A court of appeals recently issued an opinion rejecting a fiduciary’s claims regarding the excessiveness of the trial court’s judgment that awarded disgorgement and exemplary damages. In Swinnea v. ERI Consulting Engineers, Inc., Snodgrass and Swinnea owned equal interests in ERI, a small consulting company that managed asbestos abatement projects, for approximately ten years. No. 12-14-00288-CV, 2016 Tex. App. LEXIS 1339 (Tex. App.—Tyler Feb. 12, 2016, no pet. h.). In August 2001, Snodgrass and ERI purchased Swinnea’s interest in ERI for $497,500, after which Swinnea was to remain an ERI employee and not compete with ERI for six years. Prior to that time, Snodgrass and Swinnea had also been equal partners in Malmeba, which owned the building where ERI maintained its offices. As part of the buyout in August 2001, Snodgrass transferred his ownership interest in Malmeba, and ERI entered into a lease agreement for six years. Unbeknownst to Snodgrass, a month before the buyout, Swinnea’s wife and the wife of another ERI employee created a new company called Air Quality Associates, which they used to bid on ERI administered asbestos abatement contracts despite having no prior experience in the asbestos abatement field. Swinnea did not disclose the existence of Air Quality Associates during the ERI buyout negotiations. After the buyout, Swinnea’s revenue production decreased by 30%-50%. Swinnea subsequently learned of Snodgrass’s involvement when one of ERI’s biggest clients informed him and then stopped bidding on ERI’s projects. The following year, in 2002, Swinnea’s wife started a new abatement contracting company, Brady Environmental, Inc., which they told Snodgrass they would use for cleaning homes and air ducts. Instead, Brady Environmental began performing asbestos abatement and competed with ERI. Swinnea continued to be employed by ERI, but the evidence showed he encouraged ERI’s clients to use his company instead of ERI. ERI terminated Swinnea in June 2004. ERI and Snodgrass sued Swinnea and Brady Environmental for breach of fiduciary duty, breach of contract, and other related causes of action. After a bench trial, the trial court found for Snodgrass and ERI on the claims for statutory fraud, common law fraud, breach of the non-compete clause, and breach of fiduciary duty. It rendered judgment for ERI and Snodgrass for combined damages of $1,020,700 and $1 million in exemplary damages.
In the first appeal of that judgment, the court of appeals reversed and rendered judgment that ERI and Snodgrass take nothing. Swinnea v. ERI Consulting Eng’rs, Inc., 236 S.W.3d 825 (Tex. App.—Tyler 2007), rev’d, 318 S.W.3d 867 (Tex. 2010). The Texas Supreme Court, however, reversed the court of appeals and remanded for consideration of the factors set forth in the Restatement (Second) of Trusts as to equitable forfeiture. ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867 (Tex. 2010). On remand, the court of appeals determined that the statutory cap on exemplary damages did not apply because the conduct fell within one of the exceptions to the cap, for violations of the Texas Penal Code. Swinnea v. ERI Consulting Eng’rs, Inc., 364 S.W.3d 421 (Tex. App.—Tyler 2012, pet. denied). The court suggested a remittitur of a portion of the award for lost profits but otherwise affirmed the trial court’s judgment. Id. The case was then remanded to the trial court for review of the forfeiture award as discussed in the Supreme Court’s opinion.
The trial court entered judgment similar to the original judgment, awarding ERI and Snodgrass actual damages in the amount of $178,601, disgorgement in the amount of $720,700, and exemplary damages of $1 million. Swinnea appealed to the court of appeals, which affirmed that judgment. The court first rejected Swinnea’s argument that the disgorgement award was punitive, recognizing that while forfeiture of contractual consideration may have a punitive effect, that is not the focus of the remedy, which is to protect relationships of trust by discouraging agents’ disloyalty. 2016 Tex. App. LEXIS 1339 at *7-8. The court held that actual damages are not a prerequisite to disgorgement of contractual consideration; thus, it is not punitive. Awards of equitable disgorgement and exemplary damages are not duplicative. Additionally, mutual restitution (which would require ERI and Snodgrass to return the consideration they received in the August 2011 buyout) was not applicable because Snodgrass and ERI were not seeking rescission of the contract; rather, the remedy of disgorgement was in response to Swinnea’s breach of fiduciary duty. Finally, as to one specific component of the award, the court held that the rental payments from ERI to Malmeba after the August 2001 buyout were properly disgorged. In short, the court held the trial court did not abuse its discretion in determining the remedy or amount of the disgorgement. Id. at *13.
The court next held that the exemplary damages award was not excessive. The court detailed the trial court’s findings regarding Swinnea’s breach of fiduciary duty and then applied the factors set forth in Alamo Nat’l Bank v. Kraus: (1) the nature of the wrong, (2) the character of the conduct involved, (3) the degree of culpability of the wrongdoer, (4) the situation and sensibilities of the parties concerned, and (5) the extent to which such conduct offends a public sense of justice and propriety. 616 S.W.2d 908, 910 (Tex. 1981). The court stated that:
The nature of the wrong was the premeditated, intentional violation of Swinnea’s fiduciary duty owed to his longtime business partner. The character of the conduct involved dishonesty and deceit. His wrongful conduct was committed over a long period of time, in bad faith, with malice, aimed at destroying ERI and Snodgrass. The parties were fiduciaries who had been in business together for about a decade. Swinnea possessed proprietary information regarding ERI and had a longstanding confidential relationship with Snodgrass. Swinnea’s culpability was significant and his conduct was highly offensive to a public sense of justice and propriety. While a considerable amount of the harm done was economic, here, there was also a considerable amount of damage done to the relationship of trust between Swinnea and ERI and Snodgrass.
Id. at *18. Swinnea’s argument that the “punitive” award was excessive was improperly based on an assumption that the amounts ordered disgorged were included in the “punitive” award, which the court had previously rejected. Thus, rather than evaluating a “punitive” award of $1,720,700 (exemplary damages plus amount of disgorgement), the court compared the $1 million exemplary damages in proportion to the combined compensatory awards of $899,301 (actual damages award plus disgorgement), which was well within constitutional parameters and not excessive. Id. at *13-21.
Finally, the court affirmed the trial court’s award of attorney’s fees to ERI and Snodgrass. Swinnea failed to preserve that complaint, and even if preserved that the award was proper because Snodgrass and ERI’s allegations included causes of action for statutory fraud and breach of contract, for which attorney’s fees were recoverable. Id. at *21-22.