Noah S. Bunker, Paul Carrell, Everett Brew Houston, Jr., W. Andrew Buchholz, Scott J. Leighty, Jad L. Davis, and Holly Clause v. Tracy D. Strandhagen

ACCEPTED

03-14-00510-CV

3762693

THIRD COURT OF APPEALS

AUSTIN, TEXAS

1/14/2015 11:07:21 AM

____________________________________________

JEFFREY D. KYLE

CLERK

No. 03-14-00510-CV

_____________________________________________

FILED IN

3rd COURT OF APPEALS

AUSTIN, TEXAS

IN THE COURT OF APPEALS 1/14/2015 11:07:21 AM

THIRD JUDICIAL DISTRICT OF TEXAS JEFFREY D. KYLE

AT AUSTIN Clerk

_______________________________________________

Noah S. Bunker, Paul Carrell, Everett Brew

Houston, Jr., W. Andrew Buchholz, Scott J.

Leighty, Jad L. Davis, and Holly Clause,

Appellants

v.

Tracy D. Strandhagen,

Appellee

FROM THE DISTRICT COURT OF TRAVIS COUNTY,

353RD JUDICIAL DISTRICT, CAUSE NO. D-1-GN-13-002811,

THE HONORABLE ORLINDA NARANJO PRESIDING

APPELLANTS’ BRIEF

Amanda G. Taylor

ataylor@textaxlaw.com

Texas Bar No. 24045921

MARTENS, TODD, LEONARD, TAYLOR & AHLRICH

301 Congress Avenue, Suite 1950

Austin, Texas 78701

Tele: (512) 542-9898

Fax: (512) 542-9899

ORAL ARGUMENT REQUESTED

IDENTITY OF PARTIES AND COUNSEL

APPELLANTS APPELLEE

Noah S. Bunker, Paul Carrell, Tracy D. Strandhagen

Everett Brew Houston, Jr., W.

Andrew Buchholz, Scott J. Leighty,

Jad L. Davis, and Holly Clause

Appellate Counsel: Trial and Appellate Counsel:

Amanda G. Taylor Daniel Byrne

ataylor@textaxlaw.com DByrne@FBHH.com

Texas Bar No. 24045921 Lessie Fiztpatrick

MARTENS, TODD, LEONARD, LFitzpatrick@FBHH.com

TAYLOR & AHLRICH Christine E. Burgess

301 Congress Avenue, Suite 1950 CBurgess@FBHH.com

Austin, Texas 78701 FRITZ, BYRNE, HEAD

Tele: (512) 542-9898 & HARRISON, PLLC

Fax: (512) 542-9899 98 San Jacinto Blvd, Suite 2000

Austin, TX 78701

Tele: (512) 476-2020

Trial Counsel:

Kelly McDonald

kmcdonald@cmcdlaw.com

Carla Garcia Connolly

cconnolly@cmcdlaw.com

CARLS, MCDONALD &

DALRYMPLE, LLP

901 South MoPac Expressway

Barton Oaks Plaza

Building 1, Suite 280

Austin, Texas 78746

Tele: (512) 472-4845

Fax: (512) 472-8403

i

TABLE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL ..................................................... i

TABLE OF CONTENTS ................................................................................. ii

INDEX OF AUTHORITIES ........................................................................... v

STATEMENT OF THE CASE ....................................................................... ix

RECORD ABBREVIATIONS ......................................................................... x

STATEMENT REGARDING ORAL ARGUMENT........................................ xi

ISSUES PRESENTED ................................................................................. xii

STATEMENT OF FACTS ............................................................................... 1

I. The Parties Entered a Series of Contracts Governing

Their Medical Practice. .................................................................... 2

A. The Partners Promised to Stay With the Practice

for a Defined Period for Important Financial

Reasons. .................................................................................. 4

B. The Partners Agreed to be Bound by a Liquidated

Damages Provision Regulating Early Departure

from their Practice. ................................................................. 5

II. Strandhagen Departed the Practice Five Years Earlier

than She had Contractually Agreed.................................................. 8

III. Strandhagen Filed Separate Proceedings Against the

Company and her Physician Partners. ............................................. 9

IV. The District Court Dismissed Part and Granted Part of

the Declaratory Relief Strandhagen Sought Against the

Physicians....................................................................................... 10

SUMMARY OF THE ARGUMENT.............................................................. 12

ii

ARGUMENT................................................................................................ 14

I. The District Court Erred by Granting Strandhagen’s

Motion for Summary Judgment..................................................... 14

A. Summary Judgment Standard of Review. .............................15

B. Strandhagen Failed to Satisfy her Summary-

Judgment Burden on the Essential Elements of

her Claim............................................................................... 16

1. Strandhagen was required to conclusively

establish two elements. ................................................ 17

2. Strandhagen conceded her inability to prove

the “difficulty of estimation” element.......................... 22

3. Strandhagen failed to conclusively prove the

“unreasonable forecast” element. ................................ 23

(a) No evidence of actual damages. ......................... 23

(b) Plain language of contract shows

reasonable forecast. ........................................... 30

(c) Fact issue exists regarding

modification. ...................................................... 33

C. Strandhagen Failed to Satisfy her Summary-

Judgment Burden Regarding the Physicians’

Status as Third-Party Beneficiaries. ..................................... 35

1. The Operations Agreement Provides a

Direct Line of Liability................................................. 36

2. A Genuine Issue of Material Fact Remains

about the Physicians’ Third-Party

Beneficiary Status. ....................................................... 37

iii

II. The District Court Erred by Denying Part of the

Physicians’ Plea to the Jurisdiction................................................ 38

A. Texas Law Prohibits Advisory Declarations on

Potential Defenses to Hypothetical Disputes. ...................... 38

B. Strandhagen’s Claim Is Not Ripe. ......................................... 43

PRAYER ...................................................................................................... 44

CERTIFICATE OF COMPLIANCE .............................................................. 45

CERTIFICATE OF SERVICE....................................................................... 45

APPENDIX:

1. Order Granting Summary Judgment (CR.212)

2. Order Granting in Part and Denying in Part Plea to the

Jurisdiction (CR.184-185)

3. Order Denying Motion for New Trial (CR.271)

4. Operations Agreement (CR.162-183)

iv

INDEX OF AUTHORITIES

CASES

Alvarado v. Lexington Ins. Co.,

389 S.W.3d 544 (Tex. App.—Houston [1st Dist.] 2012, no pet.) ....... 37

Atmos Energy Corp. v. Abbott,

127 S.W.3d 852 (Tex. App.—Austin 2004, no pet.) ........................... 40

Baker v. Int’l Record Syndicate, Inc.,

812 S.W.2d 53 (Tex. App.—Dallas 1991, no writ)......................... 18, 25

BHP Petro. Co. v. Millard,

800 S.W.2d 838 (Tex. 1990) .............................................................. 42

Brooks v. Northglen Ass’n,

141 S.W.3d 158 (Tex. 2004) ................................................... 39, 40, 41

California Prods. v. Puretex Lemon Juice, Inc.,

334 S.W.2d 780 (Tex. 1960) .............................................................. 40

Chenault v. Phillips,

914 S.W.2d 140 (Tex. 1996) ............................................................... 39

City of Euless v. Dallas/Fort Worth Int’l Airport Bd.,

936 S.W.2d 699 (Tex. App.—Dallas 1996, writ denied) ..................... 39

City of Pasadena v. Smith,

263 S.W.3d 80 (Tex. App.—Houston [1st Dist.] 2006, pet. denied) .. 39

Farmers Ins. Exch. v. Rodriguez,

366 S.W.3d 216 (Tex. App.—Houston [14th Dist.] 2012, pet. denied) 41

Federal Deposit Ins. Corp. v. Lenk,

361 S.W.3d 602 (Tex. 2012) .......................................................... 16, 17

v

Flores v. Millennium Interests, Ltd.,

185 S.W.3d 427 (Tex. 2005)............................................................... 16

GPA Holding, Inc. v. Baylor Health Care Sys.,

344 S.W.3d 467 (Tex. App.—Dallas 2011, pet. denied) .............. passim

Healix Infusion Therapy, Inc. v. Bellos,

No. 11-02-00346-CV, 2003 WL 22411873 (Tex. App.—Eastland

Oct. 23, 2003, no pet.) ................................................................. 20, 24

In re City of Dallas,

977 S.W.2d 51 (Tex. App.—Fort Worth 1998, orig. proceeding) ........ 40

In re Kasschau,

11 S.W.3d 305 (Tex. App.—Houston [14th Dist.] 1999,

orig. proceeding) ................................................................................ 34

In re Poly-Am., L.P.,

262 S.W.3d 337 (Tex. 2008) .............................................................. 33

Khan v. Meknojiya,

No. 03-11-00580-CV, 2013 WL 3336874 (Tex. App.—Austin

June 28, 2013, no pet.) ........................................................... 16, 19, 21

Landry's Seafood Restaurants, Inc. v. Waterfront Cafe, Inc.,

49 S.W.3d 544 (Tex. App.—Austin 2001, pet. dism’d) ....................... 17

LHR Enters., Inc. v. Geeslin,

No. 03-05-00176-CV, 2007 WL 3306492 (Tex. App.—Austin

Nov. 7, 2007, pet. denied) ............................................................ 40, 42

Murphy v. Cintas Corp.,

923 S.W.2d 663 (Tex. App.—Tyler 1996, writ denied) .......... 21, 28, 30

vi

Nexstar Broad., Inc. v. Gray,

No. 09-07-00364-CV, 2008 WL 2521967 (Tex. App.—Beaumont

2008, no pet.) ......................................................................... 21, 41, 42

Patterson v. Planned Parenthood,

971 S.W.2d 439 (Tex. 1998) ............................................................... 40

Paulsen v. Texas Equal Access to Justice Found.,

23 S.W.3d 42 (Tex. App.—Austin 1999, pet. denied) ......................... 40

Phillips v. Phillips,

820 S.W.2d 785 (Tex. 1991) ....................................................16, 23, 24

Sealock v. Texas Fed. Sav. & Loan Assoc.,

755 S.W.2d 69 (Tex. 1988) ................................................................. 25

Southern Union Co. v. CSG Sys., Inc.,

No. 03-04-00172-CV, 2005 WL 171349 (Tex. App.—Austin

Jan. 27, 2005, no pet.) ............................................................... passim

State v. Margolis,

439 S.W.2d 695 (Tex. Civ. App.—Austin 1969, writ ref’d n.r.e.)........ 42

Tex. Ass’n of Bus. v. Tex. Air Control Bd.,

852 S.W.2d 440 (Tex. 1993) .............................................................. 39

Texas Dep’t of Pub. Safety v. Moore,

985 S.W.2d 149 (Tex. App.—Austin 1998, no pet.) ............................ 39

Texas Dept. of Crim. Justice-Cmty. Justice Assistance Div. v. Campos,

384 S.W.3d 810 (Tex. 2012)............................................................... 14

Thomas v. Graham Mortg. Corp.,

408 S.W.3d 581 (Tex. App.—Austin 2013, pet. denied)......................15

vii

Transcont’l Realty Investors, Inc. v. Orix Capital Markets, LLC,

353 S.W.3d 241 (Tex. App.—Dallas 2011, pet. denied) ...................... 41

Triton 88, LP v. Star Electricity, LLC,

411 S.W.3d 42 (Tex. App.—Houston [1st Dist.] 2013, no pet.) ..... 20, 24

Valence Operating Co. v. Dorsett,

164 S.W.3d 656 (Tex. 2005) ...............................................................15

Waco Indep. Sch. Dist. v. Gibson,

22 S.W.3d 849 (Tex. 2000)................................................................ 40

STATUTES & RULES

TEX. CONST. art. II, § 1.................................................................................. 40

Tex. R. App. P. 39.1 ...................................................................................... xi

Tex. R. App. P. 39.2 ...................................................................................... xi

Tex. R. App. P. 43.2 ..................................................................................... 14

Tex. R. App. P. 43.3 ..................................................................................... 14

Tex. R. App. P. 43.4 ..................................................................................... 44

Tex. R. Civ. P. 139 ........................................................................................ 44

Tex. R. Civ. P. 166a .......................................................................................15

Tex. R. Civ. P. 94 ......................................................................................... 16

OTHER AUTHORITIES

RESTATEMENT (SECOND) OF CONTRACTS § 356 ......................................... 28, 29

viii

STATEMENT OF THE CASE

Nature of This appeal arises from Appellee Dr. Tracy

the Case Strandhagen’s declaratory judgment claims against

seven of her former partners in the Austin

Anesthesiology Group (“AAG”), Appellants Drs.

Noah S. Bunker, Paul Carrell, Everett Brew Houston,

Jr., W. Andrew Buchholz, Scott J. Leighty, Jad L.

Davis, and Holly Clause (collectively, “the

Physicians”). Strandhagen sought declarations

against them that (1) she was terminated without

cause, meaning the liquidated damages provision in

the parties’ contract would be inapplicable to her;

and (2) the liquidated damages provision was an

unenforceable penalty. (CR.4-9).

Course of The Physicians filed a Plea to the Jurisdiction

Proceedings seeking dismissal of Strandhagen’s claims. (CR.77-

84). The trial court granted the Plea as to ground (1)

and denied it as to ground (2). (CR.184; Appx. 2).

Strandhagen then filed a Motion for Summary

Judgment on ground (2). (CR.154-159).

Trial Court The trial court granted Strandhagen’s Motion,

Disposition declaring the liquidated damages provision to be an

unenforceable penalty. (CR.212; Appx. 1). This

resulted in a Final Judgment.

The Physicians filed a Motion for New Trial, urging

in regard to ground (2) of Strandhagen’s claim that it

was error to deny the Physicians’ Plea and to grant

Strandhagen’s Motion. (CR.213-227). Following a

hearing, the trial court denied the Physicians’ Motion

for New Trial. (CR.271; RR.1-29; Appx. 3). The

Physicians timely perfected appeal. (CR.272-273).

ix

RECORD ABBREVIATIONS

Abbreviation Meaning

“CR” The primary Clerk’s Record, pages 1-286, filed on

10/15/14.

A “supplemental” clerk’s record was subsequently

filed on 10/30/14 (for reasons unknown to the

Physicians) containing duplicates of documents

already in the primary CR.

A second “supplemental” clerk’s record was filed on

12/22/14 containing the order directing transfer of

the sealed documents referenced below.

The Physicians do not cite to either portion of the

“supplemental” record.

“Sealed.CR” A sealed document (Strandhagen’s Employment

Agreement), filed as an original exhibit on 12/22/14.

The Physicians’ citations to the Sealed.CR correlate to

the actual portions of the Employment Agreement,

whether it be a numbered page of the contract or an

Appendix thereto, because the District Clerk did not

assign separate “record pages” to this original

document.

“RR” The Reporter’s Record, pages 1-29, which was filed on

9/25/14. This is the transcript from the hearing on

the Physicians’ Motion for New Trial.

x

STATEMENT REGARDING ORAL ARGUMENT

Oral argument should be granted because it will aid the decisional

process by allowing the Court clarify and further develop the unique facts

and legal issues in this case. See Tex. R. App. P. 39.1, 39.2.

This case presents unique facts borne from Strandhagen’s decision to

file a preemptive lawsuit against the Physicians while simultaneously

pursuing a separate yet related claim in a different forum against their

parent company. This case also presents important and unsettled legal

questions as applied to these facts, including: (1) What elements of proof

are required to prevail on an affirmative defense of “unenforceable

penalty?”, and (2) When is a declaratory judgment claim sufficiently ripe

for review?

xi

ISSUES PRESENTED

Issue 1: Was it reversible error for the district court to grant

Strandhagen’s traditional motion for summary judgment

declaring the parties’ liquidated damages provision to be an

unenforceable penalty?

Issue 2: Was it reversible error for the district court to deny the portion

of the Physicians’ Plea to the Jurisdiction contending that

Strandhagen’s claim was not yet ripe for decision?

xii

STATEMENT OF FACTS

Dr. Tracy Strandhagen, an anesthesiologist, left her medical practice

group approximately five years prior to the expiration of the seven-year

term that she had contractually agreed to work. (CR.160; Sealed.CR.12).

Before Strandhagen’s partners decided whether to sue her for breach of

contract or other claims, Strandhagen filed this preemptive lawsuit seeking

judicial declarations that would preclude her partners from recovering

against her under the liquidated damages provision of the parties’ contract

if they decided to bring a future claim against her. (CR.4-9). Strandhagen

named as defendants seven individual partners, who were the then-current

members of the practice group’s Advisory Board (Appellants Dr. Noah S.

Bunker, Dr. Paul Carrell, Dr. Everett Brew Houston, Jr., Dr. W. Andrew

Buchholz, Dr. Scott J. Leighty, Dr. Jad L. Davis, and Dr. Holly Clause)

(collectively, “the Physicians”). (CR.1-3, 162, 179). 1 The trial court

granted declaratory relief in favor of Strandhagen. (CR.212, 271). The

Physicians urge this Court to reverse that decision.

1 Although Strandhagen appears to have chosen these defendants based on their

prior service on the Board, she sued them in their individual capacities, not in their

capacities as Board members.

1

I. THE PARTIES ENTERED A SERIES OF CONTRACTS

GOVERNING THEIR MEDICAL PRACTICE.

Tracy Strandhagen and approximately sixty other anesthesiologists

were members of the Austin Anesthesiology Group (“AAG”). (CR.38, 160).

In October 2011, they collectively decided to sell 100% of their outstanding

interests in AAG to American Anesthesiology of Texas (“AAT” or “the

Company”)2 pursuant to a Membership Interest Purchase Agreement

(“the Purchase Agreement”). (CR.38, 77, 155, 162). 3 The

anesthesiologists thereby became “physician partners” of AAT (“the

Partners”). 4 (CR.162). In connection with this transaction, the Company

and the Partners entered two types of additional contracts. (CR.162, 186-

187).

First, the Company and the Partners entered an Advisory Board and

Internal Operations Agreement (“the Operations Agreement”). (CR.77,

162-183; Appx. 4). This agreement (1) established the duties, powers, and

2 AAT is an indirect subsidiary of a national medical services provider, Mednax,

Inc. (CR.6, 80; Sealed.CR.11).

3 A copy of the Purchase Agreement is not included in the record. It is referenced,

however, by the other contracts contained therein. (See CR.162; Sealed.CR.1).

4 Under the assorted agreements, the anesthesiologists are referred as the

“Physicians,” “Partners,” and/or “Physician Partners.” Herein, when referenced as an

entire group, they will be called the “Partners.” To distinguish this from references to

the seven, individual physicians named as defendants in this lawsuit, the latter will be

called the “Physicians.”

2

procedures of the Partners’ Advisory Board, Medical Director, and Partners’

Representative; (2) identified the individuals who would serve the initial

terms of those positions; and (3) set forth the obligations owed by each

physician to the other Partners and the Company. (Id.).

Second, the Company entered separate Employment Agreements

with each of the Partners “to protect the business interests and goodwill of

[the Company] and to promote the effective administration and

continuation of the Practice.” (Sealed.CR.1, 3, 12; see also CR.111, 155, 166-

167).5 As shown by Strandhagen’s contract, the Employment Agreements

set forth, inter alia, (1) the duties, services, and standards of conduct that

the Partners promised to provide; (2) the parties’ billing and compensation

agreements; and (3) the terms of the Partners’ non-competes.

(Sealed.CR.1-12, 24). Importantly, the Employment Agreements specified a

set number of years that each Partner agreed to work for the practice (“the

Initial Term”). (CR.167; Sealed.CR.12). Strandhagen’s contract specified

that “the term of [the Employment Agreement] shall be a period of seven

(7) years,” which would expire in approximately October 2018.

(Sealed.CR.12). 6

5 Strandhagen’s Employment Agreement was submitted as a sealed, in camera

“Exhibit A-1” as part of the summary-judgment record and in connection with the

Motion for New Trial. (CR.146-147, 150-152, 271; Sealed.CR; RR.23-24, 28).

3

A. The Partners Promised to Stay With the Practice for a

Defined Period for Important Financial Reasons.

The Partners’ agreements to stay with the practice for a designated

period of time was tied to the amount of monetary consideration they

received under the Purchase Agreement. (See CR.144, 167-168). Their

collective agreements to stay for a designated number of years also had

important financial implications for the practice. First, each of the

physicians brought to the practice many years of experience and goodwill

that could not be readily replaced in the event of an early departure. (See

Sealed.CR.1). Strandhagen’s Employment Agreement reflects that she, like

her Partners, “ha[d] practiced medicine in the Specialty for many years and

[] developed substantial personal goodwill, including business contacts,

reputation, and other relationships in the health care industry.”

(Sealed.CR.1).

Beyond the Partners’ goodwill value, the profitability of their practice

also depended on each Partner working a designated shift schedule, as

determined by the Medical Director. (CR.168; Sealed.CR.2-3). They

worked in “units” to fulfill the schedule, which required the cooperation

and dedication of each Partner. (Sealed.CR.2, 7, Annex A, B). Fulfillment

6 It appears that the majority of the Partners, like Strandhagen, agreed to seven-

year terms while seven of them negotiated shorter terms of employment. (See CR.168;

Sealed.CR.12).

4

of these obligations allowed the practice to earn annual gross profits, which

directly affected the Partners’ ability to earn annual incentive bonuses.

(CR.187; Sealed.CR.9, Annex A, B).

B. The Partners Agreed to be Bound by a Liquidated

Damages Provision Regulating Early Departure from

their Practice.

In recognition of the financial importance of the Partners remaining

with the practice for the entire duration of their agreed-upon terms, they

collectively agreed to be bound by a liquidated damages provision stating

that, if a Partner departed the practice early, he or she would be liable to

the remaining Partners for a specified amount of damages, subject to

certain exceptions. (CR.168). More specifically, the Operations Agreement

provided that—given (1) the consideration received by the Partners under

the Purchase Agreement and the calculation of bonuses based upon the

profits of the Company, and (2) the Partners’ agreements to work for a

specified Initial Term—if any Partner departed early, the others “may suffer

harm, including, without limitation, increased workloads necessitated by

such termination, material impairment of the ability of the Physicians to

earn bonuses, . . . material impairment of the Physicians’ relationships with

hospitals and other [parties] . . ., and hiring and training costs related to

replacement physicians.” (CR.167-168, 187).

5

The Partners “acknowledge[d] and agree[d]” that such that damages

would be difficult to prove, and that it would otherwise be inconvenient or

non-feasible to obtain another adequate remedy. (CR.168). Thus, they

agreed that if any Partner terminated his or her employment prior to the

expiration of the Initial Term (with some exceptions, as discussed below),

then he or she would pay the remaining Partners “as liquidated

damages and not as a penalty, the amount set forth below.” (CR.168)

(emphasis added).

The majority of the sixty Partners agreed to be bound by a liquidated

damage amount of $500,000. (CR.156, 168). Seven others negotiated

individual liquidated damages amounts between $240,000 and $400,000,

presumably tied to having negotiated shorter “Initial Terms” of

employment. (CR.168). The Partners “each acknowledge[d] and

agree[d] that the Liquidated Damages Amount is reasonable in

light of the anticipated harm which would be caused by a Terminating

[Partner’s] breach of or default under this Agreement, the difficulty of proof

of loss, the inconvenience and non-feasibility of otherwise obtaining an

adequate remedy, and the value of the transactions to be consummated

under the Purchase Agreement and the other Transaction Documents.”

(CR.168) (emphasis added).

6

The Partners agreed to several exceptions in which the liquidated

damages provision would not be enforced. First and foremost, a Partner

would not be liable for liquidated damages if the Company terminated the

Partner’s employment without cause prior to expiration of the Initial Term.

(CR.168). The Employment Agreement specified events that would provide

the Company “cause” for termination. (Sealed.CR.13-18). Second, a Partner

would not be liable for liquidated damages if his or her employment ended

early due to the Partner’s death or disability, a down-sizing of the company,

or similar specified exceptions. (CR.169). Finally, each Partner had the

option of petitioning for permission by the majority to terminate his or her

employment early without payment of liquidated damages in the event of

“unforeseen circumstances” or “to provide other services to the Company or

its Affiliates.” (CR.169).

The Partners expressly acknowledged the importance of these

provisions. The Operations Agreement states that their “agreement to be

bound by the covenants set forth herein, which [] are narrowly tailored and

necessary to protect the Physicians’ legitimate interests as a group,”

constituted a “significant inducement to [the Partners] entering into the

Purchase Agreement and consummating the transaction contemplated

thereby.” (CR.162).

7

II. STRANDHAGEN DEPARTED THE PRACTICE FIVE YEARS

EARLIER THAN SHE HAD CONTRACTUALLY AGREED.

Under Strandhagen’s Employment Agreement, the initial seven-year

term of her employment was not set to expire until approximately October

2018. (Sealed.CR.12). Strandhagen’s employment was terminated five

years early, between July-September 2013. (CR.88, 160, 187).

Strandhagen claimed she was constructively discharged on the basis

of gender discrimination in July 2013. (CR.88, 93, 101). If that were true,

it would provide a “terminated without cause” exception to her liability

under the liquidated damages provision. (CR.168). To the contrary, the

Company claimed that, following a series of disciplinary infractions,

Strandhagen quit or was terminated with cause in September 2013.

(CR.103, 144). Under that circumstance—whether Strandhagen resigned

without first obtaining permission from the majority of her partners for an

early departure or was rightfully terminated for engaging in detrimental

conduct, failing or refusing to adhere to specified policies and standards, or

breaching other terms of her Employment Agreement—Strandhagen would

be liable for payment of liquidated damages. (CR.167-169; Sealed.CR.13-

15).

8

III. STRANDHAGEN FILED SEPARATE PROCEEDINGS AGAINST

THE COMPANY AND HER PHYSICIAN PARTNERS.

In approximately December 2013, Strandhagen filed an employment-

discrimination complaint against the Company with the Texas Workforce

Commission, Civil Rights Division and the EEOC. (CR.39, 80, 85-87, 91-

92). Despite having not made any representation of discrimination in

connection with the buyout just two months earlier, Strandhagen now

claimed that she had suffered such discrimination “for many years.”

(CR.93, 144). The primary issue in Strandhagen’s proceeding against the

Company was, therefore, whether she was terminated with or without cause

(i.e., whether Strandhagen’s termination resulted from her misconduct or

was based on gender discrimination).

While those administrative claims were pending, Strandhagen

initiated this suit in the Travis County District Court against seven of her

Partners: Drs. Bunker, Carrell, Houston, Buchholz, Leighty, Davis, and

Clause (“the Physicians”). (CR.4). Strandhagen’s sole cause of action was a

declaratory judgment claim. (CR.40). She sought declarations that:

9

(1) she was terminated without cause, meaning the liquidated

damages provision is inapplicable to her; and

(2) the liquidated damages provision is an unenforceable

penalty because:

(a) the resulting harm from Strandhagen’s early

termination was not incapable or difficult of

estimation,

(b) the liquidated damages amount is not a reasonable

forecast of just compensation, and

(c) it purports to render her liable to the Physicians for

a breach of her Employment Agreement to which

they are not parties or third-party beneficiaries.

(CR.40-41).

IV. THE DISTRICT COURT DISMISSED PART AND GRANTED

PART OF THE DECLARATORY RELIEF STRANDHAGEN

SOUGHT AGAINST THE PHYSICIANS.

The Physicians filed a Plea to the Jurisdiction seeking dismissal of

both grounds of Strandhagen’s declaratory judgment claim. (CR.70, 77).

The Physicians argued: (1) Strandhagen’s request to declare whether or not

she was terminated for cause duplicated the primary issue pending before

the TWC/EEOC, and she was required to exhaust her administrative

remedies first; and (2) Strandhagen’s challenge to the liquidated damages

provision was not ripe because the Physicians had not made any demand

nor sued her to collect such damages. (CR.79-80). The district court (the

10

Honorable Steven Yelenosky presiding) granted the first argument, thereby

dismissing ground (1) of Strandhagen’s declaratory judgment claim, and

denied the second, maintaining jurisdiction over ground (2) of

Strandhagen’s claim. (CR.184). Strandhagen does not appeal the dismissal

of ground (1) of her claim.

Strandhagen then moved for a traditional summary judgment

granting ground (2) of her claim. In so doing, she abandoned her

contention that (a) the resulting damages would be incapable or difficult of

estimation, instead arguing only that the liquidated damages provision was

unenforceable as a matter of law because (b) the amount to be paid was not

a reasonable forecast of just compensation, and (c) the Physicians were not

third-party beneficiaries of her Employment Agreement. (CR.154, 196).

Following the Physicians’ Response, further briefing by both parties, and a

hearing, the district court (the Honorable Orlinda Naranjo presiding)

granted Strandhagen’s motion. (CR.186-212). Without specifying any

grounds, the Court “declare[d] that the $500,000 purported liquidated

damages clause in the . . . Operations Agreement is an unenforceable

penalty,” and denied all other relief not expressly granted. (CR.212). This

resulted in a final judgment. (CR.212).

11

The Physicians filed a Motion for New Trial urging several reasons

why the grant of summary judgment was improper, as argued below.

(CR.213-250). The Court denied the motion following a hearing on its

merits. (CR.271; RR.1-29). The Physicians appealed. (CR.272-78).

SUMMARY OF THE ARGUMENT

This Court must decide whether to uphold the plain language of a

contract that was mutually-agreed to by parties of equal sophistication or,

instead, allow one of those parties (Strandhagen) to secure a premature

avoidance of the contractual liability provision before any actual dispute

has arisen and without sufficient evidence to support her request. The

district court improperly refused to enforce the parties’ contract and

granted Strandhagen advisory relief. This Court should reverse those

errors.

The first issue is whether the district court erred in granting

Strandhagen a traditional summary-judgment when she failed to satisfy her

burden of conclusively proving each element of her affirmative defense that

the liquidated damages provision in the parties’ Operations Agreement is

an unenforceable penalty. The answer is yes. The summary-judgment

order should be reversed.

12

Strandhagen failed to establish the two essential elements of her

claim. She unequivocally abandoned the first element (that damages

resulting from her breach would be difficult to estimate), and she failed to

offer conclusive proof of the second element (that the liquidated amount

was an unreasonable forecast of the actual damages). In regard to the

latter, Strandhagen (a) offered no evidence of the actual damages to

establish an unreasonable disparity; (b) her contentions ignore the plain

language of the contract; and (c) in any event, a fact issue exists about

whether the court should modify the liquidated amount rather than strike it

all together.

Strandhagen also failed to establish that it was necessary for the

Physicians to be third-party beneficiaries of her Employment Agreement to

enforce the liquidated damages provision under their own Operations

Agreement. Even had such status been required, Strandhagen did not

satisfy her summary-judgment burden of conclusively negating its

existence.

The second issue is whether the district court erred in denying the

portion of the Physicians’ Plea to the Jurisdiction arguing that

Strandhagen’s declaratory judgment claim was unripe. Again, the answer is

yes. The partial denial of the Plea should be reversed. This presents an

13

alternative basis to reverse the summary judgment because such relief

should not have been granted in the absence of jurisdiction. Strandhagen’s

claim misuses the Declaratory Judgment Act by seeking an advance ruling

on a potential affirmative defense to a dispute that has not yet (and may

never) come to exist. As such, the district court’s grant of a declaration in

her favor was advisory and improper.

ARGUMENT

In two issues, the Physicians respectfully request that this Court

reverse the district court’s (1) grant of Strandhagen’s traditional Motion for

Summary Judgment on her declaratory judgment claim, and (2) partial

denial of the Physician’s Amended Plea to the Jurisdiction. If the latter is

reversed, then a judgment dismissing Strandhagen’s claims should be

rendered in favor of the Physicians. See Texas Dept. of Crim. Justice-

Cmty. Justice Assistance Div. v. Campos, 384 S.W.3d 810, 812 (Tex. 2012).

Otherwise, the case should be remanded for further proceedings. Tex. R.

App. P. 43.2, 43.3.

I. THE DISTRICT COURT ERRED BY GRANTING

STRANDHAGEN’S MOTION FOR SUMMARY JUDGMENT.

Strandhagen’s Motion for Summary Judgment should have been

denied because she failed to conclusively establish (1) the essential

14

elements of her claim and (2) that the status of the Physicians as third-

party beneficiaries to her Employment Agreement had any impact on the

enforceability of the liquidated damages provision. In any event, as argued

under Issue 2, the court erred in granting summary judgment on a

hypothetical (unripe) question because it lacked subject-matter jurisdiction

to do so.

A. Summary Judgment Standard of Review.

This Court reviews the grant of summary judgment de novo. Valence

Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). Appellate

courts “review the evidence presented in the motion and the response in the

light most favorable to the party against whom the summary judgment was

rendered, crediting evidence favorable to that party if reasonable jurors

could, and disregarding contrary evidence unless reasonable jurors could

not.” Thomas v. Graham Mortg. Corp., 408 S.W.3d 581, 588 (Tex. App.—

Austin 2013, pet. denied). “A movant is entitled to traditional summary

judgment if (1) there are no genuine issues as to any material fact and (2)

the moving party is entitled to judgment as a matter of law.” Id. (citing Tex.

R. Civ. P. 166a(c)).

15

B. Strandhagen Failed to Satisfy her Summary-Judgment

Burden on the Essential Elements of her Claim.

Strandhagen moved for a traditional summary judgment declaring

that the liquidated damages provision in the Operations Agreement is an

unenforceable penalty. (CR.154). “The term ‘liquidated damages’ ordinarily

refers to an acceptable measure of damages that parties stipulate in

advance will be assessed in the event of a contract breach.” Flores v.

Millennium Interests, Ltd., 185 S.W.3d 427, 431 (Tex. 2005).

Although Strandhagen was the plaintiff, her declaratory judgment

claim—which was filed preemptively in attempt to avoid potential liability

under the liquidated damages provision—was in the nature of an

affirmative defense. “Whether a contractual provision is an unenforceable

penalty and not a liquidated damage clause is an affirmative defense.” GPA

Holding, Inc. v. Baylor Health Care Sys., 344 S.W.3d 467, 471 (Tex. App.—

Dallas 2011, pet. denied) (citing Tex. R. Civ. P. 94; Phillips v. Phillips, 820

S.W.2d 785, 789 (Tex. 1991)); Khan v. Meknojiya, No. 03-11-00580-CV,

2013 WL 3336874, *2 (Tex. App.—Austin June 28, 2013, no pet.) (same).

When a movant seeks a traditional summary judgment on an affirmative

defense, the movant carries the burden of demonstrating her entitlement to

judgment as a matter of law by conclusively proving each element of the

affirmative defense. Federal Deposit Ins. Corp. v. Lenk, 361 S.W.3d 602,

16

609 (Tex. 2012); Landry's Seafood Restaurants, Inc. v. Waterfront Cafe,

Inc., 49 S.W.3d 544, 547 (Tex. App.—Austin 2001, pet. dism’d).

Strandhagen agrees that she bore the burden of proof on her

affirmative defense of penalty. (CR.195-196, 262). Strandhagen and the

Physicians disagree, however, about which elements she was required to

prove to be entitled to summary judgment. The Physicians argue she had

to prove two elements, while Strandhagen claims she had to prove only one

or the other. (CR.188-189, 196, 262).

Although the Texas Supreme Court has not definitively answered this

legal question, several intermediate courts—including this one—have

reached the conclusion urged by the Physicians. See infra. In any event,

because Strandhagen failed to conclusively prove both elements, the orders

granting her summary judgment and denying the Physicians’ Motion for

New Trial should be reversed. (RR.14).

1. Strandhagen was required to conclusively

establish two elements.

The most on point opinion is GPA Holding, 344 S.W.3d at 476. Like

Strandhagen, GPA moved for summary judgment urging that the liquidated

damages clause in its contract with Baylor was an unenforceable penalty.

Id. The Dallas Court held that, “[t]o obtain summary judgment on the

17

affirmative defense of penalty, GPA [as the party seeking to avoid

enforcement of the provision] must prove each element of the defense.”

Id. (emphasis added). GPA’s required elements were that: (1) the harm

resulting from a breach was not incapable or difficult of estimation, and (2)

the amount of liquidated damages provided by the contract was not a

reasonable forecast of actual damages. Id.; see also Baker v. Int’l Record

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

(“Evidence related to the difficulty of estimation and the reasonable

forecast must be viewed as of the time the contract was executed.”).

“The difficulty (or lack of difficulty) in estimation as well as

the unreasonableness of the damages estimate were GPA’s to

prove. General statements about a ‘more reasonable’ or ‘modest’ rate are

not evidence that the harm from late payment is difficult to estimate, or

that the normal billed charges were an unreasonable forecast of the loss

actually sustained.” GPA Holding, 344 S.W.3d at 476 (emphasis added).

“Because GPA did not meet its burden of establishing that the clause . . .

was an unenforceable penalty,” the trial judge did not err in denying GPA’s

motion for summary judgment on this issue.” Id.

This Court reached the same conclusion following a jury trial in

Southern Union Co. v. CSG Systems, Inc., No. 03-04-00172-CV, 2005 WL

18

171349, *4 (Tex. App.—Austin Jan. 27, 2005, no pet.). Southern Union

argued that the damages provision was an unenforceable penalty. Id. This

Court held that “[t]he party challenging the award of liquidated damages

has the burden to establish that the two-prong test is not satisfied

and that, instead, the award of liquidated damages is an unenforceable

penalty.” Id. at *4 (emphasis added). The Court then discussed whether

Southern Union satisfied the “first part of its burden” regarding “difficulty

of estimation” and the “second part of its burden” regarding “reasonable

forecast of just compensation.” Id. at *4-6. Concluding that Southern

Union failed to prove either essential element, the Court affirmed the award

of liquidated damages, subject to a partial remittitur on another issue. Id.

at *7-8.

More recently, in Khan v. Meknojiya, 2013 WL 3336874 at *2,

Mekonjiya moved for summary judgment on the affirmative defense of

penalty. In considering whether the district court properly denied that

motion, this Court stated that, “to be entitled to summary judgment,

Meknojiya had to conclusively establish every element of this defense,”

and then set forth the two elements regarding (1) incapable or difficult of

estimation, and (2) reasonable forecast of compensation. Id. at *2-3

19

(emphasis added) (ultimately holding that the provision was not one for

liquidated damages and thus the penalty analysis was inapplicable).

The Eastland Court of Appeals also held that a party seeking to avoid

enforcement of a liquidated damages provision on summary judgment

must prove both elements of the penalty affirmative defense. Healix

Infusion Therapy, Inc. v. Bellos, No. 11-02-00346-CV, 2003 WL 22411873,

*2 (Tex. App.—Eastland Oct. 23, 2003, no pet.). The Court held that “the

burden Healix [as the party claiming penalty] must bear [is] that at the time

the agreement was made damages could be easily ascertained and that the

amount of the liquidated damages award was not a reasonable forecast of

just compensation.” Id. (emphasis added). Healix’s contention “that the

award of liquidated damages is disproportionate to actual damages” was

insufficient on its own. Id. “Healix still must show that, at the time the

agreement was made, the amount of the liquidated damages was not a

reasonable forecast.” Id. “Healix failed to meet his burden of proof on the

penalty issue.” Id. at *3.

Other courts have reached similar conclusions. See Triton 88, LP v.

Star Electricity, LLC, 411 S.W.3d 42, 62 (Tex. App.—Houston [1st Dist.]

2013, no pet.) (favorably citing GPA Holding and concluding “Triton failed

to raise a fact question on its claim that the . . . clause constituted an

20

impermissible penalty,” where Triton “did not present any evidence

regarding the parties’ ability to estimate actual damages . . . or what a

reasonable forecast of damages would have been at the time the contract

was formed.”); Murphy v. Cintas Corp., 923 S.W.2d 663, 666 (Tex. App.—

Tyler 1996, writ denied) (“For the provision to be an unenforceable penalty,

the uncertainty of the damages and the reasonableness of the stipulation

must have existed at the time when the contract was executed.” Where

neither element was proven, the clause was held enforceable.) (emphasis

added).

The Physicians acknowledge that contrary authority exists in which

courts have not required proof of both elements before concluding the

provision to be a penalty. See, e.g., Nexstar Broad., Inc. v. Gray, No. 09-

07-00364-CV, 2008 WL 2521967 (Tex. App.—Beaumont 2008, no pet.)

(holding liquidated damages provision to be an unenforceable penalty

because it was an unreasonable forecast of just compensation without

discussion of the difficulty of estimation element); (RR.9-10).

However—given the black-letter law that a movant seeking traditional

summary judgment on its affirmative defense is required to prove every

element of its defense, coupled with prior holdings of this Court (Southern

Union and Kahn) and the case most on point (GPA Holdings) requiring

21

proof of both elements to prevail on the affirmative defense of penalty—the

Physicians urge this Court to conclude Strandhagen was required to

establish both elements, and decline to follow opinions to the contrary.

Consequently, this Court should reverse the judgment if it concludes that

Strandhagen failed to conclusively establish either one of the two required

elements that (1) the harm resulting from a breach was not incapable or

difficult of estimation (i.e., the harm could be easily and accurately

estimated), or (2) the amount of liquidated damages provided by the

contract was not a reasonable forecast of actual damages (i.e., the

liquidated damages amount was excessive compared to the actual damages

resulting from a breach).

But even if this Court were to conclude that Strandhagen was

required to prove only one element of her affirmative defense, reversal of

the judgment is still necessitated by the fact that Strandhagen failed to

conclusively prove both of the foregoing elements.

2. Strandhagen conceded her inability to prove the

“difficulty of estimation” element.

Strandhagen unequivocally admitted that “[s]he does not seek to

negate the element concerning the difficulty of estimation . . .; she only

seeks to negate the second element.” (CR.196, 263). The record leaves no

22

doubt that Strandhagen failed to carry her burden of proof on this element.

The summary judgment should be reversed accordingly.

3. Strandhagen failed to conclusively prove the

“unreasonable forecast” element.

Strandhagen did not satisfy her summary-judgment burden of

proving that the liquidated damages amount failed to reasonably forecast

actual damages because (a) she offered no evidence to demonstrate what

the actual damages were or that there was an excessive disproportion

between the amounts; (b) to accept her argument, this Court must

disregard the plain language of the contract; and (c) a genuine issue of

material fact remains about whether the liquidated damages clause should

be modified rather than struck as unenforceable.

(a) No evidence of actual damages.

(i) Texas law requires proof of actual damages.

Although the question of “[w]hether a contractual provision is an

enforceable liquidated damages provision or an unenforceable penalty is a

question of law for the court to decide, [s]ometimes . . . factual issues must

be resolved before the legal question can be decided.” Phillips v. Phillips,

820 S.W.2d 785, 788 (Tex. 1991). Our supreme court identified a typical

fact issue in connection with the “unreasonable forecast” element arising

23

from the movant’s requirement to “prove what the actual damages were” in

comparison to “the amount contracted for.” Id. The party claiming the

provision is a penalty “must prove actual damages, if any, to show that the

actual loss was not an approximation of the stipulated sum.” Healix, 2003

WL 22411873 at *2.

Where a party fails to offer any evidence of actual damages in

comparison to the liquidated amount, the court may conclude that the

party has failed to carry its burden of proof and uphold the liquidated

damages provision. See e.g., Triton, 411 S.W.3d at 62 (“Triton did not

present any evidence regarding what a reasonable forecast of damages

would have been at the time the contract was formed, nor did it present any

evidence of StarTex’s actual damages. Thus, . . . [the] liquidated damages

[clause] provided a reasonable forecast of just compensation.”).

Additionally, vague averments of “unreasonableness” not supported

by actual evidence will not suffice to establish the defense of penalty. The

movant cannot meet its burden simply by claiming that the actual damages

are not yet ascertainable and therefore tantamount to “zero.” Healix, 2003

WL 22411873 at *2. And as noted by this Court, a liquidated damages

amount awarding two to three times the amount of actual damages is not

per se unreasonable. Southern Union, 2005 WL 171349 at *6 (citing

24

Sealock v. Texas Fed. Sav. & Loan Assoc., 755 S.W.2d 69, 70 (Tex. 1988)

(“uph[olding] a trial court’s judgment awarding $790,000 in liquidated

damages, which was twice the $395,000 found as actual damages”); Baker

v. Int’l Record Syndicate, Inc., 812 S.W.2d 53, 56 (Tex. App.—Dallas 1991,

no writ) (“approv[ing] a liquidated damages award of $51,000, which was

more than triple the $15,000 found as actual damages”).

In GPA Holding, 344 S.W.3d at 476, the movant “offered evidence

comparing the discounted rates to the hospital’s normal billed rates for the

charges at issue,” including an affidavit with an attached chart showing “the

percentage difference between the discounted rate and the normal billed

charge for each of the charges at issue,” and presented argument about an

alternative damage calculation that the movant contended would be more

reasonable. Even this was not enough. The court held that movant failed

to carry its burden of proof on the “unreasonable forecast” element because

it failed to attach evidence in support of the alternative calculation. Id.

(ii) Strandhagen offered no proof of actual

damages, and her “one size fits all” argument

fails.

Strandhagen offered no evidence of what the Physicians’ actual

damages were or would be in the event that they brought a future suit

against her for breach of contract nor did she establish any alternative

25

damages calculation that she would contend is more reasonable. Instead,

Strandhagen claimed that, as a matter of law, the liquidated damage

amount was unreasonable because it was a “one size fits all” provision, i.e.,

the same amount of damages would be owed regardless of when she

terminated her employment. (CR.157, 197-98, 264). This contention is

insufficient without any proof of how the liquidated damage amount was

calculated or what the actual damages were.

Strandhagen relied on cases holding that a liquidated damages

provision may be unenforceable if it imposes the same amount of liability

for breaches that are both trivial and severe. (CR.198). This is not the case

under the Operations Agreement. Here, the liquidated damages provision

applies to only one form of breach: a Partner’s early departure from the

practice. (CR.167-168). It does not apply, for example, to non-material

breaches like the Advisory Board’s failure to hold a regular meeting

(CR.163) or its failure to take a written vote upon request (CR.164).

Strandhagen attempts to transform the time of the breach into a

measure of its materiality. But Strandhagen presented no evidence to

establish that the financial impact on the remaining Partners would be

substantially greater or lesser depending on the timing of another Partner’s

early departure. As previously discussed, important financial reasons

26

supported the Partners’ agreement to be bound by this liquidated damages

clause, including the anticipated impact that one’s early departure would

have on the practice’s gross profits and the Partners’ abilities to earn annual

bonuses, as well as the resulting loss of experience and goodwill, which

could not be easily or quickly replaced. Supra, Statement of Facts Section

I.A. These financial considerations could be the same whether Strandhagen

quit on day 1 or day 1,000. Strandhagen offered no evidence to prove

otherwise. Instead, she simply claimed that “the consequences of Dr.

Strandhagen’s employment terminating obviously varies over time.”

(CR.157). This unsupported allegation does not suffice to meet her burden.

Strandhagen’s “one size fits all” contention also fails in light of the

several exceptions to the liquidated damages provision. (CR.167-169).

Several types of “early departures” were carved out from application off the

provision. These exceptions eliminate the imposition of any liability for

early termination scenarios that would not constitute a material breach of

the contract (such as early termination based on disability or with

permission by the majority). Hence, the clause was narrowly drafted, not

an unenforceable “one size fits all” provision.

Moreover, relevant legal authorities are contrary to Strandhagen’s

contention. The fact that a liquidated damages provision awards a uniform

27

amount for the breach of a term agreement regardless of the date of the

breach is not per se unreasonable. In Murphy v. Cintas Corp., 923 S.W.2d

663, 666 (Tex. App.—Tyler 1996, writ denied), Murphy claimed that the

liquidated damages provision was an unenforceable penalty because it

imposed the same amount of damages for early cancellation of the parties’

agreement whether it resulted from his failure to pay for one of the

contemplated goods (at the end of the contract’s term) or all of them (at the

beginning). Id. The court rejected this argument and enforced the

provision. Id. at 666-667.

The Restatement of Contracts regarding liquidated damages is

consistent with Murphy. See RESTATEMENT (SECOND) OF CONTRACTS § 356,

Liquidated Damages and Penalties (1981). Comment (b), “Test of

Penalty,” states that a liquidated damages amount “is reasonable to the

extent that it approximates the actual loss that has resulted from the

particular breach, even though it may not approximate the loss that might

have been anticipated under other possible breaches.” Id. (emphasis

added). Thus, this Court needs to determine only whether Strandhagen

conclusively established that the liquidated amount was an unreasonable

forecast of the actual damages resulting from this particular breach (her

28

five-year premature departure from the practice). Strandhagen offered no

prove to establish this element.

According to Restatement Section 356, whether the liquidated

amount reasonably forecast other breaches that may have occurred is not a

basis to deny the provision’s enforceability in this case. Id. This is

confirmed by Illustration 2 to Section 356. In that example, partners A, B,

and C formed a veterinary practice promising to remain as a partnership for

ten years. Id. The liquidated damages clause provided that, if one partner

terminated early (and the others continued the business), and the

terminating partner breached his duty of non-competition, he would be

liable for $50,000. This provision is enforceable because “[e]ven though

$50,000 may be unreasonable in relation to the loss that may have resulted

in other circumstances, it is not unreasonable in relation to the actual loss.”

Id.

In the absence of any evidence from Strandhagen to support her

claim that the liquidated damages amount was not a reasonable forecast of

just compensation—and especially considering that all inferences must be

construed in favor of the Physicians as nonmovants—the record fails to

conclusively demonstrate that Strandhagen satisfied her burden of proof on

29

this element. This Court should reject Strandhagen’s facial challenge just

as the court did in Murphy, 923 S.W.2d at 666.

(b) Plain language of contract shows reasonable

forecast.

Beyond the lack of evidence in support of Strandhagen’s contention

that the liquidated damages amount was an unreasonable forecast of the

actual damages, the plain language of the parties’ contract demonstrates

that it was not. The Court would be required to disregard or render

meaningless certain portions of the contract to accept Strandhagen’s

argument.

In determining whether Strandhagen has satisfied her burden on the

affirmative defense of penalty, this Court must keep in mind the basic rules

of contract construction, as recognized in GPA Holding, 344 S.W.3d at 471.

“The court’s primary concern in interpreting a written contract is to

determine the mutual intent of the parties as manifested in the contract, . . .

and the agreement must be enforced as written.” Id. Terms should be given

their plain and ordinary meaning, and interpretations that render any

portion meaningless should be avoided. Id.

This Court considered the plain language of the contract as a basis for

rejecting a penalty defense and enforcing a liquidated damages provision in

Southern Union Co. v. CSG Systems, Inc., No. 03-04-00712CV, 2005 WL

30

171349, *4-6 (Tex. App.—Austin Jan. 27, 2005, no pet.). There, the contract

stated that the damages provision was included “[b]ecause of the difficulty

in ascertaining CSG’s actual damages for a termination or other breach of

the Agreement,” and that “CSG would have been unwilling to provide the

Services at the fees set forth in the Agreement” had Southern Union not

promised “certainty of revenue” by obligating itself to pay the

discontinuance fee in the event that it breached the contract.” Id. at *4.

The damages provision also “expressly state[d] that it ‘is not a penalty’ and

that it ‘is a reasonable estimation of the actual damages which CSG would

suffer if CSG were to fail to receive the amount of processing business as

contemplated by this Agreement.’” Id. at *6. The Court clarified that,

“[a]lthough parties cannot avoid a challenge to a liquidated damages

provision simply by characterizing it as ‘reasonable,’ such express language

is instructive of the parties’ intent when the terms are mutually bargained

for between equally competent parties.” Id.

This Court also put weight on the fact that the “provision was a

bargained-for exchange, negotiated and approved by both companies.” Id.

“When a provision is mutually bargained for by equally competent parties,

we give deference to its enforcement. . . . From the face of the contract,

Southern Union understood at the time it entered the agreement that CSG’s

31

damages would be difficult to estimate and therefore agreed a liquidated

damages provision was necessary.” Id.

Much like the Southern Union/CSG contract, the Operations

Agreement between Strandhagen and her Partners expressly stated that the

stipulated amount was to be paid “as liquidated damages, and not as a

penalty,” and that the amount was “reasonable in light of the anticipated

harm which would be caused by a Terminating Physician’s breach or

default under this Agreement.” (CR.168). Additionally, the Partners

agreed that the contract’s provisions were “narrowly tailored and necessary

to protect the Physicians’ legitimate interests as a group,” and that they

constituted a “significant inducement to [the Partners] entering into the

Purchase Agreement, and consummating the transaction contemplated

thereby.” (CR.162).

Also like the Southern Union/CSG contract, Strandhagen and her

Partners were mutually competent parties who voluntarily and knowingly

entered this bargained-for exchange. (CR.162, 173-178). Hence, this Court

should defer to the plain language of the Operations Agreement, which

evidences the parties’ mutual intent for the liquidated damages provision to

be valid and enforceable, and not construed as a penalty. To do otherwise

would impermissibly render meaningless the express provisions of the

32

contract stating that the damages provision was reasonable, narrowly-

tailored, a necessary inducement, and not a penalty.

(c) Fact issue exists regarding modification.

Finally, to any extent the Court believes Strandhagen offered proof

that the damages provision was not a reasonable forecast of actual

damages, she has still failed to conclusively establish this element of her

defense because the “Severability” clause in the parties’ contract creates a

genuine issue of material fact.

Section 7(f) of the Operations Agreement provides:

Severability. . . . In the event that any provision of

this Agreement shall be declared by a Court of

competent jurisdiction to exceed the limits such

court deems reasonable and enforceable, said

provisions shall be deemed modified to the

minimum extent necessary to make such

provisions reasonable and enforceable.

(CR.171) (emphasis added).

“An illegal or unconscionable provision of a contract may generally

be severed so long as it does not constitute the essential purpose of the

agreement.” In re Poly-Am., L.P., 262 S.W.3d 337, 357, 360 (Tex. 2008)

(recognizing that, pursuant to the parties’ contract, the arbitrator “would be

free to modify” terms found to be unconscionable rather than striking them

altogether). Severability is determined by the intent of the parties as

33

evidenced by the language of the contract. In re Kasschau, 11 S.W.3d 305,

313 (Tex. App.—Houston [14th Dist.] 1999, orig. proceeding).

Here, the liquidated amount could be modified in a narrow fashion

without undermining the essential purpose of the parties’ contract. The

express purpose of the Operations Agreement was to “establish an Advisory

Board and set forth certain understandings and agreements among

themselves regarding the operations of their practice.” (CR.162). The

specific amount of liquidated damages applicable to any particular

physician was not the “essential purpose” of the Agreement.

In light of the Severability clause, the district court erred by declaring

the liquidated damages provision wholly unenforceable as a matter of law.

Even if the court considered $500,000 to be an unreasonable liquidated

amount, the court should have concluded that a genuine issue of material

fact exists about what modified amount or calculation would be reasonable

to enforce in its place, keeping with the parties’ express intent to modify the

term “to the minimum extent necessary.” To do otherwise, the Court

would have to impermissibly rewrite the parties’ bargained-for exchange to

strike out the final sentence of Paragraph 7(f), which is a mandatory

provision voluntarily agreed to by the parties. Alternatively, if this Court

34

concludes the Severability clause is ambiguous, then it creates a genuine

issue of material fact requiring reversal and remand. (RR.12-14, 22-23).

C. Strandhagen Failed to Satisfy her Summary-Judgment

Burden Regarding the Physicians’ Status as Third-

Party Beneficiaries.

Strandhagen also moved for summary judgment based on her

argument that the liquidated damages provision is unenforceable because it

seeks to render her liable to the Physicians for a breach of her Employment

Agreement, to which the Physicians are not parties or third-party

beneficiaries. (CR.157-158). This did not provide a valid basis for summary

judgment because (1) Strandhagen’s liability for liquidated damages arises

directly from the Operations Agreement between her and her Physician

Partners, and does not require that the Physicians be third-party

beneficiaries of her Employment Agreement; and/or (2) Strandhagen failed

to conclusively establish that the Physicians were not third-party

beneficiaries of the Employment Agreement.

35

1. The Operations Agreement Provides a Direct Line

of Liability.

Paragraph 5 of the Operations Agreement provides:

[I]f [any Partner] terminates his or her employment

with the Company prior to the expiration of the

Initial Term, the Physicians may suffer harm [as

specified therein]. . . . In light of the foregoing, if a

[Partner’s] employment with the Company is

terminated for any reason during the Initial Term .

. . other than a termination without cause . . . then

such [Terminating Partner] shall promptly pay . . .

as liquidated damages and not as a penalty . . . the

amount set forth below.

(CR.167-168).

This provision creates a direct line of liability for liquidated damages

between an early-terminating physician and her remaining Partners based

on the direct harm that will be suffered by the remaining Partners as a

result of the early termination. (Id.). Under this provision, there is no need

for the Physicians to be third-party beneficiaries of the Employment

Agreement to enforce the liquidated damages clause. The Physicians (if

they sued Strandhagen for breach of contract) would not be attempting to

recover under the Employment Agreement as third-party beneficiaries.

Rather, they would be seeking and are entitled to directly enforce the

liability provisions contained within the four corners of their own contract

with Strandhagen. (RR.10-11).

36

2. A Genuine Issue of Material Fact Remains about

the Physicians’ Third-Party Beneficiary Status.

Alternatively, even if the Court were to conclude that the Physicians

are required to be third-party beneficiaries of Strandhagen’s Employment

Agreement to enforce the liquidated damages clause under the Operations

Agreement, it was error to grant summary-judgment on this ground

because Strandhagen did not conclusively establish the absence of such

third-party beneficiary status.

Strandhagen’s Motion for Summary Judgment states in a single,

conclusory sentence that the Physicians “are [not] third-party beneficiaries”

to the Employment Agreement. (CR.158). She did not provide any

evidence or analysis about the intention of the Employer or herself (or any

of the other Partners) when entering their Employment Agreements, nor

about the meaning of the contract as a whole. Strandhagen failed to satisfy

her traditional summary-judgment burden on this ground. See Alvarado v.

Lexington Ins. Co., 389 S.W.3d 544, 564 (Tex. App.—Houston [1st Dist.]

2012, no pet.) (“It was Lexington’s burden, as movant for summary

judgment, to prove its entitlement to summary judgment against Alvarado

as a matter of law. We hold that Lexington failed to carry its burden of

conclusively negating Alvarado’s status as a third-party beneficiary to the

37

Policy. Thus, we hold that the trial court erred in rendering summary

judgment in favor of Lexington.”).

II. THE DISTRICT COURT ERRED BY DENYING PART OF THE

PHYSICIANS’ PLEA TO THE JURISDICTION.

The Physicians’ Amended Plea to the Jurisdiction argued, in part, that

Strandhagen’s request for a declaration that the liquidated damages

provision was an unenforceable penalty was not yet ripe for decision

because the Physicians had not yet decided whether to sue her for breach of

contract, much less made a demand or filed suit on that basis. (CR.79-80).

In the absence of a live, justiciable controversy, the court lacked subject-

matter jurisdiction over Strandhagen’s claim. (CR.79-80). On this basis,

the district court erred by denying this portion of the Physician’s Plea and

by granting an advisory summary judgment on Strandhagen’s unripe

declaratory judgment claim, and by denying the opportunity to correct this

error in response to the Motion for New Trial. (CR.184-85, 212, 271). This

Court should reverse these decisions and render judgment dismissing

Strandhagen’s claims for a lack of jurisdiction.

A. Texas Law Prohibits Advisory Declarations on

Potential Defenses to Hypothetical Disputes.

In an action for declaratory relief, a plaintiff must allege facts that

affirmatively demonstrate that the trial court has subject matter

38

jurisdiction. Tex. Ass’n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440,

446 (Tex. 1993); City of Pasadena v. Smith, 263 S.W.3d 80, 86 (Tex. App.—

Houston [1st Dist.] 2006, pet. denied). “A request for declaratory relief

alone does not establish jurisdiction in [the] Court. . . . [It is] merely a

procedural device for deciding cases already within a court’s jurisdiction.”

Chenault v. Phillips, 914 S.W.2d 140, 141 (Tex. 1996).

For a court to have jurisdiction to consider a declaratory-judgment

action, there must be a “justiciable controversy as to the rights and status

of” the parties, and the requested declaration “must actually resolve the

controversy.” Brooks v. Northglen Ass’n, 141 S.W.3d 158, 163-64 (Tex.

2004). “A justiciable controversy is one in which a real and substantial

controversy exists involving a genuine conflict of tangible interests and not

merely a theoretical dispute.” Texas Dep’t of Pub. Safety v. Moore, 985

S.W.2d 149, 153 (Tex. App.—Austin 1998, no pet.); see also City of Euless v.

Dallas/Fort Worth Int’l Airport Bd., 936 S.W.2d 699, 703 (Tex. App.—

Dallas 1996, writ denied) (if there is no actual controversy between parties,

declaratory judgment is improper).

“Section 37.004 does not . . . extend an open-ended invitation to

parties seeking interpretation of their contracts. There must be some

showing that litigation is imminent between the parties unless the

39

contractual uncertainties are judicially resolved.” Paulsen v. Texas Equal

Access to Justice Found., 23 S.W.3d 42, 46 (Tex. App.—Austin 1999, pet.

denied); see also In re City of Dallas, 977 S.W.2d 51, 57 (Tex. App.—Fort

Worth 1998, orig. proceeding). The Declaratory Judgments Act does not

permit litigants to “fish judicial ponds for legal advice.” California Prods.

v. Puretex Lemon Juice, Inc., 334 S.W.2d 780, 781 (Tex. 1960).

“The need for a justiciable controversy is related to the jurisdictional

concepts of standing and ripeness and does not supersede these concepts.”

LHR Enters., Inc. v. Geeslin, No. 03-05-00176-CV, 2007 WL 3306492, *4

(Tex. App.—Austin Nov. 7, 2007, pet. denied). Ripeness is a necessary

component of subject matter jurisdiction. Waco Indep. Sch. Dist. v.

Gibson, 22 S.W.3d 849, 850 (Tex. 2000); Atmos Energy Corp. v. Abbott,

127 S.W.3d 852, 857 (Tex. App.—Austin 2004, no pet.). “The requirement

that a claim be ripe for review is based on the prohibition against issuing

advisory opinions.” LHR Enters., 2007 WL 3306492 at *4 (citing

Patterson v. Planned Parenthood, 971 S.W.2d 439, 442 (Tex. 1998); TEX.

CONST. art. II, § 1 (separation of powers); Brooks, 141 S.W.3d at 164

(explaining that separation of powers provision bars issuance of advisory

opinions)). “[T]here must be a concrete injury for the claim to be ripe.” Id.

“A claim is not ripe if it is based on hypothetical or contingent facts that

40

may not occur as anticipated or may not occur at all.” Id.; see also Farmers

Ins. Exch. v. Rodriguez, 366 S.W.3d 216, 223 (Tex. App.—Houston [14th

Dist.] 2012, pet. denied) (declaratory claim was not ripe where parties’

liability for damages depended on outcome of a separate proceeding, which

had not yet finalized).

Based on these concepts, a “defendant may not use a declaratory

judgment to prematurely adjudicate defenses to liability that may not yet

exist. . . . [U]nder the federal constitution, [a] party may not use a

declaratory judgment to get [an] advance ruling on an affirmative defense.”

Transcont’l Realty Investors, Inc. v. Orix Capital Markets, LLC, 353

S.W.3d 241, 245 (Tex. App.—Dallas 2011, pet. denied) (emphasis added)

(noting that a declaratory claim seeking to “assess[] the success of a defense

to a potential claim (breach-of-contract or otherwise) is generally the type

of hypothetical question federal courts endeavor to avoid”). “The

declaratory judgment was not intended to permit the piecemeal trial of

lawsuits.” Id. (holding the court lacked jurisdiction to issue a premature

declaration regarding validity of contractual guarantee).

In Nexstar Broad., Inc. v. Gray, No. 09-07-00364-CV, 2008 WL

2521967, *2 (Tex. App.—Beaumont June 26, 2008, no pet.), the court held

that it was an improper use of the DJA for a party with potential liability

41

under a contract to seek a declaration that simply restated the “penalty”

affirmative defense and sought no relief beyond what that defense would

afford (i.e., avoidance of liquidated damages). This holding was based, in

part, on the fact that the parties had no ongoing relationship—as contrasted

from declarations in other cases that would settle future disputes of an

ongoing relationship between the parties. Id. (citing BHP Petro. Co. v.

Millard, 800 S.W.2d 838, 841-842 (Tex. 1990)).

Similarly, this Court held in LHR Enterprises that the district court

lacked jurisdiction to declare the meaning of the Insurance Commission’s

conclusion that it “may impose an administrative penalty” in certain

circumstances where there was no pending or impending action to seek

such a remedy from plaintiff. 2007 WL 3306492 at *5; see also State v.

Margolis, 439 S.W.2d 695, 697-98 (Tex. Civ. App.—Austin 1969, writ ref’d

n.r.e.) (where plaintiff merely alleged, without any supporting proof, that

defendant had “indicated an intention” to seek statutory penalty against

plaintiff, and defendant denied that allegation in its pleadings, there was no

evidence that a bona fide controversy existed giving rise to any justiciable

issues between the parties; hence, declaratory judgment was improper).7

7 LHR Enterprises and Margolis involved statutory penalties available to the State

in specified circumstances. While the cases are procedurally similar to the instant case

in that they presented un-ripe claims for declaratory relief related to the enforcement of

these remedies prior to a pending demand for their recovery, they are substantively

42

B. Strandhagen’s Claim Is Not Ripe.

The declaration sought by Strandhagen merely presents a

hypothetical or contingent question about what damages may be available

if the Physicians were to pursue a claim against her in the future for breach

of contract. Strandhagen only speculated that she has “learned . . . [the

Physicians] and perhaps others are seeking to pursue her for collection,”

but she failed to offer any proof that a live, justiciable controversy actually

existed. (CR.8, 112). The Physicians generally denied all of Strandhagen’s

allegations, specifically pled that her claim has not matured, and moved for

dismissal based on their specific contention to the contrary. (CR.74-75, 79).

A potential breach of contract suit against Strandhagen is not a certain,

imminent, or unavoidable controversy. At best, it is hypothetical or

contingent on other events. Hence, there is not a sufficiently ripe dispute

between these parties about which declaratory relief may be appropriately

granted. Strandhagen’s attempt to misuse the Declaratory Judgment Act to

obtain an advance ruling on her affirmative defense should be dismissed.

distinct in that they involved “penalties” rather than a liquidated damages clause as

here.

43

PRAYER

Based on the foregoing, Appellants respectfully pray that this Court

sustain both of their issues on appeal and reverse the district court’s grant

of Strandhagen’s Motion for Summary Judgment, its partial denial of the

Physicians’ Plea to the Jurisdiction, and its denial of the Physicians’ Motion

for New Trial. If the jurisdictional ruling is reversed, then this Court should

render judgment in favor of the Physicians dismissing Strandhagen’s claim

in its entirety. Otherwise, this Court should remand to the district court for

further proceedings.

Appellants further pray that this Court tax all costs against

Strandhagen, both in this Court and below, and award the Appellants any

such other relief at law or equity to which they may be justly entitled. Tex.

R. App. P. 43.4; Tex. R. Civ. P. 139.

Respectfully submitted,

MARTENS, TODD, LEONARD, TAYLOR & AHLRICH

By: __/s/ Amanda G. Taylor____

Amanda Garrett Taylor

ataylor@textaxlaw.com

Texas Bar No. 24045921

301 Congress Avenue, Suite 1950

Austin, Texas 78701

Tele: (512) 542-9898

Fax: (512) 542-9899

ATTORNEY FOR APPELLANTS

44

CERTIFICATE OF COMPLIANCE

I certify that this Appellants’ Brief complies with the typeface

requirements of Tex. R. App. P. 9.4(e) because it has been prepared in a

conventional typeface no smaller than 14-point for text and 12-point for

footnotes. This document also complies with the word-count limitations of

Tex. R. App. P. 9.4(i) because, according to the word-count tool of the

computer program used to prepare this document, it contains 8,855

words, excluding any parts exempted by Tex. R. App. P. 9.4(i)(1).

/s/Amanda Taylor__________

Amanda Taylor

CERTIFICATE OF SERVICE

I certify that a true and correct copy of this Appellants’ Brief was filed

electronically and served on all counsel via e-mail in compliance with Tex.

R. App. P. 9.5(b) and L.R.3 on this 14th day of January, 2015.

Daniel Byrne

DByrne@FBHH.com

Lessie Fiztpatrick

LFitzpatrick@FBHH.com

FRITZ, BYRNE, HEAD & HARRISON, PLLC

98 San Jacinto Blvd, Suite 2000

Austin, TX 78701

Telephone: (512) 476-2020

/s/Amanda Taylor__________

Amanda Taylor

45

NOTICE SENT~LOCUTORY NONE

DC BK14156 PG221

DISP PARTIES· ALL

DISP CODE: ~ CLS 'flRtCf

REDACT PGS:_ _ _-,:o-~-

NO. D-1-GN-13-002811

JUDQE OL!J CLERK.~~-

TRACYD.sT § IN THE DISTRICT COURT

§

PLAINTIFF §

§

v. §

§

§

NOAH S. BUNKER, PAUL § 353rd JUDICIAL DISTRICT

CARRELL, EVERETT BREW §

HOUSTON, JR., W.ANDREW §

BUCHHOLZ, SCOTT J. LEIGHTY, §

JAD L. DAVIS, and HOLLY § ..... e"'

<Cc:r

CLAUSE, §

§

DEFENDANTS § TRAVIS COUNTY, TEXAS

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

On February 20, 2014, Plaintiffs Motion for Summary Judgment came on to be

heard. After reading the pleadings, hearing the arguments presented by counsel,

reviewing the case law, and considering the same, the Court finds that the Motion is

GRANTED.

Therefore, IT IS ORDERED, ADJUDGED, AND DECREED that Plaintiffs

Motion for Summary Judgment is GRANTED, and the Court DECLARES that the

$500,000 purported liquidated damages clause in the Advisory Board and Internal

Operations Agreement is an unenforceable penalty.

All relief not expressly granted is DENIED.

SIGNED on this the &A'J day of May, 2014.

JUDGE ORLINDA L. NARANJO

419TH DISTRICT COURT

212

DC BK14013 PG2586

1/1 0/2014 11 :21 :46 AM

Amalia Rodriguez-Mendoza

District Cl+rk

Travis County

D-1-GN-13-00~811

I

I

CAUSE NO. D-l-GN-l3-002Hll

TRACY D. STRANDHAGEN, § IN THE DlSTRlCT COURT

PLAfNTlFF, §

§

§

V. § TRA VTS COUNTY, TEXAS

§

§

NOAH S. BUNKER, PAUL CARRELL, §

EVERETT BREW HOUSTON, JR., §

W. ANDREW BUCHHOLZ, SCOTT J. §

LEiGHTY, JAD L. DAVIS, and §

HOLLY CLAUSE §

DEFENDANTS. § 353HD JUDICIAL DISTRICT

ORDER GRANTING IN PART AND DENYING IN PART .DEFENDANTS 1 AMENDED

PLEA TO THE JlJRlSDlCTION

On November 25, 2013 came on tbr hearing Defendants' Amended Plea to the

Jurisdiction. After considering the same, the Court is ofthe qpinion that the Amended Plea to the

Jurisdiction is meritorious in part and should be grarltea In patt and denied in patt.

rt is therefore ORDERED that:

1, Defendant's Amended Plea to the Jurisdiction is GRANTED as to Plaintiff's request for a

declaratory judgment that she was tertninated without cause and therefore the Termination

Penalty Provisions (as defined in the Plaintiffs First Amended Petition) are inappllcable to her.

The Court lacks jurisdiction over this claini, and it is therefore dismissed for lack of jurisdiction;

and

2. Defendant's Amended Plea to ihe Jurisdiction is DENIED as to Plaintiffs request for

declaratory judgment that the liquidated damages provisibn in the Termination Penalty

Provisions is an invalid and tinenforceable penalty. The Court has jurisdiction over tnis claim.

SIGNED AND ENTERED thi$ _j_ {) day of ..,..jNy '20.1 3.

184

DC BK14013 PG2587

APPROVED AS TO FORM:

FRITZ, BYRNE, HEAD & HARRISON, PLLC

98 San Jacillto Boulevard, Suite 2000

Austin, Texas 78701-4286

(512) 476-2020

(512) 4 77-5267 (tax)

Lessie G, Fitzpatrick

State Bar No. 240122630

ATTORNEYS FOR PLAINTIFF

TRACY D. STRANDHAGEN

CARLS, McDONALD & DALRYMPLE, L.L.P.

Barton Oaks Plaza 1

901 S. Mopac Expressway, Suite 280

Austin, Texas 78746 /'

By: ,kd~ ~ YvJ<:-DJ'VI-~·

KeHy ;;::tM,cDonald

State Bar Number 13551275

Carla Garcia Connolly

State BarNo. 07631100

ATTORNEYS :FOR DEFENDANTS

NOAH S. BUNKER, PAUL CARRELL,

EVERETT DREW HOUSTON, JR.,.

W. ANDREW BUCHI-IOLZ, SCO'tf J. HEJGHTY,

JAD L. DAVIS and HOLLY CLAUSE

2

185

DC BK 14225 PG220

Filed in The District Court

of Travis County, Texas

JUL 30 2014

CAUSE NO. D-1-GN-13-002811 At 3'. \~ M.

Amalia Rodriguez:eJldaza, Clerk

TRACY D. STRANDHAGEN § IN THE DISTRICT COURT

§

Plaintiff §

§

v. §

§

NOAH S. BUNKER, PAUL § TRAVIS COUNTY, TEXAS

CARRELL, EVERETT BREW §

HOUSTON, JR., W. ANDREW §

BUCHHOLZ, SCOTT J. LEIGHTY, §

JAD L. DAVIS, and §

HOLLY CLAUSE, §

§

Defendants § 353rd JUDICIAL DISTRICT

ORDER DENYING DEFENDANTS'

MOTION FOR NEW TRIAL

On this day came to be considered the Defendants' Motion for New Trial. The

Court, having considered the ounds asserted in Motion, the Response, the arguments of

counsel, the evidence on fi1 , and the contents of the Court's file, determines that the

Motion for New Trial should be DENIED.

Pagel

271

ADVISORY BOARD AND

INTERNAL OPERATIONS AGREEMENT

This ADVISORY BOARD AND INTERNAL OPERATIONS AGREEMENT (this

"Agreement") is made and entered into this _. . day of October 2011, by and among the

undersigned physicians who are employed by American Anesthesinlogy of Texas, Inc. (such

employed physicians being ref~rr~d to herein as the "Physicians''), a Texas non profit

corporation certified as a lieahh care organi7.ation by the Texas State Board of Megical

Examiners (the "Company"), Noah Bunker, M.D., the Corporate Medical Director of the

Company (the "Medical Director"), and Chi B. Vo, M.D., the Physician P<!rthers' Representative

under the Purchase Agreement (as defined below) (the ''Partners' Representative").

RECITALS:

WHEREAS, as of the date hereof, the Company intends to acquire all of the issued and

outstanding membership interests of Austin Anesthesiology Group, PJ.;LC C'AAG"), pursuant to

that certain Membership Interest Purchase Agreement, dated as of October 6, 2011, among the

Company, AAG, AAG Holdings, AAG Sidecar LLC, those certain Physicians who arc members

of AAG, and the Physician Partners' Representative (the "Purchase Agreement") (unless the

context shall otherwise require, capitalized terms used herein without definition shall have the

respective meanings ascribed thereto in the Purchase Agreement);

WHEREAS, the Physicians desire to establish an Advisory Boru·d at1d set fmth certain

understandings and agreements among themselves regarding the operations of their practice

following the Closing under the Purchase Agreement; and

WHEREAS, a significant inducement to Physicians~ entering into the Purchase

Agreement, and consummating the transaction contemplated thereby, is the Physicians'

agreement to be bound by the covenants set forth herein, which covenants are narrowly tailored

and necessary to protect the Physicians' legitimate interests.as a group.

NOW THEREFORE, in consideration of the foregoing recitals, the mutu.al covenants

contained herein and other good and valuable consideration, the receipt and sufficiency of which

is hereby acknowledged, the parties hereby agree as follows:

1. Advisory Board.

(a) The Physicians hereby establish a board (the "Advisory Board") to

provide binding advice and guidance to the Medical Director on certain matterSas further set

forth herein. The Advisory Board shall consist ofseve11 (7) members{ea.cn an "Advisory Board

Member" and, colleCtively, the "Advisory Board Members"), each ofwhornmust be a pruty to

this Agreement, and one of which shall be the Medical Director. 'rhe Advisory Board Members

(other than the Medical Director) will serve tenns of three (3) years. '[wo (2) Advisory Board

Members will be elected each year consistent with AAG's past practices for management

committee elections. The Medical Director's term on the Advisory Board will be co-terminus

with the term as Medical Director set forth in Section 3(a). The names of the Advisory Board

23502.2-688675 v1

EXHIBIT

l-A 162

Members to serve as such shall be evidenced on Exhibit A attached hereto and made a part

hereof, as amended upon any change of the Advisory Board.

(b) Any Advisory Board Member may resign at any time by giving written

notice to all of the Physicians. The resignation of l!lny Advisory Board Member shall talw effect

upqn receipt of notice thereof or at such later time as shall be specified in such notice; and,

unless otherwise specified therein, the acceptance of such resignation shall not be necessary to

make it effective. ··

(c) An Advisory Board Member may be removed, with or without cause, by

the affirmative vote of at least a majority of the Physicians. Furthermore, the Advisory Board

may by majority vote cast a vqte of"no confidence" in an Advisory Board Member, in which

case the Advisory Board shall refer the matter to the Physicians for a vote to remove such

Advisory Board Member.

(d) If an Advisory Board Member (the "Vacating Member") (i) is removed in

accordance with Section 1(c) or (ii) resigns or otherwise vacates the position for any reaSoil, the

Physicians shall elect a new Advisory Board Member to replace the Vacating Member by the

vote of a simple majority of the Physicians.

(e) Unless otherwise prohibited by any officer or AfiHiate of the Company,

any Advisory Board Member may examine the books and records ofthe Company for a purpose

reasonably related to such Advisory Board Member's position as an Advisory Board Member.

(f) The Advisory Board Members will not receive any additional

compensation from the Company for serving as Advisory Board Members.

(g) The Advisory Board may designate one or more committees. Any such

committee, to the extent detetmined by the Advisory Board, shall have and may ex~icise all

authority deterniined by the Advisory Board, subject to any restrictions contained herein. The

terms. qualifications and duties ofthe members of such committees shall be detertnined by the

Advisory Board and shall be substantially consistent with the past practices of AAG.

(h) l}nless otherWise undertaken by an officer, director or other Affiliate of

the Company, the Medical Director, with input from the Advisory Board, shall be responsible for

implementing, documenting, carrying-out and enforcing the disciplin_ary procedures of the

Company substantially consistent with the pastpractices of AAG.

2. Meetings of the Advisory Board.

(a) The Advisory Board may hold its meetings, both regular and special, in

such manner as is determined by the Advisory Board from time to time.

(b) At least four (4) of the Advisory Board Members shall be necessary to

constitute a quorum for the transaction of business; provided, that every act or decision done or

2

163

made by the Advisory Board shall require the affim1ative vote of at least four (4) Advisory

Board Members.

(c) Advisory Board Members may participate in any meeting of the Advisory

Board by means of conference telepqone or similar communications equipment, provided all

persons participating in the meeting can hear one aQOther, and such participation in a meeting

shall constitute presence in person at the meeting.

(d) All votes required of the Advisory Board hereunder may be by voice vote

unless a written ballot is requested, whiQh request may be made by one Advisory Board Member.

(e) Any action, which under any provision of this Agreement is to be taken at

a meeting of the Advisory Board, may be taken without a meeting 'by written consent signed by

not less than the number of Advisory Board Members necessary to take the action at a meeting

ofthe Advisory Board at which all Advisory Board Member~ were present and voted. Such

written consent will be kept with the records of the Advisory Board.

(f) A majority of the Advisory Board Members may adjourn any Advisory

Board meeting to meet again at a stated day and hour or until the time fixed for the next regular

meeting of the Advisory Board.

3. Medical Director.

(a) The Physicians acknowledge and agree that Noah Bunker, M.D. has been

appointed as the initial Medical Director of the C9mpany pursuant to the Corporate Medical

Director Agreement, dated as of the date hereof, by and between Noah Bunker, M.D. and the

Company (the "Medical Director Agreement"). Notwithstanding the terms and conditions of the

Medical Director Agreement, the initial Medical Director and each oth~r Medical Dii·ector Of the

Company thereafter shall serve for single tetms of four (4) yeats. Any Medical Director may

seek re-election for subsequent term{s) of four (4) years each; provided, that the then-current

Medical Director who is not re-elected must resigh in accordance with the Medical Director

Agreement with sufficient notice such th~t the Medical Director's term is limited to 1bur (4)

years. The Medical Director shall be elected by the affirmative vote of a simple majority of the

Physicians.

(b) I In the event of a dispute between the Medical Director and the Advisory

Bom·u and/or the Physicians, a simple majority of the Physicians may cast a vote of"no

confidence" in the Medical Director. In such event, the Medical Director shall have thirty (30)

days from the date of such vote of no confidence to resolve the dispute with due notification to

the Advisory Board and the Phy~icians of such dispute and !he resolution thereof. Should the

dispute remain unresolved following the expiration of such thirty {30) day cure period as

determined by th~ Advisory Board in it sole discretion then upon the affirmative vote of a simple

majority of the Physicians (excluding, for this purpose, the Medical Director), the Medical

Director shall resign as the Medical Director. Furthermore, seventy-five percent(75%) or more

of the Physicians (excluding, for this purpose, the Medical Director) (a "Supermajority ofthe

3

164

Physicians") may elect to remove the Medical Director at any time for any reason or for no

reason; provided that the Physicians and the Medical Director understand and agree that ~uch

removal will be subject to the consent of the Company (such consent not to be unreasonably

withheld or delayed). Any such resignation by or removal of the Medical Director pursuant to

th:i.s Section S(b) shall occur upon at least ninety (90) days' prior written notice to the Company

and the Medical Director. The Physicians and !he Medical Director also understand and agree

that the Company may elect to remove the Medical Director for any reason or for no reason upon

at leasf ninety (9n) days' prior written notice to the Mc;:dical Director and the Partners'

Representative. The Medical Director may voluntarily resign and terminate his ot her services

under the Corporate Medical Director Agreement for any reason or for no reason upon at least

ninety (90) days' prior written notice to the Comp@y and the Partners' Repre~entative. A

majority of the Physicians shall have the power and authority to appoint, by written notice to the

Company, a replacement for n;ny terminated Medical Director (a "~Replacement Medical

Director"), which replacement shall satisfy the qualifications set forth in Addendum 1 to the

Corporate Medical Director Agreement ("Addendum 1") an!l otherwis_e be acceptable to the

Company (such acceptance not to be unreasonably withheld or delayed). The parties

acknowledge that under the terms of the Corporate Medical Director Agreement, if the

Physicians fail to appoint a Replacement Medical Director who satisfies the qualifications set

forth in such Addendum 1 and is otherwise acceptable to the Company (such acceptance not to

be unreasonably withheld or delayed) on or before the ninety-first (91 51) day following notice of

the termination of the Medical Director or the date of death of the Medical Director, then the

Co111pany will h:ave the power and authority to appoint a Replacement Medical Director in good

faith. If, for any reason, there is a vacancy in the Medical Director position, then pending any

replacement thereof in accordance with the terms hereof and the Corporate Medical Director

Agreement, a majority of the Physicians shall have the right to immediately appoint a temporary

successor to have responsibility for and authority to conduct the rights and duties granted to the

Medi_ccai Director Under the Purchase Agreement and the Physifans' Employment Agreements,

which temporary successor shall satisfy the qualifications set forth in Addendum 1 and otherwise

be acceptable to the Company (such acceptance not to be unreasonably withheld or delayed);

provided that the Company shall appoint a temporary successor if none i~ appointed by a

majority of the Physicians within ten (1 0) Business bays of any vacancy in the position of

MediCal Director. For the avoidance of doubt, the Advisory Board may at any time recommend

to the Physicians that the Medical Director be removed upon the required vote of the Physicians

specified above.

(c) T11e parties acknowledge that under the Corporate Medical Director

Agreement, the Medical Director will receive an a:tiliual service stipenq from the Company or

general group funds of the practice in an amount equal to Ten Thousand Dollars ($1 0,000). The

M{dical Director shall defray p~rsonal cos1s of all non-clinical work, i!lcludi]1g per diem

coverage, from any such stipend received for his other duties as the Medical Director. The

Advisory Board may determil1e in its sole discretion that the Medical Director should receive

additional compensation or bene:tits in consideration for the Medical Director's services in such

role, and in such event the Advisory BQard shall recommend to the Medical Director the source

of such additional compensation or bendits.

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165

(d) The Medi_cal Director shall abide by all of the terms and conditions of this

Agreement. The Medical Director shall maintain his or her share ofciinical responsibilities

throughout his or her service tenn as Medical Director. The Medical Director is expected to be

an effective liaison between the Company and the Physicians and is expected to faithfully and

reciprocally communiq.te all expectations,demands and/or decisions as pertinent to the

Companf and tbe Physicians. The Medical Director shall not, and shall fisc coimneteially

reasonable efforts to cause the Company notto, without seeking approval from the Advisory

Board: (i) Ul}ilaterally hir~ or fire any Physicians, associate physiCians or other professionals or

office staff; (ii) unilaterally alter salaries ofthe Physicians, associate physicians or other

or

professiona}s or offt_ce staff; (iii) unil{iterally altefaaily monthly schedules; (iv) unilaterally

alter physician service sites ortimes; or (v) make recommendations to the President of the

Company on salary and bonus disbursement and the division ~nd allocatiop. of the "Performance

Incentive Bonus,"as de:flped in the Physicians' Employment Agreements; provided further, that

the Medical Director shall make bonus disbursement reports available for inspection by the

Physicians at the offices of the Practice. During the Initial Te11n of the Physiciails' Employm~ht

Agreements and during the applicable period for negotiating the Renewal term of the

Physicians' EmploymentAgreements, the Medical Director shall not on behalf of the Company,

either directly or indirectly, (i) negotiate, recomrricnd, approve or offer any Physician

employment terms and conditions inconsistent in any material respect with the employment

terms and conditions of other Physicians (except for the pre-approval of Outside Activities (as

defined in the Phys!cians' Employment Agreements)), or (ii) negotiate, recommend, approve or

offer any Physician-special incentives, bonuses or other benefits not alTered to the other

Physicians.

(e) The Corporate Medical Director shall use co:mifiercially reasonable efforts

to delegate appropriate duties and responsibilities to the Advisory Board from time to time. The

Medical Director shall use comin~rcially reasonable efforts to sH~re information fr()m or related

to the Company with the Advisory Board.

(f) Notwithstanding anything to the contrary herein, (i) in the event of any

conflict between the terms of this Agreement and the Medical Director Agreement, then the

terms Of the Medic-al Director Agreement shall control; and (ii) in the event the Medical Director

receives advice and/or directives from the Advisory Board and/or the Physicians that conflicts

With advice and/or directives from the Company or its Affiliates, then the Physicians understand

and agree thaithe Medical Director will follow the advice and/or directives from the Company

and its Affiliates,

4. Partners' Representative.

(a) ThePhysicians acknowle~ge and agree that Chi B. Vo, M.D. has been

appointed as the Pat1ner.s' Represent~tive pursuant to the Purchase Agreement and wil1 act as an

agent of the Physicians under the Purchase Agreement and is granted such powers as are

delegated under the Purchase Agreement,

(b) Notwithstanding the foregoing and the powers that are delegated to the

Partners' Representative under the Purchase Agreement, the Partners' Representative shall

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166

provide to the Physicians prompt notice and copies of all notices and communications

transmitted to the Partners' Representative by the Buyer under the Purchase Agreement. In

addition, the Partners' Representative shall not, without first consulting in good faith with and

receiving prior written consent from, a majority of the Physicians:

(A) waive provisions of the Purchase Agreement or any other

Transaction Document;

(B) resolve any dispute arising under the Purchase Agreement or any

other Transaction Document, including, btit not limited to, as contemplated by Section 6

of the Purchase Agreement;

(C) make any material decisions with respect to the defense of any

litigation described in Section 6.3 of the Purchase Agreement;

(D) agree to, negotiate, enter into settlements and compromises of, or

d~mand arbitration with respect to any such claims referenced in subparagraphs (ii) and

(iii) above; or

(E) take or fail to take any other actions that would have an adverse

impact on the rights of the Physicians, economic or otherwise, under the Purchase

Agreement.

(c) The Partners' Representative may resign by delivering written notice t9

the Physicians with a copy to the Buyer, at least thirty (30) days prior to the effective date of

s11ch resignation. A majority ofthe Physicians may terminate the appointment ofthe Partners'

Representative, by delivering written notice thereto, with a copy to the Buyer, whiCh notice shall

designate the effective date of such termination not earlier than five (5) Business Days after the

B\lyer's rec~ipt of such notice. In the event of such resigmition or termination, a successor

Prutners' Representative shall be appointed by a majority ofthe Physicians and written notice of

such appointment shall be delivered to the Buyer. If, at any time, the Partners' Representative

has resigned or has been termitmted and a successor Partners' Representative has not been

appointed in accordance with the foregoing sentence, then _unless and until a successor Partners'

Representative is so appointed, the Medical Director shall be deemed to be the successor

Partners' Representative for purposes ofthis Agreement and the Purchase Agreement. After the

appointment (or deemed appointment) of a personas a successor Partners' Representative, all

references to such Partners' Representative shall be deemed to include such successor.

5. Physician Obligations.

(a) Each Physicianlihderstarids and (lgrees that (i) in addition to the

consideration under the Purchase Agreement, beginningon January 1, 2013, the Physicians are

eligible fpr certain bonuses \Ulder the Company's PhysiCian Performance Incentive Program

based upon the proilts of the Company, (ii) he or she has entered into an Employment

Agreement with the Company to perfoi:m certain services for the Compatiy for an initial term as

set forth in his or her Employment Agreement (the "Initial Terni") and (iii) if he or she

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167

terminates his or her employment with the Company prior to the expiration of the Initial Term,

the Physicians may suffer harm, including, without limitation, increased workloads necessitated

by such terrrlination, mat¢rial impairment of the ability of the Physicians to earn bqrtuses under

the Company's Physician Perfbtmance Incentive Program, material impairment of the Physician'

relationships with hospitals and other health-care facilities, third-party payors and other

stakeholders, and hiring and tnrlning costs related to replacement physicians.

(b) In light oftheforegoing, if a Physician's employment With the Company

is terminated for any reason duringothe Initial Term of a te1minating Physician's Employment

Agreement other than atertninatio:h without cause by the Company, subject to Section 5(c)

hereof, theri such terminating physician (a "Terminating Physician") shall promptly pay to the

non-terminating Physiciaps, but in any event within five (5) Business Days of the termination of

s).lch Terminating Physician's employment, n.cs liquid11ted damages, and not as a penalty, the

amount set forth below to be shared equally by the non-terminating .Physicians (th~ ''Llguidated

Damages Amount"). If the Liquidated Damages Amount is not paid by the Terminating

Physician within such five (5) Business Day period, then the Liquidated Damages Amount shall

thereafter bear interest at the rate often percent (1 0%) per animm until such Liquidated Damages

Amount, together with the accrued interest, is paid in full.

Terminating Physician Liquidated Damages Amount

Carolyn G. Biebas, M.D. $400,000

James C. Chapin, M.D. $400,000

Richard S. Himes, Jr., M.D. $~~(),000

Richard L. Laube, M.D. $320,000

Gary J. Mihm, M.D. $240,000

Sharon A. Oxford, M.D. $400,000

All other Physicians $500,000

The Liquidated Damages Amount for Ann John, M.D. shall be (i) $375,000 ifthc terrilination

date occurs prior to the two (2) year anniversary of employment with the Company, or (ii)

$300,000 if the termination date occurs at anytime thereafter during the initial Term of her

Employment Agreement.

In addition to the Liquidated Damages A!nount, the Terminating Physician shall

reimburse the Company and the Physicians for all out of pocket costs and attorneys' fees

incurred by the Company and/or the Phy~icians in any arbitration or litigation to enfotce the

Terminating Physician's Employment Agreement or this Agreement. The Physicians each

acknowledge and agree that the Liquidated Damage Amount is reasonable in light of the

anticipatedharm which would be causco by a Termin!lting Physician's breach of ordefault under

this Agreement, the difficulty ofproof ofloss, the inconvenience and non-feasibility of otherwise

optaining an adequate remedy, and the value of the transactions to be consummated under the

Purchase Agreement and the other Transaction Documents.

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(c) Notwithstanding the foregoing and for the avoidance of doubt, i1 is hereby

acknowledged and agreed that the provisions set forth in this Section 5 shall not apply to a

Physician in the event (i) of the death of such Physician, (ii) such Physician suffers a permanent

Disability (as defined in the Physician's Employment Agreement) or an "own occupation"

disabiBty 1 (iii) such Physician is terminated due to a Material Decline or Right-Sizing (as such

tertl)s·ai'edefineci in the P}1ysician's Employ111eilt AgreeJ1ient), (iv) the Company's contract with

St: David's Healthcare Partnership is terminated, (v) ofPhysician's Qualifying Termination (as

cl~fined in the Physicia:il's Employment Agreement), or (vi)of an approved termination pursuant

to Section 5(d) below. the Physicians also acknowledge and agree that unforeseen conditions

may arise during the Initial Term that rriay prompt a Physician to tertninate his or her

employment with the Company. Under such circumstances, a Physician may petition the

Advisory Board and upon receiving the written consent ofa majority of the Advisory Board,

may t~@inate his or her employment with the Company without being required to pay the

Liquidated Damages Amount and the out of pocket costs and attorneys' fees referenced in

Section $(b) above.

(d) Conflict of Interest. In the event that a Physician desires to voluntarily

terminate his or her Employment Agreefuent in order to provide other services to the Company

or its Affiliates, such Physician may petition the other Physicians to allow the termination of his

or her employment with the Company, and upon receiving the written consent of at least a

majority of the other Physicians, may terminate his or her employment with the Company

without beip.g required to pay the Liquidated Damages Am()unt and the out ofpocketcosts and

attorneys' fees referenced in Section 5(b) above. During the Initial Term of the Physicians'

Employment Agreements and during the applicable }Jeriod for negoti~ting the Renewal Ts:rm of

the Physicians' Employment Agreements, each Phys:lcian shall report to the Advisory Board the

occurrence of any offer, negotiation or discussion whereby any such Physician would receive

¥rriployment terms and conditions inconsi~tent in any material respect with the employment

terms and conditions of other Physicians (except for the pre-approval of Outside Activities (as

defined in the Physicians' Employment Agreements)), or any special incentives, bonuses oi other

benefits not Offered to the other Physicians;

(e) The Physicians ackfi{)wledge and agree that nothing contained in this

Agreement shall in any way limit or impair the Company's rights under any Employment

Agreements or other agteements with the Physicians.

6. Indemnification.

(a) Any person who at any time serves or has served as an Advisory Board

Member shall have a right to be indemnified by the Physicians to the fullest extent permitted by

law agairist (i) reasonable expenses, including attorneys' fees, actually and necessarily incurred

by him or her in cohifection with any threatened, pending or completed action, suit or

proceeding, whether civil, criminal, administrative or investigative (and '"1Y appeal therein), and

whether Qr not brought by or on behalf.ofthe Physicians, seeking to hold hi111-or het lhtblc by

reason of the fact that he or she is or was acting in such capacity, and (ii) reasonable payments

made by him or her in satisfaction of any judgment, money decree, fine, penalty or settlement for

which he or she may have become liable in any such action, suit or proceeding; provided

8

169

however, that an Advisory Board Memb_er shall only he entitled to ind~mnification pursuant to

this Section 6 so long as such Advisory Board Member acted in good faith in carrying out the

decisions or actions which were the subject or basis of liability as set forth abovcin items (i) and

(ii); provided further, that no Advisory Board Member shall be entitled to indeJ1111ification in the

event of such Advisory Board Member's gross negligence.

(b) The Advisory Board ~shall take all such action as may be necessary and

appropriate to require the Physicians to pay the indemnification requirecl by this provision,

including without limitation, to the extent needed, making a good faith evaluation of the manner

in which the claimant for indemnity acted and of the reasonable amount of indemnity due him or

her. The Physicians shall pay their Pro Rata Shan~ of such indemnity claim to tlie claimant within

ten (1 0) business days of receipt of notice of any such claim for indemnity. Forpurposes ofthis

Section 6, the "Pro Rata Share" shall he an amount equal to the total amount ofthe indemnity

claim approved by the Advisory Board divided by the then-cuiTent number of Physicians party to

this Agreement. If a Physician's Pro Rata Share is not paid within teh (1 0) business days, then

interest shall accrue at the rate often percent (10%) per annum until such Pro Rata Share,

together with the accrued interest, is paid in full.

(c) Any person who at any time after the adoption of this provision serves or

has serv(!d on the Advisory Board s}1all be deemed to be doing or .to have done so :in reliance

upon, and as consideration for, the right of indemnification provided herein. Such right shall

inure to the benefit of the legal representatives of any such person and shall not be exclusive of

any other rights to which such person may be entitled apart from the provision of this provision.

(d) The Physicians shall (upon receipt of an undertaking by or on behalfofthe

Advisory Board Member involved) pay expenses (including attorneys' fees) incuiTed by such

Advisory Board Member in defending any threatened, pending or completed action, suit or

proceeding and any appeal therein whether civil, criminal, administrative, investigative or

arbitrative and whether formal or informalor appearing as a witness at a time when he or she has

not been named as a defen:aartt or a respondent with respect thereto in advance of the flnal

disposition ofsuch proceeding. ·

7. Miscellaneous.

(a) Notices and Voting Procedures. All notices and other communications

hereunder shall be in writing and may be given by personal delivery, reputable express courier,

registered or certified fuail (return receipt requested), or by email, in t11e discretion of the

Advisory Board. Such notice shall be deemed effective when received if it is given by personal

delivery, reputable expre.ss courier or einail, and will be effective three (3) days after mailing by

registered or certified mail, so long as it is actually received within five (5) days (arid, if not so

receivs:o within five ($) days, is effective when actually received), fo the parties at the addre·~s.es

specified on Exhibit Rhcreto or such other address of which notice is provided pursuant to th:is

provisign. Any vote, consent or approval of either the Advisory Board or the Physicians may be

delivered and conducted by email ballot or any other means determined by the Advisory Board.

Meeting minutes and voting records shall be recorded and disseminated by the Advisory Board

in a maill1er substantially consistent with the past practices of AAG.

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170

(b) Enforcement. The Physicians agree that a breach or violation of fhe tem1s

of

of this Agreement by any them may cause irreparabl~ damage to the other, the exact amount

of which is impossible to ascertain, and for that reason the Physicians agree that the non-

breaching parties wi11 be entitled to a decree of specific performance of the terms of this

Agreement or an itl.juhction restrai:tling further breach or violation thereof by the breaching party

or parties, said nght to be in addition to any other remedies of the parties.

(c) Amendments. This Agreement may be amended only with the approval of

at least fl. majority of the Physicians. Any amendments tQ this Agreement shall be binding on all

Physicians, the Medical Director and the Partners' Representative.

(d) No Third Party Beneficiaries. This Agreement is entered into solely for the

benefit of the parties hereto and no term, provision or covenant hereunder shall confer or be

deemed to confer a benefit on any other person, oth(}r than as may be set forth hei'ein.

(e) Assignment. Np party hereto may assign, delegate or otherwise transfer

any of such party's rights, interests or obligations under this Agreement.

(f) Severability. Each provision of this Agreement is intended to be

severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such

illegality ot invalidity sha11, to the greatest extent possible, not affecttbe legality or validity of

the remainder of this Agreement. In the event that any provision ofthis Agreement shall be

declared by a COUrt of COmpetent jurisdjctign to exceed the limits St1Ch ~OUrt deems tea~sonable

and enrorceable, said provisions shall be deemed modified to the minimum extent necessary to

make suchprovisions reasonable and enforceable.

(g) No Waiver. Neither the failure nor any delay on the part of any party

hereto in exe:rcising any right_, power or privilege granted herein shall op(!tatc as a waiver

thereof, nor shaH any single orpartial exercise thereof preclude any other or further exercise of

any other right, power or privilege which Il1ay be provided by law.

(h) Counterparts: Delivery by Facsimile. 'Ibis Agreement may be executed in

any number of 90Unterparts with the saJI1,e effect as if all parties hereto h.aci signed the same

document. All counterparts shall be construed together and shall constitute one agreement. This

Agreement and any amcndil).enls hereto, to the extent signeo and delivcrt!d by mean~ of a

facsimile machine or by e-mail in PDF or similar format, shall be treated in all manner and

respects as an original agreement or instrument and shall be considered to have the same binding

legal effect as if it were the original signed version thereof delivered in person. At the request of

any party hereto, each other party hereto or thereto shall re-cxecute original forms of this

Agreefiieht and deliver thelJl to all other parties. N() PrfrtY hereto shall raise the l!Se Of a facsimile

machine or e-mail to deliver a signature or the fact that any signature or agreement or instrument

was transmitted or coffil!lunicated through the use of{l. facsimile l1l~chine or e-mail as a defense

to the formation of a contract and each such party forever waives any such defense.

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171

(i) Controlling Law. This Agreement has been entered into inthc State of

Texas, artd this Agreement, including any rights, remedies, or obligations provided for

hereunder, shall be construed and enforced in accordance with the laws of the State of Texas.

G) Non-Voting Physicians. Notwithstanding anything herein to the contrary,

]Uchard S.ijimecs, Jr., M.D., l9chard L. Laube, M.D. and (}aryJ. Mihni, M;D. (the "Non-Voting

Physicians'!) slrall not be entitled to vote on any matter set forth herein and are not eligible to

serve oJl the Advisory Board; provided how~ver, that sm.:h Non-Voting Physicians shiill have all

other rights, and be boundby all obligations, of the Physicians underthis Agreement.

(k) Additional Physicians. From time to time after the Effective Date of this

Agreement, the Advisory Board may invite new physicians hired by the Company ("New

PHysicians") to participate in the beilefits and become bound by the tem1s of this Agreement by

signing a joinder to this Agreement in a manner determined by the Advisory Board. In such

event, the Advisory Board will deterinine any and all conditions, rights and duties associated

with any New Physician's joinder to this Agreement~and such NewPhysicians shall thereafter be

''Physicians" hereunder for all purposes; provided however, that New Physicians shall not be

subject to the provisions of Sections 4 ana S(a) through S(d) ofthis Agreement and shall not be

considered a "Physician'' for the purposes of such sections.

(1) Replacement Medical Directors. Any Replacement Medical Director must

becom~ bound by the terms of this AgfeeJUent by signing a joinder to this Agreement in the form

of Exhibit C hereto.

(m) Spousal Consent. As a condition precedent to the effectiveness ofthe

Agreement, each Physician's spouse shall execute a consent substantially in the form attached

hereto as EXhibit D.

[Signature Pages Follow]

11

172

IN WITNESS WHEREOF, the undersigned have executed and delivered this Advisory

Board and Internal Operations Agreement to be effective as of the date first above written.

PHYSICIANS:

Erick S. Allen, M.D.

Mark Archibald, M.D.

Scott Bale, M.D.

Shawn A. Barrett, M.D.

T. MarkBedillion, M.D.

Carolyn G. Biebas, M.D.

Ravneet K. Birmg, M.D.

Elizabeth L. Buchholz, M.D.

W. Andrew Buchholz, M.D.

Noah S. Bunker, M.D.

Paul Carrell, M.D.

23502.2-668675 v1

173

IN WI'INESS WHEREOF, the undersigned have executed and delivered this Advisory

Board and Internal Operations Agreement to be effective as of the date first above written.

James C. Chapin, M;D.

Holly Clause, M.D.

David J. Cross, M.D.

William J. Crowley, Ill, M.D.

B. Will Curtis, M.D.

Jad L. Davis, M.D.

Brian D. Dewan, M.D.

Khoa J:)o, ~M.D.

Allen D. Dornak, M.D.

Cedric Dupont, M.D.

Stanley R. Eckert, M.D.

23502.2-688675 v1

174

IN WITNESS WHEREOF, the undersigned have executed and delivered this Advisory

Board and Internal Operations Agreement to be effective as of the date first above written.

Joseph D. Eddings) M.D.

William A. Eilers) III, M.D.

S. Dralq: Fason, M.D.

Troy W. Gras, M.D.

Deborah L. Hamill, M.D.

Christine Harrison) M.D.

LD R. Herz_og) M.D.

StevenS. Hewitt, M.D.

RichardS. Himes, Jr., M.D.

Everett Brew Houston, Jr., M.D.

Rima Jakstys) M.D.

23502.2-688675 v1

175

IN WITNESS WHEREOF, the undersigned have executed and delivered this Advisory

Board and Internal Operations Agreement to be effective as of the date first above written.

Zeeyoung T. Jang, M.D.

Jeffrey M. Jekot, M.D.

Ann John, M.D.

Joe D. Kocks, Jr., M.D.

Richard L. Laube, M.D.

~ ~

Jonathan J. Lee, M.D.

Scott J. Leighty, M.D.

SuzatmeN. Litna, M.D.

Shelby Marquarat, M.D.

Gary J. Mihm, M.D.

George M. Miller, M.D.

23502.2-686675 v1

176

IN WITNESS WHEREOF, the undersigned have executed a11d delivered this Advisory

Board and Internal Operations Agreement to be effective as of the date first above written.

Steven E. Miller, M.D.

Mattin C. Milliken, M.D.

Paul B. Nelson, M.D.

Jeffrey J. Nitzsche, M.D.

Oliver E. Orth, M.D.

Slfaron A. Oxford, M.D.

Diinpal R. Patel, M:D.

M. Brett Pillow, M.D.

Vijay K. Ravula, M.D.

Jeffrey J. Rockwell; M.D.

Kevin R. Shelly, M.D.

23502.2-688675 v1

177

. IN WITNESS WHEREOF, the undersigned have executed and delivered this Advisory

Board and Internal Operations Agreement to be effective as ofthe date first above written.

Gary W; Smith, M.D.

Tracy D. Stranc1hagen, M.D.

Ryan Sturgeon, M.D.

ChiB. Vo,M.D.

David J. Walton, M.D.

MEDICAL DIRECTOR:

Noah Bunker,· M.D.

Address:

PARTNERS' REPRESENTATIVE:

Chi B. Vo, M.D.

Address:

23502.2-688675 v1

178

EXHIBIT A

ADVISORY BOARD

Noah S. Bunker, M.D. (term expires on [October 6], 2Ql~)

Paul Carrell, M.D. (term expires on Decernber31, 2012)

Jad L. Davis, M.D. (tenn expires on December 31, ~013)

LD R. I-lerzog, }v1.D. (term expires on Decen1ber 31, 2011)

Everett Brew Houston, Jr., M.D. (term expires on December 31, 2013)

Jonathan J. Lee, M.D. (term expires on December31, 2012)

Jeffrey J. Rockwell, M.D. (term expires on December 31, 2011)

23502.2-688675 v1

179

180

181

EXHIBITC

JOINDER TO ADVISORY BOAR]) AND

INTERNAL OPERATIONS AGREEMENT

I hereby accept my appointment as Med!c.a.! Director pursuant to the Advisory Board and

Internal Operations Agreement dated October 6, 2.011 (the "Agrement"), and agree to be bound

by the tctn1s of, and to comply with and fulfill all obligations, Goilirilitirients, and agreements

otherwise imposed upon the Medical Director thereunder.

----------'M.D.

''Replacement Corporate Medical Director"

23502.2-688675 v1

182

EXHIBITD

FORM OF SPOUSAL CONSENT

WRITTEN CQNSENT

OF SPOUSE OF

"'--------'----~--' M.D.

In cgnnection with that certain Advisory Board and Internal Operations Agreement entered

into on October_, 2011 (the "Advisory Board Agreement"),.by, between and among the individual

physicians, jncluding the Signatory (as defined below), whoseh!!tnes are set forth on the signature

pages thereto (collectively, the ''Physicians"), the undersigned, being the lawful spouse of

--------~--' M.D. (''Signatory'') hereby certifies as follows:

1. I hereby consent to the execution by Signatory of the Advisory Board Agreement

and the performance by Signatory of Signatory's obligations under the Advisory Board Agreement.

2. I have had an opportunity to review the Advisory Board Agreement.

3. I have had an opportunity to consult with an attorney and other advisors regarding

the Advisoty Board Agreement arid the tnmsactions contemplated thereurtder priotto executing and

delivering this written consent.

. .. 4. I hereby acknowledge and agree that the Physicians and their respective agents and

affiliates are entitled to rely on the consent provided hereunder.

IN WITNESS WIIEREOF, the undersigned has duly executed this Written Consent on

October _ _, 2011.

Name:

Witness

23502.2-.688675 v1

183

Alvarado v. Lexington Ins. Co., 389 S.W.3d 544 (2012)

389 S.W.3d 544

Court of Appeals of Texas,

Houston (1st Dist.).

Javier ALVARADO, Appellant

v.

LEXINGTON INSURANCE COMPANY, Appellee.

Nos. 01–10–00740–CV, 01–10–01150–CV. | Oct. 18, 2012.

Synopsis

Background: Mortgagor brought action against insurance company that issued “force-placed”

insurance policy to mortgagee, for breach of contract, breach of the duty of good faith and

fair dealing, and violations of the Insurance Code and the Deceptive Trade Practices Act, after

insurance company rejected mortgagor's claim for property damage following a hurricane. The

11th District Court, Harris County, Mike Miller, J., granted insurance company's motion for

summary judgment. Mortgagor appealed.

[Holding:] On rehearing, the Court of Appeals, Evelyn V. Keyes, J., held that mortgagor qualified

as a third-party beneficiary under policy.

Reversed and remanded.

Jane Bland, J., dissented.

Opinion, 371 S.W.3d 417, superseded.

Attorneys and Law Firms

*546 Wyatt David Snider, Snider & Byrd, LLP, Beaumont, TX, Jacqueline M. Stroh, The Law

Office of Jacqueline M. Stroh, San Antonio, TX, for Appellant.

William M. Briscoe, Eggleston & Briscoe, LLP, Michael F. Hord, Hirsch & Westheimer, P.C.,

Houston, TX for Appellee.

Panel consists of Justices KEYES, BLAND, and SHARP.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1

Alvarado v. Lexington Ins. Co., 389 S.W.3d 544 (2012)

OPINION ON REHEARING

EVELYN V. KEYES, Justice.

Appellee, Lexington Insurance Company (“Lexington”), moved for rehearing of our April 19,

2012 opinion. We grant the motion for rehearing, withdraw our April 19, 2012 opinion and

judgment, and issue this opinion and judgment in their stead. Our disposition remains the same.

We dismiss Lexington's May 21, 2012 motion for en banc reconsideration as moot. 1

Appellant, Javier Alvarado, sued Lexington for breach of contract, breach of the duty of good faith

and fair dealing, and violations of the Texas Insurance Code and the Deceptive Trade Practices Act

(“DTPA”) after Lexington rejected Alvarado's claim for property damage following Hurricane Ike.

The trial court rendered summary judgment in favor of Lexington. In one issue, Alvarado contends

that the trial court erred in rendering summary judgment because Lexington did not conclusively

negate Alvarado's status as a third-party beneficiary under the “force-placed” insurance policy

issued by Lexington to Alvarado's mortgage lender.

We reverse and remand for further proceedings consistent with this opinion.

Background

Before May 2008, Alvarado maintained homeowner's insurance on his property with Columbia

Lloyds. Alvarado testified by affidavit that when he refinanced his mortgage in May 2008 with

Flagstar Bank (“Flagstar”), a Flagstar representative informed him that he had to cancel his policy

with Columbia Lloyds and that Flagstar would obtain homeowner's insurance on his behalf.

Flagstar obtained a “force-placed” insurance policy on Alvarado's property with Lexington (“the

Policy”). 2 Alvarado's *547 monthly payments to Flagstar included the principal and interest on

his mortgage, as well as taxes and the premiums on the Policy.

In September 2008, Alvarado's property sustained damage as a result of Hurricane Ike. Flagstar

made a claim on the Policy, and Lexington paid Flagstar $4,410.49 in damages. According to

Alvarado's affidavit, Flagstar did not provide any of these funds to Alvarado for the purpose of

repairs, and it did not apply these funds to the balance of his mortgage. The application of these

funds is not part of the record.

After Lexington denied his claim for damages, Alvarado sued Lexington for breach of contract,

breach of the duty of good faith and fair dealing, and various violations of the Texas Insurance

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2

Alvarado v. Lexington Ins. Co., 389 S.W.3d 544 (2012)

Code and the DTPA. 3 Alvarado alleged that he was the owner of the Policy and that Lexington

had “sold the policy, insuring the property to [Alvarado] or [Alvarado's] predecessors in interest.”

Among other allegations, Alvarado argued that Lexington “failed to perform [its] contractual

duty to adequately compensate [Alvarado] under the terms of the policy” and that Lexington

“misrepresented to [Alvarado] that the damage to the property was not covered under the policy,

even though the damage was caused by a covered occurrence.”

Lexington moved for traditional summary judgment. It argued that Alvarado could not recover on

any of his claims because Lexington never entered into a contract with Alvarado; Alvarado was

neither a named insured nor an additional insured on the Policy; Flagstar obtained the Policy “to

protect its interest in the residence for which Flagstar was the mortgagee”; the Policy provided

that all payments for damages were to be made solely to Flagstar; and the Policy “expressed no

intent to benefit [Alvarado] in any way.” Lexington contended that Alvarado did not qualify as a

third-party beneficiary of the Policy and that, as a result, no legal relationship existed between it

and Alvarado and Alvarado lacked standing to bring his claims. 4

As summary judgment evidence, Lexington attached a copy of the Policy as Exhibit A. Lexington

pointed out that the “Common Policy Declarations” in the Policy provide that “Flagstar Bank,

FSB” is the “named insured” and that the “Mortgage Guard Property Policy” section further

defines “named insured” as “the Lending Institution named on the Declaration Page” and “you”

as “the Named Insured shown in the Declarations.” It further pointed out that the Policy states,

“In consideration of the premium to be charged we will (as shown on the Declaration Page)

insure ... the Lending Institution (you, as shown on the Declaration Page) against direct physical

loss resulting from destruction of or damage to your property....” It also pointed to language in the

Policy stating that the Policy provides coverage for the dwelling, other structures on the property,

personal property, and loss of use “in which the insured has a mortgage and/or owner interest.”

Lexington argued that, although the Policy covers personal property, that coverage is limited to

the extent to which Flagstar, as *548 the named insured, has a mortgage or ownership interest

in the property.

The Policy also includes the following “Mortgage Clause”:

Loss, if any, under this policy will be payable to the mortgagee (or trustee) as

its interests may appear under all present or future mortgages upon the Covered

Property described on the reporting forms in which mortgagee may have an

interest as mortgagee (or trustee) in order of precedence of said mortgages.

Lexington pointed out that the “Loss Payable” clause provides, “Loss will be adjusted with and

made payable to you unless another payee is specifically named.” It observed that this clause does

not provide that Alvarado, the borrower, is entitled to proceeds in excess of Flagstar's insurable

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3

Alvarado v. Lexington Ins. Co., 389 S.W.3d 544 (2012)

interest in the property, nor does it allow Alvarado to participate in the claim adjustment process.

It emphasized that neither Alvarado nor his property is specifically mentioned in the Policy.

In response to Lexington's summary judgment motion, Alvarado argued that Endorsement #

12 to the Policy, entitled “Special Broad Form Homeowners Coverage,” expressly provides

homeowners' coverage for homeowners of properties specified on reporting forms referenced by

the Policy. He argued that this endorsement directly benefits him and supports his third-party

beneficiary status. Alvarado pointed to language in Endorsement # 12 defining “insured” as “[y]ou

and residents of your household” and defining “insured location” as the “residence premises,”

which is further defined as “[t]he one family dwelling where you reside.” He contended that this

language refers to him and not to Flagstar, the mortgage company. Alvarado also pointed out

that Endorsement # 12 provides coverage for direct physical loss to property, additional living

expenses, personal property damage, personal liability for suits brought against the insured for

bodily injury or property damage, and medical payments to others. He contended that this coverage

could only apply to him and not to Flagstar. He also argued that Endorsement # 12 confers a benefit

upon him because the endorsement's “Mortgage Clause” provides, “If a mortgagee is named in this

policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests

appear.” According to Alvarado, “This clearly shows that the word ‘you’ in the Endorsement

refers to [Alvarado] ... but it does not necessarily refer to the mortgagee which would be Flagstar

Bank.” Therefore, Alvarado contended, because Endorsement # 12 “was intended to confer a direct

benefit” on him, he qualifies as a third-party beneficiary of the Policy.

Lexington replied and argued that Endorsement # 12 “only provides homeowners coverage for

property and damages in which Flagstar has a mortgage and/or an ownership interest.” (Emphasis

in original.) Lexington contended that the

Supplemental Declaration Page [to the Policy] qualifies every statement

made about homeowner's insurance in the Policy, leaving no doubt that

all homeowner's coverage statements and inclusions are meant solely and

exclusively to pertain to the insured, Flagstar Bank's, interest. Any references

[Alvarado] makes to the Homeowners Coverage Form are limited by the

Supplemental Declaration Page.

(Emphasis in original.) Lexington argued that, under the supplemental declarations, any coverage

provided pursuant to the Policy is limited to property or damages in which the named insured,

which is defined in the Common Policy Declarations solely as Flagstar, has a mortgage or

ownership interest. Lexington also argued that the Policy language clearly defines “you” as *549

the “Named Insured shown in the Declarations” and that Alvarado is not named as an insured,

additional insured, or third-party beneficiary in any part of the Policy, including Endorsement # 12.

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Alvarado v. Lexington Ins. Co., 389 S.W.3d 544 (2012)

Neither Lexington nor Alvarado submitted any summary judgment evidence demonstrating

whether or not Alvarado's property is specified on the reporting forms submitted by Flagstar to

Lexington showing properties covered by Endorsement # 12. Nor is there any evidence as to what

Flagstar's and Alvarado's interests in the property are. However, there is some evidence, in the form

of Alvarado's affidavit, that Flagstar submitted a claim under the Policy to Lexington for damage

to Alvarado's property and that Flagstar did not repair the damage, did not distribute the funds to

Alvarado to repair the damage, and did not apply the funds to the balance of Alvarado's mortgage.

[1] On August 19, 2010, the trial court granted Lexington's motion for summary judgment.

Because Alvarado's claims against Bower, Flagstar, and Proctor Financial remained pending, this

was an interlocutory order that was not yet final and appealable. Alvarado, however, prematurely

filed a notice of appeal, and the appeal was assigned to this Court and given appellate cause number

01–10–00740–CV. Alvarado filed a motion to sever his claims against Lexington, which the trial

court granted, and the trial court then rendered judgment in favor of Lexington on November 19,

2010. After the trial court rendered this final judgment, Alvarado filed a second notice of appeal,

which resulted in appellate cause number 01–10–01150–CV. We decide the first-filed appeal,

appellate cause number 01–10–00740–CV, and dismiss appellate cause number 01–10–01150–

CV. 5

Standard of Review

We review de novo the trial court's ruling on a summary judgment motion. Mann Frankfort Stein

& Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex.2009). To prevail on a traditional

summary judgment motion, the movant must establish that no genuine issues of material fact exist

and that it is entitled to judgment as a matter of law. TEX.R. CIV. P. 166a(c); Little v. Tex. Dep't

of Criminal Justice, 148 S.W.3d 374, 381 (Tex.2004). When a defendant moves for summary

judgment, it must either: (1) disprove at least one essential element of the plaintiff's *550 cause

of action, or (2) plead and conclusively establish each essential element of its affirmative defense,

thereby defeating the plaintiff's cause of action. Cathey v. Booth, 900 S.W.2d 339, 341 (Tex.1995).

If the movant meets its burden, the burden then shifts to the nonmovant to raise a genuine issue of

material fact precluding summary judgment. See Centeq Realty, Inc. v. Siegler, 899 S.W.2d 195,

197 (Tex.1995). The evidence raises a fact issue if reasonable and fair-minded jurors could differ

in their conclusions in light of all of the summary judgment evidence. Goodyear Tire & Rubber

Co. v. Mayes, 236 S.W.3d 754, 755 (Tex.2007) (per curiam). To determine if the nonmovant has

raised a fact issue, we view the evidence in the light most favorable to the nonmovant, crediting

favorable evidence if reasonable jurors could do so, and disregarding contrary evidence unless

reasonable jurors could not. See Fielding, 289 S.W.3d at 848 (citing City of Keller v. Wilson, 168

S.W.3d 802, 827 (Tex.2005)). We indulge every reasonable inference and resolve any doubts in

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5

Alvarado v. Lexington Ins. Co., 389 S.W.3d 544 (2012)

the nonmovant's favor. See Sw. Elec. Power Co. v. Grant, 73 S.W.3d 211, 215 (Tex.2002) (citing

Sci. Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 911 (Tex.1997)).

Third–Party Beneficiary Status

In his sole issue, Alvarado contends that the trial court erred in rendering summary judgment

in favor of Lexington because Lexington failed to conclusively negate his status as a third-party

beneficiary of the Policy. Lexington responds that this Court should overrule Alvarado's sole issue

and affirm the summary judgment because Alvarado failed to plead his third-party-beneficiary

status. It further argues that we should affirm the summary judgment because Alvarado failed to

raise a genuine issue of material fact with respect to his third-party-beneficiary status.

1. Alvarado's Right to Argue His Third–Party–Beneficiary Status

[2] Before we address the merits of Alvarado's sole issue, we address Lexington's contention that

Alvarado was required to plead third-party beneficiary status, and that, because he did not, we

should affirm the trial court's summary judgment on that basis alone.

[3] Lexington's contention is without merit. Lexington itself raised the issue of Alvarado's third-

party-beneficiary status by arguing in its summary judgment motion that Alvarado did not qualify

as a third-party beneficiary to the Policy and therefore lacked standing. Standing is a jurisdictional

issue that cannot be waived and may be raised at any time. See Tex. Ass'n of Bus. v. Tex. Air

Control Bd., 852 S.W.2d 440, 445 (Tex.1993). Here, it was raised by Lexington as grounds for

granting it summary judgment against Alvarado.

Rule 166a provides that a defendant against whom a claim is asserted “may, at any time, move with

or without supporting affidavits for summary judgment in his favor as to all or any part thereof.”

TEX.R. CIV. P. 166a(b). The Rule further provides that summary judgment shall be granted if

the motion and the summary judgment evidence “show that, except as to the amount of damages,

there is no genuine issue as to any material fact and the moving party is entitled to judgment as a

matter of law on the issues expressly set out in the motion or in an answer or other response.” Id.

166a(c). Lexington moved for summary judgment on all of Alvarado's claims on the ground that

he lacked standing to pursue them because he was neither a party to the insurance contract between

Lexington and Flagstar nor *551 a third-party beneficiary of the contract. Alvarado responded

to this issue in his summary judgment response. The issue of Alvarado's third-party-beneficiary

status was thus squarely before the trial court in Lexington's motion and Alvarado's response.

Lexington's contention that Alvarado may not seek to overturn a summary judgment on the very

issue it presented to the trial court in its own motion as the basis for granting summary judgment

is directly contrary to the express language of Rule 166a and is without merit.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6

Alvarado v. Lexington Ins. Co., 389 S.W.3d 544 (2012)

We now turn to the merits of Alvarado's sole issue.

2. Third–Party–Beneficiary Status Under Force–Placed Insurance Policies

[4] [5] [6] [7] [8] Insurance contracts are subject to the same rules of construction as ordinary

contracts. Archon Invs., Inc. v. Great Am. Lloyds Ins. Co., 174 S.W.3d 334, 338 (Tex.App.-

Houston [1st Dist.] 2005, pet. denied) (citing Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d

819, 823 (Tex.1997)). When a policy permits only one reasonable interpretation, we construe it as

a matter of law and enforce it as written. Id. (citing Upshaw v. Trinity Cos., 842 S.W.2d 631, 633

(Tex.1992)). When construing an insurance policy, “[w]e must strive to effectuate the policy as

the written expression of the parties' intent.” Id. (citing State Farm Life Ins. Co. v. Beaston, 907

S.W.2d 430, 433 (Tex.1995)). To discern the intent of the parties to a contract, the court examines

and considers the entire writing to harmonize and give effect to all the provisions of the contract so

that none will be rendered meaningless, no single provision taken alone will be given controlling

effect, and all the provisions will be considered with reference to the whole instrument. In re

Serv. Corp. Int'l, 355 S.W.3d 655, 661 (Tex.2011). If the term to be construed is unambiguous

and susceptible of only one construction, we “give the words in the policy their plain meaning.”

Archon, 174 S.W.3d at 338 (citing Devoe v. Great Am. Ins., 50 S.W.3d 567, 571 (Tex.App.-Austin

2001, no pet.)).

[9] [10] In determining whether a third party can enforce a contract, we look only to the intention

of the contracting parties. Basic Capital Mgmt., Inc. v. Dynex Commercial, Inc., 348 S.W.3d 894,

900 (Tex.2011); MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex.1999);

Union Pac. R.R. Co. v. Novus Int'l, Inc., 113 S.W.3d 418, 421 (Tex.App.-Houston [1st Dist.] 2003,

pet. denied). The fact that a person might receive an incidental benefit from a contract to which he

is not a party does not give that person a right to enforce the contract. Basic Capital Mgmt., 348

S.W.3d at 899–900; MCI Telecomms., 995 S.W.2d at 651; Union Pac., 113 S.W.3d at 421.

[11] [12] [13] [14] A third party may recover on a contract made between other parties only

if the contracting parties intended to secure a benefit to the third party and only if the contracting

parties entered into the contract directly for the third party's benefit. Basic Capital Mgmt., 348

S.W.3d at 900; MCI Telecomms., 995 S.W.2d at 651; Union Pac., 113 S.W.3d at 421. The third

party must show that he is either a donee or a creditor beneficiary of the contract, and not one who

is only incidentally benefitted by its performance. MCI Telecomms., 995 S.W.2d at 651; Union

Pac., 113 S.W.3d at 421. A party is a donee beneficiary if the promised performance wi

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