Appellants’ motion was partially granted and partially denied; Appellee’s motion was denied, and the motion to lift the stay was dismissed as moot. The ruling, issued on July 12, 2022, by the Fourteenth Court of Appeals, involved the case of American Akaushi Association, Inc., HeartBrand Holdings, Inc., and Ronald Beeman against Twinwood Cattle Company, Inc. The Appellants contested the trial court's determination regarding the supersedeas bond amount, arguing it was set too high, while Twinwood contended the bond should be increased. An agreement between the parties resulted in a stay of the judgment's execution pending the motions' resolution.
The court modified the supersedeas bond amount and lifted the previously issued stay, allowing HeartBrand 20 days to file additional security in the trial court. The underlying case involved breach of contract and fraud claims against the American Akaushi Association regarding its obligation to provide DNA verified pedigrees for Twinwood’s cattle. A jury ruled in favor of Twinwood, finding that the Association breached its contract and committed fraud, while also implicating HeartBrand and Beeman in a conspiracy that harmed Twinwood. The final judgment totaled $20,454,863 in damages.
Before the judgment, HeartBrand distributed $1.5 million in dividends and purchased shares for $875,000, prompting Twinwood to seek a temporary injunction to prevent further asset distributions. HeartBrand later submitted a joint supersedeas bond of $6,708,083.90, claimed to be fifty percent of its net worth. However, a contest filed by Twinwood led to a three-day evidentiary hearing, where the trial court found HeartBrand’s net worth evidence insufficient and ruled the bond amount inadequate, leading to the current appeals process.
The court ruled that a $20 million promissory note between the Beemans and HeartBrand should be classified as invested capital instead of a liability, citing that it was a related party transaction lacking arm's length negotiation, with the Beeman family controlling HeartBrand and benefiting from the arrangement. Key factors included the note's origin from Ronald Beeman when banks declined to provide favorable terms, the lack of repayment intent as the debt increased significantly without principal payments, and HeartBrand's decision to pay dividends instead of servicing the note. Additionally, the note was treated as a capital contribution with no borrowing limits or structured repayment terms, allowing unrestricted beneficiary access to funds.
The court also disregarded a $1.5 million dividend distribution and an $875,000 share purchase as attempts to artificially lower HeartBrand's net worth, subsequently adjusting HeartBrand’s liabilities down by $20 million and increasing its assets by $2,375,000. This led to a recalculated net worth of $35,791,168 for supersedeas bond purposes, necessitating a bond of $17,895,584 based on a 50% cap per rule 24.2. Alternatively, if valuing by fair asset value rather than book value, the net worth was determined to be at least $65,471,804.
In their motion for review, Appellants sought to vacate the court’s net worth findings and requested a bond of $6,708,183.90, while Twinwood sought to increase the bond to $20,454,863, urging the court to uphold the trial court’s order if this request was denied. The enforcement of the judgment was stayed pending the review of these motions. The applicable standards for superseding a judgment were outlined, including filing a written agreement, posting a bond, or providing alternate security as per Tex. R. App. P. 24.1(a).
To supersede a money judgment, the required security amount must equal the sum of compensatory damages awarded, interest estimated for the appeal duration, and costs awarded in the judgment, as outlined in Tex. R. App. P. 24.2(a)(1) and Tex. Civ. Prac. Rem. Code Ann. 52.006(a). This amount cannot exceed either 50% of the judgment debtor’s net worth or $25 million (Tex. R. App. P. 24.2(a)(1)(A)). When a judgment debtor provides security based on net worth, they must concurrently file an affidavit detailing their net worth and comprehensive information about their assets and liabilities (Tex. R. App. P. 24.2(c)(1)). A judgment creditor has the right to contest the debtor's claimed net worth and may conduct reasonable discovery, followed by a trial court hearing on the matter (Tex. R. App. P. 24.2(c)(2)-(3)). The debtor bears the burden of proof regarding net worth, which is defined as the difference between total assets and total liabilities according to generally accepted accounting principles. Appellate courts can review the sufficiency of the security amount, with the trial court's determination being subject to an abuse of discretion standard (Tex. R. App. P. 24.4(a)(1)). The abuse of discretion test assesses whether the trial court acted according to guiding principles or unreasonably. Legal and factual sufficiency challenges are reviewed based on traditional evidentiary standards, with specific requirements for both types of challenges. The burden lies with the judgment debtor to conclusively establish their position in legal sufficiency appeals.
Testimony from interested witnesses can establish a fact legally only if it is clear, direct, and positive, easily contradicted if false, and free from discrediting circumstances. The trial court serves as the sole judge of witness credibility, including experts, and has the discretion to favor one expert over another. Appellants presented testimony from three witnesses, while Twinwood presented one, along with deposition excerpts and seventy-two documentary exhibits.
Key evidence included a $20 million promissory note related to a December 2011 line of credit agreement between Beeman and HeartBrand, which bore 4% interest. The line of credit was utilized for various operating expenses by HeartBrand, and its financial statements for 2012 and 2013 listed the note as a liability, confirmed by external auditors' opinions. In August 2014, the line of credit was modified to a 'line of credit promissory note' during a corporate reorganization, with a security agreement pledging HeartBrand's assets. The outstanding principal at that time was $17,326,635.86.
HeartBrand drew funds, peaking at $24,850,396.73 in November 2015, before starting repayments as the company became profitable. A further modification in 2018 set a new maturity date of 2028, reduced the interest rate to 2.91%, and confirmed an outstanding principal balance of $20 million, with additional payments of $1,367,500 made within eight months. Since fiscal year 2019, HeartBrand has engaged RSM US LLP for financial statement reviews.
The 2019 and 2020 financial statements classified a note as a liability, confirming its treatment as debt without requiring material restatements to align with generally accepted accounting principles. HeartBrand reported the note's balance and interest on federal tax returns, while Ronald and Joan Beeman reported interest income. Both Ronald Beeman and Carol Brown affirmed the note's status as debt intended for repayment. Twinwood's evidence contrasted with the Beemans', noting HeartBrand's significant debt and impending bankruptcy during the Beemans' takeover. Initial attempts to secure traditional financing were unsuccessful, necessitating personal funds from the Beemans to sustain operations.
The note, signed by Brown for HeartBrand and Ronald Beeman for Beeman Ranch, is a related party transaction with later signatures by Jordan and Ronald Beeman. An amendment in 2018 involved estate planning for the Beeman family, with $20 million still owed. The Beeman family holds a majority of HeartBrand shares, with Ronald as chairman and Jordan as president. HeartBrand's payments on the note amount to $48,500 monthly, totaling $582,000 annually, while the liability surged from approximately $780,000 in 2011 to over $24 million in 2015, with limited principal payments.
The line of credit had no limits until recently; Brown could draw from it without cash constraints. Since modifying the note in August 2018, HeartBrand has not paid principal, and discussions about repayment have not occurred among key parties. Ronald Beeman mentioned potential refinancing or balloon payments in 2028. Interest rates on the note have varied from 4% to 0.25% to 2.91%, with HeartBrand consistently paying interest but never required to reduce principal. In 2021, HeartBrand chose to distribute a $1.5 million dividend to all shareholders, including non-family members, after a fourteen-year hiatus from dividend payments, citing good financial performance in 2020 and 2021. The external accountant was unaware of these dividend distributions.
Share purchase proceedings were initiated by three non-family shareholders of the company, who requested refunds for their investments, citing reasons such as medical expenses. Appellants contest the trial court's findings regarding credibility and the completeness of evidence related to assets and liabilities necessary for determining net worth, arguing that these findings are unsupported or contradictory. The court, however, maintained its authority to assess witness credibility and found that while it accepted some of the Appellants' evidence, it deemed other parts inadequate, thus justifying its conclusions regarding HeartBrand’s net worth.
Further, Appellants assert that a $20 million promissory note between HeartBrand and the Beemans should be recognized as a liability in the net worth calculation. They argue that the court's dismissal of this note as a liability, treating it as capital instead, constitutes a legal error. Citing precedents, Appellants emphasize that related-party debts should not be ignored if they reflect genuine value exchanged. They reference cases where similar debts were included in net worth assessments, arguing that the trial court improperly disregarded the promissory note without appropriate justification.
The trial court classified a $20 million note owed to a shareholder as capital rather than a liability, based on various factors indicating the note's characteristics aligned more with equity. The court clarified that related-party debts are not automatically deemed liabilities for calculating a company's net worth, as established in relevant case law. The court referenced a multi-factor test traditionally used in tax and bankruptcy contexts to differentiate between debt and equity, noting factors such as the parties’ intent, their relationship, and management involvement. Although the Appellants argued that these factors were irrelevant and that the court lacked discretion to treat the note as capital, the court maintained that it had the authority to assess the net worth of a judgment debtor, including determining the classification of liabilities. The trial court's findings were based on evidence presented regarding the treatment of the note, and it was well within its discretion to accept or reject the characterization of the note. In response to the Appellants' legal sufficiency challenge, the court concluded that they failed to prove that the evidence overwhelmingly supported their claim that the note was a liability.
The evidence, viewed favorably to the trial court's findings, indicates that the transaction was a related-party deal benefiting Ronald Beeman and his family, who controlled HeartBrand. Ronald Beeman provided HeartBrand with a line of credit on more favorable terms than typical bank loans, with no maturity date until August 2018. The principal amount surged from under $1,000,000 to over $20,000,000 in a few years, with HeartBrand making minimal principal payments and lacking a repayment plan for the principal balance due in 2028. The interest rate was modified frequently but remained below 4%. The trial court deemed this arrangement substantively different from an arm's length transaction with an independent financial institution, noting that a bank had previously refused to lend under similar conditions. The court found sufficient legal evidence to classify the $20 million note as invested capital rather than a liability.
Appellants failed to demonstrate an abuse of discretion, as the trial court had conflicting testimony and expert evidence to consider. Although Appellants’ expert argued the note should be treated as a liability under accounting principles, the court was not obligated to accept this view. While the trial court's factual statements were not entirely accurate, particularly regarding principal payments made in 2014 and 2015, the evidence still supported the characterization of the note as invested capital.
Additionally, the jury verdict on July 16, 2021, indicated that a $875,000 shareholder buyback on July 28, 2021, and a $1.5 million dividend distribution in September 2021 should be added back to HeartBrand’s net worth, as they were seen as attempts to diminish net worth following an unfavorable jury outcome.
Appellants argue that the court erred in its findings because HeartBrand lacks access to certain funds, contending that Twinwood must prove the transactions in question were fraudulent transfers to disregard them. While acknowledging the funds are unavailable to HeartBrand, the court notes that HeartBrand has not claimed an inability to secure a supersedeas bond or that doing so would cause substantial economic harm. The trial court retains authority beyond fraudulent transfer laws to consider post-verdict asset transfers and can disregard transactions deemed outside the ordinary course of business to prevent the dissipation of assets and ensure judgment satisfaction.
The trial court's findings regarding HeartBrand’s $1.5 million dividend distribution indicated that the decision to pay dividends was made after an adverse verdict, with the payment being only the second instance of dividends paid to shareholders, primarily benefiting Ronald Beeman’s family. The external accountant was unaware of these payments, which supports the trial court's conclusion that the dividends were not part of normal business operations and aimed at reducing net worth post-verdict. The trial court only disregarded the 2021 dividends, not those from 2020.
In reviewing the evidence, appellants present facts suggesting a reversal, including substantial dividends paid to non-Beeman shareholders, HeartBrand's profitable year despite the adverse verdict, and retained cash post-dividend payments. However, the court finds these points insufficient to demonstrate an abuse of discretion or that the findings contradict the evidence. The dividends, while following a profitable year, occurred after a significant jury verdict against HeartBrand.
Regarding post-verdict share purchases, initiated by unrelated early investors seeking to liquidate their shares for personal reasons, the court finds no evidence that HeartBrand or Ronald Beeman instigated these actions. The share ownership was limited, with no direct connection to the allegations of wrongdoing, indicating the transactions were shareholder-initiated rather than orchestrated by HeartBrand.
HeartBrand's willingness to purchase shares amid a lack of liquidity in the market is acknowledged, as it is common for closely held corporations or other shareholders to seek minority interests. No evidence of wrongdoing is suggested beyond the timing of share repurchases, which was not initiated by HeartBrand. The trial court's conclusion that these purchases were outside the ordinary course of business or intended to reduce net worth was deemed an abuse of discretion.
Twinwood argues for an increased bond amount of $20,454,863, asserting HeartBrand failed to demonstrate its net worth adequately. Previous cases cited by Twinwood indicated that the courts found the evidence of net worth to be insufficient. However, HeartBrand provided some credible evidence, enabling the trial court to determine its net worth, which Twinwood challenged by proposing a "fair value" approach to asset valuation instead of "book value."
The trial court's alternative fair value assessments were considered conditional findings, and Twinwood did not demonstrate an abuse of discretion in the trial court's calculation of HeartBrand’s net worth based on book value. Consequently, the appellate court granted the motion to correct the erroneous addition of $875,000 to HeartBrand’s net worth but denied Twinwood’s motion. HeartBrand's net worth is determined to be $34,916,168, requiring a bond of $17,458,084, necessitating HeartBrand to file additional security of $10,749,900. The previous stay order is lifted, and enforcement of the judgment is suspended for twenty days.
