Preview
FILED
DALLAS COUNTY
11/26/2014 2:26:43 PM
GARY FITZSIMMONS
DISTRICT CLERK
CAUSE NO. DC-12-12902
WHITE ROCK ADVISORS, LLC, § IN THE DISTRICT COURT OF
GREG W. HEXT and §
SOUTHWEST MERCHANT GROUP, INC., §
§
Plaintiffs/Counter-Defendants, §
v. §
§
THE RICHARDSON TRIDENT §
COMPANY and THOMAS E. BENTLEY, §
§ DALLAS COUNTY, TEXAS
Defendants/Counter-Plaintiffs, §
v. §
§
BERNARD CARRICO, §
§
Third-Party Defendant/Counter-Plaintiff, §
v. §
§
THE RICHARDSON TRIDENT §
COMPANY, §
§
Counter-Defendant. § 134TH JUDICIAL DISTRICT
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S
MOTION FOR JUDGMENT ON THE VERDICT
TO THE HONORABLE JUDGE OF THIS COURT:
COMES NOW, Third-Party Defendant Bernard V. Carrico, Jr. (“Carrico”) in the above-
entitled cause, and at the Court’s request, files this Brief in Support of Bernard V. Carrico, Jr.’s
Motion for Judgment on the Verdict, and in support would respectfully show as follows:
I.
ARGUMENT AND AUTHORITIES
On November 17, 2014, a hearing was held on: (1) Bernard V. Carrico, Jr.’s Motion for
Judgment on the Verdict; and (2) The Richardson Trident Company’s Motion to Disregard Jury
Findings and for Judgment Notwithstanding the Verdict. During the course of the hearing in
which Trident’s counsel asked the Court to disregard all of the jury’s answers to Question Nos.
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 1
MOTION FOR JUDGMENT ON THE VERDICT
1, 3, 10 and 11, and enter judgment for Trident on none of the jury answers in the verdict, the
Court requested all counsel to submit briefing on the legal effect of the jury’s answer to Question
No. 1 on the authority of the Court to impose the equitable remedy of fee forfeiture against
Carrico. Specifically, the parties were asked to address whether the jury’s finding that Carrico’s
“use of the advantage of his position to gain a benefit for himself at the expense of The
Richardson Trident Company” was ultimately “fair and equitable to The Richardson Trident
Company” bars Trident’s claim for equitable relief. The short answer to this question is that the
jury’s fact finding that despite Carrico’s breach of his fiduciary duty, the transaction was
ultimately fair and equitable to Trident precludes the imposition of the equitable remedy of fee
forfeiture. Burrow v. Arce, 997 S.W.2d 229, 245-246 (Tex. 1999); State v. Texas Pet Foods, 591
S.W.2d 800, 803 (Tex. 1979); Stephens County Museum, Inc. v. Swenson, 517 S.W.2d 257 (Tex.
1974); and Lee v. Hasson, 286 S.W.3d 1, 21 n. 13 (Tex. App. – Houston [14th Dist.] 2007, pet.
denied).
It is well-established that not every breach of fiduciary duty justifies fee forfeiture or
other equitable relief. Burrow, 997 S.W.2d at 241. For example, even if a jury finds that an
attorney has breached his fiduciary duty, the denial of a fee forfeiture is appropriate ifthe jury
also found that the attorney/client transaction was ultimately fair and equitable to the client as
reflected in other findings that the attorneys obtained a sale of their client’s stock upon terms and
conditions acceptable to him and that the client suffered no damages as a result of the attorney’s
misconduct. Miller v. Kennedy & Minshew, P.C., 142 S.W.3d 325, 338-340 (Tex. App. – Fort
Worth 2003, pet. denied). Whether the equitable remedy of fee forfeiture should be imposed by
the Court is restricted to “clear and serious violations of duty which involve fact issues for the
jury to decide, including, but not limited to, the value of the fiduciary’s services, and the
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 2
MOTION FOR JUDGMENT ON THE VERDICT
existence and amount of harm to the client. Burrow, 997 S.W.2d at 246; and Miller 142 S.W.3d
at 338. Consequently, in an equitable proceeding involving a breach of fiduciary duty, “ultimate
issues of fact are submitted for jury determination” as a predicate to the imposition of any
equitable remedy by the Court. Burrow, 997 S.W.2d at 245; and State v. Texas Pet Foods, 591
S.W.2d 800, 803 (Tex. 1979); and Miller, 142 S.W.3d at 338-339. Moreover, “equity is a court
of conscience” that seeks to do justice in good faith. Flores v. Flores, 116 S.W.3d 870, 876
(Tex. App. – Corpus Christi 2003, no pet.). Thus, if the transaction was fair and equitable to the
beneficiary despite a breach of fiduciary duty, equity has already been served.
Accordingly, although a jury “does not determine the expediency, necessity or propriety
of equitable relief,” the Texas Supreme Court has explained that when a contested fact issue
exists as to whether the transaction was ultimately fair and equitable to the client, that fact issue
must be resolved before equitable relief can be determined, and “a party is entitled to have that
resolution made by a jury.” Burrow, 997 S.W.2d at 246, citing Texas Pet Foods, 591 S.W.2d at
803. See also, Stephens County Museum, Inc., 517 S.W.2d at 261 (a material issue of fact is
“whether the transactions were ultimately fair and equitable” to the clients). If a transaction was
ultimately fair and equitable to the beneficiary, there is no justification for the imposition of an
equitable remedy.
The exclusive role of the submission of Question No. 1 in the Court’s Charge was to
determine in this equitable proceeding, whether the transaction in question was nevertheless “fair
and equitable” to Trident despite Carrico’s “use of the advantage of his position to gain a benefit
for himself at the expense of” Trident. Trident implicitly agreed with the appropriateness and
need to obtain a fact finding to Question No. 1 because, like the claimant in Thygeson, Trident
did not object to the submission of Question No. 1 on the grounds that itwas unsupported by
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 3
MOTION FOR JUDGMENT ON THE VERDICT
sufficient conflicting evidence or that its finding would be immaterial to its claim for equitable
relief. See Thygesen v. Strange, Nos. 14-09-00866-CV, 2013 W.L. 2247381, at *3 (Tex. App. –
Houston [14th Dist.] May 21, 2013, pet. denied.). As in Thygesen, having consented to the
submission of a predicate jury question to an award of equitable relief, Trident cannot now
successfully contend that the jury’s verdict that the transaction was fair and equitable to Trident
was “advisory only” and that the trial court could still decide to impose an equitable remedy. Id.
at *2 (applying Texas procedural law). Moreover, the Thygesen appellate court acknowledged
the controlling principle of Texas law that in the apportionment of duties between the jury and
the trial court when a party requests equitable relief, a party is entitled to have the ultimate fact
question of whether the transaction was fair and equitable to the client resolved by a jury as a
predicate to the Court’s determination of whether to award equitable relief. Id. at *3, citing
Burrow, 997 S.W.2d at 245-246.
There are a number of factors that relate to whether a transaction was “fair and equitable”
or “fair and reasonable” to the client despite the breach of a fiduciary duty. These “fairness
factors” include:
(1) whether the fiduciary significantly benefited from the transaction as viewed in
light of circumstances existing at the time of the transaction,
(2) whether the fiduciary benefited at the expense of the beneficiary,
(3) whether the consideration received by the fiduciary was excessive,
(4) whether the beneficiary had the benefit of independent advice, and
(5) whether there was full disclosure of all material facts regarding the transaction.
See e.g. Lee, 286 S.W.3d at 21, citing Estate of Townes v. Townes, 867 S.W.2d 414, 417 (Tex.
App. – Houston [14th Dist.] 1993, writ denied).
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 4
MOTION FOR JUDGMENT ON THE VERDICT
Although some of these factors may relate to the determination of “fairness” with respect
to whether the fiduciary breached his duty, “these issues are also factors in determining the
fairness of the transaction” as a predicate to the award of equitable relief. Lee, 286 S.W.3d at 21,
n. 13. Therefore, in light of the Court’s directed verdict, and even in the event that the jury had
found a breach of fiduciary duty in answer to Question No. 3, it was necessary to submit
Question No. 1 as a predicate to the award of any equitable relief. Having properly submitted
Question No. 1, absent any objection by Trident, its answer cannot now be legally ignored.
II.
EVIDENCE SUPPORTING THE JURY’S ANSWER TO QUESTION NO. 1
Throughout the trial, both sides spent considerable time presenting evidence concerning
Carrico’s conduct, the benefits received by Carrico, the harm, if any, to Trident, and the overall
effect that the transaction had on Trident. As discussed in detail below, abundant evidence was
presented upon which a jury could reasonably conclude that the Trident/White Rock transaction
was fair and equitable to Trident at its inception as well as in the ultimate result. In contrast,
Trident’s letter brief does not contend that there is insufficient evidence to support the jury’s
answer to Question No. 1 or what role Question No. 1 served in the Court’s Charge if not to
serve as a necessary predicate to Trident’s claim for equitable relief.
(1) Whether the fiduciary significantly benefited from the transaction as viewed
in light of circumstances existing at the time of the transaction.
Greg Hext testified at length that the terms of the engagement agreement between White
Rock Advisors and Trident were fair and reasonable at its inception. Hext testified that the terms
of the agreement, including the 7% Sale Fee, conformed to industry standards for a transaction
involving a company as financially distressed as Trident. The evidence showed that the White
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 5
MOTION FOR JUDGMENT ON THE VERDICT
Rock/Trident Agreement was negotiated after Trident/Bentley had already fired multiple
professional services firms that had been thus far unsuccessful in recapitalizing the company or
restraining Thomas E. Bentley’s spending habits which had imperiled the company. Hext
explained that the level of the risk to White Rock involved in this particular transaction
supported a fee of at least 7% and that he/White Rock would not have entered into the agreement
without the inclusion of the 7% Sale Fee due to those risks.
Furthermore, the evidence reflected that at the time the White Rock/Trident agreement
was entered into the expected Sale Fee to White Rock Advisors would be $0.00, because 7% of
an insolvent company is $0.00. Additionally, the evidence showed that the Sale Fee was a
purely contingent fee with a strict, difficult to achieve condition precedent to payment. In this
regard, the evidence showed that a sale of Trident actually had to close before White Rock
Advisors was entitled to the Sale Fee, as opposed to the Growth Capital Partners and Trenwith
agreements which only required that a letter of intent be obtained to trigger the Sale Fee
obligation. Thus, although the value of the 7% fee in the agreement ultimately increased with
the value of Trident, this increase directly related to the work required and anticipated level of
difficulty. Further, the evidence showed that these predecessor firms had not been successful
even in meeting the lower standards set forth in their engagement agreements and thus had not
provided value to Trident. Lambert Mathieu echoed this sentiment, and testified based on his
experience in the financial industry, that deals can be structured in a variety of ways and must be
evaluated accordingly. Lambert Mathieu stated that he understood and analyzed the terms of the
White Rock Engagement Agreement at the time it was executed, including the Sale Fee, and
testified that the terms were fair and reasonable to Trident.
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 6
MOTION FOR JUDGMENT ON THE VERDICT
Lambert Mathieu, Laura Kellogg and Carrico testified that the White Rock/Trident
agreement was negotiated and, subject to oversight from outside counsel, accepted by Trident’s
upper management and Board of Directors. Specifically, evidence was presented that certain
provisions of the engagement agreement were modified at the request of Trident’s upper
management. Laura Kellogg testified that she was aware of the Sale Fee provision and asked
Carrico questions regarding it which were answered and explained to her satisfaction prior to
execution of the engagement agreement. Additionally, testimony from those individuals, as well
as Terry Bentley Hill, and correspondence from outside counsel and Trident’s Board of Directors
minutes show that the engagement was approved, ratified and confirmed by the Board of
Directors after its members were provided the opportunity to ask questions. Moreover, evidence
was presented that the proposed board resolution concerning the entire White Rock/Trident
engagement agreement was provided by Trident’s counsel to directors, Laura Kellogg, Terry
Bentley Hill and Tom Bentley, Jr., two days prior to that board meeting.
Finally, the evidence at trial, including the White Rock/Trident engagement agreement
itself, the Chapman Hext Engagement Agreement, correspondence between Trident and its
counsel, the testimony of Laura Kellogg, Thomas E. Bentley, Lambert Mathieu, Greg Hext and
Carrico showed that the Chapman Hext and White Rock’s dual roles (including their agent
Carrico) of CRO and investment banker, was disclosed to and known by all relevant parties. In
fact, the testimony established that the engagement to these dual positions was suggested and
encouraged by Trident to create significant cost savings of approximately $1.5 million and
informational synergies for Trident. Therefore, on the basis of all of the foregoing evidence, a
reasonable jury could have concluded that despite a breach of fiduciary duty by Carrico, the
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 7
MOTION FOR JUDGMENT ON THE VERDICT
White Rock/Trident Agreement was fair and equitable to Trident when viewed in light of the
circumstances in existence at the time of the transaction.
(2) & (3) Whether the fiduciary benefited at the expense of the beneficiary, and was
the consideration excessive.
Another factor which bears on whether the transaction was fair and equitable to the
beneficiary is whether the fiduciary benefited “at the expense of” the beneficiary. Lee, 286
S.W.3d at 21. In every breach of fiduciary case reviewed for this brief, there existed a direct
correlation between the compensation or benefit received by the fiduciary and a reduction of the
beneficiary’s estate. See, e.g. Lee, 286 S.W.2d at 22, 28 (the fiduciary’s first year salary would
reduce the beneficiary’s marital estate by a low of $4,702,500.00 or a high of $15.4 million,
together with other employment benefits); Estate of Townes, 867 S.W.2d at 420 (fiduciary
withdrew $400,000.00 from beneficiary’s account without authority). However, the evidence at
bar was that whatever amount of additional compensation Carrico would be entitled to from the
future sale of Trident would be paid out of White Rock’s 7% Sale Fee, which fee Trident had
always agreed to pay. In other words, Carrico was not a party to the White Rock/Trident
engagement agreement and the additional compensation Carrico earned as a result of the Trident
sale did not increase the cost of the sale to Trident. Instead, Carrico’s compensation was
determined by and paid through his Independent Contractor Agreement with White Rock and
was paid out of White Rock’s 7% Sale Fee reducing White Rock’s profit, but not Trident’s.
Therefore, there was considerable evidence introduced that Carrico did not benefit “at the
expense of” Trident with respect to the compensation he earned through his Independent
Contractor Agreement with White Rock.
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 8
MOTION FOR JUDGMENT ON THE VERDICT
Another fairness factor is whether the fiduciary received excessive consideration for the
services he provided. Carrico, on behalf of Chapman Hext and White Rock Advisors, provided
extensive services and valuable results for Trident in exchange for the consideration received by
Chapman Hext and White Rock Advisors under the engagement agreements. Specifically, the
evidence presented through Carrico, Greg Hext, Robin Kain, Lambert Mathieu and Laura
Kellogg showed that they prepared the financing memorandum, engaged in aggressive
recapitalization efforts, obtained recapitalization letters of intent, obtained necessary audits,
restored the faith of the bank group, overcame the catastrophic impact of the August Issues, and
after the cease funding demand letter was delivered at the banking meeting in late January 2011,
began obtaining purchase offers and were involved in the Metals USA transaction that resulted in
approximately $122 million in cash, benefits and releases of obligations for Trident and Bentley.
The evidence showed that while Carrico was at Trident, the company went from having a
negative value of approximately $30 million with littlehope of survival, to a company a year
later worth more than $120 million dollars due in large part to Carrico’s efforts.
The testimony of Laura Kellogg and Carrico showed that for more than a year Carrico
acted with good faith and in the best interests of Trident. For example, the testimony showed
that Carrico recommended seeking bankruptcy protection despite the fact that a bankruptcy filing
would have terminated his role at Trident and eliminated any possibility of his receiving any
compensation as a result of White Rock earning a recapitalization Success Fee or Sale Fee.
Carrico worked diligently, devoting hundreds of hours to the efforts to recapitalize and
ultimately to facilitate the sale of Trident for an enormous profit.
The testimony of Carrico, Greg Hext and the terms of Carrico’s independent contractor
agreement put in evidence the fact that Carrico was compensated as an hourly employee by
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 9
MOTION FOR JUDGMENT ON THE VERDICT
White Rock Advisors and only had a contingent non-quantifiable interest in any Sale Fee or
Success Fee earned by White Rock Advisors or Chapman Hext. Comparatively, the evidence
showed that Trident’s benefit of $122 million in cash, benefits and releases far exceeded the
potential relative benefit to Carrico, which was paid out of and did not increase the amount of the
Sale Fee Trident always agreed to pay White Rock and which amount was awarded to White
Rock in arbitration and confirmed by a Final Judgment. Moreover, an arbitration panel has
previously determined that the entire 7% Sale Fee was reasonable and owed by Trident to White
Rock which was confirmed by a Final Judgment.
This evidence is not only legally sufficient, but is overwhelmingly sufficient to support
the Jury’s answer to Question No. 1 that the transaction was fair and equitable to Trident, in all
respects.
(4) Whether the beneficiary had the benefit of independent advice.
The vast majority of breach of fiduciary duty cases involve a professional (i.e. attorney or
financial advisor) who takes advantage of an individual beneficiary. In those scenarios, it is very
rare that the beneficiary has the benefit of independent professional advice, and in fact, there are
instances where the fiduciary dissuaded the beneficiary from obtaining independent advice. See
e.g. Lee, 286 S.W.3d at 22. Thus, the factor of whether the beneficiary had the benefit of
independent advice in dealing with the fiduciary is an important factor in whether the transaction
was fair and equitable for the beneficiary.
The White Rock/Trident Engagement Agreement was a negotiated agreement between
sophisticated parties. The jury also received evidence that in connection with the transaction,
Trident received independent legal advice of counsel, Christie Flanagan, in connection with its
dealing with White Rock and Carrico. Furthermore, Lambert Mathieu testified that he accepted
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 10
MOTION FOR JUDGMENT ON THE VERDICT
the White Rock/Trident Agreement as Trident’s CFO and that based on his experience in the
financial industry, that he thought its terms, including the Sale Fee, were reasonable. Finally, the
jury received evidence that the Trident Board of Directors considered and ratified the White
Rock/Trident Agreement after its members had been provided an opportunity to ask questions
about its terms.
Thus, there was ample evidence presented upon which a jury could reasonably find that
Trident had the benefit of independent professional advice and that the agreement was fair and
equitable to Trident.
(5) Whether there was full disclosure of all material facts regarding the
transaction.
The amount of the contingent compensation could not have been disclosed by Carrico
prior to the execution of the White Rock/Trident Agreement, but could only be determined by
Greg Hext after the unanticipated sale of Trident occurred more than a year later. More
importantly, whatever amount of additional compensation Carrico might have been entitled to
from the sale of Trident would be paid out of White Rock’s 7% Sale Fee which fee Trident had
always agreed to pay, and Carrico’s compensation would not have and did not cause any
increased cost of the sale to Trident. Consequently, a jury could reasonably have concluded that
the information that Carrico might receive an unspecified contingent amount of compensation
under his independent contractor agreement in the event of a sale of Trident did not involve the
failure by Carrico to disclose material information that rendered the transaction unfair to Trident.
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 11
MOTION FOR JUDGMENT ON THE VERDICT
III.
TRIDENT’S “UNCLEAN HANDS” ALSO PRECLUDES
AN AWARD OF EQUITABLE RELIEF
In addition to the jury’s answer to Question No. 1 that despite Carrico’s breach of
fiduciary duty, the transaction was fair and equitable to Trident, Trident is also not entitled to
equitable relief because of the doctrine of unclean hands which is a fundamental concept of
equity jurisprudence. The equitable doctrine of unclean hands expresses the principle that when
a party comes into court seeking equity, he must show that his own conduct has been fair,
equitable and honest with respect to the particular controversy in issue. Lazy M Ranch, LTD. v.
TXI Operations, LP, 978 S.W.2d 678, 683 (Tex. App. – Austin 1998, pet. denied.) (mining
company not entitled to specific performance because it had violated the same agreement); and
Crown Construction Co. v. Huddleston, 961 S.W.2d 552, 559 (Tex. App. – San Antonio 1997,
no pet.) (claimant who was in breach of lease may not receive equity to extend it). Moreover,
the doctrine of unclean hands is applied to preclude equitable relief to one whose own conduct
has been unjust, or marked by want of good faith, or one who has violated the principles of
equity and righteous dealing. Crown Construction Co., 961 S.W.2d at 559, citing Ligon v. E. F.
Hutton & Co., 428 S.W.2d 434, 437 (Tex. Civ. App. – Dallas 1968, writ ref’d n.r.e.); 34 Tex.
Jur. 3d Equity § 32 (1984).
As applied to the case at bar, Trident is precluded from an equitable remedy of fee
forfeiture or profit disgorgement because of an abundance of undisputed evidence that Trident
breached the White Rock/Trident Agreement by having engaged in its own sale efforts in breach
of the exclusivity provision of the agreement. Furthermore, the evidence presented at trial
established that Trident’s sole shareholder, Thomas Bentley, engaged in numerous inequitable
and unjust or bad faith activities that undermined the recapitalization efforts and resulted in
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 12
MOTION FOR JUDGMENT ON THE VERDICT
Trident’s sale and the triggering of the Sale Fee at issue. In this regard, the evidence further
showed that while Carrico and White Rock worked diligently to obtain purchase offers, Trident
was engaged in its own sale efforts to attempt to circumvent the exclusivity provision in the
White Rock. This evidence that Trident violated the White Rock Engagement Agreement was
undisputed and was presented through multiple witnesses including Sparky McDuff, Greg Hext
and Carrico. The evidence further showed that Trident also tried to renege on payment of the 7%
Sale Fee which harmed Carrico by delaying receipt of his compensation pursuant to his
Independent Contractor Agreement with White Rock. As a party requesting an equitable
remedy, Trident must come to the Court with clean hands. This clear contractual violation, as
well as the August Issues perpetrated by Trident’s sole shareholder, were exhaustively addressed
at trial, and should bar any award of equity by the Court. Otherwise, Trident will be unjustly
enriched if itis allowed to achieve through equity what it was found not to be entitled to in
arbitration and by the jury.
WHEREFORE, PREMISES CONSIDERED, Carrico respectfully requests that the Court
enter judgment for Carrico in accordance with the jury’s verdict as requested in Carrico’s Motion
for Judgment on the Verdict (form of Judgment enclosed), and for such other and further relief,
both at law and in equity, to which Carrico is entitled.
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 13
MOTION FOR JUDGMENT ON THE VERDICT
Respectfully submitted,
HIERSCHE, HAYWARD, DRAKELEY & URBACH, P.C.
By: /s/ Kevin J. Keith
James T. Drakeley
State Bar No. 06111600
R. Scott Seifert
State Bar No. 24003860
Kevin J. Keith
State Bar No. 11187700
Laurie N. Arnoldy
State Bar No. 24078158
15303 Dallas Parkway, Suite 700
Addison, Texas 75001
Tel: 972-701-7000
Fax: 972-701-8765
Email: jdrakeley@hhdulaw.com
sseifert@hhdulaw.com
kkeith@hhdulaw.com
larnoldy@hhdulaw.com
ATTORNEYS FOR BERNARD V. CARRICO, JR.
CERTIFICATE OF SERVICE
I, the undersigned, hereby certify that on November 25, 2014, a true and correct copy of
the above and foregoing document was electronically served upon counsel for
Defendants/Counter-Plaintiffs, pursuant to Texas Rule of Civil Procedure 21a.
Jeffrey M. Tillotson, P.C.
jtillotson@lynnllp.com
John D. Volney
jvolney@lynnllp.com
Michelle Ku
mku@lynnllp.com
Lynn Tillotson Pinker & Cox, LLP
2100 Ross Ave., Suite 2700
Dallas, Texas 75201
/s/ Kevin J. Keith
Kevin J. Keith
BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 14
MOTION FOR JUDGMENT ON THE VERDICT
Preview
FILED DALLAS COUNTY 11/26/2014 2:26:43 PM GARY FITZSIMMONS DISTRICT CLERK CAUSE NO. DC-12-12902 WHITE ROCK ADVISORS, LLC, § IN THE DISTRICT COURT OF GREG W. HEXT and § SOUTHWEST MERCHANT GROUP, INC., § § Plaintiffs/Counter-Defendants, § v. § § THE RICHARDSON TRIDENT § COMPANY and THOMAS E. BENTLEY, § § DALLAS COUNTY, TEXAS Defendants/Counter-Plaintiffs, § v. § § BERNARD CARRICO, § § Third-Party Defendant/Counter-Plaintiff, § v. § § THE RICHARDSON TRIDENT § COMPANY, § § Counter-Defendant. § 134TH JUDICIAL DISTRICT BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S MOTION FOR JUDGMENT ON THE VERDICT TO THE HONORABLE JUDGE OF THIS COURT: COMES NOW, Third-Party Defendant Bernard V. Carrico, Jr. (“Carrico”) in the above- entitled cause, and at the Court’s request, files this Brief in Support of Bernard V. Carrico, Jr.’s Motion for Judgment on the Verdict, and in support would respectfully show as follows: I. ARGUMENT AND AUTHORITIES On November 17, 2014, a hearing was held on: (1) Bernard V. Carrico, Jr.’s Motion for Judgment on the Verdict; and (2) The Richardson Trident Company’s Motion to Disregard Jury Findings and for Judgment Notwithstanding the Verdict. During the course of the hearing in which Trident’s counsel asked the Court to disregard all of the jury’s answers to Question Nos. BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 1 MOTION FOR JUDGMENT ON THE VERDICT 1, 3, 10 and 11, and enter judgment for Trident on none of the jury answers in the verdict, the Court requested all counsel to submit briefing on the legal effect of the jury’s answer to Question No. 1 on the authority of the Court to impose the equitable remedy of fee forfeiture against Carrico. Specifically, the parties were asked to address whether the jury’s finding that Carrico’s “use of the advantage of his position to gain a benefit for himself at the expense of The Richardson Trident Company” was ultimately “fair and equitable to The Richardson Trident Company” bars Trident’s claim for equitable relief. The short answer to this question is that the jury’s fact finding that despite Carrico’s breach of his fiduciary duty, the transaction was ultimately fair and equitable to Trident precludes the imposition of the equitable remedy of fee forfeiture. Burrow v. Arce, 997 S.W.2d 229, 245-246 (Tex. 1999); State v. Texas Pet Foods, 591 S.W.2d 800, 803 (Tex. 1979); Stephens County Museum, Inc. v. Swenson, 517 S.W.2d 257 (Tex. 1974); and Lee v. Hasson, 286 S.W.3d 1, 21 n. 13 (Tex. App. – Houston [14th Dist.] 2007, pet. denied). It is well-established that not every breach of fiduciary duty justifies fee forfeiture or other equitable relief. Burrow, 997 S.W.2d at 241. For example, even if a jury finds that an attorney has breached his fiduciary duty, the denial of a fee forfeiture is appropriate ifthe jury also found that the attorney/client transaction was ultimately fair and equitable to the client as reflected in other findings that the attorneys obtained a sale of their client’s stock upon terms and conditions acceptable to him and that the client suffered no damages as a result of the attorney’s misconduct. Miller v. Kennedy & Minshew, P.C., 142 S.W.3d 325, 338-340 (Tex. App. – Fort Worth 2003, pet. denied). Whether the equitable remedy of fee forfeiture should be imposed by the Court is restricted to “clear and serious violations of duty which involve fact issues for the jury to decide, including, but not limited to, the value of the fiduciary’s services, and the BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 2 MOTION FOR JUDGMENT ON THE VERDICT existence and amount of harm to the client. Burrow, 997 S.W.2d at 246; and Miller 142 S.W.3d at 338. Consequently, in an equitable proceeding involving a breach of fiduciary duty, “ultimate issues of fact are submitted for jury determination” as a predicate to the imposition of any equitable remedy by the Court. Burrow, 997 S.W.2d at 245; and State v. Texas Pet Foods, 591 S.W.2d 800, 803 (Tex. 1979); and Miller, 142 S.W.3d at 338-339. Moreover, “equity is a court of conscience” that seeks to do justice in good faith. Flores v. Flores, 116 S.W.3d 870, 876 (Tex. App. – Corpus Christi 2003, no pet.). Thus, if the transaction was fair and equitable to the beneficiary despite a breach of fiduciary duty, equity has already been served. Accordingly, although a jury “does not determine the expediency, necessity or propriety of equitable relief,” the Texas Supreme Court has explained that when a contested fact issue exists as to whether the transaction was ultimately fair and equitable to the client, that fact issue must be resolved before equitable relief can be determined, and “a party is entitled to have that resolution made by a jury.” Burrow, 997 S.W.2d at 246, citing Texas Pet Foods, 591 S.W.2d at 803. See also, Stephens County Museum, Inc., 517 S.W.2d at 261 (a material issue of fact is “whether the transactions were ultimately fair and equitable” to the clients). If a transaction was ultimately fair and equitable to the beneficiary, there is no justification for the imposition of an equitable remedy. The exclusive role of the submission of Question No. 1 in the Court’s Charge was to determine in this equitable proceeding, whether the transaction in question was nevertheless “fair and equitable” to Trident despite Carrico’s “use of the advantage of his position to gain a benefit for himself at the expense of” Trident. Trident implicitly agreed with the appropriateness and need to obtain a fact finding to Question No. 1 because, like the claimant in Thygeson, Trident did not object to the submission of Question No. 1 on the grounds that itwas unsupported by BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 3 MOTION FOR JUDGMENT ON THE VERDICT sufficient conflicting evidence or that its finding would be immaterial to its claim for equitable relief. See Thygesen v. Strange, Nos. 14-09-00866-CV, 2013 W.L. 2247381, at *3 (Tex. App. – Houston [14th Dist.] May 21, 2013, pet. denied.). As in Thygesen, having consented to the submission of a predicate jury question to an award of equitable relief, Trident cannot now successfully contend that the jury’s verdict that the transaction was fair and equitable to Trident was “advisory only” and that the trial court could still decide to impose an equitable remedy. Id. at *2 (applying Texas procedural law). Moreover, the Thygesen appellate court acknowledged the controlling principle of Texas law that in the apportionment of duties between the jury and the trial court when a party requests equitable relief, a party is entitled to have the ultimate fact question of whether the transaction was fair and equitable to the client resolved by a jury as a predicate to the Court’s determination of whether to award equitable relief. Id. at *3, citing Burrow, 997 S.W.2d at 245-246. There are a number of factors that relate to whether a transaction was “fair and equitable” or “fair and reasonable” to the client despite the breach of a fiduciary duty. These “fairness factors” include: (1) whether the fiduciary significantly benefited from the transaction as viewed in light of circumstances existing at the time of the transaction, (2) whether the fiduciary benefited at the expense of the beneficiary, (3) whether the consideration received by the fiduciary was excessive, (4) whether the beneficiary had the benefit of independent advice, and (5) whether there was full disclosure of all material facts regarding the transaction. See e.g. Lee, 286 S.W.3d at 21, citing Estate of Townes v. Townes, 867 S.W.2d 414, 417 (Tex. App. – Houston [14th Dist.] 1993, writ denied). BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 4 MOTION FOR JUDGMENT ON THE VERDICT Although some of these factors may relate to the determination of “fairness” with respect to whether the fiduciary breached his duty, “these issues are also factors in determining the fairness of the transaction” as a predicate to the award of equitable relief. Lee, 286 S.W.3d at 21, n. 13. Therefore, in light of the Court’s directed verdict, and even in the event that the jury had found a breach of fiduciary duty in answer to Question No. 3, it was necessary to submit Question No. 1 as a predicate to the award of any equitable relief. Having properly submitted Question No. 1, absent any objection by Trident, its answer cannot now be legally ignored. II. EVIDENCE SUPPORTING THE JURY’S ANSWER TO QUESTION NO. 1 Throughout the trial, both sides spent considerable time presenting evidence concerning Carrico’s conduct, the benefits received by Carrico, the harm, if any, to Trident, and the overall effect that the transaction had on Trident. As discussed in detail below, abundant evidence was presented upon which a jury could reasonably conclude that the Trident/White Rock transaction was fair and equitable to Trident at its inception as well as in the ultimate result. In contrast, Trident’s letter brief does not contend that there is insufficient evidence to support the jury’s answer to Question No. 1 or what role Question No. 1 served in the Court’s Charge if not to serve as a necessary predicate to Trident’s claim for equitable relief. (1) Whether the fiduciary significantly benefited from the transaction as viewed in light of circumstances existing at the time of the transaction. Greg Hext testified at length that the terms of the engagement agreement between White Rock Advisors and Trident were fair and reasonable at its inception. Hext testified that the terms of the agreement, including the 7% Sale Fee, conformed to industry standards for a transaction involving a company as financially distressed as Trident. The evidence showed that the White BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 5 MOTION FOR JUDGMENT ON THE VERDICT Rock/Trident Agreement was negotiated after Trident/Bentley had already fired multiple professional services firms that had been thus far unsuccessful in recapitalizing the company or restraining Thomas E. Bentley’s spending habits which had imperiled the company. Hext explained that the level of the risk to White Rock involved in this particular transaction supported a fee of at least 7% and that he/White Rock would not have entered into the agreement without the inclusion of the 7% Sale Fee due to those risks. Furthermore, the evidence reflected that at the time the White Rock/Trident agreement was entered into the expected Sale Fee to White Rock Advisors would be $0.00, because 7% of an insolvent company is $0.00. Additionally, the evidence showed that the Sale Fee was a purely contingent fee with a strict, difficult to achieve condition precedent to payment. In this regard, the evidence showed that a sale of Trident actually had to close before White Rock Advisors was entitled to the Sale Fee, as opposed to the Growth Capital Partners and Trenwith agreements which only required that a letter of intent be obtained to trigger the Sale Fee obligation. Thus, although the value of the 7% fee in the agreement ultimately increased with the value of Trident, this increase directly related to the work required and anticipated level of difficulty. Further, the evidence showed that these predecessor firms had not been successful even in meeting the lower standards set forth in their engagement agreements and thus had not provided value to Trident. Lambert Mathieu echoed this sentiment, and testified based on his experience in the financial industry, that deals can be structured in a variety of ways and must be evaluated accordingly. Lambert Mathieu stated that he understood and analyzed the terms of the White Rock Engagement Agreement at the time it was executed, including the Sale Fee, and testified that the terms were fair and reasonable to Trident. BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 6 MOTION FOR JUDGMENT ON THE VERDICT Lambert Mathieu, Laura Kellogg and Carrico testified that the White Rock/Trident agreement was negotiated and, subject to oversight from outside counsel, accepted by Trident’s upper management and Board of Directors. Specifically, evidence was presented that certain provisions of the engagement agreement were modified at the request of Trident’s upper management. Laura Kellogg testified that she was aware of the Sale Fee provision and asked Carrico questions regarding it which were answered and explained to her satisfaction prior to execution of the engagement agreement. Additionally, testimony from those individuals, as well as Terry Bentley Hill, and correspondence from outside counsel and Trident’s Board of Directors minutes show that the engagement was approved, ratified and confirmed by the Board of Directors after its members were provided the opportunity to ask questions. Moreover, evidence was presented that the proposed board resolution concerning the entire White Rock/Trident engagement agreement was provided by Trident’s counsel to directors, Laura Kellogg, Terry Bentley Hill and Tom Bentley, Jr., two days prior to that board meeting. Finally, the evidence at trial, including the White Rock/Trident engagement agreement itself, the Chapman Hext Engagement Agreement, correspondence between Trident and its counsel, the testimony of Laura Kellogg, Thomas E. Bentley, Lambert Mathieu, Greg Hext and Carrico showed that the Chapman Hext and White Rock’s dual roles (including their agent Carrico) of CRO and investment banker, was disclosed to and known by all relevant parties. In fact, the testimony established that the engagement to these dual positions was suggested and encouraged by Trident to create significant cost savings of approximately $1.5 million and informational synergies for Trident. Therefore, on the basis of all of the foregoing evidence, a reasonable jury could have concluded that despite a breach of fiduciary duty by Carrico, the BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 7 MOTION FOR JUDGMENT ON THE VERDICT White Rock/Trident Agreement was fair and equitable to Trident when viewed in light of the circumstances in existence at the time of the transaction. (2) & (3) Whether the fiduciary benefited at the expense of the beneficiary, and was the consideration excessive. Another factor which bears on whether the transaction was fair and equitable to the beneficiary is whether the fiduciary benefited “at the expense of” the beneficiary. Lee, 286 S.W.3d at 21. In every breach of fiduciary case reviewed for this brief, there existed a direct correlation between the compensation or benefit received by the fiduciary and a reduction of the beneficiary’s estate. See, e.g. Lee, 286 S.W.2d at 22, 28 (the fiduciary’s first year salary would reduce the beneficiary’s marital estate by a low of $4,702,500.00 or a high of $15.4 million, together with other employment benefits); Estate of Townes, 867 S.W.2d at 420 (fiduciary withdrew $400,000.00 from beneficiary’s account without authority). However, the evidence at bar was that whatever amount of additional compensation Carrico would be entitled to from the future sale of Trident would be paid out of White Rock’s 7% Sale Fee, which fee Trident had always agreed to pay. In other words, Carrico was not a party to the White Rock/Trident engagement agreement and the additional compensation Carrico earned as a result of the Trident sale did not increase the cost of the sale to Trident. Instead, Carrico’s compensation was determined by and paid through his Independent Contractor Agreement with White Rock and was paid out of White Rock’s 7% Sale Fee reducing White Rock’s profit, but not Trident’s. Therefore, there was considerable evidence introduced that Carrico did not benefit “at the expense of” Trident with respect to the compensation he earned through his Independent Contractor Agreement with White Rock. BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 8 MOTION FOR JUDGMENT ON THE VERDICT Another fairness factor is whether the fiduciary received excessive consideration for the services he provided. Carrico, on behalf of Chapman Hext and White Rock Advisors, provided extensive services and valuable results for Trident in exchange for the consideration received by Chapman Hext and White Rock Advisors under the engagement agreements. Specifically, the evidence presented through Carrico, Greg Hext, Robin Kain, Lambert Mathieu and Laura Kellogg showed that they prepared the financing memorandum, engaged in aggressive recapitalization efforts, obtained recapitalization letters of intent, obtained necessary audits, restored the faith of the bank group, overcame the catastrophic impact of the August Issues, and after the cease funding demand letter was delivered at the banking meeting in late January 2011, began obtaining purchase offers and were involved in the Metals USA transaction that resulted in approximately $122 million in cash, benefits and releases of obligations for Trident and Bentley. The evidence showed that while Carrico was at Trident, the company went from having a negative value of approximately $30 million with littlehope of survival, to a company a year later worth more than $120 million dollars due in large part to Carrico’s efforts. The testimony of Laura Kellogg and Carrico showed that for more than a year Carrico acted with good faith and in the best interests of Trident. For example, the testimony showed that Carrico recommended seeking bankruptcy protection despite the fact that a bankruptcy filing would have terminated his role at Trident and eliminated any possibility of his receiving any compensation as a result of White Rock earning a recapitalization Success Fee or Sale Fee. Carrico worked diligently, devoting hundreds of hours to the efforts to recapitalize and ultimately to facilitate the sale of Trident for an enormous profit. The testimony of Carrico, Greg Hext and the terms of Carrico’s independent contractor agreement put in evidence the fact that Carrico was compensated as an hourly employee by BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 9 MOTION FOR JUDGMENT ON THE VERDICT White Rock Advisors and only had a contingent non-quantifiable interest in any Sale Fee or Success Fee earned by White Rock Advisors or Chapman Hext. Comparatively, the evidence showed that Trident’s benefit of $122 million in cash, benefits and releases far exceeded the potential relative benefit to Carrico, which was paid out of and did not increase the amount of the Sale Fee Trident always agreed to pay White Rock and which amount was awarded to White Rock in arbitration and confirmed by a Final Judgment. Moreover, an arbitration panel has previously determined that the entire 7% Sale Fee was reasonable and owed by Trident to White Rock which was confirmed by a Final Judgment. This evidence is not only legally sufficient, but is overwhelmingly sufficient to support the Jury’s answer to Question No. 1 that the transaction was fair and equitable to Trident, in all respects. (4) Whether the beneficiary had the benefit of independent advice. The vast majority of breach of fiduciary duty cases involve a professional (i.e. attorney or financial advisor) who takes advantage of an individual beneficiary. In those scenarios, it is very rare that the beneficiary has the benefit of independent professional advice, and in fact, there are instances where the fiduciary dissuaded the beneficiary from obtaining independent advice. See e.g. Lee, 286 S.W.3d at 22. Thus, the factor of whether the beneficiary had the benefit of independent advice in dealing with the fiduciary is an important factor in whether the transaction was fair and equitable for the beneficiary. The White Rock/Trident Engagement Agreement was a negotiated agreement between sophisticated parties. The jury also received evidence that in connection with the transaction, Trident received independent legal advice of counsel, Christie Flanagan, in connection with its dealing with White Rock and Carrico. Furthermore, Lambert Mathieu testified that he accepted BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 10 MOTION FOR JUDGMENT ON THE VERDICT the White Rock/Trident Agreement as Trident’s CFO and that based on his experience in the financial industry, that he thought its terms, including the Sale Fee, were reasonable. Finally, the jury received evidence that the Trident Board of Directors considered and ratified the White Rock/Trident Agreement after its members had been provided an opportunity to ask questions about its terms. Thus, there was ample evidence presented upon which a jury could reasonably find that Trident had the benefit of independent professional advice and that the agreement was fair and equitable to Trident. (5) Whether there was full disclosure of all material facts regarding the transaction. The amount of the contingent compensation could not have been disclosed by Carrico prior to the execution of the White Rock/Trident Agreement, but could only be determined by Greg Hext after the unanticipated sale of Trident occurred more than a year later. More importantly, whatever amount of additional compensation Carrico might have been entitled to from the sale of Trident would be paid out of White Rock’s 7% Sale Fee which fee Trident had always agreed to pay, and Carrico’s compensation would not have and did not cause any increased cost of the sale to Trident. Consequently, a jury could reasonably have concluded that the information that Carrico might receive an unspecified contingent amount of compensation under his independent contractor agreement in the event of a sale of Trident did not involve the failure by Carrico to disclose material information that rendered the transaction unfair to Trident. BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 11 MOTION FOR JUDGMENT ON THE VERDICT III. TRIDENT’S “UNCLEAN HANDS” ALSO PRECLUDES AN AWARD OF EQUITABLE RELIEF In addition to the jury’s answer to Question No. 1 that despite Carrico’s breach of fiduciary duty, the transaction was fair and equitable to Trident, Trident is also not entitled to equitable relief because of the doctrine of unclean hands which is a fundamental concept of equity jurisprudence. The equitable doctrine of unclean hands expresses the principle that when a party comes into court seeking equity, he must show that his own conduct has been fair, equitable and honest with respect to the particular controversy in issue. Lazy M Ranch, LTD. v. TXI Operations, LP, 978 S.W.2d 678, 683 (Tex. App. – Austin 1998, pet. denied.) (mining company not entitled to specific performance because it had violated the same agreement); and Crown Construction Co. v. Huddleston, 961 S.W.2d 552, 559 (Tex. App. – San Antonio 1997, no pet.) (claimant who was in breach of lease may not receive equity to extend it). Moreover, the doctrine of unclean hands is applied to preclude equitable relief to one whose own conduct has been unjust, or marked by want of good faith, or one who has violated the principles of equity and righteous dealing. Crown Construction Co., 961 S.W.2d at 559, citing Ligon v. E. F. Hutton & Co., 428 S.W.2d 434, 437 (Tex. Civ. App. – Dallas 1968, writ ref’d n.r.e.); 34 Tex. Jur. 3d Equity § 32 (1984). As applied to the case at bar, Trident is precluded from an equitable remedy of fee forfeiture or profit disgorgement because of an abundance of undisputed evidence that Trident breached the White Rock/Trident Agreement by having engaged in its own sale efforts in breach of the exclusivity provision of the agreement. Furthermore, the evidence presented at trial established that Trident’s sole shareholder, Thomas Bentley, engaged in numerous inequitable and unjust or bad faith activities that undermined the recapitalization efforts and resulted in BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 12 MOTION FOR JUDGMENT ON THE VERDICT Trident’s sale and the triggering of the Sale Fee at issue. In this regard, the evidence further showed that while Carrico and White Rock worked diligently to obtain purchase offers, Trident was engaged in its own sale efforts to attempt to circumvent the exclusivity provision in the White Rock. This evidence that Trident violated the White Rock Engagement Agreement was undisputed and was presented through multiple witnesses including Sparky McDuff, Greg Hext and Carrico. The evidence further showed that Trident also tried to renege on payment of the 7% Sale Fee which harmed Carrico by delaying receipt of his compensation pursuant to his Independent Contractor Agreement with White Rock. As a party requesting an equitable remedy, Trident must come to the Court with clean hands. This clear contractual violation, as well as the August Issues perpetrated by Trident’s sole shareholder, were exhaustively addressed at trial, and should bar any award of equity by the Court. Otherwise, Trident will be unjustly enriched if itis allowed to achieve through equity what it was found not to be entitled to in arbitration and by the jury. WHEREFORE, PREMISES CONSIDERED, Carrico respectfully requests that the Court enter judgment for Carrico in accordance with the jury’s verdict as requested in Carrico’s Motion for Judgment on the Verdict (form of Judgment enclosed), and for such other and further relief, both at law and in equity, to which Carrico is entitled. BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 13 MOTION FOR JUDGMENT ON THE VERDICT Respectfully submitted, HIERSCHE, HAYWARD, DRAKELEY & URBACH, P.C. By: /s/ Kevin J. Keith James T. Drakeley State Bar No. 06111600 R. Scott Seifert State Bar No. 24003860 Kevin J. Keith State Bar No. 11187700 Laurie N. Arnoldy State Bar No. 24078158 15303 Dallas Parkway, Suite 700 Addison, Texas 75001 Tel: 972-701-7000 Fax: 972-701-8765 Email: jdrakeley@hhdulaw.com sseifert@hhdulaw.com kkeith@hhdulaw.com larnoldy@hhdulaw.com ATTORNEYS FOR BERNARD V. CARRICO, JR. CERTIFICATE OF SERVICE I, the undersigned, hereby certify that on November 25, 2014, a true and correct copy of the above and foregoing document was electronically served upon counsel for Defendants/Counter-Plaintiffs, pursuant to Texas Rule of Civil Procedure 21a. Jeffrey M. Tillotson, P.C. jtillotson@lynnllp.com John D. Volney jvolney@lynnllp.com Michelle Ku mku@lynnllp.com Lynn Tillotson Pinker & Cox, LLP 2100 Ross Ave., Suite 2700 Dallas, Texas 75201 /s/ Kevin J. Keith Kevin J. Keith BRIEF IN SUPPORT OF BERNARD V. CARRICO, JR.’S Page 14 MOTION FOR JUDGMENT ON THE VERDICT