In re DeMattia

• Decision Date: 12 April 2022
• Docket Number: 05-21-00460-CV
• Citation: 644 S.W.3d 225
• Parties: IN RE Mark DEMATTIA, Relator
• Court: Texas Court of Appeals

644 S.W.3d 225

IN RE Mark DEMATTIA, Relator

No. 05-21-00460-CV

Court of Appeals of Texas, Dallas.

Opinion Filed April 12, 2022

S. Wallace Dunwoody IV, Michael Craig Wilson, Dallas, for Relator.

Catherine Baldo, Scott P. Stolley, Craig A. Albert, for Real party in interest.

Before Justices Schenck, Nowell, and Garcia

Opinion by Justice Nowell

In the underlying proceeding, real party in interest Restoration Specialists, LLC (Restoration) sued Mark DeMattia, RS Commercial Construction LLC, and RS, Inc. Restoration asserted various claims against relator related to his acts while he was a managing member of Restoration. Relator Mark DeMattia filed a motion for summary judgment seeking advancement of his legal expenses pursuant to Restoration's corporate regulations. After the trial court denied relator's request, he filed this petition for writ of mandamus alleging the trial court abused its discretion by denying advancement of his legal expenses. We initially denied this petition for writ of mandamus because relator improperly relied on a docket sheet entry and did not provide the Court with a written order or a record reflecting the trial court's ruling.

Relator then filed a motion for rehearing seeking to supplement the record with the written order and asking us to consider the petition on the merits. We requested and received a response from the real party in interest.

We conclude the advancement provision includes actions, like this one, against former members and that the trial court abused its discretion by denying relator's motion for summary judgment. We also conclude that relator does not have an adequate remedy by appeal. Accordingly, we conditionally grant the petition for writ of mandamus.

Background

In 1967, a group of Dallas firefighters formed Restoration to provide emergency services to properties damaged by storms, floods, and fires. Relator and his younger brother, David DeMattia, bought Restoration in 2004 and reorganized the company as a limited liability company. Relator was the managing member and David was the minority member. Restoration later expanded its services to include commercial construction and job order services. Relator then spun off the job services division into a separate company, RSCC.

In 2018, WyoTexGa, LLC bought Restoration. According to Restoration, a few days before the closing, relator wrongfully copied or deleted Restoration's project history files. Restoration later sued relator claiming his wrongful acts while he was a managing partner harmed Restoration. In particular, Restoration alleged:

• "[B]efore the September 5, 2018 closing"—while still a managing member of Restoration—[relator] wrongfully copied and/or deleted certain files and emails "belonging to Restoration";

• "While still a member of Restoration (as well as an employee) , [relator] owed Restoration a formal fiduciary duty, including a duty of loyalty" and "a duty to refrain from self-dealing," and breached his duties by taking "Company Project History Files and emails (for his own use ...)";

• "Given the self-interested nature of [relator's] actions," he must show he "did not use the advantage of his position to gain any benefit for himself at the expense of Restoration"; and

• "[Relator] acquired these trade secrets from Restoration while still a member of Restoration (as well as an employee)" and "had reason to know that his knowledge of the trade secrets was acquired under circumstances giving rise to a duty to maintain their secrecy."

Relator requested Restoration to indemnify, advance, and reimburse relator's expenses incurred in defending the lawsuit pursuant to Restoration's corporate regulations (the Regulations) and various provisions of the Texas Business Organizations Code. After Restoration refused to advance the requested costs, relator filed a counterclaim for breach of contract and advancement of his litigation expenses. Relator then filed a motion for summary judgment on those claims.

In his motion for summary judgment, relator claimed he was entitled to advancement of his legal fees under the broad and mandatory indemnification and advancement rights provision contained in Restoration's Regulations. Relator argued that section 8.002(b) of the Texas Business Organizations Code provides that an advancement provision adopted in an LLC's governing documents is enforceable. See TEX. BUS. ORGS. CODE § 8.002(b). He also argued Restoration's Regulations required Restoration to advance expenses incurred by a current or former member in an action brought against him "by reason of the fact that he or she is or was" a member, and Restoration must "pay or reimburse" such expenses "in advance of the final disposition" of the proceeding and "to the fullest extent" permitted by the business organizations code. According to relator, because Restoration filed the underlying proceeding alleging he breached his fiduciary duties and stole its trade secrets based on his acts while he was a managing member of Restoration, its Regulations required advancement of his legal fees independent of his right to indemnification or allegations of wrongdoing.

Restoration responded to relator's motion contending relator was not entitled to advancement of the fees for several reasons. Specifically, Restoration alleged it need not advance fees to relator because: (1) the plain language of section 9.6 of the Regulations requires the claimant to be a member, in contrast to the indemnity provision which requires the claimant to be a member or former member; (2) relator's affidavit regarding fees was insufficient because it is not a fee affidavit by a legal expert; (3) the fees are not segregated to separate fees required to defend relator from those used to defend the other two defendants (RS Commercial Construction, LLC and RS, Inc.); (4) there are genuine issues of fact regarding the reasonableness of the fees; (5) the motion for summary judgment is legally insufficient; and (6) relator's claim is dependent upon his successful defense of the claims against him.

Relator replied that the Regulations unequivocally require advancement of the requested legal fees because read in context the advancement provision applies to both members and former members. Relator also argued that Restoration's arguments regarding the sufficiency of the motion and reasonableness of the fees were "red herrings" because relator was seeking summary judgment on his "entitlement to advancement" not on the reasonableness of the fees incurred to date.¹

At the hearing, relator maintained he is entitled to advancement of fees as a former member pursuant to the Regulations as well as chapter 8 of the business organizations code. Restoration, on the other hand argued that chapter 8 of the code does not apply, but rather, the limited liability company provisions of the business organizations code applied, and those provisions, unlike the provisions in chapter 8, do not allow for advancement of fees to former governing members. Relator replied that the LLC act was adopted before the business organizations code, and the Regulations specifically reference the business organizations code, which does provide for advancement to former members.

Mandamus Standard

Mandamus is an extraordinary remedy that is available only when the trial court has clearly abused its discretion and there is no adequate remedy by appeal. In re Prudential Ins. Co. , 148 S.W.3d 124, 135–36, 137 (Tex. 2004) (orig. proceeding). A clear abuse of discretion occurs when a trial court "reaches a decision so arbitrary and unreasonable as to amount to a clear and prejudicial error of law." Walker v. Packer , 827 S.W.2d 833, 839 (Tex. 1992) (orig. proceeding). A trial court has no discretion in determining what the law is or applying the law to the facts. Id. Therefore, a clear failure by the trial court to analyze or apply the law correctly will constitute an abuse of discretion and may result in appellate reversal by extraordinary writ. Id. at 840. In the context of a claim for advancement of legal fees, mandamus is the appropriate relief to correct an order denying advancement of a claimant's fees because the act of proceeding to trial without advancement would defeat the substantive right at stake. In re Aguilar , 344 S.W.3d 41, 45 (Tex. App—El Paso 2011, orig. proceeding).

Discussion

There is limited Texas case law concerning advancement under the Texas Business Corporation Act or the Texas Business Organizations Code. But the courts of Delaware have addressed advancement on numerous occasions, and courts throughout the United States, including Texas, look to Delaware on matters of corporate law. See L Series, LLC v. Holt , 571 S.W.3d 864, 871 (Tex. App—Fort Worth 2019, pet. denied) ; Aguilar , 344 S.W.3d at 46–47. Indemnification encourages corporate service by protecting an official's personal financial resources from depletion by the expenses incurred during litigation that results from the official's service. Aguilar , 344 S.W.3d at 46 (citing Homestore, Inc. v. Tafeen , 888 A.2d 204, 211 (Del. 2005) ). "Advancement is an especially important corollary to indemnification" because it provides corporate officials with immediate interim relief from the burden of paying for a defense. Aguilar , 344 S.W.3d at 46. "Although the right to indemnification and advancement are correlative, they are separate and distinct legal actions." Id. The right to advancement is not dependent on the right to indemnification. Id. "A now long line of recent cases enforces mandatory advancement provisions. These cases all stand for the proposition that a ... bylaw ... provision mandating advancement in no way renders the right to advances dependent upon the right to indemnity." Id. (citing Stephen A. Radin, "Sinners Who Find Religion": Advancement of Litigation Expenses to Corporate Officials Accused of Wrongdoing , 25 REV. LITIG . 251, 268–69 (2006) ). The "ultimate purpose" of advancement is to "protect[ ] corporate...