Davis v. MSR Holdings, LLC

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ALAN DAVIS, JOHN MAHONY, THE MAHONY GROUP, LLP, AND MICHAEL W. FOULARD, Appellants v. MSR HOLDINGS, LLC AND MARRICK MEDICAL FINANCE, LLC, Appellees

No. 01-22-00451-CV

Court of Appeals of Texas, First District

June 28, 2024

On Appeal from the 151st District Court Harris County, Texas Trial Court Case No. 2016-68569

Panel consists of Justices Goodman, Landau, and Hightower.

MEMORANDUM OPINION

Richard Hightower Justice

Following a bench trial, the trial court rendered judgment in favor of appellee MSR Holdings, LLC against appellants (1) Alan Davis (2) John Mahony, (3) The Mahony Group, LLP, and (4) Michael W. Foulard based on the trial court's determination that they had violated the Texas Securities Act related to the sale of securities in Iomnis Surveillance Solutions, LLC (Iomnis). The trial court also rendered judgment against Davis and Foulard in favor of Marrick Medical Finance, LLC (Marrick) after determining that Davis and Foulard had breached an agreement under which the trial court determined Marrick was a third-party beneficiary.^[1] On appeal, the dispositive issues that we address are whether the evidence was legally and factually sufficient to support liability under the Texas Securities Act, whether Marrick was a third-party beneficiary under the agreement, and whether the statute of frauds barred enforcement of the agreement.

We affirm in part and reverse and render in part.

Background

A. Iomnis's Company Structure

Formed in 2011, Iomnis made and sold computer servers to operate surveillance systems. Ownership in the company was divided into classes of membership units, including Class A Membership Units and Common Membership Units. Initially, Foulard was the only owner of Class A Membership Units. In 2013, Foulard and his wife Georgia divorced, and she received part of his units. The following year, Foulard sold 10 percent of his units to Dynarock Affiliates, LLC, a company owned in part by his estranged son, George.

On December 30, 2014, an amended company agreement for Iomnis (Company Agreement) was signed. A schedule attached to the Company Agreement reflected the ownership interests of the three Class A Members: (1) Foulard owned an 18.56 percent interest, (2) Georgia owned a 29.95 percent interest, and (3) Dynarock owned an 11.39 percent interest. The schedule also reflected that Iomnis had two owners of Common Membership Units: (1) Alan Davis-Iomnis's chief executive officer and president-who owned a 20.60 percent interest, and (2) Shelby Beard-vice president of sales and marketing-who owned a 15.50 percent interest.^[2]

The Company Agreement provided that the "Board of Managers shall exercise complete and exclusive control of the management of [Iomnis's] business and affairs, and have the right, power, and authority on behalf of the Company, and in its name, to exercise all of the rights, power, and authorities of the Company." The Board of Managers was comprised of five managers: three Class A Managers- Foulard, Georgia, and George-and two Common Managers-Davis and Beard. George served as chairman of the Board.

The Company Agreement stated that "[t]he vote of the majority of the Class A Managers shall constitute the act of the Board." To issue new membership units or other forms of new membership interest, the Company Agreement required "prior written vote or consent of the Members holding a Supermajority Interest." The agreement defined "Supermajority Interest" to mean "(a) members whose aggregate Voting Percentage Interests exceed sixty-six and two-thirds percent (66-2/3%) and (b) the majority of the Class A Members." The schedule showed that each member's respective "voting percentage interest" varied slightly from his or her ownership interest. Foulard's voting percentage interest was 19.37 percent, Georgia's was 31.20 percent, Dynarock's was 11.83 percent, Davis's was 21.45 percent, and Beard's was 16.15 percent.

Although he had an ownership interest in Iomnis since its inception, Foulard was never an officer or employee, and he was not involved in Iomnis's day-to-day operations. Davis testified that, as Iomnis's president, he made the "everyday decisions" for the company. Davis explained that, before Foulard and Georgia divorced, he would go to Foulard for financial decisions, but, after the divorce, he reported to a "supermajority [of the] Class A Members"-meaning two of the three Class A Members. Davis testified that, for financial decisions, he "typically" went first to George, the Chairman of the Board, but, at times, he went to all three Class A Members-Foulard, Georgia, and George.

The divorce between Foulard and Georgia was acrimonious. Foulard testified that, when George purchased the Class A Membership Units from him and became Chairman of the Board, he and George were estranged. The evidence at trial showed that George and Georgia always voted the same on matters brought to the Board, thereby constituting a supermajority voting interest that would control on matters affecting Iomnis's management.

Foulard testified that, since the divorce, he had not communicated with Georgia. While he had since reconciled with George, Foulard indicated that the communications he had with George through 2015 were acrimonious. Because of the discord, Foulard testified that, after George and Georgia became members, he "c[a]me to the conclusion . . . that it probably wouldn't be a great idea for me to continue my involvement with Iomnis, if possible, in light of the fact that there was a lot of acrimony," which caused him to lose sleep and impacted his ability to manage another company, Gulfstream, his primary business.

Even before the divorce, the evidence showed that Foulard's involvement in Iomnis was limited. He testified that he attended a few board meetings, a convention, and one company presentation, but he was not involved in the technical or planning side of the business. Foulard's business, Gulfstream, had provided office space for Iomnis but Iomnis moved out before 2015. Gulfstream's chief financial officer, Becky Clamp, had also provided accounting services for Iomnis, but, by January 2015, she had stopped providing those services.

B. Iomnis's Financial Issues

By 2015, Iomnis was struggling financially, and its members had been loaning it money to cover its expenditures. In 2014, Foulard loaned Iomnis $820,504 and Dynarock loaned it over $900,000. In the first half of 2015, Georgia loaned Iomnis $975,000, and Davis loaned it $513,898. Despite the loans, Iomnis could not pay all of its expenses. For instance, Iomnis had not paid some of its employees and owed some of its salespeople commissions. Iomnis was also unable to pay its primary vendor, Dell, from which Iomnis purchased the hardware it needed to make the product it sold. By mid-2015, the Dell account was delinquent with Iomnis owing Dell over $1.3 million. Dell had placed a hold on Iomnis's account and did not sell any hardware to Iomnis for 90 days.

In addition, Iomnis owed $170,000 to John Mahony for consulting services that he and his company, The Mahony Group, LLC, provided to Iomnis. Mahony testified that the services entailed assessing whether Iomnis "was a good candidate to take to the market" for sale. He determined that, because of its debt, Iomnis was not a good candidate for sale. Mahony determined that the Iomnis's sale price would likely not cover the outstanding loan it owed to its members. Mahony provided feedback regarding how Iomnis could improve and modify its operations to make the company more saleable. In June 2015, Iomnis hired Mahony as its chief operating officer. At the time, Iomnis still owed Mahony and his company $170,000.

C. The Transaction

Because Iomnis needed funding, Iomnis's vice president, Ken Harrison, approached his friend, Perry Rickel, at church about investing in Iomnis. On June 3, 2015, Harrison sent Rickel an email about the investment. Harrison stated, "As we talked about at church[,] Iomnis is growing at a crazy pace[,] but we need cash to sustain short term operations." He told Rickel that it was "a great time to steal some equity [in Iomnis] that is worth drastically less right now than it will be in a year." He represented that Iomnis had pending contracts for orders that it could not fulfill because it needed funding to execute on the contracts. Harrison told Rickel that "our growth is massive but needs short term funding in order to produce such a huge upswing in orders."

The next day, Rickel responded, asking about Iomnis's ownership structure. Harrison replied, listing Iomnis's owners. Harrison also told Rickel that he "just bought 2.7% of the company." He stated that his and Dynarock's purchase of membership units were based on valuing Iomnis at $17.5 million.

In addition to Harrison, Rickel communicated with Davis and Mahony about purchasing membership units in Iomnis. At trial Rickel testified that Harrison, Davis, and Mahony told him that his investment would be used to enable Iomnis to meet its current contractual obligations, which in turn would lead to Iomnis's growth. Specifically, Harrison, Davis, and Mahony told Rickel that the funds would be used for three purposes: (1) completing the "development of [Iomnis's] software so that [it] could execute on the contracts that [it] had in hand"; (2) purchasing business software to aid in running the company; and (3) hiring a "competent controller." In an email to Rickel on which Davis was copied, Mahony told Rickel that "[t]wo of their top immediate priorities with investment money [were] to hire a controller and purchase . . . business enterprise software to bring all our systems together." Rickel agreed that using the investment funds in the manner represented to him would help Iomnis...