United States Court of Appeals,
Fifth Circuit.
No. 92-2293.
R. Michael LLOYD, et al., Plaintiffs-Appellees,
v.
PENDLETON LAND & EXPLORATION, INC., Defendant-Appellant.
June 14, 1994.
Appeal from the United States District Court for the Southern
District of Texas.
Before POLITZ, Chief Judge, KING and DAVIS, Circuit Judges.
POLITZ, Chief Judge:
Pendleton Land and Exploration, Inc. appeals an adverse
judgment in its counterclaims against R. Michael Lloyd and Bob
McCormack. Because the trial court erred in declining to submit
Pendleton's breach of fiduciary claim to the jury we must vacate
and remand for a new trial.
Background
In the fall of 1985, R. Michael Lloyd, a geologist, began
consulting for Pendleton, a family-owned oil and gas exploration
company. Under an oral agreement they focused on a large section
of Kansas made up of six areas of mutual interest. These areas, or
"panels," included three identified as "Rainbow West," "Anthony,"
and "Clearwater/Wichita." Pendleton shared its extensive
geological data base with Lloyd who, with the aid of Pendleton
employees, used that information to develop a new concept for
marketing and sale. When asked why they freely disclosed the
company's valuable geological data to Lloyd, the Pendletons replied
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that they trusted him and considered him part of the family. Lloyd
described the relationship as a joint venture in which each player
made contributions toward a mutually beneficial goal.
Shortly after the new concept was developed Bob McCormack
joined the exploration team. He also was given access to the
Pendleton data base. McCormack initially was assigned to
investigate the entire Kansas region but it subsequently was agreed
that for marketing purposes each panel would be developed and sold
separately. In September 1986 the parties focused on "Rainbow
West" and began framing a written agreement to formalize their
relationship. In response to a draft submitted by Pendleton, Lloyd
and McCormack, for the first time, asserted that they owed no
obligation to Pendleton with regard to areas in Kansas beyond
"Rainbow West" and "Anthony." Pendleton deemed this unacceptable
and in a draft agreement dated January 10, 1987 included a covenant
not to compete and a provision against disclosure or use of
proprietary work product. This agreement, signed by Lloyd and
McCormack on February 27, 1987, provided that compensation for the
"various oil and gas exploration projects" would be "determined on
a project by project basis" and incorporated into the contract via
appendices.
The "Rainbow West" panel was sold to Texaco in September 1987
for $1.2 million. Lloyd and McCormack recommended that they next
focus on "Clearwater/Wichita." Pendleton chose to develop the
"Anthony" panel. While "Anthony" was being marketed, Lloyd and
McCormack began an independent pursuit of "Clearwater/Wichita."
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They assert that they informed the Pendletons of their action; the
Pendletons disavow such notice. When the "Anthony" panel sold to
Enron in March 1989, Pendleton refused to compensate Lloyd and
McCormack and demanded that they cease their operations in
"Clearwater/Wichita." The demand was ignored; Pendleton filed an
action in federal court in Kansas. Lloyd and McCormack filed an
action in Texas shortly thereafter. The Kansas action was
transferred to Texas and the two proceedings were consolidated.
Lloyd and McCormack were aligned as plaintiffs and Pendleton, over
its objection, was aligned as defendant in the consolidated action.
Pendleton formally raised its claim for breach of fiduciary
duty in the Joint Pretrial Order of August 26, 1991. In the
pretrial order, approved and adopted by the court, Pendleton
asserted breach of fiduciary duty three times, twice in its
contentions and once in its list of contested issues. Lloyd and
McCormack did not object to the pretrial order. They acknowledge
that the pretrial order raised the issue of breach of fiduciary
duty. In its opening statement, Pendleton informed the jury that
its action involved not only breach of contract, but it also
involved fairness, trust, and the relationship between consulting
geologists and exploration companies. In proof of the latter it
elicited testimony from the Pendletons, as well as from Lloyd and
McCormack, attesting to the trust and confidence each placed in the
other in the development of the Kansas properties. Lloyd
characterized the relationship by stating that he did not work
"for" the Pendletons but "with" them on projects designed for their
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mutual benefit.
The magistrate judge, sitting by consent under 28 U.S.C. §
636(c), ruled that the issue of breach of fiduciary duty should not
be submitted to the jury and that, as a matter of law, Lloyd and
McCormack's alleged breach of contract did not excuse Pendleton's
obligation to pay their compensation. The magistrate judge
instructed the jury that Pendleton owed Lloyd and McCormack the
compensation claimed. The jury, limited in its consideration to
the parties' contractual claims, returned a verdict in favor of
Lloyd and McCormack. Pendleton's Motion for Judgment as a Matter
of Law or New Trial was denied. Pendleton timely appealed.
Analysis
Pendleton advances four assignments of error on appeal; one
has merit. It first challenges the trial judge's refusal to
realign it as a party plaintiff. Alignment of the parties lies in
the sound discretion of the court;1 we perceive no abuse of that
discretion.
Pendleton next contends that the trial court erred in ruling
as a matter of law that the alleged breach of contract by Lloyd and
McCormack did not excuse the obligation of Pendleton on their
compensation. This argument is foreclosed by Hanks v. GAB Business
Services, Inc.2 As the Texas Supreme Court has held, the critical
issue is whether the obligation avoided was dependent upon or
1
Moreau v. Oppenheim, 663 F.2d 1300 (5th Cir.1981), cert.
denied, 458 U.S. 1107, 102 S.Ct. 3486, 73 L.Ed.2d 1368 (1982).
2
644 S.W.2d 707 (Tex.1982).
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correlative to the obligation allegedly breached. " "[W]hen a
covenant goes only to part of the consideration on both sides and
a breach may be compensated for in damages, it is to be regarded as
an independent covenant, unless this is contrary to the expressed
intent of the parties.' "3 The instant case is indistinguishable
from the facts in Hanks where the contract covered numerous items
and contained no express language indicative of dependency. The
trial court properly determined that Pendleton's obligation to
compensate Lloyd and McCormack was independent of their obligation
to refrain from unfair competition and the improper use of
proprietary information.
Pendleton then challenges the jury instruction that it owed
Lloyd and McCormack the compensation. Pendleton judicially
admitted, however, that it owed Lloyd and McCormack the money,
"subject to certain legal defenses." The "legal defenses"
apparently was Pendleton's affirmative claim that Lloyd and
McCormack breached the noncompetition and proprietary rights
clauses. The trial court ruled that the obligations were
independent. There was no error in this instruction.
Finally, Pendleton challenges the trial court's failure to
instruct on the issue of breach of fiduciary duty. We conclude and
hold that this constituted error. The issue was raised in the
court-approved Joint Pretrial Order which supplanted all previous
3
Hanks, 644 S.W.2d at 708 (quoting World Broadcasting
System, Inc. v. Eagle Broadcasting Co., 162 S.W.2d 463, 465
(Tex.Civ.App.—San Antonio 1942)).
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pleadings and controlled all subsequent action in the litigation.4
The evidence adduced at trial suggested both a fiduciary
relationship and a breach. While we are mindful that the issue
before the trial court was not an easy one, the seventh amendment
preserves the right of parties to a jury trial unless there is "no
legally sufficient evidentiary basis for a reasonable jury to find
for [the] party on th[e] issue."5 Viewing the evidence in the
light most favorable to Pendleton, and drawing all inferences in
its favor, we must conclude that the evidence did not point so
strongly and overwhelmingly in favor of Lloyd and McCormack that
reasonable jurors could not find a breach of fiduciary duty under
Texas law.6 We further conclude that the failure to instruct the
jury with regard to the fiduciary duty issue may have tainted its
answers to the questions posed. We therefore must VACATE the
judgment of the trial court and REMAND for a new trial on all
issues.
4
Fed.R.Civ.P. 16(e); United States v. Shanbaum, 10 F.3d 305
(5th Cir.1994); Syrie v. Knoll Int'l, 748 F.2d 304 (5th
Cir.1984).
5
Fed.R.Civ.P. 50(a)(1); see also Kirby Lumber Corp. v.
White, 288 F.2d 566, 573 (5th Cir.1961).
6
See Omnitech Int'l, Inc. v. Clorox Co., 11 F.3d 1316 (5th
Cir.1994); see also, Gaines v. Hamman, 163 Tex. 618, 358 S.W.2d
557 (1962) (reversing summary judgment on facts similar to those
presented in this case).
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