Court Opinion

ID: 3089011
Source: CourtListenerOpinion
Date Created: 2015-10-16 03:36:55.37996+00
Date Added: 2024-06-11T12:46:49.480660
License: Public Domain

NUMBER 13-12-00099-CV

                           COURT OF APPEALS

                  THIRTEENTH DISTRICT OF TEXAS

                    CORPUS CHRISTI - EDINBURG

KNAPP MEDICAL CENTER, INC.,                                             Appellant,

                                          v.

JEFFREY C. GRASS,                                                         Appellee.

                   On appeal from the 430th District Court
                         of Hidalgo County, Texas.

                                 OPINION
   Before Chief Justice Valdez and Justices Benavides and Perkes
                   Opinion by Justice Benavides
      Appellant, Knapp Medical Center (KMC), appeals the trial court’s denial of its

motion for summary judgment in favor of appellee Jeffrey Grass’s cross-motion for

summary judgment. By four issues, KMC asserts that that trial court erred by:
      (1)   ruling as a matter of law that it was not exempt from the disclosure
            requirements for non-profit corporations under the Business Organizations
            Code;

      (2)   overruling its objections to an affidavit made by Grass’s expert;

      (3)   ordering an overbroad production of financial documents; and

      (4)   ordering KMC to post a supersedeas bond without any evidence of
            damage or loss to Grass on appeal.

We reverse and render.

                               I.      BACKGROUND

      On February 7, 2011, Grass, a licensed Texas attorney from Plano, sent a letter

to KMC’s chief financial officer, Curtis Haley, and requested numerous documents

pursuant to section 22.353 of the Texas Business Organizations Code.      See TEX. BUS.

ORGS. CODE ANN. § 22.353 (West 2011). Grass’s request included:

      (1)   A copy of KMC’s by-laws;

      (2)   Minutes of the Board of Directors meetings for each meeting since 2006;

      (3)   Audited financials and related reports under Circular A-133 for each tax
            year since 2006;

      (4)   Management Representation letters from client to auditors showing
            contingencies and off balance sheet liabilities;

      (5)   All Internal Control reports issued by accountants or auditors for each year
            since 2006;

      (6)   All federal tax returns (Forms 990 and IRS correspondence) for each tax
            year since 2006;

      (7)   Copies of Forms W2 and W3 for each tax year since 2006;

      (8)   Copies of Forms 1096 and 1099s for each tax year since 2006;

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        (9)    Related Party Transaction Reports required of 501(c)(3) companies since
               2006;

        (10)   Travel Expense Reports required of 501(c)(3) companies since 2006;

        (11)   Personal Activity Reports required of 501(c)(3) companies since 2006;

        (12)   Due diligence reports as a result of [KMC’s] proposed merger with Valley
               Baptist Hospital;

        (13)   Form 1023 (Original application for tax exempt status to the Internal
               Revenue Service);

        (14)   List of contractors since 2006;

        (15)   Comparative studies performed and any and all documents considered by
               the Compensation Committee in setting the compensation of the Chief
               Executive Officer and all subsequent bonuses since 2006;

        (16)   Any and all documents related to insurance policies obtained and
               maintained by KMC for each year since 2006; and

        (17)   The identities of any entities or sub-entities formed for the purpose of
               merging or acquiring other healthcare facilities or for the recruitment of
               primary care physicians.

        KMC resisted Grass’s request and cited its exemption from such disclosure under

section 22.355(2) of the business organizations code.    See id. § 22.355(2). KMC then

filed a petition for declaratory judgment that requested the trial court to declare KMC

exempt from any requirement to produce the documents under section 22.355(2).          See

id.   Grass answered the petition and asserted an affirmative defense of estoppel based

on the state’s public policy that favors public disclosure of financial documents of

non-profit corporations.

        A.     Grass’s Motion for Summary Judgment

        Grass also filed a motion for summary judgment. The motion contends, among

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other things, that KMC was not entitled to the statutory exemption of non-disclosure as a

matter of law because KMC set up a sham non-profit corporation known as Knapp

Medical Center Foundation (“the Foundation”) to circumvent the section 22.353

disclosure requirements.        Grass asserts that because KMC receives funds from the

Foundation, which solicits funds in excess of $10,000 from the public, KMC is subject to

the disclosure requirements of section 22.353(b). Grass contends that the Foundation

was a “shell corporation” designed to funnel money to KMC, and this formation should

not extend the statutory exemption of non-disclosure to KMC.

        Grass attached an affidavit from former paid KMC consultant Patricia C. Fogarty

to his motion. In it, Fogarty asserts that to her “recollection,” “Knapp Medical Center

Foundation both solicited and received more than $10,000 yearly from sources other

than its own trustees,” and that it was her “professional opinion that [the Foundation] has

existed only to support the work of [KMC]” and that to her “knowledge[,] it does not

function for any other purpose.”

        The Texas Medical Association (TMA), with leave granted by the trial court, filed a

brief amicus curiae in support of Grass’s motion for summary judgment.1 TMA’s brief

essentially reiterates the arguments contained in Grass’s motion and also attaches other

supporting evidence, including:

        (1)     The Foundation’s Articles of Incorporation, which states that the
                Foundation is “organized for the sole benefit of, and the specific purpose of

        1
           The Texas Medical Association (TMA) contends in its brief that it has an interest in this case
through its TMA members on staff at Knapp Medical Center. The TMA also indicated that appellee, Jeffrey
Grass, represents members of TMA “who are advocating on behalf of their patients and the community of
Weslaco.”

                                                   4
                supporting . . . of [KMC] in Weslaco . . . so long as [KMC] shall qualify as an
                exempt organization” under the federal Internal Revenue Code; and

          (2)   Filings with the Texas Secretary of State that show KMC’s chief executive
                officer, James A. Summersett III, served as the registered agent for both
                KMC and the Foundation.

          B.    KMC’s Motion for Summary Judgment

          By its own motion for summary judgment, KMC contends that it is entitled to

protection from disclosure of financial documents as a matter of law under the exemption

articulated in section 22.355(2) because KMC and the Foundation are entirely separate

non-profit corporations.    KMC also contends that TMA’s claim that the Foundation is a

“sham corporation” is “without evidence or citation to legal authorities.” Further, KMC

asserts that Grass’s argument is unsupported under the relevant statute or stated public

policy.

          KMC attached the following evidence to support its motion:

          (1)   An affidavit from KMC CEO James Summersett, who contends, among
                other things, that KMC: (a) is a not-for-profit corporation organized under
                the laws of Texas; (b) does not “intend to solicit and receive contributions
                from the public in an amount exceeding $10,000”; and (c) receives grants
                from the Foundation for the purchase of specific items of equipment, as
                directed by the Foundation’s board of directors and are not made to
                support KMC’s general operating expenses. Summersett also states that
                KMC and the Foundation are separate corporations and that the
                Foundation solicits, receives, and accepts gifts.

          (2)   A February 20, 2011 letter to KMC from Grass, in which Grass broadens
                his initial request for disclosure from his original to include “comparative
                pay studies” and “all contracts, agreements, resolutions, minutes of
                meetings, notes and informal memoranda pertaining to any aspect of the
                total compensation and benefit package(s) of the CEO. . . .”

          KMC also filed a response to Grass’s motion for summary judgment.               The

                                               5
response adopts all of its arguments from its own motion and includes the same exhibits.

In its response, KMC also objected to Grass’s use of Fogarty’s affidavit because her

statements were “improperly qualified,” under rule 166a.              See TEX. R. CIV. P. 166a.2

        C.       The Trial Court’s Orders

        On August 17, 2011, the trial court held a hearing on each party’s respective

motion.       After taking the matter under advisement, the trial court eventually issued a

ruling on October 11, 2011, which granted Grass’s motion for summary judgment and

denied KMC’s. The trial court found that Grass was entitled to summary judgment as a

matter of law because KMC was not exempt under the relevant statutes.                            On the

parties’ agreement, the Court also ordered an evidentiary hearing as to what documents

were subject to public disclosure.

        On October 27, 2011, Grass filed a “Revised Document Request” which

requested six categories of documents:

        (1)      KMC’s financial statements, including balance sheets, statement of
                 cash flows, income statements, and pre-adjusted trial balances;

        (2)      Management letters from the external auditor;

        (3)      IRS Forms 990 for all related entities;

        (4)      Compensation documentation for all employees, including W-2s,
                 1099, and payroll reports;

        2
           Grass filed a response KMC’s motion for summary judgment in which he incorporated the same
arguments and evidence from his own motion for summary judgment. In his response, however, Grass
attached a second affidavit signed by Patricia Fogarty which changed the contested portions of her
previous affidavit from “recollections” and “opinions” to positive and direct statements—e.g. “I was aware
that [the Foundation] both solicited and received more than $10,000 yearly from sources other than its own
trustees.”

                                                    6
       (5)     Documents about deferred executive compensation, including
               written plans, contracts with agencies, minutes of the Board of
               Directors authorizing the arrangement, and any contracts relating to
               future obligations; and

       (6)     Any other documentation expressly referred to in Section 22.352(a)
               as it relates to the financial statement information provided within
               Subsection (b) and the underlying footnotes to the financial
               information.

Grass’s amended request was supported by an affidavit signed by accountant Steven C.

Thompson, Ph.D. In the affidavit, Thompson states that he has personal knowledge of

the facts involved in the case, is familiar with Generally Accepted Accounting Principles

(GAAP) and Accounting Standards Codification (ASC) standards of accounting, and that

all six categories of documents requested “fall within the definition of records, books, and

annual reports as expressed by [Texas Business Organizations Code] sections 22.352

and 22.353.”

       Without waiving its previous exemption argument, KMC filed a response to

Grass’s request and objected to Thompson’s affidavit on the ground that it “tries to

invade the province of the Court by interpreting the meaning of the statute.” KMC also

responded to Thompson’s affidavit by an affidavit from its own expert, Rodney Lenfant.

       On December 14, 2011, the trial court held a hearing without oral testimony as to

what documents KMC was required to disclose.            After the hearing, the trial court

deferred its ruling.   In the interim, Grass filed a supplemental brief which argued that

KMC should be allowed to withhold documents pending an appeal if KMC posted a

$50,000 supersedeas bond.       See TEX. R. APP. P. 24.2(A)(3). KMC responded by letter

                                             7
brief, which argued against posting a supersedeas bond because Grass would suffer “no

loss or damage while this case is on appeal.”

      Two days later, the trial court ruled, in relevant part, that:

      (1)    KMC’s objections to Thompson’s affidavit, which gave his opinion about
             what documents fall within the meaning of the public disclosure statute
             under generally accepted accounting principles be overruled;

      (2)    Grass’s Revised Document Request be granted, in part, and denied, in
             part;

      (3)    KMC produce the following documents for calendar years 2008, 2009,
             2010:
                   a. Internal Revenue Service Forms 990 for 2008 and 2009;

                    b. Internal Revenue Service Forms 990 for 2010 after it is prepared
                       and filed;

                    c. Documents that trace how grants from the Foundation were
                       used for 2008–2010, including documentation that reflects the
                       sale or disposition of any items purchased by KMC with grants
                       from the Foundation during 2008–2010.

                    d. KMC financial statements, including all balance sheets,
                       statement of cash flows, income statements, and pre-adjusted
                       trial balances;

                    e. Management letters from the external auditor;

                    f. Compensation Documentations, with redacted             personal
                       information, such as social security numbers; and

                    g. Deferred executive compensation, including written plans,
                       contracts with agencies, board of directors minutes authorizing
                       such arrangement, and any contracts relating to future
                       obligations;

      (4)        That KMC post a $25,000.00 supersedeas bond pending appeal; and

      (5)        That the present orders disposed of all remaining issues of the case
                 and rendered the case final and appealable.

                                              8
This appeal ensued.3

                                 II.      SUMMARY JUDGMENT

        By its first issue, KMC asserts that the trial court erred when it ruled that KMC was

not exempt from the disclosure requirements of sections 22.353 and 22.355 of the

Business Organizations Code as a matter of law.

        A.      Standard of Review

        We review a trial court’s grant of summary judgment de novo.                 Mid-Century Ins.

Co. of Tex. V. Ademaj, 243 S.W.3d 618, 621 (Tex. 2008). When, as here, both parties

moved for summary judgment and the trial court granted one and denied the other, we

determine all questions presented and render the judgment the trial court should have

rendered.     Id. (citing Argonaut Ins. Co. v. Baker, 87 S.W.3d 526, 529 (Tex. 2002); see

FM Props. Op. Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000).                                  On

cross-motions for summary judgment, each party bears the burden of establishing that it

is entitled to judgment as a matter of law.          City of Garland v. Dallas Morning News, 22
S.W.3d 351, 356 (Tex. 2000).

        Here, both parties rely on statutory provisions to support their respective motions.

In general, matters of statutory construction are questions of law.             Argonaut, 87 S.W.3d
3
           We note that various amicus curiae briefs were filed in this case. See TEX. R. APP. P. 11. The
Texas Medical Association, American Medical Association, Texas State Representative Armando Martinez,
and the Objective Watchers of the Legal System (O.W.L.S.) filed a joint amici brief in support of appellee
Grass. Additionally, (1) the Texas Hospital Association, Texas Association of Voluntary Hospitals, Texas
Organization of Rural & Community Hospitals; (2) Community Hospital Corporation and Memorial Health
System of East Texas; and (3) Christus Health, Memorial Hermann Healthcare System, the Methodist
Hospital System, Texas Children’s Hospital, and Texas Health Resources all filed their respective amici
briefs in support of appellant KMC.

                                                    9
at 529; City of Garland, 22 S.W.3d at 356. Our objective in construing a statute is to

give effect to the Legislature’s intent and shall consider at all times, the old law, the evil,

and the remedy.        TEX. GOV’T CODE ANN. § 312.005 (West 2005); see Mid-Century, 243
S.W.3d at 621.        Our interpretation of these statutes begins with their plain meaning,

which we derive from the entire act and not just from isolated portions.                       Id. (internal

citations omitted). Therefore, we read the statute as a whole and interpret it to give

effect to every part.

        B.      Statutory Construction and Interpretation

        Both parties agree that the relevant statutory provisions involved in this case arise

out of Chapter 22 of the Texas Business Organizations Code concerning the regulation

of non-profit corporations—specifically, Subchapter H, regarding the public disclosure of

financial records and annual reports of these corporations.                See TEX. BUS. ORGS. CODE

ANN. §§ 22.351–.356.

        First, we read and construe section 22.353 as a statutory mandate to all domestic

non-profit corporations4 to keep records, books, and annual reports of the non-profit

corporation’s financial activity on file at the non-profit corporation registered or principal

office in Texas for at least three years after the close of the non-profit corporation’s fiscal

year.       Id. § 22.353.        Further, section 22.353 requires all domestic non-profit

corporations to make said records, books, and annual reports, which are held for at least

        4
          A non-profit corporation under this chapter is “a corporation, [in which] no part of the income of
which is distributable to a member, director, or officer of the corporation” formed for any lawful purpose not
expressly prohibited, including any purpose described in section 2.002 of the business organizations code.
See TEX. BUS. ORGS. CODE ANN. §§ 22.001; 22.051 (West 2011); see also id. § 2.002 (West 2011).

                                                     10
three years after the close of each fiscal year, available to the public for inspection and

copying at the corporation’s registered or principal office. The statute also allows the

corporation to charge reasonable fees for preparing copies of a record or report.   Id.

       Section 22.353 is essentially a re-codification of the now defunct Texas Civil

Statutes article 1396-2.23A § C into the Texas Business Organizations Code.      See Acts

2003, 78th Leg., R.S., ch. 182 § 1, 2003 Tex. Sess. Law. Serv. Ch. 182 (H.B. 1156)

(West).   The legislative intent behind the original provision of the Texas Non-Profit

Corporation Act was to open the windows of transparency to non-profit organizations

who solicited money from the public by keeping financial records on file and opening

those records for public inspection, if so requested.      According to the original bill

analysis, then-Senator Gene Jones of Harris County authored the legislation as a

response to his previously failed attempt to conduct a study of a non-profit drug

rehabilitation program in Houston that was rumored to have used funds for investments

in night clubs. See Senate Comm. on Bus. & Indus., Bill Analysis, Tex. S.B. 857, 65th

Leg., R.S. (1977).

       We recognize section 22.355, however, as a list of available statutory exemptions

for non-profit corporations to the record-keeping and public-disclosure requirements of

section 22.353.      Because KMC only argues for protection under the statute’s second

listed exemption, we will only construe that one.     See TEX. BUS. ORGS. CODE ANN. §

22.355(2).   Under this exemption, non-profit corporations are not subject to section

22.353 if they do not intend to solicit and receive and do not actually raise or receive

during a fiscal year contributions in an amount exceeding $10,000 from a source other

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than its own membership.       Id.   Like section 22.353, section 22.355 originally appeared

in article 1396.2.23A § E of the Texas Civil Statutes.

       Since its re-codification in 2003, our research—including the research of the

parties to this appeal—reveals no case law which specifically addresses, interprets, or

analyzes the current applicable statute.          The Austin Court of Appeals, however,

construed and analyzed the relevant exemption under its predecessor statute in a case

involving similar facts to the one before us today.      See Tex. Appellate Practice & Educ.

Res. Ctr. v. Patterson, 902 S.W.2d 686, 688 (Tex. App.—Austin, 1995, writ denied).

       In Patterson, state senator Jerry Patterson requested disclosures of the financial

records and reports, pursuant to section 22.353’s predecessor, article 1396-2.23A § C,

from a non-profit corporation (“the Resource Center”), whose stated purpose was to

ensure that death row inmates in Texas had adequate legal counsel.               See id. at 687.

The Resource Center denied Patterson’s request, and Patterson responded by filing a

petition for writ of mandamus in Travis County district court. After a hearing, the district

court determined that the disclosure statute applied to the Resource Center and ordered

it to turn over all records, books, and financial reports of its financial activities.

       The Resource Center argued on appeal that it was exempt from the disclosure

requirements as a matter of law under article 1396–2.23A(E)(2) (present-day section

22.355(2)).    The Austin court agreed.          While the Resource Center admitted to

receiving revenue totaling $3.9 million during the 1993 fiscal year, it argued that the

revenues received were not raised or received through “contributions,” as articulated in

the statute, because “contributions” did not include “grants received . . . [from] state and

                                               12
private foundations.” Id. at 688. In its opinion, the Austin court cited the original bill

analysis and bill hearings, which revealed a “narrowly drawn law” that focused on

non-profit corporations which solicited “funds from the public.” Id. at 688–89 (emphasis

in original).     The court further held that “when a non[-]profit corporation receives grant

funding . . . the statute is unnecessary because the terms of the grant and the grantor’s

oversight provide the means of holding the corporation accountable for the use of grant

funds.”     Id.

       Because we conclude that the purpose and language of the current section

22.353 exemption is unchanged from its article 1396–2.23A(E)(2) predecessor, we will

extend the Patterson holding to this case and apply the principles herein.

       C.         Discussion

       Thus, the principal issue in this case is whether, as KMC argues, a non-profit

corporation hospital, which makes grant requests and receives grants for specific items

to and from a non-profit corporation foundation, whose sole purpose of formation is to

provide financial support for said non-profit corporation hospital, is exempt as a matter of

law from the public-disclosure requirement articulated the business organizations code.

See id. §§ 22.353; 22.355. KMC asserts that the evidence establishes, as a matter

of law, that it falls under the section 22.355 (2) exemption from public disclosure of

financial records and reports. We agree.

       Grass argues that KMC should not be                   shielded from the      statutory

public-disclosure mandates for non-profit corporations because KMC and the

Foundation are in essence one in the same because the Foundation is a “straw-man”

                                               13
and “shell corporation” designed solely to funnel money to KMC. The record shows that

KMC and the Foundation are separate domestic non-profit corporations.                 The

Foundation was incorporated for “the sole benefit of, and the specific purpose of

supporting . . . [KMC].” Furthermore, the record shows that the Foundation “solicits,

receives, and accepts gifts” from the public. However, this evidence alone does not

support or establish any theory of liability to pierce the corporate veil. See SSP Partners

v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 454 (Tex. 2009) (citing Castleberry v.

Branscum, 721 S.W.2d 270, 271–72 (Tex. 1986)).            Accordingly, we conclude that

based on the record, KMC and the Foundation are separate and distinct domestic

non-profit corporations.

       Next, KMC chief executive officer Summersett’s affidavit shows that KMC does

not intend to solicit and receive contributions from the public in an amount exceeding

$10,000.   Summersett’s affidavit also indicates that KMC receives grants from the

Foundation to purchase specific equipment and not for general operating expenses.

The rule in Patterson holds that when a non-profit corporation receives grant funding,

section 22.353 (formerly art. 1396-2.23A § C) is not applicable because “the terms of the

grantor’s oversight provide the means of holding the corporation accountable for the use

of grant funds.”   Patterson, 902 S.W.2d at 689.     Therefore, we conclude that KMC’s

grants from the Foundation are not “contributions” as interpreted in section 22.355(2),

and, as a result, the section 22.355(2) exemption applies to KMC as a matter of law.

See id. at 688.

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       KMC’s first issue is sustained.5

                                     III.   CONCLUSION

       We reverse the trial court’s judgment that grants Grass’s motion for summary

judgment and orders KMC to disclose documents under section 22.353. We render

KMC exempt from the statutorily-mandated disclosures of section 22.353.

                                                             __________________________
                                                             GINA M. BENAVIDES,
                                                             Justice

Dissenting Opinion by
Chief Justice Rogelio Valdez.

Delivered and filed the
6th day of June, 2013.

       5
        Because our ruling on KMC’s first issue is dispositive, we need not address KMC’s remaining
issues. See TEX. R. APP. P. 47.1.

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