Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

Because Fraud By Nondisclosure Cannot Occur After A Transaction Is Consummated, Employees Generally Do Not Owe A Duty To Disclose Their Employers’ Breaches of Contract To Third Parties

Posted in Cases Decided, Texas Court of Appeals

In CLC Roofing v. Helzer, a roofer purchased shingles from a seller and stored them on the seller’s property. No. 02-17-00229-CV, 2019 Tex. App. LEXIS 5927 (Tex. App.—Fort Worth July 11, 2019, no pet. history). Six months after the relevant purchase was consummated, the seller, who was in financial trouble, returned the buyer’s shingles to a manufacturer to pay down a debt owed by the seller. The seller then went into bankruptcy. The purchaser then sued several employees for fraud and fraud by omission. The jury found for the purchaser, awarding actual and punitive damages. The trial court entered judgment notwithstanding the verdict for an employee/salesman, but entered judgment against an employee/officer. The parties appealed.

The court of appeals first addressed the duty to disclose information in a commercial setting and held that any such duty arises before the transaction is consummated:

In general, there is no duty to disclose without evidence of a fiduciary or confidential (also referred to as “informal”) relationship. Section 551 of the Restatement (Second) of Torts—which the Supreme Court of Texas has neither expressly adopted nor rejected—recognizes a general duty of a party to a business transaction to disclose certain information in specific circumstances. Under Section 551, if a party to a business transaction has a duty to another party to disclose information, then the failure to disclose the information may be actionable for fraud to the same extent that an affirmative misrepresentation could be. Whether a party has a duty to disclose despite the absence of a confidential relationship is addressed in subsection (2) of Section 551. The duties it sets out all apply before the transaction is consummated.

Section 551 of the Restatement does not confer on parties to a transaction a duty to disclose information learned after the transaction is consummated. [N]umerous courts of appeals, including this court, have concluded that a duty to disclose may arise in the following circumstances: (1) when one voluntarily discloses information, the whole truth must be disclosed; (2) when one makes a representation, new information must be disclosed when that new information makes the earlier representation misleading or untrue; and (3) when one makes a partial disclosure and conveys a false impression. However, it is worth noting that the application of these duties to a business transaction in the absence of a confidential or fiduciary relationship traces back to Restatement Section 551.

Id. The court then affirmed the judgment for the employee/salesperson because there was no evidence that he had knowledge that his employer would breach the purchase agreement before it was entered into, i.e., no evidence that he knew that his employer would not segregate the shingles for the purchaser or would return them to a third party. The court explained:

What CLC essentially contends that Thompson failed to disclose after consummation of the June 2012 bulk buy was JEH’s breach of the Release or of its oral agreement with CLC. That, without more, is not a valid basis for a fraud by nondisclosure claim. To hold otherwise would compel any person with knowledge of their employer’s breach of contract to proactively disclose that breach to the other contracting party or be liable for fraud. This is not the law in Texas.

Id.

Regarding the employee/officer, he had signed a landlord’s release document that required the seller to segregate the shingles in the yard and maintain them for the purchaser. The court held that there was no evidence that the seller did not comply with those requirements before the transaction was consummated:

JEH’s failure to segregate CLC’s bulk buy shingles from JEH’s other inventory could support a fraud claim only if there was other circumstantial evidence of fraud. However, there is no evidence that JEH failed to segregate the shingles for bulk buys prior to the June 2012 bulk buy, and the only (albeit limited) evidence on this question is that until at least several months after the June 2012 bulk buy, JEH did segregate CLC’s shingles.

Id. With respect to the fraud by omission claim, it also failed:

[T]here is no evidence that E.G. failed to disclose JEH’s noncompliance with the Release because there is no evidence that JEH was prohibited from pulling the bulk buy shingles from its own inventory, and there is no evidence that prior to the June 2012 bulk buy, JEH failed to segregate the bulk buy shingles. Thus, at the time E.G. signed the Release, JEH’s promise to segregate the shingles was not a partial disclosure that conveyed a false impression or failed to disclose the whole truth. And when JEH made the December 2012 shingles return and stopped segregating CLC’s bulk buy shingles, the bulk buy transaction had already been consummated. Any disclosure after that time would have required E.G. to disclose JEH’s breach of its agreements, which he had no duty to do. Thus, E.G.’s failure to disclose the return cannot support a fraud by omission claim. And the record is devoid of any evidence establishing the existence of a confidential relationship between CLC and E.G. that would otherwise give E.G. a duty to disclose the information.

Id. The court affirmed the judgment for the employee/salesperson and reversed and rendered judgment for the employee/officer.

Interesting Note: As a matter of full disclosure, the author successfully represented the employee/officer on appeal in this case. This opinion is important precedent in Texas on the duty to disclose. The Texas Supreme Court recently held, for the first time, that a party can owe a duty to disclose information outside of a confidential or fiduciary relationship. Bombardier Aerospace Corp. v. SPEP Aircraft Holdings, LLC, 572 S.W.3d 213, 219 (Tex. 2019). In doing so, the Court did not discuss the limitations on that principal as they were not raised in that opinion; indeed, the Court’s holding was dicta. Specifically, the Court did not address whether such a duty could survive after a transaction was consummated.

The CLC opinion is important precedent in Texas because it clearly limits a duty to disclose information to before a transaction is consummated. Claims that are based on alleged nondisclosures made after the consummation of a transaction fall outside of Section 551’s scope and are not actionable. Purina Co. v. McKendrick, 850 S.W.2d 629, 633-34 (Tex. App.—San Antonio 1993, writ denied); Susanoil, Inc. v. Cont’l Oil Co., 519 S.W.2d 230, 236 (Tex. Civ. App.—San Antonio 1975, writ ref’d n.r.e.). This makes sense for many reasons. If it were otherwise, a company’s employees would have a duty to disclose their employer’s breach of contract to third parties every time the employer breaches a contract. Texas law does not support such a broad duty of disclosure. See Oliver v. Rogers, 976 S.W.2d 792 (Tex. App.—Houston [1st Dist.] 1998, pet. denied) (holding that a contracting party has no duty to disclose changed circumstances that occur after a contract is formed). That would place an employee in a very difficult position with conflicting duties. An employee owes a fiduciary duty to its employer to not disclose confidential information. Should an employee have to disclose information to protect his or her self-interest where the disclosure would also violate a duty owed to his or her employer? That is an unfair position to place an employee. Moreover, a contrary argument would violate the concepts of the inducement and reliance elements of fraud by nondisclosure. If the plaintiff already entered into the transaction, the non-disclosing party could not have intended to induce anything regarding the subsequent nondisclosure. Also the plaintiff would not rely on anything more than what was represented prior to the transaction. The CLC opinion is very well reasoned and will assist parties in Texas in dealing with fraud by nondisclosure claims in commercial settings.

Estate Representative May Not Need To Post A Bond To Supersede A Judgment in Texas

Posted in Cases Decided, Texas Court of Appeals

In Wheatley v. Farley, a trial court entered an order awarding relief to both parties, and both parties appealed. No. 08-18-00106-CV, 2019 Tex. App. LEXIS 4626 (Tex. App.—El Paso June 5, 2019, no pet. history). One party was a dependent administrator, and the trial court ruled that he did not have to post a supersedeas bond to stay execution of the judgment. The court of appeals affirmed this ruling:

Section 351.002 provides that an appeal bond is not required if an appeal is taken by an executor or administrator, unless the appeal personally concerns the executor or administrator. Tex. Estates Code Ann. § 351.002(a), (b). Wheatley argues that an “appeal bond” is not the same as a “supersedeas bond,” and therefore, Section 351.002 does not operate to excuse Farley from the requirement that he post a supersedeas bond to suspend the judgment pending appeal. We agree with Wheatley that an appeal bond and a supersedeas bond are two different types of bonds and they serve different functions. Nevertheless, as seen in the Supreme Court’s decision in Ammex Warehouse Co. v. Archer, 381 S.W.2d 478, 480-82 (Tex. 1964), the exemption of executors and administrators from the requirement that they give security for costs on appeal is significant in determining whether they are required to post a supersedeas bond.

….

We recognize that Section 351.002 refers to “appeal bond” rather than the more general term “bond” that appeared in the predecessor statute, but it was well understood that Article 2276 concerned the requirement that the appellant give security for costs on appeal by filing an appeal bond. We hold that when an executor or administrator of an estate appeals, he or she is not required to post a supersedeas bond unless the appeal personally concerns the executor or administrator. The Probate Court’s order does not expressly state whether the appeal personally concerns Farley, but the record reflects that Farley is a court-appointed administrator who has no personal interest in the estate. Consequently, Farley is not required to post a supersedeas bond to suspend the judgment and his filing of a notice of appeal operated to suspend the judgment.

Id. (citing In re Shore, 106 S.W.3d 817, 821 (Tex. App.—Texarkana 2003, orig. proceeding) and Vineyard v. Irvin, 855 S.W.2d 208, 212 (Tex. App.—Corpus Christi-Edinburg 1993, orig. proceeding)).

Interesting Note: Unless a judgment is superseded, a judgment creditor can collect on the judgment pending an appeal. If the judgment debtor wants to stop the creditor from collecting on the judgment pending an appeal, the judgment debtor generally should post a supersedeas bond. Supersedeas bonds can be expensive and can be difficult to obtain. The holding above is a good holding for any estate representative faced with the task of appealing a judgment. It means that an estate can appeal an adverse judgment without the expense and hassle of obtaining a bond.

This holding is not good news for a judgment creditor, who may face the dissipation of assets by an estate. Without the filing of a supersedeas bond, the judgment creditor has no protection that at the end of the case, when all appeals are completed, that it will have assets to collect. Therefore, judgment creditors in this situation should consider seeking an injunction in the trial court to stop any dissipation of assets while the appeal is pending. The Texas Rules of Appellate Procedure expressly allow trial courts to grant that type of temporary relief pending an appeal to prevent the unfairness that may arise from allowing a judgment debtor to operate as normal without the filing of a supersedeas bond.

Federal District Court Holds That A Former Director Of Nonprofit Did Not Have Standing To Sue For The Board’s Breach Of Fiduciary Duty And That Employers Do Not Owe Fiduciary Duties To Employees

Posted in Items of Interest

In Garcia v. Communities in Schools of Brazoria County, a director sued a nonprofit’s board for breach of fiduciary duty arising from his removal. 2019 U.S. Dist. LEXIS 97017 (S. D. Tex. June 10, 2019). The board alleged that he did not have standing to bring such a claim, and the district court agreed:

Garcia lacks standing to bring a derivative claim for the Joint Venture Board’s alleged breach of fiduciary duty or ultra vires acts. Under Texas law, a shareholder of a for-profit corporation may bring a derivative suit under the Business Organizations Code. Tran v. Hoang, 481 S.W.3d 313, 316 (Tex. App.—Houston [1st Dist.] 2015, pet. denied) (citing Tex. Bus. Orgs. Code §§ 21.551-21.563). However, “[n]o parallel provision confers this status upon the members of a nonprofit who are not otherwise authorized to sue by the organization itself.” Id. Garcia’s former executive director position does not give him standing to assert these claims.

Id. (citing Swain v. Wiley College, 74 S.W.3d 143 (Tex. App.—Texarkana 2002, no pet.)). The court also held that the director failed to state a claim for breach of a fiduciary duty owed to him as an employee because Texas law does not recognize a fiduciary duty or a duty of good faith and fair dealing owed by an employer to an employee. Id. (citing Beverick v. Koch Power, Inc., 186 S.W.3d 145, 153 (Tex. App.—Houston [1st Dist.] 1997, pet. denied) and City of Midland v. O’Bryant, 18 S.W.3d 209, 216 (Tex. 2000)).

Recorded Webinar – Trustee Quandary: Criminal Acts By Beneficiaries With Or On Trust Property

Posted in Knowledge Library, Webinars

 

Recorded Webinar

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, discusses rising drug abuse issues and the possibility that a beneficiary of a trust may commit criminal activities on or with trust property.  This webinar provides suggestions for trustees in this situation and address several important concerns, including the duty of loyalty the trustee owes the beneficiary and its limits, the duty to properly manage trust assets, the duty to report criminal activity, and the duty to preserve evidence.

CLICK HERE FOR WEBINAR

Criminal Acts With Trust Property_Paper

Criminal Acts With Trust Property_Presentation

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

Texas Supreme Court Holds That Contractual Clauses That Waive The Statute Of Limitations May Be Enforceable

Posted in Cases Decided, Texas Supreme Court

In Godoy v. Wells Fargo Bank, N.A., a bank sued a guarantor to recover on a deficiency following a foreclosure sale. No. 18-0071, 2019 Tex. LEXIS 443 (Tex. May 10, 2019). The defendant guarantor alleged that any such claim was barred by the two-year statute of limitations. The lender argued that the guarantor waived the statute-of-limitations defense had been waived by provisions in the loan documents. The guarantor argued that a statute-of-limitations defense can only be waived if the language in the waiver is specific and for a defined period of time, and claimed that the waiver was indefinite and void as against public policy because it allowed the lender to bring suit at any time in the future. The lender argued that, by signing a broad waiver of all defenses, a party can waive all statute-of-limitations defenses indefinitely.

Regarding waivers of a statute of limitations defense, the Texas Supreme Court held:

In Simpson v. McDonald, we stated: “It appears to be well settled that an agreement in advance to waive or not plead the statutes of limitation is void as against public policy.” Since Simpson was decided, courts of appeals have built upon its holding to require that a waiver of a statute of limitations is void unless the waiver is “specific and for a reasonable time.” Indeed, the requirement that in order to be enforceable the statute-of-limitations waiver must be “specific” and “only for a reasonable time” was already understood to be part of the law at the time Simpson was decided.… Blanket pre-dispute waivers of all statutes of limitation are unenforceable, but waivers of a particular limitations period for a defined and reasonable amount of time may be enforced.

Id. The Court ruled that the clause in the case was sufficiently specific and was for a reasonable time and ruled for the lender.

Interesting Note: Fiduciaries are often in the position of a lender. For example, a trustee may make a loan to a beneficiary of a trust. Sometimes the trustee has to collect on that debt when the borrower defaults, and that fight can revolve around the statute of limitations. Indeed, a trustee never wants to sue its beneficiary for any reason, and delay is often present in these circumstances. For example, recently, a court of appeals held that the statute of limitations did not apply to bar a trustee’s claim on a promissory note under the facts of that case. DeRoeck v. DHM Ventures, LLC, No. 03-15-00713-CV,  2019 Tex. App. LEXIS 4721 (Tex. App.—Austin June 7, 2019, no pet. history). The Godoy opinion arms a trustee with one more tool. A trustee can have the note, guaranty agreement, or other similar document expressly state that the borrower waives the defense of the statute of limitations for a certain period of time (negotiate notes have a six year statute of limitations in Texas, and potentially, a waiver clause could extent that to eight years).

Fifth Circuit Affirmed Judgment Against A Company’s Former Officer For Breach Of Fiduciary Duty

Posted in Items of Interest

In Ebert v. Dejoria (In re Latitude Sols., Inc.), a bankruptcy trustee sued a company’s former officers for breach of fiduciary duty. No. 18-10382, 2019 U.S. App. LEXIS 13060 (5th Cir. April 30, 2019). The trustee asserted that LSI was a sham company set up to fail from the outset and a vehicle for the officers to participate in a securities-fraud scheme known as “pump-and-dump,” while the officers claimed LSI was legitimately founded to develop and commercialize technology capable of remediating contaminated water. LSI was a publicly traded company that began operating in 2009 and developed patented technology for treatment of wastewater in the oil and gas industry. LSI was a speculative venture that eventually filed for bankruptcy in November 2012. After a jury trial, the jury found that an officer, Cowan, breached his fiduciary duties to the company, and awarded damages. Cowan appealed.

The Fifth Circuit held that the trustee had to prove: 1) that a fiduciary relationship existed; 2) that Cohen breached his fiduciary duty to LSI; and 3) that Cohen’s breach resulted in injury to LSI or benefitted him. The first element was not in dispute, and Cohen’s fiduciary duty required a duty of loyalty and duty of care to LSI.

The trustee’s case began by alleging an elaborate pump-and-dump scheme of LSI’s stock and wide scale fraud, but by the time the case was submitted to the jury, her argument was based entirely on alleged improper conduct related to a contract, the Jabil contract. The court quoted from the trustee:

[T]he fraud, the improper conduct, was entering into the Jabil contract in May 2011. That’s what inevitably caused this company to collapse, that’s what caused the damages, and that was the impetus of why or purpose of this fraudulent scheme was to enter into that Jabil contract, make a big splash, make it seem like this was a legitimate business when it had no hope for survival.

Id. The court noted the following evidence to support the trustee’s claim:

Cohen took on Appel as an advisor and spoke to him daily; Cohen sent Appel non-public information, including lists of shareholders and stock sales on a weekly basis; Cohen dealt personally with Jabil; prior to the Jabil contract, Cohen had not told anyone at Jabil about Appel’s conviction for securities fraud manipulation; LSI had no idea whether the machinery from the Jabil contract would work; LSI had no business plan, or leads to monetize the equipment from the contract, but Cohen and Appel drafted LSI press releases together to generate good news and publicize it; and while still a director, Cohen sold his stock in LSI for $400,000 because he “needed to have some money in the bank.”

Id. The court noted that the officer contended that his conduct was protected by the business judgment rule:

In Texas, the “rule . . . protects corporate officers and directors, who owe fiduciary duties to [a] corporation[] from liability for acts that are within the honest exercise of their business judgment and decision.” Sneed v. Webre, 465 S.W.3d 169, 173 (Tex. 2015) (citation omitted). Negligent, unwise, inexpedient, or imprudent actions are protected so long as “the actions [are] ‘within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved.’” Id. at 178 (quoting Cates v. Sparkman, 73 Tex. 619, 11 S.W. 846, 849 (Tex. 1889)) (footnote omitted). The jury charge, however, instructed the jury on both what is required to show a breach of fiduciary duty, along with the parameters of the business judgment rule. Given Cohen’s actions, a reasonable jury could weigh the evidence, consider the business judgment rule, but conclude that Cohen breached his fiduciary duty to LSI.

Id. The court then disagreed with an argument that the trustee had to have expert testimony regarding the alleged pump-and-dump securities fraud scheme. The court also found that there was sufficient evidence to support the jury’s damages findings. “Considering the jury found Cohen liable for a breach of fiduciary duty based on an alleged pump-and-dump scheme and improperly propping up LSI by entering the Jabil contract for nefarious purposes, there is legally sufficient evidence for a reasonable jury to award $400,000 in damages.” Id.

In A Trust Case, A Court Affirms Judgment Against A Beneficiary/Limited Partner’s Aiding-And-Abetting-Breach-Of-Fiduciary-Duty Claim For Distributions To A Trustee/Limited Partner

Posted in Cases Decided, Texas Court of Appeals

In Marshall v. Ribosome L.P., a beneficiary of a trust sued a limited partnership of which the trustee was a partner. No. 01-18-00108-CV, 2019 Tex. App. LEXIS 3787 (Tex. App.—Houston [1st Dist.] May 9, 2019, no pet. history). The beneficiary asserted that the limited partnership aided and abetted a breach of fiduciary duty by making distributions to the trustee, when the trustee was refusing to make distributions to the beneficiary. The trial court granted summary judgment for the partnership, and the beneficiary appealed.

The court of appeals held that an aiding and abetting breach of fiduciary duty claim rests on an underlying breach of such a duty. The beneficiary claimed that the trustee had breached her fiduciary duty by failing to make distributions of trust income. The court rejected that theory because the trustee had broad discretion to make distributions:

Under the Trusts’ language, however, the Trustee has absolute, unfettered discretion over the decision to accumulate or distribute the Trust income. See, e.g., Caldwell v. River Oaks Tr. Co., No. 01-94-00273-CV, 1996 Tex. App. LEXIS 1798, 1996 WL 227520, at *12 (Tex. App.—Houston [1st Dist.] May 2, 1996, writ denied) (mem. op.) (“A power is considered discretionary if the trustee may decide whether or not to exercise it.”). In her “sole discretion,” the Trustee “may accumulate or distribute income accruing for the benefit of the beneficiaries,” and “determin[e] the time or frequency of any distributions” as well as “the manner, time, circumstances, and conditions of the exercise of any right, power or authority vested in the Trustee.” Preston claims that his breach of fiduciary duty claim is supported by evidence that Elaine acted unfairly, suggesting that she knew he had come to depend on the distributions and that she had treated his brother differently under the separate trusts that benefit him. Preston labels this perceived unfairness as “bad faith”; however, a decision to accumulate interest—which the plain language of the Trusts expressly allows—and the differences in treatment between the beneficiaries of different trusts does not raise a fact issue showing a breach of fiduciary duty. Neither of the Trusts contains language limiting the trustee’s discretionary authority, such as by declaring a purpose to provide living expenses or requiring the distributions to Preston to be equal to those made to Pierce, Jr. under the trusts that benefit him. See, e.g., Doherty v. JPMorgan Chase Bank, N.A., No. 01-08-00682-CV, 2010 Tex. App. LEXIS 2185, 2010 WL 1053053, at * (Tex. App.—Houston [1st Dist.] Mar. 11, 2010, no pet.) (mem. op.) (holding that trustee erred in denying funds for modification of bathroom in daughter’s home where beneficiary had moved after suffering stroke that left her physically impaired; trust required disbursement of funds on beneficiary’s request to provide for her “comfort, health, support, or maintenance”). None of the circumstances raises a fact issue as to whether Elaine abused the broad discretionary authority conferred by the Trusts.

Id. The court also noted that there was no evidence of loss or injury to the beneficiary or the trusts or of benefit to the trustee resulting from the decision to accumulate the income instead of distributing it. The court stated: “Preston claims that the withholding of Trust income ‘causes [him] damages equal to the distributions that were wrongly withheld.’ But the Trusts do not give Preston any right to override the Trustee’s decisions about how to handle the trust income. And, as he remains the beneficial owner of the interest income accumulated in the Trusts, he is not entitled to a damages award that would amount to a double recovery.” Id.

The beneficiary claimed that the partnership aided and abetted the trustee’s decision to accumulate the trust income by making distributions to the trustees, as their legal owners, rather than directly to him, as the trusts’ beneficiary. The court first discussed the concept of such a claim:

The Texas Supreme Court observed that, if it were to recognize a cause of action for aiding and abetting tortious conduct, “[c]ourts should look to the nature of the wrongful act, kind and amount of assistance, relation to the actor, defendant’s presence while the wrongful act was committed, and defendant’s state of mind.” First U. Pentecostal, 514 S.W.3d at 225 (citing Juhl v. Airington, 936 S.W.2d 640, 644-45 (Tex. 1996)). Such a claim’s purpose would be “to deter antisocial or dangerous behavior.” Juhl, 936 S.W.2d at 644; see also W. Fork Advisors, LLC v. SunGard Consulting Servs., LLC, 437 S.W.3d 917, 921 (Tex. App.—Dallas 2014, pet. denied) (aiding and abetting claim requires actor, with unlawful intent, to give substantial assistance and encouragement to wrongdoer in tortious act).

Id. The court then rejected the beneficiary’s claim under the facts of this case:

Here, the allegedly wrongful conduct—Ribosome’s distribution of proceeds to the Trusts, as limited partners, rather than to Preston, their beneficiary—is required by Ribosome’s partnership agreement. Ribosome generally distributes profits to its limited partners according to the terms of its partnership agreement. It cannot deviate from those terms without direction from its general partner and the limited partner that is legally entitled to receive the share of profits. When the Trustee expressly revoked any authorization that may previously have existed for Ribosome to distribute the proceeds it owed to the Trusts directly to the Trusts’ beneficiary, Ribosome lost any authority to distribute the Trusts’ profits directly to Preston. No evidence shows that Ribosome gave the Trustee substantial assistance and encouragement to revoke that authorization, or that Ribosome could have acted differently had it believed the Trustee acted wrongfully by doing so. Because Ribosome’s distribution of profits in compliance with its partnership agreement does not constitute conduct in furtherance of a breach of fiduciary duty, the trial court properly granted summary judgment on Preston’s aiding and abetting claim.

Id.

Finally, the court rejected the beneficiary’s accounting claim against the partnership. The court acknowledged that the beneficiary was a limited partner in his individual capacity. However, the court held that a limited partner does not generally have a right to an accounting against a partnership:

An accounting is available when (1) the parties have a contractual or fiduciary relationship; (2) the facts and accounts are “so complex [that] adequate relief may not be obtained at law”; and (3) standard discovery procedures cannot provide adequate relief at law. T.F.W. Mgmt. v. Westwood Shores Prop. Owners Ass’n, 79 S.W.3d 712, 717-18 (Tex. App.—Houston [14th Dist.] 2002, pet. denied). In its summary-judgment motion, Ribosome argued that its partnership agreement identified any rights Preston had as to Ribosome, Ribosome had provided him with all the financial information that he was entitled to under the partnership agreement, and the agreement did not entitle Preston to a common-law accounting. Ribosome’s partnership agreement identifies the rights and duties of the limited partners and their duties in relation to the partnership. With respect to financial information, the partnership agreement gives the limited partner the right to inspect Ribosome’s books and records at reasonable times. It does not, however, include any additional right to an accounting, and Preston does not identify any other source that gives him that right. See Tex. Bus. Orgs. Code § 153.105 (explaining that rights of limited partners may be created only by certificate of formation, partnership agreement, other statutory provisions, or other limited partnership provisions). Preston further argues that Ribosome owes him a fiduciary duty to provide an accounting because of his limited partner status. He cites no authority for this argument and the Business Organizations Code makes clear any fiduciary powers or liabilities belong not to the limited partnership, but to its general partner. See id. § 153.152. Because the partnership agreement does not require Ribosome to comply with a limited partner’s demand for an accounting and Ribosome does not owe Preston an independent duty that would give rise to a right to an accounting, the trial court did not err in granting summary judgment on this claim.

Id. The court affirmed the summary judgment regarding the accounting claim.

Texas Statutes Now Allow A Court To Modify Or Reform An Unambiguous Will

Posted in Items of Interest

I. Introduction

Historically, Texas courts could not resort to extrinsic evidence to construe an unambiguous will. San Antonio Area Foundation v. Lang, 35 S.W.3d 636 (Tex. 2000). The Texas Supreme Court stated as follows:

In construing a will, the court’s focus is on the testatrix’s intent. This intent must be ascertained from the language found within the four corners of the will. The court should focus not on “what the testatrix intended to write, but the meaning of the words she actually used.” In this light, courts must not redraft wills to vary or add provisions “under the guise of construction of the language of the will” to reach a presumed intent. Determining a testatrix’s intent from the four corners of a will requires a careful examination of the words used. If the will is unambiguous, a court should not go beyond specific terms in search of the testatrix’s intent.

Id. at 639 (internal citations omitted). See also Stephens v. Beard, 485 S.W.3d 914, 916 (Tex. 2016); Hysaw v. Dawkins, 483 S.W.3d 1 (Tex. 2016). In 2015, the Texas Legislature created several provisions that allow a court to look at extrinsic evidence to modify the otherwise unambiguous terms of a will upon certain circumstances. Tex. Est. Code § 255.451.

II. Texas Estate Code Provision Allowing Modification and Reformation Of A Will

The Texas Estates Code allows a personal representative to petition a court to modify or reform a will on one of three different grounds:

(a) On the petition of a personal representative, a court may order that the terms of the will be modified or reformed, that the personal representative be directed or permitted to perform acts that are not authorized or that are prohibited by the terms of the will, or that the personal representative be prohibited from performing acts that are required by the terms of the will, if: (1) modification of administrative, nondispositive terms of the will is necessary or appropriate to prevent waste or impairment of the estate’s administration; (2) the order is necessary or appropriate to achieve the testator’s tax objectives or to qualify a distributee for government benefits and is not contrary to the testator’s intent; or (3) the order is necessary to correct a scrivener’s error in the terms of the will, even if unambiguous, to conform with the testator’s intent.

(b) An order described in Subsection (a)(3) may be issued only if the testator’s intent is established by clear and convincing evidence.

Tex. Est. Code § 255.451. The statute limits who can seek to modify a will. Texas Estates Code § 22.031 defines “‘personal representative’ to include (1) an executor and independent executor; (2) an administrator, independent administrator, and temporary administrator; and (3) a successor to an executor or administrator.” Tex. Est. Code § 22.031. So, this requires that a personal representative bring a claim to modify a will—a beneficiary is not allowed to do so. This is an important limitation as a personal representative may be less inclined to seek a modification or reformation that favors some beneficiaries over others due to its fiduciary duties, whereas a beneficiary, who owes no fiduciary duties, would be more inclined to do so.

The statute only allows a court to modify or reform a will or to allow a personal representative to act contrary to the plain language of the will for three limited reasons. First, allowing the modification “is necessary or appropriate to prevent waste or impairment of the estate’s administration.” Id. This provision would require the personal representative to present evidence that by following the express terms of the will that there would be a waste of estate assets or would impair the estate’s administration. Second, allowing the modification will “is necessary or appropriate to achieve the testator’s tax objectives or to qualify a distributee for government benefits and is not contrary to the testator’s intent.” Id.

Third, allowing the modification “is necessary to correct a scrivener’s error in the terms of the will, even if unambiguous, to conform with the testator’s intent.” This provision would allow a personal representative to offer evidence that, despite what the will unambiguously provides, that the testator really wanted something different. This is the most controversial basis to modify a will because presumably a testator reads and understands the will that he or she executes. It is presumed that he or she understands the plain meaning of the words in the will. It is assumed that if a testator states his or her intentions before executing a will that he or she changed his or her mind when they executed a will that has a contrary meaning. The statute does not define the term scrivener’s error. Under a commonly understood understanding of “scrivener’s error,” this statutory basis appears to be narrow: “A scrivener’s error is an error resulting from a minor mistake or inadvertence, especially in writing.” Packard Transport, Inc. v. Dunkerly, No. 14-09-00652- CV, 2010 Tex. App. LEXIS 4984 at *12 (Tex. App.—Houston [14th Dist.] July 1, 2010, no pet.) (mem. op.) (citing Black’s Law Dictionary 582 (8th ed. 2004)).

A scrivener’s error does not include a mistake of law or fact by the testator. If the testator meant what was written, even if based on false information, then there was not a scrivener’s error. It should be noted that one ground for undue influence in Texas is fraud and deceit. So, if a beneficiary misrepresents a legal or factual matter upon which the testator relied in executing a will, a trial court may refuse to admit the will to probate.

III. Burden of Proof To Establish A Scrivener’s Error

One important limitation is that a scrivener’s error must be proven by clear and convincing evidence, and not merely by a preponderance of the evidence. In the vast majority of situations in civil law, the preponderance of the evidence standard applies. Under a preponderance of the evidence burden, the fact finder must decide if the plaintiff’s allegations meet the legal standard of the preponderance of the evidence meaning that they are “more likely true than not.” Essentially, the fact finder must be convinced that it is at least 51% likely that the plaintiff’s allegations are correct. The fact that the Texas Legislature has refused to use the commonly-used preponderance of the evidence standard is very significant. “[N]o doctrine is more firmly established than that issues of fact are resolved from a preponderance of the evidence.” Ellis Cnty. State Bank v. Keever, 888 S.W.2d 790, 792 (Tex. 1994) (quoting Sanders v. Harder, 148 Tex. 593, 227 S.W.2d 206, 209 (1950)). “Only in extraordinary circumstances, such as when we have been mandated to impose a more onerous burden, has this Court abandoned the well-established preponderance of the evidence standard.” Id. Clear and convincing evidence is “proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established.” In re J.O.A., 283 S.W.3d 336, 345 (Tex. 2009). This is an intermediate standard, falling between the preponderance standard of ordinary civil proceedings and the reasonable doubt standard of criminal proceedings. State v. Addington, 588 S.W.2d 569, 570 (Tex. 1979). While the proof must weigh heavier than merely the greater weight of the credible evidence, there is no requirement that the evidence be unequivocal or undisputed. Id. So, trial courts should not grant modification or reformation relief where it is a close call; a party seeking that relief has a heavy burden to establish that a ground for the relief is established by firm and credible evidence that substantially outweighs counter evidence.

IV. Recent Texas Property Code Provision Allowing Reformation of A Trust

It should be noted that in 2017, the Texas Legislature added Texas Property Code Section to similarly permit reformation of a trust:

On the petition of a trustee or a beneficiary, a court may order that the terms of the trust be reformed if: (1) reformation of administrative, nondispositive terms of the trust is necessary or appropriate to prevent waste or impairment of the trust’s administration; (2) reformation is necessary or appropriate to achieve the settlor’s tax objectives or to qualify a distributee for governmental benefits and is not contrary to the settlor’s intentions; or (3) reformation is necessary to correct a scrivener’s error in the governing document, even if unambiguous, to conform the terms to the settlor’s intent.

Tex. Prop. Code §112.054(b). Subsections (e) and (f) also provide: “(e) An order described by Subsection (b-1)(3) may be issued only if the settlor’s intent is established by clear and convincing evidence. (f) Subsection (b-1) is not intended to state the exclusive basis for reformation of trusts, and the bases for reformation of trusts in equity or common law are not affected by this section.

V. Overarching Purpose Is To Conform Will To True Intention of Testator

The Estate’s Code also provides: “The court shall exercise the court’s discretion to order a modification or reformation under this subchapter in the manner that conforms as nearly as possible to the probable intent of the testator.” Tex. Est. Code § 255.452. This provision enforces the traditional concept that a testator’s intent should control. In exercising its ability to modify or reform a will, this statute provides that the court should do so to conform to the probable intent of the testator. This provision makes complete sense regarding the third ground for modifying a trust: scrivener’s error. It makes less sense regarding the first two grounds: modification of administrative, nondispositive terms to prevent waste or impairment of the estate’s administration or to achieve the testator’s tax objectives or to qualify a distributee for government benefits.

VI. Modification or Reformation May Be Retroactive

The trial court can reform a will so that it has retroactive effect. Id. at § 255.453. This may be very important for tax reasons and also to protect a personal representative who had not acted in conformance with the express terms of a will. If the modification or reformation has retroactive effect, then the personal representative did act in conformity with the modified or reformed will, and did not breach an duty, even though he, she or it did not act in conformity with the express terms of the will.

VII.     Potential Liability Of Personal Representative For Bringing Or Failing To Bring Action To Modify or Reform A Will

The statute provides for a protection for a personal representative who does not act to modify or reform a will. Section 255.455 provides:

(a) This subchapter does not create or imply a duty for a personal representative to: (1) petition a court for modification or reformation of a will, to be directed or permitted to perform acts that are not authorized or that are prohibited by the terms of the will, or to be prohibited from performing acts that are required by the terms of the will; (2) inform devisees about the availability of relief under this subchapter; or (3) review the will or other evidence to determine whether any action should be taken under this subchapter.

(b) A personal representative is not liable for failing to file a petition under Section 255.451.

Tex. Est. Code § 255.455. So, a personal representative may not be sued by a beneficiary for failing to petition a court to modify or reform a will. Even if the personal representative knows that the testator wanted something different from what was expressly stated in his or her will, the personal representative does not have to try to correct the error and may follow the express terms of the will without fear that a beneficiary will be able to successfully sue the personal representative for breaching a duty. This provision will certainly make it more likely that personal representatives will not seek a modification or reformation.

Further, a personal representative may breach duties where he, she or it attempts to modify or reform a will. A personal representative owes the same fiduciary duties to estate beneficiaries as a trustee owes a trust beneficiary as a personal representative is essentially a trustee of the trust estate. A trustee owes a duty of loyalty to each beneficiary and owes a duty to treat beneficiaries fairly. One could certainly see a circumstance where the personal representative seeks a modification or reformation to favor one beneficiary over another or to protect itself from liability for taking actions that were not allowed by a will. Where no ground exists for such a modification or reformation, the personal representative would likely breach a fiduciary duty.

So, where a personal representative has no liability for failing to modify or reform a will, and may have liability for trying to do so, it is almost certain that no reasonable personal representative would seek to modify or reform a will unless every interested party agrees with that course of action.

VIII.    Conclusion

This relatively new statute is controversial in Texas even though it is limited. One law student advocates for broadening the scope of the statute and allowing courts to modify wills in additional circumstances, including a mistake of law or fact or because there are changed circumstances. Brent Debnam, Deadly Intentions: Posthumously Modifying Unambiguous Wills To Protect The Actual Intentions Of Texas’s Testators, 462 Estate Planning And Community Property Law Journal, 461 (2017). Others prefer the historical plain-meaning rule and the inability to modify or reform an unambiguous will. Once again, historically, Texas courts considered a will a unilateral instrument, and were concerned only with the intention of the testator as expressed in the will. Gee v. Read, 606 S.W.2d 677, 680 (Tex. 1980); Stewart v. Selder, 473 S.W.2d 3, 7 (Tex. 1971); Guilliams v. Koonsman, 154 Tex. 401, 279 S.W.2d 579, 581 (1955). Courts held that it was the sense in which the words were used by the testator that was the ultimate criterion to judge intent. A basic rule of will construction was that the words of a will should be given their plain and usual meaning unless it is clear from the will as a whole that the testator intended a different meaning. Jensen v. Cunningham, 596 S.W.2d 266, 271 (Tex. Civ. App.—Corpus Christi 1980, no writ). A will should not be construed to defeat the manifest purpose of the testator to have a reasonably prompt settlement and distribution of his or her estate or construed as to accomplish something the testator expressly forbade. Brooker v. Brooker, 76 S.W.2d 180 (Tex. Civ. App.—Fort Worth 1934), set aside on other grounds, 130 Tex. 27, 106 S.W.2d 247 (1937); Wisdom v. Wilson, 59 Tex. Civ. App. 593, 127 S.W. 1128 (Tex. Civ. App.—1909, writ refused). Many dislike the concept of changing the plain meaning rule because this significant change risks eviscerating a testator’s right to control his or her estate after death and also creates unnecessary hardships for clients, practitioners, and courts. There are no court opinions in Texas at this time construing the new statutes discussed above. Time will tell how courts in Texas will take to modifying or reforming an unambiguous will.

Court Held That Heirs Had Standing To Participate In Estate Even After They Received The Assets They Were Due

Posted in Cases Decided, Texas Court of Appeals

In In re Estate of Daniels, after the decedent’s death, his wife and his other heirs filed competing applications for independent administration of his estate. No. 06-18-00049-CV, 2019 Tex. App. LEXIS 2905 (Tex. App.—Texarkana April 11, 2019). After the homestead property was set aside and the temporary administrator conveyed the interests in that property to the wife and the heirs, the wife moved to dismiss the heirs and their pleadings for lack of standing because they no longer had a financial interest in the estate. The trial court granted the motion, and the heirs appealed.

The court of appeals held that because Texas Estate Code Section 22.018 defines “interested person” in the disjunctive; one is an interested person if they are an “heir, devisee, spouse, [or] creditor” or one who has a “property right in” or a “claim against” the estate being administered. The court held that a party does not have to have a financial interest in the estate to have standing:

Accordingly, if one is not an heir, devisee, spouse, or creditor, then one must have a property right in or a claim against the estate to be an interested person. However, an interested person does not have to be both “(1) an heir, devisee, spouse, or creditor and (2) a person with a property right in or claim against the estate.” Therefore, as long as the Heirs meet the statutory definition of “heir” under Section 22.015, they are “interested persons” under Section 22.018(1), even if they do not have a pecuniary interest in the estate.

Id. The court also held that the heirs also did not lose standing by enforcing their rights and obtaining assets from the estate:

It is undisputed that the Heirs satisfied the statutory definition of heir at the time the temporary administrator conveyed them property interests from the estate. Just as accepting benefits under a will does not bar the devisee from pursuing other estate-related rights he has as a devisee, the Heirs’ acceptance of property interests from the estate does not bar them from exercising their other rights as heirs, such as seeking to be named administrators and objecting to LaStarza’s application for the same. Therefore, the Heirs have standing to pursue their application, objections, and other motions.

Id. The court reversed the trial court’s order and held that the heirs had standing.

Court Affirms Finding Of Undue Influence Regarding Execution Of Will

Posted in Cases Decided, Texas Court of Appeals

In In re Estate of Russey, the decedent was going through a divorce and signed a will. No. 12-18-00079-CV, 2019 Tex. App. LEXIS 1536 (Tex. App.—Tyler February 28, 2019, no pet. history). She died before the divorce was finalized. Her children took their father’s side on some issues. During this time, a sister of a friend of the decedent “swooped in,” befriended the decedent, began taking her to her medical appointments and to the hospital, and assisted with the divorce proceedings. After the decedent’s phone texted her attorney that she wanted to draft a will and name her new friend as her sole beneficiary, the decedent executed the will. The decedent passed away shortly thereafter, and the will was offered to probate. The decedent’s daughter challenged the will. Following a bench trial, the trial court entered its order denying the admission of the will to probate and granting the daughter’s application for independent administration. The friend appealed.

The court of appeals discussed the standards for undue influence. “To establish undue influence, a contestant must show the following: (1) the existence and exertion of an influence; (2) the effective operation of such influence so as to subvert or overpower the mind of the testator at the time of the execution of the testament; and (3) the execution of a testament which the maker thereof would not have executed but for such influence.” Id. (citing Rothermel v. Duncan, 369 S.W.2d 917, 922 (Tex. 1963)).

The court first considered whether there was sufficient evidence that the friend had a fraudulent motive in having the decedent sign the will. The friend was subject to an order of deferred adjudication for theft of $55,471.20, and she was required to pay restitution in the amount of $38,721.96. At the time the decedent signed the will, her estate was worth more than the $28,000. “This monetary need on Watson’s part amounts to some circumstantial evidence underlying her motive to seek to influence Russey to name her as her sole devisee of her will.” Id. The court also looked at evidence that the friend poisoned the decedent’s relationship with her daughter. The daughter testified that the friend “froze her out,” thereby preventing her from being able to reestablish any type of relationship with the decedent. The court considered the circumstances surrounding the drafting and execution of the will. The friend and her husband were present when the decedent executed the will in her home. The court held that the evidence was legally and factually sufficient to support the trial court’s findings that an influence existed and was exerted by the friend.

Regarding whether the influence overpowered the decedent’s mind, the court first considered the decedent’s mental and physical capacity to resist and her susceptibility to the type and extent of the influences exerted. The trial court found that, due to her health problems, the decedent was reliant on others for transportation, and that the friend befriended the decedent while she was suffering from these health problems and that the decedent became dependent on the friend during her last illness for much of her care and transportation. The decedent was lonely at a time when the friend “swooped in” to provide assistance and became deeply involved in divorce proceedings. The court concluded that this evidence was sufficient to establish that the decedent was incapable of resisting her susceptibility to the influence. The court stated:

Further, in considering Russey’s state of mind at the time she executed her will, we note that Watson and Beatty actively sought to continue Russey’s estrangement from Stevens and her grandchildren. The record also reflects that Watson and her husband made certain they were present when Russey signed the will, in which Watson was designated as her sole devisee; no family members were present or were invited to attend the signing of the will.

Id. The court concluded:

Considering the cumulative effect of the evidence related to (1) Russey’s susceptibility and dependence on Watson at the end of her life, (2) the details surrounding the signing of the March 2, 2017, will, and (3) Watson’s successfully keeping Stevens and her children away from Russey during this time, we conclude that a factfinder reasonably could determine that Watson exerted her influence and subverted and overpowered Russey’s mind at the time she signed the will.

Id.

Lastly, the court consider whether the decedent would not have executed the instrument, but for the influence. “Satisfaction of this element usually is predicated on whether the disposition of property is unnatural.” Id. The court stated:

One of the main objects of the acquisition of property by the parent is to give it to his child; and that child in turn will give it to his, in this way the debt of gratitude we owe to our parent is paid to our children. Thereby, each generation pays what it owes to the preceding one by payment to the succeeding one. This seems to be the natural law for the transmission of property. Any departure from that course, though it may not be uncommon or unusual, is unnatural.

Id. The evidence showed that the decedent never made a will until the friend reentered her life during her last illness. Because the evidence supported that the friend unduly influenced the decedent when she never had before sought to create such a document, the court concluded that the trial court reasonably could have determined that the will was unnatural in that it passed all of her property to the friend with no apparent consideration given to her children or grandchildren. The court affirmed the trial court’s finding of undue influence.

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