Rash v. J.V. Intermediate, Ltd.

• Decision Date: 22 August 2007
• Docket Number: No. 06-5128.,06-5128.
• Citation: 498 F.3d 1201
• Parties: W. Clayton RASH, Plaintiff-Appellee, v. J.V. INTERMEDIATE, LTD., a Texas Limited Partnership, successor by conversion to Joint Venture Piping, Inc., a Texas Corporation, and J.V. Industrial Companies, Ltd., a Texas Limited Partnership, successor by conversion to J.V. Piping, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

498 F.3d 1201

W. Clayton RASH, Plaintiff-Appellee, v. J.V. INTERMEDIATE, LTD., a Texas Limited Partnership, successor by conversion to Joint Venture Piping, Inc., a Texas Corporation, and J.V. Industrial Companies, Ltd., a Texas Limited Partnership, successor by conversion to J.V. Piping, Inc., Defendants-Appellants.

No. 06-5128.

United States Court of Appeals, Tenth Circuit.

August 22, 2007.

Steven M. Harris (C. Matthew Bickell with him on the briefs) Doyle Harris Davis & Haughey, Tulsa, OK, for Appellants.

David E. Jones (Donna L. Smith with him on the brief) Logan & Lowry, LLP, Tulsa, OK, for Appellee.

Before McCONNELL, McKAY, and TYMKOVICH, Circuit Judges.

TYMKOVICH, Circuit Judge.

This diversity case requires us to apply Texas law to three issues arising from claims that an employee secretly owned a company that competed and contracted with his employer: (1) the existence and scope of a fiduciary duty between an agent and a principal, (2) the propriety of the equitable remedy of forfeiture for breach of a fiduciary duty, and (3) the operation of the statute of frauds with respect to employment contract extensions.

Since the employee in this case owed a fiduciary duty to disclose his interest in a company doing business with his employer, the district court erred in dismissing the employer's claim for breach of a fiduciary duty. We remand for determination of damages on the claim. We also remand the forfeiture issue for further consideration in light of our holding on the fiduciary duty claim. We affirm the district court's evaluation of the statute of frauds.

I. Factual Background

J.V. Intermediate, Ltd. and J.V. Industrial Companies, Ltd. (collectively, "JVIC") are Texas-based companies which build, refurbish, expand and manage assets for industrial process plants worldwide. JVIC hired W. Clayton Rash to start and manage a Tulsa, Oklahoma division of its industrial plant maintenance business, inspecting, repairing, and maintaining oil refineries and power plants. The parties signed an employment agreement providing Rash a base salary of $125,000, a bonus of 20% of JVIC-Tulsa's net profits, and a termination bonus of 20% of the division's equity. The contract stipulated the use of Texas law and required that Rash "devote [his] full work time and efforts" to JVIC. The agreement was to last for two years, from 1999 to 2001. Rash continued to serve as manager of the Tulsa branch until 2004, without any written contract extension.

Starting in 2001, JVIC claims that Rash actively participated in and owned at least four other businesses, none of which were ever disclosed to JVIC. One of those businesses was Total Industrial Plant Services, Inc. (TIPS), a scaffolding business. TIPS bid on projects for JVIC-Tulsa, and JVIC-Tulsa, with Rash as its manager, often selected TIPS as a subcontractor. At some point during Rash's tenure, JVIC started its own scaffolding business.¹ Between 2001 to 2004, JVIC paid over $1 million to TIPS. The Tulsa division never used JVIC's scaffolding services.

Rash resigned from JVIC in July 2004.

II. Procedural History

Rash subsequently sued JVIC for breach of contract and fraud. He claimed the company purposely understated the net profits and equity of the Tulsa branch and therefore did not properly pay him the net profit and equity bonuses. As affirmative defenses and counterclaims, JVIC claimed that Rash (1) materially breached his employment agreement, (2) breached his duty of loyalty, and (3) breached his fiduciary duty.

Prior to trial, JVIC filed a summary judgment motion seeking a finding that the statute of frauds barred enforcement of the employment contract. JVIC contends that Rash could not recover unpaid bonuses earned after the expiration of the initial two-year term because the employment contract was not renewed in writing. The district court found for Rash, holding the statute of frauds did not apply.

At trial, the district court submitted various instructions to the jury relating to Rash's contract claims. In addition, the court granted Rash's Rule 50 motion for a judgment as a matter of law on JVIC's counterclaim for breach of fiduciary duty. See Fed.R.Civ.P. 50. The jury was therefore only instructed on one of JVIC's counterclaims — the breach of the duty of loyalty. Rash requested a damages award of $564,993 for his breach of contract claim and the jury granted him $444,933. JVIC sought $143,000 in damages for its breach of the duty of loyalty claim and received $71,500 from the jury.

After the jury verdict, JVIC filed a(1) motion for a new trial, Fed R. Civ. P. 59(a), (2) renewed motion for judgment as a matter of law on the fiduciary duty claim, id. R. 50(b), (3) motion for the equitable relief of fee forfeiture due to Rash's duty of loyalty violation, (4) motion to alter or amend the judgment, id. R. 59(e), and (5) motion to vacate the verdict, id. R. 60(b)(6). The district court denied all JVIC's motions.

JVIC timely filed a notice of appeal.

III. Analysis

JVIC appeals the district court's orders relating to (1) fiduciary duty, (2) fee forfeiture, and (3) the statute of frauds.

We review a district court's disposition of motions for summary judgment and motions for judgment as a matter of law de novo, Miller v. Auto. Club of New Mexico, Inc., 420 F.3d 1098, 1102-03 (10th Cir.2005), applying the same legal standard that the district court applied. See David P. Coldesina, D.D.S., P.C., Empl. Profit Sharing Plan & Trust v. Estate of Simper, 407 F.3d 1126, 1130-31 (10th Cir. 2005) (reviewing summary judgment motion de novo); Marshall v. Columbia Lea Reg'l Hospital, 474 F.3d 733, 738 (10th Cir.2007) (reviewing a motion for judgment as a matter of law de novo). We construe all factual inferences in the light most favorable to the non-moving party. Miller, 420 F.3d at 1102-03.

We apply Texas law pursuant to the choice of law provision in the JVIC-Rash employment contract, reviewing the district court's interpretation and determination of state law de novo. Freightquote.com, Inc. v. Hartford Cas. Ins., 397 F.3d 888, 892 (10th Cir.2005). "Where the state's highest court has not addressed the issue presented, the federal court must determine what decision the state court would make if faced with the same facts and issue." Oliveros v. Mitchell, 449 F.3d 1091, 1093 (10th Cir.2006) (internal quotation omitted).

A. Fiduciary Duty

JVIC argues that the district court erred in granting Rash's Rule 50 motion seeking judgment as a matter of law on JVIC's breach of fiduciary duty counterclaim at the close of evidence. We agree. Not only do we find that Rash's agency relationship with JVIC created a fiduciary obligation, but that the undisputed evidence also showed that Rash breached his fiduciary duty.

1. Is there a fiduciary relationship?

To recover for breach of fiduciary duty, the evidence must prove "the existence of a fiduciary duty, breach of the duty, causation, and damages." Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 508 (Tex.App.2003). Fiduciary duties are imposed by courts on some business relationships because of the special trust between the parties. Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 200 (Tex. 2002). Yet, Texas courts have deemed it "impossible to give a definition of the term that is comprehensive enough to cover all cases." Id. at 199. "[G]enerally speaking, it applies to any person who occupies a position of peculiar confidence towards another." Id. This broad definition includes relationships of "integrity and fidelity" and contemplates "fair dealing and good faith" rather than legal obligation, as the basis of the transaction. Id. Nevertheless, Texas courts also warn that it is well settled that "not every relationship involving a high degree of trust and confidence rises to the stature of a fiduciary relationship." Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 176-177 (Tex.1997).

Under Texas law, fiduciary relationships can arise from both formal and informal relationships. An informal fiduciary relationship may flow from "a moral, social, domestic or purely personal relationship of trust and confidence." Associated Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 287 (Tex.1998). "[I]n order to give full force to contracts, [Texas courts] do not create such a [informal fiduciary] relationship lightly." Schlumberger Tech. Corp., 959 S.W.2d at 177. "To impose an informal fiduciary duty in a business transaction, the special relationship of trust and confidence must exist prior to, and apart from, the agreement made the basis of the suit." Associated Indem. Corp., 964 S.W.2d at 288.

Texas courts also recognize that certain relationships constitute formal fiduciary relationships as a matter of law. Examples of these fiduciary relationships are trustee to beneficiary, executor to beneficiary of estates, attorney to client, and partner to partner. Johnson, 73 S.W.3d at 200. Under Texas common law, the agent to principal relationship also gives rise to a fiduciary duty. Id.

With respect to the agent to principal relationship, the Texas Supreme Court has adopted relevant provisions of the Restatement (Second) of Agency. See id. In particular, § 387 provides: "[U]nless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency." Restatement (Second) of Agency (1958). "The agreement to act on behalf of the principal," moreover, "causes the agent to be a fiduciary, that is, a person having a duty, created by his undertaking, to act primarily for the benefit of another in matters connected with his undertaking." Id. § 13, cmt. a.

Accordingly, under Texas law a fiduciary relationship may exist between Rash and JVIC in two circumstances, if the evidence established that: (1) Rash was an agent of JVIC, or (2) a prior "special relationship of trust and confidence" exists between the two.

The district court determined...