Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

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.

 

Court Held That A Power Of Attorney Agent Had Authority To Sue On Behalf Of The Principal And Affirmed A Finding That A Mineral Deed Was Procured By Fraud And Undue Influence

Posted in Cases Decided, Texas Court of Appeals

In Cortes v. Wendl, an elderly woman signed a deed conveying her mineral rights to two individuals. No. 06-17-00121-CV, 2018 Tex. App. LEXIS 4457 (Tex. App.—Texarkana June 20, 2018, no pet.). When the woman’s nurse and friend learned of the transaction, she obtained a power of attorney and filed a lawsuit on the woman’s behalf, claiming that the mineral deed was executed as a result of duress, coercion, and undue influence, and that no consideration was paid for the conveyance. The defendants alleged that the plaintiff had no capacity to sue. The court of appeals affirmed the trial court’s implied finding that the plaintiff had capacity:

“A power of attorney is a written instrument by which one person, the principal, appoints another person, the attorney-in-fact, as agent and confers on the attorney-in-fact the authority to perform certain specified acts on behalf of the principal.” An agent has express authority to take all actions designated by the principal. An agent has implied authority “to do whatever is necessary and proper to carry out the agent’s express powers.” Wendl introduced the durable power of attorney executed by Hardy as an exhibit, without objection. The power of attorney explicitly granted Wendl: “[a]uthority to initiate a claim and litigation, if necessary; negotiate; make decisions; and pursue the legal claim [Hardy] may have against Johnny Coutts, Charles [Randy] Hardy, and/or Isabel Cortes, or anyone else involved, and to pursue those claims or litigation as she sees fit for [Hardy] and/or [Hardy’s] estate. [Wendl] is further given specific authority to negotiate and make all decisions on [Hardy’s] behalf including accepting or rejecting offers of settlement, contracting for and payment of attorney’s fees, and costs.” The record supports the trial court’s implied finding that Wendl, in her capacity as agent and attorney-in-fact for Hardy, had the capacity to bring the lawsuit on Hardy’s behalf.

Id.

The court then analyzed whether there was sufficient evidence to establish that the deed was procured by undue influence. “In deciding whether there was undue influence in executing a deed, the court considers three factors: (1) the existence and exertion of an influence; (2) whether the influence operated to subvert or overpower the grantors’ minds when they executed the deed; and (3) whether the grantors would not have executed the deed but for the influence.” The court stated:

[A]lthough undue influence implies the existence of sufficient mental capacity to execute a deed if not hindered by another’s overriding influence, “weakness of mind and body, whether produced by infirmities of age or by disease or otherwise, may be considered as a material circumstance in determining whether or not a person was in the condition to be susceptible to undue influence.” Further, a beneficiary’s voluntary participation in the preparation or signing of a deed can be one of the considerations used to determine if there was undue influence, as can an unnatural disposition of property by the grantor, Long.

Cortes and Fernandes visited Hardy monthly to deliver the note payment on the property previously owned by Hardy. During these visits, they continually complained to Hardy that the property was no good without the minerals and that they wanted to purchase the minerals. These continual complaints and entreaties caused the elderly Hardy to feel pressured, frightened, and nervous. They were making her a “nervous wreck.” They often met with Hardy one-on-one in her room at the assisted living facility and made these complaints to her privately. This frightened Hardy, and she began to lock the door to her room during the day, as she thought Cortes and Fernandes might hurt her. Hardy testified to these things and further testified that, when she failed to relent, Cortes and Fernandes told her that the IRS was going to come after her if she did not sell the minerals. Hardy was told that she needed to sign over her mineral rights to Cortes so that she would not be in trouble. Hardy testified that she felt that she had to do something because the IRS was coming after her. Threats about the IRS caused Hardy to become so nervous that she was shaking, and she thought she was going to have seizures, as she did after her husband passed away. The evidence further suggests that Hardy was essentially tricked into going alone with Cortes to the title company in Longview to sign the mineral deed. Hardy testified that she was not paid anything for her mineral rights, and she was not aware that the deed provided that Cortes was entitled to all past royalties not yet cashed out—to include the royalty payment from Sabine Oil & Gas Corporation. Hardy’s testimony alone is evidence of the existence and exertion of Cortes’ and Fernandes’ influence.

….

Jimmy Don Reedy, who executed the 2010 agreement with Hardy and Randy to excavate topsoil from the property, testified that he removed less than ten fourteen-yard loads of topsoil from the property. According to Reedy, the removal of that quantity of topsoil is not enough to cause any kind of damage to the land. The topsoil was not removed over a five-year period. Instead, Reedy testified that it was removed fairly near the time of the agreement. In 2010, Fernandes asked Reedy to leave the property, and he did so. According to Reedy, if Cortes told Hardy that the land was no good because the topsoil had been removed, that would be false.

Id. The court of appeals affirmed the trial court’s rescinding the mineral deed after finding that the evidence was legally and factually sufficient to support the trial court’s implied findings.

Court Discusses Diversity of Citizenship Jurisdiction Where A Trustee Removed The Case

Posted in Items of Interest, Uncategorized

In Thunder Patch II, LLC v. JPMorgan Chase Bank, N.A., plaintiffs filed suit against a trustee in state court seeking a declaration regarding the enforceability of a mineral lease, and the trustee removed the case to federal court based on diversity of citizenship. No. 5-18-CV-00629-OLG-RBF, 2018 U.S. Dist. LEXIS 207696 (W.D. Tex. December 10, 2018). The plaintiff filed a motion to remand and argued that there was not complete diversity because the defendant trustee should also have the citizenship of the states where the trust’s beneficiaries reside.

The court held that when a trustee is sued in its capacity as a trustee, it is the citizenship of the trustee—not the trust’s beneficiaries—that matters for diversity of citizenship purposes. “This rule governs so long as the trustee has ‘real and substantial control’ over the trust’s assets.” Id. The court held that the trustee had control over the assets and cited to trust provisions that granted that power:

Here, Plaintiffs sued JPMorgan as the trustee for the Red Crest Trust; the Red Crest Trust is not a named defendant. Indeed, according to Thunder Patch and HOC, Texas law required them to file suit in this exact manner. Accordingly, the rule from Navarro controls here, as the Fifth Circuit has explained. It is apparent from the record and pleadings that JPMorgan has sufficiently real and substantial control over the trust’s assets, and it therefore is the entity that matters for purposes of diversity jurisdiction.

….

Because JPMorgan is the party with real and substantial control over the trust’s assets, it is JPMorgan’s citizenship that matters here. The Amended Notice of Removal sufficiently alleges complete diversity in good faith based on information and belief.

Id. The court denied the motion to remand and also denied the plaintiffs’ motion for leave to amend their complaint to add a non-diverse defendant.

Interesting Note: Due to a national bank’s ability to remove a case to federal court for diversity of citizenship jurisdiction, many plaintiffs are adding bank employees as defendants to defeat complete diversity and diversity jurisdiction. The bank then has the uphill battle to prove that the employee was fraudulently joined. This jurisdictional fight means that more bank employees will be joined in litigation where they formerly were not.

For example, in Medve v. JPMorgan Chase Bank, N.A., a plaintiff sued a bank and three of its employees for breaches of fiduciary duties arising from fiduciary accounts. No. H-15-2277, 2016 U.S. Dist. LEXIS 11961 (S.D. Tex. February 2, 2016).  The bank removed the case to federal court based on diversity jurisdiction: the plaintiff was a Texas resident and the bank was a resident of Ohio. The plaintiff filed a motion for remand, asserting that there was not complete diversity as he had sued three of the bank’s employees, who also lived in Texas, as defendants. The bank asserted that the employees were fraudulently joined, and therefore, did not count for diversity purposes.  The district court reviewed whether the plaintiff pled a reasonable basis for recovery as against the bank’s employees. The bank argued that “there is no basis in the law for finding that an employee of a trustee is directly liable for breach of trust.”  However, the court agreed with the plaintiff that there are three separate legal bases under Texas law for imposing liability on an employee who carries out the fiduciary functions of an entity: “(1) first, the employee owes a fiduciary duty directly as a subagent carrying out the employer’s fiduciary functions, (2) second, the employee is liable if he ‘participates’ in the employer’s breach of fiduciary duty, which the employee necessarily does if he is the one carrying out the breaches, and (3) third, the employee is personally liable for any tort he commits in the course of his employment, and breach of fiduciary duty is of course a tort.” Id. The court granted the motion to remand, finding it did not have diversity jurisdiction.

.