Opinion
CIVIL ACTION NO. 3:99-CV-2796-G.
February 26, 2001.
MEMORANDUM ORDER
This action is before the court on cross-motions for partial summary judgment. For the reasons discussed below, the defendants' motion is granted, and the plaintiff's motion is granted in part and denied in part.
I. BACKGROUND
The background facts of this case are set out in the court's September 27, 2000 memorandum order and need not be repeated at length. See Logal v. Stasan, Inc., No. 3:99-CV-2796-G, 2000 WL 1449890, at *1-2 (N.D. Tex. Sept. 27, 2000). On March 20, 2000, the defendants Michael P. Logal ("M. Logal"), Deborah V. Logal ("D. Logal") and Network Staffing Services, Inc. ("NSSI") (collectively, the "defendants") filed their first amended complaint. See Plaintiffs' First Amended Complaint. The complaint sought declaratory relief to determine if the 300 shares of NSSI common stock belonging to Stasan, Inc. ("Stasan" or the "plaintiff") were invalid and should be canceled. See id. at 3. On June 13, 2000, Stasan filed its motion for summary judgment. See Stasan, Inc.'s Motion for Summary Judgment. On September 27, 2000, this court — having determined that the four-year statute of limitations barred the defendants' claim that Stasan's 300 shares of common stock were invalid — granted Stasan's motion for summary judgment. See Logal, 2000 WL 1449890, at *4.
On October 31, 2000, this court entered an order realigning the parties.
On July 6, 2000, Stasan filed its amended counterclaim asserting numerous causes of action against the defendants. See Defendant Stasan, Inc.'s Amended Counterclaim ("Counterclaim"). Stasan's third cause of action seeks declaratory relief against the defendants to determine whether Stasan's 300 shares of common stock in NSSI are valid. Id. ¶ 90. The action also seeks declaratory relief to determine whether the current board of directors of NSSI includes Stasan's president and chief executive officer, Estelle Blumberg ("E. Blumberg"), and/or her husband Richard Blumberg ("R. Blumberg"), Stasan's business manager. See id.; see also Counterclaim ¶ 6, and Appendix to Defendants' Cross-Motion for Partial Summary Judgment and Response to Plaintiff's Motion for Partial Summary Judgment ("Defendants' Appendix") at 167.
Stasan now moves for partial summary judgment on its declaratory relief cause of action. See Plaintiff Stasan, Inc.'s Brief in Support of Motion for Partial Summary Judgment ("Plaintiff's Summary Judgment Brief") at 1. In particular, Stasan seeks a declaration that (1) its 300 shares of common stock were validly issued; (2) the NSSI Board of Directors elected on July 29, 1999 (the "Stasan Board"), which allegedly included E. Blumberg and R. Blumberg, is valid; and (3) all actions taken by any other purported board should be considered null and void. See Plaintiff's Summary Judgment Brief at 1. The defendants cross-move for summary judgment on the second of these issues. See Defendants' Brief in Support of Their Cross-Motion for Partial Summary Judgment and Response to Plaintiff's Motion for Partial Summary Judgment ("Defendants' Summary Judgment Brief") at 2.
II. ANALYSIS A. Evidentiary Burdens on Motions for Summary Judgment
Summary judgment is proper when the pleadings and evidence on file show that no genuine issue exists as to any material fact and that the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). "[T]he substantive law will identify which facts are material." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A genuine issue of material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. A movant for summary judgment makes such a showing by informing the court of the basis of its motion and by identifying the portions of the record which reveal there are no genuine material fact issues. Celotex Corporation v. Catrett, 477 U.S. 317, 323 (1986). The pleadings, depositions, admissions, and affidavits, if any, must demonstrate that no genuine issue of material facts exists. FED. R. Civ. P. 56(c).
The disposition of a case through summary judgment "reinforces the purpose of the Rules, to achieve the just, speedy, and inexpensive determination of actions, and, when appropriate, affords a merciful end to litigation that would otherwise be lengthy and expensive." Fontenot v. Upjohn Company, 780 F.2d 1190, 1197 (5th Cir. 1986).
Once the movant makes this showing, the nonmovant must then direct the court's attention to evidence in the record sufficient to establish that there is a genuine issue of material fact for trial. See Celotex, 477 U.S. at 323-24. To carry this burden, the "opponent must do more than simply show . . . some metaphysical doubt as to the material facts." Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 586 (1986). Instead, the nonmovant must show that the evidence is sufficient to support a resolution of the factual issue in its favor. See Anderson, 477 U.S at 249.
While all of the evidence must be viewed in a light most favorable to the motion's opponent, see Anderson, 477 U.S. at 255 (citing Adickes v. S.H. Kress Company, 398 U.S. 144, 158-59 (1970)), neither conclusory allegations nor unsubstantiated assertions will satisfy the opponent's summary judgment burden. See Little v. Liquid Air Corporation, 37 F.3d 1069, 1075 (5th Cir. 1994) ( en banc); Topalian v. Ehrman, 954 F.2d 1125, 1131 (5th Cir.), cert. denied, 506 U.S. 825 (1992). Summary judgment is proper if, after adequate time for discovery, the motion's opponent fails to establish the existence of an element essential to its case and as to which it will bear the burden of proof at trial. See Celotex, 477 U.S. at 322-23.
B. The Validity of Stasan's Shares
Stasan contends that its 300 shares of NSSI stock are valid, because Stasan provided adequate consideration for the shares, and because the defendants acknowledged and ratified this consideration contemporaneously with the stocks' issuance. See Plaintiff's Summary Judgment Brief at 3-5. In addition, Stasan argues that the defendants are estopped from denying the validity of the plaintiff's shares. See id. at 5-16. The defendants respond that, because Stasan allegedly failed to pay any consideration before its shares were issued, the shares are void as a matter of law. See Defendants' Summary Judgment Brief at 9-13. The defendants also deny that they are estopped from challenging Stasan's shareholder status. Id. at 13-20.
The defendants' assertion that Stasan failed to pay consideration for its shares is frivolous. The NSSI board of directors — which at the time included M. Logal — issued Stasan's shares on July 1, 1994. See Plaintiff's Appendix at 91, 93. The Board expressly determined at the time that the shares were being issued in exchange for Stasan's "contribution of cash, property and/or labor." See id. at 89. Moreover, the stock certificate issued to Stasan by NSSI states on its face that the shares were "fully paid and non-assessable." Plaintiff's Appendix at 46. At the time the initial shares were offered, Stasan, through R. Blumberg, had forwarded $49,950 to NSSI. See id. at 96-97.
Texas law provides that, "[i]n the absence of fraud in the transaction, the judgment of the board of directors or the shareholders . . ., as the case may be, as to the value and sufficiency of the consideration received for shares shall be conclusive." Tex. Bus. Corp. Act art. 2.16(B) (Vernon Supp. 2001). Moreover, § 5.02 of the NSSI bylaws in effect in 1994, when Stasan's stock was issued, states that, "in the absence of fraud in the transaction, the judgment of the Board as to the value of consideration received shall be conclusive." Plaintiff's Appendix at 112; see also Sandor Petroleum Corporation v. Williams, 321 S.W.2d 614, 616 (Tex.Civ.App. — Eastland 1959, writ ref'd n.r.e.) (same). Without alleging fraud in the transaction, the defendants in the instant case are attempting — contrary to these unambiguous authorities — to transform into a disputed factual issue the conclusive determination by NSSI's board of directors that the consideration provided by Stasan was valid consideration. This they cannot do.
The defendants insist that it is irrelevant to the case at bar whether a board of directors' valuation of consideration is conclusive, arguing that the question presented here "is not whether Plaintiff gave sufficient value as consideration for the Stock; the question is whether Plaintiff gave any consideration for the Stock." Defendants' Summary Judgment Brief at 11 (emphasis in original). As noted before, the NSSI board of directors resolved on July 1, 1994 that Stasan's 300 shares of stock were to be issued in exchange for the plaintiff's "contribution of cash, property and/or labor." See Plaintiff's Appendix at 89. Furthermore, the stock certificate — also issued by NSSI on July 1, 1994 — states that Stasan's shares were "fully paid and non-assessable." Plaintiff's Appendix at 46. These statements clearly reflect a determination by the NSSI board of directors in 1994 that Stasan paid, at a minimum, sufficient consideration for its 300 shares of stock. The defendants' contrary claim finds no support whatsoever in the evidentiary record. Accordingly, the court concludes that Stasan's 300 shares of NSSI common stock were validly issued.
Consistent with this court's earlier opinion granting Stasan's summary judgment motion, see Logal, 2000 WL 1449890, at *4 n. 4, the court further concludes that the defendants are estopped from challenging the validity of Stasan's shares. On facts substantially similar to those in this case, the Texas Supreme Court rejected a claim by a corporate plaintiff — like that advanced by NSSI here — that issuance of its shares to one McAlister, for an oil and gas lease that was not in McAlister's name, "was void in its incipiency." McAlister v. Eclipse Oil Co., 98 S.W.2d 171, 175, 176 (Tex. 1936). Under the plain language of McAlister, NSSI and the other defendants in the instant case are barred from challenging the validity of the issuance of Stasan's shares:
Of course, in a diversity case such as this, the court is bound to follow decisions of the Supreme Court of Texas. See, e.g., Shanks v. AlliedSignal, Inc., 169 F.3d 988, 993 (5th Cir. 1999); Samuels v. Doctors Hospital, Inc., 588 F.2d 485, 488-89 (5th Cir. 1979).
According to the undisputed record but three persons took any part in the organization and incorporation of this concern [Eclipse Oil Co.], including the original issuance of its capital stock. These three persons were McCall, McAlister, and Spell. The three persons just named subscribed for all of the concern's capital stock, and certainly, as between themselves, paid for all they had subscribed for in the way and in the manner they had agreed. All such interested parties were fully cognizant of all that was being done. All three knew that McCall and McAlister were each subscribing for $19,500 of the capital stock, and were paying for same by transferring to the corporation the lease above described at a valuation of $39,000. All three knew that Spell was subscribing for $1,000 of the capital stock, and was paying for same with the derrick above mentioned. At the times all this occurred no party, other than McCall, McAlister, Spell, the corporation, and the state, had any interest in the matter whatever. . . . There were no creditors. . . . [E]xcept as to the state, no person or party other than the corporation and the three persons who subscribed for and received all of its capital stock had any interest in this corporation or its corporate affairs. Under such a record we think that, as between each other, neither the corporation itself nor any of its stockholders has any right to say that the issuance of the stock to McAlister was a void transaction in its incipiency.McAlister, 98 S.W.2d at 176. The record clearly demonstrates that the defendants in the instant case, like the plaintiff in McAlister, had full knowledge of the issuance of Stasan's 300 shares, participated in the issuance of those shares, and, up until 1999, treated Stasan as a shareholder of NSSI. For example, in May 1996, when Articles of Merger and a Plan of Merger were executed by NSSI, all of the NSSI shareholders, including the defendant D. Logal, executed a Shareholder Agreement. See Plaintiff's Appendix at 47-58. The Shareholder Agreement lists Stasan as the largest of the seven NSSI shareholders, owning 300 of the 890 shares then outstanding. See id. The Agreement was signed by all the shareholders, including the defendant D. Logal. See id. at 56. The defendant M. Logal also signed the Shareholder Agreement as D. Logal's spouse. See id. Minutes of the NSSI Board of Directors Meeting of February 9, 1998, which both D. Logal and M. Logal attended, reflect that the directors of NSSI confirmed at the meeting that the shareholders of the corporation included, at that time, Estelle Blumberg on behalf of Stasan. See Minutes of the Board of Directors Meeting, Plaintiff's Appendix at 65-69. More recently, as noted before, NSSI, D. Logal, and M. Logal alleged in pleadings filed in this court that Stasan had obtained thirty percent of the stock in NSSI in return for receivables financing provided by Stasan's owner, Richard Blumberg. See Complaint for Damages and Jury Demand ¶ 17, Plaintiff's Appendix at 1, 4-5. Under such a record — and guided by the Texas Supreme Court's decision in McAlister — the court concludes that the defendants in the case at bar are estopped from challenging the validity of Stasan's 300 shares of NSSI stock.
C. Dueling Boards of Directors: the "Stasan" Board vs. the "Logal" Board
Stasan argues that, because its stock in NSSI is valid, (1) the Board of Directors that was elected on July 29, 1999 (the "Stasan" board), is the proper board of NSSI, and (2) all actions taken by any other elected board are null and void. See Plaintiff's Summary Judgment Brief at 16-19. These claims are without merit. On July 29, 1999, R. Blumberg, as chairman of the board of directors of NSSI, convened an NSSI shareholders' meeting, which all shareholders attended either in person or by proxy. Plaintiff's Appendix at 155-56. At this meeting, R. Blumberg, E. Blumberg, Piotr Zapendowski ("Zapendowski"), and Ilene Phillips were elected, by a majority of the NSSI shares, to be the members of a new board of directors. See id.
The defendants allege, however, that, subsequent to the July 29, 1999 shareholders' meeting, the Blumberg board was replaced pursuant to a written agreement signed by a majority of NSSI shareholders. See Defendants' Summary Judgment Brief at 21. Indeed, uncontradicted evidence in the summary judgment record establishes that on August 11, 1999, Zapendowski, D. Logal, Laura Smith, Emily Carlson, and Ed Astin — who at the time collectively owned 64 percent of the outstanding stock, according to NSSI's stock ledger book — subscribed to a "Written Consent of the Shareholders of Network Staffing Services, Inc." (the "Written Consent"), which, among other things, removed the Blumberg board and named D. Logal, M. Logal, Bill Emery, and Kathleen Logal (the "Logal" board) as NSSI's new directors. See Defendants' Appendix at 153-62.
The NSSI bylaws expressly authorize the use of such written consents under certain conditions, all of which were met in this case. Section 3.10 of the bylaws provides in relevant part:
(1) Any action required or permitted by the [Texas Business Corporation] Act to be taken at any annual or special meeting of shareholders of the corporation may be taken without a meeting, without prior notice and without a vote, if the action is taken by the holders of outstanding stock of each voting group entitled to vote thereon having not less than the minimum number of votes with respect to each voting group that would be necessary to authorize or take such action at a meeting at which all voting groups and shares entitled to vote thereon where [sic] present and voted. In order to be effective, the action must be evidenced by one or more written consents describing the action taken, dated and signed by approving shareholders having the requisite number of votes of each voting group entitled to vote thereon, and delivered to the corporation by delivery to its principal office in this state, its principal place of business, the corporate secretary, or another office or agent of the corporation having custody of the book in which proceedings of meetings of shareholders are recorded.
Defendants' Appendix at 36-37.
The Written Consent describes the action taken, is dated and signed by approving shareholders holding a sufficient number of votes, and was delivered to NSSI. See Defendants' Appendix at 153-62. Section 3.04 of the NSSI bylaws indicates that the "minimum number of votes necessary" is a majority of outstanding shares. See id. at 33. It therefore appears that the requirements set forth in Section 3.10 of the bylaws were satisfied in this case. Accordingly, the court concludes that the Stasan board was properly removed and replaced by the Written Consent. The defendants are thus entitled to summary judgment denying, as a matter of law, the plaintiff's request for a judicial declaration that the Stasan board "is the proper Board of Directors of NSSI. . . . ." Plaintiff's Summary Judgment Brief at 1.
Finally, Stasan asks the court to declare that all actions taken by any purported board of directors other than the Blumberg board should be considered null and void. See Plaintiff's Summary Judgment Brief at 1. The court has previously concluded, however, that the Written Consent effectively established the Logal board as NSSI's proper board of directors. Accordingly, Stasan's request for a declaration of the Logal board's invalidity must also be denied. The court notes, moreover, that Stasan did not request in its pleadings that the actions of any board other than the Blumberg board be declared null and void. Because the court cannot award relief that has not been requested in the pleadings, and because Stasan has made no motion to amend its pleadings out of time, the plaintiff's request is denied.
III. CONCLUSION
For the reasons stated above, Stasan's motion for partial summary judgment is GRANTED to the extent it requests the court's declaration that Stasan's 300 shares of NSSI stock were properly issued. Stasan's motion is DENIED in all other respects. The defendants' counter-motion for partial summary judgment — which seeks the court's denial of Stasan's request for a declaration that the Blumberg board of Directors is NSSI's board of directors — is GRANTED.