Tex. Ear Nose & Throat Consultants, PLLC v. Jones

• Decision Date: 25 June 2015
• Docket Number: NO. 14–13–00891–CV,14–13–00891–CV
• Citation: 470 S.W.3d 67
• Parties: Texas Ear Nose & Throat Consultants, PLLC, Joseph Edmonds, Newton Duncan, and James Albright, Appellants v. John K. Jones, M.D., Appellee
• Court: Texas Court of Appeals

470 S.W.3d 67

Texas Ear Nose & Throat Consultants, PLLC, Joseph Edmonds, Newton Duncan, and James Albright, Appellants

v.John K. Jones, M.D., Appellee

NO. 14–13–00891–CV

Court of Appeals of Texas, Houston (14th Dist.).

Opinion filed June 25, 2015

Aaron Ries, James Caruthers, Charles Littleton Fridge III, Houston, TX, for appellant.

Matthew J. Mussalli, The Woodlands, TX, Robert A. Plessala, Houston, TX, for appellee.

Panel consists of Justices Boyce, Jamison, and Donovan.

OPINION

Martha Hill Jamison, Justice

These consolidated cross-appeals stem from the departure of one member, John Jones, from a closely-held medical practice, Texas Ear Nose & Throat Consultants, PLLC (TENT). Jones sued TENT and the other members, Joseph Edmonds, Newton Duncan, and James Albright, alleging, principally, breach of the agreements between them, shareholder oppression, and denial of access to the practice's books and records. TENT and the other members counter-claimed against Jones for breach of contract. Based on an extensive jury verdict, the trial court awarded each side breach of contract damages and related attorney's fees, awarded Jones additional attorney's fees on his claim seeking access to books and records, and ordered the other members to buy out Jones's membership as a remedy for shareholder oppression, although at half the value determined by the jury as the value of his interest.

In their appeal, appellants (TENT and the other members) raise eight issues. The first three challenge the legal and factual sufficiency of the evidence to support the jury's findings that TENT breached Jones's employment agreement (issue one), Jones was entitled to $374,694.01 in “ancillary income” due to the alleged breach (issue two), and Jones's own breach of the agreement was excused (issue three). In issue four, appellants contend that the jury finding that Jones was still a member of TENT at the time of trial was incorrect as a matter of law. In their remaining issues, appellants contend the trial court erred in: awarding attorney's fees to Jones based on the alleged denial of access to books and records (issue five); determining shareholder oppression occurred based on particular jury findings (issue six); awarding attorney's fees on Jones's breach of contract claim (issue seven); and awarding attorney's fees to Jones based on an intervention filed by his wife (issue eight).

In his first two cross-issues, Jones challenges the finding that he breached an agreement between the parties and thereby caused damages and the award of attorney's fees based on that alleged breach. In cross-issues three and four, Jones challenges the trial court's reduction of the buy-out award for shareholder oppression and urges that if we reverse the award of ancillary income for appellants' breach of contract, we make the same award based on the shareholder oppression findings.

We modify the judgment so as to render the award of attorney's fees for the denial of access against TENT and not the individual defendants and remand for further consideration of the correct amount to be awarded. We reverse the trial court's buy-out order, but remand Jones's shareholder oppression claims for further consideration below. We additionally reverse the award of damages and attorney's fees based on Jones's alleged breach of contract and render judgment TENT take nothing on that cause of action. We overrule all other issues.

I. Background

Jones was one of the founding members of TENT in 1996. Three basic documents governed the relationship between each member, TENT, and the other members: (1) a Members Agreement, (2) Regulations, and (3) a Physician's Employment Agreement (one for each member, governing their employment within the practice). An original set of documents was signed by all of the members in 1996. Over time, members joined and departed TENT and changes were needed in the governing documents. A second set of documents was drafted in 2002; however, it was disputed whether all the members signed all of the new documents. The issue was presented to the jury, which found that Jones's relationship with TENT and the other members was governed by the 1996 Employment Agreement (1996 EA), the 2002 Members Agreement (2002 MA), and the 2002 Amended Regulations (as further modified by amendments passed at a 2008 board of directors meeting).

Members received a monthly salary under the agreements and, if the member generated additional net revenue, a monthly salary supplement; however, if a member generated less revenue than salary received in a month, he owed the difference back to TENT. Members also received additional income that was generated by services other than those provided directly by a doctor, such as administration of hearing tests. The 2002 EA referred to this additional income as “ancillary income” and provided for its equal distribution, but there was evidence this income was divided evenly even before 2002. In 2002, the then-current members of TENT established a separate corporation, Texas Center for Hearing Aids, Inc., which also divided profits equally among the members but had no direct relationship to TENT.

Further under the agreements, TENT was required to give six months' written notice to terminate a member's employment, and such termination could only be accomplished by unanimous consent of the other members. A member was required to give one year's notice of retirement. As will be discussed in more detail below, retirement, termination, or abandonment triggered certain redemption procedures. A member who abandoned his interest still would be liable for his share of liabilities until a replacement was found.

From early on, TENT utilized a flexible line of credit. By 2009, apparently due to an expansion in services, TENT's debt had grown substantially to about $1.3 million. TENT also had been outsourcing accounting duties to a third-party provider, which allegedly was underperforming and may have added to the escalating debt. The members began holding frequent meetings, brought the accounting back to an in-house bookkeeper, and decided to have an audit performed. Jones had said that he planned to retire near his 70th birthday, which was on January 8, 2011.

In late October or early November 2009, Jones hired a lawyer and requested performance of the previously-agreed audit and disclosure of certain TENT financial information. On November 15, during an emergency members meeting to discuss accusations of inappropriate behavior by a member of the staff, Jones mentioned a recently-ended affair between Duncan and a TENT nurse. Apparently offended, Duncan resigned as TENT president on November 17, to be replaced by Edmonds. On the morning of November 17, Mrs. Jones encountered Mrs. Albright at a store, and Mrs. Albright said that her husband had informed her on November 15 that Jones was leaving TENT. According to her testimony at trial, Mrs. Jones was surprised by this information. Also on November 17, according to Jones, Edmonds entered Jones's office, accused him of undermining the practice and told him that Duncan could no longer work with him, he was to leave by January 2010, and he should not discuss the matter with the staff.

Jones delivered his notice of retirement on November 19, 2009. He attended two additional members meetings in late November and early December. At the later meeting, the members decided not to pay for an audit despite Jones's insistence. His last day of work for TENT was December 15, and he subsequently went to work at Baylor College of Medicine. TENT then began using ancillary income to pay down its debt and did not pay further ancillary income to Jones, but invoiced Jones for his share of liabilities. Although a new doctor had been employed, allegedly with an eye toward replacing Jones upon his retirement, TENT never replaced Jones as a member. Jones also was removed as a director of the Texas Center for Hearing Aids, allegedly without his knowledge, when it was transferred to another departing member who is not a party to this lawsuit. Jones filed suit on February 22, 2010. At the time of trial, evidence showed that TENT was in the process of being sold to Texas Children's Hospital, with the remaining members to become employees of that entity.

The jury found that TENT failed to comply with the 1996 EA and that its failure was not excused; as a result, the jury awarded Jones $374,694.01 in damages. The jury also found that Jones failed to comply with the 1996 EA, but his failure was excused and TENT breached first. Additionally, the jury found that Jones failed to comply with the 2002 MA, this failure was not excused, and TENT did not fail to comply with that agreement. The jury awarded TENT $286,071.89 in damages. The jury further found that Jones was still a member and director of TENT at the time of trial. Lastly, the jury found that Edmonds, Duncan, and Albright committed seven of eleven listed actions (which the trial court used to determine shareholder oppression) and determined that the fair market value of Jones's ownership interest in TENT at the time of trial was $555,000. As mentioned above, based in part on these findings, the trial court awarded each side breach of contract damages and related attorney's fees, awarded Jones additional attorney's fees on his claim seeking access to books and records, and ordered the other members to buy out Jones's membership as a remedy for shareholder oppression, albeit at half the value assigned by the jury.¹

II. TENT's Appeal

A. Sufficiency of the Evidence on Breach of 1996 EA

In their first issue, appellants challenge the legal and factual sufficiency of the evidence to support the jury's finding that TENT failed to comply with the 1996 EA. When reviewing for legal sufficiency, we consider the evidence in the light most favorable to the finding and indulge every reasonable inference that supports the challenged finding. City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex.2005). We credit...