Bradford A. Phillips, Clifton Phillips, Ryan T. Phillips and F. Terry Shumate v. United Heritage Corporation, a Utah Corporation

Opinion

IN THE TENTH COURT OF APPEALS

No. 10-08-00161-CV

BRADFORD A. PHILLIPS, CLIFTON PHILLIPS, RYAN T. PHILLIPS AND F. TERRY SHUMATE, Appellants v.

UNITED HERITAGE CORPORATION, A UTAH CORPORATION, Appellee

From the 249th District Court Johnson County, Texas Trial Court No. C200500312

OPINION

It is a fundamental principle that the corporate structure normally insulates

shareholders, officers, and directors from individual liability for the debts, liabilities,

and obligations of the corporation. See Willis v. Donnelly, 199 S.W.3d 262, 271-72 (Tex.

2006). Nevertheless, their abuse of this privilege can result in the “piercing of the

corporate veil” and the imposition of individual liability. See Castleberry v. Branscum,

721 S.W.2d 270, 271 (Tex. 1986). Theories exist that provide a basis for piercing the corporate veil. However, these theories and the attempts to utilize them are not

substantive causes of action. See Mapco, Inc. v. Carter, 817 S.W.2d 686, 688 (Tex. 1991);

Gallagher v. McClure Bintliff, 740 S.W.2d 118, 119 (Tex. App.—Austin 1987, writ denied).

Rather, they are a means of imposing on an individual a corporation’s liability for an

underlying cause of action. See Dick’s Last Resort of the West End, Inc. v. Market/Ross, Ltd.,

273 S.W.3d 905, 909 (Tex. App.—Dallas 2008, pet. denied) (citing Cox v. S. Garrett, L.L.C.,

245 S.W.3d 574, 582 (Tex. App.—Houston [1st Dist.] 2007, no pet.)).

In the matter before us, Bradford A. Phillips, Clifton Phillips, Ryan T. Phillips,

and F. Terry Shumate appeal from the trial court’s judgment based on jury findings that

pierced the corporate veil of Black Sea Investments, Ltd. and held them each

individually liable for a judgment United Heritage Corporation had taken against Black

Sea in a prior suit. In seven issues, Appellants contend that: (1) the trial court erred in

denying their motions to transfer venue; (2) the trial court erred in rejecting the defense

of res judicata asserted by Bradford A. Phillips; (3) the trial court erred in denying their

motions for judgment notwithstanding the verdict pursuant to the applicable laws of

the Turks and Caicos Islands and article 8.02(A) of the Texas Business Corporation Act;

(4) the trial court erred in denying their motions for judgment notwithstanding the

verdict pursuant to article 2.21(A) of the Texas Business Corporation Act; (5) the

evidence is legally insufficient to support the verdict of the jury and the trial court’s

judgment; (6) the evidence is factually insufficient to support the verdict of the jury and

the trial court’s judgment; and (7) the trial court submitted an erroneous jury charge.

Because the trial court erred in determining that the Texas Business Corporation Act did

Phillips v. United Heritage Corp. Page 2 not apply to this action and UHC failed to establish that Appellants committed actual

fraud, we reverse the judgment of the trial court and render judgment that Appellants

are not individually liable to UHC for the prior judgment entered against Black Sea.

I. Factual and Procedural History

Black Sea Investments, Ltd. was incorporated as an exempt company in the

Turks and Caicos Islands on July 30, 1993. The laws under which it was formed

required that Black Sea maintain its primary operations outside the territorial

boundaries of those Islands. During its existence, Appellants at various and relevant

periods of time served as either an officer or director of this corporation. However,

Appellants were never shareholders in Black Sea. United Heritage Corporation (UHC)

is a Utah Corporation and publicly traded entity in the NASDAQ capital market sector.

Because of its exempt and foreign corporation status, Black Sea was authorized to

acquire and sell certain unregistered securities and avoid the prolonged investment

registration requirements mandated by the Securities and Exchange Commission for

similar domestic securities transactions. In 1997, Black Sea and UHC began negotiating

the potential private offering of certain UHC securities. At the time, UHC’s principal

place of business was located in Cleburne, Johnson County, Texas. On or about

December 17, 1997, Black Sea and UHC executed a Subscription Agreement for the

purchase of $300,000.00 of UHC stock. Pursuant to the terms of this agreement, UHC

sold 352,941 shares of its common stock to Black Sea. A majority of these shares were

subsequently sold by Black Sea between July 16 and August 28, 1998. It was the alleged

Phillips v. United Heritage Corp. Page 3 untimely manner in which these shares were disposed of by Black Sea that precipitated

the filing of UHC’s first suit.

UHC originally filed suit against Black Sea and Bradford A. Phillips asserting

claims for breach of contract, common law fraud, and statutory fraud. UHC also sought

a declaratory judgment. After a bench trial, the trial court found that Black Sea’s actions

constituted a breach of the Subscription Agreement. The trial court thereafter rendered

judgment against Black Sea solely on the breach of contract claim and awarded UHC

$2,000,000.00 in damages, plus attorney’s fees, costs, and interest. The trial court further

concluded that Bradford A. Phillips was not personally liable to UHC under any theory

alleged. An appeal ensued and this Court affirmed the trial court’s judgment. See

United Heritage Corp. v. Black Sea Invs., Ltd., No. 10-03-00139-CV, 2005 WL 375443 (Tex.

App.—Waco February 16, 2005, no pet.) (mem. op.).

UHC eventually proceeded to execute and collect the judgment it had secured

against Black Sea in the first suit. These efforts were unsuccessful. As a result, UHC

filed the present action to enforce this judgment against Black Sea. Additionally, UHC

sought to pierce the corporate veil of Black Sea claiming that Appellants utilized Black

Sea: (1) as their alter ego; (2) as a sham to perpetrate a fraud; (3) to evade an existing

legal obligation; and (4) as a means to justify a wrong. See Castleberry, supra. In

response, Appellants contended, inter alia, that the Texas Business Corporation Act

(TBCA) governed the disposition of these claims. Specifically, Appellants contended

that the claims UHC had asserted against them were subject to and barred by the laws

of the Turks and Caicos Islands pursuant to article 8.02(A) of the TBCA or, alternatively,

Phillips v. United Heritage Corp. Page 4 by article 2.21(A) of the TBCA. The trial court rejected Appellants’ contentions and

charged the jury pursuant to the Castleberry principles. UHC prevailed on each charged

theory. The jury’s verdict effectively pierced the corporate veil of Black Sea and held

Appellants individually liable for the judgment UHC had taken against Black Sea in the

first suit. The trial court entered judgment on the jury’s verdict and this appeal

followed. Black Sea defaulted and did not appeal the judgment entered against it.

II. Standard of Review

The denial of a motion for judgment notwithstanding the verdict is reviewed

under a no-evidence standard. Tanner v. Nationwide Mut. Fire Ins. Co., 289 S.W.3d 828,

830 (Tex. 2009) (citing City of Keller v. Wilson, 168 S.W.3d 802, 823 (Tex. 2005)). We credit

evidence favoring the jury verdict if reasonable jurors could, and disregard contrary

evidence unless reasonable jurors could not. Tanner, 289 S.W.3d at 830 (citing Central

Ready Mix Concrete Co. v. Islas, 228 S.W.3d 649, 651 (Tex. 2007)). We will uphold a

judgment based on the jury's finding if more than a scintilla of competent evidence

supports it. Id. (citing Wal-Mart Stores, Inc. v. Miller, 102 S.W.3d 706, 709 (Tex. 2003) (per

curiam)). Therefore, we must decide whether the evidence presented at trial could

allow reasonable and fair-minded people to reach the verdict under review. Id. (citing

City of Keller, 168 S.W.3d at 827).

III. Statutory Construction

We begin our analysis by reviewing the applicable principles of statutory

construction. It is axiomatic that statutory construction is a question of law. See State ex

rel. State Dep’t of Highways & Pub. Trans. v. Gonzalez, 82 S.W.3d 322, 327 (Tex. 2000).

Phillips v. United Heritage Corp. Page 5 Therefore, when construing a statute, our objective is to ascertain and give effect to the

Legislature’s intent. TEX. GOV’T CODE ANN. §§ 311.021, 311.023, 312.005 (Vernon 2005);

see also State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006); McIntyre v. Ramirez, 109 S.W.3d

741, 745 (Tex. 2003); Kroger Co. v. Keng, 23 S.W.3d 347, 349 (Tex. 2000). In discerning that

intent, we look to the plain and common meaning of the statute’s words. See Tex. Dep’t

of Transp. v. City of Sunset Valley, 146 S.W.3d 637, 642 (Tex. 2004). Further, we read the

statute as a whole, not just in isolated portions. See City of San Antonio v. City of Boerne,

111 S.W.3d 22, 25 (Tex. 2003).

Where statutory language is unambiguous, we interpret the statute according to

its terms, and give true meaning and effect to the language consistent with other

provisions in the statute. See McIntyre, 109 S.W.3d at 745. We consider the objective the

law seeks to obtain and the consequences of a particular construction. TEX. GOV’T CODE

ANN. § 311.023(1), (5); see also McIntyre, 109 S.W.3d at 745. We should not construe a

statute in a manner that will either render any provision meaningless, see Columbia Med.

Center of Las Colinas, Inc. v. Hogue, 271 S.W.3d 238, 256 (Tex. 2008), or lead to a foolish or

absurd result when another reasonable and logical alternative is available. See Univ. of

Tex. S.W. Med. Ctr. at Dallas v. Loutzenhiser, 140 S.W.3d 351, 356 n.20 (Tex. 2004); see also

Tex. Dep't of Protective & Regulatory Servs. v. Mega Child Care, Inc., 145 S.W.3d 170, 177

(Tex. 2004) (noting that when a statutory text is unambiguous, courts must adopt the

interpretation supported by the statute's plain language unless that interpretation

would lead to an absurd and unreasonable result). We also consider the legislative

history in construing an unambiguous statute, see TEX. GOV’T CODE ANN. § 311.023(3)

Phillips v. United Heritage Corp. Page 6 (Vernon 2005), and presume the Legislature would not perform a useless act in

adopting a statute. See Webb County Appraisal Dist. v. New Laredo Hotel, Inc., 792 S.W.2d

952, 954 (Tex. 1990).

IV. Article 8.02(A) of the Texas Business Corporation Act

In their third issue, Appellants complain that the trial court erred by not

applying the applicable laws of the Turks and Caicos Islands pursuant to article 8.02(A)

of the TBCA to the determination of whether the corporate veil of Black Sea should be

pierced. No Texas court has specifically addressed this issue in the context Appellants

now urge.

Article 8.02(A) states:

A. A foreign corporation which shall have received a certificate of authority under this Act shall, until its certificate of authority shall have been revoked in accordance with the provisions of this Act or until a certificate of withdrawal shall have been issued by the Secretary of State as provided in this Act, enjoy the same, but no greater, rights and privileges as a domestic corporation organized for the purposes set forth in the application pursuant to which such certificate of authority is issued; and, as to all matters affecting the transaction of intrastate business in this State, it and its officers and directors shall be subject to the same duties, restrictions, penalties, and liabilities now or hereafter imposed upon a domestic corporation of like character and its officers and directors; provided, however, that only the laws of the jurisdiction of incorporation of a foreign corporation shall govern (1) the internal affairs of the foreign corporation, including but not limited to the rights, powers, and duties of its board of directors and shareholders and matters relating to its shares, and (2) the liability, if any, of shareholders of the foreign corporation for the debts, liabilities, and obligations of the foreign corporation for which they are not otherwise liable by statute or agreement.

TEX. BUS. CORP. ACT ANN. art. 8.02(A) (Vernon 2003) (emphasis added). In 1989, the

Legislature deemed it necessary to amend article 8.02(A) to address and clarify the

Phillips v. United Heritage Corp. Page 7 limited circumstances under which veil piercing claims could be asserted against a

shareholder of a foreign corporation. See Acts 1955, 54th Leg., ch. 64, effective

September 6, 1955; amended by Acts 1989, 71st Leg., ch. 801, § 40, effective August 28,

1989; see also Willis, 199 S.W.3d at 271-72. The scope and intent of article 8.02(A) is now

clearly defined: the laws of a foreign corporation’s state or place of incorporation, not

Texas law, shall govern the adjudication and disposition of shareholder liability and

other veil piercing claims against shareholders that involve the debts, liabilities, and

obligations of the corporation. Although Texas courts have applied the laws of other

states in determining veil piercing issues under article 8.02(A),1 we are confronted with

the assertion of veil piercing claims involving an entity (Black Sea) that was

incorporated in a foreign country. Nevertheless, the issues we must resolve go beyond

Black Sea’s corporate formation.

Here, although Appellants served as either officers or directors of Black Sea, they

were never shareholders. UHC contends that non-shareholder officers and directors of

a foreign corporation are and should be excluded from the scope and protections

afforded to shareholders under article 8.02(A) because although directors are referred to

in article 8.02(A)(1) (addressing a foreign corporation’s internal affairs),2 neither officers

nor directors are specifically mentioned in article 8.02(A)(2) (the shareholder liability

section). We do not find this argument persuasive.

1 See Pride Intern., Inc., v. Bragg, 259 S.W.3d 839, 849 (Tex. App.—Houston [1st Dist.] 2008, no pet.) (applying Delaware law); ASARCO LLC v. Americas Mining Corp., 382 B.R. 49, 64-65 (S.D. Tex. 2007) (applying New Jersey law); In re Kilroy, 357 B.R. 411, 425 (Bankr. S.D. Tex. 2006) (applying Delaware law).

2 The evidence UHC presented at trial focused extensively on the internal affairs of Black Sea. Here, the status of Black Sea’s internal affairs is of no consequence to the issues this Court must address.

Phillips v. United Heritage Corp. Page 8 It is not surprising that the Legislature referred only to shareholders when it

enacted and later amended article 8.02(A) because veil piercing claims are primarily

asserted against shareholders, not non-shareholder officers and directors.

Consequently, should officers and directors who are non-shareholders of a corporate

entity be subject to the same veil piercing theories? Although some Texas state and

federal courts have addressed whether traditional veil piercing claims may be pursued

against non-shareholders,3 the extent to which these theories can be utilized to impose

individual liability on a non-shareholder for corporate debts, liabilities, and obligations

remains unclear.4 Having considered the unique circumstances presented in this action

and the statutory scheme at issue, we believe the veil piercing theories and principles

that are available and used to hold shareholders individually liable for the debts,

liabilities, and obligations of a foreign corporation under article 8.02(A) should apply

equally and in the same manner to non-shareholder officers and directors of that entity.

Certain provisions of the Business Organizations Code, the successor to the

TBCA, are also instructive and mirror the language and intent of article 8.02(A). 5 The

3See Bollore S.A. v. Import Warehouse, Inc., 448 F.3d 317, 325-26 (5th Cir. 2006) (“[t]he great weight of Texas precedent indicates that, for the alter ego doctrine to apply against an individual…, the individual must own stock in the corporation.”); see also Stewart & Stevenson Servs. v. Serv-Tech, 879 S.W.2d 89, 108 (Tex. App.—Houston [14th Dist.] 1994, writ denied); Lane v. Dickinson State Bank, 605 S.W.2d 652-53 (Tex. Civ. App.—Houston [1st Dist.] 1980, no writ); Patterson v. Wizowaty, 505 S.W.2d 425, 428 (Tex. Civ. App.— Houston [14th Dist.] 1974, no writ); George v. Houston Boxing Club, Inc., 423 S.W.2d 128, 132 (Tex. Civ. App.—Houston [14th Dist.] 1968, writ ref’d n.r.e.).

4 In the past, the “single business enterprise” theory was applied by some Texas courts to hold non- shareholder corporate affiliates liable for the corporation’s debts, liabilities, and obligations. We note that the Texas Supreme Court recently rejected this theory and its application. See SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 455-56 (Tex. 2008).

5 The Legislature enacted the Business Organizations Code in 2003, effectively reorganizing and recodifying the Texas statutes governing business entities into a single Code. Although enacted in 2003,

Phillips v. United Heritage Corp. Page 9 Business Organizations Code explicitly states that the laws of a foreign corporation’s

state or place of incorporation shall apply when determining the liability of a

managerial official (i.e., an officer or director of a corporation) or a shareholder, for an

obligation, debt, or liability of the corporation. TEX. BUS. ORGS. CODE ANN. § 1.104

(Vernon Pamp. 2009) (“The law of the jurisdiction that governs an entity … applies to

the liability of an owner, a member, or a managerial official of the entity … for an

obligation, including a debt or other liability, of the entity …”) (emphasis added).

Importantly, article 8.02(A) (recodified in TEX. BUS. ORGS. CODE ANN. §§ 1.101-1.106

(Vernon Pamp. 2009)) was one of the source statutes the Legislature relied on for the

adoption of section 1.104, and the revisor’s note further indicates that no substantive

change to the source law was intended in the enactment of this section. See TEX. BUS.

ORGS. CODE ANN. § 1.104 Revisor’s Note (Vernon Pamp. 2009).

For purposes of determining individual liability in a veil piercing context under

article 8.02(A), we conclude that applying the laws of a foreign corporation’s state or

place of incorporation to the shareholders of that entity, including shareholders who are

also corporate officers and directors, while under the same circumstances requiring the

laws of Texas to govern the fate of non-shareholder officers and directors of the same

the Business Organizations Code did not become effective until January 1, 2006. This delay was structured to provide a transition period during which domestic entities formed on or after January 1, 2006, and foreign entities not registered in Texas on January 1, 2006, would be governed by the Business Organizations Code. Any entity formed prior to January 1, 2006, would continue to be governed until January 1, 2010 by the pre-Code statutes under which they were formed, e.g., the TBCA, unless such entity filed with the Texas Secretary of State a “Statement of Early Adoption” and an election to be governed by the Business Organizations Code. All pre-Code statutes, including articles 8.02(A) and 2.21(A) of the TBCA, expired on January 1, 2010. Therefore, the Business Organizations Code now applies to all business entities, regardless of when such entities were formed. See In re HRM Holdings, LLC, 421 B.R. 244, 246 (Bankr. N.D. Tex. 2009).

Phillips v. United Heritage Corp. Page 10 foreign entity, produces an unreasonable, illogical, and absurd result and is contrary to

the spirit and intent of article 8.02(A). Therefore, we hold that the scope and protections

of article 8.02(A) extend and apply to non-shareholder officers and directors of a foreign

corporation in the determination of their potential individual liability for that

corporation’s debts, liabilities, and other obligations.

A. Notice of Foreign Laws

UHC contends that if the laws of the Turks and Caicos Islands (TCI) are

applicable to this action, Appellants failed to properly comply with the requirements of

Texas Rule of Evidence 203 regarding the laws of a foreign country. See TEX. R. EVID.

203. Rule 203 is a “hybrid rule” by which the presentation of foreign law to the court

resembles the presentment of evidence, although the determination of its application is

ultimately a question of law. See Long Distance Int’l, Inc. v. Telefonos De Mexico, S.A., 49

S.W.3d 347, 351 (Tex. 2001). Nevertheless, a party who intends to rely on the laws of a

foreign country under Rule 203 must provide to all parties (1) some form of notice and

(2) copies of any writings or other sources that the proponent will utilize as proof of

such foreign laws. It is UHC’s belief that Appellants neither proffered nor requested

the trial court to take judicial notice of the laws of TCI, therefore, it should be presumed

that the laws of TCI and Texas are the same. We disagree.

Approximately five months prior to the commencement of trial, Appellants filed

their motion for summary judgment based in part on the laws of TCI, which the trial

court denied. Appellants’ summary judgment evidence included deposition excerpts

from UHC’s retained expert, Timothy Prudhoe, a British barrister and practicing TCI

Phillips v. United Heritage Corp. Page 11 attorney. Prudhoe also prepared a comprehensive report. His deposition testimony

and report explained the application and fundamental principles of the laws of TCI, and

his conclusions as to Appellants’ potential liability to UHC. At the trial of this action,

Prudhoe’s deposition testimony and report were offered by UHC and admitted into

evidence without objection for all purposes. Here, UHC is a victim of its own trial

strategy. As such, UHC cannot by its actions now complain that the trial court

erroneously admitted this evidence. See Halim v. Ramchandani, 203 S.W.3d 482, 492 (Tex.

App.—Houston [14th Dist.] 2006, no pet.); Voskamp v. Arnoldy, 749 S.W.2d 113, 123-24

(Tex. App.—Houston [1st Dist.] 1987, writ denied); Schwarte v. Bunting, 210 S.W.2d 655,

657 (Tex. Civ. App.—Waco 1948, writ ref’d n.r.e.).

Moreover, in addition to their motion for summary judgment, at trial Appellants

presented to the trial court for its consideration a voluminous trial brief on TCI law.

Their brief was based substantially upon Prudhoe’s deposition testimony and report.

UHC did not object to this proffer. Here, we find that Appellants substantially

complied with the procedures and requirements of Rule 203. Reasonable notice of

Appellants’ intention to rely on the laws of TCI, including the necessary proof of these

laws, was provided to UHC. See Nexen, Inc. v. Gulf Interstate Eng’g Co., 224 S.W.3d 412,

417-19 (Tex. App.—Houston [1st Dist.] 2006, no pet.); Lawrenson v. Global Marine, Inc.,

869 S.W.2d 519, 525-26 (Tex. App.—Texarkana 1993, writ denied). In fact, counsel for

UHC acknowledged this at oral argument. Nevertheless, even if we are incorrect in our

analysis, because UHC did not attempt to limit the trial court’s consideration of the

laws of TCI under this rule or the scope of the evidence that was introduced to explain

Phillips v. United Heritage Corp. Page 12 and support these laws, it has forfeited the right to complain of Appellants’ use of this

evidence. See Dankowski v. Dankowski, 922 S.W.2d 298, 303 (Tex. App.—Fort Worth 1996,

writ denied).

B. Laws of the Turks and Caicos Islands

The Turks and Caicos Islands, located approximately ninety (90) miles to the

north of the Dominican Republic, are a common law jurisdiction which primarily

follows English law. TCI has adopted ordinances that address the potential personal

liability for officers and directors of corporations formed under TCI law. TCI

ordinances are comparable to our statutes. Under TCI law, it is a fundamental principle

that a validly constituted and operated corporate entity has its own legal existence and

limited liability. See Salomon v. A. Salomon & Co. Ltd., [1897] AC 22 HL (E).

In most jurisdictions, including Texas, the circumstances under which an officer

or director may be held personally liable for the debts, liabilities, or obligations of the

corporation are limited. Similarly, the circumstances for imposing personal liability

under TCI law are also restricted. According to Prudhoe, UHC’s retained expert on TCI

law, the circumstances required to pierce the corporate veil under TCI law are limited to

when:

The officer or director acted ultra vires;

The articles of association provide for unlimited officer or director liability;

Upon the winding up of the corporation, monies are to be recovered from the officer or director that belong to the corporation;

Debts are incurred by the officer or director if the corporation is insolvent;

Phillips v. United Heritage Corp. Page 13 The officer or director has personally committed a tortious activity that would be tantamount to actual fraud;

The officer or director voluntarily assumes personal liability for the corporation’s torts;

The officer or director procures or induces the corporation to commit a tort; and

The officer or director has given a personal guarantee.

Prudhoe’s testimony, conclusions, and the substance of his report were undisputed.

Consequently, in order to establish a valid claim against Appellants under TCI law, it

was incumbent upon UHC to prove that any of the listed circumstances were

applicable. We have thoroughly reviewed the record before us and it is clear that UHC

failed to present any evidence that would support a right to recovery.

There is no evidence that Appellants acted ultra vires, or contrary to the stated

objectives of Black Sea. There is no evidence that Appellants had unlimited liability

pursuant to Black Sea’s articles of association, or that they provided any personal

guarantee. There is no evidence that Appellants owed any monies or were financially

indebted to Black Sea upon its winding up, or that Black Sea was insolvent when UHC’s

underlying causes of action accrued. Additionally, there is no evidence that Appellants

voluntarily assumed any personal liability for the judgment rendered against Black Sea

in the first suit or for any tortious acts allegedly committed by Black Sea. Yet, other

circumstances further preclude UHC’s ability to recover against Appellants.

This is an action to enforce and collect a judgment taken against Black Sea in the

first suit for its breach of the Subscription Agreement, not for its alleged tortious

activities. Indeed, UHC believes that Appellants engaged in fraudulent conduct and

Phillips v. United Heritage Corp. Page 14 because of their alleged conduct they should each be individually liable to it for this

judgment. Nevertheless, in its responses to Appellants’ request for admissions, UHC

admitted that Appellants had not committed an actual fraud against it. In fact, UHC

conceded it had no right of recovery against Appellants for fraud or any other relevant

cause of action because it had previously litigated these claims, unsuccessfully, in the

first suit. Consequently, UHC’s admissions are conclusive and further dispositive as to

these issues. See TEX. R. CIV. P. 198.3.

UHC presented no evidence that would allow it to recover against Appellants

under any applicable TCI theory or law. In fact, the uncontroverted testimony,

conclusions, and report of UHC’s retained expert even supports Appellants’

contentions. Therefore, if the laws of TCI apply to this action pursuant to article 8.02(A),

Appellants would not be individually liable to UHC for the judgment taken against

Black Sea. Appellants’ third issue is sustained.

V. Article 2.21(A) of the Texas Business Corporation Act

In their fourth issue, Appellants further complain that the trial court erred by

refusing to apply the standards set forth in article 2.21(A) of the TBCA. This statute

requires an affirmative finding of actual fraud in order to pierce the corporate veil when,

like in this action, a contractual obligation of the corporation or any matter that relates to

or arises from such obligation is involved. See Willis, 199 S.W.3d at 271-72 (recognizing

that article 2.21 limits Castleberry’s application); Priddy v. Rawson, 282 S.W.3d 588, 600

(Tex. App.—Houston [14th Dist.] 2009, pet. denied); Dick’s Last Resort, 273 S.W.3d at 909-

10. Article 2.21(A) states in part:

Phillips v. United Heritage Corp. Page 15 A. A holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares whose subscription has been accepted, or any affiliate thereof or of the corporation, shall be under no obligation to the corporation or to its obligees with respect to:

. . .

(2) any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, owner, subscriber, or affiliate is or was the alter ego of the corporation, or on the basis of actual fraud or constructive fraud, a sham to perpetrate a fraud, or other similar theory, unless the obligee demonstrates that the holder, owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, owner, subscriber, or affiliate; or

TEX. BUS. CORP. ACT ANN. art. 2.21(A) (Vernon 2003) (recodified in TEX. BUS. ORGS. CODE

ANN. §§ 21.223-21.226 (Vernon Pamp. 2009)) (emphasis added). We must initially

determine if the Legislature intended to include non-shareholder officers and directors

of a corporation within the scope of this statute. Consistent with our interpretation of

article 8.02(A), we hold that it did.

Article 2.21(A) was amended by the Legislature in 1997 to include the phrase

“any affiliate thereof or of the corporation.” This amendment expanded the

classification of persons previously covered by that article. See Acts 1955, 54th Leg., ch.

64, effective September 6, 1955; amended by Acts 1997, 75th Leg., ch. 375, § 7, effective

September 1, 1997. Central to our analysis is the interpretation of the term “affiliate.”

UHC contends that an “affiliate” under article 2.21(A) should not include non-

shareholder officers and directors of the corporation unless they are affiliates of

Phillips v. United Heritage Corp. Page 16 shareholders, owners of any beneficial interests in the shares, or subscribers of shares

whose subscription has been accepted. We disagree. The plain and intended meaning

of “affiliate” as article 2.21(A) and its amendments reflect, also encompasses any

individual who is affiliated with (1) a shareholder of the corporation, (2) a beneficial

owner or subscriber of shares of the corporation, or (3) simply the corporation itself in

some capacity, which we hold includes officers and directors.

The Business Organizations Code defines “affiliate” as “a person who controls, is

controlled by, or is under common control with another person.” See TEX. BUS. ORGS.

CODE ANN. § 1.002(1) (Vernon Pamp. 2009) (emphasis added). This definition is derived

from the Federal Securities Act of 1933, and was not intended to be substantively

different from the TBCA’s definition of “affiliate.” See TEX. BUS. ORGS. CODE ANN. §

1.002(1) Revisor’s Note (Vernon Pamp. 2009); see also TEX. BUS. CORP. ACT ANN. art.

13.02(A)(1) (Vernon 2003) (defining “affiliate” as “a person who … controls, is controlled

by, or is under common control with a specified person.”) (emphasis added). Further,

relevant and controlling statutes define a “person” to include an individual. See TEX.

BUS. ORGS. CODE ANN. § 1.002(69-b) (Vernon Pamp. 2009); see also TEX. BUS. CORP. ACT

ANN. art. 13.02(A)(7) (Vernon 2003). Therefore, it logically follows that an “affiliate”

must also include individuals. Moreover, it is significant that the concept of an

“affiliate” has been generally understood to encompass officers and directors. C.f. 17

C.F.R. § 230.144(a)(1) (defining an “affiliate” of an issuer as “a person that directly, or

indirectly through one or more intermediaries, controls, or is controlled by, or is under

Phillips v. United Heritage Corp. Page 17 common control with, such issuer”). We agree with this concept and hold that the term

“affiliate” encompasses and includes officers and directors of the corporation.

We further conclude that in order to give proper meaning and effect to the

Legislature’s amendment to article 2.21(A), the term “affiliate” must also be extended to

include affiliates of the corporation or the phrase “thereof or of the corporation” is

rendered meaningless. See In re Moore, 379 B.R. 284, 291 n.6 (Bankr. N.D. Tex. 2007) (“In

1997, the legislature added ‘affiliates’ of the corporation, of the shareholders, of the

owners of beneficial interests in shares, and subscribers of shares to the list of parties to

whom § 2.21(A) applies (which, as of 1993, already included shareholders, beneficial

interest holders, and subscribers of shares).”). The word “thereof” links “affiliate” to

the antecedent category of parties, i.e., shareholders, owners of beneficial interests in

shares, or subscribers of shares. The phrase “or of the corporation” relates “affiliate”

solely to the corporation itself. Clearly, the phrase “or of the corporation” would be of

no consequence if the affiliate relationship was limited only to shareholders, beneficial

owners, and subscribers. In this instance, we do not believe that the Legislature

intended to enact a statute with such a limited application, effect, and purpose and we

decline to construe it so narrowly. Therefore, we hold that non-shareholder officers and

directors are also affiliates of the corporation under article 2.21(A). Consequently,

Appellants are affiliates of Black Sea for purposes of article 2.21(A)’s application.

Because of their status as affiliates, in order to pierce the corporate veil of Black

Sea, UHC was required to establish that Appellants not only caused Black Sea to be

used for the purpose of perpetrating an actual fraud, they did in fact perpetrate an

Phillips v. United Heritage Corp. Page 18 actual fraud on UHC primarily for their own direct personal benefit. See TEX. BUS.

CORP. ACT. art. 2.21(A)(2) (Vernon 2003); see also Priddy, 282 S.W.3d at 600-01; Dick’s Last

Resort, 273 S.W.3d at 909; Solutioneers Consulting, Ltd. v. Gulf Greyhound Partners, Ltd.,

237 S.W.3d 379, 389 (Tex. App.—Houston [14th Dist.] 2007, no pet.). UHC was clothed

with this burden of proof. As such, UHC was obligated to request the submission of the

necessary questions in the trial court’s charge and to obtain affirmative jury findings of

actual fraud against Appellants. See Dick’s Last Resort, 273 S.W.3d at 911-13; Huff v.

Harrell, 941 S.W.2d 230, 237 (Tex. App.—Corpus Christi 1996, writ denied); see also TEX.

R. CIV. P. 273, 274. UHC did neither. Although the jury found that Appellants had

committed constructive fraud, such a finding cannot support the recovery UHC seeks

against them. Constructive fraud and actual fraud are independent causes of action

and a finding of constructive fraud will neither establish nor support a finding of actual

fraud. See Archer v. Griffith, 390 S.W.2d 735, 740 (Tex. 1964); Cotton v. Weatherford

Bancshares, Inc., 187 S.W.3d 687, 696 (Tex. App.—Fort Worth 2006, pet. denied); Flanary

v. Mills, 150 S.W.3d 785, 795 (Tex. App.—Austin 2004, pet. denied).

Here, the failure to request and obtain affirmative jury findings of actual fraud

against Appellants is fatal to UHC’s recovery pursuant to article 2.21(A). Nevertheless,

even if the jury had been properly charged, the record is silent as to any evidence of an

actual fraud committed by Appellants or that any such fraud would have been for

Appellants’ direct personal benefit. Further, UHC conclusively admitted that

Appellants had not committed an actual fraud against it. See TEX. R. CIV. P. 198.3.

Phillips v. United Heritage Corp. Page 19 Therefore, if article 2.21(A) applies to this action, UHC’s claims to pierce the corporate

veil of Black Sea would also fail. Appellants’ fourth issue is sustained.

VI. Choice of Law and Conclusion

It is not necessary for us to determine whether TCI or Texas law should apply to

the piercing claims asserted by UHC because, under either statute, these claims fail and

the disposition of this appeal would be the same. See generally Duncan v. Cessna, 665

S.W.2d 414, 419 (Tex. 1984) (noting that before undertaking a choice of law analysis, the

court must determine whether different results would be produced under the laws of

the competing jurisdictions). We conclude the trial court erred in denying Appellants’

motions for judgment notwithstanding the verdict. Appellants’ third and fourth issues

are sustained. In light of our holding, we need not address Appellants’ remaining

issues. See TEX. R. APP. P. 47.1.

Accordingly, the judgment of the trial court is reversed and judgment is rendered

that UHC take nothing on its claims against Appellants. See TEX. R. APP. P. 43.3.

W. STACY TROTTER Judge

Before Chief Justice Gray, Justice Reyna, and Judge Trotter6 Reversed and rendered Opinion delivered and filed May 26, 2010 [CV06]

6 The Honorable W. Stacy Trotter, Judge of the 244th District Court of Ector County, sitting by assignment of the Chief Justice of the Supreme Court of Texas pursuant to section 74.003(h) of the Government Code. See TEX. GOV’T CODE ANN. § 74.003(h) (Vernon 2005).

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