Court Opinion

ID: 2985170
Source: CourtListenerOpinion
Date Created: 2015-09-22 22:17:33.581494+00
Date Added: 2024-06-11T11:44:41.393782
License: Public Domain

Petition for Writ of Mandamus Conditionally Granted and Majority and
Dissenting Opinions filed January 2, 2014.

                                     In The

                    Fourteenth Court of Appeals

                               NO. 14-13-00681-CV

         IN RE PLATINUM ENERGY SOLUTIONS, INC., Relator

                        ORIGINAL PROCEEDING
                          WRIT OF MANDAMUS
                             234th District Court
                            Harris County, Texas
                      Trial Court Cause No. 2012-30972

                           MAJORITY OPINION

      Relator Platinum Energy Solutions, Inc. filed a petition for writ of
mandamus in this Court. See Tex. Gov’t Code Ann. §22.221 (Vernon 2004); see
also Tex. R. App. P. 52. Platinum asks this Court to compel the Honorable Wesley
Ward, presiding judge of the 234th District Court of Harris County, to vacate his
July 15, 2013 order denying Platinum’s motion for protective order and October
21, 2013 order granting the real parties in interest’s motion to compel in the
underlying shareholder derivative shareholder suit. We conditionally grant the
petition for writ of mandamus.

                                      I. BACKGROUND

       Platinum is a Nevada corporation and an oil field services provider
specializing in premium hydraulic fracturing, coiled tubing, and other pressure-
pumping services.        The real parties in interest are minority shareholders of
Platinum.1 They filed a shareholder derivative suit against nominal defendant
Platinum and its current or former officers and directors on May 25, 2012.2 The
minority shareholders alleged claims based on self-dealing, conflicts of interest,
excessive compensation, and waste.

       Platinum’s board of directors formed a Special Litigation Committee on
June 5, 2012 to investigate the minority shareholders’ suit and determine the
appropriate response. Platinum also adopted a charter to govern the committee.

       The committee presented its findings to Platinum’s board of directors in
December 2012. The committee found no evidence of breach of fiduciary duties
or corporate waste; it recommended that Platinum refrain from pursuing the
minority shareholders’ claims. The committee report concluded, in part:

       The low probability of success combined with Platinum’s current
       financial challenges would provide little, if any, gain. Additionally,
       the SLC is concerned that pursuing any claims would expose the
       1
         Real parties in interest are Starstream Capital, LLC, Robert E. Chamberlain, Jr., Martha
Derrick, Marvel K. Mann, and John Dinn Mann.
       2
         The officer/director defendants are L. Charles Moncla, Jr., J. Clarke Legler, II, Jose E.
Feliciano, Colin Leonard, Richard L. Crandall, William Restrepo, Mervin Dunn, Daniel T.
Layton, Layton Corporation, Clearlake Capital Partners, LLC, and Clearlake Capital Partners II
(Master), L.P.
                                                2
      Company to additional claims, counterclaims, or liabilities. The
      significant disruptions to business activity, mounting litigation costs,
      the current natural gas market, and other mitigating circumstances
      warrant no further legal action on Platinum’s behalf.

The committee also recommended that Platinum move to dismiss the derivative
action.

      Platinum filed a motion to dismiss the derivative action on February 15,
2013. The minority shareholders subsequently served a request asking Platinum to
produce 45 categories of documents in connection with the Special Litigation
Committee’s investigation.            Platinum objected on grounds that the requested
production (1) exceeds the permissible scope of discovery; and (2) is overbroad
and unduly burdensome. Platinum also filed a motion for protective order. After a
hearing on July 1, 2013, the trial court signed the July 15 order denying Platinum’s
motion for protective order. On October 21, 2013, the trial court signed a separate
order that overruled Platinum’s objections to the document requests and compelled
production by November 11, 2013 of documents responsive to 43 of the 45
categories.3 Platinum then filed a motion in this court to stay the October 21 order,
which we granted on October 30, 2013.

      Platinum argues in this mandamus proceeding that the trial court abused its
discretion insofar as the permitted discovery goes beyond the following limited
subjects: (1) the committee’s independence and disinterestedness; (2) whether the
committee’s review was undertaken in good faith; and (3) the reasonableness of
the committee’s procedures used to investigate the minority shareholders’ claims.

      3
          The minority shareholders voluntarily withdrew requests Nos. 5 and 6.
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                            II. STANDARD OF REVIEW

      Mandamus is appropriate when then relator demonstrates that (1) the trial
court clearly abused its discretion; and (2) the relator has no adequate remedy by
appeal. In re Reece, 341 S.W.3d 360, 364 (Tex. 2011) (orig. proceeding). A trial
court clearly abuses its discretion if it reaches a decision so arbitrary and
unreasonable as to amount to a clear and prejudicial error of law, or if it clearly
fails to analyze the law correctly or apply the law correctly to the facts. In re
Cerberus Capital Mgmt., L.P., 164 S.W.3d 379, 382 (Tex. 2005) (orig. proceeding)
(per curiam).

      The adequacy of an appellate remedy must be determined by balancing the
benefits of mandamus review against the detriments. In re Team Rocket, L.P., 256
S.W.3d 257, 262 (Tex. 2008) (orig. proceeding). Because this balance depends
heavily on circumstances, it must be guided by analysis of principles rather than
simple rules that treat cases as categories. In re McAllen Med. Ctr., Inc., 275
S.W.3d 458, 464 (Tex. 2008) (orig. proceeding).        In evaluating benefits and
detriments, we consider whether mandamus will preserve important substantive
and procedural rights from impairment or loss. In re Prudential Ins. Co. of Am.,
148 S.W.3d 124, 136 (Tex. 2004) (orig. proceeding). We also consider whether
mandamus will ―allow the appellate courts to give needed and helpful direction to
the law that would otherwise prove elusive in appeals from final judgments.‖ Id.
Finally, we consider whether mandamus will spare the litigants and the public ―the
time and money utterly wasted enduring eventual reversal of improperly conducted
proceedings.‖ Id.

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             III. THIS MANDAMUS PROCEEDING IS NOT PREMATURE

      The minority shareholders contend that Platinum’s request for mandamus
relief is premature because the trial court has not yet ruled on Platinum’s
objections that the requests are overbroad and burdensome. We disagree. A
review of Platinum’s motion for protective order shows that Platinum initially
objected to the 45 categories of requested documents as being overbroad and
unduly burdensome; Platinum also argued that the categories exceeded the scope
of permissible discovery. The order denying Platinum’s motion for protective
order states the motion ―is hereby denied in its entirety.‖ After Platinum filed this
petition, the trial court signed its October 21 order overruling Platinum’s
objections that the 43 categories still at issue are overbroad and burdensome.
Therefore, we reject the minority shareholders’ contention that the trial court did
not rule on all of Platinum’s objections.

                                   IV. ANALYSIS

      In the trial court and in this mandamus proceeding, the parties dispute
whether Texas or Delaware law governs the scope of permissible discovery in
connection with a motion to dismiss a derivative action against Platinum.
Resolution of this issue turns on two provisions contained in Chapter 21 of the
Texas Business Organizations Code.

      When construing a statute, the primary objective is to give effect to the
Legislature’s intent. Tex. Lottery Comm’n v. First State Bank of DeQueen, 325
S.W.3d 628, 635 (Tex. 2010). ―We presume the Legislature selected language in a
statute with care and that every word or phrase was used with a purpose in mind.‖
Id.   We construe statutes by first looking to the statutory language for the
                                            5
Legislature’s intent, and only if we cannot discern legislative intent in the language
of the statute itself do we resort to canons of construction or other aids such as
which statute is more specific.‖ Id. at 639.

       Subchapter L of Chapter 21 governs derivative actions in Texas. See Tex.
Bus. Orgs. Code Ann. §§ 21.551–.563 (Vernon 2012). Chapter 21 establishes a
mechanism by which a corporation may move to dismiss a derivative action filed
against it:

              (a) A court shall dismiss a derivative proceeding on a motion by
       the corporation if the person or group of persons described by Section
       21.554 determines in good faith, after conducting a reasonable inquiry
       and based on factors the person or group considers appropriate under
       the circumstances, that continuation of the derivative proceeding is
       not in the best interests of the corporation.

Tex. Bus. Orgs. Code Ann. § 21.558(a). In turn, section 21.554 provides for
independent and disinterested persons, who may be directors of the corporation, to
determine ―how to proceed on allegations made in a demand or petition.‖ Tex.
Bus. Orgs. Code Ann. § 21.554.

       Discovery in connection with a section 21.558 motion to dismiss is governed
by section 21.556, which provides as follows:

       (a) If a domestic or foreign corporation proposes to dismiss a
       derivative proceeding under Section 21.558, discovery by a
       shareholder after the filing of the derivative proceeding in accordance
       with this subchapter shall be limited to:

             (1) facts relating to whether the person or group of persons
       described by Section 21.558 is independent and disinterested;

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             (2) the good faith of the inquiry and review by person or group;
      and

            (3) the reasonableness of the procedures followed by the person
      or group in conducting the review.

      (b) Discovery described by Subsection (a) may not be expanded to
      include a fact or substantive matter regarding the act, omission, or
      other matter that is the subject matter of the derivative proceeding.
      The scope of discovery may be expanded if the court determines after
      notice and a hearing that a good faith review of the allegations for
      purposes of Section 21.558 has not been made by an independent and
      disinterested person or group in accordance with that section.

Tex. Bus. Orgs. Code Ann. § 21.556 (emphasis added). The purpose behind
section 21.556’s limitation on discovery is to (1) focus on the manner in which the
committee performed its obligations; and (2) avoid delving into the merits of the
shareholders’ claims unless a determination first has been made that a good faith
review was not conducted. See Tex. Bus. Orgs. Code Ann. § 21.556(b).

      Platinum contends that section 21.556 applies to it as a Nevada corporation
and limits the scope of permissible discovery in connection with its motion to
dismiss the derivative action.

      The minority shareholders rely instead on section 21.562, entitled
―Application to Foreign Corporations,‖ which provides as follows:

             (a) In a derivative proceeding brought in the right of a foreign
      corporation, the matters covered by this subchapter are governed by
      the laws of the jurisdiction of incorporation of the foreign corporation,
      except for Sections 21.555, 21.560, and 21.561, which are procedural
      provisions and do not relate to the internal affairs of the corporation.

                                         7
                (b) In the case of matters relating to a foreign corporation under
         Section 21.554, a reference to a person or group of persons described
         by that section refers to a person or group entitle under the laws of the
         jurisdiction of incorporation of the foreign corporation to review and
         dispose of a derivative proceeding. The standard of review of a
         decision made by the person or group to dismiss the derivative
         proceeding shall be governed by the laws of the jurisdiction of
         incorporation of the foreign corporation.

Tex. Bus. Orgs. Code Ann. § 21.562 (emphasis added). The excluded provisions
referenced in subsection (a) do not pertain to discovery; section 21.55 addresses a
stay of proceedings, section 21.562 addresses discontinuance or settlement, and
section 21.561 addresses payment of expenses. See Tex. Bus. Orgs. Code Ann.
§§ 21.555 (stay of proceeding), 21.560 (discontinuance or settlement), 21.561
(payment of expenses).

         It is undisputed that Nevada, the state of Platinum’s incorporation, looks to
Delaware law in connection with derivative lawsuits. See Moradi v. Adelson, No.
2:11-CV-00490, 2012 WL 3687576, at *2 n.1 (D. Nev. Aug. 27, 2012) (―Nevada
courts follow Delaware law when addressing shareholder-derivative lawsuits.‖).
Therefore, the minority shareholders contend that section 21.562 mandates the
application of Delaware law in determining the scope of permissible discovery in
connection with Platinum’s motion to dismiss the minority shareholders’ derivative
claim.

         Tension exists between sections 21.566 and 21.562; the former section
applies Chapter 21’s discovery limits to ―domestic or foreign‖ corporations, while
the latter section omits Chapter 21’s discovery limits from the list of statutory
provisions applicable to foreign corporations in this context. Commentators have

                                            8
noted this tension. See Todd A. Murray & Lyndon F. Bittle, Emerging Issues
Raised by Derivative Shareholder Actions Involving Foreign Corporations
Headquartered in Texas: Making Sense of the Interaction between Texas
Procedures and Substantive Law, 39 Tex. Tech. L. Rev. 1, 26–27 (2006) ( ―level
of uncertainty‖ exists because section 21.556 refers to ―a domestic or foreign
corporation‖ seeking to dismiss a derivative proceeding, while section 21.562
refers to application of laws to ―foreign corporations‖).

      The minority shareholders argue that section 21.556 does not apply here
because section 21.562(a) does not include section 21.556 in the list of provisions
applicable to a foreign corporation. This argument reflects the maxim that the
expression of one implies the exclusion of another, known as expressio unius est
exclusio alterius. Mid-Century Ins. Co. of Tex. v. Kidd, 997 S.W.2d 265, 274 (Tex.
1999). However, ―[t]he doctrine of expressio unius est exclusio alterius is simply
an aid to determine legislative intent, not an absolute rule. As a rule of reason and
logic, it should not be mechanically applied to compel an unreasonable
interpretation.‖ Id.

      Platinum asserts that section 21.556 should control over section 21.562
because section 21.556 is the more specific statute. This argument dovetails with
section 311.026 of Texas Government Code, which addresses circumstances in
which general and specific statutes are in conflict:

             (a) If a general provision conflicts with a special or local
      provision, the provisions shall be construed, if possible, so that effect
      is given to both.
            (b) If the conflict between the general provision and the special
      or local provision is irreconcilable, the special or local provision
                                          9
      prevails as an exception to the general provision, unless the general
      provision is the later enactment and the manifest intent is that the
      general provision prevail.

Tex. Gov’t Code Ann. § 311.026 (Vernon 2013). Section 311.026(b) applies only
if the general provision and special provision irreconcilably conflict with each
other. Tracfone Wireless, Inc. v. Comm’n on State Emergency Commc’ns, 397
S.W.3d 173, 181 (Tex. 2013); Sowell v. Int’l Interests, LP, No. 14-12-00105-CV,
— S.W.3d — 2013 WL 4604708, at *6 (Tex. App.—Aug. 29, 2013, pet. filed).

      We conclude that sections 21.556 and 21.562(a) are in conflict. We further
conclude that sections 21.556 and 21.562(a) cannot be read so that effect is given
to both in this particular context involving the scope of permissible discovery in
connection with a motion to dismiss a derivative action. See Tex. Gov’t Code
Ann. § 311.026(a) (conflicting provisions ―shall be construed, if possible, so that
effect is given to both‖).
      Section 21.556’s discovery limitation expressly applies to domestic and
foreign corporations in a proceeding to dismiss a shareholder derivative action.
Section 21.562(a) states that foreign corporations are subject only to Chapter 21’s
provisions addressing a stay of the derivative proceeding, discontinuance or
settlement of the proceeding, and payment of expenses incurred; otherwise, a
derivative action brought in the name of a foreign corporation is governed by the
laws of the jurisdiction of incorporation of the foreign corporation. Because these
provisions irreconcilably conflict, we must determine which provision controls in
this specific context involving the scope of permissible discovery in connection
with a foreign corporation’s motion to dismiss a derivative action.

                                         10
      We conclude that section 21.556 controls here because it is more specific.
Section 21.556 is more specific because it addresses the narrower topic of
discovery in a proceeding on a motion to dismiss the derivative action, while
section 21.562(a) addresses the more general topic of selecting the law applicable
to foreign corporations. See Tex. Gov’t Code Ann. § 311.026(b) (special provision
prevails over general provision where they irreconcilably conflict).
      The minority shareholders further contend that Delaware law should control
the scope of discovery in this context because Texas courts must apply the internal
affairs doctrine to foreign-filing entities. The applicable statute states as follows:

      If the formation of an entity occurs when a certificate of formation or
      similar instrument filed with a foreign governmental authority takes
      effect, the law of the state or other jurisdiction in which that foreign
      governmental authority is located governs the formation and internal
      affairs of the entity.
Tex. Bus. Orgs. Code Ann. § 1.102 (Vernon 2012); see also Tex. Bus. Orgs. Code
Ann. § 21.562(a) (laws of jurisdiction of incorporation of foreign corporation apply
to derivative action, except for specified provisions, which are procedural and do
not relate to the internal affairs of the foreign corporation).

      The minority shareholders also argue that, to the extent sections 21.556 and
21.562(a) are in conflict, courts resolve the statutory conflict by examining the
object sought to be obtained and the consequences of a particular construction. See
Tex. Gov’t Code Ann. § 311.023(1), (5) (Vernon 2013). Therefore, they contend
section 21.556 must yield to section 21.562(a) because the application of section
21.556 would ignore public policy goals embodied in the internal affairs doctrine.

                                           11
      We reject these contentions because the internal affairs doctrine has no
application to this discovery dispute. The internal affairs of an entity include (1)
―the rights, powers, and duties of its governing authority, governing persons,
officers, owners, and members‖; and (2) ―matters relating to its membership
interests.‖ Tex. Bus. Orgs. Code Ann. § 1.105 (Vernon 2012).

      Because section 21.556 governs this discovery dispute, the minority
shareholders are limited to discovery addressing (1) whether the Special Litigation
Committee is independent and disinterested; (2) whether the committee’s inquiry
and review was undertaken in good faith; and (3) the reasonableness of the
committee’s procedures. Tex. Bus. Orgs. Code Ann. § 21.556(a).

                                    V. REMEDY

      Appeal is an inadequate remedy when the appellate court would not be able
to cure the trial court’s discovery error. In re Dana Corp., 138 S.W.3d 298, 301
(Tex. 2008) (per curiam) (orig. proceeding); In re Kuntz, 124 S.W.3d 179, 181
(Tex. 2003) (orig. proceeding). This occurs when the trial court erroneously orders
the disclosure of information, which will materially affect the rights of the
aggrieved party.    Walker v. Packer, 827 S.W.2d 833, 843 (Tex. 1992) (orig.
proceeding); see also In re E.I. DuPont de Nemours & Co., 136 S.W.3d 218, 223
(Tex. 2004) (orig. proceeding) (―As DuPont would lose the benefit of the privilege
if the documents at issue are disclosed, even if its assertions of privilege were later
upheld on appeal, we conclude that this Court may provide mandamus relief in this
case.‖). Here, the trial court signed an order on July 15, 2013, denying Platinum’s
motion for protective order without specifying its reasons. The trial court signed
another order on October 21, 2013, in which it granted the minority shareholders’
                                          12
motion to compel and overruled Platinum’s objections without specifying reasons.
The record before us does not make clear whether the trial court’s orders were
based on a determination that (1) section 21.562(a) controls over the discovery
limits set forth in section 21.556; or (2) section 21.556 applies and the 43
categories of documents at issue are discoverable under the limits established in
section 21.556.

      All panel members in this court agree that section 21.556 governs here and
limits the minority shareholders to discovery addressing (1) whether the Special
Litigation Committee is independent and disinterested; (2) whether the
committee’s inquiry and review was undertaken in good faith; and (3) the
reasonableness of the committee’s procedures.

      Therefore, the trial court acted beyond its discretion insofar as it required
production of the 43 categories of documents at issue to occur based on a
determination that section 21.562(a) governs this inquiry.

      Because the trial court’s orders do not expressly address whether the
minority shareholders are entitled to production of the 43 categories at issue in
light of section 21.556’s specific discovery limits, it should have the opportunity in
the first instance to make this determination in light of today’s opinion clarifying
the reach of section 21.556. See Tex. R. App. P. 52.8(c); see also In re Nance, 143
S.W.3d 506, 514 (Tex. App.—Austin 2004, orig. proceeding) (explaining ―[a]ny
disclosure should be no broader than necessary and it is a trial court’s obligation to
oversee and safeguard the records to ensure unnecessary matters are not
disclosed,‖ and ordering the trial court to vacate its order and review documents at
issue in camera to determine whether each is subject to the physician-patient
                                          13
privilege); In re Sears, Roebuck & Co., 123 S.W.3d 573, 579–80 (Tex. App.—
Houston [14th Dist.] 2003, orig. proceeding) (holding discovery requests could
have been more narrowly tailored, and ordering trial court to vacate discovery
orders and conduct further proceedings); In re Shipmon, 68 S.W.3d 815, 822 (Tex.
App.—Amarillo 2001, orig. proceeding [mand. denied]) (stating, ―[a]lthough we
have jurisdiction to direct the trial court to proceed to make an effort to impose
reasonable discovery limits, we may not tell the trial court what limits it should
enter[,]‖ and directing the trial court to consider and determine, in the exercise of
its discretion, the need for reasonable discovery limits).

      We conditionally grant Platinum’s petition for writ of mandamus.      The trial
court is directed to make an express determination as to the 43 categories of
documents at issue, and to determine whether these categories pertain to one or
more of the areas of inquiry allowed by section 21.556(a). The writ will issue only
if the trial court does not act in conformity with this opinion. We lift our stay
granted on October 30, 2013.

                                        /s/    William J. Boyce
                                               Justice

Panel consists of Chief Justice Frost and Justices Boyce and Jamison. (Frost, C.J.,
dissenting)

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