Court Reversed Forfeiture Award Due To Trial Court Not Indicating It Followed The Correct Standard

In Cooper v. Sanders H. Campbell/Richard T. Mullen, Inc., a company filed suit under a promissory note against a former joint venture partner. No. 05-15-00340-CV, 2016 Tex. App. LEXIS 9253 (Tex. App.—Dallas August 24, 2016, no pet. history). The defendant filed a counterclaim for breach of fiduciary duty and sought equitable forfeiture for the amount owed under the note. The trial court initially awarded the plaintiff $1.4 million on the note, but later reduced that award by $520,000 for the equitable forfeiture claim. Both parties appealed.

The court of appeals affirmed the plaintiff’s note claim, and then turned to the defendant’s equitable forfeiture claim. The defendant argued that the trial court should have awarded an amount of forfeiture for the entire note claim, and not just a partial award. The plaintiff argued that the forfeiture award should be reversed because “the record does not show the trial court made the required determination that the conduct of the Mullen Co. was a ‘clear and serious’ breach of fiduciary duty, which the trial court can conclude only after applying the factors identified by the Texas Supreme Court.” Id. (citing ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 874, 875 (Tex. 2010)). The court first set out the standards for equitable forfeiture:

Courts may fashion equitable remedies such as disgorgement and forfeiture to remedy a breach of a fiduciary duty. Disgorgement is an equitable forfeiture of benefits wrongfully obtained. A party must plead forfeiture to be entitled to that equitable remedy. Whether a forfeiture should be imposed must be determined by the trial court based on the equity of the circumstances. However, certain matters may present fact issues for the jury to decide, such as whether or when the alleged misconduct occurred, the fiduciary’s mental state and culpability, the value of the fiduciary’s services, and the existence and amount of harm to the principal. Once the factual disputes have been resolved, the trial court must determine: (1) whether the fiduciary’s conduct was a “clear and serious” breach of duty to the principal; (2) whether any monetary sum should be forfeited; and (3) if so, what the amount should be.

As stated above, the trial court’s first step is to determine whether there was a “clear and serious” breach of duty. The trial court should consider factors such as: (1) the gravity and timing of the breach; (2) the level of intent or fault; (3) whether the principal received any benefit from the fiduciary despite the breach; (4) the centrality of the breach to the scope of the fiduciary relationship; (5) any other threatened or actual harm to the principal; (6) the adequacy of other remedies; and (7) whether forfeiture fits the circumstances and will work to serve the ultimate goal of protecting relationships of trust. However, forfeiture 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.

Second, the trial court must determine whether any monetary sum should be forfeited. The central purpose of forfeiture as an equitable remedy is not to compensate the injured principal, but to protect relationships of trust by discouraging disloyalty. Disgorgement is compensatory in the same sense as attorney fees, interest, and costs, but it is not damages. As a result, equitable forfeiture is distinguishable from an award of actual damages incurred as a result of a breach of fiduciary duty. In fact, a claimant need not prove actual damages to succeed on a claim for forfeiture because they address different wrongs. In addition to serving as a deterrent, forfeiture can serve as restitution to a principal who did not receive the benefit of the bargain due to his agent’s breach of fiduciary duty. Third, if the trial court determines there should be a forfeiture, it must determine what the amount should be. The amount of disgorgement is based on the circumstances and is within the trial court’s discretion. For example, it would be inequitable for an agent who performed extensive services faithfully to be denied all compensation if the misconduct was slight or inadvertent.

Id. (internal citations omitted).

The court then noted that the defendant did not plead for equitable forfeiture, though he did plead for breach of fiduciary duty and seek an award of damages. The defendant did not seek a jury finding on the plaintiff’s mental state or culpability, the value of its services, or the existence and amount of harm to defendant. The jury found that the plaintiff breached its fiduciary duty to the defendant, but awarded him no damages. The defendant then asked the trial court to enter an award of forfeiture damages in his motion for judgment notwithstanding the verdict, and in other post-trial motions. However, the defendant did not adequately brief the issue and the factors relevant to such a claim. The court of appeals held that the record did not support the trial court’s award, and remanded the case for further proceedings to allow the trial court to consider the appropriate legal standards, elements, and factors in finding that a forfeiture award should be entered:

Cooper did not identify or brief in the trial court the requirement that the trial court conclude there was a “clear and serious” breach of duty as a predicate to assessing a sum that should be awarded as an equitable forfeiture. Cooper does not cite to anything in the record, nor can we find anything in the record, to show that in the fashioning of the equitable forfeiture award the trial court considered the “principles” or “factors” enumerated in ERI Consulting. Accordingly, we conclude the claim of forfeiture should be remanded to the trial court for consideration of the factors described by the Texas Supreme Court.

Interesting Note: This court of appeals holds that a trial court’s analysis regarding an award of equitable forfeiture must be shown in the record. This is a departure from normal rules of procedure regarding a trial court’s findings. When a trial court makes factual findings in a dispute, a party may seek findings of fact and conclusions of law – that is true even if some issues are submitted to a jury. IKB Indus. v. Pro-Line Corp., 938 S.W.2d 440, 443 (Tex. 1997). Where neither party timely requests findings of fact, an appellate court must uphold the trial court’s judgment on any valid legal theory that was presented to the court and is supported by the evidence. Davis v. Huey, 571 S.W.2d 859, 862 (Tex. 1978). When no findings of fact are properly requested or filed, the trial court’s judgment implies all findings of fact necessary to support it. Sixth RMA Partners v. Sibley, 111 S.W.3d 46, 52 (Tex. 2003); Carter v. William Sommerville and Son, Inc., 584 S.W.2d 274, 276 (Tex. 1979). Moreover, in the context of a jury trial, there can be omitted elements of a claim. Texas Rule of Civil Procedure 279 provides that where some elements of claim or defense are submitted to the jury, but others are not, the omitted elements are presumed in favor of the trial court’s judgment. Tex. R. Civ. P. 279. Accordingly, if a party does not want the omitted elements found in favor of the judgment, it has the burden to request express findings from the trial court on those omitted elements. Tex. R. Civ. P. 299; Insurance Co. of St. Louis v. Bellah, 373 S.W.2d 691, 692 (Tex. App.—Fort Worth 1963, no writ).

The Cooper court did not state in the opinion whether either party requested findings, though it is apparent from the opinion that the trial court did not enter any findings. Under normal procedure regarding a claim submitted to a jury, the omitted findings should have been found in favor of the judgment as some of the elements were submitted to the jury (breach of fiduciary duty) but others were not (mental culpability). However, equitable forfeiture is an equitable remedy that a trial court decides, not a jury. Burrow v. Arce, 997 S.W.2d 229, 245 (Tex. 1999). Yet, as there were no findings of fact requested, all of the findings necessary to support the factors and elements for equitable forfeiture should have been presumed in favor of the judgment. This opinion stands for the proposition that there appears to be a reverse presumption that a trial court does not follow the law or follow proper standards in the context of equitable forfeiture where the record is silent on the court’s process. A party (especially the winning party) should request the trial court to enter findings of fact and conclusions of law regarding an equitable forfeiture award. That is not necessarily common sense to an attorney in Texas. Normally, the prevailing party does not seek findings, because in their absence all findings will be presumed in favor of the judgment. The winning party in an equitable forfeiture case should request findings of fact and also prepare a draft of those findings for the court’s consideration.

Of course if findings are entered (or implied findings applied) that does not mean that a court of appeals should automatically affirm the judgment; the plaintiff can still challenge those implied findings for legal or factual sufficiency of the evidence. A party should specifically challenge the trial court’s finding of fact in its issues presented and in its arguments in the brief. In re Estate of Bessire, 399 S.W.3d 642, 648-49 (Tex. App.—Amarillo 2013, pet. denied); In re M.W., 959 S.W.2d 661, 664 (Tex. App.—Tyler 1997, writ denied). Appellate complaints must be directed at specific findings of fact rather than at the judgment as a whole. In re Estate of Bessire, 399 S.W.3d at 648-49; In re M.W., 959 S.W.2d at 664. A broad challenge to the sufficiency of evidence without specifying the challenged finding of fact preserves nothing for review. Bransom v. Standard Hardware, Inc., 874 S.W.2d 919, 927 (Tex. App.—Fort Worth 1994, writ denied). An appellant should brief an appeal of implied findings as if they had been given as express findings. Russell v. Russell, 865 S.W.2d 929 (Tex. 1993); Giangrosso v. Crosley, 840 S.W.2d 765, 769 (Tex. App.—Houston [1st Dist.] 1992, no writ); see also Mcdonald & Carlson, Texas Civil Practice 2d, §18.12-18.13. Unless the trial court’s findings are challenged by a point of error on appeal, they are binding upon the appellate court and the parties, and the appealing party waives any complaint regarding the evidence to support the findings. Cass v. Stephens, 156 S.W.3d 38, 77 (Tex. App.—El Paso 2004, pet. denied); Northwest Park Homeowners Ass’n, Inc. v. Brundrett, 970 S.W.2d 700 (Tex. App.—Amarillo 1998, pet. denied); Whitehead v. Univ. of Tex., 854 S.W.2d 175, 178 (Tex. App.—San Antonio 1993, no writ). If a party fails to challenge findings of fact that support the judgment, the court of appeals should summarily affirm the judgment. Brundrett, 970 S.W.2d at 704.

So, where a trial court makes express findings, a party appealing from a trial court’s award of equitable forfeiture should specifically challenge via issue statements the factual findings in support of the award and then argue those issues in the body of the brief. Where there are no express findings, the appealing party should: 1) complain that the trial court did not make any findings and seek an abatement in the court of appeals so that the trial court make those findings; and 2) in an abundance of caution, argue that the specific implied findings are not supported by the evidence.