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AES Valves, LLC v. Kobi International, Inc.

Court of Appeals of Texas, First District

October 31, 2019

AES VALVES, LLC AND IES INTERNATIONAL ENERGY SERVICES, LTD., Appellants
v.
KOBI INTERNATIONAL, INC. D/B/A KOBI GROUP, Appellee

          On Appeal from the 125th District Court Harris County, Texas, Trial Court Case No. 2016-61999

          Panel consists of Chief Justice Radack and Justices Goodman and Countiss.

          MEMORANDUM OPINION

          Sherry Radack Chief Justice.

         In this restricted appeal, appellants, AES Valves, LLC ("AES") and IES International Energy Services, Ltd. ("IES"), argue that the trial court improperly granted a no-answer default judgment in favor of appellee, Kobi International, Inc. d/b/a Kobi Group ("Kobi"). In three issues, appellants argue that (1) the trial court improperly granted a default judgment and (2) legally and factually insufficient evidence supports the award of damages, attorney's fees, and prejudgment interest.

         We affirm in part and reverse and remand in part.

         Background

         In 2012, Kobi and AES entered into a $1.25 million purchase order for custom plug valves for a pipeline project in Peru. Although AES delivered the plug valves, Kobi alleged that the plug valves were defective and inoperable for the project. Despite AES and IES's[1] assurances that they would repair the plug valves, Kobi alleged that the plug valves were never adequately repaired. Kobi sued appellants for breach of contract, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, fraud, and violations of the Deceptive Trade Practices Act ("DTPA"). As relevant here, Kobi sought economic damages, treble damages under the DTPA, [2]exemplary damages for fraud, and attorney's fees under section 38.001(8) of the Texas Civil Practice and Remedies Code and section 17.50(d) of the DTPA. Kobi also alleged that AES and IES were jointly and severally liable pursuant to alter ego theories.

         Kobi attempted to serve Robert Schmidt, the president and registered agent of both AES and IES, multiple times with a private process server and a constable. When those attempts at service were unsuccessful, Kobi filed a motion for substituted service.[3] Kobi asserted that it used reasonable diligence to find the registered agent at appellants' registered office, and Kobi attached the process server's affidavit, stating that she could not locate Robert Schmidt. Kobi requested that the trial court allow Kobi to serve the secretary of state, as appellants' agent for service of process.[4]

         On December 27, 2016, the trial court granted Kobi's motion for substituted service, allowing service of process on appellants in one of five ways, including serving the Texas Secretary of State, as agent for appellants.

         After appellants failed to answer, Kobi sought a default judgment on liability, asserting that it completed substituted service by affixing "a true copy of the citation and a copy of Plaintiff's First Amended Petition to the front door of the usual place of abode of Defendants AES Valves, LLC's and IES International Energy Services, Ltd.'s registered agent, Robert Schmidt, 13714 Vinery, Cypress, TX 77429." Kobi stated that it received returns of service for both AES and IES on February 16, 2017. Kobi asserted that because AES and IES had not answered, it was entitled to a default judgment on liability and a hearing to establish the amount of damages.

         On April 25, 2017, the trial court granted the default judgment on liability. Kobi then moved for a default judgment on damages, asserting that it was entitled to recover damages as stated in its first amended petition. Kobi sought economic damages of $8, 347, 015.78 via its DTPA, fraud, and other causes of actions, and it sought treble damages of $16, 694, 031.56 pursuant to the DTPA. Alternatively, Kobi sought exemplary damages of $33, 388, 063.12 under its fraud cause of action and section 41.003 of the Texas Civil Practice and Remedies Code.[5] Kobi also sought attorney's fees under section 38.001(8) of the Texas Civil Practice and Remedies Code and under section 17.50 of the DTPA.

         After a hearing on its motion for default judgment on damages on July 13, 2017, [6] Kobi filed a supplement to its motion, asserting that the trial court requested that Kobi submit a revised proposed order that awarded treble damages but not punitive damages and awarded attorney's fees incurred on a contingency basis. The trial court signed a July 26, 2017 final judgment, which awarded Kobi a lump sum of $25, 041, 047.34 in damages, $400, 640.00 in attorney's fees, and prejudgment interest. The trial court's final judgment further provided that AES and IES are jointly and severally liable to Kobi for all amounts in the judgment.

         On January 25, 2018, appellants filed a notice of restricted appeal.

         Service of Process

         In their first issue, appellants argue that the default judgment cannot stand because they were not properly served.

         A. Standard of Review

         To succeed on a restricted appeal, a party is required, among other things, [7]to show that error is apparent on the face of the record. Tex.R.App.P. 30; Barker CATV Constr., Inc. v. Ampro, Inc., 989 S.W.2d 789, 791 (Tex. App.-Houston [1st Dist.] 1999, no pet.); see Primate Constr., Inc. v. Silver, 884 S.W.2d 151, 152 (Tex. 1994). The face of the record consists of all the papers on file in the appeal, including any reporter's record. Osteen v. Osteen, 38 S.W.3d 809, 813 (Tex. App.-Houston [14th Dist.] 2001, no pet.). A review of a restricted appeal includes review of the legal and factual sufficiency of the evidence, including the evidence of damages. Norman Commc'ns v. Tex. Eastman Co., 955 S.W.2d 269 270 (Tex. 1997); Regions Bank v. Centerpoint Apartments, 290 S.W.3d 510, 512 (Tex. App.-Amarillo 2009, no pet.).

         A restricted appeal is a direct attack. Barker CATV, 989 S.W.2d at 792; see Primate, 884 S.W.2d at 152. The record must affirmatively show strict compliance with the rules for service of citation in order for a default judgment to withstand direct attack. Barker CATV, 989 S.W.2d at 792; Primate, 884 S.W.2d at 152. If strict compliance is not affirmatively shown, the service of process is invalid and has no effect. Barker CATV, 989 S.W.2d at 792. There are no presumptions in favor of valid issuance, service, or return of citation in the face of a restricted appeal attacking a default judgment. See Primate, 884 S.W.2d at 152.

         When, as here, the defendants' registered agent cannot be found at its registered office with reasonable diligence, the plaintiff is permitted to seek substituted service on the secretary of state. See Tex. Bus. Orgs. Code § 5.251(1)(B). Service of process on the secretary of state is accomplished by delivering duplicate copies of the process and any required fee. See id. § 5.252. Thereafter, the secretary of state shall forward the process to the entity's most recent address on file with the secretary of state by certified mail, return receipt requested. See id. § 5.253. The secretary may issue a certificate of service known as a Whitney Certificate. See Wright Bros. Energy, Inc. v. Krough, 67 S.W.3d 271, n.1 (Tex. App.-Houston [1st Dist.] 2001, no pet.) (stating that "Whitney certificate" is issued by secretary of state when it has received two copies of petition and citation and has forwarded one copy of each to defendant) (citing Whitney v. L & L Realty Corp., 500 S.W.2d 94, 95-96 (Tex. 1973)). "Absent fraud or mistake, the Secretary of State's certificate is conclusive evidence that the Secretary of State, as agent of [the defendant], received service of process for [the defendant] and forwarded the service as required by the statute." Capitol Brick, Inc. v. Fleming Mfg. Co., 722 S.W.2d 399, 401 (Tex. 1986).

         B.Analy ...


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