Partners v. Gunnerman

Decision Date30 June 2011
Docket NumberNo. 10–50695.,10–50695.
Citation643 F.3d 410
PartiesARETE PARTNERS, L.P., Plaintiff–Appellee,v.Rudolf W. GUNNERMAN, Defendant–Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

OPINION TEXT STARTS HERE

Roger James George, Jr., Julie Anne Ford, Trial Attys., Austin, TX, for PlaintiffAppellee.

Jeffrey Mark Tillotson, Lynn, Tillotson, Pinker & Cox, L.L.P., Dallas, TX, for DefendantAppellant.Appeal from the United States District Court for the Western District of Texas.Before KING, WIENER, and CLEMENT, Circuit Judges.PER CURIAM:

Rudolf W. Gunnerman appeals the district court's award to Arete Partners, L.P. of prejudgment interest at the statutory rate of five percent to the date of its final judgment. Gunnerman argues that his deposit of Arete's damages into the registry of the district court should prevent the accrual of prejudgment interest at the statutory rate after that date. Because such a result would be inconsistent with the purpose of prejudgment interest and would undermine the rule applied to awards of prejudgment interest by the Supreme Court of Texas, we affirm the judgment of the district court.

I. FACTUAL & PROCEDURAL BACKGROUND1

Arete Partners, L.P. sued Rudolf Gunnerman for fraud and breach of contract in connection with the sale of securities, and the parties reached a settlement before trial. Gunnerman stopped making settlement payments to Arete, and Arete filed the instant lawsuit against Gunnerman, alleging that Gunnerman had violated the terms of the settlement agreement and asserting causes of action for breach of contract and fraud. After a bench trial, the district court found in favor of Arete on both its fraud claim and its breach of contract claim. The district court concluded that, under either the fraud or breach of contract theory, Arete's actual damages were $1,060,649.27, which was the difference between what Arete was entitled to receive under the settlement agreement and what Gunnerman had already paid Arete. In addition to Arete's actual damages, the district court concluded that Arete was entitled to $500,000 in exemplary damages on its fraud claim. On its contract claim, Arete was entitled to actual damages plus its attorney's fees. The district court required Arete to elect between the fraud and breach of contract theories of recovery before entering a final judgment, and Arete elected to recover based on its fraud claim.

Gunnerman appealed the final judgment granting recovery under the fraud theory of liability. To stay the enforcement of the judgment pending his appeal, Gunnerman asked for, and received, permission to deposit $1,113,469.61 into the registry of the court in lieu of a supersedeas bond. This amount reflected Arete's actual damages—to which it was entitled under either theory of recovery—plus one year's postjudgment interest of $52,820.34. The district court deposited the funds in an interest-bearing account. Gunnerman's appeal was successful, and this court vacated the district court's award of actual and exemplary damages for Arete's fraud claim. Gunnerman, 594 F.3d at 398. This court remanded the case to the district court to allow Arete to elect recovery under its breach of contract claim. Id. This court's mandate in Gunnerman was subsequently amended to allow the district court to award Arete “pre-judgment and post-judgment interest according to law.”

On remand, Arete elected to recover on its breach of contract claim. It also sought prejudgment interest at the statutory rate of five percent on its actual damages from November 21, 2005, the date Gunnerman breached the settlement agreement, through the entry of a final judgment awarding Arete damages on its contract claim. Gunnerman conceded that Arete was entitled to its actual damages under a contract theory of liability, but disputed whether Arete was entitled to prejudgment interest at the statutory rate through the date of the district court's second final judgment. Gunnerman claimed Arete was entitled to prejudgment interest at the statutory rate only from November 21, 2005 to October 6, 2006, the date on which Gunnerman deposited the full amount of Arete's actual damages into the registry of the district court. For the remaining time period, Gunnerman argued that Arete was only entitled to whatever interest the amount deposited into the registry actually earned. The district court rejected Gunnerman's argument and entered a final judgment on June 23, 2010, awarding Arete its actual damages of $1,060,649.27 and prejudgment interest at five percent accruing from November 21, 2005 to the date the judgment was entered. Gunnerman appealed.

II. LEGAL STANDARDS

In this diversity case, Texas law governs the award of prejudgment interest. Meaux Surface Protection, Inc. v. Fogleman, 607 F.3d 161, 172 (5th Cir.2010). To determine Texas law on the accrual and rate of prejudgment interest, this court first looks to the decisions of the Supreme Court of Texas. See Transcontinental Gas Pipe Line Corp. v. Transp. Ins. Co., 953 F.2d 985, 988 (5th Cir.1992) (“In order to determine state law, federal courts look to final decisions of the highest court of the state.”).

We review the district court's award of prejudgment interest for an abuse of discretion. Int'l Turbine Servs., Inc. v. VASP Braz. Airlines, 278 F.3d 494, 499 (5th Cir.2002). A district court abuses its discretion when “its ruling is based on an erroneous view of the law or on a clearly erroneous assessment of the evidence.” Chaves v. M/V Medina Star, 47 F.3d 153, 156 (5th Cir.1995) (citation omitted).

III. ANALYSIS

The issue in this case is whether the district court committed legal error when it awarded Arete interest at the statutory rate from the date of Gunnerman's breach of the settlement agreement to the date of its final judgment awarding Arete actual damages based on a contract theory of recovery. Gunnerman urges this court to conclude that his deposit of the full amount of Arete's actual damages into the court's registry on October 6, 2006, stopped the accrual of prejudgment interest at the statutory rate. Instead, according to Gunnerman, Arete is only entitled to the interest that actually accrued on the funds in the registry.2

To address Gunnerman's arguments, we look to the decisions of the Supreme Court of Texas on the purpose of prejudgment interest and the rate at which it accrues. By way of background, the Texas Finance Code defines interest as “compensation for the use, forbearance, or detention of money.” Tex. Fin.Code Ann. § 301.002(a)(4) (West 2006). Recent Supreme Court of Texas decisions place particular emphasis on the fact that prejudgment interest is intended to compensate a plaintiff for the ‘lost use of the money due as damages during the lapse of time between the accrual of the claim and the date of judgment.’ Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 528 (Tex.1998) (quoting Cavnar v. Quality Control Parking, Inc., 696 S.W.2d 549, 552 (Tex.1985)); see also Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809, 816 (Tex.2006) (same). The Supreme Court of Texas's rationale for this approach is that a plaintiff is not otherwise fully compensated by the amount of damages sustained at the time of the wrong (the breach of a contract or the infliction of a tortious injury) because he has “been denied the opportunity to invest and earn interest on the amount of damages between the time of the occurrence and the time of judgment.” Cavnar, 696 S.W.2d at 552. Earlier decisions also focused on prejudgment interest as compensation for a defendant's unauthorized use of funds belonging to a plaintiff. See Republic Nat. Bank of Dallas v. Northwest Nat. Bank of Fort Worth, 578 S.W.2d 109, 117 (Tex.1978); Phillips Petroleum Co. v. Stahl Petroleum Co., 569 S.W.2d 480, 485–87 (Tex.1978). The plaintiff's lost use of money and the defendant's unauthorized use of the plaintiff's money are, in many cases, flip sides of the same coin, see, e.g., Stahl Petroleum Co., 569 S.W.2d at 487 (involving a debtor who “was holding and using money of the [creditor] without its consent”), such that the plaintiff is entitled to compensation regardless of how the court expresses the purpose of prejudgment interest.

In this case, Gunnerman claims that because he deposited funds in the amount of Arete's actual damages into the registry of the district court, there would be no justification for awarding Arete prejudgment interest at the statutory rate as compensation for Gunnerman's use of those funds after that date. This argument overlooks the fact that the interest on the funds in the registry of the court will be used to satisfy Gunnerman's obligation to pay prejudgment interest. So, in a real sense, the money is still working for him. More important, Arete's loss of use of the funds represented by the judgment has in no way been assuaged by Gunnerman's decision to deposit those funds into the registry of the district court. Arete is still unable to use the money, although Arete has security for it. Arete is entitled to be compensated for this lost use, irrespective of whether Gunnerman has the use of those funds. 3

Having established that Gunnerman's deposit of Arete's actual damages into the registry of the district court did not alter Arete's entitlement to prejudgment interest on those funds, we next turn to the question of the applicable rate of prejudgment interest. Our decision regarding the proper rate of interest is informed by several decisions by the Supreme Court of Texas, some of which have been discussed above.

In Johnson & Higgins, the Supreme Court of Texas addressed whether the calculation of prejudgment interest for a contract claim was governed by statute or by general principles of equity developed at common law. 962 S.W.2d at 528. Before the Supreme Court's decision in Cavnar, prejudgment interest was available at common law only when damages were certain. Cavnar, 696 S.W.2d at 553....

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