600 Congress Avenue, Suite 2200
Austin, TX 78701
Telephone: 512-305-4700
Fax: 512-305-4800
www.lockelord.com
Mike A. Hatchell
Direct Telephone: 512-305-4752
Direct Fax: 512-391-4752
mahatchell@lockelord.com
December 31, 2015
12/31/2015
The Hon. Pam Estes, Clerk
Twelfth Court of Appeals
1517 West Front Street, Suite 354
Tyler, Texas 75702
Re: No. 12-14-00288-CV; J. Mark Swinnea v. ERI Consulting Engineers, Inc.
and Larry Snodgrass; In the Twelfth Court of Appeals
Dear Ms. Estes:
Subject to the accompanying motion for leave to file this post-argument
letter brief, the Appellees appreciate your forwarding the following to the Court:
At the oral argument of this case on November 17, 2015, the Court asked if
there was further authority on the issue of whether sums disgorged in equity for
breach of fiduciary duty can be characterized as punitive damages and then, in this
case, combined with the specific award of punitive damages for purposes of
analyzing the “proportionality” element under a United States Constitution “due
process” analysis.
After the argument, Appellees researched the issue further nationwide and in
Texas. Additional authorities identified from that research and elsewhere are
supplied in the following charts:
The Hon. Pam Estes, Clerk
December 31, 2015
Page 2
NON-TEXAS AUTHORITIES:
§43, Restatement (Second) of Torts, cmt. “When the compensation of the trustee
is reduced or denied, the reduction or
denial is not in the nature of an
additional penalty for the breach of trust
but is based upon the fact that the
trustee has not rendered or has not
properly rendered the services for which
compensation is given,” as quoted in
Burrow v. Arce, 997 S.W.2d 229, 238
(Tex. 1999).
Turnbow v. Life Partners, Inc., No. “Disgorgement wrests ill-gotten gains
3:11-CV-1030-M, 2013 WL 3479884, from the hands of the wrong-doer” and
at *18 (N.D. Tex. July 9, 2013). is intended to be “remedial and not
punitive.”
S.E.C. v. Koenig, 532 F. Supp. 2d 987, “The SEC has also established by a
994 (N.D. Ill. 2007), aff'd in part and preponderance of the evidence that it is
remanded, 557 F.3d 736 (7th Cir. 2009). entitled to disgorgement. Disgorgement
is an equitable, not a punitive remedy
and should be fashioned so as to deprive
Koenig of the unjust enrichment he
derived from his securities violations.
Lipson, 278 F.3d at 664. The
disgorgement figure calculation is
discretionary and need not be exact.
SEC v. First Jersey Secs. Inc., 101 F.3d
1450, 1474-75 (2d Cir. 1996).
Ambiguity relating to the calculation
should be resolved against Koenig. SEC
v. Lorin, 76 F.3d 458, 462 (2d
Cir.1996).
The Hon. Pam Estes, Clerk
December 31, 2015
Page 3
U.S. S.E.C. v. Blackwell, 477 F. Supp. “Defendants argue that this court may
2d 891, 915 (S.D. Ohio 2007). offset a criminal fine against a
disgorgement order if it finds that the
criminal fine either served the same
purpose as the requested disgorgement,
or that the criminal fine was intended to
be, at least in part, restitutionary in
nature. In support of these propositions,
Defendants rely on SEC v. Monarch
Funding Corp., 1996 WL 348209 at
*10, 1996 U.S. Dist. LEXIS 8756 at *35
(S.D.N.Y. June 24, 1996). In Monarch,
the SEC sought disgorgement in the
amount of $1,566,000 against defendant
Bertoli (“Bertoli”) even though in a
prior criminal action, Bertoli was
assessed a $100,000 criminal fine. The
court rejected Bertoli’s contention that
disgorgement would violate the
constitution’s prohibition against double
jeopardy because disgorgement is not
punitive in nature. Id. at 1996 WL
348209 at *10, 1996 U.S. Dist. LEXIS
8756 at *34.
F.T.C. v. Febre, 128 F.3d 530, 537 (7th “[D]isgorgement is designed to be
Cir. 1997). remedial and not punitive. Rowe v.
Maremont Corp., 850 F.2d 1226, 1241
(7th Cir. 1988). “[D]isgorgement does
not penalize, but merely deprives
wrongdoers of ill-gotten gains.” CFTC
v. Hunt, 591 F.2d 1211, 1222 (7th Cir.
1979). As an equitable remedy,
disgorgement is meant to place the
deceived consumer in the same position
he would have occupied had the seller
The Hon. Pam Estes, Clerk
December 31, 2015
Page 4
not induced him to enter into the
transaction. Disgorgement also prevents
the defendant from being unjustly
enriched by his fraud. Randall v.
Loftsgaarden, 478 U.S. 647, 671–72,
106 S.Ct. 3143, 3157–58, 92 L.Ed.2d
525 (1986).
TEXAS AUTHORITIES:
International Bankers Life Ins. Co. v. “[A] recovery of the consideration
Holloway, 368 S.W.2d 567, 584 (Tex. paid as a result of fraud constitutes
1963). actual damages, and will serve as a
basis for recovery of exemplary
damages.” Id. at 583 (quoting Briggs
v. Rodriguez, 236 S.W.2d 510 (Tex.
Civ. App.—San Antonio 1951, writ
ref’d n.r.e.) (emphasis added).
“It is consistent with equitable
principles for equity to exact of a
defaulting corporate fiduciary not
only the profits rightfully belonging to
the corporation but an additional
exaction for unconscionable conduct.”
(Emphasis added).
Nabours v. Longview Savs. & Loan “[W]here equity requires the return of
Ass’n, 700 S.W.2d 901 (Tex. 1985). property, this ‘recovery of consideration
paid as a result of fraud constitutes
actual damages and will serve as a basis
for the recovery of exemplary
damages.’” Id. (quoting Holloway, 368
S.W.2d at 568).
The Hon. Pam Estes, Clerk
December 31, 2015
Page 5
In the Estate of Preston, 346 S.W.3d “While the mere grant of injunctive
137 (Tex. App.—Fort Worth 2011, no relief will not support an award of
pet.). punitive damages, the supreme court has
recognized a ‘recovery of property’
exception to the rule requiring the
recovery of actual damages, noting that
‘where equity requires the return of
property, this ‘recovery of the
consideration paid as a result of fraud
constitutes actual damages and will
serve as a basis for the recovery of
exemplary damages.’” Id. at 169-770
(quoting Nabours, 700 S.W.2d at 904-
05). (Emphasis added.)
Scott v. Sebree, 986 S.W.2d 364, 368 “We do not believe that by using the
(Tex. App.—Austin 1999, pet. denied). term ‘actual damages’ in [the statutory
fraud context] the legislature intended to
preclude a defrauded party from
utilizing an appropriate equitable
substitute for out-of-pocket or benefit-
of-the-bargain damages.” (Emphasis
added)
Lesikar v. Rappeport, 33 S.W.3d 282 “[T]he Supreme Court has authorized
(Tex. App.—Texarkana 2000, pet. the recovery of punitive damages in
denied). actions sounding in equity, even where
there is no award of typical actual
damages.” Id. at 310 (citing Nabours;
later discussing and quoting from
Holloway, 368 S.W.2d at 584).
(Emphasis added.)
The Hon. Pam Estes, Clerk
December 31, 2015
Page 6
Procom Energy, L.L.A. v. Roach, 16 Rejecting an argument that “the
S.W.3d 377, 385 (Tex. App.—Tyler recovery of actual damages is a
2000, pet. denied). prerequisite to an award of exemplary
damages: “Note 3 of the Nabours
opinion authorizes punitive damages
where these damages are incident to
equitable relief when it involves the
return of property.” Id. “The ‘return of
property’ exception, however, is not as
narrow as Nabours seems to imply. In
International Bankers Life v. Holloway,
368 S.W.2d 567, 584 (Tex. 1963), the
court sanctioned the recovery of
punitive damages in an equitable action
in which the plaintiff sought to recover
usurped corporate profits.” Id. “Thus,
under the Holloway opinion, we
conclude that punitive damages may be
recoverable where equitable relief is
granted and the promised interest has
not been conveyed, despite the absence
of jury findings of actual damages.” Id.
In re Longview Energy Co., 464 S.W.3d Quoting Burrow v. Arce for the
353, 361 (Tex. 2015). proposition that “equitable forfeiture ‘is
not mainly compensatory … nor is it
mainly punitive’ and ‘cannot … be
measured by … actual damages’” and
also holding: “[d]isgorgement is
compensatory in the same sense
attorney fees, interest, and costs are, but
it is not damages.”
The Hon. Pam Estes, Clerk
December 31, 2015
Page 7
Ex parte Ward, 964 S.W.2d 617 (Tex. “Until recently, the federal courts were
Crim. App. 1998) (en banc). at odds as to whether federal forfeiture
under the civil statutes constituted
‘punishment’ as to which the Double
Jeopardy Clause of the Fifth
Amendment applied. However, the
United States Supreme Court recently
resolved this confusion by concluding
federal civil forfeitures do not constitute
‘punishment’ for purposes of the Double
Jeopardy Clause because they are civil
in rem proceedings which are neither
punitive nor criminal in nature.” Id. at
625-26 (citing United States v. Usery,
518 U.S. 267 (1996)).
2007 Infiniti G35X Motor Vehicle, VIN “Traditional civil forfeitures, in rem
JNKBV61E17M708556 v. State, No. 06- proceedings, are not considered
13-00057-CV, 2014 WL 991970, at *1 punishment or fines and thus are not
n.1 (Tex. App.—Texarkana Mar. 13, subject to the Eight Amendment’s
2014, no pet.). prohibition against excessive fines.”
The Hon. Pam Estes, Clerk
December 31, 2015
Page 8
These additional authorities confirm that disgorgement is a remedy, not
punishment, with the disgorged sums acting as an “additional exaction” for actual
damages that are difficult to prove because of the nature of the wrong. As such,
disgorged sums cannot be moved to the other side of the equation for a “due
process” analysis under the proportionality criterion adopted in the United States
Supreme Court cases
Respectfully submitted,
LOCKE LORD LLP
/s/ Mike A. Hatchell
Michael Austin Hatchell
The Hon. Pam Estes, Clerk
December 31, 2015
Page 9
CERTIFICATE OF SERVICE
I certify that on December 31, 2015, a true and correct copy of the foregoing
was e-served via EFileTx.gov upon the following counsel of record:
Gregory D. Smith Michael E. Gazette
Nolan Smith megazette@suddenlink.com
gsmith@rameyflock.com Law Office of Michael E. Gazette
nolans@rameyflock.com 100 E. Ferguson, Suite 1000
Ramey & Flock, P.C. Tyler, TX 75702
100 E. Ferguson, Suite 500
Tyler, TX 75702
/s/ Mike Hatchell
Mike Hatchell