Texas Court of Appeals Rules on Validity and Enforceability of Agreement under TRCP 11

by Jeremy Clare

The Court of Appeals for the 1st District of Texas at Houston affirmed two summary judgment orders regarding the enforceability of a rule 11 agreement and the right to prepay under the agreement.

Background

In General Metal Fabricating Corporation GMF v. Stergiou, No. 01-11-00460-CV (Tex. App.—Houston [1st Dist.] May 24, 2012), Arnold Curry, General Metal Fabricating Corporation, and GMF Leasing, Inc. (“GMF”) and John Stergiou and Main Marine Repair and Industrial Cleaning Company (“Stergiou”) were in a dispute over ownership of shares of GMF stock for more than a decade. After several rounds of litigation, the parties agreed to interlocutory appeal of two summary judgment orders. The first order concluded that a rule 11 agreement agreed upon by the parties was an enforceable settlement agreement. The second order concluded that the rule 11 agreement did not confer any right to prepay the future payments owed according to the agreement.

GMF and Stergiou reached a settlement during the second trial of the dispute and executed a rule 11 agreement. According to the agreement, Curry (GMF’s representative) would pay Stergiou $300,000 in return for the stock. Under the agreement’s terms, payment would be in the form of a promissory note with a $20,000 down payment and installment payments of $4,000 of principal and interest every month thereafter. GMF eventually tendered one cashier’s check for $20,000 and another for $280,000 to Stergiou. Stergiou rejected the payments.

The parties then disputed the effect and terms of the rule 11 agreement. They agreed to resolve their dispute by summary judgment. The trial court determined that the rule 11 agreement was enforceable but did not permit prepayment. The parties then agreed to interlocutory appeal on two issues: (1) whether the rule 11 agreement is an enforceable agreement and (2) whether GMF had the right to prepay its debt under the agreement.

Court of Appeals

Stergiou challenged the trial court’s determination that the rule 11 agreement was enforceable. It contended that (1) the parties never achieved anything more than an agreement to agree, (2) that compliance with the agreement could not be ordered because its terms are too indefinite, and (3) that the agreement did not satisfy the statute of frauds.

Addressing Stergiou’s first contention, the Court interpreted the agreement according to contract law. Stergiou argued that the agreement does not provide enough information regarding the documents necessary to execute the agreement (i.e. the promissory note, deed of trust, security agreement, and financing statement) and is not a valid contract. The Court concluded that the agreement did include all essential terms because rule 11 settlement agreements that contain terms of payment and release of claims contain all material terms as a matter of law. The particular terms of the additional documents were not required. Furthermore, the parties’ behavior on the record indicated that they believed the agreement was binding. Therefore, the agreement was not an unenforceable agreement to agree.

Similarly, in response to Stergiou’s second contention, the Court concluded that the terms of the agreement are not so indefinite as to preclude its enforcement. Stergiou contended that the agreement cannot be enforced until the additional documents were executed. The Court disagreed. The agreement set forth the amounts to be paid for the stock and how and when the payments were to be made.

Stergiou also argued that the agreement did not satisfy the statute of frauds because the real property offered as security in the agreement was not sufficiently described. The Court first questioned whether the statute of frauds was applicable to the agreement but ultimately concluded that even if the statute of frauds did apply, the agreement satisfied it. The Court noted that the statute of frauds does not require a complete description of the land in a single document. Rather, the complete description may be obtained from documents prepared throughout the transaction. The Court concluded that the various deeds of trust and draft security agreements contained sufficient descriptions of the real property. Thus, the Court determined that the rule 11 agreement was enforceable.

GMF contended that the trial court erred in the second summary judgment order determining that they had no right to prepay the full $300,000. GMF argued that the particular language used in the agreement to allow for payment of the $20,000 down “on or before” a certain date allowed for prepayment of the entire $300,000. The Court disagreed. Because the language in the agreement was not ambiguous, the Court construed it according to the plain meaning of the express wording used. A plain, literal reading of the agreement compelled the Court to conclude that there was no right of prepayment of the continuing monthly payments.

Therefore, the Court affirmed the trial court’s two summary judgment orders.

Jeremy Clare is a law clerk at Karl Bayer, Dispute Resolution Expert. Jeremy received his J.D. from the University of Texas School of Law in 2012 and received a B.A. from the University of South Carolina where he studied political science.