Ovation Finance Holdings 5 LLC v. G.E.T. Marketing, LLC PSW Real Estate, LLC And Stapleton Group ( 2024 )

In The
Court of Appeals
Seventh District of Texas at Amarillo
No. 07-23-00398-CV
OVATION FINANCE HOLDINGS 5 LLC, APPELLANT
V.
G.E.T. MARKETING, LLC; PSW REAL ESTATE, LLC;
AND STAPLETON GROUP, APPELLEES
On Appeal from the 459th District Court
Travis County, Texas
Trial Court No. D-1-GN-23-003968, Honorable Amy Clark Meachum, Presiding
April 15, 2024
OPINION 1
Before QUINN, C.J., and DOSS and YARBROUGH, JJ.
Background
Picture the following hypothetical final exam question in the business entities class
at Whatsamater U Law School. Jack runs a business wherein he invests and trades in
equities, like common stock sold on a stock exchange. Often, money was borrowed from
1 Because this appeal was transferred from the Third Court of Appeals, we apply its precedent
should it conflict with that of the Seventh Court of Appeals. TEX. R. APP. P. 41.3.
lenders to effectuate his purchases. One of the equities purchased was ten shares of
Berkshire Hathaway Inc., BRK A. Like many shareholders, he regularly attended annual
meetings and voted the shares owned as part of his business. Eventual economic
downturn adversely impacted his portfolio and financial worth. Fearing Jack’s insolvency,
one lender decided to petition for a receivership over his “property and business.” Jack
acceded, resulting in the trial court’s appointment of a receiver over his “property and
business.” Because part of his “property and business” consisted of owning and
managing the ten Berkshire shares, the trial court also placed Berkshire in receivership.
Berkshire objected and moved to vacate same since it was not named in the lender’s
petition, not insolvent, and not a debtor of the lender. Jack and the lender contested the
motion, arguing that Jack’s “property and business” included the equitable interest in
Berkshire and its management. Add into the situation a statute permitting a trial court to
“appoint a receiver for the entity’s property and business” when “the entity is insolvent or
in imminent danger of insolvency.” Now the final exam question is: should the trial court
grant Berkshire’s motion to dissolve the receivership over it?
Those circumstances generally reflect the non-hypothetical ones at bar. PSW
Real Estate, LLC (PSW) was the investor/debtor purportedly bordering on insolvency,
while G.E.T. Marketing, LLC (GET) was the creditor petitioning for receivership. The
entities in which PSW owned a membership or equitable interest in were SB Webberville
Road, LLC (Road) and PSW Webberville LLC (Webberville). PSW agreed to the
receivership and the order executed by the trial court. Through that order, the trial court
placed PSW and 55 “affiliates” into receivership. Two of the 55 were Road and
Webberville. No one presented evidence showing that PSW, Road, or Webberville were
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alter egos of each other or subject to having their respective corporate identities
disregarded. Indeed, GET argued nothing like that in its petition. Nor did it actually 1)
petition for a receiver over the 55 “affiliates,” 2) prove it was a creditor of Road or
Webberville, or 3) illustrate that Road or Webberville were insolvent.
And, though neither Road nor Webberville themselves moved to dissolve the
receivership over them, another member or creditor of those entities did, Ovation Finance
Holdings 5 LLC. So, part of the final exam question also includes an issue on standing.
That is . . . does a creditor or non-managerial member of Road or Webberville have
standing to attack the trial court’s ruling at bar?
Respecting the distinct corporate identities involved, applying the definitions of
“property and business” to the circumstances at bar, and complying with settled authority
concerning receiverships, we answer the final exam question “yes” and reverse.
Analysis
Section 11.404 of the Texas Business Organizations Code authorizes courts to
appoint a rehabilitative receiver to conserve the “property and business” of an entity and
to avoid damage to interested parties. TEX. BUS. ORGS. CODE ANN. §11.404(b)(1). The
authority comes with caveats, though. Appointment is allowed if “all other requirements
of law are complied with” and “all other available legal and equitable remedies, including
the appointment of a receiver for specific property of the domestic entity under Section
11.402(a), are inadequate.” TEX. BUS. ORGS. CODE ANN. § 11.404(b)(2), (3); see Ritchie
v. Rupe, 443 S.W.3d 856, 863-64 (Tex. 2014) (discussing former rule). Furthermore, the
legislature defined “business” to mean “a trade, occupation, profession, or other
commercial activity,” TEX. BUS. ORGS. CODE ANN. § 1.002(5), and “property” to include
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“tangible and intangible property and an interest in that property.” TEX. BUS. ORGS. CODE
ANN. § 1.002(77).
The decision to appoint carries aspects of discretion. Thus, our review of it is under
the standard of abused discretion. Xr-5, LP v. Margolis, No. 02-10-00290-CV, 2011 Tex.
App. LEXIS 2181, at *4 (Tex. App.—Fort Worth Mar. 24, 2011, no pet.) (mem. op.); City
of Hughes Springs v. Hughes Springs Volunteer Ambulance Serv., 223 S.W.3d 707, 709
n.1 (Tex. App.—Texarkana 2007, no pet.). And, discretion is abused when the trial court
acts without reference to any guiding rules and principles. Low v. Henry, 221 S.W.3d
609, 614 (Tex. 2007). An instance of that consists of misapplying or misinterpreting the
law. In re Millwork, 631 S.W.3d 706, 711 (Tex. 2021).
To the foregoing, we add another requirement of the law. It obligates us to
recognize that corporations have separate identities, which separateness generally must
be observed. Neff ex rel. Weatherford Int’l. Ltd. v. Brady, 527 S.W.3d 511, 525 (Tex.
App.—Houston [1st Dist.] 2017, no pet.) (quoting Docudata Records Mgmt. Servs., Inc.
v. Wieser, 966 S.W.2d 192, 197 (Tex. App.—Houston [1st Dist.] 1998, pet. denied)). For
example, a subsidiary corporation and its parent corporation are separate and distinct
“persons” as a matter of law. ETC Tex. Pipeline, Ltd. v. Addison Expl. & Dev., LLC, 582
S.W.3d 823, 837 (Tex. App.—Eastland 2019, pet. denied), overruled in part on other
grounds in Montelongo v. Abrea, 622 S.W.3d 290 (Tex. 2021). Unless the corporate veil
is used as a sham, it matters not that the parent dominates or controls the subsidiary or
otherwise treats it as its instrumentality or agency. Id. Nor does commonality of directors
or managers alone permit courts to avoid the separateness of which we speak. Id.4
Similarly, because of their separate identities, corporations generally are not liable for
each other’s obligations. Id.The same is true of corporations and their shareholders. They have distinct legal
identities. Hicks. v. State, 419 S.W.3d 555, 558 (Tex. App.—Amarillo 2013, pet. ref’d).
Indeed, a shareholder simply owns an interest in the corporation. Id. It is not the
corporation. This also applies to limited liability companies. They too are legal entities
separate from its members. Steer Wealth Mgmt., LLC v. Denson, 537 S.W.3d 558, 567
(Tex. App.—Houston [1st Dist.] 2017, no pet.); Sherman v. Boston, 486 S.W.3d 88, 94
(Tex. App.—Houston [14th Dist.] 2016, pet. denied); Fowler v. Montis, No. 13-13-00581-
CV, 2014 Tex. App. LEXIS 12521, at *2-3 (Tex. App.—Corpus Christi Nov. 20, 2014, no
pet.) (mem. op.); Geis v. Colina Del Rio, LP, 362 S.W.3d 100, 109 (Tex. App.—San
Antonio 2011, pet. denied). With that, we turn to the issues at hand.
1. Standing
We questioned Ovation’s standing to seek vacation of the receiverships over Road
and Webberville and asked the parties to brief same. They did. We also conducted our
own research. It led us to the following conclusion. Standing exists.
According to our Supreme Court, “when a court takes control and custody of the
property of a corporation by the appointment of a receiver, all creditors of the corporation
are in effect or constructively before the court.” Security Trust Co. v. Lipscomb Cty, 180
S.W.2d 151, 157-58 (Tex. 1944). Should they have notice of the proceedings, they also
“are bound by the court’s orders approving claims and determining rights in and to the
property or its proceeds.” Id. The record before us discloses that Ovation was a creditor
of both Road and Webberville. It also had notice of the receiverships. Thus, it is “before
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the court” and subject to its orders. Being so subject, it has legal standing to question
them, like that under attack here.
2. Consent
As alluded to earlier, the trial court appointed Stapleton Group, Inc., “to act and
serve as the Court’s appointed Receiver over PSW’s operations and property . . . .” It
also defined “PSW” as “PSW Real Estate, LLC and its affiliates listed on Exhibit A.” Road
and Webberville were two of the 55 “affiliates” named in that exhibit.
The appointment came in response to GET’s “Emergency Application for
Appointment of Receiver (the “Application”) . . . .” Unlike the trial court, though, GET did
not allege or define, within the Application, PSW as any entity other than “PSW Real
Estate, LLC.” Nor did its application mention any of the 55 affiliates or seek a receivership
over any of them.
And, aside from the recital within the trial court’s order alluding to “considering . . .
the evidence,” neither the parties nor the record illustrates that the court actually held an
evidentiary hearing or formally received evidence. Rather, it appears that the receivership
emanated from the agreement of GET and PSW. The trial court noted within its order
that “PSW does not oppose the appointment of a rehabilitative receiver or the injunctive
relief ancillary thereto.” Furthermore, legal counsel for PSW affixed his signature to the
document evincing PSW “Agreed” to its “Form and Content.” But, unlike PSW, did Road
or Webberville agree?
Neither of those entities were signatories to the order. Nor did any attorney agree
to it in “form and content” on their behalf. Indeed, counsel for PSW signed the document
merely as “Attorneys for Defendant PSW Real Estate LLC.” He did not purport to be
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representing PSW as the court defined “PSW.” Similarly missing is evidence that either
Road or Webberville were notified of GET’s application, served with citation, appeared in
the suit, or deemed insolvent before being placed in receivership. These circumstances
hardly support the notion that they consented to their respective receivership. This may
explain why neither the receiver nor GET relied on the ground in their respective appellate
briefs. 2 Instead, they argued that placing the 55 “affiliates” into receivership was
appropriate because they were the property and business of PSW.
3. Property and Business
Were Road and Webberville the “property and business” of PSW, as contemplated
by § 11.404 of the Business and Commerce Code? We answer “no” after applying the
legal authority mentioned earlier.
No one disputes that PSW was a member of or otherwise owned an “equity
interest” in Road and Webberville. Nor does anyone suggest the corporate veils of Road
and Webberville were used as a sham in some way by PSW. Without the latter in play
then, both we and the trial court must respect the distinct legal status or identity of Road
and Webberville. Moreover, PSW’s membership interest likens to owning stock in a
corporation. As such, the former owned an interest in the latter, and that interest
constituted property of PSW. TEX. BUS. ORGS. CODE ANN. at § 101.106(a) (stating that a
membership interest in a limited liability company is personal property). Owning an
interest in them, though, did not make PSW, Road, or Webberville one and the same.
Nor did it make the entities Road and Webberville themselves property of PSW; to hold
otherwise would be to ignore the separate identities of each. That means PSW’s property
2 Ovation broached the topic in its appellate brief.
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subject to receivership under § 11.404(a) included its membership interest in the two
other distinct entities, not the entities themselves.
As for whether Road and Webberville were PSW’s “business” under § 11.404(a),
we initially say that words grouped in a list should be given related meaning when
construing a statute. Ritchie, 443 S.W.3d at 869. We heed that rule of construction when
looking at the statutory definition of “business” assigned in the Business Organizations
Code.
After mentioning “trade,” “occupation,” and “profession,” the legislature ended the
definition with the phrase “or other commercial activity.” TEX. BUS. ORGS. CODE ANN.
§ 1.002(5). The latter passage sets the framework within which we read the former
nouns. Simply put, “or other . . . activity” alludes to what the entity does or its job, so to
speak. Thus, trade, occupation, and profession are to be read as alluding to the
insolvent’s business and its scope. 3 So, in permitting a trial court to “appoint a receiver
for the entity’s . . . business . . . .” TEX. BUS. ORGS. CODE ANN. § 11.404(a), the legislature
merely allowed the court to place a receiver in the shoes of the insolvent entity. Once in
those shoes, the receiver could then control or manage the insolvent’s job, trade, or
commercial activity, as allowed by law. Simply put, the focus rests on gaining control of
the insolvent’s business. The statute says nothing about placing distinct legal entities
(irrespective of their financial stability) into receivership as well simply because the
3 This comports with the common understanding of “trade,” “occupation,” and “profession.” Each
refers to what the entity regularly does as work or in commerce. See Merriam-Webster.com/dictionary/trade
(defining “trade” as an occupation, business or work regularly engaged in) (last visited April 8, 2024);
Merriam-Webster.com/dictionary/occupation (defining “occupation” as an activity in which one engages)
(last visited April 8, 2024); Merriam-Webster.com/dictionary/profession (defining “profession” as a calling,
vocation, or employment) (last visited April 8, 2024).
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insolvent may have some financial interest in them. To do that would be to ignore the
distinct legal status of the other entities. It would be tantamount to ignoring the expressed
statutory conditions precedent to a receivership, such as insolvency, deadlocked
management, illegal action by governing persons, the wasting of assets, or deadlocked
shareholders. See TEX. BUS. ORGS. CODE ANN. § 11.404(a)(1)(A)-(E) (listing the
conditions). And, we hesitate to read into the statute more authority than its own
definitions encompass, especially when receiverships are harsh remedies, Fortenberry v.
Cavanaugh, No. 03-04-00816-CV, 2005 Tex. App. LEXIS 4665, at *5-6 (Tex. App.—
Austin June 16, 2005, no pet.) (mem. op), to be cautiously applied. Elliott v. Weatherman,
396 S.W.3d 224, 228-29 (Tex. App.—Austin 2013, no pet.). Here, that means the trial
court could permit a receiver to step into PSW’s shoes and control the latter’s job, trade,
work, vocation, or commercial activity. It does not mean the trial court could place into
receivership distinct legal entities simply because PSW’s business included commercial
interaction with them.
If the foregoing were not so, then Jack’s insolvency (harkening back to the final
exam question) would authorize the appointment of a receiver over Berkshire Hathaway.
The justification? Jack’s job included his ownership and management of Berkshire
Hathaway stock through which he exercised some control over the company by voting
the shares. That is absurd, and we cannot construe a statute so as to bring about an
absurd result. See Rodriguez v. Safeco Ins. Co., 684 S.W.3d 789, ___, 2024 Tex. LEXIS
93, at *12-13 (Tex. Feb. 2, 2024).
In sum, PSW’s insolvency may have warranted the appointment of a receiver. Yet,
the extent of that appointment, given our construction of § 11.404(a), was limited. The
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statute did not allow the trial court to exceed the definitions of “the entity’s property and
business” or disregard other statute requirements. See TEX. BUS. ORGS. CODE ANN.
§ 11.404(a). Nor did it allow the court to disregard the distinct legal identities of other
corporations or limited liability companies. So, with PSW’s being the purported insolvent
“entity” at issue, the receivership could extend no further. It could not ensnare Road or
Webberville into their own receiverships merely because they may be subsidiaries of or
have business dealings with PSW. In placing Road and Webberville themselves in
receivership, the trial court exceeded the scope of § 11.404(a), failed to abide by
controlling rules and principles, and abused its discretion. Consequently, we reiterate our
answer “yes” to the final exam question and reverse the trial court’s order refusing to
vacate the receiverships over Road and Webberville. So too do we enter the order which
the trial court should have and order they be dissolved. TEX. R. APP. P. 43.3 (stating that
when reversing, the appellate court generally must render the judgment that the trial court
should have rendered).
Brian Quinn
Chief Justice
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