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

In this contract dispute, the Court of Appeals applied the standard set forth by the Texas Supreme Court in Hathaway v. General Mills, Inc., 711 S.W.2d 227 (Tex. 1986), to the modification of an at will sales representative agreement.  In Hathaway, the Supreme Court stated that “to prove a modification of an at will employment contract, the party asserting the modification must prove two things: (1) notice of the change; and (2) acceptance of the change.”  The notice must be unequivocal and, if so, continued employment constitutes acceptance of the change.  The Court found in this case that, although the plaintiff “unequivocally denied” agreeing to or negotiating any modifications to his commission, the defendants letter outlining the modification contained no equivocation and there was no dispute that the plaintiff continued working.

Hampden Corp. v. Remark, Inc.

Steadfast Insurance Company entered into an agreed judgment with appellants and later filed an application for turnover and appointment of a receiver in aid of judgment.  Steadfast set its application for hearing but did not provide notice to appellants.  At the ex parte hearing, Steadfast represented to the trial court that it had given appellants notice, and the trial court granted its application.  Not surprisingly, the Court of Appeals set aside the turnover order and appointment of receiver for failure to provide notice.

Mac23, Inc. v. Steadfast Ins. Co.

In this class action concerning certain practices of a life insurance settlement company, the Court of Appeals upheld a decision to certify the case as a class action.  The defendants challenged the decision on several grounds, including that the trial court purportedly failed to consider “the res judicata risks” of certifying a class action on absent class members.  The Court, however, rejected this argument, pointing to facts in the record showing that the trial court considered the other pending lawsuits.  The Court also pointed to the certification order which specifically limits the class to the narrow focus of the lawsuit and which directed that class members should be given notice of their right to opt out of the class.

Life Partners, Inc. v. McDermott

In an attempt to collect on a $3.6 million promissory note, Graham Mortgage Corporation filed suit against several parties, including appellant Barbara Mills, who had executed a personal guaranty for up to $1.8 million (half of the total amount).  Graham Mortgage successfully moved for summary judgment against Ms. Mills, and the trial court entered a judgment against her for $2.8 million plus interest and attorneys’ fees.  Ms. Mills appealed, arguing that the guaranty limited her liability to $1.8 million, plus fees and expenses.

Graham Mortgage did not contest that there was an error in the amount of the judgment, but instead argued that the Court of Appeals could simply modify the amount of the judgment pursuant to Rule of Civil Procedure 46.5, which allows for voluntary remittitur.  The Court disagreed, noting that Rule 46.5 “only allows voluntary remittitur after a court of appeals has reversed the trial court’s judgment because of a legal error affecting only part of the damages awarded.”

Mills v. Graham Mortgage Corp.

Television reporter Brett Shipp was sued for defamation by Dr. Richard Malouf, founder of the All Smiles Dental Center. Shipp broadcast a story on allegations of Medicaid fraud involving Malouf, and closed by reporting that Malouf “has yet to comment on the allegations but filed for bankruptcy and is in the process of divesting his once impressive empire.” Malouf alleged that statement was defamatory because it was All Smiles Dental Center that filed for bankruptcy, not Malouf personally. Shipp filed a plea to the jurisdiction and a motion to dismiss under the Texas Citizens Participation Act. The trial court denied both the plea and the motion, and Shipp took the matters up on interlocutory review.

The Court of Appeals affirmed the denial of the plea to the jurisdiction, but reversed and rendered based on on the TCPA. The plea to the jurisdiction claimed that the county court at law was without jurisdiction because it would deny Shipp the right to a 12-person jury. The Court quickly disposed of that issue, citing its own case law establishing that the size of the available jury does not negate subject matter jurisdiction that has otherwise been properly conferred on a court. As to the TCPA, the Court held that Shipp had met his initial burden of showing that the lawsuit arose out of his exercise of the right to free speech because the subject matter of his report as a whole — not just the statement about the bankruptcy filing — was made in connection with a matter of public concern. That shifted the burden to Malouf to come forward with a prima facie case, based on “clear and specific evidence,” for each element of his defamation claim. Malouf argued that a false accusation of personal bankruptcy was defamation per se, which would have given rise to a presumption of damages. The Court of Appeals disagreed, holding that it was not defamation per se because it did not “touch Malouf in a way that is harmful to one engaged in the profession of dentistry.” Without any other clear and specific evidence of damages, the Court held that the motion to dismiss under the TCPA should have been granted.

Shipp v. Malouf, No. 05-13-01080-CV

An employer sued its former employee for misappropriating funds from the company, alleging multiple causes of action, including breach of contract, fraud, and breach of fiduciary duty.  The jury returned a verdict in favor of the employer on all counts and awarded economic and punitive damages.  The trial court also awarded the employer attorneys’ fees based on its breach of contract claim.

On appeal, among other things, the employee argued that the trial court’s damages award violated the one-satisfaction rule, which limits a plaintiff who suffers a single injury to damages based on only one cause of action.  The Court of Appeals agreed, noting that “when a defendant’s acts result in a single injury and the jury returns favorable findings on two or more theories of liability, the plaintiff has the right to a judgment on the theory entitling him to the greatest or most favorable relief.”  Consequently, the Court set aside the attorneys’ fees and statutory damages awarded by the trial court, and awarded the employer economic and exemplary damages under its breach of fiduciary duty claim (which does not provide for the recovery of attorneys’ fees) because that result gave the employer its largest recovery.

McCullough v. Scarbrough, Medlin & Assocs.

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.

The Court of Appeals affirmed the trial court’s grant of a no evidence motion for summary judgment in which the defendant, a lumber company, was alleged to have breached its contract to build a swimming pool for plaintiff.  The Court found that, although there were cracks alleged in the built pool, nothing in the plaintiff’s affidavit identifies a contractual obligation that the defendant failed to perform.

Lopez v. Metro Lumber Indus.

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)

Cornerstone Healthcare owns and operates a group of hospitals located in several states. It filed suit against Nautic Management VI, the general partner or manager of several private equity funds. NMVI filed a special appearance to challenge personal jurisdiction, but the trial court overruled it. On interlocutory appeal, the Court of Appeals reversed and rendered judgment dismissing NMVI from the case. Cornerstone argued that NMVI should be subject to specific personal jurisdiction in Texas because it controlled the funds whose representatives had traveled to Texas and conducted the business that got them all sued. The Court of Appeals disagreed, holding Cornerstone to its word that it was not attempting to pierce the corporate veil and therefore refusing to attribute the contacts of the funds to NMVI.

Nautic Mgmt. VI, LP v. Cornerstone Healthcare Group Holding, Inc., No. 05-13-00859-CV

The plaintiff sought a declaration that it has an easement by necessity to cross the defendant’s property to gain access to County Road 134.  Property law buffs (or those studying for the bar exam) will recall that an easement by necessity is established when there is:

1. unity of ownership of the dominant and servient estates prior to severance;
2. necessity of a roadway; and
3. existence of the necessity at the time of the severance of the two estates.

The resolution of this case turned on the third element–specifically, whether CR 134 existed when the two tracts were severed nearly 150 years ago in 1866.  Because the plaintiff did not meet its burden of establishing that CR 134 was being used at that time, the Court of Appeals affirmed the trial court’s finding that the plaintiff does not have an easement by necessity across the defendant’s property to access CR 134.

Staley Family Partnership v. Stiles

Addressing the trial court’s denial of the defendant’s motion to compel arbitration, the Court of Appeals held the following language insufficient to require arbitration of this dispute over a trust agreement: “We request that any questions or disputes that may arise during the administration of this trust be resolved by mediation and if necessary, arbitration.”  According to the Court, the trust agreement elsewhere established that the trust would be subject to the jurisdiction of a court if interested parties, such as the appellees, filed a legal proceeding.  Thus, the Court establish that the “request” for arbitration was “precatory, not mandatory.”

Trinity Structural Towers, Inc. sued two related companies: 1) Suzlon Wind Energy Corporation (Suzlon Wind), a Delaware corporation with its principal place of business in Texas, and 2) Suzlon Energy Company (Suzlon India), Suzlon Wind’s India-based parent company.  Trinity sued both defendants for breach of contract and several related claims.  Suzlon India filed a special appearance, arguing that it was not subject to personal jurisdiction in Texas, which the trial court denied.

On interlocutory appeal, the Court of Appeals reversed the trial court and dismissed Suzlon India from the case for lack of personal jurisdiction.  Even though one of Suzlon India’s employees signed the contract at issue, the evidence was clear that the contract was between Trinity and Suzlon Wind, not Suzlon India.  The Court also rejected Trinity’s argument that Suzlon India was acting as Suzlon Wind’s agent, noting that Trinity did not meet its burden under Texas law to prove an agency relationship.

Suzlon Energy Ltd. v. Trinity Structural Towers Inc.

Dentist, Stephen Chu, ordered dental supplies form the plaintiff, accepted the shipment, but refused to pay the balance.  The plaintiff sued Dr. Chu individually and his dental practice, Stephen Chu, DDS, MSD, PA d/b/a Smile Again Orthodontics” for breach of contract and account stated.  Dr. Chu, however, declared bankruptcy and was subsequently nonsuited.  The Court found that a series of invoices addressed to “Stephen Chu DDS” could not establish, on summary judgment, that ” Stephen Chu, DDS, MSD, PA d/b/a Smile Again Orthodontics” was a party to the contract.

Chu v. Schein

Altus Brands II LC filed for a writ of garnishment against two officers of Swordfish Financial, Inc., seeking to enforce a $289,886 judgment from Minnesota against Swordfish. The trial court permitted Altus to execute on specific stock transferred to the officers by Swordfish in 2010, but refused to enter a money judgment against them. Altus appealed. The opinion is lengthy and exceedingly fact-specific — it’s the kind of case where dozens of findings of fact and conclusions of law get dropped into a single footnote.

Because the value of the stock had declined since the date of its transfer, the Court of Appeals held that the trial court had erred in only permitting Altus to execute on the stock, and that a money judgment was necessary to ensure that Altus’s position was not prejudiced by the fraudulent transfer. However, the amount of that money judgment was not to exceed the the value of the stock at the time of transfer, so as not to create a windfall in favor of Altus. The Court also affirmed the trial court’s findings regarding the cancellation of a $3.5 million promissory note from Swordfish to the officers, which Altus was apparently trying to use as further proof of its fraudulent transfer claim for the full amount of the Minnesota judgment.

Altus Brands II LLC v. Alexander, No. 05-13-06660-CV

In this whistleblower lawsuit, Ginger Weatherspoon alleged that the Office of the Attorney General (OAG) retaliated against her and ultimately terminated her employment after she reported that she was pressured to sign a false affidavit.   According to Ms. Weatherspoon, the affidavit was going to be used to support a judicial misconduct complaint against a district judge in Dallas (apparently, Judge David Hanschen).

The OAG sought to have Ms. Weatherspoon’s case dismissed based on sovereign immunity, and moved for summary judgment on that basis.  The Texas Government Code waives sovereign immunity for claims brought under the Texas Whistleblower Act, but, in order for a claim to fall within the purview of that statute, the alleged conduct must be reported to “an appropriate law enforcement authority.”  The OAG argued that Ms. Weatherspoon did not make her report to an appropriate law enforcement authority because she reported the alleged conduct only to her division head in the Child Support Division of the OAG.  The Court of Appeals disagreed, and upheld the trial court’s decision to deny the OAG’s Motion, because Ms. Weatherspoon’s division head was required to forward her report to the OAG’s Office of Special Investigations–an appropriate law enforcement authority.

Office of Attorney General v. Weatherspoon, No. 05-00632-CV

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.

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

A memorandum opinion teases, but does not answer, an interesting question: Does Chapter 74 of the Civil Practice & Remedies Code require a plaintiff to produce an expert report for a breach of contract claim arising out of the provision of medical services? Margaret Miller’s son placed her in a “skilled nursing resident program” at Plaza Health Services and contractually agreed to be the “responsible party” for payment. Among other things, the contract provided that the facility was a “restraint-free community,” and that no restraints of any type would “be used as punishment or as a substitute for more effective medical nursing care or for the convenience of the community staff.” After the nursing facility sued for unpaid bills, he he counterclaimed for breach of contract, DTPA, and medical negligence claims. The negligence claims were dismissed due to the failure to file a medical expert report, and the trial court granted a motion in limine to exclude evidence of restraints or straitjackets used on Ms. Miller. Unfortunately, error was not preserved on that issue due to the lack of a proper proffer of the excluded evidence. The grant or denial of a motion in limine does not preserve error by itself. If the motion is granted, the losing party must, during trial, (1) approach the bench and ask for a ruling, (2) formally offer the excluded evidence, and (3) obtain a ruling on the offer. Here, the appellants argued about the relevance of the evidence, but never actually offered it or obtained a ruling during trial on its admissibility. Accordingly, error was not preserved, and judgment for the nursing facility was affirmed.

Ferguson v. Plaza Health Servs. at Edgemere, No. 05-12-01399

In this breach of warranty case, the Court upheld the trial court’s summary judgment dismissal because the contract at issue did not contain an express warranty.  Although the plaintiff argued that the contract listed the services the defendant was to provide, the Court found that “[t]he mere identification of what services are to be performed is not, without more, an express warrant that those services are to be performed to any particular standard or quality.”

Staton Holdings v. Tatum LLC

Our sister blog, 600 Camp, has posted a PowerPoint presentation by Lyle Cayce, the Clerk of the United States Court of Appeals for the Fifth Circuit. For anyone who has slogged through the hyperlinking of legal authorities and record citations in an appellate brief, it’s a glimpse into the future (or as they like to call it in the Fifth Circuit, “the present”) of e-filing. As Mr. Cayce described during last week’s appellate conference in Austin, the Fifth Circuit has commissioned software that automatically converts the parties’ electronically filed briefs into fully hyperlinked e-briefs for the judges, their staffs, and even the parties themselves. As a result, every citation is automatically converted to a hyperlink that can take the reader directly to the cited material, whether it is in the record or on whichever legal research service the user prefers. Kudos to the Fifth Circuit for figuring out how to make e-filing simpler and better for everyone involved, and let’s hope that the Texas courts will be headed that way as well.

Cornerstone Healthcare Group Holding, Inc., a provider of post acute care hospital services, was pursuing acquisition opportunities of rehabilitation facilities in Texas.  In the midst of these efforts, several of its executives left the company.  Around the same time, New Reliant, a Delaware limited liability company, acquired a rehabilitation hospital in Texas called “Old Reliant.”  Cornerstone filed suit against New Reliant and a few other entities that had indirect ownership stakes in New Reliant via a chain of subsidiaries, alleging that several of Cornerstone’s recently-departed executives had usurped a corporate opportunity from Cornerstone.

The entities with ownership stakes in New Reliant filed special appearances, asserting that the court lacked personal jurisdiction over them.  Cornerstone argued that the entities were subject to jurisdiction in Texas based on their indirect ownership interest in New Reliant–a company doing business in Texas–and the fact that they held 100% of the stock of every entity involved in the purchase of the hospitals.  The entities argued that they were separate companies (based in Delaware) and that their only contact with Texas was their passive, indirect ownership interests in New Reliant. The trial court granted the entities’ special appearances, and Cornerstone appealed. The Court of Appeals affirmed, rejecting Cornerstone’s argument that the subsidiaries in between the entity defendants and New Reliant should be ignored.  The Court further explained that nothing in the record suggested “that the degree of control exercised by appellees is greater than that normally associated with with common ownership and directorship.”

Cornerstone Healthcare Group Holding, Inc. v. Reliant Splitter, L.P. et al., No. 05-11-01730-CV

In 2010, the Court of Appeals reversed summary judgment in favor of the lender in a collateral-disposition case, holding that the borrowers had raised a fact question as to the commercial reasonableness of the property. DMC Valley Ranch, L.L.C. v. HPSC, Inc., 315 S.W.3d 898 (Tex. App.–Dallas 2010, no pet.). On remand, the lender took the position that the defendants’ valuation expert report was correct, and again moved for summary judgment on that basis (apparently seeking to recover a smaller deficiency rather than fighting for a larger one). The trial court granted summary judgment for the lender, and also awarded attorney fees via summary judgment. The Court of Appeals affirmed on the deficiency ruling, but reversed on attorney fees. The Court held that there was a fact issue on the reasonableness and necessity of the attorney fees because the defendants’ attorney had submitted an affidavit opining that it was unreasonable to seek fees for unsuccessful appeals and motions, and that it was not appropriate to have seven lawyers on the file. The case was therefore remanded for further proceedings on attorney fees.

DMC Valley Ranch LLC v. HPSC, Inc., No. 05-11-01730-CV