NUMBER 13-12-00099-CV
COURT OF APPEALS
THIRTEENTH DISTRICT OF TEXAS
CORPUS CHRISTI - EDINBURG
KNAPP MEDICAL CENTER, INC., Appellant,
v.
JEFFREY C. GRASS, Appellee.
On appeal from the 430th District Court
of Hidalgo County, Texas.
OPINION
Before Chief Justice Valdez and Justices Benavides and Perkes
Opinion by Justice Benavides
Appellant, Knapp Medical Center (KMC), appeals the trial court’s denial of its
motion for summary judgment in favor of appellee Jeffrey Grass’s cross-motion for
summary judgment. By four issues, KMC asserts that that trial court erred by:
(1) ruling as a matter of law that it was not exempt from the disclosure
requirements for non-profit corporations under the Business Organizations
Code;
(2) overruling its objections to an affidavit made by Grass’s expert;
(3) ordering an overbroad production of financial documents; and
(4) ordering KMC to post a supersedeas bond without any evidence of
damage or loss to Grass on appeal.
We reverse and render.
I. BACKGROUND
On February 7, 2011, Grass, a licensed Texas attorney from Plano, sent a letter
to KMC’s chief financial officer, Curtis Haley, and requested numerous documents
pursuant to section 22.353 of the Texas Business Organizations Code. See TEX. BUS.
ORGS. CODE ANN. § 22.353 (West 2011). Grass’s request included:
(1) A copy of KMC’s by-laws;
(2) Minutes of the Board of Directors meetings for each meeting since 2006;
(3) Audited financials and related reports under Circular A-133 for each tax
year since 2006;
(4) Management Representation letters from client to auditors showing
contingencies and off balance sheet liabilities;
(5) All Internal Control reports issued by accountants or auditors for each year
since 2006;
(6) All federal tax returns (Forms 990 and IRS correspondence) for each tax
year since 2006;
(7) Copies of Forms W2 and W3 for each tax year since 2006;
(8) Copies of Forms 1096 and 1099s for each tax year since 2006;
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(9) Related Party Transaction Reports required of 501(c)(3) companies since
2006;
(10) Travel Expense Reports required of 501(c)(3) companies since 2006;
(11) Personal Activity Reports required of 501(c)(3) companies since 2006;
(12) Due diligence reports as a result of [KMC’s] proposed merger with Valley
Baptist Hospital;
(13) Form 1023 (Original application for tax exempt status to the Internal
Revenue Service);
(14) List of contractors since 2006;
(15) Comparative studies performed and any and all documents considered by
the Compensation Committee in setting the compensation of the Chief
Executive Officer and all subsequent bonuses since 2006;
(16) Any and all documents related to insurance policies obtained and
maintained by KMC for each year since 2006; and
(17) The identities of any entities or sub-entities formed for the purpose of
merging or acquiring other healthcare facilities or for the recruitment of
primary care physicians.
KMC resisted Grass’s request and cited its exemption from such disclosure under
section 22.355(2) of the business organizations code. See id. § 22.355(2). KMC then
filed a petition for declaratory judgment that requested the trial court to declare KMC
exempt from any requirement to produce the documents under section 22.355(2). See
id. Grass answered the petition and asserted an affirmative defense of estoppel based
on the state’s public policy that favors public disclosure of financial documents of
non-profit corporations.
A. Grass’s Motion for Summary Judgment
Grass also filed a motion for summary judgment. The motion contends, among
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other things, that KMC was not entitled to the statutory exemption of non-disclosure as a
matter of law because KMC set up a sham non-profit corporation known as Knapp
Medical Center Foundation (“the Foundation”) to circumvent the section 22.353
disclosure requirements. Grass asserts that because KMC receives funds from the
Foundation, which solicits funds in excess of $10,000 from the public, KMC is subject to
the disclosure requirements of section 22.353(b). Grass contends that the Foundation
was a “shell corporation” designed to funnel money to KMC, and this formation should
not extend the statutory exemption of non-disclosure to KMC.
Grass attached an affidavit from former paid KMC consultant Patricia C. Fogarty
to his motion. In it, Fogarty asserts that to her “recollection,” “Knapp Medical Center
Foundation both solicited and received more than $10,000 yearly from sources other
than its own trustees,” and that it was her “professional opinion that [the Foundation] has
existed only to support the work of [KMC]” and that to her “knowledge[,] it does not
function for any other purpose.”
The Texas Medical Association (TMA), with leave granted by the trial court, filed a
brief amicus curiae in support of Grass’s motion for summary judgment.1 TMA’s brief
essentially reiterates the arguments contained in Grass’s motion and also attaches other
supporting evidence, including:
(1) The Foundation’s Articles of Incorporation, which states that the
Foundation is “organized for the sole benefit of, and the specific purpose of
1
The Texas Medical Association (TMA) contends in its brief that it has an interest in this case
through its TMA members on staff at Knapp Medical Center. The TMA also indicated that appellee, Jeffrey
Grass, represents members of TMA “who are advocating on behalf of their patients and the community of
Weslaco.”
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supporting . . . of [KMC] in Weslaco . . . so long as [KMC] shall qualify as an
exempt organization” under the federal Internal Revenue Code; and
(2) Filings with the Texas Secretary of State that show KMC’s chief executive
officer, James A. Summersett III, served as the registered agent for both
KMC and the Foundation.
B. KMC’s Motion for Summary Judgment
By its own motion for summary judgment, KMC contends that it is entitled to
protection from disclosure of financial documents as a matter of law under the exemption
articulated in section 22.355(2) because KMC and the Foundation are entirely separate
non-profit corporations. KMC also contends that TMA’s claim that the Foundation is a
“sham corporation” is “without evidence or citation to legal authorities.” Further, KMC
asserts that Grass’s argument is unsupported under the relevant statute or stated public
policy.
KMC attached the following evidence to support its motion:
(1) An affidavit from KMC CEO James Summersett, who contends, among
other things, that KMC: (a) is a not-for-profit corporation organized under
the laws of Texas; (b) does not “intend to solicit and receive contributions
from the public in an amount exceeding $10,000”; and (c) receives grants
from the Foundation for the purchase of specific items of equipment, as
directed by the Foundation’s board of directors and are not made to
support KMC’s general operating expenses. Summersett also states that
KMC and the Foundation are separate corporations and that the
Foundation solicits, receives, and accepts gifts.
(2) A February 20, 2011 letter to KMC from Grass, in which Grass broadens
his initial request for disclosure from his original to include “comparative
pay studies” and “all contracts, agreements, resolutions, minutes of
meetings, notes and informal memoranda pertaining to any aspect of the
total compensation and benefit package(s) of the CEO. . . .”
KMC also filed a response to Grass’s motion for summary judgment. The
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response adopts all of its arguments from its own motion and includes the same exhibits.
In its response, KMC also objected to Grass’s use of Fogarty’s affidavit because her
statements were “improperly qualified,” under rule 166a. See TEX. R. CIV. P. 166a.2
C. The Trial Court’s Orders
On August 17, 2011, the trial court held a hearing on each party’s respective
motion. After taking the matter under advisement, the trial court eventually issued a
ruling on October 11, 2011, which granted Grass’s motion for summary judgment and
denied KMC’s. The trial court found that Grass was entitled to summary judgment as a
matter of law because KMC was not exempt under the relevant statutes. On the
parties’ agreement, the Court also ordered an evidentiary hearing as to what documents
were subject to public disclosure.
On October 27, 2011, Grass filed a “Revised Document Request” which
requested six categories of documents:
(1) KMC’s financial statements, including balance sheets, statement of
cash flows, income statements, and pre-adjusted trial balances;
(2) Management letters from the external auditor;
(3) IRS Forms 990 for all related entities;
(4) Compensation documentation for all employees, including W-2s,
1099, and payroll reports;
2
Grass filed a response KMC’s motion for summary judgment in which he incorporated the same
arguments and evidence from his own motion for summary judgment. In his response, however, Grass
attached a second affidavit signed by Patricia Fogarty which changed the contested portions of her
previous affidavit from “recollections” and “opinions” to positive and direct statements—e.g. “I was aware
that [the Foundation] both solicited and received more than $10,000 yearly from sources other than its own
trustees.”
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(5) Documents about deferred executive compensation, including
written plans, contracts with agencies, minutes of the Board of
Directors authorizing the arrangement, and any contracts relating to
future obligations; and
(6) Any other documentation expressly referred to in Section 22.352(a)
as it relates to the financial statement information provided within
Subsection (b) and the underlying footnotes to the financial
information.
Grass’s amended request was supported by an affidavit signed by accountant Steven C.
Thompson, Ph.D. In the affidavit, Thompson states that he has personal knowledge of
the facts involved in the case, is familiar with Generally Accepted Accounting Principles
(GAAP) and Accounting Standards Codification (ASC) standards of accounting, and that
all six categories of documents requested “fall within the definition of records, books, and
annual reports as expressed by [Texas Business Organizations Code] sections 22.352
and 22.353.”
Without waiving its previous exemption argument, KMC filed a response to
Grass’s request and objected to Thompson’s affidavit on the ground that it “tries to
invade the province of the Court by interpreting the meaning of the statute.” KMC also
responded to Thompson’s affidavit by an affidavit from its own expert, Rodney Lenfant.
On December 14, 2011, the trial court held a hearing without oral testimony as to
what documents KMC was required to disclose. After the hearing, the trial court
deferred its ruling. In the interim, Grass filed a supplemental brief which argued that
KMC should be allowed to withhold documents pending an appeal if KMC posted a
$50,000 supersedeas bond. See TEX. R. APP. P. 24.2(A)(3). KMC responded by letter
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brief, which argued against posting a supersedeas bond because Grass would suffer “no
loss or damage while this case is on appeal.”
Two days later, the trial court ruled, in relevant part, that:
(1) KMC’s objections to Thompson’s affidavit, which gave his opinion about
what documents fall within the meaning of the public disclosure statute
under generally accepted accounting principles be overruled;
(2) Grass’s Revised Document Request be granted, in part, and denied, in
part;
(3) KMC produce the following documents for calendar years 2008, 2009,
2010:
a. Internal Revenue Service Forms 990 for 2008 and 2009;
b. Internal Revenue Service Forms 990 for 2010 after it is prepared
and filed;
c. Documents that trace how grants from the Foundation were
used for 2008–2010, including documentation that reflects the
sale or disposition of any items purchased by KMC with grants
from the Foundation during 2008–2010.
d. KMC financial statements, including all balance sheets,
statement of cash flows, income statements, and pre-adjusted
trial balances;
e. Management letters from the external auditor;
f. Compensation Documentations, with redacted personal
information, such as social security numbers; and
g. Deferred executive compensation, including written plans,
contracts with agencies, board of directors minutes authorizing
such arrangement, and any contracts relating to future
obligations;
(4) That KMC post a $25,000.00 supersedeas bond pending appeal; and
(5) That the present orders disposed of all remaining issues of the case
and rendered the case final and appealable.
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This appeal ensued.3
II. SUMMARY JUDGMENT
By its first issue, KMC asserts that the trial court erred when it ruled that KMC was
not exempt from the disclosure requirements of sections 22.353 and 22.355 of the
Business Organizations Code as a matter of law.
A. Standard of Review
We review a trial court’s grant of summary judgment de novo. Mid-Century Ins.
Co. of Tex. V. Ademaj, 243 S.W.3d 618, 621 (Tex. 2008). When, as here, both parties
moved for summary judgment and the trial court granted one and denied the other, we
determine all questions presented and render the judgment the trial court should have
rendered. Id. (citing Argonaut Ins. Co. v. Baker, 87 S.W.3d 526, 529 (Tex. 2002); see
FM Props. Op. Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000). On
cross-motions for summary judgment, each party bears the burden of establishing that it
is entitled to judgment as a matter of law. City of Garland v. Dallas Morning News, 22
S.W.3d 351, 356 (Tex. 2000).
Here, both parties rely on statutory provisions to support their respective motions.
In general, matters of statutory construction are questions of law. Argonaut, 87 S.W.3d
3
We note that various amicus curiae briefs were filed in this case. See TEX. R. APP. P. 11. The
Texas Medical Association, American Medical Association, Texas State Representative Armando Martinez,
and the Objective Watchers of the Legal System (O.W.L.S.) filed a joint amici brief in support of appellee
Grass. Additionally, (1) the Texas Hospital Association, Texas Association of Voluntary Hospitals, Texas
Organization of Rural & Community Hospitals; (2) Community Hospital Corporation and Memorial Health
System of East Texas; and (3) Christus Health, Memorial Hermann Healthcare System, the Methodist
Hospital System, Texas Children’s Hospital, and Texas Health Resources all filed their respective amici
briefs in support of appellant KMC.
9
at 529; City of Garland, 22 S.W.3d at 356. Our objective in construing a statute is to
give effect to the Legislature’s intent and shall consider at all times, the old law, the evil,
and the remedy. TEX. GOV’T CODE ANN. § 312.005 (West 2005); see Mid-Century, 243
S.W.3d at 621. Our interpretation of these statutes begins with their plain meaning,
which we derive from the entire act and not just from isolated portions. Id. (internal
citations omitted). Therefore, we read the statute as a whole and interpret it to give
effect to every part.
B. Statutory Construction and Interpretation
Both parties agree that the relevant statutory provisions involved in this case arise
out of Chapter 22 of the Texas Business Organizations Code concerning the regulation
of non-profit corporations—specifically, Subchapter H, regarding the public disclosure of
financial records and annual reports of these corporations. See TEX. BUS. ORGS. CODE
ANN. §§ 22.351–.356.
First, we read and construe section 22.353 as a statutory mandate to all domestic
non-profit corporations4 to keep records, books, and annual reports of the non-profit
corporation’s financial activity on file at the non-profit corporation registered or principal
office in Texas for at least three years after the close of the non-profit corporation’s fiscal
year. Id. § 22.353. Further, section 22.353 requires all domestic non-profit
corporations to make said records, books, and annual reports, which are held for at least
4
A non-profit corporation under this chapter is “a corporation, [in which] no part of the income of
which is distributable to a member, director, or officer of the corporation” formed for any lawful purpose not
expressly prohibited, including any purpose described in section 2.002 of the business organizations code.
See TEX. BUS. ORGS. CODE ANN. §§ 22.001; 22.051 (West 2011); see also id. § 2.002 (West 2011).
10
three years after the close of each fiscal year, available to the public for inspection and
copying at the corporation’s registered or principal office. The statute also allows the
corporation to charge reasonable fees for preparing copies of a record or report. Id.
Section 22.353 is essentially a re-codification of the now defunct Texas Civil
Statutes article 1396-2.23A § C into the Texas Business Organizations Code. See Acts
2003, 78th Leg., R.S., ch. 182 § 1, 2003 Tex. Sess. Law. Serv. Ch. 182 (H.B. 1156)
(West). The legislative intent behind the original provision of the Texas Non-Profit
Corporation Act was to open the windows of transparency to non-profit organizations
who solicited money from the public by keeping financial records on file and opening
those records for public inspection, if so requested. According to the original bill
analysis, then-Senator Gene Jones of Harris County authored the legislation as a
response to his previously failed attempt to conduct a study of a non-profit drug
rehabilitation program in Houston that was rumored to have used funds for investments
in night clubs. See Senate Comm. on Bus. & Indus., Bill Analysis, Tex. S.B. 857, 65th
Leg., R.S. (1977).
We recognize section 22.355, however, as a list of available statutory exemptions
for non-profit corporations to the record-keeping and public-disclosure requirements of
section 22.353. Because KMC only argues for protection under the statute’s second
listed exemption, we will only construe that one. See TEX. BUS. ORGS. CODE ANN. §
22.355(2). Under this exemption, non-profit corporations are not subject to section
22.353 if they do not intend to solicit and receive and do not actually raise or receive
during a fiscal year contributions in an amount exceeding $10,000 from a source other
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than its own membership. Id. Like section 22.353, section 22.355 originally appeared
in article 1396.2.23A § E of the Texas Civil Statutes.
Since its re-codification in 2003, our research—including the research of the
parties to this appeal—reveals no case law which specifically addresses, interprets, or
analyzes the current applicable statute. The Austin Court of Appeals, however,
construed and analyzed the relevant exemption under its predecessor statute in a case
involving similar facts to the one before us today. See Tex. Appellate Practice & Educ.
Res. Ctr. v. Patterson, 902 S.W.2d 686, 688 (Tex. App.—Austin, 1995, writ denied).
In Patterson, state senator Jerry Patterson requested disclosures of the financial
records and reports, pursuant to section 22.353’s predecessor, article 1396-2.23A § C,
from a non-profit corporation (“the Resource Center”), whose stated purpose was to
ensure that death row inmates in Texas had adequate legal counsel. See id. at 687.
The Resource Center denied Patterson’s request, and Patterson responded by filing a
petition for writ of mandamus in Travis County district court. After a hearing, the district
court determined that the disclosure statute applied to the Resource Center and ordered
it to turn over all records, books, and financial reports of its financial activities.
The Resource Center argued on appeal that it was exempt from the disclosure
requirements as a matter of law under article 1396–2.23A(E)(2) (present-day section
22.355(2)). The Austin court agreed. While the Resource Center admitted to
receiving revenue totaling $3.9 million during the 1993 fiscal year, it argued that the
revenues received were not raised or received through “contributions,” as articulated in
the statute, because “contributions” did not include “grants received . . . [from] state and
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private foundations.” Id. at 688. In its opinion, the Austin court cited the original bill
analysis and bill hearings, which revealed a “narrowly drawn law” that focused on
non-profit corporations which solicited “funds from the public.” Id. at 688–89 (emphasis
in original). The court further held that “when a non[-]profit corporation receives grant
funding . . . the statute is unnecessary because the terms of the grant and the grantor’s
oversight provide the means of holding the corporation accountable for the use of grant
funds.” Id.
Because we conclude that the purpose and language of the current section
22.353 exemption is unchanged from its article 1396–2.23A(E)(2) predecessor, we will
extend the Patterson holding to this case and apply the principles herein.
C. Discussion
Thus, the principal issue in this case is whether, as KMC argues, a non-profit
corporation hospital, which makes grant requests and receives grants for specific items
to and from a non-profit corporation foundation, whose sole purpose of formation is to
provide financial support for said non-profit corporation hospital, is exempt as a matter of
law from the public-disclosure requirement articulated the business organizations code.
See id. §§ 22.353; 22.355. KMC asserts that the evidence establishes, as a matter
of law, that it falls under the section 22.355 (2) exemption from public disclosure of
financial records and reports. We agree.
Grass argues that KMC should not be shielded from the statutory
public-disclosure mandates for non-profit corporations because KMC and the
Foundation are in essence one in the same because the Foundation is a “straw-man”
13
and “shell corporation” designed solely to funnel money to KMC. The record shows that
KMC and the Foundation are separate domestic non-profit corporations. The
Foundation was incorporated for “the sole benefit of, and the specific purpose of
supporting . . . [KMC].” Furthermore, the record shows that the Foundation “solicits,
receives, and accepts gifts” from the public. However, this evidence alone does not
support or establish any theory of liability to pierce the corporate veil. See SSP Partners
v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 454 (Tex. 2009) (citing Castleberry v.
Branscum, 721 S.W.2d 270, 271–72 (Tex. 1986)). Accordingly, we conclude that
based on the record, KMC and the Foundation are separate and distinct domestic
non-profit corporations.
Next, KMC chief executive officer Summersett’s affidavit shows that KMC does
not intend to solicit and receive contributions from the public in an amount exceeding
$10,000. Summersett’s affidavit also indicates that KMC receives grants from the
Foundation to purchase specific equipment and not for general operating expenses.
The rule in Patterson holds that when a non-profit corporation receives grant funding,
section 22.353 (formerly art. 1396-2.23A § C) is not applicable because “the terms of the
grantor’s oversight provide the means of holding the corporation accountable for the use
of grant funds.” Patterson, 902 S.W.2d at 689. Therefore, we conclude that KMC’s
grants from the Foundation are not “contributions” as interpreted in section 22.355(2),
and, as a result, the section 22.355(2) exemption applies to KMC as a matter of law.
See id. at 688.
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KMC’s first issue is sustained.5
III. CONCLUSION
We reverse the trial court’s judgment that grants Grass’s motion for summary
judgment and orders KMC to disclose documents under section 22.353. We render
KMC exempt from the statutorily-mandated disclosures of section 22.353.
__________________________
GINA M. BENAVIDES,
Justice
Dissenting Opinion by
Chief Justice Rogelio Valdez.
Delivered and filed the
6th day of June, 2013.
5
Because our ruling on KMC’s first issue is dispositive, we need not address KMC’s remaining
issues. See TEX. R. APP. P. 47.1.
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