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Wells Fargo Bank, N.A. v. Militello

Court of Appeals of Texas, Fifth District, Dallas

June 20, 2017

WELLS FARGO BANK, N.A., AS SUCCESSOR TRUSTEE TO CHASE BANK OF TEXAS, N.A., FOR THE REVOCABLE TRUST ESTABLISHED BY ANGELA LEIGH SIMPSON STARRETT BY AGREEMENT DATED SEPTEMBER 8, 1999, Appellant
v.
ANGELA LEIGH MILITELLO, F/K/A ANGELA LEIGH SIMPSON STARRETT, Appellee

         On Appeal from the 298th Judicial District Court Dallas County, Texas Trial Court Cause No. DC-10-06211

          Before Justices Bridges, Lang-Miers, and Schenck

          MEMORANDUM OPINION

          ELIZABETH LANG-MIERS JUSTICE.

         Appellant Angela Leigh Militello sued appellant Wells Fargo Bank, N.A., for breach of fiduciary duty, fraud, negligence, and gross negligence arising from its management of several trusts. After a bench trial, the trial court rendered judgment for Militello on all of her claims and made findings of fact and conclusions of law in support of the judgment. In this appeal, Wells Fargo challenges the legal and factual sufficiency of the evidence to support the trial court's awards of actual, exemplary, and mental anguish damages. Wells Fargo also challenges the trial court's award of prejudgment interest, and contends the trial court erred by rejecting an agreed settlement credit and by refusing to enforce an exculpatory clause in one of the trusts.

         Militello concedes that the trial court erred by rejecting the settlement credit, [1] and further agrees to remit several specific damage amounts awarded by the trial court. But she contends the evidence was sufficient to support the trial court's awards in all other respects, and she argues that the trial court did not err regarding the exculpatory clause or in its prejudgment interest award. We conclude:

• the evidence is legally and factually sufficient to support the trial court's actual damage awards, as partially remitted;
• the evidence is legally and factually sufficient to support an award of mental anguish damages, but we suggest remittitur of a portion of the trial court's award;
• the evidence is legally and factually sufficient to support an award of exemplary damages, adjusted by the voluntary remittitur and the suggested remittitur, if accepted, and the award is not excessive;
• the trial court did not abuse its discretion in its award of prejudgment interest; and
• the trial court did not err by refusing to enforce the exculpatory clause in the trust agreement between Wells Fargo and Militello.

         Accordingly, we modify the trial court's judgment to delete the amounts remitted by Militello. We suggest remittitur of a portion of the mental anguish damages, and adjustment of the exemplary damages award by the voluntary remittitur and suggested remittitur, if accepted. In all other respects, we affirm the trial court's judgment.

         Background

         Militello was orphaned at the age of seven. Her grandmother and great-grandmother created trusts for her benefit. Wells Fargo and its predecessors administered these trusts in the bank's Midland Texas branch. The trusts included millions of dollars in assets, including stocks, bonds, cash, and producing and non-producing oil and gas properties. These trusts remained Militello's primary source of income after she reached adulthood because her ongoing health problems prevented regular employment.

         Over the years, Militello came to know Mike Tandy, the bank's trust officer. Tandy and Militello "had a good working relationship, " according to Militello. At trial, she described him as a "strong mentor for me." She looked to Tandy for advice "all the time" after she became an income beneficiary of the trusts at age 18. In 1999, when Militello was 25 years old, one of the trusts of which she was a beneficiary was ending. It contained over 200 producing and non-producing oil and gas properties. Tandy requested that Militello leave the properties with Wells Fargo so that Tandy could continue as her trust officer. Tandy did not suggest that Militello obtain any legal or financial advice before making a decision. He represented that she would benefit from the experience and expertise of the bank's oil and gas department, but did not explain that the bank's fees for managing the properties would exceed $20, 000 per year. Relying on Tandy's representations, Militello signed a revocable trust agreement with the bank on September 8, 1999. The trust was referred to by the parties at trial as the "Grantor Trust." Its assets consisted of Militello's share of oil and gas properties from her great-grandmother's estate.

         Militello offered evidence at trial that the Grantor Trust's small interests in a large number of properties were marketable and attractive to investors during the relevant time period. Dee Patterson, a petroleum engineer and one of Militello's expert witnesses, explained:

Q. Now, when you have a group of properties like that and you have a small interest in each one of the properties, is-would you consider those to be good properties or bad properties?
A. Given the location of these properties, I would consider them to be very good properties. The reason why is, they are in the Permian Basin, which is one of the most-or predominantly in the Permian Basin, which is one of the most prolific oil and gas basins in the world.
It's also a diverse set of assets, where you avoid concentration risk. Concentration risk is somewhat defined as, if there is one specific property that generates most of the revenue, if something happens to it and it stops producing, then you stand to lose a significant portion of income. These properties were diverse enough where not any one property was predominant in generating income for the trust.

         In late 2005 and early 2006, Militello advised Tandy that she was experiencing cash flow problems as a result of her divorce and expensive medical treatments. Militello suffers from lupus. Part of her treatment involved intravenous infusions costing approximately $8, 000 per month that were only initially covered by insurance. She also saw a rheumatologist for kidney problems related to lupus and underwent chemotherapy. She also owed approximately $20, 000 to her divorce lawyer. In 2005, Militello became concerned about keeping up with her expenses, and "[p]retty immediately" contacted Tandy for help. She asked for advice and recommendations for addressing her problems, and specifically asked if it would be possible to sell "a small portion of the oil, " as well as other options.

         Bruce Wallace, Militello's expert witness on fiduciary matters, testified that at the time of Militello's request for assistance, "all of the assets that were available to [her] were, in fact, managed by Wells Fargo." Wallace also explained that "it would have been incumbent on Wells Fargo, " as Militello's fiduciary, "to sit down with her immediately following [her request] and begin working through the assets that were available to her and the alternatives that were available to her from these . . . six different accounts before any decisions would be made as to what steps should be taken to accomplish her objectives." Although Wells Fargo advised Militello not to sell her minerals, it did not offer any other possible solutions to her financial difficulties.

         Instead, Wells Fargo proceeded to advise Militello about the sale of oil and gas properties from the Grantor Trust. Although Tandy did not have expertise in valuing oil and gas assets, he told Militello that "[w]e probably can sell 1/2 of your minerals and get close to $300, 000 for them." Wallace testified that at the time, the minerals were producing a revenue stream of $24, 000 per month, indicating that they had "significantly more value" than Tandy's estimate. Militello's petroleum engineer expert Patterson estimated that the 2006 fair market value of the properties was $1, 451, 000, a "best estimate" from a range of $1, 196, 000 to $1, 860, 000.

         Militello traveled to Midland to obtain additional information from Wells Fargo about the sale of the minerals. She met with Tandy and Dottie McLaughlin, the Wells Fargo trust department's oil and gas asset manager. McLaughlin provided a one-page sheet showing net income from the Grantor Trust for 2004 and 2005. The sheet also showed first quarter 2006 income from the Grantor Trust of $71, 550, and $286, 200 annualized. The source of these figures is unclear from the record. Wells Fargo provided only this one-page sheet to inform Militello's decision whether to sell the properties in her trust. Although Wells Fargo relies on Militello's instructions to sell the properties, Wallace testified that Wells Fargo did not provide sufficient information for Militello to give Wells Fargo "any type of direction." Further, the record reflects that Militello does not have a college degree or other experience in making investment decisions.

         After further communications, Tandy advised Militello that according to McLaughlin, "we could sell as little as 35% of your minerals and receive at least $200, 000 for them." This percentage resulted from McLaughlin's contact to Ernest Kuehne Jr., a Wells Fargo customer. Kuehne owned beneficial interests in certain royalty trusts managed by Wells Fargo's trust department. Wells Fargo trust administrator John Michael Talley (Tandy's supervisor) testified that he, McLaughlin, and the bank's "relationship manager" for the royalty trusts had dinner with Kuehne during the relevant time period because Kuehne had "substantial assets" and "was in the process of doing some estate planning" that could involve additional trust management business for Wells Fargo that Talley hoped to secure.

         Kuehne was also interested in buying oil and gas properties and had asked to be put on a bid list with Wells Fargo to be contacted about potential sales. McLaughlin contacted Kuehne in 2006, explaining that a trust beneficiary wanted to sell an interest in her oil and gas properties. McLaughlin first asked Kuehne if he was interested in purchasing specific properties from the trust. When he declined, McLaughlin then asked him whether he would be interested "in buying $200, 000 worth of what was in this trust." He explained:

Q. And would that require you then to give her a percentage value of what you would be willing to give in return for $200, 000?
A. Yes, ma'am.
Q. And in your four decades of experience in selling oil and gas, have you had other transactions where they tell you the price they want you to pay, and then you tell them what percentage?
A. No, ma'am.

         Kuehne named a percentage, and through an entity called Falon Partners, LLC, eventually purchased all of the oil and gas properties in the Grantor Trust for $530, 000 in three transactions that occurred in May 2006, October 2006, and March 2007. Eighteen months later, Kuehne sold the same properties to Baloney Feathers, LLC, for $5, 175, 000.

         McLaughlin also testified that she was the sole person at Wells Fargo involved in the negotiation and sale of the properties in the Grantor Trust. She said that in response to Militello's inquiry, she "hired an engineer to do an evaluation of the properties." She identified Robert Leonard, Jr. as the person she hired, but the record reflected that Leonard was a landman, not an engineer, and Leonard's evaluation was made before Militello said she wanted to consider selling. Based on Leonard's report, Wells Fargo valued the Grantor Trust's properties at approximately $400, 000.

         Tandy instructed McLaughlin that Militello wanted to sell "enough properties to get $200, 000, " and "to see what percentage of her properties would need to be sold to-to get that amount." McLaughlin did not undertake any analysis to determine this percentage. She contacted Kuehne after a call to one other potential investor was unsuccessful, and made no other attempt to market the properties or obtain an updated appraisal prior to the second and third sales. As will be discussed further below, Leonard's valuation was made as of May 2005, and was almost two years old at the time of the final sale, and in any event did not include all of the properties in the trust. With each sale, McLaughlin accepted the offer Kuehne made, without negotiation. According to Patterson, Wells Fargo sold the properties for nearly $1 million less than their fair market value.

         The purchaser, Falon, wrote three one-sentence letters to Wells Fargo stating its offers, the only documentation for the sales. Wallace testified that Wells Fargo's failure to negotiate and prepare written purchase and sale agreements was a breach of Wells Fargo's fiduciary duties to Militello. Wallace also testified that deeds should have been prepared and recorded and notification should have been given to the oil companies in question so that they knew to distribute future proceeds to the new owner. Wallace explained that under Wells Fargo's own internal policy, these steps should have been completed within 120 days of the sales, but instead, "Wells Fargo was still working on the deeds three years after the initial sale." McLaughlin conceded that she did not timely handle the preparation and filing of the deeds, in violation of Wells Fargo's policy.

         Wells Fargo contended, however, that it acted reasonably by retaining a well-respected law firm to prepare the deeds. Nonetheless, Wallace testified that Wells Fargo was responsible for providing correct information to the law firm, including a purchase and sale agreement, from which deeds could be prepared. Because there were no purchase and sale agreements, "there was no basis for the attorney or for Ms. McLaughlin to rely on to properly oversee the preparation of the deed . . . to comport with the terms of the sale." Kuehne testified that he paid the same law firm to prepare the deeds for the third sale, but the deeds "failed on their face" because "they didn't really convey anything." Kuehne also explained that some of the properties were conveyed directly from the Grantor Trust to Baloney Feathers because correct deeds had never been recorded to convey the property from the Grantor Trust to Falon, and there was no record of Falon's ownership. Kuehne testified that he finally paid to fix the deeds himself because Wells Fargo never did so.

         McLaughlin also testified that she was responsible for leaving the oil and gas properties in Militello's account until 2008 or 2009. Wells Fargo did not notify the oil and gas producers of the sales from the Grantor Trust to Falon or instruct them that income should be sent to Falon instead of the Grantor Trust. Only after Falon's sale to Baloney Feathers did McLaughlin instruct someone from her office to notify the producers. Until 2008, Wells Fargo continued to charge Militello's trust account for taxes, insurance, and fees associated with the property and income that Militello no longer owned. When questioned about a 2008 account statement for the Grantor Trust, McLaughlin testified:

Q. So can we agree that in 2008 Ms. Militello's trust account was still being used to filter income payable to Falon?
A. Yes. . . .
Q. [C]an we agree that . . . Ms. Militello's account [was] still being charged for . . . insurance and taxes and expenses related to the 160 acres in Pecos, Texas?
A. Yes.
Q. And can we agree . . . that [the property] was deeded to Falon?
A. Yes.
Q. So we can agree that none of these charges to her trust account is appropriate because it pertains to property she doesn't own?
A. Yes.

         McLaughlin testified that from the time of the first sale in May 2006 until 2008, Wells Fargo used Militello's account to receive income that belonged to both Militello and Falon. In addition, some checks made out to the Grantor Trust were deposited into Kuehne's account. Neither Militello nor Kuehne gave Wells Fargo permission to commingle funds in their accounts.

         In July 2007, Tandy retired, and Randy Wilson succeeded him as Militello's trust officer. At first, Militello directed her questions to Randy Wilson. She explained the financial difficulties she had encountered since her divorce and as a result of her illness. The record reflects that Militello attempted to obtain basic information about the trusts managed by Wells Fargo for her benefit and her overall financial situation, hoping to "at least pay a small amount on my taxes, and not be 'late' on anything." She told Randy Wilson, "I need to try and keep my credit in good standing." She requested statements, purchase and sale agreements for the sales made from the Grantor Trust, and other information. Within a month, Randy Wilson refused to speak directly to Militello, telling her that she would need to speak to the bank's lawyer, Mike Willson, if she wanted any additional information about her trusts. Although Militello complied, asking attorney Chris Parvin to correspond with Mike Willson, months later she was still attempting to obtain basic information about the sales. In January 2008, and again in April 2008, Militello attempted to find out why the Grantor Trust was still holding income on which she was paying taxes and the bank's monthly fees. She had not received any deeds reflecting the sales, and was not even aware of Falon's identity, referring to "the properties that the 'mystery men' bought." The record reflects that the Grantor Trust account was not finally closed until August 2009.

         Militello testified that Wells Fargo's actions caused problems with numerous taxing authorities, including the IRS. She received 1099 forms showing receipt of income on properties she no longer owned. A taxing authority in New Mexico levied $17, 000 from her bank account in 2011 for income allegedly earned on property owned by the Grantor Trust after the sales to Falon. Because she had no written information from Wells Fargo, she had nothing to present to the IRS or other authorities to demonstrate that she no longer owned the properties. Militello brought suit against Wells Fargo in 2010, alleging breach of fiduciary duty and other causes of action.

         The case was tried to the court over eight days in April 2012. Over 20 witnesses testified, and over 4, 500 pages of exhibits were admitted into evidence. The parties filed post-trial briefing and a stipulation regarding attorney's fees in May and June 2012. The trial court did not render judgment, however. Militello filed a motion for judgment in July 2013, and again requested entry of judgment by letters to the court dated September 23, 2013, March 28, 2014, and March 19, 2015. Wells Fargo responded once, on March 24, 2015, requesting entry of a take-nothing judgment. After Militello filed a petition for mandamus in this Court, the trial court rendered judgment on June 30, 2015, and rendered an amended final judgment on September 11, 2015, more than three years after the conclusion of the trial. In the judgment, Militello was awarded:

$1, 328, 448.35

past economic damages

$29, 296.75

disgorgement of trust fees

$1, 000, 000.00

past mental anguish damages

$3, 465, 490.20

exemplary damages

$467, 374.00

attorney's fees

         Militello was also awarded amounts for her appellate attorney's fees in the event of an unsuccessful appeal by Wells Fargo. The judgment includes awards of prejudgment and postjudgment interest and costs. The trial court also made findings of fact and conclusions of law, including Finding of Fact 2, that the following actions by Wells Fargo were breaches of its fiduciary duties to Militello:

• "not disclosing basic, necessary information to Militello relating to the creation of the revocable trust and the subsequent sales of 100% of her oil [and] gas interests"
• "failing to investigate alternatives to selling her assets when she came to them for help in 2005"
• "failing to properly value and market Militello's oil and gas properties"
• "profiting from the sale of Militello's oil and gas assets at a discount to another high-profile bank client"
• "failing to prepare purchase and sale agreements for the sale of her trust assets"
• "failing to prepare and properly record deeds upon the sale of her assets"
• "failing to notify the producers of the change in ownership of the oil and gas assets after they were sold"
• "continuing to use Militello's trust account for the benefit of another customer"
• "keeping the trust account open until 2009, years after all of the assets had been sold" and
• "continuing to use Militello's trust account through 2008 (at which time she no longer owned any of the oil and gas properties from the trust) as a means to receive income from producers, report the income under Militello's social security number, and then distribute that income to another Wells Fargo client."

         Finding of Fact 2. Wells Fargo does not challenge Finding of Fact 2 on appeal.

         Standards of Review

         In an appeal from a bench trial, we review a trial court's findings under the same legal and factual sufficiency of the evidence standards used when determining if sufficient evidence exists to support the answer to a jury question. Catalina v. Blasdel, 881 S.W.2d 295, 297 (Tex. 1994). We review de novo the trial court's conclusions of law. R.J. Suarez Ents., Inc. v. PNYX L.P., 380 S.W.3d 238, 242 (Tex. App.-Dallas 2012, no pet.). If the trial court rendered the proper judgment, we will not reverse based on an erroneous conclusion of law.

         When a party attacks the legal sufficiency of an adverse finding on which it did not have the burden of proof at trial, it must demonstrate there is no evidence to support the finding. Croucher v. Croucher, 660 S.W.2d 55, 58 (Tex. 1983). Conversely, when the party who had the burden of proof at trial complains on appeal that the evidence is legally insufficient to support an adverse finding, that party must demonstrate that the evidence establishes, as a matter of law, all vital facts in support of the issue. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex. 2001) (per curiam). In determining whether the evidence is legally sufficient to support a finding, we consider the evidence in the light most favorable to the judgment and indulge every reasonable inference that would support it. City of Keller v. Wilson, 168 S.W.3d 802, 807, 827 (Tex. 2005). We credit favorable evidence if a reasonable factfinder could and disregard contrary evidence unless a reasonable factfinder could not. Id. "The final test for legal sufficiency must always be whether the evidence at trial would enable reasonable and fair-minded people to reach the verdict under review." Id. at 827.

         In evaluating a factual sufficiency challenge, we consider and weigh all of the evidence, not just the evidence supporting the finding. Maritime Overseas Corp. v. Ellis, 971 S.W.2d 402, 406-07 (Tex. 1988). We may set aside the finding only if it is so contrary to the overwhelming weight of the evidence as to be clearly wrong and unjust. Id.; Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986) (per curiam).

         In considering a challenge to a finding of gross negligence as a predicate for exemplary damages, our standard of review is heightened. Columbia Med. Ctr. of Las Colinas, Inc. v. Hogue, 271 S.W.3d 238, 248 (Tex. 2008). We review all of the evidence to determine whether the trial court could have formed a firm belief or conviction that (1) the defendant's conduct involved an extreme degree of risk when viewed objectively from the defendant's standpoint at the time of the occurrence, considering the probability and magnitude of the potential harm to others; and (2) the defendant was subjectively aware of, but consciously indifferent to, this risk. Id. at 249; Tex. Civ. Prac. & Rem. Code Ann. § 41.001(11) (West Supp. 2016). We assume the trial court resolved disputed facts in Militello's favor if a reasonable factfinder could do so. Columbia Med. Ctr., 271 S.W.3d at 248.

         The factfinder is the sole judge of the credibility of the witnesses and the weight to be given their testimony. City of Keller, 168 S.W.3d at 819 (legal sufficiency review); Golden Eagle Archery, Inc. v. Jackson, 116 S.W.3d 757, 761 (Tex. 2003) (factual sufficiency review). We will not substitute our judgment for that of the trial court merely because we might reach a different conclusion. City of Keller, 168 S.W.3d at 819, 822; Golden Eagle Archery, Inc., 116 S.W.3d at 761.

         Remittitur of Economic Damages

         We first address Militello's agreed remittitur of several amounts of economic damages awarded in the trial court's judgment. Militello's appellate brief includes a "statement of remittitur" of certain amounts challenged in Wells Fargo's appeal. She "does not oppose a remittitur" of five items of damages, but she asserts that "[t]he Court should include the amount of the settlement credit in the total amount of actual damages used to calculate the amount of exemplary damages permitted under Section 41.008(b) of the Texas Civil Practice and Remedies Code." The amounts Militello has agreed to remit are:

$213, 000.00

credit for settlement with former defendant

$25, 000.00

for legal services rendered to Militello by Dale Strauss

$35, 350.25

for legal services rendered to Militello by Chris Parvin

$65, 151.96

tax levy addressed to Chesapeake Operating Inc.

$634.00

federal tax levy resolved in Militello's favor

$339, 136.21

Total statement of remittitur

         If part of a damages award lacks sufficient evidentiary support, the proper course is to suggest a remittitur of that part of the verdict. Larson v. Cactus Util. Co., 730 S.W.2d 640, 641 (Tex. 1987); see also Tex. R. App. P. 46.3 (court of appeals may suggest remittitur). As the prevailing party at trial, appellees must be given the option of accepting the remittitur or having the case remanded for a new trial. See Tex. R. App. P. 46.3; Larson, 730 S.W.2d at 641; McLeod v. Gyr, 439 S.W.3d 639, 650 (Tex. App.-Dallas 2014, pet. denied). Here, however, because Militello has already consented to remittitur, we modify the trial court's judgment to delete these items.

         Economic Damages

         After Militello's remittitur, the following items of economic damages remain in dispute:

• $150, 000 in "tax-related damages" (consisting of $50, 000 for a forensic accounting, $29, 000 for past legal fees, $20, 000 for future legal fees, $41, 000 in penalties and interest related to capital gains taxes, and $10, 000 for future tax return amendments);
• $17, 000 tax levy by the State of New Mexico,
• $75, 000 in lost production revenue, and
• $24, 856.96 from Militello's money market account.

         In its second issue, Wells Fargo challenges the sufficiency of the evidence to support these awards. We conclude that Militello presented sufficient evidence to support each of these amounts.

         A. Tax-related damages

         The evidence at trial was that Wells Fargo did not timely or properly document any of the sales from Militello's trust to Falon, and did not notify the oil and gas producers of the transfer of Militello's interests, or prepare and record correct deeds until three years after the fact. And it failed to amend its internal accounting, resulting in Militello's accounts showing the receipt of amounts that were no longer attributable to interests owned by her trust. These errors caused problems in the preparation of Militello's tax returns, and attracted the attention of various tax authorities. When Militello attempted to obtain information from Wells Fargo to address these problems, Wells Fargo did not provide her with a correct accounting. It was necessary for Militello to retain and consult her own tax advisors in order to resolve these problems. At trial, Militello's tax lawyer Andrea Winters gave expert testimony to explain and quantify Militello's damages relating to correcting her tax problems. We summarize Winters's testimony before addressing Wells Fargo's specific complaints about it.

         1. ...


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