AME & FE INVESTMENTS, LTD., Appellant v. NEC NETWORKS, LLC, d/b/a CaptureRX, Appellee
AME & FE Investments, Ltd. (“AME”) filed a motion in this appeal challenging the trial court's Amended Order Setting Security in which the trial court declines to permit AME to supersede the underlying judgment if appellee, NEC Networks, LLC, d/b/a CaptureRX (“NEC”), posts a bond in the amount of $1.5 million to secure AME against any loss or damage it will be caused in the event AME prevails on appeal. After reviewing AME's motion, NEC's response, and the replies filed by the parties, we grant AME's motion and remand the Amended Order Setting Security to the trial court for the entry of an order consistent with this opinion.
In 2009, AME and NEC signed a Note Purchase Agreement (“NPA”) pursuant to which AME loaned NEC $1.5 million secured by liens on and security interests in NEC's assets and property. Under the NPA, NEC granted AME an option to convert the entire principal amount of the loan into 30% of NEC's Class A Units of membership interest at any time prior to the loan's maturity date.
In July 2012, NEC filed suit against AME asserting in pertinent part: (1) a breach of contract claim against AME for refusing to accept a payoff tendered on November 19, 2012, and for refusing to release its liens and security interests; and (2) a claim seeking a declaration that AME's option to convert the loan into Class A Units ended on October 1, 2011. AME filed counterclaims against NEC for breach of contract, fraud, and fraudulent transfer, claiming, in pertinent part, that AME was still entitled to convert the loan into 30% of NEC's Class A Units.
On April 8, 2016, the trial court granted partial summary judgment for NEC on NEC's declaratory relief and breach of contract claims, concluding that: (1) AME breached the NPA by failing to accept the tendered payoff from NEC and refusing to release its liens and security interests; and (2) AME failed to provide written notice of an election to convert the loan into Class A Units before the loan's maturity date. As a result, the partial summary judgment determined that AME was not entitled to convert the loan into Class A Units. On May 23, 2016, the trial court also granted NEC's traditional and no-evidence motions for summary judgment against AME on some of AME's breach of contract counterclaims.
A jury trial was subsequently held on the parties' remaining claims. Based on the jury's verdict,1 the trial court signed a final judgment on March 10, 2017, which incorporated the trial court's previous summary judgment rulings. In the final judgment, the trial court ordered AME to pay NEC $6,000 and further ordered that AME take nothing on its counterclaims against NEC.2 The final judgment also vacated AME's liens and security interests. AME timely filed a notice of appeal.
On May 1, 2017, AME made a cash deposit in lieu of supersedeas bond in the amount of $8,498.65. On May 5, 2017, NEC filed a document entitled Alternative Motions to Set Security or Determine Bond, requesting the trial court to either: (1) increase the amount of AME's supersedeas bond to adequately protect NEC against any loss or damage the appeal might cause; or (2) allow NEC to enforce the judgment by requiring NEC to post security in accordance with Texas Rule of Appellate Procedure 24.2(a)(3).
On May 10, 2017, the trial court held an evidentiary hearing on NEC's alternative motions. During the hearing, NEC presented evidence of the harm NEC would suffer if the judgment was superseded during the pendency of the appeal. NEC argued the trial court should either increase the amount of AME's supersedeas bond to $43,998,000.00 to adequately protect NEC against the loss or damage it would suffer during the pendency of the appeal, or, in the alternative, allow NEC to enforce the judgment by posting security in the amount of $1.5 million, representing the loan balance secured by AME's liens and security interests. AME argued the trial court should increase its supersedeas bond to $3 to $5 million at the most or, in the alternative, require NEC to post security in an amount equal to the value of 30% of NEC's Class A Units. On May 26, 2017, the trial court signed an Amended Order Setting Security declining to permit AME to supersede the judgment and requiring NEC to post security in the amount of $1.5 million, thereby allowing NEC to enforce the judgment.
On June 7, 2017, AME filed a motion challenging the trial court's order and an emergency motion to stay the trial court's order pending our resolution of its challenge. On June 8, 2017, this court granted AME's emergency motion to stay. On November 7, 2017, NEC filed a motion to vacate our stay of the trial court's order.
Scope and Standard of Review
“Rule 24.4 authorizes appellate courts to engage in a limited supersedeas review, specifically to review (1) the sufficiency or excessiveness of the amount of security, (2) the sureties on a bond, (3) the type of security, (4) the determination whether to permit suspension of enforcement, and (5) the trial court's exercise of discretion in ordering the amount and type of security.” El Caballero Ranch, Inc. v. Grace River Ranch, L.L.C., No. 04-16-00298-CV, ––– S.W.3d ––––, ––––, 2016 WL 4444400, at *3 (Tex. App.—San Antonio Aug. 24, 2016, order). “After completing this limited review, we may require that the amount of a bond be increased or decreased and that another bond be provided and approved by the trial court clerk.” Id. “We may also require other changes in the trial court order and remand for entry of findings of fact or for the taking of evidence.” Id.
“We review a trial court's ruling under Rule 24 under an abuse of discretion standard.” Id. “A trial court has no ‘discretion’ in determining what the law is or applying the law to the facts.” Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992). “Thus, a clear failure by the trial court to analyze or apply the law correctly will constitute an abuse of discretion.” Id.
Although a judgment debtor generally is entitled to supersede a judgment while pursuing an appeal, see Tex. R. App. P. 24.2, the trial court in this case declined to permit AME to supersede the judgment pursuant to Rule 24.2(a)(3). As a result, NEC was required to post “security ordered by the trial court in an amount and type that will secure [AME] against any loss or damage caused by the relief granted [NEC] if [this] court determines, on final disposition, that that relief was improper.” Tex. R. App. P. 24.2(a)(3); see also Robert B. Gilbreath & Curtis L. Cukjati, Superseding the “Other Judgment”, 12 App.Advoc. 11, 12 (1998) (noting judgment creditor must post security that will protect the judgment debtor “against the loss or damage that will be caused by the relief granted in the judgment”).
In AME's motion challenging the trial court's order, AME argues the amount of security posted by NEC is insufficient to secure it against its loss or damage if it prevails on appeal. Specifically, AME argues the amount of security posted by NEC does not secure the damage AME would be caused if this court determines it is entitled to convert the loan into 30% of NEC's Class A Units. AME asserts that allowing NEC to enforce the judgment by vacating AME's liens and security interests will enable NEC to take any number of actions that could affect the value of NEC's Class A Units.
“Supersedeas preserves the status quo of the matters in litigation as they existed before the issuance of the order or judgment from which an appeal is taken.” Smith v. Texas Farmers Ins. Co., 82 S.W.3d 580, 585 (Tex. App.—San Antonio 2002, pet. denied). In El Caballero Ranch, Inc., this court addressed what the status quo is when a trial court allows a judgment creditor to post security and proceed with enforcing a judgment.
In El Caballero Ranch, Inc., the trial court entered a judgment declaring that Grace River Ranch, L.L.C. had a valid easement across El Caballero Ranch with the right to use and maintain the road and any bridges lying along the easement. ––– S.W.3d at ––––, 2016 WL 4444400, at *2. El Caballero appealed, and the parties filed cross motions for supersedeas bond. Id. “The trial court ultimately determined Rule 24.2(a)(3) applied and signed an order setting $110,250.00 as the amount of bond necessary for Grace River to post to immediately enforce the judgment and access the easements during the pendency of the appeal.” Id. El Caballero filed a motion in this court challenging the trial court's order. Id. at ––––, 2016 WL 4444400 at *3.
After determining that Rule 24.2(a)(3) applied, this court addressed El Caballero's argument that “the amount of security posted by Grace River does not secure it against loss or damage.” Id. at ––––, 2016 WL 4444400 at *6. El Caballero argued that Grace River intended to build a permanent concrete structure on the easement which would permanently change the nature and quality of the real property, thereby causing irreparable harm. Id. Given the irreparable harm, El Caballero argued “no amount of security would secure it against [its] loss or damage in the event it prevail[ed] on [the] underlying judgment.” Id.
This court noted Rule 24.2(a)(3) “requires that the amount and type of security ordered must ‘secure the judgment debtor against any loss or damage’ caused in the event the judgment debtor prevails on appeal.” Id. (quoting Tex. R. App. P. 24.2(a)(3)). In analyzing that “loss or damage,” this court considered the damage that would be caused to El Caballero by the actions Grace River could take in enforcing its judgment pending final disposition of the appeal. See id. This analysis was necessary to ensure the status quo would be preserved as it existed before the issuance of the trial court's judgment. See Smith, 82 S.W.3d at 585. Noting that the evidence established that the repairs Grace River intended to undertake would cost $25,000 to remove, this court held the amount of security the trial court required Grace River to post would secure El Caballero against any loss or damage. El Caballero Ranch, Inc., ––– S.W.3d at ––––, 2016 WL 4444400, at *6.
In this case, the status quo the posted security must preserve is the value of NEC's Class A Units “as it existed before the issuance of the [ ] judgment” while AME's liens and security interests were in place to protect that value by preventing NEC from certain actions in relation to its assets and property. Smith, 82 S.W.3d at 585. Consistent with our holding in El Caballero Ranch, Inc., the trial court was required to consider the damage that would be caused to AME by actions NEC could take in enforcing its judgment. If AME prevails on appeal, it will be entitled to 30% of NEC's Class A Units. Because AME's liens and security interests will be vacated while the appeal is pending, AME could lose the value of its potential equity interest if NEC sold, transferred, or dissipated its assets.
The portion of Rule 24.2(a)(3) allowing the judgment creditor to post security and enforce its judgment while an appeal is pending is not frequently addressed by appellate courts. An issue that has been addressed, however, is the amount that a judgment debtor would be required to post if a judgment awarded a judgment creditor an interest in a limited liability company. In Abdullatif v. Choudhri, No. 14-16-00116-CV, ––– S.W.3d ––––, 2017 WL 2484374 (Tex. App.—Houston [14th Dist.] June 8, 2017, order [leave denied] ), the underlying litigation concerned ownership interests in a limited partnership and a limited liability company which was the general partner of the limited partnership. Id. at ––––, 2017 WL 2484374 at*1. The judgment awarded Ali Choudhri damages and declared his respective ownership interests in the two entities and the dates on which Choudhri obtained the percentage ownership.3 Id. The trial court signed a Supersedeas Order, permitting the appellants “to supersede the judgment with a cash deposit equal to the amount of damages plus applicable interest.” Id. The order also “prohibited certain activities by the business entities as further security for Choudhri pending appeal.” Id. Choudhri filed a motion in the Houston court arguing the trial court's Supersedeas Order did not provide sufficient security for the declaratory portion of the judgment which the opinion defines as the “Declarations.” Id.
The Houston Court first held the trial court abused its discretion by not setting the security appellants were required to post to supersede the Declarations. Id. at –––– – ––––, 2017 WL 2484374 at *2-4; see also Orix Capital Markets, LLC v. La Villita Motor Inns, No. 04-09-00573-CV, 2010 WL 307885, at *3-4 (Tex. App.—San Antonio Jan. 27, 2010, order) (holding supersedeas bond must cover both monetary and declaratory portions of a judgment); Delhi Gas Pipeline Corp. v. Hassell, 730 S.W.2d 159, 161 (Tex. App.—Tyler 1987, orig. proceeding) (same). The Houston court then addressed “which part of Rule 24 governs superseding the Declarations.” Abdullatif, ––– S.W.3d at ––––, 2017 WL 2484374, at *5. Noting an interest in a partnership and a membership interest in a limited liability company are personal property, the Houston court concluded Rule 24.2(a)(2) governed how the appellants could supersede the Declarations. Id. The Houston court also concluded the prohibitions in the trial court's Supersedeas Order were not relevant to the supersedeas analysis, noting the amount of security required to supersede the trial court's judgment was set by Rule 24.2(a)(2). Id. at ––––, 2017 WL 2484374 at *7. Because Rule 24.2(a)(2) requires “the amount of security [to be] at least ‘the value of the property interest on the date when the court rendered judgment,’ ” the Houston court held “the trial court abused its discretion by not determining the value of the property interests it declared had been assigned to Choudhri and using that value to set the security appellants [were required] to post to supersede the Declarations.” Id. (quoting Tex. R. App. P. 24.2(a)(2)).
Although the security in this case is governed by Rule 24.2(a)(3), the Houston court's opinion provides guidance regarding the amount of security that is sufficient to protect a party against loss or damage during the pendency of an appeal when a judgment awards the party an interest in an entity. In this case, if AME prevails on appeal, it will be entitled to 30% of NEC's Class A Units. Therefore, we hold the trial court abused its discretion in not determining the value of 30% of NEC's Class A Units on the date the trial court rendered judgment and using that value in setting the amount of security NEC was required to post.
We grant AME's motion and remand the Amended Order Setting Security to the trial court for the entry of an order consistent with this opinion. In the event the trial court declines to permit AME to supersede the judgment, the trial court must take evidence on the value of 30% of NEC's Class A Units as of the date the trial court rendered judgment and use that value in setting the amount and type of security NEC must post. See Abdullatif, ––– S.W.3d at ––––, 2017 WL 2484374, at *7 (remanding order for trial court to take evidence and determine amount and type of security to be posted); Devine v. Devine, 07-15-00126-CV, 2015 WL 5228254, at *4 (Tex. App.—Amarillo Sept. 2, 2015, order) (remanding to trial court where evidence in record was not sufficient for appellate court to determine appropriate type and amount of security to be posted).
1. The jury was instructed that AME failed to comply with the NPA when it refused to accept the tendered payoff from NEC and refused to release its liens and security interests on November 19, 2012.
2. With regard to the damages awarded to NEC, the jury was instructed to consider the difference in interest NEC paid to AME from April 1, 2012 through November 19, 2012, and the interest that NEC would have paid under another loan that NEC was unable to secure allegedly due to AME's wrongful actions.
3. The judgment declared that Choudhri owned a 15% interest in both the limited partnership and the limited liability company as of June 18, 2008, and owned a 49.5% interest in the limited partnership and a 50% interest in the limited liability company as of October 29, 2010. Id. at ––––, 2017 WL 2484374 at *5.
Opinion by: Irene Rios, Justice