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Fiduciary






FIDUCIARY DUTY BY CORPORATE OFFICERS AND OTHERS
OFFICERS OF A CORPORATION OWE A FIDUCIARY DUTY TO THE CORPORATION

FORFEITURE OF COMPENSATION OF FIDUCIARY

BREACH OF CONFIDENTIAL RELATIONSHIP

CONSTRUCTIVE FRAUD


OFFICERS OF A CORPORATION OWE A FIDUCIARY DUTY TO THE CORPORATION

Officers of a corporation, by virtue of their authority, privileges and trust, have a strict fiduciary obligation to their corporation. International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 576 (Tex. 1963). With this obligation goes responsibility and accountability. Id. Officers of a corporation occupy a fiduciary position and owe a duty of loyalty to the corporation. Poe v. Hutchins, 737 S.W.2d 574, 584 (Tex. App.–Dallas 1987, writ ref’d n.r.e.). Corporate officers owe the corporation and its shareholders a duty to act only in their best interest. Hughes v. Houston Northwest Medical Ctr., Inc., 680 S.W.2d 838, 843 (Tex. App.–Houston [1st Dist.] 1984, writ ref’d n.r.e.).

Corporate officers and directors are fiduciaries, and the consequences of their acts as such are determinable under the facts in each case. Paddock v. Siemoneit, 147 Tex. 571, 218 S.W.2d 428, 7 A.L.R.2d 1062. Contracts between a corporation and its officers and directors are not void but are voidable for unfairness and fraud with the burden upon the fiduciary of proving fairness. This Court in Tenison v. Patton, 95 Tex. 284, 67 S.W. 92, considered the problem of whether a contract which a director makes with the corporation is voidable at the option of the corporation or its stockholders without inquiry into the fairness of the transaction. In adopting the rule that such a contract may be upheld, with the burden on the director of establishing the fairness of the transaction to the corporation, this Court expressed full assent to the principle “”which declares that a trustee, in dealing with trust property, cannot claim for himself, but must yield to the beneficiary, any profit which he makes.” The opinion continued by saying that “”The cases in which trustees have been held liable for profits, upon the principle stated, have generally arisen where, in the acquisition or disposition of property for the beneficiary, the trustee has received to himself {368 S.W.2d 577}a profit, as when he has sold property for one price, and accounted to the corporation for a less price, or has bought at one price, and sold to the company at a larger one, or has received a secret bonus or advantage in the transaction in which he has acted for the corporation.” See also Popperman v. Rest Haven Cemetery, 162 Tex. 255, 345 S.W.2d 715; Zorn v. Brooks, 125 Tex. 614, 83 S.W.2d 949; Milam v. Cooper Company, Tex.Civ.App., 258 S.W.2d 953, wr. ref. n. r. e. A corporate fiduciary is under obligation not to usurp corporate opportunities for personal gain, and equity will hold him accountable to the corporation for his profits if he does so. Transactions in which a corporate fiduciary derives personal profit, either in dealing with the corporation or its property, or in matters of corporate interest, are subject to the closest examination and the form of the transaction will give way to the substance of what actually has been brought about. One court has commented that a director of a corporation is held “”in official action, to the extreme measure of candor, unselfishness, and good faith. Those principles are rigid, essential, and salutary.” Kavanaugh v. Kavanaugh Knitting Co., 226 N.Y. 185, 123 N.E. 148. In speaking of the wise interposition of the law in relations which excite conflict between self-interest and integrity, another court has commented that the law “”acts not on the possibility, that, in some cases, the sense of that duty may prevail over the motives of self-interest, but it provides against the probability in many cases, and the danger in all cases, that the dictates of self-interest will exercise a predominant influence and supersede that of duty.” Michoud v. Girod, 4 How. 503, 11 L.Ed. 1076, 1099. A director who diverts profits from the corporation in violation of his fiduciary relationship is personally liable even though the profits are acquired by an agency controlled by the director. Durfee v. Durfee & Canning, Inc., 323 Mass. 187, 80 N.E.2d 522. The responsibility of the corporate fiduciary includes the dedication of his uncorrupted business judgment for the sole benefit of the corporation. Perlman v. Feldmann, 2 Cir., 219 F.2d 173, 50 A.L.R.2d 1134. The rule of corporate opportunity charges the interest acquired by an officer or director of a corporation in violation of his duty with a trust for the benefit of the corporation; “”a constructive trust is the remedial device through which precedence of self is compelled to give way to the stern demands of loyalty.” Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A.2d 503. Western States Life Insurance Co. v. Lockwood, 166 Cal. 185, 135 P. 496; 173 Cal. 734, 161 P. 498, considered the problem of profits received by the president, who was also a director of the corporation, as a secret partner in a firm contracting with the corporation to secure subscriptions to its capital stock. The court upheld recovery of the profits by the corporation against the contention that the services of the president and director were reasonably worth the amount received and that the amount was fairly earned. The court reasoned that the fiduciary was forbidden to make any secret profit and the activities of the fiduciary promoting the sale of subscriptions through the selling agency “”must be held to have done in execution of his trust as such director.” which rendered him accountable to the corporation for the personal profits realized therefrom.

International Bankers Life Insurance Co. v. Holloway, 368 S.W.2d 567, 576-77 (Tex. 1963).

Fiduciaries who breach their duty forfeit all right to compensation, even if they did not profit from the breach of fiduciary duty.

It is beside the point for either Turner or Corbett to say that Kinzbach suffered no damages because it received full value for what it has paid and agreed to pay. A fiduciary cannot say to the one to whom he bears such relationship: You have sustained no loss by my misconduct in receiving a commission from a party opposite  to you, and therefore you are without remedy. It would be a dangerous precedent for us to say that unless some affirmative loss can be shown, the person who has violated his fiduciary relationship with another may {138 Tex. 574} hold on to any secret gain or benefit he may have thereby acquired. It is the law that in such instances if the fiduciary “takes any gift, gratuity, or benefit in violation of his duty, or acquires any interest adverse to his principal, without a full disclosure, it is a betrayal of his trust, and a breach of confidence, and he must account to his principal for all he has received.” United States v. Carter, 217 U.S. 286, 30 Sup. Ct. 520, 54 L. Ed. 775, 19 Am. Cas. 594. See also Ash v. A. B. Frank Co., 142 S. W. 42; Armstrong v. O’Brien, 83 Texas 635, 19 S. W. 268.

Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509, 514-15 (1942). See also Moore v. Kelley, 162 S.W. 1034, 1037 (Tex. Civ. App. — Amarillo 1914, writ ref’d) (“if [an agent] acts adversely to his employer in any part of the transaction, …, it amounts to such a fraud upon the principal as to forfeit any right to compensation for services”).

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FORFEITURE OF COMPENSATION OF FIDUCIARY

Nor is automatic and complete forfeiture necessary for the remedy to serve its purpose. On the contrary, to require an agent to forfeit all compensation for every breach of fiduciary duty, or even every serious breach, would deprive the remedy of its equitable nature and would disserve its purpose of protecting relationships of trust. A helpful analogy, the parties agree, is a constructive trust, of which we have observed:

Constructive trusts, being remedial in character, have the very broad function of redressing wrong or unjust enrichment in keeping with basic principles of equity and justice. . . . Moreover, there is no unyielding formula to which a court of equity is bound in decreeing a constructive trust, since the equity of the transaction will shape the measure of relief granted.38

Like a constructive trust, the remedy of forfeiture must fit the circumstances presented. It would be inequitable for an agent who had performed extensive services faithfully to be denied all compensation for some slight, inadvertent misconduct that left the principal unharmed, and the threat of so drastic a result would unnecessarily and perhaps detrimentally burden the agent’s exercise of judgment in conducting the principal’s affairs.

The proposed Restatement (Third) of The Law Governing Lawyers rejects a rigid approach to attorney fee forfeiture. Section 49 states:

A lawyer engaging in clear and serious violation of duty to a client may be required to forfeit some or all of the lawyer’s compensation for the matter. In determining whether and to what extent forfeiture is appropriate, relevant considerations include the gravity and timing of the violation, its wilfulness, its effect on the value of the lawyer’s work for the client, any other threatened or actual harm to the client, and the adequacy of other remedies.39

The remedy is restricted to “clear and serious” violations of duty. Comment d to section 49 explains: “A violation is clear if a reasonable lawyer, knowing the relevant facts and law reasonably accessible to the lawyer, would have known that the conduct was wrongful.”40 The factors for assessing the seriousness of a violation, and hence “whether and to what extent forfeiture is appropriate”, are set out in the rule. Elaborating on the rule, the comments to section 49 make it clear that forfeiture of fees for clear and serious misconduct is not automatic and may be partial or complete, depending on the circumstances presented. Comment a states: “A lawyer is not entitled to be paid for services rendered in violation of the lawyer’s duty to a client, or for services needed to alleviate the consequences of the lawyer’s misconduct.”41 And comment e observes: “Ordinarily, forfeiture extends to all fees for the matter for which the lawyer was retained . . . .”42 But comment e adds: “Sometimes forfeiture for the entire matter is inappropriate, for example when a lawyer performed valuable services before the misconduct began, and the misconduct was not so grave as to require forfeiture of the fee for all services.”43 And comment b expands on the necessity for exercising discretion in applying the remedy:

Forfeiture of fees, however, is not justified in each instance in which a lawyer violates a legal duty, nor is total forfeiture always appropriate. Some violations are inadvertent or do not significantly harm the client. Some can be adequately dealt with by the remedies described in Comment a or by a partial forfeiture (see Comment e). Denying {997 S.W.2d 242} the lawyer all compensation would sometimes be an excessive sanction, giving a windfall to a client. The remedy of this Section should hence be applied with discretion.44

The Restatement’s approach, as a whole, is consistent with Texas law concerning constructive trusts, and we agree with the forfeiture rule stated in section 49 as explained in the comments we have quoted. This rule, or something similar, also appears to have been adopted in most other jurisdictions that have considered the issue.45

The rule is not dependent on the nature of the attorney-client relationship, as the {997 S.W.2d 243} court of appeals thought,46 but applies generally in agency relationships. Thus, as we have already seen, section 243 of the Restatement (Second) of Trusts sets out a similar rule for forfeiture of a trustee’s compensation: “If the trustee commits a breach of trust, the court may in its discretion deny him all compensation or allow him a reduced compensation or allow him full compensation.”47 Comment c to section 243 elaborates:

It is within the discretion of the court whether the trustee who has committed a breach of trust shall receive full compensation or whether his compensation shall be reduced or denied. In the exercise of the court’s discretion the following factors are considered: (1) whether the trustee acted in good faith or not; (2) whether the breach of trust was intentional or negligent or without fault; (3) whether the breach of trust related to the management of the whole trust or related only to a part of the trust property; (4) whether or not the breach of trust occasioned any loss and whether if there has been a loss it has been made good by the trustee; (5) whether the trustee’s services were of value to the trust.48

Section 469 of the Restatement (Second) of Agency requires forfeiture of all compensation that cannot be apportioned for properly performed services if the agent willfully and deliberately breaches his duty to his principal,49 and as we have noted, comments to section 49 of the proposed Restatement (Third) of The Law Governing Lawyers echo this view.50 But we do not read section 469 to mandate automatic forfeiture or preclude consideration of factors other than an agent’s willfulness any more than comments to section 49 do.

Section 49 sets out considerations similar to those for trustees in applying the remedy of fee forfeiture to attorneys. As we have already noted, they are: “the gravity and timing of the violation, its wilfulness, its effect on the value of the lawyer’s work for the client, any other threatened or actual harm to the client, and the adequacy of other remedies.”51 These factors are to be considered in determining whether a violation is clear and serious, whether forfeiture of any fee should be required, and if so, what amount. The list is not exclusive. The several factors embrace broad considerations which must be weighed together and not mechanically applied. For example, the “wilfulness” factor requires consideration of the attorney’s culpability generally; it does not simply limit forfeiture to situations in which the attorney’s breach of duty was intentional. The adequacy-of-other-remedies factor does not preclude {997 S.W.2d 244} forfeiture when a client can be fully compensated by damages. Even though the main purpose of the remedy is not to compensate the client, if other remedies do not afford the client full compensation for his damages, forfeiture may be considered for that purpose.

To the factors listed in section 49 we add another that must be given great weight in applying the remedy of fee forfeiture: the public interest in maintaining the integrity of attorney-client relationships. Like the fifth factor identified by the court of appeals — “the extent to which the attorney’s or firm’s conduct offends a public sense of justice and propriety”52 — concern for the integrity of attorney-client relationships is at the heart of the fee forfeiture remedy. The Attorneys’ argument that relief for attorney misconduct should be limited to compensating the client for any injury suffered ignores the main purpose of the remedy.

Amici curiae, Professor Charles Silver and Professor Lynn Baker of the University of Texas School of Law, argue that section 49 of the proposed Restatement (Third) of The Law Governing Lawyers differs from the rule applicable to other agency relationships and is bad policy. They contend that in general the remedy of forfeiture applies only when the agent is suing for payment of compensation, and for a good reason. A principal dissatisfied with an agent’s conduct, they argue, should terminate the agency and withhold compensation; the principal should not be allowed to wait until after the agent has completed his service and then try to take unfair advantage by suing to recover compensation already paid. We disagree that section 49 states a different rule for attorneys. As we have already noted, section 469 of the Restatement (Second) of Agency provides:

An agent is entitled to no compensation for conduct which is disobedient or which is a breach of his duty of loyalty; if such conduct constitutes a wilful and deliberate breach of his contract of service, he is not entitled to compensation even for properly performed services for which no compensation is apportioned.53

Amici argue that this rule is limited by the caption of section 469, “Disloyalty or Insubordination as Defense”.54 But the comments to section 469 do not limit application of the rule to the defense of an agent’s claim for compensation. Comment a states in part: “An agent is entitled to no compensation for a service which constitutes a violation of his duties of obedience.”55 Comment e adds that a “principal can maintain an action to recover the amount” of compensation paid to an agent to which the agent is not entitled.56 Amici argue that the scope of the rule should not be found in the comments, but we think there is more justification for looking to the comments than to two words in the title.

Nor do we agree with amici that forfeiture should, as a matter of policy, be limited to the defense of an agent’s claim for compensation. A client may well not know of his attorney’s breach of fiduciary duty until after the relationship has terminated. An attorney who has clearly and seriously breached his fiduciary duty to his client should not be insulated from fee forfeiture by his client’s ignorance of the matter. Nor should an attorney who has deliberately engaged in professional misconduct be allowed to put his client to the choice of terminating the relationship and risking that the outcome of the litigation may be adversely affected, or continuing the relationship despite the misconduct. The risk that a client will try to take unfair advantage of his former attorney does not justify {997 S.W.2d 245} restricting forfeiture to a defensive remedy when the trial court is easily able to prevent inequity in applying the remedy.

Accordingly, we conclude that whether an attorney must forfeit any or all of his fee for a breach of fiduciary duty to his client must be determined by applying the rule as stated in section 49 of the proposed Restatement (Third) of The Law Governing Lawyers and the factors we have identified to the individual circumstances of each case.

Burrow v. Arce, 997 SW2d 229, 241-43 (Tex. 1999)(emphasis added).

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BREACH OF CONFIDENTIAL RELATIONSHIP

Texas has recognized the tort of breach of confidential relationship. Thigpen v. Locke, 363 S.W.2d 247 (Tex. 1962) sets forth the elements of a confidential relationship.

. . . Confidential relationships may arise not only from the technical fiduciary relationships such as attorney-client, trustee-cestui quie trust, partner-partner, etc.- which as a matter of law are relationships of trust and confidence – but may ariseinformally from “moral, social, domestic, or purely personal” relationships. . . . But mere subjective trust alone is not enough to transform arms length dealing intoa fiduciary relationship so as to avoid the statute of frauds. . . . We reaffirm theprinciple that parties to a contract have an obligation to protect themselves byreading what they sign.

In Thigpen, 363 S.W.2d at 253, the Supreme Court made this observation concerning the law of confidential or fiduciary relationships, viz:

Restatement of Restitution defines the confidential relationship existing “. . . where, because of family relationship or otherwise, the transferrer is in fact accustomed to be guided by the judgment or advice of the transferee or is justified in placing confidence in the belief that the transferee will act in the interest of the transferor.” Restatement of restitution § 182, comment on clause (b), p. 75. In the cases of Mills v. Gray, 147 Tex. 33, 210 S.W.2d 985, and Fitz-Gerald v. Hull, 150 Tex. 39, 237 S.W.2d 256, this court recognized that confidential relationship may arise not only from the technical fiduciary relationships such as attorney-client, cestui que trust, partner and partner, etc.–which as a matter of law or relationships in trusting confidence–but may arise informally from “moral, social, domestic, or purely personal” relationships. 54 Am.Juris. 173 § 225, “Trusts”. (Quoted in Fitz-Gerald v. Hull, supra). The existence of the fiduciary relationship is to be determined from the actualities of the relationship between the persons involved. (Emphasis supplied).

Thigpen case went on to hold that debtor-creditor relationship did not, as a matter of law, establish a confidential or fiduciary relationship. However, it was very careful to point out that in such holding it was not detracting from the former statements of the law and held as follows:

Our holding in no way detracts from the principle that a relationship of trust andconfidence may be shown to arise informally from purely personal relationships.All we hold is that respondents do not testify to facts–other than their ownsubjective feelings–which show that their relationship with Thigpen was anythingmore than a debtor-creditor relationship.

Crim Truck & Tractor Co. v. Navistar International Transportation Corp., 823 S.W.2d 591 (Tex. 1992), held as follows:

[There is] . . . the rule that a party to a contract is free to pursue its own interest,even if it results in the breach of that contract, without incurring tort liability. . .(citing cases). . . . The fact that one business man trusts another, and relies uponhis promise to perform a contract, does not rise to a confidential relationship. . .(citing cases). Every contract includes an element of confidence and trust that eachparty will faithfully perform his obligation under the contract. Neither is the factthat the relationship has been a cordial one, of long duration, evidence of a confidential relationship. . . Mere subjective trust alone is not enough totransform arm length dealing into a fiduciary relationship. . . Further, the Crims point to language in the contract which they claim articulates a special confidencebetween these parties beyond that ordinarily found in a contract. We areunpersuaded that this language was ever intended to inject an element of personal trust and confidence above and beyond that which is ordinarily contemplated by parties to contract of this type. . . The Crims’ reliance on the cited contract language as evidence of a confidential relationship is misplaced. Such “boiler plate” language is designed to give the parties some degree of control over whom they do business, and nothing more.

The language set forth in footnote 7, page 595 of the Crim Truck & Tractor v. Navistar International Transportation Corp. case, supra, has this language: “This is a personal  agreement, involving mutual confidence and trust. . . “

In Fitz-Gerald v. Hull, 230 S.W.2d 256, 261, 262 (Tex. 1951), the Supreme Court gave a detailed discussion of a general law relating to confidential relationships which is instructive in  our situation. The court held as follows:

While a confidential or fiduciary relationship does not in itself give rise toa constructive trust, an abuse of confidence rendering the acquisition or retentionof property by one person unconscionable against another suffices generally toground equitable relief in the form of the declaration and enforcement ofconstructive trust, and the courts are careful not to limit the rule or the scope of its application by a narrow definition of fiduciary or confidential relationships protected by it. An abuse of confidence within the rule maybe an abuse of either a technical fiduciary relationship or of an informal relationship where one persons trusts in relies upon another, while the relation is a moral, social, domestic, or merely personal one. . .

The abuse of a confidential relationship by acquiring property through theemployment of knowledge or interest obtained in such relationship constitutes asufficient basis for equitable relief in the form of the declaration and enforcementof a constructive trust in respect of such property and in favor of the person wrong.The relationships of trustee and cestui que trust, principal and agent, client andattorney, and employer and employee, are striking, but far from exclusive,examples of confidential relationships within the meaning of this rule. . .

An unfair transaction between a confider and confidant or fiduciary, at leastwhere the confidence is induced by fiduciary relationship between the parties, givesrise to a constructive trust in respect of any unjust enrichment of the confidant or fiduciary. Where such a transaction is attacked, the burden of proof is on theconfidant or fiduciary to establish the fairness of the transaction, and to this end hemust fully disclose the facts and circumstances, and affirmatively show his goodfaith and the absence of pressure or influence on his part in the matter. However,it is not every relationship to which the term “fiduciary” or “confidential” can be applied with reason or plausibility, so as to raise a presumption of unfair dealings between the parties to the relationship. It is a question of the actual relationship between the parties that must be inquired into, and not whether the terms “fiduciary,” “confidential,” or “trust” can, with some degree of reason, be applied to the relationship. . . .

. . . The rules is not confined to a particular class of persons, such as guardians, trustee, or solicitors, but is a rule of universal application to all persons coming within its principle.

Thus we see that the principle of a confidential or fiduciary relationship is not to be narrowly construed, but is to be inquired about according to the circumstances and people involved. It is clearly an inquiry as a matter of fact.

In Schiller v. Elick, 240 S.W.2d 997, 999-1000 (Tex. 1951), the Supreme Court was dealing with an agent in relation to the agents principals. The Supreme Court made the following observations, viz:

The term “fiduciary” as used in the Texas cases has not been reduced to precise definition. Edward v. Strong, 147 Tex. 155, 213 S.W.2d 979. The cases all involve an overreaching made possible by a misplaced confidence. It is not necessary for there to be all elements of agency for hire for a “fiduciary” relationship to come into being. See Fitz-Gerald v. Hull, Tex.Sup., 237 S.W.2d 256, for an exhaustive discussion of the term “fiduciary.”

Schiller stands for the proposition that once again the term “fiduciary” is one to be determined on the facts of the case.

In Page Airways, Inc. v. Associated Radio Service Co., 545 S.W.2d 184, 192-193 (Tex.Civ.App. — San Antonio 1976, n.r.e.), the court made the following observations concerning how confidential or fiduciary relationships are created and how they are established in the courts:

Waiver or estoppel ordinarily are questions of fact, and if the evidence is conflicting as to such matters, it should be submitted to the jury . . . [citing cases] . . . whether or not a confidential relationship exists is a question of fact. MacDonald v. Follett, 142 Tex. 616, 180 S.W.2d 334 (1944). . . A confidential relationship exists where one party is in fact accustomed to being guided by the judgment or advice of the other, or is justified in placing confidence in the belief that such party will act in its interest. Thigpen v. Locke, 363 S.W.2d 247 (Tex. 1962). In Schiller v. Elick, 150 Tex. 363, 240 S.W.2d 997 (1951) the court said:

Defendant Elick denies any obligation to or fiduciary relationship with the Schillers. . . . Elick offers considerable proof supporting his contention that this was in fact an arms length trade and argues it effective here. Our problem is not to determine who is telling the truth, but only to determine whether there is any testimony which, if believed, will support the trial court’s judgment. Whether or not a fiduciary relationship exists is question of fact.

A confidential relationship may arise not only from a technical fiduciary relationship, but also informal relationship where one person trusts in and relies upon another, whether the relationship is social, domestic, or personal. Fitz-Gerald v. Hull, 150 Tex. 39, 237 S.W.2d 256 (1951). (Emphasis supplied)

Page Airways reasserts what has been established already in the Supreme Court cases — that is, that whether or not a fiduciary relationship exists is a question of fact.

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CONSTRUCTIVE FRAUD

At common law, the word “fraud” refers to an act, omission, or concealment in breach of a legal duty, trust, or confidence justly imposed, when the breach causes injury to another or the taking of an undue and unconscientious advantage.[ft.nt.6] Russell v. Industrial Transp. Co., 113 Tex. 449, 258 S.W. 462 (1924); Kellum v. Smith, 18 Tex. 835 (1857). Common-law fraud includes both “actual” and “constructive {759 S.W.2d 495} fraud.” The former encompasses intentional breaches of duty that are designed to injure another or to obtain an undue and unconscientious advantage, Price v. D’Yarmett, 27 S.W.2d 616 (Tex.Civ.App.1930, writ ref’d); the latter encompasses those breaches that the law condemns as “fraudulent” merely because they tend to deceive others, violate confidences, or cause injury to public interests, the actor’s mental state being immaterial, Archer v. Griffith, 390 S.W.2d 735 (Tex.1965). A false representation of a past or present material fact, when one has a duty to speak the truth, is of course a frequent ground for recovery in fraud when another relies thereon to his detriment, even in an ordinary arms-length transaction in which no “fiduciary duties” exist and only the ethics of the marketplace apply. See, e.g., Jeffcoat v. Phillips, 534 S.W.2d 168 (Tex.Civ.App.1976, writ ref’d n.r.e.).

If, however, the relationship between the parties is a “fiduciary relationship,” as a matter of fact or of law, the law imputes to the relationship additional and higher duties and their breach may constitute a fraud as well. Generally speaking, these additional duties are described as those of “good faith and candor” by the fiduciary toward his principal, 36A C.J.S. Fiduciary, at 381 (1961). This includes the general duty of full disclosure respecting matters affecting the principal’s interests and a general prohibition against the fiduciary’s using the relationship to benefit his personal interest, except with the full knowledge and consent of the principal. All transactions between the fiduciary and his principal are presumptively fraudulent and void, which is merely to say that the burden lies on the fiduciary to establish the validity of any particular transaction in which he is involved. Id. at 389. Particular applications of these general rules, in circumstances analogous to the present case, are set out in the footnote.[ft.nt.7 omitted]

Chien v. Chen, 759 S.W.2d 484, 494-95 (Tex. App.–Austin 1988, no writ).

The “legal duty” may arise from several sources. It may arise because of a statute, as in Tex. Rev. Civ. Stat. Ann. art. 6573a, setting out the various acts and omissions by a real-estate broker which, when applicable, may justify revoking or suspending his license. The duty may arise from contract as well. Finally, the duty may arise from a “trust.” This word actually refers to a very precise relationship — one in which a person holds a property interest subject to an equitable obligation to keep or use that interest for the benefit of another. 1 Bogert, Trusts and Trustees, § 1, 1-2 (2d ed. 1984); Restatement 2d, Trusts § 2 (1959). While the expression “fiduciary relationship” is thus a defining element of the legal concept of a “trust,” the same expression has been employed by analogy in other relationships that are not “trusts” in the strict or technical sense, i.e., partnerships, agency, attorney-client, accountant-client, and others. This simply is a shorthand way of implying that the higher duties demanded of a fiduciary are applicable in that particular relationship — a relationship where “the law demands of one party an unusually high standard of ethical or moral conduct with reference to another.” 1 Bogert, supra, at 3.

The specific kinds of relationship, in which the higher standards do apply, may be determined as a matter of law or as a matter of fact. As a matter of law, they apply for example in the attorney-client relationship, Cooper v. Lee, 75 Tex. 114, 12 S.W. 483 (Tex.1889), between a director and his corporation, Tenison v. Patton, 95 Tex. 284, 67 S.W. 92 (1902), between partners, Johnson v. Peckham, 132 Tex. 148, 120 S.W.2d 786 (1938), between joint tenants having funds on deposit, Texas Bank & Trust Co. v. Moore, 595 S.W.2d 502 (Tex.1980), and between principal and agent, Scott v. Weaver, 2 S.W.2d 870 (Tex.Civ.App.1927, writ dism’d).

As a matter of fact, the higher standards may apply if it be established that one has placed special confidence in another where the latter is bound, in equity and good conscience, to act in good faith and with due regard to the interests of the other; or when special confidence is reposed in one who obtains thereby a resulting superiority of position and influence. See, e.g., Consolidated Gas & Equipment Company of America v. Thompson, 405 S.W.2d 333 (Tex.1966); Thigpen v. Locke, 363 S.W.2d 247 (Tex.1962); Schiller v. Elick, 150 Tex. 363, 240 S.W.2d 997 (1951); Kinzbach Tool Co., Inc., 160 S.W.2d at 512, 150 Tex. 363. The fiduciary relationship may rise merely “from moral, social, domestic or purely personal relationships,” Thigpen, 363 S.W.2d at 253, but mere antecedent dealings between persons or the mere fact that one subjectively trusts the other do not alone justify reposing confidence in him in the sense demanded by a “fiduciary relationship,” something apart from the transaction itself being necessary. Consolidated Gas & Equipment Co., 405 S.W.2d at 336. The length of the relationship is one important factor. Harris v. Sentry Title Co., Inc., 715 F.2d 941 (5th Cir. 1983), cert. denied, 467 U.S. 1226, 81 L. Ed. 2d 874, 104 S. Ct. 2679 (1984).

Equitable remedies, such as rescission or the imposition of a constructive trust, may be awarded for breach of the higher standards of conduct demanded in the fiduciary relationship. Consolidated Gas & Equipment Company of America, 405 S.W.2d at 336; Thigpen v. Locke, 363 S.W.2d at 252.

Chien v. Chen, 759 S.W.2d 484, 494, n.6 (Tex. App.–Austin 1988, no writ).

The issue here is constructive or legal fraud and not actual fraud. Actual fraud usually involves dishonesty of purpose or intent to deceive, whereas constructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injure public interest. 37 C. J. S. Fraud § 2; 23 Am. Jur. Fraud and Deceit § 4.

Archer v. Griffith, 390 S.W.2d 735, 740 (Tex.1965). Constructive fraud can apply in a principal-agent relationship. Fitz-Gerald v. Hull, 230 S.W.2d 256, 261 (Tex. 1951).

Agency, properly speaking, relates to commercial or business transactions, while service deals with matters of manual or mechanical execution; the essential distinction is that an agent is employed to establish contractual relations between the principal and third persons, while the servant is not.

Talley v. Shasta and Co., 146 S.W.2d 802, 804 (Tex.Civ.App. — 1940, no writ).

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