Federal Courts Deny Motions To Dismiss Breach Of Fiduciary Duty Claims Due To The Economic Loss Rule

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In R.P. Small Corp. v. Land Dep’t, Inc., the plaintiff sued the defendant for breaching fiduciary duties due to a confidential relationship regarding oil and gas development. No. H-20-14902021 U.S. Dist. LEXIS 133695 (S. D. Tex. July 19, 2021). The plaintiff alleged that the defendant took advantage of his relationship, lied about his qualifications and experience, and overbilled and had self-dealing transactions. The defendant filed a motion to dismiss based on the economic loss rule, arguing that the plaintiff’s claims all arose from oral and written contracts. The federal district court denied the motion to dismiss. The court first discussed the economic loss rule:

Under Texas law, the “economic loss rule generally precludes recovery in tort for economic losses resulting from a party’s failure to perform a contract when the harm consists only of the economic loss of a contractual expectancy.” In determining if the economic loss rule applies, Texas courts look to both the “source of the alleged duty and the nature of the claimed injury.” “[A] party may elect a recovery in tort if the duty breached stands independent from the contractual undertaking, and the alleged damages are not solely the result of a bargained-for contractual benefit.” This is because “‘[t]ort obligations are in general obligations that are imposed by law—apart from and independent of promises made and therefore apart from the manifested intention of the parties—to avoid injury to others.'”

Id. The court then noted that the economic loss rule does not apply to breaches of fiduciary duty that arose independent of a contract. “Under Texas common law, an ‘informal fiduciary duty may arise from a moral, social, domestic or purely personal relationship of trust and confidence, generally called a confidential relationship.’” Id. The court then held that there were sufficient pleadings to support an independent fiduciary duty based on a confidential relationship:

Here, as the Land Defendants acknowledge, RPS alleges a source of duty separate from any alleged written or oral agreement—the longstanding relationship between Small and Mann. RPS describes the breach of fiduciary duty as invoicing RPS two and three times for the same work, entering into and supervising the Five Star MSA and placing his own interests above RPS’s, concealing information from RPS, failing to require his companies to follow the contractual requirements, diverting funds for individual purposes, commingling funds, and self-dealing. Dkt. 67 (fourth amended complaint). RPS states that these breaches resulted in excessive costs to RPS, lost business opportunities, and damage to RPS’s reputation and goodwill in the industry. While certainly some of the allegations relate to the alleged oral agreement between RPS and Mann, and some are tied to the written agreements between the companies, the allegations of a duty independent of the contracts and damages to RPS’s reputation and goodwill resulting from Mann’s alleged breach of his fiduciary duties to his long-time friend and business associate are sufficient at the motion to dismiss stage to state a plausible claim for relief that is not barred by the economic loss rule.

Id.

In Tristani v. Optionsellers, plaintiffs sued defendants for “reckless mismanagement of Plaintiffs’ investment accounts.” No. 6:19-cv-585-JDK, 2021 U.S. Dist. LEXIS 100020 (E.D. Tex. April 5, 2021). To formalize the relationship, each plaintiff signed multiple agreements. Among other things, the defendants filed a motion to dismiss because “Texas’s economic loss rule bars Plaintiffs’ claims for negligent misrepresentation, negligence, negligent supervision, and breach of fiduciary duty.” The court granted the motion as to the negligent misrepresentation, negligence, and negligent supervision claims, but denied it as to the breach of fiduciary duty claims. Regarding the economic loss rule, the court stated:

Under Texas’s economic loss rule, a plaintiff who is a party to a contract cannot sue under tort unless (1) the defendant owed plaintiff a common law—not contractual—duty and (2) the plaintiff suffered an injury independent of the contract. “In operation, the rule restricts contracting parties to contractual remedies for those economic losses associated with the relationship, even when the breach might reasonably be viewed as a consequence of a contracting party’s negligence.” In deciding whether the economic loss rule applies, a court should “examine the source of the defendant’s duty and the nature of the claimed injury.” When “[p]laintiffs fail to allege facts that would impose a duty upon [d]efendants outside of the alleged contracts[,]” the economic loss rule bars the claim and it “should be dismissed as not plausible.” Further, the Court must determine “whether the injury is to the subject of the contract itself.” “Texas has recognized that, where the damages claimed are (as here) economic loss to the subject of the contract itself, the remedy ordinarily is one of contract alone.”

Id. (internal citations omitted). The court held that the economic loss rule barred the negligent misrepresentation claim:

The alleged statements by Defendants relate directly to the parties’ contracts, wherein the parties repeatedly affirmed that Defendants’ services were not assured to result in profit and that Plaintiffs “discussed the risks of futures and options trading” with the Defendants and understood those risks. To the extent Defendants’ trading strategy varied from the “discussed [] risks,” Plaintiffs’ action arises, if at all, under contract.

Id. The court also held that the economic loss rule barred the plaintiff’s negligence claim:

The Complaint expressly references Plaintiffs’ accounts and makes clear that Defendants assumed these duties when they undertook to manage the accounts pursuant to the parties’ agreements. The alleged duties, then, arise under the parties’ contracts, and the remedy for breach sounds in contract.

Id. Finally, the court held that the economic loss rule also barred the negligent supervision claim: “Like Plaintiffs’ negligence claim, this claim is barred by the economic loss rule because both the source of Defendants’ duty and the nature of Plaintiffs’ injury are contractual.” Id.

However, the court held that the economic loss rule did not bar the plaintiffs’ breach of fiduciary duty claim:

Defendants assert, without analysis or support, that the economic loss rule also bars Plaintiffs’ breach-of-fiduciary-duty claim. But “the economic loss rule is inapplicable, and does not bar [a] breach of fiduciary duty claim” when a contract “creates a special relationship that creates fiduciary duties by operation of law.” Here, Plaintiffs have alleged a fiduciary duty created by the parties’ contract, and Defendants have not identified any other source of a fiduciary duty. Accordingly, the Court DENIES Defendants’ motion to dismiss Plaintiffs’ fiduciary duty claim

Id. (internal citations omitted).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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