Opinion issued August 5, 2021
In The
Court of Appeals
For The
First District of Texas
————————————
NO. 01-19-00642-CV
———————————
JAMES J. MCKINLEY AND KIN-TEK LABORATORIES, INC., Appellants
V.
KIN-TEK ANALYTICAL, INC., Appellee
On Appeal from the 122nd District Court
Galveston County, Texas
Trial Court Case No. 17-CV-1218
MEMORANDUM OPINION
Appellants, James J. McKinley and Kin-Tek Laboratories, Inc. (“McKinley”
and “Laboratories” or, collectively, “appellants”), appeal from a final judgment
entered following a jury verdict in favor of appellee Kin-Tek Analytical, Inc.
(“Analytical”). In nine issues, appellants challenge the jury’s damages and attorney’s
fees awards. We affirm.
Background
McKinley founded Laboratories in 1970 and ran the company for decades as
its sole owner. Laboratories sold, manufactured, and supported chemical calibration
devices, including permeation tubes and calibration gas standard generators. The
calibration gas standard generators hold permeation tubes at a certain temperature,
which allows the permeation tubes to create a gas customers use to calibrate their
chemical analyzers, detectors, monitors, and other similar instruments. Laboratories
also made and sold standardized instruments, including calibration devices for about
600 different chemicals that can be customized to meet the customer’s particular
need.
Around 2011 or 2012, Laboratories “went into a decline.” McKinley reached
out to William Botts, whom McKinley had known for over 20 years, for help. Botts
worked part-time as a consultant to help Laboratories find potential investors.
Initially, Botts was paid a fee, but he later worked for free when Laboratories was
no longer able to pay him.
In 2013, McKinley approached Botts about Botts either buying or investing
in Laboratories himself. Botts and McKinley signed a Letter of Intent (“LOI”),
which contemplated the formation of a new company that would “purchase all the
2
assets and assume certain liabilities of [Laboratories],” as opposed to a personal
investment by Botts. Ultimately, the parties signed an Asset Purchase Agreement
(the “Agreement”) on February 14, 2014, whereby the new company, Analytical,
acquired Laboratories’ assets. The parties structured the deal as an asset purchase,
meaning the purchase price for Laboratories’ assets reflected its working capital. As
Laboratories’ working capital declined throughout negotiations, so did the purchase
price. The final purchase price in the Agreement was $50,000, which included
$36,564.92 in cash that Laboratories was allowed to keep and a cash payment of
$13,435.08 made by Analytical to Laboratories.
Botts holds 60 percent of Analytical’s shares, and McKinley holds the
remaining 40 percent. Under the Agreement, Analytical acquired all of Laboratories’
assets (except McKinley’s personal effects), but Analytical assumed only certain
liabilities specifically enumerated in the Agreement.
In October 2017, McKinley sued Botts and Analytical, alleging that Botts was
mismanaging Analytical and bringing causes of action for breach of contract,
conspiracy, tortious interference, and breach of fiduciary duty. Botts and Analytical
filed counterclaims against McKinley and third-party claims against Laboratories,
alleging that they breached the Agreement by making inaccurate representations and
warranties, failed to perform contractual duties, and failed to discharge liabilities
they retained under the Agreement. Botts and Analytical also alleged that they were
3
fraudulently induced by McKinley and Laboratories to execute the Agreement.
McKinley and Laboratories filed an amended petition, adding Laboratories as a
plaintiff, adding a cause of action for fraudulent inducement, and dropping their
cause of action for tortious interference.
In March 2019, shortly before trial, McKinley and Laboratories nonsuited
their claims against Botts and Analytical. The trial court realigned the parties to
designate Botts and Analytical as plaintiffs. At some point before trial, Botts
nonsuited his personal claims against McKinley and Laboratories, and the case
proceeded to trial on Analytical’s claims.1
The jury returned a verdict in favor of Analytical, finding that both McKinley
and Laboratories “fail[ed] to comply with the Agreement.” The jury awarded
Analytical a total of $274,134.41 in damages and $193,067.82 in attorney’s fees.
Specifically, as damages, the jury awarded:
• $16,437.93 for “[l]osses arising from uncollectable receivables”
• $57,138.12 for “[l]osses arising from obsolete or excess inventory”
• $26,525.34 for “[l]osses arising from liabilities for unused employee
vacation”
• $25,000 for “[l]osses arising from liabilities for product warranty costs”
1
Though a notice of nonsuit of Botts’s claims is not included in the clerk’s record,
the trial court’s jury charge and judgment identify Analytical as the only plaintiff
and only award damages only to Analytical.
4
• $17,550 for “[l]osses arising from product documentation issues”
• $33,439 for “[l]osses arising from product design issues”
• $41,559 for “[l]osses arising from failure to disclose material facts”
• $45,985 for “[l]osses arising from obsolete or malfunctioning
equipment”
• $10,500 for “[l]osses arising from failure to remove hazardous
materials”
McKinley and Laboratories moved for judgment notwithstanding the verdict
(“JNOV”). The trial court denied the JNOV motion and entered a final judgment in
Analytical’s favor. This appeal followed.2
Excluded Liabilities
In their first issue, appellants argue that, as a matter of law, Analytical is not
entitled to recover $125,101.39 in damages for “Excluded Liabilities,” including
uncollectable receivables, obsolete or excess inventory, unused employee vacation,
and product warranty costs. In their second related issue, appellants argue that the
evidence is legally and factually insufficient to support these damages because Botts
knew or should have known the amount of these items before signing the Agreement.
2
McKinley timely filed a notice of appeal. The notice of appeal was amended to
include Laboratories as an additional appellant before the appellants’ brief was filed.
See TEX. R. APP. P. 25.1(g).
5
A. Standard of Review and Applicable Law
In a legal-sufficiency review, we consider the evidence in a light most
favorable to the jury’s verdict, indulging every reasonable inference that would
support it, crediting favorable evidence if reasonable jurors could, and disregarding
contrary evidence unless reasonable jurors could not. City of Keller v. Wilson, 168
S.W.3d 802, 827 (Tex. 2005); Republic Petroleum LLC v. Dynamic Offshore Res.
NS LLC, 474 S.W.3d 424, 433 (Tex. App.—Houston [1st Dist.] 2015, pet. denied).
We sustain a legal-sufficiency challenge only when: (1) the record discloses a
complete absence of evidence of a vital fact; (2) the court is barred by rules of law
or evidence from giving weight to the only evidence offered to prove a vital fact;
(3) the evidence offered to prove a vital fact is no more than a mere scintilla; or
(4) the evidence establishes conclusively the opposite of the vital fact. Regal Fin.
Co. v. Tex Star Motors, Inc., 355 S.W.3d 595, 603 (Tex. 2010) (citing Merrell Dow
Pharms., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex. 1997)). We defer to the jury’s
determination of the witnesses’ credibility and the weight to accord their testimony.
City of Keller, 168 S.W.3d at 819; Republic Petroleum, 474 S.W.3d at 433.
In a factual-sufficiency review, we consider all the evidence in a neutral light
and set aside the jury’s verdict only if it is so contrary to the overwhelming weight
of the evidence as to be clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175,
176 (Tex. 1986); Republic Petroleum, 474 S.W.3d at 433. Jurors are entitled to
6
resolve inconsistencies in witness testimony, whether those inconsistencies result
from the contradictory accounts of multiple witnesses or from internal contradictions
in the testimony of a single witness. McGalliard v. Kuhlmann, 722 S.W.2d 694, 697
(Tex. 1986); Republic Petroleum, 474 S.W.3d at 433.
We construe contracts as a matter of law, absent ambiguity. Moayedi v.
Interstate 35/Chisam Rd., L.P., 438 S.W.3d 1, 7 (Tex. 2014). Our primary concern
is to ascertain and give effect to the parties’ true intentions as expressed in the
agreement. El Paso Field Servs., L.P. v. MasTec N. Am., Inc., 389 S.W.3d 802, 805
(Tex. 2012). “We consider the entire writing and attempt to harmonize and give
effect to all the provisions of the contract by analyzing the provisions with reference
to the whole agreement.” Frost Nat’l Bank v. L & F Distribs., Ltd., 165 S.W.3d 310,
312 (Tex. 2005) (per curiam). “No single provision taken alone will be given
controlling effect[.]” J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229
(Tex. 2003). We give contract terms their plain, ordinary, and generally accepted
meanings unless the contract itself shows them to be used in a technical or different
sense. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex. 2005).
Unless the court finds a contract ambiguous, a contract’s meaning and intent
is determined from the four corners of the document without the aid of extrinsic
evidence. Chapman v. Hootman, 999 S.W.2d 118, 123 (Tex. App.—Houston [14th
Dist.] 1999, no pet.). A contract is ambiguous when it is reasonably susceptible to
7
more than one meaning. See Italian Cowboy Partners, Ltd. v. Prudential Ins. Co.,
341 S.W.3d 323, 333 (Tex. 2011). A lack of clarity or disagreement over the
interpretation of contract language does not make a contract ambiguous. Universal
Health Servs., Inc. v. Renaissance Women’s Group, P.A., 121 S.W.3d 742, 746
(Tex. 2003).
B. Analysis
Under Article 4 of the Agreement, Analytical agreed to “assume[,] pay,
satisfy, discharge, perform and fulfill . . . certain obligations and liabilities of
[Laboratories] described on the attached Exhibit B.” The Agreement also provided
that no other liabilities, other than those described in Exhibit B, would be assumed
by Analytical. It stated that:
[Analytical] expressly disclaim[ed] responsibility for . . . any and all
Losses and obligations . . . except those items in Exhibit B and not to
exceed the amounts set beside each item. All other liabilities not
identified and/or expressly cited in Exhibit B Assumed Liabilities are
expressly disclaimed by [Analytical] and [Analytical] shall not be
responsible for, and shall not assume nor be obligated to pay, perform
or discharge any liabilities of [Laboratories].
(Emphasis added.) Further, McKinley and Laboratories agreed to indemnify
Analytical for their failure to satisfy any liability or obligation other than those
Assumed Liabilities described in Exhibit B.
8
Exhibit B to the Agreement set forth the specific liabilities Analytical agreed
to assume, stating that “[l]iabilities not Included on Seller Financial Statements as
listed below will be assumed up to the amounts set beside each below:”
(Emphasis added.) Exhibit B then provided that “[a]ny amounts exceeding the
estimate set forth above shall be the responsibility of [McKinley] and [Laboratories]
and shall be Excluded Liabilities.”
Both sides argue that this provision is unambiguous, but they offer a different
interpretation. According to appellants, although Exhibit B includes provisions for
“Excluded Liabilities,” those provisions “are only for amounts above Exhibit B’s
stated amounts.” Appellants argue that any damage award for the four categories
above—what appellants call the Excluded Liabilities—is contrary to the plain
language of the Agreement because the parties chose not to include a specific dollar
amount for these categories. Stated another way, because the contract did not include
a specific dollar amount for these four categories, Analytical assumed liability for
any and all amounts related to these four categories. In contrast, Analytical argues
that it assumed no liability at all because the Agreement states “No estimate
9
provided” for each of these four categories and because no amount was “set beside
each below.”
Reading all parts of the Agreement together and giving effect to each word,
clause, and sentence, as we must, we agree with Analytical. We conclude that
although Analytical expressly agreed to assume liability for uncollectable accounts
receivable, product warranties, unused employee vacation, and obsolete and excess
inventory, it did so limiting its liability to the amounts expressly stated in Exhibit B.
Because there was no amount set beside these categories, McKinley and
Laboratories retained all liability for these four categories as articulated in Exhibit
B and as found by the jury.
In Article 4 and Exhibit B of the Agreement, Analytical expressly disclaimed
any and all liabilities not specifically set forth in Exhibit B and expressly stated that
it was assuming the liabilities set forth in Exhibit B only up to the amounts stated
beside each category. The plain meaning of this language indicates that the estimate
provided would be the upper limit of what Analytical would be responsible for
paying, i.e., it would assume liability in an amount less than or equal to, but no more
than, the estimated amount. See Up to, MERRIAM-WEBSTER’S COLLEGIATE
DICTIONARY, (11th ed. 2020) (“used as a function word to indicate a limit or
boundary”); see also Up to, CAMBRIDGE DICTIONARY,
https://dictionary.cambridge.org/us/dictionary/english/up-to, last visited July 22,
10
2021 (“used to say that something is less than or equal to but not more than a stated
value, number, or level” ). Because “[n]o estimate [was] provided,” however, there
was no “amount set beside each” category and, therefore, Analytical did not assume
any amount. This is the only reasonable interpretation because it takes into account
the language in the Agreement that Analytical was assuming only certain liabilities
expressly included, and only for certain amounts explicitly stated. Anything else not
expressly disclosed was to be an Excluded Liability.
In reaching this conclusion, we are unpersuaded by appellants’ contention that
Analytical should have known the amounts for these four categories because Botts
“had full access to Laboratories accounting records prior to signing the Agreement”
and, therefore, Analytical assumed these liabilities in any and all amounts. That
Botts arguably could have determined the estimated amounts for these four
categories—an issue we do not decide—does not change the language of the
Agreement, which explicitly limited the Assumed Liabilities to those “amounts set
beside each” specific category set forth in Exhibit B. And appellants cite to no
authority to support their contention that their characterization of Botts as an
“insider” and “experienced corporate savior” would affect this Court’s interpretation
of this unambiguous Agreement.
We conclude that for uncollectable receivables, product warranty costs,
unused employee vacation, or obsolete or excess inventory, the amount that
11
Analytical assumed liability for was zero, and that any amounts above zero for these
liabilities were Excluded Liabilities under the Agreement.
Furthermore, to the extent that appellants’ second issue can be construed as
challenging the sufficiency of the evidence supporting the jury’s findings awarding
Analytical $16,437 for uncollectable accounts receivable, $57,138.12 for product
warranties, $26,525.34 for unused employee vacation, and $25,000 for obsolete and
excess inventory, we conclude there is legally and factually sufficient evidence to
support these findings. Botts testified that the amounts for these items should have
been included in Laboratories’ financial statements but were not.
After the Agreement was executed, Analytical filed an IRS Form 8594, which
is a form that must be filed after the sale or purchase of a business. This form must
be filed by both parties to the transaction, as it is “a reflection of their agreement for
the transaction involved.” Analytical introduced the Form 8594, as Plaintiff’s
Exhibit 12, that it filed after executing the Agreement based on information provided
by its accountant Doug Dickie, and Botts testified that McKinley agreed to the
amounts reflected in Exhibit 12. Analytical’s Form 8594 reflected a total amount of
assets purchased (or purchase price) of $284,552, the same amount of liabilities
assumed. Included in that total amount of liabilities was $16,437 for uncollectable
accounts receivable, $57,138.12 for product warranties, $26,525.34 for unused
employee vacation, and $25,000 for obsolete and excess inventory.
12
Considering the evidence in a light most favorable to the jury’s findings and
indulging every reasonable inference to support them, we conclude there is legally
sufficient evidence to support the jury’s total award of $125,101.39 in damages for
uncollectable accounts receivable, product warranties, unused employee vacation,
and obsolete and excess inventory. See City of Keller, 168 S.W.3d at 827. Likewise,
we conclude that the jury’s findings are not so contrary to the overwhelming weight
of the evidence as to be clearly wrong and unjust and, therefore, there is factually
sufficient evidence to support the jury’s damages. See Cain, 709 S.W.2d at 176.
We overrule appellants’ first and second issues.
Sufficiency of the Evidence of Other Damages
In their third, fourth, fifth, sixth, and seventh issues, appellants challenge the
legal and factual sufficiency of the evidence supporting the jury’s findings awarding
damages for product documentation issues, product design issues, failure to disclose
material facts, obsolete equipment, and failure to remove hazardous materials.
Applying the legal- and factual-sufficiency standards set out above, we address each
issue in turn.
A. Product Documentation Issues
In their third issue, appellants contend there was legally and factually
insufficient evidence to support the jury’s finding that $17,550 would fairly and
reasonably compensate Analytical for its damages that resulted from product
13
documentation issues. They argue that Botts never testified why “Laboratories could
somehow make these products or use these systems, but Analytical could not do so.”
And they contend that there was no evidence that a product documentation issue
existed at the time of the Agreement. Therefore, appellants urge this Court to strike
the $17,550 damages for product documentation issues.
McKinley and Laboratories represented and warranted in Article 5(AC) of the
Agreement that:
each product has adequate manufacturing documentation, including
drawings, specifications, manufacturing process descriptions, bill of
material, assembly instruction and test procedure so that a worker of
average skill in manufacturing will be able to assemble and test such
product to conform with published specifications.
Botts explained that having proper product documentation was important because
Analytical makes “technical products” that “people use to calibrate their devices.”
Many of these products have a number of different component parts that must “fit
[and] function together,” which makes it “critically important that documentation is
available to make all of these products.” Botts further testified that he would not
have been able to discover all the issues related to product documentation during the
due-diligence process because “[y]ou really find out when you make the product.”
Botts testified that although it was “certainly possible” to hire a consultant during
the due-diligence process to ensure that everything was correct, it would have been
“cost prohibitive” due to the number of products made and chemicals used by
14
Laboratories. “It would have cost more to do the due diligence than it did to buy the
company.” Instead, he spoke to McKinley to confirm there was adequate product
documentation and relied on McKinley’s representations that there was.
Botts testified, however, that the representation related to adequate product
documentation contained in the Agreement was not true, and that Analytical incurred
$17,550 in costs “relating to information that was not available regarding
equipment . . ., how to operate the equipment, and product information
documentation.” Specifically, Botts testified to product documentation issues related
to six systems or pieces of equipment—the permeation cylinder, the quote system,
the gauge system, solenoid brackets, Span Pac/H20 Silk Screen, and the heater oven.
Contrary to appellants’ assertion, Botts did testify as to why Analytical could
not make these products or use these systems. With respect to these items, Botts
testified that the product documentation and information was either incorrect (for
the permeation cylinder and quote system), missing entirely (for the gauge system,
solenoid brackets, and Span Pac/H20 Silk Screen), or incomplete (for the heater
oven). Finally, and despite appellants’ assertion to the contrary, Botts testified that
these issues did not arise in the years after the Agreement but were present at the
time the parties entered into the Agreement.
Considering the evidence in a light most favorable to the jury’s finding and
indulging every reasonable inference to support it, we conclude there is legally
15
sufficient evidence to support the award of $17,550 for product documentation
issues. See City of Keller, 168 S.W.3d at 827. Likewise, we conclude that the jury’s
finding is not so contrary to the overwhelming weight of the evidence as to be clearly
wrong and unjust and, therefore, there is factually sufficient evidence to support the
award of $17,550 for product documentation issues. See Cain, 709 S.W.2d at 176.
We overrule appellants’ third issue.
B. Product Design Issues
In their fourth issue, appellants contend there was legally and factually
insufficient evidence to support the jury’s finding that $33,439 would fairly and
reasonably compensate Analytical for its damages that resulted from product design
issues related to the HG10 Liter Humidification Module. Appellants argue that the
evidence does not establish that any product design issues existed at the time of the
Agreement, nor does the evidence establish that there was a “HG10 product line
wide flaw,” only that one customer had a problem with its product.
McKinley and Laboratories represented and warranted in Article 5(AC) of the
Agreement that:
all product designs are free of defects which would prevent products
manufactured therefrom from properly performing, functioning, and
complying with published specifications and representations as to such
products made in any publication by [Laboratories], including sales
brochures and other marketing materials, etc.
16
Two witnesses testified for Analytical on the design issues associated with the HG10
Liter Humidification Module (“HG10”): Botts and Danet Vrazel, vice president and
general manager of Analytical. Botts testified that McKinley’s and Laboratories’
representation that all product designs were free from defects was important because
a “product will not work if it has defects in it. And if it works some, it may not have
long-term reliability.” He admitted that he was neither a chemist nor a design
engineer and that he would not have been able to tell if a defect existed in a product
during the due-diligence process because “[y]ou really only find out when you make
the product.” Botts testified that appellants’ representations that the products were
free from design defects was not true because the product design for the HG10 was
defective. He explained that the HG10, in layman’s terms, was designed to “create
a humidity that will have a calibration standard,” or stated another way, to create an
“air sample that has a certain amount of humidity in it.” He testified that an issue
arose when Analytical sold the HG10 to a customer and that customer reported back
that the product was not working properly. As a result, and at McKinley’s direction,
Analytical engaged Martin Company to remedy the issue. Botts testified that
Analytical suffered losses in the amount of $33,439 because of this product design
issue, which included costs related to Martin Company’s invoices, in-house costs
(including time spent by McKinley working with Martin Company), materials, and
warranty.
17
Vrazel testified in more detail about the HG10 and design issues. She testified
that the HG module “will add humidified gas to a calibration gas stream in order to
create a variable level of humidity” and “can calibrate monitors that . . . would
require or be out in an atmosphere where there’s humidity.” Vrazel further testified
that Analytical’s standard HG module is the 5-liter system, and that the 10-liter
system includes “an option to allow a higher dilution gas to go into the gas-stream.”
She explained that the HG module’s design was completed in 2012 or 2013, before
the execution of the Agreement.
She testified, however, that after the parties entered the Agreement, Analytical
was contacted by one of its representatives who sold the HG10 to a customer in the
United Kingdom (“UK”). The representative informed Analytical of an issue the
customer was having with the instrument. As Vrazel explained, the HG10 “was
designed to be automated and allow relative humidity [to be calibrated] on an
automated basis.” In this instance, Analytical discovered that the automation part of
the instrument was not working properly. Vrazel testified that the issue was thought
to be related to a software problem.
Vrazel also testified that, shortly after discovering the issue with the HG10,
Analytical discovered that four of the 5-liter modules, which had been sold to the
United States Air Force, were also not stabilizing well and having the same
automation issue. At that point, Analytical “realized that something needed to be
18
done.” Analytical engaged Jim McCabe and Martin Company. McCabe was a
former employee of Laboratories who was involved with the development of the
software and design of the HG modules. He worked for Laboratories from about
2006 until 2011 or 2012, when he went to Martin Company. McCabe helped resolve
some of the issues with the HG10, as he “knew all about the instrumentation.”
According to the invoices submitted by Martin, McCabe completed his work in
2016.
Vrazel admitted during cross-examination that McKinley informed the
customer that they should be able to use the HG10 in non-automated mode—“simply
flip it from automated to nonautomated”—and “get the requirements that they
wanted.” She also testified that she did not know if the customer was using the HG10
as designed. Finally, Vrazel testified that the 5-liter system used by the Air Force
was different than the HG10 liter module.
Appellants claim that this evidence fails to demonstrate that any alleged defect
existed at the time of the Agreement or that the design defect was product wide. We
disagree. As noted above, Vrazel testified that the design for the HG10 module was
completed in about 2012, before the Agreement was executed. She also testified that
Analytical brought in McCabe and Martin Company to resolve the issues with the
HG10 once the issues were discovered because McCabe knew the instrumentation
and was involved in the development of the software and overall design. Further,
19
she testified that the problem with the HG10 was believed to be a “software issue.”
Because the HG10’s design was completed around 2012, and because Analytical (at
the recommendation of McKinley) chose to bring in a person who was familiar with
the overall design and software used in the HG10 to remedy what was believed to
be a software issue, the jury reasonably could have inferred that the problem with
the HG10 was in fact a flaw in the original design that existed prior to the time of
the Agreement in 2014.
Considering the evidence in a light most favorable to the jury’s finding and
indulging every reasonable inference to support it, we conclude there is legally
sufficient evidence to support the award of $33,439 for product design issues. See
City of Keller, 168 S.W.3d at 827. Likewise, we conclude that the jury’s finding is
not so contrary to the overwhelming weight of the evidence as to be clearly wrong
and unjust and, therefore, there is factually sufficient evidence to support the award
of $33,439 for product design issues. See Cain, 709 S.W.2d at 176.
We overrule appellants’ fourth issue.
C. Failure to Disclose Material Facts
In their fifth issue, appellants contend there was legally and factually
insufficient evidence to support the jury’s finding that $41,559 would fairly and
reasonably compensate Analytical for its damages that resulted from the failure to
disclose material facts. Appellants argue that these damages were awarded for
20
“post-Agreement product issues” related to component parts used in manufacturing
two Analytical products—Model No. 491 and FlexStream—even though there was
insufficient evidence that appellants failed to disclose that these issues existed prior
to the Agreement.
McKinley and Laboratories represented and warranted in Article 5(AE) of the
Agreement that:
Full Disclosure. Neither this Agreement nor any certificate, report,
statement or other document delivered or to be delivered to [Analytical]
by [Laboratories] in connection with the negotiation of this Agreement
or consummation of the transactions contemplated hereby contains or
will contain any untrue statement of a material fact or omits or will omit
to state a material fact necessary to make the statements contained
herein or therein not misleading.
Botts testified that, despite this representation, significant issues were not disclosed
by appellants. First, Botts testified that there was an issue with the touch screen for
the FlexStream, which was the “No. 1 selling product” for Analytical. A few months
after the Agreement was executed, Analytical discovered that the manufacturer of
the touch screen had discontinued the touch screen. Botts testified that he
investigated this issue personally, “trying to understand how in the world can [a]
supplier discontinue a part they know their customers are using in their
products . . . as a surprise.” But when Botts contacted the manufacturer, he
discovered that the manufacturer had in fact notified their customers. Botts further
testified that this was a “known situation” before the parties entered the Agreement,
21
and ultimately required a redesign of the FlexStream product at an increased cost of
$200 per unit. Finally, in total, Analytical presented evidence that it cost $24,946 to
resolve the issue related to the FlexStream, which included consultant fees, higher
unit costs, and fees related to Analytical employees’ time spent addressing this issue.
Appellants point to Botts’s testimony that the manufacturer did not
discontinue the touch screen until after the Agreement was entered into in February
2014 in support of their argument that there is no evidence they failed to disclose an
issue that existed at the time of the Agreement. While it is true that Botts testified
that Analytical became aware of the issue with the touch screen “a few months after
the Asset Purchase Agreement,” he also testified that the manufacturer had notified
its customers that it was discontinuing the touch screen before doing so. Viewing
this testimony in conjunction with Botts’s other testimony that the issue with the
FlexStream touch screen was a “known situation before the transaction,” the jury
could have reasonably inferred that the manufacturer informed Laboratories that it
was discontinuing the touch screen before the parties entered into the Agreement in
February 2014, even though the touch screen was not actually discontinued until
after the Agreement. Accordingly, despite appellants’ assertion to the contrary, there
was evidence presented that this issue related to the FlexStream touch screen existed
before the execution of the Agreement and should have been disclosed.
22
Botts also testified to an issue with a second product—Kin-Tek Product
Model No. 491—that was not disclosed. He testified that Model No. 491 was a heater
controller and Analytical’s “second most important product in the company at the
time.” Analytical learned after the Agreement that this product contained obsolete
parts, meaning “the supplier of the part[] had already discontinued it.” Laboratories
had been using replacement parts from “a secondary market source [for] these
obsolete parts, [and] had them on a shelf and were using them.” Botts testified that
Analytical was not informed at the time of the Agreement that the Model No. 491
was “being built with parts that were no longer being produced,” but that information
“absolutely would have been” important to know. Botts further testified that
Analytical incurred $16,613 in costs related to this product, which included
consultant fees, material and inventory costs, and costs related to Analytical
employees’ time spent to resolve this issue. The Model No. 491 was ultimately
discontinued because of the discontinued component part, and, because of the part
change, it would have required a redesign of the Model No. 491 with new parts for
it to continue to be manufactured.
From this evidence—particularly Botts’s testimony that Laboratories was
obtaining substitute parts for Model No. 491 from a secondary market source—the
jury could have reasonably inferred that Laboratories knew at the time of the
Agreement that the Model No. 491 was being made with obsolete parts.
23
Accordingly, despite appellants’ assertion to the contrary, there was evidence
presented that this issue related to the Model No. 491 existed before the execution
of the Agreement and should have been disclosed.
Considering the evidence in a light most favorable to the jury’s finding and
indulging every reasonable inference to support it, we conclude there is legally
sufficient evidence to support the award of $41,559 for the failure to disclose
material facts. See City of Keller, 168 S.W.3d at 827. Likewise, we conclude that the
jury’s finding is not so contrary to the overwhelming weight of the evidence as to be
clearly wrong and unjust and, therefore, there is factually sufficient evidence to
support the award of $41,559 for the failure to disclose material facts. See Cain, 709
S.W.2d at 176.
We overrule appellants’ fifth issue.
D. Obsolete and Malfunctioning Equipment
In their sixth issue, appellants argue that there was legally and factually
insufficient evidence to support the jury’s finding that $45,985.02 would fairly and
reasonably compensate Analytical for its damages that resulted from obsolete or
malfunctioning equipment, including a 57-gauge, a dry calibration device, a welder,
ground fault testing equipment, and an eyewash station. According to appellants, the
evidence does not establish that any of this equipment was obsolete or
malfunctioning on the date of the Agreement.
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McKinley and Laboratories represented and warranted in Article 5(E) of the
Agreement that the assets were sufficient to carry on the business:
Sufficiency of the Assets: The Assets to be sold to [Analytical]
hereunder constitute all of the assets used in the Business except for the
Excluded Assets, and are sufficient to carry on such Business as carried
on by [Laboratories] on or prior to the Closing Date. With the exception
of Inventory and Inventory Supplies in transit and [Laboratories’]
mobile equipment located at or traveling to or from sites in connection
with the performance by [Laboratories] of on-going Contracts, all the
tangible assets are situated at [Laboratories’] business address.
Botts testified that there were five pieces of equipment that were malfunctioning or
not working at all and that Analytical sought damages for a 57-gauge, a dry
calibration device, a welder, ground fault testing equipment, and an eyewash station.
1. 57-gauge
With respect to the 57-gauge, Botts testified that there were certain parts on
the gauge system that did not work, and that Analytical had to purchase replacement
parts for those that were not working. Botts testified that the total cost for these parts
was $8,154. Botts stated it was his understanding that the 57-gauge was not working
at the time of the Agreement, and that this piece of equipment was necessary for
Analytical’s business.
He admitted on cross-examination that he did not know exactly when the
component part of the equipment failed, but that “no one [at Analytical] was made
aware of it until after we had done the deal.” He explained that he discovered it was
not working when he saw an order for a certain product, but the product had not been
25
made or shipped yet. Botts was informed by Mike McKinley, McKinley’s son, that
the 57-gauge was broken and that they did not have the money to buy a replacement
part. Botts disagreed that the 57-gauge broke after the Agreement, testifying that he
was informed by “people in the lab” that “it had been broken for a while.” In light
of this evidence, we disagree with appellants’ assertion that there was insufficient
evidence that the 57-gauge was not working at the time of the Agreement.
2. Dry Calibration Device
The next piece of equipment Botts testified about was the dry calibration
device, which is a piece of equipment that is required as a part of the manufacturing
process for other Analytical products. Specifically, the dry calibration device is
“required to perform the final test of a product confirming that it meets its
specifications.” Botts testified that, at the time of the Agreement, the dry calibration
device “apparently . . . did not work.” Further, Botts testified that he was “told [the
dry calibration device] had not been working.” Analytical introduced an exhibit,
dated five days after the Agreement, for a replacement dry calibration device, the
cost of which was $7,800. Botts testified that this was not a cost that Analytical
anticipated incurring at the time of the Agreement. Despite appellants’ assertion to
the contrary, there was evidence introduced that the dry calibration device was not
working at the time of the Agreement.
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3. Welder
The third piece of malfunctioning equipment about which Botts testified was
a welder, which is a “welding machine that is used to weld certain parts in the Kin-
Tek [Analytical] product line.” But the welder that Analytical had “did not work.”
Botts testified that Analytical incurred costs of $27,394 to rent a welder on two
different occasions (once in 2016 and once in 2018) and then purchase a new welder
(in 2019). These costs were not anticipated by Analytical at the time it entered into
the Agreement.
On cross-examination, Botts testified that Analytical discovered the welder
did not work “several months after the [Agreement].” He admitted he did not know
whether the welder was working on the day of the Agreement. He explained, “The
welder was only used when we had a certain piece of equipment on order . . . from
customers,” and there had not been “a piece of that equipment purchased for a
while.” He also testified that “the historical trend of the sales of the product that’s
welded . . . [was] only a few a year,” which was “one of the reasons it was not
evident that this welder did not work” until 2016, after the Agreement.
Appellants argue that this testimony shows that “the welder must have been
working at least through November 2016 to handle those few times a year welding
needs to which Botts testified.” We disagree. Botts did not testify that the product
that required the welder had in fact been purchased in 2014 or 2015, only that there
27
had not been “a piece of that equipment purchased for awhile.” He further explained
that because this piece of equipment was not purchased often, this was one of the
reasons Analytical did not discover that the welder was not working until 2016. From
this, the jury reasonably could have inferred that the welder was not working at the
time of the Agreement.
4. Ground Fault Test Equipment
The next piece of equipment about which Botts testified was the ground fault
test equipment. Botts testified that this device “tests an electrical property of a piece
of equipment[ ] and . . . ensures that the equipment is grounded.” He explained that
an electrical test is required for products with a “CE certification,” which is an
“European certification mark that has to be put on equipment when you sell into
Europe.” “[S]ome time after the [Agreement,]” Analytical discovered that the test
was not being performed because “the piece of equipment . . . doing the test . . . had
failed and had been put on the shelf and been sitting there and everybody ignored
it.” Botts testified that he believed the ground fault testing device had been broken
for “over a year and had been put on the shelf and unused.”
On cross-examination, Botts further testified that he learned there was a
problem with the ground fault test equipment two years after the Agreement. Botts
testified that he was told that this piece of equipment was left by a UK sales
representative, but that it had never worked and, therefore, Laboratories had never
28
performed the required electrical test. Botts confirmed that Laboratories was not
performing the electrical test at the time of the Agreement. He further stated that
Laboratories was not in compliance with the CE Certification because it was not
performing the electrical test, despite putting the certification mark on the
equipment. He knew that Laboratories was not in compliance because they were not
performing the electrical test because the ground fault testing equipment did not
work, and Botts was told by Laboratories employees that the electrical test was not
being performed.
Appellants contend that because the issue with the ground fault test equipment
did not come to light until two years after the Agreement, and because Botts testified
he did not ask questions about the equipment until after the Agreement, “one can
only assume that Analytical never bothered checking to see if [the] equipment was
functional . . . at the time of the Agreement.” We disagree. The above evidence
shows that: (1) though Laboratories had this testing equipment, it never worked;
(2) Laboratories never performed the ground fault test; and (3) Laboratories was not
performing this required test at the time of the Agreement. From this evidence, the
jury could have reasonably concluded that the ground fault testing equipment was
not working at the time of the Agreement.
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5. Eyewash Station
The final piece of equipment about which Botts testified was the eyewash
station. Botts testified that a chemical laboratory is required to have certain safety
devices, one of which is an eyewash station where employees can wash their eyes in
the event chemical vapor is released into the air. Botts testified that although
Laboratories had an eyewash station, it did not work. Botts testified that the eyewash
station was “necessary for safety” and that, in his mind, he “wouldn’t run a business
without it.” The eyewash station cost $837.50 to replace in September 2015. Botts
testified that Analytical was not aware that the eyewash station was broken when it
purchased Laboratories’ assets.
Appellants argue that this evidence “does not mean that the eyewash station
was in fact broken at all.” They argue again that “one can only assume that
Analytical never bothered checking to see if [the] equipment was functional . . . at
the time of the Agreement.” We disagree. Botts explicitly testified that the eyewash
station did not work. The jury could have reasonably inferred from this testimony,
combined with his testimony that Analytical did not know it was broken at the time
of purchase (i.e., the Agreement), that the eyewash station was in fact broken at the
time of the Agreement.
Considering the evidence in a light most favorable to the jury’s finding and
indulging every reasonable inference to support it, we conclude there is legally
30
sufficient evidence to support the award of $45,985.02 for obsolete or
malfunctioning equipment. See City of Keller, 168 S.W.3d at 827. Likewise, we
conclude that the jury’s finding is not so contrary to the overwhelming weight of the
evidence as to be clearly wrong and unjust and, therefore, there is factually sufficient
evidence to support the award of $45,985.02 for obsolete or malfunctioning
equipment. See Cain, 709 S.W.2d at 176.
We overrule appellants’ sixth issue.
E. Failure to Remove Hazardous Materials
In their seventh issue, appellants argue that there is legally and factually
insufficient evidence to support the jury’s finding that $10,500 would fairly and
reasonably compensate Analytical for its damages that resulted from the failure to
remove hazardous materials.
Laboratories represented in Article 8(E) of the Agreement that it would
dispose of certain chemicals and other materials:
Sublease. Pursuant to the Sublease Agreement in Exhibit I,
[Laboratories] who is the Sublessor in such agreement, agrees to make
disposition of certain chemicals, expired permeation tubes, canisters,
and other materials identified by a label marked “Waste” and for safety
reasons located in designated places on Leased Premises as follows:
expired permeation tubes and one (1) chlorine gas canister having a
corroded valve on the gated patio outside the lab area; expired chemical
raw materials, generally in glass bottles, in the chemical storage room
atop the chemical storage cabinets; and 3 empty gas canisters on the
floor of the chemical room. Such obligations of Sublessor are
specifically not assumed by Sublessee. Such Disposal will be
completed within 90 days from the effective date of the sublease.
31
Question 3 of the trial court’s charge to the jury asked the jury to consider
whether to award damages to Analytical as a result of its “[l]osses arising from
failure to remove hazardous materials, if any.” Appellants contend that the evidence
presented “does not establish that the subject materials were hazardous needing
some outside company’s expertise to handle the disposal” and, therefore, there is
insufficient evidence supporting the jury’s damage award.
The jury charge did not define “hazardous materials,” and appellants did not
object to the lack of a definition. Thus, here, we must measure the sufficiency of the
charge against the commonly understood meaning of “hazardous materials.” See
Nowlin v. Keaton, No. 01-17-00523-CV, 2019 WL 1996483, at *25 (Tex. App.—
Houston [1st Dist.] May 7, 2019, no pet.) (mem. op.) (considering sufficiency of
evidence in light of commonly understood meaning of “keyless dead bolt” because
jury charge did not define the term and parties did not object to lack of definition);
Fenner v. Samson Res. Co., No. 01-03-00049-CV, 2005 WL 2123043, at *3 (Tex.
App.—Houston [1st Dist.] Aug. 31, 2005, pet. denied) (construing “surface”
according to its plain and ordinary meaning where neither parties’ agreement nor
jury charge defined the term); see also Osterberg v. Peca, 12 S.W.3d 31, 55 (Tex.
2000) (holding, when no objection is made to jury charge, sufficiency of evidence is
measured against charge given rather than some other unidentified law).
“Hazardous” is defined in Merriam-Webster’s Collegiate Dictionary as “involving
32
or exposing one to risk (as of loss or harm).” Hazardous, MERRIAM-WEBSTER’S
COLLEGIATE DICTIONARY, (11th ed. 2020).
Botts testified that as part of the Agreement, Laboratories agreed to remove
certain chemicals from the property and did remove some of those chemicals. After
the Agreement was signed, however, as new employees came in to work for
Analytical, they discovered additional chemicals needing disposal. These chemicals
were present on the property at the time of the Agreement and were manufactured
or purchased well before the Agreement. Botts testified that Analytical received a
bid to dispose of these chemicals from Clean Harbor for $10,500, and this amount
was reflected on Analytical’s exhibit detailing its damages for “Hazardous chemicals
disposal.”
Vrazel, whose education and background is in chemistry and who had worked
for Laboratories since 2001, testified in detail about the specific chemicals for which
Analytical sought damages. She testified that there were a handful of chemicals that
need to be disposed of that remain at Analytical, which are kept in a chemical storage
room, and that were present at the time of the Agreement. The chemicals included
“an actual gas cylinder of pure arsine,” which was a “very old cylinder,” as well as
cylinders of phosphine, chlorine, and hexafluorine. Vrazel testified that the
hexaflourine cylinder expired in April of 1995.
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Vrazel also testified that, in addition to the cylinders, there were a number of
permeation tubes stored in the chemical room that were “very old, contaminated,
particulates inside, corroded, or degraded, obsolete and defective[.]” A number of
these permeation tubes had calibration dates of 2004. Vrazel testified that there were
around 245 to 250 permeation tubes that have not been disposed of but cannot simply
be thrown away with chemicals still inside because “the different type of chemicals
would require a different type of neutralization or disposal process.”
Vrazel stated that although an Analytical technician could probably neutralize
and dispose of some of the permeation tubes, disposing of others would require that
certain disposal procedures be followed, and it would take time and effort to research
the requirements for each different chemical. Vrazel contacted a vendor, Clean
Harbor, whose business is to “dispose of chemicals and clean up the environment,
[and] do different things with environmental hazards.” Vrazel testified that
Analytical received a quote from Clean Harbor for $10,000 or $10,500 to pick up
and properly dispose of the chemicals and tubes.
On cross-examination, Vrazel admitted that one of the chemicals—
hexafluorine—was classified as nonhazardous on the safety data sheet and presented
“no danger to the environment.” She explained, however, that these statements were
referred to the transportation of hexafluorine, and not the disposal. And although the
safety data sheet indicated that there were “[n]o specific disposal measures for the
34
nonhazardous aqueous solution,” Vrazel did not believe that Analytical’s employees
“know how to dispose of an actual cylinder,” but that Clean Harbor likely does, as
“[t]hat’s what their business is.”
Based on the testimony and evidence presented that it was not just the
chemicals but the cylinders and permeation tubes that needed to be properly disposed
of—items which were described as “very old, contaminated, . . . corroded, or
degraded, . . . and defective”—and that these chemicals and their containers cannot
simply be thrown away, but must be neutralized first, the jury reasonably could have
determined that the chemicals and their respective containers were “hazardous
materials,” i.e., posed some risk of loss or harm.
Considering the evidence in a light most favorable to the jury’s finding and
indulging every reasonable inference to support it, we conclude there is legally
sufficient evidence to support the award of $10,500 for failure to remove hazardous
materials. See City of Keller, 168 S.W.3d at 827. Likewise, we conclude that the
jury’s finding is not so contrary to the overwhelming weight of the evidence as to be
clearly wrong and unjust and, therefore, there is factually sufficient evidence to
support the award of $10,500 for failure to remove hazardous materials. See Cain,
709 S.W.2d at 176.
We overrule appellants’ seventh issue.
35
Fraud Claims
In their eighth and ninth issues, appellants argue that Analytical’s fraudulent
inducement claim is barred as a matter of law and, if the only remaining claim is the
fraudulent inducement claim, the attorney’s-fee award is unsupportable. Analytical
responds that these issues are moot because it “chose not to pursue its fraudulent
inducement claim, the jury was not asked about it, and it was not incorporated into
the final judgment.” We agree with Analytical that these issues on appeal identify
no error in the trial court’s judgment and, thus, present nothing for our review.
In the trial court’s jury charge, the jury was asked only two liability questions.
Question 1 asked: “Did McKinley fail to comply with the Agreement?” And
Question 2 asked: “Did Laboratories fail to comply with the Agreement?” These
liability questions are taken directly from the Texas Pattern Jury Charge (“PJC”) for
Breach of Contract. See TEXAS PATTERN JURY CHARGES: BUSINESS, CONSUMER,
INSURANCE & EMPLOYMENT § 101.2. Question 3 then asked the jury “[w]hat sum of
money, if any, if paid now in cash, would fairly and reasonably compensate
Analytical for its damages, if any, that resulted from such failure to comply?” This
too is identical to the PJC Question on Contract Damages. Id. § 115.3. The only
other question related to the amount of attorney’s fees to be awarded; there was no
question in the charge related to Analytical’s fraudulent inducement claim. See, e.g.,
id. §§ 105.1, 105.2. Furthermore, the trial court’s judgment awards Analytical
36
“$274,134.41 in actual damages for the amounts awarded by the jury in its answers
to Question No. 3.”
Because Analytical’s fraudulent inducement claim was not submitted to the
jury and, therefore, the jury returned no findings and the trial court rendered no
judgment on this claim, appellants eighth and ninth issues relating to this claim
present nothing for our review. We overrule appellants’ eighth and ninth issues.
Conclusion
We affirm the judgment of the trial court.
Amparo Guerra
Justice
Panel consists of Justices Countiss, Rivas-Molloy, and Guerra.
37