In Novedea Sys. v. Colaberry, Inc., co-founders of a business discussed terms of a buy-out, but ended up in litigation. No. 6:20-cv-00180-JDK, 2021 U.S. Dist. LEXIS 152372 (E. D. Tex. August 13, 2021). One co-founder sued on his behalf and on behalf of the company against the other co-founder without discussing the suit with the other co-founder or the board of directors. The defendant filed a motion for summary judgment, arguing that the plaintiff did not have authority to file a lawsuit for the company. The plaintiff responded that his “authority derives from his standing “as a longtime manager and corporate officer” of Novedea, or alternatively, as a shareholder bringing a derivative action.” Id.

The court stated:

“Generally, an officer of the corporation may not authorize the pursuit of litigation without a delegation of authority from the board of directors.” Here, Dasari has presented no evidence that Novedea’s board authorized him to bring this lawsuit. In fact, Novedea’s board has since resolved that the company wants no part of this litigation.

Plaintiffs alternatively claim that Dasari is suing on behalf of Novedea in a shareholder-derivative capacity. Federal Rule of Civil Procedure 23.1 allows “one or more shareholders . . . [to] bring a derivative action to enforce a right that the corporation or association may properly assert but has failed to enforce.” But derivative-action complaints must meet certain pleading requirements, including a particularized statement describing “any effort by the plaintiff to obtain the desired action from the directors . . . and the reasons for not obtaining the action or making the effort.” Fed. R. Civ. P. 23.1(b). And under Texas law, the shareholder must first demand that the corporation take action before bringing suit, stating with particularity the act that is the subject of the claim. Katamaraja argues that Dasari never made such a pre-suit demand, which is fatal to Novedea’s claims. For corporations with fewer than thirty-five shareholders, however, the demand requirement “do[es] not apply to a claim or derivative proceeding by a shareholder . . . against a director, officer, or shareholder of the corporation.” Thus, because Novedea has only two shareholders, Dasari was not required to make a pre-suit demand before bringing claims against Katamaraja, a Novedea director.

The demand requirement nevertheless applies to claims “made against a person who is not that director, officer, or shareholder.” This means that Dasari must show he demanded Novedea’s board take action against Colaberry before bringing this suit. And here, Dasari did not even attempt to show he satisfied this requirement until his sur-reply, leaving Katamaraja no ability to respond. In any event, Dasari’s claimed pre-suit demand is insufficient as a matter of law because it does not include a demand that Novedea’s board file this lawsuit. Even if it were sufficient, Texas law prohibits suits brought within ninety days of the demand unless the demand was rejected, the corporation is suffering irreparable injury, or irreparable injury would result from waiting. Dasari presents no evidence of a rejection, and the Court has previously denied Dasari’s claims of irreparable injury. Accordingly, Novedea’s claims against Katamaraja may proceed as shareholder derivative claims by Dasari, but Novedea’s claims against Colaberry must be dismissed for failure to satisfy the statutory demand requirement.

Id. (internal citations omitted). Accordingly, the court allowed the shareholder derivative action to continue as against the officer.

The owners of a corporation may enter into shareholder agreements that address and resolve many disputes. For example, the Texas Supreme Court noted: “Shareholders of closely-held corporations may address and resolve such difficulties by entering into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements.” Ritchie v. Rupe, 443 S.W.3d 856, 871 (Tex. 2014).

Regarding shareholder agreements, the Texas Business Organizations Code provides:

(a) The shareholders of a corporation may enter into an agreement that: (1) restricts the discretion or powers of the board of directors; (2) eliminates the board of directors and authorizes the business and affairs of the corporation to be managed, wholly or partly, by one or more of its shareholders or other persons; (3) establishes the individuals who shall serve as directors or officers of the corporation; (4) determines the term of office, manner of selection or removal, or terms or conditions of employment of a director, officer, or other employee of the corporation, regardless of the length of employment; (5) governs the authorization or making of distributions whether in proportion to ownership of shares, subject to Section 21.303; (6) determines the manner in which profits and losses will be apportioned; (7) governs, in general or with regard to specific matters, the exercise or division of voting power by and between the shareholders, directors, or other persons, including use of disproportionate voting rights or director proxies; (8) establishes the terms of an agreement for the transfer or use of property or for the provision of services between the corporation and another person, including a shareholder, director, officer, or employee of the corporation; (9) authorizes arbitration or grants authority to a shareholder or other person to resolve any issue about which there is a deadlock among the directors, shareholders, or other persons authorized to manage the corporation; (10) requires winding up and termination of the corporation at the request of one or more shareholders or on the occurrence of a specified event or contingency, in which case the winding up and termination of the corporation will proceed as if all of the shareholders had consented in writing to the winding up and termination as provided by Subchapter K; (11) with regard to one or more social purposes specified in the corporation’s certificate of formation, governs the exercise of corporate powers, the management of the operations and affairs of the corporation, the approval by shareholders or other persons of corporate actions, or the relationship among the shareholders, the directors, and the corporation; or (12) otherwise governs the exercise of corporate powers, the management of the business and affairs of the corporation, or the relationship among the shareholders, the directors, and the corporation as if the corporation were a partnership or in a manner that would otherwise be appropriate only among partners and not contrary to public policy.

(b) A shareholders’ agreement authorized by this section must be: (1) contained in: (A) the certificate of formation or bylaws if approved by all of the shareholders at the time of the agreement; or (B) a written agreement that is: (i) signed by all of the shareholders at the time of the agreement; and (ii) made known to the corporation; and (2) amended only by all of the shareholders at the time of the amendment, unless the agreement provides otherwise.

Tex. Bus. Orgs. Code § 21.101. See Batey v. Droluk, No. 01-12-01058-CV, 2014 Tex. App. LEXIS 3979 (Tex. App.—Houston [1st Dist.] Apr. 10, 2014, no pet.) (limitations in shareholder agreement was effective). The Code does not limit other shareholder agreements: “This subchapter does not prohibit or impair any agreement between two or more shareholders, or between the corporation and one or more of the corporation’s shareholders, permitted by Title 1, this chapter, or other law.” Id. at § 21.110.

There are notice requirements. Tex. Bus. Orgs. Code § 21.103. If a purchaser of shares does not have knowledge of the existence of a shareholder agreement, it is entitled to rescind the purchase. Id. at § 21.105(a). An action to enforce the right of rescission must be commenced not later than the earlier of: (1) the 90th day after the date the existence of the shareholder agreement is discovered; or (2) the second anniversary of the purchase date of the shares. Id. at § 21.105(c). A shareholders’ agreement ceases to be effective when shares of the corporation are: (1) listed on a national securities exchange; or (2) regularly traded in a market maintained by one or more members of a national or affiliated securities association. Id. at § 21.109(a).

If properly executed, such an agreement is enforceable and generally trumps statutory provisions: “A shareholders’ agreement that complies with this subchapter is effective among the shareholders and between the shareholders and the corporation even if the terms of the agreement are inconsistent with this code.” Tex. Bus. Orgs. Code § 21.104; Skeels v. Suder, No. 02-18-00112-CV, 2021 Tex. App. LEXIS 4810 (Tex. App.—Fort Worth June 17, 2021, no pet. history).  The abilities of parties to avoid the Business Organization Code’s provisions shows Texas’s strong policy preference for freedom of contract. See Energy Transfer Partners, L.P. v. Enter. Partners, L.P., 593 S.W.3d 732, 738 (Tex. 2021) (“Our decisions recognizing this policy are decades older than the BOC or its predecessor statute.”).

The court in Skeels v. Suder, stated: “a shareholder agreement, signed by all shareholders and ‘made known’ to the corporation, governs corporate action notwithstanding a contrary provision in the BOC. And shareholders are, therefore, free to agree to stricter or more lenient rights than those provided in the BOC. Accordingly, the terms of any share redemption may be provided in a governing document or an applicable agreement among the members, even if the document or agreement is broader or narrower than the dictates of the BOC.” No. 02-18-00112-CV, 2021 Tex. App. LEXIS 4810 (Tex. App.—Fort Worth June 17, 2021, no pet. history) (internal citations omitted). The court held that a shareholder agreement regarding redemptions rights was enforceable even if it was inconsistent with the Business Organizations Code. Id. “[T]he terms of any share redemption may be provided in a governing document or an applicable agreement among the members, even if the document or agreement is broader or narrower than the dictates of the BOC.” Id. at *21. Partners of a law firm entered into a shareholder agreement that allowed certain individuals to take action. The resolution stated:

Notwithstanding the number of shareholders, or the number of shares issued to any shareholder, Walker Friedman, Jonathan Suder and Michael Cooke, collectively, have been entitled, and shall continue to be entitled, to take affirmative action on behalf of the Firm, and veto any vote or action taken by or on behalf of the Firm, and/or by any other shareholder, whether individually, or collectively.

Id. (emphasis added). Under that power, the majority owners forcibly redeemed one shareholder’s shares for zero dollars. Id. The majority of the court of appeals affirmed that under the various documents, it had the right to do so: “The plain language of the Resolution—a shareholder agreement—broadly allowed Friedman, Suder, and Cooke as the Firm’s governing authority to take affirmative action on behalf of the Firm; thus, the trial court did not err by finding that the Resolution governed the redemption of Skeels’s shares on the terms dictated by the Firm’s governing authority.” Id.

The result in Skeels seems somewhat unfair, in that a majority can decide to redeem a minority owner’s shares for no consideration solely due to a shareholder agreement’s very vague language giving the majority a power to “take affirmative action.” Id. (Birdwell, J., dissenting) (“With the preceding statutory analysis in mind, I conclude that the Resolution did not contemplate share redemption, much less attempt to comport with Section 303.004(b)(2). Nothing in the Resolution purports to allow the shareholders in general––or only Friedman, Suder, and Cooke collectively––to take action inconsistent with any specific provision of the BOC or the BOC in general, nor does it evidence an intent that the Firm as an entity would not be bound by any particular BOC provision, including Section 303.004. Nothing in it specifically––or even generally––addresses redemption.”). Accordingly, shareholder agreements are very powerful tools in Texas, and parties should be very careful to review same when contemplating ownership in a corporation.

Trust beneficiaries often request a corporate trustee to prepare a statutory accounting. The Texas Trust Code in Section 113.151 provides that a beneficiary may request a written statement of accounts. Tex. Prop. Code 113.151. Regarding what information needs to be contained in a written statement of accounts, parties and the courts must first look to the terms of the trust. Tex. Prop. Code § 111.0035(b). As one commentator provides: “The settlor may specify in the terms of the trust instrument what must be contained in an accounting by the trustee. When the trust instrument is silent concerning the contents of an accounting, the Trust Code provides a list of items that must be included in every accounting.” 4 Texas Probate, Estate and Trust Administration § 81.63. A trustee and a court should give deference to the trust document and follow its requirements (whether more stringent or less stringent than a statutes require).

Where the trust document is silent, the parties should refer to the Texas Trust Code. The Texas Trust Code provides: “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 and that has not been previously listed or inventoried as property of the trust; (2) a complete account of receipts, disbursements, and other transactions regarding the trust property for the period covered by the account, including their source and nature, with receipts of principal and income shown separately; (3) a listing of all property being administered, with an adequate description of each asset; (4) the cash balance on hand and the name and location of the depository where the balance is kept; and (5) all known liabilities owed by the trust.” Tex. Prop. Code § 113.152.

Unlike a written statement of account under the Texas Estates Code, an accounting for a trust does not have to be a sworn document. There is no statutory form or other requirement for how this information has to be presented. The comments to the Uniform Trust Code, which has a similar report/disclosure requirement, provides: “The Uniform Trust Code employs the term ‘report’ instead of ‘accounting’ in order to negate any inference that the report must be prepared in any particular format or with a high degree of formality. The reporting requirement might even be satisfied by providing the beneficiaries with copies of the trust’s income tax returns and monthly brokerage account statements if the information on those returns and statements is complete and sufficiently clear. The key factor is not the format chosen but whether the report provides the beneficiaries with the information necessary to protect their interests.” Unif. Trust Code § 813(c) cmt.

A corporate trustee’s statements are often sufficient to comply with a statutory accounting/report/statement requirement if they contain the required information. For example, in In re Goar, a beneficiary complained that a trustee did not provide an adequate statutory report. 2012 Ariz. App. Unpub. LEXIS 1541 (Ct. App. Ariz. December 31, 2012). The court held that the trustee’s trust statements were sufficient to comply with the statutory report requirement. Id. It held that it would not read into the statute any other or additional requirements than what were expressly stated. Id. The court stated:

Contrary to Myers’s assertion, Bossé’s proposed trust distribution meets the reporting requirements of § 14-10813(C). The document provides detailed information about the trusts; the assets held therein and their respective values; the previous and proposed distributions; and a holdback for administrative expenses. In addition, Bossé attached to that document a recent account statement listing the trust assets with more specificity and reflecting the income, deposits, withdrawals, expenses, purchases, and sales. The proposed distribution submitted by Bossé thus includes the ‘receipts and disbursements’ that Myers had specifically requested.

Id. See also 72 TEX. JUR 3RD, TRUSTS § 153 (“It is usual for trustees, and in their own interest, to supply statements of account to a beneficiary on request in order to obviate a suit for an accounting.”).

So, where a trustee’s statements include all of the statutorily required information, a trustee should not be required to repackage the same information at great expense and provide it to the beneficiary. The Texas Trust Code provides that: “The court may require the trustee to deliver a written statement of account to all beneficiaries on finding that the nature of the beneficiary’s interest in the trust or the effect of the administration of the trust on the beneficiary’s interest is sufficient to require an accounting by the trustee.” Tex. Prop. Code 113.151. When disputed, a court can exercise its discretion to hold that a trustee has no duty to produce a new statement of account when the trustee’s previously produced account statements met the statement of account requirement.

Further, courts have jurisdiction to provide instructions to a trustee on its duties and obligations. Texas Property Code Section 115.001(a) provides that this Court has jurisdiction to “(4) determine the powers, responsibilities, duties, and liability of a trustee; … (6) make determinations of fact affecting the administration, distribution, or duration of a trust; (7) determine a question arising in the administration or distribution of a trust; (8) relieve a trustee from any or all of the duties, limitations, and restrictions otherwise existing under the terms of the trust instrument or of this subtitle; (9) require an accounting by a trustee, review trustee fees, and settle interim or final accounts…” Tex. Prop. Code § 115.001(a). Texas Civil Practice and Remedies Code Section 37.005 provides: “A person interested as or through … a trustee … in the administration of a trust … may have a declaration of rights or legal relations in respect to the trust or estate: … (2) to direct the executors, administrators, or trustees to do or abstain from doing any particular act in their fiduciary capacity; (3) to determine any question arising in the administration of the trust or estate, including questions of construction of wills and other writings; or (4) to determine rights or legal relations of an independent executor or independent administrator regarding fiduciary fees and the settling of accounts.” Tex. Civ. Prac. & Rem. Code § 37.005. So, a trustee can file suit and obtain its attorney’s fees for doing so to challenge a beneficiary’s needless demand for an accounting.

Parties often add limitation-of-liability clauses to their agreements. These types of clauses can purport to limit a party’s claims or damages or both.  Damage-limitation clauses can take many different forms. For example, such a clause may forbid the recovery of consequential or loss profits damages. Cont’l Holdings, Ltd. v. Leahy, 132 S.W.3d 471, 475-76 (Tex. App.—Eastland 2003, no pet.). Further, a contractual provision setting an upper limit on the amount recoverable is a limitation of liability provision. Arthur’s Garage, Inc. v. Racal-Chubb Sec. Sys., 997 S.W.2d 803, 810 (Tex. App.—Dallas 1999, no pet.); Fox Elec. Co. v. Tone Guard Sec., Inc., 861 S.W.2d 79, 83 (Tex. App.—Fort Worth 1993, no writ). If a plaintiff brings suit, the terms of the contract determine the relative positions of the parties and control the level of liability of either party. Federated Dept. Stores, Inc. v. Houston Lighting & Power Co., 646 S.W.2d 509, 511 (Tex. App.—Houston [1st Dist.] 1982, no writ).

Limitation-of-liability clauses are generally considered to not violate public policy. See e.g., Martin v. Lou Poliquin Ents., Inc., 696 S.W.2d 180, 186 (Tex. App.—Houston [14th Dist.] 1985, writ ref’d n.r.e.) (“a limitation of liability clause may waive a party’s right to recover under the common law theory of breach of contract”); Brewer v. Myers, 545 S.W.2d 235, 237 (Tex. App.—Tyler 1976, no writ) (citations omitted) (“Having thus bound himself to accept the sum for such damages as may be suffered by reason of nonperformance of the contract on the part of the purchaser, the seller cannot sue the proposed purchaser for actual damages.”); Vallance & Co. v. DeAnda, 595 S.W.2d 587, 590 (Tex. App.—San Antonio 1980, no writ); Allrights, Inc. v. Elledge, 515 S.W.2d 266, 267 (Tex. 1974). When determining whether a limitation of liability provision violates public policy, courts will generally consider whether there was a disparity in bargaining power between the parties. Allright, 515 S.W.2d at 267. Some courts have also applied an unconscionability analysis. Head v. U.S. Inspect DFW, Inc., 159 S.W.3d 731, 748-749 (Tex. App.—Fort Worth 2005, no pet.). Under that analysis, courts will consider the bargaining process (procedural unconscionability aspect) and the fairness of the contractual provision in controversy, by determining whether there are legitimate commercial reasons that justify its inclusion as part of the agreement (substantive unconscionability aspect). Id.; Am. Employers’ Ins. Co. v. Aiken, 942 S.W.2d 156, 160 (Tex. App.—Fort Worth 1997, no writ). A party relying on the defense of unconscionability carries the burden to show both procedural and substantive unconscionability. In re Turner Bros. Trucking Co., 8 S.W.3d 370, 376-77 (Tex. App.—Texarkana 1999, orig. proceeding).

There is a unique issue that arises when a fiduciary attempts to enforce a limitation-of-liability clause in a contract with its principal. The principal may be able to void or rescind the agreement between it and its principal, potentially due to fraud, constructive fraud (material omission) or a breach of fiduciary duty. Indeed, the Texas Supreme Court held that “fraud vitiates whatever it touches.” Hooks v. Samson Lone Star, Ltd. P’ship, 457 S.W.3d 52, 57 (Tex. 2015). A plaintiff can generally rescind a transaction due to a breach of fiduciary duty. See, e.g., Manges v. Guerra, 673 S.W.2d 180, 181 (Tex. 1984) (upholding the award of actual and exemplary damages as well as cancelling a self-dealing lease); Houston v. Ludwick, No. 14-09-00600-CV, 2010 Tex. App. LEXIS 8415, at 8 (Tex. App.—Houston [14th Dist.] Oct. 21, 2010, pet. denied) (awarding rescission for two properties and actual damages for two properties that the lawyer purchased for inadequate consideration and in conflict with his representation); Acevedo v. Stiles, No. 04-02-00077-CV, 2003 Tex. App. LEXIS 3854, at 2 (Tex. App.—San Antonio May 7, 2003, pet. denied) (“If both rescission and damages are essential to accomplish full justice, they may both be awarded.”); Acevedo v. Stiles, No. 04-02-00077-CV, 2003 Tex. App. LEXIS 3854, at 3 (Tex. App.—San Antonio May 7, 2003, pet. denied) (opining that the awards of rescission and damages are essential to accomplish full justice against lawyers); Snyder v. Cowell, 2003 Tex. App. LEXIS 3139, at 10 (Tex. App.—El Paso Apr. 10, 2003, no pet.) (mem. op.) (stating that if the trustee “violated his fiduciary duty not to self-deal, the beneficiary may have had a cause of action to repudiate the … transaction or to hold the trustee personally liable”); Miller v. Miller, 700 S.W.2d 941, 945-46 (Tex. App.—Dallas 1985, writ ref’d n.r.e.) (holding that trial court erred in denying rescission relief where plaintiff established a breach of fiduciary duty). “Rescission” is a common shorthand for the composite remedy of rescission and restitution. Cruz v. Andrews Restoration, Inc., 364 S.W.3d 817, 825 (Tex. 2012).

“Rescission is an equitable remedy that operates to extinguish a contract that is legally valid but must be set aside due to fraud, mistake, or for some other reason to avoid unjust enrichment.” Gentry v. Squires Constr., Inc., 188 S.W.3d 396, 410 (Tex. App.—Dallas 2006, no pet.). Upon rescission, the rights and liabilities of the parties are extinguished, any consideration that was paid is returned, and the parties are restored to their respective positions as if no contract between them had ever existed. Ginn v. NCI Bldg. Sys., 472 S.W.3d 802, 837 (Tex. App.—Houston [1st Dist.] 2015, no pet.); Baty v. ProTech Ins. Agency, 63 S.W.3d 841, 855 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).

Where the principal successfully voids the agreement due to fraud or constructive fraud, can the fiduciary still take advantage of the limitation-of-liability clause in the contract? Where the principal successfully voids an agreement due to a breach of fiduciary duty, can the fiduciary still take advantage of the limitation-of-liability clause in the contract?

In Bombardier Aerospace Corp. v. SPEP Aircraft Holdings, LLC, the court of appeals held that a limitation-of-liability clause that precluded exemplary damages was not enforceable where the defendant committed constructive fraud. 565 S.W.3d 280, 301 (Tex. App.—Dallas 2017). The court held:

Following the Supreme Court’s reasoning in Prudential and upholding the well-established principle that “fraud vitiates whatever touches it,” we conclude a buyer cannot be bound by an agreement waiving exemplary damages if the seller commits fraud by nondisclosure. To conclude otherwise would allow a seller to deliberately fail to disclose material facts to entice a buyer to enter a contract and then shield himself from damages to which the buyer is entitled.

Id. at 305. This case was reversed by the Texas Supreme Court, which held that generally limitation-of-liability clauses for punitive damages were enforceable in fraud actions:

We have never held, however, that fraud vitiates a limitation-of-liability clause. We must respect and enforce terms of a contract that parties have freely and voluntarily entered. And the plaintiffs “cannot both have [the] contract and defeat it too. Rather than seeking rescission of the agreements based on Bombardier’s fraudulent conduct, the plaintiffs have tried to enforce the agreements, seeking an award of actual damages, while at the same time seeking to strike the limitation-of-liability clauses to receive an exemplary damages award. In Italian Cowboy Partners, Ltd. v. Prudential Insurance Company of America, 341 S.W.3d 323 (Tex. 2011), we explained that “when sophisticated parties represented by counsel disclaim reliance on representations about a specific matter in dispute, such a disclaimer may be binding, conclusively negating the element of reliance in a suit for fraudulent inducement.” Id. at 332. We further explained that fraudulent inducement is not always a ground to set aside a contract, stating that in certain circumstances a contract’s terms may preclude a claim for fraudulent inducement with “a clear and specific disclaimer-of-reliance clause.” Id. Similarly, Bombardier and the purchasing parties—sophisticated entities represented by attorneys in an arms-length transaction—bargained for the limitation-of-liability clauses to bar punitive damages. In balancing the competing interests between protecting parties from “unintentionally waiving a claim for fraud” and “the ability of parties to fully and finally resolve disputes between them,” we believe parties can bargain to limit exemplary damages. See id. We note that the purchasing parties did not waive a claim for fraud; they only waived the ability to recover punitive damages for any fraud. As such, the valid limitation-of-liability clauses must stand.

Bombardier Aerospace Corp. v. SPEP Aircraft Holdings, LLC, 572 S.W.3d 213, 232 (Tex. 2019) (internal citation omitted). It is unclear why the Texas Supreme Court would allow a party guilty of fraud to take advantage of a clause that artificially limited the grieved party’s ability to seek damages in a voided agreement that never should have been executed.

Importantly, the Texas Supreme Court held that this holding was only related to fraud claims, not breach of fiduciary duty claims. Id. (“Because there is no breach of fiduciary duty claim and the plaintiffs did not seek exemplary damages on that basis, we decline to decide whether a breach of fiduciary duty for fraudulent conduct would affect the validity of a limitation-of-liability clause.”). So, the issue of whether a defendant can enforce a limitation-of-liability clause in a rescinded contract due to a breach of fiduciary duty is still an open question.

It should be noted that when a fiduciary enters into a transaction with a principal, there is a negative presumption that the transaction is invalid and the burden is on the fiduciary to prove the fairness and enforceability of the transaction. For example, in Keck, Mahin & Cate v. Nat’l Union Fire Ins. Co., the Texas Supreme Court considered whether a release agreement could bar claims arising from a fiduciary relationship. 20 S.W.3d 692, 699 (Tex. 2000). The court determined that the release did not preclude claims brought against an attorney. The Court held that because the relationship was fiduciary in nature and the release was negotiated during the attorneys’ representation of the insured, the presumption of unfairness or invalidity applied. Id. at 699. The attorneys had the burden to show the release was fair or valid. Id. at 699. The court stated:

Contracts between attorneys and their clients negotiated during the existence of the attorney-client relationship are closely scrutinized. Because the relationship is fiduciary in nature, there is a presumption of unfairness or invalidity attaching to such contracts. . . KMC had the burden on summary judgment to prove that the release agreement it negotiated with Granada was fair and reasonable. Further, it was KMC’s burden as a fiduciary to establish that Granada was informed of all material facts relating to the release. The present summary judgment record does not establish the state of Granada’s information or that the agreement was fair and reasonable. The only evidence that KMC identifies is a recitation in the release that KMC “advised Granada in writing that independent representation [would be] appropriate in connection with the execution of this Agreement.” This bare recitation is not sufficient to rebut the “presumption of unfairness or invalidity attaching to the contract.” Accordingly, KMC has not carried its summary judgment burden… KMC has not established that the release agreement is a complete defense to National’s and INA’s equitable subrogation claim…

Id. at 699.

How can a fiduciary prove the fairness of a transaction? In Harrison v. Harrison Interests, a beneficiary of an estate and multiple trusts had a dispute with the executors and trustees. No. 14-15-00348-CV, 2017 Tex. App. LEXIS 1677 (Tex. App.—Houston [14th Dist.] February 28, 2017, pet. denied). The parties then executed a master settlement agreement that allowed the parties to dissociate themselves, distribute property, and that agreement contained releases for the fiduciaries. After the agreement was signed, the beneficiary had additional complaints and filed suit. The fiduciaries argued that the releases in the agreement precluded the beneficiary’s breach of fiduciary duty claim. The beneficiary argued that certain portions of the agreement were unfair and contended that because the defendants owed him fiduciary duties, as a matter of law, the defendants were required to rebut a presumption that the transactions are unfair. The trial court granted summary judgment for the defendants based on the release language, and the beneficiary appealed.

The court of appeals held: “Texas courts have applied a presumption of unfairness to transactions between a fiduciary and a party to whom he owes a duty of disclosure, thus casting upon the profiting fiduciary the burden of showing the fairness of the transactions.” Id. “Where a transaction between a fiduciary and a beneficiary is attacked, it is the fiduciary’s burden of proof to establish the fairness of the transaction.” Id. The court of appeals noted that it must balance the principle that fiduciary duties arise as a matter of law with an obligation to honor the contractual terms that parties use to define the scope of their obligations and agreements, including limiting fiduciary duties that might otherwise exist. “This principle adheres to our public policy of freedom of contract.” Id. The court held that in deciding whether the release is valid, the court should consider the following factors: “(1) the terms of the contract were negotiated, rather than boilerplate, and the disputed issue was specifically discussed; (2) the complaining party was represented by counsel; (3) the parties dealt with each other in an arms-length transaction; (4) the parties were knowledgeable in business matters; and (5) the release language was clear. The court also emphasized that the fact that the parties “are effecting a ‘once and for all’ settlement of claims” weighed in favor of upholding the release. Id.

Accordingly, there is a good argument that even if some aspects of the limitation-of-liability clause is enforceable regarding a fraud claim, it would not be enforceable regarding a breach of fiduciary duty claim. See generally Swinnea, 318 S.W.3d at 870 (allowing forfeiture as an equitable remedy for breach of fiduciary duty in addition to actual damages for fraud and breach of contract, but declining to evaluate the award in light of rules applicable to punitive damages). Further, even if a limitation-of-liability clause that prohibits punitive damages is enforceable, would such a clause apply to prohibit benefit of the bargain damages (lost profits, etc.) or even restitutionary damages (returning consideration to the principal)? Would public policy support enforcing a limitation-of-liability clause in a rescinded and void agreement where the breach-of-fiduciary-duty plaintiff/principal is not made whole? Should a defendant/fiduciary have to prove up the fairness of the limitation-of-liability clause using the factors set forth above before it can enforce the clause? Time will tell.

David F. Johnson presented his paper “Business Divorce: Minority Shareholder Rights In Texas” to the State Bar of Texas’s Business Disputes Course on September 2-3, 2021. This presentation addressed shareholder oppression claims in Texas, minority shareholder rights (such as contractual rights, stock rights, disclosure rights, distribution rights, employment rights, and receivership rights), fiduciary duties in business divorce cases, derivative actions, and attorney representation issues.

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In JPMorgan Chase Bank, N.A. v. Campbell, a member of a limited partnership sued other partners, including a trustee of a trust, to dissolve the partnership. No. 09-20-00161-CV, 2021 Tex. App. LEXIS 5001 (Tex. App.—Beaumont June 24, 2021, no pet. history). The trustee was listed as a nominal defendant, and the trustee filed claims seeking declaratory relief regarding it not having to participate in an arbitration proceeding. The plaintiffs then filed additional claims against the trustee including breach of fiduciary duty and for modification of the trust. The trustee filed a special appearance regarding those new claims, which the trial court denied. The trustee appealed.

The court of appeals first held that the trustee did not waive its right to object to personal jurisdiction by answering the original suit and seeking declaratory relief. The court noted that “Rule 120a allows a party to file a special appearance in any severable action of a lawsuit.” Id.  The court held: “the trust modification claim is a severable action, and that JPMorgan did not waive its challenge to the trial court’s exercise of personal jurisdiction over it by appearing in and seeking declaratory relief in the underlying arbitration suit.” Id. Continue Reading Texas Court Does Not Have Personal Jurisdiction Over A Trustee Of A Trust With Texas Timber Rights

The owners of a corporation may enter into shareholder agreements. In Richie, the Texas Supreme Court stated: “Shareholders of closely-held corporations may address and resolve such difficulties by entering into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements.” Ritchie v. Rupe, 443 S.W.3d 856, 871 (Tex. 2014). Continue Reading Shareholder Agreements Are Very Powerful In Texas: Parties Should Carefully Review Those Agreements Before Obtaining Stock In A Corporation

In Lawrence v. Bailey, a son killed his parents with a sledge hammer. No. 01-19-00799-CV, 2021 Tex. App. LEXIS 4716 (Tex. App.—Houston [1st Dist.] June 15, 2021, no pet. history). The son was a named beneficiary of the father’s life insurance policy. The insurance company filed an interpleader action regarding the life insurance proceeds. The trial court awarded those to the father’s estate, and the father’s brother then filed a motion for new trial. The brother alleged that under the slayer statute, that he was entitled to the proceeds. The trial court denied the motion, and the brother appealed.

The court of appeals first held that the brother had standing to seek a declaration regarding the ownership of the insurance proceeds. The court noted that the brother argued:

Under the Texas Slayer Statute, a beneficiary of a life insurance policy or contract forfeits the beneficiary’s interest in the policy or contract if the beneficiary is a principal or an accomplice in willfully bringing about the death of the insured.” See Tex. Ins. Code. § 1103.151. He pointed out that, “[i]f there is no contingent beneficiary entitled to receive the proceeds of a life insurance policy or contract, the nearest relative of the insured is entitled to receive the proceeds.” Id. § 1103.152(c).

Continue Reading Relative Had Standing To Assert Slayer Statute And Declaration Regarding Rights To Insurance Proceeds Over Victim’s Estate

In Bird v. Carl C. Anderson, a trust beneficiary sued a defendant for usurping a trustee’s role and breaching fiduciary duties as a de facto trustee. No. 03-21-00140-CV, 2021 Tex. App. LEXIS 5036 (Tex. App.—Austin June 24, 2021, no pet. history). The plaintiff complained that the defendant “reinvested the proceeds into ‘high-risk and non-diversified investments that exposed the trusts and [their] beneficiaries to inappropriate levels of risk,’ causing the trusts to substantially diminish in value; distributed assets to himself, Jennifer, and perhaps others to the Foundation’s detriment; and had Jennifer sign all of the transactional documents in her role as trustee even though she was and is incapacitated.” Id. The defendant filed a motion to dismiss under Texas Rule of Civil Procedure 91, arguing that there was no de facto trustee status in Texas. The trial court denied the motion, found that “Texas law recognizes the legal capacity of ‘de facto trustee’ in the context of the administration of private trusts,” but certified the issue for permissive appeal.
The court of appeals declined to accept the petition for interlocutory appeal. Continue Reading Court Discusses De Facto Trustee Status In Texas

David F. Johnson presented “Breach of Fiduciary Duty Claims Against Trustees/Managers of Closely-Held Businesses” with Kenneth J. Fair of Wright Close & Barger, LLP, on July 22, 2021, for Strafford Webinars to a national audience. This presentation covered various issues involved in a trustee owning an interest in a closely-held business when disputes arise. The presentation discussed why a trust may own an interest in a closely-held business, the fiduciary duties of a trustee, the fiduciary duties of an officer/director and the business judgment rule, the conflicting standards that may apply when a person is both a trustee and an officer/director, how to resolve those conflicting duties, the payment of litigation expenses when suits arise in this area, and issues involving the attorney/client relationship and the attorney/client privilege.

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