Opinion
NO. 01-16-00853-CV
07-17-2018
GFH FUNDING, LTD. AND GONZALEZ FINANCIAL HOLDINGS, INC., Appellants v. KRAKEN HOLDINGS, LLC AND MORLOCK, LLC, Appellees
On Appeal from the 55th District Court Harris County, Texas
Trial Court Case No. 2010-52641
MEMORANDUM OPINION
Appellants, GFH Funding, Ltd. ("GFH") and Gonzalez Financial Holdings, Inc. ("Gonzalez"), appeal from the trial court's judgment rendered in favor of appellee, Kraken Holdings, LLC ("Kraken"), on its breach of contract action. In five issues, GFH and Gonzalez contend that (1) the reporter's record is unreliable; (2) there is no evidence of breach; (3) the trial court abused its discretion in denying their motion for new trial; (4) the trial court abused its discretion in denying their motion to compel; and (5) there is no evidence to support the trial court's award of damages in the amount of $589,889 to Kraken. We affirm.
Background
On August 23, 2010, Kraken and Morlock, LLC sued GFH and Gonzalez alleging breach of contract. On February 24, 2015, the case proceeded to a bench trial.
The testimony at trial showed that Kraken is in the business of making tax lien loans and acquiring properties through tax foreclosures. GFH is in the business of originating and selling tax transfer notes and liens. In 2008, David Klein, on behalf of Kraken, and Gonzalez, on behalf of GFH, entered into an agreement under which Kraken would advance sums to GFH so that GFH could purchase tax notes and liens. GFH was then to transfer those notes and liens to Kraken and also perform loan servicing for Kraken. The basic terms of the agreement were set forth in an email exchange between the parties and signed by them on October 31, 2008. This email exchange (Plaintiff's Exhibit 3) was admitted at trial.
Section 32.06 of the Tax Code enables an owner of real property to authorize another party to pay the taxes assessed against the property and contemplates that the tax lien against the property will then be transferred to the party who pays the taxes. See TEX. TAX. CODE ANN. § 32.06 (West 2015); Genesis Tax Loan Servs., Inc. v. Kothmann, 339 S.W.3d 104, 106 (Tex. 2011) ("Section 32.06 of the Texas Tax Code provides that a tax lien on real property, which takes priority over many other liens, may be transferred, under specified conditions, to a person who pays the taxes with the owner's permission.").
Under the arrangement, Kraken made several advances of funds to GFH and advanced further funds by paying subsequent unpaid taxes on the subject properties and adding them to the loan amount, a transaction referred to by the parties as a "force pay." After making the loans, GFH would consolidate a number of the loans into "pools." In November and December 2008, and April 2009, Kraken paid GFH a total amount of $1,898,628 for the purchase of three pools of tax lien notes known as Kraken 1, Kraken 2, and Kraken 3.
For a period of time, Kraken received payments on the notes it purchased. However, with only a few exceptions, GFH never delivered any of the original notes, or copies of the notes, to Kraken. At the time of trial, Kraken had received a total amount of $1,308,729 in principal repayment on the notes from GFH, and a balance of $589,899 remained owing.
At the conclusion of trial, the trial court found, among other things, that (1) the parties had formed a contract, (2) the contract included a provision by which GFH was required to provide Kraken with the tax lien notes themselves, (3) GFH materially breached the contract by failing to deliver the tax lien notes to Kraken, (4) GFH's breach damaged Kraken because it could not collect the notes directly from the borrowers as it was not the holder of the notes, and it had no proof that the notes even existed. The trial court further found that the only measure of damages available to Kraken was a refund of its unpaid principal.
Although interest was owed under the agreement, Kraken did not seek recovery of the accrued but unpaid interest.
On August 8, 2016, the trial court signed a judgment in favor of Kraken and against GFH, and it awarded damages to Kraken in the amount of $589,899. On June 22, 2016, the trial court entered written findings of fact and conclusion of law.
The judgment also ordered that Kraken take nothing against Gonzalez, and that Morlock take nothing against GFH and Gonzalez. Kraken does not contest the take-nothing judgment in favor of Gonzalez. Morlock did not appeal the take-nothing judgment rendered in favor of GFH and Gonzalez.
Reporter's Record
In their first issue, GFH and Gonzalez argue that the reporter's record on appeal may be inaccurate and therefore cannot be relied on as evidence.
The record reflects that, on July 13, 2017, this Court abated this appeal and remanded the case to the trial court to address a dispute about the accuracy of the reporter's record—specifically, GFH's Exhibits 1 and 2, identified as "Distribution Lists for 2012-2015" and "Kraken Portfolio," respectively, that were not included in the reporter's record filed on March 2, 2017. On August 14, 2017, the trial court held an abatement hearing at which the parties informed the trial court that they were "in agreement" regarding the exhibits and that they had been offered at trial. The exhibits were reoffered at the abatement hearing and included in the reporter's record filed on September 19, 2017, and we reinstated the appeal.
GFH and Gonzalez now assert that the reporter's record "may contain inaccuracies" because the court reporter "stated in an email that she relied on an 'inaudible' tape recording." Thus, they argue, they are entitled to a new trial.
Rule of Appellate Procedure 34.6(f) provides that an appellant is entitled to a new trial if:
(1) the appellant has timely requested a reporter's record;TEX. R. APP. P. 34.6(f); see also Routier v. State, 112 S.W.3d 554, 571 (Tex. Crim. App. 2003). If the record does not support each of these facts, the appellant is not entitled to a new trial. TEX. R. APP. P. 34.6(f); see also Haynes v. Haynes, No. 04-15-00107-CV, 2017 WL 2350970, at *3 (Tex. App.—Houston [14th Dist.] May 31, 2017, pet. denied) (mem. op.) (noting movant is not entitled to new trial unless all four circumstances are present).
(2) without the appellant's fault, a significant exhibit or a significant portion of the court reporter's notes and records has been lost or destroyed or—if the proceedings were electronically recorded—a significant portion of the recording has been lost or destroyed or is inaudible;
(3) the lost, destroyed, or inaudible portion of the reporter's record, or the lost or destroyed exhibit, is necessary to the appeal's resolution; and
(4) the lost, destroyed or inaudible portion of the reporter's record cannot be replaced by agreement of the parties, or the lost or destroyed exhibit cannot be replaced either by agreement of the parties or with a copy determined by the trial court to accurately duplicate with reasonable certainty the original exhibit.
At the abatement hearing, the following exchange between GFH's counsel and the trial court took place:
[Counsel]: At the trial, I questioned the plaintiff on transfers of the tax lien which were provided from the plaintiff to me. It doesn't say in the transcript that it was offered or admitted.
My concern was as e-mails from the court reporter that said that the transcript relied on the tape recording, not the written. However, I asked the court reporter and she says it was on a hand - steno -
[The Court]: We have full record that's stenograph, not recorded.
[Counsel]: Right. Right. That was my concern. I just had an issue with that to make sure we had a clean record, to make sure that's cleared up.
[The Court]: It's cleared up.
Thus, contrary to GFH's and Gonzalez's assertion, the record reflects that the court reporter told counsel that the transcript had been recorded stenographically. The trial court also advised counsel that the full record was stenographically recorded. Counsel did not call the court reporter to testify at the hearing nor did the court reporter file an affidavit stating that she relied on an audio recording to prepare the record. Having failed to show that the hearing was electronically recorded and that "a significant portion of the recording . . . is inaudible," see TEX R. APP. P. 34.6(f), GFH and Gonzalez are not entitled to a new trial under rule 34.6(f). Accordingly, we overrule their first issue.
Because GFH and Gonzalez have not satisfied the second requirement of rule 34.6(f), we need not address the remaining requirements. See TEX. R. APP. P. 34.6(f); see also Aranda v. State, No. 2-08-119-CR, 2009 WL 279489, at *4 (Tex. App.—Fort Worth Feb. 5, 2009, no pet.) (mem. op., not designated for publication) (concluding defendant could not satisfy requirements of rule 34.6(f) because he could not show that any portion of record related to adjudication hearing was lost or destroyed).
Sufficiency of the Evidence
In their second issue, GFH and Gonzalez contend that there is no evidence that GFH breached the contract. In their fifth issue, they argue that the evidence does not support the trial court's award of damages to Kraken in the amount of $589,889.
A. Standard of Review and Applicable Law
Because this was a bench trial, the trial judge issued findings of fact and conclusions of law. We review the trial court's conclusions of law de novo. BMC Software Belg., N.V. v. Marchand, 83 S.W.3d 789, 794 (Tex. 2002). The findings of fact in a bench trial have the same force and dignity as a jury verdict, and we review them for legal and factual sufficiency of the evidence under the same standards we apply in reviewing a jury's findings. See Anderson v. City of Seven Points, 806 S.W.2d 791, 794 (Tex. 1991).
When conducting a legal sufficiency review, we consider the evidence in the light most favorable to the challenged finding and indulge every reasonable inference that would support it. See City of Keller v. Wilson, 168 S.W.3d 802, 823 (Tex. 2005). We must credit favorable evidence if a reasonable factfinder could and disregard contrary evidence unless a reasonable factfinder could not. See id. at 827. We must determine whether the evidence at trial would enable a reasonable and fair-minded factfinder to find the facts at issue. See id. The factfinder is the only judge of witness credibility and the weight to give to testimony. See id. at 819.
When reviewing a challenge to the factual sufficiency of the evidence, we examine the entire record, considering both the evidence in favor of, and contrary to, the challenged finding. See Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986) (per curiam). After considering and weighing all the evidence, we set aside the fact finding only if it is so contrary to the overwhelming weight of the evidence as to be clearly wrong and unjust. See Pool v. Ford Motor Co., 715 S.W.2d 629, 635 (Tex. 1986). The trier of fact is the sole judge of the credibility of the witnesses and the weight to be given to their testimony. GTE Mobilnet of S. Tex. Ltd. P'ship v. Pascouet, 61 S.W.3d 599, 615-16 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).
"The essential elements of a breach of contract claim are (1) the existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages sustained as a result of the breach." Schlumberger Ltd. v. Rutherford, 472 S.W.3d 881, 892 (Tex. App.—Houston [1st Dist.] 2015, no pet.). "A breach occurs when a party fails or refuses to do something he has promised to do." Mays v. Pierce, 203 S.W.3d 564, 575 (Tex. App.—Houston [14th Dist.] 2006, pet. denied).
B. Analysis
GFH and Gonzalez do not dispute that a contract existed or that Kraken performed. Rather, they argue that there is no evidence that GFH breached the contract by failing to deliver the notes to Kraken because there is no evidence that it was required to deliver the notes to Kraken. It also argues that the evidence does not support the trial court's award of damages to Kraken in the amount of $589,889.
1. Breach
In its written findings of fact and conclusions of law, the trial court found, among other things, that the contract between Kraken and GFH included a provision by which GFH was required to provide Kraken with the notes themselves, and that GFH materially breached the contract by failing to deliver the tax lien notes to Kraken. Plaintiff's Exhibit 3, which the trial court found to be the parties' agreement, outlines certain terms of the parties' agreement, including the following: "[Alan Groves] will select up to $250,000 (note value)/month of existing delinquent tax liens which you will sell to us at the existing current balance at the time of the transaction. GFH will deliver these notes monthly as long as [David Klein] is buying more than $500k worth of notes and so long as GFH complies with its fiduciary duty and such notes are available to GFH without breaching our current agreements."
Klein's testimony also revealed that GFH was supposed to provide Kraken with the
Q: So these were documents that were supposed to be provided to Kraken by GFH?
A: Yes, sir.
Q: Throughout this entire process and relationship to GFH, did you receive those documents?
A: Absolutely not.
Q: On any of these loans?
A: No.
Q: Did you receive any - at any time did you ever receive any original promissory notes?
A: No.
Q: Did you ever receive any copies of promissory notes?
A: No.
2. Damages
In its written findings and conclusions, the trial court found that GFH's breach damaged Kraken because Kraken could not collect the notes directly from the borrowers as it was not the holder of the notes, and it had no proof that the notes even existed. The trial court further found that the only measure of damages available to Kraken was a refund of its unpaid principal, and that the amount of unpaid principal was $589,899.
In support of their contention that the evidence does not support the trial court's award of $589,889 in damages to Kraken, GFH and Gonzalez argue that the evidence shows that Kraken received payments on the notes and that it was still receiving payments at the time of trial. In support of their argument, they point to the following testimony by Gonzalez:
Q: When did you stop doing distributions and who's making those now?
A: I stopped when we surrendered our license.
Q: Okay. So that was roughly a year ago maybe or less.
A: No, a few months ago. I don't remember anymore.
Q: And who's making those distributions today?
A: Well, PTL—PTL whatever their name is distributes them to us and we turn around and send them to David.
Kraken does not dispute that it received some payments on the notes it purchased. Rather, it argued at trial that a balance of $589,899 remained owing, not including interest. The evidence presented in support of the trial court's award of damages to Kraken included Plaintiff's Exhibit 5, a summary of the payments that Kraken made to GFH and the payments that Kraken received from GFH for Kraken 1, 2, and 3. The summary shows that, in 2015, GFH owed an outstanding balance on its principal repayments to Kraken of (1) $153,883 for Kraken 1, (2) $216,702 for Kraken 2, and (3) $219,314 for Kraken 3, for a total of $589,889. Klein also testified as follows:
Q: So, if my math is correct for 1, 2, and 3, the total Kraken funded to GFH starting on November of 2008 through, I guess, April of 2009, a total amount would be $1,898,628?
A: Yes, sir.
Q: And as payments on the principal of those notes, the total amount received is [] $1,308,729?
A: Yes, sir.
Q: And that's the amounts that Kraken has advanced and haven't gotten money back?
A: That's the principal amount.
Q: You don't have notes for that amount either?
A: I don't have any notes.
The total amount of Kraken's payments ($1,898,628), minus GFH's payment on the principal ($1,308,729), leaves a balance owing of $589,889.
We hold that the record contains legally sufficient evidence to support the trial court's finding that GFH breached the contract by failing to deliver the tax lien notes to Kraken, GFH's breach damaged Kraken, and Kraken incurred damages in the amount of $589,899. We further hold that the trial court's findings are not so contrary to the great weight and preponderance of the evidence that the findings are clearly wrong and manifestly unjust, and, therefore, that the evidence is factually sufficient to support the trial court's findings. See Pool, 715 S.W.2d at 635. We overrule GFH's and Gonzalez's second and fifth issues.
Motion for New Trial
In their third issue, GFH and Gonzalez contend that the trial court abused its discretion by denying their motion for new trial as it contained newly discovered evidence of promissory notes crucial to determination of the case.
A trial court may grant a new trial for good cause, on motion of a party, or on the court's own motion. TEX. R. CIV. P. 320. To obtain a new trial based on newly discovered evidence, a party must show the trial court that (1) the evidence has come to light since trial; (2) it is not due to lack of diligence that it was not produced sooner; (3) the new evidence is not cumulative; and (4) the new evidence is so material that it would probably produce a different result if a new trial were granted. Waffle House, Inc. v. Williams, 313 S.W.3d 796, 813 (Tex. 2010). We review a trial court's denial of a motion for a new trial for abuse of discretion. In re R.R., 209 S.W.3d 112, 114 (Tex. 2006); Imkie v. Methodist Hosp., 326 S.W.3d 339, 344 (Tex. App.—Houston [1st Dist.] 2010, no pet.). The trial court abuses its discretion if it acts without reference to any guiding principles or acts arbitrarily or unreasonably. Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241-42 (Tex. 1985). Under the abuse of discretion standard, we view the evidence in the light most favorable to the trial court's ruling. Martin v. New Century Mortg. Co., 377 S.W.3d 79, 88 (Tex. App.—Houston [1st Dist.] 2012, no pet.).
GFH and Gonzalez's argument is unavailing for two reasons. First, in their motion for new trial, they did not argue that they were entitled to a new trial based on newly discovered evidence. Rather, they took issue with the trial court's finding that GFH failed to provide Kraken with copies of the promissory notes, and they further argued that GFH had, in fact, later provided the promissory notes pursuant to the trial court's order. Second, GFH and Gonzalez's motion for new trial does not meet the requirements for a new trial based on newly discovered evidence. The evidence attached to the motion does not demonstrate that the evidence was "newly" discovered or that failure to discover it sooner should be excused. See Waffle House, 313 S.W.3d at 813. Nor does the motion show that the new evidence is so material that it would probably produce a different result were a new trial granted. See id. The trial court therefore reasonably could have concluded that GFH and Gonzalez did not demonstrate grounds for a new trial based on newly discovered evidence.
We hold that the trial court did not abuse its discretion in denying GFH and Gonzalez's motion for new trial. We overrule their third issue.
Motion to Compel
In their fourth issue, GFH and Gonzalez argue that the trial court abused its discretion by denying their motion to compel because Kraken refused to provide several documents which formed the basis of the trial court's ruling.
An appellate court reviews a trial court's ruling on a motion to compel discovery under an abuse of discretion standard. Macy v. Waste Mgmt., Inc., 294 S.W.3d 638, 651 (Tex. App.—Houston [1st Dist.] 2009, pet. denied); see also Johnson v. Davis, 178 S.W.3d 230, 242 (Tex. App.—Houston [14th Dist.] 2005, pet. denied) (citing Cire v. Cummings, 134 S.W.3d 835, 838 (Tex. 2004)). Trial courts have broad discretion in matters of discovery. Macy, 294 S.W.3d at 651; Johnson, 178 S.W.3d at 242. An appellate court should reverse a trial court's ruling on a motion to compel only when the trial court acts in an arbitrary and unreasonable manner, without reference to any guiding principles. Macy, 294 S.W.3d at 651; see also Barnett v. Cty. of Dall., 175 S.W.3d 919, 924 (Tex. App.—Dallas 2005, no pet.).
GFH and Gonzalez argue that, despite several requests, Kraken refused to provide any documents or make any documents available for copying and inspection as requested in their requests for production sent to Kraken on July 23, 2013. They contend that this failure caused them harm because the documents at issue resulted in the unfavorable ruling against them at trial.
In their motion to compel filed on February 20, 2014, GFH and Gonzalez stated that they had sent requests for production, disclosures, and interrogatories to Kraken on July 23, 2013, Kraken had failed to respond to the requests for production and interrogatories, and the trial court should order Kraken to respond to the requests (a copy of which it attached to its motion). In its response to the motion, Kraken stated that it had responded to the discovery and had made all documents available at the office of Kraken's counsel. In its November 6, 2014 order, the trial court found that GFH and Gonzalez's motion to compel was moot because "[Kraken] reports that the discovery responses have been served."
Aside from a general statement in their motion that Kraken failed to respond to its discovery requests, GFH and Gonzalez did not identify any information requested with sufficient particularity that we can conclude that the trial court abused its discretion in denying discovery, nor did it explain the relevance of any of the information requested. See Contractors Source, Inc. v. Amegy Bank Nat'l Ass'n, 462 S.W.3d 128, 139 (Tex. App.—Houston [1st Dist.] 2015, no pet.); Macy, 294 S.W.3d at 651; Austin v. Countrywide Homes Loans, 261 S.W.3d 68, 75 (Tex. App.—Houston [1st Dist.] 2008, pet. denied). Further, Kraken responded to the motion to compel by asserting that it had responded to the discovery requests and also made all documents available at its counsel's office.
We hold that the trial court did not abuse its discretion in denying GFH and Gonzalez's motion to compel. See Contractors Source, 462 S.W.3d at 139; Macy, 294 S.W.3d at 651. We overrule their fourth issue.
Conclusion
We affirm the trial court's judgment.
Russell Lloyd
Justice Panel consists of Chief Justice Radack and Justices Jennings and Lloyd.