Opinion
No. 05-09-00783-CV
Opinion issued August 30, 2011.
On Appeal from the 101st District Court Dallas County, Texas, Trial Court Cause No. 07-07214-E.
Before Justices MOSELEY, BRIDGES, and O'NEILL.
MEMORANDUM OPINION
Earth Biofuels, Inc. appeals the trial court's take nothing judgment on its suit to recover under two promissory notes. In two issues, Earth Biofuels argues the promissory notes were assignable, and Airo Wireless Media, Inc.'s contract with another entity, Blue Wireless, was not a binding contract and did not preclude assignment of the promissory notes. We affirm the trial court's judgment.
Thomas Ventulett, CEO of Airo, testified Airo builds "software for managing data and the location of individuals" and specialized handsets. In the spring of 2006, Airo began developing an "indestructible" telephone handset designed for military and secret service clients. Airo developed the design process and was beginning some of the lab testing in the summer of 2006 as well as testing with telephone providers in the United States, Australia, and Mexico. At that time, Airo had purchase orders for handsets totaling $27 million. Airo needed approximately $3 million to go into production of the handsets, and it was looking at alternatives to raise the capital it needed. An investment banker introduced Ventulett to Dennis McLaughlin, a principal at Blue Wireless, and Blue Wireless and Airo executed a term sheet on August 4, 2006. The term sheet provided for a bridge loan from Blue Wireless for $250,000 in exchange for a $250,000 promissory note issued by Airo and convertible to 5% of Airo's outstanding shares of common stock. The term sheet further contemplated an additional investment of $3.25 million, convertible to 46.5% of Airo's stock. Ventulett testified Airo did not want only a $250,000 loan because "[t]here was no way to repay that." Ventulett explained that handsets are costly to build and require commitments to multiple vendors. With only $250,000, Airo could "hardly even get the process started" and could only initiate the production of handsets it could not pay to have finished.
After the execution of the term sheet, the parties began "the due diligence process moving forward and working together." Trey Berndt, president of Blue Wireless, visited Airo's offices and told one of Airo's licensees that Blue Wireless was "funding the company." At the same time, Airo made various financial documents available to Blue Wireless and provided additional corporate documents requested by Blue Wireless' law firm. On August 25, 2006, Airo and Blue Wireless executed a letter of intent under which the parties acknowledged the prior $250,000 bridge loan and promissory note issued by Airo, Blue Wireless agreed to make a further bridge loan for $650,000 in exchange for a $650,000 promissory note, and Blue Wireless intended to pay a further $2.6 million pursuant to a schedule of payments. Upon payment of the aggregate amount of $3.5 million, Blue Wireless was to have 51% interest in Airo. The letter of intent further provided that, even if the parties failed to execute a formal agreement incorporating the terms of the letter of intent, the sections requiring Blue Wireless to pay $3.5 million for 51% of Airo's stock and requiring both parties to maintain confidentiality would "have continuing effect."
Blue Wireless failed to fully fund the $650,000 note and instead funded $554,550, despite Ventulett's repeated requests for the full amount. Ventulett explained Airo had made commitments with its vendors and "it was going to start costing money in ever-increasing increments." Ventulett testified "it had become apparent by about the middle of September that the funding was going nowhere." Ventulett spoke to Taber Wetz, interim chief financial officer for Blue Wireless. Wetz said Airo "needed to turn over 51% of the shares" of Airo stock to Blue Wireless, and Blue Wireless would provide the full $3.5 million in funding at a future date. Wetz said Blue Wireless "needed control of the company in order to raise the money through their publishing." Ventulett said Airo would "have problems with our shareholders" if Airo turned over 51% of its shares with no compensation. Ventulett tried to arrange a third-party law firm to hold the shares in escrow and distribute the shares as Blue Wireless continued to fund the company, but Blue Wireless refused.
On September 27, 2006, Blue Wireless entered an assignment and assumption agreement with Earth Biofuels assigning Airo's promissory notes to Earth Biofuels. In February or March 2007, Airo received by mail a "draft amendment" to the $650,000 note seeking to reduce it to $554,550, and a proposed assignment agreement asking Airo to consent to the assignment of the promissory notes to Earth Biofuels. Airo did not sign the amendment or the consent to the assignment of the promissory notes, and nobody from Blue Wireless contacted Airo about the amendment or the assignment. Ventulett testified that, because Blue Wireless did not make the full $3.5 million investment, Airo lost its manufacturing agreement and its design team, and more than $27 million in purchase orders were canceled. Airo lost a net profit of approximately $5.5 million. Earth Biofuels filed suit attempting to collect on the two promissory notes. Following a trial before the court, the trial judge entered a take nothing judgment against Earth Biofuels. This appeal followed.
In its first issue, Earth Biofuels argues the two promissory notes at issue were assignable. In its second issue, Earth Biofuels argues the August 25, 2006 letter of intent did not constitute a binding contract entitling Airo to an offset for damages caused by Blue Wireless against the amounts due under the promissory notes. Because these issues are interrelated, we address them together. When a party attacks the legal sufficiency of an adverse finding regarding an issue on which it had the burden of proof, the party must demonstrate on appeal that the evidence established the fact in its favor as a matter of law. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex. 2001) (per curiam) (citing Sterner v. Marathon Oil Co., 767 S.W.2d 686, 690 (Tex. 1989)). In reviewing such a challenge, we must first examine the record for evidence that supports the finding, crediting favorable evidence if a reasonable fact finder could, while disregarding all evidence to the contrary, unless a reasonable fact finder could not disregard it. City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005); see also Seidel v. Seidel, 10 S.W.3d 365, 368 (Tex. App.-Dallas 1999, no pet.) (in reviewing legal sufficiency of the evidence, we view evidence in light most favorable to trial court's findings, consider only the evidence and inferences that support the findings, and disregard all evidence and inferences to the contrary; we uphold trial court's findings if more than a scintilla of evidence exists to support them); Dunn v. Dunn, 177 S.W.3d 393, 396 (Tex. App.-Houston [1st Dist.] 2005, pet. denied) (we review findings of fact entered in trial before the court for legal and factual sufficiency of the evidence by same standards used to review a jury's answer to a special issue). We review a trial court's conclusions of law de novo. BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789, 794 (Tex. 2002).
The following elements are required for the formation of a valid and binding contract: (1) an offer, (2) acceptance in strict compliance with the terms of the offer, (3) a meeting of the minds, (4) each party's consent to the terms, and (5) execution and delivery of the contract with the intent that it be mutual and binding. Cessna Aircraft Co. v. Aircraft Network, L.L.C., 213 S.W.3d 455, 465 (Tex. App.-Dallas 2006, pet. denied). Here, the parties negotiated an agreement in which Airo would issue 51% of its stock to Blue Wireless in exchange for Blue Wireless' payment of $3.5 million. The August 25, 2006 letter of intent contemplated the subsequent execution of a formal agreement incorporating the terms of the letter of intent. No such formal agreement was executed. Earth Biofuels argues the letter of intent was therefore not a binding contract. On the contrary, the August 25, 2006 letter of intent specified the sections detailing the $250,000 and $650,000 bridge loans, as evidenced by two promissory notes, and the additional payment of $2.6 million in exchange for a 51% interest in Airo, along with the section on confidentiality, were to "have continuing effect" even should the parties fail to execute a formal agreement. Both Airo and Blue Wireless executed the August 25, 2006 letter of intent. We conclude this evidence was sufficient to show the formation of a valid contract. See City of Keller, 168 S.W.3d at 827; Seidel, 10 S.W.3d at 368; Dunn, 177 S.W.3d at 396; Cessna, 213 S.W.3d at 465.
The parties stipulated that the two promissory notes at issue were non-negotiable. Since the notes are not negotiable instruments, whenever Earth Biofuels acquired them, and under whatever terms it acquired them, it is not a holder and, therefore, cannot be a holder in due course entitled to take the instruments free of Airo's claims and defenses. See Tex. Bus. Com. Code Ann. § 3.306 (West 2002); Leavings v. Mills, 175 S.W.3d 301, 311 (Tex. App.-Houston [1st Dist.] 2004, no pet.). Accordingly, as the trial court concluded, to the extent Earth Biofuels could enforce the promissory notes, it is subject to all the defenses available against Blue Wireless, including the offset that Airo can establish as a result of Blue Wireless' breach of the investment agreement. See Leavings, 175 S.W.3d at 311. To prove a cause of action for breach of contract, Airo must prove (1) the existence of a valid contract, (2) performance or tendered performance by Airo, (3) a breach of the contract by Blue Wireless, and (4) damages sustained by Airo as a result of the breach. Valero Mktg. Supply Co. v. Kalama Int'l, 51 S.W.3d 345, 351, H1 2001.
We have already concluded the investment agreement between the parties was a valid contract. The record shows Airo tendered its performance under the contract. However, Blue Wireless breached the contract by failing to pay the full $650,000 bridge loan and failing to pay the entire $3.5 million investment. At the time, Airo had in hand three purchase orders for handsets totaling in excess of $27 million. Airo had made Blue Wireless aware that it needed the full $3.5 million investment to fulfill the purchase orders. Because Blue Wireless failed to make the full $3.5 million investment, Airo lost all three purchase orders. Ventulett's testimony regarding the lost profits, based on the profits and margin on the lost purchase orders, was sufficient to establish Airo's loss in excess of $5 million as a result of Blue Wireless' breach. See Szczepanik v. First S. Trust Co., 883 S.W.2d 648, 649 (Tex. 1994) (opinions or estimates of lost profits must be based on objective facts, figures, or data from which amount of lost profits may be ascertained). Thus, as the trial court concluded, Airo's damages exceeded the amounts claimed by Earth Biofuels under the promissory notes. Accordingly, the trial court correctly entered a take nothing judgment against Earth Biofuels on its claims under the notes. We overrule Earth Biofuels' first and second issues.
We affirm the trial court's judgment.