American Realty Trust Inc. v. Matisse Capital Partners LLC

United States Court of Appeals
Fifth Circuit
F I L E D
December 17, 2003
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk
_____________________
No. 02-11148
_____________________
AMERICAN REALTY TRUST INC; BASIC CAPITAL MANAGEMENT INC
Plaintiffs - Counter Defendants - Appellants
v.
MATISSE CAPITAL PARTNERS LLC; ET AL
Defendants - Counter Claimants
MATISSE CAPITAL PARTNERS LLC; PAUL BAGLEY
Defendants - Counter Claimants - Appellees
_________________________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
No. 3:00-CV-1810-G
_________________________________________________________________
Before KING, Chief Judge, and DAVIS and EMILIO M. GARZA, Circuit
Judges.
KING, Chief Judge:*
Two corporations brought breach of contract and breach of
fiduciary duty claims against their former financial consultants,
and the defendant consultants countersued for breach of contract.
The jury returned verdicts in the plaintiffs’ favor on all
*
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that this opinion should not be published and is not precedent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.
relevant counts. On the defendants’ renewed motion for judgment
as a matter of law, the district court set aside the verdicts and
entered judgment in the defendants’ favor, granting the
defendants a substantial recovery on their counterclaim. For the
following reasons, we AFFIRM in part, REVERSE in part, and
REMAND.
I. BACKGROUND
A. Facts
Viewing the evidence in the light most favorable to the
jury’s verdict, the facts in this case are as follows:
American Realty Trust, Inc. (“ART”) is a publicly traded
Georgia corporation engaged in the real estate business. It has
no employees of its own, and since 1989 it has been managed and
advised by Basic Capital Management, Inc. (“BCM”), a private
corporation that at all relevant times also has owned a majority
of ART’s stock. BCM is indirectly owned by a trust created by
real estate magnate Gene Phillips for the benefit of his
children.
Early in 2000, ART found itself with a need to raise
additional capital and refinance certain loans. For help in
obtaining the desired new capital and financing, ART began
negotiations aimed at securing the consulting services of Matisse
Capital Partners, LLC (“Matisse”). Matisse’s two principals,
Paul Bagley and Jack Takacs, had connections to Wall Street that
2
would, in ART’s estimation, raise ART’s reputation with potential
investors and financiers. Matisse was represented in the
negotiations by the law firm of Andrews & Kurth. On April 13,
2000, ART, BCM, and another ART-affiliated entity entered into an
agreement styled a Financial Consulting, Management and Marketing
Agreement (“the Consulting Contract”) with Matisse. The eleven-
page document required Matisse to assist ART in arranging certain
financing transactions, in exchange for which ART would pay
Matisse a monthly fee of $200,000 and, on at least some
transactions, a percentage commission. Matisse’s duties under
the Consulting Contract fell into three categories: (1)
collaborating with ART to develop, within 30 days, a list of
financing projects to be pursued; (2) preparing business plans,
budgets, and analyses of the designated projects; and (3)
assisting ART in negotiating and closing the designated projects.
The Consulting Contract required Matisse to obtain ART’s approval
of, inter alia, “any contract or subcontract with a third party.”
Further, the Consulting Contract provided that “Matisse will
perform its duties under this Agreement with due diligence and in
a fiduciary manner.”
In addition to obligating ART to pay Matisse a monthly fee
and certain commissions, the Consulting Contract required ART to
cause Bagley to be elected to ART’s board of directors and to be
installed as chairman of the board. ART also contracted to give
Matisse a loan that would allow Matisse to purchase ART common
3
stock. The Consulting Contract further required ART and BCM to
use their best efforts to see to it that ART acquired an option
to buy out BCM’s advisory contracts with ART and other Phillips-
affiliated companies, so that ART could become self-
administering.
By its terms, the Consulting Contract was to run for a
period of twelve months, with an automatic renewal for a
subsequent twelve months on the condition that Matisse arrange
for $100 million of new capital and refinance at least half of
ART’s outstanding land loans. The agreement also provided,
however, that it would terminate “upon election of ART, forthwith
and upon notice, for any negligence, impropriety, or other
wrongful act of Matisse or any of its officers, employees, or
agents.”
The Consulting Contract further provided that it was
“subject to the approval of the Board of Directors of each of
ART, BCM and [another ART-affiliated company]. If any such
company’s Board of Directors fails to approve this transaction,
this agreement shall terminate without liability of either
party.” ART’s board did not approve the Consulting Contract
until May 19, 2000, a bit over a month after it was signed, and
BCM’s board never approved it.1 The parties nonetheless operated
1
At trial, it was disputed whether BCM’s representatives
told Bagley and Takacs that BCM’s board had approved the
Consulting Contract. BCM’s alleged misrepresentations about the
board’s approval formed the basis of Matisse’s fraud claim, which
4
as if the Consulting Contract were in force. Bagley was
appointed to ART’s board and made chairman of the board, as
required by the Consulting Contract, on April 28. The board also
appointed Bagley to the position of chief executive officer on
that date, although the corporation’s bylaws did not provide for
any such post. The Consulting Contract did not require ART to
appoint Bagley as its CEO, but ART believed that doing so would
increase his credibility on Wall Street in his dealings on ART’s
behalf. Bagley and Takacs began to work with A. Cal Rossi, who
at that time was an executive vice president of both ART and BCM,
on putting together a list of financing projects. BCM paid the
first monthly consulting fee to Matisse in early May, and ART
made the second payment in early June.2 Bagley and Takacs were
given office space at BCM’s offices, though they rarely worked
out of those offices. ART’s day-to-day operations remained under
the control of the company’s president, Carl Blaha.
On June 14, 2000, FBI agents searched BCM’s offices, and
word quickly spread that Phillips and Rossi had been indicted by
a New York grand jury on federal securities charges. The
publicity surrounding the indictments precipitated a drop in the
market price of ART’s stock, as well as the stock of other
the jury rejected and which is not at issue in this appeal.
2
According to ART and BCM, ART could not make the first
payment because its board had not yet approved the Consulting
Contract. But (also according to ART and BCM) BCM, which was not
a public company, operated under looser financial rules.
5
Phillips-affiliated companies. This drop in share prices plunged
ART into a financial emergency, because ART owed margin loans
secured by stock held in its affiliated companies. ART’s lenders
made margin calls on ART, demanding repayment or additional
collateral for the loans. ART feared that the margin lenders
would sell the margin shares at the now-depressed market price, a
price that seriously undervalued the companies’ underlying real
estate holdings.
ART’s board of directors held an emergency meeting on June
17 to discuss the company’s response to the margin calls. The
board was told that efforts were being made to sell certain
properties to generate cash, but that these sales would not be
sufficient to meet the margin calls. ART’s main response,
spearheaded by Brad Phillips, the son of Gene Phillips, was to
try to negotiate forbearance agreements with each of the margin
lenders in order to avoid a sale of the underpriced margin
shares. The minutes of the meeting report that Bagley inquired
about the board’s current delegations of authority to the
corporation’s officers and asked the corporation’s counsel to
review those delegations. At that time, Blaha was the only
officer to whom the board had delegated authority.
Bagley knew about Brad Phillips’s efforts to secure
forbearance agreements, but Bagley seems to have pursued a
different response to the crisis. In his view, the only way for
ART to survive was to persuade the New York Stock Exchange to
6
suspend trading in the ART affiliates’ stock. In order to
reassure the exchanges, Bagley believed that it was necessary to
enter talks with a credible financing source capable of
satisfying the margin debt. To this end, he and Takacs began
negotiating with the Hampstead Group, a large institutional
investment fund. In the negotiations with Hampstead, which
continued into the evenings and over the weekend, Bagley and
Takacs were assisted by the lawyers from Andrews & Kurth who had
previously represented Matisse in the negotiation of the
Consulting Contract. Robert Waldman, ART’s general counsel, was
aware of the negotiations but was not told the details of the
proposed deal.
The result of the talks with Hampstead was a Letter of
Intent dated June 22, 2000, in which Hampstead expressed its
interest in acquiring a majority of the margin shares held by
ART.3 While the Letter of Intent was not binding with respect to
that sale, it did contain a few binding obligations. Most
significantly, it contained a “no-shop” provision that barred ART
from negotiating with any other party regarding a sale of the
margin shares until August 8, 2000. If ART breached the no-shop
provision, the Letter of Intent provided that Hampstead would be
entitled to reimbursement of its out-of-pocket costs expended in
3
The Letter of Intent was actually executed between ART
and SH Funding Partners, L.P., an entity created by Hampstead for
purposes of the proposed transaction. Like the parties, we will
use the label “Hampstead” to refer to these associated entities.
7
connection with the proposed transaction. The Letter of Intent
was signed for ART by “Paul Bagley, Chairman and Chief
Executive.”
None of ART’s other officers or directors had any input into
the Letter of Intent, and Bagley did not consult them before he
signed it. When ART’s board and officers learned of the Letter
of Intent’s terms, they were stunned and angered. The jury heard
testimony from ART’s witnesses that the Letter of Intent, and the
no-shop provision in particular, undercut Brad Phillips’s efforts
to obtain forbearance agreements and contradicted his statements
to the margin lenders.
A special meeting of ART’s board was held on June 24 to
discuss progress in dealing with the margin debt situation. Some
of the directors questioned the wisdom of the Letter of Intent,
criticized Bagley for not informing them about it, and expressed
their belief that Bagley lacked the authority to execute it. At
some point in the meeting, Bagley refused to answer any more
questions until he consulted with his own counsel, and he later
left the meeting. The board unanimously removed Bagley from his
positions as CEO and chairman of the board. Two days later, on
June 26, ART sued Matisse, Bagley, and Takacs (collectively
“Defendants”) in Texas state court, asserting breach of the
Consulting Contract and breach of fiduciary duties, as well as
other claims. Bagley resigned from his position as a director of
ART on July 10.
8
B. Proceedings Below
Defendants removed the case to the district court on the
basis of diversity of citizenship. They also countersued ART and
filed a third-party complaint against Gene Phillips and Rossi.
BCM was later joined as a plaintiff.
The joint pretrial order, dated July 22, 2002, set forth the
parties’ various claims, defenses, and contentions. Those claims
that remain relevant for purposes of this appeal are ART’s claims
for breach of contract and breach of fiduciary duty, BCM’s claim
for breach of contract, and Matisse’s counter-claim for breach of
contract. ART’s breach of contract claim asserted that
Defendants both failed to undertake the duties required by the
Consulting Contract and affirmatively breached it by secretly
negotiating the Hampstead Letter of Intent. Alternatively, ART
claimed that the Consulting Contract had terminated without
further liability to pay Matisse’s fees because BCM’s board had
never approved it. ART’s fiduciary duty count alleged that
Defendants’ actions with respect to the Hampstead Letter of
Intent breached duties of care and loyalty owed to the
corporation; these fiduciary duties arose, according to ART, both
from Bagley’s status as an officer and director of ART and from
the Consulting Contract itself, in which Matisse promised to
undertake its efforts on ART’s behalf “in a fiduciary manner.”
As a remedy, ART sought disgorgement of Matisse’s fees, as well
9
as “actual, consequential, and special damages” in an unspecified
amount.
BCM’s breach of contract claim asserted two alternative
theories. First, since BCM’s board never approved the contract,
Defendants breached the Consulting Contract by carrying on as if
it were in force, circumventing the provision requiring BCM’s
consent. Second, if the Consulting Contract were valid, then
Defendants breached it in the same ways alleged by ART. BCM
sought to recover at least the $200,000 it had paid Matisse as
the first monthly consulting fee.
In its counterclaim against ART for breach of contract,
Matisse contended that the Consulting Contract was valid and
effective, and that ART had either waived or was estopped from
asserting any defect resulting from BCM’s failure to approve it.
ART breached the contract, according to Matisse, by terminating
it without cause, by failing to make the third monthly payment,
and by failing to make the loan that would enable Matisse to
purchase stock in ART. Matisse sought the $2 million of monthly
consulting fees it was owed for the remainder of the first year
of the Consulting Contract, and it also sought to recover the
fees it would have earned in the renewal term, on the theory that
ART’s breach prevented Matisse from satisfying the conditions
necessary to trigger the renewal.
10
Both sides additionally requested an award of attorneys’
fees, as provided for under both Texas law and a provision of the
Consulting Contract.
The district court denied the parties’ cross-motions for
summary judgment, and a jury trial followed. The ten-day trial
featured over a dozen witnesses and over a hundred exhibits. At
the close of the evidence, the parties filed Rule 50 motions for
judgment as a matter of law. The court denied these without
prejudice to entertaining the motions again after the jury’s
verdict.
The jury’s verdict resolved almost all of the issues against
Defendants. Relevantly for purposes of this appeal, the jury
found in favor of ART on its breach of contract and fiduciary
duty counts and in favor of BCM on its contract claim; the jury
found that Matisse had not proven its breach of contract claim
against ART. When asked to quantify the amount of damages the
victorious plaintiffs should be awarded on each of their claims,
however, the jury answered “none.”
After the verdict, ART and BCM moved for entry of judgment
on the verdict and Defendants renewed their motion for judgment
as a matter of law. In their motion, Defendants asked the
district court to set aside the verdicts in favor of ART and BCM
and to enter judgment for Matisse on its breach of contract
claim. The district court granted Defendants’ renewed motion for
judgment as a matter of law, remarking as follows: “The court
11
agrees with the arguments and authorities in the defendants’
motion. These arguments and authorities are incorporated herein
by reference as the basis for this ruling. Granting the
defendants’ motion necessarily means, of course that the
plaintiffs’ motion for entry of judgment on the verdict must be
denied.” Although Defendants’ motion had asked for further
proceedings to fix damages, the court instead entered judgment
for Matisse for $4.4 million (i.e., $200,000 per month for the
remainder of the Consulting Contract, including the renewal
term), plus pre- and post-judgment interest. The court’s
judgment also awarded Matisse attorneys’ fees in an amount to be
determined in a subsequent hearing.
ART and BCM now appeal the district court’s judgment.4
II. STANDARD OF REVIEW
We review the district court’s grant of judgment as a matter
of law under Rule 50 de novo, applying the same standard as the
district court. See Coffel v. Stryker Corp., 284 F.3d 625, 630
(5th Cir. 2002). Judgment as a matter of law is appropriate with
respect to an issue if “there is no legally sufficient
evidentiary basis for a reasonable jury to find for [a] party on
that issue.” FED. R. CIV. P. 50(a)(1). This occurs when the
facts and inferences point so strongly and overwhelmingly in the
4
ART later filed a separate appeal, No. 03-10462,
relating to the amount of attorneys’ fees awarded to Matisse in
the subsequent hearing.
12
movant’s favor that reasonable jurors could not reach a contrary
verdict. Coffel, 284 F.3d at 630. In considering a Rule 50
motion, the court must review all of the evidence in the record,
drawing all reasonable inferences in favor of the nonmoving
party; the court may not make credibility determinations or weigh
the evidence, as those are jury functions. Reeves v. Sanderson
Plumbing Prods., Inc., 530 U.S. 133, 150 (2000). In reviewing
the record as a whole, the court “must disregard all evidence
favorable to the moving party that the jury is not required to
believe. That is, the court should give credence to the evidence
favoring the nonmovant as well as that evidence supporting the
moving party that is uncontradicted and unimpeached, at least to
the extent that that evidence comes from disinterested
witnesses.” Id. at 151 (citation and internal quotation marks
omitted).
III. ANALYSIS
This appeal involves claims of breach of contract and breach
of fiduciary duty, claims for which state law provides the
substantive rules of decision. The parties agree that Texas law
governs the contract issues.5 The parties also recognize,
however, that since ART is a Georgia corporation, ART’s internal
5
The Consulting Contract contains a choice-of-law clause
selecting Texas law to govern all disputes. The Texas courts
will enforce such clauses so long as the chosen state bears some
reasonable relationship to the parties and the transaction.
Lockheed Martin Corp. v. Gordon, 16 S.W.3d 127, 133 (Tex.
App.—Houston [1st Dist.] 2000, pet. denied).
13
affairs (including the rights and duties of its officers and
directors) are governed by Georgia law. See Askanase v. Fatjo,
130 F.3d 657, 670 (5th Cir. 1997) (“Federal courts sitting in
Texas apply the law of the state of incorporation when a
corporation’s internal affairs are implicated.”). We begin by
discussing the district court’s disposition of the breach of
contract claims, then turn to the breach of fiduciary duty
claims.
A. Breach of Contract
The jury returned verdicts in favor of both ART and BCM on
their respective breach of contract claims against all three
Defendants, but the jury awarded no damages. The jury also found
that Matisse had not proven its breach of contract claim against
ART. The district court disagreed and overturned the verdicts
for ART and BCM and entered a sizable judgment for Matisse. The
question before us is whether the district court erred in ruling
that a rational jury could reach no other conclusion.
To begin with one of the simpler aspects of this complicated
case, we believe that the district court was correct to reject
the jury’s verdict to the extent that the jury found that Bagley
and Takacs individually, as opposed to Matisse, had breached the
Consulting Contract.6 The Consulting Contract states that it was
6
It appears that the district judge harbored concerns
about this issue even before the charge was given to the jury.
Before the closing statements, Defendants’ counsel asked the
court to “correct” the verdict form by removing Bagley and Takacs
14
“executed . . . by and between MATISSE PARTNERS, LLC, a Colorado
limited liability company” and the ART corporations. It was
signed on Matisse’s behalf by Takacs in his capacity as Matisse’s
managing director. It is of course true that a business entity
can act only through its officers, employees, and other agents.
If Matisse breached the contract, it would therefore necessarily
be by virtue of acts taken by Bagley or Takacs. But that truism
does not mean that any breach of the Consulting Contract, which
breach could only happen through those two individuals’ actions,
creates individual liability on Bagley and Takacs. Cf. Gonzales
County Water Supply Corp. v. Jarzombek, 918 S.W.2d 57, 59-61
(Tex. App.—Corpus Christi 1996, no writ). To so hold would
ignore the fact that Matisse’s principals were doing business as
an LLC.
We recognize that the Consulting Contract specifically
refers to Bagley and Takacs by name and states that they will
undertake services for ART, but it is still Matisse who was the
promisor here. The Consulting Contract provides that “Matisse
agrees that these individuals will be primarily responsible for
Matisse’s performance under this Agreement, and will spend
substantial amounts of time on the responsibilities of Matisse
hereunder” (emphasis added). As we have said, Matisse could
from the question relating to the breach of contract claim. The
court responded, “I don’t think they were part of the contract,
but . . . that’s the plaintiff’s contention. I’m submitting it
as the plaintiff requested.”
15
perform under the contract only through its agents Bagley and
Takacs, but that does not make the agents parties to the
Consulting Contract. Thus no action for breach of contract can
lie against them. See Bernard Johnson, Inc. v. Cont’l
Constructors, Inc., 630 S.W.2d 365, 369 (Tex. App.–Austin 1982,
writ ref’d n.r.e.) (“As a general rule, a suit for breach of
contract may not be maintained against a person who is not a
party to the contract, particularly a non-party who is assigned
duties by the terms of the contract.”). Nor was there any basis
for the jury to conclude that Bagley and Takacs personally formed
any other contract, separate from the written Consulting
Contract, with ART and its affiliates. Therefore, we hold that
the district court did not err to the extent that its judgment
set aside the jury’s verdict with respect to the plaintiffs’
breach of contract claims against Bagley and Takacs individually,
as opposed to Matisse.
To clear away another relatively straightforward issue, we
also affirm the district court’s judgment to the extent that it
rejected the jury’s verdict in BCM’s favor on its breach of
contract claim. Defendants’ renewed motion for judgment as a
matter of law attacked the jury’s verdict on BCM’s breach of
contract claim on the grounds that no duties under the Consulting
Contract ran in favor of BCM. While BCM is a signatory to the
Consulting Contract, Defendants pointed out that BCM’s main role
in the agreement was its promise to assist ART in buying out
16
BCM’s advisory agreements. In granting Defendants’ motion, the
district court implicitly accepted the argument that Matisse’s
duties under the Consulting Contract ran to ART, not to BCM. The
appellate briefs filed by ART and BCM do not offer any argument
against this aspect of the district court’s judgment, and so they
have waived the issue. See Gann v. Fruehauf Corp., 52 F.3d 1320,
1328 (5th Cir. 1995). Accordingly, we do not decide whether
there was reversible error in the district court’s judgment to
the extent that it set aside the jury’s verdict in favor of BCM
on its breach of contract claim.
We come then to heart of the breach of contract issue, the
question whether the district court erred in rejecting the jury’s
verdict against Matisse on ART’s breach of contract claim and
instead entering judgment——again notwithstanding the jury’s
verdict——in favor of Matisse. In framing the issue, we note that
ART and Matisse agree that ART took actions inconsistent with the
Consulting Contract, such as removing Bagley from his position as
chairman of the board at the June 24 meeting. The critical
dispute is whether Matisse had already breached the Consulting
Contract before ART took those actions. ART contends that
Matisse had failed to perform as promised, in particular by
negotiating and signing the Hampstead Letter of Intent. Not only
was the Letter of Intent unauthorized by either the Consulting
Contract or Bagley’s position as chairman and CEO, says ART, but
Bagley and Takacs in fact pursued the Hampstead deal because it
17
would earn Matisse a commission under the Consulting Contract,
not because the deal was in ART’s best interests. ART argues
that it therefore properly terminated the Consulting Contract.
In response, Matisse contends that ART merely used the Hampstead
Letter of Intent as a pretext to terminate the Consulting
Contract. The true reason for ART’s dissatisfaction with the
consulting arrangement, according to Matisse, is that Gene
Phillips had realized that his indictment would scare off
investors and impair ART’s ability to raise funds, meaning that
there would be little to be gained from the $200,000 monthly
payment to Matisse.7 ART’s suit, filed only days after the
revelation of the Letter of Intent, was in Matisse’s view an
attempt to preempt Matisse from filing its own suit for breach of
contract.8
Matisse’s theory is not an unreasonable one. ART and
Phillips may well have been looking for an excuse to slip out of
7
ART had in fact failed to make the third monthly
payment, which was expected on June 15, the day after the FBI
searched BCM’s offices. We do not take Defendants to assert,
however, that this failure to make timely payment itself amounts
to a material breach on ART’s part. On Defendants’ theory of the
case, Gene Phillips and ART had decided to breach the contract
soon after the crisis hit, but (again, on Defendants’ view) ART’s
actual breach of the Consulting Contract did not occur until
later, probably at the June 24 board meeting. While ART’s
failure to make the payment on June 15 might well have given
Matisse the right to suspend its own performance until it
received assurances, Defendants’ position is that they in fact
redoubled their efforts when ART ran into its financial crisis.
8
The district judge remarked on more than one occasion
that Matisse should have been the true plaintiff in this case.
18
the Consulting Contract. The jury, however, which had the
benefit of seeing and hearing the witnesses firsthand, rejected
Matisse’s pretext theory. Based on our review of the record, we
believe that there was sufficient evidence for them rationally to
reach that conclusion. If the jury credited the testimony of
ART’s witnesses, the jury could have found that ART believed that
Matisse had breached the Consulting Contract, as the jury itself
found. To the extent that Defendants advance a different reading
of the facts, their argument must fail. See Reeves, 530 U.S. at
150 (stating that the court “may not make credibility
determinations or weigh the evidence” in ruling on a Rule 50
motion).
Defendants’ argument does not, however, rest solely on an
effort to re-weigh the disputed evidence. The legal centerpiece
of the argument in Defendants’ renewed Rule 50 motion to the
district court, as well as in their brief on appeal, is the
contention that Bagley’s actions with respect to the Hampstead
Letter of Intent simply cannot constitute a breach of contract on
Matisse’s part, for the Letter of Intent reveals on its face that
Bagley signed it for ART in his capacity as CEO and chairman of
the board, not in his capacity as an agent of Matisse.
Defendants repeatedly press upon us the importance of realizing
that Bagley had two distinct roles vis-à-vis ART: one as a
financial consultant to ART under the Consulting Contract and one
as ART’s chairman/CEO. Defendants ask us to conclude that
19
Bagley’s deeds in the latter role as a corporate representative
of ART are therefore irrelevant, as a matter of law, with respect
to Matisse’s performance under the Consulting Contract.
It is of course true, as Defendants argue, that the same
individual can act in distinct legal capacities. We do not
believe, however, that this well-settled principle is
determinative of the rather unusual case before us today.
Although Bagley had two different legal personalities——Matisse
consultant on the one hand and ART officer/director on the
other——we believe that his actions in his capacity as an ART
officer and director could still amount to a breach of the
Consulting Contract. The Consulting Contract called for Bagley
to be installed as chairman of the board and required that
Matisse’s duties, to be discharged by Bagley and Takacs, be
performed “with due diligence and in a fiduciary manner.”
Therefore, given the peculiar nature of the Consulting Contract,
any malfeasance undertaken in Bagley’s role with ART could breach
both Matisse’s contractual duties to ART as well as Bagley’s
distinct, corporate-law duties to ART. That is, although we
agree with Defendants that the two sets of duties are
conceptually distinct, it is also the case that the same conduct
can in practice violate both sets of duties. Otherwise, the
contract would saddle ART with a duty to continue paying
faithless and negligent consultants, as long as the consultants’
trespasses were accomplished under ART’s name.
20
Defendants’ own arguments recognize the soundness of our
conclusion. One of the ways in which ART breached the Consulting
Contract, on Defendants’ view of the case, was in removing Bagley
from his position as chairman in contravention of the one-year
appointment specified in the Consulting Contract. ART’s removal
of Bagley altered the corporate-law relationship between ART and
Bagley, but, on Defendants’ own view, it also simultaneously
breached the Consulting Contract, which installed him as chairman
in the first place. Just as Defendants would have us recognize
that ART’s actions against Bagley in his corporate role with ART
could constitute a breach of the Consulting Contract between ART
and Matisse, so too do we recognize that Bagley’s actions in his
corporate role with ART can violate that same agreement.9 We
note as well that the Hampstead negotiations, along with other
events that might have constituted a breach of the Consulting
Contract, were not solely attributable to Bagley; Takacs took
part in these activities as well, as did Matisse’s counsel,
Andrews & Kurth, making it very much a Matisse operation (or so a
jury was entitled to find). As such, Matisse’s failure to obtain
9
Corporate executives’ relationships with the
corporation are often governed by contractual duties as well as
by status-based duties imposed by corporate law. Texas law and
Georgia law both provide that although a corporate board can
remove an executive at any time, the individual can still sue the
corporation for thereby breaching his or her employment contract.
See O.C.G.A. § 14-2-844; TEX. BUS. CORP. ACT ANN. art. 2.43 (Vernon
2003).
21
ART’s approval of the Letter of Intent could also have been found
by the jury on this record to breach the Consulting Contract.
Since there was a legally sufficient basis for the jury’s
conclusion that ART proved at trial that Matisse breached the
Consulting Contract, the district court erred in overturning that
portion of the verdict. For the same reason, the district court
also necessarily erred in entering judgment as a matter of law in
Matisse’s favor, and awarding a substantial recovery, on
Matisse’s breach of contract claim.
B. Breach of Fiduciary Duty
ART’s complaint alleged that Defendants breached the
fiduciary duties they owed to ART. According to ART, these
duties arose from two sources: (1) Bagley’s status as an officer
and director of ART and (2) the contractual arrangement between
Matisse and ART. The district court instructed the jury that
Matisse was ART’s agent, and that an agent owes fiduciary duties
to its principal; it likewise charged the jury that officers and
directors owe fiduciary duties to the corporation they serve.
The court further instructed that these duties required Bagley
and Matisse to
deal fairly and honestly with ART, to make reasonable use
of ART’s confidences, to act in the utmost good faith and
with the most scrupulous honesty toward ART, to fully and
fairly disclose all important information to ART, to
place ART’s interests before their own, and not to use
their position as agent, officer, or director to the
detriment of ART.
22
The jury’s verdict was that both Bagley and Matisse breached
fiduciary duties owed to ART. As with the contract claim,
however, the jury awarded ART no damages.10
Although ART’s complaint included separate counts for
breaches of the duties of care and of loyalty, and the pretrial
order also mentioned both theories, the charge to the jury spoke
generically of “fiduciary duties” without distinguishing between
the distinct types of duties.11 The parties do not challenge the
content of the jury instruction, however. For purposes of our
assessment of the legal sufficiency of the jury’s verdict,
therefore, we need only ask whether there was sufficient evidence
10
The verdict form included a question asking whether
Takacs was vicariously liable for Bagley’s or Matisse’s breach of
fiduciary duty on a theory of civil conspiracy. The verdict form
instructed the jury to skip this question, however, since the
jury awarded ART no damages. The verdict with respect to Takacs
is not an issue in this appeal.
In their motion for entry of judgment on the verdict, ART
and BCM requested disgorgement of the $400,000 paid to Matisse
under the Consulting Contract; they argued that disgorgement was
required as a matter of law when there has been a breach of
fiduciary duty, despite the jury’s verdict that they were
entitled to no damages. This issue has not been pursued on
appeal, and it is therefore waived.
11
The distinction between the duties of loyalty and of
care was relevant at trial because ART’s articles of
incorporation arguably waive the corporation’s right to recover
against officers and directors for breaches of the duty of care.
When ART moved for entry of judgment on the verdict, Defendants
argued that the verdict was ambiguous in that the jury
instructions, while apparently focusing on the law of the duty of
loyalty, also referred to incidents that arguably implicated the
duty of care. Since the district court rejected the verdict, the
court did not have any occasion to decide which duty was
breached.
23
for the jury to find a breach of fiduciary duty according to the
law that they were given.
We begin with the jury’s finding that Bagley breached his
fiduciary duties to ART. Upon examination of the record, we
conclude that a rational jury could have found that Bagley failed
to satisfy the standard expressed in the jury instruction. Not
only did Bagley fail to consult with ART’s board and other
officers about executing the Letter of Intent, but, according to
ART’s witnesses, Bagley in fact actively kept ART’s people in the
dark about the details of the Letter of Intent. ART’s board
learned of the terms only after the Letter of Intent had been
signed. Bagley was advised in the Hampstead negotiations by the
law firm of Andrews & Kurth, the same firm that had earlier
represented Matisse, adverse to ART, in negotiating the
Consulting Contract. Waldman, ART’s own general counsel, was
unaware of the nature of the agreement that was being
contemplated. These actions violate, at a minimum, Bagley’s duty
“to fully and fairly disclose all important information to ART.”
We conclude that the jury’s verdict against Bagley on ART’s
fiduciary duty count was therefore sound.12
12
ART contended at trial that Matisse stood to earn a fee
on the Hampstead deal (unlike the forbearance agreements that
Brad Phillips was busy arranging) and that Defendants’ own
financial interests therefore led them to pursue an agreement
that was disadvantageous for ART. Defendants responded that they
had no personal stake in the Hampstead deal because the
Consulting Contract did not entitle them to any fee on a
transaction such as that contemplated in the Letter of Intent.
24
The jury also found that Matisse, in addition to Bagley
individually, had breached fiduciary duties owed to ART. Unlike
Bagley, Matisse was of course not an officer or a director of
ART. According to the jury instructions, the fiduciary
relationship between Matisse and ART arose from Matisse’s
position as ART’s agent under the Consulting Contract.13 In
their renewed motion for judgment as a matter of law, Defendants
argued that Matisse could not have violated any fiduciary duty
because: (1) an entity cannot breach contractually created
fiduciary duties when it has not breached the underlying
contract, and (2) Bagley had not violated fiduciary duties he
owed to ART, so no breach on his part could be attributed to
Matisse. Since the predicates for those arguments are no longer
available in light of our dispositions of the other claims in
this case, the jury’s verdict should be reinstated to the extent
that it found against Matisse on ART’s breach of fiduciary duty
claim.
The parties’ dispute stems from a disagreement over the scope of
a “catch-all” clause that obligated ART to pay Matisse a
commission on additional transactions not specifically mentioned
in the Consulting Contract. ART produced some rather thin
evidence that possibly tended to show that the Matisse
consultants expected to earn a commission on the Hampstead deal.
We need not decide if there was sufficient evidence to support a
finding of self-dealing, however, for the jury instruction does
not require proof of self-dealing.
13
Regardless of whether or not such a characterization of
the parties’ relationship is accurate, Defendants have not
objected to it.
25
C. Proceedings on Remand
The district court’s judgment notwithstanding the verdict
also gave Matisse, as the newly prevailing party, an award of
costs and attorneys’ fees in an amount to be determined in a
subsequent hearing. Since we have now partially reversed the
district court’s judgment and reinstated portions of the jury’s
verdict, we remand the case to the district court to vacate the
award of attorneys’ fees to Matisse,14 see Coffel, 284 F.3d at
641, and to determine ART’s entitlement to attorneys’ fees (if,
indeed, ART is so entitled, as to which we intimate no opinion).
IV. CONCLUSION
We conclude that the district court properly granted some
portions of Defendants’ renewed motion for judgment of law, but
we also hold that the district court erred in granting other
portions. We AFFIRM the district court to the extent that it
entered judgment in favor of all three Defendants on BCM’s breach
of contract claim and in favor of Bagley and Takacs on ART’s
breach of contract claim. We REVERSE the district court’s entry
of judgment in Matisse’s favor on its breach of contract claim,
and REMAND for entry of judgment in favor of ART on ART’s breach
of contract claim against Matisse and on ART’s breach of
14
We recognize that ART’s appeal of the district court’s
order fixing the amount of attorneys’ fees was dismissed.
However, Matisse’s entitlement to such fees was the subject of
this appeal, and is disposed of contrary to Matisse herein.
26
fiduciary duty claim against Matisse and Bagley, with no damages
to be awarded to ART on any of such claims. We REVERSE the
district court’s finding that Matisse was entitled to attorneys’
fees, and we REMAND for a determination of ART’s entitlement to
attorneys’ fees and for further proceedings consistent herewith.
Costs shall be borne by Matisse.
27