David F. Johnson presented to the Tarrant County Probate Bar Association on May 4, 2023, on the topic of “Trust Issues in Divorce Proceedings.” This program discussed some of the many trust issues that arise in divorce proceedings, including trust basics, voiding trusts due to fraud/constructive fraud/breach of fiduciary duty, characterization of trust assets
In Dunn v. Chappelle (In re Alta Mesa Res., Inc.), a bankruptcy trustee sued the officers and directors of a limited partnership and related entities for operating a drilling program despite having lower than expected results. No. 19-35133, 2022 Bankr. LEXIS 2928 (U.S. Bankr. Ct. October 13, 2022). The defendants filed a motion to dismiss. The court granted it in part and denied it in part. The court first analyzed the partnership agreement and held that officers of the partnership’s parent corporation did not owe fiduciary duties to the partnership:
In In re Estate of Poe, shortly before his death, Dick, who was the sole director of Poe Management, Inc. (PMI), authorized the corporation to issue new shares that he bought for $3.2 million. No. 20-0178, 2022 Tex. LEXIS 544 (Tex. June 17, 2022). This made Dick the majority owner of PMI, which was the general partner of several Poe-owned businesses. As a result of the purchase, Dick’s death vested control of the family enterprise in the two co-executors of Dick’s estate rather than Dick’s son, Richard, who was PMI’s only other shareholder.
Continue Reading Texas Supreme Court Holds That A Director Of A Corporation Cannot Hold An Informal Fiduciary Duty To A Stockowner
In Hotze v. In Mgmt., LLC, family members sued each other over control of a family business. No. 14-18-00995-CV, 2021 Tex. App. LEXIS 5821 (Tex. App.—Houston [14th Dist.] July 22, 2021, no pet. history). Three of the brothers ended up with greatly increased control of the company after debt the company owed to a partnership formed by the three brothers was partially converted into company stock. Id. Two other brothers and other associated parties filed two lawsuits, bringing both individual and derivative claims, which were consolidated for trial. “A key issue in the case was whether the promissory note between Troika and CECO authorized a partial conversion of debt for stock.” Id. The trial court concluded that it did, and instructed the jury to that effect. The two brothers appealed.
Continue Reading Court Holds That Promissory Note Did Not Allow Partial Conversion To Equity
David F. Johnson presented his paper “Business Divorce: Minority Shareholder Rights In Texas” to the State Bar of Texas’s Business Disputes Course on September 2-3, 2021. This presentation addressed shareholder oppression claims in Texas, minority shareholder rights (such as contractual rights, stock rights, disclosure rights, distribution rights, employment rights, and receivership rights), fiduciary duties in
The owners of a corporation may enter into shareholder agreements. In Richie, the Texas Supreme Court stated: “Shareholders of closely-held corporations may address and resolve such difficulties by entering into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements.” Ritchie v. Rupe, 443 S.W.3d 856, 871 (Tex. 2014).
Continue Reading Shareholder Agreements Are Very Powerful In Texas: Parties Should Carefully Review Those Agreements Before Obtaining Stock In A Corporation
In Trinh v. Cent. River Healthcare Group, a brother sued his sister over the management of a PLLC. No. 03-19-00393-CV, 2021 Tex. App. LEXIS 4542 (Tex. App.—Austin June 9, 2021, no pet. history). The brother claimed that the sister promised to pay him a salary, and she did not. The court of appeals affirmed
In Villareal v. Saenz, two co-owners of a limited liability company sued each other regarding conduct surrounding a business divorce. 5-20-CV-00571-OLG-RBF, 2021 U.S. Dist. LEXIS 94183 (W.D. Tex. May 18, 2021). After the parties asserted allegations against each other, they entered into a release agreement. The parties agreed that “Saenz would assign his entire interest to ZroBlack LLC to Villarreal.” After the release, Saenz refused to return certain property to the company. Villarreal sued for breach of fiduciary duty and other claims.
Saenz filed a motion to dismiss, and the district court magistrate judge recommended that the claims that arose before the release be dismissed, but recommended that the claims that arose after the release continue. Regarding Saenz’s fiduciary duties after the release agreement was executed, the court stated:
Continue Reading Business Divorce: Exiting Member of LLC May Still Owe Fiduciary Duties
In Adam v. Marcos, an attorney and his client agreed to a joint venture/partnership. No. 14-18-00450-CV, 2021 Tex. App. LEXIS 2060 (Tex. App.—Houston March 18, 2021, no pet. history). The attorney sued the client for breaching the agreement. The trial court ruled for the client on the attorney’s breach of the partnership agreement claim and a breach of fiduciary duty claim. The court of appeals affirmed. The court of appeals first held that the partnership agreement was presumptively invalid because the attorney owed fiduciary duties to the client when it was entered into:
Contracts between attorneys and their clients negotiated during the existence of the attorney-client relationship are closely scrutinized. Because the relationship is fiduciary in nature, there is a presumption of unfairness or invalidity attaching to such contracts. The burden is on the attorney to prove the fairness and reasonableness of the agreement. Moreover, as a fiduciary, Marcos had the burden to establish that Adam was informed of all material facts relating to the agreement. Additional important factors in determining the fairness of a transaction involving a fiduciary include whether the consideration was adequate and whether the beneficiary obtained independent advice.
Id. The court of appeals held that the jury’s finding of breach of duty by the attorney supported invalidating the partnership agreement: “Because the jury found that Marcos failed to fulfill his fiduciary duties to Adam in regard to the alleged partnership agreement, and the evidence supports that finding, the presumption that the contract was invalid applies. Thus, the trial court did not err in holding the agreement was invalid and unenforceable.” Id.
Continue Reading Business Divorce: Partnership Agreement Was Invalid Where It Was Entered Into Between A Fiduciary And Principal And Was Otherwise Unfair And The Principal Did Not Owe Fiduciary Duties As A Partner Where There Was No Enforceable Partnership
In TSA-Tex. Surgical Assocs., L.L.P. v. Vargas, one partner sued his other partners for various claims regarding the defendants attempt to squeeze the plaintiff out of the partnership. No. 14-19-00135-CV, 2021 Tex. App. LEXIS 1330 (Tex. App.—Houston [14th Dist.] February 25, 2021, no pet. history). The defendants filed a motion to dismiss under the Texas Citizens Participation Act (TCPA), and the trial court denied the motion. The defendants appealed.
The TCPA was enacted “to encourage and safeguard the constitutional rights of persons to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the rights of a person to file meritorious lawsuits for demonstrable injury.” Id. (citing Tex. Civ. Prac. & Rem. Code § 27.002). It does so by authorizing a party to file a motion to dismiss a legal action that “is based on, relates to, or is in response to a party’s exercise of the right of free speech, right to petition, or right of association.” Id.
The court of appeals affirmed the denial of the motion to dismiss under the TCPA. The defendants argued that the plaintiff’s claims were based on, related to, or in response to the exercise of free speech because the claims purportedly involve communications regarding the provision of medical services. The court of appeals disagreed:
Continue Reading Business Divorce: Court Affirms Denial Of SLAPP Motion Regarding Partnership Divorce Suit