author: NYE, Chief Justice.

text:
    PARLIAMENT INSURANCE COMPANY, Appellant, v. The L. B. FOSTER COMPANY et al., Appellees.
    No. 1042.
    Court of Civil Appeals of Texas, Corpus Christi.
    Dec. 31, 1975.
    Rehearing Denied Jan. 30, 1976.

      Dale French, Dameris & French, Houston, for appellant.
    Arthúr P. Terrell, Butler, Binion, Rice, Cook & Knapp, Houston, for appellees.
   OPINION

NYE, Chief Justice.

This is a suit brought by two material-men, L. B. Foster Company and Howard Smith Company against Parliament Insurance Company to recover upon a subcontractor’s performance-payment bond which was executed in favor of the original contractor. Plaintiff L. B. Foster and plaintiff Howard Smith Company sought recovery for materials sold and delivered to the subcontractor. Trial was before a jury which answered submitted special issues. The jury found favorably toward plaintiffs with the trial court entering judgment that plaintiff Foster recover the sum of $15,-304.67 and that plaintiff Smith recover the sum of $14,300.83. The defendant Parliament Insurance Company, who had issued the performance-payment bond, has duly perfected its appeal to this Court.

The facts of this case with several exceptions are undisputed. Certain trial stipulations were entered into by the parties prior to trial. From the record and stipulations, it appears that George C. Cox, Inc. was the prime contractor on two separate projects with a Utility District and with a Water Control Improvement District. Cox had entered into separate contractual agreements with these two governmental entities which are located in Harris County. John Dickson, d/b/a Dickson Drilling Company, was a subcontractor on each of the public work projects of C.N.P. Utility District and W.C. I.D. 109. The subcontractor’s job entailed drilling and equipping a water well on each of these projects. As a requirement of its subcontract with Cox, Dickson Drilling Company was required to furnish separate performance and payment bonds, “guaranteeing payment to all persons supplying labor and materials or furnishing him any equipment in the execution.”

The defendant Parliament Insurance Company as surety executed two Performance-Payment Contractor’s Bonds. One in the amount of $47,107.00 and the other in the amount of $55,017.00. In each, Dickson was the principal and George C. Cox, Inc. was the obligee. The record discloses that both plaintiffs had prior business dealings with subcontractor Dickson and had extended him an open line of credit. Prior to the commencement of the subject projects, Dickson had certain amounts then outstanding and due to the plaintiffs.

It was undisputed that sometime between April 14 and June 14, 1972, the plaintiff L. B. Foster Company sold to Dickson Drilling Company certain pipe having the fair market value of $7,107.43 for use on the public work, C.N.P. Utility District; that on or about April 25, 1972, the plaintiff Howard Smith Company sold to Dickson some stainless steel screen and other equipment for use on the said public work in C.N.P. Utility District having a fair market value of $6,223.91; and that on or about July 3, 1972, the plaintiff Foster sold to Dickson other materials and supplies for use on the public work of W.C.I.D. 109 having the fair market value of $8,137.63, plus freight charges in the amount of $59.61; and that later plaintiff Smith sold to Dickson materials and supplies for use on the public work in W.C.I.D. 109 having the fair market value of $8,076.92. It is further undisputed that all of the above supplies referred to were used and utilized in and for C.N.P. Utility District and W.C.I.D. 109, Harris County, Texas, and that prior to being supplied such materials, Dickson agreed to the prices stated above. Plaintiffs allege that they received no payment for the above materials from Dickson Drilling Company.

Dickson Drilling Company was adjudicated a bankrupt in the United States District Court for the Southern District of Texas. Thereafter, plaintiffs L. B. Foster Company and Howard Smith Company brought suit against Parliament Insurance Company for the sums set out above under the payment and performance bonds executed by defendant. The defendant answered asserting in effect two defenses: 1) that these performance-payment contractor’s bonds did not inure to the benefit of the materialmen; and 2) that in any event payment was made, but that such payments were applied by the plaintiffs to past debts leaving the amounts due on the present projects. unpaid.

The trial was before a jury and the case submitted on special issues. The jury found that: 1) no payment was made to Foster by Dickson from the proceeds earned from C.N.P. Utility District and/or W.C.I.D. 109 wherein an officer, employee, or agent of Foster knew of the source of those payments, and 2) no payment was made to Smith by Dickson from the proceeds earned from C.N.P. Utility District and/or W.C. I.D. 109 wherein an officer, employee, or agent of Smith knew the source of those payments. Based on the answered issues, the trial court entered judgment accordingly-

The defendant Parliament Insurance Company brings forward twenty-two points of error. These points, however, can be conveniently grouped into three areas. The defendant’s first six points of error complain of the performance-payment contractor’s bonds sued on, contending that under the wording of these bonds, said bonds were, as a matter of law, indemnity bonds only and did not inure to the benefit of either plaintiff.

The contract between George C. Cox, Inc. and Dickson Drilling Company obligated Dickson to execute separate performance and payment bonds, each in the sum of one hundred percent (100%) of the total contract price in standard forms for this purpose, guaranteeing faithful performance of the work and the fulfillment of any guarantees required, and further guaranteeing payment to all persons supplying labor and materials or furnishing him any equipment in the execution of the contract.

The subject bonds were furnished by Dickson as principal in each bond and the obligee being George C. Cox, Inc. Both bonds in question were identical except for the date of execution and the project which they were to cover. They were designated “PERFORMANCE-PAYMENT CONTRACTOR’S BOND”. The questioned provision contained in each bond reads as follows:

“Now, Therefore, the condition of the obligation is such that, if the Principal shall faithfully perform the contract on his part, and shall fully indemnify and save harmless the Obligee from all cost and damage which the Obligee may suffer by reason of failure so to do and shall fully reimburse and repay the Obligee all outlay and expense which the Obligee may incur in making good any such default, and shall pay all persons who have contracts directly with the Principal for labor or materials, then this obligation shall be null and void, otherwise it shall remain in full force and effect.” (Emphasis added.)

The bond now under consideration was to become void upon the doing of the following things by Dickson: first, that he shall faithfully perform the contract on his part; second, that he shall fully indemnify and save harmless the obligee (Cox) from all cost and damage which the obligee may suffer by reason of failure so to do; third, that he shall fully reimburse and repay the obligee all outlay and expense which the obligee may incur in making good any such default; and fourth, that he shall pay all persons who have contracts directly with the principal for labor or materials. If the only purpose in the insertion of the fourth obligation was to protect the obligee, Cox, then under present Texas law the plaintiff cannot recover. See Metropolitan Casualty Ins. Co. v. Texas Sand & Gravel Co., 68 S.W.2d 551 (Tex.Civ.App.—Waco 1934, writ dism’d); Employers Liability Assur. Corporation v. Trane Co., 139 Tex. 388, 183 S.W.2d 398 (1942, opinion adopted). However, if such provisions were incorporated for the benefit of materialmen and laborers, then they (materialmen and laborers) may invoke such provisions for their protection. Wm. Cameron & Co. v. American Surety Co. of New York, 55 S.W.2d 1032 (Tex.Comm’n App.1932, judgment adopted); Mosher Mfg. Co. v. Equitable Surety Co., 229 S.W. 318 (Tex.Comm’n App.1921, judgment adopted). The effect that is to be given to such a clause depends on the intention of the parties. In ascertaining such intent, considerable weight is given to the question of whether or not such clause (“and shall pay all persons who have contracts directly with principal for labor or materials”) was or was not necessary for the protection of the obligee in the bond. If the intent of such provision was necessary for the complete protection of the named obligee (in this case Cox, Inc.), then the bond is generally construed as an indemnity bond which would inure for his protection only. In other words, if the provision (number four) is not necessary for the protection of the obligee, then it must have been inserted into the bond for some purpose. The courts then construe such provision as inuring to the benefit of the laborers and materialmen. See Metropolitan Casualty Ins. Co. v. Texas Sand & Gravel Co., supra; Mosher Mfg. Co. v. Equitable Surety Co., supra; American Employers’ Ins. Co. v. Roddy, 51 S.W.2d 280 (Tex.Comm’n App.1932, holding approved); Wm. Cameron & Co. v. American Surety Co. of New York, supra; Bill Curphy Co. v. Elliott, 207 F.2d 103 (C.C.A. 5th Cir.1953); American Surety Co. of New York v. Shaw, 69 S.W.2d 47 (Tex.Comm’n App.1934, holding approved).

The question presented for decision is, therefore, whether the language of the de-feasance clause of the subject bond (as set out above) is such as would give a direct right of action to the materialmen against the surety (defendant) on the subcontractor’s bond, or whether such provision was for the exclusive benefit of Cox, the contractor. The plaintiffs herein contend that the subject bond in question combined in the one bond their requirement to furnish both a performance and payment bond. Such contention is bolstered by the fact that only one bond was issued for each job and further on the fact that the bond that was issued stated in bold type at the top of the bond the words, “Performance-Payment Contractor’s Bond”. Dickson was required by his contract with Cox to furnish both a performance and payment bond. The defendant surety company contends that the subject clause was for the protection of the obligee and, therefore, the defendant surety company is not liable to the plaintiff mate-rialmen.

Ordinarily a performance bond protects the principal for the full performance of the contract. The payment bond is generally for the sole benefit of laborers and materialmen to guarantee payments for work, labor and materials that were furnished and that went into the job. Article 5160, subd. A(b) which requires performance and payment bonds from the prime contractor on public work, provides:

“(b) A Payment Bond, in the amount of the contract, solely for the protection of all claimants supplying labor and materials as hereinafter defined, in the prosecution of the work provided for in said contract, for the use of each such claimant.”

However, the obligations of the surety arise out of and are imposed by the bond and are measured and determined by its terms. Employers’ Liability Assur. Corporation v. Trane Co., supra; Metropolitan Casualty Ins. Co. v. Texas Sand & Gravel Co., supra.

In a case of striking similarity, Wm. Cameron & Co. v. American Surety Co. of New York, supra, upon which the plaintiffs rely primarily, a materialman brought suit to recover upon a surety bond given in connection with a contract for the construction of a warehouse between the owner and general contractor. The bond executed by the defendant had a provision containing almost identical language as that contained in the bond in question. The bond in that case reads in part as follows:

“Now therefore, the Condition of this Obligation is such that if the Principal shall faithfully perform the Contract on his part, and satisfy all claims and demands, incurred for the same, and shall fully indemnify and save harmless the Owner from all cost and damage which he may suffer by reason of failure so to do, and shall fully reimburse and repay the Owner all outlay and expense which the Owner may incur in making good any such default, and shall pay all persons who have contracts directly with the Principal for labor or materials, then this obligation shall be null and void; otherwise it shall remain in full force and effect.: (Emphasis supplied.)

The court held the condition of the bond “that if the principal shall faithfully perform the contract on his part and satisfy all claims and demands incurred for the same, and indemnify and save harmless the owner from all cost and damage which he may suffer by reason of failure so to do, and reimburse and repay the owner all outlay and expense which the owner may incur in making good such default”, is for the benefit of and amply sufficient to protect the owner against liens and every other character of loss and expense, and it was unnecessary for his protection to add the clause “shall pay all persons who have contracts directly with the principal for labor and materials”, since “the contract exempted the owner from any contractual liability to them.” The court continued by stating that by such clause it was unquestionably intended to protect all such persons having contracts directly with the principal for labor or materials. Wm. Cameron & Co. v. American Surety Co. of New York, supra, and the cases cited therein. See also Parker Roofing Co. v. Aetna Casualty & Surety Co., 55 S.W.2d 508 (Tex.Comm’n App.1932, judgment adopted); Mosher Mfg. Co. v. Equitable Surety Co., supra; American Surety Co. of New York v. Shaw, supra.

The subject contract between George C. Cox and Dickson Drilling Company has a similar provision included therein protecting Cox from claims of materialmen or laborers. Said provision reads in part as follows:

“3.13 Protection Against Claims of SubContractors, Laborers, Materialmen and Furnishers of Machinery, Equipment and Supplies. The CONTRACTOR (Dickson) agrees that he will indemnify and save the OWNER (Cox) harmless from all claims growing out of the lawful demands of sub-contractors, laborers, workmen, mechanics, materialmen and fur-nishers of machinery and parts thereof, equipment, power tools, and all supplies,

Therefore, in view of the terms of the subcontract between George C. Cox, Inc. and Dickson Drilling Company, whereby Dickson agreed to protect and save harmless Cox from the claims of laborers and materi-almen, it is clear by the inclusion in the performance-payment contractor’s bond of the clause, “and shall pay all persons who have contracts directly with the principal for labor or materials,” that it was intended to protect all such persons having contracts directly with the principal (Dickson) for labor or materials.

The appellant Parliament Insurance Company contends that the two Performance-Payment Contractor’s bonds given by Dickson, as principal, to secure its performance and payment of the contract between it and Cox was strictly an indemnity bond for the contractor’s (George C. Cox, Inc.) protection only and that it was not made for the benefit of materialmen, citing as its primary authorities: Metropolitan Casualty Ins. Co. v. Texas Sand & Gravel Co., 68 S.W.2d 551 (Tex.Civ.App.—Waco 1934, writ dism’d) and Employers’ Liability Assur. Corporation v. Trane Co., 139 Tex. 388, 163 S.W.2d 398 (Tex.Comm’n App.1942, opinion adopted). These decisions, however, are clearly distinguishable from the case at bar in that there exists different circumstances together with the fact that the language of the defeasance clause in the bond in those cases differ materially from that clause contained in the bonds before us.

In Metropolitan Casualty Ins. Co. v. Texas Sand & Gravel Co., supra, the plaintiff having furnished labor and material to a subcontractor on a public works project sought to recover on the bond given by the subcontractor to the original contractor. The bond there was a statutory performance bond as provided for in Article 5160 Tex.Rev.Civ.Stat.Ann. (1971) and contained the following condition:

“The condition of this obligation is such that if the bounded principal, . shall in all things well and truly perform all the terms and conditions of the foregoing contract, . . . and shall pay all claims for labor performed and materials furnished . . . then this obligation is to be void . . . ”

The Waco Court held that the provision in the bond that the subcontractor “shall pay all claims for labor performed and materials furnished”, was necessary for the protection of the original contractor and should be construed as inserted for his benefit and not for the benefit for third parties. The court based their decision on the fact that it was well settled that an original contractor who contracted with the State for the construction of a public highway was liable, upon compliance by the creditor with the terms of the statute (Article 5160), for the costs of labor and materials furnished to a subcontractor and used by him in the construction of the road. It is important to note here, the absence of a contractual provision like that found in the case at bar, protecting the contractor from claims of laborers and ma-terialmen. It was obviously necessary for the Waco Court to construe the clause “and shall pay all claims for labor performed and materials furnished” as necessary for the complete protection of the named payee and not as inuring to the benefit of laborers and materialmen. See Wm. Cameron & Co. v. American Surety Co. of New York, supra.

The performance-payment contractor’s bond sued on here contains certain clauses in addition to those contained in the bond before the Waco Court. The subject bond provides further: that the principal “shall fully indemnify and save harmless the obli-gee from all cost and damage which the obligee may suffer by reason of failure so to do and shall fully reimburse and repay the obligee all outlay and expense which the obligee may incur in making good any such default . . The Metropolitan Casualty case, therefore, is no authority for appellant’s contention.

The Employers’ Liability Assur. Corporation v. Trane Co., supra, is also distinguishable and is no authority for appellant’s contentions. There, the plaintiff brought an action against the surety on a subcontractor’s bond (Article 5160 Bond) to recover an amount due for materials sold to the subcontractor by plaintiff. Included within the contract between the general contractor and the subcontractor was a provision whereby the subcontractor agreed to pay for all labor and materials used and protect the owner and original contractor from these claims. Thus, there existed a provision in the contract like that in the Wm. Cameron case between the contractor and subcontractor protecting the contractor from claims of laborers and materialmen. However, the bond sued on contained a defeasance clause much unlike the defea-sance clause existing in the case at bar containing no such protective clause. That clause reads in part as follows:

“If the said principal shall well, truly and faithfully keep and perform all of the terms, provisions, covenants and conditions of the foregoing contract . . ., then this obligation shall be void.”

The court held that the obligation of the principal to pay for labor and materials (contained in the contract) was made by reference a part of the condition stated in the bond and, therefore, the substance of the defeasance clause was thus construed to mean that if the principal shall perform the terms and conditions of the contract and pay for all labor and materials used and required and protect the contractor and owner from all claims, then the obligation shall become null and void. The court after making such a construction held that the provision in the contract between the original contractor, and the subcontractor, that the latter shall pay for all labor and materials, made by reference a part of the defea-sance clause in the bond, was necessary for the complete protection of the original contractor. Such clause was made necessary for the complete protection of the original contractor by the fact that no other provision in the bond existed protecting the contractor. Again, this case is not controlling, because the language of the defeasance clause differs materially from that contained in the bond now before us.

We pause to note the Texas rule that all doubts in the construction of the bond must be resolved against the surety. National Surety Corporation v. Rauscher, Pierce & Co., 369 F.2d 572 (C.C.A. 5th Cir.1967); Fidelity & Deposit Co. of Maryland v. Central State Bank of Dallas, 12 S.W.2d 611 (Tex.Civ.App.—Waco 1928, no writ); First State Bank of Temple v. Metropolitan Casualty Ins. Co. of New York, 125 Tex. 113, 79 S.W.2d 835 (1935).

In connection with the surety’s intent in executing the bond, the construction contract between Cox and Dickson should be considered. The contract required Dickson to guarantee payment to all material-men. The intent then is to be determined by the terms of the bond construed in light of the contract in connection with which it was executed. 17 Am.Jur.2d Contractors’ Bonds § 17 (1964). Here, the contract was expressly made a part of the bond. The defendant surety company had knowledge of the provision contained therein which included the promise by Dickson to protect Cox from all claims of materialmen and laborers (such as plaintiff herein). Having such knowledge, it is clear to us that the defendant surety company by including in the bond the specific clause: “shall pay all persons who have contracts directly with the principal for labor or materials”, intended that this specific clause was inserted for the protection of the materialmen. The part of the title of the bond (i. e. “Payment”) would not have been inserted by the surety company if this was not so, as it would have been a misleading label.

There has been a vast amount of litigation on the subject of the liability of a surety company on such a bond. In other jurisdictions where the same form of bond in identical language (excepting the heading in some instances) was under consideration, it was held that those who furnished material to the subcontractor were entitled to recover thereon. See Pittsburgh Plate Glass Co., Inc. v. Fidelity & Deposit Co. of Maryland, 193 N.C. 769, 138 S.E. 143 (1927); Mansfield Lumber Co. v. National Surety Co., 176 Ark. 1035, 5 S.W.2d 294 (1928); Aetna Casualty & Surety Co. v. United States Gypsum Co., 239 Ky. 247, 39 S.W.2d 234 (1931); Johnson Electric Co. v. Columbia Casualty Co., 101 Fla. 186, 133 So. 850 (1931); Fidelity & Deposit Co. of Baltimore, Md. v. Rainer, 220 Ala. 262, 125 So. 55 (1929); Hartford Accident & Indemnity Co., Hartford, Conn. v. W. & J. Knox Net & Twine Co., 150 Md. 40, 132 A. 261 (1926); Byram Lumber & Supply Co. v. Page, 109 Conn. 256, 146 A. 293 (1929); Thompson Yards v. Van Nice, 59 S.D. 306, 239 N.W. 753 (1931); La Salle Iron Works, Inc. v. Largen, 410 S.W.2d 87 (Mo.Sup.Ct.1967). See also 77 A.L.R. 21, 56; 118 A.L.R. 57, 65; 17 Am.Jur.2d Contractor’s Bonds § 18 (1964).

We hold that the defendant surety company intended to issue a payment bond for the benefit of the materialmen as the contract provided. We further hold that the bond as written, in any event, was for the benefit of the plaintiff materialmen. Appellant’s points of error 1-6 are overruled.

In appellant’s points of error 7 through 14, it contends that if in fact the performance-payment contractor’s bond inures to the benefit of the plaintiff materialmen, the bond covers only those materials furnished to Dickson after the execution of the bond (August 14, 1972). It is stipulated by the parties that sometime around July 3, 1972 plaintiff Foster sold and delivered materials to Dickson, valued at $8,137.63, plus $59.61 freight charges, to be used on the W.C.I.D. 109 project; and that plaintiff Smith sold and delivered $8,076.92 worth of materials to Dickson at some time prior to August 14, 1972, to be used on the W.C.I.D. 109 project. The surety company, therefore, contends that it is not liable for such materials furnished to Dickson prior to August 14, 1972 when the defendant surety executed the performance-payment contractor’s bond.

The plaintiffs assert first that the surety company’s contention that it is not liable for materials furnished the subcontractor prior to the execution date of the bond constitute an affirmative defense of avoidance and was waived by its failure to plead the same. Plaintiffs further assert that even if such point is properly in the case, the authorities hold that if the materials were actually incorporated in the job it is immaterial whether the materials were furnished to the subcontractor prior to or after the date of the bond. We agree with both contentions.

The surety company did not plead that it was not liable on its performance-payment contractor’s bond for certain materials furnished to the principal because the material was furnished prior to the bond being executed. Such an assertion is an affirmative defense that must be pleaded otherwise it is waived. Since this defense of avoidance was not pleaded, it was waived. Rule 94, T.R.C.P.; Manes Construction Company v. Wallboard Coatings Company, 497 S.W.2d 334 (Tex.Civ.App.—Houston [14th Dist.] 1973, no writ); See also Petroleum Anchor Equipment, Inc. v. Tyra, 419 S.W.2d 829 (Tex.Sup.1967); Mercantile National Bank at Dallas v. Electrical Supply Corporation, 434 S.W.2d 907 (Tex. Civ.App.—Dallas 1968, writ ref’d n. r. e.); 2 McDonald’s Texas Civil Practice § 7.34.1 et seq.

It has been held that, where the bond of the subcontractor inures to the benefit of the laborers and materialmen, it is immaterial if some of the materials were furnished to the principal contractor prior to the execution of the bond, so long as such labor and materials were used in the performance of the work which was covered by the subcontract. Reed v. Maryland Casualty Company, 244 F.2d 857 (C.C.A. 5th Cir. 1957); 13 Couch on Insurance 2d § 47:188 (1965). It is undisputed that the materials in question which were furnished to Dickson, were used on the project. There was nothing in the bond which would exclude payment for materials that were used on the project, if they were furnished or purchased prior to the bond being executed.

Appellant contends that this case is governed by the general rule that a contract of surety is not retrospective in its operation and no liability attaches to the surety for defaults occurring before it is entered into, unless an intent to be so liable is indicated. Citing 74 Am.Jur.2d § 30 Suretyship; 72 C.J.S. Principal and Surety § 108. This argument has no merit since there is no evidence of a default by Dickson prior to the date the bond was executed. Appellant’s points of error Nos. 7-14 are overruled.

The surety company in its points of error 15 through 22 asserts that there was no evidence to support the jury’s answers to the special issues and that the jury’s answers thereto were against the greater and overwhelming weight of the credible evidence.

Where the contention on appeal is that there is no evidence to support the jury findings, it is the duty of the reviewing court to view the evidence in its most favorable light, considering only the evidence and inferences which support the finding, and rejecting the evidence and inferences which are contrary to the findings. Butler v. Hanson, 455 S.W.2d 942 (Tex.Bup.1970); Garza v. Alviar, 395 S.W.2d 821 (Tex.Sup. 1965); Calvert, “No Evidence” and “Insufficient Evidence” Points of Error, 38 Tex.L. Rev. 361 (1960). The “against the great weight” points require us to review and weigh all evidence. In re King’s Estate, 150 Tex. 662, 244 S.W.2d 660 (1951).

The record reflects that prior to furnishing Dickson materials for the two subject projects, Dickson owed the plaintiffs outstanding balances that were unpaid. Dickson made several payments to plaintiff Foster; one being on April 19, 1972, in the amount of $2,683.96 and another on June 22, 1972, in the amount of $2,630.34, plus a $1,000.00 payment on August 1, 1972. The proof also shows that Dickson made payments to plaintiff Smith; one in the amount of $2,335.52 on June 23, 1972, and another in the amount of $4,060.57 on July 8, 1972.

The surety company contends that when payments are made from the proceeds or fruits of the very contract, business or transaction covered by the obligation of a surety, and when the source of the funds are known to the creditor or person receiving the same, the surety is entitled to have the payments applied to the discharge of the debt for which he is bound, even though application has been made by the creditor otherwise. Citing Aetna Casualty & Surety Co. v. Hawn Lumber Co., 128 Tex. 296, 97 S.W.2d 460 (1936). This case is not controlling. The evidence shows that the plaintiffs did not know the source of the payments, nor did they receive any instructions or directions on how such payments were to be applied. See also Munn v. Riggs, 257 S.W.2d 714 (Tex.Civ.App.—Amarillo 1953, no writ).

Miss Krahl, the credit manager of L. B. Foster Company, testified that these payments were received from Dickson, but that there were no instructions as to what invoices they were to be applied to or any information as to the source of these funds. The amount of the payments did not match any particular invoice. They were, therefore, applied to the oldest accounts, leaving the invoices for materials supplied on the water district projects unpaid.

Betty Wright, the assistant office manager for Howard Smith Company, testified that the payments which they received from Dickson were received without instructions or directions as to how they should be applied. She stated that she credited them to the balance of the account (oldest unpaid portion of account) since the checks did not equal any combination of any invoices. It is, therefore, clear that there is ample evidence to support the jury’s findings to the special issues that an officer, employee, or an agent of both plaintiffs did not know the source of those payments and should not have known.

Having considered all of the evidence the surety company’s points of error Nos. 15-22 are overruled.

Judgment of the trial court is affirmed.


source: Caselaw Access Project

author: COULSON, Justice.

license: Public Domain

text:
    Dorothy Gray HORLOCK, Appellant, v. Roy M. HORLOCK, Appellee.
    No. 1158.
    Court of Civil Appeals of Texas, Houston (14th Dist.).
    Dec. 31, 1975.
    Rehearing Denied Feb. 25, 1976.

      Robert J. Piro, Baker & Botts, Eugene L. Smith, Houston, for appellant.

      Bryan W. Scott, Michael D. Stewart, Urban, Coolidge, Pennington & Scott, Houston, for appellee.
   COULSON, Justice.

. This is an appeal from a final decree of divorce. The principal issue is whether the court’s property division is just and right.

Dorothy Gray Horlock, appellant, thirty-five years of age, and Roy M. Horlock, appellee, forty-one years of age, were married on November 22, 1966. Dorothy Gray Horlock had not been previously married. Roy M. Horlock was married to Margaret Boudreaux Horlock until her death on August 1, 1965. She bequeathed her entire estate to Roy M. Horlock. Three daughters were born to Margaret Boudreaux Horlock and Roy M. Horlock. One child, a son, was born to Dorothy Gray Horlock and Roy M. Horlock.

The parties separated on or about July 1, •1973. A final decree granting the appellant a divorce was entered on January 6, 1975. Custody of the son was granted to appellant. Appellee was ordered to pay child support of $750 per month, to pay for his son’s medical hospitalization, to pay his son’s medical and dental expenses in excess of $100 per year, to pay all of his son’s orthodontic expenses, and to pay his son’s private school tuition. Appellee was granted visitation rights with his son at specified times.

The divorce decree ordered a division of the Horlocks’ estate and established responsibility for the discharge of debts and liabilities. The appellant’s attorney was awarded a judgment against appellee of $15,000 for legal services rendered on appellant’s behalf. All costs were adjudged against the appellee. Dorothy Horlock has brought this appeal.

Appellant’s points of error concern four major issues. First, the appellant contends that certain gifts made during their marriage by Roy M. Horlock to his three daughters constituted fraud on the appellant’s community estate. Second, the appellant challenges the trial court’s determination that the separate estate of the appellee was entitled to reimbursement from the community estate for the proceeds from the sale of property owned by appellee prior to the date of the marriage (these proceeds having become totally comingled with the community estate of the parties). Third, the appellant contends that the trial court abused its discretion in the division of the parties’ property because the division was not fair and equitable. Fourth, the appellant contends that the trial court erroneously determined that certain shares of capital stock in Collegiate Services Corporation were a part of the community property of the parties; her argument being that the stock was his separate property.

THE GIFTS TO THE CHILDREN

During the marriage, the appellee made gifts to his mother, who was blind and confined to a nursing home. He also made gifts to his three daughters and to his son. On appeal, the appellant has challenged only the gifts to the three daughters as being a fraud on her rights. The gifts ranged in value from $3,000 to $6,000 per year plus an amount equal to the lifetime federal gift tax exclusion for both the ap-pellee and the appellant. The total value of the gifts to the three daughters was $131,-517.

Appellant’s contention that community property was used in making the gifts is not challenged by appellee. He did not tell the appellant that he was making the gifts to his three daughters, and admitted that the appellant would have strenuously protested had she known of the gifts. In 1972, appellee filed a gift tax return on which the appellant’s name appeared. A third party signed the appellant’s name to the return at the request of the appellee, who acted without the knowledge and consent of the appellant. The appellee and his accountant testified that the resulting income tax advantage generated by the gifts to his children was the motivation for the gifts. The appellee testified that in making the gifts he intended no deprivation of the appellant’s rights. The trial court found that the appellee had not perpetrated an actual or constructive fraud upon the appellant by making the gifts to his three daughters.

To sustain a cause of action for actual fraud, the appellant has the burden of showing that the gifts were made with the primary purpose of depriving her from having the use and enjoyment of the assets comprising the gifts. Actual fraud involves dishonesty of purpose or intent to deceive. Land v. Marshall, 426 S.W.2d 841, 846 (Tex.Sup.1968); Archer v. Griffith, 390 S.W.2d 735, 740 (Tex.Sup.1964). Here, the appellant has failed to sustain her burden of showing an actual fraud. The evidence in support of appellant’s position is conflicting. The appellee admitted that he made the gifts knowing that the appellant would not approve of them, however, there is ample evidence that the appellee’s intention in making the gifts was to benefit both the community estate and the parties’ individual estates upon the death of each or both of them.

The trial court found that at the time of the marriage, appellee owned property having a net value of approximately $1,000,000. Most, if not all of the community estate, would be classified as the special community of the husband under Texas Family Code Annotated, § 5.22. There may be a fraud on a spouse’s community interest where the special community property of the other spouse is involved. However, the fact that it is a spouse’s special community is important in considering the rights of disposition which accrue to that spouse given the special nature of that community property. It is not necessary that one spouse approve or agree with the dispositions made by the other spouse of that other spouse’s special community property. Murphy v. Metropolitan Life Insurance Company, 498 S.W.2d 278 (Tex.Civ.App.—Houston [14th Dist.] 1973, writ ref’d n. r. e.). The single fact that the appellee intentionally prevented the appellant from finding out about the gifts which he made to his daughters does not constitute actual fraud.

In the instance of constructive fraud, a gift of one spouse’s share of the community property will be set aside where the gift is unfair to that spouse. It was the appellee’s burden to prove that the gifts were fair. Murphy v. Metropolitan Life Ins. Co., supra; Givens v. Girard Life Insurance Company of America, 480 S.W.2d 421 (Tex.Civ.App.—Dallas 1972, writ ref’d n. r. e.).

In considering the wife’s claim of a constructive fraud against her share of the community property the courts have considered three primary factors. Those factors are the size of the gift in relation to the total size of the community estate, the adequacy of the estate remaining to support the wife in spite of the gift, and the relationship of the donor to the donee. Givens v. Girard Life Insurance Company of America, supra; Hartman v. Crain, 398 S.W.2d 387 (Tex.Civ.App.—Houston 1966, no writ).

Significant to the disposition of the issue of constructive fraud in this case are the findings of fact filed by the trial court. Among other things, the trial court found that Roy M. Horlock had three daughters by his prior marriage. At the time of the parties’ separation the girls’ ages were fourteen, seventeen and eighteen. The daughters inherited nothing from their deceased mother, whose will named Roy M. Horlock as her sole beneficiary of her substantial estate. The trial court further found that during their marriage, Dorothy Gray Horlock and Roy M. Horlock quarreled over Dorothy Gray Horlock’s demands that Roy M. Horlock’s daughters not share with her in his properties. She also demanded an interest in the properties owned by Roy M. Horlock prior to the marriage.

Roy M. Horlock’s daughters are the natural objects of his bounty. The total value of the gifts to the daughters was $131,517. The trial court found as a fact that the appellee at the time of the marriage owned properties having a net value of approximately $1,000,000, and that at the time of the dissolution of the marriage appellant and appellee owned properties having a net value of approximately $3,000,000 to $4,000,000. It is evident that throughout the marriage the value of the estate was in excess of $1,000,000. Assuming the lower value of $1,000,000, the appellee’s gifts to his three daughters constituted no more than 13.1517% of the total estate. The remaining minimum figure of approximately $870,000 in community funds would be sufficient to provide for the needs of the wife. The foregoing facts and considerations coupled with the tax advantages sought by the appellee removes the gifts by the appellee to his daughters from the pale of a constructive fraud upon the wife’s portion of the community estate.

The appellant’s first four points of error are overruled.

THE RIGHT OF THE HUSBAND’S SEPARATE ESTATE TO REIMBURSEMENT FROM THE COMMUNITY ESTATE

Appellant’s points of error eight through eleven challenge the trial court’s conclusions of law that the appellee is entitled to reimbursement for the use of his separate funds to enhance, improve, and increase the value of the community estate. The trial court concluded as a matter of law that regardless of appellee’s equitable right of reimbursement, the property division made in the judgment is fair and equitable.

As a part of the findings of fact, the trial court found that at the time of the marriage the appellee owned properties having a net value of approximately $1,000,000. Subsequent to the marriage the appellee sold separate property real estate for approximately $700,000. The appellee also received payments in excess of $200,000 under certain contracts which had been entered into prior to the marriage and which the appellee had already performed. The total value of the separate property sold and collected subsequent to the marriage was $921,000. The appellee, in his role as manager of his separate estate and the parties’ community estate, placed the proceeds of these sales into an investment account at the First City National Bank of Houston. The account existed prior to marriage and had been in use by the appellee, who was engaged in the real estate business. He had become established as a successful businessman in various phases of the building and apartment businesses, including construction, ownership and management.

The appellee comingled the proceeds of the sale of his separate property with the community property of the parties. The appellee admitted at trial and admits in his brief that the proceeds of the sale of his separate property have become completely comingled with the community estate. Ap-pellee made no attempt at trial to trace the use of the proceeds of the sale of his separate property into any other transactions. The trial court determined in its conclusions of law that the appellee was entitled to reimbursement by reason of using his separate funds to enhance, improve and increase the value of the community estate. The trial court did not determine the amount of such reimbursement; however, the court did find as a fact that during the marriage specific properties owned by the appellee prior to the marriage were sold for a total sum in excess of $900,000, which was placed in the investment account at First City National Bank of Houston and thereafter used for the enhancement of the community estate.

The appellant requested additional findings of fact to compel the trial judge to specifically determine the amount of reimbursement to which the appellee’s separate estate was entitled. However, the trial judge refused to reply to that request.

It is the appellant’s position that the ap-pellee is not entitled to reimbursement to his separate estate. The appellant further contends that, although the appellee may have utilized the proceeds of the sale of his separate property for the benefit of the community estate, the appellee allowed his separate property to become completely co-mingled with the community estate to a point at which segregation of the two estates is impossible. Appellant argues that the application of the doctrine of reimbursement is precluded by Texas Family Code Annotated § 5.02, which states:

Property possessed by either spouse during or on dissolution of marriage is presumed to be community property.

The appellant contends that neither of the two recognized methods of escaping the effect of the presumption of community property, tracing or reimbursement, is applicable in this case. Here, tracing is impossible. Appellant contends that the ap-pellee is also unable to rely upon reimbursement because the appellee cannot show that the specific use to which the proceeds of the sales of his separate property were put benefited the community. Appellant argues that the appellee cannot rely on the gross assumption that the $921,000 was used to benefit the community, in the absence of some direct evidence of how those funds were spent. It is the appellant’s position that at the dissolution of a marriage, a spouse must trace and clearly identify separate property in order to discharge the burden of satisfactorily proving that such property is not community property. She relies on Tarver v. Tarver, 394 S.W.2d 780 (Tex.Sup.1965); Moor v. Moor, 24 Tex.Civ.App. 150, 255 S.W. 231 (San Antonio 1900, no writ); and Ervin v. Ervin, 60 Tex.Civ.App. 537, 128 S.W. 1139 (1910, writ dism’d).

The cases cited by the appellant are not directly in point. In Tarver the parties challenging the trial court’s determination that certain properties were community in nature proceeded under the theory of constructive trust and sought to be awarded a one-half interest in the properties themselves. The issue of reimbursement was not raised. The challenging parties were required to trace those funds held prior to the marriage into specific assets held at the dissolution of marriage in order to discharge their burden.

Moor is most frequently cited for the proposition that reimbursement will not be allowed when the husband comingles his separate estate with the community estate. Moor is discussed at length in a commentary by Professor Huie. Huie, Commentary on the Community Property Laws of Texas, 13 Tex.Rev.Civ.Stat.Ann. 25 (1960). See also Comment, 36 Texas Law Review 196 (1955); _ 6 St. Mary’s Law Journal 234 (1974). In Moor the husband first sought to trace the assets from his separate estate to that which he had comingled with the community estate. His claim for reimbursement was apparently an alternative claim. In that context, the husband attempted to pass the entire loss of a business venture onto the community estate rather than accepting a proportionate share of the loss on his separate estate. It should be observed that the remedy of reimbursement is equitable in nature. Considering the situation presented in Moor, the court equitably refused to sustain the husband’s contentions.

Ervin is an example of a large number of cases wherein the husband failed to raise the claim of reimbursement. The arguments of appellant on the issue of reimbursement are not persuasive. It should be kept in mind that in seeking reimbursement the appellee does not ask to share in the actual assets which have been determined to be community property. Rather, the ap-pellee seeks to recover an amount substantially equal to the amount of capital which he brought into the marriage as separate property and which he utilized for the benefit of the community estate.

Since the latter 1940’s, courts in Texas have acted favorable toward allowing reimbursement and in allowing the tracing of separate funds. For example, in Hartman v. Hartman, 253 S.W.2d 480 (Tex.Civ.App. 1952, no writ), the husband was awarded reimbursement of $30,000 as compensation for the investment of his separate estate in the community business. The husband had entered into the marriage owning separate property valued at $37,794. He was engaged in the construction business and operated out of a single investment banking account. The evidence in Hartman showed that during the course of the marriage more than $200,000 passed through the bank account. The facts did not lend themselves to tracing, but the trial court did award reimbursement. See also Schmidt v. Huppman, 73 Tex. 112, 11 S.W. 175 (1889); Farrow v. Farrow, 238 S.W.2d 255 (Tex.Civ.App.—Austin 1951, no writ). For examples of a more liberal treatment of the tracing doctrine, see Blumer v. Kallison, 297 S.W.2d 898 (Tex.Civ.App.—San Antonio 1956, writ ref’d n. r. e.); Barrington v. Barrington, 290 S.W.2d 297 (Tex.Civ.App.—Texarkana 1956, no writ). Another development in this area is exemplified by the case of Sibley v. Sibley, 286 S.W.2d 657 (Tex.Civ.App.—Dallas 1955, writ dism’d). Sibley stands for the proposition that where a bank account contains both community and separate monies, it is presumed that community monies are drawn out first.

Under these cases, the trial court was justified in awarding the husband a separate estate reimbursement. The husband’s separate estate served as a strong foundation upon which the community’s wealth was built. Throughout the marriage the husband utilized that foundation to provide for the appellant and to establish the $3,000,000 to $4,000,000 estate. Equity is well served by reimbursing him for that initial investment. In this case there is no question of fraud against the wife’s estate, against the community, or against any third party creditor. One of these factors could shift the equities involved and preclude the appellee’s recovery of reimbursement.

As a part of the appellant’s argument on the question of reimbursement, complaint is made of the trial court’s failure to make additional findings of fact and conclusions of law relative to the appellee’s claim for reimbursement. The trial judge’s reticence to make such findings served only to cloud the issue in the case on appeal. In view of the position which we take on the issue of reimbursement, the trial court’s decision not to make additional findings of fact was harmless error. The trial court did not make specific findings as to each asset claimed as a source of reimbursement. Because no such findings were requested by the appellant, it is unnecessary for us to discuss the status of each of the assets claimed by the appellee as separate property-

THE DIVISION OF THE COMMUNITY ESTATE

Appellant’s points of error 12 and 13 urge that the trial court’s division of the community estate was so unfair and inequitable as to constitute an abuse of discretion.

The property division ordered by the court awarded to the appellant assets with a net value of $1,295,306. The appellee was awarded assets with a net value of $2,682,-023. However, the record demonstrates that the husband by virtue of his investments in Collegiate Services Corporation, was under a contingent liability of roughly $2,000,000. Further, the court’s property division allocated one-half of the Collegiate Service Corporation stock to the appellant but did not obligate the appellant to service the debt incident to the stock. The court found that the Collegiate Service Corporation stock did not have a market value, but that it had future potential. The effect of the judgment was to award the appellant the right to receive the benefits of any increase in value of the Collegiate Service Corporation stock without any obligation to service the debt coupled with such ownership.

The community estate’s debt structure was examined in great detail during the trial of the case. Most of the community’s assets served as security for outstanding debts. Some of the debts were free of personal liability. By the terms of the judgment the appellee was made responsible for the majority of the debt. Many debts were evidenced by promissory notes bearing short term maturity dates. In order for the appellee to successfully refinance the short term obligation and to service the long term indebtedness, it was necessary for him to have greater liquidity than the appellant. When considering the debt status of the community estate, it is clear that the unequal division of the community estate was necessary in the interest of preserving the community assets. Such a consideration does not constitute an abuse of discretion. Carle v. Carle, 149 Tex. 469, 234 S.W.2d 1002 (1951); Waggener v. Waggener, 460 S.W.2d 251 (Tex.Civ.App.—Dallas 1970, no writ); Dorfman v. Dorfman, 457 S.W.2d 417 (Tex.Civ.App.—Texarkana 1970, no writ). The appellant’s points 12 and 13 are overruled.

Appellant’s points 14 and 15 involve the value of a washateria business awarded to the appellant which the appellee claimed to be community property but which the trial court determined to be the appellee’s separate property. The appellant valued the washateria business at $100,000, five times its net income. The appellee valued the washateria at approximately $5,000. On appeal, the parties have reversed their positions. The appellee would prefer that the assets be valued at the higher level to decrease the difference between the appellee’s and the appellant’s share of the community estate. The appellant for the same reason seeks a value to be placed upon the wash-ateria business at the lower figure of $5,000. It is admitted by the appellant that points 14 and 15 are of little importance in this appeal. We find points of error 14 and 15 are immaterial; they are overruled.

COLLEGIATE SERVICES CORPORATION STOCK

Prior to the marriage, the appellee owned 800 shares of Student Housing, Inc., a corporation engaged in providing off-campus housing for students at various colleges and universities. On February 6, 1969, Student Housing, Inc. merged with two other corporations to form Collegiate Services Corporation. As a result of that merger the appel-lee became the owner of 14,152 shares of Collegiate Services Corporation stock. A year after the merger, the parties acquired an additional 40 shares of stock in CSC.

At the time of the merger, the owners of Student Housing, Inc. contributed its assets and $200,000 in order to participate equally in the merger. The $200,000 was paid to Student Housing, Inc. to discharge certain obligations. This payment stabilized the debt structure of Student Housing, Inc. at the time of the merger. The CSC stock was issued to Mr. Horlock in exchange for his stock in Student Housing, Inc.

During the trial and on appeal the appellant attempted to demonstrate that the ap-pellee’s shares of CSC stock, presumed to be community property of the parties, were in fact the separate property of the appellee. The appellant further attempted to show that if the CSC stock was the appellee’s separate property the community estate was entitled to a reimbursement of $100,000 for funds spent to maintain the appellee’s interest in CSC. The trial court found that the appellee contributed separate and community funds of approximately $60,000 to maintain this investment prior to the merger of CSC and Student Housing, Inc. After the merger, the appellee made additional contributions of approximately $40,000 toward preserving the CSC investment. The court’s division of the community property awarded one-half of the CSC stock to the appellant and one-half of the CSC stock to the appellee. However, it was ordered that only the appellee would be liable for the outstanding obligations accruing with the ownership of the CSC stock. In the event CSC calls upon its shareholders for additional contributions, the appellant may pass the cash call and thereby forfeit her stock in CSC to the appellee, or, the appellant may pay the cash call outright or upon terms specified in the judgment and retain her stock position in CSC.

The trial court made no specific findings as to the separate or community nature of the shares of CSC stock. However, the trial court in its conclusions of law enumerated those properties found to be the separate property of the appellee and did not include the CSC stock. From that conclusion of law it may be inferred that the trial court determined that the CSC stock was the community property of the parties. The appellant’s position is that the CSC stock was the separate property of the ap-pellee. Therefore, the appellant argues that the appellee owed the community estate a reimbursement of $100,000 for community funds spent to benefit the appellee’s separate property, the CSC stock.

The question presented is whether the appellant sustained her burden of overcoming the presumption that the CSC stock was the community property of the parties. There is no question that the original block of 14,152 shares of CSC stock was acquired by Mr. Horlock as a result of the merger of Student Housing, Inc. with the two other corporations. The shares of stock held by the appellee in Student Housing, Inc. were his separate property because he owned them prior to this marriage. Mutations and changes in the character of property do not affect the property’s nature as separate or community, where it can be definitely traced and identified by clear and satisfactory proof. Speer, Marital Rights in Texas § 389 (4th Edition) (1961).

The evidence clearly establishes that the 14,152 shares of CSC stock acquired as a result of the merger were a part of the appellee’s separate property. The additional 40 shares of CSC stock acquired by the parties on May 31, 1970 are presumed to be community property rather than separate property of the appellee.

In the additional findings of fact, the trial court determined that separate and community funds in the approximate amount of $100,000 had been spent on the maintenance of the CSC investment. However, the trial court refused to make a determination of the amount of reimbursement due to the community estate by virtue of its contribution to the maintenance of the CSC investment. Because we find that, as a matter of law, the original 14,152 shares of CSC stock were the separate property of the appellee, the community estate is entitled to reimbursement from the separate estate of the appellee for that portion of the community estate expended on the maintenance of the CSC investment. It is the appellant’s burden to establish the right of equitable reimbursement of the community estate from the separate estate of the appellee. The appellant is aided in meeting her burden by the presumption that assets purchased and money spent during marriage are community rather than separate property. Hartman v. Hartman, 253 S.W.2d 480 (Tex.Civ.App.—Austin 1952, no writ). The trial court’s failure to determine that the 14,152 shares of CSC stock were a part of the separate estate of the appellee is error. Based upon the presumptions favoring the position of the appellant, the community estate is entitled to a reimbursement from the separate estate of the appel-lee in the sum of $100,000 expended during the period of the marriage. The $100,000 to be reimbursed to the community estate shall be divided $50,000 to the appellant and $50,000 to the appellee. Appellant’s points of error number 5, 6 and 7 are sustained.

Texas Family Code § 3.63 provides that in a decree of divorce the court shall order a division of the parties’ estate in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage. The division of the property need not be equal if the circumstances will justify awarding more than one-half to one spouse. The court’s power extends to separate as well as community property. A variety of factors may justify an unequal division. Here, the court could consider the fact that the husband owned assets with a net worth of over $1,000,000 at the time of the marriage and that the assets were utilized in developing the community estate.

The right of reimbursement is- an equitable right. It may be considered by the trial court in the division of the properties of the parties. The generous provisions made for the support of the parties’ son is an additional equitable consideration which may be considered in the division of the parties’ properties. The debt structure of the assets of the parties and the necessity of the renegotiation of numerous short term debts by the husband, as well as the extensive contingent liability imposed upon the husband, are equities to be considered by the trial court in dividing the parties’ properties. In exercising its equitable powers, the court may consider the fact that the parties’ estate primarily consists of equitable interests in real property, much of which is unimproved, and the fact that the prevailing economic conditions constitute a threat to the community estate as an entirety. Upon reviewing the record in this case, we conclude that the court’s property division is just and right.

The judgment of the trial court is modified to require the appellee to reimburse $100,000 to the community estate for advances used to maintain the CSC investment. Such reimbursement shall be paid $50,000 to the appellant and $50,000 to the appellee. In all other respects the judgment of the trial court is affirmed.


author: PEDEN, Justice.

text:
    Waymon Joel TAYLOR, Appellant, v. COLONIAL SAVINGS ASSOCIATION, Appellee.
    No. 16545.
    Court of Civil Appeals of Texas, Houston (1st Dist.).
    Dec. 31, 1975.
    Rehearing Denied Feb. 12, 1976.

      Hicks, Hirsch, Glover & Cochran, Iris Hefter Robinson, Houston, for appellant.
    Vinson, Elkins, Searls, Connally & Smith, Frank C. Gibbs, III, Houston, for appellee.
   ON MOTION FOR REHEARING

PEDEN, Justice.

We withdraw the opinion we filed on November 6, 1975, in this case and substitute this opinion for it.

The plaintiff, Waymon Taylor, appeals from the entry of a judgment notwithstanding the verdict. Colonial Savings, his mortgagee, had obtained a fire insurance policy on the mortgaged property at Taylor’s expense, as authorized by the deed of trust, and Taylor sued Colonial, alleging that it negligently failed to obtain insurance coverage on his garage apartment, the one of his two buildings that was later damaged by fire.

The jury made these findings in response to special issues:

1) Colonial Savings Association undertook to provide fire insurance coverage on Mr. Taylor’s premises.
2) Colonial or its officers or representatives were aware that there were two structures on the premises.
3) (submitted conditionally) Colonial or its officers or representatives failed to relay this information to the C. M. Burton Insurance Agency.
4) (submitted conditionally) The failure to relay this information to the C. M. Burton Insurance Agency was negligence.
5) (submitted conditionally) The negligence was the proximate cause of Mr. Taylor’s not being able to recover for the fire loss to his property.
10) The jury did not find Taylor negligent in the way he examined his insurance policy.
12) Taylor failed to request issuance of fire insurance on the garage apartment.
13) The jury did not find this failure to be negligence.
14) Reasonable restoration cost was $5,594.20.

Taylor’s first point of error is that the trial court erred in granting Colonial’s motion for judgment notwithstanding the verdict on the grounds that the findings in answer to Special Issues 3, 4 and 5 should be disregarded for the reason that, as a matter of law, appellee had no duty to perform or omit to perform acts pertaining to the transaction in question. Taylor argues that a duty to act in a non-negligent manner arises whenever an affirmative course of action is undertaken, even though the service is gratuitous.

We look to the evidence. Taylor obtained the property in 1967 from a Mr. and Mrs. J. E. Reynolds, who conveyed it “subject to the existing lien with Colonial Savings Association.” The Reynolds, as grantors, had executed a deed of trust to secure the lien. It contained this provision:

“The grantors further agree . to keep all improvements now on or hereafter placed on the property hereby conveyed, insured against loss or damage by fire and other hazards ... in such amounts as may be required by such holder (but such amounts shall never be required for more than the unpaid balance owing on said indebtedness, or the largest amount obtainable), with all loss or damage payable, by the terms of each policy, to the holder of said indebtedness as its interest shall appear ... In the event the grantors fail ... to furnish hazard insurance policies and pay the premiums thereon, as hereinbefore provided, the holder of the indebtedness may . . procure such insurance and add the amount paid . to the indebtedness held by it . . . ”

Taylor testified that when he bought the Reynolds’ equity in the property, Mr. Reynolds said it was insured and the insurance was being paid through Colonial. The next time he heard from Colonial was some time later, when the insurance had expired and Colonial had renewed it.

Colonial sent the following letter dated July 23, 1968:

“Mr. Waymon Joel Taylor, Sr.
1232 Richelieu Street
Houston, Texas 77018
“Re: Loan 800 - 0068
Property 846 E 26th St. Sunset Heights
“Dear Mr. Taylor:
“The insurance coverage on the above captioned has expired today and we have bound $8,700 coverage with out agent on this property.
“Please let us know if you now live on this property. If you do reside at this address, you may wish to have this coverage written as a homeowner’s instead of a straight fire policy.
“Let us know in order that we may have the agent write this coverage.
Yours truly,
/s/ Esse Priester”

Taylor agreed that he probably received this letter from one to three days after July 23,1968. He testified that he called Colonial and told them he didn’t live on the property and wasn’t going to live there. He said he asked Colonial about liability coverage and was given the telephone number of the insurance agent, Mr. Burton. He talked to Burton about the two houses on the property. He received an insurance policy from Colonial a few days later, glanced at it and filed it away, thinking his buildings were adequately protected. He doesn’t know whether the policy that Reynolds had covered both buildings. Reynolds told him the place was insured and he relied on that.

The insurance policy obtained by Colonial included $8,700 in fire insurance coverage. It provided that loss on building items be payable to Colonial as mortgagee or trustee as its interest may appear. The property described was “One Comp. Asbestos Siding Building at 842 E. 26th Street, Houston, Texas . . .” The amount of Taylor’s debt to Colonial is not in evidence. The title guaranty policy he obtained when he bought Reynolds’ equity in January 1967, states that Reynolds’ note to Colonial was in the original amount of $8,700.

Taylor based his suit on his claim that Colonial was negligent in not obtaining insurance coverage on the garage apartment; he neither pleaded nor proved that Colonial had any contractual duty to obtain insurance coverage on the garage apartment.

Taylor cites Fox v. Dallas Hotel Co., 111 Tex. 461, 240 S.W. 517 (1922) in support of his position that even though Colonial owed him no duty to obtain insurance coverage for him, once it undertook to do so it had a duty to act in a non-negligent manner. In that case the court held the Dallas Hotel Company liable for the death of Fox in a defective elevator maintained under contract by a third party. The hotel company contended that it owed Fox no duty, but the Texas Supreme Court held that it had a non-contract duty at common law to use property under its control so as not to injure others, stating that the general principle underlying this holding was this quotation from 1 Street’s Foundations of Legal Liability 92:

“ ‘In every situation where a man undertakes to act or to pursue a particular course, he is under an implied legal obligation or duty to act with reasonable care, to the end that the person or property of others may not be injured by any force which he sets in operation or by any agent for which he is responsible. If he fails to exercise the degree of caution which the law requires in a particular situation, he is liable for any damage that results to another just as if he had bound himself by an obligatory promise to exercise the required degree of care.’ ”,

The appellant also cites Reeves County Gas Co. v. Church, 464 S.W.2d 489 (Tex.Civ.App.1971, no writ); Bolin v. Tenneco Oil Co., 373 S.W.2d 350 (Tex.Civ.App.1963, writ ref. n. r. e.) and Rick Furniture Co. v. Smith, 202 S.W. 99 (Tex.Civ.App.1918, no writ) as supporting his position. In each of them the court held that the defendant had (or may have had) a legal duty to act with care by reason of the defendant’s having undertaken an affirmative course of action, even though the service rendered was gratuitous.

The rule in question is stated in § 323 of 2 Restatement of Torts 2d (1965 ed.):

“One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of the other’s person or things, is subject to liability to the other for physical harm resulting from his failure to exercise reasonable care to perform his undertaking, if
“(a) his failure to exercise such care increases the risk of such harm, or
“(b) the harm is suffered because of the other’s reliance upon the undertaking.”

Under Rule 301 Tex.R.C.P., a motion for judgment notwithstanding the verdict may be rendered by the trial court if a directed verdict would have been proper, “and provided further that the court may upon like motion and notice, disregard any special issue jury finding that has no support in the evidence.” To sustain the action of the trial court it must be determined that there is no evidence on which the jury could have made the findings relied upon. All testimony must be considered in a light most favorable to the party against whom the motion is sought and every reasonable intendment deducible from the evidence is to be indulged in such party’s favor. Leyva v. Pacheco, 163 Tex. 638, 358 S.W.2d 547 (1962); Burt v. Lochausen, 151 Tex. 289, 249 S.W.2d 194 (1952). The determination of whether a duty exists is one of law to be determined by the court. Webb v. City of Lubbock, 380 S.W.2d 135 (Tex.Civ.App.1964, writ ref’d n. r. e.). For negligence to exist there must be a violation of a duty owed to the very person claiming on the ground of negligence. Rosas v. Buddies Food Store, 518 S.W.2d 534 (Tex.1975); 40 Tex.Jur.2d Sec. 6, p. 448. The plaintiff has the burden of proving the existence and violation of a legal duty. Coleman v. Hudson Gas and Oil Corp., 455 S.W.2d 701 (Tex.1970).

The deed of trust established the parties’ contractual rights and duties. The requirement of the amount of insurance was impliedly for the benefit of the mortgagee, to protect its investment. The duty to obtain insurance was on Taylor, and Colonial was entitled to protect itself if he failed to act. The deed of trust provision required only that the mortgagor insure up to an amount equal to the unpaid indebtedness, and absent proof to the contrary, the mortgagee was entitled to judge what was a reasonable amount of insurance to protect its investment, but we hold that Colonial, having undertaken to obtain the insurance, had a duty to exercise reasonable care “to keep all improvements ... on the property . . . insured against loss or damage by fire . . .”

Taylor’s second point of error is that the trial court erred in granting Colonial’s motion for judgment notwithstanding the verdict by disregarding the jury’s answers to issues 10 and 13 on the basis that since Taylor had the insurance policy in his possession for approximately two and one-half years before a dispute arose, he was es-topped from asserting that Colonial was negligent in obtaining it. We sustain. The Texas Supreme Court held, in a suit to reform a fidelity bond, Fireman’s Fund Indemnity Co. v. Boyle General Tire Co., Tex., 392 S.W.2d 352 (citing 81 A.L.R.2d 66), that under the Texas rule “an insured who accepts a policy without dissent, is presumed to know its contents, but the presumption may be overcome by proof that ‘he did not know its contents when it was accepted, as by showing that when he received it he put it away without examination, or that he relied upon the knowledge of the insurer and supposed he had correctly drawn it.’ ” Although our case is not one brought against an insurer for reformation of an insurance contract, we think this rule should be applied to excuse Taylor’s failure to examine the policy.

Taylor’s third point is that the trial court erred in granting appellee’s motion because there was evidence of probative force to support the jury’s answers to special issues necessary to the jury verdict. We sustain this point on the strength of the evidence we have noticed.

We have concluded that the appellant was entitled to recover from Colonial, but we note that if the insurance policy obtained by Colonial had included coverage for the garage apartment the appellant’s recovery under the policy would have been limited by this provision:

“If any item of insurance covers . more than one building, structure, or place . . . the amount of insurance under each such item shall attach on each building ... in that proportion which the value of each said building . shall bear to the value of all the property covered by such item.”

Taylor testified that in his opinion the values of his two buildings were about equal before the fire. Since only the garage apartment building seems to have been damaged, his recovery under the policy could not have exceeded one-half of the amount of his coverage, so his recovery should be limited to half of $8,700, or $4,350.

The judgment of the trial court is reversed and judgment is here rendered in favor of Taylor for $4,350.


author: CHADICK, Chief Justice.

text:
    Ruby Sears TIGRETT, Appellant, v. HERITAGE BUILDING COMPANY, Appellee.
    No. 8314.
    Court of Civil Appeals of Texas, Texarkana.
    Jan. 6, 1976.
    Rehearing Denied Feb. 17, 1976.

      Alfred W. Ellis, Woodruff & Smith, Dallas, for appellant.
    Gerald Coplin, Passman, Jones, Andrews, Coplin, Holley & Co., Dallas, for appellee.
   CHADICK, Chief Justice.

Appellant, Ruby Sears Tigrett, moved for judgment upon the verdict a jury returned to special issues in a breach of contract action. The Motion was overruled and a motion for judgment notwithstanding the verdict, urged by appellee Heritage Building Company, was granted. Judgment was entered in the trial court that Mrs. Tigrett take nothing.

I.

Stated in broad terms the issue in this appeal is whether the parties, Mrs. Tigrett and Heritage Building Company, entered into an enforceable contract. To simplify discussion, the question is divided into two parts and a negative answer to either requires an affirmance of the judgment below.

II.

Heritage Building Company, Mrs. Tigrett’s employer at times pertinent to this case, is a non-subscriber as classified by the Texas Workmen’s Compensation Act. Heritage’s position in this appeal is that Vernon’s Ann.Civ.St. art. 8306, Secs. 1 and 4 governed Mrs. Tigrett’s suit and that such statute excludes a breach of contract action and confined Mrs. Tigrett to a negligent tort action for recovery of damages she claimed for personal injuries received in the course of her employment. Heritage insists the term shall in Article 8306, Sec. 4 is utilized in the mandatory sense, when consideration is given to the intent of the act and its purposes and restrictions. In this connection it is postulated that the intent of Sec. 4 is to provide an exclusive remedy; and that the only remedy allowed is a suit by an injured employee against a non-subscribing employer for damages resulting from the employer’s negligence proximately causing the employee’s injury. Article 8306, Sec. 1 is interpreted as impliedly supporting the exclusive remedy construction by singling out and denying to the non-subscriber employer only tort action defenses of contributory negligence, negligence of a fellow employee, and assumed risk of injury incident to employment.

Heritage cites State Board of Insurance v. Betts, 158 Tex. 612, 315 S.W.2d 279 (1958); Crickmer v. King, 507 S.W.2d 314 (Tex.Civ.App. Texarkana 1974, no writ); Few v. The Charter Oak Fire Insurance Company, 463 S.W.2d 424 (Tex.1971) and Employers’ Liability Assur. Corporation, Limited v. Young County Lumber Co., 122 Tex. 647, 64 S.W.2d 339 (1933, opinion adopted) in support of its argument that use of the word shall in Sec. 4 indicates a legislative intent that a negligence suit is mandatory and exclusive. Unquestionably the auxiliary verb shall has a mandatory connotation. However, not one word but the act as a whole must be consulted in determining the legislative intent. 53 Tex. Jur.2d, Statutes, Sec. 163. Gayle v. Alexander, 75 S.W.2d 706 (Tex.Civ.App. Waco 1934, no writ) pro vides, useful directions for ascertaining legislative intent, there it is said,

“A mandatory provision in a statute is one, the omission to follow which renders the proceeding to which it relates illegal and void, while a directory provision is one, the observance of which is not necessary to the validity of the proceeding. A statute may be mandatory in some respects and directory in others. (Citations omitted) There is no universal rule or absolute test by which directory provisions in a statute may in all circumstances be distinguished from those which are mandatory, but in the determination of this question, as every other question of statutory construction, the prime object is to ascertain the legislative intent from a consideration of the entire statute, its nature, its object, and the consequences that would result from construing it one way or the other. Words of permissive character may be given a mandatory significance to effect the legislative intent. On the other hand, the language of a statute, however mandatory in form, may be deemed directory whenever the legislative purpose can best be carried out by such construction.”

The same exclusive remedy contention made in the present appeal was urged in Anderson-Berney Realty Co. v. Soria, 123 Tex. 100, 67 S.W.2d 222 (1933). The contention was rejected. The employer in the Soria case was a subscriber when the employment contract with Soria was made. The employers’ Workmen’s Compensation insurance policy was permitted to lapse but neither statutory nor other notice that the employer had ceased to be a subscriber was given. Soria, a watchman, was murdered in the course and scope of his employment. Soria’s wife, as beneficiary, brought an ex contractu action for damages grounded upon a breach of the employment contract, which when made, provided for Texas Workmen’s Compensation Act coverage. The ex contractu action was sustained. The Soria case does not decide the precise question presented in this appeal and no case in point, from this or any other jurisdiction, has come to the attention of this court. But the Soria case clearly holds that an employee injured in the course and scope of his employment may prosecute a breach of contract action against his non-subscribing employer and such employee or his beneficiary is not confined by Secs. 1 and 4 to a negligence action.

The primary purpose of the Texas Workmen’s Compensation Act is to benefit and protect employees. 62 Tex.Jur.2d, Workmen’s Compensation, Sec. 2. The act is generally held to be remedial and its uncertain provisions are liberally construed to accomplish the act’s purpose and promote justice. 62 Tex.Jur.2d, Workmen’s Compensation, Sec. 8. The act regulates in detail the relationship of subscribing employers and their employees or successor beneficiaries. However, regulation of non-subscribers and their employees is less extensive and the act does not expressly change their relationship except to restrict the non-subscribers’ defenses to an employee’s negligence action. Deprivation of the valuable right to contract for his own benefit and protection with a non-subscriber is not beneficial to an employee and intent to declare or imply that it is beneficial is not discerna-ble in the terms or objective of the act. No declared or implied purpose of the act that would be furthered by a restriction on the right of non-subscribers and their employees to validly contract is suggested by Heritage or known to this court.

To sum up, consideration of the law settled by Anderson-Berney Realty Co. v. Soria, supra, together with the general purpose of the Texas Workmen’s Compensation Act, and application of the rule of Gayle v. Alexander, supra, leads to the conclusion that Article 8306, Secs. 1 and 4 does not provide an exclusive remedy, and that an employee of a non-subscriber may maintain an action for a breach of a valid contract governing employment. Whether Mrs. Ti-grett and Heritage entered into a valid contract governing compensation for her injuries must next be considered.

III.

Mrs. Tigrett’s pleadings stated the existence of a contract and its breach and relied upon the rule of law that a contract implied in fact arises when the acts of the parties are such as to indicate a mutual intent to contract. See Marr-Piper Co. v. Bullís, 1 S.W.2d 572 (Tex.Comm’n App.1928, jdgmt. adopted); Terry County Airport Board v. Clark d/b/a Clark Aerial Service, 378 S.W.2d 932 (Tex.Civ.App. Amarillo 1964, no writ); Turners, Inc. v. Klaus, 341 S.W.2d 182 (Tex.Civ.App. San Antonio 1960, writ ref’d n. r. e.); Kuhlmann’s Estate v. Poss, 220 S.W. 564 (Tex.Civ.App. San Antonio 1920, no writ).

A few months before injury, Mrs. Tigrett, in a casual conversation with a work supervisor concerning delivery of a check to a fellow employee who had undergone surgery, was told “. . . this is such a good company that they pay workmen’s compensation to a man when he didn’t get hurt on the job.” About ten days after Mrs. Tigrett was injured she asked the shop manager about compensation and was told she, as a piece-work or contract worker, was not entitled to workmen’s compensation. She protested that she was an hourly employee at the time of injury and was advised to take the claim for compensation to Mr. G. M. Pointer, described in the record as the owner of the company. She telephoned Mr. Pointer and he agreed to get “the workmen’s compensation checks started.” She thereafter received nine weekly checks for forty-nine dollars ($49.00) each, drawn on the company’s compensation account, and several distinctly marked as payment of workmen’s compensation. The amount of the each weekly cheek was equal to the Texas Workmen’s Compensation Act rate for weekly total disability under the law in effect when Mrs. Tigrett was injured.

Mr. Pointer’s testimony, fairly summarized, was that it was the policy of the company to provide its employees the same benefits that would have been available to them under the Texas Workmen’s Compensation Act, insisting that each injured employee was considered on an individual basis, and that valued employees might be compensated on a different basis, but even new employees and laborers were compensated at “at least as much as they would have gotten had there been workmen’s compensation in effect” adding that “if a man got hurt on the job and it was our fault, we paid his bills.” For impeachment purposes this extract from a letter written by Mr. Pointer in response to a claim, approximately three years before Mrs. Tigrett’s injury, was admitted in evidence, viz.:

“This company provides the same benefits that would be available to the employee under the Compensation Act; therefore, if you will have Mr. Gardner contact us we will attempt to find a doctor in Terrell that can give him the needed medical treatment. This company will pay these bills. Also if you will so advise us we will calculate compensation which he is due and forward it to you.”

The shop manager was asked if the company “had an implied agreement with its employees to provide them with the same benefits to which they might have been entitled had there been workmen’s compensation coverage.” He replied that most employees did not ask but any that did were told “. . .we would provide for them as was the case, you know, and if they needed anything, why, we would do it.” When asked to clarify his statement he said: “Well, of course, I being an employee there was also concern about if I happened to get hurt on the job or anything and as me personally asking about me personally, I had been assured, you know, that each case was taken up on its individual merits. I mean if a man breaks his leg, he suffers no loss of income. He doesn’t suffer any hardships at all. This is what I was given to believe when I went to work here.”

After injury Mrs. Tigrett underwent treatment by a physician of her own choice. When she made a claim she was directed by Heritage supervisory personnel to consult certain other physicians, chosen by Heritage, and did so. She underwent examination, hospitalization, and treatment prescribed by the company’s chosen medical' practitioners over a period of several months and was still requesting medical service when she was advised that Heritage would no longer assist her.

The jury found as a fact that Heritage offered to provide its employees with the same benefits that they would have received had it provided insurance coverage under the Texas Workmen’s Compensation Act and that Mrs. Tigrett accepted the offer thereby consummating a contract. The jury apparently disbelieved the exculpatory evidence offered by Heritage, as it was authorized to do, that is, if . it was our fault, we paid . . ”.

The previously recited facts clearly evidence such essentials of a contract as competent parties, contractual subject matter, and mutuality of agreement. These elements need no further notice but mutuality of obligation and contractual consideration is less clear. < There is evidence of partial performance by both Mrs. Tigrett and Heritage. Heritage paid and Mrs. Ti-grett accepted weekly benefits; medical treatment was furnished and accepted. It is a settled rule that consideration may be either a benefit to the promisor or detriment to the promisee. 17 Am.Jur.2d, Contracts, Sec. 96. By agreeing to accept benefits measured by the provisions of the workmen’s compensation law Mrs. Tigrett gave up her acknowledged right to sue in tort for her full damage. And, on the other hand, in consideration of limiting its liability to the equivalent of benefits that might accrue under the Texas Workmen’s Compensation Act, Heritage escaped liability in tort for Mrs. Tigrett’s full disability. The agreement and conduct of the parties is such that promissory estoppel might be invoked by either as a substitute for consideration; though decision here does not necessarily rest upon that doctrine. See 17 Am. Jur.2d, Contracts, Sec. 89. In the partial performance of the contract Mrs. Tigrett gave up the ministrations of her chosen physician and changed her position by accepting treatment tendered by Heritage as well as otherwise conforming to the contract found by the jury.

Contention that the contract is void because it purports to limit Heritage’s liability for the consequences of its own negligence ignores the posture of the case. The contract was made after Mrs. Tigrett’s injury, not before, and it dealt with existing conditions, not future negligence or speculative facts. Prospective operation of the agreement was severable from the claim pending at the time the agreement was made. A valid subject of the agreement was the method by which the amount of any damages then claimed by Mrs. Tigrett would be calculated. The parties agreed that Mrs. Tigrett’s existing, unliquidated claim for damage would be measured by the terms of the Texas Workmen’s Compensation Act. Agreements of this nature have been upheld in other jurisdictions. See Adler v. Hohn, 129 Ohio 303, 195 N.E. 481 (1935); 15 Am.Jur.2d, Compromise and Settlement, Sec. 18. The contract was not contrary to public policy.

IV.

As indicated, the conclusion is reached that the trial court should have entered judgment in response to the stipulations of the parties and the jury’s verdict. The judgment of the trial court is reversed. In compliance with Tex.R.Civ.P. 434, judgment is rendered that Mrs. Tigrett recover compensation in a lump sum at the rate of $49.00 per week for 401 weeks, together with interest from the date of the trial court judgment, and costs.

      . Both an action for negligent tort and for breach of contract were originally plead by Mrs. Tigrett. Prosecution of the tort action was abandoned at the beginning of the trial.

      . “Section 1. In an action to recover damages for personal injuries sustained by an employe in the course of his employment, or for death resulting from personal injury so sustained, it shall not be a defense:
      1. That the employe was guilty of contributory negligence.
      2. That the injury was caused by the negligence of a fellow employe.
      3. That the employe had assumed the risk of the injury incident to his employment; but such employer may defend in such action on the ground that the injury was caused by the willful intention of the employe to bring about the injury, or was so caused while the employe was in a state of intoxication.”
      ******
      “Sec. 4. Employes whose employers are not at the time of the injury subscribers to said association, and the representatives and beneficiaries of deceased employes who at the time of the injury were working for nonsubscribing employers can not participate in the benefits of said insurance association, but they shall be entitled to bring suit and may recover judgment against such employers, or any of them, for all damages, sustained by reason of any personal injury received in the course of employment or by reason of death resulting from such injury, and the provisions of section 1 of this law shall be applied in all such actions.”

      . A Per Curiam Opinion. Judge James P. Alexander, later Chief Justice, Supreme Court of Texas, was a member of the court.

      . The briefs on file in the Supreme Court were examined, as well as the court’s opinion, to confirm this fact.