Equitable Forfeiture Remedies

In 2009, in the case of ERI Consulting Engineers, Inc. v. Swinnea, 318 S.W.3d 867 (Tex. 2010): the Texas Supreme Court ruled on the use of the proceeds of a questionable partnership buyout as equitable forfeiture.

In this case, two partners in an engineering firm had been in business for a decade. One of the partners J. Mark Swinnea persuaded Larry Snodgrass and the company to buyout his share of the Texas business ERI. However, Snodgrass was ignorant of the fact that Swinnea’s wife and another employee had formed a second corporation. The new company, Air Quality Associates, began doing essentially the same type of business as ERI. Swinnea remained an employee of ERI, but allowed the revenues that he generated for the company to decrease. Under the agreement, they were to remain the same or increase. It was shown that Swinnea subsequently made a number of moves that were counter to ERI’s interests, including referring business to yet another company in which he had interest. Swinnea was eventually fired by Snodgrass, but not before heavily damaging ERI for personal gain.

For the Texas Supreme Court, Justice Paul W. Green wrote:

“After a bench trial, the trial court found for Snodgrass and ERI on their claims for statutory fraud in a real estate and stock transaction, common law fraud, breach of the non-compete clause in the contract, as well as for breach of fiduciary duty. It rendered judgment awarding ERI and Snodgrass combined damages of $1,020,700, and $1 million in exemplary damages.”

The Twelfth District Court of Appeals overturned the decision, ruling that the money gained from the fiduciary breach was not subject to equitable foreclosure. However, the Texas Supreme Court reversed this appellate decision.

“We hold that when a partner in a business breached his fiduciary duty by fraudulently inducing another partner to buy out his interest, the consideration received by the breaching party for his interest in the business is subject to forfeiture as a remedy for the breach, in addition to other damages that result from the tortious conduct.”

As a Houston, TX business litigator, I frequently meet with clients who have either been the victims of a breach of fiduciary obligations, or have been accused of inappropriate conduct with regard to their duty to their employers. Whether you suspect an employee of this type of conduct or you are the plaintiff or defendant in a lawsuit, you need to protect your interests by hiring a Texas business litigation attorney immediately.

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