Opinion
No. 11-18-00151-CV
07-31-2020
JOHN F. HEAD, Appellant v. ASCENDANT PETROLEUM HOLDING, LLC; ASCENDANT PETROLEUM, LLC; ATOM PETROLEUM, LLC; POLANCO PIPELINE, LLC; CAW RESOURCES, LLC; AND BOBBY L. PUGH, Appellees
On Appeal from the 238th District Court Midland County, Texas
Trial Court Cause No. CV53995
MEMORANDUM OPINION
This is an appeal from an order granting a plea to the jurisdiction. It concerns a former member's standing to bring direct and derivative claims against and on behalf of a Delaware limited liability company. The trial court determined that the former member did not have standing to bring his claims.
Appellant, John F. Head, was a member of Ascendant Petroleum Holding, LLC (Ascendant). CAW Resources, LLC was the manager of Ascendant, and Bobby L. Pugh was the manager of CAW Resources. Ascendant Petroleum, LLC; Atom Petroleum, LLC; and Polanco Pipeline, LLC are subsidiaries of Ascendant.
Head pledged his membership unit in Ascendant as security for a secured promissory note in favor of Ascendant. Head later sued Appellees, asserting direct claims against all Appellees and derivative claims on behalf of Ascendant against CAW Resources and Pugh. Ascendant subsequently repossessed Head's membership unit.
After repossessing Head's membership unit, Appellees filed a plea to the jurisdiction arguing that the claims asserted by Head were barred because Head was no longer a member of Ascendant. Head appeals the trial court's order granting the plea to the jurisdiction. We affirm.
Background Facts
In 2011, Tom L. Stover, the Oil and Gas Properties Manager for Ascendant, offered Head the opportunity to acquire one membership unit in Ascendant. Head accepted Stover's offer, and the parties executed three documents: a secured promissory note in the amount of $50,000, a security agreement, and the Ascendant Petroleum Holding, LLC Limited Liability Company Agreement (Company Agreement). We note at the outset that the Company Agreement specifically provided that it was to be governed by the law of the State of Delaware. Conversely, the note and the security agreement provided that they would be governed by Texas law.
Under the terms of the secured promissory note and the security agreement, Ascendant accepted Head's membership unit in Ascendant as collateral for the payment of the promissory note and Head's performance of the security agreement and the Company Agreement. One of the conditions of the promissory note was that the balance of the note would immediately become due and payable upon Head's insolvency.
On July 19, 2017, a Colorado court rendered a judgment for $912,720.58 plus postjudgment interest of $105.99 a day in favor of Stover against Head individually and against his law firm, Head and Associates, PC. These amounts remain unpaid.
Appearing pro se, Head filed suit against Appellees on November 16, 2017. Head asserted five claims against Appellees:
Head is also pro se on appeal.
1. to compel an inspection of the books and records of Ascendant, Ascendant's three subsidiaries, CAW Resources and Pugh;After Head had filed suit against Appellees, Ascendant's attorney sent a letter to Head on March 7, 2018, notifying Head that he was in breach of the security agreement and the promissory note's solvency requirements because Head had failed to pay what he owed under the Colorado judgment and that he was presumed insolvent. The letter demanded that Head provide Ascendant "with reasonable and sufficient evidence of [Head's] solvency" within ten days. The letter further provided that Ascendant would take possession of Head's membership unit in Ascendant if Head did not provide evidence of his solvency.
2. for breach of fiduciary duty against CAW Resources and Pugh;
3. for negligence against Pugh;
4. for a declaratory judgment regarding the transfer of certain membership interests in Ascendant, Ascendant's subsidiaries, CAW Resources, and Pugh; and
5. to appoint a receiver.
Head did not provide the requested evidence of his solvency. Ascendant's attorney then sent Head another letter on April 3, 2018, notifying Head that Ascendant had taken possession of Head's membership unit and that Head was no longer a member of Ascendant.
After taking possession of Head's membership interest, Appellees filed a plea to the jurisdiction on April 27, 2018, asking the trial court to dismiss Head's claims against Appellees because Head no longer had standing to pursue the claims because he was no longer a member of Ascendant. After a hearing, the trial court granted Appellees' plea to the jurisdiction and dismissed Head's claims in their entirety. Head filed this appeal, arguing, among other things, that the trial court improperly granted Appellees' plea to the jurisdiction because Head is still a member of Ascendant.
Analysis
Head brings five issues on appeal. Most of Head's issues focus on his assertion that Ascendant did not properly repossess his membership interest. Head asserts in his first and second issues that his membership interest in Ascendant was incapable of repossession. He asserts in his third and fourth issues that Ascendant improperly disposed of his ownership interest after repossession. In his fifth issue, Head asserts that Appellees' actions violated the covenant of good faith and fair dealing. As clarified by Head's reply brief, he asserts that he continues to be a member of Ascendant because of an improper repossession and that he therefore continues to have standing to prosecute his lawsuit.
"Under choice of law principles, Texas courts apply the law of the jurisdiction that has the most significant relationship to the particular substantive issue to be resolved." Longview Energy Co. v. Huff Energy Fund LP, 533 S.W.3d 866, 872 (Tex. 2017). Conversely, the law of Texas, as the forum state, governs matters of procedure. Id.
The parties agree that Delaware law applies to the issue of standing in this case. In this regard, Ascendant is a limited liability company formed in Delaware. Thus, Delaware law controls the interpretation of the Company Agreement. See 6 DEL. CODE ANN. § 18-1101(i); Sandt v. Energy Maint. Servs. Grp. I, LLC, 534 S.W.3d 626, 635 (Tex. App.—Houston [1st Dist.] 2017, pet. denied); Strebel v. Wimberly, 371 S.W.3d 267, 276 (Tex. App.—Houston [1st Dist.] 2012, pet. denied). Furthermore, the Company Agreement provides that it is to be interpreted under Delaware law.
Procedurally, a plea to the jurisdiction is a dilatory plea, the purpose of which is generally to defeat an action "without regard to whether the claims asserted have merit." Bland Indep. Sch. Dist. v. Blue, 34 S.W.3d 547, 554 (Tex. 2000). In filing a plea to the jurisdiction challenging Head's standing to maintain his suit, Appellees challenged the trial court's subject-matter jurisdiction. See id. Because subject-matter jurisdiction is a question of law, we conduct a de novo review of the trial court's granting of the plea. Tex. Dep't of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 226 (Tex. 2004).
A plea to the jurisdiction can take two forms: (1) a challenge to the plaintiff's pleadings regarding his allegation of jurisdictional facts or (2) an evidentiary challenge to the existence of jurisdictional facts. Id. at 226-27; W. Odessa Volunteer Fire Dep't, Inc. v. Contreras, 549 S.W.3d 203, 208 (Tex. App.—Eastland 2018, no pet.); see Mission Consol. Indep. Sch. Dist. v. Garcia, 372 S.W.3d 629, 635 (Tex. 2012). Appellees challenged the existence of a jurisdictional fact—whether Head remained a member of Ascendant. If a plea to the jurisdiction challenges the existence of jurisdictional facts, we consider relevant evidence submitted by the parties when necessary to resolve the jurisdictional issues raised, as the trial court is required to do. Miranda, 133 S.W.3d at 227. If the evidence creates a fact question regarding the jurisdictional issue, then the plea to the jurisdiction must be denied. Id. at 227-28. Conversely, if the relevant evidence is undisputed or fails to raise a fact question on the jurisdictional issue, the trial court rules on the plea to the jurisdiction as a matter of law. Id. at 228. As noted by the court in Miranda, this standard mirrors that of a traditional summary judgment. Id.; see TEX. R. CIV. P. 166a(c).
Standing is determined on a claim-by-claim basis. Heckman v. Williamson Cty., 369 S.W.3d 137, 152-53 (Tex. 2012). Head's standing to bring his claims requires us to determine whether each of his claims are direct claims or derivative claims. Under Delaware law, the test adopted in Tooley v. Donaldson, Lufkin & Jenrette, Inc. is used to determine if a claim is direct or derivative in the context of a Delaware limited liability company. See Kelly v. Blum, No. 4516-VCP, 2010 WL 629850, at *9 (Del. Ch. Feb. 24, 2010) (mem. op.) (citing Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1035-36 (Del. 2004)).
In Tooley, the Supreme Court of Delaware expressed the standard for determining whether a claim is direct or derivative in the corporate context. 845 A.2d at 1033. Applying that standard, the test we use to determine whether a limited liability company member's claim is direct or derivative turns solely on the following questions: (1) who suffered the alleged harm (the limited liability company or the suit member, individually) and (2) who would receive the benefit of any recovery or other remedy (the limited liability company or the members, individually)? Id. As explained by the court in Kelly v. Blum:
Specifically, the Court evaluates whether the nature of the alleged injury is such that it falls directly on the LLC as a whole and only secondarily on an individual member as a function of and in proportion to his pro rata investment in the LLC, in which case the claim would be derivative, or whether the injury inflicts direct harm on the rights of the member as an individual.2010 WL 629850, at *9 n.63.
The application of the Tooley test leads us to conclude that Head only raises one direct claim, his claim asking the court to compel an inspection of Appellees' books and records. Head's other four claims—breach of fiduciary duty, negligence, the request for a declaratory judgment, and the appointment of a receiver—are all based on alleged injuries to the limited liability company as a whole. Head premises all of these claims on the general allegation that mismanagement of Ascendant and its subsidiaries has occurred. Head could not prove his alleged injuries without proving injury to Ascendant. Accordingly, these claims are derivative claims.
The Delaware LLC Act creates a statutory right to bring a derivative action. CML V, LLC v. Bax, 6 A.3d 238, 241 (Del. Ch. 2010), aff'd, 28 A.3d 1037 (Del. 2011) (citing 6 Del. C. §§ 18-1001 & 18-1002). Additionally, "[Delaware] case law governing corporate derivative suits is equally applicable to suits on behalf of an LLC." VGS, Inc. v. Castiel, No. C.A. 17995, 2003 WL 723285, at *11 (Del. Ch. Mar. 10, 2003) (mem. op.) (noting that the Delaware LLC Act's provisions for a derivative action originated "from the well-developed body of Delaware law governing derivative suits by stockholders of a corporation").
Delaware follows the continuous ownership requirement for derivative suits, requiring that a derivative plaintiff must not only be a stockholder at the time of the alleged wrong and at the time of the commencement of suit but must also maintain his shareholder status throughout the litigation. Lewis v. Anderson, 477 A.2d 1040, 1046 (Del. 1984). The rationale behind this rule is that "shareholders sue in a representative capacity only," and "a plaintiff's derivative claim is regarded as a property right belonging to the corporation instead of the shareholder." Ala. By-Prods. Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., Inc., 657 A.2d 254, 265 (Del. 1995).
Standing then, for the derivative action plaintiff, is not so much a matter of the plaintiff having a personal stake in the outcome of the controversy as a matter of the plaintiff having an interest in the corporation which justifies the plaintiff's bringing suit on its behalf. When the interest is extinguished, so is the plaintiff's justification for maintaining a derivative action.In re Lubrizol Shareholders Litigation, 79 N.E.3d 579, 585 (Ohio Ct. App. 2017).
Head acknowledges that he must continue to have an ownership interest in Ascendant in order to continue to have standing to prosecute his claims. See Lewis, 477 A.2d. 1046. In their plea to the jurisdiction, Appellees argued that Head was no longer a member of Ascendant because Ascendant repossessed Head's membership unit on April 3, 2018. In support of this assertion, Appellees submitted with their plea the affidavit of Stover, the secured promissory note, the security agreement, the Company Agreement, the Colorado Judgment Transcript, the letter Ascendant's attorney sent to Head regarding his breach of the solvency requirements of the note and security agreement, and the subsequent letter Ascendant's attorney sent to Head stating that Ascendant had taken possession of Head's membership unit.
In his affidavit, Stover stated that, because Head failed to pay the $912,720.58 judgment against him, Ascendant's attorney notified Head that he was in breach of the solvency requirements of the note and security agreement. When Head did not respond with evidence that he remained solvent, Ascendant's attorney subsequently informed Head that Ascendant had taken possession of his membership unit and that Head was no longer a member of Ascendant.
Appellees assert that the evidence they submitted with their plea to the jurisdiction negated the existence of a jurisdictional fact—that Head remained a member of Ascendant. Appellees further assert that the burden shifted to Head to raise a fact question on the issue of standing. Appellees contend that Head failed to raise a fact question because he did not submit any evidence in response to the plea to the jurisdiction. Appellees' contentions are based on the procedure outlined in Mission Consolidated Independent School District v. Garcia. 372 S.W.3d at 636; see Tooker v. Alief Indep. Sch. Dist., 522 S.W.3d 545, 553 (Tex. App.—Houston [14th Dist.] 2017, no pet.).
Head filed a response to the plea to the jurisdiction. He asserted that Ascendant could not have repossessed Head's membership interest because it is a "general intangible" that is incapable of either possession or repossession. Head also asserts that Ascendant did not dispose of the collateral in a method permitted by Article 9 of the Uniform Commercial Code. See TEX. BUS. & COM. CODE ANN. § 9.610 (West 2011).
Head attached to his response an e-mail that he sent to Ascendant's attorney prior to the repossession wherein Head objected to Ascendant's intent to repossess his membership interest. However, the e-mail is not properly authenticated as summary judgment evidence because it was not accompanied by an affidavit. See TEX. R. CIV. P. 166a(f). Furthermore, the e-mail does not set out the contentions that Head asserted in response to the plea to the jurisdiction or on appeal. Instead, the e-mail primarily set out Head's assertion that Ascendant's attorney had a conflict of interest.
Head relies on the documents attached to Appellees' plea to the jurisdiction for his contention that his membership interest was incapable of being repossessed. Section 9.609 of the UCC provides that, after default, a secured party may take possession of the collateral without judicial process, if it proceeds without breach of the peace. BUS. & COM. § 9.609. "The Uniform Commercial Code provides that unless otherwise agreed, upon default a secured party has the right to take possession of the collateral." Cohen v. Rains, 769 S.W.2d 380, 384 (Tex. App.—Fort Worth 1989, writ denied) (citing the predecessor to Section 9.609). The security agreement executed by Head and Ascendant did not provide that Head's membership interest could not be repossessed. Accordingly, we disagree with Head's assertion that his membership interest was incapable of being repossessed. See 395 Lampe, LLC v. Kawish, LLC, No. C12-1503RAJ, 2014 WL 221814, at *6 (W.D. Wash. Jan. 21, 2014) (holding that a secured party could take possession under the UCC of the debtor's ownership interest in a limited liability company).
The evidence that Appellees attached to their plea to the jurisdiction conclusively established that Head no longer owned a membership interest in Ascendant because the evidence showed that Ascendant repossessed it. Thus, Head had the burden to raise a fact question that he retained ownership. Head did not meet this burden. While Head asserts that Ascendant improperly disposed of his membership interest after it repossessed it, he did not present any evidence concerning Ascendant's later disposition, if any, of his membership interest. In this regard, the UCC "either expressly permits a secured party to take full ownership of collateral ('record or legal title') without effecting a 'disposition [for Article 9 purposes],' or, at a minimum, it does not prohibit a secured party from doing so." Id.; see Spellman v. Indep. Bankers' Bank of Fla., 161 So. 3d 505, 508 (Fla. Dist. Ct. App. 2014) (citing 395 Lampe, LLC for this proposition). Accordingly, the trial court did not err in granting Appellees' plea to the jurisdiction on Head's causes of action for breach of fiduciary duty, negligence, the request for a declaratory judgment, and the appointment of a receiver.
We must next determine whether Head had standing to bring his direct claim to compel an inspection of Appellees' books and records. With respect to Ascendant's books, the Delaware Code provides that a member of a limited liability company has the right, subject to reasonable standards established by the limited liability company agreement, a manager, or members, to make a reasonable demand to inspect the records of the company for "any purpose reasonably related to the member's interest as a member of the limited liability company." 6 DEL. CODE ANN. § 18-305. Section 18-305's corporate analogue, 8 Delaware Code Section 220, guides the scope of Section 18-305. See 8 DEL. CODE ANN. § 220. Section 220 "'plain[ly] and unambiguous[ly]' limits inspection rights to current stockholders and directors." Prokupek v. Consumer Capital Partners LLC, C.A. No. 9918-VCN, 2014 WL 7452205, at *6 (Del. Ch. Dec. 30, 2014) (alterations in original) (quoting King v. DAG SPE Managing Member, Inc., C.A. No. 7770-VCP, 2013 WL 6870348, at *6 (Del. Ch. Dec. 23, 2013) (mem. op.)). Thus, Head no longer had standing to inspect Ascendant's books after he no longer held an ownership interest in Ascendant. See id. at *7 (By its plain language, Delaware Code Section 18-305(a) of the LLC Act "confers inspection rights only on current members of an LLC.").
Head also did not have standing to inspect the books of CAW Resources or the three subsidiaries. Head did not have an ownership interest in any of these entities. His only basis for requesting an inspection of the records of these other entities was his ownership of an interest in Ascendant—an ownership interest that no longer exists. Accordingly, the trial court did not err in granting Appellees' plea to the jurisdiction on Head's direct claim. See Arbor Place, L.P. v. Encore Opportunity Fund, L.L.C., No. CIV.A. 18928, 2002 WL 205681, at *5 (Del. Ch. Jan. 29, 2002).
We overrule Head's first four issues asserting that he continued to own an interest in Ascendant. We also overrule Head's fifth issue asserting that Ascendant's repossession of his ownership interest violated a covenant of good faith and fair dealing. Head is essentially asserting that Ascendant was operated in a fraudulent manner and that the repossession of his ownership is part of this fraud. However, Head did not support this claim with any evidence. Accordingly, it cannot be used to establish that Head remains a member of Ascendant in order for him to have standing to assert his claims.
This Court's Ruling
We affirm the order of the trial court. July 31, 2020
JOHN M. BAILEY
CHIEF JUSTICE Panel consists of: Bailey, C.J.,
Stretcher, J., and Wright, S.C.J. Willson, J., not participating.
Jim R. Wright, Senior Chief Justice (Retired), Court of Appeals, 11th District of Texas at Eastland, sitting by assignment.