AUSTIN – Luring a partner into a buyout while plotting to compete against him constitutes fraud and requires forfeiture even if the victim can't prove damages, the Supreme Court of Texas decided on May 7.
The justices resolved a disagreement between Smith County District Judge Cynthia Kent, who ordered Mark Swinnea to forfeit $720,700 to Larry Snodgrass, and 12th District appeals judges who ruled that Swinnea owed Snodgrass nothing.
"The remedy of forfeiture is necessary to prevent such abuses of trust, regardless of proof of actual damages," Justice Paul Green wrote.
He wrote that "a fiduciary who breaches his duty should not be insulated from forfeiture if the party whom he fraudulently induced into contract is ignorant about the fraud, or fails to suffer harm."
Although the justices agreed with Kent in principle, they criticized her calculations and directed her to review the forfeiture amount.
They also faulted her findings that Swinnea owed Snodgrass $300,000 in lost profits and $1 million in punitive damages, and they directed the appeals court to trim those figures.
Swinnea and Snodgrass teamed up in asbestos abatement in 1992, as ERI Consulting Engineers. ERI paid rent to Malmeba Co., another business they owned.
In 2001, ERI paid Swinnea $497,500 to redeem his stock, and Snodgrass transferred his half of Malmeba to Swinnea.
ERI agreed to employ Swinnea for six years and continue renting from Malmeba, while Swinnea agreed not to compete with ERI.
When Snodgrass made the deal, he didn't know that the wives of Swinnea and ERI employee Chris Power had created a new company, Air Quality Associates.
Snodgrass didn't catch on even when ERI accepted bids from Air Quality Associates.
He found out from Jeff Shannon of Merico, an asbestos abatement contractor who found himself bidding against the wives.
Swinnea and his wife formed another firm, Brady Environmental.
They told Snodgrass they would clean homes and air ducts.
Instead, they performed asbestos projects with a method that didn't require a consultant.
Snodgrass fired Swinnea, who obtained an asbestos consulting license the next day.
Snodgrass moved ERI out of Malmeba's building, and he sued Swinnea.
After a bench trial, Kent ordered forfeiture of $437,500 for the buyout, $150,000 for half of Malmeba, and $133,200 for rent ERI paid to Malmeba.
She awarded $300,000 in profits ERI lost from damage to its association with Merico, and she added $1 million in punitive damages.
Appeals judges of the 12th District in Tyler wiped out the awards, finding ERI failed to prove actual damages or that Swinnea obtained any ill-gotten gain.
In reversing the 12th District, the Supreme Court relied on a 1999 opinion that forfeiture removes any incentive for an agent to stray from a duty of loyalty.
According to Green, however, Kent's forfeiture didn't fit the circumstances.
He wrote that ERI apparently lost about $178,000 in profits, not $300,000.
"ERI proved lost profit damages; its entitlement to recover them survives the trial court's error in awarding too much," he wrote.
He wrote that 12th District judges should first adjust actual damages from lost profits and then adjust punitive damages.
Then, he wrote, they should remand the case to Kent to adjust the forfeiture.
Sarah Duncan represented ERI. Gregory Smith represented Swinnea