Opinion issued May 9, 2013
In The
Court of Appeals
For The
First District of Texas
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NO. 01-11-00341-CV
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K-SOLV, LP, Appellant
V.
EDWARD J. MCDONALD AND ALAN D. PETERS, Appellees
On Appeal from the 269th District Court
Harris County, Texas
Trial Court Case No. 2009-61942
MEMORANDUM OPINION
After entry of a final judgment on all claims between all parties, K-Solv, LP
appeals from a partial summary judgment granted in favor of defendants Edward
McDonald and Alan Peters on a claim that they were vicariously liable for the
obligations of a limited liability company of which they were members. We affirm
the trial court’s ruling.
Background
K-Solv, LP brought an action for breach of contract, quantum meruit, suit on
a sworn account, and fraud against Energy America Geothermal, LLC. The
fundamental factual allegation was that that Energy America ordered and received
materials from K-Solv, but it failed to make payment. K-Solv subsequently
amended its petition to join Energy America’s individual members as defendants,
asserting direct claims as well as claims based on vicarious liability for the
obligations of Energy America.
Appellees Edward McDonald and Alan Peters were among the individual
defendants joined in the suit, and they initially moved for a no-evidence summary
judgment on all claims against them. This initial motion was granted with respect
to the direct claims but denied with respect to vicarious liability. K-Solv
subsequently nonsuited its breach of contract and quantum meruit claims against
Energy America, and it voluntarily dismissed all claims against all of the
individual defendants other than McDonald and Peters. The two individual
defendants then filed another motion for summary judgment on the vicarious
liability claim, which at that point was the only remaining claim against them. The
trial court granted this second motion. Ultimately an agreed final judgment was
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entered in favor of K-Solv on its suit on sworn account and fraud claims against
Energy America—the only claims remaining in the case.
K-Solv appeals only the trial court’s partial summary judgment dismissing
its vicarious liability claim against McDonald and Peters.
Analysis
We review a trial court’s summary judgment ruling de novo. Travelers Ins.
Co. v. Joachim, 315 S.W.3d 860, 862 (Tex. 2010); Mann Frankfort Stein & Lipp
Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex. 2009). In conducting our
review, we view the evidence in the light most favorable to the nonmovant,
crediting evidence favorable to that party if reasonable jurors could and
disregarding contrary evidence unless reasonable jurors could not. Mann
Frankfort, 289 S.W.3d at 848; see City of Keller v. Wilson, 168 S.W.3d 802, 827
(Tex. 2005). When, as here, the trial court’s summary-judgment order does not
specify the grounds on which it was granted, we must affirm the order if any of the
asserted grounds for summary judgment are meritorious. W. Invs., Inc. v. Urena,
162 S.W.3d 547, 550 (Tex. 2005).
On a motion for traditional summary judgment, the movant has the burden to
show that no genuine issue of material fact exists and that it is entitled to judgment
as a matter of law. See TEX. R. CIV. P. 166a(c); KPMG Peat Marwick v. Harrison
Cnty. Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex. 1999). The movant may
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satisfy this burden by conclusively negating at least one essential element of each
of the plaintiff’s causes of action. Sci. Spectrum, Inc. v. Martinez, 941 S.W.2d
910, 911 (Tex. 1997). On a motion for no-evidence summary judgment, the
nonmovant has the burden to present evidence sufficient to raise a genuine issue of
fact on each of its claims. TEX. R. CIV. P. 166a(i); Mack Trucks, Inc. v. Tamez, 206
S.W.3d 572, 582 (Tex. 2006). The nonmovant may satisfy this burden by
presenting more than a scintilla of evidence on each challenged element of each
cause of action on which it has the burden of proof at trial. TEX. R. CIV. P. 166a(i);
see Mack Trucks, 206 S.W.3d at 582.
McDonald and Peters assert, and K-Solv does not dispute, that applicable
provisions of the Business Organizations Code govern the legal liability of a Texas
limited liability company and its members, as disputed in this appeal. 1 The Code
provides that an LLC member “may be named as a party in an action by or against
1
See TEX. BUS. ORGS. CODE ANN. § 402.001(a)(1), (2) (West 2012). Under
the Code as currently enacted, LLC-member liability is subject to the same
statutory limitations and exceptions as corporate-shareholder liability. See
id. § 101.002(a); see also id. §§ 21.223–.226. Section 101.002—the
provision of the Code that extends its statutory limitations on corporate
liability to LLC liability—took effect on September 1, 2011, after the trial
court granted summary judgment on K-Solv’s vicarious liability claim. See
Act of April 20, 2011, 82nd Leg., R.S., ch. 25, § 2, 2011 Tex. Gen. Laws 45,
45. No party contends that section 101.002 applies to this appeal, and for
purposes of this opinion we apply the law as it existed prior to
section 101.002’s effective date. See Univ. of Tex. Sw. Med. Ctr. at Dallas
v. Estate of Arancibia, 324 S.W.3d 544, 547 (Tex. 2010).
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the [LLC] only if the action is brought to enforce the member’s right against or
liability to the company.” See TEX. BUS. ORGS. CODE ANN. § 101.113 (West
2012). Furthermore, “Except as and to the extent the company agreement
specifically provides otherwise, a member or manager is not liable for a debt,
obligation, or liability of a limited liability company, including a debt, obligation,
or liability under a judgment, decree, or order of a court.” Id. § 101.114. Based on
these statutory provisions, the appellees contend the applicable version of the Code
bars vicarious liability against LLC members, and common-law corporate-veil-
piercing theories are not applicable to them. Alternatively, McDonald and Peters
contend that even if common-law theories of vicarious liability apply to LLC
members, K-Solv’s claim against them fails because it cannot prove the necessary
elements of “actual fraud” and a “direct personal benefit.” See id. § 21.223(b).
K-Solv responds that despite these statutory provisions, Texas courts have
nevertheless applied common-law veil-piercing theories in the LLC context,
relying upon Sanchez v. Mulvaney, 274 S.W.3d 708, 712 (Tex. App.—San Antonio
2008, no pet.), and McCarthy v. Wani Venture, A.S., 251 S.W.3d 573, 590–91
(Tex. App.—Houston [1st Dist.] 2007, pet. denied). Nevertheless, K-Solv
concedes in its brief that it must show actual fraud and a direct personal benefit to
prevail on its vicarious liability claim against McDonald and Peters. In its briefing,
K-Solv identifies the elements of a vicarious liability claim, stating that when the
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“suit is based on or relates to a contract,” the claimant must show that the
defendant “perpetrated an actual fraud on the plaintiff primarily for the defendant’s
direct personal benefit.” Although K-Solv asserted a variety of claims, all of them
arise out of its purchase agreement with Energy America. K-Solv contends that
there is a question of fact on the element of fraud, but in its appellant’s brief it
makes no argument with respect to the “direct personal benefit” element.
We agree that the common-law vicarious liability of McDonald and Peters
for Energy America’s obligation to K-Solv, if any, is contingent on a showing of
actual fraud and direct personal benefit. See Shook v. Walden, 368 S.W.3d 604,
611–22 (Tex. App.—Austin 2012, pet. denied) (holding that, although
section 21.223 did not apply to LLC veil-piercing claims under applicable law, the
same policy judgments and balancing of interests compelled common-law
application of actual fraud and direct personal benefit requirements); Sanchez, 274
S.W.3d at 712 (holding that trial court properly granted summary judgment on
veil-piercing claim against LLC members when there was no evidence of actual
fraud); see also McCarthy, 251 S.W.3d at 589–90 (affirming vicarious liability
judgment against LLC member when evidence supported jury’s finding that
member used LLC to perpetrate actual fraud on claimant primarily for member’s
own direct personal benefit).
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The summary-judgment motion at issue did not specify whether McDonald
and Peters sought a traditional or no-evidence summary judgment, and the trial
court’s order granting the motion did not identify which rule it was applying.
Substantively, the motion raised both evidentiary challenges and purely legal
challenges. We thus treat the motion as both a traditional and no-evidence motion
for summary judgment. See, e.g., Davis v. Canyon Creek Estates Homeowners
Ass’n, 350 S.W.3d 301, 307–08 (Tex. App.—San Antonio 2011, pet. denied); Tex.
Integrated Conveyor Sys., Inc. v. Innovative Conveyor Concepts, Inc., 300 S.W.3d
348, 375 (Tex. App.—Dallas 2009, pet. denied).
In their motion, McDonald and Peters asserted that K-Solv had no evidence
of the “direct personal benefit” element of its vicarious liability claim:
There is absolutely no evidence of any benefit McDonald or Peters
might have derived from [Energy America’s] Elyria project, which is
the project for which the K-Solv material was used. And, according
to Rutherford [v. Atwood, No. 01-00-00113-CV, 2003 WL 22053687,
at *3–5 (Tex. App.—Houston [1st Dist.] Aug. 29, 2003, no pet.)
(mem. op.),] and like cases, the “direct personal benefit” must be
something more than a salary draw or other expenses from the
company. And any personal benefit must be direct, as opposed to
indirect, and that the company was used primarily for the
shareholder’s benefit. There is absolutely no evidence of these
elements.
On appeal, they re-assert this ground as supporting the trial court’s summary
judgment.
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K-Solv responded to the motion on both traditional and no-evidence
grounds. With respect to the element of “direct personal benefit,” K-Solv asserted:
[B]y not paying for the product [that Energy America ordered from K-
Solv], McDonald and Peters were able to pay monies toward loan
obligations personally guaranteed by them and pay the IRS 941 taxes
which if not paid would have resulted in a 100% personal penalty on
McDonald and Peters. These facts constitute a direct personal benefit
to McDonald and Peters. See Bank Statements attached hereto as
Exhibit H.
But the bank records attached as “Exhibit H” to K-Solv’s response do not establish
any connection between Energy America’s transaction with K-Solv and its
payment of debt or tax obligations. Even assuming that payment of LLC
obligations such as these could constitute the kind of “direct personal benefit”
necessary to hold the LLC’s members vicariously liable for the LLC’s contractual
defaults, the absence of any evidence of a connection between these payments and
Energy America’s transaction with K-Solv is fatal. See Menetti v. Chavers, 974
S.W.2d 168, 175 (Tex. App.—San Antonio 1998, no pet.) (reversing judgment
imposing individual liability on shareholders for corporate obligation and stating
that “[e]vidence that the [defendants] bought their groceries or paid their credit
card bills from the corporate account is insufficient, because the fraud must relate
to the transaction at issue, the contract between the [defendants] and the
[plaintiffs]”); Rutherford, 2003 WL 22053687, at *4–5 (explaining that alleged
direct personal benefit to corporate actor must relate to alleged fraudulent
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transaction to support vicarious liability); cf. Simplified Dev. Corp. v. Garfield,
No. 14-06-00526-CV, 2008 WL 399433, at *6 (Tex. App.—Houston [14th Dist.]
Feb. 14, 2008, pet. denied) (mem. op.) (affirming jury finding of direct personal
benefit to defendant when, among other things, evidence showed that fraudulent
transfer of assets at issue in case was made in exchange for release from personal
guaranty and other benefits).
Thus, the trial court correctly concluded that the summary-judgment record
contained no evidence of an essential element of K-Solv’s vicarious liability claim
against McDonald and Peters—specifically, evidence that they perpetrated the
alleged fraud against K-Solv primarily for their own direct personal benefit. See
Shook, 368 S.W.3d at 622 (holding that trial court erred in rendering judgment
against LLC member when there was no proof that the member “caused [the LLC]
to be used to perpetrate actual fraud for his direct, personal benefit”); see also
Solutioneers Consulting, Ltd. v. Gulf Greyhound Partners, Ltd., 237 S.W.3d 379,
389 (Tex. App.—Houston [14th Dist.] 2007, no pet.); Bates v. de Tournillon,
No. 07-03-0257-CV, 2006 WL 265474, at *3 (Tex. App.—Amarillo Feb. 3, 2006,
no pet.) (mem. op.).2 Because McDonald and Peters presented the trial court with
2
Because we conclude that the trial court’s summary judgment is sustainable
on this ground, we do not reach the issue of whether an LLC member may
be held liable under pre-section-101.002 common law when evidence of
actual fraud and direct personal benefit is present.
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at least one meritorious ground for summary judgment, we must affirm the trial
court’s order. See Urena, 162 S.W.3d at 550.
Conclusion
We hold that the trial court did not err in granting summary judgment in
favor of McDonald and Peters on K-Solv’s vicarious liability claim. We therefore
affirm the trial court’s judgment.
Michael Massengale
Justice
Panel consists of Justices Keyes, Massengale, and Brown.
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