Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

Court Holds That There Is A Fact Issue By Former Employer Against Employee For Breach Of Fiduciary Duty In Self-Dealing Transactions

Posted in Items of Interest

In Roberts v. Overby-Seawell Co., an employee sued his former employer for the failure to pay commissions. No. 3:15-CV-1217-L, 2018 U.S. Dist. LEXIS 47821 (N.D. Tex. March 23, 2018). The former employer filed a counterclaim for breach of fiduciary duty arising out of the employee’s failure to disclose that he had an interest in other entities with whom the employer was entering into transactions. Both parties filed dispositive motions, and the court refused to dismiss the defendant’s counterclaim. The employee argued that he did not owe a fiduciary duty and that the former employer had no evidence of damages arising from his alleged breach of fiduciary duties. The former employer argued that the employee owed a fiduciary duty and breached that duty by failing to disclose his ownership interest in other entities, and by focusing his time and effort on those entities to his own personal benefit instead of pursuing new business for the employer. The court stated:

Under Texas law, the elements of a breach of fiduciary duty claim are: (1) the existence of a fiduciary relationship; (2) a breach of the fiduciary duty; and (3) the breach resulted in injury to the plaintiff or benefit to the defendant. Texas recognizes that the agent-principal relationship gives rise to a fiduciary duty. An agent “has a duty to deal openly with the employer and to fully disclose to the employer information about matters affecting the company’s business.” Further, an agent who negotiates on behalf of his principal must disclose any adverse interest in the matter of the negotiation. An agent owes a “duty to deal fairly with the principal in all transactions between them.” First, the court concludes that Roberts, acting as an agent who negotiated on behalf of OSC, owed Defendants a fiduciary duty that arose as a matter of law as part of the principal agent relationship. Second, contrary to Roberts’s argument in his motion for summary judgment, Defendants do not need evidence of damages, as a benefit to the plaintiff suffices to prevail on a breach of fiduciary duty claim. Roberts’s income tax returns are evidence of profits from these other businesses sufficient to raise a genuine dispute of material fact as to whether he benefited from the alleged breach. Having reviewed the summary judgment record, the court determines that the parties have provided conflicting evidence as to whether Roberts fully disclosed his ownership interest and active role in other entities to Defendants, including Equiguard Agency, Lendwell, and Tech2Roi. As this issue is at the heart of Defendants’ breach of fiduciary duty counterclaim, the court will deny Roberts’s motion for summary judgment on this counterclaim.

Id.

Texas Supreme Court Compels Arbitration For Lender And Disagrees With Fifth Circuit

Posted in Cases Decided, Texas Supreme Court

In Henry v. Cash Biz, LP, a borrower sued a lender for the lender reporting the borrower’s bad checks to the district attorney’s office. No. 16-0854, 2018 Tex. LEXIS 164 (Tex. February 23, 2018). The borrower left checks as security for the loans. When the borrower defaulted, the lender attempted to cash the checks, and the checks were denied or insufficient funds. The lender then reported the bad checks to legal authorities. The borrower then sued the lender for improperly using the district attorney’s office. The parties’ agreement stated: “all disputes . . . shall be resolved by binding arbitration only on an individual basis with you.” Id. The contracts further provide that:

[T]he words “dispute” and “disputes” are given the broadest possible meaning and include, without limitation (a) all claims, disputes, or controversies arising from or relating directly or indirectly to the signing of this Arbitration Provision, the validity and scope of this Arbitration Provision and any claim or attempt to set aside this Arbitration Provision; (b) all federal or state law claims, disputes or controversies, arising from or relating directly or indirectly to this Disclosure Statement (including the Arbitration Provision), . . . (c) all counterclaims, cross-claims and third party claims; (d) all common law claims, based on contract, tort, fraud, or intentional torts; (e) all claims based on a violation of any state or federal constitution, statute or regulation; . . . (f) . . . claims for money damages to collect any sum we claim you owe us and/or the Lender; (g) all claims asserted by you individually against us . . . including claims for money damages and/or equitable or injunctive relief; (h) all claims asserted on your behalf by another person; (I) all claims asserted by you as a private attorney general, as a representative and member of a class of persons, or in any other representative capacity, against us . . . ; and/or (j) all claims arising from or relating directly or indirectly to the disclosure by us . . . of any non-public personal information about you.

The trial court denied the lender’s motion and agreed with the borrower that (1) their allegations related solely to the lender’s use of the criminal justice system so the arbitration clause was inapplicable, and (2) the lender waived its right to arbitration by substantially invoking the judicial process. The court of appeals reversed.

The Texas Supreme Court affirmed the court of appeals’s decision. The Court first held that the claims were within the scope of the clause. The Court stated: “the arbitration agreement applies to ‘all disputes’ and specifies that ‘dispute and disputes’ are given the broadest possible meaning and include, without limitation . . . all claims, disputes, or controversies arising from or relating directly or indirectly to the signing of this Arbitration Provision.” Id. The Court stated:

Given the presumption favoring arbitration and the policy of construing arbitration clauses broadly as noted above, it follows that the arbitration clause here applies—just as it says—to all disputes, even those relating only indirectly to the loan agreements. The Borrowers asserted that after they missed payments, Cash Biz deposited their postdated checks; the checks were returned for insufficient funds; Cash Biz threatened the Borrowers with criminal prosecution unless the loans were repaid; and when the Borrowers failed to pay, Cash Biz indeed pursued charges for issuance of bad checks. The Borrowers allege that when Cash Biz entered into the loan agreements, it failed to disclose the possibility that if the personal checks were presented to the banks for payment and were not paid, criminal prosecutions would follow. The Borrowers’ claims are not for breach of any specific obligations under the loan contracts. Nevertheless, their claims are based on the manner in which Cash Biz pursued collection of loans and are at least indirectly related to the contracts the Borrowers signed obligating them to repay the loans. Therefore, we agree with Cash Biz that the Borrowers’ claims are within the scope of the arbitration provision.

Id. The Court then addressed the argument that the lender had waived the clause by seeking relief from the district attorney’s office. The Court held that simply reporting the bad checks to the district attorney’s office was not sufficient to waive arbitration rights. Interestingly, in doing so, the Court expressly disagreed with the Fifth Circuit:

[I]n Vine v. PLS Financial Services, Inc., 689 F. App’x 800 (5th Cir. 2017) (per curiam). There, as did Cash Biz here, a short-term lender had borrowers sign postdated checks, which were presented for payment after the borrowers defaulted. Id. at 801. When the checks were not paid, the lender submitted the unpaid checks and affidavits to the local district attorneys. Id. The Vine court declined to follow the decision of the court of appeals in this case. Id. at 806. Rather, it concluded that the lender’s actions in submitting affidavits to prosecuting attorneys waived its right to enforce the arbitration agreement. Id.

With due respect, and recognizing that it is important for federal and state law to be as consistent as possible in this area where we have concurrent jurisdiction, we agree with the dissenting justice in Vine. Id. at 807 (Higginson, J., dissenting). We conclude, as he did, that although some lenders may be “gaming the system” by taking actions like the lenders took there and as Cash Biz took here, more is required for waiver of a contractual right to arbitrate. Id.

Id. The Court affirmed the court of appeals’s order compelling arbitration.

Presentation: Fiduciary Litigation Update, Texas Bankers Association’s Legal Conference

Posted in Items of Interest, Knowledge Library

David F. Johnson presented his paper on “Litigation Update, Including Fiduciary Issues” to the Texas Bankers Association’s Legal Conference in Austin, Texas, on April 5, 2018.  This presentation covered recent Texas precedent on arbitration clauses, forum-selection clauses, lost documents, aiding and abetting breach of fiduciary duty, damages for a trustee’s breach of fiduciary duty, and other matters.  The paper and presentation are attached below.

Texas Fiduciary Litigation Update – PPT Presentation

Texas Fiduciary Litigation Update_Paper

If you are interested in joining our next complimentary webinar or presentation, please send your request to dfjohnson@winstead.com.

Magistrate Recommends Denying A Motion To Dismiss Against A Bank For Aiding and Abetting Breach Of Fiduciary Duty

Posted in Cases Decided, Texas Court of Appeals

In Schmidt v. JP Morgan Chase Bank, N.A., the plaintiff’s employee opened credit cards in the employer’s name, used those credit cards for the employee’s own personal use, and paid those credit card bills with funds from the employer’s operating account and/or through advances from the employer’s line of credit. No. H-17-0532, 2018 U.S. Dist. LEXIS 43665 (S.D. Tex. February 2, 2018). The employer sued the bank for aiding and abetting breach of fiduciary duty and other claims for the amounts the employer lost as a result of the employee’s conduct. The defendant filed a motion to dismiss for failure to state a claim. The magistrate recommended granting it in part and denying it in part. Regarding the aiding and abetting claim, the court stated:

“Under Texas law, ‘where a third party knowingly participates in the breach of duty of a fiduciary, such third party becomes a joint tortfeasor with the fiduciary and is liable as such.’ 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.” Here, Schmidt alleges, in a conclusory fashion, that Defendants “knowingly participated” in Rhodes’ breach of fiduciary duty, and that they “allowed” Rhodes to open credit card accounts in Schmidt’s name without his authorization, and “allowed” Rhodes to obtain a cashier’s check from Schmidt’s account. While Schmidt does not allege that Defendants knew Rhodes was acting without Schmidt’s authorization, and does not allege that Defendants were aware of Rhodes’ fiduciary duty to Schmidt and her breach of that duty, Schmidt could arguably do so if there are facts that would support such allegations. On this record, therefore, Schmidt should be allowed an opportunity to include such allegations in an amended pleading that conforms with the requirements of FED. R. Civ. P. 11(b) in an attempt to state a plausible claim for aiding and abetting a breach of fiduciary duty.

Id.

Interesting Note. The court cites to knowing-participation cases in discussing the plaintiff’s aiding-and-abetting claim. The Texas Supreme Court has not expressly adopted an aiding-and-abetting claim for breach of fiduciary duty. It has adopted a knowing-participation claim. The law in Texas is ambiguous regarding whether knowing participation and aiding and abetting are the same or different theories, and if they are different, how they are different. This opinion certainly blurs the distinction between the two theories.

Court Affirmed Summary Judgment For A Trustee Due To An Exculpatory Clause

Posted in Cases Decided, Texas Court of Appeals

In Kohlhausen v. Baxendale, the court affirmed a summary judgment for a trustee on the basis of an exculpatory clause in a trust document. No. 01-15-00901-CV, 2018 Tex. App. LEXIS 1828 (Tex. App.—Houston [1st Dist.] March 13, 2018, no pet. history). A mother created a testamentary trust for the benefit of her son Kelley William Joste. The will, which named Kelley as trustee and beneficiary of his trust, also set forth the provisions governing the administration:

6.2 With regard to each trust created by this [Article VI], my Trustee shall distribute to the Beneficiary of such trust or any descendant of such Beneficiary such amounts of trust income and principal as shall be necessary, when added to the funds reasonably available to each such distributee from all other sources known to my Trustee, to provide for the health, support, maintenance and education of each such distributee, taking into consideration the age, education and station in life of each such distributee.

9.4 . . . Any Executor or Trustee shall be saved harmless from any liability for any action such Executor or Trustee may take, or for the failure of such Executor or Trustee to take any action if done in good faith and without gross negligence.

Id. After the mother died, Kelley exercised his right to become the sole trustee of his trust. After Kelley died, his estranged daughter received control of the trust’s assets. She then died. Her executor then sued her father’s executor for the father allegedly breaching his fiduciary duty by: (1) failing to disclose information; (2) engaging in self-dealing, i.e., gifting himself trust assets in excess of his support needs; (3) failing to make any distributions to his daughter or consider her support needs; (4) failing to consider his other sources of support and his own station in life before making distributions to himself; (5) commingling trust assets with personal assets; (6) pledging trust assets as collateral in violation of the will’s terms; and (7) failing to document his activity as trustee.

The father’s executor filed a motion for summary judgment and argued that the claims should be dismissed because the will’s exculpatory clause relieved the trustee from liability for any actions or omissions “if done in good faith and without gross negligence.” Id. After a hearing, the trial court granted the motion.

The court of appeals held that an exculpatory clause argument is an affirmative defense. “A defendant urging summary judgment on an affirmative defense is in the same position as a plaintiff urging summary judgment on a claim,” and that the party asserting an affirmative defense has the burden of pleading and proving it. Id. The court held that after the trustee established the existence of the exculpatory clause, the burden shifted to the non-movant to bring forward evidence negating its applicability. The court stated:

In this case, Baxendale pleaded the exculpatory clause and attached a copy of the Will containing the clause to his summary judgment motion. The Will plainly states that Kelley is not liable for any acts or omissions so long as such conduct was done “in good faith and without gross negligence.” Because Baxendale established that he was entitled to summary judgment as a matter of law on all of Kohlhausen’s claims based on the plain language of the Will, Kolhausen was required to bring forth more than a scintilla of evidence creating a fact issue as to the applicability of the clause, i.e., evidence that Kelley’s acts or omissions were done in bad faith or with gross negligence.

….

In her affidavit, Kohlhausen averred that after reviewing the financial documents available to her she was “unaware of any evidence that Kelley made any distributions to Valley from the Trust between 1997 and 2012.” Kohlhausen further averred: “I have reviewed the account statements produced by [Baxendale]. These statements are incomplete and I am unable to ascertain from them an accurate account of what receipts and distributions were made from the Trust during the time Kelley was trustee.” Kohlhausen also stated that she was “unaware of any documentation to suggest Kelley ever contacted Valley to inquire about her support needs during the time he was trustee.”

….

Kohlausen’s affidavit does not raise a fact issue as to whether Kelley failed to disclose information regarding the Trust to Valleyessa, make distributions to Valleyssa, consider her support needs, or document his activities as trustee. The paucity of evidence in this case is a result of the fact that both principals to the dispute have passed away. There is no one to depose and no affidavits to file establishing key facts. Moreover, the terms of the Will provided that Valleyessa was a contingent beneficiary, and Kelley, as the primary beneficiary, was allowed but not required to make a distribution to Valleyessa. Kohlhausen’s attorney is reduced to an attempt to build a case on the scant records left behind by Kelley. Such evidence amounts to no more than a scintilla and is insufficient to even establish what actions Kelley took or failed to take as trustee, much less that Kelley acted in bad faith or with gross negligence.

Id. The court held that because the summary judgment evidence failed to raise an issue of material fact as to whether any of the father’s alleged acts or omissions were taken in bad faith for involved gross negligence, the plaintiff failed to meet her burden of establishing the inapplicability of the exculpatory clause to such acts or omissions and affirmed the summary judgment for the defendant.

Court Holds That Laches Did Not Bar A Will Contest

Posted in Cases Decided, Texas Court of Appeals

In In re Estate of Perez-Muzza, two days before the statute of limitations period ended, a contestant filed a will contest seeking to have a court set aside an order admitting a will to probate. No. 04-16-00755-CV, 2018 Tex. App. LEXIS 1859 (Tex. App.—San Antonio March 14, 2018, no pet. history). Will contests must be filed within two years of the trial court’s order admitting the will to probate. Id. (citing Tex. Est. Code Ann. § 256.204(a)). The trial court entered an order granting the contestant’s traditional motion for summary judgment and setting aside its previous order admitting the will to probate. On appeal, the original will’s proponent contended that there was a genuine issue of material fact regarding his laches defense to the contestant’s motion.

The court of appeals affirmed the trial court’s order setting aside the order admitting the will to probate. Regarding the laches defense, the court stated:

The affirmative defense of laches precludes a plaintiff from asserting a legal or equitable right after an unreasonable delay against a defendant who has changed his position in good faith and to his detriment because of the delay. As a general rule, laches is inappropriate when a statute of limitations applies to the cause of action. To prevail on a laches defense where the cause of action was filed within the applicable statute of limitations, the defendant must additionally show “extraordinary circumstances” that would work a “grave injustice.”

Id. The court concluded that because the contestant filed her suit two days before the statute of limitations expired, the proponent was required to show the circumstances of this case were so “extraordinary” that allowing her to prosecute her will contest would work a “grave injustice.”

To support his laches defense, the proponent filed an affidavit wherein he attested that although he interacted with the contestant during the administration of the estate as independent executor, neither she nor anyone else in the family expressed concerns regarding the will’s validity. He further stated that he relied on the validity of the will by paying estate debts and taxes and distributing estate assets. To support his argument that the case presented extraordinary circumstances that would work a grave injustice, the proponent stated: “I no longer have much of the property that I inherited under the Will and that remained after paying estate debts and expenses as specifically ordered to do by this Court. Setting aside the probate of the Will at this late date would result in a grave injustice to me and any other person who acquired title and ownership of estate property without knowledge that the Will might be invalid, such as the banks who foreclosed on the certificates of deposit and the Internal Revenue Service.” Id.

The court noted that the proponent was the sole beneficiary under the probated will. The court held that although the proponent argued that he acted in good faith to his detriment because of the delay in filing the will contest, he did not present evidence that the delay was unreasonable. The court stated:

Rolando merely asserts he followed the procedures required for closing the estate and argues that the independent administration of the estate was terminated prior to suit being filed. Other than mentioning the IRS and the banks that foreclosed on the estate’s certificates of deposit, Rolando does not specify how setting aside the trial court’s previous order probating the will would result in a grave injustice to him or others, besides the IRS and banks. Additionally, Rolando does not specify who acquired title and ownership of the disposed-of property or under what circumstances. Further, Rolando does not specify when he disposed of estate property he inherited — before or after Veronica filed suit to contest the validity of the will. Even taking as true all evidence favorable to Rolando and resolving any doubts in his favor, given the scant evidence presented by Rolando, we cannot say the circumstances of this case are so extraordinary that allowing Veronica to prosecute her will contest would work a grave injustice.

Id.

The court held that the proponent had the burden to establish a fact issue on every element of his affirmative defense, and that he did not show that he changed his position in good faith, and to his detriment, due to the delay in filing the will contest. Also, it held that he failed to show the case presented extraordinary circumstances that would work a grave injustice. Therefore, the court held that the trial court did not err by granting the contestant’s motion for summary judgment and setting aside its previous order admitting the will to probate.

Court Enforced Forum-Selection Clause In Trust Document

Posted in Cases Decided, Texas Court of Appeals

In In re JP Morgan Chase Bank, N.A., trust beneficiaries sued the trustee for alleged breaches of fiduciary duty in Dallas, Texas. No. 05-17-01174-CV, 2018 Tex. App. LEXIS 1883 (Tex. App.—Dallas March 14, 2018, original proceeding). The settlor executed the trust agreement in New York, and it included the following forum-selection clause: “The validity and effect of the provisions of this Agreement shall be determined by the laws of the State of New York, and the Trustee shall not be required to account in any court other than one of the courts of that state.” Id. The trustee filed a motion to dismiss the Texas suit due to the forum-selection clause, alleging that the beneficiaries had to file suit in New York. The trial court denied the motion, and the trustee filed a petition for writ of mandamus with the court of appeals.

In the court of appeals, the beneficiaries argued that the language of the forum-selection clause applied only to a claim for an accounting and did not apply to their breach-of-fiduciary-duty claim. The court of appeals disagreed, holding that the phrase “to account” was broader. After reviewing several definitions of the phrase, the court stated: “[W]e conclude ‘required to account in’ is used as a broad, unrestricted phrase and means relators may not be sued or otherwise required to explain alleged wrongdoing regarding the Trust or its administration in any state other than New York.” Id. The court also found support for its conclusion from the trust document in that “account” was used broadly in other portions of the trust. The court concluded the scope of the forum-selection clause included the beneficiaries’ claims for breach of fiduciary duty.

The beneficiaries also argued that trial court correctly denied the motion to dismiss because the mandatory venue statute in Texas Property Code Section 115.002(c) showed a strong public policy to keep the action in Texas. The court of appeals held that, although a venue-selection clause that was contrary to Section 115.002 would be unenforceable, the same was not true of a forum-selection clause. Id. (citing Liu v. Cici Enters., LP, No. 14-05-00827-CV, 2007 Tex. App. LEXIS 81, 2007 WL 43816, at *2 (Tex. App.—Houston [14th Dist.] Jan. 9, 2007, no pet.) (mem. op.) (“The distinction between a forum-selection clause and a venue-selection clause is critical. Under Texas law, forum-selection clauses are enforceable unless shown to be unreasonable, and may be enforced through a motion to dismiss. In contrast, venue selection cannot be the subject of private contract unless otherwise provided by statute.”)). Further, although the beneficiaries contended that proceeding in New York would be unreasonable and seriously inconvenient, they failed to present any evidence to support those contentions. The court held that the trial court abused its discretion in denying the motion to dismiss and granted mandamus relief.

Interesting Note: This is the first case in Texas to enforce a forum-selection clause contained in a trust document. “A forum-selection clause is a creature of contract.” Phoenix Network Techs. (Europe) Ltd. v. Neon Sys., Inc., 177 S.W.3d 605, 611 (Tex. App.—Houston [1st Dist.] 2005, no pet.). Interestingly, the court of appeals in In re JPMorgan Chase Bank, N.A., did not address an argument that the forum-selection clause should not be enforced because a trust is not a contract between the trustee and the beneficiary.

In 2013, the Texas Supreme Court enforced an arbitration clause that was contained in a trust document. Rachel v. Reitz, 403 S.W.3d 840 (Tex. 2013). The Court did so for two primary reasons: 1) the settlor determines the conditions attached to her gifts, which should be enforced on the basis of the settlor’s intent; and 2) the issue of mutual assent can be satisfied by the theory of direct-benefits estoppel, so that a beneficiary’s acceptance of the benefits of a trust constitutes the assent required to form an enforceable agreement to arbitrate. Id. The Court stated that generally Texas courts strive to enforce trusts according to the settlor’s intent, which courts should divine from the four corners of unambiguous trusts.  The Court noted that the settlor intended for all disputes to be arbitrated via the trust language. Id. The Court then looked to the Texas Arbitration Act, which provides that a “written agreement to arbitrate is valid and enforceable if the agreement is to arbitrate a controversy that: (1) exists at the time of the agreement; or (2) arises between the parties after the date of the agreement.” Id. (citing Tex. Civ. Prac. & Rem. Code 171.001(a) (emphasis added)). The Court noted that the statute uses the term “contract” in another provision, and that the Legislature intended for the terms “agreement” and “contract” to be different.  As the statute does not define the term “agreement,” the Court defined it as “a mutual assent by two or more persons.” Id. Thus, a formal contract is not required to have a binding “agreement” to arbitrate. The Court resolved the issue of mutual assent by looking to the theory of direct-benefits estoppel. Because the plaintiff had accepted the benefits of the trust for years and affirmatively sued to enforce certain provisions of the trust, the Court held that the plaintiff had accepted the benefits of the trust such that it indicated the plaintiff’s assent to the arbitration agreement. The Court ordered the trial court to grant the trustee’s motion to compel arbitration.

There is not a comparable statute that requires the enforcement of “agreements” for forum-selection. There could be an issue of whether the Rachel v. Reitz/arbitration-clause analysis should apply to forum-selection clauses. However, there is precedent in Texas that arbitration clauses are a type of forum-selection clause. St. Clair v. Brooke Franchise Corp., No. 2-06-216-CV, 2007 Tex. App. LEXIS 2805, 2007 WL 1095554, at *4 (Tex. App.—Fort Worth Apr. 12, 2007, no pet.) (mem. op.). See generally Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 534, 115 S. Ct. 2322, 2326, 132 L. Ed. 2d 462 (1995) (recognizing arbitration provisions are a subset of forum-selection clauses).

Court Reversed Order Removing Trustee Where Trustee Did Not Receive Notice Of The Hearing

Posted in Cases Decided, Texas Court of Appeals

In In re Estate of Moore, the court of appeals addressed the proper procedure for removing an acting trustee and appointing a successor trustee. No. 08-14-00298-CV, 2018 Tex. App. LEXIS 1950 (Tex. App.—El Paso March 15, 2018, no pet. history). A beneficiary filed a motion to remove a trustee, but did not serve notice of the hearing. After the court removed the trustee, the trustee appealed on multiple grounds, including that she was denied due process by being removed without notice of the hearing.

The court of appeals first described the authority to remove a trustee:

A trustee may be removed by the terms prescribed in the trust instrument, or by a court of competent jurisdiction after a hearing brought by an “interested person,” provided the court finds cause for removal. Tex. Prop. Code Ann. § 113.082 (West 2014). Under the Texas Property Code, a district court has original jurisdiction over all proceedings against a trustee and all proceedings concerning trusts, including proceedings to construe a trust instrument and to appoint or remove a trustee. Tex. Prop. Code Ann. § 115.001(a)(West Supp. 2017); Cone v. Gregory, 814 S.W.2d 413, 414 (Tex. App.–Houston [1st Dist.] 1991, no pet.). A district court’s jurisdiction over such proceedings is exclusive, except for jurisdiction conferred by law on lesser courts, including a county court at law. Tex. Prop. Code Ann. § 115.001(d). Further, in a county that lacks a statutory probate court but has a county court a law exercising original probate jurisdiction, the interpretation and administration of a testamentary trust or an inter vivos trust created by a decedent whose will has been admitted to probate in that court is considered a matter related to a probate proceeding. Tex. Est. Code Ann. § 31.002 (West 2014). Thus, under either code, a county court a law acting in this capacity has jurisdiction over a suit involving a testamentary trust. Gregory, 814 S.W.2d at 414. A trustee is a necessary party to an action involving a trust or against a trustee, provided a trustee is serving at the time the action is filed. Tex. Prop. Code Ann. § 115.011; Smith v. Plainview Hospital and Clinic Foundation, 393 S.W.2d 424, 427 (Tex. Civ. App.—Amarillo 1965, writ dism’d). Notice may be given to parties or those entitled to receive notice by the manner prescribed by the Texas Rules of Civil Procedure, or may be given directly to the party or to the party’s attorney if the party has appeared by attorney or requested that notice be sent to his attorney. Tex. Prop. Code Ann. § 115.016 (West 2014). Texas Rules of Civil Procedure 21a allows service to be accomplished by delivering a copy to the party to be served or to the party’s duly authorized agent or attorney of record. Tex.R.Civ.P. 21a.

Id. The court held that the order removing the trustee must be reversed because she was not served with notice of the hearing:

Here, it is undisputed that Appellant did not personally receive notice in the proceeding below. It is also undisputed that Wm. Monroe Kerr and A.M. Nunley III, Appellant’s attorneys of record in the original probate proceeding, were not served with notice of the hearing. The record only contains a certificate of service on Brandon S. Archer, who did not appear as attorney of record in the original probate proceeding and was not designated to receive service on Appellant’s behalf as allowed by Section 115.016 of the Texas Property Code. Failure to give proper notice “violates ‘the most rudimentary demands of due process of law.'” Peralta v. Heights Medical Center, Inc., 485 U.S. 80, 84, 108 S.Ct. 896, 899, 99 L.Ed.2d 75 (1988)(quoting Armstrong v. Manzo, 380 U.S. 545, 550, 85 S.Ct. 1187, 1190, 14 L.Ed.2d 62 (1965)). If improper notice is given to a party of proceedings when notice is required, any subsequent court proceedings vis-à-vis the party not given notice are void. Lytle v. Cunnigham, 261 S.W.3d 837, 840 (Tex.App.–Dallas 2008, no pet.); Gutierrez v. Lone Star Nat. Bank, 960 S.W.2d 211, 214 (Tex.App.–Corpus Christi-Edinburg 1997, pet. denied). At the time of the hearing below, Appellant had been serving and holding herself out as acting trustee for more than twenty years. Appellee asserts that she did not qualify as interested person under the Estates Code and therefore there was no requirement that she be cited or otherwise given notice. But Appellant was not required to show that she was an interested person; per Section 115.011 of the Texas Property Code, as trustee, Appellant was a necessary party to the proceedings. Tex. Prop. Code Ann. § 115.011. She was, however, not served with citation, and “[i]f proper service is not affirmatively shown, there is error on the face of the record.” Westcliffe, Inc. v. Bear Creek Const., Ltd., 105 S.W.3d 286, 290 (Tex.App.–Dallas 2003, no pet.)(citing Primate Const., Inc. v. Silver, 884 S.W.2d 151, 153 (Tex. 1994)). Because Appellant was a necessary party and has demonstrated error on the face of the record, she has carried her burden under elements two and four to succeed on restricted appeal. Alexander, 134 S.W.3d at 848. Since proper service on Appellant is not shown, it is apparent that the county court at law did not obtain jurisdiction over Appellant and the proceeding to have her removed as trustee and a successor trustee appointed is void. Lytle, 261 S.W.3d at 840.

Id. The court reversed and remanded for further proceedings.

Texas Supreme Court Rules That Trustee Is Not Liable For Fraud In Leasing Minerals Due To “Red Flags” And Express Contradictory Language That Negated Justifiable Reliance

Posted in Cases Decided, Texas Supreme Court

In JPMorgan Chase Bank, N.A. v. Orca Assets G.P., a trustee leased minerals to a leasee. No. 15-0712, 2018 Tex. LEXIS 250 (Tex. March 23, 2018). That leasee did not immediately record the lease. The trustee’s agent then signed a letter of intent to lease tracts from the same area. When the new lease signed leases on the same property, the original leasee contacted the new leasee and informed it of the title defect. The trustee then offered to refund the bonus payments to the new leasee, but that tender was refused. Rather, the new leasee sued the trustee for fraud and other related claims for $400,000,000 arising from statements that the acreage was open for lease. The trial court ruled for the trustee and concluded that the unambiguous terms of the letter of intent and the subsequent leases precluded the new leasee’s contract claim and ruled as a matter of law that it could not establish the justifiable-reliance element of its fraud and negligent-misrepresentation claims. The court of appeals affirmed the trial court’s contract ruling, but it reversed on fraud and negligent misrepresentation. The court of appeals held that the negation-of-warranty provision did not clearly and unequivocally disclaim reliance on prior representations.

The Texas Supreme Court reversed the court of appeals and affirmed the trial court’s ruling for the trustee. The trustee admitted that the statement regarding the acreage being “open” was made and that it was false. Rather, it argued that the evidence disproved the justifiable reliance element for the fraud and negligent misrepresentation claims. Regarding this element, the Court stated:

Justifiable reliance usually presents a question of fact. But the element can be negated as a matter of law when circumstances exist under which reliance cannot be justified. In determining whether justifiable reliance is negated as a matter of law, courts “must consider the nature of the [parties’] relationship and the contract.” “In an arm’s-length transaction[,] the defrauded party must exercise ordinary care for the protection of his own interests. . . . [A] failure to exercise reasonable diligence is not excused by mere confidence in the honesty and integrity of the other party.” And when a party fails to exercise such diligence, it is “charged with knowledge of all facts that would have been discovered by a reasonably prudent person similarly situated.” To this end, that party “cannot blindly rely on a representation by a defendant where the plaintiff’s knowledge, experience, and background warrant investigation into any representations before the plaintiff acts in reliance upon those representations.”

Id. The Court then discussed the concept of “red flags” as evidence that negates justifiable reliance. The Court previously held that “a person may not justifiably rely on a misrepresentation if ‘there are “red flags” indicating such reliance is unwarranted.'” Id. (citing Grant Thornton, LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010)). The Court used this “red flags” analysis to a non-professional fraud case. The Court stated that the trustee argued that the following “red flags” preclude justifiable reliance: (1) its agent’s statement that he “would have to check” whether the property was open for lease; (2) its insistence on the stricter negation-of-warranty provision; (3) its refusal to accept responsibility for verifying title; (4) the letter of intent itself; (5) its agent’s statement that other lessees were not doing careful title work; (6) the new leasee’s knowledge that competitors might delay recording their leases; (7) the new leasee’s knowledge that it ceased checking property records after signing the letter of intent; and (8) the new leasee’s landman’s “doubts” at the closing, manifested by her request that the trustee confirm once more whether the property was “open.” The Court stated:

We are not prepared to say that any single one of these factors could preclude justifiable reliance on its own and as a matter of law. We especially reject the notion that the mere use of the negation-of-warranty and no-recourse provision in the letter of intent and the leases could wholly negate justifiable reliance. Oil-and-gas leases, like other instruments of conveyance, often negate warranties of title. As the courts did in Grant Thornton and Lewis, we must instead view the circumstances in their entirety while accounting for the parties’ relative levels of sophistication.

Id. The Court then held that both parties were sophisticated, and after marching through the circumstances, the Court held that these “red flags” were sufficient to negate justifiable reliance. The Court also held that the lease expressly contradicted the false statements, thus proving that there was no justifiable reliance. Regarding the standard for this analysis, the Court stated:

In reaching its conclusion, the court of appeals held that for a contradiction to preclude justifiable reliance, both the contractual clause and the extra-contractual representation it supposedly contradicts must explicitly speak to the same subject matter with sufficient specificity to correct and contradict the prior oral representation. Such a requirement is simply too strict to be workable as it essentially requires the contract and extra-contractual representation to use precisely the same terms.

Id. The Court concluded that the evidence showed that the new lease did not justifiably rely on the false statement that the acreage was open:

Viewed in context with the numerous “red flags,” Orca’s sophistication in the oil-and-gas industry, and the direct contradiction between the representation and the letter of intent, Orca cannot maintain its claim of justifiable reliance. Orca, composed of experienced and knowledgeable businesspeople, negotiated an arm’s-length transaction and then placed millions of dollars in jeopardy—all while operating under circumstances that similarly situated parties would have regarded as imminently risky. Orca needed to protect its own interests through the exercise of ordinary care and reasonable diligence rather than blindly relying upon another party’s vague assurances. Its failure to do so precludes its claim of justifiable reliance as a matter of law.

Id. The Court made it a point to expressly state that “either ‘red flags’ alone or direct contradiction alone can negate justifiable reliance as a matter of law. In this case, however, both theories apply. And either would be sufficient to preclude justifiable reliance.” Id. n. 2. The court reversed and rendered for the trustee.

Texas Supreme Court Holds That Testator Devised Property As A Life Estate

Posted in Cases Decided, Texas Supreme Court

In Knopf v. Gray, the will disposed of the testator’s entire estate, specifically including a tract of land. No. 17-0262, 2018 Tex. LEXIS 249 (Tex. March 23, 2018). The provision through which the testator devised the land stated: “NOW BOBBY I leave the rest to you, everything, certificates of deposit, land, cattle and machinery, Understand the land is not to be sold but passed on down to your children, ANNETTE KNOPF, ALLISON KILWAY, AND STANLEY GRAY. TAKE CARE OF IT AND TRY TO BE HAPPY.” Id. The testator’s son attempted to then transfer the land to a third party, and his children sued for a declaration that the son did not have the right to do so because he only had a life estate. The parties filed competing summary judgment motions, and the trial court and court of appeals both ruled for the son.

The Texas Supreme Court reversed both lower courts. The Court first reviewed the standards for interpreting wills:

A court must construe a will as a matter of law if it has a clear meaning. However, when a will’s meaning is ambiguous, its interpretation becomes a fact issue for which summary judgment is inappropriate. A will is ambiguous when it is subject to more than one reasonable interpretation or its meaning is simply uncertain. Whether a will is ambiguous is a question of law for the court. The cardinal rule of will construction is to ascertain the testator’s intent and to enforce that intent to the extent allowed by law. We look to the instrument’s language, considering its provisions as a whole and attempting to harmonize them so as to give effect to the will’s overall intent. We interpret the words in a will as a layperson would use them absent evidence that the testator received legal assistance in drafting the will or was otherwise familiar with technical meanings.

Id. The issue in the case is whether the land was devised in fee simple or whether a life estate was created. The Court stated that “An estate in land that is conveyed or devised is a fee simple unless the estate is limited by express words, but the law does not require any specific words or formalities to create a life estate.” Id. The words used in the will must only evidence intent to create what lawyers know as a life estate. “[A] will creates a life estate ‘where the language of the instrument manifests an intention on the part of the grantor or testator to pass to a grantee or devisee a right to possess, use, or enjoy property during the period of the grantee’s life.’” Id.

The Court held that the provision, read as a whole, merely created a life estate:

We need only read the provision as a whole to see a layperson’s clearly expressed intent to create what the law calls a life estate. Reading all three clauses together, Allen grants the land to Bobby subject to the limitations that he not sell it, that he take care of it, and that it be passed down to his children. This represents the essence of a life estate; a life tenant’s interest in the property is limited by the general requirement that he preserve the remainder interest unless otherwise authorized in the will. Allen’s words in the contested provision unambiguously refer to elements of a life estate and designate her grandchildren, the petitioners, as the remaindermen. The language thus clearly demonstrates that the phrase “passed on down,” as used here, encompasses a transfer upon Bobby’s death.

Id. Therefore, the Court reversed and rendered for the son’s children.

 

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