Family estate planning issues arise far too often when a child takes financial advantage of a parent who is mentally incompetent because of dementia or other mental infirmities. This is why it is so important to plan our estates while we still have our mental faculties and to put trustworthy people in charge who have the necessary skills to manage our estates after we are gone.This can be seen from a recent 2018 opinion by the Dallas Court of Appeals.

In Anderton v. Green, 555 S.W.3d 361 (Tex. App.—Dallas 2018, no pet. h.), James sued his niece, Jennifer, who was raised by James’s mother, Frances, Jennifer’s grandmother. During her lifetime, Frances set up a trust for the benefit of James and his brother which later held about $1 million in assets. Frances provided for Jennifer by naming her as the beneficiary of several annuities. Frances also made Jennifer joint owner on some of Frances’s bank accounts.

In 2009, James bought his mother’s grass farm business.  James later became incarcerated. After his release, James and his wife lived on the grass farm. Whereas, Jennifer became a registered nurse and helped care for Frances in the remaining years before Frances’s death.

By 2011,  Frances suffered from dementia. On October 15, 2012, Frances’s second husband, Clarence, along with Frances’s son James drove Frances to the banks where her accounts were held and had Frances complete paperwork to remove Jennifer from the accounts. The next day Clarence took Frances to a lawyer’s office and Frances signed documents revoking powers of attorney previously granted to Jennifer and granting a new power of attorney to James. Jennifer took immediate action to have Frances reverse the account changes.

On October 19, 2012, only four days after Clarence and James had Frances change her accounts, James filed an application for guardianship of Frances, based upon Frances’s mental incapacity. During the guardianship proceedings, James testified that Frances was competent to undertake banking transactions on Monday and Tuesday but not on Wednesday and Thursday. After the completion of the hearing, the court later appointed individuals other than James to serve as Frances’s guardians.

Unfortunately, Frances died shortly afterwards on November 26, 2012. James then sued Jennifer alleging conversion of $750,000 in annuity benefits she received upon Frances’s death. Jennifer counter-sued James and asked the Court to declare that Frances’s bank accounts now belonged to Jennifer, and the October 16, 2012 power of attorney Frances signed in favor of James and any related transactions were invalid.

The court heard the testimony of 15 witnesses at the over seven-day trial. At the conclusion of the trial, the court rendered judgment in favor of Jennifer declaring that Frances lost her mental capacity prior to October 15, 2012; and all actions taken by Frances after that date, at any financial institution or attorney’s office, lacked any legal effect and were void. The court also awarded Jennifer $223,364 in attorney fees. James appealed. The Court of Appeals affirmed the trial court’s decision, except the court remanded the case back to the trial court for further consideration of attorney fees.

In the discussion by the Court of Appeals, the court states, “To have mental capacity, the person executing the instrument must have had sufficient mind and memory to understand the nature and effect of her act at the time of the document’s execution….”Capacity may be assessed by considering such factors as 1) the person’s outward conduct demonstrating an “inward and causing condition,” 2) preexisting external circumstances tending to produce a special mental condition, and 3) the person’s mental condition before or after the relevant point in time from which her mental capacity or incapacity may be inferred.”……..”Finally, expert testimony on the matter is not required since the requisite proof regarding mental capacity may reside within the common knowledge and experience of laypersons.”

The evidence included testimony from witnesses who testified that “Frances was unable to recall that she was married to Clarence; that Jennifer was her granddaughter; or that she had, one or two days prior, undertaken significant banking transactions, including moving $100,000 from one bank to another and changing her long-settled plan that Jennifer would be “taken care of” through investments managed by Mason.” There were also notations in Frances’s medical records that stated Frances’s  was “demented and cannot relate much history,” and looked “disheveled and tired.”

In its holding, the Court of Appeal’s stated: “We conclude the evidence supports the trial court’s declarations that Frances “lost her mental capacity to manage all aspects of her property sometime prior to October 15, 2012, and her loss of mental capacity to manage all aspects of her property continued uninterrupted until her death on November 26, 2012,” and that Frances’s actions on or after October 15, 2012 “at any financial institution or attorney’s office, lacked any legal effect and are invalid, null, and void.”  The Court of Appeals also held that the award of some of the attorney fees was authorized by law. However, not all of the attorney fees were recoverable, and Jennifer failed to present evidence segregating recoverable and unrecoverable fees. Therefore, the court reversed the portion of the trial court’s judgment awarding attorney fees and the case for further proceedings on that issue.

Lessons learned from this case are that it is important to do comprehensive estate planning while we are still mentally capable of managing our finances. Further, if one family member takes financial advantage of another family member who is not mentally competent, all is not lost.  Any transactions by the mentally competent family member are subject to being declared void and set aside.  To prove this, evidence will need to be presented from witnesses who knew the mentally incompetent family member and can testify that the family member was forgetful, confused or mentally incapable of managing his finances when the transactions in question were completed.  Also, medical evidence should be presented of the medical conditions in issue.  Of course, it is unfortunate that our surviving family members should have to go through the stress and expense of litigation to right the wrong.  That is why we should make sure that while we are still mentally capable that we get our estates in order.  This is a true gift of love we can give to our children and close family members.

Introduction. In Texas, officers and directors of a corporation owe fiduciary duties to the corporation. “Three broad duties stem from the fiduciary status of corporate directors; namely, the duties of obedience, loyalty, and due care. Ubelaker at 781–82. The duty of obedience requires a director to avoid committing ultra vires acts, i.e., acts beyond the scope of the powers of a corporation as defined by its charter or the laws of the state of incorporation.” …”The duty of loyalty dictates that a director must act in good faith and must not allow his personal interests to prevail over the interests of the corporation.” …“Under the law of most jurisdictions, the duty of care requires a director to be diligent and prudent in managing the corporation’s affairs.” Gearhart Indus., Inc. v. Smith Intern., Inc., 741 F.2d 707, 720 (5th Cir. 1984). What happens when an officer or director breaches one of these fiduciary duties?

Texas Supreme Court opinion. In the recent Texas Supreme Court case of Longview Energy Co. v. Huff Energy Fund LP, 533 S.W.3d 866, 868 (Tex. 2017), reh’g denied (Dec. 8, 2017), reh’g denied (Jan. 26, 2018), the court addressed the evidence required to support the remedies allowed for breach of corporate fiduciary duties. These remedies include the imposition of a constructive trust upon assets wrongfully acquired and disgorgement of ill-gotten gains.

In this case, Longview Energy Corporation sued two of its directors and entities associated with them after discovering one of the associated entities, Riley-Huff, purchased mineral leases in an area where Longview had been investigating the possibility of buying leases.  The jury found that the directors breached their fiduciary duties owed to Longview by usurping a corporate opportunity and by competing with the corporation without disclosure. The trial court rendered judgment awarding Longview $95.5 million, imposing a constructive trust in Longview’s favor on substantially all Riley-Huff’s Eagle Ford acreage leases and associated properties, together with future production from the leases; and ordering Riley-Huff to transfer the leases and properties to Longview. Unfortunately, for Longview, the court of appeals reversed the judgment and the Texas Supreme Court affirmed the reversal.

Background. Longview, an oil and gas exploration company, was looking into investment opportunities in the Eagle Ford. In 2010, Longview held a board meeting to discuss the results of its investigation. The proposal before the board involved investing up to $40 million to lease 7,000 acres for drilling. The proposal did not identify or target specific acreage or leases in the large blobs of land considered. Longview decided against investing, at least in part, because of alleged misrepresentations and factual omissions by two of Longview’s board of directors.

These two directors had formed Riley-Huff in the preceding year to locate and fund oil and gas investments including in Eagle Ford. This had not been disclosed to Longview. Just 3 days before the 2010 Longview board meeting, Riley-Huff agreed to purchase Eagle Ford leases from Wyldfire which was one of the lease brokers Longview consulted in developing the proposal. Riley-Huff eventually acquired mineral leases to approximately 50,000 Eagle Ford acres, some of which were within the blobs on maps Longview’s board had considered.

The jury found that the two Defendant directors breached their fiduciary duties owed to Longview by taking a corporate opportunity and by engaging in competition with Longview without the approval of its board of directors. The trial court rendered judgment awarding Longview $95.5 million; imposing a constructive trust in Longview’s favor on substantially all Riley-Huff’s Eagle Ford acreage leases and associated properties, together with future production from the leases; and ordering Riley-Huff to transfer the leases and properties to Longview.

Court’s holding. The Texas Supreme Court affirmed the reversal of the trial court’s judgment because Longview failed to prove that the leases in issue were acquired by Riley-Huff as a result of the Defendants’ breach of fiduciary duties. There was no evidence that the leases in question were leases that Longview intended to acquire.  There was only evidence that these leases were encompassed within the large blobs of land considered by Longview as part of the investment proposal.  Thus, the evidence was not specific enough to support the court’s imposition of a constructive trust upon these leases, award of $95 million in lost profits or award of other remedies.

Conclusion. The lessons learned from this case are that corporate officers and directors owe strict fiduciary duties to the corporation and must be open and honest with the corporation about any competing ventures in which the directors and officers have invested or intend to invest.  Otherwise, they may have to account to the corporation for these investments.  Further, it is important for a plaintiff suing for breach of fiduciary duty to hire competent financial experts to trace the specific assets that a plaintiff alleges were wrongfully acquired as a result of a defendant’s breach.  Can you imagine investing large amounts of money and time into a lawsuit, being awarded a judgment for almost $100 million in damages and then later having the judgment reversed?

Introduction. In Lyda Swinerton Builders, Inc. v. Oklahoma Sur. Co., 16-20195, 2018 WL 4113795 (5th Cir. Aug. 29, 2018), the United States Firth Circuit Court of Appeals had to decide whether a subcontractor’s commercial general liability (“CGL”) insurance policy covered the defense of the general contractor named as an additional insured under the policy.

Background. Lyda Swinerton Builders, Inc. (“Lyda”) was hired as the general contractor to build a 10 story building in College Station, Texas. Lyda hired numerous subcontractors including roofer, A. D. Wills Company, Inc. (“Willis”). The subcontract agreement between Lyda and Willis contained a broad indemnity clause requiring Willis to indemnify and hold harmless Lyda and the owner of the project including against property claims, arising out of Willis’s work.

Willis obtained a CGL insurance policy that identified Willis as the named insured, provided contractual liability coverage, and contained an endorsement naming Lyda as an additional insured.

The project owner later sued Lyda for allegedly failing to properly perform its work resulting in damages to the owner. The allegations included that the roof was affected by the deficient work and that Lyda’s negligence caused loss of use of the building and property damage separate and apart from Lyda’s scope of work under the contract documents.

Issue. Lyda requested that the CGL insurance carrier cover its defense against the lawsuit by the project owner, since Lyda was an additional insured under the CGL insurance policy. The carrier denied the request and another lawsuit ensued including between Lyda and the carrier.

Court’s holding. The United States 5th Circuit Court of Appeals held in the lawsuit between Lyda and the CGL insurance carrier that:

  1. The CGL insurance policy obligated the carrier to defend Lyda as an additional insured against the underlying lawsuit filed by the owner of the project.
  2. The carrier’s failure to tender a defense and pay for defense costs also would entitle Lyda to recover an 18% penalty against the carrier under the Texas Prompt Payment of Claims Act.
  3. If Lyda establishes that the carrier’s misrepresentations caused it to be deprived of a defense, Lyda can recover the defense costs under Chapter 541 of the Texas Insurance Code–without limitation from the independent-injury rule–which may also entitle Lyda to recover treble damages if the carrier knowingly violated the statute.

Is contractual privity required for an owner to sue a builder for defective workmanship?

Construction defect lawsuits often involve claims against multiple defendants since the typical construction project involves work performed for the owner by a general contractor who in turn hires multiple subcontractors to perform the work.  But what happens when the original owner of the property with the improvements subsequently sells the property?  Can the subsequent owner sue the original builder for defective workmanship?

Austin Court of Appeals–no privity required

Background. The Austin Court of Appeals recently addressed this question involving the construction of a home. Plaintiffs purchased the home at issue from a third-party relocation company that had purchased the home from its original owners.  After purchasing the home, the Plaintiffs allegedly discovered various construction defects.  The Plaintiffs sued the builder even though they did not have a contract with the builder to build the home.  Their claims against the builder included those for breach of implied warranty to perform in a workmanlike manner. The builder contended that the Plaintiffs did not have the legal capacity to sue the builder for breach of warranty because the builder did not have a contract with the Plaintiffs.  Rather, the builder’s contract was with former owners of the property.

Holding. The court held that the Plaintiffs had the right to sue the builder for breach of implied warranty even though the Plaintiffs did not have a contract with the builder. “The supreme court has held that a subsequent purchaser of a home may maintain a cause of action for breach of the implied warranties of habitability and good workmanship, which are implied by every contract for the construction of a home. See Gupta, 646 S.W.2d at 169 (“We hold that [the implied warranty of habitability and good workmanship] does cover latent defects not discoverable by a reasonably prudent inspection of the building at the time of [a subsequent] sale…. As between the builder and owner, it matters not whether there has been an intervening owner.”).”Maroney v. Chip Buerger Custom Homes, Inc., 03-17-00355-CV, 2018 WL 3041087, at *8 (Tex. App.—Austin June 20, 2018, pet. filed).

 

Contingent trust beneficiary. A contingent trust beneficiary is one who does not have the right to receive benefits under a specific trust until the occurrence of a future event.  Typically, a contingent beneficiary’s right to receive benefits under the trust would vest upon the death of one or more named beneficiaries. The question often arises as to what rights a contingent beneficiary has to protect his or her contingent rights.

Rights against trustee. In the recent case of Mayfield v. Peek, 446 S.W.3d 253 (Tex. App.—El Paso 2017, no pet. h.), the court held that the contingent beneficiary had standing to sue the Trustee of the trust.

Facts of case. This case arose out of a sister and brother—Mayfield and Bruce—fighting over an inheritance from their parents. The parents had created and placed several real properties and other assets into a revocable trust. Apparently, the parents became the vested beneficiaries of the trust upon its creation. Upon their death, the trust became irrevocable and Mayfield and Bruce would become the vested beneficiaries.  Ten years after the creation of the trust, Bruce became the Trustee.

After the parents died, Mayfield sued Bruce sued one another. Mayfield sued Bruce for breaching his fiduciary duties as Trustee.  The factual allegations included that, prior to the death of their parents, Mayfield and her brother Bruce had not spoken for 30 years. Bruce had managed to restrict his father’s access to Mayfield and others. Further, Bruce convinced the mentally impaired parents to transfer assets out of the trust for Bruce’s benefit and to terminate the trust.

Breach of fiduciary duty. Mayfield sued Bruce for breaching his fiduciary duties as Trustee by unduly influencing their mentally impaired parents into:

a. Wrongfully transferring assets out of the trust for Bruce’s benefit; and

b. Terminating the trust.

This apparently resulted in Mayfield receiving nothing from the trust after her parents died.

Jurisdictional issue. Bruce contended that Mayfield was only a contingent beneficiary of the revocable trust and as a contingent beneficiary she did not have standing to sue him. Thus, her claim should be dismissed.

Court’s holding. The appellate court held that under the Texas Trust Code both vested and contingent beneficiaries may have the right to sue a Trustee.  Under the facts of this case, the contingent beneficiary—Mayfield—had standing to sue the Trustee—Bruce—and was allowed to go forward with her claim.

The Texas legislature made numerous changes to state laws in the estate planning area including to statutory provisions that govern wills, trusts, probate, and financial powers of attorney. One substantive change to the Durable Power of Attorney Act limits the scope of the fiduciary duties owed by the appointed agent to his principal (person granting the power) under a financial power of attorney.

Continue Reading Texas Durable Power of Attorney Act Amended to Limit Agency Liability

In 2011, the Texas legislature passed a bill that provides an expedited dismissal remedy to citizens who are wrongfully sued for speaking out about matters of public concern regarding the government or a business. Testimony in support of the bill showed that SLAPP suits — strategic lawsuits against public participation — were often filed against these citizens to chill public debate. Apparently, this was becoming more pervasive in the age of the internet. The bill that was passed is now Texas Civil Practice & Remedies Code Chapter 27, known as the Texas Citizens Participation Act. Defendants who are successful under the Act are not only entitled to a dismissal of the claim for defamation but they are also entitled to recover costs and attorney fees.

Continue Reading Texas Supreme Court Dismisses Libel Claim Filed Against Citizen for Facebook Posting

On May 26, 2017, the Texas Supreme Court refused to recognize the existence of a cause of action for tortious interference with inheritance rights.  Kinsel v Lindsey, 15-0403, 2017 WL 2324392 (Tex. May 26, 2017).  Many  Texas courts have long considered this to be a viable cause of action since the 1987 decision of King v. Acker, 725 S.W.2d 750 (Tex. App.—Houston [1st Dist.] 1987, no writ).   In that case, the decedent’s widow forged a power of attorney to transfer stock from decedent to her while the decedent was still alive and in a coma. After the death of decedent, a temporary administrator was appointed to recover the stock for the benefit of decedent’s estate.  This caused the estate to incur additional expenses.  The decedent’s children and mother who were beneficiaries of the estate sued the decedent’s widow for tortious interference with their inheritance rights. The King court upheld the jury’s verdict for actual and punitive damages based upon the widow’s tortious interference with the inheritance rights of decedent’s children and mother.

Now, 30 years later, the Texas Supreme Court in Kinsel v. Lindsey, supra, determined that there is no cause of action in Texas for tortious interference with inheritance rights.  Does this mean that heirs who have been wrongfully cheated out of their inheritance no longer have a remedy? No, it just means that they will have to resort to more traditional causes of action like a will contest asking a court to set aside a will that has been procured by undue influence or fraud. However, even the Kinsel court seems to accept that, absent a cause of action for tortious interference with inheritance, there may be times when the heirs will not have a remedy to recover all the damages caused by someone who wrongfully interferes with inheritance rights.

New Insurance Bill – Storm Loss Claims

On May 19, 2017, a bill was sent by the Texas legislature to the Governor for signature relating to claims for storm loss property damage. This bill was passed to curb alleged lawsuit abuses for property damages caused by severe storms. According to House Research Organization Bill Analysis, the supporters of the bill state that the frequency of these types of lawsuits has increased 1400 percent since 2012, are motivated by profit rather than actual damages, and should be discouraged. The proponents of the bill contend that the bill will obstruct the rights of property insurance policyholders to relief by restricting their rights to sue insurance carriers that wrongfully deny or underpay claims.

The bill will require an insured consumer who has suffered a storm loss to their home or real property to provide 61 days advance written notice to their insurance carrier before filing a lawsuit. The notice must specify the acts of the carrier giving rise to the claim, the amount owed, and the amount incurred in attorney fees. The carrier will be allowed to perform a pre-suit inspection of the property. The bill also provides a mechanism for protecting an insurance carrier’s agents and claims adjusters from personal liability. The bill, amongst other things, places limitations upon the rights of the insured consumer to recover attorney fees and interest. Obviously, only time will tell if the bill achieves its purpose.

Modern technology is making it much more difficult for businesses to protect their trade secrets. Long gone are the days when an unscrupulous company officer or employee would have to spend hours late at night at the copy machine to copy and steal valuable trade secrets like customer lists, plans or specifications. In the digital age, this can be accomplished in a matter of minutes by downloading the data to a flash drive that fits on a key chain. Texas is doing its best to pass laws to protect businesses from trade secret theft. As discussed in one of my previous articles, the Texas Uniform Trade Secrets Act was passed in 2013, making it easier for businesses to protect their trade secrets.

This act has now been amended. On May 19, 2017, the Texas Governor signed the bill into law clarifying the meaning of the act and expanding the definition of trade secrets that are protected. The act as amended, effective as of Sept. 1, 2017, provides that “”trade secret” means all forms and types of information, including business, scientific, technical, economic, or engineering information, and any formula, design, prototype, pattern, plan, compilation, program device, program, code, device, method, technique, process, procedure, financial data, or list of actual or potential customers or suppliers, whether tangible or intangible and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if…..”

The italicized language is the language that was added by the amendment. As you can see, the amendment expands the definition of a trade secret so that a wider net is cast to make additional types of company information protectable as a trade secret. So for example, if you own an engineering firm and engineering information or plans are stolen, the act includes this information as a protectable trade secret. Keep in mind, if your business has suffered a trade secret loss, time is of the essence and you should take immediate action.