Century Resources Land LLC v. Adobe Energy Inc. (In Re Adobe Energy Inc.)

United States Court of Appeals
Fifth Circuit
F I L E D
November 17, 2003
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk
_____________________
No. 03-20013
_____________________
In The Matter Of: ADOBE ENERGY INC
Debtor
----------------------
CENTURY RESOURCES LAND LLC
Appellant
v.
ADOBE ENERGY INC
Appellee
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
No. H-02-CV-1333
_________________________________________________________________
Before KING, Chief Judge, DENNIS, Circuit Judge, and LYNN,
District Judge.*
KING, Chief Judge:**
*
District Judge of the Northern 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that this opinion should not be published and is not precedent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.
A creditor of a Chapter 11 debtor filed a proof of claim in
the bankruptcy court, asserting breach of a confidentiality
agreement and seeking imposition of a constructive trust upon
part of the debtor’s property. On the debtor’s objection to the
proof of claim, the bankruptcy court held a trial and then
disallowed the creditor’s claim. The district court affirmed the
bankruptcy court’s order. For the following reasons, we also
AFFIRM.
I. FACTUAL AND PROCEDURAL BACKGROUND
This appeal concerns whether the bankruptcy court erred in
refusing to impose a constructive trust upon an oil and gas lease
held by bankrupt debtor Adobe Energy, Inc. (“Adobe”). The
creditor seeking to impose the constructive trust is the lease’s
previous holder, Century Resources Land, L.L.C. (“Century”).
The subject lease covers land in Hardin County, Texas, in an
area referred to as the Pine Island Prospect. In 1994, a
geologist presented Edward DeStefano, an investor, with an
opportunity for oil and gas exploration in this area. In a
series of letter agreements, DeStefano promised to find a third-
party investor to finance the development of a shallow formation
identified by the geologist. The development of this formation
was to be known as the East Sour Lake Field Redevelopment Project
(“the Project”).
2
DeStefano later presented the Project to Sheldon Solow,
another investor. Solow agreed to invest in the Project through
the vehicle of a limited liability company, and so he and
DeStefano formed Century in September 1995. Solow owned a 55%
stake in Century, and the remaining 45% interest was held by a
company wholly owned by DeStefano. Century was managed by
DeStefano and Steven Cherniak, Solow’s designee. DeStefano bore
the primary responsibility for acquiring the mineral leases
needed to assemble the Project, and he also agreed to market the
Project to third parties.
From 1995 to 1997, DeStefano accumulated a number of oil and
gas leases for use in the Project. These included a lease over a
certain 401-acre tract held by the Choice Thompson Family Trust
(“the Thompson Lease”). The acquisition of the Thompson Lease
required Century to obtain a release from the oil companies that
had previously completed a successful well on the tract. In
securing this release, an effort that began before the formation
of Century, DeStefano used the services of E. David Philley, an
attorney who had previously assisted DeStefano in connection with
another Project-related lease in 1995. Century eventually
succeeded in acquiring the Thompson Lease in an instrument dated
July 23, 1996. All sides agree that Philley worked as
DeStefano’s attorney at various times both before and after the
formation of Century, but the parties disagree over whether
Philley was also Century’s attorney.
3
Century began to market the Project in September 1997. As
part of that effort, Century put together a brochure that
included geological data and analyses, as well as documents
setting forth the rules and terms governing the offer. These
terms stated, among other things, that prospective partners must
possess minimum financial and technical qualifications; Century
included these requirements because it planned to retain an
interest in the Project, once developed. The rules also required
prospective partners to sign a confidentiality/non-competition
agreement before they would be given a presentation about the
Project.
On October 14, 1997, Century’s representatives presented the
Project to Adobe. The primary dispute at trial centered upon
what happened at this meeting. Century contends that Adobe’s
representatives signed the confidentiality/non-competition
agreement, or at least orally agreed to its terms. Adobe’s
representatives testified that they neither signed nor orally
assented to any agreement. The bankruptcy court found that Adobe
had orally agreed to generalized terms of confidentiality and
non-circumvention, but the court also found that the oral
agreement did not include the specific details set forth in the
written document that was included in the Project brochure.
Philley happened to be at Adobe’s offices on another matter
at the time of the October 14 meeting, and he apparently entered
the meeting as it was breaking up. After the meeting, he spoke
4
with Adobe’s president, Michael McMahon, whom he knew from
previous dealings. The two apparently agreed on a scheme
according to which Adobe would purchase the Project and then
immediately re-sell it to a third party, TransTexas, at a
substantial profit. In support of this plan, Philley would
produce a sham letter in which Century would offer to sell the
Project to Adobe for $1200 per acre, a figure substantially
higher than that actually contemplated. McMahon would then show
the letter to TransTexas, using the bogus $1200 figure to garner
a similar price from TransTexas. The difference between what
Adobe would actually pay to Century and the inflated price
received from TransTexas would then be split between Philley and
Adobe. Century’s representatives did not know of this plan, much
less authorize it.
Century had for some time been suffering from an internal
conflict over how to manage the company and market the Project.
The court documents submitted by Century as part of its proof of
claim show that Solow obtained an injunction against DeStefano’s
marketing efforts shortly after the Project was presented to
Adobe. (Indeed, matters would later deteriorate further: Solow
and Century sued DeStefano in 1999 in New York, alleging that
DeStefano had mismanaged the business and conspired with Adobe to
induce Century to accept Adobe’s offer.)
Despite this internal dissension, negotiations with Adobe
continued. On October 21, 1997, Adobe sent a letter to Century
5
offering to buy an interest in the Project for $700 per acre.
Adobe then raised the offer to $800 on October 30, and the
parties continued to negotiate after that date. During the
course of negotiations Adobe apparently misrepresented its
technical and financial ability to develop the Project. On May
20, 1998, there was a meeting between DeStefano, Solow, and
McMahon, after which Adobe made yet another offer to Century. On
June 1, Adobe communicated to Century, through DeStefano, a June
4 deadline for acceptance of the latest offer. Solow replied on
June 4, not to accept Adobe’s offer but to inform Adobe that
DeStefano had been removed from his position as one of Century’s
managers. Negotiations continued for a time, with Cherniak now
acting as Century’s primary representative. But Century again
rejected Adobe’s overtures, having formed a suspicion that Adobe
was an unsuitable partner.
Events then took an unfortunate turn for Century. On July
24, 1998, Century received notice that the Thompson Lease had
expired because Cherniak had mistakenly failed to pay a delay
rental. Century’s loss became Adobe’s gain when Philley, who had
learned of the termination notice from DeStefano, told McMahon
and another Adobe executive about the opportunity to acquire the
now-expired Thompson Lease. The record contains a faxed message
from Philley, addressed to his “compadres” at Adobe, urging that
they immediately contact the Thompson family’s representative.
Despite Century’s efforts to tender the late rental payment, the
6
Thompson family cancelled Century’s lease and, on August 31,
1998, agreed to a new lease with Adobe.
After acquiring the Thompson Lease, Adobe began to drill,
using the geological information learned from Century’s
presentation to locate its wells. Little came of the wells,
however, because Adobe damaged the production zone by improperly
cementing its pipes. In addition, Adobe experienced cash flow
problems traceable to its depletion and overproduction of
previously drilled wells.
Adobe filed a voluntary petition under Chapter 11 of the
Bankruptcy Code on September 10, 1999. On January 12, 2000,
Century filed a proof of claim based upon pending actions against
Adobe in the Texas and New York state courts. Adobe objected to
the claim, and the bankruptcy court held a trial. Century’s case
was based on two contentions: (1) Adobe had breached the October
14 confidentiality/non-competition agreement and (2) Adobe would
be unjustly enriched unless a constructive trust were imposed on
the Thompson Lease and its proceeds. After several days of
trial, the bankruptcy court set forth findings of fact and
conclusions of law in a memorandum opinion. The bankruptcy court
concluded that Century had not satisfied the requisites for a
constructive trust under Texas law, and it disallowed Century’s
claim for breach of the confidentiality/non-competition agreement
because Century had offered no evidence of damages. Abandoning
its claim for damages, Century appealed the constructive trust
7
decision to the district court. In a lengthy opinion, the
district court affirmed the bankruptcy court, concluding that
Century had not satisfied two of the three requisites for a
constructive trust under Texas law. Specifically, the district
court held first that Century had not shown that Adobe committed
fraud (either actual or constructive); second, because of the
accidental lapse of Century’s lease over the Thompson property,
the district court held that Adobe’s later lease was not a
traceable res upon which to impose the trust. In addition, the
district court suggested, sua sponte, that Century should have
initiated a formal adversary proceeding rather than using the
proof of claim process.
Century now appeals to this court.
II. STANDARD OF REVIEW
We review the bankruptcy court’s findings of fact for clear
error and its conclusions of law de novo. Killebrew v. Brewer
(In re Killebrew), 888 F.2d 1516, 1519 (5th Cir. 1989). Under
the clear error standard, the bankruptcy court’s factual findings
will be set aside “only if, on the entire evidence, we are left
with the definite and firm conviction that a mistake has been
made.” Allison v. Roberts (In re Allison), 960 F.2d 481, 483
(5th Cir. 1992). The ultimate decision whether or not to impose
the equitable remedy of a constructive trust is committed to the
sound discretion of the trial court, the exercise of which we
8
review for abuse. Burkhart Grob Luft und Raumfahrt GmbH & Co. KG
v. E-Systems, Inc., 257 F.3d 461, 469 (5th Cir. 2001). The trial
court necessarily abuses its discretion if it bases its decision
on an error of law or on clearly erroneous factual findings.
Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990).
III. DISCUSSION
The Bankruptcy Code defines the bankruptcy estate broadly,
encompassing most of the property held by the bankrupt debtor.
See 11 U.S.C. § 541 (2000). However, the bankruptcy estate does
not include any property to which the debtor holds only legal,
but not equitable, title. Id. § 541(d). The bankruptcy estate
therefore generally does not embrace property that the debtor
holds in trust for another, nor does it include property subject
to a constructive trust. A constructive trust is therefore an
attractive option for a disappointed creditor, for it gives the
creditor the sole claim on property that would otherwise be
distributed pro rata among all creditors. See Haber Oil Co. v.
Swinehart (In re Haber Oil Co.), 12 F.3d 426, 435-36 (5th Cir.
1994).1
1
In its briefs on appeal to the district court, Century
offered to subordinate its constructive trust so that it would
not interfere with the priorities established by the bankruptcy
court’s reorganization plan. We are not sure that Century’s
latter-day concession, made on appeal, is relevant to the
question of whether the bankruptcy court abused its discretion.
In any event, our decision rests squarely on the requisites for a
constructive trust under Texas law, not on the Bankruptcy Code’s
overarching policy of ratable distribution among creditors.
9
Under Texas law, a constructive trust is an equitable remedy
that the courts may impose when “the person holding the title to
property would profit by a wrong or would be unjustly enriched if
he were permitted to keep the property.” Omohundro v. Matthews,
341 S.W.2d 401, 405 (1960). Imposition of a constructive trust
is appropriate when the plaintiff proves: (1) the defendant has
committed actual fraud or has committed constructive fraud
through the breach of a preexisting fiduciary or confidential
relationship, (2) the defendant would be unjustly enriched by
retaining the proceeds of the wrong, and (3) there is a traceable
res upon which to impress the trust. See Haber Oil, 12 F.3d at
437; Monnig’s Dep’t Stores, Inc. v. Azad Oriental Rugs (In re
Monnig’s Dep’t Stores, Inc.), 929 F.2d 197, 201 (5th Cir. 1991);
Meadows v. Bierschwale, 516 S.W.2d 125, 128-29 (Tex. 1974). The
courts below identified two deficiencies in Century’s request for
a constructive trust: Century had not shown that Adobe committed
fraud or breached a confidential relationship, and Adobe’s
subsequent lease on the Thompson tract was not a traceable res
upon which to impose the trust.
On appeal, Century argues forcefully that the equitable
remedy of constructive trust is flexible enough to pierce through
the lapse of Century’s lease and attach to Adobe’s subsequent
lease, thereby satisfying the traceable res requirement.
Happily, we need not decide that question, for we hold that
Century has failed to satisfy the first requisite for imposition
10
of a constructive trust: fraud or breach of a confidential
relationship. We discuss each of those alternatives in turn.
A. Actual Fraud
Assuming that the other requirements are satisfied, a
plaintiff can show entitlement to a constructive trust by proving
that the defendant committed fraud. Meadows, 516 S.W.2d at 128-
29. Under Texas law, a plaintiff asserting fraud must prove
that: (1) a material representation was made, (2) the
representation was false, (3) the speaker made the representation
knowing it was false, or made it recklessly without any knowledge
of its truth and as a positive assertion, (4) the speaker made
the representation with the intent that the plaintiff should rely
on it, (5) the plaintiff acted in reliance on the representation,
and (6) the plaintiff thereby suffered injury. Eagle Props.,
Ltd. v. Scharbauer, 807 S.W.2d 714, 723 (Tex. 1990). While
Century has persuaded us that various of these elements might be
present in different parts of the events underlying this case, we
must agree with the courts below that nowhere do the elements
come together so as to constitute a fraud that would entitle
Century to a constructive trust over the Thompson Lease.
Century has pointed to a number of misrepresentations made
by Adobe during the course of the parties’ dealings. It appears,
for example, that Adobe misrepresented its financial and
technical ability to carry out the proposed project, intending to
11
induce Century to transact business with a company that——if the
true facts were revealed——failed to meet Century’s minimum terms.
The principal impediment to founding an action upon these
misrepresentations, however, is that Century and Adobe never
consummated their deal; Century did not sell the Project leases
to Adobe. While the misrepresentations may have induced Century
to extend the negotiations unnecessarily, Century has not
explained how the mere continuation of negotiations might have
injured Century or unjustly enriched Adobe. Century has not, for
instance, contended that its negotiations with Adobe cost it an
opportunity to market the Project to a more suitable partner——
those types of injuries have never been the basis of Century’s
claims. Instead, the relevant harm has been the loss of the
Thompson Lease (or the ability to profit from it) to Adobe. That
loss, however, bears no connection to Adobe’s wrongful
continuation of negotiations.
Century makes a stronger case for fraud when it argues that
Adobe wrongfully induced Century to reveal its geological secrets
at the October 14 meeting, which revelation was made in reliance
upon Adobe’s promise of confidentiality and non-circumvention.
Although Adobe’s representatives apparently did not sign
Century’s proffered written agreement at the October 14, 1997,
meeting, the bankruptcy court found that the parties reached a
vague oral agreement to protect Century’s confidential
proprietary information. The bankruptcy court further found that
12
Adobe later breached that agreement by using Century’s
information to target its drilling efforts once it acquired the
Thompson lease.
Adobe’s breach of the oral confidentiality agreement would
at first blush appear to sound in breach of contract, and it is
well-settled that the mere failure to keep a promise is not
itself fraudulent.2 Nonetheless, the Texas courts also recognize
that “[a] promise to do an act in the future is actionable fraud
when made with the intention, design and purpose of deceiving,
and with no intention of performing the act.” Spoljaric v.
Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986). The
crucial question, therefore, is whether Adobe’s representatives
lacked any intention, at the time of the oral agreement, of
honoring their promise to keep Century’s information secret.
Like other issues of intent, this is generally a question of
fact. Coffel v. Stryker Corp., 284 F.3d 625, 634 (5th Cir.
2002); Spoljaric, 708 S.W.2d at 434.
Century has pointed to a number of circumstances that, in
its view, lead to an inference that Adobe’s representatives never
had any intention of maintaining confidentiality. These
circumstances include the fact that Adobe later denied that any
2
Indeed, as remarked earlier, Century had originally
asserted a claim for breach of the agreement, but the bankruptcy
court disallowed it because there was no evidence on damages. A
constructive trust, on the other hand, generally does not require
proof of damages. See Kinzbach Tool Co. v. Corbett-Wallace
Corp., 160 S.W.2d 509, 514 (Tex. 1942).
13
confidentiality agreement had ever existed, as well as the speed
with which McMahon and Philley hatched their secret scheme to
sell the Project to TransTexas at an inflated price——which
transaction would likely involve revealing Century’s information,
though it is unclear whether that in fact happened. Later events
are, of course, admissible evidence on the question of earlier
intent.3 The bankruptcy court, which had the advantage of
listening to the witnesses, concluded that Adobe’s
representatives did not harbor a contemporaneous fraudulent
intent. On appeal, the district court’s opinion provided a
detailed consideration of each of the various circumstances that
Century would use to infer fraudulent intent. As the district
court’s careful opinion explains, Century’s evidence of later
circumstances is susceptible of more than one reasonable
interpretation. For example, if Adobe’s representatives never
intended to keep Century’s information confidential, but promised
to do so only to induce Century to reveal its data, then there
would have been little reason for them to continue with months of
negotiations. In the end, it is unclear to us whether Adobe’s
3
The Texas courts have held that later circumstances of
the sort identified by Century can raise an inference that a
promisor never intended to keep an agreement. See, e.g., T.O.
Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 222 (Tex.
1992) (“Denying that a promise has been made is a factor showing
no intent to perform when the promise was made.”); Spoljaric, 708
S.W.2d at 435 (stating that the failure to engage in any pretense
of performance is a factor tending to prove the lack of an
earlier intent to perform).
14
representatives intended to misuse Century’s secrets from the
start. Therefore, in assessing the bankruptcy court’s findings
on this point, we cannot say that “we are left with the definite
and firm conviction that a mistake has been made,” Allison, 960
F.2d at 483.
B. Breach of Confidential Relationship
As an alternative to proving that the defendant committed
actual fraud, a plaintiff may be entitled to a constructive trust
upon showing that the defendant committed constructive fraud by
exploiting a preexisting confidential relationship. See Monnig’s
Dep’t Stores, 929 F.2d at 201-02; Meadows, 516 S.W.2d at 128.
Summarizing Texas law on this point, we have said the following:
In recognizing a constructive trust, the critical
requirement . . . is that the parties have a confidential
or fiduciary relationship prior to and apart from the
transaction in question. This relationship may be
established through prior joint business ventures, family
relationships, or other types of close, confidence-
inducing relationships. It need not arise from a strict,
formal fiduciary relationship. However, mere subjective
confidence among business associates or the like is
insufficient to support a constructive trust.
Harris v. Sentry Title Co., 715 F.2d 941, 946 (5th Cir. 1983)
(citations omitted), modified on other grounds, 727 F.2d 1368
(5th Cir. 1984).
We do not take Century to assert that it shared a
preexisting confidential relationship with Adobe. Rather,
Century’s argument focuses on Philley’s role. All sides agree
that Philley had acted at times as DeStefano’s lawyer. According
15
to Century, Philley had also acted as the company’s lawyer.
Philley thus owed duties of loyalty to Century, duties that he
breached (says Century) when he told Adobe of the chance to
acquire the Thompson Lease. Adobe induced (or at least knowingly
accepted the benefits of) Philley’s breach of that fiduciary
duty. Century therefore asks the court to disgorge from Adobe
the ill-gotten proceeds of Philley’s evident betrayal. This
argument appears to be a viable theory under Texas law. See
Ginther v. Taub, 675 S.W.2d 724, 728 (Tex. 1984) (allowing a
constructive trust to be imposed against the beneficiary of an
attorney’s breach of fiduciary duties to his client); Kinzbach
Tool Co., 160 S.W.2d at 514 (“It is settled as the law of this
State that where a third party knowingly participates in the
breach of duty of a fiduciary, such third party becomes a joint
tortfeasor with the fiduciary and is liable as such.”). We shall
therefore assume that Century would be entitled to a constructive
trust upon the Thompson Lease (or its proceeds), if Adobe
acquired it through Philley’s breach of a confidential
relationship with Century.
While Century has made this theory of constructive fraud one
of its main arguments on appeal, it was not so prominent at
trial. The main issues at trial were whether the parties had
entered into a binding confidentiality agreement at the October
14 meeting and whether Adobe had committed actual fraud. To the
extent that Century’s post-trial brief discussed the legal
16
requisites for a constructive trust, its argument focused on
actual fraud, though it did also state that a breach of a
preexisting confidential relationship would likewise support a
constructive trust. The brief asserted that Philley was
Century’s lawyer, but it did not cite authority that would help
the bankruptcy judge assess whether such a relationship existed;
nor did the brief cite authorities, such as those noted in the
previous paragraph, that would show that a constructive trust
could be imposed against Adobe as the beneficiary of Philley’s
apparent misconduct. In its opinion, the bankruptcy court did
not address this legal theory of recovery in any detail, but it
did not need to do so, for it concluded that Century’s claim for
a constructive trust failed due to the absence of a traceable
res. It may be that the bankruptcy court fully understood
Century’s argument regarding constructive fraud but simply chose
to dispose of Century’s claims by focusing on the res
requirement, a choice that it is certainly entitled to make.4
Another explanation, however, is that Century’s oblique
presentation of the issue did not suffice to properly put the
theory before the trial court. As we have warned in the past,
“the litigant must press and not merely intimate the argument
during the proceedings before the [trial] court. If an argument
4
We note that we are permitted to affirm the bankruptcy
court’s judgment on grounds other than those on which it relied.
See Besing v. Hawthorne (In re Besing), 981 F.2d 1488, 1494 (5th
Cir. 1993).
17
is not raised to such a degree that the [trial] court has an
opportunity to rule on it, we will not address it on appeal.”
FDIC v. Mijalis, 15 F.3d 1314, 1327 (5th Cir. 1994). We believe
that Century’s constructive fraud argument presents a close
question under that rule. To avoid the harshness of a
forfeiture, we will address the merits of Century’s constructive
fraud argument.
Century’s argument is predicated upon the contention that
the bankruptcy court found as a matter of fact that Philley had
acted as Century’s lawyer; having made that factual finding,
Century’s argument continues, the court then erred as a matter of
law by failing to impose the constructive trust needed to
disgorge from Adobe the proceeds of Philley’s breach. We reject
the first step of Century’s argument, however, for we do not
share Century’s view of the bankruptcy court’s findings. In a
portion of its opinion discussing background facts related to the
accumulation of leases needed for the Project, the bankruptcy
court stated that Philley negotiated with the Thompson family on
Century’s behalf. Yet this does not necessarily mean that an
attorney-client relationship existed between Philley and Century.
Under Texas law, there is no attorney-client relationship absent
privity of contract; the fact that an attorney undertakes
services for the benefit of an entity does not mean that the
entity is the attorney’s client. See First Nat’l Bank of Durant
v. Trans Terra Corp. Int’l, 142 F.3d 802, 806-08 (5th Cir. 1998);
18
Banc One Capital Partners Corp. v. Kneipper, 67 F.3d 1187, 1198-
99 (5th Cir. 1995); Barcelo v. Elliott, 923 S.W.2d 575, 578-79
(Tex. 1996).5
Alternatively, if we accept Century’s position that the
subject statement was indeed a finding that Philley was Century’s
attorney, then the finding would not be supportable. The
attorney-client relationship “results from the mutual agreement
and understanding of the parties concerned.” Parker v. Carnahan,
772 S.W.2d 151, 156 (Tex. App.—Texarkana 1989, writ denied).
There is no evidence of an express contract between Philley and
Century. On the contrary, Philley testified that his client was
DeStefano, and Cherniak did not contradict that testimony.
It is true that an attorney-client relationship may also be
formed by implied contract; that is, an agreement may be implied
from actions that reveal the parties’ intent to establish the
relationship. Id.; see also Yaklin v. Glusing, Sharpe & Krueger,
875 S.W.2d 380, 383 (Tex. App.—Corpus Christi 1994, no writ).
But “[a]lthough the attorney-client relationship can be implied,
5
Century argues in its reply brief that the strict Texas
privity rule applies only in the context of attorney malpractice
cases. The reason that the privity rule is applied in
malpractice cases, however, is precisely because malpractice
liability runs only in favor of one who is the attorney’s client.
See First Nat’l Bank of Durant, 142 F.3d at 806 (“Texas law is
clear that a legal malpractice claim requires proof of an
attorney-client relationship between the plaintiff and the
defendant attorney.”); see also Barcelo, 923 S.W.2d at 578-79.
The question here is whether Philley breached professional duties
owed to his client, so the privity rule applies.
19
courts will not readily impute the contractual relationship
absent a sufficient showing of intent.” Banc One, 67 F.3d at
1198. The district court explained at some length, and very
persuasively, that the record does not support the existence of
any such intent. Philley testified that he worked for DeStefano,
and this was the only testimony as to the various actors’
intentions. Significantly, Philley’s work for DeStefano on
Project-related leases began before the formation of Century,
and this relationship did not appear to change once the company
was formed. Moreover, Philley did not look to the company for
payment when DeStefano was unable to pay Philley’s legal fees.
This is certainly not a case in which the interests of
DeStefano were simply the same as those of Century, such that his
personal attorney would automatically represent Century as well.
The documents forming Century, as well as the letter agreement
between DeStefano’s wholly owned company and Solow, give the two
owners distinct interests and responsibilities with respect to
Century. As we noted earlier, DeStefano’s company held only a
minority interest in Century. On Century’s own view of the case,
DeStefano was very much pursuing his own interests in his
management of Century.
As a manager of Century, DeStefano may well have had the
authority to hire attorneys to work for the company.6 But that
6
Even in the absence of a specific authorization from
the principal, an agent’s authority to hire subagents and engage
20
does not mean, as Century seems to believe, that any attorney
hired by DeStefano would be the company’s attorney. Century did
not produce evidence that would establish the necessary intent to
form such a relationship between Philley and Century——or rather
to transform DeStefano’s relationship with Philley into a
relationship between Philley and Century. Absent such intent,
the fact that Philley’s services benefitted Century fails as a
matter of law to establish an attorney-client relationship. See
First Nat’l Bank of Durant, 142 F.3d at 806-08.
We note that Century also argues on appeal that other types
of fiduciary or confidential relationships apart from an
attorney-client relationship might have existed between Philley
and Century, such as that Philley was Century’s agent or that
there was at least an informal relationship of confidence between
the two. Century did not argue these theories in its pre-trial
statement and post-trial briefs submitted to the bankruptcy
court; insofar as constructive fraud was an issue in the
bankruptcy court, the suggestion was that Philley was Century’s
attorney. To the extent that these new theories are separable
from the claim that an attorney-client relationship existed, we
contractors can often be inferred. See Stowe v. Wooten, 37
S.W.2d 1055, 1057 (Tex. Civ. App.—Eastland 1931), aff’d, 62
S.W.2d 67 (Tex. Comm’n App. 1933, judgm’t adopted); RESTATEMENT
(SECOND) OF AGENCY § 80 (1958). In this case, however, the
documents creating Century appear to impose significant
restrictions on DeStefano’s power to bind the company. For
purposes of our decision, we may assume that DeStefano would have
had the power to engage Philley as Century’s lawyer.
21
do not consider them on appeal because they were not raised in
the bankruptcy court. See Clyde Bergemann, Inc. v. The Babcock &
Wilcox Co. (In re The Babcock & Wilcox Co.), 250 F.3d 955, 961-62
(5th Cir. 2001).
Century has been roughly treated in this matter——by Adobe,
by Philley, and perhaps by its own manager, DeStefano.
Understandably, Century has sought redress, and its able counsel
have advanced several theories through which its losses might be
recouped, including the device of a constructive trust. Yet
while the constructive trust is a flexible equitable tool, “it
cannot correct every injustice.” Pope v. Garrett, 211 S.W.2d
559, 562 (Tex. 1948). The court’s discretion to impose a
constructive trust is confined by certain rules, and Century has
not satisfied them.7
IV. CONCLUSION
For the foregoing reasons, the district court’s judgment
affirming the bankruptcy court’s disallowance of Century’s proof
of claim is AFFIRMED.
7
Given our disposition of the case, we need not consider
the possibility, suggested by the district court, that Century’s
claim is procedurally faulty in that it was conducted through
proof of claim proceedings rather than through a full-fledged
adversary proceeding. See generally Haber Oil, 12 F.3d at 437-40
(explaining when a formal adversary proceeding is required).
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