In In re Estate of Hines, the trial court held that an applicant was not equitably adopted by the decedent in an heirship proceeding. No. 06-20-00007-CV, 2020 Tex. App. LEXIS 8000 (Tex. App.—Texarkana July 27, 2020, no pet.). The applicant appealed, and the court of appeals affirmed. The court first addressed the law on equitable adoption:

Adoption by estoppel takes place “when [a person’s] efforts to adopt [a child] are ineffective because of failure to strictly comply with statutory procedures or because, out of neglect or design, agreements to adopt are not performed.” The doctrine of equitable adoption is not “the same as legal adoption” and does not contain “all of the legal consequences of a statutory adoption.” Courts in Texas have “long” recognized the doctrine of equitable adoption. The Texas Estates Code recognizes the doctrine, defining “child” as including a person adopted by “acts of estoppel.” For example, a child has been adopted by estoppel “when a natural parent delivers a child into the custody of others under an agreement between the parent and the custodians that the child will be adopted, and thereafter the custodians and child live in relationship with that of parent and child.” “In no case” has a court in Texas “upheld the adoptive status of a child in the absence of proof of an agreement or contract to adopt.” The agreement may be oral. Adoption by estoppel must be proved by a preponderance of the evidence. Even though Texas recognizes the doctrine of equitable adoption, it has “done so only with caution and within certain well-defined boundaries.” It exists to prevent “a situation where it would be inequitable and grossly unfair to the adopted child, who has performed services and rendered affection, for the adoptive parent or his privies to deny the adoption.” Yet, adoption by estoppel is not a statutory doctrine. Instead, it is a judicially created equitable doctrine…  [T]o establish that there was an agreement, Hilton was required to prove that Hines (1) executed “a statutory instrument of adoption in the office of the county clerk”; (2) attempted to complete the statutory adoption but failed “to do so because of some defect in the instrument of adoption, or in its execution or acknowledgment”; or (3) agreed with “[Hilton] to be adopted, or with [Hilton]’s parents, or some other person in loco parentis that he . . . would adopt [Hilton].”

Id. (internal citation omitted).

The court held that here was evidence that the applicant considered the decedent to be his father, that the decedent referred to him as his “son,” and that they spent a significant amount of time together. There was evidence to show that decedent and applicant presented themselves to the public as a family. Even so, the court held that there was evidence to support the trial court’s decision as there was no evidence that the decedent had promised to adopt the applicant:

The record established that Danny never entered into a written or oral agreement with Hines allowing Hines to adopt Hilton. Likewise, there was no evidence that Betty Jo agreed to Hines’s adoption of Hilton. That said, there was some evidence that Hines had potentially intended to adopt Hilton sometime in the future. According to Hilton, Hines had discussed with him the possibility of adoption when he was younger, but no agreement was made at the time, and Hines and Hilton chose to put off the issue of adoption until a later date. Likewise, Petty testified that Hines told her that he wanted to adopt Hilton, but because of an issue regarding the possibility of Hilton’s name being changed, the matter was dismissed. And contrary to Petty’s initial testimony, she also said that Hines had told her that he did not “need a piece of paper to tell [him] who [his] kid [was] or tell [him] who [his] son [was],” which is evidence that Hines never intended to adopt Hilton. Regardless, in Hines’s conversations with all of those witnesses, there was no evidence that Hines ever followed-up by actually entering into an agreement to adopt Hilton. Moreover, many of the witnesses testified that they had no knowledge of the existence of an agreement for Hines to adopt Hilton. Because there was some evidence to support the trial court’s finding that no agreement to adopt Hilton existed between Hines and Hilton, or Hines and Hilton’s parents, we find that the evidence was legally sufficient to support the trial court’s finding.

Id.

In Benge v. Thomas, a settlor created a trust and appointed her daughter, Missi, as the trustee. No. 13-18-00619-CV, 2020 Tex. App. LEXIS 6888 (Tex. App.—Corpus Christi August 27, 2020, no pet.). The trust owned an interest in a limited partnership that contained mineral interests. Missi’s daughter, Benge, was a beneficiary of the trust. Benge sued Missi for various claims of breach of fiduciary duty arising from the operation of the limited partnership and other issues. The trial court granted summary judgment for Missi, and Benge appealed.

The court of appeals first addressed Benge’s claim that Missi breached her fiduciary duty to the trust by allowing the limited partnership’ general partner to make objectionable transactions. Benge claimed that Missi breached her fiduciary duty in her capacity as trustee because she should have prevented the general partner from making the transactions. The court disagreed:

AFT Property as general partner had the authority to make these decisions. The evidence establishes as a matter of law that the 2012 Trust as a limited partner had no decision-making rights regarding AFT Minerals’ assets. Benge’s complaints all involve alleged damages to AFT Minerals and not to Benge herself. Thus, AFT Minerals would have had to bring these claims and not Missi in her capacity as trustee or Benge as a remainder beneficiary. See Hall v. Douglas, 380 S.W.3d 860, 873 (Tex. App.—Dallas 2012, no pet.) (“[C]laims for “a diminution in value of partnership interests or a share of partnership income” may be asserted only by the partnership itself.”); see also Adam v. Harris, 564 S.W.2d 152, 156-57 (Tex. App.—Houston [14th Dist.] 1978, writ ref’d n.r.e.) (“A clear line exists between actions of a trustee and those of an officer of a corporation owned wholly or in part by the trust, even where the same person ‘wears both hats.’”).

Id.

Benge also complained that Missi did not keep adequate records of the trust, and specifically complained that “Missi had a duty to keep records of AFT Minerals’ transactions pursuant to her role as trustee of the 2012 Trust.” Id. The court acknowledged that a trustee has a duty to maintain accurate records regarding a trust’s transactions, but disagreed that the trustee had a duty to maintain records regarding the transactions of a limited partnership that the trust has an interest in:

Here, Benge is not complaining of Missi’s failure to perform any of the above-listed duties or of Missi’s noncompliance with above-listed statutorily required maintenance of accounting records for the 2012 Trust. Benge does not complain about a lack of records of transactions involving the 2012 Trust, and she does not claim that Missi failed to maintain records of transactions in her capacity as trustee of the 2012 Trust. Instead, without supporting authority, she complains that Missi’s duties of maintaining accounting records in her capacity as trustee encompassed a duty to also provide an accounting of AFT Minerals’ transactions and that Missi failed to maintain records of those transactions.

Moreover, as part of the agreements, as set up by Anne, AFT Property’s limited partners, including the 2012 Trust, were not guaranteed any distributions from AFT Minerals and owned no interest in AFT Minerals’ assets. Thus, to the extent that Benge argues that Missi had a duty to maintain records of AFT Minerals’ transactions because AFT Minerals is a trust asset, we conclude that argument is without merit. Therefore, without more, we are unable to conclude that Missi had a duty in her capacity as trustee of the 2012 Trust to make an accounting of AFT Minerals’ transactions to Benge and that Benge in her capacity as a remainder beneficiary of the 2012 Trust can demand such an accounting of AFT Minerals’ transactions.

Id.

The court then addressed Benge’s claim that Missi breached duties by failing to sue third parties to protect the trust’s assets. The court framed this as a derivative claim on behalf of the trust against the trustee. The court stated that Benge solely relied on her standing as a “vested” remainder beneficiary of the trust to provide her standing to bring that claim. The court held that Benge was not a “vested” beneficiary, but a “contingent” beneficiary. The court held that a contingent remainder beneficiary does not have standing to sue regarding the administration of a trust:

Section 115.011 explicitly states, “Contingent beneficiaries designated as a class are not necessary parties to an action under Section 115.001.” Id.; see also id. § 115.001. Section 115.011 explains that “necessary parties” to an action under § 115.001 are those beneficiaries of the trust “designated by name,” “a person who is actually receiving distributions from the trust estate at the time the action is filed,” and the trustee serving at the time the action is filed. Id. § 115.011(b)(2), (3), (4). In addition, in Berry v. Berry, this Court held that a contingent remainder beneficiary seeking relief individually did not have standing to sue the trustee because a contingent remainder beneficiary is not a necessary party, and we upheld the trial court’s summary judgment dismissing the contingent remainder beneficiary’s individual claim against the trustee. No. 13-18-00169-CV, 2020 Tex. App. LEXIS 1884, 2020 WL 1060576, at *4 (Tex. App.—Corpus Christi-Edinburg Mar. 5, 2020, no pet.) (mem. op.) (citing Davis v. First National Bank of Waco, 139 Tex. 36, 161 S.W.2d 467, 472 (Tex. 1942) (noting that the court held that “[a]n expectant heir has no present interest or right in property that he may subsequently inherit and consequently he cannot maintain a suit for the enforcement or adjudication of a right in the property”; Davis v. Davis, 734 S.W.2d 707, 709-10 (Tex. App.—Houston [1st Dist.] 1987, writ ref’d n.r.e.) (explaining that the potential beneficiary “did not have standing to sue based on his claim that he is a potential beneficiary of trust assets” and “[o]ne cannot maintain a suit for the enforcement or adjudication of a right in property that he expects to inherit, because he has no present right or interest in the property”))). We conclude that Benge is a contingent remainder beneficiary as further explained below.

Benge made no other argument in the trial court and makes no other argument on appeal supporting a conclusion that she has standing to bring a derivative claim on behalf of the 2012 Trust. See Tex. Prop. Code Ann. § 115.011; see also id. § 115.001. Thus, having concluded that Benge is a contingent remainder beneficiary with no standing and that her breach of fiduciary claims are meritless, we are unable to reverse the trial court’s granting of Missi’s plea to the jurisdiction on this basis.

Id. The court therefore concluded that Benge did not have standing to assert the claim because the way that she framed her standing was incorrect.

The court also affirmed the dismissal of Benge’s claims against third parties on behalf of the trust because she did not have standing to do so:

In addition, in In re Benge, 2018 Tex. App. LEXIS 1512, 2018 WL 1062899, at *1 we cited In re XTO Energy Inc., 471 S.W.3d 126, 131 (Tex. App.—Dallas 2015, no pet.), among other cases, stating that generally beneficiaries cannot bring derivative suits on behalf of the trust and concluded that the trial court in this case did not err in dismissing Benge’s derivative claims. See Jacobs v. Jacobs, 448 S.W.3d 626, 630 (Tex. App.—Houston [14th Dist.] 2014, no pet.) (“The ‘law of the case’ doctrine is defined as that principle under which questions of law decided on appeal to a court of last resort will govern the case throughout its subsequent stages.”). In Berry, we noted as an exception to this general rule, a “beneficiary [may] step into the trustee’s shoes and maintain a suit on the Trust’s behalf when “the trustee’s refusal to bring suit [against a third party on behalf of the trust is] wrongful.” Berry, 2020 Tex. App. LEXIS 1884, 2020 WL 1060576, at *5. Here, Benge has not shown that Missi’s acts of not suing AFT Property, O&G, and AFT Minerals was a result of wrongful conduct. See id. Therefore, Benge has not shown that she has standing to sue Missi derivatively on behalf of the 2012 Trust on this basis.

Id. The court of appeals then affirmed an award of attorney’s fees to Missi under the Uniform Declaratory Judgment Act and also the Texas Trust Code. The court affirmed the trial court’s orders dismissing Benge’s claims.

Interesting Note: This case raises a very common and complex issue in trust administration: a trustee managing business interests. A trustee has a duty to act prudently in managing and investing trust assets. A trustee has the duty to make assets productive while at the same time preserving the assets. Hershbach v. City of Corpus Christi, 883 S.W.2d 720, 735 (Tex. App.—Corpus Christi 1994, writ denied). It has a duty to properly manage, supervise, and safeguard trust assets. Hoenig v. Texas Commerce Bank, 939 S.W.2d 656, 661 (Tex. App.—San Antonio 1996, no writ). There is a duty to invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. Tex. Prop. Code Ann. § 117.004. The proper standard against which a trustee is measured is that of an ordinary person in the conduct of his own affairs. Stone v. King, No. 13-98-022-CV,2 000 Tex. App. LEXIS 8070, 2000 WL 35729200 (Tex. App.—Corpus Christi 2000, pet. denied) (not designated for publication) (citing Hoenig v. Texas Commerce Bank, N.A., 939 S.W.2d 656, 661 (Tex. App.–San Antonio 1996, no writ)). However, the Texas Uniform Prudent Investor Act provides that in a trustee’s management of assets: “A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee’s representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise.” Tex. Prop. Code § 117.004(f).

“The trustee’s duties apply not only in making investments but also in monitoring and reviewing investments, which is to be done in a manner that is reasonable and appropriate to the particular investments, courses of action, and strategies involved.” Restatement (Third) Of Trusts, §90(b). The trustee has a fiduciary duty to exercise his control of investments for the benefit of the trust beneficiaries. This would require the trustee to supervise corporate management to ensure that the officers and directors of the corporation are at all times managing the corporation in the best interest of the beneficiaries of the trust. SCOTT at §193 (“The trustee will be held accountable by the court if in the exercise of his power of control over the corporation he acts for his own interest rather than for the interest of the beneficiaries.); Johnson v. Witkowski, 573 N.E.2d 513, 519 (Mass. App. Ct. 1991); In Re Koretzky’s Estate, 86 A.2d 238, 248 (NJ 1951); In the Matter of Hubbell, 97 N.E.2d 888, 891 (N.Y. 1950); In the Matter of the Estate of Sakow, 601 N.Y.S.2d 991 (N.Y. Surr. Ct. 1994); In the Matter of the Estate of Schulman, 568 N.Y.S.2d 669 (N.Y. App. Div. 1991); Jennings v. Speaker, 571 P.2d 358 (Ca. Ct. App. 1977).

The trustee has a duty to the trust beneficiaries to exercise the rights of a minority shareholder prudently. The Texas Business Organizations Code provides the statutory requirements for shareholder derivative proceedings. Tex. Bus. Orgs. Code Ann. §§ 21.551–.563. Under these statutes, a minority shareholder or partner may sue the managers/officers of a company or partnership for breaching duties owed to the entity. Id. If the trustee fails or refuses to exercise such rights (e.g., if the trustee individually is the alleged wrongdoer as an officer/director), the trust beneficiary has a claim for breach of fiduciary duty against the trustee for failing to exercise such minority shareholder rights. See, e.g., Spear v. Fenkell, No. 13-02391, 2015 U.S. Dist. LEXIS 76191 (D. Pa. June 12, 2015) (court did not dismiss claim by plaintiff that ESOP trustee breached fiduciary duties by not brining a shareholder derivative action); Atwood v. Burlington Indus. Equity, No. 2L92CV00716, 1994 U.S. Dist. LEXIS 12347 (D.N.C. August 3, 1994) (plaintiff had claim that ESOP trustee breached fiduciary duties by failing to initiate a state law shareholder derivative action to recover for alleged breaches of fiduciary duty). See also Pudela v. Swanson, No. 91-C-3559, 1995 U.S. Dist. LEXIS 2148 n.6 (D. Ill. February 21, 1995) (ESOP trustee may have had a duty to bring shareholder derivative action to challenge over compensation to himself in other capacity).

This issue is even more complex where the trustee is also involved in the management of the business as an officer or director. See Mary Burdette, Fiduciary Duties Within Fiduciary Duties: Trust Owning Stock in a Closely-Held Corporation, State Bar of Texas, Advanced Estate Planning and Probate Course (2012). The issue is whether the trustee is liable for breach of fiduciary duty as a trustee due to the actions or inactions it committed as an officer or director of a business owned or partially owned by the trust. There is very little authority in Texas on this issue. The authority that exists is old and holds that the trustee is not liable for its actions as an officer or director because those actions were taken in a different capacity. See Adam v. Harris, 564 S.W.2d 152 (Tex. Civ. App.—Houston [14th Dist.] 1978, writ ref’d n.r.e.). But see Cleaver v. Cleaver, 935 S.W.2d 491 (Tex. App.—Tyler 1996, no writ). Cases from other jurisdictions hold that the trustee may be liable for actions taken as an officer or director where the trust owns a controlling interest in the business. See, e.g., In re Sylvester’s Estate, 172 N.Y.S.2d 57 (S. Ct. 1958); Taylor v. Errion, 44 A.2d 356 (N.J. 1945); Brown v. McLanahan, 148 F.2d 703 (4th Cir. 1945); In re Ebbets’s Estate, 267 N.Y.S. 268, 270 (Surrogate’s Court 1933). One Texas case held that an executor did not breach any duties to liquidate a business where the estate only owned a minority interest. See Guerra v. Guerra, No. 04-10-00271-CV, 2011 Tex. App. LEXIS 6730 (Tex. App.—San Antonio August 24, 2011, no pet.).

In Roels v. Valkenaar, a shareholder filed a shareholder derivative suit against former and current officers and directors of the company based on multiple claims of breach of fiduciary duty. No. 03-19-00502-CV, 2020 Tex. App. LEXIS 6684 (Tex. App.—Austin August 20, 2020, no pet. history). The defendants filed a motion to dismiss, and the trial court denied it. The defendants appealed, and the court of appeals reversed in part and affirmed in part.

The plaintiffs’ first claim dealt with certain interested-direction transactions that were loans from the company. The court dismissed these claims because the evidence showed that regarding one transaction that there was director consent to the loan and regarding the other loans that there was not sufficient evidence of damages. The court stated:

Self-dealing (i.e., an “interested transaction”) may constitute breach of an officer’s or director’s fiduciary duty to the corporation. However, we need not determine whether the shareholders met their prima facie burden as to the element of breach because we conclude that they have not met the burden as to the element of damages. To prove the damage-to-plaintiff or benefit-to defendant element of a claim for breach of fiduciary duty based on self-dealing, a plaintiff must demonstrate that the fiduciary obtained a benefit for itself either at the expense of its principal or without equally sharing the benefit with the principal. While the shareholders have alleged in conclusory fashion that the loans contained “non-market terms” and have “disproportionately benefitted” Roels and Barshop, they have not identified any specific harm to the Company or benefit to the defendants as a direct result of the loans.

Id.

The court affirmed the denial of the motion to dismiss regarding the plaintiff’s misappropriation of company resources claim as against one defendant. That defendant was an officer that inappropriately used company assets to do due diligence on a transaction:

[W]e conclude that based on the above evidence it may be reasonably inferred that Roels pursued the acquisition with the intent that he benefit from the Company’s expenditure of funds on due diligence, as he initially entered into the letter of intent on behalf of MBlock, brought the unsolicited proposal to the Company and advanced it (including restructuring the deal in MBlock’s favor), voted against the proposal on behalf of the Company, and then closed on the deal on behalf of MBlock.

Id.

The court dismissed the plaintiffs’ dereliction of duty claim due to the business judgment rule. The court stated:

In Texas, the business judgment rule generally protects company officers and directors for alleged breaches of duties that are based on actions that are negligent, unwise, inexpedient, or imprudent if the actions were “within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved.” In contrast, “an officer or director’s breach of duty that would authorize court interference ‘is that which is characterized by ultra vires, fraudulent, and injurious practices, abuse of power, and oppression on the part of the company or its controlling agency clearly subversive of the rights of the minority, or of a shareholder, and which, without such interference, would leave the latter remediless.’” Essentially, the business judgment rule, as pronounced long ago by the supreme court in Cates and reaffirmed more recently in Sneed, operates at this stage of a lawsuit as a requirement that a plaintiff plead more than “mere mismanagement,” neglect, abuse of discretion, or unwise and inexpedient acts to state a cause of action… Because the shareholders have not identified clear and specific evidence of conduct by Pabst that does not fall within the business judgment rule, we conclude that the trial court should have granted his motion to dismiss as to the shareholders’ “dereliction of duties” claims.

Id.

In In re Estate of Hallmark, an executrix of an estate filed suit in probate court for declarations regarding a partnership and sued the other partners. No. 11-18-00187-CV 2020 Tex. App. LEXIS 7063 (Tex. App.—Eastland August 31, 2020, no pet. history). One partner filed a cross-claim against the other partner for mismanagement and sought a receivership, which was granted. The managing partner then appealed.

The court of appeals held that the probate court did not have jurisdiction to enter the receivership. The trial court’s order held that it was awarding a receivership under the Texas Civil Practice and Remedies Code Chapter 64 and under the Texas Business Organizations Code. However, the Business Organizations Code provides that “[a] receiver may be appointed for a domestic entity or for a domestic entity’s property or business only as provided for and on the conditions set forth in this code.” Id. (citing Tex. Bus. Orgs. Code § 11.401). Because the partnership was a domestic entity, the receivership order had to stand, if at all, under the Texas Business Organizations Code.

The court then looked at the Texas Business Organizations Code and held that because the receivership order gave the receiver control over the entirety of the partnership’s business, it was a rehabilitative receivership and not one for a specific asset. The court held: “the characterization of the receivership order as a rehabilitative receivership under Section 11.404 or a receivership for specific property under Section 11.403 is significant from a jurisdictional standpoint because a rehabilitative receivership can only be ordered by a district court.” Id. Because the probate court did not have statutory jurisdiction under the Texas Organizations Code to award a rehabilitative receivership, the court reversed the order.

In Kankonde v. Mankan, an attorney appealed the entry of an arbitration award on behalf of his clients, a doctor and his practice. No. 08-20-00052-CV, 2020 Tex. App. LEXIS 7040 (Tex. App.—El Paso August 31, 2020, no pet. history). The attorney then withdrew, and the wife of deceased doctor then filed an appellant’s brief. After providing time to obtain counsel, the court of appeals struck the brief and dismissed the appeal because a non-attorney could not represent an estate:

 Peggy Kankonde, a non-attorney acting pro se, filed an Appellant’s Brief purportedly on behalf of Mutombo Kankonde (deceased) and East-Side Oncology Clinic, P.L.L.C. However, a pro se litigant who is not an attorney cannot file pleadings on behalf of an estate or a corporation; only an attorney may do that. See In re Estate of Maupin, No. 13-17-00555-CV, 2019 Tex. App. LEXIS 6321, 2019 WL 3331463, at *2 (Tex. App.—Corpus Christi July 25, 2019, pet. denied)(mem. op.)(citing cases holding that non-lawyer cannot appear pro se on behalf of an estate as independent executor and that an attorney must represent the interests of the estate); Moore v. Elektro-Mobil Technik GmbH, 874 S.W.2d 324, 327 (Tex. App.—El Paso 1994, writ denied)(corporation must be represented in Texas courts by an attorney on appeal).

In order to prosecute proceedings and make valid filings in this Court, the Estate and the Corporation must be represented by a licensed attorney. We have provided Appellants with the opportunity to obtain counsel. As of this date, Appellants remain unrepresented. Because the Estate and the Corporation have not obtained counsel despite notice from this Court via order that counsel was required, we will dismiss this appeal.

Id.

David F. Johnson presented his paper on “Administering A Trust In A Recession: Trust Loans To Beneficiaries” to the Houston Bar Association’s Probate and Estate Section on October 27, 2020 via a webinar format. This presentation addressed, among other things, a trustee’s authority to loan trust assets to beneficiaries, co-trustee issues, conflicts of interest, the duty of loyalty and confidentiality, the duty to diversify, the duty to properly manage a trust, due diligence and documentation considerations, potential tax issues, pursuing claims against a defaulting beneficiary, claims against a trustee for making such a loan, and options that trustees can pursue to limit risk associated with making such loans.

Read the Full Article

In Keel Recovery, Inc. v. Tri City Adjusters, Inc., a company sued its former employee for breach of fiduciary duty related to reporting certain alleged criminal activity related to the repossession of vehicles. No. 05-19-00686-CV, 2020 Tex. App. LEXIS 7273 (Tex. App.—Dallas September 4, 2020, no pet. history). The defendants filed a motion to dismiss, which was denied, and they appealed. The court of appeals rendered that the trial court should have dismissed the plaintiff’s claim as against the former employee:

Specifically, while Arion may have had a fiduciary duty to her employer, TCA, that does not mean she owed any fiduciary duty to Peters as owner of TCA. Arguably, to the extent Arion owed TCA a fiduciary duty, that duty was fulfilled by reporting Peters’ criminal activity that could subject TCA to negative consequences.

Id. The court also held that without a breach of fiduciary duty claim, there could be no aiding and abetting breach of fiduciary duty: “Because plaintiffs failed to establish Arion breached her fiduciary duty, we further conclude plaintiffs failed to establish any of the other Keel defendants aided and abetted Arion in any such breach of fiduciary duty.” Id.

In In the Estate of Flarity, a son of the testator challenged the trial court’s probating of a 2004 will and the appointment of two of his siblings, named in that will, as executors. No. 09-19-00089-CV, 2020 Tex. App. LEXIS 7536 (Tex. App.—Beaumont September 17, 2020, no pet. history). The contestant alleged that the testator did not have mental competence. The court of appeals disagreed. The court first addressed the standard for mental competency challenges:

In reviewing evidence addressing a testator’s capacity, we focus on the condition of the testator’s mind on the day the testator executed the will. Under Texas law, whether a testator has the testamentary capacity hinges on the condition of the testator’s mind the day the testator executed her will. Thus, the proponents of the will must prove that, when the testator signed the will, she could understand: the business in which she was engaged, the nature and extent of her property, the persons to whom she meant to devise and bequeath her property, the persons dependent on her bounty, the mode of distribution that she elected to choose among her beneficiaries, a sufficient memory so she could collect the elements of the business she wanted to transact and hold it in mind long enough to allow her to perceive the relationship between property and how she wanted to dispose of it, all so she could form reasonable judgments about doing those things.

Id. Applying those legal principals, the court held that the evidence was sufficient to support the trial court’s finding that the testator had capacity. There was testimony from the two children that were executors that the testator knew what she was doing. The contestant relied on his own testimony that the testator suffered from recurring depression many times in her life, including 2004. The court held:

But there is no expert testimony showing Paula was clinically depressed. There are not medical records in evidence that support Joe’s claim. While Joe argues Paula was not being treated for her condition in 2004, he never established that she was suffering from depression that year, as the parties never developed evidence about whether Paula was or was not seeing doctors at any time for any reasons at a time relevant to the day Paula signed the will. Furthermore, even Joe and Becky never testified that Paula told them at any time in 2004 that she was being treated for depression.

Id. Further, the court held that the testator had a reason for her will and there was no evidence that the executors influenced her:

Generally, the evidence admitted in the trial reflects that Paula chose to give her children a percentage share of her estate based on how much time they spent with her as she aged. Joe does not contend the evidence shows he spent more time with Paula than his siblings. Nor does he suggest that Paula miscalculated how much time he spent with her when compared with his siblings. Instead, Joe argues that Wes and Merrie obtained a larger share because they spent more time with her. That may be true, but that evidence does not show that Merrie and Wes used their influence to get Paula to change her will in a way that favored them during a period that Paula could not freely make that decision on her own.

Id.

Finally, the court of appeals affirmed the trial court’s appointment of the co-executors. The court stated the legal standard as:

When a testator nominates a person to be the executor of her will, the law requires the probate court to appoint that person to that office unless one of the enumerated exceptions in the Estates Code applies. The exceptions allow the probate court to choose someone else other than the person the testator named if the person the testator named renounces the appointment, or the evidence shows the person is “not qualified,” statutorily disqualified, or “unsuitable” for the office. Since the Estates Code requires probate courts to appoint the person the testator nominated in her will absent one of the listed exceptions, Joe was required to prove in the trial that Wes and Merrie were not qualified, statutorily disqualified, or unsuitable for the office. Thus, since Joe is attacking an adverse finding on which he had the burden of proof in the trial, he “must demonstrate on appeal that the evidence establishes, as a matter of law, all vital facts in support of the issue.” To do that, he must show the evidence before the probate court conclusively shows one of the enumerated exceptions to the provisions requiring probate courts to appoint the person the testator designated applies

Id. The court held that evidence from the contestant of hostility was not sufficient to show that the co-executors were not suitable. The court also held that the fact that one of the co-executors let her son live a home owned by the estate without the payment of rent was not a conflict as that could be viewed as a benefit to the estate (having someone protect and upkeep estate property) and that the co-executor was a part owner of the home and had the right to have her son live there without paying rent (in the absence of an objection co-owner). The court of appeals affirmed the trial court in all things.

In Michael D. Heatley v. Red Oak 86, L.P. & Charles Johnson, investors in a limited partnership sued the managing member for breach of fiduciary duty. No. 05-18-01083-CV, 2020 Tex. App. LEXIS 6592 (Tex. App.—Dallas August 17, 2020, no pet. history). The jury found that the defendants owed a fiduciary duty, breached the duty, but that the plaintiffs did not incur any damages. The trial court then, after trial, entered an award of equitable forfeiture and awarded the plaintiffs over $250,000, which accounted for the defendants’ total contributions to the partnership. The defendants appealed.

The defendants argued that the plaintiffs waived any right to equitable forfeiture by failing to submit a question as to the level of the defendants’ intent in breaching duties. The court of appeals first discussed equitable forfeiture:

A trial court may order fee forfeiture as equitable relief when normal damages measures may not adequately address a breach of fiduciary duty. In ruling on a request for forfeiture, a trial court must determine three elements: [1] whether a “violation is clear and serious, [2] whether forfeiture of any fee should be required, and [3] if so, what amount.” In making that determination, the court must consider non-exclusive factors: “[t]he gravity and timing of the breach of duty”; “the level of intent or fault”; “whether the principal received any benefit from the fiduciary despite the breach”; “the centrality of the breach to the scope of the fiduciary relationship”; “any threatened or actual harm to the principal”; “the adequacy of other remedies”; and “[a]bove all” whether “the remedy fit[s] the circumstances and work[s] to serve the ultimate goal of protecting relationships of trust.” These “several factors embrace broad considerations which must be weighed together and not mechanically applied.” Thus, for example, “the ‘willfulness’ factor requires consideration of the [fiduciary’s] culpability generally; it does not simply limit forfeiture to situations in which the [fiduciary’s] breach of duty was intentional.”  Nor would “the adequacy-of-other-remedies factor . . . preclude forfeiture in circumstances where the principal could be fully compensated by damages.” The Heatley parties correctly note that, in the fee-forfeiture context, “when contested fact issues must be resolved before equitable relief can be determined, a party is entitled to have that resolution made by a jury.” And “a dispute concerning an agent’s culpability—whether he acted intentionally, with gross negligence, recklessly, or negligently, or was merely inadvertent—may present issues for a jury.”

Id. (internal citations omitted). The court then looked to whether the defendants had preserved their complaint about the missing findings on intent. The court held that the plaintiffs had the burden to plead, prove, and obtain jury findings on fee forfeiture. The court state that Texas Rule of Civil Procedure 278 states that “[f]ailure to submit a question shall not be deemed a ground for reversal of the judgment, unless its submission, in substantially correct wording, has been requested in writing and tendered by the party complaining of the judgment.” Id. The court held that the defendants waived their objection by failing to request any question on the plaintiff’s claim or by failing to object to the omission:

The Heatley parties argue that because there was a fact issue requiring jury determination on their level of intent or fault, the lack of a jury question and answer is fatal to the trial court’s conclusion to order fee forfeiture. We cannot reverse on this basis because they neither objected nor submitted a question “in substantially correct wording.” In the absence of a submitted question, an objection will preserve error where, as here, the party seeking reversal did not have the burden of proof with respect to the question at issue. Objections to a jury charge must be made “before the charge is read to the jury” and “must be specific, pointing out ‘distinctly the objectionable matter and the grounds of the objection.’” “Failure to timely object to error in a jury charge waives that error.” The Heatley parties did not tender a question related to fee forfeiture, addressing the level of intent with which they breached their fiduciary duties or specifically addressing any other Burrow factor. They did not object to the lack of such a question. Thus, we cannot reverse in their favor, as parties who failed to object to the absence of a jury question or to submit one at all.

Id. The court then reviewed the evidence and determined that it was sufficient to support the trial court’s forfeiture award. The court held that the evidence supported the trial court’s finding that the breach was serious as the defendants failed to disclose information that went the heart of the investment and also disclosed that same information to other investors. The court held that even though the evidence was conflicting, it supported a finding of intentional conduct by the defendants. The court then held that the fact that the plaintiffs were not damaged and that the defendants did not obtain an improper benefit were not dispositive:

This argument ignores a central tenet of forfeiture: “The main purpose of forfeiture is not to compensate an injured principal . . . . Rather, the central purpose is to protect relationships of trust by discouraging agents’ disloyalty. . . . or other misconduct.” A “client need not prove actual damages in order to obtain forfeiture” for breach of fiduciary duty. And, “even if a fiduciary does not obtain a benefit . . . by violating his duty, a fiduciary may be required to forfeit the right to compensation for the fiduciary’s work.” Forfeiture punishes a breach of fiduciary duty and exists as an equitable manner of compensating principals in situations where strict legal analysis does not support traditional measures of damages. The “threatened or actual harm to a principal” is only one relevant factor to be considered, while the most important consideration, “[a]bove all,” is whether “the remedy . . . fit[s] the circumstances and work[s] to serve the ultimate goal of protecting relationships of trust.

And, contrary to the Heatley parties’ argument, the jury’s refusal to find unjust enrichment cannot prevent forfeiture in this case. Here, unjust enrichment required the jury to find they acted intentionally; forfeiture, as we have noted, can be based on less than intentional conduct. In any event, the Heatley parties acquired interests adverse to their principals, Johnson and Red Oak, “without a full disclosure,” a betrayal of “trust and a breach of confidence.”

Id. The court also affirmed the trial court’s award of joint and several liability between the defendants based on knowing participation in the breach. The court of appeals held that the fact that the plaintiffs failed to obtain any jury findings on knowing participation was not important. The trial court’s judgment was affirmed.

Interesting Note. This is a highly interesting case from a procedural standpoint. It appears that the plaintiffs went to the jury on actual damages, but the jury found that they had no damages and that the defendants were not unjustly enriched. So, the breach of fiduciary duty finding was somewhat meaningless at that time. The plaintiffs then went to the trial court after trial and sought the equitable forfeiture award based on the jury’s breach of fiduciary duty finding so that they could recovery something. The trial court then evaluated the evidence and found that equitable forfeiture was appropriate and entered findings to support it.

First, the court of appeals should have properly discussed who should make the determination for equitable relief. The Texas Supreme Court held: “A jury does not determine the expediency, necessity, or propriety of equitable relief such as disgorgement or constructive trust.” Energy Co. v. Huff Energy Fund LP, 533 S.W.3d 866 (Tex. 2017). However, “If ‘contested fact issues must be resolved before a court can determine the expediency, necessity, or propriety of equitable relief, a party is entitled to have a jury resolve the disputed fact issues.’” Id. So, a jury decides fact issues that must be resolved before a trial court can award equitable relief. As one court recently held: “as a general rule, when contested fact issues must be resolved before equitable relief can be determined, a party is entitled to have that resolution made by a jury. In re Troy S. Poe Trust, No. 08-18-00074-CV, 2019 Tex. App. LEXIS 7838 (Tex. App.—El Paso August 28, 2019, no pet.) (reversing trial court’s award of equitable relief where underlying fact issues needed to go to the jury). For example, the Texas Supreme Court reversed a trial court’s award of profit disgorgement where the jury only found a revenue number and did not find the amount of profit made by the fiduciary defendant. Energy Co. v. Huff Energy Fund LP, 533 S.W.3d 866.

The Heatley court expressly stated that there was conflicting evidence on the factors for forfeiture relief. Those underlying fact issues had to go the jury, and the trial court had no authority to resolve them. The court of appeals held that there were no forfeiture factors submitted to the jury. It would seem that this case should fall under Texas Rule of Civil Procedure 279. “Upon appeal all independent grounds of recovery or of defense not conclusively established under the evidence and no element of which is submitted or requested are waived.”  Tex. R. Civ. P. 279; Eagle Oil & Gas Co. v. Shale Expl., LLC, 549 S.W.3d 256, 281 (Tex. App.—Houston [1st Dist.] 2018, pet. dism’d). Where a party fails to submit any element of its claim or affirmative defense, that claim or defense is waived unless the evidence conclusively establishes it under the law. Gulf States Utils. Co. v. Law, 79 S.W.3d 561, 565 (Tex. 2002); T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 222-23 (Tex. 1992); Harmes v. Arklates Corp., 615 S.W.2d 177, 179 (Tex. 1981). The court of appeals should have reversed and rendered that the plaintiffs waived their right to forfeiture relief by failing to submit questions to support its claim.

The court of appeals in Heatley, however, held in a footnote that Rule 279 does not apply to equitable relief: “the jury never considers the “elements” of fee forfeiture; that inquiry is specifically reserved to the trial court in its equitable capacity, and thus Rule 279 has no operation here.” Michael D. Heatley v. Red Oak 86, L.P. & Charles Johnson, 2020 Tex. App. LEXIS 6592, n. 4. But this ignores the fact that fact issues must be submitted to a jury before a trial court can award equitable relief.

Further, the court’s conclusions on error preservation are suspect. Basically, the court of appeals held that the defendants had a duty to request that the plaintiff’s claim for equitable relief be submitted in the charge or object to its omission from the charge to preserve error that there were no findings to support the trial court’s equitable award. A party only has to request a question if it is a question upon which it has the burden of proof. Tex. R. Civ. P. 278. A party can object to the failure to submit a question if it is a question upon which the opposing party has the burden of proof. Id. If a claim is completely omitted, a party should not object to its omission because the other party waived the claim pursuant to Rule 279.

A party should object to the omission where the claim or defense is partially submitted. Tex. R. Civ. P. 279. As the Texas Supreme Court described: “[W]hen some but not all elements of a claim or cause of action are submitted to and found by a jury, and there is no request or objection with regard to the missing element, a trial court may expressly make a finding on the omitted element, or if it does not, the omitted element is deemed found by the court in a manner supporting the judgment if the deemed finding is supported by some evidence.” In re J.F.C., 96 S.W.3d 256 (Tex. 2002). Where one or more elements of a claim or defense are submitted in the charge, then the party opposing the claim or defense can either request or object to preserve error as to the omitted element. Morris v. Holt, 714 S.W.2d 311 (Tex. 1986). As Rule 279 requires, the omitted element that a party desires to have implied must have been necessarily referable to elements that were submitted. Tex. R. Civ. P. 279. The necessarily referable requirement is intended to give parties fair notice of, and an opportunity to object to, a partial submission. Superior Trucks, Inc. v. Allen, 664 S.W.2d 136, 144 (Tex. App.—Houston [1st Dist.] 1983, writ ref’d n.r.e.).

In Heatley, the court should have analyzed whether the plaintiffs’ forfeiture claim was partially submitted because the plaintiffs did submit a breach of fiduciary duty question. Were the fact questions involved in the forfeiture claim “necessarily referable” to the submitted breach of fiduciary duty claim? If so, then potentially the defendants waived an objection to the missing fact findings being made by the trial court, which the trial court expressly found against the defendants. If they were not “necessarily referable,” then the defendants did not waive their complaint and the plaintiffs waived their claim. The court of appeals never addressed this issue, which is the real issue in the appeal.

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In Duncan v. O’Shea, three co-trustees brought a declaratory judgment action against a fourth co-trustee, seeking a declaration that the sale of trust real property was valid over the objection of the fourth co-trustee. No. 07-19-00085-CV, 2020 Tex. App. LEXIS 6564 (Tex. App.—Amarillo August 17, 2020, no pet. history). The trial court granted the relief via summary judgment, and the fourth co-trustee appealed.

The fourth co-trustee first complained that the trial court erred in awarding declaratory relief because she had filed a suit in Maine that raised breach of fiduciary duty claims, and that the relief in Texas “will not settle the dispute between the parties or resolve all of the issues pending in the Maine lawsuit, such relief cannot be granted.” Based on the Texas Uniform Declaratory Judgment Act, the court of appeals disagreed:

Appellant’s argument disregards the plain language of section 37.003 of the TUDJA which provides: “[a] court of record within its jurisdiction has power to declare rights, status, and other legal relations whether or not further relief is or could be claimed.” While Appellant argues that a declaratory judgment must terminate any and all controversies between the parties, such a conclusion is not required under the language of the TUDJA, nor has it been interpreted in such a way by any known case law, including Annetta South… So long as there is a justiciable controversy existing between the parties and the declaratory judgment will resolve that dispute, a declaratory judgment may be sought with respect to that dispute.

That being said, a question of jurisdiction does arise “if there is pending, at the time of the commencement of the declaratory action, another action or proceeding to which the same persons are parties, in which are involved and may be adjudicated the same identical issues that are involved in the declaratory action.” However, the “mere pendency of another action between the same parties, without more, is no basis for refusing declaratory relief.” A declaratory judgment may not be refused because of the pendency of another suit if the controversy will not necessarily be determined in that suit. Where speedy relief is “necessary to the preservation of rights which otherwise may be impaired or lost, courts will entertain an action for a declaratory judgment as to questions which are determinable in a pending action or proceeding between the same parties.”

While we agree with Appellant that the suit in Maine involves the same parties and the same real property at issue here, the dispute between the parties here, i.e., the authority of a majority of cotrustees to act on behalf of the Marital Trust, will not be determined in the Maine suit. Therefore, we agree with Appellees that the trial court had the authority to grant declaratory relief in this matter.

Id. The fourth co-trustee argued that the district court did not have jurisdiction because it should have been in probate court. The court of appeals disagreed, and held that the Texas Property Code specifically provided for jurisdiction over trust disputes to district courts. Id. (citing Tex. Prop. Code Ann. § 115.001(a)).

The court of appeals also disagreed with an argument that the judgment was improper due to a failure to add necessary parties:

[N]ecessary parties to an action like the one before us include (1) a beneficiary of the trust on whose act or obligation the action is predicated; (2) a beneficiary of the trust designated by name, other than a beneficiary whose interest has been distributed, extinguished, terminated, or paid; (3) a person who is actually receiving distributions from the trust estate at the time the action is filed; and (4) the trustee, if a trustee is serving at the time the action is filed. See Tex. Prop. Code Ann. § 115.011 (West Supp. 2019). There is nothing in the record showing that any of the beneficiary grandchildren satisfy the criteria set forth above. As such, those parties are not necessary and are not required to be joined in this matter.

Id.

The court of appeals also held that the three co-trustees had the authority to sale the real property over the objection of the fourth co-trustee:

[T]he declaratory judgment granted does not specifically authorize the sale of any property. It merely declares that under applicable law and the terms of the Marital Trust, if Appellees, being a majority of the cotrustees, decide to sell a piece of real property held in the Marital Trust, then they may do so without her agreement. Appellees also note that if an actual sale violated the terms of the trust instrument or otherwise breached a fiduciary duty, Appellant would have a claim at that time.

Id. The court also held that this declaratory relief was not an impermissible advisory opinion:

Appellees contend the declaratory relief sought is not some abstract question of law, but is, instead, a justiciable controversy existing between the parties. Appellees contend that, in situations like the present controversy, where multiple trustees serve concurrently, cotrustees may act by majority decision. Appellees’ position is not contrary to either the terms of the Marital Trust or applicable statutory authority. Reviewing the trust and the applicable statutes, the trial court’s judgment did not determine an abstract question of law, nor did it address a hypothetical injury only. When this declaratory judgment becomes final, Appellees will be able to move forward with a sale of real property held in the Marital Trust, with the assurance that the agreement of all four cotrustees is not needed, so long as a majority of the cotrustees are in agreement. Under the facts of this case, we see nothing advisory about the trial court’s declaratory judgment.

Id. The court affirmed the trial court’s judgment in all things.

Interesting Note: This case raises several interesting issues that arise when co-trustees manage trusts; such as how co-trustees are to manage trusts, what rights co-trustees in the minority have, etc. Co-trustees are obligated to manage the trust together. The first place to look for who co-trustees are to manage a trust is the trust document itself. If the trust document requires unanimity or allows action by a minority of co-trustees, the trust document should control. However, in the absence of language in the trust expressly stating how the co-trustees are to manage the trust, Texas has statutory guidelines.

At common-law, the co-trustees had to act with unanimity: “The traditional rule, in the case of private trusts, was that if there were two or more trustees, all had to concur in the exercise of their powers.” Scott and Ascher on Trusts, When Powers Are Exercisable By Several Trustees, § 18.3. The Texas Property Code, however, provides that, in the absence of trust direction, co-trustees generally act by majority decision. Tex. Prop. Code § 113.085(a); Berry v. Berry, no. 13-18-00169-CV, 2020 Tex. App. LEXIS 1884 (Tex. App.—Corpus Christi March 5, 2020, no pet.). See also Restatement (Third) of Trusts, § 39. Co-Trustees in the majority have the power to act for the trust. They can, of course, abuse that power. A co-trustee in the minority has the right and duty to sue its co-trustees when they have a serious breach of fiduciary duty. Tex. Prop. Code § 114.006. Under this provision a co-trustee has a duty to prevent its co-trustee from committing a serious breach of trust and/or compel a co-trustee to redress such a breach. In re Cousins, 551 S.W.3d 913, n.2 (Tex. App.—Tyler 2018, orig. proceeding).

Absent trust language to the contrary, co-trustees who are in the minority do not have authority or power to act for the trust. For example, one court held that a co-trustee did not have authority to sue a third party on behalf of the trust where he was in the minority. Berry v. Berry, no. 13-18-00169-CV, 2020 Tex. App. LEXIS 1884 (Tex. App.—Corpus Christi March 5, 2020, no pet.). His remedy was to sue his co-trustees. Id. See also Ward v. Stanford, 443 S.W.3d 334 (Tex. App.—Dallas 2014, pet. denied) (the court of appeals held that a trust would not have accelerated a note where two of the three trustees voted against that action.).

There are circumstance when less than a majority of co-trustees can act for the trust under the Texas Trust Code. If a vacancy occurs in a co-trusteeship, the remaining co-trustees may act for the trust. Tex. Prop. Code § 113.085(b). If a co-trustee is unavailable to participate and prompt action is necessary to achieve the efficient administration or purposes of the trust or to avoid injury to the trust property or a beneficiary, the remaining co-trustee or a majority of the remaining co-trustees may act for the trust. Id. § 113.085(d). Otherwise, an act by less than a majority of the co-trustees (absent trust document approval) is not valid, may result in liability to the improperly acting co-trustee, and may be voided depending on the innocence of the third party.

Co-trustees each owe fiduciary duties, and they should exercise their duties jointly, as a unit. So, one co-trustee should not take any action without the consent of the other co-trustees. Shellberg v. Shellberg, 459 S.W.2d 465, 470 (Civ. App.—Fort Worth 1970, ref. n.r.e.) (“The trust instrument conveyed the property to two trustees and provided that their powers were joint; the management, control and operation of the trust was to be by the joint action of the two trustees.”). For example, if a trust calls for two co-trustees, it cannot operate with just one. Id. For further example, in Conte v. Conte, the court of appeals affirmed a trial court’s order denying a co-trustee’s request for reimbursement for attorney’s fees expended in connection with a declaratory judgment action brought by another co-trustee. 56 S.W.3d 830 (Tex. App.—Houston [1st Dist.] 2001, no pet.). The court noted that the trust expressly provided that “any decision acted upon shall require unanimous support by all co-trustees then serving,” and “[c]learly, Joseph Jr.’s decision to employ counsel to defend against his co-trustee’s declaratory judgment action was not the subject of unanimous support by all co-trustees.” Id. Thus, he was not entitled to reimbursement from the trust for his attorneys’ fees, despite the trust’s provision that “[e]very trustee shall be reimbursed from the trust for the reasonable costs and expenses incurred in connection with such trustee’s duties.” Id. In a footnote, the court also noted that the other co-trustee had paid for her attorneys from the trust without the consent of the other co-trustee and noted that this was an issue that the successor trustee or beneficiary could raise in a later proceeding. Id. See also Stone v. King, No. 13-98-022-CV,2000 Tex. App. LEXIS 8070, 2000 WL 35729200 (Tex. App.—Corpus Christi 2000, pet. denied) (co-trustee had no authority to pay funds to third party without consent of co-trustee or to pay his attorneys for defense of claims).

Of course, co-trustees have duties to cooperate and work together, to facilitate a positive relationship, and they can be removed for hostility that impacts the management of the trust. Co-trustees also have duties to participate in management and disclose information to each other. The Author suggests that anyone interested in co-trustee management of trusts refer to his article and webinar from September of 2020 that is posted on this blog.