Computed Imaging Service, Inc./Fayette Memorial Hospital v. Fayette Memorial Hospital/Computed Imaging Service, Inc.

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-00-00322-CV

Computed Imaging Service, Inc./Fayette Memorial Hospital, Appellants

v.

Fayette Memorial Hospital/Computed Imaging Service, Inc., Appellees

FROM THE DISTRICT COURT OF FAYETTE COUNTY, 155TH JUDICIAL DISTRICT

NO. 96V-161, HONORABLE DAN R. BECK, JUDGE PRESIDING

Computed Imaging Service, Inc. ("CIS") sued Fayette Memorial Hospital

("Fayette") for breach of a medical equipment lease. Although a bench trial resulted in a judgment

that imposed liability on Fayette, CIS challenges the legal sufficiency of the evidence to support

findings regarding mitigation of damages and the calculation of prejudgment interest. Fayette also

appeals, contending that it proved its defense of novation as a matter of law. Finding no reversible

error on these issues, we will affirm the judgment of the district court.

Facts

In 1989, CIS, a company primarily involved in the sale, rental, and service of

medical diagnostic equipment, leased a computed tomographic scanner ("CT scanner" "CIS

scanner" or "the scanner") and accompanying services to Fayette on a shared basis. The shared-basis lease provided that the CT scanner would also be used by other healthcare providers

according to a prearranged schedule. Under this agreement, Fayette was the scanner's "home

base" and CIS organized transportation between sharing parties. In October 1992, the parties

signed a one-year renewal of their previous lease agreement ("October contract"). All periodic

agreements between CIS and Fayette, including the October contract, provided that Fayette was

to use only CIS's scanner and that monthly lease payments were based on the number of scans

performed.

In May 1993, CIS and Fayette entered into an agreement specifying various changes

in their relationship ("May agreement"). The May agreement provided: (1) for Fayette's full-time, exclusive use of the CT scanner; (2) for a three-year term, effective September 9, 1993; (3)

that Fayette would supply its own operating technician; and (4) that CIS would construct a

suitable, permanent site for the CT scanner in Fayette's parking area. Under the May agreement,

as in all previous leases, Fayette was billed monthly on a "per scan" basis. From January 1994

through August 1995, Fayette averaged 43.5 scans per month and was charged $280 per scan; the

average monthly bill was $12,180.

On September 9, 1993, Fayette commenced its exclusive use of the CT scanner.

By the fall of 1994, Fayette decided to seek bids for a helical CT scanner that could provide

superior image quality. Fayette inquired about whether CIS could provide a helical scanner and

what it would cost to buy out the remainder of the current three-year contract. Larry Fechik,

president of CIS, indicated that CIS could not provide a helical scanner and that Fayette could buy

out the current contract for $240,000. In September 1995, Fayette purchased and installed a new

scanner from another company and ceased use of the CIS scanner altogether. CIS was aware of

the purchase and notified Fayette that it was in breach of contract. However, the CIS scanner

remained at Fayette for approximately four more months, until CIS removed it in December 1995.

From April 1996 through expiration of the three-year term in September, CIS rented the CT

scanner to Weimar Hospital ("Weimar").

In June 1996, CIS filed suit for breach of contract. In August 1999, Fayette moved

for summary judgment on its affirmative defense of novation. A docket entry indicates that the

trial court heard the motion, but there is no order in the record disposing of it. In October 1999,

after a bench trial, the court issued a letter to the parties declaring that Fayette had breached the

contract, and soliciting proposed findings of fact and conclusions of law. In January 2000, the

trial court rendered a final judgment awarding CIS (1) $36,540 in compensatory damages; (2)

prejudgment interest of 18% on compensatory damages, calculated from March 31, 1996 to the

date of judgment; and (3) $14,765 in attorney's fees. In response to a request from CIS, the trial

court issued findings of fact and conclusions of law, which state that (1) CIS failed to mitigate its

damages by failing to immediately remove the CT scanner from Fayette's premises in September

1995; (2) CIS was not entitled to recover damages for the period of September to December 1995;

and (3) the damages award had been reduced by the income received from the Weimar hospital

contract. In the meantime, Fayette filed a motion to modify, correct, or reform the final

judgment. The court granted the motion and vacated the portion of the judgment dealing with pre-

and post-judgment interest. In April 2000, the trial court issued its corrected final judgment,

changing the prejudgment interest rate from 18% to 6%, to be calculated from June 3, 1996

through the date of judgment.

Discussion

I. Novation

Fayette asserts that the trial court erred by denying its motion for summary

judgment on its defense of novation. (1) By this point, Fayette also argues that it established its

novation defense as a matter of law at trial. We will examine all the evidence presented at trial

to determine whether this is the case.

Fayette contends that the May agreement (1) constituted a novation, a new and

complete contract that did not contain an exclusivity term; and (2) extinguished the October

contract. Fayette argues that it therefore did not breach its contract with CIS by using another CT

scanner. A party must establish four essential elements to prove novation: "a previous valid

obligation; a mutual agreement of all parties to acceptance of a new contract; a substitution of the

new contract for the old, effecting its extinguishment; and a valid new agreement." Commercial

Credit Corp. v. Brown , 471 S.W.2d 914, 919 (Tex. Civ. App.--Amarillo 1971, writ ref'd n.r.e.)

(citations omitted).

The intent or agreement to accept the new obligation in lieu and in discharge of the

old one may be inferred from the facts and circumstances and conduct of the

parties. A novation agreement need not be in writing or evidenced by express

words since, like any other ultimate fact, it may be inferred from the acts and

conduct of the parties and other facts and circumstances.

Id . (citations omitted). "For there to be a novation it must clearly appear such was the intention

of the parties. Novation is never presumed." Allstate Ins . Co. v. Clarke , 471 S.W.2d 901, 907

(Tex. Civ. App.--Houston [1st Dist.] 1971, writ ref'd n.r.e.) (citations omitted).

In dispute is whether the parties entered the May agreement in order to modify and

extend the October contract or to extinguish the October contract. In our review of the trial

court's attempt to discern the parties' intent, we are not limited to a review of the May agreement

alone; we may infer the parties' intent from the facts, circumstances, and conduct of the parties.

See Commercial Credit , 471 S.W.2d at 919 . Although the May agreement was titled "agreement"

not "modification" and could have stood alone as a new contract, the facts and circumstances of

its execution suggest otherwise. The parties' October contract was valid for twelve months or

until renewal , and was still in effect at the time of execution of the May agreement. The October

contract provided that it "superseded all prior agreements;" the May agreement did not. The

October contract was six pages in length; the May agreement was only one page. The October

contract contained numerous, typical contract terms governing warranty, billing, default, and

indemnity; the May agreement did not. In addition, we note that as a result of the May agreement,

CIS incurred significant new liabilities. The May agreement discontinued the shared-basis lease

and gave Fayette exclusive use of the CT scanner. This required CIS to purchase another scanner

to fulfill contracts with other providers who had shared use with Fayette. Furthermore, pursuant

to the May agreement, CIS paid for the construction of a permanent site for the scanner in

Fayette's parking lot. It seems unlikely that CIS would contract to incur these expenses at the

same time it agreed to waive the exclusivity provision; that provision would have been its only

guarantee of recouping the costs incurred in the May agreement. Otherwise, CIS subjected itself

to the risk that Fayette would immediately discontinue use of its CT scanner, at a significant loss

to CIS.

In further support of its argument that the May agreement was a novation, Fayette

asserts that a new agreement may be inferred where it is so inconsistent with the original that the

two cannot co-exist. Scalise v. McCallum , 700 S.W.2d 682, 684 (Tex. App.--Dallas 1985, writ

ref'd n.r.e.). Except for the terms explicitly modified, we do not find any such inconsistency

between the October contract and May agreement. In particular, nothing in the May agreement

is in conflict with the exclusivity term in the October contract.

Alternatively, Fayette urges that to the extent the May agreement is ambiguous, it

should be construed against the drafter, CIS. See AT&T Corp. v. Rylander , 2 S.W.3d 546, 559

(Tex. App.--Austin 1999, pet. denied) (stating general rule that document is construed strictly

against author). We hold that even if the May agreement was ambiguous and construed against

CIS, Fayette failed to prove an essential element of its novation defense, that is, the existence of

a mutual agreement to form a new contract. See Commercial Credit , 471 S.W.2d at 919 .

Therefore, the trial court could properly find that the evidence did not support the affirmative

defense of novation. See id. Fayette's cross-point is overruled.

II. Mitigation

CIS asks us to review the legal sufficiency of the evidence to support the trial

court's mitigation findings for two time periods (1) September to December 1995, when the CT

scanner remained idle at Fayette; and (2) April to September 9, 1996, during which time the

scanner was leased to Weimar. CIS appeals the resulting reductions in damages.

In reviewing a legal sufficiency, or no-evidence point, we must consider only the

evidence and inferences tending to support the finding of the trier of fact and disregard all

evidence and inferences to the contrary. Alm v. Aluminum Co. of Am. , 717 S.W.2d 588, 593

(Tex. 1986); Garza v. Alviar , 395 S.W.2d 821, 823 (Tex. 1965). A no-evidence point must be

sustained when there is complete absence of evidence regarding a vital fact. Williams v.

Anderson , 850 S.W. 2d 281, 283 (Tex. App.--Austin 1993, writ denied). If there is more than

a scintilla of evidence to support the findings, a no-evidence challenge cannot be sustained.

Catalina v. Blasdel , 881 S.W.2d 295, 297 (Tex. 1994).

We first examine the issue of CIS's failure to mitigate. Mitigation of damages is

an affirmative defense. Cocke v. White , 697 S.W.2d 739 (Tex. App.--Corpus Christi 1985, writ

ref'd n.r.e.). "[T]he defendant claiming mitigation of damages has the burden not only to prove

lack of diligence on the part of the plaintiff but also to prove the amount by which the damages

were increased by such failure to mitigate damages." Id . at 744 (citation omitted).

CIS contends that Fayette failed to meet its burden of proving that CIS did not

mitigate its damages from September through December 1996. CIS does not contest the finding

that it left its CT scanner at Fayette for four months after learning that Fayette was using another

scanner. It argues, however, that Fayette did not present any evidence that had CIS actively

pursued a rental to another hospital, there was a likelihood that CIS could have leased or sold the

CT scanner in dispute. On the contrary, CIS asserts that there was evidence that the other hospital

in question was not interested in the CIS scanner. In addition, CIS contends that it left the scanner

at Fayette in hopes of negotiating a new agreement with Fayette. CIS also argues that Fayette

failed to meet its burden of proving the amount by which damages were increased due to failure

to mitigate.

Larry Fechik, the president of CIS, testified that he knew of Fayette's use of

another scanner, and thus the breach of the contract's exclusivity term, in September 1995. The

unchallenged fact that the CIS scanner was left on the Fayette premises for the next four months

could support either an inference of an attempted renegotiation, as CIS claims, or of a failure to

mitigate, as Fayette asserts. We must consider only the inferences tending to support the trial

court's findings. Alm , 717 S.W.2d at 593 ; Garza , 395 S.W.2d at 823 . This evidence was

sufficient to prove CIS's lack of diligence. It was not necessary for Fayette to show that there

were other parties who would have agreed to rent or purchase the CT scanner. We conclude that

there was more than a scintilla of evidence to support the trial court's finding of failure to

mitigate.

The evidence also supports the trial court's finding that CIS failed to mitigate

damages in the amount of $48,720. This deduction was calculated by multiplying the amount of

the average monthly scanner bill from January 1994 to August 1995 by the number of months CIS

left the idle scanner at Fayette ([43.5 scans per month x $280 per scan] x 4 months). CIS neither

contested the reasonableness of this method of calculating damages nor presented evidence that

the resulting sums were inaccurate. We hold that the amount of the average monthly cost for lease

of the scanner by Fayette constitutes more than a scintilla of evidence to support the deduction of

$48,720 for failure to mitigate damages. See Catalina , 881 S.W.2d at 297 .

Next, we examine the issue of CIS's actual mitigation of damages during the time

the scanner was leased to Weimar. The trial court reduced the damages award by $12,180 per

month from April 1996 through the end of the contract term, which was September 9, 1996. The

burden of proof as to the extent that damages were, or could have been, mitigated lies with the

party that has broken the contract. Powers v. Powers , 714 S.W.2d 384, 389 (Tex. App.--Corpus

Christi 1986, no writ); Houston Chronicle Publ'g Co. v. McNair Trucklease, Inc . 519 S.W.2d

924, 929 (Tex. Civ. App.--Houston [1st Dist.] 1975, writ ref'd n.r.e.).

CIS contends that Fayette failed to meet its burden of proving the nature and extent

of mitigation. It asserts that the evidence was insufficient to support the following findings of fact

and conclusions of law made by the trial court:

8. Plaintiff rented the subject CT scanner unit to the Weimar hospital within three

months of retrieving the unit from Defendant's premises.

9. Plaintiff's damages, if any, must be reduced by the income received by

Plaintiff from the Weimar hospital contract.

10. At most, Plaintiff's damages accrued for a period of seven months -- from

September 1995 to March of 1996, when the CT scanner was rented to the

Weimar hospital.

13. Plaintiff is only entitled to recover for damages for the period of three months

that it took Plaintiff to rent the CT scanner after Plaintiff retrieved the scanner.

CIS also challenges two implied findings: (1) that the CT scanner was rented to Weimar Hospital

for the entire time between April 1, 1996 and September 9, 1996; and (2) that CIS received

$12,180 in monthly net rental income during this period.

Fechik testified to the fact that the CT scanner was rented to Weimar Hospital

approximately three months after its retrieval from Fayette. Although the testimony at trial was

brief, it was a sufficient basis for the finding that CIS actually mitigated its damages. Examining

only the evidence in support of the trial court's findings, we conclude that the testimony provided

more than a scintilla of evidence on which the trial court could find actual mitigation from April

1996 until the lease's expiration. See Catalina , 881 S.W.2d at 297 .

CIS also contests the trial court's deduction of $12,180 per month for the period

of actual mitigation. CIS contends that Fayette offered no evidence of the amount CIS actually

received from Weimar. Examining all of the evidence presented in support of the findings, we

conclude that there was sufficient evidence from which the trial court could infer that the amount

CIS received in actual mitigation was approximately the same as it would have received, on

average, from Fayette.

Assuming that CIS provided approximately the same service to Weimar, using the

same scanner, the trial court could have accepted Fayette's evidence of past average monthly

billing as a reasonable estimate of future income for purposes of making a mitigation reduction

from the total actual damages. We also note that CIS offered no affirmative evidence to support

an alternative finding on the nature and extent of mitigation. Because CIS offered no contradictory

evidence to challenge the testimony supporting Fayette's claims on the mitigation issues, we are

obligated to conclude that the record contains sufficient evidence supporting the trial court's award

of damages. See Lakeway Land Co. v. Kizer , 796 S.W.2d 820, 824 (Tex. App.--Austin 1990,

writ denied). Accordingly, we hold that Fayette met its burden of proving the nature and extent

of CIS's actual mitigation. See id. CIS's mitigation issues are overruled.

III. Prejudgment Interest

CIS contends that the trial court should have awarded prejudgment interest at a rate

of 18% from the sixteenth day after the month to which the damages apply, instead of 6% from

the date the lawsuit was filed, as specified in the modified final judgment. CIS bases its claim on

paragraph seven of the October contract, titled "Billing," which reads in part: "Client will pay CIS

in full for previous month services within fifteen (15) days of receipt of each monthly statement.

All past due amounts bear interest at the highest rate permitted by law payable on demand. The

obligation to pay fees is absolute, unconditional and not subject to offset." At all times relevant

to this dispute, the highest rate of interest allowed by Texas law was 18% per annum. See Tex.

Fin. Code Ann. § 304.002 (West 1998); Cavalcade Oil Corp. v. Samuel , 746 S.W.2d 842, 845

(Tex. App.--El Paso 1988, writ denied).

In response, Fayette argues that paragraph thirteen of the contract, entitled

"Default," controls. That paragraph defines default as occurring if a client "defaults in the

payment of any sum of money due under this agreement" or "in the performance of any other of

its obligations under this Agreement." Paragraph thirteen also specifies that upon default

Client shall pay and be liable for all past due fees and other sums called for by this

Agreement, plus damages equal to the net present value of all future profits to be

earned by CIS during the term of this Agreement. For purposes of the net present

value calculation, a discount factor of 6% per annum shall be used.

Fayette interprets this provision as applicable to a breach and argues that it sets 6% as the measure

of prejudgment interest on future profits awarded as damages. Fayette further contends that case

law and the Texas Finance Code govern the starting date for interest accrual. See Tex. Fin. Code

Ann. § 304.104 (West Supp. 2001); Johnson & Higgins of Tex . , Inc. v. Kenneco Energy, Inc .,

962 S.W.2d 507, 531 (Tex. 1998) (holding that in common law breach of contract case, accrual

dates are same as set by section 304.104 of Texas Finance Code, previously applicable only to

judgments in wrongful death, personal injury, and property damage cases).

Because Fayette was not liable for past due bills, its breach of the contract's

exclusivity provision should be interpreted as a default; thus, the paragraph seven billing provision

is inapplicable. However, because paragraph thirteen concerns only the method of discounting

future profits to present value, it cannot serve as the basis for calculating prejudgment interest.

Instead, we hold that the default rate of 6% set by section 302.002 of the Texas Finance Code

controls. See Tex. Fin. Code Ann. § 302.002 . The relevant portion of the Finance Code states

that interest commences on the earlier of the date suit is filed or the 180th day after a party

receives notice of a written claim. Id . § 304.104. We also conclude that the trial court correctly

determined that accrual of interest should commence from the date suit was filed. See Johnson

& Higgins , 962 S.W.2d at 531 . CIS's prejudgment interest issues are therefore overruled.

Conclusion

Having found no reversible error on the issues of novation, mitigation, and

prejudgment interest, we affirm the judgment of the district court.

Mack Kidd, Justice

Before Justices Kidd, Yeakel and Jones *

Affirmed

Filed: January 11, 2001

Do Not Publish

* Before J. Woodfin Jones, Justice (former), Third Court of Appeals, sitting by assignment. See

Tex. Gov't Code Ann. § 75.003 (a)(1) (West 1998).

1. The record does not indicate that the trial court ruled on the motion. Furthermore, even if

the court had rendered an order, "where a motion for summary judgment is denied by the trial

judge and the case is tried on its merits, the order denying the motion for summary judgment is

not reviewable on appeal." Horton v. Horton , 965 S.W.2d 78, 88 (Tex. App.--Fort Worth 1998,

no pet.).

o which the damages apply, instead of 6% from

the date the lawsuit was filed, as specified in the modified final judgment. CIS bases its claim on

paragraph seven of the October contract, titled "Billing," which reads in part: "Client will pay CIS

in full for previous month services within fifteen (15) days of receipt of each monthly statement.

All past due amounts bear interest at the highest rate permitted by law pa