Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

Court Affirms Submission of Mitigation Instruction In A Breach Of Fiduciary Duty Case To Affirm A Jury’s Finding Of No Damages

Posted in Cases Decided, Texas Court of Appeals

In E.L. & Associates v. Pabon, a company sued two former directors and their son for breaching fiduciary duties when the company lost a lease for a restaurant it operated and the directors’ son opened a nearly identical restaurant in the same location.  No. 14-15-00631-CV, 2017 Tex. App. LEXIS 4547 (Tex. App.—Houston [14th Dist.] May 18, 2017, no pet. history). A jury found that the directors breached their fiduciary duties and that their son assisted in the breaches of fiduciary duty, but awarded no damages to the company. The company appealed and complained that the trial court should not have submitted a mitigation instruction in the damages question. The instruction stated: “Do not include in your answer any amount that you find E.L. & Associates, Inc. could have avoided by the exercise of reasonable care.” Id. at *7.

The court of appeals first discussed the concept of the duty to mitigate damages:

The doctrine of mitigation of damages, sometimes referred to as the doctrine of avoidable consequences, requires an injured party to use reasonable efforts to avoid or prevent losses. In the context of a breach of contract case, the doctrine has been stated as follows: “‘Where a party is entitled to the benefits of a contract and can save himself from the damages resulting from its breach at a trifling expense or with reasonable exertions, it is his duty to incur such expense and make such exertions.’” The doctrine has been applied in breach of contract and tort cases.

Id. at *9 (internal citations omitted).

The company argued that it could not have a duty to mitigate before it incurred damages, and the court of appeals disagreed: “It is not the damages themselves that trigger the duty to mitigate, but knowledge by the non-breaching party of the breach that ultimately causes the damages. The question before us, then, is what the breach of fiduciary duty was, and when EL&A had knowledge of the breach.” Id. at *13.

The court then found that the company had knowledge of the defendant’s breaches before any damages occurred and that it could have done something to mitigate the harm:

[T]he jury properly could have considered evidence of Efrain or George’s failure to mitigate by signing a new lease if there was evidence that they were aware of the breach before the Pabons’ lease was signed on March 15, 2011. To that end, the record contains evidence that EL&A repeatedly was made aware throughout 2009 and 2010 that the Pabons were refusing to renew and provide a guaranty for the lease on EL&A’s behalf. The record also contains evidence that EL&A was made aware at least as early as January 2011 that the Pabons had disclosed Efrain’s status as the majority shareholder of EL&A. Based on this evidence, the record before us could support a jury finding that EL&A failed to reasonably mitigate its damages — its loss of the restaurant location — by having Efrain sign and become guarantor of a lease after learning of the Pabons’ breaches but before (1) the month-to-month lease was terminated in February 2011; or (2) Solis signed the new lease for the same location on March 15, 2011.

The court then held that the trial court did not err by including a mitigation instruction in the damages question and affirmed the judgment.

Court Holds That Board Of Trustees Of A Nonprofit Do Not Owe The Same Duties As A Trustee Of A Trust

Posted in Cases Decided, Texas Court of Appeals

In Young v. Heins, Young brought third-party claims against the board of trustees of a nonprofit home owner association for breach of fiduciary duty, breach of the duty of good faith and fair dealing, breach of contract, intentional infliction of emotional distress, and for a declaratory judgment. No. 01-15-00500-CV, 2017 Tex. App. LEXIS 5075 (Tex. App.—Houston [14th Dist.] June 1, 2017, no pet. history). In his claims for breach of fiduciary duty and the duty of good faith and fair dealing, Young argued that because the trustees had a fiduciary relationship with him, they owed him a “duty to refrain from self-dealing, a duty of care and loyalty, a duty of full disclosure, a duty to act with the strictest integrity, and the duty of fair, honest dealing.” Id. Young further argued that they breached their duties to him because they had claimed that he had violated deed restrictions, knowing that he had not done so, and claimed that he had not timely paid his maintenance assessments, knowing that he had in fact paid them. The trustees filed a summary judgment motion, which the trial court granted. The court of appeals noted that the association’s bylaws, states that the affairs of the association “shall be managed by a Board of five . . . trustees, who need not be members of the Association.” But the court held that the mere use of the word “trustee,” does not create a trust or a trustee relationship. Id. (citing Nolana Dev. Ass’n. v. Corsi, 682 S.W.2d 246, 249 (Tex. 1984); Stauffacher v. Coadum Cap. Fund 1, LLC, 344 S.W.3d 584, 588-89 (Tex. App.—Houston [14th Dist.] 2011, pet. denied)). The court concluded that “the duties that a trustee has to a trust do not apply to a director of a nonprofit corporation.” Id. The court affirmed the summary judgment for the board of trustee members.

Court Holds That Majority Shareholders In Closely Held Corporation Do Not Owe Fiduciary Duties To Minority Shareholders

Posted in Cases Decided, Texas Court of Appeals

In Herring Bancorp, Inc. v. Mikkelsen, a corporation acquired a majority of the outstanding shares of preferred stock by “repurchasing” those shares in accordance with the articles of incorporation, including the shares owned by a trustee. No. 07-15-00327-CV2017 Tex. App. LEXIS 5131 (Tex. App.—Amarillo June 2, 2017, no pet. history). This was against the wishes of the trustee, a minority shareholder. The trustee filed claims for oppression of a minority shareholder in a closely-held corporation and breach of fiduciary duty.

The court of appeals held that oppression of a minority shareholder was not a viable claim. The court of appeals noted that in Ritchie opinion, the Texas Supreme Court specifically refused to recognize a common-law cause of action for minority shareholder oppression in closely-held corporations and concluded that section 11.404 of the Texas Business Organizations Code authorizes the only remedy for oppressive conduct by those in control of a corporation—appointment of a rehabilitative receiver. Id. (citing Ritchie v. Rupe, 443 S.W.3d 856, 866 (Tex. 2014)). “Because Appellee’s oppression of a minority shareholder in a closely-held corporation is not a viable cause of action,” the court reversed that finding. Id.

The court then turned to the breach of fiduciary duty claim. The court held that there was no formal fiduciary duty between a majority and minority shareholder in a closely-held corporation:

The Texas Supreme Court has never recognized a formal fiduciary duty between a majority and minority shareholder in a closely-held corporation. One’s status as a co-shareholder in a closely-held corporation alone does not automatically create a fiduciary relationship between co-shareholders. “A co-shareholder in a closely held corporation does not as a matter of law owe a fiduciary duty to his co-shareholder.” Even in the context of disproportionate ownership interests, the vast majority of intermediate appellate courts of this State have declined to recognize a broad formal fiduciary relationship between majority and minority shareholders that applies as a matter of law to every transaction between them.

Id. The court therefore reversed a breach of fiduciary duty finding in this case as well.

Court Reversed A Finding Of Breach Of Fiduciary Duty (And $470,000,000 Judgment) Because No Partnership Ever Existed Due To The Failure Of Conditions Precedent

Posted in Cases Decided, Texas Court of Appeals

In Enterprise Prods. Partners, L.P. v. Energy Transfer Partners, L.P., the jury found Enterprise Products Partners, L.P. (“Enterprise”) was in a general partnership with Energy Transfer Partners, L.P. (“ETP”) regarding a pipeline project and that Enterprise breached its duty of loyalty as a partner to ETP. No. 05-14-01383-CV, 2017 Tex. App. LEXIS 6658 (Tex. App.—Dallas July 18, 2017, no pet. history). The trial court’s judgment awarded ETP actual damages of $319,375,000 and disgorgement of $150,000,000. Enterprise argued on appeal that the trial court erred by denying Enterprise’s motions for directed verdict and JNOV because the parties’ written agreements contained unperformed conditions precedent that as a matter of law precluded the forming of the disputed partnership, and without a partnership, Enterprise owed no fiduciary duties to ETP.

The court of appeals agreed that the parties’ agreement had certain unperformed conditions precedent before any partnership was created: “In this case, the Letter Agreement barred the formation of a partnership ‘unless and until [1] the Parties have received their respective board approvals and [2] definitive agreements . . . have been . . . executed and delivered by both of the Parties.’ These conditions precedent were not performed. Unless they were waived, no partnership was formed, and ETP cannot recover on its claims for breach of joint enterprise and breach of fiduciary duty.” Id. The court then analyzed whether the Enterprise waived the conditions precedent. ETP did not submit a jury question on waiver, and so under Texas Rule of Civil Procedure 279, such a claim was waived unless it was proved as a matter of law. The court reviewed the evidence and held that there was at least a fact question on waiver. The court concluded “that ETP waived its waiver theory by failing to obtain a jury finding on the waiver theory. Because the conditions precedent were not performed and ETP did not conclusively prove the parties waived the conditions precedent, there was no partnership between Enterprise and ETP. We therefore conclude the trial court erred by denying Enterprise’s motions for directed verdict and JNOV.” The court reversed the considerable judgment and rendered for defendant Enterprise.

Court Finds That Breach Of Fiduciary Duty Claims Is Preempted By Trade Secrets Claim

Posted in Cases Decided, Texas Court of Appeals

In Super Starr Int’l, LLC v. Fresh Tex Produce, LLC, a Texas entity that distributes produce throughout the United States filed suit against another Texas entity that imports foreign grown produce into the United States and other related entities for a variety of claims arising from the defendants’ attempts to distribute produce without the plaintiff. No. 13-16-00663-CV, 2017 Tex. App. LEXIS 6801 (Tex. App.—Corpus Christi July 20, 2017, no pet. history). The plaintiff’s claims included breach of various agreements, breach of fiduciary duty, misappropriation of trade secrets, and aiding and abetting breach of fiduciary duty. The plaintiff sought and obtained a temporary injunction that precluded the defendants from distributing the produce and other relief, including an order to preserve electronic evidence. The defendants appealed.

The court of appeals reversed and rendered in part and remanded in part. “To obtain a temporary injunction, the applicant must plead and prove three elements: (1) a cause of action; (2) a probable right to relief; and (3) a probable, imminent, and irreparable injury in the interim.” Id. The court first analyzed the plaintiff’s claim that the plaintiff was really a partnership because the parties used the term “partner” in various contexts. The court held that it was solely a limited liability company due to the Texas Business Organizations Code and the wording of the LLC agreement:

The “term ‘partner’ is regularly used in common vernacular and may be used in a variety of ways,” and “[r]eferring to . . . a ‘partner’ in a colloquial sense is not legally sufficient evidence of expression of intent to form a business partnership.” Here, the context in which the statements were made establishes that the parties’ use of the term “partner” was colloquial, not legal. Absent something more, we conclude that the Distributor presented no evidence that conclusively negates the plain text of the business organizations code and the operating agreements, both of which require us to determine as a matter of law that the LLC was solely a limited liability company, not a partnership

Id.

The court then held that the plaintiff’s breach of fiduciary duty claim was preempted by its trade secret claim:

The gravamen of the Distributor’s breach of fiduciary duty claim duplicates its claim based on the Texas Uniform Trade Secrets Act. . . The Texas Uniform Trade Secrets Act generally “displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret.” . . . Where a claim is based on a misappropriation of a trade secret, then it is preempted by the Texas Uniform Trade Secrets Act. In this case, the Distributor’s breach of fiduciary duty claim duplicates its alleged violation of the Texas Uniform Trade Secrets Act. Appellants could not “divert[] [the LLC’s] accounts and business” or “solicit[] [the LLC’s] accounts and employees” without the use of alleged trade secrets. Accordingly, the preemption provision in the Texas Uniform Trade Secrets Act precludes the Distributor’s breach of fiduciary duty claim from serving as a basis for temporary injunctive relief.

Id.

The court then reviewed the plaintiff’s aiding and abetting breach of fiduciary duty claim and held that same could not survive without an underlying breach of fiduciary duty claim: “Generally, when a breach of fiduciary duty claim fails, so should an aiding and abetting in the breach of fiduciary duty claim, to the extent one exists in Texas.” Id. The court held that there was not a showing of a probable right of recovery regarding these claims.

Finally, the temporary injunction order prohibited the defendants from: “Destroying, deleting, erasing, losing, hiding, altering, or modifying in any manner the electronic information, including emails, text messages, recordings, and other communications involving or mentioning [the Importer], [the Grower], [the LLC], [the Distributor] or any of its principals or employees, or accounts which have done business through [the LLC].”  Id. The court held that this relief should be reversed because “the Distributor presented no evidence or argument of a probable, imminent, and irreparable injury in the interim stemming from the acts restrained in Restriction 8.” Id.

Court Reverses Summary Judgment For Directors Because They Could Not Consent To Their Own Breaches of Fiduciary Duty

Posted in Cases Decided, Texas Court of Appeals

In Corley v. Hendricks, three individuals (Gaylen, Dan, and Corley) operated a business as shareholders, officers, and directors. No. 02-16-00293-CV, 2017 Tex. App. LEXIS 3846 (Tex. App.—Fort Worth April 27, 2017, no pet. history). Galen then terminated Corley and removed him as an officer and director. Corley then sued the other two for breach of fiduciary duty, theft under the TTLA, fraud, and civil conspiracy, as well as a shareholder’s derivative action under Texas Business Organizations Code Section 21.563. During the course of discovery, an expert learned that Gaylen had moved $2.4 million from a retained earnings account to Gaylen’s personal account and did other inappropriate activities such as pay for family vacations from the business. Galen and Dan filed a no-evidence summary judgment motion on Corley’s theft claim under the TTLA, asserting that there was no evidence that they acted without consent. They argued that because Gaylen and Dan were officers and directors at the time of Gaylen’s actions, her actions had the effective consent of the company. The trial court granted the defendants’ motion for summary judgment, and the plaintiff appealed.

The court of appeals reversed, holding that Gaylen and Dan could not give consent to the improper transactions because they were interested directors and officers. “Interested directors and shareholders cannot give effective consent to breaching their fiduciary duty to the company by stealing from the company at the expense of other directors and shareholders.” Id. The court held:

In Corley’s affidavit attached to his summary judgment response, he stated that he did not know and was not told about the transactions in which the Hendrickses allegedly stole funds from SSBI. Corley could not consent to transactions he knew nothing about. Corley thus presented the trial court with more than a scintilla of summary judgment evidence that he—the only disinterested director and shareholder—had not consented to the transactions. See Tex. Bus. Orgs. Code Ann. § 21.418(b)(1) (providing that a transaction involving an interested director is valid if the material facts as to the director’s interest in the transaction are disclosed and the transaction is approved by the majority of disinterested directors or by a good faith vote by the shareholders).

The Hendrickses’ only summary judgment ground relied on their ability to consent to the transactions, which, as a matter of law, they could not do. Because the Hendrickses could not consent to their own theft, and because Corley produced evidence that he did not consent to the transactions, Corley produced evidence raising a fact issue about whether SSBI had consented to the transactions.

Id. The court reversed the summary judgment and remanded the case for further proceedings in the trial court.

Court Reviews Damages For Mental Anguish, Exemplary Damages, and Other Categories For A Trustee’s Breach Of Fiduciary Duty

Posted in Cases Decided, Texas Court of Appeals

In Wells Fargo v. Militello, a trustee appealed a judgment from a bench trial regarding a beneficiary’s claims for breach of fiduciary duty, negligence, and fraud. No. 05-15-01252-CV, 2017 Tex. App. LEXIS 5640 (Tex. App.—Dallas June 20, 2017, no pet. history). Militello was an orphan when her grandmother and great-grandmother created trusts for her. She had health issues (Lupus) that prevented her from working a normal job, and she heavily relied on the trusts. When Militello was 25 years old, one of the trusts was terminating, and it contained over 200 producing and non-producing oil and gas properties. The trustee requested that Militello leave the properties with it to manage, and she created a revocable trust allowing the trustee to remain in that position.

Later, in late 2005 and early 2006, Militello advised the trustee that she was experiencing cash flow problems as a result of her divorce and expensive medical treatments. Instead of discussing all six accounts with Militello, the trustee suggested that she sell the oil and gas interests in her revocable trust. The trustee then sold those assets to another customer of the trustee; a larger and more important customer. There were eventually three different sales, and the buyer ended up buying the assets for over $500,000 and later sold those same assets for over $5 million. The trustee did not correctly document the sale, continued reporting income in the revocable trust, and did not accurately report the sales to the beneficiary. The failure to accurately document and report the sales and income caused Militello several tax issues, and she had to retain accountants and attorneys to assist her in those matters.

The beneficiary sued, and the trial court held a bench trial in 2012. Later, the trial court awarded Militello: $1,328,448.35 past economic damages, $29,296.75 disgorgement of trust fees, $1,000,000.00 past mental anguish damages, $3,465,490.20 exemplary damages, and $467,374.00 attorney’s fees. The trustee appealed, alleging that the evidence was not sufficient to support many of the damages award but did not appeal the liability finding of breach of fiduciary duty. The beneficiary agreed that the economic damages should be remitted (decreased) by around $340,000, which would also impact the exemplary damages award. The trustee argued that the evidence did not support other awards of damages.

The trial court awarded damages based on Militello’s expenses associated with dealing with tax issues, including accountant fees and attorney’s fees. The evidence at trial was that the trustee did not timely or properly document any of the sales from Militello’s trust, did not notify the oil and gas producers of the transfer of Militello’s interests, and did not prepare and record correct deeds until three years after the fact. It failed to amend its internal accounting, resulting in Militello’s accounts showing the receipt of amounts that were no longer attributable to interests owned by her trust. These errors caused problems in the preparation of Militello’s tax returns, and attracted the attention of various tax authorities. When Militello attempted to obtain information from the trustee to address these problems, it did not provide her with a correct accounting. It was necessary for Militello to retain and consult her own tax advisors in order to resolve these problems. At trial, Militello’s tax lawyer gave expert testimony to explain and quantify Militello’s damages relating to correcting her tax problems. The court of appeals affirmed the trial court’s awards for the Militello for these issues.

The trustee also challenged the trial court’s award of $1,000,000.00 in “past mental anguish damages pursuant to Texas Trust Code Section 114.008(a)(10).” Id. Section 114.008 is entitled “Remedies for Breach of Trust,” and Subsection 114.008(a)(10) allows a court to “order any other appropriate relief” to “remedy a breach of trust that has occurred or might occur.” Id. The court held that breaches of fiduciary duty can lead to awards of mental anguish damages. To sustain such an award “[t]here must be both evidence of the existence of compensable mental anguish and evidence to justify the amount awarded.” Id. “Mental anguish is only compensable if it causes a ‘substantial disruption in . . . daily routine’ or ‘a high degree of mental pain and distress.’” Id. “Even when an occurrence is of the type for which mental anguish damages are recoverable, evidence of the nature, duration, and severity of the mental anguish is required.’” Id.

The record included her testimony and months of communications between Militello and the bank showing multiple disruptions and mental distress in Militello’s daily life in attempting to obtain her own and her children’s housing, medical care, and other needs. Militello established that she was entirely dependent on the trustee’s competent administration of her trusts for her financial security and daily living expenses. The primary source of Militello’s monthly income was permanently depleted, leaving her constantly worried about her financial security. Militello testified that the stress aggravated her Lupus, and that she suffered an ulcer and “broke out in shingles.” Id. She received notices from the IRS and other tax authorities that tax was due on properties she did not own, and she owed thousands of dollars in penalties. Her trust officer refused to discuss these problems with her, referring her to its outside counsel. The court of appeals concluded that there was evidence to support an award of mental anguish damages.

The court next reviewed the amount of the award of mental anguish damages. Appellate courts must “conduct a meaningful review” of the fact-finder’s determinations, including “evidence to justify the amount awarded.” Id. The court held that the $1 million award was not supported by the evidence and suggested a remittitur down to $310,000 based on evidence of other actual damages:

[T]he record supports a lesser amount of mental anguish damages. The items making up the remainder of Militello’s actual damages, net of the $921,000 related to the market value of the oil and gas properties, represent expenses, fees, and losses Militello incurred as a direct result of Wells Fargo’s gross negligence and breaches of fiduciary duty. These items include legal fees incurred relating to drafting, creation, and recording of void deeds, lost production revenue, improperly transferred money market funds, bank fees, and the tax-related amounts we have discussed in detail above, among other items. These amounts total $310,608.89, after subtraction of the amounts Militello voluntarily remitted. Much of the mental anguish Militello described is a direct result of the bank’s unresponsiveness and gross negligence in carrying out its fiduciary duties to her, and is reflected in these expenses. We conclude that the evidence is sufficient to support the amount of $310,608.89, representing amounts of actual damages caused by the bank’s breaches of fiduciary duty and gross negligence, but excluding the actual damages attributable to market value of the properties. We conclude that this amount would fairly and reasonably compensate Militello for the mental anguish she suffered.

Id.

The trustee requested that the appellate court disallow the award of prejudgment interest attributable to the trial court’s delay in signing the judgment. Citing rule of judicial administration 7(a)(2), the trustee argued that “the Court should cut off prejudgment interest for the period starting at the Rule 7(a)(2) date line, which was July 26, 2012.” Id. The court held that “[p]rejudgment interest is awarded to fully compensate the injured party, not to punish the defendant.” Id. The court stated: “If we were to sustain Wells Fargo’s complaint, Militello would not be fully compensated for lost use of the money due as damages during the lapse of time between the accrual of the claim and the date of judgment. As between Militello, who established Wells Fargo’s liability for breaches of its duties to her, and Wells Fargo, we conclude that Wells Fargo should bear the prejudgment interest cost of the delay.” Id.

The court next turned to the trustee’s challenge to the exemplary damages award. The trustee contended that Militello did not establish harm resulting from fraud, malice, or gross negligence by clear and convincing evidence, as required by section 41.003 of the Texas Civil Practice and Remedies Code. The trustee argued that breach of fiduciary duty, by itself, is insufficient predicate under section 41.003. The appellate court did not resolve that issue because it concluded there was clear and convincing evidence to support the trial court’s express finding that the trustee was grossly negligent.

Gross negligence consists of both objective and subjective elements. Under the objective component, “extreme risk” is not a remote possibility or even a high probability of minor harm, but rather the likelihood of the plaintiff’s serious injury. Id. The subjective prong, in turn, requires that the defendant knew about the risk, but that the defendant’s acts or omissions demonstrated indifference to the consequences of its acts. The court of appeals held that the evidence in the case supported the trial court’s findings:

The record reflects that Wells Fargo and its predecessors had served as Militello’s fiduciaries since her childhood. As well as serving as trustee for the Grantor Trust, Wells Fargo also served as the trustee for several other family trusts of which Militello was a beneficiary. As trustee, Wells Fargo was aware of the amount of income Militello received each month from each trust, combining the amounts in a single monthly payment made to Militello. If Wells Fargo was not earlier aware that income from the trusts was Militello’s sole source of income, it became aware when Militello first contacted the bank about her financial problems in 2005. She explained to Tandy that the income she received from the trusts was insufficient to meet her expenses and debts, and she asked for help. When Tandy retired, Militello again explained her financial situation to Randy Wilson, and made clear the source of her financial problems and her need for help in solving them. Wells Fargo was therefore actually aware of the risk to Militello’s financial security from depletion of the Grantor Trust. As Wallace testified, however, Wells Fargo breached its fiduciary duty by failing to explore other possible options to assist Militello through her financial difficulties. Wallace testified that Wells Fargo’s conduct involved an extreme degree of risk. He divided his evaluation of Wells Fargo’s conduct as a fiduciary into three time periods. His first period, the “evaluation phase,” began in December 2005 when Militello contacted Wells Fargo for help, and ended in late May 2006 when the decision to sell the properties was made. Wallace’s second period covered the sale itself, including the marketing of the properties and the decision to sell. The third period covered the execution of the sale, and included Wells Fargo’s adherence to its own internal policies and carrying out its duties to Militello in distribution of the properties after the sale. Wallace testified in detail regarding the duties that Wells Fargo, as Militello’s fiduciary, should have carried out in each of the three periods. He testified that, among other deficiencies, Wells Fargo failed: to provide sufficient information to Militello to make an informed decision about sales from the Grantor Trust, to obtain a “current evaluation of the property prepared by a competent engineer” before the sales, to explain the valuation to Militello and discuss the tax consequences of a sale, to market the properties to more than one buyer, to negotiate to get the best price possible for the properties, to negotiate a written purchase and sale agreement, to convey correct information to the attorneys preparing the deeds for the sales, to notify the oil and gas producers of the change in ownership, and to create a separate account after the sales, instead commingling the proceeds received “for a period of up to three years.” . . . Under our heightened standard of review, we conclude the trial court could have formed a firm belief or conviction that Wells Fargo’s conduct involved an extreme degree of risk, and Wells Fargo was consciously indifferent to that risk. We also conclude that Militello offered clear and convincing evidence to support the trial court’s finding that Wells Fargo was grossly negligent, and therefore met her burden to prove the required predicate under section 41.003(a).

Id. The court also held that the amount awarded was supported by the evidence: “Having considered the relevant Kraus and due process factors, we conclude an exemplary damages award of $2,773.826.67 is reasonable and comports with due process.” Id. The court did suggest a remittitur due to the decrease in economic damages.

The trustee’s final argument dealt with an exculpatory clause in the trust agreement. By its express terms, the clause did not preclude the trustee’s liability for gross negligence, bad faith, or willful breach of the trust’s provisions:

The Trustee shall not be liable for any loss or depreciation in value of the properties of the Trust, except as such loss is attributable to gross negligence, willful breach of the provisions of this Trust, or bad faith on the part of the Trustee. The Trustee shall not be responsible for any act or omission of any agent of the Trustee, if the Trustee has used good faith and ordinary care in the selection of the agent.

Id. The trustee contended that the property code “expressly allows exculpatory clauses to shield a trustee from ordinary negligence.” Id. (citing Tex. Prop. Code § 114.007). It also argued that it “used good faith and ordinary care” in selecting its agents, including “(1) the law firm that prepared the erroneous deeds, (2) Leonard, who prepared the mineral interest valuation used by the bank, and (3) Harrell, who prepared erroneous tax returns, and consequently is not liable for errors made by those agents.” Id.

The court of appeals disagreed with the trustee’s arguments: “We have concluded that the evidence supports the trial court’s finding that Wells Fargo’s conduct constituted gross negligence.” Id. In addition, there was evidence that the trustee “failed to use ordinary care in its selection of Leonard, if not its other agents.” Id. “Because the exculpatory clause in the Grantor Trust does not apply to losses ‘attributable to gross negligence,’ we conclude that the trial court did not err in refusing to enforce it to bar Militello’s claims.” Id.

Interesting Note: This is an interesting case because it deals with exemplary damages and mental anguish damages in the context of a breach of fiduciary duty by a trustee.

Exemplary Damages. “Exemplary damages” includes punitive damages. Tex. Civ. Prac. & Rem. Code Ann. § 41.001(5).  A jury may only award exemplary damages if the claimant proves, by clear and convincing evidence, that the harm resulted from: (1) fraud; (2) malice; or (3) gross negligence. Id. at § 41.003(a). A defendant’s breach of a fiduciary duty is ordinarily not enough, by itself, to support an award of exemplary damages. There must be an aggravating factor, such as actual fraud, gross negligence, or malice. Hawthorne v. Guenther, 917 S.W.2d 924, 936 (Tex. App.—Beaumont 1996, writ denied). A breach of fiduciary duty, however, often involves aggravated or fraudulent conduct, regardless of the actual motive of the defendant, that justifies an award of exemplary damages to deter such conduct. See, e.g., International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 584 (Tex. 1963); Natho v. Shelton, No. 03-11-00661-CV, 2014 Tex. App. LEXIS 5842, 2014 WL 2522051, at *2 (Tex. App.—Austin May 30, 2014, no. pet.); Lesikar v. Rappeport, 33 S.W.3d 282, 311 (Tex. App.—Texarkana 2000, pet. denied); Fidelity Nat’l Title Co. v. Heart of Tex. Title Co., No. 03-98-00473-CV, 2000 Tex. App. LEXIS 72 (Tex. App.—Austin 2000, no pet.); Hawthorne v. Guenther, 917 S.W.2d at 936; NRC, Inc. v. Huddleston, 886 S.W.2d 526, 533 (Tex. App.—Austin 1994, no writ) (upholding portion of district court’s judgment awarding actual and punitive damages for breach of fiduciary duty); Murphy v. Canion, 797 S.W.2d 944, 949 (Tex. App.—Houston [14th Dist.] 1990, no pet.); Cheek v. Humphreys, 800 S.W.2d 596, 599 (Tex. App.—Houston [14th Dist.] 1990, writ denied) (“Exemplary damages are proper where a fiduciary has engaged in self-dealing”); Morgan v. Arnold, 441 S.W.2d 897, 905–906 (Tex. Civ. App.—Dallas 1969, writ ref’d n.r.e.).

One important protection for defendants is the statutory cap on the amount of exemplary damages.  The Texas Civil Practice and Remedies Code permits exemplary damages of up to the greater of: (1) (a) two times the amount of economic damages; plus (b) an amount equal to any noneconomic damages found by the jury, not to exceed $750,000; or (2) $200,000.  Tex. Civ. Prac. & Rem. Code Ann. § 41.008(b). This cap need not be affirmatively pleaded as it applies automatically and does not require proof of additional facts.  Zorrilla v. Aypco Constr., II, LLC, 469 S.W.3d 143 (Tex. 2015). However, these limits do not apply to claims supporting misapplication of fiduciary property or theft of a third degree felony level. Tex. Civ. Prac. & Rem. Code Ann. § 41.008(c)(10). Natho v. Shelton, 2014 Tex. App. LEXIS 5842 at n. 4. The statute states that the caps “do not apply to a cause of action against a defendant from whom a plaintiff seeks recovery of exemplary damages based on conduct described as a felony in the following sections of the Penal Code if … the conduct was committed knowingly or intentionally….”  Id.  Accordingly, if a defendant is found liable for one of these crimes with the required knowledge or intent, it cannot take advantage of the statutory exemplary damages caps.

Mental Anguish. A plaintiff can potentially recover mental-anguish damages if the damages are a foreseeable result of a breach of fiduciary duty. Perez v. Kirk & Carrigan, 822 S.W.2d 261, 266-67 (Tex. App.—Corpus Christi 1991, writ denied) (client was entitled to mental anguish award in breach of fiduciary duty by an attorney regarding the disclosure of confidential information). In Douglas v. Delp, the Texas Supreme Court stated that mental-anguish damages were not allowed when the defendant’s negligence harmed only the plaintiff’s property. 987 S.W.2d 879, 885 (Tex. 1999). In those cases, damages measured by the economic loss would make the plaintiff whole. Id. Applying those concepts to attorney malpractice, the court stated that limiting the plaintiff’s recovery to economic damages would fully compensate the plaintiff for the attorney’s negligence. Id. The court concluded “that when a plaintiff’s mental anguish is a consequence of economic losses caused by an attorney’s negligence, the plaintiff may not recover damages for that mental anguish.” Id.

The Texas Supreme Court reiterated that when an attorney’s malpractice results in financial loss, the aggrieved client is fully compensated by recovery of that loss; the client may not recover damages for mental anguish or other personal injuries. Belt v. Oppenheimer, Blend, Harrison & Tate, 192 S.W.3d 780, 784 (Tex. 2006). In Tate, the Court held that estate planning malpractice claims seeking purely economic loss are limited to recovery for property damage. Id. The Court held that when the damages are financial loss, a party is fully compensated by recovery of that loss. Id. So, if the plaintiff is seeking a claim for breach of fiduciary duty based on negligent conduct, a plaintiff may not be able to obtain mental anguish damages if the economic damages make the plaintiff whole.

In a situation where the plaintiff’s breach of fiduciary duty claim is based on non-negligent conduct, such as fraud or malice, a plaintiff can “recover economic damages, mental anguish, and exemplary damages.” Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 304 (Tex. 2006) (mental anguish damages permissible for fraud claim); City of Tyler v. Likes, 962 S.W.2d 489, 497 (Tex. 1997) (stating that mental anguish damages are recoverable for some common law torts involving intentional or malicious conduct). For example, in Parenti v. Moberg, the court of appeals affirmed an award of mental anguish damages for a beneficiary suing a trustee for breach of fiduciary duty. No. 04-06-00497-CV, 2007 Tex. App. LEXIS 4210 (Tex. App.—San Antonio May 30, 2007, pet. denied). The court stated: “Here, the jury found that Parenti acted with malice, and Parenti does not challenge that finding. Therefore, because the jury found that Parenti acted with malice, we hold that the trial court did not err in awarding mental anguish damages to Moberg.” Id.

Finally, even if allowed, mental anguish damages are difficult to prove. The Texas Supreme Court has noted: “The term ‘mental anguish’ implies a relatively high degree of mental pain and distress. It is more than mere disappointment, anger, resentment or embarrassment, although it may include all of these. It includes a mental sensation of pain resulting from such painful emotions as grief, severe disappointment, indignation, wounded pride, shame, despair and/or public humiliation.” Parkway Co. v. Woodruff, 901 S.W.2d 434, 444 (Tex. 1995). The Court held that an award for mental anguish will normally survive appellate review if “the plaintiffs have introduced direct evidence of the nature, duration, and severity of their mental anguish thus establishing a substantial disruption in the plaintiff’s routine.” Id.

In Service Corp. International v. Guerra, the Texas Supreme Court reversed an award of mental anguish damages. 348 S.W.3d 221, 231-32 (Tex. 2011). The Court held: “Even when an occurrence is of the type for which mental anguish damages are recoverable, evidence of the nature, duration, and severity of the mental anguish is required.” Id. at 231. In Guerra, the jury awarded mental anguish damages to three daughters of the deceased when the cemetery disinterred and moved the body of their father. Id. at 232. One daughter testified that it was “the hardest thing I have had to go through with my family” and that she “had lots of nights that I don’t sleep.” Id. Another daughter testified, “We’re not at peace. We’re always wondering. You know we were always wondering where our father was. It was hard to hear how this company stole our father from his grave and moved him.” Id. There was also evidence from third parties that the daughters experienced “strong emotional reactions.” Id. Yet, the Court held that this was not sufficient to support an award of mental-anguish damages. Id. See also Hancock v. Variyam, 400 S.W.3d 59 (Tex. 2013) (reversing award of mental anguish damages).

In Martin v. Martin, the court of appeals reversed a mental anguish award against a trustee based on a claim of intentional breach of fiduciary duty because the beneficiary did not have sufficient evidence of harm. 363 S.W.3d 221 (Tex. App.—Texarkana 2012, pet. denied). The evidence of mental anguish was: “It’s impacted our whole family. We don’t — for generations and generations to come, we don’t have any — it just hurts. It’s affected my father. I worry about him every day talking to him on the phone, the stress. I worry about those in the company that have to deal with what’s going on.” Id. The court held that: “Courtney failed to establish a high degree of mental pain and distress that is more than mere worry, anxiety, vexation, embarrassment, or anger.” Id. See also Onyung v. Onyung, No. 01-10-00519-CV, 2013 Tex. App. LEXIS 9190 (Tex. App.—Houston [1st Dist.] July 25, 2013, pet. denied) (reversed mental anguish damages because plaintiff did not have sufficient evidence of harm). However, in Moberg, the court of appeals affirmed the modest award of $5,000 in mental anguish damages in a breach of fiduciary duty case against a trustee where the evidence showed that the beneficiary: “cried, lost sleep, vomited, and missed work for ‘several days’. . .” 2007 Tex. App. LEXIS 4210. These are very fact-specific determinations.

Courts Hold That Fiduciaries Waived Complaints About Trial Court Orders

Posted in Cases Decided, Texas Court of Appeals

In In re Estate of Roach, a trial court removed an executor for multiple grounds, including: (1) Texas Estates Code Section 404.0035(b)(5), which authorizes removal when an independent executor becomes incapable of properly performing his fiduciary duties due to a material conflict of interest, and (2) Section 404.0035(b)(3), which authorizes removal when an independent executor is proved to have been guilty of gross misconduct or gross mismanagement in the performance of his duties. No. 07-16-00315-CV, 2017 Tex. App. LEXIS 4028 (Tex. App.—Amarillo May 3, 2017, no pet. history). The executor appealed but only expressly challenged the conflict-of-interest ground.

The court of appeals noted that an appellant must challenge all independent bases or grounds that fully support a complained of ruling or judgment. It stated that “[i]f an independent ground fully supports the complained-of ruling or judgment, but the appellant assigns no error to that independent ground, we must accept the validity of that unchallenged independent ground, and thus any error in the grounds challenged on appeal is harmless because the unchallenged independent ground fully supports the complained-of ruling or judgment.” Id. The court of appeals affirmed because the executor waived his appeal by not challenging one of the grounds that supported the trial court’s order. The court held that where one of the independent grounds that fully supports a trial court’s order has not been challenged, the appellate court need not address the evidence supporting this unchallenged ground:

Removal of an independent executor of an estate may be ordered by a court if the independent executor, inter alia, is proven to have been guilty of gross misconduct or gross mismanagement in performance of his duties, see section 404.0035(b)(3), or becomes incapable of properly performing his fiduciary duties due to a material conflict of interest, see section 404.0035(b)(5). The trial court’s finding that Tom engaged in gross misconduct and gross mismanagement by failing to pursue claims under the Roach Oil note and causing Ashtola to overcharge Rosemary and the estate is an independent ground that fully supports the trial court’s removal of Tom as independent executor. As such, any error resulting in the trial court’s finding of a material conflict of interest is harmless and we must affirm the trial court’s removal of Tom as independent executor on the unchallenged ground that he was guilty of gross misconduct or gross mismanagement.

Id.

In Barcroft v. Walton, a trustee and executor appealed a trial court’s turnover order. No. 02-16-00404-CV, 2017 Tex. App. LEXIS 4078 (Tex. App.—Fort Worth May 4, 2017, no pet. history). The fiduciary did not file a complete reporter’s record of the hearing on the motion for turnover order and otherwise did not comply with the rules of appellate procedure governing agreed or partial reporter’s records. The court of appeals held that it “must presume that the omitted portions of the reporter’s record support entry of the September 19, 2016 turnover order.” Id. The court concluded: “Presuming the omitted portions of the reporter’s record of the September 19, 2016 hearing support the trial court’s entry of the September 19, 2016 turnover order, Barcroft has failed to show an abuse of discretion in any of his three issues. We therefore overrule them and affirm the trial court’s order.” Id.

Interesting Note: Attorneys specialize in numerous areas of the law. One type of specialization is appellate law. For example, there is a Texas Board of Legal Specialization certification in appellate law. The procedural requirements for an appeal are very complex, and clients should make sure that their trial attorneys enlist the assistance of qualified appellate lawyers when they engage in an appeal. The ramifications for not doing so can be seen in these cases. The parties attempted to appeal orders on substantive arguments, but the court of appeals did not have to address the merits of the appellants’ arguments due to their trial counsels’ failure to properly brief the appeals, obtain an adequate record, and challenge all potential grounds upon which the order could have been sustained.

Texas Supreme Court Will Decide Whether Texas Recognizes A Tortious Interference With Inheritance Claim

Posted in Cases Decided, Texas Supreme Court

In Anderson v. Archer, the trial court’s judgment awarded the plaintiffs $2.5 million in damages based on a tortious interference with inheritance claim. No. 03-13-00790-CV, 2016 Tex. App. LEXIS 2165 (Tex. App.—Austin March 2, 2016, pet. granted). The defendants appealed and argued that Texas law does not recognize such a claim. The court of appeals agreed with the appellants. The court held that prior cases from that court and the Texas Supreme Court had never adopted such a claim:

In short, we agree with the Amarillo Court of Appeals that “neither this Court, the courts in Valdez, Clark, and Russell, nor the trial court below can legitimately recognize, in the first instance, a cause of action for tortiously interfering with one’s inheritance.” We also agree with the Amarillo court’s assessment that neither the Legislature nor Texas Supreme Court has done so, or at least not yet. Absent legislative or supreme court recognition of the existence of a cause of action, we, as an intermediate appellate court, will not be the first to do so.

Id. The court also rejected an argument that a tortious interference with inheritance claim is merely a subset of the tort of tortious interference with a contract or prospective contractual or business relationship. It held that it was a separate claim that had not yet been recognized. The court therefore reversed the award for the plaintiff. The plaintiff sought review in the Texas Supreme Court, and today, the Court granted the petition for review. The Court’s staff described the issue as: “The principal issue is whether Texas should recognize tortious interference with inheritance rights.”

The Texas Supreme Court recently issued an opinion in Jackson Walker, LLPO v. Kinsel, No. 15-0403, 2017 Tex. LEXIS 477 (Tex. May 26, 2017), where the court of appeals addressed the issue of whether a tortious interference with inheritance rights claim existed in Texas. The Court held that it would not decide that issue in Kinsel because the plaintiff had other adequate remedies. It appears that the Court will address this important issue in the Anderson case.

Recorded Webinar – Recent Developments In Trustees’ Use Of Exculpatory, Release, and Disclaimer-Of-Reliance Clauses In Texas

Posted in Items of Interest, Knowledge Library, Uncategorized
Recorded Webinar

Recorded Webinar

Thank you to everyone who joined us on June 13 for the webinar “Recent Developments In Trustees’ Use Of Exculpatory, Release, and Disclaimer-Of-Reliance Clauses In Texas.”  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, covers a trustee’s ability to enforce beneficial trust and contract clauses that alter its duties and liabilities, including exculpatory, release, and disclaimer-of-reliance clauses. This presentation also includes suggested tips for drafting these types of clauses.

CLICK HERE FOR WEBINAR

Paper: Trustee Use of Exculpatory Release and Disclaimer Clauses

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

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