O P I N I O NIn this contract dispute arising out of a highway construction project, subcontractor Vernco Construction obtained a multimillion-dollar verdict against its former Corporate Vice President David Nelson and against prime contractor E.E. Hood & Sons, Inc. (Hood) after Hood fired Vernco and hired Nelson’s own private construction company, Collective Contracting, Inc., to finish certain subcontracted sewer work.Although the procedural issues at play are complex, Vernco—alleging causes of action for breach of contract, tortious interference with a contract, breach of fiduciary duty, and fraud/conspiracy to defraud—essentially accuses Hood and Nelson of conspiring to sabotage Vernco’s subcontract so that Nelson’s personal company could then step in, perform work, and receive money that should have gone to Vernco. Hood and Nelson contend there was no conspiracy; rather, Vernco’s financial troubles and alleged misappropriation of funds ultimately led to a lapse in insurance coverage at the construction site, which gave Hood good cause to terminate Vernco’s subcontract and hire Nelson’s company to finish the job. Hood also insists it has already paid Vernco all monies legally owed per the terms of the Vernco Subcontract. Following trial, the jury sided with Vernco on all causes of action.Hood and Nelson seek reversal of the judgment on multiple grounds. We reverse and render in part on the issue of attorney’s fees, reform the remainder of the judgment to reflect liability on breach of fiduciary duty grounds rather than breach of contract grounds, affirm the judgment as modified as to all issues except lost profit damages, and suggest a remittitur on lost profit damages.[1]I.BACKGROUNDA.Factual HistorySetting the Stage: Vernco, Hood, and the Applewhite ProjectIn February 2004, after soliciting bids for a large construction project aimed at bolstering road and utilities infrastructure around the site of a proposed Toyota plant south of San Antonio, Texas (the Applewhite Project), the Texas Department of Transportation (TxDOT) ultimately awarded a prime contract to E.E. Hood & Sons, Inc. (Hood). Hood, in turn, hired Vernco Construction, Inc., as its subcontractor for water utility services. Hood had previously hired Vernco as a subcontractor on a different project (the Pat Booker Project). Jack Claflin was the owner/president of Vernco. Corporate Vice President David Nelson headed Vernco’s water utility services division and was largely the point person between Vernco and Hood for both the Pat Booker Project and the Applewhite Project. While this case primarily involves a dispute over the Vernco’s work on the Applewhite Project, as a side issue, Vernco alleges that Nelson told the company that as a result of delays on the Pat Booker Project, Vernco would be entitled to between $150,000 and $170,000 in inefficiency claims from TxDOT. According to Claflin, Nelson represented that he would file those claims on Vernco’s behalf. It is undisputed that Nelson did not timely file the Pat Booker project inefficiency claims.Relevant Terms of the Applewhite Project Prime Contract and the Vernco SubcontractThe Applewhite Project’s Prime Contract between TxDOT and Hood incorporated by reference the provisions of TxDOT’s 1993 Standard Specifications for Construction and Maintenance of Highways, Streets, and Bridges (also known as the “Blue Book”). Germane excerpts of the Blue Book and subsequent change orders modifying the Prime Contract will be discussed later in this opinion.Prime contractor Hood, in turn, signed a subcontract for utilities services with Vernco (the Vernco Subcontract). Relevant to this appeal are five sections of the Vernco Subcontract.Payment ArrangementSection 3(e) of the Vernco Subcontract details the payment arrangement between the parties and places restrictions on what Vernco may do with the money it receives from Hood:Section 3. PAYMENT. (a) The Contractor agrees to pay the Subcontract for the performance of this Subcontract, as specified herein, the sum of Two Million Two Hundred Nunety [sic] Two Thousand Three Hundred Eleven and Ninety Four Hundredths dollars ($2,292,,311.94 [sic]) subject to additions and deductions for charges agreed upon or determined, as herein after provided. Partial payments will be made to the Subcontractor each month in the amount equal to 95 per cent of the value . . . of the quantity . . . of the work performed hereunder, less the aggregate of previous payments . . . . Upon complete performance of this Subcontract by the Subcontractor and final approval and acceptance of Subcontractor’s work and materials by the Owner, the Contractor will make final payment to the Subcontractor of the Balance due to him under this Subcontract no sooner than 10 days after full payment for such work and materials has been received [sic] by the Contractor from the Owner.…(c) Contractor reserves the right to make payment by joint check or by direct check to Subcontractor’s materialmen or sub-subcontractors or any person who has right of action against Contractor or Contractor’s Surety under any law. Subcontractor agrees that contractor reserves the right of determination as to what manner of payment shall be made.…(e) The Subcontractor agrees and covenants that money received for the performance of this Subcontract shall be used solely for the benefit of persons and firms supplying labor, materials, supplies, tools, machines, equipment, plant or services exclusively for this project in connection with this Subcontract and . . . any money paid to the Subcontractor pursuant to this Subcontract shall immediately become and constitute a trust fund for the benefit of said persons and firms, and shall not in any instance be diverted by Subcontractor to any other purpose until all obligations arising hereunder have been fully discharged, and all claims arising therefrom have been fully paid . . . . [Emphasis in orig.].Changes to the Scope of Work and Price AdjustmentsSection 4 of the Vernco Subcontract deals with how changes and adjustments in the scope of work and the amount of money owned to Vernco will be handled:Section 4. CHANGES. The Contractor may at any time by written order of Contractor’s authorized representative, and without notice to the Subcontractor’s sureties, make changes in, additions to and deletions from the work to be performed and materials to be furnished under this Subcontract, and the Subcontractor shall promptly proceed with the performance of this Subcontract as so changed. Any increase or decrease in the Subcontract price resulting from changes shall be agreed upon in writing by the parties hereto. Any claim for adjustment of the subcontract price under this Section must be made in writing within ten days from the date such changes are ordered. The Subcontract price shall be equitably adjusted on account of any such changes, subject to any applicable provisions of the contract between the Contractor and the Owner . . . .Subcontractor’s Inability to Complete Subcontracted WorkSection 5 of the Vernco Contract addresses Vernco’s prosecution of work:Section 5. PROSECUTION OF WORK.…(b) In the event the Subcontractor fails to comply, or becomes disabled and is unable to comply with the provisions of this Subcontract as to character or time of performance, and the failure or inability is not corrected within five days after written request by the Contractor to the Subcontractor, the Contractor may, by other Subcontractor or otherwise, without prejudice to any other right or remedy, take over and complete the performance of this Subcontract at the expense of the Subcontractor, or, without taking over the work, may furnish the necessary materials and/or employ the workmen necessary to remedy the situation at the expense of the Subcontractor. If the Contractor takes over the work pursuant to this paragraph it is specifically agreed that the Contractor may take possession of the premises and of all materials the Subcontractor at the site for the purpose of completing the work covered by this Subcontract. . . .Insurance CoverageSection 10 of the Vernco Subcontract outlines insurance requirements for the Applewhite Project:Section 10. INSURANCE. (a) The Subcontractor shall provide and maintain Workman’s Compensation and Employer’s Liability Insurance for the protection of his employees, as required by law of an employer or to limits specified in the contract. The Subcontractor shall also provide and maintain full force and effect, during the term of this Subcontract, insurance (including but not limited to insurance covering the operation of automobiles, trucks and other vehicles) with an insurance company satisfactory to the Contractor protecting the Subcontractor, the Owner and the Contractor against liability from damages . . . arising from and growing out of the Subcontractor’s operations in connection with the performance of this Subcontract.(b) [ . . . ] Written proof satisfactory to the Contractor and the Owner of compliance with the requirements of this section shall be furnished to the Contractor and the Owner before any work is performed under this Subcontract. Such proof of insurance shall provide for ten (10) days written notice to the Contractor and the Owner prior to the cancellation or modification of any insurance referred to therein.BreachFinally, Section 31 deals with what happens in the event of a breach:Section 31. BREACH OF TERM OR CONDITION. Upon Subcontractor’s breach of any term or condition of this Subcontract, except those which specifically provide a period within which a particular breach may be cured, the Contractor, in his sole discretion, may immediately declare this Subcontract terminated, and shall be entitled to all the rights and remedies provided by this Subcontract and by law. The waiver by Contractor of any particular breach shall in no way affect Contractor’s right to terminated [sic] this Subcontract on any subsequent breach.Vernco Defaults on Obligations to Suppliers; Nelson and Claftin Become Personal Guarantors of the Vernco SubcontractOn June 16, 2004, Hood issued Vernco its first check for work on the Applewhite Project. On July 15, 2004, Hood issued Vernco a second check. The combined value of both those checks was more than $950,000. Vernco was obligated to pay its suppliers from that sum of money; however, the evidence is undisputed that Vernco failed to do so, at least in part. One supplier, National Waterworks, made a claim against Vernco with Hood and threatened to file liens against the project, alleging that Vernco failed to pay an invoice. According to Hood, the outstanding claim could have led Hood to lose the Prime Contract entirely. As such, on August 11, 2004, Hood executed a letter agreement with Vernco (the Letter Agreement) and personal guaranty agreements with Claflin and Nelson (the Guaranty Agreements) to rectify the problem. The Letter Agreement stated as follows: Vernco stipulates[,] acknowledges[,] and agrees that it has received from Hood, pursuant to the Contract[,] the sum of $950,663.96. From the sum of $950,663.96 Vernco was obligated to pay all suppliers in connection with the Contract. [ . . . ] Although paid by Hood, Vernco failed to pay the suppliers the sum of $583,440.73 through June 30, 2004. National Waterworks Inc. of Waco, Texas has submitted a claim against Hood. [ . . . ] Vernco is therefore in breach of the Contract and has requested Hood to settle the debt and obligation owed in the following manner: a. Vernco will furnish no less than three crews averaging 4-6 people on the job evidenced by the Contract until such job is completed to the fullsatisfaction of Hood and all suppliers of Vernco are paid in full. Hood has no obligation to accept the crews and all work performed shall be subject to the approval by Hood. All future checks to Vernco pursuant to the Contract shall be joint checks issued to Vernco and its suppliers. Hood is authorized, at its election, to direct or make any payment owed Vernco under any other contract to suppliers under the Contract. David Nelson and Jack Claflin will execute an affidavit, at Hood’s request, identifying all suppliers and amounts owed as of August, 1, 2004, and further an affidavit upon completion of Contract identifying all suppliers and that all suppliers have been paid in full. David Nelson and Jack Claflin individually do hereby, jointly and severally, agree to fully indemnify, protect, and hold harmless Hood it’s [sic] officers and directors from and against any and all claims, demands, costs, liabilities, or other expenses of any kind or nature arising from or out of the Contract . . . . David Nelson and Jack Claflin agree to provide additional security or collateral, at the request of Hood, sufficient to secure the obligations of Vernco under the Contract or this Agreement. David Nelson and Jack Claflin agree to assume any and all liabilities and obligations owed by Vernco to Hood; including but not limited to all obligations by Vernco to pay its suppliers and to protect Hood from any and all claims associated therewith and to execute the Guarantee Agreements attached hereto . . . . Work Stalls As Scope of Applewhite Project Expands; TxDOT Issues Change Order 17In summer 2004, the parties realized that the Applewhite Project would need sewer pipes larger than those originally contemplated in the Prime Contract. Horizontal drilling work on the Applewhite Project stopped for several months as prime contractor Hood and TxDOT attempted to reach a mutually agreeable price point for the sewer pipe change order and scope of work. Negotiations ultimately stalled, leading TxDOT to invoke the force account provisions[2] of the Prime Contract. Using the price schedule set out in the Blue Book for work performed on a force account basis, TxDOT issued Change Order 17, which made certain alterations to the scope of work on the Prime Subcontract. The change order allowed for certain force account markups (FAMs) to be paid.After Change Order 17 was issued, Hood met with its subcontractors, including Vernco, to discuss the changes, including the allocation of FAMs among the subcontractors. What happened at that meeting is disputed. No written agreement as to how the FAMs would be split appears in the record. It is undisputed that Vernco never formally requested an equitable adjustment in price in writing under the procedure set out in Subcontract Section 4. Nevertheless, the parties all agree that Hood promised to give Vernco the 55 percent labor burden, and Vernco actually received that FAM payment in a two-party check. Beyond that, the record is conflicting.At trial, Claflin and Nelson both claimed to have been on the phone during the part of the meeting dealing with the FAMs. However, Claflin testified that Nelson later told him that in addition to the 55 percent labor burden markup, Hood would also pay Vernco 20 percent on labor, 10 percent on materials, and 20 percent on equipment. Nelson agreed that he understood that Hood would pay those specific percentages on markups, but also claimed at trial that it was Claflin who had told him Hood would pay those percentages, and not the other way around. Ranney Hood and Randy Hood both insisted that they initially told all subcontractors that they would only receive the 55 percent labor burden; however, Ranney Hood testified that Hood eventually gave a 10 percent materials markup to the other subcontractors and not Vernco.Hood Terminates the Vernco Contract, Then Hires David Nelson’s Company to Finish Work on the Applewhite ProjectAfter the discussion regarding Change Order 17, Vernco continued its work on the Applewhite Project. In January 2005, Vernco received a check for $50,000.00, which represented the first profits Vernco was entitled to keep for itself in full. Vernco was scheduled to make a $14,515 insurance premium payment to Insurance One in early January 2005. The evidence is undisputed that Vernco failed to make this payment. Vernco maintains on appeal that due to the lack of FAM payments and the four percent retainage that Hood kept on every payment, Vernco could not pay its bills, including the insurance premium, out of the $50,000 check. Vernco’s insurance coverage had lapsed once before, but Vernco was able to reinstate coverage.A week before Nelson received notice that Vernco’s insurance coverage had lapsed and Hood terminated the Vernco Subcontract, Nelson began asking agent Gerald Koenning about obtaining insurance coverage for his personal construction company, Collective Contracting. Koenning was also the insurance agent for Vernco. At that point in time, Collective Contracting had no cash on hand. The only asset in its possession was a pickup truck.On January 28, 2005, Nelson learned that Vernco’s insurance coverage had lapsed because Vernco failed to pay the outstanding premium. Nelson informed Hood that Vernco employees could not report to work that day because Vernco’s liability insurance had lapsed for non-payment and it was a safety issue. Nelson did not first tell Claflin about the lapse in insurance coverage before calling Hood. While Nelson did tell Hood about the lapse in insurance coverage, Nelson did not tell anyone else on Vernco’s other jobs.Ranney Hood told Nelson to have Koenning call Hood to discuss the insurance situation. Based on Vernco’s failure to maintain liability insurance, Hood called Claflin in and terminated the Vernco Subcontract. That same day, Hood hired Nelson’s own personal construction company, Collective Contracting, Inc. (CCI), to perform the remainder of the work on the water utility subcontract.At the time Nelson began working on the Applewhite Project, Collective Contracting was not a TxDOT-approved subcontractor, nor did it have insurance coverage. Hood advanced Collective Contracting $14,438.29 so that it could procure insurance. Hood’s accounts payable bookkeeper testified that Hood’s advancement of money to a subcontractor in that fashion was unusual. Collective Contracting was also subject to a smaller retainage percentage in the payments it received from Hood as compared to Vernco. Vernco alleges that by contracting with Collective Contracting as a separate entity instead of hiring Nelson in-house directly, Vernco was also able to claim an extra five percent FAM for itself for employing a subcontractor. By the time the Applewhite Project was completed, Collective Contracting was able to purchase new equipment and had other contracts with Hood.B.Procedural HistoryVernco Sues; Hood and Nelson Question Vernco’s StandingVernco reached an agreement effective September 1, 2006,[3] with one of its creditors, Jefferson State Bank (the Bank), to stave off foreclosure of certain liens against the company (the Forbearance Agreement). As part of the Forbearance Agreement, Vernco and Claflin as Vernco’s guarantor acknowledged that the Bank had a security interest in various Vernco assets, that it had taken “ownership, possession, custody and control of the Company’s receivables and proceeds therefrom” with the consent of both Claflin and Vernco, and that:One of the receivables that Lender now owns is a claim against E.E. Hood & Sons, Inc., David Nelson and other parties . . . styled and numbered as ‘Vernco Construction, Inc. v. David Nelson, et al.’; Cause No. 2006-CI-18807 and pending in the 225th Judicial District Court of Bexar County, Texas (‘the Litigation’). The Company and the Guarantor have requested that, in consideration for the Company’s and Guarantor’s assistance to Lender in collecting the sums that are subject to the Litigation, they be compensated for such assistance in the event of a recovery and upon the terms and conditions set forth herein.In a section of the Forbearance Agreement detailing various acknowledgement, Vernco, Claflin, and the Bank make the following acknowledgment about the Bank’s security interests:3. Acknowledgment of Security Interests. The Company and the Guarantor jointly and severally acknowledge the validity and enforceability of the security interests granted in favor of the Lender pursuant to the security agreements . . . . The Company and Guarantor jointly and severally acknowledge that Lender, pursuant to applicable law, is the owner of all of the Company’s receivables (and proceeds therefrom), including, but not limited to, the receivables and claims (including the commercial tort claims) identified in the Litigation. However, the Company and Gaurantor acknowledge that Lender has not accepted and taken ownership of such receivables and claims in full satisfaction of its claims against the Company and Guarantor, the remaining balance of such claims being set forth above.After the effective date of the Forbearance Agreement with the Bank, Vernco sued Hood, Nelson, and Collective Contracting. Hood and Nelson filed a pretrial motion to dismiss for want of jurisdiction, asserting that Vernco lacked standing to prosecute the case because it had assigned all its interests to the Bank under the Forbearance Agreement. In response, Vernco submitted a copy of an addendum to the Forbearance Agreement that it and the Bank had executed after the motion to dismiss was filed (the Addendum) purportedly clarifying that Vernco was acting in accordance with the Bank’s wishes. The trial court denied the motion to dismiss, and the case proceeded to trial. Hood and Nelson renewed their challenges to jurisdiction several times during trial. The trial court declined to rule on those challenges or otherwise dismiss the case.At TrialVernco ultimately proceeded to trial on several causes of action: (1) breach of contract by Hood; (2) breach of fiduciary duty by Nelson, with Hood being implicated as a party to the breach through knowing participation; (3) tortious interference with a contract by Nelson; (4) fraud and conspiracy to defraud by both Hood and Nelson.Jury Charge and VerdictBreach of ContractThe jury charge’s Question 1 asked: “Did Hood fail to comply with the Applewhite Subcontract[4] prior to January 21, 2005 by failing to pay Vernco markups for labor, equipment, and/or materials pursuant to the Applewhite Subcontract?” The jury responded “yes.” Question 2 asked: “What amounts of money, if any, if paid now in cash, would fairly and reasonably compensate Vernco for its damages, if any, proximately caused by Hood’s breach of the Applewhite Subcontract?” The question instructed the jury to consider only: (1) lost profits, if any, on the non-force account work; (2) lost profits, if any, on the force account work; (3) loss of Vernco’s value, if any, as a business. The jury returned a verdict in the following amounts: $1,191,758.00 in lost profits on non-force account work $2,122,978.00 in lost profits on force account work $511,000.00 in loss of Vernco’s value as a business. The jury also awarded attorney’s fees of $800,000.00, plus $30,000.00 in contingent attorney’s fees if Hood appealed (Question 3).[5]Tortious Interference with a Contract The jury also found that Nelson intentionally interfered with the Vernco Subcontract (Question 8), that Nelson did not have a good faith belief he had the right to do so (Question 9), and that he was 75 percent responsible for tortious interference damages (Question 12). Koenning and Insurance One were deemed to have also interfered in the Vernco Subcontract (Question 10) and were 25 percent responsible for tortious interference damages (Question 12).[6] Question 11 asked what amount of money would compensate Vernco for such interference. The question instructed the jury to consider only (1) lost profits, if any, on the non-force account work; (2) lost profits, if any, on the force account work; (3) loss of Vernco’s value, if any, as a business. The jury returned a verdict in the following amounts: $1,191,758.00 in lost profits on non-force account work $2,122,978.00 in lost profits on force account work $511,000.00 in loss of Vernco’s value as a business. Breach of Fiduciary DutyQuestion 14 set out the question of fiduciary duty as follows:Did Nelson comply with his fiduciary duty to Vernco?Nelson owed Vernco a fiduciary duty relating to the performance of his role at Vernco as Vernco’s employee in charge of Vernco’s water utilities work on the Pat Booker and Applewhite projects. To prove he complied with his duty, Nelson must show all of the following: the conduct in question was fair and equitable to Vernco; Nelson made reasonable use of the confidence that Vernco placed in him; Nelson acted in the utmost good faith and exercised the most scrupulous honesty toward Vernco; Nelson placed the interest of Vernco before his own; Nelson did not use the advantage of his position to gain any benefit for himself at the expense of Vernco; Nelson did not place himself in any position where his self-interest might conflict with his obligations as a fiduciary; and Nelson fully and fairly disclosed all important information to Vernco concerning the conduct in question. The jury answered “no” and found that Nelson acted with malice (Questions 14 and 16). The jury also found that Hood knowingly participated in Nelson’s breach of his fiduciary duty to Vernco (Question 17) and acted with malice as well (Question 18).Question 15 asked what amount of money would compensate Vernco for such interference. The question instructed the jury to consider (1) lost profits, if any, on the non-force account work; (2) lost profits, if any, on the force account work; (3) loss of Vernco’s value, if any, as a business. The jury returned a verdict in the following amounts: $1,191,758.00 in lost profits on non-force account work $2,122,978.00 in lost profits on force account work $511,000.00 in loss of Vernco’s value as a business $350,000.00 from the failure to pursue inefficiency claims. FraudOn Vernco’s fraud claim, the jury found that both Hood and Nelson committed fraud against Vernco but that Koenning and Insurance One did not commit fraud (Question 19). In Question 21, the jury found Hood and Nelson each 50 percent liable for damages (Question 21).In Question 20, the jury was asked what amount of money would reasonably compensate Vernco for damages caused by fraud. The question instructed the jury to consider only (1) lost profits, if any, on the non-force account work; (2) lost profits, if any, on the force account work; (3) loss of Vernco’s value, if any, as a business. The jury returned a verdict in the following amounts: $1,191,758.00 in lost profits on non-force account work $2,122,978.00 in lost profits on force account work $511,000.00 in loss of Vernco’s value as a business. Related to the fraud findings in Question 19, the jury found that both Hood and Nelson acted with malice (Question 22).Civil ConspiracyQuestion 23 was contingent on jury answers of either “no” to Question 14 (i.e. finding that Nelson did not comply with his fiduciary duty) or “yes” to Question 19 (i.e. one or more defendants committed fraud). Question 23 asked:Were two or more of those listed below part of a conspiracy that damaged Vernco?To be part of a conspiracy, a defendant and another person or persons must have had knowledge of, agreed to, and intended a common objective or course of action that resulted in the damages to Vernco. One or more persons involved in the conspiracy must have performed some act or acts to further the conspiracy.Answer ‘Yes’ or ‘No’ as to each of the following:Hood ANSWER: YesNelson ANSWER: YesKoenning/Insurance Once ANSWER: YesPunitive DamagesQuestions 24 and 25 related to the jury’s malice findings as to the breach of fiduciary dutyand fraud claims. The instruction asked the jury to assess exemplary damages—”an amount that you may in your discretion award as a penalty or by way of punishment.” The jury assessed $150,000.00 in punitive damages against Hood (Question 24) and $150,000.00 against Nelson (Question 25).The jury’s final verdict is represented in visual form below in Table 1.1.JURY’S FINAL VERDICT
