J. Mark Swinnea v. ERI Consulting Engineers, Inc. and Larry Snodgrass

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).

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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

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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).

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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.)

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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.”

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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.”

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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