Fiduciary Litigation in the State of Texas
I. FIDUCIARY DUTY DEFINED
The term "fiduciary" refers to integrity and fidelity. There is a general prohibition against a fiduciary using the relationship to benefit his personal interest, except with the full knowledge and consent of the principal. The duty owed is one of loyalty, good faith, strict integrity, and fair and honest dealing.
II. INFORMAL FIDUCIARY DUTIES, STANDARDS OF PROOF AND JURY INSTRUCTIONS
A fiduciary relationship is said to exist when a person has either a duty to act for or give advice for the benefit of another within
the scope of the relationship.
As a matter of law, attorneys owe fiduciary duties to their clients, partners in a general partnership owe each other fiduciary duties, and general partners in a
limited partnership owe fiduciary duties to the limited partners. As a matter of fact, a fiduciary duty may be found if evidence establishes that one has placed special confidence in another where
the latter is bound, in equity and good conscience, to act in good faith and with due regard to the interests of the other; or when special confidence is reposed in one who, thereby, obtains a
resulting superiority of position and influence. Thus, fiduciary relationships may arise "from moral, social, domestic or purely personal relationships."
III. FORMAL FIDUCIARY RELATIONSHIPS
The most common fiduciary relationships include the following:
• Attorneys owe a fiduciary duty to their clients;
• Partners owe each other a fiduciary duty;
• Associates of law firms owe a fiduciary duty to their employers not to personally profit or realize a financial gain or
other advantage from referring or participating in the referral of a matter to another law firm or lawyer;
• Agents owe a fiduciary duty to their principals;
• Escrow agents owe a fiduciary duty to both parties to the contract;
• Insurance agents owe a fiduciary duty to their insurers under agency contracts;
• Spouses generally owe each other a fiduciary duty;
• Holders of power of attorney owe a fiduciary duty to the transferors of the power of attorney;
• Corporate officers owe a fiduciary duty to the corporations they serve;
• Joint venturers owe a fiduciary duty in dealings within the scope of the joint venture;
• Executors and trustees owe a fiduciary duty to the beneficiaries of the estate or trust;
• Securities brokers,like other agents, owe a fiduciary duty to their customers in matters within the scope of their agency;
• Taxpayers owe a fiduciary duty to the state to hold in trust the money they receive or collect for the benefit of the state;
• Class representatives in a class action suit owe a fiduciary duty to the class members;
• Mineral rights-holders of executive rights to a mineral estate owe a fiduciary duty to the holders of a non-executive interest;
• Condominium board members and officers of condominium boards owe a fiduciary duty to the unit owners for the members or
officers' acts or omissions; and
• Employees owe a fiduciary duty to their employers and are obligated to act in their employers' interests while they are
employed.
IV. DUTIES A FIDUCIARY OWES HIS CLIENT
As a general rule, the following are fiduciary duties:
• the duty of loyalty and good faith;
• the duty of candor;
• the duty to refrain from self-dealing;
• the duty of fair and honest dealing;
• the duty of full disclosure;
• the duty not to usurp a corporate opportunity;
• the duty to refrain from competing;
• duty of competence;
• duty to act with integrity of the strictest kind; and
• the duty to exercise reasonable discretion.
V. CATEGORIES OF BUSINESS RELATIONSHIPS THAT PERTAIN TO FIDUCIARY DUTIES
A. Attorneys - Attorneys owe fiduciary relationships to their clients and, moreover, a law firm associate owes a fiduciary duty to his law firm not to realize any financial gain from referring a case to another law firm or lawyer, without the express permission of the employer.
B. Insurance Companies - Insurance companies, as a general rule, do not owe a fiduciary duty to their policy-holders unless such a relationship is developed separate and apart from the contract. However, there are other statutes which apply to the relationship between and insurance company and its policyholders. The Duty of Good Faith and Fair Dealing; the Texas Insurance Code; the Texas Deceptive Trade Practices Act; and the Prompt Payment of Claims statute are some examples of other avenues for pursuing an insurance company for violation of a duty or statute.
C. Financial Advisors and Stock Brokers - One Texas Supreme Court case discusses duties owed by financial
advisors and stockbrokers. The issue before the Texas Supreme Court was whether a stockbroker has a legal duty to ascertain the mental competence of an investor prior to assisting in a transaction
involving securities. The Texas Supreme Court reversed and held that a stockbroker owed no duty, fiduciary or otherwise, to determine the competence of an investor. The Court reasoned that those who
are incapacitated are already protected [or should be] through guardianships and other legal mechanisms such as making certain transactions voidable. The sad result of this opinion is that the Texas
Supreme Court apparently assumes that everyone has access to guardianships and other legal mechanisms such as making certain transactions voidable. In the real world, most working people at the middle
or lower economic spectrum either don’t know about or don’t have the funds to hire lawyers to set up guardianships and other legal mechanisms to make certain transactions voidable. It would appear the
fair rule would be that the stockbrokers and other financial advisors, who are supposed to be educated and sophisticated in business matters, should not have a free ticket, and no duty, to take some
reasonable steps to make sure that their customers have the mental competence to make investment decisions, especially in light of the many questionable investment schemes which have been disclosed in
the past several years by brokers and investment firms.
Generally speaking, a non-discretionary account has been interpreted to mean that there is a fiduciary duty, but it imposes only the
obligation to avoid unauthorized trades. However, a financial advisor who manages a discretionary account may be held to a more encompassing and broader fiduciary duty.
In one case, a stock
broker who agreed to act as a financial advisor was held to be in a position of trust that exceeded a mere arm's length transaction and, in fact, elevated to a fiduciary status by the nature of the
broker's actions.
In another case, the Houston Court of Appeals held that a financial advisor owed his client an informal fiduciary duty.
D. Partnerships - Partners owe each other a fiduciary duty.
In one case, the Court of Appeals held that
a partner owes a "strict duty" of good faith and candor, and that there is a "general prohibition" against the fiduciary using the relationship to benefit his personal interest, except with full
disclosure to the principal.
The Texas Revised Partnership Act was intended to reconcile the common law of partnerships with modern day business practices, including a rejection of the traditional
"fiduciary" label, but cases still carry over the stricter language. (one case held partners owe one another a fiduciary duty, included in which is a strict duty of good faith, while a managing partner
owes his partners the highest fiduciary duty recognized in law).
Under Texas law, there is no formal fiduciary relationship between a lessee and a royalty owner.
E. Employee Duties to the Employer - Fiduciaries owe a duty not to compete against each other or against the
entity at issue. In one case, the Corpus Christi Court of Appeals held that a partner in an accounting firm breached his fiduciary duty by providing accounting services in competition with the firm where
he was employed and by appropriating firm resources for personal use.
Similarly, in another case, an employee of a trucking company started a competing business. Prior to his resignation, the
employee incorporated the new company, purchased insurance, obtained hauling permits and talked with drivers about leaving the old company to join his new company. The trucking company sued the employee
for breach of fiduciary duty. The Court of Appeals nevertheless concluded that "there is nothing legally wrong in engaging in such competition or in preparing to compete before the employment terminates."
The Court underscored the point that the employee was an at-will employee, who was not restricted by a non-compete agreement.
F. Corporate Officers, Directors, and Shareholders - Corporate officers and directors owe a fiduciary duty to act in the best interests of the corporation's shareholders. This fiduciary duty, however, is owed directly to the corporation and does not extend to the individual shareholders. Shareholders may still assert derivative claims on the corporation's behalf in the event a corporate director breaches his duty to the corporation.
G. Trustees - Trustees owe a fiduciary duty to their beneficiaries. (one case recognized trustee owes trust beneficiary fiduciary duty). An independent executor's fiduciary duty runs to the estate's beneficiaries, and it arises from his status as a trustee of the estate's property. Thus, the independent executor owes a legal duty of care to the estate and its beneficiaries. (one case held that former temporary administratrix of estate owed legal duty of care under Section 230 of Probate Code to estate in negligence action brought by permanent administrator); (another case held that former temporary administratrix of estate did not owe legal duty of care under Section 230 of Probate Code to obtain fire insurance for estate property in negligence action because it was impossible to obtain such insurance).
VI. ELEMENTS OF PROOF AND THE APPLICABLE BURDEN
"The elements of a breach of fiduciary duty claim are: (1) a fiduciary relationship between the plaintiff and defendant, (2) a breach by
the defendant of his fiduciary duty to the plaintiff, and (3) an injury to the plaintiff or benefit to the defendant as a result of the defendant's breach." To recover for a breach of fiduciary duty, a
plaintiff has the burden of proving each element.
When a fiduciary profits or benefits in any way from a transaction with the beneficiary, a presumption of unfairness arises that shifts the burden
of persuasion to the fiduciary to show: (1) that the transaction was made in good faith; (2) that the transaction was fair and equitable to the beneficiary; and (3) that the transaction was made after
full and complete disclosure of all material information to the principal.
VII. REMEDIES FOR BREACH OF FIDUCIARY DUTY
A. INTRODUCTION
In an action for breach of fiduciary duty, the plaintiff can recover actual damages including out of pocket losses and lost profits. The
plaintiff can also recover mental anguish, but only if it was a foreseeable result of the fiduciary breach. In an action for breach of fiduciary duty, the plaintiff can recover exemplary damages if the
breach was intentional. Courts can also grant equitable relief such as imposing a constructive trust on proceeds, funds, or property obtained as a result of a breach of fiduciary duty.
In addition
to the above remedies, the Texas Supreme Court has recently expanded the available damages to include the recovery of fee forfeiture, disgorgement, and equitable forfeiture of the contractual consideration
in a transaction – even if there are no actual damages that have been shown.
A recent Supreme Court decision in the area of fiduciary relationships holds that contractual consideration received in
the sale of a business is subject to equitable forfeiture as a remedy for breach in addition to other damages that result from the tortious conduct. The Texas Supreme Court has held the equitable remedy of
either forfeiture or disgorgement may apply regardless of whether actual damages are proven.
Claims for breach of fiduciary duty provide claimants with a wide range of remedies. Moreover, claimants
need not demonstrate any actual damage to obtain remedies for fiduciary duty breaches.
B. DAMAGES
1. The Pattern Jury Charge on Breach of Fiduciary Duty Damages Questions
The Texas Pattern Jury Charge envisions that, as a general matter, a plaintiff in a breach of fiduciary duty action can recover all damages
that were proximately caused by the breach. Pattern Jury Charge 115.18 provides:
Question on actual damage for breach of fiduciary duty.
Question No. ______:
What sum of money, if any, paid now in cash, would fairly and reasonably compensate Paul paying for his damages, if any, that were proximately caused by such conduct?
Considering the following elements of damages if any, and none other. [Sample A – Loss of benefit of the bargain] The difference, if any,
between the value of the paint job agreed to by the parties and the value of the paint job performed by Don Davis. The difference in value, if any, shall be determined at the time and place the paint
job was performed. [Sample B – Remedial damages] The reasonable and necessary cost to repaint Paul Payne’s truck. [Sample C – Loss of contractual profit] The difference between the agreed price and the
cost Paul Payne would have incurred in painting the truck. [Sample D – Loss of contractual profit plus expenses incurred before breach] The amount Don Davis agreed to pay Paul Payne less the expenses
Paul Payne saved by not completing the paint job. [Sample E – Damages after mitigation] The difference between the amount paid by Paul Payne to John Jones for painting the truck and the amount Paul Payne
had agreed to pay Don Davis for that work. [Sample F – Mitigation expenses] Reasonable and necessary expenses incurred in attempting to have the truck repainted. [Sample G – Incidental damages] Reasonable
and necessary costs to store Paul Payne’s tools while the truck was being repainted. Do not add any amount for interest on damages, if any,
a. sustained in the past.
Answer: __________________________.
b. that, in reasonable probability will be sustained in the future.
Answer: __________________________.
The
2010 Texas Pattern Jury Charge specifically advises that these damage elements should be submitted separately and individually.
2. Actual Damages
While a claimant need not demonstrate actual damages to recover on a breach of fiduciary duty claim, he can, of course recover his actual damages. Texas courts have awarded actual damages in breach of fiduciary duty cases based upon both the out of pocket and lost profits measures of damages. Certain Texas cases have indicated that mental anguish damages may be available for breach of fiduciary duty. On the other hand, other Texas cases have indicated that it will be very difficult to recover mental anguish damages in breach of fiduciary duty claims. In one case, the Texas Supreme Court determined that mental anguish awards were not proper as a matter of law in legal malpractice cases.
3. Exemplary Damages
In addition to actual damages, claimants can recover exemplary damages for breach of fiduciary duty by showing that the defendant‘s breach
was intentional. The intent issue concerning exemplary damages for breach of fiduciary duty is whether the one with a fiduciary duty intended to gain an additional unwarranted benefit. One case held a
defendant‘s intentional breach of fiduciary duty is a tort for which a plaintiff may recover punitive damages. Interestingly, the opinion does not address whether its intentional standard for the recovery
of exemplary damages is consistent with the statutory standard outlined in Chapter 41 of the TCPRC which says that exemplary damages may be awarded only if the claimant proves by clear and convincing
evidence that the harm with respect to which the claimant seeks recovery of exemplary damages results from: (1) fraud; (2) malice; or (3) gross negligence. Cases addressing the recovery of exemplary
damages in the fiduciary duty context allow for the recovery of exemplary damages regardless of whether actual damages were also awarded. One case held that exemplary damages may be awarded when the only
other award was a disgorgement remedy. These cases arguably conflict with TCPRC (exemplary damages may be awarded only if damages other than nominal damages are awarded.) Additionally, exemplary damages
are subject to a limitation in amount pursuant to TCPRC § 41.008 and/or the Texas and United States Constitutions. TCPRC § 41.008 limits the amount of exemplary damages to:
(1) two times the amount of economic damages plus
(2) an amount equal to non-economic damages not exceeding $750,000, or
(3) $200,000.
This limitation does not apply, however, to any cause of action based upon conduct described as a felony under TEX. PENAL CODE § 32.45. TPC § 32.45 criminalizes the intentional, knowing or reckless
misapplication of property held as a fiduciary that involves substantial risk of loss. Such misapplication constitutes a felony if it involves property with a value in excess of $1,500. Thus, where the
breach in question involves misapplication of funds (or other property) in excess of $1,500, there will be no statutory cap on exemplary damages except subject to the Due Process Clause of the United
States Constitution and the Texas Constitution limits on exemplary damages.
4. Availability of Attorney’s Fees as Actual Damages
In a legal malpractice case, the Supreme Court recently held that attorney‘s fees incurred in the underlying lawsuit are recoverable as actual damages to the extent that they were proximately caused by the defendant attorney‘s negligence. There is a decent chance this holding could be extended to breach of fiduciary duty claims.
VIII. PARTICIPATION IN BREACH OF FIDUCIARY DUTY
In addition to recovering from the fiduciary himself, one may recover from any individuals that knowingly participated in the breach of fiduciary duty. One case stated: It is settled as the law of this State that where a third party knowingly participates in the breach of duty of a fiduciary, such third party becomes a joint tortfeasor with the fiduciary and is liable as such.
IX. EQUITABLE REMEDIES
Courts have a wide ranging power to fashion equitable relief for breach of fiduciary duty. The potential remedies include disgorgement by the fiduciary of any profits he received as well as his fee, constructive trust, rescission, and receivership.
A. Disgorgement
A breaching fiduciary is subject to two types of disgorgement. First, he must account to his fiduciary and disgorge any profit he made as a result of his breach. Second, he may be required to disgorge any fee he was to receive from the beneficiary.
1) Disgorgement of profits - A fiduciary must account for, and yield to the beneficiary, any profit he makes as a result of his breach of fiduciary duty. The basis for this remedy is that a fiduciary that has violated his relationship of trust should not be permitted to hold onto any secret gain or benefit he received as a result. It is the law that . . . if the fiduciary takes any gift, gratuity, or benefit in violation of his duty, or acquires any interest adverse to his principal, without a full disclosure, it is a betrayal of his trust and a breach of confidence, and he must account to his principal for all he has received. A plaintiff does not need to prove that it was harmed to recover disgorgement damages. To get a disgorgement award, the plaintiff needs to prove that the fiduciary improperly benefited from the breach of fiduciary duty.
2) Disgorgement of fees - Additionally, a court may order that the fiduciary disgorge any sums paid to him as a fee in connection with his duties. Disgorgement of fees may be ordered even absent any harm to the claimant. The main purpose of forfeiture is not to compensate an injured principal …. Rather, the central purpose … is to protect relationships of trust by discouraging agents’ disloyalty.
B. Constructive Trust
A constructive trust is an equitable remedy imposed to prevent unjust enrichment. The elements of a constructive trust are: (1) breach of a special trust, fiduciary relationship, or actual fraud; (2) unjust enrichment of the wrongdoer; and (3) tracing to an identifiable.
C. Rescission
A beneficiary is entitled to rescind a contract that was the result of a breach of fiduciary duty.
D. Receivership
A court may appoint a receiver to take control of property and trace funds to determine equitable title to property.
X. PRE-JUDGMENT INTEREST
A claimant is entitled to recover pre-judgment interest in a breach of fiduciary duty case.
XI. THE STATUTE OF LIMITATIONS
The applicable statute of limitations for breach of fiduciary duty is not later than four years after the day the cause of action accrues. TEX. CIV. PRAC. & REM. CODE ANN. § 16.004(a)(5) However, the discovery rule defers the accrual of certain causes of action until the plaintiff knew or through the exercise of reasonable diligence should have discovered the wrong. The discovery rule applies in those cases where the nature of the injury incurred is inherently undiscoverable and the evidence of injury is objectively verifiable. To be inherently undiscoverable, an injury, by its nature, must be unlikely to be discovered within the limitations period despite the exercise of due diligence. When dealing with a fiduciary, the nature of the injury is presumed to be inherently undiscoverable. However, a plaintiff must still exercise diligence and has some responsibility to ascertain when an injury occurs.