Opinion
No. 04-05-00938-CV
Delivered: March 28, 2007.
Appeal from the 131st Judicial District Court, Bexar County, Texas, Trial Court No. 2003-CI-18313, Honorable John D. Gabriel, Jr., Judge Presiding.
Affirmed.
Before: ALMA L. LÓPEZ, Chief Justice, PHYLIS J. SPEEDLIN, Justice, REBECCA SIMMONS, Justice.
MEMORANDUM OPINION
Aegis Insurance Holding Company, L.P. ("Aegis"), and Final Arrangements, L.L.C. ("FAL") appeal from a judgment entered in favor of a group of San Antonio investors, George N. Gaiser, Sr., Jose San Martin IV, as Trustee, and A.M. Stringfellow (collectively the "Investors") for misrepresentations and omissions in connection with the sale of FAL's securities in violation of the Texas Securities Act (TSA) and for breach of a buy back agreement. We affirm the judgment of the trial court.
Factual Procedural Background
FAL is a limited liability company that was formed in June 2000 by William S. Kilroy, Jr. FAL's business is providing services to funeral homes through its subsidiaries Continental Computer Specialities, Inc., a software provider to funeral homes, and Arrangeonline.com, an internet-based funeral services planner and database. Arrangeonline.com was formed in October 1999. Continental Computer had a 15-year operating history with revenue and an approximately 40% share of the national market in funeral software services at the time it was acquired by FAL in June 2000. Kilroy was the chairman of the board, president and chief executive officer ("CEO") of FAL, and became the president and CEO of Continental Computer after its acquisition. Kilroy was the majority partner in Aegis, which in turn held the majority of the membership interests in FAL.
In August 2000, George Gaiser, Sr. was approached by his stockbroker, Layng Guerriero, who was Kilroy's partner in Aegis, about investing in FAL through a private securities offering. A meeting was held in San Antonio between Gaiser and Guerriero, and several other potential investors. A written Private Placement Memorandum dated August 15, 2000 (the "PPM") which made representations concerning FAL's business, ownership, management, accounting and operating procedures, as well as the risks of investment, was delivered and discussed at the meeting, along with a written business plan prepared by Guerriero. The PPM also incorporated an Operating Agreement indicating, among other matters, that FAL would be run through a board of managers, would maintain its books in accordance with generally accepted accounting principles (GAAP), and after the close of the offering would provide audited financial statements at year-end. In addition, Guerriero made several oral representations at the meeting about how FAL would be operated, and about the investors' potentially high return on their investments. Gaiser and San Martin, as Trustee on behalf of several others, decided to invest and executed Subscription Agreements representing that they were "qualified investors" who were sufficiently sophisticated and experienced to evaluate the risks of the investment. The Subscription Agreements also contained a warranty clause in Paragraph 5(a)(iii) in which the investor warranted that no oral or written representations had been made which were inconsistent with those in the PPM and Subscription Agreement. Gaiser discussed the FAL investment opportunity with Stringfellow, who was not present at the meeting; Stringfellow also decided to invest in FAL. Throughout the relevant events, Gaiser has acted as the representative of the Investors.
Subsequently, in January 2001, Kilroy contacted Gaiser to request a second investment under the extended private placement offering. Based on Kilroy's assurances that FAL's business was "going great," Gaiser and the other Investors made an additional investment. In October 2001, Kilroy again solicited Gaiser to invest the "last $25,000," representing that FAL was doing fine and that another individual intended to invest $500,000, raising FAL's value to approximately $48 million. In the aggregate, the San Antonio Investors made a total investment in FAL of approximately $1 million.
The last investment of $25,000 was eventually repaid to Gaiser, and is not part of the rescission or damages awarded by the judgment.
By mid-2002, Gaiser was concerned because he had learned that most of the key management employees were gone, and that FAL was not being run through its Board or in accordance with its Operating Agreement, but was being run by Kilroy, who had been putting in and taking out money from FAL without proper authorization, accounting or documentation, some of which was for his personal use. In addition, the Investors had never received any audited financial statements or been provided access to FAL's books and records as represented in the PPM and Operating Agreement. Gaiser approached Kilroy about buying back the Investors' units at "par," i.e., for the original investment price, before the end of 2002. Following several discussions and an October 2002 meeting in San Antonio, Kilroy sent a November 26, 2002 letter to Gaiser discussing a buy back of the Investors' units at par through his company Aegis which was to be closed within the first three months of 2003; the letter modified the "hand-shake" deal reached at the October 2002 meeting by providing for a three-year payout period for the $1 million buy back. Gaiser stated that he accepted the letter offer by signing the letter and returning it to Kilroy before the stated December 10 deadline; he stated he also verbally accepted the offer in a phone call to Kilroy. This letter formed the basis of the Investors' breach of contract claim against Aegis. Kilroy did not perform under the November 26, 2002 letter, and subsequent discussions and offers to modify certain terms of the buy back occurred, but no modified deal was ever accepted by Gaiser.
The Investors subsequently learned of several misrepresentations and omissions of material fact in the PPM and Operating Agreement, as well as oral misrepresentations by Guerriero and Kilroy, pertaining to FAL's ownership, management, operation, financial accounting procedures and preparation of audited financial statements. In November 2003, Gaiser and the other Investors filed suit against Aegis, FAL and Kilroy for misrepresentations under the TSA, common law fraud, fraudulent inducement under the Texas Business and Commerce Code, and breach of contract. FAL filed a counterclaim against the Investors alleging their breach of the Subscription Agreement warranties, and seeking contractual indemnification of its litigation expenses under the Subscription Agreement. After a lengthy jury trial, the jury returned a verdict in favor of the Investors on their TSA and breach of contract claims. Specifically, judgment for rescission of the investments under the TSA in the total amount of $ 1,619,442.34 was entered against FAL and against William S. Kilroy, Jr., individually, based on a finding of alter ego, and judgment for damages for breach of contract in the total amount of $1,417,096.98 was entered against Aegis. The Investors also received an award of $310,000 in attorney's fees. The written judgment provides that the Investors are entitled to only "one satisfaction" of the judgment, whether through rescission or damages for breach of the buy back agreement. Aegis and FAL timely appealed. Kilroy filed a Chapter 7 bankruptcy petition, and is not a party to this appeal.
On appeal, Aegis and FAL jointly raise four main issues: (1) whether an election of remedies between the TSA and breach of contract claims should have been required to avoid a double recovery; (2) whether the Investors' claims under the TSA for misrepresentations and omissions were barred as a matter of law because of the Subscription Agreement's contractual warranties, the Investors' breach of those warranties, and the fact that the alleged misrepresentations were true or related only to future events and conduct; also, whether the judgment on the TSA claims must be reversed due to conflicting jury findings; (3) whether there is legally and factually sufficient evidence to support the Investors' judgment on their breach of contract claim; and (4) whether the court should have entered judgment for FAL on its counterclaim for indemnification based on the jury's finding that the Investors breached the warranties they made in Paragraph 5 of the Subscription Agreement.
Election of Remedies
In their first issue, Aegis and FAL assert that the trial court erred by denying their request that the Investors be forced to make an election of remedies, i.e., between rescission of their investment under the TSA and damages for breach of the buy back agreement. Aegis and FAL contend the two remedies are mutually exclusive and the judgment's award of both provides a double recovery. They acknowledge the handwritten notation on the judgment that the Investors "are only entitled to one satisfaction of this judgment concerning the return of their investment," but claim it did not cure the double recovery and request a remand for an election of remedies.
Double Recovery and One Satisfaction Rule.
A party is entitled to seek damages on alternative theories, but is not entitled to recover on both theories because that is considered a double recovery. Waite Hill Services, Inc. v. World Class Metal Works, Inc., 959 S.W.2d 182, 184 (Tex. 1998) (per curiam); JHC Ventures, L.P. v. Fast Trucking, Inc., 94 S.W.3d 762, 774 (Tex.App.-San Antonio 2002, no pet.). A "double recovery" occurs when a plaintiff obtains more than one recovery for the same injury or loss. Waite Hill, 959 S.W.2d at 184; Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1, 7 (Tex. 1991). The prohibition against double recovery is a corollary of the rule that a party is entitled to only one satisfaction for the injuries sustained. Stewart Title, 822 S.W.2d at 7 (noting that "[a]ppellate courts have applied the one satisfaction rule when the defendants commit the same act as well as when defendants commit technically differing acts which result in a single injury").
A party who has two inconsistent remedies must elect between them; remedies are "inconsistent" when one of the remedies results from affirming the transaction and the other results from disaffirming the transaction. Foley v. Parlier, 68 S.W.3d 870, 882 (Tex.App.-Forth Worth 2002, no pet.). For example, in a fraud case, a plaintiff can either claim rescission for fraud and get his property back, or he can sue for damages and affirm the transaction. Id.; see also Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d 671, 676-77 (Tex. 2000) ("It is well settled that one who is induced by fraud to enter into a contract has his choice of remedies. `He may stand to the bargain and recover damages for the fraud, or he may rescind the contract, and return the thing bought, and receive back what he paid,'" quoting Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d 233, 238-39 (1957)); see also Swink v. Alesi, 999 S.W.2d 107, 111 (Tex.App.-Houston [14th Dist.] 1999, no pet.) (buyer of business who sued for breach of contract and for fraud based on misrepresentations was required to elect between remedies, absent evidence of separate and distinct damages).
Here, the Investors sued FAL and Kilroy for rescission of their $1 million total investment based on misrepresentations under article 581-33 of the TSA. See Tex. Rev. Civ. Stat. Ann. art. 581-33(A)(2) (Vernon Supp. 2006) (providing that a purchaser who sues under article 581-33 may sue "either at law or in equity for rescission or for damages if the buyer no longer owns the security"); Tex. Cap. Securities, Inc. v. Sandefer, 58 S.W.3d 760, 776 (Tex.App.-Houston [1st Dist.] 2001, pet. denied) (purchaser who still owns the securities at the time of suit is only entitled to rescission under article 581-33). The TSA's rescission remedy is intended to restore the plaintiff to his original position, and requires the seller to return the purchase price of the security to the buyer even if the buyer did not sustain actual damages. Sandefer, 58 S.W.3d at 776. In addition, the Investors sued Aegis for breach of the November 26, 2002 buy back agreement, seeking damages equal to their total investment of $1 million. Even though the Investors sued different defendants based on different actions, there was only one injury as a result of the defendants' actions — the loss of the Investors' aggregate $1 million investment; moreover, the relief sought by the Investors pursuant to both claims was the same, i.e., re-payment of their total investment through whatever means. The Investors cite nothing in the record to show they presented evidence of any additional injuries or recoverable losses, and consistently maintained they were only seeking a return of their investment. See Foley, 68 S.W.3d at 883-84; Waite Hill, 959 S.W.2d at 185.
Awarding either rescission under the TSA or damages for breach of the buy back agreement makes the Investors whole; awarding both constitutes a prohibited double recovery. The trial court's judgment properly notes that the Investors are entitled to recover only "one satisfaction" for their injury, which was the loss of their aggregate $1 million investment. Accordingly, under the terms of the judgment, the Investors are only entitled to one recovery either through rescission or through damages, and there is no violation of the double recovery or one satisfaction rule. Aegis' and FAL's first issue is overruled.
Texas Securities Act In its second main issue, FAL contends the trial court's judgment under the Texas Securities Act is not supported by the law or the facts. Specifically, FAL argues the Investors' claims under the TSA for misrepresentations and omissions are: (1) "barred as a matter of law" because of the contractual warranties the Investors made when they signed the Subscription Agreement, and the Investors' breach of those warranties; and (2) not supported by legally and factually sufficient evidence because FAL's alleged misrepresentations were in fact true, or were predictions of future events and conduct which are not actionable under the TSA. FAL also asserts the judgment on the TSA claims must be reversed because the jury's finding of a violation of the TSA conflicts with its finding of no common law fraud.
The Texas Securities Act applies to persons and corporations who offer or sell unregistered securities. Flowers v. Dempsey-Tegeler Co., 472 S.W.2d 112, 115 (Tex. 1971). The fraud provision, article 581-33, is remedial in nature, and "should be given the widest possible scope." Tex. Rev. Civ. Stat. Ann. art. 581-33; Sandefer, 58 S.W.3d at 775 (quoting Flowers, 472 S.W.2d at 115). The TSA is to be construed to protect investors. Tex. Rev. Civ. Stat. Ann. art. 581-10-1(B) (Vernon Supp. 2006); Sandefer, 58 S.W.3d at 775.
Here, the Investors sued for the statutory remedy of rescission of their investment under article 581-33(A)(2) of the TSA based on oral and written misrepresentations and omissions of material fact by FAL and its agents in connection with the sale of its securities. See Tex. Rev. Civ. Stat. Ann. art. 581-33(A)(2). Article 581-33(A)(2) provides that "[a] person who offers or sells a security . . . by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made . . . not misleading, is liable to the person buying the security from him, who may sue . . . in equity for rescission. . . ." Id.; Sandefer, 58 S.W.3d at 775. The jury found in Question No. 1 that FAL violated the TSA by selling its units by means of an untrue statement of material fact or an omission to state a material fact. The jury was instructed that a fact is "material" if "there is a substantial likelihood that it would have assumed actual significance in the deliberations of a reasonable investor, in that it would have been viewed by the reasonable investor as significantly altering the total mix of information made available." The jury was also instructed that a "prediction" may constitute an untrue statement of material fact if the speaker does not believe, or have a reasonable basis to believe, it is accurate, or if the speaker is aware of undisclosed facts that would undermine the accuracy of the statement. The jury was further instructed that it is a defense to liability under the TSA if FAL proves by a preponderance of the evidence that it did not know, and in the exercise of reasonable care could not have known, of the untruth or omission; in addition, the jury was properly instructed that this defense does not apply to any writing prepared by FAL in connection with the sale of its securities. See Tex. Rev. Civ. Stat. Ann. art. 581-33(A)(2).
1. Investors' Warranties in Subscription Agreement "Unclean Hands ."
In the first part of its argument, FAL cites the PPM's lengthy disclosure of risk factors and the Investors' warranties in Paragraph 5 of the Subscription Agreement that they were sophisticated investors, and were not relying on any oral or written representations outside of the PPM and Subscription Agreement, as barring the Investors' claims under the TSA as a matter of law. Characterizing its argument as based on a contractual "merger or waiver clause," FAL asserts that the mere existence of the Investors' representations and warranties that they were qualified to make an informed investment decision, that they had read and understood the PPM and its risk factors, and that they did not receive or rely on outside information, operates to bar the Investors' suit for misrepresentations and omissions in connection with the sale of FAL's securities. FAL cites Prudential Ins. Co. of Am. v. Jefferson Assocs., Ltd., 896 S.W.2d 156 (Tex. 1995), and Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997), along with several intermediate courts of appeal cases, for the proposition that parties "may contractually restrict their ability to assert that they were induced into an agreement," but cites no authority applying that concept in a securities fraud action under the TSA. In fact, the TSA fraud provision under which the Investors sued contains an express "anti-waiver" provision. See Tex. Rev. Civ. Stat. Ann. art. 581-33(L) (providing, "[a] condition, stipulation, or provision binding a buyer or seller of a security . . . to waive compliance with a provision of this Act or a rule or order or requirement hereunder is void"); see also, e.g., Geodyne Energy Income Prod. P' ship I-E v. Newton Corp., 161 S.W.3d 482, 487 (Tex. 2005) (noting that merger doctrine does not prevent proof of prior misrepresentations under DTPA); Smith v. Levine, 911 S.W.2d 427, 431-32 (Tex.App.-San Antonio 1995, writ denied) (waiver provision does not necessarily defeat consumer's cause of action for affirmative misrepresentations under DTPA); Frizzell v. Cook, 790 S.W.2d 41, 45-46 (Tex.App.-San Antonio 1990, writ denied) (DTPA and TSA provisions are consistent, and securities fraud action may be brought under both statutes, although double recovery is prohibited). FAL's argument fails.
The second part of FAL's argument is that the jury's finding that the Investors breached their warranty that they did not receive information outside the PPM constitutes a finding of "unclean hands," and therefore bars their receipt of rescission under the TSA. The doctrine of unclean hands is applied to prevent a party whose own conduct in connection with the transaction has been "unconscientious, unjust, or marked by a want of good faith, or one who has violated the principles of equity and righteous dealing" from seeking equitable relief. See Crown Const. Co., Inc. v. Huddleston, 961 S.W.2d 552, 559 (Tex.App.-San Antonio 1997, no writ) (party's own breach of lease prevented it from seeking equitable relief in form of extension of lease); see also Schenck v. Ebby Halliday Real Estate, Inc., 803 S.W.2d 361, 367 (Tex.App.-Fort Worth 1990, no writ) (jury's finding of negligence by buyers, i.e., unclean hands, was a factor to be considered by trial court in awarding equitable remedy of rescission under DTPA). FAL cites no authority that the common law defense of "unclean hands" can be used to defeat a claim for rescission under the TSA. See, e.g., Schenck, 803 S.W.2d at 367 (common law defense of unclean hands cannot be used to defeat claims under the DTPA). At most, the jury's finding of the Investors' breach of a warranty is simply a factor to be considered by the trial court in determining whether to grant rescission. Id.; see also Sandefer, 58 S.W.3d at 774 (decision whether to grant equitable remedy like rescission, whether at common law or as statutory remedy, lies within trial court's discretion). In addition, the breach of warranty finding would only affect the Investors' claims based on misrepresentations outside the PPM and Subscription Agreement, and would not affect their claims based on the misrepresentations within and omissions from those documents. FAL's issue is overruled.
The jury found in Question No. 9 that the Investors "failed to comply with the warranty provisions contained in paragraph 5 of the subscription agreement." Paragraph 5 of the Subscription Agreement contains several warranties, including the warranty in part (a)(iii) that "[n]o oral or written representations have been made other than as stated in this Subscription Agreement and the Memorandum, and no oral or written information furnished to the Purchaser or his advisor(s) in connection with the offering of the Units was in any way inconsistent with the information stated in this Subscription Agreement or the Memorandum." On appeal, the parties presume that the jury's finding of a breach was based on the warranty in Paragraph 5(a)(iii).
2. FAL's "Misrepresentations" Were Either True or Predictions of Future Conduct.
In its second issue under the TSA, FAL argues that the alleged misrepresentations were either true statements of fact, or were mere promises of future performance and conduct that FAL intended to comply with at the time of the securities offering; therefore, such statements were not actionable under the TSA. FAL also phrases this argument as a legal and factual sufficiency challenge, although it does not engage in a typical sufficiency analysis. The Investors respond that FAL's misrepresentations and omissions related to either existing matters of material fact, or to FAL's on-going business practices and operating procedures from the time of the offering forward, and thus were not simply promises or predictions of future actions.
FAL also asserts that Layng Guierrero's oral representations to the Investors are not actionable under the TSA, and any claim based on his oral representations is barred due to the Investors' breach of their Paragraph 5 warranty that they received no representations inconsistent with the PPM. Because we sustain the Investors' TSA judgment on the basis of material omissions from the PPM, we need not address this issue.
To recover under article 581-33(A)(2), a plaintiff must prove a security was sold by means of (1) an untrue statement of material fact, or (2) an omission to state a material fact that is necessary to make the statement made not misleading. Tex. Rev. Civ. Stat. Ann. art. 581-33(A)(2). The plaintiff must introduce evidence of a material misrepresentation or omission that related to the security and induced its purchase. Crescendo Investments, Inc. v. Brice, 61 S.W.3d 465, 475 (Tex.App.-San Antonio 2001, pet. denied) (citing Nicholas v. Crocker, 687 S.W.2d 365, 368 (Tex.App.-Tyler 1984, writ ref'd n.r.e.) (statement made after the purchase of the security is not the "means" by which security was sold)). An omission or misrepresentation of fact is "material" if "there is a substantial likelihood that a reasonable investor would consider it important in deciding to invest." Sandefer, 58 S.W.3d at 776 (quoting Weatherly v. Deloitte Touche, 905 S.W.2d 642, 649-50 (Tex.App.-Houston [14th Dist.] 1995, writ dism'd w.o.j.)); Duperier v. Tex. State Bank, 28 S.W.3d 740, 745 (Tex.App.-Corpus Christi 2000, pet. dism'd by agrmt) (an omission or misrepresentation is material if there is a substantial likelihood that proper disclosure would have been viewed by a reasonable investor as "significantly altering the total mix of information made available"). The investor has no duty of due diligence, and is not required to prove he would have acted differently "but for" the omission or misrepresentation; in other words, there is no reliance element. Duperier, 28 S.W.3d at 745; Sandefer, 58 S.W.3d at 776; Summers v. WellTech, Inc., 935 S.W.2d 228, 234 (Tex.App.-Houston [1st Dist.] 1996, no writ) (TSA does not require a showing that investor would not have purchased the security if he had known of adverse material facts). The focus under article 581-33(A) is on the conduct of the seller, not on the conduct of individual buyers. Sandefer, 58 S.W.3d at 776. Finally, statements of opinion, including opinions regarding value of the securities, are generally not actionable under article 581-33 of the TSA. Id. ("puffing" or "dealer talk," such as a prediction of increased share price, generally does not amount to an actionable misrepresentation); Paull v. Capital Res. Mgmt, Inc., 987 S.W.2d 214, 218-19 (Tex.App.-Austin 1999, pet. denied) (characterization of investment as "low risk" and prediction of "large revenues for a long time" were statements of opinion that were not actionable under fraud provision of TSA where investors had equal access to information on which opinions were based).
FAL contends that the representations in the PPM that it would be run through its Board of Managers, and would be run in accordance with the procedures set forth in its Operating Agreement, were mere "promises of future conduct" that it intended to comply with, and were not actionable misrepresentations of material "facts" in existence at the time of the sale of its securities. We need not determine, however, whether the PPM's representations as to FAL's on-going operating procedures were statements of "fact" that induced the purchase of its securities, or were merely "forward looking" statements or "predictions of future events," because the PPM fails to disclose other matters of "fact" in existence at the time of the securities' sale that the jury could have found were material omissions under article 581-33(A)(2). Specifically, we refer to (1) the PPM's failure to disclose Nadine Smith's personal services contract with Kilroy individually, and (2) the PPM's failure to disclose the existence of a written option agreement held by Aegis to redeem the Class B units.
At trial, Kilroy admitted that during a two-year period he advanced approximately $1.1 million to FAL, and withdrew approximately $600,000 from FAL's accounts, without prior notice or approval by the Board and without proper documentation, as required by FAL's Operating Agreement. Further, although the Operating Agreement prohibited the managers from commingling FAL's funds with any member's funds, evidence was presented of Kilroy's repeated withdrawals from FAL's "miscellaneous expense" account for non-business purposes, and without proper notice and accounting. In addition, although the PPM represented that FAL would maintain its books and records in accordance with GAAP, would provide audited financial statements to members at year-end, and would provide access to its books and records to members, Gaiser testified that these basic operating procedures were not followed; the Investors never had access to FAL's books and records, never received an audited financial statement, and the accounts were not kept according to GAAP.
Nadine Smith's Personal Services Contract with Kilroy.
The PPM stated that Nadine Smith had previous experience as an investment banker and management consultant, and was a member of FAL's Board of Managers, and was one of three members of FAL's Investment Committee, which had certain superior rights to the Board of Managers. The PPM further stated that Smith was currently the President of Aegis Asset Management, Inc., a company for which Kilroy was the CEO. The PPM failed to disclose, however, that Nadine Smith also had a personal services contract with Kilroy individually at the time of the offering. At trial, Gaiser testified that the fact that Smith had a personal contract with Kilroy on the side, and was "working for Kilroy directly," at the time of the offering was never disclosed to the Investors, either orally or in writing. Gaiser testified that he understood Nadine Smith's role in FAL to be very important in that she was an "investment specialist" with prior experience taking companies through the steps in "going public." Gaiser viewed Smith as a "key person" in the success of FAL and Continental Computer, and stated that the existence of her personal services contract with Kilroy affected the issue of Smith's independence and loyalty to FAL and her ability to give her "undivided attention" to making FAL a success. Gaiser testified that Smith's separate contract with Kilroy individually led to Smith having a divided personal interest, i.e., a potential conflict of interest. At trial, Kilroy admitted that his personal services contract with Smith was "not directly disclosed" in the PPM. In June 2002, Kilroy bought out the remainder of Smith's personal contract with him, in addition to her employment contract with FAL and her FAL options, for a total of $200,000, of which approximately $56,000 was attributable to Smith's personal contract with Kilroy.
Guerriero orally represented to Gaiser and the Investors at the August 2000 meeting that the goal was for Nadine Smith to take FAL public within one to two years after the offering.
Gaiser also felt it was important that Smith have a personal ownership stake in FAL to ensure that FAL received her "undivided attention" and full loyalty since she would personally benefit from FAL's success. The Investors claimed that the PPM misrepresented the fact that Smith had a current 3.5% ownership interest in FAL at the time of the offering, while in reality she only had options to purchase a 3.5% interest, which she never exercised. Because we sustain the jury's finding that FAL violated the TSA based on the omissions of material fact discussed herein, we need not determine whether there was sufficient evidence to support a finding that Smith's ownership interest was materially misrepresented in the PPM.
Aegis' Written Option Agreement to Redeem the Class B Units.
Further, several representations were made in the PPM that "the Company," which is FAL, had the right to redeem all of the outstanding Class B units for approximately $7 million by June 17, 2001; if FAL failed to do so, the Class B units would be automatically converted into a 66.66% majority interest in the outstanding Class A units, resulting in substantial dilution to the other members' interests in FAL. At trial, Gaiser testified that after the Investors had made their investments, he learned that FAL did not in fact have the right to redeem the Class B units. Rather, Aegis Insurance Holding Company had a written option agreement with Fullington and Freeman to redeem their Class B units by June 16, 2001; the fully executed option agreement signed by Kilroy was admitted into evidence. Gaiser testified that Aegis' written option agreement for the Class B units was never disclosed to him or the other Investors, either orally or in writing. Gaiser further testified that he probably would not have invested, and would not have advised the others to invest, if he had known of Aegis' option agreement because he would have considered that fact to be a "red flag" that FAL's income stream during the next year might not be sufficient to provide $7 million to redeem the Class B units. Finally, Kilroy admitted at trial that the Aegis option agreement to purchase the Class B units was not disclosed in the PPM; he stated it was disclosed on the back of the unit certificates instead.
The units issued to the Investors and others pursuant to the PPM are "Class A membership interests." When FAL acquired Continental Computer in June 2000, as part of the purchase price it issued 44,200 units of "Class B membership interests" carrying superior rights to the two stockholders of Continental Computer, Michael Fullington and Elwood Freeman; FAL also gave Fullington and Freeman two-year employment contracts, and placed them on FAL's Board of Managers.
Based on our review of the record, we conclude there is legally and factually sufficient evidence to support the jury's finding in Question No. 1 that FAL violated the TSA. See Tex. Rev. Civ. Stat. Ann. art. 581-33(A)(2); see also City of Keller v. Wilson, 168 S.W.3d 802, 827-28 (Tex. 2005) (stating legal sufficiency standard); Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986) (stating factual sufficiency standard). Accordingly, we overrule FAL's issue and sustain the jury's finding in Question No. 1 that FAL violated the TSA in the sale of its securities to the Investors.
3. Conflict Between Jury Findings on TSA and Common Law Fraud Claims.
In its third TSA issue, FAL asserts there is a "fatal conflict" between the jury's finding in Question No. 1, in which it found a violation of the TSA, and its findings in Questions No. 2 and 3, in which it rejected the Investors' common law fraud and fraudulent inducement claims. In reviewing jury findings for conflict, the threshold question is whether the findings are about the same material fact. Bender v. Southern Pac. Transp. Co., 600 S.W.2d 257, 260 (Tex. 1980); Crescendo Investments, 61 S.W.3d at 476. A court may not strike jury answers as conflicting if there is any reasonable basis upon which they can be reconciled. Bender, 600 S.W.2d at 260; Crescendo Investments, 61 S.W.3d at 476. The court must reconcile apparent conflicts in the jury's findings if reasonably possible in light of the pleadings and evidence, the manner of submission, and the other findings considered as a whole. Bender, 600 S.W.2d at 260. The appellate court's duty is to harmonize jury findings when possible. Id.; Rice Food Markets, Inc. v. Ramirez, 59 S.W.3d 726, 733 (Tex.App.-Amarillo 2001, no pet.). Appellate courts are further mandated to try to interpret jury findings so as to uphold the trial court's judgment. Ramirez, 59 S.W.3d at 733.
In this case, the jury's answers to Question No. 1 and Question Nos. 2 and 3 are not about the same material fact. See Bender, 600 S.W.2d at 260. Question No. 1 concerning the TSA violation inquired whether FAL sold a security by means of either an untrue statement of material fact or an omission of a material fact. Question Nos. 2 and 3 on common law fraud similarly inquired whether FAL made a false representation of material fact or failed to disclose a material fact; however, those questions required findings on the additional elements of intent and reliance and injury. See Dow Chem. Co. v. Francis, 46 S.W.3d 237, 242 (Tex. 2001). Therefore, there is no fatal conflict between the jury's findings because the questions did not turn on the same material facts. This issue is overruled.
4. Other Errors in Judgment on TSA Claims.
Finally, FAL also asserts there are other miscellaneous errors in the TSA judgment that require reversal. FAL claims that one of the Investors, Stringfellow, was not entitled to recover under the TSA because he never personally received any written documents before he invested; however, the undisputed trial evidence showed that Stringfellow relied on Gaiser's information and advice, which in turn was based on the written PPM and Subscription Agreement. Next, citing no authority, FAL complains that there was no jury finding as to which investment by the Investors violated the TSA (Gaiser made a series of three investments ); however, Question No. 1 applied to the sale of all the FAL securities, and the judgment properly awards rescission as to all the investments made by the Investors in FAL. Further, FAL did not raise this objection to the charge at trial; therefore, it is waived. Tex. R. App. P. 33.1(a); Green Intern., Inc. v. Solis, 951 S.W.2d 384, 389 (Tex. 1997). FAL next contends that because the trial court made no express finding that it was "equitable under the circumstances" for the Investors to recover their attorneys' fees under article 581-33(D)(7) of the TSA, the award of attorney's fees must be reversed. See Tex. Rev. Civ. Stat. Ann. art. 581-33(D)(7); however, the parties stipulated as to the amount of attorney's fees, awarding attorney's fees under the TSA is within the trial court's discretion, and the court made an implied finding that the award of attorney's fees to the Investors is equitable. Id.; Grant Thornton L.L.P. v. Suntrust Bank, 133 S.W.3d 342, 362 n. 12 (Tex.App.-Dallas 2004, pet. filed). Finally, citing no authority, FAL argues that the judgment fails to order the Investors to tender their units to FAL under the rescission remedy; however, it is implied in the judgment that the Investors must return their unit certificates to FAL to obtain rescission, and the record reflects that the Investors offered to tender their units in their pleadings and Gaiser tendered their certificates at trial. See Russell v. French Associates, Inc., 709 S.W.2d 312, 315 (Tex.App.-Texarkana 1986, writ ref'd n.r.e.) (tender of return of securities made prior to judgment was sufficient under TSA). These issues are without merit.
Based on the foregoing analysis, all of FAL's issues under the TSA are overruled.
Breach of Contract — Buy Back Agreement
In its third main issue, Aegis argues that the evidence is legally and factually insufficient to support the jury's findings in Question Nos. 4 and 5 that the November 26, 2002 letter constituted a buy back "contract" which Aegis breached. Aegis contends that, based on the plain language of the letter, it is clear it was not a binding agreement, but only a proposal to conduct further negotiations; therefore, as a matter of law, the letter did not constitute a binding agreement to buy back the Investors' shares, and the award of damages for breach of contract must be reversed and a take-nothing judgment rendered in favor of Aegis.
Legal and Factual Sufficiency Standards of Review .
When considering a legal sufficiency challenge, we review the evidence in the light most favorable to the verdict giving "credit [to] favorable evidence if reasonable jurors could, and disregard[ing] contrary evidence unless reasonable jurors could not." City of Keller, 168 S.W.3d at 827 (ultimate question is whether the evidence at trial would enable reasonable and fair-minded people to reach the verdict). Evidence is legally insufficient when the record discloses: (1) a complete absence of evidence of a vital fact; (2) the court is barred by rules of law 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 a vital fact. Id. at 810. When reviewing a jury verdict to determine the factual sufficiency of the evidence, we must consider and weigh all the evidence to determine whether the findings are so against the great weight and preponderance of the evidence as to be manifestly unjust. Cain, 709 S.W.2d at 176.
Applicable Law .
To have an enforceable agreement, the parties must agree on all the essential terms. T.O. Stanley Boot Co., Inc. v. Bank of El Paso, 847 S.W.2d 218, 221 (Tex. 1992); Oakrock Exploration Co. v. Killam, 87 S.W.3d 685, 690 (Tex.App.-San Antonio 2002, pet. denied). The parties may agree upon the principal terms of the contract in a binding agreement, and leave other nonessential terms open for later negotiations. T.O. Stanley, 847 S.W.2d at 221; John Wood Group USA, Inc. v. ICO, Inc., 26 S.W.3d 12, 19 (Tex.App.Houston [1st Dist.] 2000, pet. denied) (citing Scott v. Ingle Bros. Pac., Inc., 489 S.W.2d 554, 555-56 (Tex. 1972)). "It is only when an essential term is left open for future negotiation that there is nothing more than an unenforceable agreement to agree." Killam, 87 S.W.3d at 690. A letter of intent may be binding even though it refers to the drafting of a future, more formal agreement. Foreca, S.A. v. GRD Dev. Co., 758 S.W.2d 744, 746 (Tex. 1988).
The determination of whether there was a meeting of the minds, and thus an offer and acceptance, is based on the objective standard of what the parties said and did, and not on their subjective state of mind. Copeland v. Alsobrook, 3 S.W.3d 598, 604 (Tex.App.-San Antonio 1999, pet. denied). There must be a clear offer and, in turn, a definite acceptance of all the terms contained in the offer. Harris v. Balderas, 27 S.W.3d 71, 77 (Tex.App.-San Antonio 2000, pet. denied). When a meeting of the minds is contested, as it is here, determination of whether the parties intended to be bound by the written agreement, or intended it to be preliminary and without legal significance, is generally a question of fact for the jury. Foreca, 758 S.W.2d at 746; Buxani v. Nussbaum, 940 S.W.2d 350, 352 (Tex.App.-San Antonio 1997, no writ). However, if the terms used can be given a definite or certain meaning, the court may determine as a matter of law that the language in the agreement conclusively establishes the intent of the parties. Foreca, 758 S.W.2d at 746; West Beach Marina, Ltd. v. Erdeljac, 94 S.W.3d 248, 258 (Tex.App.-Austin 2002, no pet.); see also, e.g., John Wood Group, 26 S.W.3d at 15, 20 (letter agreement's statement that it was "not binding" except for certain provisions, conclusively established that parties did not intend to be bound as matter of law).
Once a binding agreement has been found to exist, our primary focus in construing the agreement is to ascertain the true intentions of the parties as expressed in the written document. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003). We consider the entire document and attempt to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless. Id. No single provision taken alone will be given controlling effect. Id. In construing an agreement, the court may consider evidence of the circumstances surrounding its execution. America's Favorite Chicken Co. v. Samaras, 929 S.W.2d 617, 622 (Tex.App.-San Antonio 1996, writ denied). If, after applying the rules of construction, a contract can be given a definite or certain legal meaning, then it is unambiguous and we construe it as a matter of law. Webster, 128 S.W.3d at 229. If the contract is subject to more than one reasonable interpretation, then it is ambiguous, creating a fact issue as to the parties' intent. Id.
Here, as in John Wood Group, the basic question is whether there was "a mutual consent to exchange the item to be sold for the agreed upon price." See John Wood Group, 26 S.W.3d at 20 (noting that the elements of a "sale" consist of (1) the thing sold, which is the object of the contract, (2) the consideration or price to be paid, and (3) the consent of the parties to exchange the thing for the price).
Evidence at Trial .
The evidence as to the intent of the parties was conflicting. At trial, Gaiser testified that at the conclusion of the October 2002 meeting, he and Kilroy had a "handshake deal" for a buy back of all the Investors' shares at par for approximately $1 million total, to be completed before the end of 2002. Guerriero also testified at trial that an agreement on the buy back was reached between Gaiser and Kilroy at the October 2002 meeting. Kilroy was to send Gaiser a written letter confirming the oral agreement within a couple of weeks. After a few weeks passed, Gaiser inquired about the letter, and Kilroy sent him the November 26, 2002 letter, which was admitted into evidence at trial. In the letter, Kilroy references the October 2002 meeting, and then states,
[P]lease consider this letter as an indication of my willingness to consider the purchase of the membership interests in [FAL] that you and your partners own. The following points are preliminary but critical terms to any transaction that may be structured:
1. Aegis . . . would purchase the units.
2. The amount of the purchase would be 100% of the amount you and your partners paid to purchase your membership interests, or about $1,000,000.
3. The purchase would be completed during the first three months of 2003.
The purchase agreement will include provisions for four equal payments, with payments to be made as follows: 25% of the purchase price will be paid at closing . . . 25% . . . on the first anniversary of the closing . . . 25% on the second anniversary . . . [and] 25% . . . on the third anniversary. . . . [emphasis added]
Kilroy then states in the letter that he recognizes the terms set forth "may not meet [Gaiser's] expectations," but they reflect the realities of FAL's situation. Finally, the letter concludes, "If you have an interest in pursuing the sale of your membership interests as outlined, please call me to discuss the terms and conditions upon which I would be willing to complete such a proposed transaction. If you do not respond by December 10, I will conclude that you do not have an interest in the offer, and it will be withdrawn." [emphasis added]
Gaiser testified that the letter offer differed from their "handshake deal" in using Aegis as the purchasing entity and providing for a four-installment payout over time, as well as delaying the closing date to early 2003, rather than the end of 2002. Gaiser stated that, nevertheless, he called Kilroy before the deadline and verbally accepted the new offer as stated in the letter. Gaiser testified he also accepted the offer by signing the letter and returning it to Kilroy before the December 10 deadline; Gaiser did not keep a copy of his signature on the letter.
Kilroy testified that his intent with respect to the November 26, 2002 letter was only to "consider" and negotiate the terms of a buy back, and that no final buy back agreement was ever reached with Gaiser. Kilroy's investment adviser John Dennis testified that he drafted the letter, along with FAL's attorney John Boyer. Dennis stated that the purpose of the letter was to determine whether "certain main issues" of the buy back would be acceptable to Gaiser. Dennis stated the letter did not contain "all of the terms necessary to finalize such a transaction," and that a final agreement was never reached. Boyer, who also negotiated with Gaiser on behalf of Kilroy concerning the buy back at various times, similarly testified that no final buy back agreement with the Investors was reached.
The buy back did not close in early 2003, and, according to Gaiser, Kilroy stopped returning his phone calls. Gaiser sent a series of emails and faxes to Kilroy over the next several months attempting to close the buy back deal, and offering to work with him on the timing and payment terms. For example, various emails and faxes by Gaiser stated, "we agreed to do a deal based on the November 26, 2002 letter . . . when can we get together and finalize it . . . to get this simple deal done?;" and "If you're not going to follow through with this buyout please tell me now. If you are, when can we get together to discuss the details?;" and asked Kilroy "to confirm . . . you are still committed to buying out the San Antonio investors like we agreed in November 2002." Kilroy did not respond to the emails and faxes from Gaiser. Then, Gaiser sent Kilroy's attorney a letter on May 22, 2003 stating that he and Kilroy had struck a verbal deal on a new payout schedule providing for the immediate return of the last $25,000 invested and a staggered payout of the rest of the investment; however, Gaiser received no response to his letter. Finally, after Gaiser saw the profit and loss statement for Continental Computer in June 2003 and realized Kilroy had been withdrawing large amounts from the "miscellaneous expense" account for non-business uses, Gaiser sent an email in which he accused Kilroy of fraud and indicated he now understood why Kilroy had been "stringing [him] along for six months and not finalizing the buyout;" Gaiser demanded that Kilroy send him a letter committing to the buyout immediately. On July 16, 2003, Gaiser received a new letter from Kilroy stating, "the purpose of this letter is to evidence my agreement to purchase the units . . . for cash" and providing for immediate payment of the last $25,000 invested and a payout schedule for the rest; Gaiser did not accept the new payout terms, and instead responded that he wanted a guarantor because he no longer trusted Kilroy. Eventually, Gaiser did receive a refund of
his last $25,000 investment from the trust account of Kilroy's attorney, but the rest of the Investors' $1 million investment was never returned.
Conclusion.
Based on our review of the evidence, we conclude there is legally and factually sufficient evidence to support the jury's findings that the letter constituted a binding agreement which was breached by Aegis. As discussed, Gaiser testified that the November 26, 2002 letter was a new offer to buy back the Investors' shares which he accepted; it was not merely a proposal to negotiate because it spelled out the basic terms and conditions of the buy back. Indeed, on its face, the November 26, 2002 letter sets out the "critical terms" of the buy back between Aegis and the Investors pertaining to the thing to be sold (the Investors' membership units), the consideration to be paid ($1 million aggregate "par" value), and the consent of the parties to exchange the units for that price to be paid in specified installments over a specified period of time. See John Wood Group, 26 S.W.3d at 20. Further, Gaiser's actions in the months after the November 26, 2002 letter support a finding that the parties had agreed on the essential terms of a buy back, and thus had a meeting of the minds; he continually sought to complete the transaction by offering to modify the timing and payment structure. In addition, Kilroy's actions in adjusting the payment schedule during the months following the letter also support a finding that he had agreed to the basic terms of the buy back, i.e., the exchange of all the Investors' units for their par value for a total price of $1 million. See Copeland, 3 S.W.3d at 604 (determination of whether there was a meeting of the minds is based on parties' objective actions, not their subjective state of mind). The jury was free to disbelieve the testimony by Kilroy and his associates that there was no final agreement, and to believe Gaiser, in finding that the November 26, 2002 letter represented a binding agreement on the essential terms of the buy back, which was subsequently breached by Aegis. See T.O. Stanley, 847 S.W.2d at 221. We overrule Aegis' issues, and sustain the award of damages for breach of contract.
Jury Finding with Respect to FAL's Right of First Refusal .
Next, Aegis and FAL argue there is "no evidence" to support the jury's finding in Question No. 6 that the Investors did not fail to comply with the right of first refusal provision in the Operating Agreement after the November 26, 2002 letter. Aegis and FAL assume the jurors found that FAL waived its right of first refusal because it contends the Investors judicially admitted they failed to comply with the right of first refusal provision. In essence, Aegis and FAL argue that the November 26, 2002 buy back agreement is void because FAL's contractual right of first refusal was violated.
Question No. 6 asked the jury whether they found by a preponderance of the evidence that the Investors "failed to comply . . . with the right of first refusal notice and offer requirements contained in section 8.04 of the Operating Agreement for the units . . . they owned after their acceptance, if any, of the November 26, 2002 letter." The jury was instructed that, "[f]ailure to comply by Plaintiffs, if any, is excused if compliance is waived by [FAL] and each of its members," and that "waiver is an intentional surrender of a known right or intentional conduct inconsistent with claiming the right."
Aegis/FAL's legal sufficiency challenge fails because there is some evidence in the record to support the jury's finding that the Investors did not fail to comply with the right of first refusal, or that FAL had waived it because it had actual knowledge of the buy back agreement. See City of Keller, 168 S.W.3d at 810. The Operating Agreement's right of first refusal is triggered by any attempt to dispose of all or a portion of a member's units in FAL, and requires the seller to first provide FAL with written notice of the offer, and to first offer to sell its units to FAL and its members on the same terms before selling the units to a third party. The Operating Agreement states that the effect of a disposition that violates the right of first refusal is to render the transaction "null and void." Both sides' experts testified that the purpose of the right of first refusal provision was to prohibit a third party or competitor from buying units in FAL without the company and other members first having the opportunity to buy the offered units.
The Investors' securities law expert, Lee Polson, testified that a right of first refusal is designed to give either the company or the other members the right to purchase the units before the units can be transferred to a third party or competitor. The purpose is to protect the investors and to "make sure that the company, or . . . its investors, are able to maintain control over the people that own their interests. . . ." FAL's expert, John Boyer, concurred with Polson's statement of the purpose of a right of first refusal.
Here, the Investors were planning to transfer their units to another FAL member, Aegis, which already held the majority of the membership units in FAL, not to an outside third party or competitor. In addition, the transfer never occurred because Aegis did not consummate the buy back; therefore, there was no actual violation of the right of first refusal provision and no transaction to be rendered null and void due to the violation. Further, Gaiser testified that after the October 2002 meeting, he attempted to comply with the right of first refusal provision by personally informing everyone associated with FAL about his buy back deal with Aegis; he admitted that he did not provide written notice. Finally, Kilroy, who was chairman of the board and CEO of FAL, as well as CEO of Aegis, had actual notice of the November 26, 2002 buy back agreement and its terms; in fact the jury made an "alter ego" finding and held Kilroy personally responsible for FAL's conduct in this matter. Moreover, FAL's corporate attorney, John Boyer, conceded that FAL had notice of the buy back of the San Antonio Investors' units. There is sufficient evidence to support the jury's finding that the Investors did not violate the right of first refusal provision because the purpose of the right of first refusal was met in that the Investors' units were to be purchased by another member (Aegis), the other members were informed, the company (FAL) had actual notice of the buy back through Kilroy, and the buy back was never consummated. This issue is overruled.
Attorney's Fees .
Finally, Aegis contends the Investors did not properly "present" their claim for breach of contract, and are therefore not entitled to attorney's fees on that claim under Chapter 38 of the Texas Civil Practices and Remedies Code. Aegis concedes the parties stipulated as to the amount of each side's attorney's fees, but argues the stipulation did not extend to the right to recover attorney's fees. Section 38.001 provides that a person may recover reasonable attorney's fees on a claim based on an oral or written contract. Tex. Civ. Prac. Rem. Code Ann. § 38.001(8) (Vernon 1997). Under section 38.002, in order to recover attorney's fees under that chapter, a party must "present the claim to the opposing party or to a duly authorized agent of the opposing party." Tex. Civ. Prac. Rem. Code Ann. § 38.002 (Vernon 1997); see Harrison v. Gemdrill Intern., Inc., 981 S.W.2d 714, 719 (Tex.App.-Houston [1st Dist.] 1998, pet. denied). Presentment of the claim is required to provide the other party with an opportunity to pay the claim before incurring an obligation for attorney's fees. Harrison, 981 S.W.2d at 719; Jones v. Kelley, 614 S.W.2d 95, 100 (Tex. 1981). No particular form of presentment is required, and it may be written or oral. Harrison, 981 S.W.2d at 719. There is no requirement that the demand, or presentment of the claim, be made through counsel. Sunbeam Env. Servs. Inc. v. Tex. Workers' Comp. Ins. Facility, 71 S.W.3d 846, 851 (Tex.App.-Austin 2002, no pet.). Here, the record shows Gaiser made numerous oral and written demands for Aegis, through Kilroy, to comply with the buy back agreement. This issue is overruled.
Aegis also complains that the trial court miscalculated the pre-judgment interest on the breach of contract award because under the "staggered payout" schedule in the November 26, 2002 letter, three of the payment dates had not passed at the time suit was filed. Aegis cites no authority in support of its argument; therefore, it is waived. Tex. R. App. P. 38.1(h) (appellant's brief must cite authority in support of each issue raised or the issue is waived).
FAL's Counterclaim for Indemnification
Finally, in its fourth main issue, FAL contends the trial court erred in failing to enter judgment in favor of FAL on its indemnification counterclaim because the jury found in Question No. 9 that each of the Investors failed to comply with the warranty provisions in Paragraph 5 of the Subscription Agreement. FAL cites no authority in support of its substantive argument and request for relief that this court render judgment "in favor of FAL on its counterclaim against each Appellee for the full amount of the stipulated [attorney's] fees." Thus, FAL's issue is waived.
FAL cites two cases to show that the indemnification provision was sufficiently "conspicuous" in the Subscription Agreement, but cites no authority in support of its argument that it was entitled to judgment on its counterclaim for indemnification under these facts.
Even if we were to address FAL's issue on its merits, we would overrule it. FAL's claim is based on Paragraph 7 of the Subscription Agreement, which contains a contractual indemnification provision in favor of FAL for "any loss arising out of or based upon any false representation or warranty" by the Investors. FAL claims that because the jury found the Investors breached the Paragraph 5 warranties, it is entitled to indemnification. We agree with the Investors' argument that the indemnification clause does not apply to, and is not triggered by, the Investors' actions in this lawsuit. FAL's general counsel and securities expert, John Boyer, testified that he drafted the indemnification clause and that it is designed to protect FAL from damages arising from a misrepresentation by a subscriber/investor that "defeat[s] the availability of the offering exception," thereby undermining the validity of the private offering and subjecting FAL to potential liability for a securities violation. The majority of the warranties in Paragraph 5 are the representations by the subscribers/investors that they qualify as sophisticated or accredited investors, which is a key prerequisite to the validity of the private offering under the securities laws. The only evidence presented at trial was that the Investors breached the subparagraph 5(a)(iii) warranty by receiving oral and/or written representations inconsistent with the PPM and Subscription Agreement. Those representations outside the PPM and Subscription Agreement are not the basis for the Investors' recovery under the TSA; rather, their judgment for rescission under the TSA is based on the written misrepresentations contained within the PPM. This issue is overruled.
Conclusion
Based on the foregoing analysis, we affirm the trial court's judgment.