Opinion
14-22-00439-CV
11-21-2023
ROBERT DIAKIW, HARLOW MANAGEMENT, L.L.C., MINAKICAPITAL INVESTMENTS, LLC, LEGACY PRECAST, LLC ANDLEGACY PRECAST ADMINISTRATIVE GROUP, LLC, RICHARDSCHULTZ, TOM HAINES, HUSSEIN SINJARI, PAT COOLEDGE,JERONIMO TREJO, AND HELEN HUERECA, Appellants v. STITES MANAGEMENT, L.L.C., GULF SHORE ERECTORS, LLC, DALESTITES, MICHAEL T. STITES, STEPHEN SCOTT STITES, MARKANDREW STITES, LINDA DIANNE WOOLARD, AND 4-SMANUFACTURING TEXAS, LLC (SUCCESSOR TO THE CLAIMS OFEAST TEXAS PRECAST CO., LTD., AND GULF COAST PRECASTERECTORS, LLC), Appellees
On Appeal from the 133rd District Court Harris County, Texas Trial Court Cause No. 2013-25191
Panel consists of Justices Wise, Zimmerer, and Poissant.
OPINION
Jerry Zimmerer Justice
Appellee East Texas Precast Company, Ltd. (ETP) was a precast concrete business whose primary job was creating precast concrete, the majority of which was used to build parking garages. Appellee Gulf Coast Precast Erectors (GCPE) was a separate company whose primary job was erecting precast concrete. In 2012, prior to the events in this case, ETP was controlled by two partners, appellant Robert Diakiw and appellee Dale Stites through entities, Harlow Management and Stites Management, that each owned.
In early 2013, Diakiw along with appellants Richard Schultz, Tom Haines, Hussein Sinjari, Pat Cooledge, Jeronimo Trejo, and Helen Huereca (collectively, the Employees) left ETP for a new precast concrete company created by Diakiw called Legacy Precast (Legacy). Appellees eventually filed claims against appellants for breach of contract, breach of fiduciary duty, and violation of the Texas Theft Liability Act. After a lengthy trial, the jury found that appellants Diakiw and Harlow breached the Partnership Agreement. The jury further found that all appellants breached their fiduciary duties to ETP. The trial court signed a final judgment ordering (1) disgorgement of Diakiw and the Employees' salaries, bonuses, and profits received as a result of their breach of fiduciary duties; and (2) disgorgement of Legacy's profits received as a result of its breach of fiduciary duty. The trial court also awarded $120,000 in breach-of-contract damages and $450,000 in attorneys' fees in connection with the breach-of-contract claim. Finally, the trial court awarded appellee 4-S Manufacturing (successor to ETP), attorneys' fees in connection with its claims for breach of contract and violation of the Theft Liability Act.
In seven issues on appeal, appellants challenge the trial court's judgment alleging (1) the judgment improperly awarded 4-S Manufacturing a double recovery; (2) no jury findings support the equitable relief of disgorgement; (3) the evidence is legally and factually insufficient to support equitable relief; (4) the evidence is legally and factually insufficient to support disgorgement of Legacy's profits; (5) disgorgement of Legacy's profits is not supported by pleadings; (6) the trial court erred in granting a directed verdict on Harlow and Diakiw's unjust-enrichment claim; and (7) the trial court erred in failing to award Diakiw and the Employees attorneys' fees as prevailing parties. Concluding that the trial court's judgment did not grant double recovery, the evidence and pleadings supported equitable relief, appellants waived their claim for unjust enrichment, and appellants are not entitled to attorneys' fees as prevailing parties, we affirm.
BACKGROUND
East Texas Precast's ownership and operation
ETP was a company that made precast concrete, which was used in the construction of parking garages. The record reflects at the times pertinent to this case, ETP was one of the only companies in the Houston area providing this product for parking garages.
Stites Management, LLC and Harlow Management, LLC were general partners of the partnership, which made up ETP. The general partners owned one percent each of ETP. Dale Stites controlled Stites Management, and was a limited partner with a 69% interest in ETP. James Harlow controlled Harlow Management, and was a limited partner with a 29% interest in ETP. In 2007, appellant Robert Diakiw acquired Harlow's 29% limited partnership interest and Harlow's control over Harlow Management. Diakiw eventually became President/CEO of ETP.
ETP was managed pursuant to an Agreement of Limited Partnership of East Texas Precast Co., Ltd., a Texas Limited Partnership (the Partnership Agreement). The Partnership Agreement gave the general partners-Stites Management and Harlow Management-"full, exclusive, and complete authority and discretion to manage, control, and direct" ETP. By January 2007, Diakiw took over the day-to- day operations of ETP, describing his role as having "complete oversight." Dale Stites lived in Missouri and generally did not engage in day-to-day operations of ETP. According to Mike Stites, Dale's son, Stites transferred his interest in ETP to his four children on January 11, 2012, with each child receiving seventeen and a quarter percent interest in ETP.
The Employees comprised senior management at ETP. Richard Schultz was the plant operations manager; Tom Haines was the sales manager; Hussein Sinjari was the project manager; Pat Cooledge was the controller; Jeronimo Trejo was the production supervisor; and Helen Huereca was the human resources manager.
Diakiw and the Employees form Legacy Precast
In October 2012 Diakiw began to send emails to the personal accounts of the Employees setting up after-hours meetings to discuss forming a new company. For example, Diakiw sent an email to Huereca instructing her to purchase portable hard drives to copy ETP computer files and transport them to the new company. Diakiw admitted that he and the Employees pursued a plan to set up a new business as early as October 16, 2012. By the end of October 2012, Diakiw and the Employees had named the new company Legacy Precast and set up an organizational chart. Diakiw and the Employees were planning to be equity owners and officers of Legacy.
Diakiw and the Employees' "resignations"
In mid-January 2013, Diakiw notified all employees at ETP and Stites that he would resign, effective January 31, 2013. At the time Diakiw announced his resignation he was planning to "wind down" ETP and close the business through receivership. Stites offered to take over the day-to-day operations of ETP, but Diakiw refused Stites's offer. Diakiw told Haines about Stites's offer and Diakiw's response, and Haines responded, "I don't think he or Mike [Stites] understand you're closing down ETP. They're acting like it will be business as usual." The same day Diakiw sent an email to ETP's counsel explaining that he announced his resignation to his direct reports. Diakiw explained, "I did my best to answer [questions] without disclosing wind down and closure scenario."
Also in January 2013 Diakiw further instructed the Employees to submit fake resignation letters. Diakiw told the Employees he would rehire them at "[t]wo to two-and-a-half times" their previous salaries. Each of the Employees was rehired by the end of January 2013 knowing they would be leaving ETP in a matter of months. Diakiw also gave other select ETP employees temporary salary increases in the hope they would move to Legacy. At the time Diakiw doubled the Employees' salaries he also asked them to invest in Legacy.
Diakiw hires a new CEO for ETP
Randall Romani began as president and CEO of ETP on February 11, 2013. At that time Romani described work at ETP as "total turmoil," due not only to Diakiw and the Employees' departures, but their efforts to encourage other employees to leave ETP. In April 2013, Diakiw contacted Romani and explained his plan to "tear[] apart East Texas Precast so that he could ramp up Legacy Precast." At the time Diakiw was still a partial owner of ETP. When Romani expressed the negative impact of Diakiw's plan on Romani's career, Diakiw offered Romani thirty percent of Legacy. Romani declined Diakiw's offer.
Romani, in his capacity as CEO of ETP, discovered that Diakiw requested and received a $408,000 distribution in March or April of 2013 at a time when ETP's cash flow could not support such a distribution. Cooledge assisted in making the distribution to Diakiw. Approximately two days before this distribution was made, Diakiw told Romani to delay paying vendors to avoid jeopardizing company cash flow. In other words, Diakiw took a large distribution from ETP at a time when ETP did not have enough cash flow to pay its bills. To avoid another cash-flow drain Romani and Stites opened a new bank account for ETP.
At the time Romani became president and CEO ETP had approximately $30 million worth of business, but was unable to fulfill the business without working capital and senior management. The senior management team that remained at ETP, Huereca and Haines, actively sabotaged work at ETP, including refusing to process employment paperwork and deleting sales contact information from ETP's computers. Haines, the sales manager, programmed his ETP phone to forward to his Legacy phone number so that if an ETP customer called his ETP phone he could speak to the customer on behalf of Legacy.
Beginning in May 2013 Romani learned that his largest customers had been told that ETP was in receivership and was going out of business. Romani had to lower his bidding price to try to get business for ETP. Romani testified that Diakiw was using inside knowledge of ETP's bidding process to undercut his bids.
Sales of concessions, scrap metal, and concrete washout
From 2009 through 2012, Diakiw and the Employees were selling scrap metal and concrete washout[ from ETP and depositing the proceeds in bank accounts that were controlled by certain of the Employees, but were not ETP accounts. The proceeds from these sales were used to fund multiple vacations for Diakiw and the Employees. During the same time period, Diakiw and the Employees operated concessions for ETP plant employees. The proceeds from these sales were deposited in non-company accounts and distributed directly to the Employees.
Diakiw explained that "concrete washout" is the residue left in a cement mixer after the cement is delivered to a mold. The washout is employed by different industries for use in road base or residential building.
A receiver is appointed for ETP
Further advancing the goal of dismantling ETP, on April 26, 2013, Diakiw, Minaki Capital Investments, and Harlow Management (collectively the Diakiw Parties) filed an original petition requesting that ETP and GCPE be "wound up and terminated" pursuant to section 11.314 of the Business Organizations Code. The petition also sought appointment of a receiver for ETP and GCPE and declaratory judgment that Romani's authority was subject to decisions of the general partners; and Stites and Stites Management had "abdicated their duty and responsibility to manage the Partnership."
Minaki Capital Investments was an entity created by Diakiw to manage investment opportunities for his family.
Daryl Bristow, the receiver, testified that when he was appointed May 13, 2013, ETP's corporate counsel informed him that he needed to "undertake a vigorous investigation." Within one or two days after Bristow's appointment he discovered that Diakiw had received distributions in 2012 of between $3.8 million and $3.9 million at a time when ETP was "strapped for money." Because ETP did not have working capital to cover those distributions, Cooledge and Diakiw "declared a 9-million-dollar debt on the books of the company to Mr. Stites, which could be called on at any time, and that would have rendered the company insolvent." The Partnership Agreement expressly prohibited actions that harmed ETP.
At the time Bristow began his investigation Cooledge and Sinjari were still employees of ETP. Bristow learned that Cooledge had an equity interest in Legacy, was an officer of Legacy, and "had simply been parked to be paid a salary at [ETP] until it was time for [Legacy] to go operational and she was leaving." Sinjari, while working as a project manager for ETP, was bidding jobs for Legacy. Bristow also learned that Huereca and other employees ran their own commissary business, used employees of ETP to operate the business, then "took the money and put it in their pockets in separate bank accounts and used it for vacations or other perks." Bristow also learned that the Employees were selling scrap metal and concrete washout, depositing the funds in separate accounts, and using the funds to take vacations.
Bristow learned that equipment used in the precast concrete business had been removed from ETP property and transported to Legacy. Bristow learned that ETP had approximately $45 million in sales but was unable to fulfill those sales "because it had been stripped of its working capital."
Working with Romani, Bristow rehabilitated ETP and sold it at auction to 4-S Manufacturing, which was comprised of the four Stites children. 4-S purchased ETP at auction for $20 million.
Litigation ensues
The underlying litigation began April 26, 2013 when the Diakiw Parties filed the aforementioned petition for receivership requesting that ETP and GCPE be "wound up and terminated." After appointment of the receiver, Stites, Stites Management, ETP and GCPE (collectively, the Stites Parties) filed counterclaims alleging breach of contract and breach of fiduciary duties.
On September 13, 2013, Bristow, after completing his investigation as receiver, filed a counterclaim and third-party petition on behalf of ETP and GCPE in which he alleged claims of breach of fiduciary duty and fraud against the Diakiw Parties. Bristow named the Employees and Legacy as third-party defendants and asserted claims for breach of fiduciary duty, fraud, conversion, violation of the Theft Liability Act, and conspiracy. Bristow also sought a constructive trust for the benefit of ETP to be imposed on "all assets of Legacy and all revenue received by Legacy."
On November 11, 2016, the trial court signed an order discharging the receiver. 4-S Manufacturing subsequently entered the litigation as successor to the claims of ETP.
After a lengthy trial in early 2019, the jury found that the Diakiw Parties breached the Partnership Agreement with Stites, Diakiw controlled Harlow, and Diakiw and the Employees breached their fiduciary duties owed to ETP. Appellees subsequently filed a motion for equitable disgorgement, which the trial court granted, ordering disgorgement of Diakiw and the Employees' salaries and $5,000,000 of Legacy's profits in addition to damages for breach of the Partnership Agreement and attorneys' fees. This appeal followed.
ANALYSIS
Appellants do not challenge the jury's findings on breach of contract, breach of fiduciary duty, and violation of the Theft Liability Act. Appellants raise seven issues on appeal challenging the trial court's judgment, which we address in turn.
I. The trial court did not impermissibly award a double recovery.
In appellants' first issue they assert the trial court erred in improperly awarding 4-S Manufacturing a double recovery, including damages for breach of contract and equitable disgorgement for breach of fiduciary duty. Appellants assert that by awarding 4-S Manufacturing its breach of contract damages in addition to equitable disgorgement, the trial court violated the one-satisfaction rule because the claims were based on the same injury.
A party is entitled to sue and seek damages on alternative theories, but is not entitled to a double recovery. Waite Hill Servs., Inc. v. World Class Metal Works, Inc., 959 S.W.2d 182, 184 (Tex. 1998). A double recovery exists when the plaintiff recovers twice for the same injury. Weeks Marine, Inc. v. Garza, 371 S.W.3d 157, 162 (Tex. 2012); Jang Won Cho v. Kun Sik Kim, 572 S.W.3d 783, 805 (Tex. App.- Houston [14th Dist.] 2019, no pet.). "Under the one-satisfaction rule, a plaintiff is entitled to only one recovery for any damages suffered because of a particular injury." Utts v. Short, 81 S.W.3d 822, 831 (Tex. 2002); accord Tony Gullo Motors I,L.P. v. Chapa, 212 S.W.3d 299, 303 (Tex. 2006). Appellants raised this issue in a post-trial motion to modify the amended judgment, which the trial court denied. In this context, we review the trial court's judgment for abuse of discretion. See Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223, 226 (Tex. 1991).
Appellants' argument fails because equitable forfeiture is distinguishable from an award of actual damages, in that it serves a separate function of protecting fiduciary relationships. ERI Consulting Eng'rs, Inc. v. Swinnea, 318 S.W.3d 867, 874 (Tex. 2010). Even if a fiduciary does not obtain a benefit by violating his duty, he still may be required to forfeit the right to compensation for his work. Id. at 873 (citing Burrow v. Arce, 997 S.W.2d 229, 237 (Tex. 1999)). The one-satisfaction rule does not preclude the recovery of both actual damages and the equitable remedy of disgorgement, as those remedies are intended to address separate and distinct injuries. Saden v. Smith, 415 S.W.3d 450, 469 (Tex. App.-Houston [1st Dist.] 2013, pet. denied). Therefore, the trial court did not abuse its discretion in awarding damages for breach of contract and ordering disgorgement for breach of fiduciary duty. We overrule appellants' first issue.
II. Appellants did not preserve error with regard to jury findings to support equitable relief.
In appellants' second issue they assert the trial court erred in awarding equitable relief because there are no jury findings to support it. The jury was asked whether Harlow, Diakiw, and the Employees violated their fiduciary duties to ETP. Appellants assert on appeal that 4-S Manufacturing failed to "request or obtain jury findings on: (1) which alleged conduct was a breach and when the alleged breach occurred; (2) the mental state and culpability of each of the Diakiw Parties and the Employees; (3) the value of the services rendered, as applicable; and (4) the existence and amount of harm to East Texas Precast."
A trial court may order disgorgement as equitable relief when normal damages may not adequately address a breach of fiduciary duty. ERI Consulting, 318 S.W.3d at 874. In ruling on a request for disgorgement, a trial court must determine three elements: (1) whether a violation is clear and serious; (2) whether disgorgement should be required; and (3) if so, what amount. Burrow, 997 S.W.2d at 243. In making that determination, a trial court must consider certain 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, and any threatened or actual harm to the principal." ERI Consulting, 318 S.W.3d at 875. "Above all, the remedy must fit the circumstances and work to serve the ultimate goal of protecting relationships of trust." Id. These "factors embrace broad considerations which must be weighed together and not mechanically applied." Id. at 874 (quoting Burrow, 997 S.W.2d at 243). These non-exclusive factors are commonly called the Burrow factors.
Whether disgorgement should be imposed must be determined by the trial court based on the equity of the circumstances. Burrow, 997 S.W.2d at 245 ("As a general rule, a jury 'does not determine the expediency, necessity, or propriety of equitable relief.'") (quoting State v. Tex. Pet Foods, Inc., 591 S.W.2d 800, 803 (Tex. 1979)). Appellants correctly assert that 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. See Burrow, 997 S.W.2d at 245. Appellants do not challenge the jury's findings that they breached their fiduciary duties, but challenge the lack of findings on the Burrow factors. Appellants, however, neither objected nor submitted a question "in substantially correct wording" that would have asked the jury to make such findings. See Tex. R. Civ. P. 274, 278.
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. See Tex. R. Civ. P. 278; Burbage v. Burbage, 447 S.W.3d 249, 256 (Tex. 2014). Under Rule of Civil Procedure 274, "[a]ny complaint as to a question, definition, or instruction, on account of any defect, omission, or fault in pleading, is waived unless specifically included in the objections." Burbage, 447 S.W.3d at 256 (quoting Tex.R.Civ.P. 274). The test ultimately asks "whether the party made the trial court aware of the complaint, timely and plainly, and obtained a ruling." State Dep't of Highways & Pub. Transp. v. Payne, 838 S.W.2d 235, 241 (Tex. 1992). Failure to timely object to error in a jury charge waives that error. Burbage, 447 S.W.3d at 256.
Appellants did not tender a question related to equitable relief, specifically addressing the Burrow factors. They did not object to the lack of such a question. See Tex. R. Civ. P. 274, 278. Thus, we cannot reverse in their favor, as parties who failed to object to the absence of a jury question or to submit one have waived that error. See Heatley v. Red Oak 86, L.P., 629 S.W.3d 377, 390 (Tex. App.-Dallas 2020, no pet.) (parties who failed to object to lack of jury question on Burrow factors waived error).
In their reply brief appellants contend they preserved this issue by timely objecting to the jury charge. Appellants cite to a non-evidentiary hearing before the trial court on the post-trial motion for equitable disgorgement. Appellants do not point to a specific objection or request for a jury finding on which the trial court ruled. Because appellants failed to preserve error, we overrule their second issue.
III. Sufficient evidence supports the trial court's award of equitable relief.
In appellant's third issue they assert the trial court erred in awarding equitable relief to 4-S Manufacturing because the evidence is legally and factually insufficient to support such relief. [
Initially, appellants complain the trial court's findings of fact are not sufficiently specific. When properly requested, the trial court has a mandatory duty to file findings of fact and conclusions of law. Izen v. Laine, 614 S.W.3d 775, 794 (Tex. App.-Houston [14th Dist.] 2020, pet. denied). The trial court filed findings of fact and conclusions of law in this case and appellants may challenge the sufficiency of the evidence to support them. Appellants have not cited, nor has independent research revealed, a requirement that the court's findings to support equitable relief meet a minimum standard of specificity.
A. Standard of review and applicable law
For a legal sufficiency challenge, we review the record in the light most favorable to the finding, crediting favorable evidence if a reasonable fact finder could and disregarding contrary evidence unless a reasonable fact finder could not. See City of Keller v. Wilson, 168 S.W.3d 802, 807 (Tex. 2005). We indulge every reasonable inference in support of the finding. Id. at 822. We may not substitute our opinions on credibility for those of the fact finder. See id. at 816-17, 822.
In a factual sufficiency review, we will set aside the finding and remand for a new trial if we conclude that the finding is so against the great weight and preponderance of the evidence as to be manifestly unjust. Golden Eagle Archery, Inc. v. Jackson, 116 S.W.3d 757, 761 (Tex. 2003). We weigh the evidence supporting the finding along with evidence contrary to the finding. See id. at 761- 62. However, the fact finder remains the sole judge of the credibility of witnesses and the weight to be given their testimony. Id. at 761. We must defer to the fact finder's determinations so long as those determinations are reasonable. See Sw. Bell Tel. Co. v. Garza, 164 S.W.3d 607, 625 (Tex. 2004). We may not merely substitute our judgment for that of the fact finder. Golden Eagle Archery, 116 S.W.3d at 761.
Courts may fashion equitable remedies such as profit disgorgement and fee forfeiture to remedy a breach of a fiduciary duty. ERI Consulting, 318 S.W.3d at 873; see also Burrow, 997 S.W.2d at 237 ("[A]s a rule a person who renders service to another in a relationship of trust may be denied compensation for his service if he breaches that trust."). The primary purpose of disgorgement as an equitable remedy is not to compensate the injured principal, but to protect relationships of trust by discouraging disloyalty. ERI Consulting, 318 S.W.3d at 872-73. Disgorgement is not justified in every instance in which a fiduciary violates a legal duty because some violations are inadvertent or do not significantly harm the principal. Burrow, 997 S.W.2d at 241; Dernick Res., Inc. v. Wilstein, 471 S.W.3d 468, 482 (Tex. App.- Houston [1st Dist.] 2015, pet. denied). The remedy of disgorgement is available for "clear and serious" violations of a fiduciary duty. Burrow, 997 S.W.2d at 241.
Once the factual disputes have been resolved, the trial court must determine whether the fiduciary's conduct was a clear and serious breach of duty to the principal, whether disgorgement should be awarded, and if so, what the amount should be. Burrow, 997 S.W.2d at 245-46. In determining whether a breach of fiduciary duty was "clear and serious," the trial court should consider factors such as the gravity and timing of the breach, 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 other threatened or actual harm to the principal, the adequacy of other remedies, and whether disgorgement "fit[s] the circumstances and work[s] to serve the ultimate goal of protecting relationships of trust." ERI Consulting, 318 S.W.3d. at 875; see Burrow, 997 S.W.2d at 243-46.
We review the trial court's order for equitable relief for an abuse of discretion. Burrow, 997 S.W.2d at 243 ("It is within the discretion of the court whether the trustee who has committed a breach of trust shall receive full compensation or whether his compensation shall be reduced or denied."). Legal and factual sufficiency are relevant factors to be considered in assessing whether the trial court abused its discretion. See Dernick, 471 S.W.3d at 482. However, an abuse of discretion does not occur when a trial court bases its decision on conflicting evidence, as long as some evidence reasonably supports the trial court's decision. See id. at 482-83.
B. Trial court's findings
The trial court signed findings of fact and conclusions of law in which it found:
• Harlow and Diakiw committed breaches of fiduciary duty owed to ETP.
• Harlow and Diakiw's breaches were clear and serious violations of fiduciary duty.
• Harlow and Diakiw's breaches were willful, committed intentionally, and central to the scope of their fiduciary duties.
• Harlow and Diakiw's breaches were of "extreme gravity because they were intended to damage [ETP] and to put it out of business."
• Harlow and Diakiw's breaches occurred from June 2012 through April 2013.
• ETP did not receive a benefit from Harlow or Diakiw.
• Harlow and Diakiw's breaches caused damage and harm to ETP.
• The gravity and timing of Harlow and Diakiw's breaches were such as to justify equitable forfeiture and disgorgement because they were intended to damage ETP and put it out of business.
• The Employees' breaches of fiduciary duty were clear and
serious, in addition to being willful and intentional.
• The gravity and timing of the Employees' breaches "were such as to justify equitable forfeiture and disgorgement of their salaries and bonuses because they were intended to damage [ETP] and put it out of business."
• The Employees' breaches occurred from June 2012 through April 2013.
• The Employees' breaches were "central to the scope of their fiduciary duty" because they were senior management personnel of ETP.
• Diakiw's breaches were central to the scope of his fiduciary duty because he was the president of ETP.
• Forfeiture of compensation by Diakiw and the Employees is "just, equitable, and proper in the circumstances of this case because there are no alternative remedies that are adequate to protect ETP or to deter similar conduct and protect relationships of trust."
C. Application
As stated above, appellants have not challenged the sufficiency of the evidence to support the jury's findings that they breached their fiduciary duties to ETP. Appellants challenge the sufficiency of the evidence to support the trial court's findings that the breaches were clear and serious, and disgorgement should be awarded.
In challenging the trial court's findings appellants first assert the evidence is legally and factually insufficient to support the factors of gravity and timing, and intent. Appellants primarily rely on their argument in the trial court that they were not bound by non-competition agreements with ETP.
When a fiduciary relationship of agency exists between employee and employer, the employee has a duty to act primarily for the benefit of the employer in matters connected with his agency. Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 200 (Tex. 2002). Among the agent's fiduciary duties to his principal are the duty not to compete with the principal on his own account in matters relating to the subject matter of the agency and the duty to deal fairly with the principal in all transactions between them. Id. The employee has a duty to deal openly with the employer and to fully disclose to the employer information about matters affecting the company's business. Daniel v. Falcon Interest Realty Corp., 190 S.W.3d 177, 185 (Tex. App.-Houston [1st Dist] 2005, no pet.). If an agent, while employed by a principal, uses his or her position to gain a business opportunity belonging to the employer, such conduct constitutes an actionable wrong. Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 510 (Tex. App.-Houston [1st Dist.] 2003, no pet.).
To be sure, once employees resign, they may actively compete with their former employer. Id. The right to prepare to compete notwithstanding, if the nature of a party's preparation to compete is significant, it may give rise to a cause of action for breach of fiduciary duty. Id. (citing Herider Farms'-El Paso, Inc. v. Criswell, 519 S.W.2d 473, 476 (Tex. Civ. App.-El Paso 1975, writ ref d n.r.e.)). "This is particularly true if a supervisor-manager acts as a 'corporate pied piper' and lures all of his employer's personnel away, thus destroying the business." Abetter Trucking, 113 S.W.3d at 511-12.
Employees may use their general knowledge, skill, and experience acquired in the former employment to compete. Sharma v. Vinmar Intern., Ltd., 231 S.W.3d 405, 424 (Tex. App.-Houston [14th Dist.] 2007, no pet.). However, there are recognized limitations on the conduct of an employee who plans to compete with a former employer. The employee may not (1) appropriate the company's trade secrets; (2) solicit the employer's customers while still working for the employer; (3) solicit the departure of other employees while still working for the employer; or (4) carry away confidential information, such as customer lists. Johnson, 73 S.W.3d at 202.
1. Evidence supporting factors of intent, gravity and timing, centrality of breach, and harm to ETP
The record reflects that Diakiw and the Employees appropriated trade secrets through downloading proprietary estimating software, solicited customers while still working for ETP, solicited the departure of other employees, and accessed customer information in the form of actual bids for business. In addition, the record reflects that Diakiw and the Employees stole physical equipment and supplies from ETP and took it to Legacy.
Diakiw admitted directing employees to remove significant equipment from ETP to use at Legacy and believed that the Partnership Agreement permitted him to do so. Diakiw further admitted that while he and the Employees remained at ETP Diakiw instructed some of the Employees to use ETP funds to purchase supplies that they planned to use at Legacy. Diakiw avoided letting Romani know they were buying supplies for Legacy with ETP funds. Diakiw admitted asking Richard Schultz to order, using ETP funds, temporary office door replacements, drywall, wood stud, mud, primer, fluorescent bulb replacements, wiring, boxes, exterior decking material, exterior lighting fixtures, and exterior primer. All of these items were intended to be used at Legacy.
Diakiw instructed Huereca to purchase portable hard drives to copy ETP computer files and transport them to the new company. Diakiw admitted that he and the Employees pursued a plan to set up a new business as early as October 2012. Diakiw admitted he actively tried to prevent Dale and Mike Stites from learning about their actions. Diakiw instructed Haines, Schultz, and Sinjari to instruct their staff of "the need to isolate [Mike Stites] from all future discussion regarding ETP or GCPE." Diakiw further instructed that he was changing the office door locks and the security pass code. Diakiw instructed Schultz to only give new keys and pass codes to the Employees.
On January 17, 2013, Diakiw reported to Haines that Dale Stites had offered to run ETP after Diakiw's resignation, but Diakiw told Stites "no." Haines replied, "I don't think he or Mike understand you're closing down ETP. They're acting like it will be business as usual." The same day Diakiw sent an email to ETP's counsel explaining that he announced his resignation to his direct reports. Diakiw explained, "I did my best to answer [questions] without disclosing wind down and closure scenario."
In response to a draft of Diakiw's official resignation announcement to employees of ETP, Haines responded:
You don't mention the "winding down" or the impending, or imminent closing of ETP. Is that intentional? If you do mention it, that will explain the mass exodus. I don't think most people in the office understand you're trying to close ETP. They just think YOU are leaving. All of us know the inside story but they don't.
Diakiw admitted that he and Haines solicited business for Legacy while stilled employed by ETP. An email dated March 5, 2013 was admitted into evidence reflecting solicitation of business from D.E. Harvey, one of ETP's largest customers. Diakiw admitted that on March 14, 2013 he was working for ETP and at the same time trying to get Legacy "off the ground." On April 3, 2013, after Diakiw resigned and was working at Legacy, Haines sent an email to Diakiw telling him about three outstanding bids that ETP was submitting to clients. On April 9, 2013, Diakiw sent an email to Haines and Sinjari requesting that they forward data from ETP to him for bidding.
Diakiw admitted that his intent was to shut down ETP through the receivership procedure. Shortly before petitioning for receivership Diakiw emailed ETP's bank officer and requested that Romani be removed from the "signatory list" for ETP and GCPE. Diakiw received bid requests from two major construction firms after he resigned as president and CEO of ETP. The bid requests were directed to ETP, but Diakiw diverted the bids to Legacy. Diakiw admitted he fabricated equipment at ETP, using ETP's resources, then took it for use at Legacy.
Huereca admitted she was actively working as the human resources manager for Legacy in April 2013 while still employed by ETP. Haines testified that he took "an estimate or two" from ETP when he left for Legacy. Schultz admitted that while employed at ETP he worked for Legacy using ETP's property. Cooledge admitted that she was employed as the controller for ETP at the same time she was employed as Vice President of Finance at Legacy. At the time, April 1, 2013, Cooledge was being paid twice her regular salary at ETP and was also a shareholder at Legacy. She did not disclose her ownership in Legacy to Romani. While still working for ETP Sinjari met with a D.E. Harvey employee and told him that ETP would be closing, but that "he should not have any concerns with respect to his project being erected at that time" because Legacy could complete the project. Other Employees also told contractors that ETP was in receivership, and was going out of business.
Each of the Employees and Diakiw admitted that the Employees submitted fake resignation letters in mid-January 2013, knowing they would be rehired at a salary at least double their previous salary. They all admitted knowing they would not be employed by ETP for more than a few months after being rehired at the higher salaries because they planned to leave for Legacy.
In an email exchange between Diakiw and Haines, in February 2013, the two men were discussing an advertisement placed in the local newspaper seeking new employees for Legacy. Haines expressed concern that the ad would not draw enough applicants due to the specialized nature of the business and the limited circulation of the local newspaper. Diakiw responded, "LOL. You are confused. We are going to pillage ETP!" The trial court could have inferred from Diakiw's email that he intended to destroy his company, ETP, in order to benefit his new company, Legacy.
Appellants assert that the evidence did not support the factors of lack of benefit to ETP, centrality of the breaches, and harm to ETP. As to lack of benefit and harm to ETP, appellants assert that when they left ETP, it had "over $60 million in jobs under contract." Appellants ignore the testimony of Romani that while ETP had jobs to complete, it could not do so because its working capital had been stripped by Diakiw and the Employees. Diakiw not only admitted his intent to shut down ETP through the receivership process, but told Romani at the time that he planned to "tear[] apart East Texas Precast so that he could ramp up Legacy Precast."
As to the centrality of the breaches, Diakiw and the Employees' breaches went to the core of ETP's business. They admitted using ETP's funds to purchase items for Legacy; they took inflated salaries from ETP while actively working to obtain business for Legacy; and they took equipment from ETP to be used by Legacy. We conclude the evidence supports the trial court's findings on intent, gravity and timing, centrality of breach, and harm to ETP.
2. Forfeiture of compensation
Appellants' assertion that forfeiture of their compensation was not warranted because other remedies were available is unavailing. Appellants assert that 4-S Manufacturing was not entitled to equitable relief because the jury failed to award it more than $120,000 in damages. The main purpose of a disgorgement remedy, however, is not to compensate the fiduciary; it is to protect the fiduciary relationship. Dernick Res., 471 S.W.3d at 486. It is for situations such as the one here-where traditional legal remedies do not adequately compensate for the loss of trust in the fiduciary relationship-that disgorgement "may be considered for that purpose." See ERI Consulting, 318 S.W.3d at 874. The trial court, not the jury, is charged with fulfilling this purpose by deciding the expediency, necessity, and propriety of equitable relief. See Burrow, 997 S.W.2d at 245.
The breaches of fiduciary duty in this case cannot be described as "inadvertent." The fact that the jury awarded a nominal amount in damages is not fatal to the trial court's award of an equitable remedy. The purpose of disgorgement is not to compensate appellees for financial loss related to the attempted closure of ETP-it is to protect the fiduciary relationship. See Dernick Res., 471 S.W.3d at 486 (affirming equitable fee forfeiture even though jury failed to award damages).
Reviewing the record under the appropriate standards of review, we cannot say the trial court abused its discretion in awarding equitable relief to 4-S Manufacturing. We overrule appellants' third issue.
IV. Disgorgement of Legacy's profits is supported by pleadings in addition to legally and factually sufficient evidence.
In appellants' fifth issue they assert that disgorgement of Legacy's profits is not supported by the live pleading of 4-S Manufacturing. In appellants' fourth issue they assert that disgorgement of Legacy's profits is not supported by legally or factually sufficient evidence. We first address whether 4-S Manufacturing's pleading was sufficient to support disgorgement.
A. The live pleading of 4-S Manufacturing
In 4-S Manufacturing's live pleading, it sought disgorgement from Diakiw, the Employees, and Legacy:
Because of their violations of fiduciary duty, the Court should order that all unlawful compensation, benefits, and other funds received by Diakiw and the other Third-Party Defendants be disgorged in favor of 4-S Manufacturing.
4-S Manufacturing's pleading defined "Third-Party Defendants" as Diakiw, the Employees, Legacy Precast, LLC, and Legacy Precast Administrative Group, LLC. In its prayer 4-S Manufacturing sought "exemplary damages; a constructive trust on all assets of, and revenue received by, Legacy Precast, LLC and Legacy Precast Administrative Group, LLC; disgorgement of all assets of, and revenue received by, Legacy Precast, LLC and Legacy Precast Administrative Group, LLC; disgorgement of all compensation and benefits fraudulently obtained by" the Employees.
Pleadings need only "provide fair notice of the claim and the relief sought such that the opposing party can prepare a defense." In re Lipsky, 460 S.W.3d 579, 590 (Tex. 2015) (orig. proceeding). A pleading is sufficient "if a court can 'ascertain with reasonable certainty the elements of a cause of action and the relief sought with sufficient particularity upon which a judgment may be based.'" Klinek v. LuxeYard, Inc., 596 S.W.3d 437, 446 (Tex. App.-Houston [14th Dist.] 2020, pet. denied) (quoting Orr v. Broussard, 565 S.W.3d 415, 420 (Tex. App.-Houston [14th Dist.] 2018, no pet.).
Appellants assert 4-S Manufacturing's pleading was insufficient to seek disgorgement of Legacy's profits. We disagree. In appellants' brief they quote the above-quoted portion of 4-S's pleading, but substitute "the Employees" for the phrase "Third-Party Defendants." Appellees sought disgorgement of "compensation, benefits, and other funds received" from all Third-Party Defendants, which included revenue received by Legacy, not just the Employees as suggested by appellants. 4-S Manufacturing's pleading is sufficient to put appellants on notice that it was seeking disgorgement of "compensation, benefits, and other funds received" in addition to revenue received from Legacy. We overrule appellants' fifth issue.
B. Sufficiency of the evidence
In appellants' fourth issue they assert the evidence is legally and factually insufficient to support the trial court's disgorgement of $5 million. We review a trial court's decision granting or denying equitable relief for an abuse of discretion. See Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d 419, 428-29 (Tex. 2008) Legal and factual sufficiency are relevant factors to be considered in assessing whether the trial court abused its discretion. See Dernick, 471 S.W.3d at 482.
Appellants do not challenge the jury's finding that Legacy "knowingly participated in the breaches of fiduciary duty" or the finding that Legacy was part of a conspiracy that damaged ETP. Appellants challenge the following findings of fact of the trial court:
Disgorgement of $5,000,000 in profits of Legacy Precast, LLC received by it as a result of its knowing participation in the breaches of fiduciary duties by Harlow Management, L.L.C., Robert Diakiw, Richard Schultz, Tom Haines, Helen Huereca, Pat Cooledge, Hussein Sinjari, and Jeronimo Trejo is just, equitable, and proper.
Because of its knowing participation in the breaches of fiduciary duty, disgorgement of profits of Legacy Precast, LLC is just, equitable, and proper.
Appellants assert three sub-issues under their fourth issue: (1) disgorgement was improper because Legacy did not owe ETP a fiduciary duty; (2) disgorgement should be limited to Legacy's profits during the time of Diakiw and the Employees' breaches; and (3) the evidence is legally and factually insufficient to support actual losses sustained by ETP. We address these sub-issues in turn.
1. Disgorgement appropriate against non-fiduciary
Appellants first assert that because Legacy was a third-party non-fiduciary, disgorgement of Legacy's profits is not permitted. To the contrary, Texas common law has long held that if a third party knowingly participates in a defendant's breach of a fiduciary duty owed to a plaintiff, the third party is jointly liable with the defendant for damages to the plaintiff proximately caused by this breach of fiduciary duty, and the plaintiff has the same equitable remedies against the defendant and the third party based upon this breach. See Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509, 512-14 (Tex. 1942); see also Hunter Bldgs. & Mfg., L.P. v. MBI Glob., L.L.C., 436 S.W.3d 9, 15 (Tex. App.-Houston [14th Dist.] 2014, pet. denied).
In this case, the jury found that Legacy knowingly participated in Diakiw and the Employees' breaches of fiduciary duties. Appellants have not challenged that finding. Therefore, the trial court did not abuse its discretion in ordering disgorgement of Legacy's profits as a third-party non-fiduciary.
2. Sufficiency of the evidence
Appellants next assert that disgorgement should be limited to profits of Legacy during the time of Diakiw and the Employees' breaches. Appellees presented evidence in the form of financial statements, which showed profits of Legacy were $179,233 in 2013, $4,361,165 in 2014, $2,205,306 in 2015, $2,381,968 in 2016, and $1,327,430 in 2017. These gross profits of Legacy add up to more than $10 million. The trial court ordered less than half these amounts be disgorged. Appellants assert that because the trial court found the breaches occurred from June 2012 through April 2013, disgorgement is limited to Legacy's profits during that time.
The obligation to avoid using trade secret information acquired during the employment relationship survives the termination of employment. Sharma, 231 S.W.3d at 424. As noted above, the record reflects that Diakiw and the Employees actively engaged in use of ETP's proprietary software used to bid on projects in addition to obtaining inside information about ETP's bids on the same projects on which Legacy was bidding. The trial court could have inferred from this evidence that Legacy profited as a result of appellants' breaches long after they left the employment of ETP.
A fiduciary must account for, and yield to the beneficiary, any profit he makes as a result of his breach of fiduciary duty. Int'l Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 576-77 (Tex. 1963); Daniel v. Falcon Interest Realty Corp., 190 S.W.3d 177, 187 (Tex. App.-Houston [1st Dist.] 2005, no pet.). In asserting that disgorgement is limited to profits incurred during the time of the breach, as opposed to as a result of the breach, appellants cite two cases from our sister courts of appeals: Orbison v. Ma-Tex Rope Co., Inc., 553 S.W.3d 17, 31 (Tex. App.-Texarkana 2018, pet. denied) and AZZ Inc. v. Morgan, 462 S.W.3d 284, 298 (Tex. App.-Fort Worth 2015, no pet.). Each of those cases is distinguishable from today's case in that those courts addressed the sufficiency of the evidence to support the Burrow factors, rather than the trial court's discretion in the amount of disgorgement ordered. See Orbison, 553 S.W.3d at 31 (trial court did not abuse its discretion because disgorgement of profits fit the circumstances of the case); AZZ Inc., 462 S.W.3d at 298-99 (remand not required when no evidence of monies subject to disgorgement was presented).
Appellants further contend that disgorgement of Legacy's profits is improper because "it is nothing more than 4-S' alleged lost profits" that were excluded from consideration by the trial court. Lost profits are damages for the loss of net income to a business and, broadly speaking, reflect income from lost business activity, less expenses that would have been attributable to that activity. Miga v. Jensen, 96 S.W.3d 207, 213 (Tex. 2002). We again note the distinction between damages, as for lost profits, and disgorgement as a remedy for breach of fiduciary duty. The purpose of disgorgement is not to compensate appellees for financial loss such as lost profits, it is to protect the fiduciary relationship. See Dernick Res., 471 S.W.3d at 486. Therefore, the trial court's order requiring disgorgement of $5 million in profits was not an award of damages for lost profits, but a remedy designed to protect the fiduciary relationship.
3. Proof of ETP's actual losses was not required.
Finally, appellants assert the trial court abused its discretion in ordering disgorgement of Legacy's profits because there is legally and factually insufficient evidence of actual loss sustained by ETP. We reiterate, however, that the purpose of disgorgement is not to compensate an injured principal but to protect relationships of trust by discouraging agents' disloyalty. ERI Consulting, 318 S.W.3d at 872-73.
In Kinzbach Tool Co., the Texas Supreme Court addressed, and disposed of, arguments similar to those presented by appellants:
It is beside the point . . . to say that Kinzbach suffered no damages because it received full value for what it has paid and agreed to pay. A fiduciary cannot say to the one to whom he bears such relationship: You have sustained no loss by my misconduct in receiving a commission from a party opposite to you, and therefore you are without remedy. It would be a dangerous precedent for us to say that unless some affirmative loss can be shown, the person who has violated his fiduciary relationship with another may hold on to any secret gain or benefit he may have thereby acquired. It is the law that in such instances if the fiduciary takes any gift, gratuity, or benefit in violation of his duty, or acquires any interest adverse to his principal, without a full disclosure, it is a betrayal of his trust and a breach of confidence, and he must account to his principal for all he has received.160 S.W.2d at 514.
In this case, as in Kinzbach, there is no requirement under Texas law that appellees prove ETP sustained a loss through their misconduct. The jury found that appellants betrayed ETP's trust and ETP is entitled to recover disgorgement as a remedy for the betrayal of that trust. See Dernick Res., 471 S.W.3d at 486.
Given the nature of the breaches in this case and the evidence presented to the trial court we cannot say the court abused its discretion in ordering disgorgement of $5 million in Legacy's profits. We overrule appellants' fourth issue.
V. The trial court did not err in granting an instructed verdict on the Diakiw Parties' unjust-enrichment claim.
In appellants' sixth issue they assert the trial court erred in granting an instructed verdict on the Diakiw Parties' unjust-enrichment claim.
When 4-S Manufacturing purchased ETP after the receivership, the parties entered into a Purchase and Sale Agreement, which required, among other things, a post-closing adjustment. The agreement also provided that the sellers must provide balance sheets within 30 days of the closing date and that the closing date balance sheets "shall be in the same format and follow the same accounting principles as the balance sheets as of September 30, 2015 that were provided by Sellers to Purchaser as part of the bidding process[.]" The difference between the current assets less the current liabilities on the two sets of balance sheets was the Balance Sheet Adjustment. If the Balance Sheet Adjustment was positive, 4-S Manufacturing, the Purchaser, was to pay the balance to ETP, the Seller. If the Balance Sheet Adjustment was negative, ETP paid 4-S Manufacturing. The Balance Sheet Adjustment was negative $2,418,145. 4-S Manufacturing received $2,279,536 as a post-closing adjustment.
The Diakiw Parties filed counterclaims for unjust enrichment in which they alleged that as a result of receiving the post-closing adjustment, 4-S Manufacturing and appellees were "unjustly enriched by receiving assets, rights, and benefits to which they are not justly entitled and would be unconscionable to retain." Before trial, the trial court granted a no-evidence summary judgment on the unjust-enrichment claim as to all appellees except 4-S Manufacturing.
At trial, the Diakiw Parties asserted that 4-S Manufacturing was unjustly enriched because the same accounting principles were not used in the two closing balance sheets. They asserted that use of the same accounting principles was a condition precedent to payment of the post-closing adjustment. Because 4-S Manufacturing failed to meet the condition precedent, the Diakiw Parties asserted 4-S Manufacturing was not entitled to payment of the post-closing adjustment.
4-S Manufacturing moved for instructed verdict on the unjust-enrichment claims because they alleged the Diakiw Parties failed to present evidence on the necessary elements of unjust enrichment. 4-S Manufacturing asserted that the Diakiw Parties did not present any evidence that any alleged benefit was obtained by fraud, duress, or taking undue advantage. 4-S Manufacturing also asserted that the Diakiw Parties failed to present evidence of an amount, "if there was a benefit in conjunction of [sic] this post-closing adjustment, which is the only basis for their unjust enrichment claim." The Diakiw Parties asserted in response that use of the same accounting principles was a condition precedent to the buyer's receipt of a post-closing adjustment. The Diakiw Parties' accounting expert testified that different accounting principles were used, which constituted some evidence. At trial, the Diakiw Parties asserted that their damages were "the entire post-closing adjustment" because the condition precedent had not been met.
On appeal, the Diakiw Parties assert they were deprived of thirty percent of the post-closing adjustment. 4-S Manufacturing responds that the trial court properly granted directed verdict because (1) the Diakiw Parties presented no evidence to support their unjust-enrichment claim; and (2) the Diakiw Parties are prohibited from raising their claim because they did not appeal the final receivership order.
On September 19, 2016, the trial court approved the post-closing adjustment and ordered the receiver to pay it. On November 11, 2016, in an order titled, "Order Discharging Receiver," the trial court directed the receiver to pay the post-closing adjustment to 4-S Manufacturing in the amount of $2,279,536. The trial court further directed the receiver to terminate the existence of the Receivership Entities in accordance with section 11.101 of the Business Organizations Code. Finally, the trial court ordered that 4-S Manufacturing be substituted in the litigation in place of the receiver with respect to all claims asserted by the receiver on behalf of ETP. No notice of appeal was filed from this order.
Certain orders in proceedings involving receivers are final and must be appealed. See Huston v. F.D.I.C., 800 S.W.2d 845, 848 (Tex. 1990) (aligning probate proceedings to receivership proceedings and concluding that "[t]he same standards apply"). If a trial court enters an order resolving "a discrete issue in connection with any receivership," that order has "the same force and effect as any other final adjudication of a court," and thus, is appealable." Id. at 847. In Huston, a receiver was appointed for an insolvent bank. The Texas Supreme Court concluded that the trial court's order determining the bank creditors' entitlement to interest resolved a discrete receivership issue and thus was an appealable final order. Id. at 846-47. Because the appellant did not timely appeal the order-indeed only filing an appeal over six months later when the receivership proceeding was terminated- the court held the appeal was untimely and the issue was waived. Huston, 800 S.W.2d at 847-49; see Tex. R. App. P. 26.1.
The reason the supreme court held orders appointing receivers are not appealable at the end of a case is rooted in principles of estoppel-the reliance of third parties who dealt with the receiver in good faith. See, e.g., Bonsmara Nat. Beef Co., LLC v. Hart of Tex. Cattle Feeders, LLC, 603 S.W.3d 385, 395 (Tex. 2020); Huston, 800 S.W.2d at 848; Gibson v. Cuellar, 440 S.W.3d 150, 154-55 (Tex. App.-Houston [14th Dist.] 2013, no pet.).
In this case, the trial court signed its order discharging the receiver and requiring payment of the post-closing adjustment on November 11, 2016. That order was a final, appealable order, and the failure to timely appeal that order waives issues disposed of by the order. Huston, 800 S.W.2d at 847-49. Because the Diakiw Parties failed to file a timely notice of appeal, we lack jurisdiction to consider any issues regarding the receivership proceeding, including payment of the post-closing adjustment. See Gibson, 440 S.W.3d at 155-56 (holding court lacked jurisdiction to review appointment of a receiver and any subsequent receiver-related order because appeal was not filed within 30 days of the date the receivership order was signed). We overrule appellants' sixth issue.
VI. The trial court did not err in failing to award the Diakiw Parties and the Employees attorneys' fees as prevailing parties on Dale Stites's claims.
In appellants' seventh issue they assert the trial court erred in failing to award attorneys' fees on Stites's claims for breach of contract. They further assert the trial court erred in failing to award attorneys' fees under the Theft Liability Act on 4-S Manufacturing's claim for theft of services.
When appellees filed their original counterclaim, Dale Stites joined as a counterclaimant for breach of the Partnership Agreement and breach of fiduciary duty. By the time of trial Dale Stites had transferred his ownership interest in ETP to his children. At trial, appellants moved for directed verdict on Stites's claims of breach of fiduciary duty and breach of the Partnership Agreement. Stites did not oppose the motion because he had sold his interest in the partnership at the relevant times. The trial court granted appellants' motion:
[The Diakiw Parties' Counsel]: Your Honor. Harlow Management, LLC, Minaki Capital Investments, LLC, and Robert Diakiw, move for directed verdict on Dale Stites' breach of fiduciary duty claim because as of January 11th, 2012, Mr. Stites no longer owned any interest either
-or in his limited partnership capacity because those interests were transferred along with all causes of actions that he would have had in connection, related to, or in any way connected with his limited partnership interest. As such -
[4-S Manufacturing's Counsel]: I'm already convinced. I don't oppose it.
THE COURT: It's granted.
[the Diakiw Parties' Counsel]: I would offer the exact same argument with respect to Mr. Dale Stites' breach of limited partnership -
[4-S Manufacturing's Counsel]: Yeah, Dale Stites is out of the case. We're not asking anything be submitted on that.
THE COURT: Granted.
A. Attorneys' fees for breach of the Partnership Agreement
By virtue of the trial court's directed verdict, the Diakiw Parties assert they are "prevailing parties" and entitled to attorneys' fees for successfully defending Stites's breach of contract action. The Diakiw Parties rely on the following portion of the Partnership Agreement:
18.5 Attorneys' Fees. In the event any proceeding is brought by the Partnership or a Partner against another Partner to enforce or for the breach of any of the provisions of this Agreement, the prevailing party shall be entitled in such proceeding to recover his reasonable attorneys' fees together with the costs incurred in such proceeding.
The trial court, in its judgment, awarded attorneys' fees to 4-S Manufacturing in connection with its claim for breach of the Partnership Agreement. The Diakiw Parties assert they are also entitled to attorneys' fees as prevailing parties because Stites dismissed his claim for breach of the Partnership Agreement.
The Partnership Agreement does not define "prevailing party," so we assume the parties used the phrase in its ordinary sense. See Bhatia v. Woodlands N. Hous. Heart Ctr., PLLC, 396 S.W.3d 658, 670 (Tex. App.-Houston [14th Dist.] 2013, pet. denied). As we explained when construing an attorney-fee provision similar to the one in this case, the "contractual provision entitling a 'prevailing party' to recover attorneys' fees does not distinguish between successful prosecution and successful defense of a claim." Chevron Phillips Chem. Co. LP v. Kingwood Crossroads, LP, 346 S.W.3d 37, 70 (Tex. App.-Houston [14th Dist.] 2011, pet. denied) (construing the language, "If [a party] is a prevailing party in any legal proceeding brought under or with relation to this contract or this transaction, such party is entitled to recover from the non-prevailing parties all costs of such proceeding and reasonable attorney's fees"). A defendant is the prevailing party if it successfully defends the case, typically by "obtaining a take-nothing judgment on the main issue or issues in the case." Bhatia, 396 S.W.3d at 670; see also Range v. Calvary Christian Fellowship, 530 S.W.3d 818, 838 (Tex. App.-Houston [14th Dist.] 2017, pet. denied).
On the "main issues" in this case-breach of the Partnership Agreement and breach of fiduciary duty-the record reflects that 4-S Manufacturing was the "prevailing party." The clear focus at trial, as it has been in the appeal, was on appellees' claims for breach of contract and breach of fiduciary duty. These intermingled claims were the bases for the vast majority of the testimony and were the primary basis for appellees' claims that they were entitled to damages for breach of the Partnership Agreement and disgorgement of profits and salaries. The jury found in appellees' favor on claims for breach of the Partnership Agreement. Under these circumstances, by obtaining a directed verdict on Stites's claims under the Partnership Agreement, but receiving an adverse judgment on Diakiw's breach of the Partnership Agreement, the Diakiw Parties cannot be said to have obtained a take-nothing judgment on the main issue or issues in the case. The Diakiw Parties, therefore, were not "prevailing parties" under the Partnership Agreement. See Bhatia, 396 S.W.3d at 670.
B. Attorneys' fees for violation of the Theft Liability Act and conspiracy to commit theft
The Diakiw Parties next assert they are entitled to attorneys' fees for defending Stites's claim that they violated the Theft Liability Act (TTLA). See Tex. Civ. Prac. & Rem. Code § 134.001, et. seq. In this regard, the Diakiw Parties assert, "Just as with his breach of contract claims against [the Diakiw Parties], Stites dismissed or non-suited his TTLA claims against the Diakiw Parties and the Employees after they moved for directed verdict." The record reflects no such action. As recited above, the Diakiw Parties moved for directed verdict on Stites's claims for breach of the Partnership Agreement and breach of fiduciary duty. They did not move for directed verdict on any purported claims under the TTLA. Similarly, with regard to the Diakiw Parties' claim for attorneys' fees pursuant to Stites's "conspiracy to commit theft claims," the record does not reflect a directed verdict or nonsuit on that purported claim.
Moreover, Stites did not plead claims under the TTLA, nor did he assert a pleading for conspiracy to commit theft. The Diakiw Parties acknowledge that Stites did not plead these claims, but assert that Stites's claims under the TTLA and for conspiracy were tried by consent. As evidence of trial by consent, the Diakiw Parties cite a sentence in response to motion for summary judgment, which stated, "In addition, Third-Party Plaintiff Dale Stites is asserting claims as a partner and a claim under the Texas Theft Liability Act." The Diakiw Parties also rely on a proposed jury charge in which Stites included jury questions under the TTLA. The charge given to the jury, however, did not contain a question about Stites's purported claim under the TTLA.
Trial by consent is intended only in the exceptional case where the record clearly reflects the parties' trial of an issue by consent. See Fontenot v. Fontenot, 667 S.W.3d 894, 906 (Tex. App.-Houston [14th Dist.] 2023, no pet.). An issue is not tried by consent if the evidence presented on that issue is also relevant to other issues raised by the pleadings. Sage St. Associates v. Northdale Const. Co., 863 S.W.2d 438, 446 (Tex. 1993). The trial-by-consent doctrine is "not intended to establish a general rule of practice," and it "should be applied with care." Fontenot, 667 S.W.3d at 906. Thus, the doctrine should not be applied in a "doubtful situation." Id.
Unpleaded claims or defenses that are tried by express or implied consent of the parties are treated as if they had been raised by the pleadings. Roark v. Stallworth Oil & Gas, Inc., 813 S.W.2d 492, 495 (Tex. 1991); see Tex. R. Civ. P. 67. Trial by consent "can cure lack of pleading, but an issue is not tried by consent merely because evidence regarding it is admitted." Bos v. Smith, 556 S.W.3d 293, 306-07 (Tex. 2018). To determine whether an issue was tried by consent, the court must examine the entire record not for evidence of the issue, but rather for evidence of trial of the issue. Id. at 307. A party consents to trial of an unpleaded issue when evidence on the issue is developed under circumstances indicating that both parties understood what the issue was in the case, and the other party failed to make an appropriate complaint. See Ingram v. Deere, 288 S.W.3d 886, 893 (Tex. 2009).
Other than a portion of a response to motion for summary judgment and a proposed jury charge the Diakiw Parties have provided no other evidence that Stites's claims were tried by consent. 4-S Manufacturing pleaded claims under the TTLA and a claim for conspiracy, but Stites did not. Not only were there no pleadings, but there was no evidence that the purported claims asserted by Stites under the TTLA and conspiracy to commit theft were tried by consent. There is also nothing in the record that reflects a directed verdict on purported TTLA or conspiracy claims made by Stites.
C. Attorneys' fees on 4-S Manufacturing's claim for theft of services
In their final sub-issue the Diakiw Parties assert the trial court erred in denying their request for attorneys' fees under the TTLA as it pertains to 4-S Manufacturing's claim for theft of services. Specifically, the Diakiw Parties assert that because no question was submitted to the jury on 4-S Manufacturing's claim for theft of services, they are prevailing parties under the statute and entitled to attorneys' fees.
The availability of attorneys' fees under a particular statute is a question of law for the court. Sunchase IV Homeowners Ass'n, Inc. v. Atkinson, 643 S.W.3d 420, 422 (Tex. 2022). We therefore review the issue de novo. El Paso Nat. Gas Co. v. Minco Oil & Gas, Inc., 8 S.W.3d 309, 312 (Tex. 1999).
The Theft Liability Act provides that "[e]ach person who prevails in a suit under this chapter shall be awarded court costs and reasonable and necessary attorney's fees." Tex. Civ. Prac. & Rem. Code § 134.005(b). The award of fees to a prevailing party in a TTLA action is mandatory. River Oaks L-M. Inc. v. Vinton-Duarte, 469 S.W.3d 213, 242 (Tex. App.-Houston [14th Dist.] 2015, no pet.). The TTLA requires the court to award attorneys' fees to a prevailing defendant "without any prerequisite that the claim is found to be groundless, frivolous, or brought in bad faith." Air Routing Int'l Corp. (Canada) v. Britannia Airways, Ltd., 150 S.W.3d 682, 686 (Tex. App.-Houston [14th Dist.] 2004, no pet.). Thus, we must decide whether the Diakiw Parties are prevailing parties under the TTLA when they received an unfavorable jury finding on 4-S Manufacturing's theft-of-property claim, and no question was submitted to the jury on theft of services.
4-S Manufacturing asserted claims under the TTLA as follows:
The actions of [appellants] in connection with the theft of East Texas Precast's property, including but not limited to the money received
from the unauthorized sale of East Texas Precast's property, theft of services of employees of East Texas Precast, theft of money taken by unauthorized and unlawful distributions, and theft of information constituting trade secrets of East Texas Precast constitute a violation of the Texas Theft Liability Act, Tex. Civ. Prac. & Rem. Code, Ch. 134.
4-S Manufacturing submitted a jury question on the TTLA including a definition of theft pursuant to Penal Code section 31.03, which defines theft as an unlawful appropriation of property. See Tex. Penal Code § 31.03. Theft of service is proscribed in a different section of the Penal Code. Tex. Penal Code § 31.04. No jury charge issue was submitted related to theft of services under section 31.04.
Relying on our sister court's decision in Brown v. Kleerekoper, No. 01-11-00972-CV, 2013 WL 816393, at *5 (Tex. App.-Houston [1st Dist.] Mar. 5, 2013, pet. denied) (mem. op.), the Diakiw Parties assert they were prevailing parties on the claim of theft of services and are thus entitled to attorneys' fees for successfully defending themselves against that claim. The plaintiff in Brown asserted two separate theft claims-one alleging theft of property and one alleging theft of services. Id. at *1. The plaintiff submitted two separate questions to the jury and the jury found against the plaintiff on the theft-of-property claim, but found in the plaintiff's favor on the theft-of-services claim. Id. The trial court awarded attorneys' fees to the defendant as the prevailing party on the theft-of-property claim. Id. The plaintiff challenged the trial court's award alleging the defendant was not a prevailing party because the plaintiff prevailed on the main issue in the case. Id. at *4. The First Court of Appeals disagreed, holding "that a party who prevails on a TTLA cause of action is entitled to recover attorney's fees, even though that party may not have prevailed on other causes of action asserted in the suit." Id. at *5. The court noted, "[t]he two TTLA offenses are completely separate." Id. at *4. The court based its decision on the variations in evidence required to establish each claim: "The theft-of-property claim required deception as defined by section 31.01(1)(E), whereas the theft-of-services claim did not." Id.
We conclude Brown is unpersuasive for two reasons. First, this case is distinguishable from Brown in that there was no jury finding on 4-S Manufacturing's theft-of-services claim. Second, the Brown court held attorneys' fees were warranted because the defendant prevailed on a separate cause of action in the suit. Id. at *5. We decline to extend the TTLA's provisions to separate causes of action because the plain language of the statute permits attorneys' fees for a prevailing party in a "suit," not a "cause of action."
The TTLA permits "a person who has sustained damages resulting from theft" to recover damages in a civil suit. Tex. Civ. Prac. & Rem. Code § 134.005(a). The TTLA further provides that "[e]ach person who prevails in a suit under this chapter shall be awarded court costs and reasonable and necessary attorney's fees." Tex. Civ. Prac. & Rem. Code § 134.005(b). The Supreme Court of Texas held that a "suit," like an "action," is "a demand of one's rights in court." Jaster v. Comet II Const., Inc., 438 S.W.3d 556, 564 (Tex. 2014) (quoting Thomas v. Oldham, 895 S.W.2d 352, 356 (Tex.1995)). A "cause of action" and a "suit" are not synonymous; rather, the "cause of action" is the right to relief that entitles a person to maintain "a suit." Id. The plain language of the TTLA permits attorneys' fees to be recovered by a prevailing party in a "suit," not a cause of action as asserted by appellants. Therefore, the Diakiw Parties did not prevail in 4-S Manufacturing's "suit" under the TTLA and are not entitled to attorneys' fees as prevailing parties.
We overrule appellants' seventh issue.
CONCLUSION
Having overruled each of appellants' issues on appeal, we affirm the trial court's judgment.