Appeal from the 269th District Court Harris County, Texas
Trial Court Cause No. 2012-61278
consists of Chief Justice Frost and Justices Christopher and
THOMPSON FROST, CHIEF JUSTICE.
case involving fraud claims by two plaintiffs against their
alleged financial advisor, the trial court granted judgment
notwithstanding the jury's verdict. In doing so, the
trial court disregarded the jury's findings in answer to
questions as to liability and actual damages for fraud and
negligent misrepresentation, the discovery rule, and
exemplary damages. We conclude that the trial court did not
err in disregarding the jury's damage finding as to the
amount of the defendant's profit from the transaction in
question, but that the trial court did err in disregarding
all of the other findings, except the
negligent-misrepresentation-liability finding, which we need
not address. We reverse the trial court's judgment and
remand for further proceedings.
Factual and Procedural Background
Richard Bryan ("Bryan") is the majority owner of
appellant/plaintiff The Bryan Group, LLC, a small business
that provides sales and marketing services for homebuilders.
In the mid-1980s, Bryan started making sporadic and small
investments with Tim Couch, whom Bryan considered to be his
financial advisor. At some point, Couch went to work at
Papalia Financial, a company owned by appellee/defendant
Angelo Mark Papalia ("Papalia"). Bryan testified
that he transferred a retirement account that he had from a
prior employer to Papalia Financial and that Bryan set up a
college savings plan for his son through Papalia Financial.
When Couch went to work at Papalia Financial, Couch took
Bryan's assets with him, and Papalia Financial then began
managing Bryan's assets and investments. Couch introduced
Bryan to Papalia.
2004, Bryan mentioned to Couch that Bryan wanted to reduce
the amount of taxes he was paying during a "good
year" in the real estate business. Papalia and Couch met
with Bryan. According to Bryan, Papalia and Couch proposed a
Welfare Benefit Plan that would use life insurance and that
would allow Bryan to invest funds via tax-deductible
contributions to the plan. The Bryan Group would make
tax-deductible contributions, providing Bryan and his wife
with invested funds that would appreciate and that they could
access for their retirement, as well as a potential death
benefit. Papalia told Bryan that Papalia had sold plans like
the proposed one before and that the proposed plan was
"a successful tax compliant program." Papalia gave
Bryan a long opinion letter from a law firm indicating that
the plan complied with then-existing tax laws.
and Couch showed Bryan a plan reflecting an investment of
approximately $132, 000 each year for ten years and showing a
certain amount of retirement funds that the investment might
yield. According to Bryan, based on the cyclical nature of
the real estate business, he could not commit to investing
$132, 000 per year for ten years, and he disclosed these
limitations to Papalia. Papalia then asked if Bryan could
invest that amount for three years. Though Bryan believed it
would be difficult to do, Bryan told Papalia that he would
commit to investing $132, 000 per year for three years.
According to Bryan, Papalia told him that if he could make
that investment for three years "this will work."
Bryan testified that Papalia did not tell him that the plan
would terminate if Bryan made only three annual payments.
Bryan thought that if he failed to make a contribution in the
fourth year, the plan would continue and Bryan would have the
option to make additional contributions in the future. Bryan
believed that Papalia was Bryan's financial advisor.
testified that he recommended this plan to Bryan and that
Papalia believed that Bryan could invest $132, 000 per year
for ten years. Papalia denied telling Bryan that the plan
would work if Bryan made only three annual payments.
Employer Welfare Benefit Plan
meeting with Papalia several more times and receiving more
information from Papalia, on December 31, 2004, Bryan signed
an Adoption Agreement on behalf of The Bryan Group, LLC,
establishing The Bryan Group, LLC Single Employer Welfare
Benefit Plan (the "Plan"). Bryan signed other
documents relating to the Plan, either on his own behalf or
on behalf of The Bryan Group, LLC.
Life Insurance Policy
the death benefit under the Plan, Bryan obtained a
"Flexible Premium Variable Life Insurance Policy"
(the "Policy"). The Policy documents reflect that
Papalia acted as the agent for the Policy. Evidence at trial
showed that the insurer paid Papalia Securities, Inc. a
one-time commission in the amount of $142, 781.74 for the
Policy. Papalia did not disclose to Bryan and The Bryan
Group, LLC (collectively the "Bryan Parties") the
amount of the commission the insurer would pay on the Policy.
Contributions and Policy Premium Payments
Bryan Parties made the anticipated annual contributions under
the Plan of approximately $132, 000 for tax years 2004, 2005,
and 2006. Bryan paid approximately $12, 500 of the premium
for the Policy each year, and The Bryan Group paid the
remainder of the premium. For tax years 2004, 2005, and 2006,
The Bryan Group took a tax deduction for the full amount of
the insurance premium that it paid for the Policy. According
to one of the Bryan Parties' testifying experts, the
Bryan Group was not entitled to this deduction. But, the
expert testified that the Internal Revenue Service
("IRS") did not challenge these deductions within
the applicable limitations period, so the Bryan Parties were
able to obtain the benefit of these deductions.
Bryan Parties' Failure to Make the 2007 Annual Plan
sent an email to Papalia on November 20, 2007, informing him
that the Bryan Parties would not be able to make the
contribution to the Plan for 2007. Bryan noted that the Bryan
Parties had made the first three annual contributions as
promised but that the Bryan Parties could not make the fourth
contribution because of the existing business environment.
Papalia testified that the Plan would terminate if the Bryan
Parties did not make an annual Plan contribution. If this
were so, then the Plan would have terminated based on the
Bryan Parties' failure to make the 2007 Plan contribution
by year-end 2007.
of the Plan
the Plan could terminate based on a failure to make the 2007
annual Plan contribution, Papalia sent the Plan administrator
a letter dated December 4, 2007, requesting that the
administrator terminate single-employer welfare benefit plans
for twenty-three of Papalia's clients, including The
Bryan Group, effective December 31, 2006, almost a year
earlier. Papalia also requested that the collateral
assignment for each of the insurance policies be released as
soon as possible. Papalia testified that he sent this letter
to the Plan administrator because the IRS recently had issued
a notice making the Plan a "listed transaction"
going forward and because "[a]t that time none of the
employers would want to fund the plan." Papalia sent
this letter without discussing with the Bryan Parties whether
the Plan should be terminated and without telling them that
he was requesting termination of the Plan.
testified that Bryan did not know that the Plan had
terminated, nor did he sign any document requesting or
approving the Plan's termination. According to Bryan,
Papalia did not tell him that the Plan had terminated until
June 2011. Notably, the Plan terminated because of
Papalia's termination letter rather than for the Bryan
Parties' failure to make the 2007 contribution. Despite
the termination of the Plan, the Policy remained in effect.
October 2010, the IRS notified Bryan and his wife that the
IRS had selected their 2007 and 2008 tax returns for
examination. (Some refer to this process as an
"audit."). In response, the Bryans provided
documents and told the IRS that the Plan had not been
terminated. Bryan testified that he talked to Papalia after
he received the letter from the IRS and that Papalia told him
not to be concerned and that the IRS had made a mistake.
following year, in June 2011, the IRS informed the Bryans
that the Plan had been terminated years before, and Papalia
told Bryan that the Plan had been terminated in 2007. The IRS
eventually sought substantial additional taxes from the Bryan
Parties. The Bryan Parties, through retained counsel,
resolved the matter for much less than the IRS had sought.
Bryan Parties' Suit Against Papalia
Bryan Parties filed suit against Papalia and other defendants
asserting claims for common-law fraud, negligent
misrepresentation, negligence, breach of fiduciary duty, and
alleged violations of the Texas Insurance Code. Before the
jury trial in the court below, the trial court dismissed the
Bryan Parties' claims against all defendants other than
Papalia based on settlements, motions to dismiss, or special
appearances. The Bryan Parties' claims against Papalia
went to a six-day jury trial.
Verdict on the Bryan Parties' Negligence,
Breach-of-Fiduciary-Duty, and Insurance-Code Claims
close of the Bryan Parties' case-in-chief, the trial
court granted Papalia's motions for a directed verdict as
to the Bryan Parties' claims for negligence, breach of
fiduciary duty, and alleged violations of the Texas Insurance
Code. When granting the motion as to the
breach-of-fiduciary-duty claim, the trial court stated that
Papalia did not owe the Bryan Parties a formal fiduciary duty
and that the evidence in the Bryan Parties' case-in-chief
did not raise a fact issue as to whether Papalia owed the
Bryan Parties an informal fiduciary duty.
Submission on Fraud and Negligent-Misrepresentation
Papalia's case-in-chief, the trial court submitted the
common-law fraud and negligent-misrepresentation claims to
the jury. In submitting the common-law fraud claim, the trial
court instructed the jury that it could find fraud based on
an affirmative misrepresentation or based on a failure to
disclose. At the charge conference, Papalia objected to the
instruction allowing the jury to find fraud based on a
failure to disclose, arguing that Papalia did not have a duty
to disclose. The trial court overruled the objection without
stating the basis on which the court concluded that Papalia
had a duty to disclose.
response to ten questions, the jury found as follows:
(1) Papalia committed fraud against the Bryan Parties;
(2) By clear and convincing evidence, the harm to the Bryan
Parties resulted from fraud by Papalia;
(3) Papalia made a negligent misrepresentation on which the
Bryan Parties justifiably relied;
(4) The negligence, if any, of nine parties other than
Papalia did not proximately cause the injury in question;
(5) Papalia's percentage of responsibility is one hundred
(6) In the exercise of reasonable diligence, the Bryan
Parties should have discovered Papalia's acts or
omissions by June 26, 2011;
(7) Papalia's acts or omissions were not excused;
(8) The amount of Papalia's profit in soliciting the
Bryan Parties to participate in the ...