ACCEPTED
03-14-00510-CV
3762693
THIRD COURT OF APPEALS
AUSTIN, TEXAS
1/14/2015 11:07:21 AM
____________________________________________
JEFFREY D. KYLE
CLERK
No. 03-14-00510-CV
_____________________________________________
FILED IN
3rd COURT OF APPEALS
AUSTIN, TEXAS
IN THE COURT OF APPEALS 1/14/2015 11:07:21 AM
THIRD JUDICIAL DISTRICT OF TEXAS JEFFREY D. KYLE
AT AUSTIN Clerk
_______________________________________________
Noah S. Bunker, Paul Carrell, Everett Brew
Houston, Jr., W. Andrew Buchholz, Scott J.
Leighty, Jad L. Davis, and Holly Clause,
Appellants
v.
Tracy D. Strandhagen,
Appellee
FROM THE DISTRICT COURT OF TRAVIS COUNTY,
353RD JUDICIAL DISTRICT, CAUSE NO. D-1-GN-13-002811,
THE HONORABLE ORLINDA NARANJO PRESIDING
APPELLANTS’ BRIEF
Amanda G. Taylor
ataylor@textaxlaw.com
Texas Bar No. 24045921
MARTENS, TODD, LEONARD, TAYLOR & AHLRICH
301 Congress Avenue, Suite 1950
Austin, Texas 78701
Tele: (512) 542-9898
Fax: (512) 542-9899
ORAL ARGUMENT REQUESTED
IDENTITY OF PARTIES AND COUNSEL
APPELLANTS APPELLEE
Noah S. Bunker, Paul Carrell, Tracy D. Strandhagen
Everett Brew Houston, Jr., W.
Andrew Buchholz, Scott J. Leighty,
Jad L. Davis, and Holly Clause
Appellate Counsel: Trial and Appellate Counsel:
Amanda G. Taylor Daniel Byrne
ataylor@textaxlaw.com DByrne@FBHH.com
Texas Bar No. 24045921 Lessie Fiztpatrick
MARTENS, TODD, LEONARD, LFitzpatrick@FBHH.com
TAYLOR & AHLRICH Christine E. Burgess
301 Congress Avenue, Suite 1950 CBurgess@FBHH.com
Austin, Texas 78701 FRITZ, BYRNE, HEAD
Tele: (512) 542-9898 & HARRISON, PLLC
Fax: (512) 542-9899 98 San Jacinto Blvd, Suite 2000
Austin, TX 78701
Tele: (512) 476-2020
Trial Counsel:
Kelly McDonald
kmcdonald@cmcdlaw.com
Carla Garcia Connolly
cconnolly@cmcdlaw.com
CARLS, MCDONALD &
DALRYMPLE, LLP
901 South MoPac Expressway
Barton Oaks Plaza
Building 1, Suite 280
Austin, Texas 78746
Tele: (512) 472-4845
Fax: (512) 472-8403
i
TABLE OF CONTENTS
IDENTITY OF PARTIES AND COUNSEL ..................................................... i
TABLE OF CONTENTS ................................................................................. ii
INDEX OF AUTHORITIES ........................................................................... v
STATEMENT OF THE CASE ....................................................................... ix
RECORD ABBREVIATIONS ......................................................................... x
STATEMENT REGARDING ORAL ARGUMENT........................................ xi
ISSUES PRESENTED ................................................................................. xii
STATEMENT OF FACTS ............................................................................... 1
I. The Parties Entered a Series of Contracts Governing
Their Medical Practice. .................................................................... 2
A. The Partners Promised to Stay With the Practice
for a Defined Period for Important Financial
Reasons. .................................................................................. 4
B. The Partners Agreed to be Bound by a Liquidated
Damages Provision Regulating Early Departure
from their Practice. ................................................................. 5
II. Strandhagen Departed the Practice Five Years Earlier
than She had Contractually Agreed.................................................. 8
III. Strandhagen Filed Separate Proceedings Against the
Company and her Physician Partners. ............................................. 9
IV. The District Court Dismissed Part and Granted Part of
the Declaratory Relief Strandhagen Sought Against the
Physicians....................................................................................... 10
SUMMARY OF THE ARGUMENT.............................................................. 12
ii
ARGUMENT................................................................................................ 14
I. The District Court Erred by Granting Strandhagen’s
Motion for Summary Judgment..................................................... 14
A. Summary Judgment Standard of Review. .............................15
B. Strandhagen Failed to Satisfy her Summary-
Judgment Burden on the Essential Elements of
her Claim............................................................................... 16
1. Strandhagen was required to conclusively
establish two elements. ................................................ 17
2. Strandhagen conceded her inability to prove
the “difficulty of estimation” element.......................... 22
3. Strandhagen failed to conclusively prove the
“unreasonable forecast” element. ................................ 23
(a) No evidence of actual damages. ......................... 23
(b) Plain language of contract shows
reasonable forecast. ........................................... 30
(c) Fact issue exists regarding
modification. ...................................................... 33
C. Strandhagen Failed to Satisfy her Summary-
Judgment Burden Regarding the Physicians’
Status as Third-Party Beneficiaries. ..................................... 35
1. The Operations Agreement Provides a
Direct Line of Liability................................................. 36
2. A Genuine Issue of Material Fact Remains
about the Physicians’ Third-Party
Beneficiary Status. ....................................................... 37
iii
II. The District Court Erred by Denying Part of the
Physicians’ Plea to the Jurisdiction................................................ 38
A. Texas Law Prohibits Advisory Declarations on
Potential Defenses to Hypothetical Disputes. ...................... 38
B. Strandhagen’s Claim Is Not Ripe. ......................................... 43
PRAYER ...................................................................................................... 44
CERTIFICATE OF COMPLIANCE .............................................................. 45
CERTIFICATE OF SERVICE....................................................................... 45
APPENDIX:
1. Order Granting Summary Judgment (CR.212)
2. Order Granting in Part and Denying in Part Plea to the
Jurisdiction (CR.184-185)
3. Order Denying Motion for New Trial (CR.271)
4. Operations Agreement (CR.162-183)
iv
INDEX OF AUTHORITIES
CASES
Alvarado v. Lexington Ins. Co.,
389 S.W.3d 544 (Tex. App.—Houston [1st Dist.] 2012, no pet.) ....... 37
Atmos Energy Corp. v. Abbott,
127 S.W.3d 852 (Tex. App.—Austin 2004, no pet.) ........................... 40
Baker v. Int’l Record Syndicate, Inc.,
812 S.W.2d 53 (Tex. App.—Dallas 1991, no writ)......................... 18, 25
BHP Petro. Co. v. Millard,
800 S.W.2d 838 (Tex. 1990) .............................................................. 42
Brooks v. Northglen Ass’n,
141 S.W.3d 158 (Tex. 2004) ................................................... 39, 40, 41
California Prods. v. Puretex Lemon Juice, Inc.,
334 S.W.2d 780 (Tex. 1960) .............................................................. 40
Chenault v. Phillips,
914 S.W.2d 140 (Tex. 1996) ............................................................... 39
City of Euless v. Dallas/Fort Worth Int’l Airport Bd.,
936 S.W.2d 699 (Tex. App.—Dallas 1996, writ denied) ..................... 39
City of Pasadena v. Smith,
263 S.W.3d 80 (Tex. App.—Houston [1st Dist.] 2006, pet. denied) .. 39
Farmers Ins. Exch. v. Rodriguez,
366 S.W.3d 216 (Tex. App.—Houston [14th Dist.] 2012, pet. denied) 41
Federal Deposit Ins. Corp. v. Lenk,
361 S.W.3d 602 (Tex. 2012) .......................................................... 16, 17
v
Flores v. Millennium Interests, Ltd.,
185 S.W.3d 427 (Tex. 2005)............................................................... 16
GPA Holding, Inc. v. Baylor Health Care Sys.,
344 S.W.3d 467 (Tex. App.—Dallas 2011, pet. denied) .............. passim
Healix Infusion Therapy, Inc. v. Bellos,
No. 11-02-00346-CV, 2003 WL 22411873 (Tex. App.—Eastland
Oct. 23, 2003, no pet.) ................................................................. 20, 24
In re City of Dallas,
977 S.W.2d 51 (Tex. App.—Fort Worth 1998, orig. proceeding) ........ 40
In re Kasschau,
11 S.W.3d 305 (Tex. App.—Houston [14th Dist.] 1999,
orig. proceeding) ................................................................................ 34
In re Poly-Am., L.P.,
262 S.W.3d 337 (Tex. 2008) .............................................................. 33
Khan v. Meknojiya,
No. 03-11-00580-CV, 2013 WL 3336874 (Tex. App.—Austin
June 28, 2013, no pet.) ........................................................... 16, 19, 21
Landry's Seafood Restaurants, Inc. v. Waterfront Cafe, Inc.,
49 S.W.3d 544 (Tex. App.—Austin 2001, pet. dism’d) ....................... 17
LHR Enters., Inc. v. Geeslin,
No. 03-05-00176-CV, 2007 WL 3306492 (Tex. App.—Austin
Nov. 7, 2007, pet. denied) ............................................................ 40, 42
Murphy v. Cintas Corp.,
923 S.W.2d 663 (Tex. App.—Tyler 1996, writ denied) .......... 21, 28, 30
vi
Nexstar Broad., Inc. v. Gray,
No. 09-07-00364-CV, 2008 WL 2521967 (Tex. App.—Beaumont
2008, no pet.) ......................................................................... 21, 41, 42
Patterson v. Planned Parenthood,
971 S.W.2d 439 (Tex. 1998) ............................................................... 40
Paulsen v. Texas Equal Access to Justice Found.,
23 S.W.3d 42 (Tex. App.—Austin 1999, pet. denied) ......................... 40
Phillips v. Phillips,
820 S.W.2d 785 (Tex. 1991) ....................................................16, 23, 24
Sealock v. Texas Fed. Sav. & Loan Assoc.,
755 S.W.2d 69 (Tex. 1988) ................................................................. 25
Southern Union Co. v. CSG Sys., Inc.,
No. 03-04-00172-CV, 2005 WL 171349 (Tex. App.—Austin
Jan. 27, 2005, no pet.) ............................................................... passim
State v. Margolis,
439 S.W.2d 695 (Tex. Civ. App.—Austin 1969, writ ref’d n.r.e.)........ 42
Tex. Ass’n of Bus. v. Tex. Air Control Bd.,
852 S.W.2d 440 (Tex. 1993) .............................................................. 39
Texas Dep’t of Pub. Safety v. Moore,
985 S.W.2d 149 (Tex. App.—Austin 1998, no pet.) ............................ 39
Texas Dept. of Crim. Justice-Cmty. Justice Assistance Div. v. Campos,
384 S.W.3d 810 (Tex. 2012)............................................................... 14
Thomas v. Graham Mortg. Corp.,
408 S.W.3d 581 (Tex. App.—Austin 2013, pet. denied)......................15
vii
Transcont’l Realty Investors, Inc. v. Orix Capital Markets, LLC,
353 S.W.3d 241 (Tex. App.—Dallas 2011, pet. denied) ...................... 41
Triton 88, LP v. Star Electricity, LLC,
411 S.W.3d 42 (Tex. App.—Houston [1st Dist.] 2013, no pet.) ..... 20, 24
Valence Operating Co. v. Dorsett,
164 S.W.3d 656 (Tex. 2005) ...............................................................15
Waco Indep. Sch. Dist. v. Gibson,
22 S.W.3d 849 (Tex. 2000)................................................................ 40
STATUTES & RULES
TEX. CONST. art. II, § 1.................................................................................. 40
Tex. R. App. P. 39.1 ...................................................................................... xi
Tex. R. App. P. 39.2 ...................................................................................... xi
Tex. R. App. P. 43.2 ..................................................................................... 14
Tex. R. App. P. 43.3 ..................................................................................... 14
Tex. R. App. P. 43.4 ..................................................................................... 44
Tex. R. Civ. P. 139 ........................................................................................ 44
Tex. R. Civ. P. 166a .......................................................................................15
Tex. R. Civ. P. 94 ......................................................................................... 16
OTHER AUTHORITIES
RESTATEMENT (SECOND) OF CONTRACTS § 356 ......................................... 28, 29
viii
STATEMENT OF THE CASE
Nature of This appeal arises from Appellee Dr. Tracy
the Case Strandhagen’s declaratory judgment claims against
seven of her former partners in the Austin
Anesthesiology Group (“AAG”), Appellants Drs.
Noah S. Bunker, Paul Carrell, Everett Brew Houston,
Jr., W. Andrew Buchholz, Scott J. Leighty, Jad L.
Davis, and Holly Clause (collectively, “the
Physicians”). Strandhagen sought declarations
against them that (1) she was terminated without
cause, meaning the liquidated damages provision in
the parties’ contract would be inapplicable to her;
and (2) the liquidated damages provision was an
unenforceable penalty. (CR.4-9).
Course of The Physicians filed a Plea to the Jurisdiction
Proceedings seeking dismissal of Strandhagen’s claims. (CR.77-
84). The trial court granted the Plea as to ground (1)
and denied it as to ground (2). (CR.184; Appx. 2).
Strandhagen then filed a Motion for Summary
Judgment on ground (2). (CR.154-159).
Trial Court The trial court granted Strandhagen’s Motion,
Disposition declaring the liquidated damages provision to be an
unenforceable penalty. (CR.212; Appx. 1). This
resulted in a Final Judgment.
The Physicians filed a Motion for New Trial, urging
in regard to ground (2) of Strandhagen’s claim that it
was error to deny the Physicians’ Plea and to grant
Strandhagen’s Motion. (CR.213-227). Following a
hearing, the trial court denied the Physicians’ Motion
for New Trial. (CR.271; RR.1-29; Appx. 3). The
Physicians timely perfected appeal. (CR.272-273).
ix
RECORD ABBREVIATIONS
Abbreviation Meaning
“CR” The primary Clerk’s Record, pages 1-286, filed on
10/15/14.
A “supplemental” clerk’s record was subsequently
filed on 10/30/14 (for reasons unknown to the
Physicians) containing duplicates of documents
already in the primary CR.
A second “supplemental” clerk’s record was filed on
12/22/14 containing the order directing transfer of
the sealed documents referenced below.
The Physicians do not cite to either portion of the
“supplemental” record.
“Sealed.CR” A sealed document (Strandhagen’s Employment
Agreement), filed as an original exhibit on 12/22/14.
The Physicians’ citations to the Sealed.CR correlate to
the actual portions of the Employment Agreement,
whether it be a numbered page of the contract or an
Appendix thereto, because the District Clerk did not
assign separate “record pages” to this original
document.
“RR” The Reporter’s Record, pages 1-29, which was filed on
9/25/14. This is the transcript from the hearing on
the Physicians’ Motion for New Trial.
x
STATEMENT REGARDING ORAL ARGUMENT
Oral argument should be granted because it will aid the decisional
process by allowing the Court clarify and further develop the unique facts
and legal issues in this case. See Tex. R. App. P. 39.1, 39.2.
This case presents unique facts borne from Strandhagen’s decision to
file a preemptive lawsuit against the Physicians while simultaneously
pursuing a separate yet related claim in a different forum against their
parent company. This case also presents important and unsettled legal
questions as applied to these facts, including: (1) What elements of proof
are required to prevail on an affirmative defense of “unenforceable
penalty?”, and (2) When is a declaratory judgment claim sufficiently ripe
for review?
xi
ISSUES PRESENTED
Issue 1: Was it reversible error for the district court to grant
Strandhagen’s traditional motion for summary judgment
declaring the parties’ liquidated damages provision to be an
unenforceable penalty?
Issue 2: Was it reversible error for the district court to deny the portion
of the Physicians’ Plea to the Jurisdiction contending that
Strandhagen’s claim was not yet ripe for decision?
xii
STATEMENT OF FACTS
Dr. Tracy Strandhagen, an anesthesiologist, left her medical practice
group approximately five years prior to the expiration of the seven-year
term that she had contractually agreed to work. (CR.160; Sealed.CR.12).
Before Strandhagen’s partners decided whether to sue her for breach of
contract or other claims, Strandhagen filed this preemptive lawsuit seeking
judicial declarations that would preclude her partners from recovering
against her under the liquidated damages provision of the parties’ contract
if they decided to bring a future claim against her. (CR.4-9). Strandhagen
named as defendants seven individual partners, who were the then-current
members of the practice group’s Advisory Board (Appellants Dr. Noah S.
Bunker, Dr. Paul Carrell, Dr. Everett Brew Houston, Jr., Dr. W. Andrew
Buchholz, Dr. Scott J. Leighty, Dr. Jad L. Davis, and Dr. Holly Clause)
(collectively, “the Physicians”). (CR.1-3, 162, 179). 1 The trial court
granted declaratory relief in favor of Strandhagen. (CR.212, 271). The
Physicians urge this Court to reverse that decision.
1 Although Strandhagen appears to have chosen these defendants based on their
prior service on the Board, she sued them in their individual capacities, not in their
capacities as Board members.
1
I. THE PARTIES ENTERED A SERIES OF CONTRACTS
GOVERNING THEIR MEDICAL PRACTICE.
Tracy Strandhagen and approximately sixty other anesthesiologists
were members of the Austin Anesthesiology Group (“AAG”). (CR.38, 160).
In October 2011, they collectively decided to sell 100% of their outstanding
interests in AAG to American Anesthesiology of Texas (“AAT” or “the
Company”)2 pursuant to a Membership Interest Purchase Agreement
(“the Purchase Agreement”). (CR.38, 77, 155, 162). 3 The
anesthesiologists thereby became “physician partners” of AAT (“the
Partners”). 4 (CR.162). In connection with this transaction, the Company
and the Partners entered two types of additional contracts. (CR.162, 186-
187).
First, the Company and the Partners entered an Advisory Board and
Internal Operations Agreement (“the Operations Agreement”). (CR.77,
162-183; Appx. 4). This agreement (1) established the duties, powers, and
2 AAT is an indirect subsidiary of a national medical services provider, Mednax,
Inc. (CR.6, 80; Sealed.CR.11).
3 A copy of the Purchase Agreement is not included in the record. It is referenced,
however, by the other contracts contained therein. (See CR.162; Sealed.CR.1).
4 Under the assorted agreements, the anesthesiologists are referred as the
“Physicians,” “Partners,” and/or “Physician Partners.” Herein, when referenced as an
entire group, they will be called the “Partners.” To distinguish this from references to
the seven, individual physicians named as defendants in this lawsuit, the latter will be
called the “Physicians.”
2
procedures of the Partners’ Advisory Board, Medical Director, and Partners’
Representative; (2) identified the individuals who would serve the initial
terms of those positions; and (3) set forth the obligations owed by each
physician to the other Partners and the Company. (Id.).
Second, the Company entered separate Employment Agreements
with each of the Partners “to protect the business interests and goodwill of
[the Company] and to promote the effective administration and
continuation of the Practice.” (Sealed.CR.1, 3, 12; see also CR.111, 155, 166-
167).5 As shown by Strandhagen’s contract, the Employment Agreements
set forth, inter alia, (1) the duties, services, and standards of conduct that
the Partners promised to provide; (2) the parties’ billing and compensation
agreements; and (3) the terms of the Partners’ non-competes.
(Sealed.CR.1-12, 24). Importantly, the Employment Agreements specified a
set number of years that each Partner agreed to work for the practice (“the
Initial Term”). (CR.167; Sealed.CR.12). Strandhagen’s contract specified
that “the term of [the Employment Agreement] shall be a period of seven
(7) years,” which would expire in approximately October 2018.
(Sealed.CR.12). 6
5 Strandhagen’s Employment Agreement was submitted as a sealed, in camera
“Exhibit A-1” as part of the summary-judgment record and in connection with the
Motion for New Trial. (CR.146-147, 150-152, 271; Sealed.CR; RR.23-24, 28).
3
A. The Partners Promised to Stay With the Practice for a
Defined Period for Important Financial Reasons.
The Partners’ agreements to stay with the practice for a designated
period of time was tied to the amount of monetary consideration they
received under the Purchase Agreement. (See CR.144, 167-168). Their
collective agreements to stay for a designated number of years also had
important financial implications for the practice. First, each of the
physicians brought to the practice many years of experience and goodwill
that could not be readily replaced in the event of an early departure. (See
Sealed.CR.1). Strandhagen’s Employment Agreement reflects that she, like
her Partners, “ha[d] practiced medicine in the Specialty for many years and
[] developed substantial personal goodwill, including business contacts,
reputation, and other relationships in the health care industry.”
(Sealed.CR.1).
Beyond the Partners’ goodwill value, the profitability of their practice
also depended on each Partner working a designated shift schedule, as
determined by the Medical Director. (CR.168; Sealed.CR.2-3). They
worked in “units” to fulfill the schedule, which required the cooperation
and dedication of each Partner. (Sealed.CR.2, 7, Annex A, B). Fulfillment
6 It appears that the majority of the Partners, like Strandhagen, agreed to seven-
year terms while seven of them negotiated shorter terms of employment. (See CR.168;
Sealed.CR.12).
4
of these obligations allowed the practice to earn annual gross profits, which
directly affected the Partners’ ability to earn annual incentive bonuses.
(CR.187; Sealed.CR.9, Annex A, B).
B. The Partners Agreed to be Bound by a Liquidated
Damages Provision Regulating Early Departure from
their Practice.
In recognition of the financial importance of the Partners remaining
with the practice for the entire duration of their agreed-upon terms, they
collectively agreed to be bound by a liquidated damages provision stating
that, if a Partner departed the practice early, he or she would be liable to
the remaining Partners for a specified amount of damages, subject to
certain exceptions. (CR.168). More specifically, the Operations Agreement
provided that—given (1) the consideration received by the Partners under
the Purchase Agreement and the calculation of bonuses based upon the
profits of the Company, and (2) the Partners’ agreements to work for a
specified Initial Term—if any Partner departed early, the others “may suffer
harm, including, without limitation, increased workloads necessitated by
such termination, material impairment of the ability of the Physicians to
earn bonuses, . . . material impairment of the Physicians’ relationships with
hospitals and other [parties] . . ., and hiring and training costs related to
replacement physicians.” (CR.167-168, 187).
5
The Partners “acknowledge[d] and agree[d]” that such that damages
would be difficult to prove, and that it would otherwise be inconvenient or
non-feasible to obtain another adequate remedy. (CR.168). Thus, they
agreed that if any Partner terminated his or her employment prior to the
expiration of the Initial Term (with some exceptions, as discussed below),
then he or she would pay the remaining Partners “as liquidated
damages and not as a penalty, the amount set forth below.” (CR.168)
(emphasis added).
The majority of the sixty Partners agreed to be bound by a liquidated
damage amount of $500,000. (CR.156, 168). Seven others negotiated
individual liquidated damages amounts between $240,000 and $400,000,
presumably tied to having negotiated shorter “Initial Terms” of
employment. (CR.168). The Partners “each acknowledge[d] and
agree[d] that the Liquidated Damages Amount is reasonable in
light of the anticipated harm which would be caused by a Terminating
[Partner’s] breach of or default under this Agreement, the difficulty of proof
of loss, the inconvenience and non-feasibility of otherwise obtaining an
adequate remedy, and the value of the transactions to be consummated
under the Purchase Agreement and the other Transaction Documents.”
(CR.168) (emphasis added).
6
The Partners agreed to several exceptions in which the liquidated
damages provision would not be enforced. First and foremost, a Partner
would not be liable for liquidated damages if the Company terminated the
Partner’s employment without cause prior to expiration of the Initial Term.
(CR.168). The Employment Agreement specified events that would provide
the Company “cause” for termination. (Sealed.CR.13-18). Second, a Partner
would not be liable for liquidated damages if his or her employment ended
early due to the Partner’s death or disability, a down-sizing of the company,
or similar specified exceptions. (CR.169). Finally, each Partner had the
option of petitioning for permission by the majority to terminate his or her
employment early without payment of liquidated damages in the event of
“unforeseen circumstances” or “to provide other services to the Company or
its Affiliates.” (CR.169).
The Partners expressly acknowledged the importance of these
provisions. The Operations Agreement states that their “agreement to be
bound by the covenants set forth herein, which [] are narrowly tailored and
necessary to protect the Physicians’ legitimate interests as a group,”
constituted a “significant inducement to [the Partners] entering into the
Purchase Agreement and consummating the transaction contemplated
thereby.” (CR.162).
7
II. STRANDHAGEN DEPARTED THE PRACTICE FIVE YEARS
EARLIER THAN SHE HAD CONTRACTUALLY AGREED.
Under Strandhagen’s Employment Agreement, the initial seven-year
term of her employment was not set to expire until approximately October
2018. (Sealed.CR.12). Strandhagen’s employment was terminated five
years early, between July-September 2013. (CR.88, 160, 187).
Strandhagen claimed she was constructively discharged on the basis
of gender discrimination in July 2013. (CR.88, 93, 101). If that were true,
it would provide a “terminated without cause” exception to her liability
under the liquidated damages provision. (CR.168). To the contrary, the
Company claimed that, following a series of disciplinary infractions,
Strandhagen quit or was terminated with cause in September 2013.
(CR.103, 144). Under that circumstance—whether Strandhagen resigned
without first obtaining permission from the majority of her partners for an
early departure or was rightfully terminated for engaging in detrimental
conduct, failing or refusing to adhere to specified policies and standards, or
breaching other terms of her Employment Agreement—Strandhagen would
be liable for payment of liquidated damages. (CR.167-169; Sealed.CR.13-
15).
8
III. STRANDHAGEN FILED SEPARATE PROCEEDINGS AGAINST
THE COMPANY AND HER PHYSICIAN PARTNERS.
In approximately December 2013, Strandhagen filed an employment-
discrimination complaint against the Company with the Texas Workforce
Commission, Civil Rights Division and the EEOC. (CR.39, 80, 85-87, 91-
92). Despite having not made any representation of discrimination in
connection with the buyout just two months earlier, Strandhagen now
claimed that she had suffered such discrimination “for many years.”
(CR.93, 144). The primary issue in Strandhagen’s proceeding against the
Company was, therefore, whether she was terminated with or without cause
(i.e., whether Strandhagen’s termination resulted from her misconduct or
was based on gender discrimination).
While those administrative claims were pending, Strandhagen
initiated this suit in the Travis County District Court against seven of her
Partners: Drs. Bunker, Carrell, Houston, Buchholz, Leighty, Davis, and
Clause (“the Physicians”). (CR.4). Strandhagen’s sole cause of action was a
declaratory judgment claim. (CR.40). She sought declarations that:
9
(1) she was terminated without cause, meaning the liquidated
damages provision is inapplicable to her; and
(2) the liquidated damages provision is an unenforceable
penalty because:
(a) the resulting harm from Strandhagen’s early
termination was not incapable or difficult of
estimation,
(b) the liquidated damages amount is not a reasonable
forecast of just compensation, and
(c) it purports to render her liable to the Physicians for
a breach of her Employment Agreement to which
they are not parties or third-party beneficiaries.
(CR.40-41).
IV. THE DISTRICT COURT DISMISSED PART AND GRANTED
PART OF THE DECLARATORY RELIEF STRANDHAGEN
SOUGHT AGAINST THE PHYSICIANS.
The Physicians filed a Plea to the Jurisdiction seeking dismissal of
both grounds of Strandhagen’s declaratory judgment claim. (CR.70, 77).
The Physicians argued: (1) Strandhagen’s request to declare whether or not
she was terminated for cause duplicated the primary issue pending before
the TWC/EEOC, and she was required to exhaust her administrative
remedies first; and (2) Strandhagen’s challenge to the liquidated damages
provision was not ripe because the Physicians had not made any demand
nor sued her to collect such damages. (CR.79-80). The district court (the
10
Honorable Steven Yelenosky presiding) granted the first argument, thereby
dismissing ground (1) of Strandhagen’s declaratory judgment claim, and
denied the second, maintaining jurisdiction over ground (2) of
Strandhagen’s claim. (CR.184). Strandhagen does not appeal the dismissal
of ground (1) of her claim.
Strandhagen then moved for a traditional summary judgment
granting ground (2) of her claim. In so doing, she abandoned her
contention that (a) the resulting damages would be incapable or difficult of
estimation, instead arguing only that the liquidated damages provision was
unenforceable as a matter of law because (b) the amount to be paid was not
a reasonable forecast of just compensation, and (c) the Physicians were not
third-party beneficiaries of her Employment Agreement. (CR.154, 196).
Following the Physicians’ Response, further briefing by both parties, and a
hearing, the district court (the Honorable Orlinda Naranjo presiding)
granted Strandhagen’s motion. (CR.186-212). Without specifying any
grounds, the Court “declare[d] that the $500,000 purported liquidated
damages clause in the . . . Operations Agreement is an unenforceable
penalty,” and denied all other relief not expressly granted. (CR.212). This
resulted in a final judgment. (CR.212).
11
The Physicians filed a Motion for New Trial urging several reasons
why the grant of summary judgment was improper, as argued below.
(CR.213-250). The Court denied the motion following a hearing on its
merits. (CR.271; RR.1-29). The Physicians appealed. (CR.272-78).
SUMMARY OF THE ARGUMENT
This Court must decide whether to uphold the plain language of a
contract that was mutually-agreed to by parties of equal sophistication or,
instead, allow one of those parties (Strandhagen) to secure a premature
avoidance of the contractual liability provision before any actual dispute
has arisen and without sufficient evidence to support her request. The
district court improperly refused to enforce the parties’ contract and
granted Strandhagen advisory relief. This Court should reverse those
errors.
The first issue is whether the district court erred in granting
Strandhagen a traditional summary-judgment when she failed to satisfy her
burden of conclusively proving each element of her affirmative defense that
the liquidated damages provision in the parties’ Operations Agreement is
an unenforceable penalty. The answer is yes. The summary-judgment
order should be reversed.
12
Strandhagen failed to establish the two essential elements of her
claim. She unequivocally abandoned the first element (that damages
resulting from her breach would be difficult to estimate), and she failed to
offer conclusive proof of the second element (that the liquidated amount
was an unreasonable forecast of the actual damages). In regard to the
latter, Strandhagen (a) offered no evidence of the actual damages to
establish an unreasonable disparity; (b) her contentions ignore the plain
language of the contract; and (c) in any event, a fact issue exists about
whether the court should modify the liquidated amount rather than strike it
all together.
Strandhagen also failed to establish that it was necessary for the
Physicians to be third-party beneficiaries of her Employment Agreement to
enforce the liquidated damages provision under their own Operations
Agreement. Even had such status been required, Strandhagen did not
satisfy her summary-judgment burden of conclusively negating its
existence.
The second issue is whether the district court erred in denying the
portion of the Physicians’ Plea to the Jurisdiction arguing that
Strandhagen’s declaratory judgment claim was unripe. Again, the answer is
yes. The partial denial of the Plea should be reversed. This presents an
13
alternative basis to reverse the summary judgment because such relief
should not have been granted in the absence of jurisdiction. Strandhagen’s
claim misuses the Declaratory Judgment Act by seeking an advance ruling
on a potential affirmative defense to a dispute that has not yet (and may
never) come to exist. As such, the district court’s grant of a declaration in
her favor was advisory and improper.
ARGUMENT
In two issues, the Physicians respectfully request that this Court
reverse the district court’s (1) grant of Strandhagen’s traditional Motion for
Summary Judgment on her declaratory judgment claim, and (2) partial
denial of the Physician’s Amended Plea to the Jurisdiction. If the latter is
reversed, then a judgment dismissing Strandhagen’s claims should be
rendered in favor of the Physicians. See Texas Dept. of Crim. Justice-
Cmty. Justice Assistance Div. v. Campos, 384 S.W.3d 810, 812 (Tex. 2012).
Otherwise, the case should be remanded for further proceedings. Tex. R.
App. P. 43.2, 43.3.
I. THE DISTRICT COURT ERRED BY GRANTING
STRANDHAGEN’S MOTION FOR SUMMARY JUDGMENT.
Strandhagen’s Motion for Summary Judgment should have been
denied because she failed to conclusively establish (1) the essential
14
elements of her claim and (2) that the status of the Physicians as third-
party beneficiaries to her Employment Agreement had any impact on the
enforceability of the liquidated damages provision. In any event, as argued
under Issue 2, the court erred in granting summary judgment on a
hypothetical (unripe) question because it lacked subject-matter jurisdiction
to do so.
A. Summary Judgment Standard of Review.
This Court reviews the grant of summary judgment de novo. Valence
Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). Appellate
courts “review the evidence presented in the motion and the response in the
light most favorable to the party against whom the summary judgment was
rendered, crediting evidence favorable to that party if reasonable jurors
could, and disregarding contrary evidence unless reasonable jurors could
not.” Thomas v. Graham Mortg. Corp., 408 S.W.3d 581, 588 (Tex. App.—
Austin 2013, pet. denied). “A movant is entitled to traditional summary
judgment if (1) there are no genuine issues as to any material fact and (2)
the moving party is entitled to judgment as a matter of law.” Id. (citing Tex.
R. Civ. P. 166a(c)).
15
B. Strandhagen Failed to Satisfy her Summary-Judgment
Burden on the Essential Elements of her Claim.
Strandhagen moved for a traditional summary judgment declaring
that the liquidated damages provision in the Operations Agreement is an
unenforceable penalty. (CR.154). “The term ‘liquidated damages’ ordinarily
refers to an acceptable measure of damages that parties stipulate in
advance will be assessed in the event of a contract breach.” Flores v.
Millennium Interests, Ltd., 185 S.W.3d 427, 431 (Tex. 2005).
Although Strandhagen was the plaintiff, her declaratory judgment
claim—which was filed preemptively in attempt to avoid potential liability
under the liquidated damages provision—was in the nature of an
affirmative defense. “Whether a contractual provision is an unenforceable
penalty and not a liquidated damage clause is an affirmative defense.” GPA
Holding, Inc. v. Baylor Health Care Sys., 344 S.W.3d 467, 471 (Tex. App.—
Dallas 2011, pet. denied) (citing Tex. R. Civ. P. 94; Phillips v. Phillips, 820
S.W.2d 785, 789 (Tex. 1991)); Khan v. Meknojiya, No. 03-11-00580-CV,
2013 WL 3336874, *2 (Tex. App.—Austin June 28, 2013, no pet.) (same).
When a movant seeks a traditional summary judgment on an affirmative
defense, the movant carries the burden of demonstrating her entitlement to
judgment as a matter of law by conclusively proving each element of the
affirmative defense. Federal Deposit Ins. Corp. v. Lenk, 361 S.W.3d 602,
16
609 (Tex. 2012); Landry's Seafood Restaurants, Inc. v. Waterfront Cafe,
Inc., 49 S.W.3d 544, 547 (Tex. App.—Austin 2001, pet. dism’d).
Strandhagen agrees that she bore the burden of proof on her
affirmative defense of penalty. (CR.195-196, 262). Strandhagen and the
Physicians disagree, however, about which elements she was required to
prove to be entitled to summary judgment. The Physicians argue she had
to prove two elements, while Strandhagen claims she had to prove only one
or the other. (CR.188-189, 196, 262).
Although the Texas Supreme Court has not definitively answered this
legal question, several intermediate courts—including this one—have
reached the conclusion urged by the Physicians. See infra. In any event,
because Strandhagen failed to conclusively prove both elements, the orders
granting her summary judgment and denying the Physicians’ Motion for
New Trial should be reversed. (RR.14).
1. Strandhagen was required to conclusively
establish two elements.
The most on point opinion is GPA Holding, 344 S.W.3d at 476. Like
Strandhagen, GPA moved for summary judgment urging that the liquidated
damages clause in its contract with Baylor was an unenforceable penalty.
Id. The Dallas Court held that, “[t]o obtain summary judgment on the
17
affirmative defense of penalty, GPA [as the party seeking to avoid
enforcement of the provision] must prove each element of the defense.”
Id. (emphasis added). GPA’s required elements were that: (1) the harm
resulting from a breach was not incapable or difficult of estimation, and (2)
the amount of liquidated damages provided by the contract was not a
reasonable forecast of actual damages. Id.; see also Baker v. Int’l Record
Syndicate, Inc., 812 S.W.2d 53, 55 (Tex. App.—Dallas 1991, no writ)
(“Evidence related to the difficulty of estimation and the reasonable
forecast must be viewed as of the time the contract was executed.”).
“The difficulty (or lack of difficulty) in estimation as well as
the unreasonableness of the damages estimate were GPA’s to
prove. General statements about a ‘more reasonable’ or ‘modest’ rate are
not evidence that the harm from late payment is difficult to estimate, or
that the normal billed charges were an unreasonable forecast of the loss
actually sustained.” GPA Holding, 344 S.W.3d at 476 (emphasis added).
“Because GPA did not meet its burden of establishing that the clause . . .
was an unenforceable penalty,” the trial judge did not err in denying GPA’s
motion for summary judgment on this issue.” Id.
This Court reached the same conclusion following a jury trial in
Southern Union Co. v. CSG Systems, Inc., No. 03-04-00172-CV, 2005 WL
18
171349, *4 (Tex. App.—Austin Jan. 27, 2005, no pet.). Southern Union
argued that the damages provision was an unenforceable penalty. Id. This
Court held that “[t]he party challenging the award of liquidated damages
has the burden to establish that the two-prong test is not satisfied
and that, instead, the award of liquidated damages is an unenforceable
penalty.” Id. at *4 (emphasis added). The Court then discussed whether
Southern Union satisfied the “first part of its burden” regarding “difficulty
of estimation” and the “second part of its burden” regarding “reasonable
forecast of just compensation.” Id. at *4-6. Concluding that Southern
Union failed to prove either essential element, the Court affirmed the award
of liquidated damages, subject to a partial remittitur on another issue. Id.
at *7-8.
More recently, in Khan v. Meknojiya, 2013 WL 3336874 at *2,
Mekonjiya moved for summary judgment on the affirmative defense of
penalty. In considering whether the district court properly denied that
motion, this Court stated that, “to be entitled to summary judgment,
Meknojiya had to conclusively establish every element of this defense,”
and then set forth the two elements regarding (1) incapable or difficult of
estimation, and (2) reasonable forecast of compensation. Id. at *2-3
19
(emphasis added) (ultimately holding that the provision was not one for
liquidated damages and thus the penalty analysis was inapplicable).
The Eastland Court of Appeals also held that a party seeking to avoid
enforcement of a liquidated damages provision on summary judgment
must prove both elements of the penalty affirmative defense. Healix
Infusion Therapy, Inc. v. Bellos, No. 11-02-00346-CV, 2003 WL 22411873,
*2 (Tex. App.—Eastland Oct. 23, 2003, no pet.). The Court held that “the
burden Healix [as the party claiming penalty] must bear [is] that at the time
the agreement was made damages could be easily ascertained and that the
amount of the liquidated damages award was not a reasonable forecast of
just compensation.” Id. (emphasis added). Healix’s contention “that the
award of liquidated damages is disproportionate to actual damages” was
insufficient on its own. Id. “Healix still must show that, at the time the
agreement was made, the amount of the liquidated damages was not a
reasonable forecast.” Id. “Healix failed to meet his burden of proof on the
penalty issue.” Id. at *3.
Other courts have reached similar conclusions. See Triton 88, LP v.
Star Electricity, LLC, 411 S.W.3d 42, 62 (Tex. App.—Houston [1st Dist.]
2013, no pet.) (favorably citing GPA Holding and concluding “Triton failed
to raise a fact question on its claim that the . . . clause constituted an
20
impermissible penalty,” where Triton “did not present any evidence
regarding the parties’ ability to estimate actual damages . . . or what a
reasonable forecast of damages would have been at the time the contract
was formed.”); Murphy v. Cintas Corp., 923 S.W.2d 663, 666 (Tex. App.—
Tyler 1996, writ denied) (“For the provision to be an unenforceable penalty,
the uncertainty of the damages and the reasonableness of the stipulation
must have existed at the time when the contract was executed.” Where
neither element was proven, the clause was held enforceable.) (emphasis
added).
The Physicians acknowledge that contrary authority exists in which
courts have not required proof of both elements before concluding the
provision to be a penalty. See, e.g., Nexstar Broad., Inc. v. Gray, No. 09-
07-00364-CV, 2008 WL 2521967 (Tex. App.—Beaumont 2008, no pet.)
(holding liquidated damages provision to be an unenforceable penalty
because it was an unreasonable forecast of just compensation without
discussion of the difficulty of estimation element); (RR.9-10).
However—given the black-letter law that a movant seeking traditional
summary judgment on its affirmative defense is required to prove every
element of its defense, coupled with prior holdings of this Court (Southern
Union and Kahn) and the case most on point (GPA Holdings) requiring
21
proof of both elements to prevail on the affirmative defense of penalty—the
Physicians urge this Court to conclude Strandhagen was required to
establish both elements, and decline to follow opinions to the contrary.
Consequently, this Court should reverse the judgment if it concludes that
Strandhagen failed to conclusively establish either one of the two required
elements that (1) the harm resulting from a breach was not incapable or
difficult of estimation (i.e., the harm could be easily and accurately
estimated), or (2) the amount of liquidated damages provided by the
contract was not a reasonable forecast of actual damages (i.e., the
liquidated damages amount was excessive compared to the actual damages
resulting from a breach).
But even if this Court were to conclude that Strandhagen was
required to prove only one element of her affirmative defense, reversal of
the judgment is still necessitated by the fact that Strandhagen failed to
conclusively prove both of the foregoing elements.
2. Strandhagen conceded her inability to prove the
“difficulty of estimation” element.
Strandhagen unequivocally admitted that “[s]he does not seek to
negate the element concerning the difficulty of estimation . . .; she only
seeks to negate the second element.” (CR.196, 263). The record leaves no
22
doubt that Strandhagen failed to carry her burden of proof on this element.
The summary judgment should be reversed accordingly.
3. Strandhagen failed to conclusively prove the
“unreasonable forecast” element.
Strandhagen did not satisfy her summary-judgment burden of
proving that the liquidated damages amount failed to reasonably forecast
actual damages because (a) she offered no evidence to demonstrate what
the actual damages were or that there was an excessive disproportion
between the amounts; (b) to accept her argument, this Court must
disregard the plain language of the contract; and (c) a genuine issue of
material fact remains about whether the liquidated damages clause should
be modified rather than struck as unenforceable.
(a) No evidence of actual damages.
(i) Texas law requires proof of actual damages.
Although the question of “[w]hether a contractual provision is an
enforceable liquidated damages provision or an unenforceable penalty is a
question of law for the court to decide, [s]ometimes . . . factual issues must
be resolved before the legal question can be decided.” Phillips v. Phillips,
820 S.W.2d 785, 788 (Tex. 1991). Our supreme court identified a typical
fact issue in connection with the “unreasonable forecast” element arising
23
from the movant’s requirement to “prove what the actual damages were” in
comparison to “the amount contracted for.” Id. The party claiming the
provision is a penalty “must prove actual damages, if any, to show that the
actual loss was not an approximation of the stipulated sum.” Healix, 2003
WL 22411873 at *2.
Where a party fails to offer any evidence of actual damages in
comparison to the liquidated amount, the court may conclude that the
party has failed to carry its burden of proof and uphold the liquidated
damages provision. See e.g., Triton, 411 S.W.3d at 62 (“Triton did not
present any evidence regarding what a reasonable forecast of damages
would have been at the time the contract was formed, nor did it present any
evidence of StarTex’s actual damages. Thus, . . . [the] liquidated damages
[clause] provided a reasonable forecast of just compensation.”).
Additionally, vague averments of “unreasonableness” not supported
by actual evidence will not suffice to establish the defense of penalty. The
movant cannot meet its burden simply by claiming that the actual damages
are not yet ascertainable and therefore tantamount to “zero.” Healix, 2003
WL 22411873 at *2. And as noted by this Court, a liquidated damages
amount awarding two to three times the amount of actual damages is not
per se unreasonable. Southern Union, 2005 WL 171349 at *6 (citing
24
Sealock v. Texas Fed. Sav. & Loan Assoc., 755 S.W.2d 69, 70 (Tex. 1988)
(“uph[olding] a trial court’s judgment awarding $790,000 in liquidated
damages, which was twice the $395,000 found as actual damages”); Baker
v. Int’l Record Syndicate, Inc., 812 S.W.2d 53, 56 (Tex. App.—Dallas 1991,
no writ) (“approv[ing] a liquidated damages award of $51,000, which was
more than triple the $15,000 found as actual damages”).
In GPA Holding, 344 S.W.3d at 476, the movant “offered evidence
comparing the discounted rates to the hospital’s normal billed rates for the
charges at issue,” including an affidavit with an attached chart showing “the
percentage difference between the discounted rate and the normal billed
charge for each of the charges at issue,” and presented argument about an
alternative damage calculation that the movant contended would be more
reasonable. Even this was not enough. The court held that movant failed
to carry its burden of proof on the “unreasonable forecast” element because
it failed to attach evidence in support of the alternative calculation. Id.
(ii) Strandhagen offered no proof of actual
damages, and her “one size fits all” argument
fails.
Strandhagen offered no evidence of what the Physicians’ actual
damages were or would be in the event that they brought a future suit
against her for breach of contract nor did she establish any alternative
25
damages calculation that she would contend is more reasonable. Instead,
Strandhagen claimed that, as a matter of law, the liquidated damage
amount was unreasonable because it was a “one size fits all” provision, i.e.,
the same amount of damages would be owed regardless of when she
terminated her employment. (CR.157, 197-98, 264). This contention is
insufficient without any proof of how the liquidated damage amount was
calculated or what the actual damages were.
Strandhagen relied on cases holding that a liquidated damages
provision may be unenforceable if it imposes the same amount of liability
for breaches that are both trivial and severe. (CR.198). This is not the case
under the Operations Agreement. Here, the liquidated damages provision
applies to only one form of breach: a Partner’s early departure from the
practice. (CR.167-168). It does not apply, for example, to non-material
breaches like the Advisory Board’s failure to hold a regular meeting
(CR.163) or its failure to take a written vote upon request (CR.164).
Strandhagen attempts to transform the time of the breach into a
measure of its materiality. But Strandhagen presented no evidence to
establish that the financial impact on the remaining Partners would be
substantially greater or lesser depending on the timing of another Partner’s
early departure. As previously discussed, important financial reasons
26
supported the Partners’ agreement to be bound by this liquidated damages
clause, including the anticipated impact that one’s early departure would
have on the practice’s gross profits and the Partners’ abilities to earn annual
bonuses, as well as the resulting loss of experience and goodwill, which
could not be easily or quickly replaced. Supra, Statement of Facts Section
I.A. These financial considerations could be the same whether Strandhagen
quit on day 1 or day 1,000. Strandhagen offered no evidence to prove
otherwise. Instead, she simply claimed that “the consequences of Dr.
Strandhagen’s employment terminating obviously varies over time.”
(CR.157). This unsupported allegation does not suffice to meet her burden.
Strandhagen’s “one size fits all” contention also fails in light of the
several exceptions to the liquidated damages provision. (CR.167-169).
Several types of “early departures” were carved out from application off the
provision. These exceptions eliminate the imposition of any liability for
early termination scenarios that would not constitute a material breach of
the contract (such as early termination based on disability or with
permission by the majority). Hence, the clause was narrowly drafted, not
an unenforceable “one size fits all” provision.
Moreover, relevant legal authorities are contrary to Strandhagen’s
contention. The fact that a liquidated damages provision awards a uniform
27
amount for the breach of a term agreement regardless of the date of the
breach is not per se unreasonable. In Murphy v. Cintas Corp., 923 S.W.2d
663, 666 (Tex. App.—Tyler 1996, writ denied), Murphy claimed that the
liquidated damages provision was an unenforceable penalty because it
imposed the same amount of damages for early cancellation of the parties’
agreement whether it resulted from his failure to pay for one of the
contemplated goods (at the end of the contract’s term) or all of them (at the
beginning). Id. The court rejected this argument and enforced the
provision. Id. at 666-667.
The Restatement of Contracts regarding liquidated damages is
consistent with Murphy. See RESTATEMENT (SECOND) OF CONTRACTS § 356,
Liquidated Damages and Penalties (1981). Comment (b), “Test of
Penalty,” states that a liquidated damages amount “is reasonable to the
extent that it approximates the actual loss that has resulted from the
particular breach, even though it may not approximate the loss that might
have been anticipated under other possible breaches.” Id. (emphasis
added). Thus, this Court needs to determine only whether Strandhagen
conclusively established that the liquidated amount was an unreasonable
forecast of the actual damages resulting from this particular breach (her
28
five-year premature departure from the practice). Strandhagen offered no
prove to establish this element.
According to Restatement Section 356, whether the liquidated
amount reasonably forecast other breaches that may have occurred is not a
basis to deny the provision’s enforceability in this case. Id. This is
confirmed by Illustration 2 to Section 356. In that example, partners A, B,
and C formed a veterinary practice promising to remain as a partnership for
ten years. Id. The liquidated damages clause provided that, if one partner
terminated early (and the others continued the business), and the
terminating partner breached his duty of non-competition, he would be
liable for $50,000. This provision is enforceable because “[e]ven though
$50,000 may be unreasonable in relation to the loss that may have resulted
in other circumstances, it is not unreasonable in relation to the actual loss.”
Id.
In the absence of any evidence from Strandhagen to support her
claim that the liquidated damages amount was not a reasonable forecast of
just compensation—and especially considering that all inferences must be
construed in favor of the Physicians as nonmovants—the record fails to
conclusively demonstrate that Strandhagen satisfied her burden of proof on
29
this element. This Court should reject Strandhagen’s facial challenge just
as the court did in Murphy, 923 S.W.2d at 666.
(b) Plain language of contract shows reasonable
forecast.
Beyond the lack of evidence in support of Strandhagen’s contention
that the liquidated damages amount was an unreasonable forecast of the
actual damages, the plain language of the parties’ contract demonstrates
that it was not. The Court would be required to disregard or render
meaningless certain portions of the contract to accept Strandhagen’s
argument.
In determining whether Strandhagen has satisfied her burden on the
affirmative defense of penalty, this Court must keep in mind the basic rules
of contract construction, as recognized in GPA Holding, 344 S.W.3d at 471.
“The court’s primary concern in interpreting a written contract is to
determine the mutual intent of the parties as manifested in the contract, . . .
and the agreement must be enforced as written.” Id. Terms should be given
their plain and ordinary meaning, and interpretations that render any
portion meaningless should be avoided. Id.
This Court considered the plain language of the contract as a basis for
rejecting a penalty defense and enforcing a liquidated damages provision in
Southern Union Co. v. CSG Systems, Inc., No. 03-04-00712CV, 2005 WL
30
171349, *4-6 (Tex. App.—Austin Jan. 27, 2005, no pet.). There, the contract
stated that the damages provision was included “[b]ecause of the difficulty
in ascertaining CSG’s actual damages for a termination or other breach of
the Agreement,” and that “CSG would have been unwilling to provide the
Services at the fees set forth in the Agreement” had Southern Union not
promised “certainty of revenue” by obligating itself to pay the
discontinuance fee in the event that it breached the contract.” Id. at *4.
The damages provision also “expressly state[d] that it ‘is not a penalty’ and
that it ‘is a reasonable estimation of the actual damages which CSG would
suffer if CSG were to fail to receive the amount of processing business as
contemplated by this Agreement.’” Id. at *6. The Court clarified that,
“[a]lthough parties cannot avoid a challenge to a liquidated damages
provision simply by characterizing it as ‘reasonable,’ such express language
is instructive of the parties’ intent when the terms are mutually bargained
for between equally competent parties.” Id.
This Court also put weight on the fact that the “provision was a
bargained-for exchange, negotiated and approved by both companies.” Id.
“When a provision is mutually bargained for by equally competent parties,
we give deference to its enforcement. . . . From the face of the contract,
Southern Union understood at the time it entered the agreement that CSG’s
31
damages would be difficult to estimate and therefore agreed a liquidated
damages provision was necessary.” Id.
Much like the Southern Union/CSG contract, the Operations
Agreement between Strandhagen and her Partners expressly stated that the
stipulated amount was to be paid “as liquidated damages, and not as a
penalty,” and that the amount was “reasonable in light of the anticipated
harm which would be caused by a Terminating Physician’s breach or
default under this Agreement.” (CR.168). Additionally, the Partners
agreed that the contract’s provisions were “narrowly tailored and necessary
to protect the Physicians’ legitimate interests as a group,” and that they
constituted a “significant inducement to [the Partners] entering into the
Purchase Agreement, and consummating the transaction contemplated
thereby.” (CR.162).
Also like the Southern Union/CSG contract, Strandhagen and her
Partners were mutually competent parties who voluntarily and knowingly
entered this bargained-for exchange. (CR.162, 173-178). Hence, this Court
should defer to the plain language of the Operations Agreement, which
evidences the parties’ mutual intent for the liquidated damages provision to
be valid and enforceable, and not construed as a penalty. To do otherwise
would impermissibly render meaningless the express provisions of the
32
contract stating that the damages provision was reasonable, narrowly-
tailored, a necessary inducement, and not a penalty.
(c) Fact issue exists regarding modification.
Finally, to any extent the Court believes Strandhagen offered proof
that the damages provision was not a reasonable forecast of actual
damages, she has still failed to conclusively establish this element of her
defense because the “Severability” clause in the parties’ contract creates a
genuine issue of material fact.
Section 7(f) of the Operations Agreement provides:
Severability. . . . In the event that any provision of
this Agreement shall be declared by a Court of
competent jurisdiction to exceed the limits such
court deems reasonable and enforceable, said
provisions shall be deemed modified to the
minimum extent necessary to make such
provisions reasonable and enforceable.
(CR.171) (emphasis added).
“An illegal or unconscionable provision of a contract may generally
be severed so long as it does not constitute the essential purpose of the
agreement.” In re Poly-Am., L.P., 262 S.W.3d 337, 357, 360 (Tex. 2008)
(recognizing that, pursuant to the parties’ contract, the arbitrator “would be
free to modify” terms found to be unconscionable rather than striking them
altogether). Severability is determined by the intent of the parties as
33
evidenced by the language of the contract. In re Kasschau, 11 S.W.3d 305,
313 (Tex. App.—Houston [14th Dist.] 1999, orig. proceeding).
Here, the liquidated amount could be modified in a narrow fashion
without undermining the essential purpose of the parties’ contract. The
express purpose of the Operations Agreement was to “establish an Advisory
Board and set forth certain understandings and agreements among
themselves regarding the operations of their practice.” (CR.162). The
specific amount of liquidated damages applicable to any particular
physician was not the “essential purpose” of the Agreement.
In light of the Severability clause, the district court erred by declaring
the liquidated damages provision wholly unenforceable as a matter of law.
Even if the court considered $500,000 to be an unreasonable liquidated
amount, the court should have concluded that a genuine issue of material
fact exists about what modified amount or calculation would be reasonable
to enforce in its place, keeping with the parties’ express intent to modify the
term “to the minimum extent necessary.” To do otherwise, the Court
would have to impermissibly rewrite the parties’ bargained-for exchange to
strike out the final sentence of Paragraph 7(f), which is a mandatory
provision voluntarily agreed to by the parties. Alternatively, if this Court
34
concludes the Severability clause is ambiguous, then it creates a genuine
issue of material fact requiring reversal and remand. (RR.12-14, 22-23).
C. Strandhagen Failed to Satisfy her Summary-Judgment
Burden Regarding the Physicians’ Status as Third-
Party Beneficiaries.
Strandhagen also moved for summary judgment based on her
argument that the liquidated damages provision is unenforceable because it
seeks to render her liable to the Physicians for a breach of her Employment
Agreement, to which the Physicians are not parties or third-party
beneficiaries. (CR.157-158). This did not provide a valid basis for summary
judgment because (1) Strandhagen’s liability for liquidated damages arises
directly from the Operations Agreement between her and her Physician
Partners, and does not require that the Physicians be third-party
beneficiaries of her Employment Agreement; and/or (2) Strandhagen failed
to conclusively establish that the Physicians were not third-party
beneficiaries of the Employment Agreement.
35
1. The Operations Agreement Provides a Direct Line
of Liability.
Paragraph 5 of the Operations Agreement provides:
[I]f [any Partner] terminates his or her employment
with the Company prior to the expiration of the
Initial Term, the Physicians may suffer harm [as
specified therein]. . . . In light of the foregoing, if a
[Partner’s] employment with the Company is
terminated for any reason during the Initial Term .
. . other than a termination without cause . . . then
such [Terminating Partner] shall promptly pay . . .
as liquidated damages and not as a penalty . . . the
amount set forth below.
(CR.167-168).
This provision creates a direct line of liability for liquidated damages
between an early-terminating physician and her remaining Partners based
on the direct harm that will be suffered by the remaining Partners as a
result of the early termination. (Id.). Under this provision, there is no need
for the Physicians to be third-party beneficiaries of the Employment
Agreement to enforce the liquidated damages clause. The Physicians (if
they sued Strandhagen for breach of contract) would not be attempting to
recover under the Employment Agreement as third-party beneficiaries.
Rather, they would be seeking and are entitled to directly enforce the
liability provisions contained within the four corners of their own contract
with Strandhagen. (RR.10-11).
36
2. A Genuine Issue of Material Fact Remains about
the Physicians’ Third-Party Beneficiary Status.
Alternatively, even if the Court were to conclude that the Physicians
are required to be third-party beneficiaries of Strandhagen’s Employment
Agreement to enforce the liquidated damages clause under the Operations
Agreement, it was error to grant summary-judgment on this ground
because Strandhagen did not conclusively establish the absence of such
third-party beneficiary status.
Strandhagen’s Motion for Summary Judgment states in a single,
conclusory sentence that the Physicians “are [not] third-party beneficiaries”
to the Employment Agreement. (CR.158). She did not provide any
evidence or analysis about the intention of the Employer or herself (or any
of the other Partners) when entering their Employment Agreements, nor
about the meaning of the contract as a whole. Strandhagen failed to satisfy
her traditional summary-judgment burden on this ground. See Alvarado v.
Lexington Ins. Co., 389 S.W.3d 544, 564 (Tex. App.—Houston [1st Dist.]
2012, no pet.) (“It was Lexington’s burden, as movant for summary
judgment, to prove its entitlement to summary judgment against Alvarado
as a matter of law. We hold that Lexington failed to carry its burden of
conclusively negating Alvarado’s status as a third-party beneficiary to the
37
Policy. Thus, we hold that the trial court erred in rendering summary
judgment in favor of Lexington.”).
II. THE DISTRICT COURT ERRED BY DENYING PART OF THE
PHYSICIANS’ PLEA TO THE JURISDICTION.
The Physicians’ Amended Plea to the Jurisdiction argued, in part, that
Strandhagen’s request for a declaration that the liquidated damages
provision was an unenforceable penalty was not yet ripe for decision
because the Physicians had not yet decided whether to sue her for breach of
contract, much less made a demand or filed suit on that basis. (CR.79-80).
In the absence of a live, justiciable controversy, the court lacked subject-
matter jurisdiction over Strandhagen’s claim. (CR.79-80). On this basis,
the district court erred by denying this portion of the Physician’s Plea and
by granting an advisory summary judgment on Strandhagen’s unripe
declaratory judgment claim, and by denying the opportunity to correct this
error in response to the Motion for New Trial. (CR.184-85, 212, 271). This
Court should reverse these decisions and render judgment dismissing
Strandhagen’s claims for a lack of jurisdiction.
A. Texas Law Prohibits Advisory Declarations on
Potential Defenses to Hypothetical Disputes.
In an action for declaratory relief, a plaintiff must allege facts that
affirmatively demonstrate that the trial court has subject matter
38
jurisdiction. Tex. Ass’n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440,
446 (Tex. 1993); City of Pasadena v. Smith, 263 S.W.3d 80, 86 (Tex. App.—
Houston [1st Dist.] 2006, pet. denied). “A request for declaratory relief
alone does not establish jurisdiction in [the] Court. . . . [It is] merely a
procedural device for deciding cases already within a court’s jurisdiction.”
Chenault v. Phillips, 914 S.W.2d 140, 141 (Tex. 1996).
For a court to have jurisdiction to consider a declaratory-judgment
action, there must be a “justiciable controversy as to the rights and status
of” the parties, and the requested declaration “must actually resolve the
controversy.” Brooks v. Northglen Ass’n, 141 S.W.3d 158, 163-64 (Tex.
2004). “A justiciable controversy is one in which a real and substantial
controversy exists involving a genuine conflict of tangible interests and not
merely a theoretical dispute.” Texas Dep’t of Pub. Safety v. Moore, 985
S.W.2d 149, 153 (Tex. App.—Austin 1998, no pet.); see also City of Euless v.
Dallas/Fort Worth Int’l Airport Bd., 936 S.W.2d 699, 703 (Tex. App.—
Dallas 1996, writ denied) (if there is no actual controversy between parties,
declaratory judgment is improper).
“Section 37.004 does not . . . extend an open-ended invitation to
parties seeking interpretation of their contracts. There must be some
showing that litigation is imminent between the parties unless the
39
contractual uncertainties are judicially resolved.” Paulsen v. Texas Equal
Access to Justice Found., 23 S.W.3d 42, 46 (Tex. App.—Austin 1999, pet.
denied); see also In re City of Dallas, 977 S.W.2d 51, 57 (Tex. App.—Fort
Worth 1998, orig. proceeding). The Declaratory Judgments Act does not
permit litigants to “fish judicial ponds for legal advice.” California Prods.
v. Puretex Lemon Juice, Inc., 334 S.W.2d 780, 781 (Tex. 1960).
“The need for a justiciable controversy is related to the jurisdictional
concepts of standing and ripeness and does not supersede these concepts.”
LHR Enters., Inc. v. Geeslin, No. 03-05-00176-CV, 2007 WL 3306492, *4
(Tex. App.—Austin Nov. 7, 2007, pet. denied). Ripeness is a necessary
component of subject matter jurisdiction. Waco Indep. Sch. Dist. v.
Gibson, 22 S.W.3d 849, 850 (Tex. 2000); Atmos Energy Corp. v. Abbott,
127 S.W.3d 852, 857 (Tex. App.—Austin 2004, no pet.). “The requirement
that a claim be ripe for review is based on the prohibition against issuing
advisory opinions.” LHR Enters., 2007 WL 3306492 at *4 (citing
Patterson v. Planned Parenthood, 971 S.W.2d 439, 442 (Tex. 1998); TEX.
CONST. art. II, § 1 (separation of powers); Brooks, 141 S.W.3d at 164
(explaining that separation of powers provision bars issuance of advisory
opinions)). “[T]here must be a concrete injury for the claim to be ripe.” Id.
“A claim is not ripe if it is based on hypothetical or contingent facts that
40
may not occur as anticipated or may not occur at all.” Id.; see also Farmers
Ins. Exch. v. Rodriguez, 366 S.W.3d 216, 223 (Tex. App.—Houston [14th
Dist.] 2012, pet. denied) (declaratory claim was not ripe where parties’
liability for damages depended on outcome of a separate proceeding, which
had not yet finalized).
Based on these concepts, a “defendant may not use a declaratory
judgment to prematurely adjudicate defenses to liability that may not yet
exist. . . . [U]nder the federal constitution, [a] party may not use a
declaratory judgment to get [an] advance ruling on an affirmative defense.”
Transcont’l Realty Investors, Inc. v. Orix Capital Markets, LLC, 353
S.W.3d 241, 245 (Tex. App.—Dallas 2011, pet. denied) (emphasis added)
(noting that a declaratory claim seeking to “assess[] the success of a defense
to a potential claim (breach-of-contract or otherwise) is generally the type
of hypothetical question federal courts endeavor to avoid”). “The
declaratory judgment was not intended to permit the piecemeal trial of
lawsuits.” Id. (holding the court lacked jurisdiction to issue a premature
declaration regarding validity of contractual guarantee).
In Nexstar Broad., Inc. v. Gray, No. 09-07-00364-CV, 2008 WL
2521967, *2 (Tex. App.—Beaumont June 26, 2008, no pet.), the court held
that it was an improper use of the DJA for a party with potential liability
41
under a contract to seek a declaration that simply restated the “penalty”
affirmative defense and sought no relief beyond what that defense would
afford (i.e., avoidance of liquidated damages). This holding was based, in
part, on the fact that the parties had no ongoing relationship—as contrasted
from declarations in other cases that would settle future disputes of an
ongoing relationship between the parties. Id. (citing BHP Petro. Co. v.
Millard, 800 S.W.2d 838, 841-842 (Tex. 1990)).
Similarly, this Court held in LHR Enterprises that the district court
lacked jurisdiction to declare the meaning of the Insurance Commission’s
conclusion that it “may impose an administrative penalty” in certain
circumstances where there was no pending or impending action to seek
such a remedy from plaintiff. 2007 WL 3306492 at *5; see also State v.
Margolis, 439 S.W.2d 695, 697-98 (Tex. Civ. App.—Austin 1969, writ ref’d
n.r.e.) (where plaintiff merely alleged, without any supporting proof, that
defendant had “indicated an intention” to seek statutory penalty against
plaintiff, and defendant denied that allegation in its pleadings, there was no
evidence that a bona fide controversy existed giving rise to any justiciable
issues between the parties; hence, declaratory judgment was improper).7
7 LHR Enterprises and Margolis involved statutory penalties available to the State
in specified circumstances. While the cases are procedurally similar to the instant case
in that they presented un-ripe claims for declaratory relief related to the enforcement of
these remedies prior to a pending demand for their recovery, they are substantively
42
B. Strandhagen’s Claim Is Not Ripe.
The declaration sought by Strandhagen merely presents a
hypothetical or contingent question about what damages may be available
if the Physicians were to pursue a claim against her in the future for breach
of contract. Strandhagen only speculated that she has “learned . . . [the
Physicians] and perhaps others are seeking to pursue her for collection,”
but she failed to offer any proof that a live, justiciable controversy actually
existed. (CR.8, 112). The Physicians generally denied all of Strandhagen’s
allegations, specifically pled that her claim has not matured, and moved for
dismissal based on their specific contention to the contrary. (CR.74-75, 79).
A potential breach of contract suit against Strandhagen is not a certain,
imminent, or unavoidable controversy. At best, it is hypothetical or
contingent on other events. Hence, there is not a sufficiently ripe dispute
between these parties about which declaratory relief may be appropriately
granted. Strandhagen’s attempt to misuse the Declaratory Judgment Act to
obtain an advance ruling on her affirmative defense should be dismissed.
distinct in that they involved “penalties” rather than a liquidated damages clause as
here.
43
PRAYER
Based on the foregoing, Appellants respectfully pray that this Court
sustain both of their issues on appeal and reverse the district court’s grant
of Strandhagen’s Motion for Summary Judgment, its partial denial of the
Physicians’ Plea to the Jurisdiction, and its denial of the Physicians’ Motion
for New Trial. If the jurisdictional ruling is reversed, then this Court should
render judgment in favor of the Physicians dismissing Strandhagen’s claim
in its entirety. Otherwise, this Court should remand to the district court for
further proceedings.
Appellants further pray that this Court tax all costs against
Strandhagen, both in this Court and below, and award the Appellants any
such other relief at law or equity to which they may be justly entitled. Tex.
R. App. P. 43.4; Tex. R. Civ. P. 139.
Respectfully submitted,
MARTENS, TODD, LEONARD, TAYLOR & AHLRICH
By: __/s/ Amanda G. Taylor____
Amanda Garrett Taylor
ataylor@textaxlaw.com
Texas Bar No. 24045921
301 Congress Avenue, Suite 1950
Austin, Texas 78701
Tele: (512) 542-9898
Fax: (512) 542-9899
ATTORNEY FOR APPELLANTS
44
CERTIFICATE OF COMPLIANCE
I certify that this Appellants’ Brief complies with the typeface
requirements of Tex. R. App. P. 9.4(e) because it has been prepared in a
conventional typeface no smaller than 14-point for text and 12-point for
footnotes. This document also complies with the word-count limitations of
Tex. R. App. P. 9.4(i) because, according to the word-count tool of the
computer program used to prepare this document, it contains 8,855
words, excluding any parts exempted by Tex. R. App. P. 9.4(i)(1).
/s/Amanda Taylor__________
Amanda Taylor
CERTIFICATE OF SERVICE
I certify that a true and correct copy of this Appellants’ Brief was filed
electronically and served on all counsel via e-mail in compliance with Tex.
R. App. P. 9.5(b) and L.R.3 on this 14th day of January, 2015.
Daniel Byrne
DByrne@FBHH.com
Lessie Fiztpatrick
LFitzpatrick@FBHH.com
FRITZ, BYRNE, HEAD & HARRISON, PLLC
98 San Jacinto Blvd, Suite 2000
Austin, TX 78701
Telephone: (512) 476-2020
/s/Amanda Taylor__________
Amanda Taylor
45
NOTICE SENT~LOCUTORY NONE
DC BK14156 PG221
DISP PARTIES· ALL
DISP CODE: ~ CLS 'flRtCf
REDACT PGS:_ _ _-,:o-~-
NO. D-1-GN-13-002811
JUDQE OL!J CLERK.~~-
TRACYD.sT § IN THE DISTRICT COURT
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PLAINTIFF §
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v. §
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NOAH S. BUNKER, PAUL § 353rd JUDICIAL DISTRICT
CARRELL, EVERETT BREW §
HOUSTON, JR., W.ANDREW §
BUCHHOLZ, SCOTT J. LEIGHTY, §
JAD L. DAVIS, and HOLLY § ..... e"'