A common complaint of a minority shareholder is the denial of access to the corporation’s books and records. A shareholder enjoys the right to examine and copy certain records of the corporation in which the shareholder owns shares. That right exists by statute, see Tex. Bus. Orgs. Code § 21.218(b), and at common law, see Texas Infra—Red Radiant Co. v. Erwin, 397 S.W.2d 491, 493 (Tex. App.—Eastland 1965, writ ref’d n.r.e.). Section 21.218 provides:

On written demand stating a proper purpose, a holder of shares of a corporation for at least six months immediately preceding the holder’s demand, or a holder of at least five percent of all of the outstanding shares of a corporation, is entitled to examine and copy, at a reasonable time, the corporation’s books, records of account, minutes, and share transfer records relating to the stated purpose. The examination may be conducted in person or through an agent, accountant, or attorney.

Tex. Bus. Orgs. Code § 21.218(b). Therefore, before the shareholder is entitled to inspect books and records, it must provide a proper purpose for doing so in writing.

Often, a shareholder may want to inspect books and records for an improper purpose, i.e., to gain an advantage for its competing business. When there is a fact issue raised on proper purpose, the parties are entitled to a jury trial on that issue. For example, in In re Elusive Holdings, Inc., No. 03-21-00563-CV, 2021 Tex. App. LEXIS 10186 (Tex. App.—Austin December 30, 2021, orig. proceeding), a former COO of a company was fired for allegedly starting a competing business. He was still a shareholder and sent written demand to inspect records, which was denied. The COO filed suit to compel the inspection, and the defendant company stated that he did so for an improper purpose. The trial court granted the inspection, and the company filed a petition for writ of mandamus in the court of appeals against the trial court based on the fact that the company was denied a jury trial on the issue of whether the purpose was proper. The court of appeals granted the mandamus, stating:

Section 21.218(b) conditions the shareholder’s right on the shareholder’s stating a “proper purpose” for the demand to examine and copy. The resisting corporation enjoys the right to a jury trial on “proper purpose” under certain conditions, including that it has pleaded facts sufficient to raise an issue on “proper purpose”:

Although the right to a jury trial does not exist in all situations where mandamus is applicable, it does exist in the situation where a corporation, in resisting a stockholder’s attempt to inspect the   books and records, raises by its pleadings a fact issue over whether the stockholder has a proper purpose for wanting to see the books.

Id.; see also Accounting Search Consultants, Inc. v. Christensen, 678 S.W.2d 593, 595 (Tex. App.—Houston [14th Dist.] 1984, no writ) (citing Uvalde Rock Asphalt and noting resisting corporation’s “entitle[ment] to a jury’s determination of the contested factual issue of whether the shareholder had a proper purpose in demanding to inspect the books”); accord Guaranty Old Line Life Co. v. McCallum, 97 S.W.2d 966, 968 (Tex. App.—Dallas 1936, no writ).

We conclude from the allegations in the Second Amended  Petition and amended answer and the statements in the Response and attached declaration by the CEO that Elusive sufficiently raised a fact issue on “proper purpose” under Section 21.218(b). The Response and declaration assert more than simply hostility or mere conclusory statements without specific facts. Instead, the CEO named specific kinds of documents that White had allegedly taken and refused to return and the specific customers who were business opportunities for Elusive that White allegedly usurped for his new business, using the unreturned confidential information to land those deals. There were thus specific facts about White’s alleged bid for competitive advantage by seeking more of Elusive’s records. See Uvalde Rock Asphalt, 425 S.W.2d at 819-20; Dyer Custom Installation, 133 S.W.3d at 882-83. And the Response, with supporting declaration evidence, discussed White’s “improperly us[ing] information secured through a prior” download of records from Elusive and his alleged improper past purchases constituting “conduct detrimental to the company.” See Dyer Custom Installation, 133 S.W.3d at 882-83.

We stress that Elusive’s live petition, answer, and Response and attached declaration are not necessarily conclusive, at this procedural stage, about White’s lacking a “proper purpose.” They are instead—and they need only have been—sufficient  to raise a fact issue. See Uvalde Rock Asphalt, 425 S.W.2d at 820. After White filed his books-and-records mandamus petition, Elusive filed a jury demand, and there is no argument before us that the jury demand was otherwise ineffective. See generally Tex. R. Civ. P. 216. Elusive raised a fact issue on “proper purpose” and so is entitled to a jury trial on the issue. Because it denied Elusive this right, the trial court abused its discretion

Id.

In Goepp v. Comerica Bank & Trust, N.A., the settlors created inter vivos trusts and their three children were the remainder beneficiaries. No. 03-19-00485-CV, 2021 Tex. App. LEXIS 5461 (Tex. App.—Austin July 9, 2021, no pet. history). The three children became co-trustees and then had disputes. They entered into a family settlement agreement, and had a corporate trustee appointed successor trustee. The corporate trustee then filed a “First Amended Petition for Settlement of Trustee’s Final Account and Order of No Liability.” Id. One of the children objected “to the Trustee’s Petition, complaining about the timing of certain preferential distribution payments, about the calculations of interest on the distributions, and that he ‘has yet to be reimbursed the monies owed to him for out of pocket expenses of durable medical equipment purchased on behalf of Iraida.’” Id. After the trial court entered the relief requested by the corporate trustee, several of the children appealed.

One child argued that the statutory probate court did not have jurisdiction over the inter vivos trust dispute. The court of appeals disagreed:

Although subsection 115.001(a) of the Texas Property Code grants a district court “original and exclusive jurisdiction over all proceedings by or against a trustee and all proceedings concerning trusts,” that subsection is prefaced with “[e]xcept as provided by Subsection (d) of this section.” Tex. Prop. Code § 115.001(a). Subsection (d)(1) states, “The jurisdiction of the district court is exclusive except for jurisdiction conferred by law on: (1) a statutory probate court[.]”And jurisdiction is conferred by law on a statutory probate court by section 32.006 of the Texas Estates Code: “In a county in which there is a statutory probate court, the statutory probate court has jurisdiction of” both “an action by or against a trustee” and “an action involving an intervivos trust, testamentary trust, or charitable trust.” It is undisputed that the Goepp Trusts are intervivos trusts and that Comerica, as trustee, brought the underlying suit in a statutory probate court in Travis County. Thus, in light of section 32.006 of the Texas Estates Code, section 115.001 of the Texas Property Code did not deprive the probate court of subject matter jurisdiction over the underlying case.

Id. The court also rejected the child’s argument that the venue statute meant that the trial court did not have jurisdiction: “But ‘[v]enue pertains solely to where a suit may be brought and is a different question from whether the court has ‘jurisdiction of the property or thing in controversy,’’ and ‘unlike subject-matter jurisdiction . . . venue may be waived if not challenged in due order and on a timely basis.’” Id.

The court also rejected the child’s complaint about the “no liability” order for the corporate trustee because it was not preserved and was waived:

In her fifth and final issue, Heidi argues that the probate court “abus[ed] [its] discretion in issuing an order of ‘no liability’ . . . to extinguish [Heidi’s] claims for breach of trust and breach of fiduciary duty in violation of the law.” Heidi does not challenge the sufficiency of the evidence supporting the order; rather, she argues that the probate court “cannot rule that Comerica . . . has no liability or attempt to adjudicate this claim, which would have a preclusive effect on further litigation elsewhere.” Heidi’s argument is not exactly clear. To the extent Heidi is challenging the order on the jurisdictional grounds raised in her first four issues, we have overruled those issues. And if Heidi is raising a nonjurisdictional ground to challenge the issuance of the “no liability” order, she did not preserve error as to this issue by making this complaint to the probate court and obtaining a ruling on the complaint.

Id.

Interesting Note: Trustees often file suits and seek some form of discharge or no liability relief. The Texas Trust Code provides that a court has jurisdiction to “determine the powers, responsibilities, duties, and liability of a trustee” and also to “require an accounting by a trustee, review trustee fees, and settle interim or final accounts.” Tex. Prop. Code 115.001(a). The Texas Trust Code also authorizes the court to accept a trustee’s resignation and discharge the trustee from the trust on the terms and conditions necessary to protect the rights of other interested parties. Texas Trust Code 113.081(b).

Due to this right, when a trustee resigns or has some other significant event occur, it is standard practice to request that the beneficiaries provide the trustee with a private release. If the beneficiary refuses, the trustee has the right to file an accounting and request a discharge, which would normally be paid for by the trust. So, the beneficiary is encouraged to sign the private release to save on expense. There is nothing particularly unfair about this where there is a corporate trustee that has produced regular statements and the beneficiary has had the opportunity to raise a complaint if he or she has one.

There is a difference between an approval of accounting and discharge and a finding of no-liability. Obtaining court approval of a final accounting alone is not or should not be an adjudication of claims by the beneficiaries. Texas State Bank v. Amaro, 87 S.W. 3d 538 (Tex. 2002). In Amaro, the Texas Supreme Court stated:

[T]he Trust Code does not contemplate that an accounting will settle the trustee’s tort liability. As noted, section 113.152 establishes the contents of an accounting and requires the trustee to list trust property, transactions, property, cash, and all known liabilities owed by the trust. It simply does not reach the trustee’s tort liability. This conclusion is supported by the Trust Code’s structure, which includes Subchapter E “Accounting by Trustee” within Chapter 113, entitled “Administration.” In contrast, Chapter 114 concerns “liabilities, rights, and remedies of trustees,   beneficiaries, and third persons.” Thus, the final accounting “forms the basis for a winding up of the trust to ascertain the balance due to the beneficiary.” Supra, 74 S.W.3d at 397. As TSB states in its brief, “TSB’s requested relief in essence provided for determination of what amounts should be paid to Vargas by TSB and the closing of the trust and issues relating thereto.” Determining TSB’s tort liability is not necessary to the closing of the trust or ascertaining the trust balance due the beneficiary, and, as we held above, was not within the scope of TSB’s requested relief. Accordingly, because approving the accounting, including the distributions, costs, and expenses, was not an adjudication of TSB’s tort liabilities, Vargas was not entitled to a jury or to forty-five days notice of the hearing.

Id. See also  Riley v. Alpert, No. 01-11-00430-CV,2012 Tex. App. LEXIS 6049, 2012 WL 3042991(Tex. App. July 26, 2012, no pet.); Bank of Texas, N.A. Trustee v. Mexia, 135 S.W.3d 356, 362 (Tex. App.—Dallas 2004, pet. denied)(approval of an accounting is an administrative function, not an adjudication of trustee’s tort liability).

So, the trustee must plead for a release and no tort liability finding, and the court must conduct an evidentiary hearing regarding the trustee’s actions. The trustee can do so under Section 115.001(a) and also via the Texas Uniform Declaratory Judgment Act in the Texas Civil Practice and Remedies Code Chapter 37. The case discussed above raises an important point, if a court grants a no-liability finding, and no one preserves any error regarding that finding, then it will be res judicata and enforceable. Cable Walt Trust Co. Inc. v. Palmer, 859 S.W.2d 475, 480-81 (Tex. App.—San Antonio 1993, writ denied).

In Quintanilla v. De La Rosa, a defendant appealed the trial court’s issuance of a temporary injunction enjoining her from withdrawing money from a bank account that belonged to a decedent.  No. 13-20-00575-CV, 2021 Tex. App. LEXIS 5849 (Tex. App.—Corpus Christi July 22, 2021, no pet. history). The plaintiff, the daughter of the decedent, sued the defendant, claiming that the defendant being listed as the beneficiary of the account was an accident and was not intentional. The court of appeals reversed the injunction because it failed to state reasons for its issuance and failed to set a trial date:

The rules of civil procedure require every order granting a temporary injunction to: (1) specifically state the reasons for its issuance and state, with reasonable detail and not by reference to the complaint or other document, the acts sought to be restrained; and (2) contain a trial setting date. The procedural requirements of this rule are mandatory. A temporary injunction that does not meet these requirements is “subject to being declared void and dissolved.” … Here, the temporary injunction does not contain any statement explaining the reasons for its issuance, and it does not set a trial date. Therefore, the temporary injunction is void.

Id.

In R.P. Small Corp. v. Land Dep’t, Inc., the plaintiff sued the defendant for breaching fiduciary duties due to a confidential relationship regarding oil and gas development. No. H-20-14902021 U.S. Dist. LEXIS 133695 (S. D. Tex. July 19, 2021). The plaintiff alleged that the defendant took advantage of his relationship, lied about his qualifications and experience, and overbilled and had self-dealing transactions. The defendant filed a motion to dismiss based on the economic loss rule, arguing that the plaintiff’s claims all arose from oral and written contracts. The federal district court denied the motion to dismiss. The court first discussed the economic loss rule:

Under Texas law, the “economic loss rule generally precludes recovery in tort for economic losses resulting from a party’s failure to perform a contract when the harm consists only of the economic loss of a contractual expectancy.” In determining if the economic loss rule applies, Texas courts look to both the “source of the alleged duty and the nature of the claimed injury.” “[A] party may elect a recovery in tort if the duty breached stands independent from the contractual undertaking, and the alleged damages are not solely the result of a bargained-for contractual benefit.” This is because “‘[t]ort obligations are in general obligations that are imposed by law—apart from and independent of promises made and therefore apart from the manifested intention of the parties—to avoid injury to others.'”

Id. The court then noted that the economic loss rule does not apply to breaches of fiduciary duty that arose independent of a contract. “Under Texas common law, an ‘informal fiduciary duty may arise from a moral, social, domestic or purely personal relationship of trust and confidence, generally called a confidential relationship.’” Id. The court then held that there were sufficient pleadings to support an independent fiduciary duty based on a confidential relationship:

Here, as the Land Defendants acknowledge, RPS alleges a source of duty separate from any alleged written or oral agreement—the longstanding relationship between Small and Mann. RPS describes the breach of fiduciary duty as invoicing RPS two and three times for the same work, entering into and supervising the Five Star MSA and placing his own interests above RPS’s, concealing information from RPS, failing to require his companies to follow the contractual requirements, diverting funds for individual purposes, commingling funds, and self-dealing. Dkt. 67 (fourth amended complaint). RPS states that these breaches resulted in excessive costs to RPS, lost business opportunities, and damage to RPS’s reputation and goodwill in the industry. While certainly some of the allegations relate to the alleged oral agreement between RPS and Mann, and some are tied to the written agreements between the companies, the allegations of a duty independent of the contracts and damages to RPS’s reputation and goodwill resulting from Mann’s alleged breach of his fiduciary duties to his long-time friend and business associate are sufficient at the motion to dismiss stage to state a plausible claim for relief that is not barred by the economic loss rule.

Id.

In Tristani v. Optionsellers, plaintiffs sued defendants for “reckless mismanagement of Plaintiffs’ investment accounts.” No. 6:19-cv-585-JDK, 2021 U.S. Dist. LEXIS 100020 (E.D. Tex. April 5, 2021). To formalize the relationship, each plaintiff signed multiple agreements. Among other things, the defendants filed a motion to dismiss because “Texas’s economic loss rule bars Plaintiffs’ claims for negligent misrepresentation, negligence, negligent supervision, and breach of fiduciary duty.” The court granted the motion as to the negligent misrepresentation, negligence, and negligent supervision claims, but denied it as to the breach of fiduciary duty claims. Regarding the economic loss rule, the court stated:

Under Texas’s economic loss rule, a plaintiff who is a party to a contract cannot sue under tort unless (1) the defendant owed plaintiff a common law—not contractual—duty and (2) the plaintiff suffered an injury independent of the contract. “In operation, the rule restricts contracting parties to contractual remedies for those economic losses associated with the relationship, even when the breach might reasonably be viewed as a consequence of a contracting party’s negligence.” In deciding whether the economic loss rule applies, a court should “examine the source of the defendant’s duty and the nature of the claimed injury.” When “[p]laintiffs fail to allege facts that would impose a duty upon [d]efendants outside of the alleged contracts[,]” the economic loss rule bars the claim and it “should be dismissed as not plausible.” Further, the Court must determine “whether the injury is to the subject of the contract itself.” “Texas has recognized that, where the damages claimed are (as here) economic loss to the subject of the contract itself, the remedy ordinarily is one of contract alone.”

Id. (internal citations omitted). The court held that the economic loss rule barred the negligent misrepresentation claim:

The alleged statements by Defendants relate directly to the parties’ contracts, wherein the parties repeatedly affirmed that Defendants’ services were not assured to result in profit and that Plaintiffs “discussed the risks of futures and options trading” with the Defendants and understood those risks. To the extent Defendants’ trading strategy varied from the “discussed [] risks,” Plaintiffs’ action arises, if at all, under contract.

Id. The court also held that the economic loss rule barred the plaintiff’s negligence claim:

The Complaint expressly references Plaintiffs’ accounts and makes clear that Defendants assumed these duties when they undertook to manage the accounts pursuant to the parties’ agreements. The alleged duties, then, arise under the parties’ contracts, and the remedy for breach sounds in contract.

Id. Finally, the court held that the economic loss rule also barred the negligent supervision claim: “Like Plaintiffs’ negligence claim, this claim is barred by the economic loss rule because both the source of Defendants’ duty and the nature of Plaintiffs’ injury are contractual.” Id.

However, the court held that the economic loss rule did not bar the plaintiffs’ breach of fiduciary duty claim:

Defendants assert, without analysis or support, that the economic loss rule also bars Plaintiffs’ breach-of-fiduciary-duty claim. But “the economic loss rule is inapplicable, and does not bar [a] breach of fiduciary duty claim” when a contract “creates a special relationship that creates fiduciary duties by operation of law.” Here, Plaintiffs have alleged a fiduciary duty created by the parties’ contract, and Defendants have not identified any other source of a fiduciary duty. Accordingly, the Court DENIES Defendants’ motion to dismiss Plaintiffs’ fiduciary duty claim

Id. (internal citations omitted).

David F. Johnson presented his paper “Litigating Self-Interested Transactions Involving Fiduciaries” to the State Bar of Texas’s Fiduciary Litigation Course on December 2-3, 2021, in San Antonio, Texas. This presentation discussed a fiduciary’s duty of loyalty, the right to compensation and other benefits, the concept of self-interested transactions, the presumption of unfairness that attaches to self-interested transactions, the factors that fiduciaries must meet to prove the fairness, and procedural issues (in summary judgment proceedings and at trial) in litigating the presumption. David was also the course director for the Fiduciary Litigation Course,  which had great attendance.

View Paper

View PowerPoint

David F. Johnson presented “Trust Issues In Divorce Proceedings” on November 17, 2021. This presentation covered trust issues that arise in divorce disputes, such as spouses creating an irrevocable trust, fraud claims to void a trust, conflict of interest issues raised by the same attorney drafting both spouse’s estate/trust documents, characterization of trust assets and distributions as separate or community, settlor standing to complain about trust administration issues, trust construction issues, adoption-in and adoption-out issues, spouse/settlor liability for controlling a trust, capacity issues raised by spouses being involved as trustees and director/officer of a closely held business, spouses’ co-trustee management issues, the new Texas Trust Code provisions dealing with the effect of dissolution of marriage on certain transfers in trusts.

View PowerPoint

David F. Johnson presented “Trustee’s Obligation to Inform Beneficiaries: Avoiding Breach of Fiduciary Duty Claims” to a national audience on November 16, 2021, via Strafford publishing with his co-presenter Scott E. Rahn, founder of RMO LLP. A critical obligation for trustees of irrevocable trusts is the duty to inform beneficiaries of the trust’s existence and activities. Trustees often face claims of breach of fiduciary duty for failure to comply with these responsibilities. Inconsistencies between the trust document and the applicable state law frequently complicate compliance. This presentation addressed a trust’s ability to expand or narrow the duty to disclose, statutory provisions dealing with the duty to disclose, demands for accountings, common law duty to disclose, disclosure duties in litigation, quiet trusts, ramifications for non-disclosure, and methods to avoid breach claims.

View PowerPoint

In In the Estate of Johnson, an applicant to be an independent administrator appealed a court’s decision to not appoint him due to his being unsuitable. No. 02-20-00133-CV, 2021 Tex. App. LEXIS 7138 (Tex. App.—Fort Worth August 26, 2021, no pet. history). The court of appeals first discussed the standard of review of orders finding a person unsuitable:

A probate court’s order finding a person is unsuitable to serve as executor is reviewed under an abuse-of-discretion standard. When applying an abuse-of-discretion standard, the normal sufficiency-of-the-evidence review is part of the abuse-of-discretion review and not an independent ground for reversal. The probate court abuses its discretion if its actions are unreasonable or arbitrary or without reference to any guiding rules or principles. “Under an abuse of discretion standard of review, we must make an independent inquiry of the entire record to determine if the trial court abused its discretion and are not limited to reviewing the sufficiency of the evidence to support the findings of fact made.”

Continue Reading Court Affirms Decision That Executor Applicant Was Unsuitable For That Position

In In re Estate of Clark, a trial court entered an order allowing a family allowance for the decedent’s wife. No. 02-20-00211-CV, 2021 Tex. App. LEXIS 5685 (Tex. App.—Fort Worth July 15, 2021, no pet. history). After the wife was removed as the administrator of the estate, the court entered another order ending the family allowance. Continue Reading Court’s Order Ending Family Allowance To Decedent’s Wife Was Reversed Due To A Lack Of Notice To The Wife

David will cover recent statutory changes and case law updates. He will discuss extending the rule against perpetuities, de jure versus de facto status as trustee, modifications to trusts, trust construction, temporary injunctions against trustees, trustee authority to sell real estate, trust management of closely held businesses, co-trustee management, exculpatory clauses, acceptance-of-the-benefits doctrine, will reformation and more.

Date: Tuesday, December 14, 2021

Time: 10:00 – 11:00 a.m. Central Time
Cost: Complimentary
Speaker: David F. Johnson

Continuing Education Credit Information:
This course was approved by the State Bar of Texas Committee on MCLE in the amount of 1 credit hour. This course has also been approved for 1.25 CTFA credit by the American Bankers Association, attendees can self report.

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

Register

Webinar instructions will be e-mailed prior to the webinar