J. Mark Swinnea v. ERI Consulting Engineers, Inc. and Larry Snodgrass

ACCEPTED
12-14-00288-CV
TWELFTH COURT OF APPEALS
TYLER, TEXAS
9/25/2015 5:04:34 PM
Pam Estes
CLERK

Oral Argument Requested
FILED IN
No. 12-14-00288-CV 12th COURT OF APPEALS
TYLER, TEXAS
9/25/2015 5:04:34 PM
In the Twelfth Court of Appeals PAM ESTES
Clerk
Tyler, Texas

J. MARK SWINNEA
Appellant

v.

ERI CONSULTING ENGINEERS, INC.
AND LARRY SNODGRASS
Appellees

Appealed from the 114th Judicial District Court
Smith County, Texas

APPELLANT’S REPLY BRIEF

Michael E. Gazette Greg Smith
Texas Bar No. 07784500 Texas Bar No. 18600600
Law Office of Michael E. Gazette Nolan Smith
100 E. Ferguson, Suite 1000 Texas Bar No. 24075632
Tyler, Texas 75702 RAMEY & FLOCK, P.C.
Telephone: 903-596-9911 100 E. Ferguson, Suite 500
Facsimile: 903-596-9922 Tyler, Texas 75702
megazette@suddenlink.com Telephone: 903-597-3301
Facsimile: 903-597-2413
gsmith@rameyflock.com
nolans@rameyflock.com
ATTORNEYS FOR APPELLANT
 CONTENTS

Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

Reply Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

I. The Court should review the punitive disgorgement and
punitive damages together, in one excessiveness analysis,
and should reduce these awards according to statutory and
constitutional limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. Because the actual damages do not flow from any cap-
busting conduct, the statutory punitive-damage cap
should apply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

III. Even considered incrementally, the punitive awards are
excessive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

A. The million-dollar punitive-damage award is
excessive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

B. The asset forfeiture in this case is per se a
punitive damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

C. The trial court’s findings do not begin to support
the near total asset forfeiture that has been awarded . . . . 13

D. The facts negate any notion that the current punitive
awards are proper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

E. The thought that Swinnea set out with actual malice,
intending to harm ERI or Snodgrass is a tenuous
notion under the record . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

IV. The excessiveness review should not involve prejudgment
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

ii
 V. ERI’s incessant references to the “unchallenged” nature
of the trial-court findings does not mask or excuse
the lack of an excessiveness analysis guided by actual
conduct and circumstances as opposed to loaded and
conclusory characterizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Conclusion and Prayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Certificate of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Certificate of Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

iii
 AUTHORITIES

CASES:

Alamo Nat. Bank v. Kraus,
616 S.W.2d 908 (Tex. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7

Allstate Ins. Co. v. Kelly,
680 S.W.2d 595 (Tex. App.-Tyler 1984, writ ref’d n.r.e.) . . . . . . . . 1, 2, 26

In re Longview Energy Co.,
464 S.W.3d 353 (Tex. 2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 2, 5

International Bankers Life Ins. Co. v. Holloway,
368 S.W.2d 567 (Tex. 1963) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Pat Baker Co. v. Wilson,
971 S.W.2d 447 (Tex. 1998) (per curiam) . . . . . . . . . . . . . . . . . . . . . . . . 10

S.E.C. v. First City Fin’l Corp.,
688 F.Supp. 705 (D.C. D.C. 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 5

S.E.C. v. Jones,
476 F.Supp.2d 374 (S.D. N.Y. 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

S.E.C. v. Manor Nursing Centers, Inc.,
458 F.2d 1082 ( 2d Cir. 1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

S.E.C. v. Patel,
61 F.2d 137 (2d Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

S.E.C. v. Teo,
746 F.3d 90 (3d Cir. 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

S.E.C. v. Todd,
2007 WL 1574756 (S.D. Cal. May 30, 2007) . . . . . . . . . . . . . . . . . . . . . . . . . 4

iv
S.E.C. v. Tome,
833 F.2d 1086 (2d Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Seminole Pipeline Co. v. Broad Leaf Partners, Inc.,
979 S.W.2d 730, 759 (Tex. App.–Houston [14th Dist.] 1998, no pet.) . . . . 26

Snepp v. United States,
444 U.S. 507, 100 S. Ct. 763, 62 L. Ed. 2d 704 (1980) . . . . . . . . . . . . . . . . . 11

Swinnea v. ERI Consulting Engineers, Inc.,
364 S.W.3d 421 (Tex. App. –Tyler 2012) . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7

OTHER AUTHORITIES:

Charles M. Hosch & Lauren T. Becker, Business Torts,
64 SMU L. REV. 87 (2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

George P. Roach, Texas Remedies in Equity for Breach of
Fiduciary Duty: Disgorgement, Forfeiture, and Fracturing,
45 ST. MARY’S L. J. 367 (2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

George P. Roach, Unjust Enrichment in Texas:
Is it a Floor Wax or a Dessert Topping?
65 BAYLOR L. REV. 153 (2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

RESTATEMENT (THIRD) OF RESTITUTION & UNJUST ENRICHMENT
§ 51 cmt. h (2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

v
 The Reply Argument

The arguments in Swinnea’s principal brief are stated as clearly as we are

capable of. Swinnea stands on them and for the most part will not repeat them.

All we ask the Court is to look past ERI’s bullying tactics, to reach the merits.

ERI simply has no merits explanation for why the sum of the disgorgement and

punitive-damage awards should escape a due-process excessiveness review.

I. The Court should review the punitive disgorgement and punitive
damages together, in one excessiveness analysis, and should reduce
these awards according to statutory and constitutional limits.

The asset forfeiture-disgorgement imposed on Swinnea is a punishment.

While disgorgement that merely compensates a plaintiff or nullifies a defense

windfall is remedial, any further disgorgement or forfeiture is a punishment. This

principle was recently endorsed by the Texas Supreme Court, in In re Longview

Energy Company, a mandamus proceeding in which the court was asked to review

a supersedeas bond amount for excessiveness. 464 S.W.3d 353, 355 (Tex. 2015).

The proceeding focused on Appellate Rule 24, governing supersedeas. Id. The

question was whether to characterize the trial court’s disgorgement of $95.5

million (the only present monetary recovery in the case1) as compensatory

1
The trial court also awarded a constructive trust upon “future net production
revenues.” Id. at 356.

1
damages to be included in the supersedeas amount. Id. at 360.

According to the trial court’s initial judgment (which was later amended

to remove all discussion of how the court had calculated the amount of

disgorgement), the $95.5 million was derived from past production revenues. Id.

at 356. Specifically, that judgment explained the $95.5 million by taking the jury-

found past production revenue ($120 million) then subtracting “the amount the

jury found that the defendants paid to acquire [those assets, $24.5 million].” Id.

at 355 (alteration in original). Consequently, the trial court’s calculation omitted

any credit for (1) the $127 million in jury-determined development costs

expended to earn those production revenues or (2) other production expenses.

Id. at 356. Based on this analysis, the supreme court concluded that the

disgorged sum “may well be punitive,” because it held the defendants liable “in

excess of net gains” from their culpable conduct.

The award may well be punitive. If we can believe the trial court’s
withdrawn characterization of the $95.5 million in its initial
judgment, then Longview was awarded gross past production
revenues less asset acquisition costs, all as found by the jury ($120
million - $24.5 million = $95.5 million), plus future production
revenues net only of royalties and taxes, not all production-related
expenses. A judgment that makes the “defendant liable in
excess of net gains [ ] results in a punitive sanction that the
law of restitution normally attempts to avoid.” Id. at 360 (italics
reflect emphasis by the court, bolding reflects our emphasis),
quoting RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST
ENRICHMENT § 51 cmt. h (2011).

2
This is exactly what Swinnea has been saying.

Disgorgement of revenues gained through the defendant’s culpable

conduct is nonetheless a “punitive sanction” whenever it exceeds the amount

necessary to divest the defendant’s net illicit profit from the transaction (i.e., illicit

benefits less costs incurred or consideration given in acquiring them). This bears

repeating: just because an award disgorges revenues that the defendant gained

via his culpable conduct, the disgorgement will be punitive, not remedial, to the

extent it exceeds the net illicit profit to the defendant. The fact that none of the

gross revenue stream would have been available to the defendants but for their

culpable conduct is not a basis on which to declare a recovery of that revenue to

be a compensatory or remedial recovery.

An unbroken line of securities cases illustrates the point. Because

securities regulations confine the Securities Exchange Commission to relief that

is “remedial relief and is not a penalty assessment,”2 the federal circuit courts, in

civil actions for securities infractions, have many times considered the difference

between remedial disgorgement and punitive disgorgement. As these cases hold,

disgorgement exceeding what is necessary to “make violations unprofitable” is

a punitive recovery. Manor Nursing Centers, Inc., 458 F.2d at 1104 (disgorging of

2
SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1104 (2d Cir. 1972).

3
“profits and income earned on [securities] proceeds” was a prohibited penalty

assessment and not a permitted remedial disgorgement); see also SEC v. Tome, 833

F.2d 1086, 1096 (2d Cir. 1987) (remedial disgorgement limited to “the amount

by which [the defendants] were unjustly enriched”); SEC v. First City Fin’l Corp.,

688 F. Supp. 705, 727 (D.C. D.C. 1988)(limiting profit disgorgement to only the

portion of profit reasonably allocable to the defendant’s violations); accord SEC

v. Patel, 61 F.3d 137, 139-40 (2d Cir. 1995)(remedial disgorgement permitted

under securities laws limited to a “reasonable approximation of profits causally

connected to the violation”); SEC v. Todd, 2007 WL 1574756 at *18 (S.D. Cal.

May 30, 2007) (SEC could not recover disgorgement because it failed to show

that the amount it sought was a reasonable approximation of the defendant’s ill-

gotten gains); SEC v. Jones, 476 F. Supp.2d 374, 386 (S.D. N.Y. 2007)(remedial

disgorgement was not recoverable because the SEC was “unable to set forth any

evidence of specific profits” from the violations); see SEC v. Teo, 746 F.3d 90,

107 (3d Cir. 2014) (in determining limits of remedial disgorgement, court

considers “whether particular profits are legally attributable to the wrongdoing,

constituting unjust enrichment,” or are more properly associated with other

conduct).

Here, the trial court has awarded an asset forfeiture of nearly all Swinnea’s

4
buyout consideration, Amended Add’l FOF 7-9, even though there is no proof

that one cent of this was an illicit profit extracted in the buyout (such as might

occur if a fiduciary breaches his duty in order to inflate the stock’s purchase

price above what its value would have been absent a breach). Indeed, there is no

evidence that Swinnea profited from his breach of duty as to the buyout

consideration: The reciprocal consideration that Swinnea exchanged (his

honestly derived shares) was worth as much as what he received – and would

have been worth the bargain even had Swinnea not participated in forming

AQA. 4 RR 115 (ERI’s accountant testified that Swinnea’s share of the business

had been worth the consideration paid in the buyout); 11/12/2013 RR at 73.

Disgorgement in this situation is punitive.

Remedial disgorgement protects relationships and deters illegal activity

“by making violations unprofitable.” First City Fin’l Corp., 688 F. Supp. at 728.

Disgorgement going beyond the fiduciary’s profit from his breach (i.e., the bump

in price realized as a result of the breach) is, as Longview Energy and the SEC cases

illustrate, a “punitive sanction” subject to both statutory and constitutional

restrictions on excessive punitive damages. To be clear: confiscation of the

consideration ERI paid Swinnea for his ERI stock is not a remedial disgorgement.

So ERI is at a crossroads. If the disgorgement is intended to be remedial,

5
it must be limited to return of the profit from Swinnea’s breach (the sales price

less the stored value reflected in Swinnea’s shares, honestly accrued over a

decade). That incremental amount is zero. Any disgorgement in this case thus

is punitive and must be subject to a constitutional excessiveness review.

ERI’s position – that a Kraus-factor review of the million-dollar punitive-

damage award should be close enough – simply can’t be the answer.3 The

excessiveness review that is necessary is a review of the combined total punishment – the

disgorgement together with the explicit punitive-damage award. This review cannot be

piecemeal. Otherwise, any level of punishment could be justified by merely

reviewing the awards in sufficiently small increments. It thus does ERI no good

to tout this Court’s prior Kraus analysis, which reviewed only the million-dollar

award4 : the moment the district court entered a disgorgement award that was not

remedial but meted out a punishment, it ensured that there should be a

3
Assuming the supreme court’s decision in this case actually authorizes punitive
disgorgement, there is nothing in that decision even hinting that the combined, total
punishment would not be subjected to a constitutional excessiveness analysis. But that is the
position ERI has backed into.
4
This Court’s Kraus analysis considered only the $1 million award. Swinnea v. ERI
Consulting Engineers, Inc., 364 S.W.3d 421, 424 (Tex. App. –Tyler 2012) (“[W]e conclude that
exemplary damages in the amount of $1,000,000.00 is not so contrary to the overwhelming
weight and preponderance of the evidence as to be clearly wrong and manifestly unjust.”). The
trial court, in contrast, has considered only the disgorgement/forfeiture (purporting to
“review” its predecessor’s long-since vacated disgorgement), and has declined to consider the
punitive-damage award. See July 2014 Amended Judgment, p. 1 (“This Court reviewed the
forfeiture award as instructed by the Court of Appeals.”).

6
constitutional excessiveness review of the combined punitive damages and

punitive disgorgement – all $1.72 million of it – at one time, measured relative

to actual damages ($178,000). Further, the Alamo factors do not explicitly or

even impliedly incorporate the ratio analysis that due process requires. See Alamo

Nat. Bank v. Kraus, 616 S.W.2d 908, 910 (Tex. 1981). And no court has reviewed

the entirety of the punishment that has been meted out – not under Krause or

according to due-process principles for excessiveness.

To sustain the current judgment, ERI must provide a constitutionally

satisfactory explanation why it is necessary to punish Swinnea at a level 10 times

greater than actual damages, which is two-and-a-half times the presumptive

constitutional maximum for even the worst cases when severe personal injury

is threatened or a large segment of the public is endangered. ERI has never

missed a beat on its way to record profits, and Snodgrass has obtained the entire

company for what we now know is a bargain price.

What is worse, even in cases of strictly remedial disgorgement, it is clear

that a court can’t effectively review punitive damages for excessiveness without

first knowing the nature and amount of all awards. See International Bankers Life

Insurance Company v. Holloway, 368 S.W.2d 567, 584 (Tex. 1963) (“the remedy

selected in relation to the actual harm done the plaintiff, together with the nature

7
of the acts of the defendants, are proper considerations in weighing the amount

of an exemplary damages award against a complaint of excessiveness and, indeed,

may be such as not to justify an award of exemplary damages.”). Thus, it is always

impermissible (procedurally and constitutionally) to assess the excessiveness of

punitive damages in a partial vacuum, such as has occurred in this case. This is

true whether one categorizes the disgorgement as punitive or remedial. And it

is true notwithstanding that this case, regrettably, has lasted a decade. Cf. ERI

Brief at 6 (accusing Swinnea of merely seeking to prolong the litigation). Even

ERI, in the supreme court, was quick to concede that this Court’s earlier

excessiveness review – the same review ERI now endorses – “was premature,”

necessitating a new excessiveness review following the trial court’s reassessment

of the disgorgement remedy. As ERI confessed respecting this Court’s 2012

excessiveness review,

Due process review of the punitive damage award was premature, because the
trial court must first obey this Court’s mandate to reevaluate the return-of-
consideration damages. . . . After that review, the trial court will no doubt
follow this Court’s instruction that a change in the underlying
damage awards requires a new due process review. ERI Response
to PFR at 3-4 (No. 12-0241 in the Texas Supreme Court)
(emphasis ours).

As previously argued, this was an estoppel. See Swinnea Brief at 20. Now, ERI

argues the opposite position. It does not deny its position in the supreme court

8
or dispute that position’s effect upon the current appeal. It just ignores the

matter.

At trial, even Snodgrass confessed that refunding the stock-purchase

funds without deducting anything for the pre-buyout accrued value of Swinnea’s

shares would not be proper. 4 RR 189 (“I believe that I am owed that money

back, yes, ma’am. Q: And then does the company come with it? A: No. But I’d

be willing to split up the filing cabinets and some of the equipment, if he thought

that was the way we had to go.”). Likewise, the total forfeiture of Malmeba’s

rental income greatly exceeds Snodgrass’s wildest dreams. 4 RR 193 (conceding

that the rental recovery requested in a damage exhibit was incorrect and

explaining: “What I should be asking for . . . is the difference between . . . what

I had to pay [in rentals] and what the true value of the rent is.”).

II. Because the actual damages do not flow from any cap-busting
conduct, the statutory punitive-damage cap should apply.

As a prelude to the new excessiveness review, this Court should revisit its

prior refusal to apply the statutory punitive-damage cap, for reasons previously

discussed and only mentioned briefly now. First, as ERI has not denied and thus

impliedly concedes, the Court acted sua sponte in busting the statutory cap.

Courts, however, generally should confine their decisions to ruling upon issues

9
raised by the parties. Swinnea Brief at 26, citing Pat Baker Co. v. Wilson, 971

S.W.2d 447, 450 (Tex. 1998) (per curiam). Second, Swinnea had no notice in the

trial court of any attempt at cap busting. The first time Swinnea knew that cap

busting was in play was upon reading this Court’s 2012 opinion, seven years

post-trial. Third, respectfully, the criminal offense of securing documents by

deception does not encompass the conduct in this case, where no one has

switched documents or the like. And finally, while the Court has determined that

Swinnea committed acts falling within a cap-busting exception for “securing

execution of documents by deception,” Swinnea, 364 S.W.3d at 424, the fact is

that the punitive damages aren’t associated with that conduct, but with the

formation of AQA. The $178,000 in lost profits – the only damages and thus the

only proper basis of the punitive damages – were sustained not because of any

execution of documents but because AQA’s formation impaired a relationship

with an ERI customer (Merico). Amended Add’l FOF 6(a). The permissible

amount of these unrelated punitive damages is not affected by the commission

of unrelated conduct that has been the source of no compensatory award.

III. Even considered incrementally, the punitive awards are excessive.

A. The million-dollar punitive-damage award is excessive.

Respectfully, the million-dollar punitive-damage award is excessive by

10
itself, both statutorily and constitutionally. The only actual damages recovered

– the $178,000 – is a recovery for the temporary loss of an ERI customer,

Merico. See Amended Add’l FOF 6(a). This loss was not sustained in

conjunction with the buyout. It resulted from formation of AQA (and, more

directly, from Snodgrass’s choice to allow AQA continued bidding access to

ERI-administered asbestos-abatement projects in lieu of a Merico relationship,

5 RR 13-14). And because punitive damages cannot be recovered upon conduct

that does not result in an underlying recovery of actual damages, it follows that

the punitive damages redress the formation of AQA, not the act of securing

documents by deception.

B. The asset forfeiture in this case is per se a punitive damage.

The asset forfeiture in this case begs for a constitutional due-process

review, one integrated into a review of all punitive recoveries. Traditionally,

disgorgement has been “tailored to deter” and confined to “reach[] only funds

attributable to the breach,” so as not to “saddle [the breaching fiduciary] with

exemplary damages out of all proportion to his gain.” Snepp v. United States, 444

U.S. 507, 515-16, 100 S. Ct. 763, 768-69, 62 L. Ed. 2d 704 (1980). Any greater

recovery, namely the near total asset forfeiture awarded in this case, would be

“intentionally punitive,” “a form of specific restitution without counter-

11
restitution,” and “a long step away from traditional remedies in equity . . . based

on the unfounded assumption that forfeiture of assets is similar to forfeiture of

revenues.” George P. Roach, Unjust Enrichment in Texas: Is It a Floor Wax or a

Desert Topping? 65 BAYLOR L. REV. 153, 248, 249-50 (2013). The two are

different. Id. at 250.

Here, the “key fact” is that Swinnea did not gain his partnership interest

in a non-consensual or unconscionable manner. See id. To afford the trial court’s

asset forfeiture without compensating Swinnea for the initial purchase of his

shares (or their pre-buyout appreciation) would not only mete out a clearly

punitive remedy, but would contradict “a long string of opinions in Texas and

elsewhere that requires the principal to reimburse the fiduciary” for the value of

any consideration he has parted with. Id. The asset-forfeiture remedy, while

apparently now permissible, still should disgorge “only funds attributable to the

breach,” id., or else it should be considered a penalty triggering all statutory and

constitutional protections against excessive punishment. See George P. Roach,

Texas Remedies in Equity for Breach of Fiduciary Duty: Disgorgement, Forfeiture, and

Fracturing, 45 ST. MARY’S L. J. 367, 436 (2014); see also Charles M. Hosch &

Lauren T. Becker, Business Torts, 64 SMU L. REV. 87, 107 (2011) (“[F]orfeiture

unlinked to actual damages, for the purpose of ‘preventing’– i.e., deterring – such

12
abuses sounds very much like exemplary or punitive damages. . . . So, if

forfeitures are to be extended beyond fees received, further equitable principles

for when, how, and how much forfeiture is appropriate will likely need to be

developed.”).

C. The trial court’s findings do not begin to support the near
total asset forfeiture that has been awarded.

ERI says the trial court’s findings and conclusions support a full $720,000

disgorgement on top of the already burdensome punitive-damage recoveries. But

these mostly conclusory assessments don’t come close to a sufficient basis for

such a clearly excessive, punitive forfeiture.

Gravity and Timing. In considering the “gravity and timing” of

Swinnea’s conduct, the trial court credits Swinnea with a “premeditated”

purpose of violating the plaintiffs’ trust (translated, he didn’t disclose AQA’s

formation, ultimately leading to a temporary loss of one ERI customer).

Amended Add’l FOF #1. Then, the court cites a “calculated course of conduct”

and a “multifaceted plot,” perhaps referencing the additional allegation (never

proved in the evidence or expressly found by the trial court) that Swinnea didn’t

work the contractually required average of 36 weekly hours (a matter for which,

in any event, no damage was ever found). Id. But beyond this, the trial court

13
leaves it to anyone’s guess how the “gravity and timing” of Swinnea’s conduct

might merit a combined recovery exceeding 10.6 times the plaintiffs’ actual

damages. It doesn’t.

Level of Fault. In considering the “level of intent or fault,” the trial court

has basically punted, stating only the conclusion that Swinnea acted with intent

“to cause injury.” Amended Add’l FOF 2. This conclusion in turn hangs on the

slenderest of factual threads: Swinnea’s alleged statement, made when Snodgrass

was on the phone buying a luxury car, to the effect that Snodgrass – not Swinnea

– was going to “run this company into the ground,” after which Swinnea and the

others would be free to buy ERI back for “pennies on the dollar.” 3 RR 129; see

also 4 RR 53-54. This may in some weak sense be relevant to motive, but it

hardly proves a gotcha case of such malice as might support a massive, punitive

asset forfeiture. Rather, the statement, presuming it was made, was an opinion

addressing Snodgrass’s business acumen.

Further, the trial court’s conclusions about Swinnea’s intent must be

leavened by the facts that (1) Swinnea and his wife completely divested their ties

with AQA within a few months after AQA’s formation, 3 RR 6, 95, (2) AQA,

as a contractor, operated a complimentary business to ERI’s function as an

engineering consulting firm, e.g., 3 RR 26, 148, (3) as ERI’s own vice president

14
agreed, the potential loss of Merico was never a threat to “the driving force of

ERI for the future,” 4 RR 20, rather, “having two companies . . . focused on

taking care of our clients” would benefit ERI in the long run, id., and (4)

Swinnea actually won back Merico (the lone customer affected by AQA’s

formation) as an ERI customer, 5 RR 14, such that ERI indisputably now enjoys

relationships with both companies. 5 RR 14; accord 5 RR 43.

The trial court appears to assume that a gateway finding of intentional

breach magically justifies any level of punishment. That notion would render

punitive damages limitless in virtually all cases where they can be awarded. And

it would offer no clue as to why a whole-nine-yards asset forfeiture might be

needed here, in the wake of the already robust punitive-damage recovery.

Benefit to ERI and Snodgrass. In purporting to consider the benefit to

the plaintiffs, the trial court does just the opposite, ignoring the fact that the

buyout made Snodgrass ERI’s sole owner – just in time to see the company

double its revenues and multiply its profitability. Amended Add’l FOF 3. The

company’s $800,000 profit in 2004 implies a benefit to Snodgrass of $400,000

from the buyout – in just that one year. 11/12/2013 RR at 73.

The ongoing ERI-AQA relationship has afforded ERI another tangible

benefit, which the trial court also ignores. And, thanks directly to Swinnea’s

15
efforts during the period in issue, 5 RR 14, Merico is again an ERI business

associate. 5 RR 14, 43. While the trial record does not quantify this latter benefit,

it is surely substantial. The evidence was that by the time of trial AQA was a

“major contributor” to ERI’s revenue, 3 RR 21, partnering with ERI on perhaps

a quarter of ERI’s projects (90% of AQA’s work), 3 RR 144, both companies

were “doing well” and their relationship was thriving. E.g., 3 RR 143; 4 RR 30.

Considering these benefits, it is safe to say that Snodgrass – now sole owner of

a prosperous company with enhanced customer relationships – came out far

better than Swinnea, and clearly better than if AQA had not been formed and

the buyout had never closed. The trial court gives no basis for ignoring these

substantial benefits, and there is no logical reason why they would not make the

recovery of punitive damages and a punitive asset forfeiture all the less

defensible.

Centrality of Conduct. The trial court says Swinnea directed his conduct

“at the core elements of ERI.” Amended Add’l FOF 4. But just how does the

formation of a complimentary business with the mere temporary loss of one

customer justify heaping a near total asset forfeiture on top of an already weighty

punitive-damage award? The trial court doesn’t say, and neither does ERI.

Harm. The trial court’s consideration of the “threatened or actual harm,”

16
Amended Add’l FOF 5, fails miserably, mostly for reasons already discussed:

The actual harm – a temporary loss of one client, which may have been fully

neutralized before trial – is insufficient to sustain a million-dollars in punitive

damages, let alone addition of another $720,000 in punitive disgorgement.

Indeed, before this litigation, Snodgrass had never even thought to request his

money back. 3 RR 46. Even ERI’s Chris Power conceded that he had always

thought AQA’s formation would benefit ERI in the long run. 4 RR 20. And as

stated, any notion that Swinnea angled for ERI’s destruction hinges on the

misreading of a singular opinion (made when Snodgrass was on the phone

buying a luxury car) that Snodgrass was about to run the company in the ground.

Adequacy of Other Remedies. On this factor, the trial court offers

nothing but a string of loaded adjectives, saying that lost profits and a punitive-

damage recovery would somehow be “inadequate to remediate under the

circumstances,” branding Swinnea’s conduct “willful, malicious,” and “highly

offensive,” and deeming Swinnea’s culpability sufficiently “significant” that

“disgorgement of the ill-gotten profits and gains” was also required. Amended

Add’l FOF 6. But there is absolutely no evidence that Swinnea accrued any such

“profits or gains.” Rather, he by all accounts gave up as much in consideration

(shares of stock he had come by honestly) as he collected in the buyout. At

17
bottom, this finding is simply inexplicable, given that the actual damages fully

compensate the loss, and the addition of another 5.6 times that amount as

punitive damages surely is sufficient to “protect the trust relationship.”

Beyond these conclusory “findings,” the trial court simply stated that each

of its three disgorgement awards5 was “fair, equitable and just” under

unspecified “facts and circumstances of this case.” Amended Add’l FOFs 7, 8,

and 9. Of course, the circumstances of the case include the existing assessment

of a million dollars in punitive damages and the trial court’s failure to find any

actual damages beyond the brief loss of a single customer relationship – a loss

that Snodgrass had his opportunities to avoid, that Swinnea worked to correct

(by successfully re-establishing ERI’s Merico customer relationship), and that

stems from nothing more sinister than Swinnea’s brief participation, right

alongside ERI’s current executive VP, in forming a complimentary business that

since has bestowed ERI with a tangible boost to its sales volume.

The trial court’s arbitrary findings lack any sign that the court (which did

not preside over the trial) ever truly analyzed Swinnea’s factual conduct or

adequately considered the limited nature of the actual damages flowing from that

5
$437,500 in buy-out cash, the entire $150,000 value of the transferred limited
partnership interest [Malmeba], and all $133,200 in rentals for ERI’s 3-year occupancy of
Malmeba’s facilities. Amended Add’l FOFs 7, 8, and 9.

18
conduct, let alone addressed the fact that ERI’s subsequent prosperity appears

to have actually been aided by the conduct. It is not enough to observe, in

conclusory fashion, that Swinnea’s conduct was intentional and constituted a

breach of fiduciary duty, throw a few adjectives on the campfire, and then call

it a day. Yet, that is a fair assessment of amended additional findings by which

the trial court has analyzed the current disgorgement.

The trial court’s hollow recitation of platitudes cannot be tolerated.

Otherwise, constitutional due-process will become a toothless concept. If the

court would have taken fair account of the total facts and circumstances, the

excessiveness of the recoveries would have been glaringly obvious.

D. The facts negate any notion that the current punitive awards
are proper.

When considered in context of the material facts, the disgorgement or

asset-forfeiture award and the million-dollar punitive-damage award mete out far

more punishment than constitutional due process could ever allow. After all:

Swinnea came about his ERI interest honestly, having bought ERI

together with Snodgrass in 1992. 2 RR 21. The buyout talks started when

Swinnea approached Snodgrass about buying Snodgrass out. 2 RR 42. Snodgrass

made a proposal. 2 RR 45-46. Swinnea countered with a proposal by which

19
Snodgrass would instead buy out Swinnea, on terms that were more favorable

to Snodgrass.6 Snodgrass accepted.

The resulting buyout agreement included an employment contract under

which Swinnea agreed to work what would average to 36 hours per week during

each three-month period. 2 RR 53; see also 3 RR 51. Extrapolating from his

personal observation, Snodgrass surmised that Swinnea didn’t meet the

contractual minimum hours. 4 RR 173. But Snodgrass couldn’t say for sure that

Swinnea didn’t satisfy this requirement. 4 RR 172. He knew Swinnea didn’t work

a full 36 hours each and every week. 4 RR 172. But the contract didn’t require that.

Id.

A month before the buyout closed, Swinnea and another ERI employee,

Chris Power, helped their wives set up an abatement contracting business, AQA.

2 RR 63-66. ERI (a consulting engineering company) and AQA (an abatement

contractor) were in “completely different,” albeit complimentary, businesses. 3

RR 26, 148. At the time, Power had been preparing for the possibility of leaving

ERI, to open a consulting business of his own, Power Environmental

Consulting. 3 RR 38, 41, 109. If Power would have launched that business, it

6
For instance, the proposal for a buy out of Swinnea’s shares provided that ERI would
pay building rentals at a “considerably” lower rate than what Snodgrass had requested in his
proposal that Swinnea buy out Snodgrass’s shares. 2 RR 49-51.

20
would have competed with ERI directly. But Power’s involvement in a

contracting business such as AQA could actually benefit ERI, the predominant

consulting company in the area, at least in the longer term. 3 RR 41; 5 RR 140,

148. As it unquestionably did. See 5 RR 101 (At trial, Snodgrass said he wanted to

see AQA prosper, because it was a way of rewarding Power for his work for

ERI); see also 5 RR 140.

Ms. Power and Ms. Swinnea were AQA’s officers and AQA employees,

while Swinnea and Power served as AQA directors. 2 RR 63-66. Neither

Swinnea nor Power told Snodgrass about their involvement with this new

company. Swinnea at trial regretted not having disclosed the AQA relationship.

2 RR 83, 149.

Within a few months after AQA’s formation, Snodgrass learned of

Swinnea and Power’s involvement in AQA, and he, too, was disappointed. 3 RR

46. But he never discussed getting his money back. 3 RR 46.

Merico, AQA’s chief competitor in asbestos remediation, “didn’t have a

problem with AQA as long as they weren’t competing against [Merico] for work

in the asbestos [business] and wouldn’t be bidding on [asbestos] projects

through ERI.” 5 RR 12. Snodgrass, however, refused to put any limit on ERI’s

budding relationship with AQA. 5 RR 13. So for that reason Merico ceased

21
dealings with ERI. 5 RR 13.

For at least a year, Merico didn’t bid on any of ERI’s projects and didn’t

invite ERI to any of Merico projects. 5 RR 14. When Merico did this, it freed

ERI’s personnel to refocus their efforts on other, more profitable work. 3 RR

70. (Merico performed asbestos remediation, which to a consultant like ERI

represented a “low profit,” cyclical business that by Snodgrass’s admission ERI

was trying to “diversify away from,” 4 RR 123, whereas mold remediation work,

which Merico didn’t undertake, was high profit. 3 RR 70.)

After a year or so, Swinnea, on ERI’s behalf, started inviting Merico to

once again bid ERI projects. 5 RR 14. As a result of Swinnea’s action, Merico in

the months before trial had been “bidding on quite a bit of ERI’s projects

again.” 5 RR 14; accord 5 RR 43. Merico’s principals refused Snodgrass’s requests

that they write a letter stating that the start up of AQA was the reason Merico

temporarily quit doing business with ERI. As they told Snodgrass, “we felt like

that we gave Larry the opportunity to have kept our relationship going if he

would not have let AQA bid on ERI’s asbestos projects” and, thus, they didn’t

think the letter Snodgrass requested would have been truthful. 5 RR 15-16.

A few months after starting AQA, the Swinneas left it, selling out to Tracy

Power.

22
 As of trial, Chris Power remained ERI’s executive vice president, 3 RR

123, while his wife owned and operated AQA. The companies thus continued

in a close relationship, with the great majority of AQA’s business coming from

ERI administered projects. 3 RR 49. When asked whether he would have given

up AQA if it was hurting ERI, Power – ERI’s employee and witness – explained

that “having two companies that were focused on taking care of our clients

would, in the long-term – the loss of Merico was – was not going to be the

driving force of ERI for the future.” 4 RR 20. This was a reference partly to the

fact that Merico’s business niche (asbestos abatement) was a slowly dying

industry, a matter that Merico’s own principals confirmed. 5 RR 9.

In contrast to Merico’s declining asbestos work, ERI’ s and AQA’s post-

buyout prospects were bright. AQA was “doing well.” 3 RR 143. So was ERI.

4 RR 178. During the post-buyout period, as Snodgrass conceded, ERI was flush

with revenues from a “huge” project. 4 RR 178. While Snodgrass in hindsight

thought Swinnea had tried to “be an anchor to drag [ERI] down,” he also

conceded that ERI had done well. 4 RR 182; 4 RR 201 (“Every year since Mark

and I owned the company, we have broke [sic] records.”). And so it had. The

company’s declared annual profit in 2004 (the year before trial) exceeded

$800,000, not much less than double the cash consideration Snodgrass paid in

23
the buyout.

Accordingly, ERI’s own CPA of 10 years, Keith Steiffel, agreed the price

paid in the buyout was “a good price.” 4 RR 115. Snodgrass, too, agreed that at

the time of trial, even in the midst of a down year revenue-wise, the company

still was worth what was paid, and Snodgrass was not in any mood to sell it. 4

RR 161-62, 190. And Swinnea’s accounting expert confirmed that the company’s

post-buyout revenue streams suggested a steady progression of values for

Swinnea’s half interest in the company:

• $613,000 to $800,000 as of the August 2001 buyout,

• $979,000 at the end of 2002, and

• $1,467,000 by the end of 2004. 11/12/2013 RR at 73.

Just for Swinnea’s former half interest.

In summary: Swinnea helped to start (and for a brief six months

supported his wife in co-managing) the environmental abatement contractor

AQA. He didn’t tell ERI or Snodgrass at the time, and in this may have

breached a fiduciary duty. But as Swinnea has argued elsewhere, AQA, being a

contractor, was in a complimentary business to ERI (which is an environmental

consultant). ERI has many customers throughout the state. AQA’s formation

caused loss of exactly one of them (Merico). Before that loss ever occurred, ERI

24
was offered the undisputed opportunity to entirely avert the loss. (Merico told

ERI that the companies could continue their business relationship if ERI agreed

AQA would not be invited to bid for ERI-supervised projects. 5 RR 12-16.) ERI

and AQA developed a prosperous relationship of their own, which necessarily

offset the loss of Merico in whole or part, yet the damage award ignores this

crucial fact.

E. The thought that Swinnea set out with actual malice,
intending to harm ERI or Snodgrass is a tenuous notion
under the record.

ERI makes much of a determination that Swinnea meant ERI harm. The

determination hinges on a the fact, already mentioned, that Swinnea is purported

to have told Power and another ERI employee to “be patient because we can

buy this company back 50 cents on the dollar. . . . Larry’s going to run it into the

ground.” 3 RR 129; see also 4 RR 53-54 (“If y’all will just kind of hang in there,

. . . Larry is basically probably going to run this thing into the ground, and we

can probably buy this thing back on [sic] pennies on the dollar”). Viewed

reasonably, this statement is a comment on Snodgrass’s business abilities and a

prediction of what he would do when running the company by himself.

Swinnea’s prediction surely also referenced the fact that before the buyout,

Snodgrass had not put nearly as many hours into the business as Swinnea had.

25
(By Snodgrass’s own account, Swinnea averaged 55 to 60 hour weeks, year after

year, while Snodgrass typically worked a standard 40 hour week. 4 RR 163.)

In any event, the company has prospered.

IV. The excessiveness review should not involve prejudgment interest.

ERI’s notion that prejudgment interest can be used to inflate the actual-

damage side of the excessiveness comparison is wrong. (ERI is also wrong to

presume “prejudgment interest of $267,000.” ERI Brief at 27. The trial court’s

judgment explicitly awards $88,370.82 in prejudgment interest and not a penny

more. 2014 Amended Judgment, p. 3.) This Court’s decision in Allstate Insurance

v. Kelly settled the matter, holding that prejudgment interest is not a part of actual

damages. Allstate Ins. Co. v. Kelly, 680 S.W.2d 595, 611 (Tex. App.–Tyler 1984,

writ ref’d n.r.e.) (DTPA trebling would be capped at three times actual-damage

award, excluding prejudgment interest, because prejudgment interest is not a

component of actual damages). Other cases directly hold that prejudgment

interest is not to be considered in evaluating punitive damages for excessiveness.

See, e.g., Seminole Pipeline Co. v. Broad Leaf Partners, Inc., 979 S.W.2d 730, 759 (Tex.

App.–Houston [14th Dist.] 1998, no pet.). Thus, a proper ratio analysis reveals

that the million-dollar punitive-damage award of itself already reflects a huge 5.6

to 1 ratio of actual to punitive damages. On adding the $720,000 in punitive

26
asset forfeiture, the ratio balloons to nearly 10 to 1. It bears repeating, the ratio

of actual damages to the combined punishments is 10 to 1. There is no reason

why this combined sum should get a free pass from constitutional scrutiny.

V. ERI’s incessant references to the “unchallenged” nature of the trial-
court findings does not mask or excuse the lack of an excessiveness
analysis guided by the actual conduct and circumstances as
opposed to loaded and conclusory characterizations.

Throughout appeal, ERI has seized every opportunity to say that the trial

court’s findings are “unchallenged.” By this, ERI means the appeal did not raise

a factual-sufficiency attack. That, of course, admits only that the evidence was

conflicting. It does not concede ERI’s sweeping characterizations. Nor does it

concede ERI’s premise, which appears to be that no punishment can be too

large in this situation. And it also doesn’t concede that the punishment’s

excessiveness can be determined without considering Swinnea’s actual conduct

and its real-life factual context. But that is exactly what ERI attempts in this case.

ERI and the trial court say no more than that Swinnea has intentionally breached

fiduciary duties and, thus, the punishment dispensed – nearly 10 times actual

damages – must be okay. Due process and excessiveness reviews don’t work that

way. Rather, the awards must be considered in light of the facts and not just

their broad legal characterizations.

27
 Conclusion and Prayer

Do not be distracted or deterred by ERI’s bullying tactics. It is

fundamental to our justice system that every defendant have the law correctly

applied to his case, regardless how the defendant and his conduct are portrayed.

The Court should reverse the prior disgorgement and punitive-damage

awards. It should undertake a full excessiveness review, to ensure compliance

with statutory as well as constitutional maxima. And it should cap the sum of all

such recoveries – whether denominated as punitive damages or as

disgorgement/forfeiture – at $357,202.10 (i.e., an amount equaling two times

recoverable actual-damages).7 Of course, Swinnea also prays for all other relief

that this appeal may authorize.

7
In any event, the Court should reject ERI’s invitation to use the disgorgement to
leverage a higher punitive-damage ceiling. Here, where the disgorgement indisputably does not
reflect an additional ERI injury, it makes no sense that the disgorgement would be lumped
with actual damages in evaluating the ratio of punishment to damages.

28
 Respectfully submitted,

/s/ Greg Smith
Greg Smith
State Bar No. 18600600
Nolan Smith
Texas Bar No. 24075632
RAMEY & FLOCK, P.C.
100 East Ferguson, Suite 500
Tyler, TX 75702
Telephone: (903) 597-3301
Facsimile: (903) 597-2413
gsmith@rameyflock.com
nolans@rameyflock.com

Michael E. Gazette
Law Office of Michael E. Gazette
100 East Ferguson, Suite 1000
Tyler, TX 75702
Telephone: (903) 596-9911
Facsimile: (903) 596-9922
megazette@suddenlink.com

COUNSEL FOR APPELLANT,
J. MARK SWINNEA

29
 Certificate of Service

The undersigned certifies that a copy of the above and foregoing

document was served upon counsel for Appellees in accordance with the

applicable Texas Rules of Civil Procedure on this the 25th day of September,

2015, on the following:

Via email drace@icklaw.com
Deborah Race
Ireland, Carroll & Kelley, P.C.
6101 S. Broadway, Suite 500
Tyler, TX 75703

Via email mahatchell@lockelord.com
Mike A. Hatchell
Locke Lord, LLP
100 Congress Avenue, Suite 300
Austin, TX 78701

Via email randerson@gillenanderson.com
Roger W. Anderson
Gillen & Anderson
613 Shelley Park Plaza
Tyler, TX 75701

/s/ Greg Smith
Greg Smith

30
 CERTIFICATE OF COMPLIANCE

1. This brief complies with the type-volume limitation of TEX. R. APP. P.
9.4 because it contains 6,411 words, excluding the parts of the brief
exempted by TEX. R. APP. P. 9.4(i)(2)(B).

2. This brief complies with the typeface requirements of TEX. R. APP. P.
9.4(e) because it has been prepared in the proportionally spaced
typeface using Word Perfect X5 in 14 point Garamond font.

Dated: September 25, 2015.

/s/ Greg Smith
Greg Smith

31