K-Solv, Lp v. Edward J. McDonald and Alan D. Peters

Opinion issued May 9, 2013

In The

Court of Appeals

For The

First District of Texas

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NO. 01-11-00341-CV

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K-SOLV, LP, Appellant

V.

EDWARD J. MCDONALD AND ALAN D. PETERS, Appellees

On Appeal from the 269th District Court

Harris County, Texas

Trial Court Case No. 2009-61942

MEMORANDUM OPINION

After entry of a final judgment on all claims between all parties, K-Solv, LP

appeals from a partial summary judgment granted in favor of defendants Edward

McDonald and Alan Peters on a claim that they were vicariously liable for the

obligations of a limited liability company of which they were members. We affirm

the trial court’s ruling.

Background

K-Solv, LP brought an action for breach of contract, quantum meruit, suit on

a sworn account, and fraud against Energy America Geothermal, LLC. The

fundamental factual allegation was that that Energy America ordered and received

materials from K-Solv, but it failed to make payment. K-Solv subsequently

amended its petition to join Energy America’s individual members as defendants,

asserting direct claims as well as claims based on vicarious liability for the

obligations of Energy America.

Appellees Edward McDonald and Alan Peters were among the individual

defendants joined in the suit, and they initially moved for a no-evidence summary

judgment on all claims against them. This initial motion was granted with respect

to the direct claims but denied with respect to vicarious liability. K-Solv

subsequently nonsuited its breach of contract and quantum meruit claims against

Energy America, and it voluntarily dismissed all claims against all of the

individual defendants other than McDonald and Peters. The two individual

defendants then filed another motion for summary judgment on the vicarious

liability claim, which at that point was the only remaining claim against them. The

trial court granted this second motion. Ultimately an agreed final judgment was

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entered in favor of K-Solv on its suit on sworn account and fraud claims against

Energy America—the only claims remaining in the case.

K-Solv appeals only the trial court’s partial summary judgment dismissing

its vicarious liability claim against McDonald and Peters.

Analysis

We review a trial court’s summary judgment ruling de novo. Travelers Ins.

Co. v. Joachim, 315 S.W.3d 860, 862 (Tex. 2010); Mann Frankfort Stein & Lipp

Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex. 2009). In conducting our

review, we view the evidence in the light most favorable to the nonmovant,

crediting evidence favorable to that party if reasonable jurors could and

disregarding contrary evidence unless reasonable jurors could not. Mann

Frankfort, 289 S.W.3d at 848; see City of Keller v. Wilson, 168 S.W.3d 802, 827

(Tex. 2005). When, as here, the trial court’s summary-judgment order does not

specify the grounds on which it was granted, we must affirm the order if any of the

asserted grounds for summary judgment are meritorious. W. Invs., Inc. v. Urena,

162 S.W.3d 547, 550 (Tex. 2005).

On a motion for traditional summary judgment, the movant has the burden to

show that no genuine issue of material fact exists and that it is entitled to judgment

as a matter of law. See TEX. R. CIV. P. 166a(c); KPMG Peat Marwick v. Harrison

Cnty. Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex. 1999). The movant may

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satisfy this burden by conclusively negating at least one essential element of each

of the plaintiff’s causes of action. Sci. Spectrum, Inc. v. Martinez, 941 S.W.2d

910, 911 (Tex. 1997). On a motion for no-evidence summary judgment, the

nonmovant has the burden to present evidence sufficient to raise a genuine issue of

fact on each of its claims. TEX. R. CIV. P. 166a(i); Mack Trucks, Inc. v. Tamez, 206

S.W.3d 572, 582 (Tex. 2006). The nonmovant may satisfy this burden by

presenting more than a scintilla of evidence on each challenged element of each

cause of action on which it has the burden of proof at trial. TEX. R. CIV. P. 166a(i);

see Mack Trucks, 206 S.W.3d at 582.

McDonald and Peters assert, and K-Solv does not dispute, that applicable

provisions of the Business Organizations Code govern the legal liability of a Texas

limited liability company and its members, as disputed in this appeal. 1 The Code

provides that an LLC member “may be named as a party in an action by or against

1

See TEX. BUS. ORGS. CODE ANN. § 402.001(a)(1), (2) (West 2012). Under

the Code as currently enacted, LLC-member liability is subject to the same

statutory limitations and exceptions as corporate-shareholder liability. See

id. § 101.002(a); see also id. §§ 21.223–.226. Section 101.002—the

provision of the Code that extends its statutory limitations on corporate

liability to LLC liability—took effect on September 1, 2011, after the trial

court granted summary judgment on K-Solv’s vicarious liability claim. See

Act of April 20, 2011, 82nd Leg., R.S., ch. 25, § 2, 2011 Tex. Gen. Laws 45,

45. No party contends that section 101.002 applies to this appeal, and for

purposes of this opinion we apply the law as it existed prior to

section 101.002’s effective date. See Univ. of Tex. Sw. Med. Ctr. at Dallas

v. Estate of Arancibia, 324 S.W.3d 544, 547 (Tex. 2010).

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the [LLC] only if the action is brought to enforce the member’s right against or

liability to the company.” See TEX. BUS. ORGS. CODE ANN. § 101.113 (West

2012). Furthermore, “Except as and to the extent the company agreement

specifically provides otherwise, a member or manager is not liable for a debt,

obligation, or liability of a limited liability company, including a debt, obligation,

or liability under a judgment, decree, or order of a court.” Id. § 101.114. Based on

these statutory provisions, the appellees contend the applicable version of the Code

bars vicarious liability against LLC members, and common-law corporate-veil-

piercing theories are not applicable to them. Alternatively, McDonald and Peters

contend that even if common-law theories of vicarious liability apply to LLC

members, K-Solv’s claim against them fails because it cannot prove the necessary

elements of “actual fraud” and a “direct personal benefit.” See id. § 21.223(b).

K-Solv responds that despite these statutory provisions, Texas courts have

nevertheless applied common-law veil-piercing theories in the LLC context,

relying upon Sanchez v. Mulvaney, 274 S.W.3d 708, 712 (Tex. App.—San Antonio

2008, no pet.), and McCarthy v. Wani Venture, A.S., 251 S.W.3d 573, 590–91

(Tex. App.—Houston [1st Dist.] 2007, pet. denied). Nevertheless, K-Solv

concedes in its brief that it must show actual fraud and a direct personal benefit to

prevail on its vicarious liability claim against McDonald and Peters. In its briefing,

K-Solv identifies the elements of a vicarious liability claim, stating that when the

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“suit is based on or relates to a contract,” the claimant must show that the

defendant “perpetrated an actual fraud on the plaintiff primarily for the defendant’s

direct personal benefit.” Although K-Solv asserted a variety of claims, all of them

arise out of its purchase agreement with Energy America. K-Solv contends that

there is a question of fact on the element of fraud, but in its appellant’s brief it

makes no argument with respect to the “direct personal benefit” element.

We agree that the common-law vicarious liability of McDonald and Peters

for Energy America’s obligation to K-Solv, if any, is contingent on a showing of

actual fraud and direct personal benefit. See Shook v. Walden, 368 S.W.3d 604,

611–22 (Tex. App.—Austin 2012, pet. denied) (holding that, although

section 21.223 did not apply to LLC veil-piercing claims under applicable law, the

same policy judgments and balancing of interests compelled common-law

application of actual fraud and direct personal benefit requirements); Sanchez, 274

S.W.3d at 712 (holding that trial court properly granted summary judgment on

veil-piercing claim against LLC members when there was no evidence of actual

fraud); see also McCarthy, 251 S.W.3d at 589–90 (affirming vicarious liability

judgment against LLC member when evidence supported jury’s finding that

member used LLC to perpetrate actual fraud on claimant primarily for member’s

own direct personal benefit).

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The summary-judgment motion at issue did not specify whether McDonald

and Peters sought a traditional or no-evidence summary judgment, and the trial

court’s order granting the motion did not identify which rule it was applying.

Substantively, the motion raised both evidentiary challenges and purely legal

challenges. We thus treat the motion as both a traditional and no-evidence motion

for summary judgment. See, e.g., Davis v. Canyon Creek Estates Homeowners

Ass’n, 350 S.W.3d 301, 307–08 (Tex. App.—San Antonio 2011, pet. denied); Tex.

Integrated Conveyor Sys., Inc. v. Innovative Conveyor Concepts, Inc., 300 S.W.3d

348, 375 (Tex. App.—Dallas 2009, pet. denied).

In their motion, McDonald and Peters asserted that K-Solv had no evidence

of the “direct personal benefit” element of its vicarious liability claim:

There is absolutely no evidence of any benefit McDonald or Peters

might have derived from [Energy America’s] Elyria project, which is

the project for which the K-Solv material was used. And, according

to Rutherford [v. Atwood, No. 01-00-00113-CV, 2003 WL 22053687,

at *3–5 (Tex. App.—Houston [1st Dist.] Aug. 29, 2003, no pet.)

(mem. op.),] and like cases, the “direct personal benefit” must be

something more than a salary draw or other expenses from the

company. And any personal benefit must be direct, as opposed to

indirect, and that the company was used primarily for the

shareholder’s benefit. There is absolutely no evidence of these

elements.

On appeal, they re-assert this ground as supporting the trial court’s summary

judgment.

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K-Solv responded to the motion on both traditional and no-evidence

grounds. With respect to the element of “direct personal benefit,” K-Solv asserted:

[B]y not paying for the product [that Energy America ordered from K-

Solv], McDonald and Peters were able to pay monies toward loan

obligations personally guaranteed by them and pay the IRS 941 taxes

which if not paid would have resulted in a 100% personal penalty on

McDonald and Peters. These facts constitute a direct personal benefit

to McDonald and Peters. See Bank Statements attached hereto as

Exhibit H.

But the bank records attached as “Exhibit H” to K-Solv’s response do not establish

any connection between Energy America’s transaction with K-Solv and its

payment of debt or tax obligations. Even assuming that payment of LLC

obligations such as these could constitute the kind of “direct personal benefit”

necessary to hold the LLC’s members vicariously liable for the LLC’s contractual

defaults, the absence of any evidence of a connection between these payments and

Energy America’s transaction with K-Solv is fatal. See Menetti v. Chavers, 974

S.W.2d 168, 175 (Tex. App.—San Antonio 1998, no pet.) (reversing judgment

imposing individual liability on shareholders for corporate obligation and stating

that “[e]vidence that the [defendants] bought their groceries or paid their credit

card bills from the corporate account is insufficient, because the fraud must relate

to the transaction at issue, the contract between the [defendants] and the

[plaintiffs]”); Rutherford, 2003 WL 22053687, at *4–5 (explaining that alleged

direct personal benefit to corporate actor must relate to alleged fraudulent

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transaction to support vicarious liability); cf. Simplified Dev. Corp. v. Garfield,

No. 14-06-00526-CV, 2008 WL 399433, at *6 (Tex. App.—Houston [14th Dist.]

Feb. 14, 2008, pet. denied) (mem. op.) (affirming jury finding of direct personal

benefit to defendant when, among other things, evidence showed that fraudulent

transfer of assets at issue in case was made in exchange for release from personal

guaranty and other benefits).

Thus, the trial court correctly concluded that the summary-judgment record

contained no evidence of an essential element of K-Solv’s vicarious liability claim

against McDonald and Peters—specifically, evidence that they perpetrated the

alleged fraud against K-Solv primarily for their own direct personal benefit. See

Shook, 368 S.W.3d at 622 (holding that trial court erred in rendering judgment

against LLC member when there was no proof that the member “caused [the LLC]

to be used to perpetrate actual fraud for his direct, personal benefit”); see also

Solutioneers Consulting, Ltd. v. Gulf Greyhound Partners, Ltd., 237 S.W.3d 379,

389 (Tex. App.—Houston [14th Dist.] 2007, no pet.); Bates v. de Tournillon,

No. 07-03-0257-CV, 2006 WL 265474, at *3 (Tex. App.—Amarillo Feb. 3, 2006,

no pet.) (mem. op.).2 Because McDonald and Peters presented the trial court with

2

Because we conclude that the trial court’s summary judgment is sustainable

on this ground, we do not reach the issue of whether an LLC member may

be held liable under pre-section-101.002 common law when evidence of

actual fraud and direct personal benefit is present.

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at least one meritorious ground for summary judgment, we must affirm the trial

court’s order. See Urena, 162 S.W.3d at 550.

Conclusion

We hold that the trial court did not err in granting summary judgment in

favor of McDonald and Peters on K-Solv’s vicarious liability claim. We therefore

affirm the trial court’s judgment.

Michael Massengale

Justice

Panel consists of Justices Keyes, Massengale, and Brown.

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