Opinion

Opinion issued July 9, 2013.

In The

Court of Appeals

For The

First District of Texas

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NO. 01-12-00051-CV

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ALBERT E. MAGILL AND JENNIFER T. MAGILL, Appellants

V.

WILLIAM HUGH WATSON, JR., AS TRUSTEE OF THE WILLIAM

WATSON, JR. TRUST-NON-EXEMPT AND ROBIN WATSON LIVESAY

AND JAMES J. LIVESAY, CO-TRUSTEES OF THE ROBIN WATSON

LIVESAY TRUST-NON-EXEMPT, Appellees

On Appeal from the 151st District Court

Harris County, Texas

Trial Court Case No. 2009-54308

OPINION

After a jury trial on a seller’s claim arising out of the breach of an earnest

money contract, the trial court signed a judgment awarding the seller of real

property the earnest money, plus liquidated damages in an amount equal to three

times the earnest money, as provided in the contract, and attorney’s fees, interest,

and costs. On appeal, the buyer (1) challenges the plaintiffs’ standing to bring the

suit, (2) contends that the liquidated damages clause of the contract is an

unenforceable penalty, and (3) argues that the evidence that the buyer breached the

contract is insufficient to support the trial court’s judgment. We affirm in part and

reverse and render in part.

BACKGROUND

Albert and Jennifer Magill entered into a contract to purchase residential real

estate from the Estate of William H. Watson, Sr. (“the Estate”). The original

closing date of the contract was November 25, 2008, and, by amendment, was

extended by agreement of the parties until January 25, 2009. The Magills

deposited $8,000 in earnest money with the title company in connection with the

contract and amendment.

The contract provided that the “Buyer may object in writing to defects,

exceptions, or encumbrances to title . . . which prohibit the following use or

activity: Construction of a new, single family residential home to be two stories

containing approximately 5,000 square feet.”

The garage on the house that the Magills wished to build encroached on the

rear set back line of the property, and the Magills were unable to obtain a variance

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from the homeowner’s association to allow the construction of the garage as

planned. On January 23, 2009, two days before the closing date, the Magills

terminated the contract. The escrow agent sent two forms authorizing release of

the earnest money; one form released the earnest money to the Magills and one

form released the earnest money to the Estate. The Magills signed the form

authorizing the release of the earnest money to themselves.

After obtaining an assignment from the Estate on January 27, 2009, the

trustees of the William Hugh Watson, Jr. Trust-Non-Exempt and the Robin Watson

Livesay Trust-Non-Exempt, filed suit against the Magills on August 26, 2009,

alleging breach of the contract. On June 29, 2009, the trustees sent the Magills a

letter demanding that they execute a release of the earnest money. The Magills did

not do so. The trustees filed suit against the Magills on August 26, 2009, alleging

that they had breached the contract and seeking recovery of the earnest money,

plus three times the amount of the earnest money, based on the following

contractual provisions:

15. DEFAULT: If Buyer fails to comply with this contract, Buyer

will be in default, and Seller may (a) enforce specific performance,

seek such other relief as may be provided by law, or both, or (b)

terminate this contract and receive the earnest money as liquidated

damages . . . .

18.D. DAMAGES: Any party who wrongfully fails or refuses to sign

a release acceptable to the escrow agent . . . will be liable to the other

party for liquidated damages in an amount equal to the sum of (i)

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three times the amount of the earnest money; (ii) the earnest money;

(iii) reasonable attorney’s fees; and (iv) all costs of suit.

The case was tried to a jury, which found that the Magills had breached the

contract. Thereafter, the trial court entered a final judgment awarding the trustees

$32,000.00, which represents the earnest money and liquidated damages in an

amount of three times the earnest money, plus attorney’s fees, interest, and costs.

STANDING

On January 27, 2009, before suit was filed by the Estate, the Estate executed

the following assignment to the trusts:

For and in consideration of $10.00 and other good and valuable

consideration, the receipt and sufficiency of which are hereby

acknowledged and confessed, the Estate of William H. Watson, Sr.,

Deceased (the “Estate”) does hereby bargain, sell, transfer and convey

to the Williams Watson, Jr. Trust—Non-Exempt and the Robin

Watson Livesay Trust—Non-Exempt, in equal, undivided shares, (a)

all of the right, title and interest of the Estate in, to and under that

certain One to Four Family Residential Contract (Resale) (the

“Contract” between the Estate, as Seller, and Albert E. Magill and

Jennifer T. Magill (collectively, the “Magills”), as Buyer dated

effective August 25, 2008, and (b) all claims and causes of action of

the Estate against the Magills pertaining in any way to the Contract

and defenses of the Estate to any claims of the Magills pertaining in

any way to the contract.

In their first issue, the Magills contend that appellees Watson and Livesay,

as trustees of the William Watson, Jr. Trust and the Robin Watson Livesay Trust,

did not have standing to bring a breach-of-contract claim against them.

Specifically, the Magills argues that “the estate’s assignment to appellees of the

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estate’s causes of action against appellants is void when no cause of action is filed

by the estate or is pending at time of the assignment[.]” The Magills further argue

that, absent a valid assignment, only the executor of the estate has standing to bring

the suit.

Standing is a component of subject-matter jurisdiction. Tex. Ass’n of Bus. v.

Tex. Air Control Bd., 852 S.W.2d 440, 445-46 (Tex. 1993). A plaintiff has standing

to sue when it is personally aggrieved by the alleged wrong. Nootsie, Ltd. v.

Williamson Cnty. Appraisal Dist., 925 S.W.2d 659, 661 (Tex. 1996). A plaintiff

may also have standing by assignment of a cause of action. See State Farm Fire &

Cas. Co. v. Gandy, 925 S.W.2d 696, 706 (Tex. 1996). A claim may be assigned

except when such an assignment is invalid as against public policy. Id. at 707.

The five instances in which assigned causes action are void as against public

police are as follows: (1) The assignment of an interest in an estate is void if used

to contest a will. Trevino v. Turcotte, 564 S.W.2d 682, 690 (Tex. 1978); (2) The

assignment of plaintiff’s claim to a tortfeasor in settlement is void when tortfeasor

asserts the claim against a joint tortfeasor. Int’l Proteins Corp. v. Ralston-Purina

Co., 744 S.W.2d 932, 934 (Tex. 1988); (3) “Mary Carter” agreements are void.

Elbaor v. Smith, 845 S.W.2d 240, 250 (Tex. 1992); (4) The assignment of a

defendant’s claims against his insurer to the plaintiff is void under certain

circumstances. Gandy, 925 S.W.2d at 705; and (5) The assignment of client’s

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legal malpractice claim arising out of litigation is void. Zuniga v. Groce, Locke, &

Hebdon, 878 S.W.2d 313, 318 (Tex. App.—San Antonio 1994, writ ref’d). The

Magills do not contend that the assignment in this case falls within one of these

prohibited categories.

To recover on an assigned cause of action, the party claiming the assigned

rights must prove (1) a cause of action existed that was capable of assignment and

(2) the cause was in fact assigned to the party seeking recovery. Ceramic Tile Int’l

Inc. v. Balusek, 137 S.W.3d 722, 724 (Tex. App.—San Antonio 2004, no pet.);

Delaney v. Davis, 81 S.W.3d 445, 448-49 (Tex. App.—Houston [14th Dist.] 2002,

no pet.); Texas Farmers Ins. Co. v. Gerbes By and Through Griffin Chiropractic

Clinic, 880 S.W.2d 215, 217 (Tex. App.—Fort Worth 1994, writ denied).

The Magills argue that there was no cause of action that existed and was

capable of assignment because no lawsuit had yet been filed. In support, the

Magills rely on section 12.014 of the Property Code, which provides:

(a) A judgment or a part of a judgment of a court of record or an

interest in a cause of action on which suit has been filed may be sold,

regardless of whether the judgment or cause of action is assignable in

law or equity, if the transfer is in writing.

(b) A transfer under this section may be filed with the papers of the

suit if the transfer is acknowledged or sworn to in the form and

manner required by law for acknowledgement or swearing of deeds.

(c) If a transfer of a judgment is filed, the clerk shall record the

transfer appropriately. If a transfer of a cause of action in which a

judgment has not been rendered is filed, the clerk shall note and

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briefly state the substance of the transfer on the court docket at the

place where the suit is entered.

(d) A transfer filed under this section is notice to and is binding on

a person subsequently dealing with the judgment or cause of action.

TEX. PROP. CODE ANN. § 12.014 (Vernon 2004).

However, the purpose of the statute is to give parties dealing with a cause of

action notice that it has been assigned and is not intended to affect the validity of

any sale of a cause of action. See Mallios v. Baker, 11 S.W.3d 157, 171 (Tex.

2000) (J. Hecht, concurring) (citing Mitchell, Gartner & Thompson v. Young, 135

S.W.2d 308, 311 (Tex. Civ. App.—Fort Worth 1939, writ ref’d)). Section 12.014

was not intended thereby to prevent the acquisition of title to a judgment, cause of

action, or an interest therein, either legal or equitable, in any other lawful manner.

HSBC Bank USA, N.A. v. Watson, 377 S.W.3d 766, 776 (Tex. App.—Dallas, 2012

pet. filed.) (citing Hunter v. B.E. Porter, Inc., 81 S.W.2d 774, 775 (Tex. Civ.

App.—Dallas 1935, no writ); Sw. Bell Tel. Co. v. Mktg. on Hold, Inc., 170 S.W.3d

814, 824–25 (Tex. App.—Corpus Christi 2005), rev’d on other grounds, 308

S.W.3d 909 (Tex. 2010) (holding “nothing in [section 12.014] precludes or

invalidates the assignments at issue in this matter simply because they were made

prior to the filing of suit”)). Therefore, we conclude that section 12.014 has no

bearing on the validity of the Estate’s assignment to the trusts.

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The Magills also rely on Briargrove Shopping Center Joint Venture v. Vilar,

Inc., 647 S.W.2d 329, 337–38 (Tex. App.—Houston [1st Dist.] 1982, no writ) for

the proposition that a suit affecting the assignor’s rights must be pending at the

time an assignment is executed. However, that language in Briargrove is dicta

because in that case it was undisputed that a suit had been filed before the

assignment. Id. Furthermore, the case that Briargrove cites as authority involves

the assignability of a wrongful death cause of action under the terms wrongful

death statute at the time, thus is distinguishable. See Lowe v. Emp’rs Cas. Co., 479

S.W.2d 383, 389–90 (Tex. Civ. App—Fort Worth 1972, no writ).

The Magill’s position is based on the false premise that a “cause of action”

applies only to claims that have already been filed in court. At common law, a

“cause of action” ordinarily consists of two distinct and separate elements, the

primary right and duty of the parties respectively and the wrongful act or omission

violating it. Mercantile Bank & Trust Co. v. Schuhart, 115 Tex. 114, 277 S.W.

621, 623–24 (1925). A “cause of action” has also been said to consist of those

facts entitling one to institute and maintain an action at law or in equity. A.H. Belo

Corp. v. Blanton, 133 Tex. 391, 396, 129 S.W.2d 619, 621 (1939); F.D.I.C. v.

Bodin Concrete Co., 869 S.W.2d 372, 378 (Tex. App.—Dallas 1993, writ denied).

Thus, a “cause of action” encompasses every essential fact that a plaintiff must

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prove to obtain a judgment. F.D.I.C., 869 S.W.2d at 378. Thus, by definition, a

cause of action may exist before a suit is instituted.

Therefore, we hold that the fact that the Estate had not filed suit before it

assigned its cause of action to the trusts is not a ground for concluding that the

trustees lack standing. And, to the extent that the Magills are complaining that the

trustees pleadings did not set forth the basis for their interest in the petition, we

note that the Magills did not specially except to the petition on that ground, thus

the issue is waived. TEX. R. CIV. P. 90.

Accordingly, we overrule issue one.

LIQUIDATED DAMAGES

In issue two, the Magills contend that the following liquidated damage

provision is unenforceable because it is an illegal penalty. The contract provided

as follows:

18.D. DAMAGES: Any party who wrongfully fails or refuses to sign

a release acceptable to the escrow agent . . . will be liable to the other

party for liquidated damages in an amount equal to the sum of (i)

three times the amount of the earnest money; (ii) the earnest money;

(iii) reasonable attorney’s fees; and (iv) all costs of suit. (Emphasis

added).

We enforce a liquidated damages clause if (1) the harm caused by the breach

is incapable or difficult of estimation, and (2) the amount of liquidated damages is

a reasonable forecast of just compensation. See Phillips v. Phillips, 820 S.W.2d

785, 788 (Tex. 1991). An assertion that a liquidated damages provision constitutes

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an unenforceable penalty is an affirmative defense, and the party asserting penalty

bears the burden of proof. Urban Television Network Corp. v. Liquidity Solutions,

277 S.W.3d 917, 919 (Tex. App.—Dallas 2009, no pet.); Fluid Concepts, Inc. v.

DA Apts., LP, 159 S.W.3d 226, 231 (Tex. App.—Dallas 2005, no pet.). Generally,

that party must prove the amount of actual damages, if any, to demonstrate that

“the actual loss was not an approximation of the stipulated sum.” Baker v. Int’l

Record Syndicate, Inc., 812 S.W.2d 53, 55 (Tex. App.—Dallas 1991, no writ). If

the amount stipulated in the liquidated damages clause is “shown to be

disproportionate to actual damages,” we should declare that the clause is a penalty

and limit recovery to actual damages. Johnson Eng’rs, Inc. v. Tri–Water Supply

Corp., 582 S.W.2d 555, 557 (Tex. Civ. App.—Texarkana 1979, no writ); see also

TEX. BUS. & COM. CODE ANN. § 2.718(a) (Vernon 2009) (“A term fixing

unreasonably large liquidated damages is void as a penalty.”). Whether a liquidated

damages clause is an unenforceable penalty is a question of law for the court, but

sometimes factual issues must be resolved before the court can decide the legal

question. See Phillips, 820 S.W.2d at 788. For example, in Phillips, the Texas

Supreme Court observed that “to show that a liquidated damages provision is

unreasonable because the actual damages incurred were much less than the amount

contracted for, a defendant may be required to prove what the actual damages

were.” Id.

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The Magills, relying on Phillips, 820 S.W.2d at 788, contend that the

liquidated damage provision is void on its face and no further evidence of the

actual damages was required. We agree.

In Phillips, a partnership agreement contained the following liquidated

damage provision in the event of a breach of trust by the general partner to the

limited partner: “If the general partner breaches his trust hereunder, he shall pay to

the limited partner as liquidated damages ten times the amount she loses as a result

of such breaches of trust.” Id. at 787. The supreme court granted an application

for writ of error “to decide whether a contractual provision that requires payment

of a multiple of actual damages for breach of trust is an unenforceable penalty[,]”

and held as follows:

The enforceability of the contractual provision in this case

involves no fact issues. A contractual provision like the one here by

which one party agrees to pay the other some multiple of actual

damages for breach of the agreement does not meet either part of the

legal test for an enforceable liquidated damages provision. It cannot

meet the first prong of the test because the harm caused by the breach

of the contract is not incapable or difficult of estimation. The

provision assumes actual damages can and will be determined, indeed

must be determined, before the prescribed multiplier can be applied.

The provision cannot meet the second prong of test because, instead

of attempting to forecast actual damages, it calls for them to be

determined and then multiplied. A contractual provision like the one

in this case is thus, on its face, an unenforceable penalty.

Id. at 789 (internal citations omitted).

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Here, the breach triggering the liquidated damage provision is the

“wrongful[] fail[ure] or refus[al] to sign a release acceptable to the escrow agent.”

However, the liquidated damage provision makes no attempt to quantify the actual

damages that would be caused by a failure to release the earnest money. Instead,

the provision merely assumes that the earnest money, which the parties have

agreed will constitute actual damages for breach of the agreement in general,

should be trebled and added to the earnest money in the event that the obligation to

release the earnest money is breached.

The trustees argue that “it is only natural that the liquidated damages for

which paragraph 18.d provides would be greater than [the earnest money] for

which paragraph 15 provides, for the party entitled to the earnest money is forced

to go through additional hoops it would not otherwise have had to go through to

ultimately obtain a recovery.” However, the damages suffered as a result of going

through such “additional hoops,” i.e., attorney’s fees, interest, and costs, are

already elements of damages that can be recovered in a suit to obtain the earnest

money. Likewise, the $80,000 the trustees claim that they suffered as a result of

selling the property at a lower purchase price is not damage caused by the failure to

release the earnest money, but by the failure to close on the real estate transaction.

Thus, we conclude that, because the contract provision simply takes the

value of the earnest money, which the parties have agreed represents the actual

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damages caused by the breach of the agreement, and multiplies it times three if

there is an additional breach of the obligation to turn over the earnest money, the

provision is an unlawful penalty and does not attempt to forecast actual damages.

This conclusion is supported by the comment promulgated by the Texas Real

Estate Commission when it drafted the form upon which the clause is based,

wherein the Commission stated that the purpose of the clause was to “provide for

additional incentives for prompt release of the earnest money.” 31 Tex. Reg. 1446,

Comment on Amendment to 22 TEX. ADMIN. CODE § 537.28 (2008) (Tex. Real

Estate Comm’n) (Standard Contract Form TREC No. 20-7).

We are not holding, however, that a contract can never provide liquidated

damages for the failure to release earnest money. We hold only that the clause in

this case, on its face, did not attempt to reasonably forecast a just compensation for

a breach of the agreement to release the earnest money.

Accordingly, we sustain issue two.

SUFFICIENCY OF THE EVIDENCE

In issue three, the Magills contend the trial court erred in denying their

motion for directed verdict because there was no evidence that they wrongfully

failed or refused to sign a release of the earnest money.

A complaint about the denial of a motion for directed verdict is the same as a

challenge to the legal sufficiency of the evidence. City of Keller v. Wilson, 168

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S.W.3d 802, 823 (Tex. 2005). Under this standard, we must view the evidence and

inferences in the light most favorable to the jury’s findings. Id. When, as here, an

appellant attacks the legal sufficiency of an adverse finding on an issue for which it

did not have the burden of proof, it must demonstrate that there is no evidence to

support the adverse finding. Croucher v. Croucher, 660 S.W.2d 55, 58 (Tex.

1983). Such a challenge will be sustained only when (1) there is a complete

absence of evidence of a vital fact; (2) the court is barred by rules of law or

evidence from giving weight to the only evidence offered to prove a vital fact; (3)

the evidence offered to prove a vital fact is no more than a mere scintilla; or (4) the

evidence conclusively establishes the opposite of a vital fact. King Ranch, Inc. v.

Chapman, 118 S.W.3d 742, 751 (Tex. 2003); see also City of Keller, 168 S.W.3d

at 810.

We have already held that recovery of treble the amount of the earnest

money was unenforceable, thus the issue of whether there is sufficient evidence

that the Magills wrongfully failed or refused to release the earnest money is

irrelevant. However, to the extent that the Magills are also contesting the jury’s

finding them liable for breaching the agreement, we note that there is evidence that

the Magills could have built a 5000 square foot house on the lot, but chose instead

to terminate the contract because they could not get a variance to permit them to

build their garage so that it encroached on the setback. Thus, the evidence is

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legally sufficient to support the jury’s finding that the Magill’s breached the

agreement, thus giving rise to damages in the amount of the earnest money.

We overrule issue three.

CONCLUSION

Because section 18.D of the contract imposed an unlawful penalty, the trial

court erred by awarding three times the earnest money, in addition to the earnest

money, plus attorney’s fees, interest, and costs. However, the evidence is legally

sufficient to support an award of liquidated damages in the amount of the earnest

money, plus attorney’s fees, interest, and costs. Therefore, we reverse the

judgment awarding the trustees “actual damages of $32,000.00, together with

interest thereon at the rate of 6% per annum” and render judgment awarding the

trustees “actual damages of $8,000.00, together with interest thereon at the rate of

6% per annum.” We affirm the remaining portions of the judgment.

Sherry Radack

Chief Justice

Panel consists of Chief Justice Radack and Justices Higley and Brown.

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