FIDUCIARY DUTY – LIABILITY OF THE FIDUCIARY · Fiduciary Duty – Liability of the Fiduciary...

FIDUCIARY DUTY – LIABILITY OF THE FIDUCIARY

Presented By

TIMOTHY W. MOUNTZ, Dallas Baker Botts L.L.P.

RICHEL ‘RIKKY’ RIVERS, Austin

Hilgers & Watkins

Prepared By

TIMOTHY W. MOUNTZ1 Baker Botts L.L.P. 2001 Ross Avenue

Suite 600 Dallas, Texas 75205

214.953.6423 214.661.4423 (fax)

[email protected]

State Bar of Texas 26TH ANNUAL ADVANCED CIVIL TRIAL COURSE

August 27-29, 2003 - Austin October 8-10, 2003 - Dallas

November 5-7, 2003 - Houston

CHAPTER 5

1 This paper is an update and combination of the papers prepared for the 1999 Advanced Civil Trial course by Richel Rivers, at Hilgers & Watkins, P.C., and for the 2002 Advanced Civil Trial Course by E. Link Beck of Beck & Given, P.C. I would like to thank both authors for allowing use of their works in the preparation of this paper. The substantial contribution made by Marc D. McPeak, an associate in the Dallas office of Baker Botts L.L.P., is also gratefully acknowledged.

TIMOTHY W. MOUNTZ Baker Botts L.L.P.

2001 Ross Avenue, Suite 600 Dallas, Texas 75201

214.953.6423 FAX: 214.661.4423

[email protected]

BIOGRAPHICAL INFORMATION

EDUCATION B.A., with high honors, Southern Methodist University J.D., Duke University School of Law PROFESSIONAL ACTIVITIES Partner, Baker Botts L.L.P. – Trial Section President, Dallas Association of Young Lawyers 1989 Chairman of the Board, Texas Young Lawyers Association 1991-92; Treasurer 1990-91; Board of Directors 1988-1993 Dallas Bar Association, Vice President (Activities) 2003; Board of Directors 1989, 1996-

current Charter Fellow, Dallas Bar Foundation Life Fellow, Texas Bar Foundation LAW RELATED PUBLICATIONS AND PRESENTATIONS Research and Managing Editor, Duke Law Journal, 1978-79 Speaker, Malpractice Liability of Accountants Under the Common Law, Dallas Chapter, TSCPA, 1997

RICHEL (RIKKY) RIVERS Hilgers & Watkins, P. C.

San Jacinto Center, Suite 1300 98 San Jacinto Boulevard

P.O. Box 2063 Austin, Texas 78768

(512) 476-4716 EDUCATION University of Texas School of Law (J.D. 1976) Trinity University (B.A. 1973) PROFESSIONAL ASSOCIATIONS Shareholder, Director, and Vice-President/Secretary, Hilgers & Watkins, P.C. Certifications in Civil Trial Law, Civil Appellate Law and Family Law, Texas Board of Legal Specialization Court Admissions: United States Supreme Court; United States District Courts for the Northern, Southern, Eastern and Western Districts of Texas; Fifth and Eleventh Circuit Courts of Appeals State Bar of Texas: Pattern Jury Charge--Family Law Committee (1998-present) Current Member: Litigation, Appellate, and Family Law Sections Administration of Rules of Evidence Committee (1991-1993) Committee on Liaison with Federal Judiciary (1979-1980) Texas Bar Foundation Life Fellow (1987-present): Chair, District 9 Nominations Committee (1997-1999) Robert W. Calvert American Inn of Court: Master (1996-present) Treasurer (1998-present) Travis County Bar Association: Member, Board of Directors (1985-1986, 1987-1988) Protective Orders Committee (1984) Judicial Evaluation Committee (1985, 1999) CLE Program Committee (1986-1987) Bankruptcy Law Section - Program Director (1986) Law Day Committee (various) Volunteer, Mentor Program (continuing) Brown Bag Seminar Chair (1987-1988) Settlement Week Committee (1991) Travis County Family Law Section: President (1985-1986) Secretary-Treasurer (1984-1985) Protective Orders Committee (1984-1985) Austin Bankruptcy Lawyers Association (1986-present): Local Rules Committee (1985) Seminar Co-Coordinator (1986) Austin Young Lawyers Association (1981-1988): Judges’ Litigation Seminar Co-coordinator (1987) Austin Lawyer Care attorney recruitment project volunteer (1987) CLE Committee (1986-1987)

Austin Lawyers Care recruitment campaign (1987) Family Counselor’s Seminar Committee (1986) AYLA Racquetball Champion, Women’s Division (1985 and 1986) Constitution and Bylaws Committee (1985) Bar Association of the Fifth Circuit (1985-present) Federal Bar Association (1985-1987) CIVIC AFFAIRS SafePlace, Board of Directors (2000-present) Austin Y.W.C.A. Board of Directors (1987-1996) Planned Parenthood - Legal Advisory Committee (1992) Austin Community College, Committee for Development of Paralegal Training Program (1986) Member, Institute for the Humanities at Salado (1983-present) Austin Civic Orchestra, Principal flutist (1987-1989) Austin Flute Club, founder and historian (1988-present) Austin Woman Magazine, Legal Editor (1984-1985) Civil Air Patrol (1976-1980) City of Austin Community Development Commission (1975-1976) PUBLICATIONS AND SPEECHES (partial listing): Robert W. Calvert American Inns of Court, Bush v. Gore (February 2001) Travis County Domestic Relations Office, Guardian ad Litem Training Program, Testifying in Court (September

2000) Austin Young Lawyers Association, Brown Bag Seminar, Ethics (September 2000) State Bar of Texas, Legal Assistants’ Division College, Advanced Family Law Drafting, Ethics in Litigation

(September 2000)

State Bar of Texas, Advanced Personal Injury Course, Ethical Dilemmas Panel, Ethical Issues in Evidence & Discovery, and Fiduciary Duty & Third Party Reliance Panel (May, July, August 2000)

State Bar of Texas, Advanced Evidence Course, Ethical Dilemmas Panel, Ethical Issues in Evidence & Discovery, and Fiduciary Duty & Third Party Reliance Panel (February, April 2000)

Travis County Bar Association, Oil & Gas Section, Burrow v. Arce and Fiduciary Responsibilities of Lawyers

(November 1999) Southwest Legal Foundation’s Patent Law Institute, Ethical Issues in Patent Litigation (November 1999) Houston Bar Association, Ethics Issues (November 1999)

State Bar of Texas, 13th Annual Advanced Evidence & Discovery Course, Ethical Dilemmas Panel, Ethical Issues in Evidence & Discovery, and Fiduciary Duty Panel (November 1999, February 2000, April 2000)

State Bar of Texas, Advanced Civil Trial Course, Fiduciary Litigation (August, September & October 1999) University of Houston Law Foundation, Discovery Institute, Ethical Considerations and Malpractice Prevention

in Litigation – Emphasis on Discovery (May 1999) Capital Area Paralegal Association, Divorce and Property (February 1999) State Bar of Texas, Conflicts and Disqualification Issues Update (February 1999) State Bar of Texas, Advanced Civil Trial Course, Fiduciary Litigation (September, October & November 1998) University of Houston Law Foundation, Marriage Dissolution Institute, Ethical Considerations and Malpractice

Prevention in a Family Law Matter (June 1998) State Bar of Texas, Recognizing and Resolving Conflicts of Interest, Motions to Disqualify (May 1997) University of Houston Law Foundation, Family Law Practice Institute, Ethical Considerations and Malpractice

Prevention in a Family Law Practice (September 1996) State Bar of Texas, Advanced Civil Trial Course, Disqualification of Lawyers and Judges (August 1996) University of Houston Law Foundation, Advanced Civil Litigation, Ethical Considerations and Malpractice

Prevention in Litigation (April 1996) State Bar of Texas, Tort Reform 1995: Texas Deceptive Trade Practices Consumer Protection Act, Insurance

Code, Exemplary Damages and Bifurcated Trials (April 1996) State Bar of Texas, Advanced Appellate Practice Seminar, Preservation of Error in State Court: Pretrial and

Trial Stages (June 1995) University of Texas, Fifth Annual Conference on Techniques for Handling Appeals in the State and Federal

Court, Preservation of Error in State Court: Pretrial and Trial Stages (June 1995) Legal Assistants Division, Advanced Personal Injury Law Seminar, Appellate Practice -- Nuts

and Bolts (February 1995) State Bar of Texas, Trial and Tactics, Preservation of Error in the Trial Court (April 1991) AYLA/TCBA, Divorce Basics Seminar, Decrees and Wage Withholding Orders (March 1990) State Bar of Texas, First Annual Advanced Family Law Course, Preservation of Error in The Trial Court

(August 1989) State Bar of Texas, Advanced Civil Trial Course, Texas Summary Judgment Practice (June 1988) State Bar of Texas, Marriage Dissolution Institute, Bankruptcy and Divorce (May 1988) AYLA Austin Lawyer’s Care Seminar, Final Judgments and Decrees (March 1988) Austin Society of CPA’s, Legal Aspects of Bankruptcy: Counseling your Debtor Client (September 1987) Travis County Bar Association, Brown Bag Seminar, Modification Motions in Bankruptcy Court (April 1987) Travis County Bar Association, Divorce Practice Seminar, Divorce Practice for the General Practitioner and

Federal Law and Texas Divorce (March 1987) Austin Lawyers Journal Article, Child Support Amendments (received TCBA Outstanding Journal Article

Award, May 1986)

AYLA Family Counselors Seminar, Counseling and The Legal Process, The Professional as Expert (April 1986) AYLA, Divorce Practice Seminar, Closing the Case: Decrees, Agreements and Sale Instruments (May 1985) Austin Chamber of Commerce, Small Business Workshop, presentation on Employee Hiring, Promotion and

Layoff (July 1984) State Bar of Texas, Collecting on Debts and Judgments, Collecting Claims Through Bankruptcy (May 1984) State Bar of Texas, Bankruptcy Institute Series, Voidable Transfers (April 1983)

Fiduciary Duty – Liability of the Fiduciary Chapter 5

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TABLE OF CONTENTS

I. INTRODUCTION...................................................................................................................................... 1

II. EARLY CASES ......................................................................................................................................... 1

III. THE FIDUCIARY DUTY.......................................................................................................................... 2

IV. IDENTIFYING FIDUCIARY RELATIONSHIPS..................................................................................... 3 A. Formal Relationships - Fiduciary Relationships as a Matter of Law.......................................................... 3

1. Agency......................................................................................................................................... 3 2. Partnerships .................................................................................................................................. 3 3. Trustees........................................................................................................................................ 4 4. Executors...................................................................................................................................... 4 5. Corporate Directors ....................................................................................................................... 4 6. Attorneys ...................................................................................................................................... 4 7. Law Partners................................................................................................................................. 5 8. Law Firm Associates ..................................................................................................................... 5 9. Executive Rights Holder ................................................................................................................ 5 10. Husband-Wife ............................................................................................................................... 5 11. Stockbrokers ................................................................................................................................. 6 12. Guardian Ad Litem........................................................................................................................ 6

B. No Fiduciary Relationship Recognized As A Matter of Law.................................................................... 6 1. Bank-Borrower.............................................................................................................................. 6 2. Joint Operating Agreement............................................................................................................. 6 3. Co-Shareholder in Closely Held Corporation ................................................................................... 6 4. Professor-Student .......................................................................................................................... 6 5. Partners-To-Be.............................................................................................................................. 6 6. Bailor-Bailee................................................................................................................................. 7

C. Informal Relationships - Other Special or Confidential Relationships ....................................................... 7 1. Employer/Employee ...................................................................................................................... 7 2. Insurer/Insured.............................................................................................................................. 7 3. Mineral Estates and other Proprietary Relationships ......................................................................... 8 4. Owner - Contractor........................................................................................................................ 9 5. Other Circumstances in Which a Confidential Relationship Has Been Recognized............................. 9

D. No Confidential Relationship .............................................................................................................. 10 1. Franchisor-Franchisee.................................................................................................................. 10 2. Hospital-Staff Physician............................................................................................................... 10 3. Bank-Debtor ............................................................................................................................... 10 4. Business Dealings ........................................................................................................................ 10 5. Prospective Employer-Employee .................................................................................................. 11 6. Shareholder of Employer and Employee........................................................................................ 11 7. Supplier-Distributor ..................................................................................................................... 11

V. DURATION OF THE DUTIES................................................................................................................ 12

VI. THE SCOPE OF THE DUTY.................................................................................................................. 12 A. General Obligations ............................................................................................................................ 12 B. Limitations on Scope .......................................................................................................................... 12

VII. REMEDIES ............................................................................................................................................. 13 1. Disgorgement .............................................................................................................................. 13 2. Fee Forfeiture.............................................................................................................................. 13 3. Constructive Trust ....................................................................................................................... 14 4. Rescission ................................................................................................................................... 14 5. Damages..................................................................................................................................... 14


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VIII. PLAINTIFF'S PROCEDURAL ADVANTAGES................................................................................... 14 A. The Mere Failure to Disclose is a Breach of Fiduciary Duty .................................................................. 14 B. Presumption of Unfairness .................................................................................................................. 14 C. Wording of Instructions ...................................................................................................................... 14

IX. CONCLUSION ........................................................................................................................................ 15 TABLE OF AUTHORITIES........................................................................................................................... 17


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FIDUCIARY DUTY – LIABILITY OF THE FIDUCIARY I. INTRODUCTION

Over the past six years the Texas Supreme Court has written a number of significant opinions that address the scope of duty owed in the context of both business and personal relationships. This paper reviews cases addressing concepts of fiduciary duty as they have developed in the Texas courts. As a general rule, individuals have no duty to aid or protect another person. See RESTATEMENT (SECOND) OF TORTS §15 (1965). However, the courts have found exception to this general rule when a special relationship of confidence and trust exists between the parties. Thus, the fiduciary relationship imposes a duty on the part of a fiduciary to act in the interests of the beneficiary of the duty, and consequently opens a field of litigation to compensate victims when the fiduciary duty is breached and, perhaps more importantly, to enforce the societal interests advanced by the imposition of such a legal duty. II. EARLY CASES

The law of fiduciary relationships in Texas has evolved through the application of both common law and equitable principles of fairness to create duties of varying scope, depending on the circumstances. Some of the most notable early Texas cases that articulate general principles of duty, breach, and appropriate remedy are: Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509,512 (Tex. 1942):

Corbett and Kinzbach were companies engaged in the oil field tool business. Corbett wanted to sell Kinzbach its contractual rights in a patented tool known as a "whipstock." Corbett persuaded Kinzbach's employee, Turner, to convince Kinzbach to make an offer to Corbett. In exchange, Corbett agreed to pay Turner a commission if Kinzbach did buy the contract, and Corbett disclosed to Turner that he would sell the contract for $20,000.

The Texas Supreme Court found that Turner occupied the status of Kinzbach's fiduciary in the transactions between Corbett and Kinzbach concerning the whipstock contract sale. The Court imposed a fiduciary duty on "any person who occupies a position of peculiar confidence towards another. It refers to integrity and fidelity. . . the term includes those informal relations which exist whenever one party trusts and relies upon another, as well as technical fiduciary relationships." Id. at 512. The Court noted that during the negotiations leading to the

consummation of the contract sale, Turner was a trusted employee of Kinzbach and Turner failed to disclose his adverse interest in the deal to his employer. The Court held that:

[I]f the fiduciary takes any gift, gratuity, or benefit in violation of his duty, or acquires any interest adverse to his principal, without a full disclosure, it is a betrayal of his trust and a breach of confidence, and he must account to his principal for all he has received.

Id. at 514 (quoting United States v. Carter, 217 U.S. 286 (1910)).

Slay v. Burnett Trust, 187 S.W.2d 377 (Tex. 1945):

Mrs. Burnett established a trust for Texas

Christian University. Mrs. Burnett named six trustees, including Mr. Slay, to manage the trust property. Upon her death, Mr. Slay, who also acted as Mrs. Burnett's attorney, became the chairman of the trustees. Id. at 380. Relying on Johnson v. Peckham, 120 S.W.2d 786 (Tex. Civ. App. - Fort Worth 1936, no writ), and Kinzbach, the Texas Supreme Court exacted a strict standard for conduct among fiduciaries. A duty of loyalty on the part of a trustee prohibits him from using his position to gain any benefit for himself at the expense of his trust, and from placing himself in any position where his self-interest will or may conflict with his obligations as trustee. Id. at 387-88. The Court further held that a trustee can make no profit out of his trust and explained that this rule springs from the trustee's duty to protect the interests of the estate and to not permit his personal interest to conflict in any way with that duty. Id. at 388.

Finally, the Court offered the trust beneficiary an election of remedies. The beneficiary can require the trustee to account either for the original fund with interest, or for the fund as invested with all profits realized. Also, the breaching fiduciary must forfeit all benefit obtained in breach of the trust. Id. at 393. Thigpen v. Locke, 363 S.W.2d 247 (Tex. 1963):

Grantors of two deeds sought to set the deeds

aside on the grounds that the Grantee was a friend, Grantors thought they were signing a lease, and the Grantee told them they could reclaim their property in five or six years after they repaid their debt to Grantee from rent on the property. During their relationship, Grantee acted for the Grantors in the following capacities: a loan officer, personally guaranteeing Grantor's loans; a business advisor, encouraging Grantor to incorporate the business; and a shareholder,

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bookkeeper, director, and vice-president of Grantor's corporation. The Supreme Court held that:

[M]ere subjective trust alone is not enough to transform arms-length dealing into a fiduciary relationship so as to avoid the statute of frauds. Businessmen generally do trust one another, and their dealings are frequently characterized by cordiality of the kind testified to here. If we should permit respondents to set aside their conveyances on such slender evidence, the security of contracts and conveyances in this state would be seriously jeopardized. Our holding in no way detracts from the principle that a relationship of trust and confidence may be shown to arise informally from purely personal relationships. All we hold is that [Grantors] do not testify to facts - other than their own subjective feelings - which show that their relationship with [Grantee] was anything more than a debtor - creditor relationship.

Id. at 253. International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567 (Tex. 1963):

An insurance company brought suit against its

former directors and officers for fraud, conspiracy, breach of fiduciary duty, mismanagement and misappropriation of corporate funds, and usurpation and appropriation of corporate opportunities. The trial court awarded the insurance company actual and exemplary damages.

The Texas Supreme Court recognized that corporate directors and officers are fiduciaries of the corporation. Generally, Texas courts have held trustees liable for profits when the trustee receives a profit from the acquisition or disposition of property for the beneficiary. For example, the courts would impose liability when: the trustee sells property for one price and accounts to the corporation for a lesser price; the trustee buys at one price and sells to the company at a higher one; or the trustee has received a secret bonus or advantage in the transaction in which he has acted for the corporation. Id. at 576-77 (citing Tenison v. Patton, 67 S.W. 92 (1902)). Thus, the Court recognized that the fiduciary cannot make any secret profit or engage in activities in his or her capacity of director. Moreover, if the fiduciary breached the trust, the court will hold the fiduciary accountable to the corporation for the personal profits realized by the fiduciary.

The directors had the burden to prove the fairness of their personal profits from each transaction. 368

S.W.2d at 577. This included the duty to obtain property for the plaintiff corporation at the "best possible price." Id. Thus, the profit the directors sought to make for themselves from the transaction belonged to the plaintiff corporation. Id. at 577-78. Indeed, fiduciaries have the duty to "exert all efforts in behalf of the corporation to the end that the sale of its stock would net the corporation the greatest possible return." Id. at 578. The Court discussed the scienter requirement and how courts should evaluate directors that sell stock for a personal gain:

The probability of harm to the corporation is self-evident and the defendants had every reason to anticipate that their activities in promoting the sales of their personally owned stock. . . at prices below that which the stock of the corporation was offered, would probably capture opportunities which might otherwise have been available to the corporation. . . [However, we] do not hold that a corporate stockholder and fiduciary is presumptively guilty of fiduciary breach in all cases when he sells personal stock during a time when the stock of the corporation is also on the market. We do hold that the making of such sales, under circumstances such as here, imposed on the defendants as stockholder-fiduciaries the burden of proving fairness when called to equitable accounting by the corporation.

Id. at 578. III. THE FIDUCIARY DUTY A fiduciary duty is the most exacting civil duty recognized by law. The fiduciary owes the beneficiary the duties of " . . . loyalty and good faith, integrity of the strictest kind, fair, honest dealing and the duty not to conceal matters which might influence his actions to his principal's prejudice." Hartford Cas. Ins. v. Walker County Agency, Inc., 808 S.W.2d 681, 688 (Tex. App. - Corpus Christi 1991, no writ) (citing Douglas v. Aztec Petroleum Corp., 695 S.W.2d 312, 318 (Tex.App. - Tyler 1985, no writ)). Although a fiduciary duty encompasses the duty of good faith and fair dealing, the fiduciary duty requires more and it often imposes an obligation on the fiduciary to place the interest of the beneficiary before the fiduciary's own interest. Crim Truck & Tractor Co. v. Navistar International Transportation Corp., 823 S.W.2d 591, 594 (Tex. 1992). Generally stated, the term "fiduciary" refers to someone who acts on behalf of another person and is obligated, when so acting, to put the benefic iary's interest ahead of any personal interests of the fiduciary. William T. Barker and Mary L. Mills, What's in a Word: Van Noy v. State Farm and "Fiduciary," 23









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INS. LITIGATION REPORTER 173 (2001). Although these statements give an indication of the broad nature of the duty, the courts have recognized varying scopes of and obligations associated with the duty. In many instances, the question of whether a fiduciary duty exists is fact-intensive. Accordingly, in order to better understand the nature of the obligation, it is necessary to examine when such a duty arises, the scope of the duty, and finally the remedies available to a beneficiary of the duty. IV. IDENTIFYING FIDUCIARY

RELATIONSHIPS As indicated, a fiduciary by definition is an

individual who acts on behalf of another. Accordingly, the duty shouldered by the fiduciary depends upon the nature of the relationship between the fiduciary and the beneficiary. The courts recognize that certain designated "formal" relationships give rise to a fiduciary duty as a matter of law. Crim, 823 S.W.2d at 593. The courts also recognize, however, that fiduciary duties can arise as a result of "informal" confidential relationships which generally are described as moral, social, domestic, or personal relationships in which one individual is being guided by the judgment or advice of another. See Thigpen, 363 S.W.2d at 253; Crim, 823 S.W.2d at 594.

A. Formal Relationships - Fiduciary Relationships

as a Matter of Law In Texas, the courts have deemed certain

relationships as fiduciary as a matter of law. These relationships are thought to automatically impose upon the fiduciary certain heightened duties, and in turn the relationships relax the protections which a person would ordinarily enjoy were the person not acting as a fiduciary. For instance, if a fiduciary relationship exists, then the courts may go so far as to relax constitutional protections applicable to a fiduciary. See, e.g., Commission for Lawyer Discipline v. Barry Robert Benton, 980 S.W.2d 425 (Tex. 1998) (lawyer's fiduciary duty to the justice system justifies relaxation of the rigorous standards ordinarily used for restrictions on political speech). And procedural and evidentiary rules may be invoked to protect the beneficiary of a fiduciary relationship from the disadvantages a fiduciary's superior power may cause in the litigation context. See, e.g., Willis v. Maverick , 760 S.W.2d 642 (Tex. 1988) (discovery rule applies in legal malpractice cases because facts which might ordinarily require investigation probably will not excite suspicion when a fiduciary relationship is involved). Some of the fiduciary relationships that the courts have recognized as a matter of law include:

1. Agency The principal-agent relationship is one in which the courts universally recognize a fiduciary duty. Agency encompasses a number of different types of relationships giving rise to a fiduciary duty, such as employer/employee, Kinzbach, 160 S.W.2d 509, attorney-in-fact, Sassen v. Tangle Grove Townhouse Condominium Assoc., 877 S.W.2d 489 (Tex.App. - Texarkana 1994, writ denied), insurance agent for insurance company, Hartford, 808 S.W.2d at 681, power of attorney, Vogt v. Warnock , 2003 WL 21197043 (Tex.App. – El Paso 2003, no pet. h.), and guardian ad litem, Byrd v. Woodruff, 891 S.W.2d 689 (Tex.App. - Dallas 1994, writ dism'd by agr.). The broadly-stated duty for an agent is that she owes the beneficiary the duty of good faith, fair dealing, honest performance and strict accountability. Sassen, 877 S.W.2d at 492. The agent further owes her principal the duty of full disclosure. Kinzbach, 160 S.W.2d at 513. See also, Maryland Ins. Co. v. Head Industrial Coatings & Servs., Inc., 906 S.W.2d 218, 233 (Tex. App.-Texarkana 1995), rev'd on other grounds, 933 S.W.2d 27 (Tex. 1996) (acknowledging an insurance agent has a fiduciary duty to the insurer under agency contract); Republic Bankers Life Ins. Co. v. Wood, 792 S.W.2d 768, 778 (Tex. App. - Fort Worth 1990, writ denied) (relationship between an agent and principal is fiduciary); Lang v. Lee, 777 S.W.2d 158 (Tex. App. - Dallas 1989, no writ) (finding agency between a widow and her uncle and step-father because "[i]n an arm's length transaction, knowledge of facts that would have excited inquiry in the mind of a reasonably prudent person, which if pursued by him with reasonable diligence would lead to the discovery of the fraud, is equivalent to knowledge of the fraud as a matter of law. In a confidential relationship, however, diligence on the part of the defrauded party does not exact as prompt and as searching an inquiry into the conduct of the other party as where the parties were strangers or were dealing with strangers."). 2. Partnerships Partners in a partnership owe each other a fiduciary duty under a variety of circumstances. See Johnson v. Peckham, 120 S.W.2d 786 (Tex. 1936) (partner selling his interest to another partner has a fiduciary duty requiring full disclosure of all important information about the value of the interest, even though the partners had strained relations and one partner had sued for an accounting and dissolution of the partnership); Hughes v. St. David's Support Corp., 944 S.W.2d 423 (Tex. App. - Austin 1997, writ denied) (holding a managing partner owes its copartners the highest fiduciary duty, which includes notifying the limited partners of an intent to sell partnership assets); M.R. Champion, Inc. v. Mizell, 904 S.W.2d 617 (Tex. 1995) (partners owe each other and their partnership a




















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fiduciary duty in the conduct of winding up partnership business); Bohatch v. Butler & Binion, 977 S.W.2d. 543 (Tex. 1998) (recognizing partnership relationship is fiduciary and imposes on the partners the obligation of loyalty to the partnership and of the utmost good faith in their dealings with each other); Ludlow v. DeBerry, 959 S.W.2d 265 (Tex. App. - Houston [14th Dist] 1997) (while the existence of a fiduciary relationship is a question for the jury, when there is no evidence of a confidential relationship it is a question of law - if a partnership is created, then the employer-partner owed a fiduciary duty to the employee-partner); American Network Leasing Corp. v. Corporate Funding Houston, Inc., 2002 WL 31266230 (Tex.App. - Houston [14th Dist.] 2002, no pet.) ("[a] partner may not use his position to gain a benefit for himself at the expense of his partners."); El Paso Production Co. v. Valence Operating Co., 2003 WL 21357287 *8 (Tex. App. – Houston [1st Dist.] 2003, no pet. h.) (formation of a partnership gives rise to a fiduciary relationship). 3. Trustees Trustees and executors owe three primary fiduciary duties to the beneficiary: duty of loyalty, duty of competence, and duty to exercise reasonable discretion. See John F. Bergner, Post-Mortem Elections and Funding Issues-The Fiduciary's Role and Potential Liability, State Bar of Texas Advanced Estate Planning Strategies Workshop (April 1997); see also, Slay v. Burnett Trust, supra Part II; Langford v. Shamburger, 417 S.W.2d 438, 443-44 (Tex. Civ. App.-Fort Worth 1967, writ ref'd n.r.e.) (noting a trust beneficiary does not have to prove trustee had an intent to defraud the trust because "[w]hen persons enter into fiduciary relations each consents, as a matter of law, to have his conduct towards the other measured by the standards of the finer loyalties. . . "); Maeberry v. Gayle , 955 S.W.2d 875 (Tex. App. - Corpus Christi 1997, n.w.h.) (uncle did not owe a fiduciary duty to his nephew as guardian of the nephew's estate because they executed deed after the nephew reached eighteen years of age and trust established for the nephew terminated when the nephew turned eighteen); Snyder v. Cowell, 2002 WL 1849145 (Tex.App. - El Paso 2003, no pet.) (trustee has a fiduciary duty not to self-deal); Prostok v. Browning, 2003 WL 1589535 (Tex.App. - Dallas 2003, no pet.) ("[a] trustee in bankruptcy owes a fiduciary duty to the parties, including creditors of the debtor."). However, statutory and common-law duties of trustees under the Texas Trust Act may be contracted away. See Clifton v. Hopkins, 2003 WL 21027235 *5 (Tex.App. – Waco 2003, no pet.) (exculpatory clauses in trusts regarding statutory and common-law duties under the Texas Trust Act are valid and not against public policy).

4. Executors An executor owes the estate and its beneficiaries a

fiduciary duty involving high standards of good faith, fair dealing, honest performance, strict accountability and the duty of full disclosure of all material facts that might affect the rights of the beneficiaries. Avary v. Bank of America, N.A., 72 S.W.3d 779, 791 (Tex.App. - Dallas 2002, no pet. h.). See also, Furr v. Hall, 553 S.W.2d 666 (Tex. Civ. App. - Amarillo 1977, writ ref'd n.r.e.) (executors' stock redemption plan constituted impermissible self-dealing); Humane Society of Austin v. Austin National Bank , 531 S.W.2d 574 (Tex. 1975), cert. denied, 425 U.S. 976 (1976) (no breach despite bank-executor's decision to invest in its own bank because, in determining testator's intent, the bank's actions were in good faith and consistent with its duty to the estate). 5. Corporate Directors Corporate officers and directors are fiduciaries with respect to the corporation. International Bankers, 368 S.W.2d at 576. They owe a duty of loyalty to the corporation and must deal with an extreme measure of candor, unselfishness and good faith. See Pinnacle Data Services, Inc. v. Gillen, 104 S.W.3d 188, 198 (Tex.App. – Texarkana 2003, no pet.) ("[i]t has been well established that the directors of a corporation stand in a fiduciary relationship to the corporation and its stockholders, and they are without authority to act in a matter in which a director's interest is adverse to that of the corporation."); General Dynamics v. Torres, 915 S.W.2d 45, 49 (Tex.App. - El Paso 1995, writ denied). They owe a duty of full disclosure. Any transaction involving self-dealing, that is, a transaction between the fiduciary and the corporation, is presumed to be unfair. Id. The Texas Business Corporation Act, however, provides a safe harbor for transactions involving "interested" directors. TEX. BUS. CORP. ACT ANN. art. 2.35-1. See also, Southwest Livestock & Trucking Co. v. Dooley, 884 S.W.2d 805 (Tex. App. - San Antonio 1994, writ denied) ("corporate officers and directors are fiduciaries and transactions in which they receive personal gain in their dealings with the corporation are subject to the closest examination.") (internal citations omitted). In bankruptcy, officers and directors owe a fiduciary duty to the company's creditors. See Prostok , 2003 WL 1589535 at *23. 6. Attorneys Attorneys have a principal-agent relationship with their clients and thus owe fiduciary duties to their clients. Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999); see also, Thompson v. Vinson & Elkins, 859 S.W.2d 617,623 (Tex. App. - Houston [1st Dist.] 1993, writ denied) (finding fiduciary duty does not extend to the relationship between a residual beneficiary of a trust and the attorney representing either the estate of the


















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decedent who created the trust or the trust itself); Cooper v. Lee, 75 Tex. 114, 12 S.W. 483, 486 (1889) (when attorney enters into a transaction with client, attorney must affirmatively show good faith, absence of undue influence, fair price, knowledge and intent of client, and that the attorney disclosed all information to the transaction and provided disinterested advice to the client); Archer v. Griffith , 390 S.W.2d 735, 739 (Tex. 1964) (subjecting the dealings, intentions, and intendments between attorney and client to exacting scrutiny); Bryant v. Lewis, 27 S.W.2d 604, 606 (Tex. Civ. App. - Austin 1930, writ dism'd w.o.j.) (requiring close scrutiny of an attorney's improper conduct in the relationship to the client); Byrd, 891 S.W.2d 689 (when an attorney appears as a guardian ad litem his status as the guardian is the source of the fiduciary relationship). In the context of this relationship, "[b]reach of fiduciary duty often involves the attorney's failure to disclose conflicts of interest, failure to deliver funds belonging to the client, improper use of client confidences, or engaging in self-dealing." Aiken v. Hancock , 2003 WL 21391670 *2 (Tex.App. – San Antonio 2003, no pet. h.). A breach of fiduciary duty claim against an attorney should be distinguished from a legal malpractice claim. The focus of a breach of fiduciary duty claim is whether an attorney obtained an improper benefit from representing a client, while the focus of a legal malpractice claim is whether an attorney adequately represented a client in accordance with the standards of ordinary care. In Commission for Lawyer Discipline v. Barry Robert Benton, Plaintiffs counsel wrote a letter to jurors chiding them for not awarding damages to his client. 980 S.W.2d 425 (Tex. 1998). The letter was found to violate Rule 3.06(d), which prohibits post-trial communications by counsel intended to embarrass or discourage jurors from further jury service. In upholding the sanction rule in most respects, the Supreme Court relaxed the "rigorous standard ordinarily used for restrictions on political speech" in order to protect the justice system from the harm an attorney has the ability to inflict. The Court went on to reason that "[a]s is the case with most fiduciary positions, the privileged place attorneys hold in the justice system gives them a special capacity to harm that system. When lawyers connected to a pending case make remarks about that case, the public is far more likely to regard them as authoritative than other speakers." Id. at 430. In Gamboa v. Shaw, a corporate shareholder brought suit against corporation's attorney for legal malpractice, breach of fiduciary duty, and conspiracy in connection with the lawyer's representation of conflicting interests in an underlying lawsuit involving the corporation. 956 S.W.2d 662 (Tex.App. - San Antonio 1997, n.w.h.). The appellate court held that

because the shareholder was not in privity with the attorney, he had no standing to maintain a claim against the lawyer. The court discussed factors that it considered at arriving in this decision, such as a reluctance to impose potentially unlimited liability on corporate attorneys, and the impossibility of zealously representing both the corporation and the shareholders in a derivative suit. 7. Law Partners Because a law partnership is a partnership, the relationship involves fiduciary obligations. Each partner has an obligation of loyalty and of utmost good faith, fairness and honesty with respect to matters relating to the partnership. Bohatch v. Butler & Binion, 977 S.W.2d 543, 545 (Tex. 1998). Because a partnership is a voluntary association, there is no duty owed by a partner to remain partners with another. Id. 8. Law Firm Associates An associate in a law firm owes a fiduciary duty to the firm not to personally profit or realize any financial gain or advantage from referring a matter to another lawyer unless the agreement with the law firm states otherwise. Johnson v. Brewer & Pritchard, 73 S.W.3d 193, 197 (Tex. 2002). 9. Executive Rights Holder The holder of executive rights to a mineral estate owes a fiduciary duty to the non-executive interest holders. This duty requires that the holder of the executive right has a duty to acquire for the non-executive every benefit that he exacts for himself. Manges v. Guerra, 673 S.W.2d 180, 183 (Tex. 1984). But see In re Bass, 2002 WL 32126139 (Tex. 2002) (duty to develop a mineral estate does not arise from a fiduciary relationship). 10. Husband-Wife Spouses owe a fiduciary duty to one another in dealing with the community estate. See, e.g., Miller v. Miller, 2002 WL 31410965 (Tex.App. – Dallas 2002, no pet.); Southwest Texas Path. Assocs. v. Roosth, 27 S.W.2d 204, 208 (Tex.App. - San Antonio 2000, no pet.); Connell v. Connell, 889 S.W.2d 534, 541 (Tex.App. - San Antonio 1994, writ denied); TEXAS COMM. ON PATTERN JURY CHARGES, STATE BAR OF TEXAS, TEXAS PATTERN JURY CHARGES – BUSINESS, CONSUMER & EMPLOYMENT PJC 206.01, 206.02A and 206.03A (1998). See also, Schlueter v. Schlueter, 975 S.W.2d 584 (Tex. 1998) (Court inherently recognized spouses have a duty not to commit fraud on the community estate); Mazique v. Mazique, 742 S.W.2d 805, 808 (Tex. App.-Houston [1st Dist] 1987, no writ) (same); Spruill v. Spruill, 624 S.W.2d 694 (Tex. App. - El Paso 1981, writ dism'd) ("a trust relationship exists between husband and wife as to that community



















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property controlled by each spouse and a presumption of constructive fraud arises when a spouse unfairly disposes of the other spouse's one-half interest in community property."); In re Matter of McCurdy, 489 S.W.2d 712 (Tex. Civ. App. - Amarillo 1973, writ dism'd) (court's discussion implies that husband had a duty to not deplete community funds by giving a large portion of the community estate to the minor child, and depriving the wife a means of supporting herself). 11. Stockbrokers The relationship between a securities broker and a customer is that of principal and agent and therefore is a fiduciary relationship. Magnum Corp. v. Lehman Brothers Kuhn Loeb, Inc., 794 F.2d 198, 200 (5th Cir. 1986). The stockbroker has the duty to exert reasonable efforts to execute the customer's order promptly at the best obtainable price. The broker has the obligation to disclose to the customer information that is material and relevant to the order. Id. This is a duty with respect to a non-discretionary account. Other courts have limited this duty, however, and do not discuss the obligation of disclosure: they state that the broker's duty in a non-discretionary account is limited to executing the orders accepted from the customer. Tapia v. Chase Manhattan Bank, N.A., 149 F.3d 404 (5th Cir. 1998); Hand v. Dean Witter Reynolds, Inc., 889 S.W.2d 483, 492 n.5 (Tex.App. - Houston [14th Dist] 1994, writ denied). In a discretionary account, the duties of the broker naturally are expanded. 12. Guardian Ad Litem A guardian ad litem appointed in the context of a settlement hearing owes a fiduciary duty to the minor and can be held liable for breach of those duties. Byrd v. Woodruff, 891 S.W.2d 689, 705 (Tex.App. – Dallas 1994, writ dism'd by agr.). The guardian ad litem participates in the case not as an attorney but as the minor's personal representative. The guardian ad litem participates to the extent necessary to adequately protect the minor's interests, and as such, has "considerable latitude in determining what depositions, hearings, conferences, or other activities are necessary to that effort." Id. (internal citations omitted). Moreover, the guardian ad litem has a fiduciary duty to the minor to

properly and prudently manage and control the ward and her estate. . . [and to] maintain and preserve the estate's assets." Special confidences exist between the guardian ad litem and the minor. In addition, the guardian has the duty to evaluate the circumstances surrounding the situation and make a recommendation to the district court on the minor's behalf.

Id. at 706-707. The guardian ad litem must: (1) use the skill and prudence in conducting the minor's affairs as an ordinary and careful person would use in the conduct of his own affairs; (2) use diligence and discretion in representing the minor's interests; and (3) be loyal to the minor. Id. B. No Fiduciary Relationship Recognized As A

Matter of Law 1. Bank-Borrower There is no fiduciary relationship as a matter of law between a bank and a borrower. See Bank One, Texas, N.A. v. Stewart, 967 S.W.2d 419 (Tex.App. – Houston [14th Dist.] 1998, no pet.); Manufacturers Hanover Trust Co. v. Kingston Investors Corp., 819 S.W.2d 607 (Tex.App. - Houston [14th Dist] 1991, no writ); Greater Southwest Office Park, Ltd. v. Texas Commerce Bank, N.A. 786 S.W.2d. 386 (Tex.App. - Houston [1st Dist] 1990, writ denied). 2. Joint Operating Agreement A joint operating agreement does not create a fiduciary relationship as a matter of law. However, "such a relationship may exist if a special relationship exists between the parties in the form of a partnership, joint venture, or agency relationship." El Paso Production, 2003 WL 21357287 at *8. 3. Co-Shareholder in Closely Held Corporation A co-shareholder in a closely held corporation does not as a matter of law have a fiduciary relationship with his co-shareholder. See Pabich v. Kellar, 71 S.W.3d 500, 504 (Tex.App. - Fort Worth 2002, pet. denied). 4. Professor-Student In the normal educational setting, there is a no fiduciary relationship as a matter of law between teachers and students. Ho v. University of Texas at Arlington, 984 S.W.2d 672, 693 (Tex.App. - Amarillo 1998, pet. denied). 5. Partners-To-Be Individuals in a business transaction who anticipate becoming partners after the acquisition of designated property do not have a fiduciary relationship if the transaction does not take place. Thanksgiving Tower Partners v. Anrose Thanksgiving Partners, 64 F.2d 227, 231 (5th Cir. 1995). But see, Fitz-Gerald v. Hull, 237 S.W.2d 256, 265 (Tex. 1951) (fiduciary duty owed between persons engaged in a joint venture or about to assume such relationship).



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6. Bailor-Bailee "A bailment does not create a formal, fiduciary relationship between bailee and bailor." Prime Products Inc. v. S.S.I. Products, Inc., 97 S.W.3d 631 (Tex.App. – Houston [1st Dist] 2002, pet. denied). C. Informal Relationships - Other Special or

Confidential Relationships In contrast to formal relationships giving rise to a fiduciary duty as a matter of law, the law protects persons in certain confidential relationships where one person comes to trust in and rely upon another, whether the relationship is social, domestic or personal. See Abetter Trucking Co. v. Arizpe, 2003 WL 21513058 (Tex.App. - Houston [1st Dist.] 2003, no pet. h.); see also, Crim, 823 S.W.2d at 594; Thigpen, 363 S.W.2d at 253; Page Airways Inc. v. Associates Radio Services Co , 545 S.W.2d 184, 185 (Tex.Civ.App. - San Antonio 1976, writ ref 'd n.r.e.). Such a relationship has been recognized where one person places special confidence in another to the extent that they do not deal with one another on an equal basis, either because of superior knowledge or dominance on one side and weakness, dependence or justifiable trust on the other. Pope v. Darcey, 667 S.W.2d 270, 271 (Tex.App. - Houston [14th Dist.] 1984, writ ref'd n.r.e.). Such a relationship exists where one party is accustomed to being guided by the judgment or advice of the other or is justified in placing her confidence in the other based upon an objective belief that the other party will act in her best interest. UTAIC v. MacKeen & Bailey, Inc., 99 F.3d 645, 649 (5th Cir. 1996); Page, 545 S.W.2d at 192. Whether such a confidential relationship exists is a question of fact. When the evidence offered is no evidence of a confidential relationship, however, the issue is a matter of law. Crim, 823 S.W.2d at 594. Furthermore, such a fiduciary duty will not be lightly imposed because of its extraordinary obligations, including the requirement that the fiduciary put the interest of the beneficiary ahead of his own. Id.; Page, 545 S.W.2d at 192. Texas courts thus have imposed several requirements that must be satisfied before such a relationship is recognized. Certainly in business transactions, and perhaps in others, the relationship must have been established prior to the transaction in question. See Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997). In other words, "the special relationship of trust and confidence must exist prior to, and apart from, the agreement made the basis of the suit." Schwager v. Telecheck Services, Inc., 2002 WL 31995012 (Tex.App. - Houston [14 Dist.] 2002, no pet.); see also, Burleson State Bank v. Plunkett, 27 S.W.3d 605, 611 (Tex.App. - Waco 2000, pet. denied); Hamblet v. Coveney, 714 S.W.2d 126, 129 (Tex.App. - Houston [1st Dist.] 1986, writ ref'd n.r.e.); Consolidated Gas &

Equipment Co. v. Thompson, 405 S.W.2d 333, 336 (Tex. 1966). The courts recognize that a fiduciary duty is an extraordinary one and will not be imposed lightly. Subjective trust alone does not justify reposing confidence in another because something apart from the transaction itself is necessary to justify reposing such trust. Gillum v. Republic Health Corp., 778 S.W.2d 558, 567 (Tex.App. - Dallas 1989, no writ). The relationship must be long-standing. The courts require that an individual be justified in placing his trust in the sense demanded by a fiduciary relationship. Accordingly, it is required that the relationship giving rise to the fiduciary duty have continued for a such a period of time that one party is justified in relying on the other to act in his best interest. American Medical International Inc. v. Giurintano, 821 S.W.2d 331 (Tex.App. - Houston [14th Dist] 1991, no writ). Whether the relationship is sufficiently long-standing to support imposition of a constructive trust is considered by some courts to be a question of law. In re Monnig's Department Stores Inc. v. Axzad Oriental Tugs, Inc., 929 F.2d 197, 202 (5th Cir. 1991) (Texas law); Harris v. Sentry Title Co ., 715 F.2d 941, 948 (5th Cir. 1983) (Texas law), modified, 727 F.2d 1368, cert. denied, 469 U.S. 1037 (1984). Some relationships that the courts have found to involve fiducia ry duties under the circumstances of the parties' dealings with one another include: 1. Employer/Employee See Kinzbach, supra. 2. Insurer/Insured A fiduciary relationship does not exist between an insurer and insured as a matter of law. See Mauskar v. Hardgrove, 2003 WL 21403464 *6 (Tex.App. – Houston [14th Dist.] 2003, no pet. h.) ("[w]e know of no authority imposing a fiduciary relationship as a matter of law between an insured and his insurer or its agent."); Duddlesten, Inc. v. Highland Insurance Co., 2003 WL 1848637 *9 (Tex.App. - Houston [1st Dist.] 2003, pet. filed) ("[t]here is no general fiduciary duty between an insurer and its insured."). However, a fiduciary relationship may exist under certain circumstances. See id .; Herrin v. Medical Protective Co., 89 S.W.3d 301 (Tex.App. - Texarkana 2002, no pet.) (whether a confidential relationship giving rise to fiduciary duties exists is a question of fact for the jury); Arnold v. National County Mutual Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987) (creating a duty to deal fairly and in good faith with their insureds in the processing and payment of claims arising out of the parties' unequal bargaining power and the insurer's exclusive control over the evaluation, processing and denial of



























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claims). But see Garrison Contractors v. Liberty Mutual Ins. Co., 927 S.W.2d 296 (Tex.App. - El Paso 1996, no writ) (no general fiduciary relationship exists between an insurer and insured, so that an insurer's statements that it would "take care of" or "look out for" the insured are insufficient evidence to establish a relationship of trust). In Aranda v. Ins. Co. of North America, the Texas Supreme Court extended the duty to cover the relationship between a workers' compensation carrier and the employees. 748 S.W.2d 210, 212-13 (Tex. 1988). But see, Patterson v. Mobil Oil Corp., 2003 WL 21434783 (5th Cir. 2003) (limiting Aranda's context to whether an employee may bring a tort action against a workers' compensation insurer for breach of duty of good faith and fair dealing); Cole v. Hall, 864 S.W.2d 563 (Tex.App. – Dallas 1993, writ dism'd w.o.j.) (Workers Compensation Act does not create an Aranda relationship between an employer and employee). In the workers' compensation contract, the compensation carrier agrees to pay for the employee's injuries, and in return, the employee agrees to relinquish his common law rights against the employer. 748 S.W. 2d. at 212. The employee that sues the compensation carrier must establish that the insurance carrier "either denied or delayed payment of the claim; and . . . knew or should have known that it was reasonably clear that the claim was covered." State Farm Fire and Cas. Ins. Co. v. Vandiver, 970 S.W.2d 731, 738-39 (Tex.App. – Waco 1998, no pet.) (internal citations omitted). In Associated Indemnity Corporation v. CAT Contracting, the Supreme Court distinguished a suretyship from an insurer relationship. 964 S.W.2d. 276 (Tex. 1998). The court held that a surety does not owe a common law duty of good faith to its principal. Id. at 280-81. The Court also declined to impose an "informal fiduciary duty" on the business transaction because no special relationship of trust and confidence existed prior to, and apart from, the agreement made the basis of the suit. Id. at 288. 3. Mineral Estates and other Proprietary

Relationships In Green v. Gemini Exploration Co., the Court of Appeals, in commenting on the relationship between leasor and lessee, noted

Texas courts have specifically held that unless the lease document itself creates in law a trust, or unless a relationship of trust and confidence necessarily results from the lessor-lessee relationship, the standard of conduct of the lessee cannot be appropriately characterized as fiduciary and thus cannot give rise to a duty of good faith and fair dealing.

2003 WL 1986859 (Tex.App. – Austin 2003, pet. filed) (internal citations omitted). In MacDonald v. Follett, Follett, an attorney, had clients who owned property and who had been approached about executing oil leases. 180 S.W.2d 334 (Tex. 1944). Follett's clients had him deal directly with MacDonald for the execution of the leases. With the consent of his clients, Follett and MacDonald agreed to share a 1/32nd overriding royalty interest. The original lease was executed in 1934. It subsequently was renewed by MacDonald in 1937 and in 1938. Follett subsequently discovered that when MacDonald executed the renewal and the 1938 lease, all of the overriding royalty interest was taken in his name and Follett was excluded. Follett brought suit. The court concluded the evidence was adequate to establish a confidential relationship giving rise to a fiduciary duty under the circumstances.

In Northern Natural Gas Company v. Conoco, Inc., a dispute arose out of an agreement between Northern and CRA, Conoco's predecessor. 986 S.W.2d 603 (Tex. 1998). The agreement provided CRA would process "all of the gas that Northern purchases and receives, in accordance with Northern's Gas Purchase Contracts with producers, . . . in keeping with all the quantity and other provisions of the various Gas Purchase Contracts dedicated hereunder remain in effect, but not less than 20 years." Id. at 604-05. In 1992, Conoco sued Northern for breach of contract alleging that Northern's attempt to extricate itself from the gas purchase agreements violated the terms of the Agreement. The Supreme Court held that Northern was obligated only to deliver for processing all gas purchased under dedicated gas purchase agreements. Such obligation did not require it to perpetuate any contracts or deliver for processing gas, which was not purchased. According to the Court, Northern's promise to deliver for processing all the gas which it purchased is the surrender of the legal right to purchase such services elsewhere and constitutes sufficient consideration independent of an implied good faith obligation. The Court held that the UCC sections relied on by Conoco did not support imposing the good faith obligation; section 1-203 does not provide an independent cause of action and section 2-306 applies to outputs and requirements contracts for the sale of goods. The court did agree with Conoco that a common law obligation of good faith should be imposed which prevents a party from avoiding an output or requirements contract by ceasing its business operations. Thus the Court overruled Northern's appeal and affirmed the court of appeals decision to remand the case for a determination of whether Northern had a valid business reason for canceling its contracts.











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4. Owner - Contractor In Formosa Plastics Corp. USA v. Presidio Engineers and Contractors, Inc., a contractor tendered a bid for a construction project based on information provided by the owner, which was accepted by the owner. 960 S.W.2d 41 (Tex. 1998). The contractor was not able to complete the project within the time frame established in the bid, and incurred substantial additional costs. Contractor sued the Owner for breach of contract, breach of duty of good faith and fair dealing, fraudulent inducement of contract, and fraudulent performance of contract claims.

The Supreme Court held "tort damages are recoverable for a fraudulent inducement claim irrespective of whether the fraudulent representations are later subsumed in a contract or whether the plaintiff only suffers economic loss related to the subject matter of the contract." Id. at 47. Although the Court found sufficient evidence to support the allegations of misrepresentation, it found no legally sufficient evidence to support the entire amount of the damages awarded, and remanded for a new trial. Id. The Court also held under the circumstances of the case, the trial court should not have submitted a good faith and fair dealing question to the jury because there is no general duty of good faith and fair dealing in ordinary, arms-length commercial transactions. Id. at 51-52. 5. Other Circumstances in Which a Confidential

Relationship Has Been Recognized UTAIC v. MacKeen & Bailey, Inc., 99 F.3d 645 (5th Cir. 1996) (Texas law). The United Teachers Associates Insurance Company ("UTAIC"), owned by David Morgan and Hoyt Whidbee, hired MacKeen to provide actuarial services. Through the years, MacKeen would make recommendations to UTAIC to acquire blocks of business from other insurance companies that had redundant (overstated) reserves. UTAIC would acquire the blocks of business, restate the reserves and free up additional capital for use in the company. Over a seven year period, MacKeen served as the only actuary for UTAIC. UTAIC developed trust and confidence in MacKeen's abilities because his advice proved to be unerringly accurate. MacKeen subsequently, in a transaction with National Foundation Life ("National") in essence notified National of the overstatement of reserves, acquired stock in National's parent company, profited personally and prevented UTAIC from acquiring the block of business. The court concluded the evidence demonstrated a confidential relationship giving rise to a fiduciary duty which MacKeen breached. Dominguez v. Brackey Enterprises, Inc., 756 S.W.2d 788 (Tex.App. - El Paso 1998, pet. denied). William Brackey sought the services of Joe Dominguez as a certified public accountant. The two subsequently became friends. Brackey relied upon

Dominguez as a certified public accountant and he also began seeking his advice about investments. When Brackey's father died, he brought his mother to Dominguez for advice about how to best invest money for the benefit of his mother. He subsequently relied upon Dominguez's advice in obta ining businesses and entering into certain business transactions. Based upon this evidence, the court concluded there was adequate evidence of a confidential relationship giving rise to a fiduciary duty. Thames v. Johnson, 614 S.W.2d 612 (Tex.Civ.App. - Texarkana 1981, no writ). Thames and his first wife had two daughters. They executed a contract to acquire approximately 100 acres of land. Subsequently, Thames' first wife died intestate at which time each of the girls, who at that time were ten and seven, received an undivided 1/4 interest in the community estate of the father and mother. Thames subsequently remarried. He subsequently completed the payments on and obtained the 100 acre tract. Thames and his second wife subsequently sold 52 acres and conveyed none of the proceeds to the daughters. The daughters sued to recover their portion of the proceeds. The court concluded that there was evidence to support a confidential relationship and thus a fiduciary duty on the part of the father based upon the parent-child relationship and upon the girls' minority status at the time of their mother's death. Keel v. Hoggard, 590 S.W.2d 939 (Tex.Civ.App. - Waco 1979, no writ). Mrs. Hoggard, joined by her husband, sold to her nephew and his wife, the Keels, by general warranty deed and a promissory note, a tract of property. The note called for payments over a designated period of time. Mrs. Hoggard and her husband subsequently began having problems. Mr. Keel appealed to his aunt that he was worried that Mr. Hoggard would somehow take the property from him if anything happened to Mrs. Hoggard. Mrs. Hoggard accordingly executed a release of lien in favor of the Keels. She directed her nephew to take the release, put it in her safe deposit box, gave him the key to do so and instructed him not to utilize the release unless Mr. Hoggard somehow tried to take the property from them or until Keel completed paying for the property. Unbeknownst to her, the nephew filed the release as a matter of record that very day. Subsequently, the Keels stopped making payments and Mrs. Hoggard brought suit. The court concluded that the evidence was sufficient to demonstrate a confidential relationship giving rise to a fiduciary duty. Mrs. Hoggard Mr. Keel's aunt, the partie s were close in their relationship, Mrs. Hoggard often ate with the Keels at their home, she moved in with Mr. Keel's mother when she had family difficulties, the promissory note for the property bore no interest, and she relied upon Mr. Keel to carry out her instructions.








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Pope v. Darcey, 667 S.W.2d 270 (Tex.App. – Houston [14th Dist.] 1984, writ ref'd n.r.e.). Pope, an attorney, represented Jenny Bruno who died and was survived by, among others, Boekleman. Pope represented her estate until his employment subsequently was terminated. Pope then negotiated with Boekleman to purchase his interest in the Bruno estate. Boekleman subsequently executed a contract to do so. The representatives of the estate sought to set aside the conveyance. The court concluded that the evidence was sufficient to find a relationship of trust and confidence. It noted that Pope prepared income tax returns for Mrs. Bruno for many years prior to her death, represented her, represented her estate and thus was familiar with the contents of the estate. Further, the court noted that Boekleman was an elderly man apparently not in complete possession of his faculties. The court concluded there was dominance on the part of Pope and weakness on the part of Boekleman coupled with trust on the part of Boekleman.

Texas Bank & Trust Co. v. Moore, 595 S.W.2d 502 (Tex. 1980). At the age of 90, Mrs. Littell broke her hip, was hospitalized and then admitted to a convalescent center where she remained for the rest of her life. During this time while she was seriously incapacitated, she relied upon her nephew, A.E. Moore, to handle her financial affairs. Over a six year period, he wrote checks for her and subsequently convinced her to transfer all of her funds into a joint account between him and Mrs. Littell. He also took possession of all of her jewelry. After she died the bank brought suit seeking to recover the funds and the jewelry. The court concluded that the evidence was sufficient to demonstrate a confidential relationship giving rise to a fiduciary duty.

D. No Confidential Relationship 1. Franchisor-Franchisee In Crim Truck and Tractor Co. v. Navistar Int'l Transp. Corp., Crim was a franchisee of Navistar and its predecessor from 1943 until 1985. 823 S.W.2d 591 (Tex. 1992). In 1983, Navistar required all of its dealers to sign a new sales and service agreement. As a result of Crim's refusal to sign, Navistar terminated the franchise in April 1985. Claiming there was a confidential relationship, the Crims brought suit, among other causes of action, for breach of fiduciary duty. The court found there was no confidential relationship. The court observed that because one businessman trusts another and relies upon his promise to perform a contract does not give rise to a confidential relationship. The fact that one of the Crims testified that the relationship was a longstanding one of mutual trust and confidence, the court concluded, was mere evidence of subjective trust alone and did not transform the arms-length dealing into a fiduciary relationship. The fact that the franchise

agreement stated that it was ". . . a personal agreement, involving mutual confidence and trust, and it may not be assigned by either party without the written consent of the other party . . ." was no evidence of a relationship of mutual trust and confidence but was merely contractual language relating to non-assignability. 2. Hospital-Staff Physician In Gillum v. Republic Health Corp., Gillum brought suit against a hospital for, among other things, breach of a fiduciary duty arising from a confidential relationship. 778 S.W.2d 558 (Tex.App. – Dallas 1989, no writ). Gillum contended there had been a relationship of hospital and staff position between himself and the hospital or its predecessors for 26 years. He contended there was a mutual goal between himself and the hospital to work together as a team to improve the health of patients, and that each party relied on the other to fulfill its responsibilities and had confidence in the other's fulfillment of its obligations. The court noted that Gillum never suggested that he reposed special confidence in the hospital and was thereafter guided by the advice and judgment of the hospital staff. Further, the court noted that Gillum's evidence demonstrated an obligation on the part of the hospital to act in good faith toward the patients, not Gillum. Finally, the court noted that Gillum had no relationship with the corporate defendant until it had recently acquired the hospital. 3. Bank-Debtor In Greater Southwest Office Park, Ltd. v. Texas Commerce Bank, N.A., the borrower brought suit against the bank claiming it breached a fiduciary duty to him by bidding an unconscionably low price at a foreclosure sale. 786 S.W.2d 386 (Tex.App. – Houston [1st Dist.] 1990, writ denied). The court noted that there is no fiduciary duty as a matter of law between a borrower and a bank. With respect to the issue of a confidential relationship, the debtor produced evidence that he had a long business relationship with the bank, that he had made substantial borrowings from and had repaid the borrowings to the bank, that the bank solicited his business and that he trusted and relied upon the bank's representatives. The court concluded that this was mere evidence of subjective trust that was not adequate to transform arms-length dealings into a confidential relationship. 4. Business Dealings In Schlumberger Tech. Corp. v. Swanson, the Swansons approached Schlumberger's predecessor concerning a proposal to mine diamonds from the ocean floor in deep waters off the South African coast. 959 S.W.2d 171 (Tex. 1997). By letter agreement, the parties agreed the project would proceed in phases and









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the Swansons were to be paid consulting fees and subsequently would have a right to purchase a company to be formed in the event that the project was commercially viable. Schlumberger subsequently entered into a joint venture agreement with two other companies. Problems developed among the joint venture partners and Schlumberger began negotiating a buyout or withdrawal. Eventually, the Swansons sold their interest to Schlumberger. The Swansons later brought suit against Schlumberger alleging fraud and breach of duty of good faith and fair dealing. Id. at 173-175. In assessing the Swansons' claim of breach of good faith and fair dealing the Court commented,

while a fiduciary or confidential relationship may arise from the circumstances of a particular case, to impose such a relationship in a business transaction, the relationship must exist prior to, and apart from, the agreement made the basis of the suit.

Id. at 177 (internal citations omitted). Because the parties had no prior fiduciary relationship, the court found no evidence of a confidential relationship between Schlumberger and the Swansons. Id. 5. Prospective Employer-Employee In American Medical Instruments v. Giurintano, Giurintano, a hospital administrator in Louisiana, was approached by American Medical International, Inc. ("AMI") to become the executive administrator at a hospital in Laredo, Texas. 821 S.W.2d 331 (Tex.App. – Houston [14th Dist.] 1991, no writ). AMI pursued Giurintano but Giurintano became concerned because the hospital in Laredo had 26 administrators in thirteen years. AMI assured him that if he were to take the position that AMI was a large company and it would support him completely. Based upon representations by AMI, Giurintano made the decision to leave Louisiana and take the new position. When he arrived, however, he received a message from AMI telling him not to report to work because of the opposition to him by the doctors at the hospital. Giurintano then learned that he was unable to obtain his previous position and filed suit for, among other causes of action, constructive fraud based upon a confidential relationship giving rise to a fiduciary duty. The court noted that there was no relationship other than the transaction between the parties and that the relationship was merely a potential employer-employee relationship. The court noted that there was no evidence to suggest any relationship other than an arms-length deal concerning future employment.

6. Shareholder of Employer and Employee In Stephanz v. Laird, 846 S.W.2d 895 (Tex.App. - Houston [1st Dist.] 1993, writ denied), Laird was approached by Stephanz, Copeland and Short, who were the sole shareholders as well as officers and directors of Union Ridge, a corporation. Union Ridge desired to hire Laird to open a business development in Houston. After substantial negotiations, Laird went to work for Union Ridge, which terminated him 18 months later. Laird filed suit against Union Ridge, Stefanz and Copeland for, among other causes of action, breach of fiduciary duty arising out of confidential relationship. The court noted there was no prior relationship among the parties and that the transaction was an arms-length business transaction with sophisticated parties on both sides of the bargaining table. Laird argued that his friendship with Short should carry over to the relationship between himself and Stephanz and Copeland. The court refused to utilize his friendship with one individual to create a confidential relationship with other individuals with whom no previous relationship existed.

7. Supplier-Distributor In ARA Automotive Group v. Central Garage, Inc., 124 F.3d 720 (5th Cir. 1997), ARA Automotive Group ("ARA"), located in Grand Prairie, Texas, manufactured and distributed air conditioners and other auto parts. Central Garage, Inc. ("Central") was a distributor of ARA products in Florida from 1953 until 1989. The parties dealt with the written distributorship agreement that was terminable at will and negotiated a new marketing agreement annually to cover specifics such as prices, credit and other terms. Additionally, the parties entered into other agreements for Central to provide engineering services in the development of ARA after-market power locks and power windows. There additionally was a verbal agreement whereby ARA allowed Central to maintain an interest-free balance with ARA of up to $500,000. When a new president took over for ARA in 1988, he took steps to improve ARA's profit margin on sales in Florida by collecting the Central account or entering the retail market directly. ARA initiated a series of meetings with Central that were acrimonious and resulted in ARA terminating the relationship with Central. In early 1989, ARA opened retail markets in direct competition with Central and hired some of Central's employees. ARA filed suit for payment of the outstanding balance in Central's account. Central counterclaimed and alleged, among other causes of action, that ARA had breached a fiduciary duty arising from a confidential relationship. Id. at 722-23. The Fifth Circuit concluded there was no confidential relationship. It relied heavily on Crim, 823 S.W.2d 591, Lee v. Wall-Mart Stores, Inc., 943 F.2d 554 (5th Cir. 1991) and Floors Unlimited, Inc. v.








12

Fieldcrest Cannon, Inc., 55 F.3d 181 (5th Cir. 1995). The Fifth Circuit stated that no Texas case has found a fiduciary relationship in the context of a franchisor-franchisee, manufacturer-distributor relationship or other transactional setting involving experienced managers. The court noted that although there was a cordial business relationship, there was nothing to indicate that the two sophisticated businesses which entered into a number of contracts for their mutual benefit ever intended to put the other party's interest ahead of its own. The court also noted that there was no agreement to share profits or losses and that ARA did not exercise such control over Central so as to have disproportionate bargaining power. V. DURATION OF THE DUTIES It is critical to determine the duration of the fiduciary relationship in assessing the actions of a fiduciary. A fiduciary relationship may terminate on the basis of documents establishing the relationship or based upon the scope of the duty. In Maeberry, Gayle never knew his father and rarely saw his mother. 955 S.W.2d 875. He was reared by his grandparents, both of whom died by the time he was 15. When his grandfather died, he left property and insurance proceeds to Maeberry as trustee for the benefit of Gayle. Maeberry was Gayle's uncle and closest remaining relative and also was appointed as Gayle's guardian. Pursuant to the terms of the guardianship and the trust, Maeberry was to serve as trustee and guardian until Gayle turned 18. Approximately six months after Gayle's 18th birthday, Maeberry took Gayle to a lawyer's office and had him execute a deed transferring ownership of the grandfather's house to Maeberry for $10.00. Gayle testified that he thought he was executing documents terminating the guardianship and he did not find out the truth for another ten years. Gayle subsequently sued Maeberry. The trial court concluded that Maeberry breached his fiduciary duty as guardian of Gayle's estate. The court of appeals held that because Gayle was over 18 years of age at the time of the conveyance and because the guardianship had concluded, Maeberry no longer owed a fiduciary duty as Gayle's guardian. In M. R. Champion v. Mizell, Champion and Mizell as partners provided services to Northwestern Resources Company ("Northwestern"). 904 S.W.2d 617 (Tex. 1995). In January 1987, Northwestern barred Mizell from its premises but Champion continued to work for Northwestern. In December 1987, Champion negotiated a three year contract with Northwestern in the name of M. R. Champion, Inc. Mizell sued Champion but went to trial only on the issue of breach of fiduciary duty. The trial court found that the partnership terminated in January of 1987, prior to the breach of fiduciary duty asserted by Mizell.

The court concluded that after a partnership terminates the fiduciary duty is limited to matters relating to the winding up of partnership affairs. In that instance, a partner had no duty to offer his former partners or partnership a business opportunity which arose after the partnership terminated. The duration of the duty can also be determined by the nature of the activity undertaken on behalf of the beneficiary. For example, with a non-discretionary account, the agency relationship between the broker and the customer begins when the customer places the order and ends when the broker executes it. This is because the broker's duty is simply to fulfill the mechanical, ministerial requirements of purchase or sale of the designated security. Hand, 889 S.W.2d at 493. VI. THE SCOPE OF THE DUTY

As previously discussed, a fiduciary undertakes to perform certain tasks on behalf of his beneficiary. In order to determine the rights and obligations of the parties, however, it is not enough simply to state that there is a fiduciary duty inherent in a particular relationship. One must focus upon the nature of the activities undertaken by the fiduciary and the identity of the beneficiary before determinations of breach and responsibility can be made. A. General Obligations Because the fiduciary duty is the highest obligation recognized by law, the courts typically use fairly broad language in describing the duty owed by a fiduciary. See, e.g., Hartford, 808 S.W.2d at 688 (duties of loyalty and good faith, integrity of the strictest kind and fair and honest dealing); Sassen, 877 S.W.2d at 492 (the duty of good faith, fair dealing, honest performance and strict accountability); General Dynamics, 915 S.W.2d at 49 (agent must fulfill its duties with reasonable care, diligence, good faith and judgment); Kinzbach, 160 S.W.2d at 513 (fiduciary must deal openly and make full disclosure to the beneficiary). In certain relationships, however, courts have recognized limitations on the scope of the duty, such as the breadth of the obligation and the identity of the beneficiary to whom the duty is owed. B. Limitations on Scope With respect to partners, the courts recognize a broad duty owed by partners to one another but the scope of that duty is limited once the partnership is in the process of terminating. Thereafter, the duty is limited to matters relating to the winding up of the partnership affairs. Mizell, 904 S.W.2d at 618. Law firm associates are employees of the law firm and thus are in an agent-principal relationship. Although the agent-principal relationship typically commands broad duties owed by the agent to the












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principal, the only scope of the duty explicitly recognized by the Texas courts is that an associate owes a fiduciary duty to the employer not to personally profit or realize any financial gain or advantage from referring a matter to another law firm or lawyer. Johnson, 73 S.W.3d at 197. The duty of stockbrokers in a non-discretionary account are ministerial in nature and essentially involve simply the appropriate processing and execution of a purchase or sale order by the customer. Hand, 889 S.W.2d at 493. An executor has a broad fiduciary duty in dealing with funds entrusted to it and must act in scrupulous good faith, casting aside completely its personal interest and opportunities for gain resulting from the fiduciary relationship. Humane Society of Austin v. Austin National Bank , 531 S.W.2d 574, 580 (Tex. 1976). The court also recognized, however, that the executor's primary duty is to preserve the assets of the estate for distribution to the beneficiaries. Id. Accordingly, the actions of an executor with respect to investment of funds will be examined with emphasis upon rate of return balanced by the safety of the investment. Id. Although attorneys owe a fiduciary duty to their clients, it is crucial that the clients be properly identified and, in certain cases, limited. For instance, residual beneficiaries under a decedent's will could not pursue a claim against attorneys hired to represent the trustee named under the decedent's will. Thompson v. Vinson & Elkins, 859 S.W.2d 617 (Tex.App. - Houston [1st Dist.] 1993, writ denied). Similarly, a shareholder of a corporation cannot pursue a claim against the attorney hired to represent the corporation and majority shareholders. Gamboa v. Shaw, 956 S.W.2d 662 (Tex.App. - San Antonio 1997, no pet.). Corporate employees should also be precluded from asserting a fiduciary duty claim against a corporate attorney with respect to matters within the course and scope of the employee's employment, as there is no personal attorney-client relationship in such a situation. Joint venturers owe one another a fiduciary duty similar in scope to that of partners. Typically, however, a joint venture is formed for a designated transaction. The scope of the duty thus relates to the objective undertaken by the joint venture. For example, there was no breach of fiduciary duty by a joint venturer involved in a joint venture to develop a particular mineral lease who acquired a lease on property not involved in the joint venture. Rankin v. Naftalis, 557 S.W.2d 940 (Tex. 1977). VII. REMEDIES 1. Disgorgement The classic case involving disgorgement is Kinzbach Tool Co. v. Corbvett-Wallace Corp., 160 S.W.2d 509 (Tex. 1942). In Kinzbach, Kinzbach and

Corbett were engaged in the oil field tool business. Corbett contractual rights to a patented tool known as a whipstock. Corbett desired to sell the contract right to Kinzbach but Kinzbach and Corbett were unfriendly with one another. Corbett contacted Turner, an employee of Kinzbach and offered to pay him a commission if Kinzbach bought the whipstock contract rights. Corbett instructed Turner that he would take $20,000 but he was not to mention price to Kinzbach. Turner approached Kinzbach and Kinzbach directed Turner to make inquiries about acquiring the whipstock contract rights. Kinzbach subsequently disclosed to Turner that he would be willing to pay as much as $25,000. Turner did not disclose that he was to earn a commission on the sale to Kinzbach and he did not disclose that Corbett would be willing to take $20,000. Kinzbach subsequently purchased the contract rights for $25,000 and then learned of the commission to be paid to Turner. Kinzbach terminated Turner and subsequently sued Corbett and Turner. Opining that Turner breached his duty of full disclosure, the court concluded that disgorgement was appropriate. The court rejected defendants' argument that Kinzbach suffered no damages because it received full value for the price paid. The court concluded that if the fiduciary takes any gratuity or benefit or acquires any interest adverse to his principal without a full disclosure, it is a betrayal of his trust and a breach of fiduciary duty. Id. at 514. 2. Fee Forfeiture An agent who breaches his fiduciary duty to his principal is not entitled to be compensated for his services and fee forfeiture is a fundamental remedy. Douglas, 695 S.W.2d at 319. The mere failure of the agent to discharge his duty of disclosure and reveal to the beneficiary all aspects of the transaction is in and of itself a breach of the duty justifying fee forfeiture. Russell v. Truitt, 554 S.W.2d 948, 954 (Tex.Civ.App.--Fort Worth 1977, writ ref'd n.r.e.). The Supreme Court has recognized that the function of fee forfeiture is not to compensate the principal for a violation of the duty of loyalty but to protect relationships based on trust by discouraging agents' disloyalty. Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999). Fee forfeiture has been considered by the courts to be an appropriate remedy without regard to whether the breach of fiduciary duty resulted in actual damages to the beneficiary. Id. at 240. The Court determined that whether an attorney must forfeit his fee is determined by applying Section 49 of the proposed RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS as well as additional factors based on the specific factual circumstances presented by each case. Id. at 245. The determination of the amount of forfeiture is to be made by the court. Id. at 246.














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The Court also ruled that when forfeiture of an attorney's fees is claimed, the trial court must determine whether a violation of duty occurred, whether forfeiture is appropriate, and whether all or only part of the attorney's fee should be forfeited. While some of these issues would be expected to present fact issues for the jury, the Court ruled that "factors like the adequacy of other remedies and the public interest in protecting the integrity of the attorney-client relationship, as well as the weighing of all other relevant considerations, present legal policy issues well beyond the jury's province of judging credibility and resolving factual disputes." Id. The court also noted the importance in determining whether forfeiture of fees is needed to satisfy public interest in protecting the attorney-client relationship. 3. Constructive Trust

The equitable remedy of the imposition of a constructive trust is recognized by the courts for a violation of a fiduciary duty arising by virtue of a confidential relationship. Meadows v. Bierschwale, 516 S.W.2d 125 (Tex. 1974); Eglin v. Schober, 759 S.W.2d 950 (Tex.App. – Beaumont 1988, writ denied); Hamblet, 714 S.W.2d at 126. 4. Rescission The remedy of rescission is available to a beneficiary who demonstrates a breach of fiduciary duty by the agent in causing the principal to enter into a designated transaction. Miller v. Miller, 700 S.W.2d 941 (Tex.App. - Dallas 1985, writ ref d n.r.e.). 5. Damages The injured beneficiary is entitled to recover actual and exemplary damages against the fiduciary which are the result of the breach of fiduciary duty. Manges, 673 S.W.2d at 180; Horton v. Robinson, 776 S.W.2d 260 (Tex.App. - El Paso 1989, no writ); Douglas, 695 S.W.2d at 319; TEXAS COMM. ON PATTERN JURY CHARGES, STATE BAR OF TEXAS, TEXAS PATTERN JURY CHARGES – BUSINESS, CONSUMER & EMPLOYMENT PJC 110.18 (1998). However, a party must first be awarded actual damages before he can recover exemplary damages. See Balusik v. Kollatschny, 2002 WL 1822360 (Tex.App. – Houston [1st Dist. ] 2002, no pet.). Recovery for exemplary damages should be governed by Chapter 41 of the Texas Civil Practice and Remedies Code. TEX. CIV. PRAC. & REM . CODE ANN. § 41.002 (Vernon 1997). See Aboud v. Schlichtmeier, 6 S.W.2d 742 (Tex.App. - Corpus Christi 1999, pet. denied).

VIII. PLAINTIFF'S PROCEDURAL ADVANTAGES

A. The Mere Failure to Disclose is a Breach of Fiduciary Duty

The fiduciary has the obligation when dealing with his beneficiary to deal openly and to make full disclosure to his beneficiary. Kinzbach, 160 S.W.2d at 514. The mere failure of the fiduciary to disclose all aspects of the transaction to the beneficiary constitutes a breach of the fiduciary duty as a matter of law. Russell, 554 S.W.2d at 954.

B. Presumption of Unfairness In certain circumstances a presumption arises that the transaction was unfair which shifts the burden of persuasion to the fiduciary to demonstrate the transaction was fair and equitable to the beneficiary. See Archer v. Griffith, 390 S.W.2d 735, 739 (Tex. 1964); Miller, 700 S.W.2d at 946 (applying presumption of unfairness to transactions between a fiduciary and a party to whom he owes a duty of disclosure, thus imposing burden to establish fairness on the fiduciary). Should the fiduciary fail to offer evidence rebutting the presumption, it is not necessary for the benefic iary to have a breach of fiduciary duty question presented to the jury. Texas Bank , 595 S.W.2d at 509. Some of the factors to be considered by the court and the jury in determining whether the transaction was fair to the beneficiary are (1) whether there was full disclosure, (2) adequacy of consideration, (3) whether the beneficiary received independent advice and (4) whether the fiduciary benefited at the expense of the beneficiary. Estate of Townes v. Townes, 867 S.W.2d 414, 417 (Tex.App. - Houston [14th Dist.] 1993, writ denied). Because the fiduciary has the burden, a special question should be submitted to the jury placing the burden on the fiduciary. See TEXAS COMM. ON PATTERN JURY CHARGES, STATE BAR OF TEXAS, TEXAS PATTERN JURY CHARGES – BUSINESS, CONSUMER & EMPLOYMENT PJC 104.2 (1998).

C. Wording of Instructions The plaintiff-beneficiary has some advantages when it comes to the wording of instructions concerning the nature of the fiduciary duty. Consider the language in the Texas Pattern Jury Charge for breach of fiduciary duty: If a fiduciary relationship is found a party will be found to have breached his duty if: (1) the transactions were not fair and equitable; (2) the fiduciary did not make reasonable use of the beneficiary's confidence; (3) the fiduciary did not act in utmost good faith and exercise the most scrupulous honesty; (4) the fiduciary did not place the beneficiary's interests before his, use the advantage of his position to gain benefit at the expense of the beneficiary, and place himself in a


















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position where his self-interest might conflict with his obligations; and, (5) did not fairly and fully disclose all important information to the beneficiary concerning the transaction. Id. IX. CONCLUSION The law of fiduciary relationships has a persistent, dynamic role in the legal system's articulation and enforcement of societal duties and their breach. Canadian lawyer J. C. Shepherd eloquently expressed the human element central to this area of law in the introduction to his treatise on the subject:

As far back as I can remember, I have always believed that the ability of human beings to trust each other is the single most important element in interpersonal relationships. As individuals, we walk around with massive defense structures built up to protect the vulnerable parts of our personalities. The strength of any friendship or other personal tie we allow can be measured by the extent to which, in the company of that other individual, we are willing to put aside our defense mechanisms and trust the other person not to take advantage of our vulnerability. So, too, in business and in government the existence of trust is the cement which allows our institutions to operate. . . The law of fiduciaries is the legal system's attempt to recognize the more blatant abuses of the trust we place in each other. It is undoubtedly the most human area of the legal system, and as such the most undefinable.

The Law of Fiduciaries, J. C. Shepherd, LL.B. (Osgoode), LL.M. (Toronto), of the Ontario Bar (1981, The Carswell Co. Ltd., Toronto, Canada).


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TABLE OF AUTHORITIES Abetter Trucking Co. v. Arizpe, 2003 WL 21513058 (Tex.App. – Houston [1st Dist.] 2003, no pet. h.).............................................................7 Aboud v. Schlichtmeier, 6 S.W.2d 742 (Tex.App. - Corpus Christi 1999, pet. denied) ......................................................................... 14 Aiken v. Hancock , 2003 WL 21391670 (Tex.App. – San Antonio 2003, no pet. h.) ......................................................................5 American Medical International Inc. v. Giurintano, 821 S.W.2d 331 (Tex.App. - Houston [14th Dist] 1991, no writ) ................................................................7, 11 American Network Leasing Corp. v. Corporate Funding Houston, Inc., 2002 WL 31266230 (Tex.App. - Houston [14th Dist.] 2002, no pet.)...............................................................4 ARA Automotive Group v. Central Garage, Inc., 124 F.3d 720 (5th Cir. 1997) ....................................................................................................................... 11 Archer v. Griffith , 390 S.W.2d 735 (Tex. 1964) ....................................................................................................................5, 14 Aranda v. Ins. Co. of North America, 748 S.W.2d 210 (Tex. 1988) .........................................................................................................................8 Arnold v. National County Mutual Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987) .........................................................................................................................7 Associated Indemnity Corporation v. CAT Contracting, 964 S.W.2d 276 (Tex. 1998) .........................................................................................................................8 Avary v. Bank of America, N.A., 72 S.W.3d 779 (Tex.App. – Waco 2003, no pet.) ...........................................................................................4 Balusik v. Kollatschny, 2002 WL 1822360 (Tex.App. – Houston [1st Dist. ] 2002, no pet.) ............................................................... 14 Bank One, Texas, N.A. v. Stewart, 967 S.W.2d 419 (Tex.App. - Houston [14th Dist.] 1998, no pet.) ....................................................................6 In re Bass, 2002 WL 32126139 (Tex. 2002) ...................................................................................................................5 Bohatch v. Butler & Binion, 977 S.W.2d. 543 (Tex. 1998) .................................................................................................................... 4, 5 Bryant v. Lewis, 27 S.W.2d 604 (Tex. Civ. App. - Austin 1930, writ dism'd w.o.j.) ...................................................................5 Burleson State Bank v. Plunkett, 27 S.W.3d 605 (Tex.App. - Waco 2000, pet. denied) ......................................................................................7 Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999) ....................................................................................................................4, 13 Byrd v. Woodruff, 891 S.W.2d 689 (Tex.App. - Dallas 1994, writ dism'd by agr.).................................................................3, 5, 6














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Clifton v. Hopkins, 2003 WL 21027235 (Tex.App. - Waco 2003, no pet.) ....................................................................................4 Commission for Lawyer Discipline v. Barry Robert Benton, 980 S.W.2d 425 (Tex. 1998) ..................................................................................................................... 3, 5 Connell v. Connell, 889 S.W.2d 534 (Tex.App. - San Antonio 1994, writ denied) ..........................................................................5 Consolidated Gas & Equipment Co. v. Thompson, 405 S.W.2d 333 (Tex. 1966) .........................................................................................................................7 Cole v. Hall, 864 S.W.2d 563 (Tex.App. – Dallas 1993, writ dism'd w.o.j.) .........................................................................8 Cooper v. Lee, 12 S.W. 483 (1889) ......................................................................................................................................5 Crim Truck & Tractor Co. v. Navistar International Transportation Corp., 823 S.W.2d 591 (Tex. 1992) .......................................................................................................2, 3, 7, 10, 11 Dominguez v. Brackey Enterprises, Inc., 756 S.W.2d 788 (Tex.App. - El Paso 1998, pet. denied) .................................................................................9 Douglas v. Aztec Petroleum Corp., 695 S.W.2d at 319 (Tex.App. – Tyler 1991, no writ) ........................................................................... 2, 13, 14 Duddlesten, Inc. v. Highland Insurance Co., 2003 WL 1848637 (Tex.App. - Houston [1st Dist.] 2003, pet. filed) ................................................................7 Eglin v. Schober 759 S.W.2d 950 (Tex.App. – Beaumont 1988, writ denied) .......................................................................... 14 El Paso Production Co. v. Valence Operating Co., 2003 WL 21357287 (Tex. App. - Houston [1st Dist.] 2003, no pet. h.) ........................................................ 4, 6 Fitz-Gerald v. Hull, 237 S.W.2d 256 (Tex. 1951) .........................................................................................................................6 Floors Unlimited, Inc. v. Fieldcrest Cannon, Inc., 55 F.3d 181 (5th Cir. 1995) ........................................................................................................................ 12 Furr v. Hall, 553 S.W.2d 666 (Tex. Civ. App. - Amarillo 1977, writ ref'd n.r.e.)..................................................................4 Gamboa v. Shaw, 956 S.W.2d 662 (Tex.App. - San Antonio 1997, no pet.) ...........................................................................5, 13 Garrison Contractors v. Liberty Mutual Ins. Co., 927 S.W.2d 296 (Tex. App. - El Paso 1996, no writ) ......................................................................................8 General Dynamics v. Torres, 915 S.W.2d 45 (Tex.App. - El Paso 1995, writ denied) ..............................................................................4, 12 Gillum v. Republic Health Corp., 778 S.W.2d 558 (Tex.App. - Dallas 1989, no writ) ....................................................................................7, 10 Greater Southwest Office Park, Ltd. v. Texas Commerce Bank, N.A., 786 S.W.2d. 386 (Tex.App. - Houston [1st Dist] 1990, writ denied) ...........................................................6, 10

















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Green v. Gemini Exploration Co , 2003 WL 9986859 (Tex.App. – Austin 2003, pet. filed) .................................................................................8 Hamblet v. Coveney, 714 S.W.2d 126 (Tex.App. - Houston [1st Dist.] 198, writ ref'd n.r.e.)........................................................7, 14 Hand v. Dean Witter Reynolds, Inc., 889 S.W.2d 483 (Tex.App. - Houston [14th Dist] 1994, writ denied) ..........................................................6, 12 Harris v. Sentry Title Co., 715 F.2d 941 (5th Cir. 1983), modified, 727 F.2d 1368, cert. denied................................................................7 Hartford Cas. Ins. v. Walker County Agency, Inc., 808 S.W.2d 681 (Tex. App. - Corpus Christi 1991, no writ)...................................................................2, 3, 12 Herrin v. Medical Protective Co., 89 S.W.3d 301 (Tex.App. - Texarkana 2002, no pet.) .....................................................................................7 Ho v. University of Texas at Arlington,

984 S.W.2d 672 (Tex.App. - Amarillo 1998, pet. denied) ...........................................................................6 Horton v. Robinson,

776 S.W.2d 260 (Tex.App. - El Paso 1989, no writ) ................................................................................ 14 Hughes v. St. David's Support Corp.,

944 S.W.2d 423 (Tex. App. - Austin 1997, writ denied) .............................................................................3 Humane Society of Austin v. Austin National Bank ,

531 S.W.2d 574 (Tex. 1975), cert. denied, 425 U.S. 976 (1976) ............................................................4, 13 International Bankers Life Ins. Co. v. Holloway,

368 S.W.2d 567 (Tex. 1963) ................................................................................................................ 2, 4 Johnson v. Brewer & Pritchard, 73 S.W.3d 193 (Tex. 2002) ......................................................................................................................5, 13 Johnson v. Peckham,

120 S.W.2d 786 (Tex. Civ. App. - Fort Worth 1936, no writ) ................................................................. 1, 3 Keel v. Hoggard, 590 S.W.2d 939 (Tex.Civ.App. - Waco 1979, no writ) ...................................................................................9 Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509 (Tex. 1942) .....................................................................................................1, 3, 12, 13, 14 Lang v. Lee, 777 S.W.2d 158 (Tex. App. - Dallas 1989, no writ) ........................................................................................3 Langford v. Shamburger, 417 S.W.2d 438 (Tex. Civ. App.-Fort Worth 1967, writ ref'd n.r.e.) ................................................................4 Lee v. Wall-Mart Stores, Inc., 943 F.2d 554 (5th Cir. 1991) ....................................................................................................................... 11 Ludlow v. DeBerry, 959 S.W.2d 265 (Tex. App. - Houston [14th Dist] 1997) ................................................................................4 M.R. Champion, Inc. v. Mizell, 904 S.W.2d 617 (Tex. 1995) ....................................................................................................................3, 12























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MacDonald v. Follett, 180 S.W.2d 334 (Tex. 1944) .........................................................................................................................8 Maeberry v. Gayle , 955 S.W.2d 875 (Tex. App. - Corpus Christi 1997, n.w.h.) ........................................................................4, 12 Magnum Corp. v. Lehman Brothers Kuhn Loeb, Inc., 794 F.2d 198 (5th Cir. 1986) .........................................................................................................................6 Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984) ....................................................................................................................5, 14 Manufacturers Hanover Trust Co. v. Kingston Investors Corp., 819 S.W.2d 607 (Tex.App. - Houston [14th Dist] 1991, no writ) .....................................................................6 Maryland Ins. Co. v. Head Industrial Coatings & Servs., Inc., 906 S.W.2d 218 (Tex. App.-Texarkana 1995), rev'd on ..................................................................................3 In re Matter of McCurdy, 489 S.W.2d 712 (Tex. Civ. App. - Amarillo 1973, writ dism'd) .......................................................................6 Mauskar v. Hardgrove, 2003 WL 21403464 (Tex.App. - Houston [14th Dist.] 2003, no pet. h.) ...........................................................7 Mazique v. Mazique, 742 S.W.2d 805 (Tex. App.-Houston [1st Dist] 1987, no writ) ........................................................................5 Meadows v. Bierschwale , 516 S.W.2d 125 (Tex. 1974) ....................................................................................................................... 14 Miller v. Miller, 700 S.W.2d 941 (Tex.App. - Dallas 1985, writ ref d n.r.e.) ........................................................................... 14 Miller v. Miller, 2002 WL 31410965 (Tex.App. – Dallas 2002, no pet.) ...................................................................................5 In re Monnig's Department Stores Inc. v. Axzad Oriental Tugs, Inc., 929 F.2d 197 (5th Cir. 1991) .........................................................................................................................7 Northern Natural Gas Company v. Conoco, Inc., 986 S.W.2d 603 (Tex. 1998) .........................................................................................................................8 Pabich v. Kellar, 71 S.W.3d 500 (Tex.App. – Fort Worth 2002, pet. denied) .............................................................................6 Page Airways Inc. v. Associates Radio Services Co, 545 S.W.2d 184 (Tex.Civ.App. - San Antonio 1976, writ ref 'd n.r.e.) .............................................................7 Patterson v. Mobil Oil Corp., 2003 WL 21434783 (5th Cir. 2003) ..............................................................................................................8 Pinnacle Data Services, Inc. v. Gillen, 104 S.W.3d 188 (Tex.App. - Texarkana 2003, no pet.) ...................................................................................4 Pope v. Darcey, 667 S.W.2d 270 (Tex.App. - Houston [14th Dist.] 1984, writ ref'd n.r.e.)....................................................7, 10 Prime Products Inc. v. S.S.I. Products, Inc., 97 S.W.3d 631 (Tex.App. – Houston [1st Dist.] 2002, pet. denied) ..................................................................7



















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Prostok v. Browning, 2003 WL 1589535 (Tex.App. - Dallas 2003, no pet.) .....................................................................................4 Rankin v. Naftalis, 557 S.W.2d 940 (Tex. 1977) ....................................................................................................................... 13 Republic Bankers Life Ins. Co. v. Wood, 792 S.W.2d 768 (Tex. App. - Fort Worth 1990, writ denied) ...........................................................................3 Russell v. Truitt, 554 S.W.2d 948 (Tex.Civ.App.--Fort Worth 1977, writ ref'd n.r.e.)..........................................................13, 14 Sassen v. Tangle Grove Townhouse Condominium Assoc., 877 S.W.2d 489 (Tex.App. - Texarkana 1994, writ denied) .............................................................................3 Schlueter v. Schlueter, 975 S.W.2d 584 (Tex. 1998) .........................................................................................................................5 Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997) .........................................................................................................................7 Schwager v. Telecheck Services, Inc., 2002 WL 31995012 (Tex.App. – El Paso 2003, no pet.) .................................................................................7 Slay v. Burnett Trust, 187 S.W.2d 377 (Tex. 1945) ..................................................................................................................... 1, 4 Snyder v. Cowell, 2002 WL 1849145 (Tex.App. – Houston [14th Dist.] 2002, no pet.)................................................................4 Southwest Livestock & Trucking Co. v. Dooley, 884 S.W.2d 805 (Tex. App. - San Antonio 1994, writ denied) .........................................................................4 Southwest Texas Path. Assocs. v. Roosth, 27 S.W.2d 204 (Tex.App. - San Antonio 2000, no pet.) ..................................................................................5 Spruill v. Spruill, 624 S.W.2d 694 (Tex. App. - El Paso 1981, writ dism'd) ................................................................................5 State Farm Fire and Cas. Ins. Co. v. Vandiver, 970 S.W.2d 731 (Tex.App. – Waco 1998, no pet.)..........................................................................................8 Stephanz v. Laird, 846 S.W.2d 895 (Tex.App. - Houston [1st Dist.] 1993, writ denied) .............................................................. 11 Tapia v. Chase Manhattan Bank, N.A., 149 F.3d 404 (5th Cir. 1998) .........................................................................................................................6 Texas Bank & Trust Co. v. Moore, 595 S.W.2d 502 ( Tex. 1980 ) ................................................................................................................10, 14 Thames v. Johnson, 614 S.W.2d 612 (Tex.Civ.App. - Texarkana 1981, no writ) ............................................................................9 Thanksgiving Tower Partners v. Anrose Thanksgiving Partners, 64 F.2d 227 (5th Cir. 1995) ..........................................................................................................................6 Thigpen v. Locke, 363 S.W.2d 247 (Tex. 1963) ..................................................................................................................1, 3, 7



















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Thompson v. Vinson & Elkins, 859 S.W.2d 617 (Tex. App. - Houston [1st Dist.] 1993, writ denied) ..........................................................4, 13 Estate of Townes v. Townes, 867 S.W.2d 414 (Tex.App. - Houston [14th Dist.] 1993, writ denied) ............................................................ 14 UTAIC v. MacKeen & Bailey, Inc., 99 F.3d 645 (5th Cir. 1996) ...................................................................................................................... 7, 9 Vogt v. Warnock , 2003 WL 21197043 (Tex.App. – El Paso 2003, no pet.) .................................................................................3 Willis v. Maverick , 760 S.W.2d 642 (Tex. 1988) .........................................................................................................................3

MISCELLANEOUS TEX. BUS. CORP. ACT ANN. art. 2.35-1.................................................................................................................4 TEX. CIV. PRAC. & REM . CODE ANN. § 41.002 (Vernon 1997) ............................................................................ 14 TEXAS COMM. ON PATTERN JURY CHARGES, STATE BAR OF TEXAS, TEXAS PATTERN JURY CHARGES – BUSINESS, CONSUMER & EMPLOYMENT PJC 206.01, 206.02A and 206.03A (1998) ............................................................................................................5 TEXAS COMM. ON PATTERN JURY CHARGES, STATE BAR OF TEXAS, TEXAS PATTERN JURY CHARGES – BUSINESS, CONSUMER & EMPLOYMENT PJC 110.18 (1998)............................................................................................................................................. 14 TEXAS COMM. ON PATTERN JURY CHARGES, STATE BAR OF TEXAS, TEXAS PATTERN JURY CHARGES – BUSINESS, CONSUMER & EMPLOYMENT PJC 104.2 (1998) .............................................................................................................................................. 14 RESTATEMENT (SECOND) OF TORTS §15 (1965) ....................................................................................................1 John F. Bergner, Post-Mortem Elections and Funding Issues-The Fiduciary's Role and Potential Liability, State Bar of Texas Advanced Estate Planning Strategies Workshop (April 1997) .......................................................................................................................................4 William T. Barker and Mary L. Mills, What's in a Word: Van Noy v. State Farm and "Fiduciary," 3 INS. LITIGATION REPORTER 173 (2001) ............................................................................2 J. C. Shepherd, LL.B. (Osgoode), LL.M. (Toronto), of the Ontario Bar, The Law of Fiduciaries, (1981, The Carswell Co. Ltd., Toronto, Canada) ................................................................................................. 15





FIDUCIARY DUTY – LIABILITY OF THE FIDUCIARY · Fiduciary Duty – Liability of the Fiduciary...

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