Court Opinion

ID: 2991447
Source: CourtListenerOpinion
Date Created: 2015-09-23 03:56:46.755254+00
Date Added: 2024-06-11T11:38:36.471036
License: Public Domain

Motion for Rehearing Denied; Opinion of July 19, 2011, Withdrawn; Affirmed, and
Substitute Memorandum Opinion filed September 29, 2011.

                                         In The

                      Fourteenth Court of Appeals

                                  NO. 14-10-01054-CV

                     SOLUM ENGINEERING, INC., Appellant

                                           V.

                           PREIS & ROY, P.L.C., Appellee

                       On Appeal from the 61st District Court
                               Harris County, Texas
                         Trial Court Cause No. 2009-25799

             SUBSTITUTE MEMORANDUM OPINION

      We overrule the motion for rehearing, withdraw our opinion dated July 19, 2011,
and issue the following substitute memorandum opinion.

      In this breach of contract case, appellant, Solum Engineering, Inc. (“Solum”)
appeals from the trial court’s judgment in favor of appellee, Preis & Roy, P.L.C.
(“P&R”). In a single issue, Solum asserts that the trial court erred in rendering judgment
against it because Solum’s majority shareholder had fired P&R before the damages at
issue were incurred. We affirm.
                                          BACKGROUND

        Solum is a corporation that, at the time this dispute arose, consisted of three
shareholders, each holding 500 shares of company stock. In September 2005, Solum,
through its then-president and shareholder Marie Starich, engaged P&R to represent it in
an effort to recover $30,000 drawn down from Solum’s line of credit that allegedly had
been appropriated by another shareholder, James G. Strachan, for his personal use.
Relations between the three shareholders of Solum broke down, and they began fighting
amongst themselves over control of the corporation. P&R filed suit on Solum’s behalf
against Strachan in Fort Bend County in an attempt to recover this money.1

        On April 23, 2007, while the suit filed by Solum against Strachan was pending in
Fort Bend County, Strachan purchased the 500 shares owned by the third shareholder of
the corporation, Jorge Gonzalez. That same day, Strachan sent letters to Starich and
P&R, purporting to fire (a) Starich as president and director of Solum and (b) P&R as its
counsel. P&R began receiving conflicting directives from the remaining shareholders.
Because it no longer knew who had authority to act on Solum’s behalf, P&R moved to
withdraw as Solum’s counsel in the Fort Bend County court on May 29, 2007.

        The Fort Bend County court heard this motion (among other matters) on July 9,
2007. At that hearing, the trial court denied P&R’s motion to withdraw on the basis that
Solum was still involved in litigation and had not yet hired another lawyer. On August 3,
2007, Solum retained substitute counsel. But between the date of Strachan’s purported
termination of P&R and the date that Solum obtained substitute counsel, P&R continued
to represent Solum and incurred an unpaid balance of fees and costs of $18,685.73.
Solum refused to pay P&R for these fees, contending that it was not obligated to do so
because Strachan, as majority shareholder, had terminated P&R’s services on April 23,
2007.

        1
        Subsequently, Strachan either initiated or was joined as a party to several different suits in Fort
Bend County variously involving Solum’s shareholders, its attorney, and the presiding trial court judge.
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       After making an unsuccessful demand on Solum for these fees, P&R filed the
instant suit for breach of contract and quantum meruit in the 61st District Court of Harris
County in April 2009. Solum filed an answer and counterclaims. The trial court denied
Solum’s request for a declaratory judgment that there was no contract because P&R had
been fired. After P&R’s partial summary judgment was granted, disposing of all of
Solum’s counterclaims except its counterclaim for breach of contract, this case was tried
to the bench on P&R’s claims on September 1, 2010.

       At the bench trial, Lori Hood, the former P&R attorney who had performed the
majority of work for Solum in the underlying Fort Bend County litigation,2 testified that
she was unaware of the timing of Strachan’s purchase of Gonzalez’s stock, explaining
that “until the shares were transferred on the books of the company, by virtue of the
company’s by-laws, the transfer was not a known fact.” She further explained that she
did not know what responsibilities the various individuals involved in the underlying
litigation had. As the company lawyer, she knew that the by-laws required shares to be
“denoted onto the share transfer ledger, an actual certificate be cancelled, and a new
certificate entered before anybody could vote those shares.”

       Hood testified that from April to August 2007, she was dealing with “upwards of
six or seven or eight letters a day from the Strachans and their lawyers.”3                 In addition,
P&R entered a copy of the official transcript from the July 9, 2007 Fort Bend County
court hearing on its motion to withdraw and copies of the bills it sent to Solum for the
services provided during the period from April to August 2007. Finally, another P&R
attorney testified regarding the attorney’s fees the firm had incurred in pursuing this
contract claim and the fees it anticipated incurring should Solum file a motion for new
trial or an appeal.

       2
           Hood was no longer employed by P&R when the bench trial was conducted.
       3
           Strachan’s father, James D. Strachan, became very involved in the Fort Bend County litigation.
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       Strachan testified that he purchased Gonzalez’s stock on April 23, 2007 and fired
P&R on that same date. He admitted that Solum’s by-laws require that all stock sales be
recorded. However, he stated his position as follows: “As a majority owner, I had the
authority to terminate Preis & Roy and Marie Starich as president of Solum
Engineering.”

       The trial court signed a final judgment in favor of P&R on September 2, 2010,
awarding P&R $18,685.73, as well as pre-judgment interest. It further awarded P&R
$51,159.00 as attorney’s fees pursuant to Chapter 38 of the Texas Civil Practice &
Remedies Code. The judgment included costs of court and attorney’s fees if Solum
unsuccessfully filed a motion for new trial or an appeal. The trial court additionally
signed findings of fact and conclusions of law on September 2, 2010. The court found, in
pertinent part, as follows:

       2.     On September 1, 2005, Solum retained P&R to assist it in
       recover[ing] monies taken from Solum by James G. Strachan, one of
       Solum’s three shareholders at the time. The parties entered into a valid
       written contract memorializing the agreement by which P&R was to
       provide representation services to Solum. All parties to the contract had
       authority to enter into said contract.

       3.     P&R represented Solum from September 1, 2005 to August 3, 2007.
       During this time period, P&R performed legal services for Solum on a
       regular basis and on which a regular and systematic account was kept.
       During the course of P&R’s representation during this time period, Solum
       incurred legal fees and costs of $75,045.16, of which the sum of $56,359.43
       was paid by Solum, leaving a due and owing balance of $18,685.73, which
       Solum refused to pay.

       4.     P&R performed its obligations under the contract by providing the
       services requested according to the rates agreed upon with Solum. Solum
       has breached the contract by failing and refusing to pay for all legal
       services performed by P&R.

       5.     As a result of Solum’s breach of its contract with P&R, P&R has
       been damaged and is entitled to recover the sum of $18,685.73, being the
       fees incurred by Solum, as well as pre-judgment and post-judgment
       interest, and its reasonable and necessary attorney’s fees in prosecuting this
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       claim pursuant to Section 38.001(1) and (8) of the Texas Civil Practice and
       Remedies Code.

Solum subsequently filed a motion for new trial, which was overruled. This appeal
timely followed.

                                          ANALYSIS

       In a single issue, Solum asserts the following:

       The trial court erred in rendering a breach of contract judgment for Preis &
       Roy, P.L.C., based on another court’s unlawful ruling that Solum
       Engineering, Inc.’s new majority owner, James G. Strachan, could not fire
       Preis & Roy because the sale of Solum’s controlling shares to him was
       incomplete, until said shares were transferred on Solum’s stock book.

       We begin our analysis by noting that nowhere in the trial court’s judgment or
findings does it indicate that the judgment was based on the Fort Bend County court’s
ruling that the sale of Solum’s controlling shares to Strachan was incomplete until the
shares were transferred in Solum’s corporate records. Thus, we focus on the central
issues in this case: (a) whether Strachan had authority to fire P&R when he became the
majority shareholder of Solum and (b) whether P&R could withdraw as Solum’s counsel
in the face of a trial court order to the contrary.

       “Under Texas law, a corporation is an entity separate from its shareholders. While
under certain extraordinary circumstances the corporate fiction may be disregarded, mere
control and ownership of all the stock of a corporation is not a sufficient basis for
ignoring the distinction between the shareholder and the corporate entity.”           Grain
Dealers Mut. Ins. Co. v. McKee, 943 S.W.2d 455, 458 (Tex. 1997) (citations omitted).
Thus, even an individual’s status as a sole shareholder does not extinguish the existence
of a corporation as a distinct legal entity, separate and apart from its shareholder(s). See
id.

       Here, as discussed above, Solum, not Strachan individually, hired P&R. Thus,
only Solum had the authority to terminate the contract with P&R. Strachan’s letter to
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P&R states: “As the majority shareholder/owner of Solum Engineering, Inc., you are
hereby notified that Preis & Roy is terminated as Solum Engineering, Inc.’s attorney of
record. This action will be ratified at duly noticed special shareholder and director
meetings on April 24, 2007.” (emphasis added). Strachan did not sign this letter as an
officer or director of Solum; rather he signed it as “James G. Strachan,” followed by his
home address. Simply put, there is nothing in this letter indicating that Strachan had the
authority to terminate the contractual relationship between Solum and P&R. See id.
Further, our review of the record indicates that Strachan did not provide any evidence
that the board of directors of Solum had terminated P&R’s representation of the
corporation. See Tex. Bus. Orgs. Code Ann. § 21.401 (West 2009) (“[T]he board of
directors of a corporation shall: (1) exercise or authorize the exercise of the powers of
the corporation; and (2) direct the management of the business and affairs of the
corporation.” (emphasis added)). Just as a shareholder generally is not liable for a
corporation’s obligations under a contract,4 a shareholder cannot terminate a
corporation’s contractual obligations. See Tex. Bus. Orgs. Code Ann. § 21.401.

       Moreover, at the time that Strachan purportedly terminated P&R, Solum was
engaged in on-going litigation in Fort Bend County. The trial judge in Fort Bend County
refused to permit P&R to withdraw as Solum’s counsel and ordered P&R to continue its
representation of the corporation until the corporate formalities were conformed with and
Solum obtained substitute counsel. “When ordered to do so by a tribunal, a lawyer shall
continue representation notwithstanding good cause for terminating the representation.”
Tex. Disciplinary Rules Prof’l Conduct R. 1.15(c), reprinted in Tex. Gov’t Code Ann.,
tit. 2, subtit. G, app. A (West 2005). Furthermore, a lawyer cannot ignore a standing
court order absent compelling reasons to do so. See Tex. Disciplinary Rules Prof’l
Conduct R. 3.04(d) (“A lawyer shall not . . . knowingly disobey, or advise the client to

       4
           E.g., Willis v. Donnelly, 199 S.W.3d 262, 271 (Tex. 2006) (“A bedrock principle of corporate
law is that an individual can incorporate a business and thereby normally shield himself from personal
liability for the corporation’s contractual obligations.”).
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disobey, an obligation under the standing rules of or a ruling by a tribunal except for an
open refusal based either on an assertion that no valid obligation exists or on the client’s
willingness to accept any sanctions arising from such disobedience.” (emphasis added)).

       Under the unique circumstances of this case, we conclude that the trial court
properly found that Solum breached its contract with P&R. Strachan failed to establish
that he had authority to terminate P&R’s representation of Solum, and P&R was ordered
by a Fort Bend County court to continue its representation of Solum until Solum retained
substitute counsel. Accordingly, we overrule Solum’s sole issue on appeal.

                                     CONCLUSION

       For the foregoing reasons, we affirm the trial court’s judgment.

                                          /s/       Adele Hedges
                                                    Chief Justice

Panel consists of Chief Justice Hedges and Justices Seymore and Boyce.

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