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Mike A. Hatchell Direct Telephone: 512-305-4752
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December 31, 2015

The Hon. Pam Estes, Clerk Twelfth Court of Appeals 1517 West Front Street, Suite 354 Tyler, Texas 75702

Re: No. 12-14-00288-CV; J. Mark Swinnea v. ERI C onsulting Engineers, Inc. and Larry Snodgrass ; In the Twelfth Court of Appeals

Dear Ms. Estes:

Subject to the accompanying motion fo r leave to file this post-argument letter brief, the Appellees appreciate your forwarding the following to the Court:

At the oral argument of this case on November 17, 2015, the Court asked if there was further authority on the issue of whether sums disgorged in equity for breach of fiduciary duty can be characterized as punitive damage s and then, in this case, combined with the specific award of punitive damages for purposes of analyzing the “proportionality” element under a United States Constitution “due process” analysis.

After the argument, Appellees researched the issue further nationwide and in

Texas. Additional authorities identified from that research and elsewhere are supplied in the following charts:The Hon. Pam Estes, Clerk December 31, 2015 Page 2

N ON -T EXAS A UTHORITIES :

§43, Restatement (Second) of Torts, cmt. “When the compensation of the trustee is reduced or denied, the reduction or

denial is not in the nature of an additional penalty for the breach of trust but is based upon the fact that the

trustee has not rendered or has not properly rendered the services for which compensation is given,” as quoted in

Burrow v. Arce , 997 S.W.2d 229, 238 (Tex. 1999).

Turnbow v. Life Partners, Inc., No. 3:11-CV-1030-M, 2013 WL 3479884, at *18 (N.D. Tex. July 9, 2013). “Disgorgement wrests ill-gotten gains from the hands of the wrong-doer” and

is intended to be “remedial and not punitive.”

S.E.C. v. Koenig, 532 F. Supp. 2d 987, 994 (N.D. Ill. 2007), a ff'd in part and remanded, 557 F.3d 736 (7th Cir. 2009). “The SEC has also established by a preponderance of the evidence that it is entitled to disgorgement. Disgorgement is an equitable, not a punitive remedy and should be fashioned so as to deprive Koenig of the unjust enrichment he

derived from his securities violations. Lipson , 278 F.3d at 664. The disgorgement figure calculation is discretionary and need not be exact. SEC v. First Jersey Secs. Inc. , 101 F.3d 1450, 1474-75 (2d Cir. 1996). Ambiguity relating to the calculation should be resolved against Koenig. SEC

v. Lorin , 76 F.3d 458, 462 (2d Cir.1996).The Hon. Pam Estes, Clerk December 31, 2015 Page 3

U.S. S.E.C. v. Blackwell , 477 F. Supp. 2d 891, 915 (S.D. Ohio 2007). “Defendants argue that this court may offset a criminal fine against a disgorgement order if it finds that the

criminal fine either served the same purpose as the requested disgorgement,

or that the criminal fine was intended to be, at least in part, restitutionary in nature. In support of these propositions, Defendants rely on SEC v. Monarch Funding Corp. , 1996 WL 348209 at *10, 1996 U.S. Dist. LEXIS 8756 at *35 (S.D.N.Y. June 24, 1996). In Monarch

, the SEC sought disgorgement in the amount of $1,566,000 against defendant Bertoli (“Bertoli”) even though in a prior criminal action, Bertoli was assessed a $100,000 cr iminal fine. The court rejected Bertoli’s contention that disgorgement would violate the constitution’s prohibition against double jeopardy because disgorgement is not punitive in nature. Id . at 1996 WL 348209 at *10, 1996 U.S. Dist. LEXIS

8756 at *34.

F.T.C. v. Febre

, 128 F.3d 530, 537 (7th Cir. 1997). “[D]isgorgement is designed to be remedial and not punitive. Rowe v. Maremont Corp. , 850 F.2d 1226, 1241 (7th Cir. 1988). “[D]isgorgement does not penalize, but merely deprives wrongdoers of ill-gotten gains.” CFTC

v. Hunt , 591 F.2d 1211, 1222 (7th Cir. 1979). As an equitable remedy, disgorgement is meant to place the deceived consumer in the same position he would have occupied had the sellerThe Hon. Pam Estes, Clerk December 31, 2015 Page 4

not induced him to enter into the transaction. Disgorgement also prevents the defendant from being unjustly enriched by his fraud. Randall v. Loftsgaarden , 478 U.S. 647, 671–72, 106 S.Ct. 3143, 3157–58, 92 L.Ed.2d 525 (1986).

T EXAS A UTHORITIES :

International Bankers Life Ins. Co. v. Holloway , 368 S.W.2d 567, 584 (Tex. 1963).  “[A] recovery of the consideration paid as a result of fraud constitutes actual damages, and will serve as a basis for recovery of exemplary damages.” Id . at 583 (quoting Briggs v. Rodriguez , 236 S.W.2d 510 (Tex. Civ. App.—San Antonio 1951, writ ref’d n.r.e.) (emphasis added).

 “It is consistent with equitable principles for equity to exact of a defaulting corporate fiduciary not only the profits rightfully belonging to the corporation but an additional

exaction for unconscionable conduct.” (Emphasis added).

Nabours v. Longview Savs. & Loan

Ass’n , 700 S.W.2d 901 (Tex. 1985). “[W]here equity requi res the return of property, this ‘recovery of consideration paid as a result of fraud constitutes actual damages and will serve as a basis for the recovery of exemplary damages.’” Id . (quoting Holloway , 368 S.W.2d at 568).The Hon. Pam Estes, Clerk December 31, 2015 Page 5

In the Estate of Preston , 346 S.W.3d 137 (Tex. App.—Fort Worth 2011, no pet.). “While the mere grant of injunctive relief will not support an award of punitive damages, the supreme court has recognized a ‘ recovery of property ’ exception to the rule requiring the recovery of actual damages , noting that ‘where equity requires the return of property, this ‘recovery of the consideration paid as a result of fraud constitutes actual damages and will serve as a basis for the recovery of exemplary damages.’” Id . at 169-770 (quoting Nabours , 700 S.W.2d at 904- 05). (Emphasis added.)

Scott v. Sebree , 986 S.W.2d 364, 368 (Tex. App.—Austin 1999, pet. denied). “We do not believe that by using the term ‘actual damages’ in [the statutory fraud context] the legislature intended to preclude a defrauded party from utilizing an appropriate equitable

substitute for out-of-pocket or benefitof-the-bargain damages.” (Emphasis added)

Lesikar v. Rappeport , 33 S.W.3d 282 (Tex. App.—Texarkana 2000, pet. denied). “[T]he Supreme Court has authorized the recovery of punitive damages in actions sounding in equity, even where

there is no award of typical actual damages .” Id . at 310 (citing Nabours ; later discussing and quoting from Holloway , 368 S.W.2d at 584). (Emphasis added.)The Hon. Pam Estes, Clerk December 31, 2015 Page 6

Procom Energy, L.L.A. v. Roach , 16 S.W.3d 377, 385 (T ex. App.—Tyler 2000, pet. denied). Rejecting an argument that “the recovery of actual damages is a prerequisite to an award of exemplary damages: “Note 3 of the Nabours opinion authorizes punitive damages where these damages are incident to equitable relief when it involves the return of property.” Id . “The ‘return of property’ exception, however, is not as

narrow as Nabours seems to imply. In International Bankers Life v. Holloway

, 368 S.W.2d 567, 584 (Tex. 1963), the court sanctioned the recovery of punitive damages in an equitable action in which the plaintiff sought to recover usurped corporate profits.” Id . “Thus,

under the Holloway opinion, we

conclude that punitive damages may be recoverable where equitable relief is granted and the promised interest has not been conveyed, despite the absence of jury findings of actual damages.” Id

.

In re Longview Energy Co. , 464 S.W.3d 353, 361 (Tex. 2015). Quoting Burrow v. Arce for the proposition that “equitable forfeiture ‘is not mainly compensatory ... nor is it mainly punitive’ and ‘cannot ... be measured by ... actual damages’” and also holding: “[d]isgorgement is compensatory in the same sense attorney fees, interest, and costs are, but it is not damages.”The Hon. Pam Estes, Clerk December 31, 2015 Page 7

Ex parte Ward , 964 S.W.2d 617 (Tex. Crim. App. 1998) (en banc). “Until recently, the federal courts were

at odds as to whether federal forfeiture

under the civil statutes constituted ‘punishment’ as to which the Double Jeopardy Clause of the Fifth Amendment applied. However, the United States Supreme Court recently resolved this confusion by concluding

federal civil forfeitu res do not constitute ‘punishment’ for purposes of the Double Jeopardy Clause because they are civil

in rem proceedings which are neither punitive nor criminal in nature.” Id . at 625-26 (citing United States v. Usery

, 518 U.S. 267 (1996)).

2007 Infiniti G35X Motor Vehicle, VIN

JNKBV61E17M708556 v. State , No. 06- 13-00057-CV, 2014 WL 991970, at *1 n.1 (Tex. App.—Texarkana Mar. 13, 2014, no pet.). “Traditional civil forfeitures, in rem proceedings, are not considered punishment or fines and thus are not subject to the Eight Amendment’s prohibition against excessive fines.”The Hon. Pam Estes, Clerk December 31, 2015 Page 8

These additional authorities confirm th at disgorgement is a remedy, not punishment, with the disgorged sums acting as an “additional exaction” for actual damages that are difficult to prove becaus e of the nature of the wrong. As such, disgorged sums cannot be moved to the other side of the equation for a “due process” analysis under the proportionality criterion adopted in the United States Supreme Court cases

Respectfully submitted,

L OCKE L ORD LLP

/s/ Mike A. Hatchell

Michael Austin HatchellThe Hon. Pam Estes, Clerk December 31, 2015 Page 9

C ERTIFICATE OF S ERVICE

I certify that on December 31, 2015, a tr ue and correct copy of the foregoing

was e-served via EFileTx.gov upon the following counsel of record:

Gregory D. Smith

Nolan Smith gsmith@rameyflock.com nolans@rameyflock.com Ramey & Flock, P.C. 100 E. Ferguson, Suite 500 Tyler, TX 75702 Michael E. Gazette megazette@suddenlink.com

Law Office of Michael E. Gazette 100 E. Ferguson, Suite 1000 Tyler, TX 75702

/s/ Mike Hatchell

Mike Hatchell