Opinion
CIVIL ACTION NO. 3:99-CV-2796-G
May 21, 2001
MEMORANDUM ORDER
The plaintiff Stasan, Inc. ("Stasan" or "the plaintiff") seeks a writ of mandamus, pursuant to Article 2.44 of the Texas Business Corporations Act ("BCA"), permitting it to inspect and copy the books and records of the defendant Network Staffing Services, Inc. ("NSSI"). See TEX. Bus. CORP. ACT Art. 2.44 (Vernon Supp. 2001); Defendant Stasan, Inc.'s Amended Counterclaim at 24.
Stasan also filed a counterclaim seeking a writ of mandamus ordering the individual defendants, Michael P. Logal ("M. Logal") and Deborah V. Logal ("D. Logal") (collectively, "the Logals"), to permit inspection and copying of NSSI's books. See Defendant Stasan, Inc.'s Amended Counterclaim ("Counterclaim") at 24. As Stasan's counsel conceded at trial, however, Texas Business Corporations Act ("BCA") Article 2.44, by its express terms, applies only to corporations. See TEX. BUS. CORP. ACT Art. 2.44 (Vernon Supp. 2001). Accordingly, Stasan's Art. 2.44 cause of action against the Logals individually is dismissed.
Stasan also seeks reasonable costs and attorneys' fees in connection with this mandamus action. See id. This case was tried to the court on March 19, 2001. The court concludes that the plaintiff is not entitled to prevail on its claims. As required by F.R. CIV. P. Rule 52(a), the court now sets forth its findings of fact and conclusions of law.
I. BACKGROUND
The background facts and procedural history of this case have already been set forth in the court's previous memorandum orders[ and will be sketched here only briefly. On March 20, 2000, the defendants NSSI, Michael P. Logal ("M. Logal"), and Deborah V. Logal ("D. Logal") (collectively, "the defendants") filed their first amended complaint, in which they sought a declaration from the court that the 300 shares of NSSI common stock belonging to Stasan, Inc. were invalid and should be canceled. See Plaintiffs' First Amended Complaint at 3. On July 6, 2000, Stasan filed an amended counterclaim seeking, among other things, the court's declaration that Stasan's 300 shares of common stock in NSSI were valid, and that the then-current NSSI Board of Directors included Stasan's president and chief executive officer, Estelle Blumberg ("E. Blumberg"), and/or her husband, Richard Blumberg ("R. Blumberg"), Stasan's business manager. See Defendant Stasan, Inc.'s Amended Counterclaim ("Counterclaim") at 19-22; Trial Transcript at 53, lines 5-6. Pursuant to BCA Article 2.44, Stasan also counterclaimed for a writ of mandamus permitting Stasan to inspect and copy certain of NSSI's books and records, and to recover reasonable costs and attorneys' fees. See Counterclaim at 18-19.
See Stasan, Inc. v. Logal, No. 3:99-CV-2796-G, 2001 WL 204778, at *1-2 (N.D. Tex. Feb. 27, 2001) ("Stasan II"); Logan v. Stasan, Inc., No. 3:99-CV-2796-G, 2000 WL 1449890, at *1-2 (N.D. Tex. Sept. 27, 2000) ("Stasan").
On October 31, 2000, this court entered an order realigning the parties.
In Stasan I, this court declared that the defendants' declaratory relief claim was barred by limitations. See Stasan I, 2000 WL 1449890, at *4. In Stasan II, the court held in pertinent part that, because Stasan had paid sufficient consideration for its 300 shares of NSSI stock, these 300 shares had been properly issued. See Stasan II, 2001 WL 204778, at *3. Stasan II also held, however, that the board of directors controlled by M. Logal and D. Logal — not the purported board controlled by Stasan principals R. Blumberg and E. Blumberg — was NSSI's proper board of directors. See id. at *5. Thus, the only cause of action remaining for decision by the court is Stasan's claim under BCA Article 2.44.
Stasan withdrew its additional counterclaim for breach of fiduciary duty, see Counterclaim at 18, at a pretrial conference held before the court on March 2, 2001. See Pretrial Conference Transcript at 2, lines 17-25, 3, lines 1-3. Stasan also impliedly withdrew its counterclaim for a temporary restraining order, temporary injunction, permanent injunction, and the appointment of a receiver against the Logals and NSSI, see Counterclaim at 22, announcing at the pretrial conference that, unless the court were to reconsider its decision in Stasan II, the only remaining claim for trial would be the plaintiff's action under BCA Article 2.44. See Pretrial Conference Transcript at 2, lines 17-25, 3, lines 1-3. Subsequent to the pretrial conference, the court denied Stasan's motion for reconsideration of Stasan II. See Order (Mar. 8, 2001). Accordingly, Stasan's counterclaim for various forms of injunctive relief and the appointment of a receiver is deemed to have been withdrawn. See also Trial Transcript at 4, lines 5-15.
II. ANALYSIS
Stasan's Claim Pursuant to Texas Business Corporations Act Article 2.44 BCA Article 2.44 provides in relevant part as follows:
C. Any person who shall have been a shareholder for at least six (6) months immediately preceding his demand, or shall be the holder of at least five percent (5%) of all the outstanding shares of a corporation, upon written demand stating the purpose thereof, shall have the right to examine, in person or by agent, accountant, or attorney, at any reasonable time or times, for any proper purpose, its relevant books and records of account, minutes, and share transferrecords, and to make extracts therefrom.
D. Any corporation which shall refuse to allow any such shareholder or his agent, accountant or attorney, so to examine and make extracts from its books and records of account, minutes, and share transfer records, for any proper purpose, shall be liable to such shareholder for all costs and expenses, including attorneys' fees, incurred in enforcing his rights under this Article in addition to any other damages or remedy afforded him by law.
TEX. Bus. CORP. ACT Art. 2.44 (Vernon Supp. 2001) (emphasis added). The court concludes that Stasan has satisfied all of the requirements contained in BCA Article 2.44(C). As noted above, this court held previously that Stasan has been a valid shareholder of 300 shares of NSSI common stock — more than the 5% of outstanding shares required under Article 2.44(C) — since 1994. See Stasan II, 2001 WL 204778, at *2-3; Stasan I, 2001 WL 1449890, at *4. Moreover, at trial, NSSI did not dispute Stasan's contentions, pursuant to Article 2.44(C), that the plaintiff (1) made a written demand for inspection and copying of NSSI records stating the purpose thereof; (2) sought to undertake its inspection and copying at a reasonable time or times; and (3) had a proper purpose in seeking to inspect and copy the defendant's records. See Trial Transcript at 95, lines 18-22; 117, line 14; 114, line 6. NSSI did question the relevance of at least a portion of the records requested by Stasan, criticizing the plaintiff's demand for documents as "overbroad." Trial Transcript at 9, lines 20-25; 10, lines 1-2. However, NSSI did not specifically identify any category of documents requested by Stasan which it deemed irrelevant; in any event, NSSI emphasized at trial that it did not "quibble" with the propriety of Stasan's demand. See Trial Transcript at 12, lines 17-18; 117, line 14. In an October 7, 1999 letter to M. Logal, Stasan's counsel stated that the records sought for inspection and copying related to Stasan President E. Blumberg's efforts to protect her interest as a shareholder in NSSI; to determine NSSI's financial status; and to determine whether an audit of NSSI's books and records would be necessary in order for her to determine the value of her stockholder interest in NSSI. See Trial Exhibit 5. At trial, R. Blumberg testified that Stasan's document inspection request was motivated by a variety of factors, including his discovery that repayment of his loans to NSSI had ceased; rumors that NSSI stock was being improperly issued and repurchased by M. Logal and other shareholders; concerns over NSSI's profitability and how the company's funds were being utilized; and his perception that NSSI's business was overly dependent on one particular client. Trial Transcript at 62, lines 2-9, 15-19. Having carefully reviewed R. Blumberg's testimony and the record as a whole, the court concludes that Stasan's written demand to inspect and copy NSSI's business records stated a proper purpose for seeking inspection and that the categories of documents requested by Stasan were relevant to that purpose. See BCA Article 2.44(C).
To prevail on its claim, however, Stasan has the burden of showing that NSSI "refuse[d]" to allow Stasan or Stasan's agent, accountant, or attorney to examine and copy the requested documents, in violation of BCA Article 2.44(D). As a brief review of the relevant facts makes clear, the plaintiff has not carried this burden. As noted above, Stasan made its initial demand that NSSI's records be made available for inspection — and also that NSSI make photocopies of these records — by way of a letter to M. Logal dated October 7, 1999. See Trial Exhibit 5. D. Logal responded in a letter two weeks later arguing that, because Stasan was not a proper shareholder of NSSI, it was not entitled to inspect NSSI records pursuant to BCA Article 2.44. See Trial Exhibit 6. In letters to D. Logal dated October 29 and November 5, 1999, Stasan renewed its demand for inspection, and expressed "shock" at NSSI's allegation that Stasan's NSSI shares were invalid. Trial Exhibits 7-8. In a response dated November 9, 1999, D. Logal restated her contention that Stasan's shares were void, but nevertheless consented to making NSSI's records available for inspection by Stasan. See Trial Exhibit 9.
On November 22, 1999, R. Blumberg advised D. Logal that he planned to come to Dallas on either December 8 or 9 to review the appropriate documents on behalf of Stasan/E. Blumberg. See Trial Exhibit 10. D. Logal responded that the records would not be available for inspection on either of those dates, and proposed either December 14-15, 1999 or January 5, 2000 as alternative dates for R. Blumberg's inspection. See Trial Exhibit 11. By letter dated December 9, 1999, Stasan made an additional demand for document inspection, this time pursuant to Florida statutes. See Trial Exhibit 12. Stasan's counsel alleged in this letter that NSSI had "already refused providing copies of the records . . . pursuant to [BCA Article 2.44]. . . ." Id. There is no evidence in the record to support this allegation, however. First, BCA Article 2.44 does not by its express terms require corporations to make photocopies of business records for shareholders. Second, even if Article 2.44 did so require, there is no evidence that NSSI ever "refused" to copy records for Stasan. It is true that NSSI did not immediately produce the photocopies demanded; but it is also true that, until its letter of December 9, 1999, Stasan never renewed the request for photocopies which it set forth in its original October 7, 1999 demand letter. That the parties actively corresponded between October 7 and December 9, 1999 regarding the scheduling of R. Blumberg's trip to Dallas to inspect the records persuades the court that, rather than obstructing Stasan's efforts to obtain access to and/or copy the NSSI records, NSSI substantially cooperated in these efforts. By letter dated December 10, 1999, R. Blumberg advised M. Logal and D. Logal that he had decided to "put off" his trip to Dallas which had been scheduled for December 14. See Trial Exhibit 63. R. Blumberg never thereafter attempted to reschedule his trip to Dallas to inspect the records. See Trial Transcript at 73, lines 6-13.
Indeed, it appears that Stasan, upon learning how costly its document copying request would be, may simply have opted not to pursue this request. M. Logal testified at trial that he obtained a quote in the range of $40,000-$50,000 for copying all of the documents requested by Stasan. See Trial Transcript at 52, lines 12-14. Logal further testified that, when he disclosed this quote to Stasan, Stasan indicated that the quote was "too much." Id. at 52, line 16.
On December 10, 1999, M. Logal and D. Logal filed the instant lawsuit, seeking a declaration that Stasan's 300 shares of NSSI common stock were void. See Plaintiffs' Original Complaint ¶¶ 5-7. In furtherance of the pretrial discovery process, Steve Dawson, a consultant enlisted by Stasan, spent approximately four hours on July 27, 2000 reviewing NSSI documents housed in a warehouse in Carrollton, Texas. See Trial Transcript at 81-83. Dawson testified at trial, however, that he was unable to locate all of documents he was looking for in the boxes provided to him by NSSI on July 27. See id. at 83, lines 16-18. By letter dated October 12, 2000, Stasan renewed its demand for inspection of corporate books and records under BCA Article 2.44. See Trial Exhibit 75. On October 19, 2000, NSSI responded by letter that, although it believed "the real purpose of [Stasan's] demand [was] for discovery in the lawsuit between the parties," the documents requested in Stasan's Request for Production of Documents had been available since July 18, 2000, and remained available for inspection by Stasan. Trial Exhibit 76.
NSSI was added as a plaintiff in the Plaintiffs' First Amended Complaint, filed on March 20, 2000.
Stasan's discovery requests in this case mirrored the document requests previously submitted by E. Blumberg and R. Blumberg pursuant to BCA Article 2.44. See Trial Transcript at 96, lines 19-21.
On November 27, 2000, Stasan filed a motion to compel the production of certain documents, contending, among other things, that it was "unreasonably burdensome for the plaintiff, who was located in Florida, to have to send a representative to Dallas in order to inspect documents located in an un-air-conditioned storage facility where documents are contained in numerous boxes that are unlabeled to correspond with . . . specific [r]equests." Trial Exhibit 15 at 5. The magistrate judge overseeing discovery in this case granted Stasan's motion in part, see Trial Exhibit 172, whereupon, on January 26, 2001, NSSI produced approximately 200 pages of documents to Stasan. See Trial Exhibit 100. At no point did NSSI "refuse" to permit Stasan or its representatives to inspect NSSI's records or to copy the records for itself. See, e.g., Trial Transcript at 51, lines 9-17. Stasan urged at trial that NSSI had effectively refused to produce the requested documents both by providing too many documents for review by Steve Dawson on July 27, 2000, and by omitting from among the documents made available some of the documents purportedly requested by Stasan. See Trial Transcript at 97, lines 1-10. Notably, however, Dawson did not request an opportunity to return after July 26, 2000 to resume his document review; Stasan never requested that he do so. See id. at 90, lines 19-22. Even if it be assumed that NSSI's document production in July 2000 was both under-inclusive and over-inclusive — as Stasan alleges — such production plainly did not constitute a "refusal" to produce the desired documents, particularly considering that Stasan failed to pursue its demand for document inspection beyond Dawson's single half-day visit.
The magistrate judge granted Stasan's motion to compel production of documents sometime in January 2001. Due to an oversight by the court, however, an order reflecting the magistrate judge's decision was not entered until March 9, 2001. Phone interview with Susan M. Hull, Esq., Counsel for NSSI, by Allen A. Drexel, Law Clerk to Hon. A. Joe Fish, United States District Judge (May 8, 2001).
BCA Article 2.44(D) imposes liability on corporations which "refuse to allow any . . . shareholder or his agent, accountant or attorney . . . to examine and make extracts from its books and records of account, minutes, and share transfer records, for any proper purpose. . . ." The statute does not require, as Stasan appears at times to suggest, see, e.g., Trial Transcript at 97-99, 104-110, that corporations take measures to make records inspection by shareholders as convenient as possible.
In light of the vast quantity and variety of documents explicitly requested by Stasan, its contention at trial that NSSI produced too many documents seems somewhat disingenuous. Stasan initially requested fully 24 different categories of documents — virtually all, if not all, of the defendant's business records. See Trial Exhibit 5; Trial Transcript at 24, lines 18-25, 25, lines 1-4, 51, lines 9-12.
M. Logal testified that, since October 7, 1999, M. Blumberg has never called him to try to schedule a date to come to Dallas to inspect the documents. Trial Transcript at 45, lines 12-17.
Significantly, Dawson's records inspection visit took place within the context of pretrial discovery, which is governed, not by BCA Article 2.44, but by the Federal Rules of Civil Procedure. See, e.g., Plaintiff Stasan, Inc.'s Motion to Compel Production of Documents at 1-2. Even if it is assumed that NSSI, by failing to produce appropriate documents in response to Stasan's pretrial request, did not comply with its discovery obligations under FED. R. ClV. P. 34(b), such noncompliance has not been shown to be a "refusal" to produce documents for inspection and copying in violation of BCA Article 2.44.
III. CONCLUSION
Because the court finds that NSSI did not refuse to allow Stasan to inspect or copy the business records it requested, NSSI is entitled to judgment on Stasan's claim pursuant to BCA Article 2.44(C)-(D). For the same reason, the court concludes that Stasan is not entitled to recover costs or expenses, including attorneys' fees, incurred in enforcing its rights under BCA Article 2.44(C)-(D). Judgment will be entered accordingly.SO ORDERED.