Willis v. Donnelly
| Decision Date | 02 June 2006 |
| Docket Number | No. 04-0409.,04-0409. |
| Citation | 199 S.W.3d 262 |
| Parties | Michael T. WILLIS, Francie Willis, Urban Retreat of Houston, Inc., and Willis Hite Enterprises, Inc., Petitioners, v. Dan DONNELLY, Respondent. |
| Court | Texas Supreme Court |
Marie R. Yeates, Harry M. Reasoner, Paul E. Stallings, D. Gibson Walton, Penelope E. Nicholson, Thad T. Dameris, Vinson & Elkins L.L.P., Billy Shepherd, Stephen R. Bailey, Cruse Scott Henderson & Allen, L.L.P., Amir H. Alavi, R. Glen Rigby, Pillsbury Winthrop LLP, Houston, for Petitioners.
Jeffery T. Nobles, Diane M. Guariglia, Allyson L. Mihalick, John K. Broussard Jr., Henry S. Platts, Beirne Maynard & Parsons, L.L.P., William T. Powell, Michael H. Norman, Norman & Powell, Houston, for Respondent.
This dispute centers on whether shareholders in closely held corporations can be held liable to an individual who agreed to a contractual business arrangement with the corporations. We agree with Petitioners Michael and Francie Willis (the Willises) that they cannot be held liable to Respondent Dan Donnelly under breach of contract and breach of fiduciary duty theories. We address other issues as well.
Michael Willis (Willis) is a successful Houston entrepreneur. In the late 1980s, he became intrigued with the idea of opening a high-end spa, where customers could receive hair styling and other personal services such as manicures and massages. He hired Richard Hite as a consultant to help develop the idea. Willis also received assistance from Charles Gebhardt, an accountant. The business plan called for the spa to be named the Urban Retreat.
Willis and others created two corporations to carry out the plan. One of the corporations would operate the initial spa. If the business succeeded a second corporation would serve as an umbrella company. The plan was eventually to "roll up" the separate spas into a single company if the concept worked in multiple locations. In March 1989 Willis/Hite Enterprises, Inc. was incorporated, and the corporation was later renamed Urban Retreat of Houston, Inc. (URH). Willis and Gebhardt were the original shareholders of URH. In August 1989, a second company called Willis/Hite Enterprises, Inc. (WHE) was incorporated as the umbrella company. Willis, Gebhardt, and Bill Caudell were the original shareholders of WHE. URH and WHE were separate corporations, and one was not the subsidiary of the other. URH and WHE are Petitioners to this appeal along with the Willises. The articles of incorporation of URH and WHE name Willis, Hite, and Gebhardt as the original directors. Willis became the chairman of URH, and Hite was elected its president.
Hite contacted Dan Donnelly (Donnelly), a successful hair stylist. Donnelly was the co-owner of Hairmasters of Houston, Inc. (Hairmasters), an incorporated business operating a hair salon. Hite and Willis met informally with Donnelly and discussed the idea for the spa. Donnelly had no prior business or personal dealings with Willis.
With drafting assistance from Gebhardt, Hite and Willis eventually signed a letter agreement that lies at the heart of this dispute. The agreement is typed but has numerous handwritten changes initialed by Hite and Donnelly. Gebhardt testified that Willis "didn't have anything to do with" the drafting of the agreement. There are several drafts of agreements concerning the Urban Retreat, and the record is uncertain as to when earlier drafts of the letter agreement were prepared and circulated. Donnelly showed a draft of the agreement to his lawyer and signed the final agreement on July 10, 1989, at a meeting attended by Donnelly, Hite, Willis, and Gebhardt. Donnelly signed as president of Hairmasters and individually. The only other person who signed the agreement was Hite, who signed as president of WHE and individually.
The agreement states in its opening sentence that it is "a letter agreement between [WHE], Richard H. Hite, Mike Willis, and [URH], and Daniel Donnelly and [Hairmasters]." A signature block at the end of the agreement was typed for "Mike Willis, Individually," but Willis crossed out this signature block at the July 10 meeting where the agreement was signed, and did not sign or initial the agreement. Donnelly testified that he signed the agreement after Willis's name was crossed out. Willis testified that he crossed his name out to make clear he did not agree to be bound in his individual capacity. Donnelly's expert witness testified that because Willis removed himself as an individual signatory to the agreement, "Mr. Willis did not intend to be a part of this agreement." Gebhardt testified that at the meeting where the agreement was signed, Willis made comments to the effect that he would not be individually responsible under the agreement, and Gebhardt passed these comments along to Hite and Donnelly.
The agreement obliged Donnelly to transfer the entire Hairmasters business to URH, but qualified this obligation with some "best efforts" language.1 It provided that Donnelly "will have the responsibility to oversee the management of the day to day operations of the URH facility."
The agreement provided that WHE and URH agree to issue Donnelly twenty-five percent ownership in URH within twelve months of the URH "Grand Opening," or when URH's gross revenues reached Hairmasters' 1988 annual gross revenues, whichever occurred first. It provided for additional stock transfers as various revenue targets for URH are met. It separately stated that WHE would issue Donnelly ten percent ownership in WHE under the same terms as the initial transfer of URH stock. It provided that Donnelly would receive a salary of $110,000, and a salary equal to five percent of URH's gross revenues after two years.
As discussed further below, the parties disputed the applicability of two other provisions of the letter agreement, the "Termination" provision and the provision for "Other Matters Relating to Shares." Donnelly argues by cross petition that the latter provision supplied the measure of damages for the failure to issue stock to him under the agreement. Willis argues that this provision is inapplicable to the dispute.
To create the Urban Retreat facility, Hite located a piece of property on San Felipe Drive. River Oaks Bank owned the property. URH obtained an $800,000 renovation loan for this property and a lease from the bank. URH and WHE were initially capitalized with only $1,000 each and were not creditworthy. Willis personally pledged a $600,000 certificate of deposit to secure the loan and guaranteed URH's lease.
The Urban Retreat facility had its grand opening on December 12, 1989. Donnelly moved into the spa and began cutting hair and managing of the facility. The spa was not profitable. Donnelly testified that he "knew it wasn't making money." Willis loaned money to URH to keep the business afloat. He eventually loaned URH approximately $2 million.
Much of the trial focused on the characterization of Willis's cash infusions into the business as loans and whether Willis failed to live up to a promise to provide capital. The debate extended to battling experts.2 Willis and Hite claimed they told Donnelly that the funds provided by Willis were loans as opposed to capital contributions. The balance sheets and the tax returns of URH describe the funds from Willis as loans, and Petitioners offered evidence that Donnelly was shown the financial records and attended meetings where the loans were discussed. While Willis testified that he agreed to "provide the capital" or to "provide capital and funding," his testimony as a whole was clear that, with the exception of his initial $1,000 contribution, he viewed these cash infusions into URH as loans. Hite likewise viewed the cash infusions as loans. Donnelly testified that he was told that "Mike's putting in the money," but conceded that "[t]hey did not tell me it would not be a loan." Regardless, the letter agreement did not expressly obligate Willis to provide any capital contributions to URH, or to provide loans for that matter.
The parties contested whether Donnelly fully transferred his hairstyling business to Urban Retreat as promised. As described above, the letter agreement is somewhat vague as to this obligation, requiring Hairmasters and Donnelly to "transfer their entire operations, staff, and clientele" to the Urban Retreat, but also stating that Donnelly was only required to use his "best efforts" to persuade his staff and clientele to transfer to URH.
Although the spa was losing money, it generated sufficient gross revenues to trigger the provisions in the letter agreement requiring the issuance of stock to Donnelly. Because the spa was so unprofitable, however, Willis asked Donnelly if he would agree to a reduced stock interest. Willis also asked Donnelly if he would agree to sign on to some of the spa's debt. Donnelly refused. Donnelly claims that Willis unilaterally cut his salary.
Willis also asked Donnelly if he would agree to delay the transfer of stock due to him under the letter agreement, and the trial testimony confirms that both Willis and Donnelly agreed to this delay.3 Donnelly states in his respondent's and cross petitioner's briefs that he "agreed to wait, based on Willis's assurances that he would live up to the Letter Agreement when the business `turned the corner.'" He made the same statement to the court of appeals. Willis wanted the transfer delayed until the spa turned the corner financially, because the delay supposedly allowed Willis to continue to take losses on the business on his personal tax returns.4 Willis and Donnelly gave consistent and uncontradicted testimony confirming this oral agreement, and there was no evidence that, during Donnelly's employment with URH, he ever withdrew his consent to delay...
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