Betty Frost McAleer v. Eastman Kodak Company and Eastman Chemical Company

NO. 07-02-0015-CV

IN THE COURT OF APPEALS

FOR THE SEVENTH DISTRICT OF TEXAS

AT AMARILLO

PANEL E

DECEMBER 2, 2002

______________________________

BETTY FROST MCALEER, APPELLANT

EASTMAN KODAK COMPANY AND
EASTMAN CHEMICAL COMPANY, APPELLEES

_________________________________

FROM THE 359TH DISTRICT COURT OF MONTGOMERY COUNTY;

NO. 97-12-04730-CV; HONORABLE JIM KEESHAN, JUDGE

_______________________________

Before QUINN and REAVIS, JJ., and BOYD, SJ.1

Appellant Betty Frost McAleer appeals from a summary judgment in favor of

appellees Eastman Kodak Company (Kodak) and Eastman Chemical Company (Chemical)

in her lawsuit seeking declaratory judgment with respect to what she alleges is a license

1
John T. Boyd, Chief Justice (Ret.), Seventh Court of Appeals, sitting by assignment.
Tex. Gov’t Code Ann. § 75.002(a)(1) (Vernon Supp. 2002).
agreement and damages for trespass. The agreement granted the right to Kodak to lay

and operate a pipeline across certain real property in Montgomery County owned by the

predecessors-in-interest to appellant. The dispute between the parties arose as a result

of the creation by Kodak of a new corporation, Chemical, and the ability of Kodak to assign

those rights to Chemical or the right of Chemical to succeed to the rights of Kodak under

the agreement. Appellant claimed that no such right existed and that the agreement

terminated as a result of Kodak’s purported assignment. Kodak asserted a counterclaim

for declaratory judgment. The trial court denied summary judgment to appellant and

granted summary judgment in favor of appellees awarding them attorney’s fees.

Appellant claims the trial court erred in ignoring the terms of the license agreement,

which were clear and unambiguous and in refusing to apply the law as it existed when the

license agreement was executed. The pertinent language of the agreement over which the

parties disagree is as follows:

The permission herein granted is personal to Second Party, and may not be
assigned or conveyed. If Second Party shall be merged or be consolidated
with or into another corporation or if another corporation shall acquire all or
substantially all of the property of Second Party, the resulting or succeeding
corporation shall succeed to this permit and shall be personally liable to First
Party, their successors and assigns, for the performance of the obligations
hereof which subsequently accrue.

The agreement also provided that it could be terminated at the option of the first party in

the event of default by the second party. The original 1961 license or easement was in

favor of “Eastman Kodak Company, a New Jersey corporation of which Texas Eastman

Company is a division.” In 1988, an amendment to the agreement was executed by

2
appellant in favor of “Texas Eastman Company, a division of Eastman Kodak Company”

to permit the laying of a second pipeline. Then, in December 1993, Kodak mailed a letter

to appellant notifying her: “Kodak intends to divest itself of substantially all of the assets

of its Eastman Chemical Company division through a stock spin-off that will occur on or

about January 1, 1994 (the ‘Spin-off’). The Spin-off will result in Kodak’s Eastman

Chemical Company division becoming a separate and independent corporation chartered

under the laws of the state of Delaware (‘Eastman Chemical Company’).” As part of the

transaction, Kodak intended to assign all of its rights and obligations under the agreement

with appellant to Chemical. Although appellant refused to consent, the assignment

subsequently occurred.

The standards applicable to review of a traditional motion for summary judgment are

so well established as to make their reiteration unnecessary. See Nixon v. Mr. Property

Management Co., Inc., 690 S.W.2d 546, 548-49 (Tex. 1985). When the trial court fails to

specify the grounds upon which summary judgment was granted, as in this case, we must

affirm it if any of the grounds stated in the motion are meritorious. Carr v. Brasher, 776

S.W.2d 567, 569 (Tex. 1989). Appellees sought summary judgment on the basis that the

agreement was transferred by operation of law, the law does not favor forfeiture and,

alternatively, the assignment from Kodak to Chemical specifically excluded any

agreements which by their terms would become void or voidable if assigned, which could

not be transferred without consent of other parties whose consent had not been secured,

or which could not lawfully be conveyed.

3
In her first issue, appellant claims the trial court erred in ignoring the terms of the

agreement which were unambiguous. Those terms, she asserts, specifically provide that

the agreement may be assigned only in the event Kodak merged with or was consolidated

with another corporation, i.e., one company combining with another, and do not apply in

the event that one company is split into two companies by a spin-off action. Appellant

posits that the meaning of the words used should be given their common one and the court

should uphold the intent of the parties to the original agreement as expressed in those

words.

In her second issue, she complains that the trial court erred in refusing to apply the

law as it existed at the time the agreement was executed. The gist of this complaint is that,

while the current provisions of the Texas Business Corporation Act specifically define

“merger” to include the division of a corporation into two or more new corporations, that

statute applies only to domestic corporations, meaning Texas corporations, which Kodak

is not, and it constitutes an ex post facto law that the parties did not contemplate when

executing the agreement. Because appellees argue appellant’s two issues together in their

response, we will likewise discuss them together.

Whether a contract is ambiguous is a question of law that must be decided by

examining the contract as a whole in light of circumstances present when the contract was

entered. Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589

(Tex. 1996). A contract is ambiguous if its meaning is uncertain and doubtful or if it is

reasonably susceptible to more than one meaning. Coker v. Coker, 650 S.W.2d 391, 393-

4
94 (Tex. 1983). However, conflicting interpretations of a contract and unclear and

uncertain language do not necessarily mean a contract is ambiguous. Cook Composites,

Inc. v. Westlake Styrene Corp., 15 S.W.3d 124, 131 (Tex.App.--Houston [14th Dist.] 2000,

pet. dism’d). Our primary concern in reviewing the contract is to determine and give effect

to the intentions of the parties as expressed in the contract. Coker, 650 S.W.2d at 393.

Appellant argues that, because we are required to examine the contract in light of

circumstances present when the contract was entered into, we may not consider any

current definitions of merger which might include a spin-off or the splitting of one company

into two companies. She cites to a 1961 version of Webster’s Collegiate Dictionary and

a 1990 Black’s Law Dictionary which contain definitions of merger which reference an

absorption of one company by another. Therefore, she posits, we must interpret the

contract in light of the ordinary meaning of merger in 1961, which did not include a splitting

apart of one company.

The provision in question does not specifically define the meaning of merger.

However, appellees rely upon an amendment to the Texas Business Corporation Act in

1989, which defines a merger as follows:

(a) the division of a domestic corporation into two or more new domestic
corporations or into a surviving corporation and one or more new domestic
or foreign corporations or other entities, or (b) the combination of one or
more domestic corporations with one or more domestic or foreign
corporations or other entities resulting in (i) one or more surviving domestic
or foreign corporations or other entities, (ii) the creation of one or more new
domestic or foreign corporations or other entities, or (iii) one or more

5
surviving domestic or foreign corporations or other entities and the creation
of one or more new domestic or foreign corporations or other entities.

Tex. Bus. Corp. Act Ann. art 1.02(A)(18) (Vernon Supp. 2002). The comment to that

provision states that the definition of merger was expanded beyond the typical definition

of a combination of two or more corporations into a single corporation. Id. cmt.

Initially, we note that this statute is not an ex post facto law as referred to by

appellant. The prohibition against ex post facto law applies only to retroactive criminal or

penal laws. Barshop v. Medina County Underground Water Conservation Dist., 925

S.W.2d 618, 633 (Tex. 1996). Further, no claim has been made by appellees that the

statute itself is actually applicable to this particular transaction. The reference to the

statute is being used “as demonstrating the legislature’s intent that the common law should

treat mergers and spin offs as the same corporate reorganization vehicle/tool.”

Article 5.06 of the Business Corporation Act further provides that when a merger

takes effect, “all rights, title and interests to all real estate and other property owned by

each domestic or foreign corporation and by each other entity that is a party to the merger

shall be allocated to and vested in one or more of the surviving or new domestic or foreign

corporations and other entities as provided in the plan of merger without reversion or

impairment, without further act or deed, and without any transfer or assignment having

occurred . . . .” Tex. Bus. Corp. Ann. art. 5.06A(2) (Vernon Supp. 2002). The comment

to that article further states in relevant part:

6
In 1987, Article 5.06 was amended to make clear that while a merger vests
the rights, privileges, immunities and franchises of the merged corporation
in the surviving corporation, this is accomplished without a transfer or
assignment having occurred. Prior to the 1987 amendment of TBCA, Article
5.06A, it was possible that a merger could have been viewed to constitute a
transfer in the context of a contract or license that required prior approval for
a transfer or assignment.

Id. cmt. Appellees assert that the transfer herein occurred under the common law doctrine

of assignment by operation of law in the manner discussed in this comment.

In support of this argument, appellees cite us to the case of TXO Production Co. v.

M.D. Mark, Inc., 999 S.W.2d 137 (Tex.App.--Houston [14th Dist.] 1999, pet. denied), for the

proposition that a merger does not violate a non-assignment clause in a contract. In that

case, TXO Production Company (TXO) and PGI entered into a series of contracts that

allowed TXO to use seismic data owned by PGI. Under the contracts, the data was not to

be made available to third parties. When TXO merged with Marathon Oil Co., PGI sought

to charge a transfer fee to allow Marathon to use the data. The court discussed case law

in other jurisdictions which have found a merger not to be a violation of a non-assignment

provision in insurance policies and real estate leases. In its discussion, the court noted

that courts disfavor forfeiture in leases. Id. at 140. Two other factors relied upon by the

court in deciding that a fee was not owed were the parties’ failure to state that the non-

assignment provision was triggered by a merger and the intent expressed by the legislature

that a prohibited transfer would not be implied by a merger. Id. at 143.

7
We note the distinction between that case and the one before us in that there was

no dispute in the former as to the definition of merger which is really the issue which we

must decide. The construction of an unambiguous contract is a matter of law. Elliott -

Williams Co., Inc. v. Diaz, 9 S.W.3d 801, 803 (Tex. 1999). In making that construction, we

must do so from a utilitarian standpoint bearing in mind the particular business activity

sought to be served. Reilly v. Rangers Management, Inc., 727 S.W.2d 527, 530 (Tex.

1987). The meaning of a particular word in a contract depends on the kind and character

of the contract, its purposes and circumstances, and the context. Enchanted Estates

Community Assn., Inc. v. Timberlake Imp. Dist., 832 S.W.2d 800, 802 (Tex.App.--Houston

[1st Dist.] 1992, no writ).

It has been held that for a non-assignability clause to prevent assignment, it must

be proved that the grantor relied on the personal trust, confidence, skill, character, or credit

of another party. Eland Energy, Inc. v. Rowden Oil & Gas, Inc., 914 S.W.2d 179, 187

(Tex.App.--San Antonio 1995, writ denied). While there is no evidence that appellant relied

on any of those features in this instance, the agreement does permit another party to

succeed to the rights of Kodak in certain situations. Therefore, we must determine if the

situation before us was intended to be one of those in which a succession of rights was to

occur.

The agreement provides that the permission granted is to be personal to the

grantee. Thus, the intent was that some unrelated third party was not to be able to assert

the rights given to Kodak. However, recognizing that corporate restructuring does happen,

8
in the event of such a situation through merger or consolidation with or into another

corporation or if another corporation acquires substantially all of the assets of Kodak, the

resulting company was to succeed to Kodak’s rights. While appellant argues that the

placement of the word “merger” indicates that it is not intended to mean anything other

than the combination of two entities into one, it could also be argued that the placement

of the word was intended to mean something different than “consolidation with or into

another corporation” or there would have been no need to use both phrases.

The apparent reason for this provision was so that the possession or control of the

property would not be substantially changed, and therefore there would be no greater risk

to the landowner who has sought to protect himself by a non-assignability clause. In this

instance, Texas Eastman Company, with which appellant had already executed an

amendment of the agreement, was a division of Chemical, which was a wholly owned

business of Kodak. Chemical was then created into a separate corporate entity, the

shares of which were distributed to the shareholders of Kodak. The services provided by

the new corporation are the same. Thus, appellant will, in effect, be dealing with the same

group she dealt with before, only now its assets are owned by a separate corporation which

was formerly an unincorporated division of Kodak. We do not see that the purpose of the

non-assignability provision is abrogated by this event. We also recognize legislative intent,

expressed prior to the transaction that is the subject of this lawsuit, that the definition of

merger should be a broad one and that a merger should not violate a non-assignability

clause. We further recognize that the law does not favor forfeitures, and we should

therefore only construe an agreement to result in forfeiture if there can be no other

9
construction. See Reilly, 727 S.W.2d at 530; TBS Exco, Inc. v. E. N. Smith, III Energy

Corp., 818 S.W.2d 417, 422 (Tex.App.--Texarkana 1991, no writ); Cambridge Oil Co. v.

Huggins,765 S.W.2d 540, 543 (Tex.App.--Corpus Christi 1989, writ denied).

Therefore, bearing in mind the kind of contract, its purpose, and public policy

considerations, we believe the only reasonable construction of the contract is that the

transaction involved does not violate the non-assignability provision of this agreement, and

that the new corporation succeeded to the rights and obligations of Kodak. The summary

judgment is affirmed.

John T. Boyd
Senior Justice

Do not publish.