Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

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

Posted in Cases Decided, Texas Supreme Court

Background: Arbitration Clauses May Apply To Trust Disputes

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

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

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

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

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

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

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

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

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

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

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

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

Id. at *8-9.

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

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

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

Posted in Cases Decided, Texas Court of Appeals

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

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

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

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

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

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

Posted in Cases Decided, Texas Court of Appeals

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

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

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

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

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

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

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

Bankruptcy Court In Texas Held That Client Did Not Adequately Plead An Aiding and Abetting Breach of Fiduciary Duty Claim Against Former Attorneys

Posted in Items of Interest

In In re Westech Capital Corp., a bankruptcy trustee sued a company’s former attorneys for breaching fiduciary duties and also for aiding and abetting the breach of fiduciary duty. No. 16-10300-TMD, 2018 Bankr. LEXIS 969 (W.D. Tex. Bankr. March 29, 2018). The attorneys filed a motion to dismiss. The court first determined that, under Delaware and Texas law, the attorneys did not breach fiduciary duties by simply committing legal malpractice: “In short, all the actions taken by Greenberg as alleged by the Trustee were actions taken in the context of the attorney-client relationship, and no more, and so the Trustee has not alleged a cognizable claim for breach of fiduciary duty on the part of Greenberg.” Id. The court then addressed the aiding and abetting claim and similarly held that it should be dismissed:

Under Texas law, aiding and abetting a breach of fiduciary duty is more often called knowing participation in a breach of fiduciary duty. But the Texas Supreme Court has not expressly decided that this cause of action exists. In First United Pentecostal Church of Beaumont v. Parker, the Texas Supreme Court stated that if a claim for aiding and abetting a breach of fiduciary duty did exist, the plaintiff would have to prove “that the defendant, with unlawful intent, substantially assisted and encouraged a tortfeasor in a wrongful act that harmed the plaintiff.” In an earlier case, Juhl v. Airington, the Texas Supreme Court explained that whether substantial assistance was provided can be evaluated by considering these factors: a. The nature of the wrongful act; b. The kind and amount of the assistance; c. The relation of the defendant and the actor; d. The presence or absence of the defendant at the occurrence of the wrongful act; and e. The defendant’s state of mind.

The scienter elements are like the requirement in Delaware law in that it requires both knowledge of the fiduciary relationship and knowledge of the breach. Even though Texas law was not discussed by either the Trustee or Greenberg, based on the arguments presented in the pleadings, the only element brought into question by Greenberg is whether Greenberg knew that it was participating in breaches of fiduciary duty. The central question therefore is whether Greenberg knew that the acts it assisted were breaches of fiduciary duty. Courts applying Texas law (and assuming the cause of action does exist) have found the requisite knowledge when the plaintiff alleged that legal counsel had adequate information because of the context in which those actions were taken.

Id. The court then analyzed the pleading and held that the trustee did not adequately plead a claim for aiding and abetting breach of fiduciary duty because the pleading did not state that the attorneys had sufficient knowledge.



Court Holds That There Is A Fact Issue By Former Employer Against Employee For Breach Of Fiduciary Duty In Self-Dealing Transactions

Posted in Items of Interest

In Roberts v. Overby-Seawell Co., an employee sued his former employer for the failure to pay commissions. No. 3:15-CV-1217-L, 2018 U.S. Dist. LEXIS 47821 (N.D. Tex. March 23, 2018). The former employer filed a counterclaim for breach of fiduciary duty arising out of the employee’s failure to disclose that he had an interest in other entities with whom the employer was entering into transactions. Both parties filed dispositive motions, and the court refused to dismiss the defendant’s counterclaim. The employee argued that he did not owe a fiduciary duty and that the former employer had no evidence of damages arising from his alleged breach of fiduciary duties. The former employer argued that the employee owed a fiduciary duty and breached that duty by failing to disclose his ownership interest in other entities, and by focusing his time and effort on those entities to his own personal benefit instead of pursuing new business for the employer. The court stated:

Under Texas law, the elements of a breach of fiduciary duty claim are: (1) the existence of a fiduciary relationship; (2) a breach of the fiduciary duty; and (3) the breach resulted in injury to the plaintiff or benefit to the defendant. Texas recognizes that the agent-principal relationship gives rise to a fiduciary duty. An agent “has a duty to deal openly with the employer and to fully disclose to the employer information about matters affecting the company’s business.” Further, an agent who negotiates on behalf of his principal must disclose any adverse interest in the matter of the negotiation. An agent owes a “duty to deal fairly with the principal in all transactions between them.” First, the court concludes that Roberts, acting as an agent who negotiated on behalf of OSC, owed Defendants a fiduciary duty that arose as a matter of law as part of the principal agent relationship. Second, contrary to Roberts’s argument in his motion for summary judgment, Defendants do not need evidence of damages, as a benefit to the plaintiff suffices to prevail on a breach of fiduciary duty claim. Roberts’s income tax returns are evidence of profits from these other businesses sufficient to raise a genuine dispute of material fact as to whether he benefited from the alleged breach. Having reviewed the summary judgment record, the court determines that the parties have provided conflicting evidence as to whether Roberts fully disclosed his ownership interest and active role in other entities to Defendants, including Equiguard Agency, Lendwell, and Tech2Roi. As this issue is at the heart of Defendants’ breach of fiduciary duty counterclaim, the court will deny Roberts’s motion for summary judgment on this counterclaim.


Texas Supreme Court Compels Arbitration For Lender And Disagrees With Fifth Circuit

Posted in Cases Decided, Texas Supreme Court

In Henry v. Cash Biz, LP, a borrower sued a lender for the lender reporting the borrower’s bad checks to the district attorney’s office. No. 16-0854, 2018 Tex. LEXIS 164 (Tex. February 23, 2018). The borrower left checks as security for the loans. When the borrower defaulted, the lender attempted to cash the checks, and the checks were denied or insufficient funds. The lender then reported the bad checks to legal authorities. The borrower then sued the lender for improperly using the district attorney’s office. The parties’ agreement stated: “all disputes . . . shall be resolved by binding arbitration only on an individual basis with you.” Id. The contracts further provide that:

[T]he words “dispute” and “disputes” are given the broadest possible meaning and include, without limitation (a) all claims, disputes, or controversies arising from or relating directly or indirectly to the signing of this Arbitration Provision, the validity and scope of this Arbitration Provision and any claim or attempt to set aside this Arbitration Provision; (b) all federal or state law claims, disputes or controversies, arising from or relating directly or indirectly to this Disclosure Statement (including the Arbitration Provision), . . . (c) all counterclaims, cross-claims and third party claims; (d) all common law claims, based on contract, tort, fraud, or intentional torts; (e) all claims based on a violation of any state or federal constitution, statute or regulation; . . . (f) . . . claims for money damages to collect any sum we claim you owe us and/or the Lender; (g) all claims asserted by you individually against us . . . including claims for money damages and/or equitable or injunctive relief; (h) all claims asserted on your behalf by another person; (I) all claims asserted by you as a private attorney general, as a representative and member of a class of persons, or in any other representative capacity, against us . . . ; and/or (j) all claims arising from or relating directly or indirectly to the disclosure by us . . . of any non-public personal information about you.

The trial court denied the lender’s motion and agreed with the borrower that (1) their allegations related solely to the lender’s use of the criminal justice system so the arbitration clause was inapplicable, and (2) the lender waived its right to arbitration by substantially invoking the judicial process. The court of appeals reversed.

The Texas Supreme Court affirmed the court of appeals’s decision. The Court first held that the claims were within the scope of the clause. The Court stated: “the arbitration agreement applies to ‘all disputes’ and specifies that ‘dispute and disputes’ are given the broadest possible meaning and include, without limitation . . . all claims, disputes, or controversies arising from or relating directly or indirectly to the signing of this Arbitration Provision.” Id. The Court stated:

Given the presumption favoring arbitration and the policy of construing arbitration clauses broadly as noted above, it follows that the arbitration clause here applies—just as it says—to all disputes, even those relating only indirectly to the loan agreements. The Borrowers asserted that after they missed payments, Cash Biz deposited their postdated checks; the checks were returned for insufficient funds; Cash Biz threatened the Borrowers with criminal prosecution unless the loans were repaid; and when the Borrowers failed to pay, Cash Biz indeed pursued charges for issuance of bad checks. The Borrowers allege that when Cash Biz entered into the loan agreements, it failed to disclose the possibility that if the personal checks were presented to the banks for payment and were not paid, criminal prosecutions would follow. The Borrowers’ claims are not for breach of any specific obligations under the loan contracts. Nevertheless, their claims are based on the manner in which Cash Biz pursued collection of loans and are at least indirectly related to the contracts the Borrowers signed obligating them to repay the loans. Therefore, we agree with Cash Biz that the Borrowers’ claims are within the scope of the arbitration provision.

Id. The Court then addressed the argument that the lender had waived the clause by seeking relief from the district attorney’s office. The Court held that simply reporting the bad checks to the district attorney’s office was not sufficient to waive arbitration rights. Interestingly, in doing so, the Court expressly disagreed with the Fifth Circuit:

[I]n Vine v. PLS Financial Services, Inc., 689 F. App’x 800 (5th Cir. 2017) (per curiam). There, as did Cash Biz here, a short-term lender had borrowers sign postdated checks, which were presented for payment after the borrowers defaulted. Id. at 801. When the checks were not paid, the lender submitted the unpaid checks and affidavits to the local district attorneys. Id. The Vine court declined to follow the decision of the court of appeals in this case. Id. at 806. Rather, it concluded that the lender’s actions in submitting affidavits to prosecuting attorneys waived its right to enforce the arbitration agreement. Id.

With due respect, and recognizing that it is important for federal and state law to be as consistent as possible in this area where we have concurrent jurisdiction, we agree with the dissenting justice in Vine. Id. at 807 (Higginson, J., dissenting). We conclude, as he did, that although some lenders may be “gaming the system” by taking actions like the lenders took there and as Cash Biz took here, more is required for waiver of a contractual right to arbitrate. Id.

Id. The Court affirmed the court of appeals’s order compelling arbitration.

Presentation: Fiduciary Litigation Update, Texas Bankers Association’s Legal Conference

Posted in Items of Interest, Knowledge Library

David F. Johnson presented his paper on “Litigation Update, Including Fiduciary Issues” to the Texas Bankers Association’s Legal Conference in Austin, Texas, on April 5, 2018.  This presentation covered recent Texas precedent on arbitration clauses, forum-selection clauses, lost documents, aiding and abetting breach of fiduciary duty, damages for a trustee’s breach of fiduciary duty, and other matters.  The paper and presentation are attached below.

Texas Fiduciary Litigation Update – PPT Presentation

Texas Fiduciary Litigation Update_Paper

If you are interested in joining our next complimentary webinar or presentation, please send your request to dfjohnson@winstead.com.

Magistrate Recommends Denying A Motion To Dismiss Against A Bank For Aiding and Abetting Breach Of Fiduciary Duty

Posted in Cases Decided, Texas Court of Appeals

In Schmidt v. JP Morgan Chase Bank, N.A., the plaintiff’s employee opened credit cards in the employer’s name, used those credit cards for the employee’s own personal use, and paid those credit card bills with funds from the employer’s operating account and/or through advances from the employer’s line of credit. No. H-17-0532, 2018 U.S. Dist. LEXIS 43665 (S.D. Tex. February 2, 2018). The employer sued the bank for aiding and abetting breach of fiduciary duty and other claims for the amounts the employer lost as a result of the employee’s conduct. The defendant filed a motion to dismiss for failure to state a claim. The magistrate recommended granting it in part and denying it in part. Regarding the aiding and abetting claim, the court stated:

“Under Texas law, ‘where a third party knowingly participates in the breach of duty of a fiduciary, such third party becomes a joint tortfeasor with the fiduciary and is liable as such.’ To establish a claim for knowing participation in a breach of fiduciary duty, a plaintiff must assert: (1) the existence of a fiduciary relationship; (2) that the third party knew of the fiduciary relationship; and (3) that the third party was aware that it was participating in the breach of that fiduciary relationship.” Here, Schmidt alleges, in a conclusory fashion, that Defendants “knowingly participated” in Rhodes’ breach of fiduciary duty, and that they “allowed” Rhodes to open credit card accounts in Schmidt’s name without his authorization, and “allowed” Rhodes to obtain a cashier’s check from Schmidt’s account. While Schmidt does not allege that Defendants knew Rhodes was acting without Schmidt’s authorization, and does not allege that Defendants were aware of Rhodes’ fiduciary duty to Schmidt and her breach of that duty, Schmidt could arguably do so if there are facts that would support such allegations. On this record, therefore, Schmidt should be allowed an opportunity to include such allegations in an amended pleading that conforms with the requirements of FED. R. Civ. P. 11(b) in an attempt to state a plausible claim for aiding and abetting a breach of fiduciary duty.


Interesting Note. The court cites to knowing-participation cases in discussing the plaintiff’s aiding-and-abetting claim. The Texas Supreme Court has not expressly adopted an aiding-and-abetting claim for breach of fiduciary duty. It has adopted a knowing-participation claim. The law in Texas is ambiguous regarding whether knowing participation and aiding and abetting are the same or different theories, and if they are different, how they are different. This opinion certainly blurs the distinction between the two theories.

Court Affirmed Summary Judgment For A Trustee Due To An Exculpatory Clause

Posted in Cases Decided, Texas Court of Appeals

In Kohlhausen v. Baxendale, the court affirmed a summary judgment for a trustee on the basis of an exculpatory clause in a trust document. No. 01-15-00901-CV, 2018 Tex. App. LEXIS 1828 (Tex. App.—Houston [1st Dist.] March 13, 2018, no pet. history). A mother created a testamentary trust for the benefit of her son Kelley William Joste. The will, which named Kelley as trustee and beneficiary of his trust, also set forth the provisions governing the administration:

6.2 With regard to each trust created by this [Article VI], my Trustee shall distribute to the Beneficiary of such trust or any descendant of such Beneficiary such amounts of trust income and principal as shall be necessary, when added to the funds reasonably available to each such distributee from all other sources known to my Trustee, to provide for the health, support, maintenance and education of each such distributee, taking into consideration the age, education and station in life of each such distributee.

9.4 . . . Any Executor or Trustee shall be saved harmless from any liability for any action such Executor or Trustee may take, or for the failure of such Executor or Trustee to take any action if done in good faith and without gross negligence.

Id. After the mother died, Kelley exercised his right to become the sole trustee of his trust. After Kelley died, his estranged daughter received control of the trust’s assets. She then died. Her executor then sued her father’s executor for the father allegedly breaching his fiduciary duty by: (1) failing to disclose information; (2) engaging in self-dealing, i.e., gifting himself trust assets in excess of his support needs; (3) failing to make any distributions to his daughter or consider her support needs; (4) failing to consider his other sources of support and his own station in life before making distributions to himself; (5) commingling trust assets with personal assets; (6) pledging trust assets as collateral in violation of the will’s terms; and (7) failing to document his activity as trustee.

The father’s executor filed a motion for summary judgment and argued that the claims should be dismissed because the will’s exculpatory clause relieved the trustee from liability for any actions or omissions “if done in good faith and without gross negligence.” Id. After a hearing, the trial court granted the motion.

The court of appeals held that an exculpatory clause argument is an affirmative defense. “A defendant urging summary judgment on an affirmative defense is in the same position as a plaintiff urging summary judgment on a claim,” and that the party asserting an affirmative defense has the burden of pleading and proving it. Id. The court held that after the trustee established the existence of the exculpatory clause, the burden shifted to the non-movant to bring forward evidence negating its applicability. The court stated:

In this case, Baxendale pleaded the exculpatory clause and attached a copy of the Will containing the clause to his summary judgment motion. The Will plainly states that Kelley is not liable for any acts or omissions so long as such conduct was done “in good faith and without gross negligence.” Because Baxendale established that he was entitled to summary judgment as a matter of law on all of Kohlhausen’s claims based on the plain language of the Will, Kolhausen was required to bring forth more than a scintilla of evidence creating a fact issue as to the applicability of the clause, i.e., evidence that Kelley’s acts or omissions were done in bad faith or with gross negligence.


In her affidavit, Kohlhausen averred that after reviewing the financial documents available to her she was “unaware of any evidence that Kelley made any distributions to Valley from the Trust between 1997 and 2012.” Kohlhausen further averred: “I have reviewed the account statements produced by [Baxendale]. These statements are incomplete and I am unable to ascertain from them an accurate account of what receipts and distributions were made from the Trust during the time Kelley was trustee.” Kohlhausen also stated that she was “unaware of any documentation to suggest Kelley ever contacted Valley to inquire about her support needs during the time he was trustee.”


Kohlausen’s affidavit does not raise a fact issue as to whether Kelley failed to disclose information regarding the Trust to Valleyessa, make distributions to Valleyssa, consider her support needs, or document his activities as trustee. The paucity of evidence in this case is a result of the fact that both principals to the dispute have passed away. There is no one to depose and no affidavits to file establishing key facts. Moreover, the terms of the Will provided that Valleyessa was a contingent beneficiary, and Kelley, as the primary beneficiary, was allowed but not required to make a distribution to Valleyessa. Kohlhausen’s attorney is reduced to an attempt to build a case on the scant records left behind by Kelley. Such evidence amounts to no more than a scintilla and is insufficient to even establish what actions Kelley took or failed to take as trustee, much less that Kelley acted in bad faith or with gross negligence.

Id. The court held that because the summary judgment evidence failed to raise an issue of material fact as to whether any of the father’s alleged acts or omissions were taken in bad faith for involved gross negligence, the plaintiff failed to meet her burden of establishing the inapplicability of the exculpatory clause to such acts or omissions and affirmed the summary judgment for the defendant.

Court Holds That Laches Did Not Bar A Will Contest

Posted in Cases Decided, Texas Court of Appeals

In In re Estate of Perez-Muzza, two days before the statute of limitations period ended, a contestant filed a will contest seeking to have a court set aside an order admitting a will to probate. No. 04-16-00755-CV, 2018 Tex. App. LEXIS 1859 (Tex. App.—San Antonio March 14, 2018, no pet. history). Will contests must be filed within two years of the trial court’s order admitting the will to probate. Id. (citing Tex. Est. Code Ann. § 256.204(a)). The trial court entered an order granting the contestant’s traditional motion for summary judgment and setting aside its previous order admitting the will to probate. On appeal, the original will’s proponent contended that there was a genuine issue of material fact regarding his laches defense to the contestant’s motion.

The court of appeals affirmed the trial court’s order setting aside the order admitting the will to probate. Regarding the laches defense, the court stated:

The affirmative defense of laches precludes a plaintiff from asserting a legal or equitable right after an unreasonable delay against a defendant who has changed his position in good faith and to his detriment because of the delay. As a general rule, laches is inappropriate when a statute of limitations applies to the cause of action. To prevail on a laches defense where the cause of action was filed within the applicable statute of limitations, the defendant must additionally show “extraordinary circumstances” that would work a “grave injustice.”

Id. The court concluded that because the contestant filed her suit two days before the statute of limitations expired, the proponent was required to show the circumstances of this case were so “extraordinary” that allowing her to prosecute her will contest would work a “grave injustice.”

To support his laches defense, the proponent filed an affidavit wherein he attested that although he interacted with the contestant during the administration of the estate as independent executor, neither she nor anyone else in the family expressed concerns regarding the will’s validity. He further stated that he relied on the validity of the will by paying estate debts and taxes and distributing estate assets. To support his argument that the case presented extraordinary circumstances that would work a grave injustice, the proponent stated: “I no longer have much of the property that I inherited under the Will and that remained after paying estate debts and expenses as specifically ordered to do by this Court. Setting aside the probate of the Will at this late date would result in a grave injustice to me and any other person who acquired title and ownership of estate property without knowledge that the Will might be invalid, such as the banks who foreclosed on the certificates of deposit and the Internal Revenue Service.” Id.

The court noted that the proponent was the sole beneficiary under the probated will. The court held that although the proponent argued that he acted in good faith to his detriment because of the delay in filing the will contest, he did not present evidence that the delay was unreasonable. The court stated:

Rolando merely asserts he followed the procedures required for closing the estate and argues that the independent administration of the estate was terminated prior to suit being filed. Other than mentioning the IRS and the banks that foreclosed on the estate’s certificates of deposit, Rolando does not specify how setting aside the trial court’s previous order probating the will would result in a grave injustice to him or others, besides the IRS and banks. Additionally, Rolando does not specify who acquired title and ownership of the disposed-of property or under what circumstances. Further, Rolando does not specify when he disposed of estate property he inherited — before or after Veronica filed suit to contest the validity of the will. Even taking as true all evidence favorable to Rolando and resolving any doubts in his favor, given the scant evidence presented by Rolando, we cannot say the circumstances of this case are so extraordinary that allowing Veronica to prosecute her will contest would work a grave injustice.


The court held that the proponent had the burden to establish a fact issue on every element of his affirmative defense, and that he did not show that he changed his position in good faith, and to his detriment, due to the delay in filing the will contest. Also, it held that he failed to show the case presented extraordinary circumstances that would work a grave injustice. Therefore, the court held that the trial court did not err by granting the contestant’s motion for summary judgment and setting aside its previous order admitting the will to probate.