C & B Sales & Service, Inc. v. McDonald, 95-30550

• Decision Date: 12 September 1996
• Docket Number: No. 95-30550,95-30550
• Citation: 95 F.3d 1308
• Parties: RICO Bus.Disp.Guide 9119 C & B SALES & SERVICE, INC., Plaintiff-Counter Defendant-Appellant-Cross-Appellee, v. Maxwell C. McDONALD, Jr., Defendant-Appellee, Cross-Appellant, v. Robert L. HUMPHREY, Compressor Operating, Inc., Defendants-Counter Claimants-Appellees. Compressor Components Corp.; Compression Components Corp., erroneously referred to as Compressor Components Corp., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1308

95 F.3d 1308

RICO Bus.Disp.Guide 9119

C & B SALES & SERVICE, INC., Plaintiff-Counter Defendant-Appellant-Cross-Appellee, v. Maxwell C. McDONALD, Jr., Defendant-Appellee, Cross-Appellant, v. Robert L. HUMPHREY, Compressor Operating, Inc.,

Defendants-Counter Claimants-Appellees.

Compressor Components Corp.; Compression Components Corp.,

erroneously referred to as Compressor Components

Corp., Defendants-Appellees.

No. 95-30550.

United States Court of Appeals, Fifth Circuit.

Sept. 12, 1996.

James K. Irvin, Milling, Benson, Woodward, Hillyer, Pierson & Miller, New Orleans, LA, Robert L. Cabes, Karen Theresa Bordelon, Milling, Benson, Woodward, Hillyer, Pierson & Miller, Lafayette, LA, for McDonald.

Kenneth M. Henke, Roy, Bivins, Judice & Henke, Lafayette, LA, Philip E. Roberts, Breaud & Lemoine, Lafayette, LA, for Humphrey, Compressor Operating, Inc., Compressor Components Corp. and Compression Components Corp.

Appeals from the United States District Court for the Western District of Louisiana.

Before JONES, SMITH and STEWART, Circuit Judges.

STEWART, Circuit Judge:

C & B Sales & Services, Inc., filed suit against Maxwell C. McDonald, Jr., Robert L. Humphrey, Compression Components Corporation ("CCC"), and Compressor Operating, Inc. ("COI"), for fraud and racketeering. C & B now comes charging that the district court erred in its judgment and award of damages. McDonald, on cross-appeal, challenges the district court's finding that he breached his fiduciary duty to C & B and also its award of damages. For the following reasons, we affirm the district court as to liability on the claims of fiduciary breach, fraud, and violations of the RICO statute. However, we remand for a recalculation of damages.

BACKGROUND

C & B is a Louisiana corporation that supplies new and used compressors and pumps for natural gas pipelines. W.R. Cason formed the company in 1964 and was its majority stockholder. There was a single, minority shareholder. Cason hired McDonald in September of 1980 to manage C & B's compressor rental division where he supervised maintenance and repair of rented compressors, identified opportunities for additional rentals, acquired used parts and compressors, and sold previously rented or refurbished compressors. McDonald was apparently so successful that Cason promoted him to company president in 1986. With Cason's consent, McDonald bought out the minority shareholder and became part owner of C & B.

Robert Humphrey is the owner and president of CCC, a Texas company that salvages used compressors and parts. In 1983, McDonald and Humphrey began jointly to buy Eventually CCC began to do business with C & B. As C & B's purchaser, McDonald leased compressors from CCC, with an option to buy. C & B exercised that option several times. CCC paid McDonald one-half of the profits from each of those transactions. McDonald assured Humphrey that he had disclosed his conflict-of-interest to C & B. In fact, he had not done so.

and sell used gas compressors and equipment on speculation. Humphrey testified that he had made similar deals with employees of other companies in the compressor business. These associations were either joint ventures, as here with McDonald, or Humphrey would be the principal paying his cohort a finder's fee for providing him with used equipment. By this time Cason had essentially retired and did not wish to assume any additional personal financial risk with respect to C & B. Accordingly, he instructed McDonald to run the company conservatively.

In late 1988 C & B began experiencing a cash flow problem which prevented it from purchasing equipment. Therefore the equipment that C & B had "bought" from Humphrey and McDonald was retained under lease terms instead. C & B then re-leased the equipment to industry customers. Humphrey and McDonald say it was this occurrence which prompted them to form another company, COI, which they jointly owned and which leased units for CCC. CCC's principal business was the purchase and sale of used equipment, not leasing directly to oil and gas operators. Humphrey did not want CCC to appear to be in competition with its customers who were in the business of leasing equipment, so he and McDonald formed COI. Humphrey asked McDonald several times if he had informed Cason of his involvement with COI, and again he assured Humphrey there was no conflict and that he had disclosed his interests to Cason. In truth, McDonald had not disclosed his involvement with either Humphrey or COI to Cason or anyone at C & B.

In August of 1988, C & B executed a loan agreement with First National Bank of Lafayette. The terms of the agreement limited C & B's to engage in outside financing or to undertake other substantial credit obligations.

COI continued to lease additional compressor units to C & B despite C & B's continuing cash flow problems. On February 6, 1989, C & B and COI entered into a second rental agreement. Like the first, only Humphrey signed the agreement on behalf of COI. But this time, instead of Cason, only McDonald signed on behalf of C & B. Cason was not given a copy of this new rental agreement, although he asked repeatedly to see it; but McDonald never showed it to him. When asked about it, McDonald told Cason that the new rental agreement was identical to the old. However, the new agreement removed the lease/purchase provision, altered the responsibility for make ready costs, and left the pricing of the units uncertain. The new rental agreement arguably did provide more favorable terms to C & B as to subleases, as C & B had no obligation to pay rentals to COI unless the unit was subleased by C & B to a customer of C & B. Therefore, when the compressor units were idle, no rent was due from C & B to COI. The lease arrangement also initially provided that C & B was to make the compressors ready for the field (the "make ready" expenses); however, C & B could recover the expenses that it incurred in doing so in full from its customer before having to remit any portion of the rental payment to COI. Of the 130 compressors operated and leased to customers by C & B, approximately 33 were owned by COI.

In 1989, Cason expressed interest in selling the compressor division. He would only agree to sell, however, if he personally would receive 2.8 million dollars net of taxes. In August of 1990, Cason entered into negotiations with Hanover Energy for the sale of the assets of the compressor division. Hanover required Cason to warrant title to C & B's equipment and customer contracts. Cason discovered at that point that despite McDonald's representations, the COI leases did not include a purchase agreement. McDonald and Humphrey then backdated a letter (the "concealment letter") establishing an agreed-upon purchase price. Just prior to closing with Hanover, C & B's attorney, William Logan, discovered, in the course of performing C & B tried to delay the sale to Hanover until it could determine the extent of McDonald's involvement with Humphrey. But Hanover, which had already hired McDonald as its general manager, threatened to sue.

due diligence, that McDonald was an incorporator and director of COI.

In accordance with the terms of the sale to Hanover, C & B's board previously had voted to award Cason and McDonald "bonuses" proportional to their respective ownership interests in C & B to be paid from the proceeds of the sale. These bonuses were necessary to meet Cason's demand of personal payment of $2.8 million after taxes. McDonald was to receive $700,000.

Around the time of the closing with Hanover, and after the disclosure of McDonald's interest in COI, counsel for Cason, Humphrey, and McDonald prepared a Mutual Act of Release and Discharge containing an indemnity provision. C & B' compressor division was sold to Hanover for $8.325 million. That price included $2.4 million for the purchase by C & B of the 33 COI units which were resold immediately, title and all, to Hanover as part of the entire transaction. In addition, Hanover paid Cason a $400,000 consulting agreement.

In light of a possible lawsuit concerning McDonald's involvement with COI, the parties agreed that his $700,000 bonus would be disbursed to McDonald's attorney, as an escrow agent pursuant to an Escrow Agreement dated December 4, 1990. These funds were to remain in escrow pending resolution of C & B's claims against McDonald. The parties were never able to agree on a settlement of C & B's claims, so C & B filed suit on June 14, 1991.

The district court held that the Mutual Release barred suit against Humphrey, CCC, and COI, and awarded them attorney's fees. Following a bench trial, the court found McDonald liable for breach of fiduciary duty but not for fraud or civil RICO. It also found that C & B had failed to prove damages with sufficient certainty, but awarded C & B the $63,534 bonus that Hanover paid to McDonald as part of his employment agreement with Hanover, entirely proportional to the bonus it paid Cason. The court also awarded as damages the portion of the $700,000 bonus placed in escrow which had been payable to McDonald. Since $150,000 in the escrow account was earmarked for taxes and therefore not to be received by McDonald, that left $550,000 plus the interest earned on that amount while in escrow.

C & B now appeals, seeking a greater damage award and judgment against Humphrey. McDonald cross-appeals.

DISCUSSION

We review the district court's findings of fact for clear error, but review issues of law de novo. Faulder v. Johnson, 81 F.3d 515, 517 (5th Cir.1996).

I. McDonald's Fiduciary Breach

The parties agree that Louisiana's rules on mandates (agency), La. Civil Code arts. 2985 et seq. govern this case. McDonald contends that portions of Louisiana's statute on corporate directors, La.Rev.Stat. §§ 12:84 and 12:91 also apply. They do dispute the proper application of articles 3005 and 3006 to the issue of damages.

According to Article 3000,

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