In A Usurpation Of Corporate Opportunity Case, The Texas Supreme Court Reversed A Constructive Trust Due To A Failure To Trace The Property To The Alleged Fiduciary Breaches And Reversed A Disgorgement Award Because There Was No Finding Of The Fiduciaries’ Profits

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In Longview Energy Co. v. The Huff Energy Fund, LP, Longview Energy Company sued two of its directors and their affiliates after discovering one affiliate purchased mineral leases in an area where Longview had been investigating the possibility of buying leases. No. 15-0968, 2017 Tex. LEXIS 525 (Tex. June 9, 2017). A jury found that the directors breached their fiduciary duties in two ways: by usurping a corporate opportunity and by competing with the corporation without disclosing the competition to the board of directors. The trial court rendered judgment awarding a constructive trust to Longview on most of the leases in question and related property and also awarded Longview $95.5 million in a monetary disgorgement award. Id. The court of appeals reversed and rendered judgment for the defendants, concluding that (1) the evidence was legally insufficient to support the jury’s finding that the directors breached their fiduciary duties by usurping a corporate opportunity, and (2) the pleadings were not sufficient to support a claim for breach of fiduciary duty by undisclosed competition with the corporation. Longview Energy Co. v. The Huff Energy Fund, 482 S.W.3d 184 (Tex. App.—San Antonio 2015).

The Texas Supreme Court affirmed the court of appeals’s judgment. Longview Energy Co., 2017 Tex. LEXIS at 525. The Court first held that Delaware law prevailed in this case on substantive issues, but that Texas law prevailed on procedural issues. The Court addressed the issue of whether the plaintiff had to trace specific property that supported the constructive trust. Citing Delaware law, the Court held:

A “constructive trust is a remedy that relates to specific property or identifiable proceeds of specific property.” “The constructive trust concept has been applied to the recovery of money, based on tracing an identifiable fund to which plaintiff claims equitable ownership, or where the legal remedy is inadequate—such as the distinctively equitable nature of the right asserted.” Thus, to obtain a constructive trust over these properties located in Texas, Longview must have procedurally proved that the properties, or proceeds from them, were wrongfully obtained, or that the party holding them is unjustly enriched. “Definitive, designated property, wrongfully withheld from another, is the very heart and soul of the constructive trust theory.” Imposition of a constructive trust is not simply a vehicle for collecting assets as a form of damages. And the tracing requirement must be observed with “reasonable strictness.” That is, the party seeking a constructive trust on property has the burden to identify the particular property on which it seeks to have a constructive trust imposed.

Id. at *15-16. The plaintiff argued that it did not have the burden to trace because that burden shifted to the defendants once the plaintiff proved the assets were commingled. The Court disagreed and noted that “the leases were separately identifiable, were not purchased with commingled funds, and were identified, lease by lease, in both the evidence and the judgment.” Id. The Court held that “[g]iven those facts, Longview had the burden to prove that, as to each lease for which it sought equitable relief of disgorgement or imposition of a constructive trust, Riley-Huff acquired that lease as a result of Huff’s or D’Angelo’s breaches of fiduciary duties.” Id. The Court concluded that there was no evidence that the defendants obtained any leases due to a breach of fiduciary duty:

There must have been evidence tracing a breach of fiduciary duty by Huff or D’Angelo to specific leases in order to support the imposition of a constructive trust on those leases. The court of appeals noted, and we agree, that there is no evidence any specific leases or acreage for leasing were identified by the brokers as possible targets for Longview to purchase or lease, nor is there evidence that any specific leases or acreage for leasing were recommended to or selected by Longview or its board for pursuit or purchase. Thus, the evidence in this case is legally insufficient to support a finding tracing any specific leases Riley-Huff acquired to a breach of fiduciary duty by either Huff or D’Angelo. Accordingly, Longview was not entitled to have a constructive trust imposed on any leases acquired by Riley-Huff or on property associated with them. Nor was Longview entitled to have title to any of the leases or associated properties transferred to it. The trial court erred by rendering judgment imposing the constructive trust on and requiring the transfer of leases and properties to Longview.

Id. at *22-23.

The Court then turned to the award of disgorgement damages and noted that both Delaware and Texas limits disgorgement to a fiduciary’s profit. “Thus, under either Delaware or Texas law, the disgorgement award must be based on profits Riley-Huff obtained as a result of Huff’s or D’Angelo’s breaches of fiduciary duties.” Id. at *28. The Court noted that the amount of profit resulting from a breach of fiduciary duty will generally be a fact question. The jury question only required the jury to find the amount of revenues the defendants received. The Court held that because jury question submitted an incorrect measure for equitable disgorgement of profit, and there was no other finding that could be used to calculate the profit, there was no jury finding that supported the trial court’s disgorgement award. Therefore, the Court affirmed the court of appeals’s judgment for the defendants.



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