X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:Marcus C. Johnson , who was a shareholder of MAII Holdings Inc., made the following allegations as the basis for his derivative proceeding: In January 2001, after MAII sold a medical appliance business, it had a balance of $29 million in cash and $2 million in liabilities; at that time its stock price was above $4 per share; and two shareholders owning 36 percent of the outstanding shares demanded a cash distribution of a minimum of $2 per share. That same month, MAII hired Christie S. Tyler as chief executive officer, and she entered into a stock purchase agreement and an employment agreement with MAII. Under the stock purchase agreement, Tyler bought MAII shares by paying cash and signing a promissory note. Under the employment agreement, Tyler would receive a salary bonus if MAII acquired an operating company. In August 2001, MAII announced that a wholly-owned subsidiary of MAII would buy Car Rental Direct.com (CRD). In March 2002, MAII announced a positive income projection for 2002 and 2003. Later that year, however, MAII became involved in a dispute with Ford Motor Credit Co., which resulted in a judgment against MAII that Johnson claimed exceeded the value of MAII’s assets. Johnson alleged MAII’s stock was valued at $.01 per share in January 2003 and that MAII was insolvent. MAII was delisted from the NASDAQ and failed to make certain SEC filings. Johnson filed the derivative proceeding in 2003. As defendants, he named Tyler (MAII’s chief executive officer and a member of MAII’s board of directors); Jackson Walker, MAII’s law firm; Richard F. Dahlson, a Jackson Walker attorney and a member of MAII’s board of directors; and Thomas A. Montgomery, John J. McDonald Jr., Anthony J. Levecchio, James “Jim” Silcock, David A. Kallenberger and Gary B. Hill, then current or former members of MAII’s board of directors. He also named MAII as a nominal defendant. Johnson alleged, among other things, that the board created a subsidiary for the CRD acquisition to sidestep a shareholder vote and that Jackson Walker and some directors realized “personal benefits” as a result of the CRD purchase. Johnson also alleged Tyler failed to pay on the promissory note related to his stock purchase agreement. MAII filed a motion to stay the derivative proceeding pursuant to Texas Business Corporation Act Art. 5.14(D), and a motion to appoint an independent and disinterested person to conduct an inquiry pursuant to Art. 5.14(H)(3). MAII moved to appoint Ernest E. Figari Jr., stating he was “an independent and disinterested investigator.” MAII attached an engagement letter and r�sum� for Figari and also filed Figari’s affidavit in support of its motion to appoint. Johnson opposed the motions, arguing that: such appointment was a waste of money and not in the shareholders’ best interest; Figari was “not truly independent” and an inquiry into referrals between Figari’s law firm and Jackson Walker was needed; and Art. 5.14(H)(3) violated Art. 1, �19 of the Texas Constitution (the due course of law provision) and was an unconstitutional delegation of judicial authority to a nonjudicial officer. The day before the court heard MAII’s motions, Johnson filed a Plaintiff’s First Amended Original Petition Containing Application for Appointment of a Receiver, adding himself individually as a plaintiff and seeking the appointment of a receiver for MAII. He alleged he was a shareholder and had an interest in the following specific corporate assets: 1. the causes of action against the directors Dahlson, Tyler, Montgomery, McDonald, Levecchio, Silcock, Kallenberger and Hill as set out in the derivative action; 2. the cause of action against Tyler for failing to pay on the promissory note related to the stock-purchase agreement; and 3. the causes of action against Jackson Walker and Dahlson as attorneys as set out in the derivative action. Johnson alleged MAII did not have enough assets to satisfy the Ford Motor Credit judgment without pursuing the claims in question. Johnson suggested William “Bill” M. Boyd be appointed as receiver to preserve these specific assets and bring about a corporate rehabilitation. Johnson requested a hearing on his application for appointment of a receiver, to which MAII objected. The trial court heard and granted MAII’s motions to stay and to appoint Figari. Later, the trial court denied Johnson’s application for appointment of a receiver and his motion for hearing. Figari began his investigation and requested three extensions of time, which the trial court granted. On Feb. 8, 2005, Ford Motor Credit filed a petition for involuntary bankruptcy, which the bankruptcy court dismissed on Aug. 6, 2005. Also, Johnson removed this suit to federal court on April 6, 2005, which remanded it on June 3, 2005. Figari gave his report to MAII on June 1, 2005. In the report, Figari determined that continuation of Johnson’s suit was not in MAII’s best interest. On June 6, 2005, MAII moved to dismiss the derivative proceeding pursuant to article 5.14(F). Although MAII resisted, Johnson obtained a copy of Figari’s report. Johnson also deposed Figari pursuant to an agreed order, and Figari produced appendices to his report, certain correspondence and his bills. Johnson filed a response to the motion to dismiss, raising additional constitutional challenges to Art. 5.14. The trial court heard MAII’s motion to dismiss; Figari was examined at the hearing. The trial court granted MAII’s motion to dismiss and entered a judgment dismissing all claims with prejudice. The trial court made findings of fact and conclusions of law. An appeal followed. HOLDING:Affirmed. In his first issue, Johnson challenged the trial court’s rulings on his request for a receivership. He asked whether Art. 5.14(H) trumps the receivership provisions of Arts. 7.04 and 7.05 such that the trial court could ignore a properly drawn petition for a receivership, refuse discovery and a hearing, and summarily dismiss the petition. Under Texas Civil Practice & Remedies Code �64.002(b), a court “may appoint a receiver for a corporation on the petition of one or more stockholders of the corporation.” A court “may not appoint a receiver for a corporation, partnership, or individual on the petition of the same corporation, partnership, or individual.” Because courts may not appoint receivers for corporations based on the corporations’ own requests, the court found that the trial court did not err in denying the request for a receiver over MAII made by a shareholder seeking to act on MAII’s behalf. Next, Johnson challenged Figari’s appointment and the trial court’s dismissal of the derivative proceeding. Under Art. 5.14, a shareholder may not commence a derivative proceeding on behalf of a corporation until 90 days after a written demand is filed with the corporation setting forth with particularity the subject of the claim or challenge and requesting that the corporation take suitable action. If the corporation commences an inquiry into the allegations made in a demand or petition and the person or group described in Art. 5.14(H) is conducting an active review of the allegations in good faith, the court shall stay a derivative proceeding until the review is completed and a determination is made by the person or group as to what further action, if any, should be taken. The stay may be renewed. The court noted that the trial court found Figari “to be disinterested, independent, and otherwise qualified in regard to expertise, experience, and independent judgment to make the determinations required [for dismissal].” The court further stated: “Figari’s letter, attached to the motion to appoint, and his affidavit stated that neither he nor any member of his law firm had represented any of the named parties to Johnson’s suit; had any direct or indirect interest in MAII or”the underlying transactions in the Suit’; or had any business, financial, or familial relationship with any of the named parties. In his affidavit, he stated he had prior experience serving as counsel to a special litigation committee and was familiar with the usual duties pursuant to article 5.14. Further, he stated that he was “generally familiar” with Jackson Walker; it was located on another floor in the same building as his firm; and he had “no business relationship with Jackson Walker L.L.P. apart from being involved, from time-to-time, in litigation in which it is involved in representing a party to such litigation.” Applying the appropriate standards of review, the court concluded that legally and factually sufficient evidence supported the trial court’s findings. The court also noted that the trial court found that “[a]fter conducting a reasonable inquiry based on the factors he deemed appropriate under the circumstances, Mr. Figari determined that continuation of the derivative proceeding was not in the best interests of MAII.” The court concluded the legally and factually sufficient evidence supported the trial court’s conclusion that Figari’s inquiry was reasonable and that his determination as to continuation of the derivative proceeding was in good faith. OPINION:Moseley, J.; Moseley, O’Neill and Mazzant, JJ.

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 3 articles* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.