Basic Capital Management, Inc. v. Dynex Commercial, Inc., No. 08-0244 (Tex. Apr. 1,
2011)(Hecht)
This is an action for breach of a commitment to provide financing for future real estate investments. The
borrowers were to be entities that would be formed to hold each investment separately as opportunities
arose. We hold that the corporate owners of those entities were third-party beneficiaries of the
commitment, and that consequential damages for the lender’s breach of the commitment were
foreseeable. We reverse the judgment of the court of appeals and remand the case to that court for
further consideration.
BASIC CAPITAL MANAGEMENT, INC., AMERICAN REALTY TRUST, INC., TRANSCONTINENTAL REALTY INVESTORS, INC.,
CONTINENTAL POYDRAS CORP., CONTINENTAL COMMON, INC., AND CONTINENTAL BARONNE, INC. v. DYNEX
COMMERCIAL, INC. AND DYNEX CAPITAL, INC.; from Dallas County; 5th district (05-04-01358-CV, 254 SW3d 508, 02-22-08)
motion for leave to amend petition for review dismissed as moot
The Court reverses the court of appeals' judgment and remands the case to that court.
Justice Hecht delivered the opinion of the Court. [14-page opinion in pdf]
View Electronic Briefs In No. 08-0244 BASIC CAPITAL MANAGEMENT, INC. v. DYNEX COMMERCIAL, INC.
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Basic Capital Mgmt, Inc. v. Dynex Commercial, Inc. (Tex. 2011)(Justice Hecht)
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Argued September 10, 2009.
Opinion Delivered: April 1, 2011.
Justice HECHT delivered the opinion of the Court.
This is an action for breach of a commitment to provide financing for future real estate investments. The
borrowers were to be entities that would be formed to hold each investment separately as opportunities arose.
We hold that the corporate owners of those entities were third-party beneficiaries of the commitment, and that
consequential damages for the lender's breach of the commitment were foreseeable. We reverse the judgment
of the court of appeals[1] and remand the case to that court for further consideration.
I
Basic Capital Management, Inc. managed publicly traded real estate investment trusts in which it also owned
stock, including American Realty Trust, Inc. ("ART") and Transcontinental Realty Investors, Inc. ("TCI").[2] We
refer to the three collectively as petitioners. Respondent Dynex Commercial, Inc. provided financing for multi-
family and commercial real estate investors.[3]
ART and TCI held investment property through wholly owned "single-asset, bankruptcy-remote entities" —
SABREs, for short. A SABRE, as the term for which it stands suggests, is an entity that owns a single asset and
whose solvency is independent of affiliates. Lenders like Dynex commonly require a SABRE as a borrower so
that in the event of default, the collateral can be recovered more easily than from a debtor with multiple assets
and multiple creditors.[4]
After several months of discussions and negotiations, Dynex agreed to loan three TCI-owned SABREs[5] $37
million to acquire and rehabilitate three commercial buildings — one each — in New Orleans if Basic would
propose other acceptable SABREs to borrow $160 million over a two-year period.[6] The agreements were
eventually formalized in letters. The New Orleans Agreement was between Dynex and TCI and provided in part:
Dynex Commercial, Inc. (Lender) herein agrees to provide financing for the acquisition and/or rehabilitation of
the captioned three (3) properties located in New Orleans, Louisiana under the following terms and conditions:
1. BORROWER: Three (3) single asset, bankruptcy remote borrowing entities, acceptable to Lender . . . .
TCI accepted the agreement as "borrower", although it is not a SABRE. The $160 million commitment ("the
Commitment") was between Dynex and Basic. It also stated that each borrower would be a "Single Asset,
Bankruptcy Remote Borrowing Entity acceptable to Lender". The SABREs would be owned by ART or TCI. "First
and foremost," Dynex stressed, "the two transactions [were] intertwined."
Dynex loaned TCI's three SABREs the money to acquire the New Orleans buildings and funded a $6 million loan
presented by Basic under the Commitment. But then market interest rates rose, making the terms of the
Commitment unfavorable to Dynex. Dynex refused to provide further funding for improvements to the New
Orleans buildings or to make any other loans under the Commitment.
Petitioners sued Dynex for breach of the Commitment, alleging that as a result, transactions that would have
qualified for funding were financed elsewhere at higher rates or not at all. Petitioners claimed damages for
interest paid in excess of what would have been charged under the Commitment and for lost profits from
investments for which financing could not be found. TCI also sued Dynex for breach of the New Orleans
Agreement. Dynex counterclaimed against petitioners for fraud.
ART and TCI alleged that they "were intended beneficiaries of the $160 million Commitment because their wholly
owned subsidiaries would own the properties and borrow the funds advanced by Dynex Commercial under the
commitment." Dynex controverted this claim, pleading that ART and TCI "lack[ed] standing to assert claims under
the alleged $160 million loan commitment". Dynex and petitioners filed cross-motions for partial summary
judgment on the issue, and the trial court granted petitioners' motion. Based on its ruling, the trial court issued
an order in limine forbidding reference to the standing arguments before the jury.
After a trial of over a month, the jury returned a petitioners' verdict. The jury found that Dynex breached the
Commitment, resulting in $256,233.25 lost profits for Basic, $25,367,090 lost profits for ART and TCI, and
$2,183,287 increased costs in obtaining alternate financing for ART and TCI. The jury also found that TCI lost
$252,577 profits as a result of Dynex's breach of the New Orleans Agreement.[7]
Dynex moved for judgment notwithstanding the verdict. Among other things, Dynex re-urged what it had earlier
called its standing argument: that ART and TCI could not recover damages for breach of the Commitment, nor
TCI for breach of the New Orleans Agreement, because neither was a party to, nor a third-party beneficiary of,
those agreements. Dynex also argued that Basic could not recover lost profits for breach of the Commitment
because such consequential damages were not reasonably foreseeable when the Commitment was made. The
trial court granted the motion and rendered a take-nothing judgment for Dynex.
Petitioners appealed. The parties raised a number of issues, but the court of appeals found two to be dispositive
and focused on them.[8] First, it agreed with Dynex that ART and TCI were not third-party beneficiaries of the
Commitment, nor TCI of the New Orleans Agreement.[9] Both agreements, the court reasoned, were expressly
made for the benefit of the borrowers — the SABREs that ART or TCI were to create as occasion arose — and
any benefit to ART and TCI was at most indirect and therefore unrecoverable.[10] Petitioners countered that
Dynex was contending, in essence, that ART and TCI were "not entitled to recover in the capacity in which [they
sued]", a matter Dynex had not raised by a verified pleading as required by Rule 93(2) of the Texas Rules of
Civil Procedure,[11] and therefore could not assert. The court of appeals rejected petitioners' argument.[12]
Second, the court held that Basic could not recover lost profits as consequential damages for Dynex's breach of
the Commitment because there was no evidence that Dynex knew, when it made the Commitment, what specific
investments would be proposed, or that other financing would not be obtainable.[13] Having concluded that there
was no basis for any recovery by ART and TCI, the court did not consider Dynex's challenges to their damage
claims.[14] The court affirmed the trial court's judgment.
We granted the petition for review.[15]
II
We consider first whether ART and TCI can recover for breach of the Commitment, and TCI for breach of the
New Orleans Agreement, as third-party beneficiaries.
We agree with the court of appeals that Dynex's failure to file a verified denial under Rule 93(2) does not
preclude it from contesting ART's and TCI's right to recover as non-parties. Though the requirement of a verified
denial to challenge a plaintiff's capacity to recover has long been part of Texas civil procedure,[16] the case law
is somewhat confused about when the requirement applies.[17] The issue is made more difficult here because
Dynex pleaded its challenge as lack of standing, which need not be raised by verified denial.[18] These
problems need not detain us here. Regardless of whether the issue is properly denominated standing, as the
parties seemed to think in the trial court, or capacity, as petitioners have argued on appeal, the substance of
Dynex's assertion — that ART and TCI cannot recover for Dynex's breaches of its agreements because they
were not parties to the agreements — was addressed in cross-motions for summary judgment and adjudicated
prior to trial. Not only was the matter raised by Dynex in its motion without objection,[19] it was raised by
petitioners themselves in their own motion, and then adjudicated in their favor. At that point, there was no longer
any reason for a verified pleading,[20] and the trial court's post-trial about-face did not resurrect the pleading
requirement.
The law governing third-party beneficiaries is relatively settled:
The fact that a person might receive an incidental benefit from a contract to which he is not a party does not give
that person a right of action to enforce the contract. A third party may recover on a contract made between other
parties only if the parties intended to secure some benefit to that third party, and only if the contracting parties
entered into the contract directly for the third party's benefit.
* * *
In determining whether a third party can enforce a contract, the intention of the contracting parties is controlling.
A court will not create a third party beneficiary contract by implication. The intention to contract or confer a direct
benefit to a third party must be clearly and fully spelled out or enforcement by the third party must be denied.
Consequently, a presumption exists that parties contracted for themselves unless it clearly appears that they
intended a third party to benefit from the contract.[21]
And of course, "[w]hen a contract is not ambiguous, the construction of the written instrument is a question of law
for the court."[22]
Dynex knew that the purpose of the Commitment was to secure future financing for ART and TCI, real estate
investment trusts that Basic managed and in which it held an ownership interest. Basic was never to be the
borrower. On the contrary, the Commitment expressly required that the borrowers be SABREs acceptable to
Dynex. Nor was Basic to own the SABREs. Dynex knew that Basic's business was to manage the investment
trusts that created and owned the SABREs as part of their investment portfolio. The requirement that all
borrowers be SABREs was for Dynex's benefit, to provide more certain recourse to the collateral in the event of
default.
As a practical matter, the parties knew that it would likely not be a SABRE that would enforce the Commitment.
By its very nature as a single-asset entity, a SABRE would not be created until an investment opportunity
presented itself, and without financing, there would be no investment. It would be unreasonable to require ART
and TCI to have created SABREs for no business purpose, merely in order that those otherwise inert entities
could sue Dynex.
The court of appeals was concerned that the benefit to ART and TCI was indirect in the sense that it flowed
through the SABRE-borrowers.[23] We certainly agree that as a general proposition, a corporate parent is not a
third-party beneficiary of its subsidiary's contract merely by virtue of their relationship. But here the benefit to
each SABRE not only inured to its parent, the transaction was so structured to benefit Dynex. SABRE-borrowers
provided a mechanism for ART and TCI to hold investment property directly but in a way that would provide
Dynex greater security. If Dynex and Basic did not intend the Commitment to benefit ART and TCI directly, then
the Commitment had no purpose whatever.
Dynex and Basic could have prevented any doubt about their intentions by expressly stating in the Commitment
that it was to benefit ART and TCI. Perhaps they did not do so because it seemed to go without saying. But we
need not speculate. The Commitment "clearly and fully spelled out" the benefit to ART and TCI because their
role was basic to Dynex's and Basic's agreement.
Dynex insists that ART's and TCI's failure to request a jury finding on whether they were third-party beneficiaries
is fatal to their recovery on that theory. But as we noted above, the proper construction of an unambiguous
contract is a matter of law. The Commitment itself, and the undisputed evidence regarding its negotiation and
purpose,[24] establish that ART and TCI were third-party beneficiaries.
Dynex argues that the New Orleans Agreement consisted of the promissory notes signed by each of TCI's three
SABREs, and that TCI was not a third-party beneficiary of the obligations set out in those notes. But the notes
were executed pursuant to a commitment by Dynex that TCI itself signed. As a party to the commitment that
provided the New Orleans Agreement financing for its SABREs, TCI was a third-party beneficiary of the
Agreement.
Accordingly, we conclude that ART and TCI were entitled to recover for Dynex's breach of the Commitment and
the New Orleans Agreement.
III
We turn to the second issue addressed by the court of appeals: whether Basic is precluded from recovering lost
profits as consequential damages for breach of the Commitment because Dynex could not reasonably foresee
them. Foreseeability is a fundamental prerequisite to the recovery of consequential damages for breach of
contract.
Consequential damages are those damages that result naturally, but not necessarily, from the defendant's
wrongful acts. They are not recoverable unless the parties contemplated at the time they made the contract that
such damages would be a probable result of the breach. Thus, to be recoverable, consequential damages must
be foreseeable and directly traceable to the wrongful act and result from it.[25]
The foreseeability requirement finds its most familiar expression in the venerated case of Hadley v. Baxendale.
Baxendale, a common carrier, failed to timely deliver Hadley's steam engine crankshaft to engineers for repairs,
and Hadley sued for lost profits from his mill as a result of the delay. The court disallowed recovery of the
damages because Baxendale had no reason to know delay would have such consequences. The correct rule,
according to the court, was this:
Where two parties have made a contract which one of them has broken, the damages which the other party
ought to receive in respect of such breach of contract should be such as may fairly and reasonably be
considered either arising naturally, i.e., according to the usual course of things, from such breach of contract
itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they
made the contract as the probable result of the breach of it.[26]
The Restatement (Second) of Contracts states the rule as follows:
(1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable
result of the breach when the contract was made.
(2) Loss may be foreseeable as a probable result of a breach because it follows from the breach
(a) in the ordinary course of events, or
(b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had
reason to know.
(3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery
only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order
to avoid disproportionate compensation.[27]
Dynex contends that when it issued the Commitment, it could not have foreseen that its breach would cause
Basic to suffer lost profits because it had no idea what specific investments Basic would propose or that
alternative financing for them would be unavailable. The court of appeals agreed, concluding that Dynex could
not be liable for Basic's lost profits unless it
knew, at the time it entered into the [Commitment]: (1) that the contracted financing was for a specific venture;
and (2) that in the event of its breach the borrower probably would be unable to obtain other financing in a
manner that would permit the borrower to carry out that venture.[28]
Certainly, a general knowledge of a prospective borrower's business does not give a lender reason to foresee
the probable results of its refusal to make the loan. But Dynex cites no authority, and we are aware of none, for
the proposition that the consequences of a lender's breach of a loan commitment are not reasonably
foreseeable unless the lender knew, at the time the commitment was made, not only the nature of the borrower's
intended use of the money, but the specific venture in which the borrower intended to engage. One case,
National Bank of Cleburne v. M.M. Pittman Roller Mill,[29] is to the contrary. There, the Bank breached its
agreement to loan the Mill $14,000 to buy wheat, and the Mill sued for the profits it would have made from the
resale.[30] The trial court rendered judgment for the Mill, but the commission of appeal reversed because there
was no evidence that the Bank knew the Mill intended to resell the wheat.[31] Had there been such evidence,
however, the Bank need not have known to whom the Mill intended to sell the wheat.
If, as found by the trial court, it was in contemplation of the parties at the time of the contract that [the Mill] was to
engage in the business of buying and selling wheat with the hope of deriving a profit therefrom, it would be
entitled, under proper pleading, to recover whatever net profits it could show that it would have made had the
terms of the contract been complied with. If [the Bank] knew at the time it obligated itself to loan the $14,000 that
the [Mill] intended to use this sum in purchasing wheat to be sold for a profit, it could not excuse itself from
liability for its wrong in breaching its contract on the plea that at the time of the contract it was uncertain whether
there would be any profits at all. If it contracted that [the Mill] should reap the benefit of profits, should there be
any, it should be required to pay whatever damages [the Mill] could show had been sustained by being deprived
of such profits.[32]
Although this Court approved only the holding and judgment of the commission of appeals, we nevertheless
regard its reasoning as sound. To be liable for the consequential damages resulting from a breach of a loan
commitment, the lender must have known, at the time the commitment was made, the nature of the borrower's
intended use of the loan proceeds but not the details of the intended venture.
There is no question Dynex knew that Basic's purpose in arranging the $160 million Commitment was to ensure
financing for ART's and TCI's real estate investments. Dynex's executive vice president testified: "We were aware
. . . that they were involved in significant commercial and multifamily endeavors [and] were constantly buying,
selling, improving, doing the normal and usual things that a real estate developer does to enhance values."
Dynex was in the business of providing capital for large real estate transactions and had entered into a number
of other similar loan arrangements. For months, Dynex discussed with Basic its intended uses of the financing
and negotiated detailed requirements for the loans to be made under the Commitment, including the
specification that the borrowers by SABREs. In sum, the evidence establishes that Dynex clearly knew how the
Commitment would be used. Indeed, it would be surprising if Dynex had agreed to lend Basic $160 million without
such knowledge.
Dynex certainly knew that if market conditions changed and interest rates rose, its refusal to honor the
Commitment would leave Basic having to arrange less favorable financing. Because that is in fact what
happened, Dynex argues that it had no reason to expect that Basic's increased financing costs would price some
investments beyond reach, resulting in opportunities lost altogether. But we cannot infer from Basic's ability to
arrange for alternate financing in a few instances that it could always do so, and nothing in the record supports
such a counterintuitive proposition. Certain that its breach would increase Basic's costs, Dynex cannot profess
blindness to the foreseeability that its breach would also cost Basic business.
Which is not to say that it actually did. The court of appeals held that the lost profits Basic claims as
consequential damages were not foreseeable to Dynex at the time the Commitment was made, and on this issue
we disagree. Dynex also argues, in this Court as in the court of appeals, that even if lost profits were
foreseeable, they were not sustained. The court of appeals did not address that argument, and neither do we. It,
among many others that the parties have raised, we leave for further consideration by the court of appeals on
remand.
* * *
Accordingly, we reverse the judgment of the court of appeals and remand the case to that court for further
consideration.
[1] 254 S.W.3d 508 (Tex. App.-Dallas 2008).
[2] Another real estate investment trust managed by Basic and involved in the events leading to this case, Continental Mortgage
and Equity Trust, Inc., merged into TCI after litigation began. For simplicity, we ascribe Continental's pre-suit actions to TCI. In
1998, the time period relevant to this case, Basic had assets of about $3 billion, ART about $1.3 billion, Continental about $426
million, and TCI about $445 million.
[3] Dynex Commercial, Inc. underwrote, closed, and serviced loans funded by Dynex Capital, Inc., also a respondent in the case.
Our references to Dynex are to Dynex Commercial.
[4] See, e.g., In re Gen. Growth Props., Inc., 409 B.R. 43, 49 n.15 (Bankr. S.D.N.Y. 2009) ("Sometimes referred to as a `single-
purpose entity' or `bankruptcy remote entity,' an SPE has been described by one commentator as `an entity, formed concurrently
with, or immediately prior to, the closing of a financing transaction, one purpose of which is to isolate the financial assets from the
potential bankruptcy estate of the original entity, the borrower or originator.' David B. Stratton, Special-Purpose Entities and
Authority to File Bankruptcy, 23-2 AM. BANKR. INST. J. 36 (March 2004). `Bankruptcy-remote structures are devices that reduce the
risk that a borrower will file bankruptcy or, if bankruptcy is filed, ensure the creditor procedural advantages in the proceedings.'
MICHAEL T. MADISON, ET AL., THE LAW OF REAL ESTATE FINANCING, § 13:38 (2008).").
[5] The three, Continental Poydras Corp., Continental Common, Inc., and Continental Baronne, Inc., were plaintiffs in the trial court,
but the jury awarded them no damages. They are petitioners in this Court, but they do not complain of the verdict or make any
arguments apart from TCI's.
[6] Dynex contends that the commitment period was only eighteen months. The difference is immaterial to our opinion.
[7] The jury found that petitioners' reasonable attorney fees were $1.95 million through trial and $150,000 for any appeal.
[8] 254 S.W.3d 508 (Tex. App.-Dallas 2008).
[9] Id. at 518, 524.
[10] Id. at 517-518. The court also concluded that ART and TCI had failed to plead that they were actually parties to the
Commitment because Basic had been acting as their agent. Id. at 518.
[11] Id. at 514; TEX. R. CIV. P. 93(2) ("A pleading setting up any of the following matters, unless the truth of such matters appear of
record, shall be verified by affidavit. . . . 2. That the plaintiff is not entitled to recover in the capacity in which he sues, or that the
defendant is not liable in the capacity in which he is sued.").
[12] 254 S.W.3d at 515, 524.
[13] Id. at 521-522.
[14] Id. at 522 & n.16.
[15] 52 Tex. Sup. Ct. J. 599 (Apr. 17, 2009).
[16] Act of May 13, 1846, 1st Leg., R.S., § 31, 1846 Tex. Gen. Laws 363, 371, reprinted in 2 H.P.N. Gammel, The Laws of Texas
1822-1897, at 1669, 1677 (Austin, Gammel Book Co. 1898); Sixth RMA Partners v. Sibley, 111 S.W.3d 46, 56 (Tex. 2003); ("When
capacity is contested, Rule 93 requires that a verified plea be filed unless the truth of the matter appears of record."); Nootsie, Ltd.
v. Williamson Cnty. Appraisal Dist., 925 S.W.2d 659, 662 (Tex. 1996) ("We have not hesitated in previous cases to hold that parties
who do not follow rule 93's mandate waive any right to complain about the matter on appeal.").
[17] See Schoellkopf v. Pledger, 739 S.W.2d 914, 920-921 (Tex. App.-Dallas 1987) ("It is something of an understatement to say
that the cases have not been entirely consistent in determining whether a defendant must have filed a verified denial of the
plaintiff's right to recover in the capacity in which he sues in order to complain on appeal that the plaintiff failed to prove ownership
of the cause of action asserted." (citing cases)), rev'd, 762 S.W.2d 145, 146 (Tex. 1988) (per curiam) (stating elliptically that "[t]he
rule means just what it says").
[18] Austin Nursing Ctr., Inc. v. Lovato, 171 S.W.3d 845, 849 (Tex. 2005) ("Unlike standing, however, which may be raised at any
time, a challenge to a party's capacity must be raised by a verified pleading in the trial court.").
[19] See Roark v. Stallworth Oil & Gas, Inc., 813 S.W.2d 492, 495 (Tex. 1991) ("In this case, Respondents moved for summary
judgment based on the affirmative defense of no consideration. Although Respondents did not plead the affirmative defense upon
which their motion for summary judgment relies, they did expressly rely on this affirmative defense in their motion for summary
judgment. Because Roark failed to direct the trial court's attention to the absence of the pleading in his written response or before
the court rendered judgment, this complaint may not be raised on appeal.").
[20] See Schoellkopf, 739 S.W.2d at 921 ("The purpose of requiring that certain matters be denied by verified pleadings or waived
is to eliminate from trial issues not seriously contested.").
[21] MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999) (citations and internal quotation marks
omitted).
[22] Id. at 650.
[23] 254 S.W.3d at 517-518.
[24] See Banker v. Breaux, 128 S.W.2d 23, 24 (Tex. 1939) (stating that the contracting parties' intention, which is of controlling
importance, must be ascertained from their agreement "in the light of the attending circumstances").
[25] Stuart v. Bayless, 964 S.W.2d 920, 921 (Tex. 1998) (per curiam) (citations and internal quotation marks omitted).
[26] 9 Exch. 341, 354, 156 Eng. Rep. 145, 151 (1854).
[27] RESTATEMENT (SECOND) OF CONTRACTS § 351 (1981).
[28] 254 S.W.3d at 520.
[29] 265 S.W. 1024 (Tex. Comm'n App. 1924, holding approved).
[30] Id.
[31] Id. at 1024, 1026.
[32] Id. at 1025.
Also see: Texas Causes of Action | 2011 Texas Supreme Court Opinions | 2011 Tex Sup Ct Per Curiams