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Bryan v. Papalia

Court of Appeals of Texas, Fourteenth District

November 9, 2017


         On Appeal from the 269th District Court Harris County, Texas Trial Court Cause No. 2012-61278

          Panel consists of Chief Justice Frost and Justices Christopher and Brown.



         In this 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.

         I. Factual and Procedural Background

         Appellant/plaintiff 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.

         In June 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.

         Papalia 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.

         Papalia 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.

         The Employer Welfare Benefit Plan

         After 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.

         The Life Insurance Policy

         To fund 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.

         Plan Contributions and Policy Premium Payments

         The 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.

         The Bryan Parties' Failure to Make the 2007 Annual Plan Contribution

         Bryan 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.

         Termination of the Plan

         Before 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.

         Bryan 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.

         IRS Action

         In 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.

         The 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.

         The Bryan Parties' Suit Against Papalia

         The 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.

         Directed Verdict on the Bryan Parties' Negligence, Breach-of-Fiduciary-Duty, and Insurance-Code Claims

         At the 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.

         Jury Submission on Fraud and Negligent-Misrepresentation Claims

         After 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.

         Jury's Verdict

         In 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 percent;
(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 ...

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