Ovation Homes, Inc. and Leldon W. Shead v. Clark/Kyser Wholesale Lumber, Inc. and John Dunlap

Shead v. Clark/Kyser

IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,

AT AUSTIN

NO. 3-92-201-CV

OVATION HOMES, INC. AND LELDON W. SHEAD,

APPELLANTS

vs.

CLARK/KYSER WHOLESALE LUMBER, INC. AND JOHN DUNLAP,

APPELLEES

FROM THE DISTRICT COURT OF WILLIAMSON COUNTY, 26TH JUDICIAL DISTRICT

NO. 88-452-C, HONORABLE WILLIAM LOTT, JUDGE PRESIDING

PER CURIAM

This appeal by writ of error involves actions for breach of contract and misapplying

trust funds based on a construction contract. See Tex. Prop. Code Ann. §§ 162.001 -.032 (West

1984 & Supp. 1993) ("Code"). Appellant Ovation Homes, Inc., contracted to build a house for

appellee John Dunlap. Appellee Clark/Kyser Wholesale Lumber, Inc., supplied lumber to

Ovation. After Ovation failed to pay for the lumber, Clark/Kyser sued Ovation on its contract

and sued Dunlap on its materialmen's lien. Dunlap cross-claimed against Ovation and filed a

third-party petition against Ovation's president, Leldon Shead. In succeeding pleadings,

Clark/Kyser named Shead as a defendant and omitted Dunlap as a defendant. Neither Ovation

nor Shead appeared for trial, though both had filed answers in the case. After a bench trial, the

court rendered judgment against Ovation and Shead and in favor of both Clark/Kyser and Dunlap.

Ovation and Shead appeal by writ of error.

Appellants Ovation and Shead assert three points of error on appeal. Each of these

points is multifarious because it embraces more than one specific ground of error. Clancy v. Zale

Corp. , 705 S.W.2d 820, 823 (Tex. App.--Dallas 1986, writ ref'd n.r.e.). Although we may

disregard multifarious points of error, we will nevertheless address each one. Id. at 824 . We will

affirm the trial court's judgment.

In point of error one, appellants allege that several errors occurred in the trial court

which entitle them to a new trial. Appellants first argue that, under Rule of Civil Procedure 245,

once a case has been set for trial, only the trial court, and not a party, can initiate a resetting.

Rule 245 provides:

The Court may set contested cases on written request of any party, or on the

court's own motion, with reasonable notice of not less than forty-five days to the

parties of a first setting for trial, or by agreement of the parties; provided,

however, that when a case previously has been set for trial, the Court may reset

said contested case to a later date on any reasonable notice to the parties or by

agreement of the parties.

Tex. R. Civ. P. 245.

Appellants argue that the court had previously set the case for trial and that

Dunlap's attorney Randall Grimes "reset" the case for the later trial date, on which appellants

defaulted. The record shows that the case was set for trial the week of August 5, 1991. The

transcript contains a copy of a letter dated August 7, 1991, that Grimes sent appellants' attorney

Elden Haugen. In the letter, Grimes advises Haugen that the case has been set for jury trial on

Monday, September 16, 1991; Grimes requests Haugen to tell him if his schedule conflicts with

this date. The record does not show that Grimes obtained the September 16th resetting. The

record shows no more than that the trial court, as authorized by Rule 245, reset the case to

September 16th. No error occurred in the manner by which the trial date was set.

Appellants next claim that the record shows error because notice of the resetting

was sent to the wrong address. In April 1991, appellants' attorney Haugen filed a court-ordered

declaration with the clerk showing his mailing address to be "Box 200850; Austin, Texas 78720."

At the top of his letter notifying Haugen of the trial setting, Dunlap's attorney Grimes lists

Haugen's address as "Box 200,850; Austin, Texas 78720;" next to and beneath this address are

the notations "CERTIFIED MAIL/RETURN RECEIPT REQUESTED," and "DUPLICATE

ORIGINAL SENT BY FIRST CLASS MAIL."

At trial, Grimes introduced in evidence the envelope he sent to Haugen by certified

mail. The envelope is addressed to Haugen at "Box 200,850; Austin, Texas 78720."

Endorsements on the envelope show that the postal service attempted delivery several times before

returning the envelope. A different endorsement on the envelope reads, "Returned to

Sender/Unclaimed." When an envelope is returned "unclaimed," the notice the envelope

contained is sufficient if it is apparent that the address was valid and could be located by the postal

service. Wright v. Wentzel , 749 S.W.2d 228, 232 (Tex. App.--Houston [1st Dist.] 1988, no writ);

see Michael A. Pohl & David Hittner, Judgments by Default in Texas , 37 Sw. L.J. 421 , 428

(1983).

Appellants admit that the record shows that the notice of the trial setting was sent

to Haugen at Box 200,850, but argue that adding the comma to Haugen's box number produced

a materially incorrect address. We fail to see how adding this comma could have confused or

misled the postal service. The face of the record does not demonstrate that notice of the resetting

was sent to the wrong address. The record instead provides some evidence that Grimes

adequately notified Haugen of the trial setting.

Appellants last argue that error appears on the face of the record because appellees

failed to certify the address of appellants' attorney to the clerk and the clerk consequently mailed

the notice of judgment to an incorrect address. See Tex. R. Civ. P. 239a; see also Tex. R. Civ.

P. 306a(3); Tex. R. App. P. 5(b)(3). Rule 239a requires the party taking a default judgment to

certify to the clerk the last known mailing address of the party against whom judgment is

rendered. The transcript in this cause does not contain this certificate. The rule also requires the

clerk to mail written notice to the party suffering the default judgment at the address shown in the

certificate. Rule 239a.

Haugen had filed in April 1991 his court-ordered declaration stating both a

residential and a mailing address. The clerk nevertheless in October sent the notice of default

judgment to Haugen at a different address. Though it is not entirely clear from the record, this

notice appears to have been returned. Appellant Shead testified at a post-judgment hearing that

he had no notice of the default judgment until January 23, 1992.

On appeal by writ of error, appellants are limited to showing the invalidity of the

judgment by the papers on file in the case. McEwen v. Harrison , 345 S.W.2d 706, 710-11 (Tex.

1961). The purpose of Rule 239a is to give defendants notice of a default judgment rendered

against them so they can timely file a motion for new trial or an appeal. The rule is designed as

an administrative convenience for the parties. Long v. McDermott , 813 S.W.2d 622, 624 (Tex.

App.--Houston [1st Dist.] 1991, no writ); Bloom v. Bloom , 767 S.W.2d 463, 468 (Tex. App.--San

Antonio 1989, writ denied). The error appellants attack is not one that would invalidate the

judgment; rather, appellants seek to reverse a judgment because of something occurring after it

was rendered. Grayson Fire Extinguisher Co. v. Jackson , 566 S.W.2d 321, 322 (Tex. Civ.

App.--Dallas 1978, writ ref'd n.r.e.). Noncompliance with Rule 239a is not, therefore, reversible

error on appeal by writ of error. Appellants' remedy is to file a bill of review. Long , 813

S.W.2d at 624 ; Bloom , 767 S.W.2d at 468 ; Grayson Fire Extinguisher Co. , 566 S.W.2d at 322-23 . We overrule point one.

In point of error two, appellants contend that they had no notice of the pleadings

on which the trial court rendered judgment. Appellants argue first that they did not receive actual

notice of Clark/Kyser's second amended original petition. Clark/Kyser's attorney certified at the

end of this petition that he sent a copy by certified mail to Elden Haugen at "P.O. Box 200850,

Austin, Texas 78720." At trial, the envelope sent to Haugen containing the petition was admitted

in evidence. The envelope is addressed to Haugen at "P.O. Box 200850; Austin, TX 78720;" a

certified mail number appears on the envelope. One endorsement on the envelope shows that

delivery was attempted twice before the letter was returned. Another endorsement shows that the

envelope was returned "unclaimed."

Again, the rule applies that a notice is sufficient when the envelope containing it

is properly addressed but returned unclaimed. Wright , 749 S.W.2d at 232 . In addition, evidence

of a certified letter, addressed correctly but returned unclaimed, does not overcome the

presumption of service created by a certificate of service. Cronen v. City of Pasadena , 835

S.W.2d 206, 209 (Tex. App.--Houston [1st Dist.] 1992, no writ); see Tex. R. Civ. P. 21a. The

address used to notify Haugen was the same one he had supplied the trial court. We determine

that Clark/Kyser afforded appellants adequate notice of its second amended original petition.

Appellants next argue that no proof of service exists for Dunlap's first amended

"cross-claim and cross-action" because the certificate of service is inadequate. Beneath his

signature on the pleading, Dunlap's attorney Randall Grimes provided this certificate of service:

"By my signature above, I certify that a true copy of the pleading was served on all other counsel

of record in accordance with the Texas Rules of Civil Procedure on the 11 day of July, 1991."

Appellants claim that the certificate fails to (1) specify that it was sent certified

mail, to Haugen, at a particular address; (2) identify the pleading; (3) contain Grimes' signature;

and (4) specify the rule service accorded with. Texas Rule of Civil Procedure 21a requires the

attorney of record to certify that he has served notice in compliance with the rule "in writing over

signature and on the filed instrument." See also Tex. R. Civ. P. 21. Rule 21a further allows a

certificate by an attorney of record showing service of a notice to provide prima-facie evidence

of service.

Grimes placed his certificate of service immediately beneath his signature on the

pleading. By doing so, he sufficiently identified the pleading served. Grimes also expressly

incorporated his signature on the pleading into his certificate. Because Rule 21a sets the general

standard for methods of service and expressly applies to pleadings required to be served under

Rule 21, Grimes' statement that he served counsel "in accordance with the Texas Rules of Civil

Procedure" could not have misled the trial court and is equivalent to certifying compliance with

"this rule." See Compusolve, Inc. v. Urban Eng'g, Inc. , 799 S.W.2d 374, 376-77 (Tex.

App.--Corpus Christi 1990, no writ) (certificate attached to proper document was not fatally

defective for misnaming the document served). Rule 21a simply does not require the other

specific information for which appellants contend. Krchnak v. Fulton , 759 S.W.2d 524, 528

(Tex. App.--Amarillo 1988, writ denied) (Rules 21a and 166a(c) do not require notice of motion

for summary judgment to be given to opposing counsel); Hurt v. Bays , 537 S.W.2d 139, 140-41

(Tex. Civ. App.--Austin 1976, writ ref'd n.r.e.) (Rule 21a does not require attorney to certify that

the address where notice was served was the "last known address"). Grimes' certificate of service

qualified under Rules 21 and 21a, and provides prima-facie evidence of service under Rule 21a.

Appellants also argue that the pleadings failed to give adequate notice of the

elements of the actions and the relief sought. Appellants first point out that Dunlap did not attach

the contract and draw schedule to his first amended cross-claim. A pleading setting out a claim

for relief must give a short statement of the cause of action sufficient to give fair notice of the

claim. Tex. R. Civ. P. 47. Fair notice requires the pleader to communicate the elements of the

cause and the relief sought with reasonable certainty; it does not require the pleader to set out the

evidence supporting his asserted cause. Stoner v. Thompson , 578 S.W.2d 679, 683 (Tex. 1979);

Edwards Feed Mill, Inc. v. Johnson , 311 S.W.2d 232, 234 (Tex. 1958). In addition, Rule of

Civil Procedure 59 does not require these documents to be attached to the pleadings. Tex. R. Civ.

P. 59.

In his first amended cross-claim, Dunlap articulated the elements of actions for

breach of contract and for misapplying trust funds. See Tex. Prop. Code Ann. §§ 162.001 -.032

(West 1984 & Supp. 1993). The text of the contract and draw schedule merely provide evidence

to support the elements of these causes. The fair notice that Dunlap's pleadings must supply did

not extend to this evidence.

Appellants' claim that Dunlap failed to allege the basis of Shead's individual

liability is incorrect: the pleading adequately charges Shead with liability for breach of contract

on the basis of piercing Ovation's corporate veil and with liability for misapplying trust funds.

See Code §§ 162.001-.031(a) (West 1984 & Supp. 1993). Any failure by Dunlap to plead the

amount of trust funds Shead allegedly misapplied is of no effect as the trial court granted Dunlap

recovery only for breach of contract. See Tex. R. Civ. P. 301. Dunlap's request for reasonable

and necessary attorney's fees was sufficient to authorize an award of fees on appeal. Ledisco Fin.

Servs., Inc. v. Viracola , 533 S.W.2d 951, 958 (Tex. Civ. App.--Texarkana 1976, no writ).

Appellants also claim that Clark/Kyser's second amended petition fails to provide

exhibits showing the materials sold Ovation, fails to provide dates of such sales, and fails to attach

the construction contract showing payments to Shead. Clark/Kyser was not required to plead or

attach these evidentiary matters. Tex. R. Civ. P. 59; Edwards Feed Mill, Inc. , 311 S.W.2d at

234 .

Appellants last contend that Clark/Kyser violated Rules of Civil Procedure 162 and

163 when it took a non-suit against Dunlap at trial. Although Clark/Kyser moved to non-suit

Dunlap at trial, Dunlap was effectively dismissed as a defendant when Clark/Kyser omitted

Dunlap from its second amended original petition. Hatley v. Schmidt , 471 S.W.2d 440, 441 (Tex.

Civ. App.--San Antonio 1971, writ ref'd n.r.e.). As discussed above, appellants were notified of

this pleading. Clark/Kyser's non-suit of Dunlap did not release a principal obligor in violation

of Rule 163. Dunlap remained in the suit as cross-plaintiff and cross-defendant against Ovation

and as cross-plaintiff against Shead. We overrule point two.

In point of error three, appellants contest the legal and factual sufficiency of the

evidence to support the judgment against them. Appellants first dispute the sufficiency of the

proof of proper service of citation and other documents, claiming that no party asked the court

to judicially notice its file. The trial court was authorized, however, to take judicial notice of its

records on its own motion. Tex. R. Civ. Evid. 201; Gardner v. Martin , 345 S.W.2d 274, 276

(Tex. 1961).

Appellant Shead next attacks the sufficiency of the evidence to support the judgment

for Clark/Kyser against him. Clark/Kyser pleaded causes of action against Shead individually for

breach of contract based on piercing the corporate veil and for misapplying trust funds. See Code,

§§ 162.001-.032 (West 1984 & Supp. 1993). The judgment does not state on which basis it was

rendered. Shead answered Dunlap's third-party petition, but he never responded to Clark/Kyser's

pleadings against him. By failing to answer Clark/Kyser's pleadings, Shead allowed Clark/Kyser

to obtain a judgment nihil dicit against him. The judgment nihil dicit constitutes Shead's

admission of the facts properly pleaded and his confession of judgment. Stoner , 578 S.W.2d at

682 ; O'Quinn v. Tate , 187 S.W.2d 241, 245 (Tex. Civ. App.--Texarkana 1945, writ ref'd).

Clark/Kyser's pleadings gave Shead fair notice of its causes of action. We discern no fundamental

error of proof that would void the judgment for Clark/Kyser against Shead. O'Quinn , 187

S.W.2d at 245 .

Ovation and Shead each challenge the sufficiency of the evidence to support

Dunlap's recovery against them. The trial court rendered judgment for Dunlap against Ovation

and Shead on the basis of breach of contract. To obtain a default judgment against Ovation and

Shead, who had answered, Dunlap was required to prove each controverted issue in the case.

Frymire Eng'g Co. v. Grantham , 524 S.W.2d 680, 681 (Tex. 1975). To obtain reversal of the

post-answer default judgment, Ovation and Shead must, among other things, show error apparent

from the face of the record; the face of the record includes the statement of facts. DSC Fin. Corp.

v. Moffitt , 815 S.W.2d 551, 551 (Tex. 1991). The evidence contained in the statement of facts

must support the post-answer default judgment. We review the sufficiency of the evidence by the

same standards that apply to ordinary appeals. Wright , 749 S.W.2d at 230, 233 ; Mountain Corp.

v. Rose , 737 S.W.2d 22, 24 (Tex. App.--El Paso 1987, writ denied); see generally Gunn v.

Cavanaugh , 391 S.W.2d 723, 724 (Tex. 1965) (writ of error affords review of the same scope

as an appeal).

Because the trial court filed no findings of fact or conclusions of law, we infer that

the court made all findings necessary to support its judgment. Burnett v. Motyka , 610 S.W.2d

735, 736 (Tex. 1980); Lassiter v. Bliss , 559 S.W.2d 353, 358 (Tex. 1978), overruled on other

grounds , Cherne Indus., Inc. v. Magallanes , 763 S.W.2d 768 (Tex. 1989). We review

appellants' no-evidence challenge by considering only the evidence and inferences tending to

support the implied findings and disregarding all evidence and inferences to the contrary. If any

probative evidence supports the findings, they must be upheld. Responsive Terminal Sys., Inc.

v. Boy Scouts of Am., 774 S.W.2d 666, 668 (Tex. 1989); Southern States Transp., Inc. v. State ,

774 S.W.2d 639, 640 (Tex. 1989). To review appellants' factual-sufficiency challenge, we

consider all the evidence and will set aside the findings only if the evidence supporting them is

so weak, or the evidence to the contrary so overwhelming, as to make them clearly wrong and

unjust. Cain v. Bain , 709 S.W.2d 175, 176 (Tex. 1986); In re King's Estate , 244 S.W.2d 660,

661 (Tex. 1951); West v. Watkins , 594 S.W.2d 800, 802 (Tex. Civ. App.--San Antonio 1980, writ

ref'd n.r.e.).

We first consider the sufficiency of the evidence to support the judgment against

Ovation. Dunlap testified at trial that he and Ovation executed a contract under which Ovation

was to build a house for Dunlap for $106,650. The contract was admitted in evidence; it was

signed on July 10, 1987, by Dunlap and Ovation, through its president Shead. As the building

progressed, Ovation and Dunlap agreed to changes in the contract, such as adding square footage

and altering a room. Dunlap testified that he and Shead signed a change order provision

incorporating the changes and increasing the contract price to $109,610.

About four months after beginning work on the house, Shead told Dunlap that he

would not finish it. Dunlap stated that up to that time he had paid Shead over $57,000; although

Shead had not paid certain suppliers and subcontractors, Shead would not give Dunlap records

showing outstanding bills or account for any of the money. Dunlap testified that he essentially

took Ovation's place as general contractor and finished the house himself. Dunlap's total cost to

build the house was $153,784.

Dunlap's testimony of the change orders was some evidence of their existence and

of the increased price agreed on to build the house. Although Dunlap pleaded only the original

and not the final contract price, he fairly apprised Ovation of both his action for breach of contract

and the reasonable cost of completing the work.

Ovation contends that no draw schedule was proven at trial. The contract provided

for progress payments during the course of construction; under its terms, Ovation was to present

Dunlap with requests to draw payment as he completed portions of the work. The contract also

required Dunlap to obtain an interim construction loan from which he would make the progress

payments. Dunlap testified that the draws were established to reimburse Shead after he had paid

the subcontractors and that the draw request forms required Shead to verify that he had paid the

bills for which he requested reimbursement.

Dunlap stated that he obtained the interim construction loan and that he made the

first draw on August 4, 1987, for $5,000; the second draw on September 17th for $16,400; and

the third draw on October 23rd for $36,675. On November 13th, Shead announced that he would

not continue the work. Dunlap's testimony is both legally and factually sufficient to prove the

dates and amounts of the draws.

Dunlap also testified that after the breach he identified and paid three major

subcontractors whom Shead had not paid in spite of having obtained draws by representing the

contrary. Dunlap subsequently identified a number of other subcontractors whom Shead had

similarly not paid from the draws. Dunlap itemized the amounts he paid for the work already

done plus the work to complete the house. The difference between the sum of these items and the

contract price for building the house was slightly larger than the amount the trial court awarded

as damages for the breach. Dunlap proved, by legally and factually sufficient evidence, both his

cause of action for breach of contract and the amount of his damages. Ovation's claims that

Dunlap's pleadings are inadequate affect only matters of evidence and are without merit.

We consider next the sufficiency of the evidence to support the judgment for

Dunlap against Shead. The trial court rendered judgment against Shead and Ovation jointly and

severally for breach of contract. This judgment corresponds to Dunlap's pleading that Shead was

individually liable for the breach of contract based on piercing the corporate veil. Shead argues

that Dunlap presented no evidence to justify piercing the corporate veil and holding Shead

individually liable.

Dunlap pleaded several bases for disregarding Ovation's corporate status, including

Ovation's existence as a sham that equity would not uphold. Courts will disregard the corporate

fiction on the basis of sham to perpetrate a fraud to prevent the corporate privilege from being

used for illegal, fraudulent, or unfair purposes. Matthews Constr. Co. v. Rosen , 796 S.W.2d 692,

693 (Tex. 1990); Castleberry v. Branscum , 721 S.W.2d 270, 273 (Tex. 1986). In determining

whether an entity's corporate status should be disregarded, the supreme court has looked for

evidence of both constructive fraud and a sham corporation that abuses the corporate privilege.

Castleberry , 721 S.W.2d at 275 . Constructive fraud requires the breach of a legal or equitable

duty that the law declares fraudulent because of its tendency to deceive, violate confidence, or

injure public interests. Id. at 273 .

Shead was serving as president of Ovation when Ovation contracted to build

Dunlap's house. The construction contract required Ovation to request, and Dunlap to make,

progress payments as Ovation completed phases of the building. Dunlap testified that he made

over $57,000 in draw payments to Shead before Shead defaulted on the contract. Chapter 162 of

the Property Code rendered these construction payments trust funds. Code, § 162.001 ( West

1984 ). Either Ovation, as the contractor, or Shead, as the officer of Ovation who received and

controlled the trust funds, became the trustee of the trust funds for the benefit of the

subcontractors and materialmen. Code, § 162.002 ( West 1984 ). A trustee who diverts trust

funds, intending to deprive the beneficiaries of them, has misapplied the trust funds, and an action

may be brought against the trustee. Code, §§ 162.005, .031 (West Supp. 1993).

Dunlap testified that the draw account set up under the construction contract was

to be used only for building his house. Dunlap also stated that before Shead obtained each draw

from him, Shead verified that he had paid the subcontractors and materialmen for their work on

the house to that point. Dunlap later examined all the bank records of the accounts into which the

draws were deposited. Dunlap testified that in examining Ovation's bank records, he discovered

that of the $57,625.00 Dunlap paid Shead to build his house, Shead spent $35,628.22 building it.

Shead's use of the remaining $22,000 included a $900 check written to his wife and substantial

amounts spent on a house that Shead was building for another person. Dunlap testified that after

Shead refused to finish the house, Dunlap borrowed money to reimburse the subcontractors who

had done work but not been paid from the draws. Dunlap then continued building the house as

his own general contractor.

Dunlap also testified that he believed that Ovation was not a valid corporation, that

it was a paper corporation, and that it had only one real employee. Dunlap did not think that

Ovation kept records. He stated that at one time Ovation hadn't paid its corporate taxes and that

at one point during 1990, Ovation had forfeited its corporate charter.

To determine that no evidence of sham to perpetrate a fraud exists, this testimony

would have to provide no reasonable ground from which a fact-finder could infer that Ovation

existed as a corporation in name only without substance and that Ovation, through Shead, acted

fraudulently. See Joske v. Irvine , 44 S.W. 1059, 1063 (Tex. 1898). Dunlap testified that Shead

diverted Dunlap's progress payments, money the Property Code considers trust funds to benefit

suppliers such as Clark/Kyser. Although Dunlap was not a statutory beneficiary of the trust

funds, he assumed Shead's obligations to the beneficiaries in order to finish the house Shead had

started. Dunlap's testimony provides some evidence of constructive fraud.

Dunlap's testimony that Ovation was a paper corporation rather than a valid

corporation and that it failed to maintain corporate records, while general, is nevertheless direct

evidence. Direct evidence of a vital fact is considered to be more than a scintilla. See Robert W.

Calvert, "No Evidence" and "Insufficient Evidence" Points of Error , 38 Tex. L. Rev. 361 , 363

(1960). From the evidence that Dunlap made all arrangements under the contract with Shead, that

Shead was Ovation's president, that Ovation only had one employee, and that Shead received and

disbursed the trust funds before refusing to continue the work, the fact-finder could reasonably

infer that Shead dominated Ovation's affairs. Indulging every reasonable inference in favor of

the trial court's judgment, we cannot say that no reasonable basis exists for the court to have

found some evidence of sham to perpetrate a fraud. See, e.g., Torregrossa v. Szelc , 603 S.W.2d

803, 804 (Tex. 1980). We therefore overrule point three.

We affirm the judgment of the trial court.

[Before Justices Powers, Kidd and B. A. Smith]

Affirmed

Filed: August 11, 1993

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