Court of Appeals of Texas, Houston (1st Dist.).

Fred CHANG, Appellant,

v.

Grace Yu-Ru CHEN HUANG, Appellee.

No. 01-97-00538-CV.

|

May 11, 1998.

On Appeal from the 234th District Court Harris County, Texas Trial Court Cause No. 89-14493

Panel consists of Chief Justice SCHNEIDER and Justices HEDGES and NUCHIA.

OPINION

SAM NUCHIA, Justice.

*1 After a jury trial, judgment was rendered against appellant for breach of fiduciary duty. We affirm in part, reverse in part, and remand.

BACKGROUND

This case has a long and tortured history. Michael Huang moved to the United States from China in 1979; his wife, appellee Grace Huang, followed shortly thereafter. Appellant Fred Chang, and his wife, Catherine Chang, helped Michael and Grace Huang out by giving them a job in San Antonio at the “Comfort Inn.” Michael, Grace, and their children also resided at the motel.

Grace Huang was at some point offered a partnership interest in the ownership of the motel. During this time, Fred and Catherine Chang’s company, Minority Enterprise Funding Inc. (MEFI) loaned Michael Huang some $60,000. Catherine also personally loaned Michael Huang $5,000.

In 1985, the motel attracted the eye of a company called Richmar, who purchased the motel for just under $2 million dollars. An audit was performed due to the sale, as well as the fact that the motel was losing money, notwithstanding its high occupancy rate.

Because there were some concerns that the Huangs had been stealing from the motel, the rest of the partnership decided to hold Grace’s share of the sale proceeds until the matter could be resolved. Fred Chang (hereinafter “Chang”) also requested that Michael Huang’s $65,000 debt be taken out of the sale proceeds. Michael and Grace refused, and Grace filed suit for an accounting of the partnership. Chang also sued Michael Huang for the $65,000 debt.

After Chang’s suit was filed, Michael Huang filed for bankruptcy protection. Chang then filed an adversary proceeding in the bankruptcy action to maintain the contract claim.

After some negotiation between the attorneys for the parties, a settlement of the entire dispute was reached. Chang would forgive Michael Huang of the $65,000 debt as well as any claim for stolen money from the partnership, and Grace would give up her partnership interest in the motel.

After the settlement, Grace sued Chang in San Antonio. After a change of venue brought the suit to Harris County, Grace nonsuited. She later refiled the suit in Harris County for fraudulently inducing her to enter into the settlement agreement, breaching his fiduciary duty by having her enter the unfair settlement agreement, and intentionally inflicting emotional distress upon her. Chang received summary judgment on the fiduciary duty and intentional infliction of emotional distress claims, but not on the fraudulent inducement claim. At trial, the jury found that Chang did not fraudulently induce Grace to sign the settlement agreement. Grace appealed the granting of summary judgment on her breach of fiduciary duty and intentional infliction of emotional distress claims.

This Court reversed the granting of summary judgment on these claims. Huang v. Chang, No. 01-92-00016-CV (Tex.App.-Houston [1st Dist.] 1993, writ denied). After a mistrial, and subsequent retrial, the jury found that Chang breached his fiduciary duty to Grace, but that he did not intentionally inflict emotional distress on her. The jury awarded $105,000 in damages; but with prejudgment interest, the award became over $250,000. Chang has raised four points of error.

DISCUSSION

Fiduciary Duty and Breach

A. Duty

*2 In the first part of his first point of error, Chang contends, as a matter of law, there was no fiduciary duty to breach. The existence of a duty is a question of law the court must decide based on the specific facts of the case. Mitchell v. M-K-T R.R., 786 S.W.2d 659, 662 (Tex.1990); Lawson v. B Four Corp., 888 S.W.2d 31, 33 (Tex.App.-Houston [1st Dist.] 1994, writ denied). We review this question of law de novo. See, e.g., State Farm Lloyds v. Kessler, 932 S.W.2d 732, 735 (Tex.App.-Fort Worth 1996, writ denied).

Chang points out that the Huangs were represented by legal counsel during the litigation and that the settlement was as a result of arm’s-length negotiations between the parties. Chang reasons that if parties can refute their settlement, even though they were represented by counsel when they settled their claims, litigation never ends.

It is undisputed that Grace Huang and Chang were partners,¹ and that Chang was the trustee of the sale proceeds. Partners owe each other and their partnership a duty in the nature of a fiduciary duty in the conduct and winding up of partnership business, and are liable for a breach of that duty. Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171 (Tex.1997). Even after the partnership terminates, the duty remains to matters relating to the winding up of the partnership’s affairs. Rice v. Angell, 73 Tex. 350, 11 S.W. 338, 340 (Tex.1889).

In Schlumberger, 959 S.W.2d at 175-76, the Texas Supreme Court reaffirmed its holding in Johnson v. Peckham, 132 Tex. 148, 120 S.W.2d 786, 788 (Tex.1938), which held that a partner can breach a fiduciary duty, even though the partners had strained relations and one partner had sued for an accounting and dissolution of the partnership. The court rejected the very same argument that Chang makes; notwithstanding the fact that the parties in Schlumberger had separate legal counsel represent them and negotiate the settlement agreement, “Johnson counsels that their negotiations terminating their relationship would not be at arm’s length, but would be conducted under the higher fiduciary standard requiring full disclosure.” Id. The policy behind this rule is that if a partner can himself end his fiduciary duty by straining the relationships or filing suit, he will always do so in order to obtain a sharp bargain. Id.

As mentioned supra, it is undisputed that Chang and Grace were partners. As a result, Chang did owe a fiduciary duty to Grace in connection with the settlement agreement.

B. Breach

In the second part of his first point of error, Chang contends that even if there was a fiduciary duty, there was no breach of that duty because the agreement was fair. Chang offers three grounds in support of his contention: (1) the bankruptcy court approved the settlement agreement as fair; (2) the agreement was in fact fair; and (3) public policy favors support of the settlement.

1. Bankruptcy court

*3 First, Chang argues that the bankruptcy court is burdened with approving all settlements for fairness, and this settlement was in fact approved. Chang argues that this is conclusive on the fairness of the settlement.

However, Grace was not an adversary or party in the bankruptcy proceeding, and the record shows the bankruptcy court’s order was based solely upon a failure to prosecute the case. There is nothing in the record that would show the court had knowledge or had made a determination of the fairness of the agreement between Grace and Chang. The order only dismisses the case for want of prosecution-it does not purport to interpret the terms of the settlement agreement. See Ginther v. Taub, 570 S.W.2d 516, 525 (Tex.Civ.App.-Waco 1978, writ ref’d n.r.e.) (where bankruptcy court’s order does not rule on fairness of agreement with nonadversary party, order is not conclusive as to that issue).

2. The agreement was fair

Chang continues his bankruptcy court argument by contending that if Grace did not think the agreement was fair, she could have appealed the decision. However, as mentioned supra, there is not an order that stipulates that the terms of the agreement were fair, and in any event, Grace was not a party to the adversary proceeding. Thus, she lacked standing to appeal.

Chang also challenges the factual sufficiency of the evidence to support the jury’s finding that the agreement was unfair. In reviewing factual sufficiency points of error, we must examine all of the evidence in the record, including any evidence contrary to the judgment to determine if the challenged finding is so against the great weight and preponderance of the evidence as to be clearly wrong or unjust. Plas-Tex. Inc. v. United States Steel Corp., 772 S.W.2d 442, 445 (Tex.1989).

Chang contends that the agreement was fair because he had a $65,000 debt, plus interest, against Michael Huang, a claim for attorney’s fees on the contract claim, as well as a claim of misappropriation of partnership monies. Grace contends that based upon the $105,000 verdict, it appears that the jury believed that Grace was entitled to $180,000 (a 22% interest in the partnership proceeds), and then discounted that amount by $75,000, which the parties concede is about what Michael Huang owed on the loans including interest. Michael Huang testified that he had taken money only to repay himself for the extensive repairs on the motel. The audit did not prove that Grace and Michael Huang had stolen anything. The jury heard all of the evidence on the fairness of the agreement and decided it was not fair. See Transmission Exchange Inc. v. Long, 821 S.W.2d 265, 271 (Tex.App.-Houston [1st Dist.] 1991, writ denied) (the jury is the sole judge of the credibility of the witnesses and the weight to be given their testimony); Miller v. Kendall, 804 S.W.2d 933, 939 (Tex.App.-Houston [1st Dist.] 1990, no writ) (the jury is free to believe or disbelieve the witnesses’ testimony in whole or in part.). We cannot say that the jury’s finding is so against the great weight and preponderance of the evidence as to be clearly wrong or unjust.

3. Public policy

*4 Chang also argues that the agreement should be declared fair because public policy favors the finality of settlements. This is true; however, the Texas Supreme Court has clearly held that the duty of a partner triumphs over the finality of settlements. See Swanson, 959 S.W.2d at 175 (rejecting argument that finality of settlement should outweigh fiduciary duty).

We overrule Chang’s first point of error.

Estoppel

In his second point of error, Chang contends that Grace should be prevented from recovery due to estoppel. In question number 2, the jury found that Grace should not be estopped to claim that the settlement agreement was a breach of fiduciary duty. Chang asserts that the evidence is legally and factually insufficient to support this finding.

We note that “[t]he doctrine of estoppel is for the protection of innocent persons, and only the innocent may invoke it.” El Paso Nat’l Bank v. Southwest Numismatic Inv. Group, Ltd., 548 S.W.2d 942, 949 (Tex.Civ.App.-El Paso 1977, no writ) (quoting 31 C.J.S. Estoppel § 75(1964)). It is an equitable construct, and one with unclean hands cannot rely on it. Hughes v. Aycock, 598 S.W.2d 370, 375 (Tex.Civ.App.-Houston [14th Dist.] 1980, writ ref’d n.r.e.); see also Foxwood Homeowners Ass’n v. Ricles, 673 S.W.2d 376, 379 (Tex.App.-Houston [1st Dist.] 1984, writ ref’d n.r.e.) (to obtain equitable remedy, party must have clean hands); Village Medical Center, Ltd. v. Apolzon, 619 S.W.2d 188, 191 (Tex.Civ.App.-Houston [1st Dist.] 1981, no writ) (“To obtain equity a party must come into court with clean hands.”).

In this case, Chang desires to use estoppel to shield himself from his own breach of fiduciary duty. Because Chang does not have “clean hands,” he may not invoke the doctrine of equitable estoppel. Texas Workers’ Compensation Ins. Facility v. Personnel Services, Inc., 895 S.W.2d 889, 894 (Tex.App.-Austin 1995, no writ) (citing El Paso Nat’l Bank and holding that where party had duty to be honest in its dealings, it is not in position to use equitable doctrine of estoppel to shield itself from the results of its dishonesty).

Chang’s second point of error is overruled.

Prejudgment Interest

In his third point of error, Chang contends that the trial court erred in granting prejudgment interest according to the case of Cavnar v. Quality Control Parking, Inc., 696 S.W.2d 549, 552 (Tex.1985). We agree.

In the recent case of Johnson & Higgins of Texas, Inc. v. Kenneco Energy Inc., 962 S.W.2d 507 (Tex.1998), the Texas Supreme Court determined that even though the Texas Tort Reform Act does not apply to a claim for economic damages, the policy behind that act should apply to all grants of pre-judgment interest derived under the common law. Kenneco Energy, Inc., 962 S.W.2d at 528-31. Therefore, prejudgment interest begins to accrue on the earlier of (1) 180 days after the date a defendant receives written notice of a claim or (2) the date suit is filed. Id. at 531 (citing Tex.Rev.Civ. Stat. art. 5069-1.05, § 6(a) (Vernon 1987)). Additionally, this prejudgment interest accrues at the rate for postjudgment interest and is computed as simple interest. Id. at 532.

*5 In this case, the limited record on appeal does not indicate when or if written notice of a claim was given to Chang, or when the suit was originally filed. As a result, the judgment must be reversed and remanded as to prejudgment interest. The trial court should award prejudgment interest in accordance with this opinion.

We sustain Chang’s third point of error.

We reverse the award of prejudgment interest and remand this issue to the trial court. In all other aspects, we affirm the judgment of the trial court.

	Footnotes
1		Because Grace Huang and Chang formed their enterprise before the Legislature revised the Texas Uniform Partnership Act in 1993, the pre-1993 statute and case law decided under that statute control our determination. Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171, 176 (Tex.1997).