Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

Trustees’ Duty to Disclose in Texas – TCBA’s Business & Estate Section

Posted in Items of Interest, Knowledge Library
Trustees’ Duty To Disclose In Texas

Trustees’ Duty To Disclose In Texas

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, presented his speech on a “Trustees’ Duty To Disclose In Texas” to the Tarrant County Bar Association’s Business and Estate Section’s membership lunch in Fort Worth, Texas, on October 20, 2016.  This presentation covered the legal issues involved in a trustee’s duty to disclose as that duty is defined in the relevant trust document, statutes, common law, and discovery rules. The presentation also addressed the ramifications for a trustee not complying with its duty to disclose and methods for a trustee to resolve disputes regarding the duty to disclose.

CLICK HERE: Trustees’ Duty to Disclose in Texas

Court Affirms Finding That Will Was Lost And Not Revoked

Posted in Cases Decided, Texas Court of Appeals

In In the Estate of Burrell, a trial court admitted a copy of will to probate, and a contestant appealed. No. 09-14-00345-CV, 2016 Tex. App. LEXIS 10421 (Tex. App.—Beaumont September 22, 2016, no pet. history). This case was decided under the Texas Probate Code and not the new Estates Code. The Probate Code required that a proponent of a copy of a will substantially prove the contents of the will by the testimony of a credible witness who has read the will, has heard the will read, or can identify a copy of the will. Another requirement was that the proponent of the copy of the will must prove the cause of the will’s non-production and that such cause must be sufficient to satisfy the trial court that the will cannot by any reasonable diligence be produced. The court stated the presumptions applicable to this case as follows:

When an original will is lost but was last seen in the testator’s possession, a rebuttable presumption arises that the testator destroyed the will with the intention of revoking it. The proponent of the copy of the will must overcome this presumption by a preponderance of the evidence. The proponent of the will can overcome the presumption by presenting evidence of circumstances contrary to the presumption or evidence that someone else fraudulently destroyed the will. “The testimony of a witness that, to her knowledge or belief, the testator did not revoke the will has been held sufficient evidence of nonrevocation to support probate of the will.”

The court of appeals described the evidence regarding destruction of the will as follows:

The trial court heard testimony that the decedent placed the will in a fireproof safe along with other legal papers and some old family photographs. Some of the appellants testified that they knew that the decedent had a will and knew that Nance was the only beneficiary under the will. The court heard testimony that the decedent was not in her home before her death, having spent time in a hospital and ultimately passing away in hospice care at a facility in another town. After the decedent’s death, Nance found the fireproof safe at the decedent’s house, but the safe had been left open and had been emptied. Nance testified that she was unable to locate any of the papers that she watched the decedent place in the safe and was unable to find the keys to the safe. Nance testified that she believed finding the safe in this condition was “unusual[.]” There are different inferences that could be drawn from the testimony and evidence, including that someone located the keys to the safe while the decedent was out of her home and emptied the contents of the safe, including the will.

The court affirmed the trial court’s findings that the will proponent met the burden to overcome the presumption of revocation:

There is circumstantial evidence in this record to rebut the presumption of revocation of the decedent’s will. The safe in the decedent’s home was found open with all of its contents removed and the keys missing, after the decedent had been away from the home due to her illness for a length of time…. Moreover, the evidence is undisputed that Nance and her daughter were the decedent’s main caregivers. The evidence also shows that Nance and the decedent continued to have a good, loving relationship up until the decedent’s death. Nance testified that the decedent never told her that she revoked the will or otherwise burned or destroyed it.

Court Reversed Summary Judgment For A Client As Against His Financial Advisor

Posted in Cases Decided, Texas Court of Appeals

In Kang v. Song, Song sued Kang for fraud, violations of the Texas Securities Act, violations of Texas’s Deceptive Trade Practices Act (DTPA), breach of fiduciary duty, negligent misrepresentation, breach of contract, and negligence based on Kang’s actions as Song’s investment adviser. No. 02-15-00148-CV, 2016 Tex. App. LEXIS 10198 (Tex. App.—Fort Worth September 15, 2016, no pet. history). Song filed a motion for traditional summary judgment on each of his claims. As evidence, Song relied on his affidavit, the affidavit of his attorney, and deemed admissions. Kang filed a response to the motion and an affidavit contradicting some of the statements in Song’s affidavit. The trial court granted summary judgment for Song, and awarded Song economic damages of $811,572.02, treble damages under the DTPA of $1,623,144.04, and attorney’s fees of $730,414.81. Kang appealed pro se.

The court of appeals reversed the judgment and remanded for further proceedings. First, the court addressed the main evidence in the case, the deemed admissions. The court held that there was no evidence that the requests for admissions were ever served on the defendant because there was no certificate of service. The court of appeals then disregarded that evidence. The court then turned to the parties’ affidavits. Song stated that he relief on Kang’s statements that he was a stock trader and investor who managed third party accounts for years, he held Series 7 and Series 66 licenses, and he would not lose an of Song’s principal investment and would receive a profit. Kang stated that he had been a financial advisor for twenty-five years and had been Song’s financial advisor for eighteen years, Song was a sophisticated business owner and investor, and that Song told him that Song’s investment objective for his stock investments is to double the value each year.

Regarding Song’s breach of fiduciary duty claim, the court stated as follows:

Song characterized Kang as an investment adviser, while Kang referred to himself as a financial advisor. An investment or financial advisor generally owes a fiduciary duty to clients, and thus, under either characterization of Kang’s role, he owed a fiduciary duty to Song. However, what a fiduciary duty requires of the fiduciary can vary. Song’s affidavit was evidence that Kang did more than merely act at Song’s direction in making investments and that Kang acted as an advisor trusted by Song to make appropriate trades in line with Song’s conservative investment strategy. But Kang produced his own affidavit to contradict Song’s. While Kang’s affidavit is short, it is some evidence that Song is an experienced business person who follows an aggressive investment strategy with the intent to double his investments each year, rather than an unsophisticated investor relying on his advisor to make decisions about investment strategy. And while Song stated that he relied on Kang’s having stockbroker licenses and his statements about his past success in trading in deciding to trust and hire Kang, Kang produced evidence that they had a nearly two-decade history of Kang providing Song with financial advice and working with him on business deals, raising a question about what factors led Song to give Kang access to his trading accounts, and thus whether Kang breached any duties to Song with respect to his obligation to disclose relevant information. In other words, Kang was Song’s fiduciary and as such owed him certain duties, but the summary judgment evidence did not establish as a matter of law what those duties encompassed or whether they were breached. And because Kang’s affidavit raised a fact issue about the nature of the investment strategy Song instructed him to follow, Song’s affidavit does not establish as a matter of law that his losses came from Kang’s breach of any duties, rather than the inherent risk of trading in securities. Viewing the evidence in the light most favorable to Kang, we conclude that Song did not establish his claim for breach of fiduciary duty as a matter of law, and thus the trial court erred by granting summary judgment on that claim.

The court similarly found that there were fact questions regarding Song’s other claims, and reversed and remanded the case for further proceedings. The court cited the following precedent for the proposition that Kang, the financial advisor, owed fiduciary duties: Izzo v. Izzo, No. 03-09-00395-CV, 2010 Tex. App. LEXIS 3623, 2010 WL 1930179, at *7 (Tex. App.—Austin May 14, 2010, pet. denied) (mem. op.) (holding that sufficient evidence supported the trial court’s conclusion that the appellee acted as the appellant’s investment adviser prior to their marriage and that he therefore owed the appellee a fiduciary duty that arose prior to the marriage); W. Reserve Life Assur. Co. of Ohio v. Graben, 233 S.W.3d 360, 374 (Tex. App.—Fort Worth 2007, no pet.) (holding that the appellee’s financial advisor had a duty to act as a fiduciary); William Alan Nelson II, Broker-Dealer: A Fiduciary by Any Other Name?, 20 Fordham J. Corp. & Fin. L. 637, 659-60 (2015) (stating that “courts and regulators look to the substance of the relationship rather than relying on titles to discern fiduciary responsibility,” regardless of whether individuals describe themselves as investment advisers, financial advisors, brokers, or dealers).

2016 Fiduciary Litigation Update, Tarrant County Probate Bar-Litigation Seminar

Posted in Items of Interest, Knowledge Library
2016 Fiduciary Update

2016 Fiduciary Update

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, spoke at the Tarrant County Probate Bar’s Litigation Seminar and presented “Fiduciary Litigation Update 2015-2016.” David discussed recent Texas precedent impacting fiduciary litigation.  Some of the issues covered included informal confidential relationships, funding of trusts, tortious interference with inheritance claims, forfeiture actions, employee liability for tortious conduct, slayer rule, and more.

CLICK HERE: 2016 Fiduciary Litigation Update_Sept 30

Interesting Issues In Legal Ethics – Presentation

Posted in Knowledge Library
Legal Ethics

Legal Ethics

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, spoke at the Tarrant County Bar Association’s Ethics Seminar on September 30, 2016, and presented “Interesting Issues In Legal Ethics.” The presentation covered the following topics: mediator participation in a suit after a failed mediation, an attorney acting as a witness, conflicts of interest, and confidentiality issues.

CLICK HERE: InterestingIssuesInLegalEthics_TCBA

Courts Address Conspiracy, Knowing Participation, and Aiding And Abetting Breach Of Fiduciary Duty Claims

Posted in Cases Decided, Texas Court of Appeals

In Rhymes v. Filter Res., Inc., a former employer sued a former employee and the employee’s new business for breach of contract, breach of fiduciary duty, and tortious interference related to the employee’s competition with the former employer after leaving its employ. No. 09-14-00482-CV, 2016 Tex. App. LEXIS 10394 (Tex. App.—Beaumont September 22, 2016, no pet. history). The jury found that the defendants tortiously interfered with the former employer’s relationships with customers, and the defendants appealed.

The court of appeals affirmed the breach of fiduciary duty finding against the employee as he formed his company and contacted his former employer’s customers before leaving his employ. The court then turned to the tortious interference finding. The court of appeals held that to prevail on a claim for tortious interference, a plaintiff must prove the following: “(1) there was a reasonable probability that the plaintiff would have entered into a business relationship with a third party; (2) the defendant either acted with a conscious desire to prevent the relationship from occurring or knew the interference was certain or substantially certain to occur as a result of the conduct; (3) the defendant’s conduct was independently tortious or unlawful; (4) the interference proximately caused the plaintiff injury; and (5) the plaintiff suffered actual damage or loss as a result.” Id. The court held that breach of fiduciary duty is an intentional tort, and also held that when “a third party knowingly participates in the breach of duty of a fiduciary, such third party becomes a joint tortfeasor with the fiduciary and is liable as such.”

The defendant argued that knowing participation could not support the jury’s finding of tortious interference because there was no separate question on that issue. The court of appeals disagreed. The jury was asked if “Rhymes and/or Rhymes Industrial intentionally interfere[d] with Filter Resources’ prospective contractual or business relations[.]” The trial court instructed the jury that tortious interference occurs, in part, when the party “acted with a conscious desire to prevent the relationship from occurring or knew that the interference was certain or substantially certain to occur as a result of his conduct[.]” The court of appeals concluded that the knowing participation claim was subsumed within this question/instruction:

To find that Industrial knowingly participated in Rhymes’s breach, the jury would have to find that (1) Industrial knew that Rhymes owed a duty to Filter and (2) Industrial was aware of its participation in the breach. Such findings are subsumed within the jury’s conclusion that Industrial knew that interference with Filter’s relationships was certain or substantially certain to occur as a result of Rhymes’s conduct. The trial court was not required to submit a separate question on knowing participation.

Finally, the defendant also contended that knowing participation cannot support tortious interference because it is a derivative tort rather than an independent tort. The court disagreed, holding that “‘Independently tortious’ does not mean that the plaintiff must prove an independent tort; rather, it means that the ‘defendant’s conduct would be actionable under a recognized tort.’” The court of appeals affirmed the jury’s liability verdict for the plaintiff.

In Zaidi v. Shah, business partners were involved in litigation regarding the purchase and sale of real property for the operation of a hospital. No. 14-14-00855-CV, 2016 Tex. App. LEXIS 9989 (Tex. App.—Houston [14th Dist.] September 8, 2016, no pet. history). The trial court found for the plaintiffs against all defendants, and awarded over $13 million dollars in damages. One of the plaintiffs’ claims was that the defendants breached a fiduciary duty, and the court found that the defendants, individually and collectively, owed fiduciary duties to the plaintiffs and committed various acts and omissions that would breach such duties, such as making material misrepresentations and failing to disclose material facts. One set of defendants challenged this holding because they did not owe fiduciary duties. The court of appeals held:

Fiduciary duties arise in two types of relationships. A confidential relationship—which may arise from a moral, social, domestic, or purely personal relationship of trust and confidence—may give rise to an informal fiduciary duty. An informal fiduciary duty will not be imposed in a business transaction unless the personal confidential relationship existed prior to, and apart from, “the agreement made the basis of the suit.”

The court noted that the plaintiffs neither alleged nor offered evidence of such a preexisting confidential relationship with any member of the appealing defendants. The court also noted that the plaintiffs did not dispute the absence of fiduciary duties, but instead argued only that one defendant was a fiduciary to many parties and that “all entities and individuals who conspired with, participated with, aided/abetted, or employed Zaidi while he was committing any breaches of fiduciary duty were also responsible for those breaches.” Id. The court of appeals noted that there was a difference between a breach-of-fiduciary-duty claim and an aiding-and-abetting breach-of-fiduciary duty claim:

But, to hold the General Partner, Chagla, and Prestige liable for conspiring in Zaidi’s breach of fiduciary duty is one theory of liability, and to hold them liable for breaching their own fiduciary duties is a distinct theory of liability. Regardless of whether there is legally sufficient evidence that Zaidi’s co-defendants conspired in his breach of fiduciary duty—a question we do not address—such evidence would not support a finding that each of the Turnaround Parties owed fiduciary duties to each of the Borrowers.

The court of appeals reversed and remanded the case for a new trial because the trial court in a bench trial failed to adequately present findings of fact and conclusions of law that linked its damages findings to valid causes of action.

In OrchestrateHR, Inc. v. Trombetta, a former employer sued its prior employee for breach of fiduciary duty and other related claims arising from the former employee’s competition with the former employer. No. 3:13-CV-2110-KS-BH, 2016 U.S. Dist. LEXIS 117986 (N.D. Tex. September 1, 2016). The former employer also sued other defendants for aiding and abetting the former employee in that breach of fiduciary duty. The opinion does not discuss the underlying facts and evidence in any detail. The defendants filed a motion for summary judgment, arguing that Texas does not recognize an aiding-and-abetting breach-of-fiduciary-duty claim. The district court denied this aspect of the motion, stating: “it is well-established under Texas law that third parties may be liable as a joint tortfeasor where they ‘knowingly participate in the breach of the duty of a fiduciary.’” Id.

In Wooters v. Unitech Int’l, Inc., a former employer, Unitech, sued its former employees for breach of fiduciary duty when it discovered that those employees had stolen its trade secrets in preparation for launching a competing company. No. 01-15-00174-CV, 2016 Tex. App. LEXIS 9610 (Tex. App.—Houston [1st Dist.] August 30, 2016, no pet. history). Unitech sued a third-party, Wooters, alleging that Wooters had conspired with the former employees to breach their fiduciary duties to Unitech, to steal Unitech’s trade secrets, and to unlawfully convert Unitech’s property. A jury found that Wooters had conspired to breach the former employees’ fiduciary duties to Unitech, and Wooters appealed.

The court of appeals first reviewed the law concerning conspiracy. The court stated:

Civil conspiracy is a combination by two or more persons to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means. The essential elements of a civil conspiracy are (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result…. Proof of a joint intent to engage in the conduct that resulted in the injury, without more, does not establish a cause of action for civil conspiracy. Civil conspiracy instead requires the specific intent to agree to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means. ‘[T]he parties must be aware of the harm or wrongful conduct at the inception of the agreement.’ … Texas has recognized a cause of action for conspiracy to breach a fiduciary duty in transactions in which a third party knowingly participates in an employee’s breach of fiduciary duty during his employment and the third party improperly benefits from it.

The court also analyzed the competing interests regarding an employee’s fiduciary duties to its employer:

Because Unitech’s conspiracy claim against Wooters is based on the underlying wrongful conduct of breach of a fiduciary duty by an employee against an employer, we consider the law that defines the parameters of that duty. An employee has a duty to act primarily for the benefit of his employer in matters connected with his employment. An employee may not (1) appropriate the company’s trade secrets; (2) solicit the former employer’s customers while still working for his employer; (3) solicit the departure of other employees while still working for his employer; or (4) carry away confidential information…. But the basis for liability for breach of an employee’s duty is limited: it is “tempered by society’s legitimate interest in encouraging competition.” Thus, “‘[a]n at-will employee may properly plan to go into competition with his employer and may take active steps to do so while still employed’” and may secretly do so with other employees, without disclosing his plans to his employer. An employee also may use his general skills and knowledge obtained through employment to compete with the former employer. Thus, an employee’s duty to his employer does not require an employee to disclose his plans to compete; he may secretly join with other employees to plan a competing company without violating any duty to his employer.

The court then analyzed the evidence and found that there was no evidence that Wooters conspired to breach fiduciary duties. The court first noted that Wooters was not a party to any agreement between Unitech and its former employees and “those agreements cannot serve as the basis for determining whether Wooters engaged in a conspiracy to breach fiduciary duty under the common law.” Id. Rather, the court framed the issue thusly: “some evidence must show that Wooters knowingly participated in an unlawful breach of duty beyond lawful preparation to compete. Thus, we consider whether a reasonable jury could find that Wooters, a non-employee, agreed with Kutach and Pennington that they would breach the fiduciary duty they owed to Unitech and knowingly participated in that breach to his benefit in connection with the steps that they took toward realizing Infinity Subsea as a competing company.” Id. The reviewed a number of facts that implicated the former employees’ breaches of duty, but noted that no evidence showed that Wooters was involved in those specific actions and that most them occurred before Wooters was involved. Further, “[t]he evidence of Wooters’s participation in a plan to form Infinity Subsea and solicitation of investors toward that effort, without more, cannot support the conspiracy finding against Wooters, as it is evidence of plans to compete, which is not unlawful.” Id. The court also disregarded evidence of phone calls: “The phone records do not support an inference of knowing participation in a breach of fiduciary duty as more likely than an inference that the discussions revolved around formulating future business plans. The latter does not denote conspiracy to participate in tortious conduct.” Id. The court concluded: “Because no evidence demonstrates that Wooters knowingly participated in unlawful conduct for an improper gain beyond evidence of participation in plans to compete when Kutach and Pennington’s employment ended, no evidence supports a finding against Wooters for civil conspiracy to breach a fiduciary duty.”

Interest Note: These cases highlight a rather confusing area of law in Texas. There is a claim for knowing participation in Texas. See Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 514 (1942). The general elements for a knowing-participation claim are: 1) the existence of a fiduciary relationship; 2) the third party knew of the fiduciary relationship; and 3) the third party was aware it was participating in the breach of that fiduciary relationship. Meadows v. Harford Life Ins. Co., 492 F.3d 634, 639 (5th Cir. 2007).

There may be a recognized aiding-and-abetting breach-of-fiduciary-duty claim in Texas. The Texas Supreme Court has stated that it has not expressly adopted a claim for aiding and abetting outside the context of a fraud claim. See Ernst & Young v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 583 n. 7 (Tex. 2001); West Fork Advisors v. Sungard Consulting, 437 S.W.3d 917 (Tex. App.—Dallas 2014, no pet.). Notwithstanding, Texas courts have found such an action to exist. See Hendricks v. Thornton, 973 S.W.2d 348 (Tex. App.—Beaumont 1998, pet. denied); Floyd v. Hefner, 556 F.Supp.2d 617 (S.D. Tex. 2008). One court identified the elements for aiding and abetting as the defendant must act with unlawful intent and give substantial assistance and encouragement to a wrongdoer in a tortious act. West Fork Advisors, 437 S.W.3d at 921.

As noted above in the Wooters case, there is also a recognized civil conspiracy claim in Texas. But there is not any particularly compelling guidance on whether these claims are the same or different. And if they are different, what differences are there regarding the elements of each claim? There also seems to be some confusion as to whether a finding of conspiracy or aiding and abetting or knowing participation automatically imposes joint liability for all damages. Most of the cases seem to indicate that a separate damage finding is necessary for each defendant because the conspiracy may not proximately cause the same damages as the original bad act. See THPD, Inc. v. Continential Imports, Inc., 260 S.W.3d 593 (Tex. App.—Austin 2008, no pet.); Bunton v. Bentley, 176 SW.3d 1 (Tex. App.—Tyler 1999), aff’d in part, rev’d in part on other grounds, 914 S.W.3d 561 (Tex. 2002); Belz v. Belz, 667 S.W.2d 240 (Tex. App.—Dallas 1984, writ ref’d n.r.e.). For a great discussion of these forms of joint liability for breach of fiduciary duty, please see E. Link Beck, Joint and Several Liability, State Bar of Texas, 10th Annual Fiduciary Litigation Course (2015).

2016 Fiduciary Litigation Update

Posted in Items of Interest, Knowledge Library
2016 Fiduciary Litigation Update

2016 Fiduciary Litigation Update

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, spoke at the Amarillo Area Bar Association in Amarillo, Texas, on September 23, 2016.  David presented his paper,“Fiduciary Litigation Update,” and discussed recent Texas precedent impacting fiduciary litigation.  Some of the issues that David discussed are informal confidential relationships, funding of trusts, tortious interference with inheritance claims, forfeiture actions, employee liability for tortious conduct, slayer rule, and more.

CLICK HERE:2016 Fiduciary Litigation Update_Paper

CLICK HERE: PowerPoint_2016 Fiduciary Litigation Update

Contractual Clauses That Impact Disputes – Presentation

Posted in Items of Interest, Knowledge Library

Contractual Clauses That Impact Disputes

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, spoke at the Texas Association of Bank Counsel’s 40th Annual Convention in Austin, Texas, on September 22, 2016. David presented his paper,“Contractual Clauses That Impact Disputes,” and discussed the purposes, standards for enforcement, and legal issues relating to the following contractual clauses: arbitration, forum-selection, venue-selection, jury-waiver, choice-of-law, indemnity, statute-of-limitations limiting, injunction, receivership, damage-limiting, and more.

CLICK HERE: Paper_Contractual Clauses That Impact Disputes

CLICK HERE: PowerPointContractual Clauses That Impact Disputes

Court Reversed Forfeiture Award Due To Trial Court Not Indicating It Followed The Correct Standard

Posted in Cases Decided, Texas Court of Appeals

In Cooper v. Sanders H. Campbell/Richard T. Mullen, Inc., a company filed suit under a promissory note against a former joint venture partner. No. 05-15-00340-CV, 2016 Tex. App. LEXIS 9253 (Tex. App.—Dallas August 24, 2016, no pet. history). The defendant filed a counterclaim for breach of fiduciary duty and sought equitable forfeiture for the amount owed under the note. The trial court initially awarded the plaintiff $1.4 million on the note, but later reduced that award by $520,000 for the equitable forfeiture claim. Both parties appealed.

The court of appeals affirmed the plaintiff’s note claim, and then turned to the defendant’s equitable forfeiture claim. The defendant argued that the trial court should have awarded an amount of forfeiture for the entire note claim, and not just a partial award. The plaintiff argued that the forfeiture award should be reversed because “the record does not show the trial court made the required determination that the conduct of the Mullen Co. was a ‘clear and serious’ breach of fiduciary duty, which the trial court can conclude only after applying the factors identified by the Texas Supreme Court.” Id. (citing ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 874, 875 (Tex. 2010)). The court first set out the standards for equitable forfeiture:

Courts may fashion equitable remedies such as disgorgement and forfeiture to remedy a breach of a fiduciary duty. Disgorgement is an equitable forfeiture of benefits wrongfully obtained. A party must plead forfeiture to be entitled to that equitable remedy. Whether a forfeiture should be imposed must be determined by the trial court based on the equity of the circumstances. However, certain matters may present fact issues for the jury to decide, such as whether or when the alleged misconduct occurred, the fiduciary’s mental state and culpability, the value of the fiduciary’s services, and the existence and amount of harm to the principal. Once the factual disputes have been resolved, the trial court must determine: (1) whether the fiduciary’s conduct was a “clear and serious” breach of duty to the principal; (2) whether any monetary sum should be forfeited; and (3) if so, what the amount should be.

As stated above, the trial court’s first step is to determine whether there was a “clear and serious” breach of duty. The trial court should consider factors such as: (1) the gravity and timing of the breach; (2) the level of intent or fault; (3) whether the principal received any benefit from the fiduciary despite the breach; (4) the centrality of the breach to the scope of the fiduciary relationship; (5) any other threatened or actual harm to the principal; (6) the adequacy of other remedies; and (7) whether forfeiture fits the circumstances and will work to serve the ultimate goal of protecting relationships of trust. However, forfeiture is not justified in every instance in which a fiduciary violates a legal duty because some violations are inadvertent or do not significantly harm the principal.

Second, the trial court must determine whether any monetary sum should be forfeited. The central purpose of forfeiture as an equitable remedy is not to compensate the injured principal, but to protect relationships of trust by discouraging disloyalty. Disgorgement is compensatory in the same sense as attorney fees, interest, and costs, but it is not damages. As a result, equitable forfeiture is distinguishable from an award of actual damages incurred as a result of a breach of fiduciary duty. In fact, a claimant need not prove actual damages to succeed on a claim for forfeiture because they address different wrongs. In addition to serving as a deterrent, forfeiture can serve as restitution to a principal who did not receive the benefit of the bargain due to his agent’s breach of fiduciary duty. Third, if the trial court determines there should be a forfeiture, it must determine what the amount should be. The amount of disgorgement is based on the circumstances and is within the trial court’s discretion. For example, it would be inequitable for an agent who performed extensive services faithfully to be denied all compensation if the misconduct was slight or inadvertent.

Id. (internal citations omitted).

The court then noted that the defendant did not plead for equitable forfeiture, though he did plead for breach of fiduciary duty and seek an award of damages. The defendant did not seek a jury finding on the plaintiff’s mental state or culpability, the value of its services, or the existence and amount of harm to defendant. The jury found that the plaintiff breached its fiduciary duty to the defendant, but awarded him no damages. The defendant then asked the trial court to enter an award of forfeiture damages in his motion for judgment notwithstanding the verdict, and in other post-trial motions. However, the defendant did not adequately brief the issue and the factors relevant to such a claim. The court of appeals held that the record did not support the trial court’s award, and remanded the case for further proceedings to allow the trial court to consider the appropriate legal standards, elements, and factors in finding that a forfeiture award should be entered:

Cooper did not identify or brief in the trial court the requirement that the trial court conclude there was a “clear and serious” breach of duty as a predicate to assessing a sum that should be awarded as an equitable forfeiture. Cooper does not cite to anything in the record, nor can we find anything in the record, to show that in the fashioning of the equitable forfeiture award the trial court considered the “principles” or “factors” enumerated in ERI Consulting. Accordingly, we conclude the claim of forfeiture should be remanded to the trial court for consideration of the factors described by the Texas Supreme Court.

Interesting Note: This court of appeals holds that a trial court’s analysis regarding an award of equitable forfeiture must be shown in the record. This is a departure from normal rules of procedure regarding a trial court’s findings. When a trial court makes factual findings in a dispute, a party may seek findings of fact and conclusions of law – that is true even if some issues are submitted to a jury. IKB Indus. v. Pro-Line Corp., 938 S.W.2d 440, 443 (Tex. 1997).  Where neither party timely requests findings of fact, an appellate court must uphold the trial court’s judgment on any valid legal theory that was presented to the court and is supported by the evidence. Davis v. Huey, 571 S.W.2d 859, 862 (Tex. 1978). When no findings of fact are properly requested or filed, the trial court’s judgment implies all findings of fact necessary to support it. Sixth RMA Partners v. Sibley, 111 S.W.3d 46, 52 (Tex. 2003); Carter v. William Sommerville and Son, Inc., 584 S.W.2d 274, 276 (Tex. 1979). Moreover, in the context of a jury trial, there can be omitted elements of a claim. Texas Rule of Civil Procedure 279 provides that where some elements of claim or defense are submitted to the jury, but others are not, the omitted elements are presumed in favor of the trial court’s judgment. Tex. R. Civ. P. 279. Accordingly, if a party does not want the omitted elements found in favor of the judgment, it has the burden to request express findings from the trial court on those omitted elements. Tex. R. Civ. P. 299; Insurance Co. of St. Louis v. Bellah, 373 S.W.2d 691, 692 (Tex. App.—Fort Worth 1963, no writ).

The Cooper court did not state in the opinion whether either party requested findings, though it is apparent from the opinion that the trial court did not enter any findings. Under normal procedure regarding a claim submitted to a jury, the omitted findings should have been found in favor of the judgment as some of the elements were submitted to the jury (breach of fiduciary duty) but others were not (mental culpability). However, equitable forfeiture is an equitable remedy that a trial court decides, not a jury. Burrow v. Arce, 997 S.W.2d 229, 245 (Tex. 1999). Yet, as there were no findings of fact requested, all of the findings necessary to support the factors and elements for equitable forfeiture should have been presumed in favor of the judgment. This opinion stands for the proposition that there appears to be a reverse presumption that a trial court does not follow the law or follow proper standards in the context of equitable forfeiture where the record is silent on the court’s process. A party (especially the winning party) should request the trial court to enter findings of fact and conclusions of law regarding an equitable forfeiture award. That is not necessarily common sense to an attorney in Texas. Normally, the prevailing party does not seek findings, because in their absence all findings will be presumed in favor of the judgment. The winning party in an equitable forfeiture case should request findings of fact and also prepare a draft of those findings for the court’s consideration.

Of course if findings are entered (or implied findings applied) that does not mean that a court of appeals should automatically affirm the judgment; the plaintiff can still challenge those implied findings for legal or factual sufficiency of the evidence. A party should specifically challenge the trial court’s finding of fact in its issues presented and in its arguments in the brief. In re Estate of Bessire, 399 S.W.3d 642, 648-49 (Tex. App.—Amarillo 2013, pet. denied); In re M.W., 959 S.W.2d 661, 664 (Tex. App.—Tyler 1997, writ denied). Appellate complaints must be directed at specific findings of fact rather than at the judgment as a whole. In re Estate of Bessire, 399 S.W.3d at 648-49; In re M.W., 959 S.W.2d at 664. A broad challenge to the sufficiency of evidence without specifying the challenged finding of fact preserves nothing for review. Bransom v. Standard Hardware, Inc., 874 S.W.2d 919, 927 (Tex. App.—Fort Worth 1994, writ denied). An appellant should brief an appeal of implied findings as if they had been given as express findings. Russell v. Russell, 865 S.W.2d 929 (Tex. 1993); Giangrosso v. Crosley, 840 S.W.2d 765, 769 (Tex. App.—Houston [1st Dist.] 1992, no writ); see also Mcdonald & Carlson, Texas Civil Practice 2d, §18.12-18.13. Unless the trial court’s findings are challenged by a point of error on appeal, they are binding upon the appellate court and the parties, and the appealing party waives any complaint regarding the evidence to support the findings. Cass v. Stephens, 156 S.W.3d 38, 77 (Tex. App.—El Paso 2004, pet. denied);  Northwest Park Homeowners Ass’n, Inc. v. Brundrett, 970 S.W.2d 700 (Tex. App.—Amarillo 1998, pet. denied); Whitehead v. Univ. of Tex., 854 S.W.2d 175, 178 (Tex. App.—San Antonio 1993, no writ). If a party fails to challenge findings of fact that support the judgment, the court of appeals should summarily affirm the judgment. Brundrett, 970 S.W.2d at 704.

So, where a trial court makes express findings, a party appealing from a trial court’s award of equitable forfeiture should specifically challenge via issue statements the factual findings in support of the award and then argue those issues in the body of the brief. Where there are no express findings, the appealing party should: 1) complain that the trial court did not make any findings and seek an abatement in the court of appeals so that the trial court make those findings; and 2) in an abundance of caution, argue that the specific implied findings are not supported by the evidence.

Recorded Webinar:  Trustee’s Duty and Right to Bring Claims On Behalf Of A Trust

Posted in Knowledge Library, Webinars
Recorded Webinar

Recorded Webinar

Thank you to everyone who joined us for the “Trustee’s Duty and Right to Bring Claims On Behalf Of A Trust” webinar on September 13.  The recorded webinar link is now available.  If you are interested in joining our next complimentary webinar, please send your request to dfjohnson@winstead.com.


David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, discusses the statutory and common-law requirements for a trustee to bring claims on behalf of a trust, the trustee’s right to control those claims, and potential ramifications regarding those rights and duties.

Target Audience: In-house counsel and other litigation contacts, trust officers, risk management contacts, and wealth advisors at banks and financial institutions.