### TEXA S C OU R T OF A PPEAL S, THIR D DIST R ICT , AT AU STIN

NO. 03-04-00816- CV

Roland D. For tenberr y, Jr., a/k/a Dale F orte nberry, Jr. and Fort une Pr oducts, Inc., App ellants

v.
Ge rald R. Cavanaugh , Jr. and Diann a Cavanaugh , Appellees

F ROM THE DISTRICT CO URT OF BURNET COUNTY , 33RD JUDICIAL DISTRI CT NO. 30599 , HO NORAB LE V. MURRAY JO RDAN, JUDGE P RESIDING

M E M O R

A N D U M O P I N I O N
T h i s i s an ac ce l er at edi n t er l o cu t o ry ap p ea l fr o m a d i s t ri ct co u rt o r d er ap p o i n t i n g a
rec eiver for a family business. The dispute ari s es over the control of the ma nag ement of F ortune Produ c ts , I n c . , a b u s in e s s in M ar b le F a ll s th a t ma

n u f a c tu r e s an d s e ll s kn if

e s h ar p e n e r s . For tune Products was c reated in 1984 by Dale a nd Be tty For tenber ry . I n 2000, they

passed ha lf of the business to their son, Dale Forte nberr y , J r., and his wife ; the rema ining ha lf went to their da ug hter, Dianna Forte nberr

y Cavana ug h and her husband, Gerald R . Cavana ug h. The c ouples serve as the company ’s sole four direc tors. For tenber ry is the company ’s pre sident, Cavanaug h is the company ’s vice pr esident and c hair of the board, a nd Dianna Cavanaug h is the secr etary -t re asure r. In fiveTex. Bus. Corp. Act Ann. a rt. 7.05, § A(1) (b) ( West 2003). 1 2 iss ue s, F or

te nb e rr y a pp e a ls the dis tr ic t c ourt ’s or de r g ra nti ng the Cava

na ug hs ’ mot ion to a

pp oin t a
rec eiver . Be cause the district court’s or der a ppointing a r ece iver fa iled to comply with the require ments of Tex as Business Corporation Act article 7.05, section A(1) (b), the sole g round on 1 which the district c ourt based its re ceive rship order , we r ever se the de cision of the district cour t and
vacate the orde r.
The Di sp ute This appea l ari s es fr om a dispute over the control of the ma nag ement of F ortune Product s . Due to this dispute, the last share holder a nd direc tor meeting in October 2003 ended without the require d re- elec tion of di rec tors and officer s, and the parties have fe uded over the day -today manag ement of the company since at least t hat t ime. By letter dated J une 28, 2003, F ortenbe rry “exerc ised [his ] auth o rity to discontinue [C avana

ug h’s] participation in the day -to-day operations of th e c o mp an y . ” O nJun e 2 9 F o rt e nb e r r y f i l e d a d e c l ar a t o r

y j u d g m e n ta c t i o ni nT r a v i s C o un ty
a g a i n s tC a v an a

u g h t o d e t e r

m i n e F o rt e nb e r

r y’ s a u t h o r i t y r e g ar d i n g m an a g e m e n to f t h e c o mp a n y. For tenber ry obt ained a temporar

y restra ining or der ba

rringCavana

ug h from his offic e at the
c o mp an y. Th e ne xt day , Jun e 30 , th e Cava na ug hs fi le d s uit

in B ur ne t Co un ty

a g a ins t F or te nb e rr y a nd F or tun e Pr od uc ts, se e kin g a

de c larator

y jud g me nt t o d e te rm ine the re sp e c tiv e ri g hts of the pa rties. The B urnet County action also a sser t ed cl ai m s for a n acc ounting, f

or monetar

y damag es for

brea ch of f

iduciary duty and duty of g ood faith and fair dealing , for the appointment of3

a re c e ive r, and

fo r i nju nc tiv e re lie f. Th e Cava

na ug hs ob ta ined a tem pora ry inj un c tio n a g a ins t Fo rt en b erry . On l y

t h e t em p o ra ry

i n j u n ct i o ni nBu rn et C o u n t y re m ai n s i nef

fe ct
. Al t h o u gh For tenber ry soug ht to abate the B urne t County action pendingresolution of the Tr avis County action,
ve nu e of an a c tio n fo r the a pp oin tme nt of a re c e ive r is mand a tor y in thi s c a se in B ur

ne t C ounty wh e re the a c tio n p ro c e e ds pe nd ingthi s a pp e a l. After hear ings on va

rious matters in B urnet County district co u rt in J uly

2004, including the motion to appoint a rece iver, the district c ourt deter mined
that the direc tors of F ortune Products, Inc., ar e dea dlocked in the mana g ement of the corpor ate a ffa irs, t h at t h e shareholder s are unable to bre ak the de adlock, a nd that irrepa rable injur y t o the cor

poration is being suffe red or is threatene d by

rea son there of. TheCou rt t

ak es u nd e r a dv ise me nt t

he iss ue of w he the r all

oth e r re me die

s, either at law or in equity, are inadequate. (Emphasis added.) Taking under a dvisement the question whethe r all re medies had be en exhausted, the cour t ordere d the par

ties to procee d to mediation. After the mediation fa iled, at an October 21, 2004 hear ing, the court re iterate d that the direc tors wer e dea dlocked in the mana g ement of the corpor ate a ffa irs and that irrepa rable injury to the corpor ation was thre atene d. As to w hether other available r emedies w ere adequate, the cour t stated : “ [N ]o w th e is s u e a s to w h e th e r o r n o t a ll r e me d ie s h a v e b e e n s o u g h t, I th ink th a t w ith the failure of the mediati o n that we ha ve g one as f

ar a s we c an g o to ge t it correc ted, so I. . . here by order that we a ppoint a rec eiver

. . . .” On Nove mber 29, the c ourt appointed a rec eiver as the c hief op e ratin g of

fi c e r o f t he c omp any wh o wou ld al so se rv e a s a fif th me mbe r of

the bo ard of dir e c tor s.4

The orde r also specifie d that the receive r would “super vise a buy -sell neg otiation between the parties in which there will be a complete sale of the stock of one pa rty to the other pa

rty .”
Stan dard of Revie w

We will affirm the interloc utory appoint ment of a r ece iver, whe ther a uthorized by statute or by

equity , unless the t rial cour t clear ly abused its discre tion. Ab e lla v . Kn igh t O il To ols , 94 5 S. W.2d 84 7, 84 9 ( Te x. Ap p. —H ou sto n [1s t D ist .] 19 97 , n o w ri t) . Atr ia l c ourt a bu se s it s discretion whe n it acts wi thout refe renc e to g uiding r ules and princ iples. Downer v. Aquam arine Op e ra tor s , Inc. , 701 S.W .2d 238, 241-42 (Te x . 1985). I f the de cision was within the trial cour t’s discretionar

y authority , we may

not reve rse simply

beca use we might have rea ched a differ ent decision. Beaumont Bank, N.A. v. Buller , 806 S.W .2d 223, 226 (Tex. 1991).

Th e re me dy

of re c e ive rs hip is a

n e xtra or din ary

re me dy that mu st b e c a

uti ou sly applied. I t has been descr ibed as a drastic, far -re aching , and har sh remedy
. See , e.g. , Ro we v . R owe , 887 S.W .2d 191, 200 (Tex. A pp.—For t Worth 1994, writ denied) ; Balias v. Balias , Inc. , 748 S.W .2d 253, 257 (Tex. App.—Houston [14t h Dist.] 1988, writ denied) . Acc ording ly , a re ceive r will not be
a pp oin te d if

ano the r r e me dy

e xists a t la

w o r i n e qu ity

th a t is a de qu a te and

c omp le te , e ve n if
rec eiver ship is authoriz ed under a spec ific statutory

provision, as in this case.
Statu tory Basis for Rehabi litati ve Re ceiv er

Article 7.05 of the Business Corporation Act g overns a ppointment of a re habilitative
rec eiver “for the assets a

nd bu s i n es s of a c orporation.” Tex. Bus. Corp. Act Ann. a rt. 7.05, § A (West 2003). The Ac t provides that the district cour t of the county

wher e a c orporation’s reg istered5

office is located may

appoint a re ceive r to conser ve the a ssets and business of the corporation and to avoid damag e to the par ties at interest, if a ll other requir ements of law are complied with and ther e
are no other leg al or e quitable re medies av ai l ab le, including the appointment of a rec eiver for specific corpor ate a ssets. Article 7.05, se ction A states the pr eliminary prer equisites f

o r a ppointment of the re ceive r:
A receive r may

be appointed f

or the a ssets and business of a corpor ation by

the di stric t c ourt

fo r t he c ounty

in w hic h th e re g ist e re d o ff ic e of the c or po ra tio n is located, w henever ci rc u mstances e x ist deemed by the cour

t to require the appointment of a r ece iver to conse rve the assets and business of the corpor ation and to avoid damag e to par

ties at interest, but only

if all other r equ i re m en t s o f l aw a re complied with and if all other reme dies available either at law or in equity, including the appointment of a rece iver for specific assets of the corporation, are de termined by thec ou rt to b e ina de qu ate. . . . Id . (empha sis added).

Article 7.05, se ction A t h en lists t he nar row instance s that may

war rant the appointment of a r ehabilitative rec eiver ship. Although the statute lists five circumstanc es in which the re c e ive r may be a

pp oin te d, the Cava

na ug hs a sse rt

that th re e are re le va

nt h e re . T he y

ur g e that a
rec eiver was wa rra nted and pr operly

appointed bec ause ( i) t h e direc tors are deadloc ked in the manag ement of the corpor ation, and the sha reholde rs ar e unable t o b re ak the de adlock, a nd irrepa rable injury to the corpor ation is being suffe red or is threatene d, see art ic le 7. 05 , § A( 1) (b ); (i i) For tenber ry eng ag ed in illeg al and oppr essive conduc t, see art ic le 7. 0 5 , § A(1)( c); a nd (iii) the sh are ho lde rs have no w b e e n d e a dlo c ke d f or a pe ri od that in c lud e s th e la st t wo annua l sh are ho lde rs ’
m ee tings, see art ic le 7
. 0 5 , § A ( 1 ) ( e )
. Su b s e c ti o nA ( 3 ) a

u th o r iz e s a

p p o in tm e n t o f

a r e h a b ilitative6

rec eiver in “any other a ctions” in which “r ece ivers have here tofore be en appointed by the usag es of the cour t of equity .” Te x . Bus. Corp. Ac t Ann. art. 7.05, § A( 3). Th e na rr owiss ue be fo re thi s Co ur t, t he n, is w he the r t

he dis tr ic t c ourt abu se d it s discretion in a

ppointing a rec eiver
. Be fore we even rea ch the specific instances in which a r ece iver may be appointed, w e must determine w hether the Cavana

ug hs have de monstrat ed that other
reme dies ava ilable e i t h er at l aw or in equity are inadequate. The bur den of pr oof to show the exis tence of circ umstances justifying the ap p o intment of a re ceive r re sts on the party seekingthe appointment. See , e.g. , Furgerson v. First Nat’l B ank , 218 S.W .2d 1019, 1020 (Tex. Civ. Ap p. —T e xar

ka na 19 49 , n o w ri t) . T his burd e n h a s n ot b e e n me t. The Cava n a u gh s c o nte n d

th a t t h e “ a lternative” reme dy

proposed by

For tenber ry —the lawsuits—is inadequate be cause it is “nowhe re as prompt, complete, practica l, and efficient” as the
rec eiver ship ordere d by

the district court. While lawsuits are not a lway s tidy and eff icient, it is the
ve ry iss ue of de a dlo c k in op e ratio n, mana g e me nt, and c ontr ol, a s we ll a s d a ma g e s, that th e laws uit s seek to addre ss. That l awsuits are not expeditious and inexpensive does not mean that they are an inadequate re medy

—or more importa

ntly , that they

should not be employ ed bef ore the harsh r emedy of re ceive rship is trigg ere d.

The e x istence of

serious disag ree ments in the prese nt case does not inexorably lead to t he a pp oin tme nt o f a

re c e iver. Th e Cava

na ug hs of fe re d n o e vid e nc e a t th e he ari ng s o n th e ir mot ion to a pp oin t a re c e ive r to su

pp or t the dis tr ic t c ourt ’s c on c lus ion that oth e r re me die s ava ila ble either at law or in equity

wer e inade quate. No e vidence in the rec ord supports the conc lusion that any met h o d s —other than the thwarte d mediation—wer e employ ed to sort out the manag ement7

difficulties. The f

ailure of a cour t-order ed mediation to re solve the issues pre sented by the decla ratory actions is insufficient to support the a ppointment of a re ceive r. There als o was no e vidence of imminent dang er of insolvency

or other e merg ency jus tif y ingthe a pp oin tme nt o f a re c e ive r. Th a t the a pp oin tme nt of a

re c e ive r i s a

dr a sti c re me dy

is clea r by the ef fec t of the orde r, w h i ch would transfer c ontrol of the compa ny to the rec eiver . The
rec eiver was a lso ordere d to supervise a buy -sell neg otiation between the parties. I f that neg otiation fails, then the or der provided that the cour t would, at that time, “issue a de cision as to the auc tion or other sa le” of the company . The Cavana ug hs cannot justify the reque st f or a re ceive rship on the g round that other r emedi es ar e inade quate to re store their c laimed rig ht of control and to pr event harm whe n the re ceive rship itself may deprive them of that contr o l. There is no indication in the
rec ord why

injuncti ve re lief and mone tary damag es could not be e mploy ed to pre serve assets or p r o v i d e ana d e qu a t e r e m e dy.

Be cause there wer e other

reme dies available , the di strict court a bused its discretion in premature ly

order ing the appointment of a r ece iver with swee ping pow ers. W e hold that, by g ra nti ngthe Cava

na ug hs ’ mot ion to a

pp oin t a re c e ive r wh e n the re wa s n o e vid e nc e su pp or tin g its findi n g t h at o t her r emedies a vailable e ither at lawor in equity wer e inade quate, the district c ourt abused its discre tion.

F or te nb e rr y a lso a sk s tha t we re mand thi s c a se to t

he B ur ne t Co un ty

dis tr ic t c ourt

so t h at i tm ay

ab at e t h e B u rn et C o u n t y

ac t i o ni nfa v o r o f t h e f

i rs t -f i l edT ra v i s C o u n t y

ac t i o n . Al t h o u gh the Burnet C ounty district court ex presse d the view that if it we re inc lined to deny the application fo r r e c e ive rs hip , th e n it wo uld a bate its a c tio n to a llo w t

he pa rt ie s to re so lve the c la ims in t he Tr a visBe cause of the disposition of this appeal, we overr ule For tenber ry ’s motion to or d er the 2 tr ia l c ourt to c omp le te the bil l- of

-e xce pti on

pr oc e dure a s mo ot. 8 County lawsuit, it did not rule on the motion to abate the Burnet C ounty action. Be cause the cour t has not ruled a

nd we c annot say

that this iss ue is fully briefe d on appea l, we re verse the dec ision of the district court to appoint a r ece iver, va cate that order , and remand for proce eding s not inconsistent with this opi nion. 2

__________________________________________ J an P. Patterson, J ustice Be fore Chief J ustice L aw, Justi ces Patter son and Pury ear Reverse d and Remande d Filed: June 16, 2005