Swank v. Cunningham
| Citation | 258 S.W.3d 647 |
| Decision Date | 27 March 2008 |
| Docket Number | No. 11-06-00172-CV.,11-06-00172-CV. |
| Parties | Mark SWANK and James J. McCoy, Jr., Individually and in Their Derivative Capacity on Behalf of Automated Marine Propulsion Systems, Inc., Appellants, v. Lloyd R. CUNNINGHAM et al., Appellees. |
| Court | Texas Court of Appeals |
Clay Rawlings, Keith Hampton, Hampton & Rawlings, Houston, R. Perry McConnell, David S. O'Neil, O'Neil & McConnell, PLLC, The Woodlands, for Appellants.
Catherine Bukowski Smith, Paul Edward Stallings, Vinson & Elkins L.L.P., Dori Elana Kornfeld, R. Paul Yetter, Douglas S. Griffith, Yetter, Warden & Coleman, L.L.P., Fred Knapp, Jr., Laura B. Rowe, Gregg C. Laswell, Hicks Thomas & Lilienstern, LLP, John B. Wallace, R. Stephen Ferrell, Lyman, Twining, Weinberg & Ferrell, Lori A. Swann, Lloyd R. Cunningham, Cunningham Law Group, Richard L. Flowers, Jr., Kevin Joseph McEvily, McEvily & Flowers, Alan Neil Magenheim, Magenheim & Associates, David Hurst Brown, Brown & Kornegay LLP, Houston, for Appellees.
Panel consists of: WRIGHT, C.J., McCALL, J., and STRANGE, J.
This is essentially a legal malpractice case brought by Mark Swank and James McCoy, Jr. against their attorneys and other attorneys involved in the underlying case of Swank v. Sverdlin, 121 S.W.3d 785 (Tex.App.-Houston [1st Dist.] 2003, pet. denied). In this cause, Swank and McCoy alleged claims for legal malpractice, breaches of fiduciary duties, conspiracy, conversion, and fraud.
The underlying litigation involved a dispute over control of Automated Marine Propulsion Systems, Inc. (AMPS), a company founded by Anatoly Sverdlin and one in which he initially owned 100% of the stock. In that suit, Sverdlin individually and derivatively on behalf of AMPS sued Swank, McCoy, the directors of AMPS, others who had invested in AMPS, and the law firm for AMPS. After Sverdlin obtained a substantial jury verdict against all of the defendants, Sverdlin settled his individual and derivative claims against Gardere, Wynne, Sewell & Riggs (the law firm that had represented AMPS when the investors loaned it $2 million) and its partner David Jungman (Gardere Wynne). Ultimately, the judgment of the trial court in Swank v. Sverdlin was reversed, and the court of appeals rendered a take-nothing judgment against Sverdlin on all his claims against the non-settling defendants. 121 S.W.3d 785.
In this suit, Swank and McCoy are complaining about the failure of AMPS to receive a portion of the $20 million settlement paid by Gardere Wynne to Sverdlin. Because their complaint rests on an assumption that AMPS had a valid jury verdict against Gardere Wynne, Swank and McCoy must show that they were stockholders of AMPS to maintain their derivative claims. Swank and McCoy had been granted options by Sverdlin on his AMPS stock. They attempted to exercise those options. However, Sverdlin refused to comply with the option contracts, and there is no evidence that Sverdlin ever delivered the AMPS stock to them.
In this cause, the trial court below granted summary judgments in favor of all the appellee attorneys. Because Swank and McCoy have no standing and because even if they had standing, their claims lack merit, we affirm.
Appellants, Swank and McCoy, were defendants in the underlying litigation. There are five groups of appellees in this cause: (1) Aubrey Calvin and John L. Verner and their law firm of Calvin, Gibbs & Verner (Calvin Verner) represented Swank and McCoy and some of the other defendants in the underlying litigation; (2) Mike Malone and his law firm of Battle Fowler, L.L.P. (Battle Fowler) were listed as being "of counsel" to Calvin Verner in the underlying litigation; (3) Lloyd R. Cunningham and Marti Batson and their law firm of the Cunningham Law Group and Kevin McEvily, Jr. and Richard L. Flowers, Jr. and their law firm of McEvily & Flowers (the Cunningham Group) represented Sverdlin individually and in his representative capacity on behalf of AMPS in the underlying litigation; (4) Beck, Redden & Secrest (Beck Redden) was substituted as counsel for Swank after the jury reached its verdict in the underlying litigation; and (5) Larry Veselka and Craig Smyser and their law firm of Smyser, Kaplan & Veselka L.L.P. (Smyser Kaplan) were substituted as counsel for McCoy after the jury reached its verdict in the underlying litigation.
Anatoly Sverdlin, an engineer from Russia, established AMPS in Houston to repair diesel marine engines on large ships. Initially, Sverdlin was the sole owner and chief executive officer of AMPS. He subsequently developed and obtained patents for a new fluid control injection system (FCIS), which allegedly improved engine efficiency and lowered costs. Sverdlin then decided to phase out of the engine repair business and concentrate on marketing the new FCIS.
After shifting away from engine repairs, AMPS began to operate at a loss, losing over $125,000 in 1995. Early in 1995, AMPS hired McCoy as vice president of industrial sales and Swank as president. Swank was to develop a business plan to attract investors for AMPS. As an incentive, Sverdlin granted Swank and McCoy options on some of his shares of AMPS's stock. These stock options gave Swank and McCoy an opportunity to each own up to twenty percent of AMPS.
McCoy introduced Sverdlin to an investor, Marvin Chudnoff, who in turn recruited additional investors. Chudnoff and three other individuals created AMPS Investment, L.L.C. AMPS Investment then created L.D.E. Associates, L.L.C. (LDE), which was the entity through which AMPS Investment and Louis Dreyfus Natural Gas Holdings Corp. (LDNGH) invested in AMPS. Jeffrey Sussman of AMPS Investment signed documents as LDE's president. There were lengthy negotiations for AMPS to obtain a $2 million loan from LDE to continue development and marketing of the FCIS. As president of AMPS, Swank often spoke on behalf of AMPS, and he hired Gardere Wynne to represent AMPS in the loan transaction. Sverdlin and his wife, who were the directors of AMPS at the time, signed a statement giving the AMPS board's approval to an initial June 1996 letter agreement for the loan, and later Sverdlin signed the final loan documents. The loan agreement was finalized in September 1996, and it gave LDE the right to choose two of the three directors. LDE chose Chudnoff and Sussman.
Unfortunately, the FCIS did not function as expected. AMPS lost money, and the parties began to disagree on how AMPS should be run. Sverdlin believed that the board of directors had stopped listening to him and that the board was taking control of AMPS, causing it to become unmanageable. Sverdlin threatened to fire Swank and McCoy and take back his patents. Swank and McCoy attempted to exercise their stock options in AMPS,1 but there is no evidence that Sverdlin ever endorsed or transferred any of his AMPS shares to them. The AMPS board decided that Sverdlin was damaging the company in violation of his employment agreement and terminated his employment in January 1997. AMPS had been operating at a loss. AMPS's net income after taxes in 1996 revealed over half a million dollars in losses. To continue operations, AMPS borrowed additional money directly from LDNGH.
AMPS and LDE obtained a temporary injunction against Sverdlin to keep him away from AMPS and its customers. Sverdlin filed a counterclaim individually and on behalf of AMPS in his derivative capacity seeking declaratory relief and alleging numerous causes of action, including fraud, breach of contract, breach of fiduciary duty, negligence, gross negligence, conspiracy, tortious interference, and usury. Sverdlin also sought declaratory relief that he was the 100% owner of AMPS. Subsequently, the trial court modified the injunction to freeze all of the parties' contractual rights and appointed a receiver to oversee AMPS's operations. The trial court then realigned the parties by making Sverdlin the plaintiff in his individual capacity and in his derivative capacity on behalf of AMPS.
The defendants in the first trial were AMPS, McCoy, Swank, Chudnoff, Sussman, LDNGH, LDE, and Gardere Wynne. Sverdlin, in his individual capacity, sued Gardere Wynne alleging malpractice based on conflicts of interest. Sverdlin also asserted derivative claims against Gardere Wynne but did not sue the firm derivatively for malpractice. Except for Gardere Wynne, which was represented by Fulbright & Jaworski, all of the defendants were represented by Calvin Verner. Battle Fowler was listed as being "of counsel" to Calvin Verner. During the first trial, the Cunningham Group represented Sverdlin individually and in his representative capacity.
After a six week jury trial, the jury awarded approximately $1.5 billion to Sverdlin and AMPS (on Sverdlin's derivative claims). After the verdict but before the judgment was entered, there were a number of changes in the defendants' legal representation:
Calvin Verner withdrew as counsel for Swank, McCoy, Chudnoff, Sussman, and LDNGH.
Beck Redden was substituted as counsel for Swank.
Smyser Kaplan was substituted as counsel for McCoy.
Brendan Sullivan, John Buckley, Jr., and David Keltner were substituted as counsel for LDNGH.
Calvin Verner continued to serve as counsel for LDE and AMPS, and Jack O'Neill was added as counsel for LDE.
AMPS's receiver asked for and received permission to hire Brown, Parker & Leahy as corporate counsel for AMPS. The order was signed on December 29, 1998.
Even though Sverdlin had not pleaded a derivative claim on behalf of AMPS for malpractice against Gardere Wynne, the trial court's charge included a question asking whether Gardere Wynne had committed negligence against AMPS. The jury found that Gardere Wynne had committed negligence against AMPS. Against Gardere Wynne, the jury awarded $24.5 million in damages to Sverdlin individually and $35 million to Sverdlin derivatively on behalf of AMPS as...
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