Hoechst Celanese Corp. v. Arthur Bros.

Citations: 882 S.W.2d 917; 1994 Tex. App. LEXIS 2215; 1994 WL 468026Docket: 13-93-077-CV

Court: Court of Appeals of Texas; August 31, 1994; Texas; State Appellate Court

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Arthur Brothers, Inc. (ABI) successfully claimed damages against Hoechst Celanese Corporation (HCC) for fraud and promissory estoppel. The jury found that HCC misled ABI into accepting a nine-month contract by falsely promising that ABI could retain its long-standing maintenance role at HCC's Bishop, Texas plant if it improved its performance. HCC appealed on eight grounds, and the court suggested a remittitur; if accepted, the judgment would be modified and affirmed, but if not, the case would be reversed and remanded.

ABI had been the maintenance contractor for HCC's Bishop plant since 1950 and had secured additional maintenance contracts across Texas by 1985. In 1987, Hoechst acquired Celanese, leading to a reevaluation of maintenance contracts. A task force was formed to consider hiring a regional contractor instead of using multiple contractors. ABI submitted the lowest bid among the finalists but was overlooked in favor of Mundy Company, which was favored by plant managers due to their experience and perceived superiority.

Concerns were raised by Bishop's plant manager about the potential negative public reaction to replacing a local contractor (ABI) with Mundy. Despite acknowledging ABI's performance issues, he advocated for giving ABI a chance to improve, suggesting a nine-month contract with specific performance expectations. This context set the stage for the subsequent legal dispute over ABI's claims against HCC.

Munoz concurred with Pausky, leading Wilmeth and Siemonsma to meet with ABI owners Aaron Starks, Larry Smith, and Dick Urban to express concerns regarding ABI's performance. Wilmeth indicated a preference for Mundy over ABI, which he deemed not even the third-best bid. They provided ABI with a 'Continued Improvement Plan' (Schedule I), detailing six areas for improvement, each with specific expectations. The plan stipulated that ABI must demonstrate satisfactory progress to HCC, forming the lawsuit's basis. Wilmeth characterized Schedule I as suggestions rather than an exhaustive list, and both HCC managers claimed compliance would only allow ABI the chance for contract renewal, denying any guarantees. In contrast, Starks and Smith asserted Wilmeth promised a two-year contract upon achieving significant improvement. Ultimately, all parties acknowledged HCC as the sole evaluator of ABI's compliance.

ABI owners accepted a nine-month contract starting May 1, 1993, and requested the inclusion of Schedule I in the contract. The contract included an exclusionary clause stating it constituted the entire agreement and any modifications must be in writing. HCC president Tom Bohrer signed the contract, possibly as late as June 1989. ABI considered relocating supervisor Pat Ley from HCC's Pampa plant to assist in compliance efforts. Ley testified that local HCC managers assured him ABI would likely secure a new contract if it complied with Schedule I, prompting his decision to join ABI instead of HCC. ABI submitted a progress report on August 1, 1989, highlighting substantial cultural and operational changes, including a significant improvement in the crew-mix ratio from 0.7 to 1.4 helpers per craftsman, aimed at cost efficiency. The parties did not convene until September 19, 1989, to discuss the August report, with ABI attributing the delay to HCC.

Participants in the meeting had differing perceptions regarding HCC's evaluation of ABI's progress. ABI's representative, Smith, believed HCC's dissatisfaction stemmed only from ABI's reporting style, while Siemonsma's follow-up memorandum clarified that HCC was overall dissatisfied with ABI's progress. Siemonsma acknowledged ABI's efforts but criticized the lack of clear plans, inadequate reporting, and insufficient improvements. He specifically noted ABI's serious safety violations related to scaffolding and deemed the crew-mix ratio improvement insignificant. Siemonsma demanded a written response from ABI, which ABI provided along with monthly reports, though requests for more meetings were largely ignored by HCC.

Subsequent meetings primarily occurred between Siemonsma and ABI's Ley to address contract maintenance, but Ley felt he received little guidance. HCC officials expressed their desire for ABI to be proactive rather than needing explicit direction, aiming to avoid an overlap between contractor and HCC employee roles. On December 11, HCC officials assessed ABI's progress, noting the need for a timely decision regarding contract transitions before the holidays. Although ABI submitted a November report on December 15, discussions during the meeting predominantly covered activities from May to October, and the evaluation was unfavorable.

Testimony from Joe Mundy indicated he was instructed to prepare a transition plan for potentially switching to Mundy as the contractor. HCC officials subsequently met with Mundy on January 10, leading to a decision to change contractors. On January 11, HCC informed ABI of the transition, acknowledging ABI's efforts but citing their inability to keep pace with evolving safety and regulatory demands. ABI agreed to help with the transition, resulting in Mundy hiring nearly all ABI employees while replacing eight management positions. Mundy's safety record was highlighted as superior to ABI's, and they proactively informed HCC of new safety regulations.

Mundy led HCC to implement safety measures for employees, including safety harnesses and long-sleeved shirts, aimed at reducing injuries and burns. Following his termination, ABI refocused on its construction arm, which prospered, while its maintenance division became inactive after the firing of Aaron Starks. The jury found HCC liable to ABI for fraud and promissory estoppel, awarding $702,825 in damages, which included $225,623 for maintenance expenses and $477,202 in lost construction profits. Additionally, punitive damages were set at $2,108,469, calculated as three times the actual damages minus two dollars. HCC challenged the fraud claim, arguing that undisputed facts did not support it and that the evidence was insufficient. The jury instruction defined fraud and misrepresentation, detailing that a party commits fraud if it makes a false representation knowingly or recklessly, intending for the other party to rely on it, which results in injury. ABI alleged that HCC misrepresented its intentions regarding a potential renewal of ABI's contract, asserting that HCC never intended to consider ABI for a new contract and only allowed them to continue for public relations reasons. HCC contended that its existing contract negated any fraud claim, arguing that losses stemmed from the failure to renew the contract. However, the court found that the representations made regarding renewal were not addressed in the contract's exclusionary clause, thus allowing for the fraud claim to stand. The court overruled HCC's first point, affirming that ABI's reliance on HCC's misrepresentation caused its detriment. The court employs different scrutiny levels when evaluating evidence sufficiency, focusing on supporting evidence while disregarding contrary evidence.

In Responsive Terminal Systems Inc. v. Boy Scouts of America, the court upheld the jury's finding of fraud based on sufficient evidence, despite inconsistencies in witness testimonies. The court emphasized that if probative evidence supports a finding, challenges to that finding must be overruled. The evidence demonstrated that HCC officials misrepresented to ABI officials that significant improvements would lead to a long-term contract, despite HCC's denials and ABI's inconsistent testimonies. The court noted the existence of circumstantial evidence indicating HCC's fraudulent intent, including a pattern of disdain toward ABI and decisions made without proper consideration of ABI's progress. The court found that ABI's reliance on HCC's representation was justified, even if local HCC officials lacked authority to grant a new contract, as the representation was part of HCC's overall policy communication. This reliance was not diminished by the contract, as the representation existed independently and under different conditions.

HCC's pre-approval of the Mundy contract in January 1990 indicates a degree of local autonomy. Evidence shows ABI suffered damages due to reliance on promises made by Hoechst Celanese (HCC). HCC challenges the findings of promissory estoppel and fraud, asserting no cause of action exists and claiming insufficient evidence supports the verdict. The court posed a question to the jury regarding Arthur Brothers' substantial reliance on HCC's promise to retain work at the Bishop facility, which the jury affirmed. The court noted that the fraud and promissory estoppel claims are closely related, as they share similar damage issues. The jury assessed actual damages for fraud at $702,825 and for promissory estoppel at $225,623 in additional expenses and $477,202 in lost profits, resulting in identical total damages for both claims.

HCC also challenges the sufficiency of the jury's damage findings on the fraud issue, noting that damages only need to be proven with reasonable certainty. ABI's claimed additional expenses amounted to $261,623, which included costs for training, truck expenses, increased office expenses, and salaries. The jury awarded nearly all claimed damages except for officers' salaries. ABI's expert testified about the necessity of these expenses for implementing the team management program and related operational needs.

Increased office expenses primarily resulted from lengthy reports mandated by the contract. Owner Aaron Starks received $50,000 for work from May to December, and Walter Dombeck was paid $14,500 for May to September. Turner viewed these salaries as damages since ABI maintained inflated pay levels, which would have been reduced had the maintenance contract not existed. Payroll overhead added approximately 20% to these salaries. ABI reported a loss of $83,803 in January, with Turner estimating a potential 70% savings if they had anticipated the contract's end and adjusted payroll accordingly. Additional expenditures included physicals, drug testing, small tools, education services, and employee recognition.

HCC argued ABI should not claim these additional expenses, as ABI was contractually bound to improve. HCC's expert, CPA Melanie Griffin, did not dismiss ABI's claims entirely or dispute Turner’s cost figures but contested that HCC owed many of these amounts, stating some were covered by the contract while others were specifically excluded. Griffin eliminated small tools expenses due to contract provisions, as well as salaries and payroll taxes for officers Starks and Smith. She also removed unrequested truck expenses and additional office costs that were unauthorized or categorized as home office expenses not covered by the contract. The January loss was excluded due to lack of information.

The contract stipulated markups on wages from 29-38.5% for payroll taxes and overhead. The jury's award for some claimed costs lacks evidence, as ABI does not argue HCC failed to pay under the contract. Truck expenses were either claimed and paid, unclaimed and thus forfeited, or unrelated to work. Increased office expenses were incurred from required reporting and were compensated under the contract, not linked to fraud. Officer salaries were not compensable under the contract as they were based on ABI's decisions and earnings from the contract, with the reduction in salaries after the contract's termination supporting the argument that they would have been lower without it.

Salaries related to the case are not recoverable as damages due to a lack of evidence linking them to misrepresentation rather than contractual obligations. The claim for losses from a sudden January shutdown is unsupported since the contract permitted termination with seven days' notice, and HCC provided a twenty-day notice prior to the contract's end. ABI did not demonstrate how earlier notification could have mitigated these costs, nor did it prove that the costs would not have arisen from a rapid shutdown in April 1989. ABI's claim of late notification contradicts its assertion of premature non-renewal by HCC, which allegedly indicates fraud. 

While some claims were unsupported, evidence sustained others, particularly regarding training expenses related to a team management concept, which HCC officials deemed appropriate for long-term implementation. HCC's expert did not exclude these expenses from the damage calculations. The salary of Walter Dombeck and associated payroll taxes were also upheld due to undisputed claims of his contributions. Additional expenditures claimed included costs for team management training and awards, which, while supported by minimal evidence, were not outweighed by contrary evidence, leading to a jury deferral on these claims. 

A revised total recovery for actual damages due to misrepresentation was established at $83,661, comprising training and education ($41,729), additional salaries ($14,500), overhead on excess salaries ($2,900), and additional expenditures ($24,532). Regarding lost profits from the construction arm, HCC argued these should not be recoverable in fraud cases, referencing case law stating that damages should reflect actual losses rather than speculative profits. However, the Texas Supreme Court has recognized lost profits as special damages in certain contexts, as seen in a case involving misrepresentation about a nearby shopping center, where the jury found the builder's lost profits were directly linked to the reliance on the misrepresentation, and the loss was not deemed overly speculative.

Fraud can lead to recoverable lost profits for service providers if the losses are directly traceable and not overly speculative. However, in this case, there is insufficient evidence to support claims of lost profits. The proof required is similar to other damages, needing competent evidence demonstrating reasonable certainty rather than exact calculations. Courts have ruled that profits must be plausible to be considered lost, and speculative profits based on uncertain market conditions cannot be recovered. In a cited case, the court reversed a lost profits award due to the plaintiffs' failure to specify lost contracts or the profits from them, highlighting that mere assertions are inadequate.

ABI's expert attempted to demonstrate lost profits by analyzing sales figures from 1990 and 1991, suggesting these reflected potential earnings without the distraction of a maintenance contract. Despite significant sales increases during those years, the analysis did not connect these figures to the previous year's performance or show that ABI lost bids due to staff redirection. Evidence indicated ABI's overall sales trend had been increasing since 1989, with no direct correlation established between the alleged distraction and any lost business opportunities. Consequently, the findings of lost profits were unsupported, leading to the conclusion that the evidence was legally insufficient. Additionally, while HCC contested the award of actual damages for promissory estoppel, the court did not rule on the claim's validity but briefly addressed the damage issues, indicating remand was unnecessary.

Damages for compliance with a broken promise align with those for fraud, but lost profits are not recoverable under promissory estoppel, as established in Fretz Constr. Co. v. Southern Nat'l Bank of Houston. Therefore, damages for promissory estoppel do not exceed those for fraud, eliminating the need for remand. In response to point seven, HCC argued that the court improperly took judicial notice of its net worth, which was accepted from Moody's International Manual despite HCC's objection. However, this action was deemed harmless as the jury had sufficient evidence regarding HCC's size from various factors and did not appear influenced by ABI's arguments. The jury awarded punitive damages of $2,108,469, which was less than the expected three to ten times actual damages, suggesting they acted independently.

HCC's contention regarding insufficient support for punitive damages was refuted because actual damages from fraud were established. The evidentiary basis for punitive damages requires a preponderance of evidence, with the jury instructed to consider multiple factors, including the nature of wrongdoing and the wrongdoer's net worth. The jury found HCC's actions—deliberately misleading ABI during a significant restructuring—worthy of punishment, compounded by HCC's perceived indifference to ABI's reliance and the emotional and financial turmoil caused by HCC's conduct. HCC's insistence on its innocence likely exacerbated the jury's sentiment, supporting the punitive damages awarded.

The jury's award of punitive damages is deemed justified, but the amount is considered excessive. The jury's punitive damages were influenced by an actual damages finding that was largely unsupported by evidence. The conduct justifying punitive damages is found to warrant a significantly lower award. HCC's request for remittitur should have been granted by the trial court. The suggested remittitur for punitive damages is set at $260,000 based on the Alamo National Bank factors. If ABI submits the remittitur within fifteen days from this opinion, the judgment will be reformed accordingly, affirming the fraud finding and modifying the actual damage award to $83,661, with pre- and post-judgment interest as ordered. If ABI does not file the remittitur within the specified time frame, the case will be entirely reversed and remanded.