Charles Saden v. Brian Smith ( 2013 )

Opinion issued September 26, 2013.
In The
Court of Appeals
For The
First District of Texas
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NO. 01-11-00202-CV
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CHARLES SADEN, Appellant
V.
BRIAN SMITH, Appellee
On Appeal from the 270th District Court
Harris County, Texas
Trial Court Case No. 2009-0059
DISSENTING OPINION
Because the majority errs in concluding that the trial court, in its judgment,
“permitted duplicative recovery of damages and included additional unauthorized
findings,” I respectfully dissent.
In this case, appellee, Brian Smith, sued appellant, Charles Saden, for breach
of contract and breach of fiduciary duty, two separate and distinct causes of action
for two separate and distinct injuries and remedies, arising out of Saden’s conduct
in the operation of POS Card Processing, Inc. (“POS”), a closely held corporation
in which Smith and Saden were the sole shareholders. As noted by the majority,
both Smith and Saden each owned 50 percent of the company, were both directors,
and were to be paid equally.
In his third issue, Saden argues that the trial court’s judgment should be
“reformed to require election of one remedy for lost profits” because “the jury was
asked to find lost profits on multiple theories of liability” and Smith “did not
distinguish his damages among any of these theories, all of which had the same
measure of damages.” (Emphasis added.) Although Saden generally asserts that
“Smith made no attempt to distinguish damages from among any of [the] theories
of recovery,” he does not challenge the legal or factual sufficiency of the evidence
supporting the jury’s specific damages findings. Rather, after quoting in his brief
questions four, ten, and eleven of the trial court’s charge to the jury, Saden makes
his complaint that “the jury was asked to find the same lost profits measure of
damages” and “Smith was allowed to recover a judgment that awarded all three of
these overlapping recoveries for lost profits.” (Emphasis added.)
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In his fifth issue, Saden argues that the trial court’s judgment must be
“reformed to eliminate findings and recoveries for fraud, defalcation and
embezzlement” because these issues “were not submitted to the jury” and recovery
on them by Smith has been “waived by omission.” Again, Saden does not
challenge the sufficiency of the evidence supporting the trial court’s conclusions
that he, in breaching his fiduciary duties owed to Smith, committed fraud,
defalcation, and embezzlement.
The majority concludes that in this case “recovery of actual damages for
both breach of contract and breach of fiduciary duty violates the one-satisfaction
rule,” and it holds that the trial court erred in rendering judgment that “permitted
duplicative recovery” of damages. It further holds that the trial court erred in
including “language” in its judgment about Saden’s acts of “fraud, defalcation, and
embezzlement.”
However, in contrast to Saden’s assertions and two of the majority’s
holdings, the record reveals that (1) the trial court carefully instructed the jury on
two different measures of damages on two distinct claims for two distinct injuries,
(2) Smith presented evidence that supports the jury’s two separate and distinct
damages findings, (3) as noted by the majority, the trial court’s equitable
disgorgement of Saden’s profit from his breach of fiduciary duty to Smith did not
result in a “damages” award duplicative of the jury’s awards, and (4) the trial
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court, in concluding that Saden, in breaching his fiduciary duties to Smith,
committed fraud, defalcation, and embezzlement, did so in support of its equitable
disgorgement of Saden’s profits derived from POS, not in regard to any separate
claim upon which it thought Smith might be entitled to recover.
Breach-of-Contract Damages
In regard to Smith’s breach-of-contract claim, the jury, in response to
question one in the trial court’s charge, expressly found that Smith and Saden
“agree[d] to equally split the revenues, less reasonable and necessary expenses,
derived from the business agreed to be conducted by POS.” (Emphasis added.)
And the jury further found that Saden failed to comply with the agreement to
equally split with Smith the revenues from POS.
In question four, the trial court instructed the jury that “[l]ost profits are a
natural, probable, and foreseeable consequence of . . . Saden’s failure to comply
with the agreement.” (Emphasis added.) The trial court expressly asked the jury
to measure the lost profits that flowed from Saden’s breach of contract. It then
asked the jury, “What sum of money, if any, if paid now in cash, would fairly and
reasonably compensate . . . Smith for his damages, if any, that resulted from . . .
Saden’s failure to comply with the agreement?” (Emphasis added.) And the jury
answered, “$941,907.”
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As noted by the majority, this answer is consistent with the testimony of
Smith’s expert, Bill Shields, an accountant who reviewed the records of POS.
Based on his review of the records and the agreement of Smith and Saden to split
the revenue of POS equally, Shields opined that Saden had withheld $941,907
from Smith. Accordingly, the jury reasonably concluded that Saden, in violation
of his agreement with Smith, withheld and failed to pay Smith $941,907, Smith’s
half of the revenues derived from POS. From this answer, it necessarily follows
that Saden’s half of the revenues of POS also totaled $941,907.
Breach-of-Fiduciary-Duty Damages
In regard to Smith’s claim against Saden for breach of fiduciary duty, the
trial court, in question seven of its charge, defined the term “relationship of trust
and confidence,” and the jury found that “a relationship of trust and confidence
exist[ed] between” Smith and Saden. In question eight, the trial court instructed
the jury on fiduciary duties, and the jury found that Saden did not “comply with his
fiduciary duties to . . . Smith.”
In question ten, the trial court instructed the jury that “[l]ost profits are a
natural, probable, and foreseeable consequence of . . . Saden’s failure to comply
with his fiduciary duties to . . . Smith.” (Emphasis added.) Here, in contrast to
question four, the trial court expressly asked the jury to measure the lost profits
that resulted from Saden’s breach of fiduciary duties, not those that resulted from
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his breach of contract. It then asked the jury, “What sum of money, if any, if paid
now in cash, would fairly and reasonably compensate . . . Smith for his damages, if
any, that resulted from . . . Saden’s failure to comply with his fiduciary duties to
. . . Smith?” (Emphasis added.) And the jury answered, “$393,093” in stark
contrast to its answer to question four, which was “$941,907.”
Again, Saden does not challenge the sufficiency of the evidence supporting
the jury’s award of $393,093. He simply assumes that the measure of damages in
question four is the same as that in question ten. Based on this assumption, Saden
further assumes that the lost profits awarded in answer to question ten are
duplicative of those awarded in answer to question four. Of course, the important
difference in what lost profits the jury was instructed to consider in answering
questions four and ten and the substantial difference in the jury’s awards in answer
to both questions illustrates the fallacy of these assumptions.
Regardless, the majority asserts, first, “there is a significant overlap between
[Smith’s] litany of Saden’s misdeeds and the misconduct documented and
accounted for in the Shield’s damages model,” and, second, “the record reveals no
competent evidence from which a fact finder could determine with reasonable
certainty the amount of lost profits separately attributable to breach of contract or
only to breach of fiduciary duty.”
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However, as noted by Smith, he presented evidence that the lost profits that
resulted from Saden’s breach of contract were different from those that resulted
from Saden’s breach of fiduciary duties. Smith asserts that the lost profits that
were “a natural, probable, and foreseeable consequence of . . . Saden’s failure to
comply with his fiduciary duties” included revenue lost by POS due to Smith’s
failure to secure the best price possible for POS accounts that he secretly sold,
failure to secure commission rates for POS equal to those he secured for himself,
sale of POS accounts and equipment, theft of $200,000 in certificates of deposit,
use of POS funds to pay personal living expenses for himself and his family, theft
of POS funds after the appointment of a receiver, and enriching himself through a
series of self-dealing transactions. Thus, there is ample evidence in the record
from which the jury could have reasonably found that Saden, in breaching his
fiduciary duties to Smith, caused Smith damages of $393,093 above and beyond
his breach-of-contract damages of $941,907.
Nevertheless, the majority conducts a sua sponte analysis of the evidence
and makes a different finding. In support its finding, the majority relies in part on
Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80 (Tex. 1992). In Holt, the Texas
Supreme Court did explain that the amount of lost profits must be “shown by
competent evidence with reasonable certainty” and “opinions or estimates of lost
profits must be based on objective facts, figures or data from which the amount of
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lost profits can be ascertained.” 835 S.W.2d at 84. However, the court further
explained that “[r]ecovery for lost profits does not require that the loss be
susceptible of exact calculation.” Id. (emphasis added). And Holt is readily
distinguishable because (1) Holt specifically argued there was “no evidence
supporting the trial court’s award of damages for lost profits” and (2) the court
held that a conclusory statement about lost income “is not the correct measure of
damages” and the testimony was “legally insufficient because it [did] not provide
any indication” of how the lost profits were determined. Id. at 83–84.
Here the majority, as did the court in Holt, engages in a “fact intensive
determination” in reaching its finding that Smith did not present reasonably certain
evidence of lost profits on his breach-of-fiduciary-duty claim. See id. However, as
noted above, Saden has not made a no-evidence challenge in this appeal. Thus, the
majority, based on its sua sponte review of the evidence, is reversing the trial
court’s judgment on unassigned error. More important, Smith, as noted above, did
present legally-sufficient evidence to support the jury’s award of $393,093 for his
damages resulting from Saden’s breach of fiduciary duties. See City of Keller v.
Wilson, 168 S.W.3d 802, 822 (Tex. 2005) (“If the evidence at trial would enable
reasonable and fair-minded people to differ in their conclusions, then [the fact-
finder] must be allowed to do so.”).
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Equitable Disgorgement
It has long been the law in Texas that courts “may fashion equitable
remedies such as profit disgorgement and fee forfeiture to remedy a breach of
fiduciary duty.” ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 873
(Tex. 2010). And the Texas Supreme Court has clearly explained that “a fiduciary
may be punished for breaching his duty.” Id. at 872 (emphasis added). Indeed,
“[t]he main purpose of forfeiture is not to compensate an injured principal. . . .
Rather, the central purpose . . . is to protect relationships of trust by
discouraging . . . disloyalty.” Id. at 872–73 (quoting Burrow v. Arce, 997 S.W.2d
229, 238 (Tex. 1999)).
A plaintiff need not even establish actual damages in order to receive the
equitable remedy of disgorgement, and “even if a fiduciary does not obtain a
benefit from a third party by violating his duty, a fiduciary may be required to
forfeit the right to compensation for the fiduciary’s work.” Id. at 873 (citing
Burrow, 997 S.W.2d at 237 (“[A] person who renders service to another in a
relationship of trust may be denied compensation for his service if he breaches that
trust.”)). However, the equitable remedy of forfeiture must “fit the circumstances”
presented. Burrow, 997 S.W.2d at 241. Here, though, Saden does not assert that
the trial court’s equitable disgorgement did not fit the circumstances.
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Rather, Saden argues only that (1) the trial court’s equitable disgorgement
constituted a double recovery or “windfall” to Smith because it was based on lost
profits and (2) the trial court’s judgment must be “reformed to eliminate findings
and recoveries for fraud, defalcation and embezzlement” because these issues
“were not submitted to the jury” and recovery on them by Smith has been “waived
by omission.”
In question eleven, the trial court asked the jury, “What was the amount
of . . . Saden’s profit from the conduct, if any, that you have found to be a breach
of . . . Saden’s fiduciary duties to . . . Smith?” (Emphasis added.) And the jury
answered “$941,907.” Because this question concerned the issue of the
appropriateness of equitable disgorgement, i.e., whether it would “fit the
circumstances,” a question of equity solely in the province of the trial court, the
trial court, did not, as asserted by Saden, instruct the jury to consider any lost
profits as it did in answering question ten. Instead, the trial court specifically
asked the jury to determine “Saden’s profit” from his wrong doing, which equaled
not only what he withheld from Smith, but also, necessarily, the profit to which
Saden himself was entitled as compensation under their agreement to split equally
the revenues derived from POS.
In question eighteen, which also concerned the issue of the appropriateness
of equitable disgorgement and which was predicated on the jury’s negative answer
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to question eight, the trial court defined the terms “malice” and “clear and
convincing.” It defined malice as “a specific intent” by Saden “to cause substantial
injury or harm to” Smith. And eleven jurors expressly found by clear and
convincing evidence that “the harm caused by” Saden’s breach of fiduciary duty
“resulted from malice.”
And, as noted above, the trial court, in its judgment, did conclude that
“Saden’s profit” of $941,907 should be equitably disgorged from him “as a result
of his acts of fraud, defalcation and embezzlement while acting and serving in a
fiduciary capacity with respect to” Smith. However, these conclusions were
apparently made by the trial court to further show that it considered Saden’s
behavior so egregious that Saden should be “punished” by being disgorged of his
profit from his wrongful acts. The trial court’s conclusions did not at all, as
asserted by Saden, concern issues that should have been “submitted to the jury”
which Smith “waived by omission.”
The bottom line is that the trial court’s equitable disgorgement from Saden
of “$941,907,” which equals his half of the revenues derived from POS, is firmly
supported by (1) the jury’s finding that Saden profited in the amount of “$941,907”
by breaching his fiduciary duties to Smith, (2) the jury’s finding by clear and
convincing evidence that “the harm caused by” Saden’s breach of fiduciary duty
“resulted from malice,” and (3) the trial court’s conclusion that Saden obtained this
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profit from Smith “as a result of his acts of fraud, defalcation and embezzlement
while acting and serving in a fiduciary capacity with respect to” Smith. These
findings and conclusion serve to show that the trial court’s equitable disgorgement
of Saden’s compensation “fit the circumstances.” See Burrow, 997 S.W.2d at 241.
Conclusion
In its judgment, the trial court, in accord with the jury’s findings, awarded
Smith $941,907 on his breach-of-contract claim and $393,093 on his claim for
breach of fiduciary duty. And, concluding that Saden, in breaching his fiduciary
duties to Smith, had committed “acts of fraud, defalcation and embezzlement,” the
trial court further awarded Smith $941,907 “in equitable disgorgement of the
profits” obtained by Saden. In doing so, the trial court did not permit a
“duplicative recovery of damages” or “include[] additional unauthorized findings.”
It simply awarded Smith separate and distinct damages for his separate and distinct
injuries, and it reasonably concluded that based on Saden’s egregious conduct, he
should further be disgorged of his half of the revenues derived from POS.
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Accordingly, I would overrule Saden’s third and fifth issues and affirm the
true and correct judgment of the trial court.
Terry Jennings
Justice
Panel consists of Justices Jennings, Bland, and Massengale.
Jennings, J., dissenting.
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