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Sandt v. Energy Maintenance Services Group I, LLC

Court of Appeals of Texas, First District

July 27, 2017


         On Appeal from the 334th District Court Harris County, Texas Trial Court Case No. 2013-23041

          Panel consists of Chief Justice Radack and Justices Jennings and Bland.


          Jane Bland Justice

         These companion cases arise from efforts to enforce a judgment against an executive officer and his company. We interpret the provisions of two agreements- the company's agreement to indemnify the officer, and the company's later settlement agreement with the plaintiff in the underlying case-to determine whether the company must indemnify the officer for the judgment against him and whether the settlement released the plaintiff's collection of that judgment if the company is obligated to pay it. We conclude that the company owes indemnity to the officer and, because the company is obligated to indemnify its officer, the settlement agreement precludes further collection of the judgment. Because the trial court similarly ruled, we affirm its judgment.


         The officer/shareholder litigation

         Jim Sandt was a former officer and shareholder of Energy Maintenance Services Group I, LLC, a closely held Delaware limited liability company. Timothy Nesler was the chief executive officer of Energy Maintenance. In 2005, Sandt sued Energy Maintenance and Nesler, among other officers of the company. The gravamen of Sandt's suit was that Energy Maintenance, Nesler, and the other officers wrongfully had diluted Sandt's ownership interest in Energy Maintenance, committing fraud and breach of fiduciary duty.

         Nesler receives indemnification for the Sandt lawsuit

         In August 2007, while Sandt's suit was pending, Energy Maintenance's board of directors agreed to indemnify Nesler for any liability arising out of or relating to the Sandt litigation. The board memorialized that agreement in a company resolution:

[It is] FURTHER RESOLVED, that the Company shall indemnify Mr. Nesler . . . in full against all damages, claims, judgments, fines and costs, including costs of defense, investigation and settlement and the cost of separate counsel, if any, together with all other expenses and damages of any kind, including punitive damages, if any, as and when incurred . . . which arise out of or are related in any way to the Sandt litigation . . . .

         The board's resolution states that it agreed to indemnify Nesler after reviewing the Sandt litigation and discussing the facts and circumstances of it with the company's officers and attorneys. The resolution further recites that, as required by the limited liability company agreement as a precondition to indemnification, the board determined that Nesler had acted in good faith and in a manner that he reasonably believed was in, and not opposed to, Energy Maintenance's best interests:

[It is] FURTHER RESOLVED, that pursuant to Section 8.3 of the Company's LLC Agreement, and with respect to the events that are the subject of the Sandt litigation, the Board has determined that indemnification of Mr. Nesler is proper under the circumstances because he has met the standard of conduct set forth in Section 8.1 of the LLC agreement . . . .

         Sandt wins the lawsuit

         The Sandt lawsuit went to trial in June 2009, about two years after the board had agreed to indemnify Nesler. A Fort Bend County jury found in favor of Sandt and against both Energy Maintenance and Nesler. The jury found that Nesler had breached his fiduciary duty to Sandt by diluting Sandt's interest in the company. It further found that Energy Maintenance and Nesler had committed statutory fraud against Sandt. Based on these and other findings, the trial court entered judgment in Sandt's favor in July 2009. The judgment awarded $780, 000 in damages and attorney's fees to Sandt from Energy Maintenance, Nesler, and two other officers, jointly and severally. In addition, the judgment awarded Sandt $300, 000 in punitive damages against Energy Maintenance and Nesler individually.

         The defendants in the Sandt case appealed the judgment. While the appeal was pending, Energy Maintenance's primary creditor took control of the company and fired Nesler from his position as chief executive officer.

         The board attempts to revoke its indemnity agreement

         In September 2011, a new board of directors voted by written consent to "revoke" the indemnification that the board had authorized in August 2007 "effective as of the date indemnification was purportedly granted." In support of its revocation, the board passed a resolution stating that its "investigation to date indicates that Mr. Nesler misrepresented to the Board the facts, circumstances and status of the Sandt Matter." The new board further stated:

[I]nvestigation to date indicates that it may have been inappropriate for the Board to purport to agree to indemnify Mr. Nesler from all liability, regardless of the basis therefor and apparently with no exclusions or exceptions . . . .

         The company settles the Sandt litigation

         In March 2012, the Fourteenth Court of Appeals affirmed Sandt's judgment against Energy Maintenance and Nesler. See Energy Maint. Servs. Grp. I, LLC v. Sandt, 401 S.W.3d 204, 223 (Tex. App.-Houston [14th Dist.] 2012, pet. denied).

         Energy Maintenance and the defendant officers petitioned for review to the Texas Supreme Court. In October 2012, while their petition was pending, Energy Maintenance settled with Sandt, as did the other company officers, save Nesler. The settlements resolved all liability other than the $300, 000 exemplary-damages award assessed against Nesler individually. The settlement agreement between Energy Maintenance and Sandt expressly provided that Sandt would not seek recovery of the $300, 000 owed by Nesler from Energy Maintenance, either "directly or indirectly."

         Nesler alone continued to pursue appellate review of the judgment. The Texas Supreme Court denied his petition.

         Nesler seeks indemnity from the company

         After the Court denied review in the Sandt case, Nesler sought indemnity from Energy Maintenance. Energy Maintenance refused to provide it and filed this suit against Nesler in April 2013, seeking a declaration that it did not owe him indemnity. Energy Maintenance contended that the jury's findings of fraud and breach of fiduciary duty against Nesler in the Sandt litigation alleviated the company's indemnification obligation, and it asserted that revocation of its agreement to indemnify Nesler was proper because Nesler had misled the board of directors about the Sandt litigation. Nesler counterclaimed for breach of contract, seeking indemnity and his attorney's fees.

         The company sues to enforce the Sandt settlement

         Energy Maintenance also sued Sandt. It requested the trial court to construe the settlement agreement between Energy Maintenance and Sandt and declare that, based on their agreement, Sandt was not owed the $300, 000 Nesler judgment if Energy Maintenance was obligated to indemnify Nesler.

         Energy Maintenance and Nesler moved for summary judgment. The trial court denied Energy Maintenance's motion and granted Nesler's motion in part, ruling that Nesler was entitled to indemnity based on the board's August 2007 indemnity resolution, and that Energy Maintenance's failure to indemnify Nesler was a breach of that agreement.

         Energy Maintenance subsequently amended its pleadings to add additional claims against both Sandt and Nesler. Energy Maintenance sued Sandt for breach of the parties' settlement agreement, alleging that Sandt's attempts to collect the $300, 000 from Nesler breached the settlement agreement. Energy Maintenance sued Nesler for breach of fiduciary duty and fraud. Energy Maintenance alleged that Nesler breached his fiduciary duty to the company by engaging in self-dealing when he diluted Sandt's ownership interest in December 2003 and when he obtained indemnity from the board of directors by misleading it in August 2007. Energy Maintenance alleged that Nesler committed fraud by concealing the nature of Sandt's allegations and the extent of his misconduct from the board when he sought indemnity.

         The trial ...

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