IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
April 7, 2009
No. 07-51305 Charles R. Fulbruge III
Clerk
SANDRA MCBETH
Plaintiff - Appellee-Cross-
Appellant-Appellee
JAMES REYNOLDS
Intervenor Plaintiff - Appellee-
Cross-Appellant-Appellee
v.
JAMES R CARPENTER
Defendant - Appellant-Cross-
Appellee
CENTRAL TEXAS WATER SOLUTIONS LP; CENTRAL
TEXAS WATER MANAGEMENT LLC
Defendants - Cross-Appellees-
Appellants
Appeals from the United States District Court
for the Western District of Texas
Before KING, BENAVIDES, and CLEMENT, Circuit Judges.
EDITH BROWN CLEMENT, Circuit Judge.
This action arises out of a failed land transaction. A jury awarded
Plaintiffs Sandra McBeth (“McBeth”) and James Reynolds (“Reynolds”)
compensatory and lost-profit damages against Defendants James Carpenter
No. 07-51305
(“Carpenter”), Central Texas Water Solutions L.P. (“Texas Water Solutions”),
and Central Texas Water Management L.L.C. (“Texas Water Management”). All
parties filed post-verdict motions—the Plaintiffs seeking an order entering
judgment in their favor and the Defendants seeking to set aside the jury verdict.
The district court entered judgment for Plaintiffs as to compensatory damages
but denied their motion with respect to lost-profit damages, entering judgment
for Defendants on that issue and setting aside the lost-profit award. All parties
appeal. For the reasons set forth below, we affirm.
FACTS AND PROCEEDINGS
In 2004, Carpenter entered into a contract with Austin Estates, L.P.
(“Austin Estates”) for the purchase of property in Travis County, Texas. Unable
to raise the necessary funds to complete the transaction, Carpenter contacted
McBeth and her then-husband, Reynolds, seeking to interest them in making an
investment in the proposed purchase. During these discussions, Carpenter
made various representations regarding the property. The statements which
later became the focus of litigation concerned the status of certain water
entitlements accruing on the land. Carpenter informed the Plaintiffs that
disputes had arisen with the City of Austin regarding water and wastewater
services available to the property. A similar dispute had prevented the previous
buyer from closing on the property. Nevertheless, Carpenter assured the
Plaintiffs that these water service conflicts would not be a significant obstacle
to the purchase. Carpenter also set forth his interest in entering into a
partnership agreement to purchase, develop, and sell the Travis County
property, and the investment opportunities involved in the transaction. Based
on these representations, on May 3, 2004, McBeth, Reynolds, and Carpenter
executed a written agreement (“May agreement”). The May agreement provided
that McBeth and Reynolds would supply the earnest money to hold open the
property purchase option, use their best efforts to obtain a loan for the
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transaction, and enter into a limited partnership with Carpenter and several
other parties to pursue the property.
A limited partnership agreement was subsequently signed, forming
StoneLake Ranch, L.P. (“StoneLake”) with the goal of acquiring the Travis
County property. This partnership became effective June 21, 2004. Carpenter
signed the partnership agreement as President of the general partner,
StoneLake Management, L.L.C. (“StoneLake Management”). The agreement
also contained Carpenter’s signature as general partner on behalf of two other
entities serving as limited partners, Texas Water Solutions and Texas Water
Management. Two further individuals, unconnected with this suit, were parties
to the contract.
Pursuant to the May agreement, McBeth and Reynolds deposited $300,000
in escrow to activate the land purchase agreement. They deposited an additional
$500,000—in $100,000 increments—to obtain five separate extensions on the
deadline to close on the property. Unable to complete the sale, without notifying
McBeth or Reynolds, Carpenter directed the money in escrow be disbursed to
Austin Estates.
Subsequently, Carpenter began negotiations with other potential
investors—excluding McBeth and Reynolds. Even though StoneLake had not
yet been dissolved, Carpenter, along with the newly secured investors,
eventually purchased the property, along with additional acreage, through an
entity with which Carpenter was affiliated. The property was then sold for a
profit of $140,000.
McBeth filed a diversity suit against Carpenter, Texas Water Solutions,
Texas Water Management, and several other Carpenter-affiliated entities. The
suit alleged common law and statutory fraud, negligent misrepresentation,
conversion, and breach of contract. McBeth voluntarily dismissed her claims
against the other entities and proceeded to trial against Carpenter, Texas Water
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Solutions, and Texas Water Management alone, seeking damages based on
claims of common law fraud and breach of fiduciary duty. The district court
granted Reynolds’s motion to intervene in the suit.
Trial commenced and the jury returned a verdict for McBeth and
Reynolds, awarding $4,215,800 in compensatory damages as well as
prejudgment and postjudgment interest, and costs. The jury’s compensatory
damages award included both out-of-pocket and lost-profit damages. McBeth
and Reynolds filed a motion for final judgment seeking a court order rendering
judgment in conformance with the jury’s verdict. Carpenter, Texas Water
Solutions, and Texas Water Management filed motions for judgment as a matter
of law, seeking to set aside the jury verdict and render judgment in their favor.
Defendants argued that there was insufficient evidence to support the verdict
and, alternatively, that the claims were barred as a matter of law.
The district court determined that the award of lost-profit damages was
based on legally insufficient evidence but found that McBeth and Reynolds were
entitled to out-of-pocket expenses in the amount of $875,000 and awarded
prejudgment and postjudgment interest. Upholding the jury’s verdict of fraud
and breach of fiduciary duty, the district court further determined that these
claims were cognizable under applicable caselaw and the jury had sufficient
evidence on which to find for Plaintiffs. All parties appealed.
STANDARD OF REVIEW
We review a district court’s ruling on a motions for judgment as a matter
of law de novo. Evans v. Ford Motor Co., 484 F.3d 329, 334 (5th Cir. 2007). “On
review of the district court’s denial of such a motion, the appellate court uses the
same standard to review the verdict that the district court used in first passing
on the motion.” Hiltgen v. Sumrall, 47 F.3d 695, 699 (5th Cir. 1995). In an
action tried by jury, a motion for judgment as a matter of law is a challenge to
the legal sufficiency of the evidence supporting the jury’s verdict. Harrington v.
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Harris, 118 F.3d 359, 367 (5th Cir. 1997). The jury verdict must be upheld
unless “a reasonable jury would not have a legally sufficient evidentiary basis
to find for the party on that issue.” F ED. R. C IV. P. 50(a)(1). We have held that
motions for judgment as a matter of law should be granted only if
the facts and inferences point so strongly and overwhelmingly in
favor of one party that the Court believes that reasonable men could
not arrive at a contrary verdict. . . . On the other hand, if there is
substantial evidence opposed to the motions, that is, evidence of
such quality and weight that reasonable and fair-minded men in the
exercise of impartial judgment might reach different conclusions,
the motions should be denied . . . .
Brown v. Bryant County, 219 F.3d 450, 456 (5th Cir. 2000) (quoting Boeing v.
Shipman, 411 F.2d 365, 374 (5th Cir. 1969) (en banc)). Furthermore,
[a] jury may draw reasonable inferences from the evidence, and
those inferences may constitute sufficient proof to support a verdict.
On appeal we are bound to view the evidence and all reasonable
inferences in the light most favorable to the jury’s determination.
Even though we might have reached a different conclusion if we had
been the trier of fact, we are not free to reweigh the evidence or to
re-evaluate credibility of witnesses. We must not substitute for the
jury’s reasonable factual inferences other inferences that we may
regard as more reasonable.
Hiltgen, 47 F.3d at 700 (quoting Rideau v. Parkem Indus. Servs., Inc., 917 F.2d
829, 897 (5th Cir. 1990)).
A federal court sitting in diversity applies state substantive law. Krieser
v. Hobbs, 166 F.3d 736, 739 (5th Cir. 1999). Thus, we look to Texas law to
evaluate the district court’s judgment.
DISCUSSION
I. Lost-Profit Damages
McBeth and Reynolds challenge the district court’s denial of their motion
to enter judgment for lost-profit damages in accordance with the jury verdict.
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No. 07-51305
They argue that the profits ultimately made on the land transaction would have
been theirs if Carpenter had performed his fiduciary duties as promised. These
assertions are unavailing.
“In Texas, lost profit damages must be established with reasonable
certainty.” Blase Indus. Corp. v. Anorad Corp., 442 F.3d 235, 238 (5th Cir. 2006)
(quotation omitted). “Lost profit damages may not be based on evidence that is
speculative, uncertain, contingent, or hypothetical.” Id. “While some
uncertainty as to the amount of damages is permissible, uncertainty as to the
fact of damages will defeat recovery.” Id.
Plaintiffs failed to show lost-profit damages with reasonable certainty. As
the district court pointed out, the later transaction which proved profitable was
markedly different from that entered into by McBeth and Reynolds. This second
contract was based on different terms, included more acreage, more capital
infusion, and less leverage than the original sales provisions. The jury heard no
evidence that the StoneLake partnership would have returned a profit to its
limited partners, McBeth and Reynolds, or that the profit would total the
awarded amount. We therefore affirm the district court’s judgment.
II. Breach of Fiduciary Duty
Carpenter seeks to set aside the district court’s judgment by arguing that
he owed Plaintiffs no fiduciary duty pursuant to the StoneLake partnership
agreement in which he acted as general partner. Furthermore, Carpenter
argues that even if he owed Plaintiffs any fiduciary duties, he did not breach
them. Texas Water Solutions and Texas Water Management, as limited
partners of the StoneLake partnership, assert similar arguments, stating that,
as limited partners they owed no fiduciary duty to either McBeth or Reynolds
and did not breach this duty even if owed. After careful review of the record and
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No. 07-51305
Texas law, we decline to disturb the jury’s verdict and affirm the district court’s
judgment.
Under Texas law, managing partners owe trust obligations to the
partnership, having a duty of loyalty and due care as well as being under an
obligation to discharge their duties in good faith and in reasonable belief that
they are acting in the best interest of the partnership. T EX. R EV. C IV. S TAT. Art.
6132b-4.04(b)–(d). Texas courts have long held that “[i]t is axiomatic that a
managing partner in a general partnership, owes his co-partners the highest
fiduciary duty recognized in the law.” Crenshaw v. Swenson, 611 S.W.2d 886,
890 (Tex. Civ. App. 1980). “In a limited partnership, the general partner acting
in complete control stands in the same fiduciary capacity to the limited partners
as a trustee stands to the beneficiaries of the trust.” Id. It “is clear that the
issue of control has always been the critical fact looked to by the courts in
imposing this high level of responsibility.” In re Bennett, 989 F.2d 779, 789 (5th
Cir. 1993). Texas law applies these same obligations where the managing
partner stands in a two-tiered partnership structure as the managing partner
of a managing partner. Id. at 790.
With respect to fiduciary duties owed by Texas Water Solutions and Texas
Water Management—as limited partners—to the Plaintiffs, Texas law
recognizes such obligations between limited partners, applying the same
partnership principles that govern the relationship between a general partner
and limited partners. Making no distinction between the fiduciary duties of
general and limited partners, the Texas Supreme Court has stated that
“[f]iduciary duties arise as a matter of law in certain formal relationships,
including attorney-client, partnership, and trustee relationships.” Ins. Co. of No.
Am. v. Morris, 981 S.W.2d 667, 674 (Tex. 1998) (emphasis added) (evaluating
claims involving limited partnerships). More specifically, in determining the
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liability of limited partners to other limited partners, Texas courts have applied
the general principles of partnership noting that, “[p]artners have a duty to one
another to make full disclosure of all matters affecting the partnership and to
account for all partnership profits and property.” Zinda v. McCann St., Ltd., 178
S.W.3d 883, 890 (Tex. App. 2005) (upholding a jury verdict finding that the
limited partner had not violated fiduciary duties owed to another limited
partner). Texas further recognizes damage awards for breach of fiduciary duties
owed by limited partners. See Dunnagan v. Watson, 204 S.W.3d 37, 46–47 (Tex.
App. 2006) (affirming judgment awarding damages to limited partnership based
on limited partner’s breach of fiduciary duty).1
A review of the record reveals that Carpenter was in a position of control
in the StoneLake partnership and therefore owed Plaintiffs “the highest
fiduciary duty recognized in the law.” Crenshaw, 611 S.W.2d at 890. The May
agreement specifically stated that “Carpenter retains the exclusive right to
manage all contracts and agreements . . . relating to the [l]and.” When the
parties entered into the StoneLake limited partnership, Carpenter signed this
agreement in his capacity as general partner of StoneLake Management, the
general partner of StoneLake. Under Texas law, the usual general partner
1
Texas Water Solutions and Texas Water Management maintain that limited partners
owe no fiduciary duties to one another, citing two unpublished Texas cases. Crawford v.
Ancira, 1997 WL 214835 (Tex. App. 1997) (unpublished); AON Props., Inc. v. Riveraine Corp.,
1999 WL 12739 (Tex. App. 1999) (unpublished). Under Texas Rules of Appellate Procedure
Rule 47.7, unpublished opinions have no precedential value. Thus, we are not bound by these
cases. Nevertheless, even a review of these cases reveals that they do not stand for the
proposition urged by Texas Water Solutions and Texas Water Management. AON Properties
sets forth that even where no fiduciary duties normally arise, they spring into existence when
a limited partner “actively engages in control over the operation of the business so as to create
duties that otherwise would not exist.” AON Props., 1999 WL 12739, *23. Carpenter
controlled both Texas Water Solutions and Texas Water Management and the evidence at trial
showed that it was often unclear on whose behalf Carpenter was acting in exercising control
over StoneLake. Therefore, even accepting the argument that fiduciary duties would not
normally arise between limited partners, even AON Properties militates the opposite
conclusion due to the relationship between these parties.
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fiduciary duties apply in this two-tiered structure where Carpenter was acting
as the general partner of a general partner. In re Bennett, 989 F.2d at 790. The
limited partnership agreement itself specifically stated that the general partner
retained exclusive control and management over the partnership. At trial,
extensive testimony established that Carpenter was “the man in control” and
“heading the efforts” of the partnership. Carpenter was often quoted as making
a point of telling all other partners that he was the general partner.
With respect to the fiduciary obligations of Texas Water Solutions and
Texas Water Management, these entities likewise owe fiduciary duties to the
Plaintiffs. The parties do not dispute that a limited partnership existed and,
based on Texas law, once such a partnership is established, fiduciary
responsibilities flow between the parties. While Texas Water Solutions and
Texas Water Management argue that there was no evidence at trial to show that
a fiduciary relationship existed, the jury was entitled to find otherwise in light
of evidence that Carpenter exerted control over StoneLake not just as general
partner of StoneLake Management but also in his capacity as President of both
Texas Water Solutions and Texas Water Management. Notably, Carpenter’s
trial testimony indicated that he was often unable to identify “which hat” he was
wearing when performing various acts related to StoneLake.
Having established that Texas law imposes fiduciary duties between
Defendants and Plaintiffs, we review the record to determine whether sufficient
evidence exists on which the jury could find that Defendants breached these
duties. Reversal is proper “only if no reasonable jury could have arrived at the
verdict.” Stevenson v. E.I. DuPont De Nemours and Co., 327 F.3d 400, 405 (5th
Cir. 2003) (quotation omitted). To reverse a jury’s determinations we must find
that the verdict was so against the weight of the evidence as to perpetrate a
manifest injustice if allowed to stand.
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Carpenter, Texas Water Solutions, and Texas Water Management all fail
to meet this high threshold. The jury heard testimony from three different
witnesses regarding Carpenter’s representations with respect to the water rights
accruing to the property and ongoing negotiations to secure these rights. These
witnesses asserted that Carpenter misrepresented both the status of discussions
as well as the City of Austin’s willingness to negotiate. Furthermore, the jury
heard testimony that Plaintiffs had sufficient funds to close the land purchase
transaction but Carpenter did not inform them of the need for financing.
Instead, the jury was presented with evidence that Carpenter, without
dissolving the partnership, secured alternate investors, purchased the property,
and turned a profit. Texas Water Management and Texas Water Solutions
operated under Carpenter’s control and witnesses testified that Carpenter was
making the same representations in his capacity as President of these limited
partnerships as on his own behalf. In sum, a review of the record discloses that
the jury had ample evidence from which to conclude that Defendants breached
their fiduciary duties.
III. Fraud
Carpenter argues that the district court should have entered judgment in
his favor because the evidence was insufficient to support the jury’s finding that
he defrauded McBeth and Reynolds by failing to adequately and accurately
disclose the status of water entitlements to the property. Texas Water Solutions
and Texas Water Management make these same assertions. Because all
Defendants raise the same challenge, we consider their arguments together and
affirm the district court’s denial of the motions for judgment as a matter of law.
To establish fraud under Texas law, a plaintiff must prove that: “(1) [the
defendant] made a material representation that was false; (2) it knew the
representation was false or made it recklessly as a positive assertion without
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any knowledge of its truth; (3) it intended to induce [the plaintiff] to act upon the
representation; and (4) [the plaintiff] actually and justifiably relied upon the
representation and thereby suffered injury.” Ernst & Young, L.L.P. v. Pacific
Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001). “As a general rule, a failure
to disclose information does not constitute fraud unless there is a duty to disclose
the information.” Bradford v. Vento, 48 S.W.3d 749, 755 (Tex. 2001). A duty to
disclose arises in a fiduciary relationship, such as a partnership. Morris, 981
S.W.2d at 674.
Carpenter, Texas Water Solutions, and Texas Water Management renew
their argument that they had no duty to disclose information to Plaintiffs and
therefore, as a matter of law, could not commit fraud. This assertion fails. As
discussed above, a fiduciary relationship existed between the parties. Thus,
Defendants had an affirmative duty to fully disclose material information. We
now review the record to determine whether Defendants breached this duty or
otherwise committed fraud.
The jury was presented with the following evidence regarding Carpenter’s
misrepresentations: 1) three witnesses testified that Carpenter assured McBeth
and Reynolds that any issues stemming from the property’s water entitlements
were not significant obstacles to closing the deal, and 2) one witness testified
that Carpenter informed him that the City of Austin would cooperate with
Carpenter to ensure that the water rights were secured, representing that he
had a relationship with the City of Austin. These representations proved false.
The property purchase was delayed and ultimately scuttled due to the ongoing
water rights negotiations. Furthermore, because Carpenter continued to assert
no disclosure obligations, a reasonable jury could determine that Carpenter
purposefully withheld or mischaracterized the information regarding the
property’s water rights based on his testimony that none was required. Evidence
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that these representations were material was presented to the jury when
McBeth and Reynolds testified that they would not have entered the StoneLake
partnership agreement if they had known the full extent of the property’s water
rights issues. McBeth and Reynolds indicated that they relied on Carpenter’s
representations that the water rights dispute would not delay the purchase in
making their investment decision. In sum, the jury had sufficient evidence to
support its fraud determination.
Texas Water Management and Texas Water Solutions were both under
Carpenter’s control and testimony established that Carpenter made the same
misrepresentations as President of these entitles as he had made in his
individual capacity. Evidence before the jury was therefore sufficient to support
the fraud verdict against Texas Water Management and Texas Water Solutions.
CONCLUSION
The judgment of the district court is AFFIRMED.
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