Balusik, J. Lorriane v. Dean D. Kollatschny ( 2002 )

  Opinion issued April 18, 2002

In The

Court of Appeals

For The

First District of Texas

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NO. 01-99-01342-CV

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J. LORRIANE BALUSIK, Appellant

V.

DEAN D. KOLLATSCHNY AND FLOORCRAFTERS, INC., Appellees

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On Appeal from the 127th District Court

Harris County, Texas

Trial Court Cause No. 97-37064

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O P I N I O N  

This is a shareholder derivative suit involving a closely held corporation owned by appellant, J. Lorriane Balusik, and appellee, Dean D. Kollatschny. The trial court rendered partial summary judgment that Balusik violated Texas Business Corporation Act article 5.10 ⁽¹⁾ when she did not obtain the approval of two-thirds of the corporation's shareholders before transferring "all, or substantially all" of its assets to another corporation owned solely by her. The remaining issues were tried to a jury. The trial court instructed the jury that Balusik's transfer of all, or substantially all, of the corporation's assets was a breach of her fiduciary duty to the corporation and to Kollatschny, its minority shareholder. Balusik appeals from the trial court's judgment awarding $375,000 in actual damages to the corporation and $125,000 in exemplary damages to Kollatschny.

Without challenging the partial summary judgment, Balusik presents eight issues for our review, contending the trial court erred in: (1) instructing the jury she breached her fiduciary duty to the corporation; (2) refusing to submit certain affirmative defenses to the jury; (3) and (4) instructing the jury she owed a fiduciary duty to Kollatschny; (5) holding she committed "defalcation" and "malicious defalcation"; (6) failing to issue findings of fact and conclusions of law; (7) awarding punitive damages to Kollatschny; and (8) submitting a single jury question on damages, which failed to reflect a proper measure of damages. We affirm in part and reverse and render in part.

Facts and Procedural Background

Balusik and Kollatschny were the only two shareholders of Floorcrafters of Texas, Inc. (Floorcrafters I), a company that installed residential flooring. Balusik owned 51% of the Floorcrafters I stock and Kollatschny owned 49%. Balusik and Kollatschny each owned 50% of the stock of Colorworld Carpet Mill Outlet, another company that sold floor covering products. The business relationship between Balusik and Kollatschny eventually deteriorated, and Floorcrafters I ceased to operate. Balusik and Kollatschny then started their own companies: Balusik was the sole shareholder of Floorcrafters, Inc. (Floorcrafters II), and Kollatschny was the sole shareholder of Installation Resources. Balusik claims that in June 1997, she sold the assets of Floorcrafters I to Floorcrafters II in exchange for Floorcrafters II assuming certain liabilities of Floorcrafters I.

On July 16, 1997, Kollatschny filed a petition for mandamus against Colorworld and Floorcrafters I to compel access to their corporate books and records. On November 4, 1997, after obtaining documentation and learning that substantially all the assets of Floorcrafters I were transferred to Floorcrafters II, Kollatschny, individually and in a shareholder derivative capacity, filed a supplemental petition suing Balusik for breach of fiduciary duty. The trial court rendered a partial summary judgment based on the following undisputed facts:

(1) The transfer of all, or substantially all, of the assets of [Floorcrafters I] to [Floorcrafters II] was a transfer which required approval of all 2/3 of the shareholders entitled to vote pursuant to Art. 5.10 of the Tex. Bus. Corp. Act.

(2) Said statute was violated in that the required approval of 2/3 of the shareholders entitled to vote was not obtained.

The case was later tried to a jury, and the trial court, over Balusik's objection, submitted the following jury instruction:

You are instructed by the Court that the disposition of all, or substantially all, of the assets [of Floorcrafters I] by Mrs. Balusik that is the subject matter of this suit was a breach of her fiduciary duty to the corporation [Floorcrafters I] and its minority shareholder Mr. Kollatschny.

The jury then found: (1) "the value" of Floorcrafters I on the date Balusik transferred its assets to Floorcrafters II was $375,000; ⁽²⁾ (2) Balusik did not act with malice in breaching her fiduciary duty to Floorcrafters I, but did act with malice in breaching her fiduciary duty to Kollatschny as a shareholder of Floorcrafters I; and (3) Balusik owed Kollatschny exemplary damages of $125,000. ⁽³⁾ The trial court rendered judgment on the verdict that Floorcrafters I recover $375,000 from Balusik in actual damages ("on the basis of defalcation while acting in a fiduciary capacity"), Kollatschny recover $125,000 from Balusik in exemplary damages ("based on malicious defalcation while acting in a fiduciary capacity"), and Kollatschny recover $110,864.45 from Floorcrafters I in expenses, including attorney's fees, plus further attorney's fees if the case was appealed. The trial court also imposed a constructive trust on Floorcrafters I's assets.

Jury Instruction

In issue one, Balusik contends the trial court erred in instructing the jury that she breached her fiduciary duty to Floorcrafters I by disposing of its assets because whether such a breach occurred was a fact issue for the jury to decide. At the charge conference, Balusik's lawyer objected as follows:

With respect to the instructions, Your Honor, on the paragraph that begins with you are instructed by the Court that the disposition and so forth, Mrs. Balusik said if you put it was a breach of her fiduciary [duties] to the corporation and its minority shareholder, Mr. Kollatschny, we object to that instruction on the basis that there is nothing contained in Article 5.10 and so forth of the Texas Business Corporation Act that says that. There is no case law that says that a transfer without two/thirds approval is in and of itself a breach of fiduciary duty. And for that reason, we ask that instruction[] be stricken.

THE COURT: Overruled.

The trial court had two potential bases on which to overrule Balusik's objection. The trial court may have concluded Balusik's failure to comply with the requirements of article 5.10 automatically resulted in a per se breach of fiduciary duty. Alternatively, the trial court may have concluded the trial evidence proved as a matter of law that Balusik breached her fiduciary duty, thus justifying an instructed verdict on that basis. ⁽⁴⁾ Balusik's objection to the charge focused only on the first potential basis, and she failed to object to the charge on the basis that the trial court erroneously granted a sua sponte instructed verdict.

Even if we were to hold that a violation of article 5.10 does not automatically result in a per se breach of fiduciary duty, we would still be unable to reach the other potential basis for overruling Balusik's objection to the charge because Balusik did not make a specific objection in the trial court. See Tex. R. App. P. 33.1(a)(1)(A). Thus, we decline to address the issue of whether a violation of article 5.10 results in a per se breach of fiduciary duty.

We overrule issue one.

In issues three and four, Balusik claims the trial court erred in instructing the jury that she owed a fiduciary duty to Kollatschny and breached that alleged duty. Regardless of the propriety of the court's instructions, neither the jury nor the trial court awarded Kollatschny any actual damages in this case for breach of fiduciary duty. Any error in this regard was therefore harmless.

We overrule issues three and four.

Affirmative Defenses

In issue two, Balusik contends the trial court erred in refusing to submit her requested issues on the affirmative defenses of "consent" and "commercial reasonableness." We do not agree with Balusik that commercial reasonableness is an affirmative defense to breach of fiduciary duty. After it is established that a defendant has a fiduciary duty, the burden shifts to the defendant to show compliance with that duty, ⁽⁵⁾

and commercial reasonableness is subsumed within the elements the defendant must establish. ⁽⁶⁾ Once the trial court instructed the jury that Balusik had breached her fiduciary duty, it could not have properly submitted Balusik's requested issues on commercial reasonableness.

In regard to consent, Balusik's appellate brief fails to make specific record references to support her claim that Kollatschny or his agent consented to the sale of Floorcrafters I. See Tex. R. App. P. 38.1(h). If this evidence was not introduced at trial, Balusik was not entitled to a consent issue. See Tex. R. Civ. P. 278 (trial court shall submit questions raised by pleadings and evidence). We do not reach the issue of whether consent is an affirmative defense to breach of fiduciary duty or is an inherent part of the defendant's burden. See Estate of Townes v. Townes, 867 S.W.2d 414, 426 (Tex. App.--Houston [14th Dist.] 1993, writ denied) (Morse, J., dissenting).

We overrule issue two.

Defalcation

In issue five, Balusik claims the trial court erred in holding that she committed "defalcation" and "malicious defalcation." Without citation to authority, Balusik argues that the characterization of her conduct as a defalcation will prevent her from discharging the debt in bankruptcy because defalcation is defined as embezzlement. See Tex. R. App. P. 38.1(h). Regardless of the merits of that argument, embezzlement is not the only definition of defalcation. Defalcation is also defined as "[l]oosely, the failure to meet an obligation; a nonfraudulent default." Black's Law Dictionary 427 (7th ed. 1999).

We overrule issue five.

Findings of Fact and Conclusions of Law

In issue six, Balusik claims the trial court erred in failing to issue findings of fact and conclusions of law regarding the following questions: (1) whether Balusik breached her fiduciary duty to Floorcrafters I; (2) whether Balusik's affirmative defenses should be considered; (3) whether Balusik owed a fiduciary duty to Kollatschny, individually; (4) whether Balusik breached a fiduciary duty to Kollatschny, individually; and (5) whether Balusik committed "defalcation" and "malicious defalcation." In essence, Balusik merely restates issues one through five and does not demonstrate that any of these questions relates to a material issue that was decided by the trial court as the fact finder. Accordingly, findings of fact and conclusions of law were not appropriate. See Tex. R. Civ. P. 296; Linwood v. NCNB Tex., 885 S.W.2d 102, 103 (Tex. 1994).

We overrule issue six.

Actual Damages

In issue eight, Balusik argues the trial court erred in submitting a single jury question on actual damages, jury question one, which failed to reflect a proper measure of damages. On appeal, Balusik claims the correct measure of damages should be the net change in the value of Floorcrafters I, as opposed to the "value of the going concern business." Balusik does not show where she objected to question one on this basis or submitted a substantially correct question. See Tex. R. Civ. P. 271-79; State Dep't of Highways & Pub. Transp. v. Payne, 838 S.W.2d 235, 240-41 (Tex. 1992). Thus, any error was waived.

We overrule issue eight.

Exemplary Damages

In issue seven, Balusik argues the trial court erred in awarding exemplary damages to Kollatschny for breach of fiduciary duty because he did not recover actual damages for breach of fiduciary duty. We agree. See Nabours v. Longview Sav. & Loan Ass'n, 700 S.W.2d 901, 904 (Tex. 1985) (actual damages must be found before exemplary damages may be awarded). The jury's and trial court's other award of damages was to Floorcrafters I, not Kollatschny.

We sustain issue seven.

Conclusion

We reverse the portion of the trial court's judgment awarding Kollatschny $125,000.00 for his exemplary-damages claim and render judgment that Kollatschny take nothing on that claim. In all other respects, we affirm the trial court's judgment.

Terry Jennings

Justice

Panel consists of Justices Cohen, Jennings, and Smith. ⁽⁷⁾

Do not publish. Tex. R. App. P. 47.4

1.

Article 5.10(A)(4) provides:

A. A sale, lease, exchange, or other disposition . . . of all, or substantially all, the property and assets, with or without the goodwill of the corporation, if not made in the usual and regular course of its business, may be made upon such terms and conditions and for such consideration . . . as may be authorized in the following manner:

. . . .

(4) . . . Such authorization shall require the affirmative vote of the holders of at least two-thirds of the outstanding shares of the corporation entitled to vote thereon . . . .

Tex. Bus. Corp. Act Ann. art. 5.10(A)(4) (Vernon Supp. 2002).

2. JURY QUESTION NO. 1

Find the value of the going concern business that was transferred from [Floorcrafters I] to [Floorcrafters II] in June of 1997.

Answer in dollars and cents, if any.

ANSWER: $375,000

3. JURY QUESTION NO. 5

What sum of money, if any, should be assessed against Lorraine Balusik and awarded to Dean Kollatschny as exemplary damages, if any, for the breach of fiduciary duty to the corporation stockholder?

. . . .

Answer in dollars, if any.

ANSWER: $125,000

4. Further, the trial court may have concluded that Balusik simply failed to present evidence to overcome the presumption of unfairness in regard to her sale of the assets of Floorcrafters I to Floorcrafters II.

See Tex. Bank & Trust Co. v. Moore, 595 S.W.2d 502, 507-09 (Tex. 1980).

5. Texas courts have applied a presumption of unfairness to transactions between a fiduciary and a party to whom she owes a duty of disclosure, thus casting on the profiting fiduciary the burden of showing the fairness of the transactions.

Tex. Bank & Trust Co., 595 S.W.2d at 507-09. The fiduciary must show proof of good faith and that the transaction was fair, honest, and equitable. Miller v. Miller, 700 S.W.2d 941, 946-47 (Tex. App.--Dallas 1985, writ ref'd n.r.e.).

6. Texas Pattern Jury Charge 104.2 sets out the elements a fiduciary must show to avoid a conclusion that the fiduciary has breached her duty:

Did [defendant] comply with [her] fiduciary duty to plaintiff?

[Because a relationship of trust and confidence existed between them,] . . . [defendant] owed [plaintiff] a fiduciary duty. To prove [she] complied with [her] duty, [defendant] must show:

a. The transaction[s] in question [was/were] fair and equitable to [plaintiff];

b. [Defendant] made reasonable use of the confidence that [plaintiff] placed in [her];

c. [Defendant] acted in the utmost good faith and exercised the most scrupulous honesty toward [plaintiff];

d. [Defendant] placed the interests of [plaintiff] before [her] own, did not use the advantage of [her] position to gain any benefit for [herself] at the expense of [plaintiff], and did not place [herself] in any position where [her] self-interest might conflict with [her] obligations as a fiduciary; and

e. [Defendant] fully and fairly disclosed all important information to [plaintiff] concerning the transaction[s].

Comm. on Pattern Jury Charges, State Bar of Tex., Texas Pattern Jury Charges: Business Consumer Employment PJC 104.2 (2000) (derived from Stephens County Museum, Inc. v. Swenson, 517 S.W.2d 257, 261 (Tex. 1974)).

7. This appeal was argued on April 23, 2001 to a panel consisting of the Honorable Murry B. Cohen and the Honorable Scott Brister, Justices, and the Honorable Jackson B. Smith, Jr., retired Justice, Court of Appeals, First District of Texas at Houston, participating by assignment. Justice Brister resigned from this Court on July 16, 2001 to become the Chief Justice of the Fourteenth Court of Appeals, and the Chief Justice of this Court appointed the Honorable Terry Jennings to participate in the appeal's decision.