'4
Court of Appeals Jftftij M&ttxtt of Qtexao at Dallas
JUDGMENT
SUNTECH PROCESSING SYSTEMS, Appeal from the 14th Judicial District Court L.L.C , CASH DELIVERY SYSTEMS, of Dallas County, Texas. (Tr.Ct.No. 98- L.L.C., UICI, INC., f/k/a UNITED 01051-A). INSURANCE COMPANIES, INC., and Opinion delivered by Justice Wright, RONALD L. JENSEN, Appellants Justices Whittington and Roach, participating. No. 05-99-00213-CV V.
SUN COMMUNICATIONS, INC. and RICHARD SCHAPPEL, Appellees
In accordance with this Court's opinion of this date, the judgment of the trial court in AFFIRMED in part and REVERSED in part. The judgment of the trial court granting judgment that Suntech Processing Systems, LLC. take nothing on its claims for conversion/misappropriation against Richard Schappel is AFFKMED.
The remainder ofthe trial court's judgment is REVERSED and this cause is REMANDED to the trial court for new trial. It is ORDERED that appellants Suntech Processing Systems, L.L.C, Cash Delivery Systems, L.L.C, UICI, INC, f/k/a United Insurance Companies, Inc., and Ronald L. Jensen recover their costs of this appeal from appellees Sun Communications, Inc. and Richard Schappel.
The obligations of United States Fire Insurance Company as surety on appellants' supersedeas bond are DISCHARGED.
Judgment entered August 1, 2000. AFFIRM in part, REVERSE and REMAND in part and Opinion Filed August 1,2000
In The
Court of Appeals JTtftl? SJtstrttt of Qtexas at Dallas No. 05-99-00213-CV
SUNTECH PROCESSING SYSTEMS, L.L.C., CASH DELIVERY SYSTEMS, L.L.C., UICI, INC., f/k/a UNITED INSURANCE COMPANTES, INC. and RONALD L. JENSEN, Appellants
V.
On Appeal from the 14th Judicial District Court Dallas County, Texas Trial Court Cause No. 98-01051-A
OPINION
Before Justices Whittington, Wright, and Roach Opinion By Justice Wright
SunTech Processing Systems, L.L.C (STP), Cash Delivery Systems, L.L.C. (CDS), UICI,
Inc., f/k/a United Insurance Companies, Inc., and Ronald Jensen appeal a summary judgment rendered infavor of Sun Communications, Inc. (Sun) and Richard Schappel.1 Inseventeen issues,
Jensen contends generally the trial court erred by: (1) declaring the parties' rights in accordance with
^TPand CDS filed ajoint brief. UICI and Jensen each filed aseparate brief. Many ofthe issues are overlapping. Sun's interpretation ofthe second memorandum agreement; (2) granting summary judgment on Sun's securities law claims; and (3) denying his counterclaims. In fifteen issues, UICI contends
generally the trial court erred by (1) granting summary judgment on Sun's securities law claim; and (2) concluding that itowed afiduciary duty to Sun. In four issues, STP and CDS contend generally the trial court erred by (1) denying their motion to disqualify one of Sun's attorneys; and (2) granting summary judgment in favor ofSun on STP's claims for conversion and misappropriation against Sun's president. We affirm in part and reverse in part. We overrule STP's fourth issue and affirm the trial court's summary judgment that STP take nothing on its claims for conversion and
misappropriation against Schappel. Because we sustain Jensen's first, fourth, seventh, and eighth issues, UICI's first, second, third, fourth, and tenth issues, and STP and CDS's second issue, we
reverse the trial court's final judgment and remand this case for a new trial.
Background
Sunwas created in 1991. It was involved in the automatic tellermachine (ATM) business.
Jensen, president ofUICI, was interested in investing in the ATM business. Jensen, UICI, and Sun agreed to form Sun Network Technologies, L.L.C. (SNT) and Sun Network Acquisitions, L.L.C. (SNA) for the purpose ofcarrying out that business. UICI invested $4 million and Jensen agreed to fund a $6 million line of credit.
In 1996, SNT was experiencing financial problems. Jensen agreed to invest funds in SNT
on the condition that SNT be restructured and divided into twocompanies. Theparties agreed and
entered into the Second Memorandum Agreement (Agreement) in March 1997. Under the terms
ofthe Agreement, the struggling ATM business remained in SNT and was renamed CDS. The profitable transaction processing services business was transferred to the new company, STP.
-2- As a result of the restructuring, Jensen owned one-hundred percent of the Class A
membership interest and eighty percent of the Class Bmembership interest of the ATM business, CDS. Sun owned the remaining twenty percent ofthe Class Bmembership interest ofCDS. UICI owned one-hundred percent ofSTP's Class Amembership interest and eighty percent ofSTP's Class B membership interest in the transaction processing services business. Sun owned the remaining twenty percent of STP's Class B membership interest. In sum, Jensen owned a controlling interest in CDS and Jensen's company, UICI, owned acontrolling interest in STP. In February 1998, UICI, as controlling member ofSTP, voted to sell STP's assets in the transaction processing services business to Transaction Network Services, Inc. After STP sold substantially all ofits assets, ithad approximately $17,847,000 in cash remaining. Thereafter, over Sun's objection, UICI voted to dissolve STP and wind up its operations. STP sought to transfer $9,638,357 ofthe proceeds from the sale ofSTP to CDS to enable CDS to pay offits loan to Jensen. Seeking to prevent this transfer offunds to CDS, Sun filed alawsuit asking the trial court to interpret the Agreement and, based on that interpretation, to award an appropriate distribution of funds from the sale ofassets ofSTP. The trial court entered atemporary injunction preventing the transfer to CDS. The trial court also ordered that CDS and STP be judicially dissolved. On interlocutory appeal, this Court affirmed the temporary injunction but reversed the order ofjudicial dissolution.
In the trial court, Sun raised the following causes of action: (1) breach of contract; (2) violation ofthe Texas Limited Liability Company Act; (3) fraudulent conveyance; (4) self-dealing, breach of fiduciary duty, constructive fraud, and constructive trust; (5) anticipatory breach; (6) violation ofboth state and federal securities laws; (7) judicial dissolution; and (8) attorney's fees.
-3- Jensen counterclaimed alleging causes of action for (1) declaratory judgment; (2)
reformation; (3) fraud; (4) negligent misrepresentation; (5) promissory estoppel; and (6) unjust enrichment. UICI asserted the following counterclaims: (1) declaratory judgment; (2) reformation;
and (3) wrongful injunction.
STP and CDS alleged counterclaims against Sun for (1) reformation; (2) recission; (3) declaratory judgment; and (4) conversion. In the alternative, STP and CDS alleged counterclaims for mutual mistake and misappropriation of company funds.
Sun filed anamended motion forsummary judgment and appellants filed cross-motions for
summary judgment. The trial court granted Sun's second amended motion for summary judgment and ordered judicial dissolution of STP and CDS and the appointment of a liquidator. The trial court also ordered that STP's assets of approximately $19.1 million be deposited in the court's
registry.
The case went totrial solely on the issue of Sun's attorney's fees. On January 5,1999, the
jury awarded Sun $1,721,240 in attorney's fees through trial and an additional $406,000 on appeal. On May 4,1999, the trial court signed the Modified Judgment and Order ofDissolution. STP, CDS, UICI, and Jensen filed this timely appeal.
Standard of Review
We review summary judgment using the following well-known standards:
(1) The movant for summary judgment has the burden ofshowing that there is no genuine issue ofmaterial fact and that itis entitled to judgment as amatter oflaw; (2) In deciding whether there is a disputed material fact issue precluding summary judgment, evidence favorable to the non-movant will be taken as true; and (3) Every reasonable inference must be indulged in favor ofthe non-movant and any doubts resolved in its favor.
-4- Nixon v. Mr. Property Mgmt Co., 690 S.W.2d 546, 548-49 (Tex. 1985). When both sides move for
summary judgment and the trial court grants one motion and denies the other, the reviewing court
should review both sides' summary judgment evidence and determine all questions presented.
Bradley v. State exrel. White, 990 S.W.2d 245, 247 (Tex. 1999). When the defendant is the
movant, summary judgment is proper only if the plaintiff cannot, as a matter of law, succeed upon
any theory pleaded. See Pierce v. Sheldon Petroleum Co., 589 S.W.2d 849, 852 (Tex. Civ.
App.-Amarillo 1979, no writ). Thus, the defendant can prevail by conclusively establishing against
the plaintiffatleast one factual element ofeach theory pleaded. See Gibbs v. GeneralMotors Corp.,
450 S.W.2d 827, 828 (Tex. 1970). When a summary judgment order does not specify the ground
upon which the ruling was granted, we will affirm the judgment ifany one ofthe grounds advanced
in the motion are meritorious. See State Farm & Cos. Co. v. S.S., 858 S.W.2d 374,380 (Tex. 1993).
The Second Memorandum Agreement
In issues one through three, Jensen contends the trial court erred by granting Sun's motion
forsummary judgment ontheAgreement. STP and CDS raise this same point intheir second issue.
The focus of the parties' controversy is the following provision of the Agreement:
All parties agree that there will benodistributions toClass B members until all Class A preferred interests in both [STP] and [CDS] have been paid or redeemed in full. Should funds be available to any parties from either [CDS] or [STP] such funds will be loaned to the other company until the preferred interests are retired. The interest rate and terms should be the same as the $2,000,000 unsecured loan of [Jensen] to [CDS].
The proper distribution of the proceeds from the sale of STP iswidely disputed. On the one hand,
Jensen contends that his interest must be paid prior to the interests of the Class A and Class B
members. On the other hand, Sun contends that the above provision provides for a loan to pay the
preferred interest. Sun contends that Jensen's interest cannot beretired by way of a loan because
-5- there is no possibility that the loan will be repaid.
STP, CDS, UICI, and Jensen filed a joint response to Sun's amended motion for partial
summary judgment. Attached tothe joint response was the affidavit ofVernon R. Woelke. Woelke
is the vice-president and treasurer of UICI. Woelke states in his affidavit that the minutes of the
February 25,1998 meeting reveal that Schappel agreed to the disposition as proposed byJensen. The
minutes state:
Mr. Kittleson indicated that he neededto knowhow the proceedswould be distributed and how much Sun would receive. Mr. Schappel then described his understanding of how the distribution would be made based on the written agreements among the parties. First, all debt to Members would be repaid in full, including interest. Mr. Schappel and Mr. Kittleson calculated this amount to be approximately $5,577,000 from [CDS] financial statements they had in their possession. Second, the Class A membership interests of $2,000,000 in [STP] and $4,000,000 in CDS would be retired. Third, the remaining assets of [STP] would be distributed 80%to UICI and 20% to Sun. Mr. Schappel also observed the remaining assets of CDS would be distributed 80% to Ron Jensen and 20% to Sun. Again there was a discussion between the various parties at which time Mr. Howard suggested a short recess. All present agreed.
Schappel disputes the minutes of the February 25, 1998 meeting. Attached to Schappel's
affidavit is a copy of Sun'swritten objections tothe minutes. In pertinent part, the objections state:
The minutes, on Page 4, purport to summarize comments made by Mr. Schappel regarding the distribution ofproceeds following the sale of[STP]. This "summary," andevery statement in it, is a complete fabrication andisfalse. Mr. Schappel did not inany way state, infer or imply any ofthe comments attributed to him inthis section ofthe minutes. Further, to the extentthat this sectionof the minutesstateor inferthat Sun, Mr. Shappel or [Mr. Kittleson] in any wayagreed withthe other parties present regarding any such distribution, it is also inaccurate and false. Sun objects to the minutes on these grounds.
A fact issue exits on the face of these opposing affidavits. UICI and Jensen contend that the funds
were to be distributed in accordancewith their view. Moreover,they contend that Sun agreed to their
proposed distribution. Sun vigorously disputes that contention. Summary judgment is not proper
-6- in the face of material issues of fact. We sustain Jensen's second issue and STP and CDS's second
issue.2
The Securities Act3
In UICI's first through fourth issues and Jensen's fourth issue, they contend the trial court
erred in granting Sun's motion for summary judgment and denying their motion for summary judgment on the violation of the Securities Act. To show that UICI and Jensen violated the Securities Act, Sun had to prove that UICI and Jensen violated a provision of the Act and that
because of that violation, it is entitled to avoid the Agreement.
In the trial court, Sun alleged that UICI and Jensen violated the following provision of the
Act:
In connection with the sale, offering for sale or delivery of, the purchase, offerto purchase, invitation ofoffers to purchase, invitations ofoffers to sell, ordealing in any other manner in any security or securities, whether or not the transaction or security is exempt under Section 5 or6 ofthis Act, directly or indirectly: (3) knowingly make any untrue statement ofamaterial fact or omit to state amaterial fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
TEX. Rev. Crv. Stat. Ann. art. 581-29(C)(3) (Vernon Supp. 2000). Contracts made in knowing
violation of any provision ofthe securities act are unenforceable by the violator. TEX. REV. Civ. STAT. ANN. art. 581-33(K) (Vernon Supp. 2000). Sun contends that UICI and Jensen cannot enforce the Agreement because itwas not publicly disclosed in violation ofsecurities laws. The Securities and Exchange Act requires publicly traded companies to disclose certain transactions through filings with the Securities and Exchange Commission. See 15 U.S.C §78m (1997).
2In light ofour disposition ofJensen's second issue, we do not address Jensen's first and third issues.
3Tex. Rev. Civ. Stat. Ann. art. Art. 581-1 (Vemon 1964 &Supp. 2000). Sun contends UICI and Jensen violated article 581-29(C)(3) when they failed to publicly
disclose theAgreement and the preferential transfers. Although, UICI disclosed this information in
1998 through its filing ofschedule 14Awith the Securities and Exchange Commission, Sun contends
it should have been disclosed in 1996 and 1997.
In response tothe motion for summary judgment, UICI and Jensen presented the affidavit of
Vernon Woelke, vice president and treasurer of UICI. Woelke testified that any failure to report
therelated party transactions consummated through the Agreement was anoversight. This summary
judgment evidence raises a fact issue as to whether UICI knowingly failed to report the Agreement
as required by the Securities and Exchange Commission. Accordingly, the trial court erred in
granting summary judgment on Sun's cause of action for securities violations. We sustain UICI's
first through fourth issues and Jensen's fourth issue.
Fiduciary Duty
In its tenth issue, UICI contends the trial court erred in concluding that it owed a fiduciary
duty to Sun as a matter oflaw.4 Sun contends that UICI owed itafiduciary duty in light ofthe fact
that UICI was the majority shareholder, owning eighty percent of STP's shares.
The limited liability company act provides:
To the extentthat at lawor in equity, a member, manager, officer, or otherpersonhas duties (including fiduciary duties) and liabilities relating thereto to a limited liability company or to another member or manager, such duties and liabilities may be expanded or restricted by provisions in the regulations.
Tex. Rev. Crv. Stat. Ann. Art. 1528n, art. 2.20B (Vernon Supp. 2000). STP's articles of
incorporation provide that "Members of this Company have a duty of undivided loyalty to this
4In his fifth issue, Jensen contends the trial court erred in ruling that "as amatter oflaw," he owed afiduciary duty toSun. The trial court's judgment references the stipulation regarding the diminished value claim. UICI, STP, and Sun are the parties to the stipulation. The judgment states, "As amatter oflaw, there exists afiduciary duty supporting the Diminished Value Claim." The trial court ruled that UICI, not Jensen, owed a fiduciary duty to Sun.
~o— Company in all matters affecting this Company's interests." There is no Texas case addressing fiduciary duties between members in a limited liability
company. This Court has addressed the existence offiduciary duties between co-shareholders in a closely held corporation. Schoelkopfv. Pledger, 739 S.W.2d 914, 920 (Tex. App.-Dallas 1987), rev'don other grounds, 762 S.W.2d 145 (Tex. 1988). We turn to our opinion in Schoelkopffox guidance. Schoelkopf owned C&C Aircraft Services. Schoelkopf was also one ofthree equal shareholders of Midway Aircraft Sales, Inc. C & C and Midway shared the same hangar. C & C
wanted tosell Cessna airplanes. However, Midway'slease gave itthe exclusive right tosell airplanes
atthe hangar. Schoelkopf persuaded the other two shareholders to transfer Midway's loans to a bank where hedid business. Hepromised theshareholders that hecould help Midway obtain better
lines of credit at the new bank. Midway's loans were transferred to the new bank and each
shareholder personally guaranteed the loans. Soon after, Schoelkoph withdrew his guarantee and Midway went into bankruptcy. Id. at 916-17.
One of Midway's shareholders sued Schoelkopf for, among other things, breach of his
fiduciary duty as a co-shareholder. This Court has held that although a fiduciary duty may exist between co-shareholders in a closely held corporation, "we are unwilling to apply it as a matter of
law to all shareholders of closely held corporations." Schoelkopf 739 S.W.2d at 920, see also
Hoggettv. Brown, 971 S.W.2d 472, 488 (Tex. App.-Houston [14*Dist] 1997, no writ). Whether afiduciary relationship exists is aquestion offact dependent upon the unique circumstances ofeach case. Kasparv. Thome, 755 S.W.2d 151, 155 (Tex. App.-Dallas 1988, no writ). In its modified judgment and order ofdissolution, the trial court stated, "As amatter oflaw, there exists afiduciary duty supporting the Diminished Value Claim." The trial court made alegal
-9- conclusion that UICI owed a fiduciary duty to Sun. Except in limited circumstances, the existence
of a fiduciary relationship is a fact question. SeeKaspar, 755 S.W.2d at 155. The statute governing
limited liability companies does not mandate a fiduciary relationship between members. STP's
regulations provide that its members owe a duty of undivided loyalty to the company. Neither the
statute nor STP's regulations give authority to the trial court to find a fiduciary duty between STP's
members as a matter of law.
We recognize that SchoelkopfInvolved equal shareholders and Sun and UICI are not equal
shareholders. However, we do not think this fact changes this Court's holding that the existence of
a fiduciary relationship between co-shareholders is a fact question. This unequal stance is a fact to
be taken into consideration by the factfinder. We conclude the trial court erred in concluding that
UICI owed Sun a fiduciary duty as a matter of law. We sustain UICI's tenth issue to the extent that
the trial court erred in ruling on the fiduciary duty issue as a matter of law. We remand the fiduciary
duty issue to the trial court for a determination by the factfinder.
Counterclaims
In issuesseven and eight, Jensen contendsthe trial court erred in granting summaryjudgment
in favor of Sun on Jensen's counterclaims for fraud, negligent misrepresentation, quantum meruit,
promissory estoppel, and unjustenrichment. These counterclaims relateto the interpretation of the
Agreement. We have held that fact issues existon the properinterpretation ofthe Agreement. Thus,
the trial court erred in granting summary judgment on Jensen's counterclaims. We sustain Jensen's
seventh and eighth issues and remand these counterclaimsto the trial court.
Attorney Disqualification
In their first issue, STP and CDS argue that the trial court erred in denying their motion to
-10- disqualify Douglas Kittleson, one ofSun's attorneys. They moved to disqualify Kittleson because
he was counsel for STP during the negotiation for the sale of STP's assets.
We review a trial court's decision on a motion to disqualify under an abuse of discretion
standard. Spears v. Fourth Court ofAppeals, 797 S.W.2d 654, 656 (Tex. 1990). We will reverse
the trial court's decision only where the trial court acted without reference to any guiding rules or
principles, oracted inan arbitrary orunreasonable manner. Metropolitan Life Ins. Co. v. SynekFin.
Corp., 881 S.W.2d 319, 321 (Tex. 1994).
Rule 1.09(a)(3) oftheTexas Disciplinary Rules ofProfessional Conduct provides: "Without
prior consent, a lawyer who personally has formerly represented a client in a matter shall not
thereafter represent another person in a matter adverse to the former client:... (3) if it is the same
or a substantially related matter." Tex. DisciplinaryR. Prof'l Conduct 1.09(a)(3), reprinted in
TEX. Gov't Code Ann. § tit. 2, subtit. G app. A (Vernon 1998). The Texas Disciplinary Rules of
Professional Conduct do not determine whether an attorney is disqualified, rather they provide
guidelines and suggest the relevant considerations. National Medical Enterprises, Inc. v. Godbey,
924 S.W.2d 123, 132 (Tex. 1996). The party seeking disqualification must prove a priorexistence
of anattorney-client relationship involving factual matters related to the present litigation and that
there is a genuine threat that confidences revealed to the attorney will be revealed to the present
adversary. National Bank v. Coker, 765 S.W.2d 398, 400 (Tex. 1989). Once the party meets this
burden, an irrebuttable presumption arises that confidences were revealed by the attorney. Id.
However, anattorney should not bedisqualified forviolating a disciplinary rule when the violation
has not resulted inactual harm to the party seeking disqualification. In reMeador, 968 S.W.2d 346,
350 (Tex. 1998).
-11- STP and CDS contend that Kittleson, through his prior representation, obtained information
relevantto the valueof STP's assets. This information, STP and CDS further contend, bears directly
on Sun's diminished value claim. This information has been publicly disclosed. For this reason,
STP and CDS cannot meet their burden ofshowing the existence of a genuine threat that confidences
revealed to Kittleson will be revealed to Sun. Moreover, Sun and STP have stipulated as to the
diminished value. Thus, STP and CDS cannot show harm in light of the stipulation as to the
diminished value claim. See In reMeador, 968 S.W.2d at 350. We conclude the trial court did not
abuse its discretion in denying the motion to disqualify. We overrule STP and CDS's first issue.
Conversion
In issue four, STP contends the trial court erred by granting summary judgment that STP take
nothing on its claimfor conversion/misappropriation againstSchappel. STP claimedthat Schappel,
while president of STP, converted or misappropriated STP funds to pay premiums on his life
insurance policy with his wife as the beneficiary. Schappel moved for summary judgment on the
ground that the claim had been released.
A facially valid release completely bars any later action on the matters the release covers.
Deer Creek Ltd v. North American Mortgage Co., 792 S.W.2d 198, 201 (Tex. App.-Dallas 1990,
no writ). A release binds only those parties named therein. Dwyer v. Sabine Mining Co., 890
S.W.2d 140, 143 (Tex. App.-Texarkana 1994, writ denied). However, the party does not have to
be specifically named in the release. A party that can be readily identified from the language of the
release is properly bound thereby. Winklerv.KirkwoodAtriumOfficePark,$16S.Vf.2dlll, 113-14
(Tex. App.-Houston [14th Dist.] 1991, writ denied).
Schappel relied on a release executed by UICI and Schappel on October 27, 1997. That
-12- release provides, in pertinent part:
UICI, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, does for itself, for its affiliates, and for its successors and assigns, forever release, discharge and acquitRichard Schappel and his respective agents, successors, assigns, representatives, affiliated corporations, affiliated partnerships, officers, employees, directors, attorneys, insurance carriers, subsidiaries, divisions, and each and every other person, partnership, firm orcorporation inprivity with Richard Schappel that are ormight be liable, directly or indirectly, fixed or contingent, of and from any and all claims, demands, liabilities, obligations, debts, agreements, liens, security interests, claims or causes of action, which have been or which might have been asserted, including and arising out of that certain letter agreement dated March 4,1997 from W. Brian Harrigan and/or UICI, which letteragreement is hereby terminated.
As part of its summary judgment evidence, Schappel included the deposition testimony of Mark
Hauptman, personal financial assistant to Jensen. Hauptman played amajor role in negotiating and drafting the release between Schappel and UICI. Hauptman testified thatthe term UICI "affiliates"
included STP and CDS. STP argues that the release does not apply to itbecause it is not specifically named in the release. Affiliate means to join or become connected with. Ballentine's Law
Dictionary 45 (3d ed. 1969). UICI was a member of STP, owning eighty percent of itsstock. We
conclude that, atthe time ofthe Schappel/UICI release, STP was an affiliate corporation ofUICI, and, thus, itwas covered under the release. The trial court properly granted summaryjudgment that STP take nothing on its claims against Schappel for conversion/misappropriation. We overrule
STP's fourth issue.
We affirm the trial court's summary judgment that STP take nothing on its claims for
conversion/misappropriation. As to the remainder of the claims, we reverse the trial court's
-13- judgment and remand this case for a new trial.5
Do Not Publish Tex. R. App. P. 47 990213
In issuethree, STPand CDScontendthe trial court erredin rendering summaryjudgmentdissolving STPand CDS. We reversethe trial court'sjudgment, partlybecause of fact issues regarding the proper distribution of the proceeds from the saleof STP'sassets. Forthis reason, the trial court's judgment dissolving STP and CDS is likewisereversed. Accordingly, we do not address STPand CDS's third issue.
-14-