Martin v. Hutchison, 06-19-00093-CV

MICHAEL MARK MARTIN, RICHARD SCOTT MARTIN, JEFFREY WEBB MARTIN,INDIVIDUALLY AND ON BEHALF OF NETWORK OPERATOR SERVICES, INC.,A TEXAS CORPORATION, Appellants v. RON HUTCHISON, TONY CASON, TIM MARTIN, AND RONNIE MARTIN, Appellees

No. 06-19-00093-CV

Court of Appeals Sixth Appellate District of Texas at Texarkana

Date Submitted: September 30, 2020

November 19, 2020

On Appeal from the 124th District Court Gregg County, Texas

Trial Court No. 2019-601-B

Before Morriss, C.J., Burgess and Stevens, JJ.

Memorandum Opinion by Justice Burgess MEMORANDUM OPINION

Michael Mark Martin, Richard Scott Martin, and Jeffery Webb Martin, the minority shareholders of Network Operator Services, Inc. (NOS), appeal the dismissal of their individual and derivative claims against Appellees Tony Cason and NOS's majority shareholders, Ron Hutchison, Tim Martin, and Ronnie Martin, pursuant to the former version of the Texas Citizen's Participation Act (TCPA).¹ In addition to dismissing the minority shareholders' claims, the trial court awarded Appellees $10,000.00 in attorney fees and assessed $10,000.00 in sanctions against the minority shareholders. Because we determine that Appellees failed to meet their initial burden to show that the TCPA applies, we reverse the trial court's judgment and remand this case for further proceedings.²

I. Factual and Procedural Background

A. Origin of the Dispute

NOS is a family-owned, Texas corporation. Its bylaws describe it as a close corporation, and the record shows that it was owned by ten shareholders, was taxed as an S corporation, and had no publicly traded stock. Before NOS was incorporated, the Martin brothers (Michael, Richard, Jeffrey, Tim, and Ronnie), their father, Richard Duane Martin (Duane), and othersentered into a shareholder preformation agreement (SP Agreement) to "set forth the arrangement pertaining to the formation of the business to operate a Telephone Switch System," NOS. In accordance with their capital contributions to the endeavor, the SP Agreement gave 275 shares of NOS to Duane; 125 shares each to Tim and Ronnie; and 17 shares each to Michael, Richard, and Jeffrey and divided the remaining shares to other parties. The SP Agreement recited that Tim and Ronnie were the only officers of NOS and were authorized to conduct the company's business. Tim, Ronnie, Duane, and Tony Rothrock were to be named and would "remain as directors of [NOS] so long as they remain[ed] . . . shareholder[s]." As for Michael, Richard, and Jeff, the SP Agreement specifically instructed them to deliver their proxy votes on all shareholder actions to Duane, who would vote on their behalf.

After NOS's formation in 1988, the S corporation's bylaws were drafted to set forth the requirements for meetings, among other things. The bylaws provided for an annual meeting of shareholders, but also stated,

Any action . . . to be taken at a meeting of the shareholders, the Board of Directors or any committee designated by the Board of Directors may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the shareholders or members of the Board of Directors or committee, as the case may be.

Further, it clarified that regular meetings of the board could be held with or without notice, unless notice was required by the bylaws.

The bylaws specified, "The business and affairs of the Corporation and all corporate powers shall be managed by the Board of Directors, subject to any limitation imposed by statute, the Articles of Incorporation or these By-laws as to action which requires authorization orapproval by the shareholders," and that NOS's officers, Tim and Ronnie, and their agents, "could perform duties in the management of [NOS]" as provided by the bylaws or board. The bylaws also gave the board "the power to enter into contracts for the employment and compensation of officers for such terms as the Board deemed advisable."

At some point, Rothrock forfeited his position on NOS's board. In the 1990s, Hutchison was named Chair of NOS's board and received a 7.75 percent stake in the company. As a result, at the time of this dispute, NOS was controlled by its board of directors, Tim, Ronnie, and Hutchison, who also owned a majority of NOS's shares (collectively the Majority Shareholders).³ After Duane passed away, his shares in NOS were spread among Michael, Richard, and Jeffrey (collectively the Minority Shareholders), who each owned 14.95 percent of NOS's shares.

The dispute arose from transfers of NOS's interest in an asset that was completed by the Majority Shareholders allegedly without the knowledge of the Minority Shareholders. We discuss the history of that asset.

In 2002, Tim and Ronnie formed a separate company called Tim Ron Enterprises, LLC (TR-LLC), a "local telephone Company servicing commercial enterprises in Longview, Texas," under the name Network Communications. In addition to being NOS board members, the Majority Shareholders were also members of TR-LLC. TR-LLC's articles of organization reserved its management to its members and stated that "any action that may be taken at any meeting of members may be taken without a meeting, without proper notice, and without a vote"if proper consent was given. It is undisputed that the Minority Shareholders had no interest in TR-LLC.

Originally, 100 percent of TR-LLC's interest was assigned to NOS. In 2004, the Majority Shareholders assigned 30 percent of NOS's interest in TR-LLC to Tony Cason, who had no interest in NOS, in exchange for Cason's consultation services to TR-LLC. This left NOS with a 70 percent interest in TR-LLC.

Becoming effective on January 1, 2015, Tim and Ronnie signed an NOS board resolution that (1) contained the following prefatory language: "Whereas this was the intent with Tim Ron Enterprises, LLC once the money it borrowed from NOS was repaid; Whereas Tim Martin, Ronnie Martin, and Ron Hutchison have personally guaranteed all debt of NOS," and (2) transferred to themselves and Hutchison 10 percent each of NOS's ownership interest in TR-LLC (the 2015 Transfer). As a result of the 2015 Transfer, NOS was left with a 40 percent interest in TR-LLC. In their petition, the Minority Shareholders contended that they were not made aware of the 2015 Transfer at the time,⁴ the transfer occurred without a board meeting, and they had not seen anything showing that NOS was compensated for the loss of its interest in TR-LLC to Tim, Ronnie, and Hutchison.

In 2018, TR-LLC was sold to a third party, Contrerra Ultra Broadband Holding, Inc. (Contrerra), for $48,000,000.00. The proceeds from the sale were used to pay bonuses to TR-LLC employees and were then divided among its interest holders, including NOS. On October 23, 2018, Hutchison wrote a letter on NOS letterhead to NOS's accountant, Penny M. Young,informing her of the sale. This letter, which was also sent to Michael, represented that NOS owned 40 percent of TR-LLC and that $3,500,000.00 was being held in escrow and would be distributed to shareholders when realized. According to the Minority Shareholders, this was the first time they became aware of the 2015 Transfer that allegedly diluted NOS's interest in TR-LLC.

When the Minority Shareholders, received "approximately $1,325 Million each," based on their ownership interest in NOS, they sued Appellees, individually and on behalf of NOS,⁵ after they realized that they were each "shorted" $1,434,510.71 or more and NOS was "shorted" $9,595,389.36. In their petition, the Minority Shareholders asserted that all shares of NOS were devalued when the Majority Shareholders transferred NOS's interests in TR-LLC to themselves without notice to the Minority Shareholders or a board meeting. The Minority Shareholders also complained that, without their knowledge, and at Cason's direction, $943,500.00 of the sale proceeds was used to pay bonuses, including an alleged $118,000.00 bonus to Cason. As a result, the Minority Shareholders asserted causes of action for civil theft under the Texas Theft Liability Act, conversion, breach of fiduciary duty, fraud, and money had and received, and sought the imposition of a constructive trust as a remedy.

B. Appellees Invoke the TCPA

Appellees filed a motion to dismiss the Minority Shareholders' claims under the TCPA on the ground that the lawsuit was based on, related to, or in response to their exercise of the right of free speech and the right of association. Under their free speech argument, Appelleesargued that the Minority Shareholders' claims were based on unidentified representations, non-disclosed facts, or "[c]ommunications in regard to NOS and [TR-LLC], its business, products, and ultimate sale," and that such communications were protected by the TCPA because they concerned public matters of economic well-being and provision of telecommunications services in the marketplace. Under their right of association argument, Appellees argued that the Minority Shareholders' claims involved communications between business enterprises and individuals that joined to collectively express, promote, pursue, or defend common interests.

In addition to arguing that the TCPA applied to the Minority Shareholders' claims, Appellees also argued that the Minority Shareholders could not make a prime facie case by clear and specific evidence as required by the TCPA and prayed for attorney fees and sanctions. In particular, Cason argued that, although he was instrumental in facilitating TR-LLC's sale to Contrerra, the Minority Shareholders could not make a prime facie case against him because he had no control of NOS, owed no fiduciary duty to them, and had no role in reducing NOS's interest in TR-LLC before the Contrerra sale. The Majority Shareholders argued that the Minority Shareholders could not bring a derivative lawsuit on behalf of NOS without board approval and that NOS's transfers of interest to themselves and to Cason were proper because NOS was under their control and management.

The...