plaintiff’s original petition, request for …€™s original petition, ... shareholder...
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No. _____________
Garren, § IN THE DISTRICT COURT
Plaintiff §
v.
§
§
§
OF HARRIS COUNTY, TEXAS
Gilley,
.,
§
§
§
Defendants § ________ JUDICIAL DISTRICT
PLAINTIFF’S ORIGINAL PETITION, REQUEST FOR
DISCLOSURE, AND REQUEST FOR PRODUCTION
Plaintiff individually and on behalf of Encompass Security, Inc. brings this
shareholder oppression and derivative action against R G , R H ,
Encompass Enterprises, Inc., and would show the Court as follows:
Discovery Control Plan
1. Plaintiff intends to conduct discovery under Level 2.
Parties
2. Plaintiff is an individual residing in Harris County,
Texas. Plaintiff is and at all relevant times has been a shareholder in Encompass Security, Inc.
and brings this action both on behalf of himself and derivatively on behalf of the corporation.
3. Defendant R G is an individual residing at
. Defendant may be served at his usual place of employment,
.
4. Defendant R H is an individual residing at
. Defendant Hambrick may be served at his usual place of employment,
.
Filed07 July 26 A11:36Charles BacarisseDistrict ClerkHarris District
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5. Defendant Encompass Security, Inc. is a Texas corporation and may be served
through its registered agent at his usual place of employment,
. Encompass Security, Inc. is joined as a nominal
defendant only on all but the claims asserted in the alternative.
6. Defendant Encompass Enterprises, Inc. is a Texas corporation and may be served
through its registered agent at his usual place of employment,
.
Jurisdiction and Venue
7. This court has original jurisdiction of the subject matter and over all parties in this
action.
8. Venue is proper in Harris County because the Defendants at all times relevant to
this action did business and committed torts in Harris County and because a substantial portion
of the acts or occurrences giving rise to the causes of action pleaded herein occurred in Harris
County. In particular and without limitation, Plaintiff has been accused of the theft of company
property in Harris County. Plaintiff has been accused of intentionally refusing to perform in
Harris Count certain legal obligations to the company regarding two company vehicles located in
Harris County. Plaintiff is accused of committing in Harris County certain acts wrongdoing with
regard to contracts relating to a job performed by the company in Harris County. The
Defendants are withholding from Plaintiff certain funds owed to him and payable in Harris
County and are further withholding his original signed share certificates, which are deliverable in
Harris County. The foregoing acts and occurrences are substantially the basis of the declaratory
judgment claims and contract claims alleged herein, but also form the basis of Defendants’
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proffered justification for violation of Plaintiff’s statutory rights to inspect documents and
oppression of Plaintiff as a minority shareholder.
Facts
9. Defendant G , Defendant H , Plaintiff, and others formed and
incorporated R2 Security and Loss Prevention Solutions, Inc. on April 21, 2004. Plaintiff
personally invested $100,000.00 in cash into the new venture, as well as his time, efforts and
expertise. The name of the corporation was changed by amendment to its articles of
incorporation to Encompass Security, Inc. on February 1, 2005. Throughout its existence,
Encompass Security, Inc. has been dominated and controlled by Defendant G and by
Defendant Ha , who control a majority of the shares and both of the two places on the
board of directors. Additionally, Defendant is the president of the corporation.
10. The business of Encompass Security, Inc. is the installation and monitoring of
alarm and security systems for commercial customers. The principal office and business of the
corporation is located in the Dallas area; however, Plaintiff and a small staff of primarily contract
employees provided services in the Houston area. In early 2007, Encompass Security, Inc. sold
its Houston operations to another company for more than $100,000 and signed a five-year
noncompete agreement prohibiting it from doing business in the Houston area. As a result of
this transaction, Plaintiff no longer had a job with Encompass Security, Inc., and (with the
knowledge and consent of the corporation) accepted employment with the buyer during the
period of transition, and has now started his own business in the Houston area.
11. Upon the sale of the Houston operations, Defendants
conspired to squeeze out Plaintiff as a shareholder. Plaintiff received absolutely nothing from
the sale of the Houston operations. Defendants refused to provide him with an accounting of the
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receipt and use of proceeds, other than an email claiming that all the proceeds had been paid to
the two defendants to reimburse them for company payables on their personal credit cards.
Defendants have also refused to provide any detailed financial information or information
regarding recent acquisitions.
12. Throughout the history of the corporation, profits have never been distributed to
shareholders by means of dividends, but have always been paid out in the form of salary and
commission. At the time of the sale of the Houston operations, Plaintiff was still owed
significant amounts of commissions and was also owed substantial expense reimbursements;
however, Defendants have failed and refused to pay those amounts in an effort to deny Plaintiff
any economic return on his investment and further to apply economic pressure.
13. Defendants’ next salvo in their campaign of oppression came on July 2, 2007,
when counsel, presumably paid with corporate funds, sent Plaintiff a demand letter attached
hereto as Exhibit A. That letter was a blatant effort to generate false issues to allow the
Defendants to gain leverage over Plaintiff to force him to abandon his investment in the
corporation. Plaintiff responded to each item raised in an effort to eliminate any basis for dispute
in a letter sent by his counsel on July 12, 2007, attached hereto as Exhibit B. On July 19, 2007,
Defendants responded in a letter attached hereto as Exhibit C.
14. In Exhibit A, Defendants falsely charged Plaintiff with the theft of tools that were
the property of the company that had been in the possession of certain contract employees in
Houston at the time of the sale. This charge was false and made in bad faith. In fact, Plaintiff
never had possession of the tools while he worked for the company and was not responsible for
them at that time. Plaintiff further did not have possession of the tools at the time the Defendants
sent the demand letter and had alerted the company to that fact a month prior to the demand
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letter. The tools had been purchased by two contract installers on a company Home Depot credit
card. The purchases were approved directly by the company, and Plaintiff had no direct
knowledge or involvement. The tools were kept by two contract employees in their trucks.
Plaintiff did not even receive an inventory of the tools to be returned until after he had already
ceased to be an employee. Nevertheless, Plaintiff cooperated and assisted in every way to make
sure that all the property was returned to the company. He inquired with the purchaser,
contacted the former contract employees, and otherwise attempted to locate the items, and was in
fact able to locate and return a few of the items. Plaintiff reiterated these facts in Exhibit B and
requested that Defendants either retract the accusation or give a reasonable legal justification for
their demand that Plaintiff pay the company the value of the tools. In Exhibit C, the Defendants
did neither.
15. Also in Exhibit A, Defendants purported to charge Plaintiff a “per diem” rental
for his use of two company vehicles in Houston. While he was an employee, the company had
leased two vehicles for Plaintiff’s use, which were paid through reductions in salary and
commissions. As part of the sale of the Houston operations, the company offered to allow
Plaintiff to keep the two vehicles provided that he have the lease transferred into his name. After
the sale and the termination of his employment with the company, Plaintiff submitted an
application with GMAC to have the vehicle leases transferred. That application was denied.
Plaintiff subsequently submitted a second application, but has received no response and has been
told that GMAC will deal only with the company on the question of the lease. All of these facts
were reported at the time to the Defendants. Nevertheless, the Defendants have done absolutely
nothing to facilitate the transfer and have refused to take back the vehicles. Furthermore, the
Defendants have claimed that Plaintiff intentionally violated his legal obligations to the company
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and are charging him a daily rental rate whereby the company would profit from his continued
possession of the vehicles. In Exhibit B, Plaintiff again explained the situation, offered to pay
any actual costs incurred by the company during the process of his applying to transfer the lease
into his name, and offered to return the vehicles if the company was no longer willing to wait,
but stated that Plaintiff had not agreed to a daily rental arrangement with the company. In
Exhibit C, Defendants maintained their outrageous position that it was Plaintiff who “failed and
refused” to transfer the lease and asserted an intention to aggressively pursue legal action against
Plaintiff.
16. In Exhibit A, Defendants further threatened legal action against Plaintiff for
signing a customer’s name to certain contracts for an installation job done in Houston prior to the
sale of the Houston operations. Plaintiff has never denied that he did this or that it was improper.
At the time, Plaintiff had a series alarm system installation jobs for a Houston customer.
Because this particular customer was a trusted friend of Plaintiff’s and because Plaintiff was
under enormous time pressure, Plaintiff filled out the paperwork on the job for his customer.
The job was then performed according to the terms of that very paperwork, and the customer
accepted and paid for the work. Afterward, Plaintiff realized that he had made a mistake and
fully disclosed the situation to the company. Defendant Gilley requested that Plaintiff obtain
signatures from the customers on those contracts. Plaintiff did so, and attached the originals of
the signed contracts to Exhibit B. Plaintiff also fully made full disclosure to his new employer,
the company that bought all the Houston business, including the jobs in question; and the new
employer expressed that he had no concern about the situation. However, despite the fact that
the job had been completely performed and paid for, despite the fact that the Houston business
had been purchased by another company, and despite the fact that the Plaintiff had complied with
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the company’s demand to rectify the mistake by obtaining actual signatures, the Defendants
refused to accept the signed contracts and stated in Exhibit C their intent to continue to prosecute
legal actions against Plaintiff.
17. Finally, in Exhibit B, Plaintiff noted that he no longer participated in company
profits through salary and commissions and, therefore, the past policy of paying out all company
profits through salary and compensation would no longer be fair going forward. Plaintiff alerted
the company that the time was appropriate for the board of directors to re-examine that past
policy or to consider the redemption of his shares. As an “outside” minority shareholder,
Plaintiff noted his need for information relating to the corporation and stated specifically that his
purposes in requesting inspection of corporate records under art. 2.44 of the Texas Business
Corporations Act was “to gain knowledge regarding the financial and operations status of the
company, the governance and ownership of the company, the nature and substance of all
transactions subject to disclosure, and the value of Mr. Garren’s shares.” The demand for
inspection complied exactly with the statutory requirements of art. 2.44, but went further to
attempt to avoid any unnecessary burden on the company by offering to change the time and date
of the inspection to some other mutually agreeable arrangement, and by stating: “I am willing to
work with you to minimize any inconvenience of this document request; provided that the
company proceeds in good faith to honor my client’s rights as a shareholder. If July 20 is not
convenient, I am willing to discuss the schedule. Also if there is some particular item that is
uniquely difficult to pull together, there is no sense in delaying the entire inspection. Please alert
me as to any particular problems, as I may be able to forgo or modify some of the requests if I
have more information about the nature of the matters and the state of the company’s records.”
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Finally, Exhibit B reiterated a request that Plaintiff had made on June 4 for the signed paper
originals of his stock certificates, a request that had been ignored by the company.
18. In Exhibit C, Defendants flatly refused to allow Plaintiff to inspect any corporate
records at any time under any circumstances in flagrant violation of the Texas Business
Corporations Act. Defendants falsely claimed that the written demand did not comply with art.
2.44. Defendants falsely claimed that Plaintiff must “demonstrate” a proper purpose and that he
did not have a proper purpose. Defendants cited their complaints and false claims against
Plaintiff as a former employee as justification for denying him his rights as a shareholder.
Finally, Defendants claimed that they were entitled to withhold all documents on the grounds
that Plaintiff was employed by a “competitor.” This last claim was particularly in bad faith
because Defendants knew that Plaintiff was at that time employed by the company that had
purchased the Houston operations and that, as a part of that transaction, Defendants Gilley and
Hambrick signed a five-year noncompete agreement that prohibited Encompass Security, Inc.
and any other company controlled by them from competing against Plaintiff’s employer.
19. Furthermore, Plaintiff has reason to believe that Defendants may have been guilty
of usurpation of corporate opportunities and acting illegally to dilute and diminish his share
interest in the corporation. In particular, in reviewing the company’s filings with the Texas
Secretary of State for the purpose of preparing Exhibit B, Plaintiff and his counsel discovered
that Defendant was the registered agent and sole director of a company named Encompass
Enterprises, Inc., which had been incorporated on February 23, 2007. While this corporation
clearly is using the name belonging to Encompass Security, Inc., so far as Plaintiff knows,
neither he nor the company has any interest in this new corporation. Plaintiff specifically
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requested information regarding this entity and other transactions in Exhibit B. The Defendants
illegally refused that request in Exhibit C.
Causes of Action
20. CAUSE OF ACTION NO. 1: Declaratory Judgment against Defendants
and with respect to Encompass Security, Inc. A justiciable dispute exists among
the parties, and Plaintiff requests this Court declare the rights, status, and other legal relations
with respect to the following matters:
a. That Plaintiff has no liability to Defendants as a result of signing a customer’s
name to certain job-related contracts by reason of absence of damages, ratification
by the customer, estoppel, and otherwise;
b. That Plaintiff has no liability or other obligation to Defendants as a result of the
lessor refusing to transfer the lease on the two company vehicles;
c. That Plaintiff has no liability to Defendants as a result of certain tools and
property of the company being lost or stolen after the sale of the Houston
operations;
d. That Plaintiff is a shareholder of Encompass Security, Inc. and the share interest
of Plaintiff;
e. That Plaintiff is entitled to possession of the original signed share certificate.
21. Attorney Fees. Plaintiff is entitled to recover reasonable and necessary attorney
fees that are equitable and just under Texas Civil Practice & Remedies Code section 37.009
because this is a suit for declaratory relief.
22. CAUSE OF ACTION NO. 2: Violation of Rights of Inspection. By their refusal
to allow an inspection of documents, Defendants violated Plaintiff’s rights to inspect corporate
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records under the common law and pursuant to art. 2.44 of the Texas Business Corporations Act.
Plaintiff is a shareholder of Encompass Security, Inc. and was a shareholder of in excess of 5%
of all outstanding shares of the company and had been a shareholder for a period in excess of six
months at the time of the written demand. Plaintiff made written demand, stating a proper
purpose, and requested inspection through his attorney at a reasonable time. Defendants refused
the demand. Plaintiff is therefore entitled to a writ of mandamus requiring the Defendants to
comply with his rights of inspection, and Plaintiff is entitled to his expenses, costs, and attorneys
fees in bringing this action to obtain redress pursuant the common law and to art. 2.44(D).
23. CAUSE OF ACTION NO. 3: Shareholder Oppression against Defendants
The conduct of Defendants constitutes shareholder
oppression. Defendants have engaged in a pattern of conduct which has in the past and will in
the future substantially defeat Plaintiff’s objectively reasonable expectations that were central to
his decision to join the venture, and further constitute burdensome, harsh and wrongful conduct,
a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its
members, or a visible departure from the standards of fair dealing and a violation of fair play on
which every shareholder who entrusts his money to a company is entitled to rely. Plaintiff is
entitled to the award of equitable remedies suitable and sufficient to redress the harm and to deter
further wrongdoing, including without limitation actual or restitutionary damages, disgorgement,
constructive trust, costs and reasonable and necessary attorneys fees, exemplary damages, and
judicially-ordered buy-out of Plaintiff’s shares at a price determined by the Court to be fair.
24. CAUSE OF ACTION NO. 4: Breach of Fiduciary Duties against Defendants
By their conduct Defendants have breached fiduciary duties owed to
Encompass Security, Inc. and to Plaintiff individually, by wrongful diminution of Plaintiff’s
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share percentage, misappropriation of corporate funds and assets, usurpation of corporate
opportunities, and otherwise. As fiduciaries, Defendants have the duty to fully and faithfully
account for all transactions involving corporate assets and opportunities and to disgorge all
profits and compensation acquired as a result of their defalcation. Plaintiff is entitled to legal
and equitable remedies on behalf of himself and on behalf of Encompass Security, Inc. pursuant
to Tex. Bus. Corp. Act art. 5.14. Alternatively, if this Court finds that justice so requires,
Plaintiff is entitled to bring this action directly as an individual action for his own benefit
pursuant to Tex. Bus. Corp. Act art. 5.14(L). Plaintiff requests that this Court order an
accounting and award actual damages, restitutionary damages, disgorgement, costs, and
attorneys fees.
25. Exemplary Damages. Defendants have committed breach of fiduciary duties
willfully, wantonly, intentionally, maliciously, and with gross disregard of the rights of others.
Plaintiff is therefore entitled to exemplary damages both individually and on the derivative
claims. Furthermore, these damages are not limited because the conduct alleged violates the
Texas Penal Code.
26. Attorneys Fees. Plaintiff is entitled to recover his expenses, including all costs
and reasonable and necessary attorneys fees, pursuant to Tex. Bus. Corp. Act art. 5.14(J).
27. CAUSE OF ACTION NO. 5: Breach of Fiduciary Duty against Encompass
Enterprises, Inc. On information and belief, Encompass Enterprises, Inc. knowing participated
in, benefitted from and conspired with Defendants to breach fiduciary
duties owed to Encompass Security, Inc. and to usurp corporate opportunities and is therefore
liable to the same extent as if it owed those fiduciary duties directly. Plaintiff, individually and
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on the derivative claims, is entitled to all remedies pleaded against Defendants Gilley and
Hambrick.
28. CAUSE OF ACTION NO. 6: Breach of Contract or Quantum Meruit against
Encompass Security, Inc. In the alternative, in the event that Plaintiff has not received full
compensation for the amounts that Defendants caused Encompass Security, Inc. to withhold as
damages or equitable relief on the above-pleaded causes of action, then Plaintiff is entitled to
recover the full amount of his compensation, commissions, and unreimbursed expenses that have
been withheld from him; or in the alternative, Plaintiff is entitled to recover the reasonable value
of the services that he rendered and that Encompass Security, Inc. accepted and the amount of
expenses he advanced on behalf of the company with the mutual understanding that he would be
paid and reimbursed, so as to prevent unjust enrichment.
29. Attorneys Fees. Pursuant to section 38.001 et seq. of the Texas Civil Practice and
Remedies Code, plaintiff is entitled to recover his reasonable and necessary attorney’s fees, costs
and expenses incurred in the enforcement of claims for services rendered and breach of an oral or
written contract. Presentment has been made.
Demand for Jury
30. Plaintiff demands a jury trial and tenders the appropriate fee with this petition.
Conditions Precedent
31. All conditions precedent to plaintiff’s claim for relief have been performed or
have occurred.
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Request for Disclosure
32. Under Texas Rule of Civil Procedure 194, plaintiff requests that defendant
disclose, within 50 days of the service of this request, the information or material described in
Rule 194.2.
Request for Production of Documents
33. Under Texas Rule of Civil Procedure 196, Plaintiff requests that Defendant
respond to this request for production of the categories of documents enumerated below within
50 days after the service of this request. Defendants must produce all requested documents for
inspection and copying as they are kept in the ordinary course of business or organized and
labeled to correspond with categories in each request. Production is to be made on the date of
the response and at the offices of Plaintiff’s counsel at the address stated herein, or at such other
date and place as the parties may mutually agree.
34. Instructions:
a. Respond in writing to each request for documents separately by listing the
documents and by describing them as defined below. If documents produced in
response to this request are numbered or otherwise labeled for production, in each
response provide both the information that identifies the document and the
document’s number.
b. For a document that no longer exists or that cannot be located, identify the
document in your response, state how and when it passed out of existence, or
when it could no longer be located, and the reasons for the disappearance. Also,
identify each person having knowledge about the disposition or loss of the
document, and identify any other document evidencing the lost document’s
existence or any facts about the lost document.
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22. All documents reflecting or relating to any claim for indemnification or
advancement of expenses relating to this litigation, and documents reflecting all
billings from and payments to attorneys relating to this litigation.
23. All photographs, film, video, or other images in your possession, custody or
control depicting Plaintiff or otherwise relating to the subject matter of this
litigation.
24. All sound recordings of Plaintiff or otherwise relating to the subject matter of
this litigation.
25. All documents relating to or referring to the value of Encompass Securities, Inc.
or its shares, including without limitation, appraisals, personal financial
statements, loan applications, and documents relating to actual or potential
purchases and sales of shares.
Prayer
37. For these reasons, plaintiff asks that Defendants be cited to appear and answer and the
court grant the following relief:
a. Declaratory Judgment;
b. Writ of Mandamus;
c. Accounting;
d. Actual Damages at law and forced buy-out, restitution, disgorgement,
constructive trust, and quantum meruit at equity;
e. Exemplary Damages;
f. Attorneys Fees, expenses, and costs;
g. Pre-judgment and post-judgment interest;
h. Such other and further relief to which Plaintiff may be justly entitled.
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Respectfully Submitted,
FRYAR LAW FIRM, P.C.
_______________________________
F. Eric Fryar
Texas Bar No. 07495770
4606 FM 1960 Rd. W., Ste 400
Houston, Texas 77069-4604
Tel. (281) 315-8860
Fax (281) 605-1888
Email: eric@fryarlawfirm.com
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