The Dallas Court of Appeals has reversed a nearly $2 million judgment, $380,000 of which consisted of punitive damages, against two executives of a credit card processing company who allegedly defrauded a lender.
Background
The facts of Thomas A. “Kip” Hyde and Robert L. Winspear v. GACP Finance Co., LLC (No. 05-23-00873-CV; October 24, 2024) are as follows. GACP is a specialty finance lender that entered into a Loan and Security Agreement (the “Credit Agreement”) with Excel Corporation, a credit card processing company. Hyde was Excel’s CEO and Winspear was the CFO. The Credit Agreement provided that no loan party could make any payment with any of the Subordinated Indebtedness (GACP’s loans) without prior written consent of the Agent. Hyde and Winspear knew the terms of the Credit Agreement because they themselves negotiated and recommended it to Excel’s board of directors, who duly approved it. The actual lender, GACP I, L.P. (“GACP Lender”) loaned Excel $13.5 million. Excel gave GACP a security interest in its assets, and, among other obligations, Excel agreed to maintain a certain liquidity as of the last date of every month. Hyde and Winspear, despite the Credit Agreement, used the loan proceeds to pay themselves $750,000 ($375,000 a piece) in deferred compensation without obtaining GACP’s consent. This payment left Excel with less than the $2 million in minimum liquidity required by the Credit Agreement.
After sending a written notice of the breach of the Credit Agreement and an attempt to revise the Credit Agreement to solve the issue, GACP entered into a forbearance agreement which sold Excel’s assets through an auction and incurred a multimillion-dollar loss. GACP subsequently filed suit against Hyde and Winspear for fraud. A jury found Hyde and Winspear committed fraud against GACP and awarded $1,211,520.00 in loss of benefit-of-the-bargain damages and $334,902.00 in out-of-pocket expenses. It further awarded $140,000 in punitive damages against Hyde and $140,000 in punitive damages against Winspear. The trial court denied appellants’ post-judgment motions. Hyde and Winspear appealed.
Analysis: Fair Notice of Pleadings Doctrine
In an opinion by Justice Nowell, the court of appeals reversed and rendered a take nothing judgment against GACP. Hyde and Winspear contended that the trial court erred by allowing GACP to argue for the first time on the third day of the trial that it was seeking damages as an agent on behalf of GACP Lender. In so doing, they argued, the trial court dispensed with the fair notice of pleadings doctrine, which shifted the burden onto Defendants to understand which party was seeking damages . GACP countered that Defendants always knew that it was seeking damages as agent and that they really raised a capacity issue, which was not preserved for appeal. The problem was that in its second amended petition, GACP repeatedly said that GACP Finance Co. LLC was the plaintiff, not GACP Lender. Furthermore, during discovery, GACP made no mention of its acting as an agent. Also, during Defendants’ opening statement, their counsel emphasized clearly that the plaintiff was GACP Finance Co. LLC, which GACP did not correct. Consequently, in its capacity as Plaintiff, GACP did not have capacity to seek GACP Lender’s damages because it violated the fair notice of pleadings doctrine by consistently referring to the damages as GACP’s damages and not to GACP seeking GACP Lender’s damages as an agent. GACP’s counsel admitted that the damages they sought were losses suffered by the lender, not GACP Finance Co. Counsel could point to only a passing reference in GACP’s live pleading that suggested it might be acting as the Lender’s agent.
The court of appeals with Defendants because “[a] ‘passing reference’ in the factual portion of a pleading does not equate to fair notice.” Instead, the second amended petition repeatedly identified GACP as the plaintiff, did not list GACP Lender as a party to the case, and stated that GACP sought not less than $6.3 million in actual and punitive damages. As noted above, the word “agent” appeared once in the petition but only in the context of GACP’s role in entering into the Credit Agreement. “Reading the second amended petition as a whole and from appellants’ perspective,” the court opined, “we cannot conclude this ‘passing reference’ equated to fair notice that GACP was seeking damages on behalf of GACP Lender as its agent.”
The court also rejected GACP’s argument that the Credit Agreement gave GACP authority to bring suit on GACP Lender’s behalf because “GACP neither specifically incorporated the Credit Agreement into, nor attached it to, its second amended petition… The fair notice of pleadings doctrine requires a pleading to give the adversary parties notice of each parties’ claims and defenses.” Thus, the court concluded that reference to a document not attached to a petition cannot satisfy the fair notice of pleadings standard. It went on to say that GACP’s argument fails even if GACP had attached the Credit Agreement to its second amended petition because the Agreement specified that the GACP had authority to bring suit as agent against Excel, not Defendants.
Capacity
The court next rejected GACP’s argument that Defendants’ capacity challenge was not preserved because they did not file a special exception or verified denial. According to the court, however, Defendants couldn’t have known that the second amended petition was even defective for purposes of filing an exception or denial because they didn’t know that GACP was suing as agent until the third day of trial.
Standing
Finally, Defendants asserted that GACP lacked standing to sue. The court agreed because on the third day of the trial, GACP said “it had zero damages of its own and was pursuing damages for GACP Lender as its agent… Accordingly, once GACP stipulated it had no damages of its own, GACP no longer had standing to bring suit against appellants.”
It seems remarkable that a dispute over a fairly hefty loan could be so mishandled as to cost the lender the benefit of a favorable jury finding against Defendants. The court of appeals’ opinion strikes us as the correct one under the circumstances because there was simply no way to fix it otherwise.
TCJL Intern Dilara Muslu researched and drafted this article.
