Opinion
NO. 01-16-01007-CV
08-14-2018
THOMAS J. HENDERSON, INDIVIDUALLY AND AS TRUSTEE OF THE MONROVIA AVENUE TRUST AND E.K. HUOTARI, Appellants v. MARVIN J. GORDON AND MYRA E. GORDON, INDIVIDUALLY AND AS CO-TRUSTEES OF THE M & M GORDON TRUST, Appellees
On Appeal from the 234th District Court Harris County, Texas
Trial Court Case No. 2015-26343
MEMORANDUM OPINION
Appellants, Thomas J. Henderson, individually and as Trustee of Monrovia Avenue Trust, and E.K. Huotari (collectively, "appellants"), challenge the trial court's judgment in favor of appellees, Marvin J. Gordon and Myra E. Gordon, individually and as co-trustees of the M & M Gordon Trust ("Gordon Trust") (collectively, "appellees"), on appellees' claim against appellants for breach of contract and their declaratory-judgment action. In two issues, appellants contend that the trial court erred in granting partial summary judgment on appellees' breach-of-contract claim and declaratory-judgment action and in denying appellants' motion for leave to join the attorney who drafted the contract at issue as a third-party defendant to the lawsuit.
Background
In their second amended petition, appellees alleged that Gordon Trust entered into a Co-Ownership Agreement (the "Agreement") with appellants regarding their investments in a property located at 12727 Westheimer Road, Houston, Texas (the "property"). Due to "a number of issues" between the parties, they subsequently entered into a First Amendment to the Agreement (the "Amendment"), in which Gordon Trust agreed to not sell its interest in the property for three years in exchange for the guarantee that it would be paid a minimum of $656,000.00 for its interest in the property upon any disposition of ownership pursuant to the Agreement. Appellees further alleged that Gordon Trust, pursuant to the Amendment, refrained from exercising its right to sell its interest in the property for three years. After that time, the property sold for $2.8 million. First American Title Company ("First American") held the net proceeds of the sale, approximately $1,632,960.75, in escrow pending instructions from the parties. However, appellants refused to consent to First American's distribution of the agreed-upon amount owed to appellees.
Appellees further allege that Huotari has not taken a position regarding the amount of proceeds to be distributed to them, but that she is an interested party necessary for adjudicating the case since she is a party to the Agreement.
Appellees asserted a claim for breach of contract and sought a declaration that they are entitled to receive $656,000.00 from the sale proceeds as well as an allocation of 40% of the seller's closing charges attributed to them for federal income tax purposes. They also sought an order from the trial court directing First American to deposit the net sale proceeds into the registry of the court, from which they requested the court to direct any payment of monetary relief awarded to them. They further sought recovery of their attorneys' fees.
Appellants answered, generally denying the allegations against them and asserting various affirmative defenses.
Appellees filed a motion for partial summary judgment on their claim for breach of contract and their declaratory-judgment action, arguing that the unambiguous terms of the Amendment entitle them to $656,000.00 from the sale proceeds. Appellees attached to their motion the affidavit of Marvin J. Gordon, who testified that appellees, in the Amendment, agreed to not sell their interest in the property for thirty-six months in exchange for a guaranteed-minimum payment upon disposition of ownership interest pursuant to the Agreement of $656,000.00. He further testified that appellees refrained from exercising their right to sell their interest in the property for more than thirty-six months, and they, therefore, were entitled to receive the guaranteed-minimum amount stated in the Amendment.
Appellees also attached to their summary-judgment motion a copy of the Amendment, which includes the following language:
Section 1. Amendments to the Agreement. Owners hereby agree to supplement and modify the Agreement as follows: (i) as of the Effective Date of this Amendment the Appraised Value of the Property is deemed to be $2,750,000; (ii) Gordon Trust agrees not to dispose of and otherwise refrain from exercising any rights under those provisions of the Agreement which provide Gordon Trust the right to dispose of its interest in the Property for a period of thirty-six (36) months from the Effective Date of this Amendment (the "Lockout Period"); (iii) notwithstanding anything written in the Agreement, as of the Effective Date of this Amendment the Ownership Interest of Gordon Trust shall be valued at a minimum of $656,000 which amount shall be the minimum amount Gordon Trust would receive upon any disposition of its Ownership Interest pursuant to the Agreement; (iv) if, upon any disposition of the Ownership Interest of Gordon Trust after the Effective Date of this Amendment, the Property is either sold for or has an Appraised Value in excess of $2,750,000 then, for each additional $50,000 of either the net sale proceeds or net Appraised Value, Gordon Trust shall be entitled to receive an additional $11,800 for each such additional $50,000 of net sale proceeds or net Appraised Value; provided no additional amount shall be payable for any fractional amounts below $50,000. The "Exhibit A" attached herewith provides an illustration of distributions that would be due to the Owners upon a potential disposition of the Property hereunder . . . .Exhibit A to the Amendment provides:
The following illustrates how the proceeds of a potential sale will be distributed if the Property is sold for $5,000,000 net of sales expenses when the mortgage debt is $1,010,000.
| Sales proceeds net of expenses of sale | $ 5,000,000 |
| Less mortgage note payoff | $ 1,010,000 |
|---|---|
| Net available proceeds | $ 3,990,000 |
| Less assumed minimum value | $ 2,750,000 |
| Net additional proceeds | $ 1,240,000 |
| Net of additional $50,000 (rounded down)($1,240,000 ÷ $50,000 = 24.8) | 24 |
| 24 times $11,800 ($11,800 × 24 =$283,200) | $ 283,200 |
| Plus guaranteed minimum to Gordon Trust | $ 656,000 |
| Total due Gordon Trust (23.5%) | $ 939,200 |
| Net available proceeds | $ 3,990,000 |
| Less due Gordon Trust | $ 939,200 |
| Available to other co-owners | $ 3,050,800 |
In their amended response to appellees' partial summary-judgment motion, appellants asserted that the language in the Amendment that appellees relied upon in support of their position that they are entitled to a guaranteed-minimum payment is ambiguous and the summary-judgment evidence created a genuine issue of material fact regarding the Amendment's language. Specifically, appellants asserted that the parties' intent was to provide appellees with an ownership interest in the amount of 23.5%, which was the parties' original agreement, based on appellees' investment. However, due to "Internal Revenue issues associated with a transaction commonly referred to as a Section 1031 exchange," the parties could not amend the Agreement to change the ownership percentages without negative tax consequences. Thus, the Agreement only reflected that appellees owned a 12.7% interest in the property even though "all of the parties . . . knew and understood at the time that [appellees] actually still owned a 23.5% interest" in the property. Appellants further asserted that the amount of $656,000.00 in the Amendment did not include necessary deductions from the proceeds that the parties, pursuant to the Agreement, were required to make for certain expenses, such as any outstanding mortgage amounts.
Appellants argued that, at a minimum, the Amendment provision establishing a guaranteed-minimum payment of $656,000.00 due to appellees in the event of ownership disposition is ambiguous because it is susceptible to more than one reasonable interpretation. They asserted that Kal Malik, the attorney who drafted the Amendment, admitted this in his deposition when he explained that the Amendment does not specifically provide for the deduction of remaining debt, contrary to the terms of the Agreement.
Finally, appellants argued that the interpretation of the Amendment proposed by appellees would mandate its reformation because it would otherwise result in partnership tax treatment in violation of Section 18 of the Agreement:
The Owners agree that nothing in this Agreement or in connection with the ownership of the Property shall be construed in a manner that would result in any Owner becoming responsible for the other Owners' tax liability or status . . . . In no event shall any provision of this Agreement be construed as creating or evidencing a joint venture or partnership relationship among the Owners with respect to the Property. The Owners agree and acknowledge that to the extent required to ensure that the relationship among them is a co-ownership relationship as opposed to a joint venture or a partnership for federal income tax purposes, any provisions hereof shall be automatically reformed and not modified in the manner necessary to ensure that this
Agreement does not create such a joint venture or partnership relationship.Appellants further argued that reformation of the Amendment would also be required because appellees' interpretation of it would entitle them to 40% of the net sale proceeds while only being allocated 12.7% of the gain. The other parties would, therefore, be required to pay tax on a gain that they did not receive, which, pursuant to Section 18, would require reformation of the Amendment.
Appellants attached to their response the affidavit of Henderson, who testified that appellees contributed $200,415.00 to the purchase price of a property that the parties had purchased in California, which was then rolled into the purchase of the property. He explained that although the Agreement stated that appellees' ownership interest in the property was 12.7%, "all the parties fully understood this error and knew [appellees'] ownership to be 23.5%" instead. And the purpose of the Amendment was to ensure appellees received "23.5% of the net cash after subtracting all closing costs and mortgage debt from the gross sale price."
Appellants also attached to their summary-judgment response appellees' discovery responses, the Agreement, a General Warranty Deed With Vendor's Lien for the property, the Amendment, a Settlement Statement from First American ("Settlement Statement"), the affidavit of Terence E. O'Malley, the affidavit of Steve M. Williard, excerpts from the deposition of Kal Malik, and an email, dated November 9, 2014, from Marvin Gordon to Henderson. The General Warranty Deed reflects the various ownership percentages in the property, including that appellees owned 12.7% and the parties took out a promissory note in the amount of $1,050,000.00 in order to finance the purchase of the property. And the Settlement Statement reflects a net payment to the "seller" of $1,892,980.75 after deducting the remaining amount due on a mortgage of $935,220.78 and other fees and expenses.
In his affidavit, O'Malley testified that, in his opinion as a Certified Public Accountant and from reviewing the law, "any special allocation and/or minimum distributions as set forth in the . . . Amendment to the [] Agreement . . . dated February 1, 2008, will necessarily force the tenants in common venture to report under Subchapter K of the Internal Revenue Code, otherwise known as partnership taxation."
In the excerpts from Malik's deposition, he testified that he refused to interpret the Amendment as he was just a "scrivener" for the parties, but he recalled that the parties intended to provide appellees 23.5% interest in the property without changing the percentage of ownership on paper to avoid certain tax implications. He admitted that the Amendment did not clarify whether or not debt was supposed to be deducted from the amount guaranteed to appellees, but if he had to "guess[]," he "would say it probably was."
Finally, in the email, dated November 9, 2014, from Gordon to Henderson, Gordon stated that Malik "made it perfectly clear that the ownership could not be changed without affecting the 1031 exchange." And Malik "did come up with a formula for [appellees] to share in the profit at a rate of 23.53% without mentioning 23.53% to avoid any suggestion that there was an ownership change." However, Gordon also stated that appellees had not been receiving proper distributions to account for 23.53% ownership over time.
The trial court granted partial summary judgment in favor of appellees on their claim for breach of contract and their declaratory-judgment action. And it ordered that the funds held in escrow by First American be deposited into the registry of the court, from which appellees would be entitled to recover the $656,000.00 minimum payment owed to them.
Additionally, nearly eight months after the trial court's deadline to do so had passed, appellants filed an opposed motion for leave to join Malik as a third-party defendant to the lawsuit on the ground that he allegedly "believes the Amendment is subject to more than one reasonable interpretation." They attached to their motion a third-party petition, asserting causes of action against Malik for negligence by an attorney and negligent misrepresentation related to his drafting of the Amendment. The trial court denied appellants' motion, and Malik was not added as a party to the lawsuit.
The trial court entered a docket control order requiring that all parties must be added and served, whether by amendment or third-party practice, by July 20, 2015. Appellants filed their motion for leave to add Malik as a third-party defendant on March 11, 2016.
After a bench trial on the remaining issue of attorneys' fees, the trial court entered its final judgment in favor of appellees on their claim for breach of contract and their declaratory-judgment action, and it awarded appellees $63,463.50 for their attorneys' fees.
Contract Ambiguity
In their first issue, appellants argue that the trial court erred in concluding that the Amendment is unambiguous and in rendering judgment against them as a matter of law on appellees' claim for breach of contract and their declaratory-judgment action because the Amendment is susceptible to more than one reasonable interpretation.
In construing a written contract, a court "must ascertain the true intentions of the parties as expressed in the writing itself." Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 333 (Tex. 2011). We examine and consider the entire writing in an effort to harmonize and give effect to all of the provisions of the contract so that none will be rendered meaningless. Id. We begin our analysis with the contract's express language. Id. And we analyze the provisions of a contract "with reference to the whole agreement." Frost Nat'l Bank v. L & F Distribs., Ltd., 165 S.W.3d 310, 312 (Tex. 2005); see also Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342, 345 (Tex. 2006) ("No single provision taken alone will be given controlling effect; rather, all the provisions must be considered with reference to the whole instrument."). Contract terms will be given their plain, ordinary, and generally accepted meanings unless the contract itself shows them to be used in a technical or different sense. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex. 2005). "We construe contracts 'from a utilitarian standpoint bearing in mind the particular business activity sought to be served' and 'will avoid when possible and proper a construction which is unreasonable, inequitable, and oppressive.'" Frost Nat'l Bank, 165 S.W.3d at 312 (quoting Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 530 (Tex. 1987)).
"Deciding whether a contract is ambiguous is a question of law for the court." N. Shore Energy, L.L.C. v. Harkins, 501 S.W.3d 598, 602 (Tex. 2016) (per curiam). If a contract is worded so that it can be given a certain or definite meaning, then it is unambiguous, and we construe it as a matter of law. El Paso Field Servs., L.P. v. MasTec N. Am., Inc., 389 S.W.3d 802, 806 (Tex. 2012). And we do so without considering parol evidence. David J. Sacks, P.C. v. Haden, 266 S.W.3d 447, 450-51 (Tex. 2008) (per curiam). If, however, after applying the pertinent rules of construction, the contract is subject to two or more reasonable interpretations, then it is ambiguous and presents a fact issue regarding the parties' intent. El Paso Field Servs., 389 S.W.3d at 806. However, a contract is not ambiguous merely because the parties disagree on its meaning. Seagull Energy, 207 S.W.3d at 345. Only if a contract is ambiguous may we consider the parties' interpretation and consider extraneous evidence to determine the true meaning of the contract. Italian Cowboy, 341 S.W.3d at 333-34.
Contract ambiguity may be either patent or latent. Nat'l Union Fire Ins. Co. of Pittsburgh v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995) (per curiam). A patent ambiguity is evident on the face of the contract, while a latent ambiguity arises only "when a contract which is unambiguous on its face is applied to the subject matter with which it deals and an ambiguity appears by reason of some collateral matter." Id. at 520. But to say extrinsic evidence may not create an ambiguity but may reveal one means only that "[t]he ambiguity must become evident when the contract is read in context of the surrounding circumstances, not after parol evidence of intent is admitted to create an ambiguity." Id. at 521.
Here, appellants argue that because the guaranteed-minimum-payment provision in the Amendment is ambiguous, the trial court erred in interpreting it as a matter of law. However, the language in the Amendment is not patently or latently ambiguous. On its face, the Amendment provides a guaranteed-minimum payment to appellees in the amount of $656,000.00 if they agreed to a lockout period of thirty-six months, during which they would not sell or otherwise dispose of their interests in the property. This language does not condition appellees' payment on the property selling for a certain amount, reduce the guaranteed payment to appellees based on the net proceeds actually received, or tie the guaranteed payment to appellees' ownership percentage. And there is no other provision to which it is in direct conflict from a plain reading of the agreements at issue. Therefore, the Amendment is not patently ambiguous.
The example provided in Exhibit A of the Amendment further supports this interpretation. There, Gordon Trust is attributed a "guaranteed minimum" of $656,000.00.
Appellants argue that the Amendment is latently ambiguous because it does not direct that mortgage debt should be deducted before arriving at a net income for distribution. However, this argument is without merit. Appellants do not assert that, after deducting the mortgage debt and other charges, there were insufficient funds remaining to make the guaranteed-minimum payment. Thus, no latent ambiguity appears by reason of the established facts in this case.
Appellants discuss at length that the parties actually intended to memorialize appellees' 23.5% ownership without explicitly stating in the Amendment that appellees owned 23.5% as opposed to the 12.7% discussed in the Agreement. However, their discussion is based entirely on inadmissible parol evidence of the parties' intent, which may not be considered to render an otherwise unambiguous provision of a contract ambiguous. See CBI Indus., 907 S.W.2d at 520 ("Parol evidence is not admissible for the purpose of creating an ambiguity.").
Appellants' argument that the Amendment's language is ambiguous because it does not address what would happen if the mortgage is deducted from the sales price and yields a negative "net additional proceeds" is hypothetical. Further, it appears similar to their argument about allocating 23.5% ownership without changing the ownership to avoid tax consequences, and it fails for the same reasons.
Finally, appellants assert that the interpretation of the Amendment proposed by appellees would result in the relationship being taxed as a partnership in violation of Section 18 of the Agreement. However, Section 1 of the Amendment specifically provides that the parties intended the guaranteed-minimum payment "[n]otwithstanding any contrary provisions of the Agreement." And in Section 2 of the Amendment, the parties specifically "consent[ed] to, ratif[ied] and approve[d] [of] th[e] Amendment in its entirety, and agree[d] to be bound by the terms and provisions of the Agreement as amended . . . notwithstanding any contrary rights and privileges which may be contained in the Agreement." Thus, the plain language of the Amendment reveals that the parties intended to modify the Agreement as stated in the Amendment, and they further intended for the provisions of the Amendment to control over any contrary provisions contained in the Agreement.
Appellants further argue that the Amendment is ambiguous because it, as interpreted by appellees, would result in the other parties paying taxes on gains that they did not receive while appellees, who are allocated 12.5% of ownership in the Agreement, would receive closer to 40% of the gains. However, this would be the case even under the interpretation proposed by appellants where appellees would receive 23.5% of the gains even though they were only allocated 12.5% of ownership in the Agreement.
Because no latent or patent ambiguities exist, we hold that the trial court did not err in interpreting the Agreement and Amendment as a matter of law and granting summary judgment in favor of appellees on their breach-of-contract claim and their declaratory-judgment action.
We overrule appellants' first issue.
Joinder
In their second issue, appellants argue that the trial court erred in denying their motion for leave to join Malik as a third-party defendant because he, as the attorney that drafted the Amendment, the interpretation of which is the primary dispute of the parties in this lawsuit, has an interest in the litigation. See TEX. R. CIV. P. 39(a).
"We review a trial court's rulings on issues concerning joinder of parties for an abuse of discretion." Crawford v. XTO Energy, Inc., 509 S.W.3d 906, 910-11 (Tex. 2017). A trial court abuses its discretion when it acts in an arbitrary or unreasonable manner, without reference to guiding rules or principles. Id. Texas Rule of Civil Procedure 39(a) provides for joinder of indispensable parties in mandatory terms, but no precise formula exists for determining whether a party falls within its provisions. Conrad Constr. Co. v. Freedmen's Town Pres. Coal., 491 S.W.3d 12, 16 (Tex. App.—Houston [14th Dist.] 2016, no pet.). Pertinent here, rule 39(a) provides the following guidelines for determining when joinder is mandatory:
A person who is subject to service of process shall be joined as a party in the action if (1) in his absence complete relief cannot be accorded among those already parties, or (2) he claims an interest relating to the subject of the action and is so situated that the disposition of the action in his absence may (i) as a practical matter impair or impede his ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his claimed interest. If he has not been so joined, the court shall order that he be made a party. If he should join as a plaintiff but refuses to do so, he may be made a defendant, or, in a proper case, an involuntary plaintiff.TEX. R. CIV. P. 39(a).
Appellants do not assert that the decision not to join Malik as a party prevented the trial court from rendering complete relief between the parties to the suit. Instead, their sole argument is that Malik should have been joined as a party because he had an interest in the litigation as the attorney who drafted the Amendment. However, the fact that Malik might have had some tangential interest in the outcome of the lawsuit is not sufficient to meet the requirements for mandatory joinder under rule 39 if he did not "claim" an interest in the subject of the lawsuit. See Crawford, 509 S.W.3d at 912 (no rule 39 joinder where "despite . . . contention that the forty-four adjacent landowners claim an interest relating to the subject of this suit by virtue of their alleged ownership interest in the . . . minerals, no record evidence shows or even suggest that a single one of the adjacent landowners has ever demanded or asserted ownership of or a royalty interest in those minerals."). "The verb 'claim' means 'to demand recognition of (as a title, distinction, possession, or power) esp. as a right'; 'to demand delivery or possession of by or as if by right'; 'to assert or establish a right or privilege.'" Id. (quoting Claim, WEBSTER'S THIRD NEW INT'L DICTIONARY (2002)).
Appellees assert in their brief that appellants have filed suit against Malik for negligence regarding his drafting of the Amendment.
Here, Malik is not a party to the Agreement or Amendment, and he has never claimed or asserted an interest regarding the interpretation of the guaranteed-minimum-payment provision in the Amendment. To the contrary, the evidence demonstrates that he, as explained in his deposition testimony, was merely a "scrivener" who drafted language as directed by the parties. Further, a judgment in this lawsuit would not prevent appellants from potentially pursuing claims against Malik in a separate lawsuit.
Accordingly, we hold that the trial court did not err in denying appellants' motion for leave to join Malik as a third-party defendant.
We overrule appellants' second issue.
Conclusion
We affirm the judgment of the trial court.
Terry Jennings
Justice Panel consists of Justices Jennings, Keyes, and Higley.