Summary
holding that evidence that CEO's salary increased after company accepted merchandise on credit was not legally sufficient evidence of direct personal benefit from transaction
Summary of this case from Tryco Enters., Inc. v. RobinsonOpinion
No. 01-03-00435-CV
Opinion issued January 20, 2005.
On Appeal from the 133rd District Court, Harris County, Texas, Trial Court Cause No. 2002-13080.
Panel consists of Justices TAFT, KEYES, and HANKS.
MEMORANDUM OPINION
Hoard Gainer Industry Co., Ltd., appellee, sued Gollin Co., Inc. on a sworn account and sued Timothy J. Gollin, appellant, for having used the corporation as a sham to perpetrate a fraud. A jury found that Gollin was responsible for the conduct of Gollin Co., Inc. and awarded Hoard Gainer $898,000 in damages. In one issue, Gollin contends that the trial court erred in entering a judgment piercing the corporate veil without any evidence meeting the requirements of the Texas Business Corporation Act article 2.21. We reverse and render a take-nothing judgment.
The Texas Business Corporation Act article 2.21A(2), concerning the liability of shareholders with respect to a corporation's obligations, places severe restrictions on a claimant's ability to pierce corporate protection of stockholders. Article 2.21A(2) reads in part:
A. A holder of shares . . . of the corporation shall be under no obligation to the corporation or its obligees with respect to:
. . .
(2) any contractual obligation of the corporation . . . on the basis of actual fraud or constructive fraud, a sham to perpetuate a fraud, or other similar theory unless the obligee demonstrates that the [share] holder . . . caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the [share] holder. . . .
TEX. BUS. CORP. ACT art 2.21, § A(2) (Vernon Supp. 2004-2005).
Background
In 1992, Gollin founded Gollin Co. to import components for office chair manufacturers, primarily in the United States and Canada. Gollin testified that they "sold them casters and chair arms and wood that went into making the kinds of chairs you buy at Office Depot." Gollin Co. grew into a 45-employee company that peaked in 1999 with sales of $30 million.
Gollin Co. purchased furniture parts from Hoard Gainer Industry Co., Ltd. Robert Li, the United States representative for this Taiwanese company, testified that, at first, it required Gollin Co. to pay for the parts at the time of delivery, but, over the years, a trust relationship was formed, and Gollin Co. would buy parts on credit. Gollin testified that, between 1997 and 1999, Gollin Co. bought and timely paid for several million dollars worth of goods from Hoard Gainer. Li testified that, in late 1998 and early 1999, Hoard Gainer sent Gollin Co. $898,037.04 in parts that would be worth three or four times the purchase price once they were assembled. Gollin, the president, CEO, and majority shareholder of Gollin Co., did not personally guarantee the purchase. Gollin Co. never paid Hoard Gainer.
Gollin testified that, in 1998, Gollin Co. grew rapidly, and, by the end of 1999, it "ran into serious cash flow problems." Gollin testified that he informed Hoard Gainer "pretty much what our situation was during the course of 1998 and 1999 as we were tight for cash and — which we believe was largely the result of growing pains." Gollin explained that Hoard Gainer was "anxious to increase the volume of business they were doing with us. We believed we would be able to survive our growth spurt and we were making regular payments to them on a weekly basis."
In 1998, Gollin's salary was $70,000, but increased to $100,000 in 1999. Gollin justified the salary increase by explaining that the company had tremendous growth in 1998. He further explained that, he never received the full salary in 1999 because the company stopped assessing salaries. He testified that he received no salary at all in 2000.
Gollin testified that, instead of filing for bankruptcy, Gollin Co. decided to liquidate its assets and attempt to pay off its creditors. By the time it ceased operations in mid-2000, Gollin Co. was indebted to many creditors, including owing $889,037. 34 to Hoard Gainer.
For about one year after Gollin Co. closed its doors, Gollin "wound up doing some contract work to do just whatever [he] could to pay [his] bills because [he] didn't have any money." In the fall of 2000, a friend invested more than $200,000 into a new investment company, Travis Street Partners, and Gollin was named the Chief Executive Officer (CEO). Travis Street Partners owns shares in ICO, a company that is worth more than $2.5 million and does almost $200 million in revenues a year. Gollin is CEO of ICO, as well.
During trial, Hoard Gainer's attorney implied that Gollin should pay Gollin Co.'s debts out of ICO's profits. Gollin responded, "ICO is not in a position to pay the debts of Gollin Company. ICO does not have any obligation, nor would it be proper for me to consider Hoard Gainer against Gollin Company. That's it."
Before trial, the parties stipulated that Gollin Co. owed Hoard Gainer $889,037.34. At trial, Hoard Gainer's only theory of liability alleged that Gollin was using Gollin Co. as a sham to perpetuate a fraud, piercing the corporate veil of protection. The jury found that Gollin was personally liable for Gollin Co.'s indebtedness. Hoard Gainer was awarded $889,037, in addition to pre- and post-judgment interest. The trial court denied Gollin's motion notwithstanding the verdict and motion for new trial.
Piercing the Corporate Veil
In his sole issue, Gollin contends that the evidence is legally and factually insufficient to support the jury's finding that he pierced the corporate veil by using Gollin Co. for the purpose of perpetrating a fraud on Hoard Gainer for his direct personal benefit.
Standard of Review
When an appellant challenges the legal sufficiency of the evidence to support a finding on which it did not have the burden of proof at trial, the appellant must demonstrate on appeal that no evidence exists to support the adverse finding. Croucher v. Croucher, 660 S.W.2d 55, 58 (Tex. 1983). In conducting a no-evidence review, an appellate court must "view the evidence in a light that tends to support the finding of the disputed fact and disregard all evidence and inferences to the contrary." Bradford v. Vento, 48 S.W.3d 749, 754 (Tex. 2001). A no-evidence point may be sustained only when the record discloses one of the following: (1) there is a complete absence of evidence of a vital fact; (2) the court is barred by rules of law or evidence from giving weight to the only evidence offered to prove a vital fact; (3) the evidence offered to prove a vital fact is no more than a mere scintilla; or (4) the evidence establishes conclusively the opposite of the vital fact. Uniroyal Goodrich Tire Co. v. Martinez, 977 S.W.2d 328, 334 (Tex. 1998).
If there is more than a scintilla of evidence to support the finding, the claim is sufficient as a matter of law. Browning-Ferris, Inc. v. Reyna, 865 S.W.2d 925, 928 (Tex. 1993). But, if the evidence offered to prove a vital fact is so weak that it does nothing more than create a mere surmise or suspicion of its existence, the evidence is no more than a scintilla and, in legal effect, is no evidence. Kindred v. Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex. 1983). "More than a scintilla of evidence exists where the evidence supporting the finding, as a whole, `rises to a level that would enable reasonable and fair-minded people to differ in their conclusions.'" Burroughs Wellcome Co. v. Crye, 907 S.W.2d 497, 499 (Tex. 1995) ( quoting Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 25 (Tex. 1994)).
In reviewing a factual-sufficiency point, we consider all the evidence supporting and contradicting the finding. Plas-Tex, Inc. v. U.S. Steel Corp., 772 S.W.2d 442, 445 (Tex. 1989). We set aside the verdict only if the finding is so contrary to the overwhelming weight of the evidence as to be clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986). In a bench trial, the trial court, as factfinder, is the sole judge of the credibility of the witnesses. Southwestern Bell Media, Inc. v. Lyles, 825 S.W.2d 488, 493 (Tex.App. 1992, writ denied).
Personal Benefit
Here, the parties agreed to the jury charge, and, in addition to a damages question, the jury was asked the following question:
Hoard Gainer objected to the submission of a damages question given the fact that the parties had already stipulated to an amount. The trial court overruled the objection, but the damages question is not before this Court.
Question 1
Is Timothy J. Gollin responsible for the conduct of Gollin Co., Inc.?
Timothy J. Gollin is "responsible" for the conduct of Gollin Co., Inc. if:
Timothy J. Gollin used Gollin Co., Inc. for the purpose of perpetrating and did perpetrate an actual fraud on Hoard Gainer Industry Co., Ltd. primarily for the direct personal benefit of Timothy J. Gollin.
"Actual Fraud" means dishonesty of purpose or intent to deceive.
Answer "Yes" or "No."
Answer: (Yes)
On appeal, Gollin contends that the evidence was legally and factually insufficient to support this finding.
To survive this sufficiency challenge, there must be sufficient evidence to support a finding of (1) actual fraud (2) for the direct personal benefit of Gollin. If there is no evidence that Gollin personally benefitted, we need not determine whether there was actual fraud.
Hoard Gainer's attorney attempted to imply that, because there were numerous international wire transfers from Gollin Co., Gollin must have personally benefitted from the transfers. Li, however, testified that he had no knowledge and no evidence regarding the recipient of the wire transfers. Li was specifically asked as follows:
Q. It is true that you don't know of your own personal knowledge what Tim Gollin said or didn't say at the time the goods were purchased?
A. I don't know.
Q. Do you have copies of any checks to Tim Gollin showing that he received money other than salary?
A. No.
. . .
Q. Do you have evidence that Tim Gollin allowed assets to be diminished in value to the prejudice of the creditors?
A. No.
. . .
Q. Do you have evidence that Tim Gollin co-mingled his personal assets with assets of the corporation?
A. I am not there. How can I know what he do?
Q. Your answer is no?
A. I don't know how to answer this question.
Q. Do you have evidence that Tim Gollin used assets of the company for his personal benefit?
A. Evidence? I don't know because I am not his family member. How can I know?
. . .
Q. Do you know of your own personal knowledge whether Tim Gollin ever gave Hoard Gainer financial information that was not true and correct?
A. No.
Hoard Gainer argues in its brief that, after it assembled and sold the parts that Hoard Gainer gave Gollin Co., Gollin used Gollin Co.'s money to "pay his personal debts." (Emphasis added.) This is not an accurate depiction of the testimony. Li was asked if he heard any of the conversation between his brother, Hoard Gainer's president, and Gollin when Gollin announced that Gollin Co. would not be able to repay Hoard Gainer. Li responded, "I overheard [Gollin] say he had to use money to pay his debt or something of that sort." Gollin was the president and CEO of Gollin Co. He testified that it used the money to pay its vendors, and the assets of the company were liquidated to pay its creditors. There is no evidence that Gollin used the proceeds to pay his personal debts.
Hoard Gainer's attorney implied that, because his salary increased from $70,000 in 1998 to $100,000 in 1999, Gollin must have benefitted from Hoard Gainer's debt. Li was asked,
Q. Would you — if Hoard Gainer have (sic) given those products to Tim Gollin, had they known he wasn't going to get — pay, he was going to give himself a raise for two years —
A. No.
Q. Does that show Tim Gollin personally benefitted from your products?
A. Yes.
Gollin testified that Gollin Co. had annual sales of more than $20 million. Furthermore, Gollin justified the pay increase due to the 50-60% growth that Gollin Co. experienced in 1998. Here, again, this excerpted testimony is based on speculation and is not evidence that Gollin's salary increase was a personal benefit that he received as a result of the transaction with Hoard Gainer.
Hoard Gainer also implied that, because he personally guaranteed some debts of Gollin Co. and not the debt in question, Gollin personally benefitted from repaying the guaranteed debts first. To support this contention, Hoard Gainer cites a portion of the record that states no such thing. The cited record is as follows:
Q. Would you tell the jury why you were unable to pay Hoard Gainer the money that they sued for in this lawsuit?
A. Because we borrowed to provide working capital for the company and to help us invest in warehouses we put up around the US, and also a factory we had ownership in in Brazil. We had consumed cash, and when we were no longer able to pay our creditors, we — the bank had a lien against all of our assets. The bank came in and basically collected all the receivables, took cash to satisfy what was owed to them. The remaining funds weren't enough to allow us to keep operating. We let people off, paid severance, had to pay their salaries and benefits, and there was no cash left over. We were left with some inventory in the spring of — spring/summer of '99, by which point we reduced office staff to five or six people. We vacated our premises on Westpark and moved to a very small space.
We were trying to survive. And we offered to pay creditors — to make a settlement with creditors with whatever cash we had left over.
This is not evidence that Gollin personally benefitted from the transaction in question.
Hoard Gainer submitted no evidence that Gollin personally benefitted from this unpaid debt. Having held accordingly, we need not address Gollin's argument that the evidence was legally and factually insufficient to support a finding of fraud.
We sustain Gollin's sole point of error.
Conclusion
We reverse and render a judgment that Hoard Gainer Industry Co., Ltd. take nothing from Timothy J. Gollin.