THE HONORABLE MARK DAVIDSON

770 South Post Oak Lane, Suite 410

Houston, Texas 77056

Mr. Rick Hawks

Mr. Michael Boltz

\1r. William Luck

near Counsel:

This matter was submitted to me as an arbitrator under the rules of the American
Arbitration Association. Both parties presented evidence and post submission briefs. This letter
is the award ofthe arbitrator. A reasoned ruling was requested, and the reasons for the findings I
make are included.
This is a dispute between two shareholders of a small business, Enviro-Grow Nursery,
Inc .. Claimant, .luan Rueda (herein ""Claimant") owns forty-nine percent of the stock.
Respondent Randall Holland (herein "Respondent") owns fifty-one percent of the stock. The
business apparently prospered for many years before the downturn in the national and local
economy in 2008. At some point after that, the profitability of the company declined. Their
business and personal relationship apparently also suffered. At some point, the Petitioner claims
the Respondent told him that he would need an army of lawyers and that he would take away
,'verything in the business. After that happened, this claim ensued.
Alleging a variety of cau..<:es of action, Claimant has plead that Respondent has used his
position as majority shareholder, president of the board of directors and president of the
company to reduce the value of his equity interest as a sharehQlder. He acknowledges the
existence of the "business judgment rule", but argues that the actions taken by Respondent are so
outside the pale of that rule that it is inapplicable. Specific actions taken by the Respondent the
Claimant argues were actionable arc;
I) Overcompensation of Respondent. For many years, the stated salary of the parties
was constant. Claimant made $1,000.00 a month and Respondent made considerable
more. This was not claimed to be inappropriate, since Claimant was only expected to
work on a part time basis, and worked the rest of the time in a business venture he
owned alone. After two management level employees left the company in 2009, the
Respondent took over some of their assignments. This was appropriate, since the
company was not making enough money to justify the hiring of new employees. The

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 problem is that as the company's financial fortunes have continued to decline, the
Respondent has, at the very least, maintained the same level of compensation and in
some ways has increased it. The respondent's salary as a percentage of gross income
was almost doubled in the last five years, assuming the Company's books are corree/.
At a time in which the company's income and profits are in a steep decline, this is
inappropriate. The effect of five years' worth of these payments has been to shrink
the Claimant's equity interest in the company substantially. Ordinarily, I would think
the compensation of the chief officer of a company would fall within the business
Judgment Rule. In this case, however, the President/CEO raised his salary as the
company's fortunes declined
I acknowledge evidence that the salary is appropriate. First, the Plaintiffs expert
witness said it was, although he was short on specifics. The problem is that the
Plaintiff was apparently keeping two sets of books, and the Plaintiffs expert waS only
offered an 0Ppoltunity to see one ofthem. When you count the company-<>wned
truck the Respondent decided to give himselffor extra work he thought he was doing,
his level of compensation goes up considerably. The expert was not advised of this
form of compensation. Nor was the expert advised of the quaint practice of pocketing
cash sales. Whether his testimony would have been the same if he knew of that
additional compensation is unknown. It is telling that the Plaintiff was paying
himself handsomely for the additional work he was doing. but offered his bookkeeper
and co-owner substantially less amounts for doing additional work.
2) Conversion of Corporate Property to the Respondent. The evidence is a mixed
bag.
a. The golf cart. The company owned a number of golf carts, which they used
to take employees and customers around the property try to sell or retrieve
plants and trees. Apparently one of the carts was used by the Plaintiff. This is
not a major problem. However, he went on and converted the property to his
own name. The taking 0 f the value of a used golf cart is not a crime against
nature. It is symptomatic of a trend of converting corporate assets to his
ownership.
b. The cash sales. When the Claimant bought plants from the company, he and
the Respondent had negotiated that he would get them at half price.
Apparently, the company made less money, although they did make a profit,
on such sales. This was known to both parties. The Claimant paid cash. The
Respondent would pocket the cash. This was not known to both parties. As a
matter of law, this is taking property from the company without the
knowledge or consent of his co-owner.
c. The truck. The company paid for a Ford F250 truck, whieh was used for
company business. The title to the car was transferred to the Respondent.
The deed to this transaction was signed by the Respondent, deeding it to
himself. He did not intorm his co-owner of this transaction. It was recorded
in a separate ledger that he did not show to his co-owner or to his expert
witness as "extra compensation." Who was the judge of the value of his extra
compensation? Himself. Did he report his extra income to the IRS?
Apparently not.

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 Respondent argues that Claimant purchased trucks from the company.as well.
The huge distinction here is that the purchase of those trucks was agreed J() by
bOlh shareholders. and that the corporation received money from the
transaction. Was the sale of the two trucks done for fair maJi(et value? J
heard no evidence one way or the other. The fact that the sales to the Claimant
ere agreed to by the Respondent is persuasive, if not conclusive. In the case
of the F250 truck, Respondent paid no money into the company, and did not
tell his co-shareholder of the transaction. That is a distinction and a difference
from Lhe purchase of the two trucks.

Respondent further argues that the truck was extra considemtion tor the extra
work he was doing. This begs all sorts of questions. First - what independent
valuation did he get before the transfer of the truck tor this extra
consideration? (Answer - no evidence presented - from which I presume
none.). Second - What extra cOllsideration did he offer other employees for
the extra work they were doing (Answer - much, much less were paid or
offered to the Claimant and the bookkeeper.) Third - in selling a company
asset to himself without any increase in the company's cash on hand, is this
not stripping the company of equity as a matter of law? (Answer - yes)

d. The Country Club Membership. This falls squarely within the Business
Judgment Rule. The evidence is that it is used for business entertainment. No
evidence was presented of excessive personal use.
e. The Grimes County Tree farm. This was, by far, the largest physical asset
of the company. The question of whether to sell led to a significant
disagreement between the panies. The Respondent advocated "shrinking the
company in order to grow the company." The problem is that after he shrunk
the company, he paid virtually all of the money to himself and his family, and
the company grew not at all.
L The Boat. This was clearly a marketing concept by making an
accommodation to a good customer. It is well within the business judgment
rule.

3) Increase in Rent Payments. The Respondent has raised the rent the company pays
him to rent property he owns. The company has rented the property for a number of
years, and rent was the same until the Respondent removed the Claimant from the
board of directors ofthe company. Since then, he has gradually raised the rent every
year. The evidence establishes that rent is now a much higher percent of gross
income than it was before the disagreement between the parties. There is no question
that the Respondent is the beneficiary ofthis increase, and that the company has
received no benefit from the increase oFrenlS. Nonetheless, since rents are within
market rates, I am (barely) unable to find a violation of the law on this portion of the
complaint.
4) Summary. I find that the Respondent breached his duties to his co-shareholder. J
find that he decreased the equity of the company, and that much, but not all, of the
diminishment in net equity of the company was converted to his personal use. To the
extent to which assets were converted 10 his personal benefit to provide him extra

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 compensation for extra work he has doing, I find that he failed to act as a fiduciary
should to his co-shareholder, and that his determination of the value of his extra work
was not based on acceptable or customary standards of corporate compensation. To
the extent to which he used corporate equity to pay himself and his family back for
loans, he failed to consider all corporate responsibilities in making a decision that
helped only himself.
5) Damages. This is trickier. The business was losing money when the Respondent
started taking its net equity. He accelerated its loss of shareholder equity. Some of
the things he did were within the business judgment rule. The decision to continue
the business was certainly within the business judgment rule. My ruling is to give the
Claimant 49% of the value of the Ford Truck, the equity in the Grimes county tree
fann and the golf cart, offset by 49% of the amount of the settlement of the suit
brought against the corporation by Amegy Bank. By my calculation that comes to
$74,572.36. In addition to that, I award prejudgment interest at the legal rate, court
costs, and, if applicable, fees of arbitration.
6) Conclusion. Neither ofthe parties are evil people. lbey had a faIling out. It
happens. If the Respondent had chosen to buyout the Claimant, none of this would
have happened. Instead, he tried to reduce the Claimant's equity to nothing. Now, he
owes him this money and Mr. Rueda is still a shareholder. Perhaps they can work
together to either wind down the company or to let it grow again. I hope so. In the
meantime, a judgment consistent with this ruling should be submitted to the Court as
soon as possible.
Thanks to all for the opportunity to serve.

Respectfully submitted,

MARK DAVIDSON

MD/ms

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