Court Opinion

ID: 2880106
Source: CourtListenerOpinion
Date Created: 2015-09-07 05:38:15.771977+00
Date Added: 2024-06-11T12:46:09.408809
License: Public Domain

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                                 MEMORANDUM OPINION

                                         No. 04-08-00509-CV

                            POLK MECHANICAL COMPANY, LLC,
                                      Appellant

                                                  v.

                                              Roy JONES,
                                               Appellee

                     From the 224th Judicial District Court, Bexar County, Texas
                                  Trial Court No. 2006-CI-05584
                         Honorable Joe Frazier Brown Jr., Judge Presiding

Opinion by:       Steven C. Hilbig, Justice

Sitting:          Sandee Bryan Marion, Justice
                  Steven C. Hilbig, Justice
                  Marialyn Barnard, Justice

Delivered and Filed: July 1, 2009

REVERSED AND REMANDED

           Polk Mechanical Company, LLC appeals a summary judgment granted in favor of Roy Jones.

The trial court concluded Polk Mechanical’s claim against Jones was barred by limitations, but found

genuine issues of material fact existed on all other grounds raised in Jones’s motion for summary

judgment. On appeal, Polk Mechanical contends the trial court erred in granting summary judgment

based on limitations, but properly denied summary judgment on the other grounds raised by Jones.
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Jones argues the summary judgment was proper as to limitations, and the trial court erred in denying

his motion for summary judgment on the basis of standing. We reverse the trial court’s judgment

and remand the cause for further proceedings.

                                          BACKGROUND

       In August 2002, Capstone Corporation agreed to issue a subcontract to Encompass

Mechanical Services for plumbing, heating, ventilation, and air conditioning design and installation

in connection with the construction of a testosterone plant for Auxilium Pharmaceuticals, Inc. and/or

DPT Laboratories, Inc. Capstone agreed to pay Encompass approximately $500,000 for its work.

Before the work required by the subcontract was completed, Encompass filed for bankruptcy

protection in November of 2002. On December 31, 2002, the bankruptcy court approved the sale

of Encompass’s assets to Ken Polk Investments, LLC, and those assets were transferred through a

series of merger transactions to Polk Mechanical. The assets transferred to Polk Mechanical

included all of Encompass’s rights under the subcontract. In addition, all Encompass employees

became employees of Polk Mechanical. In March 2003, Polk Mechanical completed the work

required by the subcontract and began to demand payment from Capstone.

       Two meetings were held in May and July of 2003 at which the parties discussed backcharge

credits or offsets that Capstone claimed it was entitled to deduct from the contract price. Capstone

initially claimed $75,366.66 in backcharges, but subsequently claimed $307,307.91. During August

2003, Polk Mechanical continued to make demands for documentation to support the backcharge

credits alleged by Capstone. In September 2003, partial documentation was provided, but the

controversy continued.

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       In late 2003 or early 2004, the debt owed by Capstone was turned over for collection to Frank

Douglas, Polk Mechanical’s chief financial officer. Douglas contacted Tom Pittman, Capstone’s

representative, on a semi-monthly or weekly basis from the date the debt was turned over to him

until March of 2006 when the decision was made to file the underlying lawsuit. In these

conversations, Capstone never stated it was refusing to pay, but provided various reasons payment

could not be made at that time, including that Capstone had not billed the project owner and that

Capstone had not been paid by the project owner. Although a settlement was reached between

August and October of 2004, the agreement was not reduced to writing and Capstone never paid the

settlement amount. After a demand letter was sent in December of 2004, Capstone prevailed upon

a mutual friend to ask Polk Mechanical to not file a lawsuit based on Capstone’s continued promises

to pay the debt when able. Finally, in April 2006, “Polk Mechanical’s patience wore out,” and it

filed the underlying lawsuit. The lawsuit included a claim against Capstone and Pittman for

misapplication of trust funds.

       In his affidavit in support of Polk Mechanical’s response to Jones’s motion for summary

judgment, Mike Miller, Polk Mechanical’s senior project manager, stated:

              Defendant Pittman was the only Capstone officer or decision maker that Polk
       Mechanical was aware of, and the only officer or decision maker at Capstone that I
       had any dealings with. On information and belief, Defendant Pittman is, and was,
       Defendant Capstone’s Vice President. Defendant Pittman acted as the final decision
       maker for Capstone during the DPT Project, and he was the one with whom all
       substantive discussions regarding the debt owed to Polk Mechanical were had. I
       never had any discussions or dealings with Roy Jones and was not aware of his
       existence. Capstone never told anyone that I know at Polk Mechanical that Capstone
       would not pay the debt owed on the DPT Project.

A substantially identical statement was made in the affidavits of Frank Douglas, Polk Mechanical’s

chief financial officer, and John Hines, Polk Mechanical’s vice-president and a minority owner.

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        In March 2007, Polk Mechanical received documents during discovery, including checks

written to Capstone by the project owner and checks written to subcontractors and suppliers by

Capstone relating to the DPT project. This information confirmed: (1) Capstone was paid by the

project owner; and (2) Capstone’s checks contained two signatures – one known to be Pittman’s and

the other suspected to be Jones’s. However, the information did not reveal whether the funds

received by Capstone from the project owner had been diverted for improper purposes. After taking

Jones’s deposition in April 2007, Polk Mechanical confirmed Jones was the president and sole

shareholder of Capstone, was a signatory on Capstone’s bank account, and had exercised control or

direction over the funds Capstone was paid by the project owner. Finally, in August 2007, Capstone

produced checking account records from which Douglas determined Capstone’s account had a

negative balance “at least by” July 2003, indicating Capstone had diverted funds paid to it for the

benefit of Polk Mechanical. An amended petition was filed in September 2007 adding a claim

against Jones for misapplication of trust funds.

        Jones moved for summary judgment asserting Polk Mechanical’s claim against him was

barred by limitations. Jones also asserted Polk Mechanical lacked standing to pursue its construction

trust fund claim because: (1) Polk Mechanical was merely an assignee of Encompass and, therefore,

was not a beneficiary under the Texas Construction Trust Fund Act; (2) Encompass had not suffered

the type of injury the Act was intended to prohibit because it was paid fair market value for its assets;

(3) Encompass did not assign its inchoate claims against Capstone to Polk Mechanical; and (4) an

assignment of Encompass’s claim under the Act violates public policy. The trial court expressly

granted Jones’s motion on limitations, but expressly denied the motion based on standing. Polk

Mechanical appeals.

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                                       STANDARD OF REVIEW

         The applicable standard of review is whether Jones, as the summary-judgment movant,

established there was no genuine issue of material fact and he was entitled to judgment as a matter

of law on the grounds set forth in his motion. See Pustejovsky v. Rapid-American Corp., 35 S.W.3d
643, 645-646 (Tex. 2000). A defendant moving for summary judgment on the affirmative defense

of limitations must conclusively prove the elements of that defense. Id.; Potter v. Kaufman & Broad

Home Sys. of Tex., Inc., 137 S.W.3d 701, 704 (Tex. App.—San Antonio 2004, no pet.). When, as

here, the plaintiff pleads the discovery rule as an exception to limitations, the defendant has the

burden of negating that exception as well. See Pustejovsky, 35 S.W.3d at 646. A defendant seeking

summary judgment based on the statute of limitations must prove when the cause of action accrued

and must negate the discovery rule by proving as a matter of law that there is no genuine issue of fact

about when the plaintiff discovered or should have discovered the nature of the injury. Potter, 137
S.W.3d at 704. When reviewing an order granting a traditional motion for summary judgment,

courts take evidence favorable to the nonmovant as true and indulge every reasonable inference from

the evidence in favor of the nonmovant. Am. Tobacco Co. v. Grinnell, 951 S.W.2d 420, 425 (Tex.

1997).

                                            LIMITATIONS

         In its response to Jones’s motion for summary judgment, Polk Mechanical conceded

limitations would bar its claim against Jones without the operation of the discovery rule,

acknowledging:

                Without the discovery rule, Polk Mechanical’s trust fund claim against
         Defendant Jones accrued in July 2003, when the trust funds held by Capstone were
         diverted. The parties agree that the four-year residual limitations period applies to
         Polk Mechanical’s trust fund claims. It is also not disputed that since Jones was not

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       added to this suit until September 24, 2007, without the operation of the discovery
       rule, the statute of limitation[s] would bar Polk Mechanical’s trust fund claim against
       Jones. (record citations omitted)

Although Polk Mechanical argues in its brief that Jones failed to conclusively establish the date on

which Polk Mechanical’s trust fund claim accrued, it is undisputed that the latest date on which the

claim accrued was in July 2003. Because Polk Mechanical did not amend its petition to add the

claim against Jones until September 2007, limitations would bar the claim unless the discovery rule

applies.

       “The discovery rule has been applied in limited categories of cases to defer accrual of a cause

of action until the plaintiff knew or, exercising reasonable diligence, should have known of the facts

giving rise to a cause of action.” HECI Exploration Co. v. Neel, 982 S.W.2d 881, 886 (Tex. 1998).

The application of the discovery rule is generally limited to those cases where the nature of the injury

is inherently undiscoverable and the evidence of the injury is objectively verifiable. Id. The

applicability of the discovery rule is determined categorically, i.e., not based on whether the

particular injury in the case at hand may not have been discovered but whether the injury is of a type

that generally is discoverable by the exercise of reasonable diligence. Id.

       Polk Mechanical’s claim against Jones arises under the Texas Construction Trust Fund Act.

Under section 162.003 of the Act, a subcontractor who labors or who furnishes labor or material for

the construction or repair of an improvement on real property is a beneficiary of any trust funds paid

by or received in connection with the improvement. TEX . PROP . CODE ANN . § 162.003 (Vernon

2007). A contractor, or an officer of a contractor who receives trust funds or who has control or

discretion of trust funds, is a trustee of the trust funds. Id. § 162.002. The Act, therefore, creates a

beneficiary/trustee relationship between a subcontractor and a contractor who receives payment from

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a project owner. See id. In other words, the Act “imposes fiduciary responsibilities on contractors

to ensure that Texas subcontractors . . . are paid for work completed.” Kelly v. Gen. Interior Constr.,

Inc., 262 S.W.3d 79, 84-85 (Tex. App.—Houston [14th Dist.] 2008, pet. granted on other grounds);

In re Faulkner, 213 B.R. 660, 666 n. 10 (Bankr. W.D. Tex. 1997) (noting that trust relationship

arises under Texas law at time payments are made to contractor for construction).

        A variation to the inherently undiscoverable element arises when applying the discovery rule

to a fiduciary relationship. Computer Assocs. Int’l, Inc. v. Altai, Inc., 918 S.W.2d 453, 456 (Tex.

1996); see also S.V. v. R.V. , 933 S.W.2d 1, 8 (Tex. 1996). In the fiduciary context, “a person to

whom a fiduciary duty is owed is either unable to inquire into the fiduciary’s actions or unaware of

the need to do so.” S V., 933 S.W.2d at 8. When a trustee breaches its duty to a beneficiary, the

nature of the injury is considered inherently undiscoverable because of the fiduciary nature of the

relationship. See id. However, the person owed a fiduciary relationship still must exercise

reasonable diligence “when the fact of misconduct becomes [so] apparent it can no longer be

ignored.”1 Id.; see also Computer Assocs. Int’l, 918 S.W.2d at 456; Slay v. Burnett Trust, 187
S.W.2d 377, 394 (Tex. 1945); G. Prop. Mgmt., Ltd. v. Multivest Fin. Servs. of Tex., Inc., 219 S.W.3d
37, 48-49 (Tex. App.—San Antonio 2006, no pet.).

        Because Jones owed fiduciary responsibilities to Polk Mechanical, the inherently

undiscoverable requirement for applying the discovery rule is satisfied. See S V., 933 S.W.2d at 8.

Moreover, the injury in this case is objectively verifiable as it can be objectively established through

bank records and cancelled checks. See HECI Exploration Co., 982 S.W.2d at 886. Accordingly,

we hold the discovery rule applied to Polk Mechanical’s claim against Jones, and Jones was required

        1
         … This need to exercise reasonable diligence becomes a factor in determining when the beneficiary should
have discovered the nature of the injury. See S.V., 933 S.W .2d at 8; Slay, 187 S.W .2d at 394.

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to conclusively negate its application to be entitled to summary judgment. See Pustejovsky, 35
S.W.3d at 646.

       To conclusively negate the discovery rule, Jones was required to prove as a matter of law that

there was no genuine issue of fact about when Polk Mechanical discovered or should have

discovered the nature of the injury. See Potter, 137 S.W.3d at 704. Inquiries involving the discovery

rule usually entail questions for the trier of fact because when a plaintiff knew or should have known

of an injury is generally a fact question. Childs v. Haussecker, 974 S.W.2d 31, 44 (Tex. 1998);

Cadle Co. v. Wilson, 136 S.W.3d 345, 352 (Tex. App.—Austin 2004, no pet.). However, if

reasonable minds could not differ about the conclusion to be drawn from the facts in the record, the

start of the limitations period may be determined as a matter of law. Childs, 974 S.W.2d at 44;

Cadle Co., 136 S.W.3d at 352; Zacharie v. U.S. Nat. Resources, Inc., 94 S.W.3d 748, 753 (Tex.

App.—San Antonio 2002, no pet.).

       Viewing the evidence in the light most favorable to Polk Mechanical, Jones failed to

conclusively establish Polk Mechanical should have known of its injury on or before September 24,

2003, or four years before the date it added Jones to the lawsuit. The summary judgment evidence

established that in September 2003 (1) Capstone was still reassuring Polk Mechanical it would be

paid, (2) Polk Mechanical had no knowledge the project owner had paid Capstone, and (3) Polk

Mechanical had no knowledge Capstone and Jones had diverted the funds. In view of the fiduciary

nature of their relationship, Polk Mechanical had no reason to make further inquiry into the conduct

of Capstone or its officers before September 24, 2003. See S.V., 933 S.W.2d at 8.

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        Because reasonable minds could differ about when Polk Mechanical knew or should have

know of its injury, Jones failed to conclusively negate the discovery rule. Accordingly, the trial court

erred in granting summary judgment in favor of Jones based on limitations.

                                              STANDING

                                           Scope of Review

        The trial court’s order states, in pertinent part:

                The Court finds that there is no genuine issue of any material fact, and
        Defendant Jones is entitled to judgment as a matter of law, that the applicable statute
        of limitations bars Plaintiff’s action against Defendant Roy Jones. But the Court
        finds that genuine issues of material facts exist as to, and Defendant Jones is not
        entitled to judgment as a matter of law on, all other grounds asserted by Defendant
        Jones in his Motion for Summary Judgment.

In its second issue, Polk Mechanical addresses the standing issue raised by Jones in his motion for

summary judgment. However, Polk Mechanical notes the trial court disagreed with Jones and urges

this court not to consider the standing ground raised in Jones’s motion. Nonetheless, Polk

Mechanical addresses the substance of the standing issue in the event this court “decides to consider

it.” In his brief, Jones raises a cross-point contending the trial court erred by not finding Polk’s lack

of standing provided a basis for summary judgment.

        In Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 624 (Tex. 1996), the Texas Supreme

Court considered “the question of whether courts of appeals should review summary judgment

grounds the trial court did not grant when considering the propriety of summary judgment.” In

Cates, the appellees filed cross-points asking the court of appeals to affirm the summary judgment

on grounds the trial court expressly denied. 927 S.W.2d at 624-25. The supreme court held “courts

of appeals should consider all summary judgment grounds the trial court rules on and the movant

preserves for appellate review that are necessary for the final disposition of the appeal when

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reviewing a summary judgment.” Id. at 626. Accordingly, because we have concluded that the trial

court erred in granting summary judgment on the basis of limitations, we must consider Jones’s

cross-point with regard to whether the trial court should have granted summary judgment in his favor

on the basis of standing. See id.; see also Carrico v. Kondos, 111 S.W.3d 582, 586 n.4 (Tex.

App.—Fort Worth 2003, pet. denied) (holding that rule 25.1(c) of Texas Rules of Appellate

Procedure does not require summary judgment movant to perfect appeal if merely seeking to affirm

trial court’s order granting summary judgment on alternate grounds because movant is not seeking

greater relief than that already granted by trial court).

                                            B. Discussion

        In making his arguments that Polk Mechanical has no standing under the Act as Encompass’s

assignee, Jones focuses on section 162.003 of the Act, arguing Polk Mechanical is not a beneficiary

under the Act with regard to the labor performed by Encompass. Jones argues that only the

subcontractor that actually performs the labor can be considered a beneficiary under the Act because

section 162.003 does not expressly refer to beneficiaries or their assignees.

        Initially we note that all of the arguments asserted by Jones ignore the fact that after Polk

Mechanical was assigned Encompass’s rights under the subcontract, Polk Mechanical labored or

furnished labor and material for the DPT project in completing the work under the subcontract,

thereby making it a beneficiary under section 162.003 of the Act. See TEX . PROP . CODE ANN .

§ 162.003 (Vernon 2007) (providing that subcontractor who labors or who furnishes labor or

material for construction or repair of improvement on real property is beneficiary). Because the

ground asserted in Jones’s motion was lack of standing and the evidence establishes Polk

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Mechanical has standing as a beneficiary for the labor it provided in completing the subcontract, the

trial court did not err in denying Jones’s motion for summary judgment on this ground.

       We additionally note that all of the standing arguments asserted by Jones presuppose

Capstone was paid by the project manager before Encompass sold its assets to Polk Mechanical.

This assumption necessarily underlies Jones’s arguments because the payment by the project

manager is the act that would give rise to the creation of a trust. See id. § 162.001 (providing that

construction payments are trust funds if payments are made to contractor under construction contract

for improvement of specific real property in this state); see also In re Faulkner, 213 B.R. at 666 n.

10 (noting that trust fund is created under Texas law at time payments are made to contractor for

construction). The record in this case, however, does not contain any evidence with regard to the

timing of the payments by the project owner to Capstone. Viewing the evidence in the light most

favorable to Polk Mechanical, the only evidence in the record is that the payments had not occurred

before the sale. The evidence shows Capstone told Polk Mechanical it could not pay because

Capstone had not been paid by the project owner. Accordingly, a genuine issue of material fact

exists as to whether a trust was ever created in favor of Encompass because the trust would have

been created at the time Capstone was paid by the project owner.

       Furthermore, Jones’s argument that Encompass’s “claim” was extinguished and his

arguments relating to whether Encompass could or did assign a “chose in action” ignore the rights

Encompass could have transferred to Polk Mechanical. Assuming the project owner paid Capstone

before Encompass sold its assets, a trust was created with Encompass as its beneficiary. See TEX .

PROP . CODE ANN . §§ 162.001, 162.003 (Vernon 2007). There is no evidence in the record

conclusively establishing Capstone misapplied the trust funds before the asset sale. Therefore, there

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was no “chose in action” to be assigned. Instead, Encompass transferred all if its rights and interests

under its subcontract to Polk Mechanical. One of the rights and interests Encompass had under its

subcontract, assuming construction funds had been paid, was its rights as a beneficiary under the

trust created by the payment of construction funds to Capstone. It is well settled that a trust

beneficiary who has the capacity to transfer property generally has the power to transfer a present,

vested equitable interest in a trust. See Faulkner v. Bost, 137 S.W.3d 254, 260 (Tex. App.—Tyler

2004, no pet.); Little v. Deaton, 416 S.W.2d 828, 832 (Tex. Civ. App.—Eastland 1967, no writ);

Long v. Long, 252 S.W.2d 235, 246 (Tex. Civ. App.—Texarkana 1952, writ ref’d n.r.e.). Nothing

in the Act prohibits a subcontractor from transferring its equitable interest in the trust to another.

Accordingly, Encompass was not prohibited from transferring any equitable interest it might have

had in a trust created by the payment of construction funds to Capstone. Because there is no

evidence the transfer from Encompass to Polk Mechanical included a transfer of a claim or a chose

in action, as opposed to a transfer of Encompass’s equitable interest as the beneficiary of a trust,

Jones’s remaining standing arguments are overruled.

                                            CONCLUSION

       We sustain Polk Mechanical’s issue, and overrule Jones’s cross-point. Accordingly, the trial

court’s summary judgment in favor of Jones is reversed, and the cause is remanded to the trial court

for further proceedings.

                                                        Steven C. Hilbig, Justice

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