2012 CASE LAW UPDATE FIDUCIARY LITIGATION

David B. WestCOX SMITH MATTHEWS INCORPORATED

112 East Pecan│Suite 1800

San Antonio, Texas 78205

210.554.5500 tel. │ 210.226-8395

Leslie v. Veterans Land Bd. of State352 S.W.3d 479 (Tex. 2011) (p.1)

Bluegreen, a land developer acquired: 4,100 acres of land; Sole right to execute oil, gas and mineral leases. Subdivided the property into 1200 lots (Mountain Lakes) Add restrictive covenants forbidding “commercial oil

drilling.”

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Oil and Gas – Executive Rights

As the subdivision was being developed The Barnett Shale was being developed Surrounding area came under lease for oil and gas

production. Minerals under Mountain Lakes land worth $610 million.

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Oil and Gas – Executive Rights

Sellers and original land owners (who reserved mineral interests) sued Mountain Lakes lot owners, Bluegreen, others: Bluegreen failed to develop the minerals Restrictive covenants limited mineral development

Trial court: Bluegreen, as owner of the executive right, breached its duty to

the holders of the mineral interests: Imposed restrictive covenants limiting oil and gas development Failed to lease the minerals Failed to give notice of its filing of the restrictive covenants

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Oil and Gas – Executive Rights

Eastland Court of Appeals reversed: Owner of the executive rights owes no duty until the right is

exercised by leasing the minerals Executive right holder’s duty is only to acquire for the mineral

interest owner every benefit it acquires for itself Because Bluegreen never excised the executive right, it had no duty

to non-participating royalty owners .

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Oil and Gas – Executive Rights

Texas Supreme Court aff’d in part, rev’d in part:

Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984) Manges leased a large part of the minerals to himself for a

nominal bonus Holder of executive rights required to use utmost good faith

and fair dealing as to interests of the non-executive mineral interest owners

Holder of the executive rights had a duty to prevent drainage of oil and gas

Duty of the executive to the non-executive is fiduciary Manges had breached this duty

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Oil and Gas – Executive Rights

Bluegreen: Unlike Manges, no self dealing Bluegreen did not acquire benefit for itself that it had not acquired for

the non-executive owners. “It may be that an executive cannot be liable to the non-executive for

failing to lease minerals when never requested to do so.” But, “Bluegreen did not simply refuse to lease the minerals in the 4,100

acres; it exercised its executive right to limit future leasing by imposing restrictive covenants on the subdivision.”

Bluegreen breached its duty to the non-executive mineral owners; remedy was cancellation of restrictive covenants.

Non-executives had no right to develop the mineral interests.

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Oil and Gas – Executive Rights

Harding Co. et al v. Sendero Res., Inc., 365 S.W.3d 732, Tex. App.-Texarkana, 2012, pet. filed) (p.3)

Harding contracted with Sendero to acquire oil and gas leases for Harding—held in name of Sendero

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Agency

Harding

Sendero (Walters, Pres.)

TWW Tyler, LP(Walters, LP)

Surles, Independent

Geologist

Boney, Landman

Assoc. LP

“Walters”(Assoc. LP)

Non-Compete

Star Prospect—Associates, LP

GP

Boney informed Harding that TWW Tyler had been assisting Harding’s competitors, EOG Resources, Inc. and Devon Energy, Inc., in acquiring leases.

Walters was accused of violating the non-compete agreement. Harding stopped making payments on Sendero contract.

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Agency

Trial Court

Sendero, Surles and Boney sued Harding for breach of contract. Harding sued Sendero, TWW Tyler, Associated, LP, Walters for breach of

non-compete. Trial Court granted Walters’ motions for summary judgment:

Walters, Assoc. LP, TWW Tyler not parties to contract Awards damages to Sendero, Associates LP

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Agency

Court of Appeals

Denied relief to Harding under the contract claims Overlapping ownership interest common ownership does not permit a

court to disregard the corporate entities. TWW Tyler and Associates, LP not liable to Harding because they

contracted with Sendero.

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Agency

Fiduciary claims under agency theory

Fact question existed as to whether TWW Tyler and Associates, LP were agents for Harding

Operating under the control and direction of Harding? For the benefit of Harding?

Evidence TWW Tyler acquired leases in subject area in manner specified by Harding

Harding paid Assoc. LP $2.1 million for lease bonuses Alleged fiduciary duty could arise only under a formal agency relationship,

not an informal fiduciary relationship; no prior relationship of trust and confidence existed.

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Agency

FIDUCIARY DUTIES

Duty of loyalty—act solely for benefit of principal in matters connected to agency Duty not to act on behalf of adverse party in transaction Agent may take action, not otherwise wrongful, to prepare for competition following

termination of agency relationship. Some evidence of breach—TWW Tyler, Assoc. LP acquired leases for Devon Energy No evidence that Sendero assisted TWW Tyler or Associates, LP in breaching their

fiduciaries to Harding The fact all entities were owned by the same person did not constitute such evidence.

Harding not excused from performing the contract by the alleged breach of fiduciary duty by TWW Tyler and Associates LP.

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Agency

Daniels v. Empty Eye, Inc., 368 S.W.3d 743 (Tex. App-Houston [14th Dist.] 2012, pet. filed) (p. 7)

H/W each owned 50% of corporation

Corporation was GP for limited partnership; H/W are limited partners

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Husband/Wife

Empty Eye, Inc.Husband-Pres.

Wife-V. Pres.

Empty Eye & Assoc. LP

GP

H-LPW-LP

LP bought land and obtained construction financing for apartment complex

Entered into construction loan agreement with bank. Husband and wife executed a personal guaranty of the

indebtedness. Each guaranty could be rescinded if no funds had been

advanced.

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Husband/Wife

Marital difficulties. LP’s debt to a different bank using credit cards with a 31%

interest rate H rescinded personal guaranty Bank rescinded the construction loan Husband contacted contractors, informed them that he did not

authorize their work Husband notified at lease one contractor that the construction loan

rescinded

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Husband/Wife

Trial Court

Wife, LP and corporation sued Husband for breach of fiduciary duty and breach of contract.

Trial Court: Husband had a relationship of trust and confidence

with the LP and corporation. Husband breached his fiduciary duty to the LP

($171,601 in damages). Husband breached his fiduciary to the corporation

($173,335 in damages).

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Husband/Wife

Court of Appeals

Contract claims: Evidence was legally insufficient to support a finding H breached

the LP Agreement. Nothing in agreement required husband to act as Limited

Partnership’s guarantor. Agreement with bank permitted him to rescind his guaranty

before funds advanced. Not liable for debts of partnership

Corporation was liable for the LP’s debts, not husband.

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Husband/Wife

FIDUCIARY DUTY CLAIMS

Husband had formal fiduciary relationships with “every other member of the Limited Partnership.”

Husband owed corporation a fiduciary duty because he was its president. Husband owed wife a fiduciary relationship in marriage. Husband participated in developing the Limited Partnership’s business plan. Wife trusted him as a business partner. Husband had a fiduciary relationship with the LP (officer of GP knowingly

participates in corporation’s breach of fiduciary duty to limited p’ship). Jury could find that confidential relationship existed as long as

Trust not based solely on status as a limited partner or solely on

Limited Partnership’s ‘subjective trust and feelings;’ and Relationships predated the transactions involved in Project.

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Husband/Wife

DISSENT

Limited partner owed no formal fiduciary duty to the limited partnership.

LP, the corporation and wife are all separate legal persons. Texas does not allow an informal fiduciary duty to be imposed on

one person based upon a “combination of relationships.” Combination of relationships insufficient to support a jury finding that

a special trust relationship existed between Husband and LP. Husband not an officer of the LP did not have a marital relationship

with the LP. No Texas precedent in which a court has held that a limited partner

owed a limited partnership an informal fiduciary duty based upon a relationship of trust and confidence.

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Husband/Wife

Camp Mystic, Inc. v. Eastland, __ S.W.3d ___, 2012 WL 2334604 (Tex. App.—San Antonio 2012, no pet.)(p. 14)

Camp mystic, an exclusive camp for girls, was owned by the Eastland family. Dick Eastland owned 38% of Camp Mystic, Inc. Brother, Stacy, an attorney, and other family members owned the

remaining interests. Concerned about liability, Stacy advocated the reorganization of the

corporation. Stacy drafted the reorganization documents and represented all

sides in the transaction. New CM Camp operations Dick NFP Owned real estate Family

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Attorneys

Dick decided to expand the camp by creating a second camp on the property

A neighbor heard the new camp would be near his property, proposed giving the camp money to not put the camp on the proposed site.

A dispute arose over how much of these proceeds should go to New CM and how much would go to NFP.

Dispute caused Stacy to re-evaluate the amount New CM was paying in rent to NFP.

Stacy determined that Dick was in default of the lease.

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Attorneys

New CM and Dick filed suit to declare rights of the parties under the lease. Stacy counterclaimed, alleging Dick

Improperly used the Camp Mystic trademark, breached the lease and breached his fiduciary duties to NFP.

Was in conflict of interest because of his ownership and position in both New CM and NFP.

New CM and Dick then countersued Stacy for professional negligence breach of fiduciary duty negligent misrepresentation.

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Attorneys

Claims against Stacy

Stacy represented to Dick lease was renewed every year for an additional five years if his lease terminated he would have five years to vacate the premises

Lease did not include such a provision. Stacy told Dick how to prepare and calculate the rent. Stacy improperly represented all sides in negotiating and preparing

the lease and conveyance without disclosing or obtaining a waiver of conflicts.

Stacy crafted reorganization in manner that put Dick in conflict of interest.

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Attorneys

Procedure

Stacy filed a traditional motion for summary judgment on the basis of limitations.

Filed a no-evidence motion for summary judgment on the grounds there was no evidence of the breach, causation, or damages elements.

Trial Court granted both of Stacy’s motions and then severed New CM and Dick’s claims against Stacy from the underlying case.

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Attorneys

Court of Appeals: reversed and remanded

Attorney obligated to render full and fair disclosure of facts material to representation. Facts which might ordinarily require investigation likely may not excite suspicion

where a fiduciary relationship is involved. Breach of disclosure is tantamount to concealment Statue of Limitation for legal malpractice does not begin to run until claimant

discovers or should have discovered facts establishing the elements. “A person to whom a fiduciary duty is owed is either unable to inquire into the

fiduciary’s actions or unaware of the need to do so.” Person to whom a fiduciary duty is owed is relieved of responsibility of diligent inquiry

into fiduciary’s conduct so long as the relationship exists. New CM and Dick had no duty to read the Lease; could rely on Stacy’s

misrepresentations [regarding the five-year extension of the lease].

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Attorneys

Attorney’s fees to defend estate. Estate of Wilbur Waldo Lynch, __S.W.3d__(Tex. App.-San Antonio 2012)(No.

04-11-00731-CV) (October 17, 2012) (In suit to set aside will, beneficiaries not representatives of estate, so had

no duty to challenge executrix’ attorney’s fees at trial; no waiver) Banking

Aflatouni v. Select Portfolio Servicing, Inc. 2012 WL 5472172 (E.D. Tex.) (Nov. 9, 2012)

Ordinarily, no fiduciary duty in lender/lendee relationships; Texas does not recognize a common law duty of good faith and fair dealings in MR/ME relationship, absent special relationship.

Accord Rhodes v. Wells Fargo Bank, N.A., 2012 WL 5363424 (N.D. Tex.) October 31, 2012.

Officers and Directors Boyd v. Four Dominion Drive, LLC, 2012 WL 5199141 (Bkrtcy. W.D. Tex.)

(October 22, 2012) Officers and directors of insolvent corporation have fiduciary duty to deal

fairly with corporation’s creditors, including preservation of corporate assets.

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Disclaimer

This PowerPoint presentation is an educational tool that is general in nature and for purposes of illustration only. The materials in this presentation are not exhaustive, do not constitute legal advice and should not be considered a substitute for consulting with legal counsel. Cox Smith Matthews Incorporated has no obligation to update the information contained in this presentation.

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