Disorgement 101

disgorgement memeIn Cooper v. Campbell, the Fifth Court reviewed the key principles that govern “equitable remedies such as disgorgement and forfeiture to remedy a breach of fiduciary duty” —

  • “The central purpose of forfeiture as an equitable remedy is not to compensate the injured principal, but to protect relationships of trust by discouraging disloyalty.
  • “Disgorgement is compensatory in the same sense as attorney fees, interest, and costs, but it is not damages. . . . In fact, a claimant need not prove actual damages to succeed on a claim for forfeiture because they address different wrongs. In addition to serving as a deterrent, forfeiture can serve as restitution to a principal who did not receive the benefit of the bargain due to his agent’s breach of fiduciary duty. . . .”
  • “The amount of disgorgement is based on the circumstances and is within the trial court’s discretion.”

The Court then remanded for more fulsome consideration of factors identifed in ERI Consulting Engineers v. Swinnea, 318 S.W.3d 867 (Tex. 2010). No. 05-15-00340-CV (Aug. 24, 2016) (mem. op.) On the general subject of disgorgement, other useful references from the Fifth Court are its recent opinion in Premier Pools Management Corp. v. Premier Pools Inc., and McCullough v. Scarbrough, Medlin & Associates, 435 S.W.3d 871, 904 (Tex. App.-Dallas 2014, pet. denied).

The return of Ritchie v. Rupe

After the Texas Supreme Court’s reversed the Fifth Court’s analysis of a shareholder oppression claim in Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014), it remanded for consideration of a parallel “informal fiduciary duty” claim.  On remand, the Fifth Court rejected that claims, concluding: (1) standing alone, “evidence of domination and control” by the majority shareholder would not establish the necessary duty, and (2) the various familial and business relationships between the plaintiff and the defendants were not enough to establish a relationship of trust and confidence, notwithstanding the interaction of various family trusts over the years.  Ritchie v. Rupe, No. 05-08-00615-CV (Jan. 12, 2016) (mem. op.)

All or Nothing

A series of oil and gas investments led to a lawsuit between BV Energy Partners and Richard Cheatham, the managing member of their jointly owned company, Tsar Energy II, LLC. Although Cheatham was initially required to work exclusively for Tsar II, that exclusivity provision was eliminated after the company had languished with only one investment made in three years. Cheatham continued to bring oil and gas opportunities to BV, and also made his own acquisitions, but the parties made no further investments were made through Tsar II. Cheatham’s investments proved to be far more lucrative than BV’s, which led BV to sue Cheatham for breach of fiduciary duty. The jury rejected those claims, and the Court of Appeals affirmed. The Court held that there was no charge error in asking the jury to consider whether the parties had formed a partnership to invest in “all” deals (as opposed to “any”) that Cheatham had an opportunity to acquire in the Marcellus Shale. The Court held that was a proper instruction because the justice’s review of the evidence and arguments at trial showed that BV had tried the case on an all-or-nothing theory.

BV Energy Partners, LP v. Cheatham, No. 05-14-00373-CV

Summary Judgment Affirmed for Former Judge Joe Kendall

The Dallas Court of Appeals has affirmed summary judgment in favor of former state and federal district court judge Joe Kendall and the law firm of Provost & Umphrey. The lawsuit alleged that the plaintiffs had provided Kendall with confidential information for a possible qui tam lawsuit related to the procurement practices of the Dallas and Houston Independent School Districts, and that Kendall and Provost had improperly used that information in filing a successful qui tam lawsuit on behalf of two other clients. Kendall and Provost sought and obtained summary judgment, arguing that no confidential information has been shared, that no duty of loyalty was owed or breached, that there was no evidence of an attorney-client relationship, and that there was no evidence of damages. Among other things, the Court of Appeals held that there was no evidence Kendall had intended to undertake a legal representation of the plaintiffs by meeting with one of them to discuss the “possibility” of a qui tam lawsuit, and that there was no evidence Kendall had actually disclosed any of the plaintiffs’ confidential information in connection with the lawsuit that was actually filed.

Gillis v. Provost & Umphrey Law Firm, LLP, No. 05-13-00892-CV

Flying High Again

The Court of Appeals has issued its first-ever (so far as 600 Commerce is aware) decision in a case with its own Wikipedia page. The City of Carrolton annexed a portion of a privately owned airfield, then issued a new ordinance to regulate it. The city then ordered the airport to be closed based on violations of the ordinance, which led the nearby homeowners to sue the city in an attempt to invalidate the ordinance and the closure order, plus an additional lawsuit against the owners of the airport for failing to bring it into compliance with the ordinance. The homeowners prevailed on both summary judgment and in a jury trial, and the Court of Appeals largely affirmed, albeit on a modified basis.

Among other things, the Court’s 48-page opinion held that the ordinance was not a valid exercise of the city’s police power because it did not require notice to the homeowners whose easements burdened the airport property, thereby depriving them of due process. The ordinance was also determined to be unconstitutionally vague, as its use of the term “owner” was ambiguous and its reference to TXDOT’s Model Rules and Regulations did not provide sufficient guidance to tell the “owner” of the airport how it should be operated. The owners of the airport also could not escape judgment on the jury’s verdict merely because the judge retired after the trial and his successor issued the final judgment, nor were they successful in their attempt to inject the Noer-Pennington antitrust doctrine into breach of contract and fiduciary duty claims. The Court remanded the case to the district court for consideration of additional issues based on the Court’s modifications of the trial court’s rulings.

Noell v. City of Carrolton, No. 05-11-01377-CV

No Lost Profits in the Riviera Maya

Except perhaps for emotional distress, lost profits continue to be one of the most difficult measures of damages to sustain on appeal. In this instance, Timothy Barton and two other individuals formed a corporation, JMJ Development, to develop resort properties in the Riviera Maya of Mexico. The company entered into non-binding letters of intent with both property owners and the owners of the W Hotel and St. Regis Hotel brands. Before those deals were completed, however, Barton formed a new corporation, JMJ Hospitality, and the record included evidence that he instructed the landowners to deal with the new company instead of JMJ Development. The jilted business associates sued for breach of fiduciary duty, breach of their shareholder agreement, tortious interference, and conspiracy. The jury returned a verdict of $7 million for past lost profits on the fiduciary duty claim and $3 million in future lost profits on the breach of contract claim.

The Court of Appeals reversed and rendered, concluding that there was insufficient evidence the original company ever had the ability to develop the properties in the first place. Although they had multiple letters of intent, the evidence showed those letters had expired of their own terms, and there had never been any binding contracts for the purchase or development of the properties. The meant there was no causation for the lost profits claimed by Barton’s former business owners. The plaintiffs also failed to account for subsequent events — namely, the economic recession that started after Barton formed his new company — and that failure rendered their lost profits model speculative and not reasonably certain. The plaintiffs also confused projected items of income as profits, without properly accounting for associated expenses. Without any reliable, non-speculative evidence of the plaintiffs’ lost damages, the Court of Appeals reversed the jury’s verdict and the trial court’s judgment.

Barton v. Resort Dev. Latin Am., Inc., No 05-11-00769-CV

All Independent Grounds

Attorney Robert Collins was sued by his client, Chris Green, for professional negligence and breach of fiduciary duty.  Green claimed that Collins had failed to serve the defendant in the underlying lawsuit, thereby allowing that case to be dismissed for want of prosecution.  As a result, Green’s claims became time-barred.  Collins filed an answer to Green’s lawsuit, but failed to appear at trial. Green testified in support of his claim, and the trial court granted a default judgment for $31,500.  The trial court subsequently denied Collins’ motion for new trial, and Collins appealed.

On appeal, Collins argued that the judgment had to be reversed because Green had failed to prove that he could have collected on any judgment in the underlying lawsuit.  But while that complaint may have been accurate, the court of appeals saw no need to reach it because Collins had failed to brief anything about Green’s breach of fiduciary duty claim.  That meant that he had failed to attack all independent grounds supporting the judgment, resulting in affirmance of the case.

Collins v. Green, No. 05-11-00893-CV

Duty to Treat Partner Fairly Ended When He Was Fired

The members of a limited partnership entered into a partnership agreement providing that they would each relinquish their partnership interest if they departed involuntarily.  The agreement also provided that while no payment was required, the remaining partners could still decide to make a payment to the involuntarily departing partner.  In late 2008, two of the three partners decided to terminate Arvid Leick.  The remaining partners initially offered to pay him in excess of $300,000, but Leick insisted on almost twice that amount.  The partnership and the remaining partners then filed suit seeking a declaratory judgment that Leick had been involuntarily terminated and that they therefore did not owe him anything at all.  Leick counterclaimed.  The jury found that Leick’s termination had been involuntary, but that he still should have been paid what the remaining partners had originally offered.  The trial court reduced the award to $125,000, but still entered judgment in favor of Leick.

On appeal, the partnership claimed that the trial court had erred by improperly instructing the jury that the remaining partners had an obligation to treat the involuntarily terminated partner fairly and reasonably.  The court of appeals reversed and entered a take-nothing judgment against Leick, holding that this instruction was contrary to the plain language of the partnership agreement, which left it up to the remaining partners whether an involuntarily departure would lead to any payment at all.  Although the Texas Revised Partnership Act does require partners to be fair and reasonable to one another, that could not serve as the basis for the jury instruction because Leick was no longer a partner after the day he was terminated.  The court of appeals likewise sustained the trial court’s directed verdict against Leick on his claim for breach of fiduciary duty, since that claim also focused on the other partners’ treatment of him after he was terminated, and there was no fiduciary duty for the parties to remain partners with one another.  Finally, the court vacated the trial court’s award of attorney fees to Leick, but noted that he still might still be able to recover fees on remand under the Declaratory Judgments Act, even though he was no longer the prevailing party.

LG Insurance Management Services, LP v. Leick, No. 05-10-01646-CV

Kiger v. Balestri

The court affirmed summary judgment in favor of the defendant on a breach of fiduciary duty claim. Balestri was a lawyer who left his practice to become CFO of an internet company. Balestri’s friend Kiger later contacted Balestri to ask about certain industry contacts that Kiger believed could help him to implement a new business idea. Kiger’s business never materialized. Balestri subsequently invested in a business in the same industry, and Kiger sued for breach of fiduciary duty. Kiger alleged that Balestri acted as his attorney and then revealed his confidential and trade secret information to the new business. The trial court granted both traditional and no evidence summary judgment against Kiger. The court of appeals affirmed, holding that despite Kiger’s contention that an implied attorney-client relationship existed between him and Balestri, no evidence of such a relationship existed in the record. Additionally, even if Kiger believed that such a relationship formed, one party’s subjective beliefs are not evidence of an implied attorney-client relationship.

Kiger v. Balestri, 05-10-01308-CV

Fair’s Fair

The court issued a significant ruling related to the remedy for shareholder oppression, holding that the equitable relief of a “fair value” buy-out was not precluded by a provision in an Agreement mandating a “book value” buy-out. Joubran, the sole shareholder of a cardiac perfusion company, hired Hughes, sold him 10% of the corporation’s outstanding shares, and entered into an Agreement requiring Joubran to purchase Hughes’s stock at book value upon the severance of his employment. Years later a dispute arose, Hughes was terminated, and Hughes sued Joubran for shareholder oppression. The trial court held that that Joubran engaged in shareholder oppression and awarded Hughes what the jury found to be the fair value of his shares in the company.

On appeal, Joubran argued that the trial court should have calculated the value of the shares based on their book value as required in the Agreement because a party to a contract generally cannot recover equitable relief inconsistent with that contract. But the court held that the trial court had the equitable power to order a buy-out at fair value because the book value of Hughes’s shares was reduced by Joubran’s oppressive conduct and, additionally, Hughes was not suing for breach of contract. This holding squares with the court’s recent decision in Ritchie v. Rupe that the “enterprise value” method for determining stock’s fair value, i.e. determining the pro rata value of each share without any discount based on the stock’s minority status or marketability, is appropriate in shareholder oppression suits when the oppressive conduct of the majority forces a minority shareholder to relinquish his ownership position. 339 S.W.3d 275, 289 (Tex. App.—Dallas 2011, pet. filed)

As a secondary issue, the court addressed whether a shareholder that exercises dominating control over a corporation owes a formal fiduciary duty to the minority shareholders. In its verdict, the jury found that no informal fiduciary duty existed between the shareholders, but nonetheless found that Joubran breached a fiduciary duty to Hughes and awarded Hughes almost $2 million in actual and exemplary damages. The trial court declined to render judgment in favor of Hughes, who argued on appeal that the trial court should have disregarded the first jury finding because, under the circumstances, Joubran owed Hughes a formal fiduciary duty. The court disagreed, citing numerous Texas cases to the contrary and noting that the Texas Supreme Court expressly declined to recognize such a duty in Willis v. Donnelly, 199 S.W.3d 262, 276 (Tex. 2006).

Cardiac Perfusion Services, Inc. v. Hughes, No. 05-10-00286-CV