In In re Estate of Scott, an annuity company sued a customer’s estate for not reporting the death of his wife, which resulted in him receiving larger monthly payments after her death than he was entitled to under the contract. No. 04-19-00592-CV, 2020 Tex. App. LEXIS 4059 (Tex. App.—San Antonio May 27, 2020, no pet. history). The customer died in 2013, and the annuity company discovered the overpayments in 2014. In 2016, the annuity company filed suit against the customer’s estate for the overpayments. Both parties filed summary judgment motions, and the trial court entered judgment for the annuity company. The estate appealed.

The court of appeals reversed and rendered for the estate. The court first addressed the annuity company’s breach of contract claim. The court held that the contract did not expressly or impliedly require the surviving spouse to report the death of the first spouse. The court held:

In sum, the annuity contract, taken as a whole, does not evidence an intent to impose an implied obligation on Harold to notify Principal of Emily’s death or an implied obligation to return money Harold received in excess of the stated contract amount. Moreover, it is undisputed that this was Principal’s contract. “In Texas, a writing is generally construed most strictly against its author and in such a manner as to reach a reasonable result consistent with the apparent intent of the parties.” Principal, a sophisticated commercial enterprise, did not include express provisions requiring Harold to notify Principal of Emily’s death or to return money received in excess of the stated contract amount. The annuity contract, as written, does not evidence an intent to imply these obligations. Because we conclude the annuity contract, taken as a whole, does not support imposition of an implied obligation on Harold to notify Principal of Emily’s death or an implied obligation to return money Harold received in excess of the stated contract amount, Principal cannot show Harold breached the annuity contract.

Id.

The court then reviewed the annuity company’s money-had-and-received claim. The court described the claim thusly: “Money had and received is an equitable doctrine designed to prevent unjust enrichment. To prevail on a claim for money had and received, the plaintiff need only prove that the defendant holds money which in equity and good conscience belongs to the plaintiff.” Id. The court held that the claim was barred by the two-year statute of limitations as the annuity company did not file its claim within two years of discovering the overpayments.

Finally, the court rejected the annuity company’s fraud by nondisclosure claim. To establish fraud by non-disclosure, “Principal must prove: (1) Harold deliberately failed to disclose material facts; (2) Harold had a duty to disclose such facts to Principal; (3) Principal was ignorant of the facts and did not have an equal opportunity to discover them; (4) by failing to disclose the facts, Harold intended to induce Principal to act or refrain from acting; and (5) Principal relied on the non-disclosure, which resulted in injury.” Id. The court held that the annuity company had an equal opportunity to discover its customer’s death:

Principal had an equal opportunity to discover Emily’s death. Principal had internal procedures in place to discover this very type of information. Angela Essick, Principal’s corporate representative, testified that between 2001 and the present, Principal utilized a third-party company and the Social Security Master Index to provide it with a list of names and social security numbers of the deceased on a quarterly basis. Principal would compare these names and social security numbers with those of its annuitants. Principal failed to discover Emily’s death through these channels because it never obtained Emily’s social security number. Principal cannot rely on its internal oversight to claim it did not have an equal opportunity to discover Emily’s death.

Id. Accordingly, the court dismissed all of the annuity company’s claims and rendered judgment for the estate of the customer.

Author David F. Johnson has been named to the board of directors for the Texas Board of Legal Specialization (TBLS). David will serve a three-year term beginning in July of 2020. The TBLS board is composed of twelve members appointed by the President of the State Bar of Texas, with the approval of its Board of Directors. The TBLS was established in 1974 by the Supreme Court of Texas. TBLS certifies lawyers and paralegals that have substantial, relevant experience in select areas of law, completed continuing legal education hours in the specialty area, and passed a rigorous exam. Out of 110,000 lawyers that are licensed to practice in Texas, only 7,400 are Board Certified. David one of less than thirty attorneys in Texas who are Board Certified in Civil Appellate Law, Civil Trial Law, and Personal Injury Trial Law. David’s main practice area is fiduciary litigation.

 

In Hanschen v. Hanschen, a trustee challenged a default judgment. No. 05-19-01134-CV, 2020 Tex. App. LEXIS 4075 (Tex. App.—Dallas May 28, 2020, no pet. history). The family sued the trustee in his personal capacity and in his capacity as trustee for breaching fiduciary duties. While the trustee was in Texas, the family served him in his personal capacity. The family then obtained a default judgment against him in both capacities when he did not file an answer. Later, the trustee filed a special appearance challenging the court’s personal jurisdiction, and the trial granted the motion. The family then appealed.

The court of appeals reversed the special appearance against the trustee in his personal capacity. The court held that because the trustee was personally served in Texas, the trial court had personal jurisdiction over him:

In this case, the family personally served James with the petition and citation while he was in Texas. The family concedes they “have never asserted that Texas has general jurisdiction over James or that the traditional minimum contacts analysis would be met in the absence of his physical presence.” They are correct and the case law is clear that a trial court has authority to exercise in personam jurisdiction over a nonresident where the court’s jurisdiction grew out of the personal service of citation upon the nonresident within the state. A nonresident, merely by reason of his nonresidence, is not exempt from a court’s jurisdiction if he voluntarily comes to the state and thus is within the territorial limits of such jurisdiction and can be duly served with process.

Id. The trustee also argued that the court did not have adequate jurisdiction over him in his personal capacity because there were no claims against him in that capacity, but the court of appeals disagreed:

While we may agree with James that the default judgment granted relief against the entities for which it would be necessary for Texas courts to have jurisdiction over James in representative capacities, the family’s petition pleaded causes of action against James individually for breaches of fiduciary duties arising from his role as trustee of the Progeny Trust and his roles in NBR-C2, NBR-C3, and NBR-Needham. The family seeks exemplary damages against James for these alleged breaches of fiduciary duties. James does not make a specific argument why these claims are not pleaded against him personally. In Texas, generally an agent is personally liable for his own tortious conduct. For these reasons, we agree with the family that James was personally served with process in Texas, so the trial court has personal jurisdiction over him in that capacity.

Id.

The court of appeals then turned to whether the trial court had personal jurisdiction over the trustee in his capacity as trustee. The court noted that the citation was not issued to him in that capacity. The court held that this defect was dispositive and affirmed the special appearance for the trustee in his representative capacity:

We have held, “[t]he capacity in which a non-resident has contact with a forum state must be considered in the jurisdictional analysis.” James was not served with a citation directed to him in any representative capacity; only “JAMES HANSCHEN WHEREEVER HE MAY BE FOUND.” At oral argument, the family argued the listing of all the parties in the citation was sufficient to constitute service on James in each representative capacity he was listed as a defendant. We reject this contention and the family’s counsel acknowledged in oral argument a citation addressed to one defendant inadvertently served on a different, unrelated defendant would not constitute good service of process merely because all defendants’ names were in the list of defendants in the style of the lawsuit… In this case, James was not served with citations which were returned to the court clerk stating he had been served in his representative capacities. Any failure to comply with the rules regarding service of process renders the attempted service of process invalid, and the trial court acquires no personal jurisdiction over the defendant. A default judgment based on improper service is void. Accordingly, the trial court did not have personal jurisdiction over James in his representative capacities.

Id.

In the Estate of Trickett, two petitioners filed an heirship proceeding to establish their status as the sole heirs and rightful owners of a royalty interest. No. 13-19-00154-CV, 2020 Tex. App. LEXIS 3949 (Tex. App.—Corpus Christi May 14, 2020, no pet. history). Others opposed the application as they claimed the same interest from the decedent’s husband’s estate. The trial court ruled for the petitioners, and the opposing parties appealed. The court of appeals first held that the statute of limitations for heirship proceedings is four years. The court then held that the applicant’s claim was barred because it accrued over forty years ago:

[A]ny alleged legal injury of which the appellees now complain occurred in 1972 when Claralyn passed away and Claralyn’s property vested in Robert. The deeds gave at least constructive knowledge that any interest appellees possessed in the property was at stake. However, appellees did not file suit until March 25, 2015, more than forty-two years after her death. We therefore conclude that appellees’ claims are barred by the four-year statute of limitations.

Id.

Interesting Note: The residual four-year statute of limitations should not apply in cases moving forward because Section 202.0025 of the Texas Estates Code now allows an heirship proceeding to be filed at any point in time after the person’s death. Tex. Est. Code Ann. § 202.0025. That statute did not apply to the case cited above because the decedent died before January 1, 2014. See Act of May 27, 2013, 83rd Leg., R.S., ch. 1136, § 62(f), 2013 Tex. Gen. Laws 2737, 2754. Instead, the court of appeals had to apply the statutes in force at the time of death. See Dickson v. Simpson, 807 S.W.2d 726, 727 (Tex. 1991).

In Episcopal Diocese of Fort Worth v. Episcopal Church, the Texas Supreme Court addressed whether a withdrawing faction was entitled to church property and also addressed a trust issue. No. 18-0438, 2020 Tex. LEXIS 434 (Tex. May 22, 2020). Following a disagreement over religious doctrine dealing with homosexuals, the Episcopal Diocese of Fort Worth and a majority of its congregations withdrew from The Episcopal Church. The church replaced the diocese’s leaders with church loyalists, and both the disaffiliating and replacement factions claimed ownership of property held in trust for the diocese and local congregations. Interestingly, on a congregation by congregation approach, the withdrawing factions may be been in the minority.

The church relied on the Dennis Canon and argued that it was a trust that protected the property for it. That canon provided, in relevant part, that “all real and personal property held by or for the benefit of any Parish, Mission or Congregation is held in trust for [TEC][.]” The parties dispute the trust’s validity under Texas law and its revocability.

The Texas Supreme Court held that under Texas trust law, a trust may be created by any of the following methods: (1) a property owner’s declaration that the owner holds the property as trustee for another person; (2) a property owner’s inter vivos transfer of the property to another person as trustee for the transferor or a third person; (3) a property owner’s testamentary transfer to another person as trustee for a third person; (4) an appointment under a power of appointment to another person as trustee for the donee of the power or for a third person; or (5) a promise to another person whose rights under the promise are to be held in trust for a third person. Id. (citing Tex. Prop. Code § 112.001).

The Texas Supreme Court held that the Dennis Cannon did not create an irrevocable trust that could not revoked:

A trust is created only if the settlor manifests, in writing, an intention to create a trust, and a settlor may revoke a trust “unless it is irrevocable by the express terms of the instrument creating it or of an instrument modifying it.” Id. The court of appeals held that the Dennis Canon is not a valid trust under Texas law because “an entity that does not own the property to be held in trust cannot establish a trust for itself simply by decreeing that it is the beneficiary of a trust.” As to revocability, we held in Masterson and Episcopal Diocese that even assuming the Dennis Canon is a valid trust, it is revocable under Texas law because it was not made expressly irrevocable. Moreover, “[e]ven if the Canon could be read to imply the trust was irrevocable, that is not good enough under Texas law. The Texas statute requires express terms making [the trust] irrevocable.” For the reasons stated by the court of appeals (among others), the Majority Diocese asserts the Dennis Canon is not a valid trust, but even if it were valid, it was revocable and revoked by the 1989 amendment to the Diocesan Constitution and Canons, nearly two decades before this dispute arose. TEC contends the Dennis Canon creates a valid trust and argues it is entitled to possession of the disputed property under that trust for two independent reasons: (1) the 1989 amendment was ineffective to revoke the Dennis Canon trust because, at that time, the Diocesan Constitution and Canons only authorized amendments to the diocese’s canons that were “not inconsistent” with the national church’s constitution and canons and (2) the trust is irrevocable because it is a contractual trust supported by valuable consideration. Neither argument is persuasive. While it is true, as TEC says, that the diocese’s organizational documents prohibited the adoption of canons inconsistent with the national church’s constitution and canons, revocation is not inconsistent with a revocable trust. Moreover, in the twenty years between revocation and eruption of a dispute over the property, TEC lodged no objection to the amended canon and does not now contend the 1989 amendment is invalid for any other reason than purported “inconsistency.” In the alternative, and contrary to our holdings in Masterson and Episcopal Diocese, TEC insists that the Dennis Canon is irrevocable notwithstanding the absence of express language of irrevocability, as required by Texas Property Code section 112.051.… TEC has not identified any provision constraining revocation of the Dennis Canon, so the statutory requirement of express language retains its legal force.

Id. Therefore, the Court held that no trust existed to protect the church and held for the faction that left the church.

In United States Bank Nat’l Ass’n v. Moss, U.S. Bank (USB) sought to vacate a default judgment in an underlying suit involving title to real property through a bill of review based on allegedly improper service under the Texas Estates Code. No. 05-19-00223-CV, 2020 Tex. App. LEXIS 4030 (Tex. App.—Dallas May 21, 2020, no pet. history). In the underlying case, a home owner sued the lender, who was assigned the deed of trust as a trustee, alleging that the lender’s claims were barred by the statute of limitations. After the trial court entered a default judgment for homeowner, the lender filed a collateral bill of review action to set it aside, claiming that service was not appropriate. The trial court granted summary judgment for the homeowner, and the lender appealed.

The court of appeals first discussed service of process under the Texas Estates Code and the Texas Civil Practice and Remedies Code:

Under the Texas Estates Code, a foreign corporate fiduciary is defined as a “corporate fiduciary that does not have its main office or a branch office in [Texas].” Tex. Est. Code § 505.001. A foreign corporate fiduciary “may be appointed by will, deed, agreement, declaration, indenture, court order or decree, or otherwise and may serve in this state in any fiduciary capacity, including as: trustee of a personal or corporate trust.” Tex. Est. Code § 505.003(a). A foreign corporate fiduciary must appoint the secretary of state as its agent for service of process and “[s]ervice of notice or process . . . on the secretary of state as agent for a foreign corporate fiduciary has the same effect as if personal service had been had in [Texas] on the foreign corporate fiduciary.” Tex. Est. Code §§ 505.004, 505.005. “[T]he appointment of the secretary of state as the agent to receive service of process . . . is limited to matters related to an estate in which the foreign bank or trust company is acting as an executor, administrator, trustee, guardian of the estate, or in any other fiduciary capacity.” Bank of N.Y. v. Chesapeake 34771 Land Trust, 456 S.W.3d 628, 635 (Tex. App.—El Paso 2015, pet. denied); see also Bank of N.Y. Mellon v. NSL Prop. Holdings, LLC, No. 02-17-00465-CV, 2018 WL 3153540, at *5 (Tex. App.—Fort Worth 2018 no pet.) (mem.op). The Civil Practice and Remedies Code provides that service may be made on a financial institution by “serving the registered agent of the financial institution; or if the financial institution does not have a registered agent, serving the president or branch manager at any office located in this state.” Tex. Civ. Prac. & Rem. Code § 17.028(b). USB’s status as a foreign financial institution is irrelevant to the statute’s application. See Bank of N.Y. Mellon v. Redbud 115 Land Tr., 452 S.W.3d 868, 871 (Tex. App.—Dallas 2014, pet. denied) (nothing in § 17.028 limits its application to Texas financial institutions).

Id. The court of appeals held that these two statutes do not conflict: “Both statutes permit service on the secretary of state, and § 505.005 applies specifically to foreign corporate fiduciaries when they are sued in that capacity.” Id. The court then held that the lender was properly served by the secretary of state and was negligent in not keeping its designee for receiving process updated.

Finally, the court held against the lender on three issues: it held that the plaintiff’s pleading was sufficient to support service under the Texas Estates Code, service on the lender’s registered agent (the Texas Secretary of State) was appropriate, and the Whitney Certificate from the Secretary of State was sufficient to show proper service. The court affirmed the trial court’s summary judgment for the homeowner.

In Yowell v. Granite Operating Co., the Texas Supreme Court reviewed the validity of an interest in a mineral lease regarding the rule against perpetuities (“Rule”). No. 18-0841, 2020 Tex. LEXIS 425 (Tex. May 15, 2020).  The court of appeals held the reserved overriding royalty interest (“ORRI”) in new leases violated the Rule and was not subject to reformation under the Property Code. The Texas Supreme Court held that the ORRI is a real property interest that violates the Rule and must be reformed, if possible, in accordance with section 5.043 of the Property Code. Regarding the Rule, the Court held:

The Texas Constitution prohibits perpetuities: “Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed . . . .” Tex. Const. art. I, § 26. A perpetuity is a restriction on the power of alienation that lasts longer than a prescribed period. ConocoPhillips Co. v. Koopmann, 547 S.W.3d 858, 866-67 (Tex. 2018). Our common law defines this period for real property conveyances, providing that “no [property] interest is valid unless it must vest, if at all, within twenty-one years after the death of some life or lives in being at the time of the conveyance.” Peveto v. Starkey, 645 S.W.2d 770, 772 (Tex. 1982).

Id. The Court then held that the ORRI did not vest and violated the Rule. The Court then turned to reformation. The Court noted Texas Property Code Section 5.043, which provides:

(a) Within the limits of the rule against perpetuities, a court shall reform or construe an interest in real or personal property that violates the rule to effect the ascertainable general intent of the creator of the interest. A court shall liberally construe and apply this provision to validate an interest to the fullest extent consistent with the creator’s intent.

(b) The court may reform or construe an interest under Subsection (a) of this section according to the doctrine of cy pres by giving effect to the general intent and specific directives of the creator within the limits of the rule against perpetuities.

(c) If an instrument that violates the rule against perpetuities may be reformed or construed under this section, a court shall enforce the provisions of the instrument that do not violate the rule and shall reform or construe under this section a provision that violates or might violate the rule.

(d) This section applies to legal and equitable interests, including noncharitable gifts and trusts, conveyed by an inter vivos instrument or a will that takes effect on or after September 1, 1969 . . . .

Tex. Prop. Code § 5.043. The Court held that this provision applied to many instruments and not just wills and trusts. Id.

The Court then addressed whether the statute could apply where a corporation was making a commercial instrument. “The court [of appeals] interpreted ‘inter vivos instrument’ to require that the conveying party have a true lifetime for the reformation statute to apply, noting that a corporation’s perpetual existence is shortened only if stated in its certificate of formation.” Id. The Court disagreed:

First, corporations can execute inter vivos instruments—trusts, for example. The Property Code articulates different methods a “property owner” may use to create a trust. Prop. Code § 112.001. One method is “a property owner’s inter vivos transfer of the property to another person as trustee for the transferor or a third person.” Id. § 112.001(2). Although this provision does not define either “property owner” or “person,” we know from other sections of the Property Code that a “settlor” is a “person who creates a trust.” Id. § 111.004(14) (emphasis added). And both the Property Code and the Code Construction Act define “person” to include a corporation. See id. § 111.004(10)(B) (defining person to include a corporation); Gov’t Code § 311.005(2) (“‘Person’ includes corporation, organization, government or governmental subdivision or agency, business trust, estate, trust, partnership, association, and any other legal entity.”). Thus, a corporation can be a settlor that creates a trust by an “inter vivos transfer of [its] property.” See Prop. Code § 112.001(2) (emphasis added). Because a corporation can make an inter vivos conveyance of property to create a trust, we decline to hold that the Legislature’s choice of the term “inter vivos” excludes corporate conveyances of property interests from the reformation statute. The court of appeals erred when it declined to reform a commercial instrument executed by Aikman—a corporation—on the ground that it lacked the ability to create an inter vivos instrument. 557 S.W.3d at 804.

Id. Because the reformation statute could apply to the instrument that created the ORRI, and because the parties disagreed on the creator’s intent, the Court remanded the case for further proceedings.

In re Estate of Bryant, a couple set up three trusts for their three children, Bill, Leslie, and Jane. No. 07-18-00429-CV, 2020 Tex. App. LEXIS 2131 (Tex. App.—Amarillo March 11, 2020, no pet. history). After the couple had both passed away, their son Bill assumed the role of trustee of three trusts: Irrevocable Trust, the Children’s Trust, and the Family Trust. Under the terms of the three trusts, following the couple’s deaths, trust assets were to be distributed to the three siblings equally, with the partial exception of the Family Trust assets. Under the Family Trust, Bill and his sister Leslie were to each receive one million dollars, after which any remaining assets would be distributed equally among all three children. This provision of the Family Trust, known to the parties as the “Advancement Clause,” stated:

During Settlors’ lifetimes, Settlors have made numerous gifts to their daughter, Jane A. Bryant, totaling at least One Million Dollars ($1,000,000). Settlors consider these gifts to be advancements on any property Jane would have received upon Settlors’ deaths from any trust created herein. Therefore, notwithstanding any previous provision herein, my Trustee shall consider and account for the advancements made to Jane in the amount of One Million Dollars ($1,000,000) before making any further distribution to Jane from any trust created herein.

Id. Bill then received three checks from life insurance companies: one, for $500,041.00, was payable to the Children’s Trust and two, totaling $510,938.82, were payable to the Family Trust. The insurance proceeds ended up in the Family Trust and Bill distributed $500,000 in Family Trust funds to himself and $500,000 in Family Trust funds to his sister Leslie.

Jane made a written demand that no further distributions be made until she was provided with documentation of her parents’ and the Family Trust’s assets, liabilities, income, and distributions. Jane then sued Bill, alleging breaches of fiduciary duty and seeking to remove him from his roles as executor of Harvey’s estate, trustee of the Family Trust, and co-trustee of the Jane A. Bryant Trust. Jane also sued Leslie and sought to remove her as successor trustee. Bill and Leslie filed counterclaims against Jane. Following a bench trial, the trial court entered its final judgment, from which all of the parties appealed.

The court of appeals first addressed an issue of whether the trial court erred in holding that a loan from the parents to Jane should have been accounted for in the Advancement Clause or whether it was still an asset of the Family Trust, as argued by Bill. The court addressed Bill’s argument that the trial court improperly invaded his discretionary authority provided under the trust document to construe the trust. The court disagreed:

Bill points out that the Family Trust gave him authority to interpret and manage the trust, specifically providing: “If and when in good faith any doubt arises as to the proper construction, interpretation, or operation of a trust established hereunder . . . or as to any other or additional matter involving the administration of a trust established hereunder or the rights of any beneficiary thereof . . . the Trustee is authorized to resolve those doubts as it deems equitable and proper, it being the Settlors’ intention to avoid suits for construction or instruction to the fullest extent possible.” Bill notes that the trial court found that the dispute arising from the parties’ conflicting viewpoints as to the meaning and scope of the Advancement Clause was “a legitimate one” and “brought in good faith.” According to Bill, this finding demonstrates that the trial court acknowledged that reasonable minds could differ. He argues that the trial court then erroneously usurped his authority as trustee to interpret the clause…

While Bill suggests that his exercise of discretion in determining the status of the Elsbeth loan under the Advancement Clause could not be disturbed by the trial court, Jane counters that the trial court had authority to ensure that Bill effectuated the purpose of the Advancement Clause. We agree with Jane. Even where a trustee is vested with broad discretion, courts may assert control over the trustee’s exercise of power “to prevent the frustration of the fundamental intent of the settlor” and compel the trustee’s performance of his duty. The Advancement Clause provides that the trustee “shall consider and account for the advancements made to Jane in the amount of One Million Dollars ($1,000,000) before making any further distribution to Jane from any trust created herein.” The language of the clause is mandatory, not discretionary. The trial court was vested with, and properly exercised, the authority to construe the trust to determine whether Bill complied with the Advancement Clause.

Id. Bill then argued that the trial court erred in including the debt as part of the Advancement Clause, but the court of appeals held that based on the drafting attorney’s testimony, that the trial court had discretion to so hold.

The court then addressed Bill’s issue concerning the trial court’s holding that he breached his fiduciary duties as trustee to the Children’s Trust and Irrevocable Trust when he distributed $500,000 each to himself and to Leslie from the Family Trust. The trial court held that Bill acted with reckless indifference in doing so, rather than distributing them under the terms of the Children’s Trust and Irrevocable Trust. Bill argued that his conduct was protected by an advice of counsel defense:

Bill contends that there was no “reckless distribution” because he was relying on advice of counsel… As the trustee of the three trusts, Bill had a fiduciary duty to Jane, a trust beneficiary. A fiduciary has the duty to avoid self-dealing, bad faith, intentional adverse acts, and reckless indifference about the beneficiary and her best interest, and cannot be relieved of liability for such conduct, even in cases where a trust instrument includes exculpatory language. Moreover, “[a] trustee commits breach of trust not only where he violates a duty in bad faith, or intentionally although in good faith, or negligently[,] but also where he violates a duty because of a mistake.” The trial court found that Bill’s purported reliance on the advice of counsel did not excuse his conduct, because of Bill’s “abject failure to provide appropriate information to counsel.” … The evidence at trial showed that when Bill received the insurance checks, he called Nelson, who represented Bill in the probate of Harvey’s will, for instructions on distributing the funds… Nelson testified that she did not know that the Children’s Trust and Irrevocable Trust existed and, if she had, she would have instructed Bill to deposit the checks into the trusts to which they were made payable…This evidence shows that, although Bill sought the advice of counsel in determining how to handle the insurance proceeds, he did so knowing that the attorney did not have critical information that could influence her instruction. Despite his knowledge that Nelson was unaware of the existence of the two other trusts, which had terms of distribution that differed from the Family Trust, Bill chose not to reveal those trusts to Nelson. “[G]ood faith is no defense where the trustee has arbitrarily overstepped the bounds of his authority, or where he has not exercised diligence or has acted unreasonably, or has been guilty of such gross neglect as no reasonably intelligent person would consider proper.” On this record, the trial court, as factfinder, could reasonably conclude that Bill did not exercise the care and diligence required of him as a fiduciary and that his claim of alleged good faith reliance on counsel was not reasonable. We therefore conclude that Jane adduced sufficient evidence to prevail on her claim that Bill failed to comply with his fiduciary duty to her in his handling of the insurance proceeds.

Id. (internal citations omitted).

Bill also argued that a provision of the Children’s Trust allowed him to make the transfers. The court stated:

Even if we were to assume that this provision authorized Bill to transfer funds from the Children’s Trust or Irrevocable Trust to the Family Trust, the provision does not relieve Bill of his fiduciary duty to Jane. As a fiduciary, Bill was obligated to act with integrity and fidelity, and to deal fairly and in good faith. Even a transaction that is legally permissible can give rise to a breach of fiduciary claim, as such a transaction may not be in the beneficiary’s best interest. As Justice Cardozo put it, “A trustee is held to something stricter than the morals of the market place [sic].”

Id. (internal citations omitted).

The court next reviewed whether the trial court erred in removing Bill as trustee of the trust created for Jane and then terminating that trust and distributing all of the proceeds to Jane. Section 113.082 of the Texas Property Code lists circumstances under which a trial court may remove a trustee, and Section 113.082(a)(4) provides that a trustee may be removed if “the court finds other cause for removal.” Id. The court found that the discord between the trustee and the beneficiary was sufficient ground to support the trial court’s removal of Bill:

Here, the trial court found that “other cause” existed for the removal of Bill as co-trustee of Jane’s trust. The trial court’s findings of fact, supported by the record, reflect that Bill and Jane were “battling siblings” with a “caustic relationship,” operating in an atmosphere of acrimony and mutual distrust. Rather than reiterate that evidence in detail here, suffice it to say that it supports the trial court’s determination that “other cause” exists to remove Bill as co-trustee.

Id. Regarding terminating the trust, the court also affirmed the trial court’s action:

Section 112.054 of the Texas Trust Code authorizes a court to terminate a trust on the petition of a trustee or beneficiary. Among other reasons, a trust may be terminated when (1) the purposes of the trust have been fulfilled or have become illegal or impossible to fulfill, or (2) because of circumstances not known to or anticipated by the settlor, the order will further the purposes of the trust. The purpose of the Jane A. Bryant Trust is to provide for Jane’s “health, education and maintenance needs.” The terms of the trust direct the trustee to “give primary consideration” to Jane when administering the trust. In addition, the trust gives the trustee discretion to distribute all of the income and/or principal of the trust when necessary or appropriate to provide for the beneficiary’s health, education, maintenance, and support. The trial court heard evidence that Jane has significant medical expenses totaling over $100,000, is unemployed, and has a terminal illness that prohibits her from working. Jane testified that she doesn’t have any retirement savings and that she has outstanding legal bills incurred in this litigation. Having sold her home, she now pays monthly rent. Jane testified that she sought a distribution from her trust to assist with these obligations. Bill maintains that Jane has “current, and significant, cash resources.” Jane testified that she had “about $350,000 worth of cash left.” The trial court found that “Jane’s circumstances justify the distribution of the entirety of her part of the Children[’]s Trust to her.” The trial court made this finding in light of evidence of the stated purposes of the trust; Jane’s health, maintenance, and support needs; the antagonistic relationship between Bill and Jane; Bill’s improper distribution of trust funds to himself and Leslie; and Bill’s reluctance to make distributions to Jane from her trust. Under these facts, we find no abuse of discretion in the trial court’s decision.

Id.

The court next addressed Bill’s argument that Jane violated the in terrorem clause of the Family Trust by filing this lawsuit and, therefore, she forfeited her interest under the trust. The court disagreed, stating that Jane did not contest or attack the validity of the trust and merely brought a declaratory judgment claim seeking the proper construction of the terms of the trust and a breach of fiduciary duty claim to determine whether Bill had administered the trust in accordance with those terms. “We do not construe the language of the in terrorem clause as prohibiting a beneficiary from instituting legal action against a trustee for breach of his fiduciary duties.” Id. “Because the nature of Jane’s suit was not to set the trust aside, but rather to compel the trustee to carry out the trust’s terms, we agree with the trial court that the in terrorem clause was not violated in this case.” Id.

The court also addressed Jane’s argument that the trial court abused its discretion in refusing to remove Bill as trustee of the other trusts. Jane sought Bill’s removal as trustee of all three trusts on the basis that he materially violated the terms of the trusts and/or his fiduciary duties as trustee. The trial court removed Bill as co-trustee of the Jane A. Bryant Trust, but declined Jane’s request to remove Bill as trustee of the Family Trust. The court stated:

Under the Texas Trust Code, a court may, in its discretion, remove a trustee under certain circumstances, including where “the trustee materially violated or attempted to violate the terms of the trust and the violation or attempted violation results in a material financial loss to the trust,” or where “the court finds other cause for removal.” … [T]he trial court found that Bill acted with reckless indifference in distributing the insurance proceeds to Leslie and himself, thereby breaching his fiduciary duties as trustee of the Children’s Trust and Irrevocable Trust. However, the trial court did “not find any other alleged act or alleged omission on the part of Bill in the management of the Family Trust to constitute a wrongful act or omission sufficient to justify his removal as Trustee of the Family Trust.” Based on the text of the statute authorizing removal of a trustee, it is clear that not every breach by a trustee requires the trustee’s removal. In this case, the trial court considered Bill’s mishandling of the insurance proceeds, which did not result in any financial loss to the trusts, and determined that this failure was insufficient to justify removal. Although Jane lodges multiple complaints about Bill’s performance as trustee, the trial court did not find, and the record does not support, any other breach. Under these circumstances, we cannot say that the decision not to remove Bill as trustee was an abuse of discretion.

Id.

The court also addressed several attorney’s fees and interest issues for both sides and affirmed the trial court on those issues as well. The court of appeals affirmed the trial court’s judgment in all respects.

Interesting Note: There are many interesting issues raised in this case, as is evidenced by the length of the blog post. One interesting issue is the ability to remove a trustee due to hostility with a beneficiary. The court did not adequately address this issue as mere hostility is not sufficient to justify removing a trustee. Not every conceivable conflict justifies removal. See, e.g., Kappus v. Kappus, 284 S.W.3d 831, 836, 838 (Tex. 2009) (good faith dispute between trustee/beneficiary and another beneficiary concerning the distribution of funds did not justify trustee’s removal even though he had a personal interest in and would gain from the distribution). Removal for a trustee having a tenuous relationship with the beneficiaries is not appropriate until the trustee is not able to properly serve. See, e.g., Ditta v. Conte, 298 S.W.3d 187, 190-91 (Tex. 2009). See also Akin v. Dahl, 661 S.W.2d 911, 914 (Tex. 1983); Moore v. Sanders, 106 S.W.2d 337, 339 (Tex. Civ. App.—San Antonio 1937, no writ). “Ill will or hostility between a trustee and the beneficiaries of the trust, is, standing alone, insufficient grounds for removal of the trustee from office.” Akin, 661 S.W.2d at 913. To remove the trustee for this reason, the trustee’s hostility to the beneficiaries must actually impede its ability to properly serve and administer the trust. See id. at  914. However, if it is the beneficiaries who create the hostility, the court should not remove the trustee: “Preservation of the trust and assurance that its purpose be served is of paramount importance in the law and this Court will not sanction the creation of hostility by a beneficiary in order to effectuate the removal of a trustee.” Id.

 

 

Beneficiaries often request that a trustee secure a loan from a third party. In an economic downturn, such requests are even more prevalent. As a general rule, a trustee should not want to do so as it should assume that the beneficiary will default and the trustee will then be placed in a situation of having pay the debt of beneficiary with trust assets and then potentially taking action against a beneficiary, a person to whom the trustee owes a fiduciary duty. Yet, the trustee may have pressure to make such a transaction.

A trustee should consider its fiduciary duties before agreeing or denying such a request. A trustee has a duty of loyalty to the beneficiaries. Texas Property Code Section 117.007 provides: “A trustee shall invest and manage the trust assets solely in the interest of the beneficiaries.” Tex. Prop. Code § 117.007; InterFirst Bank Dallas, N.A. v. Risser, 739 S.W.2d 882, 898 (Tex. App.—Texarkana 1987, no writ). A trustee owes a duty of loyalty to each beneficiary, therefore, the trustee should weigh whether securing a loan for one beneficiary may violate a duty of loyalty owed to another beneficiary.

In this regard, a trustee has a duty to treat all beneficiaries with impartiality. Texas Jurisprudence states:

A trustee must act for all the beneficiaries; he or she may not properly act for only some of them. The trustee owes the same fiduciary duty to all to protect their respective interests, without partiality or favor to some at the expense of others; thus, a trustee is bound, in the absence of instructions to the contrary, to administer the trust with an eye to a remainder interest, as well as to the interest of a life tenant, and he or she cannot slight one interest for the benefit of the other. Additionally, a trustee owes the same fiduciary duty to a contingent beneficiary as to one with a vested interest, insofar as necessary for the protection of the rights of the contingent beneficiary in the trust property. This duty of impartiality has been codified in the Uniform Prudent Investor Act, which states that if a trust has two or more beneficiaries, the trustee must act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries.

Tex. Jur. 3rd, Trusts, § 64. So, a trustee has to weigh whether securing a loan for one beneficiary complies with a duty of impartiality: is the trustee impermissibly favoring one beneficiary over another?

A trustee also has a duty to properly manage trust assets: “A trustee’s fundamental duties include the use of the skill and prudence which an ordinary, capable, and careful person will use in the conduct of his own affairs as well as loyalty to the trust’s beneficiaries.” Herschbach v. City of Corpus Christi, 883 S.W.2d 720, 735 (Tex. App.—Corpus Christi 1994, writ denied). Texas Property Code Chapter 117 (The Uniform Prudent Investor Act) provides that a trustee may manage trust property and invest and reinvest in property of any character on the conditions and for the lengths of time as the trustee considers proper. Tex. Prop. Code Ann. § 113.006. Chapter 117 limits this rather broad grant of authority and provides that a trustee who invests and manages trust assets owes a duty to the beneficiaries to comply with the prudent investor rule. Tex. Prop. Code Ann. § 117.003(a). Under the statute, the prudent investor rule provides, in part: “(a) A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.” Id. The trustee must address whether it is a prudent investment and management of trust assets to secure a loan for a beneficiary.

A trustee, however, should keep in mind that because securing a loan for a beneficiary is inherently different than for a third party, a trustee should consider whether the security is more akin to a distribution. The Restatement provides:

Sometimes a beneficiary requests funds for a purpose that falls within the reasonable discretion of the trustee but which the applicable standard would not require the trustee to furnish. If the trustee is reluctant for some reason to make the requested distribution, and particularly if the trustee’s concern is one of impartiality, the trustee has discretion to make a loan or advance to the beneficiary. The loan need not qualify as a prudent investment under § 90. RESTATEMENT THIRD, TRUSTS (Prudent Investor Rule) § 227. It is a form of discretionary benefit, and may be made at a market rate of interest or at low or no interest; and funds may be advanced with recourse only against the beneficiary’s interest, without personal liability.

RESTATEMENT (THIRD) TRUSTS, § 50, cmt. d(6). Accordingly, a trustee should consider whether the trust allows the trustee to treat a security transaction as a type of benefit and/or distribution to the beneficiary (and there may be certain tax considerations resolved as well).

A trustee has a duty to disclose to a beneficiary. A trustee also has a duty of full disclosure of all material facts known to it that might affect the beneficiaries’ rights. Montgomery v. Kennedy, 669 S.W.2d 309, 313 (Tex. 1984). Further, a trustee has a duty of candor. Welder v. Green, 985 S.W.2d 170, 175 (Tex. App—Corpus Christi 1998, pet. denied). Regardless of the circumstances, the law provides that beneficiaries are entitled to rely on a trustee to fully disclose all relevant information. See generally Johnson v. Peckham, 132 Tex. 148, 120 S.W.2d 786, 788 (1938). So, a trustee has a duty to disclose the securing of a loan for one beneficiary to other beneficiaries.

This may conflict with a duty of confidentiality. The duty of loyalty includes a duty to maintain the confidentiality of a beneficiary’s information. The Restatement provides: “The trustee is under a duty to the beneficiary not to disclose to a third person information which he has acquired as trustee where he should know that the effect of such disclosure would be detrimental to the interest of the beneficiary.” RESTATEMENT (SECOND) OF TRUSTS § 170. The Restatement addresses the conflicting position that a trustee is in when a duty to maintain the confidentiality of a beneficiary’s information abuts a duty to disclose to other beneficiaries:

This duty of confidentiality ordinarily does not apply to the disclosure of trust information to beneficiaries or their authorized representatives (see duties to inform and report, §§ 82 and 83) or, in the interest of one or more trust beneficiaries, to the trustees of other trusts or the fiduciaries of fiduciary estates in which a beneficiary has an interest. Even in providing information to or on behalf of beneficiaries, however, the trustee has a duty to act with sensitivity and, insofar as practical, with due regard for considerations of relevancy and sound administration, and for the personal concerns and privacy of the trust beneficiaries.

RESTATEMENT (THIRD) OF TRUSTS § 78. Where a beneficiary’s information impacts a co-beneficiary’s interest in the trust, a trustee may be in a position where a duty of loyalty requires disclosure.

After considering its fiduciary duties, a trustee should consider whether it has the authority or power to secure a loan for a beneficiary. A trustee generally has authority to encumber trust assets:

Unless prohibited by statute or the terms of the trust, a trustee has power to borrow money for trust purposes and to pledge, mortgage, grant a deed of trust, or otherwise encumber trust property. The trustee has a duty to exercise caution as well as the duty to exercise care and skill in deciding whether and under what terms to borrow money for trust purposes or to grant a security interest in trust property… Because of a trustee’s duty to respect the terms of the trust (§ 76), it is normally improper for a trustee to exercise the power to encumber trust property by granting security interests in assets that are to be specifically distributed to one or more beneficiaries on termination.

Restatement (Third) of Trusts, § 86.

A trustee should review the trust agreement. “The trustee shall administer the trust in good faith according to its terms and the Texas Trust Code.” Tolar v. Tolar, No. 12-14-00228-CV, 2015 Tex. App. LEXIS 5119 (Tex. App.—Tyler May 20, 2015, no pet.). “The powers conferred upon the trustee in the trust instrument must be strictly followed.” Id. There are potential trust provisions that expressly allow a trustee to provide security for loans to beneficiaries. One example is as follows:

The trustee, in the trustee’s discretion, is authorized to endorse, guarantee, become the surety of or otherwise become obligated for or with respect to the debts or other obligations of any person (including a beneficiary), firm, corporation, partnership, trust or other legal entity, whether with or without consideration, when the trustee believes such actions advance the purposes of any trust created or continued hereunder.

Where a trust document allows such a transaction, a trustee may generally enter into such an agreement when it is done in good faith. For example, in one case, the trust granted the trustee the power: “to lend money to any beneficiary hereunder, either with or without security and on such other terms as my executors may deem appropriate.” In re Hanes, 214 B.R. 786, 822 (Bankr. E.D. Va. 1997). The court construed this language as: “The language of the above provisions expressly permits lending to the beneficiaries and the pledging of any assets to secure borrowing.” Id. It held that the challenged loans were permissible:

Viewing the instruments and the circumstances as a whole, we find that it was Hanes, Sr.’s intention to give his sons broad authority to manage the Marital Trust in their absolute discretion. The family investment plan was a proper function of Hanes duties as Trustee. To the extent that the DCI Companies were investments made by HILP in furtherance of the family investment plan, the pledges securing lending directly to these entities was authorized.

Id.

In the absence of trust language, there is general statutory authority that may allow this type of transaction. A trustee has the general power to do anything that is necessary or appropriate to carry out the purpose of the trust. Tex. Prop. Code Ann. § 113.002. There is also a specific statute that addresses encumbering trust assets:

A trustee may borrow money from any source, including a trustee, purchase property on credit, and mortgage, pledge, or in any other manner encumber all or any part of the assets of the trust as is advisable in the judgment of the trustee for the advantageous administration of the trust.

Tex. Prop. Code § 113.015 (emphasis added). This statute allows a trustee to encumber trust assets (allow them to be collateral for a loan) if the trustee finds that the lien would be advantageous for the administration of the trust. Note that this does not require the trustee to find that it is a good investment or that encumbering the assets are for consideration. Rather, a trustee may find, for example, that benefiting a beneficiary by agreeing to such a lien may be advantageous to the administration of the trust where the trust is for the primary benefit of the beneficiary and agreeing to the lien is better than making an outright distribution or a loan to the beneficiary. Other states have similar statutes that allow a trustee to secure loan for the benefit of a beneficiary. See, e.g., Oregon Rev. Stat.  130.725 (2017) (A trustee may “[p]ledge trust property to guarantee loans made by others to the beneficiary.”).

A third party lender will likely want to make sure that the trustee has the authority to encumber trust assets and may seek a copy of the trust document. When a trustee wants to enter into a transaction to secure a loan for a beneficiary, it may want to provide a certification of trust instead of providing an entire trust document. Tex. Prop. Code § 114.086.

If the beneficiary causes harm to the trust due to his or her activities, a trustee may have a claim against the beneficiary. Texas Property Code Section 114.031 provides:

A beneficiary is liable for loss to the trust if the beneficiary has: (1) misappropriated or otherwise wrongfully dealt with the trust property; (2) expressly consented to, participated in, or agreed with the trustee to be liable for a breach of trust committed by the trustee; (3) failed to repay an advance or loan of trust funds; (4) failed to repay a distribution or disbursement from the trust in excess of that to which the beneficiary is entitled; or (5) breached a contract to pay money or deliver property to the trustee to be held by the trustee as part of the trust.

Tex. Prop. Code § 114.031(a). So, if a beneficiary has caused loss to the trust due to wrongfully dealing with trust property, a trustee has a claim against the beneficiary, who is liable for the loss. Id.

One important issue is that the beneficiary may not have any assets, so suing the beneficiary may be a worthless exercise. The Texas Property Code also has a provision that allows a trustee to offset any distributions to the beneficiary due to a loss:

Unless the terms of the trust provide otherwise, the trustee is authorized to offset a liability of the beneficiary to the trust estate against the beneficiary’s interest in the trust estate, regardless of a spendthrift provision in the trust.

Tex. Prop. Code § 114.031(b). Therefore, if a trustee establishes a claim against the beneficiary, the trustee can then simply payoff that debt by offsetting distributions otherwise due to the beneficiary from the trust. However, a trustee generally does not want to rely on this statutory right to offset debts to the trust by the beneficiary, and it should be used only when necessary.

Further, a trustee that enters into such a transaction should consider methods to limit risk. The trustee can always filed suit to seek an instruction from a court on the propriety of a transaction. Additionally, there are non-judicial methods to limit risk. Once such method is to enter into a release agreement with all relevant beneficiaries. A beneficiary who has full capacity and acting on full information may relieve a trustee from any duty, responsibility, restriction, or liability that would otherwise be imposed by the Texas Trust Code, and this release must be in writing and delivered to the trustee. Tex. Prop. Code Ann. § 114.005. Further, writings between the trustee and beneficiary, including releases, consents, or other agreements relating to the trustee’s duties, powers, responsibilities, restrictions, or liabilities, can be final and binding on the beneficiary if it is in writing, signed by the beneficiary, and the beneficiary has legal capacity and full knowledge of the relevant facts. Tex. Prop. Code Ann. § 114.032. Minors are bound if a parent signs, there are no conflicts between the minor and the parent, and there is no guardian for the minor. Id. So, a trustee can limit its risk of future claims by having beneficiaries consent to the security agreement and release the trustee for any results therefrom.

In conclusion, a trustee usually has the power or authority to secure a loan for a beneficiary. However, the trustee should use caution in doing so as it has a duty to protect trust assets and invest them wisely. If a trustee contemplates securing a loan, it should seek legal advice on documenting the loan transaction with the lender and documenting the transaction with the beneficiary (and other beneficiaries) to limit risk of claims in the future.

In In the Estate of Nicholas, the temporary administrator of an estate and the decedent’s mother filed a Texas Rule of Civil Procedure 202 petition concerning a shootout at a residence by the City of Houston Police Department. No. 14-19-00716-CV, 2020 Tex. App. LEXIS 2532 (Tex. App.—Houston [14th Dist.] March 26, 2020, no pet. history). The petitioners sought to investigate potential claims against the city. The city filed a plea to the jurisdiction, asserting that the petition failed as a matter of law because the statutory probate court lacked statutory subject-matter jurisdiction and other grounds. The court denied the plea, and an interlocutory appeal followed.

The court of appeals discussed a statutory probate court’s jurisdiction:

Section 32.005 of the Texas Estates Code provides that a “statutory probate court has exclusive jurisdiction of all probate proceedings, regardless of whether contested or uncontested.” Tex. Est. Code § 32.005(a) (emphasis added). In a county in which there is a statutory probate court, “a claim brought by a personal representative on behalf of an estate” is also a claim “related to [a] probate proceeding.” See Tex. Est. Code § 31.002(a)(3), (c)(1)-(2) (defining “matters related to a probate proceeding”)… In addition, Section 32.005(a) recognizes that the Estates Code provides for concurrent jurisdiction over some causes of action related to a probate proceeding.4Link to the text of the note Specifically, the statutory probate court has concurrent jurisdiction [*10]  with district courts in actions enumerated in Section 32.007. Tex. Est. Code § 32.005(a); see also Tex. Est. Code § 32.007. Section 32.007 of the Texas Estates Code provides that a statutory probate court has concurrent jurisdiction with a district court over several types of actions, including “a personal injury, survival, or wrongful death action by or against a person in the person’s capacity as a personal representative.” See id. § 32.007(1).

Id. The court then discussed Rule 202:

Texas Rule of Civil Procedure 202 provides a mechanism for requesting court authorization of pre-suit depositions to either (1) perpetuate or obtain testimony for use in an anticipated lawsuit, or (2) investigate a potential claim or suit. Tex. R. Civ. P. 202.1. … A Rule 202 petition must “be filed in the proper court of any county . . . .” Tex. R. Civ. P. 202.2(b). This court has previously held that “[a] proper court to entertain a Rule 202 petition is a court that would have subject-matter jurisdiction over the underlying dispute or anticipated lawsuit; thus, we must look to the substantive law of the underlying dispute or anticipated action to determine jurisdiction.”

Id. The court then analyzed the petitioners’ claims and held that the statutory probate court had subject matter jurisdiction over those claims:

The claims Petitioners seek to investigate include survival claims. “A personal injury action survives to and in favor of the heirs, legal representatives, and estate of the injured person.” The personal representative of Rhogena’s estate is the proper party to bring a survival claim to recover damages Rhogena suffered before her death. … Accordingly, the potential survival claims Petitioners seek to investigate by the Rule 202 proceeding are matters “related to a probate proceeding” and therefore fall within a statutory probate court’s subject matter jurisdiction. Moreover, Estates Code section 32.007 provides separately that a statutory probate court has concurrent jurisdiction with the district court in, among other lawsuits, “a personal injury, survival, or wrongful death action by or against a person in the person’s capacity as a personal representative.” Jo Ann Nicholas is alleged to be Rhogena’s mother and has explained in the Rule 202 petition her desire to investigate, and her interest in, a potential wrongful death claim against the City. An action to recover damages for the wrongful death of a decedent is for the exclusive benefit of the surviving spouse, children, and parents of the deceased.

Id. Therefore, the court held that the trial court had subject matter jurisdiction over the Rule 202 petition and affirmed the denial of the plea to the jurisdiction.