Sandeep Patel and ERCC Construction Company, LLC v. Warwick Construction, Inc.

01-20-00208-CV

2022 | Cited 0 times | Court of Appeals of Texas | January 20, 2022

Opinion issued January 20, 2022

In The

Court of Appeals

For The

First District of Texas

NO. 01-20-00208-CV

SANDEEP PATEL AND ERCC CONSTRUCTION COMPANY, LLC, Appellants V. WARWICK CONSTRUCTION, INC., Appellee

On Appeal from the 268th District Court Fort Bend County, Texas Trial Court Case No. 14-DCV-219641

MEMORANDUM OPINION

Appellee Warwick Construction, Inc. sued Sandeep Patel and ERCC

Construction Company, LLC, and others who settled before trial, for unpaid amounts

owed on a contract to build a hospice facility. Warwick also alleged that Patel and

others committed fraud and engaged in a conspiracy to commit fraud. A jury found 2 that ERCC breached the construction contract and violated the Texas Prompt Pay

Act, that Patel and ERCC violated the Texas Construction Trust Fund Act by

misapplying funds and committed fraud against Warwick. The jury found the

following amounts of damages: $463,406.48 for breach of contract; $373,000 for

misapplication of trust funds; $33,000 for fraud, plus $500,000 each against Patel

and ERCC as exemplary damages relating to fraud. The trial rendered judgment on

the jury verdict, awarding Warwick damages for breach of contract, misapplication

of trust funds, fraud, exemplary damages of $200,000 each (the statutory maximum)

against Patel, pre- and post-judgment interest, statutory penalty interest for failing

to promptly pay, and attorney s fees. The final judgment made ERCC and Patel

jointly and severally liable for $372,000.00 for ERCC s breach of contract and

for Patel s [misapplication of trust funds], respectively, and awarded an additional

$91,406.48 for ERCC s breach of contract, which is the difference between the

jury s award for breach-of-contract damages and $372,000.

Patel and ERCC appealed, raising seven issues. They assert that the trial court

erred by: (1) assigning joint and several liability for breach-of-contract damages

awarded solely against ERCC; (2) violating the one satisfaction rule and awarding

double recovery by rendering judgment on both breach of contract and

misapplication of trust funds; (3) failing to apply settlement credits to the

misapplication of trust funds damages award; (4) rendering judgment on fraud when

3 the contract language allegedly precludes a finding of justifiable reliance;

(5) rendering judgment on fraud when the evidence was legally insufficient and

(6) factually insufficient; and (7) awarding constitutionally excessive exemplary

damages based on legally and factually insufficient evidence.

Because we conclude that the one satisfaction rule applies in this case and that

recovery is not viable on either the claim for misapplication of trust funds or the

claim for fraud, we reverse the trial court s judgment and render take-nothing

judgment on the misapplication of trust funds claim and the fraud claim, and we

remand to the trial court for entry of judgment consistent with this opinion, including

calculation of prejudgment interest.

Background

Sandeep Patel is the managing member of ERCC. Syed Anwar, Aman Jafar,

and Khurram Ibrihim are the other members of ERCC, which was formed in 2011. 1

Patel, Anwar, Jafar, and Ibrihim also had an ownership interest in Altus Sugarland

Realty, L.P. ( Altus ). Patel also owns Sterling Group of Engineering Companies

( Sterling Engineering ). Stanley Robinson worked for ERCC. Years before

working for ERCC and while working for another company, Robinson hired and

1 Anwar, Jafar, and Ibrihim settled with Warwick before trial, and they are not parties to this appeal. 4 worked with Tony Annan, who founded and remained as the president of Warwick

Construction.

In late October 2013, Altus entered into a contract with ERCC to build the

Altus Hospice Home ( Altus Hospice ), a health care facility to be located in Sugar

Land, Texas. Sterling Engineering was designated as the architect for the project.

The contract price was $3,200,000. The contract required ERCC as contractor to

provide a payment and performance bond in the amount of $3,200,000. But ERCC,

which had not yet done any construction projects, was unable to obtain a payment

and performance bond.

Robinson invited Annan to bid on the Altus Hospice job, and Warwick

Engineering submitted a bid. Although Annan later testified that he initially believed

that Warwick would be contracting directly with Altus, Annan learned that ERCC

would be contracting directly with Altus. In November 2013, ERCC as -

builder for the project entered into a contract with Warwick, as contractor, for the

construction of Altus Hospice. The contract stated that it integrated agreement between the parties hereto and supersedes prior negotiations,

representations or agreements, either written or oral. The contract price was

$3,200,000. The contract required Warwick to provide a payment and performance

bond in the amount of $3,200,000. The parties later agreed to remove landscaping

from the scope of work contractually assigned to Warwick. Warwick also agreed

5 that $352,000 of its contract price would instead be paid to Sterling Engineering for

project management.

Warwick obtained a payment and performance bond, which Annan personally

guaranteed. The bond was accepted by Altus in lieu of a bond obtained by ERCC.

According to Patel s trial testimony, ERCC reimbursed Warwick for the cost of

obtaining the payment and performance bond. Construction began, and, in

accordance with the contract, Warwick submitted applications for payment on a

monthly basis. The first five applications for payment were timely paid in full.

According to Annan, the next six or seven applications were not timely paid, but

they were paid by the time of trial. Annan testified that not being promptly paid may

have hurt his relationships with his subcontractors and could harm his business in

the future, but he did not quantify these costs. Annan also testified at trial that ERCC

still owed Warwick $463,406.48 for work completed pursuant to change orders,

which are changes to the scope of the construction project due to engineering

requirements or owner choices.

Warwick filed a mechanic s and materialman s lien and a constitutional lien

against Altus Hospice, and later Warwick filed suit to foreclose the liens. Warwick

amended its petition, adding various claims against ERCC, Patel, and Sterling

Engineering. Warwick settled with Altus, and Sterling Engineering declared

bankruptcy. Warwick removed the case to the bankruptcy court, and when Sterling

6 Engineering s bankruptcy was finally resolved, the case was remanded to state court

for disposition of Warwick s remaining claims against ERCC and Patel.

In response to interrogatories, and prior to the settlement with Anwar, Jafar,

and Ibrihim, Warwick stated:

After all just and lawful offsets, payments, and credits have been allowed, Warwick remains unpaid in the amount of $870,302.03 for the labor, materials, and equipment it provided to the Defendants for which it has not been paid, plus $352,000 which was fraudulently withheld from its contract based on the fraudulent misrepresentations that [Sterling Engineering] would act as the Project Manager in exchange for such funds.

The trial court held a pretrial hearing on the parties motions in limine at which

Warwick raised the issue of settlements. Warwick stated that it had received a

settlement from Altus on its lien claim, that it had informed ERCC and Patel of the

amount, and it asked for any comments about settlements to be excluded from trial.

Warwick then asked the court how it preferred to address settlement credits:

So the issue we wanted to talk about with you is how how do you want us to do it with regard to our damages. For instance, we have a set damage amount, plus attorney . We received a settlement from Altus. A portion of that settlement would go to the segregated attorney principal of our damage number.

We can do it one of two ways. We can either present our whole damage model without deducting anything out for the Altus settlement, and in the event we prevail at the time that judgment is entered, you apply the credit at that time to reduce our judgment by whatever we have received on the principal and the attorney fees. Or we can present the reduced number taking out the amount that we received that applies to the principal.

7 The trial court responded: ERCC and Patel then stated on the record that Anwar, Jafar, and the estate of Ibrihim had reached a

settlement with Warwick. The record indicates that Anwar, Jafar, and the estate of

Ibrihim each agreed to pay Warwick $40,000, without joint and several liability, to

fully settle the claims against them.

The next day, before opening statements, ERCC and Patel nsel objected

to Warwick pre-applying a settlement credit:

We . . . believe it the plaintiff to put on all their evidence of whatever damages are. If they recover, then we can approach the Court as to how that settlement credit should be applied. Because they ple causes of action, multiple theories of recovery against multiple defendants, and depending on how that shakes out, we don f pre- you know, do the pre- arithmetic on the potential settlement credit at this time.

The trial court disagreed, saying: I think we can do the pre-arithmetic and I

think that that would be a better way to get away from the jury issues that they really

aren g to be dealing with. . . [I]f youe already had those amounts in pre-

settlement, then we need to take them out. Warwick with the trial

court saying: Yes, that we re seeking a reduced amount . . . I last night based on the $120,000

settlement that was recorded on the record yesterday. I took that out as well . . . .

The trial court stated: yesterday.

8 The case was tried to a jury. At trial, Patel acknowledged that Warwick was

not paid for the labor and materials for the change orders at issue. Annan testified

that ERCC owed Warwick $463,406.48 for charges arising from the change orders. 2

Annan acknowledged that ERCC informed Warwick that it needed more

documentation relating to some of the change orders in order to authorize payment.

Tiffany Nowak, who worked for Sterling Engineering and handled all the accounting

for the project, also testified that ERCC did not receive sufficient documentation

from Warwick on its payment requests relating to the change orders.

Nowak testified about the accounting records for the project. She said that

ERCC had one bank account and did not maintain separate accounts for different

projects. Nowak testified that ERCC received a total of $2,883,074.19 in payments

from Altus for the Altus Hospice project, and $2,506,422.74 of that amount was paid

to Warwick. She also testified that ERCC paid a total of $2,891,156.60, which was

more than it received from Altus, to complete the project. Nowak further testified

that ERCC repaid each of its four members their $5,000 initial investments.

Annan testified that, based on ERCC ERCC withheld

$376,651.45 in money from Altus that should have been paid to Warwick in

satisfaction of the labor and materials charges due to the change orders. Instead,

2 This figure represents the difference between the $870,302.03 alleged in response to discovery and the amount of settlement that Warwick deducted based on the court s determination at the pretrial conference. 9 ERCC used that money to pay its landscaping contractors and vendors and to pay

other direct job costs ERCC incurred. Patel ony was equivocal. First, he

testified that he used money that should have been paid to Warwick to pay for other

direct project expenses, such as landscaping contractors, but he maintained that this

was a permissible use of the funds. Later, he testified that ERCC paid Warwick

at was intended for Warwick, and he said that none of the money

used to repay the initial investors came from a source that should have been paid to

Warwick.

As to his allegations of fraud, Annan testified that Robinson, on behalf of

ERCC, told him that ERCC was going to obtain a payment bond. Annan said that he

signed the contract on behalf of Warwick because he trusted Robinson and relied on

that representation. Annan testified that he read and understood the contract with

ERCC before he signed it. He admitted that he did not ask to see ERCC

he signed the contract, but he said: They lied to me about the bond. He also

testified that, unbeknownst to him and Warwick, ERCC used his bond to satisfy its

contractual obligation to provide Altus with a payment and performance bond.

Annan said: They hid it from me. Patel, however, testified that Annan never asked

ERCC to provide a payment bond and that ERCC would not have done so because

the purpose of a payment and performance bond is to protect, ultimately, the project

owner.

10 Annan testified that Warwick was damaged by ERCC isrepresentation

about the bond because it had no payment bond to rely on when ERCC failed to pay

for labor and materials relating to the change orders. Annan also testified that

Warwick was not alleging any fraud relating to the $352,000 payment to Sterling

Engineering.

The jury unanimously found that: (1) ERCC breached the contract with

Warwick; (2) ERCC failed to pay Warwick promptly for its work; (3) ERCC and

Patel were trustees of trust funds received from the owner of the project, Altus;

(4) Warwick was a beneficiary of trust funds for the project; (5) ERCC and Patel

misapplied project trust funds; (6) ERCC and Patel committed fraud against

Warwick; (7) clear and convincing evidence showed that Warwick was harmed by

ERCC and Patel ulent misrepresentation; (8) ERCC and Patel did not engage

in a conspiracy to damage Warwick. The jury found the following amounts of

damages:

Breach of contract $ 463,406.48

Misapplication of trust funds 372,000.00

Fraud 33,000.00

Exemplary damages against ERCC 500,000.00

Exemplary damages against Patel 500,000.00

11 Warwick moved for entry of judgment on the verdict, and ERCC and Patel

responded. ERCC and Patel argued that Warwick was required to elect a remedy

between breach of contract and misapplication of trust funds in violation of the

TCTFA. They also argued that they were entitled to settlement credits as to the award

of $372,000 on the misapplication of trust funds claim because Warwick sought the

full amount of damages for this claim, instead of reducing the amount sought to

account for settlement credits. ERCC and Patel also argued that the settlement

credits exceeded the jury ward of damages for the misapplication of trust funds

claim and the fraud claim. ERCC and Patel argued, in the alternative, that the

exemplary damages should be reduced to $200,000 under the mandatory cap in the

Texas Civil Practice and Remedies Code and further reduced to $132,000 to comport

with due process.

The trial court vacated its first judgment, and it entered final judgment on

December 20, 2019. The trial court accepted all of the jury judgment that Warwick r from and against Patel

act and for Patel [misapplication of trust funds in] violation of the Texas Construction Trust Fund

statute, respectively . . . . The trial court also awarded Warwick $91,406.48 against

ERCC er with the amount in the

foregoing paragraph equals the total amounts awarded by the jury for ERCC

12 breach of contract . . . . The court awarded $33,000 for fraud against ERCC and

Patel ,000 each, from ERCC and Patel, as exemplary

damages. The court awarded 18% statutory penalty interest from ERCC due to its

violation of the Texas Prompt Payment Act in addition to 5.5% prejudgment interest

from both ERCC and Patel. Finally, the trial court awarded costs of court and

attorney fees.

The trial court denied ERCC and Patel s motion to modify the judgment, and

ERCC and Patel appealed.

Analysis

ERCC and Patel raise seven issues on appeal. Because they control our

disposition of this appeal, we focus on the second, third, and fourth issues. First, we

consider whether the trial court .

Because we agree that it does, we must consider how to reform the judgment to

afford Warwick the maximum relief to which it is entitled. ERCC and Patel argue

on appeal (1) that the entire damages award on Warwick of trust

funds claim is extinguished by the proper application of settlement credits and

(2) that Warwick fraud claim is entirely precluded because the parties negates justifiable reliance as a matter of law.

13 I. Standard of review

[W]hether the plaintiff has complained of a single, indivisible injury, and

whether the defendant is entitled to credit one or more settlements against the

judgment, are legal determinations that we review de novo. Sky View at Las

Palmas, LLC v. Mendez, 555 S.W.3d 101, 109 n.8 (Tex. 2018). Justifiable reliance

usually presents a question of fact, the element can be negated as a matter of

law when circumstances exist under which reliance cannot be justified. JPMorgan

Chase Bank, N.A. v. Orca Assets G.P., L.L.C., 546 S.W.3d 648, 654 (Tex. 2018).

We therefore review ERCC and Patel , third, and fourth issues de novo. See

Sky View, 555 S.W.3d at 109.

II. One Satisfaction Rule

A. A party is entitled to one recovery for one injury.

A party may sue and seek damages on alternative theories of liability. Waite

Hill Servs., Inc. v. World Class Metal Works, Inc., 959 S.W.2d 182, 184 (Tex. 1998);

see Madison v. Williamson, 241 S.W.3d 145, 159 (Tex. App. Houston [1st Dist.]

2007, pet. denied). Under the one-satisfaction rule, a plaintiff is entitled to only one

recovery for any damages suffered because of a particular injury. TMRJ Holdings,

Inc. v. Inhance Techs., LLC, 540 S.W.3d 202, 208 (Tex. App. Houston [1st Dist.]

2018, no pet.); see Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 303 (Tex.

2006). There can be but one recovery for one injury and the fact that more than one

14 defendant may have caused the injury or that there may be more than one theory of

liability, does not modify this rule. Stewart Title Guar. Co. v. Sterling, 822 S.W.2d

1, 8 (Tex. 1991). Although the traditional one satisfaction principle applies to

cases in which an injured plaintiff is wholly compensated by settling defendants or

other third parties, it also applies when a defendant commits technically different

acts that result in a single injury. 3 Madison, 241 S.W.3d at 158 59. e

satisfaction rule may limit a plaintiff where the amounts awarded

vary from claim to claim. Lundy v. Masson, 260 S.W.3d 482, 506 (Tex. App. Houston [14th Dist.] 2008, pet. denied).

When a defendant s acts result in a single injury, and the jury returns

favorable findings on more than one theory of liability, the plaintiff is entitled to

judgment on the theory affording him the greatest relief. Saden v. Smith, 415

S.W.3d 450, 465 66 (Tex. App. Houston [1st Dist.] 2013, pet. denied) (citing

Birchfield v. Texarkana Mem l Hosp., 747 S.W.2d 361, 367 (Tex. 1987)). Ordinarily

the prevailing party will elect which remedy it prefers prior to entry of judgment, but

when it does not the trial court should use the findings to render judgment affording

the maximum relief. Star Houston, Inc. v. Shevack, 886 S.W.2d 414, 422 (Tex.

3 nt awarding damages on each alternate theory may be upheld if the theories depend on separate and distinct injuries and if separate and distinct damages findings are made as to each Madison v. Williamson, 241 S.W.3d 145, 158 (Tex. App. Houston [1st Dist.] 2007, pet. denied). 15 App. Houston [1st Dist.] 1994), writ denied per curiam, 907 S.W.2d 452, 452

(Tex. 1995); accord Lundy, 260 S.W.3d at 505 06.

B. Warwick advanced three liability theories arising from one injury.

In their second issue, ERCC and Patel argue that the trial court violated the one satisfaction rule because Warwick was not required to elect a

remedy and was awarded multiple damages for a single injury. ERCC and Patel

maintain that the three claims on which Warwick prevailed breach of contract,

misapplication of trust funds, and fraud all sought recovery for the same injury:

the nonpayment of Warwick for labor and materials related to the Altus hospice

construction project. Warwick ded petition was the live pleading at trial.

In its live pleading, Warwick alleged that it had suffered at least $870,302.03 in

breach-of-contract damages, $352,000 in fraud damages due to the reduction in

contract price to pay Sterling Engineering to act as project manager, and unspecified

damages for misapplication of trust funds under the Texas Construction Trust Fund

Act.

1. Breach of contract

Evidence at trial demonstrated that Warwick contracted with ERCC for the

construction of the Altus hospice. Patel conceded that ERCC failed to pay Warwick

for some labor and materials related to change orders that was owed under the

contract, and the evidence was undisputed that the amount owed was $463,406.48.

16 Thus, liability and damages for breach of contract were established conclusively at

trial. See AKIB Constr. Inc. v. Shipwash, 582 S.W.3d 791, 806 (Tex. App. Houston

[1st Dist.] 2019, no pet.) (stating essential elements of breach-of-contract claim).

2. Misapplication of trust funds

Warwick of trust funds claim was based on the Texas

Construction Trust Fund Act ( TCTFA ). See TEX. PROP. CODE §§ 162.001 .033.

Under the TCTFA, ]onstruction payments are trust funds . . . if the payments are

made to a contractor or subcontractor or to an officer, director, or agent of a

contractor or subcontractor, under a construction contract for the improvement of

specific real property in this state. Id. § 162.001(a). r,

or owner or an officer, director, or agent of a contractor, subcontractor, or owner

who receives trust funds or who has control or direction of trust funds, is a trustee of

the trust funds. Id. § 162.002. r,

subcontractor, or materialman who labors or who furnishes labor or material for the

construction . . . of an improvement on specific real property . . . is a beneficiary of

any trust funds paid or received in connection with the improvement. Id. §

162.003(a).

A trustee who, intentionally or knowingly or with intent to defraud, directly

or indirectly retains, uses, disburses, or otherwise diverts trust funds without first

fully paying all current or past due obligations incurred by the trustee to the

17 beneficiaries of the trust funds, has misapplied the trust funds. Id. § 162.031.

Current or past due obligations are those obligations incurred or owed by the

trustee for labor or materials furnished in the direct prosecution of the work under

the construction contract prior to the receipt of the trust funds and which are due and

payable by the trustee no later than 30 days following receipt of the trust funds. Id.

§ 162.005(2). The TCTFA provides that the misapplication of trust funds is a Class

A misdemeanor or felony of the third degree, depending on the circumstances. Id. §

162.032. Although the statute lacks an express provision for a private civil right of

action, this court has recognized a private right of action arising from a violation of

the TCTFA because y duty normally gives rise to a private

right of action on behalf of the injured person (or group of persons) for whose benefit

the statute was enacted. Lively v. Carpet Servs., Inc., 904 S.W.2d 868, 871 (Tex.

App. Houston [1st Dist.] 1995, writ denied).

The TCTFA does not expressly require that the trustee and beneficiary of trust

funds be in privity of contract, and the broad definitions of trustee and beneficiary

indicate that they will not always be parties to the same contract. In this case,

however, Warwick directly contracted with ERCC. And the damages Warwick

alleged and proved at trial arose from ERCC ay for labor and materials

supplied related to change orders. Although Warwick advanced a different model of

computing damages the difference between the money ERCC received from Altus

18 and the money paid to Warwick the damages arose from the same injury as the

breach of contract damages: ERCC under the contract.

On appeal Warwick concedes that all of the misapplication of trust funds damages

overlapped with the breach of contract damages. We conclude that breach of contract

and misapplication of trust funds were alternative theories of liability arising from

the same injury.

3. Fraudulent inducement

Warwick also pleaded a claim for fraudulent inducement. In its pleadings and

discovery responses, Warwick alleged that ERCC and Patel fraudulently induced it

to enter the contract with ERCC by promising to obtain a payment and performance

bond. It also alleged fraud arising from the $352,000 that was deducted from

Warwick o pay Sterling Engineering to act as project manager, but

at trial, Warwick disavowed this theory of recovery. Annan specifically testified that

Warwick was not seeking any fraud damages from the reduction in its contract price

to pay Sterling Engineering for project management.

Texas law has long imposed a duty to abstain from inducing another to enter

into a contract through the use of fraudulent misrepresentations. Anderson v.

Durant, 550 S.W.3d 605, 614 (Tex. 2018) (stating elements of fraudulent

inducement). Fraudulent inducement is actionable when the misrepresentation is a

false promise of future performance made with a present intent not to perform. Id.

19 The existence of a contract is an essential element of proof of a claim for fraudulent

inducement. Id. Two types of direct damages are available for common-law fraud:

out-of-pocket damages, measured by the difference between the value expended

versus the value received, and benefit-of-the-bargain damages, measured by the

difference between the value as represented and the value received. Id.

At trial, Warwick ed in closing that ERCC and Patel had

fraudulently induced Warwick to enter into the construction contract by representing

that it would obtain a payment and performance bond that it never obtained.

On appeal, Warwick argues that it sought damages for nonpayment through

its breach-of-contract and misapplication-of-trust-funds claims and damages for

fraud. Warwick contends that the predicate for the fraud award is independent of

nonpayment. Warwick argues on appeal that it sought out-of-pocket damages for

fraud, specifically (1) the reduction of its contract price to pay Sterling Engineering

for project management, (2) the lack of independent project management services,

(3) damage to Warwick ionships with subcontractors, and (4) costs incurred

to settle the claims with its subcontractors.

The record does not support this argument. First, Annan testified that

Warwick was not seeking any fraud damages from the reduction in its contract price

to pay Sterling Engineering for project management. Second, Warwick did not

introduce any evidence that it was injured by the absence of independent project

20 management services. Third, its evidence that its relationships with its

subcontractors was damaged was limited to Annan about ERCC failure to promptly pay Warwick. Annan testified that ERCC failure to promptly

pay our subs, Warwick through it, but it did

do damage, judgment who we went into

business with. But Warwick provided no evidence quantifying those alleged out-

of-pocket damages or additional expenses associated with settling claims with

subcontractors. Instead, in closing Warwick relied on its evidence of damages due

to ERCC failure to pay for labor and materials associated with the change orders.

In closing argument, Warwick argued:

So Question 11 is what we call the damages question on the fraud claim. You have to figure out how much my client fraud. . . . But at the very least, the 463,000 that they didn ay us are

our damages, and you may find that the trust funds as well, the fact that they got our money and kept it are also part of our fraud damages. So at a minimum it as well for an additional 376, and you can put a number in the blank that you ladies and gentlemen feel is the appropriate measure of damages that the evidence has shown was suffered by my client.

We conclude that Warwick sought benefit-of-the-bargain damages for its

fraudulent inducement claim, specifically asking the jury to award the amount they didn represents the same injury for which Warwick sought

recovery under theories of breach of contract and misapplication of trust funds.

* * *

21 We conclude that Warwick successful liability theories all sought

damages for the same injury the nonpayment of labor and materials Warwick

expended on construction of the Altus hospice. See Madison, 241 S.W.3d at 158 59

(jury may return favorable findings on alternative theories of liability). We sustain

ERCC and Patel Warwick is entitled to recover its damages based

on the theory that afforded it the greatest or most favorable relief. See id. On appeal,

ERCC and Patel raise additional challenges to the viability of judgment based on

misapplication of trust funds and fraud.

II. Application of settlement credits extinguishes recovery on misapplication of trust funds theory.

In their third issue, ERCC and Patel argue that the trial court erred by failing

to apply settlement credits to Warwick misapplication-of-trust-funds claim. They contend that application of the settlement

credits would extinguish Warwick

In addition to preventing a plaintiff from obtaining multiple recoveries on

alternative theories of liability when it has suffered only one injury, the

onesatisfaction rule also prevents a plaintiff from obtaining more than one recovery

by crediting a non-settling defendant for payments made in settlement of damages

from a singular injury. Sky View, 555 S.W.3d at 106 07. The Texas Supreme Court

has explained:

22 [W]hen a plaintiff files suit alleging that multiple tortfeasors are responsible for the plaintiff s injury, any settlements are to be credited against the amount for which the liable parties as a whole are found responsible, but for which only the non-settling defendant remains in court. The rationale for this doctrine is that the plaintiff should not receive a windfall by recovering an amount in court that covers the plaintiff s entire damages, but to which a settling defendant has already partially contributed. The plaintiff would otherwise be recovering an amount greater than the trier of fact has determined would fully compensate for the injury.

First Title Co. of Waco v. Garrett, 860 S.W.2d 74, 78 (Tex. 1993).

A defendant seeking a settlement credit has the burden to prove its right to

such a credit. Utts v. Short, 81 S.W.3d 822, 828 (Tex. 2002); Mobil Oil Corp. v.

Ellender, 968 S.W.2d 917, 927 (Tex. 1998); Alanis v. US Bank Nat l Ass n, 489

S.W.3d 485, 509 (Tex. App. Houston [1st Dist.] 2015, pet. denied). Under the

common law, the record must show the amount of the settlement credit. Utts, 81

S.W.3d at 828; Ellender, 968 S.W.2d at 927 (citing Garrett, 860 S.W.2d at 78);

Alanis, 489 S.W.3d at 509. Once the non-settling defendant demonstrates a right to

a settlement credit, the burden shifts to the plaintiff to show that certain amounts

should not be credited because of the settlement agreement s allocation of damages,

for example between actual and exemplary damages. Utts, 81 S.W.3d at 828;

Ellender, 968 S.W.2d at 928 (recognizing that settling plaintiffs are in better position

than non-settling defendants to ensure that settlement awards are properly allocated).

The record demonstrates that Warwick settled with Altus and with Anwar,

Jafar, and the estate of Ibrihim. Warwick informed the trial court on the record

23 outside the presence of the jury that it had settled with Altus and sought to deduct

the amount of settlement from the damages it asked the jury to find. Warwick

explained that the total amount of damages it sought for nonpayment was

$870,302.03. ERCC and Patel informed the court that Anwar, Jafar, and the estate

of Ibrihim had settled with Warwick for $40,000 each, for a total of $120,000.

Warwick told the court that it had deducted the $120,000 from the amount of

damages it would ask the jury to find, which was $463,406.48 after deducting all

settlements. The jury did find $463,406.48 as damages for breach of contract. ERCC

did not dispute that amount at trial and has not challenged the amount or the

application of settlement credits on appeal. Based on this information in the record,

it is possible to calculate the settlement credits that that ERCC and Patel wish to

apply to the misapplication of trust fund damages. See Utts, 81 S.W.3d at 828;

Ellender, 968 S.W.2d at 927; Alanis, 489 S.W.3d at 509.

Total amount of damages alleged by Warwick $ 870,302.03

Amount Warwick asked jury to find for breach of contract, after deduction of settlement amounts 463,406.48

Difference (Total of settlements) 406,895.55 Anwar, Jafar, Ibrihim settlements (total) 120,000 Difference (Altus settlement, estimated) 28,6895.55

Because the record demonstrates the amount of settlement credits that ERCC

and Patel seek to apply to the TCTFA claim, the burden shifted to Warwick to show

that certain amounts should not be credited due to the allocation of damages in the

24 settlement agreements. See Utts, 81 S.W.3d at 828; Ellender, 968 S.W.2d at 928.

But Warwick presented no evidence about the allocation of sums in the settlements.

Instead, Warwick argues that ERCC and Patel are not entitled to a credit based

on its settlement with Altus, because that settlement was based on a lien and ERCC

and Patel were not jointly and severally liable on the lien. In Sky View, the Texas

Supreme Court held that a finding of joint liability is not required for the application

of the one satisfaction rule, which is not limited to situations in which defendants

have been found liable on the same cause of action. Sky View, 555 S.W.3d at 112 13; see, e.g., Waite Hill Servs., 959 S.W.2d at 185 (holding trial court erred by

refusing an election-of- contract, as well as

tort damages, and the jury awarded the identical amount in response to both damages

Warwick the same injury as its claims for breach

of contract, misapplication of trust funds, and fraud: nonpayment of labor and

materials Warwick spent on the project. See TEX. PROP. CODE § 53.023(1)

(mechanic materialman lien secures payment for material

furnished for the construction ).

Warwick also asserts that its settlements with Altus, Anwar, Jafar, and the

estate of Ibrihim were already reflected in the economic damages it sought at trial.

The record does not demonstrate that Warwick deducted any amounts reflective of

the settlements from what it asked the jury to find on its

25 misapplication-of-trust-funds claim. Warwick relied on an entirely different method

of calculating damages for misapplication of trust funds than it did for its

breach-of-contract claim, which relied on Annan much remained unpaid. Warwick asserted that the proper measure of damages for

its misapplication-of-trust-funds claim was the difference between the total amount

of money that Altus paid ERCC ($ 2,891,156.60) and the total amount of money that

ERCC paid Warwick ($ 2,506,422.74), or $ 384,733.76. Annan testified at trial

ERCC received a total of $ 376,651.46 from Altus that ERCC should have but

failed to disburse to Warwick. The jury awarded $ 372,000 as actual damages for

misappropriation of trust funds. See Clerk ey, if any, if

paid now in cash, would fairly and reasonably compensate Warwick for its damages,

if any, that were proximately caused by such misapplication of trust funds?

Although the jury here awarded different amounts of actual damages for

breach-of-contract and misapplication of trust funds, our analysis that Warwick recovery depends on an election between these claims due to the one satisfaction

rule remains unchanged. See Lundy, 260 S.W.3d at 506 (noting that jury awarded

different amounts of actual damages on alternative liability theories that addressed

a singular injury).

Because the record demonstrates ERCC and Patel the

application of settlement credits and because Warwick has not demonstrated that an

26 allocation in the settlement agreements precludes the application of settlement

credits, we conclude that the trial court erred by failing to apply them. The jury

awarded $372,000 in actual damages for misapplication of trust funds. The total

amount of settlement credits is $406,895.55. We conclude that the settlement credits

would entirely extinguish Warwick covery under this theory of liability, and we

hold that recovery under Warwick -of-trust-funds claim is not

viable. We sustain ERCC and Patel third issue.

III. The parties makes Warwick sentations that ERCC would obtain a bond unjustifiable.

In their fourth issue, ERCC and Patel argue that the trial court erred by

rendering judgment for Warwick on its fraud claim because its reliance on a

representation that ERCC would obtain a payment and performance bond was

contradicted by the parties s that it could have relied on the

representation despite the language in the contract. We disagree.

Warwick alleged that it was fraudulently induced to enter the contract with

ERCC by representations that the project would be bonded and ERCC would obtain

the payment and performance bond. Annan testified at trial that he would not have

signed the contract on behalf of Warwick had he known that ERCC would not obtain

the bond. He also testified that he had read and understood the contract.

The elements of a claim for fraudulent inducement are (1) a material

misrepresentation, (2) made with knowledge of its falsity or asserted without

27 knowledge of its truth, (3) made with the intention that it should be acted on by the

other party, (4) which the other party relied on and (5) which caused injury.

Mercedes-Benz USA, LLC v. Carduco, Inc., 583 S.W.3d 553, 557 (Tex. 2019)

(quoting Anderson, 550 S.W.3d at 614 fraudulent inducement arises only

in the context of a contract, the existence of a contract is an essential part of its

Anderson, 550 S.W.3d at 614.

To prevail on a fraud claim, a plaintiff [must] show actual and justifiable

reliance. Mercedes-Benz USA, 583 S.W.3d at 558 (quoting Grant Thornton LLP

v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010)). Whether a

party s actual reliance is also justifiable is ordinarily a fact question, but the element

may be negated as a matter of law when circumstances exist under which reliance

cannot be justified. Mercedes-Benz USA, 583 S.W.3d at 558. ] party to a written

contract cannot justifiably rely on oral misrepresentations regarding the contract s

Nat l Prop. Holdings, L.P. v. Westergren, 453 S.W.3d 419,

424 (Tex. 2015).

In determining whether justifiable reliance is negated as a matter of law,

courts must consider the nature of the parties

JPMorgan Chase, 546 S.W.3d at 654 (quotation omitted). A party must exercise

ordinary care when entering into an arm length transaction, and his failure to do so

is not excused by his mere confidence in the honesty and integrity of the other

28 party. Thigpen v. Locke, 363 S.W.2d 247, 251 (Tex. 1962). A party cannot blindly

rely on a representation when he knows, based on his experience and background,

that he should investigate, but he fails to do so. JPMorgan Chase, 546 S.W.3d at

654. Reliance on a representation is not justified when there are red flags that

indicate such reliance is unwarranted. Grant Thornton, 314 S.W.3d at 923. Reliance

on an oral representation is also unjustified when the oral representation is contradicted by the express, unambiguous terms of a written agreement between the

parties. DRC Parts & Accessories, L.L.C. v. VM Motori, S.P.A., 112 S.W.3d 854,

858 (Tex. App. Houston [14th Dist.] 2003, pet. denied). A party who enters into a

written contract while relying on a contrary oral agreement does so at its peril Id.

at 859.

ERCC and Patel argue that the contract with Warwick directly contradicted

the alleged representation that ERCC would obtain a payment and performance

bond. The ERCC-Warwick contract incorporates E in regard to rance

and Bonds. Exhibit E provides

ARTICLE E.2 SURETY BONDS

§ E.2.1 The Contractor [Warwick] shall provide surety bonds as follows: (Specify type and penal sum of bonds.) Type Penal Sum ($0.00) Payment and Performance 3,200,000.00

29 In Texas, payment and performance bonds are statutory and must comply with

the provisions of Chapter 53, Subchapter I of the Texas Property Code ( Bond to

Pay Liens or Claims ). See TEX. PROP. CODE §§ 53.201 .211. original

contractor who has a written contract with the owner may furnish at any time a bond

for the benefit of claimants. Id. § 53.201(a). The bond protects the owner and its

property from claims by the same class of people who would otherwise be entitled

to file a mechanic and materialman lien. See id. § 53.201(b) (

id. § 53.205(a) ( Claims id. § 53.021 ( Persons Entitled to Lien .

The Property Code establishes a broad category of people entitled to a lien, and the

statute does not contemplate multiple payment and performance bonds on a

particular project because the original contractor s bond would protect the owner

from claims from tiers of subcontractors. See TEX. PROP. CODE § 53.021(a)(1) (

person has a lien if . . . the person labors . . . or furnishes labor or materials for

construction or repair in this state of . . . a house, building, or improvement . . . . .

The contract between ERCC and Warwick expressly required Warwick to

provide a payment and performance bond in the total amount of the project, $3.2

million. In light of the statutory scheme pertaining to such bonds, this contract

provision directly contradicts Warwick reliance on the alleged representation that

ERCC would obtain the exact same bond. See JPMorgan Chase, 546 S.W.3d at 660.

We conclude that Warwick fraud claim fails as a matter of law because the element

30 of justifiable reliance is negated by the contract. We sustain ERCC and Patel fourth

issue.

Conclusion

Having concluded that recovery is not viable under either the

misapplication-of-trust-funds claim or the fraud claim, we hold that Warwick recovery must be limited to its breach-of-contract claim. We reverse the judgment

of the trial court and render judgment that Warwick take nothing on its

misapplication-of-trust-funds claim and its fraud claim, and we remand this case to

the trial court for entry of judgment consistent with this opinion, including proper

computation of prejudgment interest. We do not reach the remainder of ERCC and

Patel it is not necessary to the disposition of this appeal.

See TEX. R. APP. P. 47.1.

Peter Kelly Justice

Panel consists of Chief Justice Radack and Justices Kelly and Landau.

Opinion issued January 20, 2022

In The

Court of Appeals

For The

First District of Texas

NO. 01-20-00208-CV

SANDEEP PATEL AND ERCC CONSTRUCTION COMPANY, LLC, Appellants V. WARWICK CONSTRUCTION, INC., Appellee

On Appeal from the 268th District Court Fort Bend County, Texas Trial Court Case No. 14-DCV-219641

MEMORANDUM OPINION

Appellee Warwick Construction, Inc. sued Sandeep Patel and ERCC

Construction Company, LLC, and others who settled before trial, for unpaid amounts

owed on a contract to build a hospice facility. Warwick also alleged that Patel and

others committed fraud and engaged in a conspiracy to commit fraud. A jury found 2 that ERCC breached the construction contract and violated the Texas Prompt Pay

Act, that Patel and ERCC violated the Texas Construction Trust Fund Act by

misapplying funds and committed fraud against Warwick. The jury found the

following amounts of damages: $463,406.48 for breach of contract; $373,000 for

misapplication of trust funds; $33,000 for fraud, plus $500,000 each against Patel

and ERCC as exemplary damages relating to fraud. The trial rendered judgment on

the jury verdict, awarding Warwick damages for breach of contract, misapplication

of trust funds, fraud, exemplary damages of $200,000 each (the statutory maximum)

against Patel, pre- and post-judgment interest, statutory penalty interest for failing

to promptly pay, and attorney s fees. The final judgment made ERCC and Patel

jointly and severally liable for $372,000.00 for ERCC s breach of contract and

for Patel s [misapplication of trust funds], respectively, and awarded an additional

$91,406.48 for ERCC s breach of contract, which is the difference between the

jury s award for breach-of-contract damages and $372,000.

Patel and ERCC appealed, raising seven issues. They assert that the trial court

erred by: (1) assigning joint and several liability for breach-of-contract damages

awarded solely against ERCC; (2) violating the one satisfaction rule and awarding

double recovery by rendering judgment on both breach of contract and

misapplication of trust funds; (3) failing to apply settlement credits to the

misapplication of trust funds damages award; (4) rendering judgment on fraud when

3 the contract language allegedly precludes a finding of justifiable reliance;

(5) rendering judgment on fraud when the evidence was legally insufficient and

(6) factually insufficient; and (7) awarding constitutionally excessive exemplary

damages based on legally and factually insufficient evidence.

Because we conclude that the one satisfaction rule applies in this case and that

recovery is not viable on either the claim for misapplication of trust funds or the

claim for fraud, we reverse the trial court s judgment and render take-nothing

judgment on the misapplication of trust funds claim and the fraud claim, and we

remand to the trial court for entry of judgment consistent with this opinion, including

calculation of prejudgment interest.

Background

Sandeep Patel is the managing member of ERCC. Syed Anwar, Aman Jafar,

and Khurram Ibrihim are the other members of ERCC, which was formed in 2011. 1

Patel, Anwar, Jafar, and Ibrihim also had an ownership interest in Altus Sugarland

Realty, L.P. ( Altus ). Patel also owns Sterling Group of Engineering Companies

( Sterling Engineering ). Stanley Robinson worked for ERCC. Years before

working for ERCC and while working for another company, Robinson hired and

1 Anwar, Jafar, and Ibrihim settled with Warwick before trial, and they are not parties to this appeal. 4 worked with Tony Annan, who founded and remained as the president of Warwick

Construction.

In late October 2013, Altus entered into a contract with ERCC to build the

Altus Hospice Home ( Altus Hospice ), a health care facility to be located in Sugar

Land, Texas. Sterling Engineering was designated as the architect for the project.

The contract price was $3,200,000. The contract required ERCC as contractor to

provide a payment and performance bond in the amount of $3,200,000. But ERCC,

which had not yet done any construction projects, was unable to obtain a payment

and performance bond.

Robinson invited Annan to bid on the Altus Hospice job, and Warwick

Engineering submitted a bid. Although Annan later testified that he initially believed

that Warwick would be contracting directly with Altus, Annan learned that ERCC

would be contracting directly with Altus. In November 2013, ERCC as -

builder for the project entered into a contract with Warwick, as contractor, for the

construction of Altus Hospice. The contract stated that it integrated agreement between the parties hereto and supersedes prior negotiations,

representations or agreements, either written or oral. The contract price was

$3,200,000. The contract required Warwick to provide a payment and performance

bond in the amount of $3,200,000. The parties later agreed to remove landscaping

from the scope of work contractually assigned to Warwick. Warwick also agreed

5 that $352,000 of its contract price would instead be paid to Sterling Engineering for

project management.

Warwick obtained a payment and performance bond, which Annan personally

guaranteed. The bond was accepted by Altus in lieu of a bond obtained by ERCC.

According to Patel s trial testimony, ERCC reimbursed Warwick for the cost of

obtaining the payment and performance bond. Construction began, and, in

accordance with the contract, Warwick submitted applications for payment on a

monthly basis. The first five applications for payment were timely paid in full.

According to Annan, the next six or seven applications were not timely paid, but

they were paid by the time of trial. Annan testified that not being promptly paid may

have hurt his relationships with his subcontractors and could harm his business in

the future, but he did not quantify these costs. Annan also testified at trial that ERCC

still owed Warwick $463,406.48 for work completed pursuant to change orders,

which are changes to the scope of the construction project due to engineering

requirements or owner choices.

Warwick filed a mechanic s and materialman s lien and a constitutional lien

against Altus Hospice, and later Warwick filed suit to foreclose the liens. Warwick

amended its petition, adding various claims against ERCC, Patel, and Sterling

Engineering. Warwick settled with Altus, and Sterling Engineering declared

bankruptcy. Warwick removed the case to the bankruptcy court, and when Sterling

6 Engineering s bankruptcy was finally resolved, the case was remanded to state court

for disposition of Warwick s remaining claims against ERCC and Patel.

In response to interrogatories, and prior to the settlement with Anwar, Jafar,

and Ibrihim, Warwick stated:

After all just and lawful offsets, payments, and credits have been allowed, Warwick remains unpaid in the amount of $870,302.03 for the labor, materials, and equipment it provided to the Defendants for which it has not been paid, plus $352,000 which was fraudulently withheld from its contract based on the fraudulent misrepresentations that [Sterling Engineering] would act as the Project Manager in exchange for such funds.

The trial court held a pretrial hearing on the parties motions in limine at which

Warwick raised the issue of settlements. Warwick stated that it had received a

settlement from Altus on its lien claim, that it had informed ERCC and Patel of the

amount, and it asked for any comments about settlements to be excluded from trial.

Warwick then asked the court how it preferred to address settlement credits:

So the issue we wanted to talk about with you is how how do you want us to do it with regard to our damages. For instance, we have a set damage amount, plus attorney . We received a settlement from Altus. A portion of that settlement would go to the segregated attorney principal of our damage number.

We can do it one of two ways. We can either present our whole damage model without deducting anything out for the Altus settlement, and in the event we prevail at the time that judgment is entered, you apply the credit at that time to reduce our judgment by whatever we have received on the principal and the attorney fees. Or we can present the reduced number taking out the amount that we received that applies to the principal.

7 The trial court responded: ERCC and Patel then stated on the record that Anwar, Jafar, and the estate of Ibrihim had reached a

settlement with Warwick. The record indicates that Anwar, Jafar, and the estate of

Ibrihim each agreed to pay Warwick $40,000, without joint and several liability, to

fully settle the claims against them.

The next day, before opening statements, ERCC and Patel nsel objected

to Warwick pre-applying a settlement credit:

We . . . believe it the plaintiff to put on all their evidence of whatever damages are. If they recover, then we can approach the Court as to how that settlement credit should be applied. Because they ple causes of action, multiple theories of recovery against multiple defendants, and depending on how that shakes out, we don f pre- you know, do the pre- arithmetic on the potential settlement credit at this time.

The trial court disagreed, saying: I think we can do the pre-arithmetic and I

think that that would be a better way to get away from the jury issues that they really

aren g to be dealing with. . . [I]f youe already had those amounts in pre-

settlement, then we need to take them out. Warwick with the trial

court saying: Yes, that we re seeking a reduced amount . . . I last night based on the $120,000

settlement that was recorded on the record yesterday. I took that out as well . . . .

The trial court stated: yesterday.

8 The case was tried to a jury. At trial, Patel acknowledged that Warwick was

not paid for the labor and materials for the change orders at issue. Annan testified

that ERCC owed Warwick $463,406.48 for charges arising from the change orders. 2

Annan acknowledged that ERCC informed Warwick that it needed more

documentation relating to some of the change orders in order to authorize payment.

Tiffany Nowak, who worked for Sterling Engineering and handled all the accounting

for the project, also testified that ERCC did not receive sufficient documentation

from Warwick on its payment requests relating to the change orders.

Nowak testified about the accounting records for the project. She said that

ERCC had one bank account and did not maintain separate accounts for different

projects. Nowak testified that ERCC received a total of $2,883,074.19 in payments

from Altus for the Altus Hospice project, and $2,506,422.74 of that amount was paid

to Warwick. She also testified that ERCC paid a total of $2,891,156.60, which was

more than it received from Altus, to complete the project. Nowak further testified

that ERCC repaid each of its four members their $5,000 initial investments.

Annan testified that, based on ERCC ERCC withheld

$376,651.45 in money from Altus that should have been paid to Warwick in

satisfaction of the labor and materials charges due to the change orders. Instead,

2 This figure represents the difference between the $870,302.03 alleged in response to discovery and the amount of settlement that Warwick deducted based on the court s determination at the pretrial conference. 9 ERCC used that money to pay its landscaping contractors and vendors and to pay

other direct job costs ERCC incurred. Patel ony was equivocal. First, he

testified that he used money that should have been paid to Warwick to pay for other

direct project expenses, such as landscaping contractors, but he maintained that this

was a permissible use of the funds. Later, he testified that ERCC paid Warwick

at was intended for Warwick, and he said that none of the money

used to repay the initial investors came from a source that should have been paid to

Warwick.

As to his allegations of fraud, Annan testified that Robinson, on behalf of

ERCC, told him that ERCC was going to obtain a payment bond. Annan said that he

signed the contract on behalf of Warwick because he trusted Robinson and relied on

that representation. Annan testified that he read and understood the contract with

ERCC before he signed it. He admitted that he did not ask to see ERCC

he signed the contract, but he said: They lied to me about the bond. He also

testified that, unbeknownst to him and Warwick, ERCC used his bond to satisfy its

contractual obligation to provide Altus with a payment and performance bond.

Annan said: They hid it from me. Patel, however, testified that Annan never asked

ERCC to provide a payment bond and that ERCC would not have done so because

the purpose of a payment and performance bond is to protect, ultimately, the project

owner.

10 Annan testified that Warwick was damaged by ERCC isrepresentation

about the bond because it had no payment bond to rely on when ERCC failed to pay

for labor and materials relating to the change orders. Annan also testified that

Warwick was not alleging any fraud relating to the $352,000 payment to Sterling

Engineering.

The jury unanimously found that: (1) ERCC breached the contract with

Warwick; (2) ERCC failed to pay Warwick promptly for its work; (3) ERCC and

Patel were trustees of trust funds received from the owner of the project, Altus;

(4) Warwick was a beneficiary of trust funds for the project; (5) ERCC and Patel

misapplied project trust funds; (6) ERCC and Patel committed fraud against

Warwick; (7) clear and convincing evidence showed that Warwick was harmed by

ERCC and Patel ulent misrepresentation; (8) ERCC and Patel did not engage

in a conspiracy to damage Warwick. The jury found the following amounts of

damages:

Breach of contract $ 463,406.48

Misapplication of trust funds 372,000.00

Fraud 33,000.00

Exemplary damages against ERCC 500,000.00

Exemplary damages against Patel 500,000.00

11 Warwick moved for entry of judgment on the verdict, and ERCC and Patel

responded. ERCC and Patel argued that Warwick was required to elect a remedy

between breach of contract and misapplication of trust funds in violation of the

TCTFA. They also argued that they were entitled to settlement credits as to the award

of $372,000 on the misapplication of trust funds claim because Warwick sought the

full amount of damages for this claim, instead of reducing the amount sought to

account for settlement credits. ERCC and Patel also argued that the settlement

credits exceeded the jury ward of damages for the misapplication of trust funds

claim and the fraud claim. ERCC and Patel argued, in the alternative, that the

exemplary damages should be reduced to $200,000 under the mandatory cap in the

Texas Civil Practice and Remedies Code and further reduced to $132,000 to comport

with due process.

The trial court vacated its first judgment, and it entered final judgment on

December 20, 2019. The trial court accepted all of the jury judgment that Warwick r from and against Patel

act and for Patel [misapplication of trust funds in] violation of the Texas Construction Trust Fund

statute, respectively . . . . The trial court also awarded Warwick $91,406.48 against

ERCC er with the amount in the

foregoing paragraph equals the total amounts awarded by the jury for ERCC

12 breach of contract . . . . The court awarded $33,000 for fraud against ERCC and

Patel ,000 each, from ERCC and Patel, as exemplary

damages. The court awarded 18% statutory penalty interest from ERCC due to its

violation of the Texas Prompt Payment Act in addition to 5.5% prejudgment interest

from both ERCC and Patel. Finally, the trial court awarded costs of court and

attorney fees.

The trial court denied ERCC and Patel s motion to modify the judgment, and

ERCC and Patel appealed.

Analysis

ERCC and Patel raise seven issues on appeal. Because they control our

disposition of this appeal, we focus on the second, third, and fourth issues. First, we

consider whether the trial court .

Because we agree that it does, we must consider how to reform the judgment to

afford Warwick the maximum relief to which it is entitled. ERCC and Patel argue

on appeal (1) that the entire damages award on Warwick of trust

funds claim is extinguished by the proper application of settlement credits and

(2) that Warwick fraud claim is entirely precluded because the parties negates justifiable reliance as a matter of law.

13 I. Standard of review

[W]hether the plaintiff has complained of a single, indivisible injury, and

whether the defendant is entitled to credit one or more settlements against the

judgment, are legal determinations that we review de novo. Sky View at Las

Palmas, LLC v. Mendez, 555 S.W.3d 101, 109 n.8 (Tex. 2018). Justifiable reliance

usually presents a question of fact, the element can be negated as a matter of

law when circumstances exist under which reliance cannot be justified. JPMorgan

Chase Bank, N.A. v. Orca Assets G.P., L.L.C., 546 S.W.3d 648, 654 (Tex. 2018).

We therefore review ERCC and Patel , third, and fourth issues de novo. See

Sky View, 555 S.W.3d at 109.

II. One Satisfaction Rule

A. A party is entitled to one recovery for one injury.

A party may sue and seek damages on alternative theories of liability. Waite

Hill Servs., Inc. v. World Class Metal Works, Inc., 959 S.W.2d 182, 184 (Tex. 1998);

see Madison v. Williamson, 241 S.W.3d 145, 159 (Tex. App. Houston [1st Dist.]

2007, pet. denied). Under the one-satisfaction rule, a plaintiff is entitled to only one

recovery for any damages suffered because of a particular injury. TMRJ Holdings,

Inc. v. Inhance Techs., LLC, 540 S.W.3d 202, 208 (Tex. App. Houston [1st Dist.]

2018, no pet.); see Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 303 (Tex.

2006). There can be but one recovery for one injury and the fact that more than one

14 defendant may have caused the injury or that there may be more than one theory of

liability, does not modify this rule. Stewart Title Guar. Co. v. Sterling, 822 S.W.2d

1, 8 (Tex. 1991). Although the traditional one satisfaction principle applies to

cases in which an injured plaintiff is wholly compensated by settling defendants or

other third parties, it also applies when a defendant commits technically different

acts that result in a single injury. 3 Madison, 241 S.W.3d at 158 59. e

satisfaction rule may limit a plaintiff where the amounts awarded

vary from claim to claim. Lundy v. Masson, 260 S.W.3d 482, 506 (Tex. App. Houston [14th Dist.] 2008, pet. denied).

When a defendant s acts result in a single injury, and the jury returns

favorable findings on more than one theory of liability, the plaintiff is entitled to

judgment on the theory affording him the greatest relief. Saden v. Smith, 415

S.W.3d 450, 465 66 (Tex. App. Houston [1st Dist.] 2013, pet. denied) (citing

Birchfield v. Texarkana Mem l Hosp., 747 S.W.2d 361, 367 (Tex. 1987)). Ordinarily

the prevailing party will elect which remedy it prefers prior to entry of judgment, but

when it does not the trial court should use the findings to render judgment affording

the maximum relief. Star Houston, Inc. v. Shevack, 886 S.W.2d 414, 422 (Tex.

3 nt awarding damages on each alternate theory may be upheld if the theories depend on separate and distinct injuries and if separate and distinct damages findings are made as to each Madison v. Williamson, 241 S.W.3d 145, 158 (Tex. App. Houston [1st Dist.] 2007, pet. denied). 15 App. Houston [1st Dist.] 1994), writ denied per curiam, 907 S.W.2d 452, 452

(Tex. 1995); accord Lundy, 260 S.W.3d at 505 06.

B. Warwick advanced three liability theories arising from one injury.

In their second issue, ERCC and Patel argue that the trial court violated the one satisfaction rule because Warwick was not required to elect a

remedy and was awarded multiple damages for a single injury. ERCC and Patel

maintain that the three claims on which Warwick prevailed breach of contract,

misapplication of trust funds, and fraud all sought recovery for the same injury:

the nonpayment of Warwick for labor and materials related to the Altus hospice

construction project. Warwick ded petition was the live pleading at trial.

In its live pleading, Warwick alleged that it had suffered at least $870,302.03 in

breach-of-contract damages, $352,000 in fraud damages due to the reduction in

contract price to pay Sterling Engineering to act as project manager, and unspecified

damages for misapplication of trust funds under the Texas Construction Trust Fund

Act.

1. Breach of contract

Evidence at trial demonstrated that Warwick contracted with ERCC for the

construction of the Altus hospice. Patel conceded that ERCC failed to pay Warwick

for some labor and materials related to change orders that was owed under the

contract, and the evidence was undisputed that the amount owed was $463,406.48.

16 Thus, liability and damages for breach of contract were established conclusively at

trial. See AKIB Constr. Inc. v. Shipwash, 582 S.W.3d 791, 806 (Tex. App. Houston

[1st Dist.] 2019, no pet.) (stating essential elements of breach-of-contract claim).

2. Misapplication of trust funds

Warwick of trust funds claim was based on the Texas

Construction Trust Fund Act ( TCTFA ). See TEX. PROP. CODE §§ 162.001 .033.

Under the TCTFA, ]onstruction payments are trust funds . . . if the payments are

made to a contractor or subcontractor or to an officer, director, or agent of a

contractor or subcontractor, under a construction contract for the improvement of

specific real property in this state. Id. § 162.001(a). r,

or owner or an officer, director, or agent of a contractor, subcontractor, or owner

who receives trust funds or who has control or direction of trust funds, is a trustee of

the trust funds. Id. § 162.002. r,

subcontractor, or materialman who labors or who furnishes labor or material for the

construction . . . of an improvement on specific real property . . . is a beneficiary of

any trust funds paid or received in connection with the improvement. Id. §

162.003(a).

A trustee who, intentionally or knowingly or with intent to defraud, directly

or indirectly retains, uses, disburses, or otherwise diverts trust funds without first

fully paying all current or past due obligations incurred by the trustee to the

17 beneficiaries of the trust funds, has misapplied the trust funds. Id. § 162.031.

Current or past due obligations are those obligations incurred or owed by the

trustee for labor or materials furnished in the direct prosecution of the work under

the construction contract prior to the receipt of the trust funds and which are due and

payable by the trustee no later than 30 days following receipt of the trust funds. Id.

§ 162.005(2). The TCTFA provides that the misapplication of trust funds is a Class

A misdemeanor or felony of the third degree, depending on the circumstances. Id. §

162.032. Although the statute lacks an express provision for a private civil right of

action, this court has recognized a private right of action arising from a violation of

the TCTFA because y duty normally gives rise to a private

right of action on behalf of the injured person (or group of persons) for whose benefit

the statute was enacted. Lively v. Carpet Servs., Inc., 904 S.W.2d 868, 871 (Tex.

App. Houston [1st Dist.] 1995, writ denied).

The TCTFA does not expressly require that the trustee and beneficiary of trust

funds be in privity of contract, and the broad definitions of trustee and beneficiary

indicate that they will not always be parties to the same contract. In this case,

however, Warwick directly contracted with ERCC. And the damages Warwick

alleged and proved at trial arose from ERCC ay for labor and materials

supplied related to change orders. Although Warwick advanced a different model of

computing damages the difference between the money ERCC received from Altus

18 and the money paid to Warwick the damages arose from the same injury as the

breach of contract damages: ERCC under the contract.

On appeal Warwick concedes that all of the misapplication of trust funds damages

overlapped with the breach of contract damages. We conclude that breach of contract

and misapplication of trust funds were alternative theories of liability arising from

the same injury.

3. Fraudulent inducement

Warwick also pleaded a claim for fraudulent inducement. In its pleadings and

discovery responses, Warwick alleged that ERCC and Patel fraudulently induced it

to enter the contract with ERCC by promising to obtain a payment and performance

bond. It also alleged fraud arising from the $352,000 that was deducted from

Warwick o pay Sterling Engineering to act as project manager, but

at trial, Warwick disavowed this theory of recovery. Annan specifically testified that

Warwick was not seeking any fraud damages from the reduction in its contract price

to pay Sterling Engineering for project management.

Texas law has long imposed a duty to abstain from inducing another to enter

into a contract through the use of fraudulent misrepresentations. Anderson v.

Durant, 550 S.W.3d 605, 614 (Tex. 2018) (stating elements of fraudulent

inducement). Fraudulent inducement is actionable when the misrepresentation is a

false promise of future performance made with a present intent not to perform. Id.

19 The existence of a contract is an essential element of proof of a claim for fraudulent

inducement. Id. Two types of direct damages are available for common-law fraud:

out-of-pocket damages, measured by the difference between the value expended

versus the value received, and benefit-of-the-bargain damages, measured by the

difference between the value as represented and the value received. Id.

At trial, Warwick ed in closing that ERCC and Patel had

fraudulently induced Warwick to enter into the construction contract by representing

that it would obtain a payment and performance bond that it never obtained.

On appeal, Warwick argues that it sought damages for nonpayment through

its breach-of-contract and misapplication-of-trust-funds claims and damages for

fraud. Warwick contends that the predicate for the fraud award is independent of

nonpayment. Warwick argues on appeal that it sought out-of-pocket damages for

fraud, specifically (1) the reduction of its contract price to pay Sterling Engineering

for project management, (2) the lack of independent project management services,

(3) damage to Warwick ionships with subcontractors, and (4) costs incurred

to settle the claims with its subcontractors.

The record does not support this argument. First, Annan testified that

Warwick was not seeking any fraud damages from the reduction in its contract price

to pay Sterling Engineering for project management. Second, Warwick did not

introduce any evidence that it was injured by the absence of independent project

20 management services. Third, its evidence that its relationships with its

subcontractors was damaged was limited to Annan about ERCC failure to promptly pay Warwick. Annan testified that ERCC failure to promptly

pay our subs, Warwick through it, but it did

do damage, judgment who we went into

business with. But Warwick provided no evidence quantifying those alleged out-

of-pocket damages or additional expenses associated with settling claims with

subcontractors. Instead, in closing Warwick relied on its evidence of damages due

to ERCC failure to pay for labor and materials associated with the change orders.

In closing argument, Warwick argued:

So Question 11 is what we call the damages question on the fraud claim. You have to figure out how much my client fraud. . . . But at the very least, the 463,000 that they didn ay us are

our damages, and you may find that the trust funds as well, the fact that they got our money and kept it are also part of our fraud damages. So at a minimum it as well for an additional 376, and you can put a number in the blank that you ladies and gentlemen feel is the appropriate measure of damages that the evidence has shown was suffered by my client.

We conclude that Warwick sought benefit-of-the-bargain damages for its

fraudulent inducement claim, specifically asking the jury to award the amount they didn represents the same injury for which Warwick sought

recovery under theories of breach of contract and misapplication of trust funds.

* * *

21 We conclude that Warwick successful liability theories all sought

damages for the same injury the nonpayment of labor and materials Warwick

expended on construction of the Altus hospice. See Madison, 241 S.W.3d at 158 59

(jury may return favorable findings on alternative theories of liability). We sustain

ERCC and Patel Warwick is entitled to recover its damages based

on the theory that afforded it the greatest or most favorable relief. See id. On appeal,

ERCC and Patel raise additional challenges to the viability of judgment based on

misapplication of trust funds and fraud.

II. Application of settlement credits extinguishes recovery on misapplication of trust funds theory.

In their third issue, ERCC and Patel argue that the trial court erred by failing

to apply settlement credits to Warwick misapplication-of-trust-funds claim. They contend that application of the settlement

credits would extinguish Warwick

In addition to preventing a plaintiff from obtaining multiple recoveries on

alternative theories of liability when it has suffered only one injury, the

onesatisfaction rule also prevents a plaintiff from obtaining more than one recovery

by crediting a non-settling defendant for payments made in settlement of damages

from a singular injury. Sky View, 555 S.W.3d at 106 07. The Texas Supreme Court

has explained:

22 [W]hen a plaintiff files suit alleging that multiple tortfeasors are responsible for the plaintiff s injury, any settlements are to be credited against the amount for which the liable parties as a whole are found responsible, but for which only the non-settling defendant remains in court. The rationale for this doctrine is that the plaintiff should not receive a windfall by recovering an amount in court that covers the plaintiff s entire damages, but to which a settling defendant has already partially contributed. The plaintiff would otherwise be recovering an amount greater than the trier of fact has determined would fully compensate for the injury.

First Title Co. of Waco v. Garrett, 860 S.W.2d 74, 78 (Tex. 1993).

A defendant seeking a settlement credit has the burden to prove its right to

such a credit. Utts v. Short, 81 S.W.3d 822, 828 (Tex. 2002); Mobil Oil Corp. v.

Ellender, 968 S.W.2d 917, 927 (Tex. 1998); Alanis v. US Bank Nat l Ass n, 489

S.W.3d 485, 509 (Tex. App. Houston [1st Dist.] 2015, pet. denied). Under the

common law, the record must show the amount of the settlement credit. Utts, 81

S.W.3d at 828; Ellender, 968 S.W.2d at 927 (citing Garrett, 860 S.W.2d at 78);

Alanis, 489 S.W.3d at 509. Once the non-settling defendant demonstrates a right to

a settlement credit, the burden shifts to the plaintiff to show that certain amounts

should not be credited because of the settlement agreement s allocation of damages,

for example between actual and exemplary damages. Utts, 81 S.W.3d at 828;

Ellender, 968 S.W.2d at 928 (recognizing that settling plaintiffs are in better position

than non-settling defendants to ensure that settlement awards are properly allocated).

The record demonstrates that Warwick settled with Altus and with Anwar,

Jafar, and the estate of Ibrihim. Warwick informed the trial court on the record

23 outside the presence of the jury that it had settled with Altus and sought to deduct

the amount of settlement from the damages it asked the jury to find. Warwick

explained that the total amount of damages it sought for nonpayment was

$870,302.03. ERCC and Patel informed the court that Anwar, Jafar, and the estate

of Ibrihim had settled with Warwick for $40,000 each, for a total of $120,000.

Warwick told the court that it had deducted the $120,000 from the amount of

damages it would ask the jury to find, which was $463,406.48 after deducting all

settlements. The jury did find $463,406.48 as damages for breach of contract. ERCC

did not dispute that amount at trial and has not challenged the amount or the

application of settlement credits on appeal. Based on this information in the record,

it is possible to calculate the settlement credits that that ERCC and Patel wish to

apply to the misapplication of trust fund damages. See Utts, 81 S.W.3d at 828;

Ellender, 968 S.W.2d at 927; Alanis, 489 S.W.3d at 509.

Total amount of damages alleged by Warwick $ 870,302.03

Amount Warwick asked jury to find for breach of contract, after deduction of settlement amounts 463,406.48

Difference (Total of settlements) 406,895.55 Anwar, Jafar, Ibrihim settlements (total) 120,000 Difference (Altus settlement, estimated) 28,6895.55

Because the record demonstrates the amount of settlement credits that ERCC

and Patel seek to apply to the TCTFA claim, the burden shifted to Warwick to show

that certain amounts should not be credited due to the allocation of damages in the

24 settlement agreements. See Utts, 81 S.W.3d at 828; Ellender, 968 S.W.2d at 928.

But Warwick presented no evidence about the allocation of sums in the settlements.

Instead, Warwick argues that ERCC and Patel are not entitled to a credit based

on its settlement with Altus, because that settlement was based on a lien and ERCC

and Patel were not jointly and severally liable on the lien. In Sky View, the Texas

Supreme Court held that a finding of joint liability is not required for the application

of the one satisfaction rule, which is not limited to situations in which defendants

have been found liable on the same cause of action. Sky View, 555 S.W.3d at 112 13; see, e.g., Waite Hill Servs., 959 S.W.2d at 185 (holding trial court erred by

refusing an election-of- contract, as well as

tort damages, and the jury awarded the identical amount in response to both damages

Warwick the same injury as its claims for breach

of contract, misapplication of trust funds, and fraud: nonpayment of labor and

materials Warwick spent on the project. See TEX. PROP. CODE § 53.023(1)

(mechanic materialman lien secures payment for material

furnished for the construction ).

Warwick also asserts that its settlements with Altus, Anwar, Jafar, and the

estate of Ibrihim were already reflected in the economic damages it sought at trial.

The record does not demonstrate that Warwick deducted any amounts reflective of

the settlements from what it asked the jury to find on its

25 misapplication-of-trust-funds claim. Warwick relied on an entirely different method

of calculating damages for misapplication of trust funds than it did for its

breach-of-contract claim, which relied on Annan much remained unpaid. Warwick asserted that the proper measure of damages for

its misapplication-of-trust-funds claim was the difference between the total amount

of money that Altus paid ERCC ($ 2,891,156.60) and the total amount of money that

ERCC paid Warwick ($ 2,506,422.74), or $ 384,733.76. Annan testified at trial

ERCC received a total of $ 376,651.46 from Altus that ERCC should have but

failed to disburse to Warwick. The jury awarded $ 372,000 as actual damages for

misappropriation of trust funds. See Clerk ey, if any, if

paid now in cash, would fairly and reasonably compensate Warwick for its damages,

if any, that were proximately caused by such misapplication of trust funds?

Although the jury here awarded different amounts of actual damages for

breach-of-contract and misapplication of trust funds, our analysis that Warwick recovery depends on an election between these claims due to the one satisfaction

rule remains unchanged. See Lundy, 260 S.W.3d at 506 (noting that jury awarded

different amounts of actual damages on alternative liability theories that addressed

a singular injury).

Because the record demonstrates ERCC and Patel the

application of settlement credits and because Warwick has not demonstrated that an

26 allocation in the settlement agreements precludes the application of settlement

credits, we conclude that the trial court erred by failing to apply them. The jury

awarded $372,000 in actual damages for misapplication of trust funds. The total

amount of settlement credits is $406,895.55. We conclude that the settlement credits

would entirely extinguish Warwick covery under this theory of liability, and we

hold that recovery under Warwick -of-trust-funds claim is not

viable. We sustain ERCC and Patel third issue.

III. The parties makes Warwick sentations that ERCC would obtain a bond unjustifiable.

In their fourth issue, ERCC and Patel argue that the trial court erred by

rendering judgment for Warwick on its fraud claim because its reliance on a

representation that ERCC would obtain a payment and performance bond was

contradicted by the parties s that it could have relied on the

representation despite the language in the contract. We disagree.

Warwick alleged that it was fraudulently induced to enter the contract with

ERCC by representations that the project would be bonded and ERCC would obtain

the payment and performance bond. Annan testified at trial that he would not have

signed the contract on behalf of Warwick had he known that ERCC would not obtain

the bond. He also testified that he had read and understood the contract.

The elements of a claim for fraudulent inducement are (1) a material

misrepresentation, (2) made with knowledge of its falsity or asserted without

27 knowledge of its truth, (3) made with the intention that it should be acted on by the

other party, (4) which the other party relied on and (5) which caused injury.

Mercedes-Benz USA, LLC v. Carduco, Inc., 583 S.W.3d 553, 557 (Tex. 2019)

(quoting Anderson, 550 S.W.3d at 614 fraudulent inducement arises only

in the context of a contract, the existence of a contract is an essential part of its

Anderson, 550 S.W.3d at 614.

To prevail on a fraud claim, a plaintiff [must] show actual and justifiable

reliance. Mercedes-Benz USA, 583 S.W.3d at 558 (quoting Grant Thornton LLP

v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010)). Whether a

party s actual reliance is also justifiable is ordinarily a fact question, but the element

may be negated as a matter of law when circumstances exist under which reliance

cannot be justified. Mercedes-Benz USA, 583 S.W.3d at 558. ] party to a written

contract cannot justifiably rely on oral misrepresentations regarding the contract s

Nat l Prop. Holdings, L.P. v. Westergren, 453 S.W.3d 419,

424 (Tex. 2015).

In determining whether justifiable reliance is negated as a matter of law,

courts must consider the nature of the parties

JPMorgan Chase, 546 S.W.3d at 654 (quotation omitted). A party must exercise

ordinary care when entering into an arm length transaction, and his failure to do so

is not excused by his mere confidence in the honesty and integrity of the other

28 party. Thigpen v. Locke, 363 S.W.2d 247, 251 (Tex. 1962). A party cannot blindly

rely on a representation when he knows, based on his experience and background,

that he should investigate, but he fails to do so. JPMorgan Chase, 546 S.W.3d at

654. Reliance on a representation is not justified when there are red flags that

indicate such reliance is unwarranted. Grant Thornton, 314 S.W.3d at 923. Reliance

on an oral representation is also unjustified when the oral representation is contradicted by the express, unambiguous terms of a written agreement between the

parties. DRC Parts & Accessories, L.L.C. v. VM Motori, S.P.A., 112 S.W.3d 854,

858 (Tex. App. Houston [14th Dist.] 2003, pet. denied). A party who enters into a

written contract while relying on a contrary oral agreement does so at its peril Id.

at 859.

ERCC and Patel argue that the contract with Warwick directly contradicted

the alleged representation that ERCC would obtain a payment and performance

bond. The ERCC-Warwick contract incorporates E in regard to rance

and Bonds. Exhibit E provides

ARTICLE E.2 SURETY BONDS

§ E.2.1 The Contractor [Warwick] shall provide surety bonds as follows: (Specify type and penal sum of bonds.) Type Penal Sum ($0.00) Payment and Performance 3,200,000.00

29 In Texas, payment and performance bonds are statutory and must comply with

the provisions of Chapter 53, Subchapter I of the Texas Property Code ( Bond to

Pay Liens or Claims ). See TEX. PROP. CODE §§ 53.201 .211. original

contractor who has a written contract with the owner may furnish at any time a bond

for the benefit of claimants. Id. § 53.201(a). The bond protects the owner and its

property from claims by the same class of people who would otherwise be entitled

to file a mechanic and materialman lien. See id. § 53.201(b) (

id. § 53.205(a) ( Claims id. § 53.021 ( Persons Entitled to Lien .

The Property Code establishes a broad category of people entitled to a lien, and the

statute does not contemplate multiple payment and performance bonds on a

particular project because the original contractor s bond would protect the owner

from claims from tiers of subcontractors. See TEX. PROP. CODE § 53.021(a)(1) (

person has a lien if . . . the person labors . . . or furnishes labor or materials for

construction or repair in this state of . . . a house, building, or improvement . . . . .

The contract between ERCC and Warwick expressly required Warwick to

provide a payment and performance bond in the total amount of the project, $3.2

million. In light of the statutory scheme pertaining to such bonds, this contract

provision directly contradicts Warwick reliance on the alleged representation that

ERCC would obtain the exact same bond. See JPMorgan Chase, 546 S.W.3d at 660.

We conclude that Warwick fraud claim fails as a matter of law because the element

30 of justifiable reliance is negated by the contract. We sustain ERCC and Patel fourth

issue.

Conclusion

Having concluded that recovery is not viable under either the

misapplication-of-trust-funds claim or the fraud claim, we hold that Warwick recovery must be limited to its breach-of-contract claim. We reverse the judgment

of the trial court and render judgment that Warwick take nothing on its

misapplication-of-trust-funds claim and its fraud claim, and we remand this case to

the trial court for entry of judgment consistent with this opinion, including proper

computation of prejudgment interest. We do not reach the remainder of ERCC and

Patel it is not necessary to the disposition of this appeal.

See TEX. R. APP. P. 47.1.

Peter Kelly Justice

Panel consists of Chief Justice Radack and Justices Kelly and Landau.

Case Summary:
To generate a summary for Sandeep Patel and ERCC Construction Company, LLC v. Warwick Construction, Inc. click here.
Back to top