Hampton v. Equity Trust Co.

607 S.W.3d 1

Laura HAMPTON, Appellant, Equity Trust Company, Cross-Appellant,

v.EQUITY TRUST COMPANY, Appellee, Laura Hampton, Cross-Appellee

NO. 03-19-00401-CV

Court of Appeals of Texas, Austin.

Filed: July 23, 2020

Brian S. Stagner, Kelly Hart & Hallman LLP, 201 Main St., Ste 2500, Fort Worth, TX 76102-3129, Matthew Meyer, Kristy Pesnell Campbell, Derrick S. Boyd, Boyd Powers & Williamson, P. O. Box 957, Decatur, TX 76234, for Appellant.

Joshua A. Romero, Jackson Walker L.L.P., 100 Congress, Suite 1100, Austin, TX 78701, Allison Cook, Jackson Walker LLP, 2323 Ross Ave., Dallas, TX 75201, Retta A. Miller, Jackson Walker L.L.P., 2323 Ross Ave Ste 600, Dallas, TX 75201-2725, for Appellee.

Before Justices Goodwin, Kelly, and Smith

OPINION

Edward Smith, Justice

These cross appeals arise from a dispute over allegedly fraudulent investments that Robert Langguth sold to investors in the Austin area. One of those investors, Laura Hampton, sued Equity Trust Company for aiding and abetting Langguth under several theories. A jury found Equity Trust liable for aiding and abetting violations of the Texas Securities Act (TSA), see Tex. Rev. Civ. Stat. art. 581-33(F)(2) (providing that person who "materially aids" another violation of TSA is jointly and severally liable to same extent as primary violator), and common law fraud. The district court rendered judgment on the common-law claim but set aside the verdict on the statutory claim. We will reverse and render a take-nothing judgment on Hampton's common-law claim and affirm the remainder of the judgment.

BACKGROUND

The basic outline of Langguth's securities fraud scheme is undisputed here.¹ In 2002, Langguth started a business making short-term "bridge loans" to real estate investors. The borrowers used the funds to purchase and improve property with the goal of selling it before the loan matured. Beginning in 2005, Langguth sold participation shares in those loans to third-party investors. For example, an investor could pay $25,000 to purchase a 25% participation share in a $100,000 promissory note. The participation share entitled the investor to 25% of the monthly interest payments and the same percentage of the principal on maturity. Langguth represented to his investors that the promissory notes were "fully secured," by which he meant that he held a first lien on each property underlying the note and the loan never exceeded 80% of the property value set by an independent appraiser. Langguth claimed to be so adept at screening borrowers that he never had to foreclose on a note.

Langguth declared bankruptcy in March 2010, and the bankruptcy trustee retained Stephen Roberts as special counsel to examine Langguth's business dealings. Roberts testified at trial that he discovered Langguth was running a Ponzi scheme.² The precise details varied with each participation investor, but the notes underlying the participation agreements were essentially worthless. Langguth collected all the funds he received into a single bank account that he used for both his personal expenses and to pay his investors. In 2012, Langguth pled guilty to federal wire fraud and money laundering charges.

In 2006, Hampton and her husband, Jack, purchased participation shares in seven promissory notes worth a total of $1,050,000. When the Hamptons expressed interest, Langguth encouraged them to open individual retirement accounts at Equity Trust. Equity Trust is a "passive custodian" of self-directed IRAs. That means Equity Trust invests its customers' funds as they direct but does not perform any due diligence or provide any investment advice. Jack testified at trial that an Equity Trust employee confirmed to him and Laura that many of Langguth's clients invested with him through Equity Trust. Hampton and her husband each opened accounts at Equity Trust, but only Jack used his to invest funds with Langguth. Hampton wired the money to Langguth directly.

Hampton and several other investors sued Langguth and Equity Trust for damages in early 2013. Equity Trust answered the suit but Langguth did not. All the plaintiffs but Hampton took a default judgment against Langguth and settled with Equity Trust, leaving Hampton as the sole plaintiff. Hampton's claims against Langguth and Equity Trust proceeded to trial in January 2019. Hampton asserted causes of action against Langguth for selling a security by means of an untrue statement or material omission of fact, see Tex. Rev. Civ. Stat. art. 581-33(A)(2), and common-law fraud. She asserted that Equity Trust was liable for, as relevant here, aiding and abetting Langguth's violations of the TSA, see id. art. 581-33(F)(2), and his common-law fraud.

After the close of evidence, the district court granted a no-answer default judgment against Langguth and charged the jury on Hampton's claims against Equity Trust. The jury found for Hampton on both theories and determined that Equity Trust was 15% liable for Hampton's damages. Equity Trust timely moved for judgment notwithstanding the verdict. The district court set aside the TSA claim but rendered judgment on the common-law aiding-and-abetting claim and awarded Hampton damages. These cross-appeals ensued.

COMMON-LAW AIDING AND ABETTING

Equity Trust argues that Texas does not recognize a common-law cause of action for aiding and abetting. We begin with this question because "[a]bsent legislative or supreme court recognition of the existence of a cause of action, we, as an intermediate appellate court, will not be the first to do so." Anderson v. Archer , 490 S.W.3d 175, 177 (Tex. App.—Austin 2016), aff'd sub nom Archer v. Anderson , 556 S.W.3d 228 (Tex. 2018). Hampton alleges in her live petition that Equity Trust "knowingly aided and abetted Robert Langguth's fraud" and that, "[t]o the extent necessary, Plaintiff invokes the doctrine set forth in Restatement (Second) of Torts § 876." Hampton stresses the "to the extent necessary" language and argues that we can affirm without deciding whether Texas recognizes section 876. In the alternative, she argues that we should recognize a cause of action based on section 876 of the Restatement of Torts.

Hampton initially argues that "[c]ivil liability for aiding and abetting fraud has been part of Texas jurisprudence since at least 1930." As exemplars, she cites Crisp v. Southwest Bancshares Leasing Co. , 586 S.W.2d 610, 614–15 (Tex. App.—Amarillo 1979, writ ref'd n.r.e.), and King v. Shawver , 30 S.W.2d 930, 932 (Tex. App.—Fort Worth 1930, no writ). In both cases, the plaintiff alleged that multiple defendants worked together to carry out the fraud and that one or more defendants "aided and abetted" the actions of another. See Crisp , 586 S.W.2d at 612 (describing allegation that Crisp Equipment knowingly participated in transaction to help co-defendant defraud leasing company); King , 30 S.W.2d at 930–31 (alleging that King aided and abetted another defendant in selling fraudulent bonds by attesting to truth of his codefendant's statements). Despite the terminology employed, there is no mention that the plaintiffs alleged a distinct cause of action against the aiding-and-abetting defendants. Instead, each plaintiff alleged—and each jury found—that the defendants all contributed to the injury and were therefore responsible for the damages. Cf. Sky View at Las Palmas, LLC v. Mendez , 555 S.W.3d 101, 106–07 (Tex. 2018) (discussing law governing liability of multiple tortfeasors who contribute to single injury). Neither case reflects that Texas law recognizes a distinct cause of action for aiding and abetting.

We next consider whether Texas has adopted section 876 of the Restatement of Torts. That section states that a person can be held liable for the conduct of another that causes harm if the defendant:

(a) does a tortious act in concert with the other or pursuant to a common design with him, or

(b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or

(c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.

Restatement (Second) of Torts § 876 (1979). In 1996, the Supreme Court of Texas declined to adopt section 876 and cautioned that "whether such a theory of liability is recognized in Texas is an open question." Juhl v. Airington , 936 S.W.2d 640, 643 (Tex. 1996). The Court has yet to answer that question. See First United Pentecostal Church of Beaumont v. Parker , 514 S.W.3d 214, 224 (Tex. 2017) (reiterating that "this Court has not expressly decided whether Texas recognizes a cause of action for aiding and abetting"); Grant Thornton LLP v. Prospect High Income Fund , 314 S.W.3d 913, 930 n.28 (Tex. 2010) (declining to decide whether cause of action exists because plaintiff failed to provide sufficient evidence); Ernst & Young, L.L.P. v. Pacific Mut. Life Ins. Co. , 51 S.W.3d 573, 583 n.7 (Tex. 2001) (same).

Hampton concedes that the Supreme Court of Texas has yet to formally recognize a cause of action for aiding and abetting and invites us to do so here.³ Our precedent dictates that this Court should not recognize a new cause of action "in the first instance."⁴ Anderson , 490 S.W.3d at 177. Instead, we defer to the Legislature or the Supreme Court of Texas to determine whether creation of a new cause of action is justified. See Kinsel v. Lindsey , 526 S.W.3d 411, 423 (Tex. 2017) (noting that absent "explicit legislative action, the question of whether [a] tort should exist under Texas law is ours to answer"); Anderson , 490 S.W.3d at 179 (observing that recognizing new cause of action "raise[s] a litany of questions regarding the contours and scope of the cause of action—questions that should properly be resolved by the Legislature or Texas Supreme Court first."). In the absence of recognition by the Supreme Court of Texas or the Legislature, we conclude that a...