This is a true story.
Tony and Eugene were friends who decided to go into business together. They formed five business entities—collectively called the B-W Companies—in order to develop low-income housing projects. They agreed to a 60-40 split. Tony would provide the funding. Eugene would provide expertise and management of the financial aspects of the business.
Eugene was also part of another business—TCB. Eugene deposited income from the B-W Companies into TCB’s bank account, and also used it to pay expenses of the B-W Companies. According to Eugene, the money was for compensation (since he did not receive a salary for his work); administrative fees; a goodwill bonus; and office, board, and mileage. He also used it for some personal transactions.
Eugene claims that he and Tony regularly went over the transactions, and Tony knew and agreed to this arrangement. While the arrangement was not in writing, shouldn’t it be easy enough to confirm this agreement with Tony?
Tony died.
Tony’s executor sued Eugene, alleging that he misappropriated funds that belonged to Tony and/or the B-W Companies. He alleged theft liability, breach of fiduciary duties, breach of the duty to account, and breach of contract.
After a judgment of the trial court and an appeal, the case is now pending in the Texas Supreme Court, where oral argument was held on October 2, 2024. Bertucci v. Watkins, 690 S.W.3d 341 (Tex. App.—Austin 2022, pet. granted)(en banc).
The case is full of legal and procedural issues. The court is considering the nature of the duties owed by Eugene to Tony and to the various entities, how the statute of limitations might apply, whether certain evidence was admissible, and what legal issues are properly presented on appeal.
Most of these issues are primarily of interest to lawyers. However, the case illustrates some very important pitfalls to be avoided by real estate professionals and investors.
1. Keep Money Separate
It is good practice to keep money for different purposes separate. Even if there’s nothing unethical going on, doing so prevents confusion and misuse, and results in cleaner books. Additionally, one of the primary reasons for forming business entities is for liability protection. Failing to keep business money separate can be a factor considered in “veil-piercing” cases and could result in a loss of that protection.
2. Stay Informed
It is also good practice to pay attention. If a party sees something that doesn’t look right, he may have a duty of inquiry and must exercise diligence in looking into the matter. Failure to do so may mean the statute of limitations stands in the way of a successful lawsuit.
3. Keep Good Records
Third, keeping good records is essential. Sometimes people do unethical things. Sometimes they forget. Sometimes they die. In this case, Eugene was not able to testify about Tony’s agreement because of the “Dead Man’s Rule.” Simplified and applied to this case, Eugene could not testify against Tony’s executor about Tony’s oral statements without other corroborating evidence. The rule exists because Tony is not able to testify and contradict Eugene’s testimony. Other rules also apply that make writings a good practice, among them the statute of frauds, the parol evidence rule, and the hearsay rule.
Nothing in this post should be considered legal advice.
