Stephen Paine, Janna McCarter Paine as Trustee for Stephen B. Paine Family Trust, Stephen Bartlett Paine, Jr., William Edward Paine, Leanne Patricia Paine v. James M. Golden, Automated Cash, Inc. and Automated ATM Service Corporation ( 2023 )

Opinion issued June 22, 2023
In The
Court of Appeals
For The
First District of Texas
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NO. 01-21-00399-CV
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STEPHEN PAINE, JANNA MCCARTER PAINE AS TRUSTEE FOR
STEPHEN B. PAINE FAMILY TRUST, STEPHEN BARTLETT
PAINE, JR., WILLIAM EDWARD PAINE, AND LEANNE PATRICIA
PAINE, Appellants
V.
JAMES M. GOLDEN, AUTOMATED CASH, INC., AND AUTOMATED
ATM SERVICE CORPORATION, Appellees
On Appeal from the 151st District Court
Harris County, Texas
Trial Court Case No. 2016-87802
MEMORANDUM OPINION ON REHEARING
Appellees James M. Golden, Automated Cash, Inc. (“ACI”), and Automated
ATM Service Corporation (“ASC”) filed a motion for rehearing of our December
20, 2022 opinion. We deny the motion for rehearing, withdraw our opinion and
judgment of December 20, 2022, and issue this memorandum opinion and
judgment in their stead. Our disposition remains the same.
This is an appeal from the trial court’s summary judgment. Appellant
Stephen Paine and appellee James M. Golden created appellees Automated Cash
Inc. (“ACI”) and Automated ATM Service Corporation (“ASC”). Paine transferred
his ownership interests in both companies to Janna McCarter Paine, as trustee of
the Stephen B. Paine Family Trust, to be held for the benefit of his three (now-
adult) children, appellants Stephen Bartlett Paine, Jr., William Edward Paine, and
Leanne Patricia Paine (collectively, “the Trust”).
When a dispute arose about the management and finances of the companies,
Paine, who maintains that he is a director of both ACI and ASC, and the Trust sued
Golden, ACI, and ASC seeking access to books and records, an accounting, and a
declaration that Paine was a director of the companies. The appellants alleged
breach of fiduciary duty, alleging, in part, that under Golden’s leadership more
than $1,000,000 was missing or had been stolen. The appellants also alleged that
Golden took invalid actions on behalf of the companies, including making
distributions to himself in excess of the distributions made to the Trust.
After an audit determined that there was a $1,019,000 accounting error,
which did not represent money missing from the businesses, the trial court granted
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summary judgment in favor of Golden, ACI, and ASC. The court also determined
that Paine was not a director based on the doctrine of judicial estoppel. The trial
court later awarded attorney’s fees under the Uniform Declaratory Judgments Act.
See generally, TEX. CIV. PRAC. & REM. CODE §§ 37.001–.011. Paine and the Trust
appealed.
On appeal, the appellants raise 15 issues regarding the court’s rulings on:
(1) motions to show authority; (2) directorship; (3) pretrial evidentiary rulings;
(4) summary judgment; and (5) Paine’s application for appointment of a receiver.
Because we conclude that the appellees did not conclusively prove their
entitlement to summary judgment, we reverse the summary judgment and remand
to the trial court for further proceedings.
Background
I. Paine and Golden enter the ATM business and create ACI and ASC.
Paine and Golden formed ACI in 1997 to operate in the ATM business.
Under ACI’s articles of incorporation, the “number of initial Directors is one,” and
the initial director was James M. Golden. According to Paine, two days after ACI
was formed, he and Golden had a meeting at which they organized ACI “according
to forms and documents prepared by our counsel.” At that meeting, 500 of the
1,000 authorized shares of ACI were issued to Paine and 500 shares were issued to
Golden. Paine averred that he and Golden were elected as the only directors of the
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ACI board of directors. Golden was appointed president of ACI, and Paine was
appointed secretary. Paine said there were no subsequent elections and that he
continued to be an officer and director of ACI. Golden testified in his deposition
that, when ACI was incorporated, Paine was a director of ACI. Immediately after
the ACI stock issuance, Paine transferred ownership of his 500 shares to his wife,
Janna McCarter Paine “to hold in trust for herself and [their] three children,
Stephen Jr., William, and Leanne.”
ASC was incorporated in Texas in 2007. According to the certificate of
formation, Golden was the organizer, and both Golden and Paine were directors.
Golden owns 50% of ASC and the other 50% is held by Janna McCarter Paine in
trust for Paine’s three children. Golden is the president of ASC, and Paine is the
secretary or the vice-president.
ACI owns approximately 126 ATM machines throughout Houston, Dallas,
and San Antonio. ACI self-funds 73 of the ATM machines, and the remainder of
the ATM machines are leased to third parties, who fund them. To fund the
machines, ACI relies on loans, which are personally guaranteed by Golden, from
Chasewood Bank. The cash from the Chasewood Bank loans and the transaction
fees from the 73 ACI-funded ATMs are maintained in a “cash inventory account”
(ending in “944”) at Chasewood Bank.
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As president of both ACI and ASC, Golden manages the daily operations of
the businesses. When Golden notices the cash inventory of an ATM is running
low, he electronically transfers money from the cash inventory account to the
Federal Reserve Bank, from which Garda Armored Car Services (“Garda”) collects
the cash, transports it to, and places it in the ATM machine.
When a customer withdraws money from an ATM, the value of the
withdrawal and the withdrawal fees are transferred electronically from the
customer’s bank account to ACI’s cash inventory account. ACI periodically
transfers the transaction fees to an operating account at Amegy Bank (ending in
“8640”). ASC generates no revenue and exists solely to service the ATM
machines, when needed.
II. Paine and Golden grow to distrust each other.
While Golden manages the daily operations of the businesses, Paine, who is
an officer and maintains that he is also a director of both companies, reviews the
books from time to time. Since at least 2014, Paine has been concerned about
irregularities in financial statements and tax returns.
From 2014 through the end of 2016, Paine and Golden exchanged numerous
emails. Paine demanded information, sought an accounting, and asked questions
based on his investigations of the company books and procedures. Paine contended
that approximately $1,000,000 was missing or had been stolen from the cash
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inventory. Paine further claimed that “an additional $300,000 to $500,000 [was]
wrongfully expensed in the corporate financial statements and tax returns.” Paine
accused Golden of self-dealing, breaching his fiduciary duties, and “attempt[ing] to
cover [his] trail” by “demand[ing] the accountants ‘wipe-out’ and deduct $400,000
of equity from the 2015 balance sheet and corporate tax return.”
Golden repeatedly informed Paine that ACI had paid the company’s
accountants to assist with Paine’s requested audit. Golden accused Paine of stalling
in completion of the audit, disputed Paine’s accusations of self-dealing and
wrongful conduct, maintained that no money was missing, and continually resisted
Paine’s attempts to alter business procedures and practices. Golden also accused
Paine of self-dealing, writing: “There is a RAT, EMBEZZLER and THIEF in this
company it’s YOU YOU YOU.”
In short, after years of acrimony, Golden and Paine were deadlocked.
III. Paine and the Trust sue Golden, ACI, and ASC.
A. The appellants plead various causes of action seeking access to
company information and alleging breach of fiduciary duty and
self-dealing by Golden.
In December 2016, Paine and the Trust filed suit against Golden, ACI, and
ASC. They later amended their petition, and their live pleading at the time of
judgment, the second amended petition, alleged that both ACI and ASC were
“deadlocked at every level.” They also alleged that a cursory review of the
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financial statements and tax returns from 2010 through 2015 revealed “serious
discrepancies,” including a discrepancy of $1,519,200 reflected on the statements
of cash flows but not on the balance sheets. Paine and the Trust alleged that this
discrepancy meant that the money was “either missing or unaccounted” and that
Golden had not explained the discrepancies. Paine and the Trust also alleged that a
$400,000 adjustment to the cash inventory balance “represent[ed] the
disappearance of $400,000 in twenty-dollar bills, with no explanation.” Finally,
Paine alleged that both he and Golden had “from time to time received informal or
de facto dividends through personal expenses paid by the corporations or informal
payments” from ACI. Paine asserted that “Golden’s de facto dividends have
greatly exceeded the payments made to or for the benefit of Paine and the Trust,
thus denying [Paine and the Trust] their right to a proportional share in the profits
of the corporation.”
Paine and the Trust pleaded the following causes of action:
1. Writ of mandamus: Paine sought a writ of mandamus requiring ACI and
ASC to permit him to inspect and copy all their books and records. Paine
also sought attorney’s fees.
2. Invalidity of corporate acts: Paine and the Trust sought an order declaring
certain corporate actions invalid under section 21.914 of the Business
Organizations Code (“Proceeding Regarding Validity of Defective
Corporate Acts and Shares”) and chapter 37 of the Texas Civil Practice
and Remedies Code (the “Uniform Declaratory Judgments Act”). Paine
and the Trust also sought: (i) a complete audit of all of ACI’s and ASC’s
financial records from inception, (ii) the imposition of a constructive
trust, (iii) an order that the ACI and ASC pay the trust “its fair share of de
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facto dividends” or that Golden return any disproportionate distributions,
(iv) that Golden pay the costs of the accounting to the corporation, and
(v) a mandatory injunction requiring that the corporations adopt
appropriate safeguards and financial controls, as approved by the Court.
Paine and the Trust challenged the following specific corporate actions:
a. the $400,000 inventory write down;
b. the alleged failure to keep accurate accounting records;
c. the alleged refusal to audit the corporation’s accounting
records;
d. the alleged payment of disproportionate de facto
dividends to Golden; and
e. Golden’s handling of the cash inventory and alleged lack
of implementation of safeguards for financial control.
3. “Common law accounting and equitable relief” (breach of fiduciary
duty): Paine and the Trust alleged that ACI and ASC committed “a
breach of trust against the Trust.” They alleged that Golden’s knowing
behavior made him jointly and severally liable for the breach of trust.
They sought an accounting from the inception of the companies and
equitable relief, including disgorgement of distributions and imposition
of a constructive trust.
4. Derivative claims: The Trust alleged that ACI and ASC are closely held
corporations and that Golden breached his fiduciary duties to the
corporations and shareholders. They pleaded that “justice requires the
derivative proceeding to be treated by the Court as a direct action brought
by Plaintiffs for their own benefit and that the recovery be paid directly
to the Plaintiffs.”
5. Declaratory judgment: Paine sought a declaratory judgment that he is
director of ACI and ASC by operation of the Texas Business
Organizations Code. This cause of action was added in a second amended
petition that was later struck as untimely filed. It was pleaded again in a
second amended petition filed in April 2020 pursuant to a court order
permitting amendment.
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The appellees’ live pleading at the time of judgment included the affirmative
defense of judicial estoppel and a claim for attorney’s fees.
B. All parties saw changes in legal representation in the trial court.
Counsel for the appellants withdrew in March 2018, and the appellants were
then pro se until M. Obaid Shariff of the Shariff Law Firm appeared in December
2018. Meanwhile, Golden, ACI, and ASC were represented by Kathleen Cynthia
Pickett and N. Kimberly Hoesl, who also now represent them on appeal. In 2018,
Pickett and Hoesl left the law firm of Hoover Slovacek and joined the Pickett Law
Group. In April 2018, Pickett, Hoesl, and Gregory A. Savage of Hoover Slovacek
filed an opposed motion to substitute counsel to allow the Pickett Law Group to
substitute in for Hoover Slovacek. In the certificate of conference on the opposed
motion to substitute counsel, Hoesl certified that she “emailed and spoke with pro
se plaintiff Stephen Paine regarding the relief sought in this motion. Mr. Paine
indicated that plaintiffs opposed the relief sought herein. About a week later,
Pickett and Hoesl filed a supplemental certificate of conference, in which Hoesl
certified: “[O]n April 27, 2018, I spoke with pro se plaintiff Stephen Paine
regarding the relief sought in this motion. Mr. Paine indicated that plaintiffs do not
oppose the relief sought in Defendants’ April 18, 2018 Motion to Substitute
Counsel.” The motion was granted in December 2018.
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C. The appellants repeatedly challenged the authority of counsel to
represent ACI and ASC and sought declaratory judgment on
Paine’s claim that he is a director of ACI and ASC.
Appellants filed several motions challenging the authority of counsel to
represent ACI and ASC, arguing that because Paine and Golden were both
directors, unanimous consent was required for Golden to validly retain counsel for
ACI and ASC.1
Paine also moved for summary judgment on his claim for a declaratory
judgment that he is a director of both ACI and ASC. About a year after the first
motion to show authority, the appellants moved for partial summary judgment on
their newly pleaded claim for a declaratory judgment that Paine was a director of
ACI and ASC. The summary-judgment evidence included Golden’s affidavit and
excerpts from Golden’s deposition, which had been taken almost a year after he
signed his affidavit. In his affidavit, Golden averred that he was the sole director of
both companies, but in his deposition, he conceded that Paine was a director of the
companies. The appellants argued that Golden’s deposition testimony conclusively
proved that Paine was a director of both companies. The court denied the motion
for summary judgment, concluding that Golden’s deposition testimony created a
1
The appellants filed three motions seeking an order striking the pleadings of ACI
and ASC and requiring Hoesl and Pickett to withdraw from representation: (1) a
motion to show authority filed in February 2019, which was denied on March 11,
2019; (2) a motion to reconsider the motion to show authority filed in March 2019,
which was denied in April 2019; and (3) a second sworn motion to show authority
filed in September 2020, which was denied the same month.
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genuine issue of material fact that precluded partial summary judgment on the
question of whether Paine is a director of ACI and ASC, “the very issue upon
which Plaintiff moved.”
D. The trial court appointed an auditor, who filed an initial report
and responses to the appellants’ special exceptions.
1. The audit
Meanwhile, in addition to litigating the question of directorship, the parties
were also litigating the other claims. In August 2019, and on the appellants’
motion, the trial court appointed the firm of Carr, Riggs, & Ingram, LLC, CPAs
and Advisors (“CRI”), to perform an audit pursuant to Texas Rule of Civil
Procedure 172. The trial court directed CRI to analyze ACI’s—and if needed
ASC’s—financial accounts to determine the reason for the alleged $400,000
variance between the draft tax return and the tax return that was filed for fiscal year
2015. The audit was performed by Marc Berry and Miles Harper, both of whom
are accountants and partners at CRI. Essentially, the audit consisted of reconciling
ACI’s records with the cash present in the company’s accounts and ATM
machines.
2. The first auditor’s report and response to exceptions
After CRI filed its first report, the appellants filed special exceptions seeking
to clarify that there was a total discrepancy of $1,019,000 in the retained earnings
account. The appellants also objected to a statement that there was no “evidence of
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theft or fraudulent activity during the years the analysis covers,” arguing that it was
overly broad and conclusory.
The first report, as clarified by the responses to the special exceptions,
reached the following conclusions:
• The reason for the $400,000 variance between the draft tax return and
the tax return for the fiscal year 2015 was an overstatement of the
ATM cash inventory.
• An additional adjustment to the final 2015 tax return in the amount of
$619,000 was warranted, because the total overstatement of ATM
cash inventory for that fiscal year was $1,019,000.
• Based on its analysis, “CRI did not find any evidence of theft or
fraudulent activity during the years the analysis covers.” This
statement is “limited to the procedures performed in the analysis
detailed in the report. These procedures, which were approved by both
parties prior to us engaging in the work, were limited to the
transactions from the Chasewood bank account ending in 944 which is
associated with the ATM cash inventory. The ATM cash inventory is
a separate balance presented on the 2015 tax return.”
• “CRI did note a significant lack of accounting controls and accounting
close procedures to reconcile operating activity each month, quarter
and year-end.”
E. February 2021 brings a flurry of motions, mostly related to the
audit.
1. The appellants’ motions
In February 2021, the appellants filed (1) a motion to appoint a receiver to
rehabilitate the companies, (2) a motion for an expanded audit to determine the
reason for the large accounting error, and (3) a motion for leave to conduct
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discovery regarding documents that were produced in January 2021 while
exchanging exhibits in anticipation of trial. These documents included pleadings
from bankruptcy cases involving Paine.
2. The appellees’ motions and pleadings
Also in February 2021, the appellees filed a motion for a pretrial ruling
under Rule 166 of the Rules of Civil Procedure (“Pretrial Conference”) on
appellants’ claims involving “theft or fraud.” The appellees argued that, under Rule
of Civil Procedure 172, the auditor’s report conclusively proved that an
overstatement of cash inventory led to the variance in the 2015 tax returns and that
the appellees did not engage in fraud in connection with the allegedly missing
$1,019,000.
Although this motion did not comply with the requirements for a motion for
summary judgment under Rule of Civil Procedure 166a, the appellees sought a
ruling that “per CRI’s verified report, there is no evidence of theft or fraudulent
activity by Defendants for the period of 2015 through June 2020, particularly
including ACI’s 2015 tax return, ACI’s Cash Inventory Account, and ACI’s
retained earnings account.”
The appellees also amended their answer and counterclaim, pleading the
affirmative defense of judicial estoppel and pleading for attorney’s fees under the
Theft Liability Act and the Declaratory Judgments Act.
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3. The hearing
At a hearing in February 2021, CRI’s Harper testified that he recommended
ACI amend its prior tax returns because the overstatement of the cash inventory
account by about $1,000,000 resulted in an artificially increased tax burden to the
company. Harper estimated that amending the tax returns could yield
approximately $300,000 in tax benefits. With the agreement of all parties, the trial
court ordered Harper and CRI to amend ACI’s tax returns. Harper also testified
that the audit procedures revealed no evidence of fraudulent activity, and the
overstatement was an accounting error. He could not, however, identify any
specific entry in ACI’s financial records that was incorrect “primarily because they
didn’t have . . . what we consider an accounting system in place.”
4. Trial court rulings
The trial court granted the appellants’ motion for an expanded audit and
ordered the auditor to:
[R]eview [ACI] and [ASC’s] (collectively, the “Defendant
Companies”) financial records, including profits and loan records, to
determine (i) the total amount of the discrepancy beyond the
$1,019,000 already uncovered (collectively, “Disputed Funds”);
(ii) whether or not the Disputed Funds existed at one point or another
in the corporate accounts of the Defendant Companies; (iii) the
specific cause of the discrepancy; and (iv) if the Disputed Funds are
the result of accounting error identify the specific errors on which you
base such conclusions. The foregoing will be made into a report which
is accompanied by an affidavit and submitted to the Court by April 2,
2021.
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The trial court also entered an order requiring Harper to file amended federal
tax returns for the years 2015 through 2019 to correct the overstated cash inventory
discovered in the audit.
The trial court denied the motion for appointment of a receiver and the
appellants’ motion to reopen discovery to further investigate materials disclosed in
January 2021. The court noted that the discovery motion was “DENIED
WITHOUT PREJUDICE, depending, possibly, on the auditors’ additional
findings.” The trial court also denied the appellees’ motion for a pretrial ruling
regarding the conclusivity of the auditor’s report, stating that the denial was
“without prejudice to refiling at the conclusion of the additional work ordered by
this Court on February 16, 2021.”
F. The second auditor’s report
The second auditor’s report, which was filed on April 2, 2021, concluded
that the disputed funds never existed. Instead, the auditor concluded that the error
arose from an earlier overstatement of debt and cash on hand. While the amount of
debt owed had previously been corrected, no such corrections had been made to
the cash on hand.
The appellees reurged their motion for a pretrial ruling on appellants’ claims
involving “theft or fraud.” They supplemented their motion with the second
auditor’s report. The appellants asserted that the second audit report supported
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their position and that they had two weeks left to timely file exceptions to the
second audit report.
The trial court issued an order granting the appellees’ requested pretrial
ruling. The order included findings of fact that detailed the auditor’s investigation.
The trial court admitted into evidence the following statements, which were
conclusions reached by the auditor, ruling that these statements were conclusive
“as to the matters they cover”:
1. After examination of all the bank accounts, loans, tax returns
and accounting documents available for Defendants ACI and
ASC from 2010 through July 2020, the only financial
discrepancy identified by the Court-appointed auditors is the
$1,019,000 overstatement of income identified in ACI’s 2015
tax return.
2. The Court-appointed auditors found no financial discrepancy
with respect to checks written by Defendant Golden to
Defendant Golden out of the ACI operating account.
3. The $1,019,000 overstatement does not reflect money that
actually existed.
4. There was no evidence of theft or fraudulent activity by
Defendants relating to the $1,019,000 overstatement.
The trial court further stated: “This ORDER is not intended to be read to
limit or preclude a trial regarding the alleged $386,737 discrepancy in
disbursement between Plaintiffs and Defendants, however.” This note referred to
the allegation that Golden gave himself disbursements exceeding disbursements
made to Janna in trust for Paine’s adult children.
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The trial court denied the appellants’ motion to require CRI to file another
verified report stating the amount of overpaid taxes.
G. The trial court grants a partial summary judgment in favor of the
appellees.
Also in April 2021, the appellees filed a combined traditional and no-
evidence motion for summary judgment. The summary-judgment motion had two
main contentions. First, the motion contended that all the appellants’ claims,
except for the declaratory judgment claim, arose under the Texas Theft Liability
Act (“TTLA”). The appellees contended that there was no evidence of (1) theft or
fraud regarding the overstatement of $1,019,000, and (2) improper distributions, or
damages. They also contended that the auditor’s report conclusively proved the
absence of fraud. They sought attorney’s fees as the prevailing party under the
TTLA. Second, the motion contended that summary judgment should be granted
on the declaratory judgment claim because they had conclusive evidence of two
affirmative defenses: (1) judicial admission and (2) judicial estoppel. These
defenses were based on statements made by Paine in two separate bankruptcy court
cases.
In response, the appellants argued that they did not bring a cause of action
under the TTLA, and they produced copies of the checks to Golden and email
correspondence between Paine and Golden as evidence of wrongful, unequal
distributions and damages. The appellants also argued that Golden, ACI, and ASC
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did not establish all three elements of the affirmative defense of judicial estoppel.
They also objected to summary judgment evidence on the grounds that the
bankruptcy court documents were not authenticated.
On May 26, 2021, the trial court granted an interlocutory “traditional and no
evidence” summary judgment. The order stated:
First, the Court hereby OVERRULES Defendants’ objections
to Plaintiffs’ summary judgment evidence. The Court likewise
overrules Plaintiffs’ authentication objections to Defendants’ PACER
summary judgment evidence.
Second, the Court finds that the Plaintiffs have adduced no
evidence, whether the cause of action is conversion or the Texas Theft
Liability Act, that the checks written by Golden were improper or
without any business justification, or otherwise wrongful. Further, the
Court finds no evidence adduced by Plaintiffs that they were damaged
by these checks.
Third, the Court finds it is not bound by its prior rulings on the
directorship issue as Defendants have timely raised a new defense of
judicial estoppel. The Court finds as a matter of law that Plaintiffs are
estopped from contending that Paine is a director of ACI and ASC.
Fourth, the Court has, in a separate Order, ruled on the
conclusivity of the auditors’ findings as it relates to the lack of
evidence of theft or fraud in connection with the overstated income in
ACI’s 2015 tax returns. That ruling remains undisturbed by this
Order.
It is therefore ORDERED that Defendants are awarded
interlocutory summary judgment against Plaintiffs on Plaintiffs’
affirmative claims, which are hereby DISMISSED WITH
PREJUDICE, and on Defendants’ claims under the Uniform
Declaratory Judgment[s] Act (UDJA).
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As to attorney’s fees, Defendants contend that Plaintiffs have
made claims under the Texas Theft Liability Act and that Defendants
contend they are the successful party under said Act. The Court finds
as a matter of law that Plaintiffs have NOT brought their claims under
the Texas Theft Liability Act, but on the basis of common law
conversion, and that therefore, there is no legal basis for an award of
fees under that statute. However, the issue of attorney’s fees remains
to be determined under the Texas UDJA claim on which Defendants
were the successful party in this litigation. The Court will consider
any award of fees under that Act via submission when said request is
promptly made and set for submission by Defendants.
The trial court later denied a motion to reconsider the interlocutory partial
summary judgment, and it rendered final summary judgment incorporating an
award of attorney’s fees.
Paine and the Trust appealed.
Analysis
This is an appeal from a summary judgment. On appeal, Paine raised the
following issues:
1. The trial court erred by refusing evidence at the hearing on the first
motion to show authority.
2. The trial court erred by denying the motion for reconsideration of the
first motion to show authority and by striking evidence associated
with this motion.
3. The trial court erred by denying a motion for partial summary
judgment regarding whether Paine was a director.
4. The trial court erred by denying the second sworn motion to show
authority.
5. The trial court erred by denying multiple requests for additional
discovery relevant to the judicial estoppel affirmative defense.
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6. The trial court erred by granting summary judgment on judicial
estoppel because it was not timely pled.
7. The trial court erred by denying multiple requests for appointment of
a receiver under Texas Business Organizations Code § 11.404.
On appeal, the Trust raised the following issues:
1. The trial court erred by granting summary judgment against each of
the Paine Parties on the affirmative defense of judicial estoppel.
2. The trial court erred by granting no-evidence summary judgment on
all the Paine Parties’ affirmative claims because the no-evidence
motion for summary judgment was improper.
3. The trial court erred by granting no-evidence summary judgment on
appellants’ affirmative claims. Golden, as fiduciary, had the burden of
proof on the fairness of the challenged transactions.
4. The trial court erred by entering a pretrial order establishing that the
auditor’s report conclusively disproved that Golden had converted
more than $1,000,000. The trial court further erred by rendering final
judgment based on this pretrial order.
5. The trial court erred by granting no-evidence summary judgment on
the common law or equitable accounting cause of action that sought a
complete accounting of ACI and ASC from inception to present day.
6. The trial court erred by denying the appellants’ request for a
supplemental auditor’s report after a court order authorized
amendment of ACI’s tax returns.
7. The trial court erred by denying the appellants’ motion for
reconsideration of the summary judgment after striking the testimony
of the appellants’ tax expert.
8. The trial court erred by denying the appellants’ motion for
reconsideration of the summary judgment after striking the appellants’
legal arguments.
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The appellants have raised 15 issues. Although the appellants filed separate
briefs, they all argued on behalf of the “Paine Parties,” which they defined as all
the appellants. We therefore will consider their issues together.
These issues generally fall into three categories: (1) issues that challenge
rulings on appellants’ motions to show authority; (2) issues that directly challenge
the trial court’s summary judgment; and (3) issues that directly challenge some
other interlocutory ruling that might indirectly affect the summary judgment.
Because we conclude that the motions to show authority were correctly decided
and that the motion for summary judgment was not meritorious, we will sustain the
first two issues raised in the “Trust’s” brief, which directly attack the summary
judgment. We will reverse the summary judgment in its entirety, and thus we do
not need to reach the appellants’ other issues.
I. Motion to show authority
The appellants challenged the authority of counsel to represent ACI and
ASC. In this court, the appellants argue that the trial court erred by refusing
evidence at the hearing on the first motion to show authority, by denying a motion
to reconsider the ruling on the first motion to show authority, and by denying the
second motion to show authority.
A party to a lawsuit who believes that the suit is being prosecuted or
defended without authority may file a sworn motion questioning the attorney’s
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authority to act. TEX. R. CIV. P. 12; see In re Murrin Bros. 1885, Ltd., 603 S.W.3d
53, 61 (Tex. 2019) (addressing Rule 12 dispute). “Rule 12 has long been the
exclusive method for questioning the authority of an attorney to bring a suit.”
Tanner v. Black, 464 S.W.3d 23, 26 (Tex. App.—Houston [1st Dist.] 2015, no pet.)
(quoting Phillips v. Phillips, 244 S.W.3d 433, 435 (Tex. App.—Houston [1st Dist.]
2007, no pet.)); see Angelina Cnty. v. McFarland, 374 S.W.2d 417, 423 (Tex.
1964)). Originally, the primary purpose of Rule 12 was to protect defendants by
enabling them to determine who had authorized the suit. Angelina Cnty., 374
S.W.2d at 423; Tanner, 464 S.W.3d at 26. “A trial court’s ruling on a motion to
show authority is not a decision on the merits or determination of ultimate
questions of fact.” Tanner, 464 S.W.3d at 26 (citing In re Guardianship of
Benavides, 403 S.W.3d 370, 374 (Tex. App.—San Antonio 2013, pet. denied)). “It
is simply a pretrial determination of an attorney’s authority to represent a party.”
Id.We review a trial court’s ruling on a motion to show authority for an abuse
of discretion. Tanner, 464 S.W.3d at 26; see Urbish v. 127th Judicial Dist. Court,
708 S.W.2d 429, 432 (Tex.1986); see also Worford v. Stamper, 801 S.W.2d 108,
109 (Tex. 1990) (holding that trial court abuses its discretion by acting without
reference to guiding rules and principles). When a party has filed a motion to show
authority, the challenged attorney bears the burden of proof “to show sufficient
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authority to prosecute or defend the suit on behalf of the other party.” TEX. R. CIV.
P. 12. If the challenged attorney fails to show authority to act, “the court shall
refuse to permit the attorney to appear in the cause, and shall strike the pleadings if
no person who is authorized to prosecute or defend appears.” Id.Murrin Brothers 1885 was an original proceeding on petition for writ of
mandamus to the Supreme Court of Texas. 603 S.W.3d at 54. In the underlying
case, “warring ownership factions” disputed the right to control a jointly owned
“honky-tonk” called “Billy Bob’s.” Id. One faction unilaterally retained counsel
for Billy Bob’s, and the other faction challenged the law firm’s authority, arguing
that the company documents required unanimity to take such an action. Id. at 56.
The trial court denied the motion to show authority. Id.
The Supreme Court of Texas denied mandamus relief, noting that mandamus
requires both an abuse of discretion and the lack of an adequate legal remedy. Id. at
56–57. The Court assumed that denial of the Rule 12 motion was an abuse of
discretion and concluded that the relator had not proven the lack of an adequate
legal remedy. Id. at 61. In analyzing the issues, the Court explained that the ruling
on the motion to show authority “was not a merits decision on ultimate issues such
as the meaning of the company documents and control of the company moving
forward.” Id. The Court also noted that if the relator succeeded “on the merits,
23
whether at trial or on appeal,” it could “pursue relief for losses suffered due to the
unauthorized hiring” of the law firm. Id. at 62.
In this case, counsel for ACI and ASC presented evidence that Golden, as a
director of ACI and ASC had retained counsel to represent both companies. This
evidence included an affidavit from Golden and corporate resolutions for ACI and
ASC authorizing the hiring of the attorneys. In the trial court, as on appeal,
appellants have conflated the question of authority to represent ACI and ASC with
the merits questions regarding corporate governance. As in Murrin Bros. 1885, the
trial court’s rulings on the motions to show authority did not determine the merits
question of whether Paine is a director of both companies.
In addition, Paine was pro se when counsel for ACI and ASC left the law
firm that had been ACI and ASC’s counsel of record, and they began practicing
under the auspices of another law firm. Although the motion to substitute counsel
filed by ACI and ASC’s attorneys initially indicated that Paine was opposed, a
supplemental certificate of conference indicated that Paine was no longer opposed
to the substitution. Paine did not file an objection to the motion to substitute
counsel. Appellees argue on appeal that Paine has waived his challenge to the
authority of counsel to represent ACI and ASC by his conduct. We agree.
Waiver is “an intentional relinquishment of a known right or intentional
conduct inconsistent with claiming that right.” Crosstex Energy Servs., L.P. v. Pro
24
Plus, Inc., 430 S.W.3d 384, 391 (Tex. 2014) (quoting Sun Expl. & Prod. Co. v.
Benton, 728 S.W.2d 35, 37 (Tex. 1987)). “Though waiver is a question of intent, it
need not be explicit.” LaLonde v. Gosnell, 593 S.W.3d 212, 219 (Tex. 2019). A
party demonstrates his intent to waive a right by behaving in a manner that is
unequivocally inconsistent with asserting that right in light of the surrounding
circumstances. Crosstex, 430 S.W.3d at 393–94. Parties may waive certain rights
by failing to object. See id. at 394.
By failing to object to the motion to substitute counsel after the
supplemental certificate of conference stated that Paine was not opposed, Paine
waived his complaint about the authority of counsel to represent ACI and ASC.
We overrule the issues that challenge the court’s rulings on the motions to show
authority.
II. Summary-judgment standards of review
“Summary judgments must stand or fall on their own merits.” Amedisys, Inc.
v. Kingwood Home Health Care, LLC, 437 S.W.3d 507, 511 (Tex. 2014) (quoting
McConnell v. Southside Indep. Sch. Dist., 858 S.W.2d 337, 343 (Tex. 1993));
accord Transcor Astra Grp. S.A. v. Petrobras Am. Inc., 650 S.W.3d 462, 478 (Tex.
2022) (holding that summary judgment motion must stand or fall on grounds
expressly presented in motion). “A court cannot grant summary judgment on
grounds that were not presented.” Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d
25193, 204 (Tex. 2002). “[I]f the grounds for summary judgment are not expressly
presented in the motion for summary judgment itself, the motion is legally
insufficient as a matter of law.” McConnell, 858 S.W.2d at 342. “In determining
whether grounds are expressly presented, we may not rely on briefs or summary
judgment evidence.” Sci. Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 912 (Tex.
1997)
We review a trial court’s summary judgment de novo. Lujan v. Navistar,
Inc., 555 S.W.3d 79, 84 (Tex. 2018). In doing so, “we take as true all evidence
favorable to the nonmovant, and we indulge every reasonable inference and
resolve any doubts in the nonmovant’s favor.” Provident Life & Accident Ins. Co.
v. Knott, 128 S.W.3d 211, 215 (Tex. 2003).
A. No-evidence motion for summary judgment
A no-evidence motion for summary judgment under Rule 166a(i) is
essentially a pretrial motion for directed verdict. Timpte Indus., Inc. v. Gish, 286
S.W.3d 306, 310 (Tex. 2009); see TEX. R. CIV. P. 166a(i). After an adequate time
for discovery, a party without the burden of proof may, without presenting
evidence, seek summary judgment on the ground that there is no evidence to
support one or more essential elements of the nonmovant’s claim or defense. TEX.
R. CIV. P. 166a(i). The motion must specifically state the elements as to which
there is no evidence. Id.; see Timpte Indus., 286 S.W.3d at 310. The trial court is
26
required to grant the motion unless the nonmovant produces summary-judgment
evidence that raises a genuine issue of material fact. TEX. R. CIV. P. 166a(i).
B. Traditional motion for summary judgment
To prevail on a traditional motion for summary judgment, the movant must
show that no genuine issue of material fact exists and that it is entitled to judgment
as a matter of law. TEX. R. CIV. P. 166a(c); Lujan, 555 S.W.3d at 84. “If the
movant carries this burden, the burden shifts to the nonmovant to raise a genuine
issue of material fact precluding summary judgment.” Lujan, 555 S.W.3d at 84;
see Maldonado v. Maldonado, 556 S.W.3d 407, 414 (Tex. App.—Houston [1st
Dist.] 2018, no pet.). The evidence raises a genuine issue of fact if reasonable and
fair-minded jurors could differ in their conclusions in light of all of the summary-
judgment evidence. Goodyear Tire & Rubber Co. v. Mayes, 236 S.W.3d 754, 755
(Tex. 2007). A defendant moving for summary judgment on an affirmative defense
has the burden to conclusively establish every element of that defense. See
Draughon v. Johnson, 631 S.W.3d 81, 88 (Tex. 2021).
III. The appellees filed a summary-judgment motion relying on no-evidence
and traditional grounds for different causes of action pleaded by the
appellants.
The appellees’ “traditional and no-evidence motion for summary judgment”
did not assert traditional and no-evidence grounds for summary judgment on the
same cause of action. E.g., Binur v. Jacobo, 135 S.W.3d 646, 650–51 (Tex. 2004)
27
(holding that party may combine request for summary judgment under no-evidence
standard with request under traditional summary judgment standard in single
motion). Rather, the motion in this case was a combination of (1) what appeared to
be an omnibus no-evidence challenge to all the appellants’ claims except the
declaratory judgment claim and (2) a traditional summary judgment on two
affirmative defenses relevant only to the declaratory judgment claim.
IV. The trial court erred by granting the no-evidence summary-judgment
motion.
The no-evidence motion for summary judgment in this case was expressly
directed to a claim under the TTLA, which authorizes an award of attorney’s fees
to a prevailing party. The motion stated: “Plaintiffs [appellants] alleged several
causes of action that are founded upon the pivotal allegation that Defendants
committed theft or fraud.” The motion also stated: “Plaintiffs also allege that
Defendant Golden wrongfully issued himself improper distributions.” Although the
appellants’ live pleading made no mention of any claim under the TTLA, the
appellees’ summary-judgment motion stated: “The applicability of the Texas Theft
Liability Act is confirmed by Plaintiffs’ allegation that ‘the underlying wrongful
conduct violates provisions of the Texas Penal Code, including theft and
misapplication by a fiduciary.’”
With that backdrop, and without identifying any elements of the claims
pleaded in the appellants’ second amended petition or disclosed in the appellants’
28
disclosures of legal theories2, the appellees moved for summary judgment. This
portion of the motion was entitled, “Traditional and No Evidence Motion for
Summary Judgment on Attorneys’ [sic] Fees Claims.” In this part of their motion,
they asserted that:
(1) they were entitled to recover attorney’s fees as prevailing parties
under the TTLA;
(2) the auditor’s report conclusively established that there was no
evidence of theft or fraud regarding the $1,019,000 overstatement of
income in ACI’s 2015 tax returns;
(3) “Plaintiffs cannot prevail on any claim based on allegations of theft or
fraud;”
(4) “Plaintiffs have no evidence of any improper distributions;”
(5) “Plaintiffs . . . identify no actual damages . . . resulting from any
alleged distribution;” and
(6) “Plaintiffs cannot prevail on their theft claims, and Defendants are the
prevailing parties because there is no theft or fraud. Defendants are
2
In an amended disclosure, the appellants disclosed the legal theories and factual
bases of their claims. This clarified that the appellants’ causes of action were:
(1) a writ of mandamus regarding inspection of books and records;
(2) a challenge to the validity of corporate acts under the Texas Business
Organizations Code, specifically: the $400,000 tax write down, the failure
to keep accurate accounting records, the payment of disproportionate de
facto dividends to Golden, Golden’s failure to exercise reasonable care in
handling cash inventory or implementing controls; and
(3) an action seeking a common law accounting and equitable relief, in regard
to the allegedly unequal distributions;
(4) derivative claims for breach of fiduciary duty in the maintenance of
accounting records and for conversion regarding the allegedly unequal
distributions; and
(5) a declaratory judgment that Paine is a director of both companies.
29
therefore entitled to recover their reasonable and necessary attorney’s
fees from Paine and the Trustee under the Theft Liability Act.”
The appellants did not plead a cause of action under the TTLA or mention
this statute in their live pleading.3 The appellants’ live pleading refers to theft only
once, stating: “Because the wrongdoing of Golden was committed maliciously
and/or fraudulently, Plaintiffs also seek an award of exemplary damages. The
statutory cap does not apply because the underlying wrongful conduct violates
provisions of the Texas Penal Code, including theft and misapplication by a
fiduciary.” (Emphasis added.) And the appellees did not expressly challenge the
elements of the claims that the appellants did plead as to which they contend there
was no evidence. The appellees’ summary-judgment motion did not expressly
mention any element of the appellants’ claims for a writ of mandamus, the
challenge to the validity of corporate acts under the Texas Business Organizations
Code, the action for a common law accounting, or the derivative claims for breach
of fiduciary duty and conversion.
It is axiomatic that a no-evidence motion must state the element or elements
for which there is no evidence. TEX. R. CIV. P. 166a(i). The Supreme Court of
Texas has “called for strict enforcement of this requirement.” Cmty. Health Sys.
3
The TTLA requires proof of theft as defined by the Penal Code. See TEX. CIV.
PRAC. & REM. CODE § 134.003(a); see also TEX. PENAL CODE §§ 31.03–.04,
31.06–.07, 31.11–.13. In this case, Golden—as a 50% shareholder in both ACI and
ASC and a director and the president of both companies—had some legal right to
distributions and access to the companies’ funds.
30
Prof’l Servs. Corp. v. Hansen, 525 S.W.3d 671, 695 (Tex. 2017); see Timpte Indus,
286 S.W.3d at 310–11 (holding that no-evidence motion must specifically identify
the challenged elements to satisfy Rule 166a(i)).
It is similarly well-settled that a trial court cannot render summary judgment
motion on grounds not presented in the motion. G & H Towing Co. v. Magee, 347
S.W.3d 293, 297 (Tex. 2011); Timpte Indus., 286 S.W.3d at 310–11; Johnson, 73
S.W.3d at 204; Science Spectrum, 941 S.W.2d at 912. “Granting a summary
judgment on a claim not addressed in the summary judgment motion therefore is,
as a general rule, reversible error.” G & H Towing, 347 S.W.3d at 297 (citing
Chessher v. Sw. Bell Tel. Co., 658 S.W.2d 563, 564 (Tex. 1983) (per curiam)).
The trial court granted summary judgment against appellants on their
“affirmative claims,” and dismissed those claims with prejudice based on a motion
that addressed only a claim that was not pleaded and that failed to address all the
claims that were pleaded. Strict enforcement of the specificity requirement in Rule
166a(i) does not permit this result.
V. The trial court erred by granting the traditional summary-judgment
motion.
The appellants argue that the trial court erred by granting traditional
summary judgment on the affirmative defense of judicial estoppel. In the trial
court, the appellees moved for summary judgment on their affirmative defenses of
judicial admission and judicial estoppel. Both defenses were based on
31
representations or omissions made by Paine in unrelated bankruptcy proceedings.
The summary-judgment evidence included a statement of financial affairs from
Paine’s bankruptcy proceeding and an answer that he filed as a defendant in an
adversary proceeding in an unrelated bankruptcy.
In the 2015 statement of financial affairs from Paine’s personal bankruptcy,
Question 18 asked:
If the debtor is an individual, list the names, addresses, taxpayer-
identification numbers, nature of the businesses, and beginning and
ending dates of all businesses in which the debtor was an officer,
director, partner, or managing executive of a corporation . . . within
SIX YEARS immediately preceding the commencement of this case.
{CR 4437}
Paine responded by listing only “Automated Financial Systems” and listing
“10 years+” instead of beginning and ending dates:
The order of discharge in this bankruptcy case was included in the summary-
judgment evidence.
In 2004, Paine, The Web Zealots, and ACI, were defendants in an adversary
proceeding brought by the bankruptcy trustee for debtor Cash Media Systems, Inc.
An answer filed in that case on behalf of Paine and ACI stated:
Defendants have not knowledge as to whether CMS entered into a
contract with The Web Zealots. Defendants deny that Stephen B.
Paine was a party to the alleged contract, and further deny that Paine
32
was the managing partner representing The Web Zealots. Defendants
admit that Paine was an officer, director, and shareholder in
Defendant Automated Cash, Inc. (“ACI”).
Paine and the Trust responded to the summary judgment, arguing that the
appellees had not conclusively proven the elements of judicial estoppel. Appellants
asserted in the trial court that Paine’s statement of financial affairs was not
inconsistent with their position in this case because Paine listed “‘Automated
Financial Systems,’ which are the relevant Defendant Companies.” The appellants
also argued that Paine did disclose his directorship relationship to the bankruptcy
court, and the appellees did not show that he never amended his statement of
financial affairs. Finally, Paine and the Trust argued that Golden, ACI, and ASC
did not demonstrate that Paine acted intentionally and not inadvertently.
The trial court expressly granted summary judgment based on judicial
estoppel.
“The doctrine of judicial estoppel ‘precludes a party from adopting a
position inconsistent with one that it maintained successfully in an earlier
proceeding.’” Pleasant Glade Assembly of God v. Schubert, 264 S.W.3d 1, 6 (Tex.
2008) (quoting 2 ROY W. MCDONALD & ELAINE G. CARLSON, TEXAS CIVIL
PRACTICE § 9.51 at 576 (2d ed. 2003)). “The doctrine is not strictly speaking
estoppel, but rather is a rule of procedure based on justice and sound public
policy.” Pleasant Glade, 264 S.W.3d at 6 (citing Long v. Knox, 155 Tex. 581, 291
33
S.W.2d 292, 295 (1956)). Judicial estoppel is not punitive; it precludes a party
from gaining an unfair advantage by adopting inconsistent positions in litigation
and “playing fast and loose with the judicial system for their own benefit.”
Ferguson v. Bldg. Materials Corp. of Am., 295 S.W.3d 642, 643 (Tex. 2009); see
also Tenneco Chem. v. William T. Burnett & Co., 691 F.2d 658, 665 (4th Cir.
1982) (finding “the determinative factor is whether the appellant intentionally
misled the court to gain unfair advantage”).
Because the issue in this case arises from a bankruptcy context, we look to
federal law to determine whether judicial estoppel applies. Espinosa v. Aaron’s
Rents, Inc., 484 S.W.3d 533, 541 (Tex. App.—Houston [1st Dist.] 2016, no pet.);
Tow v. Pagano, 312 S.W.3d 751, 756 (Tex. App.—Houston [1st Dist.] 2009, no
pet.). To establish judicial estoppel as an affirmative defense, the appellees were
required to conclusively show that: (1) the appellants asserted a legal position in
this state court proceeding that is clearly inconsistent with their prior position in
the bankruptcy court; (2) a court accepted the prior position; and (3) the
nondisclosure in the bankruptcy case was intentional and not inadvertent.
Espinosa, 484 S.W.3d at 541.
Appellants argue that the appellees failed to conclusively prove that Paine
and the Trust asserted a legal position in this case that is clearly inconsistent with
their prior position asserted in bankruptcy court. We agree.
34
The appellees argued that the statement of financial affairs from Paine’s
bankruptcy indicated that his service began and ended more than ten years prior to
the filing of the bankruptcy petition. Question 18 of the statement of financial
affairs asked for beginning and ending dates of service as director, but Paine
responded “10+,” which is ambiguous. While it could suggest that his service
began and ended more than ten years earlier, it could also suggest that his service
began ten years earlier and was continuing. Because this evidence is ambiguous, it
does not conclusively establish that Paine took a different position in the
bankruptcy court about whether he was a director of ACI.4
The statement in the answer in the adversary proceeding is likewise
ambiguous. Paragraph 11 of the answer refers to a contract and a time when parties
entered the contract. The appellees argue that Paine’s statement that he “was” a
director of ACI means that when he filed the answer, he was no longer a director of
ACI. But the answer does not say that he ceased serving as a director of ACI at any
time. The petition to which Paine’s answer was responsive is not in the record.
Without further context, this document is inconclusive about the dates when Paine
served as a director of ACI.
4
The parties do not differentiate between AFS and ACI. The appellees did not
argue that the statement of financial affairs is a contrary statement because it lists
only AFS and not ACI, and the appellants assert that the companies are the same.
Nothing in the voluminous appellate record explains the precise relationship
between these companies, though emails between Golden and Paine suggest a
pattern of using the terms ACI and AFS interchangeably.
35
Because the summary-judgment evidence the appellees rely on does not
conclusively show that Paine previously took an adverse position in federal court
on the question of whether he is a director of ACI, we conclude that the appellants
failed to prove the first element of judicial estoppel and were not entitled to
summary judgment. We sustain the first issue in the Trust’s brief.
Conclusion
We reverse the trial court’s summary judgment and remand this case to the
trial court for further proceedings.
Peter Kelly
Justice
Panel consists of Justices Kelly, Rivas-Molloy, and Guerra.
36