; FIDUCIARY DUTIES LIABILITY CASE LAW UPDATE JIM
Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out
Your Federal Quarterly Tax Payments are due April 15th Get Help Now >>

FIDUCIARY DUTIES LIABILITY CASE LAW UPDATE JIM

VIEWS: 33 PAGES: 17

  • pg 1
									FIDUCIARY DUTIES & LIABILITY – CASE LAW UPDATE




                    JIM HARTNETT, JR.
                     The Hartnett Law Firm
                       2920 N. Pearl St.
                      Dallas, Texas 75201
                        (214) 742-4655
                     (214) 855-7857 – Fax
                   jim@hartnettlawfirm.com




                       State Bar of Texas
             RD
        23        ANNUAL LITIGATION UPDATE
                     January 18 - 19, 2007
                          San Antonio

                       CHAPTER 19
                                    JIM HARTNETT, JR.
                                    The Hartnett Law Firm
                                      2920 N. Pearl Street
                                      Dallas, Texas 75201
                                        (214) 742-4655
                                     FAX : (214) 855-7857

                             BIOGRAPHICAL INFORMATION

EDUCATION

    B.A, Austin College, 1979
    J. D., The University of Texas, 1983

PROFESSIONAL ACTIVITIES

    Partner, The Hartnett Law Firm, Dallas, Texas
    Member, State Bar of Texas
    Member, Dallas Bar Association
    Member, American Trial Lawyers Association
    Member, Fellow of The Texas Bar Foundation
    Former Board Member, Dallas Bar Association’s Probate, Trusts and Estate Section
    Former Barrister, Southwestern Legal Foundation’s Patrick E. Higginbotham Inn of Court
    The Texas Lawyer’s “Go To” lawyer in Trusts and Estates, 2003

LAW RELATED PUBLICATIONS, SEMINARS

    Author/Speaker for Midland Business and Estate Counsel, September 9, 1997
           “Basic Steps in Avoiding and Surviving Probate and Trust Litigation”

    Author/Speaker for Advanced Estate Planning and Probate Law Course, Austin, Texas,
           June 4, 1998
           “Discovery Avenues in Trust and Estate Litigation”

    Author/Speaker for Midland Business and Estate Counsel, September 15, 1998
           “Inside Simmons vs. Simmons, Texas’ Biggest Poker Game”

    Author/Speaker for Tarrant County Probate Bar Association, Ft. Worth, Texas, December 3, 1998
           “Discovery Avenues in Trust and Estate Litigation”

    Panelist for Advanced Estate Planning Strategies Course, San Diego, CA.,
           April 20, 1999
           “Multiple Fiduciary Relationships and Complex Trusts and Estate Plans”

    Author/Speaker for Advanced Estate Planning and Probate Law Course, San Antonio, Texas,
            June 3, 1999
           “New Discovery Rules and Their Impact on Probate and Trust Litigation”
Author/Speaker for South Texas College of Law, Wills & Probate Institute, Houston, Texas,
        September 17, 1999
       “Discovery Avenues in Trust and Estate Litigation- The Information You Need, Where to
              Find It and How to Get It” -

Co-Author/Speaker for Wills, Estate, and Probate: A Satellite Broadcast, January 21, 2000
      "How to Reach a Settlement Agreement: Using Mediation and Other Techniques"

Speaker for Tarrant County Probate Bar Association, Probate Litigation Seminar,
       April 25-26, 2002
      "Technology in the Courtroom"

Speaker for Advanced Estate Planning and Probate Course, Dallas, Texas, June 5-7, 2002
      "Effective Use of Experts, Including Demonstration of Direct and Cross- Examination"

Author/Speaker for Probate, Trusts and Estates Section, Dallas Bar Association, October 26, 2004
       “Undue Influence Can Kill: Don’t Let Your Plan Be Next”

Author/Speaker for Real Estate, Probate and Trust Law Section, Denton County Bar Association,
        March 16, 2005
       “Undue Influence Can Kill: Don’t Let Your Plan Be Next”

Speaker for Denton County Bar Association, April 7, 2006
      “Top Ten Ways a Fiduciary Can Assure Him/Herself of Getting Sued”

Speaker for Tarrant County Probate Bar Association, Probate Litigation Seminar
      September 22, 2006
      “Let’s Do Lunch with Anna Nicole”




                                            2
Fiduciary Duties & Liability – Case Law Update                                                                                                             Chapter 19


                                                                 TABLE OF CONTENTS

I.     INTRODUCTION................................................................................................................................................... 1
       A. Fiduciary Litigation is a Great Opportunity for the Creative Lawyer ............................................................. 1

II.    DEFINING FIDUCIARY RELATIONSHIPS ....................................................................................................... 1
       A. What is a Fiduciary?........................................................................................................................................ 1
          1. A Person .................................................................................................................................................. 1
          2. A Trust..................................................................................................................................................... 1
          3. A Capacity ............................................................................................................................................... 1
          4. A Duty ..................................................................................................................................................... 1
          5. A Relationship ......................................................................................................................................... 1
          6. A Doctrine ............................................................................................................................................... 2

III. TYPES OF FIDUCIARY RELATIONSHIPS ........................................................................................................ 2
     A. Creation of Formal and Informal Relationships .............................................................................................. 2
     B. Formal Relationships Created by Statute ........................................................................................................ 3
        1. Fiduciary duty of partners to a partnership.............................................................................................. 3
        2. Fiduciary duty of tax collectors to the State ............................................................................................ 3
        3. Fiduciary duty created in property transactions during a divorce ........................................................... 3
        4. Fiduciary duty created in Trust Code ...................................................................................................... 3
        5. Corporate Fiduciary................................................................................................................................. 3
     C. Formal Fiduciary Relationships Recognized by Common Law...................................................................... 3
        1. Attorneys ................................................................................................................................................. 3
        2. Partners .................................................................................................................................................... 3
        3. Associates of law firms............................................................................................................................ 3
        4. Agents...................................................................................................................................................... 3
        5. Spouses .................................................................................................................................................... 3
        6. Holders of power of attorney................................................................................................................... 3
        7. Corporate officers .................................................................................................................................... 3
        8. Joint venturers.......................................................................................................................................... 3
        9. Executors and trustees ............................................................................................................................. 3
        10. Securities brokers .................................................................................................................................... 3
        11. Class representatives................................................................................................................................ 3
        12. Mineral rights holders.............................................................................................................................. 3
        13. Condominium board members ................................................................................................................ 4
        14. Employees ............................................................................................................................................... 4
     D. Fiduciary Relationships Created by Contract.................................................................................................. 4
        1. Formal Fiduciary Relationships Created by Contract.............................................................................. 4
        2. Informal Fiduciary Relationships Created by Contract ........................................................................... 4
     E. Informal Fiduciary Relationships Created by the Facts .................................................................................. 4
        1. Trust or reliance upon another................................................................................................................ 4
        2. Acquisition of a high degree of trust, influence or confidence............................................................... 4
        3. Dominance by one and weakness and dependence by the other ............................................................ 4
     F. Special Fiduciary Relationships ...................................................................................................................... 5
        1. A duty of good faith and fair dealing....................................................................................................... 5
        2. Exist as a matter of law............................................................................................................................ 5

IV. WHAT’S HAPPENED IN 2006? ........................................................................................................................... 5
    B. Discovery Rule and Limitations...................................................................................................................... 6
    C. Fiduciary Duties Can be Negated by Contract ................................................................................................ 6
    D. Attorney Malpractice or Breach of Fiduciary Duty......................................................................................... 6
    E. Segregation of Attorney’s Fees ....................................................................................................................... 6
    F. Constructive Trusts- Limits on Imposition...................................................................................................... 6
    G. No Presumption of Unfairness for Changed IRA Designation ....................................................................... 6
    H. Fee-Sharing Agreements Between Lawyers.................................................................................................... 7
                                                                                     i
Fiduciary Duties & Liability – Case Law Update                                                                                                             Chapter 19

       I.     Conspiracy to Breach Fiduciary Duty and Joint Liability ............................................................................... 7
       J.     Confidential Relationship and Attorney-Client Relationships ........................................................................ 7
       K.     Officer and Director Fiduciary Duties............................................................................................................. 7
       L.     Corporate Officers May Owe Fiduciary Duties to Individual Shareholders and the Majority Shareholder
              May Owe Fiduciary Duties to Minority Shareholders, but Not in this Case................................................... 8
       M.     Family Law- Fiduciary Duty Owed When Managing Other Spouse’s Community Property......................... 8
       N.     Majority Shareholder May Owe Fiduciary Duties to Minority Shareholders- Usually Question of Fact....... 8
       O.     Intentional Torts Such as Breach of Fiduciary Claims are Not Subject to the Tort Claims Act ..................... 8
       P.     Constructive Trust is Not a Cause of Action – It’s Just a Remedy ................................................................. 9
       Q.     In a Business Transaction, Confidential Relationship Must Exist Prior to, and Apart from, the Agreement
              Made the Basis of the Suit............................................................................................................................... 9
       R.     Attorney Fee Forfeiture for Breach of Fiduciary Duty.................................................................................... 9
       S.     Jurisdiction over Fiduciary Duty Claims Related to Trusts ............................................................................ 9
       T.     Fiduciary Duties of Escrow Agents............................................................................................................... 10

VI. WHAT’S AHEAD FOR 2007?............................................................................................................................. 10
    A. Disgorgement & Fee Forfeiture Cases .......................................................................................................... 10
    B. Probate Court Jurisdiction of Trust Cases .................................................................................................... 10
    C. The Texas Supreme Court Touches on Fiduciary Duty ............................................................................... 10
    D. Personal Injury Lawyers Push The Envelope............................................................................................... 10

VII. REFERENCES...................................................................................................................................................... 11
     1. Primary Source ............................................................................................................................................ 11
     2. Restatements ................................................................................................................................................ 11
     3. Treatises and Statutes................................................................................................................................... 11
     4. Articles ....................................................................................................................................................... 11




                                                                                    ii
Fiduciary Duties & Liability – Case Law Update                                                                 Chapter 19


FIDUCIARY DUTIES & LIABILITY –                                    created by his undertaking, to act primarily for
                                                                  another’s benefit in matters connected with such
CASE LAW UPDATE                                                   undertaking.
                                                                  2. A Trust – as an adjective, it means of the nature of
I. INTRODUCTION: This paper is primarily an                       a trust; having the characteristics of a trust; analogous
update of relevant 2006 Texas cases addressing various            to a trust; relating to or founded upon a trust or
fiduciary duty cases. The paper begins with a                     confidence.
background on fiduciary relationships graciously                  3. A Capacity – as a capacity, one is said to act in a
provided by John F. Nichols, Sr. and a brief discussion           “fiduciary capacity” or to receive money or contract a
of fiduciary duties in general. The paper concludes               debt in a “fiduciary capacity,” when the business which
with some observations about what to expect in 2007               he transacts, or the money or property which he
and a list of helpful references that Mr. Nichols has             handles, is not his own or for his own benefit, but for
complied.                                                         the benefit of another person, as to whom he stands in
                                                                  a relation implying and necessitating great confidence
A. Fiduciary Litigation is a Great Opportunity for                and trust on the one part and a high degree of good
     the Creative Lawyer                                          faith on the other part. The term is not restricted to
     Lawyers often talk about refusing to take a case             technical or express trusts, but includes also such
because it does not pass the “smell test.” If ever there          offices or relations as those of an attorney at law, a
was an area of law suited to the “smell test”, it is the          guardian, executor, or broker, a director of a
breach of fiduciary duty case. What other area of the             corporation, and a public officer.
law submits a jury question that asks “Was it fair?”              4. A Duty – as a duty, one has a duty to act for
(Texas Pattern Jury Charges 104.2 & 206.4B).                      someone else’s benefit, while subordinating one’s
Fiduciary duty cases also bring into play all the rules of        personal interests to that of the other person. It is the
equity which look through the superficial fictions and            highest standard of duty implied by law (e.g., trustee,
facts and acts on the facts, giving them controlling              guardian).
effect. Equity looks to the substance and not the                 5. A Relationship – as a relationship, it is a very
shadow, to the spirit, and not the letter. It seeks justice       broad term embracing both technical fiduciary
rather than technically, truth rather than evasion,               relations and those informal relations which exist
common sense rather than quibbling. Equity abhors                 wherever one person trusts in or relies upon another.
technical rules and restrictions. A court of equity will          One founded on trust or confidence reposed by one
depart from rigid rules of law whenever it is necessary           person in the integrity and fidelity of another. Such
to accomplish the ends of justice.                                relationship arises whenever confidence is reposed on
     Barr v. Thompson, 357 S.W.2d 36, 42                          one side, and domination and influence result on the
(Tex.Civ.App.-Dallas 1961, no writ). The rules of                 other; the relation can be legal, social, domestic, or
equity give lawyers a lot of freedom to craft their case          merely personal.
and to craft a remedy.
                                                                       A relationship subsisting between two persons in
II. DEFINING FIDUCIARY RELATIONSHIPS.                             regard to a business, contract, or piece of property, or
                                                                  in regard to the general business or estate of one of
This section was substantially developed by John                  them, of such a character that each must repose trust
Nichols, Sr. of Houston, Texas for the Fiduciary                  and confidence in the other and must exercise a
Litigation Course. John’s excellent work has been                 corresponding degree of fairness and good faith. Out
reprinted and used often by speakers on the topic of              of such a relationship, the law raises the rule that
fiduciary relationships.                                          neither party may exert influence or pressure upon the
                                                                  other, take selfish advantage of his trust, or deal with
A. What is a Fiduciary?                                           the subject-matter of the trust in such a way as to
                                                                  benefit himself or prejudice the other except in the
     Black’s Law Dictionary, Sixth Edition (1990), pp.            exercise of the utmost good faith and with the full
625-6, defines “fiduciary” as a person, trust, capacity,          knowledge and consent of that other, business
duty, relation and doctrine as follows:                           shrewdness, hard bargaining, and astuteness to take
                                                                  advantage of the forgetfulness or negligence of another
1. A Person – as a noun, the term means a person                  being totally prohibited as between persons standing in
holding the character of a trustee, or a character                such a relationship to each other. Examples of
analogous to that of a trustee, in respect to the trust and       fiduciary relationships are those existing between
confidence involved in it and the scrupulous good faith           attorney and client, guardian and ward, principal and
and candor which it requires. A person having duty,

                                                              1
Fiduciary Duties & Liability – Case Law Update                                                                  Chapter 19

agent, executor and heir, trustee and cestui que trust,          informal fiduciary relationships can also be created by
landlord and tenant, etc.                                        facts. Last, special fiduciary relationships exist as a
                                                                 matter of law based on the status of the parties.
6. A Doctrine – as a doctrine, the “fiduciary shield
doctrine” is an equitable doctrine which holds that              A.   Creation      of    Formal       and     Informal
actions taken by individual defendants solely in their                Relationships.
capacity as corporate officers could not provide the                  Fiduciary relationships are created in three ways,
basis for the exercise of jurisdiction over their persons,       to wit:
absent circumstances making such exercise
appropriate.      This doctrine confers jurisdictional                a.    by statute or common law;
immunity upon corporate officials even though their                   b.    by contract; or
conduct be tortious as long as the actions taken were in              c.    by facts.
the interests of the corporation and not purely personal
and the corporation is not merely a shell for the                      Fiduciary relationships created by statutory or
individual and does not lack sufficient assets to                common law or contract are referred to as “formal
respond.                                                         relationships”; whereas fiduciary relationships created
                                                                 by facts are referred to as “informal relationships.”
Practice Note: Although the Texas Supreme Court                  Texas Bank & Trust Co. v. Moore, 595 S.W.2d 502,
had not explicitly adopted the “fiduciary shield                 507 (1980); Stephanz v. Laird, 846 S.W.2d 895, 901
doctrine,” several appellate courts have applied the             (Tex.App.-Houston [1st Dist.] 1993, writ denied); Lacy
doctrine to jurisdictional claims based on the theory of         v. Ticor Title Ins. Co., 794 S.W.2d 781, 788
general jurisdiction to protect corporate officers who           (Tex.App.-Dallas 1990), writ denied, 803 S.W.2d 265
acted in a representative rather than a personal                 (Tex. 1991); American Tank & Manufacturing Co. v.
capacity. Brown v. General Brick Sales Co., 39                   First Nat’l Bank, 370 S.W.2d 948, 950 (Tex.App.-
S.W.3d 291, 297 to 300 (Tex.App.-Fort Worth 2001,                Amarillo 1963, writ n.r.e).
no pet.) (Court failed to apply fiduciary shield doctrine,             In litigation on fiduciary relationships created by
but discusses the law of intermediate Texas appellate            statute or common law, the primary question is
courts that have applied the theory). However, under             whether the fiduciary (the person) complied with
the fiduciary shield doctrine, there is no blanket               his/her fiduciary duty to the beneficiary. The burden
protection from personal jurisdiction simply because             of proof on this question is on the fiduciary. See Texas
the defendant’s alleged acts were done in a corporate            Pattern Jury Charges (P.J.C.) 104.2 (2003), which
capacity; instead, each defendant’s contacts with the            submits the question of breach of fiduciary duty,
forum State must be assessed individually. D. H. Blair           whether the duty is based on a formal or an informal
Inv. Banking Corp. v. Reardon, 97 S.W.3d 269, 277 to             relationship, where it is alleged that the fiduciary has
278 (Tex.App.-Houston [14th Dist.] 2002, pet.                    profited or benefited from a transaction with the
dismissed); Shapolsky v. Brewton, 56 S.W.3d 120, 132             beneficiary.
(Tex.App.-Houston [1st Dist.] 2001, no pet.) (fiduciary                If the existence of an informal fiduciary
shield doctrine did not protect son of publisher’s               relationship is in question, a preliminary question is
owner, who alleged that his representations regarding            submitted whether a relationship of trust and
publishing contract with author were made in his                 confidence exists between the fiduciary and
capacity as an officer, employee, or agent of publisher,         beneficiary. The burden of proof on this question is on
and thus his contacts established specific jurisdiction          the person or entity asserting the existence of the
for author’s action on the contract; son had negotiated          relationship. Texas Pattern Jury Charges (P.J.C.)
contract and communicated with author by telephone               104.1 (2003). Once the existence of the relationship is
and mail in Texas, and did not deny having made false            established, the burden of proof switches from the
statements during the communications, and alleged                beneficiary to the fiduciary. Another example of this
cause of action was substantially connected to contact).         submission in the family law context are community
                                                                 property transfers from a spouse to a third party, where
III. TYPES OF FIDUCIARY RELATIONSHIPS.                           the question is whether the transfer from the spouse to
      The law sets forth three types of fiduciary                the third party was fair, and if it wasn’t fair, what is the
relationships: (1) formal fiduciary relationships, (2)           amount of the financial loss suffered by the community
informal fiduciary relationships, and (3) special                estate as a result of the transfer by the spouse to the
fiduciary relationships. Formal fiduciary relationships          third party. See Texas Pattern Jury Charges (P.J.C.)
can be crated by statute, common law or by contract.             206.4B (2003).
Informal fiduciary relationships can also be created by
statute, common law or by contract. In addition,

                                                             2
Fiduciary Duties & Liability – Case Law Update                                                                Chapter 19

B.   Formal Relationships Created by Statute.                      2.   Partners
     The following formal fiduciary relationships have                  M.R. Champion, Inc. v. Mizell, 904 S.W.2d 617,
been created by statute:                                                618 (Tex. 1995).

1.   Fiduciary duty of partners to a partnership                   3.   Associates of law firms
          “A partner owes to the partnership, the other                 Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d
     partners, and a transferee of a deceased partner’s                 193 (Tex. 2002).
     partnership interest as designated in Section
     152.406(a)(2): (1) a duty of loyalty; and (2) a duty          4.   Agents
     of care.” Tex. Bus. Org. Code Ann. §152.204.                       See Johnson, 73 S.W.3d at 200.

2.   Fiduciary duty of tax collectors to the State                         a. Escrow agents
          The Texas Tax Code confers a fiduciary duty                         Watkins v. Williamson, 869 S.W.2d
     on ‘any person who receives or collects a tax or                         383, 387 (Tex.App.-Dallas 1993, no writ).
     any money represented to be a tax from another
     person holds the amount so collected in trust for                     b. Insurance agents
     the benefit of the state and is liable to the state for                  Hart Cas. Ins. Co. v. Walker Cty. Agency,
     the full amount collected plus any accrued                               808 S.W.2d 681, 687-88 (Tex.App.-Corpus
     penalties and interest on the amount collected.”                         Christi 1991, no writ).
     Tex. Tax Code §111.016(a).
                                                                   5.   Spouses
3.   Fiduciary duty created in property transactions                    Connell v. Connell, 889 S.W.2d 534, 541
     during a divorce                                                   (Tex.App-San Antonio 1994, writ denied).
          “The subsequent actual receipt by the non-
     owning party of property awarded to the owner in              6.   Holders of power of attorney
     a decree of divorce or annulment creates a                         Stum v. Stum, 845 S.W.2d 407, 414-15 (Tex.App.-
     fiduciary obligation in favor of the owner and                     FortWorth 1992, no writ).
     imposes a constructive trust on the property for
     the benefit of the owner.” Tex. Fam. Code                     7.   Corporate officers
     §9.011.                                                            Faour v. Faour, 789 S.W.2d 620, 621-22
                                                                        (Tex.App.-Texarkana 1990, writ denied).
4.   Fiduciary duty created in Trust Code
          A statutory definition of a fiduciary is as              8.   Joint venturers
     follows:      “Fiduciary” means a personal                         Rankin V. Naftalis, 557 S.W.2d 940, 944 (Tex.
     representative or a trustee. The term includes an                  1977).
     executor administrator, successor personal
     representative, special administrator, and a person           9.   Executors and trustees
     performing substantially the same function. TEX.                   Humane Soc’y v. Austin Nat’l Bank, 531 S.W.2d
     PROP. CODE §116.002(3).                                            574, 577 (Tex. 1975).

5.   Corporate Fiduciary                                           10. Securities brokers
         A corporate fiduciary is defined at TEX.                      Hand v. Dean Witter Reynolds, 889 S.W.2d 483,
     PROB. CODE §3(d) and TEX. PROB. CODE §601(6).                     492 n. 5 (Tex.App.-Houston [14th Dist.] 1994,
                                                                       writ denied).
C.    Formal Fiduciary Relationships Recognized by
      Common Law.                                                  11. Class representatives
      By case authority the following formal                           Glassell v. Ellis, 956 S.W.2d 676, 683-84
relationships have been determined to exist as a matter                (Tex.App.-Texarkana 1997, pet. dism’d).
of law:
                                                                   12. Mineral rights holders
1.   Attorneys                                                         Manges v. Guerra, 673 S.W.2d 180, 183 (Tex.
     Willis v. Maverick, 760 S.W.2d 642, 645 (Tex.                     1984).
     1998).




                                                               3
Fiduciary Duties & Liability – Case Law Update                                                               Chapter 19

13. Condominium board members                                    Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41,
    Harris v. Spires Council of Co-Owners, 981                   52 (Tex. 1998). The duty only arises when a contract
    S.W.2d 892, 897 (Tex.App.-Houston [1st Dist.]                creates a special relationship of trust and reliance
    1998, no pet.).                                              between the parties to the contract. Crim, at 594. In
                                                                 Prime Products, the court held no fiduciary
14. Employees                                                    relationship existed because there was no evidence in
    Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d               the contract showing a higher level of trust had been
    193, 201-02 (Tex. 2002). See also O’Connors,                 agreed to. Prime Products, 97 S.W.3d at 638.
    Causes of Action – 2006 Chp. 10 [Fiduciary Duty]                   As with formal fiduciary relationships created
    pp. 217-219.                                                 through a contract, an informal fiduciary relationship
                                                                 created by a contract is governed by the terms of the
D.    Fiduciary Relationships Created by Contract.               contract. Crutcher-Rolfs-Cummings, Inc. v. Ballard,
      A fiduciary relationship arises from a contract            540 S.W.2d 380, 387 (Tex.App.-Corpus Christi 1976).
when an element of trust, necessary to accomplish the            In Ballard, the court held that the duration of the
goals of the contract, is present. Prime Products, Inc.          fiduciary relationship was governed by the terms of the
v. S.S.I. Plastics, Inc., 97 S.W.3d 631 (Tex.App.-               contract made between the parties. Since the contract
Houston [1st Dist.] 2002).                                       specified a relationship would continue for the life of
   A fiduciary relationship can be either a formal               the patents unless otherwise agreed, the court held that
fiduciary relationship or an informal fiduciary                  a fiduciary relationship existed because no agreement
relationship. Id.                                                had been made to terminate the agreement and the
                                                                 patents were still in effect. Id.
1.   Formal Fiduciary Relationships Created by
     Contract                                                    E.   Informal Fiduciary Relationships Created by
     A formal fiduciary relationship may be created by                the Facts.
a contract. Lacy v. Ticor Title Ins. Co., 794 S.W.2d                 The following fact patterns have been held to have
781, 788 (Tex.App.-Dallas 1990), writ denied 803                 given rise to informal fiduciary relationships:
S.W.2d 265 (Tex. 1991). “’Fiduciary relation’ applies
to legal relations between parties, created by law or by         1.   Trust or reliance upon another –
nature of contract between parties, where equity                           When one person trusts in and relies upon
implies confidence and reliance in consummation of                    another, whether the relationship is moral, social,
purposes for which the relation was created.” Id.                     domestic, or purely personal. Schlumberger Tech.
     Once a fiduciary relationship has been established               Corp. v. Swanson, 959, S.W.2d 171, 176 (Tex.
through the contract, the court must them determine if                1997); Thigpen v. Locke, 363 S.W.2d 247, 253
the fiduciary duty has been breached. Id. Parties to a                (Tex. 1963); see Fitz-Gerald v. Hull, 237 S.W.2d
contract intend every clause of the agreement to have                 256, 261 (Tex. 1951);
effect. Id. If the construction of the contract is valid
and enforceable, the clauses of the contract will be             2.   Acquisition of a high degree of trust, influence or
used to judge whether there has been a breach. Id. In                 confidence –
Lacy, the court used the plain meaning of a letter of                      When a high degree of trust, influence, or
credit to determine what the terms of the agreement                   confidence has been acquired. Crim Truck &
were between the parties because “any other                           Tractor Co. v. Navistar Int’l. Transp. Corp., 823
construction of the letter of credit would render the                 S.W.2d 591, 594 (Tex. 1992); Texas Bank & Trust
performance of the letter of credit meaningless.” Id.                 Co. v. Moore, 595 S.W.2d 502, 507 (Tex. 1980);
                                                                      Carr v. Weiss, 984 S.W.2d 753, 765 (Tex.App.-
2.    Informal Fiduciary Relationships Created by                     Amarillo 1999, pet. denied); or
      Contract
      An informal relationship arises “where one person          3.   Dominance by one and weakness and dependence
trusts in and relies upon another, whether the relation is            by the other –
moral, social, domestic or merely personal.” Crim                          As a result of dominance on the part of one
Trust & Tractor Co., v. Navistar Int’l. Transp. Corp.,                or weakness and dependence on the part of the
823 S.W.2d 591, 594 (Tex. 1992). An informal                          other.     Associated Indem. Corp v. CAT
fiduciary duty does not arise in all contractual                      Contracting, Inc., 918 S.W.2d 580, 596
relationships, particularly, this duty does not arise in              (Tex.App.-Corpus Christi 1996), aff’d in relevant
ordinary arms-length commercial transactions. Subaru                  part, 964 S.W.2d 276 (Tex. 1998); See Texas
of Am. v. David McDavid Nissan Inc., 84 S.W.3d 212,                   Bank & Trust v. Moore, 595 S.W.2d 502, 508
225 (Tex. 2002); Formosa Plastics Corp. USA v.                        (Tex. 1980).

                                                             4
Fiduciary Duties & Liability – Case Law Update                                                                  Chapter 19

      The commonality in most informal fiduciary                   represent a class, the duty will be imposed not just to
relationships is that dealings between the plaintiff and           the parties, but to that class. See Plaza, at 278 finding
the fiduciary continued long enough to justify the                 the entire class of bank/depositor relationships to be
plaintiff’s reliance on the fiduciary to act in the                “special relationships.”        Westfall, Gregory B.,
plaintiff’s best interest. Carr v. Weiss, 984 S.W.2d               Comment “But I know it when I see it”: A Practical
753, 765-6 (Tex.App.-Amarillo 1999, pet. denied);                  Framework for Analysis and Argument of Informal
Stephanz v. Laird, 846 S.W.2d 895, 902 (Tex.App.-                  Fiduciary Relationships. 23 Tex. Tech L. Rev. 835
Houston [1st Dist.] 1993, writ denied). However                    (1992). Since the court’s ruling in Plaza, the Texas
subjective trust alone does not create a fiduciary                 Supreme Court reaffirmed that the duty of good faith
relationship, the nature of which must be determined               does not arise in ordinary commercial transactions.
from objective facts. Trostle v. Trostle, 77 S.W.3d                Formosa Plastics Corp. USA v. Presidio Eng’rs &
908, 914 (Tex.App.-Amarillo 2002, no pet.). In                     Contrs., Inc., 960 S.W.2d 41, 52 (Tex. 1998). It also
business transactions the fiduciary relationship must be           ruled that the relationship between a debtor and a
shown to have existed before and apart from the                    creditor does not fulfill the requirements of a special
agreement that is the basis for the suit. Schlumberger             relationship which imposes the duty of good faith.
Tech. Corp. v. Swanson, 959 S.W.2d 171, 177 (Tex.                  FDIC v. Coleman, 795 S.W.2d 706, 708-709 (Tex.
1997).                                                             1990). Based on these two decisions, argument has
                                                                   been made that Plaza has been implicitly overruled in
F.   Special Fiduciary Relationships.                              cases of debtors and creditors. Eller v. Nationsbank of
     Special fiduciary relationships have two primary              Texas, 975 S.W.2d 803, 809 (Tex.App.-Amarillo
features:                                                          1998).
                                                                         These prior rulings, however, do not affect the
1.    A duty of good faith and fair dealing.                       finding of a special relationship between insurers and
      Although a special relationship is generally                 their insured. Arnold v. Nat’l County Mut. Fir. Ins.
termed a fiduciary relationship, the special relationship          Co., 725 S.W.2d 165, at 167 (Tex. 1987). The court, in
only gives rise to the tort duty of “good faith and fair           Arnold, found that in the insurance context, a special
dealing.” Crim Truck and Tractor Co. v. Navistar                   relationship arises because: (1) there is an unequal
Int’l. Transp., 823 S.W.2d 591, 594 (Tex. 1992). The               bargaining power between the parties and (2) the
“special relationship” is a term of art that is fairly new         nature of insurance contracts would allow dishonest
to the law of Texas. Crim, at 594; English v. Fischer,             insurers to take advantage of an insured’s misfortunes.
660 S.W.2d 521 (Tex. 1983). Although it is generally               Id. Taking these reasons into consideration, the court
termed a “fiduciary” relationship, unlike the two other            ruled, “[An] indemnity company is held to that degree
fiduciary relationships (formal and informal), the                 of care and diligence which a man of ordinary care and
special relationship gives rise only to the tort duty of           prudence would exercise in the management of his
good faith and fair dealing. Crim. at 594. The special             own business.” Id. The insurer breaches their duty by
relationship does not carry with it the full range of              denying a claim without a reasonable basis for denial
fiduciary rights and duties normally associated with the           or by denying a claim without doing a reasonable
other fiduciary relationships discussed above. Id. As              investigation. Aranda v. Insurance Co. of North
the Texas Supreme Court has recently stated, “The                  America, 748 S.W.2d 210, 213 (Tex. 1998).
duty of good faith and fair dealing merely requires the
parties to ‘deal fairly’ with one another and does not             IV. WHAT’S HAPPENED IN 2006?
encompass the often more onerous burden that requires                   Here are some of the 2006 cases that address or
a party to place the interest of the other party before his        relate to various aspects of fiduciary litigation.
own as with the other fiduciary relationships. Id.
                                                                   A. No Fiduciary Duties for Named Executor in
2.    Exist as a matter of law.                                         Muniment of Title
      With the special relationship, as with the formal            Estate of Kuykendall, 206 S.W.3d 766 (Tex.App.-
fiduciary relationship, the relationship exists as a               Texarkana, 2006).
matter of law, so the status of the parties again serves
as its own proof that the relationship exists. Plaza               The named executor probated a will as muniment of
Nat’l Bank v. Walker, 767 S.W.2d 276, 278 (Tex.App.-               title only. The heirs of the estate sued the named
Beaumont 1989, writ denied) [“We hold that a special               executor for breach of fiduciary duty. The court held
relationship exists between a bank and its depositors.”]           that although defendant was named as executor in the
Therefore, when the court determines that the duty of              will, because he probated the will as muniment of title
good faith and fair dealing should be imposed in a                 only, and was never appointed the estate’s
particular case, to the extent that the parties to that case

                                                               5
Fiduciary Duties & Liability – Case Law Update                                                                Chapter 19

representative, as a matter of law there are no fiduciary        E. Segregation of Attorney’s Fees
duties owed to the beneficiaries.                                Tony Gullo Motors I, L.P. v. Chapa, 2006 WL
                                                                 3751591 (Tex. 2006).
B. Discovery Rule and Limitations
G. Property Management v. Multivest Financial                    Although not a fiduciary duty case, this is an important
Services of Texas, Inc.                                          case. Many fiduciary duty claims do not allow for
2006 WL 3208665 (Tex.App.-San Antonio, 2006)                     recovery of attorney’s fees, so claims for attorney’s
                                                                 fees are often tied to another theory: the “inextricably
In a dispute over purchase and operation of an office            intertwined and not subject to segregation” exception,
building, plaintiff sued for breach of fiduciary duty.           would often allow for the recovery of all or most of the
Court held that relationship between partners is                 attorney’s fees. Here the Supreme Court modified the
fiduciary in nature, but that does not change the rule           previous rule expressed in Stewart Title Guaranty Co.
that diligence in discovering the breach of fiduciary            v. Sterling, 941 S.W.2d 68 (Tex. 1997).
duty is required. Existence of a fiduciary relationship
affects the application of the rule; it is one of the            F. Constructive Trusts- Limits on Imposition
circumstances to be considered in determining whether            Flournoy v. Wilz, 201 S.W.3d 833 (Tex.App.-Waco
the breach might have been discovered in the exercise            2006, pet. filed).
of reasonable diligence. One in a relationship of trust
is not always justified as a matter of law in neglecting         Father accused of taking money from a personal injury
every precaution until something occurs to arouse his            settlement for his incapacitated son and using it to
suspicions. Each case must rest on its own facts.                partly finance the purchase of a farm. The trial court’s
                                                                 imposition of constructive trust over the entire fund
C. Fiduciary Duties Can be Negated by Contract                   was reversed; the appellate court held that the
In re Great Western Drilling, LTD.                               constructive trust should only be imposed over the part
2006 WL 3461801 (Tex. App.-Eastland, 2006)                       of the farm that was paid for using the son’s funds – in
                                                                 this case an undivided 35%. The court reasoned that if
Parties entered in to a Joint Operating Agreement over           you want to impose a constructive trust, you must be
an oil and gas lease. Working interest owners sued               able to trace the misused funds over to a specific asset,
claiming that organization breached fiduciary duties to          and that it was the plaintiff’s burden to prove how
them. Court held no that fiduciary duty existed                  much of the asset should be subject to a constructive
between the parties because the contract specifically            trust. This result seems to conflict with some of the
disclaimed any fiduciary duty or confidential                    burdens of proof that are traditionally shifted to the
relationship.                                                    breaching fiduciary.

D. Attorney Malpractice or Breach of Fiduciary                   G. No Presumption of Unfairness for Changed
    Duty                                                             IRA Designation.
Beck v. Looper Reed and McGraw, 2006 WL 1452108                  Porter v. Denas, 2006 WL 1686515 (Tex.App.—San
(Tex.App.-Dallas 2006).                                          Antonio 2006, pet. denied).

The court held that it is improper to couch a legal              Nephew and grandniece, both of whom were attorneys,
malpractice claim as a breach of fiduciary duty claim            were sued by personal representative of the estate
to extend the statute of limitation. If the cause of             because they were beneficiaries of the decedent’s IRA.
action involves the attorney’s negligence, it is a legal         Defendants had prepared wills and knew that the
malpractice claim and subject to a two-year statute of           decedent intended to leave her assets to her son. The
limitations. A breach of fiduciary duty claim involving          IRA made up about 35% of the assets. Defendants
the attorney arises in cases where the attorney obtained         denied knowing that they were the beneficiaries of the
an improper benefit from representing the client. This           IRA, but evidence suggested that they did know. The
seems like a flimsy distinction. A lynchpin of                   court found that the defendants breached their fiduciary
fiduciary relationship is the duty of loyalty. For               duties. The court also held that there was no
example, if a lawyer has a conflict of interest and gives        presumption of unfairness (creating the rebuttable
advice that is detrimental to one client, but favorable to       presumption that the transaction is void) as to the IRA
the other, that seems like malpractice and a breach of           designation because it was not a gift. According to the
fiduciary duty arising from the same act.                        court, presumption of unfairness cases, which shift the
                                                                 burden of showing fairness to the fiduciary, involve
                                                                 inter vivos transactions only. In another holding, the
                                                                 court held that legal malpractice are based an

                                                             6
Fiduciary Duties & Liability – Case Law Update                                                                 Chapter 19

attorney’s failure to exercise ordinary care. However,            done by any of the conspirators in furtherance of the
a claim for a breach of fiduciary duty often involves             conspiracy.
often involves an attorney’s failure to disclose
conflicts, failure to deliver client funds, improper use          J.   Confidential Relationship and Attorney-Client
of confidences, or engaging in self-dealing. Therefore,                Relationships
this was a breach of fiduciary case, not a legal                  In the Matter of the Estate of Wallace
malpractice case.                                                 2006 WL 3611277 (Tex.App.—San Antonio 2006).

H. Fee-Sharing Agreements Between Lawyers                         This case involves an oral agreement to make a will.
Jones v. Blume, 196 S.W.3d 440 (Tex.App.-Dallas                   Riddick claimed that he had a close personal
2006, pet. denied).                                               relationship with the decedent. Decedent agreed to sell
                                                                  a 500-acre tract of land to Riddick at a later,
Jones and Blume were co-counsel in a lawsuit against              unspecified date, with consideration being Riddick’s
an insurance company. They, and another lawyer,                   performance of personal services. Later, decedent and
entered into an agreement to split fees and for Blume             his wife agreed to bequeath Riddick an undivided one-
to front expenses. Settlement proceeds were received              half interest in 100 acres, rather than selling him the
by Blume and distributed to the other lawyers. Jones              entire 500 acres. They prepared wills in accordance
objected to Blume’s calculations and sued him for                 with that, but later they changed the wills. Court
breach of fiduciary duty. Jones used a shotgun                    rejected Riddick’s assertion that decedent owed him
approach to try to establish that Blume owed him                  fiduciary duties. The Court went through the oft-
fiduciary duties on a number of bases, all of which the           recited maxims of informal fiduciary duties: they arise
court rejected. All of the formal relationships were              from a moral, social, domestic or purely personal
rejected (though Jones did not vigorously pursue his              relationship of trust and confidence; they are not
joint venture position). The primary focus was on the             created lightly; not every relationship involving a high
existence of an informal fiduciary relationship. There            degree of trust and confidence rises to the stature of a
was evidence that the two shared office space and that            fiduciary relationship; a fiduciary relationship may
Blume had paid some of Jones’ expenses when he fell               arise as a result of dominance in the part of one, or
ill. But the court focused on the fact that this happened         weakness on the part of another; before an informal
after the fee-sharing arrangement had been agreed to              fiduciary duty in a business transaction will be
by the parties, and thus there was no evidence of                 imposed, it must be established that the special
fiduciary duty at the time of the agreement. The court            relationship of trust and confidence existed prior to and
did not determine that a fiduciary duty existed after the         separate from the agreement made the basis of the suit;
fact, but suggested that even if it did, it was irrelevant.       subjective trust alone will not create a fiduciary
                                                                  relationship; the nature of the relationship must be
I.  Conspiracy to Breach Fiduciary Duty and                       established from objective facts; and the fact that a
    Joint Liability                                               relationship has been a cordial one of long duration, is
Paschal v. Great Western Drilling, Ltd., 2006 WL                  not evidence of a confidential relationship. Riddick
2975312 (Tex.App.—Eastland 2006)                                  submitted an affidavit that showed his subjective
                                                                  beliefs that he trusted the decedent, but it was
Great Western sued employee’s wife in order to                    unsupported by objective facts that he trusted the
recover money ($1.5 million) embezzled by employee.               decedent to act in a manner exhibiting the highest
Wife claimed that employee did not have a fiduciary               degree of loyalty and fair dealing.
duty to his company despite employee’s position as                         The court also held that because Riddick was
senior revenue accountant in charge of disbursing                 an attorney for the decedent, that obviated any finding
revenue to the various working interests and royalty              that decedent owed a fiduciary duty to Riddick. An
interest owners under leases operated by Great                    attorney-client relationship establishes a fiduciary duty
Western. The court found that employee did have a                 as a matter of law from the attorney to the client, and
fiduciary relationship based on his responsibilities to           apparently precludes an attorney from establishing that
distribute millions of dollars of revenue to the                  a client owes him informal fiduciary duties.
appropriate recipients. The wife also objected to the
finding of a breach because it was based on the                   K. Officer and Director Fiduciary Duties
conduct of a non-party- her employee husband- who                 Scruggs Management Services, Inc. v. Hanson, 2006
was deceased. The court ruled that because employee               WL 3438243 (Tex.App.—Fort Worth 2006).
and wife were a part of a conspiracy that harmed Great
Western, a conspirator is responsible for all the acts            Alleged breach of fiduciary duty by an officer or
                                                                  director of a company. Scruggs contended that

                                                              7
Fiduciary Duties & Liability – Case Law Update                                                               Chapter 19

Hanson, while an officer and fiduciary of Scruggs,              fiduciary duty to the other spouse, and a presumption
breached his fiduciary duty by usurping a corporate             of constructive fraud arises if the transfer was made
opportunity which later benefited TIG, where Hanson             without the knowledge or consent of the other party. If
worked both before and after his time at Scruggs. The           a property interest is disposed of without the other
court held that to establish a breach of fiduciary duty         spouse’s knowledge or consent, the spouse who
by usurping a corporate opportunity, the corporation            disposed of the property has the burden of proof to
must prove that an officer or director misappropriated a        show the fairness of the disposition of the community
business opportunity that properly belongs to the               property.
corporation. The business opportunity arises where a
corporation has a legitimate interest or expectancy in,         N. Majority Shareholder May Owe Fiduciary
and the financial resources to take advantage of, a                 Duties to Minority Shareholders- Usually
particular business opportunity. Because the court                  Question of Fact
found that the new opportunity for TIG was based on             Redman v. Griffith, 202 S.W.3d 225 (Tex.App.-Tyler
Hanson’s personal knowledge and his prior experience            2006).
at TIG, and not Hanson’s employment at Scruggs,
Scruggs failed to prove that Hanson misappropriated a           Minority shareholders sued the Griffith defendants in a
business opportunity that properly belonged to                  variety of fiduciary capacities, including as officers,
Scruggs.                                                        directors, and majority shareholders. The court held
                                                                that a co-shareholder in a closely-held corporation does
L.   Corporate Officers May Owe Fiduciary Duties                not, as a matter of law, owe a fiduciary duty to his co-
     to Individual Shareholders and the Majority                shareholder. The existence of such a duty depends on
     Shareholder May Owe Fiduciary Duties to                    the circumstances. A fiduciary duty exists between co-
     Minority Shareholders, but Not in this Case.               shareholders if a confidential relationship exists.
Cotten v. Weatherford Bancshares Inc., 187 S.W.3d               “Further, fiduciary relationships may be created by
687 (Tex.App.-Fort Worth 2006, pet. denied).                    contract, through the repurchase of a shareholder’s
                                                                stock in a closely-held corporation, in certain
Cotten sued corporation and controlling shareholders            circumstances in which a majority shareholder in a
for breach of fiduciary duty. The court held that               closely-held corporation dominates control over the
corporate officers do not owe fiduciary duties to               business, and closely-held corporations in which the
individual shareholders unless a contract or                    shareholders operate more as partners than in strict
confidential relationship exists in addition to the             compliance with the corporate form.” Plaintiffs’
corporate relationship. Here there was no evidence of           claims that the defendants exercised a great deal of
a confidential relationship. The court also noted that in       control over the closely-held corporation and engaged
certain    limited     circumstances,     the   majority        in wrongful conduct and a lack of fair dealing with
shareholders who dominate the control over the                  regard to the company’s affairs, sufficiently alleged a
business may owe such a duty to minority                        breach of fiduciary duty by way of oppressive conduct.
shareholders, especially preferred shareholders.                Accordingly, the court reversed the summary judgment
However, because defendants did not own stock in the            in the defendants’ favor and remanded.
corporation at issue- instead they controlled another
entity was the controlling shareholder- the court found         O. Intentional Torts Such as Breach of Fiduciary
that Cotten had failed to sue the proper party.                      Claims are Not Subject to the Tort Claims Act
                                                                Phillips v. Dafonte, 187 S.W.3d 669 (Tex.App-
M. Family Law- Fiduciary Duty Owed When                         Houston [14th Dist.] 2006).
    Managing    Other   Spouse’s   Community
    Property                                                    Suit against a state-employed doctor for, among other
Boyo v. Boyo,196 S.W.3d 409 (Tex.App.-Beaumont                  things, breach of fiduciary duty. The doctor moved to
2006).                                                          dismiss on the basis that the complained-of acts were
                                                                committed within the scope of his employment, and
Husband transferred community property assets to a              thus the State could have been sued instead of him and
corporation of which he was a part owner and to                 so it was the proper defendant. If accurate, that would
others, including friends and relatives. Wife further           entitle the doctor to dismissal of the claims against him
complained that community assets were commingled                under the Tort Claims Act. The court disagreed,
with corporate assets. Husband argued that the                  holding that “intentional torts such as a breach of
transfers were made for adequate consideration. The             fiduciary duty are not subject to the Tort Claims Act”,
court held that a spouse who controls the other                 the claim for breach of fiduciary duty could not have
spouse’s interest in community property owes a

                                                            8
Fiduciary Duties & Liability – Case Law Update                                                                 Chapter 19

been brought against the State, and thus doctor was the          R. Attorney Fee Forfeiture for Breach of
proper defendant.                                                    Fiduciary Duty.
                                                                 Haden v. Sacks, 2006 WL 2567672 (Tex. App. –
P.  Constructive Trust is Not a Cause of Action –                Houston [1st Dist.], September 7, 2006).
    It’s Just a Remedy
In Re Arrendell, 2006 WL 3740669 (Tex.App.-                      Dispute arose between client Haden and attorney Sacks
Texarkana 2006).                                                 based upon Haden’s refusal to pay the invoices. Haden
                                                                 argued that the fees were excessive and the attorneys
Keeling, the agent under a power of attorney granted             breached their fiduciary duties by charging excessive
by her elderly sister, was found to have breached her            fees. Trial court in the case of the attorneys against
fiduciary duties by becoming the beneficiary of pay-             Haden granted “no evidence” summary judgments in
on-death accounts of her sister. A will that was                 favor of the attorneys and against Haden because there
executed by the sister and offered by Keeling was also           was no evidence of any damage. Haden had argued the
denied probate. A house was also transferred into the            damages were the fees themselves, in part because they
name of one of decedent’s grandchildren. The trial               were excessive. The court disagreed that there were
court awarded damages against Keeling, imposed a                 any damages.
constructive trust over the pay-on-death account                      Haden failed to seek fee forfeiture as a remedy for
proceeds, and set aside the deed transferring the house          the attorney’s breach of fiduciary duty. “[A] client
to the grandchild. Keeling complained that the                   need not prove actual damages in order to obtain
imposition of those terms of the judgment effectively            forfeiture of an attorney’s fees for the attorney’s breach
granted a post-verdict trial amendment to allow new              of fiduciary duty to the client.” Haden, at *18, citing
causes of action to be pled. The court accurately                Burrow v. Arce, 997 S.W.2d 229, 240 (Tex. 1999).
pointed out that a constructive trust is not a cause of          Haden waived fee forfeiture.
action, but rather a remedy for breach of fiduciary duty
and a means of enforcing the jury’s verdict. The court           S.   Jurisdiction over Fiduciary Duty Claims
held that the order setting aside deeds improperly                    Related to Trusts.
obtained by the fiduciary was a proper method of                 In Re: Guardianship of Gibbs, 2006 WL 2830821
effectuating its judgment.                                       (Tex.App.-Fort Worth, 2006, Mot for Rehearing filed
                                                                 and submitted/pending).
Q. In a Business Transaction, Confidential
     Relationship Must Exist Prior to, and Apart                 This case has a long history, but the focus here will be
     from, the Agreement Made the Basis of the                   on the fiduciary duty allegation and holding. A lawsuit
     Suit.                                                       was filed in a District Court in Denton County for the
Four Brothers Boat Works, Inc. v. Tesoro Petroleum               return of in excess of $1,000,000.00 in trust assets
Companies, Inc., 206 WL 3589480 (Tex.App.-Houston                taken out of the trust by virtue of a provision in the
[14th Dist.] 2006).                                              trust allowing such removal if the primary beneficiary
                                                                 and at least 3 of 4 contingent beneficiaries agreed. The
Subtenant sued tenant for breach of fiduciary duty, in           case was later transferred to the Denton County
part for failing to exercise a renewal option on its lease       Probate Court. 3 of the 4 contingent beneficiaries, all
so that subtenant could remain on the premises.                  associated with the Republic of Texas, presented their
Defendant tenant was granted summary judgment that               mother with documents ordering the removal of said
it did not owe subtenant fiduciary duties. Subtenant             funds from the trust for purposes of purchasing rations
argued that, while there was no formal fiduciary                 for the impending “Y2K disaster.” The fourth child as
relationship, an informal one had arisen. The appellate          next friend for his mother, filed a lawsuit for the return
court affirmed the finding of no fiduciary relationship.         of the trust funds taken, alleging the transaction(s)
This is another case that lays out the requisites for an         were invalid based upon breach of fiduciary duty and
informal fiduciary relationship. While it retreads old           other grounds.
grounds, it provides a careful analysis and an in-depth                A default judgment was entered against the 3
discussion of the issue. A close relationship which              children for the return of the trust assets. An appeal
develops after the execution of the agreement sought to          challenging jurisdiction ensued.
be enforced cannot serve as a basis for imposing a                     Consistent with its holding in Mobil Oil v. Shores,
fiduciary relationship at the time the agreement is              128 S.W.3d 718, 723 (Tex. App. – Fort Worth 2004,
executed.                                                        no pet.) (suit to recover underpaid carbon dioxide
                                                                 royalties is not specifically enumerated in §115.001
                                                                 and does not concern a trust because it does not affect
                                                                 the administration, distribution or duration of the

                                                             9
Fiduciary Duties & Liability – Case Law Update                                                                Chapter 19

trust), in Gibbs, the Fort Worth Court of Appeals, held,         probate court concurrent jurisdiction with district
“…the causes of action against appellants for                    courts and provides that the district court shall have
restitution and breach of fiduciary duty are not                 jurisdiction of all matters concerning trusts, including,
enumerated in section 115.001(a), nor do they fall               a specified “laundry list” of categories. This “laundry
within its scope. … All of [the actions enumerated in            list” has been held to be exclusive despite the fact that
section 115.001(a)] involve actions relating to the trust        the jurisdictional statute relates to “all matters
itself or the operation thereof. None involves anything          concerning trusts.” The legislature has struggled with
remotely resembling a tort action.” Gibbs, at *3. The            eliminating or modifying the “laundry list” to make it
Court found the statutory probate court lacked                   clearer for the courts. One problem with eliminating
jurisdiction over the breach of fiduciary duty claims,           the laundry list is that it includes certain actions that
because they are not specifically enumerated in Tex.             are not found elsewhere in the Trust Code, such as a
Trust Code §115.001, and held the (default) judgment             judicial settlement of accounts. How the Legislature
void.                                                            addresses problems remains to be seen, but don’t be
                                                                 surprised if the Legislature amends this section in a
T. Fiduciary Duties of Escrow Agents                             manner to make it clear that all litigation relating
Prospect High Income Fund v. Grant Thornton, LLP                 predominantly to a trust or the trustee of the trust can
203 S.W.3d 602, 617 (Tex.App.-Dallas, 2006)                      be brought in the probate court. This is an important
                                                                 fix because under the most recent interpretation of the
An escrow agent owes fiduciary duties to both parties            law, one can not even sue the trustee of a testamentary
in a transaction, including the duty of loyalty, the duty        trust for theft in the statutory probate court.
to make full disclosure, and the duty to exercise a high
degree of care to conserve the money placed in escrow            C. The Texas Supreme Court Touches on
and pay it only to those persons entitled to receive it.              Fiduciary Duty
                                                                 Nat’l Plan Admin. v. Nat’l Health Ins. Co., 150 S.W.3d
VI.     WHAT’S AHEAD FOR 2007?                                   718 (Tex.App.-Austin 2004, pet. granted).

A.    Disgorgement & Fee Forfeiture Cases                        Health insurance underwriter sued a third-party
     Expect to see more disgorgement cases, especially           administrator and its parent corporation for breach of
involving large attorney’s fees. Several significant             contract and fiduciary duty in connection with transfer
cases are already pending and have been talked about             of policies to another insurer. The Court found that the
publicly, such as Medina, et. al. v. Ammons Law Firm             third party administrator owed the underwriter
LLP, et. al., pending in Galveston. Medina is a suit by          fiduciary duties based on the statutes regulating agents,
32 disgruntled plaintiffs who settled their case with BP         and particularly third-party administrators, in the
and now complain that their lawyers did not fully                Insurance Code as well as the written agreement
disclose all matters involving other plaintiffs and that         between the parties. The court noted that the written
the lawyers also charged unreasonably high fees.                 agreement here gave control of substantial and critical
Disgorgement of money paid is also a remedy sought               information regarding the plaintiff to the defendant.
in the Dallas case between Fred Baron and Baron &                     The appellee argued that it could only be sued for
Budd. The law on fee forfeiture or disgorgement since            breach of contract because there was a written contract
Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999) has still             between the parties. The Court disagreed, finding that
not developed nearly enough to really inform us as to            some of the plaintiff’s allegations were based on
the application of and the limits of this remedy. The            breaches of the defendant’s duties of loyalty, fidelity,
disgorgement remedy is a handy one, especially where             and honesty that stem from its fiduciary role – not
there are no other damages. One can recover for                  merely elements of the contract.
breach of fiduciary duty even though one has not                     National Plan has appealed based on these two
suffered actual damage. The disgorgement remedy                  issues arguing that 1) there can be no cause of action
provides a form of monetary relief, and a claim for              for breach of fiduciary duty because the written
disgorgement of all trustee’s fees is typical now in             agreement limited the obligations of the parties, and
breach of fiduciary duty cases against trustees. The             any breaches are outside that written agreement, and 2)
Supreme Court is considering this case, which has                the court erred in finding a fiduciary relationship with
already been argued and submitted.                               no limitation between the parties based on the
                                                                 insurance code and/or the written agreement.
B.   Probate Court Jurisdiction of Trust Cases.
     There has been a difficult battle in recent years           D. Personal Injury Lawyers Push The Envelope.
concerning the breadth of probate court jurisdiction in               The tort reforms of the last two legislative
trust matters. TEX. TRUST CODE §115.001 gives the                sessions have sent a lot of personal injury lawyers

                                                            10
Fiduciary Duties & Liability – Case Law Update                                                                    Chapter 19

scrambling to find new areas to pursue. Many are                            and 104.2 with Commentary (2006); Chapter 206
branching into fiduciary duty claims.             Just as                   [Fraud] PJC 206.4B with commentary (2006).
aggressive personal injury lawyers really pushed the                   •    West’s Texas Penal Code – 2004 Edition, §32.43
envelope in expanding theories of recovery and                              [Commercial        Bribery]        and     §32.45
damage theories in the area of personal injury, we can                      [Misapplication of Fiduciary Property or
probably expect the same in fiduciary breach cases.                         Property of Financial Institution].
Areas that will be especially attractive to new theories               •    State Bar of Texas – Fiduciary Litigation
will be the fiduciary relationships that naturally involve                  Seminars 2004, 2005, 2006.
large dollars, such as ERISA plans and corporate                  4.       Articles.
governance.                                                            •    Crespi, Rethinking Corporate Fiduciary Duties:
                                                                            The Inefficiency of the Shareholder Primacy
VII. REFERENCES:                                                            Norm, 55 SMU L. Rev. 141 (2002).
     Mr. Nichols has developed a handy list of                         •    Martin, The Line Has Been Drawn on the
references. These references and materials are highly                       Attorney-Client Relationship: The Implications
recommended reading for the practitioner handling                           of Burrow v. Arce on Texas Practitioners, 32
fiduciary matters and litigation, to wit:                                   Tex. Tech. L. Rev. 391 (2001).
1. Primary Source.                                                     •    Vestal, Special Ethical and Fiduciary Challenges
   O’Connor’s, Causes of Action – 2006, Chapter 10                          for Law Firms Under the New and Revised
[Fiduciary Duty] pp. 215-228.                                               Unincorporated Business Forms, 39 S. Tex. L.
2. Restatements.                                                            Rev. 445 (1998).
   • Restatement (2d) of Agency §13 (agent as                          •    Ward, Enlarging an Employer’s Fiduciary Hat:
      fiduciary), §§399-409 (liabilities), §§410-421                        Varity Corp. v. Howe Increases Employers’
      (defenses) (1958).                                                    Exposure to Liability When They Act as ERISA
   • Restatement of Restitution §138 (violation of                          Fiduciaries, 43 Hous. L. Rev. 1195 (1997).
      fiduciary duty), §143 (defenses-change of                        •    Beyer, The Durable Power of Attorney for
      position by fiduciary), §§190-201 (acquisition of                     Property Management, 59 Tex. B.J. 314 (1996).
      property by fiduciary) (1937); see also Smith v.                 •    Sutton, The Lawyer’s Fiduciary Liabilities to
      Bolin, 271 S.W.2d 93, 96 (Tex. 1954) (adopting                        Third Parties, 37 S. Tex. L. Rev. 1033 (1996).
      §200 on use of knowledge or information by
                                                                       •    Anderson & Steele, Fiduciary Duty, Tort &
      fiduciary).
                                                                            Contract: A Primer on the Legal Malpractice
   • Restatement (2d) of Trusts §§169-185 (Fiduciary                        Puzzle, 47 SMU L. Rev. 235 (1994).
      duties of trustees) (1959).
                                                                       •    Beveridge, Does a Corporation’s Board of
   • Restatement (3d) of the Law Governing Lawyers                          Directors Owe a Fiduciary Duty to Its
      §37 (forfeiture of fees) (2000). The Texas                            Creditors?, 25 St. Mary’s L.J. 589 (1994).
      Supreme Court quoted parts of Section 49 of the
                                                                       •    Nelson, The Prudent Person Rule: A Shield for
      Proposed Final Draft, regarding forfeiture of
                                                                            the Professional Trustee, 45 Baylor L. Rev. 933
      fees, with approval in Burrow v. Arce, 997
                                                                            (1993).
      S.W.2d 229, 237 & 241 (Tex. 1999).
                                                                       •    Westfall, “But I Know It When I See It”: A
3. Treatises and Statutes.
                                                                            Practical Framework for Analysis and Argument
   • 4, 11, 12, 14 Dorsaneo, Texas Litigation Guide
                                                                            of Informal Fiduciary Relationships, 23 Tex.
      ch. 55 (constructive trusts), ch. 160 (corporate
                                                                            Tech L. Rev. 835 (1992).
      management), ch. 180 (partner’s liability), ch.
                                                                       •    Palmiter, Reshaping the Corporate Fiduciary
      216 (agency)(2004).
                                                                            Model: A Director’s Duty of Independence, 67
   • 3 Edgar & Sales, Texas Torts & Remedies
                                                                            Tex. L. Rev. 1351 (1989).
      §44.03[1][b] (2004).
                                                                       •    Smith, Implications of a Fiduciary Standard of
   • 17 Woodward & Smith, Texas Practice:
                                                                            Conduct for the Holder of the Executive Right,
      Probate & Decedents’ Estates §498 (2004).
                                                                            64 Tex. L. Rev. 371 (1985).
   • West’s Texas Practice Guide:          Probate, I.
                                                                       •    Finnen, Imposition of a Constructive Trust Based
      Overview of Personal Representatives Duties and
                                                                            upon a Breach of Fiduciary Duty in Joint
      Powers §§8:1-8:3 (2005); Family Law, II.
                                                                            Venture Situations, 21 S. Tex. L. Rev. 229
      Breach of Fiduciary Duty, A. Fiduciary Duties
                                                                            (1981).
      Owed Between Spouses, §§16:8 – 16:11 (2005).
   • State Bar of Texas – Pattern Jury Charges
      [Question and Instruction—Breach of Fiduciary
      Duty], Chapter 104 Fiduciary Duty – PJC 104.1

                                                             11

								
To top