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Limited Liability Companies (L.L.C.’s) Under Texas Law and Section 101 of the Business Organizations Code–Fort Worth, Texas Business Law Attorneys

TEXAS BUSINESS ORGANIZATIONS CODE CHAPTER 101. LIMITED LIABILITY COMPANIES

BUSINESS ORGANIZATIONS CODE

TITLE 3. LIMITED LIABILITY COMPANIES

CHAPTER 101. LIMITED LIABILITY COMPANIES

SUBCHAPTER A. GENERAL PROVISIONS

Sec. 101.001. DEFINITIONS. In this title:

(1) “Company agreement” means any agreement, written or oral, of the members concerning the affairs or the conduct of the business of a limited liability company. A company agreement of a limited liability company having only one member is not unenforceable because only one person is a party to the company agreement.

(2) “Foreign limited liability company” or “foreign company” means a limited liability company formed under the laws of a jurisdiction other than this state.

(3) “Limited liability company” or “company” means a domestic limited liability company subject to this title.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.002. APPLICABILITY OF OTHER LAWS. (a) Subject to Section 101.114, Sections 21.223, 21.224, 21.225, and 21.226 apply to a limited liability company and the company’s members, owners, assignees, affiliates, and subscribers.

(b) For purposes of the application of Subsection (a):

(1) a reference to “shares” includes “membership interests”;

(2) a reference to “holder,” “owner,” or “shareholder” includes a “member” and an “assignee”;

(3) a reference to “corporation” or “corporate” includes a “limited liability company”;

(4) a reference to “directors” includes “managers” of a manager-managed limited liability company and “members” of a member-managed limited liability company;

(5) a reference to “bylaws” includes “company agreement”; and

(6) the reference to “Sections 21.157-21.162” in Section 21.223(a)(1) refers to the provisions of Subchapter D of this chapter.

Added by Acts 2011, 82nd Leg., R.S., Ch. 25 (S.B. 323), Sec. 1, eff. September 1, 2011.

SUBCHAPTER B. FORMATION AND GOVERNING DOCUMENTS

Sec. 101.051. CERTAIN PROVISIONS CONTAINED IN CERTIFICATE OF FORMATION. (a) A provision that may be contained in the company agreement of a limited liability company may alternatively be included in the certificate of formation of the company as provided by Section 3.005(b).

(b) A reference in this title to the company agreement of a limited liability company includes any provision contained in the company’s certificate of formation instead of the company agreement as provided by Subsection (a).

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.0515. EXECUTION OF FILINGS. Unless otherwise provided by this title, a filing instrument of a limited liability company must be signed by an authorized officer, manager, or member of the limited liability company.

Added by Acts 2007, 80th Leg., R.S., Ch. 688 (H.B. 1737), Sec. 96, eff. September 1, 2007.

Sec. 101.052. COMPANY AGREEMENT. (a) Except as provided by Section 101.054, the company agreement of a limited liability company governs:

(1) the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and

(2) other internal affairs of the company.

(b) To the extent that the company agreement of a limited liability company does not otherwise provide, this title and the provisions of Title 1 applicable to a limited liability company govern the internal affairs of the company.

(c) Except as provided by Section 101.054, a provision of this title or Title 1 that is applicable to a limited liability company may be waived or modified in the company agreement of a limited liability company.

(d) The company agreement may contain any provisions for the regulation and management of the affairs of the limited liability company not inconsistent with law or the certificate of formation.

(e) A company agreement may provide rights to any person, including a person who is not a party to the company agreement, to the extent provided by the company agreement.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2013, 83rd Leg., R.S., Ch. 9 (S.B. 847), Sec. 5, eff. September 1, 2013.

Sec. 101.053. AMENDMENT OF COMPANY AGREEMENT. The company agreement of a limited liability company may be amended only if each member of the company consents to the amendment.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.054. WAIVER OR MODIFICATION OF CERTAIN STATUTORY PROVISIONS PROHIBITED; EXCEPTIONS. (a) Except as provided by this section, the following provisions may not be waived or modified in the company agreement of a limited liability company:

(1) this section;

(2) Section 101.101, 101.151, 101.206, 101.501, 101.602(b), or 101.613;

(3) Chapter 1, if the provision is used to interpret a provision or define a word or phrase contained in a section listed in this subsection;

(4) Chapter 2, except that Section 2.104(c)(2), 2.104(c)(3), or 2.113 may be waived or modified in the company agreement;

(5) Chapter 3, except that Subchapters C and E may be waived or modified in the company agreement; or

(6) Chapter 4, 5, 7, 10, 11, or 12, other than Section 11.056.

(b) A provision listed in Subsection (a) may be waived or modified in the company agreement if the provision that is waived or modified authorizes the limited liability company to waive or modify the provision in the company’s governing documents.

(c) A provision listed in Subsection (a) may be modified in the company agreement if the provision that is modified specifies:

(1) the person or group of persons entitled to approve a modification; or

(2) the vote or other method by which a modification is required to be approved.

(d) A provision in this title or in that part of Title 1 applicable to a limited liability company that grants a right to a person, other than a member, manager, officer, or assignee of a membership interest in a limited liability company, may be waived or modified in the company agreement of the company only if the person consents to the waiver or modification.

(e) The company agreement may not unreasonably restrict a person’s right of access to records and information under Section 101.502.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2007, 80th Leg., R.S., Ch. 688 (H.B. 1737), Sec. 97, eff. September 1, 2007.

Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 38, eff. September 1, 2009.

Acts 2011, 82nd Leg., R.S., Ch. 139 (S.B. 748), Sec. 34, eff. September 1, 2011.

SUBCHAPTER C. MEMBERSHIP

Sec. 101.101. MEMBERS REQUIRED. (a) A limited liability company may have one or more members. Except as provided by this section, a limited liability company must have at least one member.

(b) A limited liability company that has managers is not required to have any members during a reasonable period between the date the company is formed and the date the first member is admitted to the company.

(c) A limited liability company is not required to have any members during the period between the date the continued membership of the last remaining member of the company is terminated and the date the agreement to continue the company described by Section 11.056 is executed.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.102. QUALIFICATION FOR MEMBERSHIP. (a) A person may be a member of or acquire a membership interest in a limited liability company unless the person lacks capacity apart from this code.

(b) A person is not required, as a condition to becoming a member of or acquiring a membership interest in a limited liability company, to:

(1) make a contribution to the company;

(2) otherwise pay cash or transfer property to the company; or

(3) assume an obligation to make a contribution or otherwise pay cash or transfer property to the company.

(c) If one or more persons own a membership interest in a limited liability company, the company agreement may provide for a person to be admitted to the company as a member without acquiring a membership interest in the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2005, 79th Leg., Ch. 64 (H.B. 1319), Sec. 71, eff. January 1, 2006.

Sec. 101.103. EFFECTIVE DATE OF MEMBERSHIP. (a) In connection with the formation of a company, a person becomes a member of the company on the date the company is formed if the person is named as an initial member in the company’s certificate of formation.

(b) In connection with the formation of a company, a person being admitted as a member of the company but not named as an initial member in the company’s certificate of formation becomes a member of the company on the latest of:

(1) the date the company is formed;

(2) the date stated in the company’s records as the date the person becomes a member of the company; or

(3) if the company’s records do not state a date described by Subdivision (2), the date the person’s admission to the company is first reflected in the company’s records.

(c) A person who, after the formation of a limited liability company, acquires directly or is assigned a membership interest in the company or is admitted as a member of the company without acquiring a membership interest becomes a member of the company on approval or consent of all of the company’s members.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2005, 79th Leg., Ch. 64 (H.B. 1319), Sec. 72, eff. January 1, 2006.

Sec. 101.104. CLASSES OR GROUPS OF MEMBERS OR MEMBERSHIP INTERESTS. (a) The company agreement of a limited liability company may:

(1) establish within the company classes or groups of one or more members or membership interests each of which has certain expressed relative rights, powers, and duties, including voting rights; and

(2) provide for the manner of establishing within the company additional classes or groups of one or more members or membership interests each of which has certain expressed relative rights, powers, and duties, including voting rights.

(b) The rights, powers, and duties of a class or group of members or membership interests described by Subsection (a)(2) may be stated in the company agreement or stated at the time the class or group is established.

(c) If the company agreement of a limited liability company does not provide for the manner of establishing classes or groups of members or membership interests under Subsection (a)(2), additional classes or groups of members or membership interests may be established only by the adoption of an amendment to the company agreement.

(d) The rights, powers, or duties of any class or group of members or membership interests of a limited liability company may be senior to the rights, powers, or duties of any other class or group of members or membership interests in the company, including a previously established class or group.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.105. ISSUANCE OF MEMBERSHIP INTERESTS AFTER FORMATION OF COMPANY. A limited liability company, after the formation of the company, may:

(1) issue membership interests in the company to any person with the approval of all of the members of the company; and

(2) if the issuance of a membership interest requires the establishment of a new class or group of members or membership interests, establish a new class or group as provided by Sections 101.104(a)(2), (b), and (c).

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.106. NATURE OF MEMBERSHIP INTEREST. (a) A membership interest in a limited liability company is personal property.

(a-1) A membership interest may be community property under applicable law.

(a-2) A member’s right to participate in the management and conduct of the business of the limited liability company is not community property.

(b) A member of a limited liability company or an assignee of a membership interest in a limited liability company does not have an interest in any specific property of the company.

(c) Sections 9.406 and 9.408, Business & Commerce Code, do not apply to a membership interest in a limited liability company, including the rights, powers, and interests arising under the company’s certificate of formation or company agreement or under this code. To the extent of any conflict between this subsection and Section 9.406 or 9.408, Business & Commerce Code, this subsection controls. It is the express intent of this subsection to permit the enforcement, as a contract among the members of a limited liability company, of any provision of a company agreement that would otherwise be ineffective under Section 9.406 or 9.408, Business & Commerce Code.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 39, eff. September 1, 2009.

Acts 2011, 82nd Leg., R.S., Ch. 139 (S.B. 748), Sec. 35, eff. September 1, 2011.

Sec. 101.107. WITHDRAWAL OR EXPULSION OF MEMBER PROHIBITED. A member of a limited liability company may not withdraw or be expelled from the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.108. ASSIGNMENT OF MEMBERSHIP INTEREST. (a) A membership interest in a limited liability company may be wholly or partly assigned.

(b) An assignment of a membership interest in a limited liability company:

(1) is not an event requiring the winding up of the company; and

(2) does not entitle the assignee to:

(A) participate in the management and affairs of the company;

(B) become a member of the company; or

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.109. RIGHTS AND DUTIES OF ASSIGNEE OF MEMBERSHIP INTEREST BEFORE MEMBERSHIP. (a) A person who is assigned a membership interest in a limited liability company is entitled to:

(1) receive any allocation of income, gain, loss, deduction, credit, or a similar item that the assignor is entitled to receive to the extent the allocation of the item is assigned;

(2) receive any distribution the assignor is entitled to receive to the extent the distribution is assigned;

(3) require, for any proper purpose, reasonable information or a reasonable account of the transactions of the company; and

(4) make, for any proper purpose, reasonable inspections of the books and records of the company.

(b) An assignee of a membership interest in a limited liability company is entitled to become a member of the company on the approval of all of the company’s members.

(c) An assignee of a membership interest in a limited liability company is not liable as a member of the company until the assignee becomes a member of the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.110. RIGHTS AND LIABILITIES OF ASSIGNEE OF MEMBERSHIP INTEREST AFTER BECOMING MEMBER. (a) An assignee of a membership interest in a limited liability company, after becoming a member of the company, is:

(1) entitled, to the extent assigned, to the same rights and powers granted or provided to a member of the company by the company agreement or this code;

(2) subject to the same restrictions and liabilities placed or imposed on a member of the company by the company agreement or this code; and

(3) except as provided by Subsection (b), liable for the assignor’s obligation to make contributions to the company.

(b) An assignee of a membership interest in a limited liability company, after becoming a member of the company, is not obligated for a liability of the assignor that:

(1) the assignee did not have knowledge of on the date the assignee became a member of the company; and

(2) could not be ascertained from the company agreement.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.111. RIGHTS AND DUTIES OF ASSIGNOR OF MEMBERSHIP INTEREST. (a) An assignor of a membership interest in a limited liability company continues to be a member of the company and is entitled to exercise any unassigned rights or powers of a member of the company until the assignee becomes a member of the company.

(b) An assignor of a membership interest in a limited liability company is not released from the assignor’s liability to the company, regardless of whether the assignee of the membership interest becomes a member of the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.1115. EFFECT OF DEATH OR DIVORCE ON MEMBERSHIP INTEREST. (a) For purposes of this code:

(1) on the divorce of a member, the member’s spouse, to the extent of the spouse’s membership interest, if any, is an assignee of the membership interest;

(2) on the death of a member, the member’s surviving spouse, if any, and an heir, devisee, personal representative, or other successor of the member, to the extent of their respective membership interest, are assignees of the membership interest; and

(3) on the death of a member’s spouse, an heir, devisee, personal representative, or other successor of the spouse, other than the member, to the extent of their respective membership interest, if any, is an assignee of the membership interest.

(b) This chapter does not impair an agreement for the purchase or sale of a membership interest at any time, including on the death or divorce of an owner of the membership interest.

Added by Acts 2011, 82nd Leg., R.S., Ch. 139 (S.B. 748), Sec. 36, eff. September 1, 2011.

Sec. 101.112. MEMBER’S MEMBERSHIP INTEREST SUBJECT TO CHARGING ORDER. (a) On application by a judgment creditor of a member of a limited liability company or of any other owner of a membership interest in a limited liability company, a court having jurisdiction may charge the membership interest of the judgment debtor to satisfy the judgment.

(b) If a court charges a membership interest with payment of a judgment as provided by Subsection (a), the judgment creditor has only the right to receive any distribution to which the judgment debtor would otherwise be entitled in respect of the membership interest.

(c) A charging order constitutes a lien on the judgment debtor’s membership interest. The charging order lien may not be foreclosed on under this code or any other law.

(d) The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of any other owner of a membership interest may satisfy a judgment out of the judgment debtor’s membership interest.

(e) This section may not be construed to deprive a member of a limited liability company or any other owner of a membership interest in a limited liability company of the benefit of any exemption laws applicable to the membership interest of the member or owner.

(f) A creditor of a member or of any other owner of a membership interest does not have the right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2007, 80th Leg., R.S., Ch. 688 (H.B. 1737), Sec. 98, eff. September 1, 2007.

Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 40, eff. September 1, 2009.

Sec. 101.113. PARTIES TO ACTIONS. A member of a limited liability company may be named as a party in an action by or against the limited liability company only if the action is brought to enforce the member’s right against or liability to the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.114. LIABILITY FOR OBLIGATIONS. Except as and to the extent the company agreement specifically provides otherwise, a member or manager is not liable for a debt, obligation, or liability of a limited liability company, including a debt, obligation, or liability under a judgment, decree, or order of a court.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

SUBCHAPTER D. CONTRIBUTIONS

Sec. 101.151. REQUIREMENTS FOR ENFORCEABLE PROMISE. A promise to make a contribution or otherwise pay cash or transfer property to a limited liability company is enforceable only if the promise is:

(1) in writing; and

(2) signed by the person making the promise.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.152. ENFORCEABLE PROMISE NOT AFFECTED BY CHANGE IN CIRCUMSTANCES. A member of a limited liability company is obligated to perform an enforceable promise to make a contribution or otherwise pay cash or transfer property to the company without regard to the death, disability, or other change in circumstances of the member.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.153. FAILURE TO PERFORM ENFORCEABLE PROMISE; CONSEQUENCES. (a) A member of a limited liability company, or the member’s legal representative or successor, who does not perform an enforceable promise to make a contribution, including a previously made contribution, or to otherwise pay cash or transfer property to the company, is obligated, at the request of the company, to pay in cash the agreed value of the contribution, as stated in the company agreement or the company’s records required under Sections 3.151 and 101.501, less:

(1) any amount already paid for the contribution; and

(2) the value of any property already transferred.

(b) The company agreement of a limited liability company may provide that the membership interest of a member who fails to perform an enforceable promise to make a payment of cash or transfer property to the company, whether as a contribution or in connection with a contribution already made, may be:

(1) reduced;

(2) subordinated to other membership interests of nondefaulting members;

(3) redeemed or sold at a value determined by appraisal or other formula; or

(4) made the subject of:

(A) a forced sale;

(B) forfeiture;

(D) another penalty or consequence.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.154. CONSENT REQUIRED TO RELEASE ENFORCEABLE OBLIGATION. The obligation of a member of a limited liability company, or of the member’s legal representative or successor, to make a contribution or otherwise pay cash or transfer property to the company, or to return cash or property to the company paid or distributed to the member in violation of this code or the company agreement, may be released or settled only by consent of each member of the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.155. CREDITOR’S RIGHT TO ENFORCE CERTAIN OBLIGATIONS. A creditor of a limited liability company who extends credit or otherwise acts in reasonable reliance on an enforceable obligation of a member of the company that is released or settled as provided by Section 101.154 may enforce the original obligation if the obligation is stated in a document that is:

(1) signed by the member; and

(2) not amended or canceled to evidence the release or settlement of the obligation.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.156. REQUIREMENTS TO ENFORCE CONDITIONAL OBLIGATION. (a) An obligation of a member of a limited liability company that is subject to a condition may be enforced by the company or a creditor described by Section 101.155 only if the condition is satisfied or waived by or with respect to the member.

(b) A conditional obligation of a member of a limited liability company under this section includes a contribution payable on a discretionary call of the limited liability company before the time the call occurs.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

SUBCHAPTER E. ALLOCATIONS AND DISTRIBUTIONS

Sec. 101.201. ALLOCATION OF PROFITS AND LOSSES. The profits and losses of a limited liability company shall be allocated to each member of the company on the basis of the agreed value of the contributions made by each member, as stated in the company’s records required under Section 101.501.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2005, 79th Leg., Ch. 64 (H.B. 1319), Sec. 73, eff. January 1, 2006.

Sec. 101.202. DISTRIBUTION IN KIND. A member of a limited liability company is entitled to receive or demand a distribution from the company only in the form of cash, regardless of the form of the member’s contribution to the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.203. SHARING OF DISTRIBUTIONS. Distributions of cash and other assets of a limited liability company shall be made to each member of the company according to the agreed value of the member’s contribution to the company as stated in the company’s records required under Sections 3.151 and 101.501.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.204. INTERIM DISTRIBUTIONS. A member of a limited liability company, before the winding up of the company, is not entitled to receive and may not demand a distribution from the company until the company’s governing authority declares a distribution to:

(1) each member of the company; or

(2) a class or group of members that includes the member.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.205. DISTRIBUTION ON WITHDRAWAL. A member of a limited liability company who validly exercises the member’s right to withdraw from the company granted under the company agreement is entitled to receive, within a reasonable time after the date of withdrawal, the fair value of the member’s interest in the company as determined as of the date of withdrawal.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.206. PROHIBITED DISTRIBUTION; DUTY TO RETURN. (a) Unless the distribution is made in compliance with Chapter 11, a limited liability company may not make a distribution to a member of the company if, immediately after making the distribution, the company’s total liabilities, other than liabilities described by Subsection (b), exceed the fair value of the company’s total assets.

(b) For purposes of Subsection (a), the liabilities of a limited liability company do not include:

(1) a liability related to the member’s membership interest; or

(2) except as provided by Subsection (c), a liability for which the recourse of creditors is limited to specified property of the company.

(c) For purposes of Subsection (a), the assets of a limited liability company include the fair value of property subject to a liability for which recourse of creditors is limited to specified property of the company only if the fair value of that property exceeds the liability.

(d) A member of a limited liability company who receives a distribution from the company in violation of this section is not required to return the distribution to the company unless the member had knowledge of the violation.

(e) This section may not be construed to affect the obligation of a member of a limited liability company to return a distribution to the company under the company agreement or other state or federal law.

(f) For purposes of this section, “distribution” does not include an amount constituting reasonable compensation for present or past services or a reasonable payment made in the ordinary course of business under a bona fide retirement plan or other benefits program.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 41, eff. September 1, 2009.

Sec. 101.207. CREDITOR STATUS WITH RESPECT TO DISTRIBUTION. Subject to Sections 11.053 and 101.206, when a member of a limited liability company is entitled to receive a distribution from the company, the member, with respect to the distribution, has the same status as a creditor of the company and is entitled to any remedy available to a creditor of the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.208. RECORD DATE. A company agreement may establish or provide for the establishment of a record date with respect to allocations and distributions.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 42, eff. September 1, 2009.

SUBCHAPTER F. MANAGEMENT

Sec. 101.251. GOVERNING AUTHORITY. The governing authority of a limited liability company consists of:

(1) the managers of the company, if the company’s certificate of formation states that the company will have one or more managers; or

(2) the members of the company, if the company’s certificate of formation states that the company will not have managers.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 43, eff. September 1, 2009.

Sec. 101.252. MANAGEMENT BY GOVERNING AUTHORITY. The governing authority of a limited liability company shall manage the business and affairs of the company as provided by:

(1) the company agreement; and

(2) this title and the provisions of Title 1 applicable to a limited liability company to the extent that the company agreement does not provide for the management of the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.253. DESIGNATION OF COMMITTEES; DELEGATION OF AUTHORITY. (a) The governing authority of a limited liability company by resolution may designate:

(1) one or more committees of the governing authority consisting of one or more governing persons of the company; and

(2) subject to any limitation imposed by the governing authority, a governing person to serve as an alternate member of a committee designated under Subdivision (1) at a committee meeting from which a member of the committee is absent or disqualified.

(b) A committee of the governing authority of a limited liability company may exercise the authority of the governing authority as provided by the resolution designating the committee.

(c) The designation of a committee under this section does not relieve the governing authority of any responsibility imposed by law.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.254. DESIGNATION OF AGENTS; BINDING ACTS. (a) Except as provided by this title and Title 1, each governing person of a limited liability company and each officer of a limited liability company vested with actual or apparent authority by the governing authority of the company is an agent of the company for purposes of carrying out the company’s business.

(b) An act committed by an agent of a limited liability company described by Subsection (a) for the purpose of apparently carrying out the ordinary course of business of the company, including the execution of an instrument, document, mortgage, or conveyance in the name of the company, binds the company unless:

(1) the agent does not have actual authority to act for the company; and

(2) the person with whom the agent is dealing has knowledge of the agent’s lack of actual authority.

(c) An act committed by an agent of a limited liability company described by Subsection (a) that is not apparently for carrying out the ordinary course of business of the company binds the company only if the act is authorized in accordance with this title.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2011, 82nd Leg., R.S., Ch. 139 (S.B. 748), Sec. 37, eff. September 1, 2011.

Sec. 101.255. CONTRACTS OR TRANSACTIONS INVOLVING INTERESTED GOVERNING PERSONS OR OFFICERS. (a) This section applies to a contract or transaction between a limited liability company and:

(1) one or more governing persons or officers, or one or more affiliates or associates of one or more governing persons or officers, of the company; or

(2) an entity or other organization in which one or more governing persons or officers, or one or more affiliates or associates of one or more governing persons or officers, of the company:

(A) is a managerial official; or

(B) has a financial interest.

(b) An otherwise valid and enforceable contract or transaction described by Subsection (a) is valid and enforceable, and is not void or voidable, notwithstanding any relationship or interest described by Subsection (a), if any one of the following conditions is satisfied:

(1) the material facts as to the relationship or interest described by Subsection (a) and as to the contract or transaction are disclosed to or known by:

(A) the company’s governing authority or a committee of the governing authority and the governing authority or committee in good faith authorizes the contract or transaction by the approval of the majority of the disinterested governing persons or committee members, regardless of whether the disinterested governing persons or committee members constitute a quorum; or

(B) the members of the company, and the members in good faith approve the contract or transaction by vote of the members; or

(2) the contract or transaction is fair to the company when the contract or transaction is authorized, approved, or ratified by the governing authority, a committee of the governing authority, or the members of the company.

(c) Common or interested governing persons of a limited liability company may be included in determining the presence of a quorum at a meeting of the company’s governing authority or of a committee of the governing authority that authorizes the contract or transaction.

(d) A person who has the relationship or interest described by Subsection (a) may:

(1) be present at or participate in and, if the person is a governing person or committee member, may vote at a meeting of the governing authority or of a committee of the governing authority that authorizes the contract or transaction; or

(2) sign, in the person’s capacity as a governing person or committee member, a written consent of the governing persons or committee members to authorize the contract or transaction.

(e) If at least one of the conditions of Subsection (b) is satisfied, neither the company nor any of the company’s members will have a cause of action against any of the persons described by Subsection (a) for breach of duty with respect to the making, authorization, or performance of the contract or transaction because the person had the relationship or interest described by Subsection (a) or took any of the actions authorized by Subsection (d).

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 44, eff. September 1, 2009.

Acts 2011, 82nd Leg., R.S., Ch. 139 (S.B. 748), Sec. 38, eff. September 1, 2011.

SUBCHAPTER G. MANAGERS

Sec. 101.301. APPLICABILITY OF SUBCHAPTER. This subchapter applies only to a limited liability company that has one or more managers.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.302. NUMBER AND QUALIFICATIONS. (a) The managers of a limited liability company may consist of one or more persons.

(b) Except as provided by Subsection (c), the number of managers of a limited liability company consists of the number of initial managers listed in the company’s certificate of formation.

(c) The number of managers of a limited liability company may be increased or decreased by amendment to, or as provided by, the company agreement, except that a decrease in the number of managers may not shorten the term of an incumbent manager.

(d) A manager of a limited liability company is not required to be a:

(1) resident of this state; or

(2) member of the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.303. TERM. A manager of a limited liability company serves:

(1) for the term, if any, for which the manager is elected and until the manager’s successor is elected; or

(2) until the earlier resignation, removal, or death of the manager.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.304. REMOVAL. Subject to Section 101.306(a), a manager of a limited liability company may be removed, with or without cause, at a meeting of the company’s members called for that purpose.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.305. MANAGER VACANCY. (a) Subject to Section 101.306(b), a vacancy in the position of a manager of a limited liability company may be filled by:

(1) the affirmative vote of the majority of the remaining managers of the company, without regard to whether the remaining managers constitute a quorum; or

(2) if the vacancy is a result of an increase in the number of managers, an election at an annual or special meeting of the company’s members called for that purpose.

(b) A person elected to fill a vacancy in the position of a manager serves for the unexpired term of the person’s predecessor.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.306. REMOVAL AND REPLACEMENT OF MANAGER ELECTED BY CLASS OR GROUP. (a) If a class or group of the members of a limited liability company is entitled by the company agreement of the company to elect one or more managers of the company, a manager may be removed from office only by the class or group that elected the manager.

(b) A vacancy in the position of a manager elected as provided by Subsection (a) may be filled only by:

(1) a majority vote of the managers serving on the date the vacancy occurs who were elected by the class or group of members; or

(2) a majority vote of the members of the class or group.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.307. METHODS OF CLASSIFYING MANAGERS. Other methods of classifying managers of a limited liability company, including providing for managers who serve for staggered terms of office or terms that are not uniform, may be established in the company agreement.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

SUBCHAPTER H. MEETINGS AND VOTING

This section was amended by the 84th Legislature. Pending publication of the current statutes, see S.B. 859, 84th Legislature, Regular Session, for amendments affecting this section.

Sec. 101.351. APPLICABILITY OF SUBCHAPTER. This subchapter applies only to a meeting of and voting by:

(1) the governing authority of a limited liability company;

(2) the members of a limited liability company if the members do not constitute the governing authority of the company; and

(3) a committee of the governing authority of a limited liability company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.352. GENERAL NOTICE REQUIREMENTS. (a) Except as provided by Subsection (b), notice of a regular or special meeting of the governing authority or members of a limited liability company, or a committee of the company’s governing authority, shall be given in writing to each governing person, member, or committee member, as appropriate, and as provided by Section 6.051.

(b) If the members of a limited liability company do not constitute the governing authority of the company, notice of a meeting of members required by Subsection (a) shall be given by or at the direction of the governing authority not later than the 10th day or earlier than the 60th day before the date of the meeting. Notice of a meeting required under this subsection must state the business to be transacted at the meeting or the purpose of the meeting if:

(1) the meeting is a special meeting; or

(2) a purpose of the meeting is to consider a matter described by Section 101.356.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2007, 80th Leg., R.S., Ch. 688 (H.B. 1737), Sec. 99, eff. September 1, 2007.

Sec. 101.353. QUORUM. A majority of all of the governing persons, members, or committee members of a limited liability company constitutes a quorum for the purpose of transacting business at a meeting of the governing authority, members, or committee of the company, as appropriate.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.354. EQUAL VOTING RIGHTS. Each governing person, member, or committee member of a limited liability company has an equal vote at a meeting of the governing authority, members, or committee of the company, as appropriate.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.355. ACT OF GOVERNING AUTHORITY, MEMBERS, OR COMMITTEE. Except as provided by this title or Title 1, the affirmative vote of the majority of the governing persons, members, or committee members of a limited liability company present at a meeting at which a quorum is present constitutes an act of the governing authority, members, or committee of the company, as appropriate.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.356. VOTES REQUIRED TO APPROVE CERTAIN ACTIONS. (a) Except as provided in this section or any other section in this title, an action of a limited liability company may be approved by the company’s governing authority as provided by Section 101.355.

(b) Except as provided by Subsection (c), (d), or (e) or any other section in this title, an action of a limited liability company not apparently for carrying out the ordinary course of business of the company must be approved by the affirmative vote of the majority of all of the company’s governing persons.

(c) Except as provided by Subsection (d) or (e) or any other section in this title, a fundamental business transaction of a limited liability company, or an action that would make it impossible for a limited liability company to carry out the ordinary business of the company, must be approved by the affirmative vote of the majority of all of the company’s members.

(d) Except as provided by Subsection (e) or any other section of this title, the company’s members must approve by an affirmative vote of all the members:

(1) an amendment to the certificate of formation of a limited liability company; or

(2) a restated certificate of formation that contains an amendment to the certificate of formation of a limited liability company.

(e) A requirement that an action of a limited liability company must be approved by the company’s members does not apply during the period prescribed by Section 101.101(b).

(f) Approval of a restated certificate of formation by a limited liability company’s members is required only if the restated certificate contains an amendment.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2005, 79th Leg., Ch. 64 (H.B. 1319), Sec. 74, eff. January 1, 2006.

Sec. 101.357. MANNER OF VOTING. (a) A member of a limited liability company may vote:

(1) in person; or

(2) by a proxy executed in writing by the member.

(b) A manager or committee member of a limited liability company may vote:

(1) in person; or

(2) if authorized by the company agreement, by a proxy executed in writing by the manager or committee member, as appropriate.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2011, 82nd Leg., R.S., Ch. 139 (S.B. 748), Sec. 39, eff. September 1, 2011.

Sec. 101.358. ACTION BY LESS THAN UNANIMOUS WRITTEN CONSENT. (a) This section applies only to an action required or authorized to be taken at an annual or special meeting of the governing authority, the members, or a committee of the governing authority of a limited liability company under this title, Title 1, or the governing documents of the company.

(b) Notwithstanding Sections 6.201 and 6.202, an action may be taken without holding a meeting, providing notice, or taking a vote if a written consent or consents stating the action to be taken is signed by the number of governing persons, members, or committee members of a limited liability company, as appropriate, necessary to have at least the minimum number of votes that would be necessary to take the action at a meeting at which each governing person, member, or committee member, as appropriate, entitled to vote on the action is present and votes.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.359. EFFECTIVE ACTION BY MEMBERS OR MANAGERS WITH OR WITHOUT MEETING. Members or managers of a limited liability company may take action at a meeting of the members or managers or without a meeting in any manner permitted by this title, Title 1, or the governing documents of the company. Unless otherwise provided by the governing documents, an action is effective if it is taken:

(1) by an affirmative vote of those persons having at least the minimum number of votes that would be necessary to take the action at a meeting at which each member or manager, as appropriate, entitled to vote on the action is present and votes; or

(2) with the consent of each member of the limited liability company, which may be established by:

(A) the member’s failure to object to the action in a timely manner, if the member has full knowledge of the action;

(B) consent to the action in writing signed by the member; or

Added by Acts 2005, 79th Leg., Ch. 64 (H.B. 1319), Sec. 75, eff. January 1, 2006.

SUBCHAPTER I. MODIFICATION OF DUTIES; INDEMNIFICATION

Sec. 101.401. EXPANSION OR RESTRICTION OF DUTIES AND LIABILITIES. The company agreement of a limited liability company may expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person has to the company or to a member or manager of the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.402. PERMISSIVE INDEMNIFICATION, ADVANCEMENT OF EXPENSES, AND INSURANCE OR OTHER ARRANGEMENTS. (a) A limited liability company may:

(1) indemnify a person;

(2) pay in advance or reimburse expenses incurred by a person; and

(3) purchase or procure or establish and maintain insurance or another arrangement to indemnify or hold harmless a person.

(b) In this section, “person” includes a member, manager, or officer of a limited liability company or an assignee of a membership interest in the company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

SUBCHAPTER J. DERIVATIVE PROCEEDINGS

Sec. 101.451. DEFINITIONS. In this subchapter:

(1) “Derivative proceeding” means a civil suit in the right of a domestic limited liability company or, to the extent provided by Section 101.462, in the right of a foreign limited liability company.

(2) “Member” includes a person who beneficially owns a membership interest through a voting trust or a nominee on the person’s behalf.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.452. STANDING TO BRING PROCEEDING. A member may not institute or maintain a derivative proceeding unless:

(1) the member:

(A) was a member of the limited liability company at the time of the act or omission complained of; or

(B) became a member by operation of law from a person that was a member at the time of the act or omission complained of; and

(2) the member fairly and adequately represents the interests of the limited liability company in enforcing the right of the limited liability company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.453. DEMAND. (a) A member may not institute a derivative proceeding until the 91st day after the date a written demand is filed with the limited liability company stating with particularity the act, omission, or other matter that is the subject of the claim or challenge and requesting that the limited liability company take suitable action.

(b) The waiting period required by Subsection (a) before a derivative proceeding may be instituted is not required if:

(1) the member has been previously notified that the demand has been rejected by the limited liability company;

(2) the limited liability company is suffering irreparable injury; or

(3) irreparable injury to the limited liability company would result by waiting for the expiration of the 90-day period.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.454. DETERMINATION BY GOVERNING OR INDEPENDENT PERSONS. (a) The determination of how to proceed on allegations made in a demand or petition relating to a derivative proceeding must be made by an affirmative vote of the majority of:

(1) the independent and disinterested governing persons present at a meeting of the governing authority at which interested governing persons are not present at the time of the vote if the independent and disinterested governing persons constitute a quorum of the governing authority;

(2) a committee consisting of two or more independent and disinterested governing persons appointed by the majority of one or more independent and disinterested governing persons present at a meeting of the governing authority, regardless of whether the independent and disinterested governing persons constitute a quorum of the governing authority; or

(3) a panel of one or more independent and disinterested persons appointed by the court on a motion by the limited liability company listing the names of the persons to be appointed and stating that, to the best of the limited liability company’s knowledge, the persons to be appointed are disinterested and qualified to make the determinations contemplated by Section 101.458.

(b) The court shall appoint a panel under Subsection (a)(3) if the court finds that the persons recommended by the limited liability company are independent and disinterested and are otherwise qualified with respect to expertise, experience, independent judgment, and other factors considered appropriate by the court under the circumstances to make the determinations. A person appointed by the court to a panel under this section may not be held liable to the limited liability company or the limited liability company’s members for an action taken or omission made by the person in that capacity, except for acts or omissions constituting fraud or wilful misconduct.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.455. STAY OF PROCEEDING. (a) If the domestic or foreign limited liability company that is the subject of a derivative proceeding commences an inquiry into the allegations made in a demand or petition and the person or group of persons described by Section 101.454 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 regarding what further action, if any, should be taken.

(b) To obtain a stay, the domestic or foreign limited liability company shall provide the court with a written statement agreeing to advise the court and the member making the demand of the determination promptly on the completion of the review of the matter. A stay, on motion, may be reviewed every 60 days for the continued necessity of the stay.

(c) If the review and determination made by the person or group is not completed before the 61st day after the date on which the court orders the stay, the stay may be renewed for one or more additional 60-day periods if the domestic or foreign limited liability company provides the court and the member with a written statement of the status of the review and the reasons why a continued extension of the stay is necessary.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.456. DISCOVERY. (a) If a domestic or foreign limited liability company proposes to dismiss a derivative proceeding under Section 101.458, discovery by a member after the filing of the derivative proceeding in accordance with this subchapter shall be limited to:

(1) facts relating to whether the person or group of persons described by Section 101.458 is independent and disinterested;

(2) the good faith of the inquiry and review by the person or group; and

(3) the reasonableness of the procedures followed by the person or group in conducting the review.

(b) Discovery described by Subsection (a) may not be expanded to include a fact or substantive matter regarding the act, omission, or other matter that is the subject matter of the derivative proceeding. The scope of discovery may be expanded if the court determines after notice and hearing that a good faith review of the allegations for purposes of Section 101.458 has not been made by an independent and disinterested person or group in accordance with that section.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.457. TOLLING OF STATUTE OF LIMITATIONS. A written demand filed with the limited liability company under Section 101.453 tolls the statute of limitations on the claim on which demand is made until the earlier of:

(1) the 91st day after the date of the demand; or

(2) the 31st day after the date the limited liability company advises the member that the demand has been rejected or the review has been completed.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.458. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A court shall dismiss a derivative proceeding on a motion by the limited liability company if the person or group of persons described by Section 101.454 determines in good faith, after conducting a reasonable inquiry and based on factors the person or group considers appropriate under the circumstances, that continuation of the derivative proceeding is not in the best interests of the limited liability company.

(b) In determining whether the requirements of Subsection (a) have been met, the burden of proof shall be on:

(1) the plaintiff member if:

(A) the majority of the governing authority consists of independent and disinterested persons at the time the determination is made;

(B) the determination is made by a panel of one or more independent and disinterested persons appointed under Section 101.454(a)(3); or

(C) the limited liability company presents prima facie evidence that demonstrates that the persons appointed under Section 101.454(a)(2) are independent and disinterested; or

(2) the limited liability company in any other circumstance.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.459. ALLEGATIONS IF DEMAND REJECTED. If a derivative proceeding is instituted after a demand is rejected, the petition must allege with particularity facts that establish that the rejection was not made in accordance with the requirements of Sections 101.454 and 101.458.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.460. DISCONTINUANCE OR SETTLEMENT. (a) A derivative proceeding may not be discontinued or settled without court approval.

(b) The court shall direct that notice be given to the affected members if the court determines that a proposed discontinuance or settlement may substantially affect the interests of other members.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.461. PAYMENT OF EXPENSES. (a) In this section, “expenses” means reasonable expenses incurred by a party in a derivative proceeding, including:

(1) attorney’s fees;

(2) costs of pursuing an investigation of the matter that was the subject of the derivative proceeding; or

(3) expenses for which the domestic or foreign limited liability company may be required to indemnify another person.

(b) On termination of a derivative proceeding, the court may order:

(1) the domestic or foreign limited liability company to pay the expenses the plaintiff incurred in the proceeding if the court finds the proceeding has resulted in a substantial benefit to the domestic or foreign limited liability company;

(2) the plaintiff to pay the expenses the domestic or foreign limited liability company or other defendant incurred in investigating and defending the proceeding if the court finds the proceeding has been instituted or maintained without reasonable cause or for an improper purpose; or

(3) a party to pay the expenses incurred by another party relating to the filing of a pleading, motion, or other paper if the court finds the pleading, motion, or other paper:

(A) was not well grounded in fact after reasonable inquiry;

(B) was not warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; or

(C) was interposed for an improper purpose, such as to harass, cause unnecessary delay, or cause a needless increase in the cost of litigation.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.462. APPLICATION TO FOREIGN LIMITED LIABILITY COMPANIES. (a) In a derivative proceeding brought in the right of a foreign limited liability company, the matters covered by this subchapter are governed by the laws of the jurisdiction of organization of the foreign limited liability company, except for Sections 101.455, 101.460, and 101.461, which are procedural provisions and do not relate to the internal affairs of the foreign limited liability company.

(b) In the case of matters relating to a foreign limited liability company under Section 101.454, a reference to a person or group of persons described by that section refers to a person or group entitled under the laws of the jurisdiction of organization of the foreign limited liability company to review and dispose of a derivative proceeding. The standard of review of a decision made by the person or group to dismiss the derivative proceeding shall be governed by the laws of the jurisdiction of organization of the foreign limited liability company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.463. CLOSELY HELD LIMITED LIABILITY COMPANY. (a) In this section, “closely held limited liability company” means a limited liability company that has:

(1) fewer than 35 members; and

(2) no membership interests listed on a national securities exchange or regularly quoted in an over-the-counter market by one or more members of a national securities association.

(b) Sections 101.452-101.459 do not apply to a closely held limited liability company.

(1) a derivative proceeding brought by a member of a closely held limited liability company may be treated by a court as a direct action brought by the member for the member’s own benefit; and

(2) a recovery in a direct or derivative proceeding by a member may be paid directly to the plaintiff or to the limited liability company if necessary to protect the interests of creditors or other members of the limited liability company.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2007, 80th Leg., R.S., Ch. 688 (H.B. 1737), Sec. 100, eff. September 1, 2007.

SUBCHAPTER K. SUPPLEMENTAL RECORDKEEPING REQUIREMENTS

Sec. 101.501. SUPPLEMENTAL RECORDS REQUIRED FOR LIMITED LIABILITY COMPANIES. (a) In addition to the books and records required to be kept under Section 3.151, a limited liability company shall keep at its principal office in the United States, or make available to a person at its principal office in the United States not later than the fifth day after the date the person submits a written request to examine the books and records of the company under Section 3.152(a) or 101.502:

(1) a current list that states:

(A) the percentage or other interest in the limited liability company owned by each member; and

(B) if one or more classes or groups of membership interests are established in or under the certificate of formation or company agreement, the names of the members of each specified class or group;

(2) a copy of the company’s federal, state, and local tax information or income tax returns for each of the six preceding tax years;

(3) a copy of the company’s certificate of formation, including any amendments to or restatements of the certificate of formation;

(4) if the company agreement is in writing, a copy of the company agreement, including any amendments to or restatements of the company agreement;

(5) an executed copy of any powers of attorney;

(6) a copy of any document that establishes a class or group of members of the company as provided by the company agreement; and

(7) except as provided by Subsection (b), a written statement of:

(A) the amount of a cash contribution and a description and statement of the agreed value of any other contribution made or agreed to be made by each member;

(B) the dates any additional contributions are to be made by a member;

(D) any event the occurrence of which requires the winding up of the company; and

(E) the date each member became a member of the company.

(b) A limited liability company is not required to keep or make available at its principal office in the United States a written statement of the information required by Subsection (a)(7) if that information is stated in a written company agreement.

(c) A limited liability company shall keep at its registered office located in this state and make available to a member of the company on reasonable request the street address of the company’s principal office in the United States in which the records required by this section and Section 3.151 are maintained or made available.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2007, 80th Leg., R.S., Ch. 688 (H.B. 1737), Sec. 101, eff. September 1, 2007.

Sec. 101.502. RIGHT TO EXAMINE RECORDS AND CERTAIN OTHER INFORMATION. (a) A member of a limited liability company or an assignee of a membership interest in a limited liability company, or a representative of the member or assignee, on written request and for a proper purpose, may examine and copy at any reasonable time and at the member’s or assignee’s expense:

(1) records required under Sections 3.151 and 101.501; and

(2) other information regarding the business, affairs, and financial condition of the company that is reasonable for the person to examine and copy.

(b) A limited liability company shall provide to a member of the company or an assignee of a membership interest in the company, on written request by the member or assignee sent to the company’s principal office in the United States or, if different, the person and address designated in the company agreement, a free copy of:

(1) the company’s certificate of formation, including any amendments to or restatements of the certificate of formation;

(2) if in writing, the company agreement, including any amendments to or restatements of the company agreement; and

(3) any tax returns described by Section 101.501(a)(2).

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

SUBCHAPTER L. SUPPLEMENTAL WINDING UP AND TERMINATION PROVISIONS

Sec. 101.551. PERSONS ELIGIBLE TO WIND UP COMPANY. After an event requiring the winding up of a limited liability company unless a revocation as provided by Section 11.151 or a cancellation as provided by Section 11.152 occurs, the winding up of the company must be carried out by:

(1) the company’s governing authority or one or more persons, including a governing person, designated by the governing authority, the members, or the governing documents;

(2) if the event requiring the winding up of the company is the termination of the continued membership of the last remaining member of the company, the legal representative or successor of the last remaining member or one or more persons designated by the legal representative or successor; or

(3) a person appointed by the court to carry out the winding up of the company under Section 11.054, 11.405, 11.409, or 11.410.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Sec. 101.552. APPROVAL OF VOLUNTARY WINDING UP, REVOCATION, CANCELLATION, OR REINSTATEMENT. (a) A majority vote of all of the members of a limited liability company or, if the limited liability company has no members, a majority vote of all of the managers of the company is required to approve:

(1) a voluntary winding up of the company under Chapter 11;

(2) a revocation of a voluntary decision to wind up the company under Section 11.151; or

(3) a reinstatement of a terminated company under Section 11.202.

(b) The consent of all of the members of the limited liability company is required to approve a cancellation under Section 11.152 of an event requiring winding up specified in Section 11.051(1) or (3).

(c) An event requiring winding up specified in Section 11.056 may be canceled in accordance with Section 11.152(a) if the legal representative or successor of the last remaining member of the domestic limited liability company agrees to:

(1) cancel the event requiring winding up and continue the company; and

(2) become a member of the company effective as of the date of termination of the membership of the last remaining member of the company, or designate another person who agrees to become a member of the company effective as of the date of the termination.

Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.

Amended by:

Acts 2007, 80th Leg., R.S., Ch. 688 (H.B. 1737), Sec. 102, eff. September 1, 2007.

SUBCHAPTER M. SERIES LIMITED LIABILITY COMPANY

Sec. 101.601. SERIES OF MEMBERS, MANAGERS, MEMBERSHIP INTERESTS, OR ASSETS. (a) A company agreement may establish or provide for the establishment of one or more designated series of members, managers, membership interests, or assets that:

(1) has separate rights, powers, or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations; or

(2) has a separate business purpose or investment objective.

(b) A series established in accordance with Subsection (a) may carry on any business, purpose, or activity, whether or not for profit, that is not prohibited by Section 2.003.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.602. ENFORCEABILITY OF OBLIGATIONS AND EXPENSES OF SERIES AGAINST ASSETS. (a) Notwithstanding any other provision of this chapter or any other law, but subject to Subsection (b) and any other provision of this subchapter:

(1) the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular series shall be enforceable against the assets of that series only, and shall not be enforceable against the assets of the limited liability company generally or any other series; and

(2) none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the limited liability company generally or any other series shall be enforceable against the assets of a particular series.

(b) Subsection (a) applies only if:

(1) the records maintained for that particular series account for the assets associated with that series separately from the other assets of the company or any other series;

(2) the company agreement contains a statement to the effect of the limitations provided in Subsection (a); and

(3) the company’s certificate of formation contains a notice of the limitations provided in Subsection (a).

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.603. ASSETS OF SERIES. (a) Assets associated with a series may be held directly or indirectly, including being held in the name of the series, in the name of the limited liability company, through a nominee, or otherwise.

(b) If the records of a series are maintained in a manner so that the assets of the series can be reasonably identified by specific listing, category, type, quantity, or computational or allocational formula or procedure, including a percentage or share of any assets, or by any other method in which the identity of the assets can be objectively determined, the records are considered to satisfy the requirements of Section 101.602(b)(1).

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.604. NOTICE OF LIMITATION ON LIABILITIES OF SERIES. Notice of the limitation on liabilities of a series required by Section 101.602 that is contained in a certificate of formation filed with the secretary of state satisfies the requirements of Section 101.602(b)(3), regardless of whether:

(1) the limited liability company has established any series under this subchapter when the notice is contained in the certificate of formation; and

(2) the notice makes a reference to a specific series of the limited liability company.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.605. GENERAL POWERS OF SERIES. A series established under this subchapter has the power and capacity, in the series’ own name, to:

(1) sue and be sued;

(2) contract;

(3) acquire, sell, and hold title to assets of the series, including real property, personal property, and intangible property;

(4) grant liens and security interests in assets of the series; and

(5) exercise any power or privilege as necessary or appropriate to the conduct, promotion, or attainment of the business, purposes, or activities of the series.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Amended by:

Acts 2013, 83rd Leg., R.S., Ch. 9 (S.B. 847), Sec. 6, eff. September 1, 2013.

Sec. 101.606. LIABILITY OF MEMBER OR MANAGER FOR OBLIGATIONS; DUTIES. (a) Except as and to the extent the company agreement specifically provides otherwise, a member or manager associated with a series or a member or manager of the company is not liable for a debt, obligation, or liability of a series, including a debt, obligation, or liability under a judgment, decree, or court order.

(b) The company agreement may expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person associated with a series has to:

(1) the series or the company;

(2) a member or manager associated with the series; or

(3) a member or manager of the company.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.607. CLASS OR GROUP OF MEMBERS OR MANAGERS. (a) The company agreement may:

(1) establish classes or groups of one or more members or managers associated with a series each of which has certain express relative rights, powers, and duties, including voting rights; and

(2) provide for the manner of establishing additional classes or groups of one or more members or managers associated with the series each of which has certain express rights, powers, and duties, including providing for voting rights and rights, powers, and duties senior to existing classes and groups of members or managers associated with the series.

(b) The company agreement may provide for the taking of an action, including the amendment of the company agreement, without the vote or approval of any member or manager or class or group of members or managers, to create under the provisions of the company agreement a class or group of the series of membership interests that was not previously outstanding.

(1) all or certain identified members or managers or a specified class or group of the members or managers associated with a series have the right to vote on any matter separately or with all or any class or group of the members or managers associated with the series;

(2) any member or class or group of members associated with a series has no voting rights; and

(3) voting by members or managers associated with a series is on a per capita, number, financial interest, class, group, or any other basis.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.608. GOVERNING AUTHORITY. (a) Notwithstanding any conflicting provision of the certificate of formation of a limited liability company, the governing authority of a series consists of the managers or members associated with the series as provided in the company agreement.

(b) If the company agreement does not provide for the governing authority of the series, the governing authority of the series consists of:

(1) the managers associated with the series, if the company’s certificate of formation states that the company will have one or more managers; or

(2) the members associated with the series, if the company’s certificate of formation states that the company will not have managers.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.609. APPLICABILITY OF OTHER PROVISIONS OF CHAPTER OR TITLE 1; SYNONYMOUS TERMS. (a) To the extent not inconsistent with this subchapter, this chapter applies to a series and its associated members and managers.

(b) For purposes of the application of any other provision of this chapter to a provision of this subchapter, and as the context requires:

(1) a reference to “limited liability company” or “company” means the “series”;

(2) a reference to “member” means “member associated with the series”; and

(3) a reference to “manager” means “manager associated with the series.”

(c) To the extent not inconsistent with this subchapter, a series and the governing persons and officers associated with the series have the powers and rights provided by Subchapters C and D, Chapter 3, and Subchapter F, Chapter 10. For purposes of those provisions, and as the context requires:

(1) a reference to “entity,” “domestic entity,” or “filing entity” includes the “series”;

(2) a reference to “governing person” includes “governing person associated with the series”;

(3) a reference to “governing authority” includes “governing authority associated with the series”; and

(4) a reference to “officer” includes “officer associated with the series.”

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Amended by:

Acts 2013, 83rd Leg., R.S., Ch. 9 (S.B. 847), Sec. 7, eff. September 1, 2013.

Acts 2013, 83rd Leg., R.S., Ch. 9 (S.B. 847), Sec. 8, eff. September 1, 2013.

Sec. 101.610. EFFECT OF CERTAIN EVENT ON MANAGER OR MEMBER. (a) An event that under this chapter or the company agreement causes a manager to cease to be a manager with respect to a series does not, in and of itself, cause the manager to cease to be a manager of the limited liability company or with respect to any other series of the company.

(b) An event that under this chapter or the company agreement causes a member to cease to be associated with a series does not, in and of itself, cause the member to cease to be associated with any other series or terminate the continued membership of a member in the limited liability company or require the winding up of the series, regardless of whether the member was the last remaining member associated with the series.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.611. MEMBER STATUS WITH RESPECT TO DISTRIBUTION. (a) Subject to Sections 101.613, 101.617, 101.618, 101.619, and 101.620, when a member associated with a series established under this subchapter is entitled to receive a distribution with respect to the series, the member, with respect to the distribution, has the same status as a creditor of the series and is entitled to any remedy available to a creditor of the series.

(b) Section 101.206 does not apply to a distribution with respect to the series.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Amended by:

Acts 2011, 82nd Leg., R.S., Ch. 139 (S.B. 748), Sec. 40, eff. September 1, 2011.

Sec. 101.612. RECORD DATE FOR ALLOCATIONS AND DISTRIBUTIONS. A company agreement may establish or provide for the establishment of a record date for allocations and distributions with respect to a series.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.613. DISTRIBUTIONS. (a) A limited liability company may make a distribution with respect to a series.

(b) A limited liability company may not make a distribution with respect to a series to a member if, immediately after making the distribution, the total amount of the liabilities of the series, other than liabilities described by Subsection (c), exceeds the fair value of the assets associated with the series.

(1) a liability related to the member’s membership interest; or

(2) except as provided by Subsection (e), a liability of the series for which the recourse of creditors is limited to specified property of the series.

(d) For purposes of Subsection (b), the assets associated with a series include the fair value of property of the series subject to a liability for which recourse of creditors is limited to specified property of the series only if the fair value of that property exceeds the liability.

(e) A member who receives a distribution from a series in violation of this section is not required to return the distribution to the series unless the member had knowledge of the violation.

(f) This section may not be construed to affect the obligation of a member to return a distribution to the series under the company agreement or other state or federal law.

(g) Section 101.206 does not apply to a distribution with respect to a series.

(h) For purposes of this section, “distribution” does not include an amount constituting reasonable compensation for present or past services or a reasonable payment made in the ordinary course of business under a bona fide retirement plan or other benefits program.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.614. AUTHORITY TO WIND UP AND TERMINATE SERIES. Except to the extent otherwise provided in the company agreement and subject to Sections 101.617, 101.618, 101.619, and 101.620, a series and its business and affairs may be wound up and terminated without causing the winding up of the limited liability company.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.615. TERMINATION OF SERIES. (a) Except as otherwise provided by Sections 101.617, 101.618, 101.619, and 101.620, the series terminates on the completion of the winding up of the business and affairs of the series in accordance with Sections 101.617, 101.618, 101.619, and 101.620.

(b) The limited liability company shall provide notice of the termination of a series in the manner provided in the company agreement for notice of termination, if any.

(c) The termination of the series does not affect the limitation on liabilities of the series provided by Section 101.602.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.616. EVENT REQUIRING WINDING UP. Subject to Sections 101.617, 101.618, 101.619, and 101.620, the business and affairs of a series are required to be wound up:

(1) if the winding up of the limited liability company is required under Section 101.552(a) or Chapter 11; or

(2) on the earlier of:

(A) the time specified for winding up the series in the company agreement;

(B) the occurrence of an event specified with respect to the series in the company agreement;

(C) the occurrence of a majority vote of all of the members associated with the series approving the winding up of the series or, if there is more than one class or group of members associated with the series, a majority vote of the members of each class or group of members associated with the series approving the winding up of the series;

(D) if the series has no members, the occurrence of a majority vote of all of the managers associated with the series approving the winding up of the series or, if there is more than one class or group of managers associated with the series, a majority vote of the managers of each class or group of managers associated with the series approving the winding up of the series; or

(E) a determination by a court in accordance with Section 101.621.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.617. PROCEDURES FOR WINDING UP AND TERMINATION OF SERIES. (a) The following provisions apply to a series and the associated members and managers of the series:

(1) Subchapters A, G, H, and I, Chapter 11; and

(2) Subchapter B, Chapter 11, other than Sections 11.051, 11.056, 11.057, 11.058, and 11.059.

(b) For purposes of the application of Chapter 11 to a series and as the context requires:

(1) a reference to “domestic entity,” “filing entity,” or “entity” means the “series”;

(2) a reference to an “owner” means a “member associated with the series”;

(3) a reference to the “governing authority” or a “governing person” means the “governing authority associated with the series” or a “governing person associated with the series”; and

(4) a reference to “business,” “property,” “obligations,” or “liabilities” means the “business associated with the series,” “property associated with the series,” “obligations associated with the series,” or “liabilities associated with the series.”

(c) After the occurrence of an event requiring winding up of a series under Section 101.616, unless a revocation as provided by Section 101.618 or a cancellation as provided by Section 101.619 occurs, the winding up of the series must be carried out by:

(1) the governing authority of the series or one or more persons, including a governing person, designated by:

(A) the governing authority of the series;

(B) the members associated with the series; or

(2) a person appointed by the court to carry out the winding up of the series under Section 11.054, 11.405, 11.409, or 11.410.

(d) An action taken in accordance with this section does not affect the limitation on liability of members and managers provided by Section 101.606.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.618. REVOCATION OF VOLUNTARY WINDING UP. Before the termination of the series takes effect, a voluntary decision to wind up the series under Section 101.616(2)(C) or (D) may be revoked by:

(1) a majority vote of all of the members associated with the series approving the revocation or, if there is more than one class or group of members associated with the series, a majority vote of the members of each class or group of members associated with the series approving the revocation; or

(2) if the series has no members, a majority vote of all the managers associated with the series approving the revocation or, if there is more than one class or group of managers associated with the series, a majority vote of the managers of each class or group of managers associated with the series approving the revocation.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.619. CANCELLATION OF EVENT REQUIRING WINDING UP. (a) Unless the cancellation is prohibited by the company agreement, an event requiring winding up of the series under Section 101.616(1) or (2) may be canceled by the consent of all of the members of the series before the termination of the series takes effect.

(b) In connection with the cancellation, the members must amend the company agreement to:

(1) eliminate or extend the time specified for the series if the event requiring winding up of the series occurred under Section 101.616(1); or

(2) eliminate or revise the event specified with respect to the series if the event requiring winding up of the series occurred under Section 101.616(2).

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.620. CONTINUATION OF BUSINESS. The series may continue its business following the revocation under Section 101.618 or the cancellation under Section 101.619.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.621. WINDING UP BY COURT ORDER. A district court in the county in which the registered office or principal place of business in this state of a domestic limited liability company is located, on application by or for a member associated with the series, has jurisdiction to order the winding up and termination of a series if the court determines that it is not reasonably practicable to carry on the business of the series in conformity with the company agreement.

Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

Sec. 101.622. SERIES NOT A SEPARATE DOMESTIC ENTITY OR ORGANIZATION. For purposes of this chapter and Title 1, a series has the rights, powers, and duties provided by this subchapter to the series but is not a separate domestic entity or organization.

Added by Acts 2013, 83rd Leg., R.S., Ch. 9 (S.B. 847), Sec. 9, eff. September 1, 2013.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Jul 12th, 2015 Collections and Foreign Judgments, Contracts and Commercial Litigation

Subrogation and Third Party Liability in Texas Civil Litigation–Labor Code Section 417–Fort Worth, Texas Subrogation Attorneys

TEXAS LABOR CODE CHAPTER 417. THIRD-PARTY LIABILITY

LABOR CODE

TITLE 5. WORKERS’ COMPENSATION

SUBTITLE A. TEXAS WORKERS’ COMPENSATION ACT

CHAPTER 417. THIRD-PARTY LIABILITY

Sec. 417.001. THIRD-PARTY LIABILITY. (a) An employee or legal beneficiary may seek damages from a third party who is or becomes liable to pay damages for an injury or death that is compensable under this subtitle and may also pursue a claim for workers’ compensation benefits under this subtitle.

(b) If a benefit is claimed by an injured employee or a legal beneficiary of the employee, the insurance carrier is subrogated to the rights of the injured employee and may enforce the liability of the third party in the name of the injured employee or the legal beneficiary. The insurance carrier’s subrogation interest is limited to the amount of the total benefits paid or assumed by the carrier to the employee or the legal beneficiary, less the amount by which the court reduces the judgment based on the percentage of responsibility determined by the trier of fact under Section 33.003, Civil Practice and Remedies Code, attributable to the employer. If the recovery is for an amount greater than the amount of the insurance carrier’s subrogation interest, the insurance carrier shall:

(1) reimburse itself and pay the costs from the amount recovered; and

(2) pay the remainder of the amount recovered to the injured employee or the legal beneficiary.

(1) considered to be the insurance carrier under this section for purposes of those benefits;

(2) subrogated to the rights of the claimant; and

(3) entitled to reimbursement in the same manner as the insurance carrier.

(d) The division shall remit money recovered under this section to the comptroller for deposit to the credit of the subsequent injury fund.

Acts 1993, 73rd Leg., ch. 269, Sec. 1, eff. Sept. 1, 1993. Amended by Acts 1997, 75th Leg., ch. 1423, Sec. 12.13, eff. Sept. 1, 1997; Acts 2003, 78th Leg., ch. 204, Sec. 4.09, eff. Sept. 1, 2003.

Amended by:

Acts 2005, 79th Leg., Ch. 265 (H.B. 7), Sec. 3.285, eff. September 1, 2005.

Sec. 417.002. RECOVERY IN THIRD-PARTY ACTION. (a) The net amount recovered by a claimant in a third-party action shall be used to reimburse the insurance carrier for benefits, including medical benefits, that have been paid for the compensable injury.

(b) Any amount recovered that exceeds the amount of the reimbursement required under Subsection (a) shall be treated as an advance against future benefits, including medical benefits, that the claimant is entitled to receive under this subtitle.

(c) If the advance under Subsection (b) is adequate to cover all future benefits, the insurance carrier is not required to resume the payment of benefits. If the advance is insufficient, the insurance carrier shall resume the payment of benefits when the advance is exhausted.

Acts 1993, 73rd Leg., ch. 269, Sec. 1, eff. Sept. 1, 1993.

Sec. 417.003. ATTORNEY’S FEE FOR REPRESENTATION OF INSURANCE CARRIER’S INTEREST. (a) An insurance carrier whose interest is not actively represented by an attorney in a third-party action shall pay a fee to an attorney representing the claimant in the amount agreed on between the attorney and the insurance carrier. In the absence of an agreement, the court shall award to the attorney payable out of the insurance carrier’s recovery:

(1) a reasonable fee for recovery of the insurance carrier’s interest that may not exceed one-third of the insurance carrier’s recovery; and

(2) a proportionate share of expenses.

(b) An attorney who represents the claimant and is also to represent the subrogated insurance carrier shall make a full written disclosure to the claimant before employment as an attorney by the insurance carrier. The claimant must acknowledge the disclosure and consent to the representation. A signed copy of the disclosure shall be furnished to all concerned parties and made a part of the division file. A copy of the disclosure with the claimant’s consent shall be filed with the claimant’s pleading before a judgment is entered and approved by the court. The claimant’s attorney may not receive a fee under this section to which the attorney is otherwise entitled under an agreement with the insurance carrier unless the attorney complies with the requirements of this subsection.

(c) If an attorney actively representing the insurance carrier’s interest actively participates in obtaining a recovery, the court shall award and apportion between the claimant’s and the insurance carrier’s attorneys a fee payable out of the insurance carrier’s subrogation recovery. In apportioning the award, the court shall consider the benefit accruing to the insurance carrier as a result of each attorney’s service. The total attorney’s fees may not exceed one-third of the insurance carrier’s recovery.

(d) For purposes of determining the amount of an attorney’s fee under this section, only the amount recovered for benefits, including medical benefits, that have been paid by the insurance carrier may be considered.

Acts 1993, 73rd Leg., ch. 269, Sec. 1, eff. Sept. 1, 1993.

Amended by:

Acts 2005, 79th Leg., Ch. 265 (H.B. 7), Sec. 3.286, eff. September 1, 2005.

Sec. 417.004. EMPLOYER LIABILITY TO THIRD PARTY. In an action for damages brought by an injured employee, a legal beneficiary, or an insurance carrier against a third party liable to pay damages for the injury or death under this chapter that results in a judgment against the third party or a settlement by the third party, the employer is not liable to the third party for reimbursement or damages based on the judgment or settlement unless the employer executed, before the injury or death occurred, a written agreement with the third party to assume the liability.

Jul 12th, 2015 Collections and Foreign Judgments, Insurance Defense Litigation, Workers' Compensation Defense

Express Warranties Under The UCC and Texas Contract Law–Fort Worth, Texas Contracts Lawyers

An express warranty is created by any affirmation of fact or a promise made by a seller to a buyer that is a part of the basis of the bargain. In addition, an express warranty may be created by a description, model, or sample of the goods. A seller breaches an express warranty when the goods fail to “conform to a promise or an affirmation of fact . . . , or the goods do not conform to a description, sample, or model . . . .” Herring v. Home Depot, Inc., 565 S.E.2d 773, 776 (S.C. Ct. App. 2002) (holding that an aggrieved buyer must also establish that the breach caused the damages for which it seeks to recover); see also Yurcic v. Purdue Pharma, L.P., 343 F. Supp. 2d 386, 394 (M.D. Pa. 2004) (holding that to prevail on breach of express warranty claim, a buyer must establish the existence of a warranty, a breach of warranty, and damages proximately caused by the breach)

“Whether an express or implied warranty has been breached is included in the revocation determination only in the sense that a breach of a
warranty could substantially impair the value of the goods to the buyer.”. 139 See U.C.C. § 2-106(2)

It is not necessary to use words like “warranty” or “guarantee” to create express warranties in a contract in Texas. Also, statements of opinion rather than fact , which are called “puffery”, do not create express warranties under Texas law.

TEX BC. CODE ANN. § 2.313 : Texas Statutes – Section 2.313: EXPRESS WARRANTIES BY AFFIRMATION, PROMISE, DESCRIPTION, SAMPLE

(a) Express warranties by the seller are created as follows:(1) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.(2) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.(3) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.(b) It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.Acts 1967, 60th Leg., p. 2343, ch. 785, Sec. 1, eff. Sept. 1, 1967. – See more at: http://codes.lp.findlaw.com/txstatutes/BC/1/2/C/2.313#sthash.nshSm46H.dpuf

Jul 11th, 2015 Collections and Foreign Judgments, Construction Law, Contracts and Commercial Litigation

Texas Discovery Disputes on Net Worth and Exemplary Damages Issues–Fort Worth, Texas Collections Attorneys

300 S.W.3d 35 (Tex.App.-Houston [14 Dist.] 2009)
In re Mark A. JACOBS, M.D., Debra C. Gunn, M.D.,
and Obstetrical and Gynecologist Associates, P.A.,
Relators.
No. 14-09-00123-CV.
Court of Appeals of Texas, Fourteenth District,
Houston.
October 20, 2009

Panel consists of Justices BROWN, BOYCE, and
SULLIVAN.
MAJORITY OPINION
JEFFREY V. BROWN, Justice.
In this original proceeding, the relators, Mark A.
Jacobs, M.D., Debra C. Gunn, M.D., and Obstetrical and
Gynecologist Associates, P.A., seek a writ of mandamus
ordering the Honorable Mike Wood, presiding judge of
Probate Court No. 2 of Harris County, to set aside his two
orders of January 23, 2009-one compelling the deposition
of Dr. Jacobs and one compelling net-worth discovery for
the past two years-and his order of January 30, 2009,
clarifying the two January 23 orders. We conditionally
grant the petition in part and deny it in part.
I
Real parties in interest, Andre McCoy, Individually
and as Permanent Guardian of Shannon Miles McCoy, an
Incapacitated Person (the ” McCoys” ), have sued the
relators and others [1] for negligence and gross
negligence in providing medical care and treatment to
Shannon while she was an obstetrical patient at Woman’s
Hospital of Texas from September 13, 2004 to September
14, 2004. On November 16, 2007, the McCoys served the
relators with requests for discovery of net-worth
information. When the relators objected to the requests
for production, the McCoys filed a motion to compel
discovery.
Page 39
On January 23, 2009, the trial court held a hearing
and signed an order directing the McCoys to amend their
pleadings to provide more specific allegations of gross
negligence against the relators following the completion
of the depositions of Dr. Jacobs and Dr. Gunn. Subject to
the filing of a sufficient pleading as to gross negligence,
the trial court further ordered the relators to produce ” the
actual financial statements they have provided to a lender
within the past two (2) years that identifies the assets and
liabilities of each Defendant.” Alternatively, if the
relators had not submitted any such financial statement to
a lender within the two years preceding the date of the
order, the court ordered each relator to:
(i) Produce an affidavit swearing that no such financial
statement has actually been submitted to a lender in the
past two (2) years; and
(ii) Produce an affidavit under oath in the format of what
would have been provided to a lender as to net worth.
The order directed that the relators produce such
net-worth information no later than thirty days after the
McCoys sufficiently pleaded gross negligence. In the
order, Judge Wood also prohibited the McCoys from
seeking to compel any additional responses to their
outstanding net-worth discovery requests, and announced
that any net-worth information provided to the McCoys
would be ” safeguarded by a protective order.” On
January 23, Judge Wood signed another order granting
the McCoys’ motion to compel the deposition of Dr.
Jacobs, and directed that the deposition may not exceed
three hours on the record.
On January 26, the relators filed a motion to clarify
the order regarding the discoverability of net worth. The
relators stated they did not understand when to produce
the net-worth information to comply with the order and
requested the trial court to so specify. Also, the relators
requested a written order on what net-worth matters, if
any, the McCoys would be allowed to cover during the
depositions of Dr. Jacobs and Dr. Gunn.
On January 30, the trial court signed an order
clarifying its prior orders regarding the discoverability of
net-worth information. The trial court directed the
relators to produce the information by February 6, 2009,
and ruled that the McCoys would be permitted to depose
Dr. Gunn and Dr. Jacobs about their net worth.
In their petition, the relators argue that the trial
court abused its discretion with respect to the orders of
January 23 and 30 by directing the relators to (1) produce
net-worth information for the past two years in the form
of actual financial statements they have provided to
lenders; (2) create a net-worth document in the format of
what would have been provided to a lender; and (3)
present Dr. Jacobs and Dr. Gunn for deposition regarding
their net worth without any temporal or subject-matter
limitations. The relators further assert they have no
adequate remedy by appeal because their rights to due
process and privacy are in jeopardy of being permanently
lost or compromised.
II
To be entitled to the extraordinary relief of a writ
of mandamus, the relator must show that the trial court
clearly abused its discretion and he has no adequate
remedy by appeal. In re Team Rocket, L.P., 256 S.W.3d
257, 259 (Tex.2008) (orig. proceeding). The party
resisting discovery bears the heavy burden of establishing
an abuse of discretion and an inadequate remedy by
appeal. In re CSX Corp., 124 S.W.3d 149, 151
(Tex.2003) (orig. proceeding) (per curiam). A trial court
abuses its discretion if it reaches a
Page 40
decision so arbitrary and unreasonable as to constitute a
clear and prejudicial error of law, or if it clearly fails to
correctly analyze or apply the law. In re Cerberus
Capital Mgmt., L.P., 164 S.W.3d 379, 382 (Tex.2005)
(orig. proceeding) (per curiam); Walker v. Packer, 827
S.W.2d 833, 839 (Tex.1992) (orig. proceeding).
Whether a clear abuse of discretion can be
adequately remedied by appeal depends on a careful
analysis of costs and benefits of interlocutory review. In
re McAllen Med. Ctr., Inc., 275 S.W.3d 458, 464
(Tex.2008) (orig. proceeding). Because this balance
depends heavily on circumstances, it must be guided by
analysis of principles rather than simple rules that treat
cases as categories. Id. ” Mandamus review of significant
rulings in exceptional cases may be essential to preserve
important substantive and procedural rights from
impairment or loss, allow the appellate courts to give
needed and helpful direction to the law that would
otherwise prove elusive in appeals from final judgments,
and spare private parties and the public the time and
money utterly wasted enduring eventual reversal of
improperly conducted proceedings.” In re Prudential Ins.
Co. of Am., 148 S.W.3d 124, 136 (Tex.2004) (orig.
proceeding); see also In re Columbia Med. Ctr. of Las
Colinas, Subsidiary, L.P., 290 S.W.3d 204, 207
(Tex.2009) (orig. proceeding) (” Used selectively,
mandamus can ‘ correct clear errors in exceptional cases
and afford appropriate guidance to the law without the
disruption and burden of interlocutory appeal.’ ” )
(quoting In re Prudential, 148 S.W.3d at 138). Thus, in
determining whether appeal is an adequate remedy, we
consider whether the benefits of mandamus review
outweigh the detriments. In re BP Prods. N. Am., Inc.,
244 S.W.3d 840, 845 (Tex.2008) (orig. proceeding).
Appeal is not an adequate remedy when the appellate
court would not be able to cure the trial court’s discovery
error. In re Dana Corp., 138 S.W.3d 298, 301 (Tex.2004)
(per curiam) (orig. proceeding); In re Kuntz, 124 S.W.3d
179, 181 (Tex.2003) (orig. proceeding).
A
The relators assert the trial court abused its
discretion by ordering them to produce their net-worth
information to the McCoys. A defendant’s net worth is
relevant in a suit involving exemplary damages. Lunsford
v. Morris, 746 S.W.2d 471, 473 (Tex.1988) (orig.
proceeding), overruled on other grounds, Walker, 827
S.W.2d at 842; Miller v. O’Neill, 775 S.W.2d 56, 58
(Tex.App.-Houston [1st Dist.] 1989, orig. proceeding).
Therefore, in cases where punitive or exemplary damages
may be awarded, parties may discover and offer evidence
of a defendant’s net worth. Lunsford, 746 S.W.2d at 473.
Generally, in cases concerning the production of financial
records, the burden rests upon the party seeking to
prevent production. In re Brewer Leasing, Inc., 255
S.W.3d 708, 712 (Tex.App.-Houston [1st Dist.] 2008,
orig. proceeding [mand. denied] ); In re Patel, 218
S.W.3d 911, 916 (Tex.App.-Corpus Christi 2007, orig.
proceeding).
The relators argue the McCoys are not entitled to
discovery on net worth until they have established a
prima facie case of gross negligence. However, the Texas
Supreme Court has expressly rejected this contention. See
Lunsford, 746 S.W.2d at 473 (rejecting requirement of
prima facie showing because ” [o]ur rules of civil
procedure and evidence do not require similar practices
before net worth may be discovered” ).[2] Therefore,
under Texas law, a party seeking discovery of net-worth
Page 41
information need not satisfy any evidentiary prerequisite,
such as making a prima facie showing of entitlement to
punitive damages, before discovery of net worth is
permitted. In re House of Yahweh, 266 S.W.3d 668, 673
(Tex.App.-Eastland 2008, orig. proceeding); In re Garth,
214 S.W.3d 190, 192 (Tex.App.-Beaumont 2007, orig.
proceeding [mand. dism’d] ); In re W. Star Trucks US,
Inc., 112 S.W.3d 756, 763 (Tex.App.-Eastland 2003,
orig. proceeding); Al Parker Buick Co. v. Touchy, 788
S.W.2d 129, 131 (Tex.App.-Houston [1st Dist.] 1990,
orig. proceeding).
The relators acknowledge the Texas Supreme
Court’s express holding in Lunsford, but argue that we
should follow other jurisdictions that require a plaintiff to
demonstrate a factual basis for punitive damages before
being allowed to do net-worth discovery.[3] Even though
Lunsford is over twenty years old, the Texas Supreme
Court has not revisited this issue. [4] As an intermediate
court of appeals, we are bound by the supreme court’s
ruling in Lunsford and, therefore, we decline the relators’
invitation. See Dallas Area Rapid Transit v.
Amalgamated Transit Union Local No. 1338, 273 S.W.3d
659, 666 (Tex.2008), cert. denied, __ U.S. __, 129 S.Ct.
2767, 174 L.Ed.2d 284 (2009) (” It is fundamental to the
very structure of our appellate system that this Court’s
decisions be binding on the lower courts.” );
Page 42
Lubbock County, Tex. v. Trammel’s Lubbock Bail Bonds,
80 S.W.3d 580, 585 (Tex.2002) (” It is not the function of
a court of appeals to abrogate or modify established
precedent…. That function lies solely with this Court.” ).
In accordance with Lunsford, the McCoys are not
required to make a prima facie case, or any other
evidentiary showing, of entitlement to punitive damages
before seeking discovery of the relators’ net-worth
information.
B
The relators also argue evidence of their net worth
is not relevant because the McCoys have not alleged
sufficient facts to support their claim of gross negligence
under section 41.001(11) of the Texas Civil Practices and
Remedies Code. Section 41.001(11) defines ” gross
negligence” :
(11) ” Gross negligence” means an act or omission:
(A) which when viewed objectively from the standpoint
of the actor at the time of its occurrence involves an
extreme degree of risk, considering the probability and
magnitude of the potential harm to others; and
(B) of which the actor has actual, subjective awareness of
the risk involved, but nevertheless proceeds with
conscious indifference to the rights, safety, or welfare of
others.
Id.
The McCoys allege Dr. Jacobs and Dr. Gunn
knowingly failed to: (1) adequately and appropriately
treat Shannon’s disseminated intravascular coagulopathy
(” DIC” ) [5]; (2) appreciate the severity of Shannon’s
coagulopathy in light of abnormal lab values indicating
that she was actively bleeding and suffering from DIC;
(3) aggressively treat Shannon’s DIC with adequate blood
products and blood-volume replacement; and (4)
repeatedly order appropriate coagulation profiles and to
serially re-check Shannon’s blood work or to monitor and
evaluate her clotting factors [6] to determine how well, or
how poorly, she was responding to treatment.
The McCoys further allege Dr. Jacobs knowingly
failed to: (1) verify that his orders for blood-volume
replacement were being carried out and Shannon was
being administered blood products as ordered; and (2)
appropriately and aggressively manage Shannon’s DIC
from the outset of her admission by ordering and
administering additional units of fresh frozen plasma to
increase Shannon’s blood volume and to correct her
consumptive coagulopathy before the delivery of her
baby.
The McCoys also allege Dr. Gunn knowingly failed
to: (1) appreciate that Shannon’s DIC was depleting and
consuming her clotting factors and that if these clotting
factors were not replaced through aggressive
blood-volume replacement and clotting-factor
replacement,
Page 43
Shannon’s blood would not be able to coagulate
effectively at the time she delivered her baby; (2)
recognize and appreciate that Dr. Jacobs had undertreated
Shannon; (3) recognize, appreciate, and appropriately
respond to Shannon’s tachycardia on September 14, 2004,
by more aggressively treating her DIC; (4) order Laisix (a
diuretic medication that increases urine output) for
Shannon, even though she knew that Shannon was
suffering from DIC and actively bleeding, and did not
need to be administered a diuretic medication; (5)
recognize, appreciate, and properly respond to the fact
that Shannon’s condition was deteriorating (as evidenced
by her tachycardia (rapid heartbeat) and urine output),
and that she was developing hypovolemic shock (shock
caused by reduction in blood volume); and (6) recognize
that she was not qualified to treat and manage Shannon’s
DIC and to request the help of a more specialized
physician to treat and manage Shannon’s DIC.
Finally, the McCoys allege the conduct of Dr.
Jacobs and Dr. Gunn, when viewed objectively from their
standpoint at the time of the occurrence, involved an
extreme degree of risk, considering the probability and
magnitude of the potential harm to others. The McCoys
further allege Dr. Jacobs and Dr. Gunn had actual,
subjective awareness of the risk involved, but
nevertheless proceeded with conscious indifference to
Shannon’s rights, safety, or welfare.
In response to the McCoys’ gross-negligence
allegations, the relators argue that merely adding the
word ” knowingly” to existing allegations of negligence
is not enough. Texas follows the ” fair notice” standard
for pleadings, which looks to whether the opposing party
can ascertain from the pleadings the nature and basic
issues of the controversy and the type of evidence that
might be relevant to the controversy. Low v. Henry, 221
S.W.3d 609, 612 (Tex.2007); Horizon/CMS Healthcare
Corp. of Am. v. Auld, 34 S.W.3d 887, 896 (Tex.2000). ” ‘
A petition is sufficient if it gives fair and adequate notice
of the facts upon which the pleader bases his claim. The
purpose of this rule is to give the opposing party
information sufficient to enable him to prepare a defense.’
” Horizon/CMS Healthcare, 34 S.W.3d at 897 (quoting
Roark v. Allen, 633 S.W.2d 804, 810 (Tex.1982)).
Exemplary damages are special damages that must be
supported by express allegations of willfulness, malice,
or gross negligence that go beyond the allegations
necessary to recover compensatory damages. Al Parker
Buick Co., 788 S.W.2d at 130. Texas law requires a
plaintiff seeking production of net worth information to ”
‘ allege facts showing that relator is liable for punitive
damages.’ ” Delgado v. Kitzman, 793 S.W.2d 332, 333
(Tex.App.-Houston [1st Dist.] 1990, orig. proceeding)
(quoting Al Parker Buick Co., 788 S.W.2d at 131).
Under Texas’ basic pleading requirements, the
McCoys’ live pleadings sufficiently allege specific facts
supporting gross negligence and invoke the objective and
subjective standards as set forth in section 41.001(11). [7]
See Tex. Civ. Prac. & Rem.Code Ann. Therefore, we
conclude the McCoys have pleaded facts sufficient for
purposes of showing they are entitled to discovery of
net-worth information from
Page 44
the relators. See In re Garth, 214 S.W.3d at 192 (holding
plaintiff’s pleadings were sufficient to notify defendants
that she sought to hold them liable for punitive damages
through conspiracy theory); In re W. Star Trucks US,
Inc., 112 S.W.3d at 763-64 (holding allegations in
petition that defendant had engaged in fraudulent and
malicious conduct were sufficient to permit discovery of
net worth); Delgado, 793 S.W.2d at 333 (holding
plaintiff’s pleading alleging defendant was ” consciously
indifferent” to safety of others was sufficient to entitle
plaintiff to discovery of net worth information).[8]
C
The relators also contend the trial court’s order
directing them to provide net-worth information for the
past two years is overly broad and unduly burdensome
because it goes beyond what is necessary to demonstrate
their respective current net worths. Discovery is limited
to matters relevant to the case. Texaco, Inc. v. Sanderson,
898 S.W.2d 813, 814 (Tex.1995) (orig. proceeding) (per
curiam); see also Tex.R. Civ. P. 192 cmt. 1 (” While the
scope of discovery is quite broad, it is nevertheless
confined by the subject matter of the case and reasonable
expectations of obtaining information that will aid
resolution of the dispute.” ). A party’s requests must show
a reasonable expectation of obtaining information that
will aid in the resolution of the dispute. In re CSX Corp.,
124 S.W.3d at 152. Therefore, discovery requests must be
reasonably tailored to include only matters relevant to the
case. In re Am. Optical Corp., 988 S.W.2d 711, 713
(Tex.1998) (orig. proceeding) (per curiam). The Texas
Supreme Court has repeatedly admonished that discovery
may not be used as a fishing expedition. K Mart Corp. v.
Sanderson, 937 S.W.2d 429, 431 (Tex.1996) (orig.
proceeding) (per curiam); Dillard Dep’t Stores, Inc. v.
Hall, 909 S.W.2d 491, 492 (Tex.1995) (orig. proceeding)
(per curiam); Texaco, Inc., 898 S.W.2d at 815.
The scope of discovery is a matter of trial-court
discretion. In re CSX Corp., 124 S.W.3d at 152.
However, a trial court abuses its discretion when it
compels overly broad discovery. In re Graco Children’s
Prods., Inc., 210 S.W.3d 598, 600 (Tex.2006) (orig.
proceeding) (per curiam); Dillard Dep’t Stores, Inc., 909
S.W.2d at 492. ” A central question in determining
overbreadth is whether the request could have been more
narrowly tailored to avoid including tenuous information
and still obtain the necessary information.” In re CSX
Corp., 124 S.W.3d at 153. Overbroad requests encompass
time periods or activities beyond those at issue in the
case-in other words, matters of questionable relevance. In
re Alford Chevrolet-Geo, 997 S.W.2d 173, 180 n. 1
(Tex.1999) (orig. proceeding).
The McCoys sought five years’ worth of financial
information from the relators. The trial court narrowed
the scope of discovery to two years’ worth. But we do not
believe the trial court sufficiently narrowed the scope of
production because only the relators’ current [9] net
Page 45
worth is relevant. See In re House of Yahweh, 266
S.W.3d at 673 (holding trial court erred in failing to limit
discovery to relators’ current balance sheets because
earlier balance sheets would not be relevant to relators’
current net worth).[10] Therefore, we conclude the trial
court abused its discretion by ordering the relators to
produce net-worth information beyond the relators’
current net worth. See In re Allstate County Mut. Ins. Co.,
227 S.W.3d 667, 669 (Tex.2007) (orig. proceeding) (per
curiam) (holding trial court’s order was abuse of
discretion because it did not limit discovery requests
which were overbroad as to time and scope). Moreover,
the relators do not have an adequate remedy by appeal
from the production of their net worth from previous
years. See In re Weekley Homes, L.P., 295 S.W.3d 309,
322-23 (Tex.2009) (orig. proceeding) (” Intrusive
discovery measures … require at a minimum, that the
benefits of the discovery measure outweigh the burden
imposed upon the discovered party.” ); In re CSX Corp.,
124 S.W.3d at 153 (holding relator lacked adequate
remedy by appeal where discovery order compelled
production of ” patently irrelevant” documents); Tilton v.
Marshall, 925 S.W.2d 672, 683 (Tex.1996) (orig.
proceeding) (op. on reh’g) (” ‘ [w]here … discovery order
imposes a burden on the producing party far out of
proportion to any benefit that may obtain to the
requesting party,’ ” mandamus relief may be justified)
(quoting Walker, 827 S.W.2d at 843).
D
The relators also complain about the trial court’s
order requiring Dr. Jacobs and Dr. Gunn to answer
questions about their net worth at their depositions.
Allowing such inquiries without any limitations as to
time or subject matter, the relators argue, is overly broad
and burdensome. See In re Alford Chevrolet-Geo, 997
S.W.2d at 180 n. 1 (explaining overbroad requests
encompass time periods or activities beyond those at
issue in case, i.e., matters of questionable relevance).
Further, the relators contend that answering deposition
questions about information they already have provided
in written discovery responses would be unnecessarily
cumulative. We address this issue by observing that we
are concerned not only with determining the appropriate
scope of discovery of the relators’ net worth under
Lunsford, but also with employing the most efficient and
least intrusive methods by which to permit the McCoys to
discover that information. See Tex.R. Civ. P. 192 cmt. 1
(explaining scope of discovery is confined by subject
matter of case and reasonable expectations of obtaining
information that will aid resolution of dispute);
Page 46
In re Weekley Homes, L.P., 295 S.W.3d at 321 (” [T]rial
courts should be mindful of protecting sensitive
information and utilize the least intrusive means
necessary to facilitate discovery.” ).
Allowing litigants to delve without limitation into
personal finances not only raises serious privacy
concerns, but also provides an opportunity for ” needless
abuse and harassment.” Wal-Mart Stores, Inc. v.
Alexander, 868 S.W.2d 322, 331-32 (Tex.1993)
(Gonzalez, J., concurring). In light of these concerns, we
believe it is appropriate to limit the scope of
oral-deposition inquiry into net worth. See Axelson, Inc.
v. McIlhany, 798 S.W.2d 550, 553 (Tex.1990) (orig.
proceeding) (explaining scope of discovery is limited by
legitimate interests of a party to avoid overly broad
requests, harassment, or disclosure of privileged
information). Accordingly, with respect to net-worth
discovery during the oral depositions of Dr. Jacobs and
Dr. Gunn, the McCoys are limited to asking each
physician to state (1) his or her current net worth, i.e., the
amount of current total assets less current total liabilities
determined in accordance with generally accepted
accounting principles (” GAAP” ),[11] and (2) the facts
and methods used to calculate what each physician
alleges is his or her current net worth. Any questioning
beyond these two narrow inquiries shall be allowed only
upon leave of the trial court after a showing that the
McCoys have reason to believe that the information
provided was incomplete or inaccurate. See In re
Prudential, 148 S.W.3d at 136 (explaining mandamus is
appropriate in exceptional cases ” to give needed and
helpful direction to the law that would otherwise prove
elusive in appeals from final judgments” ). And to the
extent more specific limitations are appropriate, such as
on the amount of on-the-record deposition time that may
be devoted to questioning about net worth, we leave that
to the sound discretion of the trial court.
E
Finally, the relators assert the trial court abused its
discretion by ordering them to create and produce
affidavits in a format of what would have been provided
to a lender as to their respective net worth. The trial court
ordered the relators to produce ” the actual financial
statements they have provided to a lender within the past
two-years.” Alternatively, the trial court directed the
relators, if they had not submitted any such financial
statements to a lender within the preceding two years, to
produce (1) an affidavit swearing that no such financial
statement has been submitted, and (2) an affidavit in the
form of what would have been provided to a lender as to
net worth. It is well-settled that a party cannot be forced
to create documents that do not exist for the sole
Page 47
purpose of complying with a request for production.[12]
Therefore, the relators are not required to create affidavits
in a format of what would have been provided to a lender
to comply with the McCoys’ request for production.[13]
Instead, the relators are required to produce in response to
the McCoys’ requests for production only documents that
already exist. In keeping with our above-holding, any
such information is limited to the relators’ respective
current net worth, as well as whatever other limitations
the trial court has set forth or may yet impose.
III
We deny the relators’ petition with regard to their
assertions that the McCoys are precluded from seeking
discovery of information of any net worth because Texas
law requires a claimant first to make a prima facie
showing of entitlement to punitive damages and the
McCoys have not pleaded sufficient allegations of
conduct entitling them to punitive damages.
We conditionally grant the relators’ petition with
regard to the trial court’s order of January 23, 2009,
requiring the relators to produce net-worth information
for the past two years. The relators are required to
produce only current net-worth information. Further, the
relators are not required to create affidavits in a format of
what would have been provided to a lender, but are
required only to produce documents in response to the
McCoys’ request for production that already exist. The
trial court is directed to modify that portion of its order
accordingly.
We further conditionally grant the relators’ petition
with regard to the trial court’s order of January 30, 2009,
permitting the questioning of Dr. Jacobs and Dr. Gunn
about their respective current net worth. Specifically, the
McCoys are limited to asking each physician to (1) state
his or her current net worth, i.e., the amount of current
total assets less current total liabilities, and (2) the facts
and methods used to calculate what each physician
alleges is his or her current net worth. Moreover, any
questioning beyond these two narrow inquiries shall be
allowed only upon leave of the trial court after a showing
that the McCoys have reason to believe that the
information provided was incomplete or inaccurate. The
trial court is directed to modify that portion of its order
accordingly, and is free to otherwise impose whatever
other limitations it determines, in its discretion, to be
appropriate.
We lift our stays issued on February 4, 2009, and
March 6, 2009. The writ will issue only if the trial court
fails to act in accordance with this opinion.
SULLIVAN, J., concurring.
KENT C. SULLIVAN, Justice, concurring.
The Court today reaches a result consistent with the
current state of Texas law. I write separately only to note
that the current Texas rule on net-worth discovery is now
decades-old and, in light of the evolution
Page 48
of Texas law, needs to be revisited. The instant case
illustrates how it contributes to unnecessary ” satellite
litigation” unrelated to the merits of the case and often
produces expense and burden far exceeding any potential
benefit.
A brief review of the history of this dispute is
illustrative. It is noteworthy that the medical incident
made the basis of this lawsuit occurred in September
2004. Five years later this legal dispute remains
unresolved-even at the trial-court level.
The specific controversy over net-worth discovery
is fast approaching its second anniversary and has
continued largely unabated. It began with an exhaustive
request for financial records covering a multi-year period.
Those discovery requests inevitably produced-over many
months-a flood of objections, hours of court hearings,
multiple court orders, and the current mandamus
proceeding with multiple appellate briefs from each side.
The cost to the parties has no doubt been significant. The
level of chaos in this case-a tort case with themes
common to many such disputes-has given me pause, with
a belief that some assessment is in order as to the efficacy
of this process as well as the relative value of the
discovery in question.
A. The Role of Net-Worth Discovery in Resolving
Material Case Issues
Under the Rules, a trial judge should limit discovery
for which the burden or expense outweighs the likely
benefit. Tex.R. Civ. P. 192.4(b). In weighing these
factors, courts are to consider, among other things, the
importance of the proposed discovery in resolving the
material issues of the lawsuit. See id.
As a general rule, evidence of a party’s wealth is
irrelevant and prejudicial. See Carter v. Exxon Corp., 842
S.W.2d 393, 399 (Tex.App.-Eastland 1992, writ denied).
Consequently, it is almost always inadmissible at trial.
See Cooke v. Dykstra, 800 S.W.2d 556, 562
(Tex.App.-Houston [14th Dist.] 1990, no writ); Carter,
842 S.W.2d at 399.
In Lunsford v. Morris, however, the Texas Supreme
Court carved out a narrow exception to the general rule of
inadmissibility, allowing parties to discover and
introduce evidence of a defendant’s net worth in cases in
which punitive or exemplary damages could be awarded.
746 S.W.2d 471, 473 (Tex.1988) (orig. proceeding),
disapproved of on other grounds by Walker v. Packer,
827 S.W.2d 833, 842 (Tex.1992) (orig. proceeding).
However, Lunsford properly should be considered in its
historical context.
Specifically, in 1981, the Texas Supreme Court
decided to re-visit the standard of review used in
reviewing jury awards of punitive damages. See Burk
Royalty Co. v. Walls, 616 S.W.2d 911, 920 (Tex.1981).
Under the prior standard, a defendant could successfully
challenge a punitive-damages award on appeal simply by
pointing to any evidence suggesting he exercised some
care. See id. at 921. However, the Court chose to depart
from that standard because it was seen as creating a
virtually impossible hurdle to the recovery of punitive
damages ” since anything may amount to some care.” Id.
In its place, the Court substituted a no-evidence standard
of review that effectively ” gave ‘ the jury greater
discretion to award punitive damages.’ ” [1]
In addition, the Burk Court authorized plaintiffs to
prove ” gross negligence,” the
Page 49
standard for imposing punitive damages, merely by
constructive notice of the defendant’s subjective state of
mind. See Burk, 616 S.W.2d at 922. Four years later, the
Court re-affirmed that holding and also expanded the
definition of ” gross negligence” to give plaintiffs
additional methods to prove a defendant’s culpability for
exemplary damages:
[T]he test for gross negligence is both an objective and a
subjective test. A plaintiff may prove a defendant’s gross
negligence by proving that the defendant had actual
subjective knowledge that his conduct created an extreme
degree of risk. In addition, a plaintiff may objectively
prove a defendant’s gross negligence by proving that
under the surrounding circumstances a reasonable person
would have realized that his conduct created an extreme
degree of risk to the safety of others.
Williams v. Steves Indus., Inc., 699 S.W.2d 570, 573
(Tex.1985) (emphasis added), superseded by statute as
recognized by Transp. Ins. Co. v. Moriel, 879 S.W.2d 10,
20 n. 11 (Tex.1994).
In 1987, the Texas Legislature began to scale back
the availability of punitive damages by enacting Chapter
41 of the Texas Civil Practice and Remedies Code.[2]
However, while the original version of Chapter 41
introduced basic limitations to the recovery of punitive
damages,[3] the protections it extended to defendants
pale in comparison with those found in the version
currently in effect.[4] Lunsford was decided the
following year but, apart from a brief mention in one of
the dissenting opinions, ignores any discussion of the
1987 reforms or their effect on the Court’s expansive
exemplary-damage decisions from earlier that decade.
See Lunsford, 746 S.W.2d at 476 (Gonzalez, J.,
dissenting).
In 1995, the Legislature passed more sweeping tort
reform to the substantive and procedural law governing
punitive damages. See Act of April 11, 1995, 74th Leg.,
R.S., ch. 19, § 1, 1995 Tex. Gen. Laws 108, 108-13
(amended 2003) (current version at Tex. Civ. Prac. &
Rem.Code Ann. §§ 41.001-.013 (Vernon 2008 & Supp.
2009)). Chapter 41 was significantly rewritten to provide
defendants dramatic protection from punitive-damage
awards, including:
• Juries could no longer award exemplary damages
intended solely to serve ” as an example to others,” but
were instead limited to assessing damages with the
purpose of punishing the defendant.
• The Legislature dramatically expanded Chapter
41’s coverage to apply to all but a very few types of tort
actions.
• A plaintiff’s burden of proof for punitive damages
was elevated to require proof of all elements by clear and
convincing evidence.
Page 50
• With few limitations, a defendant could no longer
be exposed to punitive damages because of another
person’s criminal act.
• The Legislature lowered the existing cap on
punitive damages.
• Upon a defendant’s motion, the trial court had to
bifurcate the jury’s determination of the amount of
punitive damages, and evidence of a defendant’s net
worth could not be admitted during the liability phase of
the trial.
Id. These substantive and procedural amendments
changed the legal landscape on two levels. First, they
further limited the amount of punitive damages that could
be assessed. See id. § 1 secs. 41.007, 41.008. Second, and
more significantly, these revisions dramatically lessened
the chances of any punitive-damage recovery by a
claimant. See id. § 1 secs. 41.001(5), 41.002, 41.003(b),
41.005.
In 2003, the Legislature further eroded a plaintiff’s
ability to recover punitive damages as a part of
comprehensive tort-reform legislation.[5] Now, unlike
the general rule permitting a civil verdict upon the vote of
only ten jurors, an award of punitive damages requires a
unanimous verdict as to liability for, and the amount of,
such damages. See Tex. Civ. Prac. & Rem.Code Ann. §
41.003(d) (Vernon 2008 & Supp. 2009); Tex.R. Civ. P.
292; Deatley v. Rodriguez, 246 S.W.3d 848, 850
(Tex.App.-Dallas 2008, no pet.).
In their brief, the McCoys acknowledge the
dramatic shift in the law on punitive damages since
Lunsford, as the Legislature has repeatedly acted ” to
tightly restrict the ability of litigants to seek and recover
exemplary damages.” [6] Thus, in the current legal
climate, far fewer cases are likely to present fact issues
for trial as to punitive-damage liability than when
Lunsford was decided more than two decades ago.[7]
Accordingly, because net-worth discovery may serve
little practical purpose in many cases, [8] trial courts
performing
Page 51
a benefit-to-burden analysis should consider appropriate
management of the scope of such discovery
corresponding to its utility in resolving these important
issues. See Tex.R. Civ. P. 192.4(b).
B. Burden and Expense of Net-Worth Discovery
The benefits of net-worth discovery are likely
limited in most cases, but the direct and indirect costs
may not be. Of course, a case against a publicly traded
corporation may present little problem in this respect, as
its net worth should be discernible simply from the
contents of a widely available annual report. Under that
scenario, the burden and expense of the proposed
discovery would be minimal. See id.
A private individual, however, presents a far
different profile with, at minimum, potentially serious
issues as to privacy rights and availability of responsive
information. Net-worth discovery as to an individual will
almost inevitably require-and deserve-much more
management and oversight by the trial court.[9] See In re
Weekley Homes, L.P., 295 S.W.3d 309, 316 (Tex.2009)
(orig. proceeding) (” To the extent possible, courts should
be mindful of protecting sensitive information and should
choose the least intrusive means of retrieval.” ).
In this case, the McCoys sought audited financial
statements that, while invasive, may at least represent one
of the most accurate and efficient ways for indicating an
individual’s net worth, if available.[10] However, they
also sought countless other categories of documents that
have been repeatedly held undiscoverable, such as
income-tax returns,[11] or which possess only the most
indirect and tenuous connection to net worth. Among this
latter category of documents are the McCoys’ requests for
(1) HUD statements reflecting the sale or purchase of real
estate; (2) ” any and all contracts that you are a party to
with any health insurance company, HMO, including
Medicare and/or Medicaid, managed care entity, or
hospital” ; (3) any documents reflecting accounts
receivable, from any time period, for the provision of
medical care; (4) accounts receivable due to the
defendant’s ” participation in any clinical drug trials,
medical device trials, or other medical product trials” for
the purpose of obtaining FDA approval; and (5) all
medical bills issued for an entire calendar year,
presumably as to all of the physicians’ patients, ”
touching, concerning, or dealing with” the provision of
medical care.
This sort of invasive discovery generally raises very
serious privacy concerns, but that is not its only cost. It
also imposes additional burden and expense on the parties
and their attorneys, as well as occupying the limited
resources of the trial court and, now, this appellate court.
See Wal-Mart Stores, Inc. v. Alexander, 868 S.W.2d 322,
331-32 (Tex.1993) (Gonzalez, J., concurring)
(commenting on the privacy concerns and potential for
abuse inherent in the ” unlimited discovery … of
sensitive, private, and confidential financial information”
).
Page 52
However, this sort of discovery should not be
unexpected given the Texas Supreme Court’s lengthy
silence as to both the precise definition of ” net worth” in
this context and the proper boundaries for the discovery
and ultimate presentation of information as to a
defendant’s net worth:
This Court in Lunsford failed to define net worth and
failed to suggest a procedure for placing such evidence
before the jury. I predicted then that in the absence of
guidance from this Court, ” confusion will prevail as
practitioners and judges attempt to ascertain the
components of ‘ net worth.’ ” Lunsford, 746 S.W.2d at
475.
Conflicting appellate court decisions on the meaning of
the term ” net worth” are evidence of the confusion
surrounding this fundamental issue. This confusion
should be resolved by this Court.
Wal-Mart, 868 S.W.2d at 330 (Gonzalez, J., concurring)
(citations omitted); see also Lunsford, 746 S.W.2d at 476
(Gonzalez, J., dissenting) (calling for clear definition of
term ” net worth” and clarity on types of documents
relevant to calculate it).
Here, the majority attempts to fairly bridge some of
this gap by offering a solid definition of ” net worth” as
assets minus liabilities. See Black’s Law Dictionary 1041
(6th ed. 1990); Wal-Mart, 868 S.W.2d at 330-31
(Gonzalez, J., concurring). Yet, even this pronouncement
may still lead to disagreements about the documents that
are relevant and discoverable to calculate this figure, in
light of the relative lack of guidance on this issue.
Trial courts have the necessary management tools to
control the sequence, timing, and scope of discovery to
minimize burden, maximize efficiency, and protect
privacy rights.[12] See Tex.R. Civ. P. 166, 192. Still, we
must acknowledge that there are literally hundreds of
Texas trial-court judges-spread over 254 counties-who
may preside over cases with claims for exemplary
damages and, of necessity, disputes involving net-worth
discovery. They each have different backgrounds,
different approaches, and different dockets. Those
dynamics are likely to produce a highly unpredictable
and idiosyncratic approach to the management of these
issues across the state-and history shows us that these are
issues that regularly recur. I believe parties to litigation in
Texas are entitled to greater clarity and predictability
from our courts. Accordingly, I would urge that Lunsford
be revisited and updated.
———
Notes:
[1] The other defendants are Woman’s Hospital of Texas,
Inc., CHCA Woman’s Hospital, L.P. d/b/a Woman’s
Hospital of Texas, Houston Woman’s Hospital Partner,
L.L.C., and James A. Collins, M.D.
[2] We note other jurisdictions require a prima facie
showing of entitlement to recover punitive damages prior
to conducting discovery on a defendant’s financial status.
See, e.g., Iowa Code Ann. § 668A.1 (1998); Larriva v.
Montiel, 143 Ariz. 23, 691 P.2d 735, 738 (1984); Curtis
v. Partain, 272 Ark. 400, 614 S.W.2d 671, 674 (1981),
overruled on other grounds, Lupo v. Lineberger, 313
Ark. 315, 855 S.W.2d 293 (1993); Herman v. Sunshine
Chem. Specialties, Inc., 133 N.J. 329, 627 A.2d 1081,
1089 (1993); Mark v. Congregation Mishkon Tefiloh, 745
A.2d 777, 780 (R.I.2000); Cramer v. Powder River Coal,
L.L.C., 204 P.3d 974, 980 (Wyo.2009). However, most
federal courts do not require a plaintiff to make a prima
facie showing of entitlement to recover punitive damages
before seeking pretrial discovery of the defendant’s
financial information. See, e.g., United States v. Matusoff
Rental Co., 204 F.R.D. 396, 399 (S.D.Ohio 2001) (stating
overwhelming majority of federal courts have concluded
plaintiffs seeking punitive damages are entitled to
discover information on defendant’s financial condition
without making prima facie showing of entitlement to
recovery of such damages); CEH, Inc. v. FV ” Seafarer” ,
153 F.R.D. 491, 498 (D.R.I.1994) (same); Mid Continent
Cabinetry, Inc. v. George Koch Sons, Inc., 130 F.R.D.
149, 151 (D.Kan.1990) (same); Doe v. Young, 2009 WL
440478, at *2 (E.D.Mo. Feb. 18, 2009) (same);
Westbrook v. Charlie Sciara & Son Produce Co., 2008
WL 839745, *2 (W.D.Tenn. Mar. 27, 2008) (same); S.
Cal. Hous. Rights Ctr. v. Krug, 2006 WL 4122148, at *4
(C.D.Cal. Sept. 5, 2006) (same).
[3] Other jurisdictions require the plaintiff to establish a
factual or evidentiary basis to be entitled to discovery on
a defendant’s net worth. See, e.g., Bryan v. Thos. Best &
Sons, Inc., 453 A.2d 107, 108 (Del.Super.Ct.1982);
Globe Newspaper Co. v. King, 658 So.2d 518, 519
(Fla.1995) (citing Fla. Stat. § 768.72); Smith v. Morris,
Manning & Martin, L.L.P., 293 Ga.App. 153, 666 S.E.2d
683, 697 (2008) (quoting Holman v. Burgess, 199
Ga.App. 61, 404 S.E.2d 144, 147 (1991)); Breault v.
Friedli, 610 S.W.2d 134, 139-40 (Tenn.Ct.App.1980). At
least two states go so far as to require the jury to return a
verdict awarding punitive damages prior to the plaintiff’s
conducting discovery on a defendant’s financial status.
See, e.g., Ex parte Hsu, 707 So.2d 223, 225-26
(Ala.1997) (citing Ala.Code § 6-11-23(b)); Prior v.
Brown Transp. Corp., 103 A.D.2d 1042, 478 N.Y.S.2d
435, 436 (N.Y.App.Div.1984) (quoting Rupert v. Sellers,
48 A.D.2d 265, 368 N.Y.S.2d 904, 912
(N.Y.App.Div.1975)).
[4] After Lunsford, the supreme court established a
bifurcated procedure for conducting trials involving
claims for punitive damages because of the ” very real
potential” that evidence of a defendant’s wealth will
prejudice the jury’s determination of other disputed issues
in tort cases. Transp. Ins. Co. v. Moriel, 879 S.W.2d 10,
30 (Tex.1994); see also Tex. Civ. Prac. & Rem.Code
Ann. § 41.009 (Vernon 2008) (providing for bifurcated
trial on claim for punitive damages).
[5] DIC ” is a rare, life-threatening condition that
prevents a person’s blood from clotting normally. It may
cause excessive clotting (thrombosis) or bleeding
(hemorrhage) throughout the body and lead to shock,
organ failure, and death.” WebMD, ” Disseminated
Intravascular Coagulation (DIC),” http:// www. webmd.
com/ a- to- z- guides/ disseminated- intravascularcoagulation-
dictopic- overview (last visited July 7,
2009). To treat DIC, ” [t]ransfusions of blood cells and
other blood products may be necessary to replace blood
that has been lost through bleeding and to replace clotting
factors used up by the body.” Id.
[6] ” Clotting factor” refers to ” any of several plasma
components (as fibrinogen, prothrombin, and
thromboplastin) that are involved in the clotting of
blood.” Merriam-Webster OnLine, ” clotting factor,”
http:// merriam-webster. com/medical/ clotting factors
(last visited July 8, 2009).
[7] Some states do not permit a plaintiff to claim punitive
damages in an original pleading, but allow for the
amendment of the plaintiff’s pleadings to claim punitive
damages, with the trial court’s permission, after satisfying
a requisite evidentiary showing. See, e.g., Idaho Code
Ann. § 6-160.4(2) (2008); Minn.Stat. Ann. § 549.191
(2000); Or.Rev.Stat. Ann. § 31.725(2) (2007).
[8] The relators argue, for the first time in their reply
brief, that we should consider, not only the pleadings, but
also the requirement that a plaintiff must first present
expert opinion of the applicable standard of care, the
alleged breach of that standard, and the causal link to
proceed on a health care liability claim when determining
whether net worth information is relevant. We do not
consider this contention because it was not raised in the
trial court or in the relators’ petition for writ of
mandamus. See In re TCW Global Project Fund, II, Ltd.,
274 S.W.3d 166, 171 (Tex.App.-Houston [14th Dist.]
2008, orig. proceeding).
[9] By ” current,” we mean as of the time the discovery is
responded to, though net-worth information should be
updated through supplementation-as should the
information in any discovery response-if it changes
materially between the service of the discovery response
and the time of trial. See Tex.R. Civ. P. 193.5(a).
[10] Other courts have similarly held only current
financial information is relevant to a punitive damages
claim. See, e.g., Hightower v. Heritage Acad. of Tulsa,
Inc., 2008 WL 2937227, at *1 (N.D.Okla. July 29, 2008)
(limiting discovery of financial information to defendant’s
balance sheet for 2008 and net worth for 2008); McCloud
v. Board of County Comm’rs, 2008 WL 1743444, at *4
(D.Kan. Apr. 11, 2008) (limiting production of
defendant’s financial information to most recent annual
reports and current financial statements); Platcher v.
Health Prof’ls, Ltd., 2007 WL 2772855, at *3 (C.D.Ill.
Sept. 18, 2007) (” Only Defendants’ current assets and
liabilities are relevant to the punitive damages claim
against them, …” ); Fieldturf Int’l, Inc. v. Triexe Mgmt.
Group, Inc., 2004 WL 866494, at *3 (N.D.Ill. Apr. 16,
2004) (” Plaintiffs’ request for non-current financial
information is irrelevant to punitive damages
determination.” ).
[11] Although section 41.011 provides that the fact finder
shall consider evidence, if any, of the defendant’s ” net
worth,” the statute does not define that term. Tex. Civ.
Prac. & Rem.Code Ann. 41.011(a)(6); see also Lunsford,
746 S.W.2d at 475 (Gonzalez, J., dissenting) (criticizing
court’s failure to define ” net worth” ). The parties have
not cited, and we have not found, any cases defining the
term ” net worth” in connection with the recovery of
punitive damages. However, ” net worth,” as used to
ascertain the amount of security required to suspend a
judgment pending appeal, has been defined as the
difference between total assets and liabilities determined
in accordance with GAAP. See Ramco Oil & Gas, Ltd. v.
Anglo Dutch (Tenge) L.L.C., 171 S.W.3d 905, 914
(Tex.App.-Houston [14th Dist.] 2005, no pet.) (defining ”
net worth” as difference between total assets and
liabilities determined in accordance with GAAP after
thorough discussion of numerous authorities); see also
Black’s Law Dictionary 1041 (6th ed. 1990) (defining net
worth as ” the amount by which assets exceed liabilities”
).
[12] See In re Guzman, 19 S.W.3d 522, 525
(Tex.App.-Corpus Christi 2000, orig. proceeding); Smith
v. O’Neal, 850 S.W.2d 797, 799 (Tex.App.-Houston [14th
Dist.] 1993, no writ); see also In re Colonial Pipeline
Co., 968 S.W.2d 938, 942 (Tex.1998) (quoting McKinney
v. Nat’l Union Fire Ins. Co., 772 S.W.2d 72, 73 n. 2
(Tex.1989) (op. on reh’g)) (” ‘ [T]his rule cannot be used
to force a party to make lists or reduce information to
tangible form.’ ” ).
[13] The relators do not complain about the order in so
far as it requires them to produce an affidavit swearing
that no such documents had been submitted to a lender in
the preceding two years.
[1] Patricia F. Miller, Comment, 2003 Texas House Bill
4: Unanimous Exemplary Damage Awards and Texas
Civil Jury Instructions, 37 St. Mary’s L.J. 515, 529
(2006) (citations omitted); see Burk, 616 S.W.2d at 922.
[2] See Act of June 3, 1987, 70th Leg., 1st C.S., ch. 2, §
2.12, 1987 Tex. Gen. Laws 37, 44 (amended 1995 &
2003) (current version at Tex. Civ. Prac. & Rem.Code
Ann. §§ 41.001-.013 (Vernon 2008 & Supp. 2009)).
[3] For example, the tort-reform legislation included a
basic cap on exemplary damages. See Act of June 3,
1987, 70th Leg., 1st C.S., ch. 2, § 2.12 sec. 41.007, 1987
Tex. Gen. Laws 37, 46 (amended 1995 & 2003). In
addition, the legislature effectively abrogated the purely
objective method of proving gross negligence. See
Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 20 n. 11
(Tex.1994). However, because this narrower definition of
” gross negligence” applied only to products-liability
cases and certain negligence actions, courts continued to
apply Burk Royalty and Steves Industries to all other
gross-negligence suits. See J. Stephen Barrick, Comment,
Moriel and the Exemplary Damages Act: Texas
Tag-Team Overhauls Punitive Damages, 32 Hous. L.Rev.
1059, 1066 (1995).
[4] See infra pp. 49-50.
[5] See Act of June 2, 2003, 78th Leg., R.S., ch. 204, §§
13.01-.08, 2003 Tex. Gen. Laws 847, 886-89 (current
version at Tex. Civ. Prac. & Rem.Code Ann. §§
41.001-.013 (Vernon 2008 & Supp. 2009)).
[6] See Miller, supra note 1, at 520 (” [T]he unanimity
requirements make it more difficult for a plaintiff to
receive a punitive damage award from a Texas jury.” ).
[7] In fact, some might argue Chapter 41, as currently
constituted, imposes punitive-damage liability only for
intentional torts. See Tex. Civ. Prac. & Rem.Code Ann.
§§ 41.001(7), (11), 41.003(a) (authorizing exemplary
damages only for fraud, malice, and gross negligence,
where malice requires proof of ” a specific intent … to
cause substantial injury or harm” and gross negligence
similarly mandates a showing of the defendant’s (1)
actual, subjective awareness of an extreme degree of risk
and (2) consciously indifferent decision to proceed
nonetheless).
[8] Indeed, discovery into a defendant’s net worth may
consume a disproportionate amount of attention inasmuch
as net worth is only one among several factors a jury
should consider, and not even the most important factor
in reviewing an amount of punitive damages. See Tex.
Civ. Prac. & Rem.Code Ann. § 41.011(a) (Vernon 2008);
Owens-Corning Fiberglas Corp. v. Malone, 972 S.W.2d
35, 45-46 (Tex.1998) (” [T]he degree of reprehensibility
of the defendant’s conduct is ‘ [p]erhaps the most
important indicium’ of the reasonableness of a punitive
damage award.” ) (quoting BMW of N. Am., Inc. v. Gore,
517 U.S. 559, 575, 116 S.Ct. 1589, 134 L.Ed.2d 809
(1996)). In fact, until Lunsford, a defendant’s net worth
was not even listed as a factor for the jury to consider in
awarding punitive damages. See Lunsford, 746 S.W.2d at
472-73; Alamo Nat’l Bank v. Kraus, 616 S.W.2d 908, 910
(Tex.1981). Even so, a post- Lunsford jury may still
decide on the amount of punitive damages without
considering evidence of the defendant’s net worth. See
Durban v. Guajardo, 79 S.W.3d 198, 210-11
(Tex.App.-Dallas 2002, no pet.).
[9] Closed corporations and closely-held corporations
may present similar, albeit somewhat less serious, issues.
[10] See Sears, Roebuck & Co. v. Ramirez, 824 S.W.2d
558, 559 (Tex.1992) (orig. proceeding). Of course, the
average private individual is highly unlikely to have
audited financial statements readily available.
[11] See id.; see also Wal-Mart Stores, Inc. v. Alexander,
868 S.W.2d 322, 331 (Tex.1993) (Gonzalez, J.,
concurring) (surveying numerous cases precluding
discovery into federal income-tax returns).
[12] For example, in appropriate cases, some trial courts
use a docket-control order to schedule and hear
summary-judgment motions on predicate
exemplary-damage issues in advance of allowing pre-trial
discovery on net worth. This approach could limit
discovery disputes and the potential cost of compliance to
only what is necessarily justified by the facts and claims
of the case. Similarly, trial courts may wish in certain
cases to allow only the threshold discovery of net-worth
amounts by way of limited disclosure at one stage of
pre-trial, and delay discovery as to underlying facts or
methods of calculation of those amounts-potentially
much more invasive and complicated-until a later point
when necessary.

Jul 11th, 2015 Collections and Foreign Judgments, Contracts and Commercial Litigation, Employment Law Defense, Insurance Defense Litigation, Nonsubscriber Law

Net Worth and Discoverability in Texas Exemplary Damages Cases–Fort Worth, Texas Civil Litigation Attorneys

The Texas Supreme Court years ago held that net worth is relevant to exemplary damages and therefore discoverable. Lunsford v. Morris, 746 S.W.2d 471, 471 (Tex. 1988) [See below]

Several courts of appeal in Texas have adopted what can be consider a formulaic definition of net worth. These courts have held that essentially net worth is calculated as the difference between total assets and total liabilities as determined by generally accepted accounting principles (GAAP). Newsome v. N. Tex. Neuro-Science Ctr., P.A., No. 08-09-00025-CV, 2009 Tex. App. LEXIS 8628, at *9 (Tex. App. El Paso Nov. 9, 2009, no pet.); In re Jacobs, 300 S.W.3d 35, 46 n.11 (Tex. App. Houston [14th Dist.] 2009, orig. proceeding); Enviropower, L.L.C. v. Bear, Stearns & Co., 265S.W.3d 1, 5 (Tex. App. Houston [1st Dist.] 2008, pet. denied) (en banc); G.M. Houser, Inc. v. Rodgers, 204 S.W.3d 836, 840 (Tex. App. Dallas 2006,
no pet.).

Texas trial courts can abuse their discretion if they fail to determination net worth, when required by the pleadings and evidence. In re Smith, 192 S.W.3d 564, 568 (Tex. 2006). The Texas statute says that there are six factors a jury should consider in determining the amount of an exemplary damage award. TEX. CIV. PRAC. & REM. CODE ANN. § 41.011(a)(1-6) (Vernon 2008):

Sec. 41.011. EVIDENCE RELATING TO AMOUNT OF EXEMPLARY DAMAGES. (a) In determining the amount of exemplary damages, the trier of fact shall consider evidence, if any, relating to:

(1) the nature of the wrong;

(2) the character of the conduct involved;

(3) the degree of culpability of the wrongdoer;

(4) the situation and sensibilities of the parties concerned;

(5) the extent to which such conduct offends a public sense of justice and propriety; and

(6) the net worth of the defendant.

(b) Evidence that is relevant only to the amount of exemplary damages that may be awarded is not admissible during the first phase of a bifurcated trial.

Added by Acts 1995, 74th Leg., ch. 19, Sec. 1, eff. Sept. 1, 1995.

LUNSFORD v. MORRIS

746 S.W.2d 471 (1988)

Garry LUNSFORD and Robert Dail, Relators, v. Hon. Joseph B. MORRIS, Judge, 101st District Court, Respondent.

Supreme Court of Texas.

Rehearing Denied March 30, 1988.

KILGARLIN, Justice.

At issue in this mandamus proceeding is whether a defendant’s net worth is subject to pre-trial discovery. We hold that such information is relevant to the issue of punitive or, as they are sometimes called, exemplary damages and therefore discoverable under Tex.R.Civ.P. 166b(2). Consequently, we conditionally grant relators’ petition for writ of mandamus.

In the underlying case, relators Lunsford and Dail sued their former employer and others alleging conspiracy and malicious defamation. Their suit sought both actual and punitive damages. In connection with the latter claim, Lunsford and Dail requested production of financial statements and other documents bearing on the defendants’ net worth. The trial court denied the requested discovery,¹ and we granted leave to file a petition for writ of mandamus after denial by the court of appeals.

We first consider whether evidence of net worth is discoverable. In Texas, a party “may obtain discovery regarding any matter which is relevant to the subject matter” of a pending action. Tex.R.Civ.P. 166b(2)(a). Further, the same rule provides “it is not ground for objection that the information sought will be inadmissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence.”

Since the earliest Texas decisions, punitive damages have been allowed, among other things, to punish a wrongdoer. “[P]unitive damages are justified by [a] blending of the interests of society with those of the aggrieved individual, thus giving damages not only to recompense the sufferer, but to punish the offender.” Graham v. Roder, 5 Tex. 141, 149 (1849). In addition to punishment, punitive damages are allowed to deter the same or similar

[746 S.W.2d 472]

future conduct. Cole v. Tucker, 6 Tex. 266, 268 (1851). Our recent decisions have continued to recognize punishment and deterrence as co-purposes of punitive damages awards. See, e.g., Hofer v. Lavender, 679 S.W.2d 470, 474-75 (Tex.1984); Pace v. State, 650 S.W.2d 64, 65 (Tex.1983).At least forty-three states now allow evidence of net worth to be discovered and admitted for the limited purpose of assessing punitive damages.² Substantial federal court authority also supports the proposition that net worth is admissible on punitive damages.³ The United States Supreme Court recognizes and adheres to the majority view. City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 270, 101 S.Ct. 2748, 2761, 69 L.Ed.2d 616 (1981). Also, the Restatement view is in accord: “The wealth of the defendant is also relevant…; the degree of punishment or deterrence resulting from a judgment is to some extent in proportion to the means of the guilty person.” Restatement (Second) of Torts § 908 (comment e) (1977). See also, Prosser & Keeton, Prosser and Keeton on Torts § 2 at 15 (5th ed. 1984).

Texas has allowed neither discovery nor admission of evidence concerning a defendant’s net worth. One hundred years ago, this court determined that the injury inflicted, rather than the ability of a defendant to pay, was the more important consideration. Young v. Kuhn, 71 Tex. 645, 652, 9 S.W. 860, 862 (1888). This view has persisted to the present day despite overwhelming authority to the contrary. See Murphy v. Waldrip, 692 S.W.2d 584, 588 (Tex.App.— Fort Worth 1985, no writ). A defendant’s “ability to pay” bears directly on the question of adequate punishment and deterrence. That which could be an enormous penalty to one may be but a mere annoyance to another. For example, one hundred dollars as a punitive award against a

[746 S.W.2d 473]

single mother of three small children may be a greater deterrent than one hundred thousand dollars awarded against a major corporation whose directors are shielded from the stark reality of harm done by the paneled walls and plush carpet of the corporate boardroom. We hold that in cases in which punitive or exemplary damages may be awarded, parties may discover and offer evidence of a defendant’s net worth.Although the issue in this case is one of discovery of net worth, cases involving admissibility of net worth into evidence are instructive. We therefore review briefly the positions taken in this and in other jurisdictions on discoverability and admissibility of net worth evidence. Just recently this court, in Birchfield v. Texarkana Memorial Hospital d/b/a Wadley Hospital, 747 S.W.2d 361 (1987), held admissible evidence of the financial condition of the hospital to demonstrate the hospital’s ability to provide proper facilities. While it is true that this holding went to a gross negligence inquiry, it nevertheless demonstrates that we have previously permitted admission of evidence of the financial condition of a defendant.

Some states allowing discovery of net worth require a prima facie showing of entitlement to punitive damages before information about a defendant’s net worth may be sought. See, e.g., Curtis v. Partain, 272 Ark. 400, 614 S.W.2d 671 (1981). Other courts would make a plaintiff wait until trial, after the jury has heard evidence warranting punitive damages, before evidence of net worth is introduced. Ruiz v. Southern Pacific Transportation Co., 97 N.M. 194, 638 P.2d 406, 414 (N.M.Ct. App.1981). One state subjects a plaintiff to a show-cause hearing in which a prima facie right to punitive damages must be proved. Leidholt v. District Court, 619 P.2d 768, 771 (Colo.1980). In Wyoming, a plaintiff must overcome two hurdles. First, the plaintiff must make a prima facie showing of entitlement to punitive damages before the trial court permits discovery of net worth. Then, a trial involving punitive damages is bifurcated: a jury must again find a plaintiff is entitled to punitive damages; and then the jury may consider evidence of net worth to determine damages. Campen v. Stone, 635 P.2d 1121, 1132 (Wyo.1981); see also Annot., 32 A.L.R.4th 432 (1984).

Our rules of civil procedure and evidence do not require similar practices before net worth may be discovered. Absent a privilege or specifically enumerated exemption, our rules permit discovery of any “relevant” matter; thus, there is no evidentiary threshold a litigant must cross before seeking discovery. Tex.R.Civ.P. 166b(2)(a). Neither do the rules of evidence contemplate exclusion of otherwise relevant proof unless the evidence proffered is unfairly prejudicial, privileged, incompetent, or otherwise legally inadmissible. Tex.R.Civ. Evid. 401, 403, 501-10, 601. Accord, Coy v. Superior Court, 58 Cal.2d 210, 373 P.2d 457, 23 Cal.Rptr. 393 (1962). We do not circumscribe, however, a trial judge’s authority to consider on motion whether a party’s discovery request involves unnecessary harassment or invasion of personal or property rights. See Tex.R.Civ.P. 166b(5) and compare Tex.R.Civ.P. 13.

Young v. Kuhn, 71 Tex. 645, 9 S.W. 860 (1888), predates both our rules of civil procedure and evidence and is no longer controlling. In a suit in which exemplary damages may be recovered, we hold the defendant’s net worth is “relevant” and therefore discoverable under Tex.R.Civ.P. 166b(2)(a).⁴ Because no privilege or other specific exemption has been shown, the trial court abused its discretion by refusing to permit the requested discovery. We are confident the trial judge will withdraw his order disallowing discovery of the defendants’ net worth; the writ of mandamus will issue only if he fails to do so. Relators’ request for a writ of prohibition is conditionally dismissed as moot.

CULVER, J., not sitting.

[746 S.W.2d 474]

ON MOTION FOR REHEARING

GONZALEZ, Justice, dissenting.

The court has glossed over the fact that this is a mandamus proceeding. Since the trial judge was following over 100 years of precedent, it is preposterous to conclude that he clearly abused his discretion. I would grant the motion for rehearing, and deny the writ. In the alternative, we should adopt some guidelines and/or make rule changes in order to avoid some of the practical problems that will arise as the bench and the bar struggle to implement this decision.

We have considered mandamus to be proper in some cases to compel a trial court to allow discovery. Jampole v. Touchy, 673 S.W.2d 569, 572-573 (Tex.1984); Allen v. Humphreys, 559 S.W.2d 798 (Tex.1977); Barker v. Dunham, 551 S.W.2d 41 (Tex. 1977). In addition, mandamus has been issued to correct improper allowances of discovery by a trial court. See, e.g., General Motors Corp. v. Lawrence, 651 S.W.2d 732 (Tex.1983); West v. Solito, 563 S.W.2d 240 (Tex.1978); Crane v. Tunks, 160 Tex. 182, 328 S.W.2d 434 (1959). However, mandamus is an extraordinary writ that should be used only when there has been a violation of a clear right possessed by the relator. Neville v. Brewster, 163 Tex. 155, 352 S.W.2d 449, 452 (1961); See State Bar of Texas v. Heard, 603 S.W.2d 829, 833 (Tex.1980).

Under Young v. Kuhn, 71 Tex. 645, 9 S.W. 860 (1886) and its progeny, the trial court in this case did not abuse its discretion in disallowing the discovery. Our most recent cases establish that a relator who attacks a trial court ruling as an abuse of discretion “labors under a heavy burden…. The relator must establish, under the circumstances of the case, that the facts and law permit the trial court to make but one decision.” Johnson v. Fourth Court of Appeals, 700 S.W.2d 916, 917 (Tex.1985). In our case, the court had but one choice—to follow our pronouncements that a defendant’s net worth was neither discoverable nor admissible to prove punitive damages. It would have been an abuse of discretion for the trial court to grant the discovery request under the law as it existed at that time. Therefore, the mandamus should be denied.¹

The majority opinion does not decide the question of admissibility of net worth evidence. Without guidelines and/or corresponding rule changes, we have needlessly planted the seeds of confusion that will result in years of litigation as practitioners and the bench strive to comply with this opinion.

In order for the benefits sought to be achieved by the court’s opinion to fully inure to the citizens of Texas, the procedure employed to offer evidence of net worth must allow the defendant’s conduct to be judged as much as possible in a prejudice-free atmosphere. It is clear that the ability of a defendant to pay has no relevance to the issues of liability or compensatory damages. Accordingly, there is no legitimate need for a jury to be made aware of a defendant’s net worth when determining these issues.

To preserve the right of all litigants to a fair trial, we should adopt procedural guidelines for cases where punitive damages may be awarded and pre-trial discovery and presentation of net worth evidence is permissible. The utilization of a bifurcated trial procedure would prevent net worth evidence from prejudicially impacting liability and compensatory damage findings when punitive damages are claimed. The idea of a bifurcated trial procedure to separately determine issues of liability and damages is not new. Federal

[746 S.W.2d 475]

district courts are empowered with discretionary authority to order a bifurcated trial for this purpose. Fed.R.Civ.P. 42(b); see 9 Wright & Miller, Federal Practice and Procedure §§ 2388-2390 (1971); see also Annotation, Propriety of Ordering Separate Trials as to Liability and Damages, Under Rule 42(b) of Federal Rules of Civil Procedure in Actions Involving Personal Injury, Death or Property Damage, 78 A.L.R.Fed. 890 (1986). This procedure has recently been upheld for use in Texas diversity actions. Rosales v. Honda Motor Co. Ltd., 726 F.2d 259, 260 (5th Cir.1984).The Supreme Court of Wyoming in Campen v. Stone, 635 P.2d 1121, 1131 (Wyo. 1981) recently instituted a bifurcated trial procedure to remedy a situation similar to that which has been created by the majority opinion. The “Wyoming Plan,” which requires that plaintiffs make a prima facie showing that a viable issue exists for punitive damages before pre-trial discovery is permitted, provides a good model for Texas. A bifurcated trial procedure would work as follows:

1. The plaintiff would claim in his petition a right to punitive damages and then seek pre-trial discovery of defendant’s net worth.2. The defendant would move for a protective order requiring the plaintiff to make a prima facie showing to the trial court that a viable issue exists for punitive damages. Upon such a showing, the pretrial discovery would be allowed. If plaintiff’s claim for punitive damages is groundless and brought in bad faith, Tex.R.Civ.P. 13 authorizes the trial court to impose sanctions.3. At trial, if sufficient evidence is produced establishing a prima facie case for punitive damages, the jury charge would make provision for compensatory damages and additionally ask the jury whether punitive damages should or should not be awarded. However, no provision would be made for the jury to determine the amount of punitive damages to be awarded at that point.4. If the jury finds that punitive damages should be awarded, it would then hear evidence of the defendant’s net worth and return a separate verdict setting the amount of punitive damages.See Campen v. Stone, 635 P.2d at 1132; see also Annotation, Necessity of Determination or Showing of Liability for Punitive Damages Before Discovery or Reception of Evidence of Defendant’s Wealth, 32 A.L.R. 4th 432 (1984). Under this plan, the admission of net worth evidence would constitute reversible error only during the first stage of a bifurcated trial.

I am also concerned that the court’s opinion will create uncertainty regarding a number of other issues. The most apparent area of uncertainty is the failure to define the term “net worth”. No fewer than eighteen times does the court’s opinion refer to “net worth”. However, despite the repetitious use of this term, the court has failed to inform the bench and bar what “net worth” is or how it should be calculated. Is a single balance sheet sufficient to identify “net worth” or is additional financial information necessary? Since “net wealth” was what the petitioner actually requested to be discovered in this case, is this synonymous with “net worth?” How do we measure net worth? Do we prove “net worth” by profit and loss statements, income tax returns, cash liquidity, a Fortune 500 listing, Standard & Poor’s rating, and the like? “I know it when I see it” is not much of a standard. Without objective criteria, a case by case determination will undoubtedly yield a wide disparity of results. Perhaps we should refer all of these questions to our Rules of Procedure and/or Evidence committees for recommendations. In the absence of guidance, confusion will prevail as practitioners and judges attempt to ascertain the components of “net worth”.

Aside from definitional problems, the respondent raises many questions in his motion for rehearing. For example:

[746 S.W.2d 476]

Does a defendant’s net worth include the cash surrender value or the limits of liability of an insurance policy? If the insurer is defending under a reservation of rights, would the insurance still be includable in the calculation of the assets? Likewise, would it make a difference if the defendant’s insurance policy did or did not provide coverage for exemplary damages?Assuming that a plaintiff attempts to offer net worth evidence that includes insurance coverage, the defendant should be able to keep this out pursuant to Tex.R.Civ. Evid. 411 which provides that liability insurance is inadmissible to prove negligent or otherwise wrongful conduct. Alternatively, such evidence could be kept out on the theory that the insurer’s duty to indemnify depends on a liability adjudication against the insured without respect to the insurer’s potential liability. The trial court judge would also have the discretion under Tex.R.Civ.Evid. 403 to exclude the evidence as misleading or unfairly prejudicial.

In an action against a corporate division or subsidiary should the net worth of the of the parent be considered? Would a different rule apply to a non-profit defendant?Once again, these questions involve considerations that properly should be balanced by the trial court judge pursuant to Tex.R.Civ.Evid. 403 when deciding the issue of admissibility.

Will a plaintiff be entitled to only an interrogatory answer stating what defendant’s net worth is, or will a plaintiff be entitled to all of the underlying financial data necessary to make his own calculations?During discovery a plaintiff should generally be entitled to copy, at his own expense, all of the relevant financial documents. However, this will be problematic since the components of “net worth” are unknown. Consequently, the trial court will need to determine exactly what constitutes “net worth” and then decide which documents are relevant to calculate “net worth”. As discussed previously, this situation is unsatisfactory and needs to be remedied by a clear definition of the term “net worth.”

At what point in time is a defendant’s net worth relevant? Should the jury receive evidence of net worth as of the time the conduct occurred or at the time of trial which may be several years later?Generally, assuming liability for punitive damages, evidence of defendant’s net worth at the time of the conduct, as well as subsequent gains and losses, is at least relevant and may be considered by a jury. However, since this issue also involves considerations of admissibility it would need be resolved by the trial court on a case by case basis. Tex.R.Civ.Evid. 611 provides that the trial court “shall exercise reasonable control over the mode and order of … presenting evidence as to (1) make the … presentation effective for the ascertainment of the truth….”

What safeguards exist to ensure that a relatively poor defendant in a multi-defendant case will not be unjustly punished by a jury on the basis of information of the other defendant’s ability to pay a large judgment?Recent tort reform legislation provides the answer to any possible problem in this area.

In any action in which there are two or more defendants, an award of exemplary damages must be specific as to a defendant, and each defendant is liable only for the amount of the award made against that defendant.Tex.Civ.Prac. & Rem.Code § 41.005 (Vernon Supp.1988). This recently enacted statute codified what undoubtedly was the common law. It provided that no defendant should be subject to primary or contributory liability for exemplary damages based upon conduct attributable to another tortfeasor. Similarly, the financial resources of any one defendant should not be relevant to punitive damages awarded against another defendant. See also Tex. R.Civ.Evid. 105(a) (when evidence is admissible as to one party but not admissible as to another, the court, upon request, shall restrict the evidence to its proper scope and instruct the jury accordingly).

[746 S.W.2d 477]

In summary, I would grant the motion for rehearing and deny the writ. In the alternative, I would adopt the above guidelines.PHILLIPS, Chief Justice, dissenting.

ON MOTION FOR REHEARING

I join in that portion of Justice Gonzalez’s dissent which discusses the nature of the writ of mandamus. I do not believe the trial judge clearly abused his discretion in this case. The resolution of this issue, although important to the jurisprudence of the state, should properly await another day.

In light of that conclusion, I do not join in the remainder of Justice Gonzalez’s opinion. In particular, I disagree with the apparent suggestion that this court should mandate a bifurcated trial whenever punitive damages are to be awarded. I believe this is an unnecessarily cumbersome means of protecting the defendant’s legitimate interests against prejudice and the invasion of privacy. The trial court can more efficiently accomplish these objectives by placing limits on the scope and nature of discovery, issuing protective orders, and giving such jury instructions as may be appropriate.

I agree with Justice Gonzalez’s observation that most of the questions raised by respondent are properly left to the discretion of the trial court. The trial court is in the best position to determine how to balance the right to legitimate discovery with the right to avoid harassment or prejudice. The exact parameters of this new right to discovery, including those problems raised in the remainder of Justice Gonzalez’s dissent, should be resolved in subsequent litigation by the orderly development of case authority.

FootNotes

1. The order denying discovery was signed by Judge Craig T. Enoch, then judge of the 101st District Court. Relators originally named Judge Enoch as respondent in C-4407. While C-4407 was pending before our court, Judge Joseph B. Morris (the present respondent) succeeded Judge Enoch as judge of the 101st District Court. We abated our proceedings so that Judge Morris would have an opportunity to reconsider Judge Enoch’s order denying discovery. By an order signed on September 8, 1987, Judge Morris “affirmed and adopted” Judge Enoch’s prior order.In a separate cause numbered C-5649, relators petitioned this court to prohibit Judge Enoch (later Judge Morris) from proceeding to trial pending our disposition of the mandamus requested in C-4407.

2. Clary Ins. Agcy. v. Doyle,620 P.2d 194, 205 (Alaska 1980); Grant v. Arizona Public Service Co.,133 Ariz. 434, 652 P.2d 507, 522 (1982); Berkeley Pump Co. v. Reed-Joseph Land Co.,279 Ark. 384, 653 S.W.2d 128, 137 (1983); Coy v. Superior Court,58 Cal.2d 210, 373 P.2d 457, 23 Cal.Rptr. 393 (1962); Leidholt v. District Court,619 P.2d 768, 770 (Colo.1980); Bennett v. Hyde, 6 Conn. 24 (1825); Bryan v. Thos. Best & Sons, Inc.,453 A.2d 107, 108 (Del.Super.1982); Rinaldi v. Aaron,314 So.2d 762, 763 (Fla.1975); Wilson v. McLendon,225 Ga. 119, 166 S.E.2d 345, 346 (1969); Beerman v. Toro Mfg. Corp., 1 Haw.App. 111, 615 P.2d 749, 755 (1980); Cheney v. Palos Verdes Inv. Corp.,104 Idaho 897, 665 P.2d 661, 666-67 (1983); Moore v. Jewel Tea Co.,116 Ill.App.2d 109, 135, 253 N.E.2d 636, 648 (1969), aff’d,46 Ill.2d 288, 263 N.E.2d 103 (1970); Hibschman Pontiac, Inc. v. Batchelor, 266 Ind. 310, 362 N.E.2d 845 (1977); Hall v. Montgomery Ward & Co.,252 N.W.2d 421, 424 (Iowa 1977); Ettus v. Orkin Exterminating Co., Inc.,233 Kan. 555, 665 P.2d 730, 738 (1983); Hale v. Aetna Casualty & Surety Co.,273 So.2d 860, 863 (La. App.1973); Hanover Ins. Co. v. Hayward,464 A.2d 156, 158 (Me.1983); Heinze v. Murphy, 180 Md. 423, 24 A.2d 917 (1942); Pedersen v. Jirsa,267 Minn. 48, 125 N.W.2d 38, 41 (1963); Hunter v. Williams,230 Miss. 72, 92 So.2d 367, 369 (1957); Golston v. Lincoln Cemetery, Inc.,573 S.W.2d 700, 708 (Mo.1978); Edquest v. Tripp & Dragstedt Co., 93 Mont. 446, 19 P.2d 637, 640-41 (1933); Southern Pacific Co. v. Watkins, 83 Nev. 471, 435 P.2d 498, 513 (1967); Belknap v. Railroad, 49 N.H. 358 (1870); Gierman v. Toman,77 N.J.Super. 18, 185 A.2d 241, 245 (1962); Aragon v. General Electric Credit Corp.,89 N.M. 723, 557 P.2d 572, 575 (Ct.App.1976); Rupert v. Sellers,48 A.D.2d 265, 368 N.Y.S.2d 904, 910-13 (1975); Harvel’s Inc. v. Eggleston,268 N.C. 388, 150 S.E.2d 786, 790 (1966); King v. Hanson, 13 N.D. 85, 99 N.W. 1085, 1092 (1904); Wagner v. McDaniels,9 Ohio St.3d 184, 459 N.E.2d 561, 564 (1984); Smith v. Autry, 69 Okl. 28, 169 P. 623 (1918); Pelton v. General Motors Acceptance Corp., 139 Or. 198, 7 P.2d 263, 266 (1932); Aland v. Pyle, 263 Pa. 254, 106 A. 349 (1919); Hargraves v. Ballou, 47 R.I. 186, 131 A. 643, 646 (1926); Hicks v. Herring,246 S.C. 429, 144 S.E.2d 151, 154 (1965); Smith v. Weber, 70 S.D. 232, 16 N.W.2d 537, 540 (1944); Odom v. Gray,508 S.W.2d 526 (Tenn.1974); Wilson v. Oldroyd,1 Utah.2d 362, 267 P.2d 759, 766 (1954); Parker v. Hoefer, 118 Vt. 1, 100 A.2d 434, 446-47 (1953); Weatherford v. Birchett, 158 Va. 741, 164 S.E. 535, 537 (1932); Riddle v. McGinnis, 22 W.Va. 253 (1883); Wangen v. Ford Motor Co.,97 Wis.2d 260, 294 N.W.2d 437, 447 (1980); Town of Jackson v. Shaw,569 P.2d 1246, 1255 (Wyo. 1977).

3. Ramsey v. Culpepper,738 F.2d 1092, 1099 (10th Cir.1984); (New Mexico law); Brink’s Inc. v. City of New York,717 F.2d 700, 707 (2nd Cir.1983) (New York law); Spaeth v. Union Oil Co. of California,710 F.2d 1455, 1460 (10th Cir.1983), Malandris v. Merrill Lynch,703 F.2d 1152, 1177 (10th Cir.1981) (Colorado law); Harris v. Harvey,605 F.2d 330, 340-41 (7th Cir. 1979); Fury Imports, Inc. v. Shakespeare Co.,554 F.2d 1376, 1389 (5th Cir.1977) (New York law); Herman v. Hess Oil Virgin Islands Corp.,524 F.2d 767, 772 (3rd Cir.1975); Clark v. Bunker,453 F.2d 1006, 1012 (9th Cir.1972).

4. We view as unnecessary and ill-advised any attempt on the limited record before us to address admissibility concerns raised in the motions for rehearing. This includes matters pertaining to when net worth is admissible, how it will be admitted, or what it means.

1. It doesn’t make any sense to say that the purpose of punitive damages is to deter others and to punish wrongdoers and then keep evidence of wealth from the jury. So, generally, I agree with the court that a jury should be able to consider the financial condition of the defendant in order to determine exemplary damages. Thus, the question is not if this evidence is relevant but when it is relevant. However, the more basic question here is whether the writ of mandamus is a proper way or vehicle to make this substantive change in the law. I don’t think so. If we had intended to overrule Young v. Kuhn, and its progeny when Tex.R.Civ. P. 166b was changed, we certainly would have announced our intention.

Jul 11th, 2015 Collections and Foreign Judgments, Contracts and Commercial Litigation, Employment Law Defense, Insurance Defense Litigation, Nonsubscriber Law

Texas Law on Piercing the Corporate Veil and Imposition of Liability on a Parent Corporation–Fort Worth, Texas Collections Attorneys

When a plaintiff in Texas wants to pierce the corporate veil in order to impose liability upon a parent corporation for the obligations of
a subsidiary, the primary factors that Texas courts will look to include the following:
(a) common stock ownership between parent and subsidiary;
(b) common directors and officers between parent and subsidiary;
(c) common business departments between parent and
subsidiary;
(d) consolidated financial statements and tax returns filed by
parent and subsidiary;
(e) parent’s financing of the subsidiary;
(f) parent’s incorporation of the subsidiary;
(g) undercapitalization of the subsidiary;
(h) parent’s payment of salaries and other expenses of subsidiary;
(i) whether parent is subsidiary’s sole source of business;
(j) parent’s use of subsidiary’s property as its own;
(k) combination of corporations’ daily operations;
(l) lack of corporate formalities by the subsidiary;
(m) whether directors and officers of subsidiary are acting
independently or in the best interests of the parent; and
(n) whether parent’s employee, officer or director was connected
to the subsidiary’s action that was the basis of the suit.

A leading case, below, is the Texas Supreme Court case of Castleberry v. Branscum

Castleberry v. Branscum :: 1986 :: Supreme Court of Texas Decisions :: Texas Case Law :: Texas Law :: U.S. Law :: Justia

Castleberry v. Branscum

721 S.W.2d 270 (1986)

Joe A. CASTLEBERRY, Petitioner, v. Byron BRANSCUM et al., Respondents.

No. C-4536.

Supreme Court of Texas.

July 2, 1986.

Rehearing Denied January 14, 1987.

*271 Bill Liebbe, McKool & Vassalo, Dallas, for petitioner.

Allen R. Morris, Dallas, for respondents.

SPEARS, Justice.

Joe Castleberry sued Texan Transfer, Inc. and Byron Branscum and Michael Byboth, individually, on a promissory note signed by the corporation for Castleberry’s shares in the closely held corporation. The jury found that Branscum and Byboth used Texan Transfer as a sham to perpetrate a fraud. Based on the jury findings, the trial court rendered judgment against Texan Transfer, disregarding its corporate fiction to hold both Byboth and Branscum individually liable. The court of appeals reversed and rendered, holding: (1) there was no evidence to support the jury’s findings; (2) the instruction submitted to the jury was defective; and (3) the issues should not have been submitted to the jury because disregarding the corporate fiction is solely a question of law. 695 S.W.2d 643. We reverse the court of appeals judgment and affirm the trial court, because under the applicable law there was some evidence to support the jury’s verdict, the objection to the instruction was improper, and disregarding the corporate fiction is a fact question for the jury.

Disregarding the Corporate FictionThe corporate form normally insulates shareholders, officers, and directors from liability for corporate obligations; but when these individuals abuse the corporate privilege, courts will disregard the corporate fiction and hold them individually liable. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571, 573 (Tex.1975); Bell Oil & Gas Co. v. Allied Chemical Corp., 431 S.W.2d 336, 340 (Tex.1968); Pace Corp. v. Jackson, 284 S.W.2d 340, 351 (Tex.1955).

We disregard the corporate fiction, even though corporate formalities have been observed and corporate and individual property have been kept separately, when the corporate form has been used as part of a basically unfair device to achieve an inequitable result.[1]Bell Oil & Gas Co. v. *272 Allied Chemical Corp., 431 S.W.2d at 340. Specifically, we disregard the corporate fiction:

(1) when the fiction is used as a means of perpetrating fraud;[2] (2) where a corporation is organized and operated as a mere tool or business conduit of another corporation; (3) where the corporate fiction is resorted to as a means of evading an existing legal obligation; (4) where the corporate fiction is employed to achieve or perpetrate monopoly; (5) where the corporate fiction is used to circumvent a statute; and (6) where the corporate fiction is relied upon as a protection of crime or to justify wrong.[3]Pacific American Gasoline Co. of Texas v. Miller, 76 S.W.2d 833, 851 (Tex.Civ.App. Amarillo 1934, writ ref’d). See also Roy E. Thomas Const. Co. v. Arbs, 692 S.W.2d 926, 938 (Tex.App.Ft. Worth 1985), writ ref’d n.r.e. per curiam, 700 S.W.2d 919 (Tex.1985); Roylex, Inc. v. Langson Bros. Const. Co., 585 S.W.2d 768, 771 (Tex.Civ. App.Houston [1st Dist.] 1979, writ ref’d n.r.e.); Wolf v. Little John Corp. of Liberia, 585 S.W.2d 774, 778 (Tex.Civ.App. Houston [1st Dist.] 1979, writ ref’d n.r.e.); Sutton v. Reagan & Gee, 405 S.W.2d 828, 837 (Tex.Civ.App.San Antonio 1966, writ ref’d n.r.e.).

Many Texas cases have blurred the distinction between alter ego and the other bases for disregarding the corporate fiction and treated alter ego as a synonym for the entire doctrine of disregarding the corporate fiction. See, e.g., William B. Roberts, Inc. v. McDrilling Co., 579 S.W.2d 335 (Tex.Civ.App.Corpus Christi 1979, no writ); Dunn v. Growers Seed Ass’n, 620 S.W.2d 233, 236-37 (Tex.Civ.App.Amarillo 1981, no writ). However, as Pacific American Gasoline Co. of Texas v. Miller indicates, alter ego is only one of the bases for disregarding the corporate fiction: “where a corporation is organized and operated as a mere tool or business conduit of another corporation.”

Alter ego applies when there is such unity between corporation and individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice. First Nat. Bank in Canyon v. Gamble, 134 Tex. 112, 132 S.W.2d 100, 103 (1939). It is shown from the total dealings of the corporation and the individual, including the degree to which corporate formalities have been followed and corporate and individual property have been kept separately, the amount of financial interest, ownership and control the individual maintains over the corporation, and whether the corporation has been used for personal purposes. See Lucas v. Texas Industries, Inc., 696 S.W.2d 372, 374 (Tex.1984); Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 573-75. Alter ego’s rationale is: “if the shareholders themselves disregard the separation of the corporate enterprise, the law will also disregard it so far as necessary to protect individual and corporate creditors.” Ballantine, Corporations § 123 at 294 (1946).

The basis used here to disregard the corporate fiction, a sham to perpetrate a fraud, is separate from alter ego. It is sometimes confused with intentional fraud; however, “[n]either fraud nor an intent to defraud need be shown as a prerequisite to disregarding the corporate entity; it is sufficient if recognizing the separate corporate *273 existence would bring about an inequitable result.” Fletcher, Cyclopedia Corporations § 41.30 at 30 (Supp.1985); Cary & Eisenberg, Corporations 101 (5th ed. 1980); R. Clark, The Duties of the Corporate Debtor to its Creditors, 90 Harv. L. Rev. 505, 543, 44 (1977); 1 Hildebrand, Texas Corporations § 5 at 40 (1942); 2 G. Hornstein, Corporation Law and Practice § 755 (1959); See also Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 573 (1975); Pacific American Gasoline Co. of Texas v. Miller, 76 S.W.2d at 840, 849; Rose v. Intercontinental Bank, N.A., 705 S.W.2d 752, 756 (Tex.App.Houston [1st Dist.] 1986, writ ref’d n.r.e.); Tigrett v. Pointer, 580 S.W.2d 375, 385 (Tex.Civ.App. Dallas 1979, writ ref’d n.r.e.); National Marine Service, Inc. v. Thibodeaux, 501 F.2d 940, 942 (Fifth Cir.1974). Thus, we held in Pacific American Gasoline Co. of Texas v. Miller that note holders could disregard the corporate fiction without showing common-law fraud or deceit when the circumstances amounted to constructive fraud. 76 S.W.2d at 840, 849. In Tigrett v. Pointer, the Dallas Court of Appeals disregarded the corporate fiction, stating correctly that “[w]hether [the individual] misled them or subjectively intended to defraud them is immaterial … [f]or the action was so grossly unfair as to amount to constructive fraud.” 580 S.W.2d at 385.

To prove there has been a sham to perpetrate a fraud, tort claimants and contract creditors must show only constructive fraud. We distinguished constructive from actual fraud in Archer v. Griffith:

Actual fraud usually involves dishonesty of purpose or intent to deceive, whereas constructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injure public interests.390 S.W.2d 735, 740 (Tex.1964).

Because disregarding the corporate fiction is an equitable doctrine, Texas takes a flexible fact-specific approach focusing on equity. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 575; First Nat. Bank in Canyon v. Gamble, 132 S.W.2d at 103; Pacific American Gasoline Co. v. Miller, 76 S.W.2d at 851; Tigrett v. Pointer, 580 S.W.2d at 381-82. For example, in First Nat. Bank in Canyon v. Gamble, this court held that we would disregard the corporate fiction when the “facts are such that adherence to the fiction would promote injustice and lead to an inequitable result.” 132 S.W.2d at 105. More recently, in Gentry v. Credit Plan Corp. of Houston, we again took an equitable approach, holding that the purpose in disregarding the corporate fiction “is to prevent use of the corporate entity as a cloak for fraud or illegality or to work an injustice, and that purpose should not be thwarted by adherence to any particular theory of liability.” 528 S.W.2d at 575. Dean Hildebrand, a leading authority on Texas corporation law, stated well the equitable approach: “When this [disregarding the corporate fiction] should be done is a question of fact and common sense. The court must weigh the facts and consequences in each case carefully, and common sense and justice must determine [its] decision.” Hildebrand, Texas Corporations § 5 at 42 (1942).[4]

*274 The EvidenceIn this case, the court of appeals found no evidence to support the jury verdict. The jury instruction presented alternative bases for disregarding the corporate fiction, including using Texan Transfer as a sham to perpetrate a fraud. We turn first to see whether there is some evidence to support this basis, since it is Castleberry’s strongest. Under the no evidence test, we consider only the evidence and inferences supporting the jury’s findings and disregard the evidence and inferences to the contrary. Sagebrush Sales Co. v. Strauss, 605 S.W.2d 857, 859 (Tex.1980).

In June 1980, Branscum, Byboth, and Castleberry formed a partnership to move furniture. Three months later, they incorporated as Texan Transfer, Inc. They each owned one-third of the closely held corporation’s shares. Byboth was president; Castleberry was vice-president; and Branscum was secretary-treasurer. Soon thereafter Branscum formed a competing business, Elite Moving. When Castleberry found out about Elite Moving, he filed an assumed name certificate. Castleberry testified that when Branscum found out about the assumed name certificate:

A He [Branscum] became very upset, [stating] that it was his company and his name, and that if he wanted to start a moving company that it was his prerogative, he could do whatever he wanted to do. Q Okay. A And that if I did not sign the name, sign the company name over to him that he would see to it that I would never get anything out of Texan Transfer. Q I’m sorry, could you repeat that last part? A That he would see that I never got anything out of Texan Transfer. He would take whatever it had out of it, anything he could to make sure I had nothing.Branscum made similar statements later to Texan Transfer’s bank.

In July 1981, at Byboth’s suggestion, Castleberry sold his stock back to the corporation, receiving a corporate promissory note for approximately $42,000. Byboth signed the note as Texan Transfer’s president. Texan Transfer made the initial installment payment of $1,000 and then defaulted on the remaining $41,000.

Castleberry testified that after the buy-out, Elite Moving began to take over more and more of Texan Transfer’s business. Branscum testified that after the buy-out Texan Transfer, Elite Moving, and later Custom Carriers were all in the same business and all operated out of his residence. Controlled by Branscum and Byboth, Texan Transfer allowed Elite Moving to use its employees and trucks. Texan Transfer supposedly loaned Elite Moving its trucks, but Branscum admitted that the companies had no written rental agreement and that no mileage records were kept to show how much Elite Moving owed Texan Transfer. Elite advertised for furniture-moving business in the phone directory and in newspapers, but Texan Transfer did not. Branscum also conceded that Texan Transfer could do Elite Moving’s work. While Texan Transfer’s business declined, Elite Moving’s prospered.

Ken Warren, CPA for Texan Transfer, Custom Carriers, Byboth, and Branscum, testified to Byboth and Branscum’s financial handling of Texan Transfer and Elite Moving. For the eighteen months prior to the buy-out agreement, Texan Transfer had a net income of $65,479. After the agreement in 1981, Texan Transfer’s annual net income fell to $2,814 and in 1982 it lost more than $16,000. In contrast, the newly formed Elite Moving declared an income in 1982 of $195,765. Castleberry maintained that Texan Transfer’s losses were caused by Byboth and Branscum’s manipulations, while Byboth and Branscum argued that they were simply natural business losses. The jury was entitled to believe either inference.

Sometime after Castleberry filed suit in April 1982, Branscum told Sue Campbell, *275 then his wife, that Castleberry “would never get a dime, that he would file bankruptcy before Castleberry got any money out of the company … [that] “he would open the company in another name so that Joe [Castleberry] wouldn’t get paid.” Shortly thereafter in September, 1982, Byboth and Branscum started another furniture moving company, Custom Carriers, Inc. At trial Byboth conceded that Custom Carriers was formed because of this lawsuit. Moreover, according to Joe Freed, owner of Freed Furniture Company, Byboth and Branscum terminated Texan Transfer’s contract with Freed Furniture, with whom Texan Transfer did the majority of its business; and they obtained for Custom Carriers the same contractdoing the same deliveries at the same rate. Freed also testified that he had had no problems with Texan Transfer. Freed was at that time the father of Branscum’s girlfriend and is now Branscum’s father-in-law.

Byboth and Branscum also sold Texan Transfer’s means of doing business and its only assetsits trucksto “independent contractors” of Custom Carriers. With the money, they paid themselves “back salaries.”

We hold that this is some evidence of a sham to perpetrate a fraud. A jury could find that Byboth and Branscum manipulated a closely-held corporation, Texan Transfer, and formed competing businesses to ensure that Castleberry did not get paid. Castleberry had little choice but to sell his shares back to the corporation. While this evidence may be no evidence of intentional fraud, constructive fraud, not intentional fraud, is the standard for disregarding the corporate fiction on the basis of a sham to perpetrate a fraud.

In determining if there is an abuse of the corporate privilege, courts must look through the form of complex transactions to the substance. The variety of shams is infinite, but many fit this case’s pattern: a closely held corporation owes unwanted obligations; it siphons off corporate revenues, sells off much of the corporate assets, or does other acts to hinder the on-going business and its ability to pay off its debts; a new business then starts up that is basically a continuation of the old business with many of the same shareholders, officers, and directors. Blank v. Olcovich Shoe Corp., 20 Cal.App.2d 456, 67 P.2d 376, 379 (2nd 1937); Plaza Express Co. v. Middle States Motor Freight, Inc., 40 Ill. App.2d 117, 189 N.E.2d 382, 384-85 (1st Dist.1963); Team Central, Inc. v. Teamco, Inc., 271 N.W.2d 914, 923 (Iowa 1979); Addison v. Tessier, 65 N.M. 222, 335 P.2d 554, 557 (1959); Dairy Co-Operative Ass’n v. Brandes Creamery, 147 Or. 488, 30 P.2d 338, 342 (1934); Culinary Workers and Bartenders Union v. Gateway Cafe, Inc., 91 Wash.2d 353, 588 P.2d 1334, 1343 (1979); Dummer v. Wheeler Osgood Sales Corp., 198 Wash. 381, 88 P.2d 453, 456-458 (1939); Soderberg Advertising, Inc. v. Kent-Moore Corp., 11 Wash.App. 721, 524 P.2d 1355, 1361-62 (1st 1974).

The InstructionThe court of appeals also held that the jury instruction on alter ego was reversible error. The trial court submitted the following issue separately for both Byboth and Branscum: “Do you find from a preponderance of the evidence that Texan Transfer, Inc. was the alter ego of the defendant?”[5] This instruction accompanied the issue:

You are instructed that a corporation may become an “alter ego” or mere extension of the individual if the individual controls the corporation and conducts its business affairs without due regard for the separate corporate nature of the business; or that such separate corporate nature ceased to exist; or if the corporate assets are dealt with by the individual as if owned by the individual; or if corporate formalities are not ad-hered *276 to by the corporation; or if the individual is using the corporate entity as a sham to perpetrate fraud or to avoid personal liability. You are further instructed that in determining whether the corporation adhered to corporate formalities and maintained a separate existence, you may consider whether the corporation maintained separate offices; maintained separate books; maintained separate employees; had separate stationary; issued stock; held regular meetings of its shareholders and Board of Directors; kept and maintained written records of the proceedings of meetings of the shareholders and Board of Directors; filing of tax returns, entering into contracts, maintenance of bank accounts, holding title to property, and other indicia of a separate corporate entity. You are instructed that the existence of one or more of these factors may or may not make Texan Transfers, Inc. the alter ego of (defendant). Whether or not Texan Transfer, Inc. was the alter ego of (defendant) should be determined from the total dealings of (defendant) and Texan Transfer, Inc. (Emphasis added.)The court’s charge defined fraud as constructive fraud: “Fraud is any act, omission, concealment that involves a breach of legal duty, trust, or confidence justly reposed and that is injurious to another person, or by which an undue and unconscionable advantage is taken.” The constructive fraud definition was not objected to and thus was tried by consent.

The court of appeals found the last part of the instruction defective: “that the existence of one or more of these factors may or may not make Texan Transfer, Inc. the alter ego of (defendant).” “One or more factors” is ambiguous; it is not clear if “one or more factors” refers to the alternative grounds for disregarding the corporate fiction or to the list of corporate formalities. If “one or more factors” refers to the list of corporate formalities, the instruction is incorrect because no one item alone would justify disregarding the corporate fiction. See Lucas v. Texas Industries, Inc., 696 S.W.2d at 374; Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 573.

The instruction is also incorrect if “one or more factors” refers to the alternative bases for disregarding the corporate fiction. As noted above, a proper alter ego instruction should include all the relevant factors and consider the total dealings of the corporation and the individual. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 573. This instruction, however, treats the several alter ego factors as if each factor alone were a sufficient basis for disregarding the corporate fiction (without due regard for the separate corporate nature of the business, or whether such separate corporate nature ceased to exist, or if the corporate assets are dealt with by the individual as if owned by the individual, or if corporate formalities are not adhered to).

Although the instruction is erroneous, the defendants have waived error by not properly objecting. Tex. R. Civ. P. Rule 274 provides:

A party objecting to a charge must point out distinctly the matter to which he objects and the grounds of his objection.The purpose of Rule 274 is to afford trial courts an opportunity to correct errors in the charge, by requiring objections both to clearly designate the error and to explain the grounds for complaint. Brown v. American Transfer & Storage, 601 S.W.2d 931, 938 (Tex.1980); Davis v. Campbell, 572 S.W.2d 660, 663 (Tex. 1978). An objection that does not meet both requirements is properly overruled and does not preserve error on appeal.

The defendants objected: [T]o the use of the conjunctive word “or” in the special issue as submitted in that same issue. It may confuse the jury or, in the alternative, prejudice the Defendant and the jury may find any one element would necessarily warrant a finding of “we do” to Special Issues No. 1 and No. 2.*277 This objection fails both requirements of Rule 274. The objection does not distinctly and separately point out the instruction’s errors, because it is unclear whether the “any one element” complaint refers to the alternative grounds for disregarding the corporate fiction or to the list of corporate formalities. Moreover, the objection complains of “elements,” but the instruction mentions only “factors.”

The objection also does not adequately explain its grounds. The grounds given here, that the instruction “may confuse the jury” or “prejudice the defendant,” are too general since they do not explain why the instruction is legally incorrect or how it would confuse the jury or prejudice the defendants. Motor 9, Inc. v. World Tire Corp., 651 S.W.2d 296, 301 (Tex.App.Amarillo 1981, writ ref’d n.r.e.); Quarles v. Smith, 379 S.W.2d 91, 93 (Tex. Civ.App.Houston 1964, writ ref’d n.r.e.).

Jury QuestionFinally, the court of appeals held that disregarding the corporate fiction is solely a question of law and, therefore, should not be submitted to the jury. We disagree. The different bases for disregarding the corporate fiction involve questions of fact. Except in very special circumstances, fact questions should be determined by the jury. Tex. Const. Art. I, § 15; State v. Credit Bureau of Laredo, Inc., 530 S.W.2d 288, 293 (Tex.1975). Therefore, we hold that the controlling issues, based on pleadings and some evidence, of the alternative bases for disregarding the corporate fiction should be submitted to the jury. See Tex. R. Civ. P. 279.

We reverse the court of appeals’ judgment and affirm the trial court’s judgment.

GONZALEZ, J., files a dissenting opinion in which CAMPBELL, WALLACE and ROBERTSON, JJ., join.

GONZALEZ, Justice, dissenting.

Castleberry sued Branscum and Byboth under the doctrine of alter ego. I agree with the court that Castleberry incurred a legal injury. However, I disagree that Castleberry should be able to recover for that injury under the doctrine of alter ego or any other theory which was submitted to the jury. Those theories simply do not apply to the facts of this case. Thus, despite the court’s commendable attempt to set guidelines for disregarding the corporate entity, I dissent because I do not agree with all of its statements on the law or with its application to the facts of this case.

The Sham to Perpetrate a Fraud TheoryWhile I agree with most of the court’s statements on the law for piercing the corporate veil, its standard for disregarding the corporate entity when used as a sham to perpetrate a fraud is far too broad. Prior to this decision, this court consistently held “that personal liability should be imposed on a stockholder only in extraordinary circumstances.” Sagebrush Sales Co. v. Strauss, 605 S.W.2d 857, 860 (Tex. 1980). See also Lucas v. Texas Industries, Inc., 696 S.W.2d 372 (Tex.1984); Torregrossa v. Szelc, 603 S.W.2d 803 (Tex.1980); (recent cases where this court recognized that disregarding the corporate fiction is an extraordinary equitable remedy). Under the court’s current analysis, the corporate entity may be pierced, as a sham to perpetrate a fraud, anytime recognition of “the separate corporate existence would bring about an inequitable result.” This standard is so broad that it is not a standard. It fails to provide any guidance on the necessary elements to assert a cause of action under this theory. Presumably, a party only needs to assert that it would be unfair or inequitable to recognize the corporate existence; the corporate veil will be pierced whenever the courts do not like the outcome, irrespective of the type of alleged misconduct by the parties. Piercing the corporate existence whenever a party does not receive a “complete” or “fair” recovery is an unworkable approach.

*278 The Application of the TheoryI also disagree with the court’s holding that there was some evidence for piercing the corporate veil based on the grounds of recovery pleaded and submitted to the jury. The court of appeals held there was no evidence on any theory which would allow “piercing the corporate veil.” Thus, in our review of this no evidence point, we must examine the record in its most favorable light to Castleberry, considering only the evidence and inferences which support the findings, and rejecting the evidence and inferences contrary to the findings. Sagebrush Sales, 605 S.W.2d 857; Garza v. Alviar, 395 S.W.2d 821 (Tex.1965).

Generally, the courts will not disregard the existence of the corporate entity. Lucas, 696 S.W.2d at 374; First Nat. Bank in Canyon v. Gamble, 134 Tex. 112, 132 S.W.2d 100, 103 (1939). The courts, however, will “pierce the corporate veil” under appropriate circumstances. In his attempt to disregard the corporate entity in this case, Castleberry only pleaded an alter ego theory.

The alter ego doctrine applies when: (1) there is such a unity between the corporation and the individual that the separateness of the corporation has ceased; and (2) the facts are such that holding only the corporation liable would promote injustice. First Nat. Bank of Canyon, 132 S.W.2d at 103; Mortgage & Trust, Inc. v. Bonner & Co., 572 S.W.2d 344, 348 (Tex.Civ.App. Corpus Christi 1978, writ ref’d n.r.e.). See Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571, 573 (Tex.1975). Thus, the alter ego doctrine may be used to disregard the corporate fiction where a corporation is organized and operated as a mere tool or business conduit of an individual. Pacific American Gasoline Co. of Texas. v. Miller, 76 S.W.2d 833, 851 (Tex.Civ.App. Amarillo 1934, writ ref’d). Under the alter ego doctrine, the corporate existence, or lack thereof, is the cause of the injustice. See Lucas, 696 S.W.2d at 376.

In this case, the instruction submitted to the jury on alter ego stated that “a corporation may become an `alter ego’ or mere extension of the individual … if the individual is using the corporate entity as a sham to perpetrate fraud.” Byboth and Branscum failed to object to the inclusion of this theory as a factor for finding alter ego. This court has held that individuals can be liable when it appears they are using the corporate entity as a sham to perpetrate a fraud. Torregrossa v. Szelc, 603 S.W.2d 803, 804 (Tex.1980); Pace Corp. v. Jackson, 155 Tex. 179, 284 S.W.2d 340, 351 (1955). Therefore, even though the sham to perpetrate a fraud theory for piercing the corporate entity was not pleaded, such a theory was before the jury in the charge. Castleberry, then, had to produce some evidence either under an alter ego theory or under a use of the corporate entity as sham to perpetrate a fraud theory.

Texan Transfer was formed by Branscum, Byboth, and Castleberry as a business partnership for the delivery of furniture. In 1980, Texan Transfer was incorporated with each of the partners owning one-third of the corporation’s stock. Shortly after the incorporation of Texan Transfer, Branscum started a moving business, Elite Moving, as a sole proprietorship.[1]

While a stockholder in Texan Transfer, Castleberry found out about Elite Moving, and filed an assumed name certificate for Elite. Castleberry testified that after Branscum found out about the filing:

A He [Branscum] became very upset, that it was his company and his name, and that if he wanted to start a moving company that it was his perogative, he could do whatever he wanted to do. Q Okay. A And that if I did not sign the name, sign the company name over to him that he would see to it that I would never get anything out of Texan Transfer. *279 Q I’m sorry, could you repeat that last part? A That he would see that I never got anything out of Texan Transfer. He would take whatever it had out of it, anything he could to make sure I had nothing.Texan Transfer allowed Elite Moving to use its employees and trucks. Branscum admitted the companies had no written rental agreement and that no mileage records were kept to show how much Elite Moving owed Texan Transfer. Furthermore, Elite advertised in the phone directory and newspapers, Texan Transfer did not.

Castleberry eventually became dissatisfied with the business arrangement; he, Branscum and Byboth agreed that the corporation would purchase his stock. A stock purchase agreement and promissory note were executed by Byboth, signing for the corporation as President. The stock sale included two cash payments and the promissory note. Neither Branscum nor Byboth signed the agreement or note in their individual capacity.

The court holds that the above facts and testimony are some evidence either of alter ego or use of the corporate entity as a sham to perpetrate a fraud. I submit that Branscum’s statements and actions in forming Elite Moving, while constituting some evidence of usurption of corporate opportunities, are not evidence of alter ego or use of the corporate entity to perpetrate a fraud.

In the six months prior to the stock purchase agreement, Texan Transfer’s income dramatically dropped. Castleberry attributed this drop in income to the fact that he, Byboth, and Branscum were no longer working the trucks, but had hired employees to work the trucks. After the stock purchase, Texan Transfer experienced financial difficulties and its assets were sold. Texan Transfer made the first of the two cash payments to Castleberry but did not make the second payment, nor did it make any payments on the promissory note.

In 1982, Branscum and Byboth formed a new corporation, Custom Carriers, Inc. Custom Carriers had the same business address as Texan Transfer and Elite Moving. Branscum and Byboth terminated Texan Transfer’s contract with its main customer, Freeds Furniture. Custom Carriers received the contract with Freeds. Branscum and Byboth sold Texan Transfer’s only assets, its trucks, to individuals who later became independent contractors for Custom Carriers. Branscum and Byboth paid themselves “back salaries” with the proceeds.

Sometime after Castleberry filed suit, Branscum told his former wife, that “he would open another company … so that Joe [Castleberry] wouldn’t get paid.” Byboth also conceded that Custom Carriers was formed because of this lawsuit.

The above statements and actions by Branscum and Byboth in forming Custom Carriers constitute some evidence under either the trust fund doctrine or a theory of denuding the corporate assets. The statements also show that Branscum did not intend to pay the debt. Clearly, Castleberry could assert a claim against Byboth and Branscum for their actions in dealing with the corporate assets. The above statements and evidence, however, are not evidence that Texan Transfer was the alter ego of Branscum and Byboth and are not evidence that the corporate entity (Texan Transfer) was used as a sham to perpetrate a fraud on Castleberry.

An additional factor to consider in determining whether Texan Transfer is the alter ego of Byboth and Branscum is that the underlying suit is based in contract and not in tort. Lucas, 696 S.W.2d at 375; Gentry, 528 S.W.2d at 573; Bell Oil & Gas Co. v. Allied Chemical Corp., 431 S.W.2d 336 (Tex.1968). In contract cases, as opposed to tort cases, the courts are less willing to disregard the corporate entity. This result follows because a plaintiff in a contract case ordinarily has an opportunity to investigate the financial strength of the corporation while dealing with it in a business transaction. Lucas, 696 S.W.2d at 375; *280 Gentry, 528 S.W.2d at 573; Hickman v. Rawls, 638 S.W.2d 100, 102 (Tex.App. Dallas 1982, writ ref’d n.r.e.). Castleberry asserts that Byboth and Branscum should be personally liable on a promissory note (a contract) executed by Texan Transfer. As an incorporator, however, Castleberry was more fully aware than other creditors of the potential viability of the corporation; still, he chose to contract only with the corporation and not with Branscum and Byboth in their individual capacities.

The court never states, nor can I determine, how Texan Transfer was the alter ego of Branscum and Byboth or how the corporate entity (Texan Transfer) was used to perpetrate a fraud. I agree with the court that Castleberry was wronged. However, he should not recover under the theories pleaded and submitted to the jury. Castleberry simply did not assert the proper cause of action. Castleberry did not sue because Texan Transfer was a sham, he sued because it stopped doing business and he did not get paid. The corporate entity, Texan Transfer, did not cause Castleberry’s legal injury. Therefore, the court of appeals reached the correct result since there was no evidence on any theory for piercing the corporate veil that was either pleaded or submitted to the jury in the charge.

The InstructionFinally, I disagree with the manner in which the court handles the submitted instruction. The trial court separately submitted the following issue for both Branscum and Byboth: “Do you find from a preponderance of the evidence that Texan Transfer, Inc. was the alter ego of [Branscum or Byboth]?” Additionally, the trial court submitted the following instruction:

You are instructed that a corporation may become an “alter ego” or mere extension of the individual if the individual controls the corporation and conducts its business affairs without due regard for the separate corporate nature of the business; or that such separate corporate nature ceased to exist; or if the corporate assets are dealt with by the individual as if owned by the individual; or if corporate formalities are not adhered to by the corporation; or if the individual is using the corporate entity as a sham to perpetrate fraud or to avoid personal liability. You are further instructed that in determining whether the corporation adhered to corporate formalities and maintained a separate existence, you may consider whether the corporation maintained separate offices; maintained separate books; maintained separate employees; had separate stationary; issued stock; held regular meetings of its shareholders and Board of Directors; kept and maintained written records of the proceedings of meetings of the shareholder and Board of Directors; filing of tax returns, entering into contracts, maintenance of bank accounts, holding titles to property, and other indicia of a separate corporate entity. You are instructed that the existence of one or more of these factors may or may not make Texan Transfers, Inc. the alter ego of [defendant]. Whether or not Texan Transfer, Inc. was the alter ego of [defendant] should be determined from the total dealings of [defendant] and Texan Transfer, Inc.The submitted instruction contains two errors: (1) it allows the jury to affirmatively answer the issue on theories for piercing the corporate entity which are not included under the alter ego doctrine; and (2) it allows the jury to find alter ego simply because Branscum or Byboth failed to meet one of the “indicia of a separate corporate entity”any one of the elements in the list of corporate formalities.

The first problem with the submitted instruction is that it allowed the jury to consider theories of recovery which are not included under the doctrine of alter ego. However, Branscum and Byboth failed to object to the inclusion of the improper theories. These theories, then, were “subsumed” in the alter ego issue even though they are not theories under alter ego. Therefore, the sham to perpetrate a fraud theory for piercing the corporate entity *281 was included in the “alter ego” issue. This error in the trial court’s instruction was waived.

Branscum and Byboth, however, objected to the second error in the instruction, stating that the instruction “may confuse the jury or, in the alternative, prejudice the Defendant and the jury may find any one element would necessarily warrant a finding of `we do’ to Special Issues No. 1 and No. 2.” Thus, Branscum and Byboth objected to the submission of the instruction because it allowed the jury to find alter ego based on failure of Texan Transfer to maintain any of the “elements” in the list of corporate formalities.

The court states that: The objection does not distinctly and separately point out the instruction’s errors, because it is unclear whether the “any one element” complaint refers to the alternative grounds for disregarding the corporate fiction or to the list of corporate formalities.721 S.W.2d at 277. The court’s interpretation of defendant’s objection is hypertechnical. Clearly, Branscum and Byboth stated that the instruction was erroneous because it allowed the jury to find alter ego based on a violation of any one of the “elements” in the list of corporate formalities. In other words, if the jury found that Texan Transfer failed to “maintain separate stationery” (one of the elements in the list of corporate formalities), it could then find that Texan Transfer failed to “adhere to corporate formalities” or failed to “maintain a separate corporate existence” (two of the five alternative grounds for disregarding the corporate fiction”factors”). Thus, the jury could answer “we do” merely on failure to maintain separate stationery. Because the jury’s answer could be based on an affirmative finding of a violation of only one of the listed corporate formalities, the instruction was erroneous. I simply cannot comprehend how this court can render against Byboth and Branscum on an issue which allows the jury to find alter ego merely because Texan Transfer and Branscum and Byboth did not maintain separate stationery.

In holding that the error in the instruction does not require reversal, the court ignores the fact that the submitted instruction is framed in the disjunctive, while its own definition of alter ego is found in the conjunctive. The court states that alter ego:

is shown from the total dealings of the corporation and the individual, including the degree to which corporate formalities have been followed and corporate and individual property have been kept separately, the amount of financial interest, ownership and control the individual maintains over the corporation, and whether the corporation has been used for personal purposes.The court, then, states that alter ego may be found by looking at one factor and another factor and yet another factor. The submitted instruction, however, tells the jury to look at factor one, or, factor two, or, factor three. Thus, the submitted instruction is clearly an erroneous misstatement on the law of alter ego.

This court has repeatedly reversed the trial court for errors in the charge, including erroneous instructions. Gulf Coast State Bank v. Emenhiser, 562 S.W.2d 449 (Tex.1978); Jackson v. Fontaine’s Clinics, Inc., 499 S.W.2d 87 (Tex.1973). See also Washington v. Reliable Life Ins. Co., 581 S.W.2d 153 (Tex.1979); Dutton v. Southern Pacific Transportation, 576 S.W.2d 782 (Tex.1978); Scott v. Atchinson, Topeka & Santa Fe Ry., 572 S.W.2d 273 (Tex. 1978). In Gulf Coast State Bank, we held that the instructions given to the jury constituted a misstatement of law. In reversing, we stated that “[a] trial court’s charge which does not instruct the jury as to the correct law is improper…. The erroneous charge constituted error which was reasonably calculated to cause and probably did cause the rendition of an improper judgment.” 562 S.W.2d at 453-54. Here, as in Gulf Coast State Bank, the erroneous instruction constituted a misstatement of *282 law. We should remand this case to the trial court for a new trial.

Finally, the court takes a unique approach in its review of “preserved error.” The court of appeals held that:

the court’s charge as a whole permitted the jury to find that Texan Transfer was [Byboth and Branscum’s] alter ego based upon the existence of only one of the factors listed above. Under the court’s charge, the jury could have found Texan Transfer to be [Byboth and Branscum’s] alter ego upon a finding that “one or more” of the above quoted factors existed.695 S.W.2d at 645. The court of appeals then held that the erroneous instruction constituted harmful error. The court of appeals reversed the judgment and rendered for Branscum and Byboth, holding there was no evidence of alter ego.

Castleberry, the adversely affected party, had to assert, by point of error on motion for rehearing at the court of appeals, any complaints he had in regard to that court’s opinion. In his motion for rehearing and in his writ application before this court, Castleberry only complained that “[t]he Court of Appeals erred in holding that the Court’s charge to the jury on the issue of alter ego was fatally defective because the issue and explanatory instruction fairly submitted the controlling issues.” Nowhere does Castleberry assert that Branscum and Byboth failed to object to the instruction or that their objection was insufficient. The rule is well established that to raise a point of error before this court, the complaining party must have raised the point on motion for rehearing in the court of appeals. Albright v. City of Houston, 677 S.W.2d 487, 488 (Tex.1984); Smith v. Baldwin, 611 S.W.2d 611, 618 (Tex.1980).

The court of appeals never had a chance to address whether Branscum and Byboth’s objection was sufficiently specific. No complaint was lodged against the objection. The court of appeals is authorized to correct errors in the judgment of the trial court. The court of appeals did not have an opportunity to address this “alleged” error; this entire argument was initiated by the court. Branscum and Byboth were never given an opportunity to respond that their objection was sufficient. This court is authorized to review errors in the judgment of the court of appeals, it is not authorized to assert, on its own initiative, errors that occurred at the trial court.

Ironically, in affirming Castleberry’s recovery, the court broadly construes the “alter ego” instruction to include a theory that was not pleaded and that has very little in common with the alter ego doctrine. At the same time, the court strictly construes Branscum and Byboth’s objection to the instruction, holding that it insufficient to preserve error, presumably because it fails to specify in which sentence the error occurred. The inconsistency in this approach is apparent.

I agree with the court that the court of appeals incorrectly held that alter ego was a question of law which should not be submitted to the jury. For the above reasons, I would remand this cause to the trial court.

CAMPBELL, WALLACE and ROBERTSON, JJ., join this dissent.

NOTES[1] Other doctrines besides disregarding the corporate fiction have been used in cases similar to this: fraudulent conveyance, Texas Sand Co. v. Shield, 381 S.W.2d 48, 52-53 (Tex. 1964) and Tex. Bus. & Comm. Code ch. 24 (Vernon Supp. 1986); the trust fund doctrine, Henry I. Siegel Co., Inc. v. Holliday, 663 S.W.2d 824 (Tex.1984); breach of fiduciary duties, International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 577 (Tex. 1963); and the denuding theory. World Broadcasting System, Inc. v. Bass, 328 S.W.2d 863, 866 (Tex.1959).

These four doctrines and disregarding the corporate fiction have different elements and remedies, and they protect different parties and interests at different times; but they serve very similar ideals and principles. R. Clark, The Duties of the Corporate Debtor to Its Creditors, 90 Harv. L. Rev. 505, 540-54 (1972). In practice, the doctrine of disregarding the corporate fiction functions to “loosen up the level of proof and the atomistic nature of the analyses required in a fraudulent conveyance action explicitly denominated as such.” Id. at 552.

[2] The phrase, “a sham to perpetrate a fraud,” comes from Pace Corp. v. Jackson, 284 S.W.2d at 351.

[3] Inadequate capitalization is another basis for disregarding the corporate fiction. Torregrossa v. Szelc, 603 S.W.2d 803 (Tex.1980); Tigrett v. Pointer, 580 S.W.2d 375, 381-82 (Tex.Civ.App. Dallas 1979, writ ref’d n.r.e.). It is instructive to compare the six categories in Pacific American Gasoline Co. of Texas v. Miller with the categories in 2 Hornstein, Corporation Law and Practice §§ 752-758 (1959) (same basic categories, but labeled somewhat differently).

[4] All other major authorities support an equitable approach as well. Ballantine, Corporations § 122 (1946) (disregard when there is misuse of the corporate privilege or injustice); Cary & Eisenberg, Corporations 80-81 (5th ed. 1980) (disregard when “the facts warrant the application of equitable principles”); 1 Fletcher, Cyclopedia Corporations § 41 at 413 (Perm.Ed. 1983) (disregarded in the interests of justice and equity); 19 Hamilton, Business Organizations § 237 at 247 (Texas Practice 1973) (“notions of simple justice and fairness”); Henn and Alexander. Laws of Corporations § 146 at 344 (3rd ed. 1983) (“Corporateness will not be recognized to produce unjust or undesirable consequences inconsistent with the purpose of the concept [allowing incorporation]”); 2 Hornstein, Corporation Law and Practice § 751 at 262 (1959) (disregard when corporation becomes “vehicle for injustice”); Latty, Subsidiaries and Affiliated Corporations 191 (1936) (“What the formula comes down to, once shorn of verbiage about control, instrumentality, agency and corporate entity, is that liability is imposed to reach an equitable result”).

[5] Each basis for disregarding the corporate fiction should be pleaded separately. Tex. R. Civ. P. 45, 47. Castleberry only pleaded alter ego, but because Byboth and Branscum did not object to the charge for a lack of pleadings, any error was waived. Murray v. O & A Express, Inc., 630 S.W.2d 633, 637 (Tex. 1982).

[1] Ostensibly, Texan Transfer and Elite Moving were not in competition with one another. Texan Transfer was in the furniture moving business and Elite Moving was in the general moving business.

Jul 11th, 2015 Collections and Foreign Judgments, Construction Law, Contracts and Commercial Litigation, Employment Law Defense, Insurance Defense Litigation

Broad Form Liability Insurance Coverage Claims in Texas– Fort Worth, Texas Insurance Defense Litigation Attorneys

BROAD FORM LIABILITY POLICY CLAIM CAN COME WITHIN BOTH CPPL AND CGL COVERAGE

In this case, before the Dallas Court of Appeals, two insurance companies insured a nursing home owner and operator as primary and excess carriers, respectively. Several lawsuits were brought against the insured and the two insurance carriers, US Fire and Scottsdale disagreed as to the amount of insurance available. Agreeing to litigate their disagreements later, the insurers defended and settled the suits. Scottsdale then filed a subrogation law suit against US Fire for amounts it expended in settling as well as defending the law suits. Scottsdale won a judgment for 1,647,766.27 from the Dallas trial court on cross motions for summary judgment. On appeal in US Fire Ins. Co. v. Scottsdale Ins. Co., 20008 WL 62561 (Tex. App.—Dallas 2008), the Dallas Court of Appeals reduced the award to $744,410.82, reversing in part and affirming in part. The Court upheld the trial court’s determination that US Fire’s CGL’s $2 million per location aggregate limit, not the CPPL’s $1 million per location aggregate limit, applied to the underlying claims. The court concluded that the liability policy permitted a claim to fall under both the CGL form and the CPPL form. The court further determined that when that occurred, as was the case here, that the higher limit would apply to the claim. The Dallas Court determined that US Fire’s breach of contract and wrongful denial did not waive the applicable self-insured retention limits.The court reversed the trial court’s ruling that the self-insured retention limits did not apply to the claims, thereby reducing Scottsdale’s recovery.

Jul 11th, 2015 Collections and Foreign Judgments, Insurance Defense Litigation

Property That Is Subject to Execution in Texas–Fort Worth, Texas Collections Attorneys

Property Subject to Execution in Texas

Corporations in Texas do not have what is considered non-exempt property. However, individual debtors can.

The judgment debtor’s property is subject to levy by execution if it is not exempted by constitution, statute, or other rule of law. See Tex. Const. art. XVI, §§ 49-51; Tex. Prop. Code Ann. §§ 41.001-42.004 (Vernon 1984); Tex. R. Civ. P. 637. In most instances, the following kinds of property will not be exempt:

1.Cash on hand or in checking or savings accounts;

2.Pleasure boats and their motors and trailers;

3 Collections (stamps, coins, etc.);

4. Stocks, bonds, notes, and other investments;

5. Real property not claimed as the homestead (summer home, rent property, etc.); and

6. Airplanes.

Jul 11th, 2015 Collections and Foreign Judgments, Contracts and Commercial Litigation

Attorney’s Fees and Section 38.001 of the Texas Civil Practice and Remedy Code–Fort Worth, Texas Contracts Law Attorneys

Even in the absence of entitlement to attorneys’ fees under the contract, a party in a Texas case can still recover attorneys’ fees as a prevailing party under the Texas Civil Practice and Remedy Code.

Section 38.001 of the Texas Civil Practice and Remedy Code provides that a person may recover reasonable attorney’s fees, in addition to the amount of a valid claim and costs, if the claim is for rendered services, performed labor, furnished materials, a suit on a sworn account or . . . an oral or written contract.” Tex. Civ. Prac. & Rem. Code 38.001. It is significant that the claim must be a valid one.

A party must (1) prevail on a cause of action for which attorney’s fees are recoverable, and (2) recover damages. Green Int’l, Inc. v. Solis, 951 S.W.2d 384, 390 (Tex. 1997).

The claimant must present the claim to the opposing party or to a duly authorized agent of the opposing party and payment for the just amount owed must not have been tendered before the expiration of the 30th day after the claim is presented. See Tex. Civ. Prac. & Rem. Code Ann. 38.002.

The prevailing party is the one “vindicated” by the judgment rendered. See Taylor Elec. Servs., Inc. v. Armstrong Elec. Supply Co., 167 S.W.3d 522, 532 (Tex. App.-Fort Worth 2005, no pet.). In determining the prevailing party, the focus is on the successful party on the merits of the case. Id. A party can be the prevailing party and thus entitled to attorney’s fees even where the amount recovered is offset by an amount awarded to the opposing party. Id. at 533 (citing Blizzard v. Nationwide Mut. Fire Ins. Co., 756 S.W.2d 801, 806 (Tex. App.-Dallas 1988, no writ)).

Jul 11th, 2015 Collections and Foreign Judgments, Construction Law, Contracts and Commercial Litigation

The Existence of Trade Secrets under Texas Law–Fort Worth, Texas Business Law Attorneys

The Existence of Trade Secrets under Texas Law
To determine whether a trade secret exists under Texas law, the Texas Supreme Court has adopted the following nonexclusive, six-factor test, which is largely a set of factors obtained from §757 of the Restatement of Torts:

(1) the extent to which the information is known outside of his business;

(2) the extent to which it is known by employees and
others involved in his business;

(3) the extent of the measures taken by him to guard the secrecy of the information;

(4) the value of the information to him and to his competitors;

(5) the amount of effort or
money expended by him in developing the information;

(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

In the application of this test, Texas courts have recognized a wide variety of proprietary information as worthy of protection. Some examples include pricing data, design of a product, business procedures, customer lists, computer programs, manufacturing information, marketing strategy, technical information and data, and vendor lists.

Jul 11th, 2015 Collections and Foreign Judgments, Contracts and Commercial Litigation, Employment Law Defense