Neftegas–Impex v. Citibank, N.A.

• Decision Date: 10 February 2011
• Docket Number: No. 01–07–00397–CV.,01–07–00397–CV.
• Citation: 365 S.W.3d 387
• Parties: JSC NEFTEGAS–IMPEX, Appellant, v. CITIBANK, N.A., Appellee. Citibank, N.A., Appellant, v. JSC Neftegas–Impex, Appellee.
• Court: Texas Court of Appeals

365 S.W.3d 387

JSC NEFTEGAS–IMPEX, Appellant,

v.CITIBANK, N.A., Appellee.

Citibank, N.A., Appellant,

v.JSC Neftegas–Impex, Appellee.

No. 01–07–00397–CV.

Court of Appeals of Texas,

Houston (1st Dist.).

Feb. 10, 2011.

Lloyd R. Cunningham, Lori A. Swann, Cunningham Law Group, Houston, TX, for Appellant.

Aaron Keiter, Strother Keiter & Mulder, P.C., Andrew R. Harvin, Michael D. Schimek, Doyle, Reed, Restrepo, Harvin & Robbins, Christopher Benjamin Dove, James R. Leahy, Locke Lord Bissell & Liddell LLP, Brent Alan Benoit, Houston, TX, for Appellee.

Panel consists of Chief Justice RADACK and Justices SHARP and TAFT.

OPINION ON REHEARING

TIM TAFT,^* Justice (Retired).

The Court's opinion and judgment in this case issued on April 16, 2010. JSC Neftegas–Impex (“JSCNI”) moved for rehearing, and Citibank, N.A. (“Citibank”) responded to that motion. After due consideration, the Court grants JSCNI's motion for rehearing, withdraws its opinion and judgment dated April 16, 2010, and issues today's opinion and judgment in their stead.

A jury rendered judgment in favor of JSCNI and against Transcontinental Products and Services, Inc. (“TPS”) for fraud and breach of fiduciary duty. The jury also rendered judgment in favor of JSCNI and against Citibank for fraud, knowing participation in TPS's breach of fiduciary duty, and conspiracy. The jury awarded actual damages against both defendants and exemplary damages against Citibank. The trial court granted in part Citibank's motion for judgment non obstante verdicto (“JNOV”), rendering a take-nothing judgment on the claims for knowing participation in TPS's breach of fiduciary duty and conspiracy and the award of exemplary damages. Both JSCNI and Citibank appeal. We modify the judgment and affirm it as modified.

BACKGROUND

OAO Neftegas (“Old Neftegas”) was founded in 1991 by Leonard Rafikov, its president, an experienced business person who had been the director of Cbnefteprovd and the First Deputy Prime Minister of the Oil Industry of the former Soviet Union. Over the course of the events relevant to this suit, Old Neftegas went bankrupt and assigned certain of its rights and liabilities to ZAO Neftegas (“New Neftegas”). In 1997, New Neftegas entered into a joint venture with TPS and another company as part of a later phase of a refinery project (“the Project”). This joint venture was JSCNI, the only of the Neftegas entities that is a party to this appeal. Nikolai Kashuro was the Director of Economy and Finance for Old and New Neftegas.

TPS, a Houston-based company, was interested in doing business by facilitating projects in Russia. Its co-owners were Irfan Abji, its president and a former loan executive with Citibank; Peter Karber, its executive vice-president; and Manuel Santos, who, along with his family, were important clients of Citibank. Karber and Abji met Edward Sartan, a Russian-born American who had been working in Russia, who would later become TPS's consultant and an interpreter and translator for the Neftegas entities for the project described below. Sartan introduced Abji and Karber to Rafikov.

The Project involved the development of mini-refineries in Siberia, Russia, something that Old Neftegas desired. Rafikov proposed the Project to TPS. TPS introduced Rafikov to John Kermath, a Citibank vice-president, as part of these discussions. In June 1994, Old Neftegas contracted with Avanti International (“Avanti”), a Houston company, for equipment, installation, and related training needed for the Project. The Avanti–Old Neftegas contract required letters of credit from a prime bank. Also in June 1994, Old Neftegas engaged TPS to initiate and to conduct discussions for financing for the Project with third-party financial institutions for up to $60 million. The same month, TPS engaged Citibank to structure the transaction and to provide financing because TPS did not have the experience to do so itself. The principal Citibank representative interacting with TPS and the Neftegas entities throughout the transaction was Kermath.

Over the next three and a half years, the Project and its proposed financing underwent three phases:

1. Phase I: this phase was structured to be a credit facility with Old Neftegas as the borrower and with the Exim Bank, pursuant to the Oil and Gas Framework Agreement (“OGFA”) between Russia and the United States, as guarantor.

2. Phase II: this phase was structured to be a 36–month “pass through” revolving credit facility ¹ in which TPS was Citibank's borrower and Old Neftegas was TPS's borrower.

3. Phase III: this phase was structured so that the joint venture JSCNI would enter into a lease with TPS, which as lessor would assume the Avanti contract and be Citibank's borrower under a three-year, revolving credit facility.

The transaction's phases, and the operative documents for Phase III (which is at issue here), are set out in detail later in the opinion. Over the Project's three phases, the Neftegas entities periodically paid fees to, or expenses of, TPS and Citibank.

The closing on the Phase III operative contracts took place in Houston, Texas on August 15, 1997. Present at the closing were Kermath, Rafikov, Sartan, and TPS representatives, among others. The parties disputed at trial whether, before the contracts were signed, Rafikov and Kermath negotiated a security-deposit schedule for collateral different from the one contained in the contracts signed that day, including an initial security deposit of $550,000. JSCNI's evidence, however, showed that this verbal discussion and agreement occurred. The parties also disputed at trial whether Kermath represented, both at the closing and at a post-closing dinner, that financing would be provided shortly after JSCNI sent Citibank the first security deposit of $550,000. Again, however, JSCNI's evidence showed that Kermath made such statements.

The Phase III contracts signed on August 15 made JSCNI the lessee of the Project equipment, made TPS the equipment's lessor, made TPS the borrower of Citibank, and authorized TPS to pursue financing on terms and conditions acceptable to it. Pursuant to that authority, TPS and Citibank agreed to a revolving credit facility that contained two aspects at issue in this appeal: (1) a $40–million facility limit, which was less than the facility limits in Phases I and II; (2) collateral consisting entirely of cash investments or United States government obligations; ² and (3) a prerequisite to financing that TPS, which had a negative net worth, maintain a minimum net worth of $500,000 and an asset-to-liability ratio of 1:1.

On November 5, 1997, Kermath sent TPS a commitment from Citibank for financing Phase III (“the Commitment Letter”). The Commitment Letter indicated that financing was conditional on several things. One of the conditions to the facility's effectiveness was “initial funding of at least $550,000” in an account designated by the Phase III contracts. The evidence favorable to JSCNI is that this “initial funding” was the initial security deposit that Kermath and Rafikov had negotiated at the August 15 closing. All parties knew that the $550,000 security deposit would come from JSCNI because TPS had a negative net worth at the time. The Commitment Letter also recited the $40–million credit-facility limit and the full-cash-collateral requirement. TPS solicited the $550,000 payment from JSCNI, but forwarded only part of the Commitment Letter to it, omitting the pages on which the credit-facility limit and full-cash-collateral requirement appeared.

JSCNI paid the $550,000 to Citibank. Unbeknownst to JSCNI, some of these funds were spent on repayment of Santos, payment of Citibank's legal and advisory fees, draws to Karber and Abji, and payment of certain of TPS's expenses.

In December 1997, Citibank revoked the Commitment Letter, stating that the sole basis for the revocation was its having learned that Karber had a criminal history. The parties disputed at trial whether Kermath knew from the Project's start that Karber had a criminal history, but JSCNI's evidence showed that he did. Although JSCNI contended below that Citibank's revocation was pretextual, it has abandoned on appeal any theory of recovery based on Citibank's failure to finance the Project. At the end of the day, not only did the Project fail, but TPS reimbursed JSCNI only $100,000 of its $550,000 security deposit.

Avanti was the first to file suit, alleging claims against TPS and Citibank. Avanti's claims were disposed of in ways that are immaterial to this appeal. JSCNI intervened in Avanti's suit, alleging claims against TPS and Citibank. By the time of trial, JSCNI was alleging the following claims:

• fraud against Citibank and TPS,

• negligent misrepresentation against Citibank and TPS,

• breach of fiduciary duty against Citibank and TPS,

• knowing participation in breach of fiduciary duty against Citibank, and

• conspiracy.

The trial court charged the jury on all claims except the negligent-misrepresentation claims against both TPS and Citibank. The jury found TPS liable for fraud and breach of fiduciary duty and awarded actual damages of $315,000 (70% of $450,000) for fraud and $1,181,000 for breach of fiduciary duty. The jury found Citibank liable for fraud, knowing participation in TPS's breach of fiduciary duty, and conspiracy in TPS's breach of fiduciary duty and fraud. It awarded actual damages of $135,000 (30% of $450,000) for fraud and exemplary damages of $2.25 million against Citibank. The trial court rendered judgment on all aspects of the verdict against TPS and rendered judgment against Citibank on the jury's finding of fraud and the related actual damages. The trial court granted Citibank's motion for JNOV on the jury's findings against it for knowing participation in TPS's breach of fiduciary duty, for conspiracy, and for exemplary damages.

JSCNI and Citibank appeal, but TPS does not.

CITIBANK'S APPEAL

In three issues, Citibank argues that it is entitled to a...