The Houston [1st] Court of Appeals has reversed a trial court ruling dismissing an oil and gas producer’s breach of fiduciary duty lawsuit against a prominent Houston law firm.
Stephen H. Dernick and David D. Dernick v. Foley & Lardner LLP, successor- in – interest to Gardere Wynne Sewell, LLP, Timothy Spear, James G. Munesteri, and Sharon M. Beausoleil (No. 01-22-00251-CV; August 27, 2024) has extensive and somewhat complex facts involving two lawsuits and a bankruptcy proceeding. As these facts are critical to understanding the court of appeals’ TCPA ruling, we will recite them in some detail, as follows.
Background
In 1981, Stephen and David Dernick set up Dernick Resources, Inc. (DRI), an oil and gas exploration and production company. In 2002, they sold a controlling interest to Yorktown Partners, which then suggested that DRI merge with a failing company Yorktown was managing, Cinco Natural Resources. The Dernicks opposed the merger, and Appellee Foley & Lardner (Foley), which had already been representing DRI, helped negotiate the Dernicks’ exit packages from DRI. The Dernicks received 12% stakes in Cinco as compensation. After the merger, Foley let DRI know that it would represent the Dernicks, Buckner (a former officer of DRI who sided with the Dernicks), and Dennis Bartoskewitz collectively known as the Cinco Minority in a matter adverse to Cinco.
In 2010, the Dernicks formed Dernick Encore LLC (Encore), an oil and gas company whose managing partner was Dernick Land LLC (Dernick Land), also an entity owned by the Dernicks. The Derricks say that Folley represented Encore from its inception while taking direction from the Dernicks while Foley says it did not represent the Dernicks at all. The Dernicks were officers of Encore until March 2017.
The Cinco Lawsuit
The Dernicks allege that Cinco started buying valuable leases and selling them to Cima Energy LLC, an entity formed by Yorktown and all of the other owners of Cinco except for the Cinco Minority. The Dernicks say that the sale of the leases to Cinco fraudulently diluted the value of Cinco shares held by the Minority shareholders. Thus, Buckner contacted Spear, a lawyer at Foley, to help the Minority Shareholders pursue legal action against Cinco and Cima. Once again, Foley and the Dernicks claim different things: Foley says that they were hired on a limited and defined basis for three months related to the Cinco dispute while the Dernicks allege that they had an agreement with Foley that Foley would represent them in the Cinco dispute. The Cinco dispute ultimately settled and received cash payments from Riley Exploration Group, a Yorktown portfolio company, in what is called the Riley Settlement. According to the Dernicks, Foley did not notify the Cinco Minority it was withdrawing from representing them, nor did the Cinco Minority terminate Foley.
The Dernicks allege that Buckner instructed Foley to form Corsa Petroleum and Cavallo LLC to accommodate the split of cash and APO Interest from the Riley Settlement. Ultimately, Buckner instructed Foley to dissolve both entities. Once again disagreeing with the Dernicks’ allegations, Foley claims that it did not represent Corsa or Cavallo.
Bankruptcy Proceeding
The Dernicks filed for Chapter 11 bankruptcy in May 2018, and a creditors meeting took place as a result. A Foley attorney attended on behalf of Encore, and the Dernicks allege that although Encore was not a creditor (Foley alleges that Encore was a creditor), it instructed Foley to attend the meeting to question the Dernicks about Corsa and Cavallo and the Riley Settlement. According to the Dernicks, it became evident that Encore was somehow going to claim that the Riley Settlement payments to the Dernicks were a business opportunity of Encore and that Foley was going to file an adversary proceeding against the Dernicks, its former clients.
Through their bankruptcy counsel, the Dernicks contacted Foley to inform them of the obvious conflict-of-interest that Foley was committing by acting adverse to their former clients. The Dernicks requested that Foley withdraw, but Foley refused, which prompted the Dernicks’ bankruptcy counsel to file a motion to disqualify Foley from representing Encore for these adverse claims. In response, Foley procured an affidavit from Spear, who testified that Foley formed Corsa and Cavallo for Encore, not the Cinco Minority. The bankruptcy court denied the Dernicks’ motion because the Dernicks didn’t prove that the matters were related or that Foley had relevant confidential information.
The Dernicks alleged that two months later, Foley filed an adversary proceeding against the Dernicks, its former clients, on behalf of Encore, saying it formed Corsa and Cavallo for Encore, and accusing the Dernicks of fraud and embezzlement. Foley never obtained permission from the Dernicks to represent Encore. These disputes eventually settled, but the Dernicks claimed that the settlement cannot resolve the damage of Foley’s breach of fiduciary duty.
The Present Litigation
The Dernicks subsequently sued Foley and their attorneys for breach of fiduciary duty, civil conspiracy, and aiding and abetting breach of fiduciary duty. They also sought to recover attorney’s fees incurred and damages for lost oil and gas deals. Foley filed an application to compel arbitration, and about a month later, moved to dismiss the Dernicks’ suit under the TCPA by asserting that the Dernicks’ lawsuit is in response to Foley’s “exercise of the right to petition.” The Dernicks’ argued in response that their claims are not subject to dismissal under the TCPA because they were based on conduct and failure to communicate rather than on any communications. They also contended that, if any communications were made, they belonged to Encore, not Foley, so Foley’s right to petition was not involved. The trial court granted Foley’s TCPA motion and dismissed the Dernicks’ claims. Foley also received around $101,757.50 in attorneys’ fees. The Dernicks subsequently appealed.
In an opinion by Justice Rivas-Molloy, the court of appeals reversed and remanded to the trial court. The Dernicks argued that Foley did not establish that the Dernicks’ claims were based on or in response to their right to petition, nor did they identify a communication that would invoke the TCPA. Consequently, the Dernicks’ claims were not based on or in response to communications, but on failure to communicate or act. According to the Dernicks, Foley could not rely on communications made for their client, Encore, to invoke the right to petition. The Dernicks also argued that the commercial speech exemption applies, that they established a prima facie case for each element of their claims, and that Foley did not prove their affirmative defenses. They further contended that the trial court erred by not giving the Dernicks attorney fees because Foley’s TCPA motion was frivolous, and that the amount awarded to Foley was excessive and unreasonable.
Foley responded that the Dernicks’ lawsuit was based entirely on Foley’s communications during judicial proceedings on behalf of Encore amd that the commercial speech exemption did not apply because their communications were not part of a commercial transaction. They asserted that the Dernicks did not establish a prima facie case for each element and that their affirmative defenses preclude the Dernicks’ claims. Foley also claimed that the amount for attorney fees they received was reasonable.
The Court of Appeals’ Ruling
The court of appeals agreed with the Dernicks that the TCPA cannot be invoked because the Dernicks’ legal action was not based on Foley’s communications in the judicial proceedings, but on their actions and conduct in representing Encore adversely to the Dernicks without seeking consent. Noting that Texas appellate courts “have declined to rewrite the TCPA to extend the definition of ‘communication’ to include [a failure] to communicate” (citations omitted), the court cited two cases (its own decision in Cweren, 2023 WL 2977755, and a Fort Worth Court of Appeals decision in Newstream, 2023 WL 5615871) for the proposition that “[s]imply alleging conduct that has a communication embedded within it does not create the relationship between the claim and the communication necessary to invoke the TCPA” (citations omitted). This case fit that pattern because while Foley did file an adversary proceeding against the Dernicks and breach its duty by doing so, that does not mean that the Dernicks’ claims were based on the judicial proceeding. In short, the Dernicks’ breach of fiduciary duty could stand without referencing the adversary proceeding at all. Thus, no “communication” in a judicial proceeding that would invoke the TCPA. Having determined that Foley’s TCPA motion to dismiss was without merit, the court of appeals reversed the award of attorney’s fees to Foley and remanded the case back to the trial court to consider the Dernicks’ entitlement to attorney’s fees.
TCJL Research Intern Dilara Muslu provided the research and writing for this article.
