case, the district court did not order a severance,
but it did grant Koehn a separate trial. Compare
TEX. R. CIV. P. 41 with TEX. R. CIV. P. 174(b). Therefore,
the danger of prejudice to Koehn's rights from evidence
of liability insurance has been minimized.
Koehn also contends his rights are prejudiced because
he must defend the suit in Gregg County, when the
collision occurred in Washington County and he lives in
Wharton County. The substance of Koehn's contention is
that, if the Shadowenses had sued only him, venue would
not have been proper in Gregg County. See TEX. CIV.
PRAC. & REM. CODE ANN. § 15.002(a)(1), (2)
(Vernon Supp. 2002) (venue is proper in the county in
which events giving rise to the claim occurred or in the
county of the defendant's residence). He contends venue
is proper over him only because of the claims asserted
against Progressive and Travelers. See TEX. CIV. PRAC.
& REM. CODE ANN. § 15.005 (Vernon Supp. 2002) (if
venue is proper against one defendant, it is proper
against all defendants).
The Texas Supreme Court has held an insured
[**10] must establish the liability of an uninsured/underinsured
[*368] motorist and the extent of
the damages before becoming legally entitled to recover
benefits under an uninsured/underinsured motorist policy.
See Henson v. S. Farm Bureau Cas. Ins. Co., 17
S.W.3d 652, 653, 43 Tex. Sup. Ct. J. 622 (Tex. 2000).
Article 5.06-1(2)(c) of the Insurance Code authorizes the
State Board of Insurance to promulgate the forms of the
uninsured/underinsured motorist coverage. TEX. INS.
CODE ANN. art. 5.06-1(2)(c) (Vernon Supp. 2002). The
Board has promulgated such forms which provide that
the policy contain a provision that the insurance company
will not be liable as a result of a judgment obtained
against the uninsured/underinsured motorist unless the
insurance company has filed a written agreement to the
settlement or the litigation against the uninsured/underinsured
motorist. There have been no indications
that such a waiver exists in the present case.
An insured seeking the benefits of uninsured/underinsured
motorist coverage may (1) sue the
insurance company directly without suing the uninsured/underinsured
motorist; (2) sue the uninsured/underinsured
motorist [**11] with the written
consent of the insurance company, making the judgment
binding against the insurance company; or (3) sue the
uninsured/underinsured motorist without the written
consent of the insurance company and then relitigate the
issue of liability and damages. Millard, 847 S.W.2d at
674; Criterion Ins. Co. v. Brown, 469 S.W.2d 484, 485
(Tex. Civ. App.-Austin 1971, writ ref'd n.r.e.). There is
no suggestion, indication, or contention the insurance
companies have entered into a written agreement making
the litigation binding on the insurance companies.
One of the purposes of requiring the insurance
company's written consent to sue is to allow the insurance
company to protect itself from a default judgment
taken against the uninsured/underinsured motorist or an
insubstantial defense by the uninsured/underinsured motorist.
See Allstate Ins. Co. v. Hunt, 469 S.W.2d 151,
154 (Tex. 1971); Criterion Ins. Co., 469 S.W.2d at 485
n.5. In Hunt, the appellee sued the uninsured motorist
with the insurer's consent and joined the insurer in the
suit. Hunt, 469 S.W.2d at 152. The trial court granted
the insurer [**12] a separate trial. Id. The appellant
then sought to defend the uninsured motorist, but the trial
court found there was a conflict of interest. Id. The Texas
Supreme Court held the trial court did not abuse its discretion
in finding a conflict of interest, held the appellant's
consent meant it was bound by the judgment
against the uninsured motorist, and upheld the judgment
against the appellant. Id. at 155.
In Gov't Employees Ins. Co. v. Lichte, 792 S.W.2d
546, 546 (Tex. App.-El Paso 1990), writ denied, 825
S.W.2d 431 (Tex. 1991) (per curiam), the appellees sued
the appellant and joined the uninsured motorist in the suit
without the appellant's consent. The appellees obtained a
default judgment against the uninsured motorist, severed
that judgment to obtain a final judgment, and moved for
summary judgment against the appellant. Id. at 546-47.
The trial court granted summary judgment, but the court

of appeals reversed, holding the appellees' failure to obtain
the appellant's consent to sue meant the issue of liability
and damages would have to be relitigated. Id. at
548-49.
If the Shadowenses [**13] had obtained Progressive's
and Travelers's consent to sue Koehn, then any
judgment against Koehn would be binding on Progressive
and Travelers. See Criterion Ins. Co., 469 S.W.2d
at 485. (The action by the Shadowenses against Progressive
and Travelers is one in contract; the action against
Koehn is an action in tort.) If the Shadowenses do not
have Progressive's and Travelers's consent to sue Koehn,
the Shadowenses will have to litigate the issue of liability
and damages against Progressive and Travelers. 3
[*369] Therefore, because the issue of liability and
damages will have to be litigated twice, the Shadowenses'
claim against Koehn is not sufficiently interwoven
with their claim against Progressive and Travelers. The
trial court has no choice but to sever the actions.
3 The record is also silent concerning what
role, if any, Progressive and Travelers will have
in defending Koehn. The Texas Supreme Court
has held an insurance company can participate on
the side of the uninsured/underinsured motorist if
the trial court determines such participation will
not constitute a conflict of interest. Allstate Ins.
Co. v. Hunt, 469 S.W.2d 151, 152-53 (Tex. 1971).
[**14] This does not address the matter of venue,
which is not before this court. Based on the record before
us, we direct the trial court to sever the cause of action
against Koehn. We are confident the district court will
comply. The writ will issue only if the trial court fails to
do so.
Ben Z. Grant
Justice

33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
LEXSEE 33 S.W.3D 282,AT 306
LYNWOOD LESIKAR AND HARRIET LEWIS LESIKAR, Appellants v. JENNY
LOU LEWIS RAPPEPORT, ET AL., Appellees
No. 06-98-00126-CV
COURT OF APPEALS OF TEXAS, SIXTH DISTRICT, TEXARKANA
SUBSEQUENT HISTORY: [**1] Petition for
Review Denied August 23, 2001. Appellants' Motion for
Rehearing Overruled. Appellee's Motion for Rehearing
Granted, December 6, 2000. Petition for review denied
by, 08/23/2001
Rehearing denied by, 11/29/2001
Subsequent appeal at Lesikar v. Rappeport, 2003 Tex.
App. LEXIS 3640 (Tex. App. Texarkana, Apr. 29, 2003)
PRIOR HISTORY: On Appeal from the 188th Judicial
District Court. Gregg County, Texas. Trial Court Nos.
92-2292-A-1 and 94-2369-A.
DISPOSITION: :Judgment conditionally affirmed, as
modified.
LexisNexis (TM) HEADNOTES - Core Concepts:
COUNSEL: Hon. David R. Watson, Harbour, Smith,
Harris & Merritt, Longview, TX. Hon. Alison H. Moore,
Thompson Coe Cousins & Irons, Dallas, TX. Hon.
Gregory D. Smith, Ramey & Flock, Tyler, TX. Hon. S.
Gary Werley, Law Offices Of S. Gary Werley, Fort
Worth, TX.
Hon. Jerry S. Harris, Harbour, Smith, Harris & Merritt,
Longview, TX. Hon. Beth D. Bradley, Thompson, Coe,
Cousins & Irons, LLP, Dallas, TX. Hon. Jacquelyn A.
Chandler, Thompson, Coe, Cousins & Irons, LLP, Dallas
TX.
JUDGES: Before Cornelius, C.J., Grant and Ross, JJ.
Opinion by Chief Justice Cornelius. Concurring Opinion
by Justice Grant.
OPINIONBY: William J. Cornelius
33 S.W.3d 282; 2000 Tex. App. LEXIS 6195
April 20, 2000, Submitted
September 12, 2000, Decided
OPINION: [*290]
Opinion by Chief Justice Cornelius
Page 1
Lynwood and Harriet Lesikar appeal from an
adverse judgment in Jenny Rappeport's suit against them
to impose a constructive trust and recover damages for
fraud and breach of fiduciary relationship.
In 1935, H. G. Lewis bought the working interest in
the T. W. Lee oil lease located in Longview, Texas, and
assigned half of the interest to J. C. Robbins. Lewis
operated the entire lease under the name L & G Oil
Company until his death in 1980. In 1964, Lewis and
Robbins each assigned to the Clark, Thomas, Winters &
Shapiro law firm of Austin, Texas (Clark, Thomas), a
1/12 working interest in oil wells 2 and 5 on the lease, or
collectively a 1/6 interest. In the early 1970s, Lewis
drilled two new wells on the lease, wells 3A and 7A.
[**2] Thereafter, although the 1964 assignment to
Clark, Thomas explicitly covered only wells 2 and 5,
Lewis paid Clark, Thomas for oil produced and billed the
firm for operating expenses as though it owned a 1/6
working interest not only in wells 2 and 5, but also in
wells 3A and 7A.
In 1980, Lewis died leaving a will that named his
two daughters, Jenny Rappeport and Harriet Lesikar,
co-independent executrices of his estate. In his will,
Lewis gave Jenny and Harriet each an undivided fifty
percent interest in his estate for life with remainders to
their children. Among Lewis's assets at his death was his
[*291] one-half interest in the T. W. Lee lease, which
the estate, through Jenny and Lewis's widow, Fay Lewis,
continued to operate under the name L & G Oil
Company. In 1985, Clark, Thomas determined that it had
no assignment to it of an interest in wells 3A and 7A and
notified L & G Oil Company of that fact. An L & G

employee wrote Clark, Thomas stating that she searched
L & G's files for an assignment concerning wells 3A and
7A, but found none. Nevertheless, L & G continued to
bill Clark, Thomas for operating expenses associated
with wells 3A and 7A, and continued to pay the firm as
though [**3] it owned an interest in those wells.
In 1992, Harriet and her husband Lynwood (Lyn)
Lesikar sued Jenny, Fay, and others seeking a
declaratory judgment as to each party's ownership in the
Lewis estate and an accounting. In 1993, the Lesikars
added Clark, Thomas as a defendant, seeking to recover
under a theory of unjust enrichment, the "overpayment"
the estate had made on wells 3A and 7A. In response, a
Clark, Thomas attorney, Barry Bishop, contacted the
Lesikars' attorney, Gary Werley. According to Bishop's
testimony, he and Werley agreed that Clark, Thomas
would disclaim its interest in wells 2 and 5 if Werley
would drop Clark, Thomas from the lawsuit and not seek
to recover the overpayment. Bishop wrote a letter to
Werley describing their understanding, referred to by the
parties as the "Rule 11 agreement," but Werley did not
sign and return it at that time. The agreement stated only
that Clark, Thomas would disclaim any interest it might
have in wells 3A and 7A in exchange for the "plaintiffs,"
Harriet and Lyn, not pursuing their overpayment claim
against the firm. On April 14, 1994, the trial court
ordered the Lewis estate closed. On July 13, 1994,
Werley sent a letter to Bishop [**4] claiming Clark,
Thomas owed the estate for the overpayment the estate
had made on wells 3A and 7A. The next day, Werley
sent Bishop a letter with a proposed assignment attached
whereby Clark, Thomas would assign its interest in wells
2 and 5 to Harriet's husband Lyn alone; the letter stated
that Lyn would be calling Bishop concerning a
"settlement offer." On July 18, Bishop notified Jenny's
attorney, Jerry Harris, about the proposed assignment,
who agreed that the estate would be willing to
completely settle the overpayment claim in exchange for
Clark, Thomas's interest in wells 2 and 5. Despite Jenny's
interest, Bishop later agreed with Werley that because
the court had ordered the estate closed, the estate would
be unable to settle the overpayment claim in exchange
for Clark, Thomas's interest in wells 2 and 5 because that
would subject the estate to ongoing liability for any
third-party claims against the Clark, Thomas interest.
They agreed that Lyn's settling the litigation in exchange
for Clark, Thomas's interest in wells 2 and 5 would be
acceptable.
In preparation for trial, Harris, on July 19, 1994,
deposed the Lesikars. Lyn stated at his deposition that he
had spoken to Clark, [**5] Thomas about acquiring
the firm's interest in wells 2 and 5. After the deposition,
Harris wrote Werley and Bishop advising them not to
enter into an agreement unless Jenny was made a party to
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 2
it. On August 3, Bishop amended the assignment to add
provisions that, among other provisions, Lyn would
indemnify Clark, Thomas not only for the overpayment
but for all claims connected with wells 2 and 5, and also
with wells 3A and 7A, and he sent a copy of the
assignment to Werley. That same day, Werley agreed to
the assignment and returned it to Bishop. A few days
later, Werley signed and returned to Bishop the Rule 11
agreement that Bishop still required, and pursuant to that
agreement, Werley dropped Clark, Thomas from the
lawsuit. On August 9, Clark, Thomas signed the
assignment and returned it to Lyn. On August 14, the
trial to close the Lewis estate began, and the
overpayment claim against Clark, Thomas was severed
into its own suit. [*292]
On August 17, 1994, Lyn recorded the assignment
from Clark, Thomas. Later that same day, the parties met
to negotiate a settlement of the litigation. At the meeting,
Lyn indicated he did not wish to discuss the Clark,
Thomas negotiations, and Harriet stated [**6] she did
not know anything about the assignment. The
discussions resulted in a settlement of the litigation
concerning the Lewis estate. On October 17, at Harriet's
request, the overpayment claim against Clark, Thomas
was dismissed without prejudice. A final judgment was
signed on October 18. Attached to it was a mutual
release in which each party released the other from
liability; however, the release contained a clause which
provided that neither party was released from liability
concerning the overpayment.
In early October 1994, Jenny learned that Lyn had
gotten permission from the Railroad Commission to
replace L & G as operator of the lease. On October 31,
Jenny, individually and on behalf of L & G Oil Company
and as "co-trustee of the testamentary trust pursuant to
Lewis's will" and several working interest owners,
brought suit against the Lesikars for the overpayment
and for an injunction, alleging that the Lesikars had
taken and converted to their own use income from estate
property. On November 18, Jenny brought suit in the
same capacity against the Lesikars for breach of
fiduciary duty and fraud. The court granted a temporary
restraining order that allowed Jenny to re-enter [**7]
the lease and operate it as L & G. The suits were joined,
and together they form the suit from which the Lesikars
bring this appeal.
The trial court submitted special questions to the
jury on all theories of recovery and defense. We omit the
instructions and definitions. The jury answered as
follows:
QUESTION NO. 1

Did Harriet Lewis Lesikar breach her fiduciary duty to
Jenny Lou Lewis Rappeport in any of the following
respects:
. . . .
Answer "Yes" or "No" to each of the following:
YES NO
a.) Failing to disclose to Jenny Lou Lewis Rappeport
and Fay Jeter Lewis on or before August 17, 1994
that her husband had acquired the Clark, Thomas interest
in the T. W. Lee Lease? Yes b.) Failing to disclose to
Jenny Lou Lewis Rappeport and Fay Jeter Lewis on or
before August 17, 1994
that the assignment of the Clark, Thomas law firm was
recorded in the deed records of Gregg County,
Texas at approximately 8:30 a.m. on the morning of
August 17, 1994? Yes c.) In settling the Clark[,] Thomas
overpayment litigation by allowing the Clark[,] Thomas
interest to be assigned to her husband and then
dismissing the overpayment litigation after her husband
acquired the Clark[,] [**8] Thomas interest in the T.
W. Lee Lease? Yes d.) By her husband acquiring the
Clark[,] Thomas interest which had been offered to the
Estate of H. G. Lewis Jr.? Yes e.) In spending funds
deposited with her agent in trust for payment of
professional accounting costs of the estate? Yes
f.) Transferring the operating interest in the T. W.
Lee Lease to her husband without payment of any
consideration? Yes g.) Transferring the operating interest
in the T. W. Lee Lease to her husband without
previously disclosing to all beneficiaries her intention to
do so? Yes h.) Secreting the transfer of the operating
interest in the T. W.
Lee lease to her husband until such time as the
beneficiaries could not challenge such transfer with the
Texas Railroad Commission? Yes
QUESTION [NO.] 2
Did Lynwood Lesikar commit fraud against Jenny Lou
Lewis Rappeport?
. . . .
Answer "Yes" or "No"
ANSWER: Yes
QUESTION [NO.] 3
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 3
Did Harriet Lesikar commit fraud against Jenny Lou
Lewis Rappeport?
. . . .
Answer "Yes" or "No"
[*293] ANSWER: Yes
QUESTION [NO.] 4
Do you find that any of the following parties were part of
a conspiracy that damaged Jenny Lou Lewis Rappeport?
. . . . [**9]
Did Conspire Did not Conspire
A. Harriet Lewis Lesikar x
B. Lynwood Lesikar x
C. Others x
QUESTION NO. 5
Did Lynwood Lesikar acquire the Operations of the T.
W. Lee Lease by deception?
. . . .
Answer "Yes" or "No."
ANSWER: Yes
[QUESTION NO.] 6
Do you find that the Clark, Thomas law firm did not own
an interest in Wells 3A and 7A on the T. W. Lee Lease?
. . . .
Answer "Did Not Own" or "Did Own"
ANSWER: Did Not Own
QUESTION NO. 7
Do you find that Jenny Rapppeport [sic] is estopped from
asserting the overpayment claim against Clark[,]
Thomas, if any, out of Wells 3A and Wells 7A in the T.
W. Lee Lease?
. . . .
Answer "Yes" or "No"
ANSWER: No
QUESTION NO. 8

Do you find that the Clark, Thomas law firm and it's [sic]
successor in interest, if any, was overpaid on the
production of the T. W. Lee Lease?
Answer "Yes" or "No"
ANSWER: Yes
If you have answered Question No. 8 "Yes" then answer
Question No. 9, otherwise do not answer Question No. 9.
QUESTION NO. 9
Do you find that the overpayment was the result of a
mutual mistake?
. . . .
Answer "Yes" or "No"
ANSWER: Yes
If you have answered Question No. 8 [**10] "Yes" then
answer Question No. 10, otherwise do not answer
Question No. 10.
QUESTION NO. 10
What amount, if any, do you find the Clark[,] Thomas
law firm or its successor Lynwood Lesikar was overpaid
on the production of the T. W. Lee Lease a.) October
1989 to the present? $ 298,547
b.) For the calendar years 1980 through September 1989?
$ 239,152
If you have answered Question No. 8 "Yes" then answer
Question No. 11, otherwise do not answer Question No.
11.
QUESTION NO. 11
When did a representative of the Estate of H. G. Lewis
Jr. know or should they have known of the existence of a
potential overpayment claim?
Answer by Month and Year
ANSWER: June 1985
QUESTION [NO.] 12
Did Lynwood Lesikar intentionally interfere with the
existing operating agreement between Jenny Lou Lewis
Rappeport d/b/a L & G Oil Company and the working
interest owners of the T. W. Lee Lease that was not
justified?
. . . .
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Answer "Did Interfere" or "Did Not Interfere"
ANSWER: Did Interfere
Page 4
If you have answered Question No. 1, 2, 3, 4, or 5 "Yes"
then answer Question No. 13, otherwise do not answer
Question No. 13.
QUESTION NO. 13
Do you find that a Constructive [**11] Trust should be
imposed on the Clark[,] Thomas interest in the T. W. Lee
Lease transferred to Lynwood Lesikar?
. . . .
Answer Yes or No:
ANSWER: Yes
QUESTION [NO.] 14
[*294] What sum of money, if any, if paid now in
cash, would fairly and reasonably compensate Jenny Lou
Lewis Rappeport for her damages, if any, that resulted
from such wrongful act you have found in Questions 1,
2, 3, 4, 5 or 12?
Consider the following elements of damages, if any,
and none other.
Answer separately in dollars and cents, if any, for
each of the following:
1. Costs incurred in correcting the wrongful
conduct?
ANSWER: $ 12,000.00
2. Loss to business reputation?
ANSWER: $ 0
3. Loss of the value of the Clark[,] Thomas interest on
August 9, 1994?
ANSWER: $ 88,000.00
4. Failure to pay reasonable operational expenses on the
T. W. Lee Lease?
ANSWER: $ 26,122.00
5. Unpaid estate income tax return preparation expense
for tax year 1994?
ANSWER: $ 1,750.00
. . . .
QUESTION [NO.] 15

What is a reasonable fee for the necessary services of
Jenny Lou Lewis Rappeport's attorney in this case, stated
in dollars and cents?
Answer in Dollars and Cents with an amount for
each [**12] of the following:
a. For preparation and trial.
ANSWER: $ 253,444
b. For an appeal to the Court of Appeals.
ANSWER: $ 30,000
c. For making or responding to a petition for review to
the Supreme Court of Texas.
ANSWER: $ 15,000
If you have found by clear and convincing evidence your
answers to Question Nos. 1, 2, 4, 5 or 12 then answer
Question No. 16, otherwise do not answer Question No.
16.
QUESTION [NO.] 16
What sum of money, if any, should be assessed against
Lynwood Lesikar and awarded to Jenny Lou Lewis
Rappeport as exemplary damages for the conduct found
in response to Questions 1, 2, 4, 5, or 12?
. . . .
Answer in dollars and cents, if any.
ANSWER: $ 2 million
If you have found by clear and convincing evidence your
answers [to] Question Nos. 1, 3, or 4 then answer
Question No. 17, otherwise do not answer Question No.
17.
QUESTION [NO.] 17
What sum of money, if any, should be assessed against
Harriet Lesikar and awarded to Jenny Lou Lewis
Rappeport as exemplary damages for the conduct found
in response to Question 1, 3, or 4?
. . . .
Answer in dollars and cents, if any.
ANSWER: $ 500,000.00
QUESTION NO. 18
Do you find that [**13] Jenny Lou Rappeport and L &
G Oil Company ratified the assignment by Clark,
Thomas, Winters & Shapiro to Lynwood Lesikar by
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 5
sending invoices for expenses, and receiving payments
on some of the invoices?
. . . .
Answer "Yes" or "No"
ANSWER: No
QUESTION NO. 19
Do you find that Jenny Lou Rappeport and L & G Oil
Company have waived the ability to contest the
assignment to Lynwood Lesikar by Clark, Thomas,
Winters & Shapiro by sending invoices for expenses, and
receiving payments on some of the invoices?
. . . .
Answer "Yes" or "No"
ANSWER: No
QUESTION NO. 20
[*295] Do you find that Jenny Lou Rappeport and/or L
& G Oil Company committed waste in selling the oil
from the T. W. Lee Lease for a price lower than that
available, to the detriment of all working interest
owners?
. . . .
Answer "Yes" or "No"
ANSWER: No
If you have answered Question No. 20 "Yes" then
answer Question No. 21, otherwise do not answer
Question No. 21.
QUESTION NO. 21
What sum of money, if any, do you find to be the
damages sustained by Lynwood Lesikar as a proximate
cause of the conduct of Jenny Lou Rappeport?
Answer in Dollars and Cents, if any.
ANSWER: $ 0
QUESTION NO. 22
Do [**14] you find that Jenny Lou Rappeport
committed malicious prosecution of Lynwood Lesikar
that proximately caused Lynwood Lesikar to suffer
damages?
. . . .
Answer "Yes" or "No"
ANSWER: No

If you have answered Question No. 22 "Yes" then
answer Question No. 23, otherwise do not answer
Question No. 23.
QUESTION NO. 23
What sum of money, if any, do you find would fairly and
reasonably compensate Lynwood Lesikar for his
damages and losses that were proximately caused by
Jenny Lou Rappeport on the occasion in question, if any?
. . . .
Answer in Dollars and Cents
ANSWER: $ 0
QUESTION NO. 24
What is a reasonable fee for the necessary services of
Lynwood Lesikar's attorney in this case in reference to
the title dispute?
Answer in Dollars and Cents with an amount for
each of the following:
Preparation and trial ANSWER: $ 35,000.00
For representation on appeal, if any,
to the Court of Appeals ANSWER: $ 30,000.00
For representation on appeal, if any,
to the Supreme Court of Texas ANSWER: $ 15,000.00
The court rendered judgment based on the jury's answers.
The Lesikars challenge the jury answers in Jenny's
favor regarding breach of fiduciary [**15] duty, fraud,
ratification, waiver, and conspiracy on the basis that they
are not supported by legally and/or factually sufficient
evidence. They also challenge the actual damages
awards, including the constructive trust and overpayment
awards, as well as the punitive damages awards.
BREACH OF FIDUCIARY DUTY AND FRAUD
The jury found that Harriet breached her fiduciary
duty to Jenny in many respects and that both Harriet and
Lyn were guilty of fraud. The Lesikars contend that the
assignment from Clark, Thomas to Lyn did not amount
to a breach of fiduciary duty or fraud by Harriet, and
they contend that the trial court erred in failing to
disregard jury findings 1a, 1b, 1c, 1d, 2, and 3 because
there is no evidence or factually insufficient evidence to
support them. They also contend that Harriet's dismissing
the suit against Clark, Thomas for the overpayment did
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 6
not amount to a breach of fiduciary duty or fraud, and
they contend that the trial court erred in failing to
disregard the jury's answers to questions 1c, 2, and 3.
They also contend that the transfer of the operations of
the T. W. Lee oil lease to Lyn did not amount to breach
of fiduciary duty or fraud, and they contend [**16] that
the trial court erred in failing to disregard the jury's
answers to questions 1f, 1g, 1h, 2, and 3.
The Lesikars attack all of the jury's findings related
to breach of fiduciary [*296] duty. In their first point,
they attack the legal and factual sufficiency of findings
1a through 1d. In their third point, they attack the legal
sufficiency of findings 1f through 1h. In a later point
regarding actual damages, they attack the legal
sufficiency of finding 1e. If any one of the findings of
breach may be upheld, the jury's finding that Harriet
breached her fiduciary duty may be upheld. We will first
address finding 1c, which speaks to the heart of this case,
the assignment and dismissal, or the settling of the
estate's overpayment claim.
A challenge on appeal that the trial court failed to
disregard a jury finding must be construed as a legal
sufficiency challenge. See Brown v. Bank of Galveston,
Nat'l Ass'n, 930 S.W.2d 140, 145 (Tex. App.-Houston
[14th Dist.] 1996), aff'd, 963 S.W.2d 511 (Tex. 1998). In
reviewing a legal sufficiency or "no evidence" question,
we consider all the evidence in the light most favorable
to the jury finding, indulging every [**17] reasonable
inference in favor of the finding. Associated Indem.
Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 285-86
(Tex. 1998); Transp. Ins. Co. v. Moriel, 879 S.W.2d 10,
25 (Tex. 1994). If there is more than a scintilla of
competent evidence to support the jury finding, we will
affirm the finding. The evidence supporting the finding
amounts to more than a scintilla if it supplies a
reasonable basis for reasonable minds to reach differing
conclusions as to the existence of the crucial fact.
Transp. Ins. Co. v. Moriel, 879 S.W.2d at 25; Orozco v.
Sander, 824 S.W.2d 555, 556 (Tex. 1992).
When reviewing the factual sufficiency of the
evidence to support the jury's verdict, we examine all of
the evidence. Lofton v. Texas Brine Corp., 720 S.W.2d
804, 805 (Tex. 1986); Hollander v. Capon, 853 S.W.2d
723, 726 (Tex. App.-Houston [1st Dist.] 1993, writ
denied). After considering and weighing all of the
evidence, we will set aside the verdict only if the
evidence is so weak, or the finding is so against the great
weight and preponderance of the evidence, that it is
clearly wrong and unjust. [**18] Cain v. Bain, 709
S.W.2d 175, 176 (Tex. 1986). When undertaking a factual
sufficiency review, we may not merely substitute our
opinion for that of the trier of fact and determine that we
would reach a different conclusion. Merckling v. Curtis,
911 S.W.2d 759 (Tex. App.-Houston [1st Dist.] 1995,

writ denied); Hollander v. Capon, 853 S.W.2d at 726.
The jury is the sole judge of the credibility of the
witnesses and the weight to be given their testimony, and
we may not act as a thirteenth juror in assessing the
evidence and the credibility of the witnesses. Seelbach
v. Clubb, 7 S.W.3d 749, 755 (Tex. App.-Texarkana 1999,
pet. denied).
It is undisputed that Harriet and Jenny were both
co-executrices and beneficiaries of the Lewis estate. As
both co-executrices and beneficiaries, each owed the
other a fiduciary duty, and each was entitled to the
other's fulfilling her fiduciary obligations.
An executrix of an estate is a fiduciary of the estate
beneficiaries. As a fiduciary, she owes the beneficiaries a
strict duty of good faith and candor, as well as the
general duty of full disclosure respecting matters
affecting the [**19] beneficiaries' interests.
Montgomery v. Kennedy, 669 S.W.2d 309, 313 (Tex.
1984); Welder v. Green, 985 S.W.2d 170, 175 (Tex.
App.-Corpus Christi 1998, pet. denied); Hawthorne v.
Guenther, 917 S.W.2d 924, 934 (Tex. App.-Beaumont
1996, writ denied); Chien v. Chen, 759 S.W.2d 484, 495
(Tex. App.-Austin 1988, no writ). The existence of
strained relations between the parties does not lessen the
fiduciary's duty of full and complete disclosure.
Montgomery v. Kennedy, 669 S.W.2d at 313. The
executrix of an estate is held to the same high fiduciary
duties and standards in the administration of a decedent's
estate that are applicable to trustees. Humane Soc'y of
Austin & Travis County v. Austin Nat'l Bank, 531 S.W.2d
574, 577 (Tex. 1975); Evans v. First Nat'l Bank of
Bellville, 946 S.W.2d 367, 379 [*297] (Tex.
App.-Houston [14th Dist.] 1997, writ denied); Ertel v.
O'Brien, 852 S.W.2d 17, 20 (Tex. App.-Waco 1993, writ
denied). In discussing the fiduciary duties of trustees, the
Texas Supreme Court has stated that the trustee's duty of
loyalty prohibits him from using [**20] the advantage
of his position to gain any benefit for himself at the
expense of his trust and from placing himself in any
position where his self-interest will or may conflict with
his obligations as trustee. Slay v. Burnett Trust, 143
Tex. 621, 187 S.W.2d 377, 388 (1945).
It is a well-settled rule that a trustee can make no
profit out of his trust. The rule in such cases springs from
his duty to protect the interests of the estate, and not to
permit his personal interest to in any wise conflict with
his duty in that respect. The intention is to provide
against any possible selfish interest exercising an
influence which can interfere with the faithful discharge
of the duty which is owing in a fiduciary capacity.
Slay v. Burnett Trust, 187 S.W.2d at 388; accord
Humane Soc'y of Austin & Travis County v. Austin Nat'l
Bank, 531 S.W.2d at 577.
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 7
Generally, there is a presumption that property
acquired during marriage is community property.
Wilson v. Wilson, 145 Tex. 607, 201 S.W.2d 226, 227
(1947). Because Lyn acquired Clark, Thomas's interest in
wells 2 and 5 as community property in exchange for the
claim of overpayment, [**21] Harriet also acquired the
interest in wells 2 and 5 in exchange for the claim of
overpayment. The Lesikars argue that the interest Clark,
Thomas assigned to Lyn was not estate property, and
therefore Harriet, by obtaining it through the assignment
to Lyn, did not breach her fiduciary duty by acquiring
estate property in violation of the statute. We agree that
Clark, Thomas's interest in wells 2 and 5 was not
property belonging to the estate. The estate, however,
owned the claim of overpayment on wells 3A and 7A, a
valuable right. Harriet did more than simply acquire the
Clark, Thomas interest; through Lyn, she acquired it in
exchange for indemnifying Clark, Thomas against this
claim of overpayment.
The Lesikars argue that Harriet did not breach her
duty by doing so because Jenny, rather than looking to
Clark, Thomas, could look to Lyn and Harriet, who
merely "indemnified" Clark, Thomas, for reimbursement
of the overpayment. If the overpayment claim was valid,
Harriet indeed had a duty not to obtain for Lyn and
herself the interest in wells 2 and 5 in exchange for
indemnifying the overpayment claim. By doing so, she
created a conflict of interest between herself and the
estate, [**22] which alone the law considers a breach
of fiduciary duty. As co-executrix of the estate, she was
an estate-creditor; she was required to pursue the claim
for overpayment on behalf of the estate. As Lyn's wife,
she stepped into Clark, Thomas's shoes and became an
estate-debtor; if the overpayment claim was valid, she
was required to pay the estate for the overpayment. As an
estate-debtor, Harriet had no incentive to aggressively
pursue the claim for overpayment against herself which,
as an estate-creditor, she was required to do. In fact, Lyn
agreed to do more than indemnify Clark, Thomas; he
agreed that he and Harriet would not pursue the
overpayment claim, and Harriet ultimately dismissed the
overpayment litigation.
In addition, notwithstanding that Lyn bargained for
Clark, Thomas's interest by promising to abandon the
overpayment claim, the Lesikars contend that "there is no
evidence that an actual overpayment existed" and that
Harriet dismissed the overpayment litigation in good
faith. However, Clark, Thomas admitted and no one
disputed that Clark, Thomas did not own an interest in
wells 3A and 7A and yet received payment for those
wells. The Lesikars' true dispute regarding the [**23]
validity of the overpayment is that the evidence was
factually insufficient to prove the amount of the
overpayment. In addition, all the parties acted as if the

claim had [*298] value; otherwise, they would not
have exchanged it or used it as a bargaining tool to
acquire the interest in wells 2 and 5. Harriet, therefore,
had a duty to pursue the claim on behalf of the estate and
not to dismiss the litigation. Her good faith is irrelevant
to her breach of duty. By acquiring the interest in wells 2
and 5 and then dismissing the overpayment litigation,
Harriet not only created a conflict of interest between
herself and the estate, but also she acquired property for
her personal benefit while acting as a fiduciary.
All transactions between a fiduciary and his
principal are presumptively fraudulent and void;
therefore, the burden lies on the fiduciary to establish the
validity of any particular transaction in which he is
involved. Chien v. Chen, 759 S.W.2d at 495. Where a
fiduciary relationship exists, the burden is on the
fiduciary to show that he acted fairly and informed the
other party of all material facts relating to the challenged
transaction. Hoggett v. Brown, 971 S.W.2d 472, 487
[**24] (Tex. App.-Houston [14th Dist.] 1997, pet.
denied). The Lesikars' attempts to overcome this
presumption fail.
As evidence of the fairness of the actions in
question, the Lesikars contend that Harriet's actions do
not amount to breach of fiduciary duty or fraud because
Harriet's primary duty was to "wind up" the estate. In
April of 1994, the trial court gave directives that the
lingering estate be closed. According to the Lesikars,
winding up required only that Harriet pay estate debts
and distribute property. While it is true that the purpose
of administering an estate is to satisfy the claims of the
decedent's creditors and to distribute the remainder of the
estate among the decedent's heirs, included within the
executor's many duties is the duty to collect all claims
and debts due the estate and to recover possession of all
property of the estate to which its owners have claim or
title. See TEX. PROB. CODE ANN. § 233(a) (Vernon
Supp. 2000). Administration therefore protects both the
rights of the decedent's heirs and the interests of the
decedent's creditors. Patterson v. Allen, 50 Tex. 23
(1878); So. Underwriters v. Lewis, 150 S.W.2d 162
[**25] (Tex. Civ. App.-Texarkana 1941, no writ). The
whole scheme of probate law favors speedy
administration, commensurate with the reasonable
protection of all interests involved. Ryan v. Flint, 30 Tex.
382 (1867). We fail to see how a directive to close the
estate entitled Harriet and Lyn to acquire the Clark,
Thomas interest for themselves in settlement of the
estate's claim for overpayment.
The Lesikars further contend that when Harriet
dismissed the claim against Clark, Thomas on October
17, 1994, the claim had already been distributed to estate
beneficiaries who could make their own choices about
prosecuting it. Their argument is that the estate had been
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 8
closed in August of 1994 and therefore the claim was not
a claim of the estate. The final settlement of the estate,
however, was not filed until October 18, 1994, one day
after Harriet dismissed the claim. In addition, in that
settlement agreement, the parties executed a mutual
release in which each party released the other from
liability. But that document stated that each party was
released from liability "with the exception of claims or
obligations related to . . . operation of the T.W. Lee Oil
Lease subsequent [**26] to August 17, 1994, and the
interest of the Clark, Thomas, Winters & Shapiro Law
Firm in the T.W. Lee Oil Lease and debts and
overpayments relating thereto." So, that claim remained a
claim of the estate. Regardless, it is a duty of a
co-executor, not the beneficiaries, to prosecute claims
owed to the estate. TEX. PROB. CODE ANN. §
233(a).
The Lesikars further contend that the trial court
erred in failing to disregard findings 2 and 3, in which
the jury found that Harriet and Lyn committed fraud.
They insist that the assignment and dismissal did not
amount to fraud. The court instructed the jury that fraud
occurs when:
[*299] a. a party conceals or fails to disclose a
material fact within the knowledge of that party,
b. the party knows that the other party is ignorant of
the fact and does not have an equal opportunity to
discover the truth,
c. the party intends to induce the other party to take
some action by concealing or failing to disclose the fact,
and d. the other party suffers injury as a result of acting
without knowledge of the undisclosed fact.
The fraud findings were broad and were not based on
any particular act. A challenge on appeal that the trial
[**27] court failed to disregard a jury's finding must be
construed as a legal sufficiency challenge. See Brown v.
Bank of Galveston, Nat'l Ass'n, 930 S.W.2d at 145. Thus,
looking only at the evidence that favors the jury's
findings and ignoring all evidence to the contrary, the
question before us is whether there is more than a
scintilla of competent evidence to support the jury
finding that Harriet and Lyn committed fraud.
Fraud requires a material misrepresentation that was
false; was either known to be false when made or was
asserted without knowledge of its truth; was intended to
be acted on; was relied on; and that caused injury.
Formosa Plastics Corp. USA v. Presidio Eng'rs &
Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998). Silence
is equivalent to a false representation where
circumstances impose a duty to speak and one
deliberately remains silent. Spoljaric v. Percival Tours,
Inc., 708 S.W.2d 432, 435 (Tex. 1986). So, for there to be

actionable nondisclosure fraud, there must be a duty to
disclose. Bradford v. Vento, 997 S.W.2d 713, 725 (Tex.
App.-Corpus Christi 1999, pet. granted); Hoggett v.
Brown, 971 S.W.2d at 487-88. [**28] Whether such a
duty exists is a question of law. Bradford v. Vento, 997
S.W.2d at 725. A duty to disclose may arise in four
situations: (1) where there is a special or fiduciary
relationship; (2) where one voluntarily discloses partial
information, but fails to disclose the whole truth; (3)
where one makes a representation and fails to disclose
new information that makes the earlier representation
misleading or untrue; and (4) where one makes a partial
disclosure and conveys a false impression. Id.; Hoggett v.
Brown, 971 S.W.2d at 487 (citing Formosa Plastics
Corp. v. Presidio Eng'rs & Contractors, Inc., 941 S.W.2d
138, 146-47 (Tex. App.-Corpus Christi 1995)).
Although Harriet notified Jenny and collaborated
with her to some extent with regard to the initial
settlement negotiations between the estate and Clark,
Thomas about exchanging the interest in wells 2 and 5
for the overpayment claim, when those negotiations
broke down Harriet did not notify Jenny that Lyn was
acquiring the Clark, Thomas interest for himself until
well after the fact.
Considering only the evidence that favors the jury's
findings and ignoring all evidence to the contrary, we
find some evidence [**29] to support the jury's findings
that Lyn and Harriet committed fraud on Jenny and the
estate by failing to disclose their dealings in exchanging
the overpayment for Clark, Thomas's interest in wells 2
and 5.
The Lesikars contend that the trial court erred in
failing to disregard jury findings 1f, 1g, 1h, and 5, by
which the jury found that Harriet breached her fiduciary
duty to Jenny by,
1f transferring the operating interest in the T.W. Lee
Lease to her husband without payment of any
consideration;
1g transferring the operating interest in the T.W. Lee
Lease to her husband without previously disclosing to all
beneficiaries her intention to do so;
1h secreting the transfer of the operating interest in
the T.W. Lee Lease to her husband until such time as the
beneficiaries could not challenge such transfer with the
Texas Railroad Commission.
[*300] In question 5, the jury found that Lyn acquired
the operations of the lease by deception.
We have already determined there is legally
sufficient evidence to support the findings of breach of
fiduciary duty in findings 1a, 1b, 1c, 1d, and 1e;
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 9
therefore, we will not address whether the evidence is
legally sufficient to support findings [**30] 1f, 1g, and
1h. We also find sufficient evidence to support the jury's
answer to question 5.
RATIFICATION AND WAIVER
After learning of Clark, Thomas's assignment of its
interest in wells 2 and 5 to Lyn, Jenny began to bill Lyn
for operating expenses associated with those wells. In
questions 18 and 19, the jury failed to find that by this
conduct Jenny ratified the assignment or waived her right
to complain of the assignment. On appeal, the Lesikars
challenge the legal and factual sufficiency to support the
jury's failure to find ratification or waiver.
Ratification and waiver are affirmative defenses that
the defendant must prove. The party with the burden of
proof who challenges the legal sufficiency to support the
jury's failure to find must surmount two hurdles.
Sterner v. Marathon Oil Co., 767 S.W.2d 686, 690 (Tex.
1989); Seelbach v. Clubb, 7 S.W.3d at 755; Neese v.
Dietz, 845 S.W.2d 311, 313 (Tex. App.-Houston [1st
Dist.] 1992, writ denied). The party must show that no
evidence supports the failure to find and that the
evidence establishes the desired finding as a matter of
law. Ramsey v. Lucky Stores, Inc., 853 S.W.2d 623
[**31] (Tex. App.-Houston [1st Dist.] 1993, writ
denied). First, we review the evidence in the light most
favorable to the jury finding, indulging every reasonable
inference in favor of the finding. Associated Indem.
Corp. v. CAT Contracting, Inc., 964 S.W.2d at 285-86. If
there is more than a scintilla of competent evidence to
support the jury finding, we will affirm the finding.
Orozco v. Sander, 824 S.W.2d at 556. Evidence amounts
to more than a scintilla if it supplies a reasonable basis
for reasonable minds to reach differing conclusions as to
the existence of the crucial fact. Id. If there is no
evidence to support the finding, then an examination of
the entire record must demonstrate that the contrary
proposition is established as a matter of law. Seelbach v.
Clubb, 7 S.W.3d at 755. If the proposition asserted by the
appellant is established as a matter of law, the point of
error will be sustained. Id.
Great weight points are factual sufficiency
challenges. Only one standard of review is used in
reviewing factual sufficiency challenges, regardless of
whether the court of appeals is reviewing a negative or
affirmative jury [**32] finding or whether the
complaining party had the burden of proof on the issue.
M. J. Sheridan & Son Co. v. Seminole Pipeline Co., 731
S.W.2d 620, 623 (Tex. App.-Houston [1st Dist.] 1987, no
writ). Therefore, we apply the appropriate standard of
review, which we have set out above.

Ratification is the adoption or confirmation by a
person, with knowledge of all material facts, of a prior
act that did not then legally bind that person and which
that person had the right to repudiate. Facciolla v.
Linbeck Constr. Corp., 968 S.W.2d 435, 440 (Tex.
App.-Texarkana 1998, no pet.). Ratification may be
either express or implied, but it must result from acts
clearly evidencing an intention to ratify. Id. Waiver is the
intentional relinquishment of a known right, or
intentional conduct inconsistent with claiming that right.
Sun Exploration & Prod. Co. v. Benton, 728 S.W.2d 35,
37 (Tex. 1987). Thus, like ratification, waiver is largely a
question of intent. Kennedy v. Bender, 104 Tex. 149,
135 S.W. 524, 525 (1911). There can be no waiver unless
so intended by one party and so understood by the other.
Vessels v. Anschutz Corp., 823 S.W.2d 762, 765 [**33]
(Tex. App.-Texarkana 1992, writ denied).
Although in their brief to this Court the Lesikars
argue that a great many of Jenny's actions evidence
ratification and waiver, [*301] the questions to the
jury based ratification and waiver only on Jenny's having
sent invoices to Lyn and having accepted payments from
him. The Lesikars do not argue that they submitted a
different question to the jury, that the court refused their
request, or that the question submitted was too specific
or otherwise improper. Thus, the narrow issue before us
is whether Jenny's sending invoices to Lyn and accepting
payments from him established either ratification or
waiver as a matter of law, and whether the jury's failure
to find ratification or waiver on the basis of that conduct
is against the great weight of the evidence.
Ratification was not established as a matter of law
merely from Jenny's billing Lyn for lease expenses and
receiving payments from him. Jenny's actions in this
regard could have reflected only that she knew Lyn had
received a purported assignment of Clark, Thomas's
interest in wells 2 and 5. Certainly, the assignment was
notice to her that Lyn claimed to own the interest, but
even if Jenny's [**34] acts were a recognition that Lyn
had acquired title to the interest, her dealing with him on
that basis did not, as a matter of law, ratify Lyn's
fraudulent acts in acquiring that interest. If Lyn had
acquired the interest directly from Jenny, her acts in
dealing with him as the owner would have constituted a
ratification of his title. But since he acquired the title
from a third party, Jenny could treat him as the owner,
but still seek to recover damages from him because of his
fraud in acquiring the interest, or seek to impose a
constructive trust on the interest. See Ford v. Culbertson,
158 Tex. 124, 308 S.W.2d 855, 865 (1958); Vessels v.
Anschutz, 823 S.W.2d at 764-65. We also find that the
jury's failure to find ratification is not against the great
weight of the evidence.
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 10
Similarly, the fact that Jenny billed Lyn for expenses
and otherwise dealt with him as if he were the owner of
the Clark, Thomas interest falls short of establishing as a
matter of law that she intended thereby to waive Harriet's
breach of fiduciary duty and Lyn's and Harriet's fraud.
Her lack of intent to waive is indicated by the fact that
she brought suit against the Lesikars [**35] well before
she began to bill Lyn for expenses. Waiver was not
established as a matter of law, and we do not find that the
jury's failure to find waiver is against the great weight of
the evidence.
CONSPIRACY
In question 4, the jury found that Harriet, Lyn, and
"others" were part of a conspiracy that damaged Jenny.
The Lesikars complain of the legal and factual
sufficiency of the evidence to support the jury's finding
that Harriet, Lyn, and "others" engaged in a conspiracy.
They first contend that there can be no liability for
conspiracy because there was no valid underlying tort.
They also contend that the evidence negates the finding
of a conspiracy because the evidence established the
contrary as a matter of law, or the great weight of the
evidence demonstrated that neither Lyn nor Harriet
knowingly conspired to commit any wrong. We overrule
these contentions.
The Lesikars challenge both the legal sufficiency
and the factual sufficiency of the evidence to support the
jury's finding. We apply the appropriate standards of
review, which we have already set out above.
A civil conspiracy is a combination by two or more
persons or entities to accomplish an unlawful purpose, or
[**36] a lawful purpose by unlawful means. Massey v.
Armco Steel Co., 652 S.W.2d 932, 934 (Tex. 1983);
Facciolla v. Linbeck Constr. Corp., 968 S.W.2d at
444-45. The elements of a civil conspiracy are: (1) two
or more persons; (2) an object to be accomplished; (3) a
meeting of the minds; (4) one or more unlawful, overt
acts; and (5) damages as the proximate result. Massey v.
Armco Steel Co., 652 S.W.2d at 934; Facciolla v.
Linbeck Constr. Corp., 968 S.W.2d at 445. It is not the
agreement itself, but an injury to the plaintiff resulting
[*302] from an act done pursuant to the common
purpose that gives rise to a cause of action for civil
conspiracy. Carroll v. Timmers Chevrolet, Inc., 592
S.W.2d 922, 925 (Tex. 1979). In other words, recovery is
not based on the conspiracy; instead, it is based on an
underlying tort. Tilton v. Marshall, 925 S.W.2d 672,
681 (Tex. 1996); Fisher v. Yates, 953 S.W.2d 370, 381
(Tex. App.-Texarkana 1997), pet. denied per curiam,
988 S.W.2d 730 (Tex. 1998). Types of torts or unlawful
acts on which a cause of action for conspiracy may be
[**37] based include breach of a fiduciary duty and
fraud, as in this case. See, e.g., Phippen v. Deere & Co.,

965 S.W.2d 713, 722 (Tex. App.-Texarkana 1998, no
pet.); Fisher v. Yates, 953 S.W.2d at 381; Vinson &
Elkins v. Moran, 946 S.W.2d 381, 411-13 (Tex.
App.-Houston [14th Dist.] 1997, writ dism'd by agr.).
We have held that the evidence in this case is legally
sufficient to support the jury's findings of breach of
fiduciary duty and fraud; therefore, we hold that valid
underlying torts were established capable of providing
the basis for the conspiracy finding.
The Lesikars also contend that neither Harriet nor
Lyn knowingly conspired to commit any wrong.
Specifically, they contend that Harriet did not know of
the assignment of the Clark, Thomas interest when she
dismissed Clark, Thomas from the lawsuit. They contend
that Lyn acted independently as well, without knowledge
of Harriet's dismissing Clark, Thomas from the lawsuit.
One of the essential elements required to establish a
civil conspiracy is a meeting of the minds on the object
or course of action. Massey v. Armco Steel Co., 652
S.W.2d at 934. Therefore, [**38] for conspiracy, the
participants must at least have knowledge of the object
and purpose of a conspiracy. One without knowledge of
the object and purpose of a conspiracy cannot be a
co-conspirator; he cannot agree, either expressly or
tacitly, to the commission of a wrong of which he is not
aware. Schlumberger Well Surveying Corp. v. Nortex
Oil & Gas Corp., 435 S.W.2d 854, 857 (Tex. 1968);
Pairett v. Gutierrez, 969 S.W.2d 512, 516 (Tex.
App.-Austin 1998, pet. denied).
Conspiracy may be established by circumstantial
evidence. Int'l Bankers Life Ins. Co. v. Holloway, 368
S.W.2d 567 (Tex. 1963); Fisher v. Yates, 953 S.W.2d at
379. The Texas Supreme Court has stated, "A conspiracy
may be proven as well by the acts of the conspirators, as
by anything they may say, touching what they intended
to do." Int'l Bankers Life Ins. Co. v. Holloway, 368
S.W.2d at 581 (quoting Whitmore v. Allen, 33 Tex. 355
(1870)). The Supreme Court has further stated:
The general rule is that conspiracy liability is
sufficiently established by proof showing concert of
action or other facts and circumstances from [**39]
which the natural inference arises that the unlawful, overt
acts were committed in furtherance of common design,
intention, or purpose of the alleged conspirators.
. . . . It is not required that each and every act of a
conspirator be shown to have been in concert with the
others or that it be established by direct evidence that all
combined at a given time prior to each transaction.
Inferences of concerted action may be drawn from joint
participation in the transactions and from enjoyment of
the fruits of the transactions . . . .
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 11
Int'l Bankers Life Ins. Co. v. Holloway, 368 S.W.2d at
581-82 (citations omitted); accord Fisher v. Yates, 953
S.W.2d at 379.
We conclude that the evidence is sufficient to
support an inference that Lyn and Harriet participated
jointly, and knowingly conspired to commit wrongs. As
we have noted, while Harriet testified that she did not
know about the assignment from Clark, Thomas to Lyn
until well after it was executed, she admitted that she had
knowledge that Lyn was interested in acquiring the
Clark, Thomas interest. Without stating that she actually
read any [*303] correspondence about the assignment,
Harriet also testified [**40] that copies of any
correspondence from Werley regarding the estate would
have been sent to her. In fact, the record reflects that
Werley copied "Mr. and Mrs. Lesikar" on both the
proposed assignment dated July 14, 1994, which he sent
to Bishop, and the "Rule 11 agreement" that he accepted
and returned to Bishop on August 8, 1994. In addition,
Harriet testified that Werley had advised her on several
occasions to dismiss the overpayment litigation, but it
was not until a few days after Lyn acquired the interest
that Harriet decided to do so. This is sufficient evidence
that Harriet knew of the scheme to acquire the Clark,
Thomas interest in wells 2 and 5 in exchange for the
estate's overpayment claim.
Although Lyn claims he acted independently of
Harriet without knowledge of the dismissal, in other
matters relating to the estate he acted on Harriet's behalf
and with Harriet's knowledge. For example, at Harriet's
direction he reviewed the deed records and discovered
the overpayment claim. He also calculated the amount of
the overpayment, on which Harriet relied in filing suit
against Clark, Thomas for the overpayment. In addition,
Lyn promised, in agreeing to the "Rule 11 agreement,
[**41] " that in exchange for Clark, Thomas's interest
in wells 2 and 5, not that he would simply indemnify
Clark, Thomas, but that he and Harriet would not pursue
the overpayment claim against Clark, Thomas. A
promise that Lyn would not seek to collect the
overpayment was worthless, because the overpayment
claim did not belong to him, but belonged to the estate.
Harriet, as a co-executrix of the estate, was needed to
fulfill Lyn's purported independent promise, which she
did by dropping Clark, Thomas from the lawsuit just
days after the assignment to Lyn was recorded. This is
sufficient evidence for the jury to find that Lyn knew of
the scheme to acquire the Clark, Thomas interest in wells
2 and 5 in exchange for the estate's overpayment claim.
We conclude that there is sufficient evidence that
Lyn and Harriet knowingly conspired to breach Harriet's
fiduciary duty to Jenny and other estate beneficiaries,
and to fraudulently acquire the Clark, Thomas interest in

wells 2 and 5 in exchange for the estate's overpayment
claim.
CONSTRUCTIVE TRUST
The Lesikars challenge the jury findings and the trial
court's judgment imposing a constructive trust on the
working interest in wells 2 and [**42] 5 acquired by
Lyn from Clark, Thomas. We find there is sufficient
evidence to justify the imposition of a constructive trust.
A constructive trust is a device equity uses to
remedy a wrong. See Meadows v. Bierschwale, 516
S.W.2d 125 (Tex. 1974); Cawthon v. Cochell, 121 S.W.2d
414 (Tex. Civ. App.-Amarillo 1938, writ dism'd). When
property has been acquired under circumstances where
the holder of legal title should not in good conscience
retain the beneficial interest, equity will convert the
holder into a trustee. Talley v. Howsley, 142 Tex. 81,
176 S.W.2d 158 (1943). A classic case for the imposition
of a constructive trust is where one party fraudulently
uses something of value belonging to another to acquire
title to property for himself. See Lotus Oil Co. v. Spires,
240 S.W.2d 357, 359 (Tex. Civ. App.-El Paso 1950, writ
ref'd n.r.e.); Collins v. Griffith, 105 S.W.2d 895 (Tex.
Civ. App.-Amarillo 1937, no writ). A constructive trust
may be imposed where one acquires legal title to
property in violation of a fiduciary relationship. See
Binford v. Snyder, 144 Tex. 134, 189 S.W.2d 471 (1945);
[**43] Dilbeck v. Blackwell, 126 S.W.2d 760 (Tex. Civ.
App.-Texarkana 1939, writ ref'd).
There is ample evidence to justify imposing a
constructive trust on the interest acquired by the
Lesikars. Although the title to the working interest was
assigned to Lyn, the legal title was acquired by Lyn as
community property of himself and Harriet. Thus,
Harriet also became a [*304] holder of an interest in
the property by virtue of the assignment. We have
previously held that Harriet breached her fiduciary duty
in dismissing the overpayment claim and acquiring the
Clark, Thomas working interest. Lyn was likewise guilty
of fraud and deceit in procuring the interest.
The final judgment awarded as damages not only a
constructive trust over the Clark, Thomas interest in
wells 2 and 5, but also part of the overpayment. The
Lesikars contend that the overpayment award, in addition
to the constructive trust award, is a windfall. We agree.
When one's funds or other assets are used by a
fiduciary to acquire property for himself, the aggrieved
party may seek the property itself or its value. See D.
Sullivan & Co. v. Ramsey, 155 S.W. 580, 586 (Tex. Civ.
App.-San Antonio 1913, no [**44] writ); Ingenhuett v.
Hunt, 15 Tex. Civ. App. 248, 39 S.W. 310 (Tex. Civ.
App. 1897, writ ref'd); 90 C.J.S. Trusts § 450, at 865
(1955). Thus, the beneficiary may elect which remedy to
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 12
pursue. Jenny prayed for recovery of the overpayment, or
alternatively for a constructive trust on the Clark,
Thomas working interest in wells 2 and 5. The jury
awarded Jenny both the overpayment and the working
interest, and neither the estate nor Jenny has elected
between those recoveries. Under the authority of
Birchfield v. Texarkana Mem'l Hosp., 747 S.W.2d 361
(Tex. 1987), we hold that Jenny should recover her
rightful interest in the property, which the evidence
shows to be of a greater value than her share of the claim
for overpayment. See Birchfield v. Texarkana Mem'l
Hosp., 747 S.W.2d at 367, holding that where the
prevailing party fails to elect between alternative
measures of damages, the court should use the findings
affording the greater recovery and render judgment
accordingly.
The amount the jury awarded as the recoverable
overpayment was $ 298,547.00. James Davis's testimony
was that the present market value of the working interest
[**45] in wells 2 and 5 was $ 207,842.69. We are
aware that the amount of the recovery for the
overpayment might suggest that it is more valuable than
the recovery of the 1/6 working interest in wells 2 and 5;
however, we must remember that the claim for
overpayment was not certain. Jenny's or the estate's
ability to recover all the alleged overpayment was
speculative at best. Moreover, the current market value
does not give adequate consideration to future revenues
that wells 2 and 5, which are producing wells, will
generate. In addition, through all of their conduct, Harriet
and Lyn certainly acted as if the working interest in wells
2 and 5 was more valuable than the claim for
overpayment.
We therefore delete the overpayment award from the
judgment and uphold the imposition of a constructive
trust, with modification. The final judgment held the
entire interest in the Clark, Thomas interest in
constructive trust and distributed it in equal thirds to
Jenny for life, Harriet for life, and Fay in fee simple.
However, Lewis bought the interest in the T. W. Lee
lease before he and Fay were married; therefore, it was
his separate property, which in his will he gave in equal
portions to Harriet [**46] and Jenny. If the estate had
recovered the overpayment, Harriet and Jenny, as
co-equal beneficiaries under Lewis's will, each would
have received one half. As such, Lyn holds the Clark,
Thomas interest in wells 2 and 5 in constructive trust
only as to Jenny's one half. Jenny should receive that one
half, while Harriet keeps the other.
As we have stated, the Lesikars argue that they did
not release the Clark, Thomas overpayment claim, so the
estate lost nothing when they acquired the working
interest. They argue that Lyn only indemnified Clark,
Thomas against any claims for the overpayment, and Lyn

now, in effect, still owes the overpayment to Jenny and
the estate. We disagree. Even if Lyn's indemnification to
Clark, Thomas on the overpayment only substitutes one
debtor for another, that substitution [*305] was not
authorized by Jenny or the estate, and it deprives them of
a valuable asset - the availability of recovery from Clark,
Thomas. Additionally, as we have already noted,
substituting Lyn and Harriet as debtors in the place of
Clark, Thomas places Harriet in a conflict of interest
relationship to the estate.
ACTUAL DAMAGES
The final judgment indicates that the trial court
awarded [**47] part of the overpayment as actual
damages. The Lesikars raise several contentions relating
to that recovery. We have held that because of the
election of remedies rule, Jenny cannot recover both the
property through a constructive trust and the claim for
overpayment that was used to acquire the property. We
have sustained the recovery of the working interest by a
constructive trust and will eliminate the recovery of the
overpayment, thus making it unnecessary to discuss the
Lesikars' remaining contentions pertaining to that
recovery.
In question 14, the jury awarded Jenny additional
actual damages for 1) "costs incurred in correcting the
wrongful conduct," 2) "failure to pay operational
expenses on the T. W. Lee Lease," 3) loss of the value of
the Clark, Thomas interest on August 9, 1994," and 4)
"unpaid estate income tax return preparation expense for
tax year 1994." The judgment indicates that the trial
court, rather than awarding the third element, imposed a
constructive trust over the interest in wells 2 and 5. The
Lesikars contend that the form of Question 14 was error
and that the first, second, and fourth damage awards are
unrecoverable for various reasons.
Form of the Question
Question [**48] 14 asked, "What sum of money, if any,
if paid now in cash, would fairly and reasonably
compensate Jenny Lou Lewis Rappeport for her
damages, if any, that resulted from such wrongful act
you have found in Questions 1, 2, 3, 4, 5 or 12?"
(emphasis added). In questions 1, 2, and 3, the jury found
Harriet liable for breach of fiduciary duty and Harriet
and Lyn liable for fraud. The Lesikars contend that the
breach of fiduciary duty and fraud theories on which the
damage question was partly predicated limit recovery to
damages that are proximately caused by their actions.
They contend that the submission of question 14 was
error because the court used the words "resulted from"
and did not require the jury to find that the damages were
proximately caused by the wrongful acts, thereby
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 13
lessening Jenny's burden of proof. We overrule this
contention.
Actual damages available for breach of fiduciary
duty and fraud include both general or direct damages
and special or consequential damages. See Airborne
Freight Corp. v. C. R. Lee Enters., Inc., 847 S.W.2d 289,
295 (Tex. App.-El Paso 1992, writ denied). Direct
damages compensate the plaintiff for loss that is
conclusively [**49] presumed to have been foreseen by
the defendant from his wrongful act. Arthur Andersen
& Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex.
1997). Consequential damages, unlike direct damages,
are not presumed to have been foreseen or to be the
necessary and usual result of the wrong. Plaintiff must
plead and prove them separately, and they must be
premised on a finding that they proximately resulted
from the wrongful conduct of the defendant. Arthur
Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d at
816; Airborne Freight Corp. v. C. R. Lee Enters., Inc.,
847 S.W.2d at 295. Thus, courts speak of a proximate
cause or a foreseeability showing in the context of
special or consequential actual damages only, not in the
context of direct actual damages. Additionally, the Texas
Pattern Jury Charges suggest that a damage question
asking the jury to assign direct damages resulting from
fraud should use the words "resulted from," while a
question asking the jury to assign consequential damages
should use the words "proximately caused by." See 4
COMM. ON PATTERN [*306] JURY CHARGES,
STATE BAR OF TEX., TEXAS PATTERN JURY
CHARGES PJC [**50] 110.19, 110.20 (1990).
In the trial court, the Lesikars objected simply that
question 14 contained "no issues of proximate cause."
On appeal, they do not contend that question 14 asks the
jury to award special or consequential damages. Instead,
they argue simply that the breach of fiduciary duty and
fraud theories require a finding that the damages were
proximately caused by their actions. Assuming the
Lesikars' objection preserved error, their argument is
incorrect, and we overrule the contention.
Costs Incurred in Correcting the Wrongful Conduct
After the assignment of wells 2 and 5 to Lyn, and on the
Lesikars' application made without Jenny's knowledge,
the Railroad Commission transferred the operations of
the T. W. Lee lease from L & G to Lyn. As a result,
Jenny incurred attorneys' fees in contesting the transfer
of operations before the Railroad Commission. In
question 14(1), the jury awarded Jenny $ 12,000.00 as
"costs of correcting wrongful conduct." The parties have
stipulated that the "cost of correcting wrongful conduct"
award refers to the Austin attorneys' fees. The Lesikars
challenge the award of the Austin attorneys' fees on

several grounds. One of their arguments [**51] is that
Jenny was required, but failed, to present expert
testimony that the fees were reasonable and necessary.
Without addressing the Lesikars' other arguments, we
sustain the point on this ground.
As a general rule, unless expressly provided for by
statute or contract, attorneys' fees incurred in the defense
or prosecution of a lawsuit are not recoverable. Turner
v. Turner, 385 S.W.2d 230, 233 (Tex. 1964). But,
attorneys' fees incurred in prior litigation with a third
party are recoverable in a subsequent suit as actual
damages. n1 See Turner v. Turner, 385 S.W.2d at 234;
Standard Fire Ins. Co. v. Stephenson, 963 S.W.2d 81, 90
(Tex. App.-Beaumont 1997, no pet.); Crum & Forster,
Inc. v. Monsanto Co., 887 S.W.2d 103, 129 (Tex.
App.-Texarkana 1994, judgm't vacated w.r.m.);
Nationwide Mut. Ins. Co. v. Holmes, 842 S.W.2d 335,
340-41 (Tex. App.-San Antonio 1992, writ denied); Baja
Energy, Inc. v. Ball, 669 S.W.2d 836 (Tex. App.-Eastland
1984, no writ); Powell v. Narried, 463 S.W.2d 43 (Tex.
Civ. App.-El Paso 1979, writ ref'd n.r.e.). The recovery
in such a case is based [**52] on equitable grounds
because the claimant was required to prosecute or defend
litigation as a consequence of the wrongful act of the
defendant. As in the traditional recovery of attorneys'
fees, the plaintiff may recover as damages only those
attorneys' fees that are reasonable and necessary. See
Turner v. Turner, 385 S.W.2d at 234; Nationwide Mut.
Ins. Co. v. Holmes, 842 S.W.2d at 340-41; Powell v.
Narried, 463 S.W.2d at 46. As stated by the court of
appeals in Powell,
Where the natural and proximate consequence of a
wrongful act has been to involve a plaintiff in litigation
with others, there may, as a general rule, be a recovery in
damages of the reasonable expenses incurred in such
prior litigation . . . but such expenses . . . must have been
incurred necessarily and in good faith, and the amount
thereof must be reasonable.
n1 Several courts of appeals have held that
the recovery of attorneys' fees is allowed only
when provided for by statute or contract, even
where such fees were incurred in other litigation
and are sought as actual damages. See, e.g.,
Peterson v. Dean Witter Reynolds, Inc., 805
S.W.2d 541, 549 (Tex. App.-Dallas 1991, no
writ); Cupples Coiled Pipe, Inc. v. Esco Supply
Co., 591 S.W.2d 615 (Tex. Civ. App.-El Paso
1979, writ ref'd n.r.e.); Dalton S.S. Corp. v. W. R.
Zanes & Co., 354 S.W.2d 621, 624 (Tex. Civ.
App.-Fort Worth 1962, no writ). We agree with
other courts and hold that a plaintiff may recover
attorneys' fees as damages where the defendant's
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 14
wrongful conduct forces the plaintiff to prosecute
or defend litigation in another proceeding.
[**53]
[*307] Powell v. Narried, 463 S.W.2d at 46
(emphasis added); accord Nationwide Mut. Ins. Co. v.
Holmes, 842 S.W.2d at 340-41.
At trial, Jenny's attorney asked Jenny only whether
she deemed the Austin attorneys' services, not fees,
reasonable and necessary. Jenny answered that she did.
The Lesikars objected that "what [Jenny] deems
reasonable and necessary . . . is not relevant." They did
not offer any controverting evidence. The Lesikars' first
contention is that the trial court erred in overruling their
objection to Jenny's testimony, in which they claim she
testified that her Austin attorneys' fees were reasonable
and necessary. They argue that Jenny is not qualified to
testify as to the reasonableness and necessity of
attorneys' fees.
We do not decide whether Jenny's opinion that her
attorneys' fees were reasonable and necessary, had she
given it, is irrelevant to that issue. Jenny's testimony was
only that she considered the Austin attorneys' work on
her case, not their fees, reasonable and necessary.
Whether the admission of this particular testimony was
irrelevant generally, we need not decide, because this
testimony certainly is irrelevant [**54] to our
determination of the Lesikars' second contention that
without expert testimony, there is insufficient evidence
of reasonable and necessary attorneys' fees.
Other than Jenny, no witness testified regarding the
Austin attorneys' fees. Thus, there was no testimony,
expert or otherwise, regarding whether those fees were
reasonable and necessary. The only other evidence
related to the Austin attorneys' fees were invoices the
Austin attorneys sent to Jenny for payment, which
indicated the amount of the fees but did not indicate the
number of hours worked or an hourly rate.
Jenny has cited no authority, and we have found
none, expressly setting out a standard for determining
reasonableness in cases where attorneys' fees are sought
as damages. We note that in Powell, in denying recovery
of attorneys' fees because of several inadequacies in the
record, the court suggested that some testimony that the
fees are reasonable and necessary is required. See Powell
v. Narried, 463 S.W.2d at 46. Rather than address the
sufficiency of her evidence, Jenny argues that pursuant to
Section 38.003 of the Texas Civil Practice and Remedies
Code, she is entitled to the presumption [**55] that "the
usual and customary attorney's fees for a claim of the
type described in Section 38.001 are reasonable." TEX.
CIV. PRAC. & REM. CODE ANN. § § 38.001, 38.003

(Vernon 1997). However, Jenny's action before the
Railroad Commission was not brought under Section
38.001; therefore, Jenny cannot benefit from any
presumption that statute allows. Further, the presumption
necessitates some showing that the fees were usual and
customary. Here, the record contains no testimony that
the Austin attorneys' fees were usual and customary.
In addition, Jenny cites Musgrave v. Brookhaven
Lake Prop. Owners Ass'n, 990 S.W.2d 386 (Tex.
App.-Texarkana 1998, pet. denied), for the proposition
that the trial court can take judicial notice of records in
its court in deciding that attorneys' fees are reasonable
and necessary. Attorneys' fees in Musgrave were
awarded by this Court pursuant to Section 5.006 of the
Texas Property Code, which is inapplicable to this case.
See Musgrave v. Brookhaven Lake Prop. Owners Ass'n,
990 S.W.2d at 400. Moreover, in this case, the jury was
the trier of fact, and while a party enjoys a presumption
[**56] of reasonableness and the availability of judicial
notice for claims brought under Chapter 38 of the Texas
Civil Practice and Remedies Code, neither does that
statute apply, and Jenny has not demonstrated that the
trial court did, in fact, take judicial notice of anything.
See TEX. CIV. PRAC. & REM. CODE ANN. § 38.001.
Finally, Jenny contends that her uncontroverted
testimony may be taken as true as a matter of law. The
general rule is that the testimony of an interested witness,
[*308] though not contradicted, does no more than raise
a fact issue to be determined by the jury. Ragsdale v.
Progressive Voters League, 801 S.W.2d 880, 882 (Tex.
1990); Disbrow v. Healey, 982 S.W.2d 189, 192 (Tex.
App.-Houston [1st Dist.] 1998, no pet.). However, there
is an exception to the rule:
There may be cases in which the expert testimony as
to the value of an attorney's services is so free from
inconsistencies, so thoroughly supported by undisputed
facts in evidence, and so clearly in accord with
knowledge and experience which the jury must have had
and with the information obtained by them on the trial,
that the court would be [**57] justified in accepting
that testimony as conclusive . . . .
Gulf Paving Co. v. Lofstedt, 144 Tex. 17, 188 S.W.2d
155, 161 (1945). Thus, this exception applies, in the
context of proving reasonable attorneys' fees, only to
competent evidence of reasonable attorneys' fees. Only
Jenny testified, and she testified only that the Austin
attorneys' services were reasonable.
Jenny has cited no authority as to why we should not
apply in this case the established rules of law pertaining
to the reasonableness of attorneys' fees, and we perceive
no reason not to, simply because the attorneys' fees here
have been awarded as actual damages. Thus, in cases
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 15
where attorneys' fees incurred in the present litigation are
sought, while an attorneys' testimony as to the
reasonableness of fees is not conclusive proof of that
issue, such testimony is generally required. Gulf Paving
Co. v. Lofstedt, 188 S.W.2d at 161; Nguyen Ngoc Giao v.
Smith & Lamm, P.C., 714 S.W.2d 144, 149 (Tex.
App.-Houston [1st Dist.] 1986, no writ). Generally, the
issue of reasonableness and necessity of attorneys' fees
requires expert testimony; an attorney testifies as [**58]
to reasonableness, and the testifying attorney must be
designated as an expert before he testifies. See E. F.
Hutton & Co. v. Youngblood, 741 S.W.2d 363, 364 (Tex.
1987).
We conclude that the attorneys' bills, in the absence
of expert testimony as to the reasonableness and
necessity of the fees, is insufficient evidence that the fees
were reasonable and necessary. We therefore reform the
judgment to delete Jenny's recovery of $ 12,000.00 for
costs incurred in correcting the wrongful conduct.
Unpaid Operational Expenses
In question 14(4), Jenny recovered as actual damages $
26,122.00 for "unpaid operational expenses," the amount
that she alleged the Lesikars owed from 1996 through
1998 for their proportionate share of expenses of
operating the lease, which Jenny sought under theories of
reimbursement, unjust enrichment, and quantum meruit.
The Lesikars contend that the trial court erred in refusing
to disregard the jury's award for these unpaid operating
expenses, which they contend is immaterial because the
predicating theories of recovery, breach of fiduciary
duty, fraud, and conspiracy do not establish any
obligation to pay the expenses, but such [**59]
obligation sounds in contract. We hold that the point has
been waived.
A motion to disregard a jury finding may properly
be granted only if the finding has no support in the
evidence or the issue is immaterial. Spencer v. Eagle
Star Ins. Co. of Am., 876 S.W.2d 154 (Tex. 1994). The
Lesikars argue that the question regarding unpaid
operating expenses should not have been submitted
because it is an improper measure of damages under the
theories of recovery submitted. This argument amounts
to an objection to the charge, which the Lesikars must
have made in the trial court, or it is waived. See TEX. R.
CIV. P. 274. Because the Lesikars failed to object to
question 14 on this ground, they have waived the alleged
error. See id.
Unpaid Estate Income Tax Return Preparation Expenses
In question 1(e), the jury found that Harriet breached her
fiduciary duty by [*309] improperly spending funds

that Jenny deposited in trust with Werley for the purpose
of paying Harriet's share of accounting costs for the
estate's income tax return preparation in 1994. Based on
that finding, in question 14(5), the jury awarded Jenny $
1,750.00 for Harriet's "unpaid estate income tax [**60]
return preparation expense for tax year 1994." This
figure represents Harriet's one-half share of the total
accounting costs which Jenny, on behalf of the estate,
ultimately paid to the accountants. The Lesikars concede
that the funds Werley held in trust for payment of
Harriet's share of accounting costs were not paid to the
accountants, but they contend that Harriet cannot be held
liable for the failure to pay them. They argue in part that
the funds are still being held in trust, and that there is no
evidence that Harriet spent the funds. We sustain the
point on this ground.
While there may be evidence that Werley and
Harriet were obligated to pay the funds to the
accountants but failed to do so, we agree that there is no
evidence that Harriet spent the funds. Jenny has pointed
out no evidence, and we have found none, showing that
Harriet actually spent the funds held in trust. The only
question on which the actual damages award for unpaid
income tax return preparation expenses could have been
based was question 1(e), which was a pointed question,
asking specifically whether Harriet breached her
fiduciary duty "in spending funds deposited with her
agent in trust for payment [**61] of professional
accounting costs of the estate" (emphasis added).
Because we find no evidence that Harriet actually spent
the funds, we reform the judgment to delete Jenny's
recovery of $ 1,750.00 for unpaid estate income tax
preparation expenses.
PUNITIVE DAMAGES
In findings 1 through 5 and 12, the jury found that
Harriet breached her fiduciary duty, that both Harriet and
Lyn committed fraud and engaged in a conspiracy, and
that Lyn acquired operation of the lease by deception and
intentionally interfered with an operating agreement.
Based on the conduct it found in questions 1 through 5 or
12, the jury awarded actual damages. Based on that same
conduct, the jury awarded $ 2,000,000.00 in punitive
damages against Lyn. Based on the conduct it found in
Questions 1, 3, or 4 (breach of fiduciary duty, fraud, and
conspiracy), the jury awarded $ 500,000.00 in punitive
damages against Harriet, which the trial court reduced to
$ 200,000.00. The Lesikars contend that the trial court
erred in awarding any punitive damages because 1) there
are defects in the actual damages awards and the theories
of recovery underlying the punitive damages awards, and
2) Texas procedures for assessing [**62] punitive
damages violate due process protections. In the
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 16
alternative, they contend that the punitive damages
awards are excessive.
Defective Basis Supporting Punitive Damages
The Lesikars contend that there must be an award of
actual damages in tort before an award of punitive
damages is proper, and further that the actual damages
awards here were not awarded in tort, so we must reverse
the punitive damages awards. Citing Lovelace v. Sabine
Consol., Inc., 733 S.W.2d 648, 654-55 (Tex.
App.-Houston [14th Dist.] 1987, writ denied), they also
contend that there must be a finding of liability on a
theory of recovery that supports punitive damages, and
further, because the punitive damages question was
asked in the disjunctive, we must reverse the punitive
damages awards if any one of the theories of recovery in
questions 1 through 5 or 12 cannot support punitive
damages. We overrule these contentions.
The Lesikars first contend that none of the actual
damages awards was awarded in tort, which defeats the
punitive damages recovery. However, the trial court
granted Jenny's plea to impose a constructive trust on the
interest in wells 2 and 5 that the Lesikars [**63]
wrongfully acquired. [*310] We disagree that a defect
in the actual damages awards would defeat the punitive
damages awards in this case, because a wholly
independent ground for the recovery of punitive damages
exists. See Lovelace v. Sabine Consol., Inc. 733 S.W.2d
at 654-55.
Generally, there must be an award of actual damages
in tort before an award of punitive damages is proper.
See Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617,
618 (Tex. 1986). But the Supreme Court has authorized
the recovery of punitive damages in actions sounding in
equity, even where there is no award of typical actual
damages. See Nabours v. Longview Sav. & Loan Ass'n,
700 S.W.2d 901, 904 n.3 (Tex. 1985); Int'l Bankers Life
Ins. Co. v. Holloway, 368 S.W.2d at 584. In Holloway,
the plaintiff corporation elected to sue for the profits
gained by the defendants in breach of their fiduciary
duties. See Int'l Bankers Life Ins. Co. v. Holloway, 368
S.W.2d at 584. In upholding an award of punitive
damages, the Supreme Court stated,
It is consistent with equitable principles for equity to
exact of a defaulting corporate fiduciary [**64] not
only the profits rightfully belonging to the corporation
but an additional exaction for unconscionable conduct.
There should be a deterrent to conduct which equity
condemns and for which it will grant relief.
Holloway, 368 S.W.2d at 584. In Nabours, the Supreme
Court rejected the contention that a mere grant of

injunctive relief will support an award of punitive
damages, but stated its holding "should not be confused
with an absolute refusal to allow punitive damages in a
case where equitable relief is had." See Nabours v.
Longview Sav. & Loan Ass'n, 700 S.W.2d at 905.
Recognizing a "recovery of property" exception to the
rule requiring actual damages, the court stated, "Where
equity requires the return of property, this 'recovery of
the consideration paid as a result of fraud constitutes
actual damages and will serve as a basis for the recovery
of exemplary damages.'" See Nabours v. Longview Sav.
& Loan Ass'n, 700 S.W.2d at 904 (quoting Int'l Bankers
Life Ins. Co. v. Holloway, 368 S.W.2d at 568). We note
that in a recent court of appeals case, ProCom Energy
L.L.A. v. Roach, although the equitable relief did not
pertain [**65] to the return of property, the court held
that a lack of finding of actual damages did not preclude
an award of punitive damages to an operator who
recovered a constructive trust on an overriding royalty
interest acquired by a gas producer, because of
fiduciary-breach and fraud relating to the gas producer's
promise to jointly acquire interest in the property and its
subsequent failure to convey the interest. See ProCom
Energy L.L.A. v. Roach, 16 S.W.3d 377, 385 (Tex.
App.-Tyler 2000, no pet. h.).
We conclude that the estate's recovery of the interest
in wells 2 and 5 based on breach of fiduciary duty and
fraud may support an award of punitive damages. The
fact that the jury awarded other actual damages for the
conduct it found in questions 1 through 5 and 12 does not
render punitive damages improper, because the property
recovered by the estate is an award of actual damages
that will support an award of punitive damages.
Next, citing Lovelace v. Sabine Consol., Inc., the
Lesikars contend that because the punitive damages
question was asked in the disjunctive, the punitive
damages awards must be reversed if any one of the
theories of recovery in questions [**66] 1 through 5 or
12 cannot support punitive damages. The only theory of
recovery the Lesikars fault is the theory in question 1
regarding breach of fiduciary duty. They argue that this
theory is incapable of supporting punitive damages
because an issue on the requisite intent or malice needed
to support a punitive damages award was not submitted
to the jury, and it was improper for the trial court to
make its own finding on that element.
In Lovelace, the jury found that the defendant had
breached two contracts, [*311] breached his fiduciary
duty, and committed fraud. The jury then awarded actual
damages attributable to the defendant's conduct, without
separation of damages according to the theory of
liability, whether contract or tort. Finally, the jury
awarded punitive damages. The court of appeals reversed
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 17
the award of punitive damages. See Lovelace v. Sabine
Consol., Inc., 733 S.W.2d at 654-55. The court stated:
An appellant cannot be held accountable for the
failure of an appellee to secure separate jury findings
upon which an accurate judgment could be based. Nor
can an appellate court imply a finding of actual damages
in tort, because a court of appeals cannot make [**67]
original findings of fact; it can only "unfind" facts. For
the foregoing reasons, we hold that the trial court erred in
awarding punitive damages where there was no
independent finding of actual damages in tort.
Lovelace, 733 S.W.2d at 655 (citations omitted). Our
case is somewhat different from Lovelace, because here,
the court awarded a constructive trust for the conduct it
found in questions 1 through 5 or 12, which amounts to
actual damages, which in turn support punitive damages.
However, we agree that punitive damages may not be
sustained where one of the theories of recovery on which
punitive damages were disjunctively awarded does not
support punitive damages.
A defendant's intentional breach of fiduciary duty is
a tort for which a plaintiff may recover punitive
damages. See Int'l Bankers Life Ins. Co. v. Holloway,
368 S.W.2d at 583-84; Hawthorne v. Guenther, 917
S.W.2d at 936; InterFirst Bank Dallas, N.A. v. Risser,
739 S.W.2d 882, 907 (Tex. App.-Texarkana 1987, no
writ). While it is a general rule that Texas courts allow
the recovery of punitive damages where the defendant, in
committing a tort, acted willfully, [**68] maliciously,
or fraudulently, where punitive damages are awarded for
breach of fiduciary duty the actual motives of the
defendant and whether the defendant acted with malice
are immaterial. But something more than a simple breach
is required for the recovery of punitive damages; the acts
constituting the breach must have been fraudulent, or at
least intentional. See Int'l Bankers Life Ins. Co. v.
Holloway, S.W.2d at 584; InterFirst Bank of Dallas,
N.A. v. Risser, 739 S.W.2d at 907. An intentional breach
may be found where the fiduciary intends to gain an
additional benefit for himself. See Int'l Bankers Life Ins.
Co. v. Holloway, 368 S.W.2d at 583-84. In Holloway, the
Supreme Court suggested that willful and fraudulent acts
are presumed when the fiduciary, as in Holloway, gains
an additional benefit for himself as a result of his breach.
In Texas Bank & Trust Co. v. Moore, 595 S.W.2d 502,
507 (Tex. 1980), the Supreme Court held that exemplary
damages are proper when self-dealing by a fiduciary has
occurred. Where, as here, a fiduciary in fact gains a
benefit by breaching her fiduciary duty, willful and
fraudulent acts may [**69] be presumed. In fact, the
jury found that Harriet breached her fiduciary duty and
committed fraud. There was no evidence of any conduct
amounting to fraud apart from the conduct found to be a

each of Harriet's fiduciary duty. Thus, the same
conduct underlying the finding of breach also amounted
to fraud.
Omitted Element in the Charge
Question 1 asked whether Harriet breached her fiduciary
duty in various respects. No question asked whether
Harriet acted intentionally, willfully, or fraudulently, or
whether she intended to gain an additional benefit for
herself. In its final judgment, the trial court supplied the
alleged omitted element, finding not only that Harriet
engaged in conduct in breach of her fiduciary duty but
also that she did so willfully and maliciously. Even if a
question on intent were required in this case, the Lesikars
have failed to preserve the error.
Where a jury awards damages based on a charge that
omits an element [*312] necessary to sustain a ground
of recovery, the trial court may either file a written
finding regarding the missing element, or may render
judgment without one. If the trial court does not file a
written finding, the omitted element is deemed [**70]
found in support of the judgment so long as no objection
was made or issue requested, and the evidence supports
such a finding. See TEX. R. CIV. P. 279; State Farm Life
Ins. Co. v. Beaston, 907 S.W.2d 430, 436 (Tex. 1995).
The Lesikars contend that the trial court's finding of
willfulness and malice was improper because of the
Texas Supreme Court's holding in Martin v. McKee
Realtors, Inc., 663 S.W.2d 446 (Tex. 1984). In that case,
the trial court awarded discretionary damages under the
DTPA where the plaintiffs obtained a jury finding that
the defendants acted "knowingly," a requirement for the
recovery of discretionary damages under the DTPA, but
where they failed to request a jury issue on discretionary
damages. The plaintiff-appellees contended that since the
"knowingly" issue had been submitted to the jury, it was
proper under Texas Rule of Civil Procedure 279 for the
issue of punitive damages to have been deemed found in
support of the discretionary damages award. In rejecting
this argument, the Supreme Court noted a court of
appeals case, Holland v. Lesesne, 350 S.W.2d 859 (Tex.
Civ. App.-San Antonio 1961, writ ref'd n. [**71] r.e.),
wherein punitive damages were held to be in the nature
of an independent theory of recovery and could not be
awarded absent a special issue thereon. The court then
held that a plaintiff seeking to recover discretionary
damages under the DTPA must request a jury issue on
such damages to avoid waiver of the recovery of those
damages. See Martin v. McKee Realtors, Inc., 663
S.W.2d at 448.
McKee does not parallel the present situation. Here,
a question on punitive damages, being in the nature of an
independent ground of recovery, was submitted, but a
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 18
question on an aggravating factor necessary to sustain a
heightened damage award was omitted. In McKee, the
Supreme Court cited Holland in support of its statement
that a trial court may not make findings of fact where the
omitted issue is an independent ground of recovery. In
Holland the San Antonio Court of Appeals held that a
finding that the conversion was either malicious or
willfully done, essential to a recovery of punitive
damages, was the plaintiff's issue, and that the issue was
waived in the absence of a request by the plaintiff for
submission of the issue. See Holland v. Lesesne, 350
S.W.2d at 865. [**72]
Despite the Supreme Court's citation to Holland,
more recent holdings of the Supreme Court suggest that
the trial court may make a finding of intent when an
issue on it is omitted, if an issue on punitive damages is
submitted. In State Farm Life Ins. Co. v. Beaston, 907
S.W.2d at 437, the Supreme Court stated that the trial
court, in expressly excluding the award of mental
anguish damages where the jury awarded them without
finding that the defendant acted knowingly, must not
have found that the defendant acted knowingly, although
the trial court could have so found under Rule 279. In
Ramos v. Frito-Lay, Inc., 784 S.W.2d 667, 668 (Tex.
1990), the court held that although the jury awarded
punitive damages despite finding that the appellee was
acting in his managerial capacity, the finding would be
deemed found since there was no objection. In addition,
the Beaumont Court of Appeals squarely addressed the
issue presented here and held that where punitive
damages were awarded for breach of fiduciary duty, but
the issue of intent, self-dealing, or malice necessary to
support the award was omitted, the defendant was
required to object to the omission [**73] under Rule
279, and failing to do so, the element could be deemed
found under Rule 279. See Hawthorne v. Guenther, 917
S.W.2d at 936.
We hold that even if the submission of a question of
intent was required in this [*313] case, the submission
of the punitive damages question along with the
submission of the issue of breach of fiduciary duty
required the Lesikars to object to the omitted issue of
intent. See TEX. R. CIV. P. 279; State Farm Life Ins. Co.
v. Beaston, 907 S.W.2d at 437; Ramos v. Frito-Lay, Inc.,
784 S.W.2d at 668; Hawthorne v. Guenther, 917 S.W.2d
at 936. Pursuant to Rule 279, where a ground of recovery
consists of more than one element, and one or more
essential elements necessarily referable thereto are
submitted and found by the jury, but one element is
omitted, that element may be found by the court or may
be deemed found in support of the judgment if the
opposing party does not object to its omission or request
an issue thereon, and there is factually sufficient
evidence to support the omitted finding. TEX. R. CIV. P.

279. The Lesikars failed to object or request an issue, so
the trial court could properly [**74] find the omitted
element if there is sufficient evidence to support it. See
id.; State Farm Life Ins. Co. v. Beaston, 907 S.W.2d at
437. Without detailing again the evidence supporting
fraud, we find there is sufficient evidence to support the
court's finding.
Due Process
The Lesikars contend that Texas procedures for
reviewing punitive damages violate constitutional due
process protections, specifically because (1) Texas trial
courts are not required to affirmatively justify the
punitive awards on the record and (2) the Texas Supreme
Court does not consider the excessiveness of punitive
damage awards, but considers only whether courts of
appeals applied an erroneous standard of review. We
overrule this contention.
The United States Supreme Court has held that due
process imposes constraints on the size of punitive
damages awards and on the procedures under which
punitive damages are awarded and reviewed. See Honda
Motor Co. v. Oberg, 512 U.S. 415, 114 S. Ct. 2331, 129
L. Ed. 2d 336 (1994); TXO Prod. Corp. v. Alliance Res.
Corp., 509 U.S. 443, 113 S. Ct. 2711, 125 L. Ed. 2d 366
(1993); Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 111
S. Ct. 1032, 113 L. Ed. 2d 1 (1991) [**75] . The Court's
recent opinions, however, do not provide specific due
process guidelines for lower courts to follow. Transp.
Ins. Co. v. Moriel, 879 S.W.2d 10, 12 n.1, 27 (Tex. 1994).
Instead, the Court has simply evaluated the
constitutionality of punitive damages awards on a
case-by-case basis, holding that certain states' procedures
in a given case either violate or comport with due
process. See Honda Motor Co. v. Oberg, 512 U.S. at 432
(holding that Oregon's procedure, which failed to provide
any post-verdict review of the amount of punitive
damages, was unconstitutional); TXO Prod. Corp. v.
Alliance Res. Corp., 509 U.S. 443, 125 L. Ed. 2d 366,
113 S. Ct. 2711 (upholding the award as constitutional);
Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. at 23-24
(upholding the award as constitutional). In Haslip, the
Court advised, "We need not, and indeed we cannot,
draw a mathematical bright line between the
constitutionally acceptable and the constitutionally
unacceptable that would fit every case." Pac. Mut. Life
Ins. Co. v. Haslip, 499 U.S. at 18.
The Texas Supreme Court in Moriel, in remanding
[**76] the case for retrial, considered it advisable to
articulate procedural standards for the trial courts to be
applied to all subsequent punitive damages cases in
Texas. See Transp. Ins. Co. v. Moriel, 879 S.W.2d at 26.
The Moriel case contains our current procedural
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 19
standards. Because it had no "bright line guidance" from
the Supreme Court, the court compared Texas
procedures to the procedures examined by the Supreme
Court in Haslip and TXO Production. The court
concluded that our procedures did not compare
favorably. It recognized as disparate that Texas trial
courts, unlike other courts, are not required to scrutinize
each award and set forth reasons on the record for
refusing to disturb a jury verdict. In addition, our
[*314] Supreme Court, unlike its counterparts in other
states, is precluded from reviewing the evidence
supporting a punitive damages award for factual
sufficiency. See Transp. Ins. Co. v. Moriel, 879 S.W.2d
at 28.
In TXO Production, the Supreme Court analyzed
punitive damages in a case where the trial court had not
articulated on the record its reasons for denying motions
for judgment notwithstanding the verdict and for
remittitur. [**77] Although the Court stated that it is
always helpful for trial courts to explain the basis for
their rulings, it held that this failure was not a
constitutional violation. See TXO Prod. Corp. v. Alliance
Res. Corp., 509 U.S. at 465. The Moriel court also
addressed the Lesikars' first argument. It recognized that
other jurisdictions expressly require the trial court to
articulate its reasons for refusing to disturb a punitive
damages award, most adopting them after Haslip. In
addition, it observed that several federal appellate courts
reviewing punitive damages awards since Haslip have
remanded the cases to the trial court with instructions to
articulate the reasons for upholding the award. See
Transp. Ins. Co. v. Moriel, 879 S.W.2d at 32. But, rather
than make this a requirement, the court noted that such
findings would obviously be helpful and urged that they
should be made to the extent practicable. Moriel, 879
S.W.2d at 33.
With regard to the argument that our Supreme Court
does not consider the excessiveness of punitive damages
awards, the Moriel court noted that while our punitive
damages awards are scrutinized less closely on [**78]
appeal to the highest court than in other states, due
process does not require two levels of appellate review.
See Transp. Ins. Co. v. Moriel, 879 S.W.2d at 29. We
note that the question of excessiveness is purely a factual
inquiry and is beyond the Texas Supreme Court's
jurisdiction and that the court has jurisdiction to
determine only whether the courts of appeals properly
review such factual inquiries. See Ellis County State
Bank v. Keever, 915 S.W.2d 478, 479 (Tex. 1995); Alamo
Nat'l Bank v. Kraus, 616 S.W.2d 908, 910 (Tex. 1981).
However, it is significant that the Texas Supreme Court
also has jurisdiction to evaluate punitive damages awards
in light of constitutional substantive due process claims,

as in this case. See Owens-Corning Fiberglas Corp. v.
Malone, 972 S.W.2d 35, 45 (Tex. 1998).
To address the disparities and bring Texas procedure
in line as providing adequate procedural safeguards to
protect against grossly excessive awards, the Moriel
court made the following two changes: It adopted the
requirement, upon request, of bifurcated trials in punitive
damage cases, and held that the court of appeals, [**79]
when conducting a factual sufficiency review of a
punitive damages award, must detail the relevant
evidence explaining why that evidence either supports or
does not support the award. Transp. Ins. Co. v. Moriel,
879 S.W.2d at 31. Several courts of appeals have held
that this heightened post-judgment procedure for
reviewing punitive damages awards mandated by Moriel
satisfies due process. See Convalescent Servs., Inc. v.
Schultz, 921 S.W.2d 731, 740 (Tex. App.-Houston [14th
Dist.] 1996, writ denied); I-Gotcha, Inc. v. McInnis, 903
S.W.2d 829, 844-45 (Tex. App.-Fort Worth 1995, writ
denied). Since Moriel, the United State Supreme Court
has held that Oregon's post-verdict procedures for
reviewing punitive damages violated due process. See
Honda Motor Co. v. Oberg, 512 U.S. 415, 129 L. Ed. 2d
336, 114 S. Ct. 2331. The procedure in Oregon, however,
was significantly dissimilar to the procedure in Texas,
and the holding in that case would not require that we
find Texas procedures unconstitutional. See Honda
Motor Co. v. Oberg, 512 U.S. 415, 129 L. Ed. 2d 336,
114 S. Ct. 2331; see also Convalescent Servs., Inc. v.
Schultz, 921 S.W.2d at 740. [**80]
In light of the United States Supreme Court's
holdings, the Texas Supreme Court's reasoned opinion in
Moriel, and the decisions of other courts of appeals, we
[*315] hold that current Texas procedures do not offend
constitutional due process protections.
Excessiveness
The Lesikars contend not only that the trial court erred in
awarding punitive damages, but also that the punitive
damages awards are excessive. We have overruled their
first contention, but we agree that the punitive damages
awards are excessive.
Punitive damages must be reasonably proportional
to actual damages, although there can be no set ratio
between actual and punitive damages that will be
considered reasonable. InterFirst Bank Dallas, N.A. v.
Risser, 739 S.W.2d at 909. The amount of punitive
damages is largely within the jury's discretion. We may
reverse a punitive damage award or suggest a remittitur
only if we determine the evidence supporting the award
is factually insufficient or the verdict is so against the
great weight and preponderance of the evidence as to be
manifestly unjust. See Transp. Ins. Co. v. Moriel, 879
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 20
S.W.2d at 30; see also Pool v. Ford Motor Co., 715
S.W.2d 629, 635 (Tex. 1986). [**81]
Whether an award of punitive damages is excessive
is measured by the factors set out in Alamo Nat'l Bank v.
Kraus, 616 S.W.2d at 910. Those factors include: (1) the
nature of the wrong, (2) the character of the conduct
involved, (3) the degree of culpability of the wrongdoer,
(4) the situation and sensibilities of the parties
concerned, and (5) the extent to which such conduct
offends a public sense of justice. Alamo Nat'l Bank v.
Kraus, 616 S.W.2d at 910.
In order to assess the reasonableness of a punitive
damages award, we are required to detail the relevant
evidence and explain why the evidence either supports or
does not support the punitive damages award. Ellis
County State Bank v. Keever, 888 S.W.2d 790, 798
(1994); Transp. Ins. Co. v. Moriel, 879 S.W.2d at 31.
Assessing the criteria set out in the Kraus case, we
find that the $ 2,000,000.00 punitive damages award
against Lyn is excessive. The loss experienced by the
estate and Jenny because of Lyn's acts was purely
financial, and in the judgment as we reform it, they will
fully recover their financial loss and more. Unlike
personal injury cases where monetary [**82] damages
cannot replace a lost life or restore a maimed body, the
actual recovery in this case will make the injured parties
completely whole. There was no mental or physical
abuse, personal outrage, insult, or opprobrious conduct.
Lyn's acts were not calculated to injure anyone's personal
sensibilities, and Jenny certainly had not reposed any
personal trust in Lyn. In fact, the parties have been
adversaries feuding and litigating for nearly fifteen years
over their family property. Lyn's motive was financial,
not spite. Considering the positions of the parties and the
ongoing legal disputes involving them and their property,
a $ 2,000,000.00 punitive damages award against Lyn
appears to be the result of passion rather than the result
of an objective assessment of the evidence. See InterFirst
Bank of Dallas, N.A. v. Risser, 739 S.W.2d at 909-10
(Cornelius, C.J., concurring). We will therefore suggest a
remittitur of $ 1,400,000.00 of the punitive damages
award against Lyn, leaving the punitive damages against
him at $ 600,000.00.
ADDITIONAL ERRORS IN THE JUDGMENT
The Lesikars contend that the judgment contains
additional errors. Specifically, they complain of [**83]
the trial court's order granting a temporary injunction
keeping Lyn from being operator on the T. W. Lee lease,
as well as that part of the judgment that confirms L & G,
Jenny, and Fay as the current operators of the lease.
In August of 1994, Harriet, in her capacity as
co-independent executrix of the Lewis estate, submitted

a "P-4" form to the Railroad Commission seeking to
[*316] change the operator of the T. W. Lee oil lease on
Commission records from L & G to Lyn. The Railroad
Commission approved the change. In November of 1994,
Jenny appealed to the Railroad Commission, arguing that
Harriet did not have authority to file the application. The
Railroad Commission disagreed with Jenny and decided
that she did not satisfy her burden of showing that she
had a good-faith claim to operate the lease and that Lyn
did not. Jenny appealed to the trial court in this case
seeking a temporary injunction against Lyn. The court
granted a temporary restraining order, pursuant to which
L & G has been operating the lease to date. The Lesikars
now contend that the trial court erred both in granting the
temporary restraining order and in stating that Jenny is
the operator of the lease; they request that [**84] we set
that part of the judgment aside. They argue that these
rulings amount to impermissible collateral attacks on a
Railroad Commission ruling. We agree.
Section 85.241 of the Natural Resources Code sets
out the procedure for appealing from a Railroad
Commission ruling. That section provides:
Any interested person who is affected by the
conservation laws of this state or orders of the
commission relating to oil or gas and the waste of oil or
gas, and who is dissatisfied with any of these laws or
orders, may file suit against the commission or its
members in a court of competent jurisdiction in Travis
County to test the validity of the law or order.
TEX. NAT. RES. CODE ANN. § 85.241 (Vernon
1993). Jenny has not addressed this provision or stated
that she followed this procedure. Instead, she sought a
temporary injunction against Lyn in the trial court below,
and sought to have the ruling permanently set aside.
These amount to collateral attacks.
A collateral attack on a judgment is an attempt to
avoid its binding force in a proceeding not instituted for
the purpose of correcting, modifying, or vacating it, but
in order to obtain some specific [**85] relief against
which the judgment stands as a bar. Our Court in recent
opinions has held that the rules concerning collateral
attack apply to orders or judgments of quasi-judicial
bodies, such as the Railroad Commission, as well as to
the courts. Arkla Exploration Co. v. Haywood, Rice &
William Venture, 863 S.W.2d 112 (Tex. App.-Texarkana
1993, writ dism'd by agr.). The exception to the general
rule is that a collateral attack upon an agency order may
be maintained successfully on one ground alone-that the
order is void. An agency order may be void in the
requisite sense on either of two grounds: 1) the order
shows on its face that the agency exceeded its
jurisdiction, or 2) a complainant shows that the order was
procured by extrinsic fraud. Gulf States Utils. Co. v.
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 21
Coalition of Cities for Affordable Util. Rates, 883 S.W.2d
739, 758 (Tex. App.-Austin 1994) (Powers, J.,
dissenting), rev'd on other grounds, 947 S.W.2d 887
(Tex. 1997). Neither of these exceptions applies in this
case. We therefore hold that the trial court was without
authority to circumvent Railroad Commission authority,
and we reform the judgment to delete that part [**86]
of Jenny's recovery.
ATTORNEYS' FEES
Jenny sought attorneys' fees at law or in equity,
and/or pursuant to Sections 37.001 and 38.001 of the
Texas Civil Practice and Remedies Code. TEX. CIV.
PRAC. & REM. CODE ANN. § § 37.001, 38.001
(Vernon 1997). Section 37.001 is the Declaratory
Judgments Act, and Section 38.001 allows the recovery
of attorneys' fees for various claims. The trial court
submitted a broad attorney-fee question to the jury:
"What is a reasonable fee for the necessary services of
Jenny Lou Lewis Rappeport's attorney in this case, stated
in dollars and cents?" The jury answered $ 253,444.00.
The Lesikars contend that while Jenny's claim for
declaratory judgment will support attorneys' fees, her
remaining tort claims will not. Thus, they contend that
the court [*317] erred in awarding attorneys' fees
because Jenny failed to segregate her fees among her
various claims or offer proof that her claims are
sufficiently interrelated or so incapable of segregation
that she should be excused from segregating them. Jenny
contends that the Lesikars have waived the alleged error.
The Lesikars respond, arguing that they have preserved
error because their [**87] appellate position is not that
Jenny failed to segregate, but that there is legally
insufficient evidence that her claims are interrelated,
which they have preserved in their post-verdict motions.
We reject the Lesikars' distinction and hold that the error
has been waived.
As a general rule, a party seeking to recover
attorneys' fees carries the burden of proof to establish
that he is entitled to them. Stewart Title Guar. Co. v.
Sterling, 822 S.W.2d 1, 10 (Tex. 1991). When a plaintiff
seeks to recover attorneys' fees in a case in which he
asserts multiple claims, at least one of which supports an
award of fees and at least one of which does not, as the
Lesikars contend is the case here, the plaintiff must offer
evidence segregating attorneys' fees among his various
claims. See Sterling, 822 S.W.2d at 10-11. An exception
to this duty to segregate arises when the attorneys' fees
are in connection with claims arising out of the same
transaction and are so interrelated that their award or
denial depends essentially on the same facts. In that
circumstance, segregation is not required. Id. at 11;
Flint & Assocs. v. Intercontinental Pipe & Steel, Inc.,
739 S.W.2d 622, 624-25 [**88] (Tex. App.-Dallas

1987, writ denied). Thus, a plaintiff must either segregate
his fees among his claims or establish that his claims are
sufficiently interrelated.
Jenny's attorney, Jerry Harris, testified to the hours
worked and the hourly rate of several attorneys who
worked on Jenny's behalf, and the amount he calculated
corresponded to the amount awarded. The Lesikars failed
to object to his testimony on the basis that Jenny failed to
segregate fees among her various claims. Furthermore,
although the Lesikars recognize in their brief that
without legally sufficient evidence that the claims are
interrelated a jury finding of the amount of Jenny's fees
is immaterial, the Lesikars failed to object to the
submission of the broad attorney-fee question. As a
result of these failures, they have waived their complaint
in this regard. Where no objection is made to the failure
to segregate attorneys' fees, either at the time evidence of
attorneys' fees is presented or to the charge, the error is
waived. Green Int'l, Inc. v. Solis, 951 S.W.2d 384, 389
(Tex. 1997); Hruska v. First State Bank of Deanville, 747
S.W.2d 783, 785 (Tex. 1988); Stewart Title Guar. Co. v.
Sterling, 822 S.W.2d at 11 [**89] (stating that remand
is appropriate "if a party refuses, over objection, to offer
evidence segregating attorney's fees among various
claims or parties, and an appellate court determines that
segregation was required" (emphasis added), and
providing that an objection to the failure of the trial court
to allocate or segregate the fees in the jury charge is
sufficient to preserve error); see also TEX. R. CIV. P.
274.
The Lesikars say their argument is not that Jenny
failed to segregate but that she failed to offer proof that
her claims are interrelated, which they may assert in
post-verdict motions. These arguments are effectively the
same. The rule requiring segregation and the exception
requiring proof that the claims are interrelated have been
called "corollary" rules. See 4 M Linen & Unif. Supply
Co. v. W. P. Ballard & Co., 793 S.W.2d 320, 327 (Tex.
App.-Houston [1st Dist.] 1990, writ denied); Flint &
Assocs. v. Intercontinental Pipe & Steel, Inc., 739 S.W.2d
at 624-25. Indeed, the Lesikars' attempt to distinguish the
arguments fails because they ultimately state, "where
plaintiffs refuse to segregate attorneys' fees, Texas courts
[**90] routinely deny any fee recovery" (emphasis
added). [*318]
Where the appellant has waived the error, a trial
court may disregard the jury finding only if it is
unsupported by the evidence or it is immaterial. Green
Int'l, Inc. v. Solis, 951 S.W.2d at 389-90 (citing Spencer
v. Eagle Star Ins. Co. of Am., 876 S.W.2d at 157);
Norrell v. Aransas County Navigation Dist. No. 1, 1
S.W.3d 296, 303-04 (Tex. App.-Corpus Christi 1999, pet.
dism'd). The jury awarded $ 253,444.00 in attorneys'
fees. This finding was material and was supported by the
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 22
uncontroverted testimony of Jenny's attorney. We,
therefore, overrule the Lesikars' point and hold that
Jenny may recover these attorneys' fees.
THE WERLEY SUMMARY JUDGMENT
In 1994, Jenny amended her pleadings to add
Werley as a counter-defendant asserting claims against
Werley for civil conspiracy, negligent misrepresentation,
and breach of fiduciary duty. Werley moved for
summary judgment, which the trial court granted. Jenny
has filed a cross-appeal complaining of the trial court's
rendition of the adverse summary judgment on her
counterclaims against Werley.
To prevail on a motion for summary judgment,
[**91] a movant must establish that there is no genuine
issue of material fact and that he is entitled to judgment
as a matter of law. TEX. R. CIV. P. 166a(c). Summary
judgment for a defendant is proper when he negates at
least one element of each of the plaintiff's theories of
recovery, or pleads and conclusively establishes each
element of an affirmative defense. Science Spectrum,
Inc. v. Martinez, 941 S.W.2d 910, 911 (Tex. 1997). When
reviewing a summary judgment, we take as true all
evidence favorable to the nonmovant. Rhone-Poulenc,
Inc. v. Steel, 997 S.W.2d 217, 223 (Tex. 1999). We
indulge every reasonable inference and resolve any doubt
in the nonmovant's favor. On appeal, the movant still
bears the burden of showing that there is no genuine
issue of material fact and that he is entitled to judgment
as a matter of law.
Conspiracy
Jenny contends that Werley engaged in a conspiracy with
Lyn and Harriet to defraud her of her interest in
reimbursement for the overpayment to Clark, Thomas.
She also contends that Werley conspired with Harriet to
assist her in breaching her fiduciary duties to the estate.
We have set out the elements of civil conspiracy [**92]
above. They are: (1) two or more persons; (2) an object
to be accomplished; (3) a meeting of the minds; (4) one
or more unlawful, overt acts; and (5) damages as the
proximate result. Massey v. Armco Steel Co., 652
S.W.2d at 933.
In his summary judgment motion and on appeal,
Werley contends that (1) an attorney cannot conspire
with his client; (2) he did not commit an underlying
fraudulent act on which conspiracy could be based; (3)
Lyn and Harriet did not commit an underlying fraud or
breach of fiduciary duty and, therefore, could not have
conspired with him to engage in those activities; and (4)
Jenny did not suffer any damage.

Regarding Werley's first contention, we hold that an
attorney may be liable for conspiracy to defraud if he
knowingly agrees with others to defraud a third person.
Likover v. Sunflower Terrace II, Ltd., 696 S.W.2d 468,
472 (Tex. App.-Houston [1st Dist.] 1985, no writ).
Regarding his second contention, even if Werley did not
commit a fraudulent act, he could be liable for conspiring
to assist the Lesikars in perpetrating their fraud.
Bernstein v. Portland Sav. & Loan Ass'n, 850 S.W.2d
694, 709 n.12 (Tex. [**93] App.-Corpus Christi 1993,
writ denied), overr. on other grounds, Crown Life Ins.
Co. v. Casteel, 22 S.W.3d 378, 389 (Tex. 2000).
Regarding his third contention, we have already held that
there is sufficient evidence to support the jury's findings
that Lyn and Harriet committed fraud.
Breach of Fiduciary Duty and Negligent
Misrepresentation
Jenny contends that Werley negligently misrepresented
material facts to [*319] her and that those
misrepresentations damaged her. In McCamish, Martin,
Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d
787 (Tex. 1999), the Texas Supreme Court recognized a
cause of action for negligent misrepresentation against an
attorney by a nonclient. In this case, Jenny contends that
the misrepresentations originate from Werley's failure to
disclose certain information, i.e., that Lyn was acquiring
Clark, Thomas's interest in wells 2 and 5.
Werley contends that he had no duty to Jenny. He
argues that the duty an attorney has in this context does
not extend to a plaintiff, like Jenny, on the opposing side
of litigation. He also contends that there was no duty
because the misrepresentation, if any, was not material
[**94] and was not such that Jenny was justified in
relying on it.
In McCamish, the court outlined the scope of the
duty imposed on an attorney to a nonclient. Relying on
RESTATEMENT (SECOND) OF TORTS § 552(2)
(1977), the court held that the duty arises when (1) the
attorney is aware of the nonclient and intends that the
nonclient rely on the representation, and (2) the nonclient
justifiably relies on the attorney's representation of a
material fact. For purposes of determining whether there
is justifiable reliance, a reviewing court must consider
the nature of the relationship between the attorney,
client, and nonclient.
Jenny contends that Werley made misleading
statements to her attorney that nothing was happening
with respect to Lyn's effort to acquire the Clark, Thomas
interest. She alleges that Werley also denied contacting
Clark, Thomas on Lyn's behalf. She contends Werley
later admitted sending an assignment to Clark, Thomas,
but denied having heard anything from them about it.
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 23
Within thirty days of these statements, the assignment
from Clark, Thomas to Lyn was consummated. Jenny
further contends that after completing the assignment
arrangement, Werley misrepresented the terms [**95]
of the assignment to her attorney.
Taking all of these assertions as true, we hold that
Werley did not have a duty to Jenny. This case is
distinguishable from McCamish, which occurred in a
transactional, as opposed to a litigation, setting. In this
case, the parties had engaged in numerous, protracted
suits. The summary judgment evidence reveals, and
Jenny admits, that she was aware that Clark, Thomas was
interested in settling the overpayment claim and had
contacted each of the co-executrices. Under these facts,
she was not justified in relying on Werley's statements,
even if they were material and Werley intended that she
rely on them.
Jenny also contends that Werley misrepresented
material facts by failing to disclose information when he
had a duty to speak. She argues that as the attorney for
the estate representative, he had a duty to disclose that
the estate could recover the Clark, Thomas interest, a
thing of value. She also contends that Werley had a duty
to disclose the extent to which Lyn was attempting to
acquire the Clark, Thomas interest. She says she was
harmed by her agreement to close the estate, which was
based on her belief that the issue of the estate's claims
[**96] against Clark, Thomas for overpayment would
be severed out for further proceedings.
For there to be actionable nondisclosure fraud, there
must be a duty to disclose. Bradford v. Vento, 997
S.W.2d at 725. Whether such a duty exists is a question
of law. Id. A duty to disclose may arise in four situations:
(1) when one is in a fiduciary relationship; (2) when one
voluntarily discloses some information, but not all of the
pertinent information; (3) when new information makes
an earlier representation misleading or untrue; and (4)
when one makes a partial disclosure and conveys a false
impression.
Nevertheless, an attorney has no duty to reveal
information about a client to a third party when that
client is [*320] perpetrating a nonviolent, purely
financial fraud through silence. Bernstein v. Portland
Sav. & Loan Ass'n, 850 S.W.2d at 704. When an attorney
does make misrepresentations on behalf of a client, the
general standard for fraud applies. But the attorney has
no duty to correct representations that prove to be false.
Id. We hold that Werley did not have a duty to disclose
this fact to Jenny or to correct any representation that
proved to be false. [**97]
Jenny contends that, by assisting Lyn in acquiring
the Clark, Thomas interest, Werley breached his
fiduciary duty to the estate beneficiaries "to collect for

them any money or other thing of value that might have
been received in settlement of the overpayment claim
against Clark, Thomas." She predicates the imposition of
a duty on Werley's duty to Harriet, and Harriet's duty as
co-executrix.
As Jenny candidly admits, however, there are Texas
cases holding that a third party does not have a cause of
action in negligence against an attorney when there is a
lack of privity. See, e.g., Thompson v. Vinson & Elkins,
859 S.W.2d 617, 621 (Tex. App.-Houston [1st Dist.]
1993, writ denied). She argues for an extension of the
law under the facts of this case because of the symmetry
between each co-executrix's duties and responsibilities.
Privity arises, she contends, because in prosecuting a
claim for the estate, the attorney has the same duty he
would have if employed by the other co-executrix -- to
recover what is owed to the estate. She contends that, in
the absence of this privity, one co-executrix cannot
protect herself from the fraud of the other.
In making this argument, [**98] however, Jenny
blurs the respective roles of an executrix and her
attorney. The executrix's duty is to prosecute claims on
behalf of the estate; the attorney's duty is to give the
executrix candid legal advice. The executrix is liable for
breach of fiduciary duties to the beneficiaries; the
attorney is liable for breach of fiduciary duties to the
executrix.
Co-executrices may have the same duties, but their
opinions may differ about how best to fulfill those duties.
Candid advice from an attorney is invaluable in weighing
those competing options. We see no reason to risk
diluting the value of that advice by requiring the attorney
of one co-executrix to effectively represent the other
co-executrix. Each co-executrix can protect herself
adequately by entering into a joint representation
arrangement with a single attorney where appropriate, or
by employing her own attorney. We conclude that the
trial court properly granted summary judgment for
Werley.
CONCLUSION
For the reasons stated, we modify the trial court's
judgment to delete Jenny Rappeport's recovery of $
12,000.00 as costs and $ 1,750.00 awarded by the jury as
unpaid accounting expenses in answer to questions 14(1)
and [**99] 14(4), and to delete the recovery by Jenny
of the "overpayment," $ 298,547.00 according to the
jury's answer to question 10(a). We also modify the
judgment to correct the constructive trust recovery to
cover all of the Clark, Thomas working interest in wells
2 and 5, rather than the interest shown in the judgment as
it now stands. We also modify the judgment to delete the
award of an injunction against Lyn with regard to the
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 24
operations of the lease, and to eliminate the provision of
the judgment restoring Jenny to the position of operator.
We further modify the judgment to award Jenny $
38,245.22 as prejudgment interest rather than the amount
contained in the judgment. We will if Jenny, within
fifteen days from the date of our opinion, files a
remittitur of $ 1,400,000.00 from the punitive damages
awarded her against Lyn Lesikar. If Jenny fails to file
such a remittitur, the judgment will be reversed, and the
cause will be remanded for a new trial.
William J. Cornelius
Chief Justice
ON MOTION FOR REHEARING
S. Gary Werley and the law firm of Bishop, Payne,
Williams & Werley, L.L.P. (collectively, Werley) have
filed a motion for rehearing in which they contend that
we should [**100] clarify our judgment to reflect that
no costs on appeal are assessed against Werley. The
judgment in the case reads, "It is further ORDERED that
the parties each pay one half of the costs incurred by
reason of this appeal." We intended that costs be divided
equally between Jenny and the Lesikars. We therefore
modify our judgment to provide that Jenny Rappeport
and the Lesikars each pay one half of the costs incurred
by reason of this appeal.
The Lesikars have also filed a motion for rehearing
in which they contend we erred in holding that they
failed to preserve error on the issue of attorneys' fees. We
held that the Lesikars waived any error with respect to
attorneys' fees by failing to object to Jenny's attorney's
testimony on the ground that she failed to segregate the
fees among her various claims. We also found that they
failed to object to the submission of the broad attorneys'
fee question. We further held that the trial court could
only disregard the jury finding if it was unsupported by
the evidence or was immaterial, neither of which we
found.
[*322contd] [EDITOR'S NOTE: The page
numbers of this document may appear to be out of
sequence; however, this pagination accurately reflects
the pagination of the original published documents.] In
their motion for rehearing, the Lesikars cite to the
reporter's record showing where they objected to the jury
charge. [**101] Nevertheless, their contention on
rehearing must be viewed within the context of their
appeal. In their initial brief on appeal, they contended
there was no evidence or insufficient evidence that
Jenny's claims were sufficiently intertwined to avoid the
requirement that attorneys' fees be segregated among her
various claims. Jenny responded that the Lesikars failed
to preserve error because they failed to object to the

evidence or to the jury charge. In their reply brief, the
Lesikars reasserted their no evidence and insufficient
evidence contentions with citations to their post-verdict
and post-judgment motions, apparently believing that the
jury's verdict on attorneys' fees was immaterial without
evidence that Jenny's claims were intertwined, and thus
their motions preserved error. But unless the Lesikars
brought to the trial court's attention Jenny's responsibility
to segregate her attorneys' fees or to demonstrate that her
claims were too intertwined to segregate them, it does
not matter whether there was evidence that her claims
were intertwined. Therefore, the Lesikars' argument on
rehearing (that they objected to the jury charge) is at
variance with their argument on appeal [**102] (that
there was insufficient evidence that Jenny's claims were
intertwined).
Moreover, the Lesikars had the burden to point out
specifically in the record where they made the proper
objection. TEX. R. APP. P. 38.1(f), (h). The Lesikars'
citations to the record were not before this Court on
appeal. The appeal involved twenty-six issues, seven
briefs totaling over 260 pages, sixteen volumes of the
clerk's record, and twenty-five volumes of the reporter's
record. Without proper citation to the record, an
objection to the charge is difficult to find in the reporter's
record, which is not indexed by objection or otherwise.
Thus, the issue was improperly briefed.
Even if we were to consider their citations, Jenny's
contention that the Lesikars' objection was not plainly
stated is persuasive. The Lesikars contend they objected
on the grounds (1) that Jenny failed to segregate her
request for attorneys' fees, and (2) that there was no
evidence regarding segregation. Reviewing their
citations to the record, we agree they objected that there
was no evidence regarding segregation. But they also
were required to object to the broad-form nature of the
attorneys' fees question to preserve error [**103] on
their contention that the jury charge should have
segregated the fee request among the claims. The only
statement by their attorney that can be construed as an
objection to the broad-form nature of the jury charge
came when he stated: "As a result, there is no evidence to
submit this question to the jury. And the question itself is
not phrased to cover attorneys' fees that would be
compensable as a matter of statute." (Emphasis added.)
The first sentence is clearly a no evidence objection. The
second sentence is an objection to the phrasing of the
jury charge, but arguably would not have put the trial
court on notice of the nature of the objection.
The objection here contrasts with the objection
lodged in Stewart Title Guar. Co. v. Sterling, 822 S.W.2d
1, 10 (Tex. 1991), where Stewart Title objected, "There
has been no breakdown or allocation to the - of the fees
incurred in connection with this defendant, as well as
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 25
numerous other defendants, in order to show what is
allocable as a reasonable amount for the prosecution of
the suit against the defendant." In that case, the objection
notified the trial court of Stewart Title's request that the
jury be [**104] charged to segregate attorneys' fees
between defendants. In this case, the Lesikars' attorney's
statement must be read in the context of their overall
objection, the thrust of which was clearly a complaint
about the sufficiency of the evidence regarding whether
Jenny's claims were sufficiently intertwined to avoid the
segregation requirement. That objection [*323] was
insufficient to notify the trial court that Jenny was
required to prove that her claims were intertwined in the
first place, or that the trial court was required to charge
the jury to segregate attorneys' fees among Jenny's
claims. We overrule the Lesikars' motion for rehearing.
William J. Cornelius
Chief Justice
Date Decided: December 6, 2000
CONCURBY: Ben Z. Grant
CONCUR: [*321contd]
[EDITOR'S NOTE: The page numbers of this document
may appear to be out of sequence; however, this
pagination accurately reflects the pagination of the
original published documents.]
CONCURRING OPINION
I would recommend that the Legislature revisit
Section 240 of the Probate Code, Joint Executors or
Administrators. TEX. PROB. CODE ANN. § 240
(Vernon 1980). I would strongly suspect that most of the
time when joint executors are named in a will, the
testator intends that these joint executors will be a check
on each other. As this case indicates, it does not work
that way. Section 240 provides that the [**105]
executors (or administrators) may act independently of
each other. This creates a hydra-headed administration of
the estate in which there is no guarantee that there will
not be a duplication of effort, as well as each being able
to hire an attorney to be paid out of the estate which
would result in double attorneys' fees. (The only
exception under Section 240 that requires the signatures
of all executors or administrators is in the conveyance of
real estate.) I would recommend Section 240 be amended
to require that the joint executors or administrators act
jointly on all matters involving the estate.
My next concern is in the construction of the law
that the attorney retained by an executor or administrator
does not represent the estate, but rather represents the

executor or administrator. See Huie v. DeShazo, 922
S.W.2d 920 (Tex. 1996).
The court in the Huie opinion cited a study that
recommended the following:
The fiduciary's duty is to administer the estate or
trust for the benefit of the beneficiaries. A lawyer whose
assignment is to provide assistance to the fiduciary
during the administration is also working, in tandem with
the fiduciary, for the benefit [**106] of the
beneficiaries, and the lawyer has the discretion to reveal
such information to the beneficiaries . . . . n2
n2 Based on "a study by the Section of Real
Property, Probate and Trust Law of the American
Bar Association entitled Report of the Special
Study Committee on Professional
Responsibility-Counselling the Fiduciary. See 28
REAL PROP., PROB. & TR. J. 823 (1994)."
33 S.W.3d 282, *; 2000 Tex. App. LEXIS 6195, **
Page 26
On the basis of precedent, the Texas Supreme Court
declined to adopt the approach recommended by this
study.
Because most beneficiaries do not have their own
attorney and rely on the attorney handling the estate to
see that it is properly administrated according to law, I
would recommend that the Supreme Court consider
changing the legal obligation in accordance with the
recommendations in the report.
Justice
Ben Z. Grant
Date Submitted: April 20, 2000
Date Decided: September 12, 2000

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LEXSEE 68 SW 3D 793
ELSIE MARTIN-SIMON, Appellant v. LETA J. WOMACK, Appellee
NO. 14-00-00319-CV
COURT OF APPEALS OF TEXAS, FOURTEENTH DISTRICT, HOUSTON
SUBSEQUENT HISTORY: [**1] Petition for
Review Denied May 23, 2002.
PRIOR HISTORY: On Appeal from the County
Civil Court at Law No. 2. Harris County, Texas. Trial
Court Cause No. 699,546.
DISPOSITION: Affirmed.
JUDGES: Kem Thompson Frost, Justice. Panel consists
of Justices Edelman, Frost, and Murphy. 7
7 Senior Chief Justice Paul C. Murphy sitting
by assignment.
OPINION BY: Kem Thompson Frost
OPINION
[*794] Appellant, Elsie Martin-Simon, appeals the
trial court's order granting judgment in favor of appellee,
Leta J. Womack, after a bench trial on Martin-Simon's
claim that Womack tortiously interfered with a contract
between Martin-Simon and The Mutual of New York
Life Insurance Company (MONY). Because the evidence
was legally and factually sufficient to support the trial
court's findings of fact, we affirm the judgment of the
trial court.
I. FACTUAL AND PROCEDURAL BACKGROUND
Martin-Simon filed a petition for divorce from her
husband and obtained a default judgment on July 3,
1996. This divorce decree divested Martin-Simon's husband
of, and awarded Martin-Simon, all interest in a life
insurance policy obtained through MONY. Womack, an
68 S.W.3d 793; 2001 Tex. App. LEXIS 7149
October 25, 2001, Rendered
October 25, 2001, Opinion Filed
Page 1
attorney representing Martin-Simon's ex-husband in the
divorce, timely filed a motion for new trial on behalf of
her client on [**2] July 19, 1996. Martin-Simon, with
the default judgment in hand, notified MONY of the divorce
decree and attempted to obtain a loan, for $
9,531.00, against the cash surrender value [*795] of
the MONY policy. In the meantime, Womack continued
her efforts to obtain a new trial on behalf of her client.
On October 9, 1996, the trial court orally granted the
motion. The court, however, did not sign an order granting
the motion. This oversight apparently went undetected
and, on October 17, 1996, a new trial began. On
October 22, 1996, the trial court discovered that it had
never signed an order granting the motion for new trial
and recessed the trial until October 28, 1996. Because the
trial court never signed an order granting the motion for
new trial, the trial court's plenary power over the divorce
proceedings expired on October 16, 1996, the 105th day
after the trial court signed the divorce decree and the day
before the "new trial" commenced. Relying on the jurisdictional
defects, Martin-Simon filed a petition for writ
of mandamus against the trial court on October 24, 1996,
seeking to prevent the trial from continuing. The First
Court of Appeals conditionally granted the petition on
November 21, 1996, stating [**3] that (1) the divorce
decree was final when the trial court signed it on July 3,
1996; and (2) as of October 16, 1996, the trial court no
longer had jurisdiction over the divorce action.
While these proceedings were pending, Martin-Simon
and Womack engaged in various communications
with MONY over the disputed policy. After Martin-Simon
prevailed in the mandamus proceeding,
Womack filed a petition for bill of review on behalf of
her client on December 4, 1996. This petition challenged
the divorce judgment and claimed the trial court's failure
to sign the order granting a new trial was not on the face

of the record, and therefore, was not discovered until
after the expiration of the court's plenary power. On December
5, 1996, Womack obtained a temporary restraining
order on behalf of her client which precluded Martin-Simon
from exercising any control over the disputed
MONY policy. In January of 1997, the trial court denied
the application for temporary injunction that Womack
had filed. Later that year, the trial court dismissed the bill
of review action.
In May of 1998, Martin-Simon filed suit against
Womack for tortious interference with Martin-Simon's
contractual relations with MONY, [**4] claiming
Womack had hindered her attempts to obtain a loan by,
inter alia, sending MONY an unsigned copy of a draft
order granting a new trial. Martin-Simon further claimed
that she had been damaged because she was unable to
obtain the loan. During a bench trial and at the close of
Martin-Simon's case, the trial court granted Womack's
motion for judgment. Martin-Simon now challenges the
trial court's order granting judgment for Womack on
Martin-Simon's claim for tortious interference.
II. ISSUES PRESENTED FOR REVIEW
In her first point of error, Martin-Simon complains
that the trial court erred in granting the motion for judgment.
In her second point of error, Martin-Simon complains
that the trial court's findings of fact are factually
incorrect. In her third point of error, Martin-Simon
claims that the trial court's findings of fact are legally
incorrect. 1
1 Although Martin-Simon phrased her points
of error as attacking only the trial court's findings
of fact, the substance of her appeal also challenges
the court's conclusions of law regarding "no
duty" justification, and privilege. However, we
affirm the trial court's judgment based on its
finding that Martin-Simon sustained no damages.
Therefore, we need not address Martin-Simon's
challenge to these conclusions of law. See Hitzelberger
v. Samedan Oil Corp., 948 S.W.2d 497,
503 (Tex. App.--Waco 1997, pet. denied) ("We
review the conclusions of law de novo to determine
their correctness . . . although if the trial
court's conclusions are erroneous, the judgment
will not be reversed if the controlling findings of
fact support a correct legal theory.") (citations
omitted).
[**5] [*796] III. STANDARD OF REVIEW
We review the trial court's order granting a motion
for judgment based only on the record before the trial
court when it granted the motion and not on matters outside
the record. Gov't Employees Credit Union of San
Antonio v. Fuji Photo Film U.S.A., 712 S.W.2d 208, 210
(Tex. App.--San Antonio 1986, writ ref'd n.r.e.).
In entering judgment at the close of Martin-Simon's
case, the trial court, acting as fact finder, is presumed to
have ruled not only on the legal sufficiency of the evidence,
but also on the weight of the evidence and the
credibility of the witnesses. See Qantel Bus. Sys., Inc. v.
Custom Controls Co., 761 S.W.2d 302, 303-05 (Tex.
1988); Schwartz v. Pinnacle Communications, 944
S.W.2d 427, 431 (Tex. App.--Houston [14th Dist.] 1997,
no writ). Thus, after granting a motion for judgment, the
trial judge may properly make findings of fact as well as
conclusions of law. See Qantel, 761 S.W.2d at 304;
Schwartz, 944 S.W.2d at 431. Findings of fact in a bench
trial have the same force and dignity as a jury verdict, we
review them for legal and factual sufficiency [**6] of
the evidence under the same standards we apply in reviewing
a jury's findings. Catalina v. Blasdel, 881
S.W.2d 295, 297 (Tex. 1994).
We first review the legal sufficiency points of error.
See Schwartz, 944 S.W.2d at 431. When a party attacks
the legal sufficiency of an adverse finding on an issue on
which she has the burden of proof, she must demonstrate
on appeal that the evidence establishes, as a matter of
law, all vital facts in support of the issue. Sterner v.
Marathon Oil Co., 767 S.W.2d 686, 690 (Tex. 1989). In
reviewing this "matter of law" challenge, this court must
first examine the record for evidence that supports the
finding, while ignoring all evidence to the contrary. Id. If
there is no evidence to support the finding, the reviewing
court will then examine the entire record to determine if
the contrary proposition is established as a matter of law.
Id. The point of error should be sustained only if the
contrary proposition is conclusively established.
Croucher v. Croucher, 660 S.W.2d 55, 58 (Tex. 1983).
When a party attacks the factual sufficiency of an
adverse finding on an issue on [**7] which she has the
burden of proof, she must demonstrate on appeal that the
adverse finding is against the great weight and preponderance
of the evidence. Id. The court of appeals must
consider and weigh all of the evidence, and can set aside
a verdict only if the evidence is so weak or if the finding
is so against the great weight and preponderance of the
evidence that it is clearly wrong and unjust. Pool v.
Ford Motor Co., 715 S.W.2d 629, 635 (Tex. 1986).
We review conclusions of law de novo to determine
whether they are correct. See Zieba v. Martin, 928
S.W.2d 782, 786 n.3 (Tex. App.--Houston [14th Dist.]
1996, no writ). Conclusions of law will be upheld on
appeal if the judgment can be sustained on any legal theory
supported by the evidence. Waggoner v. Morrow,
932 S.W.2d 627, 631 (Tex. App.--Houston [14th Dist.]
1996, no writ). Thus, incorrect conclusions of law do not

equire reversal if the controlling findings of fact support
the judgment under a correct legal theory. Id.
IV. ANALYSIS
The Texas Supreme Court has outlined the following
elements for a claim of tortious interference with a contract:
[**8] (1) the [*797] existence of a contract
subject to interference; (2) the occurrence of an act of
interference that was willful and intentional; (3) the act
proximately caused the claimant's damage; and (4) actual
damage or loss occurred. Holloway v. Skinner, 898
S.W.2d 793, 795-96 (Tex. 1995). Based upon the evidence
presented at trial, the trial court found, among other
things, that Martin-Simon had failed to prove any
compensable damages.
In her appellate brief, Martin-Simon claims she suffered
actual damages of $ 18,950.00 in attorney's fees,
incurred in connection with the mandamus proceeding
and in defending the bill of review, and $ 7,200.00 in
attorney's fees in a suit she brought against MONY to
enforce her rights in the policy. Martin-Simon also states
that she "lost the use of the money from the cash value"
of the insurance policy.
Attorney's Fees as Damages
In Texas, attorney's fees expended in prior litigation
generally are not recoverable as damages; attorney's fees
are recoverable only when an agreement between the
parties so provides. See Dallas Cent. Appraisal Dist. v.
Seven Inv. Co., 835 S.W.2d 75, 77 (Tex. 1992) (attorney's
fees [**9] may not be recovered unless provided for by
statute or by contract between the parties); New Amsterdam
Cas. Co. v. Tex. Indus., Inc., 414 S.W.2d 914, 915
(Tex. 1967) (attorney's fees not recoverable in tort claims
unless provided by statute or contract); Cupples Coiled
Pipe, Inc. v. Esco Supply Co., 591 S.W.2d 615, 619 (Tex.
Civ. App.--El Paso 1979, writ ref'd n.r.e.) (attorney's fees
from prior tort or contract suits against third parties are
not recoverable as damages in subsequent suits). Under
various circumstances, 2 some of our sister courts of appeals
have adopted an equitable exception to the general
rule of non-recovery of attorney's fees in tort cases.
However, neither the Texas Supreme Court 3 nor this
court 4 has adopted any wrongful-act exception to this
rule and we decline to do so in this case.
2 See Estate of Arlitt v. Paterson, 995 S.W.2d
713, 721 (Tex. App.--San Antonio 1999, pet. denied)
(holding that, although attorney's fees are
usually not recoverable unless permitted by statute
or contract, contractual or statutory authorization
was not necessary in a malpractice claim to
recover attorney's fees and costs as damages);
Standard Fire Ins. Co. v. Stephenson, 963 S.W.2d
81, 90-91 (Tex. App.--Beaumont 1997, no pet.)
(stating "this court has . . . held such fees may be
recoverable where the natural and proximate results
and consequences of prior wrongful acts
have been to involve a plaintiff in litigation with
and against third parties and other parties, and
holding that, in a bad faith claim, an insured
could recover attorney's fees incurred as a result
of the insurer's bad faith where those fees were
incurred in prior litigation between the insurer
and the insured); Tex. Beef Cattle Co. v. Green,
883 S.W.2d 415, 430 (Tex. App.--Beaumont
1994), rev'd on other grounds, 921 S.W.2d 203
(Tex. 1996) (acknowledging the general rule that,
unless provided for by statute or by contract of
the parties, attorney's fees incurred by a party in
previous litigation are not recoverable against the
present adversary in new, current litigation, but
holding that necessary and reasonable attorney's
fees and costs, even though expended and incurred
in previous litigation, can be recovered as
proper damages in a later suit based on tortious
interference of contract, where the natural and
proximate results and consequences of prior
wrongful acts had involved a plaintiff in litigation
with and against third parties and other parties);
Nationwide Mut. Ins. Co. v. Holmes, 842 S.W.2d
335, 341 (Tex. App.--San Antonio 1992, writ denied)
(recognizing that a recovery of attorney's
fees based upon equitable principles can exist);
Baja v. Energy, Inc. v. Ball, 669 S.W.2d 836, 839
(Tex. App.--Eastland 1984, no writ) (holding
that, on the basis of usages and principles of equity,
plaintiff was entitled to recover his attorney's
fees to defend prior lawsuit because the expenses
were caused by the defendant's wrongful
act); Powell v. Narried, 463 S.W.2d 43, 46 (Tex.
Civ. App.--El Paso 1971, writ ref'd n.r.e.) (denying
a recovery of attorney's fees because of inadequacies
in the record, but recognizing that where
the natural and proximate consequence of a
wrongful act has been to involve plaintiff in litigation
with others, there may be a recovery in
damages of the attorney's fees incurred in such
prior litigation against the author of such act).
[**10]
3 The Texas Supreme Court has adopted a
"common fund" [*798] equitable exception to
the general rule prohibiting recovery of attorney's
fees absent contractual agreement or statute. See
Knebel v. Capital Nat'l Bank in Austin, 518
S.W.2d 795, 799 (Tex. 1974) (stating "one who
preserves or protects a common fund works for
others as well as for himself, and the others so
benefited should bear their just share of the ex-

penses, including a reasonable attorney's fee.").
"Although the common fund doctrine has been
infrequently asserted in Texas, the courts have
applied it to class actions, see, e.g., City of Dallas
v. Arnett, 762 S.W.2d 942, 954 (Tex.
App.--Dallas 1988, writ denied); shareholder derivative
suits, see, e.g., Bayliss v. Cernock, 773
S.W.2d 384, 386-87 (Tex. App.--Houston [14th
Dist.] 1989, writ denied); and insurance subrogation,
see, e.g., Camden Fire Ins. Ass'n v. MO., KY
& Tenn. Ry. Co., 175 S.W. 816, 821 (Tex. Civ.
App.--Dallas 1915, no writ.)." Lancer Corp. v.
Murillo, 909 S.W.2d 122, 126 (Tex. App.--San
Antonio 1995, no writ.); see Libhart v.
Copeland, 949 S.W.2d 783, 804 (Tex.
App.--Waco 1997) (finding that church members
suing on behalf of entire church were entitled to
attorney's fees under the "common fund" doctrine);
Crouch v. Tenneco, Inc., 853 S.W.2d 643,
645 (Tex. App.--Waco 1993, writ denied) (upholding
award of attorney's fees to class counsel
on equitable principle of "common fund"). That
exception, however, does not apply to the facts of
this case, and it is not a wrongful-act exception
held to exist by the cases cited in footnote 2,
above.
[**11]
4 In Massey v. Columbus State Bank, the First
Court of Appeals incorrectly cited an opinion
from this court for the proposition that equitable
principles may allow the recovery of attorney's
fees and other litigation expenses where a party
was required to prosecute or defend a previous
suit as a consequence of a defendant's wrongful
act. See 35 S.W.3d 697, 701-02 (Tex.
App.--Houston [1st Dist.] 2000, pet. denied) (citing
Mattly v. Spiegel, Inc., 19 S.W.3d 890, 898-99
(Tex. App.--Houston [14th Dist.] 2000, no pet.)).
In a parenthetical to its citation of Mattly, the
First Court interpreted Mattly as allowing the recovery
of "attorney's fees incurred in resolving
credit problems created by defendant's wrongful
issuance of a credit card." 35 S.W.3d at 701. In
Mattly, this court only ruled on the issue of Rule
13 sanctions, finding that a claim for attorney's
fees in a negligence action was not filed in bad
faith by a party's attorney, where the attorney researched
statutes applicable to a negligence claim
and where the attorney, during his research, located
a Texas case recognizing that equity allows
recovery of attorney's fees and other litigation
expenses "'where a party was required to prosecute
or defend the previous suit as a consequence
of the 'wrongful act' of the defendant.'"). Mattly,
19 S.W.3d at 897 (citing Baja, 669 S.W.2d at
838-39; Estate of Arlitt, 995 S.W.2d at 721).
[**12] Viewing only the evidence which supports
the trial court's damages finding, we note the absence of
a contract or statute which provides for the recovery of
Martin-Simon's attorney's fees. Nothing in the record
establishes any agreement under which Womack would
be obligated to pay Martin-Simon's attorney's fees, nor is
there any evidence to suggest the existence of any contract
between the two. Martin-Simon did not seek to recover
attorney's fees under any statute nor does she claim
to be entitled to recover such sums based on any statutory
provision. Moreover, Martin-Simon cites no available
equitable exception which would permit her to recover
attorney's fees as damages in this case, and we will not
create one. Accordingly, we find the evidence was legally
sufficient to support the trial court's finding that Martin-Simon
failed to prove she was entitled to any compensable
damages. 5
5 In a single statement in her appellate brief,
Martin-Simon urges that she "lost the use of the
money from the cash value" of the MONY policy.
Martin-Simon cites no facts in the record to
support her contention and makes no argument to
explain how much, if any, actual damages she
incurred from loss of use of the money or how
the amount should be calculated, or could be calculated,
from the evidence in the record. MONY
ultimately made the loan to Martin-Simon, and
Martin-Simon settled her claims against MONY.
Because her unsupported, conclusory assertions
provide no guidance for a legal or factual sufficiency
review, we will not consider Martin-Simon's
damage arguments for loss of use of
money. See TEX. R. APP. P. 38.1(h); Rendleman
v. Clarke, 909 S.W.2d 56, 58-59 (Tex.
App.--Houston [14th Dist.] 1995, writ ref'd n.r.e.)
(refusing to consider legal and factual sufficiency
points of error which were not properly briefed).
[**13] [*799] Considering and weighing all of
the evidence in light of the governing law which provides
no basis for recovery of attorney's fees as damages
in a case such as this, the evidence supporting the damages
finding is not so weak or so against the great weight
and preponderance of the evidence that it is clearly
wrong or unjust. See Pool v. Ford Motor Co., 715
S.W.2d 629, 635 (Tex. 1986). Thus, the evidence is factually
sufficient to support the trial court's finding that
Martin-Simon suffered no compensable damages.
Legally and factually sufficient evidence supports
the trial court's finding that Martin- Simon did not suffer
any compensable damages. Therefore, we overrule her
second and third points of error challenging the legal and

factual sufficiency of the trial court's damages finding.
Because Martin-Simon failed to establish the element of
damages, the trial court did not err in granting Womack's
motion for judgment at the close of Martin-Simon's case.
6 Accordingly, we overrule Martin-Simon's first point of
error.
6 See Ashcreek Homeowner's Ass'n, Inc. v.
Smith, 902 S.W.2d 586, 587 (Tex. App.--Houston
[1st Dist.] 1995) (citing Qantel Bus. Sys., Inc. v.
Custom Controls Co., 761 S.W.2d 302, 303 (Tex.
1988) ("A more judicially efficient and economical
procedure is to allow the trial judge, sitting as
trier of fact and law, to rule on both the factual
and legal issues at the close of the plaintiff's case
and to make factual findings at that time if requested
by a party.")).
[**14] Having overruled all points of error, we
affirm the trial court's judgment.
/s/ Kem Thompson Frost
Justice 7
7 Senior Chief Justice Paul C. Murphy sitting
by assignment.

35 S.W.3d 697, *; 2000 Tex. App. LEXIS 7624, **
LEXSEE
HENRY R. MASSEY AND ANN ALICIA MASSEY, Appellants v. COLUMBUS
STATE BANK, Appellee
NO. 01-99-01432-CV
COURT OF APPEALS OF TEXAS, FIRST DISTRICT, HOUSTON
SUBSEQUENT HISTORY: [**1] Motion for
Rehearing of Petition for Review Denied June 28, 2001.
Petition for Review Denied May 10, 2001.
PRIOR HISTORY: On Appeal from the 25th District
Court. Colorado County, Texas. Trial Court Cause No.
19,477.
DISPOSITION: Affirmed.
LexisNexis (TM) HEADNOTES - Core Concepts:
COUNSEL: FOR APPELLANT: Henry P. Massey,
Houston, TX.
FOR APPELLEE: Janet E. Militello, HOUSTON, TX.
JUDGES: Panel consists of Chief Justice Schneider and
Justices Wilson and Andell.
OPINIONBY: Michael H. Schneider
OPINION: [*699]
This is an appeal from a default judgment granted in
favor of appellee, Columbus State Bank. Henry Massey
and Ann Massey, appellants, appeal, contending (1) the
default judgment against them should be set aside, and
(2) the trial court committed several errors in the
damages portion of the judgment. We affirm the
judgment of the trial court.
Factual Background
Several years ago Henry Massey was a shareholder in
Columbus State Bank and sat on its Board of Directors.
Mr. Massey borrowed a large sum of money from the
35 S.W.3d 697; 2000 Tex. App. LEXIS 7624
November 9, 2000, Opinion Issued
Page 1
Bank, pledging his stock in the Bank and other assets as
collateral. The Bank was forced to foreclose on his stock
and other collateral when he did not fulfill his
obligations. Mr. Massey also was removed from his seat
on the Board.
At one point, Mr. Massey's daughter, Ann Massey,
owned one share of stock in the Bank. Based on her de
minimis ownership, Mr. Massey and his daughter began
writing a series of letters and making certain demands
[**2] on the Bank for its financial records, Board
records, stockholder lists, a summary of the total
attorney's fees paid, a reconciliation of all loan loss
reserves on all other accounts, and a summary of all
travel, entertainment, and convention expenses paid. Mr.
Massey and his daughter also filed a complaint with the
Texas Department of Banking alleging embezzlement of
dividends, a grievance with the State Bar of Texas for the
Bank's Board's chairperson, a complaint with the Texas
State Board of Public Accountancy against the Bank's
outside independent accounting firm concerning
information that the firm provided to them, and a
complaint with the Sheriff's Department of Colorado
County, Texas, claiming that property had been stolen.
The Bank then filed its Original Petition and Mr.
Massey and his daughter were served with citation. Mr.
Massey and his daughter did not file an answer or
otherwise appear in the suit. As such, the Bank moved
for and was granted an interlocutory default judgment
against Mr. Massey and his daughter. After a hearing on
damages, the district court signed the final judgment.
Although Mr. Massey and his daughter did not answer or
participate in the suit, they [**3] filed a number of
motions and letters, many of which were served on
Columbus State Bank.
Default Judgment Cannot Be Set Aside

Complaints regarding the trial court's failure to set
aside a default judgment must be raised in a motion for
new trial. TEX. R. CIV. P. 324(b)(1). In the motion for
new trial, the movant must: (1) establish that the failure
to answer was not intentional or the result of conscious
indifference; (2) set up a meritorious defense; and (3)
demonstrate that setting aside the default judgment
would not delay or otherwise injure the plaintiff.
Craddock v. Sunshine Bus Lines, Inc., 134 Tex. 388, 133
S.W.2d 124, 126 (Tex. 1939). Because this is a direct
appeal from a default judgment, Mr. Massey and his
daughter are required to prove the Craddock elements.
However, Mr. Massey and his daughter did not argue any
of the Craddock elements in their brief, or in any
post-judgment motions. Even if Mr. Massey and his
daughter had set forth proof of the points of error they
assert in their brief, it would not be sufficient in this case.
Proof of a meritorious defense would only satisfy the
second element of Craddock.
[*700] Bank's [**4] Prior Suit
Columbus State Bank filed a suit against Mr.
Massey and his daughter in 1993 that was dismissed for
want of prosecution. Mr. Massey and his daughter assert
that the dismissal of the Bank's prior suit for want of
prosecution bars the Bank's causes of action here. A
dismissal for want of prosecution is not "with prejudice."
Carter v. Charles, 853 S.W.2d 667, 672
(Tex.App.-Houston [14th Dist.] 1993, no writ). It is not
an adjudication of the rights of the parties, but simply
places the parties in the position they were in prior to
filing the action. Id. Therefore, the dismissal of the prior
suit does not bar any of the Bank's present claims.
Statute of Limitations
Mr. Massey and his daughter argue that the exhibits
submitted at the damages hearing were barred by the
statute of limitations. First, there is no authority that the
statute of limitations applies to evidence submitted in
support of a claim. Additionally, limitations is procedural
and may be waived if not affirmatively plead. TEX. R.
CIV. P. 94; Luker v. Arnold, 843 S.W.2d 108, 120 (Tex.
App.-Fort Worth, 1992, no writ). As such, Mr. Massey
and his daughter waived [**5] limitations by failing to
answer the suit.
Venue
Mr. Massey and his daughter argue the judgment
was improper because certain exhibits were not covered
by the venue of this Court. "An objection to improper
venue is waived if not made by written motion filed prior
to or concurrently with any other plea, pleading, or
motion . . . ." TEX. R. CIV. P. 86. Because Mr. Massey
and his daughter did not file a motion to transfer venue
35 S.W.3d 697, *; 2000 Tex. App. LEXIS 7624, **
Page 2
within the time allowed for them to answer, they waived
their right to challenge venue. Wilson v. Texas Parks and
Wildlife Dept., 886 S.W.2d 259, 260 (Tex. 1994).
Moreover, venue was proper in Colorado County.
Venue is proper in the county in which all or a
substantial part if the events or omissions giving rise to
the claim occurred. TEX. CIV. PRAC. & REM. CODE
ANN. § 15.002 (a)(1) (Vernon Supp. 2000). The
events giving rise to this lawsuit and subsequent
judgment were the threatening and harassing phone calls
and letters sent to the Bank in Colorado County.
The Bank's Counsel
Mr. Massey and his daughter assert that the Bank's
attorneys were barred from representing the Bank
because of a conflict [**6] of interest. However, a party
who does not file a motion to disqualify opposing
counsel in a timely manner waives the complaint. In re
Epic Holdings, Inc., 985 S.W.2d 41, 52 (Tex. 1998)
(original proceeding). Because Mr. Massey and his
daughter never filed a motion to disqualify, they waived
any complaint with regard to any alleged conflict.
Challenges to Damages Lack Merit
Mr. Massey and his daughter have raised several issues
with respect to the damages portion of the judgment.
Notice
The interlocutory default judgment was properly entered
against Mr. Massey and his daughter because they did
not timely answer or appear in the suit. Mr. Massey and
his daughter were given notice that the default judgment
had been entered. What Mr. Massey and his daughter
complain about on appeal is that they should have been
given notice of the hearing on unliquidated damages.
However, separate notice of a hearing on unliquidated
damages is not required. Long v. McDermott, 813
S.W.2d 622, 624 (Tex.App.-Houston [1st Dist.] 1991, no
writ).
Mr. Massey and his daughter rely on Texas Rule of Civil
Procedure 124 to assert they were [**7] entitled to
notice on the hearing on damages. However, rule 124
requires only that defendants be served [*701] with
process before judgment is entered. TEX. R. CIV. P.
124. There is no dispute that Mr. Massey and his
daughter were properly served in this case.
Appellants also assert that the district clerk failed to
comply with Rule 246. Rule 246 requires the clerk to
give notice of trial to non-resident attorneys. TEX. R.
CIV. P. 246. It is well-settled that "after a citation and
petition are served on a defendant, the plaintiff has no

legal duty to notify the defendant before taking a default
judgment on the causes of action asserted in the served
petition." Long v. McDermott, 813 S.W.2d 622, 624
(Tex. App.--Houston [1st Dist.] 1991, no writ).
As such, because this rule requires the clerk to give
notice of trial to non-resident attorneys, it is inapplicable
here.
Massey and his daughter base their argument on a
letter sent to the district clerk by Mr. Massey, in which
he acknowledged receipt of the notice informing him that
a default judgment had been entered against him. In the
letter, Mr. Massey requested copies of several
documents, and, at the end of the [**8] letter, requested
notice of future hearings and copies of all past notices.
There is no rule, however, requiring the district clerk to
comply with his request.
In Western Union Telegraph Co. v. Skinner, 60 Tex.
Civ. App. 477, 128 S.W. 715, 716 (Tex. Civ. App. 1910,
writ ref'd), Western Union filed its answer a few hours
after the district court entered a default judgment against
it. On appeal, Western Union complained that although
the answer was on file, it was not given notice of the
hearing to receive evidence on damages. Id. The court of
appeals held that the failure to notify the defendant was
not error. Western Union, 128 S.W. at 717. Once the
default judgment was entered, the defendant had no right
except to demand a trial by jury as to the amount of
damages. Id. Likewise, if Mr. Massey and his daughter
had filed a jury demand and paid the jury fee, they would
have been entitled to notice of the hearing on damages.
TEX. R. CIV. P. 243; Marr v. Marr, 905 S.W.2d 331,
333 (Tex.App.-Waco 1995, no writ). Without such a
demand, or any rule requiring the district clerk to give
Mr. Massey and his daughter notice of the hearing, no
notice was required. Western Union, 128 S.W. at 717.
[**9]
Attorney's Fees
Mr. Massey and his daughter argue that attorney's
fees should not have been awarded because the suit did
not involve a contract and attorney's fees are not
authorized by statute. We disagree.
Although parties generally cannot recover attorney's
fees in the absence of a contract or statute specifically
authorizing such, equitable principles may allow the
recovery of attorney's fees and other litigation expenses
"where a party was required to prosecute or defend the
previous suit as a consequence of the 'wrongful act' of
the defendant." Baja Energy, Inc. v. Ball, 669 S.W.2d
836, 838-39 (Tex. App.-Eastland 1984, no writ); see also
35 S.W.3d 697, *; 2000 Tex. App. LEXIS 7624, **
Page 3
Mattly v. Spiegel, Inc., 19 S.W.3d 890, 898-99 (Tex.
App.--Houston [14th Dist.] 2000, no pet.) (attorney's fees
incurred in resolving credit problems created by
defendant's wrongful issuance of a credit card
recoverable); Estate of Arlitt v. Paterson, 995 S.W.2d
713, 721 (Tex. App.-San Antonio 1999, pet. denied)
(holding that, although attorney's fees usually are not
recoverable unless permitted by statute or contract,
statutory or contractual authorization was not necessary
in a [**10] malpractice claim to recover attorney's fees
and costs as damages); Standard Fire Ins. Co. v.
Stephenson, 963 S.W.2d 81, 90-91 (Tex. App.-Beaumont
1997, no pet.) (holding that, in a bad faith claim, an
insured could recover attorney's fees incurred as a result
of the insurer's bad faith where those fees were incurred
in prior litigation between the insurer and the insured);
and Nationwide Mutual Ins. Co. v. Holmes, 842 S.W.2d
335, 340-42 (Tex. App.-San Antonio 1992, writ denied)
(holding that insured, who incurred unnecessary [*702]
attorney's fees in order to induce insurer to indemnify
him, may recover those fees in a later suit "in the name
of equitable principles").
By failing to answer the suit, appellants admitted to
filing false and defamatory complaints with the Texas
Department of Banking, an unfounded grievance with
the State Bar of Texas against the Bank's Board chairman
and outside counsel, a groundless complaint with the
Texas State Board of Public Accountancy, and a
complaint with the Sheriff's Department of Colorado
County, Texas. n1 As a result of these wrongful acts, the
Bank was forced to spend $ 104,000. responding to and
defending against [**11] all of these complaints and
grievances. The trial court properly allowed these
attorney's fees as an element of actual damages. As such,
the award should be upheld.
n1 See Lakeside Leasing Corp. v. Kirkwood
Atrium Office Park, 750 S.W.2d 847, 850 (Tex.
App.--Houston [14th Dist.] 1988, no writ) ("By
failing to answer, a defendant generally admits
the material facts properly alleged in his
opponent's petition.").
We affirm the judgment of the trial court.
Michael H. Schneider
Chief Justice
Panel consists of Chief Justice Schneider and Justices
Wilson and Andell.

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LEXSEE 82 SW 3D 337
Tom C. McCall and David B. McCall, Appellants v. Tana Oil and Gas Corporation
and Robert B. Rowling, Appellees
NO. 03-00-00347-CV
COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN
SUBSEQUENT HISTORY: [**1] Released for
Publication October 18, 2001. Petition for review granted:
Tana Oil & Gas Corp. v. McCall, 2002 Tex. LEXIS
63 (Tex. May 23, 2002).
Petition for review granted by Tana Oil & Gas Corp. v.
McCall, 2002 Tex. LEXIS 63 (Tex., May 23, 2002)
Reversed by, in part, Judgment entered by Tana Oil &
Gas Corp. v. McCall, 104 S.W.3d 80, 2003 Tex. LEXIS
11, 46 Tex. Sup. Ct. J. 452 (Tex., 2003)
PRIOR HISTORY: FROM THE DISTRICT
COURT OF TRAVIS COUNTY, 200TH JUDICIAL
DISTRICT. NO. 97-13325, HONORABLE CHARLES
F. CAMPBELL, JR., JUDGE PRESIDING.
In re McCall, 967 S.W.2d 934, 1998 Tex. App. LEXIS
2386 (Tex. App. Corpus Christi, 1998)
Niemeyer v. Tana Oil & Gas Corp., 39 S.W.3d 380, 2001
Tex. App. LEXIS 837 (Tex. App. Austin, 2001)
DISPOSITION: Affirmed in Part; Reversed and
Remanded in Part.
COUNSEL: FOR APPELLANTS: Mr. Tom C. McCall,
McCall & Ritchie, L.L.P. Austin, TX.
FOR APPELLEES: Ms. Roberta S. Dohse, Mr. R. Clay
Hoblit, Chaves, Gonzales & Hoblit, L.L.P. Corpus
Christi, TX.
JUDGES: Before Justices Kidd, Yeakel and Powers. *
* Before John E. Powers, Senior Justice (retired),
Third Court of Appeals, sitting by assignment.
See Tex. Gov't Code Ann. § 74.003(b)
(West 1998).
82 S.W.3d 337; 2001 Tex. App. LEXIS 4969
July 26, 2001, Filed
OPINION BY: John E. Powers
OPINION
Page 1
[*341] Tom C. McCall and David B. McCall (the
"McCalls") appeal from a judgment that they take nothing
by their claims against Tana Oil and Gas Corporation
and Robert B. Rowling ("appellees"). We will affirm the
judgment in part and reverse in another part, remanding
to the trial court the part reversed.
THE CONTROVERSY
John Niemeyer retained the McCalls to represent
him in litigation with Tana Oil and Gas Corporation. In
Niemeyer's behalf, the McCalls sued the corporation on
October 19, 1995, in the Fayette County district court, to
recover mineral royalties allegedly owed Niemeyer. 1
Very soon thereafter, appellees alleged various causes of
action in a suit against the McCalls, Niemeyer, and other
members of the Niemeyer family, filed November 2,
1995, in a district [**2] court of Nueces County. On
April 22, 1998, in an original mandamus action brought
by the McCalls, the Thirteenth Court of Appeals ordered
abatement of the Nueces County suit, but not before the
McCalls had incurred substantial attorneys' fees defending
against appellees' Nueces County suit. See In re
McCall, 967 S.W.2d 934 (Tex. App.--Corpus Christi
1998, orig. proceeding).
1 The Fayette County suit was tried and appeals
were taken from the resulting judgment to
the Third Court of Appeals by both Tana Oil and
Gas Corporation and Niemeyer. See Niemeyer v.
Tana Oil & Gas Corp., 39 S.W.3d 380 (Tex.
App.--Austin 2001, pet. denied).

The McCalls thereafter sued appellees in a Travis
County district court alleging appellees' Nueces County
suit was groundless and maliciously conducted for the
express purpose of disrupting the Fayette County litigation
by interfering with the McCalls' representation of
Niemeyer. Upon such allegations, the McCalls founded
the following causes of [**3] action: tortious interference
with the McCall-Niemeyer contract; abuse of process;
and malicious prosecution of a civil proceeding.
The trial court appears to have decided each cause of
action adversely to the McCalls as a matter of law, which
the McCalls claim was reversible error in each instance.
Before we turn to those matters, however, we will upon
our own motion inquire whether the judgment is not
within our power to review because it fails to adjudicate
all three causes of action brought by the McCalls. See K
& S Interests, Inc. v. Texas Am. Bank/Dallas, 749 S.W.2d
887, 891 (Tex. App.--Dallas 1988, writ denied).
APPELLATE JURISDICTION
Abuse of Process. The McCalls' action for abuse of
process was decided adversely to them on appellees' motion
for summary judgment, as stated expressly in an
interlocutory order signed by the trial judge on May 10,
2000.
Tortious Interference. The McCalls' action for tortious
interference with the McCall- Niemeyer contract
was determined adversely to the McCalls, as a matter of
law, in response to appellees' motion for directed verdict.
Malicious Prosecution. While the trial-court rulings
on the two foregoing [**4] actions were expressly
made a part of the judgment [*342] instrument quoted
at length below, the McCalls' action for malicious prosecution
is not mentioned expressly in that instrument and
is not the subject of any interlocutory trial-court order.
It appears from the record that another trial judge
heard appellees' motion for summary judgment directed
at the McCalls' malicious-prosecution claim. That judge
evidently sent to counsel of record a "letter ruling" dated
December 9, 1999. Therein, the judge stated appellees'
motion was "granted" as to the McCalls' malicious-prosecution
claim and directed appellees to "submit
an appropriate order." No such interlocutory order
appears in the clerk's record; indeed, the "letter ruling" is
before us solely in the form of a copy attached to each
party's brief in this Court. The copy does not bear the
district clerk's file mark and nothing in the record suggests
the letter was filed with the district clerk. 2 We
therefore conclude that the record fails to show that appellees'
motion for summary judgment as to the malicious-prosecution
claim was adjudicated before the case
was called for trial on May 8, 2000. See Goff v.
Tuchscherer, 627 S.W.2d 397, 398-99 (Tex. 1982); [**5]
In re Fuentes, 960 S.W.2d 261, 264-65 (Tex.
App.--Corpus Christi 1997, orig. proceeding); Mays v.
Foremost Ins. Co., 627 S.W.2d 230, 231-32 (Tex.
App.--San Antonio 1981, no writ).
2 The McCalls designated the "letter ruling"
for inclusion in the clerk's record. Because a copy
of the document was not included therein, we assume
the "letter ruling" was never filed with the
clerk.
On May 15, 2000, the trial judge signed an
"Amended Final Judgment Based Upon Directed Verdict."
The instrument recites as follows:
Be it remembered that, on the 8th day of May, 2000,
the above-entitled and numbered cause was regularly
reached and called for trial, and came the parties to said
cause, in person and by counsel, and announced themselves
ready for trial. Whereupon came a jury of twelve
(12) good and lawful men and women, who were duly
impaneled and sworn by the Court and . . . thereupon
said cause proceeded to trial before said Court and jury.
The Court, having entered [sic] [**6] an order
granting [appellees'] Motion for Summary Judgment on
Abuse of Process, and having entered an order granting
[appellees'] Motion for Directed Verdict on Claim for
Tortious Interference, and there being no remaining live
claims, dismissed the jury.
It is, therefore, ordered, adjudged and decreed, by
the Court that Directed Verdict and Final Judgment in
favor of [appellees] should be entered and that [the
McCalls] take nothing against [appellees]. It is further
ordered by the Court that all costs of this suit be and the
same are hereby adjudged against the [McCalls], and that
[appellees] shall recover such costs from [the McCalls],
for which execution shall issue if not timely paid.
It is further ordered that all relief not expressly
granted herein is denied.
Is the foregoing a final judgment for purposes of appeal
even though it does not adjudicate expressly the McCalls'
malicious-prosecution action?
When a judgment not intrinsically interlocutory in character
is rendered and entered in a case regularly set for a
conventional trial on the merits . . . it will be presumed
for appeal purposes that the Court intended to, and did,
dispose of all [**7] parties legally before it and all issues
made by the pleadings between such parties.
North East Indep. Sch. Dist. v. Aldridge, 400 S.W.2d 893,
897-98 (Tex. 1966). That [*343] the instrument signed
May 15, 2000, was intended to be a final judgment is
indicated by the recitals contained therein to the effect

that the case was set and called for trial before a jury and
the cause proceeded to trial; the decree that the McCalls
take nothing as against appellees; the declaration that all
relief not granted expressly is denied; and the recital that
the jury were dismissed because, in effect, all the
McCalls' claims had been decided against them on questions
of law, leaving nothing for the jury to determine.
The effect of the instrument signed May 15, 2000, is
to dispose of the McCalls' malicious-prosecution claim
by necessary implication and as a matter of law. See
Farmer v. Ben E. Keith Co., 907 S.W.2d 495, 496 (Tex.
1995); North East Indep. Sch. Dist., 400 S.W.2d at 895;
Ferguson v. Ferguson, 161 Tex. 184, 338 S.W.2d 945,
947 (Tex. 1960); Hargrove v. Insurance Inv. Corp., 142
Tex. 111, 176 S.W.2d 744, 746 (Tex. 1944); [**8]
Trammell v. Rosen, 106 Tex. 132, 157 S.W. 1161, 1162
(Tex. 1913). Whether the disposition was by way of ruling
as a matter of law on appellees' unresolved motion
for summary judgment (which remained pending for
want of an interlocutory order) or by way of the trial
judge's power to withdraw an issue from the jury, as discussed
in footnote four infra, the result is the same.
We hold accordingly that the judgment instrument
signed May 15, 2000, resolved all issues between the
parties and it is, therefore, a final judgment for purposes
of appeal.
DIRECTED VERDICT--TORTIOUS INTERFER-
ENCE
In answer to the McCalls' tortious-interference
claim, appellees interposed the affirmative defense of
legal justification and a plea that the damages sought to
be recovered for the alleged interference consisted solely
of attorneys' fees, which are not recoverable as a matter
of law because not authorized by contract or statute. 3 It
appears to be undisputed that attorneys' fees incurred by
the McCalls in defending the Nueces County suit are the
principal injury for which they seek damages in their
tortious-interference action.
3 Appellees urged a special exception on the
same ground. It does not appear, however, that a
ruling was obtained thereon before judgment. See
Tex. R. Civ. P. 90; In re Moore, 890 S.W.2d 821,
826-27 (Tex. App.--Amarillo 1994, no writ).
[**9] After the jury were impaneled, but before
any evidence was adduced, the trial judge sustained appellees'
motion for directed verdict challenging the
McCalls' tortious-interference claim. A directed verdict
is ordinarily made, at the earliest, when the plaintiff
rests. See 4 McDonald, Texas Civil Practice § 24:49, at
129-30 (1992). Directed verdicts have also been sustained,
however, where the substantive law did not as a
matter of law permit a plaintiff to recover on his pleaded
cause of action. See, e.g., Anderson v. Vinson Exploration,
Inc., 832 S.W.2d 657, 665 (Tex. App.--El Paso
1992, writ denied) (directed verdict on ground that investor
not "consumer" under Deceptive Trade Practices
Act); Dillard v. Broyles, 633 S.W.2d 636, 644 (Tex.
App.--Corpus Christi 1982, writ ref'd n.r.e.) (directed
verdict on ground that statute of limitations barred plaintiff's
action as matter of law). Under this theory, the timing
of a directed verdict would appear to be immaterial.
It is on this basis that we discuss appellees' contention
that the McCalls could not as a matter of law prevail on
their tortious-interference claim.
The judgment, signed May 15, 2000, determines
[**10] as a matter of law that the [*344] McCalls
cannot recover on their tortious-interference claim for
three stated reasons: (1) attorneys' fees as damages are
not recoverable absent a contract or statute providing
therefor; (2) a pleading defect on the McCalls' part; and
(3) appellees' affirmative defense of justification had
been established as a matter of law. A fair reading of
appellees' motion for directed verdict reveals that it states
only one ground for directed verdict, namely appellees'
affirmative defense of justification. For purposes of discussion,
however, we will assume that appellees' motion
also requested a directed verdict on the other two
grounds recited in the judgment. 4 We will discuss each
of the three grounds.
4 The rules of procedure required that appellees'
"motion for directed verdict . . . state the
specific grounds therefor." Tex. R. Civ. P. 268.
This fair-notice requirement is undercut considerably,
however, by the trial judge's power to
withdraw a case from the jury on his own motion
and to render judgement. See Rudco Oil & Gas
Co. v. Gulf Oil Corp., 169 S.W.2d 791, 792 (Tex.
Civ. App.--Austin 1943, writ ref'd w.o.m.). We
believe it necessary, therefore, to discuss each of
the three grounds mentioned as well as any other
suggested by the record that might justify the directed
verdict.
[**11] Attorneys' Fees as Damages. The judgment
declares in effect that the McCalls did not suffer
any compensable loss or injury because their only
claimed injury consisted of attorneys' fees incurred by
them in defending against appellees' Nueces County suit;
and, as a matter of law such fees are not recoverable,
even as damages, because not authorized in this instance
by statute or contract. We believe a directed verdict on
this ground constituted reversible error.
It is well established under the "American Rule" that
attorneys' fees, as such, are not recoverable unless authorized
by contract or statute. Turner v. Turner, 385

S.W.2d 230, 233 (Tex. 1964). This general rule is not,
however, without exception. In some circumstances,
damages measured by a plaintiff's attorneys' fees are
recoverable. Where a constable wrongfully denied plaintiff's
right to replevy property seized under a writ of sequestration,
for example, it was held that the plaintiff
could recover from the constable and his surety, as
damages, the amount of attorneys' fees incurred by the
plaintiff to procure approval of his replevy bond. See
Findley v. Mitchell, 50 Tex. 143, 147-48 (1878). [**12]
Equitable considerations have led to several narrow
exceptions upon which attorneys' fees may be recovered
as damages even though not authorized by contract or
statute. See generally Knebel v. Capital Nat'l Bank, 518
S.W.2d 795, 799-800 (Tex. 1974). One such exception to
the general rule is almost as well-established as the general
rule itself: Where the defendant's tort requires the
plaintiff to act in the protection of his interests by bringing
or defending an action against a third person, the
plaintiff "is entitled to recover compensation for the reasonably
necessary loss of time, attorney fees and other
expenditures thereby suffered or incurred." Restatement
(Second) of Torts § 914(b) (1977); see generally C. T.
Drechsler, Annotation, Right to Recover as Damages
Attorney's Fees Incurred in Earlier Litigation with a
Third Person Because of Involvement Therein Through a
Tortious Act of Present Adversary, 45 A.L.R.2d 1183
(1956 & Supp. 2001); see, e.g., Lesikar v. Rappeport, 33
S.W.3d 282, 306 (Tex. App.--Texarkana 2000, dism'd as
moot); Baja Energy, Inc. v. Ball, 669 S.W.2d 836, 838-39
(Tex. App.--Eastland [**13] 1984, no writ). It is evident,
however, that this exception is not applicable here
because the attorneys' fees claimed by the McCalls as
damages were [*345] not incurred in litigation with a
third person, but in litigation with appellees, their present
adversary. We believe, however, that another
well-established exception to the general rule is applicable.
In their tortious-interference claim, the McCalls alleged
appellees prosecuted their Nueces County suit
"without any basis in fact or law" and "maliciously and
in bad faith with specific intent to disrupt the contract
relationship between" Niemeyer and the McCalls. Other
allegations in the McCalls' petition characterize appellees'
conduct in similar terms concerning the Nueces
County suit. These allegations easily bring the McCalls'
tortious-interference action within another exception to
the general rule that attorneys' fees are not recoverable,
even as damages, unless authorized by contract or statute.
This exception authorizes recovery of damages
measured by attorneys' fees when the defendant "has
acted in bad faith, vexatiously, wantonly, or for oppressive
reasons." Alyeska Pipeline Service Co. v. Wilderness
Society, 421 U.S. 240, 258-59, 44 L. Ed. 2d 141, 95 S.
Ct. 1612 (1975) [**14] (quoting F. D. Rich Co. v.
United States, 417 U.S. 116, 129, 40 L. Ed. 2d 703, 94 S.
Ct. 2157 (1974)). For purposes of this exception, "an
action is brought in bad faith when the claim is entirely
without color and has been asserted wantonly, for purposes
of harassment or delay, or for other improper reasons."
Browning Debenture Holders' Comm. v. DASA
Corp., 560 F.2d 1078, 1088 (2d Cir. 1977). If the action
itself is brought in bad faith, damages measured by attorneys'
fees for the entire proceeding may be recovered;
if bad faith exists only in the manner in which the litigation
is conducted, damages are made commensurate with
that part of the attorney's work and expense necessitated
by the defendant's bad-faith conduct. See Synanon
Found., Inc. v. Bernstein,, 517 A.2d 28, 38-39 (D.C. Cir.
1986). The bad-faith exception appears to be the basis
upon which damages measured by attorneys' fees were
awarded in Mattly v. Spiegel, Inc., 19 S.W.3d 890,
898-99 (Tex. App.--Houston [14th Dist.] 2000, no pet.)
(where defendant issued to imposter credit card bearing
plaintiff's name, notwithstanding warning to notify plaintiff
[**15] before issuing credit card in her name, plaintiff
entitled to damages against defendant measured by
amounts paid plaintiff's attorney in resisting defendant's
attempts to collect from plaintiff sums charged by imposter);
Standard Fire Ins. Co. v. Stephenson, 963
S.W.2d 81, 90-91 (Tex. App.--Beaumont 1997, no pet.)
(in plaintiff's action against insurer, plaintiff entitled to
damages measured by attorneys' fees incurred by plaintiff
in previous suit resulting from defendant's bad faith);
Nationwide Mut. Ins. Co. v. Holmes, 842 S.W.2d 335,
341-42 (Tex. App.--San Antonio 1992, writ denied) (in
plaintiff's action under Deceptive Trade Practices Act,
plaintiff entitled to damages against defendant measured
by attorneys' fees incurred in attempts to persuade defendant
liability insurer to either settle earlier personal-injury
action against plaintiff, or indemnify him,
where defendant insurer withheld information from
plaintiff knowing he would thereby incur additional attorneys'
fees in the earlier action).
Because the McCalls' petition invoked the bad-faith
exception, the trial court erred in concluding as a matter
of law that they could not recover [**16] in the present
cause damages measured by the attorneys' fees they incurred
in defending against appellees' Nueces County
suit. We hold accordingly.
Pleading Defect. The judgment signed May 15,
2000, recites as follows a second ground for directing a
verdict [*346] against the McCalls' tortious-interference
action as a matter of law:
Additionally, in response to [appellees'] motion, the
[McCalls] have not reformed their pleadings or addressed
argument to rebut or avoid [appellees'] argument.

If we understand correctly this rather cryptic sentence,
it appears to have two parts, namely: (1) a trial
judge had ruled previously that the McCalls' pleading of
their tortious-interference claim was defective in some
respect; and (2) the McCalls were required to set forth
"argument" rebutting an unidentified "argument" advanced
by appellees concerning that claim. Referring to
this part of the judgment, appellees state in their brief to
this Court that "ample opportunities were made available
to [the McCalls] earlier in the course of the lawsuit to
address the very problems with the damages claims that
were at issue in the tortious interference claim." (This
refers evidently to [**17] appellees' position that attorneys'
fees as damages are not recoverable absent a statute
or contract so providing.) This quotation from appellees'
brief is supported by a footnote reference to a "letter order"
signed earlier in the litigation by another trial judge
wherein the judge stated he had construed certain
grounds in appellees' motion for summary judgment to
be special exceptions directed at the McCalls' pleaded
causes of action for abuse of process and invasion of
privacy. The "letter order" sustains these special exceptions
and gives the McCalls opportunity to amend their
pleadings pertaining to abuse of process and invasion of
privacy. The "letter order" does not, however, refer to the
McCalls' cause of action for tortious interference with
the McCall-Niemeyer contract. This is not surprising
because the McCalls first brought a claim for tortious
interference in a supplemental petition filed well after
the date of the "letter order."
We hold the directed verdict against the McCalls'
tortious-interference claim may not rest upon the pleading
defect mentioned.
Justification. The judgment signed May 15, 2000,
declares finally that "even if [the McCalls] [**18]
could establish all the elements of this cause of action,
the court is of the opinion that as a matter of law [appellees]
would prevail on the affirmative defense of justification."
We believe the record will not support a conclusion
that appellees had established as a matter of law
their affirmative defense of justification.
The basic principles applicable in this connection
are as follows:
"Legal justification or excuse is treated as a type of
privilege. The party asserting this privilege does not deny
the interference but rather seeks to avoid liability based
upon a claimed interest that is being impaired or destroyed
by the plaintiff's contract. Such defenses, which
constitute a confession and avoidance, are affirmative in
nature. Tex. R. Civ. P. 94. Therefore, . . . the privilege of
legal justification or excuse in the interference of contractual
relations is an affirmative defense upon which
the defendant has the burden of proof.
Sterner v. Marathon Oil Co., 767 S.W.2d 686, 689-90
(Tex. 1989) (emphasis added).
A defendant may establish the privilege by showing
that he acted to further or protect his own legal rights or
he may show he acted [**19] in good faith, to further or
protect a colorable legal right even though his claim ultimately
proves to be mistaken. The first alternative presents
a question of law for the trial court; the second
presents a question of fact for the fact-finder because
good faith is inherently a question of fact. Motive is immaterial
in [*347] connection with the first alternative;
it is material in connection with the second. See
Prudential Ins. Co. of America v. Financial Review
Servs., Inc., 29 S.W.3d 74, 80 (Tex. 2000); Calvillo v.
Gonzalez, 922 S.W.2d 928, 929 (Tex. 1996) Friendswood
Dev. Co. v. McDade + Co., 926 S.W.2d 280, 282 (Tex.
1996); Texas Beef Cattle Co. v. Green, 921 S.W.2d 203,
211 (Tex. 1996); Bennett v. Computer Assocs. Int'l., 932
S.W.2d 197, 204 (Tex. App.--Amarillo 1996, writ denied).
Whether a defendant's interference with a contract is
justified requires a consideration of the following factors:
(1) the nature of the defendant's conduct; (2) the defendant's
motive if he claims to have exercised a colorable
legal right in good faith; (3) the plaintiff's interests in his
contract; (4) the interests [**20] sought to be advanced
by the defendant; (5) society's interests in protecting the
defendant's freedom of action and the plaintiff's contractual
interests; (6) the proximity or remoteness of the defendant's
conduct to the interference; and (7) the relations
between the plaintiff and the defendant. See
Wal-Mart Stores, Inc. v. Sturges, 2001 Tex. LEXIS 18, 44
Tex. Sup. J. 486 (Mar. 8, 2001); Restatement (Second) of
Torts § 767 (1979).
For purposes of discussion, we will assume the
McCalls established that appellees interfered with the
McCall-Niemeyer contract, leaving the issue to be
whether the interference was privileged as a matter of
law under the foregoing rules and the record before us.
The initial barrier to appellees' affirmative defense
of justification or privilege is the fact that they have never
identified any right or interest of theirs that was allegedly
affected by the McCall-Niemeyer employment contract
to which they were strangers. In answer to the
McCalls' plea of tortious interference, appellees declared
merely that the McCalls' action was "barred by the doctrine
of legal justification." In their motion for directed
verdict, appellees stated [**21] only that their "assertion
of a colorable legal right has been established here
as a matter of law, since the only act complained of,
which is alleged to constitute the act of interference, is
the filing of a suit against [the McCalls] in Nueces

County." In their brief to this Court, appellees state only
abstractions and naked conclusions concerning the defense
of justification, such as the following: "Here, the
filing of suit or assertion of a claim was privileged" and
"one may be 'privileged' to assert a claim 'even though
the claim may be doubtful, so long as it [sic] asserted a
colorable legal right.'" Our independent search of the
record does not reveal what right or interest of appellees
might have been affected by the McCall-Niemeyer contract.
As a matter of law, justification is not established
when the defendant does not claim a right, colorable or
otherwise, that exists under the contract with which he
interferes. See Sterner, 767 S.W.2d at 689-90; Bennett,
932 S.W.2d at 204.
Certain remarks in appellees' brief perhaps suggest a
theory that any and all lawsuits are privileged as a matter
of law and cannot, therefore, constitute [**22] grounds
for a tortious-interference cause of action. We reject the
theory. "Litigation is a powerful weapon, and when instituted
in bad faith for the purpose of causing damage or
loss, it is a wrongful method of interference." Hughes v.
Houston Northwest Med. Ctr., Inc., 680 S.W.2d 838, 842
(Tex. App.--Houston [1st Dist.] 1984, writ ref'd n.r.e.).
We believe also that the trial court committed reversible
error in sustaining as a matter of law appellees'
justification defense because the court could not do so
reasonably without an evidentiary showing [*348] as
to the following considerations: (1) appellees' motive in
filing and maintaining the Nueces County lawsuit, to the
extent the directed verdict may rest upon the ground that
appellees exercised a colorable legal right in good faith;
(2) the interests appellees attempted to advance by their
Nueces County suit; and (3) the relations that in fact existed
between appellees and the McCalls. See Sturges,
2001 Tex. LEXIS 18, *8, 44 Tex. Sup. J. at 490; Restatement
(Second) of Torts § 767, supra.
Even though none of the foregoing grounds, recited
in the judgment signed May 15, 2000, will support a directed
verdict against [**23] the McCalls' tortious-interference
claim, we are obliged to affirm the
judgment if it is otherwise supported by the record. See 6
McDonald & Carlson, Texas Civil Practice § 8:9, at 216
(2d ed. 1998). We find nothing in the record, however,
that supports judgment as a matter of law against the
McCalls' tortious-interference claim.
We therefore sustain the McCalls' first point of error
to the effect that the trial court erred in its order that the
McCalls take nothing by their tortious-interference cause
of action. 5
5 We have treated as a single point of error
four "issues" brought by the McCalls, which the
parties also combined for discussion in their
briefs. The "issues" are whether the trial court
erred by: (1) directing a verdict before receiving
evidence; (2) dismissing the jury on the ground
that appellees would "prevail" on their affirmative
defense of justification; (3) denying the
McCalls a jury trial; and (4) refusing to make
findings of fact and conclusions of law in support
of whatever factual bases the trial judge used as
grounds for his directed verdict. As explained
earlier in our opinion, we have discussed the parties'
opposing contentions, insofar as they are
relevant, under the larger issue of whether the
substantive law entitled appellees to judgment as
a matter of law, on the tortious-interference
claim, on any basis shown in the record. This is,
we believe, the main thrust of the parties' respective
arguments on appeal. We are mindful that we
must construe points of error broadly and liberally
in order to obtain a just, fair, and equitable adjudication
of the litigants' rights. See Williams v.
Khalaf, 802 S.W.2d 651, 658 (Tex. 1990); Sterner
v. Marathon Oil Co., 767 S.W.2d 686, 690 (Tex.
1989).
[**24] SUMMARY JUDGMENT--ABUSE OF
PROCESS
The McCalls contend summary judgment adverse to
their claim for abuse of process was precluded by a record
showing as to the following: After filing the Fayette
County suit in Niemeyer's behalf, Tom C. McCall received
a telephone call from a lawyer employed by Tana
Oil and Gas Corporation. The lawyer demanded that the
Fayette County suit be dismissed or "something would
happen." When the McCalls failed to dismiss the suit,
appellees carried out the implied threat by bringing the
Nueces County suit against the McCalls and others,
manufacturing false allegations therein in support of a
groundless claim intended to disrupt the Fayette County
suit. The McCalls appear to plead that the citations procured
by appellees to begin the Nueces County litigation,
and all other writs and notices employed by appellees in
the course of that litigation, amounted to an abuse of the
processes mentioned. The McCalls refer to no particular
process.
The elements of an abuse-of-process action are as
follows: (1) the defendant made an [*349] illegal or
improper use of process, (2) acting from an ulterior motive,
(3) resulting in injury to the plaintiff. See Bossin v.
Towber, 894 S.W.2d 25, 33 [**25] (Tex. App.--Houston
[14th Dist.] 1994, writ denied); Baubles & Beads v. Louis
Vuitton, S.A., 766 S.W.2d 377, 378 (Tex.
App.--Texarkana 1989, no writ). The ulterior motive
required by the second element does not supplant, su-

persede, or substitute for the illegal or improper use of
process required by the first element; both elements must
be established along with the third. See RRR Farms, Ltd.
v. American Horse Prot. Ass'n, Inc., 957 S.W.2d 121, 134
(Tex. App.--Houston [14th Dist.] 1997, pet. denied);
Baubles & Beads, 766 S.W.2d at 378-79; Martin v. Trevino,
578 S.W.2d 763, 769 (Tex. Civ. App.--Corpus
Christi 1978, writ ref'd n.r.e.).
The McCalls have not challenged appellees' position
that all processes used by them in the Nueces County
litigation were employed for their intended purposes.
Citation, for example, was procured by appellees and
used for its intended purpose of summoning the McCalls
to appear and answer appellees' claims in that suit. Consequently,
appellees contend, the McCalls cannot establish
the first element of a cause of action for abuse of
process. We agree.
In their brief to this Court, the [**26] McCalls assail
the summary judgment against their
abuse-of-process claim on the following theory alone:
It is the McCalls' position that Tana and Rowling, by
filing a lawsuit against the McCalls with the purpose of
forcing dismissal of a client's collateral lawsuit, abused
the process as a matter of law . . . . The filing of fictitious
and groundless pleadings against attorneys, who are officers
of the court, is an attack upon the judicial system
itself which cannot be tolerated in a civilized society.
Attorneys, as well as judges, reporters, court clerks and
other officers of the court have statutorily imposed duties
and obligations. Any attempt to use groundless and harassing
litigation to force an officer of the court to abandon
his or her duties must be treated as an abuse of process.
The McCalls offer nothing by way of authority or
analogy to support the foregoing theory, and we have
been unable to find or imagine any such support. We
hold the trial court did not err in its summary judgment
that the McCalls take nothing by their abuse-of-process
action.
SUMMARY JUDGMENT--MALICIOUS PROSE-
CUTION
The McCalls also asserted a cause of action for malicious
prosecution based [**27] upon the Nueces
County suit, alleging the suit was brought and continued
by appellees without probable cause and for purposes of
intimidation and coercion as mentioned previously. As a
result of the litigation, the McCalls alleged, they lost
time from their law practice and "sustained severe mental
anguish, anger, fear, distress, sleepless nights and other
injuries."
In order to recover on their malicious-prosecution
claim, the McCalls were required to establish the following
elements: (1) the institution or continuation of
civil proceedings against them, (2) by or at appellees'
insistence, (3) malice in the commencement of the proceeding,
(4) lack of probable cause for the proceeding,
(5) termination of the proceeding in the McCalls' favor,
and (6) special damages. See Texas Beef Cattle Co., 921
S.W.2d at 207. Appellees moved for summary judgment
on grounds that the McCalls could not as a matter of law
establish the favorable termination required by element
five and had not pled the special injuries necessary for
proof of the special damages required by element six.
The trial court evidently sustained appellees' position
that abatement of the Nueces County suit [**28] is
not a termination favorable to the McCalls, as a matter of
law; and, appellees point out, Tana Oil and Gas Corporation
took a non-suit as to Tom McCall and Rowling took
a non-suit as to [*350] both McCalls, precluding as a
matter of law any judicial determination on the merits in
favor of the McCalls. See KT Bolt Mfg. Co. v. Texas
Elec. Coops., Inc., 837 S.W.2d 273, 275 (Tex.
App.--Beaumont 1992, writ denied).
We agree that absent a final judgment in the abated
Nueces County suit, there is no termination of that litigation,
much less a termination favorable to the McCalls.
This is implicit in the proposition that while a judgment
in the underlying suit is on appeal, there can be no termination
in favor of the plaintiff who brings a malicious-prosecution
action. See Texas Beef Cattle Co., 921
S.W.2d at 208. On the other hand, the voluntary non-suits
taken by appellees might satisfy the favorable-termination
element depending upon the circumstances
attending the non-suits. See Restatement (Second)
of Torts § 674(b) cmt. j (1977); see generally
Vitauts M. Gulbis, Annotation, Nature of Termination of
Civil Action Required to Satisfy Element of [**29]
Favorable Termination to Support Action for Malicious
Prosecution, 30 A.L.R. 4th 572 (2001). Consequently, we
do not interpret KT Bolt Manufacturing as standing for
an iron-clad rule that a favorable termination may never,
as a matter of law, arise from a voluntary non-suit taken
by the plaintiff in the underlying civil suit upon which a
claim for malicious prosecution is founded. 6 See James
v. Brown, 637 S.W.2d 914, 918-19 (Tex. 1982); Sullivan
v. O'Brien, 85 S.W.2d 1106, 1115 (Tex. Civ. App.--San
Antonio 1935, writ ref'd); Davidson v. First State Bank,
310 S.W.2d 678, 681 (Tex. Civ. App.--El Paso 1958, no
writ).
6 Section 674 of the Restatement (Second) of
Torts was apparently incorporated into our jurisprudence
by the supreme court decision in Texas
Beef Cattle Co. See Texas Beef Cattle Co. v.

Green, 921 S.W.2d 203, 208 (Tex. 1996) (referring
specifically to comment j of that section,
dealing with the favorable-termination requirement).
The comment states that a withdrawal or
abandonment of the plaintiff's claim in the underlying
civil suit may amount to a favorable
termination depending upon the circumstances;
and, in that connection sections 660, 661, and
665, discussing the same element in connection
with an underlying criminal proceeding, are pertinent.
Restatement (Second) of Torts § 674 cmt. j
(1977).
[**30] We need not pursue further the question of
favorable termination, however, because we believe appellees'
position relative to the special-damage requirement
of element six is well taken.
Section 904 of the Restatement (Second) of Torts
provides as follows:
(1) "General damages" are compensatory damages
for a harm so frequently resulting from the tort that is the
basis of the action that the existence of the damages is
normally to be anticipated and hence need not be alleged
in order to be proved.
(2) "Special damages" are compensatory damages
for a harm other than one for which general damages are
given.
Restatement (Second) of Torts § 904 (1977). 7
7 The special-damages requirement of Texas
Beef Cattle Company is not an element required
by the Restatement provisions dealing with the
"Wrongful Use of Civil Proceedings," the Restatement
term for a malicious-prosecution action
founded upon an underlying civil action. See Restatement
(Second) of Torts § 674 (1977). The
special-damages requirement is common in other
jurisdictions, however, and is discussed ably and
at length in an appendix attached to the court's
opinion in Engel v. CBS, Inc., 182 F.3d 124 (2d
Cir. 1999). The appendix consists of the opinion
of the New York Court of Appeals issued in answer
to a certified question in a case much like
the present case.
[**31] [*351] In Texas Beef Cattle, the supreme
court fixed the meaning of the special-damages requirement
as follows:
It is insufficient that a party has suffered the ordinary
losses incident to defending a civil suit, such as inconvenience,
embarrassment, discovery costs, and attorney's
fees. . . . There must be some physical interference with a
party's person or property in the form of an arrest, attachment,
injunction, or sequestration.
Texas Beef Cattle Co., 921 S.W.2d at 208-09 (citations
omitted, emphasis added). It does not appear that the
emphasized items are stated as examples; it appears rather
that they are stated by way of limiting the grounds
upon which special damages may be claimed. While the
McCalls' petition avers that the Nueces County lawsuit
actually made more difficult their representation of Niemeyer
in the Fayette County litigation, the petition does
not claim the McCalls or their property were subjected to
arrest, attachment, injunction, or sequestration as required
by Texas Beef Cattle. Consequently, the McCalls
could not prove the special damages required for a cause
of action for malicious prosecution.
For the foregoing reasons, [**32] we overrule the
McCalls' point of error that the trial court erred in its
judgment that the McCalls take nothing by their action
for malicious prosecution.
We reverse the judgment below insofar as it orders
that the McCalls take nothing by their claim for tortious
interference with contract and remand that claim to the
trial court for proceedings not inconsistent with our
opinion. See Tex. R. App. P. 44.1(b). We affirm the balance
of the judgment. All trial-court costs were taxed
against the McCalls. We believe it just, therefore, to assess
all appellate costs against appellees. See Tex. R.
App. P. 43.4, 43.6.
John E. Powers, Justice
Before Justices Kidd, Yeakel and Powers *
Affirmed in Part; Reversed and Remanded in Part
Filed: July 26, 2001
* Before John E. Powers, Senior Justice (retired),
Third Court of Appeals, sitting by assignment.
See Tex. Gov't Code Ann. § 74.003(b)
(West 1998).
[**33]

LEXSEE 879 SW 2D 10
TRANSPORTATION INSURANCE COMPANY, PETITIONER v. JUAN CARLOS
MORIEL, RESPONDENT
PRIOR HISTORY: [**1] ON APPLICATION
FOR WRIT OF ERROR TO THE COURT OF AP-
PEALS FOR THE EIGHTH DISTRICT OF TEXAS.
This Opinion Substituted on Overrule of Rehearing
for Withdrawn Opinion of February 2, 1994, Previously
Reported at: 1994 Tex. LEXIS 23.
COUNSEL: FOR PETITIONER: Ms. Claudia Wilson,
ATT 021671300, Rentz, Mr. John K., ATT 016784500,
Baker & Botts, Houston, TX. Bradford, Mr. James W.,
ATT 000282000, Angleton, TX. Greenhill, Hon. Joe R.,
ATT 000000023, Baker & Botts, Austin, TX.
FOR RESPONDENT: Gunn, Mr. Jerry W., ATT
008623000, Krist, Mr. Ronald D., ATT 011727000, Krist
Gunn Weller Neumann & Morrison, Houston, TX.
JUDGES: CORNYN, PHILLIPS, GONZALEZ,
HIGHTOWER, HECHT, ENOCH, SPECTOR, DOG-
GETT, GAMMAGE
OPINION BY: JOHN CORNYN
OPINION
[*12] JUSTICE CORNYN delivered the opinion
of the Court, in which CHIEF JUSTICE PHILLIPS,
JUSTICE GONZALEZ, JUSTICE HIGHTOWER, JUS-
TICE HECHT, JUSTICE ENOCH and JUSTICE
SPECTOR join.
Respondent's Motion for Rehearing is overruled. We
withdraw our prior opinion and substitute the following
in its place.
No. D-1507
SUPREME COURT OF TEXAS
879 S.W.2d 10; 1994 Tex. LEXIS 90; 37 Tex. Sup. J. 883
June 8, 1994, Delivered
Page 1
This case requires us to clarify the standards governing
the imposition of punitive damages in the context
of bad faith insurance litigation. The parties have asked
[**2] us to address three issues. First, in a bad faith
case, how should Texas courts apply the definition of
gross negligence from Burk Royalty Co. v. Walls, 616
S.W.2d 911 (Tex. 1981), to determine whether punitive
damages are appropriate? Second, what constitutes legally
sufficient evidence of gross negligence to support
an award of punitive damages? Third, what limits do the
Due Process clause of the Fourteenth Amendment to the
United States Constitution and the Due Course clause of
the Texas Constitution, TEX. CONST. art. 1, § 19, place
on punitive damages? 1 We hold [*13] that Juan Moriel
did not present legally sufficient evidence of gross
negligence. Therefore, Moriel is not entitled to punitive
damages. It necessarily follows that the constitutional
issues -- whether the size of the punitive damages award
or the procedures the trial court followed violated
Transportation's due process rights -- are questions that
must await another day. City of San Antonio v. Schautteet,
706 S.W.2d 103, 105 (Tex. 1986) (per curiam) (explaining
that constitutional challenges should not be addressed
when a case may be decided on nonconstitutional
grounds). Because the court has not [**3] previously
addressed punitive damages in the bad faith context, and
because this opinion represents a substantial clarification
of the gross negligence standard that will apply in all
cases, we remand this case for a new trial in the interest
of justice.
1 The manner and extent to which due process
requires procedural safeguards and substantive
limits on punitive damages is a matter of continuing
controversy throughout the United States.
We note that the United States Supreme Court

has granted certiorari on this issue frequently in
recent years, but has given lower courts no
bright-line guidance. See Browning-Ferris Indus.,
Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 106 L.
Ed. 2d 219, 109 S. Ct. 2909 (1989); Pacific Mut.
Life Ins. Co. v. Haslip, 499 U.S. 1, 113 L. Ed. 2d
1, 111 S. Ct. 1032 (1991); TXO Prod. Corp. v.
Alliance Resources Corp., 125 L. Ed. 2d 366, 113
S. Ct. 2711 (1993). The Court has recently granted
certiorari again on this important issue. See
Oberg v. Honda Motor Co., 316 Ore. 263, 851
P.2d 1084 (Or. 1993), cert. granted, 62 U.S.L.W.
3470 (U.S. Jan. 14, 1994) (No. 93-644). State supreme
courts and legislatures have adopted a variety
of measures to regulate the frequency and
magnitude of punitive damages awards, including
absolute caps on punitive awards or maximum
ratios with respect to actual damages, see, e.g.,
TEX. CIV. PRAC. & REM. CODE § 41.007
(Vernon Supp. 1994), bifurcated trials upon
proper motion, see Wal-Mart Stores, Inc. v. Alexander,
868 S.W.2d 322, 329-32 (Tex. 1993)
(Gonzalez, J., concurring), or elevated burdens of
proof such as "beyond a reasonable doubt," or
"clear and convincing evidence." See Haslip, 499
U.S. at 23 n.11. Many states following Haslip
have required detailed jury instructions explaining
the factors governing the size of punitive
damages awards. See generally Alamo Nat'l Bank
v. Kraus, 616 S.W.2d 908, 910 (Tex. 1981);
Haslip, 499 U.S. at 28-30 (upholding award
based on Alabama list of governing factors).
[**4] I
On March 15, 1986, Juan Moriel, an employee of
Cashway Building Materials in El Paso, was injured
when a stack of countertops fell on him. Moriel suffered
three broken ribs, a broken wrist, and a fractured pelvis.
As a result, he was hospitalized for twelve days. His
hospitalization costs were paid by Cashway's workers'
compensation carrier, Transportation Insurance Company.
A few days after leaving Providence hospital, Moriel
experienced periodic loss of movement in one leg. He
returned to Providence to undergo tests for possible
nerve damage, but the record does not reveal the results
of those tests. Six weeks after the accident, Moriel attempted
to resume sexual relations with his wife but discovered
he was impotent. He had never before experienced
this problem.
Moriel's orthopedist, Dr. Toni Ghiselli, referred him
to Dr. Abel Garduno, a urologist. Dr. Garduno ordered
tests for Moriel at Pathlab in El Paso. The Pathlab tests,
however, revealed no physical cause for his complaint.
Dr. Garduno prescribed hormones, but these were no
help. Dr. Garduno then referred Moriel to Dr. Gonzalo
Diaz at the Sun Towers Sleep Disorder Center in El Paso
for further testing. An equipment [**5] failure rendered
the Sun Towers tests inconclusive and precluded further
testing for "months." Therefore, Dr. Diaz recommended
that Moriel undergo testing at the Baylor College of
Medicine Sleep Disorders and Research Center in Houston.
On August 9, 1986, Moriel asked Less Huss, the
adjustor handling his workers' compensation claim, to
authorize payment for the Baylor tests in Houston. Huss
was an employee of Crawford & Company, an independent
adjusting company that handled claims for
Transportation. According to Moriel's testimony, Huss
required Moriel to obtain an authorization letter from Dr.
Ghiselli, which Moriel did within two or three days.
Huss then instructed Moriel that he would need a letter
from his urologist, Dr. Garduno. Moriel complied with
this request within three days. According to Moriel, Huss
then instructed him to obtain yet another letter from Dr.
Diaz. Moriel again complied. Huss then indicated that he
could not personally authorize the Baylor tests, but that
he needed approval from his superiors at Transportation's
Dallas offices.
On September 10, 1986, Transportation told Moriel's
attorney that it would cover the tests but not Moriel's
travel expenses to [**6] Houston. Moriel's attorney
accepted the proposal the same day. Moriel testified that
the month that had elapsed between his request and
Transportation's approval forced him to reschedule the
tests. After a ten-day [*14] delay, Moriel underwent
testing in Houston on September 25 - 27. The results of
the testing at Baylor indicated that Moriel's impotence
problem was at least partially physical. Although no specific
treatment for the physical problem was indicated,
the Baylor report recommended that Moriel obtain
counseling for emotional problems, for which Dr. Garduno
referred Moriel to a psychiatrist, Dr. Oscar Perez.
Moriel testified that he personally delivered a copy of the
Baylor report to Huss, and obtained Huss's authorization
for Perez's treatment.
Dr. Perez treated Moriel until April 1987. At trial,
Dr. Perez testified that Moriel's impotence had both
physical and mental components, and that Moriel was
able to overcome the mental component through therapy
and resume sexual relations with his wife.
The $ 3,155.00 bill for Moriel's Baylor tests was
presented to Transportation on November 4, 1986. Although
Transportation authorized the testing in advance,
it delayed payment [**7] of this bill for more than two
years. Transportation claimed that it initially delayed
payment because no medical report accompanied the bill,

ut Moriel testified that he personally delivered the report
to Huss shortly after the tests were completed. Even
after the date Transportation conceded receiving the report,
though, it continued to deny payment on the ground
that Moriel's impotence was unrelated to his on-the-job
injury.
Transportation also received bills for Dr. Perez's
services totalling $ 2,075.00, but delayed paying them
for more than a year on the ground that it had never received
his medical report. Yet Perez testified that he had
sent a detailed report promptly at the conclusion of
Moriel's treatment.
Transportation also delayed paying a $ 382.25 bill
from Providence Hospital for follow-up outpatient tests.
Huss's correspondence indicates he sent the bill to
Transportation along with the other Providence bills,
which totalled nearly $ 7000.00, and that Transportation
paid the other Providence bills. Transportation also paid
the bill for follow-up testing in September 1987, after
Providence filed a collection action against Moriel.
Finally, Transportation failed [**8] to pay the $
238.20 Pathlab bill before the commencement of Moriel's
lawsuit. However, the evidence reflects that Pathlab
mailed the bill to the wrong address and that Transportation
did not receive it before the suit was filed.
While he was being tested and treated, Moriel filed a
workers' compensation claim against Transportation,
securing a $ 30,022.77 award from the Industrial Accident
Board (IAB) on July 17, 1987. After Transportation
appealed that award to district court, Moriel counterclaimed
for additional compensation, unpaid medical
bills, and bad faith claims practices. In July 1988, Moriel
and Transportation settled the workers' compensation
claim, leaving the bad faith claim extant.
At the trial of the bad faith claim, the jury found that
Transportation delayed paying the medical bills without
a reasonable basis, that it knew or should have known
that it had no reasonable basis to delay payment, and that
it acted "with heedless and reckless disregard" for Moriel's
rights. The jury awarded Moriel $ 1000.00 in actual
damages, excluding mental anguish, $ 100,000.00 in
mental anguish damages, and $ 1,000,000.00 in punitive
damages. Moriel also obtained findings that Transportation
[**9] had engaged in unfair, deceptive or misleading
acts or practices prohibited by statue that caused him
actual damages, including mental anguish. The trial court
entered judgment on the bad faith findings, and overruled
Transportation's motions for judgment notwithstanding
the verdict, new trial, remittitur, and to disregard the jury
findings.
The court of appeals affirmed, 814 S.W.2d 144, with
one justice dissenting, 814 S.W.2d at 151 (Koehler, J.,
dissenting).
II
We must initially determine whether the settlement
of Moriel's workers' compensation claim precludes his
recovery of punitive damages. The agreed Partial Judgment
setting forth the parties' workers' compensation
settlement recited that "it [appears] to the Court that the
extent of the injury and liability for compensation or
medical expenses are [*15] uncertain . . . ." Transportation
argues that this judgment recital precludes the later
finding of conscious indifference on its part, and thus
eliminates Moriel's right to pursue a claim for punitive
damages. In support of this position, Transportation cites
Izaguirre v. Texas Employers' Ins. Ass'n, 749 S.W.2d 550
(Tex. App. -- Corpus Christi 1988, writ denied), [**10]
and Price v. Texas Employers' Ins. Ass'n, 782 S.W.2d 938
(Tex. App. -- Tyler 1989, no writ), which held that similar
recitals agreed to by the claimant in settling a workers'
compensation claim constituted judicial admissions
estopping the claimant from later asserting a bad-faith
claim. See also National Union Fire Ins. Co. v.
Dominguez, 793 S.W.2d 66 (Tex. App. -- El Paso 1990),
rev'd on other grounds, 873 S.W.2d 373 (Tex. 1994). 2
2 Transportation also cites Torchia v. Aetna
Casualty & Sur. Co., 804 S.W.2d 219 (Tex. App.
-- El Paso 1991, writ denied). In that case, however,
the claimant's bad-faith cause of action was
expressly included in the parties' settlement
agreement.
While we do not disagree with these cases, they are
not dispositive of Moriel's claims under the facts of this
case. Moriel's workers' compensation counterclaim included
a demand for additional lost wages as well as
unpaid medical expenses. The Partial Judgment states
only that "the extent of the injury and liability [**11]
for compensation or medical expenses are uncertain . . .
." (emphasis added). This recital indicates, at most, that
Transportation's total liability was uncertain; it does not
constitute an admission by Moriel or a finding by the
court that Transportation's liability for each and every
medical bill, or even any of the medical bills, was uncertain.
Indeed, the settlement required Transportation to
pay the disputed medical bills in full. Furthermore,
Moriel's bad faith contentions are primarily related to
Transportation's bad faith delay in paying Moriel's medical
bills. The recital in the Partial Judgment is therefore
not inconsistent with Moriel's claim that Transportation
had a clear and certain duty to promptly pay at least
some of the medical expenses, particularly those which
Transportation authorized in advance.

Moreover, unlike the cases Transportation relies on,
the Partial Judgment which Moriel approved specifically
reserved his bad-faith claim as follows:
It is further ORDERED that this partial
judgment does not release and discharge
Plaintiff TRANSPORTATION INSUR-
ANCE COMPANY and any and all of its
agents or representatives of and from any
and all liability [**12] of any character
arising out of claims made pursuant to allegations
of bad faith, violations to the
Texas Insurance Code, and Deceptive
Trade Practices Act and Breach of Fiduciary
Duty, as well as the manner in
which TRANSPORTATION INSUR-
ANCE COMPANY failed to pay or delayed
payment of the medical bills, as
more fully alleged in Defendant JUAN
CARLOS MORIEL'S Fifth Amended
Counterclaim, Paragraphs XV through
XXIV and that these claims are not subject
to this partial judgment and remain
pending in the above styled and numbered
cause. It is further ORDERED that this
partial judgment does not release and
discharge Plaintiff TRANSPORTATION
INSURANCE COMPANY and any and
all of its agents or representatives of and
from any and all liability of any character
as alleged in Defendant JUAN CARLOS
MORIEL'S Fifth Amended Counterclaim,
Paragraph XXV as it pertains to those allegations
of bad faith, violations of the
Texas Insurance Code, Deceptive Trade
Practices Act and Breach of Fiduciary
Duty, as well as the manner in which
TRANSPORTATION INSURANCE
COMPANY either failed to pay or delayed
payment of the medical bills.
Transportation concedes this point, stating in its brief
that "because [**13] . . . Moriel preserved his right to
sue Transportation for bad faith, [Transportation] does
not argue that the agreement and judgment preclude such
a cause of action." Transportation thus asserts its estoppel
argument only as to the conscious indifference finding
underlying the punitive damage award. But it appears
that Moriel likewise preserved the punitive damages
claim. The reservation in the Partial Judgment extends to
"any and all liability of any character arising out of
claims made [*16] pursuant to allegations of bad faith
. . . as well as the manner in which [Transportation]
failed to pay or delayed payment of the medical bills . . .
." 3 This specific reservation of Moriel's bad-faith and
punitive damages claim, combined with the fact that
Moriel's bad faith complaints primarily arise out of
Transportation's delay in paying the medical bills in dispute
rather than the extent of his injuries, controls over
the more general recital that Transportation's liability
was "uncertain." See O'Connor v. O'Connor, 694 S.W.2d
152, 155 (Tex. App. -- San Antonio 1985, writ ref'd
n.r.e.).
3 The reservation, which is quoted in full
above, refers to specific paragraphs of Moriel's
Fifth Amended Counterclaim, which is not in the
appellate record. Transportation does not contend,
however, that Moriel's claim for punitive
damages falls outside of the referenced paragraphs.
[**14] Accordingly we hold, under the facts of
this case, that the recital in the Partial Judgment concerning
Transportation's uncertain liability does not preclude
Moriel's claim for punitive damages.
III
A. The Exceptional Nature of Punitive Damages
The typical remedy in a civil case is an award of money
damages sufficient to compensate the injured plaintiff.
Cavnar v. Quality Control Parking, Inc., 696 S.W.2d
549, 552 (Tex. 1985); Reaugh v. McCollum Exploration
Co., 139 Tex. 485, 163 S.W.2d 620, 621 (Tex. 1942).
Compensatory damages are intended to make the plaintiff
"whole" for any losses resulting from the defendant's
interference with the plaintiff's rights. 4 Cavnar, 696
S.W.2d at 552; W. PAGE KEETON, ET. AL.,
PROSSER AND KEETON ON THE LAW OF TORTS
§§ 1, 4 (5th ed. 1984) [hereinafter PROSSER &
KEETON].
4 "Contract liability is imposed by the law for .
. . a single limited interest, that of having contracts
performed. Quasi-contractual liability is
created for the prevention of unjust enrichment.
The criminal law is concerned with the protection
. . . of the public at large . . . . There remains a
body of law which is directed toward the compensation
of individuals, rather than the public,
for losses they have suffered within the scope of
their legally recognized interests generally . . .
where the law considers that compensation is required.
This is the law of torts. . . . The purpose
of the law of torts is to adjust these losses, and to
afford compensation for injuries sustained as a
result of the conduct of another." W. PAGE
KEETON, ET. AL., PROSSER AND KEETON

ON THE LAW OF TORTS § 1, at 5-6 (5th ed.
1984) (emphasis added).
[**15] Punitive damages have an altogether different
purpose. Cavnar, 696 S.W.2d at 555; Smith v.
Sherwood, 2 Tex. 460, 463-64 (1847). "The idea of punishment,
or of discouraging other offenses usually does
not enter into tort law. . . . In one rather anomalous respect,
[punitive damages], the ideas underlying the
criminal law have invaded the field of torts." PROSSER
& KEETON § 2. More than 100 years ago, in one of its
first opinions addressing punitive damages, this court
recognized the close connection between punitive damages
and the criminal law:
Such indifference is morally criminal,
and if it leads to actual injury may well be
regarded as criminal in law. A mere act of
omission or non-feasance, to be punishable
by exemplary damages, should reach
the border-line of a quasi-criminal act of
commission or malfeasance.
Southern Cotton Press & Mfg. Co. v. Bradley, 52 Tex.
587, 600-601 (1880) (citations omitted). Punitive (or
exemplary) damages are levied against a defendant to
punish the defendant for outrageous, malicious, or otherwise
morally culpable conduct. Id.; TEX. CIV. PRAC.
& REM. CODE ANN. § 41.001(3) (Vernon Supp. 1994)
(defining "exemplary [**16] damages" as "any damages
awarded as an example to others, as a penalty, or by
way of punishment"). The legal justification for punitive
damages is similar to that for criminal punishment, 5 and
like criminal punishment, punitive [*17] damages
require appropriate substantive and procedural safeguards
to minimize the risk of unjust punishment.
5 The traditional justifications for criminal
punishment include (1) rehabilitation of the defendant,
WAYNE R. LAFAVE & AUSTIN W.
SCOTT, JR., SUBSTANTIVE CRIMINAL LAW
§ 1.5(a)(3) (West ed. 1986), (2) disabling, id. at §
1.5(a)(2), or deterring, id. at § 1.5(a)(1), the defendant
from committing further crime, (3) deterring
persons other than the defendant from crime,
id. at § 1.5(a)(4), (5), (4) desert or retribution --
punishing the defendant because he or she deserves
to be punished, id. at § 1.5(a)(6), and (5)
vengeance -- satisfying the urge of the community
to return to the defendant the injury done.
OLIVER W. HOLMES, JR., THE COMMON
LAW 40-41 (1881).
[**17]
Although punitive damages are levied for the public
purpose of punishment and deterrence, 6 the proceeds
become a private windfall. 7 See 26 U.S.C. §§ 104,
104(a)(2) (excluding personal injury compensatory
damages but not punitive damages from income for tax
purposes); Commissioner v. Miller, 914 F.2d 586, 591
(4th Cir. 1990) (explaining that punitive damages, unlike
personal injury damages, are not excludable from income
because "such damages are a windfall . . . over and above
any award of compensatory damages"). In contrast,
criminal fines are paid to a governmental entity and used
for a public benefit. Our duty in civil cases, then, like the
duty of criminal courts, is to ensure that defendants who
deserve to be punished in fact receive an appropriate
level of punishment, while at the same time preventing
punishment that is excessive or otherwise erroneous.
6 "Unlike compensatory damages, which are
purely civil in character, punitive damages are, by
definition, punishment. They operate as . . . fines
levied . . . to advance governmental objectives."
Haslip, (1991) (O'Connor, J., dissenting).
[**18]
7 "It is generally agreed that punitive damages
are a windfall to the plaintiff and not a matter of
right . . . ." PROSSER AND KEETON § 2 at 14;
see also Haslip, 499 U.S. at , (describing
punitive damages as a "windfall") (quoting Newport
v. Fact Concerts, Inc., 453 U.S. 247, 271, 69
L. Ed. 2d 616, 101 S. Ct. 2748 (1981) ("The impact
of such a windfall recovery is likely to be
both unpredictable and, at times, substantial.")
(emphasis added)).
B. Bad Faith Insurance Disputes
Defining the substantive standard for punitive damages
in the context of a bad faith insurance dispute requires
an examination of the relationship of a claim for
punitive damages to the underlying claims for breach of
contract and bad faith. Our law recognizes a three-tier
framework for measuring damages in an insurance coverage
dispute, and each level is associated with distinctly
different policies, substantive definitions, and measures
of proof. A bad faith case can potentially result in three
types of damages: (1) benefit of the bargain damages for
an accompanying breach [**19] of contract claim, (2)
compensatory damages for the tort of bad faith, and (3)
punitive damages for intentional, malicious, fraudulent,
or grossly negligent conduct. It is important to preserve
distinct legal boundaries between the three bases of recovery
to prevent arbitrariness and confusion at the critical
thresholds. See, e.g., Lyons v. Millers Casualty Ins.
Co., 866 S.W.2d 597, 600 (Tex. 1993) ("This focus on
evidence and its relation to the elements of bad faith is
necessary to maintain a distinction between a contract

claim on the policy, and a claim of bad faith delay or
denial.").
As we said in Viles v. Security Nat'l Ins. Co., 788
S.W.2d 566, 567 (Tex. 1990), "[A] breach of the duty of
good faith and fair dealing will give rise to a cause of
action in tort that is separate from any cause of action for
breach of the underlying insurance contract." The contract
aspect of a coverage dispute concerns either the
factual basis for the claim, the proper legal interpretation
of the policy, or both. If the loss is covered, then the insurer
is obligated to pay the claim according to the terms
of the insurance contract. See Crisp v. Security Nat'l Ins.
Co., 369 [**20] S.W.2d 326, 328-29 (Tex. 1963); Klein
v. Century Lloyds, 154 Tex. 160, 275 S.W.2d 95 (Tex.
1955). An insurer's nonpayment of a covered claim ordinarily
is a breach of contract, and does not alone entitle
a plaintiff to mental anguish, Dean v. Dean, 837 F.2d
1267 (5th Cir. 1988) (citing St. Elizabeth Hosp. v. Garrard,
(Tex. 1987), overruled on other grounds, Boyles v.
Kerr, 855 S.W.2d 593 (Tex. 1993)), or exemplary damages.
Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617
(Tex. 1986).
The threshold of bad faith is reached when a breach
of contract is accompanied by an independent tort. Evidence
that merely shows a bona fide dispute about the
insurer's liability on the contract does not rise to the level
of bad faith. National Union Fire Ins. Co. v.
Dominguez, 873 S.W.2d 373, 376-77 (Tex. 1994); National
Union Fire Ins. Co. v. Hudson Energy Co., 780
S.W.2d 417, 426 (Tex. App. -- Texarkana 1989), aff'd,
[*18] 811 S.W.2d 552 (Tex. 1991). 8 Nor is bad faith
established if the evidence shows the insurer was merely
incorrect about the factual basis for its denial of the
claim, or about the proper construction of the policy.
Lyons, 866 [**21] S.W.2d at 601 ("The issue in bad
faith focuses not on whether the claim was valid, but on
the reasonableness of the insurer's conduct in rejecting
the claim."). A simple disagreement among experts about
whether the cause of the loss is one covered by the policy
will not support a judgment for bad faith. Id. To the contrary,
an insured claiming bad faith must prove that the
insurer had no reasonable basis for denying or delaying
payment of the claim, and that it knew or should have
known that fact. Arnold v. National County Mut. Fire
Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987); Aranda v.
Insurance Co. of N. Am., 748 S.W.2d 210, 213 (Tex.
1988).
8 It is not apparent why JUSTICE DOGGETT
mischaracterizes Hudson Energy as a means of
"freeing from responsibility" insurers that "willfully
. . . [delay] or deny coverage with no reasonable
basis," or as creating "a perverse incentive
for insurers to manufacture . . . coverage
disputes" for the purpose of delay. S.W.2d
, . By definition, such insurers are guilty of
bad faith. Aranda v. Insurance Co. of N. Am.,
748 S.W.2d 210 (Tex. 1988). What he calls "the
bona fide dispute rule" is nothing more than a
shorthand notation for the observation that the
parties to an insurance contract will sometimes
have a good faith disagreement about coverage.
Under such circumstances, the parties may require
a court to interpret policy language for
them, or a jury to resolve factual disputes. Simply
because the parties go to court does not raise an
issue of the insurer's bad faith. We do agree with
JUSTICE DOGGETT, however, when he says
that "Claims for insurance contract coverage are
distinct from those in tort for bad faith; resolution
of one does not determine the other." S.W.2d
at .
[**22] The final critical threshold is that separating
the tort of bad faith from conduct subject to punishment.
Even if the insurer has "no reasonable basis" to
deny or delay payment of the claim, the plaintiff may not
recover punitive damages on that basis alone. Arnold,
725 S.W.2d at 168 ("the same principles allowing recovery
of [punitive] damages in other tort actions" apply
with respect to bad faith) (citing Ware v. Paxton, 359
S.W.2d 897, 899 (Tex. 1962) ("The fact that an act is
[tortious] is not of itself ground for an award of exemplary
or punitive damages.") (quoting Jones v. Ross, 141
Tex. 415, 173 S.W.2d 1022, 1024 (Tex. 1943) (quoting 25
C.J.S. Damages § 123 at 726 (1966)))). The bad faith of
the insurer justifies an award of compensatory damages
and nothing more. Only when accompanied by malicious,
intentional, fraudulent, or grossly negligent conduct
does bad faith justify punitive damages. Id.
It is as important to maintain the distinction between
punishment and compensation in the context of bad faith
as it is in the remainder of tort law. The reason the law of
torts recognizes compensation, rather than punishment,
as its paramount objective [**23] is that civil punishment
can result in overdeterrence and overcompensation.
Every tort involves conduct that the law considers
wrong, but punitive damages are proper only in the most
exceptional cases. Unless bad faith is accompanied by
aggravated conduct by the insurer, then compensatory
damages alone are the proper remedy.
The particular difficulty at this threshold is to articulate
the distinction between simple and aggravated bad
faith in a manner that judges and juries may accurately
and fairly apply. In a helpful effort to draw this distinction
the Arizona Supreme Court has observed:
Such damages are recoverable in bad
faith tort actions when, and only when, the

facts establish that the defendant's conduct
was aggravated, outrageous, malicious or
fraudulent. Indifference to facts or failure
to investigate are sufficient to establish
the tort of bad faith but may not rise to the
level required by the punitive damage
rule. The difference is no doubt harder to
articulate in legalistic terms than it is to
differentiate on the facts. To obtain tort
damages, for instance, the plaintiff must
prove only that the defendant
. . . [acted without] the reasonable
[**24] basis required for denying the
claim. To obtain punitive damages, plaintiff
must also show that the evil hand that
unjustifiably damaged the objectives . . .
[of] the insurance contract was guided by
an evil mind which either consciously
sought to damage the insured or acted intentionally,
knowing that its conduct was
[*19] likely to cause unjustified, significant
damage to the insured.
Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 578
(Ariz. 1986) (emphasis in original) (citations omitted).
Likewise, the Alabama Supreme Court in Continental
Assur. Co. v. Kountz, 461 So. 2d 802 (Ala. 1984), developed
a two-part standard for punitive damages in a bad
faith insurance dispute. The Kountz court held that before
punishment is justified, an insurer (1) must have intentionally
breached the duty of good faith and fair dealing,
and (2) must additionally have engaged in conduct that
involved "malice, willfulness or wanton and reckless
disregard of the rights of others." Id. at 808-09.
There is not yet any uniformity among states concerning
the proper test for punitive damages in a bad
faith case. See JOHN C. MCCARTHY, RECOVERY OF
DAMAGES FOR BAD FAITH [**25] § 1.60 (1990).
However, a review of relevant cases in a number of jurisdictions
reveals two core requirements: (1) the insurance
carrier must act on the basis of an aggravated mental
state, such as intent, recklessness, or gross negligence,
that involves either deliberate and purposeful injury to
the insured or actual subjective awareness that serious
injury is highly probable, and (2) this intended or probable
injury must be independent and qualitatively different
from the breach of contract and the compensable harms
associated with it. See Kountz, 461 So. 2d 802; Rawlings,
151 Ariz. 149, 726 P.2d 565; Linthicum v. Nationwide
Life Ins. Co., 150 Ariz. 326, 723 P.2d 675 (Ariz. 1986)
(en banc); Borland v. Safeco Ins. Co., 147 Ariz. 195, 709
P.2d 552 (Ariz. Ct. App. 1985); Weisman v. Blue Shield
of Cal., 163 Cal. App. 3d 61, 209 Cal. Rptr. 169, 173-74
(Cal. Ct. App. 1984); Newton v. Standard Fire Ins. Co.,
291 N.C. 105, 229 S.E.2d 297, 302 (N.C. 1976); Shimola
v. Nationwide Ins. Co., 25 Ohio St. 3d 84, 495 N.E.2d
391, 39 (Ohio 1986) (per curiam); Anderson v. Continental
Ins. Co., 85 Wis. 2d 675, 271 N.W.2d 368, 378-79
(Wis. 1978); Guarantee [**26] Abstract & Title Co.
v. Interstate Fire & Casualty Co., 232 Kan. 76, 652 P.2d
665, 668 (Kan. 1982). We believe the general thrust of
these cases is essentially correct. 9 However, no jurisdiction
has a gross negligence standard or bad faith jurisprudence
identical to those of Texas. Moreover, none of
these jurisdictions has addressed the critical distinctions
in a manner we find completely satisfactory. Therefore,
the duty falls on this court to add our refinements to these
earlier analyses in a manner that meshes properly with
the rest of Texas law.
[**27] IV
9 We disagree with JUSTICE DOGGETT'S
reading of the authorities cited. S.W.2d at
, n.16, n.17, n.18. In determining whether contract
damages alone will support punitive damages
against a breaching insurer, each of these jurisdictions
adopts a "separate injury" rationale as
opposed to a "same injury" rule. Although not all
of these jurisdictions recognize the tort of bad
faith, each decision is relevant because each uses
similar standards to govern punitive damages in
this context.
Three steps are required to analyze whether the evidence
in this case is legally sufficient to support punitive
damages. The first is to examine our traditional definition
of gross negligence and identify its basic elements.
The second is to determine how these elements should be
applied in the context of a bad faith insurance coverage
dispute. Only then can we reach step three and determine
meaningfully whether legally sufficient evidence supports
the verdict.
A.
1. The Definition of Gross Negligence
In Burk Royalty, 616 S.W.2d at 920, we analyzed the
history of gross negligence evidentiary review in Texas
at length and determined that "all roads" lead to the following
definition of gross negligence:
Gross negligence, to be the ground for
exemplary damages, should be that entire
want of care which would raise the belief
that the act or omission complained of

was the result of a conscious indifference
to the right or welfare of the person or
persons to be affected by it.
This definition is taken verbatim from Missouri Pac. Ry.
v. Shuford, 72 Tex. 165, 171, 10 S.W. 408, 411 (1888),
and is little changed since this court first defined gross
[**28] negligence in Southern Cotton Press, 52 Tex.
587 (1880) [*20] ("that entire want of care which
would raise a presumption of conscious indifference to
consequences"). In 1987, however, the legislature modified
the common law definition:
"Gross negligence" means more than
momentary thoughtlessness, inadvertence
or error of judgment. It means such an
entire want of care as to establish that the
act or omission was the result of actual
conscious indifference to the rights, safety,
or welfare of the person affected. 10
10 Consistent with our earlier observations
about the quasi-criminal nature of punitive damages,
it is noteworthy that the civil standard for
gross negligence bears a remarkable resemblance
to the statutory definition of criminal recklessness:
A person acts recklessly, or is
reckless . . . when he is aware of
but consciously disregards a substantial
and unjustifiable risk that
the circumstances exist or the result
will occur. The risk must be of
such a nature and degree that its
disregard constitutes a gross deviation
from the standard of care
that an ordinary person would exercise
under all the circumstances
as viewed from the actor's standpoint.
TEX. PENAL CODE ANN. § 6.03(c) (Vernon
1974). This definition was adopted from the
American Law Institute Model Penal Code. Under
the Model Penal Code, both criminal negligence
and criminal recklessness require extremely
risky behavior:
A person acts with criminal
negligence . . . when he ought to
be aware of a substantial and un-
justifiable risk that the circumstances
exist or the result will occur.
The risk must be of such a
nature and degree that the failure
to perceive it constitutes a gross
deviation from the standard of care
that an ordinary person would exercise
under all the circumstances
as viewed from the actor's standpoint.
TEX. PENAL CODE ANN. § 6.03(d) (Vernon
1974). Criminal negligence and recklessness differ
from one another only in terms of mental
state. A criminally negligent defendant "ought to
be aware" of a "substantial and unjustifiable"
risk, while a reckless defendant is subjectively
aware of an identical risk but disregards it. Importantly,
nobody is subject to criminal punishment
if they are aware of a relatively minor risk
or simply negligent.
It should not be surprising that the civil definition
of gross negligence and the criminal definition
of recklessness are virtually identical. Both
serve the same purpose -- identifying when it is
appropriate to punish an individual for consciously
disregarding an unjustifiable risk.
[**29] TEX. CIV. PRAC. & REM. CODE ANN. §
41.001(5) (Vernon Supp. 1994) (emphasis added). The
statutory definition of gross negligence, when compared
with the common law definition, emphasizes that the
evidence must "establish" the defendant's actual conscious
indifference, rather than raise the mere belief that
conscious indifference might be attributable to a hypothetical
reasonable defendant. 11 John T. Montford &
Will G. Barber, 1987 Texas Tort Reform: The Quest for
a Fairer and More Predictable Texas Civil Justice System,
25 Hous. L. Rev. 245, 323-24 (1988). Because the
Tort Reform Act codified the common law definition and
made no change affecting the basic elements of gross
negligence, Act of June 3, 1987, 70th Leg., 1st C.S., ch.
2, § 2.12, (codified as TEX. CIV. PRAC. & REM. CODE
ANN. § 41.001 (5)), the language defining gross negligence
to be applied in a particular case should not turn
on the applicability of the Act.
11 This statutory change was prompted, in part,
by a 1985 case that suggested that common law
gross negligence may be established by reference
to a purely objective standard -- what "a reasonable
person would have realized" under the same
or similar circumstances. See Williams v. Steves
Indus. Inc., (Tex. 1985).

[**30] Our cases before Burk Royalty tended to
focus only on one portion of the Shuford definition, "entire
want of care," and reasoned that any defendant who
exercised "some care" could not be grossly negligent.
Burk Royalty, 616 S.W.2d at 918 (citing Sheffield Div.,
Armco Steel Corp. v. Jones, 376 S.W.2d 825 (Tex.
1964)). Burk Royalty cautioned, however, that "entire
want of care" must be "understood in the context of the
whole [definition]," and correctly instructed reviewing
courts to look for evidence of the defendant's subjective
mental state rather than the defendant's exercise of care.
Id. at 922 ("What lifts ordinary negligence into gross
negligence is the mental attitude of the defendant").
Although Burk Royalty exhorted a reviewing court
to look to "all of the surrounding facts," our usual process
of "no evidence" review constrains us to look only
to the evidence that favors the verdict. Garza v. Alviar,
395 S.W.2d 821, 824 (Tex. 1965), cited in Burk Royalty,
616 S.W.2d at 922. Applying traditional legal sufficiency
review since Burk Royalty, we have consistently disregarded
[*21] facts that tend to contradict the [**31]
verdict. General Chem. Corp. v. De La Lastra, 852
S.W.2d 916, 921 (Tex. 1993), cert. dismissed, 114 S. Ct.
490 (1993); Williams v. Steves Indus., Inc., 699 S.W.2d
570, 574 (Tex. 1985); International Armament Corp. v.
King, 686 S.W.2d 595, 597 (Tex. 1985); Trenholm v.
Ratcliff, 646 S.W.2d 927, 931 (Tex. 1983); Neely v.
Community Properties, Inc., 639 S.W.2d 452, 454 (Tex.
1982).
Unfortunately, other aspects of Burk Royalty caused
the courts to have difficulty applying the appropriate
standard of review in gross negligence cases. First, Burk
Royalty admonished courts to concentrate on the defendant's
mental state, Burk Royalty, 616 S.W.2d at 922,
but offered no other ground to distinguish gross from
ordinary negligence. 12 Second, Burk Royalty correctly
permitted an inference of subjective awareness from
surrounding circumstances. Id. As a result, our usual "no
evidence" review process, when applied to the Burk
Royalty analysis of gross negligence eroded the distinction
between gross and ordinary negligence. If evidence
of carelessness could support a finding of negligence,
then the evidence viewed in its most favorable light
[**32] would often support a circumstantial inference
of subjective awareness as well. Id. Because subjective
awareness was the only ground the court identified to
separate gross from ordinary negligence, id., the Burk
Royalty analysis readily permitted an inference of gross
negligence from evidence of "some" carelessness. See,
e.g., General Chem. Corp., 852 S.W.2d at 921 (holding
chemical manufacturer grossly negligent for failure to
include word "death" in extensive warning label based on
evidence of manufacturer's awareness of incident involving
misuse of unlabelled product 15 years earlier);
but see Wal-Mart Stores, Inc. v. Alexander, 868 S.W.2d
322 (Tex. 1993) (expressly distinguishing between legally
sufficient evidence of negligence and legally sufficient
evidence of gross negligence). In this way, Burk
Royalty established a "some carelessness" standard of
legal sufficiency review that was as favorable to punitive
damage awards as the earlier "some care" test had been
hostile to them.
12 Thus, it has been argued that under Burk
Royalty, gross negligence is simply "a conscious
decision to act negligently." This argument eliminates
the distinction between negligence and
gross negligence because a jury can always infer
that a person knew what he or she was doing.
[**33] 2. Toward a Functional Interpretation
"Some carelessness" review invariably confuses two
very different things: (1) some evidence of carelessness,
and (2) legally sufficient evidence that the defendant was
consciously indifferent to the rights, safety, or welfare of
others. The fundamental defect in the "some carelessness"
approach is that it fails to consider the definition of
gross negligence as a whole. The entire definition of
"gross negligence" is "such an entire want of care as to
establish that the act or omission was the result of actual
conscious indifference to the rights, safety, or welfare of
the person affected." TEX. CIV. PRAC. & REM. CODE
ANN. § 41.001(5) (Vernon Supp. 1994) (emphasis added).
Gross negligence thus involves two components: (1)
the defendant's act or omission, and (2) the defendant's
mental state. As defined, the act or omission element
must involve behavior that endangers the rights, safety,
or welfare of the person affected. 13 TEX. CIV. PRAC &
REM. CODE ANN. § 41.001(5) (Vernon Supp. 1994).
Gross negligence, then, differs from ordinary negligence
with respect to both elements -- the defendant must be
"consciously indifferent" and [**34] his or her conduct
must "create an extreme degree of risk." Williams,699
S.W.2d at 573; see also Wal-Mart, 868 S.W.2d at 326
("We reaffirm that a gross negligence finding may be
upheld on appeal only if there is [legally sufficient] evidence
that a) the defendant's conduct created an extreme
risk of harm, and b) the defendant was aware of the extreme
risk.").
13 Burk Royalty described gross negligence as
involving "peril" to the injured party. Burk Royalty,
616 S.W.2d at 922.
As we have recently reiterated, the test for gross
negligence "contains both an [*22] objective and a
subjective component." Wal-Mart, 868 S.W.2d at 326.
Subjectively, the defendant must have actual awareness

of the extreme risk created by his or her conduct. Id. Objectively,
the defendant's conduct must involve an "extreme
degree of risk," a threshold significantly higher
than the objective "reasonable person" test for negligence.
Id. Extreme risk is a function of both the magnitude
and the probability [**35] of the anticipated injury
to the plaintiff. As we said in Wal-Mart, the "extreme
risk" prong is not satisfied by a remote possibility of injury
or even a high probability of minor harm, but rather
"the likelihood of serious injury" to the plaintiff. Id. at
327. (emphasis omitted).
An act or omission that is merely thoughtless, careless,
or not inordinately risky cannot be grossly negligent.
Only if the defendant's act or omission is unjustifiable
14 and likely to cause serious harm can it be grossly
negligent.
14 The justification issue is essential for both
courts and juries in determining whether a defendant
was grossly negligent when the defendant
introduces evidence of mitigating circumstances.
See, e.g., Burk Royalty, 616 S.W.2d at 926
(Greenhill, C.J., concurring):
For example: there is evidence
that the defendant, in a
non-defective car, continues to
drive at 65 miles per hour into a
small town. The defendant runs a
red light and passes a car over the
center line before there is an accident.
That is "some evidence" of
gross negligence. If the court only
considers that evidence, it must
affirm a gross negligence finding.
Then the court finds that the defendant's
wife and daughters, or
other persons, are bleeding to
death in the back seat of defendant's
car; and they will die if they
do not receive immediate medical
attention. Will the court then use
the "traditional no evidence" test
to evaluate gross negligence?
There may be negligence, yes. But
is there conscious indifference to
human life?
The answer, of course, is that we should apply
our traditional "no evidence" test. By taking an
extreme risk, this hypothetical defendant greatly
increased the likelihood (1) that an accident
would prevent his wife and daughters from ever
obtaining medical care, and (2) that additional
medical attention would be required for both
himself and bystanders. Jurors could nevertheless
decide that the risk was excusable under the circumstances,
which is their prerogative.
Assuming that the jury decides this hypothetical
defendant was grossly negligent, then this
court could only reverse the verdict if the evidence
in the record were legally insufficient to
permit an inference that the defendant had actual
subjective awareness of the risk he created. See
William Powers, Jr. & Jack Ratliff, Another Look
at "No Evidence" and "Insufficient Evidence," 69
Tex. L. Rev. 515, 522-23 (1991).
[**36] It should not be surprising, perhaps, that
many efforts to analyze gross negligence findings confuse
the defendant's mental state with the nature of the
defendant's act or omission. The mental state involves
awareness of the risk, and thus the two are interrelated.
As Prosser and Keeton point out, most jurisdictions distinguishing
gross from ordinary negligence have focused
on either the difference in the defendant's mental state or
the difference in riskiness of the defendant's act, but the
two definitions have tended to merge and "take on the
same meaning, of an aggravated form of negligence . . .
." PROSSER & KEETON § 34 at 214 (5th ed. 1984),
cited in Williams, 699 S.W.2d at 572. But this is not so in
Texas. Ours is "a hybrid definition, distinctive to this
state . . . combining both of the traditional tests for gross
negligence." Williams, 699 S.W.2d at 572-73.
Williams also suggested that gross negligence could
be proved if "under the surrounding circumstances a
reasonable person would have realized that his conduct
created an extreme degree of risk to the safety of others."
Id. at 573. This language is potentially misleading, however.
It is true that the [**37] relative riskiness of the
defendant's action can be determined by an objective
"extreme risk" test, but before a gross negligence finding
can be sustained the evidence must show both that the
act was likely to result in serious harm and that the defendant
was consciously indifferent to the risk of harm.
Wal-Mart, 868 S.W.2d at 326. The requirement of conscious
indifference, which our law requires, is superfluous
unless it requires proof that the defendant had actual
subjective knowledge of an extreme risk of serious harm.
Williams, therefore, should not be read to import the objective
"reasonable person" standard for ordinary negligence
into the distinctly different process of determining
subjective mental state in gross negligence cases.
[*23] Recognizing the practical difficulty of producing
direct evidence of conscious indifference short of
the defendant's admission, Williams quite reasonably
stated that "the plaintiff need not prove the defendant's
subjective state of mind by direct evidence," and author-

ized proof of this element by circumstantial evidence. n6
99 S.W.2d at 573 ("reaffirming [the] holding in Burk
Royalty," 616 S.W.2d at [**38] 922). We hereby reaffirm
our holding that the defendant's subjective mental
state can be proven by direct or circumstantial evidence.
Determining whether an act or omission involves
extreme risk or peril requires an examination of the
events and circumstances from the viewpoint of the defendant
at the time the events occurred, without viewing
the matter in hindsight. In every negligence or gross negligence
case, some injury has allegedly occurred. However,
the magnitude of the injury may be entirely disproportionate
to the riskiness of the behavior. For example,
inadvertently dropping a wooden board into the metal
hold of a ship may constitute negligence, but cannot be
gross negligence. This is so even though the board, upon
landing, triggers a Rube Goldberg chain reaction, eventually
causing the whole ship to explode. 15 See In re
Polemis, [1921] 3 KB 560. If somebody has suffered
grave injury, it may nevertheless be the case that the behavior
which caused it, viewed prospectively and without
the benefit of hindsight, created no great danger. In
such a case, punitive damages are not appropriate. In
summary, the definition of gross negligence includes two
elements:
15 In contrast, an act or omission that creates a
great peril but results in only a minor injury may
be grossly negligent. If, for example, a person
fires a gun randomly into a crowd of schoolchildren,
but the shooting only results in the destruction
of a pair of sunglasses, the defendant would
still be grossly negligent. See TXO Prod. Corp. v.
Alliance Resources Corp., 125 L. Ed. 2d 366,
380, 113 S. Ct. 2711 (1993).
[**39]
(1) viewed objectively from the standpoint
of the actor, the act or omission
must involve an extreme degree of risk,
considering the probability and magnitude
of the potential harm to others, and (2) the
actor must have actual, subjective awareness
of the risk involved, but nevertheless
proceed in conscious indifference to the
rights, safety, or welfare of others.
B. Application to Bad Faith Insurance Disputes
An insurer's delay or refusal to pay an insured's
claim, even when the insurer has no reasonable basis for
doing so, is not gross negligence. It is bad faith. An insurer
is liable for punitive damages only if the bad faith
tort was accompanied by gross negligence. 16 Aranda,
748 S.W.2d at 215; Arnold, 725 S.W.2d at 168 ("the
same principles allowing [the] recovery of [punitive]
damages in other tort actions" apply with respect to bad
faith) (citing Ware, 359 S.W.2d 897); cf. Lyons, 866
S.W.2d at 600. Although the multiple grounds of recovery
in bad faith lawsuits might seem to complicate the
gross negligence issue, the proper analysis is relatively
simple -- gross negligence in the context of insurance is
no different [**40] from gross negligence in any
other context.
16 A literally correct statement of the law is,
"Only if gross negligence, intentional injury,
fraud or malice accompany the bad faith tort are
punitive damages proper." This case deals only
with gross negligence, however. We therefore
express no opinion on the circumstances in which
an insurer's intentional misconduct will justify
punitive damages.
In addition to conscious indifference, an insured
who alleges gross negligence must prove that the insurer
committed an act that was likely to cause serious injury.
In essence, the issue in determining whether bad faith
involved an independent likelihood of "serious injury" is
whether the insurer engaged in the sort of outrageous
behavior that the law seeks to punish. Ware, 359
S.W.2d at 899 ("The fact that an act is [tortious] is not of
itself ground for an award of exemplary or punitive
damages.").
It may be easier to describe "serious injury" in a bad
faith case by first saying what it cannot be. It cannot
[**41] be the injury associated with the breach of contract.
Other jurisdictions considering this issue uniformly
require some serious injury that is [*24] independent
and qualitatively different from the breach of the insurance
contract. Linthicum, 150 Ariz. 326, 723 P.2d 675;
Borland, 147 Ariz. 195, 709 P.2d 552; Weisman, 209
Cal. Rptr. at 173-74; Newton, 229 S.E.2d at 302; Shimola,
495 N.E.2d at 393; Anderson, 85 Wis. 2d 675, 271
N.W.2d 368; Guarantee Abstract, 652 P.2d at 668. Nor
do mere inconvenience, annoyance, or delay satisfy this
requirement. Some inconvenience accompanies the
breach of any contract, and is not ordinarily considered
punishable, even if the breach is intentional. 711
S.W.2d at 618. Although the bad faith breach of an insurance
contract, unlike the breach of most contracts,
may justify an award of consequential damages for mental
anguish, 17 Arnold, 725 S.W.2d at 168, the existence of
mental anguish damages alone does not ordinarily warrant
legal punishment.
17 Transportation has not challenged recovery
of mental anguish damages for its bad faith or the

legal sufficiency of the evidence concerning
Moriel's mental anguish.
[**42] Some consequential injuries may satisfy
the "independent and qualitatively different" test for punitive
damages. For example, if an insured requires
medical treatment, yet her insurer denies coverage in bad
faith with full knowledge of the danger to the insured,
then the insured will probably suffer serious injury not
ordinarily associated with mere breach of contract. Also,
some forms of insurance, such as disability insurance,
may be such that insurers frequently can expect that bad
faith denial of coverage will result in such an extraordinary
degree of hardship and oppression that punishment
would be warranted. See Delgado v. Heritage Life Ins.
Co., 157 Cal. App. 3d 262, 203 Cal. Rptr. 672, 680-81
(Cal. Ct. App. 1984).
Because the fact patterns arising in insurance coverage
disputes vary so widely, we must rely on the evolution
of the common law to increase the precision of
this distinction over time. In general, though, an insurance
carrier's refusal to pay a claim cannot justify punishment
unless the insurer was actually aware that its
action would probably result in extraordinary harm not
ordinarily associated with breach of contract or bad faith
denial of a claim -- [**43] such as death, grievous
physical injury, or financial ruin. See, e.g., Silberg v.
California Life Ins. Co., 11 Cal. 3d 452, 113 Cal. Rptr.
711, 521 P.2d 1103 (1974) (holding carrier subject to
punitive damages when it knew that its bad faith denial
of health insurance claim for over two years caused great
harm to the plaintiff, including denial of surgical treatment,
inability to afford pain medication, failure of his
small business, two nervous breakdowns, and repossession
of plaintiff's wheelchair). The harm must be independent
and qualitatively different from the sort of injuries
that typically result from bad faith or breach of contract.
Jim Walter Homes, 711 S.W.2d at 618; 359 S.W.2d
at 899.
V
To sustain the punitive damages awarded to Moriel
in this case, the record must contain legally sufficient
evidence of Transportation's gross negligence. Otherwise,
we are obligated to reverse the judgment of the
court below.
However, we are not simply directed to determine
whether evidence exists that has some remote relation to
the verdict. We must also determine whether the evidence
is legally sufficient. Robert W. Calvert, "No Evidence"
and Insufficient [**44] Evidence" Points of
Error, 38 Tex. L. Rev. 361 (1960); William Powers, Jr.
& Jack Ratliff, Another Look at "No Evidence" and
"Insufficient Evidence," 69 Tex. L. Rev. 515 (1991). If
the evidence is legally sufficient, we may not reverse the
trial court's judgment; if it is not legally sufficient, we are
compelled to do so.
"The evidence presented, viewed in the light most
favorable to the prevailing party, must be such as to permit
the logical inference [that the jury must reach]." Lyons,
866 S.W.2d at 600; Dominguez, 873 S.W.2d at 376.
There must necessarily be a logical connection, direct or
inferential, between the evidence offered and the fact to
be proved. Lyons, 866 S.W.2d at 600 (citing Pittman v.
Baladez, 158 Tex. 372, 312 S.W.2d 210, 216 (Tex.
1958)). However, we must also bear in mind the difference
between materiality of the evidence and the issue of
evidentiary sufficiency. Simply because a piece or pieces
of [*25] evidence are material in the sense that they
make a "fact that is of consequence to the determination
of the action more . . . or less probable," TEX R. CIV.
EVID. 401, does not render the evidence legally sufficient
[**45] . As Professor McCormick succinctly put
it, "a brick is not a wall." CHARLES T. MCCORMICK,
HANDBOOK OF THE LAW OF EVIDENCE § 152
(West ed. 1954); see also FED. R. EVID. 401 advisory
committee's note; RICHARD D. FRIEDMAN, THE
ELEMENTS OF EVIDENCE 59-60 (West ed. 1991).
In evaluating legal sufficiency, we are required to
determine whether the proffered evidence as a whole
rises to a level that would enable reasonable and
fair-minded people to differ in their conclusions. William
Powers, Jr. & Jack Ratliff, Another Look at "No Evidence"
and "Insufficient Evidence," 69 Tex. L. Rev. 515,
522, 523 (1991) ("The court must be persuaded that reasonable
minds could not differ on the matter . . . . Ultimately,
the test for "conclusive evidence" . . . is similar
to the test for "no evidence" . . . the court asks whether
reasonable minds could differ about the fact determination
to be made by the jury."); Calvert, supra at 363-65
("The rule as generally stated is that if reasonable minds
cannot differ from the conclusion that the evidence lacks
probative force it will be held to be the legal equivalent
of no evidence."); see also Litton Indus. Prods., Inc. v.
Gammage, 668 S.W.2d [**46] 319, 324 (Tex. 1984);
Woods v. Townsend, 144 Tex. 594, 192 S.W.2d 884 (Tex.
1946); Joske v. Irvine, 91 Tex. 574, 44 S.W. 1059 (Tex.
1898); McDonough v. Zamora, 338 S.W.2d 507, 515-16
(Tex. Civ. App. -- San Antonio 1960, writ ref'd n.r.e.).
As we have previously stated, there is evidence that
Transportation agreed in advance to pay for Moriel's
testing but not his travel, that its process of deciding
whether to pay caused a ten-day delay in testing, that it
delayed for two years to pay the testing expenses and for
over a year to pay subsequent treatment expenses.
Transportation eventually paid only after the threat of
collection efforts. 18 Transportation says it disputed coverage
of the treatment expenses because it believed that
Moriel's impotence was not work-related, but Transpor-

tation's reasons for delay are irrelevant because it concedes
for purposes of this appeal that legally sufficient
evidence supports the jury's conclusion that it acted
without any reasonable basis and is thus liable for bad
faith. 19
18 The Workers' Compensation Act makes the
employee's obligation to pay medical bills secondary
to that of the insurer. Smith v. Stephenson,
641 S.W.2d 900, 902 (Tex. 1982). Moreover, it
prohibits health care providers from trying to
collect from the employee unless and until the
IAB rules that the carrier is not responsible for
payment. Id. at 903. Therefore, Transportation
did not expose Moriel to any risk of legitimate
collection efforts by his healthcare providers
when it simply brought a dispute before the IAB.
Transportation cannot be held legally accountable
on the assumption that Moriel's providers would
try to collect in violation of the law.
[**47]
19 Less than two weeks before we issued this
opinion, Transportation moved to amend its application
for writ of error to challenge the legal
sufficiency of the bad faith findings. This court
may allow such an amendment "at any time when
justice requires upon such reasonable terms as the
court may prescribe." TEX. R. APP. P. 131(h).
Transportation could have, but did not, raise this
point of error in its original application; we have
overruled its motion to amend.
The jury found that Transportation acted in "heedless
and reckless disregard" of Moriel's rights. The jury's
other findings, (1) that Transportation had no reasonable
basis to delay payment, and (2) that Transportation
"knew or should have known" it had no reasonable basis,
only support the unchallenged award of bad faith damages.
"Heedless and reckless disregard," as defined in the
jury instruction, is gross negligence. See Rowan v. Allen,
134 Tex. 215, 134 S.W.2d 1022, 1024 (Tex. 1940).
Under a gross negligence theory, Transportation
cannot be liable for punitive damages unless it was
"consciously indifferent." The question [**48] is not
whether Transportation was unreasonable or whether it
"should have known" it was acting in bad faith, but
whether Transportation was actually aware of an extreme
risk -- some genuine and unjustifiable likelihood of serious
harm to Moriel that was independent and qualitatively
[*26] different from the inconvenience of an
unreasonable delay in payment.
The evidence presented does not support this finding.
Viewed in its most favorable light, Moriel's evidence
does not support either (1) the inference that Transportation
had any subjective awareness that Moriel would
probably suffer serious injury because of Transportation's
delay, or (2) the inference that Transportation's
actions created any risk of serious harm to Moriel.
The only harm that Transportation's delay caused
Moriel was the anxiety of knowing that his bills were not
paid until Providence Hospital filed a collection action in
violation of the Workers' Compensation Act. 20 While
Moriel's anxiety and embarrassment were genuine, this
injury does not rise to the level of serious harm sufficient
to justify punitive damages. 21 Cf. Fidelity & Guar. Ins.
Underwriters v. Saenz, 865 S.W.2d 103, 113 (Tex. App.
[**49] -- Corpus Christi 1993, writ granted); Cronin v.
Bacon, 837 S.W.2d 265, 269 (Tex. App. -- Fort Worth
1992, writ denied) (defining "mental anguish").
20 Moriel testified that he was embarrassed
because Dr. Perez had not been paid for the services
he rendered, causing Moriel to terminate
the therapy prematurely. Thus, he testified that
Transportation's failure to pay the Perez bill, at
least indirectly, hindered his psychiatric treatment.
However, there is no evidence in the record
that this was ever communicated to Transportation.
21 JUSTICE DOGGETT mistakenly suggests
that punitive damages are the only deterrent
available at law, and that the absence of punitive
damages should be taken as an indication that a
tort is "not worth deterring." S.W.2d at .
We disagree. Not only does the prospect of being
sued and having to defend oneself have a deterrent
effect in most circumstances, but the threat
of compensatory damages also serves as a deterrent,
even for such "repeat-players" in litigation
as insurance companies. In cases in which punitive
damages are not appropriate, an insurer
denying a valid claim can face a judgment that
includes prejudgment interest and the claimant's
attorneys' fees, over and above the policy benefits.
Moreover, if an insurer denies its insured's
claim without any reasonable basis or knowingly
engages in a statutorily prohibited practice, then
it faces either extracontractual bad faith damages
or statutory treble damages, respectively. Finally,
insurers must ordinarily pay their own litigation
costs even if they prevail on the coverage issue.
[**50] Although the jury found that Moriel suffered
substantial mental anguish, this consequential injury
does not support the punitive damage award under
the circumstances of this case. We cannot rule out the
possibility that evidence of aggravating circumstances
might, in a different case, justify punitive damages for an
insurer's conscious indifference to the probability of
mental anguish. However, even assuming that sufficient

evidence of aggravating circumstances were in this record,
Moriel has still failed to introduce any evidence
whatsoever that Transportation had subjective awareness.
Because Moriel alleged no other form or risk of
consequential injury, and introduced no evidence of the
same, Transportation's "no evidence" point must be sustained.
Ordinarily, reversal on this point of error would result
in judgment in Transportation's favor on the issue of
punitive damages. However, the trial was conducted at a
time when no opinion of this court specifically addressed
the standards governing the imposition of punitive damages
in bad faith lawsuits. Moreover, today's decision
represents a substantial clarification of the Texas gross
negligence standard and "no evidence" review [**51]
of gross negligence findings. We have broad discretion
to remand for new trial in the interest of justice. TEX. R.
APP. P. 180; Exxon Corp. v. Tidwell, 867 S.W.2d 19, 23
(Tex. 1993); Boyles, 855 S.W.2d at 603; Murray v. San
Jacinto Agency, Inc., 800 S.W.2d 826, 830 (Tex. 1990);
Scott v. Liebman, 404 S.W.2d 288, 294 (Tex. 1966). We
therefore reverse the judgment of the court of appeals
and remand this case for a new trial. We are convinced
that a retrial of the case, applying the standards announced
today, is warranted in the interest of justice.
VI
Procedural Standards
Inasmuch as we are remanding this case for retrial, we
consider it advisable, in the exercise of our common law
duties, to articulate procedural standards for the trial
court. The standards we announce apply to all punitive
damage cases tried in the future. In [*27] Pacific Mut.
Life Ins. Co. v. Haslip, 499 U.S. 1, 18, 113 L. Ed. 2d 1,
111 S. Ct. 1032 (1991), the Supreme Court expressed
concern that punitive damages might "run wild," recognizing
that unlimited discretion on the part of a jury or
reviewing court "may invite extreme results that jar one's
constitutional sensibilities." [**52] The Court did not,
however, set forth specific due process guidelines, but
merely held that the Alabama system under scrutiny in
Haslip passed constitutional muster. The Court focused
on the jury instruction, which provided some limit on the
jury's discretion, and the process of post-verdict review
by Alabama trial and appellate courts.
The jury instruction in Haslip explained that the
purpose of punitive damages is to "punish the defendant"
and "for the added purpose of protecting the public by
[deterring] the defendant and others from doing such
wrong in the future." Id. at 19. The instruction further
explained that punitive damages are not compulsory, and
that in awarding damages a jury "must take into consideration
the character and the degree of the wrong as
shown by the evidence and necessity of preventing similar
wrong." Id. The Court held that the jury's discretion
under this instruction, although significant, was not unlimited,
as it "was confined to deterrence and retribution,
the state policy concerns sought to be advanced." Id. The
Court concluded that this instruction "reasonably accommodated
[the defendant's] interest in rational decisionmaking
[**53] and Alabama's interest in meaningful
individualized assessment of appropriate deterrence
and retribution." 22 Id. at 20.
22 The jury instruction used in this case is
more comprehensive than that in Haslip, and thus
would presumably pass scrutiny under the United
States Constitution. It provided as follows:
The term "punitive damages" is
an amount which you may, in your
discretion, award as an example to
others and as a penalty or by way
of punishment, in addition to any
amount you may have found as
actual damages.
In determining that amount,
you may consider--
1. the nature of the wrong,
2. the frequency of the wrongs committed,
3. the character of the conduct involved,
4. the degree of culpability of the wrongdoer,
5. the situation and sensibilities
of the parties concerned,
6. the extent to which such
conduct offends a public sense of
justice and propriety, and
7. the size of the award needed
to deter similar wrongs in the future.
[**54] The Court next examined post-verdict review
of punitive damages by Alabama trial courts. These
courts must scrutinize each award, considering such fac-

tors as "the culpability of the defendant's conduct," the
"desirability of discouraging others from similar conduct,"
the "impact upon the parties," and "other factors,
such as the impact on innocent third parties." Id. (quoting
Hammond v. City of Gadsden, 493 So. 2d 1374, 1379
(Ala. 1986)). Alabama trial courts must also state on the
record their reasons for interfering with the verdict or
refusing to do so. Id. The Court held that these procedures
provide "meaningful and adequate review by the
trial court whenever a jury has fixed the punitive damages."
Id.
The Court finally focused on appellate review of
Alabama punitive damage awards, which "provides an
additional check on the jury's or trial court's discretion."
Id. at 20-22. The Alabama Supreme Court first undertakes
a comparative analysis, and then applies "detailed
substantive standards" to evaluate the award, 23 making
sure that the award "does not exceed an amount that will
accomplish society's goals of punishment and deterrence."
Id. at 21 (citing [**55] Green Oil Co. v.
Hornsby, 539 So. 2d 218, 222 [*28] (Ala. 1989); Wilson
v. Dukona Corp., 547 So. 2d 70, 73 (Ala. 1989)).
"This appellate review makes certain that the punitive
damages are reasonable in their amount and rational in
light of their purpose to punish what has occurred and to
deter its repetition." 24 Id.
23 These standards include:
a) whether there is a reasonable
relationship between the punitive
damages award and the harm
likely to result from the defendant's
conduct as well as the harm
that actually has occurred; b) the
degree of reprehensibility of the
defendant's conduct, the duration
of that conduct, the defendant's
awareness, any concealment, and
the existence and frequency of
similar past conduct; (c) the profitability
to the defendant of the
wrongful conduct and the desirability
of removing that profit and
of having the defendant also sustain
a loss; (d) the "financial position"
of the defendant; (e) all the
costs of litigation; (f) the imposition
of criminal sanctions on the
defendant for its conduct, these to
be taken in mitigation; and (g) the
existence of other civil awards
against the defendant for the same
conduct, these also to be taken in
mitigation.
499 U.S. at 21-22.
[**56]
24 Appellate review in Alabama determines
whether the amount of the award is excessive
under the circumstances of the case, but the Court
viewed this as a procedural due process protection,
as it provides a post-hoc check on the jury's
discretion. 499 U.S. at 22-23. Justice O'Connor
questioned whether appellate review, even if it
did ensure that the amount of the punitive award
was not excessive, could cure a jury instruction
she found to be unconstitutionally vague. Id. at
43-44 (O'Connor, J., dissenting).
In conclusion, the Court held that the Alabama procedures
did not violate due process, as their application
"imposes a sufficiently definite and meaningful constraint
on the discretion of Alabama factfinders in
awarding punitive damages. The Alabama Supreme
Court's postverdict review ensures that punitive damages
awards are not grossly out of proportion to the severity
of the offense and have some understandable relationship
to compensatory damages." Id. at 22.
The Supreme Court again examined the constitutional
issues surrounding punitive damages in TXO Prod.
Corp. v. [**57] Alliance Resources Corp., 125 L. Ed.
2d 366, 113 S. Ct. 2711 (1993). That case involved a
West Virginia slander of title action in which the jury
awarded compensatory damages of $ 19,000 and punitive
damages of $ 10 million. The Court upheld the punitive
award against a procedural and substantive due process
attack, although there was no majority opinion.
The West Virginia procedures in TXO differed from
those previously examined in Haslip in that the trial
court did not articulate its reasons for upholding the large
punitive damages verdict. The Court nevertheless concluded
that this was not a constitutional defect, id. at
2724 (plurality opinion of Stevens, J., joined by
Rehnquist, C.J., and Blackmun & Kennedy, JJ.); id. at
2726 (Scalia, J., concurring, joined by Thomas, J.), but
the plurality emphasized that the trial judge did "give
counsel an adequate hearing on TXO's postverdict motions."
Id. at 2742.
Many aspects of the procedures employed up to now
by Texas courts do not compare favorably to those examined
in Haslip and TXO. First, although a defendant
may obtain trial court review of a punitive damage award
by filing a motion for new trial, [**58] TEX. R. CIV.
P. 320, there has been no requirement that trial courts
scrutinize each award, setting forth reasons on the record
for refusing to disturb a jury verdict. Indeed, trial courts
have not even been required to rule on motions for new

trial as the passage of time may serve to overrule a new
trial motion by operation of law. TEX. R. CIV. P.
329b(c). Thus, the judge who heard first-hand the evidence
in a case, and who is uniquely positioned to determine
whether the jury's award was based on passion or
prejudice rather than reason, is not required to perform a
meaningful review of the award.
Second, although this Court has set forth factors to
guide Texas courts of appeals in evaluating punitive
damages awards, see Alamo Nat'l Bank v. Kraus, 616
S.W.2d 908, 910 (Tex. 1981), a court of appeals may
overturn the jury's verdict and order the case retried only
if the verdict "is so against the great weight and preponderance
of the evidence as to be manifestly unjust." Pool
v. Ford Motor Co., 715 S.W.2d 629, 635 (Tex. 1986). 25
[*29] Moreover, this court, unlike its counterparts in
Alabama, West Virginia, and most other states, is precluded
from reviewing the evidence [**59] supporting
a punitive damages award for factual sufficiency. TEX.
CONST. art. V, § 6; TEX. GOV'T CODE § 22.225(a);
Kraus, 616 S.W.2d at 910. Although due process does
not require two levels of appellate review, this aspect of
Texas procedure means that the evidence supporting a
punitive award is scrutinized less closely on appeal to the
highest court here than in some other states.
25 The burden in Texas for reversing a punitive
damages verdict on appeal does not appear
functionally different from that in Alabama and
West Virginia. A Texas court of appeals may
overturn the jury's verdict and order a new trial if
the verdict "is so against the great weight and
preponderance of the evidence as to be manifestly
unjust." Pool, 715 S.W.2d at 635; In Re King's
Estate, 150 Tex. 662, 244 S.W.2d 660, 661 (Tex.
1951). In Alabama, the "presumption of correctness"
accorded to the jury's verdict may be overcome
by "a clear showing that the amount of the
verdict is excessive," Wilson v. Dukona Corp.,
547 So. 2d 70, 72 (Ala. 1989), while in West Virginia
an award may be reversed on appeal if it is
"so unreasonable as to demonstrate such passion
and prejudice that a new trial is warranted." TXO
Prod. Corp. v. Alliance Resources Corp., 187 W.
Va. 457, 419 S.E.2d 870, 890 (W.Va. 1992), aff'd,
125 L. Ed. 2d 366, 113 S. Ct. 2711 (1993). Although
the words used are quite different, we are
not convinced that there is a meaningful difference
among these respective standards that would
produce a different result.
[**60] The broad jury discretion that is the hallmark
of the common law punitive damages system must
be complemented by procedural safeguards that will ensure
against excessive or otherwise inappropriate awards.
26 We conclude that the Texas procedures for assessing
and reviewing punitive damage awards, both at the trial
and appellate levels, in some respects may not adequately
ensure that such awards "are not grossly out of proportion
to the severity of the offense and have some understandable
relationship to compensatory damages."
Haslip, 499 U.S. at 22. Although we do not reach the
question whether the procedures previously employed
violated either the state or federal 27 constitutions, pursuant
to our authority under the common law, we announce
two changes in the procedures by which punitive damages
may be sought. In our view, these modifications
will not only enhance the overall fairness and predictability
of punitive damage awards, but they should also
ameliorate some of the potential arbitrariness that inheres
in our current system. Although Transportation argues
for procedural changes only on constitutional grounds,
various amici curiae alternatively argue for common-law
[**61] reform. Justice Kennedy suggested this approach
in Haslip:
26 The only aspect of Texas procedure to
clearly meet or exceed the minimal requirements
has been the instructions given to juries. A Texas
jury, although possessing significant discretion in
awarding punitive damages, receives more guidance
than did the jury in Haslip. See supra note
21. Texas jurors are instructed on the factors set
forth in Kraus, 616 S.W.2d at 910, and thus determine
the amount of the award based on the
same criteria that the trial and appellate courts
use in determining whether the award is excessive.
27 The United States Court of Appeals for the
Fifth Circuit has considered the existing Texas
procedures for imposing punitive damage awards
in light of Haslip, and concluded that they do not
violate federal due process. Glasscock v. Armstrong
Cork Co., 946 F.2d 1085 (5th Cir. 1991),
cert. denied, 112 S. Ct. 1778 (1992).
We do not have the authority, as do
judges in some of the States, to [**62]
alter the rules of the common law respecting
the proper standard for awarding
punitive damages and the respective roles
of the jury and the court in making that
determination. Were we sitting as
state-court judges, the size and recurring
unpredictability of punitive damages
awards might be a convincing argument
to reconsider those rules or to urge a
reexamination by the legislative authority.

499 U.S. at 42 (Kennedy, J., concurring). Other state
supreme courts have recently modified their punitive
damage procedures without holding those procedures
unconstitutional. See Gamble v. Stevenson, 305 S.C. 104,
406 S.E.2d 350 (S.C. 1991); Hodges v. S.C. Toof & Co.,
833 S.W.2d 896 (Tenn. 1992); Crookston v. Fire Ins.
Exch., 817 P.2d 789 (Utah 1991).
A. Bifurcation
We held in Lunsford v. Morris, 746 S.W.2d 471 (Tex.
1988), that evidence of a defendant's net worth is relevant
in determining the proper amount of punitive damages,
and therefore may be subject to pretrial discovery.
This decision aligned Texas with the overwhelming majority
of other jurisdictions on this issue. See Lunsford,
746 S.W.2d at 472 n.2. As we noted in Lunsford, the
[**63] amount of punitive damages necessary to punish
and deter wrongful conduct depends on the financial
strength of the defendant. "That which could be an
enormous penalty to one may be but a mere annoyance
to another." Id. at 472.
[*30] However, evidence of a defendant's net
worth, which is generally relevant only to the amount of
punitive damages, by highlighting the relative wealth of
a defendant, has a very real potential for prejudicing the
jury's determination of other disputed issues in a tort
case. We therefore conclude that a trial court, if presented
with a timely motion, should bifurcate the determination
of the amount of punitive damages from the remaining
issues. See Wal-Mart, 868 S.W.2d at 329-32
(Gonzalez, J., concurring). Under this approach, the jury
first hears evidence relevant to liability for actual damages,
the amount of actual damages, and liability for punitive
damages (e.g., gross negligence), and then returns
findings on these issues. If the jury answers the punitive
damage liability question in the plaintiff's favor, the same
jury is then presented evidence relevant only to the
amount of punitive damages, and determines the proper
amount of [**64] punitive damages, considering the
totality of the evidence presented at both phases of the
trial.
At least thirteen states now require bifurcation of
trials in which punitive damages are sought. 28 Ten of
these, California, Georgia, Kansas, Missouri, Montana,
Nevada, Ohio, Tennessee, Utah, and Wyoming, generally
follow the procedure outlined above, in which the
amount of punitive damages is bifurcated from the remaining
issues. The other states require bifurcation of the
entire punitive damage claim, including liability and
amount. We believe the former approach is preferable, as
some of the evidence relevant to punitive damage liability,
such as evidence of gross negligence, will also be
relevant to liability for actual damages. Bifurcating only
the amount of punitive damages therefore eliminates the
most serious risk of prejudice, while minimizing the
confusion and inefficiency that can result from a bifurcated
trial. See Lunsfo 746 S.W.2d at 477 (Phillips, C.J.,
dissenting on motion for reh'g). 29
28 CAL. CIV. CODE § 3295(d) (West Supp.
1993); GA. CODE ANN. § 51-12-5.1(d) (Supp.
1992); KAN. STAT. ANN. § 60-3701(a) (Supp.
1993); MINN. STAT. ANN. § 549.20(4) (West
Supp. 1993); MO. ANN. STAT. § 510.263
(Vernon Supp. 1992); MONT. CODE ANN. §
27-1-221(7) (1991); NEV. REV. STAT. §
42.005(3) (1991); N.J. STAT. ANN. §
2A:58C-5(b) (West 1987); N.D. CENT. CODE §
32-03.2-11(2) through (4) (1993); OHIO REV.
CODE ANN. § 2315.21(C) (Baldwin 1993);
UTAH CODE ANN. § 78-18-1(2) (1992);
Campen v. Stone, 635 P.2d 1121, 1132 (Wyo.
1981); Hodges v. S.C. Toof & Co., 833 S.W.2d
896 (Tenn. 1992).
[**65]
29 Despite the authority of trial courts to order
separate trials under Tex. R. Civ. P. 174(b), we
have previously held that liability and damages
may not be bifurcated in a personal injury action.
Iley v. Hughes, 158 Tex. 362, 311 S.W.2d 648,
651 (Tex. 1958). Citing our "long standing policy
and practice" against "piecemeal trials," id. at
651, the court said: "The public interest, the interests
of litigants and the administration of justice
[are] better served by rules of trial which
avoid a multiplicity of suits." Id. Arguably, this
holding would apply to punitive, as well as actual,
liability and damages. But see Beverly Enterprises
of Texas, Inc. v. Leath, 829 S.W.2d 382,
387 (Tex. App. -- Waco 1992, no writ) (the court,
without citing Iley v. Hughes, held that a trial
court does have discretion under Rule 174(b) to
bifurcate the amount of punitive damages from
punitive liability); Miller v. O'Neill, 775 S.W.2d
56, 59 (Tex. App. -- Houston [1st Dist.] 1989,
orig. proceeding) (same). Although we remain
resolute that piecemeal trials as a general rule
should be avoided, given the importance of the
considerations we have discussed, we conclude
that punitive damage cases should be the exception
to the rule.
[**66] The issue in this Court is not whether bifurcation
of punitive damage claims is constitutionally
required, but whether our system of imposing punitive
damages, on the whole, provides adequate procedural
safeguards to protect against awards that are grossly excessive.
Concluding that the current procedures are not

adequate, we hereby adopt the requirement of bifurcated
trials in punitive damage cases.
B. Court of Appeals Review of the Evidence
A court of appeals may vacate a damage award or suggest
a remittitur only if the award is "so factually insufficient
or so against the great weight and preponderance of
the evidence as to be manifestly unjust." Pope v. Moore,
711 S.W.2d 622, 624 (Tex. 1986); see Pool, 715 S.W.2d
at 635; In Re King's Estate, 150 Tex. 662, 244 S.W.2d
660, 661 (Tex. 1951). A court of appeals is also governed
by this same standard when reviewing a trial court's
suggestion of remittitur. Larson v. Cactus Util. Co., 730
S.W.2d 640 (Tex. 1987). While we do not alter this level
of [*31] appellate deference, 30 we emphasize that
courts of appeals must carefully scrutinize punitive
awards to ensure that they are supported by the [**67]
evidence. We have already held in Pool that courts of
appeals, when reversing on insufficiency grounds, should
detail the evidence in their opinions and explain why the
jury's finding is factually insufficient or is so against the
great weight and preponderance of the evidence as to be
manifestly unjust. 715 S.W.2d at 635. Due to the jury's
broad discretion in imposing punitive damages, we believe
that a similar type of review is appropriate when a
court of appeals is affirming such an award over a challenge
that it is based on insufficient evidence or is
against the great weight and preponderance of the evidence.
This will ensure careful appellate review of the
punitive award, and allow this court to determine whether
the court of appeals correctly applied the Kraus factors.
Thus, we hold that the court of appeals, when conducting
a factual sufficiency review of a punitive damages
award, must hereafter detail the relevant evidence in
its opinion, explaining why that evidence either supports
or does not support the punitive damages award in light
of the Kraus factors.
30 The Supreme Court in Haslip distinguished
Alabama's appellate review, under which the
court applies detailed substantive standards, from
the Vermont scheme, which allows an award to
be set aside only if it is "manifestly and grossly
excessive." 499 U.S. at 21 n. 10. Although Texas
also uses a "manifestly unjust" standard, our review
is actually more aligned with Alabama's in
that the court of appeals makes this determination
by applying the specific Kraus factors.
[**68] C. Clear and Convincing Evidence
Clear and convincing evidence is "that measure or degree
of proof which 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." State v. Addington, 588
S.W.2d 569, 570 (Tex. 1979); TEX. FAM. CODE §
11.15(c) (Vernon 1986). Many states have raised the
evidentiary burden for gross negligence and punitive
damages from "a preponderance of the evidence" to
"clear and convincing evidence." See Linthicum, 723
P.2d at 681; Masaki v. General Motors Corp., 71 Haw.
1, 780 P.2d 566, 575-75 (Haw. 1989); Tuttle v. Raymond,
494 A.2d 1353, 1363 (Me. 1985); Owens-Illinois,
Inc. v. Zenobia, 325 Md. 420, 601 A.2d 633, 657 (Md.
1992); Hodges v. S.C. Toof & Co., 833 S.W.2d 896, 90
(Tenn. 1992); Wangen v. Ford Motor Co., 97 Wis. 2d
260, 294 N.W.2d 437, 443 (Wis. 1980); ALA. CODE §
6-11-20 (Supp. 1993); ALASKA STAT. § .09.17.020
(Supp. 1991); CAL. CIV. CODE § 3294(a) (West Supp.
1994); GA. CODE ANN. § 51-12-5.1(b) (Supp. 1991);
IND. CODE ANN. § 34-4-34-2 (Burns Supp. 1993);
IOWA CODE ANN. § 668A.1(1)(a) (West 1987); KAN.
STAT. ANN. § 60-3701(c) [**69] (Supp. 1992); KY.
REV. STAT. ANN. § 411.184(2) (Michie/Bobbs-Morril
Supp. 1993); MINN. STAT. ANN. § 549.20(1)(a) (West
Supp. 1994); MONT. CODE ANN. § 27-1-221(5) (1991);
NEV. REV. STAT. ANN. § 42.005(1) (Supp. 1993); N.D.
CENT. CODE 32-03.2-11 (Supp. 1993); OHIO REV.
CODE ANN. § 2307.80(A) (Anderson 1991); OR. REV.
STAT. § 30.925 (1991); S.C. CODE ANN. § 15-33-135
(Law Co-op. Supp. 1991); UTAH CODE ANN. §
78-18-1 (Supp. 1992); see also COLO. REV. STAT. §
13-25-127(2) (1989) (requiring proof beyond a reasonable
doubt); FLA. STAT. ANN. Ch. 768.73(1)(b) (Harrison
Supp. 1992) (punitive damages in excess of cap allowed
if claimant demonstrates to the court by clear and convincing
evidence that award is not excessive); OKLA.
STAT. ANN. tit. 23, § 9 (West 1987) (clear and convincing
evidence required to award punitive damages in excess
of cap); S.D. CODIFIED LAWS ANN. § 21-1-4.1
(1987) (discovery on the punitive damages claim and
submission of the punitive damages claim to the jury
cannot occur unless the court finds "after a hearing and
based on clear and convincing evidence" that there is a
reasonable basis to believe that the defendant engaged in
willful, wanton, or malicious [**70] conduct).
This change has also been endorsed by commentators,
see Dorsey D. Ellis, Punitive Damages, Due Process,
and the Jury, 40 Ala. L. Rev. 975, 993-995 (1989);
American Law Institute, Reporters' Study, II Enterprise
Responsibility for Personal Injury -- Approaches to Legal
and Institutional Change 248-249 (1991), and favorably
noted by the 499 U.S. at 23 n.11 (while not
[*32] constitutionally required, "there is much to be
said in favor of [the clear and convincing standard] or,
even, 'beyond a reasonable doubt,' . . . as in the criminal
context").
Notwithstanding this support in other jurisdictions, 31
our Legislature expressly considered and rejected the

clear and convincing evidence standard for punitive
damages as part of its 1987 tort-reform legislation. See
Montford & Barber, 25 HOUS. L. REV. at 333. As this
higher burden is not constitutionally compelled, see
Haslip, 499 U.S. at 23 n.11, the usual preponderance
standard would remain the law in cases governed by the
Act. Inasmusch as application of different evidentiary
standards, depending on whether a case is governed by
tort-reform legislation would be unnecessarily confusing,
we decline [**71] to adopt the clear and convincing
standard pursuant to our common-law authority at this
time.
31 Accord Ford Motor Co. v. Durrill, 714
S.W.2d 329, 347 (Tex. App. -- Corpus Christi
1986), judgm't vacated by agreement, 754 S.W.2d
646 (Tex. 1988) (acknowledging, although ultimately
rejecting, the strength of arguments in
support of clear and convincing standard for punitive
damages).
D. Trial Court Articulation
The Supreme Court emphasized in Haslip that trial
courts in Alabama are required to scrutinize punitive
damage awards, reflecting on the record their reasons for
upholding or refusing to uphold the award. 499 U.S. at
20. The Court concluded that this procedure ensured
"meaningful and adequate review by the trial court
whenever a jury has fixed the punitive damages." Id. In
Texas, trial courts have not been required to articulate
their reasons for upholding punitive awards, or even to
take affirmative steps to consider post trial objections to
a punitive damage award.
As [**72] noted by the Utah Supreme Court in
adopting this requirement:
The reason that any determination as to
whether the jury exceeded its proper
bounds is best made in the first instance
by the trial court is that the trial judge is
present during all aspects of the trial and
listens to and views all witnesses. Therefore,
he or she can best determine if the
jury has acted with "passion or prejudice"
and whether the award is too small or too
large in light of the evidence.
Crookston v. Fire Ins. Exch., 817 P.2d 789, 804 (Utah
1991). Meaningful trial court review is especially important
in Texas because of the deference which our
courts of appeals must give to jury verdicts, see Pool,
715 S.W.2d at 635, and the absence of this court's jurisdiction
to review factual sufficiency points.
At least eight jurisdictions now expressly require the
trial court to articulate its reasons for refusing to disturb
a punitive damage award. See Hammond v. City of
Gadsden, 493 So. 2d 1374, 1379 (Ala. 1986); O'Dell v.
Basabe, 119 Idaho 796, 810 P.2d 1082, 1092 (Idaho
1991); Medical Mut. Liab. Ins. Soc'y v. B. Dixon
Evander & Assocs., 92 Md. App. 551, 609 A.2d 353,
368-69 [**73] (Md. App. 1992) (not per se required, but
trial court's failure to explain reasoning may constitute
abuse of discretion); G.N. Danavox, Inc. v. Starkey
Labs., Inc., 476 N.W.2d 172, 177 (Minn. App. 1991, review
denied), cert. denied, 119 L. Ed. 2d 565, 112 S. Ct.
2940 (1992); Gamble v. Stevenson, 305 S.C. 104, 406
S.E.2d 350, 354 (S.C. 1991); Hodges v. S.C. Toof & Co.,
833 S.W.2d 896, 902 (Tenn. 1992); Crookston v. Fire
Ins. Exch., 817 P.2d 789, 811 (Utah 1991) (requiring
trial court articulation whenever ratio of punitive damages
to actual damages exceeds 3:1); Garnes v. Fleming
Landfill, Inc., 186 W. Va. 656, 413 S.E.2d 897, 910 (W.
Va. 1991). Most of these jurisdictions have adopted this
requirement after Haslip. Moreover, several federal appellate
courts reviewing punitive damage awards since
Haslip have remanded the cases to the trial court with
instructions to articulate the reasons for upholding the
award. See Cole v. Control Data Corp., 947 F.2d 313,
321 (8th Cir. 1991); Union Nat'l Bank v. Mosbacher, 933
F.2d 1440, 1448 (8th Cir. 1991), cert. denied, 116 L. Ed.
2d 775, 112 S. Ct. 870 (1992); American Employers Ins.
Co. [**74] v. Southern Seeding Servs., Inc., 931 F.2d
1453, 1458 (11th Cir. 1991); Robertson Oil Co. v. Phillips
Petroleum Co., 930 F.2d 1342, 1347 (8th Cir. 1991).
[*33] We are sensitive to the demands already
placed on our trial courts, which are overworked and
understaffed. More than most states, Texas permits local
governments to decide what levels of staffing, housing
and equipment are appropriate to operate the state courts.
NATIONAL CENTER FOR STATE COURTS, SUR-
VEY (1985). While some counties make excellent provision
for their courts, in many instances this "reliance on
the counties to fund most of the courts is one source of
chronic fiscal crisis." AMERICAN BAR ASSOCIA-
TION SPECIAL COMMITTEE ON FUNDING THE
COURT SYSTEM, FUNDING THE JUSTICE SYS-
TEM: A CALL TO ACTION 54 (1992) (analyzing Texas
court funding). As a result, Texas trial courts are generally
badly understaffed. See id. A recent survey indicates
that about seventy percent of Texas district judges
have no access to secretarial services, while even fewer
have paid law clerks. OFFICE OF COURT ADMIN-
ISTRATION OF TEXAS, DISTRICT COURT RE-
SOURCES SURVEY (June 1990).
Although we have on occasion suggested that our
trial [**75] courts make specific findings not required
by statute or rule, see Chrysler v. Blackmon, 841 S.W.2d

844 (1992), we do not do so lightly. While such a practice
would facilitate meaningful post-verdict review of
punitive damage awards at both the trial and appellate
levels, we will not require such findings as a prerequisite
for a judgment including punitive damages. We do observe
that such findings "would obviously be helpful,"
Transamerican Natural Gas v. Powell, 811 S.W.2d 913,
919 n.9 (Tex. 1991), and urge that such findings be made
to the extent practicable.
For the foregoing reasons, we reverse the judgment
of the court of appeals and remand this case for a new
trial in accordance with this opinion.
John Cornyn
Justice
Opinion Delivered: June 8, 1994
CONCUR BY: LLOYD DOGGETT
CONCUR
JUSTICE DOGGETT, joined by JUSTICE GAM-
MAGE, concurring.
In response to revisions to the majority opinion
made during the pendency of the motion for rehearing,
my opinion of February 2, 1994 is withdrawn and the
following is substituted.
Undoubtedly the insurance industry provides an
important service to our society, but I see no reason why
it should not have to comply [**76] with the law like
the rest of us. Because of the tremendous economic
power large insurers can exert relative to individual
Texas families and businesses, this Court has sought to
offer policyholders some protection. Without a meaningful
remedy against insurance companies that dishonor
their policies, "unscrupulous insurers [can] take advantage
of their insureds' misfortunes." Arnold v. National
County Mut. Life Ins. Co., 725 S.W.2d 165, 167
(Tex. 1987).
But the majority's mission in recent months has been
to dismantle, as much as possible, the different safeguards
that insurance policyholders and beneficiaries
have been previously assured by the laws of Texas.
Instead of fairness to all, the majority has replaced protection
of insureds with protection of insurers, leaving
the insurance industry largely free to do as it pleases.
See, e.g., Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132,
1994 Tex. LEXIS 14, 37 Tex. Sup. J. 345 (Jan. 5, 1994);
Allstate Ins. Co. v. Watson, 1993 Tex. LEXIS 152, 37
Tex. Sup. J. 169 (Nov. 24, 1993); Lyons v. Millers Casualty
Ins. Co., 866 S.W.2d 597 (Tex. 1993); National Union
Fire Ins. Co. v. Dominguez, 873 S.W.2d 373 (Tex.
1994); [**77] Spencer v. Eagle Star Ins. Co. of Ameri-
ca, 1993 Tex. LEXIS 96, 36 Tex. Sup. J. 1090 (June 30,
1993). It is as if, to borrow a phrase from Will Rogers,
this majority never met an insurance company it didn't
like.
When dealing with a large insurance company, one
danger against which insureds need protection is profitable
indifference. See, e.g., Weisman v. Blue Shield of
California, 163 Cal. App. 3d 61, 209 Cal. Rptr. 169, 173
(Cal. App. 1984) (upholding punitive damages on showing
insurer had "overriding concern for a minimum-expense
operation, regardless of the peril involved").
As long as the actual damages suffered by an
insured is relatively small in comparison to an insurer's
very substantial assets, liability for actual damages may
offer little incentive to provide care and promptness in
processing claims. Referenced by the majority as illustrating
its new standard, Silberg v. California Life Ins.
Co., 11 Cal. 3d 452, 521 P.2d 1103, 113 Cal. Rptr. 711
(Cal. 1974) (en banc), indicates the magnitude of suffering
a Texas policyholder must henceforth endure before
invoking the punitive damages remedy that today's opinion
[*34] seeks to eliminate. S.W.2d [**78] at .
Punitive damages will be deemed appropriate only in
circumstances such as those where the insurer's bad faith
effectively denies an insured surgical treatment and pain
medication, destroys his business, produces two nervous
breakdowns and causes loss of his wheelchair to the repo
man. Id. And even then the insured must also show that
the company actually knew such consequences would
result.
I.
I believe in reasonable constraints on the use of punitive
damages against insurance companies as well as
any other defendant. Had there been the slightest interest
in achieving that objective on a principled basis, consistent
with our prior jurisprudence, we could long ago
have resolved this cause with unanimity. But the majority
is committed to fulfilling its social agenda at any
cost--mere precedent, a procedural rule, a statute or the
Texas Constitution present no obstacles on the way to
achieving whatever it perceives to be of ultimate benefit.+
With judgments for punitive damages at times involving
substantial amounts, this court should thoroughly
review individual cases and the broader legal standards
upon which they are decided to guarantee that justice is
[**79] truly being rendered. Certainly not all misconduct
should give rise to damages in an amount greater
than that necessary to compensate the victim. Adjudging
more than compensatory damages in the absence of conscious
indifference only adds one wrong to another by
wronging the wrongdoer. Most assuredly, some concerns
of commercial interests regarding aberrational verdicts

are legitimate, but such decisions do not reflect a systemic
"crisis"; rather they reinforce the need for careful
case-by-case review of punitive determinations.
Accordingly, we must ensure that courts of appeals
conduct a most careful review of the factual sufficiency
of evidence. I am also sympathetic to the concept of requiring
bifurcation of the determination of the amount of
punitive damages, but insurance companies should be
held to ordinary requirements of preservation of error
like other litigants. Despite Transportation's unquestionable
waiver of any complaint about bifurcation, 1 today's
opinion decides this issue.
1 Rather than bifurcation, Transportation proposed
in a motion in limine to prohibit introduction
of evidence of its financial status "until sufficient
evidence [of liability for punitive damages]
had been introduced to warrant [such] introduction;"
the trial court granted this relief. Not
until its motion for new trial did Transportation
belatedly make any request for bifurcation. Nor
did it request bifurcation in its application for
writ of error.
[**80] Though with this majority it may seem a
rather antiquated notion, I still believe that judges should
resolve the issues the parties properly present rather than
those that the judges wish that had presented. 2 Ironically,
one major complaint that Transportation did specifically
urge is one that the majority chooses to sidestep. I would
agree with the insurer on this point by requiring that a
trial court articulate reasons for overruling a motion for
new trial challenging an award of punitive damages. Articulation
ensures "meaningful and adequate review by
the trial court whenever a jury has fixed the punitive
damages." See Pacific Mut. Life Ins. Co. v. Haslip, 499
U.S. 1, 111 S. Ct. 1032, 1044, 113 L. Ed. 2d 1 (1991).
Who better to determine
2 In its quest to radically rewrite the state's tort
law, the majority ignores the prudential limitations
applicable to the judicial branch of government.
Besides deciding a bifurcation issue that
was not before the Court, the majority purports to
make significant revisions to the law governing
an insurer's duty of good faith and fair dealing
even though Transportation's liability for a bad
faith breach was not at issue here. See infra notes
13 - 16 and accompanying text. The majority also
purports to render an interpretation of the statutory
definition of gross negligence found in the
Texas Civil Practice and Remedies Code, even
though this case is not governed by that statute.
See infra note 22 and note 33 and accompanying
text.
[**81]
whether the jury exceeded its proper
bounds [than] the trial judge [who] is
present during all aspects of the trial and
listens to and views all witnesses. Therefore,
he or she can best determine if the
jury has acted with "passion or prejudice"
and whether the award is too small or too
large in light of the evidence.
[*35] Crookston v. Ins. Exchange, 817 P.2d 789, 804
(Utah 1991) (requiring trial court articulation where ratio
of punitive damages to actual damages exceeds 3:1).
In addition to Utah, seven other states now require such
articulation 3 as have some federal courts. 4 Though conceding
that such articulation "would facilitate meaningful
post-verdict review of punitive damage awards," would
be "helpful," S.W.2d , the majority rejects
Transportation's request. I would grant it and remand to
the trial court for such articulation. Compare Chrysler
Corp. v. Blackmon, 841 S.W.2d 844, 850-53 (Tex. 1992)
(requiring trial court to make findings of fact and conclusions
of law or to explain reasons for imposing severe
discovery sanctions).
3 See Hammond v. City of Gadsden, 493 So. 2d
1374, 1379 (Ala. 1986); O'Dell v. Basabe, 119
Idaho 796, 810 P.2d 1082, 1092 (Idaho 1991);
Medical Mut. Liab. Ins. Soc. v. B. Dixon Evander
& Assocs., 92 Md. App. 551, 609 A.2d 353,
368-69 (Md. App. 1992) (not per se required, but
trial court's failure to explain reasoning may constitute
abuse of discretion); GN Danavox, Inc. v.
Starkey Labs., Inc., 476 N.W.2d 172, 177 (Minn.
App. 1991); Gamble v. Stevenson, 305 S.C. 104,
(S.C. 1991); Hodges v. S.C. Toof & Co., 833
S.W.2d 896, 902 (Tenn. 1992); Garnes v. Fleming
Landfill, Inc., 186 W. Va. 656, 413 S.E.2d 897,
910 (W. Va. 1991).
[**82]
4 See Cole v. Control Data Corp., 947 F.2d
313 (8th Cir. 1991); Union National Bank v.
Mosbacher, 933 F.2d 1440, 1448 (8th Cir. 1991);
American Employers Ins. Co. v. Southern Seeding
Services, Inc., 931 F.2d 1453, 1458 (11th Cir.
1991); Robertson Oil Co. v. Phillips Petroleum
Co., 930 F.2d 1342, 1347 (8th Cir. 1991).
Such a remand is, however, quite different from that
provided by today's opinion, which has its origins in the
great misadventure in Boyles v. Kerr, 855 S.W.2d 593,
603 (Tex. 1993), a decision upon which the majority now
relies. There remand was employed simply as an artifi-

cial face-saving device for the majority. There was no
harm in a remand, so long as the claimant was likely,
under the newly announced law, to lose on retrial anyway.
5 And this added the glow of justice to a great injustice.
Today's remand is more of the same. If the majority
is correct that there is really no evidence of gross negligence,
Transportation is entitled to rendition rather than
wasting the resources of all parties on a meaningless
exercise.
5 "Most likely being led down the garden path,
Susan Kerr is now directed back to the trial court
to pursue this new cause of action, in which those
who are injured are 'seldom successful.'" Id. at
609 (Doggett, J., dissenting on rehearing) (quoting
Twyman v. Twyman, 855 S.W.2d 619, 631
(Tex. 1993) (Hecht, J., dissenting)).
[**83] A further safeguard for all parties is the
avoidance of a standardless charge that leaves the jury
without meaningful guidance in performing its vital task.
A proper instruction of the type now incorporated into
the Texas Pattern Jury Charge 6 was employed here. As I
note in 868 S.W.2d at 334 (Doggett, J., dissenting), that
can be followed by appellate review that considers, in
light of the trial court's articulation, these same factors,
outlined in Alamo Nat'l Bank v. Kraus, 616 S.W.2d 908,
910 (Tex. 1981):
6 2 STATE BAR OF TEXAS, TEX. PAT-
TERN JURY CHARGES § 29.03 (1992).
In determining the reasonableness
of the amount of an exemplary damages
verdict, an appellate court must consider
1) the nature of the wrong, 2) the character
of the conduct involved, 3) the degree
of the culpability of the wrongdoer, 4) the
situation and the sensibilities of the parties
concerned, 5) the extent to which
such conduct offends a public sense of
justice and propriety.
And there may well be other moderate [**84] reforms,
which when properly presented, can ensure greater fairness.
But the majority rejects this rational approach and,
instead, attempts to rewrite the history of the law and
ignores our Constitution by treating punitive damages
themselves as an aberration -- establishing new barriers
that threaten to eliminate entirely the effectiveness of this
long-established method by which a community can impose
penalties to deter egregious wrongdoing. Today's
endeavor represents another phase in the majority's construction
of a legal bulwark to shield large insurance
companies from any [*36] attempt by juries to discourage
particularly outrageous and offensive behavior.
II.
Though now misdescribed by the majority as a recent
deviance of an "exceptional nature," in contradistinction
to "typical" tort law, S.W.2d at , punitive
damages "have been in existence since the Code of
Hammarabi in 2000 B.C." 1 LINDA L. SCHLUETER &
KENNETH R. REDDEN, PUNITIVE DAMAGES § 1.0
at 3 (2d ed., 1989). 7 The original suit under the English
common law, predating the distinction between civil and
criminal, was an "appeal" brought by a private party
having "the double object of satisfying [**85] the private
party for his loss, and the king for the breach of his
peace." 8 OLIVER WENDELL HOLMES, THE COM-
MON LAW 34 (Little Brown 1963); see CUSHMAN K.
DAVIS, THE LAW IN SHAKESPEARE 153 (1883).
The purpose of such an action was not limited to compensation;
rather "the King or other lord exacted further
payments from the wrong-doer . . . on the ground that
every evil deed inflicts a wrong on society in general, as
well upon its victim." WILLIAM S. MCKECHNIE,
MAGNA CARTA 285 (1914). Even as the law came to
distinguish between criminal and civil actions, jurors had
near complete discretion over the amount of damages
awarded in civil suits "until comparatively recent times."
1 SEDGWICK ON DAMAGES § 349, at 688 (9th ed.,
1912). See, e.g., Townsend v. Hughes, 86 Eng. Rep. 994,
994-95 (C.P. 1649) (courts should not interfere with jury's
power to award damages). By the end of the 18th
century, as recovery for damages became limited to specific
standardized categories dependent on the nature of
the claim, jurors nevertheless retained near absolute discretion
to set damages that would punish outrageous behavior
and discourage oppression. SEDGWICK ON
DAMAGES § 349, at 689; Continuity [**86] of Punitive
Damages, 42 AM. U. L. REV. at 1287-89,
1292-96. See also Wilkes v. Wood, Lofft. 1, 18-19, 98
Eng. Rep. 489, 498-99 (K.B. 1763) (upholding # 1000
punitive damage verdict against King's agent on grounds
that "damages are designed not only as satisfaction to the
injured person, but likewise as punishment to the guilty,
to deter from any such proceeding for the future and as
proof of the detestation of the jury to the action itself").
These damages were known as "punitive," "exemplary"
or "vindictive" damages. SEDGWICK ON DAMAGES
§ 347, at 687.
7 Punitive damages were also recognized in
Roman Law and in the Vedic Law of Manu. Michael
Rustad & Thomas Koenig, The Historical
Continuity of Punitive Damages: Reforming the

Tort Reformers, 42 Am. U.L. Rev. 1264, 1285-86,
(1993) [hereinafter, Continuity of Punitives]
8 Moreover, an informer, as a qui tam plaintiff,
could file ordinary general writs against individuals
who had wronged the King. Note, The History
and Development of Qui Tam, 1972 Wash.
U. L. Q. 81, 87 (Since the thirteenth century private
individuals could bring qui tam lawsuits to
protect the King's interests). By the fifteenth century,
statutes were enacted to ensure that the qui
tam plaintiff received a share of the recovery assessed
against the defendants. Id. Qui tam causes
of action, permitting a civil litigant who had suffered
no individualized injury to recover noncompensatory
penalties from wrongdoers, have
"been in existence . . . in this country ever since
the foundation of our government." Marvin v.
Trout, 199 U.S. 212, 225, 50 L. Ed. 157, 26 S. Ct.
31 (1905).
[**87] In the leading authority identifying them as
a separate species of damages, "exemplary damages"
were assessed against a government official for a printer
who suffered arrest and seizure of his equipment, as a
result of criticizing the King. Huckle v. Money, 2 Wils.
K.B. 205, 95 Eng. Rep. 768 (C.P. 1763). Although actual
damages were estimated by the court to be less than # 20,
the jury awarded # 300. Id. In refusing an effort to overturn
the verdict as excessive, the court declared:
It is very dangerous for Judges to intermeddle
in damages for torts . . . .
[The jury] saw a magistrate over all the
King's subjects, exercising arbitrary power,
violating Magna Charta, and attempting
to destroy the liberty of the Kingdom
by insisting upon the legality of the warrant
before them; they heard the King's
Counsel, and saw the solicitor of the
Treasury endeavoring to support and
maintain the legality of the warrant in a
tyrannical and severe manner. These are
the ideas which struck the jury on the trial;
and I [*37] think they have done
right in giving exemplary damages.
Id. at 769 (Camden, C.J.).
Whenever an injury is done under
[**88] the color of authority, as if an officer
empowered to press exceed the authority
given him by the press warrant; or
if the master of the ship abuse the power
by law vested in him over the sailors un-
der this command . . . the jury in assessing
damages is not confined to the damages
which have actually been sustained, but
ought to assess exemplary damages.
Huckle v. Money (Camden, C.J.), quoted in 1 SEDG-
WICK ON DAMAGES § 350, at 690 (citing SAYER
ON DAMAGES 220). Punitive damages were thus established
as a fundamental method by which the misuse
of power could be deterred. See generally Continuity of
Punitives, 42 AM. U. L. REV. at 1287-89, 1292-96.
American courts early accepted this same function
for punitive damages. See, e.g, Genay v. Norris, 1 S.C. L.
6 (1784) (awarding vindictive damages against physician
who spiked enemy's drink with toxin causing "extreme
and excruciating pain"); Coryell v. Colbaugh, 1 N.J.L. 77
(1791) (holding that injuries of an "atrocious and dishonorable
nature" call for exemplary damages "for example's
sake, to prevent such offenses in the future");
Tillotson v. Cheetham, 3 Johns. 351 (N.Y. Sup. Ct. 1808)
(citing [**89] Huckle for rule that exemplary damages
are appropriate when personal injury is small but liberty
interests are at stake); Hazard v. Israel, 1 Binn. 240 (Pa.
1808) (permitting punitive damages against Sheriff for
misconduct of his deputy in executing writ, in absence of
actual damages).
Early in the course of Texas jurisprudence, this
Court recognized that by awarding punitive as well as
compensatory damages in certain cases the law "blends
together the interests of society and the aggrieved individual,
and gives damages not only to recompense the
sufferer, but to punish the offender." Graham v. Roder, 5
Tex. 141, 149 (1849). Soon thereafter we noted that punitive
damages also serve to deter future misconduct by
setting "a public example to prevent the repetition of the
act." Cole v. Tucker, 6 Tex. 266, 26 (1851). Our reliance
on this remedy predated even the first relevant writing by
the United States Supreme Court that
it is a well-established principle of the
common law, that in actions of trespass
and all actions on the case for torts, a jury
may inflict what are called exemplary,
punitive or vindictive damages upon a
defendant, having in view the enormity
[**90] of his offense rather than the
measure of compensation to the plaintiff.
Day v. Woodworth, 54 U.S. 363, 14 L. Ed. 181 (1851).
Sufficient importance was attached to punitive
damages that they were accorded constitutional stature.
See TEX. CONST. art. XII, § 39 (1869) (providing that

one "committing a homicide through wilful act or omission,
shall be responsible in exemplary damages"). 9
While many new provisions added by this Convention 10
were later rejected as the misdeeds of Radical Republicans,
this particular reform was embraced by the elected
delegates of 1875. After debate and rewording, 11 the
delegates adopted and the [*38] people of Texas ratified
as part of our fundamental governing law the requirement
that anyone "committing a homicide, through
wilful act, or omission, or gross neglect, shall be responsible,
in exemplary damages." TEX. CONST. art. XVI, §
25. Texas is the only state in the nation with such a provision.
9 Delegate F.W. Sumner's motion to strike this
provision was defeated 40 to 29. 1 DEBATES OF
THE RECONSTRUCTION CONVENTION OF
1868 756 (1870). As approved, it read:
Every person, corporation or
company, that may commit a
homicide through wilful act or
omission, shall be responsible in
exemplary damages to the widow,
heirs, legal representatives or
creditors, of his or her body, or
such of them as there may be,
separately and consecutively,
without regard to any criminal
proceeding that may or may not be
had in relation to the homicide.
[**91]
10 See Quinlan v. Houston & Tex. Central Ry.,
34 S.W. 738, 744 (Tex. 1896) (explaining that,
pursuant to a proclamation of U.S. President Andrew
Johnson, this convention met to restore the
Constitution of 1845 and disavow the 1861 Secession
Convention); see also Grigsby v. Peak,
57 Tex. 142, 145, 150-51 (1882).
11 The Committee on General Provisions,
chaired by Delegate C.S. West of Travis County,
reported a proposed section identical to the 1869
Constitution, except for punctuation and the
omission of the phrase, "separately and consecutively."
JOURNAL OF THE 1875 CONSTITU-
TIONAL CONVENTION 557 (1875). The only
further change made was on the motion of Delegate
William H. Stewart of Galveston County to
add "or gross neglect" after "omission." Id. at
701.
Later Texas jurisprudence continued to emphasize
that punitive damages serve essential deterrent and retributive
functions:
As a punishment, exemplary damages
are designated not only as a satisfaction to
the injured person, but likewise as a punishment
for the guilty, to deter from any
such proceeding in the future, [**92]
and as a proof of the detestation of the jury
to the act itself. The theory of exemplary,
punitive, or vindictive damages . . .
involves a blending of the interests of society
in general with those of the aggrieved
individual in particular.
Foster v. Bourgeois, 253 S.W. 880, 885 (Tex. Civ. App.
1923), aff'd, 113 Tex. 489, 259 S.W. 917 (Tex. 1924). 12
III.
12 See also Lunsford v. Morris, 746 S.W.2d
471, 471-72 (Tex. 1988); Hofer v. Lavender, 679
S.W.2d 470, 474-75 (Tex. 1984); Pace v. State,
650 S.W.2d 64, 65 (Tex. 1983); Pan Am. Petroleum
Corp. v. Hardy, 370 S.W.2d 904, 908 (Tex.
Civ. App.--Waco 1963, writ ref'd n.r.e.); Burlington-Rock
Island R.R. v. Newsom, 239 S.W.2d
734, 737 (Tex. Civ. App.--Waco 1951, no writ);
Schutz v. Morris, 201 S.W.2d 144, 147 (Tex. Civ.
App.--Austin 1947, no writ).
Rewriting history to characterize our civil courts
solely as forums for compensation, the majority objects
to punitive damages as "overcompensation" -- a true
"windfall." [**93] S.W.2d at . But punitive
damages have always served a broader function than that
of compensation. See, e.g., Linthicum v. Nationwide Ins.
Co., 150 Ariz. 326, 723 P.2d 675, 679 (Ariz. 1986) (en
banc) (besides punishing the wrongdoer and deterring
similar conduct, punitive damages serve the purpose of
"preserving the peace, inducing private law enforcement,
compensating victims for otherwise unrecoverable losses,
and financing the costs of litigation"); DAN B.
DOBBS, REMEDIES § 3.9 at 205 (1st ed. 1973) (availability
of punitive damages encourages civil plaintiffs to
act as private attorneys general).
Similarly, in complaining of "overdeterrence,"
S.W.2d at , the majority can only mean that abuse of
policyholders by insurers, as well as other abuse of ordinary
citizens by the powerful, has been so curtailed that
our existing level of deterrence can be reduced by eliminating
this one important element. But see Leigh v.
Engle, 858 F.2d 361, 368 (7th Cir. 1988) (recognizing
that "there is no way to overdeter" failure by fiduciary to
attempt to perform fiduciary duties). Indeed, "overdeterrence"
is an unusual new term that has appeared [**94]

previously neither in Texas jurisprudence nor in ordinary
dictionaries; rather it seems to be a recent invention of
the law and economics school. Perhaps the majority
subscribes to that perspective, which maintains that
compensatory tort law should not prevent wrongly
caused injuries, but rather encourage misconduct to the
extent that its economic benefit outweighs its cost.
RICHARD A. POSNER, ECONOMIC ANALYSIS OF
THE LAW 147-52, 176-77 191-95 (3rd ed. 1986). The
function of the tort system based on a negligence standard
is said to be merely the "deterrence of inefficient accidents."
Id. at 187 (emphasis added).
To the extent that punitive damages are obtainable,
courts "implicitly reject the economic view that the optimal
level of violations is greater than zero." DOUG-
LAS LAYCOCK, REMEDIES 607, 612 (1985) (citing
Grimshaw v. Ford Motor Co., 119 Cal. App. 3d 757, 174
Cal. Rptr. 348 (Cal. Ct. App. 1981) (upholding $ 125
million punitive damage award on grounds that defendant
exposed individuals to extreme risk after calculating
that it would be more profitable to let the accidents happen
and pay compensatory damages, than to spend the
money necessary to prevent the accidents); [**95] and
Brown v. Missouri, Pac. R.R., 703 F.2d 1050 (8th Cir.
1983) (same)). See also Wangen v. Ford Motor Co. 97
Wis. 2d 260, 294 N.W.2d 437, 451 (Wis. 1980) ("[Were it
not for punitive damages,] some may think it cheaper to
pay damages or a forfeiture than to change a business
practice."); Sturm, Ruger & Co. v. Day, 594 P.2d 38, 47
(Alaska 1979) ("threat of punitive damages serves a deterrence
function in cases . . . in which it would [*39]
be cheaper for the manufacturer to pay compensatory
damages to those who did present claims than it would
be to remedy the product's defect"); Haslip, 111 S. Ct. at
1045 (listing "the degree of reprehensibility" and "profitability"
of misconduct as factors for "determining
whether a punitive award is reasonably related to the
goals of deterrence and retribution").
IV.
That Transportation did not timely challenge its liability
for bad faith insurance practices 13 does not slow
the majority in the least from pontificating on this subject.
This is part of a pattern now prevalent here of adjusting
the law to fit the majority's social preferences
without regard to whether a litigant has properly sought
relief. See General [**96] Motors v. Saenz, 873
S.W.2d 353, 1993 Tex. LEXIS 159, 37 Tex. Sup. J. 176,
184 (Nov. 24, 1993) (Doggett, J., dissenting).
13 Only within this month, more than a year
after it filed its application for writ of error, did
Transportation seek to amend its application to
challenge its liability on the bad faith claim. This
motion was properly denied.
Broadly characterizing Lyons v. Millers Casualty
Ins. Co., 866 S.W.2d 597 (Tex. 1993), the majority now
insists that there can be "no evidence" of bad faith when
"the jury . . . decides the insurer was simply incorrect
about the factual basis for its denial of the claim" or a
"simple disagreement among experts" occurs over coverage.
S.W.2d at . At best these rules beg the
important questions appellate courts are charged with
answering. The evidence is often contradictory as to
whether the insurer was "simply wrong." When finding a
breach of the duty of good faith and fair dealing in response
to a properly submitted charge, a jury seldom
indicates [**97] that it "decided the insurer was simply
wrong." Nor are disagreements among experts usually
"simple." These new rules have only served to promote
unconstitutional factfinding by giving credence to expert
opinion that the majority preferred, but which the jury
could easily have found entirely incredible, Lyons, 866
S.W.2d at 604-05 (Doggett, J., dissenting), and by categorically
limiting solely to coverage, evidence that the
jury could have interpreted as implicating both coverage
and bad faith. Id. at 603-04; Dominguez, 873 S.W.2d at
(Doggett, J., dissenting). As further authority for its new
approach, the majority glibly asserts that "a brick is not a
wall." S.W.2d . Conducting a whole new mode
of review based on this short aphorism, however, the
majority is likely to use it as a sledgehammer, reducing
to piles of rubble the fact-finding edifices which the
Constitution and a complex set of procedures carefully
entrust juries to assemble.
Even more remarkably, considering that bad faith
liability is not at issue here, the majority additionally
appears to make its first embrace of the so-called bona
fide dispute rule. S.W.2d [**98] at (citing National
Union Fire Ins. v. Hudson Energy Co., 780 S.W.2d
417 (Tex. App.--Texarkana 1989), aff'd on other
grounds, 14 811 S.W.2d 552 (Tex. 1991)). As applied in
Hudson, this rule appears rather narrow: an insurer's
failure to pay can evidence malice and, if arbitrary and
capricious, gross negligence, absent a bonafide controversy
over coverage; but such a dispute cannot be created
by "a strained and unconscionable interpretation of policy
coverage." 780 S.W.2d at 427. Such a rule is not,
however, well-suited for the narrow type of review permitted
this Court by the Texas Constitution. 15 By having
this [*40] Court determine whether the coverage dispute
is truly bona fide, the majority promotes yet another
mechanism for our unconstitutionally engaging in factfinding.
16
14 Hudson Energy involved the reversal by the
court of appeals of a bad faith judgment on no

evidence grounds based at least in part on the
plaintiff's own testimony that the claims adjustor
had not unreasonably delayed the claim. 780
S.W.2d at 426-27. Since the policyholder never
appealed this part of the judgment, we never considered,
much less "affirmed," the court of appeals'
analysis of the bad faith claim.
[**99]
15 See Wilson v. Wilson, 145 Tex. 607, 201
S.W.2d 226, 227 (Tex. 1947) ("[The] Supreme
Court is not invested with the power to determine
facts."); Choate v. San Antonio & A.P. Ry., 91
Tex. 406, 44 S.W. 69, 69 (Tex. 1898) (Constitution
restricts this Court to questions of law). As
we said in Browning-Ferris, Inc. v. Reyna, 865
S.W.2d 925, 928 (Tex. 1993),
In reviewing a "no evidence"
point, this Court "must consider
only the evidence and inferences
tending to support the jury's finding,
viewed most favorably in
support of the finding, and disregard
all contrary evidence and inferences."
Havner v. E-Z Mart
Stores, Inc., 825 S.W.2d 456, 458
(Tex. 1992); State v. $ 11,014.00,
820 S.W.2d 783 (Tex. 1991); Garza
v. Alviar, 395 S.W.2d 821, 823
(Tex. 1965).
16 The majority, discussing appellate review of
punitive damage awards, laments the constitutional
limitations on its ability to review and reverse
jury findings. S.W.2d at .
This rule was appropriately subjected to severe criticism
in Nationwide Mutual Ins. Co. v. Crowe [**100] ,
857 S.W.2d 644, 649 n.1 (Tex. App.--Houston [14th
Dist.] 1993, writ denied), since some categories of insurance
claims almost always will give rise to coverage
controversies. Such a dispute may well develop without
bad faith, but it is also conceivable that delay, even by an
insurer with an otherwise legitimate dispute, may constitute
bad faith. A central tenet of our decisional law is that
claims for insurance contract coverage are distinct from
those in tort for bad faith; resolution of one does not determine
the other. Aranda v. Insurance Co. of North
America, 748 S.W.2d 210, 214 (Tex. 1988). The nature of
a policyholder's breach of contract claim against the insurance
company "is not controlling as to the question of
breach of the duty of good faith and fair dealing." Viles v.
Security Nat'l Ins. Co., 788 S.W.2d 566, 567 (Tex. 1990).
Certainly an insurer who willfully fails to investigate a
claim, and delays and denies coverage with no reasonable
basis, should not be freed from responsibility for its
misconduct simply because it belatedly uncovers a contractual
defense.
By adopting the ambiguous bona fide dispute rule,
the majority may be enabling insurers to defeat [**101]
bad faith claims merely by bringing a challenge to coverage.
Today's opinion offers a perverse incentive for
insurers to manufacture or accentuate coverage disputes
and further delay payment of claims.
V.
A.
For the very few types of bad faith claims which can
henceforth be established, the majority now seeks to bar
recovery for punitive damages. Citing only foreign authorities,
today's opinion imposes an unusual rule with
absolutely no basis in Texas law that punitive damages
are recoverable only when the injury risked by the insurer's
misconduct is "independent and qualitatively different
from the sort of injuries that typically result from bad
faith or breach of contract." 17 S.W.2d at . This
declaration that the injury for punitive damages purposes
must be different from that recoverable for bad faith
breach of contract apparently represents a notorious first
in our national jurisprudence. 18 Of course, no Texas authority
exists for the bold new claim that
17 Neither Texas case cited by the majority is
relevant. Jim Walter Homes, Inc. v. Reed, 711
S.W.2d 617, 618 (Tex. 1986), stands only for the
well-accepted proposition that exemplary damages
cannot be recovered in the absence of a tort.
In Ware v. Paxton, 359 S.W.2d 897, 899 (Tex.
1962), the type of conduct of the defendant, not
the nature of the injury to the plaintiffs, was the
reason for rejecting such damages.
[**102]
18 At best, two of the nine foreign cases cited,
S.W.2d at , Shimola v. Nationwide Ins. Co.,
25 Ohio St. 3d 84, 495 N.E.2d 391, 392 n.1, 393
(Ohio 1986) and Guarantee Abstract & Title Co.
v. Interstate Fire & Cas. Co., 232 Kan. 76, 652
P.2d 665, 668 (Kan. 1982), merely hold that punitive
damages are not recoverable on a contract
claim; neither involved viable tort claims. See
also Glenn v. Fleming, 247 Kan. 296, 799 P.2d
79, 89 (Kan. 1990) (Kansas does not recognize
the tort of breach of duty of good faith and fair
dealing).
In a not too subtle manner, the majority
seeks to incorporate into Texas law the law of
other jurisdictions that refuse entirely to subject

insurers to any liability for bad faith torts. See
S.W.2d at , n.9.
an insurance carrier's refusal to
pay a claim cannot justify punishment
unless the insurer was actually aware that
its action would probably result in extraordinary
harm not ordinarily associated
with breach of contract or bad faith denial
of a claim.
S.W.2d at . Rather [**103] this simply constitutes
a new edict that punitive damages liability is hereby
eliminated for virtually all insurance company conduct --
no matter how [*41] morally reprehensible and intentionally
harmful. 19
19 This ruling also conflicts with the
well-established law in most jurisdictions recognizing
the bad faith tort, which allow punitive
damages where an insurer willfully or recklessly
withholds policy benefits, without requiring that
the insured suffer extensive consequential damages.
See, e.g., Continental Assurance Co. v.
Kountz, 461 So. 2d 802, 809 (Ala. 1984); Hawkins
v. Allstate Ins. Co., 152 Ariz. 490, 733 P.2d
1073, 1079-80 (Ariz. 1987); Employers Equitable
Life Ins. Co. v. Williams, 282 Ark. 29, 665 S.W.2d
873, 873-74 (Ark. 1984); Hagel v. Blue Cross and
Blue Shield of North Carolina, 91 N.C. App. 58,
370 S.E.2d 695, 699 (N.C. App. 1988); Berry v.
Nationwide Mut. Fire Ins. Co., 181 W. Va. 168,
381 S.E.2d 367, 374 (W. Va. 1989).
A one-dimensional definition of "extraordinary
[**104] harm" or "extreme degree of risk" can be easily
employed to insulate those responsible for outrageous
conduct:
This majority can simply squelch by
branding as "non extreme" any legitimate
evidence that stands in the way of a preferred
outcome. Such use of the word
"extreme" merely provides another elastic
device for an appellate court to sweep
away any evidence inconsistent with the
result it wants.
To the extent that what makes a risk
"extreme" is a function of any thing other
than a judicially desired result, the sole
determinant appears to be the probability
that harm will occur. This is only one de-
terminant of the "extremity" of a risk;
equally important is the character of the
wrongful conduct involved. Punitive
damages should be tied to the outrageousness
of that conduct.
Wal-Mart Stores, Inc. v. Alexander, 868 S.W.2d at 334
(Tex. 1993) (Doggett, J., dissenting). This focus solely on
the degree of harm to a particular individual conflicts
with the principle underlying punitive damages, which
views the harm as directed to the individual as a part of
society at large. Angela P. Harris, Rereading Punitive
Damages: Beyond the Public/Private Distinction [**105]
, 40 Ala. L. Rev. 1079, 1107 (1989). The more outrageous
misconduct seems to a group of twelve ordinary
citizens representing the collective voice of the community,
the greater are society's interests in deterrence and
punishment. See also Michael Rustad, In Defense of Punitive
Damages in Products Liability: Testing Tort Anecdotes
with Empirical Data, 78 Iowa L. Rev. 1, 88
(1992) [hereinafter Punitive Damages].
This case illustrates the arbitrary use to which the
majority can put this new emphasis on separate individualized
injury, distinct from that associated with bad faith
and breach of contract injuries. Juan Moriel's distress
was neither ordinary nor insignificant. He, in the words
of the court of appeals,
received an injury that affected an intimate
and personal part of his life. He
was sued. He resorted to heavy drinking
and his marriage was jeopardized.
814 S.W.2d at 150. Substituting a rarified view perceived
from the top of the Supreme Court building in
Austin for the moral outrage of the jury in El Paso
County, the majority patronizingly labels "genuine", but
not worth deterring, Moriel's fear and trauma of struggling
with the resistant Transportation [**106] Insurance
Company to obtain the means to recover his full
masculinity.
B.
Still not satisfied that it has sufficiently insulated
insurers from responsibility to their policyholders, the
majority deliberately misconstrues Williams v. Steves
Industries, 699 S.W.2d 570, 573 (Tex. 1985), in a way
that effectively reverses the definition and proof of gross
negligence contained in this widely applied precedent.
What the majority cites as a "suggestion" of Williams,
S.W.2d at , n. 11, is in fact its holding; Williams identifies
alternative objective and subjective tests for establishing
the requisite mental state for gross negligence:

We held in Burk Royalty that the defendant's
state of mind distinguishes gross
negligence from negligence; however, we
also recognized that a test requiring the
plaintiff to prove gross negligence by direct
evidence of a defendant's subjective
state of mind would leave outrageous
conduct unpunished. Therefore, we held
that "[a] mental state may be inferred
from actions. All actions or circumstances
indicating a state of mind amounting to a
conscious indifference must be examined
in [*42] deciding if there [**107] is
some evidence of gross negligence." Burk
Royalty, 616 S.W.2d at 922. We reaffirm
our holding in Burk Royalty that the
plaintiff need not prove the defendant's
subjective state of mind by direct evidence.
Thus, the test for gross negligence is
both an objective and subjective test. A
plaintiff may prove a defendant's gross
negligence by proving that the defendant
had actual subjective knowledge that his
conduct created an extreme degree of risk.
In addition, a plaintiff may objectively
prove a defendant's gross negligence by
proving that under the surrounding circumstances
a reasonable person would
have realized that his conduct created an
extreme degree of risk to the safety of
others.
699 S.W.2d at 573 (emphasis added). 20
20 It is particularly disingenuous for the majority
to refer to this holding as a "suggestion,"
while relying on commentary quoting this very
passage as an important holding. See John T.
Montford & Will G. Barber, 1987 Texas Tort
Reform: the Quest for a Fairer and More Predictable
Texas Civil Justice System (pt 2.), 25
Hous. L. Rev. 245, 324 (1988).
[**108] The majority today decides to extirpate
this passage not by expressly overruling Williams, but by
characterizing its clear and unmistakable language as
"misleading." 21 S.W.2d at . Up until now, neither
we nor any of the other state or federal courts that have
had occasion to interpret Williams have found anything
misleading about this language. In Clifton v. Southern
Pacific Transp. Co., 709 S.W.2d 636, 640 (Tex. 1986),
we reiterated that
21 As in Alexander, 868 S.W.2d at 325-26, the
majority plays word games with the terms "objective"
and subjective" to obfuscate the clear
language of Williams. There are two components
to gross negligence: (1) the mental state of the
defendant and (2) the degree to which his conduct
puts the plaintiff at risk. As the numerous authorities
cited above explain, the subjective and objective
tests identified in Williams are both used
to determine whether the defendant possessed the
requisite mental component, i.e. conscious indifference.
The majority does not use the words
"subjective" and "objective" in this way, however,
perhaps because it denies that Williams even
permitted an objective test for conscious indifference.
The majority now confusingly chooses to
refer to the entire first component, the mental
state, as the "subjective" component of gross negligence.
S.W.2d at ; Alexander, 868
S.W.2d at 326. The term "objective" no longer
refers to one test for the defendant's mental state;
but rather to the second component of gross negligence,
the extreme degree of risk. S.W.2d
at ; Alexander, 868 S.W.2d at 326.
[**109]
requiring the plaintiff to prove gross
negligence only by direct evidence of a
defendant's subjective state of mind . . .
raises an almost insurmountable barrier to
recovery. Recognizing this dilemma, we
held in Burk Royalty that a mental state
may be inferred from actions. Considering
all actions or circumstances indicating a
state of mind amounting to conscious indifference
to the rights of others, a plaintiff
may objectively prove a defendant's
gross negligence by proving that, under
the surrounding circumstances, a reasonable
person would have realized that his
conduct created an extreme degree of risk
to the safety of others.
(citations omitted). This too has been the consistent
reading of Williams by every Texas court of appeals that
has had occasion to interpret it.
The federal courts have similarly recognized that

Texas courts have made clear that the
state of mind required to constitute gross
negligence can be shown by objective evidence
. . . proving that, under the circumstances,
a reasonable person would have
realized that his conduct created an extreme
degree of risk to the safety of others.
Denham v. United States, 834 F.2d [**110] 518, 522
(5th Cir. 1987); see also Toomer v. United Resin Adhesives,
Inc., 652 F. Supp. 219, 225-26 (N.D. Ill. 1986)
(Texas law allows proof of "defendant's gross negligence
by proving that under the surrounding circumstances a
reasonable person would have realized that his conduct
created an extreme degree of risk to the safety of others").
All of these rulings say the opposite of what the
majority now adopts as new state law. No longer can
common law gross negligence be established by evidence
of circumstances which would have shown an
awareness [*43] of an extreme risk by a reasonable
person. 22
22 Although this is not a case in which the new
statutory definition of gross negligence applies,
see infra, note 32, and accompanying text, the
majority suggests that its new common law definition
of gross negligence should be used in all
cases, even those subject to the Tort Reform Act.
S.W.2d at . Although in this dictum the majority
takes the position that the legislature has
eliminated Williams' objective test for determining
actual conscious indifference, the majority
also asserts that the "Tort Reform Act codified
the common law definition and made no changes
affecting the basic elements of gross negligence."
S.W.2d at . The Senate floor debate on the
statute in question reveals no mention of either
Williams or any desire to alter the objective
method of proving conscious indifference. To the
contrary, the legislative sponsor, Senator John
Montford, suggested that gross negligence could
encompass highly risky acts of ordinary negligence
which result from mistaken, rather than
knowledgeable, behavior. See Debate on Tex.
S.B. 287 on the Floor of the Senate, 70th Leg. 3-9
(May 6, 1987) (transcript of tapes available from
Senate Staff Services Office). Senator Montford
further explained that the statutory definition encompasses
conduct that falls between criminal
conduct and ordinary negligence. Id. In other
words, the requirements for a culpable mental
state should be the least restrictive for ordinary
negligence (i.e. no knowledge or intent required)
and the most narrow for criminal negligence,
while the new statutory civil gross negligence
falls somewhere in the middle. Yet the statutory
definition of criminal negligence incorporates an
objective standard of knowledge like that set
forth in Williams:
A person acts with criminal
negligence . . . when he ought to
be aware of a substantial and unjustifiable
risk that the circumstances
exist or the result will occur.
TEX. PEN. CODE § 6.03(d) (emphasis added). If
one can be liable for criminal penalties for failing
to be aware of a substantial and unjustifiable risk,
then, as suggested by Senator Montford during
debate, that same failure creates liability for punitive
damages. The Tort Reform Act codified the
objective test for conscious indifference found in
the common law until today. For this reason, and
because this case is not governed by the statutory
definition of gross negligence, today's radical redefinition
of common law gross negligence
should not be controlling in future cases subject
to the statutory definition.
Under most circumstances, it is such exchanges
by the legislators while considering the
enactment that offer an indication of legislative
intent. Compare General Chemical Corp. v. De
La Lastra, 852 S.W.2d 916, 923 (Tex. 1993) (the
post debate professed "intent of an individual
legislator, even a statute's principal author, is not
legislative history controlling the construction to
be given a statute."); C&H Nationwide, Inc. v.
Thompson, 1993 Tex. LEXIS 161, 37 Tex. Sup. J.
149, 165 (Nov. 24, 1993) (Doggett, J., concurring)
(accepting legislative author's post debate
description of legislative process because rather
than being an "after-the-fact, self-serving [statement]
of a single legislator or an attempt to embellish
and expand language that the legislature
did not approve, [it was] really the legislative
equivalent of an admission against interest").
[**111] Williams' articulation of an objective
standard of mental culpability was solidly rooted in this
Court's past precedent. In Brooke v. Clark, 57 Tex. 105,
106 (1882), for example, punitive damages were awarded
against a physician who, during the birth of the plaintiff,
tied "a ligature around [the plaintiff's] penis, instead
of the umbilical cord, . . . whereby the glands of the pe-

nis came entirely off." Even though no evidence of the
physician's actual mental state was introduced to prove
conscious indifference, 23 the jury verdict was upheld:
23
The testimony in this case
shows that the defendant was
skillful in his profession; that he
seemed anxious to discharge his
whole duty; desired to be sent for
to adjust the ligature should it become
detached; no reason or motive
is shown why he should carelessly,
much less willfully, have
caused the injury; on the contrary,
his own interest and reputation, to
say nothing of the ordinary
promptings of humanity to render
aid and not to inflict injury under
such circumstances, would seem
conclusively to have prohibited
intentional wrong.
57 Tex. at 117 (Bonner, J., dissenting).
[**112]
The criminal indifference of the defendant
to results was a fact which the jury
were at liberty to infer from the gross
mistake which he either made or permitted
to be made, and the grievous injury
which was liable to result and did result
therefrom. If there was any other evidence
tending to negative any wrong intent or
actual indifference on his part, still the
existence or non-existence of such criminal
indifference was a question of fact for
the jury, and was rightly submitted to
them. If the conduct of the defendant in
the discharge of his duty . . . was so
grossly negligent as to raise the presumption
of his criminal indifference as to results,
we very greatly doubt whether it
should avail to exempt him from exemplary
damages, for him to show that he
had no bad motive, and that he acted otherwise
in a manner tending to show that
he was not, at heart, indifferent.
[*44] 57 Tex. at 113-14. Brooke and Williams are entirely
consistent with fundamental principles of law obscured
and denigrated by the majority, such as the im-
portant role of punitive damages in enforcing standards
of conduct. 24
24
When we are dealing with that
part of the law which aims more
directly than any other at establishing
standards of conduct, we
should expect there more than
elsewhere to find that the tests of
liability are external and independent
of the degree of evil in the
particular person's motives or intentions.
HOLMES, THE COMMON LAW at 43.
[**113] In reversing Williams, however, the majority
both redefines gross negligence to provide special
protection to those who choose not to be aware of the
consequences of their actions and creates a new evidentiary
barrier to proving this restricted redefinition of
gross negligence, thereby taking from juries the ability to
pass community judgment on whole categories of
wrongdoers. The majority seems eager to free those
causing grievous injury to others from the obligation to
reasonably think or perceive or to summon up even the
most minimal awareness possessed by a reasonable person.
Ultimately, today's writing holds that an insurance
company can go unpunished unless the policyholder it
victimized can prove not only unusual harm from the
misconduct but also that the insurer knew or expected the
unusual to happen.
Although I would not prejudge the trial court's articulation
of the facts on remand, it is important to
acknowledge that the majority has deliberately disregarded
evidence of gross negligence contained in the
record. According to Moriel, actual conscious indifference
is shown by the testimony of Transportation's adjustor,
who acknowledged the wrongfulness of an insurer
[**114] in failing to pay submitted medical bills unless
a controversion was filed with the Industrial Accident
Board. 25 Yet Transportation failed to controvert any of
four bills that it refused to pay until settlement. Payment
of one of these was denied, and ultimately delayed more
than two years after the request for treatment, even
though Moriel had received permission for treatment
from Transportation, after being sent back three times to
three different physicians for referrals. Transportation's
adjustor described her practice of sometimes consciously
declining to notify an injured worker of the insurer's decision
to deny payment. Because of her intentional decision
not to respond to Moriel's request, he was forced to

defend a collections suit. The adjustor admitted, moreover,
that such delays could cause harm additional to that
resulting from the work-related injury.
25 Apparently this bothered the adjustor more
than it does the majority. Today's opinion specifically
seems to offer insurers a complete excuse
for engaging in this practice, which Transportation's
own agent conceded to be wrong.
S.W.2d at n.18.
[**115] VI.
A.
Attacks on the concept of punitive damages are certainly
not new. At about the time that Texas was enshrining
this remedy in its fundamental governing law,
another state's highest court decried punitive damages as
"a monstrous heresy . . . an unsightly and an unhealthy
excrescence, deforming the symmetry of the body of the
law." Fay v. Parker, 53 N.H. 342, 382 (1873). More recent
opposition, while conceding that "punitive damages
may have served a valuable function in the scheme of
ancient law," reveals the same philosophy, claiming that
the "doctrine is monstrously archaic" and calling for its
abolition or emasculation. James B. Sales & Kenneth B.
Cole, Jr., Punitive Damages: A Relic That Has Outlived
Its Origin, 37 Vand. L. Rev. 1171, 1178 (1984).
If punitive damages cannot be formally eliminated,
opponents urge mechanisms for their effective elimination,
such as requiring that a jury find proof of gross negligence
"beyond a reasonable doubt." Id. at 1167. 26
[*45] To support such an abrupt change in our well
recognized jurisprudence, these opponents point to most
any case in which substantial punitive damages have
been assessed. See id. at 1141 [**116] n.117 (claiming
that the need for change is exemplified by the verdict
regarding the fiery deaths resulting from a conscious
corporate decision to avoid safer gas tank design in
Grimshaw v. Ford Motor Co., 119 Cal. App. 3d 757, 174
Cal. Rptr. 348 (Cal. Ct. App. 1981)); Punitive Damages,
78 IOWA L. REV. at 21 (discussing opponents' claims as
"theoretical and of the 'school of tort reform by anecdote'
or 'isolated fact'"); Stephen Daniels and Joanne Martin,
Myth and Reality in Punitive Damages, 75 Minn. L. Rev.
1, 14 (1990) (opponents use "horror stories and anecdotes"
rather than hard data).
26 Though flirting with such heightened proof
requirements, the majority finally decides that
this Court should not impose as a prerequisite for
punitive damages the same clear and convincing
evidence standard that the Legislature has already
rejected. See S.W.2d . I certainly agree
with this conclusion. Not only is such a standard
"not constitutionally compelled," id., it would also
represent a total divergence from one of the
most firmly established principles of our jurisprudence.
Only in an extraordinary circumstance
such as where we have been mandated to impose
a more onerous burden has this Court abandoned
the well established preponderance of the evidence
standard. See Addington v. Texas, 441 U.S.
418, 427, 60 L. Ed. 2d 323, 99 S. Ct. 1804 (1979).
Not until remand did we adopt a "clear and convincing
evidence" standard in civil commitment
cases. See State v. Addington, 588 S.W.2d 569,
570 (Tex. 1979); see also In the Interest of G.M.,
596 S.W.2d 846, 847 (Tex. 1980) (relying on Addington,
establishing that the clear and convincing
evidence standard applies to the involuntary
termination of parental rights).
[**117] The incidence and amount of punitive
damages may indicate a deficiency in our legal system or
may be reflective of a community determination of a
gross deficiency in conduct. Since punitive or exemplary
damages often emanate from most nonexemplary conduct,
in any fine tuning of the law, we must consider
what degree of change is justified by the empirical data.
B.
Available data demonstrates that punitive damages
are actually assessed far more infrequently than critics
suggest. After reviewing more than 25,000 civil jury
verdicts from 1981-1985 in 47 counties in 11 states, the
American Bar Foundation concluded that all four of the
central propositions 27 upon which those attacking punitive
damages rely are factually insupportable. See Daniels
and Martin, 75 Minn. L. Rev. at 4. Less than five
percent of all jury verdicts included findings of punitive
damages. Id. at 32 (Table II). With the exception of five
California counties, median 28 punitive damage awards in
the various jurisdictions were all below $ 40,000. Id. at
42 (Table VI). The American Bar Foundation's conclusions
are corroborated by the findings of a comprehensive
survey of products liability verdicts [**118] between
1965 and 1990 that:
27 "All other claims about the harmful effects
of punitive damages presume the accuracy of
[four] propositions": 1) punitive damages are
routinely awarded; 2) they are awarded in large
amounts; 3) the frequency and size of the awards
has been rapidly increasing; and 4) these phenomena
are national in scope. Daniels and Martin,
75 Minn. L. Rev. at 14.
28 Punitive damages critics consistently cite
the mean, or average, amount of punitive verdicts
as evidence that they are "skyrocketing," and
avoid mentioning the median, or figure above

which half of the verdicts fall. Daniels and Martin,
75 Minn. L. Rev. at 41. The median is much
more representative whenever there are more extreme
cases at one end of the distribution than the
other. Id. at 40 (citing HUBERT BLALOCK,
SOCIAL STATISTICS 69-70 (rev. 2d ed. 1979)).
Because there are a few very large punitive damages
claims, the median verdict, which is not
skewed by these exceptional cases, accords a
more accurate representation of the pattern of
verdicts as a whole.
[**119]
punitive damages are infrequently
awarded and often scaled down in the
post-trial period. . . . punitive damages
awards in nonasbestos products liability
cases decreased between 1986 and 1990.
29
29 MICHAEL RUSTAD, DEMYSTIFYING
PUNITIVE DAMAGES IN PRODUCTS LIA-
BILITY CASES: A SURVEY OF A QUARTER
CENTURY OF TRIAL VERDICTS 38 (Roscoe
Pound Foundation, 1991) [hereinafter DEMYS-
TIFYING PUNITIVE DAMAGES].
A similar survey of federal products liability verdicts
from 1982-84 found that punitive damages were
awarded and upheld on appeal in only three percent of
the cases. See WILLIAM M. LANDES & RICHARD A.
POSNER, THE ECONOMIC STRUCTURE OF TORT
LAW 302-07 (1987). 30
30 See also Michael J. Saks, Do We Really
Know Anything About the Behavior of the Tort
Litigation System -- And Why Not? 140 U. Pa. L.
Rev. 1147, 1251 (1992) (concluding that a wide
variety of data "are not consistent with the conclusion
that jury awards [for punitive damages]
have in general risen sharply"); J. O. Clements,
Comment, Limiting Punitive Damages: A Placebo
for America's Ailing Competitiveness, 24 ST.
MARY'S L.J. 197, 212-15 (1992) (rebutting former
Vice President Dan Quayle's contention that
punitive damages are both "freakish" and "routine").
[**120] [*46] Those who oppose our
longstanding reliance upon trial by jury automatically
assume that a sizeable verdict indicates an inappropriate
decision by the jury rather than by the wrongdoer. But
recent research emphasizes that the possibility of punitive
damages
discouraged firms from marketing
dangerous products or failing to recall
them. The vast majority of dangerous
products have been recalled, modified and
redesigned by their manufacturers . . .
The study's central finding is that bad
products were made better or taken off the
market. There is little evidence that good
products were withdrawn unnecessarily
by potential punitive damages exposure.
Punitive Damages, at 79-80. After identifying as examples
twenty-one products that were either improved or
recalled following punitive damages verdicts, id. at
81-82, the study concludes:
Restricting this remedy reduces the incentives
for safety and may tempt corporations
to put profits ahead of the public
interest. Eliminating punitive damages
would have the effect of lowering safety
standards. In the long run, the American
emphasis on safety, backed by the social
control of punitive damages, [**121]
will produce the top quality products
needed to compete in the international
marketplace.
Id. at 85. Moreover, punitive damages verdicts in 355
products liability cases nationwide for the period from
1965-1990, see DEMYSTIFYING PUNITIVE DAM-
AGES, at 23, compare with an estimated 29,000 deaths
and 33 million injuries annually that are associated with
consumer products. U.S. Consumer Product Safety
Commission, WHO WE ARE, WHAT WE DO 1 (1987).
Given the increasing size of the injury pool and myriad
other potential contributing factors to changes in punitive
damages verdicts, 31 the data for an abrupt, radical change
is simply lacking.
31 Even if the empirical data demonstrated an
increase in the frequency and amount of punitive
damages verdicts, more must be known:
Any inference about whether
the average size of awards or settlements
has gone up, down, or
remained level, in real terms, depends
upon knowing what the pool

[**122] C.
of injuries looks like. If the pool of
injuries has increased and the inherent
seriousness of the injuries
or the cost of repairing them has
increased, one should not be surprised
to find a commensurate increase
in cases or awards.
Saks, 140 U. Pa. L. Rev. at 1174.
So strong is the majority's desire to legislate concerning
punitive damages that it misinterprets a statute,
wholly inapplicable here, to provide a meaning contrary
to both its plain wording and the underlying legislative
intent. Since 1987 when the term "gross negligence" was
removed from common law development for most types
of tort actions and defined by legislative enactment, the
role for our judiciary on this subject has been limited
principally to statutory enforcement. Having been commenced
before the effective date of this statute, September
2, 1987, Moriel's claim is one of a limited number of
lawsuits still subject to the common law definition of
gross negligence. 32 Not content to decide only one of a
small and decreasing number of cases, the majority seeks
to rewrite a statute, which is in no way applicable here:
32 This statutory definition of gross negligence
may not apply to tort actions for bad faith. Stephen
Pate, Insurance Bad Faith: Defendant's
Perspective, in TEXAS TORTS IN THE 90'S at
C-10 (1992) ("It is an open question whether the
exemplary damages limitation applies to a common
law breach of the duty of good faith and fair
dealing."). However, with the majority's recent
rulings, there will now quite clearly be a small
and decreasing category of bad faith cases.
[**123]
"Gross negligence" means more than
momentary thoughtlessness, inadvertence,
or error of judgment. It means such an entire
want of care as to establish that the act
or omission was the result of actual conscious
indifference to the rights safety, or
welfare of the person affected.
TEX. CIV. PRAC. & REM. CODE § 41.001(5) (Supp.
1994). That the word "extreme" never appears in this
definition does not deter the frustrated legislators, who
compose the current majority, from adopting an amendment
to add an "extreme degree of risk" component.
[*47] S.W.2d at . To the extent that others may
share the majority's enthusiasm for eliminating punitive
damages, we have a forum in our democracy that can
weigh such conflicting views and evaluate the empirical
evidence in public hearings. The appropriate avenue for
relief in Texas is not through the type of crude manipulation
of the law that has occurred here but rather at the
Legislature -- the same place to which the "tort reformers"
turned in 1987. 33
33 As two scholars point out,
The debate [regarding punitive
damages] changed in the 1980's as
a part of an intense,
well-organized, and well-financed
political campaign by interest
groups seeking fundamental reforms
in the civil justice system
benefiting themselves.
Stephen Daniels and Joanne Martin, Myth and
Reality in Punitive Damages, 75 Minn. L. Rev. 1,
10 (1990). In fact, "since the mid-1980's, a majority
of states have enacted tort reforms curbing
punitive damages." Punitive Damages, 78 Iowa
L. Rev. at 6. The Texas debate played itself out in
the fight over passage of the 1987 tort reform
package, which has been well documented. Senator
John Montford's sponsorship of broad "tort
reform" legislation advanced by the insurance
industry and other lobby groups operating under
the title "Texas Civil Justice League" is described
in John T. Montford & Will G. Barber, 1987
Texas Tort Reform: the Quest for a Fairer and
More Predictable Texas Civil Justice System (pts.
1-2), 25 Hous. L. Rev. 59, 245, 324 (1988). That
battle resulted in, among other things, a statutory
cap on punitive damages to the greater of four
times compensatory damages or $ 200,000.
TEX. CIV. PRAC. & REM. CODE § 41.007
(1988). The constitutionality of that limitation is
not at issue here.
[**124] VII.
Punitive damages have played a necessary role in
preserving the public health and safety and societal confidence
in law enforcement. In today's complex technological
world that role retains continuing significance.
By penalizing those who consciously disregard others'
rights, punitive damages provide important incentives for
the implementation of critical safety measures. At the
same time, by holding accountable those actors whose
behavior society considers most outrageous, such dam-

ages reinforce the boundaries of acceptable conduct and
thereby instill greater public trust.
None of this, however, means our system is perfect
-- undoubtedly some defendants are improperly punished
just as some wrongdoers are unjustly assessed no punitive
damages. Thus, I favor improving our existing approach
rather than abandoning it. Today I would have
joined in an attempt to make that system more fair to the
wrongdoer, but I must dissent vigorously from today's
decision to engage in unprecedented wholesale revision
of the law of our state in order to protect the insurance
industry from the judgment of the community. 34 A
judge's desire to further a social policy objective has unfortunately
[**125] once again overcome sound jurisprudence.
34 Today's writing does, of course, represent
more than a special favor to the insurance industry;
it is equally applicable to any wrongdoer, including
those who continue to manufacture dangerous
products. S.W.2d at . The majority
has concluded generally that the deterrence of
wrongful conduct offered by punitive damages is
unnecessary because just "the prospect of being
sued and having to defend oneself have a substantive
deterrent effect" and compensatory
damages are a quite sufficiently "powerful deterrent."
Id. n.20

2006 Tex. App. LEXIS 979, *
3 of 3 DOCUMENTS
MARY JO NASCHKE d/b/a M. J. NASCHKE PUBLIC RELATIONS, Appellant v.
GULF COAST CONFERENCE d/b/a INTERNATIONAL WELLNESS CONFER-
ENCE and BOB KIBLER, INDIVIDUALLY, Appellees
NO. 14-04-00687-CV
COURT OF APPEALS OF TEXAS, FOURTEENTH DISTRICT, HOUSTON
SUBSEQUENT HISTORY: Petition for review filed
by, 03/24/2006
PRIOR HISTORY: [*1] On Appeal from County
Civil Court at Law No. 4. Harris County, Texas. Trial
Court Cause No. 779,174.
DISPOSITION: Affirmed.
COUNSEL: For Appellants: Anthony P. Griffin, Galveston,
TX.
For Appellees: Brian Jude McNamara, Kingwood, TX.
JUDGES: Panel consists of Justices Edelman, Seymore,
and Guzman.
OPINIONBY: Richard H. Edelman
OPINION:
Mary Jo Naschke d/b/a M. J. Naschke Public Relations
("Naschke") appeals a judgment notwithstanding
the verdict ("JNOV") granted in favor of Gulf Coast
Conference d/b/a International Wellness Conference
("Gulf Coast") and Bob Kibler, individually, on the
ground that the law allows recovery of attorney's fees
incurred due to a third party's wrongful act. We affirm.
As relevant to this appeal, Naschke was hired by
Gulf Coast to arrange advertising for its International
Wellness Conference (the "conference"). Naschke contracted
with the Houston Chronicle (the "Chronicle") to
run newspaper advertisements for the conference. The
Chronicle brought suit against Gulf Coast, its President,
Kibler, and Naschke, seeking payment for the advertisements.
Naschke countersued the Chronicle and filed
cross-claims against Gulf Coast and Kibler. The claims
asserted by and against the Chronicle were settled before
2006 Tex. App. LEXIS 979
February 7, 2006, Judgment Rendered
February 7, 2006, Opinion Filed
Page 1
trial, and Naschke obtained a jury verdict against Gulf
Coast and Kibler for the attorney's [*2] fees she incurred
in the preparation and trial of this lawsuit. However,
the trial court granted a JNOV in favor of Gulf
Coast and Kibler and entered a take-nothing judgment
against Naschke.
A trial court may grant a judgment notwithstanding
the verdict if there is no evidence to support one or more
of the jury findings on issues necessary to liability. Tiller
v. McLure, 121 S.W.3d 709, 713, 46 Tex. Sup. Ct. J. 632
(Tex. 2003). No evidence exists when, among other
things, the court is barred by rules of law from giving
weight to the only evidence offered to prove a vital fact.
Volkswagen of Am., Inc. v. Ramirez, 159 S.W.3d 897,
903, 48 Tex. Sup. Ct. J. 256 (Tex. 2004).
Naschke's sole issue on appeal contends that the trial
court erred in granting the JNOV because Texas law
allows the equitable recovery of attorney's fees incurred
due to a third party's wrongful act, and the evidence in
this case supports the jury verdict against appellees on
that claim.
The trial court's charge to the jury (the "charge")
contained the following instruction:
Unless provided by statute or by contract
of the parties, attorney's fees incurred by a
party to litigation are not recoverable
against an adversary, [*3] either in tort
or in a suit upon a contract. However,
where the natural and proximate consequences
of a wrongful act has been to involve
a plaintiff in litigation with others,
there may, as a general rule, be a recovery
in damages of the reasonable expenses
incurred in such prior litigation, against
the author of such acts, including the

compensation of attorney's fees; but such
expenses must be the natural and proximate
consequences of the injury complained
of and must have been incurred
necessarily and in good faith, and the
amount thereof must be reasonable.
(emphasis added). Questions 1 and 2 then asked the jury
whether Gulf Coast and Kibler, respectively, committed
a wrongful act that proximately caused the Chronicle to
file a lawsuit against Naschke. The jury answered "yes"
to each question. The damage question associated with
questions 1 and 2 asked for the amount of a reasonable
fee for the necessary services of Naschke's attorney in
this case, to which the jury responded "$ 23,500." Gulf
Coast objected to the charge and sought its JNOV on the
ground, among others, that this court has declined to
adopt an equitable exception to the rule requiring a statutory
or [*4] contractual basis for recovery of attorney's
fees. n1
n1 See Martin-Simon v. Womack, 68 S.W.3d
793, 797-98 (Tex. App.--Houston [14th Dist.]
2001, pet. denied).
Section 914 of the Restatement (Second) of Torts
provides:
(1) The damages in a tort action do not
ordinarily include compensation for attorney
fees or other expenses of the litigation.
(2) One who through the tort of another
has been required to act in the protection
of his interests by bringing or defending
an action against a third person is entitled
to recover reasonable compensation for
loss of time, attorney fees and other expenditures
thereby suffered or incurred in
the earlier action.
2006 Tex. App. LEXIS 979, *
Page 2
RESTATEMENT (SECOND) OF TORTS § 914 (1979).
In Turner, the Texas Supreme Court acknowledged the
theory of recovery set forth in section 914 but held that
its requirements were not met by the facts of that case
and did not otherwise expressly adopt or [*5] reject that
theory. See Turner v. Turner, 385 S.W.2d 230, 234, 8
Tex. Sup. Ct. J. 112 (Tex. 1964). Since then, the Court
has not again addressed the possible application of that
rule, and Texas intermediate courts of appeals opinions
have differed regarding whether it is applicable under
Texas law and, if so, its scope. n2
n2 See generally James Michael Stanton,
Recovering Attorney's Fees in Equity Under Texas
Law: Why Some Texas Courts of Appeal Have
It Wrong, 29 T. MARSHALL L.REV. 243 (2004).
Because we are bound to follow the existing laws of
the State, we are not at liberty to adopt a theory of recovery
that has not been enacted by the Legislature or
adopted by the Texas Supreme Court. Moreover, even if
section 914 had been adopted in Texas, it allows attorney's
fees to be recovered only where they have been
incurred due to the tort of another, n3 as contrasted from
any "wrongful act," as provided in the charge. Because
the charge did not define "wrongful act," it essentially
authorized [*6] the jury to award attorney's fees for any
act it considered wrongful, whether or not that act is
deemed wrongful under the law (and it would thereby
effectively preclude any appellate review of the evidence
to support such a verdict). Because Naschke's sole issue
cites no binding or well-reasoned authority (or rationale)
that supports allowing the recovery authorized by the
charge in this case, it fails to demonstrate that the trial
court erred in granting the JNOV. Therefore, Naschke's
issue is overruled, and the judgment of the trial court is
affirmed.
n3 RESTATEMENT (SECOND) OF TORTS
§ 914(2).
/s/ Richard H. Edelman
Justice

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842 S.W.2d 335, *; 1992 Tex. App. LEXIS 3188, **
LEXSEE 842 S.W.2D 335,AT 341
NATIONWIDE MUTUAL INSURANCE COMPANY d/b/a Nationwide Insurance
Company, Appellant v. Peter F. HOLMES, Appellee
SUBSEQUENT HISTORY: [**1]
Appeal No. 04-91-00263-CV
COURT OF APPEALS OF TEXAS, FOURTH DISTRICT, SAN ANTONIO
Rehearing Denied: December 10, 1992.
PRIOR HISTORY:
Appeal from the 225th District Court of Bexar
County. Trial Court No. 88-CI-16697. Honorable
Carleton B. Spears, Judge Presiding
DISPOSITION:
AFFIRMED IN PART; REVERSED AND
RENDERED IN PART.
LexisNexis (TM) HEADNOTES - Core Concepts:
COUNSEL:
FOR APPELLANT: Melvin A. Krenek, MELVIN
A. KRENEK & ASSOCIATES, 303 Concord Plaza,
7710 Jones Maltsberger Road, San Antonio, TX 78216.
FOR APPELLEE: R. Wes Johnson, Michael A.
Chovanec, CHOVANEC & JOHNSON, INC., One
International Centre, 100 N.E. Loop 410, Suite 925, San
Antonio, TX 78216.
JUDGES: Sitting: Blair Reeves, Chief Justice, Shirley
Butts, Justice, Orlando Garcia, Justice
OPINIONBY: BLAIR REEVES
OPINION:
[*336] OPINION
842 S.W.2d 335; 1992 Tex. App. LEXIS 3188
October 28, 1992, Delivered
October 28, 1992, filed
Page 1
This appeal challenges a judgment against an
insurance company that is based on a Stowers n1 cause
of action and the Deceptive Trade Practices Act (DTPA).
n1 G.A. Stowers Furniture Co. v. American
Indemnity Co., 15 S.W.2d 544 (Tex. Comm'n
App. 1929, holding approved).
The appellee asserts in a cross-point that the trial
court erred [**2] by not awarding him mandatory
statutory damages under Section 17.50(b)(1) of the
DTPA since he was awarded actual damages.
FACTS
Dr. Peter Holmes, appellee, had a traffic accident in
Houston with Jimmy Matheny on April 3, 1985. The
appellee hit the Matheny vehicle when the car in front of
[*337] him stopped suddenly. Jimmy Matheny's wife,
Glenda Matheny, was a passenger and was injured.
Property damage to appellee's car was under $ 500.00
while the property damage to appellant's car was $
672.68. The appellee had car insurance with
Nationwide Insurance Company (Nationwide) at the time
of the car accident, with a liability limit of $ 100,000.00
per person and $ 300,000.00 per occurrence.
Glenda Matheny sued the appellee and served him
with notice mid-September 1986 (Matheny lawsuit).
Matheny alleged that she suffered a whiplash type injury
and temporomandibular joint dysfunction (TMJ) from
the car accident. Nationwide's attorney, Tim Tunks,
responded to the lawsuit on behalf of Holmes.
One week before trial, Tunks advised Holmes that
he was negligent and there was a substantial possibility
that he could receive a verdict above the policy limits.

This evaluation [**3] was based on the fact that several
doctors confirmed that Matheny's TMJ resulted from the
accident. Additionally, Tunks received an economist's
report that estimated Matheny's economic damages at $
115,000.00 in addition to $ 10,000.00-$ 30,000.00 worth
of pain and suffering damages. Tunks advised Holmes
that Nationwide was not going to settle and advised him
to hire a lawyer.
Taking Tunks' advice, Holmes hired an attorney to
negotiate either a settlement within his policy limits or an
indemnification for damages in excess of his policy
limits. The fee agreement was as follows: (1) $ 2500.00
for handling pre-trial negotiations; and (2) $ 7500.00 if
Nationwide refused to settle or indemnify Holmes before
the first day of trial. The reason for the second part of
the fee schedule was that the attorney would have to
travel from San Antonio to Houston for the trial.
The Friday before trial, Matheny made a $
92,500.00 settlement offer which was within policy
limits. The next day Nationwide's Claims Attorney,
Tunks, appellee's attorney, and the appellee had a
telephone conference. The Claims Attorney was aware of
the following things: (1) the Matheny settlement offer
was within policy [**4] limits; (2) Tunks, the attorney
hired by Nationwide, recommended that the lawsuit be
settled for between $ 90,000.00 and $ 100,000.00; (3)
liability was probable; (4) Holmes would incur an
additional $ 7500.00 in attorney fees if the case went to
trial; and (5) Holmes wanted the case settled for $
92,500.00. Also, the Claims Attorney opined that the
suit should be settled for an amount up to $ 100,000.00
but refused to settle for $ 92,500.00 because the
Nationwide Claims Manager would not authorize the
settlement. Additionally, the Claims Manager would not
indemnify Holmes for any excess judgment. The Claims
Attorney stated that if the judgment was more than $
104,000.00 or $ 105,000.00 then Nationwide would pay
bankruptcy costs for the appellee. Alternatively,
Nationwide suggested that Holmes pay the difference
between what they were willing to pay ($ 75,000.00) and
the $ 92,500.00 settlement offer. The Claims Attorney
had Tunks ask the plaintiff whether she would be
interested in a $ 80,000.00 settlement with a $ 14,000.00
future medical option. The plaintiff rejected this idea.
Throughout pre-trial discovery, there were several
settlement demands which were not presented to [**5]
the appellee.
The Claims Attorney sent Holmes a letter
confirming the telephone conference. He also reiterated
Nationwide's refusal to settle or indemnify Holmes but
agreed to pay for the costs and expenses of a bankruptcy
proceeding, at Nationwide's option, in the event of an
adverse judgment in excess of his policy limits. That
same day, a Nationwide Claims Attorney from
842 S.W.2d 335, *; 1992 Tex. App. LEXIS 3188, **
Page 2
Columbus, Ohio told the Houston Claims Attorney that
Nationwide would indemnify Holmes. Holmes was not
informed of this decision.
The Matheny lawsuit went to trial and Holmes
incurred $ 7500.00 in attorney fees. If the case had
settled or Holmes had been notified of Nationwide's
decision to indemnify him before the first day of trial, he
would not have incurred the $ 7500.00 legal fee.
Nationwide notified the appellee in writing during
opening statements that they would indemnify him for
any excessive [*338] judgment. Thus, even though
Nationwide had decided to indemnify Holmes the
Saturday before trial, it failed to tell him until the trial
commenced. Consequently, Holmes incurred $ 7500.00
of unnecessary legal fees.
n2
[**6]
After a four day trial, Holmes was found not liable.
n2 Nationwide, however, was sanctioned $
10,000.00 for discovery abuse for failing to
produce pictures prior to trial; Nationwide
presented the pictures on the last day of trial.
Holmes was distressed by Nationwide's discovery
abuse because Tunks told him that this conduct
could be reversible error which could lead to
another trial. Matheny appealed but the case
was settled before submission.
The appellee then filed this lawsuit against
Nationwide under the Stowers doctrine for negligent
failure to settle within policy limits and for
unconscionable acts under the DTPA. The jury found
affirmatively on the following jury questions: (1)
Nationwide's refusal to settle the Matheny lawsuit
against Peter Holmes prior to the first day of trial was
negligence which was a proximate cause of damages to
him; (2) such negligence was gross negligence; (5)
Nationwide engaged in an unconscionable action or
course of action which was a producing cause of
damages to appellee; (7) appellee was entitled to
damages of $ 7500.00 which were the reasonable and
necessary attorney's fees for legal services in the
Matheny trial; (8) appellee was entitled to $ 10,000.00
exemplary damages; appellee was entitled to the
following legal fees: $ 15,000.00 for preparation of trial
of Nationwide lawsuit, $ 5,000.00 if appealed to Court of
Appeals, $ 7500.00 if making or responding to
application for writ of error to Texas Supreme Court, and
$ 2500.00 if writ of error granted by Texas Supreme
Court.

We rule first upon appellant's second point of error:
whether the appellant's breach of [**7] his duty to
exercise due care and diligence was, as a matter of law,
the proximate cause of appellee's damages.
During pre-trial proceedings, the appellee was
counseled by his attorney, who was hired by Nationwide,
that an excess judgment was likely and that he should
retain, on his own, an attorney to represent him for any
excess judgment. A telephone conference was held the
Saturday before trial between Nationwide, the appellee,
and his attorney. Nationwide was informed that the
appellee would incur an additional $ 7500.00 in attorney
fees if either the case was not settled before trial or
Nationwide would not agree to indemnify the appellee
before trial. Nationwide knew that very day that they
would indemnify the appellee but did not inform the
appellee until the opening statements of the trial.
Consequently, the appellee incurred $ 7500.00 of
unnecessary legal fees.
The jury found the following things: (1) Nationwide
was negligent for refusing to settle Matheny's claim
against the appellee prior to the first day of trial; (2)
Nationwide's negligence proximately caused appellee to
suffer damages; and (3) appellee's damages were $
7500.00 he expended for attorneys' fees that he [**8]
incurred during the Matheny trial.
Appellee's theory of recovery was based partially on
the cause of action recognized in G.A. Stowers Furniture
Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex.
Comm'n App. 1929, holding approved). The Stowers
court recognized the existence of a negligence cause of
action against insurance companies based on the agency
relationship. The court held that when an insurance
company contracts to act as the exclusive and absolute
agent of the insured in all matters pertaining to litigation,
it ought to be held to that degree of care and diligence
which an ordinarily prudent person would exercise in the
management of his own business; and if an ordinarily
prudent it ought to be held to that degree of care and
diligence which an ordinarily prudent person would
exercise in the management of his own business; and if
an ordinarily prudent person, in the exercise of ordinary
care, as viewed from the standpoint of the assured, would
have settled the case, and failed or refused to do so, then
the agent, which in this case is the indemnity company,
should respond in damages.
Stowers, 15 S.W.2d at 547.
As a matter of law, Nationwide's [**9] refusal to
settle Matheny's claim before the [*339] first day of
trial was not negligence and did not proximately cause
the appellee $ 7500.00 unnecessary legal fees.
842 S.W.2d 335, *; 1992 Tex. App. LEXIS 3188, **
Page 3
Nationwide's refusal to settle caused no damages since
the jury found Holmes not liable. Instead Nationwide's
failure to inform the appellee that he was indemnified
until after the trial began is what proximately caused
appellee's damages. If Nationwide was negligent, it was
because the company failed to inform Holmes before
trial that he was indemnified. Therefore, as a matter of
law, the trial court erred when it granted appellee a
judgment based on jury question one; appellant's motion
for judgment n.o.v. should have been sustained as to this
jury finding. Appellant's second point of error is
sustained.
Because we sustained appellant's second point of
error, we do not consider its first point of error
concerning whether an adverse judgment in excess of an
insured's policy limit (excess judgment) in an underlying
lawsuit is an essential element of a Stowers cause of
action.
EXEMPLARY DAMAGES
The appellant asserts that, as a matter of law, the
appellee was not entitled to exemplary damages of $
[**10] 10,000.00 because he was not entitled to recover
actual damages.
A plaintiff cannot recover exemplary damages until
he proves an entitlement to actual damages. Wright v.
Gifford-Hill & Co., 725 S.W.2d 712, 714 (Tex. 1987);
Nabours v. Longview Savings & Loan Ass'n, 700 S.W.2d
901, 903 (Tex. 1985). We have ruled that the appellee is
not entitled to actual damages. Therefore, it follows that
he is not entitled to exemplary damages for gross
negligence.
UNCONSCIONABLE CONDUCT AND
SUFFICIENCY OF THE EVIDENCE
Appellant has two complaints about the jury finding
that it participated in unconscionable conduct: (1) it was
entitled to a motion for directed verdict or a judgment
non obstante veredicto because there were no damages
proved as a matter of law; and (2) there was no evidence
or insufficient evidence to support the jury's answer to
question number 5.
In reviewing the appellant's no evidence points of
error, we will consider only the evidence and inferences
that tend to support the trial court's finding while
disregarding all evidence and inferences to the contrary.
Stafford v. Stafford, 726 S.W.2d 14, 16 (Tex. 1987); Alm
v. Aluminum Co. of America, [**11] 717 S.W.2d 588,
593 (Tex. 1986), cert. denied, 112 L. Ed. 2d 102, 111
S.Ct. 135 (1990); Garza v. Alviar, 395 S.W.2d 821, 823
(Tex. 1965). In considering appellant's factual
sufficiency points, we will consider and weigh all the
evidence and reverse for a new trial only if the
challenged finding is so against the great weight and

preponderance of the evidence as to be manifestly unjust,
shocking to the conscience, or clearly demonstrates bias.
Pool v. Ford Motor Co., 715 S.W.2d 629, 635 (Tex.
1986); 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).
We consider his first complaint. The appellant
claims that the trial court erred when it denied their
Motion for Directed Verdict or denied their Motion for
Judgment non obstante veredicto because there was no
evidence to support the jury finding of unconscionable
action on the part of the appellant under the Deceptive
Trade Practices Act (DTPA). The appellant explains
this point further by stating that because there was no
excess verdict, the appellee suffered no actual damages.
Because actual damages are an essential element of a
DTPA cause of action [**12] for an unconscionable
act, they argued, he had no DTPA cause of action as a
matter of law.
We disagree with appellant's logic. The appellant
argues that the appellee suffered no actual damages
because there was no excess verdict. As we explained
previously, the appellee suffered actual damages of $
7500.00 when Nationwide failed to inform the appellee
that he was indemnified until after the trial began.
Because the appellee suffered actual damages, his DTPA
cause of action for an unconscionable [*340] act is
viable. Consequently, appellant's motions for a directed
verdict and judgment non obstante veredicto were denied
properly.
We consider appellant's second complaint that the
trial court erred in rendering judgment for Holmes
because there is no evidence or insufficient evidence to
support the jury's answers to Questions No. 1, No. 2,
and No. 5. We do not concern ourselves with Jury
Questions No. 1 and No. 2 because they dealt with the
Stowers negligence and gross negligence causes of
action; these points of error are no longer relevant after
we sustained appellant's second point of error. What
concerns us is whether there was any evidence or
sufficient evidence [**13] to support Jury Question No.
5 through which the jury found that Nationwide engaged
in an unconscionable action or course of action which
was a producing cause of damages to the appellee.
Unconscionable action or course of action is defined
as "an act or practice which, to a person's detriment: (A)
takes advantage of the lack of knowledge, ability,
experience, or capacity of a person to a grossly unfair
degree." TEX. BUS. & COM. CODE ANN. § 17.45(5)
(Vernon 1987). We will construe this provision
liberally in order to promote its underlying purpose to
protect consumers against unconscionable actions. TEX.
BUS. & COM. CODE ANN. § 17.44 (Vernon 1987).
842 S.W.2d 335, *; 1992 Tex. App. LEXIS 3188, **
Page 4
Nationwide knew that the appellee would incur an
additional personal liability for $ 7500.00 attorney's fees
if his case was not settled or if Nationwide would not
agree to indemnify the appellee before trial. While it is
true that Nationwide had no contractual obligation to
indemnify the appellee, Nationwide decided the Saturday
before trial that they would indemnify the appellee. It
was unconscionable for Nationwide to withhold the
indemnification information when they knew it would
cause the appellee to incur $ 7500.00 of unnecessary
[**14] legal fees. We find there is sufficient evidence
to support the jury's finding of an unconscionable act.
Stafford v. Stafford, 726 S.W.2d 14, 16 (Tex. 1987).
After considering and weighing all the evidence we
uphold the finding in Jury Question No. 5. The
evidence showed that the appellee hired an attorney on
the advice of his Nationwide attorney (Tunks) because it
was thought an excess verdict was probable. The goal
of Holmes' attorney was to persuade Nationwide to either
settle or indemnify the appellee. There was sufficient
evidence for the jury to have found that it was
unconscionable for Nationwide not to tell the appellee
that they would indemnify him when they knew a delay
in telling him would cause him to incur unnecessary
legal fees.
The appellant argues that it was impossible for the
appellee to have been taken advantage of since he was
represented by an attorney. We disagree with this
contention. Nationwide was informed of the impending
legal fees if the appellee was not indemnified by the first
trial day. In fact, they advised appellee to seek legal
counsel. The decision to indemnify the appellee was
wholly within the knowledge of Nationwide. The
timing [**15] of the release of information concerning
whether the appellee would be indemnified was under
the total control of Nationwide and the timing is what
caused appellee's damages. Thus, the fact that the
appellee was represented by counsel had no effect, in this
instance, on the fact that the appellee was taken
advantage of unfairly.
DTPA DAMAGES
The appellant asserts that there was no evidence or
insufficient evidence to support the finding in Jury
Question No. 7(a) that awarded as damages reasonable
and necessary attorney's fees that were incurred in the
Matheny lawsuit. Appellant explains that Holmes hired
his lawyer for matters concerning his relationship with
Nationwide but not to defend him against the Matheny
lawsuit. Consequently, they allege, damages are
inappropriate since they are irrelevant to the Matheny
defense.
The charge asked the jurors what sum of money
would compensate the appellee for "reasonable and

necessary attorney's fees [*341] for legal services
rendered to Peter Holmes by Chovanec & Johnson, Inc.
concerning the Matheny trial." It can be inferred from
appellant's argument that they think the charge's
language "concerning the Matheny [**16] trial"
precludes an award since the attorneys' fees were not
rendered for the defense of the Matheny suit.
We do not agree with appellant. The jury charge
attempted to draw the attention of the jury to the attorney
fees that appellant incurred to protect his interests during
the Matheny trial rather than the attorney fees that were
incurred in the underlying lawsuit that prosecuted
Nationwide for their unconscionable actions. It should
not be read narrowly to exclude a damage award on a
technical reading. Additionally, Nationwide's attorney,
Tunks, suggested that appellee retain counsel to
represent his interests for a possible excess verdict.
Thus, the attorneys' fees did concern the Matheny trial.
The appellant asserts additionally that the appellee is
not entitled to attorneys' fees as actual damages since
they are not authorized by contract or statute.
"Actual damages" in the DTPA means those
recoverable at common law. Brown v. American
Transfer & Storage Co., 601 S.W.2d 931, 939 (Tex.
1980), cert. denied, 449 U.S. 1015, 66 L. Ed. 2d 474, 101
S. Ct. 575 (1980). Generally, unless provided for by
statute or by contract between the parties, attorney's
[**17] fees incurred by a party to litigation are not
recoverable against his adversary either in an action in
tort or by suit upon a contract. Turner v. Turner, 385
S.W.2d 230, 233 (Tex. 1964). A recovery of attorney's
fees based upon equitable principles, however, can exist.
Baja Energy, Inc. v. Ball, 669 S.W.2d 836, 838 (Tex.
App.--Eastland 1984, no writ); Brandtjen & Kluge, Inc.
v. Manney, 238 S.W.2d 609, 612 (Tex. Civ. App.--Fort
Worth 1951, writ ref'd n.r.e.). A recovery of attorneys'
fees was upheld on equitable principles under the
common fund doctrine. Knebel v. Capital Nat'l Bank in
Austin, 518 S.W.2d 795 (Tex. 1974). In Baja Energy, Inc.
v. Ball, 669 S.W.2d 836 (Tex. App.--Eastland 1984, no
writ) the plaintiff had to defend a trespass and conversion
cause of action in a previous lawsuit for plugging a well.
The court held that on the basis of usages and principles
of equity, the plaintiff was entitled to recover his
attorney's fees to defend the prior lawsuit since the
expenses were caused by the defendant's wrongful act.
Baja Energy, although not directly on point, is
analogous to the case at hand. Appellee did not incur
legal expenses by defending [**18] himself in the
Matheny lawsuit. Instead he incurred them in trying to
persuade Nationwide to either settle the case or
indemnify him. Nationwide normally would not be
liable for appellee's attorney fees for independent
842 S.W.2d 335, *; 1992 Tex. App. LEXIS 3188, **
Page 5
representation. It was, however, wrongful for
Nationwide to withhold information from the appellee
when they knew that such a delay would cause him to
incur additional, unnecessary attorney fees.
Further support of our holding is found in Powell v.
Narried, 463 S.W.2d 43 (Tex. Civ. App.--El Paso 1971,
writ ref'd n.r.e.). The court ultimately denied a recovery
of attorney fees because of inadequacies in the record.
The court, however, recognized that:
where the natural and proximate consequence of a
wrongful act has been to involve a plaintiff in litigation
with others, there may, as a general rule, be a recovery in
damages of the reasonable expenses incurred in such
prior litigation, against the author of such act, including
the compensation for attorney's fees; but such expenses
must be the natural and proximate consequences of the
injury complained of and must have been incurred
necessarily and in good faith, and the amount thereof
must be reasonable. [**19]
Powell, 463 S.W.2d at 46. In the case at hand,
Nationwide's wrongful act did not lead to litigation
between the appellee and a third party. The court in
Powell, however, recognized that attorneys' fees are
recoverable as reasonable expenses when such expenses
are the natural and proximate consequences of another's
wrongful act. Such is the case here.
[*342] The general rule disallowing attorney's
fees applies to attorney's fees that are incurred while
prosecuting or defending a cause of action. In the case at
hand, the attorney's fees were not incurred prosecuting or
defending the underlying cause of action. Therefore, this
prohibition should not apply. There is nothing
sacrosanct about attorney's fees per se that forbids their
award as damages. Instead, attorney's fees as damages
are disallowed generally because our system of
American jurisprudence does not award successful
litigants their attorney's fees.
The DTPA is to be construed liberally and applied to
promote its underlying purposes, which are to protect
consumers against unconscionable actions and to provide
efficient and economical procedures to secure such
protection. TEX. BUS. & COM. CODE ANN. [**20]
§ 17.44 (Vernon 1987). As stated by the Texas
Supreme Court:
The object of awarding a plaintiff recovery is to
compensate for the actual loss sustained as a result of the
defendant's conduct. The DTPA embraces this concept
by permitting the injured consumer to recover the
greatest amount of actual damages alleged and factually
established to have been caused by the deceptive
practice, including related and reasonably necessary

expenses . . . . The amount of actual damages
recoverable under the DTPA is determined by the total
loss sustained as a result of the deceptive trade practice.
Kish v. Van Note, 692 S.W.2d 463, 466 (Tex. 1985).
In the case at hand, the $ 7500.00 attorney's fees
were not incurred by the appellee in defending the
underlying suit. Instead, they were incurred to induce
Nationwide to indemnify him. Because Nationwide's
unconscionable act caused the appellee to incur
unnecessary attorney's fees, in order to secure the
appellee consumer protection, the award is upheld in the
name of equitable principles. The appellee should be
compensated for the total loss he sustained. Nationwide
should not avoid judgment just because the damages
appellee [**21] sustained, as a result of Nationwide's
unconscionable act, happened to be attorney's fees.
In his cross-point, appellee asserts that the trial court
erred by not awarding him additional damages
representing two times that portion of actual damages not
exceeding $ 1,000.00. The appellee submitted the
request in his Motion for Judgment. The trial judge
crossed out the paragraph awarding the DTPA statutory
damages in his judgment order.
Under Section 17.50(b)(1) of the DTPA, if actual
damages are found, it is mandatory that the court award
additional statutory damages in the amount specified.
Martin v. McKee Realtors, Inc., 663 S.W.2d 446, 447
(Tex. 1984). We upheld the actual damages awarded
under the DTPA. Therefore, appellee is entitled to $
2,000.00 of statutory damages.
842 S.W.2d 335, *; 1992 Tex. App. LEXIS 3188, **
DTPA ATTORNEY'S FEES
Page 6
Appellant asserts there was no evidence or
insufficient evidence to support the findings of Jury
Question No. 10. Appellant's discussion better defines
what they mean. They argue that if in fact the appellant
was involved in unconscionable conduct, it was not a
producing cause of appellee's damages. Therefore,
because the appellee was not entitled to actual damages,
he was [**22] not entitled to recover attorney's fees
pursuant to the DTPA statute. Consequently, there was
no evidence or insufficient evidence to support the jury's
findings in question No. 10.
We have already found that appellant's
unconscionable conduct was a producing cause of
appellee's damages. Therefore, he was entitled to actual
damages and attorney's fees. See TEX. BUS. & COM.
CODE ANN. § 17.50 (Vernon 1987 & Supp. 1992).
We do not consider appellant's other points of error
since they are not dispositive.
The trial court judgment is affirmed in part and
reversed and rendered in part. The appellee is not
entitled to $ 10,000.00 in exemplary damages but is
entitled to $ 2,000.00 in DTPA statutory damages. The
remaining judgment is affirmed because [*343] it is
supported by the DTPA cause of action.
BLAIR REEVES,
Chief Justice

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LEXSEE 317 SW 3D 361
BROWN & BROWN OF TEXAS, INC. F/K/A POE & BROWN OF TEXAS, INC.
AND TRANSCONTINENTAL INSURANCE COMPANY, Appellants v. OMNI
METALS, INC., Appellee
NO. 01-05-01190-CV
COURT OF APPEALS OF TEXAS, FIRST DISTRICT, HOUSTON
SUBSEQUENT HISTORY: Released for Publication
September 13, 2010.
Petition for review filed by, 07/15/2010
PRIOR HISTORY: [**1]
On Appeal from the 61st District Court, Harris County,
Texas. Trial Court Cause No. 1996-36058A.
Brown & Brown of Tex., Inc. v. <strong>Omni</strong> <strong>Metals</strong>, Inc., 2009
Tex. App. LEXIS 9579 (Tex. App. Houston 1st Dist., Dec.
17, 2009)
COUNSEL: For APPELLANT: Henry S. Platts Jr., Jeffrey
Parsons, Kristen Werner Kelly, Berine, Maynard &
Parsons, L.L.P., Houston, TX; Russell J. Bowman,
Bowman & Stella, P. C., Dallas, TX.
For APPELLEE: Mark C. Harwell, Cotham, Harwell &
Evans, Houston, TX.
JUDGES: Panel consists of Justices Keyes, Higley, and
Nuchia. 7 Justice Nuchia, dissenting.
7 Justice Sam Nuchia, who retired from the
First Court of Appeals on January 1, 2009, continues
to sit by assignment for the disposition of
this case, which was submitted on February 13,
2007.
OPINION BY: Evelyn V. Keyes
OPINION
[*368] OPINION ON REHEARING
317 S.W.3d 361; 2010 Tex. App. LEXIS 2338
March 25, 2010, Opinion Issued
Page 1
On March 20, 2008, a panel of this Court reversed
the trial court's judgment and rendered judgment that
appellee <strong>Omni</strong> <strong>Metals</strong>, Inc. take nothing by its claims.
<strong>Omni</strong> did not file a motion for rehearing, but instead
filed a motion for en banc reconsideration. We treated
the motion for en banc reconsideration as a motion for
rehearing, granted rehearing, and withdrew the March
20, 2008 opinion and judgment and issued our December
17, 2009 opinion and judgment in their place. Appellants
Brown & Brown of Texas and Transcontinental Insurance
Company filed [**2] motions for rehearing and
rehearing en banc. We now grant appellants' motions for
rehearing, withdraw our December 17, 2009 opinion and
judgment, and issue this opinion and judgment in their
place, clarifying our December 17, 2009 opinion. Thus,
the appellants' motions for en banc reconsideration are
rendered moot and are dismissed. See Brookshire Bros.,
Inc. v. Smith, 176 S.W.3d 30, 41 & n.4 (Tex.
App.--Houston [1st Dist.] 2004, pet. denied) (supp. op.
on rehearing). We modify the judgment of the trial court
and affirm as modified.
This case is on appeal from a trial court judgment in
favor of <strong>Omni</strong>, a buyer and seller of steel coils. Port
Metal Processing, Inc. (Port Metal) stored steel belonging
to <strong>Omni</strong>, processed that steel into coils, and temporarily
stored the finished coils for <strong>Omni</strong>. Port Metal purchased
insurance from appellant Transcontinental Insurance
Company (Transcontinental), originally through the
Russell Lee Jacobe Insurance Agency (Jacobe). Jacobe
was acquired on November 1, 1994 by Poe & Brown of
Texas, Inc. (Poe & Brown), which is now known as appellant
Brown & Brown of Texas, Inc. (Brown &
Brown).

The underlying proceeding on which this action is
based is a suit for [**3] damages arising from a fire that
occurred on December 5, 1995 damaging <strong>Omni</strong>'s steel
stored in a facility operated by Port Metal. The trial
[*369] court granted Poe & Brown and Transcontinental
summary judgment on <strong>Omni</strong>'s negligent misrepresentation
and DTPA claims arising out of oral and written
representations made by Poe & Brown, Transcontinental's
local agent, to <strong>Omni</strong> and Port Metal, regarding Port
Metal's bailee insurance coverage for <strong>Omni</strong>'s steel stored
at Port Metal. See <strong>Omni</strong> <strong>Metals</strong>, Inc. v. Poe & Brown of
Texas, Inc., No. 14-00-01081-CV, 2002 Tex. App. LEXIS
4334, 2002 WL 1331720 (Tex. App.--Houston [14th
Dist.] June 13, 2002, pet. denied) (not designated for
publication). The Fourteenth Court of Appeals reversed
the summary judgment and remanded the case to the trial
court.
The case was tried against Brown & Brown, Poe &
Brown's successor, and Transcontinental before a jury
beginning on October 11, 2005. It was submitted to the
jury on theories of negligent misrepresentation and unfair
or deceptive acts or practices under former article 21.21
section 16 of the Texas Insurance Code and section
17.46(b) of the Texas Deceptive Trade Practices Act
(DTPA). The trial court rendered judgment on the jury
verdict in favor [**4] of <strong>Omni</strong> on November 28, 2005.
Defendants Transcontinental and Brown & Brown timely
appealed.
On appeal, Brown & Brown raises four issues. It
contends that (1) the evidence is factually and legally
insufficient to establish (a) that it made a negligent misrepresentation
or engaged in unfair or deceptive acts under
the DTPA, (b) that the representation caused <strong>Omni</strong>'s
damages, (c) that <strong>Omni</strong> justifiably relied on Poe &
Brown's misrepresentations, and (d) that Poe & Brown
acted knowingly; (2) the DTPA does not apply to <strong>Omni</strong>
because <strong>Omni</strong> is not a consumer under the DTPA or an
insured or third party beneficiary under Port Metal's
Transcontinental insurance policy; (3) attorney's fees
incurred in another lawsuit and awarded <strong>Omni</strong> in this suit
are not recoverable as damages; and (4) the trial court
erred in not giving it a proper credit for a $ 1,660,000
settlement in the other lawsuit.
Transcontinental raises seven issues. It contends that
(1) Transcontinental could not be liable for representations
made by Poe & Brown (a) when <strong>Omni</strong> presented no
evidence that any representation of Poe & Brown was
made with the actual or apparent authority of Transcontinental
and (b) when <strong>Omni</strong> failed to submit [**5] a
separate issue in the charge on Brown & Brown's actual
or apparent authority and obtain a jury finding; (2) the
evidence establishes as a matter of law that Transcontinental
is not liable for Poe & Brown's actions in sending
certificates of insurance to <strong>Omni</strong>; (3) <strong>Omni</strong>'s misrepre-
sentation claim is not viable, as a matter of law, because
(a) no one at <strong>Omni</strong> read the certificates of insurance, (b)
the certificates disclaimed any representation regarding
coverage, (c) a statement made by Poe & Brown to Port
Metal's president, Blake McKnight, in 1993 regarding
coverage of <strong>Omni</strong>'s product was not made to <strong>Omni</strong>, and
(d) Port Metal's president had no authority to act for
Transcontinental in representing to <strong>Omni</strong> that its metal
was covered by Port Metal's bailee policy; (4) <strong>Omni</strong> was
not entitled to recover attorney's fees of $ 740,000 for
pursuing a tort action against the starters of the fire; (5)
the jury's award of additional damages of $ 1,080,000
awarded <strong>Omni</strong> on its DTPA claims against Transcontinental
are erroneous because Transcontinental had no
contact with <strong>Omni</strong> and there is no evidence Transcontinental
knew of any wrongful act, as required for recovery
of additional damages; (6) the [**6] trial court erred
in not giving a $ 1,660,000 settlement credit to Transcontinental
that <strong>Omni</strong> received from third parties; and (7)
the trial court erred in not admitting evidence of a prior
federal judgment in Transcontinental's favor. In its own
issues (3) and (4), [*370] Brown & Brown joins in
and adopts Transcontinental's arguments and authorities
with respect to issues (5) and (6).
We modify the judgment of the trial court and, as
modified, affirm.
PROCEDURAL HISTORY
Port Metal's warehouse burned down on December
5, 1995, and <strong>Omni</strong> lost $ 2,600,000 in steel stored at Port
Metal. Transcontinental, Port Metal's insurer, denied
coverage for damages to <strong>Omni</strong>'s steel on the ground that
Port Metal's "all risk" bailee policy was subject to an
exclusion for goods stored at Port Metal for more than
sixty days for which Port Metal received a storage fee.
<strong>Omni</strong> paid storage fees to Port Metal. <strong>Omni</strong> filed suit
against Port Metal and defendants it alleged were responsible
for the fire, namely Electrical Wire & Cable
Company, Inc., Electrical Redesign Company, Lighting
Surplus, Harry Schubeck, Jr., and Textron, Inc. It subsequently
added Poe & Brown, Port Metal's insurance
agent, and Transcontinental, Port [**7] Metal's insurer.
<strong>Omni</strong> settled separately with the original defendants for a
total of $ 1,660,000. <strong>Omni</strong> spent $ 740,000 on attorney's
fees that were not legally recoverable prior to settlement.
<strong>Omni</strong>'s suit against Transcontinental and Poe &
Brown was severed from the claims against the settling
defendants. In the severed suit, <strong>Omni</strong> raised claims
against Transcontinental and Poe & Brown for negligent
misrepresentation and violations of section 17.46(b) of
the DTPA 1 under former article 21.21, section 16 of the
Texas Insurance Code. 2 Transcontinental and Poe &
Brown successfully moved for summary judgment. <strong>Omni</strong>
appealed the summary judgment to the Fourteenth Court

of Appeals, which reversed the judgment by opinion
entered June 13, 2002, and remanded the case for trial.
<strong>Omni</strong> <strong>Metals</strong>, Inc., 2002 Tex. App. LEXIS 4334, 2002 WL
1331720. This appeal follows from the trial on remand
from the Fourteenth Court of Appeals.
1 TEX. BUS. & COM. CODE ANN. § 17.46(b)
(Vernon Supp. 2009).
2 The relevant insurance provisions at issue in
this case are found in former article 21.21 of the
Insurance Code. See Act of April 25, 1957, 55th
Leg., R.S., ch. 198, 1957 Tex. Gen. Laws 401,
401, amended by Act of May 10, 1973, 63rd
Leg., R.S., [**8] ch. 143, § 2, 1973 Tex. Gen.
Laws 322, 335 and Act of June 8, 1995, 74th
Leg., R.S., ch. 414, § 13, 1995 Tex. Gen. Laws
26-27 (hereinafter "former TEX. INS. CODE art.
21.21"). The legislature has since repealed those
provisions and enacted new provisions incorporating
the content of the repealed provisions. See
Act of May 20, 2003, 78th Leg., R.S., ch. 1274,
§§ 2, 26(a)(1), 26(1)(10), 2003 Tex. Gen. Laws
3611, 3641, 4138 (current version at TEX. INS.
CODE ANN. §§ 541.001-.454 (Vernon 2009)).
In the original appeal of this case prior to trial on
remand, the Fourteenth Court of Appeals made a number
of holdings pertinent to the instant appeal. It held that
Poe & Brown voluntarily disclosed to <strong>Omni</strong> that Port
Metal had bailee insurance which covered "all risks,"
and, therefore, that Poe & Brown had a duty to disclose
the storage fee exclusion, of which it was aware but <strong>Omni</strong>
was not. 2002 Tex. App. LEXIS 4334, [WL] at *3-4.
The Court also held that a fact issue existed as to
"whether [Poe & Brown] misrepresented coverage because,
under the circumstances, the 'all risk' certificate of
insurance was false and misleading." 2002 Tex. App.
LEXIS 4334, [WL] at *4-5. The Court further held that a
fact issue existed as to whether Poe & Brown could be
[**9] held liable to <strong>Omni</strong> if it misrepresented coverage to
Port Metal by telling Port Metal's president that the policy
would cover "[p]roduct owned by my customers for
processing in-located in my facility." 2002 Tex. App.
LEXIS 4334, [WL] at *8.
The court also refused Poe & Brown's and Transcontinental's
request that it hold [*371] that disclaimers
in certificates of insurance delivered to <strong>Omni</strong> prevented
the creation of a false impression about coverage
as a matter of law. 2002 Tex. App. LEXIS 4334, [WL] at
*6. Rather, it held that, given the "all risk" designation in
the certificate, "the disclaimers in the certificate present a
conflicting fact that we must disregard in applying the
summary judgment standard of review." 2002 Tex. App.
LEXIS 4334, [WL] at *7. The court also rejected Poe &
Brown's and Transcontinental's argument that it had no
duty to disclose because it had no duty to explain policy
exclusions to an insured. Id.
In addition, the court refused to hold that <strong>Omni</strong>
could not sue on the basis of its reliance on misrepresentations
made by Poe & Brown to Port Metal and repeated
by Port Metal to <strong>Omni</strong>. Id. Observing that "[c]ertain
persons, other than the direct recipient of a misrepresentation
can sue for negligent misrepresentation," the
Fourteenth Court held that the [**10] evidence raised a
fact issue as to whether Poe & Brown misrepresented
coverage to Port Metal. 2002 Tex. App. LEXIS 4334,
[WL] at *7-8 (citing cases and RESTATEMENT (SE-
COND) OF TORTS § 552(2) (1977)). In response to Poe
& Brown's argument that <strong>Omni</strong> had a duty to read the
policy itself, the court held, "<strong>Omni</strong>'s failure to read the
policy does not support the granting of summary judgment."
2002 Tex. App. LEXIS 4334, [WL] at *8. In other
words, the court held that <strong>Omni</strong> <strong>Metals</strong> had no legal duty
to read the policy. The court further held that <strong>Omni</strong> was
not prevented from bringing its DTPA claims through
article 21.21 section 16(a) of the Insurance Code by lack
of consumer status. 2002 Tex. App. LEXIS 4334, [WL] at
*9.
The court refused to address Transcontinental's argument
that <strong>Omni</strong> could not recover against Transcontinental
and Poe & Brown attorney's fees of $ 740,000 it
had incurred in pursuing a tort action against the third
parties allegedly responsible for starting the fire because
the issue was not included in the motion for summary
judgment. 2002 Tex. App. LEXIS 4334, [WL] at *10. The
court likewise refused to address the issue of Poe &
Brown's actual or apparent authority to act as Transcontinental's
agent because it was not presented in the motion
for summary judgment. Id. The court remanded
[**11] the case for trial. Id.
THE TRIAL
The trial began on October 11, 2005. The evidence
at trial comported with, and elaborated upon, the summary
judgment evidence. It showed that <strong>Omni</strong> was a
customer of Port Metal, a steel processing company; that
<strong>Omni</strong> stored steel coils at the Port Metal warehouse; and
that Port Metal charged <strong>Omni</strong> a storage fee on steel coils
left at the warehouse longer than 60 days.
Blake McKnight, Port Metal's president, testified
that he asked Danny Sparks, then an agent for Jacobe and
later an agent for Poe & Brown, to insure the Port Metal
warehouse and its inventory, including steel that Port
Metal's customers were storing at the warehouse. However,
the original policy, written in 1992, excluded from
coverage property held in storage for which a storage
charge was made, as did the 1993, 1994, and 1995 renewals.
McKnight read the 1992 policy and asked Sparks

about the exclusion for stored property. Sparks told him
the exclusion did not apply to property stored like <strong>Omni</strong>'s
at Port Metal. McKnight testified that he did not read the
1995 insurance policy in effect at the time of the fire.
Sparks testified that, by June 1993, he knew the policy
did not provide the coverage [**12] he promised
because he knew Port Metal was charging a storage fee
to its customers like <strong>Omni</strong>. However, he did not explain
to McKnight, to Port Metal, or to any of Port Metal's
customers that the insurance policy excluded the steel
Port [*372] Metal's customers stored at Port Metal.
Sparks also knew, from at least June 28, 1993, that Port
Metal received revenues from its customers of $ 6,000 a
month for storage fees. He also knew that Port Metal
relied upon him to obtain coverage for all of its customers'
steel. Sparks testified that he made a mistake by
selling a policy that did not provide coverage to all of
Port Metal's customers because of the storage exclusion.
He further testified that he had an obligation to find out
whose steel was being stored, but that he never made
such an inquiry. Nor did he ever inform either McKnight
or <strong>Omni</strong> of the exclusion, despite knowing that there was
a gap in the intended coverage and that he had a duty to
inform McKnight of the exclusion.
<strong>Omni</strong>'s president, Arthur Tomes, spoke on several
occasions with Port Metal's president, McKnight, and
inquired whether <strong>Omni</strong>'s steel at Port Metal's warehouse
was insured. McKnight assured him it was. <strong>Omni</strong> also
requested [**13] and received certificates of insurance
from Jacobe and later from Poe & Brown to document
Port's Metal's insurance coverage for <strong>Omni</strong>'s steel to
provide to <strong>Omni</strong>'s secured lender. Sparks delivered the
certificates to <strong>Omni</strong> knowing that <strong>Omni</strong> wanted the certificates
to make sure that all its steel at Port Metal was
covered. The 1993 certificate sent by Sparks to <strong>Omni</strong>
noted the $ 3,000,000 bailee liability policy issued by
Transcontinental. It also contained the statement, typed
by Sparks, that Port Metal's insurance coverage "IN-
CLUDES PROPERTY OF OTHERS IN CUSTODY OF
INSURED." Sparks admitted at trial that this was "untrue."
In 1994 and 1995, Sparks delivered insurance certificates
to <strong>Omni</strong> containing the representation that the
insurance covered "All Risk." Brown & Brown's expert
testified at trial that the certificates were "misleading."
Each of the certificates contained the following disclaimer:
"THIS CERTIFICATE IS ISSUED AS A
MATTER OF INFORMATION ONLY AND CON-
FERS NO RIGHTS ON THE CERTIFICATE HOLDER.
THIS CERTIFICATE DOES NOT AMEND, EXTEND
OR ALTER THE COVERAGE AFFORDED BY THE
POLICIES DESCRIBED BELOW."
Tomes, <strong>Omni</strong>'s president, testified at trial that he did
not "personally read and [**14] review every single
certificate of insurance that came across to <strong>Omni</strong>" and
that he did not ask for or "actually receive the insurance
policy rather than the certificate of insurance" because
the company "would think that the certificate of insurance
would be adequate to cover what we needed." He
"just look[ed] at 'all risks.'" The certificates confirmed
what McKnight had told him, and he saw nothing on the
certificates that gave him any reason to doubt what
McKnight had told him. The certificates were also reviewed
by Debbie Hiner at <strong>Omni</strong> and then forwarded to
<strong>Omni</strong>'s secured lender as proof that the steel was insured.
Tomes testified that "they were satisfied too."
On December 5, 1995, the warehouse caught fire
and $ 2,600,000 million worth of <strong>Omni</strong>'s steel was ruined.
The same day, Sparks approached Port Metal's
president, McKnight, and told him, "If anybody asks
you, don't mention the word 'storage.'" Sparks also telephoned
another of <strong>Omni</strong>'s customers, Mike Lykos, and
told him "please do not mention the word 'storage.'"
Following the trial, the jury found the following:
1. Transcontinental and Poe & Brown
made negligent misrepresentations on
which <strong>Omni</strong> justifiably relied.
2. Damages for [**15] the negligent
misrepresentations of $ 704,267 (value of
steel), $ 370,964.72 (expenses incurred
[*373] in selling the steel), and $
740,000 (attorney's fees incurred by <strong>Omni</strong>
in the lawsuit against the parties who
caused the fire).
3. Transcontinental and Poe & Brown
engaged in an unfair or deceptive act that
damaged <strong>Omni</strong>.
4. Damages for the unfair or deceptive
act of $ 704,267 (value of steel), $
370,964.72 (expenses incurred in selling
the steel), and $ 740,000 (attorney's fees
incurred by <strong>Omni</strong> in the lawsuit against
the parties who caused the fire).
5. Transcontinental and Poe & Brown
knowingly engaged in their conduct.
6. Treble damages for the knowing
conduct of $ 1,620,000 for Poe & Brown
and $ 1,080,000 for Transcontinental.
7. Attorney's fees of $ 161,050.07
(preparation and trial), $ 50,000.00 (appeal
to court of appeals), and $ 25,000.00
(appeal to supreme court).
8. Transcontinental's and Poe &
Brown's negligence caused the injury.

9. Transcontinental was 40% responsible
and Poe & Brown 60% responsible.
The trial court entered judgment on the jury verdict
on November 28, 2005. In the judgment, it also awarded
Poe & Brown and Transcontinental a settlement credit
against (1) the $ 704,267 [**16] awarded <strong>Omni</strong> by the
jury for "the value of the loss less any amounts <strong>Omni</strong>
received from the sale of the steel or from Transcontinental"
and (2) the $ 370,964.72 awarded <strong>Omni</strong> by the
jury for "reasonable and necessary expenses incurred in
attempting to sell the steel"; and (3) $ 169,213.61 for
prejudgment interest on the principal of (1) and (2) from
December 13, 1996 through April 13, 1999. The total
amount of the settlement credit was thus $ 1,244,445.33.
The judgment expressly excluded from the settlement
credit the $ 740,000 awarded <strong>Omni</strong> by the jury as economic
damages for "the amount of reasonable and necessary
attorneys' fees and expenses incurred by <strong>Omni</strong> in
a previous suit where <strong>Omni</strong> was required to prosecute the
previous suit as a consequence of Defendants' wrongful
conduct."
The instant appeal follows from the trial court's November
28, 2005 judgment.
DISCUSSION
A. Law of the Case Doctrine
Because this case comes to us on appeal after remand
from reversal of summary judgment by the Fourteenth
Court of Appeals, we consider, as a preliminary
matter, the "law of the case" doctrine. That doctrine is
defined as "that principle under which questions of law
decided on appeal to a court [**17] of last resort will
govern the case throughout its subsequent stages." Loram
Maint., Inc. v. Ianni, 210 S.W.3d 593, 596 (Tex. 2006);
Yazdchi v. San Antonio Fed. Credit Union, No.
01-07-00189-CV, 2009 Tex. App. LEXIS 1185, 2009 WL
417299, at *3-4 (Tex. App.--Houston [1st Dist.] Feb. 19,
2009, no pet.) (not designated for publication). Under
this doctrine, a court of appeals will ordinarily be bound
by its initial decision if there is a subsequent appeal in
the case. Briscoe v. Goodmark Corp., 102 S.W.3d 714,
716 (Tex. 2003). "By narrowing the issues in the successive
stages of the litigation, the law of the case doctrine
is intended to achieve uniformity of decision, judicial
economy, and efficiency." Id. It is based on public policy
and is aimed at bringing finality to litigation. Id. A decision
rendered on an issue by an appellate court does not,
however, absolutely bar reconsideration of the issue on a
second appeal. Id. The application of the doctrine lies
within the discretion of the court, depending on the circumstances
of the case. [*374] Id. It is an exception to
the law of the case doctrine that the original decision was
clearly erroneous. Id.
Here, the Fourteenth Court of Appeals issued a
number of rulings on [**18] the legal issues presented
by the parties' motions for summary judgment. The case
was subsequently tried in reliance on those rulings and a
verdict rendered from which this appeal is taken. Therefore
we will follow the law of the case established by the
Fourteenth Court of Appeals unless we conclude that, in
some respect, it is clearly erroneous.
B. <strong>Omni</strong>'s Failure to Submit Issue and Obtain Jury
Finding on Poe & Brown's Authority to Act as
Transcontinental's Agent
In its first issue, Transcontinental argues that <strong>Omni</strong>
failed to submit a separate issue on agency in the charge
and failed to obtain a separate jury finding on Poe &
Brown's actual or apparent authority to act as its agent. 3
<strong>Omni</strong> responds that Transcontinental failed to make any
timely objection to the absence of a separate issue and
therefore waived error and that, even if it had preserved
error, the omitted finding was a finding as to an element
of the ground of recovery on <strong>Omni</strong>'s claims, was supported
by evidence, and was therefore deemed found
under Texas Rule of Civil Procedure 279.
3 This issue was raised by Transcontinental in
its briefing on appeal in <strong>Omni</strong> <strong>Metals</strong> v. Poe &
Brown, but it was not addressed by the Fourteenth
[**19] Court of Appeals because it was
not presented in the motion for summary judgment.
<strong>Omni</strong> <strong>Metals</strong>, Inc. v. Poe & Brown of Texas,
Inc., No. 14-00-01081-CV, 2002 Tex. App.
LEXIS 4334, 2002 WL 1331720, at *10 (Tex.
App.--Houston [14th Dist.] June 13, 2002, pet.
denied) (not designated for publication).
The jury charge did not contain a separate issue on
Poe & Brown's status as an agent of Transcontinental.
However, the charge instructed the jury that "[a]uthority
for another to act for a party must arise from the party's
agreement that the other act on behalf and for the benefit
of the party" and that, if so authorized, "that other party
is also authorized to do whatever else is proper, usual,
and necessary to perform the act expressly authorized." It
also instructed the jury that "[a]pparent authority exists if
a party (1) knowingly permits another to hold himself out
as having authority or, (2) through lack of ordinary care,
bestows on another such indications of authority that
lead a reasonably prudent person to rely on the apparent
existence of authority to his detriment. . . ."
Jury questions 1 and 3 then asked the jurors whether
"one or more of the Defendants made a negligent misrepresentation
on which <strong>Omni</strong> <strong>Metals</strong>, [**20] Inc. justi-

fiably relied" or "engage[d] in any unfair or deceptive act
or practice that caused damages to <strong>Omni</strong> <strong>Metals</strong>." The
questions asked the jurors to respond separately for Poe
& Brown and for Transcontinental. The damages questions
similarly requested separate answers for each defendant.
Transcontinental did not object to the instructions,
and it did not object to the failure to submit a separate
agency question. The judgment awarded actual
damages, attorney's fees, and costs jointly and severally
against Poe & Brown and Transcontinental. It also
awarded additional damages of $ 1,620,000 against
Brown & Brown f/k/a Poe & Brown and of $ 1,080,000
against Transcontinental.
1. Waiver
Texas Rule of Civil Procedure 274 requires that "[a]
party objecting to a charge must point out distinctively
the objectionable matter. . . . Any complaint as to a question,
definition, or instruction . . . is waived unless specifically
included in the [*375] objections." TEX. R.
CIV. P. 274; see also Pitman v. Lightfoot, 937 S.W.2d
496, 520 (Tex. App.--San Antonio 1996, writ denied)
(holding that by failing to challenge court's agency instruction
on actual and apparent authority, appellants
waived any complaint [**21] on appeal regarding implied
finding of agency relationship); Shandee Corp. v.
Kemper Group, 880 S.W.2d 409, 412 (Tex.
App.--Houston [14th Dist.] 1994, writ denied) (holding
that appellant waived complaint regarding agent's authority
as imputed by Texas Insurance Code because he
"did not object to the instructions on the ground that they
did not include a definition of the statutory agency requirements").
Because there was no objection to the charge as
submitted, we hold that Transcontinental failed to preserve
error with respect to the inclusion of an instruction
on actual and apparent authority in the jury charge and
that its complaint is waived. Even if the issue were not
waived, however, we would not find error.
2. Omission of an Element of the Charge
Texas Rule of Civil Procedure 279, governing omissions
from the charge, provides, in relevant part:
Upon appeal all independent grounds
of recovery or of defense not conclusively
established under the evidence and no
element of which is submitted or requested
are waived. When a ground of recovery
or defense consists of more than one
element, if one or more of such elements
necessary to sustain such ground of recovery
or defense, and necessarily
[**22] referable thereto, are submitted to
and found by the jury, and one or more of
such elements are omitted from the
charge, without request or objection, and
there is factually sufficient evidence to
support a finding thereon, the trial court,
at the request of either party, may after
notice and hearing and at any time before
the judgment is rendered, make and file
written findings on such element or elements
in support of the judgment. If no
such written findings are made, such
omitted element or elements shall be
deemed found by the court in such manner
as to support the judgment. . . .
TEX. R. CIV. P. 279.
Under Rule 279, "[w]hen a question is omitted
which constitutes only a part of a ground of recovery,
and other questions referable to that ground are submitted
and answered, the omitted elements are deemed
found in support of the judgment if no objection is made
and they are supported by some evidence." Ins. Co. of N.
Am. v. Morris, 928 S.W.2d 133, 143 (Tex. App.--Houston
[14th Dist.] 1996), rev'd on other grounds, 981 S.W.2d
667 (Tex. 1998) (deeming apparent authority of surety to
make representations about quality of partnership investments
found by acts of participation, knowledge,
[**23] or acquiescence by principal); see also Ramos v.
Frito-Lay, Inc., 784 S.W.2d 667, 668 (Tex. 1990) (stating
that when "issues are omitted which constitute only a
part of a complete and independent ground and other
issues necessarily referable to that ground are submitted
and answered, the omitted elements are deemed found in
support of the judgment if no objection is made and they
are supported by some evidence"); Lexington Ins. Co. v.
Buckingham Gate, Ltd., 993 S.W.2d 185, 197-98 (Tex.
App.--Corpus Christi 1999, pet. denied).
Here, the actual or apparent authority of Poe &
Brown to act as the agent of Transcontinental is one of
the elements of a finding of Transcontinental's liability
for negligent misrepresentation and deceptive trade practices
under the DTPA and the Insurance Code. We hold
that, by [*376] Transcontinental's failure to object to
the omission of a jury question on Poe & Brown's actual
or apparent authority to act as an agent of Transcontinental
in making representations about coverage to clients
and third parties, and by the submission of evidence
that Poe & Brown made representations regarding Port
Metal's bailee policy to Port Metal and to <strong>Omni</strong>, Poe &
Brown's status as an [**24] agent of Transcontinental is
deemed found. See TEX. R. CIV. P. 279.

We overrule Transcontinental's first issue.
C. Poe & Brown's Authority to Act as Transcontinental's
Agent
In its second issue, Transcontinental argues that the
evidence was both legally and factually insufficient to
support the jury's answers to questions number 1, 2, 8,
and 9, finding Transcontinental liable for misrepresentation
and violations of the DTPA. It argues that even if
Poe & Brown's agency status is deemed found, Poe &
Brown was a soliciting agent and that a soliciting agent
"does not have authority to alter the policy via representations,
and thus, the insurer has no liability as a matter
of law where the agent issues a certificate of insurance
that misstates coverage."
1. Standard of Review of Legal and Factual Sufficiency
of the Evidence
In a legal sufficiency, or "no-evidence" review, we
determine whether the evidence would enable reasonable
and fair-minded people to reach the verdict under review.
City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex.
2005). In conducting this review, we credit favorable
evidence if reasonable jurors could, and disregard contrary
evidence unless reasonable jurors could not.
[**25] Id. We consider the evidence in the light most
favorable to the finding under review and indulge every
reasonable inference that would support it. Id. at 822.
We must sustain a no-evidence contention only if (1) the
record reveals a complete absence of evidence of a vital
fact, (2) the court is barred by rules of law or of evidence
from giving weight to the only evidence offered to prove
a vital fact, (3) the evidence offered to prove a vital fact
is no more than a mere scintilla, or (4) the evidence establishes
conclusively the opposite of the vital fact. Id. at
810; Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d
706, 711 (Tex. 1997). When reviewing a no-evidence
point of error, "all the record evidence must be considered
in the light most favorable to the party in whose
favor the verdict has been rendered, and every reasonable
inference deducible from the evidence is to be indulged
in that party's favor." Merrell Dow, 953 S.W.2d at 711.
"Anything more than a scintilla of evidence is legally
sufficient to support the finding." Formosa Plastics
Corp. v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d
41, 48 (Tex. 1998). In reviewing a challenge to the factual
sufficiency of the evidence, [**26] we "must consider
and weigh all the evidence and should set aside the
judgment only if it is so contrary to the overwhelming
weight of the evidence as to be clearly wrong and unjust."
Arias v. Brookstone, L.P., 265 S.W.3d 459, 468
(Tex. App.--Houston [1st Dist.] 2007, pet. denied) (citing
Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986)).
The jury is the sole judge of witnesses' credibility; it
may choose to believe one witness over another, and a
reviewing court cannot impose its own opinion to the
contrary. Wilson, 168 S.W.3d at 819; Arias, 265 S.W.3d
at 468. Because it is the jury's province to resolve conflicting
evidence, we must assume that jurors resolved all
conflicts in accordance with their verdict if reasonable
human beings [*377] could do so. Wilson, 168 S.W.3d
at 819; Arias, 265 S.W.3d at 468.
2. Evidence of Agency
It is established law that
an insurance company is generally liable
for any misconduct by an agent that is
within the actual or apparent scope of the
agent's authority. This rule is based on notions
of fairness: "since the principal has
selected the agent to act in a venture in
which the principal is interested, it is fair,
as between him and a third person, to impose
upon [**27] him the risk that the
agent may exceed his instructions."
Celtic Life Ins. Co. v. Coats, 885 S.W.2d 96, 98B99 (Tex.
1994) (citations omitted); Lexington Ins. Co. v. Buckingham
Gate, Ltd., 993 S.W.2d 185, 197 (Tex.
App.--Corpus Christi 1999, pet. denied). A local recording
agent is "a person or firm engaged in soliciting and
writing insurance, being authorized by an insurance
company . . . to solicit business and write, sign, execute
and deliver policies of insurance, and to bind companies
on insurance risks." Royal Globe Ins. Co. v. Bar Consultants,
Inc., 577 S.W.2d 688, 692 (Tex. 1979) (citing
Act of May 23, 1951, 52nd Leg., R.S., ch. 491, 1951
Tex. Gen. Laws 1067, repealed by Act of May, 2003,
78th Leg., R.S., ch. 1274, § 26(a)(1), 2003 Tex. Gen.
Laws 3641 ("former TEX. INS. CODE art. 21.14, § 2"));
Lexington Ins., 993 S.W.2d at 198. By necessary implication,
the local recording agent of an insurer has the
authority to represent the coverage afforded by the policies
it sells. Royal Globe, 577 S.W.2d at 694. "If [the]
representations [are] false . . . under the explicit language
of Section 16, Article 21.21 [of the Insurance Code] and
Section 17.46(b)(12) of the DTPA, his actions constitute[]
[**28] a deceptive act or practice for which his
principal is accountable." Id. However, a soliciting agent
is someone "who does not sign and execute policies of
insurance, and who does not maintain company records
of such transactions." Maccabees Mut. Life Ins. Co. v.
McNiel, 836 S.W.2d 229, 232 (Tex. App.--Dallas 1992,
no writ) (citing former TEX. INS. CODE art. 21.14). "It
is the settled law of this State that a soliciting agent of an
insurance company has no power or authority to make a

contract on behalf of the company or to waive the terms
of the policy." Int'l Sec. Life Ins. Co. v. Finck, 496
S.W.2d 544, 546 (Tex. 1973); Lexington Ins., 993 S.W.2d
at 199.
Whether an agency relationship exists is usually a
question of fact, and circumstantial evidence may be
used to establish agency and the extent of the agent's
authority. Pitman, 937 S.W.2d at 521. To determine
whether an agent had apparent authority we look to the
acts of the principal "to see if those acts would lead a
reasonably prudent person using diligence and discretion
to suppose that the agent had the authority he purported
to exercise." Shandee, 880 S.W.2d at 412 (quoting Guthrie
v. Republic Nat'l Ins. Co., 682 S.W.2d 634, 637 (Tex.
App.--Houston [1st Dist.] 1984, writ ref'd n.r.e.)).
Transcontinental [**29] argues that Poe & Brown
was a soliciting agent without power to make a contract
on behalf of Transcontinental. However, the record reflects
that Poe & Brown was Transcontinental's local
recording agent. The High Performance Agency Agreement
(the Agreement) between Transcontinental and Poe
& Brown gave Poe & Brown explicit authority "[t]o
bind, execute and issue the kinds of insurance contracts
and bonds to which this Agreement applies. . . ." In addition,
both Robert Pryor, Transcontinental's "Authorized
Agent," and Sparks testified that Poe & Brown acted as
Transcontinental's agent. The Agreement expressly
grants Poe & Brown [*378] the authority "[t]o countersign
insurance contracts, bonds, certificates and endorsements."
Moreover, Transcontinental represented
that Poe & Brown was its "authorized agent" on the insurance
policy issued to Port Metal. Likewise, the certificates
issued expressly represented that Pryor was
Transcontinental's "authorized representative." Transcontinental
presented no rebuttal evidence.
Reviewing the record evidence in the light most favorable
to <strong>Omni</strong> and indulging every reasonable inference
in its favor, we hold that the evidence is legally
sufficient to show that [**30] Poe & Brown was
Transcontinental's local recording agent and that it
therefore had the actual authority to sell Transcontinental
insurance policies. We further hold that Transcontinental
knowingly permitted Poe & Brown and Poe & Brown's
agents "to hold [themselves] out as having authority" to
provide certificates of insurance for Transcontinental
insurance products to its insureds and third parties and to
make representations about the scope of insurance coverage
to them or, at the very least, that Transcontinental
"bestow[ed] on [Poe & Brown] such indications of authority"
with respect to such actions that would "lead a
reasonably prudent person to rely on the apparent existence
of authority to his detriment." See Merrell Dow,
953 S.W.2d at 711.
Considering and weighing all the evidence, we hold
that the implied finding that Poe & Brown was Transcontinental's
local recording agent with the authority to
provide certificates of insurance and to make representations
about the scope of insurance coverage is not so
contrary to the overwhelming weight of the evidence as
to be clearly wrong and unjust. Arias, 265 S.W.3d at 468.
We hold, therefore, that the evidence is legally and factually
[**31] sufficient to show that Poe & Brown was
Transcontinental's recording agent and that it had the
actual authority to provide certificates of insurance to its
insureds and third parties and to make representations
about Port Metal's insurance coverage as Transcontinental's
agent.
We overrule Transcontinental's second issue.
D. <strong>Omni</strong>'s Standing to Maintain DTPA--Texas Insurance
Code Claims
In its second issue, Brown & Brown argues that
<strong>Omni</strong> lacked standing to bring a claim under the DTPA,
specifically under subsections 17.46(b)(5) and (12) of the
Texas Business and Commerce Code, under which <strong>Omni</strong>'s
DTPA claims were submitted to the jury in Question
3 of the jury charge. See TEX. BUS. & COM. CODE
ANN. § 17.46(b)(5), (12). Transcontinental argues that
"<strong>Omni</strong> did not purchase or seek to purchase the policy"
and therefore it is not a consumer under the DTPA, as
required for standing under section 17.46(b)(5), nor does
<strong>Omni</strong> fall within the scope of "persons" permitted to
bring DTPA claims under section article 21.21 section
16(a). Brown & Brown acknowledges that consumer
status is not required to bring a claim under subsection
17.46(b)(12).
Former article 21.21 section 16(a) of the Insurance
Code [**32] provided that "any person who has sustained
actual damages caused by another's engaging in an
act or practice declared in Section 4 of this Article to be
unfair methods of competition or unfair or deceptive acts
or practices in the business of insurance or in any practice
specifically enumerated in a subdivision of Section
17.46(b), Business & Commerce Code, as an unlawful
deceptive trade practice may maintain an action against
the person or persons engaging in such acts or practices."
Former TEX. INS. CODE art. 21.21, § 16(a), (b) (emphasis
added). The section required that, "[t]o maintain
an action for [*379] a deceptive act or practice enumerated
in Section 17.46(b), Business & Commerce
Code, a person must show that the person has relied on
the act or practice to the person's detriment." Id. 4
4 Former article 21.21 section 16(a) and (b) of
the Insurance Code provided:

Sec. 16. (a) any person who has
sustained actual damages caused
by another's engaging in an act or
practice declared in Section 4 of
this Article to be unfair methods
of competition or unfair or deceptive
acts or practices in the business
of insurance or in any practice
specifically enumerated in a
subdivision of Section 17.46(b),
Business & Commerce Code,
[**33] as an unlawful deceptive
trade practice may maintain an action
against the person or persons
engaging in such acts or practices.
To maintain an action for a deceptive
act or practice enumerated in
Section 17.46(b), Business &
Commerce Code, a person must
show that the person has relied on
the act or practice to the person's
detriment.
(b) In a suit filed under this
section, any plaintiff who prevails
may obtain:
(1) the amount
of actual damages
plus court costs and
reasonable and
necessary attorneys'
fees. If the trier of
fact finds that the
defendant knowingly
committed
the acts complained
of, the trier of fact
may award not
more than three
times the amount of
actual damages[.]
Former TEX. INS. CODE art.
21.21, § 16 (emphasis added).
Current section 541.151 of the
Insurance Code similarly provides
for a private cause of action for
damages against an insurer for acts
(1) defined by section 541.051
through section 541.061 of the
Code as "an unfair method of
competition or an unfair or deceptive
act or practice in the business
of insurance" or (2) "specifically
enumerated in Section 17.46(b),
Business & Commerce Code, as an
unlawful deceptive trade practice
if the person bringing the action
[**34] shows that the person relied
on the act or practice to the
person's detriment." TEX. INS.
CODE ANN. § 541.151 (Vernon
2009). Under current section
541.051 of the Insurance Code, it
is "an unfair method of competition
or an unfair or deceptive act
or practice in the business of insurance
to . . . make, issue, or circulate
or cause to be made, issued,
or circulated [a] . . . statement
misrepresenting with respect to a
policy issued . . . (A) the terms of
the policy [or] (B) the benefits or
advantages promised by the policy.
. . ." TEX. INS. CODE ANN. §
541.051 (Vernon 2009).
Former article 21.21, section 4 included among the
actions defined as unfair and deceptive acts or practices
in the business of insurance the "[m]aking, issuing, circulating,
or causing to be made, issued or circulated, any
. . . statement misrepresenting the terms of any policy
issued or to be issued or the benefits or advantages
promised thereby. . ., or using any name or title of any
policy or class of policies misrepresenting the true nature
thereof. . . ." Id. § 4(1).
Section 17.46(b) of the Business and Commerce
Code, which has not been recodified, provides, in relevant
part:
(b) . . . the term "false, misleading,
[**35] or deceptive acts or practices" includes,
but is not limited to, the following
acts:
. . . .
. . . .
(5) representing that
goods or services have
sponsorship, approval,
characteristics, ingredients,
uses, benefits, or quantities
which they do not have. . .

(12) representing that an
agreement confers or involves
rights, remedies, or
obligations which it does
not have or involve, or
which are prohibited by
law[.]
TEX. BUS. & COM. CODE ANN. § 17.46(b) (Vernon
Supp. 2009).
Section 17.50(a) of the DTPA, generally governing
standing to bring a DTPA claim, provides:
(a) A consumer may maintain an action
where any of the following constitute a
producing cause of economic damages or
damages for mental anguish:
[*380] (1) the use
employment by any person
of a false, misleading, or
deceptive act or practice
that is:
(A) specifically enumerated
in a subdivision of
Subsection (b) of Section
17.46 of this subchapter;
and
(B) relied on by a
consumer to the consumer's
detriment[.]
TEX. BUS. & COM. CODE ANN. § 17.50(a) (Vernon
Supp. 2009) (emphasis added).
1. <strong>Omni</strong>'s Consumer Status Under § 17.46(b)(5)
Brown & Brown acknowledges that former article
21.21, section 16(a) of the Insurance Code did not incorporate
the "consumer" [**36] standing requirement
of section 17.50(a) of the DTPA unless the terms of the
specific subsection under which a claim was pled required
consumer status. See former TEX. INS. CODE art.
21.21, § 16(a). However, it argues that, in Crown Life
Insurance Co. v. Casteel, the Texas Supreme Court held
that a plaintiff must prove consumer status to bring a
DTPA claim for the misrepresentation of "goods or services"
under subsection 17.46(b)(5) and that <strong>Omni</strong> does
not qualify as a consumer under the DTPA, i.e., as one
"who seeks or acquires by purchase or lease, any goods
or services." 22 S.W.3d 378, 386-87 (Tex. 2000); see
TEX. BUS. & COM. CODE ANN. § 17.45(4).
Our disposition of this issue is controlled by the law
of the case. With respect to <strong>Omni</strong>'s consumer status, the
Fourteenth Court of Appeals stated in <strong>Omni</strong> <strong>Metals</strong>:
<strong>Omni</strong> brought its DTPA-based claims
through article 21.21 of the Insurance
Code. TEX. INS. CODE ANN. art. 21.21,
§ 16(a) (Vernon Supp. 2002). Article
21.21, section 16(a), provides a cause of
action for "unlawful deceptive trade practice[s]"
defined under the laundry list of
DTPA section 17.46(b). Article 21.21
does not require consumer status to bring
a DTPA-based cause of action. [**37]
Crown Life Ins. Co. v. Casteel, 22 S.W.3d
378, 386 (Tex. 2000). "But if the terms of
a subsection of DTPA section 17.46(b)
require consumer status, then consumer
status is required to bring an action under
article 21.21 for its violation." Id.
<strong>Omni</strong> pleaded violations of DTPA
section 17.46(b)(5), (7), (12), and (23). By
their terms, subsections (5), (7), and (23)
require consumer status. Id. at 387. However,
subsection (12) does not require
consumer status. Id. Because consumer
status is not required, the trial court erred
in granting summary judgment on <strong>Omni</strong>'s
claim for violation of DTPA section
17.46(b)(12).
For the remaining DTPA provisions
pled by <strong>Omni</strong>, we must determine whether
consumer status requires direct purchase
or lease of services from Poe &
Brown. "Privity of contract with a defendant
is not required for the plaintiff to
be a consumer." Amstadt v. U.S. Brass
Corp., 919 S.W.2d 644, 649 (Tex. 1996).
Further, "[t]he consumer does not have to
be the actual purchaser of the insurance in
order to be classified as a consumer under
the DTPA." How Ins. Co. v. Patriot Fin.
Serv. of Texas, Inc., 786 S.W.2d 533, 539
(Tex. App.--Austin 1990), overruled on
other grounds by Hines v. Hash, 843
S.W.2d 464 (Tex. 1992). [**38] Accordingly,
<strong>Omni</strong> is not denied consumer status
by lack of privity with Poe & Brown. The

trial court erred in granting summary
judgment on this ground. . . .
2002 Tex. App. LEXIS 4334, 2002 WL 1331720, at *9.
We hold that the law of the case controls, and that <strong>Omni</strong>
was entitled to consumer status under section 17.46(b)(5)
and was not required to have consumer status under section
17.46(b)(12). See id.
[*381] 2. <strong>Omni</strong>'s Standing as a "Person" Under
Former Article 21.21, Section 16(a)
Brown & Brown also argues that <strong>Omni</strong> does not
qualify as a "person" entitled to make a claim under former
article 21.21 section 16(a) of the Insurance Code
because <strong>Omni</strong> was not an "insured or third party beneficiary"
of Port Metal's insurance policy. Brown & Brown
acknowledges that "any person" damaged by another's
engaging in a practice specifically enumerated in subsection
17.46(b) as a deceptive practice can bring a cause of
action under that subsection. However, it argues that
"[s]everal Texas courts . . . have construed the term 'any
person' as used in [former Texas Insurance Code article]
21.21 § 16(a) to mean only the insured or a third party
beneficiary and have held that only an insured or third
party beneficiary to a policy have standing [**39] to
bring a [DTPA-Texas Insurance Code] claim."
It is well established that an insurer's misrepresentation
regarding coverage is actionable under the Texas
Insurance Code and the DTPA against agents and companies.
See Mem'l Hosp. Sys. v. Northbrook Life Ins. Co.,
904 F.2d 236, 243-44 (5th Cir. 1990) (recognizing cause
of action in Texas under article 21.21 against insurance
carrier for false representation of coverage by insurance
agent or company acting as ERISA plan agent); Tenner
v. Prudential Ins. Co., 872 F. Supp. 1571, 1573 (E.D.
Tex. 1994) (holding that action could be maintained under
DTPA against insurance agent who allegedly acted
outside scope of authority in misrepresenting that life
policies were paid in full); Royal Globe, 577 S.W.2d at
693 (holding that misrepresentation by local recording
agent as to coverage for damages for vandalism was actionable
under DTPA and Insurance Code); Celtic Life
Ins. Co. v. Coats, 831 S.W.2d 592, 596 (Tex.
App.--Austin 1992) (holding that misrepresentation as to
psychiatric benefits by health insurance agent was actionable
under article 21.21 of the Insurance Code and
under DTPA), aff'd as modified, 885 S.W.2d 96 (Tex.
1994); State Farm Fire & Cas. Co. v. Gros, 818 S.W.2d
908, 912-13(Tex. App.--Austin 1991, no writ) [**40]
(holding that misrepresentation by local recording agent
as to terms or benefits of homeowner's policy was unfair
or deceptive act of principal); Hermann Hosp. v. Nat'l
Standard Ins. Co., 776 S.W.2d 249, 252-53 (Tex.
App.--Houston [1st Dist.] 1989, writ denied) (recognizing
cause of action by hospital that treated insured under
article 21.21, section 16 against insurers for allegedly
misrepresenting that care and treatment fell within insurance
coverage).
In Aetna Cas. & Sur. Co. v. Marshall, the Texas Supreme
Court held that "[s]ection 16 of article 21.21
makes actionable any violation of [Texas Business and
Commerce Code section] 17.46." 724 S.W.2d 770, 772
(Tex. 1987) (holding that injured worker was entitled to
recover treble damages against insurer in suit under article
21.21, section 16 for "representing to him that it
would provide benefits by the agreement and then failing
to do so"). The court made it clear that contractual privity
or third party beneficiary status is not required for standing
to bring claims against insurers for negligent misrepresentation
and deceptive acts and practices under the
Insurance Code and the DTPA. Id. It emphasized, "The
question is simply whether [**41] Aetna engaged in
conduct prohibited by section 17.46." Id.
This Court, following Marshall, has likewise held
that privity of contract is not required for the imposition
of a legal duty under article 21.21, section 16. Hermann
Hosp., 776 S.W.2d at 252 (recognizing cause of action by
hospital that treated insured against insurers for allegedly
misrepresenting [*382] that care and treatment fell
within insurance coverage). We opined:
Hermann Hospital is not suing on an
insurance policy or for the wrongful denial
of payment under [its patient's] worker's
compensation insurance policy. It is
suing for the damages it suffered by relying
on the representations of coverage allegedly
made by appellees. The supreme
court has held that misrepresentations as
to coverage and benefits are precisely the
sort of conduct that give rise to a course
of action under this section. Aetna, 724
S.W.2d at 772. We find that as a practical
matter, the relationship between insurance
companies and provides of health care is a
direct one, with the health care provider
acting in reliance on the representations of
coverage made by the carriers. Hospitals
and other health care providers must, and
do, rely upon the insurance [**42] carriers
representations of coverage in making
their decision regarding admission of potential
patients. If insurance coverage and
benefits can be verified, the hospital will
usually accept an assignment of benefits
to insure it is paid for any services rendered.
If insurance coverage and benefits

Id.
cannot be verified, or if no coverage exists,
the medical provider can then make
alternative financial arrangements. To insulate
the insurance carriers from liability
leaves the medical care provider without
recourse against the party causing its
damage, if it acts in reliance on the representation
of coverage. Had the insurance
carrier not falsely or negligently provided
information, appellant could have sought
alternative means to ensure that it received
payment for service before rendering
them.
The exact same reasoning applies in this case, in
which <strong>Omni</strong> sought a representation from Poe & Brown
that its steel stored at Port Metal was insured for use in
its business dealings, specifically including reassurance
that its steel was protected by insurance and an assurance
for its lender that the lender's collateral was protected.
Had Poe & Brown not falsely represented that <strong>Omni</strong>'s
steel [**43] was covered by insurance, <strong>Omni</strong> could
have protected its own interests and those of its lenders
either by notifying Port Metal of the gap in the coverage
extended by its bailee policy, so that Port Metal could
cure the defect in coverage, or by procuring coverage of
its own, and it would not have suffered the $ 3,000,000
loss it did suffer as a result of Poe & Brown's false assurance
that "all risks" were covered by the policy.
Brown & Brown, however, cites to a string of authorities
that it contends support its position, including
Tamez v. Certain Underwriters at Lloyd's, London, 999
S.W.2d 12 (Tex. App.--Houston [14th Dist.] 1998, pet.
denied); Pineda v. PMI Mortgage Insurance Co., 843
S.W.2d 660 (Tex. App.--Corpus Christi 1992, writ denied);
and Chaffin v. Transamerica Insurance Co., 731
S.W.2d 728 (Tex. App.--Houston [14th Dist.] 1987, writ
ref'd n.r.e.).
We find these cases distinguishable. Each involved
third party claimants under an insurance policy where the
insurer had not made any representation directly to the
third party upon which that party relied. See Tamez, 999
S.W. 2d at 21-22 (denying standing to third-party claimants
seeking to recover insurance proceeds under policy
[**44] in which they were named neither as insured nor
as beneficiary); Pineda, 843 S.W.2d at 672-73 (denying
standing to mortgagors to bring bad faith, insurance
code, and DTPA counterclaims against mortgage insurer
when mortgagors' claims were "all premised on the spurious
argument that they were 'insureds' under the PMI
policy, in [*383] privity with PMI, or were otherwise
beneficiaries under the policy"); Chaffin, 731 S.W.2d at
731-32 (denying standing to homeowners claiming to be
intended beneficiaries of subcontractor's insurance policy
to bring fraud claim against insurance company for initial
allegedly wrongful denial of coverage to subcontractor
when there was no evidence that homeowners detrimentally
relied on initial denial and homeowners ultimately
received entire coverage of policy).
Unlike the plaintiffs in each of the foregoing cases,
who brought claims of fraud and deceptive statements
against insurers based on alleged misrepresentations and
bad faith actions under a contract to which they were
neither parties nor third party beneficiaries, <strong>Omni</strong> bases
its claims upon false and misleading representations
about a third party's insurance coverage made to it by the
insurer's agent for [**45] its use in its business relations
and upon which <strong>Omni</strong> detrimentally relied to its pecuniary
loss. <strong>Omni</strong> thus falls squarely within the scope of
persons entitled to sue for damages under the plain language
of former article 21.21, section 16(a).
We overrule Brown & Brown's second issue.
E. Negligent Misrepresentation and Unfair and Deceptive
Acts
In its first issue, Brown & Brown argues that the
evidence is legally and factually insufficient to establish
that (a) Poe & Brown made a negligent misrepresentation
and engaged in an unfair or deceptive act; (b) the
representation caused <strong>Omni</strong>'s damages; (c) <strong>Omni</strong> justifiably
relied on Poe & Brown's misrepresentation; and (d)
Poe & Brown acted knowingly.
In its third issue, Transcontinental similarly argues
that <strong>Omni</strong>'s misrepresentation claim is not viable because
(a) no one at <strong>Omni</strong> read the certificates of insurance; (b)
the certificates disclaimed any representation regarding
coverage; (c) there is no evidence that Sparks's comment
to Port Metal's president, McKnight, regarding the purpose
of the storage charge exclusion was conveyed to
anyone at <strong>Omni</strong>; and (d) McKnight had no authority to
act for Transcontinental when he stated to <strong>Omni</strong>'s president,
[**46] Tomes, that <strong>Omni</strong>'s stored steel was covered
by Port Metal's bailee policy.
The third and fourth of Transcontinental's contentions--that
Sparks's comment to Port Metal regarding the
purpose of the storage charge exclusion and McKnight's
statements to Tomes about coverage are not actionable
against Transcontinental--are not supported by any argument
or authority and are therefore waived. See TEX.
R. APP. P. 38.1(i). We address the remaining issues together
as questions of the legal and factual sufficiency of
the evidence to support <strong>Omni</strong>'s negligent misrepresentation
and deceptive trade practices claims.
1. Appellants' Negligent Misrepresentation

In the first part of its first issue, Brown & Brown
argues that the evidence is legally and factually insufficient
to support <strong>Omni</strong>'s misrepresentation claim and its
claims under former article 21.21 of the Texas Insurance
Code and subsections 17.46(b)(5) and (12) of the DTPA.
Specifically, it contends that the evidence is insufficient
to support the jury's answers to Jury Question 1, in which
the jury was asked whether Poe & Brown made a negligent
misrepresentation, and Jury Question 3, in which
the jury was asked whether Poe & Brown engaged "in
[**47] any unfair or deceptive act or practice that caused
damages to <strong>Omni</strong> <strong>Metals</strong>."
The charge defined "unfair or deceptive act or practice"
to mean "1) representing that goods or services had
or would have [*384] characteristics that they did not
have; or 2) representing that an agreement confers or
involves rights that it did not have or involve." See TEX.
BUS. & COM. CODE ANN. § 17.46(b)(5), (12).
a. Appellants' Duty to Disclose
Brown & Brown argues that, of the four communications
made to <strong>Omni</strong> concerning Port Metal's bailee
insurance, three were made by Jacobe and only one by
Poe & Brown, which subsequently acquired Jacobe and
has itself since been acquired by Brown & Brown. Thus,
it alleges, the only communication between Poe &
Brown and <strong>Omni</strong> was the 1995 certificate of insurance
delivered to <strong>Omni</strong> by Poe & Brown, which stated that
Port Metal had a $ 3,000,000 "All Risk" "Bailee Liability"
policy from Transcontinental. The bailee policy
stated that the insurer, Transcontinental, "will pay for
'loss' . . . from any of the Covered Causes of Loss,"
which it defined as "RISKS OF DIRECT PHYSICAL
'LOSS' . . . except those causes of loss listed in the Exclusions."
Brown & Brown argues that, "[a]s a matter
[**48] of law, Poe & Brown's certificate of insurance
does not make a false representation by accurately describing
the bailee policy as an 'All Risk' policy." It refers
us to State Farm County Mutual Insurance Co. v.
Moran, 809 S.W.2d 613 (Tex. App.--Corpus Christi
1991, writ denied), and North American Ship Building,
Inc. v. Southern Marine & Aviation Underwriting, Inc.,
930 S.W.2d 829 (Tex. App.--Houston [1st Dist.] 1996, no
writ), as support for its argument.
In <strong>Omni</strong> <strong>Metals</strong>, the Fourteenth Court of Appeals
recited the elements of negligent misrepresentation,
namely, that (1) a representation was made by a defendant
in the course of business; (2) the defendant supplied
false information for the guidance of others in their
business; (3) the defendant failed to exercise reasonable
care or competence in obtaining or communicating the
information; and (4) the plaintiff suffered pecuniary loss
by justifiably relying on the representation. 2002 Tex.
App. LEXIS 4334, 2002 WL 1331720, at *4; see also
Fed. Land Bank Ass'n v. Sloane, 825 S.W.2d 439, 442
(Tex. 1991).
In the prior appeal of this case, the Fourteenth Court
of Appeals pointed out that a misrepresentation need not
be an affirmative misrepresentation of fact. It [**49]
stated, "Where there is a duty to speak, silence may be as
misleading as a positive misrepresentation of existing
facts." <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex. App. LEXIS 4334, 2002
WL 1331720, at *3 (quoting Smith v. Nat'l Resort Cmty.,
Inc., 585 S.W.2d 655, 658 (Tex. 1979)). "Whether a duty
to disclose exists is a question of law." Id. (citing Bradford
v. Vento, 48 S.W.3d 749, 755 (Tex. 2001)). It further
opined, "A duty to disclose may arise in four situations:
(1) when there is a fiduciary relationship; (2) when one
voluntarily discloses information, the whole truth must
be disclosed; (3) when one makes a representation, new
information must be disclosed when that new information
makes the earlier representation misleading or
untrue; and (4) when one makes a partial disclosure and
conveys a false impression." Id. (quoting Hoggett v.
Brown, 971 S.W.2d 472, 487 (Tex. App.--Houston [14th
Dist.] 1997, pet. denied)).
<strong>Omni</strong> argued that Poe & Brown had a duty to disclose
under Hoggett scenarios three and four. 2002 Tex.
App. LEXIS 4334, [WL] at *4. The Fourteenth Court of
Appeals agreed. Id. <strong>Omni</strong> had argued that Poe & Brown
should have revealed the storage fee exclusion to correct
impressions left by earlier certificates of insurance. Id.
The court observed [**50] that the summary judgment
evidence showed that the earliest certificate of insurance
provided to <strong>Omni</strong>, for Port Metal's 1992-93 bailee policy,
stated that "coverage includes property of others in
custody of [*385] insured." Id. Sparks, an insurance
agent employed by Poe & Brown at the time of the fire
loss, sent the certificate to <strong>Omni</strong>. Id. The summary
judgment evidence showed that Sparks was aware of the
storage fee exclusion by May of 1995. Id. He had been
questioned about the storage fee exclusion by Port
Metal's president, who told him Port Metal charged its
customers a storage fee. Id. Nevertheless, Sparks did not
disclose or provide additional information about the
storage exclusion to <strong>Omni</strong>, even when he knew that <strong>Omni</strong>
wanted to make sure that its property was covered by
insurance purchased by Port Metal. Id. The court of appeals
concluded, based on the summary judgment evidence,
that "Sparks never corrected the impression conveyed
by the 1992-93 policy, which was misleading
given facts Sparks later learned." Id. It held that these
circumstances created a fact issue as to whether appellees
breached the duty prescribed under Hoggett scenario
three. Id.
<strong>Omni</strong> also contended that, under [**51] the circumstances,
the "all risk" certificate of insurance was a
partial disclosure that conveyed a false impression and

was therefore false under Hoggett scenario four. Id. The
Fourteenth Court of Appeals again agreed. Id. It stated:
We conclude that the evidence shows
Poe & Brown understood it was answering
<strong>Omni</strong>'s question, "Is my property at
Port Metal's facility covered?" At that
time, Poe & Brown knew that Port Metal
wanted to cover all property of its customers,
was aware of the storage exclusion
in the policy, and knew that Port
Metal was charging its customers a storage
fee. Despite this knowledge, the certificate
of insurance was its only answer, a
partial answer, to <strong>Omni</strong>'s question. The
certificate verified "all risk" bailee liability
coverage with a $ 3,000,000 limit. In
deposition, Poe & Brown's corporate representative
admitted that the term "all
risk" did not really cover all possible risks
and was possibly confusing. Thus, taken
in the light most favorable to <strong>Omni</strong>, the
all risk designation left a false impression
under the circumstances.
Id. The court held, "Accordingly, there is a fact issue
whether appellees met their duty under Hoggett scenario
four." Id.
In its second [**52] issue in <strong>Omni</strong> <strong>Metals</strong>, <strong>Omni</strong>
argued that a fact issue existed as to whether Poe &
Brown had misrepresented coverage "because, under the
circumstances, the 'all risk' certificate of insurance was
false and misleading." Id. Poe & Brown made the same
argument it makes here--that the certificate could not be
considered a misrepresentation as a matter of law--and it
relied upon the same authority, North American Shipbuilding,
in support of its argument. 2002 Tex. App.
LEXIS 4334, [WL] at *5. The Fourteenth Court of Appeals
addressed Poe & Brown's argument at length and
found North American Shipbuilding to be distinguishable
"for several reasons." Id.
The court stated:
First, the "all risks" representation in
that case was found in the insurance policy,
not just in two words on a certificate:
"[this policy] insures against all risks of
physical loss or damage to the Vessel . . .
except as herein provided." 930 S.W.2d at
831. Second, an exclusion for faulty
workmanship was also fully delineated in
the same document. In comparison, the
certificate sent to <strong>Omni</strong> did not set for the
storage exclusion. Third, the defendants in
N. Am. Shipbuilding did not communicate
the "all risk" policy clause in response to a
specific inquiry. [**53] In contrast, Poe
& Brown provided the 'all risk" certificate
in response to <strong>Omni</strong>'s inquiry for confirmation
that its steel was covered while at
Port Metal. Fourth, in N. Am. Shipbuilding,
[*386] the insured failed to provide
summary judgment proof that the insurer
misrepresented the coverage to include
faulty workmanship. The summary judgment
proof here reveals that appellees told
Port Metal that the storage exclusion did
not apply.
Id. The court followed Black v. Victoria Lloyds Insurance,
797 S.W.2d 20 (Tex. 1990), in holding that a fact
issue existed concerning misrepresentation of liability
insurance coverage for personal use when an insurance
company represents that "complete . . . insurance" has
been provided when it has not. <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex.
App. LEXIS 4334, 2002 WL 1331720, at *5; see Black,
797 S.W.2d at 24 (holding that insurance identification
card provided to driver of leased vehicle by lessor's insurance
company, which stated only that policy complied
with "the compulsory auto laws of the State of Texas,"
but did not indicate that driver of leased vehicle did not
have liability insurance coverage for personal use of vehicle,
raised fact issue concerning misrepresentation of
insurance coverage). The [**54] court concluded that
<strong>Omni</strong> had raised a fact issue with respect to "whether
[Poe & Brown] misrepresented the coverage afforded by
the policy." <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex. App. LEXIS 4334,
2002 WL 1331720, at *5.
We adopt the Fourteenth Court of Appeals' statement
of the law and apply the law of the case.
At trial, the jury was asked in Question 1 whether
Poe & Brown made a negligent misrepresentation. In
Question 3, it was asked whether Poe & Brown had engaged
"in any unfair or deceptive act or practice that
caused damages to <strong>Omni</strong> <strong>Metals</strong>." It responded 'yes' to
both questions. We consider, therefore, whether the evidence
is legally and factually sufficient to support the
jury's findings.
The facts presented to the jury in this case comport
with the facts presented to the Fourteenth Court of Appeals
in the summary judgment evidence. See id. at
*1B2. The unrebutted evidence shows that the bailee
policies issued to Port <strong>Metals</strong> contained an exclusion for
stored goods. Port <strong>Metals</strong> was concerned about insuring
all of the steel stored with it. Its president, McKnight,
read the 1992 policy and asked its insurance agent,

Sparks, about the exclusion. Sparks assured him the exclusion
did not apply to the steel stored at Port Metal,
[**55] and McKnight conveyed this information to <strong>Omni</strong>.
Indeed, <strong>Omni</strong>'s president, Tomes, asked McKnight on
several occasions whether <strong>Omni</strong>'s steel stored at Port
Metal's warehouse was insured and was assured by him
that it was.
<strong>Omni</strong>'s bank required that <strong>Omni</strong> request certificates
of insurance from Jacobe and later Poe & Brown to
document Port's Metal's coverage, and <strong>Omni</strong> did. Sparks
delivered the certificates to <strong>Omni</strong> knowing that <strong>Omni</strong>
wanted the certificates to provide to its secured lender to
show that all of its steel at Port Metal was covered by
insurance. Despite knowing that Port Metal relied upon
him to obtain coverage for all of its customers' steel, as
well as knowing, from at least June 28, 1993, that Port
Metal received revenues from its customers of $ 6,000 a
month for storage fees, and knowing, by at least July of
1993, that Port <strong>Metals</strong>' bailee policy excluded from coverage
goods "for which a storage charge is made," Sparks
did nothing to inform Port Metal or its customers of the
exclusion. Rather, he typed into the 1993 certificate on
Port Metal's $ 3,000,000 bailee policy that he delivered
to <strong>Omni</strong> the statement that Port Metal's bailee policy
"INCLUDES PROPERTY OF OTHERS IN CUSTODY
[**56] OF INSURED," a statement Sparks admitted was
"untrue." He then delivered two more "All Risk" certificates
to <strong>Omni</strong> without mentioning the exclusion.
[*387] Considering the evidence in the light most
favorable to the jury's verdict, we hold that the evidence
would enable reasonable and fair-minded people to conclude
that Poe & Brown, Transcontinental's agent, made
a negligent misrepresentation. Merrell Dow, 953 S.W.2d
at 711. There was no evidence that Poe & Brown did not
make the representations complained of. Therefore, considering
and weighing all the evidence neutrally, we hold
that the jury's finding that Poe & Brown and Transcontinental
made negligent misrepresentations is not so contrary
to the overwhelming weight of the evidence as to
be clearly wrong and unjust. Arias, 265 S.W.3d at 468.
We hold, therefore, that the evidence is both legally and
factually sufficient to support the jury's finding that Poe
& Brown and Transcontinental made negligent misrepresentations
to <strong>Omni</strong>. We further hold that the evidence
was both legally and factually sufficient to support the
jury's finding that Poe & Brown, Transcontinental's
agent, represented to <strong>Omni</strong> that Port Metal's bailee policy
had a characteristic [**57] it did not have, namely the
characteristic of covering <strong>Omni</strong>'s steel coils stored at
Port Metal, and that Poe & Brown and Transcontinental
represented to <strong>Omni</strong> that the bailee policy conferred a
right that it did not confer, namely the right to recover
insurance proceeds for damage to <strong>Omni</strong>'s steel stored at
Port Metal.
We overrule the first part of Brown & Brown's first
issue.
b. Justifiable Reliance and Causation
In the second and third parts of its first issue, Brown
& Brown argues that the evidence is legally and factually
insufficient to establish that a representation by Poe &
Brown caused <strong>Omni</strong>'s damages. Brown & Brown contends
that there is no evidence that <strong>Omni</strong> read Poe &
Brown's 1995 certificate of insurance before the 1995
fire and that, as a matter of law, <strong>Omni</strong> <strong>Metals</strong> could not
detrimentally rely on the term "all risk" in the certificate
of insurance to mean that its steel coils were covered
under Port Metal's bailee policy or that the policy would
have "no conditions, no terms, no exclusions" limiting
coverage. Transcontinental argues in the first and second
parts of its third issue that no one at <strong>Omni</strong> read the certificates.
Both Brown & Brown and Transcontinental
also argue [**58] that the fact that the certificates contained
a disclaimer is conclusive evidence of a lack of
justifiable reliance.
"Under the DTPA, a consumer may bring an action
when he has relied to his detriment on a false or misleading
representation, and the reliance is a producing
cause of damages." Am. Home Shield, Inc. v. Kortz, No.
01-99-00380-CV, 2000 Tex. App. LEXIS 6125, 2000 WL
1262617, at *3 (Tex. App.--Houston [1st Dist.] 2000,
pet. dism'd) (not designated for publication); see also
Leyendecker & Assocs., Inc. v. Wechter, 683 S.W.2d 369,
373 (Tex. 1984). The plaintiff may recover either "the
value of that which he has received" ("out of pocket"
damages) or "the difference between the value as represented
and the actual value received" ("benefit of the
bargain" damages). Am. Home Shield, 2000 Tex. App.
LEXIS 6125, 2000 WL 1262617, at *3; see also Leyendecker,
683 S.W.2d at 373. Evidence that a misrepresentation
as to the terms or benefits of coverage prevented
an insured from taking steps to prevent a loss is sufficient
to support a jury finding that the misrepresentation
was a producing cause of damages. Gros, 818 S.W.2d at
914 (holding that evidence that insureds could have taken
steps to prevent damage to their home caused by
landslide, [**59] such as re-engineering retaining wall,
had they known retaining wall failure would not be covered
by homeowner's policy, was sufficient to support
jury's finding that insurer's [*388] misrepresentations
regarding coverage were producing cause of insureds'
damage).
In addition, Texas has long recognized the tort of
negligent misrepresentation as described in section 552
of the Restatement (Second) of Torts and its application
to professionals. McCamish, Martin, Brown & Loeffler v.
F.E. Appling Interests, 991 S.W.2d 787, 791 (Tex. 1999).
Section 552(1) provides:

One who, in the course of his business,
profession or employment, or in any
transaction in which he has a pecuniary
interest, supplies false information for the
guidance of others in their business
transactions, is subject to liability for pecuniary
loss caused to them by their justifiable
reliance upon the information, if he
fails to exercise reasonable care or competence
in obtaining or communicating
the information.
Id. at 791 (emphasis added) (quoting RESTATEMENT
(SECOND) OF TORTS § 552 (1977) and applying section
to define scope of duty of attorney to non-client to
whom he has made representation); see Sloane, 825
S.W.2d at 442 (applying [**60] section 552 to define
scope of lender's duty); Stone v. Lawyers Title Ins. Corp.,
554 S.W.2d 183, 188 (Tex. 1977) (holding that title insurer
can be liable for fraud in misrepresenting state of
title); Great Am. Mortgage Investors v. Louisville Title
Ins. Co., 597 S.W.2d 425, 430 (Tex. Civ. App.--Fort
Worth 1980, writ ref'd n.r.e.) (applying tort of negligent
misrepresentation to title insurer).
Under this law, "[i]t is well settled that even though
one does not have a duty to act, if one acts voluntarily,
he must do so with due care and is generally liable for
negligence." Great Am. Mortgage, 597 S.W.2d at 430
(holding that title binder who had no duty to disclose
existence of deed restriction but who "actually represented
that no deed restrictions were in existence . . . is
held to the standard of reasonable care and may under
the proper circumstances be liable in tort for damages
caused by a negligent misrepresentation"). In the context
of title insurance, the law imposes a duty on the title insurer
to know whether a statement he makes to the seller
is true, and it holds him responsible for an affirmative
representation that is the "producing cause" of damages
to the party purchasing [**61] the insurance. First Title
Co. v. Garrett, 860 S.W.2d 74, 76 (Tex. 1993). Similarly,
the theory of negligent misrepresentation permits plaintiffs
who are not parties to a contract for the professional
services of lawyers to recover from the contracting professionals
in situations in which the attorney who provides
the false information is aware of the non-client and
intends that the non-client rely on the information.
McCamish, 991 S.W.2d at 792.
However, liability is limited to the loss suffered
(a) by the person or one of a limited
group of persons for whose benefit and
guidance [one] intends to supply the in-
formation or knows that the recipient intends
to supply it; and (b) through reliance
upon it in a transaction that [one] intends
the information to influence or
knows that the recipient so intends or in a
substantially similar transaction.
Id. at 794 (quoting RESTATEMENT (SECOND) OF
TORTS § 552(2)) (emphasis added).
In determining whether the justifiable reliance element
of negligent misrepresentation is met, the court
must consider the nature of the relationship between the
professional, his client, and the nonclient. See
McCamish, 991 S.W.2d at 794. The professional must
have invited [**62] reliance. See id. (holding that attorney
owes duty of care to nonclient only if attorney
invites [*389] reliance); see also Sloane, 825 S.W.2d
at 442 (finding evidence sufficient to support borrowers'
claim that bank has duty to use reasonable care whenever
it provides information to its customers or potential customers
which it breached when it allegedly encouraged
borrowers to incur expenses in reliance on false information
provided by bank in relation to their loan application).
The misrepresentation must have been the cause in
fact of the plaintiff's damages. The damages recoverable
for a negligent misrepresentation are those necessary to
compensate the plaintiff for the pecuniary loss to him of
which the misrepresentation is the legal cause, including,
inter alia, "pecuniary loss suffered . . . as a consequence
of the plaintiff's reliance on the misrepresentation."
Sloane, 825 S.W.2d at 442 (quoting RESTATEMENT
(SECOND) OF TORTS § 552B). The two elements of
proximate cause are (1) that an omission or act was a
substantial factor in bringing about the plaintiff's injury,
without which no harm would have occurred, or cause in
fact, and (2) that the actor would have anticipated the
danger [**63] that his negligent act created for others,
or foreseeability. City of Gladewater v. Pike, 727 S.W.2d
514, 517 (Tex. 1987); see also Havner v. E-Z Mart
Stores, 825 S.W.2d 456, 458-59 (Tex. 1992). The act or
omission need not be the sole cause of the plaintiff's
harm, and causation need not be supported by direct evidence;
circumstantial evidence and inferences therefrom
are a sufficient basis for finding causation. Havner, 825
S.W.2d at 459.
(1) Legal Sufficiency of the Evidence of Justifiable
Reliance and Causation
Brown & Brown argues that because Tomes, <strong>Omni</strong>'s
president, testified that he did not specifically recall
reading the certificates of insurance, "the evidence is
legally and factually insufficient to support the cause in

fact and reliance elements of <strong>Omni</strong>'s claims." Brown &
Brown also argues that "<strong>Omni</strong> could not have justifiably
or reasonably relied on the term 'All Risk' to mean that
all of its steel coils were covered under Port Metal's policy
or that the policy would have 'no conditions, no
terms, no exclusions' limiting coverage" because of the
disclaimer in the certificate that "THIS CERTIFICATE
IS ISSUED AS A MATTER OF INFORMATION ON-
LY AND CONFERS NO RIGHTS ON THE CERTIFI-
CATE [**64] HOLDER. THIS CERTIFICATE DOES
NOT AMEND, EXTEND OR ALTER THE COVER-
AGE AFFORDED BY THE POLICIES DESCRIBED
BELOW." Transcontinental likewise argues that the fact
that the certificates contain a disclaimer is conclusive
evidence of a lack of justifiable reliance.
We construe Brown & Brown's and Transcontinental's
argument to be that <strong>Omni</strong> could not justifiably rely
on Poe & Brown's representation that Port Metal had an
"all risk" bailee policy; rather, <strong>Omni</strong> was barred by the
disclaimer as a matter of law from relying on appellants'
representation of coverage of "all risks" in the certificate
of insurance, and it had a legal duty to read the policy
referenced in the certificate of insurance to determine the
scope of any exclusions. Because <strong>Omni</strong> did not ask for
and read the policy, the evidence was legally insufficient
to support its negligent misrepresentation and DTPA
claims under the Insurance Code.
We hold that the law of the case again controls. In
<strong>Omni</strong> <strong>Metals</strong>, in response to <strong>Omni</strong>'s appeal of the summary
judgment entered against it, Poe & Brown and
Transcontinental argued, as they do here, that <strong>Omni</strong> had
a duty to read the policy itself. Reversing the summary
judgment, the Fourteenth Court [**65] of Appeals
pointed out that "[c]ertain persons, other than the direct
recipient of a misrepresentation, [*390] can sue for
negligent misrepresentation." <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex.
App. LEXIS 4334, 2002 WL 1331720, at *7 (citing RE-
STATEMENT (SECOND) OF TORTS § 552(2)) (describing
persons who may sue for negligent misrepresentation
as including person or persons "for whose benefit
and guidance [the defendant] intends to supply the
information or knows that the recipient intends to supply
it" and "through reliance upon it in a transaction that [the
defendant] intends the information to influence or knows
that the recipient so intends or in a substantially similar
transaction"). The court also observed that, in the cases
upon which <strong>Omni</strong> relied, "the failure to read the policy
was no apparent bar to a claim for misrepresentation."
2002 Tex. App. LEXIS 4334, [WL] at *8 (citing Lexington
Ins. Co., 993 S.W.2d at 197-98 (stating that any misconduct
by agent that is within actual or apparent scope
of agent's authority and that insurer's recording agent's
misrepresentation of coverage is considered that of insurer);
Black, 797 S.W.2d at 24B25. It held, "<strong>Omni</strong>'s
failure to read the policy does not support the granting of
summary judgment." <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex. App.
LEXIS 4334, 2002 WL 1331720, at *8. [**66] In other
words, the court held that <strong>Omni</strong> <strong>Metals</strong> had no legal duty
to read the policy upon which judgment against it could
be based.
The Fourteenth Court of Appeals specifically rejected
the argument that the disclaimer on the certificate
of insurance put <strong>Omni</strong> on notice that there could be exclusions
that would prevent its stored steel from being
covered by Port Metal's "all risk" bailee policy and that it
placed on <strong>Omni</strong> a duty of due diligence to read the bailee
policy to determine the extent of Port Metal's coverage.
The court stated,
[I]ssuance of a certificate of insurance
[the 1993 certificate] without disclosure
of additional information about the storage
fee exclusion and issuance of another
certificate [the 1995 certificate], coupled
with the circumstances under which it was
sent to <strong>Omni</strong> and the assurances of coverage
to Port Metal, give rise to causes of
action for misrepresentation. We reject
appellees' arguments that, as a matter of
law, issuance of an insurance certificate
does not create a duty; presence of disclaimers
precludes the creation of a false
impression; no duty to disclose arises because
there is no duty to explain policy
exclusions to an insured; and the use of
[**67] "all risk" cannot convey a false
impression.
2002 Tex. App. LEXIS 4334, [WL] at *7. Adopting the
law of the case, we hold that <strong>Omni</strong>'s negligent misrepresentation
and DTPA claims were not barred as a matter
of law by the failure of its president to read every word
in the certificate of insurance or to request and read the
policy to determine whether its steel was excluded from
coverage.
Our conclusion is not changed by the cases relied
upon by Brown & Brown to support its claim. In none of
its cases was there a direct misrepresentation to the
plaintiff or any evidence that the plaintiff received and
relied upon a false or misleading representation. See
Rocky Mountain Helicopters, Inc. v. Lubbock County
Hosp. Dist., 987 S.W.2d 50, 53 (Tex. 1998) (stating, "the
record contains no evidence that [the plaintiff] was aware
of the [representation] or that [the defendant] had communicated
its content or existence to anyone outside of
the company"); Sw. Bell Tel. Co. v. Boyce Iron Works,
Inc., 726 S.W.2d 182, 187 (Tex. App.--Austin 1987)

(holding there was no proof that plaintiff had "even heard
of any representations, much less misrepresentations"),
rev'd on other grounds, 747 S.W.2d 785 (Tex. 1988);
Rivera v. Philip Morris, Inc., 395 F.3d 1142, 1155 (9th
Cir. 2005) [**68] (stating there was "no admissible
evidence identifying what statements attributable to [the
defendant] the decedent actually saw, heard, or read and
relied upon").
[*391] Nor is our conclusion changed by Transcontinental's
argument that, as a matter of law, reliance is
never justified when a party receives a disclaimer. Rather,
we agree with <strong>Omni</strong>'s argument that all of the cases
cited by Transcontinental on this point are factually distinguishable
and inapplicable in that "they relate solely to
binding contractually disclaimed reliance." See Coastal
Bank SSB v. Chase Bank of Texas, N.A., 135 S.W.3d 840,
844 (Tex. App.--Houston [1st Dist.] 2004, no pet.);
Bluebonnet Sav. Bank F.S.B. v. Grayridge Apt. Homes,
Inc., 907 S.W.2d 904, 910 (Tex. App.--Houston [1st
Dist.] 1995, writ denied); Airborne Freight Corp. v. C.R.
Lee Enters., 847 S.W.2d 289, 298 (Tex. App.--El Paso
1992, writ denied). Here there was no contract between
<strong>Omni</strong> and Brown & Brown, and there was specifically
no contractually binding agreement by <strong>Omni</strong> not to rely
on the certificate provided to it for use in its business
dealings. Rather, the certificate was delivered to <strong>Omni</strong>
by Poe & Brown for the express purpose of conveying to
[**69] <strong>Omni</strong>'s lender the assurance that <strong>Omni</strong>'s steel
stored at Port Metal was insured and with Poe & Brown's
knowledge that it would be so relied upon. Thus, Poe &
Brown invited <strong>Omni</strong>'s reliance on its representations. See
McCamish, 991 S.W.2d at 794.
Moreover, Poe & Brown's delivery of the requested
certificate to <strong>Omni</strong> and its failure to correct information
regarding coverage that it knew to be incorrect caused
<strong>Omni</strong> not to take other steps to assure the coverage of its
steel stored at Port Metal. This is essentially the same
scenario as in Hermann Hospital, in which we opined,
To insulate the insurance carriers from
liability leaves the [third-party plaintiff to
whom coverage was misrepresented for
use in its business dealings] without recourse
against the party causing its damage,
if it acts in reliance on the representation
of coverage. Had the insurance carrier
not falsely or negligently provided
information, appellant could have sought
alternative means to ensure that it received
payment for service before rendering
them.
776 S.W.2d at 252. We declined to find that such a suit
was barred as a matter of law in Hermann Hospital, and
we similarly decline to find that a suit for misrepresentation
[**70] is barred in this case.
Finally, our holding that <strong>Omni</strong> justifiably relied on
Poe & Brown's false representations and that those representations
caused it pecuniary damages is not changed
by Brown & Brown's and Transcontinental's reliance on
new authority since <strong>Omni</strong> <strong>Metals</strong> was decided, namely
the Southern District of Texas's construction of Texas
law in TIG Insurance Co. v. Sedgwick James, 184 F.
Supp. 2d 591 (S.D. Tex. 2001) (Via Net I), and the Texas
Supreme Court's subsequent per curiam opinion in a
companion case, Via Net v. TIG Insurance Co., 211
S.W.3d 310 (Tex. 2006) (Via Net II).
In Via Net I, the named insured, Corporate Express,
Inc., purchased two commercial general liability (CGL)
insurance policies from Lumbermens Mutual Casualty
Company for itself and its subsidiaries, Policies 300 00
and 300 01. 184 F. Supp. 2d 591 at 594. The named insureds
on Policy 362 00 were "U.S. Delivery Systems
[USDS] and its subsidiaries, United Transnet, Inc. and its
subsidiaries, and Corporate Express, Inc. [CEI] (the parent
company of [USDS] and united Transnet)." Id. Policy
362 00 contained no provision for additional insured
coverage. Id. Policy 30001's named insured was CEI.
While subsidiaries [**71] of CEI were included on
Policy 300 01, which did provide for additional insureds,
the policy specifically excluded Corporate Express Delivery
Systems, Inc. [*392] (CEDS) and its subsidiaries,
which included USDS, whose Houston subsidiary
was Via Net. Id. Via Net was thus insured only under
Policy 300 00. Id.
One of Via Net's customers was Safety Lights Sales
& Leasing, Inc. (Safety Lights). In March 1996, Safety
Lights demanded that it be added as an additional insured
to Via Net's insurance policy in order for Via Net to remain
a vendor with Safety Lights. See id. As evidence
that it had been added as an additional insured, Safety
Lights requested a certificate of general and auto liability
insurance from Via Net, and it further required that the
certificate "evidence 'waiver of subrogation and additional
insured in favor of Safety Lights Company.'" Id. at
594-95. CEDS's insurance agency, Sedgwick, issued a
certificate to Safety Lights under Policy 362 00 listing
Via Net and USDS as the insureds. Id. The certificate
stated, "Certificate holder is added as additional insured
re: general liability." Id. at 595. The certificate contained
the same disclaimer as in this case. Safety Lights did
[**72] not ask for or seek to read Policy 362 00 to which
the certificate of insurance referred. See id. at 598. Policy
362 00 did not provide for additional insureds.

Subsequently, an employee of Via Net was injured
while delivering a steel plate to Safety Lights. He sued
Safety Lights under various theories, including violations
of the Texas Insurance Code, the DTPA, negligence,
misrepresentation and fraud, claiming that Lumbermens
should provide coverage under Policy 362 00. The United
States District Court rejected Safety Light's claim that
it was entitled to coverage under Policy 362 00. The
court held that a "certificate of insurance will not suffice
to create insurance coverage if such coverage is precluded
by the terms of the policy." Id. at 597 (citing
Wann v. Metropolitan Life Ins. Co.., 41 S.W.2d 50, 52
(Tex. Com. App. 1931) for proposition that "certificate of
insurance does 'not constitute the complete contract of
insurance' and must be construed in connection with underlying
insurance policy"). Observing that under Texas
law, "[a]n insured has a duty to read the insurance policy
and is charged with knowledge of its provisions," the
court concluded that Safety Lights, claiming to [**73]
be an additional insured under Policy 300 01, "should be
held to the same obligation as a named insured to review
a policy of insurance on which it seeks to rely, and its
reliance solely on the agent's certificate of insurance is
not reasonable under the circumstances presented by the
admissible evidence." Id. at 603 (citing Ruiz v. Gov't
Emp. Ins. Co., 4 S.W.3d 838, 841 (Tex. App.--El Paso
1999, no pet.)). It concluded that Safety Lights' reliance
upon the certificate of insurance to provide it additional
insured status was not reasonable. Id. at 604. 5
5 With respect to Safety Lights' Insurance
Code and DTPA claims, the court acknowledged
that "Section 4 of Article 21.21 of the Texas Insurance
Code and Section 17.46 of the DTPA
prohibit the making of any statement misrepresenting
the terms of any insurance policy." TIG
Ins. Co. v. Sedgwick James, 184 F. Supp. 2d 591,
604 (S.D. Tex. 2001) (Via Net I) (citing former
TEX. INS. CODE art. 21.21, § 4(1); TEX. BUS. &
COM. CODE ANN. § 17.46). But it held that
Safety Lights' DTPA and Article 21.21 claims
failed as a matter of law because its damages and
expenses related to its employee's personal injury
suit were entirely borne by TIG, so [**74] that
Safety Lights suffered no economic damages, and
TIG brought suit "only under its rights of subrogation
under the insurance policy it issued to
Safety Lights," and, "a subrogee can have no
greater rights than its subrogor," so that "TIG, as
subrogee, cannot state a claim under the DTPA."
Id. at 605.
After its unsuccessful federal suit to recover as an
additional insured under the Lumbermens policy, Safety
Lights sued Via Net in Texas state court for breaching
[*393] its promise to provide additional insured cover-
age. Via Net II, 211 S.W.3d 310. The issue when the suit
was eventually appealed to the Texas Supreme Court
was whether the discovery rule applied to Safety Lights'
suit, which arose less than four years after coverage was
denied but more than four years after the promise to provide
coverage was breached. Id. at 311-12. The court
observed that Via Net's policy with Lumbermens "did
not provide for additional-insured coverage and no endorsement
adding it as an insured was ever issued." Id. at
312. It held that, as a contracting party, Safety Lights had
a duty to use ordinary care for the protection of its own
interests and to use due diligence to verify contract performance.
Id. at 314. [**75] Because the breach would
have been easily discoverable merely by Safety Lights'
"asking [its] contract partner for information needed to
verify contractual performance," the Texas Supreme
Court held that, under the circumstances of the case, the
discovery rule did not apply, although it might apply to
contract cases under other circumstances. Id. at 314-15.
The court commented in dicta, "Given the numerous
limitations and exclusions that often encumber such policies,
those who take such certificates at face value do so
at their own risk." Id. at 314.
We decline to extend the reasoning in Via Net I and
Via Net II regarding the due diligence obligations of a
person claiming to be entitled to insurance proceeds as a
party to an insurance contract to persons bringing claims
under the Texas Insurance Code alleging negligent misrepresentation
and violations under the DTPA based on
false representations of the contents of insurance policies
by insurance agents and companies upon which the
plaintiff relied in its business dealings and which caused
the plaintiff to suffer economic damages. In Via Net I,
the relevant holding was that a party claiming to be entitled
to insurance coverage as an [**76] additional insured
under an insurance policy, and therefore claiming
to be in contractual privity with the insurance company,
cannot rely on a certificate of insurance to extend more
coverage than is actually conveyed by the policy itself,
any more than the named insured can. Rather, a party
claiming to be an additional insured is held to the same
burden as the named insured of reading the policy to
ascertain its right to coverage. See Via Net II, 211 S.W.3d
at 314. Here, under a far different set of circumstances,
<strong>Omni</strong> was not an additional insured, but a customer of an
insured, and the question is whether <strong>Omni</strong> could justifiably
rely upon the affirmative misrepresentations of the
insurance agent for a third party, Port Metal, that Port
Metal was insured and, therefore, that <strong>Omni</strong>'s steel was
protected by Port Metal's insurance, which were made
both orally and in certificates of insurance solicited and
relied upon by <strong>Omni</strong> for use in its own business dealings.
It is well established that, unlike a party to an insurance
contract claiming to be an insured and therefore

entitled to recover insurance proceeds, a party to whom a
third party's insurance agent has made misrepresentations
regarding [**77] the extent of the third party's insurance
coverage for use in the business dealings of the recipient
has no duty of due diligence to seek out and read
the third party's insurance policy and to verify its terms
and conditions in order to maintain a suit for misrepresentation
and deceptive acts and practices against the
agent and his principal under the Insurance Code and the
DTPA. See <strong>Omni</strong> <strong>Metals</strong>, 2002 Tex. App. LEXIS 4334,
2002 WL 1331720, at *8 (holding that <strong>Omni</strong>'s failure to
read Port Metal's policy was no bar to claim for misrepresentation
by Port Metal's insurance agent); see also
Royal Globe, 577 S.W.2d at 693 (holding false representations
of local recording agent [*394] regarding coverage
afforded by policy for vandalism actionable under
former article 21.21, section 16 and DTPA section
17.46(b)(12)); Celtic Life Ins. Co., 831 S.W.2d at 596
(holding misrepresentation by health insurance agent as
to benefits actionable under article 21.21, section 16 and
DTPA); Gros, 818 S.W.2d at 912-13 (same with respect
to homeowner's policy); Hermann Hosp., 776 S.W.2d at
253 (same with respect to representation to hospital regarding
coverage of worker's compensation insurance
policy). These cases stand in contrast to contract [**78]
law, where it is equally well established that a contracting
party has a duty of due diligence regarding formation
and performance of the contract. See Via Net II, 211
S.W.3d at 314 (stating, "Due diligence may include asking
a contract partner for information needed to verify
contractual performance"); Coastal Bank SSB, 135
S.W.3d at 843 (holding that contract and circumstances
surrounding its formation determine whether disclaimer
of reliance in contract is binding and bars fraudulent inducement
claim by party to contract).
The only requirement for a party seeking to hold liable
the principal of an insurance agent who made a false
representation about coverage is that the recipient look to
the acts of the principal "to see if those acts would lead a
reasonably prudent person using diligence and discretion
to suppose that the agent had the authority he purported
to exercise." Shandee, 880 S.W.2d at 412 (quoting Guthrie
v. Rep. Nat'l Ins. Co., 682 S.W.2d 634, 637 (Tex.
App.--Houston [1st Dist.] 1984, writ ref'd n.r.e.)). Here,
there was nothing to indicate that Transcontinental had
not authorized Poe & Brown to represent the extent of
Port Metal's insurance coverage to <strong>Omni</strong>. And, as
[**79] Transcontinental's recording agent, Poe & Brown
did, in fact, have such authority. See Royal Globe, 577
S.W.2d at 694 (local recording agent of insurer has authority
to represent coverage afforded by policies it
sells). If representations about the extent of coverage by
an authorized agent are false, "under the explicit language
of Section 16, Article 21.21 and Section
17.46(b)(12) of the DTPA," those actions constitute a
deceptive act or practice for which not only the agent but
his principal is accountable. See id.
We hold that <strong>Omni</strong> had no legal duty to obtain and
read Port Metal's bailee insurance policy or to verify its
terms in order to maintain its suit for misrepresentation
and violations of the DTPA under article 21.21 of the
Insurance Code. We therefore address whether the evidence
was factually sufficient under the circumstances of
this case to show that <strong>Omni</strong> justifiably relied on Poe &
Brown's misrepresentations.
(2) Factual Sufficiency of the Evidence of Reliance
and Causation
Here, at <strong>Omni</strong>'s request, Sparks, a Poe & Brown insurance
agent, delivered certificates of insurance stating
that <strong>Omni</strong>'s steel stored at Port Metal was covered under
Port Metal's "all risk" bailee insurance [**80] policy.
Sparks knew the request was made so that <strong>Omni</strong> could
provide the certificate to its secured lender to prove that
its steel was insured. Sparks also knew by mid-1993 that
Port Metal charged <strong>Omni</strong> a storage fee for its metal
stored at Port Metal, that goods for which Port Metal
charged a storage fee were excluded by the terms of the
bailee policy, and that that information was not contained
on any of the certificates. Rather, the information on
each of the certificates was, by Sparks' own admission,
"untrue" and, by Poe & Brown's expert's admission
"misleading."
While Tomes, <strong>Omni</strong>'s president, testified at trial that
he did not "personally read [*395] and review every
single certificate of insurance that came across to <strong>Omni</strong>"
and that he did not ask for or "actually receive the insurance
policy rather than the certificate of insurance," he
also testified that he "just look[ed] at 'all risks'" and saw
that the certificates sent him confirmed what McKnight,
Port Metal's president, had told him and that nothing on
the certificates gave him any reason to doubt McKnight.
Tomes testified that the certificates would also have been
reviewed by Debbie Hiner at <strong>Omni</strong>, that they were then
forwarded [**81] to <strong>Omni</strong>'s secured lender as proof that
the steel was insured, and that "they were satisfied too."
He stated that he did not ask for the policy because the
company "would think that the certificate of insurance
would be adequate to cover what we needed." In addition,
<strong>Omni</strong>'s president was assured that its steel was insured
by Port Metal's president, McKnight, who had read
the policy and who received the misinformation directly
from Sparks in response to his question about the exclusion
he saw in the 1992 bailee policy. That misinformation
was never corrected by appellants prior to the fire
that damaged <strong>Omni</strong>'s steel.
Considering the evidence in the light most favorable
to the jury's verdict, we hold that the evidence would
enable reasonable and fair-minded people to find that

<strong>Omni</strong> justifiably relied on Poe & Brown's negligent misrepresentation
and that the negligent misrepresentation
caused <strong>Omni</strong>'s pecuniary damages, and therefore the
evidence in support of these elements of <strong>Omni</strong>'s claim
was legally sufficient. See Wilson, 168 S.W.3d at 827.
Considering and weighing all the evidence neutrally, we
further hold that the evidence on these elements was not
so contrary to the overwhelming weight [**82] of the
evidence as to be clearly wrong and unjust and was thus
factually sufficient. See Arias, 265 S.W.3d at 468.
We overrule the third part of Brown & Brown's first
issue and Transcontinental's third issue.
c. Poe & Brown's Knowledge
Brown & Brown also argues in its first issue that the
evidence is legally and factually insufficient to support
the jury's finding that Poe & Brown "knowingly" engaged
in an unfair or deceptive act or practice, as required
for an award of additional damages of up to three
times actual damages under former article 21.21. See
former TEX. INS. CODE art. 21.21, '16 (b)(1). Brown &
Brown contends that it sends out thousands of certificates
of insurance a week nationwide and that "[o]ther
than Poe & Brown's 1995 certificate sent to <strong>Omni</strong> less
than two (2) months before the December 5, 1995 fire,
there is absolutely no evidence of any other communication
between <strong>Omni</strong> and Poe & Brown."
The charge tracked the language of the DTPA in defining
"knowingly" as
actual awareness, at the time of the
conduct, of the falsity, deception, or unfairness
of the conduct in question or actual
awareness of the conduct constituting
a failure to comply with a warranty. Actual
awareness [**83] may be inferred
where objective manifestations indicate
that a person acted with actual awareness.
See TEX. BUS. & COM. CODE ANN. § 17.45(9). Actual
awareness "means that a person knows that what he is
doing is false, deceptive, or unfair" and does it anyway.
St. Paul Surplus Lines v. Dal-Worth Tank Co., 974
S.W.2d 51, 53B54 (Tex. 1998). The term "knowingly"
lies on a continuum of "gross negligence, 'knowingly,'
'willful' and intentional" with "gross negligence being the
lowest mental state and intentional being the highest." Id.
(quoting Luna v. [*396] N. Star Dodge Sales, Inc.,
667 S.W.2d 115, 118 (Tex. 1984)).
Here, the evidence shows that Sparks, Poe &
Brown's agent, knew by at least July, 1993 that Port
Metal's bailee policy excluded from coverage goods for
which a storage charge was made. He also knew from
approximately the same time that Port Metal received
revenues from its customers of $ 6,000 a month for storage
fees. He knew that Port Metal relied on him to obtain
coverage for all of its customers' steel. Sparks also knew
that <strong>Omni</strong> stored its steel at Port Metal and that <strong>Omni</strong>'s
request for a certificate of insurance was for the purpose
of providing its secured lender assurance that [**84]
the steel stored at Port Metal was covered by Port Metal's
bailee policy. When Sparks sent the requested certificate
to <strong>Omni</strong> stating that it covered "all risks," Sparks knew
that representation was false and misleading. Indeed, on
the day of the fire two months later, Sparks advised both
Port Metal and one of its customers not to mention the
word "storage" to anyone. None of this evidence is controverted.
Considering the evidence in the light most favorable
to the jury's verdict, we hold that the evidence would
enable reasonable and fair-minded people to find that
Sparks, an insurance agent with Poe & Brown, knew that
his representations to <strong>Omni</strong> that Port Metal's insurance
policy covered "all risks" was false and misleading and
that he knew <strong>Omni</strong> would rely on the false information
to satisfy its own and its secured lender's concerns that
the steel be insured. Thus we hold that the evidence in
support of Poe & Brown's knowledge of its misrepresentation
was legally sufficient to support the jury's finding.
See Wilson, 168 S.W.3d at 827. Considering and weighing
all the evidence neutrally, we further hold that the
evidence regarding Poe & Brown's knowledge of the
misrepresentation was [**85] not so contrary to the
overwhelming weight of the evidence as to be clearly
wrong and unjust, and thus it was factually sufficient.
See Arias, 265 S.W.3d at 468.
We overrule Brown & Brown's first issue and
Transcontinental's third issue.
F. Additional Damages Awarded <strong>Omni</strong>
In its fifth issue, Transcontinental argues that additional
damages of $ 1,080,000 awarded <strong>Omni</strong> against
Transcontinental are erroneous because Transcontinental
had no contact with <strong>Omni</strong> and there is no evidence
Transcontinental knew of any wrongful act, as required
for an award of additional damages. On rehearing,
Transcontinental re-urges and elaborates upon its argument
from its original brief that an agent's knowledge
cannot be attributed to its principal under the DTPA and
the Texas Insurance Code.
Former article 21.21, section 16 of the Insurance
Code permitted an award of additional damages of up to
three times actual damages "[i]f the trier of fact finds that
the defendant knowingly committed the acts complained
of." Former TEX. INS. CODE art. 21.21, § 16(b)(1)
(current version at TEX. INS. CODE ANN. § 541.152(b)).

In its answer to question 3, the jury found that both Poe
& Brown and Transcontinental had committed [**86]
an unfair or deceptive act or practice by either "(1) representing
that goods or services had or would have characteristics
that they did not have; or (2) representing that
an agreement confers or involves rights that it did not
have or involve." In its answer to Question 5, the jury
found that both defendants engaged in this conduct
"knowingly." In its answer to Question 6, the jury found
that <strong>Omni</strong> should be awarded $ 1,620,000 against Poe &
Brown and $ 1,080,000 against Transcontinental because
their conduct was committed knowingly. The issue presented
by [*397] Transcontinental is whether those
damages can be attributed to a principal whose agent has
made the misrepresentation.
The assessment of additional damages under former
article 21.21, section 16 of the Insurance Code is not
dependent on rules of common-law negligence but on the
existence of corporate knowledge and therefore may be
taken against a principal based solely upon the vicarious
or imputed knowledge or intent of its agent. Maryland
Ins. Co. v. Head Indus. Coatings & Servs., Inc., 906
S.W.2d 218, 229-30 (Tex. App. --Texarkana 1995), rev'd
on other grounds, 938 S.W.2d 27 (Tex. 1996). Companies
"are responsible for the knowledge [**87] possessed
by those whom they appoint as agents." See id. at
229 (imputing to insurance company knowledge of terms
of policy that should have been issued that was possessed
by local recording agent).
In Royal Globe, the supreme court addressed
"whether a misrepresentation about coverage afforded by
a policy of insurance, made by the insurance company's
local recording agent, is a deceptive trade practice [and
insurance code violation] under Texas statutes for which
the insurance company as principal is liable for treble
damages." 577 S.W.2d at 689. The court held that an
insurance company that authorizes an agent to sell its
policies may not escape liability for misrepresentations
made by the agent that violate section 17.46 of the DTPA
or former article 21.21 of the Insurance Code merely by
establishing that the agent had no actual authority to
make the misrepresentation. Id. at 693. The insurance
company can be found to have vicariously committed the
deceptive act or practice. Id.
In Celtic, the supreme court reaffirmed the principle
that "[a]n insurance company is generally liable for any
misconduct by an agent that is within the actual or apparent
scope of the agent's authority." 885 S.W.2d at 98.
[**88] It stated that an insurer "cannot escape liability on
the basis that it did not authorize particular representations
concerning the policy." Id. at 99. The proper inquiry
is whether the agent was acting within the scope of
the agency relationship at the time of the wrongful act.
Id. (holding that misrepresentation made by agent in
course of explaining terms of policy was within scope of
his authority).
In Maryland Ins. Co., the court, applying standard
doctrines of agency under circumstances very similar to
those in this case, held that "[t]he knowledge of the agent
is the knowledge of the company itself" and that, therefore,
the plaintiff "was entitled to a determination as a
matter of law that the violation of the Insurance Code
had been done knowingly." 906 S.W.2d at 228-29; see
also Ins. Co. of N. Am., 928 S.W.2d at 145 (deeming apparent
authority of surety to make representations about
quality of securities knowledge or acquiescence by principal);
Gros, 818 S.W.2d at 913 (stating, "when State
Farm's agent misrepresented coverage, that misrepresentation
made her individually liable . . . and that statement
was also a misrepresentation by State Farm that made it
liable as well"); [**89] Lexington Ins. Co., 993 S.W.2d
at 198 ("When an insurer's recording agent misrepresents
coverage the misrepresentation is considered that of the
insurer.").
Here, Sparks, an agent for Poe & Brown, Transcontinental's
local recording agent, falsely represented that
Port Metal's Transcontinental "All Risks" bailee policy
covered <strong>Omni</strong>'s steel stored at Port Metal. Sparks testified
that he made a mistake by selling a policy that did
not provide coverage to all Port Metal's customers because
of the storage exclusion; he understood that <strong>Omni</strong>
wanted the certificates to make sure that its steel at Port
[*398] Metal was covered; he knew by mid-1993 that
the policy did not provide the coverage he promised because
he know Port Metal charged a storage fee to some
of its customers; he never made an inquiry into whose
steel was being stored, even though he knew that it was
his responsibility; and he never informed either
McKnight or <strong>Omni</strong> of the exclusion despite knowing that
there was a gap in the intended coverage and that he had
a duty to inform McKnight of the exclusion. Sparks's
statements to both Lykos and McKnight immediately
after the fire, "[I]f anybody asks you, don't mention the
word 'storage,'" [**90] confirmed his knowledge of the
falsity of the representations.
We hold that, in knowingly misrepresenting the
scope of Port Metal's bailee coverage, Sparks was acting
within the scope of his duties as a Poe & Brown agent,
and therefore his representations and the knowledge of
their falsity are both attributable to Poe & Brown, his
principal. In turn, Poe & Brown's knowledge of the falsity
can be attributed to Transcontinental, its principal,
which had appointed Poe & Brown as its recording agent
with authority to make representations about the terms of
the insurance policies it sold.
On rehearing, Transcontinental cites as support for
its argument that Sparks's knowledge of the falsity of his

epresentations cannot be attributed to Transcontinental
the Texas Supreme Court's opinion in Dal-Worth Tank
and two intermediate appellate court opinions, The
Woodlands Land Dec. Co., L.P. v. Jenkins, 48 S.W. 3d
415 (Tex. App.--Beaumont 2001, no writ) and Connell
Chevrolet Co. v. Leak, 967 S.W.2d 888 (Tex.
App.--Austin 1998, no pet.). None of these cases are
availing. In each, additional damages were denied because
there was no evidence that the agents knew their
representations were false. That [**91] is not the case
here. Rather, the record affirmatively demonstrates that
Sparks knew that his representations that <strong>Omni</strong>'s metal
stored at Port Metal was covered by Port Metal's "All
Risk" bailee policy were false. Under Dal-Worth Tank,
"objective manifestations [that] indicate that a person
acted with actual awareness" of the falsity of his representations
satisfy the standard for assessing additional
damages under the DTPA and the Insurance Code. 974
S.W.2d at 53-54.
Because both Sparks and Poe & Brown were acting
within the scope of their authority in representing that
Port Metal's "All Risks" bailee policy covered <strong>Omni</strong>'s
stored steel, we hold that both Poe & Brown and Transcontinental
could be held liable to <strong>Omni</strong> for damages
under the DTPA and the Insurance Code. The jury found
that the representations were false and that both Poe &
Brown and Transcontinental acted "knowingly," and we
have held that evidence in the record is sufficient to
support these finding under both legal and factual sufficiency
standards. Therefore, we hold that the trial court
did not err in entering judgment on the verdict finding
Transcontinental liable for additional damages for
knowingly misrepresenting [**92] the coverage provided
by Port Metal's bailee insurance policy in violation
of the Insurance Code and the DTPA.
We overrule Transcontinental's fifth issue.
G. Attorney's Fees and Costs Incurred in Prior Litigation
In its fourth issue, Transcontinental argues that <strong>Omni</strong>
may not recover attorney's fees of $ 740,000 it incurred
in pursuing a separate tort action against the third
parties responsible for starting the fire. In its third issue,
Brown & Brown joins in [*399] and adopts Transcontinental's
arguments as its own. 6
6 Although this issue was raised in <strong>Omni</strong> <strong>Metals</strong>,
it was not addressed by the Fourteenth Court
of Appeals because it was not part of the parties'
motion for summary judgment. 2002 Tex. App.
LEXIS 4334, 2002 WL 1331720 at *10.
After the fire in which its steel at Port Metal was
damaged, <strong>Omni</strong> filed suit against Port Metal and the par-
ties it alleged were responsible for the fire, Electrical
Wire & Cable Company and others. <strong>Omni</strong> subsequently
amended its pleadings to name Poe & Brown and Transcontinental
as defendants. On January 9, 1998, the trial
court entered its Supplemental Order on Severance, severing
all actions against Poe & Brown and Transcontinental
from the actions against the parties allegedly responsible
[**93] for the fire. The instant appeal is taken
from the severed action against Poe & Brown and
Transcontinental. <strong>Omni</strong> contends that the litigation
against the alleged responsible parties was prior litigation
for which an equitable exception against wrongdoers
applies that permits recovery of its attorney's fees.
<strong>Omni</strong> acknowledges that the general rule in Texas is
that "attorney's fees may not be recovered from an opposing
party unless such recovery is provided for by
statute or by contract between the parties." Travelers
Indem. Co. v. Mayfield, 923 S.W.2d 590, 593 (Tex.
1996); see also Turner v. Turner, 385 S.W.2d 230, 233
(Tex. 1965). However, in Turner, the supreme court recognized,
without adopting, an exception to the general
rule provided for in the Restatement of the Law: Torts,
Vol. 4 § 914. Id. at 234. The exception provides that
"where a plaintiff has been involved in litigation with a
third party as a result of the tortious act of another, the
plaintiff may recover in a separate suit for his reasonable
and necessary expenses of the prior litigation." Id. Certain
prerequisites must, however, be met. Id. These include:
(1) the plaintiff must have incurred attorney's fees
in the prosecution [**94] or defense of a prior action,
and (2) the litigation must have involved a third party
and must not have been brought against the defendant in
the same action in which the fees are sought. Id. (holding
that section 914 did not cover case where, in
cross-action, defendant former husband sought recovery
from former wife of attorney's fees incurred defending
alienation of affections suit brought against both).
Subsequent to Turner, this Court and other Texas
courts of appeals have held that "equitable principles
may allow the recovery of attorney's fees and other litigation
expenses 'where a party was required to prosecute
or defend the previous suit as a consequence of the
"wrongful act" of the defendant.'" Massey v. Columbus
State Bank, 35 S.W.3d 697, 701 (Tex. App.--Houston [1st
Dist.] 2001, no pet.) (awarding bank recovery of attorney's
fees incurred in suit against former director for
damages due to filing of false and defamatory complaints
and groundless grievances with regulatory agencies); see
also Standard Fire Ins. Co. v. Stephenson, 963 S.W.2d
81, 90-91 (Tex. App.--Beaumont 1997, no pet.) (stating
that "fees may be recoverable where the natural and
proximate results and consequences [**95] of prior
wrongful acts have been to involve a plaintiff in litigation
with and against third parties and other parties" and

holding that insured could recover attorney's fees incurred
in prior litigation between insurer and insured as
result of insurer's bad faith claim); Baja Energy, Inc. v.
Ball, 669 S.W.2d 836, 838-39 (Tex. App.--Eastland 1984,
no writ) (in third-party action brought by oil well operator
against assignor lessee for contribution and indemnity,
awarding oil well operator recovery of [*400] attorney's
fees incurred in defense of bad faith action for
trespass to try title and conversion brought by assignee).
However, our sister court, the Fourteenth Court of Appeals,
has refused to adopt an equitable exception to the
general rule. See Martin-Simon v. Womack, 68 S.W.3d
793, 797-98 (Tex. App.--Houston [14th Dist.] 2001, pet.
denied).
Here, the trial court awarded <strong>Omni</strong> its attorney's fees
incurred in an earlier stage of the instant litigation, which
was brought initially against the parties allegedly responsible
for the fire and to which appellants were added.
After the settlement of <strong>Omni</strong>'s claims against the
other defendants, <strong>Omni</strong>'s suit against Poe & Brown and
Transcontinental [**96] was severed into a separate
cause of action and tried and is now the subject of this
appeal. The litigation for which fees were awarded can
thus not properly be styled "prior litigation." Rather, it is
a suit for recovery of fees incurred in the original cause
of action from which this suit was severed after settlement
of the causes of action brought against the other
parties. Thus, the award violates the prerequisites for
recovery of attorney's fees in the absence of a contractual
or statutory provision set out in Turner, namely that the
plaintiff must have incurred attorney's fees in the prosecution
or defense of a prior action and that the litigation
must have involved a third party and must not have been
brought against the defendant in the same action in
which the fees are sought. Turner, 385 S.W.2d at 234.
We hold that, under the circumstances of this case, the
general rule that attorney's fees may not be recovered
unless such recovery is provided for by statute or by
contract between the parties applies. See Mayfield, 923
S.W.2d at 593. It is undisputed that no statute or contract
provided for the recovery of attorney's fees incurred by
<strong>Omni</strong> in the prior stage of this litigation [**97] involving
the settling defendants. We hold, therefore, that the
trial court erred in awarding <strong>Omni</strong> its attorney's fees of $
740,000 under the equitable exception to the general
rule.
We sustain Transcontinental's fourth issue.
H. Settlement Credit
In its sixth issue, Transcontinental argues that the
trial court erred in not giving it the full $ 1,660,000 settlement
credit that <strong>Omni</strong> received from the settling defendants.
In its fourth issue, Brown & Brown joins in and
adopts Transcontinental's argument as its own. Specifi-
cally, Transcontinental argues that it is entitled to a credit
for the full amount of the settlement under the one satisfaction
rule. <strong>Omni</strong> argues that Transcontinental is not
entitled to the full settlement credit because a
non-settling tort-feasor may claim a credit only for damages
for which all tortfeasors are jointly liable.
The trial court's judgment granted Poe & Brown and
Transcontinental settlement credit against (1) the $
704,267 awarded <strong>Omni</strong> by the jury for "the value of the
loss less any amounts <strong>Omni</strong> received from the sale of the
steel or from Transcontinental"; (2) the $ 370,964.72
awarded <strong>Omni</strong> by the jury for "reasonable and necessary
expenses incurred in attempting [**98] to sell the
Steel"; and (3) $ 169,213.61 for prejudgment interest on
the principal of (1) and (2) from December 13, 1996
through April 13, 1999. The total amount of the settlement
credit granted was $ 1,244,445.33. Transcontinental
argues that it should have been granted a settlement
credit for the entire amount of the settlement, $
1,660,000. It argues that a dollar for dollar settlement
credit is applied first to past damages and prejudgment
interest that have accrued on the damages as of the time
of the settlement. It states that [*401] the damages in
the case prior to settlement amounted to $ 1,075,231.72
for the steel and mitigation costs. The settlements for $
1,660,000 were entered into on April 13, 1999. Using the
7% prejudgment interest rate used by the trial court and
its accrual date of December 13, 1996, it argues that prejudgment
interest that would have accrued on these
damages as of the time of the settlement would be $
175,690.06, or approximately $ 6500 more than the prejudgment
interest credit granted it by the trial court.
Transcontinental argues that <strong>Omni</strong>'s total recovery,
after subtracting the $ 740,000 in attorney's fees damages
and the $ 1,080,000 in additional damages, [**99]
which Transcontinental contends were not properly recoverable
against it, should have been $ 1,412,554.78,
consisting of the $ 1,075,231.72 granted it as a settlement
credit for past damages, plus $ 175,690.06 in accrued
prejudgment interest at the time of the settlement,
plus attorney's fees of $ 161,000 through trial, and costs
of $ 633.00. Transcontinental argues that Poe & Brown
was held jointly liable for these amounts. Therefore,
since the total amount of recoverable damages was $
1,412,554.78 after adjustments for the improper award of
additional damages and past attorneys fees, Transcontinental
argues that it is entitled to a settlement credit for
the entire $ 1,660,000. Since the amount of the credit it
contends it is due exceeds the total amount of the judgment
against it, Transcontinental argues that judgment
should be had in its favor.
<strong>Omni</strong> agrees that Transcontinental was entitled to a
settlement credit for actual damages awarded by the jury
for the loss on its steel inventory and the expenses of

mitigating the damages, together with prejudgment interest
on those amounts calculated through the date of the
original settlements, April 13, 1999. But it contends that
Transcontinental [**100] is not entitled to settlement
credit for the $ 740,000 awarded as damages for litigation
expenses <strong>Omni</strong> incurred in prior litigation due to
Transcontinental's and Poe & Brown's wrongful actions
and that Transcontinental is not entitled to a credit for the
additional damages assessed against it for its knowing
participation in violations of the DTPA and Insurance
Code. It observes that "Texas law does not provide for
such a credit." See TEX. CIV. PRAC. & REM. CODE
ANN. § 33.002 (Vernon 2003).
The Texas Supreme Court has held that "[u]nder the
one satisfaction rule, the nonsettling defendant may only
claim a credit based on the damages for which all tortfeasors
are jointly liable." Crown Life Ins. Co. v. Casteel,
22 S.W.3d 378, 391 (Tex. 2000); Garrett, 860 S.W.2d at
78; Paschall v. Peevey, 813 S.W.2d 710, 712 (Tex.
App.--Austin 1991, writ denied).
Here, Poe & Brown and Transcontinental were
found jointly liable for actual damages of $ 704,267 for
the value of the steel and $ 370,964.72 for mitigation
damages; $ 740,000 in prior litigation attorney's fees; and
$ 161,050.07 in attorney's fees, plus $ 50,000 for appeal
to the Court of Appeals and $ 25,000 for appeal to the
Supreme Court of [**101] Texas. The trial court
awarded Poe & Brown a total settlement credit of $
1,244,445.33, which did not include the $ 740,000 for
prior attorneys fees. We have held that the $ 740,000 was
improperly awarded to <strong>Omni</strong>. We have also held that the
additional damages of $ 1,620,000 and $ 1,080,000
awarded <strong>Omni</strong> for Poe & Brown's and Transcontinental's
violations of the DTPA were properly assessed separately
against Poe & Brown and Transcontinental respectively
and are not subject to settlement credit. See TEX.
CIV. PRAC. & REM. CODE ANN. § 33.002); Maryland
Ins. Co., 906 S.W.2d at 230.
[*402] We hold that the trial court did not err in
awarding settlement credit to appellants. We overrule
Transcontinental's sixth issue and Brown & Brown's
fourth issue.
I. Admissibility of Prior Federal Judgment
In its seventh issue, Transcontinental argues that the
trial court erred in not admitting evidence of a prior federal
judgment in Transcontinental's favor over <strong>Omni</strong>'s
hearsay and irrelevance objections. Transcontinental
states that it "sought to introduce this evidence to show
that it could not have 'knowingly' refused to pay any
amounts <strong>Omni</strong> was claiming, because a federal court had
long ago ruled that it had [**102] no liability, even to
its own insured, Port Metal."
The general rule in Texas is that a judgment in another
cause finding a fact in issue in a case at bar is not
admissible. Davis v. Zapata Petroleum Corp., 351
S.W.2d 916, 922 (Tex. Civ. App.--El Paso 1961, writ
ref'd n.r.e.). "The fact that another jury had theretofore,
in another case, determined the very questions at issue in
the present trial would have had a strong tendency to
induce the jury in the subsequent case to reach the same
conclusion, and would therefore have been very prejudicial.
Such judgment, under well settled rules, could not
have been introduced in evidence to establish the facts on
which it was rendered." Id. While a judgment may be
introduced to show its own existence, a judgment "is not
admissible for the purpose of showing what matters were
adjudicated except where the parties and the subject
matter in each suit are the same, or where the matter determined
was of a public nature (in rem) and from public
considerations should be considered binding upon all
persons." Id.
Here, Transcontinental has failed to show that the
prior federal judgment was admissible. We hold that the
trial court did not err in excluding [**103] it.
We overrule Transcontinental's seventh issue.
CONCLUSION
We modify the judgment to deduct the $ 740,000 in
attorney's fees damages awarded appellee <strong>Omni</strong> <strong>Metals</strong>,
Inc. from appellants Transcontinental Insurance Company
and Brown & Brown of Texas, Inc. We affirm the
judgment of the trial court as modified.
Evelyn V. Keyes
Justice
DISSENT BY: Sam Nuchia
DISSENT
DISSENTING OPINION ON REHEARING
While I vote to grant both motions for rehearing, I
do not agree with the relief granted by the Court. I,
therefore, respectfully dissent from the Court's judgment
for the reasons set out in my December 17, 2009 dissenting
opinion on motion for en banc reconsideration.
Sam Nuchia
Justice

NOTICE: [**1] PUBLISH
86 S.W.3d 827, *; 2002 Tex. App. LEXIS 7370, **
LEXSEE 86 SW 3D 827
Pacesetter Pools, Inc./Pierce Homes, Inc., Appellants v. Pierce Homes,
Inc./Pacesetter Pools, Inc., Appellees
NO. 03-01-00561-CV
COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN
86 S.W.3d 827; 2002 Tex. App. LEXIS 7370
October 17, 2002, Filed
SUBSEQUENT HISTORY: Rehearing Denied November 7, 2002. Released for Publication November 7, 2002.
PRIOR HISTORY: FROM THE DISTRICT COURT OF DENTON COUNTY, 393RD JUDICIAL DISTRICT NO.
98-30481-393, HONORABLE SAM HOUSTON, JUDGE PRESIDING.
DISPOSITION: Affirmed.
COUNSEL: For Appellant: Mr. Kenneth S. Beat, Strasburger & Price, L.L.P., Dallas, TX. Mr. Lou McCreary - Law
Offices of Lou McCreary, Austin, TX.
For Appellee: Mr. Stacy R. Obenhaus - Gregory A. Harwell, Gardere Wynne Sewell LLP, Dallas, TX.
JUDGES: Before Chief Justice Aboussie, Justices B. A. Smith and Yeakel.
OPINIONBY: Lee Yeakel
OPINION: [*829]
Page 1
Pacesetter Pools, Inc. ("Pacesetter") and Pierce Homes, Inc. ("Pierce Homes") were joint tortfeasors in an underlying
cause of action for damage to the foundation of a home. The plaintiff prevailed in arbitration against Pierce Homes.
Pierce Homes paid the arbitrator's n1 award and sought contribution from Pacesetter. A jury found that the plaintiff's
damages were caused by the negligence of Pacesetter and Pierce Homes and attributed the negligence ninety percent to
Pacesetter and ten percent to Pierce Homes. The district court rendered judgment for Pierce Homes and against Pacesetter
for $ 193,986.80--ninety percent of the arbitrator's award--plus interest and court costs. The court did not award
attorney's fees. Pacesetter appeals the award of damages, and Pierce Homes appeals the court's denial of attorney's fees.
We will affirm the district-court judgment.
[**2]
n1 Texas law uses the terms "arbiter" and "arbitrator" interchangeably. Compare, e.g., J.J. Gregory
Gourmet Servs., Inc. v. Antone's Imp. Co., 927 S.W.2d 31, 33 (Tex. App.--Houston [1st Dist.] 1995, no writ)
(using "arbiter"), with the Uniform Arbitration Act, Tex. Civ. Prac. & Rem. Code Ann. § § 171.001-.098 (West
Supp. 2002) (using "arbitrator"). We will employ the statutory term.
FACTUAL AND PROCEDURAL BACKGROUND
Julie Allcox n2 sued Pacesetter and Pierce Homes for damages to a home she purchased from Pierce Homes in
Flower Mound. Allcox alleged that Pacesetter and Pierce Homes had negligently designed and built the home's founda-

86 S.W.3d 827, *; 2002 Tex. App. LEXIS 7370, **
Page 2
tion and swimming pool and, as a result of such negligence, she sustained damages. n3 Pierce Homes cross-claimed
against Pacesetter, asserting that any construction defects were the fault of Pacesetter and that "Pacesetter is liable to
Pierce Homes for indemnity, contribution, and for any amounts Pierce Homes may be compelled to pay to [Allcox] as a
result of the occurrences made the basis of [Allcox's] Lawsuit."
[**3]
n2 The suit was originally filed in the name of "Robert and Julie Stevens." However, during the pendency
of the suit and before arbitration, the Stevenses divorced, and Julie Stevens changed her name to "Julie Allcox."
Robert Stevens quitclaimed his interest in the home to Allcox, and she was the sole claimant in the arbitration.
The district court dismissed Robert Stevens's claims, and he is not a party to this appeal. For convenience, we
will refer solely to Allcox as the plaintiff in the underlying suit.
n3 Allcox also sued Larry F. Smith, who she alleged "participated in the design of the foundation and/or the
construction of the foundation of the home." The district court rendered summary judgment for Smith, and he is
not a party to this appeal.
Allcox filed a motion to compel arbitration and plea in abatement, asserting that she was entitled to have her claims
against Pierce Homes arbitrated pursuant to an arbitration clause contained in a homeowner's warranty that Pierce
Homes had provided Allcox. Over Pacesetter's objection, the district court granted the motion and abated the action
pending arbitration. Pacesetter was not a party to the warranty and refused to participate in the arbitration. The arbitrator
awarded Allcox $ 215,541, including attorney's and expert's [*830] fees. n4
[**4]
n4 The arbitrator also ordered that Pierce Homes pay $ 8441 for American Arbitration Association administrative
fees and expenses, including $ 980 that had been paid by Allcox, and arbitrator's fees of $ 19,832.42, including
$ 5900 that had been paid by Allcox.
Pierce Homes moved to confirm the arbitrator's award. The district court rendered an interlocutory judgment granting
Pierce Homes' motion, converting the arbitrator's award "into a partial judgment that is final as to [Allcox's] claims
against Pierce Homes," and granting Allcox judgment against Pierce Homes for the damages, fees, and expenses
awarded by the arbitrator. The interlocutory judgment recited that Pierce Homes had made payments to Allcox satisfying
its liability under the arbitrator's award before the judgment's rendition. n5
n5 The interlocutory judgment was signed by Judge Vicki Isaacks.
Asserting that the arbitration award had resolved any liability they may have had to Allcox, both Pacesetter and
Pierce Homes filed motions for summary judgment, asking the district court to dismiss Allcox's action against them.
The court granted the motions and realigned the parties, leaving only Pierce Homes' claims against Pacesetter to be adjudicated.
Pierce Homes and Pacesetter stipulated that [**5] the arbitrator's award of $ 215,541 constituted the total amount
of Allcox's damages.
At trial, Pierce Homes presented three expert witnesses who testified that improper construction by Pacesetter of
the swimming pool and related decking had caused water to saturate the soils under the Allcox home. Pacesetter offered
no expert testimony in opposition. The jury returned a verdict that both Pacesetter and Pierce Homes were negligent and
caused the damage to the home. The jury apportioned the negligence ninety percent to Pacesetter and ten percent to
Pierce Homes and found $ 81,000 to be a reasonable attorney's fee "for the necessary services of Pierce Homes' attorneys
in representing Pierce Homes in the arbitration action brought by [Allcox]."

86 S.W.3d 827, *; 2002 Tex. App. LEXIS 7370, **
Page 3
Pacesetter filed a motion for judgment non obstante veredicto, asserting that there was no legal theory under which
it could be held liable to Pierce Homes and, in any event, Pierce Homes was not entitled to recover attorney's fees. See
Tex. R. Civ. P. 301. The district court rendered final judgment in favor of Pierce Homes in the amount of $
193,986.90--ninety percent of the stipulated damages--but did not award attorney's fees. [**6] n6
n6 The final judgment was signed by Judge Sam Houston.
In three issues on appeal, Pacesetter contends that: (1) Pierce Homes was not entitled to contribution after paying
the arbitration award in full satisfaction of Allcox's damages; (2) Pierce Homes did not have a right of subrogation under
the warranty and, if it did, such right was barred by Pierce Homes' voluntarily paying the arbitration award; and (3)
Pierce Homes did not have standing to assert a cause of action for negligence and, if it did, Pierce Homes waived its
cause of action by not requesting that it be submitted to the jury. Pierce Homes also appeals, contending that the district
court erred in refusing to award it the attorney's fees it incurred in defending Allcox's claims.
DISCUSSION
Standard of Review
Whether Pierce Homes was entitled to either contribution or subrogation and whether it had standing to assert a
[*831] cause of action for negligence are questions of law. "When an issue turns on a pure [**7] question of law, we
do not give any particular deference to legal conclusions of the trial court and apply a de novo standard of review."
Trinity Indus., Inc. v. Ashland, Inc., 53 S.W.3d 852, 868 (Tex. App.--Austin 2001, pet. denied) (citing Tenet Health Ltd.
v. Zamora, 13 S.W.3d 464, 468 (Tex. App.--Corpus Christi 2000, pet. dism'd w.o.j.)).
Contribution
By its first issue, Pacesetter asserts that Pierce Homes was not entitled to contribution. Contribution is allowed in
Texas only among joint tortfeasors. See Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818, 27 Tex. Sup. Ct. J.
140 (Tex. 1984). Pierce Homes sought recovery under chapter 33 of the Texas Civil Practices and Remedies Code. See
Tex. Civ. Prac. & Rem. Code Ann. § § 33.001-.017 (West 1997 & Supp. 2002). n7 Subject to certain exceptions not
relevant here, chapter 33 "applies to any cause of action based on tort in which a defendant, settling person, or responsible
third party is found responsible for a percentage of the harm for which relief is sought." Id. § 33.002(a). Generally,
a defendant may be liable to a claimant "only [**8] for the percentage of damages found by the trier of fact equal to
the defendant's percentage of responsibility with respect to the . . . harm for which damages are allowed." Id. §
33.013(a). A defendant who "pays a percentage of the damages . . . greater than his percentage of responsibility . . . has
a right of contribution for the overpayment against each other liable defendant" to the extent that the other defendant has
not paid the amount equal to his percentage of responsibility. Id. § 33.015(a). Pierce Homes argued that because it paid
all of Allcox's damages, as awarded by the arbitrator and stipulated by the parties to this appeal, and the jury found that
those damages were ninety percent attributable to the negligence of Pacesetter, Pierce Homes could recover from Pacesetter
ninety percent of the damages that it paid Allcox. The district court agreed and rendered judgment accordingly.
[**9]
n7 Pacesetter, in its brief, states that Pierce Homes asserted other theories of contribution in the district
court, but the only theory under which it could recover is that found in chapter 33 of the Texas Civil Practice and
Remedies Code. Tex. Civ. Prac. & Rem. Code Ann. § § 33.001-.017 (West 1997 & Supp. 2002). Because, in
this Court, Pierce Homes briefs and argues a right to contribution only under chapter 33, we will not discuss
other theories of contribution.
Pacesetter recognizes that chapter 33 might provide Pierce Homes with a right of contribution but asserts that
Pierce Homes waived any such right. Pacesetter bases its assertion on the fact that Pierce Homes paid the arbitration
award. Pacesetter contends that the arbitration award is no different from a settlement, as it was paid in full before the
district court's confirming the award or conducting a trial to determine contribution. Pacesetter points out that Pierce
Homes did not seek to vacate the arbitration award, nor did it await trial on the remaining issues in the cause, including

86 S.W.3d 827, *; 2002 Tex. App. LEXIS 7370, **
the issue of whether, based on proportionate responsibility, Pierce Homes was jointly and severally liable for Allcox's
entire award.
Page 4
The civil practice and remedies code does not include a definition of either "settled" or "settlement." Section
33.011(5) defines "settling person" as "a person who at the time of submission has paid or promised to pay money or
anything of monetary value to a claimant at any time in consideration of potential liability." Id. § 33.011(5). In reviewing
the meaning of "settled" or "settlement," the Texas Supreme [*832] Court has held "that 'settlement,' as used
in the [**10] comparative- responsibility law, means money or anything of value paid or promised to a claimant in
consideration of potential liability." C & H Nationwide, Inc. v. Thompson, 903 S.W.2d 315, 319 (Tex. 1994).
On Allcox's motion, the district court ordered her claims against Pierce Homes to arbitration pursuant to a binding
arbitration agreement. Arbitration is not settlement. An arbitrator's award has the same effect as a judgment of a court of
last resort. Holk v. Biard, 920 S.W.2d 803, 806 (Tex. App.--Texarkana 1996, orig. proceeding [leave denied]); J.J.
Gregory Gourmet Servs., Inc. v. Antone's Imp. Co., 927 S.W.2d 31, 33 (Tex. App.--Houston [1st Dist.] 1995, no writ).
Furthermore, a trial court reviewing an arbitrator's award may not substitute its judgment for the arbitrator's merely because
it would have reached a different decision. Riha v. Smulcer, 843 S.W.2d 289, 292-94 (Tex. App.--Houston [14th
Dist.] 1992, writ denied) (citing Bailey & Williams v. Westfall, 727 S.W.2d 86, 90 (Tex. App.--Dallas 1987, writ ref'd
n.r.e.)). The grounds for vacating an arbitrator's award are limited to [**11] those situations where: (1) the award was
the product of corruption, fraud, or undue influence; (2) a party was prejudiced by the evident partiality, misconduct, or
willful behavior of the arbitrator; (3) the arbitrator exceeded his powers; (4) the arbitrator refused to postpone the hearing,
refused to hear evidence material to the controversy, or otherwise conducted the hearing so as to substantially prejudice
the rights of a party; or (5) if there was no arbitration agreement, the issue was not adversely determined in a proceeding
to compel or stay arbitration, and the complaining party participated over objection. See Act of May 29, 1965,
59th Leg., R.S., ch. 689, § 1, 1965 Tex. Gen. Laws 1593, 1601, repealed and recodified by Act of May 8, 1997, 75th
Leg., R.S., ch. 165, § 5.01, 1997 Tex. Gen. Laws 325, 334 (former Tex. Rev. Civ. Stat. arts. 224-238-6, current version
at Tex. Civ. Prac. & Rem. Code Ann. § 171.088 (West Supp. 2002)); J.J. Gregory Gourmet Servs., 927 S.W.2d at
33. Pacesetter does not assert the existence of any such ground but, rather, argues that "because Pierce Homes [**12]
voluntarily paid the arbitration award without seeking to vacate the award . . . [it] must be viewed as a settling defendant."
Our review of the record reveals nothing that would compel the overturning of the award. The law does not require
the performance of useless acts. See Bailey v. Brodhead, 838 S.W.2d 922, 925 (Tex. App.--Austin 1992, no writ)
(finding no justification to construe provision of insurance code to require performance of a "potentially useless act"); In
re Daley, 29 S.W.3d 915, 921 (Tex. App.--Beaumont 2000, orig. proceeding) (Walker, C.J., dissenting) ("'Lex non
praecipit inutilia, quia inutilis labor stultus,' which translates as 'the law commands not useless things, because useless
labor is foolish.'"). We will not equate a party who suffers an adverse arbitrator's award to a settling person.
Section 33.016(b) grants a right of contribution only to a "liable defendant." Id. § 33.016(b). A liable defendant is
"a defendant against whom a judgment can be entered for at least a portion of the damages awarded to the claimant." Id.
§ 33.011(3). The interlocutory judgment against Pierce Homes did not absolve Pacesetter [**13] of liability to Allcox.
The judgment established the total amount of damages due Allcox and found that Pierce Homes was liable for such
damages pursuant to its warranty. The interlocutory judgment did not attempt to determine negligence culpability between
Pierce Homes and Pacesetter. Both parties, in their respective motions for summary [*833] judgment against
Allcox, invoked the "one-satisfaction rule," asserting that Allcox could not seek damages beyond those awarded in the
interlocutory judgment. See Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1, 5, 35 Tex. Sup. Ct. J. 206 (Tex. 1991)
("An injured party is entitled to but one satisfaction for the injuries sustained by [her]."). What remained, after the district
court granted the motions for summary judgment, was for the court to apportion Allcox's damages between the two
remaining parties to the extent that each was a tortfeasor as to Allcox. Pierce Homes satisfies the definition of a liable
defendant. The court's ruling did not mean that Pierce Homes was not liable for at least a portion of Allcox's tort damages;
its effect was that Allcox could recover, in toto, no more than the arbitrator's award.
Under the facts presented by this [**14] case, we hold that, pursuant to chapter 33 of the civil practice and remedies
code, Pierce Homes is not a settling person but is a liable defendant. Thus, Pierce Homes did not waive its right to
seek contribution against Pacesetter. We overrule Pacesetter's first issue.
Subrogation and Negligence
By its second and third issues, Pacesetter posits that Pierce Homes has no subrogation rights and may not recover under
a theory of negligence unless it suffered damage to a property interest. Because we have held that Pierce Homes was

86 S.W.3d 827, *; 2002 Tex. App. LEXIS 7370, **
Page 5
entitled to recovery against Pacesetter for contribution, we need not consider whether Pierce Homes was also entitled to
recovery through subrogation or negligence. Additionally, in its brief to this Court, Pierce Homes waives any recovery
based on the jury's negligence finding. We thus do not consider Pacesetter's second and third issues. See Tex. R. App. P.
47.1 (opinions to be as brief as practicable).
Attorney's Fees
Pierce Homes appeals the district court's refusal to award the attorney's fees it incurred in defending the arbitration
demanded by Allcox and ordered by the court. The court asked the jury to determine [**15] the reasonable attorney's
fees incurred by Pierce Homes "in the arbitration action brought by [Allcox]." The jury responded, "$ 81,000.00."
However, the district-court judgment is silent as to attorney's fees.
The availability of attorney's fees is a question of law. Cf. Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 94, 42
Tex. Sup. Ct. J. 875-95 (Tex. 1999) ("The availability of attorney's fees under a particular statute is a question of law for
the court."). We apply a de novo standard of review to questions of law. Trinity Indus., 53 S.W.3d at 868. n8
[**16]
n8 The parties join issue here over whether the district court erred in granting Pacesetter's motion for
judgment non obstante veredicto with regard to the jury's finding of the amount of reasonable attorney's fees incurred
by Pierce Homes in defending the arbitration. See Tex. R. Civ. P. 301. Because the availability of attorney's
fees is a question of law, "the jury's finding about the amount of reasonable attorney's fees is immaterial to
the ultimate legal issue of whether such fees are recoverable . . . ." Holland v. Wal-Mart Stores, Inc., 1 S.W.3d
91, 95, 42 Tex. Sup. Ct. J. 875 (Tex. 1999). When the trial court disregards a jury's finding on an immaterial issue,
the resulting judgment is not considered as one rendered non obstante veredicto. T. A. Manning & Sons, Inc.
v. Ken-Tex Oil Corp., 418 S.W.2d 324, 326 (Tex. Civ. App.--Austin 1967, writ ref'd n.r.e.); Kuehnhoefer v.
Welch, 893 S.W.2d 689, 692 (Tex. App.--Texarkana 1995, writ denied).
Generally, attorney's fees may not be recovered "unless provided for by statute or by contract between the parties."
Dallas Cent. Appraisal Dist. v. Seven Inv. Co., 835 S.W.2d 75, 77, 35 Tex. Sup. Ct. J. 856 (Tex. 1992). There is no contract
between Pierce Homes and Pacesetter that would allow [*834] the recovery of attorney's fees, nor does the contribution
statute at issue provide for such recovery. See Tex. Civ. Prac. & Rem. Code Ann. § § 33.001-.017 (West 1997
& Supp. 2002). Attorney's fees may not be recovered in tort cases. Knebel v. Capital Nat'l Bank, 518 S.W.2d 795,
803-04, 18 Tex. Sup. Ct. J. 120 (Tex. 1974). Pierce Homes, however, relying on Lesikar v. Rappeport, 33 S.W.3d 282
(Tex. App.--Texarkana 2000, pet. denied) and Baja Energy, Inc. v. Ball, 669 S.W.2d 836 (Tex. App.--Eastland 1984, no
writ), argues that it was entitled to attorney's fees because it was required to defend the arbitration as a consequence of
Pacesetter's wrongful act in negligently constructing Allcox's pool and decking. Thus, Pierce Homes reasons, its attorney's
fees incurred in the arbitration are recoverable as actual damages. See Massey v. Columbus State Bank, 35
S.W.3d 697, 701 [**17] (Tex. App.--Houston [1st Dist.] 2000, pet. denied) ("Equitable principles may allow the recovery
of attorney's fees and other litigation expenses 'where a party was required to prosecute or defend the previous
suit as a consequence of the "wrongful act" of the defendant.'") (quoting Baja Energy, 669 S.W.2d at 838- 39); GXG,
Inc. v. Texacal Oil & Gas, 977 S.W.2d 403, 424 (Tex. App.--Corpus Christi 1998, pet. denied) (citing Baja Energy, 669
S.W.2d at 838-39).
Pacesetter responds that Pierce Homes' theory of recovery is inapplicable because the equitable recovery of attorney's
fees is premised on the prior litigation's arising solely from the wrongful act of the party against whom the fees are
sought. Here, because the jury found that Allcox's damages were caused by the negligent conduct of both Pierce Homes
and Pacesetter, equitable principles do not allow Pierce Homes to recover its previously incurred attorney's fees as
damages. See Dayton Hudson Corp. v. Eldridge, 742 S.W.2d 482, 488 (Tex. App.--Dallas 1988, writ denied). The Eldridge
court denied recovery because the party seeking to recover [**18] was "not an innocent party forced to incur
costs and expenses, including attorney's fees, to be treated as the legal consequences of some original wrongful act of
another and permitted to be recovered as damages." Id. Distinguishing Baja Energy, the court of appeals held that to
recover attorney's fees against a third party for defending a claim against another, the claimant must be a "wholly innocent
party" brought into the action solely as a result of the conduct of the third party. Id.
The case now before us is likewise distinguishable from Baja Energy and the cases that follow it. Baja Energy, the
operator of an oil and gas well, contracted with Ball to plug the well. The contract provided that Baja was the owner of

86 S.W.3d 827, *; 2002 Tex. App. LEXIS 7370, **
Page 6
the well and would defend title to it. Baja Energy, 669 S.W.2d at 837. However, before the well was plugged, Baja, on
behalf of the true owner of the well, assigned the lease to another, thus rescinding the plugging contract. Id. Baja did not
notify Ball of the assignment, and Ball proceeded to perform the contract, resulting in his being sued by the new owner
for trespass and conversion. Id. at 837-38. The court [**19] of appeals held that Baja "acted wrongfully in unilaterally
rescinding the contract without notice to Ball" and that, absent such wrongful act, Ball would not have been forced
to defend the subsequent suit. Id. at 839. Thus, Ball was allowed to recover his litigation expenses, including attorney's
fees, from Baja. Id.
Lesikar, the other case on which Pierce Homes relies, is of questionable applicability. In Lesikar the defendants
wrongfully transferred operations of an oil and gas lease, forcing the plaintiff to contest the transfer before the Texas
Railroad Commission. Lesikar, 33 S.W.3d at 306. The trial court awarded the plaintiff her attorney's fees incurred in
"correcting the [*835] wrongful conduct." Id. The court of appeals observed that the attorney's fee award was challenged
"on several grounds," but only addressed the plaintiff's failure to present expert testimony to the trial court regarding
the reasonableness and necessity of the fees. Id. The court reversed the attorney's fee award. Id. at 308. With
regard to the issue now before this Court, the court did no more than observe that "attorneys' fees incurred in [**20]
prior litigation with a third party are recoverable in a subsequent suit as actual damages." Id. at 306 (citations and footnote
omitted).
Here, Allcox alleged negligence against both Pierce Homes and Pacesetter, and the jury found that both were in fact
negligent to some degree. We hold that the district court, under the circumstances presented by this case, did not err in
refusing to award against Pacesetter the attorney's fees incurred by Pierce Homes in defending Allcox's arbitration
claim. We overrule Pierce Homes' issue.
CONCLUSION
We affirm the district-court judgment.
Lee Yeakel, Justice
Affirmed

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PRIOR HISTORY: [**1]
805 S.W.2d 541, *; 1991 Tex. App. LEXIS 718, **
LEXSEE 805 S.W.2D 541,AT 549
ROY S. PETERSON, Appellant v. DEAN WITTER REYNOLDS, INC., Appellee
On Appeal from the 192nd Judicial District Court;
Dallas County, Texas; Trial Court Cause No. 87-3506-K.
DISPOSITION:
Affirmed.
LexisNexis (TM) HEADNOTES - Core Concepts:
COUNSEL:
Gary B. Maddox, George H. Tarpley.
Will S. Montgomery, David Ford Hunt, Charles
Rodney Acker.
JUDGES:
JJ.
No. 05-90-00607-CV
COURT OF APPEALS OF TEXAS, Fifth District, Dallas
Justices Warren Whitham, Lagarde and Kinkeade,
OPINIONBY:
WHITHAM
OPINION:
[*543] OPINION
The appellee, Dean Witter Reynolds, Inc., brought
this action to recover a deficit in a futures trading
account of its customer, the appellant, Roy S. Peterson.
The trial court: (1) directed a verdict for Dean Witter on
its case-in-chief; (2) directed a verdict against Peterson
on certain of his cross-claims and affirmative defenses;
and (3) submitted Peterson's remaining cross-claims
[*544] to the jury. Of those submitted to the jury, the
805 S.W.2d 541; 1991 Tex. App. LEXIS 718
February 13, 1991, Filed
Page 1
jury found in Peterson's favor only on a breach of
fiduciary duty issue. The jury, however, found no
proximate cause for damages. Consequently, the trial
court entered judgment in favor of Dean Witter and
against Peterson and Peterson appeals. For the reasons
that follow, we affirm. Furthermore, Dean Witter
maintains on cross-appeal that Peterson has taken this
appeal for delay and without sufficient cause. We [**2]
find no merit in this contention. Therefore, we decline to
assess any damages as requested by Dean Witter under
Texas Rule of Appellate Procedure 84.
Background
Peterson had over twenty-five years experience as a
speculator in the commodities markets. He aggressively
traded live cattle futures, live hog futures, and pork belly
futures on the Chicago Mercantile Exchange. He
maintained brokerage accounts at eight different firms
over the years. Peterson started in business by
speculating in real estate, but then became a full-time,
professional commodities speculator. It was not unusual
for Peterson to trade in large quantities of futures
contracts. In fact, Peterson was one of the largest
commodity speculators in the country, having controlled
over 70 million pounds of live cattle at one time.
Traders like Peterson can either be "long" or "short"
in their market positions. To be long means the trader is
obliged to take delivery of a certain quantity of a graded
commodity during the delivery month. To be short
means that the trader has the obligation to deliver the
same quantity of the graded commodity during the
delivery month. The "delivery month" is the month
during which [**3] the futures contract expires. At that
point, one of two things happens: (1) delivery of the
commodity takes place; or, (2) the futures contract is
closed out when the short trader buys it back or the long
trader sells. Pork belly futures contracts, for example,
have delivery months of February, March, May, July,
and August. One pork belly futures contract represents

the obligation to take delivery of 40,000 pounds of
frozen pork bellies.
Like most speculators, Peterson traded on margin,
allowing him to leverage his money by putting up a
fraction of the cost of the contracts. Margin takes two
forms in commodities futures trading. To begin trading, a
speculator must deposit a good faith amount of money,
called "initial margin." To continue trading, the
customer's margin money must maintain a certain level
relative to the current market value of his positions. This
is called "maintenance margin." The minimum margin
for pork bellies is established by the Chicago Mercantile
Exchange, but may be increased by the brokerage firm.
The brokerage firm may not waive the margin
requirement. If the market turns against the customer, the
brokerage firm makes a "margin call" on the customer,
requiring [**4] the customer to deposit additional
margin money within a specified time in order to retain
his positions. If the value of the customer's market
positions falls far enough, the customer's account may go
into a deficit, which means that his margin money has
been exhausted, and his account has a negative worth. A
deficit is a large, or very bad, margin call. If the
customer cannot make a deposit sufficient to cover his
margin call by the deadline given by the brokerage firm,
the brokerage firm has the right to sell or liquidate the
customer's position in the market to prevent further
losses.
Commodities futures trading is regulated by, inter
alia, the Chicago Mercantile Exchange. All brokerage
firms and customers must comply with the Chicago
Mercantile Exchange's rules and regulations. Among
those rules is Rule 827, which governs what may be used
as margin. Rule 827 (at all times relevant to this lawsuit)
stated the only way a customer may meet his margin
requirements:
Clearing members may accept from their customers as
margin, cash, U.S. Government obligations, securities
listed on the New York or American Stock Exchange (at
a value of 70% of market prices), gold warehouse [**5]
receipts registered for delivery on a U.S. designated
contract market [*545] (at a value of 70% of the
London Spot Gold P.M. Fix), or for IMM or IOM traded
commodities, except Random Length Lumber, Letters of
Credit of not less than the amount required for initial
margin.
Rule 827 goes on to say that if the customer fails to put
up the required margin, the brokerage firm may liquidate
the customer's account on as little as one hour's notice.
Even if the customer never puts up the margin money,
the brokerage firm must satisfy the exchange's margin
requirements, if necessary, out of the brokerage firm's
805 S.W.2d 541, *; 1991 Tex. App. LEXIS 718, **
Page 2
own pocket. Violation of Rule 827 is a "major offense,"
which can subject the brokerage firm to an action by the
Chicago Mercantile Exchange. The Chicago Mercantile
Exchange also regulates the time during which margin
money must be paid. The Chicago Mercantile Exchange
requires each brokerage firm to deposit at the Chicago
Mercantile Exchange the amount of money necessary to
keep the customer's account fully margined. If a
customer's account goes into a deficit, then the brokerage
firm must use its own capital to satisfy the Chicago
Mercantile Exchange's requirements, then look [**6] to
the customer to pay back the money. Hence, a deficit is,
therefore, not an academic matter because the brokerage
firm has already paid out the money it seeks to recover
from the customer.
Peterson took his business to Dean Witter in early
1985. Peterson regularly traded hundreds of pork belly
futures contracts at a time, representing millions of
pounds of frozen pork. While Peterson traded through
Dean Witter, he had a direct phone line to his account
broker, and he was charged discounted commissions and
minimum margin requirements. Also, Dean Witter set up
a special bank account at Peterson's bank, to ensure
quick transfers of money. Peterson had a computer in his
office, which allowed him to track every trade by every
customer in the market within a few seconds of its
occurrence.
When he opened his account at Dean Witter,
Peterson signed a customer agreement governing his
relationship with Dean Witter. The customer agreement
provides:
All transactions under this agreement shall be subject to
the constitution, rules, regulations, customs and usages
of the exchange or market, and its clearing house, if any,
whether the transactions are executed by you or your
agents. . . [**7] .
* * *
You [Dean Witter] are hereby authorized, in your
discretion, . . . should you for any reason whatsoever
deem it necessary for your protection, to sell any or all of
the securities and commodities or other property which
may be in your possession or which you may be carrying
for the undersigned . . . in order to close out the account
or accounts of the undersigned in whole or in part . . . .
Such sale, purchase or cancellation may be made
according to your judgment and may be made, at your
discretion, on the exchange or other market where such
business is then usually transacted, . . . without notice to
the undersigned . . . and the undersigned shall remain
liable for any deficiency . . . .

The undersigned will at all times maintain margins for
said accounts, as required by you from time to time.
(emphasis added).
The Chicago Mercantile Exchange's Emergency
Order
In early 1987, Peterson was long over 150 February
pork belly futures contracts. On February 6, 1987, the
Chicago Mercantile Exchange unexpectedly issued an
emergency order requiring all speculators to reduce their
holdings to 50 February contracts by February 11, [**8]
and to 25 February contracts by February 13. Dean
Witter had nothing to do with the issuance of the
emergency order, and could not waive its effect on Dean
Witter's customers. Peterson, like other speculators, had
to sell some of his contracts to comply with the
regulatory requirement. Following the emergency order,
the market price of pork belly contracts dropped. As a
result, Peterson began to have margin calls in his
account. His first margin call, for $ 200,000, came on
February 11th. As of that same day, Peterson [*546]
also had a deficit of over $ 90,000 in his accounts, in
addition to the margin call. Peterson funded the deficit
on February 12, but did nothing to satisfy the margin
call. By the end of the day, the market had further moved
against Peterson, creating a deficit of over $ 250,000 and
margin requirements of another $ 200,000. Dean Witter
had to pay the Chicago Mercantile Exchange the amount
of the deficit and the maintenance margin, and wait for
Peterson to repay Dean Witter. Peterson's account had a
continuous margin call and deficit from February 13th
through February 18th, but Peterson never again sent in
any money to cover his futures trading losses.
[**9] The Assigned Deliveries
Further increasing his debt to Dean Witter, Peterson
was assigned deliveries on some of his futures contracts
during mid-February, 1987. Delivery of a futures
contract occurs when the Chicago Mercantile Exchange
assigns the contract of a short trader (or seller) to the
contract of a long trader (or buyer), and requires the short
to deliver the commodity to the long. Ownership of the
commodity is evidenced by warehouse receipts. The
warehouse receipts are delivered to the brokerage firm
the same day that the customer is notified of the delivery.
When delivery occurs, leverage is no longer possible,
and the brokerage firm must pay the Chicago Mercantile
805 S.W.2d 541, *; 1991 Tex. App. LEXIS 718, **
Page 3
Exchange the full market price for the warehouse
receipts before 9:00 a.m. the next morning. The
brokerage firm must then recoup the money used to pay
for the warehouse receipts from its customer.
For regulatory purposes, each commodity account is
divided into two parts. In Dean Witter's accounting
system, the part in which trading in futures contracts
occurs is called a "type-4" or trading account. The other
part is called a "type-G" or delivery account, and is
where Dean Witter accounts for deliveries of [**10]
commodities. This division into two parts is an internal
accounting device of Dean Witter; Dean Witter divides
the account because the Chicago Mercantile Exchange
regulates futures trading (in type-4 accounts), but does
not regulate deliveries (in type-G accounts). If a
customer takes no deliveries, the type-G account shows
no activity. If pork belly warehouse receipts are
delivered, an entry is made showing an asset in the
customer's type-G account. If the customer owes the
brokerage firm margin money at this point, the market
value of his pork belly warehouse receipts cannot be
used to satisfy the margin, because Rule 827 does not
allow the use of pork belly warehouse receipts as margin
payments.
The Chicago Mercantile Exchange assigned
Peterson's account delivery of seven warehouse receipts
on February 11. Peterson's account took delivery of
eighteen more warehouse receipts on February 12 or 13,
and three more warehouse receipts on February 17.
Because he was out of money, Peterson arranged for a
third party, Larry Larsen, to pay for the warehouse
receipts. Larsen wired $ 176,000 to pay for the first
seven warehouse receipts directly into Peterson's account
at Dean Witter. The [**11] Dean Witter branch office
receiving money cannot put money directly into the
delivery account. Instead, the money is received into the
trading account (type 4) and then manually journaled
into the delivery account (type G) by Dean Witter's New
York office. On February 17, Larsen then wired $
441,000, to pay for eighteen warehouse receipts, to
Peterson's bank account in Houston. Peterson then wired
the money to Dean Witter. Larsen and Peterson followed
the same procedure for the last three warehouse receipts.
Peterson's Accounts and Dean Witter's Actions
Shown below is a recap of the deteriorating status of
Peterson's accounts, from February 12-18:
________________________________________________________________________________
Feb.
12 Feb. 13 Feb. 14 Feb. 15 Feb. 16 Feb. 17 Feb. 18
Margin
Requi-

805 S.W.2d 541, *; 1991 Tex. App. LEXIS 718, **
Page 4
rement $ 372,000 $ 311,000 $ 311,000 $ 311,000 $ 311,000 $ 306,000 $ 0
Deficit $ 259,616 $ 283,962 $ 283,962 $ 283,962 $ 283,962 $ 260,360 $ 393,081
________________________________________________________________________________
[*547] The amount Peterson owed Dean Witter on
each day was the sum of the margin requirement and the
deficit.
Peterson was in constant contact with his Dean
Witter broker, Dottie St. Clair, and her manager, Alan
Schroeder, during this time. Peterson [**12] spoke to
St. Clair several times every day about his account.
Peterson knew he had a serious deficit that he would
have to pay to Dean Witter. St. Clair kept him
continuously apprised of his accounts' status, and
Peterson, by using his office quote-machine and his own
aptitude for figures, could compute his own margin
requirements within a few thousand dollars based on the
market price. Both St. Clair and Schroeder repeatedly
told Peterson beginning February 12th that he would
have to cure the deficit in his account or face the
possibility of liquidation of his positions. Finally, after
giving Peterson six days to put up the money he owed,
on February 18 Dean Witter notified Peterson by
telephone and by hand-delivered letter that it would
begin liquidating his positions within one day if he did
not put up $ 260,360 (the previous day's deficit). The
letter also notified Peterson that, even if he cured the
deficit within the hour, he would have to deposit enough
money to satisfy his maintenance margin requirements
by 10:00 a.m. the next day, or Dean Witter would
liquidate his positions. Because Peterson makes much of
the letter, we quote the letter in full:
At the close of business [**13] of February 17, 1987,
your two commodity accounts (369-40500 and
369-40502) have total requirements of $ 306,000. The
deficit in these accounts is $ 260,360. Unless sufficient
funds are brought in to satisfy the deficit of $ 260,360
within the hour, we may begin to liquidate your open
positions. No money has been received from you since
Thursday, February 12, 1987 to cover losses on your
futures positions.
Further, we may begin, unless all open margin calls are
satisfied by 10:00 a.m. CST, on February 19, 1987, a
complete liquidation of your futures positions at Dean
Witter Reynolds, Inc.
Thus, the letter gave Peterson two deadlines to pay Dean
Witter the money owed: first, Peterson had to make up
the deficit within one hour, and, if he did so; second,
Peterson then would be given until 10:00 a.m. the
following day to make the required margin payments.
Rule 827 allowed Dean Witter to give Peterson one
hour's notice because the commodities markets are
extremely volatile. Had the market turned completely
against Peterson, Dean Witter faced the prospect of
losing $ 250,000 per day while it waited for Peterson to
raise money. The letter was delivered to Peterson at
11:37 a.m., [**14] central time on February 18. As
Peterson well knew, the pork belly market closed at 1:00
p.m. every day. Peterson knew that if he forced Dean
Witter to wait the full hour to begin the liquidation, there
would only be twenty minutes to sell his positions. Even
so, Peterson did not complain of the deadline, nor did he
tell Dean Witter to begin the sale earlier, to allow more
time for the sale. On February 18, one hour following the
deadline, Dean Witter conducted a complete liquidation
of all 306 futures contracts owned by Peterson. After
Peterson missed his first deadline by failing to fund his
deficit, the second deadline became moot.
The $ 412,000.00 Debit to Peterson's Account
Once the liquidation was complete, Peterson still
had a deficit of over $ 392,000 in his account. Peterson
did not send in any money to pay the deficit, nor did he
demand that Dean Witter reinstate his market positions.
Therefore, following the futures contract liquidation on
February 18, Dean Witter sold to Oscar Mayer, on
February 20, 1987, the 18 warehouse receipts previously
sold by Peterson to Larsen. Dean Witter knew of the
prior Larsen purchase of these receipts because its own
[*548] broker [**15] gave the instructions for the
handling of the receipt of the funds from Larsen but
nonetheless sold these receipts to Oscar Mayer. Thus
after February 20, 1987, all of Peterson's futures
contracts and all of his warehouse receipts had been
liquidated by Dean Witter. After these events, Dean
Witter's records showed approximately an $ 18,000
surplus in Peterson's account. The $ 18,000 credit in
Peterson's account was continually reflected on monthly
statements generated by Dean Witter and sent to
Peterson for in excess of two years, from March 1987
through April 1989. In May 1989, Dean Witter debited
Peterson's account for $ 412,000, thereby reflecting the
deficit of $ 393,000. The reason for this debit is shown
below. It is the $ 393,000 deficit that Dean Witter
recovered from Peterson in the judgment here at issue.
The Larsen Claim
Larsen originally brought this suit against Dean
Witter and Peterson. Larsen claimed, inter alia, that
Dean Witter converted his warehouse receipts by selling
them to Oscar Mayer. Dean Witter argued that it had a

superior right to the warehouse receipts as against
Larsen, but if not, then it had a right to recover against
Peterson. The trial court [**16] granted Larsen's motion
for summary judgment on the conversion claim. Dean
Witter then settled the controversy with Larsen. Shortly
after this settlement, Dean Witter debited Peterson's
account for $ 412,000. Peterson does not question the
amount debited.
The Trial Court's Judgment
In the present case, after both sides had rested, the
trial court directed a verdict in favor of Dean Witter on
its breach of contract claim and against Peterson's claims
for fraud, breach of contract, tortious interference with
contract, and slander. For its claim, Dean Witter was
awarded $ 393,811 in damages, representing the deficit
in Peterson's trading account. Further, the trial court
awarded Dean Witter attorney's fees totalling $
253,709.84 plus additional sums pending any appeal and
certain pre-judgment interest. On Peterson's remaining
claims, the jury found that Dean Witter had breached its
fiduciary duty to Peterson and awarded Peterson punitive
damages totalling $ 100,000. The trial court, however,
did not render judgment on this amount because the jury
found that the breach of fiduciary duty did not
proximately cause any actual damages. We address
Peterson's points of error as briefed [**17] by Peterson.
The Directed Verdict
In his first point of error, Peterson contends that the
trial court erred by directing a verdict in favor of Dean
Witter on its case in chief because probative, conflicting
evidence was introduced which, when viewed most
favorably to Peterson, would not support the directed
verdict. In his second point of error, Peterson contends
that the trial court erred by directing a verdict in favor of
Dean Witter that Peterson take nothing on his
cross-claims for breach of contract and tortious
interference with contract because probative, conflicting
evidence was introduced which, when viewed most
favorably to Peterson, would support a recovery by
Peterson on these claims. Peterson argues these questions
together. The rule as generally stated is that the plaintiff
is entitled to a directed verdict when reasonable minds
can draw only one conclusion from the evidence.
Collora v. Navarro, 574 S.W.2d 65, 68 (Tex. 1978). The
task of an appellate court in such a case is to determine
whether there is any evidence of probative force to raise
fact issues on the material questions presented. Collora,
574 S.W.2d at 68. The court must consider all of the
[**18] evidence in the light most favorable to the party
against whom the verdict was instructed, discarding all
contrary evidence and inferences. Collora, 574 S.W.2d
at 68. When reasonable minds may differ as to the truth
of controlling facts, the issue must go to the jury.
805 S.W.2d 541, *; 1991 Tex. App. LEXIS 718, **
Page 5
Collora, 574 S.W.2d at 68. In his brief, Peterson first
argues trial court error in disposing of his cross-claims
for breach of contract and tortious interference by
directed verdict. Thus, we reach Peterson's second point
of error. [*549] First, we address Peterson's claim for
breach of contract.
Peterson's Breach of Contract Claim
Peterson sees three components of his breach of
contract claim: first, the "delivery breach"; second, the
"liquidation breach"; and third, the "letter breach."
"The delivery breach." This claim is grounded on
Dean Witter's failure to initially deliver the warehouse
receipts to Larsen. As damages, Peterson claims the
amount of his attorneys' fees to defend the Larsen suit. In
Texas, attorneys' fees expended in prior litigation with
third parties are not recoverable as damages: attorneys'
fees are only recoverable when provided for by contract
or by agreement between [**19] the parties. See
Cupples Coiled Pipe, Inc. v. Esco Supply Co., 591
S.W.2d 615, 619 (Tex. Civ. App. -- El Paso 1979, writ
ref'd n.r.e.) (attorneys' fees from prior tort or contract
suits against third parties are not recoverable as damages
in subsequent suits); see Buck v. Johnson, 495 S.W.2d
291, 297 (Tex. Civ. App. -- Waco 1973, writ ref'd n.r.e.)
(the trial court's assessment of third party
cross-defendants' attorneys' fees as damages was error).
Counsel's fees incurred in prosecuting a suit for or
defending against a wrong are not ordinarily recoverable
as actual damages. Cupples Coiled Pipe, 591 S.W.2d at
619. Thus, inequitable as it may be, the law does not
provide for the recovery of litigation expense in this
case. Cupples Coiled Pipe, 591 S.W.2d at 619. Because
Peterson's damage element of his "delivery breach" claim
fails as a matter of law, it follows that the trial court did
not err in directing a verdict insofar as the "delivery
breach" component of Peterson's breach of contract
claim is concerned. In so holding, we decline to follow
Baja Energy, Inc. v. Ball, 669 S.W.2d 836, 839 (Tex.
App. -- Eastland 1984, no writ). See Note, Baja: An
Aberration [**20] or a Catalyst, 37 BAYLOR L.
REV. 829, 837-39 (1985).
"The liquidation breach." This claim is grounded
on Dean Witter's asserted failure to follow the customs
and usages in the market. Peterson points to the language
of the customer agreement: "All transactions under this
agreement shall be subject to the . . . custom and usages
of the exchange or market. . . ." Although Peterson tells
us in his brief that "evidence was introduced to show that
Dean Witter did not do so [follow custom and usages]
with respect to the liquidation," Peterson fails to cite to
the record where we may find this evidence. Instead,
Peterson proceeds to cite to the record a description of
the manner of liquidation. n1 We conclude, therefore,

that in the present case the references to certain facts do
not contain proper references to the record where the
matters complained of may be found. Kropp v. Prather,
526 S.W.2d 283, 288 (Tex. Civ. App. -- Tyler 1975, writ
ref'd n.r.e.). The burden is on appellant to show that the
record supports his contentions and to point out the place
in the record where the matters complained of are shown.
Kropp, 526 S.W.2d at 288. In the present case, the
statement [**21] of facts contains 1,178 pages and 287
exhibits. In the present case, as in Kropp, we do not feel
that the rules require us to read through the entire record
to determine whether appellant's allegations have any
validity. Kropp, 526 S.W.2d at 288. We conclude, as
did the court in Kropp, that appellant has failed to meet
his burden. Kropp, 526 S.W.2d at 288. Hence, we
decline to search the record for evidence of what is
"custom and usages." Nevertheless, we note that the
customer agreement specifically provides that:
You [Dean Witter] are hereby authorized, in your
discretion, . . . should you for any reason whatsoever
deem it necessary for your protection, to sell any or all of
the securities and commodities or other property which
may be in your possession or which you may be carrying
for the undersigned . . . in order to close out the account
or accounts of the undersigned in whole or in part . . . .
Such sale, purchase or cancellation may be made
according to your judgment and [*550] may be made,
at your discretion, on the exchange or other market
where such business is then usually transacted, . . .
without notice to the undersigned [**22] . . . and the
undersigned shall remain liable for any deficiency . . . .
(emphasis added).
We conclude that the above quoted language of the
customer agreement controls over the general contractual
reference to "custom and usages" relied upon by
Peterson. It is well settled that a special, or more
particular, clause must prevail over a general clause.
Western Oil Fields, Inc. v. Pennzoil United, Inc., 421
F.2d 387, 389 (5th Cir. 1970). See Leopard v. Stanolind
Oil & Gas Co., 220 S.W.2d 259, 263 (Tex. Civ. App. --
Dallas 1949, writ ref'd n.r.e.). Moreover, we conclude
that nothing contained in Peterson's description of the
manner of liquidation establishes a violation by Dean
Witter of the above quoted "in your discretion" language
of the customer agreement and Peterson does not
contend that it does so. Thus, we cannot say that there is
any evidence to raise a fact issue on the "liquidation
breach" issue. It follows, therefore, that the trial court did
not err in directing a verdict insofar as the "liquidation
breach" component of Peterson's breach of contract
claims is concerned.
805 S.W.2d 541, *; 1991 Tex. App. LEXIS 718, **
[**23]
Page 6
n1 "Manner of liquidation" tells us nothing
about "custom and usages."
"The letter breach." By "letter," Peterson refers to
Dean Witter's letter of February 18, 1987. Peterson urges
that this letter "creates a contractual relationship between
the parties." To this end, Peterson reads the February 18
letter to impose upon Dean Witter a contractual duty to
wait until 10:00 a.m. February 19 to conduct a complete
liquidation. Hence, Peterson insists that Dean Witter
breached this "agreement" by conducting a complete
liquidation of his positions on February 18. We disagree
that Dean Witter "breached" a "contract." We read the
February 18 letter as no more than a notice to Peterson
that the axe is about to fall unless he, Peterson, makes
good on his own contractual obligations. Understandably
Peterson cites no authority holding that a letter notifying
a debtor of a default creates a contract. Mutuality of
obligation is a requisite in the formation of a contract.
Texas Gas Utilities Co. v. Barrett, 460 S.W.2d 409, 412
(Tex. 1970). A contract in which there is no
consideration moving from one party, or no obligation
upon him, lacks mutuality, is unilateral, and
unenforceable. Texas Gas, 460 S.W.2d at 412 (citing
Texas Farm Bureau Cotton Ass'n [**24] v. Stovall,
113 Tex. 273, 253 S.W. 1101, 1105 (1923)). In the
present case, there was no consideration, no mutual
promise, and no acceptance of this "contract" by
Peterson. Even if Peterson could fashion an argument
that the notice letter constituted an "offer," it is
undisputed that there was no acceptance. Every witness,
including Peterson, testified that Peterson did not send in
any money to pay the deficit in order to extend the time
to pay the remainder of his margin call. We conclude that
the trial court did not err in directing a verdict as to the
"letter breach" component of Peterson's breach of
contract claim. We reach this conclusion because there
was no contract to breach.
Tortious Interference
Peterson maintains that Dean Witter tortiously
interfered with the contract between him and Larsen for
the sale of eighteen warehouse receipts. The essential
elements of a claim for tortious interference are that: (1)
a contract existed that was subject to interference; (2) the
act of interference was willful and intentional; and (3)
such intentional act was a proximate cause of the
plaintiff's damages; and (4) actual damage or loss
occurred. Griffin v. Rowden, 702 [**25] S.W.2d 692,
693 (Tex. App. -- Dallas 1985, writ ref'd n.r.e.). Peterson
repeats his contentions made under his "delivery breach"
argument complaining of Dean Witter's failure to
initially deliver the warehouse receipts to Larsen. Again,
Peterson claims as actual damages the amount of his

attorneys' fees to defend the Larsen suit. For the same
reasons expressed in our disposition of the damage issue
under Peterson's "delivery breach" argument, we again
conclude this "attorneys' fee" damage claim fails as a
matter of law. Peterson, however, suggests one [*551]
additional actual damage suffered by him. Peterson tells
us that his "reputation in the industry in general and with
Larsen in particular was damaged." Peterson, however,
fails to tell us the amount of those damages or where we
can locate in the record the means whereby those
"reputation" damages can be determined. Indeed, during
argument on the motion for directed verdict, the patient
trial court tried for six pages of the record to obtain from
Peterson's counsel the answer to the trial court's question:
"What do you think his damages are; how many
dollars?" The trial court never obtained an answer. On
appeal, Peterson does [**26] not give us the answer.
We decline to search the record for the answer. See
Kropp, 526 S.W.2d at 288. Therefore, we conclude that
Peterson's "reputation" damage claim fails as a matter of
law. For the above reasons, we conclude that Peterson
failed to establish the fourth element of a claim for
tortious interference, i.e., actual damage. It follows that
the trial court did not err in directing a verdict as to
Peterson's claim for tortious interference.
To summarize to this point, Peterson contends in his
second point of error that the trial court erred by
directing a verdict that Peterson take nothing on his
cross-claims for breach of contract and tortious
interference with contract. Having found no merit in any
of Peterson's breach of contract component arguments
and no merit in Peterson's tortious interference with
contract argument, we overrule Peterson's second point
of error. We turn next to consider Peterson's complaint as
to the directed verdict in favor of Dean Witter on its case
in chief. Thus, we reach Peterson's first point of error.
Dean Witter's Breach of Contract Claim
The dispute centers on the existence of a deficit.
Peterson insists that there was no [**27] deficit.
Peterson's calculations eliminate the deficit by treating as
an "asset" the market value of the delivered warehouse
receipts in Peterson's type-G account while at the same
time counting the money received from Larsen to pay for
those warehouse receipts as an "asset" in his trading
account. We conclude that Peterson's calculation does
not eliminate the deficit. We reach this conclusion for
two reasons. First, Rule 827 does not permit using the
warehouse receipts in Peterson's calculation. Second,
Peterson cannot double count his assets. We reason that
Peterson cannot simultaneously credit his accounts with
Larsen's money to pay for the warehouse receipts and the
warehouse receipts themselves. As a matter of law, and
certainly of logic, Peterson must choose one or the other.
It is admitted that if only one "asset" is counted in the
805 S.W.2d 541, *; 1991 Tex. App. LEXIS 718, **
Page 7
calculation of the deficit, then Peterson's account shows a
deficit. In short, we conclude that Peterson's calculation
ignores reality. Peterson directed Dean Witter to send the
warehouse receipts to Larsen. Hence, Peterson cannot
have it both ways. Peterson cannot be heard to ask that
the warehouse receipts be sent to Larsen and then argue
that they [**28] should be counted as assets with which
to eliminate his deficit. It is undisputed that as soon as
the warehouse receipts were delivered to Peterson's
account, Dean Witter had to pay the Chicago Mercantile
Exchange for them. Dean Witter was entitled to collect
the money for those receipts from someone. Larsen paid
for the warehouse receipts, and the trial court
subsequently determined that Larsen was entitled to
receive his money back. Once Dean Witter paid Larsen
his money back, that money had to be subtracted from
Peterson's account, leaving a deficit. Peterson does not
challenge the amount subtracted; to wit, $ 412,000.00.
We conclude that as a matter of law Dean Witter is
entitled to recover that deficit from Peterson. It follows
that the trial court did not err by directing a verdict in
favor of Dean Witter on its case in chief. We overrule
Peterson's first point of error.
Peterson's Waiver Defense
In his third point of error, Peterson contends that the
trial court erred by failing to submit to the jury Peterson's
affirmative defense of waiver because probative
evidence was introduced to support the elements to
establish waiver. Waiver [*552] is an affirmative
defense. [**29] TEX. R. CIV. P. 94. An appellant
must make an effort to obtain jury findings with respect
to an affirmative defense; otherwise, the appellant
waived the affirmative defense. See Conrad v. Judson,
465 S.W.2d 819, 827 (Tex. Civ. App. -- Dallas 1971, writ
ref'd n.r.e.), cert. denied, 405 U.S. 1041, 92 S.Ct. 1312,
31 L.Ed.2d 582. In the present case, Peterson filed with
the district clerk on November 6, 1989, a document
entitled "Roy S. Peterson's Requested Charge of the
Court." The trial court's charge was not prepared until
November 8, 1989. Peterson never tendered his
requested questions and instructions to the trial court.
Perhaps this explains why nowhere in Peterson's
argument appears reference to "Roy S. Peterson's
Requested Charge of the Court." Indeed, nowhere in his
argument does Peterson tell us if he objected to the
charge or sought to obtain a jury finding on waiver. In
any event, issues proposed for inclusion within the
charge must be tendered after the draft charge is given to
the parties by the court: the filing of a set of proposed
questions, definitions and instructions before the charge
conference, without more, does not suffice to preserve
error. See [**30] Wilson v. King, 311 S.W.2d 957,
959 (Tex. Civ. App. -- Austin 1958, writ ref'd). We
conclude that Peterson waived his affirmative defense of

waiver and failed to preserve the assigned error. We
overrule Peterson's third point of error.
The Proximate Cause Question
In his fourth point of error, Peterson complains that
the trial court erred in submitting a "proximate cause"
issue on Peterson's claim of breach of a fiduciary duty in
liquidating Peterson's account because proximate cause
was established as a matter of law. In his fifth point of
error, Peterson contends that the trial court erred by
accepting the jury's answer to the proximate cause
question (question six) because it was against the great
weight of the evidence. Peterson argues these two points
together. The jury found no proximate cause. As to the
"great weight of the evidence" question, we note that
Peterson's fifth point of error is not briefed. Points of
error not separately briefed are waived. La Sara Grain v.
First Nat'l Bank of Mercedes, 673 S.W.2d 558, 568 (Tex.
1984) (on reh'g). A point of error that is not briefed fails
to meet the minimum requirements of Rule 414(e), Texas
Rules of Civil Procedure [**31] [now TEX. R. APP. P.
74(f)], and the appellate court considers such a point to
be waived. Schero v. Astra Bar, Inc., 596 S.W.2d 613,
614 (Tex. App. -- Corpus Christi 1980, no writ). We
conclude that in the present case, Peterson waived his
fifth point of error. We overrule Peterson's fifth point of
error.
Next we consider Peterson's fourth point of error.
Where the defendant's actions are alleged to constitute a
breach of fiduciary duty, the defendant is entitled to a
take-nothing judgment because of the jury's finding
negating the existence of the essential element of
proximate cause. See Shindler v. Harris, 673 S.W.2d 600,
606 (Tex. App. -- Houston [1st Dist.] 1984, writ ref'd
n.r.e.). Peterson agrees. Peterson, however, argues that
proximate cause was established as a matter of law
because the wrongful liquidation of Peterson's account
was established as a matter of law. We disagree that
wrongful liquidation of Peterson's account was
established as a matter of law. Instead, as shown from
our disposition of Peterson's "liquidation breach" claim,
Dean Witter did not wrongfully liquidate Peterson's
account as a matter of law. Hence, we conclude that
proximate cause [**32] was not established as a matter
of law. We overrule Peterson's fourth point of error.
Whether the Jinkins Rule Bars Dean Witter's
Recovery
In his sixth point of error, Peterson contends that the
trial court erred in entering judgment for Dean Witter on
its case in chief because the judgment allowed a settling
defendant to recover indemnity or contribution from a
non-settling defendant in violation of the rule of Beech
Aircraft Corp. v. Jinkins, 739 S.W.2d 19, 21-22 (Tex.
1987). Peterson states the rule of Beech Aircraft to be
805 S.W.2d 541, *; 1991 Tex. App. LEXIS 718, **
Page 8
that "the Jinkins Rule voids as a matter of public policy
any [*553] right of contribution and indemnity
between defendants if the settling defendant is jointly
responsible for the damages. . . . International Proteins
v. Ralston-Purina Co., 744 S.W.2d 932 (Tex. 1988)." For
purposes of this opinion we accept Peterson's statement
of the rule. Peterson grounds his asserted violation of the
rule of Beech Aircraft on the premise that "Dean Witter's
claim against Peterson arises from its settlement with
Larry Larsen." We disagree with Peterson's premise.
Hence, we conclude that the trial court did not violate the
rule of Beech [**33] Aircraft. We reach this
conclusion for two reasons. First, Dean Witter and
Peterson were not joint tort-feasors in Larsen's suit for
conversion. The focal point of this determination prior to
settlement was the trial court's order of April 27, 1988,
granting Larsen's motion for partial summary judgment
against Dean Witter on Larsen's counts for conversion or
money had and received. There the trial court held Dean
Witter solely liable for conversion of Larsen's property.
Indeed, Peterson does not claim to, or admit to,
conversion of Larsen's warehouse receipts. At most,
Peterson tells us in his reply brief that "both Dean Witter
and Peterson were sued by Larsen thereby making them,
potentially, joint tort-feasors." (emphasis added). We
conclude that suggested "potentially" will not operate to
invoke the rule in the present case as Peterson would
have us do. Second, Dean Witter sued Peterson for debt
incurred under a contract, the customer agreement. Dean
Witter did not sue Peterson for contribution. In this
connection, we decline Peterson's invitation to treat Dean
Witter's actions as an "artifice" designed to deceive the
judicial system. As put to us in Peterson's reply brief:
The [**34] creation of an account deficit (and the
corresponding claim to recover same under a breach of
contract theory) is an artifice designed to mask the true
nature of Dean Witter's claim, which is to recover all or
part of the sums paid to Larsen on a settlement. The
Jinkins Rule prohibits such a result. The form in which
Dean Witter cast its claim should not be allowed to
override the public policy which prohibits the substance
of the claim from being successfully asserted.
By our above disposition of the issue of Dean Witter's
breach of contract claim, we rejected Peterson's
challenge to the account deficit. We continue to do so.
Again we conclude that the trial court did not err in
entering judgment for Dean Witter on its case in chief.
Moreover, we conclude that in doing so the trial court
did not violate the rule of Beech Aircraft. We overrule
Peterson's sixth point of error.
The Calculation of Pre-Judgment Interest and Award of
Attorneys' Fees to Dean Witter

In his seventh point of error, Peterson contends that
the trial court erred in calculating pre-judgment interest
from March 1987 because the deficit on which the
interest was calculated was not in existence [**35]
prior to May 1989. The trial court calculated and
awarded pre-judgment interest totalling $ 65,963.34. The
trial court calculated interest for the period from March
31, 1987, (30 days after the month of liquidation)
through February 6, 1990, (the date of judgment).
Peterson asserts that the time period used to calculate
interest was in error. Peterson argues that, at best,
interest should be calculated beginning thirty (30) days
from May 1989 "when the deficit was created by Dean
Witter." We disagree that Dean Witter "created" the
deficit. Instead, Peterson himself "created" the deficit by
failing to perform the customer agreement. Indeed,
Peterson's contention under his seventh point of error
repeats arguments we have above rejected. Complicated
though the computation may be, as shown above, the
trial court did not err by directing a verdict in favor of
Dean Witter on its claim in chief in the amount of $
393,811.00. That claim was for the amount of the deficit.
As discussed above, that deficit existed in February 1987
and remained unpaid by Peterson at all times thereafter.
Hence, we conclude that the trial court did not err in
calculating pre-judgment interest for the period from
[**36] March 31, 1987, to date of judgment. We
overrule Peterson's seventh point of error.
[*554] In his eighth point of error, Peterson
contends that the trial court erred in awarding attorneys'
fees to Dean Witter if this court decides that Dean Witter
was not entitled to recover on its case-in-chief because
Dean Witter would not be a prevailing party. We have
decided that Dean Witter was entitled to recover on its
case in chief. We overrule Peterson's eighth point of
error.
Dean Witter's Attorneys' Fees on Appeal and Rule
84 Damages
In its sole cross-point of error, Dean Witter
contends: (a) that this court should award Dean Witter its
attorneys' fees on appeal and (b) a ten percent (10%)
penalty against Peterson under Texas Rules of Appellate
Procedure 84. The trial court awarded Dean Witter $
45,000.00 if this case were appealed. We affirm the trial
court's judgment. Consequently, we decline to award
Dean Witter an additional $ 45,000.00 for a successful
appeal to this court.
805 S.W.2d 541, *; 1991 Tex. App. LEXIS 718, **
Page 9
Next, we consider Dean Witter's request for an
award of Rule 84 damages. The Rule provides:
In civil cases where the court of appeals shall determine
that an appellant has taken an appeal for delay [**37]
and without sufficient cause, then the court may, as part
of its judgment, award each prevailing appellee an
amount not to exceed ten percent of the amount of
damages awarded to such appellee as damages against
such appellant.
TEX. R. APP. P. 84. Hence, we must determine if
Peterson has taken this appeal for delay and without
sufficient cause. First, we consider the question of taking
the appeal without sufficient cause. We cannot say that
Peterson has taken this appeal without sufficient cause.
Indeed, we do not read Dean Witter's brief to argue want
of sufficient cause other than to express the conclusion
that Peterson's arguments are without merit. Next, we
consider whether Peterson has taken this appeal for
delay. Rule 84 derives from former Rule 438 of the
Texas Rules of Civil Procedure. In addressing the "has
been taken for delay" question under the former rule, we
looked at the case from the point of view of the advocate
and determined whether he had reasonable grounds to
believe that the case would be reversed. See Beckham v.
City Wide Air Conditioning Co., 695 S.W.2d 660, 663
(Tex. App. -- Dallas 1985, writ ref'd n.r.e.). Assuming
this to be the correct standard [**38] under Rule 84, we
apply it to the present case. We cannot say that this
appeal reflects dilatory tactics on the part of Peterson's
attorney. See Beckham, 695 S.W.2d at 663.
Consequently, we conclude that Peterson's counsel, as
advocate, had some reasonable grounds to believe that
the case would be reversed. See Beckham, 695 S.W.2d at
663. We conclude, therefore, that Peterson did not take
this appeal for delay. The purpose of Rule 84 is to shift
part of an appellee's expense and burden of defending
himself in a frivolous appeal to the appellant. Dallas
County Appraisal Dist. v. The Leaves, Inc., 742 S.W.2d
424, 431 (Tex. App. -- Dallas 1987, writ denied).
Nevertheless, we conclude that in the present case we
cannot assess damages under Rule 84 of ten percent of
the trial court's monetary judgment against Peterson.
Accordingly, we refuse to assess damages against
Peterson and in favor of Dean Witter in the amount of
ten percent (10%) of the damages awarded to Dean
Witter. We overrule Dean Witter's cross-point.
Affirmed.

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463 S.W.2d 43, *; 1971 Tex. App. LEXIS 2805, **
LEXSEE 463 S.W.2D 43
Ben F. Powell and J. N. Hendricks, d/b/a Hendricks & Powell Insurance, Appellants
v. Brady Narried, Appellee
SUBSEQUENT HISTORY: [**1]
N.R.E.
PRIOR HISTORY: Appeal from the District Court of
El Paso County
LexisNexis (TM) HEADNOTES - Core Concepts:
JUDGES:
William E. Ward, Associate Justice. Ramsey, C.J.,
not sitting.
OPINIONBY:
WARD
OPINION:
[*44] Recovery was obtained by workman for
injuries sustained in the course of his employment and
against his employer on common-law liability of
negligence. The non-subscribing workman's
compensation employer, by third-party action, recovered
for all damages sustained in this action against his
insurance brokers upon various grounds of negligence
relating to their failure to procure workmen's
compensation insurance coverage. The brokers having
appealed, we affirm the judgment of the trial court as
herein modified.
On May 18, 1967 Brady Narried, who was in the
automobile salvage business, secured a contract for the
dismantling of a large feed mixing mill with the right to
sell the dismantled equipment and machinery as salvage.
For some fifteen years Mr. Narried had done business
with Hendricks & Powell Insurance, a local insurance
No. 6132
Court of Civil Appeals of Texas, Eighth District, El Paso
463 S.W.2d 43; 1971 Tex. App. LEXIS 2805
January 27, 1971
Page 1
agency, and the third-party defendants herein. Though
Mr. Narried had never carried workmen's compensation
insurance before, due to the high risk in his type of
business, he did want coverage for [**2] his employees
in the dismantling of the feed mill, since he felt the job
was out of his regular line of work. According to Mr.
Narried, on May 19th or 20th, and within a day or two of
securing the contract, he called Mr. Ben Powell on the
telephone and requested the workmen's compensation
coverage, and Mr. Powell told him to go ahead with the
work as he was covered. In prior insurance dealings
when Mr. Narried had secured insurance coverage, he
had generally ordered insurance over the telephone and
did not pay for the coverage until he was billed by his
agents. In this case the insurance agency billed Narried
for the workmen's compensation premiums on June 30,
1967, and the invoice was paid by Narried on July 5,
1967. On June 27th Jesus Holguin, an employee for Mr.
Narried and working on the dismantling job, was
severely injured in the course of his employment. It was
not until some time after July 5th that Narried first
learned that he had no workmen's compensation
coverage.
Trial was to a jury which, in answer to special
issues, found that Narried failed to provide his employee,
Holguin, with a reasonably safe place in which to work;
that he failed to provide an adequate support [**3] for
the tubing upon which Holguin was working; that each
of these failures was negligence and proximate cause of
the injuries received by Holguin. The jury also found that
Mr. Powell represented to Narried that he was covered
by workmen's compensation insurance prior to Holguin's
accident and that such representation was negligence and
the proximate cause of Narried's being engaged as an
employer without workmen's compensation insurance. In
addition, they found that Powell failed to advise Narried
that he had been unable to obtain the insurance, and that
such failure was negligence and was a proximate cause

of Narried's being engaged as an employer without
workmen's compensation insurance [*45] coverage;
that Powell failed to obtain workmen's compensation
insurance for Narried prior to the injuries to Holguin;
that such failure was negligence and a proximate cause
of Brady Narried being engaged as an employer without
workmen's compensation insurance. The jury further
found that a reasonable attorney's fee for the
representation of Brady Narried in this case was
$2,200.00, and that the sum of $50,000.00 would be the
amount that would reasonably compensate Holguin for
the injuries [**4] suffered by him; and that the
reasonable charge for the medical services incurred by
Holguin was $1,000.00. Judgment was entered on the
verdict in favor of Holguin against Narried in the sum of
$51,000.00, and in favor of Narried against the
third-party defendants, Powell and Hendricks, in the sum
of $53,200.00. Immediately, remittiturs were filed by
Holguin and Narried for certain small items relating to
the medical expense in the amount of $538.00 and to the
attorney's fees in the amount of $200.00.
The rule seems to be settled that if an insurance
agent or broker, with a view toward being compensated,
undertakes to procure insurance for another and, through
fault or neglect, fails to do so, he will be held liable for
any damage that results thereby. The failure of an agent
or broker, even after the exercise of reasonable diligence
to procure insurance, to notify the insured of the agent's
inability to obtain insurance, will likewise impose
liability upon him. Burroughs v. Bunch, 210 S.W.2d
211 (Tex.Civ.App., El Paso 1948, wr.ref.); Gibbs v.
Allstate Insurance Company, 386 S.W.2d 606
(Tex.Civ.App., Ft. Worth 1965, wr.ref., n.r.e.); Scott v.
Conner, 403 S.W.2d 453 (Tex.Civ.App., [**5]
Beaumont 1966); 29 A.L.R.2d 171. Obviously, then, an
insurance agent has a duty to his client not to advise the
client that he is covered by insurance if he is, in fact, not
so covered. The suit is not upon any oral contract of
insurance. It is a negligence action. The mere fact that
workmen's compensation coverage on only part of
Narried's business could not be obtained was no defense
to the theory of this action. If it could not be obtained
after the agent had undertaken to procure the insurance,
the failure of the agent to notify the insured of his
inability was actionable. Certainly his misrepresentation
was actionable. The trial court was correct in overruling
the motion for an instructed verdict.
In the course of the dismantling of the feed mill, two
large feed bins or tubes, together with their attached
metal supporting columns, had been placed on the
ground. Holguin was in the process of cutting the
supporting columns away from the bins with a torch and
Narried had placed a cable from a winch truck around
the bins in order to hold the bins firmly in the air and
463 S.W.2d 43, *; 1971 Tex. App. LEXIS 2805, **
Page 2
suspended after the support columns were cut loose.
When Holguin cut the last strip or supporting column
loose, the [**6] large bins moved forward and struck
him in the back, as the supporting cable had not been
properly balanced when it was placed around the bins.
Special Issue No. 2 inquired of the jury whether
Narried failed to provide Holguin with a reasonably safe
place in which to work on the occasion in question. The
jury's answer to this question, together with the related
issues regarding negligence and proximate cause, was
only one group of two groups that furnished the ground
for imposing liability upon Narried. The appellants
objected to the submission of Special Issue No. 2 on the
ground that it was entirely too broad, was a global
submission of the issue and, furthermore, called for a
mere conclusion.
We believe the objection to the broad submission
was good, and the court was probably in error in the
submission over the objection, particularly where a
specific act was relied upon as inquired about in Special
Issue No. 5, hereinafter discussed. Kainer v. Walker,
377 S.W.2d 613 (Tex. 1964); Jack Cane Corporation v.
Gonzales, 410 S.W.2d 953 (Tex.Civ.App., San Antonio
1967, n.w.h.). The present case is [*46] distinguished
from Prewitt v. Waller, 423 S.W.2d 641 (Tex.Civ.App.,
Dallas 1967, [**7] n.w.h.), where no objection was
made to the identical submission. But the error, if any, in
the method of submission does not require a reversal of
the trial court's judgment, as the judgment can rest on the
jury's answers to the submission of the specific issues
centered around Special Issue No. 5. Rule 434, Texas
Rules of Civil Procedure, is applicable, McDonald Texas
Civil Practice, Vol. 3, § 12.37.2.
The appellants objected to the submission of Special
Issue No. 5, inquiring if Narried had failed to provide
adequate support for the tubing upon which Holguin was
working on the occasion in question, on the ground that
it was misleading and the evidence showed that there
was adequate support for the tubing. We cannot agree, as
the evidence showed that when the supports were cut
away, the cable supporting the tubing, being improperly
placed, caused the tube or bin to drop, or sway, and
strike Holguin. We fail to see how the question was
misleading, and if we are in error it was the appellants'
duty to point out distinctly as to how it was misleading.
Rule 274, T.R.C.P.
The appellants further objected to the submission by
the court of the issue of a reasonable attorney's fee for
[**8] the attorney of Brady Narried. Unless provided
by statute or by contract of the parties, attorney's fees
incurred by a party to litigation are not recoverable
against an adversary, either in tort or in a suit upon a
contract. Turner v. Turner, 385 S.W.2d 230 (Tex. 1964).

However, where the natural and proximate consequence
of a wrongful act has been to involve a plaintiff in
litigation with others, there may, as a general rule, be a
recovery in damages of the reasonable expenses incurred
in such prior litigation, against the author of such act,
including the compensation for attorney's fees; but such
expenses must be the natural and proximate
consequences of the injury complained of and must have
been incurred necessarily and in good faith, and the
amount thereof must be reasonable. See annotation, 45
A.L.R.2d 1185. The testimony on attorney's fee in the
present case all relates to the present action. A reading of
the Statement of Facts reflects that little defense, if any,
was made by Narried to the action of Holguin, but that
the greater part of the investigation and testimony in the
case concerned the liability of the insurance agents to
Narried. No attempt at any break-down was [**9]
made, and there is no testimony as to the amount of any
attorney's fee being charged Narried for that portion
relating only to the defense of Holguin's suit; nor is any
testimony produced as to whether or not this was
reasonable or necessary. Further, as stated in the Turner
case, supra, the requisite of a prior action is missing; nor
is the requisite met by cross-action of Narried against the
insurance agents for his attorney's fees. Therefore, that
part of the judgment which permits the recovery by
Narried of any attorney's fees is reversed, and the
judgment will be so reformed in that regard.
The appellants' primary defense to the cross-action
of Narried was to the effect that the first inquiry
concerning the obtaining of workmen's compensation
insurance coverage was not made by Narried until June
20, 1967. That the agent immediately inquired as to
possible coverage through three other general agencies
and determined that coverage could not be obtained. That
on June 26th he had Mr. Narried apply by written
application to the Texas Workmen's Compensation
Assigned Risk Pool in Austin for his necessary coverage.
That though the application signed by Mr. Narried and
the necessary bank [**10] money order were mailed on
June 26th, the accident occurred before the Assigned
Risk application could possibly be processed. To this
defense, Mr. Narried offered proof that this written
application purportedly signed by Mr. Narried was a
forgery; that dates on covering letters to the Assigned
Risk Pool had been changed, and that the actual bank
money order executed by the [*47] bank had not been
issued until June 29th, some two days after Holguin's
accident.
As defensive matter, appellants presented and
requested the submission of a charge inquiring of the
jury if the application to the Assigned Risk Pool had
been signed by Narried. Such an issue as to who signed
the application was evidentiary and not controlling, and
463 S.W.2d 43, *; 1971 Tex. App. LEXIS 2805, **
Page 3
the trial court committed no error in refusing the
submission of the issue. Rule 279, Texas Rules of Civil
Procedure.
Complaint is made that the jury's answer to the
damage issue, in the amount of $50,000.00, was so
contrary to the great and overwhelming weight of the
evidence as to be clearly wrong and unjust, and was
excessive. The trial court permitted the jury, in answer to
the question, to consider past and future physical pain
and mental anguish, loss of [**11] earnings in the past,
and loss of earning capacity in the future. A
consideration of the entire record on the subject shows
that Holguin, an uneducated, healthy, 35-year-old
workman with a life expectancy of 34.5 years, suffered a
severe compression fracture of the eleventh and twelfth
dorsal vertebrae. He received emergency treatment and
was fitted with a back brace which he wore continuously
for five or six months. He remained in bed for two weeks
and was off work for some four months. He returned to
his same job at the auto wrecking yard, but has not been
able to do any heavy work and uses the other men to
carry the heavy parts. Although he has improved, his
condition has stabilized and has remained the same for a
year before trial. The testimony shows that a
compression fracture of this nature is impossible to
correct. The only hope is to stabilize it and, if anything,
the condition will worsen with time. Holguin
experienced severe pain following the accident and
continues to experience pain after excessive work, while
any twisting makes him ill with pain for two or three
days. He complains of pain frequently, and after a full
days' work his wife has to rub him with ointments,
[**12] all of which, from a medical point of view, is
reasonable and will continue. His personality has
changed and he is irritable. He has worked at his same
position since returning and is satisfied that he can
continue at the yard with his present routine. He has
received a five cents an hour raise since returning to
work, and now makes $1.70 per hour. We think the
evidence is amply sufficient to support the recovery.
There is no formula for the exact measurement of
pecuniary compensation for physical pain and mental
anguish, and it is a matter for the jury, which will not be
interfered with when there is substantial evidence to
support the jury finding. Robinson v. Ashner,
Tex.Civ.App., 357 S.W.2d 611, aff'd. 364 S.W.2d 223
(Tex.1963). Further, based upon the whole record we
cannot say the amount awarded by the jury is
unreasonable, and we hold, therefore, that it is not
excessive. Port Terminal Railroad Association v.
Macaluso, 450 S.W.2d 873 (Tex.Civ.App., Houston
1970).

We have carefully examined the appellants'
remaining points and find they are without merit, and
they are all overruled.
The trial court's judgment is therefore reformed only
to the extent of eliminating therefrom [**13] the award
of damages as attorney's fees in favor of Narried against
463 S.W.2d 43, *; 1971 Tex. App. LEXIS 2805, **
Page 4
the third-party defendants, Ben F. Powell and J. N.
Hendricks, in the amount of $2,000.00 with interest
thereon. As so reformed, the judgment of the trial court
is affirmed.
RAMSEY, C.J., not sitting.

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LEXSEE 114 SW 3D 15
Qwest Communications International, Inc.; Qwest Communications Corporation;
and SP Constructions Services, Inc./AT&T Corp.; AT&T Communications of the
Southwest, Inc.; CK Directional Drilling; and Charles Loyd Nelson, Appellants v.
AT&T Corp.; AT&T Communications of the Southwest, Inc./Qwest Communications
International, Inc.; Qwest Communications Corporation; SP Construction
Services, Inc.; C&S Directional Boring Company, Inc.; CK Directional Drilling; and
Charles Loyd Nelson, Appellees
NO. 03-02-00030-CV
COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN
SUBSEQUENT HISTORY: [**1] Released for
Publication June 12, 2003.
Reversed by, in part, Petition for review granted by
Qwest Int'l Communs. v. AT&T Corp., 167 S.W.3d 324,
2005 Tex. LEXIS 485 (Tex., 2005)
PRIOR HISTORY: FROM THE DISTRICT
COURT OF TRAVIS COUNTY, 261ST JUDICIAL
DISTRICT. NO. 97-13778, HONORABLE SUZANNE
COVINGTON, JUDGE PRESIDING.
Qwest Communs. Int'l v. AT&T Corp., 2000 Tex. App.
LEXIS 8724 (Tex. App. Austin, Oct. 19, 2000)
DISPOSITION: Affirmed in Part; Reversed and
Rendered in Part.
COUNSEL: For CK & Nelson: C. Mark Stratton, Sue
M. Lee, Henslee Fowler Hepworth & Schwartz, LLP.,
Austin, TX.
For: C&S: Michael J. Clark, Thornton Summers Biechlin
Dunham & Brown, Inc. Austin, TX.
For Qwest & SP: Thomas C. Wright, Julia L. Kurtz, The
Wright Law Firm, Houston, TX. , Molly H. Hatchell,
Hatchell P.C., Tyler, TX.
For AT&T: Joseph Latting, John K. Schwartz, Barbara
Ellis, E. Lee Parsley, Jennifer L. Mathis, Locke, Liddell
& Sapp, L.L.P. Austin, TX.
114 S.W.3d 15; 2003 Tex. App. LEXIS 4898
June 12, 2003, Filed
Page 1
JUDGES: Before Justices B. A. Smith, Yeakel and
Aboussie *
* Before Marilyn Aboussie, Chief Justice (retired),
Third Court of Appeals, sitting by assignment.
See Tex. Gov't Code Ann. § 74.003(b)
(West 1998).
OPINION BY: Lee Yeakel
OPINION
[*21] OPINION
Qwest Communications International, Inc., Qwest
Communications Corp., and SP Construction Services,
Inc. (together "Qwest") appeal a final judgment awarding
economic and exemplary damages to AT&T Corporation
and AT&T Communications of the Southwest, Inc. (together
"AT&T") for damage to an AT&T fiber-optic
cable. CK Directional Drilling and Charles Nelson (together
"CK") and AT&T also appeal the final judgment,
challenging the district court's calculation of damages.
We will affirm in part and reverse and render in part.
FACTUAL AND PROCEDURAL BACKGROUND
In 1996 Qwest began the construction of a nationwide
fiber-optic communication network to compete
against AT&T and other communications companies. 1
By the fall of 1997, with the permission of [**2] the

Texas Department of Transportation, Qwest was laying
fiber-optic cable in highway rights-of-way between Austin,
San Antonio, and Houston. AT&T fiber-optic cables
lay buried in the same rights-of-way. The rights-of-way
also accommodate cables, pipes, and lines of various
other utility companies. The rights-of-way's narrow
width dictates that underground cables be buried near to
one another. Qwest informed AT&T of its cable-laying
operations, and AT&T had representatives at the various
sites to aid in coordination, mark the AT&T cable, and
avoid potential damage. This action involves Qwest's
cable-laying operations along State Highway 21 between
Austin and Seguin.
1 A fiber-optic communications network is
comprised of thousands of miles of underground
fiber-optic cable, which carries voice, data, and
video telecommunications services.
On September 16, 1997, Qwest severed an AT&T
fiber-optic cable. The next month, CK, a subcontractor
employed by C&S Directional Boring Company, Inc.
("C&S") to perform [**3] boring operations for Qwest,
cut the cable a second time. 2 [*22] Qwest had contracted
with C&S to perform cable-laying operations,
and C&S, in turn, had retained CK. A third cut occurred
in December, when CK employees again cut the AT&T
cable. AT&T filed suit against Qwest and C&S, seeking
damages and an injunction to stop Qwest's cable-installation
practices. AT&T obtained a temporary
restraining order against Qwest; however, at the courthouse
immediately before a scheduled temporary-injunction
hearing, Qwest and AT&T reached an
agreement (the "Agreement"), which they announced to
the district court.
2 During boring operations, an operator, using
a drilling rig, sends a boring device into the
ground and along a predetermined, horizontal
path. At a preselected point, the operator turns the
bore upwards, drilling a path to the surface. At
the exit hole, a larger drilling head and the underground
cable are attached to the bore. The
boring device reverses direction, widening the
hole, and pulls the cable back through the original
hole to where it began, thus installing the cable.
As the bore travels underground, it transmits a
radio signal, which is detected by a worker-operated
sensor, such as a "DigiTrak locator,"
monitored at the surface. The length and depth of
the horizontal bores vary depending on conditions;
however, the operations that led to the second
and third cuts were about 500 feet in length
and four to six feet below the surface.
[**4] The Agreement embodied a nationwide cooperative
plan regarding Qwest's fiber-optic-network
installation. 3 AT&T dictated the Agreement into the
court record without objection. Later, AT&T filed a motion
for contempt and sanctions, alleging that Qwest had
violated the terms of the Agreement while conducting
cable-laying operations in another state. Qwest then disputed
the validity of the Agreement. At a district-court
hearing, AT&T presented an "Agreed Order," which it
asserted was the exact rendition of the Agreement previously
read into the record. Qwest objected, arguing the
order was incomplete as a rule 11 agreement. See Tex. R.
Civ. P. 11 (agreement between parties enforced if in
writing, signed, and filed as part of record, or agreement
made in open court and entered of record). The district
court signed the order and made findings of fact and
conclusions of law that the Agreement was an enforceable
rule 11 agreement. 4
[**5]
3 The Agreement essentially provided: (1) restrictions
on excavation work and boring operations
by Qwest when in the vicinity of an existing
AT&T cable, (2) procedures for Qwest to notify
AT&T of its activities, (3) requirements of meetings
between Qwest and AT&T, (4) requirements
for approval of Qwest's work plans by AT&T,
and (5) provisions for AT&T to have a site representative
present during Qwest's operations in
proximity to an AT&T cable. The Agreement
was to expire in three years.
4 On the last page of the order, the district
court annotated that "no enforcement of paragraphs
(b) [and] (c) will be entertained until a Feb
25, 26, 1998 hearing on clarification." The court
signed a final order on March 25, 1998. The enforcement
restriction noted in the first order is of
no consequence to this appeal. Both orders were
signed by Judge John Dietz.
This Court dismissed Qwest's appeal of the order,
holding it to be a nonappealable interlocutory order over
which we lacked jurisdiction. Qwest Communications
Int'l Inc. v. AT&T Corp., 983 S.W.2d 885 (Tex.
App.--Austin 1999). The supreme court reversed and
remanded the cause to this Court, holding that the order
was appealable because it granted a temporary injunction.
Qwest Communications Corp. v. AT&T Corp., 24
S.W.3d 334, 43 Tex. Sup. Ct. J. 600 (Tex. 2000) (citing
Act of April 2, 1997, 75th Leg., R.S., ch. 1296, § 1, 1997
Tex. Gen. Laws 4936, 4936-37 (amended 2001) (current
provision at Tex. Civ. Prac. & Rem. Code Ann. §
51.014(a)(4) (West 2003)). After remand, this Court
dismissed [**6] the interlocutory appeal on the joint
motion of the [*23] parties. Qwest Communications
Int'l Inc. v. AT&T Corp., No. 03-98-111-CV (Tex.

App.--Austin Oct. 19, 2000, no pet.) (not designated for
publication). The case then proceeded to trial in the district
court. 5
5 The case was tried before Judge Suzanne
Covington, who signed the final judgment.
The jury awarded economic damages to AT&T for
all three cable cuts: for the first cut, the jury awarded $
205,187.69 against Qwest, finding that Qwest acted with
malice; for the second cut, the jury awarded $
339,809.98 against CK; for the third cut, the jury awarded
AT&T $ 143,583.83, with responsibility apportioned
between Qwest (20%), C&S (30%), and CK (50%), and
found that Qwest and C&S acted with malice. Additionally,
the jury found Qwest had breached the Agreement
and awarded $ 317,814 to AT&T. The jury found that at
all times C&S was responsible for the conduct of CK, its
subcontractor, and that Qwest was responsible for the
conduct of C&S. The jury [**7] awarded AT&T $ 350
million in exemplary damages against Qwest and $
51,000 in exemplary damages against C&S. 6 After the
verdict, the district court advised the parties that the calculation
of exemplary damages would not include: (1)
prejudgment interest, (2) breach-of-contract damages, or
(3) damages resulting from the second cut; in addition,
twenty percent of the damages found arising from the
third cut would be included in calculating exemplary
damages. The court also stated that prejudgment interest
against CK began on May 5, 2000, the date AT&T
amended its petition to name CK as a defendant. The
final judgment employed the formula previously announced
by the district court and, in addition, reduced
the exemplary-damages award against Qwest to two
times economic damages in accordance with the statutory
cap on exemplary damages, resulting in exemplary
damages of $ 467,808.91. The judgment did not toll the
accrual of prejudgment interest as to CK's portion of the
damages.
6 The parties and the district court use the
term "punitive damages" to describe the exemplary
damages allowed by the civil-practice-and-remedies
code. See Tex. Civ.
Prac. & Rem. Code Ann. § 41.001-.013 (West
1997 & Supp. 2003). For clarity, we will use the
legislature's term.
[**8] By four issues, Qwest challenges: (1) the
legal and factual sufficiency of the evidence supporting
the exemplary-damages award; (2) the existence of a rule
11 agreement; (3) the damages award for breach of the
Agreement; and (4) Qwest's liability for the negligence
of the independent contractors. AT&T, by two issues,
argues that the district court miscalculated the exemplary
damages and incorrectly calculated prejudgment interest.
Finally, CK argues that the district court erred in failing
to toll prejudgment interest as to the damages awarded
against it.
DISCUSSION
I. The Exemplary-Damages Award
By its first issue, Qwest challenges the legal and
factual sufficiency of the evidence supporting the jury's
award of exemplary damages. The jury found that
Qwest's actions were the result of its malice. Specifically,
Qwest contends that AT&T did not meet the
clear-and-convincing-evidence burden required for such
a finding because: (1) a corporation cannot be liable for
exemplary damages unless a managerial agent participates
in the conduct and (2) there was no proof of malice.
See Tex. Civ. Prac. & Rem. Code Ann. § 41.001
(West [**9] 1997).
Because AT&T's burden of proof at trial was by
clear-and-convincing evidence, our legal-and-factual-sufficiency
review [*24] must incorporate
this heightened standard. In two recent opinions,
the supreme court has articulated the standards for conducting
a legal-and-factual-sufficiency review when the
burden of proof at trial was by the clear-and-convincing
standard. See In re J.F.C., 96 S.W.3d 256, 46 Tex. Sup.
Ct. J. 328 (Tex. 2002), In re C.H., 89 S.W.3d 17, 45 Tex.
Sup. Ct. J. 1000 (Tex. 2002); see also Bentley v. Bunton,
94 S.W.3d 561, 597, 45 Tex. Sup. Ct. J. 1172 (Tex. 2002)
(for purpose of proving actual malice in defamation action,
evidence is clear and convincing if it supports firm
conviction that fact to be proved is true).
In J.F.C. the supreme court held that the legal-sufficiency
review "must take into consideration
whether the evidence is such that a fact finder could reasonably
form a firm belief or conviction about the truth
of the matter on which the [plaintiff] bears the burden."
96 S.W.3d at 265-66. The court stated that the a reviewing
court, in conducting a legal-sufficiency review,
should "look at all the evidence in the light most favorable
to the finding to determine [**10] whether a reasonable
trier of fact could have formed a firm belief or
conviction that its finding was true." Id. at 266. Deference
to the fact finder's conclusion requires "looking at
the evidence in the light most favorable to the judgment
[which] means that a reviewing court must assume that
the fact finder resolved disputed facts in favor of its
finding if a reasonable fact finder could do so . . . a court
should disregard all evidence that a reasonable fact finder
could have disbelieved or found to have been incredible."
Id. The court continued, stating:
This does not mean that a court must disregard all evidence
that does not support the finding. Disregarding

undisputed facts that do not support the finding could
skew the analysis of whether there is clear and convincing
evidence.
If, after conducting its legal sufficiency review of
the record evidence, a court determines that no reasonable
fact finder could form a firm belief or conviction that
the matter that must be proven is true, then that court
must conclude that the evidence is legally insufficient.
Id.
Regarding a factual-sufficiency review under the
clear-and-convincing standard, [**11] the court
opined that "a court of appeals must give due consideration
to evidence that the fact finder could reasonably
have found to be clear and convincing." Id. The court
held that the inquiry must be "whether the evidence is
such that a fact finder could reasonably form a firm belief
or conviction about the truth of the . . . allegations."
Id. The court then stated:
a court of appeals should consider whether disputed
evidence is such that a reasonable fact finder could not
have resolved that disputed evidence in favor of its finding.
If, in light of the entire record, the disputed evidence
that a reasonable fact finder could not have credited in
favor of the finding is so significant that a fact finder
could not reasonably have formed a firm belief or conviction,
then the evidence is factually insufficient. A
court of appeals should detail in its opinion why it has
concluded that a reasonable fact finder could not have
credited disputed evidence in favor of the finding.
Id. at 266-67.
In Texas a party may recover exemplary damages if
the jury finds the defendant acted with malice. See Tex.
Civ. Prac. & Rem. Code Ann. § 41.003(a)(2) [**12]
(West 1997). Jury Questions 4, 8, and 14 asked whether,
by clear-and-convincing evidence, the harm to AT&T
from the three cuts resulted from malice. The charge
defined malice as:
An act or omission by [Qwest, C&S, or CK],
[*25] (i) which, when viewed objectively from the
standpoint of that party at the time of its occurrence, involved
an extreme degree of risk, considering the probability
and magnitude of the potential harm to others; and
(ii) of which the party had actual, subjective awareness
of the risk involved, but nevertheless proceeded
with conscious indifference to the rights, safety, or welfare
of others.
This language tracks the civil-practice-and-remedies
code. See id. § 41.001(7). The jury found that no party
acted with malice with regard to the second cut and no
malice on CK's part with regard to the third cut. Howev-
er, the jury found that the first cut resulted from Qwest's
malice and the third cut from the malice of Qwest and
C&S.
Malice includes two elements: (1) viewed objectively
from the actor's standpoint, the act or omission
must involve an extreme degree of risk, considering the
probability and magnitude of the potential harm to others,
and [**13] (2) the actor must have actual, subjective
awareness of the risk involved, but nevertheless
proceed in conscious indifference to the rights, safety, or
welfare of others. Mobil Oil Corp. v. Ellender, 968
S.W.2d 917, 921, 41 Tex. Sup. Ct. J. 763 (Tex. 1998)
(citing Transportation Ins. Co. v. Moriel, 879 S.W.2d 10,
23, 37 Tex. Sup. Ct. J. 883 (Tex. 1994)). 7 Evidence of
simple negligence is not enough to prove either the objective
or subjective elements. Id. Under the first element,
"extreme risk" is not a remote possibility of injury
or even a high probability of minor harm, but rather the
likelihood of serious injury to the plaintiff. Id. Under the
second element, actual awareness means that the defendant
knew about the peril, but its acts or omissions
demonstrated that the actor did not care. Id. Both elements
may be proved by circumstantial evidence. Id.
7 In Mobil Oil Corp. v. Ellender, the supreme
court noted that, in 1995, the legislature substituted
"malice" for "gross negligence" as a prerequisite
for exemplary damages. 968 S.W.2d 917,
921 n.2, 41 Tex. Sup. Ct. J. 763 (Tex. 1998). The
Ellender court stated that the definition of malice
in section 41.001(7)(B) "mirrors this Court's definition
of gross negligence in Transportation Ins.
Co. v. Moriel, 879 S.W.2d 10, 23, 37 Tex. Sup.
Ct. J. 883 (Tex. 1994). Therefore, this opinion's
legal sufficiency review of gross negligence is
relevant to legal sufficiency review of malice as
redefined by section 41.001(7)(B)." Id.
[**14] A corporation may be liable for exemplary
damages resulting from malice only if the corporation
itself acts with malice. Id. A corporation "can act only
through agents of some character." Id. A corporation is
liable for exemplary damages if it authorizes or ratifies
an agent's gross negligence or if it is grossly negligent in
hiring any unfit agent. Id. Liability is present if the corporation
acts maliciously through the actions or inactions
of a corporate vice principal or officer. Id. at 922; ONI,
Inc. v. Swift, 990 S.W.2d 500, 503 (Tex. App.--Austin
1999, no pet.). In Ellender, the supreme court applied the
vice-principal approach to determine whether a corporation
was liable for exemplary damages. Ellender, 968
S.W.2d at 922 (citing Hammerly Oaks, Inc. v. Edwards,
958 S.W.2d 387, 389, 41 Tex. Sup. Ct. J. 187 (Tex.
1997)). A vice principal embodies: (1) corporate officers;
(2) those who have authority to employ, direct, and dis-

charge servants of the master; (3) those engaged in the
performance of nondelegable or absolute duties of the
master; and (4) those to whom the master has confided
the management of the whole or a department or [**15]
a division of the business. Id.
In determining whether acts are directly attributable
to the corporation, the reviewing court does not simply
judge individual [*26] elements or facts. Id. Instead,
to determine if the corporation acted with malice, the
court should review all the surrounding facts and circumstances
and "the reasonable inferences the fact finder
can draw from what the corporation did or failed to do
and the facts existing at relevant times that contributed to
a plaintiff's alleged damages." Id.
Qwest asserts that none of its vice principals were
involved in the cable cuts and that the evidence is legally
and factually insufficient as to the objective element of
malice. We disagree. There is ample evidence, when
viewed objectively from Qwest's standpoint, that fostering
a corporate environment of rapid cable-laying operations
in the same rights-of-way and in close proximity to
AT&T's cable created an extreme risk of damage to
AT&T's fiber-optic system. The jury heard testimony
that Qwest's upper management was involved in the project
and that they promoted a hurried pace for its completion.
Qwest laid its fiber-optic cable within the same
highway right-of-way [**16] as AT&T, and the Qwest
cable was buried about fourteen feet from the AT&T
cable. Fiber-optic cables are fragile and expensive conduits
that transport enormous amounts of information
every second; if damaged, thousands of customers lose
service.
Scott Howerton, Qwest's construction manager for
work along Highway 21, testified that Qwest was funding
its fiber-optic-cable installation by contracting with
other communications companies that paid Qwest upon
the completion of network segments. In the event Qwest
fell behind schedule, it would be liable to pay a penalty
to the contracting companies. Howerton stated that he
had eleven months, from February 1997 to January 1998,
to complete this leg of the installation. He testified as to
Qwest's hiring practices, stating that when he arrived in
Texas he supervised six Qwest employees, and by September
he had hired over one hundred more to facilitate
construction. He was the person ultimately responsible
for the hiring process in Texas. Howerton stated that
Qwest was about two months behind schedule when the
first cut occurred.
Moreover, the evidence showed that Qwest's nationwide
installation operations had resulted in numerous
cuts to other [**17] fiber-optic cables and buried utility
lines. Danny Bottoms, a former Qwest senior manager,
testified about the hurried atmosphere at Qwest to finish
the fiber-optic-cable system. He testified that "every
member of the management team" at Qwest was pushing
to get the job done.
There is also evidence to support the subjective
component of malice. John Huffman, the AT&T employee
who investigated the first cut for AT&T, testified
that after the cut, AT&T attempted to facilitate cooperation
between the two corporations. He read into the record
a memorandum recounting a telephone conversation
between Steve Szabo, AT&T's cable-network manager,
and Qwest's "call before you dig" center, during which
Szabo requested Qwest's project plan information and the
names of construction project managers. AT&T desired
the information in an attempt to prevent future cable
cuts. Huffman testified that, to his knowledge, AT&T
received no information from Qwest after the call. Similarly,
Huffman read a second Szabo memorandum into
the record where Szabo, after the second cut, wrote that
he met with two Qwest representatives, asking them to
provide AT&T with project plans and seeking cooperation
with Qwest [**18] at the work site. The memo
stated that Szabo never received any response. Huffman
also testified that Szabo communicated with Qwest two
more times as well. Thereafter, Szabo talked to another
Qwest employee, and [*27] this time Qwest indicated
that it would cooperate with AT&T. However, the third
and final cut occurred shortly thereafter. Huffman testified
that between the first and the third cable cuts, AT&T
received no meaningful cooperation from Qwest.
Terry Philips, another AT&T employee, supervised
crews that were marking AT&T's cable ahead of the
crews installing the Qwest cable. She testified that Howerton
"basically [] told me that [Qwest] had a schedule to
keep, that they weren't going to stop or slow down for
[AT&T] and that it was our problem if we didn't have
enough people out there to cover them on that job."
Howerton's testimony corroborated Philips's. AT&T employee
Charles Rotan patrolled AT&T's cable system for
malfunctions and mishaps. He testified to observing
Qwest crews working twelve-to-thirteen-hour days, often
without lunch.
Regarding the first cut, Huffman told the jury that
the Qwest employee driving a plow was digging six
inches from where AT&T's cable was [**19] marked.
As the Qwest driver approached a road sign, he turned to
go around it. Huffman testified that the AT&T observer
told the plow driver to stop because the plow was very
close to AT&T's cable and the AT&T observer wanted to
verify its location. After a momentary stop, the driver's
supervisor directed him to continue; the driver proceeded
to cut AT&T's cable. Walt Donovan, a Qwest vice president,
testified that the driver's personnel record did not
indicate any training by Qwest and that he had not discovered
information of any such training. Donovan also

testified that the plow driver's first day on the job was
only three days before the first cut. Moreover, Howerton
testified that the plow driver's supervisor had no construction
experience listed in his personnel record and
that Qwest gave him no training regarding excavation in
the vicinity of underground utilities.
Charles Nelson, CK's cofounder, testifying about the
third cut, stated that he had drilled the initial bore with a
four or four-and-one-half inch drill bit, which came close
to AT&T's cable during the boring. The next day, when a
ten-to-twelve-inch back-reamer bore was used to widen
the hole, CK cut AT&T's cable. [**20] 8 Nelson stated
that the bore "ended up where I didn't think it was supposed
to be." Nelson agreed that while he used the bore,
the drill drifted under AT&T's cable, resulting in the cut;
however, during this process, the DigiTrak locator indicated
that the bore was eleven feet from AT&T's cable.
Nelson stated that before the third cut, he had heard that
there had been "interference" or problems with the Digi-
Trak locators. Moreover, Nelson testified that subsequent
tests of the DigiTrak demonstrated that it was showing a
deviation error of five feet. Nelson stated that he did not
know how AT&T's cable was cut and that he did not
intend for the bore to move toward AT&T's cable. However,
he testified that either "something was out of control"
or he could have been turning it.
8 Nelson testified that another employee operated
the drill, while he located and supervised.
Dr. Samuel Ariaratnam testified that CK deviated
from "good practice" and industry standards when the
second and third cuts occurred. [**21] Specifically, he
cited the failure to maintain a log of all the DigiTrak
readings as the bore proceeded underground and the inadequate
calibration of the DigiTrak. Ariaratnam testified
[*28] that the drill would only deviate on its own
if it hit something but that, if the calibration was correct
and the operator had control of its movement, the bore
should have traveled straight along its intended path.
Reviewing Nelson's deposition, Ariaratnam opined that
Nelson's statement, in which he said that a driller should
just work through any interference affecting the Digi-
Trak, demonstrated a lack of care akin to gambling, because
loss of the signal from the bore could result in deviation
from the intended path. Ariaratnam expressed the
opinion that Nelson knew that he had bored close to
AT&T's cable and that he should not have taken the
chance at using the back-reamer bore to widen the hole.
When asked if CK and Nelson committed "legal malice,"
Ariaratnam stated that Nelson did not intentionally cut
AT&T's line, but he acted with recklessness when he
operated the twelve-inch bore after initially drilling so
close to AT&T's cable.
Based on a thorough review of all the evidence (1)
in the [**22] light most favorable to the finding and (2)
in light of the entire record, we hold that a reasonable
trier of fact could have formed a firm belief or conviction
that Qwest and CK acted with malice. We hold that the
evidence is both legally and factually sufficient to support
both elements of Ellender. See 968 S.W.2d at 921.
We overrule Qwest's first issue.
II. The Agreement and Breach-of-Contract Damages
A. The Agreement
By its second issue, Qwest asserts that the Agreement
is not a valid rule 11 agreement. See Tex. R. Civ. P.
11. The district court submitted the issue of the Agreement's
breach to the jury, who found that Qwest had
breached the Agreement. Qwest argues that the court had
no authority to enforce the Agreement over Qwest's objection
and that the award of contract damages was error.
Additionally, Qwest contends that the Agreement lacked
"material" terms. AT&T rejoins that judgment on the
Agreement was rendered in open court when the Agreement
was dictated into the record and that attorney's fees
are recoverable for Qwest's breach.
Rule 11 provides in its entirety:
Unless otherwise provided in these rules, no agreement
[**23] between attorneys or parties touching any
suit pending will be enforced unless it be in writing,
signed and filed with the papers as part of the record, or
unless it be made in open court and entered of record.
Id. (emphasis added). The rule provides threshold requirements
that apply to all settlement agreements. Padilla
v. LaFrance, 907 S.W.2d 454, 460, 38 Tex. Sup. Ct.
J. 663 (Tex. 1995) (citing Kennedy v. Hyde, 682 S.W.2d
525, 528, 28 Tex. Sup. Ct. J. 146 (Tex. 1984) ("Rule 11 is
a minimum requirement for enforcement of all agreements
concerning pending suits, including, but not limited
to, agreed judgments.")); Roeglin v. Daves, 83
S.W.3d 326, 330 (Tex. App.--Austin 2002, pet. denied).
"Compliance with Rule 11 is a general prerequisite for
any judgment enforcing an agreement touching a pending
suit." Kennedy, 682 S.W.2d at 529. As a general rule,
"judgment is rendered when the trial court officially announces
its decision in open court or by written memorandum
filed with the clerk." Reppert v. Beasley, 943
S.W.2d 172, 174 (Tex. App.--San Antonio 1997, no writ)
(citing S & A Rest Corp. v. Leal, 892 S.W.2d 855, 857
n.1, 38 Tex. Sup. Ct. J. 303 (Tex. 1995)). [**24] "The
words used by the trial court must clearly indicate the
intent to render judgment at the time the words are expressed."
S & A Rest., 892 S.W.2d at 858. Consent also
must exist at the time the court undertakes [*29] to
make the agreement the judgment of the court. Id. (citing

Quintero v. Jim Walter Homes, Inc., 654 S.W.2d 442,
444, 26 Tex. Sup. Ct. J. 570 (Tex. 1983)). A party has the
right to revoke consent to an agreement at any time before,
but not after rendition of judgment. Quintero, 654
S.W.2d at 444; Arriaga v. Cavazos, 880 S.W.2d 830, 833
(Tex. App.--San Antonio 1994, no writ). When a trial
court has knowledge that one of the parties to a suit does
not consent to a judgment, the trial court should refuse to
sanction the agreement as the judgment of the court.
Quintero, 654 S.W.2d at 444. The court rendering an
agreed judgment must do so "in strict or literal compliance
with that agreement." Vickrey v. American Youth
Camps, Inc., 532 S.W.2d 292, 292, 19 Tex. Sup. Ct. J.
131 (Tex. 1976).
At a December 1997 hearing scheduled for the purpose
of hearing AT&T's request for a temporary injunction
against Qwest, precipitated by [**25] Qwest's cutting
AT&T's cable, the parties announced in open court
that they had resolved the immediate dispute, and AT&T
dictated the Agreement into the district-court record.
When the court questioned Qwest about additions or
deletions before AT&T's recitation, Qwest responded: "I
hope to just say, agreed, Your Honor." AT&T then read
the Agreement into the record, and Qwest offered one
addition:
And that the agreement does not act to release us
from any liability that we had to them--that the defendants
had to the plaintiffs before today's date. It doesn't
constitute an admission of our liability and it does not act
as a release of any liability the plaintiffs have to the defendant
for any damage they have done to our property.
AT&T responded: "That's correct, Your Honor."
Qwest, responding to the court's question concerning its
authority to enforce the agreement for operations conducted
out of state, stated that "it is contemplated that
this agreement will actually be reduced to a contract between
these parties to resolve any problems we had in
Texas." The court then asked when performance was
required.
The Court: How is it that you know that you're
within 30 feet [**26] of an AT&T optic cable.
AT&T: Because what happens when they--before
they start to dig any time they think they might be, they
call us and we go out there and we tell them exactly
where the cable is.
The Court: Okay.
Qwest: I believe the agreement provides, Your
Honor, and correct me if I'm wrong, Mr. Schwartz
[AT&T's attorney], it is within X number of feet of
where they have marked their cable, Your Honor.
. . . .
Qwest: What the agreement contemplates, Your
Honor, is we won't do any of this within X feet of where
they have marked on the ground.
AT&T: Well, and I think the agreement says this,
but there are some locations where they are going under
rivers and under highways where you're not out there
painting.
The Court: Low percentage activity.
AT&T: Even AT&T hasn't figured that one out yet.
The Court: Okay. With respect to the plaintiff's application
for temporary injunction, judgment is rendered.
[AT&T], you'll do the order. Pass it by [Qwest] and discussion
for forum [sic] and then you all will submit it to
me.
The hearing concluded at this point. Qwest did not
object to anything that occurred at the hearing, before,
during, [**27] or after AT&T's reading of the Agreement.
[*30] Only after AT&T reduced the recitation to
a proposed written order for submission to the district
court did Qwest object and refuse to approve the written
proposal.
AT&T later filed a motion for contempt and sanctions,
accusing Qwest of violating the Agreement. Following
a hearing, the district court determined that there
was no withdrawal of consent, no ambiguity, no mistake,
no lack of an essential term, and that there was, in fact,
an agreement. The district court signed an "Agreed Order,"
which memorialized the language of the Agreement
previously announced in open court. 9 The following
month, the court overruled Qwest's motion to strike and
motion to determine that no rule 11 agreement existed.
Qwest argues that it did not consent and that it objected
to the "Agreed Order" signed February 17, 1998.
9 The "Agreed Order" states that AT&T and
Qwest had previously appeared and Qwest "announced
that [Qwest] had reached an agreement
with [AT&T] and requested that the Court enter
the following agreement, which shall be enforceable
by the contempt powers of this Court or any
other court of competent jurisdiction." The order
was drafted by counsel for AT&T and signed by
the district court over the objection of Qwest.
Regardless of whether there was a rule 11
agreement, the order was not "agreed."
[**28] Approval of a settlement may not constitute
rendition of an order enforcing that settlement. Cf. S
& A Rest., 892 S.W.2d at 857 (approval of settlement
does not necessarily constitute rendition of judgment).
But the facts before this Court differ from those of S & A
Restaurant. There, the parties announced a settlement in
open court, which the trial court accepted. Id. The court

then explained to the plaintiff that once the court signed
a judgment "everything else, it's full, final and complete."
Id. at 858. The supreme court stated that for an
agreement to constitute an agreed judgment, "the words
used by the trial court must clearly indicate the intent to
render judgment at the time the words are expressed,"
and held that there was no agreed judgment rendered at
the time the court accepted the settlement. Id. Here, the
district court heard the settlement agreement as it was
read into the record, announced "judgment is rendered,"
and instructed counsel to prepare an appropriate written
order. There can be no doubt that the court intended at
that time to dispose of the issues before him in the manner
announced by the parties. Moreover, [**29] the
parties sought the ruling. See Burnaman v. Heaton, 150
Tex. 333, 240 S.W.2d 288, 291 (Tex. 1951) ("consent
must exist at the very moment the court undertakes to
make the agreement the judgment of the court"). We will
apply the same standard applicable to agreed judgments
to agreed interlocutory orders and hold that Qwest's attempt
to withdraw consent came too late.
We now turn to Qwest's contention that the Agreement
failed for lack of material terms. Rule 11 requires
that an agreement be: (1) in writing and filed in court or
(2) that the terms of the agreement be announced in open
court and entered of record. Ebner v. First State Bank, 27
S.W.3d 287, 295 (Tex. App.--Austin 2000, pet. denied).
"These two provisions allow the agreement[] to be put
into written form and kept with the court's records so that
the parties to the suit cannot dispute its existence or contents."
Id. (citing Kosowska v. Kahn, 929 S.W.2d 505,
507 (Tex. App.--San Antonio 1996, writ denied)). "There
should be nothing left for adjustment between the parties
relating to the subjectmatter [sic] of the agreement. Until
all the terms of a final judgment [**30] have been definitely
agreed upon by all parties . . . the court [is] without
power to render a judgment by agreement." Matthews v.
Looney, 132 Tex. 313, 123 S.W.2d 871, 873 [*31]
(1939) (citing Wyss v. Bookman, 235 S.W. 567 (Tex.
Com. App. 1921) (one essential feature required by party
was omitted)). Whether a rule 11 agreement fails for lack
of an essential term is a question of law. DaimlerChrysler
Corp. v. Brannon, 67 S.W.3d 294, 298 (Tex.
App.--Texarkana 2001, no pet.) (citing Ronin v. Lerner, 7
S.W.3d 883, 888 (Tex. App.--Houston [1st Dist.] 1999,
no pet.)).
The reason for the essential-term requirement is expressed
in McLendon v. McLendon: "the law . . . only
requires the parties to reach an agreement as to all material
terms of the agreement [to] prevent[] the trial court
from supplying additional terms to which the parties
have not agreed." 847 S.W.2d 601, 606 (Tex.
App.--Dallas 1992, writ denied). The McLendon court
held that specific provisions in underlying documents
regarding a partnership being used as a security interest
for obligations in division of property did not affect the
[**31] substantive division of the marital property. Id.
In Ronin, the court opined that the law of contracts applies
to rule 11 agreements. 7 S.W.3d at 886 (citing Padilla,
907 S.W.2d at 460 (writings embodying rule 11
agreement analogized to those required by statute of
frauds)). The court held that apportionment of liability
for indemnification was not an essential term "because
the record reflected the essential terms with sufficient
detail to determine the obligations of the parties." Id. at
888.
Other case law speaks to when missing provisions are
material and leave the trial court without power to render
the judgment. In Reppert, the court held that an agreement
lacked the essential element as to whether the
judgment would be self-enforcing through the trial
court's contempt power or breach of contract. Reppert,
943 S.W.2d at 174. In Rogers v. Rogers, the court of appeals
held that an agreement dictated into the record
concerning the division of property similarly failed for
lack of a material term. 806 S.W.2d 886, 888 (Tex.
App.--Corpus Christi 1991, no writ). The agreement in
Rogers did not include [**32] the manner in which 240
payments of $ 3500 per month would be secured. Id. The
court held this term crucial because of the extended time
frame and risk involved, noting that an earlier opinion
stated "the trial court has no power to supply terms, provisions
or conditions not previously agreed to by the
parties." Id. (quoting Leal v. Cortez, 569 S.W.2d 536, 538
(Tex. Civ. App.--Corpus Christi 1978, no writ)).
Here, Qwest argues that after the district court's rendition,
the parties were ordered to reduce the Agreement
to a written order, which never occurred. Qwest urges
that the Agreement dictated in open court lacked some
material terms, which should have been reflected in the
written order. Qwest posits that these material terms include
several distance requirements, which some portions
of the Agreement contain but others lack. AT&T
responds that some provisions do not have distance requirements,
but that they are not required, and nothing on
the face of the Agreement indicates that it is incomplete.
AT&T contends that Qwest is simply attempting to avoid
its Agreement.
The Agreement delineates the circumstances in
which Qwest was to inform AT&T of its cable-installation
[**33] operations and the precautions
that Qwest was to take. These provisions explain the
circumstances in detail, including distances, stating when
Qwest was to notify AT&T of excavation operations. 10
The parties agreed to closely [*32] cooperate on future
operations. The Agreement requires Qwest to monitor its
operations with electronic devices and qualified person-

nel. It also provides for the sanction of contempt if
Qwest fails to abide by the Agreement. The absence of
some distance requirements, when the Agreement contains
others, is not indicative of missing essential or material
terms. See Scott v. Ingle Bros. Pac., Inc., 489
S.W.2d 554, 555, 16 Tex. Sup. Ct. J. 145 (Tex. 1972)
(parties may agree on some terms sufficient to create
contract, leaving other provisions for later negotiation).
Any missing distance requirements are not material and
could, therefore, be left open for future negotiation
without destroying the contract's effectiveness. We
overrule Qwest's second issue.
10 The Agreement (A) requires notice to
AT&T if Qwest excavated within thirty feet of
AT&T's cables; (B) states that Qwest would not
engage in boring operations in the absence of
continuous electronic location of the borehead
during boring and pull-back operations, distance
was not specified; (C) states a thirty-foot requirement
for boring and digging test pits or
holes to verify the location of the borehead; (D)
requires the use of DigiTrak monitoring equipment,
stating no distance requirement; (E) requires
proper calibration of the DigiTrak; (F) requires
Qwest to submit to AT&T any plans and
the details of the operations if excavating within
thirty feet of an AT&T cable; (G) requires AT&T
approval for Qwest operations within two lateral
feet and three vertical feet of an AT&T cable; and
(H) specifies certain procedures when Qwest was
boring within five feet of an AT&T "underground
facility."
[**34] B. Breach-of-Contract Damages
By its third issue, Qwest challenges the damages
awarded AT&T for Qwest's breach of the Agreement.
The jury was asked: (1) whether Qwest had breached the
Agreement and (2) the "costs and expenses incurred by
AT&T that were the natural, probable, and foreseeable
consequence of Qwest's breach of the Rule 11 Agreement."
The jury found that Qwest breached the Agreement
and awarded AT&T damages of $ 317,824.16. The
record indicates that AT&T requested $ 300,000 in attorney's
fees for the breach-of-contract claim and $
17,824.16 in travel expenses AT&T incurred in attempting
to monitor Qwest's activities across the country.
Qwest argues that: (1) "Texas law does not permit recovery
of attorney's fees as 'damages'" and (2) "attorney's
fees do not meet the definition in the damage question."
AT&T asserts that $ 150,000 in attorney's fees was incurred
between January and March 1998, when the district
court gave final approval to the "Agreed Order." The
remaining $ 150,000 was incurred in defending Qwest's
interlocutory appeal to this Court and the supreme court.
Qwest rejoins that the attorney's fees proved were not a
consequence of any breach but were [**35] incurred as
the result of AT&T's response to Qwest's challenge to
the validity of the Agreement and "Agreed Order."
Qwest asserts that "no actual damages were presented or
proven" by AT&T.
As a general rule, attorney's fees are not recoverable
from an opposing party unless such recovery is provided
for by statute or by contract between the parties. Trinity
Indus., Inc. v. Ashland, Inc., 53 S.W.3d 852, 869 (Tex.
App.--Austin 2001, pet. denied). This general rule is not
without exception. In some circumstances, damages
measured by a plaintiff's attorney's fees are recoverable.
See, e.g., McCall v. Tana Oil & Gas Corp., 82 S.W.3d
337, 344 (Tex. App.--Austin 2001), rev'd on other
grounds, 104 S.W.3d 80, 46 Tex. Sup. J. 452, 2003 Tex.
LEXIS 11 (citing Findley v. Mitchell, 50 Tex. 143,
147-48 (1878)) (recovery of attorney's fees as damages
permitted where constable wrongfully denied plaintiff's
right to replevy seized property). Additionally, equitable
considerations have led to several narrow exceptions
allowing attorney's fees to be recovered as damages
[*33] even though not authorized by contract or statute.
See Knebel v. Capital Nat'l Bank, 518 S.W.2d 795,
798-800, 18 Tex. Sup. Ct. J. 120 (Tex. 1974) [**36]
(discussing "common fund" doctrine and "fee shifting").
In McCall, this Court discussed two such exceptions. See
82 S.W.3d at 344-45. The first exception applies "where
the defendant's tort requires the plaintiff to act in the
protection of his interests by bringing or defending an
action against a third party, the plaintiff 'is entitled to
recover compensation for the reasonably necessary loss
of time, attorney fees and other expenditures thereby
suffered or incurred.'" Id. at 344 (citing Restatement
(Second) of Torts § 914(2) (1977)); see also Baja Energy,
Inc. v. Ball, 669 S.W.2d 836, 838-39 (Tex.
App.--Eastland 1984, no writ). The second exception
permits recovery of damages measured by attorney's fees
when the defendant "has acted in bad faith, vexatiously,
wantonly, or for oppressive reasons." Id. at 345 (citing
Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S.
240, 258-59, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975)).
However, these exceptions are inapplicable to the matter
now before us.
AT&T argues that the attorney's fees are "properly
recoverable as consequential damages" and that recovery
[**37] should be permitted based on equitable principles.
AT&T relies on Nationwide Mutual Insurance Co.
v. Holmes, where the court held that attorney's fees were
"recoverable as reasonable expenses when such expenses
are the natural and proximate consequences of another's
wrongful act." 842 S.W.2d 335, 341 (Tex. App.--San Antonio
1992, writ denied) (citing Baja Energy, 669 S.W.2d
at 838). Holmes was sued for injuries resulting from a

car accident, and when his insurance carrier Nationwide
indicated that it would not settle the claim, upon Nationwide's
advice, Holmes hired an attorney to protect his
interests. Id. at 337. The suit against Holmes went to trial
and Nationwide provided representation; however, Nationwide,
knowing that Holmes was obligated to pay his
retained attorney $ 7500 upon commencement of trial,
failed to notify Holmes that it would indemnify him for
any judgment in excess of the policy limits. Id. at
337-38. Holmes sued Nationwide for violation of the
DTPA and received a favorable judgment, including recovery
of the attorney's fees. Id. at 338. The court noted
that Holmes did not incur the attorney's fees in defending
himself [**38] in the original suit, but rather incurred
the expenses because of Nationwide's wrongful conduct.
Id.
Nationwide Mutual Insurance is distinguishable because
AT&T is not recovering damages under the DTPA,
and Qwest did not act wrongfully in exercising its right
to appeal the "Agreed Order." Although AT&T now argues
that Qwest's interlocutory appeal was filed to effect
a delay, AT&T did not assert this allegation nor did it
request sanctions before this Court. Moreover, we find
no evidence of bad faith by Qwest in pursuing the appeals.
See General Elec. Credit Corp. v. Midland Cent.
Appraisal Dist., 826 S.W.2d 124, 125, 35 Tex. Sup. Ct. J.
25 (Tex. 1991) (sanctions not appropriate where appellant's
argument on appeal fails to convince court but has
reasonable basis in law and constitutes informed,
good-faith challenge to trial court's judgment).
Under these circumstances, we hold that AT&T's
attorney's fees were not recoverable as consequential
damages. In addition, we hold that the $ 17,824.16 in
travel expenses incurred by AT&T in monitoring Qwest's
activities in other parts of the country were not occasioned
by any alleged breach of the Agreement. AT&T
presented no other evidence [**39] of
breach-of-contract damages. We hold that AT&T failed
to present legally sufficient evidence [*34] of these
two elements of damage and sustain Qwest's third issue.
III. Qwest's Liability for the Independent Subcontractors
By its fourth issue, Qwest argues that it is not liable
for the negligence of the independent subcontractors.
The district court submitted four questions to the jury
concerning whether C&S was under Qwest's control and
whether CK was under C&S's control at the time of the
second and third cuts. As to the second cut, Question 9
asked the jury whether C&S was "conducting operations
for the benefit of Qwest and subject to the control by
Qwest as to the detail of the work." Question 10 asked
whether CK was "conducting operations for the benefit
of C&S Boring and subject to control by C&S Boring as
to the details of its work." Questions 15 and 16 asked
similar questions as to Qwest's control over C&S regarding
the third cut. The jury answered all four questions
affirmatively, and the district court found Qwest
jointly and severally liable with C&S and CK for the
second and third cuts. In its attempt to avoid liability for
what Qwest argues are independent contractors, [**40]
Qwest offers two arguments: (1) because AT&T did not
request a question as to whether Qwest controlled the
details of CK's work and Questions 9, 10, 15, and 16 did
not submit a respondeat superior theory as to CK,
AT&T waived the theory as between Qwest and CK, and
(2) the evidence as to both contractors' lack of independence
is legally and factually insufficient. AT&T
responds that, based on the jury findings and the evidence,
Qwest is vicariously liable for C&S's and CK's
actions in cutting AT&T's cable.
Generally, an employer or owner is not liable for the
acts of its independent contractors. See Abalos v. Oil
Dev. Co., 544 S.W.2d 627, 631, 20 Tex. Sup. Ct. J. 49
(Tex. 1976); Scott Fetzer Co. v. Read, 945 S.W.2d 854,
859 (Tex. App.--Austin 1997), aff'd, 990 S.W.2d 732, 42
Tex. Sup. Ct. J. 264 (Tex. 1998); see also Lee Lewis
Const., Inc. v. Harrison, 70 S.W.3d 778, 783, 45 Tex.
Sup. Ct. J. 232 (Tex. 2001). For a general contractor to
be liable for its independent contractor's acts, it must
have the right to control the means, methods, or details
of the independent contractor's work. Lee Lewis Const.,
70 S.W.3d at 783; Elliott-Williams Co. v. Diaz, 9 S.W.3d
801, 804, 43 Tex. Sup. Ct. J. 200 (Tex. 1999); [**41]
Redinger v. Living, Inc., 689 S.W.2d 415, 418, 28 Tex.
Sup. Ct. J. 404 (Tex. 1985) (contractor responsible for
physical harm caused by independent contractor if contractor
retained control of work). The control must relate
to the injury the negligence causes, and the contract must
grant the contractor at least the power to direct the order
in which work is to be done. Elliott-Williams, 9 S.W.3d
at 804.
In Cage Brothers v. Friedman, Friedman sued Cage
Brothers for trespass and damages to his property. 312
S.W.2d 532, 533 (Tex. Civ. App.--San Antonio 1958, writ
ref'd n.r.e.). Cage Brothers had contracted with the State
as general contractor to maintain a segment of highway.
Id. Workers mistakenly destroyed a fence and cut trees
on Friedman's property. Friedman sued, and Cage Brothers
claimed the workers were employed by an independent
subcontractor and, therefore, Cage Brothers was not
responsible. Id. at 534. In holding Cage Brothers liable,
the court reviewed the evidence indicating Cage Brothers'
level of control over the workers. Id. The court observed
that: (1) the State required contractors to seek
approval of any subcontractors, [**42] which Cage
Brothers failed to do; (2) all the employees were on Cage
Brothers' payroll, tax, social security, and workman's

compensation lists; (3) all were paid by Cage Brothers;
(4) the person who signed the employees' checks was
[*35] a partner of the subcontractor company; and (5)
this partner and another partner of the subcontractor directed
the employees on the job and were paid salaries
by Cage Brothers. Id. The court concluded its review of
the evidence by observing that: "We think there is more
than slight testimony, and that the evidence is sufficient
to meet the test of master and servant relationship." Id.
Qwest argues that the evidence to support the requisite
level of control is neither legally nor factually sufficient.
After reviewing the evidence, we disagree. Although
the contract between C&S and CK indicates the
existence of a contractor and independent subcontractor
relationship, such fact is not dispositive. See Farrell v.
Greater Houston Transp. Co., 908 S.W.2d 1, 3 (Tex.
App.--Houston [1st Dist.] 1995, writ denied) (where
contract does not grant control over work details to principal,
evidence outside contract must show true operating
agreement [**43] vested right of control in principal).
Evidence at trial revealed that C&S contractually retained
some control over CK's work, but CK personnel,
and Nelson in particular, also exercised some oversight
with regard to C&S's operations. Nelson, who had previously
been employed with C&S, admitted to "guiding
and helping" C&S construction crews, and he signed
C&S drawings as the "foreman." C&S retained the right
to control CK's employee-hiring decisions in the contract.
Additionally, the evidence showed that CK and
C&S shared equipment, as evidenced by the testimony of
Nelson and C&S's president. As is germane to the events
giving rise to this action, there is no practical difference
between C&S and CK.
The contract between Qwest and C&S demonstrates
Qwest's right to control C&S. The contract states that
C&S was to follow Qwest's plans and that Qwest would
review and advise C&S as to the work performed and its
acceptability. Qwest also had the right to require C&S to
hire more workers, increase overtime operations, or require
additional days of work. Further, C&S agreed not
to subcontract any of the work without Qwest's approval
and to guarantee any subcontractor's work. Moreover, the
[**44] contract stated that C&S would be "responsible
for the proper and safe performance of the work." Qwest
also retained the right to terminate any C&S employee it
found objectionable. Qwest routinely had an inspector on
site, including when the second and third cuts occurred.
Nelson testified that Junior Drake "was a Qwest guy"
who was in charge of CK's excavations in November.
Nelson testified that after finishing two bores, Drake
"come down and asked me would I consider to make a
longer bore . . .," instead of the two bores that Nelson
had drilled. In response to the request, Nelson stated:
"And I told him, yes, I would try."
Qwest offered contrary evidence as to its control of
C&S and CK. Regarding the testimony of Nelson, Qwest
points out that Nelson stated that the Qwest employee
"asked," not "directed," him to redo an excavation. Nelson
also testified that no C&S personnel directed his
operations at any time relevant to the second and third
cuts. Qwest argues that its contracts with C&S and
C&S's contract with CK clearly state that the relationship
is that of an independent contractor. However, we conclude
that there is legally and factually sufficient evidence
to support the [**45] jury's finding to the contrary.
Qwest's argument that AT&T was required to submit
a jury question concerning Qwest's control of CK is
likewise without merit. Where issues that constitute only
a part of a complete and independent ground are omitted
and other [*36] issues necessarily referable to that
ground are submitted and answered, the omitted elements
are deemed found in support of the judgment if no
objection to the omission is made, and the answers are
supported by some evidence. Tex. R. Civ. P. 279; Ramos
v. Frito-Lay, Inc., 784 S.W.2d 667, 668, 33 Tex. Sup. Ct.
J. 191 (Tex. 1990) (omitted element of managerial capacity
supported by some evidence deemed found). Although
it was AT&T's burden to obtain an affirmative
finding as to Qwest's control over CK, it was Qwest's
responsibility to object to the omission. See Tex. R. Civ.
P. 279. Qwest did not object, and the omitted issue constituted
only a part of a complete and independent
ground of recovery--Qwest's responsibility for the work
of the independent contractors, and other evidence adduced
at trial supports the finding.
Qwest hired C&S as a subcontractor. From the evidence,
the jury could have determined that Qwest controlled
C&S. [**46] Similarly, from the evidence the
jury could have determined C&S controlled CK. Moreover,
there is some evidence that Qwest exercised control
over CK. Qwest did not object to AT&T's failure to request
a jury question as to whether Qwest controlled the
actions of CK. Id.; Ramos, 784 S.W.2d at 668. We overrule
Qwest's fourth issue.
IV. Exemplary Damages and Prejudgment Interest
The district court calculated exemplary damages as
follows: (1) damages resulting from the first cut were
included; (2) prejudgment interest, breach-of-contract
damages, and damages resulting from the second cut
were not considered; and (3) twenty percent of the damages
resulting from the third cut were considered. Applying
the statutory cap, the district court reduced the
jury's exemplary-damages award to two times the economic
damages, or $ 467,808.91. 11

11 The district court, based on the jury's finding,
awarded AT&T $ 51,000 in exemplary
damages against C&S for its role in the third cut
and rendered judgment for that amount. Because
the amount of exemplary damages against C&S
was less than the economic damages found
against C&S, the district court was not required
to apply section 41.008(b). See Tex. Civ. Prac. &
Rem. Code Ann. § 41.008(b) (West Supp. 2003).
No party appeals this portion of the judgment.
[**47] A. The Exemplary-Damages Cap
By its first issue on appeal, AT&T argues that the
district court improperly limited exemplary damages.
The district court based the calculation of exemplary
damages only on Qwest's actions associated with the
findings of malice: the first cut and twenty percent of the
third cut. AT&T contends that the district court should
have used the following formula to calculate damages:
"add[] prejudgment interest to the $ 1 million in actual
damages that the jury found AT&T had suffered, and
then double[] the sum to arrive at the proper amount of
exemplary damages to be awarded against Qwest."
Qwest responds, arguing that exemplary damages are not
warranted, that joint and several liability is not available
for exemplary damages, and that it should not be held
responsible for the actions of C&S and CK. Alternatively,
Qwest urges that if exemplary damages are proper,
then the district court's calculation should be upheld. We
will affirm the district court's application of the statutory
exemplary-damages cap and the award of its exemplary
damages.
The dispute over the calculation of the exemplary
damages turns on chapter 41 of the civil-practices-and-remedies
[**48] code. See Tex. Civ.
Prac. & Rem. Code Ann. § 41.001-.013 (West 1997 &
Supp. 2003). [*37] Statutory construction is a question
of law, Johnson v. City of Fort Worth, 774 S.W.2d 653,
656, 32 Tex. Sup. Ct. J. 504 (Tex. 1989), the resolution of
which must begin by looking to the statute's words, Liberty
Mutual Insurance Co. v. Garrison Contractors, Inc.,
966 S.W.2d 482, 484, 41 Tex. Sup. Ct. J. 637 (Tex. 1998).
"The goal of statutory construction is to give effect to the
intent of the legislature." Monsanto Co. v. Cornerstones
Mun. Util. Dist., 865 S.W.2d 937, 939, 37 Tex. Sup. Ct. J.
199 (Tex. 1993) (citing Harris County Dist. Attorney's
Office v. J.T.S., 807 S.W.2d 572, 574, 34 Tex. Sup. Ct. J.
538 (Tex. 1991)). Simply stated, where a statute is unambiguous,
we discern the legislature's intent from the
"plain and common meaning of the words and terms
used." Id. (citing Moreno v. Sterling Drug, Inc., 787
S.W.2d 348, 352, 33 Tex. Sup. Ct. J. 360 (Tex. 1990);
RepublicBank Dallas, N.A. v. Interkal, Inc., 691 S.W.2d
605, 607, 28 Tex. Sup. Ct. J. 516 (Tex. 1985)).
As applied here, chapter 41 limits an award of exemplary
damages to two times the amount of economic
damages. Tex. Civ. Prac. & Rem. Code Ann. §
41.008(a)(1)(A) [**49] (West Supp. 2003). Exemplary
damages are "any damages awarded as a penalty or by
way of punishment." Id. § 41.001(5). Economic damages
are "compensatory damages for pecuniary loss; the term
does not include exemplary damages or damages for
physical pain and mental anguish, loss of consortium,
disfigurement, physical impairment, or loss of companionship
and society." Id. § 41.001(4). "Exemplary damages
may be awarded only if the claimant proves by clear
and convincing evidence that the harm with respect to
which the claimant seeks recovery of exemplary damages
results from . . . malice." Id. § 41.003(a) (West 1997);
see also id. § 41.004(b) (West 1997). Finally, "prejudgment
interest may not be assessed or recovered on an
award of exemplary damages." Id. § 41.007 (West 1997).
The two-times-economic-damages award should be
applied only to the damages for the actions where the
jury found malice. The jury found no malice in connection
with the second cut. Likewise, AT&T did not request
a jury question asking for a finding of malice as to
Qwest's breach of the Agreement. We hold that the district
court was correct in excluding such damages in calculating
allowable [**50] exemplary damages.
AT&T's contention that all the damages are "economic
damages" and should be included in the calculation
contravenes the statutory purpose of exemplary
damages, which is to punish. See id. § 41.001(5). If
AT&T had brought a separate suit for each cut, resulting
in the same jury findings as here, AT&T would not have
been entitled to exemplary damages as to the second cut,
because the jury did not find malice as to that act. To
make such an award now would be counterintuitive; the
jury found no malice as to Qwest's actions regarding the
second cut. The supreme court has opined that: "our duty
in civil cases . . . like the duty of criminal court, is to
ensure that defendants who deserve to be punished in
fact receive an appropriate level of punishment, while at
the same time preventing punishment that is excessive or
otherwise erroneous." Moriel, 879 S.W.2d at 17. Here, to
award AT&T exemplary damages for what is essentially
a negligent act would impose an inappropriate level of
punishment.
Nor should prejudgment interest be doubled in the
damages-cap calculation. In Ellis County State Bank v.
Keever, the supreme court held that an award of [**51]
prejudgment interest on exemplary damages was improper.
888 S.W.2d 790, 798, 37 Tex. Sup. Ct. J. 1117
(Tex. 1994) (citing Act of June 3, 1978, 70th Leg., 1st
C.S., ch. 2, § 2.12, 1978 Tex. Gen. Laws 37, 46 (amended
1995) (current version at Tex. Civ. Prac. & Rem.
Code Ann. § 41.007)). [*38] The court opined that

"punitive damages, being inherently penal in character,
should not be enlarged by the imposition of prejudgment
interest in the absence of an express legislative intent to
do so." Id. Although AT&T advocates that it is not seeking
prejudgment interest on the exemplary damages, but,
rather, the inclusion of prejudgment interest as an "economic
damage," its argument was rejected in Seminole
Pipeline Co. v. Broad Leaf Partners, Inc. 979 S.W.2d
730 (Tex. App.--Houston [14th Dist.] 1998, no pet.)
(noting that result of this argument was mathematically
same where jury's award greatly exceeds cap). 12 Adding
prejudgment interest to the award of economic damages
and then doubling the sum would be no different than
adding two times the economic damages and two times
the prejudgment interest to compute the final award. We
overrule AT&T's [**52] first issue.
12 In St. Paul Surplus Lines v. Dal-Worth
Tank Co., the supreme court held that under the
DTPA, prejudgment interest should not be added
to the "actual damages" and then trebled, reasoning
that "trebling the sum of damages ["D"] and
interest ["I"] is equal to the sum of treble damages
and treble interest: in other words, 3(D + I) =
3D + 3I." 974 S.W.2d 51, 54, 41 Tex. Sup. Ct. J.
1357 (Tex. 1998). Here, AT&T's argument, reduced
to an algebraic formula, would be 2(D + I)
= 2D + 2I.
B. Prejudgment Interest
By its second issue, AT&T disputes the district
court's calculation of prejudgment interest. CK, by its
only issue on appeal, also argues that the district court
erred in calculating the prejudgment interest. On November
12, 1997, AT&T filed suit only against Qwest
and C&S. On January 23, 1998, C&S sued CK as a
third-party defendant. On May 5, 2000, AT&T amended
its petition, naming CK and Nelson as additional defendants.
After the verdict, the district court determined
that prejudgment [**53] interest began to accrue
against CK on the date AT&T amended its petition to
include CK as a defendant, May 5, 2000, and that CK's
two settlement offers, which AT&T rejected, did not toll
the accrual of prejudgment interest as to CK's portion of
the damages.
1. Date of Accrual Against CK
AT&T argues that the prejudgment interest should
have begun to accrue from December 12, 1997, the date
the original suit was filed. Alternatively, AT&T contends
that accrual should begin on January 23, 1998--the date
CK first had notice of AT&T's claims by virtue of C&S's
suit against CK--or 180 days after this date, because CK
"could have, but chose not to settle those claims." See
Tex. Fin. Code Ann. § 304.104 (West Supp. 2003). CK
responds that the district court properly held that prejudgment
interest ran from May 5, 2000, the date AT&T
amended its petition naming CK and Nelson. The Texas
Finance Code provides:
Except as provided by Section 304.105 or 304.108,
prejudgment interest accrues on the amount of a judgment
during the period beginning on the earlier of the
180th day after the date the defendant receives written
notice of a claim [**54] or the date the suit is filed and
ending on the day preceding the date judgment is rendered.
Prejudgment interest is computed as simple interest
and does not compound.
Id.
In Robinson v. Brice, this Court, construing a predecessor
of section 304.104, held that the defendant must
receive written notice of a "claim." 13 894 S.W.2d 525,
528 [*39] (Tex. App.--Austin 1995, writ denied). Robinson
involved a one-car accident in which the injured
passenger sued the driver, who was driving his employer's
car. Id. at 527. The plaintiff argued that prejudgment
interest began to run 180 days after the corporation's
insurance company received a copy of the accident report
from the corporation, or, in the alternative, 180 days
from the plaintiff's request for additional payments. Id. at
528-29. Because the finance code did not define the term
"claim," we determined that the term's ordinary meaning
was: "a demand for compensation or an assertion of a
right to be paid." Id. As a result, we held that notification
of the accident and an injury were not enough; however,
we further held that the request for additional payments
directed [**55] to the insurance company was sufficient
notice of a claim. Id. We construed the statute liberally to
achieve its purposes of fully compensating plaintiffs and
encouraging settlements. Id. at 529 (citing Tex. Gov't
Code Ann. § 312.006(a) (West 1998)).
13 Texas Revised Civil Statute article
5069-1.05 § 6(a) preceded section 304.104, Texas
Finance Code; however, the applicable language
is identical. Compare Act of June 3, 1987, 70th
Leg., 1st C.S., ch. 3, § 1, 1987 Tex. Gen. Laws
51, 51, with Tex. Fin. Code Ann. § 304.104 (West
2003).
In Lee v. Fenwick, the court, interpreting the same
civil statute, held that sending notice to an attorney not of
record for the defendants does not provide notice to the
defendants. 907 S.W.2d 88, 89 (Tex. App.--Eastland
1995, writ denied). The applicable statutory language
was "written notice of a claim" to the [**56] "defendant."
Id. (quoting Act of June 3, 1987, 70th Leg., 1st
C.S., ch. 3, § 1, 1987 Tex. Gen. Laws 51, 51 (amended
1995) (current version at Tex. Fin. Code Ann. §

304.104)). In Lee, the plaintiff's attorney sent notice to an
attorney whom he believed represented the two defendants;
however, a different attorney appeared of record.
Id. at 89-90. The record did not reflect any authority on
the part of the attorney. Id. at 90. The court held that
there was no proof that the attorney who received notice
was an attorney for both defendants, the attorney did not
appear of record for the defendants, and there was no
proof that the defendants received the written notice;
therefore, the prejudgment interest ran from the date suit
was filed and not from the date of the notice sent to the
misidentified attorney. Id.
Finally, in Thrift v. Hubbard, the court held that
"suit was filed" when plaintiffs amended their petition to
include a claim for intentional infliction of emotional
distress. 44 F.3d 348, 362 (5th Cir. 1995) (interpreting
Act of June 3, 1987, 70th Leg., 1st C.S., ch. 3, § 1, 1987
Tex. Gen. [**57] Laws 51, 51 (amended 1995)). Thus,
plaintiffs would be allowed to recover prejudgment interest
on their claim from the date of amendment and not
from the date suit was first filed. Id. The Thrift court held
the defendants had notice of the claim, and thus an opportunity
to settle, when they received the amended petition,
and that holding otherwise would defeat the statute's
objective of encouraging settlements. Id. The court also
ruled that the 180-day delay from the amendment to the
accruing of prejudgment interest did not apply because
the language "whichever is earlier" required the accrual
to begin on the earlier of the two dates--the date the
plaintiffs amended their petition. Id.
Here, the purpose of encouraging settlements would
not be served if prejudgment interest began to run from
December 12, 1997, the date AT&T filed suit against
Qwest and C&S, because CK had received no notice at
that time that AT&T asserted a claim against it. On January
23, 1998, the date C&S sued CK, CK received notice
and an opportunity to settle the claim with C&S;
however, AT&T had yet to present notice to CK of a
[*40] claim; as of this date CK was a named defendant
only as to C&S. Nelson [**58] had not yet been named
as a defendant. AT&T argues that because the district-court
judgment found Qwest and C&S jointly and
severally liable to AT&T for the damages caused by CK,
prejudgment interest should begin to run against CK on
December 12, 1997. AT&T posits that by virtue of this
holding, it would have been entitled to the damages
caused by CK from Qwest and C&S without suing CK
and prejudgment interest would have run from December
12, 1997. Therefore, it should not be penalized for filing
suit against CK, which would result from designating the
May 5, 2000 date as the date that prejudgment interest
began to run against CK. AT&T directs this Court to no
authority in support of this proposition, and we have
found none. The fact remains that AT&T made no claim
against CK to which it could respond until AT&T actually
named CK as a defendant. In the hypothetical scenario
described by AT&T, CK would not be liable for
prejudgment interest. Only Qwest and C&S would be
liable. We hold that AT&T did not give the required notice
of its claim to CK until May 5, 2000, when AT&T
amended its petition to name CK as a defendant. Only
then was CK required to consider whether it should settle
[**59] with AT&T. We overrule AT&T's second issue.
2. Tolling
In its only issue, CK argues that the district court
erred in failing to toll the accrual of prejudgment interest
for the period after CK made its two settlement offers,
until October 25, 2001, the date of entry of judgment. 14
CK posits that tolling should have began on September
21, 2000, when it made an offer to settle for $ 200,000,
and on April 25, 2001, when CK made its second settlement
offer for $ 439,684.93. In the alternative, CK urges
that the settlement offers were open to acceptance until
AT&T rejected them in writing. Although, CK admits
that AT&T had promptly rejected both offers, it argues
that the rejections were not in writing and AT&T had the
burden of proving that the rejections were "immediate,"
rather than "prompt."
14 CK argues that the total amount of its
damages to AT&T should be $ 439,803.34, a difference
from the judgment of $ 32,393.30.
The purpose of prejudgment interest is twofold: "(1)
encouraging [**60] settlements and (2) expediting both
settlements and trials by removing incentives for defendants
to delay without creating such incentives for
plaintiffs." Johnson & Higgins of Tex., Inc. v. Kenneco
Energy, 962 S.W.2d 507, 529, 41 Tex. Sup. Ct. J. 268
(Tex. 1998); West Beach Marina, Ltd. v. Erdeljac, 94
S.W.3d 248, 266 (Tex. App.--Austin 2002, no pet.). The
finance code controls the effects of a settlement offer on
the accrual of prejudgment interest. See Tex. Fin. Code
Ann. § 304.105 (West Supp. 2003). Specifically, "if
judgment for a claimant is more than the amount of a
settlement offer of the defendant, prejudgment interest
does not accrue on the amount of the settlement offer
during the period that the offer may be accepted." Id. §
304.105(b). Further, a settlement offer must be in writing
to affect the accrual of prejudgment interest. Id. §
304.106. The supreme court, in C & H Nationwide, Inc.
v. Thompson, opined that the purpose of prejudgment
interest is to "encourage settlement." 903 S.W.2d 315,
325, 37 Tex. Sup. Ct. J. 1059 (Tex. 1994) (citing Act of
June 3, 1987, 70th Leg., 1st C.S., ch. 3, § 1, 1987 Tex.
Gen. Laws 51, 52 (amended [**61] 1995) (current provision
at Tex. Fin. Code Ann. § 304.105)). [*41] The
court noted that the tolling provisions suspend accrual of

prejudgment interest during the period in which a settlement
offer may be accepted. This is not merely an effort
to arrive at an accurate measure of compensation for the
plaintiff's loss of use of money, since a plaintiff who
declines a settlement offer has been without the use of
the money just as surely as one who received no offer.
Id. (emphasis added). The supreme court's language
contemplates the possibility of the rejection of a settlement
offer.
In Harris v. Mickel, a defendant made a settlement
offer for an amount greater than the final damage award,
but the plaintiff rejected it four days later. 15 F.3d 428,
429 (5th Cir. 1994) (citing Act of June 3, 1987, 70th
Leg., 1st C.S., ch. 3, § 1, 1987 Tex. Gen. Laws 51, 52
(amended 1995)). The court held that the defendant was
entitled to have the prejudgment interest tolled for the
four days, or from the time of the offer until the plaintiff's
rejection. Id. at 430-31. The court opined that "once
an offer is rejected, the general [**62] rule is that the
offer is thereby terminated, and consequently it cannot be
accepted." Id. at 431 (emphasis added).
Although an intention of the legislature in authorizing
prejudgment interest was to foster settlements, there
is no legal prohibition against rejecting an offer and no
requirement that an offer cannot be rejected or that the
rejection be in writing. See Thompson, 903 S.W.2d at
325. Only the settlement offer need be in writing; the
statute makes no mention of the form a rejection must
take. See Tex. Fin. Code Ann. § 304.105, .106. CK has
directed this Court to no authority for its assertions and,
moreover, stipulated to AT&T's "prompt" rejections of
the offers. 15 Furthermore, CK's argument that a settlement
offer made after the jury verdict should toll the
accrual of prejudgment interest is equally without merit.
After the jury verdict, AT&T was entitled to the amount
awarded, subject to the district court's approval. We
overrule CK's issue.
15 CK asked the district court to admit letters
containing its two settlement offers into evidence.
AT&T objected, unless CK stipulated to the fact
that AT&T "promptly" rejected the offers. Before
their admittance, CK asked for the court's ruling.
The testimony proceeded as follows:
AT&T: Well, subject to the-the stipulation
that I mentioned.
CK: That you rejected the one, and I assume
that you're rejecting the second one? Because you
haven't called me up and said you're not going to
take it.
AT&T: Well, I don't agree with that characterization
of the facts and the--what I said was
that assuming that we are agreeing that our responses
to these settlement offers, so-called,
are--were prompt and negative, then I'm okay
with having these come into evidence. Subject--otherwise,
we want to prove what happened,
with evidence.
CK: And that's fine. They did reject them,
and that's fine.
The Court: Okay.
AT&T: Then, in that--and therefore, I have
no objection to the letters coming in.
The Court: They [the settlement-offer letters]
are admitted then on the stipulation stated on the
record, with respect-with regard to the response
by AT&T.
[**63] CONCLUSION
We reverse the district court's judgment in so far as
it awards AT&T damages for its breach-of-contract action
and render judgment that AT&T take nothing by
such claim. In all other respects, we affirm the district-court
judgment.
Lee Yeakel, Justice
Affirmed in Part; Reversed and Rendered in Part

§ 914 Expense of Litigation
LEXSTAT RESTATEMENT TORTS 914
Restatement of the Law, Second, Torts
Copyright (c) 1979, The American Law Institute
Case Citations
Rules and Principles
Division 13 - Remedies
Chapter 47 - Damages
Topic 1 - General Statements
Restat 2d of Torts, § 914
Page 1
(1) The damages in a tort action do not ordinarily include compensation for attorney fees or other expenses of
the litigation.
(2) One who through the tort of another has been required to act in the protection of his interests by bringing
or defending an action against a third person is entitled to recover reasonable compensation for loss of time, attorney
fees and other expenditures thereby suffered or incurred in the earlier action.
COMMENTS & ILLUSTRATIONS: Comment on Subsection (1):
a. The rule in this country, in contrast to that in England, is that neither party to a tort action can recover in that
action his counsel fees or other legal expenses of maintaining the action itself, except to the limited extent to which he
may be authorized to do so by statutes providing that he may recover his "costs" and disbursements. Historically the
rule goes back to a time when the small amounts awarded for "costs" were in fact adequate, or nearly so, to reimburse
him for the expenses for litigation. This rule does not apply, of course, when a statute or a contract provides expressly
or impliedly for the recovery of counsel fees or other expenses. Exception to the rule is also occasionally made in other
cases involving the assertion of a claim or defense known to be spurious, or amounting to harassment or oppressive action,
especially in suits in equity where the court traditionally has more discretion. The cases are not sufficient to establish
individual exceptions or adequately related to permit the crystallization of a composite rule.
In awarding punitive damages when they are otherwise allowable, the trier of fact may consider the actual or probable
expense incurred by the plaintiff in bringing the action. (See § 908, Comment e). This has been especially true
when gross fraud is involved.
Comment on Subsection (2):
b. The rule stated in this Subsection applies when the preceding action was brought against the present plaintiff
either by a third person or by the state, and also when the present plaintiff has been led by the defendant's tort to take
legal proceedings against a third person. When a cause of action or an alleged cause of action against the defendant in
a proceeding exists only because of a tort of another, the defendant can notify the other to defend the proceeding and if
the other fails to defend the defendant can either defend, subsequently recovering all the reasonable expenses of the
defense, or refuse to defend, in which case he can recover from the tortfeasor the amount of any judgment obtained
against him.

See Section 871A for a statement of other items for which damages may be recovered by one who has been subjected
to liability by the tort of another. As there stated (Comment f), there may be recovery in advance of payment
under some circumstances.
Illustrations:
1. With knowledge of their source, A sells stolen goods to B, who believes A to be the owner. B is arrested but
not convicted on the charge of having received the stolen goods with knowledge that they were stolen. He is also sued
for conversion by the true owner. B can recover the amount that he reasonably expends in defense of both the tort and
the criminal proceedings and in satisfaction of any judgment against him.
2. A, fraudulently purporting to be an agent for B, contracts with C, who, upon B's failure to perform and in the
belief that B is liable, brings unsuccessfully a suit against B. C can recover damages from A for the cost of the proceeding.
3. A, who is B's agent, collects money due from C to B. Later A represents to B that C did not pay him and B
brings suit against C for the amount supposed to be due. B can recover from A the expenses of suit as well as the
amount received by A.
c. On actions for malicious prosecution, malicious abuse of process and similar actions, see §§ 670, 671, 681 and
682. On actions for indemnity or contribution in cases in which both the present plaintiff and the present defendant
were liable in tort to a third party and where the present plaintiff was required to pay the amount due, see §§ 886A and
886B.
REPORTERS NOTES: Subsection (1) has been added to round out the Section.
Subsection (1): Attorney's fees normally not allowable: Olokele Sugar Co. v. McCabe, Hamilton & Renny Co., 53
Hawaii 69, 487 P.2d 769 (1971); U.S. Piping, Inc. v. Travelers Indemnity Co., 9 N.C.App. 561, 176 S.E.2d 835 (1970).
Attorney's fees allowable under statute: Uniflow Mfg. Co. v. King-Seeley Thermos Co., 428 F.2d 335 (6th Cir.
1970) (patent infringement); Orgel v. Clark Boardman Co., 301 F.2d 119 (2d Cir. 1962), cert. denied, 371 U.S. 817, 83
S.Ct. 31, 9 L.Ed.2d 58 (1962) (copyright infringement); Uniform Deceptive Trade Practices Act § 3.
Vexatious litigation. Cf. Guardian Trust Co. v. Kansas City S. Ry., 28 F.2d 233 (8th Cir. 1928) aff'd on other
grounds, 281 U.S. 1, 50 S.Ct. 194, 74 L.Ed. 659 (1930). Harassment or oppression: Cf. Lee v. Southern Home Sites
Corp., 444 F.2d 143 (5th Cir. 1971) (civil rights act); Rolax v. Atlantic Coast Line Ry., 186 F.2d 473 (4th Cir. 1951);
Hochman v. Zigler's Inc., 139 N.J.Eq. 139, 50 A.2d 97 (1946).
Equity discretion. Cf. Vaughan v. Atkinson, 369 U.S. 527, 82 S.Ct. 997, 8 L.Ed.2d 88 (1962), reh. denied, 370
U.S. 965, 82 S.Ct. 1578, 8 L.Ed.2d 834 (1962), on remand, 206 F.Supp. 575 (E.D.Va.1962) (wilful and persistent failure
to provide maintenance for seaman); Sprague v. Ticonic Nat. Bank, 307 U.S. 161, 59 S.Ct. 777, 83 L.Ed. 1184 (1939).
Recognizing that attorney's fees may be an aspect of punitive damages see Schlein v. Smith, 160 F.2d 22 (D.C. Cir.
1947); Freemont Oil Co. v. Marathon Oil Co., 92 Ohio Abs. 76, 26 O.O.2d 109, 192 N.E.2d 123 (1963).
Subsection (2): With Illustration 1, cf. Turner v. Zip Motors, Inc., 245 Iowa 1091, 65 N.W.2d 427 (1954); Hynes
v. Patterson, 95 N.Y. 1 (1884); Security State Bank v. W. R. Johnston & Co., 204 Okl. 160, 228 P.2d 169 (1951).
Illustration 2 is based on Collen v. Wright, 8 El. & Bl. 647, 120 Eng.Rep. 241 (1857); Randall v. Trimen, 18 C.B.
786, 139 Eng. Rep. 1580 (1856). Cf. International State Bank v. Trinidad Bean & Elev. Co., 79 Colo. 286, 245 P. 489
(1926); Philpot v. Taylor, 75 Ill. 309 (1874); Tarnowski v. Resop, 236 Minn. 33, 51 N.W.2d 801 (1952); Myers v. Adler,
88 Mo.App. 607, 176 S.W. 538 (1915).
With Illustration 3, cf. Fidelity & Cas. Co. v. J. D. Pittman Tractor Co., 244 Ala. 354, 13 So.2d 669 (1943); Boston
& Albany R. Co. v. Richardson, 135 Mass. 473 (1883); Prior Lake State Bank v. Groth, 259 Minn. 495, 108 N.W.2d 619
(1961); Bergquist v. Kreidler, 158 Minn. 127, 196 N.W. 964 (1924); Boyles v. Burnett, 213 Mo.App. 288, 249 S.W. 719
(1923). And see Stiles v. Municipal Council of Lowell, 233 Mass. 174, 123 N.E. 615 (1919).
See generally Highlands Underwriters, Inc. v. Elegante Inns, Inc., 361 So.2d 1060 (Ala.1978); Walters v. Marler,
83 Cal.App.3d 1, 147 Cal.Rptr. 655 (1978); Professional Rodeo Cowboys Ass'n v. Wilch, Smith & Brock, 42 Colo. App.
30, 589 P.2d 510 (1978); Wiemer v. Havana Nat'l Bank, 67 Ill.App.3d 882, 24 Ill.Dec. 428, 385 N.E.2d 340 (1978);
Fowler v. Benton, 245 Md. 540, 226 A.2d 556 (1967), cert. denied, 389 U.S. 851, 88 S.Ct. 42, 19 L.Ed.2d 119 (1967),

eh'g denied, 389 U.S. 996, 88 S.Ct. 460, 19 L.Ed.2d 505 (1967); Chartrand v. Riley, 354 Mass. 242, 237 N.E.2d 10
(1968); Central Trust Co., Rochester, N.Y. v. Goldman, 70 A.D.2d 767, 417 N.Y.S.2d 359 (1979).
On whether attorney's fees can be awarded when the prior action was against the same party contrast Feldmessor v.
Lemberger, 101 N.J.L. 184, 127 A. 815 (1925) (yes), with Blum v. William Goldman Theatres, 164 F.2d 192 (3rd Cir.
1947) (no).
CROSS REFERENCES: Digest System Key Numbers:
C.J.S. Damages § 50.
West's Key No. Digests, Damages 71-73.
Legal Topics:
For related research and practice materials, see the following legal topics:
TortsDamagesCompensatory DamagesGeneral OverviewTortsDamagesCosts & Attorney FeesGeneral Overview

LEXSEE 979 SW 2D 730
SEMINOLE PIPELINE COMPANY, MAPCO, INC., and MID-AMERICA PIPE-
LINE COMPANY, Appellants v. BROAD LEAF PARTNERS, INC., PIERRE
CAVANESS, CAROLYN CAVANESS, BETTY CRAWFORD, DR. ROBERT
HARDIE, HERBERT KLATTE, ESTHER MAE KLATTE, JAMES JEFFRESS,
SONYA JEFFRESS, JAMES NITSCH, LOIS NITSCH, CHARLES NITSCH, ROY
WHITE, DOROTHY WHITE, DAVID SCHULZ, VICKI SCHULZ, W. W.
O'DONNELL, REGINA O'DONNELL, W. H. TONN, III, and JEANNE TONN, as
Independent Executrix of the Estate of W. H. TONN, Appellees
NO. 14-96-00825-CV
COURT OF APPEALS OF TEXAS, FOURTEENTH DISTRICT, HOUSTON
979 S.W.2d 730; 1998 Tex. App. LEXIS 6677; 142 Oil & Gas Rep. 338
PRIOR HISTORY: [**1] On Appeal from the
55th District Court. Harris County, Texas. Trial Court
Cause No. 92-24087.
DISPOSITION: Affirmed in Part, Reversed and
Remanded in Part, Reversed and Rendered in Part.
COUNSEL: Kevin F. Risley of Houston, TX, Frank W.
Gerold of Houston, TX, William Charles Powers of Austin,
TX, for appellants.
Joseph A. Garnett of Houston, TX, Lauren L. Beck of
Houston, TX, George Chandler of Lufkin, TX, Richard
Sheehy of Houston, TX, for appellees.
JUDGES: Panel consists of Justice Yates, Hudson, and
Fowler.
OPINION BY: J. Harvey Hudson
OPINION
[*734] OPINION
This is an appeal from a suit arising out of an explosion
at an underground salt-dome storage facility and
pipeline pumping station. Twenty-two plaintiffs sued
appellants, Seminole Pipeline Company, MAPCO, In-
October 15, 1998, Judgment Rendered
October 15, 1998, Opinion Filed
Page 1
corporated, and Mid-America Pipeline, for damages resulting
from the explosion. 1
1 Two plaintiffs, Walter and Beryl Carss, settled
with the defendants prior to this appeal.
On appellants' motion, the trial was bifurcated.
Phase one of the trial resolved liability issues [**2] on
actual and punitive damages, and determined the amount
of the plaintiff's compensatory damages. The jury found
each of the defendants (1) was negligent; (2) created a
nuisance by their use of the property; (3) was grossly
negligent; (4) acted with malice; (5) proximately caused
the plaintiffs' damages by their negligence; and (6) created
a permanent nuisance. Also finding appellants
jointly and severally liable for the total amount of plaintiffs'
damages, the jury awarded appellees approximately
5.4 million dollars in actual damages for property damage
and mental anguish. In phase two, the jury assessed
punitive damages and awarded appellees 46 million dollars
in exemplary damages against each appellant.
After several post-verdict hearings, the trial court
reduced the exemplary damage award from 46 million
dollars to four times the amount of actual damages, or
approximately 21.6 million dollars. The trial court rendered
judgment and the defendants appealed, raising
forty-six points of error. A number of plaintiffs filed
cross-appeals.

On February 27, 1998, appellants and ten of the appellees,
Pierre Cavaness, Carolyn Cavaness, Betty
Crawford, Individually and as Trustee of the [**3]
Betty A. Crawford Trust, Robert Hardie, James Jeffress,
Sonya Jeffress, Charles E. Nitsch, James A. Nitsch, Lois
B. Nitsch, and David Schulz, filed a joint motion to dismiss
all claims between them on appeal. We granted
their motion and issued an opinion on March 26, 1998.
On March 27, 1998, appellants and six appellees, Broad
Leaf Partners, Ltd., Herbert Klatte, Esther Mae Klatte,
Roy White, Dorothy White, and Vicki Schulz, also filed
a joint motion to dismiss. On April 30, 1998, this court
granted the motion and ordered all points of error asserted
by appellants against the settling appellees and all
cross-points of error asserted by the settling appellees
dismissed.
Twenty-two of appellants' points of error remain for
our consideration. Appellants contend (1) the evidence is
legally and factually insufficient to support the jury's
finding of negligence and gross negligence, (2) the trial
court misapplied the statutory cap on punitive damages
and such damages are excessive, (3) the award for mental
anguish is not supported by legally or factually sufficient
evidence and is excessive, (4) the issue of mental
anguish was improperly submitted to the jury, and (5) the
trial court erred [**4] in calculating the amount of prejudgment
interest. Appellees, W.W. O'Donnell, Regina
O'Donnell, W. H. Tonn, III, and Jeanne Tonn, as Executrix
of the Estate of W. H. Tonn, II, bring seven
cross-points. We affirm the judgment of the trial court in
part and also reverse and remand in part.
[*735] I. CONSTRUCTION AND HISTORY OF
THE BRENHAM CAVERN
As common carrier pipeline companies, appellants
transport ethane, propane, butane and other natural gas
liquids (also known as NGL or LPG) through their pipeline
networks. These products are actually gases, but
they are most efficiently transported and stored while in
a liquid state. To maintain these products in liquid form
they must either be compressed or cooled. If they are not
pressurized, these liquids will quickly revert back into a
gaseous state at normal temperatures. 2 To enhance their
ability to deliver an uninterrupted supply of natural gas
liquids, appellants have constructed a series of underground
reservoirs into which they can divert and maintain
these products under pressure. When appellants'
supply of natural gas liquids exceeds demand, the excess
product is diverted into an underground cavern. Likewise,
when demand exceeds [**5] the supply, appellants
make up the difference by drawing from their reserves.
2 At atmospheric pressure, for example, propane
will begin boiling at -44 degrees F. If the
pressure is increased to 94 psig (pounds per
square inch gauge), the boiling point rises to 60
degrees F. Likewise, if the pressure is increased
to 174 psig, propane does not begin boiling until
the temperature reaches 100 degrees F.
Appellants began construction of the Brenham saltdome
cavern storage facility in 1980, by a procedure
known as "washing." Fresh water was injected into an
underground salt formation and the resulting brine was
extracted. By this method, appellants "washed out" a
huge subterranean cavern. In 1981, appellants obtained a
permit from the Texas Railroad Commission to use the
cavern as a storage facility for up to 150,000 barrels of
natural gas liquids.
[*736] Normally, natural gas liquids stored in
saltdome caverns "float" on an underground lake of
heavy brine where they are safely contained under pressure.
3 When additional [**6] natural gas liquids are
injected into the cavern, brine is displaced and forced to
the surface through a pipe known as the "brine string."
The excess brine is collected in a large surface pit. When
natural gas liquids are extracted from the reservoir, brine
from the surface pit refills the cavern and keeps the remaining
product under pressure. Thus, while the product
inventory may vary from day to day, there remains an
unbroken "string of brine" linking the brine pit on the
surface with the brine lake at the bottom of [*737] the
subterranean cavern. The weight of the brine within the
brine string maintains pressure on the cavern and prevents
the stored natural gas liquids from vaporizing and
escaping to the surface.
3 Brine has more than twice the density of liquid
propane.
If incoming product pushes the brine level below the
bottom of the brine string, natural gas liquids will flow
through the brine string to the surface. As the column of
brine is displaced by product in the brine string, the
pressure in the reservoir [**7] falls, natural gas liquids
within the brine string and reservoir vaporize, and a
"geyser" of escaping gas spews from the brine pit. As the
pressure exerted on the product lessens, the flow of gas
increases, and, if the path to the surface is not closed by
mechanical means, all of the product inventory in the
cavern will vaporize and escape into the atmosphere.
When mixed with oxygen, NGL vapor is extremely
flammable and capable of explosive ignition. 4 Because
of this potential hazard, the cavern operator must carefully
monitor the facility's inventory to insure that it never
exceeds the capacity of the reservoir.
4 One gallon of vaporized propane, mixed with
air, has the equivalent energy of 13 pounds of
TNT.

To prevent product escaping in the event of an accidental
overflow, appellants equipped the brine string at
the Brenham cavern with a pressure sensing device
called a Barksdale switch. Theoretically, if gas escaped
through the brine string, the Barksdale switch would
detect the drop in pressure and activate [**8] a trip
check system. Safety mechanisms would then automatically
seal the cavern and prevent additional vapor from
escaping into the air. The facility also had between 20
and 25 hazardous gas sensors around the facility to detect
any escaping vapor. These sensors were connected to a
trip check alarm inside the facility's office. Appellants
also installed monitors to detect changes in cavern pressure,
and to indicate the volume of product entering or
leaving the cavern. Moreover, the hazardous gas sensors
were monitored 24 hours a day in Mid-America's home
office in Tulsa, Oklahoma by means of a computer network.
From 1981 until the date of the explosion, Seminole
periodically increased the facility's storage capacity by
"washing" the cavern with fresh water and further eroding
the salt dome. Brine that could not be stored in surface
holding pits was sold to outside vendors and transported
off site. By November of 1991, Seminole had
increased the Brenham cavern's storage capacity from
150,000 to 336,600 barrels. Seminole informed the Texas
Railroad Commission of its new storage capacity and
set the working capacity of the cavern at 300,000 barrels,
90% of the actual calculated capacity.
[**9] On March 31, 1992, Troy Boisen, a
Mid-American employee living in Brenham, conducted a
routine check of the trip check system, and found it to be
operating normally.
II. THE ACCIDENT
On April 7, 1992, at approximately 6:09 a.m., a hazardous
gas alarm sounded at Mid-America's office in
Tulsa, Oklahoma. At 6:10 a.m., Dwight Aryain, the dispatcher
monitoring the facility, called Boisen and informed
him that a "hazardous gas fault" alarm had been
activated at the cavern. Aryain asked Boisen to drive to
the facility to determine the source of the signal. Boisen
arose, took a shower, dressed, and stopped at a convenience
store for a soft drink. He arrived at the cavern approximately
20 minutes after receiving the call.
Boisen immediately observed that a large cloud of
"fog" had engulfed the facility. 5 When Boisen attempted
to turn off the engine of his diesel pickup, the motor continued
to run on the airborne gas vapor. Concluding there
was probably not enough oxygen in the air to sustain him
long enough to get to the facility's manual shut-off valve,
Boisen retreated to the house of some nearby residents.
From there, Boisen telephoned the Tulsa dispatch office
and advised it of [**10] the hazardous gas situation. He
then called his supervisor, Ron Ritchey. Ritchey ordered
[*738] Boisen to evacuate the area, retreat to a safe
distance, and not to enter the vapor cloud.
5 Seminole later estimated that three to five
thousand barrels of natural gas liquids escaped to
the surface and were released into the atmosphere.
Boisen instructed the residents of the house to leave
the area. Disregarding his personal safety and Ritchey's
explicit instructions, Boisen entered the vapor cloud and
attempted to reach the main facility with the intention of
shutting off the gas. Boisen encountered two other Seminole
employees at the entrance of the facility, and the
three men attempted to reach the main shut-off valve.
The concentration of gas, however, was too great, and
the men were forced to abandon the effort because the
safety trailer which housed their emergency breathing
apparatus and equipment necessary to perform the shut
down was ninety miles away in Sugar Land. Shortly
thereafter, Boisen noticed the headlights [**11] of a car
disappear into the vapor cloud. Seconds later, the gas
cloud exploded with the estimated force of a
three-kiloton bomb. 6
6 A retired Air Force Colonel with an advanced
degree in nuclear physics, Walter Carss,
was an eye witness to the explosion. Carss said
the countryside was suddenly illuminated by a
brilliant flash of light. Turning in his chair, Carss
looked in the direction of the cavern. There, he
observed an enormous fireball billowing skyward.
As the fireball cooled, it began to turn into
a huge pillar of grey smoke. Carss then noticed a
visible shock wave racing across the rural landscape.
He watched the shock wave rip limbs off
trees and flatten the grass as it inexorably rushed
across the creek and pastures. When the shock
wave reached him, Carss reported hearing "the
loudest noise that I have ever heard." Although
his home was more than a mile from the cavern,
Carss found himself surrounded by flying glass
and insulation. The brick wall on the side of the
house nearest the blast was shattered and the
doors, windows, and their casings were blown out
of the wall. The roof of the house was also badly
damaged.
[**12] III. MAPCO'S LIABILITY
The jury found the explosion was proximately
caused by the negligence of all three defendants.
Mid-America and Seminole do not contest this finding.
MAPCO, however, claims it was not negligent, and in its

eleventh point of error, contends the evidence is legally
and factually insufficient to support the jury's finding in
this regard. While Mid-America and Seminole concede
they were responsible for the overfill, MAPCO claims it
did not own or control the Brenham cavern, and it denies
all liability for the incident. Appellees, on the other hand,
argue that MAPCO possessed sufficient control over the
construction and operation of the Brenham facility to
permit the jury to infer its negligence under the doctrine
of res ipsa loquitur.
When both legal and factual sufficiency challenges
are raised on appeal, the court must first examine the
legal sufficiency of the evidence. See Glover v. Texas
Gen. Indem. Co., 619 S.W.2d 400, 401 (Tex. 1981) (per
curiam). In reviewing a challenge to the legal sufficiency
of the evidence, an appellate court considers only the
evidence and inferences tending to support the trial
court's findings and disregards all evidence [**13] and
inferences to the contrary. See Weirich v. Weirich, 833
S.W.2d 942, 945 (Tex. 1992).
Res ipsa loquitur is applicable only when two factors
are present: (1) the character of the accident is such
that it would not ordinarily occur in the absence of negligence;
and (2) the instrumentality causing the injury is
shown to have been under the management and control
of the defendant. See Haddock v. Arnspiger, 793 S.W.2d
948, 950 (Tex. 1990). Here, the record indicates MAP-
CO's direct involvement in the day-to-day operations of
the cavern was extremely limited. Although MAPCO
employees did perform occasional inspections of the
facility inventory sheets, 7 we do not find this fact alone
to be the type of control necessary to impose liability
under the doctrine of res ipsa loquitur.
7 MAPCO exercised "spot checks" of the records
of various MAPCO entities, including the
Brenham cavern. In August of 1986, for example,
MAPCO's auditors checked thirteen of the cavern's
inventory sheets and found significant
arithmetic errors on five sheets. The auditors
alerted Seminole and Mid-America to these errors.
[**14] Appellees also attempt, however, to blend
the doctrines of alter ego and res ipso loquitur and contend
that MAPCO's corporate structure and operations
were so intertwined with those of Mid-America and
Seminole that it effectively "controlled" cavern operations.
For example, MAPCO is the [*739] sole shareholder
of MAPCO Natural Gas Liquids Incorporated.
MAPCO NGL, in turn, owns all the stock of
Mid-America Pipeline Company. The senior
vice-president of MAPCO, NGL, Robert Thomas Cronk,
Jr., also serves as the senior vice-president of Seminole
Pipeline Company. Mid-America supplies all of Semi-
nole's employees and owns 80% of its stock. Fred Isaacs,
President of Seminole, is paid directly by MAPCO. 8
Isaacs also admitted he was responsible for the construction
of the Brenham cavern and its safety controls. In
other words, Mid-America is the business entity that
conducts MAPCO's inter-state business and Seminole is
the business entity which conducts MAPCO's intra-state
business in Texas. All three appellants are Oklahoma-based
corporations located at the same address.
8 At the time of trial, Isaacs was a MAPCO retiree,
but was still on the company's payroll as a
contract consultant and served as president of
Seminole Pipeline. Neither Isaacs, nor any other
employee working at the Brenham facility, is
paid by Seminole. MAPCO is compensated for
services it renders to Seminole through
Mid-America. Mid-America bills Seminole for its
direct costs and then charges it an administrative
fee for providing personnel and equipment to operate
its facilities.
[**15] As a general rule, a parent corporation is
not liable for torts committed by its subsidiaries. See
Lucas v. Texas Indus., Inc., 696 S.W.2d 372, 374 (Tex.
1984). However, we will disregard the corporate fiction
(1) when the fiction is used as a means of perpetrating
fraud; (2) where a corporation is organized and operated
as a mere tool or business conduit of another corporation;
(3) where the corporate fiction is resorted to as a means
of evading an existing legal obligation; (4) where the
corporate fiction is employed to achieve or perpetrate a
monopoly; (5) where the corporate fiction is used to circumvent
a statute; or (6) where the corporate fiction is
relied upon as a protection of crime or to justify wrong.
See Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex.
1986).
Here, the record demonstrates the three defendant
corporations were closely tied to one another, but a subsidiary
corporation will not be regarded as the alter ego
of its parent merely because of stock ownership, a duplication
of some or all of the directors or officers, or an
exercise of control that stock ownership gives to stockholders.
See McFee v. Chevron Int'l Oil Co., Inc., 753
S.W.2d 469 (Tex. [**16] App.-Houston [1st Dist.]
1988, no writ). There must be something more than mere
unity of financial interest, ownership and control before
we will make the parent liable for the subsidiary's tort.
See Lucas, 696 S.W.2d at 374. In short, absent a showing
of wrongdoing on the part of the parent corporation,
Texas courts have refused to make the parent liable for
its subsidiary's torts. See Lubrizol v. Cardinal Constr.,
868 F.2d 767, 771 (5th Cir. 1989). Accordingly, we reject
appellees contention that MAPCO's corporate structure
demonstrates it "controlled" cavern operations.

Appellees contend, however, that appellants' attorneys
made certain admissions regarding the cause of the
explosion. They claim almost no effort was made during
trial to distinguish MAPCO from Mid-America or Seminole.
In fact, all three defendants were represented by
the same counsel and during voir dire, appellants' lead
trial counsel introduced everyone on the defense team
and made the following comments during his examination
of the venire:
Immediately after this accident - this explosion - we
really didn't think that it was our responsibility. But as
events unfolded and as the examination of what occurred
[**17] did ensue, we have determined that it was
caused by an overfill of the cavern. So whatever evidence
is brought in here to determine that there was an
overfill, it is really not addressing an issue that's in contest
here. We overfilled the cavern. Gas escaped from the
cavern and it was ignited, and there was this terrible explosion.
That explosion that we regret.
We didn't mean to do wrong. But unfortunately, we
did.
* * *
. . . The explosion came from our cavern.
[*740] We have learned our lesson. We have indicated
in this Court that we were the parties responsible
for that overfill. . . .
* * *
We have realized our mistakes. And in this case, we
are ready to pay for the damages that we have caused.
This theme reappeared during defense counsel's
closing statements to the jury when he said:
When we were in court before on opening statement,
I told you what our story - what our theme - was that we
wanted to get over to you. It was simply this: That we
didn't mean to do wrong, but unfortunately we did. We
learned our lesson, changed our ways, but weren't given
a chance to keep the cavern open. We accept our mistakes
and we are ready to pay for damage we caused. But
the plaintiffs [**18] want us to pay for things we didn't
do. And that's why we think the plaintiffs' requests for
damages are unfair.
MAPCO argues that counsel's statements were
"merely a recognition that the cavern was overfilled,"
and not an admission of liability. Citing to Carroll Instrument
Co. v. B.W.B. Controls, Inc., 677 S.W.2d 654,
659 (Tex. App.-Houston [lst Dist.] 1984, no writ), they
also argue that MAPCO's counsel did not make any
binding judicial admissions and that if he did, Royce M.
Parr, General Counsel and secretary for MAPCO NGL,
unambiguously refuted those statements. Parr testified
that he was present at trial, not as a company representative,
but as an attorney on behalf for MAPCO Natural
Gas Liquids, Inc., Mid-America Pipeline Company, and
Seminole Pipeline Company. When asked whether the
companies he was representing "admitted negligence for
the damages sustained by [plaintiffs]," Parr responded
"They have not."
The record also reveals that appellants' counsel's
remarks during voir dire were prefaced with, "Let me
explain Seminole's position." (Emphasis added). Likewise,
counsel's closing argument made reference to his
opening statement where, again, his comments [**19]
seem to have been directed toward Seminole. Before
admitting "we" overfilled the cavern, counsel told the
jury about the 36,000 barrel "safety factor" and said:
Now that was the thinking of Seminole, that they
were providing a cushion. That's what was in their mind.
That's what they were conscious of.
The truth is, the day before the explosion Seminole
had no idea that they were that close or that they were
anywhere near the safety - safe working capacity of the
cavern.
(Emphasis added).
A judicial admission results when a party makes a
statement of fact which conclusively disproves a right of
recovery or defense he currently asserts. See H.E. Butt
Grocery Co. v. Pais, 955 S.W.2d 384, 389 (Tex. App.-San
Antonio 1997, no writ) (citing Gevinson v. Manhattan
Constr. Co. of Okl., 449 S.W.2d 458, 466 (Tex. 1969)). A
judicial admission must be (1) made in the course of a
judicial proceeding; (2) contrary to an essential fact for
the party's recovery [or defense]; (3) deliberate, clear and
unequivocal; (4) related to a fact upon which judgment
for the opposing party could be based; and (5) enforcing
the admission would be consistent with public policy.
See Sepulveda [**20] v. Krishnan, 839 S.W.2d 132,
135 (Tex. App.-Corpus Christi 1992), aff'd, 916 S.W.2d
478 (Tex. 1995). Counsel's statements on behalf of his
client will be deemed judicial admissions only if they
satisfy the five criteria listed above. See Sepulveda, 839
S.W.2d at 135; see also Shafer v. Bedard, 761 S.W.2d
126, 129-30 (Tex. App.-Dallas 1988, no writ); Hochmetal
Africa (PTY), Ltd. v. <strong>Metals</strong>, Inc., 566 S.W.2d 715,
718 (Tex. Civ. App.-Corpus Christi 1978, no writ); Rosse
v. Northern Pump Co., 353 S.W.2d 287, 292 (Tex. Civ.
App.-Austin 1962, writ ref'd n.r.e.).
The principle of binding a party by his judicial admission
should be applied with caution because the effect
is that the declarant swears himself out of court. See
Esteve Cotton Co. v. Hancock, 539 S.W.2d 145, 157
(Tex. Civ. App.-Amarillo 1976, writ ref'd n.r.e.). The
statements made here were, at best, equivocal. We find

the character of the statements do not rise to the level of
"judicial admissions."
[*741] In the event that MAPCO's liability cannot
be based upon judicial admissions, appellees contend it
can be supported by the jury's finding of a permanent
nuisance because MAPCO does not challenge the finding.
[**21] The jury, however, only assessed damages
stemming from the "occurrence in question." We find the
only reasonable interpretation of this phrase has reference
to the explosion. While a permanent nuisance might
fairly be described as a "condition," it is rarely considered
an "occurrence."
Accordingly, there is no evidence to support the
conclusion that MAPCO was negligent or that it possessed
such control over the operation of the Brenham
facility to render it liable for damages under the res ipsa
loquitur doctrine. Appellants' eleventh point of error is
sustained.
IV. GROSS NEGLIGENCE AND MALICE
The jury also found all three appellants acted with
gross negligence and malice. These findings provide the
basis for the award of exemplary damages. In their first
six points of error, appellants attack these findings, and
hence the exemplary damages, by arguing the trial court
erred in overruling their motions for (1) directed verdict,
(2) judgment n.o.v., and (3) new trial because the evidence
is legally and factually insufficient to support any
finding of gross negligence or malice as to each of the
appellants.
Claiming appellees' own experts admit appellants
had no subjective [**22] awareness of the risk of explosion,
appellants argue appellees' "theory of gross negligence
seems to be that an abundance of evidence of
simple negligence combined with a tragic result metamorphosizes
the appellant's conduct into gross negligence."
Relying upon Transportation Ins. Co. v. Moriel,
appellants contend that evidence of ordinary negligence,
though it may lead to massive damage, does not constitute
proof of gross negligence. See 879 S.W.2d 10,
21-22 (Tex. 1994). Appellants also argue that even if
some evidence shows they could have taken additional
safety precautions or used safer equipment to lessen the
risk of injury, such evidence does not necessarily establish
gross negligence. See Sheffield Div., Armco Steel
Corp. v. Jones, 376 S.W.2d 825 (Tex. 1964); Universal
Servs. Co., Inc. v. Ung, 904 S.W.2d 638, 641(Tex. 1995).
Where the cause of action accrues, as it did here,
before September 1, 1995, a punitive damage award requires
proof that the damage or harm resulted from
fraud, malice, or gross negligence. 9 In such cases, the
Civil Practice and Remedies Code defines gross negligence
as:
9 See Act of June 3, 1987, 70th Leg., 1st C.S.,
ch. 2, § 2.12, 1987 Tex. Gen. Laws 1, 45 (formerly
codifed at TEX. CIV. PRAC. & REM.
CODE § 41.003).
[**23] More than momentary thoughtlessness,
inadvertence, or error of judgment. It means such an entire
want of care as to establish that the act or omission
was the result of actual conscious indifference to the
rights, safety, or welfare of the persons affected.
See Act of June 3, 1987, 70th Leg., 1st C.S., ch. 2, §
2.12, 1987 Tex. Gen. Laws 44 (formerly codifed at TEX.
CIV. PRAC. & REM. CODE § 41.001(5)); see also Burk
Royalty Co. v. Walls, 616 S.W.2d 911, 920 (Tex. 1981).
In Moriel, the Supreme Court held that gross negligence
involves two components: (1) the defendant's act
or omission and (2) the defendant's mental state. See 879
S.W.2d at 21. Gross negligence differs form ordinary
negligence in two respects: (1) the defendant must be
"consciously indifferent," and (2) his conduct must "create
an extreme degree of risk." Id.
The test for gross negligence contains both an objective
and subjective component. 879 S.W.2d at 21-22.
Subjectively, the defendant must have actual awareness
of the extreme risk created by his conduct. 879 S.W.2d
at 22. Objectively, the defendant's conduct must involve
an "extreme degree of risk," a threshold significantly
higher than the [**24] objective "reasonable person"
test for negligence. Id. Extreme risk is a function of both
the magnitude and the probability of the anticipated injury
to the plaintiff. Id. An act or omission that is merely
thoughtless, careless, or not inordinately risky cannot be
grossly negligent. Id.
[*742] For actions accruing prior to September 1,
1995, the Civil Practice and Remedies Code also defines
malice as "an act that is carried out by the defendant with
a flagrant disregard for the rights of others and with actual
awareness on the part of the defendant that the act
will, in reasonable probability, result in human death,
great bodily harm, or property damage." 10
10 See Act of June 3, 1987, 70th Leg., 1st C.S.,
ch. 2, § 2.12, 1987 Tex. Gen. Laws 1, 44 (formerly
codifed at TEX. CIV. PRAC. & REM.
CODE § 41.001(6)(B)) (emphasis added).
A. Standard of Review
In reviewing the evidence under a no evidence point,
we consider all the evidence in the light most favorable
to the prevailing party, indulging [**25] every reasonable
inference in that party's favor. See Associated Indem.
Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 285-86

(Tex. 1988); see also Moriel, 879 S.W.2d at 24. In evaluating
legal sufficiency, we are required to determine
whether the proffered evidence as a whole rises to a level
that would enable reasonable and fair-minded people to
differ in their conclusions. Moriel, 879 S.W.2d at 25.
The Supreme Court has held that when conducting a
factual sufficiency review of a punitive damages award,
we must detail the relevant evidence, explaining why that
evidence either supports or does not support the punitive
damages award in light of the factors set out in Alamo
Nat'l Bank v. Kraus, 616 S.W.2d 908, 910 (Tex. 1981).
See Moriel, 879 S.W.2d at 31. Therefore, in reviewing
the appropriateness of the jury's award we will consider
(1) the nature of the wrong; (2) the character of the conduct
involved; (3) the degree of culpability of the
wrongdoer; (4) the situation and sensibilities of the parties
affected by the wrong; and (5) the extent to which
such conduct offends a public sense of justice and propriety.
See Kraus, 616 S.W.2d at 910.
B. [**26] Subjective awareness and conscious
indifference
While appellants freely admit that neighboring
property owners were damaged when the cavern facility
exploded, they strenuously contend there was little, if
any, evidence to support a finding of gross negligence or
malice. Because they had numerous safety mechanisms
and procedures in place at the time of the explosion, appellants
claim the jury had no basis for finding they were
subjectively aware of the risk, yet consciously indifferent
to the rights, safety, or welfare of others.
Appellants point to evidence that the cavern had a
capacity of 336,600 barrels and the anticipated inventory
on the day of the accident was only 288,305 barrels, or
48,000 barrels less than cavern capacity. Moreover, the
cavern had been filled with 297,649 barrels of natural
gas liquids without incident on March 11, 1992. Accordingly,
on April 7, 1992, appellants believed the cavern
contained 9,344 fewer barrels than it did on March 11,
1992. Further, they tested the Barksdale switch a week
before the explosion and found it to be fully operational.
The technician who ran the test found the trip check system,
solenoid, tubing, plunger, valve, and valve [**27]
handle all functioning normally. He also recalibrated the
Barksdale switch at that time and set it to activate if the
pressure in the brine string fell below 100 psi.
Finally, appellants contend their confidence in the
safety system was reasonable because the same trip
check system had worked in 1988 and had closed in the
cavern when natural gas liquids began escaping through
the brine string. Appellants argue that this evidence
shows them to be subjectively justified in believing their
safety mechanisms and procedures would shut down the
cavern in the event of an overflow.
1. Awareness of the risk
We begin our analysis by noting that the transportation
and storage of natural gas is an inherently hazardous
venture because the potential for disaster is enormous.
The Supreme Court has observed:
In the operation of its business a gas company is
bound to exercise such care and diligence as to avoid
injury to the . . . property of others by the escape of gas .
. . . The degree of care required to [*743] prevent injury
has been variously stated to be ordinary care, due
care, due and reasonable care, great care, a high degree
of care, and the highest degree of care. This variety
[**28] of expression means no more, however, than
that care and diligence should always vary according to
the exigencies which require vigilance and attention,
conforming in amount and degree to the particular circumstances
under which they are to be exerted . . . .
Therefore, in view of the highly dangerous character of
gas and its tendency to escape, a gas company must use a
degree of care to prevent damage commensurate to the
danger which it is its duty to avoid.
Prudential Fire Ins. Co. v. United Gas Corp., 145
Tex. 257, 199 S.W.2d 767, 772-3 (1946).
Appellants were well aware of the potential danger
for property damage, personal injury, and death that
could result if the cavern was overfilled. Wes Baker,
operations supervisor for Seminole Pipeline from 1981 to
1985, testified that Seminole's instructor's manual on
meter tickets and daily operating reports for
Mid-America contained the following admonition:
Accurate product inventory records may help prevent
accidents resulting in overfilling a cavern, tank or
section of pipeline. Overfilling and/or overpressure of a
vessel can result in personal injury, property damage or
worse.
(Emphasis added).
Charles Vest, an [**29] employee of Mid-America,
testified that the Y-grade product which was stored in the
cavern at the time of the explosion had a typical vapor
pressure of 250 pounds. 11 A Mid-America publication
states:
11 Y-grade product is a raw mix of natural gas
liquids combining ethylene, propane, butane, and
natural gasoline.
If the pressure on Y-grade is reduced to or below it's
[sic] vapor pressure, the product will suddenly and very
rapidly vaporize. This is called flashing. Flashing product
can be very dangerous.
Appellants were also aware that natural gas liquids
will enter the brine string if the cavern is overfilled, and

if natural gas liquids entered the brine string, cavern
pressure would be reduced and flashing would occur.
Thus, the first line of defense against flashing is to make
certain the cavern's inventory of natural gas liquids does
not exceed its capacity.
a. Inaccuracy of inventory estimates
While appellants used meters to track the number of
barrels of product moving in and out of the [**30] cavern,
Wes Baker, an operations supervisor, testified that
variables such as temperature and pressure would induce
errors in any meter. Because meters cannot precisely
measure the amount of product passing in or out of the
cavern, it was impossible for appellants to know the exact
number of barrels of natural gas liquids stored in the
cavern. Although errors induced by inaccurate meters
may be relatively small, this inaccuracy is compounded
each time product is added to or subtracted from inventory.
Only when all natural gas liquids are removed and
the cavern is filled with brine alone, can the product inventory
be precisely known, i.e., zero barrels. The record
shows that appellants were subjectively and objectively
aware that as they added and removed product without
emptying the cavern, their inventory estimates became
less reliable. The longer appellants waited between emptying
the cavern, the greater the chance of a major error
in inventory calculations.
During normal operations, gas was continuously diverted
in and out of a series of caverns along appellants'
pipeline network. In the normal course of business, appellants
emptied their caverns approximately once a year
[**31] to insure the accuracy of their inventory estimates.
However, because the Brenham facility sat atop a
large cavern, Wes Baker testified that appellants attempted
to empty it more frequently than some of the
other reservoirs. In fact, appellants' records indicate they
emptied the Brenham facility and "re-zeroed" the inventory
base line on an average of 16 times per year from
1982 through 1991. Curiously, appellants abandoned this
practice in 1991. During the first [*744] seven months
of 1991, the cavern was emptied eight times. However,
between July 12, 1991, and April 7, 1992, the date of the
explosion, the cavern was never emptied. In fact, this
nine-month hiatus appears to be the longest such interval
in the history of the facility.
Because serious inventory discrepancies were often
discovered each time the cavern was emptied, prudence
required this procedure to be repeated frequently. For
example, when appellants did not empty the cavern for
four months between February 23, 1987, and June 27,
1987, they discovered an inventory discrepancy of
28,710 barrels. When appellants did not empty the cavern
during a five-month period in 1989, they discovered
they had underestimated cavern inventory [**32] by
24,347 barrels. In fact, significant errors occurred even
during brief intervals. Records show the cavern was
emptied on September 18, 1987; the inventory was reset
to zero, and the cavern was refilled. Three days later, on
September 21, 1987, the cavern was emptied again and
found to contain 15,129 more barrels of natural gas liquids
than anticipated. The cavern was refilled and emptied
the following day. After only one day's use, appellants
discovered they had underestimated inventory by an
additional 6,818 barrels. The inventory base line was
reset to zero, and the cavern was put back in use. When it
was emptied two days later on September 24, 1987, appellants
found an unexpected 9,953 barrels in the cavern.
In other words, if the cavern had not been emptied three
times during the six-day period between September 18,
1987, and September 24, 1987, the cavern would have
contained 31,900 more barrels of natural gas liquids than
anticipated.
Six months before the accident, in October of 1991,
a data clerk in Tulsa discovered a mistake of 28,406 barrels
had been made in Brenham. When Charles Vest
discovered he had made a significant miscalculation regarding
the amount of product [**33] transferred from
the Brenham cavern into a customer's line, he wrote a
memorandum to his supervisor in which he admitted:
I misunderstood the accounting procedure to be used
in accounting for barrels delivered to UTTCO from ten
days earlier this month. Due to this we subtracted barrels
delivered to UTTCO from cavern inventory in error. The
net result is that we need to add 28,406 barrels to the
cavern inventory at Brenham.
On March 11, 1992, less than a month before the accident,
inventory estimates indicated the volume of the
cavern had reached 297,649 barrels, an all-time high.
Because the cavern had not been emptied in 8 months,
this estimate was highly suspect and an employee was
assigned to "sit" the cavern, i.e., remain at the site all
night to watch for any signs of an overfill. The cavern
did not overflow that evening. The cavern's inventory
was subsequently reduced and appellants deemed it unnecessary
to continue to "sit" the cavern during the
evening hours.
At the end of March, eight days before the explosion,
Seminole held a meeting to discuss cavern inventory.
Because there had been a series of serious inventory
miscalculations, Charles Vest suggested the cavern be
emptied [**34] and the inventory "reset to zero." Vest's
suggestion, however, was disregarded, the cavern was
not emptied, the inventory calibrations were not reset,
and more natural gas liquids were pumped beneath the
ground.
David Allen Haney, scheduler for MAP-
CO/Mid-America, also discussed the possibility of zero-

ing-out the cavern. He testified he told John Mobley,
Vest's field supervisor, that schedulers are totally dependent
on the data provided by the field staff, and that
just two days before the accident, he and Mobley "discussed
that [the cavern] was up there at the operating
limit. . . . We definitely talked about lowering the inventory."
Despite his concerns, the cavern was not emptied
and Haney personally ordered approximately 36,000
additional barrels placed in the cavern.
After the accident, Wes Baker headed up a team to
reconstruct the cavern's inventory. The starting point for
the reconstruction was the last time the inventory had
been reset to zero, nine months earlier. The team estimated
that, at the time of the accident, there were approximately
50,000 more barrels of product in the cavern
than shown on appellant's [*745] records. One thousand
barrels of the overage was attributable [**35] to
85 different arithmetic errors made by the cavern's operators.
Almost 700 other errors resulted from operators
using incorrect temperature and pressure correction factors
in their calculations. Baker's team finally determined
that the size of the overage was an aggregate of mismeasurements
made by the cavern operators over a
270-day time period.
b. Inadequacy of the safety trip check system
The trip check system was appellants' second line of
defense against a catastrophic failure. It was designed to
shut in the cavern if gas began flowing up the brine
string, and it did so successfully on one occasion several
years prior to the explosion. This system, however, had a
mixed history of success. On March 18, 1982, Charles
Vest was in the station control building at the Brenham
facility when a 20 to 30 foot plume of water and gas began
spewing out of brine pit number one. Because the
Barksdale switch did not shut in the cavern, Vest had to
manually close the trip check valve. Vest reported the
system failure to the operations supervisor, Wes Baker.
Likewise, in 1988, Vest observed gas escaping to the
surface of brine pit number one when the Barksdale
switch failed to shut [**36] in the cavern during an
inadvertent overfill. Vest was again forced to manually
shut down the cavern. Fortunately, these incidents occurred
during normal work hours; otherwise, the leaks
would have continued unabated.
Troy Boisen was primarily in charge of testing and
calibrating the Barksdale switch every six months. If the
switch did not operate properly three times in succession,
he replaced it. Boisen testified that appellants had no
written company procedures concerning the periodic
Department of Transportation (DOT) inspections of the
Barksdale switch. When performing inspections and
maintenance on the switch, Boisen merely set the switch
to the pressure range marked on the DOT report, 100
p.s.i. Admitting that he did not know the switch's recommended
activation range, Boisen was not aware the
manufacturer's specifications cautioned that if the
switch's settings were set beneath the recommended
range, the switch would not operate reliably.
Rudolf Wolf, president and general manager of
Barksdale, Incorporated, the manufacturer of the Barksdale
switch, testified that his company conducted a
post-accident examination of the switch used at the
Brenham saltdome facility. Barksdale's [**37] technicians
discovered the switch used by appellants was an
odd assemblage of "cannibalized" parts taken from other
Barksdale switches. The switch housing had been manufactured
prior to November, 1984. The bourdon tube had
been put in stock in January, 1989. The microswitch was
manufactured in 1980, and the block bracket was made
in 1985. Sometime after the switch was shipped from the
company, its two set screws had been either removed or
loosened and retightened. One screw was set at 90
pounds and the other at 100 pounds. An adjustable
bourdon tube's switches typically range from 150 to 200
psi up to 18,000 psi. The adjustable range for the switch
involved in this accident was designed to operate between
160 to 2,000 psi. When set at 100 psi, as it was
here, Barksdale's literature indicates the switch would
yield poor accuracy.
Barksdale technicians attempted to "trip" the switch
by applying pressure ranging from 10 to 200 psi. The
switch did not activate. Further examination of the
switch revealed corrosion inside the pressure connection,
switch housing, and the threads of the switch housing.
The surge dampener was totally obstructed with particles
of brown material that could have [**38] been a combination
of sand, rust, pipe scale, and salt crystals. When
technicians removed the surge dampener, the switch
worked properly. Appellees' expert witness testified that
he had examined the switch and concluded that it had not
been properly maintained. He based his conclusions on
(1) corrosion inside the switch's pressure connection; (2)
corrosion in the switch housing; (3) corrosion in the
threads of the switch housing; (4) dirt and debris clogging
the sensing line; and (5) brown material totally
blocking the surge dampener.
[*746] 2. Conscious disregard of the danger
Despite appellants' knowledge that the Barksdale
switch was the only automated, non-manual, safety device
on the brine string capable of shutting in the cavern,
appellants only tested its reliability semi-annually. Appellants
also knew the switch had been rebuilt from used
parts and had made the conscious decision to set it below
its recommended operating range. The employee in
charge of maintaining, testing, and calibrating the switch

was, by his own admission, ignorant of the manufacturer's
recommended pressure range for this switch.
Despite the sporadic reliability of their automated
safety mechanisms, [**39] appellants left the Brenham
cavern unattended 16 hours of each day. 12 During
the evening hours, the last line of defense was a monitoring
station in Tulsa, Oklahoma, where four dispatchers
watch over Mid-America's approximately 10,000
miles of pipeline twenty-four hours a day. On the day of
the accident, three dispatchers were monitoring the pipeline.
That morning, Gary Dwayne Nabors, dispatcher for
Mid-America, was supervising Dwight A. Aryain, a dispatcher
trainee.
12 Since the explosion, all storage caverns in
Texas are manned twenty-four hours a day.
Nabors, had undergone four months of training before
he assumed the position of dispatcher. At no time
during his training had he ever been placed in a mock
situation involving a cavern overfill, nor did appellants
possess any equipment to simulate an emergency scenario.
When the Tulsa monitoring center received the hazardous
gas alarm, Nabors and Aryain followed the company's
standard operating procedure. Aryain telephoned
Troy Boisen and asked him to [**40] drive out to the
Brenham cavern and "check it out." Because only one
sensor detected gas and the two men did not see anything
on their system console that would indicate gas had entered
the brine string, they chose not to notify emergency
personnel. Aryain assumed that if the cavern had overfilled,
the safety check system would shut down the cavern
automatically. 13 Although the hazardous gas alarm
sounded 27 times, Aryain did not wait for Boisen to call
back, but left the building when his shift ended.
13 Prior to the explosion, no one taught Aryain
what an overfill situation would look like on a
monitor, nor was he ever exposed to simulated
drills of what the computer readouts would look
like if the cavern overfilled.
Aryain was relieved by Roger Collins, a dispatcher
with fifteen years experience. Aryain and Norris briefed
Collins on the gas alarm and told him that they had
called Boisen, but did not inform him as to the time of
the call. Collins confirmed that it was company policy
not to treat one hazard [**41] sensor as an emergency
situation. He had confidence in the minicomputer system,
and testified that "if everything worked like it
should have there would have been enough information"
to realize there was a dangerous situation in Brenham.
Unfortunately, Collins' monitors never registered a trip
check, fire, rate of flow change, or any other faults. As
Collins later related, "[there] simply wasn't enough information
there to tell me that we had a problem." If the
system had reported more faults, Collins said he would
have alerted emergency personnel to the danger.
However, even if Tulsa had realized there was an
emergency situation in Brenham, the monitoring facility
had no means by which it could remotely activate the trip
check system or close in the cavern. The only way to
stop product from flowing out of the cavern was for
someone to physically enter the Brenham facility and
manually close the valve.
Alan Wolf, an employee of Mid-America, was, at
the time of the accident, a computer technician maintaining
the minicomputer system. He testified that the
software for the system was developed in 1974 by TRW,
and was installed in 1982 on two mirrored minicomputers.
While this was [**42] considered "state of the art"
in 1982, Wolf acknowledged that by 1990, it was obvious
"we were pushing the limits of the system, as far as
how many points it could handle, how fast it could process
data." The system had several other weaknesses,
including a lack of software packages to detect leaks, and
an unfortunate [*747] tendency to crash frequently.
Wolf testified the system "was being rebooted every
three to five days." During a reboot, dispatchers did not
have control of the system. Data from the minicomputer
system was displayed in a tabular format instead of real-time
graphic readouts, and the system did not have the
ability to display real-time graphs of pressures, discharge
pressures, and cavern pressure. Wolf also conceded the
computer system in place at the time of the explosion did
not have the capability to discern whether the cavern was
being overfilled. Wolf admitted the system was limited
in the length of the alarm message it could display, and
at the time of the explosion, it was not possible to record
data as it came in and replay past events. In February,
1992, less than a month before the accident, Wolf wrote
a memo outlining new features he would like to see on
the [**43] new system, including a simulator training
station.
Timothy Richard Moran, an employee of PB-KBB,
Inc., an engineering construction company, was hired by
Mid-America, Seminole, and MAPCO, to investigate the
accident. Moran concluded that having only one safety
device on the brine string was not "a reasonable design"
and further determined that having only one device on
the brine string would not be what he considered "an
adequate design." He also stated that the explosion
would not have occurred if the Brenham facility had installed
and maintained a flare. Such a flare would have
ignited the escaping gas long before it could accumulate
into an explosive cloud. In a safety publication authored
by Moran, he recommended (1) an excess flow detector
on the product line; (2) redundant safety systems em-

ploying two devices (ESD valves) on the brine line; and
(3) two devices on the product line set to detect different
parameters, including pressure flow and/or conductance
and pressure. When an abnormal situation occurred, one
of the detectors would detect the anomaly and shut down
the system. PB-KBB also recommended a separator/flare
system.
C. Gross negligence
The testimony of [**44] appellants' own employees
establishes their subjective and objective awareness
that their meters were imprecise and that their inventory
estimates could differ from actual inventory by thousands
or tens of thousands of barrels. Evidence established
that appellants were also aware that (1) their inventory
estimates were often in error; (2) they had
grossly underestimated the cavern's inventory in 1982;
(3) a major calculation error had taken place six months
earlier; (4) they had a "cloud" on the inventory; (5) the
cavern's inventory was reaching capacity; (6) the only
way to get an accurate measurement of the cavern's inventory
was to zero out the cavern; and (7) it had been
nine months since the cavern had been emptied.
As early as 1990, appellants knew they were pushing
the limits of their old computer monitoring system.
They were aware (1) it had no packages in place that
would detect leaks; (2) the system went down every three
to five days; (3) when the system was rebooted dispatchers
did not have control of the system; (4) data was displayed
in a tabular format instead of real-time graphic
readouts of pressures, discharge pressures, and cavern
pressure; and (5) even if an emergency [**45] situation
in Brenham were discovered, the dispatch facility had no
capability to close the "trip check" remotely.
We find the evidence is legally sufficient and conclude
the jury was justified in finding Seminole and
Mid-America had an actual subjective awareness of the
risk of an overfill. They were also aware that an overfill
would present a danger of a massive explosion. Nevertheless,
they consciously proceeded to add natural gas
liquids to the cavern without manning the facility, installing
a flare system, setting up duplicate or redundant
trip check safety mechanisms, or otherwise attempting to
lessen the danger. In short, Seminole and Mid-America
proceeded with conscious indifference to the rights,
safety, and welfare of others.
We also reject appellants' contention that the evidence
was factually insufficient to support the jury's
finding of gross negligence. We are aware that appellants
did not deliberately overfill the cavern and once the leak
was discovered, their employees risked their [*748]
lives and suffered personal injury attempting to stem the
flow of gas. Further, appellants attempted to maintain a
safety margin of 36,000 barrels by never filling the cavern
with more than [**46] 300,000 barrels of natural
gas liquids. Finally, appellants were aware the Barksdale
switch had successfully shut in the cavern on one occasion
when it was inadvertently overfilled.
However, Seminole and Mid-America were also
aware the Barksdale switch had failed on at least two
occasions. The Brenham facility was designed by the
president of Seminole and appellants knew (1) the
Barksdale switch was the only safety device at the facility
that had the capability of shutting in the cavern in the
event of an overfill; (2) they had only the vaguest notion
of the size of their product inventory because nine
months had elapsed since the cavern had been emptied;
(3) if the cavern overfilled during the night, no employees
would be at the facility to visibly observe the escaping
gas; (4) the computer system designed to alert company
dispatchers in Tulsa was approaching obsolescence
and was incapable of providing much of the information
needed to discern whether the cavern had overfilled; (5)
even if alerted to the danger, Mid-American dispatchers
in Tulsa had no means of remotely shutting in the cavern;
(6) by the time a local employee could be alerted
and directed to manually shut in the [**47] cavern, he
would likely need emergency breathing apparatus stored
90 miles from the facility. The jury's finding of gross
negligence is amply supported by the evidence, and we
cannot say its finding is so contrary to the overwhelming
weight of the evidence as to be clearly wrong and unjust.
D. Malice
"Gross negligence" and "malice" are not synonymous.
Historically, "gross negligence" has always been
perceived as a lower and less deliberate level of culpability
than "malice," and facts establishing the former will
not necessarily support the later.
The concepts of gross negligence and malice first
appear in criminal law sometime after the thirteenth century
as a means of distinguishing levels of homicide
based upon a defendant's mens rea. See 2 SIR FRED-
ERICK POLLOCK AND FREDERIC WILLIAM
MAITLAND, THE HISTORY OF ENGLISH LAW
464-86 (2d ed. Cambridge 1899). The distinction between
a willful murder and a homicide by misadventure
was expressed in terms of malitia praemeditata and
malitia excogitata. An intentional homicide, i.e., one
committed with "malice aforethought" was punishable by
death, while an accidental homicide due to negligence
carried no criminal [**48] liability. Later, an intermediate
level of culpability, i.e., "gross" or "criminal" negligence,
was recognized in cases of involuntary manslaughter.
See United States v. Browner, 889 F.2d 549,
553 (5th Cir. 1989) (stating that under common law the
"requisite mental state [for manslaughter] is reduced to

'gross' or 'criminal' negligence, a culpability that is far
more serious than ordinary tort negligence but still falls
short of that most extreme recklessness and wantonness
required for 'depraved heart' malice").
"Malice" constituted the highest level of criminal
culpability and was defined as the "willful and intentional
doing of some wrongful act." See Crutchfield v. State,
110 Tex. Crim. 420, 10 S.W.2d 119, 121 (1928). This is
not to say, however, that the defendant had to intend a
specific result of his actions or even hate his victim. In
Banks v. State, where the defendant fired indiscriminately
at a moving train and killed a man he did not know,
the Court of Criminal Appeals wrote:
Malice may be toward a group of persons as well as
toward an individual. It may exist without former grudges
or antecedent menaces. The intentional doing of any
wrongful act in [**49] such manner and under such
circumstances as that the death of a human being may
result therefrom is malice.
85 Tex. Crim. 165, 211 S.W. 217 (1919).
"Gross negligence," while less culpable than "malice,"
was also based upon conscious decisions and deliberate
conduct. "The difference between malice, which
will support conviction for murder, and gross negligence,
which will permit of conviction only for manslaughter, is
one of degree rather than kind." United States v. Fleming,
739 F.2d 945, 948 (4th Cir. 1984). Malice "contemplates
a subjective [*749] awareness of a higher degree
of risk than does gross negligence, and involves an
element of wantonness which is absent in gross negligence."
People v. Watson, 30 Cal. 3d 290, 637 P.2d 279,
179 Cal. Rptr. 43 (Cal. 1981).
The concepts of "gross negligence" and "malice"
migrated into civil law as civil liability began to attach to
criminal homicides. While early Teutonic law supplied a
measure of compensation to the families of murder victims,
the common law provided no recompense. 14 Under
the common law, a cause of action for personal injuries
resulting in death terminated upon either the death of the
victim, or the wrongdoer. [**50] See Burk Royalty,
616 S.W.2d at 916. This rule came under attack around
the middle of the nineteenth century, and in 1869 the
Texas Constitution added a provision for the recovery of
exemplary damages in cases of homicide resulting from
a "willful act or omission." Id. In 1876, the Constitution
expanded this right to include homicides due to gross
negligence. 15
14 Teutonic law prescribed a price on human
life. See 2 POLLOCK AND MAITLAND at
449-51. In the case of an egregious homicide, the
offender forfeited his life at the hands of the victim's
kinsmen. This had the unintended effect of
spawning blood-feuds, and thus with less egregious
homicides, the offender was not executed,
but was required to pay a monetary sum for the
life he had taken. One payment, the bot, was paid
to the victim's family. Another payment, the wite,
was made to the king. Id.
In England, however, it was established during
the Norman age that while willful homicide
was a capital crime, the family of the victim had
no right to compensation of any kind. Id. at 459.
15 TEX. CONST. art. XVI, § 26:
Every person, corporation, or company, that
may commit a homicide, through wilful act, or
omission, or gross neglect, shall be responsible,
in exemplary damages, to the surviving husband,
widow, heirs of his or her body, or such of them
as there may be, without regard to any criminal
proceeding that may or may not be had in relation
to the homicide.
[**51] In 1974, "malice" disappeared from Texas
criminal law with the adoption of a new penal code. 16 It
survives, however, in civil law where it remains distinctly
different from gross negligence. See Randolph v. Edmonds,
185 Tenn. 37, 43-45, 202 S.W.2d 664, 667
(1947). The primary distinction between "malice" and
"gross negligence" is, in both civil and criminal law, the
certainty of causing harm. When a defendant acts with
gross negligence, his conscious indifference to the risk
subjects the plaintiff to a "likelihood" of serious injury.
See Mobil Oil Corp. v. Ellender, 968 S.W.2d 917, 921
(Tex. 1998). However, when a defendant acts with malice,
he is aware that his flagrant disregard of the plaintiff's
rights will, "in reasonable probability," result in
death, great bodily harm, or property damage. See Act of
June 3, 1987, 70th Leg., 1st C.S., ch. 2, § 2.12, 1987
Tex. Gen. Laws 1, 44 (formerly codified at TEX. CIV.
PRAC. & REM. CODE § 41.001). 17
16 Criminal "malice" has been replaced with
culpable mental states of "intentionally" and
"knowingly." See Act of May 24, 1973, 63rd
Leg., R.S., ch. 399, 1973 Tex. Gen. Laws 883,
892 (codified at TEX. PENAL CODE §§
6.02-.03). These two terms, however, continue to
closely track the civil definition of malice. Compare
the two definitions of malice found in §
41.001 with the definitions of intentional and
knowingly found in the Penal Code:
(6) "Malice" means:
(A) conduct that is specifically intended by
the defendant to cause substantial injury to the
claimant; or

(B) an act that is carried out by the defendant
with a flagrant disregard for the rights of others
and with actual awareness on the part of the defendant
that the act will, in reasonable probability,
result in human death, great bodily harm, or
property damage.
See Act of June 3, 1987, 70th Leg., 1st C.S.,
ch. 2, § 2.12, 1987 Tex. Gen. Laws 1, 44 (formerly
codified at TEX. CIV. PRAC. & REM.
CODE § 41.001).
(a) A person acts intentionally, or with intent,
with respect to the nature of his conduct or
to a result of his conduct when it is his conscious
objective or desire to engage in the conduct or
cause the result.
(b) A person acts knowingly, or with
knowledge, with respect to the nature of his conduct
or to circumstances surrounding his conduct
when he is aware of the nature of his conduct or
that the circumstances exist. A person acts
knowingly, or with knowledge, with respect to a
result of his conduct when he is aware that his
conduct is reasonably certain to cause the result.
See TEX. PENAL CODE § 6.03 (Vernon
1994).
[**52]
17 We believe "reasonable probability" represents
a higher standard than "likelihood" and is
akin to the "high probability" standard of criminal
malice. See Watson, 30 Cal. 3d at 300. If "reasonable
probability" had the same meaning as
"likelihood," there would be no meaningful distinction
between "malice" and "gross negligence."
Presuming the Legislature did not intend
to enact a useless redundancy, we are bolstered in
our belief that the terms have distinctly different
meanings. See Liberty Mut. Ins. Co. v. Garrison
Contractors, Inc., 966 S.W.2d 482, 485 (Tex.
1998) (holding "we do not lightly presume that
the Legislature may have done a useless act.").
[*750] Here, appellees presented considerable
evidence that appellants were cognizant of the hazardous
danger which would occur if the cavern was overfilled.
As we have previously stated, the evidence further shows
appellants knew their inventory estimates were suspect.
Appellants, nevertheless, consciously disregarded the
risk, thereby creating the "likelihood" of a catastrophic
explosion and serious injury. However, we find no evidence
in [**53] the record before us that appellants
believed the cavern would probably overflow. In fact, the
undisputed evidence shows appellants believed the cavern
inventory was at least 9,000 barrels below what it
had been less than a month before the accident. While
inventory inaccuracies certainly raised a likelihood the
cavern might overflow, there is no evidence to show appellants
believed it would probably overflow.
Accordingly, we hold the evidence is legally and
factually sufficient to support the jury's findings of gross
negligence, but legally and factually insufficient to sustain
the finding of malice. We therefore sustain appellants'
fourth point of error and overrule their first, second,
third, fifth, and sixth points of error.
V. PUNITIVE DAMAGES CAP
In points of error seven through ten, appellants contend
the trial judge misinterpreted the punitive damages
cap found in Section 41.007 of the Civil Practice and
Remedies Code.
The aggregate compensatory damages found by the
jury for all of the plaintiffs, including past and future
mental anguish, was $ 5,395,400. The jury awarded punitive
damages in the amount of $ 46,000,000 against
each defendant. The jury then [**54] apportioned the
punitive damages award among the various plaintiffs by
assigning each a specific percentage of the award. The
portion assigned to each of the O'Donnells, for example,
was 14.99%. The portion assigned to W. H. Tonn and
Jeanne Tonn was 5.79% and 4.74% respectively. Thus,
the jury's verdict for the appellees was:
Jury's verdict
Plaintiff Actual Damages Punitive Damages / each
defendant W. W. O'Donnell $ 842,000 $ 6,895,400 Regina
O'Donnell $ 842,000 $ 6,895,400W. H. Tonn, III $
353,250 $ 2,663,400 Jeanne Tonn 18 $ 294,250 $
2,180,400
18 As executrix of the Estate of W. H. Tonn,
II.
The statutory cap on punitive damages in effect at
the time this cause of action accrued provides that "exemplary
damages awarded against a defendant may not
exceed four times the amount of actual damages or $
200,000, whichever is greater." 19 Attempting to implement
the cap, the trial judge reduced the punitive damages
to $ 21,581,600 per defendant (or four times the
total actual damages of $ 5,395,400). [**55] The court
then apportioned this sum according to the percentages
devised by the jury as follows:
19 See Act of June 3, 1987, 70th Leg., 1st C.S.,
ch. 2, § 2.12, 1987 Tex. Gen. Laws 1, 46 (formerly
codified at TEX. CIV. PRAC. & REM.
CODE § 41.007).
Court's judgment

Plaintiff Actual Damages Punitive Damages / each
defendant W. W. O'Donnell $ 842,000 $ 3,235,081.84
Regina O'Donnell $ 842,000 $ 3,235,081.84W. H. Tonn,
III $ 353,250 $ 1,249,574.64 Jeanne Tonn 20 $ 294,250 $
1,022,967.84
20 As executrix of the Estate of W. H. Tonn,
II.
Appellants complain that when the trial court used
the total actual damages figure assessed against all of the
defendants to calculate the amount of punitive damages
owed by each defendant, it effectively tripled the capped
award. Instead, appellants contend the trial court should
have [**56] used the following equation to calculate
the statutory cap:
(actual damages) x 4 = total punitive damages allowed
However, the trial court relied upon the following
formula:
[*751] (actual damages) x 4 x (number of defendants)
= total punitive damages allowed
Appellants claim the trial court has improperly
capped the punitive damages at twelve times actual
damages instead of four times actual damages.
A. Application of the cap
We must decide whether the damage cap applies to
the plaintiffs' award or the defendants' liability. If we
find the cap should be applied so as to limit each plaintiff's
award of punitive damages to four times his actual
damages, the trial court's judgment violates the statute.
However, if we find the cap is applied to limit each defendant's
liability to four times the plaintiff's actual
damages, then we must affirm trial court's judgment as
proper.
When construing a statute, we are to consider the
"object sought to be attained." See TEX. GOV'T CODE
ANN. § 311.023 (Vernon 1988). It seems apparent that
one of the purposes of the 1987 tort reform legislation
was to make the Texas civil justice system more predictable.
[**57] See John T. Montford and Will G.
Barber, 1987 Texas Tort Reform: The Quest for a Fairer
and More Predictable Texas Civil Justice System, 25
HOUS. L. REV. 59, 69 (1988). Presumably, the cap
found in Section 41.007 was to provide a measure of
predictability by narrowing the range of punitive damages
that might be awarded to a plaintiff. However, Senator
John T. Montford, the principal author of the statute, has
said Section 41.007 was intended to apply on a "per defendant"
basis:
Under section 41.007, a claimant cannot recover
exemplary damages from any one defendant in excess of
four times the amount of the claimant's actual damages,
but can recover up to that amount from each defendant
against whom the trier of fact awards exemplary damages.
Montford, 25 HOUS. L. REV. at 335 (emphasis
added). 21
21 To provide further illumination, Senator
Montford includes the following hypothetical:
The plaintiff's actual damages are $ 100,000.
Plaintiff is 20% responsible for the loss; defendant
A is 30% responsible; and defendant B is
50% responsible. The jury imposes punitive
damages against defendant A in the amount of $
250,000 and against defendant B in the amount of
$ 1,000,000. According to Senator Montford, the
plaintiff is entitled to collect punitive damages of
$ 650,000, namely, $ 250,000 from defendant A
and $ 400,000 (4 x $ 100,000) from defendant B.
Id., at 335-37.
[**58] Ironically, if we find the statute applies on
a "per defendant" basis, it will have little value as a
"cap." In cases involving multiple tort-feasors, it is not
difficult to imagine hypothetical scenarios where the cap
would be completely ineffective. Absurdly excessive and
even unconstitutional awards of punitive damages are
possible under the statute if it is interpreted as "capping"
the punitive damages on a "per defendant" basis. 22
22 In an amicus curiae brief, the Texas Civil
Justice League offered the following hypothetical
scenario:
The exemplary damages of a defendant that
the jury finds is liable for only one percent of the
actual damages would be capped at four times
100% of the actual damages of all the defendants.
Thus, for example, if a jury found actual damages
of $ 1 million and fixed one defendant's percentage
of responsibility at one percent, that defendant
would be liable for only $ 10,000 in actual
damages (one percent of $ 1 million). But that
defendant would be exposed to $ 4 million in
exemplary damages (four times $ 1 million) - an
amount four hundred times its actual damages liability.
[**59] We are cognizant that the opinion of an individual
legislator, even a statute's principal author, is
not legislative history controlling the construction to be
given a statute. See General Chem. Corp. v. De La
Lastra, 852 S.W.2d 916, 923 (Tex. 1993). Nevertheless,
we find Senator Montford's interpretation persuasive

primarily because it is consistent with the plain wording
of the statute. The cap provides that "exemplary damages
awarded against a defendant may not exceed four times
the amount of actual damages." 23 Like the civil liability
cap found in the Medical Liability and Insurance Improvement
Act, "the damages cap amounts should be
calculated on a 'per defendant' basis because the [the
statute] clearly applies to the recovery against the individual
[*752] defendant, not the award to the individual
plaintiff." Rose v. Doctors Hosp., 801 S.W.2d 841,
847 (Tex. 1990).
23 See Act of June 3, 1987, 70th Leg., 1st C.S.,
ch. 2, § 2.12, 1987 Tex. Gen. Laws 1, 46 (formerly
codified at TEX. CIV. PRAC. & REM.
CODE § 41.007) (emphasis added).
[**60]
In construing a statute, we must look to the intent of
the legislature and must construe the statute so as to give
effect to that intent. See One 1980 Pontiac v. State, 707
S.W.2d 881, 882 (Tex. 1986). By giving effect to the legislative
intent, i.e., that the cap should apply on a "per
defendant" basis, we realize our decision renders the
statute wholly ineffective in achieving the legislative
objective of establishing greater predictability. Still, the
task of drafting effective legislation rests with the legislature,
not this court.
B. Calculation of the cap
Appellants also contend the trial court improperly
calculated the cap when it considered actual damages of
"claimants" who were not included in the jury charge.
The jury, for example, found the actual damages of W.
W. and Regina O'Donnell to be $ 1,024,000, jointly. The
jury further found W. W. O'Donnell was separately entitled
to $ 330,000 for his past and future mental anguish,
and that Regina O'Donnell was entitled to a similar
amount for her separate past and future mental anguish.
Appellants contend there are three separate "claimants"
here: (1) W. W. and Regina O'Donnell, jointly; (2) W.
W. O'Donnell, [**61] individually; and (3) Regina
O'Donnell, individually. When the jury was asked to
apportion the exemplary damages by assigning a percentage
to each plaintiff, the names of W. W. O'Donnell
and Regina O'Donnell were separately submitted. Appellants
contend that, because the O'Donnells were not
also submitted jointly, the trial court should only have
considered their individual awards for mental anguish
when calculating the cap, and that it erred in including
the joint award of $ 1,024,000 in actual damages.
The statute provides that before punitive damages
may be awarded to a "claimant," such person must prove
his injury, damage, death, or harm was due to the fraud,
malice, or gross negligence of the defendant. 24 According
to the Texas Civil Practice and Remedies Code, each
plaintiff is a "claimant." 25 Both of the O'Donnells are
plaintiffs and, therefore, individual claimants. After
finding their damages were caused by appellants' gross
negligence, the jury awarded the O'Donnells' property
damages jointly because they owned the property jointly.
We find the trial court did not err in including their
property damages as part of the actual damages when it
calculated the punitive [**62] damage cap. Like the
O'Donnells, the Tonns were also joint owners of property
damaged by the explosion, and we find, therefore, the
trial court did not err in calculating the punitive damage
cap on their actual property damages.
24 See Act of June 3, 1987, 70th Leg., 1st C.S.,
ch. 2, § 2.12, 1987 Tex. Gen. Laws 1, 45 (formerly
codified at TEX. CIV. PRAC. & REM.
CODE § 41.003).
25 See Act of June 3, 1987, 70th Leg., 1st C.S.,
ch. 2, § 2.12, 1987 Tex. Gen. Laws 1, 44 (formerly
codified at TEX. CIV. PRAC. & REM.
CODE § 41.001):
"Claimant" means a party, including a plaintiff,
counterclaimant, cross-claimant, or
third-party plaintiff, seeking recovery of exemplary
damages. In a cause of action in which a
party seeks recovery of exemplary damages related
to injury to another person, damage to the
property of another person, death of another person,
or other harm to another person, "claimant"
includes both that other person and the party
seeking recovery of exemplary damages.
Claiming the trial [**63] court erred in not suggesting
a remittitur, appellants next contend that even
after the punitive damages award was reduced by the
statutory cap it was excessive. No set rule exists by
which we determine whether the amount of exemplary
damages was excessive. See Kraus, 616 S.W.2d at 910.
Factors that are often considered are (1) the nature of the
wrong, (2) the character of the defendant's conduct, (3)
the degree of the defendant's culpability, (4) the situation
and sensibility of the parties, and (5) the extent to which
the conduct offends the public sense of justice and propriety.
See Underwriters Life Ins. Co. v. Cobb, 746
S.W.2d 810, 818 (Tex. App.-Corpus Christi 1988, no
writ). We may also consider (1) the frequency of the
wrongful conduct; (2) the size of an award needed to
deter similar wrongs in the future; and (3) the financial
ability of the defendant. See Haryanto v. Saeed, 860
S.W.2d 913, 923 (Tex. [*753] App.--Houston [14th
Dist.] 1993, writ denied). The ratio between the amount
of actual damages and exemplary damages will vary according
to the facts of the particular case. See Kraus, 616

S.W.2d at 910. In reviewing the award, the court will
determine whether, [**64] under the circumstances of
the case, the award is reasonably proportional to the actual
damages. See id. One of the major purposes of
awarding punitive damages in Texas is to punish and
deter the wrongful conduct of the party. See Moriel, 879
S.W.2d at 29. In reviewing a punitive damage award, we
can only vacate or suggest a remittitur if we find the punitive
award is so factually insufficient or so against the
great weight and preponderance of the evidence as to be
manifestly unjust. 879 S.W.2d at 30.
Here, the wrong committed by Mid-America and
Seminole is that while they were aware of the extremely
hazardous nature of their product, they continued filling
the cavern during the evening hours while the facility
was unmanned, knowing they had no reliable estimates
of their present inventory, the cavern was near capacity,
and that if overfilled, the cavern could empty its entire
contents into the atmosphere. The character of appellants'
conduct placed the owners of neighboring lands and residences
in profound danger of a catastrophic explosion.
The culpability of Mid-America and Seminole is further
increased by their knowledge of the facility's limitations,
the history of inventory [**65] miscalculations and
overfills, the intermittent reliability of the sole automatic
shut-down device on the brine string, and the inability of
dispatchers in Tulsa to remotely shut down the cavern.
Neighboring land owners were unaware of the risks being
taken by appellants and were unable to take any protective
measures. Their homes, their possessions, their
lands, their livestock, and their physical safety were
jeopardized by appellants' conduct. Few commercial
activities carry the inherent capability of achieving the
magnitude of destruction presented here. We find appellants'
cavalier posture toward the storage of more than
300,000 barrels of natural gas liquids and the threat imposed
to neighboring land owners is highly offensive to
any sense of justice and propriety.
The devastation wrought by the explosion was
fueled by a cloud of no more than 5,000 barrels of vaporized
gas, a very small percentage of the cavern's inventory.
Had the escaping gas not been detonated by a
passing automobile, the cloud and the accompanying
damage could have reached enormous proportions. After
reviewing the evidence, we do not find the award of punitive
damages to be excessive under the facts presented
[**66] here.
Accordingly, we overrule appellants' seventh,
eighth, and tenth points of error.
VI. MENTAL ANGUISH
Appellants contend in points of error twelve, thirteen,
twenty-six, and twenty-seven that, because appel-
lees were not physically injured in the blast, the evidence
is legally and factually insufficient to support the jury's
award of damages for mental anguish. Appellants assert
that a claim for mental anguish, based solely on the loss
of property, cannot be sustained. Alternatively, in points
of error twenty-eight, twenty-nine, forty-two, and forty-three
appellants argue that the jury's mental anguish
award is excessive. Finally, in points of error forty-four
and forty-five appellants assert that the trial court impermissibly
lowered appellees' burden by submitting a
defective definition of mental anguish.
Emotional distress is a subjective injury that is hard
to predict, often speculative, easily fabricated, difficult to
verify, and almost impossible to refute. Thus, the early
general common law rule was that mental anguish damages
were not recoverable. See Parkway Co. v. Woodruff,
901 S.W.2d 434, 442 (Tex. 1995). Still, justice requires
the victim be fully compensated [**67] for his injury or
loss, and on some occasions the injury is largely, if not
primarily, emotional. The Supreme Court has struggled,
therefore, to fashion principles permitting recovery for
severe emotional distress while maintaining constraints
and safeguards against those who are merely disappointed,
embarrassed, or angry.
The first restrictive principle regarding mental anguish
is that liability does not extend to mere insults,
indignities, t [*754] hreats, annoyances, petty oppressions,
or other trivialities because it is too easy for a person
to claim his feelings have been hurt. RESTATE-
MENT (SECOND) OF TORTS § 46 cmt.(d) at 73 (1965).
Moreover, in Texas, there is no independent cause of
action for the negligent infliction of emotional distress.
See Boyles v. Kerr, 855 S.W.2d 593, 597 (Tex. 1993). As
a safeguard against fabricated claims, damages for mental
anguish are recoverable only when based upon a verifiable
breach of some other cognizable legal duty. Id.
Finally, if the plaintiff's injury is purely economic, his
claim of mental anguish is suspect. 26 The Texas Supreme
Court recently held that when a plaintiff's emotional distress
is based solely on negligent damage [**68] to his
property, he cannot recover for mental anguish. See City
of Tyler v. Likes, 962 S.W.2d 489, 497 (Tex. 1997).
26 See and compare Stewart Title Guar. Co. v.
Aiello, 941 S.W.2d 68, 72 (Tex. 1997) (breach of
contract will not support claim of mental anguish);
Federal Land Bank v. Sloane, 825 S.W.2d
439, 442-43 (Tex. 1991) (mental anguish damages
are not recoverable for negligent misrepresentation);
Duncan v. Luke Johnson Ford, Inc., 603
S.W.2d 777, 779 (Tex. 1980) (careless violation
of the Deceptive Trade Practices Act will not
provide a basis for mental anguish); Bekins Moving
& Storage Co. v. Williams, 947 S.W.2d 568,

584 (Tex. App.-Texarkana 1997, no writ) (DTPA
and insurance cases that do not involve personal
injury cannot support claims of mental anguish
without "knowing" conduct).
Here, however, appellees' loss was not due to simple
negligence, but to acts of gross negligence. Thus, the
issue presented here was not addressed in Likes. 27 We
must now decide the issue left unanswered [**69] in
Likes - whether a claim of mental anguish can rest solely
upon property damage caused by a defendant's willful,
malicious, or grossly negligent acts.
27 In fact, the court specifically reserved the
question for future disposition when Chief Justice
Phillips wrote: "Because the injury to Likes's
property was not intentional or malicious, or even
grossly negligent, we need not decide whether
mental anguish arising out of property damage
may be legally compensable when a heightened
degree of misconduct is found." Likes, 962
S.W.2d at 497.
Where the defendant's negligent or willful acts have
proximately caused injury, harm, or loss, the object of
the law is to make the plaintiff whole, that is to restore to
him fully all that was wrongfully taken, damaged, or
destroyed. 28 A plaintiff whose property has been destroyed
by the tortuous acts of another is generally entitled
to recover the market value of the property at the
time of its loss. The market value of the damaged property,
however, may not fully [**70] reflect the value of
the item to its owner. "[A] personal record or manuscript,
an artificial eye or a dog trained to obey only one master,
will have substantially no value to others than the owner."
RESTATEMENT (SECOND) OF TORTS § 911
cmt.(e) at 474 (1979). Nevertheless, if the property can
be replaced, the plaintiff's compensatory damages are
limited to the cost of replacement. Id. If the item cannot
be replaced, the plaintiff is entitled to recover its special
value to the owner as evidenced by its original cost,
quality, and condition at the time of its loss. Id.; see also
Allstate Ins. Co. v. Chance, 590 S.W.2d 703, 704 (Tex.
1979) (restating the rule that where goods have no recognized
market value, the jury may consider the original
cost, cost of replacement, opinions of qualified witnesses,
and the use to which the property was put).
28 "It is the duty of the courts to afford a remedy
and redress for every substantial wrong."
Robb v. Pennsylvania R.R. Co., 58 Del. 454, 210
A.2d 709, 714 (Del. 1965). "Every act of man
whatever that causes damage to another obliges
him by whose fault it happened to repair it."
Powell v. Brookshire's Grocery Co., Inc., 705 So.
2d 286, 292 (La. Ct. App. [2nd Cir.] 1997).
[**71] As a general rule, compensatory damages
do not include sentimental value. See RESTATEMENT
(SECOND) OF TORTS § 911 cmt.e at 475 (1979). However,
when an object's primary value is in sentiment, that
is, when the object's special value is greater than the
market value, then the sentimental value becomes the
sole criterion for the assessment of damages. See Brown
v. Frontier Theatres, Inc., 369 S.W.2d 299, 305 (Tex.
1963).
Thus, while "value" is the primary component in assessing
property damages, it may not reflect the full
measure of the plaintiff's damages. A plaintiff may be
very fond of a [*755] favorite chair, but unless the
chair is an heirloom with a sentimental value exceeding
its market value, the emotional pain occasioned by its
loss cannot be added to the chair's market value. Full
restitution would theoretically include compensation for
both (1) the market value of the chair and (2) the emotional
affliction stemming from its loss. The majority
rule, however, is that damages for emotional distress are
not included within actual damages merely for the loss of
things. See RESTATEMENT (SECOND) OF TORTS §
911 cmt.e at 475 (1979). There are several reasons for
the rule.
[**72] Frequently, no nexus of proximate cause
exists between the negligent acts of the defendant and the
plaintiff's emotional distress. To prevail on a claim of
emotional distress, the plaintiff must establish the defendant
negligently committed some other tort and that
such negligent injury proximately caused severe emotional
distress. See Campos v. Ysleta Gen. Hosp., Inc.,
836 S.W.2d 791, 795 (Tex. App.-El Paso 1992, writ denied).
While pain and suffering are natural consequences
of a personal injury, the loss of property is normally associated
only with annoyance and inconvenience. Thus,
severe emotional distress is not usually a foreseeable
consequence of property damage. See Likes, 962 S.W.2d
at 495.
Even when damages are awarded for personal injuries,
the determination of a monetary award for mental
suffering is highly speculative. When mental anguish is
based solely upon property damage, few fact finders are
able to relate to the extreme emotional attachment to
material possessions needed to spawn true emotional
distress. The Supreme Court of Wisconsin has concluded
that to permit recovery for emotional distress arising
from property damage
. . . would remove any [**73] logical stopping
point to a tort-feasor's liability. Each and every plaintiff
in any property damage claim could assert an emotional
distress claim based not on the effect of the incident itself,
but on how their lives had changed since the underlying
incident. Such an allowance could open the way to

ecovery for stress incurred by any amount of damage to
any type of property.
Kleinke v. Farmers Coop. Supply & Shipping, 202
Wis. 2d 138, 549 N.W.2d 714, 717 (Wis. 1996).
Also, a claim of mental suffering is easily fabricated
and difficult to refute. Mental anguish stemming from
the loss of property is, to some extent, contingent upon
the plaintiff's sentimental attachment to the property.
To determine when such an attachment to property
is real and when it is false, and to determine exactly how
significant the attachment is, would be difficult, if not
impossible. Every plaintiff in a negligent property damage
case would be encouraged to claim an extreme emotional
attachment to the damaged property.
Kleinke, 202 Wis. 2d at 146, 549 N.W.2d at 717.
Traditionally, damages for emotional distress have been
permitted only where there is some means for assuring
the validity [**74] of the claim. See State Farm Life
Ins. Co. v. Beaston, 907 S.W.2d 430, 435(Tex. 1995).
Finally, the resolution of such claims can be overly
burdensome to the judicial system. Claims based on mere
worry, anxiety, vexation, embarrassment, or anger are
not actionable. See Parkway, 901 S.W.2d at 444. While
persons may become distraught over the loss of property,
such distress is a life experience that all may unfortunately
expect to endure. See Bowen v. Lumbermens Mut.
Cas. Co., 183 Wis. 2d 627, 517 N.W.2d 432 (Wis. 1994).
Thus, even when the plaintiff suffers serious emotional
distress, his ability to recover is sometimes restricted to
preserve judicial resources. See Blagrove v. JB Mechanical,
Inc., 934 P.2d 1273, 1276 (Wyo. 1997).
While all of these considerations are applicable to
claims of mental anguish arising solely from negligent
injury to property, they may have little or no application
to similar claims based upon intentional torts. Harm intentionally
inflicted is made more painful precisely because
it is intentionally inflicted. "Even a dog distinguishes
between being stumbled over and being kicked."
29 While the tort-feasor may intend only to [**75] inflict
[*756] physical or economic injury, he nevertheless
intends harm to the plaintiff, and the mental anguish associated
with such a deliberate act is foreseeable. Proximate
cause is, therefore, more easily established, and in
the case of many intentional torts, such as assault, battery,
false imprisonment, and defamation, mental suffering
frequently constitutes the principal element of damages.
Gonzales v. Personal Storage, Inc., 56 Cal. App.
4th 464, 65 Cal. Rptr. 2d 473, 477 (Cal. Ct. App. 1997).
29 OLIVER WENDELL HOLMES, JR., THE
COMMON LAW 3 (Boston, Little 1881).
Further, when a tort-feasor engages in extreme and
outrageous intentional invasions of the plaintiff's mental
and emotional tranquility, the outrageous conduct affords
the necessary assurance of the validity of the claim. Id.;
Powell v. Brookshire's Grocery Co., Inc., 705 So. 2d at
292. Thus, the modern rule provides for recovery of
emotional distress damages in cases of intentional torts.
See Birchler v. Castello Land Co., Inc., 133 [**76]
Wash. 2d 106, 942 P.2d 968, 973 (Wash. 1997).
Having concluded that intentional injury to property
will support a claim of mental anguish where simple
negligence will not, we must next decide whether gross
negligence will support a claim for emotional distress.
Whether the "value" of plaintiff's property is lost due to
negligence, gross negligence, or an intentional act, the
extent of the "property" tort or material loss is the same.
The distinguishing factor which permits damages for
mental anguish in the case of an intentional tort, but denies
it for simple negligence, is the presence of a malevolent
intent personally directed at the plaintiff. Only
when there is an intentional interference with property
interests can it be inferred that the defendant intended to
harm the plaintiff. Birchler, 942 P.2d at 973. When a
tort-feasor damages a plaintiff's property through gross
negligence, such a desire may or may not be present.
To illustrate the concept, suppose a very expensive
vase which is a family heirloom of great sentimental
value is kept by its owner on a table. 30 A friend, who is
aware of the owner's feelings, inadvertently bumps
against the table and knocks the vase [**77] to the
floor. The owner sinks into depression and suffers severe
emotional distress. Because the property damage was
due to simple negligence, the owner cannot recover for
her mental anguish.
30 Our illustration is adapted from the hypothetical
scenario used by the Superior Court of
Delaware. See Pritchett v. Delmarva Builders,
Inc., 1998 Del. Super. LEXIS 102, *11, No. 97
C-03-011, 1998 WL 283376, at *4 (Del. Super.
Ct. Feb. 27, 1998).
Suppose, however, the friend picks up the vase, and
intending to alarm its owner, begins pitching it into the
air. The friend does not intend to damage the vase, but he
accidentally fails to catch it and the heirloom is broken.
It is not simply the friend's gross negligence and conscious
disregard that would subject him to liability for
mental anguish, but his intent to emotionally torment the
owner. Although the friend did not intend to cause severe
emotional distress, his motive was to cause worry, anxiety,
and vexation. Thus, the tort was not perpetrated
merely against the owner's property, but against [**78]
the owner personally.

Suppose the friend, having no intention to alarm the
owner, decides to move the table without first securing
the vase. Although aware of the danger, the friend consciously
disregards it and deems it more expedient to
transport the table and the vase in one trip rather than to
safely move them individually. While moving the table
and vase, the friend stumbles, tipping the vase and causing
it to roll off the table and smash onto the floor. The
loss is due to gross negligence unaccompanied by personal
animus against the owner.
The Supreme Court of Alabama considered a case
where the plaintiff's automobile was losing engine coolant.
When the plaintiff took his car to a repair shop, he
was informed the problem was probably due to a defective
head gasket. Later, the repair shop mechanics told
the plaintiff the engine head was cracked and would have
to be replaced. The mechanic showed the plaintiff four
marks on the head and said they were visible cracks.
After the head had been replaced, the plaintiff took the
old head to an auto parts shop to determine why it had
cracked. He was informed that the head was not cracked
and that the marks were factory [*757] markings
placed [**79] on the head at the time of its manufacture.
When the plaintiff called the auto repair shop to
complain, he was vigorously assailed with insulting and
abusive language. See Reinhardt Motors, Inc. v. Boston,
516 So. 2d 509 (Ala. 1986).
In Reinhardt, the court sustained the award for mental
anguish, not because the economic injury was inflicted
intentionally, but because it was inflicted upon the
plaintiff personally. See Reinhardt, 516 So. 2d at 511.
"Where the injury is committed under circumstances of
insult or contumely, mental suffering may be recoverable."
Id.
The Texas Supreme Court has not yet embraced the
Reinhardt rationale, but it has specifically commended
the bench and bar to compare the Alabama court's analysis
with dicta found in Luna v. North Star Dodge Sales,
Inc., 667 S.W.2d 115 (Tex. 1984) (stating that mental
anguish is recoverable for "willful tort, willful and wanton
disregard, or gross negligence"). See Likes, 962
S.W.2d at 497. We find Reinhardt to be persuasive. Accordingly,
we hold that where a claim of mental anguish
is based solely upon property damage resulting from
gross negligence, recovery is contingent upon evidence
of [**80] some ill-will, animus, or design to harm the
plaintiff personally. We believe this rationale is more
consistent with the general principle that emotional distress
is not usually recoverable as an element of property
damages unless an improper motive is involved.
Blagrove, 934 P.2d at 1276.
Only William Tonn was present when the explosion
occurred and, although he was slammed against a mirror
by the force of the blast, he was not physically injured.
The evidence shows appellants were grossly negligent in
their operation and maintenance of the cavern, and that
appellees experienced frustration, depression, anxiety,
sorrow, and anger over the destruction of their property.
Appellants' conduct was unconscionable, however, appellees
have presented no evidence to suggest appellants
actions were motivated by animus, hostility, malevolence,
or ill-will. Without this additional element, the
presence of gross negligence alone is not sufficient to
support an award for mental anguish arising solely from
damage to property. Accordingly, we sustain appellants'
twelfth, thirteenth, twenty-sixth, and twenty-seventh
points of error. In light of our holding, we need not address
appellants' twenty-eighth, [**81] twenty-ninth,
forty-second, forty-third, forty-fourth, or forty-fifth
points of error.
VII. PREJUDGMENT INTEREST
In their forty-sixth point of error, appellants contend
the trial court erred in calculating the prejudgment interest.
Because no notice of claim was filed, appellants argue
the trial court should have commenced its calculations
of prejudgment interest 180 days after appellees
filed suit.
When this suit was commenced, Article 5069-1.05,
Section 6(a) of the civil statutes provided:
Judgments in wrongful death, personal injury, and
property damage cases must include prejudgment interest.
Except as provided by Subsections (b), (c), and (d) of
this section, prejudgment interest accrues on the amount
of the judgment during the period beginning on the 180th
day after the date the defendant receives written notice of
a claim or on the day the suit is filed, whichever occurs
first, and ending on the day preceding the date judgment
is rendered.
See Act of June 3, 1987, 70th Leg., 1st C.S., ch. 3, §
1, 1987 Tex. Gen. Laws 1, 51 (formerly codified at TEX.
REV. CIV. STAT. art. 5069-1.05, § 6). Appellees contend
the reference to 180 days applies only to a notice of
[**82] claim, not the filing of the suit.
We agree with appellees and hold that under the
terms of the statute prejudgment interest should be calculated
beginning either 180 days after receipt of a notice
of claim or on the day suit is filed, whichever occurs
first. See John T. Montford and Will G. Barber, 1987
Texas Tort Reform: The Quest for a Fairer and More
Predictable Texas Civil Justice System, 25 HOUS. L.
REV. 59, 103-04 (1988) (explaining in hypothetical
number one that where notice of claim is given 60 days
prior to filing of suit, prejudgment interest should be
calculated from the day the suit was filed). When there is
no [*758] notice of claim, prejudgment interest is

calculated from the day the suit was filed, not 180 days
after the suit was filed. See Hughes v. Thrash, 832
S.W.2d 779, 787 (Tex. App.-Houston [1st Dist.] 1992, no
writ).
Accordingly, we overrule appellants' forty-sixth
point of error. 31
31 Appellants' remaining points of error are in
regard to plaintiffs who have reached a settlement
and have been dismissed from this appeal. Thus,
we need not address these points.
[**83] VIII. APPELLEES' CROSS-POINTS
Appellees raise seven cross-points of error. In their
first point of error, appellees/cross-appellants contend the
trial court erred in applying the statutory cap on punitive
damages. Because appellees neither adequately brief
their contention, nor indicate with argument and authorities,
the specific error which the trial court is alleged to
have committed, we find they have waived their point of
error. See TEX. R. APP. P. 38.1(h); Johnson v. Odom,
949 S.W.2d 392, 394 (Tex. App.-Houston [14th Dist]
1997, pet. denied); Rauscher Pierce Refsnes, Inc. v.
Great Southwest Sav., F.A., 923 S.W.2d 112, 117 (Tex.
App.-Houston [14th Dist.] 1996, no writ). Accordingly,
appellees' first cross-point is overruled.
A. Intentional Nuisance
In their second cross-point, appellees contend the
statutory cap is not applicable because appellants committed
an intentional tort. As previously discussed, the
jury found appellants acted with malice. The jury also
found the cavern had become a permanent nuisance in
that it would continue to substantially interfere with the
plaintiffs' use and enjoyment of their property. Appellees
claim the combination [**84] of malice and permanent
nuisance constitute an intentional tort and that the cap,
therefore, does not apply in this case.
Because the jury's finding of malice is not supported
by evidence, we need not reach the merits of appellees'
contention. Accordingly, we overrule appellees' second
cross-point.
B. Constitutionality of the punitive damages cap
Appellees contend in their third cross-point that the
cap, as applied in this case, infringes upon the open
courts, due course of law, and trial by jury provisions of
the Texas Constitution. 32 Appellees fail to explain, and
we fail to see, how the punitive damages cap violates
these constitutional provisions.
32 The constitution specifically provides, "All
courts shall be open, and every person for an in-
jury done him, in his lands, goods, person or reputation,
shall have remedy by due course of law."
See TEX. CONST. art. I, § 13. It further guarantees,
"The right of trial by jury shall remain inviolate."
See TEX. CONST. art. I, § 15.
The purpose [**85] of punitive damages is not to
restore the plaintiff's property or compensate him for his
loss. Punitive damages are levied for the public purpose
of punishment and deterrence. Moriel, 879 S.W.2d at
17. While the plaintiff may be motivated to pursue this
public purpose in the hope of securing punitive damages,
such proceeds are a windfall and not a matter of right.
Moriel, 879 S.W.2d 10 n.7 (quoting W. PAGE KEETON,
ET. AL, PROSSER AND KEETON ON THE LAW OF
TORTS § 2 at 14 (5th ed. 1984)). The constitutional provisions
cited by appellees serve to protect only private
rights and interests. Because the statutory cap on punitive
damages affects only public punishment interests, it does
not infringe upon any constitutional right held by appellees.
Accordingly, we overrule appellees' third
cross-point.
C. Waiver
In their fourth point of error, appellees claim appellants
waived any right to assert the statutory cap on punitive
damages because they did not raise the cap in their
pleadings. Appellees assert that if a defendant fails to
plead an affirmative defense, the defense is waived unless
the issue is tried by implied consent or the trial court
permits an amendment [**86] of the pleadings. See
Petroleum Anchor Equip., Inc. v. Tyra, 419 S.W.2d 829,
834-835 (Tex. 1967). We disagree.
[*759] To successfully impose an affirmative defense,
the proponent must plead and prove his defense.
Here, the statutory cap applies to every defendant other
than those who specifically intend to cause substantial
injury or who commit an intentional tort. 33 If an intentional
tort and/or malice is not pled and proven by the
plaintiff, the cap automatically applies. Thus, we do not
view the statutory cap as an affirmative defense. Because
the defendants had nothing to prove, they had nothing to
plead. Accordingly, we find appellants had no burden to
raise the statutory cap in their pleadings, and we overrule
appellees' fourth cross-point.
33 See Act of June 3, 1987, 70th Leg., 1st C.S.,
ch. 2, § 2.12, 1987 Tex. Gen. Laws 1, 46 (formerly
codified at TEX. CIV. PRAC. & REM.
CODE § 41.008).
D. Prejudgment Interest on Future Damages
In their fifth cross-point, appellees contend the trial
[**87] court erred in failing to award prejudgment in-

terest on future damages. See C & H Nationwide, Inc. v.
Thompson, 903 S.W.2d 315, 324-27 (Tex. 1994). Appellees'
future damages were awarded for mental anguish.
Because we vacated the mental anguish award, we need
not reach this issue. Appellees' fifth cross-point is overruled.
E. Prejudgment Interest and Actual Damages
In appellees' sixth cross-point, they contend the trial
court erred by not including prejudgment interest as part
of the award of "actual damages" when it calculated the
punitive damages cap.
The statute provides that "prejudgment interest may
not be assessed or recovered on an award of exemplary
damages." 34 Appellees claim, however, they are not
seeking interest on punitive damages, but simply seeking
inclusion of prejudgment interest as part of their "actual
damages." The result, however, is mathematically the
same where, as here, the jury's award greatly exceeds the
cap.
34 See Act of June 3, 1987, 70th Leg., 1st C.S.,
ch. 2, § 2.12, 1987 Tex. Gen. Laws 1, 46 (formerly
codified at TEX. CIV. PRAC. & REM.
CODE § 41.006).
[**88] If, hypothetically, a plaintiff is awarded
damages of $ 1,000 with a one year period for calculating
prejudgment interest, appellees suggest the trial court
should calculate the cap in the following manner:
1,000 (damages) x 10% = 100 (prejudgment interest)
1,000 (damages) + 100 (prejudgment interest) =
1,100 (actual damages)
1,100 (actual damages) x 4 (cap) = 4,400 (punitive
damages)
1,100 (actual damages) + 4,400 (punitive damages)
= 5,500 total recovery
The method specifically barred by statute is:
1,000 (actual damages) x 4 (cap) = 4,000 (punitive
damages)
1,000 (actual damages) + 4,000 (punitive damages)
= 5,000 (total damages)
5,000 (total damages) x 10% = 500 (prejudgment
interest)
5,000 (total damages) + 500 (prejudgment interest) =
5,500 total recovery
Using either formula, the plaintiff's total recovery
would be the same.
While there is considerable division among the
courts of appeals on this issue, 35 we question appellees'
ability to circumvent the statutory provisions by simply
utilizing a different mathematical formula to produce the
same result. Moreover, this court has previously considered
this issue and held that prejudgment interest [**89]
is not included within "actual damages." See Roberts v.
Grande, 868 S.W.2d 956, 960 (Tex. App.-Houston [14th
[*760] Dist.] 1994, no writ); Rotello v. Ring Around
Products, Inc., 614 S.W.2d 455, 463 (Tex. Civ.
App.-Houston [14th Dist.] 1981, writ ref'd n.r.e.). We
see no reason to overrule our earlier holdings. Accordingly,
we overrule appellees' sixth cross-point.
35 The Third and Fifth Courts of Appeals have
held that prejudgment interest constitutes part of
the plaintiff's "actual damages." See Paramore v.
Nehring, 792 S.W.2d 210, 212 (Tex. App.-Austin
1990, no writ); Cain v. Pruett, 938 S.W.2d 152,
158 (Tex. App.-Dallas 1996, no writ). The Second,
Fourth, Ninth, and Twelfth Courts of Appeals
have held prejudgment interest should not
be included in "actual damages." See Hope v. Allstate
Ins. Co., 719 S.W.2d 634, 638 (Tex.
App.-Fort Worth 1986, writ ref'd n.r.e.); Benefit
Trust Life Ins. Co. v. Littles, 869 S.W.2d 453, 473
(Tex. App.-San Antonio 1993, no writ); Mobil Oil
Corp. v. Ellender, 934 S.W.2d 439, 470 (Tex.
App.-Beaumont 1996), rev'd in part on other
grounds, 968 S.W.2d 917 (Tex. 1998); Allstate
Ins. Co. v. Kelly, 680 S.W.2d 595, 611 (Tex.
App.-Tyler 1984, writ ref'd n.r.e.).
[**90] F. Calculation of the Punitive Damage Award
In their final cross-point, appellees contend the court
erred when it computed their portion of the punitive
damages award. The combined damages of all the plaintiffs
was $ 5,395,400. The jury awarded total punitive
damages of $ 46,000,000. Rather than granting each
plaintiff four times his actual damages, the trial court
reduced the total punitive damages to $ 21,581,600 (or
four times $ 5,395,400). Using the percentage computed
by the jury, the court then apportioned the $ 21,581,600
among the plaintiffs. As a result, some plaintiffs were
awarded slightly more than four times their actual damages;
others, like the O'Donnells and Tonns, were
awarded slightly less. Appellees contend this procedure
was flawed and the trial court did not properly apportion
the punitive damage award among the plaintiffs.
This issue, however, is not properly before us. It is
well established that "an appellee may complain by
cross-point in his brief in the court of appeals, without
perfecting an independent appeal, of any error in the trial
court as between appellant and appellee." Donwerth v.

Preston II Chrysler-Dodge, 775 S.W.2d 634, 639 [**91]
(Tex. 1989) (emphasis added). Here, however, appellees
complain of an error that is between appellees and their
former co-appellees.
Citing Warren v. Triland Investment Group, 779
S.W.2d 808 (Tex. 1989) as authority, appellees contend
the matter may be properly raised by a cross-point. In
that case, Warren sued and obtained a judgment against
two defendants, Vista and Triland. Triland appealed.
Warren filed cross-points pertaining to his claims against
both Vista and Triland. The court of appeals overruled
all of Warren's cross-points on the ground that those
points had to be raised by a separate appeal.
Observing that Triland had not limited its appeal, the
Supreme Court, in a per curiam opinion, held that (1)
Warren was free to present cross-points; (2) the court of
appeals' decision conflicted with Donwerth; and (3) remanded
the cause for further proceedings. The opinion
does not comment on the validity of Warren's
cross-points pertaining to Vista, and we believe the decision
was based on the court of appeals' refusal to consider
the cross-points relating to Triland. Thus, we do not
believe Warren is controlling.
A year after the Warren decision, one of [**92] our
sister courts considered a case in which two plaintiffs,
Falcon and INA sued a single defendant, Pollock. See
Sheldon L. Pollack Corp. v. Falcon Indus., 794 S.W.2d
380 (Tex. App.-Corpus Christi 1990, writ denied). The
trial court entered judgment in favor of Falcon and INA.
Pollock appealed. In two cross-points, INA argued, as do
the appellees, that the trial court erred in apportioning the
damages as between the plaintiffs. After examining the
Supreme Court's decisions in Donwerth and Warren, the
court of appeals wrote:
Neither of the recent Supreme Court cases dealing
with this issue involved cross points raised by one
co-appellee against another. In fact, both specifically
base their holdings on cross-appeals between an appellant
and an appellee.
794 S.W.2d at 384-85. In deciding INA should have
filed a separate appeal, the court concluded it had "no
jurisdiction to entertain INA's cross points." Id., at 385.
We agree, and finding the same rationale applies here,
overrule appellees' seventh cross-point.
Accordingly, we reverse the trial court's judgment,
in part, and render judgment in favor of MAPCO. As to
MAPCO, appellees take nothing. As to Seminole and
[**93] Mid-America, we vacate the award for past and
future mental anguish. We also vacate the jury's finding
of malice. In all other respects, we affirm the trial court's
judgment as modified.
Because the award for past and future mental anguish
is vacated, the punitive damage cap and prejudgment
interest must be recalculated. However, the record
before us does not contain the original plea in intervention
[*761] or the date such instrument was filed, and
we cannot ascertain the period of prejudgment interest.
Accordingly, we remand this cause to the trial court for
recomputation of the judgment consistent with this opinion.
J. Harvey Hudson
Justice
Judgment rendered and Opinion filed October 15,
1998.
Panel consists of Justice Yates, Hudson, and Fowler.

963 S.W.2d 81, *; 1997 Tex. App. LEXIS 6716, **
LEXSEE 963 S.W.2D 81,AT 90
STANDARD FIRE INSURANCE COMPANY, Appellant v. JOY LENDERMAN
STEPHENSON, Appellee
NO. 09-96-033 CV
COURT OF APPEALS OF TEXAS, NINTH DISTRICT, BEAUMONT
PRIOR HISTORY: [**1] On Appeal from the
217th District Court. Angelina County, Texas. Trial
Cause No. 24195-90-6-A.
DISPOSITION: AFFIRMED AS REFORMED IN
PART; REVERSED AND REMANDED IN PART.
LexisNexis (TM) HEADNOTES - Core Concepts:
JUDGES: JOHN HILL, Justice. n1 Before Walker, C.J.,
Stover and Hill, JJ.
n1 The Honorable John Hill, sitting by assignment
pursuant to TEX. GOV'T CODE ANN. § 74.003(b)
(Vernon 1988).
OPINIONBY: JOHN HILL
OPINION: [*83] OPINION
The Standard Fire Insurance Company appeals from a
judgment resulting from a [*84] jury trial in which the
jury found Standard Fire breached its duty of good faith
and fair dealing by denying and delaying payment of a
death benefits claim under the Texas Workers
Compensation Act. Joy Lenderman Stephenson,
appellee, is the widow of Douglas Stephenson, who died
suddenly of a heart attack while working for Champion,
Inc. The judgment awarded Mrs. Stephenson actual
damages in her bad faith claim, consisting of mental
anguish damages and her attorney's fees in the
underlying workers' compensation claim; exemplary
damages; and attorney's fees pursuant to her DTPA
claim. Standard Fire presents seventeen points of error.
For reasons set forth in this opinion, we sever Mrs.
Stephenson's [**2] claim for attorney's fees under the
963 S.W.2d 81; 1997 Tex. App. LEXIS 6716
March 13, 1997, Submitted
October 30, 1997, Opinion Delivered
Page 1
DTPA, reverse the judgment with respect to that claim,
and remand that claim to the trial court for further
proceedings. With respect to Mrs. Stephenson's bad faith
claim, we reform the judgment to delete exemplary
damages, the award of attorney's fees under the DTPA,
and any prejudgment interest attributable to either the
exemplary damages or the DTPA attorney's fee award,
and we affirm the judgment as reformed.
SUFFICIENCY OF THE EVIDENCE: BAD FAITH
Standard Fire contends in point of error one that
because neither legally nor factually sufficient evidence
supports the jury's finding that Standard Fire breached
the duty of good faith and fair dealing, the trial court
erred in overruling Standard Fire's motion for judgment
notwithstanding the verdict and its motion for new trial.
Legal Sufficiency
In considering and determining legal sufficiency or
no evidence points of error, we must only consider the
evidence, and the inferences therefrom, tending to
support the jury's findings, disregarding all evidence and
inferences to the contrary. Havner v. E-Z Mart Stores,
Inc., 825 S.W.2d 456, 458 (Tex. 1992).
Doug Stephenson [**3] was an employee of
Champion Paper Mill in Lufkin and in charge of a
paper-making machine. He was a very dedicated
employee. On the morning of August 30, 1989,
Stephenson encountered a problem with a paper machine
that was costing his company close to $ 10,000 per hour.
Except for a thirty-minute break, he and a co-worker,
Michael Parks, worked to fix the problem. Around part
of the machine where Stephenson was working the
temperature was about 100 degrees with approximately
100% humidity. The effective heat index was roughly
130 degrees or beyond. The air in a part of the machine

where Stephenson would not ordinarily have been
working was stagnant and extremely hot. Sam Ellis, Jr., a
former employee of Champion, described it as absolutely
horrendous. Another part of the machine where
Stephenson was working was described as the "hell
hole." Ellis described the heat there as absolutely stifling,
like walking into a blast furnace. He said the humidity in
the area was so high and the air so still that sweating had
no cooling effect on the body.
Stephenson skipped a lunch break to continue trying to
fix the problem, saying, "We're going to do this first."
Parks testified Stephenson [**4] appeared to be feeling
flustered because the machine was not doing what he
wanted. About five minutes after coming from a hot area,
Stephenson bent down to attach a hose to a foam
machine for another foaming operation. Stephenson
stood up, then fell backwards. The death certificate listed
the cause of his death as an acute myocardial infarction,
a heart attack.
Dr. Craig Pratt, a professor of medicine at Baylor
University College of Medicine, testified he is board
certified in internal medicine and cardiovascular disease
and is an internationally recognized authority on the
cause of sudden cardiac death. He stated it was his
opinion that, based upon Stephenson's elevated
emotional stress, the work he was doing, and the heat
conditions, the working conditions and his job
environment would have been a major cause of
Stephenson's death. He said it could not be argued by any
reasonable person that Stephenson's death was not, at
least in part, caused by the working conditions.
Karen Baker Waddill, the adjuster for the
Stephenson claim, but who is no longer with [*85]
Standard Fire, testified Standard Fire basically
approached heart attack claims by conducting an
investigation that [**5] would disprove the claim. She
said there were discussions indicating that from the
beginning of the claim there was an intentional,
deliberate effort upon the part of the insurance company
to deny the claim. She indicated she conducted an
investigation to disprove the compensability of the claim,
as opposed to trying to approve it, in accordance with
instructions from her supervisors.
Ms. Waddill interviewed Michael Parks,
Stephenson's co-worker, shortly after Stephenson's death.
A review of the interview reveals Ms. Waddill showed
little interest in the heat or stress level of what
Stephenson was doing leading up to his heart attack.
Instead, it centered on what he was doing at the time of
the attack, along with his general attitude and lack of
complaints during the week and immediately preceding
the attack. When Parks mentioned the heat they
encountered the morning of the attack, she did not follow
963 S.W.2d 81, *; 1997 Tex. App. LEXIS 6716, **
Page 2
up with any questions except to seek to establish
Stephenson could have showered had he chosen to.
Waddill was aware the family was contending
Stephenson's death was caused by the heat, stress, and
exertion at his job. A co-worker reviewing her file
inquired how specifically the complaints [**6] had
been about heat problems and inquired how hot it was
where Stephenson was working. She suggested medical
follow-up with a doctor and attorney was needed. There
was no follow-up in accordance with this suggestion. No
doctor was contacted for an opinion as to whether
Stephenson's death might have resulted from his working
conditions until after the claim had already been
controverted by Standard Fire.
There was testimony the file was closed despite the
incompleteness of the investigation, because it was felt
after speaking with personnel at the paper mill that Mrs.
Stephenson would not pursue her claim. Ms. Waddill
testified that at the time the insurer denied the claim it
had not conducted a reasonable and thorough
investigation upon which to deny the claim and that in
her opinion it violated its duty of good faith and fair
dealing.
An insurer breaches its duty of good faith and fair
dealing when the insurer fails to attempt to effectuate a
settlement where its liability has become reasonably
clear. The Universe Life Ins. Co. v. Giles, 950 S.W.2d
48, 55 (Tex. 1997) (citing TEX. INS. CODE ANN. art.
21.21, § 4(10)(a)(ii) (Vernon 1981 & Supp. 1997)). The
insurer may also [**7] breach its duty of good faith and
fair dealing when it fails to reasonably investigate a
claim in order to determine whether its liability is
reasonably clear. Id. at 56 n. 5.
Prior to the opinion in Giles, the standard was that
an insurer breaches its duty of good faith and fair dealing
if the insurer denies a claim with no reasonable basis or
fails to determine whether a reasonable basis for denial
exists. Arnold v. National County Mut. Fire Ins. Co.,
725 S.W.2d 165, 167 (Tex. 1987). The question asked of
the jury, based upon that former standard, did not frame
the issue specifically in terms of whether Standard Fire
reasonably investigated the claim in question. Instead,
when asking the jury whether Standard Fire breached the
duty of good faith and fair dealing, the trial court
instructed the jury that "A party fails to comply with its
duty of good faith and fair dealing when without a
reasonable basis, it denies a claim, [or] without a
reasonable basis, it delays payment of a claim, and it
knew or should have known, based on its duty to
thoroughly investigate claims, that there was no
reasonable basis for denying the claim or delaying
payment of the [**8] claim."

There is evidence that would show Standard Fire's
investigation of Mrs. Stephenson's claim was not a
reasonable one but, instead, was an investigation
conducted to disprove the compensability of the claim, in
accordance with instructions from the investigator's
supervisors. There was also evidence that Standard Fire
basically approached heart attack claims by conducting
an investigation that would disprove the claim. The jury
could have concluded, based upon the evidence we have
outlined, that Standard Fire denied Mrs. Stephenson's
claim without a reasonable basis and that its purported
reliance upon its investigation was a mere pretext for
denial of the claim. We hold [*86] there was some
evidence supporting the jury's finding Standard Fire
breached its duty of good faith and fair dealing,
regardless of whether the Giles standard or the Arnold
standard is applied. See State Farm Lloyds v. Nicolau,
951 S.W.2d 444, 40 Tex. Sup. J. 794, 796, 1997 WL
377346 (1997).
Standard Fire contends the evidence is not sufficient to
support the jury's finding of good faith and fair dealing.
Basically, Standard Fire argues the evidence fails to
establish its denial [**9] of Mrs. Stephenson's claim
was unreasonable. It says there was a bona fide dispute
as to coverage, that the evidence establishes a "simple
disagreement among experts." It refers us to evidence,
much of it acquired after the claim was denied, to show it
had a reasonable basis for denying Mrs. Stephenson's
claim.
As previously noted, there was evidence Standard
Fire did not reasonably investigate this claim and
medical evidence no one could reasonably question this
claim was compensable. From this evidence a jury could
conclude Standard Fire did not have a reasonable basis
for denying Mrs. Stephenson's claim.
We first note that although Standard Fire refers us to
evidence favorable to a negative finding to the "good
faith and fair dealing" question, we are generally not to
consider such evidence in connection with the "no
evidence" standard of review unless such evidence is
undisputed and allows only one logical inference. See
Giles, 950 S.W.2d at 48. Since we do not find the
evidence to which Standard Fire refers us to be of this
character, we do not consider it in this "no evidence"
review.
In support of its argument that the evidence is
insufficient to support a finding of [**10] bad faith,
Standard Fire refers us to numerous cases, including
Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 17
(Tex. 1994); Republic Ins. Co. v. Stoker, 903 S.W.2d 338,
340 (Tex. 1995); Aranda v. Insurance Co. of N. Am., 748
S.W.2d 210, 213 (Tex. 1988); Union Bankers Ins. Co. v.
Shelton, 889 S.W.2d 278, 287 (Tex. 1994); National
963 S.W.2d 81, *; 1997 Tex. App. LEXIS 6716, **
Page 3
Union Fire Ins. Co. of Pittsburgh, Pa. v. Dominguez, 873
S.W.2d 373, 376 (Tex. 1994); and Lyons v. Millers
Casualty Ins. Co. of Tex., 866 S.W.2d 597, 600 (Tex.
1993).
In Moriel, 879 S.W.2d at 17-18, the Court held
evidence that merely shows a bona fide dispute about the
insurer's liability on the contract does not rise to the level
of bad faith; that bad faith is not established if the
evidence shows the insurer was merely incorrect about
the factual basis for its denial of the claim, or about the
proper construction of the policy; and that a simple
disagreement among experts about whether the loss is
one covered by the policy will not support a judgment
for bad faith. We find nothing in Moriel to be in conflict
with our holding here. The evidence showing the insurer
purposefully did not conduct a reasonable investigation
[**11] in accordance with a policy that such claims
were not compensable shows this was not merely a case
of mistaken judgment concerning liability, dispute about
liability, or a disagreement among experts.
In Stoker, the Court held that as a general rule there
can be no claim for bad faith when an insurer has
promptly denied a claim that is in fact not covered.
Stoker, 903 S.W.2d at 341. Even then, however, the
Court noted there could be an exception, adding, "nor
should we be understood as retreating from the
established principles regarding the duty of an insurer to
timely investigate its insureds' claims. These
circumstances are not present in this case." Id. We note
there is evidence from which the jury could have
reasonably concluded these circumstances are present in
this case.
In Aranda, the Court held a workers' compensation
carrier had a duty to deal fairly and in good faith with
injured employees in the processing of compensation
claims. Aranda, 748 S.W.2d at 212-13. The Court
further held that in order to assert such a claim the
claimant "must establish (1) the absence of a reasonable
basis for denying or delaying payment of the benefits of
the policy [**12] and (2) that the carrier knew or
should have known that there was not a reasonable basis
for denying the claim or delaying payment of the claim."
Aranda, 748 S.W.2d at 213. We find nothing in Aranda
inconsistent with our holding in this case.
[*87] In Shelton, 889 S.W.2d at 279, the Court
made two findings, neither of which is relevant to the
case at bar. Standard Fire's citation is to the concurring
and dissenting opinion in that case.
In Dominguez, the Court, in finding there was no
evidence of a breach of the duty of good faith and fair
dealing, stated that while there was evidence the claim
was compensable, there was no evidence casting doubt
upon the insurer's reliance on medical professionals or on

the claimant's statement that his condition was not work
related. Dominguez, 873 S.W.2d at 377. In this case
there is evidence casting doubt upon the insurer's
reliance on its investigation.
In Lyons, the Court affirmed a court of appeals
finding of no evidence to support the jury's finding of a
breach of good faith and fair dealing. Lyons, 866 S.W.2d
at 602. The Court noted the evidence at best only showed
the insurer was liable under [**13] its policy but that
there was no evidence the insurer lacked any reasonable
basis for denying the claim where it relied on experts for
the denial. Id. at 601. The court noted there was no
showing the report of the experts relied upon by the
insurer in denying coverage were not objectively
prepared. Id. In this case there is evidence that in
denying Mrs. Stephenson's claim Standard Fire relied on
an investigation that was not objectively conducted. If
anything, this case supports our holding that the evidence
is sufficient to support the jury's finding. Again, we hold
there is legally sufficient evidence to support the jury's
finding that Standard Fire breached its duty of good faith
and fair dealing.
Factual Sufficiency
When reviewing a jury verdict to determine the
factual sufficiency of the evidence, we must consider and
weigh all of the evidence and should set aside the verdict
only if it is so contrary to the overwhelming weight of
the evidence as to be clearly wrong and unjust. Cain v.
Bain, 709 S.W.2d 175, 176 (Tex. 1986) (per curiam).
Evidence showed that Dr. Chandra, the physician who
saw Mr. Stephenson when he was brought to the
hospital, told [**14] Mrs. Stephenson his death was not
heat related and later issued a report stating the cause of
his death was a matter of pure speculation.
Dr. Thomas Lombardo, a Beaumont cardiologist,
testified he could not say what caused Mr. Stephenson's
death and he agreed with Dr. Chandra the death was not
heat related and that any opinion as to the cause of Mr.
Stephenson's death was pure speculation.
There is evidence that in April 1990, after the claim
had been controverted, Ms. Waddill sought the opinion
of Dr. Adele Perlman, an M.D. employed by Standard
Fire. She asked her for anything that would either refute
or relate the heat at the mill to the heart attack. Dr.
Perlman replied, "If the work being performed was not
unusual, unduly strenuous, or in a temperature that was
not markedly different than the usual temperature to
which the employee was accustomed, then I would not
see any causal relationship between his heart attack and
his employment." Dr. Perlman also said, "On the other
hand, if this man was performing very strenuous work
under conditions to which he was not accustomed, then
963 S.W.2d 81, *; 1997 Tex. App. LEXIS 6716, **
Page 4
the added strain to his heart could have aggravated and
precipitated the myocardial infarction."
Dr. [**15] George Morris, a retired cardiac surgeon,
testified he did not believe Mr. Stephenson's death was
job related. He agreed with Dr. Chandra the death was
not heat related and that any opinion as to its cause was
pure speculation. He also indicated agreement with Dr.
Perlman's conclusion that if the work being performed
was not unusual, not unduly strenuous, and not in a
temperature markedly different from that to which the
worker was accustomed, there would be no relationship
between the employment and the death from heart attack.
Ms. Waddill testified she did not think Mrs.
Stephenson could add anything that would establish the
cause of Mr. Stephenson's death. Ms. Waddill believed,
based upon her interview with Michael Parks, the only
eyewitness to Mr. Stephenson's death, the heart attack
was not compensable. She said she knew OSHA had
investigated the death and found it was not related to the
job. She indicated knowledge that Mr. Stephenson
[*88] had no history of heart problems and had no
medical treatment for at least three years before his
death. She also knew he had made no complaints of any
symptoms of ill health to Mr. Parks on the day in
question. She was aware no autopsy [**16] had been
performed and that acute myocardial infarction was
listed on the death certificate as the cause of death. More
than one expert gave an opinion that Mr. Stephenson's
death was not related to his employment.
Tom Milam, Karen Waddill's supervisor at the time of
her investigation, testified Standard Fire did not have a
policy to deny all heart attack claims. Instead, he said,
office policy is to go out and investigate these incidents,
ascertain to the best of their ability what the facts are,
and make a decision based upon that investigation. He
said there was no policy or rule in his office that heart
attack claims were to be manipulated or slanted so as to
justify denial. He indicated there had never been such a
practice or policy.
Martha Duey, another Standard Fire employee, also
denied the existence of such a practice or policy.
Considering all of the evidence, we do not find the
verdict to be so contrary to the overwhelming weight of
the evidence as to be clearly wrong and unjust. We
overrule Standard Fire's first point of error.
SUFFICIENCY OF THE EVIDENCE: DTPA
CLAIM
Standard Fire contends in point of error two there is
neither legally nor factually sufficient [**17] evidence
to support the jury's finding of deceptive acts or

practices. Standard Fire argues that since there was not
sufficient evidence to support the jury's finding as to
Standard Fire's breach of the duty of good faith and fair
dealing there is also insufficient evidence to support the
jury's finding of deceptive acts or practices. Inasmuch as
we have found the evidence sufficient to support the
jury's finding of the breach of duty of good faith and fair
dealing, we overrule point of error two.
Standard Fire urges in point of error three the trial
court erred in overruling its motion for judgment
notwithstanding the verdict and its motion for new trial
because neither legally nor factually sufficient evidence
supports the jury's finding of "knowing" conduct.
Standard Fire acknowledges Mrs. Stephenson did not
recover any damages as a result of the jury's answer to
this question. Consequently, if the evidence were not
sufficient so that there was any error on the part of the
trial court with respect to Standard Fire's motion for
judgment notwithstanding the verdict or its motion for
new trial, it was not such an error as was reasonably
calculated to cause or that probably did cause [**18]
the rendition of an improper judgment. TEX. R. APP. P.
81(b)(1). n2 We overrule point of error three.
n2 We apply the former rules in that this
appeal was perfected prior to September 1, 1997.
See Final Approval of Revisions to the Texas
Rules of Appellate Procedure, 60 Tex. B.J. 876
(1997).
SUFFICIENCY OF THE EVIDENCE: MENTAL
ANGUISH
Standard Fire argues in point of error six that
because neither legally nor factually sufficient evidence
supports the jury's finding of past mental anguish, the
trial court erred in overruling its motion for judgment
notwithstanding the verdict and its motion for new trial.
Dr. Larry Pollock, a psychologist, testified Mrs.
Stephenson was in a condition of chronically depressed
mood. He said she was passive and dependent and that
made her vulnerable to someone taking advantage of her.
He said the fact that she trusted she would be treated
fairly and believed in that impacted on her state of
depression. He said the fact she was having difficulty
getting the widow's [**19] benefits she had expected
was a big complication causing her a great deal of
distress. He indicated that in his opinion the necessity
of having to struggle and fight for the benefits had
caused Mrs. Stephenson tremendous psychological pain
and anguish and suffering, in addition to prolonged
depression that she otherwise would not have had. He
testified the struggle had interfered seriously with her
963 S.W.2d 81, *; 1997 Tex. App. LEXIS 6716, **
Page 5
ability to go through the normal grieving and mourning
process. He stated all of the trauma Mrs. Stephenson had
experienced [*89] was related to the fact that she
honestly expected, given the tenure her husband had with
Champion and his long-standing relationship to the
company, things would have been treated differently.
He mentioned that her sister-in-law stated, in 1991,
Mrs. Stephenson was no longer the bubbly, sociable,
outgoing person she was prior to her husband's death and
she tended to severely restrict her social activities,
participating mainly in family gatherings where she no
longer appeared to enjoy the company of her relatives as
she previously had.
Pollock indicated that in his opinion Mrs.
Stephenson would look back on the period after her
husband's death and struggling [**20] with the
insurance company as having been a really prolonged
period of misery that would haunt her for a long, long
time, the rest of her life.
Sam Ellis, a union representative, testified Mrs.
Stephenson was terrified about filing a workman's
compensation claim.
Standard Fire argues Mrs. Stephenson cannot
recover damages for mental anguish that might have
been caused by its denial of her claim because "such
feelings arise whenever a claim is denied and litigation
ensues; thus, they cannot support recovery of mental
anguish damages. If they did, mental anguish damages
would be automatically recoverable in every coverage
dispute."
Standard Fire's argument is not correct. First, if the
insurer has not been guilty of breaching its duty of good
faith and fair dealing, such damages would not be
recoverable. If the insurer does breach its duty of good
faith and fair dealing, the fact that everyone it injures in
that way suffers from some mental anguish, which may
not rise to a compensable level, does not make such
damages not recoverable for those who suffer a
compensable level of mental anguish.
Standard Fire relies on the opinion of the Texas
Supreme Court in the case of Parkway [**21] Co. v.
Woodruff, 901 S.W.2d 434 (Tex. 1995). The case
involved a suit brought by a couple relating to the
flooding of their home. Id. at 436. The only evidence of
mental anguish related to the couple being upset and
disturbed -- what the Supreme Court termed as "mere
emotions." Id. at 445. The Court held that evidence of
the flooding of the couple's home, together with only a
showing of mere emotions, did not constitute sufficient
evidence to support an award of damages for mental
anguish. Id. The Court stated, however, that an award of
mental anguish damages will survive a legal sufficiency

challenge when the plaintiff has introduced direct
evidence of the nature, duration, and severity of their
mental anguish, thus establishing a substantial disruption
in the plaintiff's daily routine. Id. at 444. The Court also
stated a plaintiff might present evidence of a high degree
of mental pain and distress that is more than mere worry,
anxiety, vexation, embarrassment, or anger. Id.
Standard Fire also refers us to the case of Saenz v.
Fidelity & Guar. Ins. Underwriters, 925 S.W.2d 607, 614
(Tex. 1996). In that case the only testimony in support of
plaintiff's [**22] mental anguish damages was her
worry about losing her home and who was going to pay
future medical bills throughout her lifetime. Id. Based
upon Parkway, the Court stated the evidence was
insufficient to support an award of damages for mental
anguish. Id. The Court stated this court must conduct an
evidentiary review with respect to the amount of the
damages. We have reviewed the evidence as set forth
above and find that a reasonable jury could determine $
150,000 is fair and reasonable compensation for the
mental anguish suffered by Mrs. Stephenson under the
circumstances presented. Standard Fire really makes no
attack on the amount awarded as mental anguish
damages, merely that the mental anguish suffered by
Mrs. Stephenson is not compensable.
Finally, Standard Fire refers us to the case of Giles,
950 S.W.2d at 48. In that case the Court refers back to its
opinion in Parkway and states that in bad faith cases
mental anguish damages are limited to those cases in
which the denial or delay in payment of a claim has
seriously disrupted the insured's life. Giles, 950 S.W.2d
at 54.
We find the evidence is legally and factually
sufficient to support the jury's [**23] verdict of
damages for mental anguish. Standard Fire argues the
evidence does not demonstrate [*90] a substantial
disruption in the plaintiff's daily routine. We believe the
testimony outlined above supports a reasonable inference
that Mrs. Stephenson's depression and grief, prolonged
by Standard Fire's bad faith, resulted in a substantial
disruption in her daily routine. Even if it did not, we hold
it constitutes evidence of a high degree of mental pain
and distress that is more than mere worry, anxiety,
vexation, embarrassment, or anger. We overrule point of
error six.
ATTORNEY'S FEES IN UNDERLYING CLAIM
Standard Fire argues in point of error seven that
because Mrs. Stephenson may not recover her attorney's
fees in the underlying worker's compensation claim as
part of her damages in this case, the trial court erred in
overruling its motion for judgment notwithstanding the
963 S.W.2d 81, *; 1997 Tex. App. LEXIS 6716, **
Page 6
verdict; its motion to modify, correct, or reform the
judgment; and its objection to the charge on that issue.
In Texas attorney's fees are generally not
recoverable in the absence of a specific statutory or
contractual provision. New Amsterdam Cas. Co. v.
Texas Indus., Inc., 414 S.W.2d 914, [**24] 915 (Tex.
1967). This court has held this is true even where they
are sought, not as attorney fees in the case at bar, but as
damages stemming from prior litigation. Choate v.
Murphy, 125 S.W.2d 413, 415 (Tex. Civ.
App.--Beaumont 1939, no writ). However, this court has
subsequently held such fees may be recoverable where
the natural and proximate results and consequences of
prior wrongful acts have been to involve a plaintiff in
litigation with and against third parties and other parties.
Texas Beef Cattle Co. v. Green, 883 S.W.2d 415, 430
(Tex. App. --Beaumont 1994), rev'd on other grounds,
921 S.W.2d 203 (Tex. 1996). See also Powell v. Narried,
463 S.W.2d 43, 46 (Tex. Civ. App. --El Paso 1971, writ
ref'd n.r.e.). Another court has held this rule applies even
if the defendant's wrongful act did not lead to litigation
between the appellee and a third party. Nationwide Mut.
Ins. Co. v. Holmes, 842 S.W.2d 335, 341-42 (Tex. App.
--San Antonio 1992, writ denied).
Standard Fire questions whether Texas has really
adopted this rule, citing several cases it claims have
rejected the rule, including Peterson v. Dean Witter
Reynolds, Inc., 805 S.W.2d 541, 549 [**25] (Tex. App.
--Dallas 1991, no writ); Cupples Coiled Pipe, Inc. v.
Esco Supply Co., 591 S.W.2d 615 (Tex. Civ. App. --El
Paso 1979, writ ref'd n.r.e.); Dalton Steamship Corp. v.
W.R. Zanes & Co., 354 S.W.2d 621, 624 (Tex. Civ. App.
-- Fort Worth 1962, no writ); Choate, 125 S.W.2d at 415;
and Sherrick v. Wyland, 14 Tex. Civ. App. 299, 37 S.W.
345 (Tex. Civ. App. 1896, no writ). We believe the better
rule is that a plaintiff such as Mrs. Stephenson should be
able to recover the damages suffered as a result of her
insurer's wrongful act and should not be foreclosed from
recovering such damages simply because the damages
were attorney's fees. See Holmes, 842 S.W.2d at 342.
Based upon this rule, we hold Mrs. Stephenson may
recover her attorney's fees in her prior workers'
compensation claim that she incurred as a consequence
of the wrongful act of Standard Fire.
Standard Fire contends even if there is such a rule it only
applies if the plaintiff was engaged in litigation with a
third party, and that the rule does not apply where, as
here, the attorney's fees occasioned by its wrongful act
were incurred in litigation with Standard Fire rather than
a third party. [**26] It is true that the exception to the
rule of attorney's fees not being recoverable is generally
stated as involving fees incurred in prior litigation with a
third party occasioned by the wrongful act of the

defendant. However, except for those cases rejecting the
exception altogether, we are aware of no Texas case, and
Standard Fire does not refer us to any, specifically
holding the exception does not apply in an insurance bad
faith case where the attorney's fees incurred by the
defendant's wrongful act were incurred in litigation with
the insurer itself. We know of no reason why Standard
Fire should not be responsible for the damages incurred
by Mrs. Stephenson as a result of its wrongful act merely
because the damage was unnecessarily-incurred
attorney's fees. We therefore hold that in a bad faith
action an insured may recover attorney's fees incurred as
a result of the insurer's bad faith, where those [*91]
fees were incurred in prior litigation between the insurer
and the insured. We overrule point of error seven.
SUFFICIENCY OF THE EVIDENCE:
EXEMPLARY DAMAGES
In points of error four, five and eight, Standard Fire
asserts the evidence is insufficient to support [**27] the
award of exemplary or punitive damages. "Punitive
damages can be awarded for bad faith only when an
insurer was actually aware that its actions involved an
extreme risk - that is, a high probability of serious harm,
such as death, grievous physical injury, or financial ruin.
. . ." Giles, 950 S.W.2d at 57. In this case there is no
evidence there was ever any extreme risk to Mrs.
Stephenson of a high probability of death, grievous
physical injury, or financial ruin. Consequently, we hold
there is no evidence to support the award of exemplary
damages.
Mrs. Stephenson contends the award of exemplary
damages is appropriate in light of the jury's finding that
Standard Fire's conduct was intentional and based upon
malice, and in view of the psychological injury to Mrs.
Stephenson and the reduction in value of her claim.
While a reasonable argument may be made for the
imposition of exemplary damages under these facts, it
appears from the Texas Supreme Court's opinion in Giles
that more is required.
We sustain points of error four, five and eight, as
they relate to Standard Fire's overall claim that under the
facts of this case Mrs. Stephenson is not entitled to
recover exemplary [**28] damages. In view of our
determination as to this issue, we need not consider any
other issues raised by these points of error.
In points of error eleven and seventeen, Standard
Fire presents points of error relating to the imposition of
exemplary damages. In view of our determination that
Mrs. Stephenson may not recover an award of exemplary
damages, we need not determine points of error eleven
and seventeen.
963 S.W.2d 81, *; 1997 Tex. App. LEXIS 6716, **
EVIDENTIARY ISSUES
Page 7
Standard Fire argues in point of error nine the trial
court erred by excluding from evidence an exhibit and
related testimony concerning the recommendation of the
prehearing officer to deny benefits and the Industrial
Accident Board's denial of benefits. These matters all
occurred after Standard Fire had denied Mrs.
Stephenson's claim. The Texas Supreme Court has held
in a bad faith case that whether there is a reasonable
basis for the denial of a claim must be judged by the
facts before the insurer at the time the claim was denied.
Viles v. Security Nat'l Ins. Co., 788 S.W.2d 566, 567
(Tex. 1990). Consequently, testimony concerning what
occurred at the Industrial Accident Board after the claim
was denied has no relevance to the issue of [**29]
Standard Fire's bad faith. We overrule point of error nine.
Standard Fire insists in point of error ten the trial
court erred by admitting into evidence Karen Waddill's
expert testimony on the existence of bad faith conduct
because Mrs. Stephenson offered no evidence of good
cause for the failure to designate her as an expert
witness. We hold that in view of Ms. Waddill's testimony
concerning the biased nature of the investigation
conducted by her on behalf of Standard Fire, if there
were any error in the trial court allowing her to
summarize her testimony by characterizing that
investigation as unreasonable and, therefore, that
Standard Fire breached the duty of good faith and fair
dealing, such error was not such error as was reasonably
calculated to cause or that probably did cause the
rendition of an improper judgment. TEX. R. APP. P.
81(b)(1). We overrule point of error ten.
THE CHARGE
Standard Fire asserts in point of error twelve the trial
court erred in overruling its objection to the definition of
the term "knowingly" in Question 4 of the Court's
charge, but acknowledges Mrs. Stephenson did not
recover any damages as a result of the jury's answer to
this question. [**30] Consequently, any error was not
such an error as was reasonably calculated to cause or
that probably did cause the rendition of an im [*92]
proper judgment. TEX. R. APP. P. 81(b)(1). We
overrule point of error twelve.
ELECTION OF REMEDIES
Standard Fire insists in point of error sixteen the trial
court erred in overruling its motion to modify, reform, or
correct the judgment because Mrs. Stephenson was not
required to elect her remedies but, instead, was awarded
exemplary damages under a common-law cause of action
as well as legal fees available only under statutory causes
of action. Because of the remedial policies underlying

the DTPA, a party is entitled to recover attorney's fees
for the successful prosecution of a DTPA claim, even if
recovery is on another theory. Orkin Exterminating Co.
v. Williamson, 785 S.W.2d 905, 913 (Tex. App. --Austin
1990, writ denied). Additionally, in view of our
determination that there is no evidence to support the
award of exemplary damages, Mrs. Stephenson will not
recover both exemplary damages and attorney's fees
under the DTPA. We overrule point of error sixteen.
ATTORNEY'S FEES IN THIS CAUSE
Standard Fire contends [**31] in point of error
thirteen the trial court erred in overruling its objection to
submitting legal fees as a percentage rather than a dollar
amount. In answer to a question in the court's charge, the
jury found a reasonable fee for the necessary services of
Mrs. Stephenson's recovery was 33 1/3 %. The Texas
Supreme Court has recently held that to recover
attorney's fees under the DTPA, the plaintiff must prove
the amount of fees was both reasonably incurred and
necessary to the prosecution of the case at bar, and must
ask the jury to award the fees in a specific dollar amount,
not as a percentage of the judgment. Arthur Andersen &
Co. v. Perry Equipment Corp., 945 S.W.2d 812, 819
(Tex. 1997). We sustain point of error thirteen.
Standard Fire asserts in point of error fourteen the
trial court erred in overruling its motion to modify,
reform, or correct the judgment because the judgment
erroneously awarded prejudgment interest on all
damages, including exemplary damages and legal fees.
Because of our holding with respect to exemplary
damages and attorney's fees under the DTPA, we must
sustain this point of error and reform the judgment to
award prejudgment interest solely on the [**32] amount
of actual damages. We do not by this holding reach the
merits of Standard Fire's contention that such interest
may not be imposed on exemplary damages or on
attorney's fees under the DTPA.
Standard Fire contends in point of error fifteen that
because the judgment awarded excessive legal fees in
several respects, the trial court erred in overruling its
motion to modify, reform, or correct the judgment. In
view of our holding that it was improper for the jury to
determine attorney's fees as a percentage of Mrs.
Stephenson's award, we need not consider this point of
error.
We sever Mrs. Stephenson's claim for attorney's fees
under the DTPA, reverse that portion of the judgment
awarding Mrs. Stephenson attorney fees under the
DTPA, and remand her claim for attorney's fees under
the DTPA to the trial court for further proceedings. With
respect to Mrs. Stephenson's bad faith claim, we reform
the judgment to delete the award for exemplary damages,
963 S.W.2d 81, *; 1997 Tex. App. LEXIS 6716, **
Page 8
for attorney's fees under the DTPA, and for any
prejudgment interest attributable to those claims.
Therefore, Mrs. Stephenson's actual damages shall be $
215,000.00 and pre-judgment interest shall be $
114,273.97. Further, this judgment [**33] in the sum
total amount of $ 329,273.97 shall bear post-judgment
interest at the rate of ten percent (10%), compounded
annually beginning on the date October 4, 1995, and
ending the day the judgment is fully paid. We affirm the
judgment as reformed.
AFFIRMED AS REFORMED IN PART;
REVERSED AND REMANDED IN PART.
JOHN HILL, Justice n1
n1 The Honorable John Hill, sitting by
assignment pursuant to TEX. GOV'T CODE ANN.
§ 74.003(b) (Vernon 1988).
ORDER
PER CURIAM
We have before the Court a "Joint Motion Under Texas
Rule of Appellate Procedure 42.1," in which the parties
ask this Court to vacate our judgment and the judgment
of the trial court without reference to the merits and
remand the cause for entry of an agreed [*93]
take-nothing judgment in accordance with the parties'
settlement agreement. The Court finds the motion
complies with TEX. R. APP. P. 42.1(a)(1). The parties
also request us to withdraw our opinion of October 30,
1997, in this appeal.
It is therefore ORDERED that the motions for
[**34] rehearing are GRANTED without reference to
the merits. Our judgment of October 30, 1997, is
VACATED. The judgment of the trial court is
VACATED and the cause is REMANDED to the 217th
District Court of Angelina County, Texas, for further
proceedings regarding the entry of judgment in
accordance with the settlement agreement of the parties.
Costs shall be assessed against the party incurring such
costs. The request to withdraw our opinion of October
30, 1997, is DENIED. We direct the Clerk of the Court
of Appeals to release our October 30, 1997, opinion for
publication.
VACATED AND REMANDED.
ORDER ENTERED March 19, 1998.
Submitted on March 13, 1997
Opinion Delivered October 30, 1997

963 S.W.2d 81, *; 1997 Tex. App. LEXIS 6716, **
Before Walker, C.J., Stover and Hill, JJ.
Page 9

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161 S.W.3d 167, *; 2005 Tex. App. LEXIS 1015, **
LEXSEE
Oscar M. Telfair, III, P.C., Appellant v. Merita Bridges and Marvin Bridges, Appellees
No. 11-03-00195-CV
COURT OF APPEALS OF TEXAS, ELEVENTH DISTRICT, EASTLAND
NOTICE: [**1] PLEASE CONSULT THE TEXAS
RULES OF APPELLATE PROCEDURE FOR CITA-
TION OF MEMORANDUM OPINIONS AND UN-
PUBLISHED OPINIONS.
PRIOR HISTORY: Appeal from Harris County.
DISPOSITION: Portion of the trial court's judgment
awarding appellees $ 10,250.00 for their attorney's fees
modified to delete this award. As modified, the trial
court's judgment affirmed.
LexisNexis(R) Headnotes
COUNSEL: For PLAINTIFF or PETITIONER: James
D. Evans, JAMES D. EVANS, III & ASSOCIATES,
ATTORNEYS at LAW, Oscar M. Telfair, III, Houston,
TX.
For DEFENDANT or RESPONDENT: Melvin Houston,
MELVIN HOUSTON & ASSOCIATES, P.C., Houston,
TX.
JUDGES: Panel consists of: Arnot, C.J., and Wright, J.,
and McCall, J.
OPINIONBY: W. G. ARNOT, III
OPINION:
[*169] This appeal arises from a fee dispute between
a law firm and its former clients. Appellant, Oscar
M. Telfair, III, P.C., represented appellees, Merita
Bridges and Marvin Bridges, in a suit concerning a defect
in the foundation of appellees' home. The law firm
obtained a settlement on behalf of appellees in the
amount of $ 86,000.00 to resolve the claim. The law firm
alleged in the underlying action that it agreed to represent
appellees in pursuing the defective foundation claim
on the basis of an oral contingent fee contract. n1 The
161 S.W.3d 167; 2005 Tex. App. LEXIS 1015
February 10, 2005, Decided
Page 1
law firm obtained a recovery against appellees in the
amount of $ 25,638.00 for its services in pursuing the
defective foundation claim under the theory of quantum
meruit. n2 The law firm also obtained a recovery for its
attorney's fees in [**2] the amount of $ 10,250.00 in
prosecuting the underlying action to obtain the quantum
meruit recovery.
[**3]
n1 Section 82.065 of the Government Code
expressly provides that contingent fee contracts
for legal services must be in writing. TEX. GOV'T
CODE ANN. § 82.065(a) (Vernon 1998). An
oral contingent fee contract is voidable by the
client. See TEX. GOV'T CODE ANN. §
82.065(b) (Vernon 1998); Enochs v. Brown, 872
S.W.2d 312, 318 (Tex.App. - Austin 1994, no
writ).
n2 Quantum meruit is an equitable remedy
based upon an implied promise to pay for benefits
received. Heldenfels Brothers, Inc. v. City of
Corpus Christi, 832 S.W.2d 39, 41, 35 Tex. Sup.
Ct. J. 802 (Tex.1992). To recover in quantum
meruit, a claimant must prove (1) valuable services
were rendered or materials furnished, (2)
for the person sought to be charged, (3) which
services and materials were accepted by the person
sought to be charged, (4) under such circumstances
as reasonably notified the person sought
to be charged that the plaintiff in performing such
services was expecting to be paid by the person
sought to be charged. Heldenfels Brothers, Inc. v.
City of Corpus Christi, supra at 41.
Appellees asserted a counterclaim against the law
firm regarding its representation of appellees in an unrelated
personal injury claim. Appellees successfully alleged
that the law firm misappropriated settlement funds
obtained on their behalf in connection with the personal

injury claim. See TEX. DISCIPLINARY R. PROF'L
CONDUCT 1.14, reprinted in TEX. GOV'T CODE
ANN., tit. 2, subtit. G app. A (Vernon 1998 & Supp.
2004 - 2005) (TEX. STATE BAR R. art. X, § 9);
Brown v. Commission for Lawyer Discipline, 980 S.W.2d
675 (Tex.App. - San Antonio 1998, no pet'n). The jury
awarded appellees $ 2,457.50 on their misappropriation
claim. The jury also determined the amount of appellees'
reasonable and necessary attorney's fees to be $
10,250.00. n3 The trial court awarded $ 10,250.00 to
appellees for their attorney's fees based upon the jury's
determination of the amount of attorney's fees.
[**4]
n3 Appellees did not offer evidence segregating
the amount of their attorney's fees incurred
for defending the law firm's quantum meruit
claim from those incurred in prosecuting their
claims for affirmative relief.
On appeal, the law firm attacks the trial court's
award of appellees' attorney's fees. The law firm contends
in its first issue that no legal basis existed for appellees
to recover their attorney's fees for either defending
the law firm's quantum meruit claim or prosecuting
their misappropriation claim. n4 We agree with the law
[*170] firm's contention in this regard. As set forth below,
the judgment of the trial court is modified and, as
modified, is affirmed.
n4 The law firm preserved this alleged error
for review by objecting to the submission of a
jury question regarding appellees' attorney's fees.
As a general rule, attorney's fees are not recoverable
in Texas unless allowed by contract or by statute. Dallas
Central Appraisal District v. Seven Investment Company,
835 S.W.2d 75, 77, 35 Tex. Sup. Ct. J. 856 (Tex.1992).
Appellees contend that they are entitled to recover their
attorney's fees under an equitable exception to the general
rule. They rely upon our opinion in Baja Energy,
Inc. v. Ball, 669 S.W.2d 836 [**5] (Tex.App. - Eastland
1984, no writ), for this proposition. We recognized a
recovery of attorney's fees in Baja Energy based upon
equitable grounds when a claimant is required to prosecute
or defend litigation involving a third party as a consequence
of the wrongful act of the defendant. Baja Energy,
Inc. v. Ball, supra at 838-39. As we stated:
The exception applies when the wrongful
act or contractual violation involves the
161 S.W.3d 167, *; 2005 Tex. App. LEXIS 1015, **
claimant in litigation with third parties
and forces the claimant to incur expenses
to protect his interests. Such costs and
expenses, including attorney's fees, are
treated as the legal consequence of the
original wrongful act and are permitted to
be recovered as damages.
Baja Energy, Inc. v. Ball, supra at 839.
Page 2
The exception we recognized in Baja Energy is narrow.
n5 It only applies when a wrongful act requires the
claimant to incur attorney's fees in prior litigation involving
a third party. See Lesikar v. Rappeport, 33
S.W.3d 282, 306 (Tex.App. - Texarkana 2000, pet'n
den'd)("attorney's fees incurred in prior litigation with a
third party are recoverable in a subsequent suit as actual
[**6] damages"). The exception is inapplicable in the
instant appeal because appellees are not seeking attorney's
fees which they incurred in prior litigation involving
a third party. To the contrary, the attorney's fees they
seek are those incurred in the original litigation with the
party alleged to have committed the wrongful act.
n5 We note that other courts have declined to
recognize the recovery of attorney's fees on equitable
grounds which we adopted in Baja Energy.
See Burnside Air Conditioning and Heating, Inc.
v. T.S. Young Corporation, 113 S.W.3d 889, 899
(Tex.App. - Dallas 2003, no pet'n).
Appellees additionally contend that they are entitled
to recover their attorney's fees under TEX. CIV. PRAC. &
REM. CODE ANN. § 38.001 (Vernon 1997). To recover
attorney's fees under this provision, a party must (1)
prevail on a cause of action for which attorney's fees are
recoverable under the statute and (2) recover damages.
Green International, Inc. v. Solis, 951 S.W.2d 384, 390,
40 Tex. Sup. Ct. J. 610 (Tex.1997). [**7] Appellees
assert that their claim regarding the alleged misappropriation
of settlement funds constituted a claim to recover
on an oral contract. See Section 38.001. We disagree
with this contention. The misappropriation claim is in the
nature of a conversion cause of action. n6 Attorney's fees
are not recoverable as either actual or exemplary damages
on a conversion claim. Jay Fikes and Associates v.
Walton, 578 S.W.2d 885, 888 (Tex.Civ.App. - Amarillo
1979, writ ref'd n.r.e.). Furthermore, Section 38.001 does
not permit [*171] appellees to recover their attorney's
fees for defending the law firm's quantum meruit claim.
Howard v. City of Kerrville, 75 S.W.3d 112, 119
(Tex.App. - San Antonio 2002, pet'n den'd). The law
firm's first issue is sustained.

[**8]
n6 Conversion occurs when one person
makes an unauthorized and wrongful assumption
and exercise of dominion and control over the
personal property of another to the exclusion of
or inconsistent with the owner's rights. Waisath v.
Lack's Stores, Inc., 474 S.W.2d 444, 447, 15 Tex.
Sup. Ct. J. 127 (Tex.1971).
The law firm's second issue addresses a postjudgment
order entered by the trial court on June 9, 2003,
directing the law firm to return settlement funds to the
registry of the trial court. During the pendency of the
underlying lawsuit, the trial court entered an order requiring
$ 45,000.00 of the $ 86,000.00 in settlement
proceeds obtained in connection with the defective
foundation claim to be deposited into the trial court's
registry. After the trial of the underlying suit and the
entry of the judgment on May 9, 2003, the trial court
entered an order on May 27, 2003, directing the trial
court clerk to pay the law firm $ 39,987.25 from the
court's registry. The trial court entered a subsequent order
on June 9, 2003, which directed the law firm to pay
the amount of $ 39,987.25 back into the registry of the
trial court by June 17, 2003.
The law firm contends on appeal that the trial court
was without jurisdiction to enter the challenged order
because it was allegedly entered after the law firm filed
its notice of appeal. The law firm further asserts that the
trial court erred by entering the order without notice to
the law firm. Our resolution of the law firm's first issue
and the [**9] eventual issuance of the mandate in this
appeal will effectively render the law firm's second issue
moot. Accordingly, we do not address the law firm's second
issue on the merits. n7 However, the law firm's
compliance with the trial court's order of June 9, 2003, is
the subject of a contempt proceeding initiated in this
court which remains pending.
n7 We have previously rejected the law
firm's jurisdictional contention in previous written
orders issued by this court. The law firm has
not preserved error with respect to its "lack of notice"
contention because the law firm did not
present this claim to the trial court for consideration.
See TEX.R.APP.P. 33.1(a).
Contempt Findings
161 S.W.3d 167, *; 2005 Tex. App. LEXIS 1015, **
Page 3
Upon the law firm's failure to comply with the trial
court's order of June 9, 2003, appellees filed a motion in
this court seeking the enforcement of the trial court's
order. We granted the relief requested by appellees in our
order of September 8, 2003, wherein we ordered the law
firm to comply with [**10] the terms of the trial court's
order of June 9, 2003, by paying the amount of $
39,987.25 into the registry of the trial court by September
19, 2003. We specifically advised the law firm that
the failure to comply with our order of September 8,
2003, might result in the institution of contempt proceedings.
The law firm did not comply with our order of September
8, 2003, which required compliance with the trial
court's order of June 9, 2003. Instead, the law firm filed a
motion for reconsideration. The law firm asserted in the
motion for reconsideration that the trial court lacked jurisdiction
to enter the order of June 9, 2003. The law firm
argued that the filing of its notice of appeal on June 9,
2003, divested the trial court of jurisdiction to enter any
further orders in the underlying cause. We overruled the
law firm's jurisdictional contention in a written order
issued on October 2, 2003. n8
n8 The law firm filed its initial notice of appeal
"after hours" on June 9, 2003, at 7:03 p.m.
Since the notice of appeal was filed after hours,
the appellate record does not necessarily establish
that the notice of appeal was filed prior to the entry
of the order of June 9, 2003. The act of the
law firm filing the notice of appeal obviously
could not have divested the trial court of jurisdiction
to enter the order of June 9, 2003, if the notice
of appeal was filed after the entry of the order.
Moreover, even if the notice of appeal was
filed prior to the entry of the order of June 9,
2003, the trial court maintained jurisdiction to
enter the order. The trial court entered the final
judgment in this cause on May 9, 2003. Therefore,
the trial court entered the order of June 9,
2003, while its plenary jurisdiction remained in
effect. See TEX.R.CIV.P. 4 & 329b(d). The filing
of a notice of appeal does not divest the trial
court of its plenary jurisdiction. See Rule 329b(d)
("The trial court, regardless of whether an appeal
has been perfected, has plenary power to grant a
new trial or to vacate, modify, correct, or reform
the judgment within thirty days after the judgment
is signed"). (Emphasis added)
The law firm cited Gano v. Villarreal, 745
S.W.2d 586, 587 (Tex.App. - Corpus Christi 1988,
orig. proceeding), for the proposition that a trial

[**11]
court is without authority to enter orders after a
notice of appeal has been filed. The law firm's reliance
on Gano was misplaced. Gano only held
that a trial court does not retain jurisdiction to
conduct contempt proceedings with respect to an
alleged violation of an order that has been appealed.
The trial court's order of June 9, 2003,
was not a contempt ruling. Moreover, the holding
in Gano has effectively been overruled in the
Texas Supreme Court's recent opinion in In re
Sheshtawy, No. 03-0766, 154 S.W.3d 114, 48 Tex.
Sup. J. 287, 2004 WL 3019232, at *7 (Tex. Dec.
31, 2004).
The law firm next filed a motion for rehearing with
respect to our denial of the [*172] motion for reconsideration.
We overruled the motion for rehearing in another
written order issued on October 24, 2003. This order
specifically directed the law firm to comply with the trial
court's order of June 9, 2003. This order further warned
the law firm that we would entertain a motion for contempt
if it did not comply with the terms of the trial
court's order of June 9, 2003, by November 7, 2003.
Accordingly, this court issued more than one written
order directing the law firm to comply with the terms of
the trial court's order of June 9, 2003. We also specifically
warned the law firm that its failure to comply with
this court's orders could possibly result in contempt proceedings
brought against the law firm. However, the law
firm did not comply with the orders of this court because
the law firm did not deposit the amount of $ 39,987.25
into the registry of the trial court.
We subsequently issued a "show cause" order on
December 5, 2003, directing the law firm's principal officer,
Oscar M. Telfair, III, P.C., to personally appear
before this court on January 15, 2004, and show cause
why the [**12] law firm should not be held in contempt
for failing to comply with the terms of this court's orders.
The show cause order specifically warned the law firm
that it could be held in contempt for failing to abide by
the terms of this court's orders. The show cause order
further warned the law firm that the possible punishment
for contempt of court is a fine of not more than $ 500.00,
confinement in jail for a term of not more than six
months, or both such fine and confinement. See TEX.
GOV'T CODE ANN. § 21.002(b) (Vernon 2004).
Prior to the "show cause" hearing conducted on
January 15, 2004, the law firm deposited the sum of $
13,500.00 into the registry of the trial court. The court
161 S.W.3d 167, *; 2005 Tex. App. LEXIS 1015, **
Page 4
proceeded with conducting the "show cause" hearing
because the law firm had not fully complied with this
court's orders to deposit the amount of $ 39,987.25 into
the registry of the trial court. The law firm appeared at
the hearing through its attorney of record and its principal
officer. These representatives advised the court at the
hearing for the first time that the law firm did not have
sufficient funds to pay the full amount of $ 39,987.25
into the registry of the court. [**13] The law firm did
not offer any legitimate reason why this information was
not previously provided to the court. This [*173] court
took the issue of holding the law firm in contempt under
advisement until the issuance of the opinion and judgment
in this appeal.
We find that appellant, Oscar M. Telfair, III, P.C.,
has failed to comply with two written orders issued by
this court on September 8, 2003, and October 24, 2003,
directing it to pay the amount of $ 39,987.25 into the
registry of the court pursuant to the trial court's written
order of June 9, 2003. We further find that appellant,
Oscar M. Telfair, III, P.C., has failed to provide the court
with a sufficient reason why it did not comply with this
court's written orders issued on September 8, 2003, and
October, 24, 2003. As a result of appellant Oscar M.
Telfair, III, P.C.'s dilatory conduct, both appellees and
this court have been required to expend time and resources
on this matter which were unnecessary to resolving
the issues on appeal.
This Court's Ruling
The portion of the trial court's judgment awarding
appellees $ 10,250.00 for their attorney's fees is modified
to delete this award. As modified, the trial court's judgment
[**14] is affirmed.
Order of Contempt
NOW, THEREFORE IT IS ORDERED, AD-
JUDGED AND DECREED by the Court of Appeals,
Eleventh District of Texas, that Oscar M. Telfair, III,
P.C. is in contempt and is fined $ 500.00 to be paid to the
Clerk of the Court of Appeals, Eleventh District of Texas,
on or before 30 days after mandate has issued.
IT IS ORDERED that all writs and other process
necessary for the enforcement of this judgment be issued.
W. G. ARNOT, III
CHIEF JUSTICE

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PRIOR HISTORY: [**1]
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
LEXSEE 883 S.W.2D 415,AT 430
TEXAS BEEF CATTLE COMPANY, ET AL, Appellants v. JEFF GREEN,
INDIVIDUALLY AND d/b/a J & F CATTLE COMPANY, Appellee
No. 09-93-013 CV
COURT OF APPEALS OF TEXAS, NINTH DISTRICT, BEAUMONT
On Appeal from the 253rd District Court. Liberty
County, Texas. Trial Cause No. 43,469-B. Hon. O'Neal
Bacon, Judge.
DISPOSITION:
AFFIRMED.
LexisNexis (TM) HEADNOTES - Core Concepts:
COUNSEL:
David J. Fisher - Orgain, Bell & Tucker - Beaumont,
for appellants.
James G. Gumbert, Mike Johnston, Bill Daniel - Sullins,
Johnston, Rohrback, Magers & Herbert - Houston, for
appellee.
JUDGES: Before Walker, C.J., Brookshire and Burgess,
JJ.
OPINIONBY: JACK BROOKSHIRE
OPINION:
[*416] OPINION
Appellee, Jeff Green (Green), brought suit against
appellants, Texas Beef Cattle Company (Texas Beef) and
W. H. (Bill) O'Brien (O'Brien), alleging an actionable
tortious interference with contract and also pleading a
cause of action for malicious prosecution. Texas Beef is
a general partnership made up of a number of general
partners. O'Brien is described as the managing partner of
883 S.W.2d 415; 1994 Tex. App. LEXIS 2218
March 10, 1994, Submitted
September 1, 1994, Delivered
September 1, 1994, Filed
Page 1
the general partnership. All the members or partners of
Texas Beef are general partners.
The Bedrock Basic Questions
In a juried proceeding, the jury found in favor of
Green. In answers to Question 1, the fact finders found
that Texas Beef and O'Brien tortiously interfered with a
contract between Green and Cargill Agricultural Credit
Corporation (Cargill) [**2] and that the tortious
interference was a proximate cause of damages to Green.
The jury in separate answers found that Texas Beef had
tortiously interfered causing damages to Green and, in
addition, that O'Brien had tortiously interfered causing
damages to Green. Question 1, inquiring about tortious
interference was, we hold, correctly submitted with
proper instructions.
In response to a separate jury question (Question 2),
the jury found that Texas Beef and O'Brien were
privileged to interfere with the contractual relationship
between Green and Cargill. However, that interference
was done with malice by O'Brien. The jury found no
malice against Texas Beef. The failing to find malice as
against Texas Beef is not controlling as to O'Brien
personally who was the managing partner. O'Brien was
not absolved. Malice was defined to include ill will,
spite, evil motives, and purposely injuring another, being
Green.
The jury also found that Texas Beef and O'Brien
maliciously prosecuted the Hartley County suit against
Green by pursuing, originating, and instigating litigation
in Hartley County and that this malicious prosecution
proximately caused damages to Green. Question 4
inquired about [**3] malicious prosecution. [*417]
We conclude Question 4 was correctly submitted with

correct instructions. The jury found for Green on the
termination element of the malicious prosecution case.
The Liberty County jury, in the case sub judice, on
the damage issues did not favor Green as to every
element of damage submitted. The jury below found no
damages for mental anguish but the jury found that
Green had been damaged in his business and personal
reputation and that Green had been damaged by having
to pay reasonable and necessary attorneys' fees and costs
in the past in connection with the Hartley County
litigation as well as reasonable and necessary attorneys'
fees and costs in the future in connection with the
Hartley County litigation. The jury awarded a sizable
sum as exemplary damages against O'Brien. No
exemplary damages were affixed against Texas Beef by
the jury.
The First Liberty County Case
To understand the posture of this appeal, it is noted
that these parties have been previously before us. A
prior, full-dress first Liberty County case was tried. The
first jury returned a detailed verdict of over 30 issues.
The pleadings of these same parties in the first [**4]
case and the issues determined therein by the first jury
control, to a significant degree, the points of error in this
subsequent appeal. Green prevailed in the first Liberty
County case. We affirmed in an unpublished opinion.
The Supreme Court denied the application for a writ of
error filed by the appellants in the first case. The first
case determined the issues, inter alia, of titles to cattle
and issues deciding the payment of debts and other
liabilities.
Appellants' Primary Position
The defendants/appellants now attack the judgment
through a number of points of error. In basic terms the
appellants argue that no judgment can be based upon the
malicious prosecution theory because Green failed to
prove the required elements of a malicious prosecution
cause of action. In separate points of error, the appellants
state that the trial judge improperly disregarded the jury
finding on privilege which was allegedly a complete
affirmative defense for the defendants in the cause of
action based on tortious interference of contract.
Appellee counters that the finding of malice as defined
destroyed the defense of privilege.
The oral submissions were very helpful and the
briefs [**5] clearly demonstrate a high degree of
professionalism.
The appellants bring 21 points of error. Many of
them are grouped. This opinion will attempt to write
upon the same as grouped.
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 2
Appellants' Attack on the Tortious Interference
Questions
The main thrust of the appellants' first group of
challenges is that since the jury found that Texas Beef
and O'Brien were privileged to interfere with a
contractual relationship between Green and Cargill, then
no recovery can be based on the theory of tortious
interference with a contract. Appellee rebuts appellants'
position by stating that since O'Brien acted with malice
as defined in Question 3 that the privilege was destroyed.
The privilege was a qualified one.
Following the trial on the merits to the jury, the able
presiding judge disregarded the jury's finding that Texas
Beef and its managing partner O'Brien were privileged to
interfere with the contractual relationship between Green
and Cargill because there was no legally sufficient
evidence to support that finding and because under the
entire verdict that finding of privilege (being a qualified
one) became ineffectual. The finding of malice as
submitted to the jury destroyed [**6] any privilege.
The trial judge in the case at bar entered judgment
against Texas Beef in favor of Green for the actual
damages, being $ 175,000 plus pre-judgment interest,
post-judgment interest, and court cost. The exemplary
damages award of $ 500,000 was set against the
managing partner, O'Brien.
Appellee's Position on the Defense of Privilege
and on the Issue of Malice and the Factual and
Procedural Background Thereof
Appellee argues that the trial court properly
disregarded the jury's answer to Question [*418] 2
dealing with privilege because such privilege only
protects good faith acts and valid assertions of legal
rights. We agree under this unique record.
Of paramount importance are the background and
the previous litigation between and among the parties.
The first Liberty County trial was conducted in April and
May of 1989. This previous litigation proceeded to final
judgment. Appellee argues several following theories
and contentions. Appellee maintains appellants were
barred by the doctrines of res judicata as well as
collateral estoppel from bringing their Hartley County
litigation. Also, the appellants violated the compulsory
counterclaim rule.
At the [**7] core of these multiple lawsuits and
appeals lies the question, ownership, and status of 247
head of cattle as well as much larger numbers of cattle of
different genders. The 247 head were steers. The other
groups of cattle included heifers and cows. Texas Beef at
the time of the various litigations was and apparently still
is a Texas general partnership in the continuing business
of buying, feeding, and selling cattle. O'Brien was, at all

elevant times, the managing partner of Texas Beef.
Green is an individual engaged in the business of buying
cattle for others and of collecting the cattle and reselling
the same. This appeal involves the third lawsuit between
Green and Texas Beef and O'Brien.
The record reflects that Green had gathered actually
about 253 head of cattle that were repetitiously described
in the statement of facts as being 247 head of steers.
Green was a bonded order buyer of cattle. Green had met
one Doug Florence who was in the cattle business in the
Panhandle area of Texas. Doug operated the Los Ninos
Ranch which was near Dalhart Texas, northwest of
Amarillo. Doug Florence also leased a large ranch
known as the Beck Ranch. The Beck Ranch was east of
Dalhart.
The [**8] record reflects that O'Brien had come to
Hardin, Texas, to look over the facilities of Green near
Daisetta and Hull. Green had several cow pens at or
near his house in Hardin. In the pens Green had
backbranded cattle and he stocked cattle. Green would
buy cattle and bring them to his pens and then ship them
out to buyers. Green stocked cattle rather than actually
pasture the cattle. Green dealt principally in cross breed
cattle because the record shows that when doing business
in the Panhandle that a bonded order buyer could not sell
cattle with over 1/8 or 1/4 Brahman blood in the cattle.
The rest of the blood line had to be of an English breed.
This requirement was necessitated by the cold winters
and other factors in the Panhandle. Doug Florence and
O'Brien had a going partnership or a joint venture
partnership in cattle.
Green had already fully paid for the 247 steers.
Green's cost was about $ 98,000 or $ 99,000. The 247
head had been gathered by Green from El Campo,
Warton, Sealy, and other towns in Texas. Some of the
247 came out of Louisiana. Green paid for the cattle with
borrowed money. He had a line of credit with First State
Bank in Hull. Doug Florence told Green to ship [**9]
the 247 steers to the Beck Ranch.
After the 247 arrived at the Beck Ranch no one paid
Green for them. The 247 were kept separated from all
other cattle on the Beck Ranch. Green had previously
delivered many head of various types of cattle before the
247 arrived. The earlier cattle included heifers, cows and
different steers. Green explained that he needed his
money quickly for the 247 steers. The 247 were offered
to O'Brien and Texas Beef. O'Brien stated that the price
was too high. Green planned to pick up the 247 and
transport them to a sale barn. Green needed to sell the
247 in order to pay his large debt to the Hull bank. The
247 were on the Beck Ranch and stayed on the Beck
Ranch for approximately a week. They were not bought
by Texas Beef or O'Brien. Texas Beef and O'Brien
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 3
unequivocally refused to buy the 247. Green had to have
his money or his 247 steers back.
Green had to concern himself with his large debt at
the First State Bank in Hull. Green in about the middle of
December of 1988 went to Amarillo to meet with Doug
and O'Brien to get payment for cattle that he delivered
earlier other than the 247 and also to make arrangements
to take back his 247 head of steers to Hardin [**10] or
elsewhere. Green had delivered many head before the
[*419] 247. Green had not received payment for the
cattle delivered before the 247. Green after the meeting
received no money for any of the cattle. The 247 were
definitely rejected by Texas Beef and O'Brien.
Doug Florence had a personal, individual line of
credit at Cargill. After the 247 were rejected, Doug
called Cargill. At Doug's personal instance and request a
draft from Cargill was made out. The draft related
strictly to the 247 head and the dollar amount was $
102,853.65. Green only broke even. Doug Florence had
arranged for the draft with Cargill through a Mr.
McMurtry. The draft contained and required Green to
execute a bill of sale as well as a full, general warranty of
title to the 247 steers to the benefit of Cargill.
Simultaneously, Green actually informed O'Brien in
person that the 247 were being shipped from the Beck
Ranch to Caprock Yard IV. Also, Green told O'Brien that
Cargill was paying in full for the 247. O'Brien had no
objection since he had definitely declined to purchase the
cattle because O'Brien insisted that the price was too
high.
The conclusion reached by our Ninth Court is that
the arrangements [**11] concerning the 247 head of
cattle constituted a separate transaction and a separate,
distinct contract from those of any other group of cattle
and O'Brien acknowledged and realized this situation.
Plaintiff's Exhibit 2 came into evidence without
objection. Plaintiff's Exhibit 2 contained a bill of sale and
the bill of sale contained, as an integral part thereof, a
general warranty that the seller Green agreed to defend
the title of the said 247 livestock against any person
whomsoever and Green warranted and certified to the
buyer and Cargill that there were no liens or security
devices or security interest on file or financial statements
on or with respect to the 247. Green had good title to the
247 head of cattle. He had paid for them in full. After
receiving the money from Cargill, Green promptly paid
off his loan at the Hull bank. This loan had been made on
the draw on the 247 head. Neither the bank at Hull nor
anyone else had made any complaint whatsoever about
Green's paying off the loan.
We conclude that the record plainly shows that
O'Brien and Texas Beef had no claim to the 247 head
and the first jury so held. O'Brien had unequivocally

declined to purchase the 247 head of [**12] cattle or
any part thereof. Green had every right to try to minimize
his losses and after O'Brien and Texas Beef had totally
rejected the 247 head of cattle, Green legitimately sold
them. The sale of the 247 head by Green in no manner
caused any loss to Texas Beef or O'Brien. Green had a
legal duty to minimize his losses and damages after
O'Brien had refused to buy. Florence, a joint venturer or
partner to Texas Beef and O'Brien had instructed Green
to send the 247 to Beck Ranch. Green had a duty to pay
the Hull bank.
Nevertheless, within some number of days after the
Cargill transaction, O'Brien received information and
learned that there were a smaller number of cattle on the
Beck Ranch than he thought was necessary to cover the
number of different cattle that Texas Beef believed that
Florence was caring for at the Beck Ranch on Texas
Beef's behalf. Under this record, Green had nothing to do
with this shortage. Florence had confessed to stealing
Texas Beef's cattle. Later it became apparent that Doug
Florence had wrongfully taken some of Texas Beef's
money with which he had claimed to use to purchase
cattle on behalf of Texas Beef, but he had not done so.
The cattle were non-existent. [**13] But again the 247
head of cattle were not involved in this shortage top, side
nor bottom.
The appellants state in their brief that Doug Florence
confessed and caused an eruption. This eruption in the
cattle industry hit the Texas Panhandle around Christmas
of 1988. Doug Florence confessed to stealing cattle from
Texas Beef. The fact finders have consistently failed to
find any culpable or off-color relationship between
Green and Doug Florence. The monies that Green
received for the 247 head of cattle were not monies from
Texas Beef. These monies derived strictly, directly, and
straight from Cargill.
Indeed, the appellants, we conclude, concede that
Green was unpaid for several large shipments of cattle
separate and apart from [*420] the 247 because
Florence's drafts and checks had been dishonored and
because Florence in some instances had simply failed to
pay for the other stock. Cargill was not in the business of
buying and selling cattle. McMurtry, a manager or
employee with Cargill, made it clear that he and Cargill
intended merely to lend money to Florence and that
Cargill treated the advance of money as a loan to
Florence -- not to anyone else. Florence, the appellants
[**14] admit, had already received approval of a $
200,000 personal line of credit with Cargill. Florence
was the actor who took the 247 head from the Beck
Ranch to the Caprock Feed Yard IV where they were
checked in under Florence's name as the owner.
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 4
Toward the very end of December of 1988, O'Brien
called McMurtry and told him of the so-called Florence
confession which had resulted in a horrendous eruption
in the Texas Panhandle cattle market. O'Brien then
claimed that Texas Beef had some nature of claim on
some of the cattle in the Caprock Feed Yards that were
standing in the name of Florence.
Then, Cargill relocated the 247 head of cattle to
another yard known as the Dalhart Sales Yard for auction
to protect their security interest. O'Brien was protesting
against Doug and Cargill, not Green. The 247 head of
cattle which were in the name of Florence or in the name
of Los Ninos Ranch were then sold at auction.
Texas Beef was untimely and belatedly attempting
to claim ownership in the 247 or some right of
possession therein. The Dalhart Livestock Auction
placed the $ 102,000 which were the sales proceeds from
the 247 head of cattle into the registry of the district
court for Hartley County. [**15] Green played no part
in these subsequent actions concerning the money placed
in the registry. The actions taken subsequent to Green's
receiving the Cargill draft were those of Texas Beef and
O'Brien concerning the 247. The record plainly shows
that O'Brien was told of the draft instrument between
Green and Cargill. O'Brien had no objection.
In late December, 1988, Texas Beef filed an
injunction suit in Hartley County District Court, cause
no. 3269, against the Los Ninos Cattle Company (the
company owned by Doug Florence), Bill Bass, and Perry
White to enjoin the removal of other cattle claimed by
Bass and White from the Beck Ranch. Later in January
of 1989, Texas Beef filed a supplemental petition against
Cargill because of the Dalhart Livestock Auction
incidents. Then in mid-January of 1989, Texas Beef filed
another pleading against Louis Dreyfus Corporation,
Seckler Company, Doug Florence, and Jeff Green. It was
evident in the record that Florence's financial situation
and business transactions created a lot of problems and
disputes among many parties. The record fails to show
that Green played any part in Florence's wrongful acts
leading to Florence's confession.
Appellants concede [**16] that Texas Beef added
Green because he was asserting a claim to cattle
somewhere in the possession of Texas Beef. Indeed,
Green had never been paid for many head of cattle
separate and apart from the 247 head. But these claims of
Green did not include or cover any of the 247 head of
steers. Cargill had fully paid Green on the 247.
Before Green was ever named or brought into the
Hartley County litigation, he (Green) filed suit in Liberty
County against Doug Florence and Texas Beef and
O'Brien to seek payments for various lots of cattle which
he had actually delivered to Florence which Florence had

apparently resold to Texas Beef. But Green had not been
paid with good checks or money. These accounts owing
to Green were large. Florence had passed to Green bad
checks marked insufficient funds. One bad check was
also marked -- do not present this check again. The
checks remained bad.
The Results of the First Liberty County Case
In Green's suit in Liberty County he alleged various
agency relationships and partnership relationships and
theories to assess debt liability against Texas Beef and its
partners. Green in his first Liberty County suit prevailed
in his claims for payment [**17] and the jury failed to
find in Texas Beef's favor on Texas Beef's counterclaim
for conversion by [*421] Green of the 247 head of
cattle and on the theory of negligent grazing. In the first
trial in Liberty County, Green won and Texas Beef and
O'Brien lost.
The Jury Findings in the First Trial of April and
May of 1989
It is important to note at this juncture that in the first
Liberty County case the jury, among other findings,
found that Texas Beef entered into either a joint venture
or partnership with Doug Florence and that Texas Beef
was estopped to deny that it had entered into a
partnership or joint venture with Florence d/b/a Los
Ninos Cattle Company, and the jury found that O'Brien
and Texas Beef had ratified the agreements by Florence
to purchase Green's cattle.
And in answer to jury Question 11 in the first trial,
the jury found that Doug Florence had made an
agreement to purchase large numbers and groups of
cattle from Green on behalf of both O'Brien and Texas
Beef and those lots included, among other lots, lots
numbered 140, 141, 143, 144, 145, 146, 147, 148, 149,
152 and 154.
Now, bear in mind that in the first Liberty County
case that the parties put [**18] in issue questions
concerning the sale of all of these cattle, the contracts
involving all of these cattle, the breach of the contracts,
and the damages to Green, found to be in excess of a
quarter of a million dollars. The first jury awarded $
258,658.80 damages to Green. This $ 258,658.80 award
was for the unpaid price of cattle other than the 247.
And very importantly, the jury in the first Liberty
County case found that Texas Beef failed to pay Doug
Florence for all the cattle in question in the suit and that
Green did not authorize Florence to accept payment for
Green from Texas Beef for the cattle involved.
The jury also found that Green was not negligent
and that Green's actions did not proximately cause
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 5
Green's own loss from the failure of Florence to pay for
the cattle received from Green.
Very significantly, the jury found that on or about
December 19, 1988, that Texas Beef was not the owner
of the 247 head and that Texas Beef did not have
possession of nor the right of possession to the 247 head
located at the Beck Ranch and shipped to Caprock Feed
Yard IV and that the fair market value of the 247 head of
cattle on December 19, 1988, amounted to $ 102,853.65.
By irrefutable [**19] logic, the award to Green of $
258,658.80 was for cattle of numerous groups other than
the 247. Very interestingly, the jury also found in the
first Liberty County trial that Jeff Green agreed with
Texas Beef to properly care for cattle identified as Lot
88529, being 446 heifers; Lot 88528, being 544 steers;
and Lot 88580, being 811 heifers, located on the Chester
Honey pasture and that Jeff Green did not negligently
fail to take care of all these cattle, being the heifers and
steers in the three numbered lots.
The jury found that O'Brien and Texas Beef ratified
even the unauthorized agreements to purchase cattle
entered into by Florence. The number of groups of cattle
were not limited in this special question. A number of
jury questions, by their wording, make plain that the first
Liberty County case involved very numerous cattle and
groups of cattle and that all of these cattle were put into
issue. Cogently, the pleadings of the parties discussed
below also placed these numerous cattle in issue.
In our view jury questions and the live pleadings in
the May 1989 Liberty County trial were relevant and
very similar to, if not identical to, the issues, contentions,
and pleadings filed [**20] later in Hartley County
against Green by Texas Beef and O'Brien. In our view
the pleadings and issues raised against Green in Hartley
County were compulsory counterclaims under TEX. R.
CIV. P. 97. Rule 97 provides in relevant part:
(a) Compulsory Counterclaims. A
pleading shall state as a counterclaim any
claim within the jurisdiction of the court,
not the subject of a pending action, which
at the time of filing the pleading the
pleader has against any opposing party, if
it arises out of the transaction or
occurrence that is the subject matter of the
opposing party's claim and does not
require for its adjudication the presence of
third parties of whom the court cannot
acquire jurisdiction; . . . .
[*422] But here, the defendants joined these
compulsory counterclaims by their own pleadings.
Hence, Green's position on compulsory counterclaims is
correct on a two-fold basis.

The Privilege, If Any, was Eviscerated
It is interesting to note that after the trial in Hartley
County wherein Texas Beef and O'Brien lost on all jury
questions, in the district court, then an appeal was taken
to the Amarillo Court of Appeals. In an excellent
opinion, the Amarillo Court [**21] agreed with Green's
position that the doctrines of res judicata and collateral
estoppel barred any of Texas Beef's or O'Brien's claims
as to the 247 head of steers which the Amarillo court
described as Group B. See Texas Beef Cattle Co. v.
Green, 860 S.W.2d 722 (Tex. App.--Amarillo 1993, writ
denied).
The Amarillo Court of Appeals fully and
unequivocally affirmed the trial court's take-nothing
judgment against Texas Beef and O'Brien (our appellants
here) with respect to the 247 steers and our Ninth Court
finds that the claims in that proceeding initiated in
Hartley County by appellants involved the same issues as
to the self-same 247 head. The jury, in the record of this
appeal, found that the appellants' prosecution in Hartley
County concerning the 247 head was a malicious
prosecution. We agree. We hold in this aspect that the
second Liberty County jury was sustained by more than
ample evidence in finding malicious prosecution. We
hold that the final judgment entered in the first Liberty
County case was strong evidence of probative force that
the underlying suit had terminated in Green's favor and
that the appellants had simply failed to acknowledge that
the judgment of [**22] May 20, 1989, was the final
judgment.
The Liberty County trial court signed its final
judgment on May 20, 1989, in Cause no. 43,469, and
Texas Beef and O'Brien began the appellate process to
the Beaumont Court of Appeals. This Court affirmed the
trial court on January 17, 1991. The Texas Supreme
Court denied writ and overruled the motion for rehearing
on September 5, 1991.
After the 1989 trial in the district court of Liberty
County in which Green prevailed and Texas Beef and
O'Brien lost and after the final judgment was entered (the
appellants seemingly concede that it was a final
judgment in their brief), then Green's attorney properly
and helpfully sent a letter to Texas Beef's attorney in
Amarillo and asked Texas Beef and their attorney to
abate all claims made against Green while the first
Liberty District Court case was on appeal.
The attorney for Texas Beef declined. Even after the
case was on appeal to the Beaumont Court of Appeals,
Texas Beef continued to press its suit in Hartley County.
The letter proved notice and knowledge to appellants that
the May 1989 judgment was final for tortious
interference of contract purposes. Appellants described
the May 20, 1989 judgment [**23] as a final one in
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 6
their brief more than once. Since appellants failed to
heed the Scurlock Oil Co. n1 rule and the notice letter,
their complaint about the lack of a final judgment was
destroyed. The critical letter of notice, requesting
abatement, will be dealt with below.
n1 Scurlock Oil Co. v. Smithwick, 724
S.W.2d 1 (Tex. 1986).
The Letter
By letter to the attorney for Texas Beef and O'Brien,
Hon. Mike Johnston on May 30, 1989, pointed out that
under the principles of res judicata and collateral
estoppel the judgment obtained by Green in the Liberty
County District Court had precluded the claims or issues
in the suit pending in Hartley County. We quote from the
notice letter:
The Supreme Court has ruled specifically
in Scurlock Oil Company v. Smithwick,
724 S.W.2d 1 (Tex. 1986), that a judgment
is final for purposes of issue and claim
preclusion despite the appeal of a
judgment.
The last paragraph of the letter asks for an agreement to
enter an order abating [**24] the Hartley County suit
until the appellate steps had been concluded. Texas Beef
declined. We quote from Scurlock Oil:
In this age of complex litigation, with
multiple suits often arising from one
occurrence, it ordinarily makes no sense
to relitigate [*423] the same issues
between the same parties, with the
possibility of inconsistent results. Once
litigated in a fair forum, that result should
be binding. . . . Moreover, the waste of
judicial time in relitigating already
decided issues is apparent. Our trial courts
are already overburdened with cases
requiring initial determination without
having to also retry questions already
decided. Therefore, we now adopt the rule
of the Restatement (Second) of Judgments
§ 13, and hold that a judgment is final
for the purposes of issue and claim
preclusion "despite the taking of an appeal
unless what is called an appeal actually
consists of a trial de novo."
The doctrine of res judicata and the doctrine of
collateral estoppel have been equated to claim preclusion
and issue preclusion and preclusion by judgment. This

appeal before us is manifestly not a trial de novo. We are
constrained, therefore, to hold that the judgment [**25]
of the Liberty County court was when entered and under
the Supreme Court's ruling a final judgment. Thus the
appellants' defense of lack of finality in the tortious
interference case is exploded. Hence, the argument of the
appellants that the judgment was not final is not sound.
In any event because of the Amarillo Court of
Appeals opinion, certainly no harm was visited upon the
appellants. We observe that the Amarillo court with
respect to the 247 head of cattle has taken the position
that the issues in respect thereto had been terminated in
Green's favor. The Supreme Court declined a writ.
Therefore, even if there were any error in the trial judge's
decision in this second Liberty County case based on the
alleged lack of termination, that decision was harmless.
But we reiterate, we do not find error.
We note the termination issue was properly
determined below and affirmed by the Court of Appeals
sitting in Amarillo. For the reasons stated above, we
determine that the appellants in this appeal, sub judice,
did not have legal or lawful justification which was a
necessary prerequisite to their asserted privilege. Justice
Carlton B. Dodson, writing for the Court stated:
In response [**26] to Texas Beef's
causes of action, in Hartley County,
Green plead res judicata and collateral
estoppel by virtue of a judgment rendered
on 20 May 1988 [sic] by the 253rd
District Court of Liberty County, Texas in
cause number 43,469. . . . However,
Texas Beef filed a counterclaim in the
Liberty County suit for conversion of the
247 head of cattle (i.e., the Group B
cattle) which were a part of the subject
matter of the Hartley County suit.
In the Hartley County action, the trial
court ordered a separate trial on Green's
defense issues of res judicata and
collateral estoppel. Those issues were
tried to a jury, and the trial court
concluded that the jury verdict was
against Texas Beef. After the judgment in
the Liberty County suit was affirmed on
appeal, the trial court rendered judgment
in the Hartley County suit in favor of
Green and denied Texas Beef's claims as
to the Group A cattle and the Group B
cattle. (Emphasis added)
And furthermore, as is shown by the record in the
first Liberty County case, virtually every one of the
paragraphs and allegations of the appellants' pleadings
that they later initiated against Green in Hartley County
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 7
were compulsory counterclaims. [**27] Appellants'
pleadings in Liberty County were in substance the same
as those filed in Hartley County.
We feel constrained to point out also that we have
deep respect for the excellent ability and scholarship of
the jurists on the Amarillo court. But we must observe
that their excellent opinion does not discuss the doctrine
of compulsory counterclaims. In addition, we have
compared the pleadings initiated by the appellants in
Hartley County against Green with their pleadings in the
first Liberty County case and we find that they are
virtually the same and for all practical purposes identical.
The prior pleadings in Liberty County and the later
pleadings in Hartley County were entered into evidence
without objection.
Appellants pleaded a cause of action against Jeff
Green for grazing losses. The pleadings filed in Liberty
County and those [*424] that were later filed in
Hartley County on negligent grazing were identical.
There were pleadings and paragraphs bearing the
caption "Action for Wrongful Sequestration" filed
against Green by Texas Beef and O'Brien. One wrongful
sequestration claim made in the Liberty case and the
same "Action for Wrongful Sequestration" later filed in
[**28] the Hartley County suit -- were identical as to
wordings and even punctuation. We hold that that is
enough to implicate the rule on compulsory
counterclaims under Rule 97 and, therefore, the
appellants in this trial at bar simply had no defense of
legal justification. The multiple terminations of all issues
on the 247 head destroyed conclusively any legal
justification in this appeal sub judice. Thus, this
malicious prosecution defense fails.
But appellants argue vehemently and rely upon
Sterner v. Marathon Oil Co., 767 S.W.2d 686 (Tex.
1989). Appellants maintain that the Sterner case
completely establishes their defense of privilege
regardless of the jury's finding of malice. We disagree.
We quote from Justice Doggett:
Many of our sister states hold that a
claim of legal justification or excuse in
the interference of contractual relations is
an affirmative defense upon which the
defendant has the burden of proof.
[citations omitted] This is because legal
justification or excuse is treated as a type
of privilege. The party asserting this
privilege does not deny the interference
but rather seeks to avoid liability based
upon a claimed interest that is being
impaired [**29] or destroyed by the
plaintiff's contract. Such defenses, which

constitute a confession and avoidance, are
affirmative in nature. TEX. R. CIV. P.
94. Therefore, we conclude that the
privilege of legal justification or excuse in
the interference of contractual relations is
an affirmative defense upon which the
defendant has the burden of proof.
. . . .
Under the defense of legal
justification or excuse, one is privileged to
interfere with another's contract (1) if it is
done in a bona fide exercise of his own
rights, or (2) if he has an equal or superior
right in the subject matter to that of the
other party. (Emphasis added)
We hold under this record that appellants failed to
exercise their claimed rights, if any, in a bona fide
manner. Malice, ill will, spite, evil motives, purposely
injuring another (Green) disemboweled any bona fide
exercises. In both Liberty County and Hartley County the
jury found that both Texas Beef and O'Brien had no
equal or superior right to the 247 head to the rights of
Green. Appellants' confidence in Sterner is misplaced.
Again, on this additional ground, legal justification is
non-existent.
We sanguinely overrule appellants' points [**30]
of error one, two, and three attacking Green's recovery
based on tortious interference with contract.
Appellants' Complaint Against the Instruction
on Contract
Appellants' point of error four objects to an
instruction contained in Question 1 alleging a comment
on the weight of the evidence. The challenged instruction
reads:
You are instructed that Jeff Green
had a contract with Cargill Agricultural
Credit Corporation whereby Green was
obligated to defend the title to the 247
head of cattle against claims made by
others.
Plainly, the above is an instruction of law; it is not a
comment on the weight of the evidence. We deem it
correct. The instruction is practicable and proper under
TEX. R. CIV. P. 277. Rule 277 in substance mandates
that the trial court shall submit such instructions and
definitions as shall be proper to enable the jury to render
a verdict. This same Rule 277 mandates that the trial
court shall submit the cause upon broad-form questions.
Trial courts routinely give instructions and definitions to
the jury on law such as those on proximate cause,
negligence, producing cause and others.
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 8
To show error in relationship to the court's [**31]
charge, appellants must prove an abuse of discretion.
Texas Dept. of Human Services v. E. B., 802 S.W.2d 647
(Tex. 1990). In this governing case Justice Cook held that
Rule 277 meant what it said. The recent amendments to
Rule 277 required broad-form submission [*425] and
a trial court must submit such broad-form questions.
Abuse of discretion occurs only when the trial court acts
without reference to any guiding principle. Rule 277 with
its provisions for instructions and definitions expedites
trials by simplifying the charge conference and making
the questions easier for the jury to understand,
comprehend, and answer.
In this case there was no dispute as to the valid and
enforceable contract between Green and Cargill. Green
was duty bound to defend by a general warranty the title
to all of the 247 head. Green had to defend the $ 102,800
plus monies he received from Cargill to vouchsafe his
payments to the Hull bank. The instrument specifically
described the 247 steers being Lots 4984 and 4985 at
Caprock IV. Green had to defend his given purchase
money security interest and his authorization to Cargill
to take full possession of the steers.
Green's general warranty was [**32] very
extensive. It included a certificate that there were no
liens, mortgages, or security interests or filed financial
statements with respect to the described livestock. We
find no error. But if there was a mistake, it was invited.
Also, appellants have completely failed to show that such
instructions were reasonably calculated to cause and
probably did cause the rendition of an improper
judgment. TEX. R. APP. P. 81(b)(1). We overrule
appellants' point of error four. Having overruled all the
challenges and points of error of appellants that attack
the theory of recovery based on tortious interference of
contract, we affirm the judgment.
The judgment below in this case has as an
independent, separate, solid ground of affirmance,
Green's cause of action for tortious interference of
contract.
The Malicious Prosecution Case
Appellants' points of error numbers five, six and
seven argue that the trial court erred in overruling the
defendants' motion for judgment n.o.v. and the
objections to the charge and the motion for new trial
because appellants say there was legally insufficient
evidence and, in the alternative, factually insufficient
evidence to support a recovery based [**33] on
malicious prosecution. The whole thrust of appellants'
argument is that Green failed to prove his case because
he failed to show that the defendants in the malicious
prosecution case caused the original, offending,
underlying suit to be filed and, secondly, he failed to

show the termination of the original suit in favor of the
party prosecuting a later malicious prosecution action
and legal damages resulting therefrom. We disagree. The
appellants brought the suit in Hartley County. The
judgment of the first Liberty County suit was a final
judgment in favor of Green and damages were amply
shown. These facts acted as a first termination, being
affirmed at all levels.
The final judgment in Hartley County acted as a
termination of the suit in Green's favor. Green's suit for
malicious prosecution was not premature or untimely.
Any argument about termination is laid to rest by the
Amarillo court and the Supreme Court. No harm is
shown by appellants. The rulings on termination were
not a denial of appellants' rights. The ruling did not cause
the rendition of an improper judgment.
The record, history, and posture of this instant
appeal before us is unique. We have been unable to find
[**34] a similar reported case. Here the first Liberty
County verdict and judgment were affirmed in the Ninth
Court, an application for writ denied in the Supreme
Court, constituting an exhaustion of all remedies and
being a thrice-final judgment and a three-fold
termination. This finality and termination concluded all
issues, claims, pleaded counterclaims and compulsory
counterclaims presented in the first Liberty County suit
are germane thereto.
Unquestionably, as to the 247 head there was a final
judgment entered in Hartley County, affirmed in the
Amarillo Court. Again, the Supreme Court denied a writ.
These final decrees constitute a three-fold termination of
all of the issues involving the 247 steers. Thus, we hold
that the element of termination in Green's malicious
prosecution case has been conclusively proved.
Accordingly, the malicious prosecution case is solidly
based on Green's favorable findings in two district
courts, by two different juries, in [*426] two Courts of
Appeals, and in a very realistic sense, the Supreme
Court.
Now, at this date, we are not called upon to pass
upon whether the element of termination was satisfied by
Green. We have no obligation to further [**35] test this
termination pursuant to TEX. R. APP. P. 81(b)(1). There
is no question of "reasonably calculated to cause and
probably did cause a rendition of an improper judgment"
because all of the prior judgments on this issues are now
"graveyard dead" without hope of resurrection.
Appellants' complaint about the lack of termination is
overruled. Appellants' point of error six is overruled.
The record makes clear that the
defendants-appellants here in this malicious prosecution
case caused the original, underlying, offending suit to be
filed in Hartley County. The documents and pleadings in
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 9
evidence sustain this proposition. Appellants' point of
error five is overruled.
Appellants cite and rely upon Kale v. Palmer, 791
S.W.2d 628 (Tex. App.--Beaumont 1990, writ denied).
Kale is inapposite.
We sanguinely determine that our case in this appeal
is dramatically and meaningfully different from Kale v.
Palmer, supra. Appellants rely on Kale to support their
contention that the termination of the original suit in
favor of the party prosecuting a later malicious
prosecution action must be shown. The facts here are
entirely different. The holding of our Court was that only
[**36] if Kale proved that the aspiration testimony was
false could the appellees be liable for fraud or
conspiracy.
In other words, to recover in their case the Kales had
to prove to the jury that Cynthia Palmer did not aspirate
vomitus in the operating delivery room. But, we held that
a jury had already decided that issue adverse to Kale.
Our Ninth Court of Appeals in Kale held that under
the doctrine of collateral estoppel essential elements of
facts determined by a court of competent jurisdiction are
binding on a subsequent action between the same parties
and those who stand in privy with them. To put it more
bluntly, the doctrine of collateral estoppel precludes the
relitigation of issues litigated in a previous action even
though the subsequent action is based upon an alleged
different cause of action.
We held that collateral estoppel does not require that
all the issues in the subsequent action be the same as
those in a prior suit, but this doctrine precludes and
disallows the same issues from being repleaded, reurged
and relitigated. Therefore, under this record, in view of
the lengthy pleading and jury findings in the first Liberty
County case, there was a termination [**37] as to the
malicious prosecution cause of action of Green. The
termination was confirmed by our Ninth Court and the
Supreme Court.
The contentions under this point made by the
appellants seek to overturn the Supreme Court's opinion
and rationale in Scurlock Oil Co., supra. Since the first
Liberty County District Court judgment was final (as
affirmed so to the Supreme Court) and because the
pronouncement of the Supreme Court in Scurlock, a
termination was effected -- as well as the finality of a
judgment. The termination defense and the final
judgment defense are under this record identical. Both
defenses failed. The evidence in the case at bar
established that the final judgment was entered in favor
of Green with respect to any of the appellants' Hartley
County claims dealing with and involving the 247 head
of cattle.

Appellants' point of error seven is to the effect that
the evidence established that the Hartley County case
was on appeal and was not terminated as a matter of law.
We disagree. The Amarillo Court has terminated any
questions about the validity of Green's malicious
prosecution case based on the 247 head. The Supreme
Court administered the "coup de grace". No [**38]
harm is shown by appellants. Indeed the Amarillo Court's
opinion on the 247 head conclusively shows lack of
harm. We overrule seven.
Appellants' Argument that Green Sustained No
Special Injury in the Malicious Prosecution Case
We additionally conclude that on this malicious
prosecution cause of action which [*427] was based
on a prior civil action, Green must show and he did show
by ample evidence that he has suffered interference as to
both his person and his property. The record reflects that
Green was required and indeed forced against his
volition pursuant to certain pre-trial procedures and
deposition notices to travel hundreds of miles from his
home in East Texas to the Panhandle in order to be in
attendance upon depositions and other pre-trial matters.
Green suffered actual interference with his person by
being required and forced as a practical matter to attend a
jury trial in Channing, Hartley County, Texas. Further,
there is no dispute that the injunction obtained by the
appellants in Hartley County caused interference with
Green's property. We conclude, therefore, that Green
suffered and sustained special injury damages. His
property, his cattle, his [**39] warranty, and especially
his money were very substantially interfered with and he
was damaged and injured substantially thereby.
His attorneys' fees in connection with the Hartley
County litigation were found by the jury to be in the
amount of $ 125,000 for past fees, expenses, and costs,
and an additional $ 25,000 for reasonable and necessary
attorneys' fees and costs in the future to be incurred in
connection with the Hartley County litigation. Appellants
place major reliance on Oakcrest Civic Club v. Lowe,
678 S.W.2d 93 (Tex. App.--Houston [14th Dist.] 1984,
writ dism'd).
Appellants argue that in the Oakcrest case that a
defendant filed a cross claim against the plaintiff for
malicious prosecution. That is not our case at bar. The
Court of Appeals reversed the judgment and rendered
that the defendant (being the counter plaintiff) take
nothing. The Fourteenth Court stated that it was clear
that the appellees filed their suit prematurely in that no
judgment had been entered in any proceedings. Green
has a final judgment in Liberty County. There was a final
judgment entered in the first Liberty County proceeding.
Furthermore, the Fourteenth Court said that the counter
[**40] plaintiffs failed to plead and prove a legal cause
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 10
of action upon which a judgment could be rendered. The
appellants' reliance upon Oakcrest is not sound.
Interestingly, appellants also place major reliance
upon Smart v. Carlton, 557 S.W.2d 553 (Tex.
App.--Beaumont 1977, writ ref'd n.r.e.). In that case, Don
Smart and Jessie Smart had been husband and wife. They
were divorced. A property settlement agreement was
incorporated into the divorce decree. Later, Jessie Smart,
the former wife, filed a bill of review claiming that Don
Smart had committed fraud. The fraud was committed by
omitting certain, important items of community property
from the divorce accounting and Jessie sought a
reformation of the decree and a judgment so as to award
to her her proper, lawful, community property rights.
Carlton was Jessie's lawyer in the bill of review
proceedings. He continued to represent her.
In the meantime, Don (who was both an attorney
and a physician) filed a cross action against Jessie and
Carlton alleging that Jessie's suit was merely for the
purpose of vengeance, harassment, and intimidation and
failed to state a cause of action as a matter of law and
was barred as a matter [**41] of law. Don further
alleged that the action of Jessie was malicious and for the
purpose of harassment to gain money and that his own
suit was a cause of action for abuse of process.
Carlton took the position that the cross action of
Don, the former husband, was really a suit for malicious
prosecution of a pending suit that had not been tried; that
is to say, in the bill of review litigation. Carlton filed a
motion for summary judgment supported by his affidavit.
The Ninth Court of Appeals determined that the cross
action filed by Don was manifestly one for malicious
prosecution based on a civil suit. Our Ninth Court further
held that one of the necessary elements of maintaining
such a malicious prosecution suit is that it must be shown
that the suit alleged had to have been prosecuted with
malice and without probable cause terminated in favor of
the plaintiff claimant. There our Court held that Don
Smart did not allege and, indeed, could not allege that
the suit filed by Jessie with Carlton as her attorney ended
in his favor. The parties were still in the actual trial of the
bill of review. No judgment of any kind had been
rendered.
[*428] The Smart case is clearly not [**42]
controlling here. It is inapposite.
We hold under this lengthy record and because of
the fact that there have been three separate lawsuits
between these parties; that therefore, there was
interference with the person of Green and certainly there
was interference with his money because of extensive
and expensive but necessary and reasonable attorneys'
fees and court costs that Green had to pay in view of

other special injuries thrust upon Green in Liberty and
Hartley Counties. The trials and the resulting appeals
constituted special injury. This interference with Green's
liquid property amounted to several hundred thousand
dollars.
Importantly, the language defining "special injury"
used in the court's instructions tracks very nearly
verbatim the standards set forth in Moiel v. Sandlin, 571
S.W.2d 567 (Tex. Civ. App.--Corpus Christi 1978, no
writ). The jury awarded $ 25,000 to Green for special
injuries and damages to his business and personal
reputation. This award adhered to Moiel, supra. In
addition, the busy trial judge was faced with a number of
appellants' requested instructions. One instruction which
was requested by the appellants was that the jury be
instructed [**43] that special injuries means actual,
physical detention of a person or seizure of his property.
We conclude that requested instruction was not correct in
our case.
We conclude that there was no difference (certainly
no meaningful difference) between the defendants'
special requested instruction number eight and the
instruction that the court gave. Any error thus was
invited. Yet another special instruction was requested
concerning special damages. It insisted that special
damages had to mean actual interference with a party's
property such as an appointment of a receiver or a writ of
replevin or an injunction. We think that was overbroad.
But we notice that in Hartley County the appellants
obtained an injunction against Green. There is no error in
this aspect of the charge. The multitude of suits and the
several appeals make our case different. The large
attorneys' fees and substantial costs and expenses satisfy
the special injury(ies) element. We overrule appellant's
point of error number nine and other points of error
dealing with special injury or damage elements. We
overrule appellants' point eight.
We overrule appellants' point of error number ten.
We conclude that the record [**44] shows a lack of
probable cause on appellants' part and therefore,
malicious prosecution ensued. The record reflects that
O'Brien made certain repeated statements in the nature of
threats that he would use court suits and he did so; in
fact, (the jury could and did believe) the appellants used
the Hartley County litigation as a means of harassing
Green in an effort to break Green financially. The
evidence supports the jury's verdict relevant thereto.
Furthermore, the lack of probable cause is evident
from the appellants' continued pursuit of their claim to
the 247 head even long after they lost these identical
claims to the very same cattle -- that is, the 247 head -- in
the first original district court suit in Liberty County. We
overrule eleven because we determine that Green
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 11
discharged his burden of proof as to lack of probable
cause. Appellants' contention that probable cause was
shown as a matter of law and the jury's answer thereto
was against the great and overwhelming preponderance
of the evidence is simply not valid or sound. This
conclusion is correct because appellants did not have the
burden of proof on this issue.
By point of error twelve the appellants charge that
[**45] the trial court erred by excluding defendants'
Bill of Exception from the evidence since it was relevant
to defendants' probable cause issue.
We overrule additional points dealing with the trial
court's exclusion of appellants' Bill of Exception
evidence. We find that the same strains of evidence were
cumulative. The exclusion of this Bill of Exception
evidence fell well within the trial court's discretion. Any
probative evidence therein was strongly and substantially
outweighed by the clear danger of unfair prejudice. The
proffered Bill of Exception, as tendered, was simply
inadmissible. TEX. R. CIV. EVID. 403.
[*429] The Bill of Exception would have created
a confusion of the issues and certain court orders therein
would have been misleading to the jury.
Additionally, the Bill contained, in great measure,
expert testimony on questions of law and mixed
questions of law and fact. Such expert testimony must
assist the trier of fact in determining fact issues. Thus,
the same is subject to careful scrutiny by the trial court.
TEX. R. CIV. EVID. 702. For the appellants to
successfully obtain reversal of a judgment grounded
upon error of the trial court in admitting or excluding
[**46] evidence, the following must be shown:
(a) that in fact the trial court committed
error; and
(b) that the error was reasonably
calculated to cause and probably did
cause rendition of an improper judgment.
Gee v. Liberty Mut. Fire Ins. Co., 765 S.W.2d 394 (Tex.
1989); Bridges v. City of Richardson, 163 Tex. 292, 354
S.W.2d 366 (Tex. 1962); TEX. R. APP. P. 81(b)(1).
We decline to find reversible error on the rulings on
excluding evidence where the excluded evidence is not
controlling of a material issue that is dispositive of the
litigation. Thus, we hold there was no error. We note that
the Bill of Exception consumed about 31 or 32 pages. As
an additional ground for our decision we have carefully
reviewed for the second time the Bill of Exception. We
decide that the entire Bill, as a unit, was tendered before
the trial court with a request for the same to go to the
jury.

Under this tender, all of the Bill had to be
admissible. It was not. The trial judge did not err.
We think that this tendered Bill of Exception
evidence was properly excluded since it violated the
opinion, decision, rationale and philosophy of Scurlock
Oil Co., supra.
The Bill of [**47] Exception evidence tendered,
inter alia, certain court orders that were entered either
while the first Liberty County judgment was on appeal or
after the appeal had been decided adversely to appellants
by our Ninth Court of Appeals. These court orders were
entered in Hartley County on motions for summary
judgment. These orders, we deem, were not relevant to
this case. Also TEX. R. CIV. P. 97 disallowed these
orders. The rule governing summary judgment practice is
vastly different as to the quality of the evidence and the
quantity thereof from the status of the evidence on an
issue in a jury case; confusion to the jury would have
resulted.
One of the excluded orders was an order for
severance and transfer. It was signed on or about January
8, 1992, which was after our opinion of our Ninth Court
of Appeals; no error is shown.
During the Bill, the appellants' testimony
repetitiously and consistently revealed that they wanted
to try again the issues and doctrines of res judicata and
collateral estoppel; but those matters were not available
for a second trial at that time. The record plainly proves
that the appellants wanted to retry the issues on the 247
head; apparently they were [**48] determined to do so
and the Hartley County jury so found. We necessarily
adhere to the Scurlock Oil case. Point of error twelve is
disallowed.
Appellants group points of error thirteen, fourteen,
fifteen, sixteen, and seventeen. These points challenge
instructions one, two, three, four, and five in the court's
charge. The challenges are uniform. Each instruction is
said to be a comment on the weight of the evidence. We
determine that each instruction is not a comment on the
weight of the evidence. The trial judge was pronouncing
the Texas law and he did so correctly. The instructions
were correct. But the same were made necessary by the
present language of TEX. R. CIV. P. 277. Rule 277
mandates that the court submit broad-form questions.
The rule, by Justice Cook's diktat, means exactly what it
says.
Rule 277 states that the trial court shall submit such
instructions as shall be proper to enable the jury to render
a verdict. The first paragraph of Rule 277 uses the
mandatory verb "shall" twice. And in this case we
interpret the phrase "shall be proper to enable the jury to
render a verdict" to mean that such instructions need
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 12
only be helpful or of assistance or merely [**49]
facilitative to the jury in reaching a verdict.
[*430] We also hold, however, that these
challenged instructions were proper under the
substantive and procedural law. Query: Does "proper"
modify only instructions and definitions or does "proper"
also mean facilitating and making it easy for the jury to
reach a verdict? We think it is salutary and correct to
give this word "proper" both meanings in this case under
this record.
The trial court abused no discretion in the instruction
on final judgments. The district judge was assiduously
following Supreme Court law. The instructions on
compulsory counterclaims were correct as we have
determined elsewhere in this opinion. Again, this record
is unique. The final judgments in both Liberty County
and Hartley County had become more than final because
of the actions of the Beaumont Court of Appeals and the
Amarillo Court of Appeals and the Supreme Court.
Hence, no harm is shown. Absolute harmlessness is
conclusively proved -- especially as to the 247 head. The
instructions one, two, three, four, and five possessed, as
of now, no probability of bringing about an improper
judgment. TEX. R. APP. P. 81(b)(1). Points of error
thirteen, fourteen, [**50] fifteen, sixteen, and
seventeen are overruled.
We hold that necessary and reasonable attorneys'
fees and costs even though expended and incurred in
previous litigation can be recovered as proper damages
in a later suit based on tortious interference of contract.
This ruling is, we conclude, a necessary exception to the
general rule. We acknowledge that the general rule
states, unless provided for by statute or by contract of the
parties, attorneys' fees incurred by a party in older
litigation are not recoverable against the present
adversary in new, current litigation. The exception to the
general rule is where the natural and proximate results
and consequences of prior wrongful acts had been to
involve a plaintiff, situated as Green, in litigation with
and against third parties and other parties.
We specifically hold, inter alia, that Green had a
right to recover his attorneys' fees and costs in the
Hartley County litigation, as to past proceedings,
whether or not such recoveries and attorneys' fees were
germane to O'Brien and Texas Beef or Cargill or any of
the other litigants involved. This ruling is correct because
O'Brien and Texas Beef forced Green into the Hartley
County [**51] case in a wrongful manner as observed
above. Texas Beef and O'Brien were the original movers,
pleaders, and authors of the Hartley County litigation
against Green; they were the tortious interferers.
Also, Green's attorneys' fees in Hartley County are
so intertwined and enmeshed as to be incapable of any

meaningful, realistic segregation. It would be virtually
impossible to separate attorneys' services in defending
against Texas Beef, O'Brien, Cargill, Los Ninos Cattle
Company, Bass and White, and others. Therefore,
appellants' point of error eighteen is overruled.
Appellants' point of error nineteen attacks the
punitive damages awarded against O'Brien as being
excessive and not proportionally related to the actual
damages. The "not proportionally" contention is clearly
not sustainable.
Without any criticism whatsoever toward any party
or counsel and with due deference to all counsel in
appellants' point of error nineteen (A), the challenge
contains two paragraphs. In the two paragraph discussion
reference is made only to five lines of testimony.
The lines of testimony set out in appellants' brief are
that "he [O'Brien] would carry me [Green] to the highest
court until he [O'Brien] [**52] eventually wears me
[Green] down." Green responded, "Well, Mr. O'Brien, I
can't stay with you . . . . I ain't got the money that you've
got. You'll eventually break me if you just keep dragging
me from one court to another."
These threats -- which the jury had a right to weigh
and believe having been made by O'Brien -- are
horrendous and horrific to an order buyer's financial life
and death. Green was so situated. O'Brien never denied
these threats. O'Brien did not even attend the second
Liberty County trial below. O'Brien was on regular,
long-planned vacation with his family. As we
comprehend the statement of facts, O'Brien took Green
aside and detained Green while making one of the
[*431] threats. This action was an interference with
Green's person. Special injury was proven. No authority
was cited in point of error nineteen (A). Appellants
candidly admit that they continued the litigation in
Hartley County.
Our Ninth Court cannot countenance or condone
such threats; we hold such threats destroy the defense of
privilege in the tortious interference case and destroy the
defense of probable cause in the malicious prosecution
suit; such threats prove lack of probable cause [**53]
against the appellants; and such threats constitute
interference with the person and personality of Green.
Appellants make no complaint about lack of a
bifurcated trial on the exemplary damage issues. Thus,
Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 1994
Tex. LEXIS 90, 37 Tex. Sup. Ct. J. 883 (June 8, 1994) is
not implicated on "bifurcation". Justice Cornyn wrote
that the Moriel opinion applies only to trials in the future.
We quote: "The standards we announce apply to all
punitive damage cases tried in the future."
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 13
We have considered the unique facts of this
particular case, weighing the nature of the wrong, the
character of the conduct involved (being the threats, the
other acts, the continuing prosecution of the complex
Hartley County case), the seriousness of the
blameworthiness of the wrongdoer, the situations and the
sensibilities of the parties concerned and the extent that
the offending conduct insults the public sense of justice
and propriety.
We overrule point of error nineteen (A).
Point of error nineteen (B) argues that the punitive
damages were excessive and not related to actual
damages. The jury awarded Green $ 175,000 in damages.
The $ 500,000 assessed [**54] as exemplary damages
in less than a 3:1 ratio.
This case, however, is especially egregious because
the first Liberty County lawsuit resulted in a final
judgment in favor of Green. Green's attorney made
appellants fully aware of the Scurlock Oil Co. rule, yet
appellants pushed forward the Hartley County litigation.
The threats of O'Brien, the jury could perceive,
reflected the "degree of culpability of the wrongdoer".
The final two Kraus n2 factors, "the situation and
sensibilities of the parties concerned" and "the extent to
which such conduct offends a public sense of justice and
propriety" are subjective.
n2 They are delineated in Alamo Nat. Bank
v. Kraus, 616 S.W.2d 908 (Tex. 1981).
Yet it is common, popular knowledge that there is a
growing wide-spread distaste for increasing litigation,
especially duplicitous, repetitive litigation.
The jury found that O'Brien, acting for Texas Beef,
maliciously continued and prosecuted the Hartley
County lawsuit despite the first Liberty County final
judgment [**55] which was based upon the extensive
verdict. O'Brien's motives, if his threats were to be
believed and carried out in actions as well as words, were
on the whole meant to ruin Green financially and cause
Green's economic death. The evidence, taken in its
entirety, is there to sustain the jury's award of $ 500,000.
The jury's award is not excessive.
We have attempted to follow the opinion of Justice
Gonzalez in Ellis County State Bank, et al v. Keever,
1994 Tex. LEXIS 120, 37 Tex. Sup. Ct. J. 1117, handed
down June 22, 1994. Keever is an opinion on malicious
prosecution.
In Moriel, Justice Cornyn set out certain standards to
be applied to all punitive damage cases tried in the

future, thus, under Justice Cornyn's clear language,
Moriel is not applicable to this appeal. We have carefully
heeded and followed the plain language of Chief Justice
Walker in Mauriceville National Bank v. Zernial, 880
S.W.2d 282 (Tex. App.--Beaumont 1994, n.w.h.).
No criticism of any counsel is intended as to any
point of error -- especially nineteen (A) and nineteen (B).
Counsel could not have anticipated Moriel, supra, and
Keever, supra, and their diktats. Thus, counsel [**56]
could not have tried this case, nor briefed this case, nor
argued this case before us in strict conformity to Moriel
and Keever.
Here, the trial was conducted and the appeal taken
without the benefit of Moriel and Keever. Moriel, as now
written, dictates [*432] new procedural standards and
the Supreme Court provided that the new procedural
standards apply to "all punitive damage cases tried in the
future".
Justice Cornyn announced new duties and
responsibilities thrust upon the courts of appeals in
reviewing the evidence on punitive damages awards. We
quote:
B. Court of Appeals Review of the Evidence
A court of appeals may vacate a
damage award or suggest a remittitur only
if the award is "so factually insufficient or
so against the great weight and
preponderance of the evidence as to be
manifestly unjust. (citations omitted). A
court of appeals is also governed by this
same standard when reviewing a trial
court's suggestion of remittitur. Larson
v. Cactus Util. Co., 730 S.W.2d 640 (Tex.
1987). While we do not alter this level of
appellate defense, we emphasize that
courts of appeals must carefully scrutinize
punitive awards to ensure that they [**57]
are supported by the evidence. We have
already held in Pool that courts of
appeals, when reversing on insufficiency
grounds, should detail the evidence in
their opinions and explain why the jury's
finding is factually insufficient or is so
against the great weight and
preponderance of the evidence as to be
manifestly unjust. 715 S.W.2d 629 at
635. Due to the jury's broad discretion in
imposing punitive damages, we believe
that a similar type of review is appropriate
when a court of appeals is affirming such
an award over a challenge that it is based
on insufficient evidence or is against the
great weight and preponderance of the
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
evidence. This will ensure careful
appellate review of the punitive award,
and allow this court to determine whether
the court of appeals correctly applied the
Kraus factors. Thus, we hold that the
court of appeals, when conducting a
factual sufficiency review of a punitive
damages award, must hereafter detail the
relevant evidence in its opinion,
explaining why that evidence either
supports or does not support the punitive
damages award in light of the Kraus
factors. (emphasis added)
Page 14
With respect, the meaning timewise of the [**58]
diktat holding that the court of appeals (when conducting
a factual sufficiency review of a punitive damages
award) "must hereafter detail" is not clear. Query: Does
"hereafter" mean appeals started or perfected after the
date of June 8, 1994? A second query: Does "hereafter"
mean an appeal that was perfected, briefed, argued, and
considered by a court of appeals but not finally decided
by the court of appeals by way of opinion? The latter
situation is where the court of appeals has performed all
of its duties and functions and circulated drafts of
opinions or issued opinions before June 8, 1994.
Then, query: What about the procedural situation
wherein an opinion has been handed down but a lengthy
motion for rehearing is being considered?
Nevertheless, we overrule appellants' point of error
nineteen (B).
Point of error twenty involves the awarding of
pre-judgment interest on the attorneys fees. Appellants
argue the pre-judgment interest should run only on those
attorney's fees which were actually paid prior to trial. In
C.T.W. v. B.C.G., 809 S.W.2d 788, 795 (Tex.
App.--Beaumont 1991, no writ) we held a party was
entitled to recover pre-judgment interest on the entire
amount [**59] of damages he is awarded in the
judgment. This point of error is overruled.
We have applied, as noted above, the correct
standards of appellate review and therefore, we overrule
appellants' point of error number eighteen dealing with
attorneys' fees, number nineteen dealing with punitive
damages, number twenty dealing with the award of
pre-judgment interest, and number twenty-one dealing
with the award of post-judgment interest.
We determine that post-judgment interest on the
attorneys' fees for appellate work, appellate briefs, and
appellate oral submissions begins to run from the date of
the intermediate appellate court's first opinion. These are
reasonable, simple, mathematical calculations.

[*433] The courts of appeals have no obligation to
detail the supportive evidence as to actual damages. But
we think we have done so. And we have done so at
considerable length.
Under the entire record, this litigation was a case for
a jury's determination. The evidence was conflicting and
that is exactly what the jury was and is for. It is the jury's
sole and exclusive prerogative to determine the facts.
The peers of all the parties have now spoken in three
separate and distinct [**60] verdicts. Each such verdict,
in their governing questions and findings, favored Green.
A court of appeals cannot act as a super jury. The Texas
Constitution forbids it. The jury findings are inviolate.
TEX. CONST. art. I § 15.
Having reviewed the record, we hold that the jury
questions and the jury's answers relevant to the malicious
883 S.W.2d 415, *; 1994 Tex. App. LEXIS 2218, **
Page 15
prosecution cause of action were proper and correct and
the instructions and definitions thereto were proper and
correct. We find ample and sufficient evidence of strong
probative force and valuation to sustain the jury's
answers. Thus, the judgment below is affirmed on a
two-fold basis; it is affirmed on the tortious interference
theory and separately and independently on the malicious
prosecution theory.
AFFIRMED.
JACK BROOKSHIRE
Justice
Submitted on March 10, 1994
Opinion Delivered September 1, 1994
Before Walker, C.J., Brookshire and Burgess, JJ.

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921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
LEXSEE
TEXAS BEEF CATTLE COMPANY ET AL., PETITIONERS v. JEFF GREEN,
INDIVIDUALLY AND D/B/A J & F CATTLE COMPANY, RESPONDENT
PRIOR HISTORY: [**1] ON APPLICATION
FOR WRIT OF ERROR TO THE COURT OF
APPEALS FOR THE NINTH DISTRICT OF TEXAS.
This Opinion Substituted on Grant in Part and Overrule
in Part of Texas Beef Cattle Company's Motion for
Rehearing and on Overrule of Jeff Green's Motion for
Rehearing for Withdrawn Opinion of January 11, 1996,
Previously Reported at: 1996 Tex. LEXIS 2. .
LexisNexis (TM) HEADNOTES - Core Concepts:
JUDGES: JUSTICE CORNYN delivered the opinion of
the Court, in which CHIEF JUSTICE PHILLIPS,
JUSTICE HECHT, JUSTICE ENOCH, JUSTICE
SPECTOR, JUSTICE OWEN, JUSTICE BAKER, and
JUSTICE ABBOTT join. JUSTICE GONZALEZ,
dissenting. JUSTICE GONZALEZ, dissenting.
OPINIONBY: JOHN CORNYN
OPINION:
[*205] Texas Beef Cattle Company's motion for
rehearing is granted in part and overruled in part. Jeff
Green's motion for rehearing is overruled. We withdraw
our opinion and judgment of January 11, 1996, and
substitute the following opinion.
This malicious prosecution and tortious interference
with contract case is the culmination of three lawsuits
filed in two counties arising out of competing claims to
several hundred head of cattle. We address three [*206]
main issues: first, whether a civil case upon which a
malicious prosecution suit [**2] is predicated has
"terminated" in favor of a plaintiff before appeals of the
underlying case have been exhausted; second, whether
No. 94-1004
SUPREME COURT OF TEXAS
921 S.W.2d 203; 1996 Tex. LEXIS 43; 39 Tex. Sup. J. 523
September 19, 1995, Argued
April 25, 1996, Delivered
Page 1
the "special injury" requirement for damages has been
satisfied in this case; and third, whether actual malice or
legal malice is the relevant inquiry in a justification
defense to a claim of tortious interference with contract.
We hold that an underlying civil claim does not
terminate in favor of the plaintiff in a malicious
prosecution case until the appeals process has been
exhausted, and that the special injury threshold for
damages in such cases requires an interference with the
plaintiff's person or property. We also hold that a jury
finding that interference is legally justified is not
nullified by a finding of actual malice. Accordingly, we
reverse the judgment of the court of appeals and render
judgment for W. H. O'Brien, the managing partner of
Texas Beef Cattle Company (Texas Beef), and Texas
Beef on the malicious prosecution claim, and render
judgment for O'Brien on the tortious interference with
contract claim.
The facts of this case are convoluted. In search of a
buyer and at the behest of Doug Florence, a cattle stocker
for and joint venturer [**3] with Texas Beef, Jeff Green
shipped 253 head of cattle to the Beck Ranch, located in
the Texas Panhandle. During negotiations with O'Brien,
Green offered to sell these cattle to Texas Beef. O'Brien
declined, saying that the price was too high.
Florence then proposed to Green that he sell the
cattle to Cargill Agricultural Credit Corporation. Cargill,
however, was only interested in 247 of the 253 head of
cattle. Green agreed to the sale and told O'Brien that 247
of the cattle would be relocated to Caprock IV, a
feedyard in Dalhart, to close the deal with Cargill.
Following this agreement, Florence shipped the cattle to
Caprock IV, where they were registered in his name.
Cargill subsequently issued a $ 102,853.65 draft to
Green, and Green warranted the buyer's title to the cattle.

Florence later confessed to Texas Beef that he had
stolen all or a major portion of Texas Beef's cattle
pastured on the Beck Ranch. O'Brien subsequently
claimed to Cargill that some or all of the cattle delivered
by Florence to Caprock IV belonged to Texas Beef.
These were the same 247 head of cattle that Texas Beef
had chosen not to buy just weeks before. Cargill
responded by relocating the cattle to the [**4] Dalhart
sale barn for auction, where 233 were sold for $
102,000.00. As a result of Texas Beef's and Cargill's
competing claims to the sale proceeds, the Dalhart
Livestock Auction interpleaded the funds into the
registry of the court in Hartley County.
The first lawsuit concerning the contested cattle was
filed by Texas Beef in Hartley County. Texas Beef sued
Cargill for conversion, and later joined Green and several
other parties who claimed title to the cattle that had been
in either Florence or Texas Beef's possession. The trial
court issued a temporary injunction against Cargill,
preventing both its collection of the auction proceeds and
the sale of any other cattle located on Caprock IV to
which Texas Beef claimed an interest. Cargill
cross-claimed against Green on his warranty of title.
Two days later, Green filed suit in Liberty County
against Texas Beef, its partners, and Florence. Green
alleged nonpayment for several shipments of cattle
delivered to Florence and resold by Florence to Texas
Beef, and that he was not certain which cattle had been
paid for. Texas Beef countersued Green for conversion
of the 247 head of cattle delivered to Caprock IV, the
identical claim it [**5] asserted in the Hartley County
case.
The Liberty County suit was tried first, in May of
1989, and resulted in a judgment for Green, including the
247 head of cattle claimed by Texas Beef. This judgment
was affirmed by the Beaumont Court of Appeals, and we
denied Texas Beef's application for writ of error on June
5, 1991.
Although it lost its counterclaim on the 247 head of
cattle in the Liberty County suit, Texas Beef pursued that
same claim in Hartley County, along with several other
claims that had not been litigated in the Liberty County
suit. The trial court ordered a separate trial on Green's
affirmative defenses of res judicata and collateral
estoppel, which [*207] resulted in a jury finding that
Texas Beef's claims to the 247 head of cattle had been
finally decided in the Liberty County suit. The Hartley
County court ultimately rendered judgment for Green on
all claims.
The Amarillo Court of Appeals affirmed that
judgment in part and reversed it in part, 860 S.W.2d 722,
agreeing that Texas Beef's claims to the 247 head of
cattle were barred by res judicata but that its claims to
921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
Page 2
other cattle were not barred. After denying the
application for writ of error, this Court [**6] overruled
the motion for rehearing on March 9, 1994.
Green filed this case in Liberty County on April 3,
1992, ten days after the trial court signed the judgment in
the Hartley County case. He alleged that Texas Beef's
continuation of the Hartley County suit after it lost the
first Liberty County suit tortiously interfered with his
contract with Cargill and amounted to malicious
prosecution. Following a jury trial, the trial court
rendered judgment for Green on both claims. The jury
found, in part, that while both Texas Beef and O'Brien
were legally justified in interfering with Green's contract
with Cargill, O'Brien had interfered maliciously. Malice
was defined in the charge as ill will, spite, evil motives,
and the purposeful injuring of another. Based on this
finding, the trial court disregarded the justification
finding for O'Brien. The trial court also rendered
judgment for Green on the malicious prosecution claim,
even though the underlying Hartley County suit was still
on appeal. The Beaumont Court of Appeals affirmed,
883 S.W.2d 415, and we granted Texas Beef and
O'Brien's application for writ of error.
I. Malicious Prosecution
To prevail in a suit alleging malicious [**7]
prosecution of a civil claim, the plaintiff must establish:
(1) the institution or continuation of civil proceedings
against the plaintiff; (2) by or at the insistence of the
defendant; (3) malice in the commencement of the
proceeding; (4) lack of probable cause for the
proceeding; (5) termination of the proceeding in
plaintiff's favor; and (6) special damages. James v.
Brown, 637 S.W.2d 914, 918 (Tex. 1982). The parties
dispute the existence of the fifth and sixth elements. We
will first address the fifth element of this cause of action,
whether at the time Green brought his malicious
prosecution suit, the underlying Hartley County case had
terminated in his favor. When the trial court rendered
judgment in the malicious prosecution case, the appeal of
the underlying civil case in Hartley County had not been
resolved. n1
[**8]
n1 Green obtained a trial court judgment on
the malicious prosecution claim in Liberty
County on September 29, 1992; the Amarillo
Court of Appeals did not render judgment in the
underlying Hartley County case until August 19,
1993. After denying the writ of error, we
overruled Texas Beef's motion for rehearing on
March 9, 1994.

A. Termination
Green argues that the Hartley County case terminated in
his favor upon entry of the trial court judgment and that
an appeal should have no affect on his malicious
prosecution claim. Green argues that our holding in
Scurlock Oil Co. v. Smithwick, 724 S.W.2d 1 (Tex. 1986),
supports the court of appeals's determination that the
Hartley County trial court judgment terminated the case
despite the pendency of the appeal. We disagree.
In Scurlock, after carefully weighing the
alternatives, we held that a judgment is generally final
for the purposes of issue and claim preclusion regardless
of the taking of an appeal. Id. at 6. The principal reason
we cited for this rule was the nonsensical alternative of
retrying the same issues between the same parties in
subsequent proceedings with the possibility of
inconsistent results. Id. We are not persuaded, however,
that this rule should be extended to the malicious
prosecution context. Although Green's conversion claim
was litigated in the first Liberty County suit, and thus
precluded the second suit based on the same claim in
Hartley County, the malicious prosecution suit did not,
strictly speaking, [**9] relitigate the claims in those
cases. The issues in the malicious prosecution suit are
more accurately characterized as being predicated upon
Green's success in the Hartley County suit and distinct
from the issues tried there. Far from relieving litigants
and the judicial system of repetitive [*208] lawsuits
with the possibility of inconsistent results, we believe
that extension of the Scurlock rule to malicious
prosecution cases would actually promote repetitive and
unnecessary litigation because it would allow the
plaintiff to prosecute a claim only to have it rendered
meaningless if later all or part of the appeal of the
underlying action is decided adversely. See Moran v.
Klatzke, 140 Ariz. 489, 682 P.2d 1156, 1159 (Ariz. Ct.
App. 1984). Thus, our holding today is consistent with
the policy underlying Scurlock: the prevention of
unnecessary litigation.
The finality rule in Scurlock merely binds the parties
and their privies to the original judgment and promotes
judicial economy by forcing a losing party to follow the
ordinary appeals process, rather than relitigating adverse
fact findings in a new lawsuit. Scurlock, 724 S.W.2d at 6.
Unlike the Scurlock [**10] rule, the rule adopted by the
court of appeals in this case would immediately expose
an unsuccessful plaintiff to tort liability, even though the
civil suit supporting the malicious prosecution claim
might be reversed on appeal, as happened, at least in
part, in this case. In contrast to a rule exposing losing
litigants to liability on the basis of a judgment that may
be reversed, potential malicious prosecution plaintiffs
suffer little additional harm in having to wait until the
921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
Page 3
appeals process has run its course, especially when pre-
and post-judgment interest are available to compensate
for any losses suffered in the interim. Accordingly, we
hold that an underlying civil suit has not terminated in
favor of a malicious prosecution plaintiff until the
appeals process for that underlying suit has been
exhausted.
We note that the rule we adopt today is in accord
with the Restatement: "If an appeal is taken, the
proceedings are not terminated until the final disposition
of the appeal and of any further proceedings that it may
entail." RESTATEMENT (SECOND) OF TORTS §
674 cmt. j (1977). This rule has also been adopted by a
majority of those states addressing either the termination
[**11] issue or the point at which the limitations period
commences. E.g., Tenth Ward Rd. Dist. v. Texas & Pac.
Ry., 12 F.2d 245, 248 (5th Cir. 1926) (applying
Louisiana law); Smith v. Hurd, 699 F. Supp. 1433, 1436
(D. Haw. 1988) (applying Hawaii law), aff'd, 985 F.2d
574 (9th Cir. 1993); Barrett Mobile Home Transp., Inc.
v. McGugin, 530 So. 2d 730, 733 (Ala. 1988); Moran v.
Klatzke, 140 Ariz. 489, 682 P.2d 1156, 1157-58 (Ariz.
Ct. App. 1984); Cazares v. Church of Scientology, 444
So. 2d 442, 447 (Fla. Dist. Ct. App. 1983); Commercial
Credit Corp. v. Ensley, 148 Ind. App. 151, 264 N.E.2d
80, 86 (Ind. Ct. App. 1970); Lindenman v. Umscheid,
255 Kan. 610, 875 P.2d 964, 975 (Kan. 1994); Breen v.
Shatz, 267 S.W.2d 942, 943 (Ky. Ct. App. 1954); Parisi
v. Michigan Townships Assoc., 123 Mich. App. 512, 332
N.W.2d 587, 591 (Mich. Ct. App. 1983); Coleman v.
Strong, 105 Okla. 282, 232 P. 378, 379 (Okla. 1925).
Our holding is also consistent with the rule we have
applied in determining whether a baseless criminal
prosecution has terminated in favor of the accused. See
Davis v. City of San Antonio, 752 S.W.2d 518, 523 (Tex.
1988) ("Even when [**12] the termination is indecisive
as to the accused's guilt, it is nevertheless favorable if the
prosecution cannot be revived."). While one Texas
court has favorably mentioned the majority rule in the
context of an underlying civil case, the decision rested
largely on other grounds. See Morris v. Hargrove, 351
S.W.2d 666, 667 (Tex. Civ. App.--Austin 1961, writ ref'd
n.r.e.) ("The suit which appellant here claims to have
been maliciously prosecuted against him was instituted
by appellant and had not terminated in plaintiff's favor
but was on appeal when the present suit was brought.").
While our holding on the termination element would
ordinarily entitle Texas Beef to a new trial on remand,
we now address the special injury element to determine
whether Texas Beef may receive further relief.
B. The Special Injury Requirement
The parties also disagree as to whether Green suffered
special damages as a result of the Hartley County

proceeding. A plaintiff must suffer a special injury
before recovering for malicious prosecution of a civil
case. It is insufficient that a party has suffered the
ordinary losses incident to defending a civil suit, such as
inconvenience, embarrassment, [**13] discovery
costs, and attorney's fees. The mere filing of a lawsuit
cannot [*209] satisfy the special injury requirement.
Martin v. Trevino, 578 S.W.2d 763, 766-69 (Tex. Civ.
App.--Corpus Christi 1978, writ ref'd n.r.e.). There must
be some physical interference with a party's person or
property in the form of an arrest, attachment, injunction,
or sequestration. Sharif-Munir-Davidson Dev. Corp. v.
Bell, 788 S.W.2d 427, 430 (Tex. App.--Dallas 1990, writ
denied). While this rule may leave a party without a
remedy for indirect losses, the countervailing policies
supporting this heightened threshold in malicious
prosecution cases are compelling and well-established in
Texas law. See Pye v. Cardwell, 110 Tex. 572, 222 S.W.
153, 153 (Tex. 1920); Salado College v. Davis, 47 Tex.
131, 135-36 (Tex. 1877). As the Corpus Christi Court of
Appeals has noted,
The special damage requirement assures
good faith litigants access to the judicial
system without fear of intimidation by a
countersuit for malicious prosecution. The
special damage requirement also prevents
successful defendants in the initial
proceeding from using their favorable
judgment as a reason [**14] to institute
a new suit based on malicious
prosecution, resulting in needless and
endless vexatious lawsuits.
Martin, 578 S.W.2d at 768.
But once the special injury hurdle has been cleared,
that injury serves as a threshold for recovery of the full
range of damages incurred as a result of the malicious
litigation. "Once this threshold showing of special
damage has been made, the injured party is entitled to
recover the damages occasioned by the prosecution." J.
HADLEY EDGAR, JR. & JAMES B. SALES, 3 TEXAS
TORTS & REMEDIES § 55.11[1], at 55-40 (1995); see
also Louis v. Blalock, 543 S.W.2d 715, 718-19 (Tex. Civ.
App.--Amarillo 1976, writ ref'd n.r.e.) ("Texas law has
long recognized that everyone is liable to be harassed
and injured in his property and feelings by unfounded
suits, but that this is not an injury for which the one sued
can have legal redress, except to visit the costs upon the
party suing, unless there is the wrongful suing out of
some process by which property is seized and damage
sustained.") (emphasis added); Boman v. Gibbs, 443
S.W.2d 267, 272 (Tex. Civ. App.--Amarillo 1969, writ
ref'd n.r.e.) ("An award of damages for prosecution of
civil [**15] suits with malice and without probable
921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
Page 4
cause cannot be recovered unless the parties sued
suffered some interference by reason of the suits with his
person or property."). We must decide whether Green
has satisfied this standard.
As we have explained above, Green initially shipped
253 head of cattle to the Beck Ranch for sale to Texas
Beef. After Texas Beef refused to purchase any of the
cattle, Green transferred 247 of the 253 head of cattle to
the Caprock IV feedyard for sale to Cargill. Cargill paid
Green in full for the 247 head of cattle. After this sale
had been completed, the Hartley County trial court
issued an injunction at Texas Beef's request. Green
asserts that this injunction satisfies the special injury
requirement. We disagree.
The record discloses that the trial court in Hartley
County granted a temporary injunction against Cargill at
the request of Texas Beef on July 20, 1989. The
injunction halted future sales of cattle in Cargill's
possession on the Caprock IV feedyard, and also ordered
that proceeds from Cargill's sale of the 233 head of cattle
at auction in Dalhart be placed into the registry of the
court. This injunction could not have interfered with
Green's [**16] person or property because, at the time
the trial court issued the injunction, he owned no cattle
on Caprock IV. Cargill had already paid Green in full for
the 247 head of cattle that Green had shipped to Caprock
IV. Although the injunction interfered with Cargill's
rights to the 247 head of cattle purchased from Green,
this would not constitute an interference with Green's
person or property.
Green argues on rehearing that the injunction also
interfered with the six head of cattle that he delivered to
the Beck Ranch but never sold to Cargill. While the
record is unclear on this point, both parties unequivocally
assert in their briefs on rehearing that the six head of
cattle that Cargill declined to purchase were never
delivered to the Caprock IV feedyard, but rather
remained at the Beck Ranch. Thus, an injunction
covering only Cargill's cattle on Caprock IV could not
have interfered with any of Green's cattle [*210] on
the Beck Ranch. Because Green owned no cattle on
Caprock IV at the time of the injunction and because the
injunction applied to the 247 head of cattle delivered to
Caprock IV and sold to Cargill, but not to any of Green's
cattle remaining at the Beck Ranch, [**17] we hold
that Green did not suffer an interference with his person
or property for purposes of his malicious prosecution
claim.
Even assuming that the Hartley County injunction
affected only Cargill and did not interfere with his own
cattle, Green would have us expand the concept of
special injury to include the incidental effects of an
injunction on third parties. Green argues that a malicious

prosecution action may be brought not only by the
specific target of an injunction, but also by those who are
indirectly affected by the injunction when the party
seeking the injunction is aware of the effects the
injunction will have on others. See Miller Surfacing Co.
v. Bridgers, 269 S.W. 838, 840 (Tex. Civ. App.--Austin
1924, no writ). Thus, Green argues that Texas Beef's
malicious pursuit of the injunction against Cargill
constituted an interference with his rights and obligations
under his warranty of title to the 247 head of cattle,
thereby satisfying the special injury requirement. On the
contrary, we hold that forcing Green to defend title to
Cargill's cattle cannot be characterized as an interference
with Green's property as we have defined such an injury
today, and we disapprove [**18] of the anomalous
holding in Bridgers to the extent that it expands the reach
of special injury to include the incidental effects of an
injunction on those who were not directly targeted by the
injunction.
Because Green presented no evidence that the
Hartley County litigation caused an interference with his
person or property, we render judgment for Texas Beef
and O'Brien on Green's malicious prosecution claim.
II. Legal Malice and the Justification Defense
To recover for tortious interference with an existing
contract, a plaintiff must prove: (1) the existence of a
contract subject to interference; (2) a willful and
intentional act of interference; (3) the act was a
proximate cause of the plaintiff's damages; and (4) actual
damage or loss. Holloway v. Skinner, 898 S.W.2d 793,
795-96 (Tex. 1995). Even if a plaintiff establishes the
elements of this cause of action, a defendant may still
prevail upon establishing the affirmative defense of
justification.
Here, the jury found that both Texas Beef and
O'Brien were justified in asserting their claim to the
cattle in the Hartley County case. But, in O'Brien's case,
the jury found that his interference had been motivated
[**19] by actual malice, which was defined as ill will,
spite, evil motives, and purposely injuring another. n2
The trial court determined that this finding of actual
malice vitiated any possible legal justification for
O'Brien's actions and therefore disregarded the finding of
justification for O'Brien, which was affirmed by the court
of appeals.
n2 We note that the Texas Legislature has
recently redefined malice as it relates to the
recovery of exemplary damages in causes
accruing after September 1, 1995. TEX. CIV.
PRAC. & REM. CODE § 41.001(7).
921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
Page 5
However, in Clements v. Withers, 437 S.W.2d 818,
822 (Tex. 1969), we explained that actual malice is
relevant only to the plaintiff's potential recovery of
exemplary damages. "Actual malice need not be shown
to recover compensatory damages for the tort of
interference with an existing contractual relationship. . . .
On the other hand, to support the recovery of punitive
damages in such a case, there must be a finding of actual
malice: ill-will, spite, evil motive, or [**20] purposing
the injury of another." Id., at 822; accord Armendariz v.
Mora, 553 S.W.2d 400, 407 (Tex. Civ. App.--El Paso
1977, writ ref'd n.r.e.) (stating that "actual malice is a
necessary element to sustain an award of exemplary
damages" for tortious interference). Numerous Texas
courts have distinguished actual malice, which triggers
recovery of exemplary damages, from legal malice,
which negates the justification defense. See Edwards
Transp., Inc. v. Circle S Transp., Inc., 856 S.W.2d 783,
789 (Tex. App.--Amarillo 1993, no writ); Exxon Corp. v.
Allsup, 808 S.W.2d 648, 659 (Tex. App.--Corpus Christi
1991, writ denied); Ryan v. [*211] Laurel, 809 S.W.2d
258, 261 (Tex. App.--San Antonio 1991, no writ); State
Nat'l Bank v. Farah Mfg. Co., 678 S.W.2d 661, 688-89
(Tex. App.--El Paso 1984, writ dism'd by agr.); Lone
Star Steel Co. v. Wahl, 636 S.W.2d 217, 222 (Tex.
App.--Texarkana 1982, no writ); CF&I Steel Corp. v.
Pete Sublett & Co., 623 S.W.2d 709, 714-15 (Tex. Civ.
App.--Houston [1st Dist.] 1981, writ ref'd n.r.e.); Garza
v. Mitchell, 607 S.W.2d 593, 600 (Tex. Civ. App.--Tyler
1980, no writ); Light v. Transport Ins. Co., 469 [**21]
S.W.2d 433, 440 (Tex. Civ. App.--Tyler 1971, writ ref'd
n.r.e.); Kingsbery v. Phillips Petroleum Co., 315 S.W.2d
561, 576 (Tex. Civ. App.--Austin 1958, writ ref'd n.r.e.);
Terry v. Zachry, 272 S.W.2d 157, 159 (Tex. Civ.
App.--San Antonio 1954, writ ref'd n.r.e.), disapproved
on other grounds by Sterner v. Marathon Oil Co., 767
S.W.2d 686, 690 (Tex. 1989); Montgomery v. Phillips
Petroleum Co., 49 S.W.2d 967, 972 (Tex. Civ.
App.--Amarillo 1932, writ ref'd); Tidal Western Oil
Corp. v. Shackelford, 297 S.W. 279, 281 (Tex. Civ.
App.--Fort Worth 1927, writ ref'd).
As we noted in Sakowitz, Inc. v. Steck, the
justification defense is based on either the exercise of (1)
one's own legal rights or (2) a good-faith claim to a
colorable legal right, even though that claim ultimately
proves to be mistaken. Sakowitz, Inc. v. Steck, 669
S.W.2d 105, 107 (Tex. 1984), overruled on other grounds
by Sterner v. Marathon Oil Co., 767 S.W.2d 686, 690
(Tex. 1989). Thus, if the trial court finds as a matter of
law that the defendant had a legal right to interfere with a
contract, then the defendant has conclusively established
the justification defense, see Steck [**22] , 669 S.W.2d
at 107, and the motivation behind assertion of that right
is irrelevant. Cf. Holloway, 898 S.W.2d at 796
(explaining that, standing alone, it is insufficient that the

interfering corporate agent "'dislikes that third party and
takes pleasure in the harm caused to him by the advice'"
(quoting RESTATEMENT (SECOND) OF TORTS §
772 cmt. c (1979)). Improper motives cannot transform
lawful actions into actionable torts. "'Whatever a man
has a legal right to do, he may do with impunity,
regardless of motive, and if in exercising his legal right
in a legal way damage results to another, no cause of
action arises against him because of a bad motive in
exercising the right.'" Montgomery v. Phillips Petroleum
Co., 49 S.W.2d 967, 972 (Tex. Civ. App.--Amarillo
1932, writ ref'd) (quoting 1 R.C.L. § 6 at 319).
On the other hand, if the defendant cannot establish
such a legal right as a matter of law, it may nevertheless
prevail on its justification defense if: (1) the trial court
determines that the defendant interfered while exercising
a colorable right, and (2) the jury finds that, although
mistaken, the defendant exercised that colorable legal
right in good faith:
It [**23] would be a strange doctrine
indeed to hold that a person having a well
grounded and justifiable belief of a right
in or to property may be held liable in
damages because of an assertion of such a
right.
Steck, 669 S.W.2d at 107 (quoting Tidal Western Oil
Corp. v. Shackelford, 297 S.W.2d 279, 281 (Tex. Civ.
App.--Fort Worth 1927, writ ref'd)). A jury question is
presented only when the court decides that although no
legal right to interfere exists, the defendant has
nevertheless produced evidence of a good faith, albeit
mistaken, belief in a colorable legal right.
In this case, Texas Beef and O'Brien did not
establish their right to interfere with Green's contract as a
matter of law. Instead, the trial court submitted a jury
question asking whether the defendants had asserted their
colorable legal claims in good faith. The court instructed
the jury that the justification defense protects only "good
faith assertions of legal rights" and that a party to or
interested in a contract may "interfere with the execution
of the contract where there is a bona fide doubt as to his
rights under it." The jury answered "yes" for both Texas
Beef and O'Brien.
Based on these answers, [**24] Texas Beef and
O'Brien established their affirmative defense of
justification and defeated Green's tortious interference
claim. Once the jury found that both defendants were
justified in interfering with the contract between Green
and Cargill, the jury's finding of actual malice became
immaterial. "Where the defendant [*212] has a proper
purpose in view, the addition of ill will toward the
plaintiff will not defeat his privilege." W. PAGE
921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
Page 6
KEETON ET AL., PROSSER AND KEETON ON THE
LAW OF TORTS § 129, at 984 (5th ed. 1984); see also
Marathon Oil Co. v. Sterner, 745 S.W.2d 420, 423-24
(Tex. App.--Houston [14th Dist.] 1988), aff'd in part,
rev'd in part on other grounds, 767 S.W.2d 686 (Tex.
1989). An actual malice finding might have supported
exemplary damages against O'Brien only if the jury had
found that he was not justified in interfering with Green's
contract.
Our conclusion about the immateriality of the jury's
finding of actual malice under these circumstances is
also supported by the very nature of an affirmative
defense, which is one of confession and avoidance.
Sterner, 767 S.W.2d at 690. An affirmative defense does
not seek to defend by merely denying [**25] the
plaintiff's claims, but rather seeks to establish "an
independent reason why the plaintiff should not recover."
2 ROY W. MCDONALD, TEXAS CIVIL PRACTICE §
9:44, at 378 (1992). Inasmuch as the jury's answers
established justification, a reason independent of the
Green's claims against O'Brien, the trial court should
have disregarded the actual malice finding as immaterial.
See C. & R. Transp., Inc. v. Campbell, 406 S.W.2d 191,
194 (Tex. 1966).
Green points to Victoria Bank & Trust Co. v. Brady,
811 S.W.2d 931 (Tex. 1991), in support of his argument
that justification is a qualified privilege that protects only
good-faith assertions of valid legal claims. As we have
explained, while we believe that good faith is immaterial
when the defendant establishes a legal right to act as it
did, we find the disposition in Brady consistent with our
holding today. The Bank in that case had interfered with
a contract by persistently claiming a security interest in
collateral even after the debt secured by the collateral
had been extinguished. Id at 940. There being no clear
legal right to interfere in such a manner, the Bank had to
present evidence that it had a good-faith [**26] belief
in at least a colorable right to the collateral. Under those
facts, whether the Bank acted in good faith was a jury
issue. The jury decided against the Bank on its
affirmative defense of justification, finding that it had not
asserted a colorable legal right in good faith, and we
affirmed part of the judgment of the court of appeals on
that basis. Id. Conversely, the jury in this case found that
both Texas Beef and O'Brien had asserted a colorable
legal right in good faith, thus entitling both of them to
judgment. The jury finding of good faith in this case,
missing in Brady, distinguishes the cases.
By clarifying today that actual malice does not
vitiate the defense of justification, we disavow good faith
as relevant to the justification defense when the
defendant establishes its legal right to act as it did. Only
when mistaken, but colorable claims of legal rights are
asserted is the good faith of the actor legally significant.

Only then must the jury determine whether the defendant
believed in good faith that it had a colorable legal right.
Because the finding that O'Brien's interference was
motivated by actual malice was irrelevant to the defense
of justification, [**27] we reverse the judgment of the
court of appeals and render judgment for O'Brien on the
tortious interference claim.
Conclusion
For the foregoing reasons, we reverse the judgment of
the court of appeals and render judgment for O'Brien and
Texas Beef on the malicious prosecution claim and for
O'Brien on the tortious interference claim. Consequently,
Green takes nothing on either cause of action.
John Cornyn
Justice
OPINION DELIVERED: April 25, 1996
DISSENTBY: RAUL A. GONZALEZ
DISSENT:
My dissenting opinion of January 11, 1996 is
withdrawn, and the following is substituted in its place.
This dispute over 247 head of cattle began in 1988.
It involves W.H. "Bill" O'Brien, and others of Texas
Beef Cattle Company (O'Brien), and Jeff Green, a small
cattle dealer. There have been three jury trials, and Green
has won every time. Two of these juries found that
O'Brien had no rights to the cattle in question. In
addition, the jury in [*213] the present case found that
O'Brien tortiously interfered with Green's rights, engaged
in malicious prosecution, and acted with ill will, spite,
and evil motives toward Green. The judgments in these
cases have been reviewed [**28] three times by courts
of appeals and twice by our Court. Green has prevailed
every time as to the cattle in question. Today, the Court
holds that the jury finding that O'Brien acted with actual
malice towards Green is "irrelevant," renders judgment
for O'Brien on tortious interference, and renders
judgment for O'Brien on Green's malicious prosecution
claim. For the reasons stated below, I would affirm the
judgment of the court of appeals.
Facts
In December 1988, Jeff Green was contacted by Doug
Florence, a joint-venture partner of and buyer for Texas
Beef, who requested that Green ship 253 head of cattle
from East Texas to the Beck Ranch, located in the Texas
Panhandle, in Hartley County, Texas. Florence wanted to
see if Texas Beef would purchase the cattle. Green
921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
Page 7
complied, and the cattle Florence requested were
segregated from other cattle when they arrived at the
Beck Ranch. Green offered to sell the cattle to Texas
Beef, but its managing partner, W.H. "Bill" O'Brien,
declined because he felt the price was too high. At
Florence's suggestion, Green agreed to sell 247 of the
253 head of cattle to Cargill Agricultural Credit
Corporation. Green informed O'Brien that he was [**29]
relocating this shipment of cattle to the Caprock IV
feedyard in Dalhart to close the deal. Cargill paid Green
$ 102,853.65, and Green warranted title to the cattle.
Florence later confessed to Texas Beef that he had
stolen a large number of Texas Beef's cattle that were
pastured at the Beck Ranch. O'Brien informed Cargill
that some or all of the cattle delivered to Caprock IV
belonged to Texas Beef, even though he knew that these
were the same 247 head he had chosen not to buy a week
before. Cargill responded by selling 233 head of the
cattle at auction, the proceeds of which were interpleaded
into the registry of the Hartley County district court.
In December 1988, Texas Beef filed suit in Hartley
County against Cargill for conversion of the cattle. Two
days later, Green filed suit in Liberty County against
Florence, Texas Beef, and Texas Beef's partners for
nonpayment on several other shipments of cattle. Green
alleged that he delivered cattle to Florence but was never
paid for the cattle or was paid with checks dishonored
because of insufficient funds. In this suit, Green asserted
that Florence was the agent of Texas Beef and its
partners and that they were jointly and [**30] severally
liable. Texas Beef counterclaimed, contending that it had
paid for all cattle received and alleging conversion by
Green of the 247 head of cattle, negligent grazing, and
wrongful sequestration of other cattle. During the course
of the Liberty County proceeding, O'Brien threatened to
ruin Green financially by endlessly dragging him into
court.
O'Brien made good on his threat by adding Green as
a defendant in the Hartley County litigation. In fact,
O'Brien and Texas Beef filed pleadings identical to those
used in their Liberty County counterclaim. At O'Brien's
request, the Hartley County court entered a temporary
injunction as to the 247 head of cattle, and Cargill
cross-claimed against Green on his warranty of title.
Liberty County Suit and Appeal
Green's Liberty County suit was tried first before a jury
on theories of joint venture and partnership, agency,
promissory estoppel, conversion, fraud, and exemplary
damages. n1 Based on favorable jury findings, the East
Texas trial court rendered judgment for Green for $
258,658.80 in actual damages, $ 6,372 in incidental
damages, prejudgment interest, and $ 125,000 in

attorney's fees. The judgment ordered Texas Beef,
[**31] O'Brien, and O'Brien's partners to take nothing
on their counterclaim. In an unpublished opinion, the
court of appeals affirmed the judgment of the trial court.
This Court denied Texas Beef's application for writ of
error.
n1 The cause of action against Florence was
severed from this suit.
Hartley County Suit and Appeal
Following the Liberty County judgment, O'Brien and
Texas Beef sought to re-litigate [*214] issues in their
home county that they had lost in Liberty County. Texas
Beef restated its allegations of fraud and conspiracy
between Green and Florence to convert Texas Beef's
cattle. It further sought to quiet title to the 247 head of
cattle. As previously noted, Texas Beef's pleadings in
this action were identical to those in the Liberty County
suit with respect to Green. Texas Beef's attorney refused
to enter an agreed plea in abatement in the Hartley
County suit pending the outcome of their appeal of the
Liberty County judgment and insisted that this case be
tried. The trial court denied [**32] Green's plea in
abatement, plea at bar, motion to dismiss, and motion for
summary judgment. However, the Hartley County trial
court ordered a separate trial on Green's affirmative
defenses of res judicata and collateral estoppel.
If O'Brien hoped for a home-field advantage with a
Texas Panhandle jury, it did not materialize. O'Brien lost
again. The jury found that Texas Beef's conspiracy
claims were asserted, or could have been asserted with
reasonable diligence, in the Liberty County case. The
jury also found that Texas Beef was afforded a full and
fair trial of its claims to ownership and possession of the
cattle in question. The trial court rendered judgment for
Green.
The court of appeals affirmed the Hartley County
judgment in part and reversed in part. Texas Beef Cattle
Co. v. Green, 860 S.W.2d 722, 725 (Tex. App.--Amarillo
1993, writ denied). It held that the first Liberty County
judgment was res judicata as to the "Group B" cattle, the
247 head, but not controlling as to "Group A" cattle, the
other cattle in which Green had not asserted a proprietary
interest. Thus, for our purposes, Green prevailed in this
appeal in all relevant respects.
Present Suit
Green [**33] filed the instant case in Liberty County
ten days after the trial court signed the judgment in
Hartley County. Green alleged malicious prosecution and
tortious interference with contract against Texas Beef
921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
Page 8
and O'Brien based on the pursuit of their Hartley County
claims after the original judgment was rendered in
Liberty County. The case was tried before a jury, and
based on favorable jury findings, the trial court rendered
judgment for Green on both claims. O'Brien appealed,
and the court of appeals affirmed. 883 S.W.2d 415. It is
this appeal that is before us now.
Malicious Prosecution
Today, the Court reverses a jury verdict in favor of
Green because the underlying suit forming the basis of
his malicious prosecution claim was still on appeal and
because Green failed to show special injury. I do not
agree with these holdings because they unnecessarily
create new law while ignoring precedent. As discussed
below, the underlying litigation has terminated
sufficiently to bring a malicious prosecution claim, and
Green has shown evidence of special injury.
Termination
In Scurlock Oil Co. v. Smithwick, 724 S.W.2d 1, 6 (Tex.
1986), this Court held that a trial [**34] court judgment
is final for purposes of issue and claim preclusion,
regardless of whether an appeal is taken, unless the
appeal amounts to a trial de novo. I see no reason why
this holding should not be applied to underlying
judgments in malicious prosecution actions.
Moreover, the Court not only misconstrues
Smithwick, it mistakenly concludes that the court of
appeals' reversal of part of the Hartley County suit,
which was the subject of Green's malicious prosecution
case, rendered the trial court's termination finding
erroneous. However, this conclusion ignores what the
court of appeals actually did. The court of appeals
affirmed the trial court as to the 247 head of cattle and
reversed as to the Group A cattle only. See Texas Beef,
860 S.W.2d at 725. Green's malicious prosecution action
was based solely on the trial court's decision as to the
Group B cattle; thus, the court of appeals did not make a
finding adverse to Green germane to his malicious
prosecution action, and any error by the trial court on this
issue was harmless.
[*215] Special Injury
Before a plaintiff may recover damages for malicious
prosecution, he must show that he suffered a special
[**35] injury in the form of a physical interference with
his person or property. Pye v. Cardwell, 110 Tex. 572,
222 S.W. 153, 153 (Tex. 1920). Because I believe Green
presented some evidence of special injury, I would
affirm the jury finding on this issue.

The record shows that Texas Beef obtained an
injunction in Hartley County against Cargill's interest in
the 247 head sold to it by Green. Although the Group B
cattle were not in Green's possession at the time the
injunction was issued, the record shows that Green's bill
of sale to Cargill contained a general warranty promising
that Green would defend title to the Group B cattle
against any person and certifying to the buyer of the
cattle and Cargill that there were no liens or security
interests as to those cattle. This warranty vested in Green
a continuing interest in the 247 head. The injunction
sought by and granted to Texas Beef interfered with this
interest. Even though the injunction was issued directly
against a third party, the interference with Green's
property interest is evident and provides some evidence
of special injury from which the jury could have made its
finding. See Miller Surfacing Co. v. Bridgers, 269 [**36]
S.W. 838, 839 (Tex. Civ. App.--Austin 1924, no writ)
(concluding that injunction proceeding against third
party, when party seeking injunction knows it will
directly affect others, can form basis of malicious
prosecution action). Thus, the jury's finding that Green
suffered special injury should be affirmed.
Malice and the Justification Defense
The Court today also reverses and renders on Green's
claim against O'Brien for tortious interference with
contract. The Court holds that the trial court erred in
concluding that the jury's finding that O'Brien acted with
malice negated the jury's finding that O'Brien was
privileged or justified in interfering with Green's
contract. This holding ignores clear precedent requiring
good faith to be shown before the defense of justification
can protect a defendant's actions.
The elements of a cause of action for tortious
interference with contract are: (1) the existence of a
contract subject to interference; (2) a willful and
intentional act of interference; (3) the act was a
proximate cause of the plaintiff's damages; and (4) actual
damage or loss. Holloway v. Skinner, 898 S.W.2d 793,
795-96 (Tex. 1995). If a plaintiff succeeds [**37] in
proving these elements, the defendant can still prevail if
he proves the affirmative defense of justification. This
defense can be proved upon a showing that the
interference was done "in a bona fide exercise of [the
interferer's] rights" or that the interferer "has an equal or
superior right in the subject matter to that of the other
party." Murray v. Crest Constr. Co., 900 S.W.2d 342,
344 (Tex. 1995). However, this defense "only protects
good faith assertions of legal rights." Victoria Bank &
Trust Co. v. Brady, 811 S.W.2d 931, 939 (Tex. 1991).
Thus, the justification privilege is a qualified privilege.
In this case, the jury found that O'Brien acted with
malice in interfering with Green's contract. The trial
921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
Page 9
court, following the clear language of Brady, held that
this finding negated the jury finding that O'Brien was
justified in his actions.
It is indisputable that Texas courts have required a
showing of good faith before holding that a party is
justified in interfering with contractual relations.
Holloway, 898 S.W.2d at 796 n.3; Brady, 811 S.W.2d at
939-40; Maxey v. Citizens Nat'l Bank of Lubbock, 507
S.W.2d 722, 726 (Tex. 1974); American [**38]
Petrofina, Inc. v. PPG Indus., Inc., 679 S.W.2d 740,
758-59 (Tex. App.--Fort Worth 1984, writ dism'd);
Hardin v. Majors, 246 S.W. 100, 102 (Tex. Civ.
App.--Amarillo 1923, no writ). In addition, keeping good
faith as part of the justification inquiry is consistent with
section 773 of the Restatement (Second) of Torts and the
law of a large number of other jurisdictions. n2 The
Court [*216] cites section 772 of the Restatement in
support of its position; however, that section relates only
to whether an action for intentional interference can be
based on the honest advice of a professional adviser and
is therefore irrelevant to our inquiry. On the other hand,
section 773 is directly applicable. It states:
n2 See, e.g., Waldinger Corp. v. CRS Group
Eng'rs, Inc., 775 F.2d 781, 790 (7th Cir. 1985)
(applying Illinois law); Johnson v. Educational
Testing Serv., 754 F.2d 20, 26 (1st Cir.) (applying
California law), cert denied, 472 U.S. 1029, 87 L.
Ed. 2d 635, 105 S. Ct. 3504 (1985); Northeast
Airlines, Inc. v. World Airways, Inc., 262 F.
Supp. 316, 320 (D. Mass. 1966); Evans v. Swaim,
245 Ala. 641, 18 So. 2d 400, 404 (Ala. 1944);
McReynolds v. Short, 115 Ariz. 166, 564 P.2d
389, 394 (Ariz. Ct. App. 1977); Conway Corp. v.
Construction Eng'rs, Inc., 782 S.W.2d 36, 40
(Ark. 1989), cert. denied, 494 U.S. 1080, 108 L.
Ed. 2d 939, 110 S. Ct. 1809 (1990); Masoni v.
Board of Trade of San Francisco, 119 Cal. App.
2d 738, 260 P.2d 205, 208 (Cal. Dist. Ct. App.
1953); Westfield Dev. Co. v. Rifle Inv. Assocs.,
786 P.2d 1112, 1118 (Colo. 1990); Dunshee v.
Standard Oil Co., 152 Iowa 618, 132 N.W. 371,
375 (Iowa 1911); Dickens v. Snodgrass, Dunlap
& Co., 255 Kan. 164, 872 P.2d 252, 257 (Kan.
1994); National Collegiate Athletic Ass'n v.
Hornung, 754 S.W.2d 855, 859-60 (Ky. 1988);
Beane v. McMullen, 265 Md. 585, 291 A.2d 37,
47 (Md. 1972); Tuttle v. Buck, 107 Minn. 145,
119 N.W. 946, 948 (Minn. 1909); Shaw v.
Burchfield, 481 So. 2d 247, 255 (Miss. 1985);
Huskie v. Griffin, 75 N.H. 345, 74 A. 595, 598-99
(N.H. 1909); Leslie Blau Co. v. Alfieri, 157 N.J.
Super. 173, 384 A.2d 859, 867 (N.J. Super. Ct.
App. Div. 1978); Williams v. Ashcraft, 72 N.M.

[**39]
120, 381 P.2d 55, 56-57 (N.M. 1963); Terry v.
Dairymen's League Coop. Ass'n, 2 A.D.2d 494,
157 N.Y.S.2d 71, 78-80 (N.Y. App. Div. 1956);
Embree Constr. Group, Inc. v. Rafcor, Inc., 330
N.C. 487, 411 S.E.2d 916, 924-25 (N.C. 1992);
Smith v. Ameriflora 1992, Inc., 644 N.E.2d 1038,
1044 (Ohio Ct. App. 1994); Banaitis v.
Mitsubishi Bank, Ltd., 129 Ore. App. 371, 879
P.2d 1288, 1298-99 (Or. Ct. App. 1994); Ruffing
v. 84 Lumber Co., 600 A.2d 545, 549-50 (Pa.
Super. Ct. 1991); West Virginia Transp. Co. v.
Standard Oil Co., 50 W. Va. 611, 40 S.E. 591,
596 (W. Va. 1901); Wartensleben v. Willey, 415
P.2d 613, 614 (Wyo. 1966).
One who, by asserting in good faith a
legally protected interest of his own or
threatening in good faith to protect the
interest by appropriate means,
intentionally causes a third person not to
perform an existing contract or enter into
a prospective contractual relation with
another does not interfere improperly with
the other's relation if the actor believes
that his interest may otherwise be
impaired or destroyed by the performance
of the contract or transaction.
RESTATEMENT (SECOND) OF TORTS § 773
(1979). The comments to section 773 reiterate that
without good faith, the defense of justification does not
apply. See id. at cmt. a. The question of how to define
good faith, however, remains open.
In American Petrofina, the Fort Worth Court of
Appeals attempted to define good faith in the context of
the justification defense to a tortious interference claim.
The court stated that "such complete innocence and
perfect good faith might very well be the basis of the
justification which constitutes a defense to a claim for
tortious interference with a contract." American
Petrofina, 679 S.W.2d at 759. This definition shows that
one's motives in interfering [**40] with a contract are
germane to the defense of justification.
The Court claims that a requirement of good faith
does not change the result in this case because the trial
court instructed the jury that O'Brien's assertion of his
legal rights must have been done in good faith for it to
find that he was justified in his actions. However, this
conclusion ignores the fact that the jury also found that
O'Brien acted with actual malice, which was defined in
the jury instruction as ill will, spite, evil motive, or
purposely injuring another. That these contradictory jury
921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
Page 10
findings can possibly be reconciled defies common
sense. How can one assert a colorable legal right in good
faith while at the same time acting with ill will, spite,
evil motives, and with an intent to injure another? It
simply cannot be done.
As shown by the facts of this case, O'Brien acted in
anything but good faith. As stated earlier, after Green
filed the original suit in Liberty County, O'Brien
threatened to ruin Green financially by dragging him into
court as many times as necessary. O'Brien made good on
his threat by filing suit against Green in Hartley County
using pleadings identical to the ones he employed in
[**41] his Liberty County counterclaim. After the
Liberty County trial judge rendered a take-nothing
judgment on Texas Beef's counterclaims against Green,
Texas Beef and O'Brien continued their suit on the
identical pleadings in Hartley County. These actions
more than support the jury's finding of actual malice on
the part of O'Brien, and the trial judge correctly
concluded that this finding nullifies the jury's finding of
justification.
Moreover, the Court's reliance on our decision in
Clements v. Withers, 437 S.W.2d 818 [*217] (Tex.
1969), for the proposition that a finding of "actual malice
is relevant only to the plaintiff's potential recovery of
exemplary damages" in tortious interference cases is
incorrect. ___ S.W.2d ___ (emphasis added). In
Clements, this Court merely explained that actual malice
is not a necessary element of a cause of action for
tortious interference with contract, but that it is a
required showing when a plaintiff seeks to recover
punitive damages. Clements, 437 S.W.2d at 822.
Nowhere in Clements did we conclude that actual malice
is irrelevant to the justification defense. In fact, in
Clements this Court never even addressed the [**42]
justification defense. Thus, our decision in Clements
does not support the majority's position and is wholly
irrelevant to the case before us.
This case illustrates why good faith should play a
part in the legal justification defense. Texas Beef had
every right to submit its claims for decision--but only
once. Filing identical claims after the first suit was
resolved against it is, as the jury found, nothing but
vexatious, malicious prosecution. Thus, because good
faith is an element of the defense of justification, I would
hold that the jury's finding that O'Brien acted with actual
malice negates the jury's finding of justification.
For the above reasons, I dissent.
Raul A. Gonzalez
Justice

Opinion Delivered: April 25, 1996
921 S.W.2d 203, *; 1996 Tex. LEXIS 43, **;
39 Tex. Sup. J. 523
Page 11

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LEXSEE 697 SW 2D 381
THERESA VAN DYKE, Petitioner, v. BOSWELL, O'TOOLE, DAVIS & PICK-
ERING, Respondent
SUBSEQUENT HISTORY: [**1] Rehearing
Denied October 23, 1985.
PRIOR HISTORY: FROM HARRIS COUNTY
FOURTEENTH DISTRICT.
COUNSEL: John H. Holloway, from Houston for Petitioner.
Don C. Fullenweider and Clinard J. Hanby, Haynes &
Fullenweider, from Houston for Respondent.
JUDGES: Justice C. L. Ray. Dissenting opinion by
Justice Gonzalez in which Justice McGee joins. Justice
William W. Kilgarlin and Justice McGee joins in the
dissenting opinion.
OPINION BY: RAY
OPINION
[*382] This cause presents the procedural issue of
whether a trial court can grant separate trials for a claim
and its counterclaim and then preclude litigation of the
counterclaim by implying facts from the facts determined
in the trial on the primary claim. The trial court held that
it was proper to preclude litigation of the counterclaim in
this situation. The court of appeals, in an unpublished
opinion, Tex. R. Civ. P. 452, affirmed the judgment of
the trial court. We reverse the judgments of the courts
below and remand this cause to the trial court for proceedings
consistent with this opinion.
The law firm of Boswell, O'Toole, Davis & Pickering
(Boswell, O'Toole) represented Theresa Van Dyke
during the trial of her divorce case. After trial, [**2]
No. C-3073
SUPREME COURT OF TEXAS
697 S.W.2d 381; 1985 Tex. LEXIS 1384; 28 Tex. Sup. J. 457
June 5, 1985
Page 1
but before rendition of judgment, Mrs. Van Dyke dismissed
Boswell, O'Toole and retained new counsel.
Boswell, O'Toole then intervened in the divorce action to
recover its fees. Over four months after the filing of the
intervention claim and less than one week before the date
set for its trial, Mrs. Van Dyke filed her answer. In her
answer, Mrs. Van Dyke generally denied Boswell,
O'Toole's claim for fees, contending that the fees were
not reasonable and that Boswell O'Toole committed
fraud. Also, Mrs. Van Dyke asserted a counterclaim,
alleging four acts of malpractice by Boswell, O'Toole:
(1) in taking a non-suit in the initial divorce proceeding
that allowed Mr. Van Dyke to sell the family's Colorado
condominium; 1 (2) in failing to obtain necessary support
and maintenance orders of the trial court; (3) in failing to
properly present the divorce evidence to establish Mrs.
Van Dyke's right to a larger share of the community and
separate estates; and (4) in failing to make the proper
motions to prevent Mr. Van Dyke from converting or
dissipating any of the community property.
1 The initial divorce action brought by Mrs.
Van Dyke ended in a non-suit. Between the taking
of the non-suit and the filing of this present
action, Mr. Van Dyke sold the family's Colorado
condominium without receiving Mrs. Van Dyke's
permission. According to Mrs. Van Dyke, this
could not have occurred if the divorce action was
pending.
[**3] When the intervention claim for fees was
called for trial on September 30, 1980, Boswell, O'Toole
complained about the surprise created by the timing of
the malpractice counterclaim filing. Consequently, Boswell,
O'Toole moved in the alternative for either a continuance
or a striking of the counterclaim. The trial court,
however, rejected Boswell, O'Toole's arguments and it

orally granted Mrs. Van Dyke's motion for a severance
and/or separate trials for the intervention claim for fees
and the malpractice counterclaim.
Immediately thereafter, the trial on the intervention
claim for fees began. During the course of that trial,
counsel for Mrs. Van Dyke cross-examined Huey
O'Toole of Boswell, O'Toole about the propriety of taking
a non-suit in the initial divorce action and how that
act allowed Mr. Van Dyke to sell the family's Colorado
condominium against Mrs. Van Dyke's wishes. This line
of questioning prompted a motion for mistrial from
Boswell, O'Toole. In the bench conference concerning
this matter, Boswell, O'Toole argued that if the court
denied the mistrial motion, it would maintain [*383]
that the malpractice counterclaim should be precluded on
the grounds that the malpractice [**4] issues were being
litigated in the trial on the intervention claim. The
trial court denied Boswell, O'Toole's motion for mistrial
and counsel for Mrs. Van Dyke further cross-examined
Huey O'Toole about this matter.
Upon completion of the trial, the jury returned its
verdict awarding Boswell, O'Toole $87,232.91 for its
fees in the divorce action and $7,000 for prosecuting the
intervention claim. While the jury did not expressly determine
whether Boswell, O'Toole committed malpractice,
its answer to the special issue determining the reasonable
value of Boswell, O'Toole's fees considered the
following factors:
1. The time and labor involved, the
novelty and difficulty of the questions involved,
and the skill requisite to perform
the legal services properly.
2. The likelihood, if apparent to the
jury, that the acceptance of the particular
employment will preclude other employment
by the lawyer.
3. The fee customarily charged in the
locality for similar legal services.
4. The amount involved and the results
obtained.
5. The time limitations imposed by
the client or by the circumstances.
6. The nature and length of the professional
relationship with the [**5] client.
7. The experience, reputation, and
ability of the lawyer or lawyers performing
the services.
On December 5, 1980, the trial court rendered
judgment in the divorce case. In this judgment, the court
severed the already litigated intervention claim for fees
and the unlitigated malpractice counterclaim from the
divorce action. A severance splits a single suit into two
or more independent actions, each action resulting in an
appealable final judgment. See Hall v. City of Austin, 450
S.W.2d 836, 837-38 (Tex. 1970). Thus, the intervention
claim for fees and the malpractice counterclaim became
its own action, distinct from the divorce action.
Four days later on December 9, 1980, Boswell,
O'Toole moved to sever the intervention claim for fees
from the malpractice counterclaim and to enter a final
judgment for fees based on the jury verdict. The trial
court, however, denied this motion. This ruling was significant
because it negated the severance portion of the
trial court's September 30, 1980 oral order granting a
severance and/or separate trials on the intervention claim
for fees and the malpractice counterclaim. Thus, the effect
of the trial court's rulings was to grant [**6] separate
trials for the fees and malpractice issues within this
severed cause of action. Van Dyke v Van Dyke, 624
S.W.2d 800, 801 (Tex. App. -- Houston [14th Dist.]
1981, no writ). In contrast to a severance, separate trials
are interlocutory, and are not final and appealable until
all the separated claims and issues in the suit have been
litigated. See Hall v. City of Austin, 450 S.W.2d at 837-8.
By separating the intervention claim for fees and the
malpractice counterclaim, the trial court decided to adjudicate
the claim for fees first and then subsequently consider
the malpractice counterclaim.
The trial on Mrs. Van Dyke's separated counterclaim
for malpractice, however, never took place. Instead, the
trial court rendered judgment on the intervention claim
for fees for Boswell, O'Toole based on the jury verdict
and summary judgment on the malpractice counterclaim
for Boswell, O'Toole based on "res judicata and/or collateral
estoppel." The court of appeals affirmed the
summary judgment, reasoning "it is obvious to us that
the jury would not have returned (the fees) verdict if they
had been persuaded by the evidence of alleged malpractice
on the part of (Boswell, O'Toole)."
[**7] In retrospect, it is easy to decide what the
trial court could have done to avoid the dilemma we now
face. It could have struck the counterclaim as being untimely
filed; it could have continued the cause until the
parties were ready to litigate [*384] the intervention
claim and the counterclaim together; or, it could have
ordered the counterclaim to be litigated immediately
along with the intervention claim. By employing any of
these options, the trial court would not have created the
need for separate trials on the intervention claim for fees
and the malpractice counterclaim. Nonetheless, Rule
174(b), Tex. R. Civ. P., permits a trial court to order sep-

arate trials for a claim and its counterclaim in "furtherance
of convenience or to avoid prejudice," and the trial
court's decision to grant separate trials should not be disturbed
on appeal absent an abuse of discretion. Iley v.
Hughes, 158 Tex. 362, 311 S.W.2d 648, 650 (1958). The
record reflects that the trial court granted separate trials
to allow Mrs. Van Dyke an opportunity to prove her case
for malpractice, while preventing additional delay in
finalizing the divorce. Since this was done in furtherance
of convenience [**8] and to avoid prejudice, the trial
court did not abuse its discretion.
Consequently, we must determine the preclusive effect,
if any, of the trial on the intervention claim for fees
with respect to the malpractice counterclaim. The notion
of precluding litigation based on prior litigation involves
the related doctrines of res judicata and collateral estoppel.
Res judicata, or claim preclusion, precludes litigation
of claims within the same cause of action that were
or could have been litigated in the first action. Texas
Water Rights Comm'n v. Crow Iron Works, 582 S.W.2d
768, 771-72 (Tex. 1979). A logical corollary to this rule
is that the res judicata effects of an action cannot preclude
litigation of claims that a trial court explicitly separates
or severs from that action. See Chandler v. Hendrick
Memorial Hospital, 317 S.W.2d 248, 251 (Tex.
Civ. App. -- Eastland 1958, writ ref'd n.r.e.); Morrison v.
St. Anthony Hotel, 295 S.W.2d 246, 249 (Tex. Civ. App.
-- San Antonio 1956, writ ref'd n.r.e.). Since the trial
court granted separate trials for the intervention claim for
fees and the malpractice counterclaim, the res judicata
effects of the action on the intervention [**9] claim for
fees cannot preclude the malpractice counterclaim.
Collateral estoppel, or issue preclusion, is more narrow
than res judicata in that it only precludes the relitigation
of identical issues of facts or law that were actually
litigated and essential to the judgment in a prior suit.
Once an actually litigated and essential issue is determined,
that issue is conclusive in a subsequent action
between the same parties. See Bonniwell v. Beech Aircraft
Corp., 663 S.W.2d 816, 818 (Tex. 1984); Wilhite v.
Adams, 640 S.W.2d 875, 876 (Tex. 1982); Restatement
(Second) of Judgments § 27 (1982). Thus, unlike the
broader res judicata doctrine, collateral estoppel analysis
does not focus on what could have been litigated, but
only on what was actually litigated and essential to the
judgment.
It is without question that the trial on the intervention
claim for fees actually litigated the fees issue and
essentially determined that Mrs. Van Dyke owed Boswell,
O'Toole $87,232.91 in fees under their employment
contract. This necessarily established the existence of a
contract between Mrs. Van Dyke and Boswell, O'Toole
with terms providing for fees in this amount. From this
determination, [**10] Boswell, O'Toole argues that
since malpractice issues were discussed in testimony at
trial, they were litigated for purposes of collateral estoppel.
We disagree. Section 27, comment (d) of the Restatement
(Second) of Judgments (1982) states that actual
litigation occurs "when an issue is properly raised, by the
pleadings or otherwise, and is submitted for determination,
and is determined." While the malpractice issues
were properly raised, the trial judge's granting of separate
trials prevented those issues from being submitted for
determination and actually determined in the action for
fees. Thus, the malpractice issues were not actually litigated
in the trial on the intervention claim for fees.
Also, even if we could imply a determination of no
malpractice by Boswell, O'Toole from the established
fact that fees are owed by Mrs. Van Dyke, that implication
would not be essential to the fees determination.
[*385] Section 27, comment (h) of the Restatement
(Second) of Judgments (1982) provides in part: "if issues
are determined but the judgment is not dependent upon
the determinations, relitigation of those issues in a subsequent
action between the parties is not precluded."
[**11] Since the resolution of a claim for fees is not
contingent upon a malpractice determination, an implication
of no malpractice would not be essential to the determination
of the fees issue for purposes of collateral
estoppel.
Finally, a question exists on whether the trial on the
separated claim for fees constituted a judgment for purposes
of collateral estoppel. While the judgment requirement
for collateral estoppel does not always require
a final, appealable judgment, the test for finality is
"whether the conclusion in question is procedurally definite."
Restatement (Second) On Judgments § 13, comment
(g) (1982). The factors to be considered in answering
this question include whether "the parties were fully
heard, (whether) the court supported its decision with a
reasoned opinion (and whether) the decision was subject
to appeal or was in fact reviewed on appeal." Id. However,
since we have already determined that the trial on the
intervention claim for fees did not actually litigate the
malpractice issue and that the malpractice issue was not
essential to the fees determination, it is not necessary for
us to address the judgment question.
Consequently, we hold that the [**12] trial court
erred in granting summary judgment on the counterclaim
thereby precluding actual litigation of Mrs. Van Dyke's
malpractice allegation. There being no reversible error
with respect to the separate trial on the intervention claim
for fees, we limit the remand of the cause to the counterclaim
for malpractice. Tex. R. Civ. P. 503. Accordingly,
we reverse the judgment of the court of appeals and remand
only the counterclaim portion of this cause to the
trial court for proceedings consistent with this opinion.

Dissenting opinion by Justice Gonzalez in which
Justice McGee joins.
DISSENT BY: GONZALEZ; KILGARLIN
DISSENT
Justice Raul Gonzalez DISSENTING OPINION
I respectfully dissent. I would affirm the judgment
of the court of appeals on the basis that the malpractice
issue has already been litigated.
The record shows that Mr. Holloway, Mrs. Van
Dyke's attorney, repeatedly questioned witnesses concerning
the propriety of a nonsuit taken by O'Toole. In
addition to raising questions concerning this specific act
of malpractice, Holloway asserted that O'Toole's actions
had been worthless to Mrs. Van Dyke and that his representation
had been ineffective. Thus, all issues presented
by Mrs. [**13] Van Dyke's allegations of malpractice
were raised by the evidence. Further, Holloway argued
these facts to the jury in his closing argument.
The requirements of a successful claim of issue preclusion
are that "(1) the facts sought to be litigated in the
second action were fully and fairly litigated in the prior
action; (2) those facts were essential to the judgment in
the first action; and (3) the parties were cast as adversaries
in the first action." Bonniwell v. Beech Aircraft
Corp., 663 S.W.2d 816, 818 (Tex. 1984). These requirements
have been satisfied. See also Restatement (Second)
of Judgments § 27 (1982); Comment, The Future of Offensive
Collateral Estoppel in Texas, 35 Baylor L. Rev.
291, 293 (1983).
The court bases its holding upon two theories. First,
the opinion states that
"while the malpractice issues were
properly raised, the trial judge's granting
of separate trials prevented those issues
from being submitted for determination
and actually determined in the action for
fees. Thus, the malpractice issues were
not actually litigated in the trial on the intervention
claim for fees."
697 S.W.2d at 384. This argument begs the question.
When [**14] determining whether the issue was actually
litigated in the first trial, it is no answer to say that it
was not so litigated because of the mere fact of the grant
of separate trials. Further, a party [*386] has no right
to a second trial when the determination of the first disposes
of the issues to be tried in the second. See Hernandez
v. Light Pub. Co., 245 S.W.2d 553 (Tex. Civ.
App. San Antonio 1952, writ ref'd); 3 R. McDonald,
Texas Civil Practice, § 10.26 (rev. ed. 1983).
The second basis advanced by the court ignores the
wording of the issues submitted to the jury and the findings
thereon. Special Issue No. 4 asked the jury to find
"the value of the reasonable and necessary attorney's
fees, . . . services . . . and . . . expenses incurred by Boswell,
O'Toole, Davis & Pickering in representing Theresa
Van Dyke . . . ." (emphasis added). The jury was to consider
the following factors in reaching this determination
of the value of the fees: ". . . the skill requisite to perform
the legal services properly . . . the amount involved and
the results . . . obtained . . . the experience, reputation
and ability of the lawyer or lawyers performing the services."
[**15] (emphasis added). The jury has already
considered the alleged malpractice in its finding of the
value of reasonable and necessary fees.
Obviously, detrimental actions negligently taken by
O'Toole would have little or no value to Mrs. Van Dyke
and would not be "reasonable ". Fees that are "reasonable"
are those that are "fair, proper, just, moderate, suitable
under the circumstances" and are "fit and appropriate
to the end in view." Blacks Law Dictionary, p. 1138 (5th
ed. 1979). Negligent work does not generate fees that are
"reasonable and necessary." The jury did not find the
value of fees in a vacuum devoid of realistic expectations
of value received. Neither were they ignorant of the "results
. . . obtained" or the skill required to perform the
services when they awarded $87,232.91 to O'Toole in
fees.
This finding by the jury contains more than an implication
as to the quality of the services rendered by
O'Toole. In light of the factors considered by the jury it
is an affirmative finding which takes into account the
totality of the circumstances surrounding the assessment
of fees and the value to Mrs. Van Dyke of the services
rendered. This conclusion is buttressed by the fact [**16]
that in Special Issue No. 5 the jury determined that the
firm had rendered "beneficial services" to Mrs. Van
Dyke worth $87,248.91.
The court also suggests that a determination in a
separate trial is not a judgment sufficiently final to serve
as the basis for issue preclusion. In assessing finality a
court is to determine if "the decision to be carried over
was adequately deliberated and firm, even if not final in
the sense of forming a basis for a judgment already entered."
Restatement (Second) of Judgments § 13, comment
(g) (1982). The determination rests on the fact that
the decision is "procedurally definite." Id. It would be
ludicrous to establish a procedure for separate trials, try
issues in separate trials and then subsequently allow relitigation
of those issues formerly decided. The procedure
allowing separate trials would be meaningless if the

findings in those trials were not afforded a substantial
degree of finality. Indeed, this court has said that an order
for separate trials "leaves the lawsuit intact but enables
the court to hear and determine one or more issues
without trying all controverted issues at the same hearing."
Hall v. City of Austin, 450 S.W.2d [**17] 836, 838
(Tex. 1970) (emphasis added).
I would hold that Mrs. Van Dyke is precluded from
relitigating any issues concerning the alleged malpractice
of O'Toole. Those issues have already been heard. The
final, and crucial step that the court refuses to recognize
is that the jury found by its answers to the special issues
that O'Toole rendered valuable and necessary services to
Mrs. Van Dyke. This is a finding totally at odds with an
allegation of legal malpractice by O'Toole or his firm.
She is collaterally estopped from relitigating this issue.
In conclusion, the holding of the court unfairly allows
Mrs. Van Dyke two bites at the apple. First, she is
allowed to present evidence and argue malpractice in an
attempt to deny fees owed to O'Toole. She is [*387]
then allowed to reargue the same facts again in an attempt
to collect a money judgment for malpractice
against O'Toole. The net effect is to unfairly subject
O'Toole to defend himself twice against the same allegations
of misconduct.
For the above reasons, I dissent.
Justic William W. Kilgarlin.
I concur with the dissent of Justice Gonzalez but
would offer an additional reason why the judgment of the
court of appeals [**18] should be affirmed.
Boswell, O'Toole, Davis & Pickering filed its petition
in intervention for attorney's fees in the divorce action
between Theresa Van Dyke and Gene Van Dyke on
May 9, 1980. It was not until September 25, 1980 that
an instrument styled "Answer of Theresa Van Dyke to
Plea in Intervention of Boswell, O'Toole, Davis & Pickering"
was filed. Trial was already scheduled for September
30, 1980, at the time of the filing of the answer.
On the day of trial, Boswell, O'Toole filed a motion to
strike the answer, in which they alleged that they had not
learned until the previous day that the answer had been
filed. In the motion to strike, the firm alleged that the
answer was a complete surprise; that it was filed without
prior leave of court, and within seven days of the date of
trial, all in violation of Tex. R. Civ. P. 63. With a jury
panel awaiting voir dire examination, the trial court considered
the motion to strike and then severed out paragraph
IV of the answer for trial at a later date.
The record fails to reveal that the trial court ever
granted leave for the filing of Theresa Van Dyke's answer.
The motion to strike should have been granted by
the trial court [**19] because of the late filing and
showing of surprise.
After the jury trial with its verdict favorable to Boswell,
O'Toole, the trial judge granted their motion for
summary judgment. Our court now concludes that it was
error for the trial judge to grant the summary judgment
on a res judicata theory. While I disagree with the court
as to this holding, a summary judgment was nevertheless
proper even if it was granted on an erroneous ground if it
"may properly be upheld on an alternative ground expressly
presented to the trial court . . ." Petroscience
Corp. v. Diamond Geophysical, Inc., 684 S.W.2d 668
(Tex. 1984). Because Boswell, O'Toole's motion to strike
was an alternative ground that would properly be upheld,
the subsequent granting of the summary judgment should
be affirmed irrespective of the stated basis on which that
judgment was granted.
Moreover, Mrs. Van Dyke had her day in court on
her defensive theory of legal malpractice. During the trial
to the jury on the issue of attorney's fees, the record is
replete with instances where Mrs. Van Dyke's attorney
injected legal malpractice into the case in an effort to
defeat the claim for attorney's fees. The jury chose not
[**20] to accept her theory.
Final judgment in behalf of Boswell, O'Toole was
proper.
Justice McGee, joins in this Dissenting Opinion.