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In re Latitude Solutions, Inc.

United States Court of Appeals, Fifth Circuit

April 30, 2019


          Appeals from the United States District Court for the Northern District of Texas

          Before BARKSDALE, SOUTHWICK, and HAYNES, Circuit Judges.


         This appeal involves two competing versions of the history and purpose of Latitude Solutions, Inc. ("LSI"). Howard Appel, Earnest Bartlett, Matthew Cohen, and John Paul DeJoria ("Appellants") characterize LSI as a publicly traded company which sought to commercialize technology that could remediate contaminated water but was unsuccessful as a speculative venture. On the other hand, LSI's bankruptcy trustee, Carey Ebert, characterizes LSI as a fraud from its inception-used only as a mechanism for Appellants to participate in and profit from a securities fraud scheme. Ebert sued several of LSI's corporate officers, directors, and investors for breaches of fiduciary duty. By the end of trial, her case focused primarily on a contract LSI entered into with Jabil Inc., one of LSI's bankruptcy creditors. The jury found Appellants liable and assessed millions of dollars in compensatory and exemplary damages. Appellants present various arguments for why we should overturn the jury verdict and reduce damages, including whether Ebert has Article III standing and whether there was legally sufficient evidence for the jury to find as it did. We AFFIRM in part, REVERSE and RENDER in part, VACATE in part, and REMAND for further consideration consistent with this opinion.[1]

         I. Background

         This appeal stems from a jury verdict and final judgment adjudicating Matthew Cohen and John Paul DeJoria liable for breaches of fiduciary duty to LSI and finding Howard Appel and Earnest Bartlett liable for aiding and abetting those breaches. The final judgment awards Ebert compensatory damages against (i) Appel, Bartlett, Cohen, and DeJoria for $6.9 million, jointly and severally, for Cohen's breach of fiduciary duty; (ii) Appel and Bartlett for $2.5 million each for aiding and abetting Cohen's breach of fiduciary duty; (iii) DeJoria for $1.5 million for his breach of fiduciary duty; and (iv) Appel for $5 million, Cohen for $2 million, and DeJoria for $1 million in exemplary damages.

         A. LSI

         The parties disagree on the basic premise of LSI's formation. Ebert asserts LSI was a sham company set up to fail from the outset, and a vehicle for Appellants to participate in a securities fraud scheme known as "pump-and-dump," while Appellants claim LSI was legitimately founded to develop and commercialize technology capable of remediating contaminated water. LSI was a publicly traded company that began operating in 2009 and developed patented technology for treatment of wastewater in the oil and gas industry. LSI was a speculative venture that eventually filed for bankruptcy in November 2012.[2]

         B. Matthew Cohen

         Cohen was one of the founding members of LSI and served as an officer and director of LSI from March 2009 through June 2012. Cohen was the Chief Financial Officer of LSI from June 2011 to June 2012.

         C. Howard Appel

         Appel was a business consultant to and raised capital for LSI. In 2004, before LSI existed, Appel pled guilty to conspiracy to commit securities fraud as well as conspiracy to commit money laundering and served twenty-one months in prison. The parties vehemently disagree whether this is relevant to LSI. The trustee uses Appel's conviction as evidence of a pattern of nefarious behavior, while Appellants argue Appel's past is the only reason for the trustee's lawsuit, despite no evidence that Appel engaged in any criminal conduct related to LSI. An LSI board member introduced Appel to the company in 2010, which eventually led to Appel's family and friends investing in LSI beginning in February 2011. Appel was responsible for raising at least $12 million in capital for LSI through outside investors. Appel did not purchase or sell any shares of LSI stock.

         D. Earnest Bartlett

         Bartlett is a friend and business associate of Appel. Appel introduced Bartlett to LSI. A company affiliated with Bartlett, FEQ Realty, invested in LSI beginning in December 2010. In April 2011, FEQ Realty entered into a consulting agreement with LSI. Appel provided his consulting services to LSI as an outside consultant under FEQ Realty's consulting agreement. Bartlett never purchased or sold any LSI stock.

         E. John Paul DeJoria

         DeJoria is an entrepreneur and philanthropist with an interest in developing clean-water solutions. He invested and lost over $11 million in LSI beginning in March 2011. For most of 2012, DeJoria was LSI's primary source of funding. DeJoria served on LSI's board of directors from October 2011 to September 2012.

         F. Jabil, Inc.

         Jabil, Inc., is not a party to the case but plays a crucial role here. In May 2011, Jabil entered into an agreement with LSI to manufacture remediation equipment. The parties dispute whether the deal was done for legitimate purposes. Jabil is a creditor in LSI's bankruptcy, with a claim for $9.55 million. By the end of evidence at trial, the trustee conceded the only damages the estate could recover were 1) the amount of the Jabil debt and 2) the amount of any gains to the defendants that the trustee could specifically link to fiduciary breaches.

         G. LSI's Bankruptcy and the District ...

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