Holloway v. Skinner

898 S.W.2d 793, 1995 WL 277114

• Court: Texas Supreme Court
• Decided: June 8, 1995
• Docket: D-4374
• Status: Published

Opinions

CORNYN, Justice,

delivered the opinion of the Court,

in which PHILLIPS, Chief Justice, GONZALEZ, Justice, GAMMAGE, Justice, and SPECTOR, Justice, join.

In this case, we consider whether Graham Holloway, the president, director, and largest shareholder of Holligan, Inc. (the Corporation), can be held liable for tortiously interfering with a contract between the Corporation and a third party. Rick Skinner and Alvin Ord’s, Inc. (collectively, Skinner), sued Holloway for, among other things, tortious interference with a contract between the Corporation and Skinner. The trial court rendered judgment on the jury’s verdict against Holloway on the tortious interference claim. The court of appeals affirmed. 860 S.W.2d 217. Because Skinner presented no evidence that Holloway, in his personal capacity, willfully or intentionally interfered with the contract, we reverse the judgment of the court of appeals and render judgment that Skinner take nothing.

Skinner previously owned a sandwich shop franchise, Alvin Ord’s. In 1981, Holloway and his father-in-law, Tom Culligan, approached Skinner about purchasing the franchise. Rather than negotiating an outright purchase, the parties settled upon a plan of joint ownership and agreed to form a corporation, Holligan, Inc., to control their holdings. Skinner contributed to the Corporation his company-owned Alvin Ord’s stores, franchise agreements, the Alvin Ord’s trade name, and trade secrets. Holloway and Cul-ligan contributed their management services and additional capital. As part of this agreement, Skinner received a $63,000 promissory note from the Corporation, a six percent royalty on gross receipts from Alvin Ord’s stores, stock, and a managerial position in the Corporation.¹ Holloway served as the Corporation’s president.

Between 1981 and 1984, the Corporation failed to make some payments due under the note and royalty agreement. In 1984, Skinner left his position at the Corporation because of a deteriorating personal relationship with Holloway. The Corporation defaulted entirely on its obligations to him in July 1985.

Skinner successfully sued the Corporation for breach of its obligations under the note and royalty agreement, but the Corporation filed for bankruptcy, and that judgment remains unsatisfied. Skinner then filed the suit against Holloway, claiming, among other things, that he tortiously interfered with the note and royalty agreement by inducing the Corporation to default on its obligations. In accord with the jury’s verdict, the trial court rendered judgment against Holloway on the tortious interference claim. The court of appeals affirmed, holding that Holloway’s status as a corporate agent did not bar Skinner’s claim of tortious interference with the Corporation’s contract, that some evidence supported the jury’s finding that Holloway induced a breach of the contract, and that Holloway had not conclusively establish that his conduct was legally justified.

I.

Texas jurisprudence has long recognized that a party to a contract has a cause of action for tortious interference against any third person (a stranger to the contract) who wrongly induces another contracting party to breach the contract. See generally Raymond v. Yarrington, 96 Tex. 443, 73 S.W. 800, 802-04 (Tex.1903) (reciting the history of this cause of action and recognizing its viability in Texas). By definition, the person who induces the breach cannot be a contracting party. Were we to recognize the tortious interference claim when this identity of interest exists, any party who breaches a contract could be said to have induced his own breach and would therefore be liable for tortious interference. Such logic would convert every breach of contract claim into a tort claim. In most cases, however, this qualification is not an issue because the alleged tortfeasor is clearly a stranger to the contract.

Here, the act of interference was allegedly committed by an individual who was also the lawful representative of the contracting party. Such a case tests the limits of the general rule barring tortious interference claims when the inducing and the breaching party are one and the same. Cf. Copperweld Corp. v. Independence Tube Co., 467 U.S. 752, 771-72, 104 S.Ct. 2731, 2741-42, 81 L.Ed.2d 628 (1984) (holding that the identical economic interests of a parent corporation and its wholly-owned subsidiary render them legally incapable of conspiring with one another); Deauville Corp. v. Federated Dep’t Stores, 756 F.2d 1183, 1196-97 (5th Cir.1985) (holding that a parent corporation cannot be liable for tortious interference with prospective business relationships of its wholly-owned subsidiary). The inducement and the breach were allegedly committed when the same person was functioning in distinctly different legal capacities.

Corporations, by their very nature, cannot function without human agents. As a general rule, the actions of a corporate agent on behalf of the corporation are deemed the corporation’s acts. See, e.g., Terry v. Zachry, 272 S.W.2d 157, 160 (Tex.Civ.App.— San Antonio 1954, writ refd n.r.e.), disapproved on other grounds in Sterner v. Marathon Oil Co., 767 S.W.2d 686, 690 (Tex.1989).² For this reason, we have held that “an officer or director [of a corporation] may not be held liable in damages for inducing the corporation to violate a contractual obligation, provided that the officer or director acts in good faith and believes that what he does is for the best interest of the corporation.” Maxey v. Citizen’s Nat’l Bank, 507 S.W.2d 722, 726 (Tex.1974). “Even the officers and directors of an ordinary corporation, while acting as such, are not personally liable even though they recommend a breach of a valid contract.” Id. at 725 (quoting Russell v. Edgewood Indep. Sch. Dist., 406 S.W.2d 249, 252 (Tex.Civ.App. — San Antonio 1966, writ refd n.r.e.)). The reason for this rule has been explained as follows:

Doing business through corporate structures is a recognized and necessary incident of business life. A party is usually able to abandon a disadvantageous but valid contract and be responsible for breach of contract only. Corporations would substantially be prevented from similarly abandoning disadvantageous but valid contracts, and from securing related business advice, if the officers and employees who advised and carried out the breach had to run the risk of personal responsibility in an action for personal interference with the contract.

Wampler v. Palmerton, 250 Or. 65, 439 P.2d 601, 606 (1968). Based on this same rationale, we have emphasized that “a clear distinction should be maintained between individual liability as distinguished from that of the corporate employer.” See Maxey, 507 S.W.2d at 726.

The elements of a cause of action for tortious interference with a contract are: (1) the existence of a contract subject to interference, (2) the occurrence of an act of interference that was willful and intentional, (3) the act was a proximate cause of the plaintiffs damage, and (4) actual damage or loss occurred. Browning-Ferris Indus. v. Reyna, 865 S.W.2d 925, 926 (Tex.1993); Victoria Bank & Trust Co. v. Brady, 811 S.W.2d 931, 939 (Tex.1991). The second element of this cause of action is of particular importance when the defendant serves the dual roles of the corporate agent and the third party who allegedly induces the corporation’s breach. To establish a prima facie case under such circumstances, the alleged act of interference must be performed in furtherance of the defendant’s personal interests so as to preserve the logically necessary rule that a party cannot tortiously interfere with its own contract.

We hold that to meet this burden in a case of this nature, the plaintiff must show that the defendant acted in a fashion so contrary to the corporation’s best interests that his actions could only have been motivated by personal interests.³ See Thomas G. Fischer, Annotation, Liability of Corporate Director, Officer, or Employee for Tortious Interference with Corporation’s Contract with Another, 72 A.L.R.4th 492, 527-30 (1989) (cases cited). Inasmuch as it is the duty of corporate officers to protect the interests of the corporation, Southwestern States Oil & Gas Co. v. Sovereign Resources, Inc., 365 S.W.2d 417, 422 (Tex.Civ.App.— Dallas 1963, writ ref d n.r.e.), the mere existence of a personal stake in the outcome, especially when any personal benefit is derivative of the improved financial condition of the corporation or consists of the continued entitlement to draw a salary, cannot alone constitute proof that the defendant committed an act of willful or intentional interference. See 3 LenoRE M. Zajdel, FletcheR Cyclopedia of the Law of PRIVATE CORPORATIONS § 1001 (perm.rev.ed.1986); see also Welch v. Bancorp Management Advisors, Inc., 296 Or. 208, 675 P.2d 172, 178 (1983) (holding that even a corporate agent’s “mixed motives” to benefit himself as well as the corporation are insufficient to establish liability); Restatement of the Law (Second) of ToRTS, § 772 cmt. c (1979) (stating that by itself, “it is immaterial that the actor also profits by the advice or that he dislikes that third party and takes pleasure in the harm caused to him by the advice”). Were this not the rule, virtually every failure to pay a corporate debt would constitute a prima facie case of tortious interference against the corporate officer who decided not to pay the debt.

The dissent suggests that we have shifted the burden of proof on the affirmative defense of legal justification. We disagree. Although we acknowledge that whether to treat this issue as part of the defendant’s burden of proof or to place the burden on the plaintiff is a close question, on balance we conclude that the burden to prove that an agent committed an act of interference for reasons personal to the agent is better placed on the plaintiff. See, e.g., Wampler, 439 P.2d at 606 (stating that this issue “might well be viewed as a lack of duty of non-interference on the part of the corporate agent”). Once that burden is met, liability for tortious interference with contract is established unless the corporate agent establishes the affirmative defense of legal justification.

II.

Holloway’s arguments boil down to two contentions: that there is not legally sufficient evidence to support the jury’s finding that he tortiously interfered with Skinner’s contractual agreement with the Corporation, and, alternatively, that he has conclusively proven the affirmative defense of legal justification. Because we agree that Skinner did not meet his burden of proving each element of tortious interference, we need not address Holloway’s affirmative defense.

To succeed on the legal insufficiency challenge, Holloway must show that there is no more than a scintilla of evidence to support one or more of the elements of tortious interference. See Robert W. Calvert, “No Evidence” and “Insufficient Evidence” Points of Error, 38 TexL.Rev. 361, 363 (1960). In reviewing the record in this ease, we conclude that there is no evidence of the second element of tortious interference: a willful or intentional act of interference.

Much of the argument in this appeal has concentrated on the legal effect of Holloway’s corporate role. Holloway asserts that a corporate representative who controls the corporation cannot interfere with the corporation’s contracts because the representative is legally indistinguishable from the corporation. The record establishes, however, that Holloway personally owned only forty percent of the stock in the Corporation. Skinner argues that this lack of complete identity of interests between the Corporation and Holloway permits the jury to infer that Holloway interfered with the contract in question.

This argument primarily addresses the first element of tortious interference: whether there was a contract subject to interference. When there is a complete identity of interests, there can be no interference as a matter of law. Here, however, because Holloway’s interests as a minority shareholder and those of the Corporation are not of necessity identical, we hold that Holloway could have acted in a manner that served his interests at the expense of the other shareholders. Thus, the contract at issue here was subject to interference, despite the substantial alignment of his interests with those of the Corporation.

In his concurring opinion, Justice Hecht states that Holloway’s authority to act on behalf of the Corporation is the dis-positive inquiry. We disagree. Justice Hecht’s view represents a substantial departure from Texas law⁴ and would effectively abrogate the tortious interference cause of action and confer blanket immunity anytime an agent acts within the scope of the agent’s general authority and regardless of whether the agent is exclusively pursuing his personal interests. In this case, Skinner does not even claim that Holloway was not authorized by the Corporation to perform all of the actions of which Skinner complains. Still, we can conceive of other scenarios in which a corporate agent, while acting within the scope of his general authority, might pursue purely selfish interests in inducing a breach of the corporation’s contract. Cf. Celtic Life Ins. Co. v. Coats, 885 S.W.2d 96, 99 (Tex. 1994) (holding that “the proper question is not whether the principal authorized the specific wrongful act,” but “whether the agent was acting within the scope of the agency relationship”). An agent’s interests and those of the corporation are not always monolithic, especially when, as here, the agent is a minority shareholder. Accordingly, we reject a “scope of authority”⁵ test and hold that the ultimate issue in a case of this nature is whether the corporation’s agent acted in a manner so contrary to the corporation’s interests that the agent could only have been motivated by personal interest.

The alignment of Holloway’s interests with those of the Corporation is also relevant to the second element of tortious interference: whether the agent of the corporation committed a willful and intentional act of interference. The plaintiff must prove more than the fact that the defendant benefitted from the breach. The plaintiff must prove that the defendant acted willfully or intentionally to serve the defendant’s personal interests at the expense of the corporation. In this case, to support the jury’s finding of tortious interference, there must be evidence that Holloway personally benefitted from decisions that were inconsistent with his duty to the Corporation, and that were directly connected to the Corporation’s decision not to pay Skinner.

The testimony at trial, as well as audit reports and bankruptcy records, establish the following uncontroverted facts. The Corporation suffered severe cash flow problems and had current liabilities that far exceeded its current assets at the time the breach occurred. These financial difficulties caused the Corporation to fall behind on its royalty payments to Skinner during the period from 1981 to 1984, and to cease making payments altogether in 1985. The salary paid to Holloway was originally $36,000, but was reduced to $24,000 prior to 1984 due to cash flow problems. During the 1984-85 fiscal year, Holloway raised his salary to $33,750. During the next year, his salary was increased to $45,000. The increase in Holloway’s salary was offset by decreases in other salaries paid as the Corporation trimmed the size of its work force, and there is no evidence that these actions were unreasonable. Holloway further testified that, in his capacity as a corporate officer, he was required to prioritize between competing claims because the Corporation had insufficient cash flow to meet all obligations when they came due.

On this record, we conclude that there is no evidence that the decision to breach the contract was so contrary to the Corporation’s best interests that it could only have been motivated by the pursuit of Holloway’s personal interests. As we have already noted, a personal benefit limited to the continued entitlement to draw a salary or derivative of the improved financial condition of the corporation does not raise a triable issue of fact in this type of tortious interference case.

Because Skinner failed to introduce any evidence tending to prove that Holloway committed an act that was so contrary to the Corporation’s best interests that it could only have been motivated by the pursuit of his personal interests, there is no evidence that Holloway tortiously interfered with Skinner’s contractual rights with the Corporation. Accordingly, we reverse the judgment of the court of appeals and render judgment that Skinner take nothing on his tortious interference claim.

1 . During the negotiations, Skinner unsuccessfully attempted to obtain personal guarantees from Holloway and Culligan on the Corporation's obligations to Skinner.

2 . Sterner held that legal justification was an affirmative defense and disapproved of Terry only to the extent that Terry held that the burden of proof was on the plaintiff. Sterner, 767 S.W.2d at 690. Because we hold that there is no evidence of actionable interference under the facts of this case, we do not reach the question of whether Holloway conclusively established his affirmative defense of legal justification.

3 . Our holding today is consistent with the standard we enunciated in Maxey: that to prevail the defendant must act in good faith and believe the act to be in the best interest of the corporation. Maxey, 507 S.W.2d at 726. If the defendant acts in a fashion so contrary to the corporation's best interests that his actions could only have been motivated by personal interests, he by definition does not act in good faith.

4 . Justice Hecht cites one case, in addition to the present one, to illustrate the supposed flaws in the Court’s rule, infra, 898 S.W.2d at 799; Morgan Stanley & Co. v. Texas Oil Co., — S.W.2d -(Tex.App. — Houston [14th Dist.] 1994, writ denied). These cases, he asserts, demonstrate that the "the Court’s rule places an agent or employee in the awkward position of answering not only to his principal but to third parties with whom the principal is dealing.” Infra, 898 S.W.2d at 800. But under Texas law, a corporate agent is already answerable to the corporation for breach of fiduciary duties, see, e.g., International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 576 (Tex.1963), and to third parties for the tort of wrongfully inducing the breach of a corporate contract. See, e.g., Maxey, 507 S.W.2d at 726 (holding that officer or director “may not be held liable, provided that the officer or director acts in good faith and believes that what he does is for the best interest of the corporation.”) (citations omitted) (emphasis added). On the other hand, the rule Justice Hecht proposes would eliminate any possibility (by eliminating any fact issue) that an agent acting within the general scope of his authority on behalf of the corporation might be called to account for tor-tious interference with his principal’s contracts. We decline to depart from established Texas law on this issue.

5 . Conversely, when the agent seeks to establish the affirmative defense of legal justification under these circumstances, the agent must necessarily prove that his acts were performed within the scope of his authority and on behalf of the corporation. See Sterner, 767 S.W.2d at 691 (holding that affirmative defense of legal justification requires a showing that (1) inducement of the breach occurred in the bona fide exercise of the actor’s own rights, or (2) that the actor had an equal or superior right in the subject matter when compared to that of the plaintiff).