In Re: Structural

• Court: Court of Appeals for the Fifth Circuit
• Decided: May 15, 2003
• Docket: 02-20941
• Status: Unpublished

Opinion

United States Court of Appeals Fifth Circuit F I L E D May 15, 2003 UNITED STATES COURT OF APPEALS Charles R. Fulbruge III FOR THE FIFTH CIRCUIT Clerk _______________________

No. 02-20941 _______________________

IN RE: STRUCTURAL SOFTWARE, INC.,

Debtor -------------------------------------

S. RAO GUNTUR; SAID IRANNEZHAAD, Appellants,

versus

ENGINEERING DYNAMICS, INC., Appellee. ________________________________________________________________

Appeal from the United States District Court for the Southern District of Texas Civil Docket H-00-CV-2571 _________________________________________________________________

Before JONES and BENAVIDES, Circuit Judges and KAZEN, District Judge.*

PER CURIAM:**

This appeal arises out of an adversary proceeding brought

by Engineering Dynamics, Inc. (“EDI”) on behalf of bankruptcy

debtor Structural Software, Inc. (“SSI”) against SSI’s sole

shareholders, S. Rao Guntur and Said Irannezhaad. EDI alleges that

* District Judge of the Southern District of Texas, sitting by designation. ** Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4. Guntur and Irannezhaad usurped a corporate opportunity belonging to

SSI. The opportunity at issue was the right to obtain stock in

Zentech, Inc. (“Zentech”) in exchange for the marketing rights and

service rights related to a computer program called StruCAD*3D

(“StruCAD”). SSI is the owner of StruCAD. The bankruptcy court

held that Guntur and Irannezhaad did usurp a corporate opportunity

of SSI and entered judgment against them. The district court

affirmed the judgment of the bankruptcy court. Finding no

reversible error, we affirm.

BACKGROUND

In 1989, EDI sued SSI for copyright infringement. EDI

alleged that StruCAD infringed copyrights owned by EDI. In 1991,

the United States District Court for the Eastern District of

Louisiana entered judgment in favor of EDI and awarded $250,000 in

damages. The district court’s judgment was affirmed in part,

reversed in part, and remanded. Eng’g Dynamics, Inc. v. Structural

Software, Inc., 26 F.3d 1335 (5th Cir. 1994), modified by, 46 F.3d

408 (1995). This case, on remand, is still pending or has just

been concluded in the district court.

In July 1989 (after EDI sued SSI), SSI entered into a

marketing agreement (“Marketing Agreement”) with Zentech under

which Zentech agreed to be SSI’s exclusive marketing agent for

StruCAD and to be solely responsible for the marketing costs in

2 exchange for fifty percent of all revenues derived from the sale of

StruCAD. On December 31, 1990, SSI entered into a new agreement

(“Maintenance Agreement”) with Zentech under which Zentech agreed

that, in addition to its role as SSI’s marketing agent, it would be

responsible for upgrading StruCAD and providing maintenance and

customer support services related to StruCAD. Under the

Maintenance Agreement, which modified the Marketing Agreement,

Zentech received eighty percent of the sales revenue as well as all

revenue derived from providing maintenance services related to

StruCAD. Concurrent with the execution of the Maintenance

Agreement, Zentech hired Guntur and Irannezhaad as employees for a

base annual salary of $60,000. Guntur and Irannezhaad were at this

time also given Zentech common stock. Guntur received 30.333% of

the common stock in Zentech, while Irannezhaad received 5% of the

common stock.

SSI filed for bankruptcy on June 23, 1992 due to EDI’s

efforts to collect on its judgment against SSI. In 1993, EDI, on

behalf of SSI, brought an adversary proceeding against Guntur and

Irannezhaad “in order to recover avoidable transfers.” The

bankruptcy court issued an order authorizing EDI to bring the

claims at issue in this case against Guntur and Irannezhaad.1 The

1 The bankruptcy court issued an order authorizing EDI, in lieu of the trustee, to pursue avoidance actions against Guntur and Irannezhaad to recover assets for the SSI estate. The

3 bankruptcy court found that the stock received by Guntur and

Irannezhaad was not in return for their employment by Zentech, but

rather was in return for SSI’s execution of the Maintenance

Agreement. As such, the bankruptcy court concluded that the

Zentech stock was a corporate opportunity of SSI that had been

misappropriated by Guntur and Irannezhaad and that the Zentech

stock properly belonged to the SSI Estate.

The bankruptcy court as part of its judgment imposed a

constructive trust on the Zentech stock received by Guntur and

Irannezhaad in connection with the Maintenance Agreement. The

bankruptcy court thus ordered that the SSI Estate recover 114,666.4

shares of Zentech held by Guntur at the time judgment was entered

and 40,000 shares of Zentech held by Irannezhaad at the time

judgment was entered. The bankruptcy court also held that the SSI

Estate was entitled to recover $696,000 from Guntur and $242,000

from Irannezhaad for cash they received from a previous sale of

Zentech stock to TDI-Halter, Inc. in November 1997.

DISCUSSION

We review bankruptcy court rulings and decisions “under

the same standards employed by the district court hearing the

bankruptcy court stated that the corporate opportunity claim that is the subject of this appeal was authorized by the order. SSI does not challenge this order on appeal and as such we do not address its propriety.

4 appeal from bankruptcy court; conclusions of law are reviewed de

novo, findings of fact are reviewed for clear error, and mixed

questions of fact and law are reviewed de novo.” Century Indem.

Co. v. NGC Settlement Trust (In re National Gypsum Co.), 208 F.3d

498, 504 (5th Cir. 2000). Under a clear error standard, we will

reverse a finding of fact “only if, on the entire evidence, we are

left with the definite and firm conviction that a mistake has been

made.” Walker v. Cadle Co. (In re Walker), 51 F.3d 562, 565 (5th

Cir. 1995) (quoting Allison v. Roberts (In re Allison), 960 F.2d

481, 483 (5th Cir. 1992)).

Under Texas law, to establish a breach of fiduciary duty

for usurping a corporate opportunity “the corporation must prove

that an officer or director misappropriated a business opportunity

that properly belongs to the corporation.” Landon v. S&H Mktg.

Group, 82 S.W.3d 666, 681 (Tex. App.–Eastland 2002, no pet.); see

also International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d

567, 576-78 (Tex. 1963); Alexander v. Sturkie, 909 S.W.2d 166, 169

(Tex. App.–Houston [14th Dist.] 1995, writ denied). “The business

opportunity arises where a corporation has a legitimate interest or

expectancy in, and the financial resources to take advantage of, a

particular business opportunity.” Icom Systems, Inc. v. Davies, 990

S.W.2d 408, 410 (Tex. App.–Texarkana 1999, no writ) (citing Dyer v.

Shafer, Gilliland, Davis, McCollum & Ashley, Inc., 779 S.W.2d 474,

5 477 (Tex. App.–El Paso 1989, writ denied)). To determine whether

a corporation has a legitimate interest in a corporate opportunity,

the court must inquire as to whether the alleged opportunity was in

the corporation’s “line of business.” Id.

Guntur and Irannezhaad argue that the bankruptcy court

erred in determining that the right to obtain the Zentech stock was

a corporate opportunity that belonged to SSI because SSI did not

have a legitimate interest in the stock. Guntur and Irannezhaad

contend that the bankruptcy court clearly erred in holding that

the Zentech stock they received was in fact consideration for SSI’s

execution of the Maintenance Agreement. We disagree. The record

contains sufficient evidence from which the bankruptcy court could

infer that the right to acquire the Zentech stock was a corporate

opportunity of SSI.

Guntur and Irannezhaad point out that there was evidence

that Zentech would never have provided stock to SSI and

additionally that there was no evidence that SSI was interested in

acquiring Zentech stock. Thus, they argue that acquisition of

Zentech stock could not have been a corporate opportunity of SSI.

This argument fails, however, because it defines the corporate

opportunity at issue too narrowly. While SSI may not have had an

interest specifically in acquiring Zentech stock, it certainly did

6 have an interest in receiving the appropriate level of

consideration for its execution of the Maintenance Agreement.

Guntur and Irannezhaad also argue that because SSI did

not have the financial resources to carry out the opportunity to

obtain the Zentech stock, they could not have usurped a corporate

opportunity of SSI. Icom Systems, Inc., 990 S.W.2d at 410 (to

usurp a corporate opportunity, corporation must have resources to

take advantage of the opportunity). Further, inasmuch as the stock

was consideration for their employment with Zentech, SSI could not

have provided the engineering services that they were to perform as

employees of Zentech. This argument fails because, as noted

previously, the bankruptcy court did not clearly err in finding

that the Zentech stock served as consideration for execution of the

Maintenance Agreement rather than for Guntur’s and Irannezhaad’s

personal services.

Additionally, Guntur and Irannezhaad argue that even if

the right to the Zentech stock was a corporate opportunity of SSI,

they did not improperly usurp the opportunity because SSI’s only

shareholders (Guntur and Irannezhaad) ratified the transaction. It

is usually a defense to a claim of usurpation of the corporate

opportunity that all of the corporation’s shareholders ratify the

transaction. Safety Int’l, Inc. v. Dyer (In re Safety Int’l,

Inc.), 775 F.2d 660, 662 (5th Cir. 1985); Dyer, 779 S.W.2d at 478.

7 Creditors, however, can challenge the breach if the transaction is

made to defraud creditors or if it is completed while the

corporation is insolvent. Dyer, 779 S.W.2d at 477; see also Newman

v. Toy, 926 S.W.2d 629, 631 (Tex. App.–Austin 1996, writ denied)

(“A sole shareholder or all shareholders acting in agreement, being

all the beneficial owners of corporate property, may themselves

deal with such property so long as the rights of creditors are not

prejudiced ...”). A bankruptcy trustee has the right to assert the

general claims of creditors for the benefit of the bankruptcy

estate and the creditors. Schimmelpenninck v. Byrne (In re

Schimmelpenninck), 183 F.3d 347, 359 (5th Cir. 1999).

At the time of the Zentech transaction, EDI was a

creditor of SSI according to Texas law. As the Texas Supreme Court

stated, at common law “one who at the time a transfer of property

is made has a right to recover damages in tort may avoid the

transfer as fraudulent if the transfer is made for the purpose of

defeating his right.” Hollins v. Rapid Transit Lines, Inc., 440

S.W.2d 57, 60 (1969) (quoting Murphy v. Dantowitz, 142 Conn. 320,

114 A.2d 194, 196-97 (1955)). Since EDI and other creditors

existed at the relevant time, the bankruptcy court could find that

Guntur’s and Irannezhaad’s ratification of the agreement was

ineffective as a defense to usurpation of the corporate

opportunity.

8 Guntur and Irannezhaad also appeal the bankruptcy court’s

award of monetary damages in favor of EDI for the Zentech stock

that Guntur and Irannezhaad sold in 1997 to TDI-Halter, Inc.

Guntur and Irannezhaad argue that the imposition of a constructive

trust was improper and that at the most EDI is only entitled to

monetary damages based on the value of the stock on January 1, 1991

(the effective date of the stock transfer).

We find their argument unpersuasive. Texas courts have

previously held that imposition of a constructive trust is a proper

remedy when a fiduciary usurps a corporate opportunity. In Canion,

the court held that “[a]n officer or director who diverts [a

corporate] opportunity and embraces it as his own is chargeable as

a constructive trustee for the benefit of the corporation and holds

all of the profits and benefits received therefrom for the

corporation.” Canion v. Texas Supply, Inc., 537 S.W.2d 510, 513

(Tex. Civ. App.–Austin 1976, writ ref’d n.r.e.). As such, EDI is

entitled a constructive trust on the Zentech stock received by

Guntur and Irannezhaad.

When a constructive trust is imposed, a fiduciary who

misappropriated the property of another is liable not only for the

value of the property he misappropriated but also for any profits

he derived from his wrongful possession of the property. Meadows

v. Bierschwale, 516 S.W.2d 125, 129 (Tex. 1974). In this case,

9 that would be the money received by Guntur and Irannezhaad from

selling the Zentech stock (even to the extent the payment exceeded

the value of the stock when they received it in 1991). Since a

constructive trust is an appropriate remedy, it was appropriate for

the bankruptcy court to award monetary damages for the full amount

of money Guntur and Irannezhaad received from TDI-Halter.

Guntur and Irannezhaad finally argue that the bankruptcy

court’s judgment cannot be based upon the Texas Uniform Fraudulent

Transfer Act, Tex. Bus. & Com. Code Ann. § 24.001, et seq. (Vernon

2002) for fifteen different reasons. Their arguments are without

merit because the bankruptcy court’s judgment is based upon

liability for usurpation of a corporate opportunity under Texas

common law and not under the fraudulent transfer statute.

For these reasons, the bankruptcy court did not err in

its conclusions of law nor did it clearly err with respect to any

findings of fact. Finding no reversible error, we affirm.

AFFIRMED.