Texas Supreme Court Hears Oral Argument on Legal Malpractice Case Involving Standing of Beneficiary of Trust

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On February 10, 2016, the Texas Supreme Court heard argument in a case that involves the issue of legal standing to sue when a trust is injured by the actions of a third party.  In DLA Piper US, LLP v. Linegar, Chris Linegar brought fraud and legal malpractice claims against DLA Piper related to a loan transaction involving Linegar’s retirement account.  No. 11-12-00201-CV, 2014 Tex. App. LEXIS 8012 (Tex. App.—Eastland July 24, 2014, pet. granted).  In 2008, one of Linegar’s companies merged with a Seattle company called Saflink.  Saflink was represented in the merger by DLA Piper, and Linegar’s company was represented by a different law firm.  After the merger, Linegar owned 35% of the new company, IdentiPHI, Inc.  In the process of completing the merger, Linegar became aware that IdentiPHI needed capital to stay in business.  Linegar proposed a $1.75 million “bridge loan” to IdentiPHI funded from his retirement account in Australia.  Linegar would later testify that he believed DLA Piper represented him on this loan (a fact which DLA Piper disputed).  The trustee for Linegar’s retirement fund, Zaychan, served as the lender for the loan to IdentiPHI, and Linegar signed the promissory note as chairman and director of Zaychan.  As the maturity date neared, Linegar discovered that no UCC-1 financing statement had been filed to perfect the note.  In order to comply with Australian law, Linegar took out a mortgage on his home and repaid his retirement account.  Zaychan assigned the IdentiPHI note to Key Ovation, one of Linegar’s other companies, and Key Ovation eventually loaned IdentiPHI another $400,000.

IdentiPHI ultimately filed for bankruptcy.  Linegar only recovered $550,000 of the $2.15 million loaned to IdentiPHI.  Linegar, Key Ovation, and Zaychan sued DLA Piper for legal malpractice and other tort claims based on the firm’s alleged misrepresentations and failure to perfect the initial loan security interest.  Zaychan’s claims were dismissed on summary judgment, Key Ovation non-suited its claims, and only Linegar’s claims proceeded to trial.  A jury found for Linegar on his negligent failure to warn, negligent misrepresentation, fraud by failure to disclose, legal malpractice, and breach of fiduciary duty claims.  The trial court entered judgment that Linegar recover over $1.1 million, and DLA Piper appealed.

The Eastland court of appeals reversed and rendered a take-nothing judgment.  See id. at *11.  DLA Piper argued that at the relevant time, Linegar was not the holder of the note or a party to the note; the note was made payable to Zaychan.  The court noted that when a trust suffers injury due to a third party’s actions, the proper party to bring suit on behalf of the trust is the trustee.  A beneficiary is allowed to do so only when the trustee cannot or will not enforce the action against the third party, and even then the beneficiary would be acting for the trustee on behalf of the trust rather than himself.  Whether Linegar was viewed as a shareholder of Zaychan or as a beneficiary of his retirement account in which Zaychan served as the trustee, the court held he did not have standing to pursue the claims.  If DLA Piper made any misrepresentations, the court held that it did so toward Zaychan, not Linegar.  Further, there was no evidence that Zaychan could not or would not enforce a cause of action against DLA Piper—in fact, Zaychan had been an initial plaintiff in the suit.

Linegar appealed to the Texas Supreme Court, which granted review.  Linegar characterizes his claim as a fiduciary one, not a suit on a note.  Linegar argues that under Texas law, the only person with standing to sue his own attorney for legal malpractice, breach of fiduciary duty, and other claims is him, as the former client, because those duties are owed directly to him, not the corporate trustee.  Further, Linegar asserts that as the equitable owner/beneficiary of funds held in the retirement account, he has a justiciable interest in those funds; therefore, he was “personally aggrieved” and the court of appeals erred in dismissing his case for lack of standing.  DLA Piper argues that the court of appeals correctly determined the standing issue because Linegar did not suffer damages and was not personally aggrieved—if anyone was injured it was Zaychan.  DLA Piper relies on “black letter” law applicable to both trustee-beneficiary standing and corporation-shareholder standing.

The Supreme Court will determine whether Linegar has standing to sue for legal malpractice and related claims if his only injury was losing the retirement money that was held by a corporate trustee.  The Court’s decision is expected as early as summer 2016.



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