Appellants’ Motion Granted in Part and Denied in Part; Appellee’s Motion
Denied; Appellee’s Motion to Lift Stay Dismissed as Moot; and Opinion filed
July 12, 2022.
In The
Fourteenth Court of Appeals
____________
NO. 14-21-00701-CV
____________
AMERICAN AKAUSHI ASSOCIATION, INC., HEARTBRAND
HOLDINGS, INC., AND RONALD BEEMAN, Appellants/Cross-Appellees
V.
TWINWOOD CATTLE COMPANY, INC., Appellee/Cross-Appellant
On Appeal from the 458th District Court
Fort Bend County, Texas
Trial Court Cause No. 18-DCV-250789
OPINION ON MOTIONS
Appellants and cross-appellees HeartBrand Holdings, Inc. (“HeartBrand”),
American Akaushi Association (“AAA”), and Ronald Beeman (collectively
“Appellants”) filed a motion to review the trial court’s net worth determination in
connection with supersedeas of the judgment. See Tex. R. App. P. 24.4. Appellee
and cross-appellant, Twinwood Cattle Company, Inc. (“Twinwood”), filed its own
motion for review. Appellants argue the trial court set the supersedeas bond amount
too high. Twinwood, on the other hand, contends the court acted within its discretion
and, if any change is warranted, the bond amount should be increased. On the
parties’ agreement, this court issued an order staying execution of the judgment
pending disposition of the motions. We grant in part and deny in part Appellants’
motion, we deny Twinwood’s motion, and we modify the supersedeas bond amount
required to continue suspension of the judgment’s execution. We lift our February
16, 2022 stay order.1 Because our order requires HeartBrand to file additional
security in the trial court, enforcement of the judgment is suspended for twenty days
from today’s date. Tex. R. App. P. 24.4(e).
Background
The underlying dispute arises from Twinwood’s breach of contract and fraud
claims in connection with AAA’s obligation to procure and provide DNA parent
verified pedigrees on Twinwood’s Akaushi cattle registered with the AAA. A jury
found in favor of Twinwood and against AAA, HeartBrand, and Beeman. As to
AAA, the jury found that it breached its contractual obligations to Twinwood and
committed fraud. The jury also found that AAA, HeartBrand, and Beeman were part
of a conspiracy that damaged Twinwood. Additionally, it found that HeartBrand is
responsible for AAA’s conduct under alter ego principles.
The trial court signed a final judgment on September 17, 2021. The amount
of compensatory damages, interest for the estimated duration of the appeal, and
costs, total $20,454,863. Absent modification by the court or application of the bond
1
We dismiss as moot Twinwood’s Motion to Lift Stay of Execution of Judgment filed June
10, 2022.
2
caps, this is the amount of security required to supersede the judgment pending
appeal. See Tex. R. App. P. 24.2(a)(1).
After the verdict but before judgment, HeartBrand distributed $1.5 million in
dividends to shareholders and purchased the shares of three shareholders for
$875,000. Based on these actions, Twinwood filed an application for a temporary
injunction. In an October 19, 2021 order, the court enjoined HeartBrand and those
acting in concert with it “from (1) making any further distributions to shareholders,
and (2) otherwise distributing cash and other assets, or liquidating assets, outside the
legitimate normal course of business so as to avoid satisfaction” of the judgment.
On November 10, 2021, HeartBrand and AAA tendered a joint supersedeas
bond of $6,708,083.90, represented to be fifty percent of HeartBrand’s net worth of
$13,416,167.80 based on a consolidated balance sheet and an affidavit from its
controller, certified public accountant Carol Brown. Twinwood filed a net worth
contest the following day. See Tex. R. App. P. 24.2(c)(2). Only HeartBrand’s net
worth is in dispute.2
After conducting a three-day evidentiary hearing on Twinwood’s contest, the
trial court signed an order sustaining the contest (the “Order”). Among other things,
the court found that the $6,708,183.90 supersedeas bond tendered by HeartBrand
was insufficient; that HeartBrand’s net worth evidence was not complete, credible,
or reliable; and that Twinwood’s evidence was credible and reliable. Three
additional findings in particular form the bases of the parties’ competing motions
before us. First, the court found that a $20 million promissory note between the
Beemans and HeartBrand and shown on the balance sheet was not a liability at all
2
The trial court found AAA’s net worth to be negative, and Beeman filed a cash deposit
in lieu of bond. Twinwood challenges neither matter.
3
but should be treated as invested capital rather than debt. The court stated the
following reasons for its finding:
The Court concludes that the $20,000,000 promissory note
between the Beemans and HeartBrand appropriately should be
characterized as invested capital rather than debt. This note was not the
result of an arm’s length negotiation; it is a related party transaction to
benefit the Beemans. The Beeman family members are beneficiaries
of payments on that account, and they control HeartBrand as
shareholders, managers, directors, and officers. Ronald Beeman
extended the initial line of credit to HeartBrand in 2001 because no
bank would offer the same terms. HeartBrand was heavily
undercapitalized before infusions from the majority shareholder
Beeman family. HeartBrand has no real intent to pay down the debt,
which grew from approximately $780,000 in 2011 to more than
$24,000,000 in four years making no principal payments. HeartBrand
elected to pay shareholder dividends rather than pay down this note.
HeartBrand has treated the line of credit and resulting promissory note
as a capital contribution to expand the business, not to be repaid. There
is no limit to the line of credit, and the beneficiaries of the note have
been allowed to draw upon it at HeartBrand’s expense unchecked.
HeartBrand and the Beemans changed the interest rate at will, which
has varied from .25% to 2.91% to 4%. Before the terms were modified
in August 2018, there was no maturity date and the principal sum at that
time was $20,000,000. HeartBrand currently is required only to pay
interest and is paying only interest on the advance and does not have a
plan on how to pay the principal balance at maturity in 2028.
The second and third topics on which the parties join issue relate to the $1.5
million dividend distribution and the $875,000 share purchase. The court
disregarded those transactions as efforts to reduce net worth after the verdict. The
court stated, “[b]ut for those distributions and purchases, there would be additional
assets on the HeartBrand balance sheet.”
Based on its findings, the court reduced HeartBrand’s liabilities by $20
million and increased HeartBrand’s assets by $2,375,000 ($1,500,000 plus
$875,000). Accounting for these modifications to HeartBrand’s original claimed net
4
worth of $13,416,168, the court found HeartBrand’s net worth for supersedeas bond
purposes to be $35,791,168. Applying rule 24.2’s fifty-percent net worth bond cap,
the court ordered HeartBrand to file $17,895,584 in security to supersede the
judgment.
The court also made conditional findings “if a net worth computation is
undertaken” on appeal based on the “fair value of assets” rather than book value.
Under that alternative valuation approach, the court found HeartBrand’s net worth
was no less than $65,471,804.
In their motion for review, Appellants ask us to vacate the trial court’s net
worth findings and direct the district clerk to approve HeartBrand’s and AAA’s joint
supersedeas bond in the amount of $6,708,183.90. Appellants raise various legal
and factual sufficiency challenges to the findings. Twinwood, on the other hand,
asks us to increase the bond amount to $20,454,863, the default amount required
under rule 24.2(a)(1) without application of the net worth caps. Should we deny that
relief, Twinwood urges us to uphold the trial court’s order. We stayed enforcement
of the judgment pending our review of the parties’ motions.
Analysis
A. Applicable Standards
A judgment debtor may supersede the judgment by: (1) filing with the trial
court clerk a written agreement with the judgment creditor for suspending
enforcement of the judgment; (2) filing with the trial court clerk a good and sufficient
bond; (3) making a deposit with the trial court clerk in lieu of a bond; or (4) providing
alternate security ordered by the court. Tex. R. App. P. 24.1(a). The amount of
security necessary to supersede a money judgment must equal the sum of: (1) the
amount of compensatory damages awarded in the judgment; (2) interest for the
5
estimated duration of the appeal; and (3) costs awarded in the judgment. Tex. R.
App. P. 24.2(a)(1); Tex. Civ. Prac. & Rem. Code Ann. § 52.006(a). The amount of
security may not, however, exceed the lesser of (1) fifty percent of the judgment
debtor’s net worth or (2) $25 million. Tex. R. App. P. 24.2(a)(1)(A), (B); Tex. Civ.
Prac. & Rem. Code Ann. § 52.006(b)(1), (2).
A judgment debtor who provides a bond or deposit based on net worth
simultaneously must file an affidavit that states the debtor’s net worth and states
complete, detailed information concerning the debtor’s assets and liabilities from
which net worth can be ascertained. Tex. R. App. P. 24.2(c)(1). A judgment creditor
may file a contest to the debtor’s claimed net worth and may conduct reasonable
discovery concerning net worth. Tex. R. App. P. 24.2(c)(2).
Following discovery, the trial court must hold a hearing on the contest. Tex.
R. App. P. 24.2(c)(3). The judgment debtor bears the burden to prove net worth. Id.
The trial court must issue an order that states each judgment debtor’s net worth and
states with particularity the factual basis for that determination. Id.; In re Smith, 192
S.W.3d 564, 566 (Tex. 2006) (orig. proceeding) (per curiam). For supersedeas
purposes, net worth is the difference between total assets and total liabilities as
determined by generally accepted accounting principles. Texas Black Iron, Inc. v.
N. Am. Interpipe, Inc., No. 14-20-00068-CV, 2020 WL 10231117, at *2 (Tex.
App.—Houston [14th Dist.] July 28, 2020, mem. op. on motion), dismissed on
motion, 2022 WL 97662 (Tex. App.—Houston [14th Dist.] Jan. 11, 2022); O.C.T.G.,
L.L.P. v. Laguna Tubular Prods. Corp., 525 S.W.3d 822, 830 (Tex. App.—Houston
[14th Dist.] 2017, op. on motion); LMC Complete Auto., Inc. v. Burke, 229 S.W.3d
469, 482 (Tex. App.—Houston [1st Dist.] 2007, pet. denied); Ramco Oil & Gas, Ltd.
6
v. Anglo Dutch (Tenge) L.L.C., 171 S.W.3d 905, 914 (Tex. App.—Houston [14th
Dist.] 2005, no pet.).3
On the motion of a party, an appellate court may review the sufficiency or
excessiveness of the amount of security. See Tex. R. App. P. 24.4(a)(1). We review
the trial court’s determination of the amount of security for an abuse of discretion.
Texas Black Iron, 2020 WL 10231117, at *2; Ramco, 171 S.W.3d at 909. Generally,
the test for abuse of discretion is whether the trial court acted without reference to
any guiding rules and principles or whether the trial court acted arbitrarily and
unreasonably. Texas Black Iron, 2020 WL 10231117, at *2 (citing McDaniel v.
Yarbrough, 898 S.W.2d 251, 253 (Tex. 1995)). The trial court abuses its discretion
if the evidence is legally or factually insufficient to support its findings. See In re
Smith, 192 S.W.3d at 570; Ramco, 171 S.W.3d at 910.
We apply traditional evidentiary sufficiency standards of review to legal and
factual sufficiency challenges in this context. Texas Black Iron, 2020 WL
10231117, at *2. For legal sufficiency challenges, we consider all of the evidence
3
We disagree with Twinwood that the First Court of Appeals deviated from this
formulation in EnviroPower, L.L.C. v. Bear, Stearns & Co., Inc., 265 S.W.3d 1 (Tex. App.—
Houston [1st Dist.] 2008, en banc order). Quoting EnviroPower, Twinwood says the correct
measure of a company’s net worth is the company’s “current assets minus current liabilities at the
time the bond is set.” Id. at 5. Twinwood reads this statement as holding that only “current assets”
and “current liabilities”, in the financial accounting sense, are considered in calculating, as rule 24
puts it, “current net worth.” And, Twinwood continues, one reason the trial court correctly
declined to count the $20 million note as a liability in the net worth calculation was because it is
shown on the balance sheet as a “long term” note payable rather than as a “current liability.” A
reading of the entire EnviroPower opinion in context, however, shows that the en banc court
adopted the traditional net worth definition as “the difference between total assets and total
liabilities as determined by generally accepted accounting principles.” Id. at 5. Moreover, given
that the EnviroPower court was citing to, and quoting from, cases such as LMC Complete
Automotive, Ramco, and G.M. Houser, Inc. v. Rodgers, 204 S.W.3d 836, 840 (Tex. App.—Dallas
2006, no pet.), we do not construe it as deviating from the uniform net worth formulation adopted
by those cases and every Texas appellate court that has considered the question. Rule 24.2’s
reference to “current” net worth means net worth at the time the bond is set.
7
in the light most favorable to the challenged finding and indulge every reasonable
inference that would support it. Id. We must credit favorable evidence if a
reasonable fact finder could and disregard contrary evidence unless a reasonable fact
finder could not. Id. Finally, we must determine whether the evidence before the
court would allow reasonable and fair-minded people to find the facts at issue. City
of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005); Ramco, 171 S.W.3d at 910.
When the issue is factual sufficiency, we examine the entire record,
considering the evidence both in favor of and contrary to the challenged finding.
Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986) (per curiam); Ramco, 171 S.W.3d at
910. We set aside the fact finding only if it is so contrary to the overwhelming
weight of the evidence as to be clearly wrong and unjust. Pool v. Ford Motor Co.,
715 S.W.2d 629, 635 (Tex. 1986); Ramco, 171 S.W.3d at 910.
Because the judgment debtor has the burden to prove net worth, prevailing on
a legal insufficiency point on appeal requires the debtor to show that the evidence
conclusively establishes, as a matter of law, all vital facts in support of its position.
See Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex. 2001); Texas Black Iron,
2020 WL 10231117, at *3; Ramco, 171 S.W.3d at 910. Testimony from interested
witnesses may establish a fact as a matter of law only if the testimony could be
readily contradicted if untrue, and is clear, direct, and positive, and there are no
circumstances tending to discredit or impeach it. Lofton v. Tex. Brine Corp., 777
S.W.2d 384, 386 (Tex.1989); see also City of Keller, 168 S.W.3d at 820.
In conducting legal and factual sufficiency review, we remain mindful that the
trial court, as fact finder, is the sole judge of the credibility of the witnesses and the
weight to be given their testimony. City of Keller, 168 S.W.3d at 819; O.C.T.G.,
L.L.P., 525 S.W.3d at 831; Ramco, 171 S.W.3d at 910. This includes experts. When
presented with more than one expert, the trial court is permitted to credit one over
8
the other. Texas Black Iron, 2020 WL 10231117, at *8 (citing Gunn v. McCoy, 554
S.W.3d 645, 665 (Tex. 2018)). We may not substitute our judgment for the fact
finder’s, even if we would reach a different answer on the evidence. LMC Complete
Auto., 229 S.W.3d at 475.
B. Evidence
Appellants presented the live testimony of three witnesses, Carol Brown,
Ronald Beeman, and William Kothman. Twinwood presented Bruce Arendale. The
court also considered deposition excerpts of several witnesses. The court admitted
into evidence seventy-two documentary exhibits.
1. Promissory note
The court heard substantial evidence about the $20 million promissory note.
We first summarize the evidence Appellants presented. Under a December 2011
letter agreement, Beeman provided a line of credit for HeartBrand’s operating
expenses to be drawn on as necessary. HeartBrand would owe 4% interest, a rate to
be reviewed upon renewal. The line of credit would be renewed annually unless
terminated. Beginning in late 2011, HeartBrand drew on the line of credit to cover
operating expenses, including cattle purchases, feed purchases, and services like
insurance and legal representation. HeartBrand’s controller, Carol Brown, testified
that she would draw on the line of credit as needed, record the draws, calculate
interest, and pay the resulting interest when due.
HeartBrand’s 2012 and 2013 audited financial statements identified the note
as a debt and included it on the balance sheet as a liability. HeartBrand’s outside
auditors opined that these financial statements were fairly presented in accordance
with generally accepted accounting principles. The line of credit was later modified
pursuant to an August 2014 “Loan Modification Agreement,” which renewed the
9
line-of-credit arrangement as a “line of credit promissory note.” The amendment
was adopted in conjunction with the reorganization of HeartBrand’s operating
subsidiaries, a reorganization HeartBrand undertook to better organize and track the
operations of its different business activities, including live cattle sales, cattle
feeding, and meat sales. The Loan Modification Agreement was accompanied by a
written security agreement pledging the assets of HeartBrand and its new
subsidiaries as collateral for the note. Lawyers filed UCC financing statements
documenting Beeman’s security interest with the Texas Secretary of State’s office.
The Loan Modification Agreement acknowledged that the note’s outstanding
principal balance as of the agreement’s effective date was $17,326,635.86.
HeartBrand continued to take advances and make principal payments under
the note from time to time, and paid interest monthly. In November 2015, the note
reached its highest balance: $24,850,396.73. From that point forward, HeartBrand
took only one more advance on the note, and began gradually paying down the note
balance as the company began to achieve profitability. In 2018, the line of credit
was again modified by a written agreement, which established a new 2028 maturity
date, changed the annual interest rate to 2.91%, and noted an outstanding principal
balance of $20,000,000.4 The remaining unpaid line of credit balance above $20
million ($1,367,500) was paid back to Ronald and Joan Beeman over the next eight
months.
Beginning in fiscal year 2019, HeartBrand began obtaining financial
statement review services from accounting firm RSM US LLP. The 2019 and 2020
financial statements again identified the note as a debt and included it on the balance
4
According to Appellants, the 2018 modification occurred in conjunction with the
Beemans’ estate planning activity. Shortly after the modification, Ronald and his wife, Joan,
assigned a 60% interest in the note to four trusts (benefiting their son and grandchildren). Ronald
and Joan still hold the remaining 40% interest in the note.
10
sheet as a liability. RSM accountants concluded that there were no material
restatements required to bring the financial statements into conformance with
generally accepted accounting principles. HeartBrand reported the note balance and
interest payments on its federal income tax returns. Ronald and Joan Beeman
reported the note interest from HeartBrand as income on their federal income tax
returns.
Ronald Beeman and Carol Brown testified that the note is a debt, that it has
always been treated as a debt, and that it is intended that the debt will be repaid
according to its terms.
Twinwood’s evidence regarding the note differed from Appellants’ in several
respects. HeartBrand owed a large amount of money and was near bankruptcy when
the Beemans took over. Ronald Beeman initially asked a bank for traditional
financing but was refused. Ronald and Joan Beeman had to personally provide the
money to continue HeartBrand’s operations, and access to a line of credit was helpful
to HeartBrand’s growth. The note provided for an interest rate very favorable to
HeartBrand. One of the board members, Bill Fielding, testified that he did not recall
any discussions or a vote of the board in connection with the note’s execution. He
did not recall ever being apprised of the note’s details. He believed it unlikely that
HeartBrand could have obtained a line of credit from a bank.
All parties have acknowledged that the note is a related party transaction. The
original note was signed by Brown on behalf of HeartBrand and by Ronald Beeman
on behalf of Beeman Ranch. Beeman Ranch is Ronald and Joan Beeman’s personal
ranching operation. Later iterations of the note were signed by Jordan and Ronald
Beeman. Beeman family members are beneficiaries of the note, including interest
payments. The note was amended in 2018 to accommodate Beeman family estate
planning and a gift of part of the note to Jordan Beeman and his children, with $20
11
million still owed to the Beeman family. The Beeman family owns most of the
shares of HeartBrand. Ronald Beeman is chairman of the board; and Jordan Beeman
is president. HeartBrand is paying the Beemans $48,500 per month on the note,
which adds up to $582,000 per year. HeartBrand shareholders are beneficiaries of
the note payments.
Liability on the note grew from approximately $780,000 in 2011 to more than
$24,000,000 four years later. During that time, HeartBrand made limited principal
payments. There was no limit to the line of credit until recently—Brown said there
was no need for one—and Brown has authority to draw on it when there is not
enough cash in the bank. Before the terms were modified in August 2018, there was
no maturity date. HeartBrand has paid no principal since modification in 2018.
Brown testified that HeartBrand has not discussed how to pay down the principal;
Jordan Beeman has never discussed with Brown a plan to pay down the principal;
and Fielding was not aware of any intent to pay down the principal. Ronald Beeman
has never asked HeartBrand to repay the line of credit. Ronald Beeman said there
could be a balloon payment or a refinancing in 2028 upon maturity.
HeartBrand and the Beemans modified the interest rate over time, which has
varied from 4% to .25% to 2.91%. HeartBrand always paid interest and never has
been required to pay down principal. HeartBrand elected to pay shareholder
dividends in 2021 rather than pay down the note.
2. Dividend distribution
The $1.5 million dividend payment was paid to all shareholders, including
forty-one shareholders outside the Beeman family who hold nearly 30% of the
company’s stock. HeartBrand also paid dividends to stockholders in 2020, though
it had not paid any dividends in the preceding fourteen years. According to Jordan
Beeman, HeartBrand decided to distribute dividends because HeartBrand had “good
12
years” in 2020 and 2021 and wanted to return those proceeds to shareholders. Most
of the shares are owned by Beeman family members. HeartBrand’s external
accountant was unaware of the dividend payments but would have expected to be
made aware of them if they occurred.
3. Share purchase
According to Beeman, the purchase of shares was initiated by three
shareholders, who were early investors in the company and are not related to the
Beeman family. These investors requested their money back, in one instance to pay
medical bills.
C. Appellants’ motion
1. The court’s credibility and completeness findings
In their first argument, Appellants challenge the court’s credibility findings,
as well as the finding that Appellants failed to “provide[] complete, detailed
information concerning assets and liabilities from which net worth can be
ascertained.” Appellants contend these findings either are unsupported or
inconsistent with the court’s ultimate conclusions.
The trial court is the sole judge of witness credibility, and Appellants have not
presented any basis on which we may disregard the court’s determinations that
Appellants’ witnesses were not credible and that Twinwood’s witnesses were
credible. Appellants suggest that, because the court used Appellants’ balance sheet
as a starting point for the net worth calculation, it plainly accepted their evidence.
We agree the court accepted some of Appellants’ evidence; but the court rejected
other portions, as was its prerogative. See Texas Black Iron, 2020 WL 10231117, at
*2, *8; White v. Pottorff, No. 05-14-00675-CV, 2015 WL 302810, at *5 (Tex.
App.—Dallas Jan. 23, 2015, mem. op. on motion). The court was within its authority
13
to find that Appellants’ evidence lacked the completeness, detail, and consistency
necessary to support HeartBrand’s alleged net worth, even though the court accepted
some of Appellants’ proof. The court’s challenged findings are not inconsistent or
unsupported for the reasons Appellants contend.
2. The $20 million promissory note
Next, Appellants argue that the $20 million note between HeartBrand and the
Beemans is a related-party debt that must be included as a liability in the net worth
calculation. They say the court’s contrary finding disregarding the debt and treating
it as capital is an error of law and unsupported by legally or factually sufficient
evidence.
According to Appellants, a trial court may not disregard related-party or
affiliate debts, as least so long as those debts are genuinely based on value the
judgment debtor received from the affiliate, as they say this note was. Appellants
cite O.C.T.G. and Texas Custom Pools, Inc. v. Clayton, 293 S.W.3d 299 (Tex.
App.—El Paso 2009, orig. proceeding). In O.C.T.G., this court examined whether
the trial court erred in excluding from O.C.T.G.’s net worth calculation liabilities it
owed to companies with common ownership. 525 S.W.3d at 827, 830. The
judgment creditor argued that GAAP required O.C.T.G. to consolidate its financial
statement with its affiliates and use eliminating journal entries because liabilities
owed to other commonly owned companies were not “real debts.” Id. at 830. We
disagreed because Texas law requires the net worth of each judgment debtor to be
determined separately. Id. (citing In re Smith, 192 S.W.3d at 568-69). We held that,
absent an alter ego finding, a court abuses its discretion by using a consolidated
financial statement to determine a judgment debtor’s net worth. Id.
In Texas Custom Pools, the Eighth Court of Appeals examined whether
amounts owed under an agreement providing for certain bonus compensation for a
14
company’s two shareholders was properly counted as a liability on the company’s
balance sheet for net worth purposes. 293 S.W.3d at 307. Due to cash flow issues,
the bonus compensation was not paid each year, and the company showed the
amounts owed on its books as a liability. Id. The trial court excluded the amounts
payable from its net worth calculation. Id. at 308. The trial court did not state the
basis for doing so, but the parties’ arguments on appeal focused on whether the
compensation agreement was valid. The court of appeals held it was valid and thus
the trial court erred in failing to treat the amounts due to the shareholders under the
compensation agreement as liabilities. Id. at 310.
Based on these cases, Appellants argue that the trial court abused its discretion
in disregarding the promissory note as a liability “merely because it is owed to a
related party.” But the trial court did not disregard the $20 million note merely
because it is owed to a shareholder. Rather, it treated the note as capital based on
several circumstances over time indicating that the note bore the characteristics of
capital rather than a liability. Additionally, neither O.C.T.G. nor Texas Custom
Pools stand for the proposition that related-party debts must always be characterized
as liabilities as a matter of law in calculating a company’s net worth. The court in
Texas Custom Pools merely concluded that no evidence supported the trial court’s
decision, not that the court lacked discretion to disregard the purported debt if
credible evidence indicated that it was not actually treated as a debt.
Further, Appellants criticize Twinwood’s reliance on a multi-factor test courts
have long used in tax and bankruptcy cases to distinguish between debt and equity.
See In re Lothian Oil Inc., 650 F.3d 539, 544 (5th Cir. 2011); Fin Hay Realty Co. v.
United States, 398 F.2d 694, 696 (3d Cir. 1968) (listing such criteria as “the intent
of the parties,” “the identity between creditors and shareholders,” “the extent of
participation in management by the holder of the instrument,” “the ability of the
15
corporation to obtain funds from outside sources,” “the voting power of the holder
of the instrument,” “the provision of a fixed rate of interest,” and “the presence or
absence of a fixed maturity date” as affecting the distinction between debt and
equity). At least one Texas court has referred to these factors in a franchise tax case.
Arch Petroleum, Inc. v. Sharp, 958 S.W.2d 475, 477 n.3 (Tex. App.—Austin 1997,
no pet.).5 The parties presented evidence bearing on these factors, and the trial court
made findings on them. Noting that such a test has never been utilized in Texas to
recharacterize or disregard a liability for net worth purposes, Appellants say those
factors are irrelevant.
We disagree with Appellants that the trial court lacked discretion to find that
the $20 million promissory note is appropriately considered as invested capital rather
than a liability. Under rule 24.2, courts assessing a judgment debtor’s net worth
have authority to determine assets and liabilities because they must ascertain net
worth from that information. The trial court is obligated to find the judgment
debtor’s net worth, and to state with particularity the reasons for its finding. Tex. R.
App. P. 24.2(c)(3); In re Smith, 192 S.W.3d at 568. Thus, whether a liability shown
on a judgment debtor’s balance sheet is or is not a debt for net worth purposes is a
matter well within a trial court’s fact-finding function. The same is true for asset
valuation. See White, 2015 WL 302810, at *5; LMC Complete Auto., 229 S.W.3d at
486. The trial court determines what the assets and liabilities are. The court is free
to credit one expert over another, or one witness over another, in performing this
duty. Texas Black Iron, Inc., 2020 WL 10231117, at *8. For these reasons, we
conclude that evidence bearing on whether the note is a liability is relevant and the
5
Arch Petroleum involved whether to characterize convertible redeemable preferred stock
shares as equity or debt for franchise tax purposes. The court cited Fin Hay’s discussion of the
distinction between debt and equity and the relevant factors bearing on the inquiry. Arch, 958
S.W.2d at 477 n.3.
16
court was authorized to consider debt as equity or capital for net worth supersedeas
bond purposes if the evidence supported a determination that the parties treated the
transaction or investment as capital or equity rather than as debt or a liability. A
court is not bound to the parties’ characterization of the interests involved and has
discretion to accept or reject some or all of Appellants’ balance sheet figures in light
of all surrounding circumstances.
Turning to their legal sufficiency challenge, Appellants contend the $20
million note is a liability as a matter of law and no controverting evidence supports
the trial court’s contrary finding. We must decide if Appellants have shown that the
evidence conclusively establishes, as a matter of law, all vital facts in support of their
contention that they met their burden of proof to show net worth. Id. at *7; Ramco,
171 S.W.3d at 910. We conclude they have not made the necessary showing.
Considered in the light most favorable to the trial court’s findings, the
evidence shows, among other things: that the transaction was a related-party
transaction benefitting Beeman and other Beeman family members (who themselves
controlled HeartBrand as shareholders and managers and directors and officers); that
Ronald Beeman offered the associated line of credit to HeartBrand on more generous
terms than banks offered; that the note had no maturity date until August 2018; that
the principal balance increased from under $1,000,000 to well over $20,000,000
within a matter of years; that though HeartBrand paid interest, it paid minimal
principal and no plan existed to pay the principal balance when the note matured in
2028; and that the interest rate was modified repeatedly and never exceeded 4%.
Twinwood’s evidence, which the trial court accepted, revealed a substantive
relationship between Ronald Beeman and the company his family controlled that
was much different than that which would accompany an arm’s length loan with a
third party disinterested financial institution. As more than one witness said, a bank
17
likely would not have agreed to the same terms and, in fact, the bank Ronald Beeman
approached for an initial loan refused. We hold the above evidence is legally
sufficient to support the court’s finding that the $20 million note is properly
considered as invested capital rather than as a liability. Appellants’ review of the
evidence disregards the standard of review and the deference we afford the trial
court.6
Next, having considered the evidence both in favor of and contrary to the trial
court’s findings, Appellants have not demonstrated an abuse of discretion. As in
Texas Black Iron, the trial court was presented with conflicting testimony, including
expert evidence, and chose what to accept and what to reject. Texas Black Iron,
2020 WL 10231117, at *8. Testimony from interested witnesses may establish a
fact as a matter of law only if the testimony could be readily contradicted if untrue,
and is clear, direct, and positive, and there are no circumstances tending to discredit
or impeach it. See Lofton, 777 S.W.2d at 386. Appellants’ evidence was subject to
several circumstances discrediting or impeaching it, including internal
inconsistencies. To be sure, Appellants’ expert testified that the note was properly
treated as a liability under generally accepted accounting principles. But the court
was not required to credit that testimony, and it did not. Even though the trial court
declined to disregard the testimony of Appellants’ witnesses entirely, the court
reasonably could have chosen not to believe certain portions of their testimony. The
court’s finding is not against the great weight and preponderance of the evidence.
6
This is not to say that the trial court’s factual statements are completely accurate. For
instance, although the signed order describes a four-year span in which the debt grew from
$780,000 to $24,000,000 and during which time HeartBrand made no principal payments, the court
incorrectly implies that no principal payments were ever made. The evidence indicates that
HeartBrand made some principal payments in 2014 and 2015, at least. Even so, the underlying
findings having support in the evidence are sufficient to uphold the characterization of the
promissory note as invested capital rather than a debt.
18
We conclude the evidence is legally and factually sufficient to support the trial
court’s findings that the $20 million promissory note is properly considered as
invested capital rather than a debt.
3. The dividend payments and share purchases
The jury returned its verdict on July 16, 2021. The court found that the
$875,000 shareholder buyback occurred on July 28, 2021, and the $1.5 million
dividend distribution occurred in September 2021. The court further found that
those amounts should be added back into HeartBrand’s net worth calculation
because they represented an effort to reduce net worth after an adverse jury verdict
and, but for those distributions and purchases, “there would be additional assets on
the HeartBrand balance sheet.”
Appellants contend that the court’s findings are error because HeartBrand no
longer has access to that money7 and, moreover, the only permissible ground on
which to disregard those transactions is if they were proven by Twinwood to be
fraudulent transfers. Regarding the first point, while we agree that those funds are
no longer available to HeartBrand—and disregarding the transactions for net worth
purposes will not afford it access to an additional $2,375,000 in cash—HeartBrand
has not argued that it otherwise lacks the liquidity or assets necessary to secure a
supersedeas bond in the amount the trial court ordered, nor has it claimed that
requiring it to file such a bond will cause it substantial economic harm.
7
As Appellants assert, “[t]he amount HeartBrand distributed as a dividend and the amount
it spent on share purchases are not HeartBrand’s assets.” Appellants cite Texas Custom Pools, in
which the court held that the trial court abused its discretion by “adding back in to the net worth
calculation the sums paid to the shareholders” which were “obviously not reflected in the [] balance
sheet.” Texas Custom Pools, 293 S.W.3d at 310.
19
Moreover, the trial court is not constrained only to fraudulent transfer law in
determining how to account for a post-verdict asset transfer. As Twinwood
observes, courts are empowered to enjoin the dissipation of assets to avoid
satisfaction of judgments, see Tex. R. App. P. 24.2(d), and have discretion to
disregard post-verdict transactions such as these if the court finds they were made
outside the ordinary course of business in an effort to reduce one’s net worth. See
LMC Complete Auto., 229 S.W.3d at 486 (concluding evidence supported court
finding that depreciation allowance on balance sheet was not made in ordinary
course of business but inserted post-verdict to reduce net worth; acknowledging that
judgment debtor’s transactions with majority shareholder could be used to increase
a net worth calculation, though finding insufficient evidence to do so on facts
presented). We agree that, under the present circumstances, disregarding these post-
verdict transactions was within the trial court’s authority so long as the findings are
supported by evidence.
We first examine HeartBrand’s $1.5 million dividend distribution. The trial
court’s findings were based on a variety of evidence, which showed among other
things that: (1) the decision to pay dividends was made after the jury’s adverse
verdict; (2) there was no regular practice of paying dividends to HeartBrand
shareholders, and in fact the $1.5 million was only the second time the company had
paid dividends;8 (3) most of the payments went to Ronald Beeman’s family; and
(4) HeartBrand’s external accountant was unaware of the payments but would have
expected to be made aware of them if they occurred. We note that the trial court
disregarded only the 2021 dividends, not the 2020 dividends. We hold the evidence
is legally sufficient to support the trial court’s finding that the dividend payments
8
HeartBrand had not paid dividends in the fourteen years preceding 2020.
20
were outside the ordinary course of business and represented an effort to reduce net
worth after an adverse verdict.
We next examine the entire record, considering all the evidence. Appellants
highlight several facts which they contend support reversal. They note that:
(1) substantial dividends went to forty-one non-Beeman-family shareholders who
hold almost 30% of HeartBrand stock; (2) that HeartBrand had a profitable year
(albeit one significantly marred by the adverse jury verdict); (3) that the only other
occasion when HeartBrand paid dividends (in 2020) likewise followed a profitable
year; and (4) that HeartBrand retained substantial cash even after the dividend
payments were made. We conclude, however, that these facts fail to demonstrate
the trial court abused its discretion or that the court’s findings are against the great
weight and preponderance of the evidence. Although the dividend payments may
have followed a profitable year, they also followed an adverse jury verdict of over
$20 million. The trial court disregarded only the 2021 dividends, not the 2020
dividends.
The post-verdict share purchases are a different matter. The share purchases
were initiated by three early investors unrelated to the Beeman family who requested
their money back. One of them needed the funds for medical expenses. None of the
shares were owned by people who had any connection with the underlying
allegations of wrongdoing. We see no evidence that HeartBrand or Ronald Beeman
prompted these share purchases; all indications point to the shareholders themselves
asking to cash out their shares, and HeartBrand merely acquiescing to their requests.
Also, as HeartBrand stock was neither widely-owned nor publicly-traded—it had
roughly forty to sixty shareholders at any given time—its shares would not tend to
be readily marketable. Given the lack of a liquid market for the shares of such a
corporation, it is unsurprising that HeartBrand would be a willing purchaser under
21
the circumstances. Cf. Ritchie v. Rupe, 339 S.W.3d 275, 293 n.33 (Tex. App.—
Dallas 2011), rev’d on other grounds, 443 S.W.3d 856 (Tex. 2014) (“Often the
parties most interested in acquiring the minority shareholder’s interest in a closely
held corporation are the corporation itself or its other shareholders”); Frank H.
Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 Stan. L.
Rev. 271, 274 (1986) (observing that “investors in closely held corporations lack a
public market for claims” like “shares or equity”).9 Though we are not suggesting
that stock repurchases by close or closely held corporations are beyond suspicion,
nothing except the timing of these purchases suggests wrongdoing, and HeartBrand
did not initiate their timing.
The present circumstances do not support the trial court’s finding that the
share purchases were outside the ordinary course of business or made in an effort to
reduce net worth. We conclude the trial court abused its discretion by adding the
value of the share purchases to increase HeartBrand’s net worth.
D. Twinwood’s motion
In its rule 24 motion, Twinwood first argues that the bond amount must be
increased to $20,454,863 as the default amount under rule 24.2(a)(1) without
application of the net worth cap because HeartBrand failed to carry its burden of
proof to establish net worth. See Ruff v. Ruff, No. 05-18-00326-CV, 2018 WL
2926639, at *4 (Tex. App.—Dallas June 8, 2018, mem. op. on motion), op. after
reinstatement of appeal, 2020 WL 4592794 (Tex. App.—Dallas Aug. 11, 2020, pet.
denied) (affirming the trial court’s dismissal of insufficient and incomplete net worth
evidence as lacking in credibility); Bishop Abbey Homes, Ltd. v. Hale, No. 05-14-
01137-CV, 2015 WL 4456209, at *4, *6 (Tex. App.—Dallas July 21, 2015, mem.
9
We express no opinion whether HeartBrand qualifies as a closely held corporation under
Texas law. See Tex. Bus. Orgs. Code Ann. § 21.563(a)(1).
22
op. on motion) (affirming the trial court’s holding the judgment debtor failed to meet
his burden where the balance sheet contained “numerous errors” and was therefore
unreliable). In the cases Twinwood cites, however, the courts found the totality of
the judgment debtors’ net worth evidence so utterly lacking in credibility, reliability,
or substance, that it constituted no evidence. Other courts have reached similar
results when trial courts are unable to determine a specific net worth based on the
evidence. See Texas Black Iron, 2020 WL 10231117, at *8 (collecting cases). Here,
in contrast, Appellants presented some evidence, and the trial court, exercising its
discretion to accept part and reject part, was able to determine, and did determine, a
sum certain as HeartBrand’s net worth.
In its second argument, Twinwood urges us to apply a “fair value” approach
to asset valuation, rather than a “book value” approach and accept the trial court’s
alternate finding that “based on the available evidence of fair value of assets, . . .
HeartBrand’s net worth is no less than $65,471,804.” The court’s alternative
calculation assesses the value of certain assets—such as the herd, semen straws, and
meat—at their current market values. Twinwood contends that valuing those assets
at their “fair” market amounts is an acceptable practice under International Financial
Reporting Standards, as well as GAAP, and that it is appropriate and necessary to
consider that value in determining net worth. But the trial court’s fair value
calculations were merely conditional findings, and we need not address them.
Twinwood has not shown that the court abused its discretion in calculating
HeartBrand’s net worth based on evidence of the company’s book value. Cf.
EnviroPower, 265 S.W.3d at 6 (holding that when the book value of assets was not
disputed, the trial court abused its discretion in setting a supersedeas bond amount
that disregarded the book value). As the EnviroPower court explained, trial courts
are not to determine the value of a judgment debtor’s assets upon their sale and then
23
use that value, thus determined, to set the bond. Id. Such an approach thwarts the
Legislature’s approach in amending Civil Practice and Remedies Code section
52.006. Id.
Conclusion
We grant Appellants’ motion with respect to the trial court’s erroneous
addition of $875,000 representative of the share purchases to increase HeartBrand’s
net worth, and we deny the motion in all other respects. We deny Twinwood’s
motion. We order that HeartBrand’s net worth is $34,916,168. HeartBrand is
required to file security in half that amount, which is $17,458,084. Tex. R. App. P.
24.2(a)(1). Because HeartBrand has filed a bond in the amount of $6,708,183.90,
HeartBrand must file additional security of $10,749,900.10 in order to continue
superseding the judgment. We lift our February 16, 2022 stay order. Because our
order requires HeartBrand to file additional security in the trial court, enforcement
of the judgment is suspended for twenty days from today’s date. Tex. R. App. P.
24.4(e).
/s/ Kevin Jewell
Justice
Panel Consists of Justices Jewell, Zimmerer, and Hassan.
24