Facts: After 10 years of being 50/50 partners in ERI Consulting Engineers, Inc. and Malmeba Company, Ltd, Larry Snodgrass agreed to buy out Mark Swinnea by paying $497,500, assigning his 50% interest in Malmeba to Swinnea, and promising Swinnea 6 years of continued employment with ERI. In return, Swinnea agreed not to compete with ERI in the asbestos abatement consulting business. What Snodgrass didn’t know was that Swinnea’s wife, along with the wife of another ERI employee, had created a new company a month before the buyout agreement was signed that would be competing directly with ERI’s customers. Later, while he remained an ERI employee, Swinnea created another company that steered business away from ERI. Eventually, Swinnea was found out and fired from ERI.
Holding: Snodgrass sued Swinnea for breach of fiduciary duty and several other causes of action. The trial court awarded Snodgrass $300,000 in lost profits, $1,000,000 in punitive damages, and ordered that Swinnea forfeit to Snodgrass the $497,500 he received from Snodgrass, along with all other financial benefits Swinnea had realized. The court of appeals reversed, finding that the evidence of damages was legally insufficient and that the remedy of equitable forfeiture was unavailable. The Texas Supreme Court reversed the appellate court, holding that equitable forfeiture was an appropriate remedy for Swinnea’s intentional breach of fiduciary duty regardless of whether Snodgrass could prove actual damages had been suffered.
Significance: Regardless of whether actual damages can be proven, a fiduciary, such as a partner, limited liability manager or corporate officer, can be required to forfeit financial benefits realized as a result of having intentionally breached a fiduciary duty. In short, “no harm, no foul,” doesn’t necessarily apply when a fiduciary duty has been intentionally breached.