Court Affirms The Equitable Forfeiture Of A Manager’s Partnership Interest Due To Breach Of Fiduciary Duty And Discussed Interesting Jury Instruction Issues

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In Michael D. Heatley v. Red Oak 86, L.P. & Charles Johnson, investors in a limited partnership sued the managing member for breach of fiduciary duty. No. 05-18-01083-CV, 2020 Tex. App. LEXIS 6592 (Tex. App.—Dallas August 17, 2020, no pet. history). The jury found that the defendants owed a fiduciary duty, breached the duty, but that the plaintiffs did not incur any damages. The trial court then, after trial, entered an award of equitable forfeiture and awarded the plaintiffs over $250,000, which accounted for the defendants’ total contributions to the partnership. The defendants appealed.

The defendants argued that the plaintiffs waived any right to equitable forfeiture by failing to submit a question as to the level of the defendants’ intent in breaching duties. The court of appeals first discussed equitable forfeiture:

A trial court may order fee forfeiture as equitable relief when normal damages measures may not adequately address a breach of fiduciary duty. In ruling on a request for forfeiture, a trial court must determine three elements: [1] whether a “violation is clear and serious, [2] whether forfeiture of any fee should be required, and [3] if so, what amount.” In making that determination, the court must consider non-exclusive factors: “[t]he gravity and timing of the breach of duty”; “the level of intent or fault”; “whether the principal received any benefit from the fiduciary despite the breach”; “the centrality of the breach to the scope of the fiduciary relationship”; “any threatened or actual harm to the principal”; “the adequacy of other remedies”; and “[a]bove all” whether “the remedy fit[s] the circumstances and work[s] to serve the ultimate goal of protecting relationships of trust.” These “several factors embrace broad considerations which must be weighed together and not mechanically applied.” Thus, for example, “the ‘willfulness’ factor requires consideration of the [fiduciary’s] culpability generally; it does not simply limit forfeiture to situations in which the [fiduciary’s] breach of duty was intentional.”  Nor would “the adequacy-of-other-remedies factor . . . preclude forfeiture in circumstances where the principal could be fully compensated by damages.” The Heatley parties correctly note that, in the fee-forfeiture context, “when contested fact issues must be resolved before equitable relief can be determined, a party is entitled to have that resolution made by a jury.” And “a dispute concerning an agent’s culpability—whether he acted intentionally, with gross negligence, recklessly, or negligently, or was merely inadvertent—may present issues for a jury.”

Id. (internal citations omitted). The court then looked to whether the defendants had preserved their complaint about the missing findings on intent. The court held that the plaintiffs had the burden to plead, prove, and obtain jury findings on fee forfeiture. The court state that Texas Rule of Civil Procedure 278 states that “[f]ailure to submit a question shall not be deemed a ground for reversal of the judgment, unless its submission, in substantially correct wording, has been requested in writing and tendered by the party complaining of the judgment.” Id. The court held that the defendants waived their objection by failing to request any question on the plaintiff’s claim or by failing to object to the omission:

The Heatley parties argue that because there was a fact issue requiring jury determination on their level of intent or fault, the lack of a jury question and answer is fatal to the trial court’s conclusion to order fee forfeiture. We cannot reverse on this basis because they neither objected nor submitted a question “in substantially correct wording.” In the absence of a submitted question, an objection will preserve error where, as here, the party seeking reversal did not have the burden of proof with respect to the question at issue. Objections to a jury charge must be made “before the charge is read to the jury” and “must be specific, pointing out ‘distinctly the objectionable matter and the grounds of the objection.’” “Failure to timely object to error in a jury charge waives that error.” The Heatley parties did not tender a question related to fee forfeiture, addressing the level of intent with which they breached their fiduciary duties or specifically addressing any other Burrow factor. They did not object to the lack of such a question. Thus, we cannot reverse in their favor, as parties who failed to object to the absence of a jury question or to submit one at all.

Id. The court then reviewed the evidence and determined that it was sufficient to support the trial court’s forfeiture award. The court held that the evidence supported the trial court’s finding that the breach was serious as the defendants failed to disclose information that went the heart of the investment and also disclosed that same information to other investors. The court held that even though the evidence was conflicting, it supported a finding of intentional conduct by the defendants. The court then held that the fact that the plaintiffs were not damaged and that the defendants did not obtain an improper benefit were not dispositive:

This argument ignores a central tenet of forfeiture: “The main purpose of forfeiture is not to compensate an injured principal . . . . Rather, the central purpose is to protect relationships of trust by discouraging agents’ disloyalty. . . . or other misconduct.” A “client need not prove actual damages in order to obtain forfeiture” for breach of fiduciary duty. And, “even if a fiduciary does not obtain a benefit . . . by violating his duty, a fiduciary may be required to forfeit the right to compensation for the fiduciary’s work.” Forfeiture punishes a breach of fiduciary duty and exists as an equitable manner of compensating principals in situations where strict legal analysis does not support traditional measures of damages. The “threatened or actual harm to a principal” is only one relevant factor to be considered, while the most important consideration, “[a]bove all,” is whether “the remedy . . . fit[s] the circumstances and work[s] to serve the ultimate goal of protecting relationships of trust.

And, contrary to the Heatley parties’ argument, the jury’s refusal to find unjust enrichment cannot prevent forfeiture in this case. Here, unjust enrichment required the jury to find they acted intentionally; forfeiture, as we have noted, can be based on less than intentional conduct. In any event, the Heatley parties acquired interests adverse to their principals, Johnson and Red Oak, “without a full disclosure,” a betrayal of “trust and a breach of confidence.”

Id. The court also affirmed the trial court’s award of joint and several liability between the defendants based on knowing participation in the breach. The court of appeals held that the fact that the plaintiffs failed to obtain any jury findings on knowing participation was not important. The trial court’s judgment was affirmed.

Interesting Note. This is a highly interesting case from a procedural standpoint. It appears that the plaintiffs went to the jury on actual damages, but the jury found that they had no damages and that the defendants were not unjustly enriched. So, the breach of fiduciary duty finding was somewhat meaningless at that time. The plaintiffs then went to the trial court after trial and sought the equitable forfeiture award based on the jury’s breach of fiduciary duty finding so that they could recovery something. The trial court then evaluated the evidence and found that equitable forfeiture was appropriate and entered findings to support it.

First, the court of appeals should have properly discussed who should make the determination for equitable relief. The Texas Supreme Court held: “A jury does not determine the expediency, necessity, or propriety of equitable relief such as disgorgement or constructive trust.” Energy Co. v. Huff Energy Fund LP, 533 S.W.3d 866 (Tex. 2017). However, “If ‘contested fact issues must be resolved before a court can determine the expediency, necessity, or propriety of equitable relief, a party is entitled to have a jury resolve the disputed fact issues.’” Id. So, a jury decides fact issues that must be resolved before a trial court can award equitable relief. As one court recently held: “as a general rule, when contested fact issues must be resolved before equitable relief can be determined, a party is entitled to have that resolution made by a jury. In re Troy S. Poe Trust, No. 08-18-00074-CV, 2019 Tex. App. LEXIS 7838 (Tex. App.—El Paso August 28, 2019, no pet.) (reversing trial court’s award of equitable relief where underlying fact issues needed to go to the jury). For example, the Texas Supreme Court reversed a trial court’s award of profit disgorgement where the jury only found a revenue number and did not find the amount of profit made by the fiduciary defendant. Energy Co. v. Huff Energy Fund LP, 533 S.W.3d 866.

The Heatley court expressly stated that there was conflicting evidence on the factors for forfeiture relief. Those underlying fact issues had to go the jury, and the trial court had no authority to resolve them. The court of appeals held that there were no forfeiture factors submitted to the jury. It would seem that this case should fall under Texas Rule of Civil Procedure 279. “Upon appeal all independent grounds of recovery or of defense not conclusively established under the evidence and no element of which is submitted or requested are waived.”  Tex. R. Civ. P. 279; Eagle Oil & Gas Co. v. Shale Expl., LLC, 549 S.W.3d 256, 281 (Tex. App.—Houston [1st Dist.] 2018, pet. dism’d). Where a party fails to submit any element of its claim or affirmative defense, that claim or defense is waived unless the evidence conclusively establishes it under the law. Gulf States Utils. Co. v. Law, 79 S.W.3d 561, 565 (Tex. 2002); T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 222-23 (Tex. 1992); Harmes v. Arklates Corp., 615 S.W.2d 177, 179 (Tex. 1981). The court of appeals should have reversed and rendered that the plaintiffs waived their right to forfeiture relief by failing to submit questions to support its claim.

The court of appeals in Heatley, however, held in a footnote that Rule 279 does not apply to equitable relief: “the jury never considers the “elements” of fee forfeiture; that inquiry is specifically reserved to the trial court in its equitable capacity, and thus Rule 279 has no operation here.” Michael D. Heatley v. Red Oak 86, L.P. & Charles Johnson, 2020 Tex. App. LEXIS 6592, n. 4. But this ignores the fact that fact issues must be submitted to a jury before a trial court can award equitable relief.

Further, the court’s conclusions on error preservation are suspect. Basically, the court of appeals held that the defendants had a duty to request that the plaintiff’s claim for equitable relief be submitted in the charge or object to its omission from the charge to preserve error that there were no findings to support the trial court’s equitable award. A party only has to request a question if it is a question upon which it has the burden of proof. Tex. R. Civ. P. 278. A party can object to the failure to submit a question if it is a question upon which the opposing party has the burden of proof. Id. If a claim is completely omitted, a party should not object to its omission because the other party waived the claim pursuant to Rule 279.

A party should object to the omission where the claim or defense is partially submitted. Tex. R. Civ. P. 279. As the Texas Supreme Court described: “[W]hen some but not all elements of a claim or cause of action are submitted to and found by a jury, and there is no request or objection with regard to the missing element, a trial court may expressly make a finding on the omitted element, or if it does not, the omitted element is deemed found by the court in a manner supporting the judgment if the deemed finding is supported by some evidence.” In re J.F.C., 96 S.W.3d 256 (Tex. 2002). Where one or more elements of a claim or defense are submitted in the charge, then the party opposing the claim or defense can either request or object to preserve error as to the omitted element. Morris v. Holt, 714 S.W.2d 311 (Tex. 1986). As Rule 279 requires, the omitted element that a party desires to have implied must have been necessarily referable to elements that were submitted. Tex. R. Civ. P. 279. The necessarily referable requirement is intended to give parties fair notice of, and an opportunity to object to, a partial submission. Superior Trucks, Inc. v. Allen, 664 S.W.2d 136, 144 (Tex. App.—Houston [1st Dist.] 1983, writ ref’d n.r.e.).

In Heatley, the court should have analyzed whether the plaintiffs’ forfeiture claim was partially submitted because the plaintiffs did submit a breach of fiduciary duty question. Were the fact questions involved in the forfeiture claim “necessarily referable” to the submitted breach of fiduciary duty claim? If so, then potentially the defendants waived an objection to the missing fact findings being made by the trial court, which the trial court expressly found against the defendants. If they were not “necessarily referable,” then the defendants did not waive their complaint and the plaintiffs waived their claim. The court of appeals never addressed this issue, which is the real issue in the appeal.

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