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OPINION

No. 04-06-00346-CV

FINLEY OILWELL SERVICE, INC.,

Appellant

v.

RETAMCO OPERATING, INC.,

Appellee

From the 131st Judicial District Court, Bexar County,
Texas

Trial Court No. 1999-CI-11287

Honorable John D. Gabriel, Judge Presiding

Opinion by: Sandee Bryan Marion, Justice

Sitting: Alma L. López, Chief Justice

Sandee Bryan Marion, Justice

Rebecca Simmons, Justice

Delivered and Filed: October 17, 2007

AFFIRMED IN PART; REVERSED AND REMANDED IN PART

This is an appeal from sanctions against appellant, Finley Oilwell,
Inc. ("Finley"), which resulted in striking Finley's answer and
counterclaim and the entry of a final default judgment awarding appellee,
Retamco Operating, Inc. ("Retamco"), actual damages, exemplary damages,
and attorney's fees. We affirm the trial court's sanctions against
Retamco; however, because the record contains legally insufficient
evidence to support the award of actual damages, we reverse and remand for
a new hearing on unliquidated damages.

BACKGROUND

In the underlying lawsuit, Retamco sued Finley, as well as Paradigm
Oil, Inc.; Pacific Operators, Inc.; and Pacific Operators of Texas, Inc.
(collectively, "Paradigm") and others. Retamco alleged causes of action
for breach of contract, fraud, and fraudulent concealment relating to a
1984 Purchase Agreement to which Retamco's predecessor ("Original ROI")
was a party.
(1) Retamco later severed its claims against Paradigm from those
against Finley and other defendants.

During the course of the proceedings against Finley, Retamco served
Finley with a request for disclosure. When Finley failed to respond,
Retamco filed a motion to compel, which the trial court granted on
February 4, 2000. On September 21, 2000, Retamco served Finley with its
first request for production of documents. When Finley objected to all of
the requests, Retamco filed a motion to compel production. Retamco also
sought to depose a Finley representative, but Finley filed a motion to
quash, which was denied. Then, in December 2001, Retamco served Finley
with its first request for admissions. Although Finley responded to the
request for admissions, Retamco considered Finley's responses to be
inadequate, and it filed a motion for deemed admissions or to compel
responsive answers. A second attempt to depose a Finley representative
resulted in another motion to quash, which was again denied.

In August 2003, Retamco filed a new motion to compel Finley to respond
to its first request for production of documents. On September 25, 2003,
the trial court granted the motion, overruling Finley's objections and
ordering Finley "to respond without objections" to Retamco's request for
production. The trial court also ordered Finley to pay Retamco $1,000 in
attorney's fees.

In September 2004, Retamco noticed the depositions of other parties and
non-party witnesses. Finley moved to quash the depositions. The trial
court granted the motion in part and denied the motion in part. Despite
being ordered to designate witnesses for deposition, Finley did not appear
at the deposition, and Retamco filed a motion to compel. Following a
hearing on the motion to compel, the trial court signed an order entitled
"Finley's Last Chance Order," which was dated February 25, 2005. In this
order, the trial court found that Retamco had "been attempting to schedule
Finley's deposition since September 21, 2000 and since that time has
issued eight Notices to take Finley's deposition, and that Finley has
resisted attempts to be deposed." The court ordered Finley to designate
individuals to appear on its behalf. Although the court denied Retamco's
request for attorney's fees, the court ended its order by stating:

The Court further ORDERS that if Finley does not appear for its
deposition as scheduled with a representative fully knowledgeable to
testify about the matters set forth in the deposition notice and pay the
ordered attorney's fees [of $1,000 pursuant to its September 25, 2003
order], the Court will consider an order striking Finley's answer and
entering a default judgment against it, and an order holding Finley's
responsible representative in contempt of court.

On March 3, 2005, Finley designated Clement Alberts for deposition. At
the deposition, Alberts was either unable or unwilling to testify on at
least nine separate topics listed in Retamco's deposition notice and he
did not produce all of the requested documents. On March 8, 2005, Retamco
gave Finley until March 18, 2005 to designate another witness. Finley did
not respond. Frustrated by Finley's repeated failure to respond to
discovery requests, Retamco filed a motion for sanctions.

By letter dated July 21, 2005, the trial court withheld an immediate
ruling on the motion for sanctions and provided Finley with another
opportunity to comply. On October 20, 2005, the trial court conducted a
sanctions hearing after which it issued its order on November 10, 2005. In
this order, the trial court found that (1) Finley had not provided Retamco
with the information it requested in the March 8, 2005 Alberts deposition;
and (2) since the court's July 21, 2005 letter, Finley had not produced
any further information to Retamco by way of interrogatory responses,
supplemental deposition responses, supplemental responses to request for
production or supplemental responses to request for admissions. The trial
court noted Finley's past failure to cooperate in discovery, its various
attempts to quash or delay depositions, Alberts's inability to testify on
at least nine topics listed in the deposition notice, and Finley's failure
to respond to Retamco's request to designate another witness by March 18,
2005. The court concluded: 7. The foregoing demonstrates an egregious and
flagrant pattern of discovery abuse by Finley. It has ignored discovery
requests, ignored court orders, and ignored deposition notices.

8. The abusive failure to respond to discovery by Finley has
substantially frustrated [Retamco's] preparation of its case. The
discovery abuse has primarily been the fault of Finely, not its
counsel.

9. These sanctions are justified. Finley's hindrance of the discovery
process justifies a presumption that its defenses lack merit. There is a
direct relationship between the offensive conduct and the sanction
imposed, because the frustrated discovery has been tailored and directed
to discovering the facts alleged to result in Finley's liability. Finley
is in a position to furnish the discovery required in this case, but
instead has deliberately hindered discovery. The discovery abuse has been
persistent and calculated. Previous court orders have been disobeyed. . .
. .

Based on its conclusions, the trial court (1) ordered Finley to pay
Retamco's attorney's fees in the amount of $25,000; (2) overruled Finley's
objections to Retamco's interrogatories, request for production and
request for admissions, and ordered further objections waived; (3) ordered
that Finley could not rely on Texas Rules of Civil Procedure 197.2(c) and
192.4 in responding to Retamco's interrogatories, request for production,
or request for admissions; and (4) ordered Finley to provide amended
answers to Retamco's interrogatories and to produce all documents under
its possession, control or custody identified in Retamco's deposition
notice. Finally, the court set a hearing for November 30, 2005 "to
determine if Finley has complied with this order and to determine if
additional sanctions are appropriate." Following the November 30, 2005
hearing, the trial court provided Finley with an additional thirty days to
comply with its November 10, 2005 order.

Another hearing was held on December 29, 2005, at which time the court
considered Retamco's motion for default judgment, which was based on
Finley's failure to pay either the $1,000 or $25,000 attorney's fees.
Retamco also asked that Finley's answer be stricken. The court did not
rule on the motion. However, another evidentiary hearing was held on
January 17, 2006, at which time the trial court considered Finley's
compliance with the November 10, 2005 order. Following this hearing, the
trial court signed a Default Judgment Against Finley, in which the court
struck Finley's answer and counterclaim, precluded Finley from opposing
Retamco's causes of action and claims for damages and attorney's fees, and
granted Retamco's motion for default judgment. The court set a hearing for
February 10, 2006 to consider Retamco's claims for actual and exemplary
damages and attorney's fees. Following the February 10, 2006 hearing, the
trial court signed a Final Judgment Against Finley, awarding Retamco
$5,656,409 in actual damages, $10,000,000 in exemplary damages, and
attorney's fees and interest. The trial court severed the Finley judgment
from the remaining defendants. This appeal by Finley ensued.

STANDING

Finley first asserts Retamco has no standing to sue because Retamco was
not a party to the 1984 agreement; Retamco never acquired Original ROI's
real property interests by assignment or formal statutory articles of
merger; Retamco was not acting in a representative capacity for Original
ROI; and no statute grants Retamco standing. Retamco counters that its
standing to sue is established by the record. On appeal, Finley relies on
the arguments made by Paradigm in the Paradigm appeal. As in the
Paradigm case, Retamco's petition was admitted into evidence at
the damages hearing here. Also as in the Paradigm case, Retamco's
petition alleged that "[o]n or about June 14, 1984, Plaintiff,
Retamco Operating, Inc. ("ROI") entered into a Purchase Agreement with PNB
Securities Corp. ("PNB") . . . ." [Emphasis added.] For the reasons stated
in this court's opinion in the Paradigm appeal, we hold that
Retamco's standing was established by the record and the trial court had
subject-matter jurisdiction. See Paradigm, 2007 WL 2427993, *2-3.
DEATH PENALTY SANCTIONS

In its second issue, Finley asserts the trial court erred in assessing
death penalty sanctions.

We review the trial court's imposition of sanctions for discovery abuse
under an abuse of discretion standard. See TransAmerican Natural Gas
Corp. v. Powell, 811 S.W.2d 913, 917 (Tex. 1991). A trial court
abuses its discretion when its ruling is arbitrary, unreasonable, or
without reference to any guiding rules or legal principles. K-Mart
Corp. v. Honeycutt, 24 S.W.3d 357, 360 (Tex. 2000). In assessing
sanctions for discovery abuse, the trial court may consider everything
that has occurred during the litigation. Berry-Parks Rental Equip. Co.
v. Sinsheimer, 842 S.W.2d 754, 757 (Tex. App.--Houston [1st Dist.]
1992, no writ). When reviewing a trial court's imposition of sanctions, we
view conflicts in the light most favorable to the trial court's ruling,
and resolve all inferences in favor of the trial court's judgment.
Herring v. Welborn, 27 S.W.3d 132, 143 (Tex. App.--San Antonio
2000, pet. denied).

The trial court has discretion to impose sanctions for discovery abuse
under Texas Rule of Civil Procedure 215. Such sanctions include an order
striking the pleadings, dismissing the action with or without prejudice,
or rendering a default judgment, i.e., "death penalty sanctions."
Tex. R. Civ. P. 215.2(b)(5). A death penalty sanction "is of particular
concern" because the trial court renders judgment without addressing the
merits of the case. Hamill v. Level, 917 S.W.2d 15, 16 (Tex.
1996). Accordingly, such sanctions must be reserved for circumstances in
which a party has so abused the rules of procedure, despite imposition of
lesser sanctions, that the party's position can be presumed to lack merit
and it would be unjust to permit the party to present the substance of
that position before the court. TransAmerican, 811 S.W.2d at
918.

A trial court may not impose sanctions that are more severe than
necessary to satisfy legitimate purposes. Cire v. Cummings, 134
S.W.3d 835, 839 (Tex. 2004). Any sanction imposed must be "just." Tex. R.
Civ. P. 215.2(b). In evaluating whether sanctions are "just," we consider
(1) whether a direct relationship exists between the offensive conduct and
the sanction imposed, and (2) whether the sanctions ordered are excessive
to punish the improper conduct. TransAmerican, 811 S.W.2d at 917.
With these principles in mind, we examine the "justness" of the trial
court's sanctions in this case.

1. Direct Relationship

Under the first prong of the TransAmerican analysis, a direct
relationship exists if a trial court directs the sanction against the
abuse found, the sanction remedies the prejudice caused to the innocent
party, and the sanction is "visited upon the offender."
TransAmerican, 811 S.W.2d at 917. Finley argues the trial court
erred because there is no direct nexus between the death penalty sanction
and Finley's alleged offensive conduct. According to Finley, the penalty
does not "fit the crime" because the focus of the sanctions hearings was
its failure to pay the monetary sanction, and not any perceived discovery
abuse. We disagree.

In its default judgment, the trial court recited Finley's failure to
comply with its orders to pay the monetary sanctions. However, the court
also took notice of each of the prior sanctions hearings, including the
January 17, 2006 hearing at which the court found that Finley had failed
to comply with the November 10, 2005 order and the December 8, 2005 order.
Specifically, the court noted Finley's failure to provide amended answers
to Retamco's interrogatories; produce all documents under its possession,
control or custody identified in Retamco's deposition notice by a date
certain; and make a good faith effort to fully, completely, and timely
answer any additional interrogatories Retamco may propound. The court also
specifically found that Finley ignored written discovery requests, court
orders, and deposition notices. Thus, it is evident from a review of the
default judgment that the trial court considered, not only Finley's
failure to pay the monetary sanctions, but also Finley's repeated refusal
to comply with court orders and discovery requests.

On the issue of complying with court orders and discovery requests,
Finley contends there were no employees other than Clement Alberts to
designate as corporate representative and there were no other documents to
produce other than those already produced. In its February 25, 2005 Last
Chance Order, the trial court ordered Finley to designate a representative
fully knowledgeable to testify about the matters set forth in the
deposition notice. At the October 25, 2005 sanctions hearing, Finley
asserted it was Retamco's burden to "find previous owners or directors or
officers that could testify." Alternatively, Finley argued that Alberts
appropriately answered the questions propounded by Retamco. Retamco
countered that instead of complying with the court's order to designate a
representative fully knowledgeable to testify about matters set forth in
the deposition notice, Finley designated Alberts who claimed knowledge of
nothing prior to 2002 because he did not become president of the company
until that year.

Finley also asserted it had complied with the court's order to answer
interrogatories and produce documents. Finley produced 188 boxes of
documents, accompanied by a list of which documents could be found in each
box. In total, Finley produced almost 6,700 pages of documents. Retamco
conceded it had received the documents but argued that most of the
documents were unsigned copies of Paradigm's documents. As to the volume
of paper produced, Retamco noted that Finley's response to a request for
production was simply to point to one or more boxes in which the document
could be found. For example, Retamco's attorney said that his request for
"a simple document" resulted in a response from Finley to "look at 15 or
16 different boxes of documents." Another request for production received
the response "see documents attached here under Bates one through 6005."
This type of response clearly violated the court's November 10, 2005 order
that Finley could not rely on Texas Rule of Civil Procedure 197.2(c),
which provides as follows:

If the answer to an interrogatory may be derived or ascertained from .
. . the responding party's business records, or from a compilation,
abstract or summary of the responding party's business records, and the
burden of deriving or ascertaining the answer is substantially the same
for the requesting party as for the responding party, the responding party
may answer the interrogatory by specifying and, if applicable, producing
the records or compilation, abstract or summary of the records. The
records from which the answer may be derived or ascertained must be
specified in sufficient detail to permit the requesting party to locate
and identify them as readily as can the responding party. . . . .

Tex. R. Civ. P. 197.2(c).

Retamco's attorney also pointed to examples of Finley's evasive answers
to Retamco's interrogatories. For example, when asked for its net worth,
Finley gave no direct answer. When asked when Alberts first became
president of Finley, Alberts replied, "sometime on or about 2002." Also,
many of the answers were based on hearsay information, rather than actual
knowledge.

Finally, on the issue of Finley's ability to pay the monetary
sanctions, Finley argues it was no longer in business, had not conducted
business since 2000, and had a negative net worth as of 2003 when it filed
for bankruptcy. Retamco presented evidence that Finley's bankruptcy had
been dismissed and the automatic stay vacated. Retamco read into evidence
portions of Alberts's deposition in which Alberts, Finley's designated
representative, stated he had no knowledge of Finley receiving any money
in 2000 or what happened to the money. Retamco, however, also presented
evidence that Finley had received over $1 million in the course of the
litigation. The trial court specifically found that "Finley has received
income during the pendency of this litigation far in excess of the
monetary sanctions awarded, and substantially in excess of any amounts
reasonably required to conduct its defense, and has conducted no business
operations, in the meantime, otherwise requiring the expenditure of such
funds."

Based on its findings of discovery abuse, the trial court concluded
there existed a direct relationship between Finley's offensive conduct and
the sanction imposed, "because the frustrated discovery has been tailored
and directed to discovering the facts alleged to result in Finley's
liability. Finley is in a position to furnish the discovery required in
this case, but instead has deliberately hindered discovery."

We conclude the trial court did not abuse its discretion in striking
Finley's pleading because the trial court's findings of discovery abuse,
both Finley's failure to pay the monetary sanctions and its failure to
comply with discovery orders, are supported by the record and there exists
a direct relationship between Finley's conduct and this sanction. Because
Finley's conduct thwarted Retamco's efforts to establish Finley's
liability, the sanction imposed here remedied the prejudice caused
Retamco.

2. Excessive Sanctions

Under the second prong of the TransAmerican analysis,
sanctions must not be excessive and the trial court must have considered
whether lesser sanctions were available that would have fully promoted
compliance. TransAmerican, 811 S.W.2d at 917. Generally, before a
sanction that prevents a decision on the merits is justified, lesser
sanctions must first be tested to determine their efficacy. Cire,
134 S.W.3d at 840 (citing Chrysler Corp. v. Blackmon, 841 S.W.2d
844, 849 (Tex. 1992)). In all but the most exceptional cases, the record
must reflect the trial court considered the availability of appropriate
lesser sanctions and must contain an explanation of the appropriateness of
the sanctions imposed. Id. at 842 (applying GTE Comm'ns Sys.
Corp. v. Tanner, 856 S.W.2d 725, 729 (Tex. 1993)); Spohn Hosp. v.
Mayer, 104 S.W.3d 878, 883 (Tex. 2003).

Finley does not assert the trial court failed to consider lesser
sanctions. Instead, Finley argues that preventing it from opposing
Retamco's evidence on damages renders Texas Rule of Civil Procedure 243
meaningless because it allows Retamco to present inaccurate or incomplete
information to the court. We disagree.

Pursuant to Rule 243, a court rendering default judgment must hear
evidence of unliquidated damages, regardless of whether the default
results from the defendant's failure to answer or from discovery
sanctions. Tex. R. Civ. P. 243. In this case, the trial court heard
evidence of unliquidated damages pursuant to Rule 243. However, Retamco
was precluded from contesting the damages evidence. Texas Rule of Civil
Procedure 215.2(b)(4) gives the trial court discretion to render a default
judgment as sanctions and to deny the offending party the right to oppose
the damages evidence. Paradigm Oil, Inc. v. Retamco
Operating, Inc., 161 S.W.3d 531, 538 (Tex. App.--San Antonio
2004, pet. denied); see also In re Dynamic Health,
Inc., 32 S.W.3d 876, 885 (Tex. App.--Texarkana 2004, orig.
proceeding); Tex. R. Civ. P. 215.2(b)(4). Therefore, because the trial
court did not abuse its discretion in denying Finley the right to oppose
the damages evidence, the sanctions imposed were not excessive. See
Paradigm Oil, 161 S.W.3d at 538.

SUFFICIENCY OF THE EVIDENCE ON
DAMAGES

Finley next challenges the sufficiency of the evidence in support of
the amount of actual damages awarded on a number of grounds, including
that the evidence is legally insufficient to support the award. At the
damages hearing, Retamco presented John Thomas, a consulting petroleum
landman, who testified on the issue of actual damages. Thomas stated he
was retained to determine Retamco's rights and interests under the 1984
purchase agreement. To accomplish this task, he reviewed the 1984 purchase
agreement, a 1993 Paradigm asset purchase agreement, the management
service agreement between Paradigm and Finley, as well as county records
that relate to the leases covered by the purchase agreement and other
documents. According to Thomas, Retamco had the right to participate in
the overriding royalty interest and working interest in any new wells
drilled, and Retamco had the right to propose new wells and participate in
other wells that might be proposed. Finally, he said Retamco had the right
to receive notice of the termination of any lease and the right to elect
to take over the lease. Thomas explained that he arrived at his conclusion
that Retamco was entitled to overriding royalty and working interest
payments "look[ing] at all the leases broadly in areas" where he knew
there had been production, and he examined the leases "that may have been
part of that production." He "came up with many, many leases that were
part of the new wells that were drilled after 1984."

Thomas next stated he arrived at the percentages to which Retamco was
entitled for overriding royalty payments and working interest payments
under the various wells. For example, he said Retamco was entitled to a
1.33 percent overriding royalty and a 2.405 percent working interest after
payout for the Washington Unit well. He then applied the overriding
royalty percentage to "production from [each well], multiplied by the
appropriate allocation for the price of oil and gas." He also
"multipl[ied] the overriding royalty number, and then added back in the
working interest number after the well had paid out." Thomas said he and
Charlie Graham, a petroleum engineer, worked together to compile numbers
for the pricing scenario and they discussed the cost of drilling wells, as
well as the monthly operating costs. Thomas explained Graham's computer
program as follows:

Charlie has some computer programs and we use his programs to put in
production numbers, to put in my percentages that Retamco was owed on each
well. Put in the data he has from the national resource code, as far as
pricing. And he ran a program on each well, and he kind of laid it out in
spread sheet form. He also provided decline curbs and graphs showing the
well's production.

Thomas explained that Graham "has methods by which he can project what
a typical well in a typical field will do over time using pressures and
decline rates." As a result, Graham prepared a report on expected future
production (a reserve study) to which Thomas and Graham assigned revenues.
Thomas said Graham "may have his own set of values that he thinks . . .
the revenues might be, but he also probably goes to other sources." Thomas
stated he did not know the sources relied upon by Graham when Graham
projected future revenues. Thomas also reviewed the operating costs of the
wells primarily located in Webb County and he thought the expenses were
"excessive."

Based on the above, Thomas opined Retamco was owed, through July 1,
2005, the following damages: (1) overriding royalty in the amount of
$1,061,686, plus $440,325 in interest; (2) working interest in the amount
of $1,688,430, plus $503,844 in interest; and (3) future revenue in the
amount of $1,962,124. On appeal, Retamco asserts Thomas's conclusions do
not constitute competent evidence of damages because his conclusions are
unsupported by objective facts, figures, or data. We agree.

Opinion testimony that is conclusory or speculative is "incompetent
evidence" and cannot support a judgment. Coastal Transp. Co. v. Crown
Cent. Petroleum Corp., 136 S.W.3d 227, 232 (Tex. 2004). "An expert
opinion is conclusory when it offers an opinion with no factual
substantiation." United Servs. Auto. Ass'n v. Croft, 175
S.W.3d 457, 463 (Tex. App.--Dallas 2005, no pet.). An expert must provide
sufficient information about the methods and procedures used to reach his
conclusion on damages. See Paradigm, 2007 WL 2427993, *5. Here,
Thomas testified to his qualifications, experience, and about the numerous
documents he reviewed, but he failed to provide the underlying facts or
data in support of his conclusions. Although Thomas characterized expenses
as "excessive," he did not provide evidence of the costs charged to
Finley, nor did he explain why these costs were excessive. Thomas stated
he and Graham compiled "numbers for the pricing scenario" and they
discussed costs. He did not provide the "numbers" or explain the pricing
scenario. Graham's report was not submitted into evidence, nor was any
report by Thomas setting forth Thomas's opinion and how he reached that
opinion. Again, for the same reasons stated in our opinion in
Paradigm, we conclude Thomas's opinion as to actual damages was
conclusory because he failed to sufficiently explain how he reached his
conclusions. Id. *6. Therefore, we sustain Finley's no-evidence
challenge to the evidence.

CONCLUSION

We affirm the trial court's imposition of sanctions striking Finley's
pleadings and denying Finley the right to oppose Retamco's damages
evidence. However, because the record contains legally insufficient
evidence to support the award of actual damages, we reverse the trial
court's Final Judgment Against Finley, dated February 10, 2006, and remand
the cause for a new hearing on unliquidated damages consistent with this
opinion.
(2)

Sandee Bryan Marion,
Justice

1. Further background on this litigation may be found
in this court's opinions in Paradigm Oil, Inc. v. Retamco Operating,
Inc., No. 04-06-00108-CV, 2007 WL 2427993 (Tex. App.--San
Antonio August 29, 2007, no pet. h.) ("the Paradigm appeal") and
Paradigm Oil, Inc. v. Retamco Operating, Inc., 161 S.W.3d 531
(Tex. App.--San Antonio 2004, pet. denied).

2. Because we reverse the
award of actual damages, we must also reverse the award of exemplary
damages and attorney's fees. Finley also asserts the trial court erred in
failing to apply a settlement credit to the judgment. We do not decide
whether Finley is entitled to the settlement credit; however, for the
reasons stated in this court's opinion in the Paradigm appeal, we
agree the trial court should consider the request for a settlement credit
if presented to the court on remand. See Paradigm, 2007 WL
2427993, *7.