In Harrison v. Harrison Interests, a beneficiary of an estate and multiple trusts had a dispute with the executors and trustees. No. 14-15-00348-CV, 2017 Tex. App. LEXIS 1677 (Tex. App.—Houston [14th Dist.] February 28, 2017, no pet. history). The parties then executed a master settlement agreement that allowed the parties to dissociate themselves, distribute property, and that agreement contained releases for the fiduciaries. After the agreement was signed, the beneficiary had additional complaints and filed suit. The fiduciaries argued that the releases in the agreement precluded the beneficiary’s breach of fiduciary duty claim. The beneficiary argued that certain portions of the agreement were unfair and contended that because the defendants owed him fiduciary duties, as a matter of law, the defendants were required to rebut a presumption that the transactions are unfair. The trial court granted summary judgment for the defendants based on the release language, and the beneficiary appealed.
The court of appeals held: “Texas courts have applied a presumption of unfairness to transactions between a fiduciary and a party to whom he owes a duty of disclosure, thus casting upon the profiting fiduciary the burden of showing the fairness of the transactions.” Id. “Where a transaction between a fiduciary and a beneficiary is attacked, it is the fiduciary’s burden of proof to establish the fairness of the transaction.” The beneficiary argued that because the agreement was a transaction between fiduciaries and a beneficiary that the presumption of unfairness applied. The court did not expressly hold that the presumption of unfairness would apply to every such contract. But the court did review the agreement, and ultimately hold that a presumption of unfairness was rebutted in the case.
The court of appeals noted that it must balance the principle that fiduciary duties arise as a matter of law with an obligation to honor the contractual terms that parties use to define the scope of their obligations and agreements, including limiting fiduciary duties that might otherwise exist. “This principle adheres to our public policy of freedom of contract.”
The court noted that the record reflected that the agreement was not executed solely for the purpose of prematurely distributing assets to the beneficiary but also to terminate his relationship with the fiduciaries and settle all claims against them. The court noted: “This severance of the relationship is achieved not only through purchasing each other’s interest in commonly-held assets, but by releasing Dan and Ed from their fiduciary duties.”
The court held that in deciding whether the release is valid, the court should consider the following:
(1) the terms of the contract were negotiated, rather than boilerplate, and the disputed issue was specifically discussed; (2) the complaining party was represented by counsel; (3) the parties dealt with each other in an arms-length transaction; (4) the parties were knowledgeable in business matters; and (5) the release language was clear.
The court also emphasized that the fact that the parties “are effecting a ‘once and for all’ settlement of claims” weighed in favor of upholding the release.
Regarding the underlying facts, the court noted that the beneficiary was of legal age and had capacity. He attended college for several years and studied business. He sought a split of interest in assets that were held in common with the fiduciaries, as well as early distribution of assets. He was represented by counsel that he described as “talented and intelligent” throughout the negotiations of the agreement. He was very involved in the negotiations and suggested many of the terms in the agreement himself. He actively participated in the decisions on the agreement. The releases were disputed and specifically discussed. The agreement clearly and unequivocally released the fiduciaries, in all capacities, from any and all claims, excluding breaches or defaults under the agreement.
The court held that “the record before this court rebuts the presumption of unfairness or invalidity attaching to the release. Accordingly, William’s only remaining claim for breach of fiduciary duty is precluded and the judgment of the trial court is affirmed.”
Interesting Note: This case is very interesting because the court enforces a release between a fiduciary/trustee and a beneficiary using the factors that the Texas Supreme Court set forth for enforcing as-is and disclaimer-of-reliance clauses. Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008) (factors for enforcing disclaimer-of-reliance clause); Prudential Ins. Co. of Am. v. Jefferson Assocs., 896 S.W.2d 156, 160 (Tex. 1995) (factors for enforcing as-is clause). To the author’s knowledge, no Texas court has previously done that. One of those factors is that the transaction was an arm’s-length transaction. Any transaction between a trustee and beneficiary is not an arm’s-length transaction. Yet, trustees can enforce release agreements. So, the arm’s-length factor is only one factor and is not dispositive of whether a release is enforceable.
Indeed, though not cited by the court in this case, there are specific statutes that hold that release agreements between trustees and beneficiaries are enforceable. 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 they are 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 can also be bound if a parent signs, there are no conflicts between the minor and the parent, and there is no guardian for the minor. Id. The key term in these statutes is that the beneficiary is acting on full knowledge.
There is another important aspect to this case: disclaimer-of-reliance clauses in agreements between a fiduciary/trustee and a beneficiary may be enforceable. Because the court expressly used the factors for enforcing disclaimer-of-reliance clauses in judging a release agreement, there is no reason that the same analysis should not also apply for disclaimer-of-reliance clauses. Where the factors support enforcement, a court should apply a disclaimer-of-reliance clause between a fiduciary and a beneficiary. See Leibovitz v. Sequoia Real Estate Holdings, L.P., 465 S.W.3d 331, 352 (Tex. App.—Dallas 2015, no pet.) (the court enforced a disclaimer-of-reliance clause despite argument that fiduciary duties existed); Texas Standard Oil & Gas, L.P. v. Frankel Offshore Energy, Inc., 394 S.W.3d 753, 763 (Tex. App.—Houston [14th Dist.] 2012, no pet.) (the court of appeals held that a disclaimer-of-reliance clause precluded all of the plaintiff’s fraudulent-inducement claims even though there was a fiduciary relationship.). But see Harris v. Archer, 134 S.W.3d 411, 447 (Tex. App.—Amarillo 2004, no pet.) (the court of appeals rejected a disclaimer-of-reliance argument where the parties were fiduciaries); Stark v. Benckenstein, 156 S.W.3d 112, 122-123 (Tex. App.—Beaumont 2004, pet. denied) (holding that disclaimer-of-reliance clause in a release was enforceable after holding that it was executed at a time when the parties did not owe each other fiduciary duties)
Finally, the fact that the parties were negotiating a termination of their relationship and dispute seems to be an important factor. In this circumstance, even though the fiduciary relationship still exists, a beneficiary should be more vigilant to protect his or her own rights than in normal interactions with the fiduciary/trustee.