Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

Codicil Was Properly Rejected Because It Did Not Adequately Refer To Last Will And Testament

Posted in Cases Decided, Texas Court of Appeals

In In the Estate of Hargrove, two daughters offered their mother’s last will and testament dated in 2017 for probate. No. 04-18-00355-CV, 2019 Tex. App. LEXIS 1703 (Tex. App.—San Antonio March 6, 2019, no pet. history). Their brother offered a subsequent codicil. After an evidentiary hearing, the trial court admitted the will to probate, issued letters testamentary to the daughters as co-independent executors, and denied the son’s application to admit the codicil to probate. The son appealed.

The court of appeals noted that a codicil must contain “a sufficient reference to a prior will” and that, if it does so, it “operates as a republication of the will in so far as it is not altered or revoked by the codicil; the will and codicil are then to be regarded as one instrument speaking from the date of the codicil.” Id. (citing Hinson v. Hinson, 154 Tex. 561, 567, 280 S.W.2d 731, 735 (1955)). The court held that the Hinson rule does not require that a codicil make a “specific” or “exact” reference to a prior will, but it does require that it state “enough information to permit adequate identification of the will being republished.” Id. The court held that the codicil in this case did not make a sufficient reference:

The Codicil does not contain a generic reference to an existing will that could be construed to mean the February 2017 Will. Instead, it contains a specific reference to a will executed at a specific time that is incompatible with identifying the Will at issue here. As noted, Mary Jane’s Will was executed on February 13, 2017. But the Codicil, which was executed a mere six weeks later, refers to “my Last Will and Testament, which was executed in the Summer of 2016.” Jim Bob contends that this is actually a reference to the February 2017 Will. But the express language of the Codicil refers to a will executed at least seven months earlier. We cannot simply overlook the discrepancy. Nor can we, in the guise of interpreting the Codicil, rewrite it to state “executed in February 2017” rather than “executed in the Summer of 2016.”

Id. The court affirmed the trial court’s rejection of the codicil.

Trial Court Had Jurisdiction To Appoint A Temporary Administrator After A Will Contest Had Been Filed Regarding A Will That Had Been Probated As A Muniment of Title

Posted in Cases Decided, Texas Court of Appeals

In Chabot v. Estate of Sullivan, the decedent’s attorney probated a holographic will as a muniment of title. No. 03-17-00865-CV, 2019 Tex. App. LEXIS 2145 (Tex. App.—Austin March 20, 2019, no pet.). A claimant then asserted a claim that the decedent sexually abused him. The tort claimant and the decedent’s sister filed will contests. The court signed an order appointing the temporary administrator and then signed a subsequent order authorizing the administrator to settle the tort claimant’s claims. The party who would take under the will alleged that the orders appointing the temporary administrator and approving the settlement were void. The court of appeals disagreed, holding that the orders were not void because the decedent’s sister and the tort claimant filed will contests well within the two-year deadline under Texas Estates Code Section 256.204(a), no representative of the estate existed at the time as it was a muniment of title, and the trial court appointed the temporary administrator pursuant to its authority under Texas Estates Code Section 452.051(a). The court noted that the Estates Code provides at least two mechanisms for challenging a probate court’s order: a bill of review and a will contest. “Section 256.204, therefore, allows for the filing of a will contest within two years of the date the will was admitted to probate. It is undisputed that both Chabot and the Tort Claimants filed timely will contests.” Id. The court concluded:

Chabot and the Tort Claimants filed will contests well within the two-year deadline. See Tex. Estates Code § 256.204(a). No representative of Sullivan’s estate existed at the time, and the trial court appointed Deadman as temporary administrator pursuant to its authority under Section 452.051. See id. § 452.051(a). Chabot has not cited any authority prohibiting the trial court’s actions, and we are not aware of any. We therefore hold that the trial court’s order appointing Deadman was not void ab initio and that the court’s subsequent order authorizing Deadman to settle the Tort Claimants’ suits was not void on that ground.

Id.

Breach Of Fiduciary Duty Claim Against Trustee Based On Self-Dealing Real Estate Investment Was Dismissed Due To Limitations, Quasi-Estoppel, And An Exculpatory Clause, But The Attorney’s Fees Award Against The Beneficiary Was Reversed Where The Award Was Not Equitable

Posted in Cases Decided, Texas Court of Appeals

In Goughnour v. Patterson, a beneficiary sued a trustee based on a failed real estate investment. No. 12-17-00234-CV, 2019 Tex. App. LEXIS 1665 (Tex. App.—Tyler March 5, 2019, no pet. history). In 2007, the trustee of four trusts invited his mother, the primary beneficiary, and his siblings, also beneficiaries, to participate in a real estate investment that he created by allowing the use of trust funds. They all agreed, and the trustee transferred a total of $2.1 million from the four trusts to the real estate investment entity. The project failed, and the trusts lost the $2.1 million. In 2011, the trustee filed suit to resign and obtain a judicial discharge. A sister filed a breach of fiduciary duty claim based on this failed investment.

After a bench trial, the court rendered judgment approving the trust accounting, approving the trustee’s administration, and holding that the trustee, individually and in his capacity of trustee, was “completely discharged and relieved of all duties” and was “fully and completely released and discharged from any and all claims, duties, causes of action or liabilities (including taxes of any kind) relating to any and all actions or omissions in connection with his administration of the DPH Trust.” Id. The court ordered that the successor trustee pay all outstanding legal and accounting fees incurred by the trust, appointed a successor trustee, and relieved the successor trustee of any and all duty, responsibility, or authority to investigate the actions or inactions of the trustee as prior trustee. The court further ordered that the sister take nothing on all her claims and ordered her to pay attorney’s fees for the trustee. The sister appealed.

The court of appeals issued a very lengthy and detailed opinion affirming in part and reversing in part the trial court’s judgment. The court of appeals first addressed the trustee’s affirmative defense of the statute of limitations:

A suit for breach of fiduciary duty or fraud must be brought no later than four years from the date the cause of action accrues… A cause of action accrues when facts have come into existence that authorize a claimant to seek a judicial remedy… When applicable, the discovery rule defers accrual of a cause of action until the plaintiff knew or, exercising reasonable diligence, should have known of the facts giving rise to the cause of action… A person to whom a fiduciary duty is owed is relieved of the responsibility of diligent inquiry into the fiduciary’s conduct, so long as the relationship exists. However, once the fact of misconduct becomes apparent it can no longer be ignored, regardless of the nature of the relationship.

Id. (internal citations omitted). The beneficiary claimed that she should not have known about the claim until 2011. The court of appeals disagreed:

The Bighorn transaction occurred on August 30, 2007. To be timely, Deborah’s claims for breach of fiduciary duty and fraud, which are based on that transaction, should have been filed by August 30, 2011. The evidence shows that, by August 30, 2011, Deborah knew that the structure of the transaction that occurred was not the one Robert described in July 2007; the housing market was struggling; one of the Bighorn builders withdrew from the project and the other stopped accepting new lots; by mid-August 2009 they ceased construction, the bank started foreclosure proceedings, and Bighorn filed for bankruptcy; and by March 2011, all of the Trust’s investments were lost with no possibility of recovery of that money. In his March 28, 2011 email, Robert stated that the Trust loaned money to Bighorn for a preferred returns interest. The emails Robert sent contained sufficient facts giving rise to her causes of action. Additionally, by the end of 2008, Deborah was angry with Robert because of the Bighorn project, and she had already asked Robert to resign from her trust before that date. We disagree with Deborah’s assertion that some of her allegations constitute breaches of fiduciary duty separate from the Bighorn transaction. Her allegations that Robert lied about the transaction, failed to provide pertinent information about the transaction, and structured the transaction differently than described in his initial email are all facets of the allegation that Robert breached his fiduciary duty by misusing Trust assets for the Bighorn project. Therefore, these allegations share the same accrual date, August 30, 2007. We conclude that the statute of limitations ran on Deborah’s breach of fiduciary duty and fraud claims on August 30, 2011.

Id. The court of appeals held that the statute of limitations also applied to the beneficiary’s diversification and defalcation claims as those were the same as the her breach of fiduciary duty claim. Id.

The court of appeals also affirmed the application of the trustee’s affirmative defense of quasi-estoppel based on the beneficiary’s prior consent to trust investments in other real estate investments:

The affirmative defense of quasi-estoppel precludes a party from asserting, to another’s disadvantage, a right inconsistent with a position she has previously taken. The doctrine applies when it would be unconscionable to allow a party to maintain a position inconsistent with one in which she acquired or by which that party accepted a benefit. The record shows that Robert initiated approximately fifty real estate transactions in which he invested Trust assets. Deborah agreed to all of these transactions. All transactions except Bighorn were successful and the Trust benefitted from those prior investments. Therefore, Deborah’s claims for breach of fiduciary duty are barred by the affirmative defense of quasi-estoppel.

Id. (internal citations omitted).

The court of appeals also affirmed the trustee’s affirmative defense of an exculpatory clause in the trust, which negated his liability:

Generally, subject to the Trustee’s duty to act in good faith and in accordance with the purposes of the Trust, the terms of the Trust prevail over provisions of the Texas Trust Code. A term of a Trust exculpates a Trustee from liability if the Trustee’s breach of trust is not committed in bad faith, intentionally, or with reckless indifference to the interest of a beneficiary. Paragraph C(5) of the Trust provided that the Trustee shall not “at any time be held liable for any action or default of himself or his agent or of any other person in connection with the administration of the trust estate, unless caused by his own gross negligence or by a willful commission by him of an act in breach of trust.” Such an exculpatory clause has been held effective in exonerating a trustee from liability for losses when no evidence of gross negligence was shown.

To prove gross negligence, a plaintiff must show (1) an act or omission that, when viewed objectively from the defendant’s standpoint at the time it occurred, involved an extreme degree of risk, considering the probability and magnitude of the potential harm to others and (2) that the defendant had an actual, subjective awareness of the risk but proceeded with conscious indifference to the rights, safety, and welfare of others. Under the first element, an “extreme risk is not a remote possibility of injury or even a high probability of minor harm, but rather the likelihood of serious injury to the plaintiff.” To determine if acts or omissions involve extreme risk, we analyze the events and circumstances from the defendant’s perspective at the time the harm occurred, without resorting to hindsight. Under the second element, “actual, subjective awareness” means that “the defendant knew about the peril, but its acts or omissions demonstrated that it did not care.” Circumstantial evidence is sufficient to prove either element.

Id. The court of appeals affirmed the trial court’s summary judgment on this ground due to the trustee’s testimony about his due diligence about the investment, the history of doing successful real estate investments, the consent of the other beneficiaries, his capacity as beneficiary and his loss associated with the investment: “There is no evidence that Robert had an actual, subjective awareness of the risk of a coming financial crisis but nevertheless proceeded with conscious indifference to the rights, safety, and welfare of the Trust, his mother, or his sisters. Thus, there is no evidence of gross negligence or a willful commission by Robert of a breach of trust. We conclude that Robert showed as a matter of law that Deborah’s claims were barred by the Trust instrument’s exculpatory clause.” Id.

The beneficiary also complained that the trial court should not have discharged the trustee from liability. The court of appeals affirmed the trial court’s discharge related to an accounting:

Whether a Trustee’s resignation should be accepted is within the discretion of the trial court. The trust code and the language of the trust instrument determine the Trustee’s powers and duties. The trust code requires that a written statement of accounts shall show (1) all trust property that has come to the trustee’s knowledge or into the trustee’s possession, (2) a complete account of receipts, disbursements, and other transactions regarding the trust property, (3) a listing of all property being administered, with a description of each asset, (4) the cash balance on hand with the name and location of the depository where the balance is kept, and (5) all known liabilities owed by the trust.… The Trust’s accountant testified that the accounting reflects the receipts, disbursements, payment of expenses, distributions, transfers, land sales, and all financial transactions that occurred in the DPH Trust. He stated that the accounting fully and fairly discloses all financial matters relating to the administration of the Trust from 2002 through 2016.

Robert testified regarding the documents that he provided to Deborah showing all financial transactions involved in the administration of the Trust. He presented monthly statements itemizing investment accounts, including their gains, losses, and values, as reported by UBS Financial Services, Inc., for 2002 through 2016 and showing the cash balance on hand. He also presented spreadsheets showing receipts and disbursements from the DPH Trust from 2002 through 2016, documents showing cash available to the DPH Trust, as well as income tax returns for the DPH Trust for 2002 through 2015. The record also contains closing statements relating to the sale of real estate.

Robert testified that each of the four trusts started with $115,000 in 1989. Since 2002, when he became Trustee, till the time of trial, he paid Ruth close to a million dollars. He estimated that the value of the DPH Trust at the time of trial was $1.2 or $1.3 million. The record shows that all investments Robert made on behalf of the Trust, with the exception of the Bighorn investment, were profitable. Additionally, Robert sent emails to Ruth and his siblings describing the current financial picture of the Trust and updating them on Trust activities. Based on the evidence presented at the hearing on Robert’s petition for resignation, we conclude the trial court did not abuse its discretion by determining that Robert properly administered the Trust and properly performed his duties, including providing the beneficiaries with a complete accounting, and the court properly approved Robert’s administration.

Id. The court of appeals also held that the trial court did not give a declaration regarding a trustee’s non-liability for tort causes of action, but rather adjudicated the beneficiary’s failed tort claims:

In the final judgment, the court ordered that Robert is fully and completely released and discharged from any and all claims, duties, causes of action or liabilities relating to any and all actions or omissions in connection with his administration of the DPH Trust. Deborah complains that this order constitutes an abuse of discretion. She states that approving a final accounting does not adjudicate a trustee’s “potential tort liability” and that a trustee cannot use a declaratory judgment action to determine “potential tort liability.” The court’s order does not include this phrase, and she does not explain how the order addresses “potential tort liability.” We conclude that it does not.… In response to Robert’s petition for resignation as Trustee, Deborah filed counterclaims alleging various theories of liability. Those counterclaims were disposed of by partial summary judgments prior to the trial before the court at which the issues of the accounting and Robert’s discharge were heard. The final judgment incorporated the prior summary judgments, specifically ordering that Deborah take nothing on all her claims against Robert. Considering the literal meaning of the language used, we conclude that the final judgment’s reference to a release of liability contemplates the previously determined counterclaims, not “potential tort liability.” As previously explained, the trial court’s rulings on Deborah’s counterclaims were proper. Therefore, the trial court did not abuse its discretion by releasing Robert from liability for his actions or omissions in connection with his administration of the Trust.

Id.

The beneficiary also complained about the trial court ordering her to reimburse the trust in the amount of $587,585 for the trustee’s attorney’s fees. The court of appeals set forth the following standards:

An award of reasonable and necessary attorney’s fees that are “equitable and just” is allowed under the Uniform Declaratory Judgments Act and the Texas Trust Code. Whether an award of attorney’s fees is equitable and just are matters of law addressed to the trial court’s discretion. That determination depends on the concept of fairness in light of all the surrounding circumstances. The party asserting the inequity of an attorney’s fee award is not required to present distinct evidence on that question of law. The court may conclude that it is not equitable or just to award even reasonable and necessary fees. In applying the Declaratory Judgments Act or trust code Section 114.064, the conclusion that an award of fees is equitable and just is not dependent on a finding that a party “substantially prevailed.” The trial court’s determination to award attorney’s fees is reviewed for an abuse of discretion. Under an abuse of discretion standard of review, we review the entire record. If there is some evidence in the record that shows the trial court followed guiding rules and principles, then the reviewing court may not find an abuse of discretion. Trial judges, as well as appellate judges, can draw on their common knowledge and experience as lawyers and judges in considering the testimony, the record, and the amount in controversy in determining attorney’s fees.

Id. The court of appeals held that the trial court abused its discretion in ordering the beneficiary to pay the trustee’s attorney’s fees:

The record shows that there was discord between Robert and Deborah since at least 2007. Deborah asked Robert to resign as Trustee. He offered to resign only if Deborah would provide him with a release of liability which Deborah refused to provide. Robert petitioned the court for approval of his resignation as Trustee in 2011. In that petition, he asked the court to render judgment approving the accounting and “releasing and fully and completely discharging [Robert] from any and all claims, duties and liabilities regarding the Trust and/or his administration of the Trust, . . .” and directing that all costs, expenses and attorney’s fees and accounting fees incurred by Robert in connection with his petition be paid out of the assets of the Trust. In her original answer, Deborah asked only for an accounting. A year after Robert filed his original petition, Deborah filed an amended answer that first included her counterclaims. In November 2015, Robert filed his first amended petition in which he stated that he sought a declaratory judgment approving the Trust accountings and releasing and discharging him, as Trustee and individually, from any liability involving matters relating to his administration of the Trust.

While acknowledging that Deborah was not required to give him a release, Robert testified that there would have been no litigation if she had provided the release. Robert’s attorney testified that Robert would agree to resign if they designated a Successor Trustee and if Deborah agreed to fully release Robert. At the same time, Robert complains that the litigation drained the Trust. His actions show that he deemed it more important to obtain the release than to preserve his mother’s funds. He asked the court to order Deborah to reimburse the Trust with $587,585 that was used to pay his attorneys and accountants for fees for services rendered to defend against the counterclaims. Robert’s attorney testified that Robert was not asking Deborah to pay for amounts predating the lawsuit or for the accounting. In argument to the court, he made it clear that Robert wanted the court to order Deborah to reimburse the Trust for fees that were incurred to defend against her counterclaims…

The record shows that Robert repeatedly engaged in self-dealing. In the summer of 2007, he told the Trust beneficiaries that, with their permission, he would invest approximately $750,000 of Trust money in a project planned by his real estate company. After getting the approval of the beneficiaries, he did not follow through on those terms. Instead, he loaned $2.1 million in Trust funds to an entity he was part owner in and lost all of that money when the deal collapsed. His actions resulted in a material financial loss to the Trust.

It is settled law that a trustee is not entitled to expenses related to litigation resulting from the fault of the trustee. Here, although Deborah asserted that Robert engaged in wrongdoing, there was no trial on Deborah’s breach of fiduciary duty and fraud claims. Robert won on those counterclaims, not after a review of the merits, but based solely on his affirmative defenses presented by way of summary judgment motion. Through affirmative defenses the defendant seeks to establish a reason why the plaintiff should not recover independent from an examination of the merits of her claims. If true, the defendant’s affirmative defense will defeat the plaintiff’s claim, even if all the allegations in the complaint are true. That Deborah’s counterclaims are barred by limitations, quasi-estoppel, and the Trust instrument’s exculpatory clause is a factor we consider in looking at the equities in this case. For purposes of our discussion, a win on affirmative defenses is not on equal footing with a win on the merits. Moreover, neither the Declaratory Judgments Act nor trust code Section 114.064 are prevailing party statutes, and an award of attorney’s fees under those statutes is not dependent on a finding that a party substantially prevailed. It follows that Robert’s win does not require a determination that an award of attorney’s fees is equitable.

We acknowledge that the judgment orders “that the Trustee has properly performed his duties and responsibilities as the Trustee of the DPH Trust.” This language is found in the sentence discharging Robert from the duties of Trustee. This can only refer to Robert’s actions that were proven at trial which did not include his defenses against Deborah’s counterclaims, the rationale for the award of $587,585.

Robert complains that Deborah was the only one to contest his actions and her counterclaims cost the Trust an enormous amount of money, depleting the liquid assets to the point that the Trust cannot pay its share of Ruth’s mandatory distributions. He argues that this causes Ruth to bear the burden of the cost of this litigation. Therefore, he argues, Deborah should reimburse the Trust. We disagree. Robert and Ruth treated the four trusts as belonging to the remainder beneficiaries by naming the trusts after them, getting their permission to use funds for investments, and by making distributions to the remainder beneficiaries during Ruth’s lifetime. Robert engaged in very risky activities and lost a substantial amount of Trust money. Deborah had the right to disagree with and question Robert’s actions, and her claims were against him individually, alleging inappropriate actions. Robert did not have the right to insist on a release from Deborah. Robert was not cleared of any wrongdoing by a review of the merits. Considering all of the circumstances, we conclude that it was inequitable as a matter of law for the trial court to order Deborah to pay Robert’s $587,585 attorney’s fee bill for his defense of her counterclaims.

Id. The court of appeals also held that the trial court erred in ordering the beneficiary to pay the attorney’s fees incurred by their mother, who was brought into the suit by the trustee. Id. However, the court of appeals rejected the beneficiary’s complaint that the trustee should reimburse the trust for funds used to pay for his attorney’s fees. The court of appeals construed that complaint to be that the trial court erred in failing to order the disgorgement of that benefit. Because there was no finding of breach of fiduciary duty, the trial court did not err in failing to order disgorgement, a remedy for a breach of fiduciary duty. Id.

OCC Announces That It Will Consider Rule Changes On Fiduciary Capacity and Non-Fiduciary Custody Activities

Posted in Items of Interest

The OCC recently issued an advance notice of proposed rulemaking  (ANPR) regarding the scope of activities that are fiduciary in nature, as well as the requirements of non-fiduciary custody activities of national banks, federal thrifts and federal branches of foreign banks. In particular, the OCC is considering amending the definition of “fiduciary capacity” to include trust-related roles allowed under state law that do not involve investment discretion—for example the roles of “trust protector,” “trust director” and “distribution trust adviser.” The OCC is also exploring the possibility of issuing explicit regulations governing non-fiduciary custody activities, activities which are currently subject to non-regulatory guidance in OCC handbooks and bulletins. The ANPR has a comment deadline of June 28, 2019. The author gives attribution to the ABA for this announcement.

 

 

Court Found Trial Court Had Jurisdiction To Appoint Temporary Administrator Where A Will Contest Was Filed From A Muniment of Title

Posted in Cases Decided, Texas Court of Appeals

Selected by Texas Bar Today as a “Top 10 Blog Post”

In Chabot v. Estate of Sullivan, the decedent’s attorney probated a holographic will as a muniment of title. No. 03-17-00865-CV, 2019 Tex. App. LEXIS 2145 (Tex. App.—Austin March 20, 2019, no pet.). A claimant then asserted a claim that the decedent sexually abused him. The tort claimant and the decedent’s sister filed will contests. The court signed an order appointing a temporary administrator and then signed a subsequent order authorizing the administrator to settle the tort claimant’s claims. The party who would take under the will alleged that the order appointing the temporary administrator and approving the settlement were void. The court of appeals disagreed, holding that the orders were not void because the decedent’s sister and the tort claimant filed the will contests well within the two-year deadline under Texas Estates Code Section 256.204(a), no representative of the estate existed at the time as it was a muniment of title, and the trial court appointed the temporary administrator pursuant to its authority under Texas Estates Code Ann. Section 452.051(a). The court of appeals noted that the Estates Code provides at least two mechanisms for challenging a probate court’s order: a bill of review and a will contest. “Section 256.204, therefore, allows for the filing of a will contest within two years of the date the will was admitted to probate. It is undisputed that both Chabot and the Tort Claimants filed timely will contests.” Id. The court concluded:

Chabot and the Tort Claimants filed will contests well within the two-year deadline. See Tex. Estates Code § 256.204(a). No representative of Sullivan’s estate existed at the time, and the trial court appointed Deadman as temporary administrator pursuant to its authority under Section 452.051. See id. § 452.051(a). Chabot has not cited any authority prohibiting the trial court’s actions, and we are not aware of any. We therefore hold that the trial court’s order appointing Deadman was not void ab initio and that the court’s subsequent order authorizing Deadman to settle the Tort Claimants’ suits was not void on that ground.

Id.

Federal District Court Refuses To Dismiss Aiding And Abetting Breach Of Fiduciary Duty Claim Against A Law Firm

Posted in Items of Interest

In Milligan v. Salamone, the Greenberg Taurig lawfirm represented the bankrupt company when it sued a president and board member. No. 1:18-CV-327-RP, 2019 U.S. Dist. LEXIS 41009 (W.D. Tex. March 14, 2019). Greenberg drafted an agreement that would cancel the president’s employment contract, release him from his non-competition and non-solicitation obligations, and promise to pay him any accrued obligations (the “Cancellation Agreement”). A bankruptcy trustee later asserted claims against Greenberg for (1) breach of fiduciary duty, (2) aiding and abetting breaches of fiduciary duty, and (3) malpractice and negligence arising from its preparation of the Cancellation Agreement. Greenberg filed a motion to dismiss, which the bankruptcy court granted, and the trustee appealed to the district court.

The district court affirmed the dismissal of the direct breach of fiduciary duty claims because, although the trustee alleged a conflict of interest, there were no allegations that Greenberg represented the company and the president in his individual capacity at the same time. The court affirmed the dismissal of the professional negligence claim because the trustee did not allege sufficient allegations of proximate cause.

The court then turned to the aiding and abetting breach of fiduciary duty allegations. The district court reversed the bankruptcy court’s dismissal of that claim. Regarding the legal basis for an aiding and abetting claim, the court stated:

The Texas Supreme Court “has not expressly decided whether Texas recognizes a cause of action for aiding and abetting.” However, Texas appellate courts have repeatedly held that “a party who knowingly participates in another’s breach of fiduciary duty may be liable for the breach as a joint tortfeasor.” “To establish a claim for knowing participation in a breach of fiduciary duty, a plaintiff must assert: (1) the existence of a fiduciary relationship; (2) that the third party knew of the fiduciary relationship; and (3) that the third party was aware that it was participating in the breach of that fiduciary relationship.” It is the final requirement—Greenberg’s knowledge that it was participating in a breach of fiduciary duty—that is before the Court now.

Id.

The trustee alleged that the president and the other board member created the Cancellation Agreement to allow them to compete with, and thereby destroy, the company. The court held that: “To have known that it was participating in Halder and Salamone’s breach of fiduciary duty, Greenberg would have to have known that their actions were fraudulent, taken in bad faith, or constituted self-dealing.” Id. The trustee alleged that Greenberg aligned with the president and board member during the board-control fight and drafted the agreement on its own initiative when it became clear that the company would not renew the president’s contract. The bankruptcy court determined from these allegations that Greenberg did not plausibly know enough to participate in the directors’ breaches of duty. The district court disagreed:

Milligan has still plausibly alleged Greenberg’s knowledge that the agreement was a violation of Salamone and Halder’s fiduciary duties. Taking Milligan’s other allegations as true, a factfinder could infer that Greenberg knew the Cancellation Agreement was not in Westech’s interest, and therefore that in drafting the agreement, Greenberg was helping Halder self-deal on his way out of the company. As the Bankruptcy Court found, Greenberg could plausibly have known that Westech was not in breach of its obligations to Halder under Halder’s employment contract, and that therefore the company would have owed Halder substantially less money if it had simply not renewed his contract. Greenberg would then have known that Westech was receiving nothing in exchange for releasing Halder from his restrictive covenants. Considered in context—the control battle, Salamone and Halder’s alignment on the board, Halder’s imminent contract expiration—a factfinder could infer that Greenberg knew that the Cancellation Agreement was a sweetheart deal for Halder. That Greenberg allegedly drafted the agreement on its own accord suggests that it was conscious of the reasons behind the agreement’s structure. Greenberg’s motion to dismiss Milligan’s aiding-and-abetting claim—perhaps better characterized as a knowing-participation claim under Texas law—is therefore denied. The Bankruptcy Court’s order is vacated as it pertains to that claim.

Id.

The Texas Supreme Court Holds That The Only Consideration In Probating A Will After The Four-Year Limitations Period Is Evidence Of The Applicant’s Default

Posted in Cases Decided, Texas Supreme Court

In Ferreira v. Butler, a husband and wife divorced, and the husband married a second wife. No. 17-0901, 2019 Tex. LEXIS 375 (Tex. April 12, 2019). The second wife died, and the husband never probated her will, which left everything to him. Nine years later, the husband died and his will left most of his estate to his first wife. The first wife was the executor of his estate, and she then attempted to probate the second wife’s will. The second wife’s intestate heirs contested the probate of that will on the ground that it was barred by the four-year limitations period in Section 256.003(a) of the Texas Estates Code. The trial court granted the heirs’ motion for summary judgment and dismissed the application to probate the second wife’s will. The court of appeals affirmed, and the first wife appealed.

The Texas Supreme Court reversed for the first wife. Section 256.003(a) of the Texas Estates Code states: “Except as provided by Section 501.001 with respect to a foreign will, a will may not be admitted to probate after the fourth anniversary of the testator’s death unless it is shown by proof that the applicant for the probate of the will was not in default in failing to present the will for probate on or before the fourth anniversary of the testator’s death.” Id. (quoting Tex. Est. Code § 256.003(a)). The Court held that the husband’s estate qualified as an interested person because he was the second wife’s heir, devisee, and spouse. The Court agreed with the lower courts that the first wife was barred from probating the second wife’s will in her capacity as executor because the first wife was standing in the shoes of the husband’s estate, the default inquiry must focus on the husband and there was no proof that the husband was not in default in failing to probate the second wife’s will within four years of her death.

The Court then held that the first wife also had standing to probate the second wife’s will in her individual capacity as she was the beneficiary of the husband’s estate, who was the beneficiary of the second wife’s estate. The Court then reversed prior precedent and held that “under Section 256.003(a), when an applicant seeks late-probate of a will in her individual capacity, only the applicant’s conduct is relevant to determining whether she ‘was not in default.’” Id. The Court held that if the first wife had applied to probate the will in her individual capacity the husband’s default would be irrelevant under Section 256.003(a). As the first wife did not assert individual standing, the Court could not render for her. However, the Court vacated the judgments of the lower courts in the interest of justice and remanded the case to the trial court to give the first wife an opportunity to amend her pleadings to pursue probate of the will in her individual capacity.

Interesting note: It is probably safe to say that the second wife would roll over in her grave if she knew that the first wife would receive the second wife’s assets over the second wife’s own children. This case brings up a very frequent issue: second marriages where the husband and wife have children from previous relationships. The spouse loves and wants to provide for his or her surviving spouse. But the spouse probably wants to leave his or her estate to his or her own children after the surviving spouse dies. If the spouse leaves everything to his or her surviving spouse outright, then the deceased spouse will have no say in where the assets go after the surviving spouse’s death. That is the exact case set forth above. This issue can be remedied by leaving the deceased spouse’s assets in a trust with the surviving spouse as the primary beneficiary and the deceased spouse’s children as the remainder beneficiaries. A word of warning is that the deceased spouse should make a third party (bank) the sole trustee or have the surviving spouse be a co-trustee with the remainder beneficiaries also being co-trustees. It is all too common for the surviving spouse, who is a sole trustee of the trust, to treat the trust assets as his or her own assets and not give consideration to his or her fiduciary duties to the remainder beneficiaries. Also, the spouse could leave property to the surviving spouse in a life estate with the remainder interest going to the deceased spouse’s children. There are other potential methods to solve this thorny issue. A person should seek legal advice from an qualified estate planning attorney to ensure that his or her assets do not end up with an unintended person or persons.

Texas Supreme Court Holds That Conspiracy Theories Have the Same Statute Of Limitations As Their Underlying Torts

Posted in Cases Decided, Texas Supreme Court

Joint liability for breach of fiduciary duty claims is a rather confusing area of law in Texas. Texas courts have discussed three different theories that allow for joint liability: knowing participation in breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and conspiracy.

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. 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.). The Texas Supreme Court has specifically stated that it has not yet adopted this type of claim. First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d 214 (Tex. 2017). 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.

There is also a recognized civil conspiracy claim in Texas. An action for civil conspiracy has five elements: (1) a combination of two or more persons; (2) the persons seek to accomplish an object or course of action; (3) the persons reach a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts are taken in pursuance of the object or course of action; and (5) damages occur as a proximate result. First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d 214 (Tex. 2017).

There is not any particularly compelling guidance on whether these three claims are the same or different. And if they are different, what differences are there regarding the elements of each claim? 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).

There was confusion as to whether a finding of conspiracy or aiding and abetting or knowing participation automatically imposes joint liability on all defendants 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. Continental 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.). The Texas Supreme Court held that the conspiracy defendant’s actions must cause the damages awarded against it, and a plaintiff cannot solely rely on just the original bad actor’s conduct. First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d at 214. So, there should be a finding of causation and damages for each conspiracy defendant (unless the evidence proves as a matter of law that all conspiracy defendants were involved from the very beginning as to all underlying torts). Id.

The Texas Supreme Court has now decided that the statute of limitations for a conspiracy claim is the same as the underlying tort. Agar Corp. v. Electro Circuits Int’l, No 17-0630, 2019 Tex. LEXIS 351 (Tex. April 5, 2019). In Agar, the plaintiff asserted claims for tortious interference, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, fraud by non-disclosure, misappropriation of trade secrets, violations of the Texas Theft Liability Act, conversion, and civil conspiracy. Id. The defendant alleges that the conspiracy claim was barred by the two-year statute of limitation, and the court of appeals agreed with that argument.

The Court noted that the statutes of limitations vary from claim to claim as determined by the Legislature. Id. (citing Tex. Civ. Prac. & Rem. Code §§ 16.002-.051). “For example, a two-year limitations period applies to suits for trespass and conversion, whereas a four-year limitations period applies to suits for fraud or breach of fiduciary duty.” Id. (citing Tex. Civ. Prac. & Rem. Code §§ 16.003(a), .004(a)(4), (5). For claims not expressly identified by the Legislature, a residual limitations period of four years is provided. Id. (citing § 16.051). The Court stated that the statutes of limitations do not mention civil conspiracy by name. The court then stated that rather than apply the four-year residual limitations period, “the courts of appeals that have considered the issue have held civil conspiracy falls under the two-year statute of limitations applied to suits for trespass in section 16.003 of the Civil Practices and Remedies Code.” Id.

The Court then addressed whether conspiracy was its own independent tort or whether it was merely a vicarious liability theory:

When used as a theory of vicarious liability, civil conspiracy is part of the factual situation that permits a remedy against co-conspirators. Without it, there would be no grounds for recovery against co-conspirators who did not commit the underlying unlawful act. So it is not inconsistent to say civil conspiracy is a vicarious liability theory while also recognizing that it is a kind of cause of action.

Id. (internal citations omitted). The Court held that civil conspiracy is not an independent tort. It also held that it does not have its own statute of limitations and is tied to the limitations of the tort underlying the conspiracy claim:

In fact, assigning civil conspiracy its own fixed limitations period conflicts with its nature as a derivative tort. Civil conspiracy requires an underlying tort that has caused damages. The cause of action for the underlying tort typically accrues as soon as the tort causes those damages. A fixed limitations period of two years for civil conspiracy that differs from that of its underlying tort can produce bizarre consequences.

….

Agar’s seventh amended petition alleges Electro engaged in a civil conspiracy to commit several underlying torts including, among others, conversion, misappropriation of trade secrets, and fraud. These underlying claims are governed by separate two-, three- and four-year statutes of limitations respectively. The civil conspiracy claims are likewise governed respectively by those statutes. Agar’s civil conspiracy claims may only proceed if they are based on an underlying tort that is itself not barred by limitations.

Id. (internal citations omitted).

Regarding accrual of the conspiracy theory’s limitations period, the Court held that “most civil conspiracy claims should accrue when the underlying tort causes harm to the plaintiff, that is, at the same time as the tort claim against the primary tortfeasor.” Id. Moreover, “If conspirators conspire about different underlying torts over the course of a conspiracy, then claims based thereon accrue separately according to when each tort and injury occur. A conspiracy claim based on an earlier underlying tort does not re-accrue when the co-conspirators agree to commit a second tort or make another overt act.” Id.

The Court then reversed the summary judgment for the defendant and remanded because some of the plaintiff’s conspiracy claims were derivative of claims that had a four-year limitations period and were not barred.

The Court has moved away from a one-size-fits-all approach to conspiracy. A plaintiff must establish that a conspiracy defendant caused particular damages after it joined the conspiracy. Further, a conspiracy defendant is only liable for damages associated with the underlying tort to which his conduct is tied. In other words, if a defendant conspired to defraud, but not tortiously interfere, then it will only be liable for the fraud damages and not the tortious interference damages. Now the Court holds that a conspiracy theory’s limitations period and accrual is tied to the underlying tort’s or torts’ limitations period. Each underlying tort may have a different limitations period and may accrue at different times, which may require different fact findings as to accrual or discovery if the discovery rule has been asserted.

What is not known is how this recent clarity on conspiracy claims applies to knowing-participation or aiding-and-abetting breach of fiduciary duty claims. Are they separate claims that have their own limitations period? If so, what are the limitations periods? Or, are they derivative claims that rely solely on the four-year limitations period of the underlying breach of fiduciary duty claim?

The end result is that jury instructions in cases involving these types of claims will be very complicated and involved. Causation, damages, and limitations may require multiple questions. A party should consider whether it would be wise to hire an attorney with appellate experience in this area to assist.

David F. Johnson Named Top Author in JDSupra Readers’ Choice Awards

Posted in Items of Interest, Knowledge Library

David F. Johnson Named Top Author

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, has been recognized as a top author by JDSupra in the 2019 Readers’ Choice Awards.

JD Supra’s Readers’ Choice Awards encompasses 26 different categories. From a pool of more than 800 authors, David’s insightful commentary was ranked fourth in the wealth management readership category. This category covers estate and gift tax, trusts, trustees, wills, closely held businesses, and fiduciary duty among other topics.

David serves as the managing shareholder of Winstead’s Fort Worth office.   He maintains an active trial practice focused on advising and representing clients in the financial services industry. David is one of twenty attorneys in the state of Texas (of 84,000 licensed) that has the triple Board Certification in Civil Trial Law, Civil Appellate and Personal Injury Trial Law by the Texas Board of Legal Specialization.

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