Court Opinion

ID: 6434
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:17:14+00
Date Added: 2024-06-11T09:37:59.034175
License: Public Domain

United States Court of Appeals,

                               Fifth Circuit.

                                No. 92-2293.

           R. Michael LLOYD, et al., Plaintiffs-Appellees,

                                     v.

      PENDLETON LAND & EXPLORATION, INC., Defendant-Appellant.

                               June 14, 1994.

Appeal from the United States District Court for the Southern
District of Texas.

Before POLITZ, Chief Judge, KING and DAVIS, Circuit Judges.

      POLITZ, Chief Judge:

      Pendleton   Land   and   Exploration,     Inc.   appeals    an   adverse

judgment in its counterclaims against R. Michael Lloyd and Bob

McCormack.    Because the trial court erred in declining to submit

Pendleton's breach of fiduciary claim to the jury we must vacate

and remand for a new trial.

                                 Background

      In the fall of 1985, R. Michael Lloyd, a geologist, began

consulting for Pendleton, a family-owned oil and gas exploration

company.    Under an oral agreement they focused on a large section

of Kansas made up of six areas of mutual interest.         These areas, or

"panels," included three identified as "Rainbow West," "Anthony,"

and   "Clearwater/Wichita."         Pendleton     shared    its    extensive

geological data base with Lloyd who, with the aid of Pendleton

employees, used that information to develop a new concept for

marketing and sale.       When asked why they freely disclosed the

company's valuable geological data to Lloyd, the Pendletons replied

                                     1
that they trusted him and considered him part of the family.      Lloyd

described the relationship as a joint venture in which each player

made contributions toward a mutually beneficial goal.

     Shortly after the new concept was developed Bob McCormack

joined the exploration team.     He also was given access to the

Pendleton   data    base.   McCormack    initially   was   assigned   to

investigate the entire Kansas region but it subsequently was agreed

that for marketing purposes each panel would be developed and sold

separately.   In September 1986 the parties focused on "Rainbow

West" and began framing a written agreement to formalize their

relationship. In response to a draft submitted by Pendleton, Lloyd

and McCormack, for the first time, asserted that they owed no

obligation to Pendleton with regard to areas in Kansas beyond

"Rainbow West" and "Anthony."    Pendleton deemed this unacceptable

and in a draft agreement dated January 10, 1987 included a covenant

not to compete and a provision against disclosure or use of

proprietary work product.     This agreement, signed by Lloyd and

McCormack on February 27, 1987, provided that compensation for the

"various oil and gas exploration projects" would be "determined on

a project by project basis" and incorporated into the contract via

appendices.

     The "Rainbow West" panel was sold to Texaco in September 1987

for $1.2 million.    Lloyd and McCormack recommended that they next

focus on "Clearwater/Wichita."        Pendleton chose to develop the

"Anthony" panel.     While "Anthony" was being marketed, Lloyd and

McCormack began an independent pursuit of "Clearwater/Wichita."

                                  2
They assert that they informed the Pendletons of their action; the

Pendletons disavow such notice.          When the "Anthony" panel sold to

Enron in March 1989, Pendleton refused to compensate Lloyd and

McCormack     and   demanded    that    they   cease    their    operations    in

"Clearwater/Wichita."       The demand was ignored;         Pendleton filed an

action in federal court in Kansas.             Lloyd and McCormack filed an

action   in   Texas   shortly     thereafter.       The    Kansas   action    was

transferred to Texas and the two proceedings were consolidated.

Lloyd and McCormack were aligned as plaintiffs and Pendleton, over

its objection, was aligned as defendant in the consolidated action.

     Pendleton formally raised its claim for breach of fiduciary

duty in the Joint Pretrial Order of August 26, 1991.                     In the

pretrial order, approved and adopted by the court, Pendleton

asserted breach       of   fiduciary    duty   three    times,   twice   in   its

contentions and once in its list of contested issues.                Lloyd and

McCormack did not object to the pretrial order.              They acknowledge

that the pretrial order raised the issue of breach of fiduciary

duty.    In its opening statement, Pendleton informed the jury that

its action involved not only breach of contract, but it also

involved fairness, trust, and the relationship between consulting

geologists and exploration companies.            In proof of the latter it

elicited testimony from the Pendletons, as well as from Lloyd and

McCormack, attesting to the trust and confidence each placed in the

other    in   the   development    of   the    Kansas     properties.     Lloyd

characterized the relationship by stating that he did not work

"for" the Pendletons but "with" them on projects designed for their

                                        3
mutual benefit.

     The magistrate judge, sitting by consent under 28 U.S.C. §

636(c), ruled that the issue of breach of fiduciary duty should not

be submitted to the jury and that, as a matter of law, Lloyd and

McCormack's alleged breach of contract did not excuse Pendleton's

obligation    to   pay   their   compensation.      The   magistrate   judge

instructed the jury that Pendleton owed Lloyd and McCormack the

compensation claimed.       The jury, limited in its consideration to

the parties' contractual claims, returned a verdict in favor of

Lloyd and McCormack.      Pendleton's Motion for Judgment as a Matter

of Law or New Trial was denied.        Pendleton timely appealed.

                                  Analysis

         Pendleton advances four assignments of error on appeal;         one

has merit.      It first challenges the trial judge's refusal to

realign it as a party plaintiff.          Alignment of the parties lies in

the sound discretion of the court;1          we perceive no abuse of that

discretion.

         Pendleton next contends that the trial court erred in ruling

as a matter of law that the alleged breach of contract by Lloyd and

McCormack did not excuse the obligation of Pendleton on their

compensation. This argument is foreclosed by Hanks v. GAB Business

Services, Inc.2    As the Texas Supreme Court has held, the critical

issue is whether the obligation avoided was dependent upon or

     1
      Moreau v. Oppenheim, 663 F.2d 1300 (5th Cir.1981), cert.
denied, 458 U.S. 1107, 102 S.Ct. 3486, 73 L.Ed.2d 1368 (1982).
     2
      644 S.W.2d 707 (Tex.1982).

                                      4
correlative to the obligation allegedly breached.                               " "[W]hen a

covenant goes only to part of the consideration on both sides and

a breach may be compensated for in damages, it is to be regarded as

an independent covenant, unless this is contrary to the expressed

intent of the parties.' "3                  The instant case is indistinguishable

from the facts in Hanks where the contract covered numerous items

and contained no express language indicative of dependency.                               The

trial court properly determined that Pendleton's obligation to

compensate Lloyd and McCormack was independent of their obligation

to   refrain         from    unfair       competition    and     the    improper    use    of

proprietary information.

      Pendleton then challenges the jury instruction that it owed

Lloyd     and    McCormack          the    compensation.         Pendleton       judicially

admitted, however, that it owed Lloyd and McCormack the money,

"subject        to    certain       legal    defenses."         The     "legal    defenses"

apparently       was        Pendleton's      affirmative        claim    that    Lloyd    and

McCormack       breached        the   noncompetition           and   proprietary     rights

clauses.         The        trial   court     ruled     that    the     obligations      were

independent.          There was no error in this instruction.

          Finally, Pendleton challenges the trial court's failure to

instruct on the issue of breach of fiduciary duty.                        We conclude and

hold that this constituted error.                     The issue was raised in the

court-approved Joint Pretrial Order which supplanted all previous

      3
      Hanks, 644 S.W.2d at 708 (quoting World Broadcasting
System, Inc. v. Eagle Broadcasting Co., 162 S.W.2d 463, 465
(Tex.Civ.App.—San Antonio 1942)).

                                                5
pleadings and controlled all subsequent action in the litigation.4

The   evidence   adduced   at   trial   suggested   both   a   fiduciary

relationship and a breach.      While we are mindful that the issue

before the trial court was not an easy one, the seventh amendment

preserves the right of parties to a jury trial unless there is "no

legally sufficient evidentiary basis for a reasonable jury to find

for [the] party on th[e] issue."5        Viewing the evidence in the

light most favorable to Pendleton, and drawing all inferences in

its favor, we must conclude that the evidence did not point so

strongly and overwhelmingly in favor of Lloyd and McCormack that

reasonable jurors could not find a breach of fiduciary duty under

Texas law.6   We further conclude that the failure to instruct the

jury with regard to the fiduciary duty issue may have tainted its

answers to the questions posed.         We therefore must VACATE the

judgment of the trial court and REMAND for a new trial on all

issues.

      4
      Fed.R.Civ.P. 16(e); United States v. Shanbaum, 10 F.3d 305
(5th Cir.1994); Syrie v. Knoll Int'l, 748 F.2d 304 (5th
Cir.1984).
      5
      Fed.R.Civ.P. 50(a)(1); see also Kirby Lumber Corp. v.
White, 288 F.2d 566, 573 (5th Cir.1961).
      6
      See Omnitech Int'l, Inc. v. Clorox Co., 11 F.3d 1316 (5th
Cir.1994); see also, Gaines v. Hamman, 163 Tex. 618, 358 S.W.2d
557 (1962) (reversing summary judgment on facts similar to those
presented in this case).

                                   6