Lead Opinion
To reward Dennis Miga for work he had done, Ronald Jensen offered him the option to buy a portion of Jensen’s stock in a privately-held corporation. When Miga tried to exercise the option, Jensen refused to honor their agreement, and Miga sued. Before trial, the corporation “went public.” The primary issue in this appeal is how to properly measure the damages caused by Jensen’s failure to deliver the stock under the option’s terms. The trial court and court of appeals concluded that Miga could recover damages measured by the subsequent appreciated value of the stock. Because we conclude that the proper measure of damages was the value of the stock on the date the stock option agreement was breached, minus the exercise price, we reverse the court of appeals’ judgment in part, affirm in part, and remand the case to the trial court for rendition of judgment in accordance with our opinion.
I
Jensen hired Miga in 1990 to help run Matrix Telecom, a privately-owned long-distance telephone company. As compensation, Jensen offered Miga, in addition to his salary, a 6% ownership interest in the company. Two years later, Matrix Tele-com became a wholly-owned subsidiary of Matrix Communications, and Jensen converted Miga’s former 6% interest into a 4.8% ownership share of the new parent company. About that time, Miga set up a meeting between Jensen and the principals of Pacific Gateway Exchange (“PGE”), a fledgling company handling international calls for other telecommunications businesses. Jensen purchased an 80% interest in PGE for $850,000, receiving 11,020 shares of common stock in the privately-held company. Miga soon helped the start-up company secure several major clients. To reward and encourage Miga’s productive efforts on PGE’s behalf, in July 1993, Jensen orally offered Miga an option to buy 4.8% of Jensen’s interest in PGE at Jensen’s original cost — that is, 528.96 shares for $40,800, or a little over $77 per share.
On December 4, 1994, Miga sent Jensen a fax indicating that he intended to resign and desired to “settle [his] account.” The following day Jensen presented Miga with a termination agreement and severance package that included $300,000 to be paid over thirty months and $450,000 net for Miga’s stock in Matrix Communications. The agreement purported to be a “complete accounting” between the parties, but it did not explicitly release Miga’s PGE option. When Miga attempted to exercise the option that day, Jensen refused. Miga tried to exercise the PGE option three more times over the next nine months. With his last demand in August 1995, he enclosed a check for $40,800. Jensen rejected these demands and returned Miga’s check.
In October 1995, Miga sued Jensen for breach of contract and fraud. At trial, Jensen conceded that he had promised Miga the option, but claimed that the option had been for a scaled price, had terminated on December 31, 1994, was subject to a buy-back if Miga resigned, and most importantly, was released by the termination agreement. Meanwhile, in mid-1996, about eighteen months after Miga’s resignation, PGE’s stock split 940 to 1, and PGE made an initial public offering. The stock opened at $12 per share, peaked at $45.75 per share, and was worth $35.75 per share at the time of trial in 1997.
The jury found for Miga on all issues, awarding damages of $1,034,400, the difference between the option’s exercise price
The court of appeals affirmed the trial court’s judgment notwithstanding the verdict on Miga’s fraud and exemplary damages claims.
Shortly after the court of appeals’ decision, the parties entered into an Agreed Order under which Jensen made “an unconditional tender [to Miga] ... of the sum of $23,439,532.78 ... toward satisfaction of the Judgment in order to terminate the accrual of post-judgment interest on that sum.” To achieve this objective, the Order provided for a reduction of Jensen’s super-sedeas bond in this amount. Jensen alleges that, if we affirm the court of appeals’ judgment, this arrangement will have saved him approximately $1 million per year in the difference between the post-judgment interest rate of 10% and the lower return on his invested supersedeas bond during the pendency of his appeal to this Court.
II
Both Miga and Jensen filed petitions for review. Miga, in his petition for review, argues that Jensen’s disagreement over the option’s terms was tantamount to a denial of the option agreement that the jury found he made, and that this denial together with his behavior during their December 5, 1994 meeting constitute circumstantial evidence that Jensen did not intend to honor the stock option contract at the time it was made in 1993. According to Miga, this evidence, coupled with Jensen’s breach, is sufficient to support the jury’s fraud finding.
Ill
Before addressing the merits of Jensen’s petition, we discuss two preliminary matters interposed by Miga. Miga asserts that Jensen’s petition is moot, and if not moot, that Jensen’s complaint is not preserved for our review.
A
We first decide whether Jensen’s $23.4 million payment to Miga mooted his appeal of the judgment against him. In Highland Church of Christ v. Powell, we acknowledged the rule that a judgment debtor’s voluntary payment and satisfaction of an adverse judgment moots the controversy, waives the debtor’s right to appeal, and requires dismissal of the case.
The Texas rule is not, and never has been, simply that any payment toward satisfying a judgment, including a voluntary one, moots the controversy and waives the right to appeal that judgment.
The Agreed Order states that the purpose of Jensen’s payment was to “terminate the accrual of post-judgment interest” on the $23.4 million judgment. This purpose makes sense only if post-judgment interest would otherwise be accruing, and interest would continue to accrue only if Jensen was pursuing an appeal of the judgment. Further, in negotiating the Order, Jensen actually discussed its anticipated jurisdictional effect with Miga. According to sworn affidavit testimony, which we may use to ascertain factual matters necessary to the proper exercise of our jurisdiction,
Contrary to Miga’s argument, our holding does not undermine the Finance Code’s post-judgment interest scheme.
B
Regarding whether Jensen preserved error, Miga argues that Jensen failed to preserve his objection to the lost
IV
We now turn to the proper measure of damages for breach of a stock option contract. The trial court submitted two damages measures to the jury in question 11:
(a) The difference between the cost to exercise the stock option contract per the parties [sic] agreement, if any, and the value of the stock in December, 1994, if any.
Answer: $1,034,400.00
(b) Lost profits to Dennis Miga that were a natural, probable, and foreseeable consequence of Ronald Jensen’s failure to comply with the agreement, if any.
Answer: $17,775,686.00
Neither party requested the lost profits instruction in part (b). In fact, Miga originally objected to the charge on the ground that the damages he sought were direct, not consequential. Jensen argues that the trial court erred in submitting the lost profits question to the jury in this case. We agree with Jensen.
Miga sought to recover the time-of-trial market gain in the stock he attempted to buy years earlier. His only evidence of “lost profits” was the increased market value of PGE stock, and the jury’s award coincided with the stock’s market value at the time of trial. But an increase in the market value of goods never delivered under a contract is not the same as lost profits.
The court of appeals nevertheless upheld the “lost profits” award, reasoning that this Court’s decisions in Randon v. Barton
Initially, we note that the Randon damages measure was patterned on an English and early New York rule,
This holding is consistent with the approach of at least two Texas courts of appeals that have addressed breach damages for contracts involving corporate stock.
As the Second Circuit has reasoned, “Measuring contract damages by the value of the item at the time of the breach is eminently sensible and actually takes expected lost future profits into account. The value of assets for which there is a market is the discounted value of the stream of future income that the assets are expected to produce.”
Calculating the value of an unex-ercised option can be a complicated enterprise,
We note that time-of-breach damages may be inadequate when an employer anti-cipatorily repudiates an option agreement; that is, the option holder’s right to exercise the option has vested, and the employer repudiates the agreement before the right to exercise the option has matured for the option holder, as there could be a question as to the time set for delivery in that circumstance.
Our holding does not preclude the award of lost profits in contract disputes involving stock and stock options. Miga simply did not claim lost profits, and the evidence he offered was relevant to the bargained-for goods’ market gain at the time of trial, not to lost profits damages. The court of appeals thus erred in affirming the trial court’s lost profits award.
Miga argues that denying him the appreciation in the value of the stock effectively rewards Jensen for breaching the agreement. As it happens, that is true. However, it was far from certain in December 1994 that the value of the stock would appreciate as it did. While Jensen ultimately benefitted from this appreciation, he also assumed the risk that the investment would be lost, just as any stockholder does. To award Miga damages based on the appreciated value of the stock would be to make him better off than he would have been had the agreement been honored by giving him an investment free of the risks other shareholders undertook. More importantly, however, trying to determine what part of the stock’s appreciation Miga would have realized had
V
Finally, Miga argues that $1,034,400 alone, recovered today, is insufficient to compensate him for the loss he suffered due to Jensen’s contractual breach in 1994. He is right. All assets, whether property or cash, fluctuate in value over time. But the proper way to make Miga whole is not by allowing him to recover the market gain he would have reaped had he received his stock as promised, managed to pay any taxes potentially owed on his gain without selling a portion of the stock, accepted the risk that the stock would drop below the exercise price, and sold it at the perfect moment when the stock hit its peak two years later. The proper way to compensate Miga for his lost investment opportunity is through the award of interest on his time-of-breach damages.
The trial court awarded 10% pre-judgment interest beginning on the date Miga’s suit was filed and running until the date the judgment was signed by the trial court. The court of appeals struck the pre-judgment portion of this award as inequitable in light of Miga’s lost profits recovery. Given our holding that Miga’s damages must be measured at the time of breach, the trial court was correct to award pre-judgment interest, although it must be computed as simple interest.
VI
Because there is no evidence of fraud, we affirm the court of appeals’ judgment as to Miga’s fraud and exemplary damages claims. Because we conclude that Jensen’s payment to Miga, made in order to stop the accrual of post-judgment interest, did not moot his appeal and that Jensen preserved his objection to the measure of damages submitted to the jury, we reach the merits of Jensen’s petition and reverse the court of appeals’ judgment. Miga’s contract damages should have been measured by the value of the option at the time of breach. Because the correct measure was submitted to the jury in question 11(a) and answered in the amount of $1,034,400, we render judgment for Miga for $1,034,400.
Further, we modify the court of appeals’ judgment to reflect that Miga receive 10% pre-judgment interest, computed as simple interest, on his damages running from the date he filed suit to the date of judgment.
Notes
.
. Id. at 380-81.
. Id. at 377-78.
.See Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc.,
.
. See, e.g., Formosa Plastics,
. See, e.g., Formosa Plastics,
.
. Id.
.
. See, e.g., Highland Church,
. See Highland Church,
. Id.
. Id. at 236.
. See Ferrell v. Trailmobile, Inc.,
. See Tex. Gov’t Code § 22.001(d).
. See Tex. Fin.Code §§ 304.001-.007.
. See, e.g., Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc.,
. See, e.g., Tex. Fin.Code § 304.005(a).
. See id. § 304.005(b).
. See id. § 304.005.
.
. See Acord v. Gen. Motors Corp.,
. State Dep’t of Highways & Pub. Transp. v. Payne,
. See Whiteside v. Trentman,
. See, e.g., Tex. Instruments, Inc. v. Teletron Energy Mgmt., Inc.,
. See, e.g., Whiteside,
. See, e.g., id. at 196; 1 Dobbs, Law of Remedies §§ 3.3(5), 4.5(3); 3 Law of Remedies § 12.4(3).
. See Heilbroner v. Douglass,
.
.
.
. Randon, 4 Tex. at 293.
. See id.; Calvit,
. See Randon, 4 Tex. at 293-94; Calvit,
. Calvit,
. See Randon, 4 Tex. at 293-95.
. See Galigher v. Jones,
. See id. at 201-02,
. See id. at 201,
. Randon,
. See Hurst v. Forsythe,
. See Hermanowski v. Acton Corp.,
. Simon,
. Id.
. Sharma v. Skaarup Ship Mgmt. Corp., 916 F.2d 820, 826 (2d Cir.1990), cert. denied,
. Id. (citation omitted).
. Id. at 825.
. See 1 Dobbs, Law of Remedies §§ 3.3(5); 3 Law of Remedies § 12.4(3).
. See Scully v. U.S. WATS, Inc.,
. See Lucente v. Int’l Bus. Machs. Corp.,
. See Lucente,
. See Randon, 4 Tex. at 293; Calvit,
. See, e.g., Lucente,
. See Bendalin v. Delgado,
. See Johnson & Higgins,
. See Tex. Fin.Code § 304.104.
. See id. §§ 304.003(c), 304.006.
. See id. § 304.104.
. See id. § 304.003(c).
. See id. § 304.006.
Dissenting Opinion
dissenting, joined by Chief Justice PHILLIPS.
Although simple and easy to apply, the Court’s time-of-breach damage measure is founded on an economic fiction that woefully deprives Miga of the benefit of his bargain. But worse, it encourages promi-sors to breach stock-option agreements in a rising market, allowing them to cap their liability while reaping the very profit potential that was promised in exchange for the promisee’s performance. Numerous courts across the country, both state and federal, have recognized that applying the rule to stocks is “very inadequate and unjust.” Galigher v. Jones,
I
Over the past decade, stock options have become an increasingly common form of executive compensation. They are often conferred in lieu of more traditional compensation, like salary or cash bonuses, to reward outstanding performance and provide an incentive for hard work to increase the company’s, and therefore the option’s, worth. Just as stock options have become more and more common, so has litigation involving their value, and “[i]t would be a herculean task to review all the various and conflicting opinions that have been delivered on this subject.” Galigher,
The problem with the Court’s damage measure was articulated over 100 years ago by the United States Supreme Court in Galigher v. Jones, supra. There, the Court recited the general rule that, as to goods that have a fixed market value at which they can be easily replaced, the measure of damages is their value at the
As long ago as 1849, we recognized that time-of-breach damages are often inadequate to compensate a person injured by another’s failure to sell or deliver goods whose value fluctuates. In Randon v. Barton,
money or other consideration for the article contracted for, has not been paid in advance ... or when extraordinary circumstances have occurred to produce extreme prices in the article during a long period of time, and the suit has been protracted without any fault of the defendant, or when the article contracted for is of a perishable nature, or such as is to be readily parted with if delivered, or when there are other circumstances attending the transaction, not in the ordinary course of trade, calculated to render such a measure of damages inequitable and unjust.
Heilbroner v. Douglass,
Ignoring the fundamental policy underlying Heilbroner, the Court concludes that the Randon measure does not apply because Miga had not paid for the options before Jensen refused to perform.
The superficiality of the Court’s distinction is particularly apparent here, where Miga tried to pay the options’ exercise price but Jensen refused to accept it. Moreover, the Court’s analysis ignores the fact that Miga was granted the options, in
The Court also reasons that Miga was not entitled to recover the stock’s increased market value as “lost profits” because there was no evidence that Miga suffered “business losses,”
The Court concludes that “[t]he proper way to compensate Miga for his lost investment opportunity is through the award of interest on his time-of-breach damages.”
While the Court’s time-of-breach damage measure deprives Miga of the very benefit he bargained for and rewards Jensen’s breach, the measure that the court of appeals approved — the highest value the stock attained before trial — has the potential to overcompensate Miga and place him in a better position than if the breach had not occurred. Such a measure allows Miga to avoid any risk of market downturns and, in hindsight, pick the precise moment when the stock reached its highest point. This approach, too, has been widely rejected. See, e.g., Galigher,
Rather than allocate all of the market risk to Jensen, or deprive Miga of his anticipated profit potential, I would follow a damage measure that allows Miga to recover market increases that occurred before the expiration of a reasonable time in which he could have mitigated his damages by entering the market and replacing the stock. This measure is patterned on the so-called “New York rule,” which the United States Supreme Court approved in Galigher as “the true and just measure of damages in these cases,” that is, “the highest intermediate value of the stock between the time of its conversion and a reasonable time after the owner has received notice of it to enable him to replace the stock.”
Compensation is the general standard for the measure of damages. It is the actual and proximate loss caused by the wrong for which the plaintiff is entitled to indemnity. Hence the general rule is that the measure of damages for the failure to deliver property according to the contract, or for its conversion, is the value of the property at the time it was to be delivered, or at the time it was converted. This general rule, however, has been found inadequate to furnish just indemnity for the losses occasioned by the conversion of, or the wrongful failure to deliver, stocks and other properties of like character, the values of which are subject to frequent and wide fluctuations. The general rule gives to the agent, broker, or person in possession of such property, that is really valuable, frequent opportunity to convert it to his own use, at a time when its market price is far below its actual value, and thus offers a prize for the breach of duty, while it often leaves the injured party remediless. To prevent this injustice ... an exception has been ingrafted upon this general rule. It is founded upon the proposition that he who deprives another of the possession and control of such property ought to assume the risk of the fluctuations in its market value, until its owner, by purchase or sale, can restore himself to the condition in which he would have been if his property had not been wrongfully taken.... The exception is that the measure of damages for the failure to sell or to deliver stocks and like speculative property, or for the conversion thereof, is the highest market value which the property attains between the time when the contract required its sale or delivery, or the time of its conversion, and the expiration of a reasonable time, to enable the owner to put himself in statu quo, after notice to him of the failure to comply with the contract, or of the conversion. This measure of damages in such cases has not been universally adopted. There are many and conflicting decisions relative to its form and its justice. But, after a careful consideration of all the authorities and the reasons which justify it, the supreme court adopted it in 1888, and that must conclude the discussion in this court.
In this case, the court of appeals held that Miga’s damages were properly measured as of the time of trial, rather than within a reasonable period after the breach, because Miga could not afford to pay the $12 per share opening price when the stock went public.
In determining what constitutes a reasonable period of time in which to replace the stock, courts have factored in some time allowance for the injured party to obtain advice and to evaluate the market. See, e.g., Stoddard,
When Jensen failed to deliver the stock as promised, all PGE stock was privately held and unavailable on the open market. If the evidence were to show that Miga could not have obtained the stock from another source until PGE went public some eighteen months later, then the $12 per share opening price would represent the highest value the stock attained between the breach and the time for replacement, and Miga would be entitled to recover the difference between that price and the option’s exercise price, or $5,925,864.
Because the Court adopts an improper damage measure in this case, I respectfully dissent.
. Miga’s option entitled him to purchase 4.8%, or 497,222 shares, of Jensen's PGE stock at a cost of $40,800, and the undisputed evidence shows that the stock's opening price was $12. Thus, 497,222 x 12 - $40,800 = $5,925,864.
Dissenting Opinion
filed a dissenting opinion.
The threshold issue in this case is whether the Court has jurisdiction to consider Jensen’s appeal even though he voluntarily paid the underlying judgment. Because the Court concludes that Jensen’s payment did not moot the appeal, I dissent.
I.BACKGROUND
After the court of appeals issued its opinion on August 3, 2000, Jensen moved in the trial court to deposit in the trial court’s registry the total amount of the actual damages award based on the court of appeals’ opinion — nearly $23,500,000. Jensen’s motion explained that the coupon rate of the Treasury Bonds he posted as security for the original supersedeas bond was lower than the post-judgment interest accruing on the damages award. Consequently, the motion asserted, Jensen no longer desired to suspend execution of the judgment. Jensen’s prayer for relief asked the trial court to “[ojrder that, immediately upon the deposit as provided above, Miga, by and through his attorneys, be immediately allowed to withdraw, without condition, the funds from the registry of the court as payment of the current amount of The Judgment.”
After several negotiations between the parties, Miga and Jensen entered into an Agreed Order. The Agreed Order provides, in pertinent part, that “Jensen desires to make an unconditional tender” to Miga of over $23,000,000 “toward satisfaction of the Judgment in order to terminate the accrual of post-judgment interest on that sum.”
On August 29, 2000, the trial court signed the Agreed Order. On that same day, Jensen issued a check to Miga and his attorneys for $23,439,532.78. Then, on October 20, 2000, Jensen petitioned this Court to challenge the actual damages award of over $23,000,000. Three days later, Miga likewise petitioned this Court to challenge the court of appeals’ decision to reduce the actual damages, calculate pre-judgment interest differently than the trial court, and affirm the trial court’s JNOV on the punitive damages and fraud claims. Miga also moved for the Court to dismiss Jensen’s petition for lack of jurisdiction.
II.PARTIES’ JURISDICTIONAL ARGUMENTS
Miga contends that, under Texas law, Jensen’s voluntarily paying the actual damages award moots Jensen’s appeal. In response, Jensen contends that his paying the actual damages award does not moot his appeal because the accrual of post-judgment interest rendered him “justifiably anxious.” Jensen concedes that he could have allowed the Treasury Bonds securing the supersedeas bond to lapse so he could invest the collateral more effectively and give Miga the opportunity to execute on the judgment. But, Jensen asserts, forcing Miga to execute on the judgment and make the $23,439,532.78 payment “obviously involuntary” would have needlessly burdened Miga, the court, and the sheriff.
III.APPLICABLE LAW
Generally, when an event occurs after a judgment that renders an issue before an appellate court moot, the court cannot decide the appeal. Gen. Land Office of Tex. v. OXY U.S.A., Inc.,
This Court first recognized the voluntary-payment-of-judgments rule in 1887. See Cravens v. Wilson,
Federal courts have a different approach for determining if a debtor’s paying the judgment moots the appeal. Federal courts hold that “payment of a judgment, of itself, does not cut off the payor’s right of appeal.” Ferrell v. Trailmobile, Inc.,
IV. ANALYSIS
In resolving the mootness issue, the Court correctly states the general rule and policy underlying it established in Highland Church. That is, when a judgment debtor voluntarily pays and satisfies a judgment rendered against him, the cause becomes moot, because a party should not be allowed to mislead his opponent into believing that the controversy is over and then contest the payment and seek recovery.
In Highland Church, the Court did not hold that the Church’s paying the judgment was involuntary — or in other words, under duress — simply because the Church sought to avoid statutory penalties and interest. See Highland Church,
Ignoring Highland Church’s entire rationale for allowing the Church to appeal, the Court concludes that Jensen was “justifiably anxious” to avoid the post-judgment interest accruing on the judgment just as the threat of statutory penalties and interest caused the Church economic duress.
But the Court’s focusing on whether the judgment debtor clearly expressed an intent to exercise his appellate rights and whether appellate relief is not futile — an inquiry the Court correctly likens to the federal approach — is a significant departure from the Texas rule. As previously discussed, the federal approach assumes that a party’s paying the judgment does not moot the appeal unless payment is by way of compromise or shows an intention to abide by the judgment, payment is coupled with the acceptance of benefits under the judgment, or compliance with the judgment renders appellate relief futile. Ferrell,
The Court suggests that its focus on whether the debtor clearly expressed an intent to appeal and whether appellate relief is futile (which follows the federal approach) is consistent with the policy in Highland Church. That is, a party should
Additionally, the Court wholly fails to explain how, under the standard it announces today, appellate relief in this case is not futile. Jensen made an unconditional payment of nearly $24,000,000 to Miga in August 2000. Two years later, this Court holds that the trial court’s $24,000,000 damages award should only be $1,000,000 plus interest. The Court does not explain how Jensen will recover the money he voluntarily and unconditionally paid to Miga. Ironically, the Court’s deciding this appeal when it should dismiss for want of jurisdiction may very well cause more litigation about this money.
Unfortunately, the Court does not recognize the import of its decision to accept as valid Jensen’s argument for why his paying the judgment did not moot his appeal. Jensen has consistently argued that he paid the judgment because the post-judgment interest accruing on the actual damages award was higher than the interest accruing on the Treasury Bonds he posted to secure the supersedeas bond. By accepting Jensen’s argument as a legitimate basis for holding the appeal is not moot — regardless of whether the federal or Texas approach applies — the Court allows judgment debtors facing significant damages awards to pay the judgment, avoid post-judgment interest, and still appeal simply because they have a “leg up” over parties with smaller pocket books who cannot afford to play the interest game in the financial market. This, perhaps, shows why this Court has not held that a party’s anxiety about accruing post-judgment interest alone renders a judgment debtor’s paying the judgment involuntary. See Highland Church,
Finally, the Court contends that its holding does not undermine the Finance Code, because post-judgment interest is not intended to punish a judgment debtor for exercising his right to appeal. While I agree that the Finance Code’s post-judgment interest provisions are not punitive, the provisions do create an incentive to pay the judgment and end the litigation. But, as this case demonstrates, allowing a judgment debtor to pay the judgment but still pursue the appeal merely because the post-judgment interest is burdensome prolongs the litigation and likely requires further court intervention for the debtor to recover the money if he prevails on appeal.
y. CONCLUSION
It is a fundamental tenet that this Court cannot decide moot controversies. OXY U.S.A., Inc.,