In an opinion issued last week, the Supreme Court of Texas clarified what claims can be asserted in suits for professional malpractice. The Court adopted the “anti-fracturing rule,” which prevents plaintiffs from recharacterizing, or “fracturing,” their ordinary negligence claims into others, such as fraud and breach of contract, to obtain a litigation advantage. The majority opinion, along with a four-Justice concurrence, also signals a general reluctance to impose “informal” fiduciary duties on professionals in business relationships. 

The case, Pitts v. Rivas, followed the bankruptcy of a homebuilder. The builder alleged that his accountants, with whom he had personal friendships for more than a decade, erroneously duplicated entries for certain assets on the builder’s financial statements, resulting in inflated figures of shareholder equity and overpayment of taxes. The builder’s subsequent restatement also caused lenders to demand additional deposits. The loss of cash reserves, combined with the loss of credit, allegedly forced the builder into bankruptcy. The builder sued his accountants, asserting claims of professional malpractice, fraud, breach of contract, and breach of fiduciary duty. In response, the accountants invoked the anti-fracturing rule, arguing that all the builder’s allegations amounted to nothing more than malpractice.

The Supreme Court agreed with the accountants, confirming that the anti-fracturing rule, which virtually all Texas courts of appeals had already adopted, did indeed apply to professional-malpractice suits. “Under the anti-fracturing rule,” the Court stated, “if the crux or gravamen of the plaintiff’s claim is a complaint about the quality of professional services provided by the defendant, then the claim will be treated as one for professional negligence even if the petition also attempts to repackage the allegations under the banner of additional claims.” Thus, the Court explained, even though the builder alleged that the accountants had misrepresented their proficiency in the QuickBooks computer program and did not timely disclose their errors, the builder could not separately sue the accountants for fraud. Those allegations, the Court observed, were better characterized as malpractice.

The Court separately addressed the builder’s claim of breach of fiduciary duty against the accountants. As to that claim, the Court held that it failed even without applying the anti-fracturing rule, because the longstanding personal friendships between the builder, the accountants, and their children were insufficient to establish fiduciary duties. The engagement letter between the builder and accountants, moreover, had shown that they maintained an arm’s-length business relationship. The nature of the business relationship must be defined by reference to the parties’ contract, the Court explained, not by evidence of their personal interactions.

In a concurring opinion, four Justices expressed deep skepticism about the notion of “informal” fiduciary relationships, opining that such relationships should be rejected altogether. The “weighty duties” of a fiduciary, the concurring Justices wrote, “cannot sprout into existence absent evidence that one has undertaken a role that Texas law recognizes as fiduciary in nature.” In a footnote, the majority opinion acknowledged the concurrence and noted that its decision, while it applied governing fiduciary precedent, should not be read as “reaffirming or agreeing with it.”

Taken together, the Court’s holdings set an important precedent for professional service firms facing claims under Texas law.

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