Chief Justice Jimmy Blacklock
Justice Rebeca Huddle
In an accounting malpractice suit involving the Dallas Court of Appeals’ application of the “anti-fracturing rule” to a real-estate developer’s fraud and breach of fiduciary duty claims against his accountants, the Texas Supreme Court has reversed the court of appeals, holding that Plaintiff’s fraud claim was barred by the Rule, The Court held further that his breach of fiduciary duty claim failed as a matter of law because it was based solely on his illegitimate theory of “informal fiduciary duties.”
Pitts, et al. v. Rivas, et al. (No. 23-0427; February 21, 2025) arose from Pitts & Pitts’ (a married couple operating an accounting firm; referred to collectively as Accountants) erroneous handling of real-estate developer, Rivas’, consolidated financial statements. Rivas initially hired Accountants in 2007 to prepare quarterly financial statement compilations for several of his assets. Over the next ten years, the parties developed a personal friendship, allegedly sharing dinners and exchanging services outside the scope of their 2015 and 2016 engagement letters (eg. Accountants preparing Rivas’ tax returns, reviewing documents free of charge, and Rivas building a house for the Pitts at a discount). The party ended in 2016, however, when Rivas began noticing errors (which an independent auditor suggested were caused by duplicated asset entries) in the financial statements given to lenders that inflated shareholder equity by over $10 million. Rivas released Accountants in 2018 and sued them in August 2020, arguing that their augmented entries forced him to restate shareholder equity figures—causing them to withdraw and demand additional deposits—and overpay taxes, depleting his accounts and bankrupting his business.
Plaintiffs asserted the whole kitchen sink, including negligence, gross negligence, professional malpractice, intentional misrepresentations, fraud, breach of fiduciary duty, and breach of contract claims. Accountants moved for summary judgment on the basis that Rivas judicially admitted in a related bankruptcy proceeding that defendants’ alleged conduct was not the proximate cause of his injuries. Defendants further argued that the negligence and breach of contract claims, which accrued in 2016 at the latest, were barred by two-year and four-year statutes of limitations, respectively. Finally, the Pitts’ argued, the fraud, breach of fiduciary duty, and breach of contract claims were barred by the “anti-fracturing rule,” which prohibits plaintiffs from re-characterizing professional negligence claims as other ones to obtain litigation benefits. The trial court granted the Pitts’ motion for summary judgment on all claims. The court of appeals affirmed the trial court judgment as to Rivas’ negligence and breach of contract claims, but reversed on his fraud and breach of fiduciary duty claims, finding they were not barred by the Rule.
The court of appeals reasoned that the Rule did not bar Rivas’ fraud claim because Accountants’ alleged deficiencies exceeded the scope of their engagement letters, which only concerned the preparation of financial statements. But in a majority opinion delivered by Chief Justice Blacklock, SCOTX disagreed, finding that the Rule wasn’t limited to the contents or scope of the engagement letter because the range of typical accounting services extended beyond preparing financial statements. Since the Accountants’ alleged deficiencies fell within the scope of common, “professional”accounting services, they sounded in professional negligence, thus invoking the Rule.
SCOTX further rejected the court of appeals’ determination that Rivas had successfully distinguished his ‘fraudulent misrepresentations’ claims from traditional a malpractice one (Latham v. Castillo, 972 S.W.2d 66, 69 (Tex. 1998)). Rivas alleged that Accountants misrepresented their proficiency with the QuickBooks computer program, which caused them to accidentally duplicate several assets, overstate shareholder equity, and trigger tax overpayment. Despite discovering the error in September 2016, Accountants still sent the statements to Rivas’ lenders, initiating the cascade of events that allegedly bankrupted his business. SCOTX reasoned that because the crux of Rivas’s claim was that Accountants failed to provide competent accounting services which consequently damaged his business, it was barred by the Rule (Duerr v. Brown, 262 S.W.3d at 70). Likewise, their ‘misrepresentations’ did not support an independent fraud claim because nothing suggested they intended to harm Rivas and succeeded in doing so. Since the evidence suggested that Accountants’ errors, not their misrepresentations, caused Rivas’ harm, Rivas’ allegations invoked professional malpractice, which under the Rule, cannot be reframed as fraud to circumvent the two-year statute of limitations.
Rivas then argued that Accountants’ harmful errors represented a breach of fiduciary duty. SCOTX rejected this reasoning as well, holding that under Texas Law accountant-client relationships do not “automatically [give] rise to fiduciary duties” in the first place. Rivas gamely tried to argue that Accountants owed him an “informal fiduciary duty” stemming from his “special” personal relationship with them. Despite listing interactions that exemplified his “high degree of trust and confidence” in Accountants, SCOTX found them irrelevant, since no relationship existed “prior to, and apart from, the agreement made the basis of the suit” and had no bearing on the parties’ engagement letter. Expanding on this last point, Justice Huddle, joined by Justices Lehrmann, Bland, and Young, penned a concurring opinion criticizing Rivas’ notion that an “informal” fiduciary duty could arise from some “special” or “confidential” relationship not legally recognized. A unanimous Court rejected Rivas’ theory, holding that the scope of “fiduciary relations” should not be expanded to include “informal fiduciary relations” …which exist whenever one party trusts and relies upon another.” The case Rivas relied on, Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509 (Tex. 1942), only concerned the principal-agent relationship, which had already long been recognized as fiduciary. Even if Rivas’ theory was valid, the Court noted that these “informal confidential relationships” have historically only justified imposing constructive trusts on non-fiduciaries. Because Rivas never sought a constructive trust, this justification remained irrelevant and the theory inapplicable.
Justice Huddle further stressed that features of “fiduciary” relationships must be clear, defined by the fiduciary’s objective role in the relationship, not a beneficiary’s subjective feelings about it. Otherwise, how can a so-called “informal” fiduciary even know they owed any fiduciary obligations in the first place? When a standard such as this is so “vague and subject to so many different meanings in different circumstances,” creating an independent legal remedy for the standard’s breach is “simply bad jurisprudence.” Thus, rejecting both the premise and theory of Rivas’ breach of fiduciary duty claim, SCOTX granted summary judgment for Accountants on all claims.
One should at least admire Plaintiffs for floating a novel theory (though it was derived from a SCOTX decision made 82 years ago) and getting that far down the road with it. In any event, the Court’s decision strengthens the anti-fracturing rule and holds plaintiffs’ feet to the fire on repetitive reframing of the same claim under different labels.
TCJL Research Intern Shaan Rao Singh researched and substantially drafted this article.
