Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

Court Holds That Testator’s Granddaughter Was A Beneficiary Of The Will

Posted in Cases Decided, Texas Court of Appeals

In McDaniel v. Meador, parties sued for declaratory relief regarding whether a granddaughter was a beneficiary of a will. No. 01-18-00041-CV, 2019 Tex. App. LEXIS 1315 (Tex. App.—Houston [1st Dist.] February 21, 2019, no pet. history). The will stated that the testator left her estate: “(a) To those of my children (JASPER “LEE” MCDANIEL, JR., AND ANDREW DOUGLAS MCDANIEL) who survive me and to the issue who survive me of those of my children who shall not survive me, in equal shares per stirpes.” Id. It also provided that if no issued survived her then she gave her estate to those who would take if the testator died intestate. One son predeceased the grandmother, and the son’s daughter, the granddaughter, claimed to be a beneficiary and entitled to a third of the estate. The trial court determined that the granddaughter was a beneficiary and was entitled to a third of the grandmother’s estate. The granddaughter’s loving uncles appealed.

The court of appeals described the rules for construing a will:

“The cardinal rule for construing a will is to ascertain the true intent of the [testatrix] as expressed in the will.” The “objective in construing a will is to discern and effectuate the testatrix’s intent as reflected in the instrument as a whole.” We ascertain the testatrix’s intent from the language within the four corners of the will. Courts “determine intent by construing the instrument holistically and by harmonizing any apparent conflicts or inconsistencies in the language.” We must focus on the meaning of the words the testatrix actually used rather than speculate about what she may have intended to write.

Id. The uncles contended that, because they survived the testator, the will designates only them as the beneficiaries of the residuary estate. The court of appeals disagreed:

When viewed holistically and harmonizing any apparent conflicts, we agree with Mandy that Frances did not intend to limit the term “children” to Jasper and Andrew in the second beneficiary clause… Frances defined who her children were in the opening provision of the Will, listing all three of her children: Jasper, James, and Andrew. By way of the parenthetical, Frances, at most, expressed her intent that she did not want James to be a beneficiary should he survive her. However, that same limitation was not placed on the term “children” in the second beneficiary clause to indicate that Frances did not intend the term “children” to include James in accordance with the definition in the Will’s opening paragraph. The Will contains no other indication that Frances intended to disinherit her granddaughter, Mandy, if James predeceased Frances… Even when given its ordinary meaning, the term “children” would also include James. And, under well-established rules of probate law, James would also be included as one of Frances’s children. The only place in the Will indicating that the “children” was intended to have a meaning different than the meaning ascribed in the opening paragraph or under the common, ordinary definition is the first beneficiary clause. Further, defining the term “children” in the second beneficiary clause to exclude James from that definition, and as a result exclude Mandy from being a beneficiary, would give rise to a potential conflict with Paragraph 2(b), which provides, “If no issue of mine survives me, I give my residuary estate to those who would take from me as if I were then to die-without a will . . . .” Paragraph 2(b) makes no exception for Frances’s issue descending through James. Thus, we read Paragraph 2(b) to affirm that Frances intended Mandy to be a beneficiary if she survived Frances.

Id. The court of appeals affirmed the trial court’s judgment for the granddaughter.

Orders Denying Arbitration Are Immediately Appealable But Parties Must Wait Until After Arbitration to Appeal Orders Granting Arbitration

Posted in Cases Decided, Texas Court of Appeals

In Fletcher v. Edward Jones Trust Co., a party sued a trust company for inappropriately distributing funds from an account, and the trial court granted the trust company’s motion to compel the dispute to arbitration. No. 11-19-00017-CV, 2019 Tex. App. LEXIS 1280 (Tex. App.—Eastland February 21, 2019, Decided; February 21, 2019, no pet. history). The plaintiff attempted to appeal the order granting the motion to compel arbitration. The court of appeals requested briefing from the parties regarding whether the court had jurisdiction over the appeal. The court noted that there was a statute that allowed interlocutory appeals from orders that deny arbitration, not from orders that compel arbitration. Tex. Civ. Prac. & Rem. Code Ann. § 171.098; Chambers v. O’Quinn, 242 S.W.3d 30, 31 (Tex. 2007). The court noted that the plaintiff filed a response that cited several cases involving mandamus proceedings, rather than direct appeals. The court held that it did not have jurisdiction over an appeal:

Unless specifically authorized by statute, appeals may be taken only from final judgments. Tex. A & M Univ. Sys. v. Koseoglu, 233 S.W.3d 835, 840-41 (Tex. 2007); Lehmann v. Har-Con Corp., 39 S.W.3d 191, 195 (Tex. 2001). Section 171.098 authorizes an interlocutory appeal from an order “denying an application to compel arbitration” and an order “granting an application to stay arbitration.” Civ. Prac. & Rem. § 171.098(a)(1)-(2) (emphasis added). The order from which Appellant attempts to appeal is not a final judgment, nor is it an order staying arbitration or denying an application to compel arbitration. An interlocutory appeal from an order granting a motion to compel arbitration is not authorized. See id. § 171.098; Chambers, 242 S.W.3d at 31; see also In re Gulf Expl., LLC, 289 S.W.3d 836, 839-40 (Tex. 2009) (adopting rule that appellate courts in Texas may review, on direct appeal, an order compelling arbitration if the order also dismisses the underlying litigation, making it a final order, rather than an interlocutory one). Because an interlocutory appeal is not authorized in this case and because a final, appealable order has not been entered, we lack jurisdiction and must dismiss this appeal. See Tex. R. App. P. 42.3.

Id.

Interesting Note: This case highlights the complete inequity involved in appellate courts’ review of orders on motions to compel arbitration. An order denying a motion to compel arbitration can be appealed immediately, but an order granting same cannot. Apparently, the cost and expense of participating in a needless trial is unfair to a party seeking arbitration, but the cost and expense of participating in a needless arbitration is not unfair to a party fighting arbitration. The potential of a loss of contractual rights outweighs the loss of constitutional rights. This issue has been resolved by the Texas Legislature in the jurisdictional statutes that it passed.

There is an alternative method to seek appellate review of a trial court’s order granting arbitration: mandamus relief. Where a trial court abuses its discretion in ruling on a matter and an appeal is inadequate, a court of appeals should grant mandamus relief. Potentially, a court of appeals could grant mandamus relief to reverse a trial court’s order granting arbitration. But even where a trial court clearly abuses its discretion in granting a motion to compel arbitration, the Texas Supreme Court generally would deny mandamus relief: “In the context of orders compelling arbitration, even if a petitioner can meet the first requirement, mandamus is generally unavailable because it can rarely meet the second. If a trial court compels arbitration when the parties have not agreed to it, that error can unquestionably be reviewed by final appeal.” In re Gulf Expl., LLC, 289 S.W.3d 836, 842 (Tex. 2009) (orig. proceeding). See also In re Vantage Drilling Int’l, 555 S.W.3d 629 (Tex. App.—Houston [1st Dist.] 2018, orig. proceeding) (appellate court denied a request for mandamus relief of a trial court’s order compelling arbitration because the petitioner had adequate remedy by appeal). Therefore, in most cases, mandamus relief will also not be available.

Because of the statutes at play, the Texas Supreme Court could not hold that an appellate court has jurisdiction over an appeal from an order granting arbitration, but it certainly could hold that an appellate court could grant mandamus relief. Indeed, the Texas Supreme Court formerly held that an appellate court could grant mandamus relief to correct a trial court’s error in denying arbitration, denying a motion to dismiss due to a forum-selection clause, or denying the impact of a contractual jury-waiver clause. It is not clear why the Texas Supreme Court is so ready to assist defendants in enforcing litigation-altering contractual clauses, but is so reluctant to support a plaintiff’s constitutional rights, such as due process, due course, and the right to a jury trial.

 

Webinar – The Velvet Hammer: Undue Influence Based on Deceit, Fraud, and Relationship Poisoning and a Financial Institution’s Duty To Detect and Report Financial Exploitation (March 15, 10:00 am CST)

Posted in Items of Interest, Knowledge Library, Webinars

Webinar – March 5

With the great transfer of wealth from the baby boomer generation, elder abuse and financial exploitation is a very timely and important topic. Undue influence often arises out of seemingly kind individuals who ingratiate themselves to an elderly person, inserting themselves between the person and relatives, and obtaining the person’s bounty due to deceit. This webinar will discuss the standards for undue influence, factors involved in recognizing that behavior, and a financial institutions duties to detect and report that behavior.

Date: Tuesday, March 5, 2019

Time: 10:00 – 10:45 a.m. (CST)

Cost: Complimentary

Speaker: David F. Johnson

Continuing Education Credit Information: 
This course is pending for MCLE credit by the State Bar of Texas Committee on MCLE in the amount of 0.75 credit hours

Who should attend:
In-house counsel and other litigation contacts, trust officers, risk management contacts, and wealth advisors

REGISTER HERE

Court Holds That A Will Left A Partial Intestacy

Posted in Cases Decided, Texas Court of Appeals

In Sullivan v. Hatchett, a husband executed a will giving his wife a life estate in his property. No. 07-17-00296-CV, 2019 Tex. App. LEXIS 980 (Tex. App.—Amarillo February 11, 2019, no pet. history). The will then provided:

THIRD: In the event [Juanita] should predecease me, or if we should die in or as a result of the same accident or disaster, or if she should not survive until ninety (90) days after my death . . . I hereby give, devise, grant and bequeath outright and in fee simple, fifty per cent (50%) of my said estate unto my Daughter, SHERRY LAYNE GIBSON HATCHETT . . . ten per cent (10%) of my said estate unto THE FIRST BAPTIST CHURCH, 2201 Broadway, Lubbock, Texas . . . .

FOURTH: All of the rest and residue of my said estate . . . I do hereby give, devise and bequeath in trust, twenty per cent (20%) of said rest and residue unto each of the two named beneficiaries, unto SHERRY LAYNE GIBSON HATCHETT as Trustee, for the use and benefit of two (2) of our three (3) grandchildren if they are still attending a college or university full time . . . such grandchildren being CHRISTINA MICHELLE HATCHETT and LISA MARIE HATCHETT . . .

Id. After the wife passed, her nephew, who was her executor, entered into a farm and ranch contract regarding a ranch former owned by the husband and wife as community property. Before closing, Sherry Gibson asserted she owned fifty percent of the husband’s estate under the third paragraph of his will, thereby creating a cloud on the title to the property. The mother’s executor then filed a declaratory judgment action to establish the interests of the parties in the property, and Sherry counter-claimed. The trial court ruled for Sherry, and the mother’s executor appealed.

The court of appeals reversed and ruled for the mother’s executor. The court first discussed the rules of will construction:

When interpreting a will, the primary focus of the court is the determination of the testator’s intent, as reflected in the will as a whole, and the effectuation of that intent as far as is legally possible. The intent must be drawn from the will, not the will from the intent. Ascertaining intent from the four corners of a will requires careful examination of the words the testator chose and the sense in which the words were used by the testator is the ultimate criterion. Words and phrases must be construed together and in context, not in isolation. A court should focus on the meaning of the words actually used by the testator and not on what he intended to write.

Id. (internal citations omitted).

The mother’s executor alleged that he was entitled to summary judgment because the second paragraph of the father’s will created a life estate only and the remaining paragraphs of the will did not establish a remainder interest or dispose of one hundred percent of the residual estate. The court of appeals agreed:

The third paragraph of Charles’s will, the survivor paragraph, provided three contingencies to effectuate a survival clause, none of which occurred… Thus, without any of the contingencies having occurred, the third paragraph became moot—thereby effectively distributing nothing to the named contingent beneficiaries, i.e., Sherry and the First Baptist Church. As such, it does not function to establish either a remainder interest or dispose of any residual interest. Because the third paragraph does not bear on the disposition of any residual interest, it does not pass title to the beneficiaries named in the trial court’s judgment. While the fourth paragraph, the residuary paragraph, does dispose of forty percent of any residual estate (twenty percent to Christina and twenty percent to Lisa), it makes no provision for the remaining sixty percent, thereby creating a partial intestacy.

Id. The court acknowledged that there is a general reluctance to find partial intestacy, but the plain words of the will control. The court held that half of the property belonged to the wife’s estate because it was her community property, forty percent of the husband’s half community interest passed via the fourth paragraph to Christina and Lisa and the remaining sixty percent of the husband’s half passed by the rules of intestate succession.

There was a dissenting justice who would have affirmed the trial court’s judgment:

There is nothing inconsistent between the Third paragraph’s provisions naming Sherry and the church as recipients of the sixty percent under the stated contingencies and the Second paragraph’s identification of them as remaindermen after the life estate given Juanita. The two paragraphs do not provide conflicting dispositions; they provide alternative dispositions. If any of the eventualities described in the Third paragraph occurred, no life estate would be created in Juanita. Read together, the Second and Third paragraphs thus consistently provide for Sherry and the church to receive the disputed sixty percent after Charles and Juanita both were deceased, regardless of the order or timing of their deaths, subject only to Juanita’s life estate.

Id.

Presentation: Saving Your Damages Award Via Temporary Injunctive Relief

Posted in Items of Interest, Knowledge Library

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, presented his paper on “Saving Your Damages Award Via Temporary Injunctive Relief” to the State Bar of Texas’s Damages in Civil Litigation Course in Dallas, Texas, on February 8, 2019.  In addition to a general discussion of issues concerning obtaining temporary injunctive relief, the presentation included a discussion of injunctive relief targeted at securing a defendant’s assets and protecting against dissipation activities. The presentation also included a discussion of other pre-trial methods to protect against asset dissipation such as attachment, garnishment, sequestration, and repossession, and compared and contrasted those methods to injunctive relief.  The paper and presentation slides are attached below.

Saving Your Damages Award Via Temporary Injunctive Relief_Paper

Saving Your Damages Award Via Temporary Injunctive Relief_Presentation Slides

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

Federal District Court Held That A Shareholder Of A Company Did Not Owe Fiduciary Duties To The Company Regarding A Transfer Of Stock Even Though He Was Also An Officer

Posted in Items of Interest

In Liberty Bankers Life Ins. Co. v. Lenhard, a company sued its former chief executive officer and shareholder for breaching fiduciary duties and fraudulent statements regarding an agreement to transfer his stock in the company. No. 3:16-CV-2417-N, 2019 U.S. Dist. LEXIS 19390 (N.D. Tex. February 6, 2019). The defendant filed a motion to dismiss the plaintiff’s claims. Regarding the breach-of-fiduciary-duty claim, the court held that under Texas law, the plaintiff had to first show that the defendant owed a fiduciary duty. The court held that the plaintiff did not establish that the defendant owed a fiduciary duty because he was only acting in his capacity as shareholder in the transaction and not as an officer:

Continental has not established a fiduciary duty existed at the time of sale. While it claims Lenhard owed a formal fiduciary duty because he was owner and CEO of Continental, he was not acting as CEO when he decided to sell the company. Rather, he was acting as a shareholder, and shareholders do not have the same special automatic fiduciary status corporate officers hold under Texas law. In re Harwood, 637 F.3d 615, 620 (5th Cir. 2011). In addition, there is no evidence that Continental relied on Lenhard for the sort of moral, financial, or personal support that is required to establish an informal fiduciary duty under Texas law. Assoc. Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 288 (Tex. 1998). Indeed, this was purely an arms-length transaction between Lenhard and Liberty for Lenhard’s shares in the company. That Continental representatives may have particularly trusted Lenhard’s representations because of their previous relationship does not in itself mean he owed a fiduciary duty upon the sale. See Meyer, 167 S.W.3d. at 331. Accordingly, the Court dismisses Continental’s breach of fiduciary duty claim.

Id. at 10-11. The court dismissed the breach-of-fiduciary-duty claim.

Interesting Note: This court correctly analyzed the fiduciary-duty issue in the complex scenario of a defendant wearing multiple hats. Often the same party acts in different capacities, one or more of those being a fiduciary relationship. A plaintiff may want all of the defendant’s actions considered in the context of the fiduciary relationship. However, the defendant is entitled to have his or her actions judged depending on the hat that he or she is wearing in relation to the actions. For example, it is common for a trustee to also have a position in a company that is owned in whole or in part by the trust. The trustee’s actions regarding the company are not necessarily judged by the trustee’s fiduciary duties as trustee. The trustee’s job as a stockholder is to attend stockholder meetings, vote as an owner, and if necessary, raise shareholder derivative actions. That is pretty much it, and only those actions are judged by a trustee’s fiduciary duty of loyalty, care, etc. The trustee’s job as an operator of the business is judged, like any other business executive, under the business judgment rule, and the beneficiary of the trust may not have standing to complain about those particular actions. So, in fiduciary litigation, it is very important to fully understand what capacities a defendant is acting in and judge his or her conduct by the correct capacity and standard related to same.

Texas Supreme Court Holds That A Limitation-Of-Liability Clause Eliminated A Punitive Damage Claim Where A Fraud Plaintiff Enforced The Contract But Refused To Address If The Holding Would Similarly Apply To A Breach-of-Fiduciary-Duty Claim

Posted in Cases Decided, Texas Supreme Court

In Bombardier Aero. Corp. v. Spep Aircraft Holdings, a plaintiff who had purchased an aircraft sued the defendant for fraud associated with representations regarding whether the aircraft was new or used. No. 17-0578, 2019 Tex. LEXIS 101 (Tex. February 1, 2019). The purchase agreement stated: “Flexjet will not be liable to either customer for any indirect, special, consequential damages or punitive damages arising out of any lack or loss of use of any aircraft, equipment, spare parts, maintenance, repair or services rendered or delivered under this purchase agreement.” Id. The plaintiff later found that parts of the aircraft were used, and sued for breach of contract and fraud. The jury found for the plaintiff and awarded actual damages and punitive damages. The court of appeals affirmed.

The Texas Supreme Court reversed the award of punitive damages. The Court held that because the plaintiff did not seek to rescind the purchase agreement, and instead sought damages while enforcing the purchasing agreement, that the plaintiff could not evade the reach of the limitation of liability clause:

As the plaintiffs point out, we have held that “fraud vitiates whatever it touches.” … 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. … 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.

Id.

The plaintiff could have, but did not assert a breach of fiduciary duty claim because the parties’ agreement gave the defendant power of attorney to inspect and accept the plane. “An agreement creating a power of attorney creates a fiduciary relationship.” Id. The Court noted that the fiduciary may be punished for breaching these duties by an award of exemplary damages. The Court stated: “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.” Id. The Court cited to its previous opinion in E.R.I. Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 870 (Tex. 2010), and noted that it allowed “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.” This reference is important because in Swinnea, the Court held that a trial court had broad discretion to award disgorgement damages (including contractual consideration) as a remedy for a breach of fiduciary duty. So, the Court left the door open to a scenario where a contract is enforced, actual damages awarded for breach of fiduciary duty, and an award of punitive damages despite the existence of a limitation-of-liability clause. The author assumes that the theory would be that a trial court could decide to not enforce a limitation-of-liability clause in equity (as a disgorgement of contractual consideration) while still otherwise enforcing a contract.

Court Holds That A Bank’s Employees Cannot Conspire To Breach Fiduciary Duties And That The Bank Did Not Owe Fiduciary Duties To A Depositor

Posted in Items of Interest, Uncategorized

In Herring v. Am. Paper & Janitorial Prods., the plaintiff was a subcontractor who provided janitorial services for a bank and was also a depositor of the bank. No. H-17-3474, 2018 U.S. Dist. LEXIS 215765 (S.D. Tex. December 24, 2018). After the plaintiff’s representatives were found stealing food after a party, the plaintiff’s contract was terminated. Later, one of the plaintiff’s employees was hired by another company, who was hired to clean the bank’s premises. The plaintiff sued the bank and the main contracting party for various claims. Specifically, the plaintiff sued the bank for breach of fiduciary duty and conspiracy due to the bank’s employees discussing terminating the plaintiff. The federal district court granted the bank’s summary judgment motion on these claims:

Herring claims that, because multiple Bank employees were involved in terminating the contract with Paper, it was a conspiracy. This, however, is not a conspiracy. No matter how much conversation and coordination may occur among people within one side of a deal or between several sides, it is not a basis for a legal claim. One cannot conspire about one’s own business interests and relationships. Collusion is only illegal if its acknowledged purpose is itself illegal and two people agree. A company cannot conspire with itself. The Bank employees are all members of the Bank, so there could be no conspiracy even if supporting facts existed.

The Bank could not have breached a fiduciary duty to Herring because it owed him none. Herring claims that the Bank owed him a fiduciary duty because Envirotech had a company account at the Bank. This argument too is misguided. In Texas, a depositor-bank relationship is a debtor-creditor relationship, not a fiduciary. While Envirotech had a company account at the Bank, the Bank owed no fiduciary duties on the account. Further, the Bank did not act on the depository account; it took action on its contract with Paper, which happened to involve Envirotech.

Id.

 

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