In Wells Fargo v. Militello, a trustee appealed a judgment from a bench trial regarding a beneficiary’s claims for breach of fiduciary duty, negligence, and fraud. No. 05-15-01252-CV, 2017 Tex. App. LEXIS 5640 (Tex. App.—Dallas June 20, 2017, no pet. history). Militello was an orphan when her grandmother and great-grandmother created trusts for her. She had health issues (Lupus) that prevented her from working a normal job, and she heavily relied on the trusts. When Militello was 25 years old, one of the trusts was terminating, and it contained over 200 producing and non-producing oil and gas properties. The trustee requested that Militello leave the properties with it to manage, and she created a revocable trust allowing the trustee to remain in that position.
Later, in late 2005 and early 2006, Militello advised the trustee that she was experiencing cash flow problems as a result of her divorce and expensive medical treatments. Instead of discussing all six accounts with Militello, the trustee suggested that she sell the oil and gas interests in her revocable trust. The trustee then sold those assets to another customer of the trustee; a larger and more important customer. There were eventually three different sales, and the buyer ended up buying the assets for over $500,000 and later sold those same assets for over $5 million. The trustee did not correctly document the sale, continued reporting income in the revocable trust, and did not accurately report the sales to the beneficiary. The failure to accurately document and report the sales and income caused Militello several tax issues, and she had to retain accountants and attorneys to assist her in those matters.
The beneficiary sued, and the trial court held a bench trial in 2012. Later, the trial court awarded Militello: $1,328,448.35 past economic damages, $29,296.75 disgorgement of trust fees, $1,000,000.00 past mental anguish damages, $3,465,490.20 exemplary damages, and $467,374.00 attorney’s fees. The trustee appealed, alleging that the evidence was not sufficient to support many of the damages award but did not appeal the liability finding of breach of fiduciary duty. The beneficiary agreed that the economic damages should be remitted (decreased) by around $340,000, which would also impact the exemplary damages award. The trustee argued that the evidence did not support other awards of damages.
The trial court awarded damages based on Militello’s expenses associated with dealing with tax issues, including accountant fees and attorney’s fees. The evidence at trial was that the trustee did not timely or properly document any of the sales from Militello’s trust, did not notify the oil and gas producers of the transfer of Militello’s interests, and did not prepare and record correct deeds until three years after the fact. It failed to amend its internal accounting, resulting in Militello’s accounts showing the receipt of amounts that were no longer attributable to interests owned by her trust. These errors caused problems in the preparation of Militello’s tax returns, and attracted the attention of various tax authorities. When Militello attempted to obtain information from the trustee to address these problems, it did not provide her with a correct accounting. It was necessary for Militello to retain and consult her own tax advisors in order to resolve these problems. At trial, Militello’s tax lawyer gave expert testimony to explain and quantify Militello’s damages relating to correcting her tax problems. The court of appeals affirmed the trial court’s awards for the Militello for these issues.
The trustee also challenged the trial court’s award of $1,000,000.00 in “past mental anguish damages pursuant to Texas Trust Code Section 114.008(a)(10).” Id. Section 114.008 is entitled “Remedies for Breach of Trust,” and Subsection 114.008(a)(10) allows a court to “order any other appropriate relief” to “remedy a breach of trust that has occurred or might occur.” Id. The court held that breaches of fiduciary duty can lead to awards of mental anguish damages. To sustain such an award “[t]here must be both evidence of the existence of compensable mental anguish and evidence to justify the amount awarded.” Id. “Mental anguish is only compensable if it causes a ‘substantial disruption in . . . daily routine’ or ‘a high degree of mental pain and distress.’” Id. “Even when an occurrence is of the type for which mental anguish damages are recoverable, evidence of the nature, duration, and severity of the mental anguish is required.’” Id.
The record included her testimony and months of communications between Militello and the bank showing multiple disruptions and mental distress in Militello’s daily life in attempting to obtain her own and her children’s housing, medical care, and other needs. Militello established that she was entirely dependent on the trustee’s competent administration of her trusts for her financial security and daily living expenses. The primary source of Militello’s monthly income was permanently depleted, leaving her constantly worried about her financial security. Militello testified that the stress aggravated her Lupus, and that she suffered an ulcer and “broke out in shingles.” Id. She received notices from the IRS and other tax authorities that tax was due on properties she did not own, and she owed thousands of dollars in penalties. Her trust officer refused to discuss these problems with her, referring her to its outside counsel. The court of appeals concluded that there was evidence to support an award of mental anguish damages.
The court next reviewed the amount of the award of mental anguish damages. Appellate courts must “conduct a meaningful review” of the fact-finder’s determinations, including “evidence to justify the amount awarded.” Id. The court held that the $1 million award was not supported by the evidence and suggested a remittitur down to $310,000 based on evidence of other actual damages:
[T]he record supports a lesser amount of mental anguish damages. The items making up the remainder of Militello’s actual damages, net of the $921,000 related to the market value of the oil and gas properties, represent expenses, fees, and losses Militello incurred as a direct result of Wells Fargo’s gross negligence and breaches of fiduciary duty. These items include legal fees incurred relating to drafting, creation, and recording of void deeds, lost production revenue, improperly transferred money market funds, bank fees, and the tax-related amounts we have discussed in detail above, among other items. These amounts total $310,608.89, after subtraction of the amounts Militello voluntarily remitted. Much of the mental anguish Militello described is a direct result of the bank’s unresponsiveness and gross negligence in carrying out its fiduciary duties to her, and is reflected in these expenses. We conclude that the evidence is sufficient to support the amount of $310,608.89, representing amounts of actual damages caused by the bank’s breaches of fiduciary duty and gross negligence, but excluding the actual damages attributable to market value of the properties. We conclude that this amount would fairly and reasonably compensate Militello for the mental anguish she suffered.
The trustee requested that the appellate court disallow the award of prejudgment interest attributable to the trial court’s delay in signing the judgment. Citing rule of judicial administration 7(a)(2), the trustee argued that “the Court should cut off prejudgment interest for the period starting at the Rule 7(a)(2) date line, which was July 26, 2012.” Id. The court held that “[p]rejudgment interest is awarded to fully compensate the injured party, not to punish the defendant.” Id. The court stated: “If we were to sustain Wells Fargo’s complaint, Militello would not be fully compensated for lost use of the money due as damages during the lapse of time between the accrual of the claim and the date of judgment. As between Militello, who established Wells Fargo’s liability for breaches of its duties to her, and Wells Fargo, we conclude that Wells Fargo should bear the prejudgment interest cost of the delay.” Id.
The court next turned to the trustee’s challenge to the exemplary damages award. The trustee contended that Militello did not establish harm resulting from fraud, malice, or gross negligence by clear and convincing evidence, as required by section 41.003 of the Texas Civil Practice and Remedies Code. The trustee argued that breach of fiduciary duty, by itself, is insufficient predicate under section 41.003. The appellate court did not resolve that issue because it concluded there was clear and convincing evidence to support the trial court’s express finding that the trustee was grossly negligent.
Gross negligence consists of both objective and subjective elements. Under the objective component, “extreme risk” is not a remote possibility or even a high probability of minor harm, but rather the likelihood of the plaintiff’s serious injury. Id. The subjective prong, in turn, requires that the defendant knew about the risk, but that the defendant’s acts or omissions demonstrated indifference to the consequences of its acts. The court of appeals held that the evidence in the case supported the trial court’s findings:
The record reflects that Wells Fargo and its predecessors had served as Militello’s fiduciaries since her childhood. As well as serving as trustee for the Grantor Trust, Wells Fargo also served as the trustee for several other family trusts of which Militello was a beneficiary. As trustee, Wells Fargo was aware of the amount of income Militello received each month from each trust, combining the amounts in a single monthly payment made to Militello. If Wells Fargo was not earlier aware that income from the trusts was Militello’s sole source of income, it became aware when Militello first contacted the bank about her financial problems in 2005. She explained to Tandy that the income she received from the trusts was insufficient to meet her expenses and debts, and she asked for help. When Tandy retired, Militello again explained her financial situation to Randy Wilson, and made clear the source of her financial problems and her need for help in solving them. Wells Fargo was therefore actually aware of the risk to Militello’s financial security from depletion of the Grantor Trust. As Wallace testified, however, Wells Fargo breached its fiduciary duty by failing to explore other possible options to assist Militello through her financial difficulties. Wallace testified that Wells Fargo’s conduct involved an extreme degree of risk. He divided his evaluation of Wells Fargo’s conduct as a fiduciary into three time periods. His first period, the “evaluation phase,” began in December 2005 when Militello contacted Wells Fargo for help, and ended in late May 2006 when the decision to sell the properties was made. Wallace’s second period covered the sale itself, including the marketing of the properties and the decision to sell. The third period covered the execution of the sale, and included Wells Fargo’s adherence to its own internal policies and carrying out its duties to Militello in distribution of the properties after the sale. Wallace testified in detail regarding the duties that Wells Fargo, as Militello’s fiduciary, should have carried out in each of the three periods. He testified that, among other deficiencies, Wells Fargo failed: to provide sufficient information to Militello to make an informed decision about sales from the Grantor Trust, to obtain a “current evaluation of the property prepared by a competent engineer” before the sales, to explain the valuation to Militello and discuss the tax consequences of a sale, to market the properties to more than one buyer, to negotiate to get the best price possible for the properties, to negotiate a written purchase and sale agreement, to convey correct information to the attorneys preparing the deeds for the sales, to notify the oil and gas producers of the change in ownership, and to create a separate account after the sales, instead commingling the proceeds received “for a period of up to three years.” . . . Under our heightened standard of review, we conclude the trial court could have formed a firm belief or conviction that Wells Fargo’s conduct involved an extreme degree of risk, and Wells Fargo was consciously indifferent to that risk. We also conclude that Militello offered clear and convincing evidence to support the trial court’s finding that Wells Fargo was grossly negligent, and therefore met her burden to prove the required predicate under section 41.003(a).
Id. The court also held that the amount awarded was supported by the evidence: “Having considered the relevant Kraus and due process factors, we conclude an exemplary damages award of $2,773.826.67 is reasonable and comports with due process.” Id. The court did suggest a remittitur due to the decrease in economic damages.
The trustee’s final argument dealt with an exculpatory clause in the trust agreement. By its express terms, the clause did not preclude the trustee’s liability for gross negligence, bad faith, or willful breach of the trust’s provisions:
The Trustee shall not be liable for any loss or depreciation in value of the properties of the Trust, except as such loss is attributable to gross negligence, willful breach of the provisions of this Trust, or bad faith on the part of the Trustee. The Trustee shall not be responsible for any act or omission of any agent of the Trustee, if the Trustee has used good faith and ordinary care in the selection of the agent.
Id. The trustee contended that the property code “expressly allows exculpatory clauses to shield a trustee from ordinary negligence.” Id. (citing Tex. Prop. Code § 114.007). It also argued that it “used good faith and ordinary care” in selecting its agents, including “(1) the law firm that prepared the erroneous deeds, (2) Leonard, who prepared the mineral interest valuation used by the bank, and (3) Harrell, who prepared erroneous tax returns, and consequently is not liable for errors made by those agents.” Id.
The court of appeals disagreed with the trustee’s arguments: “We have concluded that the evidence supports the trial court’s finding that Wells Fargo’s conduct constituted gross negligence.” Id. In addition, there was evidence that the trustee “failed to use ordinary care in its selection of Leonard, if not its other agents.” Id. “Because the exculpatory clause in the Grantor Trust does not apply to losses ‘attributable to gross negligence,’ we conclude that the trial court did not err in refusing to enforce it to bar Militello’s claims.” Id.
Interesting Note: This is an interesting case because it deals with exemplary damages and mental anguish damages in the context of a breach of fiduciary duty by a trustee.
Exemplary Damages. “Exemplary damages” includes punitive damages. Tex. Civ. Prac. & Rem. Code Ann. § 41.001(5). A jury may only award exemplary damages if the claimant proves, by clear and convincing evidence, that the harm resulted from: (1) fraud; (2) malice; or (3) gross negligence. Id. at § 41.003(a). A defendant’s breach of a fiduciary duty is ordinarily not enough, by itself, to support an award of exemplary damages. There must be an aggravating factor, such as actual fraud, gross negligence, or malice. Hawthorne v. Guenther, 917 S.W.2d 924, 936 (Tex. App.—Beaumont 1996, writ denied). A breach of fiduciary duty, however, often involves aggravated or fraudulent conduct, regardless of the actual motive of the defendant, that justifies an award of exemplary damages to deter such conduct. See, e.g., International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 584 (Tex. 1963); Natho v. Shelton, No. 03-11-00661-CV, 2014 Tex. App. LEXIS 5842, 2014 WL 2522051, at *2 (Tex. App.—Austin May 30, 2014, no. pet.); Lesikar v. Rappeport, 33 S.W.3d 282, 311 (Tex. App.—Texarkana 2000, pet. denied); Fidelity Nat’l Title Co. v. Heart of Tex. Title Co., No. 03-98-00473-CV, 2000 Tex. App. LEXIS 72 (Tex. App.—Austin 2000, no pet.); Hawthorne v. Guenther, 917 S.W.2d at 936; NRC, Inc. v. Huddleston, 886 S.W.2d 526, 533 (Tex. App.—Austin 1994, no writ) (upholding portion of district court’s judgment awarding actual and punitive damages for breach of fiduciary duty); Murphy v. Canion, 797 S.W.2d 944, 949 (Tex. App.—Houston [14th Dist.] 1990, no pet.); Cheek v. Humphreys, 800 S.W.2d 596, 599 (Tex. App.—Houston [14th Dist.] 1990, writ denied) (“Exemplary damages are proper where a fiduciary has engaged in self-dealing”); Morgan v. Arnold, 441 S.W.2d 897, 905–906 (Tex. Civ. App.—Dallas 1969, writ ref’d n.r.e.).
One important protection for defendants is the statutory cap on the amount of exemplary damages. The Texas Civil Practice and Remedies Code permits exemplary damages of up to the greater of: (1) (a) two times the amount of economic damages; plus (b) an amount equal to any noneconomic damages found by the jury, not to exceed $750,000; or (2) $200,000. Tex. Civ. Prac. & Rem. Code Ann. § 41.008(b). This cap need not be affirmatively pleaded as it applies automatically and does not require proof of additional facts. Zorrilla v. Aypco Constr., II, LLC, 469 S.W.3d 143 (Tex. 2015). However, these limits do not apply to claims supporting misapplication of fiduciary property or theft of a third degree felony level. Tex. Civ. Prac. & Rem. Code Ann. § 41.008(c)(10). Natho v. Shelton, 2014 Tex. App. LEXIS 5842 at n. 4. The statute states that the caps “do not apply to a cause of action against a defendant from whom a plaintiff seeks recovery of exemplary damages based on conduct described as a felony in the following sections of the Penal Code if … the conduct was committed knowingly or intentionally….” Id. Accordingly, if a defendant is found liable for one of these crimes with the required knowledge or intent, it cannot take advantage of the statutory exemplary damages caps.
Mental Anguish. A plaintiff can potentially recover mental-anguish damages if the damages are a foreseeable result of a breach of fiduciary duty. Perez v. Kirk & Carrigan, 822 S.W.2d 261, 266-67 (Tex. App.—Corpus Christi 1991, writ denied) (client was entitled to mental anguish award in breach of fiduciary duty by an attorney regarding the disclosure of confidential information). In Douglas v. Delp, the Texas Supreme Court stated that mental-anguish damages were not allowed when the defendant’s negligence harmed only the plaintiff’s property. 987 S.W.2d 879, 885 (Tex. 1999). In those cases, damages measured by the economic loss would make the plaintiff whole. Id. Applying those concepts to attorney malpractice, the court stated that limiting the plaintiff’s recovery to economic damages would fully compensate the plaintiff for the attorney’s negligence. Id. The court concluded “that when a plaintiff’s mental anguish is a consequence of economic losses caused by an attorney’s negligence, the plaintiff may not recover damages for that mental anguish.” Id.
The Texas Supreme Court reiterated that when an attorney’s malpractice results in financial loss, the aggrieved client is fully compensated by recovery of that loss; the client may not recover damages for mental anguish or other personal injuries. Belt v. Oppenheimer, Blend, Harrison & Tate, 192 S.W.3d 780, 784 (Tex. 2006). In Tate, the Court held that estate planning malpractice claims seeking purely economic loss are limited to recovery for property damage. Id. The Court held that when the damages are financial loss, a party is fully compensated by recovery of that loss. Id. So, if the plaintiff is seeking a claim for breach of fiduciary duty based on negligent conduct, a plaintiff may not be able to obtain mental anguish damages if the economic damages make the plaintiff whole.
In a situation where the plaintiff’s breach of fiduciary duty claim is based on non-negligent conduct, such as fraud or malice, a plaintiff can “recover economic damages, mental anguish, and exemplary damages.” Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 304 (Tex. 2006) (mental anguish damages permissible for fraud claim); City of Tyler v. Likes, 962 S.W.2d 489, 497 (Tex. 1997) (stating that mental anguish damages are recoverable for some common law torts involving intentional or malicious conduct). For example, in Parenti v. Moberg, the court of appeals affirmed an award of mental anguish damages for a beneficiary suing a trustee for breach of fiduciary duty. No. 04-06-00497-CV, 2007 Tex. App. LEXIS 4210 (Tex. App.—San Antonio May 30, 2007, pet. denied). The court stated: “Here, the jury found that Parenti acted with malice, and Parenti does not challenge that finding. Therefore, because the jury found that Parenti acted with malice, we hold that the trial court did not err in awarding mental anguish damages to Moberg.” Id.
Finally, even if allowed, mental anguish damages are difficult to prove. The Texas Supreme Court has noted: “The term ‘mental anguish’ implies a relatively high degree of mental pain and distress. It is more than mere disappointment, anger, resentment or embarrassment, although it may include all of these. It includes a mental sensation of pain resulting from such painful emotions as grief, severe disappointment, indignation, wounded pride, shame, despair and/or public humiliation.” Parkway Co. v. Woodruff, 901 S.W.2d 434, 444 (Tex. 1995). The Court held that an award for mental anguish will normally survive appellate review if “the plaintiffs have introduced direct evidence of the nature, duration, and severity of their mental anguish thus establishing a substantial disruption in the plaintiff’s routine.” Id.
In Service Corp. International v. Guerra, the Texas Supreme Court reversed an award of mental anguish damages. 348 S.W.3d 221, 231-32 (Tex. 2011). The Court held: “Even when an occurrence is of the type for which mental anguish damages are recoverable, evidence of the nature, duration, and severity of the mental anguish is required.” Id. at 231. In Guerra, the jury awarded mental anguish damages to three daughters of the deceased when the cemetery disinterred and moved the body of their father. Id. at 232. One daughter testified that it was “the hardest thing I have had to go through with my family” and that she “had lots of nights that I don’t sleep.” Id. Another daughter testified, “We’re not at peace. We’re always wondering. You know we were always wondering where our father was. It was hard to hear how this company stole our father from his grave and moved him.” Id. There was also evidence from third parties that the daughters experienced “strong emotional reactions.” Id. Yet, the Court held that this was not sufficient to support an award of mental-anguish damages. Id. See also Hancock v. Variyam, 400 S.W.3d 59 (Tex. 2013) (reversing award of mental anguish damages).
In Martin v. Martin, the court of appeals reversed a mental anguish award against a trustee based on a claim of intentional breach of fiduciary duty because the beneficiary did not have sufficient evidence of harm. 363 S.W.3d 221 (Tex. App.—Texarkana 2012, pet. denied). The evidence of mental anguish was: “It’s impacted our whole family. We don’t — for generations and generations to come, we don’t have any — it just hurts. It’s affected my father. I worry about him every day talking to him on the phone, the stress. I worry about those in the company that have to deal with what’s going on.” Id. The court held that: “Courtney failed to establish a high degree of mental pain and distress that is more than mere worry, anxiety, vexation, embarrassment, or anger.” Id. See also Onyung v. Onyung, No. 01-10-00519-CV, 2013 Tex. App. LEXIS 9190 (Tex. App.—Houston [1st Dist.] July 25, 2013, pet. denied) (reversed mental anguish damages because plaintiff did not have sufficient evidence of harm). However, in Moberg, the court of appeals affirmed the modest award of $5,000 in mental anguish damages in a breach of fiduciary duty case against a trustee where the evidence showed that the beneficiary: “cried, lost sleep, vomited, and missed work for ‘several days’. . .” 2007 Tex. App. LEXIS 4210. These are very fact-specific determinations.