14th Court of Appeals Affirms Victory for Texas Limited Partner Fiduciary Duty Claims
The 14th Court of Appeals (Houston, Texas) today affirmed Fryar Law Firm's $1.7 million judgment in favor of a Texas limited partner for breach of fiduciary duties. The judgment included more than $1 million in punitive damages.
The case was brought by Houston business woman, Misty Cauthen, a limited partner in Texas limited partnership, against David Bruce, the majority limited partner and officer controlling the corporate general partner of the limited partnership. The limited partnership held a tract of land in Kingwood, Texas, that Cauthen and Bruce had purchased for the use of a separate business that they jointly owned. The business rented the real estate from the partnership for an amount equal to the mortgage and property tax payments. Ultimately, the two business partners had a falling out and decided to part ways. Ms. Cauthen's interest in the business was purchased pursuant to a buy-sell agreement, but the parties were unable to reach an agreement on the limited partnership. Although the rental arrangement continued, Bruce caused the general partner to begin sending "capital calls" for Cauthen's percentage of the mortgage payments, which she was unable to pay. When Cauthen's "debt" reached $50,000, Bruce "foreclosed" on her interest for the amount of the debt--thus acquiring her entire limited partnership interest, which was worth more than $500,000, for $50,000 in fictious debt. The trial court granted a summary judgment on Cauthen's claim for wrongful foreclosure under the Uniform Commercial Code and later granted a directed verdict on breach of the partnership agreement. Eric Fryar tried the case in April 2015 on breach of fiduciary duties claims, and the jury awarded $520,000 in actual damages and $1.2 million in punitive damages.
Fiduciary Duties in a Limited Partnership
The case raised important issues of fiduciary duties against an officer of a corporate general partner of a limited partnership to the limited partners, which we have written about in this blog. The court of appeals affirmed the award of damages and punitive damages.
Attorney's Fees for Breach of Fiduciary Duties
In addition to actual and punitive damages, the trial court's judgment also awarded almost $500,000 in attorney's fees on the breach of fiduciary duties claim. Generally, attorney's fees are not recoverable for breach of fiduciary duties, which is a tort. However, the trial court applied the narrow exception that permits recovery of attorney's fees under Section 38.001 of the Texas Civil Practice and Remedies Code for torts that are premised on the interpretation of a written contract, which we have discussed in another post on this blog. The court of appeals originally issued its opinion in Bruce v. Cauthen in October 2016, reversing only on the award of attorney's fees and remanding to the trial court. The court's reasoning was that the award had been based on the "inextricably intertwined" doctrine that the Texas Supreme Court overruled in Tony Gullo Motors v. Chapa. Fryar Law Firm filed a motion for rehearing pointing out that the award had not been based on that doctrine but on the application of Section 38.001 to a breach of fiduciary duties claim that required interpretation of the limited partnership agreement. The court withdrew its opinion and substituted a new one changing the dispostion to affirmed as modified, but continued to disallow the award of attorney's fees. The court did not discuss the legal basis of trial court's award, but simply refused to apply that law without comment. That portion of the decision is a disappointment for small business owners, who frequently have breach of fiduciary duties claims that turn on the interpretation of written agreements such as partnership agreements, bylaws, and shareholder agreements. Nevertheless, the court's failure to address the legal theory means that this new appellate opinion will not serve as authority denying or limiting the law permitting recovery of attorney's fees under Section 38.001 for breach of fiduciary duties involving contractual interpretation issues, but merely holds that the plaintiff must segregate recoverable and non-recoverable fees under the statute.