Demond, Walter ( 2015 )

PD-1636-14
COURT OF CRIMINAL APPEALS
AUSTIN, TEXAS
Transmitted 2/20/2015 2:23:35 PM
Accepted 2/25/2015 10:24:44 AM
ABEL ACOSTA
No. PD-1636-14 CLERK
In the Court of
Criminal Appeals of Texas
WALTER DEMOND,
Petitioner,
v.
THE STATE OF TEXAS,
Respondent.
On Petition for Discretionary Review from the
Third Court of Appeals at Austin, Texas
Case No. 03-11-00553-CR
REPLY TO RESPONSE TO PETITION FOR DISCRETIONARY REVIEW
James C. Ho
State Bar No. 24052766
Prerak Shah
State Bar No. 24075053
February 25, 2015
GIBSON, DUNN & CRUTCHER LLP
2100 McKinney Avenue, Suite 1100
Dallas, TX 75201-6912
Tel.: (214) 698-3264
Fax: (214) 571-2917
jho@gibsondunn.com
pshah@gibsondunn.com
COUNSEL FOR PETITIONER
TABLE OF CONTENTS
Index of Authorities .................................................................................................. ii
Argument....................................................................................................................2
I. Fuelberg did not commit a crime—and the only way to
affirm Demond’s conviction is to misconstrue Texas Penal
Code § 32.45................................................................................................... 2
II. Moreover, Demond did not commit a crime—and the only
way to affirm his conviction under the law of parties is to
ignore this Court’s precedent. ........................................................................ 5
III. The Third Court’s decision will have grave consequence
on legal and business decision-making. ......................................................... 7
Prayer for Relief .......................................................................................................10
Certificate of Compliance ........................................................................................11
Proof of Service .......................................................................................................11
i
INDEX OF AUTHORITIES
Cases
Amaya v. State,
733 S.W.2d 168 (Tex. Crim. App. 1986)...............................................................5
Batey v. Droluk,
2014 WL 1408115 (Tex. App.—Houston [1st Dist.] Apr. 10, 2014, no pet.).......8
Cates v. Sparkman,
11 S.W. 846 (Tex. 1889) ........................................................................................8
Demond v. State,
2014 WL 6612510 (Tex. App.—Austin Nov. 21, 2014, pet. filed).......... 2, 3, 4, 8
Gearhart Indus., Inc. v. Smith Int’l, Inc.,
741 F.2d 707 (5th Cir. 1984)..................................................................................8
Miller v. Am. Tel. & Tel. Co.,
507 F.2d 759 (3d Cir. 1974)...................................................................................8
United States v. D’Amato,
39 F.3d 1249 (2d Cir. 1994) ...................................................................................9
Statutes
TEX. PENAL CODE § 32.45 ..........................................................................................9
TEX. PENAL CODE § 32.45(a)(2) ............................................................................3, 4
TEX. PENAL CODE § 7.02 ............................................................................................2
Rules
TEX. R. APP. P. 66.3(b)-(d).........................................................................................2
ii
TO THE HONORABLE COURT OF CRIMINAL APPEALS OF TEXAS:
The Third Court’s decision to affirm Walter Demond’s convictions was not
only incorrect; it begs for this Court’s review. The decision was contrary to statutory
text, contrary to this Court’s precedents, and will have drastic consequences on legal
and business decision-making in this State.
The State has no meaningful response to the issues raised by Demond’s Petition
for Review. Indeed, the State’s response is notable for what it does not say. It does
not dispute that Fuelberg had the authority to hire outside consultants. It does not
dispute that the jury in this case was asked to convict an outside counsel based on their
review of someone else’s discretionary business decisions (and with the benefit of
hindsight). It does not dispute that outside counsel can no longer rely on the mere
approval of a CEO or general counsel to bill a company for particular expenses in a
particular manner. And, incredibly, it does not even cite Amaya v. State, 733 S.W.2d
168 (Tex. Crim. App. 1986) (en banc), which declared that to be liable of the crime of
misapplication under the law of parties, the State must prove beyond a reasonable
doubt that the defendant knew he was assisting a crime—which did not occur here.
Accordingly, the Petition for Discretionary Review should be granted.
1
ARGUMENT
This Court takes into account various factors when deciding whether to grant a
petition for discretionary review, including whether the decision below (1)
misconstrues a statute; (2) conflicts with a decision of this Court; or (3) decides an
important question of state law that should be settled by this Court. TEX. R. APP. P.
66.3(b)-(d). This case meets all three of those factors.
I. Fuelberg did not commit a crime—and the only way to affirm Demond’s
conviction is to misconstrue Texas Penal Code § 32.45.
The court of appeals misconstrued Texas Penal Code § 32.45. As fully
explained in the Petition, if section 32.45 is applied correctly, there is insufficient
evidence to convict Demond.1 PDR 3-12.
The State attempts to defend the conviction by arguing that:
On this evidence, the jury could have reasonably concluded beyond a
reasonable doubt (1) that Fuelberg held PEC property as a fiduciary, (2)
that Fuelberg and Petitioner intentionally and knowingly subjected that
property to a substantial risk of loss by funneling it to Fuelberg’s brother
(Curtis) and the son of a PEC board member (Bill Price) through
arrangements in which they knew PEC would receive little or no benefit,
and finally (3) that Petitioner’s role in the scheme—utilizing his law firm
1
Demond was convicted of misapplication under the law of parties. Demond v. State, 2014
WL 6612510, at *12 (Tex. App.—Austin Nov. 21, 2014, pet. filed). For a defendant to be
guilty under the law of parties, a principal actor—in this case Bennie Fuelberg—must
commit the underlying offense. TEX. PENAL CODE § 7.02. Therefore, the State had to prove
Fuelberg committed misapplication. The State argues that Demond’s guilt is not contingent
on Fuelberg’s conviction. Resp. 12. That is correct. But while Demond’s guilt is not
contingent on Fuelberg’s conviction, it is contingent on whether Fuelberg actually committed
the offense.
2
to make these sham hires—made him guilty as a party to Fuelberg’s
misapplication.
Resp. 3-4.
The State’s response is revealing in what it does not say. To convict Demond,
the State had to prove that Fuelberg misapplied property by “deal[ing] with property
contrary to . . . an agreement under which the fiduciary holds the property.” TEX.
PENAL CODE § 32.45(a)(2). But the State’s rundown of what the jury could have
reasonably concluded conspicuously omits any discussion of an agreement violated by
Fuelberg.
That is because no such agreement exists. Rather, the undisputed evidence
demonstrates that Fuelberg had absolute authority to hire the outside consultants at
issue in this case. See, e.g., 10.RR.199-200; 12.RR.8-10; 13.RR.35-37; 13.RR.189-
191; Demond, 2014 WL 6612510, at *6 (the “undisputed evidence admitted at trial
established that Fuelberg had broad authority to hire both PEC employees and outside
consultants,” and there was “no evidence to indicate that any other PEC bylaw limited
Fuelberg’s authority to hire outside consultants”).
So Fuelberg never dealt with PEC funds contrary to any agreement—and thus
the misapplication conviction here must be reversed.
Later in its response, the State does argue that “the extensive effort Fuelberg
and Petitioner undertook to conceal the arrangements—from both the PEC board and
3
from Petitioner’s law partners—was strong circumstantial evidence that they knew the
board would not approve of them.” Resp. 6.
But even assuming arguendo that the State’s conclusion is a reasonable
interpretation of the evidence (which it is not)2, that is still plainly insufficient to
affirm. Again, Fuelberg only committed misapplication if he “deal[t] with property
contrary to . . . an agreement under which the fiduciary holds the property.” TEX.
PENAL CODE § 32.45(a)(2). Here, there was no agreement to “not do things that he
thought the board would not approve of”—just an employment agreement that gave
Fuelberg the authority to hire outside consultants, but has boilerplate language
requiring him to “perform all of his duties properly and faithfully in the best interest
of the PEC.” Demond, 2014 WL 6612510, at *7.
Perhaps the State thinks that boilerplate language means Fuelberg commits a
crime when he does something he thought the board would not approve of. But if that
is truly what the State is arguing, then this prosecution is even more troubling: a CEO
can now face felony charges if he does something he is authorized to do, so long as a
2
Even the Third Court acknowledged that there was no evidence suggesting that Fuelberg
“induced the PEC to make payments it otherwise would not have made.” Demond, 2014 WL
6612510, at *14. See also id. at *12-13 (finding “no direct testimony to [the] effect” that
“the PEC would have potentially reined in or revoked Fuelberg’s authority to hire outside
consultants had the PEC known that its funds were being paid to Curtis and Price”; “none of
the [PEC] directors testified that the board would have stepped in and blocked these
payments. . . . [N]one of the directors testified that had they known that Curtis and Price
were being paid through Clark Thomas, they would have recommended that the PEC’s
nepotism policy be modified to cover outside consultants. . . . [N]o witness testified that had
either the PEC’s accounting department or board of directors known about these payments,
they would have considered terminating Fuelberg’s employment or reining in his authority”).
4
prosecutor can convince a jury that the CEO thought his Board may not have liked
what he did. That cannot possibly be correct.
II. Moreover, Demond did not commit a crime—and the only way to affirm
his conviction under the law of parties is to ignore this Court’s precedent.
The prosecution of Demond is doubly flawed. Separate and apart from
Fuelberg’s innocence, Demond cannot be guilty under the law of parties unless he
knew he was facilitating a crime. The Third Court’s holding otherwise is contrary to
this Court’s precedent.
In Amaya, this Court held that a defendant cannot be convicted under the law of
parties “without some indication that [he] knew [he] w[as] assisting in the commission
of an offense.” 733 S.W.2d at 174 (emphasis in original). Otherwise, “criminal
complicity would extend to all those who perform acts that happen to assist in a
criminal undertaking, even though there was no knowledge that a crime was being
assisted.” Id.
Amaya centered not on the ignorance of the conduct, but on the ignorance that
the conduct constituted an offense, because “the conduct prohibited is not inherently
criminal.” Id. The Court acknowledged that the defendant was embroiled in a
criminal scheme, but held that no rational juror could have found a violation beyond a
reasonable doubt, because the evidence was insufficient to show that the defendant
had acted with the intent to promote or assist in its commission. Id. at 175.
5
Tellingly, the State failed to even mention Amaya in its Response—because
there is no way around its binding precedent. In this case, there is no evidence that
Demond had any idea that hiring Curtis and Price was a crime. Therefore, in light of
this Court’s holding in Amaya, Demond cannot be guilty of misapplication of
fiduciary property under the law of parties.
The best the State can offer is that “[i]t was reasonable for the jury to conclude
that Petitioner, as PEC’s attorney, would have been familiar with those provisions
[that the State thinks Fuelberg acted contrary to in a manner sufficient to justify
criminal prosecution].” Resp. 4-5.
But that is rank speculation, without any evidentiary support (unsurprisingly,
the State provides no record citation). It is unclear why the State thinks Demond—an
outside energy lawyer—would be familiar with the minutiae of his client’s CEO’s
employment agreement. Moreover, even if Demond had known the terms of
Fuelberg’s employment contract, he was obviously not required to second-guess a
CEO’s estimation of whether hiring outside consultants was or was not an
“unauthorized appropriation” of his company’s funds. The State’s apparent belief
otherwise only further underscores how radical this prosecution is.
The evidence does not remotely establish that Demond knew his conduct
constituted a crime. It shows he followed his client’s designated representative’s
instructions with regards to billing procedures. It would be absurd to conclude
6
Demond knew he was facilitating a crime based on those billing instructions—
particularly in light of the legitimate business reasons Fuelberg gave him.
If the Third Court’s opinion stands, outside counsel can no longer rely on the
approval of a CEO or general counsel to bill the company for particular expenses in a
particular manner. Instead, a lawyer may need to confirm every billing practice with
the company’s board of directors, and perhaps the Attorney General as well.
But make no mistake: that is the inevitable consequence of the State’s theory.
In its response, the State takes care to point out that Demond’s client was the PEC, not
Fuelberg—suggesting that it was Demond’s duty to confirm with his true client before
agreeing to the billing practices in question. Resp. 6. Indeed, the State thinks that
Demond should have known “Fuelberg was no longer acting in the interest of PEC,”
id., when he chose to spend 0.0048 percent of a single year’s operating budget to
retain a lobbyist and local counsel—thus demanding that outside counsel second-
guess the business decisions of their client’s executives or face jail time. Needless to
say, the State’s position here is troubling.
III. The Third Court’s decision will have grave consequence on legal and
business decision-making.
Finally, this Court should grant the petition because this case raises a host of
novel legal theories that will have a significant effect on the relationship between
Texas businesses and their outside lawyers. This Court should settle those important
issues for the benefit of the entire state.
7
The Third Court essentially held that an authorized expenditure may become
unauthorized if a jury, with hindsight, determines that it was ill-advised or wasteful.
Specifically, the court declared the Curtis and Price engagements violated Fuelberg’s
duty, under his employment contract, to “perform all of his duties properly and
faithfully in the best interest of the PEC.” Demond, 2014 WL 6612510, at *7. It is
frightening to imagine empowering jurors to convict an executive simply because they
disagree—with the benefit of hindsight—on whether certain actions were or were not
in the best interest of his company. The holding below transforms boilerplate
language in an employment agreement into the basis of a criminal conviction.
The Third Court should have avoided hinging criminal liability on a jury’s
second-guessing of a CEO’s commercial assessment of the value of intangible goods
by applying the same business judgment rule that shields corporate executives from
liability for unwise decisions in innumerable contexts. That rule reflects “the
unanimous decision of American courts to eschew intervention in corporate decision-
making.” See Miller v. Am. Tel. & Tel. Co., 507 F.2d 759, 762 (3d Cir. 1974). Texas
courts also will not impose liability upon a corporate director for mistakes of business
judgment that damage corporate interests. See, e.g., Gearhart Indus., Inc. v. Smith
Int’l, Inc., 741 F.2d 707, 721 (5th Cir. 1984); Cates v. Sparkman, 11 S.W. 846, 849
(Tex. 1889); Batey v. Droluk, 2014 WL 1408115, at *13 (Tex. App.—Houston [1st
Dist.] Apr. 10, 2014, no pet.).
8
The business judgment rule applies not only in civil cases—it can apply in the
criminal context as well. See, e.g., United States v. D’Amato, 39 F.3d 1249, 1258 (2d
Cir. 1994). And for good reason.
The State, however, worries that if the rule is applied in the criminal context, it
would prevent any misapplication conviction arising in a corporate environment.
Resp. 8. But this fear is utterly unfounded. The business judgment rule obviously has
its limits, particularly in the context of a misapplication charge.
The misapplication of fiduciary property statute criminalizes dealing with
property contrary to an agreement or a law. TEX. PENAL CODE § 32.45. So, for
example, if a corporation’s by-laws prohibit spending company funds on future
investors, but the CEO consistently wines and dines prospective financiers on the
corporation’s dime, he has dealt with property he holds as a fiduciary contrary to an
agreement—and therefore has committed misapplication of fiduciary property. In that
illustration, the business judgment rule would not save the CEO—even if every
potential backer ultimately invested in the company to the company’s benefit—
because his actions were in direct violation of an agreement, as prohibited by the
statute. The limit on his authority pursuant to an agreement was clear; thus, there was
no business judgment involved.
But when the basis for a misapplication conviction is boilerplate language in an
agreement requiring the fiduciary to exercise care in managing the company’s
9
affairs—as Fuelberg’s employment contract in this case did—a level of judgment is
inherently called for. When a CEO faces a complex business decision of that nature—
one that is not specifically addressed in any agreement or law—he should receive the
protection of the business judgment rule before being sent to jail.
PRAYER FOR RELIEF
For the foregoing reasons, the petition should be granted.
DATED: February 20, 2015 Respectfully submitted,
/s/ James C. Ho
James C. Ho
State Bar No. 24052766
Prerak Shah
State Bar No. 24075053
GIBSON, DUNN & CRUTCHER LLP
2100 McKinney Avenue, Suite 1100
Dallas, TX 75201-6912
Tel.: (214) 698-3264
Fax: (214) 571-2917
jho@gibsondunn.com
pshah@gibsondunn.com
COUNSEL FOR PETITIONER
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CERTIFICATE OF COMPLIANCE
In compliance with Texas Rule of Appellate Procedure 9.4(i)(2)(E), this brief
contains 2,387 words, excluding the portions of the brief exempted by Rule 9.4(i)(1).
/s/ James C. Ho
James C. Ho
PROOF OF SERVICE
I certify that on February 20, 2015, a true and correct copy of this motion was
served on the following counsel of record via electronic mail:
Dustin Howell
OFFICE OF THE ATTORNEY GENERAL
P.O. Box 12548 (MC 059)
Austin, Texas 78711-2548
dustin.howell@texasattorneygeneral.gov
Lisa C. McMinn
STATE PROSECUTING ATTORNEY
P.O. Box 13406
Austin, Texas 78711-3046
lisa.mcminn@spa.texas.gov
/s/ James C. Ho
James C. Ho
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