Lazy M Ranch, Ltd. v. TXI Operations, LP, as Successor and Assignee of Texas Industries, Inc.

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-97-00687-CV

Lazy M Ranch, Ltd., Appellant

v.

TXI Operations, LP, as successor and assignee of Texas Industries, Inc., Appellee

FROM THE DISTRICT COURT OF LIBERTY COUNTY, 253RD JUDICIAL DISTRICT

NO. 53453, HONORABLE W. G. WOODS, JR., JUDGE PRESIDING

TXI Operations, LP ("TXI") sued Lazy M Ranch, Ltd. ("Lazy M") for specific

performance of a contract giving TXI an option to lease land for mining. (1) The trial court granted

TXI's motion for summary judgment, awarding TXI specific performance of the option provision.

Lazy M appeals the trial-court order. We will reverse the summary-judgment order and remand

the cause to the trial court.

THE CONTROVERSY

TXI wished to explore a portion of the Lazy M land for sand, gravel, and other

construction materials and to obtain an option right to mine the materials if prospects proved

favorable. In September 1995 the company began negotiations with Dr. George Morris, Jr., the

owner of Lazy M.

In February 1996 Dr. Morris informed TXI of the creation of Lazy M Ranch, Ltd.,

("Lazy M"), a limited partnership. Dr. Morris was president of Lazy M's sole general partner,

Lazy M Management, L.L.C. Ownership of the ranch had been transferred to the partnership.

At this time, Dr. Morris was suffering from a serious illness but continued to negotiate the lease

on behalf of Lazy M.

On April 1, 1996, TXI and Dr. Morris (representing Lazy M) executed a written

contract. The contract required TXI to pay Lazy M $2,000 for the right to explore by conducting

subsurface tests on a part of Lazy M land--1,669 acres specifically described in the contract by

metes and bounds. For the same consideration, the contract gave TXI an exclusive and

irrevocable option to lease 300 of the 1,669 acres to mine subsurface materials. To exercise

the option right, the contract required TXI to (1) give Lazy M written notice of its election within

six months of the April 1 contract and (2) tender $98,000 to Lazy M. TXI paid the required

$2,000 and began exploration under the contract.

Dr. Morris died in August 1996. On September 27, 1996, TXI attempted to

exercise its option by delivering the required written notice accompanied by a $98,000 bank check.

Dr. Morris's son, George Morris, III, who had succeeded his father as president of Lazy M

Management, L.L.C., refused to lease any of the land to TXI. He returned TXI's check with a

letter explaining that Lazy M would not lease the land as promised because TXI had breached the

contract by entering upon and testing Lazy M's land outside the 1,669 acres specified in the

contract. Morris further stated he believed TXI had unfairly procured the agreement by taking

advantage of the ailing Dr. Morris.

TXI sued Lazy M for specific performance of its obligation to give a lease. The

trial court granted TXI's summary-judgment motion and awarded TXI specific performance. Lazy

M brings four points of error: (1) there exists a genuine issue of material fact as to whether Dr.

Morris had the mental capacity to enter into a binding contract at the time the contract was

executed; (2) TXI materially breached the contract before attempting to exercise the option,

thereby excusing Lazy M from performance; (3) TXI is not entitled in equity to specific

performance because TXI had "unclean hands" in the transaction; and (4) Lazy M did not have

adequate notice or opportunity to respond to new arguments and additional grounds TXI raised

to support its motion for summary judgment.

A movant for summary judgment has the burden of showing its entitlement to

judgment as a matter of law. In deciding whether a disputed issue of material fact precludes

summary judgment, proof favorable to the nonmovant will be taken as true and every reasonable

inference will be indulged to resolve any doubt in favor of the nonmovant. Nixon v. Mr. Property

Management Co. , 690 S.W.2d 546, 548-49 (Tex. 1985).

Material Breach Excusing Lazy M from Performance

The parties do not dispute that TXI gave timely notice of its election to lease the

property described in the contract; they do not dispute that TXI tendered the required $98,000.

In its second point of error Lazy M contends the summary judgment is nevertheless erroneous

because the record contained genuine issues of material fact. These pertain to Lazy M's

affirmative defense that TXI materially breached the contract while Lazy M's obligation to deliver

a lease remained executory. See Brownlee v. Brownlee, 665 S.W.2d 111, 112 (Tex. 1984). A

party to a contract may elect to terminate the contract and be excused from performance of any

executory obligation if the other party repudiates the contract or commits a material breach. See

MJR Corp. v. B & B Vending Co. , 760 S.W.2d 4, 20-21 (Tex. App.--Dallas 1988, writ denied);

Corso v. Carr , 634 S.W.2d 804, 808 (Tex. App.--Fort Worth 1982, writ ref'd n.r.e.); Board of

Regents of University of Texas v. S & G Const. Co., 529 S.W.2d 90, 97 (Tex. Civ. App.--Austin

1975, writ ref'd n.r.e.).

In addition to pleading the foregoing defense, Lazy M urged the defense in

opposition to TXI's motion for summary judgment supported by the affidavit of George C.

Morris, III. The affidavit states as follows:

Contrary to the agreement, TXI personnel roamed throughout other parts of the

Ranch and conducted testing and coring outside of the area subject to the

agreement. Ranch personnel saw TXI conducting [tests] outside of the area subject

to the agreement. We found numerous core holes outside of [the area]. We

repeatedly objected to the continued violations. In the sand and gravel business,

the data from testing and coring is valuable. . . . TXI . . . stole valuable

information about the subsurface potential of the Ranch. . . . These breaches

occurred and had been communicated to TXI before TXI tendered the check and

notice of intent to exercise its option to lease.

Nothing in the summary-judgment record contradicts the facts set forth in the affidavit; they must

be taken as undisputed. The issue reduces to whether those facts show prima facie the "material"

breach necessary to the defense. We believe the undisputed facts show prima facie a "material"

breach.

It is generally said that breach of a "dependent" covenant of the contract may give

the non-breaching party an election to terminate the contract while breach of an "independent"

covenant will not; in the latter case, the non-breaching party may only recover for the breach in

a separate cause of action. See, e.g., Investors' Utility Corp. v. Challacombe , 39 S.W.2d 175,

178 (Tex. Civ. App.--Waco 1930, no writ). It is also said that whether a covenant is dependent

or independent depends on the parties' intention at the time the contract is made. See, e.g., John

R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80, 86 (Tex. App.--Houston [14th Dist.] 1996, writ

denied) . The parties' intention is, however, not always discernable from the contract language

and the parties often neglect entirely to consider whether they intend a particular covenant to be

dependent or independent. For that reason, "it is better to drop any talk about the intention of the

parties when they express none and rest doctrines of [constructive dependence] solely on their

fairness--a quite sufficient basis." 6 Williston on Contracts § 825 (3d ed. 1962).

In the present case, the parties' contract expressly limits the ranch area that TXI

would be permitted to explore. By agreeing to this restriction, TXI impliedly covenanted not to

explore outside the restricted area. Nothing in the contract language expressly indicates, however,

whether the parties intended the implied covenant to be dependent or independent. We turn then

to the question of fairness as suggested by Williston.

If the implied covenant is held to be dependent, TXI will forfeit its right to an

option. Forfeitures will be avoided unless contract language admits of no other construction or

results in a construction that is unreasonable, inequitable, or oppressive. Reilly v. Rangers

Management, Inc. , 727 S.W.2d 527, 530 (Tex. 1987). In this connection, several factors may be

considered.

One factor is the extent to which the non-breaching party will be deprived of the

benefit it reasonably could have anticipated had the breach not occurred. "The less the non-breaching party is deprived of the expected benefits, the less the material breach." Hernandez v.

Gulf Group Lloyds , 875 S.W.2d 691, 693 (Tex. 1994). In the present case, it is not shown that

Lazy M is deprived of any benefit by reason of the breach; the summary-judgment record shows

without contradiction, however, that the breach caused injury to Lazy M.

The following factors also suggest that it would be unreasonable, inequitable, and

oppressive to regard the breach as pertaining merely to an independent covenant:

(1) the extent to which the injured party can be adequately compensated for the part

of the benefit of which he will be deprived;

* * *

(3) the likelihood that the party failing to perform will cure his failure, taking into

account all of the circumstances including any reasonable assurances; and

(4) the extent to which the behavior of the party failing to perform comports with

standards of good faith and fair dealing.

See Restatement of Contracts (Second) § 241(a) (1981); Gulf Group Lloyds , 875 S.W.2d at 693 .

The Morris affidavit shows prima facie that TXI's trespasses were intentional and

repeated over several protests by Lazy M. In addition to injuries to the surface of land outside

the restricted area, TXI obtained information about the geology of the subsurface of that

land--information that belonged to Lazy M and information that TXI acquired in violation of the

contract and without any right whatever. This is distinctly unlike a simple case of surface trespass

and the repair of any surface injury for which reasonable compensation may be calculated and

paid. The record does not show that TXI made any reasonable assurances regarding a cure for

its wrongs or the injuries it inflicted on Lazy M, including compensation for any non-tangible

injuries resulting from the sub-surface information it obtained. The factor of good faith and fair

dealing weighs most heavily against TXI in light of its repeated testing of areas outside the area

specified in the contract over Lazy M's repeated objections. Nothing in the record refutes

Morris's affidavit declaration that "[i]n the sand and gravel business, the data from testing and

coring is valuable" and that TXI "stole valuable information about the subsurface potential of the

ranch." In light of these factors, we believe it would be inequitable, unreasonable, and oppressive

to construe as an independent covenant TXI's implied covenant not to explore outside the area

delimited in the contract.

TXI contends that even if its breach was material, Lazy M waived its right to

terminate the contract by allowing TXI to continue testing after the breach. (2) See Chilton Ins. Co.

v. Payton Pate Enters., Inc., 930 S.W.2d 877, 887-88 (Tex. App.--San Antonio 1996, writ

denied) ("[T]reating a contract as continuing, after a breach, deprives the nonbreaching party of

any excuse for terminating their own performance."). It is not shown in the record, however, that

Lazy M treated the contract as continuing. Neither party explains in the record when the alleged

trespasses occurred or when Lazy M voiced its objections to them. The record does not show that

Lazy M failed to voice its objections within a reasonable period of time or that there was the type

of delay between the time Lazy M discovered the breach and the time it repudiated the contract

such that Lazy M waived as a matter of law any right to end the contract.

For the foregoing reasons, we sustain Lazy M's second point of error.

Specific Performance

Even if TXI's breach was not a material breach of a dependent covenant, the record

does not demonstrate that TXI was entitled as a matter of law to the equitable remedy of specific

performance:

In the language of Lord Selborne: "the principle which is material to be considered

is, that the court gives specific performance instead of damages only when it can

by that means do more perfect and complete justice. " The foundation and measure

of the jurisdiction is the desire to do justice, which the legal remedy would fail to

give. This justice is primarily due to the plaintiff, but not exclusively, for the

equities of the defendant are also protected. Specific performance is, therefore, a

conscious attempt on the part of the court to do complete justice to both the parties

with respect to all the judicial relations growing out of the contract between them.

4 Pomeroy's Equity Jurisprudence § 1401 at 1033 (5th ed. 1941) (emphasis in original).

Lazy M argues that even if its failure to honor the option agreement entitled TXI

to some relief, perhaps damages, TXI is not entitled to the equitable remedy of specific

performance because it comes to the court with "unclean hands." Under the doctrine of unclean

hands, a court may refuse to grant equitable relief to a plaintiff who has been guilty of unlawful

or inequitable conduct regarding the issue in dispute. See Right to Life Advocates, Inc. v. Aaron

Women's Clinic , 737 S.W.2d 564, 571 (Tex. App.--Houston [14th Dist.] 1987, writ denied).

TXI contends that the doctrine of "unclean hands" cannot apply in the present

circumstances. According to TXI, even if it breached the lease by trespassing outside the

restricted area, its inequitable conduct was unrelated to the issue in dispute. See Axelson v.

McIlhany , 798 S.W.2d 550, 556 (Tex. 1990) (doctrine of unclean hands held inapplicable where

inequitable conduct unrelated to relief sought by petitioners).

We do not believe TXI's trespass was unrelated to TXI's attempt to enforce the

contract. We agree the doctrine of unclean hands does not apply when a party is guilty of

inequitable conduct with regard to a transaction separate from the one in dispute. First Coppell

Bank v. Smith , 742 S.W.2d 454, 464 (Tex. App.--Dallas 1987, no writ). But in this case, the

issue in dispute is whether TXI is entitled to enforce rights embodied in the very contract that TXI

allegedly violated.

The equitable maxim as to clean hands "is confined to misconduct in regard to , or

at all events connected with , the matter in litigation, so that it has in some measure

affected the equitable relations subsisting between the two parties, and arising out

of the transaction; it does not extend to any misconduct, however gross, which is

un connected with the matter in litigation, and with which the opposite party has no

concern .

* * *

The rule does not go so far as to prohibit a court of equity from giving its aid to a

bad or faithless man or a criminal. The dirt upon his hands must be his bad

conduct in the transaction complained of. If he is not guilty of inequitable conduct

toward the defendant in that transaction, his hands are as clean as the court can

require.

2 Pomeroy's Equity Jurisprudence §399 at 95-96 (5th ed. 1941) (emphasis added). It may not

reasonably be contended that TXI's alleged misconduct did not grow out of or is unconnected to

the lease-option transaction, or that it is a matter with which Lazy M has no concern. We hold

accordingly.

Finally, the summary-judgment record is not sufficiently developed so as to permit

a court to determine as a matter of law a set of facts that would entitle TXI to specific performance

in equity. When a trial court purports to make a decision without a sufficient factual basis, it is

said that the court abuses its discretion. See Dallas General Drivers v. Wamix, Inc. of Dallas , 295

S.W.2d 873, 878 (Tex. 1956); Powers v. Temple Trust Co. , 78 S.W.2d 951, 952 (Tex. 1935);

Haden Employees' Ass'n v. Lovett , 122 S.W.2d 230, 233 (Tex. Civ. App.--Galveston 1938, writ

ref'd). We hold accordingly and sustain Lazy M's third point of error.

The points of error discussed above are dispositive of the appeal.

We reverse the summary judgment and remand the cause to the trial court.

John Powers, Justice

Before Justices Powers, Kidd and B. A. Smith

Reversed and Remanded

Filed: September 24, 1998

Publish

1. TXI Operations, LP, is successor and assignee of Texas Industries, Inc.

2. TXI also asserts it cured any alleged breach by ceasing its trespassing. According to TXI,

Lazy M "asserts that it complained of [the] alleged testing and that such testing was thereafter

ceased." TXI refers us to Morris's affidavit. We find in Morris's affidavit no assertion that TXI

ceased its unauthorized testing. To this extent TXI misstates the record.

ispute. See Right to Life Advocates, Inc. v. Aaron

Women's Clinic , 737 S.W.2d 564, 571 (Tex. App.--Houston [14th Dist.] 1987, writ denied).

TXI contends that the doctrine of "unclean hands" cannot apply in the present

circumstances. According to TXI, even if it breached the lease by trespassing outside the

restricted area, its inequitable conduct was unrelated to the issue in dispute. See Axelson v.

McIlhany , 798 S.W.2d 550, 556 (Tex. 1990) (doctrine of unclean hands held inapplicable where

inequitable conduct unrelated to relief sought by petitioners).

We do not believe TXI's trespass was unrelated to TXI's attempt to enforce the

contract. We agree the doctrine of unclean hands does not apply when a party is guilty of

inequitable conduct with regard to a transaction separate from the one in dispute. First Coppell

Bank v. Smith , 742 S.W.2d 454, 464 (Tex. App.--Dallas 1987, no writ). But in this case, the

issue in dispute is whether TXI is entitled to enforce rights embodied in the very contract that TXI

allegedly violated.

The equitable maxim as to clean hands "is confined to misconduct in regard to , or

at all events connected with , the matter in litigation, so that it has in some measure

affected the equitable relations subsisting between the two parties, and arising out

of the transaction; it does not extend to any misconduct, however gross, which is

un connected with the matter in litigation, and with which the opposite party has no

concern .

* * *

The rule does not go so far as to prohibit a court of equity from giving its aid to a

bad or faithless man or a criminal. The dirt upon his hands must