Kafai Lee v. Kenneth Lau, Connie Andrews, and Golden Wok, LTD. ( 2015 )

ACCEPTED
04-15-00260-CV
FOURTH COURT OF APPEALS
SAN ANTONIO, TEXAS
9/4/2015 1:00:14 PM
KEITH HOTTLE
CLERK
No. 4-15-00260-CV
_____________________________________________
FILED IN
IN THE FOURTH COURT OF APPEALS 4th COURT OF APPEALS
SAN ANTONIO, TEXAS
SAN ANTONIO, TEXAS 9/4/2015 1:00:14 PM
_____________________________________________
KEITH E. HOTTLE
Clerk
KAFAI LEE,
Appellant,
V.
KENNETH LAU, CONNIE ANDREWS,
CHINA ROSE MANAGEMENT, LLC,
AND CHINA ROSE, LTD.
Appellees.
____________________________________________
Appealed from the 45th Judicial District Court of
Bexar County, Texas
Cause No. 2012-CI-12940
_____________________________________________
APPELLANT’S BRIEF
_____________________________________________
PRINS LAW FIRM
4940 Broadway, Suite 108
San Antonio, Texas 78209
(210) 820-0833
(210) 820-0929 [fax]
taprins@prinslaw.com
Todd A. Prins
State Bar No. 16330400
ATTORNEY FOR APPELLANT
KAFAI LEE
ORAL ARGUMENT REQUESTED
IDENTITY OF PARTIES AND COUNSEL
Appellant Kafai Lee
Appellant’s Counsel Todd A. Prins
State Bar No. 16330400
PRINS LAW FIRM
4940 Broadway, Suite 108
San Antonio, Texas 78209
(210) 820-0833
(210) 820-0929 [Fax]
taprins@prinslaw.com
Kenneth Lau, Connie Andrews, China
Appellees Rose Management, LLC and China
Rose, Ltd.
Appellees’ Counsel Sylvan S. Lang, Jr.
State Bar No. 11898700
LANG LAW FIRM, P.C.
13409 N.W. Military Hwy., Ste 210
San Antonio, Texas 78231
Telephone: (210) 479-8899
Facsimile: (210) 479-0099
Sylvan@langfirm.com
Attorney for Kenneth Lau & Connie
Andrews
Thomas G. Kemmy
State Bar No. 11254600
LAW OFFICE OF THOMAS G.
KEMMY
322 W. Woodlawn Avenue
San Antonio, Texas 78212
Telephone: (210) 735-2233
Facsimile: (210) 736-9025
tkemmy@sbcglobal.net
Attorney for China Rose Management,
LLC and China Rose, Ltd.
2
TABLE OF CONTENTS
Identity Of Parties And Counsel .......................................................................................... 2
Table of Authorities ............................................................................................................. 4
Statement of the Case .......................................................................................................... 7
Statement on Oral Argument ............................................................................................... 8
Issues Presented for Review ................................................................................................ 8
Statement of Facts ............................................................................................................. 10
Summary of the Argument ................................................................................................ 13
Standard of Review ........................................................................................................... 14
Arguments & Authorities .................................................................................................. 15
Issue 1: The Trial Court Improperly Reversed The Jury’s Negative Finding To Jury
Question No. 5 Because There Was Sufficient Evidence To Support The Jury’s
Finding. .......................................................................................................................... 15
Issue 2: The Trial Court Improperly Reversed The Jury’s Negative Finding In Jury
Questions Nos. 7b And 8b Because There Was Sufficient Evidence To Support The
Jury’s Finding................................................................................................................. 18
Issue 3: The Trial Court’s Findings Of Fact And Conclusions Of Law Do Not Support
The Final Judgment Because The Trial Court Failed Make Findings As To Appellant’s
Statute Of Limitations Defense. ..................................................................................... 19
Issue 4: The Trial Court Abused Its Discretion When It Ordered Appellant To Forfeit
His Partnership Interest In China Rose, Ltd. Because Such A Remedy Is Not Available
In Texas. ......................................................................................................................... 22
Issue 5: The Trial Court Improperly Awarded $452,000 In Actual Damages Because
There Was Legally And Factually Insufficient Evidence To Support Such A Finding. 26
Issue 6: By Awarding Both Forfeiture And Actual Damages, The Trial Court Granted
Appellees And Impermissible Double Recovery. .......................................................... 27
Issue 7: The Trial Court Erred When It Awarded Appellees Attorney’s Fees Because
Such A Remedy Is Not Available For Breach Of Fiduciary Duty. ............................... 28
CONCLUSION AND PRAYER ....................................................................................... 34
3
TABLE OF AUTHORITIES
Cases
Allison, v. Harrison, 156 S.W.2d 137 (Tex. 1941) ..................................................23
Brown & Brown of Tex., Inc. v. Omni Metals, Inc., 317 S.W.3d 361, 2010 Tex.
App. LEXIS 2338, *96 (Tex. App. Houston [1st Dist.] 2010, no pet.) ...............32
Burrow v. Acre, 997 S.W.2d 229 (Tex. 1999) ............................................ 22, 23, 25
Cale’s Cleane Scene Carwash, Inc. v. Hubbard, 76 S.W.3d 784 (Tex. App.—
Houston [14th Dist.] 2002, no pet.) .....................................................................14
Crawford v. McDonald, 88 Tex. 626, 33 S.W. 325 (1895) .....................................20
De La Rosa v. Kaples, 812 S.W.2d 432 (Tex. App.-San Antonio 1991, writ denied)
..............................................................................................................................31
Deutsch v. Phillips Petroleum Co., 56 Cal. App. 3d 586, (Cal. App. 2d Dist. 1976)
..............................................................................................................................24
Dobson v. Dobson 594 S.W.2d 177 (Tex. App. —Houston [1st Dist.] 1980) .........25
Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238 (Tex. 1985) ..................22
ERI Consulting Eng’rs., Inc. v. Swinnea, 318 S.W.3d 867 (Tex. 2010) .......... 23, 24
G.R.A.V.I.T.Y. Enters. v. Reece Supply Co., 177 S.W.3d 537, 2005 Tex. App.
LEXIS 6266, *18-19 (Tex. App. -- Dallas 2005, no pet.) ...................................30
Gerdes v. Kennamer, 155 S.W.3d 541 (Tex.App.—Corpus Christi 2004, no pet.) 22
Gereb v. Smith-Jaye, 70 S.W.3d 272, 273 (Tex. App.-San Antonio 2002, no pet.)28
4
Holland v. Wal-Mart Stores, Inc. 1 S.W.3d 91 (Tex. 1999)....................................29
Holley v. Watts, 629 S.W.2d 694 (Tex. 1982) .........................................................14
Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509 (Tex. 1942) .........23
Marin Real Estate Partners, L.P. v. Vogt, 373 S.W.3d 57 (Tex. App.—San
Antonio, 2011, no pet.) ........................................................................................28
Massey v. Columbus State Bank, 35 S.W.3d 697, 2000 Tex. App. LEXIS 7624
(Tex. App. -- Houston [1st Dist.] 2000, pet. denied) .................................... 31, 32
McCullough v. Scarbrough, Medlin & Assocs., 435 S.W.3d 871 (Tex. App.—
Dallas, 2014, pet. denied) ....................................................................................29
McGuire v. Kelley, 41 S.W.3d 679 (Tex. App.—Texarkana 2001, no pet.) .... 29, 30
Nationwide Mut. Ins. Co. v. Holmes, 842 S.W.2d 335, 1992 Tex. App. LEXIS
3188 (Tex. App. San Antonio 1992, writ denied). ..............................................33
O’Flaherty v. Belgum 115 Cal. App. 4th 1044 (Cal. App. 2d Dist. 2004) ..............24
Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014) .........................................................17
Scharer v. John’s Cars, Inc., 776 S.W.2d 228 (Tex. App.—El Paso 1989, writ
denied) ........................................................................................................... 14, 15
Schiller v. Elick, 240 S.W.2d 997 (Tex. 1951) ........................................................23
See In re Estate of Corriea, 719 A.2d 1234 (D.C. 1998) ........................................24
Snepp v. United States, 444 U.S. 507 (1980) ...........................................................24
5
Tamez v. Tamez, 822 S.W.2d 688 (Tex. App.—Corpus Christi, 1991, writ denied)
..............................................................................................................................21
Tanner v. Nationwide Mut. Fire Ins. Co., 289 S.W.3d 828 (Tex. 2009) .......... 14, 19
Turner v. Turner, 385 S.W.2d 230, 1964 Tex. LEXIS 630, *8, 8 Tex. Sup. J. 112
(Tex. 1964) ...........................................................................................................32
Vickery v. Comm’n for Lawyer Discipline, 5 S.W.3d 241 (Tex. App.—Houston [1st
Dist.] pet. denied) .......................................................................................... 20, 21
Western Reserve Life Assurance Co. of Ohio v. Graben, 233 S.W.3d 360 (Tex.
App.—Fort Worth, 2007, no pet.) .......................................................................29
Statutes
Tex. Civ. Prac. & Rem. C. § 38.001 ........................................................................33
TEX. CIV. PRAC. & REM. Code §16.004(a)(5). .........................................................19
Rules
Tex. R. App. P. 38.1(e) ..............................................................................................8
Tex. R. App. P. 39.1(d) ..............................................................................................8
TEX. R. CIV. P. 299 ...................................................................................................21
6
STATEMENT OF THE CASE
Appellant/Plaintiff/Counter-Defendant, Kafai Lee (“Lee” or “Appellant”)
sued Kenneth Lau, Connie Andrews, Appellees/Defendants/Counter-Plaintiffs
(“Lau”, “Andrews”, or “Appellees”), and Golden Wok, Ltd., seeking declaratory
relief that Lee was a one-third owner in the partnership that owns a Golden Wok
Restaurant located on Marbach Road in San Antonio, Texas. (Appx. 4: Plaintiff's
Original Petition).
Lau, Andrews, and Golden Wok, Ltd., asserted counter-claims against
Lee, alleging tortious interference with existing and prospective contractual
relations and wrongful diversion of funds.1 (1 C.R. at 11). Further, Lau and
Andrews alleged Lee breached his fiduciary duties of loyalty, honesty, fidelity,
and good faith. China Rose Management, LLC and China Rose, Ltd., (“China
Rose, LLC”, “China Rose, Ltd”, or “Appellees”), as intervenors, also asserted
cross-claims against Lee for tortious interference with contracts, breach of
fiduciary duties, and conversion. (1 C.R. at 17, 985).
After a trial on the merits, the Court submitted the case to the jury. The
jury returned a verdict that was partially in Lee’s favor. (6 C.R. at 2031) Despite
the verdict, the Court signed and entered the Final Judgment in this case on
1
Golden Wok, Ltd. has been dismissed from the lawsuit and is not the subject of this appeal. (6CR40).
2
This standard of review applies to points of error 1, 2, and 5.
3
Issue: 1 supra at pp. 9-11.
4
Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1, 7 (Tex. 1991) (holding that when a party pursues several
7
February 26, 2015 which reversed some of the jury’s findings and granted full
relief to Appellees. (6 C.R. at 2089).
STATEMENT ON ORAL ARGUMENT
Oral Argument and discussion of the facts and the applicable precedent
would significantly aid the Court in deciding this case. See Tex. R. App. P.
38.1(e), 39.1(d). Furthermore, the trial court’s award of forfeiture of a partnership
interest for breach of fiduciary duty is a novel remedy that has never been awarded
in Texas. For these reasons, Appellant requests oral argument.
ISSUES PRESENTED FOR REVIEW
Issue 1: The trial court improperly reversed the jury’s negative finding
to jury question No. 5 because there was sufficient evidence to support the jury’s
finding.
Issue 2: The trial court improperly reversed the jury’s negative finding
in jury questions Nos. 7b and 8b because there was sufficient evidence to support
the jury’s finding.
Issue 3: The trial court’s findings of fact and conclusions of law do not
support the final judgment because the trial court failed make findings as to
appellant’s statute of limitations defense.
8
Issue 4: The trial court improperly ordered Appellant to forfeit his
partnership interest in China Rose, Ltd. because such a remedy is not available in
Texas.
Issue 5: The trial court improperly awarded $452,000 in actual damages
because there was legally and factually insufficient evidence to support such a
finding.
Issue 6: By awarding both forfeiture and actual damages, the trial court
granted Appellees an impermissible double recovery.
Issue 7: The trial court erred when it awarded Appellees attorney’s fees
because such a remedy is not available for breach of fiduciary duty.
9
STATEMENT OF FACTS
Appellant, Kafai Lee, and Appellees, Kenneth Lau and Connie Andrews, are
partners in various business entities that operate Chinese food restaurants in San
Antonio and Austin. (Appx. 4: Plaintiff's Original Petition). The entities most
important to this appeal are Golden Wok, Ltd., who was a defendant and counter-
plaintiff before it was dismissed from the lawsuit, and Appellee China Rose, Ltd.
(6 C.R. at 2087).
Golden Wok, Ltd. is owned by general partner Golden Wok Management,
LLC whose sole members are Kenneth Lau and Connie Andrews, and limited
partner Golden Wok Holdings, LLP whose sole partners are also Lau and
Andrews. (9 R.R.; D's Exh. 39). Golden Wok, Ltd. owns and operates the Golden
Wok restaurant on Marbach Road in San Antonio (“Golden Wok—Marbach”). (4
R.R. at 11:3-6) At trial, Kafai Lee sought a declaratory judgment entitling him to a
1/3 interest in Golden Wok—Marbach. (6 C.R. at 2029, 2031). The jury found that
the parties did not agree to be partners in Golden Wok—Marbach, and Appellant
does not appeal the jury’s finding on this issue. Id.
China Rose, Ltd. is owned by general partner China Rose Management,
LLC, whose managers are Lee, Lau and Andrews, and limited partner, China Rose
Holdings, LLP, whose partners are also Lee, Lau and Andrews in equal 1/3 shares.
(9 R.R., D's Exh. 36) China Rose, Ltd. owns and operates four restaurants in San
10
Antonio that are operated by third-party restaurant managers. Pursuant to
restaurant management agreements, the restaurant managers are obligated to pay
monthly fees to China Rose, Ltd. (9 R.R., D's Exh. 1-3).
China Rose, Ltd. and China Rose Management, LLC, as intervenors, joined
Lau and Andrews, as counter-plaintiffs, alleging inter alia breach of fiduciary duty
against Lee. In support of their claim for breach of fiduciary duty, Appellees
alleged: 1) Lee breached his fiduciary duty when he opened a competing Wok Inn
restaurant at Loop 1604 and Culebra Road; 2) Lee breached his fiduciary duty
when he, on behalf of China Rose, Ltd., amended three of the restaurant
management agreements to allow those the restaurant managers to pay reduced
monthly fees over time; and 3) Lee breached his fiduciary duty when Lee
subsequently terminated the restaurant management agreements and moved the
agreements, and income due thereunder, to his own company CHR, LLC. (1 C.R.
at 25, 985).
Points 1) and 2) above were submitted to the jury for determination. (6 C.R.
at 2029, 2031). With respect to point 3), Lee stipulated that he breached his
fiduciary duty to Appellees when he terminated the restaurant management
agreements and moved the agreements and income to CHR, LLC. Lee argued,
however, that such conduct did not harm or injure Appellees because the
terminations were voided, any money Lee diverted to CHR, LLC was immediately
11
returned to China Rose, Ltd., and that Lee in no way profited from his conduct. (5
R.R. at 98: 5-14). The jury was therefore asked whether Lee intended to cause
Appellees injury, and whether Appellees were in fact injured, as a result of Lee’s
conduct. (6 C.R. at 2029, 2031).
According to the jury, Lee did not breach his fiduciary duty when he opened
the competing Wok Inn or when he amended the restaurant management
agreements. (6 C.R. at 2031). The jury also found that while Lee intended to harm
Lau, Andrews, and China Rose, Ltd. when he terminated the restaurant
management agreements and moved the agreements and income to CHR, LLC,
such conduct did not actually harm the Appellees. Id.
Despite the verdict, the trial court entered judgment n.o.v. granting
Appellees full relief (the “Final Judgment”). (6 C.R. at 2089). Specifically, the
Final Judgment reversed the jury’s verdict and found 1) Lee breached his fiduciary
duty when he amended the restaurant management agreements; and 2) Lee’s
subsequent termination of the restaurant management agreements and movement
of the agreements and income to CHR, LLC caused Appellees harm. The Final
Judgment awarded actual damages in the amount of $452,000 plus attorney’s fees.
Id. The Final Judgment also required Lee to forfeit his ownership interest in China
Rose, Ltd. and China Rose Management, LLC. Lee now appeals the trial court’s
Final Judgment. Id.
12
SUMMARY OF THE ARGUMENT
The trial court erred when it reversed the jury’s findings and entered a
Final Judgment granting full relief to Appellees. Specifically, the Court
disregarded the jury’s findings that Appellant did not breach his fiduciary duty;
that Appellees, Lau, Andrews, and China Rose Ltd., suffered no damage
resulting from Appellant’s alleged breach of fiduciary duty; and ordered
Appellant to forfeit his ownership interest in China Rose, Ltd. and China Rose
Management, LLC. The Court further awarded actual damages to Appellees,
Lau, Andrews and China Rose, Ltd., in the amount of $452,000, even though no
evidence was introduced at trial to support the award. Finally, in connection with
the stipulated breach of fiduciary duty claim, the Court awarded Appellees, Lau,
Andrews, and China Rose, Ltd. $8,552.50 in attorney’s fees as actual damages
incurred prior to the initiation of the lawsuit, plus a combined total of $158,095
in attorney’s fees incurred through trial for the court-entered breach of fiduciary
duty finding.
The Court erred in awarding the relief set forth in the Final Judgment
because the relief: 1) is not supported by the evidence; 2) impermissibly
disregards the jury’s findings; 3) constitutes a “double recovery” in favor of
Appellees; and 4) impermissibly awards attorney’s fees. Accordingly, the Court
13
abused its discretion when it entered the Final Judgment and the appellate court
should reverse the trial court’s ruling and render judgment in favor of Appellant.
STANDARD OF REVIEW2
The appellate court reviews a judgment notwithstanding the verdict under a
“no-evidence” standard, meaning the appellate court credits evidence favoring the
jury verdict if reasonable jurors could, and disregards contrary evidence unless
reasonable jurors could not. Tanner v. Nationwide Mut. Fire Ins. Co., 289 S.W.3d
828, 830 (Tex. 2009). In determining a “no-evidence” point, all testimony must be
considered in the light most favorable to the Appellant and every reasonable
intendment deductible from the evidence is to be indulged in the Appellant’s favor.
Scharer v. John’s Cars, Inc., 776 S.W.2d 228, 231 (Tex. App.—El Paso 1989, writ
denied).
The trial judge may not render a judgment n.o.v., even though the great
weight and preponderance of the evidence might be to the contrary. Id. at 230-31.
That is, a trial court may not disregard a jury’s negative finding and substitute its
own affirmative finding unless the evidence conclusively establishes the
affirmative finding as a matter of law. Holley v. Watts, 629 S.W.2d 694, 696 (Tex.
1982); Cale’s Cleane Scene Carwash, Inc. v. Hubbard, 76 S.W.3d 784, 786 (Tex.
App.—Houston [14th Dist.] 2002, no pet.). Therefore, the only way for the trial
2
This standard of review applies to points of error 1, 2, and 5.
14
court to properly disregard the jury’s verdict in this case, is if the evidence
conclusively established, as a matter of law, that Appellant breached his fiduciary
duty to Appellees and, as a result, that Appellee’s suffered substantial injury.
Scharer at 231. Because there is more than a scintilla of evidence establishing that
Appellant did not breach his fiduciary duty to Appellees and that Appellees were
not damaged, the verdict must be upheld and the trial court’s judgment should be
reversed.
ARGUMENTS & AUTHORITIES
Issue 1: The trial court improperly reversed the jury’s negative finding to jury
question No. 5 because there was sufficient evidence to support the jury’s finding.
In Question No. 5, the Court asked the jury:
“With regard to the ‘First Amendment’ to the three restaurant management
agreements that reduced the monthly payments from each of the three
China Rose restaurant managers, did Kafai Lee fail to comply with his
fiduciary duty to Kenneth Lau, Connie Andrews, and China Rose, Ltd?”
The jury answered “No.” (6 C.R. at 2039).
The First Amendments were implemented, in part, to extend three
restaurant management agreements whose terms were for only six months. (9
R.R. D’s Exh. 1-3). The First Amendments also contained a contractual
provision that would allow restaurant managers to pay reduced monthly
management fees over an extended period of time (the “step-down” provision).
15
(9 R.R.; Ds’ Ex. 18 and 19). Lee testified that the step-down provision was
implemented to reward restaurant managers who performed well over time at
their respective restaurants by allowing them to use a portion of the management
fees which would otherwise go the China Rose, Ltd., to repair the aging
restaurant facilities and equipment. (3 R.R. at 33: 1-18).
The evidence shows that Appellees were aware of and consented to the
First Amendment. First, the jury heard evidence that Appellee Lau implemented
a six-month term in the original restaurant management agreements in order to
test the performance of the newly hired restaurant managers, suggesting that if
the managers performed well, their contract would be extended. (3 R.R. at 33:
16-18, 161: 8-18; 4 R.R. at 101: 13-231). Second, the jury heard testimony that
the Appellant Lee informed Lau about the First Amendments and Lau did not
object. (3 R.R. at 32: 8-19; 4 R.R. 101: 20-21). Third, the First Amendments
were entered into in 2008 (Ds’ Ex. 18 and 19; 3 R.R. 161: 5-9), years before the
dispute between parties ever began, suggesting that Appellees, who were in
control of China Rose’s books and records (3 R.R. at 193:20-194:6; 4 R.R. at
112:7-13, 125:16-18), knew about and agreed to the First Amendments. Fourth,
China Rose, Ltd. continued to receive restaurant management fees for years after
the original restaurant management agreements expired (4 R.R. 130:6-11),
suggesting Appellees knew of and agreed to the First Amendments which
16
extended the term of the parties’ original agreement with the restaurant managers
by approximately ten years (9 R.R.; Ds’ Ex. 18 and 19; 3 R.R. at 6-15).
Finally, evidence was introduced to the jury showing that, as manager of
China Rose Management, LLC, (China Rose, Ltd.’s general partner), Appellant
was fully authorized to enter into the First Amendments (9 R.R. Ds’ Ex. 36 at 4;
9 R.R. Ds’ Ex. 38 at 3.); See also Ritchie v. Rupe, 443 S.W.3d 856, 900 (Tex.
2014) (holding the business judgment rule shields managers from liability for
rational decisions made for the company’s benefit).
In light of this evidence, the jury found that Appellant did not breach his
fiduciary duty when he executed the First Amendments with the restaurant
managers. (6 C.R. at 2039). Nevertheless, the Court substituted its own
judgment for that of the jury’s, disregarded the jury’s negative finding, and
affirmatively found that Appellant did in fact breach his fiduciary duty to
Appellees Lau, Andrews, and China Rose, Ltd. (6 C.R. at 2089). In light of the
evidence presented at trial, reasonable minds could have concluded that
Appellant’s conduct did not constitute a breach of fiduciary duty. Tanner at 830.
Therefore, the trial court erred when it disregarded the jury’s findings to question
No. 5 and the trial court’s Final Judgment should be reversed.
17
Issue 2: The trial court improperly reversed the jury’s negative finding in jury
questions nos. 7b and 8b because there was sufficient evidence to support the
jury’s finding.
In Jury Question Nos. 7b and 8b, the jury found that Appellant Lee did not
cause Appellants Lau, Andrews, or China Rose, Ltd. substantial injury or harm
when Lee terminated the China Rose restaurant management agreements and
moved those agreements and income to his limited liability company, CHR,
LLC. (6 C.R. at 2041-2042).
To support this finding, the jury heard evidence that the China Rose
restaurant management agreements were never actually put into effect, any
money Appellant diverted to CHR, LLC was immediately returned, and that
Appellant in no way profited from the cancellation of the China Rose restaurant
management agreements. (3 R.R. at 47:1 - 49:10, 123:10-15, 164:9-20; 4 R.R.
33:3-34:18, 129:6-130:19 , 136:16-137:2). Appellees also could not articulate
any injury or damages they suffered as a result of the termination and transfer
of the China Rose restaurant management agreements. (4 R.R. at 34:15-18,
108:9-16, 129:18-130:19).
In light of the evidence, the jury found that that Appellant Lee did not
cause Appellees Lau, Andrews, or China Rose, Ltd. substantial injury or harm
when Lee moved the China Rose restaurant management agreements and income
to CHR, LLC. (6 C.R. at 2041). Nevertheless, the Court substituted its own
18
judgment for that of the jury’s, disregarded the jury’s negative finding, and
affirmatively found that Lee’s conduct substantially injured or harmed Lau,
Andrews, and China Rose, Ltd. (6 C.R. at 2090-2091). In light of the evidence
presented at trial, reasonable minds could have concluded that Lee’s conduct did
not substantially injure or harm Lau, Andrews, or China Rose, Ltd. Tanner at
830. Therefore, the trial court erred when it disregarded the jury’s findings to
questions numbers 7b and 8b, and the trial court’s final judgment should be
reversed.
Issue 3: The trial court’s findings of fact and conclusions of law do not support
the Final Judgment because the trial court failed make findings as to Appellant’s
statute of limitations defense.
Appellant raised the statute of limitations as an affirmative defense in
response to Appellees’ claim for breach of fiduciary duty. (4 C.R. at 1444). As it
relates to this appeal, Appellees allege that Appellant breached his fiduciary duty
when he executed the First Amendments to the restaurant management
agreements. (1 C.R. at 88-89). However, because the First Amendments were
executed in February, 2008 (9 R.R.; Ds’ Ex. 18 and 19), and Appellees’ failed to
file their counterclaim until December 19, 2012, Appellees’ claim is barred by
the four-year limitations period. See TEX. CIV. PRAC. & REM. Code
§16.004(a)(5).
19
At trial, the parties agreed that all affirmative defenses would be
determined by the trial court after the jury returned its verdict. (4 R.R. at 51:6-
24). Because the jury found that Appellant did not breach his fiduciary duties (6
C.R. at 2037), there was no need for the trial court to address Appellant’s
affirmative defenses. However, once the trial court reversed the jury’s decision,
it was required to make findings as to Appellant’s statute of limitations defense
which, despite Appellant’s request, it failed to do. (6 C.R. at 42; 6 R.R. at 18:21 -
19:17).
Public policy favors the validity of judgments. See Crawford v.
McDonald, 88 Tex. 626, 33 S.W. 325, 328 (1895). When a court makes findings
of fact, but inadvertently omits an essential element of a ground of recovery or
defense, the presumption of validity will supply the omitted element by
implication. Vickery v. Comm’n for Lawyer Discipline, 5 S.W.3d 241, 252 (Tex.
App.—Houston [1st Dist.] pet. denied). However, if the record demonstrates the
trial judge deliberately omitted the element, the presumption is refuted and the
element cannot logically be supplied by implication. Id. In other words, the
presumption of validity is rebutted where the record suggests the trial court was
aware of the omission and its alleged significance, yet deliberately omitted the
element from its written findings. Id. at 253.
20
If a ground of recovery or defense is entirely omitted, i.e., if the trial court
omits every element of the particular ground of recovery or defense, this is some
evidence the court did not rely on the ground or defense in reaching its decision.
Id. “In such case, the omission is deemed to be deliberate; ‘the judgment may
not be supported upon appeal by a presumed finding upon any ground of
recovery or defense, no element of which has been included in the findings of
fact . . .’.” Id. citing TEX. R. CIV. P. 299. Refusal of the court to make a finding
requested shall be reviewable on appeal. TEX. R. CIV. P. 299.
Here, the trial court was asked twice to make rulings on Appellant’s statute
of limitations defense—first before the charge was submitted to the jury (5 R.R.
at 51:6-23), and again in Appellant’s request for findings of fact and conclusions
of law. (6 C.R. at 2095). Because the trial court’s findings of fact omit every
element of Appellant’s statute of limitations defense, the Final Judgment cannot
be supported on appeal because the affirmative defense, though properly before
the trial court, was not even considered. The trial court’s failure to make findings
regarding Appellant’s limitations defense constitutes reversible error because it
has prevented Appellant from adequately presenting the matter on appeal.
Vickery at 256, citing Tamez v. Tamez, 822 S.W.2d 688, 692-93 (Tex. App.—
Corpus Christi, 1991, writ denied). Therefore, the trial court’s Final Judgment
should be reversed.
21
Issue 4: The trial court abused its discretion when it ordered Appellant to forfeit
his partnership interest in China Rose, Ltd. because such a remedy is not available
in Texas.
Forfeiture is an equitable remedy. Burrow v. Acre, 997 S.W.2d 229, 245
(Tex. 1999). Awards of equitable remedies are reviewed under an abuse of
discretion standard. See Gerdes v. Kennamer, 155 S.W.3d 541, 545 (Tex.App.—
Corpus Christi 2004, no pet.). A court abuses its discretion if it acts without
reference to any guiding rules or principles. Downer v. Aquamarine Operators,
Inc., 701 S.W.2d 238, 241 (Tex. 1985).
Prior to submitting the Court’s charge to the jury, Appellant stipulated that
he breached his fiduciary duty to Appellees when he terminated the China Rose
restaurant management agreements and moved those agreements and income to
Appellant’s own company, CHR, LLC. (5 R.R. at 26:8-12, 28:3-8). Appellant
did not stipulate that he caused Appellees any damages and, in fact, had argued
that he did not. (5 R.R. at 26:13-27:4). The issue of damages was submitted to
the jury and the jury found that Appellees did not suffer substantial harm or
injury as a result of Appellant’s conduct. (6 C.R. at 2042). The Court
disregarded the jury’s finding and ordered that Appellant forfeit his ownership
interest in China Rose, Ltd. and China Rose Management, LLC. (6 C.R. at
2091).
22
Where an agent who breaches his fiduciary duty has profited or benefitted
from a transaction, the principal is entitled to equitable relief, such as rescission,
profit disgorgement, or fee forfeiture, without having to show that the breach
caused damages. Burrow at 239-40; Kinzbach Tool Co. v. Corbett-Wallace
Corp., 160 S.W.2d 509, (Tex. 1942). Profit disgorgement is appropriate when a
fiduciary uses his position to gain a benefit for himself at the expense of the
principal. Schiller v. Elick, 240 S.W.2d 997, 999 (Tex. 1951). Further, an agent
who breaches his fiduciary duty may forfeit some or all of the fees incurred in the
transaction. Burrow at 240-41. Finally, the Court may rescind a transaction
accomplished by a breach of the agent’s fiduciary duty. See e.g. Allison, v.
Harrison, 156 S.W.2d 137, 140 (Tex. 1941).
In support of its award of forfeiture, the trial court relied on ERI
Consulting Eng’rs., Inc. v. Swinnea, 318 S.W.3d 867 (Tex. 2010) (Appx. 3 -
Findings of Fact and Conclusions of Law at ¶31). In ERI Consulting, the Court
held that when a business partner breaches his fiduciary duty by fraudulently
inducing another partner to buy out his interest, the consideration received in the
transaction may be subject to forfeiture. ERI Consulting at 882. While this case
deals with a partnership dispute, it does not stand for the proposition that
forfeiture of a partnership interest is an appropriate remedy for breach of
fiduciary duty. ERI Consulting merely stands for the proposition that any
23
consideration received by virtue of an agent’s breach of fiduciary duty is subject
to forfeiture as an equitable remedy. Id. Because Appellant did not profit from
his alleged breach, and Appellant’s partnership interests were not obtained in
connection with any alleged breach, forfeiture of his partnership is outside the
scope of the relief contemplated in ERI Consulting.
It is also important to note that the breaching fiduciary in ERI Consulting,
Larry Snodgrass, was allowed to keep his partnership interest. ERI Consulting at
871. This is because fee forfeiture is generally not considered punitive to a
defendant fiduciary. See In re Estate of Corriea, 719 A.2d 1234, 1241 (D.C.
1998) (explaining that fee forfeiture is not punitive in nature). Asset forfeiture,
however, flouts the safeguards that prevent equitable remedies from exacting
punitive measures and therefore can easily exceed the defendant’s gain. Snepp v.
United States, 444 U.S. 507, 515-516, (1980) (holding that constructive trust
remedies “[conform] relief to the dimensions of the wrong…since the remedy
reaches only funds attributable to the breach, it cannot saddle the [fiduciary]
agent with exemplary damages out of all proportion to his gain.”). It is well
established that courts generally discourage asset forfeiture. O’Flaherty v.
Belgum 115 Cal. App. 4th 1044, 1059 (Cal. App. 2d Dist. 2004), citing Deutsch
v. Phillips Petroleum Co., 56 Cal. App. 3d 586, 592 (Cal. App. 2d Dist. 1976)
(“[T]he law abhors forfeiture.”).
24
Never in Texas has a court required a partner to forfeit his ownership
interest in his company as an equitable remedy for breach of fiduciary duty. In
fact, when faced with the opportunity to order such forfeiture, Texas courts have
refused to do so. Dobson v. Dobson 594 S.W.2d 177, 181 (Tex. App. —Houston
[1st Dist.] 1980) (holding that a breach of a partnership agreement does not lead
to loss of a partner’s interest even if the breach is committed in bad faith.)
Courts have ordered fee forfeiture and profit disgorgement as an equitable
remedy against fiduciaries that profit from their breach of fiduciary duty. See
Burrow at 240. In this case, however, the jury found that Appellant did not profit
from the termination of the China Rose restaurant management agreements, or by
moving those agreements and income to CHR, LLC (6 C.R. at 2042).
Furthermore, Appellant’s ownership interest in the China Rose entities was
obtained in 2004, years before the breach in question (9 R.R.; Ds’ Ex. 32-38),
meaning Appellant’s ownership interest was not a byproduct of his breach of
fiduciary duty, and thus cannot be the subject of a forfeiture remedy. For these
reasons, in addition to the jury’s finding of no substantial harm or injury, there
was no equitable basis, much less legal precedent, which would permit the Court
to order Appellant to forfeit his ownership interest in China Rose, Ltd. and China
Rose Management, LLC. Therefore, the Court abused its discretion when it
25
ordered Appellant to forfeit his ownership interest in the China Rose entities and
the Final Judgment should be reversed.
Issue 5: The trial court improperly awarded $452,000 in actual damages because
there was legally and factually insufficient evidence to support such a finding.
The jury found that Appellant did not breach his fiduciary duty to
Appellees when he executed the First Amendments to the restaurant management
agreements and, as a result, the jury did enter an award of damages on the issue.
(6 C.R. at 2039). However, when the trial court reversed the jury’s finding, it
awarded Appellees $452,000 in actual damages. (6 C.R. at 2091). The trial court
calculated actual damages by multiplying the difference in the reduced
management fees received by China Rose, Ltd. under the step-down provision by
the number of months the restaurant managers began to pay reduced fees through
the date of trial. (Appx. 3 - Findings of Fact and Conclusions of Law at ¶ 9).
The trial court’s damages award should be reversed because, as discussed above,
there is more than a scintilla of evidence to support the jury’s verdict that
Appellant did not breach his fiduciary duty to Appellees when he executed the
First Amendments.3 The damages award should also be reversed because it is
unsupported by the evidence presented at trial.
3
Issue: 1 supra at pp. 9-11.
26
At trial, Appellee Connie Andrews testified that one of the restaurant
managers, Sun Yo Guan, was behind in her monthly payments to China Rose,
Ltd. (4 R.R. at 106:19-107:10). Ms. Andrews also testified that she did know
how many monthly payments Sun Yo Guan had missed since she became a
manager in 2007. (4 R.R. at 108:3-8). Essentially, the trial court’s calculation of
damages requires Appellant to pay the difference of the reduced monthly
management fees regardless of whether the restaurant managers actually paid
those fees. In other words, the trial court calculated actual damages based on the
amount the restaurant managers were supposed to pay under the step-down
provision, not what the managers have actually paid. No evidence was
introduced at trial setting forth the amount of fees the restaurant managers owed
after the step-down provision took effect and no evidence at was introduced at
trial showing the amount each of the managers actually paid. Therefore, there is
insufficient evidence to support the trial court’s award of damages and the Final
Judgment should be reversed.
Issue 6: By awarding both forfeiture and actual damages, the trial court granted
Appellees and impermissible double recovery.
By awarding forfeiture of Appellant’s ownership interest in China Rose,
Ltd. and China Rose Management, LLC in addition to the award of actual
damages, the Court granted Appellees a “double recovery” of damages.
27
Whether Appellees received a double recovery is a question of law, and
therefore in reviewing the issue, the Appellate Court conducts a de novo review.
Marin Real Estate Partners, L.P. v. Vogt, 373 S.W.3d 57, 75 (Tex. App.—San
Antonio, 2011, no pet.)
“A double recovery exists when a plaintiff is awarded more than
one recovery for the same injury. ‘Texas law does not permit double recovery.’”
The prohibition against double recovery is a corollary to the one satisfaction rule,
which provides that a plaintiff may recover only for the damages suffered as a
result of a particular injury.” Id. at 76 (internal citations omitted).
Here, the trial court reversed the jury’s verdict and found Appellant liable
for breach of fiduciary duty for executing the First Amendments to China Rose
restaurant management agreements (6 C.R. at 2091). However, the trial court
awarded both forfeiture and actual damages for the same tortious conduct. Id.
Thus, the trial court granted Appellees an impermissible double recovery, and the
Final Judgment should be reversed.
Issue 7: The trial court erred when it awarded Appellees attorney’s fees because
such a remedy is not available for breach of fiduciary duty.
The trial court's decision to award attorney's fees is reviewed de novo on
appeal. Gereb v. Smith-Jaye, 70 S.W.3d 272, 273 (Tex. App.-San Antonio 2002,
no pet.). In its Findings of Fact and Conclusions of Law, the trial court incorrectly
28
relied on several cases: McGuire v. Kelly; G.R.A.V.I.T.Y. Enters.v. Reece Supply
Co.; Massey v. Colombus; and Nationwide Mut'; Ins. Co. v. Holmes. (Appx. 3,
Findings of Facts and Conclusions of Law at ¶39, 41, 42). The trial court
awarded Appellees $8,552.50 in attorney’s fees as actual damages incurred prior to
the lawsuit and an additional $158,095.00 in attorney’s fees incurred through trial
as a result of Lee’s breach of fiduciary duty (6 C.R. at 2091-2092). The trial court
abused its discretion in granting this award because, after disregarding the jury’s
answer, the court found Appellant liable for breach of fiduciary only, and no rule,
statute, or case permits the award of attorney’s fees in a case for breach of
fiduciary duty. See Holland v. Wal-Mart Stores, Inc. 1 S.W.3d 91, 95 (Tex. 1999).
In fact, Texas case law specifically prohibits an award of attorney’s fees for breach
of fiduciary duty. See McCullough v. Scarbrough, Medlin & Assocs., 435 S.W.3d
871, 917 (Tex. App.—Dallas, 2014, pet. denied); Western Reserve Life Assurance
Co. of Ohio v. Graben, 233 S.W.3d 360, 377 (Tex. App.—Fort Worth, 2007, no
pet.) (“Attorney’s fees are not available for a breach of fiduciary duty claim.”)
To support the Court’s award of attorney’s fees, Appellees relied on a
Texas appellate court case, McGuire v. Kelley, 41 S.W.3d 679 (Tex. App.—
Texarkana 2001, no pet.) (6 C.R. at 25:2-16). In McGuire, the Court awarded
Kelley attorney’s fees for breach of contract under Chapter 38 of the Texas Civil
Practice & Remedies code even though she elected to recover actual and
29
exemplary damages under her claim for breach of fiduciary duty. Id. at 682-683.
In McGuire, the jury found McGuire liable to Kelly for breach of contract, breach
of fiduciary duty, and fraud. Id. Under the One Satisfaction Rule4, however,
Kelley was required to elect recovery on only one theory of liability. Id. Even
though Kelley elected to recover under her breach of fiduciary duty claim, the
Court awarded her statutory attorney’s fees because the jury also found McGuire
liable for breach of contract. Id.
This case is distinguishable from McGuire because the only finding against
Appellant was for breach of fiduciary duty. No other cause of action or theory of
recovery was presented to the jury for determination and neither the trial court
nor the jury found Appellant liable for breach of contract or any other unlawful
conduct (6 C.R. at 2031-2044). Because Appellant was found liable on a breach
of fiduciary duty claim only, Appellees are not entitled to recover attorney’s fees.
Therefore, the Court abused its discretion when it awarded attorney’s fees and the
Final Judgment should be reversed.
In G.R.A.V.I.T.Y., the Dallas Court of Appeals analyzed whether a party who
did not recover damages could be entitled to attorney's fees. G.R.A.V.I.T.Y. Enters.
v. Reece Supply Co., 177 S.W.3d 537, 546, 2005 Tex. App. LEXIS 6266, *18-19
(Tex. App. -- Dallas 2005, no pet.). The Court held that attorneys fees should not
4
Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1, 7 (Tex. 1991) (holding that when a party pursues several
causes of action arising from the same course of conduct by the defendant and resulting in a single injury, the
plaintiff is limited to one satisfaction.)
30
be awarded, and further analyzed whether a party could be awarded attorneys fees
for defending a breach of contract claim. Id. citing De La Rosa v. Kaples, 812
S.W.2d 432 (Tex. App.-San Antonio 1991, writ denied). De la Rosa allows for an
exception to the general rule of non-recovery where a claim and counterclaim (on a
breach of contract claim) where "the matters encompassed by the claim and
counterclaim are indistinguishable, where they arose from the same transactions,
where the same facts required to prosecute the claim are required to defend against
the counterclaim." De la Rosa at 434. Here, Appellant submitted only one issue to
the jury for consideration, and it was not for breach of contract. The matters
encompassing Appellant's claim and Appellee's counterclaims are very
distinguishable, and do not rely on the same facts to prosecute and defend the
claims. Therefore, the trial court's reliance on G.R.A.V.I.T.Y. was improper, and an
award of attorneys fees based on this case should be reversed.
Next, the trial court relied on Massey v. Colombus State Bank, which held
"attorney's fees incurred in responding to false and defamatory grievances filed
with regulatory agency recoverable as damages." Massey v. Columbus State Bank,
35 S.W.3d 697, 2000 Tex. App. LEXIS 7624 (Tex. App. -- Houston [1st Dist.]
2000, pet. denied). In Massey, the bank brought suit against Massey for complaints
with the Texas Department of Banking, an unfounded grievance with the State Bar
of Texas against the Bank's Board chairman and outside counsel, a groundless
31
complaint with the Texas State Board of Public Accountancy, and a complaint with
the Sheriff's Department of Colorado County, Texas. Id. at *10. As a result of these
numerous actions, the bank, prior to its litigation against Massey for defamation,
"was forced to spend $104,000. responding to and defending against all of these
complaints and grievances." Id. The Court of Appeals upheld the award of
attorney's fees incurred while responding to those grievances. Id.
Here, the trial court's award of attorney's fees is improper because the
Appellees' attorney's fees did not arise from prior litigation. See, e.g. Brown &
Brown of Tex., Inc. v. Omni Metals, Inc., 317 S.W.3d 361, 400, 2010 Tex. App.
LEXIS 2338, *96 (Tex. App. Houston [1st Dist.] 2010, no pet.); Turner v. Turner,
385 S.W.2d 230, 234, 1964 Tex. LEXIS 630, *8, 8 Tex. Sup. J. 112 (Tex.
1964)(plaintiff may recover in a separate suit for his reasonable and necessary
expenses of the prior litigation). Further, Appellants actions do not rise to the same
level of maliciousness as was the case in Massey. Therefore, the trial court erred
when it relied on Massey in its award of attorney's fees, and should be reversed.
The trial court further relied on Nationwide Mut'l Ins. Co. v. Holmes, in the
premise that the award of attorney's fees is proper "where such expenses are the
natural and proximate cause of another's bad faith and wrongful conduct." . (Appx.
3, Findings of Facts and Conclusions of Law at ¶39, 41, 42); Nationwide Mut. Ins.
Co. v. Holmes, 842 S.W.2d 335, 1992 Tex. App. LEXIS 3188 (Tex. App. San
32
Antonio 1992, writ denied). In Holmes, Holmes was sued for injuries resulting
from a car accident, and when his insurance carrier Nationwide indicated that it
would not settle the claim, upon Nationwide's advice, Holmes hired an attorney to
protect his interests. Id. at 337. The suit against Holmes went to trial and
Nationwide provided representation; however, Nationwide, knowing that Holmes
was obligated to pay his retained attorney $7500 upon commencement of trial,
failed to notify Holmes that it would indemnify him for any judgment in excess of
the policy limits. Id. at 337-38. Holmes sued Nationwide for violation of the DTPA
and received a favorable judgment, including recovery of the attorney's fees. Id. at
338. The court noted that Holmes did not incur the attorney's fees in defending
himself in the original suit, but rather incurred the expenses because of
Nationwide's wrongful conduct. Id.
Holmes is distinguishable because Appellees did not recover damages under
the DTPA, and the expenses they incurred were not the natural and proximate
cause of Appellant's wrongful act (his breach of fiduciary duty); the expenses were
the natural and proximate cause of being sued by Appellant. See 2 R.R. 208:7-17.
As such, the trial court erred in awarding Appellant's attorney's fees under Holmes.
Finally, the trial court relied on Tex. Civ. Prac. & Rem. C. § 38.001, et. seq.,
authorizing recovery of attorney's fees in suits for breach of contract. There was no
33
award for Appellant's breach of contract. Therefore, the trial court erred, and its
award of attorneys fees should be reversed.
CONCLUSION AND PRAYER
This Court must reverse the judgment made by the trial court because the
trial court abused its discretion when it disregarded the jury’s negative finding and
substituted its own affirmative finding. The trial court erred by incorrectly
awarding relief to Appellees that: 1) was not supported by the evidence introduced
at trial; 2) impermissibly disregarded the jury’s findings; 3) constituted “double
recovery” in favor of Appellees in violation of the one satisfaction rule; and 4)
incorrectly awarded attorney’s fees for breach of fiduciary duty. Appellant
respectfully prays that this Court reverse the Final Judgment of the trial court and
render judgment in favor of the Appellant.
Respectfully submitted,
PRINS LAW FIRM
4940 Broadway, Ste. 108
San Antonio, Texas 78209
Telephone: (210) 820-0833
Telecopier: (210) 820-0929
By:__________________________
TODD A. PRINS
State Bar No. 16330400
Email:
taprins@prinslaw.com
34
CERTIFICATE OF SERVICE
I certify that on September 4, 2015, Appellant’s Brief was served on the
following counsel of record via email and facsimile.
Sylvan S. Lang, Jr. Thomas G. Kemmy
LANG LAW FIRM, P.C. LAW OFFICE OF THOMAS G.
13409 N.W. Military Hwy., Ste 210 KEMMY
San Antonio, Texas 78231 322 W. Woodlawn Avenue
Telephone: (210) 479-8899 San Antonio, Texas 78212
Facsimile: (210) 479-0099 Telephone: (210) 735-2233
Facsimile: (210) 736-9025
Attorney for Kenneth Lau & Connie Attorney for China Rose, Ltd. and China
Andrews Rose Managment, LLC
PRINS LAW FIRM
4940 Broadway, Ste. 108
San Antonio, Texas 78209
Telephone: (210) 820-0833
Telecopier: (210) 820-0929
By:_______________________
TODD A. PRINS
State Bar No. 16330400
Email:
taprins@prinslaw.com
APPENDIX
Tab 1: Final Judgment Order by the Trial Court (6 CR at 2031)
Tab 2: The Jury Charge and Verdict (6 CR at 2089)
Tab 3: Trial Court's Findings of Fact and Conclusions of Law
Tab 4: Plaintiff's Original Petition
36