2012 CASE LAW UPDATE FIDUCIARY LITIGATION

2012 CASE LAW UPDATE FIDUCIARY LITIGATION David B. West Cox Smith Matthews Incorporated 112 East Pecan│Suite 1800 San Antonio, Texas 78205 210.554.5500 tel. │ 210.226-8395

Oil and Gas – Executive Rights Leslie v. Veterans Land Bd. of State352 S.W.3d 479 (Tex. 2011) (p.1) Bluegreen, a land developer acquired: • 4,100 acres of land; • Sole right to execute oil, gas and mineral leases. • Subdivided the property into 1200 lots (Mountain Lakes) • Add restrictive covenants forbidding “commercial oil drilling.”

Oil and Gas – Executive Rights • As the subdivision was being developed • The Barnett Shale was being developed • Surrounding area came under lease for oil and gas production. • Minerals under Mountain Lakes land worth $610 million.

Oil and Gas – Executive Rights • Sellers and original land owners (who reserved mineral interests) sued Mountain Lakes lot owners, Bluegreen, others: • Bluegreen failed to develop the minerals • Restrictive covenants limited mineral development • Trial court: • Bluegreen, as owner of the executive right, breached its duty to the holders of the mineral interests: • Imposed restrictive covenants limiting oil and gas development • Failed to lease the minerals • Failed to give notice of its filing of the restrictive covenants

Oil and Gas – Executive Rights • Eastland Court of Appeals reversed: • Owner of the executive rights owes no duty until the right is exercised by leasing the minerals • Executive right holder’s duty is only to acquire for the mineral interest owner every benefit it acquires for itself • Because Bluegreen never excised the executive right, it had no duty to non-participating royalty owners .

Oil and Gas – Executive Rights Texas Supreme Court aff’d in part, rev’d in part: • Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984) • Manges leased a large part of the minerals to himself for a nominal bonus • Holder of executive rights required to use utmost good faith and fair dealing as to interests of the non-executive mineral interest owners • Holder of the executive rights had a duty to prevent drainage of oil and gas • Duty of the executive to the non-executive is fiduciary • Manges had breached this duty

Oil and Gas – Executive Rights • Bluegreen: • Unlike Manges, no self dealing • Bluegreen did not acquire benefit for itself that it had not acquired for the non-executive owners. • “It may be that an executive cannot be liable to the non-executive for failing to lease minerals when never requested to do so.” • But, “Bluegreen did not simply refuse to lease the minerals in the 4,100 acres; it exercised its executive right to limit future leasing by imposing restrictive covenants on the subdivision.” • Bluegreen breached its duty to the non-executive mineral owners; remedy was cancellation of restrictive covenants. • Non-executives had no right to develop the mineral interests.

Agency Harding Co. et al v. Sendero Res., Inc., 365 S.W.3d 732, Tex. App.-Texarkana, 2012, pet. filed) (p.3) Harding contracted with Sendero to acquire oil and gas leases for Harding—held in name of Sendero Harding Non-Compete Star Prospect—Associates, LP Surles, Independent Geologist Sendero (Walters, Pres.) GP Boney, Landman Assoc. LP “Walters” (Assoc. LP) TWW Tyler, LP (Walters, LP)

Agency • Boney informed Harding that TWW Tyler had been assisting Harding’s competitors, EOG Resources, Inc. and Devon Energy, Inc., in acquiring leases. • Walters was accused of violating the non-compete agreement. • Harding stopped making payments on Sendero contract.

Agency Trial Court • Sendero, Surles and Boney sued Harding for breach of contract. • Harding sued Sendero, TWW Tyler, Associated, LP, Walters for breach of non-compete. • Trial Court granted Walters’ motions for summary judgment: • Walters, Assoc. LP, TWW Tyler not parties to contract • Awards damages to Sendero, Associates LP

Agency Court of Appeals • Denied relief to Harding under the contract claims • Overlapping ownership interest common ownership does not permit a court to disregard the corporate entities. • TWW Tyler and Associates, LP not liable to Harding because they contracted with Sendero.

Agency Fiduciary claims under agency theory • Fact question existed as to whether TWW Tyler and Associates, LP were agents for Harding • Operating under the control and direction of Harding? • For the benefit of Harding? • Evidence TWW Tyler acquired leases in subject area in manner specified by Harding • Harding paid Assoc. LP $2.1 million for lease bonuses • Alleged fiduciary duty could arise only under a formal agency relationship, not an informal fiduciary relationship; no prior relationship of trust and confidence existed.

Agency FIDUCIARY DUTIES • Duty of loyalty—act solely for benefit of principal in matters connected to agency • Duty not to act on behalf of adverse party in transaction • Agent may take action, not otherwise wrongful, to prepare for competition following termination of agency relationship. • Some evidence of breach—TWW Tyler, Assoc. LP acquired leases for Devon Energy • No evidence that Sendero assisted TWW Tyler or Associates, LP in breaching their fiduciaries to Harding • The fact all entities were owned by the same person did not constitute such evidence. Harding not excused from performing the contract by the alleged breach of fiduciary duty by TWW Tyler and Associates LP.

Husband/Wife Daniels v. Empty Eye, Inc., 368 S.W.3d 743 (Tex. App-Houston [14th Dist.] 2012, pet. filed) (p. 7) H/W each owned 50% of corporation Corporation was GP for limited partnership; H/W are limited partners Empty Eye, Inc. Husband-Pres. Wife-V. Pres. GP H-LP W-LP Empty Eye & Assoc. LP

Husband/Wife • LP bought land and obtained construction financing for apartment complex • Entered into construction loan agreement with bank. • Husband and wife executed a personal guaranty of the indebtedness. • Each guaranty could be rescinded if no funds had been advanced.

Husband/Wife • Marital difficulties. • LP’s debt to a different bank using credit cards with a 31% interest rate • H rescinded personal guaranty • Bank rescinded the construction loan • Husband contacted contractors, informed them that he did not authorize their work • Husband notified at lease one contractor that the construction loan rescinded

Husband/Wife Trial Court • Wife, LP and corporation sued Husband for breach of fiduciary duty and breach of contract. • Trial Court: • Husband had a relationship of trust and confidence with the LP and corporation. • Husband breached his fiduciary duty to the LP ($171,601 in damages). • Husband breached his fiduciary to the corporation ($173,335 in damages).

Husband/Wife Court of Appeals Contract claims: • Evidence was legally insufficient to support a finding H breached the LP Agreement. • Nothing in agreement required husband to act as Limited Partnership’s guarantor. • Agreement with bank permitted him to rescind his guaranty before funds advanced. • Not liable for debts of partnership • Corporation was liable for the LP’s debts, not husband.

Husband/Wife FIDUCIARY DUTY CLAIMS • Husband had formal fiduciary relationships with “every other member of the Limited Partnership.” • Husband owed corporation a fiduciary duty because he was its president. • Husband owed wife a fiduciary relationship in marriage. • Husband participated in developing the Limited Partnership’s business plan. • Wife trusted him as a business partner. • Husband had a fiduciary relationship with the LP (officer of GP knowingly participates in corporation’s breach of fiduciary duty to limited p’ship). • Jury could find that confidential relationship existed as long as • Trust not based solely on status as a limited partner or solely on Limited Partnership’s ‘subjective trust and feelings;’ and • Relationships predated the transactions involved in Project.

Husband/Wife DISSENT • Limited partner owed no formal fiduciary duty to the limited partnership. • LP, the corporation and wife are all separate legal persons. • Texas does not allow an informal fiduciary duty to be imposed on one person based upon a “combination of relationships.” • Combination of relationships insufficient to support a jury finding that a special trust relationship existed between Husband and LP. • Husband not an officer of the LP did not have a marital relationship with the LP. • No Texas precedent in which a court has held that a limited partner owed a limited partnership an informal fiduciary duty based upon a relationship of trust and confidence.

Attorneys Camp Mystic, Inc. v. Eastland, __ S.W.3d ___, 2012 WL 2334604 (Tex. App.—San Antonio 2012, no pet.)(p. 14) • Camp mystic, an exclusive camp for girls, was owned by the Eastland family. • Dick Eastland owned 38% of Camp Mystic, Inc. • Brother, Stacy, an attorney, and other family members owned the remaining interests. • Concerned about liability, Stacy advocated the reorganization of the corporation. • Stacy drafted the reorganization documents and represented all sides in the transaction. • New CM Camp operations Dick • NFP Owned real estate Family

Attorneys • Dick decided to expand the camp by creating a second camp on the property • A neighbor heard the new camp would be near his property, proposed giving the camp money to not put the camp on the proposed site. • A dispute arose over how much of these proceeds should go to New CM and how much would go to NFP. • Dispute caused Stacy to re-evaluate the amount New CM was paying in rent to NFP. • Stacy determined that Dick was in default of the lease.

Attorneys • New CM and Dick filed suit to declare rights of the parties under the lease. • Stacy counterclaimed, alleging Dick • Improperly used the Camp Mystic trademark, breached the lease and breached his fiduciary duties to NFP. • Was in conflict of interest because of his ownership and position in both New CM and NFP. • New CM and Dick then countersued Stacy for • professional negligence • breach of fiduciary duty • negligent misrepresentation.

Attorneys Claims against Stacy • Stacy represented to Dick lease was renewed every year for an additional five years if his lease terminated he would have five years to vacate the premises • Lease did not include such a provision. • Stacy told Dick how to prepare and calculate the rent. • Stacy improperly represented all sides in negotiating and preparing the lease and conveyance without disclosing or obtaining a waiver of conflicts. • Stacy crafted reorganization in manner that put Dick in conflict of interest.

Attorneys Procedure • Stacy filed a traditional motion for summary judgment on the basis of limitations. • Filed a no-evidence motion for summary judgment on the grounds there was no evidence of the breach, causation, or damages elements. • Trial Court granted both of Stacy’s motions and then severed New CM and Dick’s claims against Stacy from the underlying case.

Attorneys Court of Appeals: reversed and remanded • Attorney obligated to render full and fair disclosure of facts material to representation. • Facts which might ordinarily require investigation likely may not excite suspicion where a fiduciary relationship is involved. • Breach of disclosure is tantamount to concealment • Statue of Limitation for legal malpractice does not begin to run until claimant discovers or should have discovered facts establishing the elements. • “A person to whom a fiduciary duty is owed is either unable to inquire into the fiduciary’s actions or unaware of the need to do so.” • Person to whom a fiduciary duty is owed is relieved of responsibility of diligent inquiry into fiduciary’s conduct so long as the relationship exists. • New CM and Dick had no duty to read the Lease; could rely on Stacy’s misrepresentations [regarding the five-year extension of the lease].

Attorney’s fees to defend estate. • Estate of Wilbur Waldo Lynch, __S.W.3d__(Tex. App.-San Antonio 2012)(No. 04-11-00731-CV) (October 17, 2012) • (In suit to set aside will, beneficiaries not representatives of estate, so had no duty to challenge executrix’ attorney’s fees at trial; no waiver) • Banking • Aflatouni v. Select Portfolio Servicing, Inc. 2012 WL 5472172 (E.D. Tex.) (Nov. 9, 2012) • Ordinarily, no fiduciary duty in lender/lendee relationships; Texas does not recognize a common law duty of good faith and fair dealings in MR/ME relationship, absent special relationship. • Accord Rhodes v. Wells Fargo Bank, N.A., 2012 WL 5363424 (N.D. Tex.) October 31, 2012. • Officers and Directors • Boyd v. Four Dominion Drive, LLC, 2012 WL 5199141 (Bkrtcy. W.D. Tex.)(October 22, 2012) • Officers and directors of insolvent corporation have fiduciary duty to deal fairly with corporation’s creditors, including preservation of corporate assets.

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

2012 CASE LAW UPDATE FIDUCIARY LITIGATION