Court Opinion

ID: 4063235
Source: CourtListenerOpinion
Date Created: 2016-09-29 20:47:17.064585+00
Date Added: 2024-06-11T14:31:44.470468
License: Public Domain

600 Congress Avenue, Suite 2200
                                                                             Austin, TX 78701
                                                                    Telephone: 512-305-4700
                                                                           Fax: 512-305-4800
                                                                           www.lockelord.com

                                                                                Mike A. Hatchell
                                                               Direct Telephone: 512-305-4752
                                                                      Direct Fax: 512-391-4752
                                                                     mahatchell@lockelord.com

                               December 31, 2015

                                                              12/31/2015
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 Consulting Engineers, Inc.
      and Larry Snodgrass; In the Twelfth Court of Appeals

Dear Ms. Estes:

        Subject to the accompanying motion for 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 damages 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

                            NON-TEXAS AUTHORITIES:

§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.       “Disgorgement wrests ill-gotten gains
3:11-CV-1030-M, 2013 WL 3479884,          from the hands of the wrong-doer” and
at *18 (N.D. Tex. July 9, 2013).          is intended to be “remedial and not
                                          punitive.”

S.E.C. v. Koenig, 532 F. Supp. 2d 987,  “The SEC has also established by a
994 (N.D. Ill. 2007), aff'd in part and preponderance of the evidence that it is
remanded, 557 F.3d 736 (7th Cir. 2009). 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.    “Defendants argue that this court may
2d 891, 915 (S.D. Ohio 2007).             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 criminal 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   “[D]isgorgement is designed to be
Cir. 1997).                               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 seller
The 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).

                                 TEXAS AUTHORITIES:

International Bankers Life Ins. Co. v.    “[A] recovery of the consideration
Holloway, 368 S.W.2d 567, 584 (Tex.        paid as a result of fraud constitutes
1963).                                     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         “[W]here equity requires the return of
Ass’n, 700 S.W.2d 901 (Tex. 1985).       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    “While the mere grant of injunctive
137 (Tex. App.—Fort Worth 2011, no      relief will not support an award of
pet.).                                  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    “We do not believe that by using the
(Tex. App.—Austin 1999, pet. denied).   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 benefit-
                                        of-the-bargain damages.” (Emphasis
                                        added)

Lesikar v. Rappeport, 33 S.W.3d 282 “[T]he Supreme Court has authorized
(Tex. App.—Texarkana 2000, pet. the recovery of punitive damages in
denied).                            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 Rejecting an argument that “the
S.W.3d 377, 385 (Tex. App.—Tyler recovery of actual damages is a
2000, pet. denied).                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 Quoting Burrow v. Arce for the
353, 361 (Tex. 2015).                 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. “Until recently, the federal courts were
Crim. App. 1998) (en banc).         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 forfeitures 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   “Traditional civil forfeitures, in rem
JNKBV61E17M708556 v. State, No. 06-     proceedings, are not considered
13-00057-CV, 2014 WL 991970, at *1      punishment or fines and thus are not
n.1 (Tex. App.—Texarkana Mar. 13,       subject to the Eight Amendment’s
2014, no pet.).                         prohibition against excessive fines.”
The Hon. Pam Estes, Clerk
December 31, 2015
Page 8

      These additional authorities confirm that disgorgement is a remedy, not
punishment, with the disgorged sums acting as an “additional exaction” for actual
damages that are difficult to prove because 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,

LOCKE LORD LLP

/s/ Mike A. Hatchell

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

                             CERTIFICATE OF SERVICE

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

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

Gregory D. Smith                          Michael E. Gazette
Nolan Smith                               megazette@suddenlink.com
gsmith@rameyflock.com                     Law Office of Michael E. Gazette
nolans@rameyflock.com                     100 E. Ferguson, Suite 1000
Ramey & Flock, P.C.                       Tyler, TX 75702
100 E. Ferguson, Suite 500
Tyler, TX 75702

                                                /s/ Mike Hatchell
                                                       Mike Hatchell