Opinion
NO. 01-16-00603-CV
03-02-2017
DORENE FLORIE, Appellant v. CRAIG REINHART, Appellee
On Appeal from the 334th District Court Harris County, Texas
Trial Court Case No. 2015-06803
MEMORANDUM OPINION
Plaintiff/appellee Craig Reinhart, individually and derivatively as a shareholder and director of Custom Advanced Connections, Inc. (CAC), sued defendant/appellant Dorene Florie on February 6, 2015. The trial court issued a temporary injunction in Reinhart's favor on July 27, 2016, and Florie brought this interlocutory appeal. See TEX. CIV. PRAC. & REM. CODE § 51.014(4) (West 2014). We affirm.
BACKGROUND
This case involves a dispute between CAC's equal owners. While the pleadings and the evidence amassed below are voluminous, unless noted otherwise, the parties are largely in agreement about the following facts—derived from the parties' sworn affidavits, exhibits, and testimony at the temporary injunction hearing—that are relevant to our review of the trial court's temporary injunction.
CAC is an S-corporation that was formed in 1997 and supplies equipment to a variety of industries. Reinhart and Florie each own 50% of the company's stock, and CAC has never had any other shareholders. When CAC was formed, the provision in its by-laws designating the number of directors that would serve on the Board was left blank. From its inception, both Reinhart and Florie were company directors and grew and operated the business together. After the original 1997 organizational meeting at which Florie was appointed President and Treasurer and Reinhart was appointed Vice-President and Secretary, CAC did not have another shareholders' or directors' meeting until 2016. The validity of the actions taken at a March 15, 2016 shareholders' meeting is at the heart of this dispute.
At some point, Florie hired her husband, son, and daughter to work at CAC, rendering her family the majority of CAC's workforce. In June 2011, Reinhart's wife was stricken with ovarian cancer. In July 2013, she learned that her cancer was growing and her tumor marker had increased.
Reinhart's petition alleged that, also around July of 2013, Florie expressed frustration with his performance and told Reinhart that she felt terrible that work was keeping him away from his wife at such a critical time. Florie issued him an ultimatum: leave his day-to-day duties at CAC or she would. Reinhart then left the company's employment. He retained his 50% ownership and officer and director positions, but voluntarily relinquished his salary shortly after leaving.
Afterwards, Florie changed the locks to the offices, claiming a breach of security, but did not give Reinhart a replacement key. The parties agree that, at some point in 2014, they first discussed Florie buying out Reinhart's interest, but they do not agree about the date on which that happened. Reinhart repeatedly and unsuccessfully requested financial information about the company, and was denied access to the records when he went to the offices on November 11, 2014 in person. Reinhart was not provided any of the company's records until after filing the underlying lawsuit. A. Distributions, Salaries, and the Bonus Plan
Throughout its history, CAC made regular and equal distributions to its two owners. In 2012, it made 26 such distributions. In 2013, it made 24. Through July 25, 2014, it made 13. Reinhart has not received a distribution since then. Records later revealed that, after July 25, 2014, Florie continued to prepare, sign, and deliver checks to herself that she classified as "distributions" totaling at least $47,337.07. Then CAC's corporate tax preparer told Florie that, as an S-corporation, CAC could not make uneven distributions to shareholders. Rather than paying Reinhart equal distributions as had always been done, Florie instead wrote a check to CAC to pay back the distributions she had taken.
Reinhart pleaded that Florie had unfettered discretion to alter accounting and business records, which she has done in the course of this litigation. For example, sometime after 2014, she went back and changed accounting references on distribution payments to "wages." In November of 2014, Florie's counsel provided a profit and loss statement for January through September of 2014. But substantial modifications were made to the records for the same period when they were reproduced in February of 2015.
At some point, Florie instituted a "bonus program" under which she increased her and employees' compensation, and it was made retroactive to July 2014. The "distribution" category was changed in CAC's accounting software to "bonus." Reinhart alleges that Florie instituted this bonus program to take money out of CAC for herself and her relatives while avoiding paying his distributions. His live petition also alleges that Florie:
-more than tripled her so-called salary from $2,322.98 per week to $7,211.54 starting in October 2014, though some weeks she paid herself even more than that;
-increased her son's salary at the Company by nearly 50 percent between January 1, 2014, and December 2014, and is believed to have continued this pattern throughout 2015 and thereafter;
-increased her husband's salary at the company by 25 percent between January 1, 2014, and December 2014, and is believed to have continued this pattern throughout 2015 and thereafter; and
-increased her daughter's salary at the company by more than 39 percent between January 1, 2014, and December 2014, and is believed to have continued this pattern throughout 2015 and thereafter.
In contrast, employees not related to Florie received raises of slightly more than 13 percent during that period, if they received raises at all.
Because CAC is an S-corporation, its profits are reported to the shareholders on a K-1 and the profits and tax liability flow through to the shareholders' individual returns. In 2015, Reinhart received a K-1 from CAC reflecting his allocation of ordinary business income of $161,880 that he owed taxes on, despite his not receiving any distributions from CAC for 2015.
B. Reinhart's Supplemental and amended application for temporary and permanent injunction
On June 7, 2016, Reinhart filed Plaintiff's First Supplemental and Amended Application for Temporary and Permanent Injunction and Request for Appointment of Receiver. That motion, supported by Reinhart's affidavit, alleged the filing was made necessary by several recent events surrounding a purported March 15, 2016 shareholder's meeting and a purported March 28, 2016 director's meeting.
Reinhart also alleged that more details relevant to the attorney conflicts identified in an earlier motion to dismiss counsel had been identified. Specifically, Reinhart contended that Charles Kirklin and Stephen Kirklin were attorneys of record for Florie when she filed her answer, and they appeared in court on her behalf on February 13, 2015. After Reinhart added CAC as a defendant on February 13, 2015, Charles withdrew as Florie's attorney and filed an answer for CAC. Because Charles has taken the position that he, "as the attorney for CAC, is answerable only to Defendant, Dorene Florie, in her role as President, the same Dorene Florie who was sued by Plaintiff for her individual wrongful acts and conduct as a shareholder, director and President that he was the attorney of record for" Reinhard asserts that a "conflict of interest has and continues to exist."
C. The March 15, 2016 Shareholders' Meeting
On February 1, 2016, Reinhart noticed a Special meeting of Shareholders and a Regular or Special Meeting of Directors for February 12, 2016. Neither Florie nor hers or CAC's attorneys showed for the meeting. Instead, they claimed through an email through their lawyer, that a shareholder's meeting would be held March 15, 2016. No formal notice was sent for March 15, 2016 meeting.
Reinhart travelled from California to attend the March 15, 2016 shareholders' meeting at the Kirklin Law Firm's office. Present were Reinhart, Florie, Charles Kirklin (for CAC), Stephen Kirklin (for Florie), Patrick McGerrigan (for Reinhart), and an unidentified person, Stephen Collins. Stephen Kirklin stated that he had invited Collins and proposed that Collins be allowed to act as Secretary, taking notes and minutes. Collins is not a shareholder, director or officer, and refused to disclose what his relationship is with Florie or defendants' attorney, responding when asked with: "I am a 39 year old male." Reinhart objected, because as CAC's Secretary, Reinhart is the one with the obligation to take notes and prepare minutes. Reinhart's attorney then announced that the meeting would be recorded on Reinhart's phone.
On the recording, Reinhart's attorney again voiced his objection that Charles Kirklin representing CAC is a conflict, and attempted to provide the other parties with minutes of the February 12, 2016 meeting that no one attended.
Florie called the meeting to order, identified that there was a quorum of shareholders, and the meeting proceeded. Over Reinhart's objection, Florie appointed Steve Collins as the Secretary of the meeting to take minutes. Florie and Reinhart objected to each other continuing as directors. Reinhart moved to open the meeting up for further discussions, which Florie refused to do. CAC's attorney stated that, since this was the annual shareholders' meeting, no further discussion on other matters was allowed. Reinhart then moved to have a meeting of directors for the election of officers since both directors—he and Florie—were present. That was denied as well.
As they left, McGerrigan asked Collins for a copy of the minutes he was going to prepare. CAC's attorney promised they would be prepared and distributed within a couple of days.
Reinhart's audio recording of the March 15, 2016 meeting was transcribed and provided to defendants' attorneys two days later, on March 17, 2016. No one objected to its completeness, and neither Charles Kirklin nor Collins supplied Reinhart or his attorney with the minutes they represented would be prepared by Collins.
D. The March 28, 2016 Directors' Meeting
On March 18, 2016, Reinhart received a notice of a directors' meeting to be held March 28, 2016. When Reinhart arrived and his attorney objected to the presence of Gyna Dionne, Florie's daughter, because she was not a shareholder, director, or officer, Reinhart and his attorney were told that after they left the March 15, 2016 shareholder's meeting, Florie continued the meeting and, on her own vote, elected her daughter Dionne as a director. Charles Kirklin provided minutes of the meeting that included what occurred after Reinhart left. Those minutes noted that Reinhart had "withdrawn from the meeting." The minutes also reflect that Florie, also on her own motion and own vote after Reinhart left, approved and ratified (1) "the bonuses and salaries paid to all CAC employees and officers for the years 2013, 2014, 2015, and 2016 and to continue the same bonus plan and salaries into the future," (2) "the 401k program instituted by CAC," (3) "the employment by CAC of attorneys Charles Kirklin, Paul Kirklin, and The Kirklin Law Firm, P.C. in the pending litigation with Reinhart," (4) "payment of $47,347.07 by Dorene Florie to CAC for amounts incorrectly accounted for as dividends," and (5) "suspension of dividends since July 2014, by CAC."
The March 28, 2016 director's meeting continued and, over Reinhart's objection, Florie and Dionne voted to remove Reinhart as Secretary and Vice-President, and to appoint Dionne as Secretary and Vice-President in his place. Florie and Dionne also voted to pass numerous resolutions, including again approving and ratifying bonuses and salaries paid to employees and officers of CAC for years 2013, 2014, 2015 and 2016 to date and ratifying the 401(k) contributions made by CAC.
INJUNCTIVE RELIEF
In light of the March 2016 events, Reinhart's supplemental and amended motion for injunctive relief requested an order that includes the following:
• enjoins Dorene Florie from making salary changes to herself and her family without Board approval beyond the salary she and her family members were allowed as of the last payroll period in July 2014;
• enjoins Dorene Florie from taking further "wages" or other compensation from CAC in excess of the $2,322.98 weekly salary she received in July 2014;
• set[s] aside as a reserve fund of CAC a sum of money of at least twice the amount (i) of her wages in excess of that fixed salary, (ii) all the wages in excess of the amounts her husband, son, and daughter earned in July 2014; and (iii) all the sums contributed by CAC to the 401(k) not approved by the Board of Directors; and (iv) the $47,337.07 she has taken since July 2014 as dividends;
• enjoins Dorene Florie from excluding Craig Reinhart from CAC's premises at 903 Bay Star Blvd., Webster, Texas 77598;
• gives Craig Reinhart full access to all CAC's books and records, including pursuant to Tex. Bus. Org. Code § 3.153;
• enjoins Dorene Florie from making or taking increases of compensation to herself, her relatives, or any officers or agents of CAC without approval of the Board of Directors;
• enjoins Dorene Florie from taking dividends or distributions, whether labeled as such or disguised under another name, to herself without approval of the Board of Directors, and without paying an equal amount at the same time to Plaintiff; and
• in the alternative, if the above equitable remedies are for any reason not granted, that the Court appoint a rehabilitative
receiver pursuant to Tex. Bus. Org. Code § 11.404. This court has jurisdiction to take this action through Tex. Bus. Org. Code §11:402(b).
• in the alternative, if the above equitable remedies are for any reason not granted, that the Court enjoin Florie and CAC pursuant to Tex. Bus. Org. Code § 20.002 (c) (1) and (2).
Florie's response to Reinhart's motion contended that injunctive relief was not warranted because her complained-of actions were all approved or ratified when she "continued to transact business after [Reinhart] withdrew from the [March 15, 2016] meeting as permitted by the CAC bylaws." She also argued that he has not established a probable right of recovery or immediate, irreparable harm. Finally, Florie contended that the relief Reinhart sought was too vague to conform with Rule 683 of the Texas Rules of Civil Procedure.
A. The Temporary-Injunction Hearing
On June 17, 2016 and July 22, 2016, the trial court held a hearing on Reinhart's temporary-injunction motion and other pending motions. The court began by listening to a recording of the March 15, 2016 shareholder's meeting made on Reinhart's phone. The court also noted that it would take Reinhart's affidavit as evidence. Both Reinhart and Florie testified about the history of the company, compensation, and the March 15 and March 28 meetings. Florie also presented an expert to testify that her compensation decisions were reasonable.
Craig Reinhart
With reference to the March 15, 2016 meeting, Reinhart testified that (1) when Reinhart and his attorney left, Charles Kirklin did nothing to indicate that there were other matters for discussion, (2) when he and his attorney stood to leave, there was nothing pending, (3) Florie did not ask him to stay, and (4) no one called him back to the meeting.
Reinhart testified that it was not until the March 28, 2016 directors' meeting that he first learned that Florie contended the March 15, 2016 meeting had continued after Reinhart and his attorney left. When Reinhart tried to, as Secretary, submit the minutes of the March 15, 2016 shareholder's meeting for approval at the March 28, 2016 directors' meeting, Charles Kirklin handed Reinhart a set of minutes that Reinhart had not seen before.
Reinhart further testified that he had no reason to leave the meeting other than there was no further business. He did not leave "out of any kind of protest." He would have stayed if he had been told the meeting was continued. Although Florie's attorneys repeatedly represented that Collins, the person who took minutes after he left the March 15 meeting, was simply a neutral person, Reinhart has since learned that he is a life-long friend of the Kirklins. Reinhart acknowledged that there was no vote on a motion to adjourn, nor was there any discussion about adjournment. But when he and his attorney left, Stephen Kirklin had already left the room, and Collins was standing up.
Dorene Florie
Florie testified that Reinhart was no longer being paid distributions because she had made the decision, as President, that the company would not pay distributions anymore. She testified that she was a more valuable employee to CAC than Reinhart was, and she believes that she has treated Reinhart fairly in deciding not to pay his distributions after July 2014. Her decision to institute a bonus plan in 2014 was also her prerogative as President of CAC. That decision, to institute reasonable compensation, was ratified at the March 28, 2016 directors' meeting.
Florie acknowledged that Reinhart was CAC Secretary at the time of the March 15, 2016 shareholders' meeting. When asked about Collins attendance and role, she gave the following testimony:
Q. Turning now to the topic of Mr. Collins. At the time you were at the meeting on March 15th, and Mr. Collins came into the room, can you explain to the Court why Mr. Collins was even invited to that meeting?
A. I asked him to actually take the minutes of the meeting.
Q. And did you have a reason to ask Mr. Collins to take minutes?
A. It was just something that was appointed to me, that's all.
Q. He was what?
A. He appointed to me.
Q. He was appointed to you?
A. Yeah.
Q. Who appointed you to him?
A. He was somebody that I asked to take minutes of the meeting.
Q. You asked your lawyers to find somebody to be at the meeting?
A. No. That's not what I said.
Q. You were the president, and a meeting was going to be conducted. Why did Mr. Collins come to the meeting at your request?
A. Because I asked him to.
Q. And your lawyers were going to be at the meeting?
A. They were.
Q. And Mr. Reinhart was going to be at the meeting?
A. He was.
Q. Mr. Reinhart is the secretary of the corporation, at that time?
A. Yes.
Q. So if the meeting was for the election of directors, what was the reason for Mr. Collins to come in?
A. I guess kind of to do the same thing that you did when you tape recorded the meeting. We needed to have some other documentation, other than what you had actually tape recorded . . . .
Florie further testified that Collins and Paul Kirklin's son own a company called Renew Pressure Washing. It was Paul that recommended Collins take the minutes. Florie did not think Collins had been paid to do so. When showed a record of her CAC's business credit card with an $18,586.95 payment to Renew Pressure Washing dated two weeks after the March 15, 2016 shareholders' meeting, she explained that Collins's company had not done work for CAC, but that CAC was paying her attorneys' fees through Renew Pressure Washing. She later clarified that CAC was paying Charles Kirklin's fees to represent CAC through Renew Pressure Washing.
B. The Temporary-Injunction Order
The trial court issued a temporary injunction in Reinhart's favor granting some of the relief he requested. The court denied Reinhart's request to limit Florie's wages. The court's order did, however, enjoin Florie from using CAC funds for personal expenses, as well as refuse to recognize the election of an additional Board member at the March 15, 2016 meeting as valid and enjoin Florie from trying to elect another member without proper notice:
Reinhart provided a proposed order. The court edited portions of that proposed order, and well as struck through portions of the factual recitations and the proposed relief before signing.
Unless Florie is enjoined from taking action, individually or as a Director or as President of Custom Advanced Connections, Inc. ("CAC") which interferes with, impairs, or otherwise deprives or seeks to deprive Reinhart of his equal 50% ownership rights in CAC, including the alleged claim by Florie of the purported election of her daughter, Gyna Dionne, as a Director, the injury to Reinhart is imminent and irreparable because he will be foreclosed from exercising his full rights as a 50% shareholder and Director, and will be unable to perform his duties as a Director for the benefit of all shareholders, protect his equal ownership and deter Florie from running the Company solely for her personal benefit.
The purported election of a 3rd Board Member without his vote deprives Plaintiff of his rights under the By-laws and 50% ownership value in CAC.
. . . .
Florie and Reinhart, as directors, are currently deadlocked in the management of the corporate affairs of CAC and are unable to break the deadlock.
. . . .
The Court further finds that unless Florie's conduct is restrained, she will likely continue to do acts not permitted by the By-Laws relating to the subject of the pending litigation, in violation of the rights of Reinhart as an equal shareholder and director, and such acts by Florie causing further injury to CAC and Reinhart and would likely render a judgment in favor of Reinhart on the final merits ineffectual.
Reinhart has shown a probable right of recovery of the claims asserted, including the claim of malicious suppression of dividends for which the remedy of a permanent injunction does exist, and has sufficiently demonstrated the injury, and likelihood of continued injury, and that immediate irreparable harm, loss or damage will result to Reinhart if this Court does not intervene and protect Reinhart's interests until his claims can be fully adjudicated.
It is therefore ORDERED that the Clerk of Court shall issue a Writ of Injunction pending final hearing and determination of this case enjoining Defendant Dorene Florie and any of her agents, servants, employees, attorneys, representatives, or any person in active concert or participation with her who receives actual notice of this Order by personal service or otherwise from:
(a) Altering, enlarging, or increasing the members of the Board of Directors beyond the present 2 directors, Florie and Reinhart, unless written notice is given by the corporation Secretary, Reinhart, stating the express purpose of having a special meeting for the election of directors in accordance with the By-Laws;
(b) Without Board approval, causing, permitting or allowing payment of personal expense by use of CAC funds without proper and itemized documentation as a business expense. Said documentation shall be provided to Plaintiff every 2 weeks.
ISSUES ON APPEAL
Florie brings the following challenges to the trial court's temporary injunction:
Issue No. 1: The Third Amended Petition fails to assert or even mention any claims related to past or future elections of directors. Can such a pleading support injunctive relief that impacts both types of elections?
Issue No. 2: The election of Gyna Dionne as a director had already occurred prior to the injunction. Is it proper for the Court to attempt to enjoin acts that have already occurred?
Issue No 3: Reinhart failed to present evidence of a probable right to recover on claims involving election of directors. Can such a lack of evidence support injunctive relief?
Issue No. 4: Reinhart failed to present evidence of imminent, irreparable harm for which there is no adequate remedy at law. Can such a lack of evidence support injunctive relief?
Issue No. 5: The Court's Temporary Injunction Order is unclear in what it requires Florie to do. Does such an order comply with Rule 683, Texas Rules of Civil Procedure?
TEMPORARY INJUNCTION
"A temporary injunction's purpose is to preserve the status quo of the litigation's subject matter pending a trial on the merits." TMC Worldwide, L.P. v. Gray, 178 S.W.3d 29, 36 (Tex. App.—Houston [1st Dist.] 2005, no pet.) (citing Walling v. Metcalfe, 863 S.W.2d 56, 57 (Tex. 1993)). A temporary injunction is an extraordinary remedy and does not issue as a matter of right. Id. To obtain a temporary injunction, the applicant must plead and prove three specific elements: (1) a cause of action against the defendant; (2) a probable right to the relief sought; and (3) a probable, imminent, and irreparable injury in the interim. Id. (citing Butnaru v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex. 2002)). A probable right to the relief sought is shown by alleging a cause of action and presenting evidence that tends to sustain it. Tel. Equip. Network, Inc. v. TA/Westchase Place, Ltd., 80 S.W.3d 601, 607 (Tex. App.—Houston [1st Dist.] 2002, no pet.). An injury is irreparable if the injured party cannot be adequately compensated in damages or if the damages cannot be measured by any certain pecuniary standard. Id.
STANDARD OF REVIEW
The decision to grant or deny a temporary injunction lies in the sound discretion of the trial court, and the court's ruling is subject to reversal only for a clear abuse of discretion. TMC Worldwide, L.P., 178 S.W.3d at 36 (citing Walling, 863 S.W.2d at 58). We must not substitute our judgment for the trial court's judgment unless the trial court's action was so arbitrary that it exceeded the bounds of reasonable discretion. Id. (citing Johnson v. Fourth Court of Appeals, 700 S.W.2d 916, 918 (Tex. 1985)). In reviewing an order granting or denying a temporary injunction, we draw all legitimate inferences from the evidence in a manner most favorable to the trial court's judgment. Id. (citing CRC-Evans Pipeline Int'l v. Myers, 927 S.W.2d 259, 262 (Tex. App.—Houston [1st Dist.] 1996, no writ)). "Abuse of discretion does not exist if the trial court heard conflicting evidence and evidence appears in the record that reasonably supports the trial court's decision." Tanguy v. Laux, 259 S.W.3d 851, 856 (Tex. App.—Houston [1st Dist.] 2008, no pet.).
ENJOINING BOARD ELECTIONS WITHOUT NOTICE
The bulk of Florie's issues challenge the portion of the trial court's order enjoining Florie from:
(a) altering, enlarging, or increasing the members of the Board of Directors beyond the present 2 directors, Florie and Reinhart, unless written notice is given by the corporation secretary, Reinhart, stating the express purpose of having a special meeting for the election of directors in accordance with the By-Laws.
A. Pleadings
In her first issue, Florie argues that the Reinhart has not pleaded any cause of action regarding the future election of directors in his Third Amended Petition, which was the live petition at the time the trial court entered its temporary injunction. Reinhart responds that complaints about this alleged defect were waived and, alternatively, that his verified Third Amended Petition and his Supplemental and Amended Application for Temporary and Permanent Injunction support the court's temporary injunction.
Rule 682 of the Texas Rules of Civil Procedure, upon which Florie relies, states that that "no writ of injunction shall be granted unless the applicant therefor shall present his petition to the judge verified by his affidavit and containing a plain and intelligible statement of the grounds for such relief." A petition that does "not address or mention" the conduct the applicant seeks to restrain, nor request "the injunctive relief that [is] the subject of [the] motion," does not contain "a plain and intelligible statement of the grounds" for injunctive relief. In re MetroPCS Commc'ns, 391 S.W.3d 329, 337 (Tex. App.—Dallas 2013, orig. proceeding). But the fact that an otherwise proper request for injunctive relief is contained in an "application," rather than "pleading" does not render it defective under Rule 682. See Houston Laureate Assocs. v. Russell, 504 S.W.3d 550, 569 (Tex. App.—Houston [14th Dist.] 2016, no pet.) ("The Residents filed such a verified petition, and although it is referred to as an 'application,' the use of this word accurately reflects that it was filed by an 'applicant' for injunctive relief as described in Rule 682. Cf. Cohen v. Landry's, Inc., 442 S.W.3d 818, 823 (Tex. App.—Houston [14th Dist.] 2014, pet. denied) ("The nature of a motion is determined by its substance, not its title or caption.")").
Reinhart's Third Amended Petition did request injunctive and declaratory relief in various forms, but the grounds for the complained-of injunctive relief related to composition of the Board did not arise until after the deadline for amending the pleadings and after Reinhart had filed his Third Amended Petition. Reinhart, however, then filed Plaintiff's First Supplemental and Amended Application for Temporary and Permanent Injunction, and Request for Appointment of Receiver. In that filing, he incorporated his previously filed petitions (along with their attached affidavits). That application complained of Florie's clandestine election of her daughter as a director after Reinhart believed the March 15, 2016 shareholder's meeting had concluded. It requested injunctive relief specifically related to that complaint, including "declar[ing] the March 15, 2016 shareholder meeting for the election of directors was concluded per the transcribed minutes presented by Reinhart in his official capacity as Secretary of CAC," "declar[ing] any other March 15, 2016 minutes, as proposed by Florie, invalid or void and of no force or effect"; and "declar[ing] the March 28, 2016 meeting invalid or void and of no force or effect." It also requested the court:
(a) enjoin Florie immediately, at least until the trial of this case, from taking any action, or causing any action to be taken, either directly or indirectly by her individually or as a Director, or as a Shareholder, or as the de-facto President, which in any way interferes with, disrupts, impairs, or otherwise deprives or seeks to deprive Reinhart of his equal 50% ownership rights in CAC including, but not limited to:
(i) his voting rights as a shareholder, including his votes for the election of directors;
(ii) his voting rights as a director, including but not limited to the appointment and election of officers, to establish officer's salaries, to declare dividends, to remove officers, to amend the By-laws, and such other rights and privileges as set forth in the By-Law;
(iii) his position, duties and rights as Vice-President and Secretary of CAC;
(iv) his individual and derivative claims and causes of action in this lawsuit by improperly attempting to preclude judicial resolution of any of the matters that are the subject of this lawsuit; and
(v) from declaring a 3rd Board of Director of the Company to anyone other than Dean Grant.
Reinhart's application was supported by his 11-page supplemental affidavit. Florie filed a lengthy response, arguing that the requested injunctive relief should be denied because, since there had been no formal adjournment when Reinhart voluntarily withdrew from the March 15, 2016 shareholders' meeting, the shareholder vote to elect Dionne was proper.
Reinhart's allegations and requested relief in his Supplemental and Amended Application for Temporary and Permanent Injunction satisfy Rule 682's requirement that an application for injunctive relief file a verified petition containing a "plain and intelligible statement of the grounds" for the requested relief.
We overrule Florie's first issue.
B. Mootness and Probable Right of Recovery
In her second issue, Florie argues that the court's order temporarily enjoining her from "altering, enlarging, or increasing the members of the Board of Directors beyond the present 2 directors, Florie and Reinhart," without following certain procedures is moot because her daughter Dionne has already been elected as a third director. In her third issue, she contends Reinhart failed to demonstrate a probable right of recovery to support that relief.
Reinhart responds that these issues are resolved by reference to a fact issue, namely:
[W]hether an annual shareholder meeting for the election of directors ended after the votes were cast by the two 50% shareholders present or did the meeting continue after a 50% shareholder exited the meeting room? Stated otherwise, does the By-law quorum saving provision sentence in § 2.08 apply under the facts of this case?
If the meeting ended before Reinhart left the meeting room, then there were no properly cast votes thereafter. The actions and votes by the remaining shareholder after he departed are of no consequence. This is a fact issue.
We agree that Florie's second and third issues turn on the validity of the vote to elect Dionne at the March 15, 2015 shareholder's meeting.
Florie argues that the quorum-saving provision in CAC's by-laws render continuation of the March 15, 2016 shareholder's meeting to elect an additional director proper because (1) the meeting was opened with a quorum, and (2) Reinhart voluntarily withdrew from the meeting before Florie nominated, and voted, on Dionne for director. Specifically, she relies upon section 2.08 of CAC's by-laws, which provides:
2.8 WITHDRAWAL OF QUORUM(emphasis added).
If a quorum is present at any meeting, the vote of the holders of a majority of the shares entitled to vote, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which a different vote is required by express provision of the statutes or by the Articles of Incorporation or these By-Laws. The shareholders present at a meeting at which a quorum is present may continue to transact business until adjournment , despite the withdrawal of shareholders after the commencement of the meeting which withdrawal leaves less than a quorum remaining at the meeting.
In support, Florie cites ITC Cellular, Inc. v. Morris, 909 S.W.2d 182 (Tex. App.—Texarkana 1995, no pet.). That case involved two factions of ITC Cellular's shareholders; the Morris faction owned the majority (53%) and the Neal faction owned a minority (18%). ITC Cellular, 909 S.W.2d at 183. A special shareholder's meeting was held in which both factions were present, representing a quorum, but a dispute immediately broke out and the Neal faction left. Id. at 183-84. After that departure, the remaining shareholders voted to remove two directors and elect two replacement directors. Id. at 184. The Neal faction sued, challenging the validity of that election and seeking a declaration to prohibit the new directors from holding themselves out as directors. Id. The trial court granted summary judgment for the Morris faction on all of the Neal faction's claims related to the impropriety of the meeting actions after the Neal faction left. Id.
One argument the Neal faction made on appeal was that the director elections held after its members left were invalid. Id. at 185. The court of appeals rejected this argument, citing a provision of the Texas Business Corporations Act and a section of ITC's by-laws, both of which are substantively similar to section 2.8 of CAC's by-laws:
Article 2.28(A) of the Texas Business Corporation Act provides:
Unless otherwise provided in the articles of corporation or bylaws, once a quorum is present at a meeting of shareholders, the shareholders represented in person or by proxy at the meeting may conduct such business as
may be properly brought before the meeting until it is adjourned, and the subsequent withdrawal from the meeting of any shareholder or the refusal of any shareholder represented in person or by proxy to vote shall not affect the presence of a quorum at the meeting.
The bylaws of ITC also state in Article 2.08 that the withdrawal of holders of sufficient voting shares leaving less than a quorum shall not prevent the remaining shareholders from continuing to transact business.Id. at 185-86 (citations omitted).
Article 2.28(A) of the Texas Business Corporation Act specifically provides that a quorum is not affected by the withdrawal of shareholders. [] In absence of any other controlling law, we find the quorum was not broken by the Neal faction's subsequent withdrawal.
. . . .
ITC urges the argument that good cause existed for the Neals to leave the special shareholders' meeting, which broke the quorum. When a shareholder is forced to leave or denied the right to participate in a shareholders' meeting, the shareholder's lack of participation is not the result of a voluntary withdrawal. When so excluded, the quorum can be broken.
In the case at bar, however, the summary judgment proof reflects that the Neals voluntarily left the meeting. We recognize that the Neals were not satisfied with the amount of stock they were allowed to vote, but the ownership of the stock is pending in another court. Any relief involving a calculation of the ownership of the stock must be resolved by that court.
Florie contends that, just as in ITC Cellular, the transcript here shows that Reinhart voluntarily withdrew before adjournment. Accordingly, she argues, because there was a quorum at the start of the meeting, she held the majority of stock at the meeting and could thus elect directors.
Reinhart responds that ITC Cellular is distinguishable for several reasons. He argues that the purpose of "the quorum savings provision is to discourage shareholders from disrupting or preventing the continuation of a meeting once a quorum is present and business remains to be transacted. The provision is not designed to take away the proper exercise of a shareholder's voting rights as agreed to by the parties." He points out that the Neal faction in ITC decided to voluntarily withdraw in protest after a quorum was present, but before a critical vote was made by the Morris faction. Id. at 186. He argues that, unlike the Neal faction in ITC Cellular, he did not seek to prevent a vote by exiting the March 15, 2016 meeting; indeed, he voted on everything presented and sought to have more matters addressed, but Florie refused.
Reinhart asserts that the situation the Delaware Chancery Court addressed in Testa v. Jarvis is more analogous here. In Testa, the company was owned 50% by Testa and 50% by Jarvis (who also served as the two directors) and had consistently "operated with less than the minimum required level of corporate formality." Testa v. Jarvis, Civ.A. No. 12847, 1994 WL 30517, at *9 (Del. Ch. 1994). Testa and Jarvis were frustrated with one another and deadlocked on decisions at their shareholder meeting, as Reinhart and Florie were in this case. Id. at *9. After their failure to reach any agreement, Testa left their shareholders' meeting. Id. Jarvis then elected a new board of directors on his own motion and vote, as Florie did in this case. Id. Jarvis made the same argument as Florie does here, i.e., that because adjournment had not been formally voted on, the departure of the other 50% shareholder was a voluntary withdraw that did not terminate the meeting. Id. Jarvis further argued, as Florie does here, that because there had been a quorum present when both 50% shareholders were present, the voluntary withdrawal of one of the two shareholders before adjournment allowed the remaining shareholder to continue conducting business, including replacing the departing shareholder/director. Id.
The Testa court rejected Jarvis's arguments, characterizing his actions as the instituting of a calculated plan to frustrate Testa's right to vote on the company's directors:
In this case, where PTI had consistently operated with less than the minimum required level of corporate formality, to claim that the March shareholder meeting was not adjourned because no one voted on it and no one rapped a gavel on a table is fictitious. No reasonable person would believe that Mr. Testa intended merely to withdraw from the meeting rather than end it, leaving Mr. Jarvis the power to elect a new board.Id. (emphasis added). The Testa court further observed that the quorum-saving rule does not apply to this situation involving two deadlocked 50% shareholders. Id. at *10. Rather, the exit of one of the two shareholders during a deadlock ends the meeting. Id. ("[W]here there are two 50 percent shareholders, exit of one during a deadlock is tantamount to adjournment."). This is because, where two 50 percent shareholders constitute all shareholders of the corporation, the reasoning behind the quorum-saving rule "has no application." Id. Indeed, "[w]ere one 50 percent shareholder compelled to remain at a meeting for fear of losing an election, corporate democracy would devolve into an endurance contest, with one party opposing motions to adjourn indefinitely, merely to break the other side down." Id.
As in Testa, the trial court here—as factfinder—reasonably could have concluded there was a plan implemented to frustrate Reinhart's ability to exercise his right as a shareholder to vote. Indeed, that was never expressly disputed in Florie's testimony nor in her attorneys' arguments. At the temporary injunction hearing, Florie's counsel acknowledged that any vote taken after Reinhart's exit from the March 15, 2016 meeting would have been invalid "if we had done something affirmatively to misrepresent something to them, then I think that's - that's a problem. We could not do that." In other words, Florie takes the position that misleading Reinhart into believing the meeting was over with words would render Reinhart's exit involuntary, but misleading him by actions and silence does not cross the line of what is permissible.
The trial court had sufficient evidence to conclude that Reinhart reasonably believed that the meeting was over when he left. In its almost twenty years of operation, CAC had never observed corporate formalities. The trial court could have determined, on this record, that Florie through her silence and actions misled Reinhart into believing the meeting was over, despite the lack of a formal vote on adjournment. See Tanguy v. Laux, 259 S.W.3d 851, 856 (Tex. App.—Houston [1st Dist.] 2008, no pet.) (trial court resolves evidentiary disputes and weighs credibility of witnesses). Accordingly, the trial court's conclusion that Reinhart did not voluntarily withdraw from the March 15, 2016 meeting is supported by the evidence.
We overrule Florie's second issue arguing that Reinhart's challenges to the March 15, 2016 election of Dionne as a director is moot, given the sufficiency of the evidence presented demonstrating that Dionne's election after Reinhart left was not valid. For the same reason, we overrule Florie's third issue to the extent it argues that Reinhart failed to present evidence of a probable right of recovery on a claim challenging Florie's actions after Reinhart left the March 15, 2016 meeting.
Florie's third issue also challenges the evidentiary support establishing a probable right of recovery on any claim related to Florie's use of CAC's funds to pay her personal expenses. This portion of her third issue is addressed in a separate section of this opinion.
C. Imminent, Irreparable Harm and No Adequate Remedy
In her fourth issue, Florie argues that Reinhart has not demonstrated that, absent an injunction, he would suffer imminent, irreparable harm for which he has no adequate remedy at law. Specifically, she contends that Reinhart has not demonstrated that he would be harmed by "future elections of directors that are conducted in accordance with the By-Laws." She also asserts that Reinhart has an adequate remedy at law to challenge Dionne's election through a quo warranto action.
The trial court's temporary injunction order states that, if temporary injunctive relief is not granted during the pendency of the lawsuit, Florie "will likely continue to do acts not permitted by the By-Laws relating to the subject of the pending litigation, in violation of the rights of Reinhart as an equal shareholder and director, and such acts by Florie causing further injury to CAC and Reinhart and would likely render a judgment in favor of Reinhart on the final merits ineffectual." It also states that, unless Florie is enjoined from taking action that "interferes with, impairs, or otherwise deprives or seeks to deprive Reinhart of his equal 50% ownership rights in CAC, including the alleged claim by Florie of the purported election of her daughter, Gyna Dionne, as a Director, the injury to Reinhart is imminent and irreparable because he will be foreclosed from exercising his full rights as a 50% shareholder and Director, and will be unable to perform his duties as a Director for the benefit of all shareholders, protect his equal ownership and deter Florie from running the Company solely for her personal benefit."
The trial court's order does not prohibit the election of additional directors, but it does recognize that Dionne's purported election was not legitimate, and prohibits Florie from "altering, enlarging, or increasing the members of the Board of Directors beyond the present 2 directors, Florie and Reinhart," unless certain procedures are followed. We agree with Reinhart that the trial court's conclusion that Reinhart would suffer imminent, irreparable injury in the absence of this provision is supported by sufficient evidence. There is evidence of Florie attempting to circumvent, through deceptive means, Reinhart's right to vote on an additional director. Florie continues to take the position that Dionne is a properly elected director. Florie and Dionne have in turn used their purported majority vote on the Board to ratify many of the actions taken by Florie on behalf of CAC that are the subject-matter of Reinhart's claims.
Florie next contends that "Quo Warranto is an adequate remedy at law that Reinhart has failed to address in his application for injunctive relief." She cites section 66.001(1) of the Texas Civil Practice and Remedies Code, which provides: "An action in the nature of quo warranto is available if: (1) a person usurps, intrudes into, or unlawfully holds or executes a franchise or an office, including an office in a corporation created by the authority of this state." She also cites Salgo v. Matthews, 497 S.W.2d 620 (Tex. Civ. App.—Dallas 1973, writ ref'd n.r.e.) for the proposition that "Texas courts have held that where an election of this kind is contested 'quo warranto was an adequate remedy,' precluding injunctive relief."
In response, Reinhart points out that a quo warranto action may only be brought by the State attorney general or a county or district attorney. See TEX. CIV. PRAC. & REM. CODE ANN. § 66.002(a) (West 2008). He argues that this is not a practical or efficient remedy, "nor could the exigencies of the situation here be prompt by invoking the State of Texas to take action." Finally, he contends that Salgo v. Matthews is inapposite because the trial court in that case "improperly and prematurely intervened by way of a mandatory injunction in an on-going election contest involving the validity of certain proxies before the election process was completed."
Regardless of whether a quo warranto action is available to Reinhart—an issue we need not decide—the trial court's injunctive relief would still be proper in this case. The Salgo case upon which Florie relies noted that injunctive relief may be appropriate if a corporate officer engages "in fraud, coercion, or any other conduct that would frustrate or seriously delay the election process." Salgo, 497 S.W.2d at 625. The court also explained that:
We do not hold that quo warranto is the only remedy available to the losers in a proxy contest. We hold that stockholders are not entitled to extraordinary mandatory relief against the election officials before completion of the election without showing that their voting rights could not be fully protected after the election in a suit, such as a proceeding in quo warranto, in which the claims of all interested candidates may be presented and finally adjudicated. Quo warranto is normally an appropriate remedy for determining issues affecting the result of an election, such as the validity of disputed proxies . . . .Id. at 632 (on rehearing).
Unlike in Salgo, Reinhart does not challenge the results of an election here; he challenges Florie's insistence that an election was held at all. The trial court determined that there was no election of Dionne to the Board after Reinhart left the March 15, 2016 shareholders' meeting because Reinhart did not voluntarily withdraw from that meeting. The court also recognized that "Reinhart has shown a probable right of recovery of the claims asserted, including the claim of malicious suppression of dividends for which the remedy of a permanent injunction does exist." In addition, the court noted that Florie would control the company completely if she controlled a third director and that delay would "likely render a judgment in favor of Reinhart on the final merits ineffectual." The trial court had sufficient evidence to support its conclusion that Reinhart did not have an adequate remedy at law, absent the imposition of injunctive relief.
We overrule Florie's fourth issue to the extent it challenges the portion of the trial court's injunction related to Board elections.
D. Specificity
In her fifth issue, Florie argues that the portion of the trial court's injunction related to Board elections is "unclear and not specific enough to satisfy the Texas Rules of Civil Procedure 683." That rule provides:
Every order granting an injunction and every restraining order shall set forth the reasons for its issuance; shall be specific in terms; shall describe in reasonable detail and not by reference to the complaint or other document, the act or acts sought to be restrained; and is binding
only upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise.TEX. R. CIV. P. 683.
"The Supreme Court of Texas has made clear that '[t]he requirements of Rule 683 are mandatory and must be strictly followed.'" In re Chaumette, 456 S.W.3d 299, 304-05 (Tex. App.—Houston [1st Dist.] 2015, orig. proceeding) (citing Interfirst Bank San Felipe, N.A. v. Paz Constr. Co., 715 S.W.2d 640, 641 (Tex. 1986)). "When a temporary injunction order does not adhere to the requirements of Rule 683 the injunction order is subject to being declared void and dissolved." Id.; see also Qwest Commc'ns Corp. v. AT&T Corp., 24 S.W.3d 334, 337 (Tex. 2000).
Florie argues that the trial court's order fails to meet the standard set out in Rule 683. Specifically, she complains that the trial court ignores Dionne's status as a director. Thus, it is unclear whether Florie can continue to recognize Dionne's authority as a director.
The order, however, discusses "the alleged claim by Florie of the purported election of her daughter, Gyna Dionne, as a Director" as an example of Florie's attempt to interfere with Reinhart's rights and the necessity of deterring "Florie from running the Company solely for her personal benefit." The court's order recognizes that "the 3rd board seat is the pivotal vote in a 3 person board" and that the "purported election of a 3rd Board Member without [Reinhart's] vote deprives Plaintiff of his rights under the By-laws and 50% ownership value in CAC." Finally, the order recognizes that "Florie and Reinhart, as directors, are currently deadlocked in the management of the corporate affairs of CAC and are unable to break the deadlock." The relief ultimately granted enjoins Florie from "[a]ltering, enlarging, or increasing the members of the Board of Directors beyond the present 2 directors, Florie and Reinhart, unless written notice is given by the corporation Secretary, Reinhart, stating the express purpose of having a special meeting for the election of directors in accordance with the By-Laws."
In light of the statements contained in the temporary injunction making clear that the court does not recognize Florie's attempt to singlehandedly elect Dionne to the Board as valid, we find no merit in Florie's contention that "[b]ecause the Order ignores the election of Gyna Dionne it is unclear what acts are to be enjoined by this Order." (emphasis added).
We overrule Florie's fifth issue.
PERSONAL EXPENSES
In her third and fourth issues, Florie also challenges as insufficient Reinhart's evidence of a probable right of recovery, irreparable injury, and no adequate remedy at law to support the portion of the trial court's order enjoining her from:
(b) Without Board approval, causing, permitting or allowing payment of personal expense by use of CAC funds without proper and itemized documentation as a business expense. Said documentation shall be provided to Plaintiff every 2 weeks.
Specifically, in her third issue, Florie contends that "[w]hile Reinhart has plead a cause of action regarding personal expenses of Florie, he offered no evidence of any such personal expenses at the injunction hearing." In her fourth issue, she contends that "[w]ith regard to personal expenses of Florie, Reinhart has offered no evidence of any such expenses in the past or any threat of such expenses in the future" and that Reinhart could be compensated for any damages following a trial.
If the evidence falls within the zone of reasonable disagreement, we may not invade the role of the fact-finder, who alone determines the credibility of the witnesses, the weight to give their testimony, and whether to accept or reject all or any part of that testimony. City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005). Reinhart presented Florie's business credit-card statement at the temporary injunction hearing reflecting a March 29, 2016 payment of $18,586 to Renew Pressure Washing, a company owned jointly by Collins and a relative of the Kirklins. Florie first testified that this payment was to pay her personal attorney, Stephen Kirklin. She then testified that the payment was instead only for CAC's attorney Charles Kirklin. Given the trial court's familiarity with Florie's unwillingness throughout the case to turn over financial records, along with the ongoing dispute about whether there were conflicts and overlap between the Kirklins' representation of CAC and Florie and the evidence presented to the trial court about CAC's funds being paid to Florie and her family, the trial court did not abuse its discretion by enjoining Florie from using CAC funds for personal expenses and requiring her to provide Reinhart with business-expense documentation.
We overrule the portion of Florie's third and fourth issues complaining of the portion of the trial court's order enjoining her from using CAC funds to pay her personal expenses.
CONCLUSION
We affirm the trial court's temporary injunction.
Sherry Radack
Chief Justice Panel consists of Chief Justice Radack and Justices Jennings and Bland.