Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

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.

Court Enforced Forum-Selection Clause In Trust Document

Posted in Cases Decided, Texas Court of Appeals

In In re JP Morgan Chase Bank, N.A., trust beneficiaries sued the trustee for alleged breaches of fiduciary duty in Dallas, Texas. No. 05-17-01174-CV, 2018 Tex. App. LEXIS 1883 (Tex. App.—Dallas March 14, 2018, original proceeding). The settlor executed the trust agreement in New York, and it included the following forum-selection clause: “The validity and effect of the provisions of this Agreement shall be determined by the laws of the State of New York, and the Trustee shall not be required to account in any court other than one of the courts of that state.” Id. The trustee filed a motion to dismiss the Texas suit due to the forum-selection clause, alleging that the beneficiaries had to file suit in New York. The trial court denied the motion, and the trustee filed a petition for writ of mandamus with the court of appeals.

In the court of appeals, the beneficiaries argued that the language of the forum-selection clause applied only to a claim for an accounting and did not apply to their breach-of-fiduciary-duty claim. The court of appeals disagreed, holding that the phrase “to account” was broader. After reviewing several definitions of the phrase, the court stated: “[W]e conclude ‘required to account in’ is used as a broad, unrestricted phrase and means relators may not be sued or otherwise required to explain alleged wrongdoing regarding the Trust or its administration in any state other than New York.” Id. The court also found support for its conclusion from the trust document in that “account” was used broadly in other portions of the trust. The court concluded the scope of the forum-selection clause included the beneficiaries’ claims for breach of fiduciary duty.

The beneficiaries also argued that trial court correctly denied the motion to dismiss because the mandatory venue statute in Texas Property Code Section 115.002(c) showed a strong public policy to keep the action in Texas. The court of appeals held that, although a venue-selection clause that was contrary to Section 115.002 would be unenforceable, the same was not true of a forum-selection clause. Id. (citing Liu v. Cici Enters., LP, No. 14-05-00827-CV, 2007 Tex. App. LEXIS 81, 2007 WL 43816, at *2 (Tex. App.—Houston [14th Dist.] Jan. 9, 2007, no pet.) (mem. op.) (“The distinction between a forum-selection clause and a venue-selection clause is critical. Under Texas law, forum-selection clauses are enforceable unless shown to be unreasonable, and may be enforced through a motion to dismiss. In contrast, venue selection cannot be the subject of private contract unless otherwise provided by statute.”)). Further, although the beneficiaries contended that proceeding in New York would be unreasonable and seriously inconvenient, they failed to present any evidence to support those contentions. The court held that the trial court abused its discretion in denying the motion to dismiss and granted mandamus relief.

Interesting Note: This is the first case in Texas to enforce a forum-selection clause contained in a trust document. “A forum-selection clause is a creature of contract.” Phoenix Network Techs. (Europe) Ltd. v. Neon Sys., Inc., 177 S.W.3d 605, 611 (Tex. App.—Houston [1st Dist.] 2005, no pet.). Interestingly, the court of appeals in In re JPMorgan Chase Bank, N.A., did not address an argument that the forum-selection clause should not be enforced because a trust is not a contract between the trustee and the beneficiary.

In 2013, the Texas Supreme Court enforced an arbitration clause that was contained in a trust document. Rachel v. Reitz, 403 S.W.3d 840 (Tex. 2013). 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. Id. The Court stated that generally Texas courts strive to enforce trusts according to the settlor’s intent, which courts should divine from the four corners of unambiguous trusts.  The Court noted that the settlor intended for all disputes to be arbitrated via the trust language. Id. The Court then looked to the Texas Arbitration Act, which provides that a “written agreement to arbitrate is valid and enforceable if the agreement is to arbitrate a controversy that: (1) exists at the time of the agreement; or (2) arises between the parties after the date of the agreement.” Id. (citing Tex. Civ. Prac. & Rem. Code 171.001(a) (emphasis added)). The Court noted that the statute uses the term “contract” in another provision, and that the Legislature intended for the terms “agreement” and “contract” to be different.  As the statute does not define the term “agreement,” the Court defined it as “a mutual assent by two or more persons.” Id. Thus, a formal contract is not required to have a binding “agreement” to arbitrate. The 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.

There is not a comparable statute that requires the enforcement of “agreements” for forum-selection. There could be an issue of whether the Rachel v. Reitz/arbitration-clause analysis should apply to forum-selection clauses. However, there is precedent in Texas that arbitration clauses are a type of forum-selection clause. St. Clair v. Brooke Franchise Corp., No. 2-06-216-CV, 2007 Tex. App. LEXIS 2805, 2007 WL 1095554, at *4 (Tex. App.—Fort Worth Apr. 12, 2007, no pet.) (mem. op.). See generally Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 534, 115 S. Ct. 2322, 2326, 132 L. Ed. 2d 462 (1995) (recognizing arbitration provisions are a subset of forum-selection clauses).

Court Reversed Order Removing Trustee Where Trustee Did Not Receive Notice Of The Hearing

Posted in Cases Decided, Texas Court of Appeals

In In re Estate of Moore, the court of appeals addressed the proper procedure for removing an acting trustee and appointing a successor trustee. No. 08-14-00298-CV, 2018 Tex. App. LEXIS 1950 (Tex. App.—El Paso March 15, 2018, no pet. history). A beneficiary filed a motion to remove a trustee, but did not serve notice of the hearing. After the court removed the trustee, the trustee appealed on multiple grounds, including that she was denied due process by being removed without notice of the hearing.

The court of appeals first described the authority to remove a trustee:

A trustee may be removed by the terms prescribed in the trust instrument, or by a court of competent jurisdiction after a hearing brought by an “interested person,” provided the court finds cause for removal. Tex. Prop. Code Ann. § 113.082 (West 2014). Under the Texas Property Code, a district court has original jurisdiction over all proceedings against a trustee and all proceedings concerning trusts, including proceedings to construe a trust instrument and to appoint or remove a trustee. Tex. Prop. Code Ann. § 115.001(a)(West Supp. 2017); Cone v. Gregory, 814 S.W.2d 413, 414 (Tex. App.–Houston [1st Dist.] 1991, no pet.). A district court’s jurisdiction over such proceedings is exclusive, except for jurisdiction conferred by law on lesser courts, including a county court at law. Tex. Prop. Code Ann. § 115.001(d). Further, in a county that lacks a statutory probate court but has a county court a law exercising original probate jurisdiction, the interpretation and administration of a testamentary trust or an inter vivos trust created by a decedent whose will has been admitted to probate in that court is considered a matter related to a probate proceeding. Tex. Est. Code Ann. § 31.002 (West 2014). Thus, under either code, a county court a law acting in this capacity has jurisdiction over a suit involving a testamentary trust. Gregory, 814 S.W.2d at 414. A trustee is a necessary party to an action involving a trust or against a trustee, provided a trustee is serving at the time the action is filed. Tex. Prop. Code Ann. § 115.011; Smith v. Plainview Hospital and Clinic Foundation, 393 S.W.2d 424, 427 (Tex. Civ. App.—Amarillo 1965, writ dism’d). Notice may be given to parties or those entitled to receive notice by the manner prescribed by the Texas Rules of Civil Procedure, or may be given directly to the party or to the party’s attorney if the party has appeared by attorney or requested that notice be sent to his attorney. Tex. Prop. Code Ann. § 115.016 (West 2014). Texas Rules of Civil Procedure 21a allows service to be accomplished by delivering a copy to the party to be served or to the party’s duly authorized agent or attorney of record. Tex.R.Civ.P. 21a.

Id. The court held that the order removing the trustee must be reversed because she was not served with notice of the hearing:

Here, it is undisputed that Appellant did not personally receive notice in the proceeding below. It is also undisputed that Wm. Monroe Kerr and A.M. Nunley III, Appellant’s attorneys of record in the original probate proceeding, were not served with notice of the hearing. The record only contains a certificate of service on Brandon S. Archer, who did not appear as attorney of record in the original probate proceeding and was not designated to receive service on Appellant’s behalf as allowed by Section 115.016 of the Texas Property Code. Failure to give proper notice “violates ‘the most rudimentary demands of due process of law.'” Peralta v. Heights Medical Center, Inc., 485 U.S. 80, 84, 108 S.Ct. 896, 899, 99 L.Ed.2d 75 (1988)(quoting Armstrong v. Manzo, 380 U.S. 545, 550, 85 S.Ct. 1187, 1190, 14 L.Ed.2d 62 (1965)). If improper notice is given to a party of proceedings when notice is required, any subsequent court proceedings vis-à-vis the party not given notice are void. Lytle v. Cunnigham, 261 S.W.3d 837, 840 (Tex.App.–Dallas 2008, no pet.); Gutierrez v. Lone Star Nat. Bank, 960 S.W.2d 211, 214 (Tex.App.–Corpus Christi-Edinburg 1997, pet. denied). At the time of the hearing below, Appellant had been serving and holding herself out as acting trustee for more than twenty years. Appellee asserts that she did not qualify as interested person under the Estates Code and therefore there was no requirement that she be cited or otherwise given notice. But Appellant was not required to show that she was an interested person; per Section 115.011 of the Texas Property Code, as trustee, Appellant was a necessary party to the proceedings. Tex. Prop. Code Ann. § 115.011. She was, however, not served with citation, and “[i]f proper service is not affirmatively shown, there is error on the face of the record.” Westcliffe, Inc. v. Bear Creek Const., Ltd., 105 S.W.3d 286, 290 (Tex.App.–Dallas 2003, no pet.)(citing Primate Const., Inc. v. Silver, 884 S.W.2d 151, 153 (Tex. 1994)). Because Appellant was a necessary party and has demonstrated error on the face of the record, she has carried her burden under elements two and four to succeed on restricted appeal. Alexander, 134 S.W.3d at 848. Since proper service on Appellant is not shown, it is apparent that the county court at law did not obtain jurisdiction over Appellant and the proceeding to have her removed as trustee and a successor trustee appointed is void. Lytle, 261 S.W.3d at 840.

Id. The court reversed and remanded for further proceedings.

Texas Supreme Court Rules That Trustee Is Not Liable For Fraud In Leasing Minerals Due To “Red Flags” And Express Contradictory Language That Negated Justifiable Reliance

Posted in Cases Decided, Texas Supreme Court

In JPMorgan Chase Bank, N.A. v. Orca Assets G.P., a trustee leased minerals to a leasee. No. 15-0712, 2018 Tex. LEXIS 250 (Tex. March 23, 2018). That leasee did not immediately record the lease. The trustee’s agent then signed a letter of intent to lease tracts from the same area. When the new lease signed leases on the same property, the original leasee contacted the new leasee and informed it of the title defect. The trustee then offered to refund the bonus payments to the new leasee, but that tender was refused. Rather, the new leasee sued the trustee for fraud and other related claims for $400,000,000 arising from statements that the acreage was open for lease. The trial court ruled for the trustee and concluded that the unambiguous terms of the letter of intent and the subsequent leases precluded the new leasee’s contract claim and ruled as a matter of law that it could not establish the justifiable-reliance element of its fraud and negligent-misrepresentation claims. The court of appeals affirmed the trial court’s contract ruling, but it reversed on fraud and negligent misrepresentation. The court of appeals held that the negation-of-warranty provision did not clearly and unequivocally disclaim reliance on prior representations.

The Texas Supreme Court reversed the court of appeals and affirmed the trial court’s ruling for the trustee. The trustee admitted that the statement regarding the acreage being “open” was made and that it was false. Rather, it argued that the evidence disproved the justifiable reliance element for the fraud and negligent misrepresentation claims. Regarding this element, the Court stated:

Justifiable reliance usually presents a question of fact. But the element can be negated as a matter of law when circumstances exist under which reliance cannot be justified. In determining whether justifiable reliance is negated as a matter of law, courts “must consider the nature of the [parties’] relationship and the contract.” “In an arm’s-length transaction[,] the defrauded party must exercise ordinary care for the protection of his own interests. . . . [A] failure to exercise reasonable diligence is not excused by mere confidence in the honesty and integrity of the other party.” And when a party fails to exercise such diligence, it is “charged with knowledge of all facts that would have been discovered by a reasonably prudent person similarly situated.” To this end, that party “cannot blindly rely on a representation by a defendant where the plaintiff’s knowledge, experience, and background warrant investigation into any representations before the plaintiff acts in reliance upon those representations.”

Id. The Court then discussed the concept of “red flags” as evidence that negates justifiable reliance. The Court previously held that “a person may not justifiably rely on a misrepresentation if ‘there are “red flags” indicating such reliance is unwarranted.'” Id. (citing Grant Thornton, LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010)). The Court used this “red flags” analysis to a non-professional fraud case. The Court stated that the trustee argued that the following “red flags” preclude justifiable reliance: (1) its agent’s statement that he “would have to check” whether the property was open for lease; (2) its insistence on the stricter negation-of-warranty provision; (3) its refusal to accept responsibility for verifying title; (4) the letter of intent itself; (5) its agent’s statement that other lessees were not doing careful title work; (6) the new leasee’s knowledge that competitors might delay recording their leases; (7) the new leasee’s knowledge that it ceased checking property records after signing the letter of intent; and (8) the new leasee’s landman’s “doubts” at the closing, manifested by her request that the trustee confirm once more whether the property was “open.” The Court stated:

We are not prepared to say that any single one of these factors could preclude justifiable reliance on its own and as a matter of law. We especially reject the notion that the mere use of the negation-of-warranty and no-recourse provision in the letter of intent and the leases could wholly negate justifiable reliance. Oil-and-gas leases, like other instruments of conveyance, often negate warranties of title. As the courts did in Grant Thornton and Lewis, we must instead view the circumstances in their entirety while accounting for the parties’ relative levels of sophistication.

Id. The Court then held that both parties were sophisticated, and after marching through the circumstances, the Court held that these “red flags” were sufficient to negate justifiable reliance. The Court also held that the lease expressly contradicted the false statements, thus proving that there was no justifiable reliance. Regarding the standard for this analysis, the Court stated:

In reaching its conclusion, the court of appeals held that for a contradiction to preclude justifiable reliance, both the contractual clause and the extra-contractual representation it supposedly contradicts must explicitly speak to the same subject matter with sufficient specificity to correct and contradict the prior oral representation. Such a requirement is simply too strict to be workable as it essentially requires the contract and extra-contractual representation to use precisely the same terms.

Id. The Court concluded that the evidence showed that the new lease did not justifiably rely on the false statement that the acreage was open:

Viewed in context with the numerous “red flags,” Orca’s sophistication in the oil-and-gas industry, and the direct contradiction between the representation and the letter of intent, Orca cannot maintain its claim of justifiable reliance. Orca, composed of experienced and knowledgeable businesspeople, negotiated an arm’s-length transaction and then placed millions of dollars in jeopardy—all while operating under circumstances that similarly situated parties would have regarded as imminently risky. Orca needed to protect its own interests through the exercise of ordinary care and reasonable diligence rather than blindly relying upon another party’s vague assurances. Its failure to do so precludes its claim of justifiable reliance as a matter of law.

Id. The Court made it a point to expressly state that “either ‘red flags’ alone or direct contradiction alone can negate justifiable reliance as a matter of law. In this case, however, both theories apply. And either would be sufficient to preclude justifiable reliance.” Id. n. 2. The court reversed and rendered for the trustee.

Texas Supreme Court Holds That Testator Devised Property As A Life Estate

Posted in Cases Decided, Texas Supreme Court

In Knopf v. Gray, the will disposed of the testator’s entire estate, specifically including a tract of land. No. 17-0262, 2018 Tex. LEXIS 249 (Tex. March 23, 2018). The provision through which the testator devised the land stated: “NOW BOBBY I leave the rest to you, everything, certificates of deposit, land, cattle and machinery, Understand the land is not to be sold but passed on down to your children, ANNETTE KNOPF, ALLISON KILWAY, AND STANLEY GRAY. TAKE CARE OF IT AND TRY TO BE HAPPY.” Id. The testator’s son attempted to then transfer the land to a third party, and his children sued for a declaration that the son did not have the right to do so because he only had a life estate. The parties filed competing summary judgment motions, and the trial court and court of appeals both ruled for the son.

The Texas Supreme Court reversed both lower courts. The Court first reviewed the standards for interpreting wills:

A court must construe a will as a matter of law if it has a clear meaning. However, when a will’s meaning is ambiguous, its interpretation becomes a fact issue for which summary judgment is inappropriate. A will is ambiguous when it is subject to more than one reasonable interpretation or its meaning is simply uncertain. Whether a will is ambiguous is a question of law for the court. The cardinal rule of will construction is to ascertain the testator’s intent and to enforce that intent to the extent allowed by law. We look to the instrument’s language, considering its provisions as a whole and attempting to harmonize them so as to give effect to the will’s overall intent. We interpret the words in a will as a layperson would use them absent evidence that the testator received legal assistance in drafting the will or was otherwise familiar with technical meanings.

Id. The issue in the case is whether the land was devised in fee simple or whether a life estate was created. The Court stated that “An estate in land that is conveyed or devised is a fee simple unless the estate is limited by express words, but the law does not require any specific words or formalities to create a life estate.” Id. The words used in the will must only evidence intent to create what lawyers know as a life estate. “[A] will creates a life estate ‘where the language of the instrument manifests an intention on the part of the grantor or testator to pass to a grantee or devisee a right to possess, use, or enjoy property during the period of the grantee’s life.’” Id.

The Court held that the provision, read as a whole, merely created a life estate:

We need only read the provision as a whole to see a layperson’s clearly expressed intent to create what the law calls a life estate. Reading all three clauses together, Allen grants the land to Bobby subject to the limitations that he not sell it, that he take care of it, and that it be passed down to his children. This represents the essence of a life estate; a life tenant’s interest in the property is limited by the general requirement that he preserve the remainder interest unless otherwise authorized in the will. Allen’s words in the contested provision unambiguously refer to elements of a life estate and designate her grandchildren, the petitioners, as the remaindermen. The language thus clearly demonstrates that the phrase “passed on down,” as used here, encompasses a transfer upon Bobby’s death.

Id. Therefore, the Court reversed and rendered for the son’s children.


Court Affirmed Judgment Against Trust Settlor Who Raised Fraud And Other Related Claims Against An Insurance Agent

Posted in Cases Decided, Texas Court of Appeals

In Jessen v. Duvall, an investor who established trusts to purchase life insurance policies sued an insurance agent for tort claims, including fraud, conspiracy, and aiding and abetting breach of fiduciary duty based on the insurance policies not being good investments and the investor losing more than $3.2 million dollars. No. 14-16-00869-CV, 2018 Tex. App. LEXIS 1369 (Tex. App.—Houston [14th Dist.] February 22, 2018, no pet. history). Three alleged events formed the plaintiff’s claims: the defendant mispresenting the resale value of the policies, the failure to disclose the commission structure of the policies, and that he failed to disclose that he paid a referral fee to the plaintiff’s tax attorney’s son. The defendant filed a motion for summary judgment, which the trial court granted. The plaintiff appealed.

The court of appeals first addressed whether the plaintiff had standing to assert the claims because the insurance policies were owned by the trusts and the plaintiff was not the trustee. The court of appeals held that the plaintiff did have standing because he asserted claims based on the advice given to acquire the policies and not a breach of contract claim under the policy:

[W]hile it is undisputed that the trustees purchased and sold the insurance policies, Jessen does not pursue claims based on duties created by the policies (contractual claims). Rather, Jessen asserts claims arising under state law (extra-contractual claims). Specifically, Jessen’s claims for fraud, aiding and abetting and conspiracy to breach a fiduciary duty, and equitable theories remain viable because he seeks redress for misrepresentations made to him prior to the trusts being created and policies purchased. There is no indication here that Jessen assigned or relinquished the extra-contractual causes of action to the trustees. As such, Jessen has standing to assert them in this litigation. See Lee v. Rogers Agency, 517 S.W.3d 137, 144-153 (Tex. App.—Texarkana 2016, pet. filed) (op. on rehearing).

Id. Regarding the claims based on the alleged failure to disclose the market value of the policies, the court held that the plaintiff failed to provide evidence that the defendant made any representations, indirectly, regarding the future market value of the policies, caused the reduced market value of the policies, or caused the plaintiff to receive a reduced value by some fraud or conspiracy. Rather, the court stated that the defendant was the only party to offer an explanation as to why the policies were sold at a loss by submitting an uncontroverted affidavit of the vice president of a company that traded in life policies, who attested to the financial collapse in the life insurance industry in 2008 and the negative financial impact it had on the resale market for life insurance policies. The court concluded that the plaintiff proffered no evidence that the reduced resale value of the policies was the result of anything more than unforeseen market conditions.

Regarding the commission structure, the court held that there was no evidence that the defendant had a duty to disclose the commission structure or that the commissions received by him were the result of a conspiracy to defraud. The evidence demonstrated that the commission was in line with industry standards, and the court held that there was no evidence that the defendant had a duty to disclosure the commission structure that was within industry norms. Moreover, in terms of damages, the plaintiff did not show he was damaged by the defendant receiving a commission as the plaintiff’s damages were based upon the decreased resale value of the life policies.

Regarding the referral fee, the plaintiff maintained that the nondisclosure of the referral fee paid by defendant was fraudulent. The court held that it was undisputed that referral fees were customary in the insurance industry and that defendant gave up part of his compensation to pay a referral fee. There was no evidence that the plaintiff paid more for the policies due to the referral fee, and the court held that there was no evidence that the defendant had any duty to disclose the referral fee. The court affirmed the summary judgment on the fraud and conspiracy to commit fraud claims.

The court then turned to the aiding and abetting breach of fiduciary duty claims. The plaintiff alleged that the defendant’s nondisclosure of the referral fee provided substantial assistance in his tax attorney’s breach of his fiduciary duty by “secretly agreeing to and then paying Bond’s son a part of the commission generated from the sale of the insurance policies to Plaintiff.” Id. “To establish aiding and abetting, the plaintiff must demonstrate that the defendant, with unlawful intent, substantially assisted and encouraged a wrongdoer in a tortious act.” The court noted that “[a]iding and abetting is a dependent claim which is premised on an underlying tort.” Id. The court then held that because the plaintiff failed to establish his breach of fiduciary duty claim against his attorney, his aiding and abetting claim also failed:

With respect to the second element, Jessen contends “Jessen has submitted evidence that Bond breached that fiduciary duty by enticing Jessen to participate in the scheme alleged, while knowing that Jessen would not be able to sell the policies for a substantial profit in the manner intended.” Jessen further claims “there is evidence that Duvall paid Jessen’s attorney Bond a kickback in order to induce him to recommend that Jessen invest in the insurance policies at issue.” … Jessen makes no reference to any part of the Texas Disciplinary Rules of Professional Conduct or case law to support his claim that Bond breached his fiduciary duty. Without the underlying tort being established, there can be no claims of aiding and abetting a breach of Bond’s fiduciary duty and/or conspiracy to breach Bond’s fiduciary duty. Moreover, even assuming, arguendo, that Jessen could establish the underlying tort, there is no evidence of Duvall knowingly aiding and abetting Bond, Sr. with such a breach. Similarly, there is no evidence of any meeting of the minds between Duvall and Bond to breach Bond, Sr.’s, fiduciary duty to Jessen. Because Jessen failed to raise any evidence to support his claim of aiding and abetting and conspiracy to breach fiduciary duty claim, summary judgment was proper.

Id. The court of appeals affirmed the summary judgment on all of the plaintiff’s claims.


Court Affirms Punitive Damages In A Breach-Of-Fiduciary-Duty/Partnership Dispute

Posted in Cases Decided, Texas Court of Appeals

In Home Comfortable Supplies, Inc. v. Cooper, the defendant induced others to start a new limited partnership with his corporation. No. 14-16-00906-CV, 2018 Tex. App. LEXIS 1381 (Tex. App.—Houston [14th Dist.] February 22, 2018, no pet. history). Among other things, he then seized the new business’s tangible assets and gave the use of the assets to a new company formed by his wife. The plaintiffs sued for fraudulent inducement, breach of fiduciary duty, conversion, and breach of contract, and trial court awarded actual damages, punitive damages, and attorney’s fees. On appeal, the defendant argued that the only actual damages proven and awarded were for breach of contract, which did not support an award of punitive damages. The defendant did not ask the trial court to identify the actual damages awarded or link them to a specific cause of action.

The court of appeals first described an appealing party’s duty to request findings:

Unchallenged findings of fact bind the appellate court unless the contrary is established as a matter of law or no evidence supports the finding. McGalliard v. Kuhlmann, 722 S.W.2d 694, 696 (Tex. 1986). If the factual findings include at least one element of a given ground of recovery or defense, any omitted unrequested elements that are supported by the evidence are supplied by a presumption in support of the judgment. Tex. R. Civ. P. 299. Although a party can avoid a presumed finding by requesting additional or amended findings that include the omitted element, see Tex. R. Civ. P. 298, no such request was made here.

The court then held that there was evidence to support a finding of breach of fiduciary duty, which would support the award of punitive damages:

Punitive damages also are available for breach of fiduciary duty. See Manges v. Guerra, 673 S.W.2d 180, 184 (Tex. 1984) (op. on reh’g). Partners share “the obligation of loyalty to the joint concern and of the utmost good faith, fairness, and honesty in their dealings with each other with respect to matters pertaining to the enterprise.” Bohatch v. Butler & Binion, 977 S.W.2d 543, 545 (Tex. 1998). Zhao and Home Comfortable Supplies do not challenge the trial court’s findings that clear and convincing evidence establishes that Zhao, individually and as president of Home Comfortable Supplies, wrongfully took possession and control of Paragon’s business assets and transferred them with the intention of destroying Paragon’s business, harming Paragon’s partners, and enriching himself. Thus, damages may have been awarded for breach of fiduciary duty. These damages may have included the value of Cooper’s and Bonner’s interest in Paragon’s assets, if the assets had been liquidated as required, as well as the money Cooper invested to obtain a larger membership interest in the General Partner.

Id. Thus, the court of appeals affirmed the trial court’s award of punitive damages.

Interesting Note: Many attorneys and clients that lose in a trial court via a bench trial are reluctant to want the trial court to explain its ruling and awards. They may feel that the findings will make them look worse than the actual judgment. That may be true, but any good appellate attorney will recommend that a losing party request findings of fact and conclusions of law. A trial court will usually not rule for the wining party on every element of every claim, and may focus the findings on just one claim or a few claims. Moreover, there is nothing to lose because if a losing party does not request findings, all findings will be presumed found to support the judgment. Worford v. Stamper, 801 S.W.2d 108, 109 (Tex. 1990). So, generally, express findings cannot be worse than the presumption, and there is no harm in obtaining adverse express findings whereas there can be more harm in having adverse presumed findings.

Parties should be aware that in Texas there are strict requirements to preserve a request for findings. The party must file a request for findings of fact and conclusions of law within twenty days of the signing of the judgment. Tex. R. Civ. P. 296. The court is supposed to file its findings of fact and conclusions of law within twenty days of the request. Tex. R. Civ. P. 297. If the court fails to do so, then the requesting party must file a notice of past due findings of fact and conclusions of law within thirty days of the filing of the original request. See id. Thereafter, the court should file findings of fact and conclusions of law within forty days from the filing of the original request. See id. If a party fails to file a notice of past due findings of fact and conclusions of law, he has waived any error in the court failing to file such, and all facts will  be presumed in  favor of the judgment. Curtis v. Commission for Lawyer Discipline, 20 S.W.3d 227, 232 (Tex. App.—Houston [14th Dist.] 2000, no pet.). Once the court files findings, a party can file a request for additional findings of fact within ten days after the original findings are filed. Tex. R. Civ. P. 298. This request for additional findings must be specific and must contain proposed findings, otherwise any error in refusing the request is waived. Alvarez v. Espinoza, 844 S.W.2d 238, 241‑42 (Tex. App.—San Antonio 1992, writ dism’d).

Just as a losing party should want express findings, a winning party should generally not want the court to issue express findings because of the presumption. Because it is difficult to preserve error on a trial court’s failure to issue findings, a winning party should be reluctant to prepare proposed findings for a trial court just because a judgment is entered or just because the losing party initially requests findings.

Court Held That Estate Beneficiary Did Not Have Standing To Assert Forfeiture Or Breach Claim Against Executrix’s Attorneys, That An Executrix Had No Authority To Pay Her Attorney’s Fees From The Estate In The Interim In Defending A Removal Action, And That The Trial Court Erred In Refusing A Motion To Compel Distribution Of The Estate

Posted in Cases Decided, Texas Court of Appeals

In re Nunu, an estate beneficiary sued the executrix to have her removed due to alleged breaches of fiduciary duty and also sought to have the court refuse to pay her attorneys in representing her in a removal action and/or sought to have those fees forfeited. No. 14-16-00394-CV, 2017 Tex. App. LEXIS 10306 (Tex. App.—Houston [14th Dist.] November 2, 2017, pet. filed). Texas Estates Code section 404.0037 provides: “[a]n independent executor who defends an action for the independent executor’s removal in good faith, whether successful or not, shall be allowed out of the estate the independent executor’s necessary expenses and disbursements, including reasonable attorney’s fees, in the removal proceedings.” Id. (citing Tex. Est. Code Ann. § 404.0037(a)). The executrix used estate funds to pay at least some of the attorneys’ fees incurred in her defense in this suit. The beneficiary challenged the payment of the attorneys’ fees by (a) arguing that the attorneys were professionally negligent and breached fiduciary duties they owed to the executrix and to the estate, or perhaps to the beneficiaries, and that as a result of this misconduct, their fees should be forfeited; (b) seeking declaratory judgment that the fees should be forfeit or disallowed; and (c) arguing that the requirements of section 404.0037 for payment of attorneys’ fees from estate have not been met.

The court of appeals first held that the beneficiary had no standing to assert a fee forfeiture claim against the attorneys in his personal capacity because he had no attorney/client relationship with the attorneys. The court also held that the beneficiary had no standing to assert a breach claim against the executrix’s attorneys. The fact that the attorneys owed fiduciary duties to the executrix and that the executrix owed fiduciary duties to the beneficiary, did not mean that the attorneys owed duties to the beneficiaries. The court held: “These are separate relationships, however, and the distinction between them cannot be ignored.” Id.

The court then addressed the declaratory judgment claims. Texas Civil Practice and Remedies Code Section 37.005(3) allows declaratory relief “to determine any question arising in the administration” of an estate. The court, however, held that “although section 37.005(3) does not limit ‘the types of questions’ that a litigant may ask, it does not remove the limitations on the questions that the trial court can answer.” Id. “A declaratory judgment requires a justiciable controversy as to the rights and status of parties actually before the court for adjudication, and the declaration sought must actually resolve the controversy.” Id. The court held that a declaration that the fees “should be” forfeited would not actually result in fee forfeiture because Section 37.006(a) provides that when declaratory relief is sought, all persons who have or claim any interest that would be affected by the declaration must be made parties and the attorneys were not parties. Further, even though Texas Civil Practice and Remedies Code Section 37.005(4) allows declaratory relief “to determine rights or legal relations of an independent executor . . . regarding fiduciary fees and the settling of accounts,” the court held that this provision dealt with the compensation of the executrix, not her attorneys. Id.

The court next turned to Texas Estate’s Code Section 404.0037, which states that if an independent executor defends a removal action in good faith that the reasonable and necessary attorney’s fees for the defense “shall be allowed out of the estate.” Id. (citing Tex. Est. Code Ann. § 404.037(a)). The court noted that good faith is an issue on which the independent executor bears the burden of proof. The court held:

“[A]n executor acts in good faith when he or she subjectively believes his or her defense is viable, if that belief is reasonable in light of existing law.” Good faith is established as a matter of law if reasonable minds could not differ in concluding from the undisputed facts that the person in question acted in good faith. Because it is an incontrovertible fact that Paul nonsuited his removal action against Nancy with prejudice, whether Nancy defended the action in good faith is a question of law. As a matter of law, “a dismissal or nonsuit with prejudice is ‘tantamount to a judgment on the merits.’” Moreover, a party who voluntarily nonsuits his claims generally cannot obtain reversal of the order on appeal. And where, as here, the party seeking the executor’s removal voluntarily and unilaterally nonsuits all such claims with prejudice on the third day of a jury trial, reasonable minds could not differ in concluding that the executor’s “efforts cause[d] [her] opponents to yield the playing the field.” Thus, when Paul irreversibly conceded his claim for Nancy’s removal, the viability and reasonableness of Nancy’s defense were established as a matter of law. Although Paul points out that the trial court made no finding that Nancy resisted her removal in good faith, a finding is unnecessary if a matter is established as a matter of law. Paul now attempts to resurrect the same grounds on which he sought Nancy’s removal as grounds for challenging Nancy’s good faith in defending the action; in essence, he contends that Nancy could not have resisted her removal in good faith because Paul would have prevailed on the merits. Those arguments must fail because his voluntary nonsuit of his removal claims with prejudice constitutes a judgment against him on the merits, and he does not (and cannot) challenge that portion of the judgment on appeal.


The court held that the executrix had no authority to pay her attorneys from estate funds in the interim and before the court allowed such an award after the removal issue was resolved:

There is no such order in the record, and the trial court could not properly have approved payments made before the removal action had been decided. See Klein v. Klein, 641 S.W.2d 387, 387 (Tex. App.—Dallas 1982, no writ) (dismissing an executor’s claims for attorneys’ fees and expenses as premature because the removal action was still pending)…. Although Nancy appears to have assumed that she could pay her legal fees without first obtaining findings that the fees were both necessary and reasonable, the statute does not authorize such a procedure.”

Id. The court sustained the beneficiary’s issue in part and remanded to the trial court the determination of the amount to be paid from the estate for the executrix’s “necessary expenses and disbursements, including reasonable attorney’s fees, in the removal proceedings.” Id.

Finally, the beneficiary challenged the trial court’s denial of his two motions to compel the executrix to distribute the estate. “A person interested in an estate may petition the court for an accounting and distribution any time after the expiration of two years from the date the court clerk first issued letters testamentary or letters of administration to any personal representative of the estate.” Id. (citing Tex. Est. Code § 405.001(a)). “Unless the court finds a continued necessity for administration of the estate, the court shall order its distribution by the independent executor to the persons entitled to the property. If the court finds there is a continued necessity for administration of the estate, the court shall order the distribution of any portion of the estate that the court finds should not be subject to further administration by the independent executor.” Id. The court held that the trial court did not abuse its discretion in denying the first motion because it was filed before the removal issue was resolved, and there were still issues continuing for the administration of the estate. However, the court held that the trial court should have granted the second motion, which was filed after the removal action was nonsuited. The court “reverse[d] this portion of the judgment, and remand the cause to the trial court (1) to determine the amount of Nancy’s reasonable and necessary attorneys’ fees and expenses to be paid from the Estate; (2) to authorize Nancy to pay that amount from Estate funds (and, if necessary, to order her to reimburse the Estate for excess legal fees and expenses already paid without authorization); and (3) to order distribution of the Estate.” Id.