Dernick Resources, Inc. v. David Wilstein and Leonard Wilstein, Individually and as Trustee of the Leonard and Joyce Wilstein Revocable Trust

Opinion

Order issued August 19, 2014

In The

Court of Appeals For The

First District of Texas ———————————— NO. 01-13-00853-CV ——————————— DERNICK RESOURCES, INC., Appellant V. DAVID WILSTEIN AND LEONARD WILSTEIN, INDIVIDUALLY AND AS TRUSTEE OF THE LEONARD AND JOYCE WILSTEIN REVOCABLE TRUST, Appellees

On Appeal from the 164th District Court Harris County, Texas Trial Court Case No. 2002-31310

OPINION ON ORDER

Judgment creditors, David and Leonard Wilstein (“the Wilsteins”), have

filed in this Court an “Emergency Motion to Increase Amount of Deposit in Lieu

of Supersedeas Bond,” challenging the trial court’s order setting the amount of the deposit filed by judgment debtor,1 Dernick Resources, Inc. (“Dernick”). We

conclude that the trial court did not abuse its discretion and deny the motion.

BACKGROUND

The Wilsteins sued Dernick for breach of contract, breach of fiduciary

duties, fraud, and conversion related to the Wilsteins’ investment in two different

oil and gas leases—the Bradshaw Joint Venture and the McCourt Field Joint

Venture. The charge eventually submitted to a jury asked, in relevant part,

What sum of money, if any, if paid now in cash, would fairly and reasonably compensate the Wilstein Brothers for their damages, if any, that were proximately caused by Dernick’s breach of fiduciary duty in failing to notify the Wilstein Brothers about acquisition of leasehold interests in Greeley County, Kansas, and in failing to account to the Wilstein Brothers for their share of the assets of the Bradshaw Joint Venture?

The jury found that the Wilsteins’ share of the sales proceeds of the Bradshaw

Joint Venture was $162,194.14.

The trial court also held a bench trial and heard evidence and arguments of

counsel on the issue of the Wilsteins’ request for equitable fee forfeiture from

Dernick regarding fees Dernick received as the operator of the McCourt Field.

Following this bench trial, the trial court found that “Dernick’s conduct constituted

a clear and serious breach of fiduciary duty” and concluded that the Wilsteins

“should recover $1,709,421.05 from [Dernick] for equitable fee forfeiture as a

1 See TEX. R. APP. P. 24.4. 2 result of Dernick’s clear and serious breach of fiduciary duties under the McCourt

Field Joint Venture and Joint Operating Agreement.” The trial court made various

findings of fact to support this conclusion, including findings regarding the specific

amounts of fees that the Wilsteins had paid and findings that, “[w]ithout Dernick’s

breach of fiduciary duties concerning the McCourt Field Joint Venture Agreement

and Joint Operating Agreement, Dernick would not have been entitled to receive

any of the fees at issue”; that “Dernick received benefits that the Wilstein Brothers

did not receive, namely fees, which the Wilstein Brothers were required to pay

Dernick or its alter ego [and subsidiary, Pathex Petroleum, Inc.]”; and that,

“[b]ecause Dernick’s right to charge and collect certain fees from the Wilstein

Brothers arose by virtue of Dernick’s breach of fiduciary duty, equity dictates that

Dernick may not retain such benefits.”

In its final judgment, the trial court awarded the Wilsteins $162,194.14, plus

5% prejudgment interest, as damages “accounting for [their] share of the Bradshaw

Joint Venture” that the jury concluded was owed to them by Dernick. The trial

court also awarded the Wilsteins $727,324.82 in attorney’s fees incurred through

the trial. Finally, the trial court ordered that the Wilsteins recover $1,709,421.06 in

“equitable fee forfeiture,” plus 5% prejudgment interest, based on its findings and

conclusions following the bench trial.

3 Dernick posted a cash deposit in the amount of $583,427.08 in lieu of a

supersedeas bond. See TEX. R. APP. P. 24.1(a)(3) (permitting judgment debtor to

suspend enforcement of judgment by “making a deposit with the trial court clerk in

lieu of a bond”). The cash deposit accounted for the compensatory damages on the

Bradshaw Joint Venture claims found by the jury and the prejudgment interest on

that award, for two years’ worth of accrued appellate post-judgment interest on the

judgment, and for costs assessed in the judgment against Dernick. The Wilsteins

moved the trial court to increase the amount of the deposit to include the $1.7

million fee forfeiture award against Dernick for the breach of its fiduciary duty.

The trial court denied the motion.

Amount of Deposit

A. Standard of Review

On the motion of a party, an appellate court may review the sufficiency or

excessiveness of the amount of bond or other security set by a trial court to secure

payment of a money judgment during the pendency of an appeal in a civil case.

TEX. CIV. PRAC. & REM. CODE ANN. § 52.006(d) (Vernon 2008); TEX. R. APP. P.

24.4(a). We review the trial court’s determination of the amount of security under

an abuse of discretion standard. Ramco Oil & Gas, Ltd. v. Anglo Dutch (Tenge)

L.L.C., 171 S.W.3d 905, 909 (Tex. App—Houston [14th Dist.] 2005, published

order). “Generally, the test for abuse of discretion is whether the trial court acted

4 without reference to any guiding rules and principles or whether the trial court

acted arbitrarily and unreasonably.” Id. at 910; see McDaniel v. Yarbrough, 898

S.W.2d 251, 253 (Tex. 1995). A failure by the trial court to analyze or apply the

law correctly is an abuse of discretion. Gonzalez v. Reliant Energy, Inc., 159

S.W.3d 615, 623–24 (Tex. 2005); Ramco Oil & Gas, 171 S.W.3d at 910.

B. Categorization of the Equitable Fee Forfeiture Award

Here, the parties dispute whether the trial court, in calculating the amount of

the deposit required in lieu of a supersedeas bond, was required to include in its

sum the $1.7 million fee forfeiture award. The Wilsteins argue that the fee

forfeiture award is properly characterized as compensatory damages that must be

included in calculating the amount required to supersede the judgment.

1. The law regarding security sufficient to supersede the judgment

When a judgment is for recovery of money, the proper amount of the bond,

deposit, or security must equal the sum of compensatory damages awarded in the

judgment, interest for the estimated duration of the appeal, and costs awarded in

the judgment. TEX. R. APP. P. 24.2(a)(1); TEX. CIV. PRAC. & REM. CODE ANN.

§ 52.006(a). The amount of security required to supersede the judgment is subject

to a statutory cap—it must not exceed the lesser of fifty percent of the judgment

debtor’s net worth or $25 million. TEX. R. APP. P. 24.2(a)(1); TEX. CIV. PRAC. &

REM. CODE ANN. § 52.006(b). These provisions were created as part of a

5 comprehensive tort reform measure, amending the previous scheme that required a

party to post security covering the entire judgment, regardless of amount. In re

Nalle Plastics Family Ltd. P’ship, 406 S.W.3d 168, 169–70 (Tex. 2013).

Although Civil Practice and Remedies Code chapter 52 does not define

“compensatory damages,” the supreme court has cited Black’s Law Dictionary

when determining whether attorney’s fees should be considered compensatory

damages. Id. at 171–72. According to Black’s Law Dictionary, “compensatory

damages” means “damages sufficient in amount to indemnify the injured person

for the loss suffered.” Id. at 171 (citing BLACK’S LAW DICTIONARY 445 (9th ed.

2009)). “The dictionary notes that the phrase is interchangeable with ‘actual

damages,’ defined as ‘[a]n amount awarded to a complainant to compensate for a

proven injury or loss; damages that repay actual losses.’” Id. at 171–72.

The supreme court has also observed that, “[w]hile chapter 52 does not

define ‘compensatory damages,’ chapter 41 does.” Id. at 174. That term, as

defined in Civil Practice and Remedies Code chapter 41, includes “economic and

noneconomic damages” and “does not include exemplary damages.” Id. (citing

TEX. CIV. PRAC. & REM. CODE ANN. § 41.001(8) (Vernon 2008)). Under chapter

41, “economic damages” are those “intended to compensate a claimant for actual

economic or pecuniary loss,” and “noneconomic damages” are “damages awarded

for the purpose of compensating a claimant for . . . nonpecuniary losses of any kind

6 other than exemplary damages.” Id. (citing TEX. CIV. PRAC. & REM. CODE ANN.

§ 41.001(4), (12)). Chapter 41 defines “exemplary damages” as “any damages

awarded as a penalty or by way of punishment but not for compensatory

purposes.” Id. (citing TEX. CIV. PRAC. & REM. CODE ANN. § 41.001(5)).

Although the supreme court noted that courts of appeals, including this one, 2

have held that chapter 41’s definition of compensatory damages does not apply in

the context of chapter 52, it also observed that the current version of the

supersedeas requirements and the enactment of chapter 41’s compensatory

damages definition were made as part of the same bill, “reflecting an intent that the

same definition apply to both provisions.” Id. The supreme court stated, “We

need not conclude that chapter 41’s ‘compensatory damages’ definition explicitly

governs here. At the very least, it is consistent with our own conclusion based on

the phrase’s ordinary meaning and our precedent—that attorney’s fees incurred in

the prosecution or defense of a claim are not compensatory damages.” Id. The

supreme court also stated, “While attorney’s fees for the prosecution or defense of

a claim may be compensatory in that they help make a claimant whole, they are

2 See Fairways Offshore Exploration, Inc. v. Patterson Servs., Inc., 355 S.W.3d 296, 302 (Tex. App.—Houston [1st Dist.] 2011, no pet.) (holding that “the definitions employed in Chapter 41 are expressly prescribed to apply to that chapter only” in concluding that attorney’s fees constitute compensatory damages for purposes of chapter 52), overruled in part, In re Nalle Plastics Family Ltd. P’ship, 406 S.W.3d 168, 174–75 (Tex. 2013) (concluding, in context of chapter 52, that attorney’s fees incurred in prosecution or defense of claim are not compensatory damages). 7 not, and have never been, damages. Not every amount, even if compensatory, can

be considered damages.” Id. at 173. However, the supreme court rejected “the

idea that attorney’s fees can never be considered compensatory damages” and held

that fees comprising the breach-of-contract damages in the underlying suit in In re

Nalle Plastics were compensatory damages. Id. at 174–75.

2. The law regarding the nature of equitable fee forfeiture

Here, the trial court characterized the $1.7 million fee forfeiture award as an

“equitable fee forfeiture” in its judgment. Thus, we must determine whether this

equitable award constituted compensatory damages for the purposes of Civil

Practice and Remedies Code chapter 52.

Courts may fashion equitable remedies such as profit disgorgement and fee

forfeiture to remedy a breach of a fiduciary duty. ERI Consulting Eng’rs, Inc. v.

Swinnea, 381 S.W.3d 867, 873 (Tex. 2010); see also Burrow v. Arce, 997 S.W.2d

229, 237 (Tex. 1999) (“[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.”). Equitable forfeiture is distinguishable from an award of actual damages

incurred as a result of a breach of fiduciary duty. Burrow, 997 S.W.2d at 240

(discussing purposes of equitable fee forfeiture and holding that claimant need not

prove actual damages to succeed in claim for fee forfeiture because “[i]t is the

agent’s disloyalty, not any resulting harm, that violates the fiduciary duty”);

8 Hoover v. Larkin, 196 S.W.3d 227, 233 (Tex. App.—Houston [1st Dist.] 2006, pet.

denied) (“[C]ourts distinguish between actual damages incurred as a result of the

breach, and the equitable remedy of fee forfeiture.”); see also Akin, Gump, Strauss,

Hauer & Feld, L.L.P. v. Nat’l Dev. & Research Corp., 299 S.W.3d 106, 122 (Tex.

2009) (holding, in context of legal malpractice suit, “A negligence claim, unlike a

fee forfeiture claim for breach of fiduciary duty, is about compensating an injured

party”).

The main purpose of forfeiture is not to compensate the injured principal,

even though it may have that effect; rather, “the central purpose of the equitable

remedy of forfeiture is to protect relationships of trust by discouraging agents’

disloyalty.” Burrow, 997 S.W.2d at 238; Hoover, 196 S.W.3d at 233; see also

Swinnea, 318 S.W.3d at 872–73 (discussing equitable remedies for breach of

fiduciary duty and stating, “We later reiterated that a fiduciary may be punished for

breaching his duty: ‘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.’”). Thus, depending on the circumstances, fee

forfeiture can serve two purposes: (1) to serve as restitution to a principal who did

not receive the benefit of the bargain due to his agent’s breach of fiduciary duties,

and (2) to deter an agent from breaching fiduciary duties to clients. Burrow, 997

S.W.2d at 237–38; Swank v. Cunningham, 258 S.W.3d 647, 673 (Tex. App.—

9 Eastland 2008, pet. denied); see also Swinnea, 318 S.W.3d at 872–73 (stating that

“a fiduciary may be punished for breaching his duty” and that main purpose of

forfeiture is not to compensate, but to protect relationships of trust by discouraging

disloyalty; discussing trial court’s return of “a significant part of the contractual

consideration” as equitable remedy, noting difficulty of categorizing this type of

damages award; and stating, “The situation arises because here the contracting

party, Swinnea, was a fiduciary, such that we must consider whether under the

circumstances an equitable remedy may cross the line from actual damages for

breach of contract or fraud (redressing specific harm) to further, equitable return of

contractual consideration”); Saden v. Smith, 415 S.W.3d 450, 475 (Tex. App.—

Houston [1st Dist.] 2013, pet. denied) (citing Swinnea and Burrow and holding that

“the equitable remedy of forfeiture must ‘fit the circumstances’ presented”).

3. Application of the law to the facts of this case

Here, the plain language of the judgment itself and the trial court’s findings

of fact support a conclusion that the equitable fee forfeiture award ordered in this

case was not primarily intended to compensate the Wilsteins, but to protect

relationships of trust by deterring Dernick from breaching its fiduciary duties. See

Swinnea, 318 S.W.3d at 872–73; Burrow, 997 S.W.2d at 238; Hoover, 196 S.W.3d

at 233. The trial court awarded the fee forfeiture following a separate bench trial,

and it listed this award separately from the actual damages awarded by the jury in

10 its final judgment. The trial court’s findings of fact following the bench trial

included a finding that “equity dictates that Dernick may not retain [the fees

collected as a result of its breach of fiduciary duty],” indicating that, rather than

compensating the Wilsteins, the purpose of the award was to punish Dernick.

Furthermore, we observe that the present question regarding whether the

equitable fee forfeiture constituted compensatory damages is analogous in some

ways to the question, addressed by the supreme court in In re Nalle Plastics, of

whether attorney’s fees constituted compensatory damages. In addressing that

question, the supreme court held, “Not every amount, even if compensatory, can be

considered damages.” In re Nalle Plastics, 406 S.W.3d at 173. Thus, even to the

extent that the fee forfeiture in this case might also be in some ways

compensatory—the return to the Wilsteins of fees Dernick would not have been

entitled to receive but for its breach of fiduciary duties—we cannot say that such

amounts constitute compensatory damages under the facts of this case. Rather,

based on the ordinary meaning of the phrase “compensatory damages” and

precedent of the Texas Supreme Court and this Court regarding the primary

purpose of equitable fee forfeiture, and based on the facts of this case, it does not

appear that the trial court abused its discretion in refusing to include the amount of

the fee forfeiture in its calculation of the compensatory damages. See id. at 171–72

(stating that compensatory damages means “damages sufficient in amount to

11 indemnify the injured person for the loss suffered”); Swinnea, 318 S.W.3d at 872–

73 (discussing equitable remedies for breach of fiduciary duty and stating that

fiduciary “may be punished for breaching his duty” and that “[t]he main purpose of

forfeiture is not to compensate an injured principal” but “to protect relationships of

trust by discouraging agents’ disloyalty”).

The Wilsteins rely on a recent case from the San Antonio Court of Appeals,

which held that if a judgment of profit disgorgement is compensatory in nature, a

trial court may include this portion of the judgment as “compensatory damages” to

be included in a security amount. Huff Energy Fund, L.P. v. Longview Energy Co.,

No. 04-12-00630-CV, 2014 WL 661710, at *3 (Tex. App.—San Antonio Feb. 12,

2014, orig. proceeding). However, the court in Huff Energy did not hold, as the

Wilsteins argue, that fiduciary equitable disgorgement is compensatory, nor did it

determine which definition of compensatory damages governs the amount of

security to be included in supersedeas bonds. See id. at *2.

In Huff Energy, the jury found that Huff Energy Company and other

defendants had breached their fiduciary duties regarding a particular oil and gas

interest, and the trial court awarded the principal recovery from the defendants for

“[certain] production revenues . . . and an additional $95,500,000.00.” Id. at *1.

The court stated that “a plain reading of this judgment supports the conclusion that

the $95,500,000.00 is compensatory in nature.” Id. at *2. It went on to hold,

12 “When, as here, ‘a judgment is unambiguous with no room for interpretation, it is

our duty to declare its effect in light of the literal language used.’” Id. at *3

(quoting Harper v. Welchem, Inc., 799 S.W.2d 492, 495 (Tex. App.—Houston

[14th Dist.] 1990, no writ.)). The Huff Energy court held, “in light of the language

used in this judgment,” that its conclusion that the award at issue in that case

constituted compensatory damages was “consistent with the ordinary meaning of

that phrase” and, accordingly, that the trial court did not abuse its discretion in

including the $95.5 million award in its calculation of the supersedeas bond. Id. at

*3, *6.

The present case is distinguishable from Huff Energy, in which the jury

found that the defendants wrongfully obtained assets as a result of their breaches of

fiduciary duties, and in which the judgment sought to return the value of these

assets that resulted from the breaches of fiduciary duties to the plaintiff by

awarding recovery from the defendants for “[certain] production revenues . . . and

an additional $95,500,000.00.” Id. at *1. Here, by contrast, the Wilsteins sought

equitable forfeiture of fees that Dernick received as the operator of the McCourt

Field Joint Venture and did not ask that Dernick be required to disgorge any profits

it received from the venture.3 Furthermore, unlike Huff Energy, where “a plain

3 The Wilsteins’ attorney, in his opening statement to the trial court in the bench trial on the fee-forfeiture claim, stated that “the focus in equity is not so much on the plaintiffs and their damages so much as it’s on the wrongdoer and whether or 13 reading of [the] judgment support[ed] the conclusion that the $95,500,000.00 [was]

compensatory in nature,” the language of the trial court’s findings of fact and the

language used in the judgment itself indicate that the primary purpose of the

forfeiture of fees was not to compensate the Wilsteins but rather to punish Dernick

for breaching its fiduciary duty. See id. at *2.

This case involves a money judgment, which can be superseded by the

deposit equal to the sum of the compensatory damages awarded in the judgment,

interest for the estimated duration of the appeal, and costs awarded in the

judgment. See TEX. R. APP. P. 24.2(a)(1). Dernick provided a deposit in lieu of a

supersedeas bond in the amount of $583,427.08, including the $162,194.14 in

damages awarded by the jury and rendered in the judgment, interest for the

duration of the appeal, and costs. Id.; see also Huff Energy, 2014 WL 661710, at

*3 (quoting Harper, 799 S.W.2d at 495). The trial court denied the Wilsteins’

request to increase the amount of the deposit by adding the fee-forfeiture award

into the amount of compensatory damages. We cannot say that the trial court’s

ruling was made without reference to any guiding rules or principles, nor do we

not the wrongdoer received a benefit. . . .” The Wilsteins’ trial counsel expressly stated, “We’re not going to ask you to order Dernick to disgorge any profits,” and the Wilsteins instead sought forfeiture of fees that Dernick had received as operator of the McCourt Field. Also, in their trial brief, the Wilsteins argued that fee forfeiture was distinguishable from an award of actual damages. 14 conclude that the trial court acted arbitrarily or unreasonably. See Ramco Oil &

Gas, 171 S.W.3d at 910.

Conclusion

We conclude that the trial court acted within its discretion in denying the

Wilsteins’ request to increase the amount of deposit in lieu of a supersedeas bond.

Accordingly, we deny the Wilsteins’ motion to increase the amount of the deposit

in lieu of a supersedeas bond.

Evelyn V. Keyes Justice

Panel consists of Chief Justice Radack and Justices Keyes and Sharp.