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concluding attorney's fees incurred by plaintiffs in prior litigation resulting from defendant's alleged breach of settlement agreement could be recovered as damages in subsequent suit to enforce settlement agreement
Summary of this case from In re PyrtleOpinion
No. 10-06-00050-CV
Opinion delivered and filed April 18, 2007.
Appealed from the 74th District Court McLennan County, Texas, Trial Court No. 98-26433.
Before Chief Justice GRAY, Justice VANCE, and Justice REYNA (Chief Justice GRAY dissenting).
MEMORANDUM OPINION
Jary Ganske, Shirley Ganske, and William Frazell, chapter 7 Trustee, (the Ganskes) appeal the granting of a summary judgment in favor of WRS Group, Ltd. (WRS) following years of litigation regarding the scope and effect of a settlement agreement. The Ganskes complain, in four issues, that the summary judgment was improper because the trial court erred in its interpretation of the indemnity and remedies provisions of the settlement agreement; erred in concluding there was no statutory basis for the recovery of attorney's fees, and erred in finding that res judicata barred their claims. We will reverse and remand.
Since the filing of this suit, WRS, Inc. has reorganized as WRS Ltd.
Factual Background
This appeal is the most current dispute in nine years of litigation centered on the termination of the business relationship between the Ganskes and WRS. Jary Ganske formerly served as president of WRS, and his wife, Shirley, worked as a consultant. Both were minority shareholders. In 1998, WRS and majority shareholder Dr. Wayman Spence bought out the Ganskes and fellow minority shareholder Robert Stovall.
One month after that buyout, WRS accused Jary of mismanagement. The Ganskes then negotiated a settlement agreement to pay $156,411.45 in exchange for a release of all potential liability to the company and Spence. Three months later, WRS sent a letter to the Ganskes claiming the settlement agreement was invalid, and stating it intended to pursue business tort claims against them. As a result, the Ganskes filed this suit against WRS and Spence for a declaratory judgment as to the validity and effect of the settlement agreement.
While the Ganskes' suit was pending, Stovall filed suit against WRS regarding certain tax issues. The Ganskes intervened in that suit, which was removed to federal court. In federal court, WRS asserted the same business tort claims which had originally prompted the declaratory judgment action. Then, WRS raised these tort claims as counterclaims in the Ganskes' declaratory judgment suit. The Ganskes were thus simultaneously defending the same claims in both federal and state court.
In federal court, the Ganskes moved for summary judgment based on the settlement agreement. Summary judgment in their favor was granted and later affirmed by the Fifth Circuit. While that appeal was pending, the Ganskes non-suited all the parties in this suit and filed suit against Spence separately. The only live claims remaining in the Ganskes' original declaratory judgment suit were WRS's business tort counterclaims.
After the Fifth Circuit affirmed the summary judgment in 2000, the Ganskes sent a letter to WRS demanding compensation for attorney's fees incurred in defending the federal and state business tort claims. In response to that letter, WRS filed a claim in this litigation for a declaratory judgment that it owed nothing to the Ganskes under the settlement agreement. The Ganskes filed an amended petition alleging WRS breached the settlement agreement by bringing business tort claims against them and demanded payment of prior attorney's fees as damages. WRS moved for summary judgment on the breach of contract claim.
In 2005, the Ganskes filed for bankruptcy, and this litigation was removed to bankruptcy court. WRS successfully moved to remand the case, and Frazell intervened. Once back in state court, WRS filed a supplement to its 2002 motion for summary judgment, and with no further hearing, the motion was granted.
Standard of Review
To prevail on a summary judgment motion, the movant must demonstrate that there are no genuine issues of material fact and that it is entitled to judgment as a matter of law. Sw. Elec. Power Co. v. Grant, 73 S.W.3d 211, 215 (Tex. 2002); Fletcher v. Edwards, 26 S.W.3d 66, 73 (Tex.App.-Waco 2000, pet. denied). An appellate court reviews the decision to grant a summary judgment de novo. Provident Life Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003). We take all evidence favoring the nonmovant as true. Sw. Elec. Power Co., 73 S.W.3d at 215; Fletcher, 26 S.W.3d at 73. We indulge every reasonable inference from the evidence in favor of the nonmovant and resolve any doubts in its favor. Id. Where the movant's basis for summary judge is an affirmative defense. A defendant must conclusively establish each element of an affirmative defense. Walker v. Harris, 924 S.W.2d 375, 377 (Tex. 1996); Sonnichsen v. Baylor Univ., 47 S.W.3d 122, 124 (Tex.App.-Waco 2001, no pet.). Once a defendant has presented sufficient evidence to establish a right to summary judgment on an affirmative defense, the burden of production shifts to the nonmovant to present evidence which raises a genuine issue of material fact as to at least one element of the affirmative defense. Dallas Sales Co. v. Carlisle Silver Co., 134 S.W.3d 928, 931-932 (Tex.App.-Waco 2004, pet. denied).
Prior Attorney's Fees
This appeal addresses only those attorney's fees claimed as damages for breach of the settlement agreement. Recovery of attorney's fees incurred in the current litigation is governed by Chapter 38 of the Civil Practice and Remedies Code. TEX. CIV. PRAC. REM. CODE ANN. §§ 38.001-38.006 (Vernon 1997).
The Ganskes contend in their first three issues that WRS failed to conclusively establish that there was no basis for recovery of attorney's fees by statute or by the contract. WRS claims that neither the indemnity nor the remedies provision of the settlement agreement allows for such a recovery and that section 38.001 of the Civil Practice and Remedies Code allows for the recovery of attorney's fees in current litigation only. The Ganskes respond that the settlement agreement does allow for litigation expenses, including prior attorney's fees, and that section 38.001 also allows for the recovery of their prior attorney's fees under these circumstances.
In Texas, attorney's fees from prior litigation are not generally recoverable. See Peterson v. Dean Witter Reynolds, Inc., 805 S.W.2d 541, 549 (Tex.App.-Dallas 1991, no writ).
Attorney's fees are recoverable only when a statute or agreement so provides. Dallas Cent. Appraisal Dist. v. Seven Inv. Co., 835 S.W.2d 75, 77 (Tex. 1992). Here, the Ganskes seek prior attorney's fees not as additional sums to which they are entitled for prevailing on the merits of the claim, but as the litigation expenses which are direct damages suffered as a result of WRS's alleged breach of the settlement agreement.
An action to enforce a settlement agreement is a contractual dispute and is governed by the rules relating to a binding contract. Ford Motor Co. v. Castillo, 200 S.W.3d 217, 223 (Tex.App.-Corpus Christi 2006, pet. filed); see also Padilla v. LaFrance, 907 S.W.2d 454, 461-63 (Tex. 1995). "There is nothing sacrosanct about attorney's fees per se that forbids their award as damages." Nationwide Mutual Ins. Co. v. Holmes, 842 S.W.2d 335, 342 (Tex.App.-San Antonio 1992 pet. denied) (awarding prior attorney's fees as actual damages in a DTPA claim). In an action for breach of contract, actual damages may be recovered when the loss is the "natural, probable, and foreseeable consequence of defendant's conduct." Mead v. Johnson Group, Inc., 615 S.W.2d 685, 687 (Tex. 1981). The prior attorney's fees are such consequences of the breach. Guffey v. Clark, 1997 Tex. App. LEXIS 1609, at *10, No. 05-93-00849-CV (Tex.App.-Dallas Mar. 31, 1997, writ denied) (not designated for publication).
The settlement agreement specifically provides that the Ganskes paid a sum to WRS "solely to buy his peace and avoid costly and time costing [sic] litigation." There could be no more foreseeable consequence of a breach of the settlement agreement than the cost of litigation that it was specifically designed to avoid. Guffey, 1997 Tex. App. LEXIS 1609, *11. Therefore, the Ganskes need rely on only the law of contracts to recover prior attorney's fees as direct damages under the terms of the settlement agreement. See also DP Solutions, Inc. v. Rollings, Inc., 353 F.3d 421, 430-31 (5th Cir. 2003) (applying Texas law to allow prior attorney's fees as damages for tortious interference with a contract).
WRS also argues that the settlement agreement limits the remedies available in the event of a breach and therefore does not allow the recovery of attorney's fees except in conjunction with an award of equitable relief. Parties to an agreement may contractually specify the remedies in the event of a breach, and thereby modify the legal and equitable remedies generally available. Limestone Group, Inc. v. Sai Thong, L.L.C., 107 S.W.3d 793, 797 (Tex.App.-Amarillo 2003, no pet.). WRS relies first on the indemnification agreement which this Court has previously interpreted to apply only to claims brought by those not a party to the settlement agreement. However, the Ganskes' current claim is not one for indemnification but for breach of contract. Because the indemnification clause does not apply to claims by parties to the settlement agreement, we need not analyze whether it allows for the recovery of the Ganskes' prior attorney's fees.
In their suit against Spence, the Ganskes asked for indemnification for having to defend claims brought by WRS. This Court held that the indemnification clause of the settlement agreement unambiguously applied only to claims brought by those who were not parties to the settlement agreement. Ganske v. Spence, 129 S.W.3d 701, 707-08 (Tex.App.-Waco 2004, no pet.).
The settlement agreement also includes a remedies provision. WRS argues that this provision specifically precludes an award of money damages only. The provision states:
The parties agree that any remedy at law for any actual or threatened violation of the terms hereof would be inadequate, and that the parties shall be entitled to specific performance hereof or injunctive relief or both, by temporary remedy, writ or order as may be entered by a court of competent jurisdiction, in addition to any damages that the parties may be legally entitled to recover, together with reasonable expenses of litigation, including attorneys' fees incurred in connection therewith, as may be approved by such court. . . .
WRS and the trial court understood this paragraph to mean that attorney's fees for breach of the agreement could be recovered only when injunctive relief or specific performance were also sought. Because the Ganskes already had a federal court judgment that the settlement was valid, they did not seek any equitable relief, only money damages for litigating the claims.
An ambiguity arises when a contract is reasonably susceptible to more than one meaning. Fox v. Parker, 98 S.W.3d 713, 719 (Tex.App.-Waco 2003, pet. denied). When a contract can be given a definite meaning or interpretation, it is not ambiguous, and the court will construe the contract as a matter of law. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). An ambiguity is not created merely because the parties advance conflicting interpretations. Grimes v. Andrews, 997 S.W.2d 877, 881 (Tex.App.-Waco 1999, no pet.) When the parties disagree over the meaning of an unambiguous contract, the court must determine the parties' intent from the agreement itself and not from the parties' present interpretations. Sun Oil Co. v. Madeley, 626 S.W.2d 726, 731-32 (Tex. 1981).
Generally, specific performance and injunctive relief are not available as a remedy for a breach of contract. See Limestone Group, 107 S.W.3d at 796-97; Canteen Corp. v. Republic of Tex. Prop. Inc., 773 S.W.2d 398, 401 (Tex.App.-Dallas 1989, no writ). Recovery for either form of equitable relief typically requires a showing that money damages are inadequate. Butnaru v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex. 2002) (showing money damages are inadequate proves the injury is irreparable); Scott v. Sebree, 986 S.W.2d 364, 368-69 (Tex.App. — Austin 1999, pet denied) (holding specific performance is a substitution when monetary damages are inadequate). Here, the remedies provision in the parties' contract overcomes these hurdles to equitable relief by stating that the parties agree money damages would be inadequate.
Though a contract may provide a specific remedy, it is not exclusive unless the parties clearly indicate that it be such. 4N Int'l, Co. v. Metro Transit Auth., 56 S.W.3d 860, 863 (Tex.App.-Houston [1st Dist.] 2001, pet. denied); Accent Builders Co. v. Southwest Concrete Sys., 679 S.W.2d 106, 109 (Tex.App.-Dallas 1984, writ ref'd n.r.e.). It is well settled that upon breach of a contract, a party may pursue any remedy which the law affords in addition to the remedies provided in the contract. Accent Builders, 679 S.W.2d at 109. Nothing in the provision indicates that the equitable remedies are exclusive. Therefore, we find that the settlement agreement does not preclude a breach of contract claim for money damages only. Under the contract, the Ganskes can recover those damages proven to be caused by the breach of contract including prior attorney's fees. Therefore, we sustain the Ganskes' first three issues.
Claim Preclusion
We turn next to the Ganskes' fourth issue, in which they claim that the trial court erred in finding their breach of contract claim was barred by res judicata or claim preclusion. Because this case rests on a judgment rendered by a federal court with federal question jurisdiction over the matter, federal law governs the claim preclusion analysis. Tex. State Tech. Coll. v. Cressman, 172 S.W.3d 61, 65 (Tex.App.-Waco 2005, pet. denied) ( citing John G. Marie Stella Kenedy Mem. Found. v. Dewhurst, 90 S.W.3d 268, 287 (Tex. 2002)).
Res judicata is also known as claim preclusion, the more modern term. We will use the term claim preclusion. In its broadest sense, res judicata refers to two distinct concepts, traditional res judicata or claim preclusion and collateral estoppel or issue preclusion. Gulf Island-IV, Inc. v. Blue Streak-Gulf IS OPS, 24 F.3d 743, 746 (5th Cir. 1994). The terminology in this area creates confusion. Id. This is why the clearer terms of claim preclusion and issue preclusion are preferred. The trial court rested its summary judgment on claim preclusion.
Under federal law, claim preclusion applies if: (1) the parties are identical or in privity; (2) the judgment in the prior action was rendered by a court of competent jurisdiction; (3) the prior action was concluded by a final judgment on the merits; and (4) the same claim or cause of action was involved in both actions. Test Masters Educ. Servs. v. Singh, 428 F.3d 559, 571 (5th Cir. 2005). If a state law cause of action was not asserted in a federal lawsuit as a supplemental claim, the action is barred by claim preclusion if the federal court in the first action would have had jurisdiction over the omitted state claim and would have exercised its discretion to hear the state claim. Jeanes v. Henderson, 688 S.W.2d 100, 104 (Tex. 1985).
There is no doubt the suits involve the same parties, and the judgment was rendered by a federal court exercising supplemental jurisdiction. The only issue is whether the suits involve the same claim. To determine what constitutes the same claim, the Fifth Circuit uses the transactional test. United Home Rentals Inc. v. Texas Real Estate Commission, 718 F.2d 324, 328 (5th Cir. 1983) (citing Nilsen v. City of Moss Point, 791 F.2d 556, 560 n. 4 (5th Cir. 1983) (en banc)). Under that test, the critical issue is whether the two actions are based on the "same nucleus of operative facts." Davis v. Dallas Area Rapid Transit, 383 F.3d 309 (5th Cir. 2004). Clearly, the issue in each case here is the interpretation of the same settlement agreement.
In the absence of any procedural obstacle, a presumption exists that the federal court would have adjudicated the state law claims in the federal action. Turner v. Richardson Indep. Sch. Dist., 885 S.W.2d 553, 559 (Tex.App.-Dallas 1994, writ denied); see also Langston v. Ins. Co. of N. Am., 827 F.2d 1044, 1046 (5th Cir. 1987). Because the federal court already decided to hear the business tort claims, there is no reason the federal court would have declined to exercise its discretion to take supplemental jurisdiction of this claim. This case clearly involves the type of claim splitting which the doctrine of claim preclusion was intended to prevent.
The Ganskes point to the absence of a claim for affirmative relief on their part to prohibit the application of claim preclusion. However, we look not only at the claims brought, but at those which could and should have been brought. In re Howe, 913 F.2d 1138, 1143-44 (5th Cir. 1990). The Ganskes further argue that, because the breach of contract claim was not a compulsory counterclaim in federal court, it cannot be precluded. However, the analysis into whether a claim is compulsory includes examining whether claim preclusion would bar its subsequent litigation. See Tank Insulation Int'l. v. Insultherm, Inc., 104 F.3d 83, 85 (5th Cir. 1997). The compulsory counterclaim rule cannot be use to bar the application of claim preclusion, but rather, the doctrine of claim preclusion can cause a claim to become compulsory. See id.
Though claim preclusion applies, the question remains whether by pursuing its claims simultaneously in federal and state court, WRS consented to parallel litigation and cannot now complain. The Fifth Circuit recognizes an exception to claim preclusion where the parties have expressly or impliedly acquiesced to claim splitting. In re Super Van, 92 F.3d 366, 371 (5th Cir. 1996) (adopting RESTATEMENT (SECOND) OF JUDGMENTS § 26 (1982)).
In this case, WRS brought the same countersuit in both federal and state court without objection. The business tort claims were not compulsory counterclaims to the federal tax litigation because they were the subject of pending litigation. FED. R. CIV. P. 13(a)(1). A final judgment in the federal case would not have a preclusive effect on the business tort claims. Neither the Ganskes nor WRS objected to the splitting of the claim or abated one proceeding for a judgment in the other.
WRS claims that the cause of action was never split because it pursued the same claims in both federal and state court as did the Ganskes. The Ganskes claim that in federal court they made only a defensive use of the release, reserving for state court their claims for affirmative relief. The Ganskes never stated a cause of action against WRS in federal court. They made a general claim for attorney's fees related to defense of the federal countersuit which was never pursued and on which the federal court never ruled. Conversely, in state court the Ganskes made an affirmative claim for relief in the form of a declaratory judgment action and later in a claim for breach of contract. While the federal litigation was pending, discovery continued in the state case. This is clearly the type of situation envisioned by the claim splitting exception. In describing its application, the Restatement states:
In their motion to dismiss and original answer to the counterclaim in federal court, the Ganskes asked for necessary attorney's fees and other relief. In their motion for summary judgment, they asked for other relief to which they may be entitled. In federal court, by local rule, attorney's fees for the prevailing party in a judgment are raised by motion, which the Ganskes did not file. W.D. TEX. R. CV-7(1). WRS never raised issue preclusion. Nonetheless, it fails in these circumstances. Issue preclusion applies when: 1) the identical issue was previously adjudicated; 2) the issue was actually litigated; and 3) the previous determination was necessary to the decision. Pace v. Bogalusa City Sch. Bd., 403 F.3d 272, 290 (5th Cir. 2005); see also RESTATEMENT (SECOND) OF JUDGMENTS § 27 (1982). The issue of attorney's fees was not actually litigated in federal court. Actual litigation requires that "an issue is properly raised, by the pleadings or otherwise, and is submitted for determination, and is determined." RESTATEMENT (SECOND) OF JUDGMENTS § 27 cmt. d. Here, attorney's fees were raised in the pleadings, but no evidence was introduced on that matter. The Restatement envisions the requirement of actual litigation as precluding issues that could have been litigated but on which evidence was never received. See RESTATEMENT (SECOND) OF JUDGMENT § 27 cmt. e ("An issue is not actually litigated if. . . .it is raised by a material allegation of a party's pleading but is admitted in a responsive pleading; nor is it actually litigated if it is raised in an allegation by one party and is admitted by the other before evidence on the issue is adduced at trial.").
"Where the plaintiff is simultaneously maintaining separate actions based upon parts of the same claim, and in neither action does the defendant make the objection that another action is pending based on the same claim, judgment in one of the action does not preclude the plaintiff from proceeding and obtaining judgment in the other action. The failure of the defendant to object to the splitting of the plaintiff's claim is effective as acquiescence in the splitting of the claim."
RESTATEMENT (SECOND) OF JUDGMENTS § 26 cmt. a (1982).
The Fifth Circuit and others apply this exception in cases of parallel litigation where the parties failed to raise the defense of claim preclusion or to abate the subsequent filed proceeding until the final judgment was reached in the first suit. See Super Van, 92 F.3d 366; Torres v. Rebarchak, 814 F.2d 1219 (7th Cir. 1987); Kern Oil Ref. Co. v. Tenneco Oil Co., 840 F.2d 730 (9th Cir. 1988); Keith v. Aldridge, 900 F.2d 736 (4th Cir. 1990); Diversified Foods Inc. v. First Nat'l Bank of Boston, 985 F.2d 27 (1st Cir. 1993). This exception essentially operates as a waiver where the parties fail to object at the outset of the subsequent litigation.
The Fifth Circuit has held that the application of this exception does not require affirmative evidence of acquiescence. Super Van, 92 F.3d at 371 n. 12. This waiver is necessary "to discourage unsavory tactical maneuvers" where a party pursues separate litigation and then seeks to hide behind the first judgment to be rendered. Super Van, 92 F.3d at 371 (rejecting defendant's argument that it need not inform the plaintiff of the preclusive effects of splitting the claim).
The Eighth Circuit has applied this exception in an analogous situation in which a company sued to collect a debt that resulted from the breach of a series of contracts. Kilpsch, Inc. v. WWR Tech., Inc., 127 F.3d 729 (8th Cir. 1997). While that debt collection case was pending, the company filed a separate suit to revoke certain licensing agreements within the contracts which were also breached by the same conduct. Id. The two suits continued simultaneously for about three months before the first suit resulted in a final judgment, then the defendants raised the defense of claim preclusion. Id. at 735. The Court, in applying section 26, found that failing to object before judgment in the first suit was entered resulted in a waiver of the defense. Id; see also Kern Oil, 840 F.2d at 735 (stating that defendant could not object to claims being split where both actions had been pending without objection and the defendant first raised claim preclusion after judgment in one case). Because WRS acquiesced to the splitting of the claim, we find that the trial court erred in granting summary judgment on the affirmative defense of claim preclusion. Therefore, we sustain the Ganskes' fourth issue.
Our holding that the federal judgment does carry a claim preclusive effect does not, on remand, allow WRS to again argue the settlement is invalid. The issue of the validity of the settlement was fully litigated in federal court, and issue preclusion prevents readdressing that claim. See Pace, 403 F.3d at 290; RESTATEMENT (SECOND) OF JUDGMENTS § 27 (1982).
We reverse the order granting a summary judgment in favor of WRS and remand this cause for further proceedings consistent with this opinion.
Reversed and remanded
DISSENTING OPINION
Contrary to the majority, what is, is not, but should be. The majority boldly states: "This appeal is the most current dispute in nine years of litigation. . . ." "[T]he most current dispute" implies that there have been a series of disputes and this is a new dispute. It is not. This appeal is the same dispute. The same dispute, but surrounded by another layer of legal arguments and personal acrimony, that could have been and legally should have been (or in the eyes of the law was implicitly) resolved as part of other litigation that is now final between these same parties.
I will not delay the disposition of this appeal with a separate, but futile, analysis of why the majority's analysis leads to an improper result.
It appears that WRS is condemned, as was Sisyphus, to roll the stone up the mountain, never to see it reach the top and roll down the far side, but to suffer its return, yet again, to the bottom.
I dissent.