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Apmd Holdings, Inc. v. Praesidium Medical Professional Liability Insurance Co.

Court of Appeals of Texas, First District

June 28, 2018

APMD HOLDINGS, INC., APMD, INC., CJT FINANCIAL INC., CJT MINING, INC., GREGORY MAYFIELD AND NEWELL FRED ANDERSON, Appellants
v.
PRAESIDIUM MEDICAL PROFESSIONAL LIABILITY INSURANCE COMPANY AND PRAESIDIUM ALLIANCE GROUP, LLC, Appellees

          On Appeal from the 113th District Court Harris County, Texas Trial Court Case No. 2012-21802

          Panel consists of Justices Keyes, Brown, and Lloyd.

          OPINION

          Evelyn V. Keyes Justice.

         In this case, appellees, Praesidium Medical Professional Liability Insurance Company ("PMPLIC" or "the insurance company") and Praesidium Alliance Group, LLC (collectively, "Praesidium"), sought to establish a medical malpractice liability insurance company incorporated in Delaware. Praesidium signed a "Memorandum of Agreement" with appellant APMD Holdings, Inc., which required, among other things, that APMD Holdings contribute 10 million shares of convertible preferred stock of Anderson Mining Corporation to serve as capital surplus for the insurance company. After the Delaware Department of Insurance ("DDOI" or "the Department") failed to approve the licensure of the insurance company, Praesidium sued APMD Holdings, Inc., APMD, Inc., CJT Financial, Inc., CJT Mining, Inc., Gregory Mayfield, and Newell Fred Anderson (collectively, "APMD") for breach of contract, fraud, and breach of fiduciary duty. After a bench trial, the trial court awarded $4, 081, 710 in damages to Praesidium, along with $342, 000 in attorney's fees, post-judgment interest, and costs.

         In six issues, APMD contends that (1) the trial court abused its discretion in granting final judgment against the defendants and finding that the Memorandum of Agreement was a valid and enforceable contract; (2) the Memorandum of Agreement was not breached by any party; (3) Praesidium Alliance Group did not suffer any damages; (4) the trial court abused its discretion in awarding legal damages; (5) the evidence was insufficient to establish fraud; and (6) the evidence was insufficient to establish breach of fiduciary duty.

         We affirm.

         Background

         Gary Schneidmiller, the chief executive officer of Praesidium Alliance Group ("Praesidium Alliance"), has worked in the insurance industry since the early 1970s, and he has extensive experience with medical malpractice insurance and insurance in the health-care context. In the early 2000s, he brought together experts from the medical, legal, and actuarial fields to create the Praesidium Guild, which had the goal of using a particular underwriting model to make medical malpractice insurance policies and premiums more equitable. Praesidium Alliance, an Ohio limited liability company, was formed out of the Praesidium Guild, and its ultimate goal was eventually to create an insurance company-PMPLIC-that would use Schneidmiller's underwriting model.

         In preparation for creating PMPLIC, Schneidmiller consulted with numerous professionals in different fields, including legal experts, actuaries, incorporators, and experts concerning the Delaware insurance statutes. The only thing that Schneidmiller was missing was a source for the insurance company's capital surplus, a "long-term reservoir," which was required by the state to assure that the company's policyholders would be protected.

         Around 2005 or 2006, Schneidmiller was introduced to Gregory Mayfield, one of the appellants in this case, who had business and financial experience. Mayfield became friends with both Schneidmiller and his son, Eric Schneidmiller, and Mayfield worked toward securing financing for the insurance company's capital surplus. Mayfield became the chief executive officer of APMD Holdings, a mining company that, along with APMD, Inc., owned mining claims, primarily for gold and silver, on land in Nevada. Fred Anderson was the president of these companies. In August 2007, Mayfield notified the Schneidmillers that he had discovered a mechanism that could work for supplying the capital surplus: using convertible preferred shares of a corporation that could be redeemed by the corporation for cash if the insurance company needed to access its capital surplus. In a letter dated August 13, 2007, Mayfield told Eric Schneidmiller, Praesidium Alliance's chief operating officer, that because preferred stock is considered liquid securities, this financing scenario should be acceptable, "but we will need to have the approval of the State Insurance Commission before moving forward with this transaction."

         Two weeks later, on August 27, 2007, Mayfield sent the following letter to Eric Schneidmiller:

This shall confirm our oral agreement between us and Praesidium Alliance Group, LLC. . . .
It is our intent to merge the respective resources with Praesidium Alliance Group, LLC to result in Praesidium Medical Professional Liability Insurance Company or such names as secures regulatory approval, which will be a Public Company with initial ownership at fifty-one percent (51%) PAG, LLC and forty-nine (49%) us. We shall provide Praesidium Medical Professional Liability Insurance Company with ten million (10, 000, 000) shares of Convertible Preferred Stock at a par value of five U.S. dollars ($5.00) from Anderson Mining Corporation [APMD Holdings] as designated "Capital Surplus" of Praesidium Medical Professional Liability Insurance Company. The net assets (assets in excess of Liabilities) of Anderson Mining Corp. exceed fifty million U.S. dollars ($50, 000, 000) by many multiples and we shall entertain any reasonable assurances required by the responsible regulatory agency charged with supervision of Praesidium Medical Professional Liability Insurance Company, on or before the registration.
If all parties, including the regulatory agencies are in agreement, we shall commence the process of doing the formalities of the Stock issuance in the first week of October 2007. Our aim is to match Praesidium Alliance Group, LLC's target of commencing operations of Praesidium Medical Professional Liability Insurance Company this year.

         Gary Schneidmiller testified that, upon being presented with Mayfield's August 2007 proposal, he researched APMD's business plan, the geologists who had certified the mining deposits, APMD's support staff, which included a prominent Houston law firm, and APMD's financial statements, which showed "2.2 billion on their books" and indicated that this amount would increase over time because APMD Holdings was still acquiring mining rights. Schneidmiller and his team at Praesidium Alliance were "satisfied that APMD was legitimate and that this was a legitimate offer." Schneidmiller had discussions with Anderson, in which Anderson told him about APMD's plans for a "very large acquisition" in the near future, and Praesidium Alliance ultimately decided to move forward with Mayfield's proposal.

         On December 21, 2007, Schneidmiller, on behalf of Praesidium Alliance, and Mayfield, on behalf of APMD Holdings, signed a "Memorandum of Agreement" ("the Agreement"). The Agreement stated:

Whereas, the ALLIANCE and APMD on August 27, 2007 agreed to merge their respective resources (as outlined in paragraph 2.A) to result in Praesidium Medical Professional Liability Insurance Company (hereinafter "CORPORATION"); and,
Whereas, The CORPORATION is being prepared for incorporation in the State of Delaware as a stock company (C-Corporation); and,
Whereas, the ALLIANCE and APMD wish to reduce to writing therein various oral agreements and written assurances to each other;
NOW, THEREFORE, the parties do mutually agree to the following provisions as the sole shareholders, namely ALLIANCE and APMD of the CORPORATION.

         The parties agreed that PMPLIC's certificate of incorporation would authorize PMPLIC to issue twenty-five million shares of common stock. PMPLIC would issue 12, 240, 000 shares to Praesidium Alliance for its contribution of "Intellectual Properties" and 11, 760, 000 shares to APMD Holdings for its contribution of "10 Million shares of convertible Preferred stock at a par value of $5 of Anderson Mining Corporation." The agreement stated that APMD Holdings' "contribution is to serve as 'designated Capital Surplus' (herein meaning not to be used or encumbered by the CORPORATION for operational expenses, and additionally as defined and interpreted by the Delaware Department of Insurance)" and that APMD Holding could, at any time, redeem all or part of the shares at $5.00 per share.

         The Memorandum of Agreement also specified that Praesidium Alliance would elect three members to serve on PMPLIC's Board of Directors-Gary Schneidmiller, Eric Schneidmiller, and Dr. Robert Felter, who would serve as the "resident director" in accordance with Delaware Department of Insurance requirements-and APMD Holdings would elect two members to serve on the Board-Mayfield and Anderson. The Agreement also included provisions stating that Praesidium Alliance "agrees and acknowledges that a condition of the contribution by APMD to the 'designated Capital Surplus' is to eventually result in the CORPORATION qualifying to be a public company and supports this as a strategic objective of the CORPORATION" and that the Memorandum of Agreement "is the full and complete agreement of the ALLIANCE and APMD as shareholders of the CORPORATION and all other matter[s] not expressly stated herein shall not be construed to be subject to this memorandum of agreement."

         PMPLIC was incorporated in Delaware on December 27, 2007. The Certificate of Incorporation provided that PMPLIC would have authority to issue twenty-five million shares of stock. The five individuals mentioned in the Memorandum of Agreement-Gary and Eric Schneidmiller, Dr. Felter, Mayfield, and Anderson-were all elected to PMPLIC's Board of Directors. By unanimous consent, PMPLIC's Board of Directors approved the issuance of 12, 240, 000 shares of stock to Praesidium Alliance in exchange for "Intellectual properties and 'Trade Secret' knowhow, including insuring systems and processes," $100, 000 cash, and "such future cash as may be required by the Delaware Department of Insurance up to $1, 000, 000." The Board also approved the issuance of 11, 760, 000 shares of stock to APMD Holdings in exchange for 10 million shares of convertible preferred stock, $5.00 par value per share of Anderson Mining Corporation "as designated Capital Surplus as more fully described in the 'Memorandum Agreement of the Shareholders' effective December 21, 2007." On December 28, 2007, APMD Holdings issued a stock certificate reflecting that it had issued ten million shares of convertible preferred stock, $5.00 par value, to PMPLIC. PMPLIC, in turn, issued a stock certificate on December 31, 2007, reflecting that it had issued 11, 760, 000 shares to APMD Holdings.[1]

         Gary Schneidmiller testified that PMPLIC could not have obtained a license to sell insurance without having capital surplus in place and that, as of the end of 2007, he believed APMD Holdings had issued its stock certificate in good faith and that "those 10 million shares had a $5 par value," thus establishing a $50, 000, 000 capital surplus. Having incorporated PMPLIC, Praesidium moved forward with its attempt to obtain a license for PMPLIC with the Department, and it made a submission to the Department in February 2008. As part of its submission, PMPLIC had to demonstrate that it had a sufficient capital surplus, and it notified the Department that its ten million convertible shares in Anderson Mining Corporation, worth $5.00 per share upon redemption by the company, would serve as its capital surplus.

         During the licensing process, the Department contacted Praesidium and requested audited financial statements from APMD Holdings. Praesidium passed this request on to APMD Holdings. Schneidmiller testified that the Department officials "wished to have confirmation directly from APMD that [it] had the assets and that the 50 million [capital surplus] was established." He also stated that the Department made inquiries concerning ...


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