In re Poe

648 S.W.3d 277

In the MATTER OF the ESTATE OF Richard C. POE, Deceased

No. 20-0178

Supreme Court of Texas.

Argued December 2, 2021

OPINION DELIVERED: June 17, 2022

Nicholas B. Bacarisse, Rachel Anne Ekery, Houston, Henry John Paoli, El Paso, Wallace B. Jefferson, Austin, Francisco J. Ortega, El Paso, Michael Downey, Houston, Richard G. Munzinger, El Paso, for Petitioners Karen G. Castro, Anthony E. Bock, and Paul O. Sergent, Jr., as Co-Trustees of the Dick Poe Estate Trust, Anthony E. Bock and Karen G. Castro, as Co-Independent Executors of the Estate of Richard C. Poe, Deceased, Poe Foundation, Inc., Poe Management, Inc.

Joseph L. Hood Jr., El Paso, for Other interested party.

Joseph L. Hood Jr., El Paso, for Petitioner.

Robert Mark Millimet, Dallas, Michael J. Collins, Craig T. Enoch, Austin, Michael J. Shane, El Paso, Shelby L. O'Brien, Austin, James Michael Stanton, William A. Brewer III, Dallas, for Respondent.

Justice Huddle delivered the opinion of the Court.

This case arises from a struggle for control of a substantial family-owned car-dealership enterprise following the death of the patriarch, Dick Poe. In the weeks before he passed, Dick, who was the sole director of Poe Management, Inc. (PMI), authorized the corporation to issue new shares. Dick bought the new shares for $3.2 million. 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.

Richard challenged the share issuance as a breach of Dick's fiduciary duty and prevailed at trial. But petitioners here assert the jury was improperly charged on the critical issue: whether Dick's admittedly self-dealing share issuance was fair to PMI and, therefore, valid and enforceable under Texas Business Organizations Code Section 21.418(b). Petitioners also contend the probate court improperly submitted a theory of liability not recognized in Texas law: that Dick, as PMI's sole director, owed Richard an "informal" fiduciary duty to manage PMI in Richard's best interest. We agree with petitioners that the probate court erred in charging the jury in both respects, and we hold that the errors were harmful. We therefore reverse and remand for a new trial.

I. Background

Richard C. Poe, popularly known as "Dick Poe," was a businessman and third-generation car dealer in El Paso. Dick was involved in the daily operations of the car dealerships well into his eighties and until the time of his death. Dick had two sons, and, for many years, the older of the two, Richard C. Poe II,¹ believed he would succeed Dick as the person who controlled the enterprise. But shortly before Dick's death, things changed.

Dick structured his many businesses to consolidate control in a single entity: PMI, a Texas corporation he formed in 2007. At the time of Dick's death, PMI was the general partner of five limited partnerships, three of which owned and operated car dealerships in El Paso—Dick Poe Toyota, Dick Poe Chrysler, and Dick Poe Dodge. Another of the limited partnerships owned the property on which Dick Poe Toyota was located, as well as a shopping center. The fifth was a family limited partnership in which equal shares were owned by two limited partners: Richard and a special needs trust Dick created to care for his other son, Troy.²

When Dick formed PMI, it had authority to issue 10,000 shares of common stock, but it issued only 1,000 shares, all to a single shareholder: Richard. Richard, in turn, ceded control of PMI to Dick. This was accomplished first through an irrevocable proxy to vote Richard's shares and, later, through Richard's successive annual appointment of Dick as PMI's sole director. Thus, while Richard owned 100% of the outstanding shares of PMI, Dick always controlled PMI. There is no evidence that Richard ever sought any contractual right to maintain a majority ownership interest in PMI or that he ever sought to serve as a PMI director.

In early 2015, Dick's health rapidly declined, and he was placed in hospice care. In May 2015, Dick, as PMI's sole director, authorized the issuance of 1,100 shares of PMI common stock to himself in exchange for approximately $3.2 million. The resolution authorizing this share issuance was dated May 1, 2015, and Dick paid PMI for the shares five days later, on May 6, 2015. It is undisputed that Richard was never advised of this share issuance until after Dick's death on May 16, 2015.

After learning about the share issuance, Richard brought direct and derivative claims³ against several parties in the probate court where Dick's will was filed. Richard sued Dick's estate through the two independent co-executors named in Dick's will: Anthony Bock and Karen Castro,⁴ who were Dick's longtime accountant and office manager/comptroller, respectively. Richard asserted that the share issuance was invalid because:

(1) it was a self-dealing transaction by Dick, a PMI director, that violated Dick's fiduciary duties to PMI;

(2) it violated a fiduciary duty Dick owed to Richard , which arose by virtue of a "confidential relationship" between them; and

(3) Dick lacked the mental competence to issue and purchase the PMI shares.

Richard also sued Bock, Castro, and a third individual—Paul Sergent, Dick's longtime attorney—in their individual capacities for allegedly breaching their fiduciary duties to PMI⁵ and for conspiring with Dick to breach his. Richard requested relief in the form of damages and a declaratory judgment.

In response, the defendants, who are petitioners here, asserted that Dick did not owe a Richard a fiduciary duty to manage PMI in Richard's best interest; rather, Dick's duty with respect to the management of PMI was to exercise his business judgment for the sole benefit of the corporation. Petitioners also argued that all the relief Richard sought was barred because the share issuance was fair to PMI and deemed valid and enforceable by the statutory safe harbor set forth in Business Organizations Code Section 21.418(b)(2).⁶

Richard's general theory at trial was that Dick would not have chosen to deprive Richard of the right to control the family business. Richard asserted that Sergent, Bock, and Castro took advantage of Dick's deteriorating condition and masterminded the share issuance to wrest control over PMI from Richard. Sergent, Bock, and Castro countered that, during the months before he died, Dick repeatedly expressed concerns about Richard's ability to manage the business and wanted to ensure someone other than Richard would control PMI.

The trial was bifurcated. The first phase focused on whether the share issuance was valid. Before trial, the probate court informed the parties this would be determined by three sub-issues: (1) whether Dick had the mental capacity to issue and purchase the shares, (2) whether the share issuance breached an informal fiduciary duty Dick owed to Richard, and (3) whether the share issuance was valid under Section 21.418 of the Business Organizations Code. At the close of Richard's case-in-chief, however, the probate court granted a directed verdict against Richard's claim regarding Dick's mental capacity.

The parties sharply disagreed about how to submit the remaining issues. Richard's proposed submission consisted of separate questions asking whether (1) Dick breached his fiduciary duty to PMI, (2) Dick owed and breached a fiduciary duty to Richard, (3) the share issuance was valid and enforceable under Section 21.418(b), and (4) the share issuance complied with Dick's duties under PMI's bylaws. By contrast, petitioners asserted that only the relevant condition in Section 21.418(b) should be submitted: whether the share issuance was fair to PMI. They also argued that Dick did not owe any separate "informal" fiduciary duty to Richard with regard to the management of PMI.⁷

The probate court submitted four questions to the jury, and petitioners objected to all four. They argued the first three, related to an "informal" fiduciary duty, should not be submitted at all because Dick's duty was to manage PMI for the sole benefit of the corporation and he therefore could not also have a duty to manage PMI in the best interest of Richard.

As submitted, Question 1 asked the predicate question to determine whether Dick owed an informal fiduciary duty⁸ to Richard:

Did a relationship of trust and confidence exist between Dick and Richard?

A relationship of trust and confidence existed if Richard justifiably placed trust and confidence in Dick to operate PMI in a manner that was consistent with Richard's best interest. Richard's subjective trust and feelings alone do not justify transforming arm's-length dealings into a relationship of trust and confidence.

This relationship must have been mutual and understood as such by both Richard and Dick.

Answer "Yes" or "No."

Questions 2 and 3 were predicated on a "Yes" answer to Question 1. Question 2 asked the jury whether the relationship of trust and confidence between Richard and Dick terminated before May 1, 2015. Question 3 then asked the jury about breach:

Did Dick comply with his fiduciary duty to Richard with respect to his management of PMI?

Given the relationship of trust and confidence between Dick and Richard, Dick owed Richard a fiduciary duty. To prove Dick complied with his duty, the Estate must show:

1. the share issuance was fair to Richard; and

2. Dick made reasonable use of the confidence that Richard placed in him; and

3. Dick acted in the utmost good faith and exercised the most scrupulous honesty toward Richard; and

4. Dick placed the interests of Richard before his own and did not use the advantage of his position to gain any benefit for himself at the expense of Richard; and

5. Dick fully and fairly disclosed all important information to Richard concerning the share issuance.

In answering whether the share issuance was fair to

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