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Cho v. Kim

Court of Appeals of Texas, Fourteenth District

April 2, 2019

JANG WON CHO, Appellant
v.
KUN SIK KIM AND VERONICA YOUNG LEE, LEGAL HEIR TO PATRICK HIY CHANG LEE, Appellees

          On Appeal from the 61st District Court Harris County, Texas Trial Court Cause No. 2013-06274

          Panel consists of Justices Wise, Hassan, and Poissant.

          SUBSTITUTE OPINION

          MEAGAN HASSAN, JUSTICE

         We deny as moot the motion for en banc reconsideration filed by Appellant, Jang Won Cho, and the motion for en banc reconsideration filed by Appellees, Kun Sik Kim and Veronica Young Lee, legal heir to Patrick Hiy Chang Lee. We withdraw our opinion dated December 28, 2018, and issue the following substitute opinion.

         Jang Won Cho appeals from a judgment against him and in favor of Appellees Kun Sik Kim and Veronica Young Lee in connection with claims for breach of fiduciary duty and fraud arising from an unsuccessful real estate project.

         Background

         This appeal stems from a project to acquire land along Homestead Road in Houston; build a retail strip shopping center called "Pandel Plaza;" and lease storefronts in the center to commercial tenants.

         The center was built but failed to generate enough rental income to cover property taxes and other expenses. Two of the three investors in the project sued the third investor alleging that the shopping center's failure is attributable to tortious conduct by the third investor.

         All of the project's investors pursued business and professional activities in Houston after coming to the city from South Korea. One of the investors was Mr. Patrick Hiy Chang Lee, a CPA. His wife is Veronica Young Lee, who is referred to as "Veronica" Lee in this litigation. She took over her husband's participation and interest in the project after his health began to decline in 2005; he died in 2013.[1] The other investors are Kun Sik Kim and Jang Won Cho, a businessman with experience in the construction industry.

         The investors created two entities to accomplish this project. One entity is "Pandel, Inc.," which was incorporated in 2000. Kim, Lee, and Cho each own one third of the corporation. Cho signed the corporation's bylaws as a director and "secretary of Pandel, Inc." with an effective date of November 20, 2000.

         The other entity is a limited partnership called "Pandel Holdings, L.P." The limited partnership's general partner is Pandel, Inc., which has a one percent interest in the limited partnership; Kim, Lee, and Cho are limited partners, each with a 33 percent interest in the limited partnership. The parties planned to transfer ownership of Pandel Plaza from the corporation to the limited partnership, but the transfer did not occur.

         The three investors contributed capital to buy the land in 2001, followed by construction of a 9, 000-square-foot building. Pandel, Inc. borrowed $500, 000 from American First National Bank in 2004 as a construction loan. The investors also made subsequent individual capital contributions.

         The project generated revenue from rent paid by tenants. Additional revenue resulted from selling an easement covering a portion of the land to the City of Houston; however, the city later constructed a ramp that impeded access to the shopping center and hid it from view.

         The shopping center's occupancy and rent revenue dwindled over time, and relations between the three investors became strained to the point where Kim and Lee sued Cho, the limited partnership, and the corporation in 2009. In July 2012, all parties filed a Rule 11 agreement under which they agreed to file a joint motion to dismiss the 2009 suit without prejudice. The dismissal order was signed on August 30, 2012, but acrimony among the investors continued unabated.

         The parties offer sharply different explanations for the shopping center's demise.

         According to appellant Cho, appellees Kim and Lee refused to contribute any funds to the business after 2008; refused to participate in managing the property or addressing its problems; and thereby put the burden entirely on Cho to manage the property and make further contributions from his personal funds to keep the business afloat as he struggled to reverse the shopping center's sagging fortunes. Acting as Pandel, Inc.'s president, Cho took out a short term loan in October 2012 for $161, 071.88 from Apex Star Properties, Inc. at an 18 percent annual interest rate. Cho contends Pandel, Inc. needed to borrow this sum to keep the property out of foreclosure because Kim and Lee refused to contribute additional capital.

         In contrast, Kim and Lee contend that Cho "abused their trust and confidence by secretly gaining personal benefits at their expense and driving the business off of a financial cliff." According to Kim and Lee, Cho did so by

• refusing "to contribute his fair share of capital, opting instead to freeride on the resources others supplied;"
• awarding Pandel Plaza's construction contract to a company he owned;
• promising "that building construction costs would amount to no more than $423, 000," which equates to $47 per square foot multiplied by the shopping center's 9, 000 square foot capacity, and then charging $67 per square foot for a total construction cost of $629, 630;
• constructing the shopping center badly, which made finding and keeping tenants more difficult;
• entering a subsequent construction contract without their knowledge;
• paying excessive monthly management fees to a company owned by Cho;
• refusing to "disclose critical financial information about what the business was doing and why;"
• failing to explain why Kim and Lee needed to make capital contributions;
• failing to notify Kim and Lee of the easement sale to the City of Houston, or to obtain their approval; and
• using the shopping center's accounts to pay for his own attorney's fees incurred in the ongoing legal disputes with Kim and Lee.

         Kim and Lee contend that Cho's mismanagement and self-dealing caused the shopping center to lose tenants, fall into disrepair, and become "unmarketable at present."

         Kim and Lee sued Cho again in February 2013; among other things, they asserted claims for breach of fiduciary duty, fraud, breach of contract, negligent misrepresentation, and conversion. Kim and Lee removed Cho as an officer and director of Pandel, Inc. in 2015, after which the shopping center "became vacant, fell to ruin, and has been subjected to fines from the City of Houston."

         The case proceeded to trial in 2016. The trial court submitted the claims against Cho to the jury, which answered a series of charge questions in favor of Kim and Lee.

• The jury answered "No" in response to Question 1, which asked: "Did Jang Won Cho comply with his fiduciary duty to Kun Sik Kim and Veronica Young Lee?" Question 1 identified five requirements for the jury to consider in deciding whether Cho complied with his fiduciary duty.
• The jury answered "Yes" in response to Question 4, which asked: "Did Jang Won Cho fail to comply with the agreement to create a partnership owned equally by Jang Won Cho, Kun Sik Kim and Veronica Young Lee for the purpose of holding the real estate located at 8213 Homestead Road, Houston, Texas 77028?"
• The jury answered "Yes" in response to Question 7, which asked: "Did Jang Won Cho commit fraud against Kun Sik Kim and Veronica Young Lee?" This question was accompanied by instructions defining fraud in two ways - once as the making of an affirmative "material misrepresentation," and then as a "failure to disclose a material fact."
• The jury answered "Yes" to Question 10, which asked: "Did Jang Won Cho make a negligent misrepresentation on which Kun Sik Kim and Veronica Young Lee justifiably relied?"
• The jury answered "Yes" to Question 13, which asked: "Did Jang Won Cho convert property belonging to Kun Sik Kim and Veronica Young Lee?"
• The jury answered "Yes" to Question 16, which asked: "Do you find by clear and convincing evidence that the harm to Kun Sik Kim and Veronica Young Lee resulted from malice, fraud, or gross negligence?"
• The jury answered "Yes" to Question 18, which asked: "Do you find by clear and convincing evidence that Jang Won Cho knowingly or intentionally misapplied fiduciary property?"

         The jury awarded damages in answers to a series of identical questions predicated on the "Yes" answers to Questions 1, 4, 7, 10, and 13. Based on its liability findings with respect to breach of fiduciary duty, breach of contract, fraud, negligent misrepresentation, and conversion, the jury awarded identical dollar amounts for each of the following elements:

• "Construction Costs" totaling $129, 630;
• "Misapplication of initial investment" totaling $352, 600;
• "Management Fees" totaling $120, 110;
• "Interest paid to Apex Star Properties, Inc." totaling $86, 978;
• "Attorney's fees for Mr. Cho's defense" totaling $44, 195; and
• "Undistributed profits" totaling $394, 770.

         The jury also awarded exemplary damages totaling $6, 769, 698 predicated on the unanimous "Yes" answer to Question 16.

         The trial court signed a final judgment against Cho, and in favor of Kim and Lee, awarding $1, 128, 283 as actual damages for the "fraud and fiduciary duty claims;" $6, 769, 698 as exemplary damages; and $354, 713.63 as prejudgment interest. Cho timely appealed.

         Analysis

         Cho challenges the trial court's final judgment in eight issues and asserts as follows.

1. Kim and Lee cannot "recover for breach of fiduciary duty where no fiduciary duty was owed as a matter of law . . . ."
2. The evidence is legally and factually insufficient to support the jury's finding that Cho committed fraud, and that Kim and Lee suffered damages caused by fraud.
3. Kim and Lee must "elect between recovering out-of-pocket reliance damages and benefit-of-the-bargain expectancy damages for fraud . . . ."
4. The evidence is legally and factually insufficient to support the jury's finding that Kim's and Lee's conduct caused damages in the amounts found by the jury.
5. A new trial should be granted based upon cumulative error because "the trial court repeatedly commented on the weight of the evidence and [Cho's] . . . credibility, and . . . the record contains numerous translation errors that undermined the reliability of the record . . . ."
6. Exemplary damages are not available in the absence of legally and factually sufficient evidence of fraud, malice, or gross negligence.
7. The exemplary damages awarded in the judgment are unconstitutionally excessive.
8. The trial court erred in computing prejudgment interest.

         We address these issues in turn, but not in the order in which they are raised.

         I. Liability and Damages

         Based on the jury's answers and the trial court's final judgment, Kim and Lee have two legal routes to a recovery against Cho in connection with their failed shopping center project. One route is based on breach of fiduciary duty; the other is based on fraud. See Hatfield v. Solomon, 316 S.W.3d 50, 59 (Tex. App.-Houston [14th Dist.] 2010, no pet.) ("[I]f a party receives favorable findings on two or more theories of recovery that are consistent with each other and result in the same damages, then the trial court may render judgment awarding a single recovery of these damages and this judgment may be based on all of these theories.").

         Kim and Lee contend that both the breach of fiduciary duty and fraud routes to recovery are legally viable on this record and support the final judgment. They do not argue that other alternative bases exist for the judgment, and they do not rely on the additional findings regarding breach of contract, negligent misrepresentation, or conversion to support the judgment. Like the parties, we too focus our liability analysis on breach of fiduciary duty and fraud.

         A. Breach of Fiduciary Duty

         Cho's first issue challenges the submission of Question 1 to the jury asking whether he complied with his fiduciary duties. Cho contends that he owed no fiduciary duties to Kim and Lee as a matter of law because (1) "the parties entered into formalized business relationships that do not give rise to such duties;" and (2) informal fiduciary duties cannot arise from "assertions of trust and confidence that did not precede the formal, written duties."

         Cho's appellate arguments challenge only the existence of a fiduciary duty; Cho does not attack the sufficiency of the evidence underlying the jury's "No" answer to Question 1 asking whether he complied with the elevated standards of conduct imposed on a fiduciary. According to Cho, no informal fiduciary relationship existed here because "the parties did not have a previous fiduciary relationship . . . before the transaction made the basis of this suit." Cho asserts as follows: "These were experienced businessmen, but they had no fiduciary relationship prior to and apart from the agreement made the basis of this suit."

         Kim and Lee contend that both a formal and an informal fiduciary relationship were established on this record. Kim and Lee argue that a formal fiduciary relationship existed among Kim, Lee, and Cho "because they were partners." Kim and Lee argue further that an informal fiduciary relationship existed among Kim, Lee, and Cho based on a relationship of trust and confidence. They also argue that Cho's counsel conceded the existence of a relationship of trust and confidence in an exchange with the trial court during the hearing on motions for directed verdict at the close of the evidence.

         1. Overview of fiduciary relationships

         "We have recognized the difficulty of formulating a definition of the term 'fiduciary' that is comprehensive enough to cover all cases." Crim Truck & Tractor Co. v. Navistar Int'l Transp. Corp., 823 S.W.2d 591, 593 n.3 (Tex. 1992), superseded by statute on other grounds as noted in Subaru of Am., Inc. v. David McDavid Nissan, Inc., 84 S.W.3d 212, 225-26 (Tex. 2002)); see also Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509, 512 (Tex. 1942).

         In certain formal relationships, such as those involving partners, trustees, or an attorney-client relationship, a fiduciary duty arises as a matter of law. Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 199 (Tex. 2002); see also Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 674 (Tex. 1998); Thigpen v. Locke, 363 S.W.2d 247, 253 (Tex. 1962).

         Apart from formal relationships in which fiduciary duties arise as a matter of law, fiduciary duties also can arise based on an informal fiduciary relationship predicated on "a moral, social, domestic or purely personal relationship of trust and confidence." Associated Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 287 (Tex. 1998); see also Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 176-77 (Tex. 1997). "But not every relationship involving a high degree of trust and confidence rises to the stature of a fiduciary relationship." Schlumberger Tech. Corp., 959 S.W.2d at 176-77. "In order to give full force to contracts, we do not create such a relationship lightly." Id. at 177. "To impose an informal fiduciary duty in a business transaction, the special relationship of trust and confidence must exist prior to, and apart from, the agreement made the basis of the suit." Associated Indem. Corp., 964 S.W.2d at 288; see also Schlumberger Tech. Corp., 959 S.W.2d at 177.

         If the existence of a formal fiduciary relationship is disputed, then a question should be submitted in the jury charge inquiring whether the formal fiduciary relationship existed at the time of the transaction at issue, or with respect to the transaction at issue, or both. See Nat'l Plan Adm'rs., Inc. v Nat'l Health Ins. Co., 235 S.W.3d 695, 700-04 (Tex. 2007); Johnson, 73 S.W.3d at 200-03.

         The existence of an informal relationship of trust and confidence usually is a question of fact. Crim Truck & Tractor Co., 823 S.W.2d at 594. "Although we recognize that the existence of a confidential relationship is ordinarily a question of fact, when the issue is one of no evidence, it becomes a question of law." Id. (citing Thigpen, 363 S.W.2d at 253).

         The jury charge did not submit a threshold question asking whether a formal or informal fiduciary relationship existed among Kim, Lee, and Cho. Instead, Question 1 assumed the existence of an informal fiduciary relationship and instructed the jury that "[b]ecause a relationship of trust and confidence existed between them, Jang Won Cho owed Kun Sik Kim and Veronica Young Lee a fiduciary duty."

         Cho did not object during the charge conference to this instruction accompanying Question 1, or to the absence of a threshold question asking the jury to determine whether a formal or informal fiduciary duty relationship existed. He did not tender a requested jury charge question asking whether a fiduciary relationship existed. Therefore, a threshold finding necessary for recovery is deemed to have been made under Texas Rule of Civil Procedure 279 in conformity with the jury's verdict provided that factually sufficient evidence supports the deemed finding. See, e.g., Republic Petroleum LLC v. Dynamic Offshore Res. NS LLC, 474 S.W.3d 424, 432 (Tex. App.-Houston [1st Dist.] 2015, pet. denied) (threshold finding of plaintiff's capacity to recover damages on behalf of working interest owners was deemed to have been made consistent with jury's verdict when capacity issue was omitted from charge without objection or tender); Tex.R.Civ.P. 279.

         A trial court may disregard a jury finding under Texas Rule of Civil Procedure 301 when it is immaterial or is not supported by legally sufficient evidence. Spencer v. Eagle Star Ins. Co. of Am., 876 S.W.2d 154, 157 (Tex. 1994); Graves v. Tomlinson, 329 S.W.3d 128, 147 (Tex. App.-Houston [14th Dist.] 2010, pet. denied). Cho filed a motion for judgment notwithstanding the verdict under Rule 301 and asserted, among other things, that the answer to Question 1 should be disregarded because (1) the jury's "No" answer is not supported by legally sufficient evidence; and (2) "as a matter of law, there was no fiduciary relationship between the parties." Cho's Rule 301 motion was overruled by implication. See Chilkewitz v. Hyson, 22 S.W.3d 825, 831 (Tex. 1999); Tex.R.App.P. 33.1(a)(2)(A).

         In reviewing a legal sufficiency challenge to the evidence, we view the evidence in the light most favorable to the finding, crediting favorable evidence if a reasonable fact finder could do so, and disregarding contrary evidence unless a reasonable fact finder could not do so. City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005). We may not sustain a legal sufficiency challenge unless the record demonstrates that: (1) there is a complete absence of a vital fact; (2) the court is barred by the rules of law or of evidence from giving weight to the only evidence offered to prove a vital fact; (3) the evidence to prove a vital fact is no more than a scintilla; or (4) the evidence established conclusively the opposite of the vital fact. Id. at 810 (quoting Robert W. Calvert, "No Evidence" and "Insufficient Evidence" Points of Error, 38 Tex. L. Rev. 361, 362-63 (1960)). The fact finder is the sole judge of the witnesses' credibility and the weight to give their testimony. Id. at 819.

         We now apply these standards in relation to the existence of a formal or an informal fiduciary relationship.

         2. Formal fiduciary relationship

         Cho contends that no formal fiduciary relationship exists with Kim and Lee because "the parties entered into two separate agreements that formally established their relationship as arm's length, contracting parties, and not as fiduciaries. ...


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