Equipment Resources International, Inc. v. Webb
(Tex.App.- Houston [1st Dist.] Oct. 8, 2009)(Bland) (breach of mediated settlement agreement,
bad faith sanctions, contractual agreement to dismiss pending suit)
AFFIRM TC JUDGMENT: Opinion by
Justice Bland   
Before Chief Justice Radack, Justices Bland and Massengale
01-08-00374-CV  Equipment Resources International, Inc. v. Julie L. Webb   
Appeal from 61st District Court of Harris County
Trial Court Judge:
Hon. John Donovan

MEMORANDUM OPINION

In settling their divorce through mediation, David Webb and Julie Webb divided the assets of their
company, Equipment Resources International (ERI), but later reopened the divorce proceeding when
David disputed ERI’s valuation.  ERI also instituted this suit against Julie, alleging that, as ERI’s head
of accounting and financial manager, she had committed fraud and engaged in a conspiracy to falsely
inflate ERI’s value.  Shortly after ERI filed the suit, David and ERI mediated another settlement with
Julie, in which ERI agreed to dismiss this suit, to admit in the motion to dismiss that the fraud and
conspiracy causes of action against Julie were factually unfounded, and to procure a dismissal order
containing a corresponding judicial finding.  ERI nevertheless persisted in prosecuting its case against
Julie, and Julie moved for summary judgment and for sanctions under Texas Rule of Civil Procedure
13 to recover attorney’s fees she expended in seeking dismissal of the suit.  The trial court granted
both motions.  ERI appeals only the sanction order, contending that the trial court abused its
discretion in awarding sanctions because its breach of the settlement agreement does not support a
Rule 13 sanction order, and the trial court erred in  finding that ERI’s pleadings, motions and
responses were groundless.  Finding no error, we affirm.

Background

During their marriage, David and Julie incorporated ERI.  As joint owners and officers and directors,
David served as president and Julie as vice president and head of accounting.

Divorce proceedings

Julie and David’s marital relationship became acrimonious, and they decided to divorce.  Julie filed a
divorce petition in Fort Bend County in 2005, but divorce proceedings began in earnest when David
filed a second petition, also in Fort Bend County, in October 2006.  In mid-November, Julie and David
attended a mediation to resolve their property division disputes.  At the time, Julie still managed the
accounting for ERI, but had moved an ERI computer to her residence so she did not have to go to the
office.

Julie and David attended a second mediation on January 31, 2007, which culminated in a mediated
settlement agreement (MSA).  In the MSA, Julie agreed to resign from ERI in exchange for David’s
agreement to buy out Julie’s interest.  Based on ERI’s financial records, David distributed
approximately $3.5 million to Julie, representing the value of her share, which included fifty percent of
ERI’s net profits for 2006.  The Fort Bend County court held a hearing in the divorce case on the
same date as the mediation.  The trial judge stated he would grant the divorce, and set a date for
entry of the final divorce judgment.

ERI accounting issues

In February 2007, David took sole control of ERI.  He concluded that ERI’s accounting records had
discrepancies that led him to overpay Julie for her share of ERI’s 2006 net profits.

On February 21, David moved to set aside the MSA, alleging that Julie knew or should have known of
the discrepancies, and her failure to report them resulted in an inflated net profits figure and, as a
result, an over-distribution to her of ERI’s assets.  The Fort Bend County court nevertheless signed
the agreed divorce judgment, which incorporated the MSA, on March 21, 2007.  David re-urged the
same grounds in a motion for new trial, which the Fort Bend County court denied on April 11, 2007.

On April 19, 2007, David filed a second motion for new trial and other post-judgment motions for
relief, now alleging that Julie had defrauded him and ERI by failing to correctly book ERI’s accounts
receivable and accounts payable, which caused her to receive an overpayment in the divorce
settlement.

On May 4, 2007, ERI filed this suit against Julie in Harris County district court, bringing claims of fraud,
breach of fiduciary duty, negligence, and breach of contract, among others, based on allegations that
she had intentionally manipulated ERI’s books to secure an over-distribution of more than $1.8
million.  When ERI deposed Julie on May 18, Julie admitted that she had accessed ERI’s financial and
banking records remotely since January 31, 2007.

On May 18, after Julie’s deposition ended, David returned to ERI’s offices.  When David arrived, he
found certain of ERI’s computer terminals unresponsive, and one terminal indicated that a remote
user was on ERI’s network.  As David prepared to leave the offices that evening, he saw Julie’s car
parked in ERI’s parking lot.  This led David to suspect that Julie was present in her friends’ office,
which was located in the same building, and that she had gained access to ERI’s computer network
through one of their computers.

On May 21, 2008, based on information obtained in Julie’s deposition and the events of May 18, ERI
secured a temporary restraining order (TRO) in the Harris County district court against Julie to
prevent her access to its computer system, financial records, and banking records.  David executed
an affidavit in support of the application.

Meanwhile, at their daughter’s urging, David and Julie agreed to attend another mediation, without
their lawyers, in an effort to resolve their continuing dispute in the Fort Bend County court about the
amount of money ERI had distributed to Julie.

Julie and David attended that mediation on May 25, 2007.  At the close of mediation on that day,
David and Julie executed a new MSA, in which they agreed to distribution of the marital estate.  Under
the May 25 MSA, Julie agreed to return to ERI $613,867.27 of the amount it had disbursed to her
under the prior MSA, and David agreed to purchase Julie’s ownership interest in ERI, the value of
which would be based on the independent determination of an auditor.

The May 25 MSA also addressed this Harris County suit.  David, in his capacity as ERI’s president,
agreed to file a motion to dismiss the suit with prejudice.  David further agreed to include in that
motion “an admission that the fraud and conspiracy causes of action were factually unfounded,” and
to ensure that the trial court’s order contained “a corresponding judicial finding.”  The MSA does not
denote ERI’s agreement to admit to the lack of factual support for its allegations supporting the fraud
or conspiracy causes of action as limited to any particular fact or specific set of facts.  David signed
the MSA both individually and as president of ERI.

Further proceedings in the Fort Bend County court

In the meantime, on May 22, 2007, the Fort Bend County court denied all of David’s remaining post-
judgment motions for relief from the March 21 divorce judgment.  According to Julie, David told her
outside of the May 25 mediation that, “since he wasn’t getting anywhere in [the divorce action in] Fort
Bend County, that he found another way to get [her], and he was going to file in another court.”  After
signing the May 25 MSA, David also told Julie that “he and his attorney had figured out a way that
they didn’t have to dismiss that [Harris County] case. . . [that] [t]hey found a loophole, and that he
never intended—in fact, he said, ‘We’re smarter than that.’”

Re-opening of divorce judgment

Despite having executed the May 25 MSA, David and Julie continued to negotiate the terms of their
divorce.  David fought to avoid the term requiring ERI to dismiss the suit against Julie, and stated to
the Fort Bend County court that he perjured himself by signing the MSA with that provision.  Both
David and Julie had the opportunity to consult with their attorneys about the MSA and David consulted
with ERI’s counsel.  The parties’ attorneys also handled the negotiations following the mediation.

Hearing and entry of second divorce judgment

On July 5, 2008 the Fort Bend County court, in the presence of Julie and David and their counsel,
presided over the hearing to sign the agreed divorce decree incorporating the MSA’s terms.  The Fort
Bend County court made clear that it would not enter judgment on the MSA unless both parties were
willing to do so at that time.  The court explained that

you do have an option and the option is that we will continue this trial; and at some point today, this
Court is going to rule on the motion for new trial.

That’s what I want to make very clear to both of you.  You do not need—you do not have to sign
either one of these agreements.  You do have an option and that is that we can continue this hearing.

Both the Fort Bend County court and his own counsel admonished David about the effect of the MSA
and the agreed judgment.  David, individually and on behalf of ERI, declared in open court that he (1)
had the opportunity to read the MSA and ask questions concerning its terms, (2) understood them,
(3) agreed to them free of coercion, and (4) intended to bind himself and ERI to the MSA’s terms.  He
signed the agreed judgment and asked the court to approve it.  At the hearing, neither David nor ERI
protested to the Fort Bend County court that certain terms of the MSA would require David to perjure
himself.

The divorce judgment addresses ERI’s agreement pertinent to this case as follows:

This [decree] is stipulated to represent a merger of a mediation agreement of May 25, 2007 between
the parties, save and except those provisions which relate to any other cause of action pending in any
other Court.  Specifically, any provisions of the May 25, 2007 [MSA] are not merged into this Decree
and remain in full force and effect:

* * *

2.     Equipment Resources, International, Inc. v. Julie Webb . . . .

Specifically, the following provisions of . . . the [MSA] are not merged into this agreement and remain
in full force and effect:

1.     Agreements pertaining to pending litigation:

a.      All civil . . . claims . . . among the parties will be dismissed with prejudice . . . includ[ing] . . . ERI
v. Julie Webb . . . .

b.     Concerning ERI v. Julie Webb . . ., the Motion will include an admission that the fraud and
conspiracy causes of action were factually unfounded and the order will contain a corresponding
judicial finding.

Concurrent proceedings in Harris County district court

On July 2, 2007, ERI amended its petition to omit the fraud and conspiracy claims against Julie, but
left intact the claims for negligence and breach of contract.  On the same date, Julie moved for
sanctions under Texas Rule of Civil Procedure 13, contending that ERI breached its agreement under
the MSA, and that ERI’s original petition, amended petition, and TRO application were “groundless
and brought for the purpose of harassment because the lawsuit was factually unfounded.”  In
response, ERI contended those terms were illegal or impossible to perform, in that David would be
forced to perjure himself by stipulating that the fraud and conspiracy allegations were factually
unfounded, and that, as a litigant, ERI could not compel the court to make a specific finding.

On December 21, 2007, Julie moved for summary judgment seeking to enforce the MSA provision and
hold ERI to its promise to dismiss the suit.  In response, ERI again amended its petition, this time to
request that the Harris County district court declare the provision unenforceable based on illegality
and impossibility, moved for summary judgment on the claim for declaratory relief.  In its opposition to
Julie’s summary judgment motion, ERI, with the support of David’s affidavit testimony, declared that
“there is ample evidence to support the fact that Julie Webb did commit fraud and participate in a
conspiracy.”  According to ERI, therefore, the agreement was unenforceable as a matter of public
policy because it would require David to commit perjury.

The Harris County district court granted Julie’s motion for summary judgment and denied ERI’s motion
on April 4, 2008.  Three weeks later, the trial court granted Julie’s motion for sanctions.  In support of
the sanctions award, the Harris County district court found that ERI failed to comply with the
agreement to dismiss the suit that it made in the May 25 MSA; that it continuously sought to delay the
dismissal; and that it continued to oppose dismissal, in violation of the agreement.  The Harris County
district court concluded that all documents that ERI filed in the proceeding after May 25, 2007
were groundless, that they were filed in bad faith, and that they were groundless and brought for the
purpose of harassment.  That such conduct was willfully done by Equipment Resources International,
Inc., and not by its attorneys.

The trial court found that Julie expended $40,662.50 in attorney’s fees for her defense through the
date of the sanctions order and that she would incur additional fees on appeal, and ordered ERI to
pay those fees as a sanction.   

DISCUSSION

In this appeal, ERI challenges only the trial court’s sanction order and not the order granting summary
judgment to Julie.  We review a sanction order under an abuse of discretion standard.  Bradt v.
Sebek, 14 S.W.3d 756, 760–61 (Tex. App.—Houston [1st Dist.] 2000, pet. denied); Laub v. Pesikoff,
979 S.W.2d 686, 693 (Tex. App.—Houston [1st Dist.] 1998, pet. denied).  When a sanction order
refers to one specific rule, either by citing the rule, tracking its language, or both, we are confined to
determining whether the sanctions are appropriate under that particular rule.  Metzger v. Sebek, 892
S.W.2d 20, 51 (Tex. App.—Houston [1st Dist.] 1994, writ denied).  In this case, the trial court relied on
Texas Rule of Civil Procedure 13 as the basis for ordering the sanction.  Rule 13 authorizes a trial
judge to impose a monetary sanction, after notice and hearing, upon a party whose attorney signs a
pleading that is groundless and brought in bad faith or for the purpose of harassment.  Tex. R. Civ. P.
13.  The rule continues:

Courts shall presume that pleadings, motions, and other papers are filed in good faith. No sanctions
under this rule may be imposed except for good cause, the particulars of which must be stated in the
sanction order. “Groundless” for purposes of this rule means no basis in law or fact and not warranted
by good faith argument for the extension, modification, or reversal of existing law.  Id.

When we review a trial court’s discretionary ruling, we distinguish those that depend on resolution of
disputed facts from those that determine the controlling legal principles.  See Walker v. Packer, 827 S.
W.2d 833, 839–40 (Tex. 1992).   The resolution of factual disputes is committed to the trial court’s
discretion, and the reviewing court may not substitute its judgment for that of the trial court.  Id. at
839.  When the court acts as fact-finder, we view evidence the trial court considered in the light most
favorable to its ruling, and indulge every legal presumption in favor of the ruling, deferring to its
judgment and refraining from substituting the trial court’s findings with our own in determining whether
an abuse of discretion has occurred.  See id. at 839–40; Hatteberg v. Hatteberg, 933 S.W.2d 522,
526 (Tex. App.—Houston [1st Dist.] 1994, no writ).  “It is not necessarily an abuse of a trial court’s
discretion if under the same facts we would decide the matter differently, or if the court committed a
mere error in judgment.” Tarrant County v. Chancey, 942 S.W.2d 151, 154 (Tex. App.—Fort Worth
1997, no writ), quoted in Bradt, 14 S.W.3d at 761.

Further, in determining the propriety of a sanction order, we are not limited to examining the trial court’
s findings of fact and conclusions of law.  Rather, we independently review the entire record to
determine whether the trial court abused its discretion.  Am. Flood Research, Inc. v. Jones, 192 S.W.
3d 581, 583 (Tex. 2006).  The trial court’s discretion is limited only by the requirement that its order
be just and that the sanctions imposed be directly related to the harm caused by the sanctioned
conduct.  Ray v. Beene, 721 S.W.2d 876, 879 (Tex. App.—Houston [1st Dist.] 1986, writ ref’d n.r.e.).

Trial court’s findings supporting the sanctions order

ERI invokes two cases, Island Entertainment, Inc. v. Castaneda, 882 S.W.2d 2 (Tex. App.—Houston
1994, writ denied), and Greiner v. Jameson, 865 S.W.2d 493 (Tex. App.—Dallas 1993, writ denied),
for the principle that a mere breach of contract cannot support a sanctions award, and contends that
the trial court abused its discretion in awarding sanctions solely for a claimed breach of the mediated
settlement agreement.

In Island Entertainment, we held that the trial court abused its discretion by awarding sanctions for
failure to pay amounts owed under a Rule 11 settlement agreement within a reasonable time.  882 S.
W.2d at 3, 5.  In a settlement involving multiple defendants, appellant Island Entertainment[1] agreed
to pay $10,000 and a portion of the appellees’ court costs. The handwritten agreement did not
include a deadline for payment.  Id. at 3.

Two weeks later, after appellees had received payment from all of the other settling defendants,
appellees sent Island Entertainment a demand for the settlement amount.  Id.  After six weeks passed
with no response, appellees moved to enforce agreement and for sanctions and set it for hearing.  Id.

The day before the scheduled hearing, Island Entertainment sent appellees a partial payment along
with a promissory note for the remainder.  The letter instructed appellees to hold the settlement funds
and note in trust pending execution and return of the release, as well as confirmation that appellees
had passed the enforcement and sanctions motions.  Id.  Appellees refused.  Id.

The trial court awarded sanctions, finding that Island Entertainment’s failure to pay the settlement
proceeds within a reasonable time amounted to a breach of the mediation agreement, and that Island
Entertainment acted in bad faith and for the purpose of delay or to otherwise harass the appellees
when it signed the agreement knowing it would not abide by it.   Id. at 4.  We concluded that Island
Entertainment’s “+conduct, although not laudatory, was at worst a breach of an implied contract term
concerning reasonably prompt payment,” and the simple breach did not support a finding that Island
Entertainment had mediated in bad faith.  Id. at 5.

Greiner involved a Rule 11 agreement, under which Greiner agreed to (1) immediately dismiss that
same suit as well as other litigation pending in Louisiana, and (2) pay specified amounts to the two
plaintiffs below.  865 S.W.2d at 496.  Greiner further agreed that, if it failed to comply with these
terms, the trial court could sign a $75,000 judgment against it.  Id.

When Greiner breached the Rule 11 agreement, the plaintiffs requested entry of the $75,000
judgment, which the trial court signed.  Id.  The judgment ordered Greiner not only to pay the required
sum, but also to dismiss with prejudice the Louisiana litigation.  Id.  A few weeks later, the plaintiffs
moved to sanction Greiner.  Id. at 496–97.

The trial court found that by not paying the judgment or dismissing the Louisiana lawsuits, Greiner
intentionally failed to comply with the terms of the Rule 11 agreement.  Id. at 497.  Without specifying
the source of its power, the trial court signed an order imposing on Greiner a punitive sanction of
$50,000 and a coercive sanction of $1,000 for each day prior to Greiner’s full compliance with the
judgment.  Id.  The trial court signed the sanctions order more than thirty days after signing the
judgment, and after Greiner had filed his notice of appeal.  Id.

The Dallas Court of Appeals held that the trial court abused its discretion by imposing sanctions.  Id.
at 500.  It reasoned that the accumulation of postjudgment interest provides the only penalty for
nonpayment of a money judgment, and, absent a finding of bad faith abuse of judicial process, the
trial court lacked a basis for the sanction.  Id.  The Dallas court of appeals further observed that, once
Greiner perfected his appeal, the appellate court had exclusive plenary jurisdiction, and thus the trial
court lacked the authority to require Greiner to dismiss the Louisiana litigation.  Id.

The facts of this case render Island Entertainment and Greer inapposite because here, the trial court
heard evidence that David acted in bad faith in continuing to pursue ERI’s Harris County suit
independent of the agreement that he dismiss it.  According to ERI, despite David’s contrary
statements before the Fort Bend County court that he understood the MSA and intended to bind
himself and ERI to its terms, free of any coercion, including a stipulation that the Harris County suit
was groundless, the Harris County district court was required to believe that ERI instituted and
continued to pursue the claims against Julie in Harris County in good faith.[2]  This position is
untenable.  As the trial court observed, the MSA provision was not just an agreement, but also a
stipulation or admission “that this case had no basis when it was filed . . . .”  The contradiction
between the statements made by ERI in the Fort Bend County court and in the Harris County district
court creates a factual dispute concerning whether ERI had a good faith factual basis for pursuing the
Harris County suit at all—one that the Harris County district court was entitled to resolve as it did,
finding that ERI’s suit had no basis in fact and law and that ERI’s continued pursuit of its suit against
Julie amounted to bad faith conduct.[3]

Unlike the mere breaches of contract at issue in Island Entertainment and Greiner, here, there was an
affirmative act coupled with evidence of bad faith intent: ERI filed documents with the trial court in
furtherance of David’s bad faith and harassment after David told Julie that he was going to “get” her
another way.  Compare Island Entertainment, 882 S.W.2d at 3, 5 (reversing sanctions award imposed
after appellants failed to respond to appellees’ repeated demands for payment of settlement) and
Greiner, 865 S.W.2d at 496 (reversing sanctions award based on failure to comply with Rule 11
agreement).

The trial court sanctioned ERI not merely because ERI refused to adhere to its agreement to dismiss
the lawsuit, but because of its treatment of the agreement’s subject matter—the truth—in
representations to two district courts in two different counties.  ERI’s refusal to withdraw pleadings that
it later stipulated were unfounded provides an independent basis for sanctions under Rule 13.

ERI also challenges the trial court’s finding that all of the pleadings, motions, and responses it made
after May 25, 2007 were filed in bad faith, pointing out that a few of those filings, such as the motion
for return of the cash bond following expiration of the TRO, were not groundless.  The majority of the
filings, however, continued to rely on the same factual allegations addressed in the May 25 MSA, and
ERI made no effort to segregate the attorney’s fees attributable to those few filings when it had the
opportunity to cross-examine Julie’s counsel during his attorney’s fees testimony.  

The trial court’s findings therefore support the sanctions award.

CONCLUSION

The record demonstrates that the Harris County district court acted within its discretion in requiring
ERI to pay Julie’s attorney’s fees as a sanction under Rule 13.  

We therefore affirm the judgment of the trial court.  All pending motions are dismissed as moot.
   
Jane Bland
   
Justice

Panel consists of Chief Justice Radack and Justices Bland and Massengale.

[1] For ease of reference, we use “Island Entertainment” to mean the appellants in the case.

[2] ERI further contends that it had a factual or legal basis for asserting that Julie could not comply with her agreement
in the MSA to dismiss criminal proceedings against David because she had no authority do so.  The Harris County
district court, however, did not need to consider whether this assertion has merit in determining the propriety of
sanctions for ERI’s continued prosecution of its claims after signing the MSA.  A Texas court’s finding that a
contractual provision offends public policy does not necessarily render the entire contract unenforceable.  See Hoover
Slovacek LLP v. Walton, 206 S.W.3d 557, 562 (Tex. 2006).  As ERI recognized in its trial court briefing, a court may
strike the offending provision and still enforce the remainder of the contract.  Id. at 565; see also Williams v. Williams,
569 S.W.2d 867, 871 (Tex. 1978) (holding that illegal provision may be severed if it does not constitute main purpose
of contract).  

[3] The trial court’s finding that “all documents filed by [ERI] in this Court since May 25, 2007” were groundless, filed in
bad faith and brought for the purpose of harassment does not, as ERI contends, require the conclusion that its
conduct predating the MSA’s execution was not in bad faith.  ERI’s contention runs counter to the deferential standard
we apply in reviewing a sanctions order.  See Am. Flood Research, Inc. v. Jones, 192 S.W.3d 581, 583 (Tex. 2006)
(holding that reviewing court does not limit itself to trial court’s sanctions order but independently reviews entire record
to determine whether it supports sanctions award).