In the Matter of the Estate of Poe

Richard Poe (Dick) operated three car dealerships. Dick’s dealerships and other property were owned by various limited partnerships. Poe Management, Inc. (PMI) was the general partner of, and thus controlled, the limited partnerships. PMI was authorized to issue up to 10,000 shares but initially issued only 1,000 shares, all of which Dick’s son, Richard (plaintiff), owned. Each year, Richard executed a written consent appointing Dick as PMI’s sole director for the next year. Richard also annually appointed Dick to be PMI’s president; Richard served as PMI’s vice president, and Paul Sergent (Dick’s lawyer) (defendant) served as PMI’s secretary. Per Sergent, this arrangement was meant to permit Dick to run the businesses for as long as he wanted and for Richard to take over when Dick died or retired. In mid-April 2014, Dick was diagnosed with a terminal medical condition. On May 1, while in the hospital for hospice care, Dick instructed Sergent to transfer control of PMI back to Dick. Sergent did so by preparing a unanimous consent of PMI’s board of directors (of which Dick was the only member) authorizing Dick’s purchase of 1,100 newly issued PMI shares for approximately $3.2 million. By virtue of this transaction, Dick controlled 52 percent of PMI’s voting stock, giving him control of PMI. Dick died on May 16. Anthony Bock (Dick’s accountant) (defendant) and Karen Castro (the dealerships’ comptroller) (defendant) were the executors of Dick’s will. By written consent of a majority of the stockholders, Castro and Bock elected Castro, Bock, and Sergent as PMI officers. Richard, who was not invited to the shareholder meeting, was removed as vice president. Richard filed a petition in probate court against Bock, Castro, Sergent (collectively, Dick’s advisers) and others, seeking a declaration that the stock issuance was not valid under Texas Business Organization Code § 21.418, which provided that an otherwise valid director self-dealing transaction was not void or voidable if it was, among other things, fair to the corporation. Dick’s advisers countered by seeking a declaration that the issuance was valid. The court asked the jury whether the issuance was fair to PMI, to which the jury responded no. Accordingly, among other things, the court declared the issuance to be invalid and unenforceable. Dick’s advisers appealed, arguing that the issuance was fair to PMI. Per Dick’s advisers, the jury’s contrary finding did not doom their position because the jury refused to find that the issuance was fair but did not affirmatively find that the issuance was unfair. In Dick’s advisers’ view, Richard bore the burden of proving unfairness, which he did not do. Accordingly, Dick’s advisers argued, both sides failed to meet their burdens to establish their entitlement to declaratory judgments, requiring that the status quo remain in place. However, Dick’s advisers’ lawyer conceded to the trial court that the advisers bore the burden of proving the fairness of the issuance.