J. Mark Swinnea v. ERI Consulting Engineers, Inc. and Larry Snodgrass
12-14-00288-CV
| Tex. App. | Sep 25, 2015Background
- Swinnea sold his ERI shares in a buyout and shortly before that helped form AQA (an abatement contractor) with others; he did not disclose that involvement and later divested his interest in AQA.
- Merico, an ERI customer, temporarily ceased dealing with ERI because AQA was permitted to bid ERI-administered asbestos projects; ERI later regained Merico and both ERI and AQA prospered and continue to do business together.
- Trial awarded $178,000 in actual damages (lost profits), $1,000,000 in exemplary (punitive) damages, and approximately $720,000 in disgorgement/asset forfeiture (total punitive/forfeiture ~ $1.72 million). The trial court characterized the forfeiture as equitable disgorgement.
- Swinnea contends the disgorgement exceeds any net illicit profit (he received fair consideration for his shares) and therefore is punitive, so the disgorgement and punitive damages must be reviewed together for excessiveness under statutory caps and the Due Process Clause.
- Procedurally, this is an appellant’s reply brief urging reversal or reduction: it argues that prior appellate treatment was incomplete because it reviewed only the $1,000,000 punitive award without accounting for the now-entered forfeiture.
Issues
| Issue | Plaintiff's Argument (Swinnea) | Defendant's Argument (ERI) | Held (what appellant asks the court to decide) |
|---|---|---|---|
| Whether disgorgement here is punitive or remedial | Disgorgement exceeds any net profit from the breach (no illicit profit on buyout), so it is punitive | Forfeiture/disgorgement is remedial restitution tied to ill-gotten gains | Court should treat forfeiture as punitive because it exceeds net illicit profit and subject it to excessiveness review |
| Whether punitive disgorgement and exemplary damages must be combined for excessiveness review | Combined total punishment should be analyzed together; piecemeal review permits circumvention of due process | Prior Kraus review of only the $1M exemplary award is sufficient | Court should review the total punitive punishment ($1.72M) in one constitutional excessiveness analysis |
| Whether statutory punitive-damage cap applies | Cap applies because actual damages ($178k) arise from conduct unrelated to the cap-busting exception; court acted sua sponte to bust the cap without notice | ERI (and prior opinions) treated cap-busting exception as applicable | Court should reapply statutory cap; punitive recoveries should be limited to statutory maxima tied to actual damages |
| Whether prejudgment interest counts as actual damages in ratio analysis | Prejudgment interest is not part of actual damages and should be excluded from the excessiveness denominator | ERI argued for including prejudgment interest to inflate actual-damage base | Court should exclude prejudgment interest when computing punitive-to-actual-damage ratio |
Key Cases Cited
- In re Longview Energy Co., 464 S.W.3d 353 (Tex. 2015) (disgorgement that exceeds net gains may be punitive and subject to excessiveness review)
- Alamo Nat. Bank v. Kraus, 616 S.W.2d 908 (Tex. 1981) (Texas factors for reviewing exemplary damages)
- Allstate Ins. Co. v. Kelly, 680 S.W.2d 595 (Tex. App.—Tyler 1984) (prejudgment interest is not part of actual damages for punitive-damage cap calculations)
- International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567 (Tex. 1963) (remedy selected and nature of acts are relevant to excessiveness of exemplary damages)
- SEC v. Manor Nursing Ctrs., 458 F.2d 1082 (2d Cir. 1972) (disgorgement limited to unjust enrichment; disgorgement beyond that is punitive)
- SEC v. Tome, 833 F.2d 1086 (2d Cir. 1987) (remedial disgorgement limited to amount of unjust enrichment)
- SEC v. Patel, 61 F.3d 137 (2d Cir. 1995) (remedial disgorgement should be a reasonable approximation of profits causally connected to the violation)
- Snepp v. United States, 444 U.S. 507 (1980) (disgorgement and similar remedies are to be tailored to deter and not to impose exemplary damages disproportionate to gain)