R. Scott Brown v. Allen D. Keel

Opinion issued March 8, 2012.

In The

Court of

Appeals

For The

First District

of Texas

————————————

NO. 01-10-00936-CV

———————————

R. Scott Brown , Appellant

V.

Allan D.

Keel , Appellee

On Appeal from the 234th District Court

Harris County, Texas

Trial Court Case No. 2009-04679

MEMORANDUM OPINION

R. Scott

Brown appeals from the trial court’s judgment notwithstanding the verdict

(JNOV) in this partnership dispute. In his first and second issues, Brown

contends that the trial court erred in granting JNOV in favor of Allan Keel

because there was sufficient evidence to support the jury’s findings on the

existence of a partnership and causation. In his third, fourth and fifth

issues, Brown challenges the trial court’s alternative JNOV reducing the

damages award and failure to grant Brown’s JNOV to increase the damages award.

We hold that the evidence is legally sufficient to support the jury’s

partnership finding but not legally sufficient to support the finding on

causation. We therefore affirm the trial court’s judgment.

Background

A. The transaction

In 2004, Brown and Keel began

discussing the possibility of starting their own private equity fund with a

focus on oil and gas investments. Brown brought finance experience to the

endeavor, while Keel brought operational experience in the energy sector. They

dubbed their venture “Maverick Energy” and traveled to New York to pitch their

fund to potential investors. The New York trip did not bear fruit, but shortly

after they returned to Houston, Brown contacted Keel about an investment

opportunity involving GulfWest Energy, a Houston-based oil and gas company.

GulfWest suffered cash-flow problems in 2004 and was looking for investors to

provide the cash-infusion needed to get the company back on track. Maverick

entered into a confidentiality agreement with GulfWest so that Brown and Keel

could obtain the information necessary to perform due diligence on a potential

investment in GulfWest.

After discovering that the name

Maverick Energy was already in use, Brown and Keel formed a Texas limited

liability company under the name Volant Energy. [1] The following day, Volant

sent GulfWest an acquisition proposal for a cash purchase of GulfWest’s shares.

Brown and Keel then began looking for an investor to finance the transaction.

As part of this effort, Keel contacted Oaktree Capital Management, a California

private investment fund.

Keel and Brown began discussions

with Oaktree about the GulfWest investment opportunity in late-November. In

early-December, Keel sent Oaktree a proposed term sheet. The term sheet

provided for $75 million in initial funding from investors, which would be used

to purchase GulfWest’s outstanding shares, converting GulfWest from

publicallyowned to privatelyowned. Under the term sheet, Keel and Brown were

identified as “Management,” who would provide $300,000 in initial funding, be

retained by the new company under five-year employment contracts, and receive

a 1% transaction fee at closing as well

as considerable equity and options in the new entity. Under their proposal,

Brown would be CFO of the new company and Keel would be CEO.

Oaktree was interested in the

investment but not under the terms proposed by Brown and Keel. Instead of

investing $75 million to purchase all of GulfWest’s shares and take the company

private, Oaktree decided to leave GulfWest public and invest $40 million to

acquire a majority interest. Oaktree decided to use its own investment vehicle

for the transaction, rather than Volant. Oaktree rejected Brown and Keel’s 1%

transaction fee and instead suggested a $600,000 transaction fee at closing to

be invested in new preferred shares of GulfWest. Oaktree also resisted paying

an investment banking fee to Brown’s employer, Southwest Securities, arguing

that Southwest had not been involved in the deal other than as Brown’s employer

when he worked on the deal; Oaktree suggested any payment to Southwest should

come out of Brown and Keel’s transaction fee. Oaktree altered the terms of

Brown and Keel’s anticipated employment contracts, including a reduced salary,

reduced bonuses and a shortened three-year term. Oaktree also wanted to give

Brown and Keel less equity and no options. In mid- and late-December, Keel sent

Oaktree revised term sheets from Volant containing most of the terms dictated

by Oaktree.

Beginning in December 2004, friction

arose between Brown, who took the lead in negotiations with Oaktree on behalf

of Brown and Keel, and Skardon Baker, Oaktree’s point man in the negotiations.

Baker was displeased with Brown’s negotiation style and demeanor. Baker also

expressed concern that Brown had never served as CFO of a publicly traded

company. Baker began to communicate primarily with Keel, leaving Brown off

emails about the transaction. Keel also began sending email to Baker and others

at Oaktree that did not include Brown, although on at least one occasion, Keel

forwarded one of Baker’s emails about the transaction to Brown. Ultimately,

Baker concluded that Oaktree should not hire Brown as CFO of the new company.

On January 9, Baker sent an email

to Keel and others stating that he had spoken with Jim Ford, managing director

of Oaktree, about the “CFO issue” and Jim was “on board with the necessary

action.” Baker suggested that Oaktree involve “Julien,” Oaktree’s lawyer, “so

we are doing it in a professional and safe manner.” Keel did not disclose his discussions with

Oaktree to Brown. At the same time, GulfWest’s cash flow problems posed a

hindrance to the transaction. GulfWest did not have funds to cover the

necessary due diligence costs. After Oaktree refused, Brown and Keel loaned

GulfWest $200,000 — $120,000

from Keel and $80,000 from Brown — to cover these costs. This loan took place on January 10 — the day after Keel received Baker’s email about

not hiring Brown.

Throughout January, Keel did not

disclose Oaktree’s intentions to Brown, but he did encourage Oaktree to handle

the matter itself. In one email between Keel and Oaktree, Keel states:

Scott senses there is something amiss and as soon as

we can get comfortable that the deal will happen I think we/you should speak

with him. He has worked very hard and even though I believe he ultimately could

be a productive CFO, I understand your issues. It is important to me that

Southwest receive a fair fee for their part in this transaction . . . I don’t know if there is a way to compensate

Scott separately but he should share in his part of the transaction fee we

agreed to if possible.

During

this time, Oaktree and GulfWest moved forward with the transaction.

On January 30, 2005, Ford

informed Brown that Oaktreewould not hire him as CFO of the new company, but

Ford left open the possibility that Brown could take on another role with the

company. Over the following week, Ford, Baker, and Keel had discussions

regarding a role for Brown other than CFO. Keel’s position in these discussions

was that it would be “tough to find a spot” for Brown other than CFO. Keel

stated, “Although I do believe Scott is a capable and creative professional,

I’m having difficulties seeing his role if it’s not that of CFO.” Keel noted

that the person hired as CFO would want an ownership interest and that interest

should come out of the stock options that would have gone to Brown. Oaktree

decided not to hire Brown in any role. On February 7, Keel met Brown for

lunch and “let him know there is no spot for him at new company[.]” Brown was

upset by this decision, and he made it clear he still felt that Southwest was

entitled to an investment banking fee based on his work on the transaction and

that he should be compensated individually for bringing the opportunity to

Oaktree.

Oaktree determined that it needed a waiver from Brown,

releasing Oaktree from any liability, before it closed the GulfWest

transaction. In exchange for a release, Oaktree offered Brown his choice of

$500,000 or $250,000 plus 250,000 common shares of the new entity at closing,

which Brown was to share with SouthWest at his “discretion.” Brown rejected

this offer, noting that the “three advisory firms were each already receiving

$500,000 fees.”

When Brown refused to sign the release, Baker contacted

Brown’s boss at Southwest. In an email following Baker’s initial communications

with Brown’s boss, Baker told Brown’s boss that Brown “has pressured us to

arrange additional compensation for him in an individual capacity” and that

Oaktree was “highly uncomfortable with that outcome” for “all the reasons we

discussed.” Oaktree offered Southwest a $500,000 investment banking fee in

exchange for signing a release and agreeing to indemnify Oaktree for any claims

against it by Brown, unless Southwest could get Brown to sign the release as

well. Brown refused to sign the release. Southwest accepted the $500,000 fee

but required Oaktree to indemnify Southwest for any claims related to the

transaction. Southwest then fired Brown.

The GulfWest transaction closed at the end of February 2005.

B. The lawsuit

Brown

sued Keel for breach of his partnership duties. [2] After a four-day trial, the

jury found that Keel and Brown had entered into a partnership to identify and

invest or acquire oil and gas companies and that Keel failed to comply with his

duty of loyalty to Brown. The jury found that Keel’s breach proximately caused

Brown damages of $1,250,000, based on “the value of the stock options on February

28, 2005 that Brown would have received but for the breach.” Finally, the jury

rejected Keel’s contention that Brown ratified his conduct.

Keel moved for JNOV and to

disregard the jury’s damages finding. Keel argued that the trial court should

enter JNOV because there was no evidence of a partnership or that Keel’s

alleged breach proximately caused Brown’s damages. Keel also argued that the

trial court should disregard the jury’s damages finding because it valued Brown’s lost stock options on the

date of closing, when the law required the stock options to be valued “on the

first day (after the breach) when the owner can take delivery of the stock.”

Valuing the stock options on the correct date, Keel asserted, Brown’s damages

were no more than $111,375.

Brown moved for JNOV on damages,

arguing that the evidence conclusively established that the value of the stock

options was $7.3 million.

The trial court denied Brown’s

motion for JNOV. It granted Keel’s motion for NOV as follows:

Defendant’s

Motion for Judgment Notwithstanding the Verdict in the amount of $111.375 in

damages is GRANTED, but such ruling in rendered moot by the Court’s other

rulings below;

Defendant’s

Motion for Judgment Notwithstanding the Verdict regarding proximate cause is

GRANTED, but such ruling is rendered moot by the Court’s other ruling below;

and

Defendant’s

Motion for Judgment Notwithstanding the Verdict regarding formation of a

partnership is GRANTED.

The trial court then entered a take-nothing judgment

in favor of Keel.

Standard of Review

“We review a JNOV under a no-evidence standard, meaning we ‘credit

evidence favoring the jury verdict if reasonable jurors could, and disregard

contrary evidence unless reasonable jurors could not.’” Tanner v. Nationwide

Mut. Fire Ins. Co. , 289 S.W.3d 828, 830 (Tex. 2009) (quoting Cent. Ready Mix Concrete Co. v. Islas ,

228 S.W.3d 649, 651 (Tex. 2007)). Under this standard, we will uphold the

jury’s finding if it is supported by more than a scintilla of competent

evidence. Id. (citing Walmart Stores, Inc. v. Miller , 102

S.W.3d 706, 709 (Tex. 2003)). We will uphold the trial court’s JNOV, on the

other hand, if there is no evidence to support the jury’s finding on a vital

fact or if the evidence conclusively establishes the opposite of a vital fact. City of Keller v. Wilson , 168 S.W.3d

802, 810 (Tex. 2005). The ultimate test for legal sufficiency is“whether the

evidence at trial would enable reasonable and fair-minded people to reach the

verdict under review.” Id. at 827 ; see also Tanner , 289 S.W.3d at 830 .

Thus, to merit the trial court’s JNOV and take-nothing judgment, Keel was

required to show that the evidence conclusively proved that a partnership did

not exist or that Keel’s breach of his partnership duties did not cause Brown

damages and that no reasonable jury was free to think otherwise. See Tanner , 289 S.W.3d at 830 .Similarly,

for either Brown or Keel to demonstrate a right to JNOV on the jury’s damages

finding, he was required to show that the evidence conclusively proved the

value of Brown’s lost stock options under the applicable measure of damages in

the amount of the judgment sought. See

id.

Partnership Evidence

In his first issue, Brown contends

that the trial court erred in entering JNOV on the ground that there was no

evidence of a partnership. The parties agree that the determination of whether

a partnership existed between Brown and Keel is made in consideration of the

five factors identified in Ingram

v. Deere , 288 S.W.3d 886, 896

(Tex. 2009). [3] These factors are:

(1) receipt or right to receive a share of

profits of the business;

(2) expression of intent

to be partners in the business;

(3) participation

or right to participate in control of the business;

(4) sharing or

agreeing to share:

(A) losses of the business; or

(B) liability for claims by third

parties against the business; and

(5) contributing

or agreeing to contribute money or property to the business.

Id. at 895; see also Tex. Bus. Orgs. Code Ann. § 152.052(a) (West Supp. 2011). Proof of each of these elements is not necessary to

establish a partnership. Ingram , 288

SW.3dat 896. Instead, all of these factors should be considered in determining

whether a partnership exists and no single factor is determinative. Id. at 896–97. Under this

totality-of-the-circumstances test, even conclusive evidence of only one factor

normally will not be sufficient to establish the existence of a partnership. Id. at 898 . On the other hand,

conclusive evidence of all five factors will establish a partnership as a

matter of law. Id.

A. Sharing

profits

Shared rights to profits and to

control the business are generally considered the most important factors in

establishing the existence of a partnership. Ingram , 288 S.W.3d at 896 ; see

also Big Easy Cajun Corp. v. Dallas Galleria Ltd. , 293 S.W.3d 345, 348 (Tex. App.—Dallas 2009, pet. denied)

(“The most important of these factors are sharing profits and participating in

control of the business.”). As evidence of profit sharing, Brown relies on his

own testimony at trial as well as certain exhibits providing for equal payments

and rights for Brown and Keel under their investment proposals. Brown testified

that he and Keel agreed to share profits and losses. He further testified that

he and Keel had agreed to a 50-50 split of both the risk of their venture and

any revenues and “upside from the investment.” The evidence at trial included a

“Maverick Energy” budget proposal from October 2004 that anticipated equal

compensation for Brown and Keel and multiple “Volant Energy” term sheets sent

to Oaktree that provided for equal compensation, employment rights, and stock

options for Brown and Keel.

Keel attacks Brown’s profit sharing

evidence on the grounds that some of Brown’s testimony relates to “revenues,”

rather than profits, and that payment of wages or other compensation is not

evidence of profit sharing. See Ingram ,

288 S.W.3d at 899 (noting the distinction between gross revenues and profits); see also id. at 898 (noting that profits

paid as compensation for work performed is not indicative of a partnership

interest). But Brown specifically testified that he and Keel agreed to share

“profits,” not just revenues. And sharing equally in revenues can equate to sharing

in profits when expenditures are also equally shared, as Brown testified here. See id. at 899 (citing to definition of

“profits” as the “excess of revenues over expenditures in a business

transaction”). Finally, although the profit sharing evidence Brown relies on

includes proposals under which Brown and Keel would be paid equal salaries, the

evidence is not limited to salary evidence. Brown testified about “profits”

broadly, as well as investment management fees earned by the partnership entity

and increases in the value of their investment.

As the sole judge of the witnesses’

credibility, the jury was free to credit Brown’s testimony that he and Keel had

agreed to share profits. See City of

Keller , 168 S.W.3d at 819 (“Jurors are the sole judges of the credibility

of the witnesses and the weight to give their testimony.”); Hoss v. Alardin , 338 S.W.3d 635, 641

(Tex. App.—Dallas 2011, no pet.) (quoting City

of Keller for this principle in context of dispute over existence of

partnership).Keel cites no evidence tending to disprove such an agreement.

This factor provides support for the jury’s partnership

finding.

B. Expression

of intent to be partners

When considering whether the parties expressed an intent to

be partners, courts look at the parties’ speech, writings, and conduct. Ingram ,

288 S.W.3d at 899 . “Evidence of intent could include, for example, the parties’

statements that they are partners, one party holding the other party out as a

partner on the business’s letterhead or name plate, or in a signed partnership

agreement.” Id. at 900 . This inquiry

is “separate and apart from the other factors” and should only include evidence

not specifically probative of the other factors. Id. at 899–900. Thus, evidence of profit or loss sharing, control,

or contribution of money or property is not evidence of an expression of intent

to be partners. Id. at 900 . “Otherwise,

all evidence could be an ‘expression’ of the parties intent, making the intent

factor a catch-all for evidence of any of the factors, and the separate

‘expression of intent’ inquiry would be eviscerated.” Id.

As evidence of an expression of intent to be partners, Brown

relies on his testimony that he and Keel were partners, that they “express[ed

a] mutual intent to be partners,” and that they “shook hands” on the agreement

before leaving for the New York trip in September 2004. Brown also relies on the

Maverick PowerPoint presentations Brown and Keel gave to potential investors in

New York, which identified Brown and Keel as “principals,” which Brown

understood to be short for “principal partners.” Brown also points out that he

and Keel were identified as the only two “managers” of Volant in documents

filed with the Texas Secretary of State. Finally, Brown relies on testimony in

which he disputes Keel’s testimony that they did not agree to be partners and

Keel never expressed an intent to be partners.

A lay witness’s conclusion as to

whether a partnership has been formed is generally not competent evidence of

the formation of a partnership. See Hoss , 338 S.W.3d at 644–45 (holding that plaintiff’s testimony

that he and defendant “specifically agree[d] to be partners” was conclusory and

therefore no evidence of an expression of intent to be partners); Torres v.

Kelley , No. 13–04–313–CV,

2007 WL 528849 , at *4 (Tex.App.—Corpus Christi Feb. 22, 2007, no pet.) (mem.

op.)(“While it is true that both parties and their attorneys made numerous

statements about a partnership to be formed, such conclusory statements are no

evidence of the formation of a partnership contract.Mere personal belief there

may be a partnership is not probative evidence.”). Thus, Brown’s testimony that

he believed himself to be partners with Keel is not, alone, evidence of a legal

partnership. While Brown identified certain bases for his conclusion, such as

his and Keel’s agreement to share profits and losses 50-50, we may not consider

evidence of the other partnership factors in determining whether the parties

expressed an intent to be partners. Ingram ,

288 S.W.3d at 900 . Moreover, while Brown

testified that he understood the term “principals” to mean “partners,” there is

no evidence that anyone else shared that understanding. Cf. Hoss , 338

S.W.3d at 644 (“Moreover, ‘there must be evidence that both parties expressed their intent to be partners.’”) (quoting Reagan v. Lyberger , 156 S.W.3d 925, 928

(Tex. App.—Dallas 2005, no pet.)).

But the jury could reasonably have inferred from Brown’s

testimony that he and Keel “express[ed] [their] mutual intent to be partners”

and “shook hands” on it, that he and Keel made mutual statements to each other

that they were partners. See Ingram ,

288 S.W.3d at 900 (stating the evidence of intent “could include, for example,

the parties’ statements that they are partners . . . .”). Although Keel denied

having made such a statement, the jury was free to credit Brown’s testimony and

discredit Keel’s contradictory testimony. See

City of Keller , 168 S.W.3d at 819 ; Hoss ,

338 S.W.3d at 641 . Brown’s testimony that he and Keel “shook hands” on their

agreement before embarking on their trip to New York in search of investors is

some evidence that they intended their expression to have significance to their

business endeavor. Cf. Ingram , 288

S.W.3d at 900 (stating that “merely referring to another person as ‘partner’ in

a situation where the recipient of the message would not expect the declarant

to make a statement of legal significance” is not sufficient because the

parties could be using the term in a colloquial sense, but the term “could

constitute legally significant evidence of expression of intent when made in a

circumstance that indicates significance to the business endeavor.”).

This factor provides support for the jury’s partnership

finding.

C. Sharing

control of business

As noted above, sharing of control,

like sharing of profits, is typically given particular importance in the

analysis of whether a partnership exists. Seeid.

at 896; Big Easy Cajun , 293

S.W.3d at 348 .The right to control a

business is the right to make executive decisions. See Ingram , 288 S.W.3d at 901–02; Guerrero v. Salinas , No. 13–05–323–CV, 2006 WL 2294578 ,

at *11 (Tex.App.—Corpus Christi Aug. 10, 2006, no pet.); Tierra Sol Joint Venture v.

City of El Paso , 155 S.W.3d

503, 508 (Tex.App.—El Paso 2004, pet. denied).

As evidence of shared control, Brown

relies on his testimony that one of the terms of their partnership agreement

was that he and Keel would “both be a part of the management team” and that

they both agreed to “participate in the control of the business.” He also testified

that he and Keel worked together and “went back and forth” on all of the

spreadsheets, presentations, and documents they prepared for their venture.

Keel likewise testified that he and Brown worked together on the spreadsheets

they presented to Oaktree and that Brown took the lead in the negotiations with

Oaktree on behalf of both of them. Keel testified that Brown would negotiate

with Oaktree and report back to Keel on the progress.

This evidence constitutes some evidence that Brown

participated in the decision-making process of his venture with Keel. There is

no contrary evidence that decision-making authority was vested in Keel alone.

This factor provides support for the jury’s partnership

finding.

D. Sharing

losses or liability

The only evidence relating to the sharing of losses or

liabilities is Brown’s own testimony that he and Keel agreed to share losses

when they met before the New York trip in September 2004 and that they agreed

to share the “risk 50/50” when putting together early budget proposals. But

Brown’s testimony is evidence, and the jury was within its prerogative to

credit that testimony. See City of Keller ,

168 S.W.3d at 819 ; Hoss , 338 S.W.3d

at 641 .

Keel argues that Brown talked about expenses, which are not

the equivalent of losses, and that Brown’s testimony about sharing the risk is

“conclusory.” But Brown specifically testified, on more than one occasion, that

he and Keel agreed to share “losses.”

Keel’s “conclusory” challenge to Brown’s testimony is misplaced. The

testimony relates to a specific, disputed factual circumstance—what the parties

agreed to, if anything, regarding losses—and not the ultimate legal question—whether

the parties were partners. Cf. Hoss ,

338 S.W.3d at 644 (rejecting conclusory lay witness testimony as to whether the

parties’ agreed to be partners); Ben Fitzgerald Realty Co. v. Muller ,

846 S.W.2d 110, 121 (Tex. App.—Tyler 1993, writ denied) (under prior

partnership law, rejecting conclusory lay witness testimony that parties were

partners) (citing Murphy v. McDermott, Inc. , 807 S.W.2d 606, 613 (Tex.App.—Houston [14th Dist.] 1991, writ

denied)).

This factor provides support for the jury’s partnership

finding.

E. Contributing

money or property to the business

Brown’s evidence of contributing to

the partnership includes (1) his testimony that he and Keel agreed to

contribute money to the business “if and when needed for closing,” (2) his

testimony that he incurred out-of-pocket expenses for travel and a Maverick

pitch book, and (3) his $80,000 loan to GulfWest.

Keel asserts that Brown’s travel

expenses were reimbursed by SouthWest. Citing Hoss , 338 S.W.3d at 648 , hefurther argues that “[t]o the extent

Brown had some out-of-pocket expenses for travel and the like, payment of

expenses is not a contribution to the partnership.” We agree that Brown’s

incurrence of costs for a pitch book and for travel, to the extent not

reimbursed by his employer, does not necessarily constitute contributing money

to the partnership. See id. (“ Evidence that business expenses were

paid by a credit card, in and of itself, is not evidence that money or property

was contributed as capital to the business.”)

Brown’s loan to GulfWest, however, can constitute

contributing money to a partnership. See

Reagan , 156 S.W.3d at 928 (holding that loan from one party to another was

evidence of fifth partnership factor); see

also Hoss , 338 S.W.3d at 647 (citing Reagan ,

156 S.W.3d at 928 ). The loan was not from a purported partner to the

partnership entity or to another partner; instead, the loan was from two

purported partners individually to third-party. But Keel admitted in his

testimony that the loan was made in order to cover GulfWest’s due diligence

costs relating to the proposed investment transaction and that he and Brown

agreed to come up with the money together. Brown testified that the loan was

made on behalf of the partnership and that they funded the loans individually,

rather than through a partnership vehicle, only for legal and accounting simplicity.

This is some evidence that Brown’s $80,000 loan to GulfWestwas made in

contribution to Brown and Keel’s partnership venture. Brown’s testimony that he

and Keel had agreed to contribute to closing costs as needed is also some

evidence of an agreement to contribute money to the partnership.

This factor provides support for the jury’s partnership

finding.

F. Conclusion

Considering this evidence in its totality, we conclude that the evidence

is legally sufficient to support the jury’s finding that Brown and Keel were

partners. See Ingram , 288 S.W.3d at 899-904 (applying totality-of-the-circumstances

test). The trial court therefore erred in granting JNOV on the ground that

there was no evidence of a partnership.

We sustain Brown’s first issue.

Causation

In

his second issue, Brown contends that the trial court erred in entering JNOV on

the ground that there was no evidence of causation. In his motion for JNOV,

Keel asserted that there was no evidence that Keel’s conduct proximately caused

Brown not to receive stock options in the new company. Keel relied on the

following testimony from Baker as conclusively proving that Oaktree would not

have proceeded with the GulfWest transaction if it required hiring Brown:

Q. Would Oakree have hired Mr. Brown and Mr.

Keel at Oaktree in February of 2005?

A. We were not prepared to go forward with the

investment with — if it required both Mr. Brown and Mr. Keel were employees.

Q. What if — what if Mr. Keel in

February of ’05 came to ya’ll and said he wasn’t coming to GulfWest without Mr.

Brown? What would Oaktree have done?

A. We would have walked away from the

investment. We were — we were uncomfortable with Mr. Brown as the

CFO at that point.

Brown

makes two responses to these arguments. First, Brown argues that even if

Oaktree did not want to hire him as CFO, they could still hire him in another

position and grant him the stock options that he had negotiated for himself and

Keel, which Keel received. Second, Brown argues that even if Oaktree did not

hire him, they could have given him the equivalent of the stock options in the

form of warrants.

A. Standards for causation of actual damages

Under

certain circumstances, a claimant in a breach of fiduciary duty action may

recover damages in equity even when actual damages are not established; but

when a claimant seeks to recover actual damages, he must prove that the damage

he seeks were caused by the breach. See

Burrow v. Arce , 997 S.W.2d 229 , 234–35, 240 (Tex. 1999). Brown sought to

recover actual damages and presented evidence based on the value of the stock

options package awarded to Keel. Question threeasked the jury to value Brown’s

damages, if any, that were proximately caused by Keel’s breach of his duty of

loyalty to Brown. The sole damages element submitted to the jury was “the value

of the stock options on February 28, 2005 that Brown would have received but

for the breach.”

“Proximate cause” subsumes two

elements: (1) cause in fact and (2) foreseeability. Akin, Gump, Strauss, Hauer& Feld, L.L.P. v. Nat’l Dev. &

Research Corp. , 299 S.W.3d 106, 122 (Tex. 2009); Finger v. Ray , 326 S.W.3d 285, 291 (Tex. App.—Houston [1st Dist.]

2010, no pet.). In turn, “cause in fact” has two sub-elements: (a) the injury

would not have occurred “but for” the defendant’s conduct and (b) the conduct

was a substantial factor in bringing about the injury. Akin, Gump, Strauss, Hauer& Feld, L.L.P. , 299 S.W.3d at 122 ; Finger , 326 S.W.3d at 291 . “Causation

must be proved, and conjecture, guess, or speculation will not suffice as that

proof.” Akin, Gump, Strauss, Hauer&

Feld, L.L.P. , 299 S.W.3d at 122 .

Thus, Brown had the burden at trial

to present some evidence that: (1) Brown would have received the stock options

package “but for” Keel’s breach; (2) Keel’s breach was a substantial factor in

Brown’s not receiving the stock options; and (3) it was foreseeable that Keel’s

breach would cause Brown not to receive the stock options. Keel was entitled to

JNOV on the element of causation if there was no evidence of one or more of

these three components of proximate cause.

B. Causation evidence

On January 30, 2005, Brown met with

Ford, Oaktree’s managing director and Baker’s superior. According to Brown,

Ford informed him that Oaktree would not hire him as CFO but stated that

Oaktree was still “very open to hearing about other positions that [he] could

have within the company and very open to discussions on that” and “open to

[him] getting the compensation package that [he] had negotiated.” Later that same

day, Ford sent an email to Baker telling Baker to “include [Brown] on the

email.”

Baker also testified that Oaktree

“kept the door open for possibly hiring [Brown] in another position” after

determining not to keep him on as CFO. But Baker also testified that he and

Keel were opposed to hiring Brown at all:

Q. . . . [S]o, he would have been part of the

management team, even though you didn’t want him as a CFO, right?

A. Correct.

Q. And, of course, [as] part of the

management team he would be entitled to all of the things that Mr. Keel got.

A. Not all of [the] things, no.

Q. Well — but you didn’t — never got to [that] point.

A. We never had a negotiation because —

Q.

Right. Because you asked Mr. Keel

what he thought about that, right?

A. We did, yes.

Q. And Mr. Keel said: No, don’t want him,

didn’t he?

A. Yes. And I felt the same way at that

point.

Q. Yeah. So, Mr. Keel is the one who

basically, as far as Oaktree was concerned, cut that rope that Mr. Brown was

hanging by, at least in February of ’05.

A. I don’t agree with that.

After Ford’s meeting with Brown,

Ford raised the possibility of hiring Brown in another position with Keel. In

an email to Ford two days after his meeting with Brown, Keel stated:

Scott would like to speak

with you regarding his role going forward, assuming we get the deal closed. He

would also like for me to argue his value in taking the company forward.

Although I do believe Scott is a capable and creative professional, I am having

difficulty seeing his role if it is not that of CFO. Also, I would expect Joe [Grady]

to want a meaningful piece of the upside, which would have to be extracted from

Scott’s share of the management equity.

Giving the above, I don’t

see much room for a compromise position. If you see it differently please let

me know and I will be glad to discuss it. I am not very interested in having a

3 way call where he wants me to demand his inclusion. If you get a chance in

the morning you may want to give me a call and we can discuss how to move

forward.

Within a week after Ford’s discussion with Brown,

Oaktree decided not to hire Brown at all.

Even

if the jury could have inferred that Keel’s resistance to hiring Brown in a position

other than CFO was a proximate cause of Oaktree’s decision not to hire Brown in

another position, there is no evidence that this caused the damages claimed by

Brown. Brown’s damages were not calculated based on a salary for this new

position. The damages question — which asked

about the damages proximately caused by Keel’s breach of loyalty — was limited to the value of the stock options

given to Keel. Keel contends that Oaktree had devoted all of the available

stock options to him, Joe Grady, who was hired as CFO

instead of Brown, and other members of the management team and that there is no

evidence that his actions caused Brown to lose stock options. Brown’s testimony

that Ford was open to discussions about Brown receiving the stock options is

not, alone, evidence that Keel’s conduct caused Oaktree not to give Brown the

stock options. [4]

According to Keel, “Brown would not have received stock options except as CFO.”

Brown cites to no evidence that, if he had been offered another position with

the new company, he would have received the same stock options package given to

Keel — or any stock options package.

Cf. id. at 116–17 (holding evidence

legally insufficient to support damages award for underlying judgment in

malpractice action when there was no evidence that plaintiff would have been

able to collect on underlying judgment); Doe v. Boys Clubs of Greater Dall., Inc. , 907 S.W.2d 472 , 477–78 (Tex. 1995)

(holding that even if defendant had a duty to investigate its volunteers,

breach of that duty was not the cause-in-fact of plaintiff’s sexual molestation

because there was no evidence that defendant would not have accepted molester

as volunteer if it had known about previous DWI conviction). Brown does

not identify any evidence of what positions Oaktreewould have considered him

for absent Keel’s resistance norany evidence that such positions would have

come with a stock options package. Absent such evidence, the jury had no basis

to conclude that, but for Keel’s conduct, Brown would have received the same stock

options package as Keel. [5]

Brown’s second argument, that

Oaktree could have given him the stock options in the form of warrants even

without hiring him, is similarly flawed. There is evidence in the record that

Oaktree could have given Brown warrants representing the stock options, but

there is no evidence that Oaktree ever considered doing so, much less that Oaktree

would have done so but for Keel’s conduct. To the contrary, after deciding not

to hire Brown at all, Oaktree offered Brown $500,000, or $250,000 plus 250,000 common share, in exchange

for a release. Brown rejected that offer, specifically asking that he be

awarded warrants representing a

meaningful number of the shares being awarded in equity options negotiated for

management. Oaktree expressly refused that request, stating that it could not

“give [Brown] an ‘employee’ stock package when [he] was not going to be an

employee.”

We overrule Brown’s second issue.

We hold that the trial court did not err in granting JNOV on the ground that

there is no evidence of causation. As a result of this holding, we need not

reach Brown’s damages issues.

Conclusion

We affirm

the trial court’s judgment on the ground that there is no evidence of

causation.

Harvey

Brown

Justice

Panel

consists of Justices Jennings, Sharp, and Brown.

Justice

Sharp, dissenting.

[1] Brown

does not contend that Volant is the partnership entity created between himself

and Keel. Cf. Lentz Eng’ing, LC v. Brown ,

No. 14-10-00610-CV, 2011 WL 4449655 , at *3

(Tex. App.—Houston [14th Dist.] Sept. 27, 2011, no. pet. h.) (“An association

or organization is not a partnership if it was created under the statute

governing the formation of LLCs.”). Volant is the investment vehicle that Brown

and Keel proposed Oaktree use to buy into GulfWest.

[2] Brown initially sued Oaktree too, but

he nonsuited Oaktree before trial.

[3] Ingram

discusses these factors under the Texas Revised Partnership Act (TRPA), which expired on January

1, 2010. See Act

of May 31, 1993, 73d Leg., R.S., ch. 917, § 1, 1993 Tex. Gen. Laws 3887 , 3890

(expired Jan. 1, 2010) (former Tex. Rev.

Civ. Stat. art. 6132b–2.02(a), 6132b–2.03(a)). After that date,

the Texas Business

Organizations Code (TBOC) applied to all partnerships, “regardless of their

formation date.” Ingram , 288 S.W.3d

at 894 n.4. Both TRPA and the TBOC identify the same five factors for

determining whether parties have formed a partnership. Compare Tex. Bus.

Orgs. Code Ann. §

152.052(a) (West Supp. 2011), with Tex.

Rev. Civ. Stat. art.6132b–2.03.

[4] The dissent relies on the following

testimony from Brown as evidence that Keel’s conduct caused Brown to lose the

stock option package:

Q: Was [Ford] open to your getting the

compensation package that you had negotiated?

A: Yes.

But,

crediting this testimony as true, it is not enough that Ford was open to the

possibility; Brown must provide the jury with some evidence from which it could

infer that Brown could have and, more-likely-than-not would have, actually received

the stock option package if not for Keel’s conduct. We agree that Keel’s

conduct need not be the only proximate cause of Brown’s loss of the stock

package —the problem here

is that there is no evidence that there was ever a reasonable probability of

Brown receiving the same stock as the company’s CFO and CEO once Oaktree

determined that he was unfit for the CFO position.

[5] We note that the jury could have reasonably

inferred that Keel breached his duty of loyalty to Brown by not informing him

of the discussion of the “CFO issue” in Baker’s January 9 email,and Brown may

have had a chance of repairing his relationship with Oaktree at that earlier

date than he did on January 30. However, the same causation problem arises —i.e., there is no

evidence of what position with the company Brown might have been offered if the

relationship had been repaired or what sort of compensation package might have

accompanied such a position.