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.

In Benge v. Roberts, a beneficiary sued co-trustees and sought to remove them for breaching duties by not considering claims against a former trustee. No. 03-19-00719-CV, 2020 Tex. App. LEXIS 6335 (Tex. App.—Austin August 12, 2020, no pet. history). Continue Reading Court Affirmed Summary Judgment For Successor Trustees Due To A Clause Stating That They Had No Duty To Investigate Former Trustee’s Actions

In Ruff v. Ruff, a beneficiary of a trust sued a former trustee, and that dispute was sent to arbitration. No. 05-18-00326-CV, 2020 Tex. App. LEXIS 6344 (Tex. App.—Dallas August 11, 2020, no pet. history). After the arbitration ruled for the beneficiary, awarding her over $49 million, the former trustee appealed arguing that the dispute should not have been sent to arbitration. Continue Reading Court Affirmed Arbitration Decision Because Multiple Documents Regarding The Resignation And Appointment Of A Trustee Constituted One Large Transaction

  1. Introduction

A plaintiff in a trust or estate dispute often needs to seek a remedy before trial to protect it from immediate injury, to protect the assets made the basis of the suit, or to discover the real condition of the parties’ relationship or business. There are different types of relief that a plaintiff can seek. Continue Reading Receiverships in Trust and Estate Litigation in Texas

David F. Johnson presented his paper entitled “Preparing the Charge, The Charge Conference, and Protecting the Charge,” to the State Bar of Texas’s Advanced Civil Appellate Course on September 9, 2020. Continue Reading Presentation: Preparing the Charge, the Charge Conference, and Protecting the Record

In In re McCown, a county court had a contested probate matter, and a party filed a motion to assign a statutory probate judge and another party filed a motion to transfer the case to a district court. No. 10-20-00128-CV, 2020 Tex. App. LEXIS 6276 (Tex. App.—Waco August 10, 2020, original proceeding). After the county court entered an order transferring the case to the district court, the party seeking a statutory probate judge filed a petition for writ of mandamus. Continue Reading Court Granted Mandamus Relief To Reverse A Probate Court’s Order Transferring A Case To A District Court

In In the Interest of M.G.G., an ex-husband was made a constructive trustee of stocks that he held in his retirement account for his ex-wife. No. 05-19-00777-CV, 2020 Tex. App. LEXIS 6291 (Tex. App.—Dallas August 10, 2020, no pet. history). The divorce order stated that upon sale of the stock, the ex-husband should send the gross receipts from the sale to the ex-wife. Continue Reading Court Reversed Breach Of Fiduciary Duty Judgment Due To A Lack Of Damages