Roland D. Fortenberry, Jr., A/K/A Dale Fortenberry, Jr. and Fortune Products, Inc. v. Gerald R. Cavanaugh, Jr. and Dianna Cavanaugh ( 2005 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-04-00816-CV
Roland D. Fortenberry, Jr., a/k/a Dale Fortenberry, Jr.
and Fortune Products, Inc., Appellants
v.
Gerald R. Cavanaugh, Jr. and Dianna Cavanaugh, Appellees
FROM THE DISTRICT COURT OF BURNET COUNTY, 33RD JUDICIAL DISTRICT
NO. 30599, HONORABLE V. MURRAY JORDAN, JUDGE PRESIDING
MEMORANDUM OPINION
This is an accelerated interlocutory appeal from a district court order appointing a
receiver for a family business. The dispute arises over the control of the management of Fortune
Products, Inc., a business in Marble Falls that manufactures and sells knife sharpeners. Fortune
Products was created in 1984 by Dale and Betty Fortenberry. In 2000, they passed half of the
business to their son, Dale Fortenberry, Jr., and his wife; the remaining half went to their daughter,
Dianna Fortenberry Cavanaugh and her husband, Gerald R. Cavanaugh. The couples serve as the
company’s sole four directors. Fortenberry is the company’s president, Cavanaugh is the company’s
vice president and chair of the board, and Dianna Cavanaugh is the secretary-treasurer. In five
issues, Fortenberry appeals the district court’s order granting the Cavanaughs’ motion to appoint a
receiver. Because the district court’s order appointing a receiver failed to comply with the
requirements of Texas Business Corporation Act article 7.05, section A(1)(b),1 the sole ground on
which the district court based its receivership order, we reverse the decision of the district court and
vacate the order.
The Dispute
This appeal arises from a dispute over the control of the management of Fortune
Products. Due to this dispute, the last shareholder and director meeting in October 2003 ended
without the required re-election of directors and officers, and the parties have feuded over the day-to-
day management of the company since at least that time. By letter dated June 28, 2003, Fortenberry
“exercised [his] authority to discontinue [Cavanaugh’s] participation in the day-to-day operations
of the company.” On June 29 Fortenberry filed a declaratory judgment action in Travis County
against Cavanaugh to determine Fortenberry’s authority regarding management of the company.
Fortenberry obtained a temporary restraining order barring Cavanaugh from his office at the
company.
The next day, June 30, the Cavanaughs filed suit in Burnet County against
Fortenberry and Fortune Products, seeking a declaratory judgment to determine the respective rights
of the parties. The Burnet County action also asserted claims for an accounting, for monetary
damages for breach of fiduciary duty and duty of good faith and fair dealing, for the appointment of
1
Tex. Bus. Corp. Act Ann. art. 7.05, § A(1)(b) (West 2003).
2
a receiver, and for injunctive relief. The Cavanaughs obtained a temporary injunction against
Fortenberry. Only the temporary injunction in Burnet County remains in effect. Although
Fortenberry sought to abate the Burnet County action pending resolution of the Travis County action,
venue of an action for the appointment of a receiver is mandatory in this case in Burnet County
where the action proceeds pending this appeal.
After hearings on various matters in Burnet County district court in July 2004,
including the motion to appoint a receiver, the district court determined
that the directors of Fortune Products, Inc., are deadlocked in the management of the
corporate affairs, that the shareholders are unable to break the deadlock, and that
irreparable injury to the corporation is being suffered or is threatened by reason
thereof. The Court takes under advisement the issue of whether all other remedies,
either at law or in equity, are inadequate.
(Emphasis added.) Taking under advisement the question whether all remedies had been exhausted,
the court ordered the parties to proceed to mediation.
After the mediation failed, at an October 21, 2004 hearing, the court reiterated that
the directors were deadlocked in the management of the corporate affairs and that irreparable injury
to the corporation was threatened. As to whether other available remedies were adequate, the court
stated: “[N]ow the issue as to whether or not all remedies have been sought, I think that with the
failure of the mediation that we have gone as far as we can go to get it corrected, so I . . . hereby
order that we appoint a receiver . . . .” On November 29, the court appointed a receiver as the chief
operating officer of the company who would also serve as a fifth member of the board of directors.
3
The order also specified that the receiver would “supervise a buy-sell negotiation between the parties
in which there will be a complete sale of the stock of one party to the other party.”
Standard of Review
We will affirm the interlocutory appointment of a receiver, whether authorized by
statute or by equity, unless the trial court clearly abused its discretion. Abella v. Knight Oil Tools,
945 S.W.2d 847, 849 (Tex. App.—Houston [1st Dist.] 1997, no writ). A trial court abuses its
discretion when it acts without reference to guiding rules and principles. Downer v. Aquamarine
Operators, Inc., 701 S.W.2d 238, 241-42 (Tex. 1985). If the decision was within the trial court’s
discretionary authority, we may not reverse simply because we might have reached a different
decision. Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223, 226 (Tex. 1991).
The remedy of receivership is an extraordinary remedy that must be cautiously
applied. It has been described as a drastic, far-reaching, and harsh remedy. See, e.g., Rowe v. Rowe,
887 S.W.2d 191, 200 (Tex. App.—Fort Worth 1994, writ denied); Balias v. Balias, Inc., 748 S.W.2d
253, 257 (Tex. App.—Houston [14th Dist.] 1988, writ denied). Accordingly, a receiver will not be
appointed if another remedy exists at law or in equity that is adequate and complete, even if
receivership is authorized under a specific statutory provision, as in this case.
Statutory Basis for Rehabilitative Receiver
Article 7.05 of the Business Corporation Act governs appointment of a rehabilitative
receiver “for the assets and business of a corporation.” Tex. Bus. Corp. Act Ann. art. 7.05, § A
(West 2003). The Act provides that the district court of the county where a corporation’s registered
4
office is located may appoint a receiver to conserve the assets and business of the corporation and
to avoid damage to the parties at interest, if all other requirements of law are complied with and there
are no other legal or equitable remedies available, including the appointment of a receiver for
specific corporate assets. Article 7.05, section A states the preliminary prerequisites for appointment
of the receiver:
A receiver may be appointed for the assets and business of a corporation by the
district court for the county in which the registered office of the corporation is
located, whenever circumstances exist deemed by the court to require the
appointment of a receiver to conserve the assets and business of the corporation and
to avoid damage to parties at interest, but only if all other requirements of law are
complied with and if all other remedies available either at law or in equity, including
the appointment of a receiver for specific assets of the corporation, are determined
by the court to be inadequate . . . .
Id. (emphasis added).
Article 7.05, section A then lists the narrow instances that may warrant the
appointment of a rehabilitative receivership. Although the statute lists five circumstances in which
the receiver may be appointed, the Cavanaughs assert that three are relevant here. They urge that a
receiver was warranted and properly appointed because (i) the directors are deadlocked in the
management of the corporation, and the shareholders are unable to break the deadlock, and
irreparable injury to the corporation is being suffered or is threatened, see article 7.05, § A(1)(b); (ii)
Fortenberry engaged in illegal and oppressive conduct, see article 7.05, § A(1)(c); and (iii) the
shareholders have now been deadlocked for a period that includes the last two annual shareholders’
meetings, see article 7.05, § A(1)(e). Subsection A(3) authorizes appointment of a rehabilitative
5
receiver in “any other actions” in which “receivers have heretofore been appointed by the usages of
the court of equity.” Tex. Bus. Corp. Act Ann. art. 7.05, § A(3).
The narrow issue before this Court, then, is whether the district court abused its
discretion in appointing a receiver. Before we even reach the specific instances in which a receiver
may be appointed, we must determine whether the Cavanaughs have demonstrated that other
remedies available either at law or in equity are inadequate. The burden of proof to show the
existence of circumstances justifying the appointment of a receiver rests on the party seeking the
appointment. See, e.g., Furgerson v. First Nat’l Bank, 218 S.W.2d 1019, 1020 (Tex. Civ.
App.—Texarkana 1949, no writ). This burden has not been met.
The Cavanaughs contend that the “alternative” remedy proposed by Fortenberry—the
lawsuits—is inadequate because it is “nowhere as prompt, complete, practical, and efficient” as the
receivership ordered by the district court. While lawsuits are not always tidy and efficient, it is the
very issue of deadlock in operation, management, and control, as well as damages, that the lawsuits
seek to address. That lawsuits are not expeditious and inexpensive does not mean that they are an
inadequate remedy—or more importantly, that they should not be employed before the harsh remedy
of receivership is triggered.
The existence of serious disagreements in the present case does not inexorably lead
to the appointment of a receiver. The Cavanaughs offered no evidence at the hearings on their
motion to appoint a receiver to support the district court’s conclusion that other remedies available
either at law or in equity were inadequate. No evidence in the record supports the conclusion that
any methods—other than the thwarted mediation—were employed to sort out the management
6
difficulties. The failure of a court-ordered mediation to resolve the issues presented by the
declaratory actions is insufficient to support the appointment of a receiver.
There also was no evidence of imminent danger of insolvency or other emergency
justifying the appointment of a receiver. That the appointment of a receiver is a drastic remedy is
clear by the effect of the order, which would transfer control of the company to the receiver. The
receiver was also ordered to supervise a buy-sell negotiation between the parties. If that negotiation
fails, then the order provided that the court would, at that time, “issue a decision as to the auction
or other sale” of the company. The Cavanaughs cannot justify the request for a receivership on the
ground that other remedies are inadequate to restore their claimed right of control and to prevent
harm when the receivership itself may deprive them of that control. There is no indication in the
record why injunctive relief and monetary damages could not be employed to preserve assets or
provide an adequate remedy.
Because there were other remedies available, the district court abused its discretion
in prematurely ordering the appointment of a receiver with sweeping powers. We hold that, by
granting the Cavanaughs’ motion to appoint a receiver when there was no evidence supporting its
finding that other remedies available either at law or in equity were inadequate, the district court
abused its discretion.
Fortenberry also asks that we remand this case to the Burnet County district court so
that it may abate the Burnet County action in favor of the first-filed Travis County action. Although
the Burnet County district court expressed the view that if it were inclined to deny the application
for receivership, then it would abate its action to allow the parties to resolve the claims in the Travis
7
County lawsuit, it did not rule on the motion to abate the Burnet County action. Because the court
has not ruled and we cannot say that this issue is fully briefed on appeal, we reverse the decision of
the district court to appoint a receiver, vacate that order, and remand for proceedings not inconsistent
with this opinion.2
__________________________________________
Jan P. Patterson, Justice
Before Chief Justice Law, Justices Patterson and Puryear
Reversed and Remanded
Filed: June 16, 2005
2
Because of the disposition of this appeal, we overrule Fortenberry’s motion to order the
trial court to complete the bill-of-exception procedure as moot.
8