The plaintiffs alleged that the Debtor breached his fiduciary duties and committed fraud and sought an award of damages along with attorney’s fees. The plaintiffs also argued that under sections 523(a)(2)(a) and 523(a)(4) their claim against the Debtor should be deemed nondischargeable. The Debtor asserted numerous affirmative defenses in response to these claims including that the breach of fiduciary duty claim was barred by the Texas four-year statute of limitations under Tex. Civ. Prac. & Rem. Code § 16.004. In turn, the plaintiffs responded that the discovery rule deferred the accrual of their claim against the Debtor until the plaintiffs knew or should have known of the facts giving rise to the cause of action. First, the Court held even with all facts construed in the Debtor’s favor, no reasonable fact-finder could hold that the plaintiffs knew or should have known of their wrongful injury. The plaintiffs were entitled to trust the documents and explanation provided by the Debtor as a fiduciary and thus, the application of the statute of limitations was equitably stopped by virtue of fraudulent concealment.
The Court further held that even if the breach of fiduciary duty allegation was barred by the statute of limitations, the discovery rule tolled the limitations. To determine the discovery rule’s applicability, Texas law requires that (1) the nature of the injury must be “inherently undiscoverable” and (2) that the injury itself must be “objectively verifiable.” The second element was not contested and in ruling on whether the injury was “inherently undiscoverable,” the Court found that the Debtor’s significant degree of cover-up was anything but apparent to the plaintiffs and that the Debtor clearly misled the plaintiffs by affirmative misstatement, intentionally withholding material information, and document-based deceptions. Consequently, the Debtor’s statute of limitations defense was denied.
Light v. Whittington (In re Whittington), 530 B.R. 360 (Bankr. W.D. Tex. 2014).
An unpaid subcontractor brought an adversary proceeding against the Debtor, a contractor, to except debt from discharge. The contractor stipulated to its liability on the debt and its nondischargeability but the subcontractor sought attorney’s fees for prosecuting the nondischargeability action. The Court found that attorney’s fees in prosecuting a dischargeability action can be recovered and declared nondischargeable if the fees are (1) allowed by statute or contract and (2) arise from or are on account of the conduct that resulted in a nondischargeable debt. In this case, the subcontractor sought fees under section 38.001(2) of the Texas Civil Practice and Remedies Code, which allows a party to recover its fees for establishing debt for labor performed. The subcontractor sought to extend section 38.001(2) to also apply to actions for misapplication of funds under the Texas Construction Trust Fund Act, even though the latter does not contain a fee-shifting provision. As Texas courts are split on this issue, the Court chose to follow the Texas courts that had held that the subcontractor could only recover fees incurred in establishing the Debtor’s liability for labor that the subcontractor performed and not for attorney’s fees incurred in establishing that the Debtor had violated the Texas Construction Trust Fund Act.
WL Cite: Schwertner Backhoe Services, Inc. v. Kirk (In re Kirk), 525 B.R. 325 (Bankr. W.D. Tex. 2015).