Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

Court Holds That Attorney Did Not Have An Attorney-Client Relationship With A Company’s Directors And Shareholders

Posted in Cases Decided, Texas Court of Appeals

Selected by Texas Bar Today as a “Top 10 Blog Post”

In Pennington v. Fields, the majority of shareholders of a closely held business forced the buy-out of the minority shareholder and litigation ensued. No. 05-17-00321-CV, 2018 Tex. App. LEXIS 6601 (Tex. App.—Dallas August 21, 2018, no pet. history). Later, the minority shareholder sued the majority shareholder’s attorney and alleged that he committed legal malpractice by, among other things, negligently advising the majority to engage in oppression and breaches of fiduciary duties and that he failed to advise the minority shareholder to protect his interests against the misconduct of the majority. The attorney filed a motion for summary judgment, alleging that he owed the minority shareholder no fiduciary duty because he never represented him, which the trial court granted. The plaintiff appealed.

Regarding the existence of the attorney-client relationship, the court of appeals stated:

The existence of a duty is an element of a legal malpractice claim. The attorney—client relationship is a contractual relationship that arises from a lawyer’s agreement to render professional services to a client. The agreement may sometimes be implied from the parties’ conduct. But whether an agreement is express or implied, there must be evidence that both parties intended to create an attorney—client relationship. One party’s subjective belief is insufficient to raise a question of fact to defeat summary judgment.

Id. (internal citations omitted). The plaintiff cited to two engagement letters between the company and the attorney, which referenced doing legal services “as required by the board of directors,” of which the plaintiff was one at the time. The court of appeals held:

These two agreements do not raise a fact issue regarding the existence of an attorney—client relationship between Pennington and Collins. Both agreements are between Advantage and Collins. A corporation is a legal entity separate and apart from the people who compose it, making it distinct from its stockholders, officers, and directors. Thus, rendering legal services to a corporation does not by itself create privity between the attorney and the corporation’s officers, directors, or shareholders. We disagree with Pennington’s argument that Collins was “clearly engaged to represent Advantage’s shareholders,” including Pennington. Pennington was not named in nor did he sign the agreement. The agreement was clearly between Collins and Advantage. Evidence of an agreement between Collins and Advantage is no evidence of an attorney—client relationship between Collins and one of Advantage’s directors or shareholders.

Id.

The plaintiff then contended that there was an implied agreement for legal representation. The court stated:

Although an attorney—client relationship may be implied from the actions of the parties, the parties must manifest an intention to create an attorney—client relationship. Whether there was a meeting of the minds must be based on an objective standard, examining what the parties did and said and not their alleged subjective states of mind… Both sides discuss the case of MacFarlane v. Nelson from the Third Court of Appeals. In that case, the court of appeals noted that when a lawyer represents a small entity with extensive common ownership and management, difficulties can arise in determining the existence of an attorney—client relationship. MacFarlane v. Nelson, No. 03-04-00488-CV, 2005 Tex. App. LEXIS 7681, 2005 WL 2240949, at *4 (Tex. App.—Austin Sept. 15, 2005, pet. denied) (mem. op.). The opinion listed several factors to consider in determining whether a lawyer for the entity also represents an individual owner: (1) whether the lawyer affirmatively assumed the duty of individual representation; (2) whether the owner had independent representation; (3) whether the lawyer previously represented the owner on a personal basis; (4) and whether the evidence demonstrates the owner’s reliance on or expectations of the lawyer’s separate representation. Id. An attorney—client relationship is not created with the individual owner simply because the owner discusses matters with the lawyer that are relevant to both the owner’s and the entity’s interests. Id.

Id. The plaintiff asserted that those factors weighed in favor of a finding that an attorney-client relationship existed, but the court disagreed:

Pennington met Collins on the day he was removed as Advantage’s president. Thus, Collins had not previously represented Pennington. Although Pennington did not have independent representation at that time, he retained his own legal counsel shortly after the June 27 meeting. Pennington asserts he believed Collins was “advising him and representing his interests” because Collins represented to Pennington that Pennington’s interests were not adverse to Fields’s and Phillips’s. He contends Collins admitted he was representing all three directors. To demonstrate this, he relies on Collins’s deposition testimony. In his deposition, Collins was asked if he thought he was helping Pennington. Collins stated he was trying to “find a solution for all of the parties to work together” and if it worked out, it would have helped Pennington. His goal was to help his clients, who were Fields and Phillips and later Advantage. Pennington’s summary judgment evidence does not show that Collins affirmatively assumed a duty to represent Pennington individually. Evidence Pennington had a subjective belief that Collins was representing him is insufficient. Whether there was a meeting of the minds about representation must be based on an objective standard, and there is no objective evidence Collins intended to create an attorney—client relationship with Pennington. An attorney—client relationship was not created between Collins and Pennington simply because Collins discussed matters with Pennington that were relevant to both Pennington’s and Advantage’s interests.

Id. The court held that the evidence did not raise a fact issue regarding the existence of an attorney-client relationship and affirmed the summary judgment motions.

Interesting Note: This case raises an important issue for attorneys who represent closely held businesses and the owners and operators of those businesses. The parties should be careful to properly document who the client is and the scope of the representation. Otherwise, there may be confusion as to whom the attorney owes fiduciary duties.

Certainly, an attorney can represent more than one party; in fact, that is very common. For example, a law firm may represent a shareholder and the company in an asset sale transaction. More commonly, a law firm may represent both spouses in the sale of real property, the leasing of minerals, or in estate planning. See, e.g., Estate of Arlitt v. Paterson, 995 S.W.2d 713, 720–721 (Tex. App.—San Antonio 1999, pet. denied) (an attorney may represent a couple as joint estate planning clients, in which case the attorney will owe a duty to both clients). So, a reasonably prudent attorney should identify who he or she represents and clarify that he or she does not represent a party when the attorney first communicates with a party regarding a legal matter. See Tex. R. Disc. C. 4.03 (“In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.”). Though not dispositive, a “trier of fact may consider the construction of a relevant rule of professional conduct that is designed for the protection of persons in the claimant’s position as evidence of the standard of care and breach of the standard.” William V. Dorsaneo, Texas Litigation Guide, § 322.02 (Citing Restatement (Third) of Law Governing Lawyers § 52, Comment f).

The downside to an attorney is that an attorney may inadvertently create an attorney-client relationship and be held to fiduciary duties that are not anticipated. To have an attorney-client relationship, there does not have to be a formal agreement. “While it is generally a relationship created by contract, an attorney-client relationship can be implied based on the conduct of the parties.” Sotello v. Stewart, 281 S.W.3d 76, 80-81 (Tex. App.—El Paso 2008, pet. denied) (citing Sutton v. Estate of McCormick, 47 S.W.3d 179, 182 (Tex. App.—Corpus Christi 2001, no pet.) and Mellon Service Co. v. Touche Ross & Co., 17 S.W.3d 432, 437 (Tex. App.—Houston [1st Dist.] 2000, no pet.)). “The attorney-client relationship may be implied if the parties by their conduct manifest an intent to create such a relationship.” Daves v. Commission For Lawyer Discipline, 952 S.W.2d 573, 577 (Tex. App.—Amarillo 1997, pet. denied). For the relationship to be established, “the parties must explicitly or by their conduct manifest an intention to create it. To determine whether there was a meeting of the minds, we use an objective standard examining what the parties said and did and do not look at their subjective states of mind.” Roberts v. Healey, 991 S.W.2d 873, 880 (Tex. App.–Houston [14th Dist.] 1999, pet. denied). “More specifically, an attorney-client relationship can be implied from the attorney’s gratuitous rendition of professional services.” Sotello v. Stewart, 281 S.W.3d at 80-81 (citing Perez v. Kirk & Carrigan, 822 S.W.2d 261, 265 (Tex. App.—Corpus Christi 1991, writ denied)).

It should also be noted that an attorney may be liable for not informing a party that it is not representing the party. Querner v. Rindfuss, 966 S.W.2d 661, 667-68 (Tex. App.—San Antonio 1998, writ denied) (recognizing that an attorney’s advice may give rise to an informal fiduciary duty even when no formal attorney-client relationship is formed). The Querner court stated:

Although an attorney hired by an executor generally represents the executor and not the beneficiary, an attorney for an executor may undertake to perform legal services as attorney for one or more beneficiaries. An attorney-client relationship may develop between the attorney retained by the executor and the beneficiaries either expressly or impliedly. Even absent an attorney-client relationship, an attorney may be held negligent for failing to advise a party that he is not representing the party. ‘If circumstances lead a party to believe that they are represented by an attorney,’ the attorney may be held liable for such a failure to advise.

Id.; see also Vinson & Elkins v. Moran, 946 S.W.2d 381 (Tex. App.—Houston [14th Dist.] 1997, pet. denied); Burnap v. Linnartz, 914 S.W.2d 142, 148 (Tex. App.—San Antonio 1995, writ denied).

So, to avoid confusion, the attorney should always have a written engagement letter that expressly identifies the client or clients, the attorney is not representing any other party not expressly mentioned, the scope of the engagement, and when the engagement will be terminated. Further, if appropriate, the attorney should follow up and orally tell those that he or she is not representing, but with whom the attorney often communicates, that he or she is not representing them and is only representing his or her client(s). Further, individuals should also seek clarification and ask an attorney who the attorney represents and whether the individual should retain his or her own attorney. Everyone should strive to be on the same page regarding who is the attorney and who is the client. This important issue may also impact who may claim the attorney-client privilege regarding communications.

The Texas Supreme Court Denies Review In A Case Awarding Mental Anguish Damages, Exemplary Damages, and Other Damages For A Trustee’s Breach Of Fiduciary Duty

Posted in Cases Decided, Texas Supreme Court

Today, the Texas Supreme Court denied review in Wells Fargo v. Militello, No. 05-15-01252-CV, 2017 Tex. App. LEXIS 5640 (Tex. App.—Dallas June 20, 2017, pet. denied). In Militello, the court of appeals affirmed a trial court’s judgment against a trustee regarding a beneficiary’s claims for breach of fiduciary duty, negligence, and fraud where the trial court awarded $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 awarded but did not appeal the liability finding. The beneficiary agreed that the economic damages should be remitted (decreased) by around $340,000, which would also impact the exemplary damages award.

The court of appeals affirmed an award of damages based on Militello’s expenses associated with dealing with tax issues, including accountant fees and attorney’s fees, incurred due to Militello having to litigate tax issues caused by the trustee’s actions. The court of appeals also affirmed, in part, the award of mental anguish damages, holding 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. The court of appeals also affirmed the award of exemplary damages because it concluded there was clear and convincing evidence to support the trial court’s express finding that the trustee was grossly negligent. The court did suggest a remittitur due to the decrease in economic damages.

This is an interesting case because it dealt with a relatively new area of potential damages: an award for expenses incurred by a beneficiary in remedying a breach of duty by a trustee. Further, though several cases in Texas hold that a plaintiff could recover mental anguish for a breach of fiduciary duty, few cases discuss the claim and the standards for such an award in a trustee/breach-of-fiduciary-duty case. Similarly, few cases discuss the standards for an exemplary damage award in a trustee/breach-of-fiduciary-duty case. So, it would seem that the issues in the case would be ripe for Texas Supreme Court review. The trustee has the right to file a motion for rehearing on the denial of its petition for review.

 

On Rehearing, Court Holds That Drafts Of Wills and Trust Documents Are Not 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-CV, 2018 Tex. App. LEXIS 6647 (Tex. App.—Dallas August 22, 2018, original proceeding). The executor sued her son’s wife and his employer, alleging that the estate had the right to certain bonuses due to a pre-nuptial agreement. The decedent’s wife alleged that the pre-nuptial agreement may not be enforceable because of fraud, i.e. fair disclosure of property and financial obligations and fraudulent inducement to sign the agreement based on statements that the son made about having the wife cared for by a trust. The wife sought discovery of drafts of wills prepared after the will admitted to probate, 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 due to the attorney-client privilege. The wife maintained that the documents were 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 initially denied the mandamus and issued an opinion. In re Rittenmeyer, No. 05-17-01378-CV, 2018 Tex. App. LEXIS 2812 (Tex. App.—Dallas April 19, 2018, original proceeding), which was reported by this Blog. The mother filed a motion for rehearing, and the court issued a new opinion, granting the relief sought.

The Court noted that wife had the burden of establishing that the exception applied and stated the importance of the attorney-client privilege. The court stated:

For the exception to apply, the rule first requires that the information is “relevant to an issue between parties.” It is well-established that evidence is relevant if: “(a) it has any tendency to make a fact more or less probable than it would be without the evidence, and (b) the fact is of consequence in determining the action.” Texas courts have applied the rule 503(d)(2) exception when a party contends the information is relevant to a claim that a decedent lacked capacity to execute codicils or trust documents or was subject to undue influence.”

Id. The wife argued that she believed that the mother destroyed a subsequent will that her husband had executed, and that drafts of wills and related communications would be relevant to that topic. The court disagreed and stated:

Significantly, however, Chris could not have revoked the 2011 Will “except by a subsequent will, codicil, or declaration in writing, executed with like formalities, or by . . . destroying or cancelling the same or causing it to be done in his presence.” Documents showing Chris’s “present intent to change or revoke a testamentary instrument in the future cannot accomplish revocation of the instrument, nor [are they] evidence of the revocation.” Consequently, drafts of wills are not relevant to whether Chris executed a later will. For the same reason, drafts of wills are not relevant to Nicole’s claims that Hedy and Ashley destroyed “a later Will” that Chris executed.

Id. The court concluded that the wife did not establish that an exception applied to the attorney-client privilege regarding the draft wills and related correspondence.

The mother also challenged the trial court’s order requiring her to produce trust documents naming her son and the wife. The court ruled that any trust created by the mother and the father would not be within the exception because they were the settlors and not the husband. Therefore, the court of appeals’ new opinion granted mandamus relief for the mother.

Webinar—Trustees’ Ability to Retain and Pay Attorneys in Texas (Sept. 18 at 10:00 am CST)

Posted in Knowledge Library, Webinars

David F. Johnson’s presentation will focus on: 1) tips and suggestions for retaining and communicating with counsel and 2) a trustee’s ability and right to pay attorneys both during and after litigation.

Webinar – September 18

Date: Tuesday, September 18, 2018

Time: 10:00 – 10:45 a.m. CST

Cost: Complimentary

Speaker: David F. Johnson

Continuing Education Credit Information:
This course is approved for MCLE credit by the State Bar of Texas Committee on MCLE in the amount of 0.75 credit hours

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

REGISTER HERE

Independent Executor Had Authority To Sell Estate Real Property Despite Nothing In Will Giving Him That Authority

Posted in Cases Decided, Texas Court of Appeals

In Graff v. 2920 Park Grove Venture, Ltd., an executor was sued after selling estate real estate because the executor allegedly sold the property for less than fair market value. No. 05-16-01411-CV, 2018 Tex. App. LEXIS 4266 (Tex. App—Dallas June 13, 2018, no pet. history). Among other claims and arguments, the plaintiff alleged that the executor had no authority to sell the property because the will was silent regarding the authority to sell real property. The court of appeals held that the executor had that authority:

It is undisputed that the will did not expressly state the executor had the authority to sell the estate’s real property. However, under Texas law, independent executors like Hayden have authority to do any act which an ordinary executor may do under an order of the probate court without the need for an order. Where the will contains no restrictive terms upon his authority, an independent executor may incur reasonable expenses in the management of the estate, adjust and pay debts against the estate and for that purpose may sell property of the estate, although the will does not expressly grant that power.

The existence of debts against the estate is sufficient to authorize the independent executor to sell real property. Stanley does not dispute that the estate had certain outstanding debts at the time of the sale. In fact, the summary judgment record reveals at the time Hayden decided to sell the apartment complex, the estate had limited cash and several outstanding debts, including federal estate taxes of over $3 million, a mortgage on the apartment complex, executor’s fees of about $800,000, as well as outstanding attorney’s fees incurred in the administration of the estate. Accordingly, Hayden had authority to sell real property to satisfy the outstanding debts of the estate.

As for his contention with respect to probate court authorization, Stanley argues that because the record does not conclusively establish that Hayden needed to sell the property in order to satisfy the estate’s outstanding debts, Park Grove has not shown the probate court would have authorized the sale. According to Stanley, because he put forth evidence of an alternative way to satisfy the outstanding debt without the sale, Park Grove was not entitled to summary judgment on this rescission claim for lack of authority. However, Stanley cites no cases to support his position. To the contrary, the cases upon which he relies suggest that all that is required to authorize a sale is to show the existence of such facts as would authorize the probate court to order a sale, such as outstanding estate debts.

Id. The court of appeals affirmed a summary judgment for the executor on this claim.

Court Rules On Lost Profits, Lost Good Will, Disgorgement, and Forfeiture Remedies Against A Former Employee For Breach of Fiduciary Duty

Posted in Cases Decided, Texas Court of Appeals

In Samuel D. Orbison & Am. Piping Inspection v. Ma-Tex Rope Co., a jury found that a former employee breached fiduciary duties by working for a competitor while being employed by the plaintiff. No. 06-17-00112-CV, 2018 Tex. App. LEXIS 4381 (Tex. App.—Texarkana June 15, 2018, no pet. history). The jury awarded lost profits, lost good will, and the court awarded other disgorgement and forfeiture relief. The defendant appealed.

The court of appeals first reversed the award of $2,000 in lost profits because there was not sufficient evidence to show how such an award was calculated. The court stated:

Matthews testified that Ma-Tex had lost profits of $2,321.00 based on the total amount API charged Halliburton Pinnacle and Arklatex. He provided no explanation of how these lost profits were determined, and Ma-Tex points to no other evidence in the record that provided an explanation of how the lost profits were determined.… [H]is testimony … does not provide this Court with the objective facts, figures, or data from which the amount of lost profits were calculated, nor the method he used to calculate them. Consequently, the evidence is legally insufficient to support the finding of $2,321.00 in lost profits.

Id. The court also reversed the award of damages due to lost good will because the evidence was simply too conclusory:

Matthews merely testified that the damage to Ma-Tex’s good will would be $10,000.00 a month for twelve months, totaling $120,000.00. Matthews never testified how he determined these estimates. Ma-Tex does not point to any testimony, and we have found none, that provides any objective facts, figures, or data in support of his opinion. Consequently, we find the evidence is legally insufficient to support the trial court’s finding of $120,000.00 in good will damages.

Id. The court then turned to the disgorgement damages and affirmed. The court discussed the concept of an employee breaching fiduciary duties:

Generally, the term fiduciary “applies to any person who occupies a position of peculiar confidence towards another” and “contemplates fair dealing and good faith.” It is well established in Texas that an employee may be in a fiduciary relationship with his or her employer. An employee may not, without breaching his fiduciary duties, “(1) appropriate the company’s trade secrets, (2) solicit the former employer’s customers while still working for his employer, (3) solicit the departure of other employees while still working for his employer; or (4) carry away confidential information.” In an unchallenged conclusion of law, which is supported by the evidence, the trial court found Orbison breached his fiduciary duties in each of these ways.

Id. The court then discussed the legal standards for forfeiture/disgorgement relief:

When the court finds a breach of fiduciary duty, it may fashion an appropriate equitable remedy, including forfeiture of fees and disgorgement of any profit made at the expense of the employer. As the Texas Supreme Court noted, when an agent breaches his fiduciary duty, he is entitled to no compensation for conduct related to the breach, and if his breach is willful, “he is not entitled to compensation even for properly performed services.” The main purpose of these equitable remedies “is not to compensate an injured principal,” but rather “to protect relationships of trust by discouraging agents’ disloyalty.” Thus, a court “may disgorge all ill-gotten profits from a fiduciary when a fiduciary . . . usurps an opportunity properly belonging to a principal, or competes with a principal.” It may also require the fiduciary to forfeit any compensation for his work paid by the principal.

Id. Regarding the application of these standards to the fact, the court sustained the trial court’s award of a forfeiture of the compensation that the defendant was paid by the plaintiff and also a disgorgement of the compensation paid by the new employer to the defendant:

Since the trial court found that Orbison breached his fiduciary duties to Ma-Tex, it had discretion to impose appropriate equitable remedies for the breach. Here, it elected to require forfeiture of a portion of the compensation paid by Ma-Tex to Orbison during the period of time that Orbison was assisting API to set up its recertification shop and was soliciting two of Ma-Tex’s employee’s to work for API. In addition, the trial court required disgorgement of an amount equal to the compensation paid by API to Orbison during the time that Orbison was actively competing with Ma-Tex by using Ma-Tex’s confidential information to solicit its customers. Under Swinnea and the cases cited therein, we see no essential distinction between forfeiting a fee paid to an attorney or trustee who breaches his fiduciary duty and forfeiting the salary paid to an employee who does the same. In each instance the breaching fiduciary received compensation from the principal while breaching his trust. Neither do we see an essential distinction between disgorging a fee paid to, or the profit made by, an agent who usurps his principal’s business opportunity and disgorging an amount equal to the salary paid to a former employee by his new employer when the former employee uses confidential information and trade secrets to solicit the customers of his former employer. In each instance, the breaching fiduciary profited by, or received compensation for, breaching the trust of his principal. The same principles apply to each of these circumstances, and the remedies of forfeiture and disgorgement are “necessary to prevent such abuses of trust.” Consequently, we find that, under the circumstances of this case, Orbison was subject to the forfeiture of his salary paid by Ma-Tex and to the disgorgement of the salary paid to him by API while he was actively using Ma-Tex’s confidential information to solicit its customers.

Id.

Court Holds That Administrator Is Not Bound By Arbitration Clause In A Will

Posted in Cases Decided, Texas Court of Appeals

In Ali v. Smith, a successor administrator of an estate sued the former executor for breach of fiduciary duties arising from his management of the finances of the estate, converting assets of the estate, and using estate funds. No. 14-18-00003-CV, 2018 Tex. App. LEXIS 5129 (Tex. App.—Houston [14th Dist.] July 10, 2018, no pet. history). The defendant filed a motion to compel arbitration based on an arbitration provision contained in the will. The will provided:

If a dispute arises between or among any of the beneficiaries of my estate, the beneficiaries of a trust created under my Will, the Executor of my estate, or the Trustee of a trust created hereunder, or any combination thereof, such dispute shall be resolved by submitting the dispute to binding arbitration. It is my desire that all disputes between such parties be resolved amicably and without the necessity of litigation.

Id. The trial court denied the motion, and the defendant appealed.

On appeal, the defendant argued that the trial court erred by not enforcing the will’s arbitration clause because the arbitration clause was enforceable under the doctrine of direct-benefits estoppel as the plaintiff had (1) “enforced the will” and brought claims against defendant “for failing to comply with the will” and (2) “received appointee fees.”

The court of appeals held that the party asserting a right to arbitration has to prove a binding arbitration agreement. “Typically, a party manifests its asset by signing an agreement.” The parties agreed that they were not signatories to the will. “But the Texas Supreme Court has ‘found assent by nonsignatories to arbitration provisions when a party has obtained or is seeking substantial benefits under an agreement under the doctrine of direct benefits estoppel.’” Id. (citing Rachal v. Reitz, 403 S.W.3d 840, 843 (Tex. 2013)). The court describe direct-benefits estoppel thusly:

This doctrine precludes a plaintiff from seeking to hold a defendant liable based on the terms of an agreement that contains an arbitration provision while simultaneously asserting the provision lacks force because the plaintiff or defendant is a non-signatory. “When a claim depends on the contract’s existence and cannot stand independently—that is, the alleged liability arises solely from the contract or must be determined by reference to it—equity prevents a person from avoiding the arbitration clause that was part of that agreement.” On the other hand, “when the substance of the claim arises from general obligations imposed by state law, including statutes, torts and other common law duties, or federal law, direct-benefits estoppel is not implicated even if the claim refers to or relates to the contract or would not have arisen but for the contract’s existence.” Additionally, a non-signatory may be compelled to arbitrate if they deliberately seek or obtain substantial benefits from the contract by a means other than the lawsuit itself. This analysis focuses on the non-signatory’s “conduct during the performance of the contract.” This doctrine will not apply if the benefits are either insubstantial or indirect.

Id. (internal citations omitted).

The court held that the plaintiff was not seeking any relief under the will, but was seeking relief under Texas statutes and common law and thus direct-benefits estoppel did not apply:

Smith alleges in the petition that Ali (1) “Failed to responsibly handle the finances of the estate”; (2) “Converted assets of the Estate to his own personal use”; and (3) “Used estate funds in violation and dereliction of his fiduciary duties.” Unlike the beneficiary in Rachal who alleged violations of the trust terms, Smith does not allege in the petition that Ali violated any terms of the will. Rather, Smith contends that her claims are based on common law and statutory provisions such as Sections 351.001 and 351.101 of the Estates Code: “The rights, powers, and duties of executors and administrators are governed by common law principles to the extent that those principles do not conflict with the statutes of this state. An executor or administrator of an estate shall take care of estate property as a prudent person would take of that person’s own property . . . .” An executor such as Ali also has a statutory duty to deliver the property of the estate to a successor representative such as Smith. And, Smith alleges in the petition that this action was brought pursuant to Section 361.153, which provides that a successor representative is “entitled to any order or remedy that the court has the power to give to enforce the delivery of the estate property” to the successor representative.

The plain language of the statutes impose duties on both executors and administrators, but executors and administrators are not the same. An executor is named in a will, while an administrator with will annexed is not. The source of the executor’s power to act is the will. The source of an administrator’s power to act is the statutes and the court. Nothing in Smith’s petition indicates that Ali’s liability need be determined by reference to the will, even though he would not have been an executor “but for” the will. The substance of the claims arise from general duties imposed by statutes and the common law. Smith has not alleged that Ali violated any terms of the will, so this theory of direct-benefits estoppel is inapplicable.

Under the second avenue for proving direct-benefits estoppel, Ali contends that Smith has obtained a benefit from the will by collecting “appointee fees” from the estate. Smith contends that she was entitled to the fees by statute, not the will. We agree with Smith. The trial court’s order authorizing Smith to collect appointee fees does not state that Smith collected a benefit under the will. And, the authorizing statute does not make a distinction based on the existence of a will. Because the trial court awarded fees and expenses to Smith without reference to the will, Ali has not shown that Smith deliberately sought or obtained substantial benefits from the will by a means other than the lawsuit.

Id. (internal citations omitted). The court of appeals affirmed the trial court’s order denying the motion to compel arbitration.

There was a dissenting justice who would have reversed the order and compelled the case to arbitration. That justice would hold that both parties agreed to the arbitration clause by accepting an appointment to administer the estate:

It is self-evident that neither Ali nor Smith physically signed Sultan’s will at the time it was executed. However, it can hardly be said that they are strangers to the will. Their acceptance of appointments to serve as executors of the will (and all its provisions) constitutes the assent required to form an enforceable agreement to arbitrate under the Texas Arbitration Act. Texas jurisprudence regarding non-signatories to an arbitration agreement, therefore, should not be applied to this dispute. Because the majority has done so, I respectfully dissent.

Id. (Jamison, J. dissenting). The dissenting justice continued: “Smith agreed to her appointment, which was to carry out Sultan’s clearly expressed intent in his will, including the intention for disputes to be arbitrated. As Smith’s counsel stated in oral argument, ‘[The administrator] does not get to re-write the will.’ Exactly.” Id.

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.

Id.

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.

Id.

 

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