Sohani v. Sunesara
| Decision Date | 31 January 2023 |
| Docket Number | 01-20-00114-CV |
| Parties | MANISCH SOHANI AND ANIS VIRANI, Appellants v. NIZAR SUNESARA, Appellee |
| Court | Texas Court of Appeals |
MANISCH SOHANI AND ANIS VIRANI, Appellants
v.
NIZAR SUNESARA, Appellee
No. 01-20-00114-CV
Court of Appeals of Texas, First District
January 31, 2023
On Appeal from the 295th District Court Harris County, Texas Trial Court Case No. 2016-08068
Panel consists of Justices Kelly, Hightower, and Farris.
MEMORANDUM OPINION ON REHEARING
APRIL L. FARRIS, JUSTICE
Appellants Manisch Sohani and Anis Virani have moved for rehearing and en banc reconsideration of our July 28, 2022 opinion and judgment. We grant the
motion for rehearing, withdraw our July 28, 2022 opinion and judgment, and issue this opinion and judgment in their stead.[1]
This is the third appeal arising out of a dispute between former business partners. Appellee Nizar Sunesara sued appellants Manisch Sohani and Anis Virani for fraud and breach of fiduciary duty. After a bench trial, the trial court found that Sohani and Virani had engaged in fraud and had breached their fiduciary duties to Sunesara. The trial court awarded Sunesara $61,300 in actual damages and $111,000 in exemplary damages from both Sohani and Virani.
Sohani and Virani raise six issues on appeal. They first challenge the judgment against them for fraud, arguing that the judgment is not supported by the pleadings or the evidence presented at trial; Sunesara did not present sufficient evidence of fraud; the judgment violates due process because Sohani and Virani lacked adequate notice of the fraud theory that served as the basis for the judgment; and the claim is barred by res judicata. In their remaining issues, Sohani and Virani argue that (1) the trial court erred by finding that they breached a fiduciary duty; (2) the actual
damages awarded were not caused by the alleged fraudulent misrepresentations or the alleged breach of duty; (3) exemplary damages are not appropriate; (4) the trial court erred by not awarding supplemental relief under the Declaratory Judgments Act; and (5) the trial court erred by considering Sunesara's late-filed responses to two post-judgment motions.
We affirm in part and reverse and remand in part.
Background
A. Factual Background
Sunesara and Virani are first cousins. They went into business together twenty years ago, in 2002. Sunesara and Virani started selling smoking products and accessories in flea markets in Austin and Houston. Finding success, they opened a retail smoke shop in Houston called Zig Zag Smoke Shop. Sohani, a college friend and fraternity brother of Sunesara, owns a wholesale distribution business. He provided inventory for the smoke shop. The parties created a corporation-MNA Corporation-to run the smoke shop. Sunesara, Virani, and Sohani each owned one-third of this corporation, and they agreed to split profits equally. Initially, Sunesara was the only employee of Zig Zag Smoke Shop, although Virani started working there as well several years later.
In 2007, the parties planned to open a second smoke shop called Burn Smoke Shop I. In preparation, they created a new corporation-SSV Corporation-to
operate both smoke shops. SSV Corporation initially had the same ownership structure as MNA Corporation, but at some point Sohani requested that he be removed as an owner of SSV Corporation due to personal financial obligations. After that change, Sunesara and Virani each had a fifty percent ownership interest in SSV Corporation.
In 2012, the parties decided to acquire an already-existing smoke shop, which they ultimately called Burn Smoke Shop II. Around this same time, they also decided to create three individual limited liability companies ("the LLCs") to own and operate each of the three smoke shops. The parties transferred Zig Zag Smoke Shop to ZZSS, LLC from SSV Corporation. They transferred Burn Smoke Shop I to BRNSS, LLC from SSV Corporation. When the parties purchased Burn Smoke Shop II, EZSS, LLC took ownership of that smoke shop.
With Virani's and Sohani's authorization, Sunesara prepared the certificates of formation for the LLCs. These documents were filed with the Texas Secretary of State. They listed Sunesara, Virani, and Sohani as "governing persons" of each LLC. The parties also filed a "Form 2553"[2] with the Internal Revenue Service for each of the LLCs. These forms reflected that Sunesara was a member of the LLCs with a one-third ownership interest. Each of the parties signed these forms.
Sunesara testified that neither Virani nor Sohani told him that they did not want him to be a member of the LLCs. Sunesara would not have consented to the formation of the LLCs if he was not going to be a member of the entities. If the LLCs had not been created, SSV Corporation would have continued to own and operate Zig Zag Smoke Shop and Burn Smoke Shop I. Sunesara also testified that neither Sohani nor Virani ever told him that the ownership of the LLCs would be different than the ownership of SSV Corporation.
In 2012 and 2013, federal authorities began targeting the distribution and sale of synthetic marijuana products, and they conducted a series of nationwide raids. Sunesara spoke with Virani and Sohani and suggested that the smoke shops stop selling these products. Although the authorities did not conduct a raid of any of the individual smoke shops, they did search the warehouse for Sohani's wholesale business. After this raid, Sunesara decided to take a leave of absence. He had minimal communication with Sohani and Virani about the smoke shops during this time, but he did not tell either of them that he no longer wanted to be a member of the LLCs.
Sohani and Virani never told Sunesara that he was not a member of the LLCs, but they prepared a tax return with their accountant that led Sunesara to believe that they "wanted to take [him] off the LLCs." The 2013 tax returns for each of the LLCs filed with the IRS included a Schedule K-1, which shows an individual's share of a
company's profits and losses, as well as the business's income and losses. The 2013 Schedule K-1s reflected that Sohani and Virani each had a fifty percent share in the LLCs' profits and losses. These documents did not show that Sunesara was a member of the LLCs. By the time these tax returns were filed, Sohani and Virani had stopped communicating with Sunesara about business matters. Sunesara learned about these tax returns only through speaking with the accountant for the LLCs.
Sunesara was audited by the IRS for the 2012 and 2013 tax years. He testified that he received cash profit distributions from the LLCs during those tax years, but he never received a Schedule K-1 and had no way of reporting that extra income to the IRS. Sunesara had to pay $13,300 in taxes, penalties, and accountant fees due to this audit.
Sunesara later learned that, in 2013, Sohani and Virani executed operating agreements for each of the LLCs. These operating agreements listed only Sohani and Virani as members of the LLCs. The agreements also stated, for both Sohani and Virani, that they made "50% of contributions" and they own "50% of profits and assets." Sohani and Virani did not present these agreements to Sunesara before they were executed. Additionally, the 2018 Texas franchise tax returns-filed during the pendency of this litigation-reflected only Sohani and Virani as members of the LLCs.
B. Procedural Background
Sunesara requested that Sohani and Virani allow him access to the books and records of the LLCs, and he hired an attorney to assist him. In response, Sohani and Virani filed suit against Sunesara, and the case was assigned to the County Civil Court at Law Number 1 of Harris County.
Sohani and Virani asserted a cause of action against Sunesara for fraud. They also sought declaratory relief, including declarations that Sunesara was not a member of the LLCs, he did not have a membership interest in the LLCs, and he was not entitled to any profit distributions from the LLCs. See Sohani v. Sunesara, 546 S.W.3d 393, 400 (Tex. App.-Houston [1st Dist.] 2018, no pet.) ("Sohani I"). In that proceeding, Sunesara asserted counterclaims for breach of fiduciary duty, breach of the duty of good faith and fair dealing, quantum meruit, fraud, and promissory estoppel. Id. He also sought declarations that he was a member of the LLCs and that he was entitled to one-third of the profits from the LLCs. Id.
The day before trial in the county court, Sunesara filed an amended answer and counterclaim that dropped all his claims for monetary relief. Id. at 401. When the parties proceeded to trial in the county court, Sunesara's only affirmative claims were for declaratory judgment. Id.
Sunesara re-filed his claims against Sohani and Virani for monetary relief in the Harris County district courts.[3] His lawsuit-the suit underlying this appeal-was assigned to the 295th District Court. In his breach of fiduciary duty claim, Sunesara alleged that Sohani and Virani, as fellow members of the LLCs, had a fiduciary duty to act for Sunesara's benefit, but they failed to properly account for the assets and profits of the LLCs. In his fraud claim, Sunesara alleged that Sohani and Virani had established that Sunesara was a member of the LLCs and entitled to one-third of the profits, but they fraudulently did not include him as a member on LLC documents and fraudulently refused to distribute his one-third share of the LLC profits. Sunesara also re-asserted his claims for breach of the duty of good faith and fair dealing and quantum meruit. Further, he sought an accounting and declarations that (1) he was entitled to have the LLCs' assets partitioned; and (2) that Sohani and Virani violated provisions of the Business Organizations Code by failing to keep accurate books and records. He also requested exemplary damages.
Meanwhile, the parties' claims in the county court were heard by a jury. The jury determined that Sunesara was a member of each LLC and was entitled to a one-third profit...
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