Thrift v. Estate of Hubbard

United States Court of Appeal,
Fifth Circuit.

No. 93-8609.

Terry THRIFT, Jr., Plaintiff-Counter Defendant-Appellant Cross-
Appellee,

v.

Sandra HUBBARD, as Independent Administratrix of the Estate of
Victor Mark Hubbard, Deceased, et al., Defendants-Counter
Plaintiffs-Appellees Cross-Appellants,

v.

EMIS SOFTWARE, INC., Counter Defendant-Appellant, Cross-Appellee.

Feb. 15, 1995.

Appeal from the United States District Court for the Western
District of Texas.

Before SMITH and EMILIO M. GARZA, Circuit Judges, and STAGG,
District Judge.*

EMILIO M. GARZA, Circuit Judge:

This appeal arises out of a suit over soured business dealings

among the various parties involved. Terry Thrift, Jr., and EMIS

Software appeal the district court's judgment on issues of alter

ego and the sufficiency of the pleadings. The Estate of Victor

Hubbard and Sandra Hubbard ("the Hubbards") and Peerless

Technologies Corporation ("Peerless") cross-appeal the district

court's judgment, alleging errors on issues of prejudgment

interest, usury, and contract ambiguity. We affirm in part,

reverse in part, and remand.

I

*
District Judge of the Western District of Louisiana,
sitting by designation.

1
 The Hubbards formed Peerless as a spinoff of the software

division of a company called PECO.1 Under the agreement between

Peerless and PECO, Peerless received ownership rights to the

division's software and other fixed assets, but PECO retained a

reversionary interest in the software and fixed assets. Peerless

also agreed to pay royalties to PECO on sales of the software. One

of the software packages that PECO transferred to Peerless was

called EMIS, then version 1.0. After its formation, Peerless

continued to develop EMIS, eventually developing versions 1.1 and

1.2.

Thrift became involved with Peerless when he purchased stock

in the company. He later agreed to fund a revolving-credit loan to

Peerless, and he and Peerless entered into a Revolving Credit Note

and Security Agreement to that effect. Thrift received certain

rights to various Peerless assets under the Agreement, and the

Hubbards pledged one-half of their Peerless stock as additional

security. Peerless defaulted on the note, and Thrift sent the

Hubbards a notice of default and demanded payment. The pledged

stock was transferred to Thrift, after which the parties negotiated

a second Revolving Credit Note.

Thrift also agreed to fund Peerless' buyout of PECO's

reversionary interest in Peerless. The Assignment and Option

Agreement executed for that purpose assigned rights in various

fixed assets to Thrift, with Peerless to lease those assets from

1
Victor Hubbard was the sole director and president of
Peerless. Sandra Hubbard was also an officer.

2
Thrift in exchange for royalty payments. Thrift gave Victor

Hubbard a check for $100,000 to fund the buyout, and Hubbard

deposited the funds in a Peerless account. Before the buyout was

executed, the IRS seized $87,122.85 from the Peerless account for

unpaid employment taxes. Peerless refunded the difference

($12,877.15) to Thrift and executed a note to Thrift for the seized

funds. Thrift then agreed to finance the buyout once more, but he

made payment directly to PECO and paid only $75,000.

Thrift also made a short-term loan of $17,981 to Peerless.

Under the terms of the loan, accounts receivable should have

provided the basis for repayment, but no repayment ever occurred.

The Hubbards shortly thereafter formed a new company, GP

Services, to act as a reseller of software for Peerless. They also

moved some of Peerless' assets to their new GP Services offices.

Thrift eventually visited the Peerless offices and discovered the

Hubbards' actions. Bill Schaeffer, Peerless' Chief Operating

Officer, agreed to change the locks on the Peerless offices to

prevent further removal of assets.

Thrift then sent the Hubbards a notice of default on the

revolving credit notes and demanded payment. He also demanded

payment of past-due royalties and the $17,981 short-term loan.

Peerless assigned accounts receivable to Thrift due to the unpaid

debts, and Thrift returned all his Peerless stock to Peerless.

Thrift later formed his own company, EMIS Software, Inc., and

EMIS Software and GP Services signed a Major Account Reseller

Agreement ("MAR") under which EMIS Software licensed GP Services to

3
resell EMIS program packages. Thrift later cancelled the MAR

pursuant to its terms. After various contacts between EMIS

Software representatives, including Thrift, and various customers

of GP Services, some of the customers withdrew from dealings with

GP Services.

Thrift ultimately sued the Hubbards and Peerless,2 alleging

breach of contract, fraud, and violations of the Texas Deceptive

Trade Practices-Consumer Protection Act ("DTPA"), in connection

with the Hubbards' and Peerless' nonpayment of funds due and owing

under the two Revolving Credit Notes, the funds advanced and

royalties due under the Assignment and Option Agreement, and the

funds lent under the $17,981 short-term arrangement. Thrift also

sought declaratory relief regarding rights in all versions of EMIS.

The Hubbards and Peerless responded with counterclaims against

Thrift and EMIS Software, Inc., alleging copyright infringement,

misappropriation of trade secrets, usury, conversion, and breach of

fiduciary duty. Peerless also sought injunctive relief concerning

the use of EMIS versions 1.1 and 1.2. Lastly, the Hubbards alleged

that Thrift and EMIS Software, Inc. had interfered with contractual

relations, defamed the Hubbards, and intentionally inflicted

emotional distress on them.

By agreement, the parties tried the case before a magistrate

judge. After denying the Hubbards' and Peerless' motion for

judgment as a matter of law, the magistrate judge submitted the

2
Thrift sued the Hubbards and Peerless both individually and
under an alter-ego theory.

4
case to a jury that decided as follows:

1. Thrift received ownership of all versions of EMIS under the
Assignment and Option Agreement.

2. The Hubbards and Peerless committed fraud against Thrift.

3. Peerless was the alter ego of the Hubbards.

4. Thrift interfered with both existing and prospective contractual
relations of the Hubbards, and EMIS Software interfered with
the Hubbards' prospective contractual relations.

5. Thrift intentionally inflicted emotional distress on the
Hubbards.

6. The stock transfer to Thrift after Peerless' default on the
first Revolving Credit Note constituted a foreclosure and
satisfaction of the debt under that note.

The jury awarded varying amounts of damages on the parties'

successful claims, and the magistrate judge awarded prejudgment

interest on certain claims. The magistrate judge overruled each

party's postjudgment motions. Thrift, EMIS Software, the Hubbards,

and Peerless all appeal the judgment on various grounds.

II

A

Thrift argues first that the Hubbards should be held

individually liable for the unremitted funds from the $100,000

transaction because the jury found that Peerless was the alter ego

of the Hubbards. The trial court applied the alter ego doctrine to

only the $17,981 loan.

The liability of a shareholder for contractual debts of a

corporation is limited by statute.

A holder of shares ... shall be under no obligation to the
corporation or to its obligees with respect to ... (2) any
contractual obligation of the corporation on the basis that
the holder, owner, or subscriber is or was the alter ego of

5
 the corporation, ... unless the obligee demonstrates that the
holder, owner or subscriber caused the corporation to be used
for the purpose of perpetrating and did perpetrate an actual
fraud on the obligee primarily for the direct personal benefit
of the holder, owner, or subscriber....

Tex.Bus.Corp. Act Ann. art. 2.21(A) (West Supp.1995). The alter

ego doctrine provides one way by which an obligee can pierce the

corporate veil to reach a shareholder's assets. Western Horizontal

Drilling, Inc. v. Jonnet Energy Corp., 11 F.3d 65, 68 (5th

Cir.1994); Fidelity & Deposit Co. v. Commercial Cas. Consultants,

Inc., 976 F.2d 272, 274 (5th Cir.1992) (commenting that alter ego

is one form of corporate disregard under Texas law); see also

Coastal Shutters & Insulation, Inc. v. Derr, 809 S.W.2d 916, 921

(Tex.App.—Houston [14th Dist.] 1991, no writ) ("Alter ego applies

when there is such unity or a blurring of identity between two

corporations or a corporation and an individual that the

separateness of the single corporation has ceased and holding only

the corporation liable would cause injustice.").3 Proving that a

corporation is the alter ego of a shareholder alone is not enough;

in order to pierce the corporate veil, the obligee must also

demonstrate fraud by and direct personal benefit to the obligor.

See Atlantic Richfield Co. v. Long Trusts, 860 S.W.2d 439, 446

(Tex.App.—Texarkana 1993, writ denied) ("[W]hen actual fraud for

3
See also Mancorp, Inc. v. Culpepper, 802 S.W.2d 226, 228
(Tex.1990) ("An alter ego relationship may be shown from the
total dealings of the corporation and the individual.");
Mancorp, Inc. v. Culpepper, 836 S.W.2d 844, 846 (Tex.App.—Houston
[1st Dist.] 1992, no writ) ("The "injustice' to be avoided in
alter ego cases is that of leaving the plaintiff with an
uncollectible judgment against the corporation, while allowing
its alter ego to go free.").

6
the benefit of the perpetrating shareholder can be shown, the

various doctrines of disregarding the corporate entity, including

alter ego and a sham to perpetrate a fraud, are still very much

alive."); Farr v. Sun World Sav. Ass'n, 810 S.W.2d 294, 296

(Tex.App.—El Paso 1991, no writ) ("Carefully preserved, however, is

the right of a person to go behind the corporate entity in order to

establish individual shareholder liability by a showing of actual

or common law fraud.").

The Hubbards contend that Thrift failed to satisfy the fraud

element of article 2.21 for the $100,000 transaction.4 We agree.

Special Interrogatory # 21 asked whether the Hubbards had committed

fraud in either the $100,000 or the $17,981 transaction,5 and

4
Because the dispositive issue is whether Thrift satisfied
the elements of the statute, the parties' arguments regarding the
present status of Castleberry v. Branscum, 721 S.W.2d 270
(Tex.1986), do not bear on the resolution of this question.
5
Special Interrogatory 21 stated as follows:

Did Peerless or Victor Hubbard or Sandra Hubbard
commit fraud in the transactions involving the $100,000
advanced by Thrift in December, 1986 or the $17,981
advanced in February, 1987?

The burden of proof for this question is upon the
plaintiff.

ANSWER: "YES" or "NO" for each of the following:

Peerless:

Victor Hubbard:

Sandra Hubbard:

INSTRUCTIONS

"Fraud" consists of the following elements:

7
Special Interrogatory # 22 asked what compensation would be

appropriate.6 The jury answered "Yes" in all three spaces in

question 21, but only awarded compensation in question 22 against

Peerless for fraud in connection with the $17,981 transaction. The

jury therefore found that the Hubbards did not commit fraud in the

$100,000 transaction.7

(1) a material representation was made;

(2) the representation was false;

(3) when the speaker made the representation he knew it
was false or made it recklessly without any
knowledge of its truth and as a positive
assertion;

(4) the speaker made the representation with intent
that it should be acted upon by Terry Thrift;

(5) Terry Thrift acted in reliance upon the
representation;

(6) Terry Thrift thereby suffered injury.
6
Special Interrogatory # 22 stated as follows:

What amount of money, if any, would fairly and
reasonably compensate Terry Thrift for the damage, if
any, suffered by him as a result of the fraud you have
found in the preceding special question?

The burden of proof for this question is upon the
plaintiff.

ANSWER IN DOLLARS AND CENTS ONLY FOR THE FOLLOWING
FOR WHOM YOU ANSWERED "YES" IN Question No. 21.

Peerless:

Victor Hubbard:

Sandra Hubbard:
7
The district court instructed the jury that damage is an
element of fraud.

8
 Thrift argues that question # 21 queried only about fraud

through misrepresentations and that he had sufficiently proved

fraud in the $100,000 transaction in other ways; therefore, he

asks that we limit the jury's finding of no fraud with respect to

the $100,000 transaction to misrepresentations. Interrogatory #

21, however, did not ask if the Hubbards had committed fraud

through misrepresentations; it asked if they had committed fraud.

The misrepresentations only impacted the definition of fraud.

Thrift had the burden of proving fraud, and if he believed that

fraud encompassed more than the definition provided in the

instruction, he should have requested an instruction to that effect

and objected to its absence. Thrift, however, did not object to

the instruction's definition of fraud, and he is now bound by the

jury's finding.8

Nonetheless, Thrift argues that, notwithstanding the jury's

finding, the district court should have found that fraud generally

committed by the Hubbards satisfied the actual fraud component of

article 2.21. We disagree. The liability imposed under article

2.21 concerns "shareholder liability for acts of the corporation in

8
See Fed.R.Civ.P. 51 ("No party may assign as error the
giving or the failure to give an instruction unless the party
objects thereto before the jury retires to consider its verdict,
stating distinctly the matter objected to and the grounds of the
objection."); McDaniel v. Anheuser-Busch, Inc., 987 F.2d 298,
306 (5th Cir.1993) ("A party has the burden to request the
submission of its issues to the jury and to request instructions
on each such issue.... [F]ailure to object to the wording of a
special issue prevents a party from objecting to such wording on
appeal."); Pan Eastern Exploration Co. v. Hufo Oils, 855 F.2d
1106, 1123 (5th Cir.1988) ("A party must ordinarily object
precisely to the wording of jury instructions and
interrogatories....").

9
connection with contract claims," Farr, 810 S.W.2d at 296 (emphasis

added), and requires a showing of actual fraud in those acts, see,

e.g., Atlantic Richfield Co., 860 S.W.2d at 446 (imposing liability

where fraud was in those transactions at issue in case); Farr, 810

S.W.2d at 297 (describing evidence relevant to fraud determination,

all of which evidence related to transaction at issue). The jury

found fraud only in relation to the $17,981 claim, and it found no

fraud in relation to the $100,000 claim. Accordingly, the

Hubbards' fraudulent conduct was not "in connection with" the

$100,000 debt, and article 2.21 prevents individual liability of

the Hubbards for that debt.

The Hubbards also challenge the trial court's decision on the

alter ego issues. They contend that they should not be held

personally liable for the $17,981 transaction because Thrift failed

to prove that they received any direct personal benefit. The

evidence showed, however, that the funds that Peerless should have

used to repay Thrift were instead used, among other purposes, by

the Hubbards to make payments on the lease for the Peerless

offices. The payments directly benefited the Hubbards because

Victor Hubbard held the lease in his own name. These facts

supported the jury's finding of alter ego. Therefore, the trial

court correctly used the jury's finding of alter ego to hold the

Hubbards individually liable for the $17,981 debt. See

Tex.Bus.Corp. Act Ann. art. 2.21(A) (West Supp.1995) (allowing

imposition of individual liability under alter ego theory where

fraud and direct personal benefit have been shown).

10
 B

Thrift contends next that the Hubbards should not recover for

interference with prospective business relations and that the

district court erred in instructing the jury on the issue because

the Hubbards failed to plead that cause of action. A court may

instruct the jury on an issue only if the issue has been properly

tried by the parties. Neubauer v. City of McAllen, 766 F.2d 1567,

1575 (5th Cir.1985) (holding that failure to try issue made

instruction on that issue reversible error). "The trial court has

no duty to give the jury an exegesis of legal principles that might

enable a plaintiff to recover or to instruct the jury on issues not

fairly raised by the pleadings, the pretrial order, or the course

of the trial." Laird v. Shell Oil Co., 770 F.2d 508, 510 (5th

Cir.1985).

The issue of interference with prospective business relations

was not tried by implied consent. The trial record contains

numerous objections, both individual and continuing, to the

admission of evidence of Thrift's interfering conduct for the

purpose of proving interference with prospective relations.

Moreover, even without objections, the admission of this evidence

does not result in trial by implied consent because the evidence

was also relevant to the issue of interference with existing

contracts.9 Accordingly, we look to the pleadings and the pretrial

9
See Quillen v. International Playtex, Inc., 789 F.2d 1041,
1043-44 (4th Cir.1986) (refusing to hold that defendant had
impliedly consented where evidence presented went to pleaded
issue primarily; therefore, "the defendant would have been
caught unaware" of the new issue); Trinity Carton Co. v.

11
order to determine if the Hubbards properly raised the issue. The

Hubbards respond that even if their pleadings were defective, the

Hubbards' proper inclusion of the issue in the pretrial order

superseded the pleadings and made the issue available for trial.10

Thrift, however, contested the issue in the pretrial order, arguing

defective pleadings.11 Although the magistrate judge never ruled

Falstaff Brewing Corp., 767 F.2d 184, 192 (5th Cir.1985) (holding
that trial by consent "requires that the parties actually
recognize the issue to have been litigated"), cert. denied, 475
U.S. 1017, 106 S.Ct. 1202, 89 L.Ed.2d 315 (1986); id. at 193
("Trial by consent may not be deemed where evidence concerning
the issue that is maintained to have been thusly tried is also
relevant to other issues that in fact have been pleaded and
tried, at least in the absence of clear notice that such issue
was being raised.").
10
See Branch-Hines v. Hebert, 939 F.2d 1311, 1319 (5th
Cir.1991) ("It is a well-settled rule that a joint pretrial order
signed by both parties supersedes all pleadings and governs the
issues and evidence to be presented at trial...."); Hall v.
State Farm Fire & Cas. Co., 937 F.2d 210, 212 (5th Cir.1991)
("Once entered, a pretrial order governs the trial."); Flannery
v. Carroll, 676 F.2d 126, 129 (5th Cir.1982) ("The claims,
issues, and evidence are limited by the [pretrial] order and the
course of the trial is thereby narrowed to expedite the
proceeding.").
11
The issue regarding tortious interference contained
Thrift's reservation: "Plaintiff/counter-defendants contend any
such question should be limited to defendants' pleadings which do
not allege interference with business relations and do not
mention Grammco/Andrews."

The relevant portion of the Hubbards' pleadings is as
follows:

B. Interference with Contractual Relationships

1. Thrift intentionally and willfully induced TFC,
Inc. to breach and violate the provisions of a contract
between TFC, Inc. of Minnesota and the Hubbards d/b/a
GP Services. Such contract called for the delivery of
hardware and software and services to TFC, Inc. for the
approximate amount of $37,000.00. Thrift falsely
represented to TFC, Inc. that the Hubbards had no right

12
on this objection, he implicitly overruled the objection by

admitting the evidence of Thrift's interfering conduct during the

to sell the software in question and made other false
representations. Such inducement by Thrift was without
legal excuse or other justification and has resulted in
Thrift wrongfully damaging the Hubbards by depriving
them of profits which they otherwise would have
received under the contract.

2. Thrift intentionally and willfully induced two
other customers of the Hubbards. Sunbelt Transformers
and Laventhol & Horwath to breach agreements with the
Hubbards, d/b/a GP Services, and to cancel orders for
hardware and software and services. Thrift, either
individually or by and through authorized agen[ ]ts,
falsely represented to said companies that the Hubbards
had no right to sell the software in question and made
other false representations. Such inducements by
Thrift were without legal excuse or other justification
and have resulted in Thrift wrongfully damaging the
Hubbards by wrongfully depriving them of profits which
they otherwise would have received under the contracts.

3. Thrift, by and through authorized agents, has
sent letters to all of the customers of the Hubbards
d/b/a GP Services for the purpose of inducing said
[sic] customers to cancel their dealings with the
Hubbards and to instead deal with Thrift's new
corporation, EMIS SOFTWARE, Inc. Such letters falsely
represented that the Hubbards had no right to sell the
software which they were selling and made other false
representations. Such letters were sent without legal
excuse or other justification and have resulted in
losses of sales, referral, and reputation suffered by
the Hubbards.

4. Thrift acted with malicious intent in all
instances set out above in that he persuaded the
contracting parties to breach their contracts out of
spite and ill-will towards the Hubbards and for the
sole purpose of causing economic injury to the
Hubbards, and because they refused to cooperate with
Thrift's plan to defraud the creditors of Peerless.
The Hubbards seek exemplary damages far in excess of
the Court's minimum jurisdictional amount.

13
trial.12

We review a trial court's interpretation of a pretrial order

only for abuse of discretion. Hall, 937 F.2d at 212; Flannery,

676 F.2d at 129. Under the Federal Rules of Civil Procedure, a

pleading, or pretrial order, need not specify in exact detail every

possible theory of recovery—it must only "give the defendant fair

notice of what the plaintiff's claim is and the grounds upon which

it rests." Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 103, 2

L.Ed.2d 80 (1957).13 Accordingly, the Hubbards satisfied the Rule

8 requirement if they gave notice of both causes of action.14

Texas law recognizes a cause of action for either

12
Moreover, because the issue was raised in the pretrial
order, even if objected to, Thrift cannot, and indeed did not,
argue that admission of evidence on this issue caused any
surprise.
13
See also Fed.R.Civ.P. 8(a) (requiring only "a short and
plain statement"), 8(e) ("Each averment of a pleading shall be
simple, concise, and direct."); Colle v. Brazos County, Tex.,
981 F.2d 237, 243 (5th Cir.1993) ("A plaintiff's complaint
ordinarily need only be a short and plain statement that gives
the defendant notice of what the claim is and the grounds upon
which it rests."); Perkins v. Silverstein, 939 F.2d 463, 467
(7th Cir.1991) (requiring plaintiffs to "identify the grounds
upon which their claims are based ... even under the liberal
notice pleading" (footnote omitted)); Bechtel v. Robinson, 886
F.2d 644, 650 n. 9 (3d Cir.1989) ("[A]s long as the issue is
pled, a party does not have to state the exact theory of relief
in order to obtain a remedy.").
14
See Torres Ramirez v. Bermudez Garcia, 898 F.2d 224, 226-
27 (1st Cir.1990) (holding that, if basis described, "the parties
were therefore aware of plaintiff's legal theory" even where the
theory was mischaracterized (citation omitted)); Lamborn v.
Dittmer, 873 F.2d 522, 526 (2d Cir.1989) (holding that the
pretrial order did not adequately disclose a theory because it
did not give notice of that theory); In re Burzynski, 989 F.2d
733, 738-39 (5th Cir.1993) (assessing whether plaintiff had
stated cause of action by alleging the elements of each tort).

14
interference with existing or with prospective contractual

relations. Juliette Fowler Homes v. Welch Assocs., Inc., 793

S.W.2d 660, 665 (Tex.1990) ("Texas law protects existing and

prospective contracts from interference."); Exxon Corp. v. Allsup,

808 S.W.2d 648, 659 (Tex.App.—Corpus Christi 1991, writ denied)

("Texas law protects prospective as well as existing contracts from

third party interference."). Tortious interference with an

existing contract consists of:

(1) the existence of a contract subject to interference,

(2) a willful and intentional act of interference,

(3) such act was a proximate cause of damage, and

(4) actual damage or loss occurred.

Browning-Ferris, Inc. v. Reyna, 865 S.W.2d 925, 926 (Tex.1993).15

Interference with prospective contracts has slightly different

elements:

(1) a reasonable probability that the parties would have
entered into a contractual relationship,

(2) an intentional and malicious act by the defendant that
prevented the relationship from occurring, with the purpose of
harming the plaintiff,

(3) the defendant lacked privilege or justification to do the
act, and

(4) actual harm or damage resulted from the defendant's
interference.

15
See Victoria Bank & Trust Co. v. Brady, 811 S.W.2d 931,
939 (Tex.1991) (setting out elements of cause of action for
tortious interference); Juliette Fowler Homes, 793 S.W.2d at 664
(same); see also Allsup, 808 S.W.2d at 654 (applying elements);
CF & I Steel Corp. v. Pete Sublett & Co., 623 S.W.2d 709, 713
(Tex.Civ.App.—Houston [1st Dist.] 1981, writ ref'd n.r.e.)
(evaluating findings on elements).

15
Allsup, 808 S.W.2d at 659. These two torts differ primarily in

that interference with prospective relations requires the

plaintiffs to prove both that they had a reasonable probability of

obtaining a contract16 and that the defendant acted with malice.17

The pretrial order included the following "Additional

Contested Issue[ ] of Fact":

Did Terry Thrift and/or EMIS Software, Inc. defame the
Hubbards, interfere with business or contractual relationships
of the Hubbards, or intentionally or recklessly inflict
emotional distress on the Hubbards in the following
transactions:

(1) Sunbelt Transformer

(2) Laventhol Horwath

(3) TFC Corporation

(4) Grammco/Andrews

16
See Caller-Times Publishing Co. v. Triad Communications,
Inc., 855 S.W.2d 18, 21 (Tex.App.—Corpus Christi 1993, no writ)
("To prove tortious interference with prospective contracts or
business relationships, the plaintiff must prove ... a
contractual relationship that the plaintiff had a reasonable
probability of realizing...."); American Medical Int'l, Inc. v.
Guirintano, 821 S.W.2d 331, 337 (Tex.App.—Houston [14th Dist.]
1991, no writ) ("To recover on a cause of action for tortious
interference with a prospective business relationship, the
plaintiff must show: (1) there was a reasonable probability that
he would have entered into a business relationship...."); see
also Verkin v. Melroy, 699 F.2d 729, 733 (5th Cir.1983)
(requiring knowledge of prospective relationship).
17
See CF & I Steel Corp., 623 S.W.2d at 715 ("Interference
with a business relationship is similar to the tort of contract
interference. It is not necessary to establish the existence of
a valid contract, but the interference with a general business
relationship is actionable only if the defendant's interference
is proven to be motivated by malice."); see also Deauville Corp.
v. Federated Dep't Stores, Inc., 756 F.2d 1183, 1196 (5th
Cir.1985) (holding that the difference between interference with
contract and prospective relations is that second tort requires
showing of "malice'); Verkin, 699 F.2d at 733 (requiring intent
to harm).

16
While it is arguable whether the pleadings adequately distinguished

between the two causes of action,18 the pretrial order clearly

identified both "business" and "contractual" relationships.

Accordingly, we cannot say the magistrate judge abused his

discretion in determining that the pretrial order gave Thrift

sufficient notice of both claims.

C

Peerless argues that the Assignment and Option Agreement

("A/O Agreement") was not ambiguous and that the district court

should not have submitted the special interrogatory that asked the

jury to determine whether the A/O Agreement had transferred

ownership of EMIS 1.1 and 1.2 to Thrift. Whether a contract is

ambiguous is a question of law. Watkins v. Petro-Search, Inc., 689

F.2d 537, 538 (5th Cir.1982).19 Accordingly, we review this issue

18
Thrift contends that the pleading heading "Interference
with Contractual Relationships" necessarily limits the Hubbards'
pleading to existing contracts. The heading does not specify
only existing contracts, however, and the term "Contractual
Relationships" can encompass both existing and future
relationships. Next, Thrift argues that the Hubbards' pleading
allegations related only to existing contracts. Although we can
identify statements implying only existing contracts, there are
also references to future contracts. For example, allegation B.3
refers to "dealings" and "losses of ... referral." Moreover, the
allegations allege both the knowledge of the prospective
relationship and the intent to harm required to show malice. See
supra note 11.
19
See also Anheuser-Busch Cos., Inc. v. Summit Coffee Co.,
858 S.W.2d 928, 935 (Tex.App.—Dallas 1993, writ denied)
("Construction of an unambiguous contract is a legal issue to be
decided by the court.... The question of whether a contract is
ambiguous is a question of law." (citations omitted)), cert.
filed, 63 U.S.L.W. 3161 (Aug. 30, 1994) (No. 94-379); Staff
Indus., Inc. v. Hallmark Contracting, Inc., 846 S.W.2d 542, 545-
46 (Tex.App.—Corpus Christi 1993, no writ) ("Whether a contract
is ambiguous is a question of law for the court to decide....").

17
de novo. See Hanssen v. Qantas Airways Ltd., 904 F.2d 267, 269

(5th Cir.1990) (reviewing question of ambiguity de novo ).

A contract is ambiguous "when its meaning is uncertain and

doubtful or it is reasonably susceptible to more than one

meaning...." Towers of Tex., Inc. v. J & J Sys., Inc., 834 S.W.2d

1, 2 (Tex.1992).20 In making this determination, a court evaluates

the language of the instrument in light of the surrounding

circumstances existing at the time of the contract.21

20
See Watkins, 689 F.2d at 538 (According to Texas law, "[a]
contract is ambiguous when it is reasonably susceptible to more
than one meaning, in the light of the surrounding circumstances
and after applying established rules of construction."); see
also Kurtz v. Jackson, 859 S.W.2d 609, 611 (Tex.App.—Houston [1st
Dist.] 1993, no writ) ("A contract is ambiguous only when there
is a genuine uncertainty which of two or more meanings is
correct.... If there is but one reasonable interpretation of the
contract, it is not ambiguous." (citations omitted)); Staff
Indus., 846 S.W.2d at 546 ("A contract, however, is ambiguous
when its meaning is uncertain and doubtful or it is reasonably
susceptible to more than one meaning."); Loehr v. Kincannon, 834
S.W.2d 445, 446 (Tex.App.—Houston [14th Dist.] 1992, no writ)
(same).
21
However, when a question relating to the construction of a
contract or its ambiguity is presented, the court is to
take the wording of the contract in the light of the
surrounding circumstances, in order to ascertain the
meaning that would be attached to the wording "by a
reasonably intelligent person acquainted with all
operative usages and knowing all the circumstances
prior to and contemporaneous with the making of the
integration, other than oral statements by the parties
of what they intended to mean."

Watkins, 689 F.2d at 538 (quoting Sun Oil Co. v. Madeley,
626 S.W.2d 726, 731 (Tex.1981)); see also Stephanz v.
Laird, 846 S.W.2d 895, 899 (Tex.App.—Houston [1st Dist.]
1993, writ denied) ("Whether a contract is ambiguous is a
legal question, reviewable by an appellate court in light of
the circumstances present when the parties entered into the
contract."); Staff Indus., 846 S.W.2d at 546 ("The
intention of the parties is to be ascertained to the extent
possible from the language of the contract itself, construed

18
 The provision in the A/O Agreement stated:

Thrift and Peerless intend that Thrift will provide a payment
of $100,000 to Peerless for the purpose of making the payment
to PECO to terminate the Definitive Agreement, and in exchange
will receive: (a) title to Software, with Peerless retaining
an exclusive license to use and market....

The definition section defined "software" as follows:

"Software" shall mean all software products identified
generally in Exhibit A to the Definitive Agreement, which is
Attachment 1(a) to this Agreement (including source code,
object code and related documentation and marketing
information) all of which were assigned to Peerless under the
Definitive Agreement.

The Agreement further provided:

In consideration of the payment to Peerless of $100,000,
Peerless assigns to Thrift all its rights, title and interest
in the following property:

(a) All Software including all copyrights, trade secret rights
and other proprietary rights to software source code,
object code and related documentation.

Lastly, Attachment 1(a) lists "EMIS (Executive Management

Information System") as one of the software products.

Peerless argues that, because Exhibit A to the Definitive

Agreement between PECO and Peerless (the "PECO Agreement") included

only EMIS 1.0 at the time it was drafted, the A/O Agreement

unambiguously transferred rights to only EMIS 1.0. Neither party

contests that, at the time that Exhibit A to the PECO Agreement was

drafted, EMIS only included version 1.0. At the time that the A/O

Agreement was drafted and signed, however, EMIS included 1.0, 1.1,

in connection with the circumstances surrounding the
execution of the contract. These surrounding circumstances
include what the particular industry considered to be the
norm or reasonable and prudent at the time." (citations
omitted)).

19
and 1.2. The software "identified generally" in Exhibit A to the

PECO Agreement was "EMIS." Nothing in the A/O Agreement clarifies

what date the A/O Agreement intended to use as the benchmark—the

date of the PECO Agreement with its Exhibit A or the date of the

A/O Agreement with its Attachment 1(a). Consequently, the district

court properly found that the A/O Agreement was ambiguous and

submitted the question to the jury. See Watkins, 689 F.2d at 538

("[O]nce the contract is found to be ambiguous, the determination

of the parties' intent through the extrinsic evidence is a question

of fact."); see also Staff Indus., 846 S.W.2d at 546 ("When the

contract contains an ambiguity, its interpretation becomes a

question of fact based on the intention of the parties to it.").

Peerless also argues that, even if the A/O Agreement is

ambiguous, the jury's finding that it transferred rights to all

versions of EMIS to Thrift was against the great weight of the

evidence, and, therefore, the district court should not have denied

Peerless' request for a new trial. We will overturn a decision

denying a motion for a new trial only where we find an abuse of

discretion by the district court. Jones v. Wal-Mart Stores, Inc.,

870 F.2d 982, 986 (5th Cir.1989); see also E.E.O.C. v. Clear Lake

Dodge, 25 F.3d 265, 271 n. 5 (5th Cir.1994) (stating that a

district court may grant a new trial if the verdict is against the

great weight of the evidence, but reviewing that decision for abuse

of discretion). "[A]ll the evidence must be viewed in a light most

favorable to the jury's verdict," id. at 987, and we will uphold

the district court's denial unless the evidence points "so strongly

20
and overwhelmingly in favor of one party that ... [a] reasonable

[jury] could not arrive at a contrary [decision]," Boeing Co. v.

Shipman, 411 F.2d 365, 374 (5th Cir.1969), and therefore the

district court abused its discretion in letting the verdict stand.

Thrift testified that he believed that the A/O Agreement

transferred rights to all versions of EMIS. Moreover, the

Hubbards' attorney testified that the contract between PECO and

Peerless had not been incorporated into the A/O Agreement, and he

conceded that contract terms generally are construed as of the date

of formation. We hold that a reasonable jury could find that the

A/O Agreement transferred rights to all three versions of EMIS to

Thrift. Accordingly, we will not overturn the district court's

refusal to disturb the jury's verdict on this issue.

D

Peerless asserts next that the district court erred when it

held that, as a matter of law, Peerless had not proven its usury

claim. " "Usury' is interest in excess of the amount allowed by

law." Tex.Rev.Civ.Stat.Ann. art. 5069-1.01(d) (West 1987). "

"Interest' is the compensation allowed by law for the use or

forbearance or detention of money; provided however, this term

shall not include any time price differential however denominated

arising out of a credit sale." Tex.Rev.Civ.Stat.Ann. art. 5069-

1.01(a) (West 1987). "The essential elements of a usurious

transaction are (1) a loan of money; (2) an absolute obligation

that the principal be repaid; and (3) the exaction from the

borrower of a greater compensation than the amount allowed by law

21
for the use of money by the borrower." Najarro v. SASI Int'l,

Ltd., 904 F.2d 1002, 1005 (5th Cir.1990), cert. denied, 498 U.S.

1048, 111 S.Ct. 755, 112 L.Ed.2d 775 (1991); accord First Bank v.

Tony's Tortilla Factory, Inc., 877 S.W.2d 285, 287 (Tex.1994). We

construe the usury statute strictly, First Bank, 877 S.W.2d at 287

("Usury statutes are penal in nature and should be strictly

construed."), and favor Thrift whenever any doubt occurs, see

Tygrett v. University Gardens Homeowners' Ass'n, 687 S.W.2d 481,

485 (Tex.App.—Dallas 1985, writ ref'd n.r.e.) ("Any doubt as to the

intention of the legislature to punish the conduct of the party

should be resolved in favor of the defendant.").

Peerless argues that, because Thrift advanced no new funds,

the Second Note is usurious on its face. We disagree. In

determining the effect of the Second Note, we consider all the

relevant documents as well as the surrounding circumstances.22

Tygrett, 687 S.W.2d at 485 ("The question of usury must be

determined by a construction of all the documents constituting the

transaction, interpreted as a whole, and in light of the attending

circumstances."). Although the initial paragraph of the Second

Note states that Peerless promises to pay $109,776.10, the

remainder of the instrument clearly explains in its title that it

is a "Revolving Credit Note" and also that the amount Peerless must

pay is limited only to the unpaid principal and any interest due

thereon.

22
Thrift contends that the Second Note was a renewal of the
First Note; the Hubbards do not agree with this
characterization.

22
 The unpaid principal balance of this note at any time shall be
the total amounts loaned or advanced hereunder by the holder
hereof, less the amount of payments or prepayments of the
principal made by or for the account of Maker. It is
contemplated that the Maker may repay portions of the
outstanding principal balance of this note at such time as it
may receive payment from its account debtors and therefore, by
reason of these prepayments hereon there may be such time when
no indebtedness is owing hereunder....

Plaintiff's Ex. 21 (Feb. 19, 1987 Revolving Credit Note ("Second

Note")). We presume that Thrift did not intend the Second Note to

be usurious. See Tygrett, 687 S.W.2d at 485 ("[T]here is a

presumption that the parties intended a nonusurious contract; when

the contract by its terms, construed as a whole, is doubtful, or

even susceptible to more than one reasonable construction, the

court will adopt the construction which comports with legality.").

Moreover, the Second Note contained a savings clause, and Texas

courts have held that savings clauses demonstrate a party's intent

that the instrument be nonusurious. See F.S.L.I.C. v. Kralj, 968

F.2d 500, 505 (5th Cir.1992) ("Texas state courts have construed

savings clauses to defeat an interpretation of a contract that

would violate the usury laws."). Accordingly, the Second Note

obligated Peerless to pay no more than what was advanced, and thus

is not usurious on its face.

Peerless also argues that, because the foreclosure satisfied

the debt that the Hubbards and Peerless owed, Thrift's demand for

pay-off constituted usury. Because the Second Note is not usurious

on its face, Peerless bears the burden of proving usury. See

Najarro, 904 F.2d at 1005-06 ("Where the transaction appears lawful

on its face, the party claiming usury has the burden of proof.").

23
On May 20, 1987, Thrift sent a letter to Peerless demanding payment

on the Second Note. See Plaintiff's Ex. 30 ("Demand Letter")

("This is to place in writing my verbal demand made this morning

for pay off of the $109,776.10 Revolving Credit Note, dated

February 19, 1987.... I demand that any payment received by you

from this day forward be signed over to me until such time as

principal and interest is paid."). Peerless argues that this

letter demanded payment of the face amount, $109,776.10. We

disagree. Nowhere in the letter does Thrift demand $109,776.10—he

merely demands payoff of the note. Moreover, the demand for

signed-over payments "until such time as principal and interest is

paid" does not ask for more than what was currently due on the

note. If, as Peerless claims, nothing is due, then Thrift's letter

demands nothing.23 Construing the Demand Letter in favor of

legality, see Tygrett, 687 S.W.2d at 485 (presuming construction

that is not usurious), we hold that it demands only the unpaid

principal and accrued interest, however much that actually is. Cf.

Tanner Dev. Co. v. Ferguson, 561 S.W.2d 777, 789 (Tex.1977)

(refusing to consider demand letter usurious because it claimed

unpaid balance and not full face amount of note). Therefore, the

district court correctly found as a matter of law that Peerless had

failed to establish a claim for usury.

E

Peerless contends further that the district court improperly

23
At the time Thrift wrote the letter, he believed that the
stock transfer had not satisfied the original debt.

24
awarded annual compounding of the prejudgment interest on the

$87,122.85 note. The parties agree that the note provided the rate

applicable for prejudgment interest—eighteen percent (the contract

specified the "highest rate allowed by applicable law"). They

disagree as to whether and to what extent compounding is allowed.

Because the note provided the rate for prejudgment interest,

we look first to determine if the note also provided guidance on

compounding. Cf. FDIC v. Blanton, 918 F.2d 524, 532-33 (5th

Cir.1990) (refusing to apply statutory rate when parties had agreed

to different rate). Thrift argues that the note parallels the

contract in Texon Energy Corp. v. Dow Chemical Co., 733 S.W.2d 328

(Tex.App.—Houston [14th Dist.] 1987, writ ref'd n.r.e.), which

provided for monthly compounding because it applied an annual

interest rate monthly. Id. at 331. Here, the note also applies an

annual interest rate, but nothing in the note defines the frequency

of application. Accordingly, the note is not dispositive on this

issue.24

"The Texas law of prejudgment interest can fairly be described

as bewildering." Concorde Limousines, Inc. v. Moloney

Coachbuilders, Inc., 835 F.2d 541, 548 (5th Cir.1987). Cavnar v.

Quality Control Parking, Inc., 696 S.W.2d 549, 554 (Tex.1985),

provides the benchmark for awards of prejudgment interest.

Although Cavnar was a wrongful death case, Texas courts have

24
Peerless argues that allowing compounded interest would
impermissibly add to the contract. Awards of prejudgment
interest are damages, however, and need not be specified in the
contract nor agreed to by the parties.

25
extended its application to cases involving economic damages.25

Under Cavnar, "a prevailing plaintiff may recover prejudgment

interest compounded daily (based on a 365-day year) on damages that

have accrued by the time of judgment." Cavnar, 696 S.W.2d at 554

(emphasis omitted).

After Cavnar, the Texas legislature enacted reform statutes

specifying judgment interest in particular types of cases.

Peerless argues that, because the note determined the interest

rate, simple interest under article 5069-1.05, § 1 should apply.26

Section 1, however, defines only the rate; it is silent as to

compounding. Therefore, we revert to the common law and Cavnar.

Spangler v. Jones, 861 S.W.2d 392, 398 (Tex.App.—Dallas 1993)

(holding that, where statute did not apply, Cavnar remained the

law).

Apparently, the district court awarded annual compounding

25
See Enterprise-Laredo Assocs. v. Hachar's, Inc., 839
S.W.2d 822, 839 (Tex.App.—San Antonio 1992, writ denied)
("[P]rejudgment interest may be awarded on a breach of contract
claim."); O'Reilly v. Grafham, 797 S.W.2d 399, 401-02
(Tex.App.—Austin 1990, no writ) (holding that Cavnar rule applies
to "non-personal injury, economic damages" cases).
26
Tex.Rev.Stat.Ann. art. 5069-1.05, § 1 (West Supp.1995)
provides:

All judgments of the courts of this state based on a
contract that provides for a specific rate of interest
earn interest at a rate equal to the lesser of:

(1) the rate specified in the contract; or

(2) 18 percent.

26
because one holding in Cavnar looked to article 5069-1.05, § 2.27

That Cavnar holding, however, only applies when damages are

unascertainable under the contract. In this case, the note clearly

defined the damages, and the incorporation of § 2 is not

necessary.28 Consequently, Cavnar's default specification of daily

compounding applies, and the district court should have calculated

prejudgment interest on the note with daily compounding. See State

v. Enterprise Bank, 873 S.W.2d 117, 119 (Tex.App.—Waco 1994, writ

denied) (explaining that daily compounding applies unless statute

dictates otherwise); Ciba-Geigy Corp. v. Stephens, 871 S.W.2d 317,

321-22 (Tex.App.—Eastland 1994, writ denied) (same); O'Reilly, 797

S.W.2d at 401 (applying daily compounding to economic damages

27
Tex.Rev.Stat.Ann. art. 5069-1.05, § 2 (West Supp.1995)
provides for judgment interest where no contract has specified
the rate.
28
Because incorporation of § 2 is not necessary, we need not
address the conflict in Fifth Circuit law concerning what form of
compounding should apply when § 2 is incorporated. Compare Law
Offices of Moore & Assocs. v. Aetna Ins. Co., 902 F.2d 418, 421
(5th Cir.1990) (daily compounding) and Concorde Limousines, 835
F.2d at 550 (daily compounding) with Guest v. Phillips Petroleum
Co., 981 F.2d 218, 223 (5th Cir.1993) (annual compounding). We
note, however, that we would be bound by the earliest decision,
Concorde Limousines, to apply daily compounding. See In re
Howard, 972 F.2d 639, 641 (5th Cir.1992) (viewing earlier
decision as binding when conflict exists); see also Broussard v.
Southern Pac. Transp. Co., 665 F.2d 1387, 1389 (5th Cir.1982) (en
banc) ("The general rule in this Circuit is that one panel cannot
overrule another panel."). The Texas courts have exhibited a
similar conflict. Compare Spangler, 861 S.W.2d at 399 (using
daily compounding and overruling OKC Corp., infra) and City of
Houston v. Wolfe, 712 S.W.2d 228, 230 (Tex.App.—Houston [14th
Dist.] 1986, writ ref'd) (daily compounding) with Enterprise-
Laredo Assocs., 839 S.W.2d at 839 (annual compounding) and OKC
Corp. v. UPG Inc., 798 S.W.2d 300, 307 (Tex.App.—Dallas 1990,
writ denied) (annual compounding), overruled as stated in
Spangler, 861 S.W.2d at 399.

27
cases); Allen v. Allen, 751 S.W.2d 567, 576 (Tex.App.—Houston

[14th Dist.] 1988, writ denied) (compounding daily under Cavnar ).29

The Hubbards argue additionally that the district court erred

when it set the start of prejudgment interest accrual on their

intentional infliction of emotional distress claims at 180 days

after the filing of those claims. They challenge both the 180 day

clock and its start on the date of filing of the emotional distress

claims rather than that of the original suit.

Article 5069-1.05, § 6 provides that prejudgment interest

begins to accrue 180 days after the date the defendant first

received written notice of the claim or on the day suit is filed,

whichever occurs first. The Hubbards argue that the filing of

their original suit in February, 1988, triggered the accrual of

prejudgment interest. We disagree, because the Hubbards did not

allege intentional infliction of emotional distress in their

original complaint. The purpose of prejudgment interest is to

encourage settlement. Cavnar, 696 S.W.2d at 554. If a defendant

has no notice of a claim, there is nothing to encourage. Thrift

first received written notice of the Hubbards' emotional distress

claims when the Hubbards amended their pleadings to include these

claims. Consequently, prior to the first notice, Thrift could not

have settled the claim, and the district court properly used the

date of the amended complaint to trigger the accrual of prejudgment

29
Peerless also argues that compounding would result in a
usurious rate. Usury however does not apply to judicial awards
of prejudgment interest. Sage St. Assocs. v. Northdale Constr.
Co., 863 S.W.2d 438, 440 (Tex.1993).

28
interest.

The district court erred, however, in applying the 180-day

delay. The 180-day delay specified in the statute only applies to

the "first written notice" portion. Hughes v. Thrash, 832 S.W.2d

779, 787 (Tex.App.—Houston [1st Dist.] 1992). Thrift first

received written notice of the emotional distress claim on November

13, 1990, when the Hubbards amended their complaint. Therefore,

180 days after that first written notice corresponded to May 12,

1991. "The day suit was filed," however, was November 13, 1990,

and the statute starts accrual of prejudgment interest on the

earlier of the two dates. Consequently, because November 13, 1990

("the day suit was filed") predated May 12, 1991 (180 days after

the first written notice), prejudgment interest on the Hubbards'

emotional distress claims should have started accruing on November

13, 1990, the date the Hubbards amended their suit to allege

emotional distress.

III

For the foregoing reasons, we AFFIRM all portions of the

district court's judgment except the awards of prejudgment interest

to Thrift on the $87,122.85 note and to the Hubbards on their

intentional infliction of emotional distress claims. We VACATE

these two awards and REMAND them to the district court for proper

recalculation.

29