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Texas Law

Texas Attorney-Client Relationship and Rule 11 Settlement

Kansas City Southern Railway v. Chavez et. al (In re Rosenthal & Watson, P.C.), adversary no. 18-01091 (January 31, 2020)

Issues: Chapter 7 trustee of debtor law firm removed a state court suit between the railway and former clients of debtor law firm to bankruptcy court.  Issues addressed by the Court included whether settlement of state court suit was enforceable, whether debtor law firm breached its fiduciary duty to clients, whether debtor law firm committed barratry, and whether bankruptcy estate of debtor law firm had contractual attorney’s fee lien.

Holdings: In a lengthy Opinion, the Court analyzed Rule 11 of Texas Rules of Civil Procedure, authority of an attorney to settle a suit for clients, Texas agency law, attorney-client duties under Texas law, various Texas Disciplinary Rules, and contractual attorney’s lien.  In sum, the Court held that: (a) Rule 11 settlement agreement was not enforceable because settlement was not authorized by clients and was an impermissible aggregate settlement; (b) law firm breached its fiduciary duty to clients, warranting equitable forfeiture of attorney’s fees and portion of expenses; (c) law firm did not commit barratry; and (d) bankruptcy estate of law firm had valid contractual lien for remaining portion of expenses.

 

Texas Rural Homestead Exemption

In re Pool, Chapter 7 case no. 18-11052-hcm (March 5, 2019)

Issues: Creditor filed an objection to a rural homestead exemption claimed by the Debtors.  The Debtors owned two separate (non-contiguous) rural properties.  The Debtors’ residence (“Residence”) was located on one property.  The Debtors actively operated their body shop business (“Body Shop”) on the other property.  The income generated from the Body Shop was used by the Debtors to support their family and Residence.  The issues addressed by the Court included whether a rural homestead under Texas law can include separate (non-contiguous) property where a debtor actively operates a business to support a debtor’s family.

Holdings: The Court analyzed Texas rural homestead laws, including Texas Property Code § 42.001(b), Texas Constitution art. XVI § 51, Fifth Circuit precedent, and Texas case law.  The Court held that a rural homestead under Texas law can include separate (non-contiguous) property where a debtor actively operates a business to support a debtor’s family and that has a nexus to the residence. As a result, the Court denied the creditor’s objection to the exemption, and determined that the Body Shop and the Residence owned by the Debtors were both exempt as a rural homestead.

 

Texas Property Code

Monge v. Rojas, et al. (September 05, 2014)   
Issues: Individual Debtors (as Plaintiffs), brought adversary proceeding against multiple Defendants. All secondary Defendants settled prior to and during trial; only primary Defendants remained. Most of Plaintiffs’ claims against remaining Defendants and Defendants’ counterclaims against Plaintiffs were based exclusively on state law causes of action, and some claims and counterclaims were based on the Bankruptcy Code. Prior to trial, all remaining parties consented to entry of a final judgment by the Bankruptcy Court. However, given the recent holdings of the Fifth Circuit regarding the constitutional authority of the Bankruptcy Court to enter a final judgment on state law claims even with consent of the parties, the Bankruptcy Court submitted 178 pages of Proposed Findings of Fact and Conclusions of Law to the District Court for review under 28 U.S.C. §157(c)(2) and Bankruptcy Rule 9033. Following review, the District Court largely adopted the Bankruptcy Court’s proposed findings and conclusions, and entered final judgment for Plaintiffs.

The disputes centered around four different residential properties and commercial property developments located in the States of New Mexico and Texas. In general, Plaintiffs sought turnover of and declaratory relief regarding certain real property in the possession of Defendants, and actual and exemplary damages based on breach of contract, fraud, breach of fiduciary duty, negligence, gross negligence, the Texas Deceptive Trade Practices Act, equitable theories under state law, and violation of the automatic stay. In general, the remaining Defendants asserted counterclaims and affirmative defenses based on the Texas Property Code, breach of contract, equitable theories under state law, statute of limitations, and section 365(i) of the Bankruptcy Code. The Bankruptcy Court conducted a six-day trial on the merits, which featured over 15 witnesses and thousands of documents. Holdings: The Bankruptcy Court proposed (and the District Court adopted) a judgment in favor of Plaintiffs and against the remaining Defendants for turnover of possession of one of the real properties, and actual damages, attorneys fees, and pre-judgment interest totaling about $1 million. In general, the Bankruptcy Court’s proposed findings and conclusions (1) awarded damages to Plaintiffs based on breach of contract and violation of the automatic stay; (2) determined that Plaintiffs were entitled to possession and turnover of certain real property held by Defendants; (3) found that the Texas Property Code did not apply to real property located in the State of New Mexico; (4) found that section 365(i) of the Bankruptcy Code did not apply to a lease/option which expired by its terms prior to Plaintiffs’ bankruptcy filing; (5) found that several of Plaintiffs’ causes of action relating to some of the properties were barred by the statute of limitations; (6) determined that the fraud-based claims of Plaintiffs should be denied; and (7) found that some of the damages sought by both Plaintiffs and Defendants were speculative.