No Governmental Immunity for Unsecured Whiteboard

Last November, the Texas Supreme Court reversed and remanded for further consideration in a case where the Dallas Court of Appeals had concluded that the plaintiff had sufficiently pleaded a waiver of sovereign immunity through the use of tangible property. The Supreme Court held that the plaintiff had not alleged a “use” of property for a whiteboard that fell on his head, because Dallas Metrocare had only made the board available for use by patients. On remand, the Court of Appeals had to consider the alternative question of whether the plaintiff’s claims alleged injury through a “condition” of property. The Court concluded that he had pleaded such a claim, based on the allegation that the whiteboard was in an unsafe condition because it was not properly secured. The case was therefore remanded to the trial court for further proceedings.

Dallas Metrocare Servs. v. Juarez, No. 05-11-01144-CV

Supreme Court Shareholder Oppression Update: Cardiac Perfusion v. Hughes

Following up on last week’s decision that basically eliminated minority shareholder oppression claims (or more precisely, shareholder oppression remedies) in Texas, the state Supreme Court has reversed and remanded another such case that passed through the Dallas Court of Appeals a couple years ago. In Cardiac Perfusion Services, Inc. v. Hughes, the Court of Appeals had affirmed the trial court’s order of a $300,000 “fair value” buyout of the oppressed shareholder’s stock, holding that the majority’s oppressive conduct justified a departure from the “book value” buyout price provided for by the parties’ shareholder agreement. With court-ordered buyouts no longer a viable remedy for shareholder oppression claims, the Supreme Court vacated that portion of the judgment, but remanded the case to the trial court in the interests of justice in order to afford the minority shareholder an opportunity to try to establish liability under one or more of the alternative claims discussed last week in Ritchie v. Rupe.

Cardiac Perfusion Servs. Inc. v. Hughes, No. 13-0014

Does Shareholder Oppression Still Exist?

This morning’s decision by the Texas Supreme Court in Ritchie v. Rupe raises some pretty substantial questions about the continuing viability of claims for minority shareholder oppression in Texas. By way of background, the decision arises out of a dispute over a family-owned investment business, with the wife and heir of one of the deceased owners claiming that the other owners were hostile to her and told her that she would “never get any money in this family.” Wanting out of the company, she sought to sell her shares to an outside investor, but the majority shareholders refused to meet with any prospective purchasers, make the company’s records available, or otherwise assist in a sale. The jury found that conduct to be oppressive, and the trial court ordered a buyout of the minority’s shares for $7.3 million. The Dallas Court of Appeals affirmed the oppression ruling, albeit with a remand for further consideration of the valuation of the plaintiff’s shares.

In reversing that decision, Justice Boyd’s majority opinion for the Supreme Court first analyzed the case under the receivership statute, currently codified at section 11.404 of the Texas Business Organizations Code. That statute permits a court to appoint a receiver when “the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent . . .” Construing and rejecting previous cases that have considered the meaning of “oppressive” conduct, the court today holds that directors or managers engage in oppressive conduct “when they abuse their authority over the corporation with the intent to harm the interests of one or more of the shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so they create a serious risk of harm to the corporation” (emphasis added). Since shareholder oppression cases have typically focused on whether the minority shareholder has been improperly harmed, the additional question of whether the majority is putting the corporation itself at risk of harm appears to be a significant shift in the law. Because the directors here had legitimate business reasons for refusing to meet with prospective buyers, there was no “serious risk of harm to the corporation,” and therefore no oppression.

Perhaps even more significant are the Supreme Court’s other two holdings in the case. Besides the refusal to cooperate with the sale of her shares, the plaintiff also alleged that the defendants had engaged in other types of oppressive conduct. The court declined to consider those other acts, however, based on its determination that the receivership statute does not authorize the remedy of a buyout of the minority’s shares. Thus, a court may order the appointment of a receiver if the corporation itself is threatened with harm, but it cannot order a buyout just because the minority shareholder is being harmed by the majority’s business decisions. Finally, because the receivership statute does not permit a buyout, the court turned to the question of whether there is a common law cause of action (and remedy) for shareholder oppression, and concluded that there is not. Although the court recognized there Texas law should protect minority shareholders from “freeze-out” or “squeeze out” tactics of the majority, it held that there are already sufficient protections with remedies such as derivative lawsuits, shareholder agreements, and common law claims such as breach of fiduciary duty and accounting. Accordingly, there was no need to recognize a common law claim for minority shareholder oppression, and it therefore could not serve as the basis to order an equitable buyout of the minority’s shares. And in fact, the Supreme Court remanded the case for further consideration of the plaintiff’s breach of fiduciary duty claim.

Going forward, the majority opinion today imposes significant restraints on shareholder oppression claims, refocusing the claim on harm suffered by the company rather than its minority shareholders and eliminating the ability of courts to order buyouts, whether at fair market value or any other price. Lawyers and clients should also make careful note of the majority’s emphasis on the utility of shareholder agreements in providing for the kinds of contractual remedies that can provide in advance for buyout provisions and other remedies that would moot the need for any shareholder oppression claim. But as Justice Guzman’s dissent correctly notes, this is a decision that puts minority shareholders in a much weakened position when their personal interests clash with the decisions of the majority.

Supreme Court Update: Ritchie v. Rupe

In what will certainly be seen as a landmark decision for Texas business law, the Supreme Court has issued its opinion today reversing the Dallas Court of Appeals in the case of Ritchie v. Rupe. As we noted a while back, the Court of Appeals had affirmed the trial court’s ruling that a minority shareholder was entitled to “fair market value” for her shares, including “discounts for lack of marketability and for the [s]tock’s minority position.” Today, the Supreme Court holds that it was not oppressive conduct for the majority shareholders to refuse to meet with prospective purchasers of the company, that the Business Organizations Code does not authorize courts to order a corporation to buy out a minority shareholder’s stock, and that there is no common-law cause of action for minority shareholder oppression. 

Ricthie v. Rupe (majority, by Justice Boyd)

Ritchie v. Rupe (dissent, By Justice Guzman)

Supreme Court Update: PlainsCapital Bank v. Martin

The Texas Supreme Court has also granted the petition for review in another case involving foreclosure sales, deficiencies, and section 51.003 of the Property Code. In Martin v. PlainsCapital Bank, the Dallas Court of Appeals reversed judgment in favor of a lender that sought to recover a deficiency because the bank had based its deficiency claim on the price it resold the property for, rather than the price it had paid over a year earlier at the foreclosure sale. Oral argument has been set at the Supreme Court for September 18.

Supreme Court Update: Moayedi v. Interstate 35

The Texas Supreme Court has unanimously affirmed the judgment of the Dallas Court of Appeals on petition for review from the case of Interstate 35/Chisam Road L.P. v. Moayedi. As regular readers will recall, Moayedi was the first of a string of cases from Dallas holding that borrowers and guarantors had contractually waived their statutory right to offset any deficiency if the foreclosure sale resulted in a price less than the collateral’s fair market value. Justice Willett, writing for the Supreme Court, agreed with that analysis, holding that section 51.003 of the Texas Property Code creates an affirmative defense that the borrower or guarantor can validly waive through a general waiver of defenses in the lending instruments. Unless the Legislature decides to step in, businesses and individuals can expect to see such waiver clauses become standard practice in property financing transactions.

Moayedi v. Interstate 35 Chisam Road LP, No. 12-0937

Supreme Court Update: No Bonanza for Ponderosa

Two years ago, the Court of Appeals reinstated a $125 million arbitration award that the trial court had set aside on the basis of evident partiality, after one of the three arbitrators failed to disclose the full extent of his ties to the claimant’s attorneys.  Our report on that decision is here: A Bonanza for Ponderosa. After this morning’s orders from the Texas Supreme Court, that bonanza is no more. That court has reversed the Court of Appeals’ judgment, reinstated the trial court’s order vacating the arbitration award, and will permit the case to once again be arbitrated before a new panel.

Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, No. 12-0789

Supreme Court Update: Kia Motors & Bioderm Skin Care

Early last year, the Texas Supreme Court granted four petitions for review out of the Dallas Court of Appeals on the same day. Today, the Supreme Court issued opinions in two of those cases, reversing them both. In Kia Motors Corp. v. Ruiz, the Supreme Court affirmed the Court of Appeals’ holding that the manufacturer was not entitled to a presumption against liability due to the vehicle’s compliance with federal crashworthiness standards. However, the Court reversed and remanded for a new trial because the trial court should not have admitted a spreadsheet containing summaries of many different warranty claims on vehicle airbag circuitry, most of which were dissimilar to the plaintiffs’ claimed defect. And in Bioderm Skin Care v. Sok, the Supreme Court reversed the Court of Appeals’ holding that the victim of a botched laser hair removal procedure was not required to submit an expert report, holding that the claim was indeed subject to the Texas Medical Liability Act because the laser could only be purchased by a licensed medical practitioner and required extensive training to operate. The case was therefore remanded for consideration of the defendants’ attorney fees and costs.

Supreme Court Update: Dallas Metrocare Services v. Juarez

Last year, the Dallas Court of Appeals held that a plaintiff had properly alleged a waiver of sovereign immunity for a government body’s use or condition of tangible personal property, based on the allegation that an improperly secured whiteboard had fallen on the plaintiff. Dallas Metrocare Services v. Juarez, ___ S.W.3d ___ (Tex. App.–Dallas 2012). The Texas Supreme Court has now reversed that decision, citing its more recent decision in Rusk State Hospital v. Black, 392 S.W.3d 88 (Tex. 2012), for the proposition that the Court of Appeals should have considered Metrocare’s argument on appeal — not raised before the trial court — that the injury did not arise from the “condition” of the property. The Supreme Court also held that there was no waiver of immunity by Metrocare’s “use” of the whiteboard, since it had simply made the board available for use by patients. The case will now be remanded to the Court of Appeals for further consideration.

Dallas Metrocare Services v. Juarez, No. 12-0685

Supreme Court Update: Ponderosa Pine Energy v. Tenaska Energy

The Texas Supreme Court has also granted the petition for review in another case from the Dallas Court of Appeals. In Ponderosa Pine Energy, LLC v. Tenaska Energy, Inc., 376 S.W.3d 358 (Tex. App.–Dallas 2012, pet. granted), the Court of Appeals reinstated a $125 million arbitration award that had been vacated by the trial court. The Court of Appeals concluded that the defendant had waived its ability to challenge the “evident partiality” of one of the arbitrators by failing to investigate the arbitrator’s disclosures until after the panel had made its award. Oral argument at the Supreme Court has been set for January 7.