Davis v. Sheerin

Decision Date30 June 1988
Docket NumberNo. 01-87-00423-CV,01-87-00423-CV
Citation754 S.W.2d 375
PartiesWilliam H. DAVIS & Catherine L. Davis, Appellants, v. James L. SHEERIN, Appellee. (1st Dist.)
CourtTexas Court of Appeals

John J. King, Anthony J. Sadberry, Margaret Ann Kickler, Sullivan, King, & Sabom, P.C., Houston, for appellants.

Kent J. Browning, Butler & Binion, Houston, for appellee.

Before EVANS, C.J., and SAM BASS and DUNN, JJ.

OPINION

DUNN, Justice.

This is an appeal from portions of a trial court's judgment, in which James L. Sheerin ("appellee") was declared to own a 45% share in a corporation and in a partnership, which included six pieces of real property found to be partnership assets. The major challenges are against an ordered buy-out of appellee's stock in the corporation and the award to appellee of 45% interest in the six tracts of land found to be partnership assets. William H. Davis ("appellant") is the owner of the remaining 55% interest in both the corporation and the partnership.

In May of 1985, appellee brought suit individually in his own right, and as a shareholder on behalf of W.H. Davis Co., Inc., a Texas corporation ("the corporation"), against William H. Davis and Catherine L. Davis ("appellants") based on allegations of appellants' oppressive conduct toward appellee as a minority shareholder, and their breaches of fiduciary duties owed to appellee and the corporation. Appellee also brought suit against appellant William Davis, to establish his 45% ownership interest in a Texas general partnership known as W.H. Davis & James L. Sheerin ("the partnership"), and certain tracts of land that appellee claimed were partnership assets, and for an alleged breach of the fiduciary duty owed by appellant to appellee in connection with the partnership.

In 1955, William Davis and appellee incorporated a business, initially started by William Davis, in which appellant Davis owned 55% and appellee owned 45% of the corporation's stock. Appellants and appellee all served as directors and officers, with William Davis serving as president and running the day-to-day operations of the business. Appellee, unlike appellants, was not employed by the corporation. In 1960, appellee and appellant William Davis formed a partnership for the purpose of acquiring real estate.

The precipitating cause of appellee's lawsuit in 1985 was appellants' denial of appellee's right to inspect the corporate books, unless appellee produced his stock certificate. Appellants claimed that appellee had made a gift to them, in the late 1960's, of his 45% interest. Just prior to appellee's filing suit on the corporate issue, appellant William Davis also denied that appellee owned a 45% interest in six tracts of land that appellee claimed were assets of their partnership. Davis claimed that the properties were not partnership assets because the first tract was acquired prior to the formation of the partnership and all of the deeds were in his name. He also claimed that appellee never intended to claim an equity interest in the properties.

Following a six-week trial to a jury, the trial court, in addition to declaring that appellee owned a 45% interest in the corporation, the partnership, and the six tracts of land found to be partnership assets, issued the following orders and award of damages:

(1) an ordered "buy-out" by appellants of appellee's 45% of the stock in the corporation for $550,000, the fair value determined by the jury;

(2) the appointment of a receiver for the corporation;

(3) an injunction against appellants' contributing to a profit sharing plan for their benefit unless a proportionate sum is paid to appellee;

(4) a mandatory injunction for the payment of dividends in the future;

(5) an award of damages in the amount of $20,893 to appellee, individually, for appellants' willful breach of fiduciary duty in receiving informal dividends by making contributions to a profit sharing plan for their benefit to the exclusion of appellee;

(6) an award of $8,500 for costs incurred by appellee in enforcing his rights to inspect the books and $65,000 for paying the court-appointed accounting firm;

(7) an award of $192,600 to appellee, on behalf of the corporation, for recovery of corporate funds used for appellants' attorney's fees;

(8) the imposition of a resulting trust on the six tracts of land;

(9) the dissolution and termination of the partnership and the recovery of $41,422 to appellee for 45% of the partnership assets (other than the land) and $12,078 from the capital account;

(10) An award of $10,583 for actual damages and $500 exemplary damages for breach of fiduciary duty in converting partnership assets other than the land;

(11) the reformation of the deeds on the six tracts of land to reflect appellee's 45% undivided interest in fee simple; and

(12) the forced sale of the six tracts of land and appointment of a receiver to sell the property and distribute the proceeds according to the parties' respective shares.

On appeal, appellants challenge the following orders of the trial court: (1) the ordered buy-out of appellee's stock in the corporation; (2) the appointment of a receiver; (3) the order to pay dividends in the future; (4) the award to appellee of 45% ownership in the six tracts of land; (5) the imposition of a resulting trust on said property; and (6) the forced sale of said property with 45% of the proceeds to be distributed to appellee. Appellants do not challenge the declaration of ownership interest in the corporation, the mandatory injunction against future contributions to the profit sharing plan to the exclusion of appellee, any of the damages awarded, the order dissolving and terminating the partnership along with the recovery of appellee's 45% interest, nor the reformation of the deeds.

In points of error one through seven, appellants challenge the court's order that they buy-out appellee's 45% interest in the corporation. Appellants' basic argument is two fold: (1) the remedy of a "buy-out" is not available to a minority shareholder under Texas law, and (2) if such a remedy were available, the facts of this case are not appropriate for, nor do the jury's findings support, the application of this remedy based on the court's determination of oppressive conduct.

The Texas Business Corporation Act does not expressly provide for the remedy of a "buy-out" for an aggrieved minority shareholder. Tex.Bus.Corp.Act. art. 7.05 (Vernon 1980) does provide for the appointment of a receiver, with the eventual possibility of liquidation, for aggrieved shareholders who can establish the existence of one of five situations, including illegal, oppressive, or fraudulent conduct by those in control.

Nor do we find any Texas cases where the particular remedy of a "buy-out" has been ordered, unless provided for in a contract between the parties. But courts of other jurisdictions have recognized a "buy-out" as an appropriate remedy, even in the absence of express statutory or contractual authority. See Alaska Plastics, Inc. v. Coppock, 621 P.2d 270 (Alaska 1980); Sauer v. Moffitt, 363 N.W.2d 269 (Iowa Ct.App.1984); McCauley v. Tom McCauley & Son, Inc., 104 N.M. 523, 724 P.2d 232 (Ct.App.1986) (granting the option of liquidation or "buy-out"); In re Wiedy's Furniture Clearance Center Co., 108 A.D.2d 81, 487 N.Y.S.2d 901 (1985); Delaney v. Georgia-Pacific Corp., 278 Or. 305, 564 P.2d 277 (1977). Alaska, Iowa, New Mexico, New York, and Oregon all have statutes that provide for liquidation as the remedy for oppressive acts, and, in the above cited cases, the courts allowed a "buy-out" as a less harsh remedy. See Alaska Stat. § 10.05.540(2) (1985); Iowa Code § 496A.94 (Supp.1988); N.M.Stat.Ann. § 53-16-16 (Supp.1987); N.Y.Bus.Corp.Law § 1104-a (McKinney 1986); Or.Rev.Stat. § 57.595 (1983). Other states' statutes specifically provide for a "buy-out," either as a remedy for an aggrieved minority shareholder, Conn.Gen.Stat.Ann. § 33-384 (West 1987); Ill.Rev.Stat. ch. 32, para. 12.55 (Supp.1988); Minn.Stats.Ann. § 302A.751 (West 1985); N.C.Gen.Stat. § 55-125.1 (1982); S.C.Code Ann. § 33-21-155 (Law.Co-op 1987), or as an option available to a majority shareholder to avoid a liquidation order, Cal.Corp.Code § 2000 (West Supp.1988); W.Va.Code § 31-1-134 (1988).

Both parties rely on Patton v. Nicholas, 154 Tex. 385, 279 S.W.2d 848 (1955), to support their respective arguments in favor of or against a court's authority in Texas to order a "buy-out." In that case, the court reversed an order of liquidation in a suit brought by an aggrieved minority shareholder, although it found that liquidation might be an appropriate remedy in some instances. The court made a thorough analysis of earlier decisions in Texas and in other jurisdictions, and held that "Texas courts, under their general equity powers, may in the more extreme cases of the general type of the instant one, decree liquidation and accordingly appoint a receiver." Id. 279 S.W.2d at 856-57. The court recognized the absence of such a remedy for a shareholder under either the old statute or the newly enacted Business Corporation Act, article 7.05, which, the court stated, reflected a preference for rehabilitation through the appointment of a receiver, as opposed to liquidation. Id., 279 S.W.2d at 854.

In describing liquidation as the "extreme or ultimate remedy," the court called for the use of lesser remedies, where such remedies were adequate to protect the interests of the aggrieved shareholders, and for "tailoring the remedy to fit the particular case." Id., 279 S.W.2d at 857. Based on its finding of sufficient evidence to support malicious suppression of dividends, but insufficient evidence to support the jury's finding of mismanagement, the court decreed a mandatory injunction for the immediate payment and future payments of reasonable dividends. Even though it reversed the judgment of liquidation, the court ordered that the trial court retain continuing jurisdiction with the right...

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