Southeast Texas Record

Wednesday, February 26, 2020

14th Court of Appeals reverses trial court judgment in fraud allegation against financial adviser

By John Sammon | Nov 22, 2017

Law money 10

HOUSTON – The Texas 14th Court of Appeals reversed an earlier trial court judgment that disregarded allegations made by the owner of a San Antonio-based real estate business who accused his financial adviser of fraud.

The Texas 14th Appeals Court concluded in its Nov. 9 opinion that the trial court lacked a proper basis to disregard the jury findings, including the allegation of fraud. The estimated $312,000 loss to appellant Richard Bryan and the recommended $2.5 million damages award should not have been disregarded by the trial court as well, the opinion said.

The appeals court said the trial court did not err in disregarding the amount of the defendant’s alleged profit from the transaction of $142,781, as evidence was insufficient to support the jury finding, but  did error in other allegations.

In addition, a disregarded charge of negligent misrepresentation by the trial court the appeals court sustained.

The appeals court reversed the trial court judgment and remanded the case for a judgment on the fraud, loss and damages claims based on the jury’s verdicts.        

Bryan and The Bryan Group LLC filed suit against Angelo Mark Papalia in 2011 alleging fraud, negligence, misrepresentation, breach of duty and violation of the Texas Insurance Code.

According to the opinion, Bryan was the majority owner of business The Bryan Group LLC that provided sales and marketing services for homebuilders. In the 1980s, Bryan started making small investments with Tim Couch. Couch went to work for Papalia Financial, a company owned by the defendant Angelo Mark Papalia.

Bryan transferred a retirement account he had from a prior employer to Papalia Financial and also set up a college savings plan for his son with the firm, the opinion states. Couch had taken Bryan’s assets with him to Papalia Financial.

In 2004, Bryan told Couch he wanted to reduce the amount of taxes he was paying in the real estate business. Papalia and Couch met with Bryan and proposed the adoption of a welfare benefit plan that would allow Bryan to invest funds in tax deductible contributions to the plan, the opinion states. The invested funds would appreciate allowing Bryan and his wife to access the funds for their retirement as well as a potential death benefit.

Papalia and Couch allegedly showed Bryan a plan with an investment of $132,000 per year for 10 years and the amount of funding the investments might yield. Based on the cyclical nature of the real estate business Bryan told the two he could not commit to investing $132,000 for 10 years, the opinion states.

Bryan alleged that he asked Papalia if he could invest such an amount for three years and Papalia assured him that if he did the plan “will work.” During testimony, the opinion states Papalia denied ever telling Bryan this.

Bryan alleged he was not told the plan would terminate if he made only three annual payments but thought that if he failed to make the fourth year, the plan would continue and he could continue to make additional contributions.

On Dec. 31, 2004, Bryan signed the Adoption Agreement (welfare benefit) Plan. Payments of $132,000 were made for the years 2004, 2005, 2006. The Bryan Group took a tax deduction for the full amount of the insurance premium that it paid for the policy, the opinion states.

However, according to the testimony of a financial expert, Bryan was not allowed to take such a deduction.

In November 2007, the opinion states Bryan sent an email to Papalia informing him that he would not make a contribution to the plan for 2007 because of change in business environment. Papalia testified the plan would terminate by the end of the year 2007 if Bryan did not make the annual contribution, the opinion states.

However, according to the opinion, before the plan could terminate, Papalia had sent a letter dated Dec. 4, 2007 requesting the administrator of the plan terminate single welfare plans for 23 clients, including Bryan.

Bryan testified he did not know the plan had been terminated, nor did he sign any document approving such an action, the opinion states.

In 2010, Bryan and his wife were audited by the Internal Revenue Service and the following year the IRS sought a substantial amount of owed back taxes, though Bryan retained an attorney and resolved the matter "for much less than the IRS had sought," the opinion states.

A trial jury delivered a verdict that Papalia committed fraud against Bryan and Bryan had sustained $312,000 in out-of-pocket losses as a result and should be awarded $2.5 million in exemplary damages.

Bryan moved for judgment based on the jury verdict and fraud claim.

Papalia filed a motion to the court to disregard the jury findings. The trial court denied Bryan’s motion and granted Papalia’s motion, rendering a judgment that Bryan take nothing and pay Papalia’s court costs.

The trial court did not specify grounds for the decision, the opinion states.  

Bryan appealed, saying the court erred in granting Papalia’s motion.

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State of Texas 14th Court of Appeals