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Draper v. Austin Manufacturing Services I, Inc.

Court of Appeals of Texas, Third District, Austin

July 13, 2017

Dennis Draper, Greg Hadley, and Charles Huston, Appellants
v.
Austin Manufacturing Services I, Inc., Appellee

         FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT NO. D-1-GN-09-004416, HONORABLE ORLINDA NARANJO, JUDGE PRESIDING

          Before Justices Puryear, Pemberton, and Field.

          MEMORANDUM OPINION

          Bob Pemberton, Justice.

         This appeal arises from the demise of a start-up company and requires us to determine whether the evidence is legally sufficient to support the district court's findings that the appellants are liable for breach of guaranty agreements that they signed. The guaranty agreements specifically refer to a purchase order 1682 ("P.O. 1682") and state that the underlying obligation is to be that of an entity named Assistant, Pro, Inc as the purchaser. However, P.O. 1682 itself identifies a different entity as the purchaser, and the evidence also reflects that the unpaid balances at issue relate to purchase orders bearing identification numbers different than P.O. 1682, or to raw materials, work-in-progress, or finished goods not tied to a particular purchase order. Upon reviewing the evidence in light of the precise terms of the guaranty agreements, we conclude that the evidence is legally insufficient to support the district court's findings that appellants breached their guaranties. We will therefore reverse and render judgment that appellee take nothing on its claims against appellants.

         BACKGROUND

         The summary that follows is derived from the evidence presented at trial. Appellee Austin Manufacturing Services I, Inc. (AMS)[1] manufactures electronic assemblies for clients. One of AMS's clients was TQI Systems, Ltd. (TQI), a company that builds oilfield products. In 2007, TQI's owner and President, Daryl Cornish, approached AMS's CEO, Brad Scoggins, to request AMS's services in manufacturing a new product. Cornish and appellants-Dennis Draper, Greg Hadley, and Charles Huston-had formed a new entity, Assistant-Pro, Inc. (A-Pro), [2] to develop the "Golf Guru, " a hand-held GPS device for use on the golf course. Cornish proposed that AMS open a new account to manufacture the Golf Guru for A-Pro.

         P.O. 1682 and the personal guaranties

         Cornish contemplated that AMS would manufacture an initial 5, 000 Golf Guru units to be delivered within four months.[3] The new A-Pro account required an approximate $650, 000 line of credit, and AMS was unwilling to proceed unless (i) both TQI and A-Pro were jointly responsible on the account (given that only TQI had a credit history with AMS), and (ii) Cornish and appellants each signed a personal guaranty for 25 percent of the debt. According to a September 24, 2007, e-mail from Cornish to Huston:

AMS normally takes our PO's out of Quickbooks.
Right now we are operating off of TQI's credit w/ AMS. TQI has done over a million with AMS over the last two years, we have an exemplary credit history (lots of revenue because of the oilfield stuff), and we have always paid on time (even though we don't always get paid on time;-). . . .
We have broached this issue with Brad Scoggins a couple of times, and his feeling was that because [A-Pro] has little or no credit history (he checked), the partners would probably have to sign guarantees with AMS to get a $650k line, and at the very least it would take a month. . . .
As long as I have pro-rata guarantees from the partners and an agreement with teeth, [A-Pro] can make out the PO to TQI for the first 5k, and TQI will issue the PO to AMS. We can setup books for [A-Pro] in Quickbooks and issue the first PO in under TQI and [A-Pro's] names so that [A-Pro] starts to build credit history.[4] After we sell the first 5k, I assume it will be much easier to get credit directly for [A-Pro]. . . .
Note that it will take 6 weeks from the time we get the PO until first article.

         At the request of Cornish, Huston prepared a draft purchase order ("P.O. # [100]") for the purchase of 5, 000 Golf Guru units with a "4 month take down." The draft was an A-Pro form (and listed A-Pro at the top), was "authorized" by Huston for A-Pro, and listed TQI (via Cornish) as the recipient to whom the products would be shipped.

         Huston's draft purchase order was not used.[5] Instead, AMS accepted a purchase order from TQI dated October 9, 2007-P.O. 1682-for the purchase of 5, 000 Golf Guru units with a purchase price of $128.95 per unit and expected delivery on November 23, 2007. P.O. 1682 identified TQI as the purchaser[6] and stated that the Golf Guru units were to be shipped directly to TQI.[7]

         Huston testified that Richard Horne, TQI's Vice President of Operations at the time, proposed using AMS's form guaranty, which was "open-ended" and said "all amounts owed." In response, Huston on October 19, 2007, sent an e-mail to Horne, Cornish, and appellants that enclosed a revision limiting the amount guaranteed to "all amounts due to [AMS], under Purchase Order ___ for the purchase of 5000 Golf Guru units (hereinafter 'Guaranteed Portion')."[8] Huston's proposed language was incorporated into the guaranties, which were signed by the four A-Pro principals[9] on October 22, 2007:

[AMS Logo] Personal Guaranty
I [signatory] (hereinafter referred to as the "Guarantor") . . . for and in consideration of your extending credit at my request to Assistant, Pro, Inc., a Texas corporation (hereinafter referred to as the "Purchaser"), of which I am a shareholder, personally guarantee to you the payment of twenty five percent (25%) [of] all amounts due to Austin Manufacturing Services LP. Inc., . . . under Purchase Order 1682 for the purchase of 5000 Golf Guru units (hereinafter "Guaranteed Portion").
I hereby agree to pay such Guaranteed Portion punctually if default in payment thereof is made by the Purchaser. The Guarantor will pay such Guaranteed Portion without requiring Austin Manufacturing Services L.P[.], or any of assignee[s] hereof, to proceed first to enforce payment upon the Purchaser. . . . Without in any way limiting the generality of the foregoing, the Guarantor acknowledges that this guaranty encompasses Purchaser's purchases of goods and/or services on account for said Guaranteed Portion, interest incurred thereon, plus any collection expense incurred while trying to collect the Guaranteed Portion while in default, including but not limited to, attorney fees, and court costs.[10]

         In sum, the personal guaranties were made "in consideration of [AMS] extending credit" to A-Pro (the "Purchaser") under P.O. 1682, and were premised on "a default in payment . . . by the Purchaser, " but P.O. 1682 itself identified TQI as the purchaser. On October 22, Huston sent an e-mail to Horne (copying the A-Pro principals) that highlighted this discrepancy and requested to revise the purchaser indicated on P.O. 1682 from TQI to A-Pro.[11] Horne on November 6 forwarded the e-mail to Scoggins, who replied and asked for "a new PO."[12] Scoggins testified that he never received the new purchase order.

         The subsequent purchase orders

         AMS did not deliver 5, 000 Golf Guru units by the November 2007 delivery date set forth in P.O. 1682.[13] In January 2008, Cornish and Horne were contemplating switching to color units in lieu of the black-and-white units already ordered.[14] Soon thereafter, TQI tendered to AMS a second P.O. 1682, again dated October 9, 2007 (the date of the original P.O. 1682), for the purchase of 1, 000 Golf Guru units.[15] In 2008 and 2009, AMS received several additional purchase orders from TQI or A-Pro for both grayscale and color Golf Guru units. Each of these orders contain a "P.O. Number" other than P.O. 1682, and most of the orders dated December 2008 or later identify A-Pro (rather than TQI) as the purchaser.[16]

         AMS representatives and Cornish testified that P.O. 1682 was, in their view, a "blanket" or "master" purchase order that identified the entire number of Golf Guru units for purchase (i.e., 5, 000 units), to be followed by subsequent "takedown" or "release" orders of product to be delivered and credited against the "blanket" order. Horne also testified that the original P.O. 1682 (for 5, 000 units) allowed for subsequent changes to the order.[17] According to Cornish, the P.O. numbers for the subsequent orders were randomly generated by TQI's "Quickbooks" software, which it used to generate purchase orders.

         Appellants dispute that P.O. 1682 was a "blanket" purchase order and urge that the order contained no terms identifying it as such. Draper testified that he had never heard of a "blanket" purchase order prior to the trial, and Huston similarly testified that he did not know the meaning of a "take-down" order. Appellants also point to Horne's testimony that he understood the second P.O. 1682 (for 1, 000 units), and the other subsequent Golf Guru purchase orders, as different than the original P.O. 1682.[18]

         In total, AMS delivered approximately 5, 300 Golf Guru units, [19] and all of the units delivered were sold. However, Cornish testified that sales were lackluster (which he attributed to continuing problems with the course maps), and TQI and A-Pro were unable to fully repay AMS.[20]

         As of 2009, AMS had unpaid Golf Guru receivables totaling $241, 977.52. Of these receivables, AMS's records reflect no balance due under P.O. 1682 (and that a balance previously due under P.O. 1682-for 1, 000 units at a purchase price of $133.08 per unit-had been paid in full). In other words, the unpaid accounts receivable in AMS's records relate to the other purchase orders that contain different identification numbers and that are at the core of the parties' dispute as to whether P.O. 1682 was a "blanket" purchase order. Moreover, the Golf Guru raw materials, work in progress, and finished goods described in AMS's records are not linked to a particular purchase order number.

         The litigation

         AMS sued A-Pro, TQI, Cornish, and appellants.[21] Against A-Pro and TQI, AMS asserted claims for breach of contract, suit on a sworn account, and quantum meruit.[22] Against Cornish and appellants, AMS asserted a claim for breach of the guaranty agreements. The defendants, including appellants, denied AMS's allegations.[23]

         The case was tried to the bench. At trial, Cornish did not dispute that A-Pro owed the amounts that AMS claimed it was owed under P.O. 1682, and he further admitted his personal liability as a guarantor for 25 percent of these amounts.[24] Appellants, however, disputed that they similarly owed any such obligation as guarantors.

         The district court subsequently rendered judgment for AMS (i) on its contract claim against A-Pro and TQI, and (ii) on its breach-of-guaranty claim against Cornish and appellants. The district court also made findings of fact and conclusions of law. The court found that "A-Pro/TQI's outstanding balance due to AMS, . . . for purchases under PO 1682 . . . is comprised of: (1) accounts receivable of $241, 977.52; (2) work in progress of $51, 873.06; (3) raw materials in the amount of $42, 379.58; and (4) finished goods in the amount of $6, 254.76, " for a total of $342, 484.92.[25] The court found that Cornish owed 25 percent of this amount (i.e., $85, 621.23) based on his approval and consent to "personally guarantee the purchase of both color and black and white Golf Guru units from AMS by A-Pro under PO 1682." The court also found that appellants guaranteed 25 percent of the purchase of 5, 000 black-and-white units at a unit price of $128.95, the outstanding balance of which was $281, 633.89, [26] which amounted to $70, 408.47 owed by each appellant. In total, the judgment awarded AMS: (i) $382, 484.92 against A-Pro and TQI, jointly and severally; (ii) $85, 621.23 against Cornish; and (iii) $70, 408.47 against each of appellants.[27]

         Draper, Hadley, and Huston appealed the judgment.[28]

         ANALYSIS

         Appellants raise four issues, three of which challenge the legal sufficiency of the evidence to support the district court's findings. In an appeal from a judgment rendered after a bench trial, the trial court's findings of fact serve the same function as a jury's verdict.[29] Appellants challenge the legal sufficiency of the evidence supporting the district court's liability findings adverse to them.[30] They will prevail in their challenge if the record shows any one of the following: (1) there is no evidence supporting a vital fact, (2) the evidence offered to prove a vital fact is no more than a mere scintilla, (3) the evidence conclusively establishes the opposite of the vital fact, or (4) the court is barred by law or the rules of evidence from considering the only evidence offered to prove the vital fact.[31] "More than a scintilla of evidence exists when the evidence supporting the finding, as a whole, 'rises to a level that would enable reasonable and fair-minded people to differ in their conclusions.'"[32] "'When the evidence offered to prove a vital fact is so weak as to do no more than create a mere surmise or suspicion of its existence, the evidence . . . in legal effect, is no evidence.'"[33] Conversely, evidence conclusively establishes a vital fact when the evidence is such that reasonable people could not disagree in their conclusions.[34]

         Whether P.O. 1682 with TQI as purchaser is within the scope of the guaranties

         Appellants contend in their first issue that the evidence conclusively establishes that "the transaction contemplated by the [guaranties]" (i.e., a P.O. 1682 from A-Pro) "did not occur, such that there was no transaction to guarantee." In other words, appellants argue that their guaranties do not cover the transaction that did occur, a P.O. 1682 from TQI. In the context of the elements of a breach of guaranty claim, we understand appellants as claiming that (i) the condition on which their liability is based did not occur (i.e., there was no P.O. 1682 from A-Pro), and (ii) appellants therefore did not fail or refuse to perform their promise since their promise was contingent on a default by A-Pro.[35] The district court found that (i) A-Pro was a party to P.O. 1682, [36](ii) A-Pro defaulted on its obligations under P.O. 1682, [37] and (iii) appellants therefore defaulted on their obligations "under P.O. 1682 and the [g]uaranties."[38] Appellants' first issue challenges the legal sufficiency of the evidence to support these findings.

         We begin by examining the guaranty agreements to ascertain the terms to which appellants agreed.[39] We construe a guaranty agreement as any other contract, [40] subject to the caveat that an ambiguous guaranty agreement should be given a construction that favors the guarantor.[41]Our "'primary concern . . . is to ascertain the true intentions of the parties as expressed in the instrument.'"[42] As recently explained by the Texas Supreme Court with respect to the construction of contracts:

We have noted for decades that the construction of an unambiguous contract, including the determination of whether it is unambiguous, depends on the language of the contract itself, construed in light of the surrounding circumstances. See Anglo-Dutch Petroleum [Int'l, Inc. v. Greenberg Peden, P.C., 352 S.W.3d 445, 449-50 (Tex. 2011)] ("Whether a contract is ambiguous is a question of law that must be decided by examining the contract as a whole in light of the circumstances present when the contract was entered.") (internal quotation marks omitted) (quoting David J. Sacks, P.C. v. Haden, 266 S.W.3d 447, 451 (Tex. 2008) (per curiam)); Tawes [v. Barnes, 340 S.W.3d 419, 426 (Tex. 2011)] (determining third-party-beneficiary status by considering "the oil and gas industry's customary purpose for using [joint operating agreements], and . . . the plain language of the [agreement] at issue here"); Luling Oil & Gas Co. v. Humble Oil & Ref. ...

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