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Thunder Rose Enterprises, Inc. v. Kirk

Court of Appeals of Texas, Thirteenth District, Corpus Christi-Edinburg

April 20, 2017

THUNDER ROSE ENTERPRISES, INC. AND MICHAEL J. PALMER, Appellants,
v.
BILLY R. KIRK AND KIRK OILFIELD EQUIPMENT SALES, INC., Appellees.

         On appeal from the 24th District Court of Goliad County, Texas.

          Before Justices Rodriguez, Contreras, and Longoria

          MEMORANDUM OPINION

          DORI CONTRERAS JUSTICE

         This case involves Michael Palmer's invention of a pressure-equalizing gate valve for use in the oil and gas industry. The principal question is whether a partnership agreement was reached to produce and market the valve. A Goliad County jury found that such an agreement did exist and that it was breached by appellants Palmer and Thunder Rose Enterprises, Inc. (Thunder Rose). The trial court rendered judgment ordering the parties to specifically perform their agreement and awarding attorney's fees and court costs to appellees Billy R. Kirk and Kirk Oilfield Equipment Sales, Inc. (collectively, Kirk).

         On appeal, appellants argue by eleven issues that (1) the evidence was insufficient to support the judgment, (2) the award of specific performance was error, (3) the jury charge contained error, (4) it was error to exclude certain evidence, and (5) the award of attorney's fees and costs was improper. We affirm as modified in part and reverse and remand in part.

         I. Factual Background

         After developing his valve invention for over twenty years, Palmer completed a prototype made out of wood and plastic in 2007. He applied for a patent and assigned the patent rights to Thunder Rose, a company owned by his two daughters.[1] Preparing to market the valve, Thunder Rose filed trademark applications for "Bullhead, " "Bullhead Control Systems, " and "Box Carrier."

         In 2008, Palmer contacted Billy Kirk, whom he had known and done business with since the 1970s, in an effort to obtain financing to test and market the valve. In November 2008, Palmer met with Kirk at Kirk's office to show him the prototype. Kirk and his associate Dickie McGee, who together owned a company called Thrubore Valves LLC (Thrubore), had discussions about forming an entity, to be called Excalibur Control Systems (Excalibur), which would own the license to produce and market the valve.

         In April 2009, Palmer, McGee, and Kirk met with Paul Wang, the operator of a Chinese manufacturer called Centermart. At the meeting, McGee, Kirk, and Wang each signed a non-disclosure agreement (NDA) stating in part that nothing in the NDA created a partnership. According to Kirk, he and Palmer agreed at the April 2009 meeting that Thrubore would pay Centermart to build a fully-functional prototype of the valve made of steel. In May, Kirk set up a Wells Fargo bank account in the name of Excalibur with Palmer, Kirk, and McGee listed as signatories. Thrubore began advancing funds through Excalibur for development of the prototype valve, including funds paid to Palmer's lawyer for patent work. Appellants note, however, that Thrubore accounted for those payments on its books as notes receivable rather than as equity or investments.

         Also in 2009, Kirk and McGee prepared a draft agreement for Excalibur stating that the parties did not intend to form a partnership or joint venture. Under the draft agreement, McGee and Kirk would each contribute $100, 000 in capital and Palmer would assign the valve patent rights to Excalibur. The agreement was never executed.

         Appellants, on the other hand, proposed that Excalibur would be jointly owned by Thunder Rose and Thrubore. In exchange, Thrubore would contribute $5 million into Excalibur. Thrubore did not have $5 million in cash, so it suggested that it would sell the valves packaged with other used oilfield equipment it already owned. Additionally, Kirk and McGee approached Wells Fargo about obtaining a $2 million loan in order to provide the financing contemplated by Thunder Rose. Wells Fargo declined to approve the loan.

         Meanwhile, in February 2010, Centermart's prototype valve was delivered to Kirk's office. Kirk and his employee Victor Barron took the prototype to RAM International, a machine shop in Corpus Christi. RAM International pressure-tested the valve and found that it tested well, but Palmer did not approve of certain changes to the design which he claimed made the valve less safe.

         Later in 2010, a dispute arose between Kirk and McGee. Kirk filed suit against McGee seeking to dissolve Thrubore and terminate their business relationship. A settlement agreement was reached in June 2012 under which Kirk received $1.3 million in cash and over $100, 000 in Thrubore's inventory. According to appellants, Kirk had substantial outstanding debts to the IRS and sought to raise cash as soon as possible by pushing the valve to market, without regard to concerns expressed by Palmer that the design was inadequately developed.

         After Kirk severed ties with McGee, he hired Barron, who had a relationship with Douson, another Chinese manufacturing concern. Barron, Palmer, and Kirk met with a Douson representative in April 2010, and Kirk ordered a prototype valve from Douson in May. In August, Palmer went with one of his daughters to Douson's facility in China to oversee testing of the first prototype. When the first prototype was delivered, Palmer began to make modifications to the valve for safety and operational reasons, which Palmer testified was standard procedure.

         In September 2010, Kirk's attorney, Lee Lewis, prepared a document with a diagram outlining the broad contours of a license agreement between Thunder Rose and Kirk. Under the diagram, Kirk would provide financing in the form of $1 million in equity and $3 million in a credit line. The parties dispute as to whether they agreed that the diagram would represent the business relationship between Thunder Rose and Kirk regarding the licensing of the valve.

         Subsequently, Kirk ordered ten additional valves from Douson. According to appellants, Kirk did not notify Palmer of the order, and Palmer had not yet completed modifications to the prototype which were necessary to make the valve safe to use. Appellants later alleged that Kirk undertook a number of other actions that misrepresented the valve's state of development and jeopardized their intellectual property rights, including attempting to sell the valves without conducting proper field testing.

         In June 2011, Kirk's attorney sent a draft agreement to Palmer's attorney to establish a Delaware limited liability corporation called Bullhead Control Systems, LLC (Bullhead) which would own the patent, trademark, and distribution rights on the valve. Under this draft agreement, Kirk would be responsible for a $750, 000 capital contribution, and Thunder Rose would contribute 100% in the rights in the patent. The draft Bullhead agreement was never executed.

         II. Procedural Background

         The instant dispute began in earnest on September 7, 2011, when Palmer proposed granting Kirk a non-exclusive license to develop and market the valve. On September 12, 2011, Palmer's attorney sent cease and desist letters demanding that Kirk immediately cease all marketing, sales, and distribution activities in connection with the valve, including using the trademark "Bullhead."

         Kirk filed suit on September 26, 2011 alleging that he and Palmer had formed a partnership in 2008 to develop, construct, market, and sell the valve. Kirk alleged that Palmer breached his duty of loyalty to Kirk, causing damages, by "prevent[ing Kirk] from realizing and enjoying profits from business opportunities presented to the partnership" and by "negotiat[ing] and enter[ing] into a competing agreement with a third party in an effort to deprive [Kirk] of available business opportunities."[2]

         Kirk's live petition, dated June 12, 2014, added Thunder Rose as a defendant and added allegations that both appellants breached the partnership agreement and misappropriated trademarks.[3] Kirk requested a declaratory judgment stating that a partnership exists, that the cease and desist letters are null and void, that Kirk is the rightful licensee and assignee of the patent and trademark rights to the valve, and that Kirk is entitled to 50% of all past and future profits from the valve. Kirk further requested actual damages, exemplary damages, and specific performance of the alleged partnership agreement. Appellants answered the suit and filed a counterclaim seeking, among other things, a declaration that they owned the valve trademarks. Appellants denied that there was an oral partnership agreement but argued in the alternative that, if there was a partnership, Kirk breached his fiduciary duties owed to the partnership. Both sides sought attorney's fees.

         Following trial, the trial court found as a matter of law that there was no written agreement between the parties other than the April 2009 NDA. However, the jury found that appellants entered into an oral partnership agreement with Kirk. The jury specifically found that the agreement contained the following terms: (1) Kirk was to supply financing and funding for the development and production of the valve; (2) the parties were to "split profits from the sale and marketing of the valve" 50/50, with Kirk recouping his expenses from his 50% share; (3) the parties were to "share losses and liability to third parties from the valve" 50/50; and (4) appellants were to assign Kirk an exclusive worldwide right or license to sell and market the valve. The jury found that appellants breached each of those terms.[4] The jury additionally found that appellants own the three trademarks at issue; that Kirk is ready, willing, and able to perform under the partnership agreement; that Kirk substantially performed under the partnership agreement before the cease and desist letters were sent; and that Kirk did not breach any fiduciary duties owed to appellants.[5]

         On June 12, 2015, the trial court rendered judgment on the verdict, declaring that a partnership exists with terms as found by the jury and that the cease and desist letters are null and void. The judgment ordered the parties to specifically perform under the partnership agreement; in particular, it ordered appellants to assign to Kirk an exclusive worldwide license to sell and market the valve, and to pay Kirk fifty percent of any past profits from the valve. The judgment stated that appellants are owners of the trademarks at issue. Finally, the judgment awarded Kirk $272, 552.11 in reasonable and necessary trial attorney's fees, as well as $25, 000 "for post-judgment enforcement which the Court finds is reasonable and probably necessary"; $50, 000 in the event of an unsuccessful appeal to this Court; $25, 000 in the event of an unsuccessful petition for review to the Texas Supreme Court; and court costs. Appellants filed a motion for new trial as well as a motion to disregard certain jury findings and to modify, correct, or reform the judgment. Both motions were denied by operation of law. See Tex. R. Civ. P. 329b(c). This appeal followed.[6]

         III. Discussion

         A. Partnership Agreement

         We first address appellants' arguments regarding the jury's findings that an oral partnership agreement existed and that appellants breached that agreement. Appellants contend there was legally and factually insufficient evidence to support those findings, and they also contend that an oral partnership agreement is precluded by the statute of frauds.

         1. Standard of Review

         In determining whether evidence is legally sufficient to support a jury finding, the ultimate test is whether the evidence would enable reasonable and fair-minded people to make the finding. City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005). Evidence will be legally insufficient to support the finding if the record reveals: (1) the complete absence of evidence of a vital fact; (2) that the court is barred by the rules of law or evidence from giving weight to the only evidence offered to prove a vital fact; (3) that the evidence offered to prove a vital fact is no more than a scintilla; or (4) that the evidence establishes conclusively the opposite of a vital fact. Id. at 810. In a legal sufficiency review, we view the evidence in the light most favorable to the finding, and we assume that jurors credited testimony favorable to the verdict and disbelieved testimony contrary to it. Id. at 819. We defer to the jury's determination as to the credibility of the witnesses and the weight to give their testimony, and we indulge every reasonable inference in support of the finding. Id. at 819, 822.

         In reviewing a factual sufficiency challenge to a jury finding on issues which the appellant did not have the burden to prove, as here, we will set aside the verdict only if the evidence that supports the finding is so weak as to make the verdict clearly wrong and manifestly unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986) (per curiam); Ins. Network of Tex. v. Kloesel, 266 S.W.3d 456, 469-70 (Tex. App.-Corpus Christi 2008, pet. denied). In a factual sufficiency review, we consider and weigh all the evidence, but as in a legal sufficiency review, we defer to the jury as the sole judge of the witnesses' credibility. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 242 (Tex. 2001); see Golden Eagle Archery, Inc. v. Jackson, 116 S.W.3d 757, 761 (Tex. 2003).

         Under both legal and factual sufficiency standards, the jury may choose to believe one witness over another, and a reviewing court may not impose its own opinion to the contrary. City of Keller, 168 S.W.3d at 819; Golden Eagle Archery, 116 S.W.3d at 761.

         2. Existence of Agreement

         By part of their first issue, appellants contend that the evidence was legally and factually insufficient to support a finding that they entered into an oral partnership agreement with Kirk.

         A "partnership" is "an association of two or more persons to carry on a business for profit as owners, " regardless of whether the persons "intend to create a partnership" and regardless of what the association is called. Tex. Bus. Orgs. Code Ann. § 152.051(b) (West, Westlaw through 2015 R.S.); see Ingram v. Deere, 288 S.W.3d 886, 898 (Tex. 2009) ("The terms used by the parties in referring to the arrangement do not control[.]"). In determining whether a partnership has been created, we consider whether the persons involved: (1) received or had the right to receive a share of the business's profits; (2) expressed an intent to be partners in the business; (3) participated or had the right to participate in control of the business; (4) agreed to share or shared the business's losses or liability for claims by third parties against the business; and (5) agreed to contribute or contributed money or property to the business. Tex. Bus. Orgs. Code Ann. § 152.052(a) (West, Westlaw through 2015 R.S.). The absence of any evidence of these factors will preclude the recognition of a partnership, and even conclusive evidence of only one factor normally will be insufficient to establish the existence of a partnership. Ingram, 288 S.W.3d at 898; see Tex. Bus. Orgs. Code Ann. § 152.052(b) (providing that the right to receive a share of profits or revenues will not, by itself, indicate that a person is a partner in a business, nor will the co-ownership of property). On the other hand, conclusive evidence of all the factors will establish the existence of the partnership as a matter of law. Ingram, 288 S.W.3d at 898. Whether a partnership exists must be determined by an examination of the totality of the circumstances. Id. at 903-04.

         At trial, Kirk testified as follows with respect to their November 2008 meeting:

A. Palmer brought the model into my office, laid it on the desk and started explaining to me how it worked. I must have looked at it for maybe an hour, checking it out. I put my hands on it, pulled the box carrier out. We looked at the little equalizer gates. I said, well, the specs are correct, and if it will fit inside of a valve it will work. So we talked a little more about it. And then we was talking about a partnership. Palmer wanted me to be his partner. He said he didn't want anybody else to be his partner. He wanted me to be his partner. So we discussed what it would take to make our partnership work.
Q. And what were those terms?
A. My obligation was to finance the whole operation, including, including his crane needed fixing; offices needed fixing; computers need to be put in. This was just preliminary. We were just discussing what would happen, you know, and how it would work. We visited for about three hours. . . . That's where me and Palmer had a meeting of the mind was in my office and we talked about the whole thing. We agreed on ...

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