“BOILERPLATE” IN JUDGMENTS HAS CONSEQUENCES

B.C. v. Steak N Shake Operations, Inc.
Supreme Court of Texas, No. 17-1008 (March 27, 2020)
Per Curiam Opinion (linked here)
We’ve all included something like this in our proposed orders, submitted to the trial court at a summary judgment hearing: “After considering the pleadings, evidence, and arguments of counsel, the Court finds that the motion should be granted.” Standard. Professional. But innocuous, right? Not really, the Supreme Court tells us.

B.C., who worked at a Steak ‘n Shake, alleged her supervisor sexually assaulted her. Steak ‘n Shake moved for summary judgment, urging both traditional and no-evidence grounds. B.C. submitted a response (with over 400 pages of evidence attached) for electronic filing on the day it was due, but said “her filing was rejected ‘because one of the exhibits was not formatted for optical character recognition.’” She corrected the technical glitch and re-filed the next day—one day after the deadline, without seeking leave to file late. Steak ‘n Shake filed a reply and objected to the late filing. The trial court granted summary judgment to Steak ‘n Shake. Its summary judgment order made no mention of Steak ‘n Shake’s objection to the late-filed response and evidence, but did contain the broad recitation quoted above, that the court had “consider[ed] the pleadings, evidence, and arguments of counsel.” The court of appeals affirmed summary judgment for Steak ‘n Shake, concluding in the process that the trial court had not considered B.C.’s late-filed response and evidence, and that it could not do so on appeal.

But the Supreme Court disagreed, reversed, and remanded. The Court acknowledged that, where there is nothing in the record to indicate the trial court granted leave for a summary judgment response and evidence to be filed late, it is presumed leave was not granted and that the tardy filing was not considered by the court. But, the Court said, an appeals court should review the record thoroughly for any “affirmative indication that the trial court permitted [and considered] the late filing.” Here, it held, “the trial court’s recital that it considered the ‘evidence and arguments of counsel,’ without any limitation, is an ‘affirmative indication’ that the trial court considered B.C.’s response and the evidence attached to it.” The Court analogized to its longstanding approach when considering late-filed amended pleadings in advance of a summary-judgment hearing. Like the situation here, the rules prohibit amendment of pleadings, without leave, within seven days of a summary-judgment hearing. But “leave of court is presumed when a summary judgment [order] states that all pleadings were considered, and when, as here, the record does not indicate that an amended pleading was not considered, and the opposing party does not show surprise.” So, be careful with “boilerplate” language in proposed orders.

One more thing. You may be thinking: Was B.C.’s filing really late at all? Shouldn’t the filing of B.C.’s response simply have related back to the day before, the deadline day, when she submitted the technically defective e-filing? Unfortunately, that was not standard practice back in 2014 when B.C. attempted her e-filing. And both the Supreme Court and court of appeals ruled B.C. waived that argument because she didn’t assert it until her motion for rehearing en banc in the appeals court.

EIGHT-CORNERS RULE LIVES ON

Richards v. State Farm Lloyds
Supreme Court of Texas (March 20, 2020)
Opinion by Justice Blacklock (linked here)
The “eight-corners rule” for determining the duty to defend is well entrenched in Texas law: A liability insurer’s duty to defend a lawsuit against its insured is determined solely by reference to the facts alleged in the underlying complaint and the terms of the insurance policy, without reliance on extrinsic evidence. See, e.g., GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). Efforts to weaken the rule’s grip, however, have continued unabated. Answering a question certified by the Fifth Circuit, the Texas Supreme Court in Richards held the eight-corners rule applies even where the operative insurance policy does not expressly promise a defense “even if the allegations of the suit are groundless, false or fraudulent.”

One of the strongest proponents of abandoning the eight-corners rule for most cases has been federal district judge John McBryde, now Senior Judge in the Fort Worth Division of the Northern District of Texas. He has relied on extrinsic evidence to negate coverage since at least 1991. In 2006 he held that the eight-corners rule arose from, and is dependent on, “groundless, false or fraudulent” language of older (pre-1996) CGL policies, and therefore does not apply to newer policies omitting that language. B. Hall Contracting, Inc. v. Evanston Ins. Co., 447 F.Supp.2d 634, 645 (N.D. Tex. 2006), rev’d on other grounds, 273 F.App’x 310 (5th Cir. 2008). The Fifth Circuit reversed the judgment in that case without mentioning the lower court’s holding on the eight-corners rule. Judge McBryde has reprised his B. Hall analysis in subsequent cases and expanded his discussion of the rule’s demise, most recently in Richards. That case arose out of the death of a ten-year-old boy in an ATV accident and a negligent-supervision lawsuit by his mother against his paternal grandparents. State Farm, which provided homeowner’s insurance to the grandparents, filed suit seeking a declaratory judgment that it had no duty to defend or indemnify them because the accident did not occur on their property and the claim triggered an “insured v. insured” exclusion. Judge McBryde granted summary judgment for State Farm, admitting and relying on extrinsic evidence over the insureds’ objections.

On appeal, the Fifth Circuit acknowledged that neither it nor the Texas Supreme Court had recognized the district court’s view of the eight-corners rule, and certified this question to the Texas court: “Is the policy-language exception to the eight-corners rule articulated in B. Hall … a permissible exception under Texas law?” The Texas Supreme Court’s answer was a resounding “No.” The Court confirmed that “parties can contract around the eight-corners rule,” but held State Farm did not do so merely by omitting the promise to “defend claims ‘even if groundless, false or fraudulent.’’’ The Court insisted the rule “is not a judicial amendment to the parties’ agreement,” but is grounded in the promise “to defend the policyholders if ‘a claim is made or a suit is brought against an insured because of bodily injury … to which this coverage applies.’” Moreover, the Court said “Texas courts have long interpreted contractual duties to defend” by applying the eight-corners rule, and noted, “If any party is familiar with the overwhelming precedent to that effect, it is a large insurance company.”

Finally, the Court acknowledged that the Fifth Circuit and some Texas courts have applied a more narrow exception to the eight-corners rule, which allows reliance on extrinsic evidence that “concerns discrete and independent coverage issues and does not touch on the merits of the underlying suit.” This exception traces its roots to dicta in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004). The viability and scope of the so-called Northfield exception has been the subject of numerous cases and commentaries over the years, but, as it has done in several previous cases, the Court again declined to resolve that controversy. “The Fifth Circuit did not ask for our opinion on that practice, so we express none.”

Stay tuned.

ONCE MORE, WITH FEELING: BUSINESS ENTITIES MUST BE REPRESENTED IN COURT BY A LICENSED ATTORNEY

R2Go Transport LLC a/k/a Ready 2 Go Transport LLC v. Xellex Corp.
Dallas Court of Appeals, No. 05-19-01246-CV (March 18, 2020)
Chief Justice Burns (Opinion, linked here), and Justices Molberg and Nowell
The Dallas Court of Appeals reminded us today that business entities in the State of Texas cannot appear in court pro se or through non-lawyer employees or members. Generally, except for the performance of ministerial tasks (like posting bond), only a licensed attorney may represent a business entity in a Texas court. The rule originated with respect to corporations in Kunstoplast of America, Inc. v. Formosa Plastics Corp., U.S.A., 937 S.W.2d 455 (Tex. 1996). It now extends to virtually all “fictional legal [business] entities,” including partnerships and limited liability companies. See, e.g., Sherman v. Boston, 486 S.W.3d 88, 95-96 (Tex. App.—Houston [14th Dist.] 2016, pet. denied). “Allowing a non-attorney to present a company’s claim would permit the unlicensed practice of law.” Id. (trial evidence presented for LLC by non-lawyer “had no legal effect” and was “legally insufficient to support a judgment”). The rule applies in all courts, trial and appellate—other than small claims courts, for which there is an express statutory exception. Tex. Gov’t Code § 28.003(e) (“A corporation need not be represented by an attorney in small claims court.”).

Here, R2Go’s counsel was allowed to withdraw from the appeal. When the LLC did not obtain replacement counsel, despite having been warned and ordered to do so, the Dallas Court dismissed its appeal, because it could not proceed with its appeal without being represented by a licensed attorney.

RULE 91a DISMISSAL: AFFIRMATIVE DEFENSE OF ATTORNEY IMMUNITY

Cherlyn Bethel v. Quilling, Selander, Lownds, Winslett & Moser, P.C.
Supreme Court of Texas, No. 18-0595 (February 21, 2020)
Opinion by Justice Devine (linked here)
Can the affirmative defense of attorney immunity be used to dismiss a case under Rule 91a? Yes, says the Supreme Court of Texas, affirming the ruling of the Dallas Court of Appeals.

The plaintiff’s husband was killed in a car accident while towing a trailer. She first sued the trailer’s manufacturer, alleging that the brakes were faulty. The law firm representing the manufacturer, Quilling Selander, took possession of the trailer and performed testing on the brakes in conjunction with its hired expert. The testing resulted in the disassembly and ultimate destruction of allegedly key evidence against the manufacturer. The plaintiff then sued Quilling Selander under various tort theories for destruction of another’s property, the trailer.

Quilling Selander moved to dismiss under Rule 91a, arguing that all the claims were barred by the attorney-immunity doctrine because all actions it took were in connection with representing a client. The trial court granted the motion and the Dallas Court of Appeals affirmed.

The two questions presented to the Court were: (1) Can a court consider an affirmative defense in deciding a Rule 91a motion when the rule limits a court’s consideration only to “the pleading of a cause of action,” and (2) Is alleged criminal conduct categorically exempt from attorney immunity?

Rule 91a permits the dismissal of a cause of action that “has no basis in law or fact.” But, in considering the motion, the rule states the court may only consider the cause of action as pleaded, without any additional evidence. The plaintiff argued that this standard excluded the attorney-immunity doctrine from the court’s purview because such an affirmative defense was outside the “cause of action” pleaded in the petition.

The Court disagreed, making a distinction between the factual scope of the court’s consideration and the legal theories it may apply. Although the court is limited to the “allegations” supporting the cause of action, Rule 91a did not restrain the “universe of legal theories by which the movant may show the claimant is not entitled to relief based on the facts as alleged.”

After ruling that a properly pleaded affirmative defense can be considered, the Court then considered whether the trial court properly dismissed the claims based on the allegedly criminal conduct of the law firm. In Cantey Hanger, LLP v. Byrd, the Court declined to recognize fraud as an exception to the attorney immunity defense, stressing that the inquiry concerned the “kind” of conduct alleged, not the “wrongfulness” of the actions.

The same was true as to conduct alleged to be criminal in nature. The proper question to ask was: Does the attorney’s conduct involve providing legal services to represent a client? The plaintiff’s labelling of such actions as criminal was irrelevant.

Therefore, while an attorney who punches an opposing counsel would not have immunity, when Quilling Selander “examined and tested evidence during discovery” in representing its client, the law firm was immune from its opposing party’s tort claims.

LEGAL MALPRACTICE CLAIMS AGAINST CRIMINAL-DEFENSE ATTORNEYS: SCOTX CLARIFIES LIMITATIONS AND THE “EXONERATION” REQUIREMENT OF PEELER v. HUGHES & LUCE

Gray v. Skelton
Supreme Court of Texas, No. 18-0386 (February 21, 2019)
Opinion by Justice Devine (linked here), dissent by Justice Blacklock (linked here)
About 25 years ago, a plurality of the Supreme Court of Texas declared in Peeler v. Hughes & Luce that a party who had been convicted of a criminal offense had to be “exonerated” on direct appeal or otherwise in order to bring a malpractice claim against the attorney who represented that party in the criminal case. But what did it mean to be “exonerated”? “Legal” innocence—i.e., just having the conviction set aside? “Actual” innocence? For more than two decades, the Court did not revisit the issue. Or specify how and when such a party could obtain or demonstrate “exoneration.” Or explain how the statute of limitations operates with respect to such a malpractice claim. In its 6-3 decision in Gray v. Skelton, the Court reaffirmed and solidified Peeler and answered those questions, providing needed clarification but likely expanding the prospect for legal malpractice claims to be brought against criminal-defense attorneys.

When Skelton, an estate planning attorney, found the original of a client’s will to be water-damaged and illegible, she printed a new copy from her electronic files and then cut and pasted onto that copy the signature portions of the water-damaged original, made a copy, and filed that copy with the probate court. For that, she was convicted of criminal forgery in 2007. Her appeal failed. Meanwhile, in a will contest in probate court, a jury found the composite will filed by Skelton was an accurate copy of the original and also found she did not intend to defraud or harm anyone by the filing of that composite. In the wake of these findings, Skelton sought to have her conviction set aside through habeas corpus, based in part on the ineffective assistance of Gray, her lawyer in her criminal case. The Fourth Court of Appeals granted Skelton the requested habeas relief, vacating her conviction because “the fundamental fairness of her trial was tainted by the ineffective assistance of her trial counsel,” without addressing her “actual” guilt or innocence.

Skelton then filed a legal malpractice lawsuit against Gray. The trial court dismissed Skelton’s claim, finding she had not proven “exoneration” as required by Peeler—apparently because she had not secured a ruling that she was “actually innocent” rather than “legally innocent” of the charge on which she had been convicted. The Fourth Court of Appeals, however, reversed that dismissal. It held that, because Skelton’s conviction had been vacated by the time she sued Gray, Peeler simply did not apply. And it went on to rule that her claim was not barred by limitations, which had been tolled until her conviction was vacated on habeas appeal (because it would have been barred by Peeler until then), and remanded the case for trial.

The Supreme Court affirmed, with a twist. It reaffirmed Peeler’s requirement that a former criminal defendant must be “exonerated” before he or she can recover against his or her criminal-defense attorney for legal malpractice. The Court then filled in the gap left by Peeler, explaining that “exoneration” has two parts. First, the former criminal defendant must have his or her conviction vacated on appeal or otherwise, e.g., through a habeas petition. But then, second, the former criminal defendant must also establish his or her “actual innocence”—not merely “legal innocence” (i.e., having the conviction vacated). This second criterion can be satisfied in the criminal appeal or habeas proceeding, if the conviction is set aside on grounds of actual innocence. But the Court rejected arguments both (1) that the presumption of innocence alone, restored after a conviction is vacated suffices to prove “actual innocence,” and (2) that actual innocence must be established in the criminal or habeas proceeding, before the claimant can initiate a malpractice lawsuit. Instead, the Court said, former criminal defendants may commence their malpractice lawsuits once their convictions are set aside, but “must obtain a finding of their innocence as a predicate of the submission of their legal malpractice claim.” That is, “[s]ubmission of the traditional elements of legal malpractice to the factfinder should … be conditioned on an affirmative finding that the malpractice plaintiffs are innocent of the crime of which they were formerly convicted.” The Court placed the burden on the claimant to prove innocence by a preponderance of evidence. This, of course, is the opposite of the situation in the criminal case, where the State had to prove guilt beyond a reasonable doubt, and it diverges from the approach taken by some other states that allow the criminal-defense lawyer to raise the former client’s guilt as a defense, thereby placing the burden for this issue on the lawyer rather than the claimant.

The Supreme Court also held the two-year statute of limitations for malpractice claims would not bar Skelton’s lawsuit. The Court ruled that under the “Hughes tolling rule”—which tolls limitations on legal malpractice claims until all appeals have ended in the case in which the alleged malpractice occurred—limitations for malpractice claims of this sort are to be tolled during all direct appeals and during the pendency of all habeas proceedings (sort of a “chess-clock” approach, where the limitations clock stops during the direct appeals, starts again when those appeals end, then stops again during any habeas proceeding(s)).

Justice Blacklock, joined by Justices Green and Bland, dissented on the limitations issue, finding the extension of the Hughes tolling rule to include habeas proceedings to be an unwise expansion of this judge-made doctrine. The dissent noted that, because a criminal defendant may file multiple habeas petitions in both state and federal courts, “a litigious convict can keep the habeas corpus ball in the air almost indefinitely, leaving criminal defense lawyers under the shadow of potential malpractice claims for many years beyond the two-year period envisioned by the Legislature.” Because the dissenting justices would have reversed on limitations grounds, they expressly declined to address the “exoneration” issue and procedures.

In sum, Skelton has satisfied the first prong of the “exoneration” requirement and will now have the chance to try to meet the second, actual-innocence prong, and then perhaps to pursue her legal malpractice claim on the merits

DENTIST IS QUALIFIED TO TESTIFY REGARDING CAUSE OF CARDIAC INFECTION

Bell v. Markham
Dallas Court of Appeals, No. 05-19-00041-CV (January 30, 2020)
Justices Molberg, Reichek, and Evans (Opinion, available here)
In this dental malpractice case, the Dallas Court of Appeals confirmed a dentist may be qualified to offer expert opinions regarding the cause of a cardiac infection. To fulfill their obligations to serve Defendants with a qualifying expert report under Chapter 74, Plaintiffs proffered the report of Robbie Henwood, DDS. Defendants objected to the report, arguing that, as a “general dentist,” Henwood was not qualified to render an expert opinion that a bacterial infection in a person’s mouth caused a cardiac infection.

The Dallas Court disagreed, noting that Chapter 74 provides that “a dentist or physician” may provide the causation testimony in a professional liability case against a dentist, if the witness is qualified to do so under the rules of evidence. Here, Henwood’s report addressed his “knowledge, skill, experience, training or education” regarding the specific issue before the court—how an infection in the mouth developed into endocarditis. The Court also focused on the fact that, in addition to being a dentist, Henwood obtained additional training and expertise in doctoral pharmacology studies and teaches premedical students cardiovascular physiology. Additionally, Henwood testified that he had provided patients with treatment plans to prevent the spread of streptococcus mitis, the bacterium at issue in this case. In his report, Henwood provided a detailed explanation of how streptococcus mitis can spread from an infected tooth to the heart and cause endocarditis. Accordingly, the Court rejected Defendants’ argument that Henwood needed a medical degree or other specialization in treating infections to qualify as an expert witness on causation.

REVERSAL OF $535 MILLION JUDGMENT AFFIRMED—NO PARTNERSHIP WHEN CONTRACTUAL CONDITIONS NOT SATISFIED OR WAIVED

Energy Transfer Partners, L.P. v. Enterprise Products Partners, L.P.
Supreme Court of Texas (January 31, 2020)
Opinion by Chief Justice Hecht (linked here)
The Supreme Court of Texas today affirmed the 2017 decision of the Dallas Court of Appeals to throw out a $535 million judgment for alleged breach of a partner’s fiduciary duty, holding no statutory partnership was created when contractual conditions precedent were not satisfied.

In 2015, ETP convinced a jury it had formed a partnership with Enterprise to develop a pipeline to transport oil from Cushing, Oklahoma to Houston, and that Enterprise had breached its duty of loyalty by contracting with another company on a similar pipeline project. The trial court entered judgment awarding ETP around $535 million in damages, interest, and disgorgement. The Dallas Court of Appeals in July 2017 held no partnership was formed because conditions stated in the parties’ written agreement had not been satisfied or waived. So it reversed and rendered a take-nothing judgment. See my previous blog post with a full discussion of the intermediate court’s opinion here.

The core issue in the case was the relationship between Chapter 152 of the Texas Business Organizations Code and the parties’ own prior written agreements. TBOC § 152.051(b) provides that “an association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether … the persons intend to create a partnership.” Section 152.052(a) then provides a list of factors “indicating that persons have created a partnership.” But the parties’ agreements stated that no partnership obligations would arise without definitive written agreements negotiated, executed, and approved by both companies’ boards of directors. The Texas Supreme Court noted, “Section 152.003 expressly authorizes supplementation of the partnership-formation rules of Chapter 152 with other ‘principles of law and equity,’ and perhaps no principle of law is as deeply ingrained in Texas jurisprudence as freedom of contract.” It also reiterated its “view expressed decades ago in Ingram [v. Deere, 288 S.W.3d 886, 898 (Tex. 2009)] that the Legislature did not ‘intend[] to spring surprise or accidental partnerships’ on parties.” Accordingly, the Court held “that parties can contract for conditions precedent to preclude the unintentional formation of a partnership under Chapter 152 and that, as a matter of law, they did so here.” And, although conditions can be waived or modified, ETP failed to either “obtain a jury finding on waiver or to prove it conclusively.”

COMPANY MANAGER PERSONALLY LIABLE FOR CONTRACT BREACH

PMC Chase, LLP v. Turnbow
Dallas Court of Appeals, No. 18-01383 (January 28, 2020)
Justices Myers, Schenck, and Carlyle (opinion linked here)
This is a cautionary tale for anyone who signs contracts or purchase orders for their company: Unless you want to be personally responsible for performing the contract, be sure the document clearly indicates you’re signing as the company’s representative.

BSS contracted to perform structural steel construction at PMC’s business. The one-page contract was directed to “Attention: Steve Turnbow,” and Turnbow, PMC’s manager, signed it. After substantial completion, BSS sent its invoice to Turnbow at PMC’s address. When it did not receive payment, BSS sued both Turnbow and PMC for breach of contract and (alternatively) quantum meruit. At trial, BSS abandoned its contract claim against PMC, insisting “the contract was with just Mr. Turnbow individually.” BSS retained its quantum-meruit claim against PMC.

PMC and Turnbow argued Turnbow acted only as an agent for PMC and was not, therefore, individually liable for any breach. After a bench trial, the court entered judgment against Turnbow for breach of contract and against PMC for quantum meruit, awarded the same damages and attorney’s fees for both causes of action, and held the defendants jointly and severally liable. The Dallas Court of Appeals affirmed the judgment.

Citing the “well-settled [principle] that the law does not presume agency,” the Court of Appeals held that because the contract “bears Mr. Turnbow’s signature and does not mention PMC Chase or indicate representative capacity in any way … it unambiguously shows it is the obligation of Mr. Turnbow personally.” This conclusion could not be altered, the Court held, by parol evidence of the parties’ intent, including both signatories’ testimony “that they understood Turnbow to have signed the contract for PMC Chase.”

The Court also affirmed the quantum-meruit judgment against PMC, holding that “appellants’ position that ‘there can be no recovery under quantum meruit where the same transaction is covered by a valid contract’ is contrary to established construction contract law,” citing Gentry v. Squires Construction, Inc., 188 S.W.3d 396, 402-03 (Tex. App.—Dallas 2006, no pet.). Finally, the Court noted that the judgment imposing joint and several liability for the same damages under the two causes of action precluded a double recovery.

LIMITATIONS: NO FRAUDULENT CONCEALMENT BASED ON NONDISCLOSURE AFTER PHYSICIAN-PATIENT RELATIONSHIP ENDS

Tarrant v. Baylor Scott & White Medical Center-Frisco
Dallas Court of Appeals, No. 05-18-01129-CV (January 15, 2020)
Justices Myers, Carlyle (Opinion, linked here), and Evans
Stephen Courtney, an orthopedic surgeon, performed back operations on plaintiffs Tarrant and Kendrick at Baylor-Frisco, a physician-owned hospital in which Courtney holds an interest. During the surgeries, Courtney used devices and monitoring services supplied by entities that also were largely owned by him. Alleging Courtney performed the operations improperly and used inappropriate products and services to increase his profits, Tarrant and Kendrick sued. Although their lawsuit was filed after the statute of limitations had expired, plaintiffs contended Courtney and his associated entities should be barred from asserting a limitations defense because Courtney had fraudulently concealed his wrongdoing.

The Dallas Court of Appeals agreed that under the equitable doctrine of fraudulent concealment, “a defendant who conceals his wrongful conduct, either by failing to disclose it when under a duty to disclose or by lying about his conduct, is estopped to assert the statute of limitations.” But, the Court explained, silence constitutes fraudulent concealment only when there is a duty to disclose. And, although the physician-patient relationship gives rise to fiduciary obligations by the physician, including the duty to make certain disclosures, that duty ends when the physician-patient relationship ends. Here, the plaintiffs’ fraudulent-concealment argument rested entirely on Courtney’s alleged silence and failure to disclose. But the physician-patient relationships ended shortly after the surgeries, beyond the limitations period. The appeals court, therefore, affirmed summary judgment for the defendants.

In so doing, the Court rejected plaintiffs’ argument that the tolling of limitations in a fraudulent-concealment case like this one should extend until the plaintiff discovers or reasonably could have discovered the physician’s fraudulent nondisclosure, rather than having the limitations clock begin ticking when the physician-patient relationship ends. The Court acknowledged the “logical force” of the argument but could find no authority to support it, and therefore declined to adopt that approach here.

IN A DERIVATIVE SUIT, CAN THE SAME LAWYERS REPRESENT THE LLC AND MEMBERS ACCUSED OF BEING ADVERSE TO THE LLC? MAYBE.

In re Murrin Brothers 1885, Ltd.
Supreme Court of Texas, No. 18-0737 (December 20, 2019)
Opinion by Justice Blacklock (linked here)
“Gone are the days when a family feud over a dance hall and saloon in the Fort Worth Stockyards would be solved by six-shooters. These days, we use lawyers instead of lead.” Still, the process can be unpleasant, if not deadly, for the lawyers as well as the parties.

Almost by definition, a derivative lawsuit pits a group of stakeholders who do not control an entity against other stakeholders or officers who do. Frequently, especially during the early rounds of these complex cases, the same lawyers are engaged to represent both the “inside” stakeholders and the entity itself—which is named as a plaintiff but also joined as a “nominal defendant” in such cases. In this particular derivative case—arising from a struggle for control of Billy Bob’s, the legendary Fort Worth honkytonk—the Texas Supreme Court was asked to decide whether attorney-conflicts rules and public policy prohibit a law firm from pursuing such a dual representation of both the entity and the controlling insiders. Its answer? Dual representation is okay this time, the Court decided, but maybe not in every case.

The Texas Supreme Court announced “no categorical rule governing dual representation in derivative litigation,” even though some jurisdictions have done so. The mere labels applied to the entity as both plaintiff and nominal defendant are not determinative, the Court said. Instead, the Supreme Court held “the proper inquiry is to look to whether the substance of the challenged representation requires the lawyer to take conflicting positions or to take a position that risks harming one of his clients”—i.e., a case-specific, functional analysis to decide “[w]hether a company and the individual defendants are ‘opposing parties’ for purposes of [Disciplinary] Rule 1.06(a).” This lawsuit, the Court observed, “is a fairly straightforward case about which ownership group controls the company’s decisions.” The true adversity, therefore, was between the “warring ownership factions,” rather than between either faction and the entity, so there was no disqualifying conflict. In fact, the Court said, in situations like this, involving a closely held entity, a trial court could simply treat the case “as a direct action” brought by one stakeholder against another, leaving the entity out of the conflicts equation entirely. Of course, if the derivative allegations in a case raised true questions of injury to the corporation purportedly caused by the insiders (for example, allegations of self-dealing or stripping corporate assets), the analysis of the propriety of dual representation of the entity and insiders might yield a different outcome. But that’s a question for another day.

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