Summary
In Classical Vacations, the defendant, a travel agency, contracted with the plaintiff, an airline, to sell plane tickets to passengers.
Summary of this case from Quintinsky v. Tx. Mut. Ins.Opinion
No. 01-01-01137-CV
Opinion issued April 10, 2003
On Appeal from the 152nd District Court, Harris County, Texas, Trial Court Cause No. 1999-25604
Panel consists of CHIEF JUSTICE RADACK and JUSTICES NUCHIA and HANKS.
MEMORANDUM OPINION
Appellee, Air France, sued appellants, Classical Vacations, Inc. and Zaher Abdo, to recover the proceeds of ticket sales for Air France flights. Air France alleged several causes of action, including breach of contract, fraud, and breach of fiduciary duty. The case was tried to a jury, which found that Classical Vacations breached its contract with Air France, committed fraud, and breached its fiduciary duty and that Abdo committed fraud and was responsible for the conduct of Classical Vacations. The jury awarded actual damages, exemplary damages, and attorney's fees to Air France. On appeal, appellants contend that the cause of action sounds only in breach of contract and also challenge the damages and alter ego findings. We modify the judgment and affirm as modified.
BACKGROUND
Abdo was the president, secretary, treasurer, and sole shareholder of Classical Vacations, a travel agency that was accredited by the Airline Reporting Corporation (ARC), a clearinghouse that allocates money between travel agencies and member airlines by paying commissions to the agencies and ticket proceeds to the airlines. Air France was a member of ARC. ARC-accredited travel agencies may receive blank ticket stock and issue tickets in the name of the member airlines. These transactions are governed by an ARC Agent Reporting Agreement (the Agreement).
Classical Vacations was a ticket consolidator for Air France. Classical Vacations issued tickets on Air France flights and, under the Agreement, was to report all tickets issued and to hold the proceeds in a separate account until paid as agreed. However, Classical Vacations did not have a separate account for the proceeds of ticket sales. Instead, it deposited the sales proceeds in its operating account and, at times, transferred money from the operating account to Classical Vacations' money market account.
In 1996, when Air France contracted with a company to audit tickets issued by travel agents, Air France learned of a large amount of underpayment by Classical Vacations. Air France confronted Abdo, who agreed to make certain payments in restitution. After that time, underpayments diminished, but did not stop entirely. Air France issued debit memos, which it called "MTB debit memos," to attempt to recover the underpayments. Air France also discovered that some tickets issued by Classical Vacations were not reported to ARC and, therefore, no payment was made to Air France. As these unreported tickets were discovered, debit memos were issued to Classical Vacations to cover the amount owed.
By March 1997, Air France believed that Abdo owed it in excess of $500,000 and asked if he could repay that amount. In April, Abdo wrote Air France with a suggested repayment schedule, which Air France accepted. During this time, Classical Vacations continued to operate as an ARC-accredited travel agency. By March 1998, Classical Vacations had authorized $431,375.97 in bank drafts to ARC, but the funds in Classical Vacations' bank account were insufficient to cover the drafts. In addition, Air France discovered that the amount due for unreported tickets was $984,211.30, not $500,000. There was also $34,000 due for unpaid MTB debit memos.
The jury awarded Air France $471,635.30 for unreported tickets, after giving credit for previous payments, $431,375.97 for returned bank drafts, and $34,000 for unpaid MTB debit memos. The jury awarded exemplary damages of $500,000 against Classical Vacations and $1,500,000 against Abdo and attorney's fees of $325,000.
DISCUSSION
Fraud and Breach of Fiduciary Duty and Exemplary Damages
In their first three points of error, appellants contend that the jury's fraud findings against Classical Vacations and Abdo and the breach-of-fiduciary-duty finding against Classical Vacations should be disregarded because Air France's only injury was economic loss and, therefore, its cause of action was for breach of contract, not for any tort. Appellants argue that this case is controlled by Southwestern Bell Telephone Co. v. DeLanney, 809 S.W.2d 493 (Tex. 1991), and Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex. 1986). In their sixth and seventh points of error, appellants contend that the jury's findings assessing exemplary damages against Classical Vacations and Abdo should be disregarded because exemplary damages may not be awarded for a breach of contract.
In DeLanney, the plaintiff alleged negligence and violation of the Texas Deceptive Practices Consumer Protection Act by Southwestern Bell, which had inadvertently omitted the plaintiff's advertisement from the Yellow Pages. DeLanney, 809 S.W.2d at 493. The supreme court said,
Texas Deceptive Trade Practices_Consumer Protection Act, Tex. Bus. Com. Code Ann. §§ 17.41_.63 (Vernon 1987 Supp. 2003).
In determining whether the plaintiff may recover on a tort theory, it is also instructive to examine the nature of the plaintiff's loss. When the only loss or damage is to the subject matter of the contract, the plaintiff's action is ordinarily on the contract.
Id. at 494. The court held that DeLanney's claim sounded solely in contract. Id. at 495.
In Reed, the plaintiffs sued for breach of contract and negligence in connection with the construction and sale of a house. Reed, 711 S.W.2d at 617. Recognizing that a party may breach duties in both tort and contract, the supreme court stated,
The nature of the injury most often determines which duty or duties are breached. When the injury is only the economic loss to the subject of a contract itself, the action sounds in contract alone.
Id. at 618. Although the jury found Jim Walter Homes to be grossly negligent in its supervision of the construction, the supreme court noted that the actual damages found by the jury related only to the cost of repairing the house and, therefore, the plaintiffs were not entitled to exemplary damages. Id."To support an award of exemplary damages, . . . the plaintiff must prove a distinct tortious injury with actual damages." Id.
In this case, the jury was asked to make findings on the following three elements of damages:
1.The value of the tickets validly issued by Classical Vacations which were not reported to the ARC and for which Air France is due compensation.
2.The sum of the ARC drafts presented on Classical Vacations' accounts which were returned due to insufficient funds and for which Air France is due compensation.
3.The value of the unpaid MTB debit memos for which Air France is due compensation.
These damages related to the subject of the contract; therefore, Air France's claim sounded solely in contract, and the jury findings of fraud and breach of fiduciary duty should have been disregarded as immaterial. Because the claim sounded solely in contract, Air France was not entitled to an award of exemplary damages.
Air France argues that this case is controlled by Formosa Plastics Corp. USA v. Presidio Engineers and Contractors, Inc., 960 S.W.2d 41 (Tex. 1998). We disagree. Under Formosa Plastics, tort damages may be recovered for fraudulent inducement even though the damages are the same economic losses that would be recoverable under a breach-of-contract cause of action. Id. at 47. In this case, Air France did not plead and the jury did not find fraudulent inducement. We decline to extend Formosa Plasticsto include fraud that occurs after the formation of a contract and that results only in loss to the subject of a contract.
We sustain appellants' points of error one, two, three, six, and seven.
Damages
In their fourth and fifth points of error, appellants challenge the jury finding in question seven, subsection one. Question seven asked,
What sum of money, if any, if paid now in cash, would fairly and reasonably compensate Air France for its damages, if any, that were proximately caused by [appellants' breach of contract, fraud, or breach of fiduciary duty]?
. . . .
1.The value of the tickets validly issued by Classical Vacations which were not reported to the ARC and for which Air France is due compensation.
The jury answered "$471,635.30."
Appellants contend, in point of error number four, that the jury's response to question seven, subsection one, should be disregarded because the parties entered into an agreement settling their dispute regarding the value of the unreported tickets and that the agreement was reduced to writing in two documents. The first, a letter from Abdo to Air France dated April 1, 1997, stated, "We figure the debit to be in the neighborhood of $500k" and proposed a schedule to repay that amount. The second, a letter from Air France to Abdo dated April 15, 1997, referenced "Outstanding Balance of at least $500,000 Due Air France," accepted the proposed payment schedule, and set out several conditions under which Air France was willing to continue its business relationship with Classical Vacations. The letter did not contain any release of liability or language to indicate full satisfaction of any debt.
Appellants did not seek any jury finding to support their contention that the two letters constituted a settlement and did not object to the submission of question number seven, subpart one, on the ground that appellants had established a settlement of Air France's claim as a matter of law. Appellants have waived point of error number four.
In point of error number five, appellants contend that the evidence is factually insufficient to support the damages finding in question seven, subpart one. Appellants specifically complain that the best evidence that an unreported ticket was actually used would be the flight coupon with a stamp on it showing that it was used, rather than a summary sheet or self-generated reports to prove damages.
At trial, appellants did not object to the admission into evidence of plaintiff's exhibits 5 through 24 and 186. These exhibits were debit memos that were prepared by auditors at Air France, showing the value of groups of unreported tickets. Appellants objected to the admission of plaintiff's exhibit 1, which was a compilation of the information contained in the debit memos, but waived this objection when they did not object to the admission of plaintiff's exhibit 1-A, which contained the same information as exhibit 1, but in chronological order. Plaintiff's exhibits 1, 1-A, 5 through 24, and 186 are, presumably, the exhibits of which appellants now complain. Appellants have waived this complaint because they did not preserve this objection at trial. SeeTex.R.App.P. 33.1(a).
Dominick Vitulli, Air France's Fraud Prevention Specialist, testified at trial, referring to the debit memos, the summaries, and other Air France and Classical Vacations documents, that the total value of issued unreported tickets known at the time of trial was $984,211.30. We hold that the evidence was factually sufficient to support the jury's finding of $471,635.30 in issued, unreported tickets. We overrule points of error four and five.
In response to a question from the jury, the trial court instructed the jury to find a net figure by making appropriate deductions.
Alter Ego
In their eighth point of error, appellants contend that the jury's finding in question 10 that Abdo was "responsible" for the conduct of Classical Vacations should be disregarded and reversed because the evidence was factually insufficient to support the jury's findings. Appellants specifically argue, "There is very limited evidence to find that Classical Vacations, Inc. was merely the alter ego of Zaher Abdo, the sole shareholder." Appellants made no complaint at trial regarding the jury finding in question number 10 and have therefore waived this complaint.
CONCLUSION
Because we have held that Air France's claim is solely in contract, we modify the judgment to delete the award of exemplary damages, and we affirm the judgment as modified.