DYNEGY, INC., Petitioner, v. Terry W. YATES, individually, and Terry W. Yates, P.C., Respondents.
-- August 30, 2013
Russell S. Post, Beck Redden, LLP, Houston, TX, for Petitioner.Wanda McKee Fowler, Wright & Close LLP, Houston, TX, for Respondents.
The statute of frauds' suretyship provision provides that an oral promise “by one person to answer for the debt, default, or miscarriage of another person” is generally unenforceable. See Tex. Bus. & Com.Code § 26.01(a), (b)(2). Dynegy, Inc. contends that this provision bars the current suit because both the fraudulent inducement and breach of contract claims against it are based on an oral promise to an attorney to pay the attorney's fees incurred by one of Dynegy's former officers. We agree. Accordingly, we reverse the court of appeals' judgment and render a take-nothing judgment in favor of Dynegy.
A grand jury indicted James Olis, a former officer of Dynegy, on multiple counts of securities fraud, mail and wire fraud, and conspiracy arising out of work he performed while at Dynegy. Dynegy's board of directors passed a resolution authorizing the advancement of attorney's fees for Olis's defense provided that Olis acted in good faith, in Dynegy's best interests, and in compliance with applicable law. The resolution provided that it “may be modified or revoked by this Board at any time as a result of changes in circumstances or further analysis.”
Olis hired Terry Yates, a criminal defense attorney, to defend him in the federal criminal investigation and an ongoing civil investigation conducted by the Securities and Exchange Commission. Olis told Yates and Mark Clark, Yates's associate, that Dynegy would be paying his legal fees. Clark called Cristin Cracraft, an attorney in Dynegy's legal department, who orally confirmed that Dynegy would pay Olis's legal fees. Clark testified that Cracraft stated, “The Board has passed a resolution, so, yes, we are paying Jamie Olis's fees,” and instructed Clark that the bills should be submitted to her. Cracraft's trial testimony was similar to Clark's version of the conversation. Olis signed a written fee agreement with Yates under which Olis agreed that he was responsible for payment of his legal fees. The contract stated that “all fees are due when billed unless other specific arrangements have been made.” Yates testified that, despite the written fee agreement, he had an oral agreement with Olis under which Yates would never look to Olis for payment of fees, but instead would look to Dynegy for payment. Yates testified that he spoke to Cracraft after faxing his fee agreement and hourly rate to Dynegy and that Cracraft told him Dynegy would pay Olis's legal fees through trial. Cracraft contradicted Yates's testimony about the phone call, however, stating that she had spoken only to Clark and never to Yates as of the date of the trial.
Dynegy then hand-delivered a letter notifying Yates that it would pay him directly for Olis's legal fees through August 17, 2003, but the remaining fees incurred were to be paid into escrow pursuant to a board resolution. Dynegy paid Yates's initial invoice for $15,000. Yates submitted his $105,176 July bill in August, but Dynegy did not pay it until after trial in November. Olis was ultimately convicted of securities fraud, mail and wire fraud, and conspiracy. United States v. Olis, 429 F.3d 540, 549 (5th Cir.2005) (affirming the conviction but remanding to the trial court to reconsider the proper sentencing guidelines). Yates submitted a third and final invoice for $448,556, representing all work performed from August 2003 through April 2004, including the November 2003 trial. Dynegy initially escrowed that amount pursuant to the board resolution, but later refused to release the escrowed funds after concluding that Olis did not meet the “good faith” standard for indemnification as required by the board's resolution.
Yates filed suit against Dynegy to recover the unpaid attorney's fees, alleging that Dynegy orally promised that it would pay Yates's fees through Olis's trial. Yates asserted claims for breach of contract and fraudulent inducement and sought benefit-of-the-bargain damages for both claims. After a three-week trial, the jury found for Yates on both claims. Yates ultimately elected to recover under his fraudulent inducement claim, and the trial court rendered judgment on that claim in favor of Yates. Dynegy filed a motion for judgment notwithstanding the verdict on its affirmative defense of statute of frauds, which the trial court denied. Dynegy appealed.
The court of appeals initially reversed and rendered judgment for Dynegy based on its affirmative defense of statute of frauds. No. 04–10–00041–CV, 2010 Tex.App. LEXIS 3556, at *1 (Tex.App.-San Antonio May 12, 2010). Thereafter, the court of appeals denied Yates's motion for rehearing while also issuing a revised opinion. No. 04–10–00041–CV, 2010 Tex.App. LEXIS 6915, at *1 (Tex.App.-San Antonio Aug. 25, 2010). Then the same panel, on its own motion, reconsidered and granted Yates's motion for rehearing. 345 S.W.3d 516, 519 (Tex.App.-San Antonio 2011). In its third opinion, the court of appeals reversed itself based on the main purpose doctrine, holding that Dynegy intended to bind itself to a primary obligation rather than a promise to pay the debt of another, and the statute of frauds was therefore inapplicable. Id. at 520, 523–25. The court of appeals also reversed the trial court's judgment based on the jury's fraud finding, holding that the evidence was legally insufficient. Id. at 534. The court of appeals then rendered judgment for Yates on his breach of contract claim. Id. at 536. Dynegy petitions this Court for review, arguing that the court of appeals erred by considering an element of the main purpose doctrine, which is an exception to the statute of frauds, as a part of Dynegy's initial burden on its statute of frauds affirmative defense. We agree.
The statute of frauds generally renders a contract that falls within its purview unenforceable. Tex. Bus. & Com.Code § 26.01(a). The party pleading the statute of frauds bears the initial burden of establishing its applicability. Tex.R. Civ. P. 94; cf. Woods v. William M. Mercer, Inc., 769 S.W.2d 515, 517 (Tex.1988) (holding that the party pleading statute of limitations has the initial burden of proof). Once that party meets its initial burden, the burden shifts to the opposing party to establish an exception that would take the verbal contract out of the statute of frauds. See Cobb v. Johnson, 108 S.W. 811, 812 (Tex.1908). One recognized exception to the statute of frauds' suretyship provision is the main purpose doctrine. See Cruz v. Andrews Restoration, Inc., 364 S.W.3d 817, 827–28 (Tex.2012). The party seeking to avoid the statute of frauds must plead, prove, and secure findings as to an exception or risk waiver under Rule 279 of the Texas Rules of Civil Procedure. See, e.g., Crown Ranch Dev ., Ltd. v. Cromwell, No. 09–10–00458–CV, 2012 Tex.App. LEXIS 1345, at * 14–15 (Tex.App.-Beaumont Feb. 23, 2012, pet. denied) (mem.op.) (“A party who contends that an agreement falls within an exception to the statute of frauds must request and obtain a jury finding on the exception.”); W.H. McCrory & Co. v. Contractors Equip. & Supply Co., 691 S.W.2d 717, 720–21 (Tex.App.-Austin 1985, writ ref'd n.r.e.) (placing the burden on the plaintiff to plead and prove an exception to the statute of frauds); cf. Woods, 769 S.W .2d at 517–18 (holding that the discovery rule, as a defense to the statute of limitations, is a plea in confession and avoidance that is waived if not pled).
A. Dynegy Met its Initial Burden to Establish Applicability of the Statute of Frauds
Here, Dynegy pled the statute of frauds as an affirmative defense and thus had the initial burden to establish that the alleged promise fell within the statute of frauds. See Tex. Bus. & Com.Code § 26.01(a), (b)(2); Tex.R. Civ. P. 94. Whether a contract comes within the statute of frauds is a question of law, which we review de novo. See Bratcher v. Dozier, 346 S.W.2d 795, 796 (Tex.1961). The statute of frauds' suretyship provision applies to “a promise by one person to answer for the debt, default, or miscarriage of another person.” Tex. Bus. & Com.Code § 26.01(b)(2). Yates argues that the suretyship provision does not apply to the oral agreement in this case because there is not a preexisting debt. On the contrary, the suretyship provision applies regardless of “whether [the debt was] already incurred or to be incurred in the future.” See Restatement (Second) of Contracts § 112 cmt. b (1981).
The record indicates that Olis hired Yates to represent him in the criminal proceedings. Olis signed a fee agreement with Yates, in which Dynegy was not mentioned. Yates agreed to defend Olis, and Olis agreed in exchange that fees were due when billed unless other arrangements were made. Both Clark and Yates testified that Cracraft orally promised that Dynegy would be paying Olis's fees through trial, and it is undisputed that this agreement was never reduced to writing. These facts establish one conclusion: Dynegy orally promised to pay attorney's fees associated with Olis's defense that, under the fee agreement, were Olis's obligation (i.e., Olis's debt). The dissent, like the court of appeals, believes that Dynegy's promise to pay Olis's legal fees was a primary obligation and not a promise to pay another's debts, and therefore the statute of frauds does not bar Yates's recovery on his breach of contract claim. But, as we have explained, a plaintiff relying on a primary obligor theory under the main purpose doctrine must plead and establish facts to take a verbal contract out of the statute of frauds. See Cruz, 364 S.W.3d at 828; Gulf Liquid Fertilizer Co. v. Titus, 354 S.W.2d 378, 382–83 (Tex.1962); Cobb, 108 S.W. at 812. We hold that Dynegy established as a matter of law that the statute of frauds' suretyship provision initially applied to bar the claims against it. See Tex. Bus. & Com.Code § 26.01(b)(2) (providing that “a promise by one person to answer for the debt ․ of another person” falls within the statute of frauds). The court of appeals erred when it held otherwise.
B. The Burden Shifted to Yates
At this point, the burden shifted to Yates to establish an exception that would take the verbal contract out of the statute of frauds—namely, the main purpose doctrine. See Cobb, 108 S.W. at 812. The main purpose doctrine required Yates to prove: (1) Dynegy intended to create primary responsibility in itself to pay the debt; (2) there was consideration for the promise; and (3) the consideration given for the promise was primarily for Dynegy's own use and benefit—that is, the benefit it received was Dynegy's main purpose for making the promise. See Cruz, 364 S.W.3d at 828. We have noted that the question of intent to be primarily responsible for the debt is a question for the finder of fact, taking into account all the facts and circumstances of the case. See Haas Drilling Co. v. First Nat'l Bank, 456 S.W.2d 886, 889 (Tex.1970) (citing Gulf Liquid Fertilizer Co., 354 S.W.2d at 384). Thus, the burden was on Yates to secure favorable findings on the main purpose doctrine.1 Yates's failure to do so constituted a waiver of the issue under Rule 279 of the Texas Rules of Civil Procedure. See Tex.R. Civ. P. 279; W.H. McCrory & Co., 691 S.W.2d at 720–21; cf. Woods, 769 S.W.2d at 518 (holding the discovery rule waived when a party neither pled nor obtained findings on the issue in response to the opposing party's limitations defense). Therefore, the court of appeals erred by considering the intent element of the main purpose doctrine in conjunction with determining whether Dynegy met its initial burden to show applicability of the statute of frauds.2
Based on the preceding analysis, we hold that the statute of frauds renders the oral agreement between Dynegy and Yates unenforceable. Consequently, Yates cannot recover under his breach of contract claim. In addition, Yates's claim for benefit-of-the-bargain damages pursuant to his alternative fraudulent inducement action is barred. See Haase v. Glazner, 62 S.W.3d 795, 799 (Tex.2001) (“[T]he Statute of Frauds bars a fraud claim to the extent the plaintiff seeks to recover as damages the benefit of a bargain that cannot otherwise be enforced because it fails to comply with the Statute of Frauds.”). Accordingly, we grant Dynegy's petition for review and, without hearing oral argument, Tex.R.App. P. 59. 1, we reverse the court of appeals' judgment and render judgment that Yates take nothing on his claims.
The Statute of Frauds “is a two-edged sword. It ․ may be used to perpetrate frauds as well as to prevent them. Under it a person may obtain an oral promise to pay the debt of a third person and then resist payment on the ground that this promise is oral and therefore unenforceable under the Statute of Frauds. Because of this and other dangers, the courts of England and this country have sought to keep the Statute within its intended purpose.”1
In this case, the Court applies the Statute of Frauds' suretyship provision to, what the jury found to be, an unconditional promise by a company to pay an attorney to defend one of its employees from a work-related prosecution. Because I do not believe the Statute was intended to apply to such promises, I respectfully dissent.
The Statute of Frauds' suretyship provision applies when a creditor seeks to recover from a guarantor because of a third person's failure to perform.2 The provision discourages false allegations that a person promised to pay if the primary debtor could not.3 The provision also protects those closely associated with the principal debtor from making rash or emotionally-driven oral promises before having “any real opportunity for awareness of the nature and magnitude of the risks undertaken.”4 The suretyship provision, however, is not intended to provide more certainty to the terms of an oral contract for the benefit of a third person.5 Nor is it intended to discourage oral promises to assume the debt of a third person.6
The Court states that the facts here “establish one conclusion: Dynegy orally promised to pay attorney's fees associated with Olis' defense [that would have otherwise been Olis' obligation.]” ––– S.W.3d at ––––. I agree, but the inference I draw from that conclusion is that Dynegy assumed the role of primary obligor, not surety. As we explained in Bank of Garvin v. Freeman, the Statute of Frauds' suretyship provision does not bar an oral promise to assume primary responsibility for the debt of another:
The meaning of that statute is to require a promise as surety for another's debt, or guarantor of another's debt, to be in writing. It never was intended to prohibit one person from assuming the payment of another's debt, as his own debt, where there is a valid consideration moving between the parties to such contract. In other words, one person for a valuable consideration may assume as his own debt the debt of another, and it need not be in writing, but he cannot contract with one person to become surety or guarantor for the debt of another person except it be in writing.7
Here, Dynegy does not claim that a surety relationship existed between Olis and itself. Dynegy argues instead that the suretyship provision applies merely because Olis and Yates entered into a written fee agreement, creating a debt. But if the creation of a debt was all that was necessary to invoke the Statute of Frauds, it would not be possible to assume another's debt by oral agreement, and the Court was wrong to say otherwise in Bank of Garvin.8
For its part, Dynegy does not claim to be the guarantor of Olis' debt. Dynegy instead concedes that it agreed to pay Yates for Olis' defense, but argues that a condition in the board resolution allowed it to stop paying Yates if Dynegy's board determined that Olis did not act in good faith. At that point, according to Dynegy, Olis became responsible for Yates' fee. But the board resolution did not make Dynegy the guarantor of Olis' debt, nor did it give the company the right to stop or suspend payment to the attorney for services already rendered. The board resolution merely stated that the employee was to repay the company if his actions were determined not to have been in good faith.
The dispute in this case is therefore not about whether Dynegy agreed to pay Yates; it clearly did. The dispute instead is about the extent of Dynegy's promise. Dynegy contends that its promise to Yates was conditioned by the terms of the board resolution. Yates contends that Dynegy's promise to pay for Olis' defense through trial was unconditional and, as to Yates, primarily the company's responsibility.
The dispute was submitted to a jury, which was asked to determine the extent of Dynegy's agreement with Yates. The charge instructed the jury that an essential term of the asserted agreement was whether Dynegy agreed to pay Yates for his legal services to Olis through trial.9 In closing argument, Dynegy argued that the jury should not find it in breach of the agreement unless it believed Dynegy made an unconditional promise to pay Yates through trial. The jury found Dynegy in breach of its agreement to pay Yates and awarded damages, apparently reasoning that the conditional payment terms of the board resolution did not apply to the oral contract between Dynegy and Yates.
The Court concludes, however, that the written fee agreement between Yates and Olis conclusively establishes Olis as the primary obligor, making Dynegy merely the surety of that obligation. Because Dynegy never intended to act as a guarantor of Olis' debt, however, the Statute of Frauds' suretyship provision should not apply as a matter of law. I therefore disagree with the Court's conclusion, but even if I agreed with it, I would nevertheless hold that the main purpose exception takes Dynegy's promise to Yates out of the Statute.
The main purpose doctrine, or leading object rule, takes a promise out of the Statute where “the consideration given for the promise is primarily for the promisor's own use and benefit.”10 The test focuses on the purpose of the promise, rather than on who receives the benefit of the promise.11 This test was devised by the courts to determine whether “the promise was manifestly induced by other than gratuitous or sentimental purposes.”12
The circumstances surrounding the promise in this case began with an SEC investigation into Project Alpha. Dynegy originally billed Project Alpha as a complex transaction that would provide the company a significant long-term supply of physical natural gas, cash funding, and a permanent tax benefit. The SEC investigation resulted in a civil fine related to the company's tax classification of the assets involved. However, the Department of Justice's investigation was just beginning.
As media publicity and threats of indictment by the Department of Justice increased, Dynegy's board passed a resolution promising to advance attorney's fees to officers and employees of the company who were involved with Project Alpha. Dynegy's bylaws required the company to indemnify its directors and officers for any civil or criminal proceedings arising out of their role as a Dynegy director or officer. Dynegy paid Olis' first attorney directly and, when Olis desired to hire Yates, the company told Yates to send the bills to the company and that it would pay him directly. The urgency in securing the services of Yates, a more experienced trial attorney, was heightened by Olis' recent indictment. Therefore, Dynegy had at least two self-serving reasons to promise to pay Yates to represent Olis: (1) to protect the company's interests; and (2) to comply with its bylaws. Yates should therefore be able to enforce Dynegy's oral contract to pay him through trial because Dynegy was acting for its own purposes and not merely as a guarantor of its employee's obligation.13
In conclusion, Dynegy has not asserted or argued that it intended to act as a guarantor of Olis' debt. Moreover, the jury agreed that Dynegy's promise to pay Yates through trial was not conditional, and thus its promise does not fall within the Statute of Frauds' suretyship provision. However, even were I to agree that the suretyship provision otherwise applies to this transaction, I would conclude that the main purpose exception takes Dynegy's promise out of the Statute. Because the Court holds the Statute of Frauds applies to bar Dynegy's oral contract with Yates, I respectfully dissent.
1. Dynegy even pointed out to the trial court and Yates the omission of any jury questions related to an exception to the statute of frauds in its written charge objections.
2. The dissent also argues that the main purpose doctrine takes Dynegy's promise out of the statute of frauds based on Dynegy's self-serving reasons for promising to pay Olis's legal fees. But, as with the intent element, Yates failed to plead and prove the consideration elements of the main purpose exception.
1. Gulf Liquid Fertilizer Co. v. Titus, 354 S.W.2d 378, 382 (Tex.1962).
2. The essential elements of a surety relationship are (1) the third person and the surety are each bound to the same performance; and, (2) the third person, rather than the surety, should be the one to perform. Restatement (Second) of Contracts § 112 cmt. c.; see also 4 Caroline N. Brown, Corbin on Contracts § 15.14, at 290 (Joseph M. Perillo ed., rev. ed. 1997) (“To be within the suretyship clause of the statute, the defendant's (S's) duty to pay must be conditional on nonpayment by the third person (P) ․”) (emphasis added).
3. Cooper Petroleum Co. v. LaGloria Oil & Gas Co., 436 S.W.2d 889, 895 (Tex.1969).
4. 4 Brown, supra, § 16. 1, at 317.
5. See id. § 15.7, at 268 (“[I]t is enough to take the defendant's promise out of the statute that the third person was not bound at all to the promisee.”).
6. See Bank of Garvin v. Freeman, 181 S.W. 187, 190–91 (Tex.1915).
7. Titus, 354 S.W.2d at 383–84 (quoting Bank of Garvin, 181 S.W. at 191 (emphasis added)).
8. Bank of Garvin, 181 S.W. at 191.
9. The charge instructions also stated that the terms of an agreement may be oral or written, or both, and that the parties must have the same understanding of the subject matter at the time of the agreement.
10. Titus, 354 S.W.2d at 383.
11. Cruz v. Andrews Restoration, Inc., 364 S.W.3d 817, 828 (Tex.2012).
12. 4 Brown, supra, § 16.1, at 317; see also Cooper, 436 S.W.2d at 895 (“[T]he basic reason for requiring that a promise to answer for the default of another be in writing is that the promisor has received no direct benefit from the transaction.”).
13. See Haas Drilling Co. v. First Nat'l Bank, 456 S.W.2d 886, 890–91 (Tex.1970) (holding that main purpose doctrine was satisfied “as a matter of law” where prospect of maintaining value of oil-producing property was sufficient benefit to enforce bank's promise to pay jetting gas company the past-due debt of the former owner).
Justice GREEN delivered the opinion of the Court, in which Chief Justice JEFFERSON, Justice HECHT, Justice JOHNSON, Justice WILLETT, Justice LEHRMANN, and Justice BOYD joined.
Justice DEVINE filed a dissenting opinion.Justice GUZMAN did not participate in the decision.