Thursday, June 20, 2019

Who Is A Fiduciary to Whom?: Round II of Cho v. Kim

Who Is A Fiduciary to Whom?: Round II of Cho v. Kim

      In response to motions for en banc reconsideration, the opinion originally issued in Cho v. Kim, dated December 28, 2018 was withdrawn, and a substitute opinion issued on April 2, 2019. Jang Won Cho v. Kum Sik Kim, ___ S.W.3d ___, No. 14-16-00962-CV, 2019 WL 1442412 (Tex. Ct. App. Houston April 2, 2019).
      In this instance, the three investors, Cho, Kim and Lee, formed a corporation in which each was a one third shareholder and in which Cho was the sole director and officer. They as well formed a limited partnership in which each was a limited partner with their jointly owned corporation serving as the 1% general partner. In response to assertions that Cho owed fiduciary duties to each of Kim and Lee arising out of these business organizations, it was held that:

The parties created a corporation, Pandel, Inc., with each of the investors participating as a one-third shareholder. This circumstance does not give rise to a formal fiduciary duty because “a co-shareholder in a closely held corporation does not as a matter of law owe a fiduciary duty to his co-shareholder.”  Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex. App.—Houston [14th Dist.] 1997, pet. denied). As Pandel, Inc.’s sole director, Cho owed fiduciary duties to Pandel, Inc. — but not to individual shareholders.  Id. (“A director’s fiduciary duty runs only to the corporation, not to individual shareholders or even to a majority of the shareholders.”). Kim and Lee do not purport to assert a derivative claim on behalf of Pandel, Inc.
When a holding company called Pandel Holdings, L.P. subsequently was created, it was established as a limited partnership among general partner Pandel, Inc. and limited partners Kim, Lee, and Cho. The agreement establishing the limited partnership provides that the general partner owes fiduciary duties. See Crenshaw v. Swenson, 611 S.W.2d 886, 890 (Tex. Civ. App.—Austin 1980, writ ref’d n.r.e.) (“In a limited partnership, the general partner acting in complete control stands in the same fiduciary capacity to the limited partners as a trustee stands to the beneficiaries of a the trust.”). The general partner was Pandel, Inc. — not Cho. Under the circumstances of this case, the existence of the limited partnership provides no basis for a formal fiduciary relationship as between Cho, Kim, and Lee.

2019 WL 1442412, *7.

      Being unable to prove a formal fiduciary relationship based upon the corporation or the limited partnership, Kim and Lee sought to impose upon Cho an informal fiduciary relationship on the basis of that they were all members of a close-knit Korean community and that they entered into the business relationship with Cho because of a pre-existing special relationship of trust that arose out of that communal relationship. As recounted by the court:
We reject Kim’s and Lee’s contention that this testimony provides some evidence of circumstances giving rise to an informal fiduciary relationship existing before and apart from the transaction at issue in this litigation — and with it their suggestion that an informal fiduciary relationship necessarily exists among all persons of shared Korean heritage who understand the importance of “hierarchy in the Korean society.” See Schlumberger Tech. Corp., 959 S.W.2d at 176-77 (“But not every relationship involving a high degree of trust and confidence rises to the stature of a fiduciary relationship.... We recognize that the Swansons testified that they trusted and relied on Schlumberger.... However, mere subjective trust does not, as a matter of law, transform arm’s length dealing into a fiduciary relationship.”) (citing  Crim Truck & Tractor Co., 823 S.W.2d at 595); see also  Atrium Boutique v. Dallas Mkt. Ctr. Co., 696 S.W.2d 197, 199-200 (Tex. App.—Dallas 1985, writ ref’d n.r.e.) (trial court properly disregarded jury finding that appellant shared a confidential relationship with appellee based on testimony that parties’ families were acquainted through school and “had a very friendly, respectful relationship with each other;” informal fiduciary duty did not arise based on testimony from appellant’s co-owner that “I trusted them. I respected them. I had known the family for 20 years and I respected them and I felt like they were a family like our family, a close-knit family, good family, good people.”).

We also note that, “particularly in the business arena, trust and reliance alone are not sufficient ingredients to create a fiduciary relationship.” Gregan v. Kelly, 355 S.W.3d 223, 229 (Tex. App.—Houston [1st Dist.] 2011, no pet.) (citing  Crim Truck & Tractor Co. v. Navistar Int’l Transp. Corp., 823 S.W.2d 591, 594-95 (Tex. 1992), superseded by statute on other grounds as noted in Subaru of Am., Inc. v. David McDavid Nissan, Inc., 84 S.W.3d 212, 225-26 (Tex. 2002) ). “A person is justified in placing his confidence in the belief that another party will act in his best interest ‘only where he is accustomed to being guided by the other party’s judgment and advice and there exists a long association in a business relationship as well as a personal friendship.’ ” Ferrara v. Nutt, 555 S.W.3d 227, 243 (Tex. App.—Houston [1st Dist.] 2018, no pet.) (quoting Areda v. S-W Transp., Inc., 365 S.W.3d 838, 841 (Tex. App.—Dallas 2012, no pet.) ); see  Lee v. Hasson, 286 S.W.3d 1, 14 (Tex. App.—Houston [14th Dist.] 2007, pet. denied).
Id., *10.
      The court rejected that this structure created an informal fiduciary relationship, citing the Schlumberger decision for the principle that “mere subjective trust does not, as a matter of law, transform and arms-length dealing into a fiduciary relationship.” Id.
      The trial court verdict against Cho based upon breach of fiduciary duty was thereby set aside as no such duty existed.
      The balance of the opinion addressed a variety of other theories for recovery, including misrepresentation and fraud. Much of the discussion in the case turns upon the wording of the jury instructions and deficiencies in objection thereto. The ultimate judgment for those actions against Cho was $352,000,600. Also, the Court of Appeals awarded punitive damages in the amount of $1,057,800. Prejudgment interest was awarded as well.

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