Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

Recorded Webinar – Legislative Update: New Vulnerable Persons and POA Statutes

Posted in Items of Interest, Knowledge Library, Webinars

Recorded Webinar

Thank you to everyone who joined us on September 26 for the webinar “Legislative Update: New Vulnerable Persons and POA Statutes.”  The recorded webinar link is now available.  If you are interested in joining our next complimentary webinar, please send your request to dfjohnson@winstead.com.

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, covers recent changes to the Texas Estates Code’s Texas Durable Power of Attorney Act and recent legislation protecting vulnerable persons and how those impact financial institutions, broker/dealers, and investment advisors.

Target Audience: In-house counsel and other litigation contacts, trust officers, risk management contacts, and wealth advisors

CLICK HERE FOR WEBINAR

Court Affirms Judgment For Estate Representative Due To A Statute-Of-Limitations Tolling Statute

Posted in Cases Decided, Texas Court of Appeals

In Kaptchinskie v. Estate of Kirchner, the purchasers of property sued an estate to establish that the estate’s claim under a note was extinguished by the statute of limitations. No. 14-15-01080-CV, 2017 Tex. App. LEXIS 7012 (Tex. App.—Houston [14th Dist.] July 27, 2017, no pet. history). The independent administratrix of the estate filed a counterclaim for the amounts due and owing. The trial court ruled for the independent administratrix, and the purchasers appealed. The trial court made no express findings of fact about the limitations defense, and the appellate court had to presume that the trial court made all findings necessary to support the judgment. The court of appeals held that the general rule is that contract claims are barred four years after accrual, but noted that there are exceptions. “Upon the death of a person to whom the cause of action belongs, the limitations period is tolled for the earlier of (a) one year, or (b) the date on which the estate’s executor or administrator is qualified.” Id. (citing Tex. Civ. Prac. & Rem. Code § 16.062). Due to when the independent administratrix was appointed, the limitations period was tolled for one year. Due to this, the court held that she could assert a breach-of-contract claim for up to five years after the claim accrued. The court concluded: “the Kaptchinskies’ next payment was due on August 1, 2009. That payment was never made. Huffman asserted her breach-of-contract claim on July 31, 2014, and at trial, she sought recovery only of amounts due on or after August 1, 2009; thus, the entirety of her claim was filed within the applicable five-year limitations period.” Id.

David F. Johnson Elected to Texas Association of Bank Counsel Board of Directors

Posted in Items of Interest

David F. Johnson

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, has been elected to the board of directors for the Texas Association of Bank Counsel (TABC) for a three-year term. David has been a frequent speaker and contributor for the organization for the past five years.

The TABC is a Texas nonprofit corporation and is its governing body is a fifteen-member board of directors, its officers, and its immediate past president. The TABC was formed in 1976 to inform and educate Texas lawyers who devote a substantial part of their professional time to representing banks and other financial institutions. The TABC is designed for bank lawyers who have a common interest in a specialized field of law. It is a resource for its members, allowing them to network with other bank lawyers who deal with similar issues. TABC members are encouraged to exchange information on transactional techniques and developments in the law, and to share ideas and concerns to enhance the knowledge and improve the skills of TABC counsel. The TABC also provides members an opportunity to convene annually with lawyers who primarily represent banks and to obtain necessary CLE.

 

Webinar: Legislative Update – New Vulnerable Persons and POA Statutes (Sept. 26 at 10:00 am CST)

Posted in Items of Interest, Knowledge Library, Webinars

Webinar – September 26

Join us for a complimentary webinar presentation covering recent changes to the Texas Estates Code’s Texas Durable Power of Attorney Act and recent legislation protecting vulnerable persons and how those impact financial institutions, broker/dealers, and investment advisors.

Date: Tuesday, September 26, 2017
Time: 10:00 – 10:30 a.m. Central Time
Cost: Complimentary
Speaker: David F. Johnson

Continuing Education Credit Information:
This course is pending for MCLE credit by the State Bar of Texas Committee on MCLE in the amount of 0.5 credit hours

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

CLICK HERE TO REGISTER

Texas Supreme Court Enforces Forum-Selection Clause In Breach Of Fiduciary Duty Case Arising From A Shareholder Agreement

Posted in Cases Decided, Texas Supreme Court

In Pinto Tech. Ventures, L.P. v. Sheldon, the Texas Supreme Court held that business tort claims, including breach of fiduciary duty, were subject to a forum-selection clause in a shareholders agreement. No. 16-0007, 2017 WL 2200357, at *9 (Tex. May 19, 2017). The plaintiffs, two shareholders, asserted business tort claims related to the alleged dilution of their equity interests against the majority shareholders and certain corporate officers. Id. at *2. The shareholders agreement included a forum selection clause in which the parties agreed to resolve “any dispute arising out of this Agreement” in Delaware. Id. at *3. The shareholders asserted no contract claims, and instead, asserted claims for fraud, breach of fiduciary duty, minority-shareholder oppression, Texas Blue Sky Law violations, and conspiracy. Id. The defendants moved to dismiss based on the forum-selection clause, and the trial court granted the motion. Id. at *3-4. In a split decision, the court of appeals reversed, holding the forum-selection clause inapplicable to the dispute because an “arising out of” forum-selection clause applies only when the claims would not exist “but for” the agreement containing the clause. Id. at *4. The court determined that the shareholders’ claims did not arise out of the agreement because the rights and obligations underlying the claims were derived from statutes and common law. Id.

The Texas Supreme Court reversed and held that the shareholders’ business tort claims were subject to the forum-selection clause. Id. at *9. The Court noted that the use of the term “dispute” instead of “claim” in the clause established that the clause applied beyond claims for breach of the agreement. Id. at *7. “Dispute” refers to a conflict or controversy whereas a “claim” means the assertion of an existing right or a demand for money, property, or a legal remedy to which one asserts a right. Id. The Court also held that a but-for relationship between the disputes and the shareholders agreement was “evident” because the shareholders’ extra-contractual statutory and tort claims involved the same operative facts as a breach of contract claim and related to rights purportedly promised under the agreement. Id. at *8. As the Court noted, the non-contractual claims were “integral to the dispute’s resolution” and, although “shareholders and corporations can have relationships without an agreement like the one at issue here, we cannot ignore the reality that an agreement, in fact, governs their relationship and Sheldon’s and Konya’s alleged grievances emanate from the existence and operation of that agreement.” Id. at *9. The Court reversed the court of appeals and affirmed the trial court’s dismissal as to the majority shareholder defendants: “we hold that the [minority] shareholders’ statutory and common-law tort claims evidence a ‘dispute arising out of’ the shareholders agreement because (1) the existence or terms of the agreement are operative facts in the litigation and (2) ‘but for’ that agreement the shareholders would not be aggrieved.”

The Court then held that defendants who were nonparties to the shareholder agreement (the CEO and CFO) could not enforce the forum-selection clause in the agreement. The Court held that they were not parties to the agreement, were not transaction participants, and that the concerted-misconduct doctrine did not apply.

Texas Adopts New Legislation Protecting Vulnerable Persons From Financial Exploitation And Places New Burdens On Financial Institutions, Securities Dealers, and Financial Advisers

Posted in Items of Interest

I.     Introduction

The Texas Legislature passed, and the Governor has signed, a new act that creates new protections for vulnerable individuals. HB 3921 creates a new chapter 280 of the Texas Finance Code and a new Article 581, Section 45, of the Texas Securities Act in the Texas Civil Statutes. The Texas Legislature now requires employees to report suspected incidences of financial exploitation to their employers, and for the financial institution, security dealers, or financial adviser to similarly make reports to the Texas Department of Family and Protective Services (the “Department”). This legislation takes effect September 1, 2017. Legislative history provides:

Interested parties contend that certain vulnerable adults lose a significant amount of money each year to fraud and financial exploitation. H.B. 3921 seeks to protect the financial well-being of these individuals by authorizing financial institutions, securities dealers, and investment advisers to place a hold on suspicious transactions involving these vulnerable adults and by requiring the reporting of suspected financial exploitation.

Definitions Of Vulnerable Person And Financial Exploitation. A “vulnerable adult” means someone who is sixty-five (65) years or older or a person with a disability. Tex. Fin. Code Ann. § 280.001. The term “exploitation” means: “the act of forcing, compelling, or exerting undue influence over a person causing the person to act in a way that is inconsistent with the person’s relevant past behavior or causing the person to perform services for the benefit of another person.” Id. at § 280.001(2).

“Financial exploitation” means:

(A) the wrongful or unauthorized taking, withholding, appropriation, or use of the money, assets, or other property or the identifying information of a person; or (B) an act or omission by a person, including through the use of a power of attorney on behalf of, or as the conservator or guardian of, another person, to: (i) obtain control, through deception, intimidation, fraud, or undue influence, over the other person’s money, assets, or other property to deprive the other person of the ownership, use, benefit, or possession of the property; or (ii) convert the money, assets, or other property of the other person to deprive the other person of the ownership, use, benefit, or possession of the property.

Tex. Fin. Code Ann. § 280.001(3)

II.     Financial Institutions

Employee Reporting Obligation. Section 280.002 provides that “if an employee of a financial institution has cause to believe that financial exploitation of a vulnerable adult who is an account holder with the financial institution has occurred, is occurring, or has been attempted, the employee shall notify the financial institution of the suspected financial exploitation.” Tex. Fin. Code Ann. § 280.002. “Financial Institution” means: “a state or national bank, state or federal savings and loan association, state or federal savings bank, or state or federal credit union doing business in this state.” Tex. Fin. Code Ann. § 277.001.

Financial Institution Reporting Obligation. If an employee makes such a report or the financial institution otherwise has cause to believe a reportable event has occurred, then the financial institution shall assess the suspected financial exploitation and submit a report to the Department. Id. at § 280.002. The report shall include: (1) the name, age, and address of the elderly person or person with a disability; (2) the name and address of any person responsible for the care of the elderly person or person with a disability; (3) the nature and extent of the condition of the elderly person or person with a disability; (4) the basis of the reporter’s knowledge; and (5) any other relevant information. Id. (citing Tex. Hum. Res. Code § 48.051). The financial institution should submit the report not later than the earlier of: (1) the date it completes an assessment of the suspected financial exploitation; or (2) the fifth business day after the date the financial institution is notified of the suspected financial exploitation or otherwise has cause to believe that the suspected financial exploitation has occurred, is occurring, or has been attempted. Id. Furthermore, a financial institution may at the time the financial institution submits the report also notify a third party reasonably associated with the vulnerable adult of the suspected financial exploitation, unless the financial institution suspects that the third party is guilty of financial exploitation of the vulnerable adult. Id. at § 280.003.

Financial Institution’s Ability To Place A Hold On Transactions. If a financial institution submits a report, it “(1) may place a hold on any transaction that: (A) involves an account of the vulnerable adult; and (B) the financial institution has cause to believe is related to the suspected financial exploitation; and (2) must place a hold on any transaction involving an account of the vulnerable adult if the hold is requested by the Department or a law enforcement agency.” Id. at § 280.004. This hold generally expires ten business days after the report was submitted. Id. The financial institution may extend a hold for an additional thirty business days “if requested by a state or federal agency or a law enforcement agency investigating the suspected financial exploitation.” Id. The financial institution may also petition a court to extend a hold. Id.

Duty To Create Policies. The statute requires that a financial institution adopt internal policies, programs, plans, or procedures for: (1) the employees of the financial institution to make the notification; and (2) the financial institution to conduct the assessment and submit the report. Id. at § 280.002(d). These policies may authorize the financial institution to make a report to other appropriate agencies and entities. Id. at § 280.002(e). A financial institution shall also adopt internal policies, programs, plans, or procedures for placing a hold on a transaction. Id. at § 280.004.

Immunity.  An employee or financial institution who makes a report to the Department or to a third party is immune from any civil or criminal liability unless the employee or financial institution acted in bad faith or with a malicious purpose. Id. at § 280.005. Further, a financial institution that in good faith and with the exercise of reasonable care places or does not place a hold on any transaction is immune from any civil or criminal liability or disciplinary action resulting from that action or failure to act. Id. at § 280.005.

Records. A financial institution shall provide access to or copies of records relevant to the suspected financial exploitation to the Department, law enforcement or a prosecuting attorney. The provisions in Texas Finance Code Section 59.006 relating to notice and reimbursement for customer records do not apply to these provisions.

III.     Securities Dealers and Financial Advisers

Professionals’ Duties To Report. It provides that if a securities professional has cause to believe that financial exploitation of a vulnerable adult who is an account holder with the dealer or investment adviser has occurred, is occurring, or has been attempted, the securities professional shall notify the dealer or investment adviser of the suspected financial exploitation. “Securities professionals” are agents, investment adviser representatives, or persons who serve in a supervisory or compliance capacity for a dealer or investment adviser.

Dealer’s/Investment Adviser’s Duty To Report. If a dealer or investment adviser is notified of suspected financial exploitation or otherwise has cause to believe that financial exploitation of a vulnerable adult who is an account holder with the dealer or investment adviser has occurred, is occurring, or has been attempted, the dealer or investment adviser shall assess the suspected financial exploitation and submit a report to the Securities Commissioner and the Department. The dealer or investment adviser shall submit the reports not later than the earlier of: (1) the date the dealer or investment adviser completes the dealer’s or investment adviser’s assessment of the suspected financial exploitation; or (2) the fifth business day after the date the dealer or investment adviser is notified of the suspected financial exploitation or otherwise has cause to believe that the suspected financial exploitation has occurred, is occurring, or has been attempted. If a dealer or investment adviser submits reports, they may also notify a third party reasonably associated with the vulnerable adult of the suspected financial exploitation, unless the dealer or investment adviser suspects the third party of financial exploitation of the vulnerable adult.

Duty To Create Policies. Each dealer and investment adviser shall adopt internal policies, programs, plans, or procedures for the securities professionals or persons serving in a legal capacity for the dealer or investment adviser to make the notification and for the dealer or investment adviser to conduct the assessment and submit reports. The policies, programs, plans, or procedures may authorize the dealer or investment adviser to report the suspected financial exploitation to other appropriate agencies and entities in addition to the Securities Commissioner and the Department, including the attorney general, the Federal Trade Commission, and the appropriate law enforcement agency. Each dealer and investment adviser shall also adopt internal policies, programs, plans, or procedures for placing a hold on a transaction.

Ability To Place Hold On Transactions. If a dealer or investment adviser submits reports, they: (1) may place a hold on any transaction that involves an account of the vulnerable adult, and the dealer or investment adviser has cause to believe is related to the suspected financial exploitation; and (2) must place a hold on any transaction involving an account of the vulnerable adult if the hold is requested by the Securities Commissioner, the Department, or a law enforcement agency. The hold expires ten business days after the date the dealer or investment adviser submits the reports. This can be extended for up to thirty business days if requested by a state or federal agency or a law enforcement agency investigating the suspected financial exploitation. The dealer or investment adviser may also petition a court to extend a hold placed on any transaction.

Immunity. A securities professional, dealer, or investment adviser who makes a notification or report or who testifies or otherwise participates in a judicial proceeding is immune from any civil or criminal liability arising from the notification, report, testimony, or participation in the judicial proceeding, unless the securities professional, person serving in a legal capacity for the dealer or investment adviser, or dealer or investment adviser acted in bad faith or with a malicious purpose. A dealer or investment adviser that in good faith and with the exercise of reasonable care places or does not place a hold on any transaction is immune from civil or criminal liability or disciplinary action resulting from the action or failure to act.

Records. A dealer or investment adviser shall provide on request access to or copies of records relevant to the suspected financial exploitation to the Department, law enforcement or a prosecuting attorney.

IV.     Other Reporting Duties

The Texas Human Resources Code has a general provision that requires anyone to report the exploitation of elderly or disabled individuals. Section 48.051 states: “a person having cause to believe that an elderly person, a person with a disability, or an individual receiving services from a provider as described by Subchapter F is in the state of abuse, neglect, or exploitation shall report the information required by Subsection (d) immediately to the department.” Tex. Hum. Res. Code § 48.051.  In the Texas Human Resources Code, the term “exploitation” means “the illegal or improper act or process of a caretaker, family member, or other individual who has an ongoing relationship with an elderly person or person with a disability that involves using, or attempting to use, the resources of the elderly person or person with a disability, including the person’s social security number or other identifying information, for monetary or personal benefit, profit, or gain without the informed consent of the person.” Id. at § 48.002. Importantly, the Texas Human Resources Code provides a criminal penalty for not reporting the exploitation: “A person commits an offense if the person has cause to believe that an elderly person or person with a disability has been abused, neglected, or exploited or is in the state of abuse, neglect, or exploitation and knowingly fails to report in accordance with this chapter.” Id. at § 48.052. Generally, this offense is a Class A misdemeanor. Id. The Texas Human Resources Code has similar immunity defenses for making reports. Id. § 48.054.

Importantly, the new provisions provide that complying with those reporting obligations also satisfies the reporting obligations under the Texas Human Resources Code. So, there is no duty to make multiple reports.

V.     Application of U.C.C. Section 3.307 To Notice

The statutory definition of “financial exploitation” seems very broad. Financial institutions, dealers, and financial advisers should be aware of another provision that dictates when a financial institution has notice of a breach of fiduciary duty. Texas Business and Commerce Code Section 3.307 sets forth the rules dictating when a taker of an instrument would lose its holder-in-due-course status and potentially make financial institutions vulnerable to other causes of action, such as conversion due to having notice of fiduciary breaches. Tex. Bus. & Com. Code Ann. § 3.307. Section 307 has been explained in this way:

When a fiduciary holds an instrument in trust for or on behalf of the represented person, he is usually authorized to negotiate the instrument only for the benefit of the represented person. When the fiduciary negotiates the instrument for his own benefit rather than for the benefit of the represented person in breach of his trust, an equitable claim of ownership on the part of the represented person arises. The represented person may assert this claim against any person not having the rights of a holder in due course. A taker cannot be a holder in due course if he has notice of the claim of the represented person. Section 3-307 determines when the taker has notice of such a claim that prevents her from becoming a holder in due course.

6 William D. Hawkland & Larry Lawrence, Uniform Commercial Code Series § 3-307:3 (Rev. Art. 3) (1999).

Section 3.307(b) of the Texas Business and Commerce Code states:

If (i) an instrument is taken from a fiduciary for payment or collection or for value, (ii) the taker has knowledge of the fiduciary status of the fiduciary, and (iii) the represented person makes a claim to the instrument or its proceeds on the basis that the transaction of the fiduciary is a breach of fiduciary duty, the following rules apply:

(1)  notice of breach of fiduciary duty by the fiduciary is notice of the claim of the represented person;

(2)  in the case of an instrument payable to the represented person or the fiduciary as such, the taker has notice of the breach of fiduciary duty if the instrument is:

(A)  taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary;

(B)  taken in a transaction known by the taker to be for the personal benefit of the fiduciary; or

(C)  deposited to an account other than an account of the fiduciary, as such, or an account of the represented person;

(3)  if an instrument is issued by the represented person or the fiduciary as such, and made payable to the fiduciary personally, the taker does not have notice of the breach of fiduciary duty unless the taker knows of the breach of fiduciary duty; and

(4)  if an instrument is issued by the represented person or the fiduciary as such, to the taker as payee, the taker has notice of the breach of fiduciary duty if the instrument is:

(A)  taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary;

(B)  taken in a transaction known by the taker to be for the personal benefit of the fiduciary; or

(C)  deposited to an account other than an account of the fiduciary, as such, or an account of the represented person.

Tex. Bus. & Com. Code Ann. § 3.307.

Although the definition of financial exploitation is broader than the provisions of Section 3.307, Section 3.307 is a good place to start to determine whether there is notice that financial exploitation may be occurring.

VI.     New Statutes May Impact Aiding And Abetting Theories

When an exploiter takes advantage of a vulnerable person, the exploiter often does not make wise investments with the wrongfully obtained assets. In other words, when someone attempts to retrieve those assets for the vulnerable person or his or her estate, the exploiter may be judgment proof. So, the plaintiff will often look to others who have deeper pockets and may be able to pay a judgment. There are several theories in Texas that allow a plaintiff to sue a third party for the exploiter’s bad conduct.

When a third party knowingly participates in the breach of a fiduciary duty, the third party becomes a joint tortfeaser and is liable as such. Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 513-14 (Tex. 1942); Kaster v. Jenkins & Gilchrist, P.C., 231 S.W.3d 571, 580 (Tex. App.—Dallas 2007, no pet.); Brewer & Pritchard, P.C. v. Johnson, 7 S.W.3d 862, 867 (Tex. App.—Houston [1st Dist.] 1999), aff’d on other grounds, 73 S.W.3d 193 (2002). The elements are: (1) a breach of fiduciary duty by a third party, (2) the aider’s knowledge of the fiduciary relationship between the fiduciary and the third party, and (3) the aider’s awareness of his participation in the third party’s breach of its duty. Darocy v. Abildtrup, 345 S.W.3d 129, 137-38 (Tex. App.—Dallas 2011, no pet). There may also be an aiding-and-abetting-breach-of-fiduciary-duty claim in Texas. See First United Pentecostal Church of Beaumont v. Parker, 2017 Tex. LEXIS 295 (Tex. Mar. 17, 2017) (assumed that such a claim existed in Texas but held that it was not expressly so holding). A civil conspiracy involves a combination of two or more persons to accomplish an unlawful purpose, or to accomplish a lawful purpose by unlawful means. Tilton v. Marshall, 925 S.W.2d 672, 681 (Tex. 1996). An action for civil conspiracy has five elements: (1) a combination of two or more persons; (2) the persons seek to accomplish an object or course of action; (3) the persons reach a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts are taken in pursuance of the object or course of action; and (5) damages occur as a proximate result.

The point is that a plaintiff may allege that the financial institution, dealer, or financial adviser knew of the exploiter’s fiduciary relationship, knew that breaches were occurring, and still assisted in completing the transactions. The plaintiff may cite to these new broad statutes (and Section 3.307) as giving legal definition to when a financial institution, dealer, or financial adviser has notice of breach of fiduciary duty. If the financial institution, dealer, or financial adviser did not properly report financial exploitation as required by the statutes, then the plaintiff will certainly take advantage of that fact in proving liability and/or exemplary damages. Accordingly, these new statutes may be far-reaching ramifications for financial institutions, dealers, or financial advisers beyond the express words in those statutes.

VII.      Conclusion

Certainly, the author agrees that financial exploitation of vulnerable persons is bad and should be punished. However, the new provisions seem to be very broad and have vague aspects that place new duties on financial institutions, dealers, financial advisers and their employees. These duties also seem to be placed at the expense of the financial institutions, dealers, and financial advisers. These new provisions raise many questions:

1) When should financial institutions, dealers, and financial advisers be imputed knowledge that a client is a vulnerable person? Is it just actual knowledge or should there be a “should have known” component? Is the knowledge of one employee imputed to all other employees?

2) The burden to make a report involves vulnerable persons who have an account with financial institutions, dealers, and financial advisers. Does an employee or financial institution, dealer, or financial adviser have any duty to investigate or report under this statute any exploitation of vulnerable persons who are not account holders? What if they are borrowers or attempted borrowers? Presumably, the Texas Human Resources Code provisions will still apply even if the other newer provisions do not.

3) What evidence will be necessary to raise a “cause to believe” that employees or financial institutions, dealers, and financial advisers should make a report?

4) What will the assessment entail? Does the financial institution, dealer, or financial adviser have a duty to investigate “outside the walls”? If the assessment leads to the belief that no exploitation has occurred, does there still have to be a report?

5) The definition of “financial exploitation” is very broad and would also seem to include even proper behavior, such as a power-or-attorney holder or agent compensating himself or herself for their services, which is expressly allowed on the new Durable Power of Attorney Statute. What duties will financial institutions, dealers, and financial advisers have to report proper behavior that seems to fit within the broad definition of “financial exploitation”?

6) If financial institutions, dealers, and financial advisers have to file suit to extend a hold, can they seek attorney’s fees and costs from the vulnerable person and/or the exploiter?

7) Do the new statutes create duties that a person can later use as a basis for a negligence suit? Do these statutes provide a basis for a negligence per se claim? Can vulnerable individuals sue financial institutions, dealers, and financial advisers for not assessing or reporting financial exploitation or placing or extending a hold that then leads to damages to the vulnerable persons?

8) When do financial institutions, dealers, and financial advisers have to adopt internal policies, programs, plans, or procedures regarding assessing and reporting financial exploitation and regarding holds? Do these have to be in writing or can they be oral? Does a defendant have to turn these over in litigation? Can these be used to set a standard of care, such that if financial institutions, dealers, and financial advisers have higher internal policies, programs, plans, or procedures than what is required by law, will the defendants have to meet their higher standards?

9) With regard to immunity, what are the legal standards for proving “bad faith or with a malicious purpose”? Who has the burden to prove that a report was made in “bad faith or with a malicious purpose”? Is the defendant presumed to act in good faith?

10) With regard to immunity for holds, what are the standards for “good faith and with the exercise of reasonable care”? Does reasonable care involve what a reasonably prudent financial institution, dealer, or financial adviser would do or simply a normal person? Will the parties be required to have expert evidence on the standard of care? If financial institutions, dealers, and financial advisers are in good faith, but do not exercise reasonable care, are they able to claim immunity? If there is no immunity, what potential damages can a vulnerable individual claim (direct or consequential damages)?

Court Affirms Summary Judgment In Will Contest Where There Was No Evidence Of Undue Influence

Posted in Cases Decided, Texas Court of Appeals

In Estate of Frye, parties filed an application to set aside an order probating a will due to an allegation of undue influence. No. 07-16-00398-CV, 2017 Tex. App. LEXIS 6992 (Tex. App.—Amarillo July 26, 2017, no pet. history). The decedent left bequests to her daughters, Judy and Patsy, in her will, but left nothing to her grandchildren, Jackson and Frye, despite her purported comments that she would do so. The grandchildren alleged that this omission was due to the efforts of Judy and Patsy to induce the decedent to change her will when her husband died. The aunts filed a no-evidence motion for summary judgment, which the trial court granted, and the grandchildren appealed.

The court of appeals held that a claim of undue influence contains several elements: 1) the existence and exertion of an influence upon the testator, 2) that subverted or overpowered his mind at the time the will was executed, and 3) so that the testator executed an instrument he would not otherwise have executed but for such influence. The court noted that influence is not “undue” unless it destroys the testator’s free agency resulting in the testament reflecting not the desires of the decedent but rather those of the person exerting the influence. “In other words, requesting or entreating another to execute a favorable dispositive instrument fails to evince undue influence; rather, the entreaties must be so excessive as to subvert the will of the maker.” Id. The court held that a will contestant must not only provide evidence that an undue influence existed, they must also offer evidence of the testatrix’s state of mind at the time the will was executed that would tend to show her free agency was overcome by such influence. The court affirmed the no-evidence summary judgment, holding that there was no evidence to support a finding of undue influence:

It is the legal truism that a person of sound mind has the right to dispose of his property as he wishes. One may be old, may be suffering from maladies, may be susceptible to influence, and may select an unordinary way to dispose of his property, but the disposition may still be emanating from her own will or choice. Simply put, the evidence of record fails to create a genuine issue of fact establishing the exertion of any influence on the part of Judy or Patsy with regard to the identity of those who were to be beneficiaries of Margaret’s estate. There is evidence that Judy and Patsy may have informed their mother of her need to change the will. So too is there evidence that Judy and or Patsy may have taken their mother to a lawyer’s office within three weeks of Eugene’s death. Frye stated in his deposition that Judy and Patsy informed Margaret that this was needed because the person designated as executor of her will (her son Gerald) had died and that they wanted to be co-executors. Yet, we are cited to nothing indicating what transpired in the lawyer’s office. Nor were we cited to evidence indicating that either Judy or Patsy was present when Margaret spoke with the lawyer or what the lawyer and Margaret discussed. It is clear that neither Judy nor Patsy were present when Margaret executed the new will.… It may be that Patsy informed Jackson, years after the will’s execution, that “we cut ya’ll out”… Yet, “we cut ya’ll out” indicates a result. It illustrates neither the presence of any communications on the matter between Judy, Patsy, and Margaret or their tenor. And though the result may have been agreeable to Judy and Patsy, there is no evidence that they asked, told, or demanded that from Margaret. At most, the evidence indicates opportunity to influence. Opportunity alone, though, is not enough to establish undue influence. Nor is it enough to create genuine issues of material fact on the matter.

Id.

The court then held that the grandchildren’s claim for tortious interference with inheritance rights failed because there was no such claim in Texas: “this court does not recognize the cause of action for tortious interference with inheritance rights… Until either the Supreme Court or the legislature recognizes it, we will not for the reasons expressed in our Kinsel opinion. Thus, the trial court did not err in granting summary judgment against them on that claim.” Id.

New Texas Statutes That Impact Fiduciaries Become Effective Today (9/1/2017)

Posted in Items of Interest

The Texas Legislature passed, and the Governor has signed, a new act that creates new protections for vulnerable individuals. This impacts financial institutions, broker/dealers, and investment advisors. The Texas Legislature now requires employees to report suspected incidences of financial exploitation of vulnerable persons (those over 65 or those with disabilities) to their employers, and for the financial institution, security dealer, or financial adviser to similarly make reports to the Texas Department of Family and Protective Services. The financial institution, security dealer, or financial adviser also have the right to place a hold on any transaction where it suspects financial exploitation is occurring related to an account. The statutes require that a financial institution, security dealer, or financial adviser adopt internal policies, programs, plans, or procedures for: (1) employees to make the notification; and (2) the financial institution, security dealer, or financial adviser to conduct the assessment and submit the report. 

The Texas Legislature has also recently instituted broad changes to the Texas Estates Code’s Texas Durable Power of Attorney Act. Due to customers’ frustration with financial institutions not accepting durable power of attorney documents, one aspect of the new statutory provisions is to make sure that financial institutions and other entities accept durable power of attorney documents with limited exceptions. Further, the statutory changes allow financial institutions to request English translations, agent certifications, and opinions of counsel to ensure that the use of the power of attorney document is valid. The statute also provides for new limited protections for financial institutions that accept power of attorney documents. The provisions also potentially allow broad additional powers to designated agents; powers that would even allow the agents to benefit themselves from the principal’s assets.

The Author will post a series of articles dealing with these new statutes and will host a webinar on September 26, 2017 at 10:00 a.m. CST where he will discuss these changes. 

 

Court Affirms Arbitration Decision Arising From Trust Dispute

Posted in Cases Decided, Texas Court of Appeals

In Saks v. Rogers, a beneficiary of a trust challenged a trial court’s enforcement of an arbitration decision. No. 04-16-00286-CV, 2017 Tex. App. LEXIS 6923 (Tex. App.—San Antonio July 26, 2017, no pet. history). The parties entered into a mediated settlement agreement (MSA) that included an arbitration agreement for “disputes aris[ing] with regard to the interpretation and/or performance of [the MSA] or any of its provisions, including the form of further documents to be executed . . . .” Id. Although not present at the mediation, the beneficiary provided another a power of attorney to act on her behalf for the MSA. Later, a party filed a motion to compel arbitration. The dispute went to arbitration, and the arbitrator issued certain findings and conclusions. The beneficiary then challenged the arbitrator’s decision because allegedly her complaints were not within the scope of the arbitration clause. The trial court enforced the arbitrator’s decision, and the beneficiary appealed.

The court of appeals concluded that the use of the language “disputes arise with regard to the interpretation and or performance of this Agreement or any of its provisions,” speaks to the broad nature of the arbitration agreement and that it was not limited to claims that literally arose under the agreement, but instead embraced all disputes between the parties that have a significant relationship with the agreement. The court then found that the beneficiary’s claims fell within the scope of the arbitration clause:

The MSA’s primary goal was the execution of documents regarding properties owned by the trust. At the heart of Landen’s dispute is the distribution of the trust’s corpus. In the previous appeal, Landen did not dispute the probate court’s order that she was a party to the MSA. Whether a conflict of interest exists regarding Appellees’ procurement of Landen’s power of attorney turns on any benefits Appellees might receive under the MSA. Similarly, whether any payment of monies to Appellees, under the MSA, involved elements of fraud also requires an evaluation of any monies owed under the MSA or the distribution of benefits stemming from the MSA. The probate court’s order, about which Landon complains, required her to execute documents under the trust. We conclude Landen failed to prove that her claims stand-alone from the MSA and that they are not “‘inextricably enmeshed’ with, or are ‘factually intertwined'” with the MSA and distributions from the trust.

Id. The court of appeals affirmed the trial court’s order enforcing the arbitrator’s opinion.

Court Held That Estate Representative Was Entitled To Discover Documents To Establish A Claim

Posted in Cases Decided, Texas Court of Appeals

In In re Cokinos, Boisien & Young, a representative of an estate of a deceased attorney sought documents from a law firm related to an alleged agreement to share fees. No. 05-16-01331-CV, 2017 Tex. App. LEXIS 6911 (Tex. App.—Dallas July 25, 2017, original proceeding). The trial court ordered that the estate representative have access to correspondence documents to which the deceased lawyer was a party because they may be relevant to a fee-sharing dispute between the estate and the law firm. The law firm filed a petition for writ of mandamus, challenging the order and arguing that the trial court abused its discretion because the documents were privileged, attorney-client communications and/or subject to the work product doctrine. The court of appeals held that an executor stands in the decedent’s shoes, and that the estate is entitled to copies of the decedent’s e-mail correspondence just as the decedent would be entitled to the e-mails if he were alive. The court held: “Indeed, where it is reasonable to do so, the estate representative is to exercise ordinary diligence to collect all claims and debts due the estate. The Estate, thus, had a duty to seek out these communications to determine if fees were owed to the Estate and litigate if necessary to recover those fees.” Id. Regarding the claim of privilege, the court held that an attorney is permitted to retain a copy of his file and that a privilege would only protect discovery by third-parties, not discovery by a party to the communication. Id. The court denied the petition for writ of mandamus and allowed the discovery order to proceed.

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