DeBord v. Circle Y of Yoakum, Inc.

• Decision Date: 26 June 1997
• Docket Number: No. 13-96-567-CV,13-96-567-CV
• Citation: 951 S.W.2d 127
• Parties: John DeBORD, et al., Appellants, v. CIRCLE Y OF YOAKUM, INC., et al., Appellees.
• Court: Texas Court of Appeals

Page 127

951 S.W.2d 127

John DeBORD, et al., Appellants, v. CIRCLE Y OF YOAKUM, INC., et al., Appellees.

No. 13-96-567-CV.

Court of Appeals of Texas Corpus Christi.

June 26, 1997.

Rehearing Overruled Aug. 7, 1997.

Before SEERDEN, C.J., and YANEZ and CHAVEZ, JJ.

OPINION

SEERDEN, Chief Justice.

The DeBords, appellants, brought an individual action against the majority shareholders and the officers and directors (appellees) of a closely held corporation to recover for oppressive conduct and breach of fiduciary duties. The DeBords also brought a derivative action on behalf of appellee corporation against the same officers and directors again alleging breach of fiduciary duties. In response, the officers and directors filed a motion to strike the DeBords' derivative claims, arguing that the DeBords, by asserting claims in both an individual and a derivative capacity, were unable to fairly and adequately represent the interests of similarly situated shareholders. Based upon the pleadings and the arguments of counsel, the trial court granted appellee directors' motion, and struck the DeBords' derivative claims. The DeBords bring this interlocutory appeal. Finding the trial court abused its discretion in striking the DeBords' derivative claims, we reverse and remand for trial.

FACTUAL BACKGROUND

This lawsuit originated as a result of a proposed merger wherein Cow Country Industries, Inc. (Cow Country) was to merge into Circle Y of Yoakum, Inc. (Circle Y). The DeBords, who own or control approximately five percent of Circle Y stock and twenty percent of Cow Country stock, objected to the merger. Nevertheless, the merger was approved by the holders of more than two-thirds of the issued and outstanding shares of Circle Y and Cow Country.

In accordance with the statutory provisions covering dissenters' rights, the DeBords made written demand for the payment of the fair value of their shares and tendered their shares. See TEX. BUS. CORP. ACT arts. 5.11-13 (Vernon 1980 & Supp.1997). The DeBords sought $100 per share for their shares of stock in Circle Y and Cow Country. However, Circle Y and Cow Country were only willing to pay $30 and $25 per share for the DeBords' shares of stock in Circle Y and Cow Country, respectively. As a result, the DeBords filed their Original Petition for Determination of Value of Shares on February 19, 1993, seeking, in their individual capacity, a determination of the value of their shares and an order for payment. The original petition named only Circle Y as a defendant.

In response, Circle Y filed a general denial and, for disputed reasons, disclaimed the effectiveness of the merger. ¹ This disclaimer, in effect, mooted the DeBords' request for the fair value of their shares.

Thereafter, on June 5, 1996, after numerous trial settings and a failed mediation, the DeBords filed their First Amended Original Petition. In the amended petition, the DeBords, pursuant to Rule 42 of the Texas Rules of Civil Procedure and article 5.14 of the Texas Business Corporation Act, asserted derivative claims in the right of Cow Country and Circle Y against the officers and directors of Cow Country and Circle Y. As in their original petition, the DeBords continued to bring claims in their individual capacity seeking an equitable buy-out of their shares in both corporations.

The DeBords' amended pleadings alleged (1) that they are shareholders of Circle Y and Cow Country; (2) that the named directors of Circle Y and Cow Country breached fiduciary duties to the corporations and its shareholders; and (3) that such breaches included: incurring costs and expenses in the phantom merger, failing to supervise employees and institute controls to prevent a defalcation and embezzlement of corporate assets, usurping corporate opportunities for personal gain, paying of excessive salaries to its officers and directors, and committing other acts that were meant to benefit a select group of shareholders or directors at the expense of the corporations and other shareholders. The DeBords also alleged that they, as minority shareholders, have been oppressed by appellees, and are thus entitled to equitable relief.

On August 8, 1996, in response to the DeBords' amended petition, the officers and directors of appellee corporations filed a motion to strike the DeBords' derivative claims. The appellee directors maintained that the DeBords' personal claims against Circle Y and Cow Country presented the DeBords with a conflict which made them unable to fairly and adequately represent the interest of other shareholders. The DeBords never filed a response to the motion. However, they argued against the motion at an oral hearing on October 29, 1996. Based upon the pleadings and the arguments of counsel, the trial court granted appellee directors' motion, and struck the DeBords' derivative claims in their entirety. The DeBords bring this interlocutory appeal.

JURISDICTION

Appellees filed, contemporaneously with their brief, a Motion to Dismiss Appeal. Appellees argue in their motion, which was carried with this appeal, that the Order Granting Defendant Directors' Motion to Strike Derivative Claims is a non-appealable interlocutory order. In support of this motion, appellees argue that the order did not affect the DeBords' individual claims. Therefore, appellees correctly argue, the order is interlocutory and cannot be appealed unless authorized by statute.

It is well-settled that appeals may be had only from final orders or judgments. Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 272 (Tex.1992). Interlocutory orders, however, may be appealed if permitted by statute. Id.; Memorial Medical Ctr. v. Garcia, 712 S.W.2d 619, 620 (Tex.App.--Corpus Christi 1986, no writ). The DeBords, conceding the interlocutory nature of their appeal, argue that this Court has jurisdiction to hear this appeal pursuant to section 51.014(3) of the Texas Civil Practice and Remedies Code. Section 51.014 of the Texas Civil Practice and Remedies Code provides that "[a] person may appeal from an interlocutory order of a district court ... that ... (3) certifies or refuses to certify a class in a suit brought under Rule 42 of the Texas Rules of Civil Procedure." TEX. CIV. PRAC. & REM.CODE ANN. § 51.014(3) (Vernon Supp.1997).

For this Court to have jurisdiction as argued by appellants, we must find that (1) a derivative suit is a form of class action, and (2) the Order Granting Defendant Directors' Motion to Strike Derivative Claims was an order refusing to certify a class. We address each in turn.

1. Relationship of Derivative Suit to Class Action

The DeBords argue that shareholder derivative actions, being governed by Rule 42, are a "species" of class action suit. We agree.

Under specifically prescribed circumstances, derivative suits may be brought by shareholders of a corporation to enforce a corporate right on behalf of the other shareholders. See TEX.R. CIV. P. 42; TEX. BUS. CORP. ACT art. 5.14 (Vernon 1980). At one time, derivative suits were held to be governed exclusively by Article 5.14 of the Business Corporation Act. See Zauber v. Murray Sav. Ass'n, 591 S.W.2d 932, 935-36 (Tex.Civ.App.--Dallas 1979, writ ref'd n.r.e.), with per curiam, 601 S.W.2d 940 (Tex.1980). Effective April 1, 1984, however, derivative suits are included under Rule 42 of the Texas Rules of Civil Procedure, which governs class actions. See TEX.R. CIV. P. 42(a). Therefore, plaintiffs bringing a derivative suit must now comply with both Rule 42 and Article 5.14.

The inclusion of derivative suits under Rule 42, entitled "Class Actions," was a recognition, by the Texas Supreme Court in its 1984 Amendment, that derivative suits are a form of class action suit. Such a recognition is not without support. A derivative suit shares many of the same attributes as a class action. For example, the derivative plaintiff acts as a representative of all corporate shareholders, and all shareholders benefit if the corporation's cause of action is ultimately vindicated. Ford v. Bimbo Corp., 512 S.W.2d 793, 795 (Tex.Civ.App.--Houston [14th Dist.] 1974, no writ). Additionally, Rule 42(a) requires that the plaintiff/stockholder fairly and adequately represent the interests of the shareholders similarly situated in enforcing the right of the corporation. This requirement is similar to the general requirement that the plaintiff in a class action fairly and adequately represent the interests of the class. See TEX.R. CIV. P. 42(a)(4). The common issues and typicality tests of Rule 42(a)(2) and (3) are inherently satisfied in a suit based on a derivative action because, by definition, the derivative rights of a corporation will result in indirect benefit to all shareholders, and the corporation's cause of action affects all shareholders indirectly. See 4 HERBERT NEWBERG, ET. AL., NEWBERG ON CLASS ACTIONS § 22.87 (3d. ed.1992). Furthermore, Rule 42(a) requires approval of the court and notice to shareholders in the event that the derivative suit is compromised or dismissed. This requirement mirrors the requirements for compromise and dismissal contained in Rule 42(e).

Because of the apparent similarities between a derivative suit and a "plain" class action, and in light of the inclusion of derivative suits under the provision controlling "class actions," we hold that a derivative suit is a form or "species" of a class action suit. See Ross v. Bernhard, 396 U.S. 531, 542, 90 S.Ct. 733, 739-40, 24 L.Ed.2d 729 (1970)(a derivative suit, at least to the extent it allows parties to be heard in equity who could not speak at law, is one kind of "true" class action); Bimbo Corp., 512 S.W.2d at 795 ("all derivative actions are per se 'true' class actions ..."). See also 4 HERBERT NEWBERG, ET. AL., NEWBERG ON CLASS ACTIONS § 22.87 (3d. ed.1992)(derivative action is a special category of class suit).

2. Nature of the Trial Court's Order

The applicable provision of the Texas Civil Practice and Remedies...