Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

Court Denied Mandamus Relief To Review Order Denying Trustee’s Request To Pay His Attorney’s Fees In The Interim

Posted in Cases Decided, Texas Court of Appeals

In In re Cousins, a trustee filed a mandamus proceeding to challenge a trial court’s order denying his motion to pay his attorney’s fees from the trust. No. 12-18-00104-CV, 2018 Tex. App. LEXIS 3930 (Tex. App.—Tyler May 31, 2018, original proceeding). A co-trustee sued the other co-trustee for a number of causes of action related to alleged breaches of fiduciary duty. The plaintiff filed a motion for court ordered payment of his legal fees and litigation expenses from the trust based on Texas Property Code Section 114.063. At the hearing, the plaintiff argued that the statute and the trust agreement authorized reimbursement for his attorney’s fees: “We’re not asking you to award us attorney fees we’re asking for access to the trust to pay our ongoing legal expenses.” Id. He incurred fees totaled just over $650,000 and argued that “[i]t’s not our burden today when seeking interim attorney’s fees to do any proof to show what’s reasonable and necessary at this stage in the game.” Id. The trial court denied the request, and the plaintiff filed a petition for writ of mandamus seeking an order from the court of appeals to order the trial court to grant the motion.

The plaintiff argued that the trial court’s order denied him “this statutory right to ongoing reimbursement.” Id. The court of appeals stated:

Section 114.063 provides, in pertinent part, that a trustee may discharge or reimburse himself from trust principal or income or partly from both for expenses incurred while administering or protecting the trust or because of the trustee’s holding or owning any of the trust property. Tex. Prop. Code Ann. § 114.063(a)(2) (West 2014). The trustee has a lien against trust property to secure reimbursement. Id. § 114.063(b). In any proceeding under the Texas Trust Code, “the court may make such award of costs and reasonable and necessary attorney’s fees as may seem equitable and just.” Id. § 114.064(a) (West 2014).

Id. According to the plaintiff, Section 114.063 applied to reimbursement during the lawsuit and Section 114.064, but not Section 114.063, applies at the end of the litigation. He argued that absent mandamus review, Section 114.063’s application evaded appellate review and he would be forced to pursue litigation with his personal funds, which was “particularly egregious here when the trial court has already found a breach of fiduciary duty and thus validated some of [his] claims.” Id.

Without ruling on the underlying merits of the argument, the court of appeals disagreed that mandamus relief was appropriate. The court stated:

According to Cousins, “[p]roceeding forward with the litigation without mandamus relief jeopardizes Cousins’s ability to diligently pursue his breach-of-fiduciary-duty lawsuit against [James], as Cousins is obligated by statute to do.” However, the denial of Cousins’ motion does not deprive him of a reasonable opportunity to develop the merits of his case, such that the proceedings would be a waste of judicial resources. An example of one such case arises “when a trial court imposes discovery sanctions which have the effect of precluding a decision on the merits of a party’s claims—such as by striking pleadings, dismissing an action, or rendering default judgment—a party’s remedy by eventual appeal is inadequate, unless the sanctions are imposed simultaneously with the rendition of a final, appealable judgment.” Walker v. Packer, 827 S.W.2d 833, 843 (Tex. 1992).

Id. The court of appeals held that the trial court’s denial of the motion is not the type of ruling that has the effect of precluding a decision on the merits. “Cousins may still pursue his claims against James, including a claim for reimbursement under Section 114.063, and the eventual outcome has not been pre-determined by Respondent’s ruling.” Id. The court also held that mandamus review was not so essential to give needed and helpful direction regarding Section 114.063 that would otherwise prove elusive in an appeal from a final judgment. The court stated:

Section 114.063 was added in 1983 and amended in 1993, and few appellate courts have cited to or substantially analyzed that section. See Act of May 27, 1983, 68th Leg., R.S., ch. 567, art. 2, § 2, 1983 Tex. Gen. Laws 3269, 3376; see also Act of May 28, 1993, 73rd Leg., R.S., ch. 846, § 31, 1993 Tex. Gen. Laws. 3337, 3350. Additionally, the Texas Trust Code expressly authorizes a court to “make such award of costs and reasonable and necessary attorney’s fees as may seem equitable and just.” Tex. Prop. Code Ann. § 114.064(a). We see no reason why a trial court’s authority to award costs and attorney’s fees would not encompass claims to reimbursement under Section 114.063. Thus, although Cousins’ petition may present a question of first impression, we cannot conclude that the petition involves a legal issue that is likely to recur such that mandamus review, as opposed to a direct appeal from a final judgment, is necessary. Should Cousins find the verdict on his reimbursement claim to be unsatisfactory, he may appeal from the final judgment on that claim and nothing prevents him from relying on Section 114.063 in a direct appeal.


The plaintiff also argued that making him utilize personal funds to pursue litigation made the proceeding more costly and inconvenient. The court held that this fact, standing alone, did not warrant mandamus review. “This is particularly true given that, as previously discussed, the denial does not preclude Cousins from presenting a claim for reimbursement at trial and, consequently, Respondent’s failure to grant the motion does not result in an irreversible waste of resources.” Id. The court of appeals denied the petition for writ of mandamus, concluding that an ordinary appeal of the order denying the motion served as a plain, adequate, and complete remedy.

Fiduciary Duties Meet Jerry Springer: Court Holds That Participants To An Extra-Marital Affair Do Not Owe Each Other Fiduciary Duties

Posted in Cases Decided, Texas Court of Appeals

In Markl v. Leake, a husband started a long-time extramarital relationship with his girlfriend in 2004. No. 05-17-00174-CV, 2018 Tex. App. LEXIS 3384 (Tex. App.—Dallas May 14, 2018, no pet. history). The husband gave her money, placed her on the payroll of his business, provided her a credit card, and maintained her vehicle and real property. The husband invested approximately $50,000 in his girlfriend’s real properties. The relationship ended when the girlfriend caused the husband to be indicted for four felony charges related to an “altercation” and obtained a protective order prohibiting his entry upon her real property. Apparently, the giflfriend had initiated a relationship with the husband’s nephew, which upset the husband. Two months after the breakup, the husband and his wife sued the girlfriend for breach of fiduciary duty, arguing that her breach deprived them of the community funds invested in the property. They also alleged fraud, conversion, and promissory estoppel. The trial court granted the girlfriend’s motion for directed verdict as to the breach of fiduciary duty claim, and the jury found against the husband and wife on their other claims. They appealed the trial court’s directed verdict on their breach of fiduciary duty claim.

In the appellate court, the husband solely relied on a theory that his confidential relationship with his girlfriend created fiduciary duties. The court of appeals stated:

Informal relationships, termed “confidential relationships,” may arise “where one person trusts in and relies upon another, whether the relation is a moral, social, domestic, or merely personal one.” A confidential relationship exists in those cases in which influence has been acquired and abused and confidence has been extended and betrayed. Whether a fiduciary relationship exists depends on the circumstances and is “determined from the actualities of the relationship between the parties.” The mere fact that one party to a relationship subjectively trusts the other does not indicate the existence of a fiduciary relationship…

But a fiduciary relationship is an extraordinary one and will not be created lightly. Not every relationship involving a high degree of trust and confidence rises to the stature of a fiduciary relationship. The law simply does not protect just any relationship between people:

Fiduciary law protects only those important social and economic interactions of high trust and confidence that create an implicit dependency and peculiar vulnerability of the beneficiary to the fiduciary. While placing ordinary trust and confidence in others may create contractual or tortious obligations, only high trust and confidence reposed within the context of the types of important social and economic relations contemplated above will give rise to fiduciary obligations. . . . Relationships, not individuals, are the prime concern of fiduciary law.

The fiduciary character of a relationship is determined by looking at both the degree of dependence and vulnerability that exists within it, and the value of the interaction to the society at large. Although we recognize the existence of a confidential relationship is ordinarily a question of fact, when the issue is one of no evidence, it becomes a question of law.

In this case, the Markls want to use fiduciary law to recoup money John spent on making repairs to the property of a woman with whom he had a ten-year clandestine relationship. The Markls argue there is no Texas case precluding as a matter of law an extramarital affair from rising to the level of a fiduciary relationship. At the same time, they direct us to no cases where such a relationship has been recognized as fiduciary in nature.

Id. (internal citations omitted). The court then discussed a case that held that having an illicit relationship does not create a fiduciary relationship. Id. (citing In re R.O., No. 03-04-00506-CV, 2005 Tex. App. LEXIS 2990, 2005 WL 910231 (Tex. App.—Austin Apr. 21, 2005, no pet.)). The court also cited to one of its prior opinions holding that a long term girlfriend/boyfriend relationship does not create a fiduciary relationship. Id. (citing  Smith v. Deneve, 285 S.W.3d 904, 911 (Tex. App.—Dallas 2009, no pet.)). The court held that no evidence showed  that the husband was accustomed to being guided by the girlfriend’s judgment or advice or that she ever gave him financial advice or assumed the role of a fiduciary toward him. The court noted:

Even though Ethel testified John could trust her and believe what she told him, that evidence does not elevate the status of their relationship into a fiduciary one. Moreover, as in R.O., although John argues their relationship was “based upon trust,” he described the stalemate dating “clear back to early in the relationship.” If John wanted out of the relationship, Ethel would tell his wife and he would lose both women; if Ethel wanted out of the relationship, she had to “settle up on the property.” Thus, the evidence shows each was acting in his or her own interest. Whether John and Ethel’s relationship contained aspects similar to a marriage is unavailing because, in this case, John was married—to Debra. Recognizing John and Ethel’s relationship as fiduciary in character, under the circumstances here, would make light of the very notion of the concepts of trust and confidence. Considering the evidence in the light most favorable to the Markls, we conclude this case does not present any evidence of justifiable trust and confidence as will create an informal fiduciary relationship. We overrule the sole issue.

Id. The court affirmed the trial court’s directed verdict order for the girlfriend.

Don’t Try It Yourself, Hire A Lawyer! Court Dismisses Pro Se Party’s Appeal Due To Procedural Errors

Posted in Cases Decided, Texas Court of Appeals

In In re Newman, a woman appealed a trial court’s order regarding admitting her husband’s will and the conduct of her step-son as executor. No. 04-17-00209-CV, 2018 Tex. App. LEXIS 4249 (Tex. App.—San Antonio June 13, 2018, no pet. history). She made the mistake of representing herself in the appeal. The court of appeals dismissed her appeal due to her failure to follow appellate procedural rules:

Leta was required to file a brief that “contain[s] a clear and concise argument for the contentions made, with appropriate citations to authorities and to the record.” See Tex. R. App. P. 38.1(i); ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 880 (Tex. 2010). Construing her brief reasonably yet liberally, we nevertheless necessarily conclude that she did not.

We recognize that Leta is not an attorney and is representing herself in this appeal. However, except in some circumstances not applicable here, a pro se litigant must comply with the Texas Rules of Appellate Procedure. “There cannot be two sets of procedural rules, one for litigants with counsel and the other for litigants representing themselves. Litigants who represent themselves must comply with the applicable procedural rules, or else they would be given an unfair advantage over litigants represented by counsel.” [Her] brief was required to identify the trial court’s alleged errors and present a “clear and concise argument for the contentions made, with appropriate citations to authorities and to the record.” Because her brief does not provide appropriate citations to the record and does not provide clear and concise arguments to support the issues she attempts to raise, her brief does not present anything for appellate review.



A. A Fractured Texas Supreme Court Holds That There Is No Tortious Interference With Inheritance Claim In Texas

Posted in Cases Decided, Texas Supreme Court

In Archer v. Anderson, Jack, who had no children, executed a will leaving his estate to his brother and his brother’s children, the Archers. No. 16-0256, 2018 Tex. LEXIS 611 (Tex. June 22, 2018). Later, Jack had a stroke and was mentally incompetent. Jack’s friend Anderson, an attorney, drafted durable and medical powers of attorney appointing himself as Jack’s attorney-in-fact. Jack signed the documents, but his medical records showed that the day he signed them he was delusional and appeared confused. Anderson also tried to have Jack change his estate plan. Anderson proposed that Jack sell his ranch and transfer the proceeds into a charitable remainder trust with the 12 charities as beneficiaries so that Jack’s entire estate would go to the charities and the Archers would be disinherited. At Anderson’s request, Jack sign new wills and trust documents, all disinheriting the Archers and leaving Jack’s entire estate to the charities. With Jack still alive, the Archers sued for a declaratory judgment that Jack had lacked the mental capacity to execute the wills and trust documents. The charities were defendants, and the parties settled with the Archers agreeing to give the charities Jack’s coin collection and pay their attorney fees, which totaled $588,054.

After Jack’s death, the Archers sued Anderson’s estate, who had also died, for intentional interference with their inheritance. Anderson never profited personally from his efforts, and the Archers received all that Jack left them in his earlier will, but they claimed the $588,054 they gave the charities in settlement, plus $2,865,928 in attorney fees and litigation expenses they incurred avoiding Jack’s post-1991 wills and trusts. The jury found in favor of the Archers, and the trial court rendered judgment for them for well over $2 million dollars. Anderson’s estate appealed. The court of appeals reversed and rendered for Anderson’s estate, holding that there was no tortious interference with inheritance claim in Texas.

The Texas Supreme Court affirmed the court of appeals’s holding. The Court noted that there was a split in the courts of appeals regarding whether such a claim existed and noted its recent opinion in Kinsel v. Lindsey, 526 S.W.3d 411, 423 (Tex. 2017), where the Court held that the it and the Texas Legislature had never expressly recognized such a claim. The Court stated:

A tort of intentional interference with inheritance is needed, it is argued, as a gap-filler when probate and other law do not provide an adequate remedy. Texas law thoroughly governs inheritance through probate and restitution and, as we noted in Kinsel, provides remedies for unfairness, such as a constructive trust. If these remedies are inadequate, it is because of legislative choice or inaction, and filling them is work better suited for further legislation than judicial adventurism.

Id. at *17-18. Ultimately, the Court held that a new tort is not needed in Texas even if other remedies would not be complete. The Court concluded: “The fundamental question is why tort law should provide a remedy in disregard of the limits of statutory probate law. We think here it should not. The tort of intentional interference with inheritance is not recognized in Texas. The decisions of the courts of appeals to the contrary are overruled.” Id. at *25-26.

The majority of the court affirmed the court of appeals and held that there was never going to be a claim for tortious interference with inheritance, at least not until the Texas Legislature created such a cause of action. There were four justices of the nine member Court, however, that only agreed in the result in this case. They would hold that the Court should not have held that such a claim could never be recognized in Texas. The dissenting justices stated:

The Court concludes that the Archers had an adequate remedy because they ultimately received their inheritance, albeit minus attorney’s fees and a settlement with the charities. But rather than leaving open the issue of whether to recognize the cause of action as we did in Kinsel, the Court changes course and closes that door. It does so even though that door might, in some instances, provide the only avenue to relief for parties who suffer loss at the hands of actors who intentionally—not merely negligently—caused the loss.

The Court says that a judicially recognized gap-filler cause of action is unnecessary because statutory probate law provides adequate remedies. My overriding concern is that neither we nor the courts of appeals have considered a sufficient spectrum of factual circumstances for us to confidently conclude that foreclosing the cause of action will not leave parties without any avenue of relief against those whose actions intentionally and wrongfully divest an elderly person with diminished capacity of assets and thus interfere with that person’s last-expressed true intentions about the disposition of his or her property.

The Court recognizes that a constructive trust can provide a remedy for unfairness. But the typical remedy of imposing a constructive trust resulting from a successful restitution action is not always available or may not provide an adequate remedy, as this Court has recognized. While we have stated that “[t]he specific instances in which equity impresses a constructive trust are numberless,” we have also acknowledged that “the reach of a constructive trust is not unlimited.” The imposition of a constructive trust generally requires the requesting party to establish (1) a breach of a special trust or fiduciary relationship or actual or constructive fraud, (2) unjust enrichment of the wrongdoer, and (3) an identifiable res that can be traced back to the original property. As applied in the inheritance context, the would-be beneficiary must trace the fraudulently obtained property to funds received by the wrongdoer. However, if the property has been dissipated or traceable funds have been depleted, there will be nothing remaining upon which to impose a constructive trust. A judgment obtained from a tort action, on the other hand, would provide the expectant beneficiary with at least potential redress.

Id. *42-44. In the end, the majority of the Court abdicated its role as a common-law court and placed all responsibility on the Legislature to create causes of action. The concurring and dissenting justices would have held that a tortious interference with inheritance rights claim may be permissible under the right circumstances (where a constructive trust claim is not a remedy because the ill-gotten gains have been dissipated) and would not have closed the door at this time.

So, at this point, plaintiffs will have to rely on other causes of action to vindicate their rights when the elderly and infirm are taken advantage of by bad people. It appears that the Court believes that a constructive trust is the principal claim in this situation. For example, in Kinsel v. Lindsey, 526 S.W.3d 411, 423 (Tex. 2017), family members and an attorney convinced an elderly woman, who did not have mental capacity, to execute new estate planning documents and sell a ranch. The ranch would have gone to other family members, but since the ranch was sold, its proceeds (cash) went to the bad individuals. The Court held that a constructive trust, based on a mental incapacity finding, provided an adequate remedy and there was no need to recognize the tort of tortious interference with inheritance rights. Id.

Regarding a constructive trust, the defendants had several arguments for why the trial court abused its discretion in creating a constructive trust in this case. Id. at *31-35. The Court disagreed and held that there does not have to be a breach of a fiduciary duty by the defendants owed to the plaintiffs. Id. There was no duty owed by the defendants to the plaintiff. Id. Citing to an earlier opinion, the Court held: “It is true that we recently recognized that a ‘breach of a special trust or fiduciary relationship or actual or constructive fraud’ is ‘generally’ necessary to support a constructive trust. But in that same case we reaffirmed our statement in Pope that ‘[t]he specific instances in which equity impresses a constructive trust are numberless—as numberless as the modes by which property may be obtained through bad faith and unconscientious acts.’” Id. Even though the defendants did not breach any duty owed to the plaintiffs, the Court concluded that the trial court acted within its discretion in imposing a constructive trust: “We hold the mental-incapacity finding, coupled with the undue-influence finding, provided a more than adequate basis for the trial court to impose a constructive trust.” Id.

But, the issue remains, what if the ranch proceeds had been dissipated? How would the plaintiffs recover what was due to them?

The Court’s opinion in Archer is good news for parties who regularly deal with the elderly and infirm. Trusted advisors have been at risk for tortious interference claims. Attorneys that draft wills and trusts, financial advisors, financial institutions, broker/dealers, insurance agents, accountants, and others who provide advice have been at risk for tortious interference claims. For example, the Archers sued Anderson, who was an attorney. The Kinsels sued Jackson Walker, who were attorneys, for tortious interference. The risk of such a claim is now gone. Of course, creative plaintiffs may think of other claims and theories to bring trusted advisors into litigation against the “bad guy” that influenced an elderly or infirm person. Claims such as conspiracy, aiding and abetting breach of fiduciary duty, and knowing participation in breach of fiduciary duty, may be raised under the correct circumstances.

Court Held That Real Estate Broker Did Not Owe Fiduciary Duties To Other Parties In A Transaction

Posted in Cases Decided, Texas Court of Appeals

In Van Duren v. Chife, the buyers of a home sued the sellers as well as the sellers’ real estate broker and his company regarding water penetration that damaged the home. No. 01-17-00607-CV, 2018 Tex. App. LEXIS 3494 (Tex. App.—Houston [1st Dist.] May 17, 2018, no pet. history). The trial court dismissed the buyers’ breach of fiduciary duty claim against the sellers’ agent. The court of appeals affirmed on that issue and held:

The existence of a fiduciary duty is an element of a claim for breach of fiduciary duty. First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d 214, 220 (Tex. 2017). Real estate brokers owe a fiduciary duty to their clients. See Birnbaum, 2015 Tex. App. LEXIS 8775, 2015 WL 4967057, at *10 (citing 22 Tex. Admin. Code § 531.1). While brokers also must treat other parties to a transaction fairly, this obligation does not make the broker a fiduciary of these other parties whom he does not represent. See Kubinsky v. Van Zandt Realtors, 811 S.W.2d 711, 715 (Tex. App.—Fort Worth 1991, writ denied) (realtors’ fiduciary duties ran to sellers they represented in transaction). The evidence establishes that Mathews was the Chifes’ real estate broker with respect to the Royal Lakes home sale and that another broker, Lofton, represented the Van Durens. The Royal Lakes contract identifies Mathews and Lofton as the brokers for the sellers and buyers respectively. Gesare testified that Mathews represented her and her husband in connection with the sale of the Royal Lakes home. Sonya likewise testified that Mathews represented the Chifes in this transaction. There is no contrary evidence in the record. Mathews met his burden to conclusively negate the existence of a fiduciary duty, a necessary element of the Van Durens’ claim for breach of fiduciary duty against him with respect to the Royal Lakes home sale. We therefore hold that the trial court properly granted summary judgment in favor of Mathews and his company on this claim.


Court Rejects Claim That Ex-Spouses Owed Each Other Fiduciary Duties

Posted in Cases Decided, Texas Court of Appeals

In Robins v. Robins, an ex-wife sued her ex-husband for breaching fiduciary duties regarding the sale of their former marital residence. No. 02-16-00285-CV, 2018 Tex. App. LEXIS 3534 (Tex. App.—Fort Worth May 17, 2018). The trial court entered a judgment finding that the ex-husband breached a fiduciary duty to his former wife and awarded her all the net proceeds from the sale and awarded her attorney’s fees. The ex-husband appealed, and the court of appeals reversed and rendered. The court stated:

Generally, to prove a claim for breach of fiduciary duty, a plaintiff must prove that the defendant had a fiduciary duty to the plaintiff, breached it, and thereby caused damages to the plaintiff. First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d 214, 220 (Tex. 2017). While spouses owe fiduciary duties to one another, ex-spouses generally do not. See Solares v. Solares, 232 S.W.3d 873, 881 (Tex. App.—Dallas 2007, no pet.) (holding that “in a contested divorce where each spouse is independently represented by counsel, the fiduciary relationship terminates”); In re Marriage of Notash, 118 S.W.3d 868, 872 (Tex. App.—Texarkana 2003, no pet.) (noting that any fiduciary duty between spouses terminates upon divorce); Bass v. Bass, 790 S.W.2d 113, 119 (Tex. App.—Fort Worth 1990, no writ) (“Although marriage may bring about a fiduciary relationship, such a relationship clearly does not continue when a husband and wife hire numerous independent professional counsel to represent them respectively in a contested divorce proceeding.”) (citation omitted). Jerry therefore had no formal fiduciary duty to Rhonda as a matter of law. Rhonda contends that “[a] moral and social relationship was created when [she and Jerry] decided post-divorce not to sell the home and [to] maintain it while the children finished high school” and that “[a] fiduciary duty existed for each party to not harm the other’s fifty percent interest in the [P]roperty.” While it is true that an informal fiduciary duty may arise from a moral, social, domestic or purely personal relationship of trust and confidence, Collins v. Kappa Sigma Fraternity, No. 02-14-00294-CV, 2017 WL 218286, at *10-12 (Tex. App.—Fort Worth Jan. 19, 2017, pet. denied), no evidence in the record before us indicates that Rhonda and Jerry had that sort of relationship after their divorce; Jerry therefore also had no informal fiduciary duty to Rhonda. See Higgins v. Higgins, 514 S.W.3d 382, 389-90 (Tex. App.—San Antonio 2017, pet. denied). We sustain Jerry’s first issue.

Id. The court also held that as attorney’s fees are not available for a breach-of-fiduciary-duty claim, the trial court erred in awarding the ex-wife her fees.

The Texas Supreme Court Holds That Incorporating The AAA Rules Does Not Delegate Arbitrability Issues To The Arbitrator For Nonsignatories

Posted in Cases Decided, Texas Supreme Court

Background: Arbitration Clauses May Apply To Trust Disputes

The Texas Supreme Court held that arbitration clauses in trust documents may be enforced regarding claims by beneficiaries against trustees. In Rachal v. Reitz, a beneficiary sued a trustee for failing to provide an accounting and otherwise breaching fiduciary duties. 403 S.W.3d 840 (Tex. 2013). The trustee filed a motion to compel arbitration of those claims due to an arbitration provision in the trust instrument. After the trial court denied that motion, the trustee appealed. The Texas Supreme Court reversed the court of appeals and held that the arbitration clause was enforceable. Id. The Court did so for two primary reasons: 1) the settlor determines the conditions attached to her gifts, which should be enforced on the basis of the settlor’s intent; and 2) the issue of mutual assent can be satisfied by the theory of direct-benefits estoppel, so that a beneficiary’s acceptance of the benefits of a trust constitutes the assent required to form an enforceable agreement to arbitrate. See id. The court of appeals had held that there was no mutual asset as the beneficiary and trustee did not sign the trust document. The Texas Supreme Court resolved the issue of mutual assent by looking to the theory of direct-benefits estoppel. Because the plaintiff had accepted the benefits of the trust for years and affirmatively sued to enforce certain provisions of the trust, the Court held that the plaintiff had accepted the benefits of the trust such that it indicated the plaintiff’s assent to the arbitration agreement. The Court ordered the trial court to grant the trustee’s motion to compel arbitration.

Some Courts Have Held That Incorporating The AAA Rules Does Delegate Arbitrability Issues To The Arbitrator

Parties can agree to delegate to the arbitrator the power to resolve gateway issues regarding the validity, enforceability, and scope of an arbitration agreement. AT&T Technologies, Inc. v. Communications. Workers, 475 U.S. 643 (1986) (holding parties may agree to arbitrate arbitrability); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1985) (holding question of primary power to decide arbitrability “turns upon what the parties agreed about that matter”).

An arbitration provision can state that any dispute shall be settled by arbitration in accordance with the rules then in effect of the American Arbitration Association. Rule 7(a) of the Commercial Arbitration Rules of the AAA grants an arbitrator “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the Arbitration Agreement.” COMMERCIAL RULES OF THE AMERICAN ARBITRATION ASSOCIATION, Rule 7(a) (http://adr.org/aaa/faces/rules).

Federal courts have concluded that an arbitration agreement’s incorporation of rules empowering an arbitrator to decide arbitrability and scope issues clearly and unmistakably evidences the parties’ intent to allow the arbitrator to decide those issues. See, e.g., Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671 (5th Cir. 2012) (We agree with most of our sister circuits that the express adoption of these rules presents clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.”); Fallo v. High-Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009) (“[W]e conclude that the arbitration provision’s incorporation of the AAA Rules . . . constitutes a clear and unmistakable expression of the parties’ intent to leave the question of arbitrability to an arbitrator.”); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1372-73 (Fed. Cir. 2006) (concluding that agreement’s incorporation of AAA rules clearly and unmistakably showed parties’ intent to delegate issue of determining arbitrability to arbitrator); Terminix Int’l Co., LP v. Palmer Ranch Ltd. P’ship, 432 F.3d 1327, 1332-33 (11th Cir. 2005) (holding that by incorporating AAA Rules into arbitration agreement, parties clearly and unmistakably agreed that arbitrator should decide whether arbitration clause was valid); Contec Corp. v. Remote Solution, Co., 398 F.3d 205, 208 (2d Cir. 2005) (“[W]hen . . . parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator.”); CitiFinancial, Inc. v. Newton, 359 F. Supp. 2d 545, 549-52 (S.D. Miss. 2005) (holding that by agreeing to be bound by procedural rules of AAA, including rule giving arbitrator power to rule on his or her own jurisdiction, defendant agreed to arbitrate questions of jurisdiction before arbitrator); Sleeper Farms v. Agway, Inc., 211 F. Supp. 2d 197, 200 (D. Me. 2002) (holding arbitration clause stating that arbitration shall proceed according to rules of AAA provides clear and unmistakable delegation of scope-determining authority to arbitrator).

In Texas, generally, courts have held that as between parties to a contract, that the incorporation of the AAA rules does delegate arbitrability issues to the arbitrator. For example, in T.W. Odom Mgmt. Servs. v. Williford, the court of appeals reversed a trial court’s decision denying a motion to compel arbitration in an employee injury suit where the employment agreement clearly provided that the AAA rules would apply. No. 09-16-00095, 2016 Tex. App. LEXIS 9353 (Tex. App.—Beaumont August 25, 2016, no pet.). The court stated:

The 2013 agreement states that “[t]he arbitration will be held under the auspices of the American Arbitration Association (“AAA”)[,]” and “shall be in accordance with the AAA’s then-current employment arbitration procedures.” The agreement also references the AAA National Rules for Resolution of Employee Disputes. Under the AAA’s Employment Arbitration Rules, Rule 6, the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” … [The parties] agreed that any arbitration would be conducted in accordance with the AAA’s employment arbitration procedures, and the agreement references the AAA’s National Rules for Resolution of Employee Disputes. The parties agreed to a broad arbitration clause that expressly incorporated rules giving the arbitrator the power to rule on its own jurisdiction and to rule on any objections with respect to the existence, scope, or validity of the agreement.

Id. at *12-13. The court therefore ordered that the trial court should have ruled that the arbitrator could make the decision on the scope and enforceability of the clause. Id.

Texas Supreme Court Recently Holds That Incorporating The AAA Rules Does Delegate Arbitrability Issues To The Arbitrator

In Jody James Farms, JV v. Altman Grp., Inc., the Texas Supreme Court refused to rule on whether the incorporation of AAA rules in an arbitration clause would send arbitrability issues to the arbitrator as between signatories. No. 17-0062-CV, 2018 Tex. LEXIS 405 (Tex. May 11, 2018). The Court, however, held that such an incorporation did not send arbitrability issues to the arbitrator as between nonsignatories to an agreement. Id. The Court stated:

While such deference may be the consequence of incorporating the AAA rules in disputes between signatories to an arbitration agreement, to the text of the note which we need not decide, the analysis is necessarily different when a dispute arises between a party to the arbitration agreement and a non-signatory. As to that matter, Texas courts differ about whether an arbitration agreement’s mere incorporation of the AAA rules shows clear intent to arbitrate arbitrability. We hold it does not. Even when the party resisting arbitration is a signatory to an arbitration agreement, questions related to the existence of an arbitration agreement with a non-signatory are for the court, not the arbitrator.

The involvement of a non-signatory is an important distinction because a party cannot be forced to arbitrate absent a binding agreement to do so. The question is not whether Jody James agreed to arbitrate with someone, but whether a binding arbitration agreement exists between Jody James and the Agency. What might seem like a chicken-and-egg problem is resolved by application of the presumption favoring a judicial determination. A contract that is silent on a matter cannot speak to that matter with unmistakable clarity, so an agreement silent about arbitrating claims against non-signatories does not unmistakably mandate arbitration of arbitrability in such cases.

Id. at *8-9.

Conclusion: The Incorporation Of AAA Rules In Trusts And Wills Will Likely Not Delegate Arbitrability Issue To The Arbitrator

To enforce an arbitration clause, the party wanting arbitration must generally prove in court the existence of an arbitration agreement and that the claims asserted fall within the scope of the agreement. In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex. 1999). Accordingly, the Jody James Farms case will likely impact how arbitration clauses in trusts or wills are litigated. Those clauses may contain an incorporation of the AAA rules. If such an incorporation was effective to send arbitrability issues to arbitration, then the arbitrator would determine whether claims fell within the scope, whether a trustee waived the right to arbitrate, whether the settlor was mentally competent to execute the trust document or will, etc. Arbitrators are generally inclined to keep claims and parties in arbitration where courts may be more unbiased on those issues. So, now, where the beneficiary or trustee does not sign the trust/will, the court will determine these issues and not the arbitrator. This may greatly impact the enforceability of arbitration clauses in trusts and wills in Texas.

Court Holds That Drafts Of Trust Documents Are Discoverable And Discusses The Attorney-Client Privilege

Posted in Cases Decided, Texas Court of Appeals

In In re Rittenmeyer, the mother of the decedent was the executor of his estate. No. 05-17-01378-CV2018 Tex. App. LEXIS 2812 (Tex. App.—Dallas April 19, 2018, original proceeding). Among other claims, the decedent’s wife alleged that there was a new will that superseded the will (“2011 Will”) admitted to probate. The wife sought discovery of drafts of wills prepared after the 2011 Will, trust documents where the decedent was a beneficiary, and communications reflecting the decedent’s intentions regarding providing for the wife. The mother objected to the discovery requests and asserted that the documents were privileged. The wife maintained that the documents are excepted from privilege by Texas Rule Evidence 503(d)(2), which provides that the attorney-client privilege does not apply “if the communication is relevant to an issue between parties claiming through the same deceased client.” Id. The trial court granted the wife’s motion to compel, and the mother filed a petition for writ of mandamus.

The court of appeals first discussed the law regarding Rule 503(d)(2):

Texas jurisprudence contains scant authority addressing the exception found in Rule 503(d)(2). …Texas courts have applied the exception to information like the discovery at issue here in cases in which a party contends a decedent’s will does not reflect the decedent’s true intent. See, e.g., In re Paschall, 2013 Tex. App. LEXIS 1254, 2013 WL 474368, at *7 (trust documents not privileged because the documents are relevant to parties’ claims that they are the decedent’s heirs at law and their assertion that the trust into which the estate was poured is invalid); see also In re Tex. A&M – Corpus Christi Found., 84 S.W.3d 358 (Tex. App.—Corpus Christi 2002, orig. proceeding) (permitting depositions of decedent’s counsel regarding decedent’s intentions and capacity where Foundation alleged decedent’s gift to the Foundation was planned and valid whereas estate contended the gift to the Foundation was procured through fraud).

Courts in other jurisdictions have also excepted similar discovery from the attorney-client privilege where, as here, the dispute is between the executor or representative of the estate and someone claiming rights under the decedent’s estate. See Remien v. Remien, No. 94 C 2407, 1996 U.S. Dist. LEXIS 10114, 1996 WL 411387 (N.D. Ill. July 19, 1996) (discovery not subject to the privilege because the dispute arose “between parties who claim through the same deceased client” where the daughter and the co-executors of the father’s estate both claimed property rights through father, and the documents at issue were relevant to that dispute, which centered on the father’s intentions regarding the distribution of stock); see also Petition of Stompor, 165 N.H. 735, 740, 82 A.3d 1278, 1282-83 (2013) (applying Remien and Texas A&M-Corpus Christi Foundation and holding that attorney’s file was not privileged because it was relevant to determining whether the petitioner unduly influenced the parents at the time they executed their estate plan in 2004 and to ascertaining whether the 2004 estate plan documents reflected the parents’ true intent).

Id. The court held that the case at issue was similar to the other Texas cases cited above in that involved a dispute between a decedent’s estate and a party who claims to be a beneficiary under the estate either through a subsequent will or because the probated will does not reflect the decedent’s intentions. The court concluded: “Under these facts, we conclude the trial court was within its discretion in applying Rule 503(d)(2) to the discovery, determining that the parties claim through the same deceased client, and compelling relator to produce that discovery.” Id. The court denied the mother’s petition for writ of mandamus.

Court Discusses The Texas Rules For Superseding Declaratory Relief In A Trust Dispute

Posted in Cases Decided, Texas Court of Appeals

In In the Interest of K.K.W., a father and mother, who were settlors, filed competing claims regarding the interpretation of a trust for their son. No. 05-16-00795-CV, 2018 Tex. App. LEXIS 2174 (Tex. App.—Dallas March 27, 2018, no pet. history). The trial court found for the father, granted him declaratory relief regarding the interpretation of the trust document, awarded $453,866.52 in attorney’s fees to the father, $578,115.62 in attorney’s fees to the trustee, court costs and also awarded $200,000 in conditional appellate attorney’s fees to father and $145,000 in conditional appellate attorney’s fees to the trustee. Based on costs and conditional appellate fees, the trial court set the bond at $401,475.00 to suspend enforcement of the judgment. The mother appealed the court’s security ruling. The court of appeals first discussed the rules for superseding a judgment:

Judgments for the recovery of money are subject to rule 24.2(a)(1), which provides that the amount of the bond, deposit, or security must equal the sum of compensatory damages awarded in the judgment, interest for the estimated duration of the appeal, and costs awarded in the judgment. Tex. R. App. P. 24.2(a)(1). The security amount for a judgment that is for the recovery of money may not exceed the lesser of 50% of the judgment debtor’s current net worth or 25 million dollars. Tex. R. App. P. 24.2(a)(1)(A)-(B). When the judgment is “for something other than money or an interest in real property,” the security “must adequately protect the judgment creditor against loss or damage that the appeal might cause.” Tex. R. App. P. 24.2(a)(3). Rule 24.2(a)(3) is routinely applied to judgments that are declaratory or injunctive in nature.

Id. The court then held that an award of attorney’s fees is generally not included in the amount of security because they are not damages or costs. The court held that “If this were only a money judgment, then the security is excessive because it exceeds the amount of costs plus interest on those costs for the estimated duration of the appeal.” Id. But the court went on to discuss the impact of the declaratory relief in the judgment:

But there is also a declaratory component of the judgment and, therefore, the judgment is partially a judgment for something other than money or an interest in property. Under Rule 24.2(a)(3), the amount of security to suspend enforcement of declaratory relief “must adequately protect the judgment creditor against loss or damage the appeal might cause.” Tex. R. App. P. 24.2(a)(3). The additional security awarded to suspend enforcement of the declaratory relief consists solely of conditional appellate fees awarded in the judgment. Such fees are not properly included as security and are excessive as a matter of law. The reasons are simple.

First, a court is prohibited from requiring a party to post bond for conditional appellate fees… Second, because recovery of conditional appellate fees are conditioned on a future event that may or may not occur, such fees are not a loss or damage that an appeal might cause and, therefore, are not properly included in the amount of security to suspend enforcement of a declaratory judgment… Finally, conditional appellate fees are attorney’s fees, albeit fees not yet earned, and attorney’s fees incurred in the prosecution or defense of a claim may not be included in the amount of security ordered by a trial court. Simply put, the trial court was prohibited from including conditional appellate fees in the security amount.

Appellees’ attempt to characterize the security amount as something other than security for the conditional appellate fees is also unavailing. We disagree with appellees’ contention that the trial court could pick any reasonable number for the security amount as long as it was less than 50% of Mother’s net worth. The 50% of net worth limit applies to money judgments, and appellees maintain that this judgment is not for the recovery of money. Tex. R. App. P. 24.2(a)(1)(A). Instead, they argue that the additional security is to suspend execution of the declaratory judgment and is proper under Rule 24.2(a)(3). Under that rule, the trial court was charged with determining a security amount that could adequately protect appellees against loss of damage that the appeal might cause them in relation to the declaratory judgment. But there is no evidence in the record showing that the appeal will harm appellees in any way as to the declaratory judgment. The declaratory relief in the judgment does not require Mother to take any action or enjoin Mother from certain actions such that suspending enforcement of that part of the judgment would somehow harm Father or the Trustee. On the contrary, no changes were made to the Trust or its operations. All parties must simply continue acting under the Trust as they always have. No security is needed to protect appellees from any harm an appeal may cause in relation to the declaratory relief.

Id. The court decreased the amount of the bond to cover the court costs and interest thereon.