Rudisill v. Arnold White & Durkee, P.C.

148 S.W.3d 556, 2004 Tex. App. LEXIS 8750, 2004 WL 2186957

• Court: Court of Appeals of Texas
• Decided: September 30, 2004
• Docket: 14-03-00508-CV
• Status: Published

Opinions

MAJORITY OPINION

ADELE HEDGES, Chief Justice.

Appellants filed this declaratory judgment action seeking a declaration of their rights following the combination of two law firms, Arnold White & Durkee, P.C. (“AWD”), and Howrey & Simon (“H & S”), which combined to form Howrey Simon Arnold & White, L.L.P. (“HSAW”). Appellants, Stephen Rudisill, Ronald Coolley, and Slawomir Szczepanski, were AWD shareholders at the time of the combination. The trial court granted summary judgment in favor of AWD. We affirm.

I. Background

In 1999, AWD and H & S entered negotiations to combine their operations. AWD’s board of directors noticed a shareholders’ meeting for January 7, 2000, for the purpose of voting on the proposed combination. The notice stated that a two-thirds majority of Class B and Class C shares would be required for passage. Appellants, each being a holder of Class B or Class C shares, submitted written objections to the combination prior to the meeting. Appellants then voted against the combination, which was approved by a two-thirds vote.

Under the terms of the Combination Agreement, all of AWD’s assets not specifically excluded were transferred to H & S. In exchange, AWD became a “Level II Partner” in H & S, which subsequently changed its name to HSAW. The only excluded assets were three vacation condominiums, two insurance policies, and several automobile leases. Closing and transfer of assets occurred on or after January 31, 2000.

AWD shareholders were eligible to become partners in HSAW by signing the Partnership Agreement. Appellants declined to sign the agreement, ceased working for AWD, and filed the present action seeking a declaration of their rights. Both sides moved for summary judgment. The trial court granted AWD’s motion without stating the basis therefor. On appeal, appellants’ three issues track their three causes of action. They contend that (1) they are entitled to dissenter’s rights of redemption under the Texas Business Corporation Act (“TBCA”), (2) if they are not entitled to dissenter’s rights, they should be reinstated to their full rights as shareholders, and (3) alternatively, they have the right to redeem their shares pursuant to the AWD Redemption Agreement.

II. Standard of Review

Under the traditional standard for summary judgment, the movant has the burden to show that there is no genuine issue of material fact and that judgment should be granted as a matter of law. Tex.R. Civ. P. 166a(c); KPMG Peat Marwick v. Harrison County Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex.1999). In reviewing a grant of summary judgment, we take as true all evidence favorable to the nonmovant and make all reasonable inferences in the nonmovant’s favor. Nixon v. Mr. Property Mgmt. Co., 690 S.W.2d 546, 549 (Tex.1985). A defendant, as mov-ant, is entitled to summary judgment if it (1) disproves at least one element of the plaintiffs theory of recovery or (2) pleads and conclusively establishes each essential element of an affirmative defense, thereby rebutting the plaintiffs cause of action. Am. Tobacco Co. v. Grinnell, 951 S.W.2d 420, 425 (Tex.1997). A plaintiff is entitled to summary judgment only if he conclusively proves all essential elements of his claim. Johnston v. Crook, 93 S.W.3d 263, 273 (Tex.App.-Houston [14th Dist.] 2002, pet. denied). When reviewing cross-motions for summary judgment, we consider both motions and render the judgment that the trial court should have rendered. Coastal Liquids Transp., L.P. v. Harris County Appraisal Dist., 46 S.W.3d 880, 884 (Tex.2001).¹

The relevant facts are generally undisputed. Indeed, at oral argument, both sides represented that there was no material issue of fact because there is no dispute regarding the facts of the case. The only dispute is a legal one: how to apply the relevant portions of the TBCA to the facts. To the extent the issues presented in this appeal involve statutory construction and application of the statute to undisputed facts, we determine the issues as a matter of law. Gramercy Ins. Co. v. Auction Fin. Program, Inc., 52 S.W.3d 360, 363 (Tex.App.-Dallas 2001, pet. denied).

In interpreting a statute, whether or not we consider it ambiguous, we may consider, among other things: the object sought to be obtained; the circumstances of the statute’s enactment; the legislative history; the common law or former statutory provisions, including laws on the same or similar subjects; the consequences of a particular construction; administrative construction of the statute; and the title, preamble, and emergency provision. Tex. Gov’t Code AnN. § 311.023 (Vernon 1998); Helena Chem. Co. v. Wilkins, 47 S.W.3d 486, 493 (Tex.2001). In examining the relevant portions of the TBCA, we focus primarily on the language of the statute itself and, to a lesser extent, the legislative history, including the interpretive commentaries attached to each section.² We consider a question of statutory interpretation under a de novo standard of review. Bragg v. Edwards Aquifer Auth., 71 S.W.3d 729, 734 (Tex.2002).³

III. Dissenter’s Rights

In their first issue, appellants contend that the trial court erred in granting summary judgment against them because they are entitled to dissenter’s rights under the TBCA, including the right of redemption for the “fair value” of the shares.

A. The Texas Business Corporation Act

The TBCA provides two procedures for authorizing a sale when all or substantially all of the property and assets of a corporation are to be sold. See Tex. Bus. Corp. Act arts. 5.09, 5.10 (Vernon 2003). The procedure that is followed is generally determined by whether the sale is deemed “in the usual and regular course of business of the corporation.” Id. A sale is considered in the usual and regular course of business if, after the sale, “the corporation shall, directly or indirectly, either continue to engage in one or more businesses or apply a portion of the consideration received in connection with the transaction to the conduct of a business in which it engages following the transaction.” Id. art. 5.09(B).

A sale in the usual and regular course of business can be authorized by the board of directors without shareholder approval. Id. art. 5.09(A). If a sale is not in the usual and regular course of business, the board must obtain approval from two-thirds of the outstanding shares entitled to vote on the proposed sale. Id. art. 5.10(A)(4).⁴ Under the latter scenario, dissenters to the sale (i.e., shareholders who voted against the sale but lost) have certain rights, including the right to redeem their shares for “fair value.” Id. arts. 5.11, 5.12. AWD generally followed the procedure for a sale that was not made in the usual and regular course of business and obtained a two-thirds majority favoring the sale. See id. art. 5.10. Notwithstanding that the procedure utilized is inconsistent with its position at trial and on appeal, AWD contends that appellants are not entitled to dissenter’s rights because the sale was in the usual and regular course of business.

According to the 1996 comment to article 5.09, the statute “was amended in 1987 to substantially expand the types of transactions that would not constitute a disposition of all or substantially all assets.... ” Id. art. 5.09, cmt. of Bar Comm. — 1996. The 1987 amendment, which added section B to the article, provided that a sale is in the usual and regular course of business if, after the sale, “the corporation shall, directly or indirectly, either continue to engage in one or more businesses or apply a portion of the consideration received in connection with the transaction to the conduct of a business in which it engages following the transaction.” Id. art. 5.09(B). The comment goes on to state, “In effect, no disposition of assets by a corporation will require shareholder approval unless the corporation liquidates and ceases to do business after the disposition.” ⁵

The House Committee on Business and Commerce prepared an analysis of the proposed amendment. According to this analysis, section B was added

to redefine what constitutes the disposition of all or substantially all of the assets of a corporation. Cases in other jurisdictions have held or implied that disposition of assets, not normally considered to be included by the phrase “all or substantially all” required shareholder approval under statutes similar to TBCA articles 5.09 and 5.10. The comment to RMBCA [the revised model code] section 12.02 rejects the holding/implication in these cases, but the RMBCA itself lacks any statutory language that would dictate the opposite result. The amendatory language is similar to that in section 121.E of the Louisiana Business Corporation Law, in that shareholder approval is not required if a corporation engages in a business or applies any assets received from a sale in the business of the corporation.

House Comm, on Bus. & CommeRce, Bill Analysis, Tex. H.B. 418, 70th Leg., R.S. (1987).⁶

Clearly, the 1987 amendment was intended to “substantially expand” the types of transactions that would not require shareholder approval. See, e.g., Tex. Bus. CoRP. Act art. 5.09, cmt. of Bar Comm. — 1996. In summary, a sale is made in the usual and regular course of business so long as the corporation is not liquidated and continues in some business, either directly or indirectly, after the sale.

B. AWD Post-Combination

Under appellants’ first issue, we examine whether AWD (1) continued to exist as a corporation after the combination and (2) continued directly or indirectly in the legal services business.⁷ AWD contends that it is still a viable corporation in the legal services business as a partner in HSAW. We agree.

1. AWD’s Evidence

Uncontroverted summary judgment evidence established that, after the eombination, AWD continued to be a Texas corporation in good standing with the Texas Comptroller’s office, and it continued to have shareholders, employees, directors, officers, and annual meetings.⁸ Evidence further established that AWD maintained its own financial and payroll records and filed separate federal and state tax returns. As a Level II Partner in HSAW, AWD enjoyed voting rights and profits commensurate with its percentage share of the partnership.⁹ AWD received Schedule K-ls from HSAW, evidencing profit or loss from the partnership. For a year and a half after the combination, it continued to have a separate office in Chicago. For the first year, only AWD shareholders were allowed to share in any contingency fees generated by AWD or its shareholders.¹⁰

2. Appellants’ Counter Arguments

Appellants contend that, in reality, AWD was subsumed in the resulting combination and that the remaining corporate structure is merely a shell that does not engage in any business. They base this argument primarily on the assertion that AWD could not remain in the legal services business because it transferred all of the assets it required for that business.¹¹ First, we note that the TBCA contains no requirement that a company retain or receive any physical assets in order for it to continue in business after transferring all or substantially all of its assets. Indeed, article 5.09 permits a sale in the usual and regular course of business to be made for such considerations as are authorized by the board of directors and “may consist in whole or in part of money or property, real or personal, including shares of any other corporation, domestic or foreign.” Tex. Bus. Corp. Act art. 5.09. Thus, the drafters of the TBCA envisioned that a corporation could continue in business despite transferring all of its assets and receiving only cash or corporate stock in return.

The language of article 5.09 is expressly nonexclusive in listing the types of considerations that may be exchanged for a corporation’s assets, and there is a logical inference that ownership in a partnership would meet the statutory requirements. See 25 Bulletin of the Section on CORPORATION, BanKing & Business Law, State Bar of Texas 12 (asserting that a drop-down of assets by a corporation to a partnership would not require shareholder approval under the TBCA); see also supra n. 2. Appellants do not argue that the partnership interest held by AWD in HSAW is not a valuable asset.¹²

It is clear that AWD remained in the legal services business, at least indirectly, in that (1) its shareholders and employees continued to practice law under the auspices of HSAW, and (2) it held an ownership interest in HSAW, which unquestionably continues directly in that business. Accordingly, the summary judgment evidence supports the conclusion that AWD is still a viable corporation directly or indirectly continuing in the legal services business as a matter of law. Therefore, the sale was made in the usual and regular course of business. See Tex. Bus. Corp. Act art. 5.09(B).

Additionally, appellants contend that because AWD obtained shareholder approval under TBCA article 5.10, and thus established immunity for the directors under article 5.12(G), it could not subsequently deny appellants’ rights as dissenters under article 5.11(A)(2). Tex. Bus. Corp. Act arts. 5.10, 5.11(A)(2), 5.12(G). Appellants have misread the statute. Article 5.12(G) expressly limits its scope to corporate actions listed in article 5.11. Id. art. 5.12(G).¹³ The only action listed in article 5.11 that appellants contend applies here is subsection 2, which provides that shareholders have the right to dissent to a sale of all or substantially all of a corporation’s assets “if special authorization of the shareholders is required.” Id. art. 5.11(A)(2) (emphasis added). In this case, special authorization of the shareholders was not required because AWD continued in business after the transfer or sale of all or substantially all of AWD’s assets. Even though AWD generally followed the procedures under article 5.10, it was not required to do so; thus, appellants are not entitled to dissenter’s rights.

Appellants further suggest that articles 5.09 and 5.10 are both mandatory; i.e., a sale in the usual and regular course of business must be accomplished under 5.09, and a sale not in the usual and regular course of business must be accomplished under 5.10. The commentary to these articles makes it clear that the procedures under 5.10 are mandatory, while the procedures under 5.09 are not. The commentary states: “Article 5.10 requires special authorization of the shareholders for a sale ... of all or substantially all of a corporation’s assets if not made in the usual and regular course of business,” and “Article 5.09 permits a sale ... of all or substantially all the assets when made in the usual and regular course of business to be made upon authorization of the board of directors.” Tex. Bus. Corp. Act art. 5.09, cmt. of Bar Comm. — 1955; art. 5.10, cmt. of Bar Comm. — 1955 (emphasis added). Because AWD was not required to follow the procedures in article 5.10 in selling its assets to H & S, appellants are not entitled to dissenter’s rights. In sum, AWD continued to exist as a corporation after the combination, and it continued, at least indirectly, in the business of providing legal services. Accordingly, we overrule appellants’ first issue.

IV. Shareholder Status

In their second issue, appellants contend that, if they are not entitled to dissenter’s rights, they should be restored to their position as shareholders and given their shares of any corporate profits distributed in the interim. AWD contends that appellants are not entitled to any post-combination distributions because their employment with AWD was terminated prior to any such disbursements, thus triggering automatic redemption under the AWD Redemption Agreement.

Appellants first contend that the operation of TBCA article 5.13 restores then-rights as shareholders. Tex. Bus. CoRP. Act art. 5.13. Article 5.13 provides that once a shareholder claims dissenter’s rights under article 5.12, he or she may not exercise the rights of a shareholder. Id. art. 5.13(A). If, however, a court determines that the shareholder is not entitled to dissenter’s rights, the shareholder’s status shall be restored, and the shareholder shall be entitled to receive any distributions made in the interim. Id. art. 5.13(C). Appellants contend that, if this Court decides that they are not entitled to dissenter’s rights, each should have his shareholder status restored. We disagree with appellants’ contention. Nothing in article 5.13 suggests that a former shareholder can regain his or her shares based on an unsuccessful claim of dissenter’s rights if shareholder status has otherwise been terminated.

The AWD Redemption Agreement provides that upon termination of employment with the corporation “for any reason,” a shareholder loses his or her rights, and the shares are to be redeemed “as of the end of the last day of the Shareholder’s employment.” ¹⁴ Each of the appellants left their employment with AWD some time in late January or early February 2000, which was around the time the combination was completed.¹⁵ Although it is unclear why the appellants’ employment was terminated, under the Redemption Agreement, the reason is irrelevant. As stated, if “for any reason” employment is terminated, the shares are redeemed as of the end of that very day. Thus, appellants’ shares are considered redeemed as of the day they left employment. It follows that, once redeemed, shares are not susceptible of revival and former shareholders are not entitled to reinstatement under the TBCA.

Appellants additionally argue that then-shares could not be considered to have been redeemed because they have not received payment for them. Under the Redemption Agreement, redemption occurs on the day of termination irrespective of whether payment was tendered on that day. The agreement provides a payment schedule, and it is clear that the lack of immediate payment was not intended to mean that the shareholder retains the shares or the attendant rights of ownership until the full amount (or any amount) is actually paid. Furthermore, it is undisputed that AWD has tendered payment to appellants, and appellants have thus far refused to accept it.¹⁶ Appellants cannot refuse payment and then argue that their shares have not been redeemed because they have not received payment.

There is no evidence that appellants failed to receive any distributions that occurred before termination of their employment and the consequent redemption of their shares.¹⁷ Because any distributions occurred after appellants left the firm, they are not entitled to participate in the distributions. The trial court did not err in granting summary judgment against this alternative claim. Appellants’ second issue is overruled.

V. Redemption

In their third issue, appellants contend that even if they are not entitled to dissenter’s rights or reinstatement, they are entitled to payment under the AWD Redemption Agreement. Appellants’ third cause of action specifically sought “a declaration that plaintiffs are entitled to enforce their rights under the Redemption Agreement.” AWD contends that because it does not deny that appellants have a right to redemption under the agreement and, in fact, has tendered payment pursuant to the agreement, the third cause of action does not present a justiciable controversy. We agree.

A claim alleging a lack of a justiciable controversy challenges the plaintiffs standing to sue and, consequently, the court's subject matter jurisdiction over the cause of action. See Tex. Ass’n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 446 (Tex.1993). Subject matter jurisdiction is a question of law that we review de novo. Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 928 (Tex.1998). For a plaintiff to have standing and a court to have jurisdiction in a declaratory judgment action, there must be a “real controversy between the parties [that] will be actually determined by the judicial declaration sought.” Tex. Ass’n of Bus., 852 S.W.2d at 446.

In the trial court and on appeal, AWD has consistently maintained that appellants are entitled to payment for their shares under the Redemption Agreement. In fact, two months before suit was filed, AWD informed appellants’ attorney by mail that “[y]our clients are still entitled to their contractual rights under the AWD ... Redemption Agreement.” AWD’s letter Usted the amounts due to each of the appellants and stated that AWD was prepared to make the payments as listed. Appellants do not argue that the amounts are in error, nor have they pled a breach of contract action based on any delay in making payments. Because AWD has consistently and expressly acknowledged appellants’ rights under the Redemption Agreement, a justiciable controversy does not exist on this issue. Therefore, judgment may not issue to declare those rights. See Bonham State Bank v. Beadle, 907 S.W.2d 465, 467 (Tex.1995).¹⁸ Appellants’ third issue is overruled.

The trial court’s judgment is affirmed.

FROST, J., Concurring.

1 . There is some dispute as to whether the trial court actually considered appellants’ motion and whether the motion sought a final judgment; however, because we hold that the trial court properly granted AWD’s motion, we need not decide whether appellants’ motion is reviewable.

2 . The interpretive commentaries were written by committees of the State Bar of Texas and not by legislative entities. They are particularly helpful as legislative history, however, because the committees originally proposed and drafted the language that became the TBCA and subsequently amended it. The committees based their work largely on the Model Business Corporation Act. See, e.g., Tex. Bus. Corp. Act art. 2.01, cmt. of Bar Comm.— 1955.

3 .The parties do not cite, and we were unable to find, any published cases that have interpreted the sections of the TBCA at issue in this appeal.

4 . As will be discussed in detail below, when a sale is in the usual and regular course of business, article 5.09 permits the sale to be made upon authorization of the board only, but when a sale is not made in the usual and regular course of business, special authorization by the shareholders must be obtained under article 5.10. Tex. Bus. Core. Act art. 5.09, cmt. of Bar Comm. — 1955; art. 5.10, cmt. of Bar Comm. — 1955.

5 . This interpretation is bolstered by a 1987 State Bar article written by two members (including the chairman) of the committee that originally drafted the section B version which passed the legislature with only one grammatical modification. In the article, the members state that "[a]s a result of this change it is clear that a drop down of assets by a corporation to a ... master limited partnership would not be an asset disposition requiring shareholder approval. In effect no disposition of assets by a corporation will require shareholder approval unless the corporation liquidates and ceases to do business after the disposition.” 25 Bulletin of the Section on Corporation, Banking & Business Law, State Bar of Texas 12 (September 1987).

6 . The cited section of the Louisiana statute governs voluntary transfers of corporate assets and provides as follows:

Nothing in this section is intended to restrict the power of any corporation, without authorization thereof by the shareholders, to sell, lease, exchange or otherwise dispose of any of its property if the entire corporate business is not ended thereby, or if some portion of the proceeds of such property is appropriated to the conduct or development of its remaining business.

La.Rev.Stat. Ann. § 121(E) (West 1994). One published case under the Louisiana provision deals with the transfer of assets from a corporation to a partnership. See Levy v. Billeaud, 443 So.2d 539 (La.1984). However, that case is of little use here because it is so readily distinguishable. The plaintiffs in Levy claimed that (1) the directors and appointed liquidator breached their fiduciary duties and (2) plaintiffs would have received no compensation for their shares if they refused to join the partnership. See id. at 541, 544. Here, appellants make no breach of fiduciary duty claims, and it is undisputed that, at a minimum, they are entitled to receive compensation for their shares under the AWD Redemption Agreement.

7 . It is undisputed that all or substantially all of AWD’s assets were transferred to HSAW. It is also important to note that, although the statute provides that a corporation can continue in business if it applies a portion of the consideration received from the transaction to the conduct of a business in which it engages following the transaction, the parties have, for the most part, limited their arguments to whether AWD continued in the legal services business after the combination. Tex. Bus. Corp. Act art. 5.09(B). We shall therefore confine our discussion to that context.

8 . Appellants point out that the number of AWD shareholders and employees has dwindled since the combination and is unlikely to be replenished. However, appellants make no arguments and cite no authority, and we are aware of none, suggesting that these facts prevent AWD from being a live corporation.

9 . The HSAW Partnership Agreement creates two levels of partnership; a Level II Partner has greater voting and other partnership rights than does a Level I Partner.

10 . Appellants point out that AWD currently has no source of income other than what it receives as a HSAW partner, does not service clients separately from HSAW, and does not market itself as a separate firm. They further assert that all AWD shareholders now hold themselves out as partners in HSAW. However, appellants again offer no explanation or authority regarding how these facts prevent AWD from being a viable corporation in the legal services business.

11 .As assets required for the practice of law, appellants list cash, accounts receivable, work-in-progress, leasehold interests, furniture, fixtures, and equipment. However, despite the offices, computers, software, fax machines, paper, pens, and pencils most lawyers use in their practices, the only “asset” truly indispensable to continuing in the legal services business is the lawyer him- or herself. Post-combination, AWD continued to retain attorneys as shareholders and employees and, as a HSAW partner, it indirectly retained the services of many more.

12 . Indeed, in their Reply Brief, appellants assert that in the transaction AWD “received from the new firm stock [sic] equal to the entire value of [AWD’s] assets.”

13 . Article 5.12(G) specifically provides that, in the absence of fraud in the transaction, the remedy of a dissenting shareholder under article 5.11 is the exclusive remedy for the recovery of the value of his or her shares. Tex. Bus. Corp. Act art. 5.12(G).

14 . Absent ambiguity, we interpret a contract as a matter of law. DeWitt County Elec. Coop., Inc. v. Parks, 1 S.W.3d 96, 100 (Tex.1999). Appellants do not specifically contend that the Redemption Agreement is ambiguous, nor do we so find.

15 . In their respective depositions, Stephen Rudisill testified that he stopped being an AWD shareholder in January 2000 and that he has not been employed by AWD since that time; Ronald Coolley testified that he was no longer an AWD employee as of February 1, 2000; and Slawomir Szczepanski testified that he has not been employed by AWD since either late January or early February 2000.

16 .This fact is discussed in greater detail in the next section of the opinion.

17 . In her affidavit, Peggy McQuaid, AWD’s administrative director, stated that AWD made no distributions to shareholders between January 31, 2000, and October 31, 2002, the latter being the date the affidavit was signed. In his deposition, Thomas Miller, as AWD’s corporate representative, testified that AWD sold its ski condominiums in March or April of 2000, and he believed the proceeds were distributed to shareholders eight or nine months later. He further stated that AWD’s South Padre condominium was sold in the month preceding July 26, 2001 (the date of the deposition), that the proceeds had not been distributed, and that he did not know if they would be. The record also contains a copy of an email from Miller, dated December 28, 2001, in which he states that the proceeds of the South Padre condominium, which totaled under $20,000, were being distributed.

18 . In their reply brief, appellants assert that they are entitled to declaration of their rights to “avoid another lawsuit, for example, if they are reinstated as shareholders trader Art. 5.13 and wish to terminate.” As we held above in regard to their second issue, appellants are not entitled to reinstatement as shareholders. Furthermore, a theoretical dispute, such as that contemplated by appellants, does not give rise to a justiciable controversy. Bonham State Bank, 907 S.W.2d at 467.