Opinion ID: 6319850
Heading Depth: 3
Heading Rank: 3

Heading: Fee Forfeiture

Text: This court reviews a district court’s award of equitable relief for abuse of discretion. Bear Ranch, L.L.C. v. Heartbrand Beef, Inc., 885 F.3d 794, 805 (5th Cir. 2018); accord Meadows v. Hartford Life Ins. Co., 492 F.3d 634, 638 (5th Cir. 2007). “A district court abuses its discretion if it bases its decision on an error of law or a clearly erroneous assessment of the evidence.” United States v. Mann, 161 F.3d 840, 861 (5th Cir. 1998). In Burrow v. Arce, the Texas Supreme Court carefully outlined the considerations that govern a court’s equitable award of fee forfeiture for an attorney’s breach of fiduciary duty. 997 S.W.2d at 237–46. The court noted that although fee forfeiture serves to compensate an injured client for his attorney’s disloyalty, the “central purpose of the equitable remedy of forfeiture is to protect relationships of trust by discouraging agents’ disloyalty.” Id. at 238. Because the main aim of the remedy is deterrence, it is irrelevant whether the attorney’s breach caused the client any damages. Id. at 239–40. At the same time, Burrow cautions that fee forfeiture is not automatic. Id. at 241. Rather, “[t]he remedy is restricted to ‘clear and serious’ violations of duty.” Id. To determine whether a breach of duty justifies fee forfeiture, a court must consider the following factors: (1) “the gravity and timing of the violation,” (2) “its wilfulness,” (3) “its effect on the value of the lawyer’s work for the client,” (4) “any other threatened or actual harm to the client,” (5) “the adequacy of other remedies,” and (6) “the public 20 Case: 20-50671 Document: 00516223471 Page: 21 Date Filed: 03/03/2022 No. 20-50671 interest in maintaining the integrity of attorney-client relationships.” Id. at 243–44 (internal quotation marks and citation omitted). The district court weighed the Burrow factors and ordered that Hughes forfeit all compensation she received from Performance Probiotics and pay it to Thomas, on behalf of PPI. On appeal, Hughes contends that the district court erred in calculating the fee forfeiture award because the breach of duty upon which the award was based arises from the fiduciary relationship between Hughes and PPI, not Hughes and Performance Probiotics. Under Texas law, “courts may disgorge all ill-gotten profits from a fiduciary when a fiduciary agent usurps an opportunity properly belonging to a principal, or competes with a principal.” ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 873 (Tex. 2010) (emphasis added). However, several courts, including this one in an unpublished opinion, have found that the fee forfeiture remedy does not extend to fees received from third parties. See Liberty Mut. Ins. Co. v. Gardere & Wynne, L.L.P, 82 F. App’x 116, 121 (5th Cir. 2003) (holding that a client was not entitled to disgorgement of fees the defendant law firm had earned by disloyally representing a third-party client); Elizondo v. Krist, 338 S.W.3d 17, 25 (Tex. App.—Houston [14th Dist.] 2010) (“[P]laintiffs should not be allowed to recover fees paid by a third party.”), aff’d, 415 S.W.3d 259 (Tex. 2013); Swank v. Cunningham, 258 S.W.3d 647, 673–74 (Tex. App.—Eastland 2008, pet. denied) (finding that “[e]quity does not support such a ‘windfall’ result”). To the extent these courts articulated a rationale for restricting the forfeiture remedy, it was that the limitation was necessary to prevent a “windfall” to the plaintiffs. E.g., Swank, 258 S.W.3d at 673; see also Gardere & Wynne, 82 F. App’x at 121 (emphasizing that permitting forfeiture of third-party gains would upset the “remedial” aspects of Burrow’s scheme). 21 Case: 20-50671 Document: 00516223471 Page: 22 Date Filed: 03/03/2022 No. 20-50671 Hughes’s argument nonetheless fails for two related reasons. First, unlike in Gardere & Wynne, Elizondo, and Swank, the entity that paid the disgorged fees here, Performance Probiotics, was not an independent third party. Hughes controlled Performance Probiotics and effectuated the transfer of PPI’s assets to Performance Probiotics. Beyond that, there is no “windfall” given the record in this case. Hughes unfairly transferred PPI’s assets to Performance Probiotics, in breach of her fiduciary duty to PPI, and then used those assets to generate the fees at issue. That is, even though Hughes was paid by Performance Probiotics, she was effectively paying herself with funds that were rightfully PPI’s. We find no abuse of discretion in the district court’s award of fee forfeiture in this context as it accords with the general rule that disloyal agents must disgorge their ill-gotten gains. See Swinnea, 318 S.W.3d at 873.