Court Opinion

ID: 6351021
Source: CourtListenerOpinion
Date Created: 2022-06-20 00:11:40.668208+00
Date Added: 2024-06-11T09:15:53.224146
License: Public Domain

Supreme Court of Texas
                            ══════════
                             No. 20-0178
                            ══════════

     In the Matter of the Estate of Richard C. Poe, Deceased

   ═══════════════════════════════════════
               On Petition for Review from the
       Court of Appeals for the Eighth District of Texas
   ═══════════════════════════════════════

                      Argued December 2, 2021

      JUSTICE HUDDLE delivered the opinion of the Court.

      Justice Young did not participate in the decision.

      This case arises from a struggle for control of a substantial family-
owned car-dealership enterprise following the death of the patriarch,
Dick Poe. In the weeks before he passed, Dick, who was the sole director
of Poe Management, Inc. (PMI), authorized the corporation to issue new
shares. Dick bought the new shares for $3.2 million. This made Dick
the majority owner of PMI, which was the general partner of several
Poe-owned businesses. As a result of the purchase, Dick’s death vested
control of the family enterprise in the two co-executors of Dick’s estate
rather than Dick’s son, Richard, who was PMI’s only other shareholder.
      Richard challenged the share issuance as a breach of Dick’s
fiduciary duty and prevailed at trial. But petitioners here assert the
jury was improperly charged on the critical issue: whether Dick’s
admittedly self-dealing share issuance was fair to PMI and, therefore,
valid and enforceable under Texas Business Organizations Code
Section 21.418(b). Petitioners also contend the probate court improperly
submitted a theory of liability not recognized in Texas law: that Dick, as
PMI’s sole director, owed Richard an “informal” fiduciary duty to
manage PMI in Richard’s best interest. We agree with petitioners that
the probate court erred in charging the jury in both respects, and we
hold that the errors were harmful. We therefore reverse and remand for
a new trial.
                            I.     Background
       Richard C. Poe, popularly known as “Dick Poe,” was a
businessman and third-generation car dealer in El Paso. Dick was
involved in the daily operations of the car dealerships well into his
eighties and until the time of his death. Dick had two sons, and, for
many years, the older of the two, Richard C. Poe II,1 believed he would
succeed Dick as the person who controlled the enterprise. But shortly
before Dick’s death, things changed.
       Dick structured his many businesses to consolidate control in a
single entity: PMI, a Texas corporation he formed in 2007. At the time
of Dick’s death, PMI was the general partner of five limited
partnerships, three of which owned and operated car dealerships in El
Paso—Dick Poe Toyota, Dick Poe Chrysler, and Dick Poe Dodge.
Another of the limited partnerships owned the property on which Dick
Poe Toyota was located, as well as a shopping center. The fifth was a

       1 For convenience, we refer to the father, Richard C. Poe, as “Dick,” and
the son, Richard C. Poe II, as “Richard.”

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family limited partnership in which equal shares were owned by two
limited partners: Richard and a special needs trust Dick created to care
for his other son, Troy.2
       When Dick formed PMI, it had authority to issue 10,000 shares of
common stock, but it issued only 1,000 shares, all to a single
shareholder: Richard. Richard, in turn, ceded control of PMI to Dick.
This was accomplished first through an irrevocable proxy to vote
Richard’s shares and, later, through Richard’s successive annual
appointment of Dick as PMI’s sole director. Thus, while Richard owned
100% of the outstanding shares of PMI, Dick always controlled PMI.
There is no evidence that Richard ever sought any contractual right to
maintain a majority ownership interest in PMI or that he ever sought to
serve as a PMI director.
       In early 2015, Dick’s health rapidly declined, and he was placed
in hospice care. In May 2015, Dick, as PMI’s sole director, authorized
the issuance of 1,100 shares of PMI common stock to himself in exchange
for approximately $3.2 million. The resolution authorizing this share
issuance was dated May 1, 2015, and Dick paid PMI for the shares five
days later, on May 6, 2015. It is undisputed that Richard was never
advised of this share issuance until after Dick’s death on May 16, 2015.
       After learning about the share issuance, Richard brought direct
and derivative claims3 against several parties in the probate court where

       2   Troy was born with cerebral palsy and requires full-time care.
       3See generally TEX. BUS. ORGS. CODE § 21.563(c)(1) (allowing courts to
treat a derivative proceeding brought by a shareholder of a closely held
corporation as a direct action for the shareholder’s own benefit); see also id.

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Dick’s will was filed.     Richard sued Dick’s estate through the two
independent co-executors named in Dick’s will: Anthony Bock and
Karen Castro,4 who were Dick’s longtime accountant and office
manager/comptroller, respectively.         Richard asserted that the share
issuance was invalid because:
       (1)    it was a self-dealing transaction by Dick, a PMI director,
              that violated Dick’s fiduciary duties to PMI;
       (2)    it violated a fiduciary duty Dick owed to Richard, which
              arose by virtue of a “confidential relationship” between
              them; and
       (3)    Dick lacked the mental competence to issue and purchase
              the PMI shares.
       Richard also sued Bock, Castro, and a third individual—Paul
Sergent, Dick’s longtime attorney—in their individual capacities for
allegedly breaching their fiduciary duties to PMI5 and for conspiring
with Dick to breach his. Richard requested relief in the form of damages
and a declaratory judgment.
       In response, the defendants, who are petitioners here, asserted
that Dick did not owe a Richard a fiduciary duty to manage PMI in
Richard’s best interest; rather, Dick’s duty with respect to the
management of PMI was to exercise his business judgment for the sole

§ 21.563(b) (providing that certain limitations on derivative proceedings, such
as the need for a written demand to the corporation, do not apply to closely
held corporations).
       4We will refer to Bock and Castro in their capacity as executors of Dick’s
estate as “the Estate.”
       5 Sergent and Castro were officers of PMI at the time of the share
issuance and at the time of trial. Bock was elected an officer of PMI following
Dick’s death.

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benefit of the corporation. Petitioners also argued that all the relief
Richard sought was barred because the share issuance was fair to PMI
and deemed valid and enforceable by the statutory safe harbor set forth
in Business Organizations Code Section 21.418(b)(2).6
       Richard’s general theory at trial was that Dick would not have
chosen to deprive Richard of the right to control the family business.
Richard asserted that Sergent, Bock, and Castro took advantage of
Dick’s deteriorating condition and masterminded the share issuance to
wrest control over PMI from Richard.              Sergent, Bock, and Castro
countered that, during the months before he died, Dick repeatedly

       6  Section 21.418(b) provides that an otherwise valid and enforceable
transaction between a corporation and one or more directors or officers is valid
and enforceable, despite being a self-dealing transaction, if any one of three
distinct conditions is true:

       (1)     the material facts are disclosed to the board of directors or a
               committee of the board of directors, which in good faith
               authorizes the transaction by a majority of disinterested
               directors or committee members;

       (2)     the material facts are disclosed to the shareholders entitled to
               vote on authorizing the transaction and the transaction is
               specifically approved in good faith by a vote of the shareholders;
               or

       (3)     the transaction is fair to the corporation when it is authorized,
               approved, or ratified by the board of directors, a committee of the
               board of directors, or the shareholders.

TEX. BUS. ORGS. CODE § 21.418(b)(1), (2).

       If any one of the conditions in subsection (b) is satisfied, Section
21.418(e) provides that neither the corporation nor any of its shareholders will
have a cause of action against the interested director or officer for breach of
duty with respect to making, authorizing, or performing the transaction
because of the director’s or officer’s interest in the corporation. Id. § 21.418(e).

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expressed concerns about Richard’s ability to manage the business and
wanted to ensure someone other than Richard would control PMI.
       The trial was bifurcated. The first phase focused on whether the
share issuance was valid. Before trial, the probate court informed the
parties this would be determined by three sub-issues: (1) whether Dick
had the mental capacity to issue and purchase the shares, (2) whether
the share issuance breached an informal fiduciary duty Dick owed to
Richard, and (3) whether the share issuance was valid under Section
21.418 of the Business Organizations Code. At the close of Richard’s
case-in-chief, however, the probate court granted a directed verdict
against Richard’s claim regarding Dick’s mental capacity.
       The parties sharply disagreed about how to submit the remaining
issues. Richard’s proposed submission consisted of separate questions
asking whether (1) Dick breached his fiduciary duty to PMI, (2) Dick
owed and breached a fiduciary duty to Richard, (3) the share issuance
was valid and enforceable under Section 21.418(b), and (4) the share
issuance complied with Dick’s duties under PMI’s bylaws. By contrast,
petitioners asserted that only the relevant condition in Section 21.418(b)
should be submitted: whether the share issuance was fair to PMI. They
also argued that Dick did not owe any separate “informal” fiduciary duty
to Richard with regard to the management of PMI.7
       The probate court submitted four questions to the jury, and
petitioners objected to all four. They argued the first three, related to

       7Before trial, the Estate moved for a partial summary judgment that
Dick owed a fiduciary duty solely to PMI and not to Richard individually. The
probate court denied the motion.

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an “informal” fiduciary duty, should not be submitted at all because
Dick’s duty was to manage PMI for the sole benefit of the corporation
and he therefore could not also have a duty to manage PMI in the best
interest of Richard.
      As submitted, Question 1 asked the predicate question to
determine whether Dick owed an informal fiduciary duty8 to Richard:
      Did a relationship of trust and confidence exist between
      Dick and Richard?
      A relationship of trust and confidence existed if Richard
      justifiably placed trust and confidence in Dick to operate
      PMI in a manner that was consistent with Richard’s best
      interest. Richard’s subjective trust and feelings alone do
      not justify transforming arm’s-length dealings into a
      relationship of trust and confidence.
      This relationship must have been mutual and understood
      as such by both Richard and Dick.
      Answer “Yes” or “No.”
      Questions 2 and 3 were predicated on a “Yes” answer to
Question 1. Question 2 asked the jury whether the relationship of trust
and confidence between Richard and Dick terminated before May 1,
2015. Question 3 then asked the jury about breach:
      Did Dick comply with his fiduciary duty to Richard with
      respect to his management of PMI?

      8  The language of Question 1 generally follows PJC 104.1 of the Texas
Pattern Jury Charges, which “submits the existence of an informal fiduciary
relationship.”  STATE BAR OF TEXAS, TEXAS PATTERN JURY CHARGES:
BUSINESS, CONSUMER, INSURANCE & EMPLOYMENT PJC 104.1 cmt. (2018).

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      Given the relationship of trust and confidence between
      Dick and Richard, Dick owed Richard a fiduciary duty. To
      prove Dick complied with his duty, the Estate must show:
             1. the share issuance was fair to Richard; and
             2. Dick made reasonable use of the confidence that
                Richard placed in him; and
             3. Dick acted in the utmost good faith and exercised the
                most scrupulous honesty toward Richard; and
             4. Dick placed the interests of Richard before his own
                and did not use the advantage of his position to gain
                any benefit for himself at the expense of Richard;
                and
             5. Dick fully and fairly disclosed all important
                information to Richard concerning the share
                issuance.
      In answering whether the share issuance was fair to
      Richard, you should consider all circumstances
      surrounding the transaction.
      Answer “Yes” or “No.”
      Petitioners also objected to Question 4, which addressed their
statutory safe-harbor defense, on multiple grounds. But, over their
objection,     the    probate   court   included   all   the   conditions   in
Section 21.418(b) regardless of applicability. It read as follows:
      Is the share issuance valid and enforceable under the
      Texas Business Organizations Code?
      The share issuance is valid and enforceable if any one of
      the following conditions is satisfied:
      (1)       the material facts as to the share issuance were
                disclosed to or known by:
                (A)    PMI’s board of directors, and the board of
                       directors in good faith authorized the share

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                   issuance by the approval of the majority of the
                   disinterested directors, or
             (B)   the shareholders entitled to vote on the share
                   issuance, and the share issuance is
                   specifically approved in good faith by a vote of
                   the shareholders; or
      (2)    the share issuance is fair to PMI when it is
             authorized, approved, or ratified by the board of
             directors or the shareholders.
      In answering whether the share issuance was valid and
      enforceable, you should consider all circumstances
      surrounding the transactions.
      Answer “Yes” or “No.”
      In a 10–2 verdict, the jury found Dick owed and breached an
informal fiduciary duty to Richard. The jury also failed to find that the
share issuance was valid and enforceable in response to Question 4.
      The second phase of the trial addressed Richard’s conspiracy and
damages claims. Richard argued that Sergent, Bock, and Castro were
liable either for breaching their own fiduciary duties to PMI or for
conspiring with Dick to cause the share issuance. Richard initially
sought damages against all defendants but later abandoned on the
record his claim for damages against the Estate.        At the close of
Richard’s case-in-chief, the probate court directed a verdict for the
individual defendants on all of Richard’s claims against them.
      The probate court rendered a judgment declaring the share
issuance invalid and unenforceable and ordering the return of the
$3.2 million Dick paid for the shares. It also rendered a take-nothing
judgment on Richard’s individual claims against Sergent, Bock, and
Castro.

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      Both sides appealed. The court of appeals affirmed the judgment
in part and reversed and remanded in part. 591 S.W.3d 607 (Tex. App.—
El Paso 2019). It held Question 4 contained “superfluous” language but
any error regarding its submission was harmless as there was sufficient
evidence to support the jury’s failure to find that the share issuance was
fair to PMI. Id. at 629–31. Because the court of appeals concluded the
jury’s answer to Question 4 was sufficient to support the judgment’s
declaration that the share issuance was invalid, the court found it
unnecessary to address the informal-fiduciary-duty theory submitted
through the first three questions. Id. at 635. But the court noted that
these issues were “substantial, and in some respects raise important
questions under Texas law.” Id.
      The Estate argued in the court of appeals that the probate court
abused its discretion by admitting evidence and permitting argument
regarding (1) the interpretation of PMI’s bylaws and Richard’s claim
they required notice to him of the share issuance, and (2) efforts by the
Toyota distributor to terminate Dick Poe Toyota’s franchise following
the share issuance. Id. at 636–38. The court of appeals rejected these
claims. Id. Notably, the court held that the lack of notice to Richard
was relevant to the fairness issue in Question 4 or the fiduciary duty
Dick allegedly owed under Questions 1 and 3. Id. at 638.
      On Richard’s cross-appeal, the court of appeals affirmed the
dismissal of Richard’s claims against the individual defendants, with
two exceptions. First, the court reversed the directed verdict in favor of
Sergent on Richard’s conspiracy claim, concluding there was sufficient
evidence to submit to a jury whether Sergent conspired with Dick by

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rendering legal advice regarding the share issuance.9             Id. at 648.
Second, the court reversed the directed verdict as to Richard’s claims for
disgorgement against Sergent and Bock for billing PMI for legal and
accounting services, respectively. Id. at 643–44.
       The Estate and Sergent each petitioned this Court for review.
                             II.      Discussion
       Petitioners challenge the court of appeals’ conclusion that any
error in submitting the Section 21.418(b) safe-harbor defense in
Question 4 was harmless. They also assert it was error for the court of
appeals to reach that conclusion without considering whether the
informal-fiduciary-duty      theory     was    erroneously     submitted     in
Questions 1 through 3. In petitioners’ view, the charge errors cannot be
analyzed in isolation because the evidence admitted to support the
informal-fiduciary-duty theory misled the jury in its consideration of the
Section 21.418(b) fairness defense submitted in Question 4.
       A trial court’s duty is to submit only those questions, instructions,
and definitions raised by the pleadings and the evidence. Thota v.
Young, 366 S.W.3d 678, 693 (Tex. 2012); Harris County v. Smith, 96
S.W.3d 230, 236 (Tex. 2002); see also TEX. R. CIV. P. 278 (“The court shall

       9 One of Sergent’s arguments in the probate court was that he could not
be subjected to civil liability for providing legal advice to Dick. See Haynes &
Boone, LLP v. NFTD, LLC, 631 S.W.3d 65, 81 (Tex. 2021). The court of appeals
concluded that attorney immunity is an affirmative defense that was not raised
in Sergent’s pleadings, so it could not affirm the directed verdict in Sergent’s
favor on that ground. 591 S.W.3d at 648 n.19. The court expressed no opinion
on how attorney immunity might apply on remand if properly raised. Id.
Sergent does not raise this argument here, so we likewise express no opinion
on its potential application.

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submit the questions, instructions and definitions in the form provided
by Rule 277, which are raised by the written pleadings and the
evidence.”). A question or instruction cannot be submitted to the jury
unless it has been properly raised by the pleadings and the evidence.
See Columbia Rio Grande Healthcare, L.P. v. Hawley, 284 S.W.3d 851,
855 (Tex. 2009) (stating that a jury instruction must “find[] support in
the pleadings and evidence”); Hill v. Winn Dixie Tex., Inc., 849 S.W.2d
802, 803 (Tex. 1992) (concluding that an unavoidable-accident
instruction was erroneous when there was no affirmative evidence to
support it); Wal-Mart Stores, Inc. v. Redding, 56 S.W.3d 141, 149 (Tex.
App.—Houston [14th Dist.] 2001, pet. denied) (holding the trial court
erred in submitting an element of damages to the jury for which there
was no evidence); Eldridge v. Collard, 834 S.W.2d 87, 90 (Tex. App.—
Fort Worth 1992, no writ) (holding the trial court erred by submitting a
question that was not “properly raised by the pleadings and the
evidence”).
      Yet even if a trial court errs in submitting a jury question or
instruction, we cannot reverse a judgment for charge error unless that
error was harmful. Thota, 366 S.W.3d at 687; see also TEX. R. APP. P.
61.1(a) (“No judgment may be reversed on appeal on the ground that the
trial court made an error of law unless the Supreme Court concludes
that the error complained of . . . probably caused the rendition of an
improper judgment . . . .”).     “Charge error is generally considered
harmful if it relates to a contested, critical issue.” Thota, 366 S.W.3d at
687 (quoting Hawley, 284 S.W.3d at 856); see also Timberwalk
Apartments, Partners, Inc. v. Cain, 972 S.W.2d 749, 755 (Tex. 1998)

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(“Error in instructions to the jury is more likely to be harmful in a closely
contested case.”). An improper instruction is especially likely to cause
an improper judgment when “the trial is contested and the evidence
sharply conflicting.” Quantum Chem. Corp. v. Toennies, 47 S.W.3d 473,
480 (Tex. 2001). In determining whether error in the charge requires
reversal, we analyze the entire record. Timberwalk, 972 S.W.2d at 756.
         Submission of an improper jury question can be harmless if the
jury’s answers to other questions render the improper question
immaterial. City of Brownsville v. Alvarado, 897 S.W.2d 750, 752 (Tex.
1995).    But submission of an immaterial issue can be harmful if it
“confused or misled the jury” in answering questions that were material
to the judgment. Id.; see also Boatland of Hous., Inc. v. Bailey, 609
S.W.2d 743, 750 (Tex. 1980); TEX. R. APP. P. 61.1(a). To determine
whether a particular question or instruction confused or misled the jury,
we “consider its probable effect on the minds of the jury in the light of
the charge as a whole.” Alvarado, 897 S.W.2d at 752 (quoting Tex.
Emps. Ins. Ass’n v. McKay, 210 S.W.2d 147, 149 (Tex. 1948)).
A.       Did the probate court err in submitting Richard’s
         informal-fiduciary-duty theory?
         Questions 1 through 3 all relate to Richard’s theory that Dick
owed and breached an “informal” fiduciary duty arising from a special
relationship of trust and confidence between the two of them. See Meyer
v. Cathey, 167 S.W.3d 327, 330–31 (Tex. 2005). The court of appeals did
not address any of petitioners’ challenges to Questions 1 through 3
because the court concluded that the jury’s answer to Question 4 was
sufficient to support the probate court’s judgment. 591 S.W.3d at 635.
Even though it noted that the issues relating to Questions 1 through 3

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were “substantial” and “in some respects raise important questions
under Texas law,” id., the court held they were not “necessary to final
disposition of the appeal.” Id. (quoting TEX. R. APP. P. 47.1). Richard
likewise contends that it is unnecessary for us to consider any alleged
errors regarding Questions 1 through 3.
      We disagree. Even if the erroneous submission of a jury question
is immaterial, it can still constitute harmful error if “the submission
confused or misled the jury” when it answered other questions that were
material to the judgment. Alvarado, 897 S.W.2d at 752. Petitioners
argue just that: they contend the probate court’s error in submitting
Richard’s informal-fiduciary-duty theory of liability in Questions 1
through 3 confused and misled the jury with respect to Question 4.
      There is another reason to consider whether submission of the
informal-fiduciary-duty theory was proper.        The court of appeals
reversed the probate court’s directed verdict on Richard’s conspiracy
claim against Sergent. 591 S.W.3d at 648. Richard alleged that Sergent
conspired with Dick to breach both his fiduciary duty to PMI and his
alleged informal fiduciary duty to Richard. But Sergent cannot be liable
for conspiring to breach an informal fiduciary duty unless Dick owed
such a duty. See Kline v. O’Quinn, 874 S.W.2d 776, 786 (Tex. App.—
Houston [14th Dist.] 1994, writ denied) (holding that a bank cannot be
liable for knowing participation in another’s breach of fiduciary duty
unless a fiduciary duty was owed); see also Chu v. Hong, 249 S.W.3d 441,
444 (Tex. 2008) (“Conspiracy is a derivative tort . . . .”). If petitioners
are correct that Texas law does not recognize an informal fiduciary duty
requiring a director to manage the corporation in the best interest of a

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shareholder, then Sergent cannot be liable for conspiring to breach such
a duty. Accordingly, we will address petitioners’ complaint regarding
Questions 1 through 3.
      Under Texas law, the business and affairs of a corporation are
managed through a board of directors.            TEX. BUS. ORGS. CODE
§ 21.401(a). Directors owe a fiduciary duty to their corporations in the
actions they take as directors. Ritchie v. Rupe, 443 S.W.3d 856, 868
(Tex. 2014). A director’s fiduciary status creates three broad duties:
duties of obedience, loyalty, and due care. Loy v. Harter, 128 S.W.3d
397, 407 (Tex. App.—Texarkana 2004, pet. denied) (citing Gearhart
Indus., Inc. v. Smith Int’l, Inc., 741 F.2d 707, 719 (5th Cir. 1984)). These
fiduciary duties run to the corporation, not to individual shareholders or
even to a majority of shareholders. Gearhart Indus., 741 F.2d at 721.
As we explained in Ritchie, a director’s fiduciary duty includes a duty to
dedicate “uncorrupted business judgment for the sole benefit of the
corporation.” 443 S.W.3d at 868 (quoting Int’l Bankers Life Ins. Co. v.
Holloway, 368 S.W.2d 567, 577 (Tex. 1963)).
      Our Court has recognized that an “informal” fiduciary duty may
arise from “a moral, social, domestic or purely personal relationship of
trust and confidence.” Meyer, 167 S.W.3d at 331 (quoting Associated
Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 287 (Tex. 1998)).
We have described the types of confidential relationships that can give
rise to a fiduciary duty imprecisely as those “in which influence has been
acquired and abused, in which confidence has been reposed and
betrayed.” Crim Truck & Tractor Co. v. Navistar Int’l Transp. Corp.,
823 S.W.2d 591, 594 (Tex. 1992) (quoting Tex. Bank & Tr. Co. v. Moore,

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595 S.W.2d 502, 507 (Tex. 1980)). But we have always made clear that
“we do not create such a relationship lightly.” Schlumberger Tech. Corp.
v. Swanson, 959 S.W.2d 171, 177 (Tex. 1997).        And we have never
recognized an informal fiduciary duty within the context of the operation
or management of a corporation, in which the corporation’s directors
have clearly defined duties to exercise their business judgment for the
sole benefit of the corporation. See Ritchie, 443 S.W.3d at 868.
      Here, Richard alleged that, based on their personal relationship
of “confidence and trust,” Dick owed a fiduciary duty to Richard
individually, in addition to Dick’s duties to PMI. According to Richard,
this duty required Dick to manage PMI in a manner consistent with
Richard’s best interest. The probate court agreed to submit the theory.
Thus, despite the acknowledgment of all involved that Dick, as PMI’s
director, was bound to dedicate his “uncorrupted business judgment for
the sole benefit of [PMI],” id. (quoting Holloway, 368 S.W.2d at 577), the
probate court determined Dick might also be bound to simultaneously
dedicate his business judgment for the benefit of Richard.
      Petitioners contend that Texas law should not recognize an
informal fiduciary duty to a shareholder with respect to a director’s
management of a corporation because, as Ritchie confirms, the director
has a duty to manage a corporation solely in the corporation’s best
interests.   Richard responds that Texas law recognizes informal
fiduciary duties where, as the jury found here, a confidential
relationship exists. He argues this duty does not disappear merely
because Dick might potentially owe conflicting duties to the corporation.

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       Both sides claim Ritchie supports their position. The question in
Ritchie was whether a minority shareholder in a closely held corporation
could assert a statutory or common-law cause of action against the
corporation’s directors for oppressing the minority shareholder’s rights.
Id. at 860. We concluded that Texas law does not recognize such a claim.
Id. In particular, we held that, “[a]bsent a contractual or other legal
obligation, the officer or director has no duty to conduct the corporation’s
business in a manner that suits an individual shareholder’s interests
when those interests are not aligned with the interests of the
corporation and the corporation’s shareholders collectively.” Id. at 888–
89 (footnote omitted). We instead noted that disputes in closely held
corporations may be prevented and resolved through shareholders’
agreements and that the Legislature granted corporate founders and
owners “broad freedom to dictate for themselves the rights, duties, and
procedures that govern their relationship with each other and with the
corporation.” Id. at 881. And we adhered to our longstanding rule that
directors’ fiduciary duties to the corporation include “the dedication of
[their] uncorrupted business judgment for the sole benefit of the
corporation.”    Id. at 868 (quoting Holloway, 368 S.W.2d at 577)
(alteration in original).
       Despite acknowledging this general rule, Richard argues that this
case involves the type of “other legal obligation” that might require Dick
to act in Richard’s interests notwithstanding Dick’s duties as director to
the corporation. See id. at 888–89. The example we cited in Ritchie was
that “informal fiduciary duties” may exist when “a special relationship
of trust . . . arise[s] between parties prior to and independent from the

                                    17
parties’ business relationship.” Id. at 889 n.58. As Richard points out,
we remanded that case for the court of appeals to address challenges to
the jury’s finding that the majority shareholders owed an informal
fiduciary duty to the plaintiff. Id. at 892. In doing so, we did not
recognize any such duty existed under the facts of that case. Nor did we
suggest that a corporation’s officers or directors could owe a fiduciary
duty to an individual shareholder with respect to their operation or
management of the corporation in conflict with the duty owed to the
corporation.10
       Here, the jury was asked whether Richard justifiably placed trust
and confidence in Dick “to operate PMI in a manner that was consistent
with Richard’s best interest.”       We have never held, in Ritchie or
elsewhere, that a corporation’s director, while owing formal fiduciary
duties to the corporation requiring him to manage the corporation’s
affairs for the sole benefit of the corporation, simultaneously owes an
informal fiduciary duty to a shareholder to operate the corporation for
that shareholder’s benefit or consistent with the shareholder’s best
interest.   On the contrary, Ritchie suggests those two duties are

       10 The primary issues in Ritchie were whether the majority
shareholders and directors of a closely held corporation engaged in oppressive
conduct that affected a minority shareholder’s ability to sell her shares and
whether a court-ordered buy-out of her shares was an authorized remedy. In
addition to being asked whether the defendants engaged in oppression, the
jury was asked whether the defendants, solely in their capacities as
shareholders, owed an informal fiduciary duty to the plaintiff. On remand, the
court of appeals held there was no evidence of a relationship of trust and
confidence to support any informal fiduciary duty. Ritchie v. Rupe, No. 05-08-
00615-CV, 2016 WL 145581, at *1 (Tex. App.—Dallas Jan. 12, 2016, pet.
denied).

                                     18
incompatible.      443 S.W.3d at 888–89 (stating that a corporation’s
director owes no duty to conduct the corporation’s business in a manner
that benefits an individual shareholder). We reaffirm this principle
today and hold that a director cannot simultaneously owe these two
potentially conflicting duties. By electing to form and own PMI as a
corporation, the parties disclaimed the existence of duties regarding the
management of the corporation’s affairs beyond those that exist by
statute or arise from the corporation’s formation documents or other
agreement. See id. at 879 (“[C]orporations and the relationships among
those who participate in them . . . are largely matters governed by
statute and contract.”); Empire Mills v. Alston Grocery Co., 15 S.W. 505,
505 (Tex. Ct. App. 1891) (“A corporation is the creature of a statute
immediately     creating    it,   or   authorizing    proceedings     for   its
organization.”).
       Accordingly, we conclude the probate court erred in submitting
Question 1 because, as a matter of law, a corporation’s director cannot
owe an informal duty to operate or manage the corporation in the best
interest of or for the benefit of an individual shareholder. A director’s
fiduciary duty in the management of a corporation is solely for the
benefit of the corporation.11 See Ritchie, 443 S.W.3d at 868; Holloway,
368 S.W.2d at 577.

       11Questions 2 and 3 were defensive questions on which the Estate had
the burden of proof, and both were conditioned on the jury’s affirmative answer
to Question 1. Because the probate court erred in submitting Question 1, there
was likewise no basis for submitting Questions 2 and 3.

                                       19
B.     Did the probate court err in submitting the Section
       21.418(b) safe-harbor defense?
       Under the common law, a contract between a corporation and
director was not automatically void but was voidable for unfairness and
fraud. Holloway, 368 S.W.2d at 576. The burden was on the director
(as fiduciary) to prove that the contract was fair. Id.; see also Tex. Bank
& Tr. Co., 595 S.W.2d at 508–09 (holding that a fiduciary who benefits
from a transaction with his or her principal has the obligation to
establish the fairness of the transaction). This Court and others have
recognized certain circumstances under which a director could establish
that his or her transaction with the corporation was valid. See Tenison
v. Patton, 67 S.W. 92, 96 (Tex. 1902) (holding that a director’s
transaction with a corporation would not be invalid if the director
established that a quorum of disinterested directors approved the
transaction after full disclosure and that the director obtained no undue
advantage from the transaction); Wiberg v. Gulf Coast Land & Dev. Co.,
360 S.W.2d 563, 567 (Tex. App.—Beaumont 1962, writ ref’d n.r.e.)
(holding that a contract between a director and the corporation may be
ratified by a majority of the shareholders after full disclosure).
       Business Organizations Code Section 21.418(b), originally
enacted in 1985,12 reflects the Legislature’s determination that

       12  The substance of Section 21.418(b) was originally enacted as
article 2.35–1 of the Business Corporation Act. Act of May 7, 1985, 69th Leg.,
R.S., ch. 128, § 9, 1985 Tex. Gen. Laws 592, 597. The Legislature adopted the
Business Organizations Code in 2003 and incorporated former article 2.35–1
as Section 21.418. Act of May 13, 2003, 78th Leg., R.S., ch. 182, § 1, sec. 21.418,
2003 Tex. Gen. Laws 267, 443. Subsection (e) was added in 2011. Act of May
11, 2011, 82d Leg., R.S., ch. 139, § 28, 2011 Tex. Gen. Laws 650, 659.

                                        20
transactions between a corporation and an interested director should be
given full legal effect if certain conditions are met. TEX. BUS. ORGS.
CODE § 21.418(b). Section 21.418(b) provides:
      An otherwise valid and enforceable contract or transaction
      [between a corporation and a director] is valid and
      enforceable, and is not void or voidable, . . . if any one of the
      following conditions is satisfied:
      (1)    the material facts as to the relationship or interest
             . . . and as to the contract or transaction are
             disclosed to or known by:
             (A)    the corporation’s board of directors or a
                    committee of the board of directors, and the
                    board of directors or committee in good faith
                    authorizes the contract or transaction by the
                    approval of the majority of the disinterested
                    directors or committee members, regardless
                    of whether the disinterested directors or
                    committee members constitute a quorum; or
             (B)    the shareholders entitled to vote on the
                    authorization of the contract or transaction,
                    and the contract or transaction is specifically
                    approved in good faith by a vote of the
                    shareholders; or
      (2)    the contract or transaction is fair to the corporation
             when the contract or transaction is authorized,
             approved, or ratified by the board of directors, a
             committee of the board of directors, or the
             shareholders.
Id. § 21.418(b).    Section 21.418(b) thus sets forth three distinct
conditions under which a self-dealing transaction is deemed “valid and
enforceable, and . . . not void or voidable”: (1) the transaction was
approved by a majority of disinterested directors with knowledge of
material facts; (2) the transaction was approved by a vote of

                                     21
shareholders with knowledge of material facts; or (3) the transaction
was “fair to the corporation when the contract or transaction [was]
authorized, approved, or ratified.” Id. The burden of proving that a
transaction falls within this safe harbor rests on the interested director.
See Roels v. Valkenaar, No. 03-19-00502-CV, 2020 WL 4930041, at *6
(Tex. App.—Austin Aug. 20, 2020, no pet.); see also Health Discovery
Corp. v. Williams, 148 S.W.3d 167, 169 (Tex. App.—Waco 2004, no pet.)
(applying former TEX. BUS. CORP. ACT art. 2.35–1, the predecessor to
Section 21.418(b)).
      The Business Organizations Code also prescribes the effect of a
finding that a transaction is within the safe harbor. Section 21.418(e)
states:
      If at least one of the conditions of Subsection (b) is satisfied,
      neither the corporation nor any of the corporation’s
      shareholders will have a cause of action against [the
      interested director or officer] for breach of duty with
      respect to the making, authorization, or performance of the
      contract or transaction because the person had the
      relationship or interest [that makes him an interested
      director or officer] . . . .
TEX. BUS. ORGS. CODE § 21.418(e).
      In this case, the Estate argued that subsection (b)(2) applied
because the share issuance was fair to PMI when it was authorized. See
id. § 21.418(b)(2). The Estate also argued that neither of the conditions
in subsection (b)(1) applied. Dick was PMI’s only director, so the share
issuance was not (and could not be) approved by a majority of
disinterested directors. See id. § 21.418(b)(1)(A). And Richard, who was
PMI’s only shareholder before the share issuance, never voted on it. See
id. § 21.418(b)(1)(B). While the Estate repeatedly argued that only

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subsection (b)(2) should be submitted, Richard argued that all three
conditions should be included in Question 4.
      In this Court, petitioners argue that Question 4 was improper
because it included extraneous instructions not supported by the
evidence. We agree. The jury was instructed that the share issuance
was “valid and enforceable” if it found any one of the three conditions
set forth in Section 21.418(b) was satisfied. But, as petitioners argue,
the evidence supported submission of only one: whether the share
issuance was fair to PMI. There was no evidence that would support a
finding of the other two conditions. It is undisputed that Dick was PMI’s
only director; therefore, it would have been impossible for a “majority of
the disinterested directors” to authorize the share issuance.          Id.
§ 21.418(b)(1)(A). Likewise, the share issuance was never approved by
“a vote of the shareholders.” Id. § 21.418(b)(1)(B). Richard was PMI’s
sole shareholder at the time of the share issuance, and it is undisputed
that he never voted for or against it.
      An instruction is improper if it is not supported by the pleadings
and evidence. See Hawley, 284 S.W.3d at 855. The court of appeals
correctly   concluded   that   Question    4   contained    “superfluous”
instructions. 591 S.W.3d at 630. In the absence of affirmative evidence
supporting them, it was error to instruct the jury that it could find the
share issuance valid and enforceable based on board or shareholder
approval. See Hill, 849 S.W.2d at 803. We conclude the probate court
abused its discretion by instructing the jury that it could find the share
issuance valid and enforceable based on the two conditions in

                                    23
Section 21.418(b)(1) when there was no evidence that could support a
finding of either.13
       In summary, we agree with petitioners that the probate court
abused its discretion by submitting Questions 1 through 3. With respect
to Question 4, we agree that the probate court erred in instructing the
jury that it could find the share issuance was valid and enforceable
based on two conditions (approval by the board of directors or
shareholders) for which there was no evidence.
C.     Were the charge errors harmful?
       As noted above, the submission of an erroneous question can be
harmful if it confuses or misleads the jury in answering a question that
is properly submitted and material to the judgment. Alvarado, 897
S.W.2d at 752; Boatland of Hous., 609 S.W.2d at 750. Richard argues
that any error in the charge was harmless because there was sufficient
evidence to support a conclusion that the share issuance was not fair to
PMI and, thus, to support the jury’s “no” answer to Question 4. In other
words, Richard contends that, because there is some evidence from
which the jury could have found that the share issuance was not fair to
PMI, the submission of questions about Richard’s informal-fiduciary-

       13The Estate also argues Question 4 was improper because (1) it asked
a question of law and (2) it should have specified May 1, 2015, as the date for
determining whether the share issuance was fair to PMI. In light of our
conclusion that the instructions accompanying Question 4 were erroneous, we
do not need to address these additional challenges to Question 4. Their
resolution would not change our ultimate disposition. We note, however, that
the determination of whether the share issuance was fair to PMI when it was
authorized would necessarily include evidence of the shares’ purchase price,
which some evidence suggests was not determined until May 5, 2015.

                                      24
duty   claim    and    the   inclusion    of   inapplicable   predicates   to
Section 21.418(b)’s safe-harbor defense was harmless.
       We disagree. The jury’s deliberations on Question 4 should have
focused solely on whether the share issuance was fair to PMI at the time
it was authorized, approved, or ratified by Dick. See TEX. BUS. ORGS.
CODE § 21.418(b)(2).     But due to the erroneous submission of the
informal-fiduciary-duty theory, a significant amount of Richard’s
evidence and argument regarding the share issuance focused on its
alleged unfairness to Richard.       Richard testified that he had been
groomed to take over the family business from a young age, and he told
the jury that the share issuance “upset the applecart” and “cut [him]
out.” He told the jury he doubted that the signature on the check to pay
for the shares was Dick’s and that he believed Dick would not have
approved the share issuance. According to Richard’s testimony, Dick
was always proud of Richard and wanted him to have control of the
family enterprise.
       Continuing with the theme of unfairness to him, Richard relied
heavily on the fact that Dick never told Richard about the share issuance
to prove that Dick did not in fact authorize it. Petitioners were each
asked repeatedly by Richard’s counsel about the fact that Richard was
not notified of the share issuance until after Dick had died. In response,
petitioners vigorously disputed Richard’s claim that PMI’s bylaws
required advance notice of the issuance to Richard. The probate court
decided to let counsel “duke it out” for the jury, and they did, making
the notice issue a focus of the trial.

                                     25
        In closing argument, Richard asserted that his failure to receive
notice of the share issuance meant that the share issuance was not fair.
But he conflated the proper inquiry (fairness to PMI) with the
improperly submitted one (fairness to Richard), arguing that “the
corporation that is PMI, is Richard” and that the share issuance “is not
fair to the one person that [PMI] was organized for. That is [Richard].”
In short, Richard leveraged the probate court’s errors to admit
prejudicial evidence under an improperly submitted theory and to
mislead the jury’s deliberations regarding Question 4 by conflating the
transaction’s fairness to Richard with its fairness to PMI.
        Whether the share issuance was fair to PMI was the critical
question. And the evidence on this was sharply conflicting. As the court
of appeals noted, “[b]oth sides presented voluminous and competing
expert testimony about the market value of PMI.” 591 S.W.3d at 630.
Richard’s expert testified that the market value of the new shares was
approximately $5.6 million, or nearly double the $3.2 million Dick paid.
But the Estate’s expert testified that the fair value of PMI at the time of
the share issuance was between $2.8 and $3.6 million. And petitioners
presented evidence that, a year before the share issuance, Richard
certified in his personal financial statement that PMI’s total value was
$5.6 million, which would make a purchase of 52.4% of the corporation
worth approximately $2.9 million, or less than the $3.2 million Dick
paid.
        The evidence on price, which should have been a key issue in the
jury’s determination of fairness to PMI, was hotly contested. The jury
returned a 10–2 verdict. And the probate court erred both in submitting

                                    26
three questions relating to an improper informal-fiduciary-duty theory
and in providing superfluous instructions on the fourth. Based on our
review of the record and considering the probable effect of the probate
court’s errors on the minds of the jury, we conclude that the probate
court’s errors probably caused the rendition of an improper judgment.
TEX. R. APP. P. 61.1(a).14
                             III.   Conclusion
       The probate court improperly submitted an invalid theory of
liability—Richard’s claim that Dick owed him an informal fiduciary duty
to manage PMI in a manner that was consistent with Richard’s best
interest. We reverse and render judgment that Richard take nothing on
this claim.
       The improper submission of this theory, along with the probate
court’s erroneous charge on the Estate’s Section 21.418(b) defense,
allowed Richard to introduce evidence and argument that misled and
confused the jury with respect to whether the share issuance was fair to
PMI when it was authorized. We conclude these charge errors probably
caused the rendition of an improper judgment. We therefore reverse the
court of appeals’ judgment affirming the probate court’s judgment for
Richard on his formal breach of fiduciary duty claim.

       14 Petitioners also argue that the probate court erred by admitting
evidence regarding (1) PMI’s bylaws, (2) the attempt to terminate the Dick Poe
Toyota dealership, and (3) Richard’s abandoned claim that Dick was
incompetent. In light of our disposition remanding the case for a new trial
based on the probate court’s charge errors, we do not address the merits of
these arguments.

                                     27
      We affirm the court of appeals’ judgment with respect to Richard’s
claims against Bock, Castro, and Sergent individually.
      We remand the case to the probate court for further proceedings.

                                       Rebeca A. Huddle
                                       Justice

OPINION DELIVERED: June 17, 2022

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