Arete Partners, L.P. v. Gunnerman

Decision Date13 January 2010
Docket NumberNo. 06-51133.,06-51133.
Citation594 F.3d 390
PartiesARETE PARTNERS, L.P., Plaintiff-Appellee, v. Rudolf W. GUNNERMAN, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Appeal from the United States District Court for the Western District of Texas.

Roger James George, Jr., Trial Atty. (argued), Julie Anne Ford, George & Brothers, L.L.P., Austin, TX, for Plaintiff-Appellee.

Jeffrey Mark Tillotson, John Volney (argued), Lynn, Tillotson, Pinker & Cox, L.L.P., Dallas, TX, for Defendant-Appellant.

Before HIGGINBOTHAM, SMITH and OWEN, Circuit Judges.

OWEN, Circuit Judge:

Arete Partners, L.P. sued Rudolf Gunnerman for breach of contract and fraud in connection with a settlement agreement entered by the parties. Gunnerman appeals from the district court's judgment finding in favor of Arete on its fraud claim, arguing that the district court erred by: (1) misapplying Texas law to find that Gunnerman had fraudulent intent; (2) finding fraudulent intent based on the facts presented; (3) finding fraud because there was no evidence of reliance; (4) calculating Arete's fraud-based damages; and (5) awarding exemplary damages. Because the facts are insufficient to establish that Gunnerman had fraudulent intent, we reverse and remand.


Arete originally filed suit against Gunnerman for fraud and breach of contract related to a securities sale. The parties signed a contractual settlement before the case reached the jury. A few months later, Arete filed an amended complaint, alleging that Gunnerman breached the settlement agreement. On the day of trial, the parties once again reached a settlement to resolve Arete's claims against Gunnerman.

The terms of the agreement were read into the district court's record by the attorneys for the parties. Although the record reflects that there was considerable discussion and confusion as to the terms of that agreement during this process, it can, with persistence, be gleaned from that record that the parties agreed: (1) a judgment would be entered in favor of Arete against Gunnerman for $4.5 million; (2) Gunnerman would pay Arete $750,000 in cash; (3) Gunnerman would transfer 1,100,000 shares of unrestricted, fully tradeable SulphCo stock into an escrow account at Goldman Sachs, with instructions to Goldman Sachs to transfer 140,000 shares of SulphCo stock per month to Arete; (4) Arete would sell no more than 35,000 shares of SulphCo stock per week; (5) when Arete received a total of $4.5 million from the sale of stock and the $750,000 cash payment, Arete would execute a release of the judgment; and (6) if and when Arete realized $5,250,000 from the sale of SulphCo stock, Arete would transfer any remaining stock back to Gunnerman. The parties made it clear in the record that any release of the judgment did not end the contractual obligations of the parties. Gunnerman was present in court when the agreement was set forth and stated on the record that he understood the settlement and agreed to its terms.

Gunnerman timely paid Arete $750,000 in cash; however, Gunnerman never transferred 1,100,000 shares into an escrow account. Gunnerman's counsel on securities matters informed him that the sale of SulphCo shares would trigger certain reporting requirements under the Securities and Exchange Commission's rules. While those reporting issues were being resolved, Arete agreed to accept a wire transfer payment based on the highest closing price for the week the shares were due to be sold.

Gunnerman instructed his contact at Goldman Sachs to divide 1,100,000 shares of SulphCo stock into units of 35,000 shares, in anticipation of having the shares transferred to Arete. Gunnerman's counsel informed Arete's counsel that they anticipated that the shares would be transferred through physical delivery of the certificates to Arete's counsel's office on a weekly basis and that they were in the process of drafting an escrow agreement to facilitate transfer of the shares. Arete objected that Gunnerman's proposed course of action violated the agreement because: (1) the transfer of restricted shares violated the promise of fully tradeable, unrestricted shares, and (2) physical delivery of shares violated the agreement to make a transfer into a Goldman Sachs escrow account. Ultimately, Gunnerman made three transfers of 35,000 shares to Arete, resulting in a transfer of 105,000 shares in total.

After Arete had sold 35,000 shares of the stock, Gunnerman offered to buy back the remaining shares that had already been transferred for the highest market price during the week of transfer. Arete agreed not to sell the stock if Gunnerman wired payment for the stock and also stated that if Gunnerman continued to deliver the 35,000 shares every week, Arete would return the certificates to him when it received payment each week. Subsequently, Arete's counsel informed Gunnerman's counsel that Arete had not received stock for the weeks of April 11th or May 13th. Arete's counsel stated that Gunnerman was in material breach of the agreement, and Arete would begin the process of executing on its judgment unless Gunnerman wired $350,000 to Arete's account. A few days later, Arete's counsel sent an email to Gunnerman's counsel with the subject "Got your message": "I believe that we are still behind one week. I do not believe we got stock for the week of April 11. Send the money everyweek [sic] for the highest prices will work great. But we need to get the money for week one." Gunnerman's counsel responded, "Ok. I spoke with Stan to confirm."

As a result of this communication, the district court found that the parties modified their agreement, and neither party disputes that finding on appeal. Under the modified agreement, in lieu of stock transfers, Gunnerman agreed to wire transfer cash to Arete at the end of each week, calculating the amount based on the highest closing price for SulphCo stock for that week. Although a formal draft of the parties' amendment to their settlement agreement was prepared, it was never signed. Following the parties' agreement, Gunnerman made cash payments of varying amounts, although the amounts did not appear to bear any particular relation to an identifiable method of calculating Gunnerman's obligations to Arete. The parties continued to dispute both the timing and the amounts of Gunnerman's periodic cash payments.

After the payments stopped altogether, Arete filed this suit against Gunnerman, alleging causes of action for breach of contract and fraud. In response, Gunnerman filed a motion to release the $4.5 million judgment, even though it was undisputed that payments toward satisfaction of that judgment had not reached its full amount. At the time of trial, the total consideration in both cash and stock provided to Arete by Gunnerman was $4,390,390.71, which was the sum of: (1) the initial $750,000 cash payment; (2) the actual proceeds of the 105,000 shares of SulphCo stock sent to Arete by Gunnerman; and (3) the total of the wire transfer payments made in lieu of Gunnerman's stock transfer obligations.

In a bench trial, the district court found in favor of Arete on its causes of action for breach of contract and fraud. The district court noted that Gunnerman had essentially conceded each of the elements of Arete's breach-of-contract claim, and the only dispute on this claim was the proper measure of damages. The district court also found in favor of Arete on its fraud claim. The court found that Gunnerman never intended to keep two distinct promises to Arete: "Gunnerman never intended to permit Arete to realize more than $4.5 million and never intended to perform the agreement to transfer 1,100,000 shares." The court concluded that the difference between the amount Arete received and what it would have received if Gunnerman had performed the modified agreement as promised was $1,060,649.27. The court found that Arete was entitled to this amount as actual damages under both its fraud and breach-of-contract causes of action. Furthermore, because the district court found that Arete's damages were the result of fraudulent promises by Gunnerman, the district court found that Arete was entitled to $500,000 in exemplary damages in addition to its actual damages. Alternatively, the district court found that Arete was entitled to actual damages plus attorneys fees under its contract claim. Arete was required to make an election between these two alternative measures of recovery before the entry of judgment; Arete elected recovery based on its fraud claim, and the district court entered judgment.

Gunnerman subsequently filed a motion to amend the judgment and the court's findings of fact and conclusions of law, arguing that the district court had incorrectly found that Gunnerman had fraudulent intent when he entered into the settlement agreement. The district court rejected Gunnerman's arguments and denied the motion. Gunnerman then filed this appeal.


On an appeal from a bench trial, we review the district court's legal determinations de novo and its factual findings for clear error.1 We will find clear error if (1) the findings are without substantial evidence to support them; (2) the court misinterpreted the effect of the evidence; or (3) although there is evidence which, if credible, would be substantial, the force and effect of the testimony, considered as a whole, convinces the court that the findings are against the preponderance of credible testimony.2


On appeal, Gunnerman argues that, in finding fraudulent inducement, the district court incorrectly applied Texas law and its factual findings were in clear error. Under Texas law, "[a] fraud cause of action requires a material misrepresentation, which was false, and which was either known to be false when made or was asserted without knowledge of its truth, which was intended to be acted upon, which was relied upon, and which caused injury."3 A promise to do an act in the future is an actionable...

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