Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

Court Found Trial Court Had Jurisdiction To Appoint Temporary Administrator Where A Will Contest Was Filed From A Muniment of Title

Posted in Cases Decided, Texas Court of Appeals

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

In Chabot v. Estate of Sullivan, the decedent’s attorney probated a holographic will as a muniment of title. No. 03-17-00865-CV, 2019 Tex. App. LEXIS 2145 (Tex. App.—Austin March 20, 2019, no pet.). A claimant then asserted a claim that the decedent sexually abused him. The tort claimant and the decedent’s sister filed will contests. The court signed an order appointing a temporary administrator and then signed a subsequent order authorizing the administrator to settle the tort claimant’s claims. The party who would take under the will alleged that the order appointing the temporary administrator and approving the settlement were void. The court of appeals disagreed, holding that the orders were not void because the decedent’s sister and the tort claimant filed the will contests well within the two-year deadline under Texas Estates Code Section 256.204(a), no representative of the estate existed at the time as it was a muniment of title, and the trial court appointed the temporary administrator pursuant to its authority under Texas Estates Code Ann. Section 452.051(a). The court of appeals noted that the Estates Code provides at least two mechanisms for challenging a probate court’s order: a bill of review and a will contest. “Section 256.204, therefore, allows for the filing of a will contest within two years of the date the will was admitted to probate. It is undisputed that both Chabot and the Tort Claimants filed timely will contests.” Id. The court concluded:

Chabot and the Tort Claimants filed will contests well within the two-year deadline. See Tex. Estates Code § 256.204(a). No representative of Sullivan’s estate existed at the time, and the trial court appointed Deadman as temporary administrator pursuant to its authority under Section 452.051. See id. § 452.051(a). Chabot has not cited any authority prohibiting the trial court’s actions, and we are not aware of any. We therefore hold that the trial court’s order appointing Deadman was not void ab initio and that the court’s subsequent order authorizing Deadman to settle the Tort Claimants’ suits was not void on that ground.

Id.

Federal District Court Refuses To Dismiss Aiding And Abetting Breach Of Fiduciary Duty Claim Against A Law Firm

Posted in Items of Interest

In Milligan v. Salamone, the Greenberg Taurig lawfirm represented the bankrupt company when it sued a president and board member. No. 1:18-CV-327-RP, 2019 U.S. Dist. LEXIS 41009 (W.D. Tex. March 14, 2019). Greenberg drafted an agreement that would cancel the president’s employment contract, release him from his non-competition and non-solicitation obligations, and promise to pay him any accrued obligations (the “Cancellation Agreement”). A bankruptcy trustee later asserted claims against Greenberg for (1) breach of fiduciary duty, (2) aiding and abetting breaches of fiduciary duty, and (3) malpractice and negligence arising from its preparation of the Cancellation Agreement. Greenberg filed a motion to dismiss, which the bankruptcy court granted, and the trustee appealed to the district court.

The district court affirmed the dismissal of the direct breach of fiduciary duty claims because, although the trustee alleged a conflict of interest, there were no allegations that Greenberg represented the company and the president in his individual capacity at the same time. The court affirmed the dismissal of the professional negligence claim because the trustee did not allege sufficient allegations of proximate cause.

The court then turned to the aiding and abetting breach of fiduciary duty allegations. The district court reversed the bankruptcy court’s dismissal of that claim. Regarding the legal basis for an aiding and abetting claim, the court stated:

The Texas Supreme Court “has not expressly decided whether Texas recognizes a cause of action for aiding and abetting.” However, Texas appellate courts have repeatedly held that “a party who knowingly participates in another’s breach of fiduciary duty may be liable for the breach as a joint tortfeasor.” “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.” It is the final requirement—Greenberg’s knowledge that it was participating in a breach of fiduciary duty—that is before the Court now.

Id.

The trustee alleged that the president and the other board member created the Cancellation Agreement to allow them to compete with, and thereby destroy, the company. The court held that: “To have known that it was participating in Halder and Salamone’s breach of fiduciary duty, Greenberg would have to have known that their actions were fraudulent, taken in bad faith, or constituted self-dealing.” Id. The trustee alleged that Greenberg aligned with the president and board member during the board-control fight and drafted the agreement on its own initiative when it became clear that the company would not renew the president’s contract. The bankruptcy court determined from these allegations that Greenberg did not plausibly know enough to participate in the directors’ breaches of duty. The district court disagreed:

Milligan has still plausibly alleged Greenberg’s knowledge that the agreement was a violation of Salamone and Halder’s fiduciary duties. Taking Milligan’s other allegations as true, a factfinder could infer that Greenberg knew the Cancellation Agreement was not in Westech’s interest, and therefore that in drafting the agreement, Greenberg was helping Halder self-deal on his way out of the company. As the Bankruptcy Court found, Greenberg could plausibly have known that Westech was not in breach of its obligations to Halder under Halder’s employment contract, and that therefore the company would have owed Halder substantially less money if it had simply not renewed his contract. Greenberg would then have known that Westech was receiving nothing in exchange for releasing Halder from his restrictive covenants. Considered in context—the control battle, Salamone and Halder’s alignment on the board, Halder’s imminent contract expiration—a factfinder could infer that Greenberg knew that the Cancellation Agreement was a sweetheart deal for Halder. That Greenberg allegedly drafted the agreement on its own accord suggests that it was conscious of the reasons behind the agreement’s structure. Greenberg’s motion to dismiss Milligan’s aiding-and-abetting claim—perhaps better characterized as a knowing-participation claim under Texas law—is therefore denied. The Bankruptcy Court’s order is vacated as it pertains to that claim.

Id.

The Texas Supreme Court Holds That The Only Consideration In Probating A Will After The Four-Year Limitations Period Is Evidence Of The Applicant’s Default

Posted in Cases Decided, Texas Supreme Court

In Ferreira v. Butler, a husband and wife divorced, and the husband married a second wife. No. 17-0901, 2019 Tex. LEXIS 375 (Tex. April 12, 2019). The second wife died, and the husband never probated her will, which left everything to him. Nine years later, the husband died and his will left most of his estate to his first wife. The first wife was the executor of his estate, and she then attempted to probate the second wife’s will. The second wife’s intestate heirs contested the probate of that will on the ground that it was barred by the four-year limitations period in Section 256.003(a) of the Texas Estates Code. The trial court granted the heirs’ motion for summary judgment and dismissed the application to probate the second wife’s will. The court of appeals affirmed, and the first wife appealed.

The Texas Supreme Court reversed for the first wife. Section 256.003(a) of the Texas Estates Code states: “Except as provided by Section 501.001 with respect to a foreign will, a will may not be admitted to probate after the fourth anniversary of the testator’s death unless it is shown by proof that the applicant for the probate of the will was not in default in failing to present the will for probate on or before the fourth anniversary of the testator’s death.” Id. (quoting Tex. Est. Code § 256.003(a)). The Court held that the husband’s estate qualified as an interested person because he was the second wife’s heir, devisee, and spouse. The Court agreed with the lower courts that the first wife was barred from probating the second wife’s will in her capacity as executor because the first wife was standing in the shoes of the husband’s estate, the default inquiry must focus on the husband and there was no proof that the husband was not in default in failing to probate the second wife’s will within four years of her death.

The Court then held that the first wife also had standing to probate the second wife’s will in her individual capacity as she was the beneficiary of the husband’s estate, who was the beneficiary of the second wife’s estate. The Court then reversed prior precedent and held that “under Section 256.003(a), when an applicant seeks late-probate of a will in her individual capacity, only the applicant’s conduct is relevant to determining whether she ‘was not in default.’” Id. The Court held that if the first wife had applied to probate the will in her individual capacity the husband’s default would be irrelevant under Section 256.003(a). As the first wife did not assert individual standing, the Court could not render for her. However, the Court vacated the judgments of the lower courts in the interest of justice and remanded the case to the trial court to give the first wife an opportunity to amend her pleadings to pursue probate of the will in her individual capacity.

Interesting note: It is probably safe to say that the second wife would roll over in her grave if she knew that the first wife would receive the second wife’s assets over the second wife’s own children. This case brings up a very frequent issue: second marriages where the husband and wife have children from previous relationships. The spouse loves and wants to provide for his or her surviving spouse. But the spouse probably wants to leave his or her estate to his or her own children after the surviving spouse dies. If the spouse leaves everything to his or her surviving spouse outright, then the deceased spouse will have no say in where the assets go after the surviving spouse’s death. That is the exact case set forth above. This issue can be remedied by leaving the deceased spouse’s assets in a trust with the surviving spouse as the primary beneficiary and the deceased spouse’s children as the remainder beneficiaries. A word of warning is that the deceased spouse should make a third party (bank) the sole trustee or have the surviving spouse be a co-trustee with the remainder beneficiaries also being co-trustees. It is all too common for the surviving spouse, who is a sole trustee of the trust, to treat the trust assets as his or her own assets and not give consideration to his or her fiduciary duties to the remainder beneficiaries. Also, the spouse could leave property to the surviving spouse in a life estate with the remainder interest going to the deceased spouse’s children. There are other potential methods to solve this thorny issue. A person should seek legal advice from an qualified estate planning attorney to ensure that his or her assets do not end up with an unintended person or persons.

Texas Supreme Court Holds That Conspiracy Theories Have the Same Statute Of Limitations As Their Underlying Torts

Posted in Cases Decided, Texas Supreme Court

Joint liability for breach of fiduciary duty claims is a rather confusing area of law in Texas. Texas courts have discussed three different theories that allow for joint liability: knowing participation in breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and conspiracy.

There is a claim for knowing participation in Texas. See Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 514 (1942). The general elements for a knowing-participation claim are: 1) the existence of a fiduciary relationship; 2) the third party knew of the fiduciary relationship; and 3) the third party was aware it was participating in the breach of that fiduciary relationship. Meadows v. Harford Life Ins. Co., 492 F.3d 634, 639 (5th Cir. 2007).

There may be a recognized aiding-and-abetting breach-of-fiduciary-duty claim in Texas. The Texas Supreme Court has stated that it has not expressly adopted a claim for aiding and abetting outside the context of a fraud claim. Ernst & Young v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 583 n. 7 (Tex. 2001); West Fork Advisors v. Sungard Consulting, 437 S.W.3d 917 (Tex. App.—Dallas 2014, no pet.). The Texas Supreme Court has specifically stated that it has not yet adopted this type of claim. First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d 214 (Tex. 2017). Notwithstanding, Texas courts have found such an action to exist. See Hendricks v. Thornton, 973 S.W.2d 348 (Tex. App.—Beaumont 1998, pet. denied); Floyd v. Hefner, 556 F.Supp.2d 617 (S.D. Tex. 2008). One court identified the elements for aiding and abetting as the defendant must act with unlawful intent and give substantial assistance and encouragement to a wrongdoer in a tortious act. West Fork Advisors, 437 S.W.3d at 921.

There is also a recognized civil conspiracy claim in Texas. An action for civil conspiracy has five elements: (1) a combination of two or more persons; (2) the persons seek to accomplish an object or course of action; (3) the persons reach a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts are taken in pursuance of the object or course of action; and (5) damages occur as a proximate result. First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d 214 (Tex. 2017).

There is not any particularly compelling guidance on whether these three claims are the same or different. And if they are different, what differences are there regarding the elements of each claim? For a great discussion of these forms of joint liability for breach of fiduciary duty, please see E. Link Beck, Joint and Several Liability, State Bar of Texas, 10th Annual Fiduciary Litigation Course (2015).

There was confusion as to whether a finding of conspiracy or aiding and abetting or knowing participation automatically imposes joint liability on all defendants for all damages. Most of the cases seem to indicate that a separate damage finding is necessary for each defendant because the conspiracy may not proximately cause the same damages as the original bad act. See THPD, Inc. v. Continental Imports, Inc., 260 S.W.3d 593 (Tex. App.—Austin 2008, no pet.); Bunton v. Bentley, 176 SW.3d 1 (Tex. App.—Tyler 1999), aff’d in part, rev’d in part on other grounds, 914 S.W.3d 561 (Tex. 2002); Belz v. Belz, 667 S.W.2d 240 (Tex. App.—Dallas 1984, writ ref’d n.r.e.). The Texas Supreme Court held that the conspiracy defendant’s actions must cause the damages awarded against it, and a plaintiff cannot solely rely on just the original bad actor’s conduct. First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d at 214. So, there should be a finding of causation and damages for each conspiracy defendant (unless the evidence proves as a matter of law that all conspiracy defendants were involved from the very beginning as to all underlying torts). Id.

The Texas Supreme Court has now decided that the statute of limitations for a conspiracy claim is the same as the underlying tort. Agar Corp. v. Electro Circuits Int’l, No 17-0630, 2019 Tex. LEXIS 351 (Tex. April 5, 2019). In Agar, the plaintiff asserted claims for tortious interference, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, fraud by non-disclosure, misappropriation of trade secrets, violations of the Texas Theft Liability Act, conversion, and civil conspiracy. Id. The defendant alleges that the conspiracy claim was barred by the two-year statute of limitation, and the court of appeals agreed with that argument.

The Court noted that the statutes of limitations vary from claim to claim as determined by the Legislature. Id. (citing Tex. Civ. Prac. & Rem. Code §§ 16.002-.051). “For example, a two-year limitations period applies to suits for trespass and conversion, whereas a four-year limitations period applies to suits for fraud or breach of fiduciary duty.” Id. (citing Tex. Civ. Prac. & Rem. Code §§ 16.003(a), .004(a)(4), (5). For claims not expressly identified by the Legislature, a residual limitations period of four years is provided. Id. (citing § 16.051). The Court stated that the statutes of limitations do not mention civil conspiracy by name. The court then stated that rather than apply the four-year residual limitations period, “the courts of appeals that have considered the issue have held civil conspiracy falls under the two-year statute of limitations applied to suits for trespass in section 16.003 of the Civil Practices and Remedies Code.” Id.

The Court then addressed whether conspiracy was its own independent tort or whether it was merely a vicarious liability theory:

When used as a theory of vicarious liability, civil conspiracy is part of the factual situation that permits a remedy against co-conspirators. Without it, there would be no grounds for recovery against co-conspirators who did not commit the underlying unlawful act. So it is not inconsistent to say civil conspiracy is a vicarious liability theory while also recognizing that it is a kind of cause of action.

Id. (internal citations omitted). The Court held that civil conspiracy is not an independent tort. It also held that it does not have its own statute of limitations and is tied to the limitations of the tort underlying the conspiracy claim:

In fact, assigning civil conspiracy its own fixed limitations period conflicts with its nature as a derivative tort. Civil conspiracy requires an underlying tort that has caused damages. The cause of action for the underlying tort typically accrues as soon as the tort causes those damages. A fixed limitations period of two years for civil conspiracy that differs from that of its underlying tort can produce bizarre consequences.

….

Agar’s seventh amended petition alleges Electro engaged in a civil conspiracy to commit several underlying torts including, among others, conversion, misappropriation of trade secrets, and fraud. These underlying claims are governed by separate two-, three- and four-year statutes of limitations respectively. The civil conspiracy claims are likewise governed respectively by those statutes. Agar’s civil conspiracy claims may only proceed if they are based on an underlying tort that is itself not barred by limitations.

Id. (internal citations omitted).

Regarding accrual of the conspiracy theory’s limitations period, the Court held that “most civil conspiracy claims should accrue when the underlying tort causes harm to the plaintiff, that is, at the same time as the tort claim against the primary tortfeasor.” Id. Moreover, “If conspirators conspire about different underlying torts over the course of a conspiracy, then claims based thereon accrue separately according to when each tort and injury occur. A conspiracy claim based on an earlier underlying tort does not re-accrue when the co-conspirators agree to commit a second tort or make another overt act.” Id.

The Court then reversed the summary judgment for the defendant and remanded because some of the plaintiff’s conspiracy claims were derivative of claims that had a four-year limitations period and were not barred.

The Court has moved away from a one-size-fits-all approach to conspiracy. A plaintiff must establish that a conspiracy defendant caused particular damages after it joined the conspiracy. Further, a conspiracy defendant is only liable for damages associated with the underlying tort to which his conduct is tied. In other words, if a defendant conspired to defraud, but not tortiously interfere, then it will only be liable for the fraud damages and not the tortious interference damages. Now the Court holds that a conspiracy theory’s limitations period and accrual is tied to the underlying tort’s or torts’ limitations period. Each underlying tort may have a different limitations period and may accrue at different times, which may require different fact findings as to accrual or discovery if the discovery rule has been asserted.

What is not known is how this recent clarity on conspiracy claims applies to knowing-participation or aiding-and-abetting breach of fiduciary duty claims. Are they separate claims that have their own limitations period? If so, what are the limitations periods? Or, are they derivative claims that rely solely on the four-year limitations period of the underlying breach of fiduciary duty claim?

The end result is that jury instructions in cases involving these types of claims will be very complicated and involved. Causation, damages, and limitations may require multiple questions. A party should consider whether it would be wise to hire an attorney with appellate experience in this area to assist.

David F. Johnson Named Top Author in JDSupra Readers’ Choice Awards

Posted in Items of Interest, Knowledge Library

David F. Johnson Named Top Author

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, has been recognized as a top author by JDSupra in the 2019 Readers’ Choice Awards.

JD Supra’s Readers’ Choice Awards encompasses 26 different categories. From a pool of more than 800 authors, David’s insightful commentary was ranked fourth in the wealth management readership category. This category covers estate and gift tax, trusts, trustees, wills, closely held businesses, and fiduciary duty among other topics.

David serves as the managing shareholder of Winstead’s Fort Worth office.   He maintains an active trial practice focused on advising and representing clients in the financial services industry. David is one of twenty attorneys in the state of Texas (of 84,000 licensed) that has the triple Board Certification in Civil Trial Law, Civil Appellate and Personal Injury Trial Law by the Texas Board of Legal Specialization.

Texas Supreme Court Holds That A Fraud-By-Nondisclosure Claim Can Apply Outside Of A Fiduciary Or Confidential Relationship

Posted in Cases Decided, Texas Court of Appeals

In Bombardier Aero. Corp. v. Spep Aircraft Holdings, a plaintiff who had purchased an aircraft sued the defendant for fraud associated with representations regarding whether the aircraft was new or used. No. 17-0578, 2019 Tex. LEXIS 101 (Tex. February 1, 2019). The plaintiff later found that parts of the aircraft were used, and sued for breach of contract and fraud. The jury found for the plaintiff and awarded actual damages and punitive damages. The court of appeals affirmed.

The Texas Supreme Court affirmed the fraud finding and actual damages award, though it reversed the punitive damages award due to limitation-of-liability clause. The Court first discussed a fraud by non-disclosure claim:

Fraud by non-disclosure, a subcategory of fraud, occurs when a party has a duty to disclose certain information and fails to disclose it. To establish fraud by non-disclosure, the plaintiff must show: (1) the defendant deliberately failed to disclose material facts; (2) the defendant had a duty to disclose such facts to the plaintiff; (3) the plaintiff was ignorant of the facts and did not have an equal opportunity to discover them; (4) the defendant intended the plaintiff to act or refrain from acting based on the nondisclosure; and (5) the plaintiff relied on the non-disclosure, which resulted in injury. In general, there is no duty to disclose without evidence of a confidential or fiduciary relationship. A fiduciary duty arises “as a matter of law in certain formal relationships, including attorney-client, partnership, and trustee relationships.” Id. (citations omitted). A confidential relationship is one in which the “parties have dealt with each other in such a manner for a long period of time that one party is justified in expecting the other to act in its best interest.” An informal relationship giving rise to a duty may also be formed from “a moral, social, domestic or purely personal relationship of trust and confidence.”

Id. The Court then described when such a claim could arise outside of a fiduciary or confidential relationship: “There may also be a duty to disclose when the defendant: (1) discovered new information that made its earlier representation untrue or misleading; (2) made a partial disclosure that created a false impression; or (3) voluntarily disclosed some information, creating a duty to disclose the whole truth.” Id. Accordingly, the Texas Supreme has not held that a party may have a duty to discuss information outside of a confidential relationship based on certain circumstances.

Oddly, the Court made this pronouncement where the defendant did not challenge the fraud finding and where the Court did not ultimately hold whether the defendant had a duty to disclose or not. This holding is simply dicta. Dictum is an observation or remark made concerning some rule, principle, or application of law suggested in a particular case, which observation or remark is not necessary to the determination of the case. BLACK’S LAW DICTIONARY 409 5th ed. (1979). Dictum is not binding as precedent under stare decisis. Lester v. First American Bank, Bryan Texas, 866 S.W.2d 361, 363 (Tex. App.—Waco 1993, writ denied). There is an exception to the precedential value of dictum depending on how it is classified, obiter dictum or judicial dictum. See Palestine Contractors, Inc. v. Perkins, 386 S.W.2d 764, 773 (Tex. 1973). Judicial dictum, a statement by the supreme court made very deliberately after mature consideration and for future guidance in the conduct of litigation, is “at least persuasive and should be followed unless found to be erroneous.” Id.

Interesting Note. This is a very significant holding because the Texas Supreme Court had never previously held that a party owed a duty to disclose outside of a confidential or fiduciary relationship. Generally, a duty to disclose arises only in confidential or fiduciary relationships. Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 674 (Tex. 1998). Whether a duty to disclose exists is a question of law. Bradford v. Vento, 48 S.W.3d 749, 755 (Tex. 2001); In re Int’l Profit Assocs., 274 S.W.3d 672, 678 (Tex. 2009). In Bradford, the Texas Supreme Court examined Texas law with regard to the duty to disclose in arm’s-length transactions. Id. The Texas Supreme Court noted that some courts required disclosure when a party makes a partial statement that is misleading and that the Restatement (Second) of Torts section 551 recognized a general duty to disclose facts in a commercial setting, but the Court clarified that “We have never adopted section 551.” Bradford, 48 S.W.3d at 755. Some courts held that Bradford confirmed that under Texas law, “a duty to disclose arises only where a fiduciary or confidential relationship exists.” Imperial Premium Finance, Inc. v. Khoury, 129 F.3d 347, 352 (5th Cir. 1997) (emphasis added); accord Coburn Supply, Co., Inc. v. Kohler Co., 342 F.3d 372, 378 (5th Cir. 2003) (holding under Texas law that, as a matter of law, an at-will, non-exclusive distributor relationship is not the kind of confidential or fiduciary relationship that would give rise to duty to disclose negotiations with another distributor or plans to terminate the distributor relationship); Bay Colony, Ltd. v. Trendmaker, Inc., 121 F.3d 998, 1004 (5th Cir. 1997) (“Texas law recognizes a duty to disclose only where a fiduciary or confidential relationship exists.”) (emphasis added). See also In re Longoria, 470 S.W.3d 616, 632 (Tex. App.—Houston [14th Dist.] July 16, 2015, original proceeding) (“No duty of disclosure arises without evidence of a confidential relationship.”); Bazan v. Muñoz, 444 S.W.3d 110, 117-18 (Tex. App.—San Antonio 2014, no pet.) (noting “[g]enerally, no duty of disclosure arises without evidence of a confidential or fiduciary relationship”).

For example, in Bay Colony, Ltd. v. Trendmaker, Inc., for example, the Fifth Circuit applying Texas law held there was no confidential or fiduciary relationship between the parties that would give rise to a duty to disclose. 121 F.3d 998, 1004 (5th Cir. 1997). In that case, Trendmaker and Bay Colony had entered into an arms-length transaction for the sale of the commercial reserves and the later modifications of real estate notes. The Fifth Circuit stated that the “fact that parties have entered into a contract does not create a confidential relationship.” Id. (citing Crim Truck & Tractor Co. v. Navistar Int’l Transp. Corp., 823 S.W.2d 591, 594 (Tex. 1992) (emphasis added)). The court concluded that under Texas law the contract did not constitute the type of special relationship necessary to create a duty to disclose. Id.(citing Lee v. Wal-Mart Stores, Inc., 34 F.3d 285, 290 n. 5 (5th Cir. 1994) (the fact that people have had prior dealing with each other … does not establish a confidential relationship)).

Admittedly, there are intermediate courts of appeals that have held that a duty to disclose may arise in arms-length transactions where: (1) one voluntarily discloses partial information, but fails to disclose the whole truth; (2) one makes a representation and fails to disclose new information that makes the earlier representation misleading or untrue; and (3) where one makes a partial disclosure and conveys a false impression. But, importantly, a trial court or intermediate court of appeals cannot adopt a common-law cause of action that has not been expressly adopted by either the Texas Legislature or the Texas Supreme Court. Jackson Walker, LLP v. Kinsel, 518 S.W.3d 1 (Tex. App.—Amarillo April 10, 2015) (no tortious interference with inheritance claim in Texas because the Texas Supreme Court or Texas Legislature had not adopted such a claim), aff’d, 526 S.W.3d 411 (Tex. 2017). The Texas Supreme Court has recently succinctly stated that absent legislative enactment, “the question of whether the tort should exist under Texas law is ours to answer.” Jackson Walker, LLP, 526 S.W.3d at 434.

The duty to disclose based on new information derives from the Restatement (Second) of Torts, Section 551. Bradford, 48 S.W.3d at 755. This section expressly limits the expanded duty of disclosure to apply only “before the transaction is consummated.” Restatement (Second) of Torts, § 551. Thus, claims that are based on alleged nondisclosures made after the consummation of a transaction fall outside of Section 551’s scope. Purina Co. v. McKendrick, 850 S.W.2d 629, 633-34 (Tex. App.—San Antonio 1993, writ denied); Susanoil, Inc. v. Cont’l Oil Co., 519 S.W.2d 230, 236 (Tex. Civ. App.—San Antonio 1975, writ ref’d n.r.e.) (affirming fraud finding when a party failed to disclose information “before closing the transaction.”). Otherwise, a company’s employees would have a duty to disclose their employer’s breach of contract to third parties every time the employer breaches a contract. Texas law does not support such a broad duty of disclosure. See Oliver v. Rogers, 976 S.W.2d 792 (Tex. App.—Houston [1st Dist.] 1998, pet. denied) (holding that a contracting party has no duty to disclose changed circumstances that occur after a contract is formed). The Texas Supreme Court did not discuss this important limitation in it dicta in the Bombardier case.

It must be noted that motions for rehearing and a new amicus brief raising this issue was filed in the Bombardier case. The Texas Supreme Court may change its opinion.

Court Holds That A “Gun Trust” Can Hold Other Assets

Posted in Cases Decided, Texas Court of Appeals

In Estate of Keener, two heirs of a trust settlor filed an application to declare heirship. No. 13-18-00007-CV, 2019 Tex. App. LEXIS 1222 (Tex. App.—Corpus Christi February 21, 2019, no pet. history). The beneficiary of the trust filed a plea in intervention in the heirship proceeding, but the trial court denied his intervention. The trust beneficiary filed an appeal of that order. The trust was styled a “gun trust.” The attorney who drafted the trust document advertised “NFA gun trusts” at gun shows across Texas. “In his promotional materials, Crownover advertises his gun trusts as vehicles used to easily transfer federally regulated firearms upon death and also as a way to legally share the use of a federally regulated category III asset, such as a silencer or suppressor, among multiple individuals. The terms of Crownover’s trusts, however, do not limit the trust property to only firearms.” Id. Under the terms of the trust, the settlor could add any real and personal property to it, and the trust did not specify how property was to be added.

The court of appeals first described the concept of a trust:

A trust is a mechanism used to transfer property. Generally, to create a trust in real or personal property, the terms of the trust must be in writing and be signed by the settlor or the settlor’s authorized agent. An inter vivos trust is a trust that is created and takes effect during the settlor’s lifetime. An inter vivos trust is typically created by (1) a declaration of trust, by which the property owner establishes a trust and declares himself or herself to be trustee, or (2) an agreement of trust, by which the property owner establishes a trust and names a third party to be the trustee. Also, a trust cannot be created unless there is trust property [], and the settlor must manifest an intention to create a trust. However, no testamentary intent is required for an inter vivos trust. When a valid trust is created, the beneficiaries become the owners of the equitable or beneficial title to the trust property and are considered the real owners. The trustee is vested with legal title and right of possession of the trust property but holds it for the benefit of the beneficiaries, who are vested with equitable title to the trust property. Acceptance by the trustee of an interest in a trust is presumed. Finally, “[p]roperty may be added to an existing trust from any source in any manner unless the addition is prohibited by the terms of the trust or the property is unacceptable to the trustee.”

Id.

The beneficiary alleged that he was the owner of the property that the heirs sought to inherit because the settlor placed the disputed property in the trust and pointed to Schedule A of the trust for this proposition. The court of appeals agreed: “Our review of the record shows that Yarter is the beneficiary of a trust established by Keener, it is undisputed that a valid trust exists, and the trial court correctly issued a finding that a trust was established.” Id. The court noted that the trust documents also did not limit the purpose of the trust or state that it was intended to only hold firearm-related property. Thus, the heir’s argument that the trust was not intended to transfer anything more than the suppressor necessarily failed. The court held that as the beneficiary of a trust, the beneficiary was an interested person under the Texas Estate’s Code and was the owner of any property that was placed in the trust. “In other words, he has a claim against the property in Keener’s estate that appellees seek to inherit.” Id. The court found that there was a fact issue as to the overall property in the trust and whether Schedule A added any property to the trust. The court concluded that the beneficiary established a justiciable interest in the proceeding and that the trial court failed to follow controlling legal precedent. The trial court erred in denying his plea in intervention.

Recorded Webinar – The Velvet Hammer: Undue Influence Based On Deceit, Fraud, and Relationship Poisoning And A Financial Institution’s Duty To Detect and Report Financial Exploitation

Posted in Items of Interest, Knowledge Library

Recorded Webinar

David F. Johnson, lead writer for the Texas Fiduciary Litigator blog, discusses the great transfer of wealth from the baby boomer generation, elder abuse and financial exploitation. Undue influence often arises out of seemingly kind individuals who ingratiate themselves to an elderly person, inserting themselves between the person and relatives, and obtaining the person’s bounty due to deceit.  This webinar will discuss the standards for undue influence, factors involved in recognizing that behavior, and a financial institutions duties to detect and report that behavior.

CLICK HERE FOR WEBINAR

The Velvet Hammer – Paper

The Velvet Hammer – Presentation

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Court Holds That Testator’s Granddaughter Was A Beneficiary Of The Will

Posted in Cases Decided, Texas Court of Appeals

In McDaniel v. Meador, parties sued for declaratory relief regarding whether a granddaughter was a beneficiary of a will. No. 01-18-00041-CV, 2019 Tex. App. LEXIS 1315 (Tex. App.—Houston [1st Dist.] February 21, 2019, no pet. history). The will stated that the testator left her estate: “(a) To those of my children (JASPER “LEE” MCDANIEL, JR., AND ANDREW DOUGLAS MCDANIEL) who survive me and to the issue who survive me of those of my children who shall not survive me, in equal shares per stirpes.” Id. It also provided that if no issued survived her then she gave her estate to those who would take if the testator died intestate. One son predeceased the grandmother, and the son’s daughter, the granddaughter, claimed to be a beneficiary and entitled to a third of the estate. The trial court determined that the granddaughter was a beneficiary and was entitled to a third of the grandmother’s estate. The granddaughter’s loving uncles appealed.

The court of appeals described the rules for construing a will:

“The cardinal rule for construing a will is to ascertain the true intent of the [testatrix] as expressed in the will.” The “objective in construing a will is to discern and effectuate the testatrix’s intent as reflected in the instrument as a whole.” We ascertain the testatrix’s intent from the language within the four corners of the will. Courts “determine intent by construing the instrument holistically and by harmonizing any apparent conflicts or inconsistencies in the language.” We must focus on the meaning of the words the testatrix actually used rather than speculate about what she may have intended to write.

Id. The uncles contended that, because they survived the testator, the will designates only them as the beneficiaries of the residuary estate. The court of appeals disagreed:

When viewed holistically and harmonizing any apparent conflicts, we agree with Mandy that Frances did not intend to limit the term “children” to Jasper and Andrew in the second beneficiary clause… Frances defined who her children were in the opening provision of the Will, listing all three of her children: Jasper, James, and Andrew. By way of the parenthetical, Frances, at most, expressed her intent that she did not want James to be a beneficiary should he survive her. However, that same limitation was not placed on the term “children” in the second beneficiary clause to indicate that Frances did not intend the term “children” to include James in accordance with the definition in the Will’s opening paragraph. The Will contains no other indication that Frances intended to disinherit her granddaughter, Mandy, if James predeceased Frances… Even when given its ordinary meaning, the term “children” would also include James. And, under well-established rules of probate law, James would also be included as one of Frances’s children. The only place in the Will indicating that the “children” was intended to have a meaning different than the meaning ascribed in the opening paragraph or under the common, ordinary definition is the first beneficiary clause. Further, defining the term “children” in the second beneficiary clause to exclude James from that definition, and as a result exclude Mandy from being a beneficiary, would give rise to a potential conflict with Paragraph 2(b), which provides, “If no issue of mine survives me, I give my residuary estate to those who would take from me as if I were then to die-without a will . . . .” Paragraph 2(b) makes no exception for Frances’s issue descending through James. Thus, we read Paragraph 2(b) to affirm that Frances intended Mandy to be a beneficiary if she survived Frances.

Id. The court of appeals affirmed the trial court’s judgment for the granddaughter.

Orders Denying Arbitration Are Immediately Appealable But Parties Must Wait Until After Arbitration to Appeal Orders Granting Arbitration

Posted in Cases Decided, Texas Court of Appeals

In Fletcher v. Edward Jones Trust Co., a party sued a trust company for inappropriately distributing funds from an account, and the trial court granted the trust company’s motion to compel the dispute to arbitration. No. 11-19-00017-CV, 2019 Tex. App. LEXIS 1280 (Tex. App.—Eastland February 21, 2019, Decided; February 21, 2019, no pet. history). The plaintiff attempted to appeal the order granting the motion to compel arbitration. The court of appeals requested briefing from the parties regarding whether the court had jurisdiction over the appeal. The court noted that there was a statute that allowed interlocutory appeals from orders that deny arbitration, not from orders that compel arbitration. Tex. Civ. Prac. & Rem. Code Ann. § 171.098; Chambers v. O’Quinn, 242 S.W.3d 30, 31 (Tex. 2007). The court noted that the plaintiff filed a response that cited several cases involving mandamus proceedings, rather than direct appeals. The court held that it did not have jurisdiction over an appeal:

Unless specifically authorized by statute, appeals may be taken only from final judgments. Tex. A & M Univ. Sys. v. Koseoglu, 233 S.W.3d 835, 840-41 (Tex. 2007); Lehmann v. Har-Con Corp., 39 S.W.3d 191, 195 (Tex. 2001). Section 171.098 authorizes an interlocutory appeal from an order “denying an application to compel arbitration” and an order “granting an application to stay arbitration.” Civ. Prac. & Rem. § 171.098(a)(1)-(2) (emphasis added). The order from which Appellant attempts to appeal is not a final judgment, nor is it an order staying arbitration or denying an application to compel arbitration. An interlocutory appeal from an order granting a motion to compel arbitration is not authorized. See id. § 171.098; Chambers, 242 S.W.3d at 31; see also In re Gulf Expl., LLC, 289 S.W.3d 836, 839-40 (Tex. 2009) (adopting rule that appellate courts in Texas may review, on direct appeal, an order compelling arbitration if the order also dismisses the underlying litigation, making it a final order, rather than an interlocutory one). Because an interlocutory appeal is not authorized in this case and because a final, appealable order has not been entered, we lack jurisdiction and must dismiss this appeal. See Tex. R. App. P. 42.3.

Id.

Interesting Note: This case highlights the complete inequity involved in appellate courts’ review of orders on motions to compel arbitration. An order denying a motion to compel arbitration can be appealed immediately, but an order granting same cannot. Apparently, the cost and expense of participating in a needless trial is unfair to a party seeking arbitration, but the cost and expense of participating in a needless arbitration is not unfair to a party fighting arbitration. The potential of a loss of contractual rights outweighs the loss of constitutional rights. This issue has been resolved by the Texas Legislature in the jurisdictional statutes that it passed.

There is an alternative method to seek appellate review of a trial court’s order granting arbitration: mandamus relief. Where a trial court abuses its discretion in ruling on a matter and an appeal is inadequate, a court of appeals should grant mandamus relief. Potentially, a court of appeals could grant mandamus relief to reverse a trial court’s order granting arbitration. But even where a trial court clearly abuses its discretion in granting a motion to compel arbitration, the Texas Supreme Court generally would deny mandamus relief: “In the context of orders compelling arbitration, even if a petitioner can meet the first requirement, mandamus is generally unavailable because it can rarely meet the second. If a trial court compels arbitration when the parties have not agreed to it, that error can unquestionably be reviewed by final appeal.” In re Gulf Expl., LLC, 289 S.W.3d 836, 842 (Tex. 2009) (orig. proceeding). See also In re Vantage Drilling Int’l, 555 S.W.3d 629 (Tex. App.—Houston [1st Dist.] 2018, orig. proceeding) (appellate court denied a request for mandamus relief of a trial court’s order compelling arbitration because the petitioner had adequate remedy by appeal). Therefore, in most cases, mandamus relief will also not be available.

Because of the statutes at play, the Texas Supreme Court could not hold that an appellate court has jurisdiction over an appeal from an order granting arbitration, but it certainly could hold that an appellate court could grant mandamus relief. Indeed, the Texas Supreme Court formerly held that an appellate court could grant mandamus relief to correct a trial court’s error in denying arbitration, denying a motion to dismiss due to a forum-selection clause, or denying the impact of a contractual jury-waiver clause. It is not clear why the Texas Supreme Court is so ready to assist defendants in enforcing litigation-altering contractual clauses, but is so reluctant to support a plaintiff’s constitutional rights, such as due process, due course, and the right to a jury trial.

 

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