Court Opinion

ID: 2987044
Source: CourtListenerOpinion
Date Created: 2015-09-23 00:43:50.157329+00
Date Added: 2024-06-11T12:43:04.656190
License: Public Domain

Motion Granted in Part, Denied in Part, and Order filed April 30, 2013

                                    In The

                   Fourteenth Court of Appeals

                            NO. 14-12-00246-CV

HUNTER BUILDINGS & MANUFACTURING, L.P., HUNTER BUILDING,
  L.L.C., AND HUNTER BUILDINGS INTERNATIONAL, L.L.C., BBG
 GROUP, L.L.C., MILO NICKEL AND THOMAS MICHAEL LEBLANC,
                          Appellants

                                      V.
                      MBI GLOBAL, L.L.C., Appellee

                  On Appeal from the 215th District Court
                          Harris County, Texas
                    Trial Court Cause No. 2008-50193

                                 ORDER

      Appellants Hunter Buildings and Manufacturing, L.P., (“Manufacturing”),
Hunter Buildings, L.L.C., (“Hunter”), and Hunter Buildings International
(“International”) moved for review of the trial court’s net worth determination
pursuant to Rule 24 of the Texas Rules of Appellate Procedure. Appellee MBI
Global, L.L.C. filed a response and appellants replied. For the reasons stated
herein, we require that the amount of security necessary to supersede the trial
court’s judgment be decreased as set forth below. To this extent, we grant in part
the Rule 24.4(a) motion filed by appellants; otherwise, we deny this motion. We
lift our stay of execution on the trial court’s judgment.

                  FACTUAL AND PROCEDURAL BACKGROUND

      The trial court signed a judgment against six entities, jointly and severally,
including Manufacturing, Hunter, and International. Appellants filed net worth
affidavits and posted cash bonds. For Manufacturing, appellants posted a cash
bond of $1,579,190 claiming a net worth of $2,864,743.25. For Hunter, appellants
posted a cash bond of $100 claiming a negative net worth of $275,148.86. For
International, appellants posted a cash bond of $100 claiming a negative net worth
of $1,664,602.91. Appellee filed a contest and after discovery a hearing was
conducted. The trial court found Hunter’s net worth to be $9,997,810 and ordered
additional security to be posted. The trial court did not state the net worth for
Manufacturing or International.

      In support of its order, the trial court made the following findings, in
pertinent part:

      6. Hunter Buildings LLC is the General Partner and in control of all
         Hunter related subsidiaries and affiliates as stipulated by the
         Defendants.
      7. Under Generally Accepted Accounting Principles (GAAP), the net
         worth of Hunter Buildings LLC must be based upon the December
         31, 2011 Consolidated Financial Statement of Hunter Buildings
         LLC in the amount of $9,997,810 because Hunter Buildings LLC
         controls all of the Hunter subsidiaries and affiliates. See,
         Plaintiff’s Exhibit P-5. As a result of this control, consolidated
         statements are necessary for a fair presentation of net worth under
         GAAP rules as explained by experts for both Plaintiff and
         Defendants.

                                           2
      8. The Defendant’s expert conceded that he did not have an opinion
         on the net worth under GAAP for either of Hunter Building and
         Manufacturing, LP or Hunter International, LLC as stand-alone
         entities, because neither he nor Hunter’s independent accountants
         had been asked to make such a determination. Because the net
         worth balance sheets offered by the Defendants are not in
         compliance with GAAP, the Defendants have not met their burden
         of proof. The Defendants failed to produce evidence illustrating an
         accurate net worth under GAAP for Hunter Building
         Manufacturing, LP or Hunter International, LLC as stand-alone
         entities.
      9. However, since the net worth of these subsidiaries is included in
         Hunter Buildings LLC according to the Consolidated Financial
         Statement, the Court finds no need to disturb the assertions in these
         affidavits.
      10.Accordingly, the court finds the net worth of Hunter Buildings
         LLC is $9,997,810 and orders additional security to be posted in
         accordance with TRAP 24.2(c)(3).

                            STANDARDS OF REVIEW

      The trial court’s determination of the net worth of a judgment debtor is
reviewed under Rule 24.4 of the Texas Rules of Appellate Procedure using an
abuse-of-discretion standard. Ramco Oil & Gas, Ltd. v. Anglo Dutch (Tenge)
L.L.C., 171 S.W.3d 905, 910 (Tex. App.—Houston [14th Dist.] 2005, no pet.).
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. See McDaniel v. Yarbrough, 898 S.W.2d 251, 253
(Tex. 1995). However, a trial court has no discretion in determining what the law is
and applying the law to the facts. See Gonzalez v. Reliant Energy, Inc., 159 S.W.3d
615, 623–24 (Tex. 2005). A failure by the trial court to analyze or apply the law
correctly is an abuse of discretion. Id.

                                           3
                                         ANALYSIS

       From the trial court’s order, appellants sought review in this Court.
Appellants make three claims in their motion: (1) the trial court abused its
discretion in finding that appellants failed to establish the net worth of
Manufacturing and International as separate entities; (2) the trial court erred in
determining Hunter’s net worth; and (3) this Court should modify the judgment on
joint and several liability. Issues one and two are intertwined as discussed below.

       A. The Separate Net Worth of Each Judgment Debtor and GAAP Rules

       The trial court is required to set the net worth of each individual debtor. “In
setting the amount of supersedeas security pending appeal, the trial court is
required to consider the separate financial condition of each judgment debtor.”
G.M. Houser, Inc. v. Rodgers, 204 S.W.3d 836 (Tex. App.—Dallas 2006) (opinion
on motion); see also Tex. R. App. P. 24.2(c) (when creditor contests a judgment
debtor’s net worth affidavit, court “must issue an order that states the debtor’s net
worth and states with particularity the factual basis for that determination”).

       The trial court concluded that Manufacturing and International failed to
present evidence of their separate net worth because there were no audited
financial statements for the individual companies and because the balance sheets1
that the companies submitted were not “in compliance with GAAP.” The trial court
further determined the net worth of Hunter should be based on an audited
consolidated financial statement for eight different entities.

       The legal questions to be answered in this motion are: (1) whether the
GAAP consolidation rule displaces case law indicating that each individual

       1
           “balance sheet. (18c) A statement of an entity's current financial position, disclosing
the value of the entity’s assets, liabilities, and owners’ equity.” BLACK’S LAW DICTIONARY (9th
ed. 2009).

                                                4
company must be examined separately, and (2) whether net worth evidence must
be in the form of a financial statement, certified by a CPA, that all requirements of
GAAP have been met.

                1. The consolidation rule

       GAAP is short for “generally accepted accounting principles.” The Financial
Accounting Standards Board (FASB), a non-governmental body of the Securities
and Exchange Commission, was charged with establishing standards of financial
accounting that govern the preparation of financial reports.2 FASB codified
thousands of pronouncements comprising GAAP for the United States into a single
source. The testifying experts both agreed that under these rules an accountant is
required to create a consolidated financial statement3 for these companies, rather
than an individual statement per company.4 The only audited financial statement
admitted in evidence was therefore a consolidated financial statement. Appellants’
expert, Saul Solomon, a certified public accountant (CPA), testified that it is only
after a full audit that a CPA can testify that all requirements of GAAP have been
met.

           Appellee’s expert, Dennis Arnie, testified that a consolidated financial
statement is necessary for a fair presentation of Hunter’s true financial situation.
Arnie did not testify, however, that Hunter was the alter ego of the other entities.
Arnie testified that it would be possible to do an individual net worth determination
for Manufacturing and International but disagreed that it was possible to do one for
Hunter.

       2
           http://www.fasb.org/facts/
       3
          “consolidated financial statement. The financial report of a company and all its
subsidiaries combined as if they were a single entity.” BLACK’S LAW DICTIONARy (9th ed.
2009).
       4
           FASB Accounting Standards Codification (ASC) Topic 810.

                                              5
       Solomon testified the accounting literature relied upon by Arnie “deals with
an auditor reporting on the parent company’s financial statements. There is other
literature that deals with reporting on subsidiary only information and that can be
done and it’s perfectly appropriate. . . . So, in other words, as an auditor, you can
report on the net worth of any of these companies individually in accordance with
GAAP, and that’s perfectly fine.” Solomon disagreed that “the whole process
under GAAP is to fairly present . . . a company’s net worth” and testified “[a]n
audit is done to present the financial statements. There’s a lot more information
presented in a financial statement than net worth.”5

       We acknowledge that courts have generally stated that “net worth” is
calculated as the difference between the party’s total assets and total liabilities as
determined by GAAP. See Ramco Oil & Gas, Ltd. v Anglo Dutch (Tenge) L.L.C,
171 S.W.3d 905, 914 (Tex. App.—Houston [14th Dist.] 2005) (order on motion).
See also In re Williams, 328 S.W.3d 103, 110 (Tex. App.—Corpus Christi-
Edinburg 2010, orig. proceeding); Texas Custom Pools, Inc. v. Clatyon, 293
S.W.3d 299, 305 (Tex. App.—El Paso 2009) (opinion on motion); Enviropower,
L.L.C. v. Bear, Stearns & Co., Inc., 265 S.W.3d 1, 5 (Tex. App.—Houston [1st
Dist.] 2008) (order); LMC Complete Automotive, Inc. v. Burke, 229 S.W.3d 469,
482 (Tex. App.—Houston [1st Dist.] 2007, no pet.). G.M. Houser, Inc. v. Rodgers,
204 S.W.3d 836, 840 (Tex. App.—Dallas 2006) (order).

       However, we hold that the GAAP consolidation rule does not displace the
legal requirement that the net worth of each individual judgment debtor must be
determined separately. There has been no finding of alter ego in this case, neither
in the case-in-chief nor in the post-judgment net worth proceeding, and using the
       5
          “financial statement. 1. A balance sheet, income statement, or annual report that
summarizes an individual's or organization's financial condition on a specified date or for a
specified period by reporting assets and liabilities.” BLACK’S LAW DICTIONARY (9th ed. 2009).

                                             6
GAAP consolidation rule would be impermissibly comingling all of the assets of
all of the companies, as if there had been a finding of alter ego. See In re Smith
192 S.W.3d 564, 568-69 (Tex. 2006) (holding alter ego finding in a post-judgment
net worth proceeding is relevant to the determination of a judgment debtor’s net
worth for the purposes of Rule 24 but may not be used to enforce the judgment
against the unnamed alter ego or any other non-judgment debtor). Without an alter
ego finding, it was error for the court to include all of the assets of the non-debtor
affiliated companies in calculating the assets of Hunter.

              2. An audited statement

       No prior case has determined what “in compliance with generally accepted
accounting principles” means in the definition of “net worth.” Appellants argue it
means that a statement of net worth offered in evidence must be audited and
certified by a CPA as compliant with GAAP.6 However, it could also mean that a
party’s assets and liabilities must be calculated using GAAP-approved
methodology. In some prior cases a CPA did testify, but in other cases there was
no indication that the person testifying was a CPA. See LMC, 220 S.W.3d at 485-
486 (testimony of owner of the company and unaudited financial statement
sufficient); Ramco Oil, 171 S.W.3d at 911 (testimony of Vice President of Finance
as to assets for Ramco Oil, along with audited financials of parent company,
sufficient to establish net worth).

       We hold that a judgment debtor does not have to present audited net worth
evidence with a certification from a CPA that all requirements of GAAP have been
met in order to meet its burden of proving its net worth. An individual can prepare

       6
         But see “certified financial statement. A financial statement examined and reported
by an independent public or certified public accountant. SEC Rule 12b–2 (17 CFR § 240.12b–
2).” Black’s Law Dictionary (9th ed. 2009).

                                             7
his own balance sheet and swear to his own net worth. See Tex. R. App. P.
24.2(c)(1).    A bookkeeper, with knowledge of the financial records of the
company, can also prepare and present a balance sheet by identifying the assets
and liabilities of a company using GAAP principles and subtracting liabilities from
assets to establish net worth. See Business Staffing, Inc. v. Jackson Hot Oil Service,
No. 08-11-00092-CV, 2012 WL 1454027, *4 (Tex. App.—El Paso 2012 (opinion
on motion); Texas Custom Pools, Inc., 293 S.W.3d 314; LMC Complete
Automotive, Inc., 229 S.W.3d 485-86; and G.M. Houser, Inc., 204 S.W.3d at 838,
846.

       B. The Separate Net Worth of Manufacturing and International

       With those principles in mind, we examine the evidence as to the separate
net worth of Manufacturing and International. Appellants introduced balance
sheets prepared by Lourdes Weneck, vice-president of finance at Manufacturing,
that reflect a separate net worth for Hunter and each of its subsidiaries and
affiliates. Manufacturing’s “Combined Balance Sheet As of January 31, 2012 Post
Audit Adjustment” reflects total assets of $8,385,552.01 and total liabilities of
$5,675781.56, for a net worth of $2,709,770.50.            The affidavit of appellants’
expert, Saul Solomon, averred a net worth for Manufacturing of $2,864,743.25.7
Within the audited consolidated financial statement, there are separate schedules
that break out the assets and liabilities for each entity. The schedule attached to the
audited consolidated financial statements reflected a net worth for Manufacturing
of $2,804,287.

       International’s “Combined Balance Sheet As of January 31, 2012 Post Audit
Adjustment” reflects total assets of $1,134,664.48 and total liabilities of

       7
       The balance sheets reflect post-audit adjustments that were not available at the time
Solomon prepared his affidavits.

                                             8
$2,541,809.74, for a negative net worth of $1,407,145.30. Solomon’s affidavit
averred a negative net worth for International of $1,664,602.91. The schedule
attached to the audited consolidated financial statement reflected a negative net
worth for International of $1,424,218.

      Weneck is not a CPA but has a degree in finance with thirty hours towards a
Master’s Degree in accounting.       Weneck testified she keeps her books in
accordance with generally accepted accounting principles, as guided by her
accountants. Weneck gives her books and records, including the balance sheets, to
the company accountants when they audit the companies. If they recommend any
changes to her books and records, she makes them. Appellee objected to Weneck's
testimony on the basis that she was not a certified public accountant and therefore
not qualified to give an opinion about GAAP. The court did not rule on that
objection. Weneck testified that you do not need to be a CPA to understand assets
and liabilities or how to add and subtract to determine net worth. Weneck testified
the balance sheets were produced in accordance with GAAP, but then testified on
cross-examination as follows:

      Q.    But you can’t testify to that, can you?

      A.    No, but they were produced that way.
      Q.    But you’re not qualified to give that opinion, are you?

      A.    No.
      Q.    Okay. Now, you would agree that the consolidated statements,
            financial statements that were done by the independent auditors
            were done in accordance with GAAP, correct?

      A.    Yes.

                                         9
      Weneck also testified that each company files its own tax returns and has
separate bank accounts. She testified that her books account for all intercompany
transactions.

      Saul Solomon testified, via affidavit, to the net worth of the appellants as
outlined above, based on an earlier version of the balance sheets. He testified at
the hearing that the net worth of the individual companies can be calculated using
the audited consolidated financial statement because that statement also includes
the audited balance sheets. Solomon testified that the auditors that compiled the
consolidated financial statements would have audited each individual company’s
balance sheets and satisfied themselves that those were in accordance with GAAP.
He further testified that they could have reported on each individual company's net
worth but they were not asked to do so.

      Solomon testified that he did not audit the financial statements. Only when
he performs a full audit can he testify that all requirements of GAAP have been
met. Solomon testified net worth is determined by the assets and liabilities and
that is what a balance sheet presents. According to Solomon, “[t]he net worth is
reflected in the audited financial statements of each individual company.”

      Arnie testified that it would be possible to do a separate net worth analysis
for Manufacturing and International but that there is no separate GAAP audit on
those entities. To create a separate statement would require the CPA to analyze all
of the intercompany allocations. He disagreed with Solomon that the schedules
attached to the audited financial statement are equivalent to an audited financial
statement, under GAAP, for the individual entities.

      We conclude that the balance sheets, affidavit testimony, and schedules
demonstrate a separate net worth for International and Manufacturing. In Ramco
Oil & Gas, Ltd., 171 S.W.3d at 911-912, this Court held that uncontradicted
                                          10
testimony conclusively proved net worth of a subsidiary as a matter of law, despite
the fact that there was no audited financial statement of the subsidiary. In this
case, similarly, appellee produced no evidence to discredit the balance sheet, the
testimony, or the schedules other than to argue that there was not a separately
audited number, certified as compliant under GAAP, for the different entities. We
hold the trial court abused its discretion in concluding that the evidence presented
was no evidence of a separate net worth. See LMC Complete Automotive, Inc. v.
Burke, 229 S.W.3d 469 (Tex. App.—Houston [1st Dist.] 2007 ) (holding LMC’s
balance sheet from September 2006 constitutes evidence, as a matter of law, that
is clear, positive, direct, otherwise credible, free from contradictions and
inconsistencies, and could have been readily controverted)

       Because the testimony was uncontroverted, we can set the bond for each
individual company. We set the bond at $1,579,190 for Manufacturing.8 Because
International has a negative net worth, the previous bond of $100 is sufficient, and
we set the bond at $100.

       C. The Separate Net Worth of Hunter

       Appellants argue the trial court erred in determining the net worth of Hunter
to be $9,997,810 based on the consolidated financial statements. In the
consolidated financial statements, the assets and liabilities of eight different entities
were consolidated under Hunter. However, each entity is a separate legal entity
that files separate tax returns. Hunter is not a 100% owner of the other entities.
And in fact there are outside owners for one of the entities—International.9 Hunter

       8
          Although the audited amount reflected a smaller net worth, Manufacturing has not
asked us to change its current bond.
       9
           The outside owners of International are also judgment debtors. They used
International’s negative net worth in their own net worth affidavits. Appellees did not challenge
those net worth affidavits.

                                               11
is the General Partner of Manufacturing but owns only 1% of its stock. Hunter
owns 1% of Hunter Leasing L.P. (“Leasing”). It has no ownership interest in the
other entities.

       There was testimony that Hunter is in control of all Hunter-related
subsidiaries and affiliates, and appellants stipulated that Hunter has control of the
limited partners. There was no finding that Hunter was the alter ego of the other
eight entities. The trial court found that because Hunter controls its subsidiaries
and affiliates, GAAP requires its net worth to incorporate the assets and liabilities
of the entities under its control. As discussed above, we hold that the trial court’s
decision on this question of law constituted an abuse of discretion. Right to control
is just one aspect of alter ego analysis, and without an alter ego finding the net
worth of each individual judgment debtor must be considered. See SSP Partners v.
Gladstrong Investments (USA) Corp., 275 S.W.3d 444, 455 (Tex. 2009) (“We
have never held corporations liable for each other’s obligations merely because of
centralized control, mutual purposes and shared finances.”). The trial court erred
in using the consolidated financial statement to determine Hunter’s net worth.

       Appellants introduced a balance sheet prepared by Weneck that reflects a
separate net worth for Hunter. Hunter’s “Combined Balance Sheet As of January
31, 2012 Post Audit Adjustment” reflects total assets of a negative $256,987.02
and total liabilities of $14,455.00, for a net worth of negative $264,513.86. The
balance sheet listed as assets for Hunter its 1% ownership interests in
Manufacturing and in Leasing. Solomon averred a negative net worth for Hunter
of $275,148.86.10 The schedule attached to the audited consolidated financial
statement reflected a negative net worth for Hunter of $274,414..

       10
        The balance sheets reflect post-audit adjustments that were not available at the time
Solomon prepared his affidavits.

                                             12
        There was no evidence controverting the assets and liabilities reflected on
the balance sheet, in the Solomon affidavit, and in the schedule for Hunter.
Because these sources reflect the total assets and liabilities of Hunter, they
demonstrate Hunter’s net worth.11 Accordingly, we hold that the trial court abused
its discretion by failing to correctly analyze the law and finding Hunter’s net worth
to be $9,997,810. Because the testimony was uncontroverted, we can set the bond
for Hunter. We hold that Hunter’s net worth is negative and that the bond of $100
that it previously filed is sufficient.

        D. Modification of the Judgment

        We refuse appellants’ request to modify the judgment to delete joint and
several liability. Any error in the judgment is an issue to be addressed on appeal,
not upon review of the amount of security. Accordingly, the motion is denied in
part.

                                          CONCLUSION

        After reviewing the record as a whole, we conclude appellants met their
burden under Texas Rule of Appellate Procedure 24.2(c)(3) to establish as a matter
of law that the net worth of Hunter, Manufacturing and International was as they
set forth in their motions. We therefore reverse the trial court’s order and order
that the amount of bond, deposit or other security necessary to supersede the trial
court’s judgment be decreased to $100 for Hunter, set at $100 for International,
and set at $1,579,190 for Manufacturing.             To this extent, we grant in part
appellants’ Rule 24.4(a) motion; otherwise we deny this motion. Our order of
January 7, 2013, staying execution of the judgment in trial court cause number

        11
         We note the inclusion of Hunter’s subsidiaries and affiliates would require Hunter to
post bond based upon assets that cannot be reached to satisfy the judgment. See SPS Partners,
275 S.W.3d at 455.

                                             13
2008-50193, styled Hunter Buildings & Manufacturing, L.P., Hunter Building,
L.L.C., and Hunter Buildings International, L.L.C., BBG Group, L.L.C., Milo
Nickel and Thomas Michael LeBlanc v. MBI Global, L.L.C, is vacated and our stay
is lifted.

                                      /s/    Tracy Christopher
                                             Justice

Panel consists of Justices Christopher, Jamison, and Busby.

                                        14