A person’s inheritance rights can be affected by the community property interest of a surviving spouse as exemplified in the recent case of House v. Webb, 06-19-00054-CV, 2019 WL 6121124, at *1 (Tex. App.—Texarkana Nov. 19, 2019, pet. denied). The results of this case turned on whether the decedent had acquired real property by gift or by purchase. If it was acquired by gift then it would have been the decedent’s separate property when the decedent died. However, if it was acquired by purchase it would have been the decedent’s community property upon her death so that only 1/2 of the property would have passed to her sole heir, her son.

 In this case, Elizabeth Bauman (Aunt Elizabeth) conveyed her 874 acre farm to her niece, Dianne House (the decedent). The deed from Aunt Elizabeth to Diane stated:

“I, ELIZABETH SPRADLEY BAUMAN, … for and in consideration of the love and affection which I have for my niece, the Grantee, have GRANTED, SOLD AND CONVEYED, and by these presents do GRANT, SELL AND CONVEY unto DIAN[N]E HOUSE … all of the surface (without the present merchantable timber) and mineral estate in the following described real property in Nacogdoches County, Texas, to-wit: … “Big Loco Farm” … and “Little Farm.”

After Dianne died, her son, David, inherited the farm.  David contended that pursuant to the terms of the deed that Aunt Elizabeth gifted the farm to Dianne and therefore it was Dianne’s separate property. Thus, upon her death David inherited 100% of the farm and Dianne’s surviving husband, Leland, did not have a community property interest in the farm. Leland contended that the conveyance of the farm was a sale to Dianne and therefore he had a community property interest in it.

The dispute proceeded to trial and the jury found that the conveyance of the farm was a gift to Dianne. On appeal, Leland’s position was that the deed, by stating that Elizabeth “Granted, Sold, and Conveyed” the farm to Dianne created a sale rather than a gift so that the farm became his and Dianne’s community property.

However, the court of appeals disagreed and found that the unambiguous language in the deed that stated that the property was conveyed “for and in consideration of” love and affection clearly showed that Aunt Elizabeth intended to gift the property to Dianne. Thus, it was Dianne’s property and David inherited it free from any community property interest claimed by Leland.

As can be seen from this case, words of conveyance do matter, and deeds should be carefully drafted to clearly express the intent of the parties to the deed.

Introduction. In the recent motor vehicle collision case of Hills v. Donis, the Houston Court of Appeals overturned a judgment awarding the Plaintiffs $145,460 for past medical expenses because the Plaintiffs failed to present competent medical expert testimony proving that their injuries were caused by the collision. 14-18-00566-CV, 2020 WL 206187, (Tex. App.—Houston [14th Dist.] Jan. 14, 2020, no pet.).

Background. The Plaintiffs were passengers in a rear-end motor vehicle collision. The Plaintiffs sought to recover damages, from the party at fault, only for Plaintiffs’ medical expenses incurred as a result of injuries sustained in the collision. The Plaintiffs did not seek to recover other types of damages typically claimed for mental anguish, pain and suffering.

The Plaintiffs sustained neck and back soft tissue injuries. The Plaintiffs proved up the medical billing records by using Section 18.001 affidavits. This is a section of the Texas Civil Practice and Remedies Code that allows a party to prove up the reasonableness and necessity of medical expenses incurred by submitting affidavits that comply with this statute. In addition to medical bills that were attached to these affidavits, Plaintiffs apparently introduced letters from the treating doctor stating Plaintiff’s injuries were caused by the collision. However, Plaintiffs did not present any deposition or live testimony from the treating doctor.

At the conclusion of the trial, the trial court entered an award in favor of Plaintiffs for past medical expenses totaling $145,460. The Defendant appealed.

Analysis by Court of Appeals. The Court of Appeals, found that the evidence presented at trial failed to show that the medical care provided to Plaintiffs was for injuries caused by the collision. The court recognized that uncontroverted Section 18.001 affidavits could be used as a procedural device to prove that the charges for medical care were reasonable and necessary. “Section 18.001 affidavits do not, however, establish the requisite causal link between the occurrence and the plaintiff’s medical expenses.” Hills v. Doris, supra, at *4.

Expert testimony is generally necessary to establish causation of medical conditions that are “outside the common knowledge and experience of jurors.” See Guevara v. Ferrer, 247 S.W.3d 662, 665 (Tex. 2007). In limited cases, however, lay testimony may support a causation finding that links an event with a person’s physical condition. Id. at 666. “This exception applies only in those cases in which general experience and common sense enable a layperson to determine the causal relationship with reasonable probability.” Kelley v. Aldine Indep. Sch. Dist., No. 14-15-00899-CV, 2017 WL 421980, at *2 (Tex. App.—Houston [14th Dist.] Jan. 31, 2017, pet. denied) (citing Guevara, 247 S.W.3d at 666; Morgan v. Compugraphic Corp., 675 S.W.2d 729, 733 (Tex. 1984)). In such cases, “lay testimony establishing a sequence of events which provides a strong, logically traceable connection between the event and the condition is sufficient proof of causation.” Id. (quoting Morgan, 675 S.W.2d at 733).

Hills v. Doris, supra, at 3.

The Court stated that the types of  injuries for which the Plaintiffs sought compensation such as cervical and lumbar radiculitis were neither common nor basic. Thus, the Plaintiffs needed medical expert testimony to prove that their injuries were caused by the collision. The Plaintiffs pointed to the letters from the treating doctor as  evidence of causation. The Court found that the conclusory letters constituted no evidence of causation.

To constitute competent evidence of causation, a medical expert’s opinion must be reliable and rest in reasonable medical probability. Crye, 907 S.W.2d at 500. “This rule applies whether the opinion is expressed in testimony or in a medical record, as the need to avoid opinions based on speculation and conjecture is identical in both situations.” Id. [he treating doctor’s] opinions are not competent evidence of causation because his opinions are conclusory. An expert’s bare proclamation that this one event caused another is not enough to establish causation; “the expert must go further and explain, to a reasonable degree, how and why the breach caused the injury based on the facts presented.” Jelinek v. Casas, 328 S.W.3d 526, 539–40 (Tex. 2010). [The treating doctor’s] letters do not provide any data or facts from which [the treating doctor] could have formed an opinion that the diagnosed injuries were caused by a motor vehicle accident. Absent such facts, [the treating doctor’s] letters are unreliable speculation, which we conclude does not constitute evidence in support of the trial court’s judgment.”

Hills v. Doris, supra, at *4.

Court’s decision. As a result of Plaintiff’s’ failure to prove that their injuries were caused by the motor vehicle collision, the Court of Appeals overturned the trial court’s judgment in favor of the Plaintiffs and rendered that the Plaintiffs take nothing. This was no doubt a stinging lost for the Plaintiffs.

Lessons learned. No matter whether a party is providing up damages in a personal injury dispute or a business dispute competent evidence, which often must include expert testimony, must be presented to support an award of damages. (See previous article–Court overturned $95 million dollar verdict because plaintiffs failed to prove damages caused by breach of fiduciary duties. https://www.texascommerciallitigator.blog/2018/10/ninety-five-million-dollar-judgment-reversed-breach-corporate-fiduciary-duty-case.html). This is why it is important to retain experienced trial counsel well-versed on the law of damages, before engaging in costly litigation.

Introduction. Negligent misrepresentation and fraud can be viable alternative causes of action to a breach of contract claim, as shown by the recent Texas federal court case of Correct RX Pharmacy Services, Inc. v. Cornerstone Automation Sys., L.L.C., 945 F.3d 423 (5th Cir. 2019). In this case, Plaintiff, Correct RX Pharmacy Services (“Correct RX”), contracted with Defendant, CASI Automation Systems, LLC (“CASI”), for CASI to provide an automated pharmacy delivery system. Correct RX advised CASI that time of completion was essential. CASI failed to timely perform and Correct RX filed this lawsuit.

Correct RX alleged causes of action for fraud and negligent misrepresentation, rather than breach of contract. The jury found in favor of Correct RX on the negligent misrepresentation allegations and awarded $3,131,064 in damages. CASI appealed this award on the grounds that Correct RX’s tort claim of negligent misrepresentation sounded in contract and was precluded by the economic loss rule. The 5th Circuit Court of Appeals disagreed with CASI and affirmed the trial court judgment based upon the jury verdict.

Background. Correct RX was in the business of providing pharmacy services to correction facilities and government entities. CASI was in the business of developing and providing automated pharmacy delivery systems. So, Correct RX began dealing with CASI to develop a more efficient means of providing pharmacy services to Correct Rx’s customers. According to the record, CASI made various representations about the quality of its services including that it had already developed software that, with only minor adaptations, would meet the needs of Correct RX.

Correct RX informed CASI that its lease at its current work location would soon expire and it was going to lease a larger facility to accommodate the new automated system that CASI would be providing. CASI agreed to develop and install the system within 30 weeks. Correct RX agreed to pay CASI $4,194,654 for its services with an enhanced down payment of over 50% to accommodate for this short completion deadline. After the agreement was entered, CASI experienced delays and later informed Correct RX that it would not be able to complete the project by the agreed deadline.

As a result, Correct RX negotiated an extension of its existing lease. Additionally, Correct RX and CASI  amended their agreement so as to extend the delivery deadline in exchange for a $200,000 price deduction. Unfortunately, CASI failed to complete the project by the new deadline resulting in Correct RX suing CASI for negligent misrepresentation and fraud.

At the trial, the evidence included that CASI engineers informed CASI negotiators that the 30 week deadline could not be met and one of the engineers even testified that no Correct RX project he had worked on had ever been completed on time. The jury found in favor of Correct RX on the negligent misrepresentation claim and awarded damages for the deposits, equipment loan interest, $73,390 for out of pocket expenses, for a total award of $3,131,064.

Appellate Court’s Decision. On appeal, CASI argued that in Texas the “economic loss rule…generally precludes recovery in tort for economic losses resulting from the failure of a party to perform under a contract.” After reciting a history of Texas cases discussing the economic loss rule, the 5th Circuit found that it did not apply to Correct RX’s claims. In finding that it did not apply and affirming the trial court’s judgment against CASI, the Court stated:

What remains is the simple determination of whether Correct Rx satisfied Texas’s independent injury requirement by recovering only the damages permitted in a negligent misrepresentation suit under section 552B of the Second Restatement. See D.S.A., Inc., 973 S.W.2d at 663. This provision permits recovery “for the pecuniary loss” resulting from “the plaintiff’s reliance upon the misrepresentation.” Restatement (Second) of Torts § 552B(1)(a)-(b). It prohibits recovery of “the benefit of the plaintiff’s contract with the defendant.” Id. at (2). As the district court determined, Correct Rx recovered only its out-of-pocket expenses, placing it back into the position it occupied before its detrimental reliance on CASI’s negligent misrepresentations. The company did not recover the value of what CASI had promised. Given this straightforward analysis, the district court also did not err in finding that Correct Rx had satisfied Texas’s independent-injury requirement. Having established a breach of an independent duty and an independent injury within the meaning of Texas law on the matter, Correct Rx’s recovery was not precluded by the Texas contractual economic loss rule.

Correct RX Pharmacy Services, Inc. v. Cornerstone Automation Sys., L.L.C., supra.

Lessons Learned. Often times, parties to a business transaction are in a rush to close the deal. In reading this opinion, it is unclear whether the contract between Correct RX and CASI contained a clause disclaiming reliance upon extracontractual representations. As discussed in one of my previous blog articles, a tightly drafted disclaimer and integration clause can even provide a defense to a defendant being sued for fraudulent inducement to enter into a contract. (https://www.texascommerciallitigator.blog/2019/06/multi-million-dollar-judgment-against-ibm-reversed-by-texas-supreme-court.html). Possibly, a tightly drafted disclaimer and integration clause would have provided CASI with a defense to the tort claim of negligent misrepresentation. This case is also an example of the plaintiff thinking outside of the box in alleging alternative causes of action to a mere breach of contract. This was probably done to allow Correct RX to recover damages that were not recoverable for a mere breach of contract. This is a prime example of why it is important to retain experienced commercial litigation counsel in high-stakes business disputes.

Introduction. The failure to plan for your estate and the succession of your business while you are healthy and mentally competent can lead to drastic and expensive measures, as shown by the recent high profile Texas case of In re Guardianship of Thrash, 04-19-00104-CV, 2019 WL 6499225 (Tex. App.—San Antonio Dec. 4, 2019, pet. denied). In this case, the Probate Court found that a successful business owner of an automotive repair shop, had become incapacitated due to dementia, Alzheimer’s and other factors. As a result the Court appointed the niece of the business owner to serve as the guardian over the business owner’s estate and a third party to serve as the guardian of the business owner’s person to manage issues such as his medical care. The Probate Court’s decision was affirmed on appeal.

Background. The background information in this appellate decision states as follows:

Thrash is a millionaire and owner of a successful automotive repair shop. He started dating Laura around 2009, and by 2012, she moved into the apartment above his shop with him. Over time, friends and family members grew concerned that Laura was isolating Thrash from them and spending large amounts of his money. In 2016, Thrash and Laura—as well as two of Laura’s adult children, Jose and Michelle—moved into a home Thrash bought for approximately $750,000 in cash. According to several long-time friends, Thrash’s purchase of the home was highly unusual because Thrash was known as a fiscally conservative person. They grew suspicious of Laura, who did not allow Thrash to have his own phone, forcing all social and business calls to go to her cell phone.

In re Guardianship of Thrash, supra, at p. 1.

In 2017 The Texas Health and Human Services Commission filed for a guardianship over Thrash, apparently after receiving an anonymous report that Laura, Thrash’s girlfriend, was mishandling Thrash’s assets. The application for guardianship alleged that 72 year old Thrash suffered from Alzheimer’ and diabetes, and was under Laura’s influence. It further alleged that Thrash recently changed his will to list Laura and her family as beneficiaries, gave Laura power of attorney over his finances and assets, and changed his business plan to name Laura as successor-owner of his automotive repair shop. A hearing was held on the application and the court found that Thrash was incapacitated and appointed an attorney to serve as temporary guardian of Thrash’s person and estate.

In November 2017, Thrash’s great-niece, Tonya Barina, filed an application to be appointed as Thrash’s permanent guardian. Laura contested it. On November 15, 2018, the Probate Court signed an order appointing Laura as guardian of Thrash’s person and Barina as guardian of Thrash’s estate.

On January 29, 2019, the Probate Court granted Barina’s motion for new trial, resulting in the court continuing to appoint Barina as the Guardian of Thrash’s estate but replacing Laura with a third party to serve as the Guardian of Thrash’s person. Laura appealed.

The San Antonio Court of Appeals reviewed the record and found that there was sufficient evidence to support the Probate Court’s decision. The medical evidence included that Thrash suffered from Parkinson’s disease, hypertension, dementia, Alzheimer’s disease and was unable to make responsible decisions for himself. The evidence also included that Thrash’s spending habits and use of money significantly changed in 2016. He purchased a home for $750,000, put Laura and her family members on Thrash’s business payroll, and loaned money Laura. The appellate court also found that there was evidence that Laura isolated Thrash from his friends and family.

In regard to the legal requirements that must be met to appoint a guardian, the court stated:

The Legislature has determined that a court shall appoint a guardian for a person other than a minor according to the circumstances and considering the best interests of the ward. Tex. Est. Code Ann. § 1104.101. Before appointing a guardian, the court must find by clear and convincing evidence that: (1) the ward is an incapacitated person; (2) it is in the best interest of the ward to have the court appoint a guardian; (3) the rights of the ward or the ward’s property will be protected by the appointment of a guardian; and (4) alternatives to guardianship and supports and services available have been considered and determined to be infeasible. Id. § 1101.101(a)(1). An “incapacitated person” is defined, in relevant part, as “an adult who, because of a physical or mental condition, is substantially unable to: (A) provide food, clothing, or shelter for himself or herself; (B) to care for the person’s own physical health; or (C) manage the person’s own financial affairs.” Id. § 1002.017(2). A determination of incapacity of an adult proposed ward must be evidenced by recurring acts or occurrences within the preceding six-month period, and not by isolated instances of negligence or bad judgment. Id. § 1101.102.

In re Guardianship of Thrash, supra, at p. 5.

Appellate court’s conclusion. The San Antonio Court of Appeals found that, under the legal requirements that must be met to appoint a guardian, the record supported  the Probate Court’s decision finding that Thrash was legally incapacitated and appointing guardians over Thrash’s person and estate.

Lessons learned. Mr. Thrash was only 72 years old when he was found to be mentally incapacitated by dementia, Alzheimer’s and other factors. It is unfortunate that he had failed to plan, while he was still mentally healthy, for his estate, his business and himself in the event of his incapacity or disability. Typically, this can be addressed through estate planning tools like powers of attorney and a will or trust, combined with proper corporate planning. This allows for us to control our own destiny while we are still legally able to do so, rather than eventually having our destiny determined by a court through a costly guardianship.

We previously discussed that  in Texas, like most states, performance under a contract containing a force majeure clause may be excused by acts of god or other exigent  circumstances defined by the clause. However, even if the contract does not contain a force majeure clause, all is not lost if COVID–19 related events are making it impossible or impracticable to perform contractual obligations.

Texas recognizes the contractual defense of impossibility of performance when a supervening cause makes it objectively impossible to perform. “Centex Corp. v. Dalton, 840 S.W.2d 952, 954 (Tex. 1992). Some courts have held that this doctrine only applies if the supervening event could not have been reasonably anticipated by the parties. “ Where the obligation to perform is absolute, impossibility of performance occurring after the contract is made is not an excuse for nonperformance if the impossibility might have reasonably been anticipated and guarded against in the contract.” Huffines v. Swor Sand & Gravel Co., Inc., 750 S.W.2d 38, 40 (Tex. App.—Fort Worth 1988, no writ). However, the Texas Supreme Court in Centex Corp. v. Dalton, supra, at. p. 954, indicated that foreseeability is only one factor to be considered.

A similar defense recognized by Texas courts, is the defense of impracticability of performance. Under this doctrine, ““Where … a party’s performance is made impracticable … by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged….” Centex Corp. v. Dalton, 840 S.W.2d at 954. Note, at least one Texas Court of Appeals has indicated that this defense does not exist. (See Huffines v. Swor Sand & Gravel Co., Inc., 750 S.W.2d 38, 40 (Tex. App.—Fort Worth 1988, no writ).) However, given that the Texas Supreme Court in Centex discusses this doctrine in its decision, a solid argument can be made that it is a recognized common law defense in Texas.

Further, if the contract is for the sale of goods, the impracticability of performance defense also exists under Texas Business & Commerce Code § 2.615 which states:

“Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:

(1) Delay in delivery or non-delivery in whole or in part by a seller who complies with Subdivisions (2) and (3) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

(2) Where the causes mentioned in Subdivision (1) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(3) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under Subdivision (2), of the estimated quota thus made available for the buyer.”

Thus, a party seeking to assert this defense will also want to make a determination whether the contract involves the sale of goods.

As a result of the unforeseeable COVID-19 pandemic, governmental orders have been issued closing businesses and schools, restricting travel, ordering workers and consumers to stay home, and disrupting supply chains, making it impossible or impracticable to perform certain contracts. Thus, if you or your business find that you cannot perform the obligations of your contract, you may have a defense under the doctrines of impossibility or impracticability.

In Texas, like most states, performance under a contract containing a force majeure clause may be excused by acts of god or other exigent  circumstances defined by the clause. Force majeure is a creature of contract and will only be applicable to the extent expressed in the contract. “The scope and effect of a “force majeure ” clause depends on the specific contract language, and not on any traditional definition of the term.” Virginia Power Energy Mktg., Inc. v. Apache Corp., 297 S.W.3d 397, 402 (Tex. App.—Houston [14th Dist.] 2009, pet. denied). As will be explained, these clauses may very well excuse contractual performance when the delay or failure to perform is being caused by the COVID-19 pandemic.

“Force majeure” is  French for “a superior force”  and is defined as:

“An event or effect that can be neither anticipated nor controlled; esp., an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do. •The term includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars).

FORCE MAJEURE, Black’s Law Dictionary (11th ed. 2019)

A typical force majeure clause will excuse performance under the contract when the delay or failure to perform is caused by acts beyond the nonperforming party’s control. The clause may specify that this includes acts of god, natural disasters, war, governmental actions, strikes, and other similar events. Further, there is no lack of foreseeability requirement, if the event is listed in the force majeure clause. Kodiak 1981 Drilling P’ship v. Delhi Gas Pipeline Corp., 736 S.W.2d 715, 721 (Tex. App.—San Antonio 1987, writ ref’d n.r.e.)

As a result of the COVID-19 pandemic, governmental orders have been issued closing businesses and schools, restricting travel, ordering workers and consumers to stay home, and disrupting supply chains. Thus, if your business is unable to timely perform its obligations under a contract because of COVID-19 events, the first place you should look for answers is in the written contract. If it contains a force majeure clause, your business’s performance under the contract may very well be excused by the express language of the contract. Stay tuned for what to do if your contract does not contain a force majeure clause.

Texas Court of Appeals Holds Workers Compensation Nonsubscribing Workers Compensation Employer Liable for Employees Injuries Sustained in Fall from Ladder

The benefit to Texas employers in maintaining workers compensation insurance is that they are shielded from liability to employees injured on the job. In exchange, employees are entitled to recover workers compensation benefits for injuries sustained on the job without having to prove that their employer was at fault. If an employer fails to maintain workers compensation, then the law states that the employer in essence waives common-law defenses such as contributory negligence and assumption of the risk.

In a recent Texas Court of Appeals case, an employee was injured on the job while at the top of a commercial extension ladder. The ladder slipped while the employee was at the top of it and the employee sustained serious bodily injuries from the fall. The employee alleged at trial that the ladder slipped because the employer stopped supporting the ladder at the bottom. The jury found in favor of the employee and awarded $427,818 in damages against the employer. (McMillan v. Hearne, 584 S.W.3d 505, 510 (Tex. App.—Texarkana 2019, no pet.)).

The employer appealed the verdict on the grounds that there was insufficient evidence to support the jury’s verdict that the employer was negligent. The Court of Appeals stated:

To prove negligence, evidence must be produced to establish a duty, a breach of duty, and damages proximately caused by the breach. Alexander v. Turtur & Assocs., Inc., 146 S.W.3d 113, 117 (Tex. 2004). Because McMillan is a worker’s compensation nonsubscriber, McMillan is not afforded the common-law defenses of contributory negligence, assumption of the risk, or negligence of a fellow servant. See Tex. Lab. Code Ann. § 406.033(a); Kroger Co. v. Keng, 23 S.W.3d 347, 350 (Tex. 2000). Thus, there are only two defenses available to McMillan, namely, (1) that he was not liable for negligence proximately causing Hearne’s injuries or (2) that Hearne was responsible for some act which was the sole proximate cause of the occurrence. See W. Star Transp. v. Robison, 457 S.W.3d 178, 187 (Tex. App.—Amarillo 2015). “Accordingly, if any negligent act by [McMillan] was a substantial factor in bringing about [Hearne’s] fall and subsequent injuries, and if that event was a foreseeable occurrence without which the fall and injuries would not have occurred, then liability has been established.” See id.

The Court of Appeals found that there was sufficient evidence to support the jury’s finding that the employer was negligent. However, the Court did find that the employer was entitled to an offset of $65k for medical and wage benefits provided to the employee under the employer’s employee benefit plan.

Although, workers compensation coverage can be expensive, especially in certain high risk industries like construction, it can also be catastrophic to a small business if it fails to purchase this coverage. A single on the job injury can result in hundreds of thousands or even millions of dollars in exposure driving a small business into bankruptcy. Thus, most entrepreneurs should budget for this expense before starting a new business.

In Texas, when a person who leaves a will passes away, the decedent’s estate vests immediately in the devisees under the will, subject to payment of the decedent’s debts. But what are the rights of the surviving spouse in his or her community property interest in the decedent’s property? This issue was recently addressed by a recent El Paso Court of Appeals decision. ( See Matter of Estate of Abraham, 583 S.W.3d 374, 377 (Tex. App.—El Paso 2019, no pet. h.).

In this case, the surviving spouse, Margaret, executed a deed assigning all of her interest in community real property that had been acquired by her deceased husband (the “Decedent”). This assignment was made after the Decedent’s date of death and after the Decedent’s Will making Margaret the sole beneficiary of the estate had been admitted to probate. However, there was a lien against the property, at the time of the assignment, for a debt that had been incurred by the Decedent, and the creditor made a claim against the estate.  Margaret did not seek the probate court’s permission to make the assignment.

As a result, the Administrator of the estate filed a lawsuit against Margaret in the probate proceedings to set aside the deed executed by Margaret. The probate court granted the Administrator’s motion for summary judgment and set aside the deed. The decision was affirmed on appeal.

In upholding the probate court’s decision, the El Paso Court of appeals stated, at p. 377:

When a person dies leaving a lawful will, “all of the person’s estate that is devised by the will vests immediately in the devisees[.]” Tex.Est.Code Ann. § 101.001(a)(1). At same time, the decedent’s estate vests subject to the payment of the debts of the decedent, unless those debts are otherwise exempted by law. Id. at § 101.051(a)(1). And more specifically, the community property that was under the deceased spouse’s sole or joint management during the marriage continues to be subject to the debts of that spouse upon his or her death. Id. at § 101.052(a); see also Tex.Fam.Code Ann. § 3.202(c)(“The community property subject to a spouse’s sole or joint management, control, and disposition is subject to the liabilities incurred by the spouse before or during marriage.”).

The Court then explained that the Texas Estates Code establishes procedures for earlier distributions of assets to the estate beneficiaries in a manner that affords protection to the estate creditors. For example, a beneficiary under the will may submit an application to the court for a partial distribution of the estate after the inventory is filed by the Administrator and approved by the court. Further, under the Texas Estates Code, a surviving spouse can obtain legal title to his or her share of community estate property by applying with the court to partition the community property and following the other applicable statutory requirements. Once again this can only be filed after the filing and approval of the inventory. Id at p. 378.

The Court of Appeals found that Margaret did not follow any of these procedures. Thus, the deed executed by Margaret after Decedent’s date of death was void and the Court of Appeals upheld the lower court’s decision to set the deed aside.

A factoring company is not subject to liability under the Texas Construction Trust Fund Act for misapplication of construction funds, according to at least one Texas Court of Appeals. Dakota Util. Contractors, Inc. v. Sterling Commercial Credit, LLC, 583 S.W.3d 199, 201 (Tex. App.—Corpus Christi 2018, pet. denied). Although, the Court indicated that this holding may frustrate the purpose of the Act to protect subcontractors and materialmen from the risk of nonpayment, the Court found that its decision was mandated by the  language of the statute.

The Texas Construction Trust Fund Act includes protection for the payment rights of subcontractors and suppliers on construction projects. In order for the Act to be applicable, “trust funds” must be received by a “trustee” as defined in the Act. Tex. Prop. Code § 162.031. Construction payments are trust funds “if the payments are made to a contractor or subcontractor or to an officer, director, or agent of a contractor or subcontractor, under a construction contract for the improvement of specific real property in this state.” Tex. Prop. Code Ann. § 162.001.  “A contractor, subcontractor, or owner or an officer, director, or agent of a contractor, subcontractor, or owner, who receives trust funds or who has control or direction of trust funds, is a trustee of the trust funds.” Tex. Prop. Code Ann. § 162.002. The Act does not apply to “a bank, savings and loan, or other lender.” Tex. Prop. Code Ann. § 162.004(a)(1).

So, for example, a general contractor would be considered a trustee under the Act of funds it received from a construction project owner for work performed by the general contractor’s subcontractor on the project. If the general contractor failed to pay its subcontractor from funds received from the owner  for the subcontractor’s work, the general contractor and its owners, officers, directors or agents who received or had control or direction of the funds could be subject to liability under the Act for misapplying the funds. The Act carries both criminal and civil penalties.

In Dakota Util. Contractors, Inc. v. Sterling Commercial Credit, supra, Atmos hired Dambold to provide pipeline construction and repair services. In turn, Dambold hired subcontractor Dakota to provide directional drilling services on several of Atmos’s projects.

At some point, Dambold also entered into a factoring agreement with Sterling, a factoring company.  Dambold factored its invoices on Atmos projects in exchange for monetary advances from Sterling. Pursuant to the factoring arrangement, Sterling was entitled to be paid directly by Atmos for Dambold’s invoices.

Atmos later defaulted under its agreement with Sterling, ceased operations and filed for bankruptcy. Apparently, Sterling had received payments from Atmos that included funds for work performed by Dakota for Dambold, and Sterling did not pay these funds over to Dakota. A partial settlement was reached in the bankruptcy case, but Dakota claimed that it was still owed money for work it performed for Dambold from funds received by Sterling from Atmos. In a nutshell, Dakota was contending that Sterling, the factoring company, stepped into the shoes of Dambold when Sterling received money from Atmos. Since the funds Sterling collected directly from Atmos included payments for work that Dakota performed, then Sterling should have paid those funds over to Dakota.

Thus, Dakota filed suit in state court for the deficiency alleging that Sterling, the factoring company, misapplied construction trust funds under the Act that were owed to Dakota.. The question before the trial court was whether Sterling was a “trustee” under the Act that owed a duty to pay over funds to Dakota for Dakota’s work. The trial court found as a matter of law that Dakota was not entitled to recover anything from Sterling under the Act and Dakota appealed.

The Court of Appeals affirmed and held that the Act did not apply to Sterling because it was not a  “trustee” and was also exempt under the Act as an “other lender”. Id at p. 208. In that regard, the Court stated:

Here, Dakota, a subcontractor, contends that Sterling, a factoring company, is liable under the Act as a trustee because Sterling acted as an agent of Dambold, a contractor, when Atmos paid Sterling the construction fees, in the form of receivables, that Atmos owed to Dambold. We disagree with this contention based on the facts of this case, the plain language of the Act, and the foregoing authority. Fundamentally, the record indicates that Sterling, as a financing entity, is not a “trustee” under the Act because it is not a “contractor, subcontractor, or owner or an officer, director, or agent of a contractor, subcontractor, or owner.” ……. In this regard, Sterling falls within the Act’s explicit exemption as an “other lender.” See Tex. Prop. Code Ann. § 162.004(a)(1).

The Court also held that payments that Atmos made to Sterling did not constitute trust funds under the statute. “Under the Act, “construction payments” are “trust funds” if the payments are made “under a construction contract for the improvement of specific real property in this state.” Tex. Prop. Code Ann. § 162.001(a).” ­.  The Court stated at pp. 208–209:

Here, the payments that Atmos made to Sterling were not made “under a construction contract” but were instead based on the factoring agreement between Dambold and Sterling.

The Court concluded that Sterling was not liable to Dakota under the Act. The Court recognized that factoring agreements may frustrate the intent of the act to protect subcontractors and materialmen from the risk of nonpayment. Unfortunately, for the subcontractor, the Court determined that its hands were tied because of the language of the Act. Thus, to the extent this creates a loophole under the statute, the Court stated it would have to be addressed by the legislature.

Introduction. Family estate disputes over trusts and wills often bring out the worst in the parties as was exemplified in the recent case of ESTATE OF FELIPE A. RADELAT, DECEASED, 02-17-00264-CV, 2019 WL 5792652, at *1 (Tex. App.—Fort Worth Nov. 7, 2019, no pet. h.). In this case, Lourdes Radelat sued her mother and brother, appellants Ana and Andrew Radelat, over their handling of an estate matter. The appellants’ defenses to the suit included that the alleged claims were barred by the statute of limitations. In other words, Lourdes waited too long to file the lawsuit. However, Lourdes countered this defense with the fraudulent concealment doctrine. That is, appellants’ fraudulent concealment tolled the running of the statute of limitations. According to the record, after the lawsuit was filed, the appellants engaged in a series of actions that violated the court’s orders and abused the discovery process. The trial court struck the appellants’ defenses and rendered what is known as death-penalty sanctions and entered judgment against the appellants who then appealed.

Background. Lourdes filed her lawsuit in 2012 pertaining to the estate of her father Felipe Radelat, the decedent, who died in 1994. The decedent created two testamentary trusts in his will which provided that upon his death the bulk of his estate was to be transferred to these two trusts. The will named decedent’s wife Anna as the executor of the estate. The will named Lourdes, Ana, and Andrew as co-trustees of the trusts. Ana, as executor, did not fund the trusts.

Apparently, Lourdes did not find out about the trusts and the fact that she was supposed to be a co-trustee until 2012, when appellants attempted to sell real estate that belonged to one of the trusts. According to Lourdes, “appellants had withheld the will from her and misled her about its content. Lourdes alleged that appellants  breached their fiduciary duties by concealing Felipe’s estate plan, failing to properly fund the trusts, and self-dealing with trust property, among other misdeeds. Lourdes demanded a statutory accounting for the trusts.” Id. at 1.

Appellant’s filed an answer to the lawsuit that included the statute of limitations defense. Further, appellants filed counterclaims to the lawsuit. Lourdes responded that limitations were tolled by appellants’ fraudulent concealment.

After the lawsuit was filed, the trial court granted a temporary injunction that restrained appellants from using funds belonging to the trust among other restrictions. During the course of the litigation, the trial court also ordered the appellants to provide an accounting to Lourdes. Further, the parties engaged in discovery including the taking of depositions.

Apparently, appellants engaged in a pattern of misconduct during the course of the proceedings. They violated the temporary injunction order by collecting rent for property that belonged to one of the trusts, submitted a false accounting to the court, failed to provide a statutory accounting for the trusts, failed to produce documents despite an order compelling production, and failed to cooperate in giving their depositions.

On January 11, 2017, after numerous hearings on these issues, the trial court ordered death-penalty sanctions against appellants for contempt of court. The court struck appellants’ answer including the statute of limitations defense.

“After a hearing to prove damages, the trial court rendered a final judgment awarding Lourdes $1,145,401 in damages and $173,467 in attorney’s fees and ordering that all remaining trust assets be distributed to Lourdes. This appeal followed.” Id. at 3.

Holding by Court of Appeals. On appeal, the appellants contended that: “as a general rule, before death-penalty sanctions may issue, the misconduct should justify the presumption that the claim or defense lacks merit.” Id. at 4.

In affirming the trial court’s decision against appellants ,the court of appeals stated (Id. at 6):

In its order, the trial court found that each of these forms of misconduct—discovery abuses,4 refusal to cooperate, violations of a temporary injunction meant to protect trust property, and deception of the court—had occurred, along with failure to produce an accounting and other misconduct. Each of these forms of misconduct generally favors the notion that appellants’ defenses lack merit.

The court of appeals also stated (Id. at 6):

But beyond this general connection, we think appellants’ misconduct speaks to the merits directly. Appellants’ primary defense was limitations. To this, Lourdes pleaded fraudulent concealment, alleging that limitations should be tolled because appellants deceived her and hid the true nature of the will and the trusts from her. See Valdez v. Hollenbeck, 465 S.W.3d 217, 230 (Tex. 2015). The nature of appellants’ misconduct—a borderline fraud on the court—could have rationally persuaded the trial court that appellants also fraudulently concealed the truth from Lourdes. Appellants’ misconduct might have convinced the judge that just as appellants provided the court with false information, they also provided Lourdes with false information concerning the nature of the will; that just as appellants withheld bank records, they likewise withheld the will from Lourdes; and that just as Ana acted with “guile and artifice” in pretending not to understand the litigation process in order to obstruct it, she acted with a similar intent in pretending not to understand her responsibilities under Felipe’s estate plan. Under this view, appellants’ misconduct could have convinced the trial court that appellants fraudulently concealed the truth from Lourdes and, therefore, that appellants’ limitations defense lacked merit. 

The court of appeals held that the trial court did not abuse its discretion and overruled the issue raised by appellants on appeal. The trial court’s judgment was affirmed.