“It is cheaper to kill a mare than it is to cripple her.”  This was considered the law in Texas until the recent Texas Supreme Court decision of J & D Towing, LLC v. Am. Alternative Ins. Corp., 478 S.W.3d 649, 652 (Tex. 2016) involving the question of first impression before the Texas Supreme Court of whether the owner of personal property totally destroyed by another’s negligence is entitled to recover loss of use damages in addition to the fair market value of the destroyed property.

In an effort to explain the history of the right to recover loss of use damages and to make a dry subject interesting, the court begins its analysis by discussing a 1932 Amarillo case in which the owner of a horse that was killed sued the party at fault to recover not only the value of the horse but also the loss of use of the horse since it was used in the owner’s hauling business. That Court held there was no right to recover loss of use damages when property is totally destroyed. See City of Canadian v. Guthrie, 87 S.W.2d 316 (Tex. Civ. App.–Amarillo 1932, no writ). After the Guthrie case, many other Texas courts of appeals followed this rule that, although loss of use damages were recoverable when property was partially damaged, these damages were not recoverable when property was totally destroyed.

The Texas Supreme Court finally settled this issue once and for all. In the J & D Towing case cited abovethe plaintiff’s tow truck was destroyed in an accident caused by the negligence of the defendant. The issue of first impression before the court was whether the owner of property destroyed by another’s negligence was entitled to recover loss of use damages from the party at faulty.    The Court recognized that under our tort system when a plaintiff sustains damages due to a defendant’s wrongful conduct, i.e. negligence, the plaintiff is entitled to be fully compensated for the damages incurred. Thus, the Court held that the plaintiff was not only entitled to recover damages for the fair market value of the tow truck but also for loss of use of the truck.

The court stated  that the owner of property totally destroyed is entitled to recover loss of use damages for the reasonable period the owner is deprived of the vehicle. The court indicated that in these types of cases that, depending upon the circumstances, loss of use damages could be measured by lost profits, the cost to rent replacement property, or the reasonable rental value of the property destroyed.

Thus, if you find yourself haggling with an insurance adjuster over whether loss of use damages are recoverable when your personal property has been totally destroyed, let the adjuster know that in Texas it is no longer cheaper to kill a horse than to maim it.

In Texas, a plaintiff filing a lawsuit pertaining to a construction project for damages arising out of the provision of services by licensed design professionals such as architects or engineers, must file an affidavit by a competent expert with the lawsuit supporting the claims against these professionals. Otherwise, the lawsuit will be dismissed.

This issue was recently addressed by the Houston Court of Appeals in Texas Southern University v. Kirksey Architects, Inc., 2019 WL 922296 (Tex.App.-Hous. (14 Dist.)) (Tex.App.-Hous. (14 Dist.), 2019) in which the Plaintiff, Texas Southern University (TSU), filed suit against architectural and engineering firms for the alleged defective design of a building on TSU’s campus. TSU failed to file a certificate of merit affidavit with the lawsuit and the Defendants sought dismissal on these grounds. The trial court dismissed TSU’s lawsuit with prejudice, and the Houston Court of Appeals affirmed this decision.

Comments. Civil Practice & Remedies Code § 150.002 requires, in any action for damages against a licensed or registered professional such as an architect or engineer arising out of the professional provided, that the plaintiff file with the lawsuit an affidavit of a competent expert. The expert must hold the same license or registration as the defendant professional and set forth the information required by the statute. Although, the statute provides an exception and extension of time for filing the affidavit under certain circumstances, the affidavit will have to be provided. The trial court must dismiss the lawsuit if the plaintiff fails to file the affidavit as required, and the dismissal may be with prejudice to refiling the lawsuit.

Thus, a party who anticipates filing a lawsuit covered by the statute should consult with an experienced litigation attorney and qualified experts early on who can provide supporting affidavits to be filed with the lawsuit.

Introduction. The Texas Supreme Court recently reversed another multi-million dollar business fraud verdict in Mercedes-Benz USA, LLC v. Carduco, Inc., 16-0644, 2019 WL 847845, at *1 (Tex. Feb. 22, 2019). The court found that the underlying contract between the parties negated the fraud claim.

Background. In this case, Carduco, Inc. entered into a Dealer Agreement with Mercedes-Benz USA, LLC (referred to in the agreement as “MBUSA”). The agreement identified Harlingen, TX as the dealership location and prohibited Carduco from changing locations without the consent of Mercedes-Benz. The agreement stated:

“MBUSA will assign to Dealer a geographic area consisting of a collection of zip codes or census tracts that is called an Area of Influence (“AOI”). MBUSA may alter or adjust Dealer’s AOI at any time. The AOI is a tool used by MBUSA to evaluate Dealer’s performance of its primary obligations hereunder. Dealer agrees that it has no right or interest in any AOI and that MBUSA may add new dealers to or relocate dealers into Dealer’s AOI. Any such addition or relocation of a dealer will result in an alteration or adjustment of Dealer’s AOI.”

(See Mercedes-Benz USA, LLC v. Carduco, Inc., supra, at *4). Carduco’s Area of Influence under the agreement included McAllen, Texas.

According to the record, two months after signing the agreement, Mercedes-Benz entered into an agreement with another dealer allowing the dealer to open a Mercedes dealership in McAllen, Texas. After learning of this, Carduco requested authorization from Mercedes to relocate to the McAllen area. Mercedes denied the request.

Carduco sued Mercedes and other related defendants alleging that the defendants fraudulently induced Carduco to believe that Mercedes would give Carduco the opportunity to relocate to McAllen as the exclusive Mercedes dealership. This was apparently based, at least in part, upon discussions that Carduco had with Mercedes representatives prior to entering the Dealer Agreement. After hearing the evidence, the jury found that Mercedes and the other named defendants fraudulently induced Carduco into making the related dealership acquisition, and awarded $15.3 million in actual damages and $100 million in punitive damages against Mercedes. The trial court entered a judgment based upon the jury’s findings. On appeal, the appellate court upheld the award for actual damages and suggested a reduction in the punitive damages award.

Holding. The Texas Supreme Court overturned the judgment based upon the jury verdict and rendered that Carduco take nothing. The court found that in order to recover on a fraud claim, the claimant must show that the claimant justifiably relied upon the alleged improper conduct and actions of the defendant. The court held that a party cannot justifiably rely on improper conduct and actions that directly conflict with the terms of the signed contract. The court held that the terms quoted above in the Dealership Agreement directly contradicted Carduco’s fraudulent inducement claims and Carduco’s reliance upon the alleged misconduct and improper actions of Mercedes was unjustified as a matter of law.

Lessons learned. It is becoming more difficult in Texas for a buyer in a business transaction to recover on fraudulent inducement claims. A seller to a transaction can avoid liability for fraud through carefully drafting the written sale agreement. Buyer’s should specify in the written agreement all terms material to the buyer’s decision to make the purchase.

Introduction. The Texas Supreme Court has now held that contractual limitation of liability clauses barring  a party’s right to recover punitive damages are enforceable, even if one of the parties to the contract commits fraud.  Bombardier Aerospace Corp. v. SPEP Aircraft Holdings, LLC, 17-0578, 2019 WL 406075, at *8 (Tex. Feb. 1, 2019)

Background. In the Bombardier case, the plaintiffs sued defendant for breach of contract, breach of warranty, and fraud. In 2010, plaintiffs purchased a Challenger 300 aircraft from defendant for $19,850,000. In the purchase negotiations the plaintiffs specified that the aircraft was to be new. However, the written purchase and aircraft management agreements contained limitation of liability clauses under which the plaintiffs agreed to waive their rights to recover punitive damages.

Subsequent to the purchase, plaintiffs discovered that the aircraft was sold with used engines. The jury awarded the plaintiffs $2,694,160 in actual damages and $5,388,320 in punitive damages. The trial court entered judgment based upon the verdict and the Dallas Court of Appeals affirmed.

Holding. The Texas Supreme Court reversed the Court of Appeals regarding the portion of the judgment awarding $5 million+ in punitive damages on the grounds that the plaintiffs waived their rights under the contracts to recover punitive damages. The Court held that, generally, contractual limitation of damages clauses are valid and enforceable. This is the law even when a party to a contract commits fraud.

Lessons learned. This case shows why a purchasing party to a contract should carefully consider whether to accept clauses limiting the right to recover damages or waiving a claim for fraud.  It also shows how the seller under a contract can limit exposure to liability through careful and meticulous drafting.

The Texas Supreme Court has finally put to rest the question of whether the implied warranty to repair or modify tangible goods or property in a good and workmanlike manner can only be brought by a consumer under the Texas Deceptive Trade Practices Act (DTPA) or whether it can be brought under the common law as well. The Court held it could in fact be brought under both, in Nghiem v. Sajib, 2019 WL 406123 (Tex.), 1 (Tex., 2019). This is significant because a consumer must bring an action under the DTPA for the breach of this implied warranty within two years or the action will be barred by the DTPA two-year statute of limitations. On the other hand, it appears that a consumer has up to four years to bring an action for breach of this implied warranty under the common law before being barred by the applicable statute of limitations. Further, there are additional criteria that must be met to bring a claim under the DTPA that do not have to be met under the common law.

In the Ngheiem case, the consumer’s airplane was damaged in a crash-landing when the airplane engine failed. The consumer made a claim against the company that had serviced the airplane for years and made repairs to it immediately before the crash. The consumer alleged that the defendant company breached the common law implied warranty to make repairs in a good and workmanlike manner. The defendant company alleged that the consumer’s claim could only be brought under the DTPA and not under common law.  Therefore, the claim was barred by the DTPA two-year statute of limitations because the consumer waited too long to file the lawsuit.  The trial court agreed and rendered judgment for the defendant and court of appeals affirmed.

The Texas Supreme Court granted the consumer’s petition for review and held that this implied warranty could be brought both under the common law and the DTPA. Since the consumer brought the action under the common law, the claims were not barred by the DTPA two-year statute of limitations.

The result of this opinion is that it will give consumers including large corporations who may not qualify for consumer status under the DTPA the right to bring an action for breach of this implied warranty. Further, it should also give consumers up to four years from the date of the breach to bring this action.

The equitable constructive trust. In Texas, a court acting in equity may impose a constructive trust upon property held by a party to a transaction that belongs to another. The Austin Court of Appeals recently used this remedy to impose a constructive trust upon life insurance proceeds that, under a divorce decree, should have passed to the decedent’s minor children.

Factual background. “Kristi and Hugh divorced in February of 2013. The agreed final decree of divorce required them to each purchase $250,000 in life insurance, designate the other “as beneficiary in trust for the benefit of the children,” and maintain the coverage until both of their children had turned 18.”  Etcheverry v. Lankford, 03-17-00797-CV, 2018 WL 6615624, at *1 (Tex. App.—Austin Dec. 18, 2018, no pet. h.).  Kristi purchased the life insurance as required by the decree.  However, three days before her death she changed the life insurance beneficiaries to Thomas and Etcheverry. Kristi committed suicide in December 2016.

Two months later, Hugh filed suit against Thomas, Etcheverry, and the life insurance company and requested that the trial court impose a constructive trust upon the proceeds for Hugh to hold in trust for the minor children. Thomas agreed to assign his share to Hugh and Etcheverry contested the proceedings.

Court’s holding. The court stated, “Even though “breach of a special trust or fiduciary relationship or actual or constructive fraud is ‘generally’ necessary to support a constructive trust,” the remedy can be imposed in other circumstances where property is “obtained through bad faith or unconscionable acts.”” The Court held that even though Etcheverry had done nothing wrong, the policy against unjust enrichment supported the imposition of a constructive trust upon the life insurance proceeds in favor of the children.  Kristi (the decedent) violated the divorce decree by changing the beneficiaries and Etcheverry would not have received anything but for that violation. Etcheverry v. Lankford, 03-17-00797-CV, 2018 WL 6615624, at *2 (Tex. App.—Austin Dec. 18, 2018, no pet. h.).

Conclusion. The court acting in equity imposed a constructive trust upon the life insurance proceeds in favor of the minor children.

 

 

 

 

 

 

 

 

If the Texas recreational-use statute applies, then a landowner’s liability is limited when a guest is injured on the owner’s property while engaged in recreation. (See Chapter 75 of the Texas Civil Practice & Remedies Code).

In the recent case of Meredith  v. Chezem , 03-18-00256-CV, 2018 WL 6425017 (Tex. App.—Austin Dec. 7, 2018, no pet. h.), the Austin Court of Appeals overturned a judgment based upon a jury verdict finding that a landowner’s negligence proximately caused injuries to a 12-year-old girl while riding an ATV on the landowner’s property. The minor child, Carli, was visiting her 12-year-old friend, Courtney Meredith, at the Meredith’s home in Burnet County. During the visit, the  Merediths gave the 12-year-old girls permission to drive around on the Meredith’s property on the family ATV. The Merediths did not supervise the girls and Courtney made a sharp turn while driving the ATV causing it to flip over and break Carli’s ankle requiring surgery. Carli’s father filed suit on Carli’s behalf and the jury found that the Meredith’s negligence proximately caused Carli’s injuries and awarded $88,620 in damages. However, the jury found that the conduct of the Merediths did not constitute gross negligence.

The Merediths cited the recreational-use-statute and moved the trial court to enter a take nothing judgment since there was no finding by the jury of gross negligence. The trial court denied the request and entered a judgment awarding the damages in the amount found by the jury.

The Austin Court of appeals held that the Texas recreational-use statute applied because the Meredith’s property was agricultural land and Carli was invited as a social guest to the Meredith’s property for recreational purposes. Since the statute applied, Carli’s father was required to prove that Carli’s injuries were the result of the Meredith’s gross negligence, malicious intent, or bad faith. Given that the jury found that the Meredith’s were only negligent but not grossly negligent, then under the statute, the Merediths were not liable for the injuries. The court of appeals reversed the  trial court’s judgment and rendered judgment that Carli take nothing on her injury claims.

 

Corporate and trust litigation can be tricky. In a recent Texas case, the Corpus Christi Court of Appeals held that trust beneficiaries failed to plead facts showing they had the legal right–standing–to bring a lawsuit on behalf of their own trusts. As a result, they lost their case on summary judgment.
The case of Am. Bank, N.A. Tr. of Lisa Marie Buckley Tr. v. Moorehead Oil & Gas, Inc., 13-17-00641-CV, 2018 WL 6219635, (Tex. App.—Corpus Christi Nov. 29, 2018, no pet. h.) involved stock held in 3 testamentary trusts set up by the Decedent for his 3 children. The stock was owned in the Moorehead company which later reorganized itself through a plan of merger to become a limited liability company. As a result, the stock held by the trusts was converted to cash. The beneficiaries of two of the trusts and the trustee of the other trust objected to the valuation of the stock, under Chapter 10 of the Texas Business & Organizations Code entitling a dissenting shareholder to obtain a judicial determination of the value. When the lawsuit was originally filed, it only named the trusts as plaintiffs. The lawsuit was later amended to name the beneficiaries of two of the trusts and the trustee of the other as the plaintiffs.
Defendant Moorehead filed a motion for summary judgment asking the court to render judgment against the plaintiffs as a matter of law on the grounds that the plaintiffs’ claims were barred by the statute of limitations. Although, the original lawsuit was filed before the expiration of the statute of limitations it did not properly name the trustees of each of the trusts as plaintiffs. A trust is not considered a separate legal entity and the lawsuit typically must be filed by the trustee on behalf of the trust. The court held that even though the lawsuit was initially improperly filed in the name of the trusts, it was sufficient to give Defendant Moorehead notice of the allegations and toll the running of the statute of limitations. Thus, Moorhead’s motion for summary judgment based upon this defense was denied.
Defendant Moorehead also requested summary judgment against the plaintiffs on the grounds that the two plaintiff beneficiaries did not have standing to bring the lawsuit as amended on behalf of the trusts. Only a trustee can bring the lawsuit, unless an exception is plead. The court agreed with Moorehead and held that the plaintiff beneficiaries did not have standing to bring the lawsuit on behalf of the trusts. Beneficiaries can only bring a lawsuit on behalf of a trust if the trustee cannot or will not bring the lawsuit. The beneficiaries failed to plead this. Thus, the court of appeals affirmed the summary judgment rendered by the trial court against the beneficiaries and overturned the summary judgment that had been rendered against the trustee.
In conclusion, this case is an example of why it is important to retain experienced counsel in handling corporate and trust litigation. Often by proper planning and pleading, the types of problems that the plaintiffs incurred in  this case can be avoided.

In 2011, the Texas Legislature passed the Texas Citizens Participation Act (TCPA) also characterized as an anti-SLAPP statute (Strategic Lawsuit Against Public Participation). “The purpose of this [Act] is to encourage and safeguard the constitutional rights of persons to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the rights of a person to file meritorious lawsuits for demonstrable injury.” Tex. Civ. Prac. & Rem. Code Ann. § 27.002 (West). However, as can be seen from one recent case, due to the broad language within the statute, the TCPA is now being applied  to lawsuits arising out of business disputes that appear to exceed the TCPA’s expressed purpose.

In the case of Grant v. Pivot Tech. Sols., Ltd., 556 S.W.3d 865, 865–71 (Tex. App.—Austin 2018, no pet. h.), the Plaintiff Purchaser Entities sued the Defendant Seller Entity and its principals  for breach of contract, tortious interference, breach of fiduciary duty, fraud, misappropriation of trade secrets, civil conspiracy and violations of non-compete agreements. The dispute arose out of an asset purchase agreement entered into between one of the Defendant Purchaser Entities and the Defendant Seller Entity.  The Defendant Seller Entity was a technology solutions provider certified by the State of Texas as a Historically Underutilized Business (HUB) allowing it to compete for government contracts that give preferential treatment to HUBs. There was a series of transfers and modifications made in connection with the asset purchase agreement in order to preserve the HUB status of the  Defendant Seller Entity.

In the years following the execution of the asset purchase agreeement, the business relationship between the Defendant Seller Entity and Plaintiff Purchaser Entities deteriorated and the underlying lawsuit ensued. The Defendants filed a motion to dismiss under the TCPA. The trial court denied the motion in its entirety and the appeal followed.

The Austin Court of Appeals found that the trial court erred in denying the motion in its entirety because the allegations in the Plaintiffs’ lawsuit fell within the purview of the TCPA. According to the appellate court, the statute applied to Plaintiffs’ lawsuit in that the underlying transactions between the buyer and seller companies and allegations against Defendants were related to the Defendant Seller Entity’s HUB status. The TCPA applies to the “exercise of the right of free speech.” The HUB issues relate to “government”and to “economic well-being.”  This is sufficient to make the best TCPA applicable. Grant v. Pivot Technology Solutions, supra, pp. 877–878.

Further, the appellate court found that the TCPA applied because the allegations in Plaintiffs’ lawsuit  involved the “exercise of the right of association.” The court stated that many of the Plaintiffs claims were based upon the Defendants’ acting together to share and use  Plaintiff’s confidential information.  “Consequently, these claims (which are almost identical to those brought by the plaintiffs in Elite Auto ) are “based on, relate[d] to, or [are] in response to” communications “between [the Defendants] who had joined together to pursue a common interest in employment with [the Defendant Seller Entities] and ensuring [Defendant Seller Entity] was able to operate as a HUB,” protected as an “exercise of the right of association.”” Grant v. Pivot Tech. Sols., Ltd., supra, p. 881.The court even seemed to place importance upon the allegations that the Defendants conspired to commit illegal acts.

The appellate court held that the trial court erred by denying the Defendants’ TCPA motion to dismiss “because the [Plaintiffs] failed to present clear and specific evidence of a prima facie case for every essential element of each and every claim for relief.” Grant v. Pivot Tech. Sols., Ltd., supra, p. 884. The only claims of the Plaintiffs that survived were those based upon improper solicitation and competition which are excluded from the TCPA under the commercial-speech exemption.

In conclusion, this opinion seems to be a far reaching opinion in applying the TCPA.  Moreover, there seems to be a growing body of Texas case law applying the Act in ways that one would never have imagined when it was first enacted. Thus, business plaintiffs and their attorneys in many types of corporate disputes will have to be prepared at the early stages of litigation to defend against a possible motion to dismiss under the TCPA. Otherwise, they may find their otherwise meritorious cases being dismissed under the Act. This will no doubt increase the costs of litigation in the early stages for business plaintiffs.

The constructive trust is a powerful weapon that plaintiffs can use against defendants who have breached their fiduciary duties or committed fraud. In one Texas case, the court of appeals actually affirmed the trial court’s award to the plaintiffs of all the assets in the business owned by the defendant who breached his fiduciary duties and committed fraud. Bright v. Addison, 171 S.W.3d 588, 595 (Tex. App.—Dallas 2005, pet. denied) .

In the Bright case, supra, Plaintiffs sued their attorney, Bright, and his law firm(s) for usurping a business opportunity to manage a casino in Aruba. Plaintiffs also sued the Aruban corporation set up by Bright to manage the casino.  The factual record of the case is limited, but apparently, Plaintiffs were in the casino business and hired Bright to perform legal work related to Plaintiffs’ business operations.  In connection with Bright’s representation of Plaintiffs, he allegedly learned of an opportunity to manage a casino in Aruba and did not disclose this opportunity to Plaintiffs   Instead, Bright took advantage of this opportunity for himself by setting up his own corporation to manage the Aruba casino.

Plaintiffs later learned about Bright’s alleged misdeeds and sued Bright and his law firms for usurping this business opportunity. Plaintiff’s alleged causes of action against Defendants including for breach of fiduciary duty, fraud and tortious interference with a prospective contract. Plaintiffs requested that the trial court impose a constructive trust upon the assets of Bright’s corporation used to manage the Aruba casino, and also requested that the trial court award Plaintiffs lost profits and punitive damages against Defendants.  Plaintiffs prevailed at trial and the Defendants appealed.

The court of appeals held that there was legally and factually sufficient evidence to show that Bright was Plaintiffs’ attorney so that Bright owed Plaintiffs a fiduciary duty of full disclosure.  Bright had a duty to disclose the opportunity to Plaintiffs to manage the Aruba casino and intentionally chose not to disclose this opportunity to them. There was sufficient evidence to uphold the trial court’s determination that Bright breached his fiduciary duty, committed fraud and committed tortious interference.

The court of appeals also affirmed the trial court’s ruling that a constructive trust should be imposed in favor of Plaintiffs upon all the assets of the Aruban corporation set up by Defendant Bright to manage the Aruba casino. The court of appeals held that breach of fiduciary duty and fraud are grounds for imposing a constructive trust and the trial court did not abuse its discretion in imposing the constructive trust.

Defendants also challenged the trial court’s award of lost profits. Defendants grounds for appeal on this issue included that Plaintiff’s expert CPA was not qualified to testify as to lost profits.  The Court found that the trial court did not abuse its discretion in finding that the CPA who had extensive experience in valuing casinos was qualified to testify.  The court also upheld the trial court’s award of punitive damages against the Defendants.

In conclusion, Texas courts have the authority to award both equitable relief and damages against parties committing breach of fiduciary duty or fraud.  One of the available equitable remedies is the imposition of a constructive trust upon assets that are obtained as a result a breach of fiduciary duty or fraud. As can be seen from the Bright case, this remedy can be harsh and extensive.  Typically, an expert will need to be hired to trace the assets upon which the plaintiff seeks the imposition of the constructive trust as well as to support an award of lost profits. If the expert is qualified, and the plaintiff proves his case, a defendant may lose everything tainted by the breach of fiduciary duty or fraud.