In Lee v. Rogers Agency, Lee purchased three whole-life insurance policies in the 1980s where each had a face value of $1,000,000. No. 06-15-00037, 2017 Tex. App. LEXIS 1069 (Tex. App.—Texarkana February 8, 2017, pet. filed). It was represented to Lee that the policies provided that Lee could shorten the premium payment period by tendering payment in full. Lee paid $238,188.15, which he understood would extinguish his obligation to pay premiums on the policies. In 1991, Lee transferred ownership of the policies an irrevocable insurance trust for tax planning purposes, and the owner became the trustee of the trust.

Later, a class action lawsuit was filed against the insurance company based on allegations that misrepresentations were made about whether a single prepayment would be sufficient to carry the cost of the policies for the life of the insured. This suit was settled with the insurer paying $2 billion to the class plaintiffs. Allegedly, notice of this class action and settlement was sent to the trustee of Lee’s trust, but the trustee did not request to be excluded from the class.

Later, Lee’s policies lapsed for non-payment of premiums, and he filed suit against the insurance company, an insurance agency, and the agent for declaratory relief and damages for claims for negligence, DTPA, insurance code, and breach of contract. The insurance company filed a motion for summary judgment and argued that Lee had no standing to litigate his claims or, in the alternative, that his claims were barred by res judicata because they had been fully litigated in the class action. The trial court granted the motion for summary judgment, and Lee appealed.

The court of appeals first addressed whether Lee had standing. In other words, the court determined whether Lee retained the right to assert extra-contractual claims based on the policies or whether those rights were transferred to the trust. The court set forth the following standards for trust construction:

The meaning of a trust instrument is a question of law when there is no ambiguity as to its terms. If the court is capable of giving a definite legal meaning or interpretation to an instrument’s words, it is unambiguous, and the court may construe the instrument as a matter of law. Only when the trust instrument’s language is uncertain or reasonably susceptible to more than one meaning will it be considered ambiguous so that its interpretation presents a fact issue precluding summary judgment. The overriding principle to be observed in construing a trust instrument is to ascertain the settlor’s intent with the view of effectuating it. “[I]t is the intention of the settlor at the time of the creation of the trust that is determinative.” We interpret trust instruments the same way as we interpret wills, contracts, and other legal documents. Thus, when interpreting a trust, a court must “(1) [c]onstrue the agreement as a whole; (2) give each word and phrase its plain, grammatical meaning unless it definitely [*9]  appears that such meaning would defeat the parties’ intent; (3) construe the agreement, if possible, so as to give each provision meaning and purpose so that no provision is rendered meaningless or moot; (4) express terms are favored over implied terms or subsequent conduct; and (5) surrounding circumstances may be considered—not to determine a party’s subjective intent—but to determine the appropriate meaning to ascribe to the language chosen by the parties.”

Moreover, when determining the parties’ intent, the court must be particularly wary of isolating individual words, phrases, or clauses and reading them out of the context of the document as a whole. For this reason, “we ‘examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless. No single provision taken alone will be given controlling effect; rather, all the provisions must be considered with reference to the whole instrument.’”

Id. at * 8-9 (internal citations omitted).

Among other provisions, the trust agreement stated:

The Trustee is hereby vested with all right, title, and interest in and to such policies of insurance, and the Trustee is authorized and empowered to exercise and enjoy, for the purposes of the Trust herein created… The Settlor hereby relinquishes all rights and powers in such policies of insurance which are not assignable, and will, at the request of the Trustee, execute all other instruments reasonably required to effectuate this relinquishment.

Id. at *10-12. The court surmised that: “[T]he first question before us is whether Lee’s causes of action in this case are among those ‘rights and powers in such policies’ that Lee assigned or relinquished when the policies were transferred to the Trust.” Id. The court held that the trust’s provisions must be read in conjunction with the purposes of the trust. “[T]he Trust’s purpose was to shield the Policies from estate taxes at Lee’s death, and to do that, Lee had to divest himself of all ‘incidents of ownership’ in the Policies.” Id. The court held that whether Lee assigned or relinquished the extra-contractual causes of action at issue turned on whether those causes of action were “incidents of ownership” as defined by federal case law under Section 2042 of the federal income tax code. The court concluded:

When interpreting the terms of the Trust Agreement in this case, we must keep in mind that Lee’s assignment and relinquishment of the Policies was intended to be only as broad as was necessary to divest himself of any “incidents of ownership.” There is no indication from the Trust language that he intended to convey anything else. If his extra-contractual claims are “incidents of ownership” in the Policies, then they were assigned or relinquished, but if they are not “incidents of ownership,” then Lee retained those claims and has standing to assert them against the Appellees.

Id. at *19.

Federal law held that the phrase “incidents of ownership” was defined as “the economic benefits of owning an insurance policy,” including “the power to change the beneficiary, to surrender or cancel the policy, to assign the policy or revoke an assignment, to pledge the policy for a loan, or to obtain a loan from the insurer for the surrender of the value of the policy.” Id. at 19-22. The court also noted that under federal law, when deciding whether a decedent has retained any “incidents of ownership” of life insurance for purposes of Section 2042, “the key question is what power did decedent possess during his lifetime to control the disposition of the policy or the proceeds?” Id. The court concluded that the extra-contractual causes of action raised by Lee were not “incidents of ownership” in the policies. Retaining those claims did not allow Lee to change the disposition of the policy proceeds in a manner contrary to the trust’s terms, either by redirecting those proceeds to himself or to some person other than the named beneficiaries. Therefore, the court held that Lee had standing to assert those claims in the litigation.

The court next addressed whether the class-action settlement barred Lee’s claim due to res judicata. One issue was whether Lee was in privity with the trust and trustee such that a judgment that barred suit by the trust also barred suit by the settlor, Lee. After analyzing res judicata precedent, the court concluded that “in order to determine whether Lee’s claims are barred by res judicata, we must decide whether Lee had a ‘substantive legal relationship’ with the Trustee …, such that he was actually represented by the Trustee in the [class action] litigation.” Id. at * 32.

The court looked at the relationship between a settlor, the trust, and the trustee:

To begin with, a settlor who “[u]nder the terms of the . . . Trust . . . do[es] not manage any of the aspects of the . . . Trust and do[es] not stand to inherit any of the trust assets” is not an “interested person” who has standing to bring an action against a trustee or to bring other proceedings related to a trust under the Texas Property Code. Likewise, a trustee does not have standing to sue a settlor for breach of fiduciary duty.

Absent some assignment of duty to the settlor in the trust instrument, a trustee has no cause of action to sue the settlor of a trust for a breach of fiduciary duty to the trust beneficiaries. A trust settlor has no fiduciary obligation to a trust beneficiary once that trust is created, and control of the trust assets is vested with the trustee. Accordingly, the few Texas cases addressing the legal relationship between a settlor and a trustee have concluded that neither has standing to sue the other, at least where “[u]nder the terms of the . . . Trust . . . the Settlor do[es] not manage any of the aspects of the . . . Trust and do[es] not stand to inherit any of the trust assets.”

This precedent is consistent with Section 200 of the Second Restatement of Trusts, which states, “No one except a beneficiary or one suing on his behalf can maintain a suit against the trustee to enforce the trust or to enjoin or obtain redress for a breach of trust.” Comment b to that section goes on to state: “Settlor and his successors in interest. Neither the settlor nor his heirs or personal representatives, as such, can maintain a suit against the trustee to enforce a trust or to enjoin or obtain redress for a breach of trust. Where, however, the settlor retains an interest in the trust property,[] he can of course maintain a suit against the trustee to protect that interest. Thus, if the settlor is also a beneficiary of the trust, or if he has an interest by way of resulting trust, or if he has reserved power to revoke the trust, he can maintain a suit against the trustee to protect his interest. So also, if the settlor makes a contract with the trustee, he can maintain an action on the contract with the trustee. The trustee, however, merely by accepting the trust and agreeing to perform his duties as trustee does not make a contract with the settlor to perform the trust which the settlor could enforce.

Id. at *34-37. The court then concluded:

Consequently, because (1) Lee, as settlor, is not an “interested person” as defined by the Property Code; (2) Lee neither owed a duty to the Trust nor was owed any duties by the trust; and (3) as Settlor of a “private irrevocable trust . . . , [he lost] the possibility of modification or input on the Trust once the Trust [was] created[,]” … then Lee and the trustee do not have a “substantial legal relationship” with each other sufficient to create privity for purposes of res judicata. Although there may be an “incidental legal relationship” between them in the sense that Lee created the Trust and the Trustee subsequently managed it, there is not the “substantive legal relationship” necessary to satisfy due process for purposes of binding Lee by the Willson judgment.

Id. at *36-37. The court held that Lee did not have standing to raise negligence and breach-of-contract claims, but did have standing to assert the DTPA and insurance code claims against the insurance company. The court reversed and remanded the summary judgment to the trial court for further proceedings.

The insurance company has since filed a petition for review in this case to the Texas Supreme Court. On April 28, 2017, the Supreme Court requested that Lee file a response to the petition, and the response is currently due on May 30, 2017.