In Re: Structural ( 2003 )

United States Court of Appeals
Fifth Circuit
F I L E D
May 15, 2003
UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk
_______________________
No. 02-20941
_______________________
IN RE: STRUCTURAL SOFTWARE, INC.,
Debtor
-------------------------------------
S. RAO GUNTUR; SAID IRANNEZHAAD,
Appellants,
versus
ENGINEERING DYNAMICS, INC.,
Appellee.
________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
Civil Docket H-00-CV-2571
_________________________________________________________________
Before JONES and BENAVIDES, Circuit Judges and KAZEN, District
Judge.*
PER CURIAM:**
This appeal arises out of an adversary proceeding brought
by Engineering Dynamics, Inc. (“EDI”) on behalf of bankruptcy
debtor Structural Software, Inc. (“SSI”) against SSI’s sole
shareholders, S. Rao Guntur and Said Irannezhaad. EDI alleges that
*
District Judge of the Southern District of Texas, sitting by designation.
**
Pursuant to 5TH CIR. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
Guntur and Irannezhaad usurped a corporate opportunity belonging to
SSI. The opportunity at issue was the right to obtain stock in
Zentech, Inc. (“Zentech”) in exchange for the marketing rights and
service rights related to a computer program called StruCAD*3D
(“StruCAD”). SSI is the owner of StruCAD. The bankruptcy court
held that Guntur and Irannezhaad did usurp a corporate opportunity
of SSI and entered judgment against them. The district court
affirmed the judgment of the bankruptcy court. Finding no
reversible error, we affirm.
BACKGROUND
In 1989, EDI sued SSI for copyright infringement. EDI
alleged that StruCAD infringed copyrights owned by EDI. In 1991,
the United States District Court for the Eastern District of
Louisiana entered judgment in favor of EDI and awarded $250,000 in
damages. The district court’s judgment was affirmed in part,
reversed in part, and remanded. Eng’g Dynamics, Inc. v. Structural
Software, Inc., 26 F.3d 1335 (5th Cir. 1994), modified by, 46 F.3d
408 (1995). This case, on remand, is still pending or has just
been concluded in the district court.
In July 1989 (after EDI sued SSI), SSI entered into a
marketing agreement (“Marketing Agreement”) with Zentech under
which Zentech agreed to be SSI’s exclusive marketing agent for
StruCAD and to be solely responsible for the marketing costs in
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exchange for fifty percent of all revenues derived from the sale of
StruCAD. On December 31, 1990, SSI entered into a new agreement
(“Maintenance Agreement”) with Zentech under which Zentech agreed
that, in addition to its role as SSI’s marketing agent, it would be
responsible for upgrading StruCAD and providing maintenance and
customer support services related to StruCAD. Under the
Maintenance Agreement, which modified the Marketing Agreement,
Zentech received eighty percent of the sales revenue as well as all
revenue derived from providing maintenance services related to
StruCAD. Concurrent with the execution of the Maintenance
Agreement, Zentech hired Guntur and Irannezhaad as employees for a
base annual salary of $60,000. Guntur and Irannezhaad were at this
time also given Zentech common stock. Guntur received 30.333% of
the common stock in Zentech, while Irannezhaad received 5% of the
common stock.
SSI filed for bankruptcy on June 23, 1992 due to EDI’s
efforts to collect on its judgment against SSI. In 1993, EDI, on
behalf of SSI, brought an adversary proceeding against Guntur and
Irannezhaad “in order to recover avoidable transfers.” The
bankruptcy court issued an order authorizing EDI to bring the
claims at issue in this case against Guntur and Irannezhaad.1 The
1
The bankruptcy court issued an order authorizing EDI, in
lieu of the trustee, to pursue avoidance actions against Guntur
and Irannezhaad to recover assets for the SSI estate. The
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bankruptcy court found that the stock received by Guntur and
Irannezhaad was not in return for their employment by Zentech, but
rather was in return for SSI’s execution of the Maintenance
Agreement. As such, the bankruptcy court concluded that the
Zentech stock was a corporate opportunity of SSI that had been
misappropriated by Guntur and Irannezhaad and that the Zentech
stock properly belonged to the SSI Estate.
The bankruptcy court as part of its judgment imposed a
constructive trust on the Zentech stock received by Guntur and
Irannezhaad in connection with the Maintenance Agreement. The
bankruptcy court thus ordered that the SSI Estate recover 114,666.4
shares of Zentech held by Guntur at the time judgment was entered
and 40,000 shares of Zentech held by Irannezhaad at the time
judgment was entered. The bankruptcy court also held that the SSI
Estate was entitled to recover $696,000 from Guntur and $242,000
from Irannezhaad for cash they received from a previous sale of
Zentech stock to TDI-Halter, Inc. in November 1997.
DISCUSSION
We review bankruptcy court rulings and decisions “under
the same standards employed by the district court hearing the
bankruptcy court stated that the corporate opportunity claim that
is the subject of this appeal was authorized by the order. SSI
does not challenge this order on appeal and as such we do not
address its propriety.
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appeal from bankruptcy court; conclusions of law are reviewed de
novo, findings of fact are reviewed for clear error, and mixed
questions of fact and law are reviewed de novo.” Century Indem.
Co. v. NGC Settlement Trust (In re National Gypsum Co.), 208 F.3d
498, 504 (5th Cir. 2000). Under a clear error standard, we will
reverse a finding of fact “only if, on the entire evidence, we are
left with the definite and firm conviction that a mistake has been
made.” Walker v. Cadle Co. (In re Walker), 51 F.3d 562, 565 (5th
Cir. 1995) (quoting Allison v. Roberts (In re Allison), 960 F.2d
481, 483 (5th Cir. 1992)).
Under Texas law, to establish a breach of fiduciary duty
for usurping a corporate opportunity “the corporation must prove
that an officer or director misappropriated a business opportunity
that properly belongs to the corporation.” Landon v. S&H Mktg.
Group, 82 S.W.3d 666, 681 (Tex. App.–Eastland 2002, no pet.); see
also International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d
567, 576-78 (Tex. 1963); Alexander v. Sturkie, 909 S.W.2d 166, 169
(Tex. App.–Houston [14th Dist.] 1995, writ denied). “The business
opportunity arises where a corporation has a legitimate interest or
expectancy in, and the financial resources to take advantage of, a
particular business opportunity.” Icom Systems, Inc. v. Davies, 990
S.W.2d 408, 410 (Tex. App.–Texarkana 1999, no writ) (citing Dyer v.
Shafer, Gilliland, Davis, McCollum & Ashley, Inc., 779 S.W.2d 474,
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477 (Tex. App.–El Paso 1989, writ denied)). To determine whether
a corporation has a legitimate interest in a corporate opportunity,
the court must inquire as to whether the alleged opportunity was in
the corporation’s “line of business.” Id.Guntur and Irannezhaad argue that the bankruptcy court
erred in determining that the right to obtain the Zentech stock was
a corporate opportunity that belonged to SSI because SSI did not
have a legitimate interest in the stock. Guntur and Irannezhaad
contend that the bankruptcy court clearly erred in holding that
the Zentech stock they received was in fact consideration for SSI’s
execution of the Maintenance Agreement. We disagree. The record
contains sufficient evidence from which the bankruptcy court could
infer that the right to acquire the Zentech stock was a corporate
opportunity of SSI.
Guntur and Irannezhaad point out that there was evidence
that Zentech would never have provided stock to SSI and
additionally that there was no evidence that SSI was interested in
acquiring Zentech stock. Thus, they argue that acquisition of
Zentech stock could not have been a corporate opportunity of SSI.
This argument fails, however, because it defines the corporate
opportunity at issue too narrowly. While SSI may not have had an
interest specifically in acquiring Zentech stock, it certainly did
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have an interest in receiving the appropriate level of
consideration for its execution of the Maintenance Agreement.
Guntur and Irannezhaad also argue that because SSI did
not have the financial resources to carry out the opportunity to
obtain the Zentech stock, they could not have usurped a corporate
opportunity of SSI. Icom Systems, Inc., 990 S.W.2d at 410 (to
usurp a corporate opportunity, corporation must have resources to
take advantage of the opportunity). Further, inasmuch as the stock
was consideration for their employment with Zentech, SSI could not
have provided the engineering services that they were to perform as
employees of Zentech. This argument fails because, as noted
previously, the bankruptcy court did not clearly err in finding
that the Zentech stock served as consideration for execution of the
Maintenance Agreement rather than for Guntur’s and Irannezhaad’s
personal services.
Additionally, Guntur and Irannezhaad argue that even if
the right to the Zentech stock was a corporate opportunity of SSI,
they did not improperly usurp the opportunity because SSI’s only
shareholders (Guntur and Irannezhaad) ratified the transaction. It
is usually a defense to a claim of usurpation of the corporate
opportunity that all of the corporation’s shareholders ratify the
transaction. Safety Int’l, Inc. v. Dyer (In re Safety Int’l,
Inc.), 775 F.2d 660, 662 (5th Cir. 1985); Dyer, 779 S.W.2d at 478.
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Creditors, however, can challenge the breach if the transaction is
made to defraud creditors or if it is completed while the
corporation is insolvent. Dyer, 779 S.W.2d at 477; see also Newman
v. Toy, 926 S.W.2d 629, 631 (Tex. App.–Austin 1996, writ denied)
(“A sole shareholder or all shareholders acting in agreement, being
all the beneficial owners of corporate property, may themselves
deal with such property so long as the rights of creditors are not
prejudiced ...”). A bankruptcy trustee has the right to assert the
general claims of creditors for the benefit of the bankruptcy
estate and the creditors. Schimmelpenninck v. Byrne (In re
Schimmelpenninck), 183 F.3d 347, 359 (5th Cir. 1999).
At the time of the Zentech transaction, EDI was a
creditor of SSI according to Texas law. As the Texas Supreme Court
stated, at common law “one who at the time a transfer of property
is made has a right to recover damages in tort may avoid the
transfer as fraudulent if the transfer is made for the purpose of
defeating his right.” Hollins v. Rapid Transit Lines, Inc., 440
S.W.2d 57, 60 (1969) (quoting Murphy v. Dantowitz, 142 Conn. 320,
114 A.2d 194, 196-97 (1955)). Since EDI and other creditors
existed at the relevant time, the bankruptcy court could find that
Guntur’s and Irannezhaad’s ratification of the agreement was
ineffective as a defense to usurpation of the corporate
opportunity.
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Guntur and Irannezhaad also appeal the bankruptcy court’s
award of monetary damages in favor of EDI for the Zentech stock
that Guntur and Irannezhaad sold in 1997 to TDI-Halter, Inc.
Guntur and Irannezhaad argue that the imposition of a constructive
trust was improper and that at the most EDI is only entitled to
monetary damages based on the value of the stock on January 1, 1991
(the effective date of the stock transfer).
We find their argument unpersuasive. Texas courts have
previously held that imposition of a constructive trust is a proper
remedy when a fiduciary usurps a corporate opportunity. In Canion,
the court held that “[a]n officer or director who diverts [a
corporate] opportunity and embraces it as his own is chargeable as
a constructive trustee for the benefit of the corporation and holds
all of the profits and benefits received therefrom for the
corporation.” Canion v. Texas Supply, Inc., 537 S.W.2d 510, 513
(Tex. Civ. App.–Austin 1976, writ ref’d n.r.e.). As such, EDI is
entitled a constructive trust on the Zentech stock received by
Guntur and Irannezhaad.
When a constructive trust is imposed, a fiduciary who
misappropriated the property of another is liable not only for the
value of the property he misappropriated but also for any profits
he derived from his wrongful possession of the property. Meadows
v. Bierschwale, 516 S.W.2d 125, 129 (Tex. 1974). In this case,
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that would be the money received by Guntur and Irannezhaad from
selling the Zentech stock (even to the extent the payment exceeded
the value of the stock when they received it in 1991). Since a
constructive trust is an appropriate remedy, it was appropriate for
the bankruptcy court to award monetary damages for the full amount
of money Guntur and Irannezhaad received from TDI-Halter.
Guntur and Irannezhaad finally argue that the bankruptcy
court’s judgment cannot be based upon the Texas Uniform Fraudulent
Transfer Act, Tex. Bus. & Com. Code Ann. § 24.001, et seq. (Vernon
2002) for fifteen different reasons. Their arguments are without
merit because the bankruptcy court’s judgment is based upon
liability for usurpation of a corporate opportunity under Texas
common law and not under the fraudulent transfer statute.
For these reasons, the bankruptcy court did not err in
its conclusions of law nor did it clearly err with respect to any
findings of fact. Finding no reversible error, we affirm.
AFFIRMED.
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