Good Faith Is Not Good Enough: Texas Court Puts Employers On Notice About For-Cause Executive Terminations

At Sheppard, we regularly advise employers on the most consequential decisions they face—including the decision to terminate a senior executive for cause. In such executive termination scenarios, the stakes are high in every direction. An appropriate for-cause termination often eliminates an executive’s right to substantial severance, equity, and post-employment benefits; saving the company significant financial burden. But an improperly documented or legally deficient for-cause determination can expose the company to significant liability.

A recent decision from the Fourteenth Texas Court of Appeals in Mastandrea v. Whitestone REIT is a must-read for any employer that has employment agreements with its executives. Mastandrea is a pointed reminder that—depending on the contract’s language—a company’s “good-faith” belief that it has “cause” to fire an executive may be insufficient.

The facts are instructive. Whitestone is a publicly-trade Maryland Real Estate Investment Trust. James Mastandrea served as Whitestone’s CEO starting in 2006. In 2014, the parties entered into an employment agreement (“Agreement”). The Agreement contained specific termination provisions that allowed either party to terminate with or without cause; with the nature of the termination determining what payments would be owed.

In August 2021, Mr. Mastandrea repeatedly met with the CEO of a potential buyer to discuss a purchase of Whitestone. Mr. Mastandrea believed he had authority to negotiate without first seeking the Whitestone Board’s approval. On January 18, 2022, Whitestone terminated Mr. Mastandrea for cause on the basis that he violated specific provisions of the Agreement—including confidentiality and a prohibition on willfully and wantonly acting in a manner materially adverse to the interests of the company and its shareholders.

Mr. Mastandrea sued Whitestone for breach of contract in February 2022. Whitestone’s primary defense was that it did not need to prove the grounds for which it terminated Mastandrea were correct. Rather, Whitestone argued that it needed only to demonstrate that it reasonably believed those grounds existed and that the trial court should defer to its conclusion. The trial court accepted this argument and ultimately granted Whitestone’s motion for summary judgment.

But the Court of Appeals reversed, rejecting Whitestone’s argument. Specifically, the Court of Appeals held that employment agreements are contracts interpreted like any other contract. So, when a discharged employee is subject to a contract that limits the employer’s right to terminate at will, the employer bears the burden of proof to show cause for the discharge. The Court of Appeals carefully distinguished the cases Whitestone relied upon, noting that those decisions involved contracts that expressly gave the employer the “sole right” to determine cause—language that was absent from Mastandrea’s agreement. In sum, the Agreement’s lack of any provision giving deference to Whitestone’s “for cause” determination was crucial.

The practical takeaways for employers from the Mastandrea case are clear and actionable.

• First, when drafting or negotiating executive employment agreements, pay close attention to how “cause” is defined. Employers who want for-cause determinations to be binding without full jury review should ensure the contract expressly grants the company the sole right to make that determination. Without that express language, the employer will be required to prove the conduct actually occurred and actually meets the contractual definition.
• Second, when a for-cause termination decision is made, document not just the business rationale, but the specific connection between the employee’s conduct and the contract language. Board minutes, investigation reports, and termination letters should be drafted with the contractual definition of cause front and center, not as an afterthought.
• Third, do not treat summary judgment as a backstop. The court concluded that Whitestone’s motion did not support the rendition of summary judgment on Mastandrea’s breach-of-contract claim, meaning the company now faces trial on claims it likely believed were long resolved. Preparation for litigation begins at the time of the termination decision, not after the lawsuit is filed.

Mastandrea v. Whitestone REIT is a timely and important reminder that “for cause” is a legal conclusion that must be earned through careful drafting on the front end, documentation at the time of termination, and a litigation strategy that is anchored to the specific language of the agreement. Employers that treat for-cause termination solely as a business decision rather than a legal one do so at significant risk.

Sheppard’s Labor and Employment team regularly counsels employers through all stages of executive employment relationships, and we are available to assist with agreement drafting, termination decisions, and, when necessary, defense of the claims that can follow.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.