In Hotze v. In Mgmt., LLC, family members sued each other over control of a family business. No. 14-18-00995-CV, 2021 Tex. App. LEXIS 5821 (Tex. App.—Houston [14th Dist.] July 22, 2021, no pet. history). Three of the brothers ended up with greatly increased control of the company after debt the company owed to a partnership formed by the three brothers was partially converted into company stock. Id. Two other brothers and other associated parties filed two lawsuits, bringing both individual and derivative claims, which were consolidated for trial. “A key issue in the case was whether the promissory note between Troika and CECO authorized a partial conversion of debt for stock.” Id. The trial court concluded that it did, and instructed the jury to that effect. The two brothers appealed.

The court of appeals reversed, holding that that note did not allow partial conversion:

Appellees assert that these provisions unambiguously authorized a partial conversion of the note. Appellants argue the note unambiguously authorized only a complete and not a partial conversion and that the trial court erred in instructing the jury otherwise. We agree with appellants. To begin with, the note does not use the phrase or refer to the concept of partial conversion. See Tex. Bus. Org. Code §21.168 (requiring that convertible debt terms must be set forth in the debt instrument). Instead, paragraph 7 authorizes the holder (Troika) to “convert the outstanding aggregate amount of principal of this Note and unpaid interest accrued thereon into . . . common stock.” The adjective “aggregate” means “total,” “combined,” “formed by the conjunction or collection of particulars into a whole mass or sum.” The Random House Unabridged Dictionary 29 (2d ed. 1994). In paragraph 7, it is used to indicate that Troika could convert the outstanding total or combined amount of principal and unpaid accrued interest. It does not suggest Troika could convert a partial amount of the debt. Additionally, the note requires that the note itself must be surrendered to effect conversion. Paragraph 7 states, “Upon conversion, the Holder shall surrender this Note at Maker’s principal office.” Paragraph 8 provides that “conversion shall be deemed to have been made at the close of business on the date that the Note has been surrendered for conversion.” The note contains no provision for issuing a new note in the event of a partial conversion. These provisions confirm that only a complete conversion is authorized by the note.

Id. The court also emphasized that the terms must be in the note, and that the parties could not imply rights:

The outside directors additionally postulate, without explanation or citation to authority, that “if a party has the right to convert all of a note, it has the right to convert part of it.” There is no reason for this to be true. As stated, convertible debt terms must be set forth in the debt instrument. See Tex. Bus. Org. Code §21.168. There may be many reasons a borrowing corporation would not want to permit any conversion unless the entirety of the connected debt is dissolved through such conversion.

Id. The court concluded that this error of law (instructing the jury that the note allowed partial conversion) required a remand for a new trial:

They also argue that the 2018 ratification vote authorized partial conversion, even if the note or the original board resolution did not. See generally Tex. Bus. Orgs. Code §§ 21.901-.917 (governing ratification of defective corporate acts and shares). The issue, however, is not just whether the board authorized a conversion of debt to stock or later ratified such action; the issue is whether, given that Troika had no right to demand a partial conversion, when the board created and gave to Troika (a partnership wholly owned by members of CECO’s board) stock that amounted to over 96% of the outstanding voting shares in CECO in exchange for cancellation of a relatively small amount of debt ($38,503.56 in principal and $203,194.44 in interest, leaving $2,461,496.44 in principal owed), did the board members commit any torts or statutory violations? Because the jury was repeatedly instructed in the charge that the note authorized partial conversion, the jury never considered the board’s actions in light of the fact that the note did not give Troika a right of partial conversion. The trial court’s error in construing the note permeated the trial and the charge and rendered many of the jury’s findings meaningless. A remand is therefore necessary for proper consideration of the board’s actions.


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Photo of David Fowler Johnson David Fowler Johnson

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David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary…

[email protected]

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. Read More

David’s financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class action, RICO actions, usury, various tort causes of action, breach of fiduciary duty claims, and preference and other related claims raised by receivers.

David also has experience in estate and trust disputes including will contests, mental competency issues, undue influence, trust modification/clarification, breach of fiduciary duty and related claims, and accountings. David’s recent trial experience includes:

  • Representing a bank in federal class action suit where trust beneficiaries challenged whether the bank was the authorized trustee of over 220 trusts;
  • Representing a bank in state court regarding claims that it mismanaged oil and gas assets;
  • Representing a bank who filed suit in probate court to modify three trusts to remove a charitable beneficiary that had substantially changed operations;
  • Represented an individual executor of an estate against claims raised by a beneficiary for breach of fiduciary duty and an accounting; and
  • Represented an individual trustee against claims raised by a beneficiary for breach of fiduciary duty, mental competence of the settlor, and undue influence.

David is one of twenty attorneys in the state (of the 84,000 licensed) that has the triple Board Certification in Civil Trial Law, Civil Appellate and Personal Injury Trial Law by the Texas Board of Legal Specialization.

Additionally, David is a member of the Civil Trial Law Commission of the Texas Board of Legal Specialization. This commission writes and grades the exam for new applicants for civil trial law certification.

David maintains an active appellate practice, which includes:

  • Appeals from final judgments after pre-trial orders such as summary judgments or after jury trials;
  • Interlocutory appeals dealing with temporary injunctions, arbitration, special appearances, sealing the record, and receiverships;
  • Original proceedings such as seeking and defending against mandamus relief; and
  • Seeking emergency relief staying trial court’s orders pending appeal or mandamus.

For example, David was the lead appellate lawyer in the Texas Supreme Court in In re Weekley Homes, LP, 295 S.W.3d 309 (Tex. 2009). The Court issued a ground-breaking opinion in favor of David’s client regarding the standards that a trial court should follow in ordering the production of computers in discovery.

David previously taught Appellate Advocacy at Texas Wesleyan University School of Law located in Fort Worth. David is licensed and has practiced in the U.S. Supreme Court; the Fifth, Seventh, and Eleventh Federal Circuits; the Federal District Courts for the Northern, Eastern, and Western Districts of Texas; the Texas Supreme Court and various Texas intermediate appellate courts. David also served as an adjunct professor at Baylor University Law School, where he taught products liability and portions of health law. He has authored many legal articles and spoken at numerous legal education courses on both trial and appellate issues. His articles have been cited as authority by the Texas Supreme Court (twice) and the Texas Courts of Appeals located in Waco, Texarkana, Beaumont, Tyler and Houston (Fourteenth District), and a federal district court in Pennsylvania. David’s articles also have been cited by McDonald and Carlson in their Texas Civil Practice treatise, William v. Dorsaneo in the Texas Litigation Guide, and various authors in the Baylor Law ReviewSt. Mary’s Law JournalSouth Texas Law Review and Tennessee Law Review.

Representative Experience

  • Civil Litigation and Appellate Law