Lead Opinion
OPINION
Opinion by
This is the second appeal relating to the divorce between James Lifshutz and Kym-berly Benson Lifshutz. See Lifshutz v. Lifshutz,
BACKGROUND
James and Kymberly were married in 1990 and separated in 1997. During the marriage, James managed the business of each of the Entities. The Entities paid various personal expenses for James and Kymberly, including a $95,000 addition to their home. The Entities were primarily involved in real estate, including the purchase and collection of notes and rental real estate. During the marriage, James purchased notes and rental real estate for the personal benefit of James and Kym-berly.
During the divorce proceedings, Kym-berly sought to pierce the corporate veil of the Entities so that James’s interest in the Entities would be included as a community property asset. The Entities filed a breach of fiduciary duty claim against James seeking damages for the personal expenses the Entities paid on his behalf and a constructive trust or damages for the business opportunities James usurped for the personal benefit of James and Kymberly. Following a bench trial, the trial court found James had breached his fiduciary duty but denied the Entities’ claim for damages or a constructive trust based on the trial court’s alter ego finding. Because the trial court found alter ego, it increased the' community estate by the amount of James’s interest in the Entities.
In the first appeal, we held that “the trial court improperly pierced the corporate entities” because the evidence was
On remand, the trial court reviewed the evidence developed at the original trial along with bank statements regarding the funds received from the sale of James’s carried interest in Hotel Partners. The trial court found that one-third of the stock in Berlee was distributed to James by Liberty Properties Partnership and then recontributed to Liberty Financial Corporation, making the stock a community property asset. The trial court further found that James was undercompensated and that the community estate was entitled to reimbursement. Finally, the trial court found that the breach of fiduciary duty claim should be denied because: (1) the claim is not just; (2) James is the alter ego of the Entities; (3) any diversion of corporate opportunities was ratified through agreement, consent, or acquiescence or James had actual or apparent authority to divert the opportunities.
Standard of Review
When a complete reporter’s record is filed, the trial court’s fact findings may be reviewed for legal and factual sufficiency under the same standards as jury verdicts. David L. Smith & Assocs., L.L.P. v. Advanced Placement Team, Inc.,
When a party not bearing the burden of proof on an issue challenges the legal sufficiency of the evidence, we review the evidence in the light most favorable to the verdict giving “credit [to] favorable evidence if reasonable jurors could, and disregard[ing] contrary evidence unless reasonable jurors could not.” City of Keller v. Wilson,
When a party attacks the legal sufficiency of an adverse finding on an issue on which it has the burden of proof, the party must demonstrate on appeal that the evidence establishes, as a matter of law, all vital facts in support of the issue. Dow Chem. Co. v. Francis,
When a party not bearing the burden of proof on an issue attacks the factual sufficiency of the evidence, we examine the entire record to determine whether there is some probative evidence to support the jury finding, after which we determine whether the evidence supporting the finding is so weak or so contrary to the overwhelming weight of the evidence as to be clearly wrong and manifestly unjust. Potter v. GMP, L.L.C.,
In making a just and right division of the community estate, broad discretion is given to the trial court, and the division will not be reversed on appeal unless the complaining party shows that the trial court clearly abused its discretion. Murff v. Murff,
Entities’ Appeal
A. Establishment of Breach of Fiduciary Duty
In their first issue, the Entities contend that they conclusively established their entitlement to relief on their claim for breach of fiduciary duty or, in the alternative, denial of relief was against the great weight and preponderance of the evidence. In addressing this issue, the Entities initially focus on the evidence supporting their claim and separately address the possible defenses. Kymberly’s brief, on the other hand, focuses on the evidence supporting the defenses to recovery rather than challenging whether the evidence was sufficient to support a finding that James did not breach his fiduciary duty.
Corporate officers owe fiduciary duties to the corporations they serve. Grinnell v. Munson,
After reviewing the record, we hold that the evidence conclusively established as a matter of law that James diverted opportunities from the Entities for personal gain, including interests in notes and rental properties.
B. Alter Ego/Sham
In their second, third, and fourth issues, the Entities challenge the trial court’s alter ego finding. The Entities contend that the finding violates the law of the case and exceeds the scope of the remand. The Entities further contend that the evidence is legally insufficient to support the finding and that alter ego is not a defense to a breach of fiduciary duty claim.
Kymberly argues that Lifshutz I drew a distinction between a finding of alter ego and the remedy of piercing the corporate veil. Accordingly, Kymberly believes that the trial court was not precluded from entering an alter ego finding on remand and relying on that finding in denying the breach of fiduciary duty claims. Kymberly further argues that if this court were to impose a constructive trust as a remedy for breach of fiduciary duty, the second requirement for piercing the corporate veil would be established because the community estate would be damaged. Finally, Kymberly contends that the trial court properly denied the breach of fiduciary duty claim because no true adversity existed between the Entities and James; therefore, the claim was a sham.
In Lifshutz I, this court asserted, “The doctrine of alter ego, in a traditional business context, allows the trial court to set aside the corporate structure of a company, or ‘pierce the corporate veil,’ to hold individual shareholders liable for corporate
At the least, a finding of alter ego sufficient to justify piercing in the divorce context requires the trial court to find: (1) unity between the separate property corporation and the spouse such that the separateness of the corporation has ceased to exist; and (2) the spouse’s improper use of the corporation damaged the community estate beyond that which might be remedied by a claim for reimbursement.
Id. at 517.
Kymberly argues that the first requirement relates only to a finding of alter ego, and the second requirement relates only to a finding that the corporate veil should be pierced. Since this court deferred to the trial court’s implied finding on the first requirement in Lifshutz I, Kymberly asserts that Lifshutz I actually “embraces” the trial court’s finding of alter ego on remand.
We agree with the Entities’ argument that reliance on the alter ego finding on remand was precluded by the law of the case and the scope of the remand. “The ‘law of the case’ doctrine is defined as that principle under which questions of law decided on appeal to a court of last resort will govern the case throughout its subsequent stages.” Hudson v. Wakefield,
“When [an appellate court] remands a case and limits a subsequent trial to a particular issue, the trial court is restricted to a determination of that particular issue.” Hudson,
In Lifshutz I, we sustained the Entities’ issues “regarding alter ego and piercing.”
The law of the case and the limited scope of the remand in this case precluded the trial court from relying on the theory of alter ego as a basis to deny damages for the breach of fiduciary duty claim. Accordingly, each of the following findings by the trial court as a reason for denying the Entities’ breach of fiduciary duty claim was improper:
The Court finds the claims by Third-Party Defendants against JAMES G. LIFSHUTZ and KYMBERLY BENSON LIFSHUTZ are not just and should be denied.
The Court finds that the Third-Party corporate Defendants are the alter ego of JAMES G. LIFSHUTZ.
The Court finds that if judgment were granted to the Third-Party corporate Defendants as requested, part of the conduct which established the alter ego finding, i.e., the usurpation of corporate opportunities to the community and the use of corporate assets to pay for community expenses, would result in harm to the community and KYMBERLY BENSON LIFSHUTZ’S separate property estate, which would require piercing the corporate veil in order to avoid an inequitable result.
The Court finds that there is no true adversity between any of the Third-Party Defendants and JAMES G. LIF-SHUTZ.
The Court finds that the Third-Party Defendants’ claims against JAMES G. LIFSHUTZ and KYMBERLY BENSON LIFSHUTZ are invalid since they are merely alter ego of JAMES G. LIF-SHUTZ.
The court finds that the Third-Party Defendants are all controlled by JAMES G. LIFSHUTZ, who sought to use the Third-party entities to advance as real an illusory and sham claim.
C. Ratification
The trial court found that the Entities ratified both the diversion of corporate opportunities and the improper payment of personal expenses through agreement, consent, or acquiescence.
Transactions between corporate fiduciaries and their corporation are capable of ratification by the shareholders or, as occurs more commonly, by the board of directors’ specific approval or acquiescence, laches, or acceptance of benefit. General Dynamics v. Torres,
In Dyer, the El Paso court held that “even when the transaction is detrimental to the corporation, no cause of action will lie if all of the shareholders have ratified the transaction.”
If we assume that a breach of fiduciary duty can be ratified, there is no evidence of full disclosure to the other shareholders. Indeed, the evidence establishes that no disclosure was made. Accordingly, the trial court erred in finding that the Entities ratified James’s breach based on the usurpation of business opportunities.
With regard to the payment of personal expenses, however, the evidence establishes that the shareholders were on notice that these expenses were being paid by the Entities. In fact, one of James’s brothers received similar benefits, and the father’s personal expenses had been paid through the Entities for years. Accordingly, the evidence supports the trial court’s finding that James’s actions with regard to the payment of personal expenses had been ratified.
D. Actual and Apparent Authority
The trial court found “that JAMES G. LIFSHUTZ had actual and apparent authority to use corporate and partnership assets as his own.”
The Entities contend that the evidence is insufficient to establish that James had actual or apparent authority. The Entities assert, “There is no evidence that any entity intentionally authorized the misuse of its assets, either by word or conduct. There is no evidence of a resolution by any corporate board of directors, or any agreement of the shareholders or partners.” The Entities further assert that apparent authority extends only to conduct that is apparently for the purpose of carrying out the entity’s business.
The law does not presume agency. Suarez v. Jordan,
Both actual and apparent authority are created through conduct of the principal communicated either to the agent (actual authority) or to a third party (apparent authority). Suarez,
There is no evidence in the record that the Entities intentionally conferred on James the authority to usurp business opportunities, took any action that would enable James to believe he had the authority to usurp business opportunities, or failed to exercise ordinary care thereby allowing James to believe he had authority. With regard to apparent authority, apparent authority exists “where the principal’s conduct would lead a reasonably prudent person to believe that the agent possessed the authority to act on behalf of the principal.” Disney Enterprises, Inc.,
E. Conclusion as to Entities’ Appeal
The evidence conclusively established that James breached his fiduciary duty in usurping the business opportunities of the Entities. The trial court erred in ignoring the law of the case and the scope of the remand in denying relief on the basis of alter ego, no true adversity, and sham. The evidence is insufficient to support the trial court’s findings that the Entities ratified James’s actions or that he had actual or apparent authority to engage in the wrongful acts. Because liability as to the breach of fiduciary duty claim was contested and damages are unliquidated, we remand the breach of fiduciary duty claim to the trial court for further proceedings consistent with this opinion. See Tex.R.App. P. 44.1(b).
James’s Appeal
A. Award of Greater Percentage of Property to Kymberly
In his first issue, James contends that the trial court “improperly disregarded” our opinion in Lifshutz I and “punished James by awarding even moi’e property to Kymberly than it awarded under the first, erroneous judgment.” James appears to contend that because we rejected Kymberly’s complaints regarding the nature of the property division in Lifshutz I, the trial court erred in changing its division on remand. In Lifshutz I, however, we expressly remanded the division of community property to the trial court for reconsideration.
B. Distribution of Berlee Lumber Company Stock
In his second issue, James challenges the finding by the trial court “that
The evidence presented on this issue is conflicting. In 1990, Liberty Properties Partnership appeared to have acquired the stock of Berlee Lumber Company from Barnard Lifshutz, James’s father. Although there is conflicting evidence with regard to the recording of this transfer in the stock book, the remainder of the evidence appears to support a finding that the stock was transferred to Liberty Properties Partnership. In 1996, the Berlee stock was transferred from Liberty Properties Partnership to Liberty Financial Corporation. The trial court found that this transfer resulted in a distribution from the partnership to James, causing it to become a community property asset before it was then recontributed to Liberty Financial Corporation.
Kymberly called several experts in both legal and accounting or tax fields who testified that the transfer caused a distribution to James. James called several experts who testified to the contrary.
Janet E. Stigent-Burns, a certified public accountant, stated she reviewed the 1996 tax return, including the Kl, financial statements, general ledgers, work paper entries, and various items in the minute book, corporate records, and partnership records. The 1996 partnership return showed a distribution to the partners consisting of the Berlee stock, a note receivable from Texas Home Improvement, and various cash distributions. Burns characterized the distribution as community property. Burns testified that the value of the distribution of Berlee stock was $1,108,348.00. On cross-examination, Burns stated that she was unaware of another way the transaction could be documented for tax purposes if the transfer was direct from Liberty Properties Partnership to Liberty Financial Corporation. Burns stated that the direct transfer could not be accomplished without a deemed or constructive distribution to James and his brothers. Burns also testified that the financial statement and tax return for Liberty Financial Corporation documenting the contribution of the Berlee stock and James’s individual tax return contained entries that were inconsistent with a direct transfer.
Norman Seeman, a certified public accountant, prepared the tax returns for James and the Entities. Although See-man agreed that the tax returns showed the Berlee stock as being distributed, See-man stated that the “amount wasn’t distributed. This amount was transferred to another corporation.” Seeman later insisted that the Berlee stock was not distributed, stating:
Don’t use the word “distributed.” You keep coming back — it wasn’t distributed. This was part of a recapitalization. It was transferred from one company to the other. You keep saying distributed, and it wasn’t distributed.
Seeman testified that he did not intend the entries to reflect a distribution but a direct transfer of the Berlee stock from the partnership to the corporation.
Peter Wolverton, a tax attorney with a masters in taxation, reviewed the tax re
Stanley Blend, a tax attorney, testified that in planning the reorganization, the Berlee stock was to be transferred from the partnership to the corporation. Blend agreed that for federal income tax purposes, the transfer of the stock was shown as a distribution to the partners; however, Blend asserted that it could have been shown as a direct investment. Blend stated that the stock certificates reflected that the ownership was transferred from the partnership to the corporation under Texas substantive law.
William Bradley, a certified public accountant, testified that the tax returns contained one acceptable way in which the direct transfer of the stock could be reported; however, other methods could also have been used. Bradley agreed that the direct transfer would “possibly” require the Berlee stock to be reflected on Liberty Financial’s books with a zero basis.
James relies on Thomas v. Thomas,
Thomas would be more on point if Liberty Properties Partnership had retained its interest in the Berlee stock. In that case, the Berlee stock would be a retained partnership asset and would not be a part of the community property estate. The distinction in this case is that the Berlee stock was undisputedly transferred, and the question is whether it resulted in a distribution to James.
Kymberly relies on Marshall v. Marshall,
In view of Marshall, James argues that the distribution in this case was an asset distribution and not a profit distribution; therefore, James contends that Marshall is not controlling. In Marshall, the court noted:
[A] withdrawal from a partnership capital account is not a return of capital in the sense that it may be characterized as a mutation of a partner’s separate property contribution to the partnership and thereby remain separate. Such characterization is contrary to the UPA and implies that the partner retains an ownership interest in his capital contribution. He does not; the partnership entity becomes the owner, and the partner’s contribution becomes partnership property which cannot be characterized as either separate or community property of the individual partners. Thus, there can be no mutation of a partner’s separate contribution; that rule is inapplicable in determining the characterization of a partnership distribution from a partner’s capital account.
As with trusts, a partnership can be an effective means of preserving the separate property character of assets contributed to the partnership and the undistributed income thereon. The partner’s spouse does not have an interest in the assets of the partnership until the assets and profits are actually distributed to the partner either in the form of partnership income or return of capital. To the extent that income distributions are made from the partnership, the distributions will be characterized as community property. Further, to the extent that distributions from the partnership include a return of the partner’s separate capital contribution, the distribution will be characterized as community income because the partnership entity becomes the owner of the capital contribution. Thus, no mutation of the partner’s separate property contribution occurs. Essentially, the rule of mutation of separate property is inapplicable in characterizing a partnership distribution from a partner’s capital account.
Lisa H. Jamieson, Marital Property Issues in the Modern Estate Plan, 49 Baylor L.Rev. 391, 402 (1997) (citing Marshall).
Even if we accept that the manner in which a transaction is documented for tax purposes is not controlling, it still must be considered as some evidence. Furthermore, although traditionally the stock book of a corporation might be decisive with regard to the manner in which stock ownership was transferred, evidence was presented in this case that could cause the trial court to question the validity of the stock book to accurately reflect the conveyance of the corporate stock. There was evidence that when the stock book was reviewed in 1993, it did not reflect the conveyance of the Berlee stock to Liberty Properties Partnership in 1990 although a subsequent review of the stock book revealed certificates dated in 1990. The trial court could have found that in light of that evidence, the stock book was not credible evidence of the manner in which the Ber-lee stock was conveyed because the stock certificates could be created at any time and back dated. Accordingly, the evidence
Texas has adhered to the entity theory of partnership since the Texas Uniform Partnership Act was enacted in 1961. See Haney v. Fenley, Bate, Deaton & Porter,
James further contends that if the trial court did not err in finding that a distribution had occurred, it erred in failing to apply a minority discount in valuing James’s 1/3 interest. Again, the evidence is conflicting on whether a minority discount should apply. James’s expert testified that no minority discount would apply because:
The time when the Burlee [sic] Lumber Company stock was a minority interest was instantaneous, at best, and according to Mr. Pearl [Berlee’s attorney], it never happened because it went — immediately became part of the capital of Liberty Finance [sic]. Under those circumstances, the number of cases which indicate whether you look at the entire transaction, there would never be a minority or marketability discount because 100% of the stock of the company was together and is still together.
Because it is within the trial court’s province to weigh the credibility of the witnesses and the weight to be given their testimony, the evidence is legally and factually sufficient to support the trial court’s finding that a minority discount was not applicable.
C. Reimbursement for Undercompen-sation
In his third issue, James challenges the trial court’s finding that “JAMES G. LIF-SHUTZ was under compensated and that the Jensen Claim of KYMBERLY BENSON LIFSHUTZ should be granted.” In the final divorce decree, the trial court ordered “that KYMBERLY BENSON LIFSHUTZ’ Jensen reimbursement claim be and it is hereby granted in the total amount of $492,835.00.”
As the party seeking reimbursement, Kymberly had the burden to prove the community estate was entitled to it. Jensen,
In this case, Kymberly presented no evidence of the amount of time that was reasonably necessary for James to spend managing and preserving the Entities. In fact, Wolverton, one of the experts called to testify regarding the Jensen reimbursement, expressly declined to provide evidence regarding this element, responding to questions about this element as follows:
Q. What was the value of the time or effort reasonably necessary for him to manage his separate property interest in Liberty Properties?
A. I do not have an opinion about that.
Q. What was the value of the time or effort reasonably necessary for him to manage his one-third ownership in Liberty Financial?
A. I do not have an opinion on that.
Although Wolverton’s testimony may have been sufficient to establish that James was undercompensated and that the value of the Entities increased as a result of James’s efforts, Kymberly is not entitled to the enhanced value of the separate property, but only to the value of time, toil, and labor utilized to benefit the Entities beyond that which was reasonably neces
Kymberly appears to contend that the trial court could have made a determination of the value of the time that exceeded what was necessary to manage and preserve the separate property from the evidence that was presented. “We acknowledge that great latitude must be afforded the trial court in its application of equitable principles to value a claim for reimbursement.” In re Marriage of Cassel,
Conclusion
The evidence is sufficient to support the trial court’s finding with regard to the distribution of the Berlee stock. The evidence is insufficient to support the Jensen reimbursement award. The trial court’s judgment as to the Entities’ breach of fiduciary duty claim is reversed. Because liability as to the breach of fiduciary duty claim was contested and damages are un-liquidated, we remand the breach of fiduciary duty claim to the trial court for further proceedings consistent with this opinion. “Any change in the trial court’s judgment on liability or damages for breach of fiduciary duty could potentially result in a loss of property from both the community estate and Kymberly’s separate estates. Because of this possibility, the property division must be remanded, including the award of attorney’s fees.” Lifshutz I,
Concurring opinion by SARAH B. DUNCAN, Justice.
Notes
. See Jensen v. Jensen,
. We note that the trial court impliedly found that James breached his fiduciary duty in expressly finding that "if judgment were granted to the Third-Party corporate Defendants as requested, part of the conduct which established the alter ego finding, i.e., the usurpation of corporate opportunities to the community and the use of corporate assets to pay for community expenses, would result in harm to the community....”
. We recognize that a Louisiana appellate court has drawn a distinction between distributions of income and distributions of a capital asset. Guilott v. Guilott,
Concurrence Opinion
concurring.
The majority holds that the business reorganization by which Liberty Financial Corporation acquired the Berlee Lumber Company stock resulted in a legally cognizable distribution to James and thus can form the predicate for Kymberly’s reimbursement claim. I disagree. The majority’s holding promotes form over substance. Even if the form of the transfer could be interpreted as a distribution to James, it is only because that form was dictated by tax considerations. In substance, there was no distribution of the stock to James. The majority’s holding thus “tend[s] to engraft upon our community property system the manifest complexities of federal tax law.” Thomas v. Thomas,
. See generally 19 Robert W. Hamilton, Texas Practice-. Business Organizations §§ 31-38 (1973 & Supp.2002).