Texas Civil Practice and Remedies Code 38.001 for Breach of Fiduciary Duty

texas civil practice and remedies code 38.001 - recovering attorney's fees in texas for breach of fiduciary duties

Can a Plaintiff Recover Attorney’s Fees Under Texas Civil Practice and Remedies Code 38.001 for a Tort Cause of Action

Texas is one of the more liberal jurisdictions in allowing the recovery of attorney’s fees in breach of contract actions, but generally attorney’s fees are not recoverable in tort actions. The typical claim for wrongdoing among owners of closely-held companies sounds in tort—usually breach of fiduciary duties or conversion.

Section 38.001 of the Texas Civil Practice and Remedies Code provides: “A person may recover reasonable attorney’s fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for: (8) an oral or written contract.” Texas courts have developed a significant exception to the general rule that permits recovery of attorney’s fees on a tort claim that is so intertwined with the contract which underlies the cause of action such that the tort action is “intrinsically founded on the interpretation of the contract.”[1]

[1] See High Plains Wire Line Servs., Inc. v. Hysell Wire Line Servs., Inc., 802 S.W.2d 406, 408 (Tex. App.—Amarillo 1991, no writ).

However, in 2006, the Texas Supreme Court in Tony Gullo Motors I, L.P. v. Chapa,[2] overruled a line of cases that had permitted the recovery of attorney’s fees incurred on tort claims where the facts of the tort claim were so “inextricably intertwined” with the facts of a contract claim, as to make segregation difficult. The doctrine was not based on the application of Section 38.001 to the tort claim but on the difficulty of segregation. Chapa overruled the “inextricably intertwined” doctrine and required segregation. However, in dicta, the Chapa Court made the sweeping statement that “For fraud, she could recover economic damages, mental anguish, and exemplary damages, but not attorney’s fees.”[3]

[2] Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299 (Tex. 2006).

[3] Id. at 304.

In 2015, HCWD, PLLC obtained a judgment for a Texas limited partner against the general partner in excess of $2 million for breach of fiduciary duties. The trial court had awarded about $500,000 in attorney’s fees as part of the judgment based on the application of Texas Civil Practice and Remedies Code 38.001 to a tort claim under the “intrinsically founded on the interpretation of the contract” exception to the general rule. In that case, two partners owned a valuable piece of real estate through a limited partnership, which had been purchased for the benefit of a closely-held corporation, which the two partners also owned together. The defendant was able to drive the plaintiff out of the corporation and obtain her shares under a buy-sell agreement, but no such agreement existed for the limited partnership. The defendant then caused the corporation to stop making rent payments to the limited partnership and issued a series of cash calls, for the mortgage payments on the land, which the plaintiff was unable to pay. When the unpaid cash calls reached $50,000, the defendant “foreclosed” on the plaintiff’s limited partnership interest, thus acquiring the plaintiff’s portion of the equity in the land, which exceeded $500,000, for ten cents on the dollar. Both the cash calls and the foreclosure violated the terms of the partnership agreement, and the court granted the plaintiff a directed verdict on the breach of contract claim. The case went to the jury on a breach of fiduciary duties theory based on the same conduct, and the jury awarded actual damages, punitive damages, and attorney’s fees. In Bruce v. Cauthen,[4] the 14th Court of Appeals affirmed the judgment, with the exception of the attorney’s fees. The Court reversed the award of attorney’s fees based on the dicta in the Chapa decision. That issue is currently pending before the Court on rehearing.

[4] No. 14-15-00693-CV, October 25, 2016, in the Fourteenth Court of Appeals.

This Article examines the existing Texas jurisprudence providing for the award of attorney’s fees under Texas Civil Practice and Remedies Code 38.001 in tort cases based on the “intrinsically founded on the interpretation of the contract” exception. That doctrine is particularly significant in shareholder oppression-type cases and disputes among partners because co-ownership of a business is always founded initially on a contract.[5] Quite often the permissibility of an action by a majority shareholder or general partner depends upon the interpretation of a contract. If the agreement of the parties does not permit the challenged conduct, then the defendant has not only breached the contract but breached fiduciary duties.

[5] See Sandor Petroleum Corp. v. Williams, 321 S.W.2d at 618 (“The original stock certificates held by Williams constituted a contract between him and the corporation. Williams had a vested property right in the value of his stock.”).

The American Rule

In Bruce v. Cauthen, the Court noted: “In Texas a party may not recover attorney’s fees from the opposing party unless an award of attorney’s fees is authorized by statute or contract. This rule is so ubiquitous that it has come to be known as the ‘American Rule.’”[6] The Court characterized as the “corollary” to that rule that a “party may not recover its attorney’s fees in an action based on tort.”[7] This is a slight over-statement. The full quote of the Texas Supreme Court in Turner v. Turner is: “The general rule of law in this state is that, unless provided for by statute or by contract between the parties, attorney’s fees incurred by a party to litigation are not recoverable against his adversary ... in an action in tort.”[8] However, what is generally true in the law is not necessarily always true. Similarly, the Chapa opinion did state: “For fraud, she could recover economic damages, mental anguish, and exemplary damages, but not attorney’s fees.”[9] That statement is also the general rule, but as the authority cited by the Supreme Court for that proposition makes clear, there is no affirmative prohibition in the law against awarding attorney’s fees for fraud or any other tort. Rather, the law is that such fees are recoverable only if provided for by contract or statute.[10] Therefore, a correct statement of the law would not be that attorney’s fees are not recoverable for tort claims, but that in most cases no statute exists to provide for such recovery.

[6] Bruce v. Cauthen at 28 (citing Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 310-11 (Tex. 2006)).

[7] Id.

[8] Turner v. Turner, 385 S.W.2d 230, 233 (Tex. 1964) (emphasis added).

[9] Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d at 304.

[10] See id. at 304 n. 5 (citing New Amsterdam Cas. Co. v. Texas Indus., 414 S.W.2d 914, 915 (Tex.1967) (stating that “attorney’s fees are not recoverable either in an action in tort or a suit upon a contract unless provided by statute or by contract between the parties”)).

Chapa’s statement regarding the general rule that attorney’s fees are not recoverable for fraud is not the holding of the case and is dicta. As a general proposition, the Court’s statement is quite accurate, but only as a general statement. Several statutes do provide for recovery of attorneys’ fees for fraud. If fraudulent misrepresentations occur in a transaction involving real estate or stock in a corporation, Tex. Bus. & Comm. Code § 27.01 provides for the recovery of attorneys’ fees, as does Tex. Civ. Stat. 581-33 for fraud in the purchase or sale of securities, as does Tex. Bus. Comm Code § 17.50(d) for fraud in consumer transactions, as does Tex. Bus. Orgs. Code § 21.561(b)(1) for fraud claims asserted in a derivative action. It is not the legal duty or cause of action that determines the availability of attorneys’ fees; it is the presence or absence of an applicable statute.

Similarly, “Breach of fiduciary is a tort claim for which attorney’s fees generally may not be recovered.”[11] That is the general rule, but it is not always true. For example, DeNucci v. Matthews states: “A prevailing party on a breach of fiduciary duty claim generally may not recover attorney’s fees against an adversary to the claim.”[12] However, that court then immediately affirms the award of attorney’s fees for breach of fiduciary duty in that case because the breach of fiduciary duty claim was brought in a derivative action[13] for which fees are provided by statute.[14] 

[11] Bruce v. Cauthen at 28.

[12] DeNucci v. Matthews, 463 S.W.3d 200, 209 (Tex. App.—Austin 2015, no pet.).

[13] See id. (“Here, however, DeNucci—pursuant to a statutory provision—was able to recover from ESS the $75,000 in attorney's fees he incurred prosecuting the breach of fiduciary duty claim derivatively on behalf of ESS.”).

[14] Tex. Bus. Orgs. Code § 21.561(b)(1).

The Chapa Decision

In Chapa, the issue of whether attorney’s fees were recoverable by statute on the fraud claims asserted was not before the Court. All parties apparently agreed, and the Court assumed without discussion, that attorneys’ fees were not recoverable based on the fraud claims asserted. Rather, the issue was whether non-recoverable fees could be awarded because the underlying facts and proof for the non-recoverable claims were “inextricably intertwined” with the underlying facts and proof for the recoverable claims, under the exception to the rule requiring segregation articulated in Stewart Title Guaranty Co. v. Sterling.[15]

[15] 822 S.W.2d 1, 11-12 (Tex. 1991) (“when the causes of action involved in the suit are dependent upon the same set of facts or circumstances and thus are ‘interwined to the point of being inseparable,’ the party suing for attorney's fees may recover the entire amount covering all claims.”).

The Chapa Court explained that the “inextricably intertwined” exception had been inconsistently applied and unworkable in practice.[16] The Court observed: “To the extent Sterling suggested that a common set of underlying facts necessarily made all claims arising therefrom ‘inseparable’ and all legal fees recoverable, it went too far.”[17] The Court then held: “Accordingly, we reaffirm the rule that if any attorney’s fees relate solely to a claim for which such fees are unrecoverable, a claimant must segregate recoverable from unrecoverable fees. Intertwined facts do not make tort fees recoverable; it is only when discrete legal services advance both a recoverable and unrecoverable claim that they are so intertwined that they need not be segregated. We modify Sterling to that extent.”[18]

[16] 212 S.W.3d at 312 (“But the courts of appeals have been flooded with claims that recoverable and unrecoverable fees are inextricably intertwined”).

[17] Id. at 313.

[18] Id. at 313–14.

The critical point is that the issue in Chapa was not for which claims are fees recoverable by statute, but how to approach the segregation of attorney’s fees in cases where there are a mixture of “recoverable and non-recoverable” claims. Chapa commented that this exception “threatened to swallow the rule.”[19] However, the “rule” that the Supreme Court was addressing was the rule that attorney’s fees must be segregated for “non-recoverable” claims, and the “exception” that the Court overturned was that segregation was unnecessary when the facts and evidence for the “non-recoverable” claims was “inextricably intertwined” with “recoverable” claims. The Chapa Court’s analysis did not address the line of authority that expands the reach of Texas Civil Practice and Remedies Code 38.001 to encompass a narrow class of tort claims.

 

[19] Id. at 311.

Texas Civil Practice and Remedies Code 38.001 applied to non-breach-of-contract claims

Construction of Section 38.001

The Texas Supreme Court has made clear that CPRC “section 38.001 is one of several statutes modifying the American Rule.”[20] That statute provides, in relevant part: “A person may recover reasonable attorney's fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for: ... (8) an oral or written contract.”[21] “Section 38.001(8) does not narrow its scope to claims for breach of contract, nor differentiate between different types of contracts: it merely applies to claims on written or oral contract.”[22] The statute “lists general types of claims, as opposed to specific causes of action.”[23] The statute applies to any claim, regardless of the source of the duty or the type of cause of action, if the claim is “based on an oral or written contract.”[24]

[20] 1/2 Price Checks Cashed v. United Auto. Ins. Co., 344 S.W.3d 378, 382 (Tex. 2011).

[21] Tex. Civ. Prac. & Rem. Code § 38.001(8).

[22] 1/2 Price Checks Cashed v. United Auto. Ins. Co., 344 S.W.3d at 388.

[23] Id. at 388 n. 27.

[24] Med. City Dallas, Ltd. v. Carlisle Corp., 251 S.W.3d 55, 57 (Tex. 2008).

Moreover, the statute specifically provides: “This chapter shall be liberally construed to promote its underlying purposes.”[25] That provision has been taken seriously by Texas courts in determining the applicability of § 38.001 to different causes of action.[26] It is important to note also that the predecessor statute to Section 38.001 originally provided for neither attorney’s fees for contract nor a liberal construction. The legislature specifically added the “suits founded on oral or written contracts” provision in 1977 and again amended the statute two years later to provide for a liberal construction.[27] “Since then, in line with the Legislature’s instruction, we have construed the statute liberally.”[28] “Although Chapter 38 does not explain its ‘underlying purposes,’ there are at least two reasons for allowing a claimant to recover attorney's fees on a contract suit. First, a wronged claimant may recover the full amount of her damages—including costs in having to litigate the suit—from the wrongdoer, so that she is made whole. And, second, a party with a small but valid contract claim is more likely to hazard bringing suit since the claimant may recover attorney's fees if successful, even if the potential amount of attorney's fees is greater than the amount of the contract.” [29] In keeping with the remedial purpose of the statute and the mandate for liberal construction, the Supreme Court has repeatedly extended the reach of §38.001(8) to claims “based on ‘based on an oral or written contract,’ but which were not based on contract law or a breach of contract cause of action.[30]

 

[25] Tex. Civ. Prac. & Rem. Code § 38.005.

[26] See 1/2 Price Checks Cashed, 344 S.W.3d at 382 (“the legislature has required that chapter 38 ‘be liberally construed to promote its underlying purposes’”); Med. City, 251 S.W.3d at 59 (noting that courts are to construe section 38.001 liberally to promote its underlying purposes); Bloom v. Bloom, 767 S.W.2d 463, 471 (Tex. App.—San Antonio 1989, writ denied); Shook v. Walden, 304 S.W.3d 910, 919 (Tex. App.—Austin 2010, no pet.), disapproved of on other grounds by In re Corral-Lerma, 451 S.W.3d 385 (Tex. 2014); Preload Tech., Inc. v. A.B. & J. Constr. Co., 696 F.2d 1080, 1094–95 (5th Cir.1983) (applying section 38.001(8) to promissory estoppel claim given liberal construction afforded under that section).

[27] 1/2 Price Checks, 344 S.W.3d 378, 383 nn.9-10.

[28] Id. at 383 n. 10 (citing Med. City, 251 S.W.3d at 59; Jones v. Kelley, 614 S.W.2d 95, 100 (Tex. 1981)).

[29] 1/2 Price Checks 344 S.W.3d at 383 (citing Shook v. Walden, 304 S.W.3d 910, 922 (Tex. App.—Austin 2010, no pet.)). See also Goodyear Tire & Rubber Co. v. Portilla, 836 S.W.2d 664, 672 (Tex. App.—Corpus Christi 1992) (“The purpose of awarding attorney's fees and taxing it against the losing defendant is to make the successful plaintiff whole.”), aff'd, 879 S.W.2d 47 (Tex. 1994).

[30] See, e.g., 1/2 Price Checks Cashed, 344 S.W.3d at 380–81, 385–86 (holding that § 38.001(8) permits an award of attorney’s fees on a statutory claim under §3.414 of the UCC for a dishonored check, even though the UCC does not provide for attorney’s fees); Med. City Dallas, Ltd., 251 S.W.3d at 63 (holding that § 38.001(8) permits an award of attorney’s fees on a statutory claim for breach of express warranty under § 2.714 of the UCC, even though the UCC does not provide for attorney’s fees). Following the Supreme Court’s liberal construction of § 38.001(8), the First Court of Appeals has held that attorney’s fees are recoverable on a statutory claim for breach of the implied warranty of merchantability under § 2.314 of the UCC, even though the UCC makes no provision for an award of fees. Howard Indus., Inc. v. Crown Cork & Seal Co., LLC, 403 S.W.3d 347, 353 (Tex. App.—Houston [1st Dist.] 2013, no pet.). The Fourteenth Court has approved that holding. See City Direct Motor Cars, Inc. v. Expo Motorcars, L.L.C., 2014 WL 2553484, at *7 (Tex. App.—Houston [14th Dist.] 2014, pet. denied).

Application of § 38.001(8) to a narrow class of tort claims

As the Supreme Court has noted, “A contract may create the state of things which furnishes the occasion of a tort.”[31] In such instances, the “acts of a party may breach duties in tort or contract or simultaneously in both.”[32] Given the inherent overlap between contractual and tort duties, it is hardly surprising that courts would occasionally recognize that a plaintiff’s specific claim, although based on duties and causes of action arising out of tort law, is really “based on an oral or written contract” and apply Section 38.001(8) in exactly the same way as the Supreme Court has repeatedly done with claims based on statutory, rather than contract law, duties.

[31] Montgomery Ward & C. v. Sharrenbeck, 204 S.W.2d 508, 511 (Tex. 1947).

[32] Anthony Equip. Corp. v. Irwin Steel Erectors, Inc., 115 S.W.3d 191, 208 (Tex. App.—Dallas 2003, pet. dism’d).

Probably the leading case to articulate the standard for applying § 38.001(8) to a cause of action arising in tort is High Plains Wire Line Services, Inc. v. Hysell Wire Line Serv., Inc.[33] Section 38.001(8) applies to a tort claim when the claim “is intrinsically founded in the interpretation of a contract.”[34] Applying Texas law, the Fifth Circuit has stated Section 38.001(8) applies to non-breach-of-contract claim when the “claim was sufficiently founded on contract.”[35]

 

[33] 802 S.W.2d 406 (Tex. App.—Amarillo 1991, no writ).

[34] Id. at 408.

[35] Kucel v. Walter E. Heller & Co., 813 F.2d 67, 73 (5th Cir. 1987).

Conversion claims under Texas Civil Practice and Remedies Code 38.001

Generally, attorney’s fees cannot be awarded for a conversion cause of action.[36] However, there is an exception when the conversion claim is so intertwined with the contract which underlies the cause of action such that the action is “intrinsically founded on the interpretation of the contract.”[37] In several conversion cases, courts have allowed recovery of attorney’s fees under Section 38.001 of the Texas Civil Practice and Remedies Code, notwithstanding the fact that the liability is based on a tort.[38]

[36] See Broesche v. Jacobson, 218 S.W.3d 267, 277 (Tex. App.—Houston [14th Dist.] 2007, pet. denied).

[37] See High Plains Wire Line Servs., Inc. v. Hysell Wire Line Servs., Inc., 802 S.W.2d 406, 408 (Tex. App.—Amarillo 1991, no writ).

[38] R.J. Suarez Enters., Inc. v. PNYX L.P., 380 S.W.3d at 249; Exxon Corp. v. Bell, 695 S.W.2d 788, 791 (Tex. App.—Texarkana 1985, no writ); High Plains Wire Line Servs., Inc., 802 S.W.2d at 408. See also NRC, Inc. v. Pickhardt, 667 S.W.2d 292, 294 (Tex. App.—Texarkana 1984, writ ref’d n.r.e.) (“Pickardt’s suit for rescission and special damages was a suit founded upon a written contract . . . .”); Berlow v. Sheraton Dallas Corp., 629 S.W.2d 818, 823 (Tex. App.—Dallas 1982, writ ref’d n.r.e.).

The application of § 38.001 to tort claims is most well developed in the context of the tort claim for conversion. To establish a claim for conversion, a plaintiff must prove that (1) the plaintiff owned or had possession of the property or entitlement to possession; (2) the defendant unlawfully and without authorization assumed and exercised dominion or control over the property to the exclusion of, or inconsistent with, the plaintiff’s rights as an owner; (3) the plaintiff demanded return of the property; (4) the defendant refused to return the property; and (5) the plaintiff was injured by the conversion.[39] The issues of whether the plaintiff owns or has a right to the property in question and whether the defendant’s possession is unlawful or without authority frequently turn on the interpretation of a contract. At least eight Texas courts of appeals, including this Court, have recognized the application of §38.001(8) to conversion claims that require the interpretation of a contract.

 

[39] Arthur W. Tifford, PA v. Tandem Energy Corp., 562 F.3d 699, 705 (5th Cir. 2009); Lawyers Title Co. v. J.G. Cooper Dev., Inc., 424 S.W.3d 713, 718 (Tex. App.—Dallas 2014, pet denied).

See discussion of the tort of stock conversion and remedies for stock conversion.

High Plains Wire Line Services, Inc. v. Hysell Wire Line Serv., Inc. was such a case. In High Plains, the plaintiff sold his business to the defendant and then sued the defendant for converting certain property that was not included in the sale. The Amarillo Court of Appeals held that the plaintiff “founded his action on an alleged breach of a ‘Sale and Purchase Agreement,’”[40] that the plaintiff had the burden to prove his ownership interest in the converted property, and that “the dispositive issues of the allegation requires an interpretation of the above cited contractual clauses.”[41] The court held that Section 38.001 applied and permitted the award of attorney’s fees on the conversion claim because “since the resolution of Hysell’s claims depended upon the interpretation of the sales contract, his cause of action was sufficiently grounded on contract to support an award of attorney’s fees,” but the court ultimately reversed the award because the plaintiff failed to comply with the notice provisions of Section 38.002.[42]

[40] 802 S.W.2d at 408.

[41] Id. at 409.

[42] Id. at 410.

In McDonald v. Clay, First Court of Appeals cited Highland Plains and held that attorney’s fees are recoverable for conversion if “the action is intrinsically founded in the interpretation of a contract,” but denied the fees because the jury found that there was no contract between the parties.[43] In Cao v. Glob. Motorcars of Houston, LLC, the First Court stated, “As a general rule, attorney's fees are not recoverable in a conversion case, however an exception exists and such fees may be recoverable when a conversion case is founded on a contract,” but held that no contract had been proven.[44] The same court also recognized the exception in F.D.I.C. v. Golden Imports, Inc., but did not apply it in that case because “resolution of Golden Imports’ conversion claim depends primarily on the analysis of MBank's right of offset, not on contract interpretation.[45]

[43] McDonald v. Clay, 1994 WL 379060, at *5 (Tex. App.—Houston [1st Dist.] 1994, writ denied).

[44] Cao v. Glob. Motorcars of Houston, LLC, 2014 WL 1338309, at *6 (Tex. App.—Houston [1st Dist.] 2014, no pet.).

[45] F.D.I.C. v. Golden Imports, Inc., 859 S.W.2d 635, 647 (Tex. App.—Houston [1st Dist.] 1993, no writ).

 

In Exxon Corp. v. Bell, the Texarkana Court of Appeals held “but in conversion cases, where the circumstances of the case reveal that the action is founded upon a contract, attorney’s fees may be recovered. Since the resolution of Rosborough's conversion claim depended entirely on the contractual interpretation, his cause of action was sufficiently grounded on contract to support the trial court's award of attorney’s fees.”[46] In R.J. Suarez Enterprises Inc. v. PNYX L.P.,[47] the Dallas Court of Appeals held: “Generally, attorney’s fees cannot be awarded for a conversion cause of action. However, if there is sufficient evidence that the conversion claim is so intertwined with the contract which underlies the cause of action such that the action is ‘intrinsically founded on the interpretation of the contract,’ a party may be entitled to recover attorney’s fees.”[48] In Mustang Trading, Inc. v. Agharanya, the same court reviewed a conversion case in which the defendant lost property that it had contracted with the plaintiff to repair, and the court held: “In conversion cases, where the circumstances of the case reveal that the action is founded upon a contract, attorney’s fees may be recovered. We conclude that the circumstances of this case reveal that the conversion action is sufficiently founded upon a contract.”[49]

[46] Exxon Corp. v. Bell, 695 S.W.2d 788, 791 (Tex. App.—Texarkana 1985, no writ). See also Braly v. Wade, 1999 WL 356064, at *4 n.5 (Tex. App.—Texarkana 1999, no pet.) (“This Court has held that in limited situations, where the circumstances of the case show that the action is founded upon a contract or upon the interpretation of a contract, then the cause of action is sufficiently grounded on contract to support a statutory award of attorney’s fees.”).

[47] R.J. Suarez Enterprises Inc. v. PNYX L.P., 380 S.W.3d 238 (Tex. App.—Dallas 2012, no pet.).

[48] Id. at 249 (but holding “even if the conversion claim were ‘intrinsically founded on the interpretation of the contract,’ we conclude the trial court did not err when it denied Suarez Enterprises request for attorney’s fees because it was not awarded any damages.”).

[49] Mustang Trading, Inc. v. Agharanya, 1992 WL 106034, at *1 (Tex. App.—Dallas May 1992, no writ).

The Austin Court of Appeals recognized the rule that attorney’s fees are recoverable for conversion “if their claim was intrinsically founded in the interpretation of a contract” in K-Bar Services, Inc. v. English[50] and in Terragora Investments, L.P. v. Niteclubs Enterprises, Inc.[51] The Beaumont Court of Appeals has held: “Attorney’s fees may be recovered in conversion cases where the circumstances of the case reveal that the action is founded on a written contract.”[52] In Wallace v. Harper, the San Antonio Court of Appeals held: “As a general rule, attorney’s fees are not recoverable in an action for conversion. However, where the resolution of the conversion claim is intrinsically founded or entirely dependent on the interpretation of a contract, attorney's fees are recoverable. One of the primary issues at trial was the nature of the arrangement between Wallace and Harper. ... We hold that Harper’s conversion claim in the instant suit was sufficiently grounded on contract to support an award of attorney’s fees.”[53]

[50] K-Bar Services, Inc. v. English, 2006 WL 903735, at *7 (Tex. App.—Austin 2006, no pet.).

[51] Terragora Investments, L.P. v. Niteclubs Enterprises, Inc., 2009 WL 483338, at *9 (Tex. App.—Austin 2009, pet. denied).

[52] Hull State Bank v. Jones, 1994 WL 97009, at *5 (Tex. App.—Beaumont 1994, writ dism’d). See also Greater Houston Radiation Oncology, P.A. v. Sadler Clinic Ass’n, P.A., 384 S.W.3d 875, 897 (Tex. App.—Beaumont 2012, pet. denied) (holding fees not recoverable for conversion because “the resolution of the conversion claim did not depend on an interpretation of the Billing Agreement, or any other written agreement”).

[53] Wallace v. Harper, 1998 WL 201723, at *5 (Tex. App.—San Antonio 1998, no pet.).

Finally, the Fourteenth Court of Appeals has held that attorney’s fees are recoverable under Texas Civil Practice and Remedies Code Section 38.001(8) for a tort claim of conversion where the claim was founded on a contract.[54] In Abraham & Co., Inc. v. Smith,[55] the Court held: “Generally, attorney’s fees are not recoverable in a tort cause of action. However, when a conversion claim is significantly intertwined with or dependent upon the interpretation of a contract between the parties, an award of fees may be appropriate.” The Court cited as authoritative on this point High Plains Wire Line Servs., Inc. v. Hysell Wire Line Serv., Inc., Exxon Corp. v. Bell, and F.D.I.C. v. Golden Imports, Inc. The Court held: “In the present case, we find the conversion claim was significantly interwoven with the contract claim and indeed was dependent on the court’s interpretation of the contract. … Therefore, in order to resolve the conversion liability issue, the court had to decide which contract provisions were still in effect, particularly as to whether Abraham was required to return any of the rugs, all of the rugs, or just two of the rugs. The court also had to reference the contract in calculating the proper amount of damages, given the $7,000 guarantee, the value placed on the rugs in the contract, and the fact that Abraham partially performed by selling one of the rugs and remitting $2,000 of the proceeds to Smith. In short, we find Smith's conversion claim fits within the limited Bell/High Plains exception.”[56]

[54] See First Nat. Bank of Missouri City v. Gittelman, 788 S.W.2d 165, 171 (Tex. App.—Houston [14th Dist.] 1990, writ denied) (“The trial court found that the bank converted Gittelman’s car. This implies that the bank had no authority to sell it. The same facts also support a finding of breach of contract.”).

[55] Abraham & Co., Inc. v. Smith, 2004 WL 210570, at *4 (Tex. App.—Houston [14th Dist.] 2004, no pet.).

[56] Id.

Breach of fiduciary duty claims under Texas Civil Practice and Remedies Code 38.001

Formal fiduciary relationships are usually formed as the result of an agreement. All partnerships exist because the partners have entered into a partnership agreement. When the breach of fiduciary duties claim depends upon the interpretation provisions of the partnership agreement, courts apply the same rule for breach of fiduciary duty tort claims as they do for conversion tort claims.

In Atterbury v. Brison, one partner sued for an accounting following his wrongful exclusion from the partnership. The dispute centered around the interpretation of a purchase option in the partnership agreement, which the defendant unsuccessfully attempted to exercise.[57] The plaintiff was awarded the value of his partnership interest and attorney’s fees under Section 38.001. On appeal, the court affirmed the award of attorney’s fees: “This action is founded on an oral or written partnership agreement and therefore recovery for attorney’s fees and prejudgment interest is proper. See Tex. Civ. Prac. & Rem. Code Ann. § 38.001(8) (Vernon 1986) (authorizing recovery of attorney’s fees in a successful suit under a contract).”[58] The plaintiff’s claim was solely based on the statutory remedy of an accounting.[59] There was no breach of contract claim. Justice Cornelius wrote a separate concurring opinion to emphasize that no breach of contract claim existed,[60] a conclusion that the majority opinion accepted.[61] In Johnson v. Graze Out Cattle Co., a partner was awarded attorney’s fees under Section 38.001 in a partnership dissolution action, even though there was no recovery for breach of contract.[62] In Long v. Lopez, one partner sued the other for reimbursement of expenses incurred in winding up the partnership. There was no claim for breach of contract, yet the Fort Worth Court of Appeals held that the plaintiff was entitled to an award of attorney’s fees under § 38.001.[63]

[57] 871 S.W.2d 824, 826 (Tex. App.—Texarkana 1994, writ denied).

[58] Id. at 828.

[59] Id. (“The Texas Uniform Partnership Act provides that any partner has a right to a formal accounting as to partnership affairs if he or she is wrongfully excluded by the co-partner. Tex.Rev.Civ.Stat.Ann. art. 6132b, § 22(a)”).

[60] See id. (Cornelius, J., concurring).

[61] See id. at 827.

[62] Johnson v. Graze Out Cattle Co., 2012 WL 2923329, at *6 (Tex. App.—Amarillo 2012, no pet.).

[63] Long v. Lopez, 115 S.W.3d 221, 228 (Tex. App.—Fort Worth 2003, no pet.).

In Sewing v. Bowman, the estate of a partner sued for statutory redemption of his partnership interest under TRPA art. 6132b–7.01(b)(1).[64] The plaintiff also sued for breach of contract, but the jury found no breach.[65] The defendant appealed the award of attorney’s fees arguing that the plaintiff should be limited to the attorney’s fees provided in the partnership statute, which are limited to situations in which “the court finds that a party acted arbitrarily, vexatiously, or not in good faith.”[66] The First Court of Appeal held that fees were recoverable under § 38.001(8): “Although Bowman did not recover on his breach-of-contract claim, his partnership-redemption claim was still based on an oral agreement. Accordingly, we hold that the trial court did not abuse its discretion in awarding him attorney’s fees.”[67]

[64] Sewing v. Bowman, 371 S.W.3d 321, 324 (Tex. App.—Houston [1st Dist.] 2012, pet. dism’d).

[65] Id. at 328.

[66] Id. at 338-39 (quoting TRPA art. 6132b–7.01(l)).

[67] Id. at 339.

In Citizens Bank & Trust Co. of Baytown v. Ertel,[68] the plaintiff sued the executor for breach of fiduciary and statutory duties in the mishandling of an estate. There was no breach of contract claim; rather, the plaintiff recovered damages for breach of fiduciary duties, exemplary damages, and attorney’s fees.[69] The First Court affirmed the award of attorney’s fees: “Ertel’s claim against Citizens was not for breach of contract, but for breach of fiduciary duty, self-dealing, and negligence. Ertel ultimately prevailed on his breach of fiduciary duty claim. Breach of fiduciary duty is a tort action. Torts are not among the claims for which attorney's fees are statutorily authorized. Tex.Civ.Prac. & Rem.Code Ann. § 38.001. Nevertheless, when a party recovers damages for a tort arising from a breach of contract, the court may award attorney’s fees.”[70] The Fourteenth Court cited Citizens Bank & Trust Co. of Baytown v. Ertel with approval in 2014, but declined to award attorney’s fees because there was no contract between the parties.[71]

[68] 2001 WL 26141, at *1 (Tex. App.—Houston [1st Dist.] 2001, pet. denied).

[69] Id. at *2.

[70] Id. at *12.

[71] See King Fuels, Inc. v. Hashim, 14-13-00010-CV, 2014 WL 2446613, at *7 & n.6 (Tex. App.—Houston [14th Dist.] May 29, 2014, no pet.)

In McGuire v. Kelley, the court of appeals affirmed Plaintiff’s attorney’s fees award under section 38.001 even though she elected to recover damages for breach of fiduciary duty, rather than her breach of contract claim.[72] In that case, Kelley sued McGuire, her attorney, for breach of fiduciary duty and breach of contract. The trial court entered a judgment on the verdict for breach of fiduciary duty, awarding mental anguish damages, exemplary damages, and attorney’s fees.[73] McGuire appealed the fee award, contending, “since the judgment was based on Kelley’s breach of fiduciary duty claim and not on breach of contract or fraud, attorney’s fees are inappropriate.”[74] The appellate court disagreed, indicating that Section 38.001 allowed for recovery in breach of contract claims. The court determined that because McGuire’s actions constituted both a breach of fiduciary duty and a breach of contract, Kelley was “entitled to recover attorney’s fees in her breach of contract suit even though she did not recover damages on a breach of contract theory, but on the breach of fiduciary duty claim.”[75] In Rogers v. RAB Investments, the court of appeals upheld an attorney’s fee award along with punitive damages because the partner’s conduct, constituted both a breach of the limited partnership agreement and breach of fiduciary duty.[76] 

[72] McGuire v. Kelley, 41 S.W.3d 679, 683 (Tex. App.—Texarkana 2001, no pet.).

[73] Id. at 681.

[74] Id. at 683.

[75] Id.

[76] Rogers v. RAB Invs., 816 S.W.2d 543, 552 (Tex. App.—Dallas 1991, no writ).

38.001 Applied to Fraud Claims and the Gill Savings Decision

The cases applying Section 38.001 to a fraud claim are much more problematic. Fraud claims frequently do arise in the context of a contract, but it is difficult to imagine a case in which a fraud claim “is intrinsically founded in the interpretation of a contract.” On the contrary, when a plaintiff sues for being fraudulently induced to enter into a contract, the plaintiff necessarily disavows the contract. The claim is not based on an existing, binding contract, which the court must interpret to determine if the plaintiff has proven her tort claim. In fraud, the contract is not binding because fraud vitiates everything it touches.[77] Claims for fraudulently inducing contracts “arises from the general obligations of law rather than the contract itself, and may be asserted in tort even if the only damages are economic.”[78] Even if the fraudulent misrepresentations are later subsumed into a contract, the liability for fraud, and the liability on the terms of the contact are completely independent.[79] Texas courts “long ago abandoned the position that procuring a contract by fraud was simply another contract dispute.”[80]

[77] Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 336 (Tex. 2011).

[78] Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 304 (Tex. 2006).

[79] See id. at 305.

[80] Id. at 306.

In Gill Sav. Ass’n v. Chair King, Inc.,[81] the Fourteenth Court held that attorney’s fees were recoverable on a fraud claim, not based on the fraud claim being “intrinsically founded in the interpretation of a contract,” but on two different grounds: First, that “an award of attorney's fees is permissible since there was a claim for and a finding of breach of contract, and the tort complained of arose out of that breach,” and second that “the causes of action involved in a suit are dependent upon the same set of facts or circumstances and thus are intertwined to the point of being inseparable, the party suing for attorney’s fees may recover even though under one or more of the causes of action such fees are not recoverable.”[82]

[81] 783 S.W.2d 674 (Tex. App.—Houston [14th Dist.] 1989), aff’d in part, modified in part, 797 S.W.2d 31 (Tex. 1990).

[82] Id. at 680.

The first ground was clearly that fees were recoverable for the fraud because the fraud arose out of a breach of contract and was based on the Tyler Court of Appeals case of Wilson v. Ferguson,[83] which affirmed an award of attorney’s fees, exemplary damages, and mental anguish damages on a negligence claim against a funeral home for mishandling a corpse based on the fact that the negligent conduct was committed in the course of performing a contract: “The Fergusons pleaded breach of contract and the jury found that Wilson had breached the contract. Although the recovery in the instant case is in tort, an award of attorney fees is permissible since there was a claim for and a finding of breach of contract, and the tort complained of arose out of that breach.”[84]

[83] Wilson v. Ferguson, 747 S.W.2d 499 (Tex. App.—Tyler 1988, writ denied).

[84] Id. at 504.

The second ground was that, even if fees were non-recoverable for fraud, they could be awarded based on the difficulty of segregation. The court’s authority was Village Mobile Homes v. Porter, which allowed the recovery of fees on a non-recoverable tort claim because the plaintiff’s attorney “could not say how much time he spent on each particular cause of action because they all arose from the same set of facts.”[85] This second ground was clearly the “inextricably intertwined” exception later recognized in Sterling and then rejected and modified in Chapa. In modifying and affirming Gill Savings, the Supreme Court did not address either ground for recovery of fees,[86] which is precisely the point that Supreme Court made clear in MBM Financial Corp. v. Woodlands Operating Co., L.P.: “But in Gill, we merely reinstated bankruptcy and appellate fees; we did not address the court of appeals’ award of fees for both contract and fraud on the basis that they were inextricably intertwined.”[87] In MBM Financial, the Supreme Court disapproved of the holding in Gill Savings based on the rejection of the “inextricably intertwined” exception in Chapa.[88] That holding addresses only the second ground of recovery stated in Gill Savings regarding segregating non-recoverable fees. The Supreme Court has never squarely addressed the first ground, that Section 38.001 applied to the fraud claim asserted in that case.

[85] Vill. Mobile Homes, Inc. v. Porter, 716 S.W.2d 543, 552 (Tex. App.—Austin 1986, writ ref'd n.r.e.).

[86] See 797 S.W.2d 31, 32 (Tex. 1990).

[87] MBM Fin. Corp. v. Woodlands Operating Co., L.P., 292 S.W.3d 660, 667 (Tex. 2009).

[88] Id. (“We explicitly rejected this intertwining exception in Tony Gullo Motors I, L.P. v. Chapa and reiterated that fees are not allowed for torts like fraud.”).

In MBM Financial’s, the Texas Supreme Court stated: “Thus, even if the Woodlands’ fraud claim arose from a breach of contract, that is no basis for an attorney’s fee award.”[89] That statement, on its own, is dicta. The issue of the application of Section 38.001 was not before the Court, and the only authority cited was Chapa, which was addressing the segregation of non-recoverable fees, not the recoverability of fees under Section 38.001. On the basis of that one statement alone, the conclusion cannot be logically drawn that the Supreme Court has held that Section 38.001 can never apply to a fraud claim, regardless of the nature of the claim; and certainly that conclusion cannot be extended to all tort claims categorically.

[89] Id.

Nevertheless, as a general rule, Section 38.001 would rarely, and perhaps never, apply to fraud claims—and certainly not because of the mere presence of a contract in the transaction. It is difficult to imagine a fraud case that is founded on the interpretation of a contract—as opposed to the contract having been founded on the fraud, which is usually the situation. The Corpus Christi Court of Appeals, following Gill Savings, held in Schindler v. Austwell Farmers Co-op, that attorney’s fees were recoverable for fraud “arising from a breach of contract.”[90] The Texas Supreme Court vacated the fraud claim, making that holding moot, but not commenting on it otherwise.[91] The Corpus Christi Court recently acknowledged that the attorney’s fees holding in Schindler was not good law.[92]

[90] Schindler v. Austwell Farmers Co-op., 829 S.W.2d 283, 288 (Tex. App.—Corpus Christi 1992), aff’d as modified, 841 S.W.2d 853 (Tex. 1992).

[91] See 841 S.W.2d at 854.

[92] Zorrilla v. AYPCO Const. II, LLC, 421 S.W.3d 54, 66 (Tex. App.—Corpus Christi 2013) (“in general, attorney’s fees are not recoverable in a fraud claim, even when the fraud arose from a breach of contract”), aff’d in part, rev’d in part on other grounds Zorrilla v. Aypco Constr. II, LLC, 469 S.W.3d 143 (Tex. 2015).

McCullough v. Scarbrough, Medlin & Associates, Inc.

In McCullough v. Scarbrough, Medlin & Associates, Inc.,[93] the Dallas Court of Appeals held that a plaintiff’s recovery on a breach of fiduciary duties claim does not include attorney’s fees.[94] However, the nature of the breach of fiduciary duties claim in McCollough was not a case within the “intrinsically founded on the interpretation of a contract” exception. In McCollough, an at-will employee misappropriated more than $137,000 in commissions during his employment.[95] The employee and the employer entered into a separation agreement that provided for an accounting for the commissions.[96] The employee did not cooperate with the accounting, and the employer ultimately sued both for breach of the separation agreement and breach of fiduciary duties for the misappropriation, and other claims. The employer received a verdict for the amount of the misappropriation, together with punitive damages, attorney’s fees, equitable disgorgement, and other relief on multiple theories of recovery.[97] The Dallas Court of Appeals held that the plaintiff must elect its remedies based on a single theory of recovery and that “[u]nder a breach-of-fiduciary duty theory, SMA can recover economic and exemplary damages and receive an equitable disgorgement remedy, but they cannot simultaneously recover attorneys’ fees or statutory damages.”[98] However, in no way was the breach of fiduciary duty claim in McCollough “intrinsically founded in the interpretation of a contract.” The contract in that case was entered into after the misappropriation of funds and had nothing to do with the basis for the breach of fiduciary duties claim. The plaintiff did not argue, and the court did not consider, whether Texas Civil Practice and Remedies Code 38.001 applied to the breach of fiduciary duty claims. The Dallas Court of Appeals has held that Section 38.001 does apply to tort claims founded in the interpretation of a contract in the conversion context,[99] , and in the breach of fiduciary duty/partnership context.[100] None of those cases were cited or considered in McCollough, and certainly none of that authority was disapproved in any way.

[93] 435 S.W.3d 871 (Tex. App.—Dallas 2014, pet. denied).

[94] Id. at 916-17.

[95] Id. at 881, 884.

[96] Id. at 881-82.

[97] Id. at 884.

[98] Id. at 917.

[99] R.J. Suarez Enterprises Inc. v. PNYX L.P., 380 S.W.3d 238, 249 (Tex. App.—Dallas 2012, no pet.); Mustang Trading, Inc. v. Agharanya, 1992 WL 106034, at *1 (Tex. App.—Dallas May 1992, no writ).

[100] Rogers v. RAB Invs., 816 S.W.2d 543, 552 (Tex. App.—Dallas 1991, no writ).