Texas Fiduciary Litigator

Texas Fiduciary Litigator

The Intersection of Texas Courts and the Fiduciary field

In A Trust Case, A Court Affirms Judgment Against A Beneficiary/Limited Partner’s Aiding-And-Abetting-Breach-Of-Fiduciary-Duty Claim For Distributions To A Trustee/Limited Partner

Posted in Cases Decided, Texas Court of Appeals

In Marshall v. Ribosome L.P., a beneficiary of a trust sued a limited partnership of which the trustee was a partner. No. 01-18-00108-CV, 2019 Tex. App. LEXIS 3787 (Tex. App.—Houston [1st Dist.] May 9, 2019, no pet. history). The beneficiary asserted that the limited partnership aided and abetted a breach of fiduciary duty by making distributions to the trustee, when the trustee was refusing to make distributions to the beneficiary. The trial court granted summary judgment for the partnership, and the beneficiary appealed.

The court of appeals held that an aiding and abetting breach of fiduciary duty claim rests on an underlying breach of such a duty. The beneficiary claimed that the trustee had breached her fiduciary duty by failing to make distributions of trust income. The court rejected that theory because the trustee had broad discretion to make distributions:

Under the Trusts’ language, however, the Trustee has absolute, unfettered discretion over the decision to accumulate or distribute the Trust income. See, e.g., Caldwell v. River Oaks Tr. Co., No. 01-94-00273-CV, 1996 Tex. App. LEXIS 1798, 1996 WL 227520, at *12 (Tex. App.—Houston [1st Dist.] May 2, 1996, writ denied) (mem. op.) (“A power is considered discretionary if the trustee may decide whether or not to exercise it.”). In her “sole discretion,” the Trustee “may accumulate or distribute income accruing for the benefit of the beneficiaries,” and “determin[e] the time or frequency of any distributions” as well as “the manner, time, circumstances, and conditions of the exercise of any right, power or authority vested in the Trustee.” Preston claims that his breach of fiduciary duty claim is supported by evidence that Elaine acted unfairly, suggesting that she knew he had come to depend on the distributions and that she had treated his brother differently under the separate trusts that benefit him. Preston labels this perceived unfairness as “bad faith”; however, a decision to accumulate interest—which the plain language of the Trusts expressly allows—and the differences in treatment between the beneficiaries of different trusts does not raise a fact issue showing a breach of fiduciary duty. Neither of the Trusts contains language limiting the trustee’s discretionary authority, such as by declaring a purpose to provide living expenses or requiring the distributions to Preston to be equal to those made to Pierce, Jr. under the trusts that benefit him. See, e.g., Doherty v. JPMorgan Chase Bank, N.A., No. 01-08-00682-CV, 2010 Tex. App. LEXIS 2185, 2010 WL 1053053, at * (Tex. App.—Houston [1st Dist.] Mar. 11, 2010, no pet.) (mem. op.) (holding that trustee erred in denying funds for modification of bathroom in daughter’s home where beneficiary had moved after suffering stroke that left her physically impaired; trust required disbursement of funds on beneficiary’s request to provide for her “comfort, health, support, or maintenance”). None of the circumstances raises a fact issue as to whether Elaine abused the broad discretionary authority conferred by the Trusts.

Id. The court also noted that there was no evidence of loss or injury to the beneficiary or the trusts or of benefit to the trustee resulting from the decision to accumulate the income instead of distributing it. The court stated: “Preston claims that the withholding of Trust income ‘causes [him] damages equal to the distributions that were wrongly withheld.’ But the Trusts do not give Preston any right to override the Trustee’s decisions about how to handle the trust income. And, as he remains the beneficial owner of the interest income accumulated in the Trusts, he is not entitled to a damages award that would amount to a double recovery.” Id.

The beneficiary claimed that the partnership aided and abetted the trustee’s decision to accumulate the trust income by making distributions to the trustees, as their legal owners, rather than directly to him, as the trusts’ beneficiary. The court first discussed the concept of such a claim:

The Texas Supreme Court observed that, if it were to recognize a cause of action for aiding and abetting tortious conduct, “[c]ourts should look to the nature of the wrongful act, kind and amount of assistance, relation to the actor, defendant’s presence while the wrongful act was committed, and defendant’s state of mind.” First U. Pentecostal, 514 S.W.3d at 225 (citing Juhl v. Airington, 936 S.W.2d 640, 644-45 (Tex. 1996)). Such a claim’s purpose would be “to deter antisocial or dangerous behavior.” Juhl, 936 S.W.2d at 644; see also W. Fork Advisors, LLC v. SunGard Consulting Servs., LLC, 437 S.W.3d 917, 921 (Tex. App.—Dallas 2014, pet. denied) (aiding and abetting claim requires actor, with unlawful intent, to give substantial assistance and encouragement to wrongdoer in tortious act).

Id. The court then rejected the beneficiary’s claim under the facts of this case:

Here, the allegedly wrongful conduct—Ribosome’s distribution of proceeds to the Trusts, as limited partners, rather than to Preston, their beneficiary—is required by Ribosome’s partnership agreement. Ribosome generally distributes profits to its limited partners according to the terms of its partnership agreement. It cannot deviate from those terms without direction from its general partner and the limited partner that is legally entitled to receive the share of profits. When the Trustee expressly revoked any authorization that may previously have existed for Ribosome to distribute the proceeds it owed to the Trusts directly to the Trusts’ beneficiary, Ribosome lost any authority to distribute the Trusts’ profits directly to Preston. No evidence shows that Ribosome gave the Trustee substantial assistance and encouragement to revoke that authorization, or that Ribosome could have acted differently had it believed the Trustee acted wrongfully by doing so. Because Ribosome’s distribution of profits in compliance with its partnership agreement does not constitute conduct in furtherance of a breach of fiduciary duty, the trial court properly granted summary judgment on Preston’s aiding and abetting claim.

Id.

Finally, the court rejected the beneficiary’s accounting claim against the partnership. The court acknowledged that the beneficiary was a limited partner in his individual capacity. However, the court held that a limited partner does not generally have a right to an accounting against a partnership:

An accounting is available when (1) the parties have a contractual or fiduciary relationship; (2) the facts and accounts are “so complex [that] adequate relief may not be obtained at law”; and (3) standard discovery procedures cannot provide adequate relief at law. T.F.W. Mgmt. v. Westwood Shores Prop. Owners Ass’n, 79 S.W.3d 712, 717-18 (Tex. App.—Houston [14th Dist.] 2002, pet. denied). In its summary-judgment motion, Ribosome argued that its partnership agreement identified any rights Preston had as to Ribosome, Ribosome had provided him with all the financial information that he was entitled to under the partnership agreement, and the agreement did not entitle Preston to a common-law accounting. Ribosome’s partnership agreement identifies the rights and duties of the limited partners and their duties in relation to the partnership. With respect to financial information, the partnership agreement gives the limited partner the right to inspect Ribosome’s books and records at reasonable times. It does not, however, include any additional right to an accounting, and Preston does not identify any other source that gives him that right. See Tex. Bus. Orgs. Code § 153.105 (explaining that rights of limited partners may be created only by certificate of formation, partnership agreement, other statutory provisions, or other limited partnership provisions). Preston further argues that Ribosome owes him a fiduciary duty to provide an accounting because of his limited partner status. He cites no authority for this argument and the Business Organizations Code makes clear any fiduciary powers or liabilities belong not to the limited partnership, but to its general partner. See id. § 153.152. Because the partnership agreement does not require Ribosome to comply with a limited partner’s demand for an accounting and Ribosome does not owe Preston an independent duty that would give rise to a right to an accounting, the trial court did not err in granting summary judgment on this claim.

Id. The court affirmed the summary judgment regarding the accounting claim.

Texas Statutes Now Allow A Court To Modify Or Reform An Unambiguous Will

Posted in Items of Interest

I. Introduction

Historically, Texas courts could not resort to extrinsic evidence to construe an unambiguous will. San Antonio Area Foundation v. Lang, 35 S.W.3d 636 (Tex. 2000). The Texas Supreme Court stated as follows:

In construing a will, the court’s focus is on the testatrix’s intent. This intent must be ascertained from the language found within the four corners of the will. The court should focus not on “what the testatrix intended to write, but the meaning of the words she actually used.” In this light, courts must not redraft wills to vary or add provisions “under the guise of construction of the language of the will” to reach a presumed intent. Determining a testatrix’s intent from the four corners of a will requires a careful examination of the words used. If the will is unambiguous, a court should not go beyond specific terms in search of the testatrix’s intent.

Id. at 639 (internal citations omitted). See also Stephens v. Beard, 485 S.W.3d 914, 916 (Tex. 2016); Hysaw v. Dawkins, 483 S.W.3d 1 (Tex. 2016). In 2015, the Texas Legislature created several provisions that allow a court to look at extrinsic evidence to modify the otherwise unambiguous terms of a will upon certain circumstances. Tex. Est. Code § 255.451.

II. Texas Estate Code Provision Allowing Modification and Reformation Of A Will

The Texas Estates Code allows a personal representative to petition a court to modify or reform a will on one of three different grounds:

(a) On the petition of a personal representative, a court may order that the terms of the will be modified or reformed, that the personal representative be directed or permitted to perform acts that are not authorized or that are prohibited by the terms of the will, or that the personal representative be prohibited from performing acts that are required by the terms of the will, if: (1) modification of administrative, nondispositive terms of the will is necessary or appropriate to prevent waste or impairment of the estate’s administration; (2) the order is necessary or appropriate to achieve the testator’s tax objectives or to qualify a distributee for government benefits and is not contrary to the testator’s intent; or (3) the order is necessary to correct a scrivener’s error in the terms of the will, even if unambiguous, to conform with the testator’s intent.

(b) An order described in Subsection (a)(3) may be issued only if the testator’s intent is established by clear and convincing evidence.

Tex. Est. Code § 255.451. The statute limits who can seek to modify a will. Texas Estates Code § 22.031 defines “‘personal representative’ to include (1) an executor and independent executor; (2) an administrator, independent administrator, and temporary administrator; and (3) a successor to an executor or administrator.” Tex. Est. Code § 22.031. So, this requires that a personal representative bring a claim to modify a will—a beneficiary is not allowed to do so. This is an important limitation as a personal representative may be less inclined to seek a modification or reformation that favors some beneficiaries over others due to its fiduciary duties, whereas a beneficiary, who owes no fiduciary duties, would be more inclined to do so.

The statute only allows a court to modify or reform a will or to allow a personal representative to act contrary to the plain language of the will for three limited reasons. First, allowing the modification “is necessary or appropriate to prevent waste or impairment of the estate’s administration.” Id. This provision would require the personal representative to present evidence that by following the express terms of the will that there would be a waste of estate assets or would impair the estate’s administration. Second, allowing the modification will “is necessary or appropriate to achieve the testator’s tax objectives or to qualify a distributee for government benefits and is not contrary to the testator’s intent.” Id.

Third, allowing the modification “is necessary to correct a scrivener’s error in the terms of the will, even if unambiguous, to conform with the testator’s intent.” This provision would allow a personal representative to offer evidence that, despite what the will unambiguously provides, that the testator really wanted something different. This is the most controversial basis to modify a will because presumably a testator reads and understands the will that he or she executes. It is presumed that he or she understands the plain meaning of the words in the will. It is assumed that if a testator states his or her intentions before executing a will that he or she changed his or her mind when they executed a will that has a contrary meaning. The statute does not define the term scrivener’s error. Under a commonly understood understanding of “scrivener’s error,” this statutory basis appears to be narrow: “A scrivener’s error is an error resulting from a minor mistake or inadvertence, especially in writing.” Packard Transport, Inc. v. Dunkerly, No. 14-09-00652- CV, 2010 Tex. App. LEXIS 4984 at *12 (Tex. App.—Houston [14th Dist.] July 1, 2010, no pet.) (mem. op.) (citing Black’s Law Dictionary 582 (8th ed. 2004)).

A scrivener’s error does not include a mistake of law or fact by the testator. If the testator meant what was written, even if based on false information, then there was not a scrivener’s error. It should be noted that one ground for undue influence in Texas is fraud and deceit. So, if a beneficiary misrepresents a legal or factual matter upon which the testator relied in executing a will, a trial court may refuse to admit the will to probate.

III. Burden of Proof To Establish A Scrivener’s Error

One important limitation is that a scrivener’s error must be proven by clear and convincing evidence, and not merely by a preponderance of the evidence. In the vast majority of situations in civil law, the preponderance of the evidence standard applies. Under a preponderance of the evidence burden, the fact finder must decide if the plaintiff’s allegations meet the legal standard of the preponderance of the evidence meaning that they are “more likely true than not.” Essentially, the fact finder must be convinced that it is at least 51% likely that the plaintiff’s allegations are correct. The fact that the Texas Legislature has refused to use the commonly-used preponderance of the evidence standard is very significant. “[N]o doctrine is more firmly established than that issues of fact are resolved from a preponderance of the evidence.” Ellis Cnty. State Bank v. Keever, 888 S.W.2d 790, 792 (Tex. 1994) (quoting Sanders v. Harder, 148 Tex. 593, 227 S.W.2d 206, 209 (1950)). “Only in extraordinary circumstances, such as when we have been mandated to impose a more onerous burden, has this Court abandoned the well-established preponderance of the evidence standard.” Id. Clear and convincing evidence is “proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established.” In re J.O.A., 283 S.W.3d 336, 345 (Tex. 2009). This is an intermediate standard, falling between the preponderance standard of ordinary civil proceedings and the reasonable doubt standard of criminal proceedings. State v. Addington, 588 S.W.2d 569, 570 (Tex. 1979). While the proof must weigh heavier than merely the greater weight of the credible evidence, there is no requirement that the evidence be unequivocal or undisputed. Id. So, trial courts should not grant modification or reformation relief where it is a close call; a party seeking that relief has a heavy burden to establish that a ground for the relief is established by firm and credible evidence that substantially outweighs counter evidence.

IV. Recent Texas Property Code Provision Allowing Reformation of A Trust

It should be noted that in 2017, the Texas Legislature added Texas Property Code Section to similarly permit reformation of a trust:

On the petition of a trustee or a beneficiary, a court may order that the terms of the trust be reformed if: (1) reformation of administrative, nondispositive terms of the trust is necessary or appropriate to prevent waste or impairment of the trust’s administration; (2) reformation is necessary or appropriate to achieve the settlor’s tax objectives or to qualify a distributee for governmental benefits and is not contrary to the settlor’s intentions; or (3) reformation is necessary to correct a scrivener’s error in the governing document, even if unambiguous, to conform the terms to the settlor’s intent.

Tex. Prop. Code §112.054(b). Subsections (e) and (f) also provide: “(e) An order described by Subsection (b-1)(3) may be issued only if the settlor’s intent is established by clear and convincing evidence. (f) Subsection (b-1) is not intended to state the exclusive basis for reformation of trusts, and the bases for reformation of trusts in equity or common law are not affected by this section.

V. Overarching Purpose Is To Conform Will To True Intention of Testator

The Estate’s Code also provides: “The court shall exercise the court’s discretion to order a modification or reformation under this subchapter in the manner that conforms as nearly as possible to the probable intent of the testator.” Tex. Est. Code § 255.452. This provision enforces the traditional concept that a testator’s intent should control. In exercising its ability to modify or reform a will, this statute provides that the court should do so to conform to the probable intent of the testator. This provision makes complete sense regarding the third ground for modifying a trust: scrivener’s error. It makes less sense regarding the first two grounds: modification of administrative, nondispositive terms to prevent waste or impairment of the estate’s administration or to achieve the testator’s tax objectives or to qualify a distributee for government benefits.

VI. Modification or Reformation May Be Retroactive

The trial court can reform a will so that it has retroactive effect. Id. at § 255.453. This may be very important for tax reasons and also to protect a personal representative who had not acted in conformance with the express terms of a will. If the modification or reformation has retroactive effect, then the personal representative did act in conformity with the modified or reformed will, and did not breach an duty, even though he, she or it did not act in conformity with the express terms of the will.

VII.     Potential Liability Of Personal Representative For Bringing Or Failing To Bring Action To Modify or Reform A Will

The statute provides for a protection for a personal representative who does not act to modify or reform a will. Section 255.455 provides:

(a) This subchapter does not create or imply a duty for a personal representative to: (1) petition a court for modification or reformation of a will, to be directed or permitted to perform acts that are not authorized or that are prohibited by the terms of the will, or to be prohibited from performing acts that are required by the terms of the will; (2) inform devisees about the availability of relief under this subchapter; or (3) review the will or other evidence to determine whether any action should be taken under this subchapter.

(b) A personal representative is not liable for failing to file a petition under Section 255.451.

Tex. Est. Code § 255.455. So, a personal representative may not be sued by a beneficiary for failing to petition a court to modify or reform a will. Even if the personal representative knows that the testator wanted something different from what was expressly stated in his or her will, the personal representative does not have to try to correct the error and may follow the express terms of the will without fear that a beneficiary will be able to successfully sue the personal representative for breaching a duty. This provision will certainly make it more likely that personal representatives will not seek a modification or reformation.

Further, a personal representative may breach duties where he, she or it attempts to modify or reform a will. A personal representative owes the same fiduciary duties to estate beneficiaries as a trustee owes a trust beneficiary as a personal representative is essentially a trustee of the trust estate. A trustee owes a duty of loyalty to each beneficiary and owes a duty to treat beneficiaries fairly. One could certainly see a circumstance where the personal representative seeks a modification or reformation to favor one beneficiary over another or to protect itself from liability for taking actions that were not allowed by a will. Where no ground exists for such a modification or reformation, the personal representative would likely breach a fiduciary duty.

So, where a personal representative has no liability for failing to modify or reform a will, and may have liability for trying to do so, it is almost certain that no reasonable personal representative would seek to modify or reform a will unless every interested party agrees with that course of action.

VIII.    Conclusion

This relatively new statute is controversial in Texas even though it is limited. One law student advocates for broadening the scope of the statute and allowing courts to modify wills in additional circumstances, including a mistake of law or fact or because there are changed circumstances. Brent Debnam, Deadly Intentions: Posthumously Modifying Unambiguous Wills To Protect The Actual Intentions Of Texas’s Testators, 462 Estate Planning And Community Property Law Journal, 461 (2017). Others prefer the historical plain-meaning rule and the inability to modify or reform an unambiguous will. Once again, historically, Texas courts considered a will a unilateral instrument, and were concerned only with the intention of the testator as expressed in the will. Gee v. Read, 606 S.W.2d 677, 680 (Tex. 1980); Stewart v. Selder, 473 S.W.2d 3, 7 (Tex. 1971); Guilliams v. Koonsman, 154 Tex. 401, 279 S.W.2d 579, 581 (1955). Courts held that it was the sense in which the words were used by the testator that was the ultimate criterion to judge intent. A basic rule of will construction was that the words of a will should be given their plain and usual meaning unless it is clear from the will as a whole that the testator intended a different meaning. Jensen v. Cunningham, 596 S.W.2d 266, 271 (Tex. Civ. App.—Corpus Christi 1980, no writ). A will should not be construed to defeat the manifest purpose of the testator to have a reasonably prompt settlement and distribution of his or her estate or construed as to accomplish something the testator expressly forbade. Brooker v. Brooker, 76 S.W.2d 180 (Tex. Civ. App.—Fort Worth 1934), set aside on other grounds, 130 Tex. 27, 106 S.W.2d 247 (1937); Wisdom v. Wilson, 59 Tex. Civ. App. 593, 127 S.W. 1128 (Tex. Civ. App.—1909, writ refused). Many dislike the concept of changing the plain meaning rule because this significant change risks eviscerating a testator’s right to control his or her estate after death and also creates unnecessary hardships for clients, practitioners, and courts. There are no court opinions in Texas at this time construing the new statutes discussed above. Time will tell how courts in Texas will take to modifying or reforming an unambiguous will.

Court Held That Heirs Had Standing To Participate In Estate Even After They Received The Assets They Were Due

Posted in Cases Decided, Texas Court of Appeals

In In re Estate of Daniels, after the decedent’s death, his wife and his other heirs filed competing applications for independent administration of his estate. No. 06-18-00049-CV, 2019 Tex. App. LEXIS 2905 (Tex. App.—Texarkana April 11, 2019). After the homestead property was set aside and the temporary administrator conveyed the interests in that property to the wife and the heirs, the wife moved to dismiss the heirs and their pleadings for lack of standing because they no longer had a financial interest in the estate. The trial court granted the motion, and the heirs appealed.

The court of appeals held that because Texas Estate Code Section 22.018 defines “interested person” in the disjunctive; one is an interested person if they are an “heir, devisee, spouse, [or] creditor” or one who has a “property right in” or a “claim against” the estate being administered. The court held that a party does not have to have a financial interest in the estate to have standing:

Accordingly, if one is not an heir, devisee, spouse, or creditor, then one must have a property right in or a claim against the estate to be an interested person. However, an interested person does not have to be both “(1) an heir, devisee, spouse, or creditor and (2) a person with a property right in or claim against the estate.” Therefore, as long as the Heirs meet the statutory definition of “heir” under Section 22.015, they are “interested persons” under Section 22.018(1), even if they do not have a pecuniary interest in the estate.

Id. The court also held that the heirs also did not lose standing by enforcing their rights and obtaining assets from the estate:

It is undisputed that the Heirs satisfied the statutory definition of heir at the time the temporary administrator conveyed them property interests from the estate. Just as accepting benefits under a will does not bar the devisee from pursuing other estate-related rights he has as a devisee, the Heirs’ acceptance of property interests from the estate does not bar them from exercising their other rights as heirs, such as seeking to be named administrators and objecting to LaStarza’s application for the same. Therefore, the Heirs have standing to pursue their application, objections, and other motions.

Id. The court reversed the trial court’s order and held that the heirs had standing.

Court Affirms Finding Of Undue Influence Regarding Execution Of Will

Posted in Cases Decided, Texas Court of Appeals

In In re Estate of Russey, the decedent was going through a divorce and signed a will. No. 12-18-00079-CV, 2019 Tex. App. LEXIS 1536 (Tex. App.—Tyler February 28, 2019, no pet. history). She died before the divorce was finalized. Her children took their father’s side on some issues. During this time, a sister of a friend of the decedent “swooped in,” befriended the decedent, began taking her to her medical appointments and to the hospital, and assisted with the divorce proceedings. After the decedent’s phone texted her attorney that she wanted to draft a will and name her new friend as her sole beneficiary, the decedent executed the will. The decedent passed away shortly thereafter, and the will was offered to probate. The decedent’s daughter challenged the will. Following a bench trial, the trial court entered its order denying the admission of the will to probate and granting the daughter’s application for independent administration. The friend appealed.

The court of appeals discussed the standards for undue influence. “To establish undue influence, a contestant must show the following: (1) the existence and exertion of an influence; (2) the effective operation of such influence so as to subvert or overpower the mind of the testator at the time of the execution of the testament; and (3) the execution of a testament which the maker thereof would not have executed but for such influence.” Id. (citing Rothermel v. Duncan, 369 S.W.2d 917, 922 (Tex. 1963)).

The court first considered whether there was sufficient evidence that the friend had a fraudulent motive in having the decedent sign the will. The friend was subject to an order of deferred adjudication for theft of $55,471.20, and she was required to pay restitution in the amount of $38,721.96. At the time the decedent signed the will, her estate was worth more than the $28,000. “This monetary need on Watson’s part amounts to some circumstantial evidence underlying her motive to seek to influence Russey to name her as her sole devisee of her will.” Id. The court also looked at evidence that the friend poisoned the decedent’s relationship with her daughter. The daughter testified that the friend “froze her out,” thereby preventing her from being able to reestablish any type of relationship with the decedent. The court considered the circumstances surrounding the drafting and execution of the will. The friend and her husband were present when the decedent executed the will in her home. The court held that the evidence was legally and factually sufficient to support the trial court’s findings that an influence existed and was exerted by the friend.

Regarding whether the influence overpowered the decedent’s mind, the court first considered the decedent’s mental and physical capacity to resist and her susceptibility to the type and extent of the influences exerted. The trial court found that, due to her health problems, the decedent was reliant on others for transportation, and that the friend befriended the decedent while she was suffering from these health problems and that the decedent became dependent on the friend during her last illness for much of her care and transportation. The decedent was lonely at a time when the friend “swooped in” to provide assistance and became deeply involved in divorce proceedings. The court concluded that this evidence was sufficient to establish that the decedent was incapable of resisting her susceptibility to the influence. The court stated:

Further, in considering Russey’s state of mind at the time she executed her will, we note that Watson and Beatty actively sought to continue Russey’s estrangement from Stevens and her grandchildren. The record also reflects that Watson and her husband made certain they were present when Russey signed the will, in which Watson was designated as her sole devisee; no family members were present or were invited to attend the signing of the will.

Id. The court concluded:

Considering the cumulative effect of the evidence related to (1) Russey’s susceptibility and dependence on Watson at the end of her life, (2) the details surrounding the signing of the March 2, 2017, will, and (3) Watson’s successfully keeping Stevens and her children away from Russey during this time, we conclude that a factfinder reasonably could determine that Watson exerted her influence and subverted and overpowered Russey’s mind at the time she signed the will.

Id.

Lastly, the court consider whether the decedent would not have executed the instrument, but for the influence. “Satisfaction of this element usually is predicated on whether the disposition of property is unnatural.” Id. The court stated:

One of the main objects of the acquisition of property by the parent is to give it to his child; and that child in turn will give it to his, in this way the debt of gratitude we owe to our parent is paid to our children. Thereby, each generation pays what it owes to the preceding one by payment to the succeeding one. This seems to be the natural law for the transmission of property. Any departure from that course, though it may not be uncommon or unusual, is unnatural.

Id. The evidence showed that the decedent never made a will until the friend reentered her life during her last illness. Because the evidence supported that the friend unduly influenced the decedent when she never had before sought to create such a document, the court concluded that the trial court reasonably could have determined that the will was unnatural in that it passed all of her property to the friend with no apparent consideration given to her children or grandchildren. The court affirmed the trial court’s finding of undue influence.

Codicil Was Properly Rejected Because It Did Not Adequately Refer To Last Will And Testament

Posted in Cases Decided, Texas Court of Appeals

In In the Estate of Hargrove, two daughters offered their mother’s last will and testament dated in 2017 for probate. No. 04-18-00355-CV, 2019 Tex. App. LEXIS 1703 (Tex. App.—San Antonio March 6, 2019, no pet. history). Their brother offered a subsequent codicil. After an evidentiary hearing, the trial court admitted the will to probate, issued letters testamentary to the daughters as co-independent executors, and denied the son’s application to admit the codicil to probate. The son appealed.

The court of appeals noted that a codicil must contain “a sufficient reference to a prior will” and that, if it does so, it “operates as a republication of the will in so far as it is not altered or revoked by the codicil; the will and codicil are then to be regarded as one instrument speaking from the date of the codicil.” Id. (citing Hinson v. Hinson, 154 Tex. 561, 567, 280 S.W.2d 731, 735 (1955)). The court held that the Hinson rule does not require that a codicil make a “specific” or “exact” reference to a prior will, but it does require that it state “enough information to permit adequate identification of the will being republished.” Id. The court held that the codicil in this case did not make a sufficient reference:

The Codicil does not contain a generic reference to an existing will that could be construed to mean the February 2017 Will. Instead, it contains a specific reference to a will executed at a specific time that is incompatible with identifying the Will at issue here. As noted, Mary Jane’s Will was executed on February 13, 2017. But the Codicil, which was executed a mere six weeks later, refers to “my Last Will and Testament, which was executed in the Summer of 2016.” Jim Bob contends that this is actually a reference to the February 2017 Will. But the express language of the Codicil refers to a will executed at least seven months earlier. We cannot simply overlook the discrepancy. Nor can we, in the guise of interpreting the Codicil, rewrite it to state “executed in February 2017” rather than “executed in the Summer of 2016.”

Id. The court affirmed the trial court’s rejection of the codicil.

Trial Court Had Jurisdiction To Appoint A Temporary Administrator After A Will Contest Had Been Filed Regarding A Will That Had Been Probated As A Muniment of Title

Posted in Cases Decided, Texas Court of Appeals

In Chabot v. Estate of Sullivan, the decedent’s attorney probated a holographic will as a muniment of title. No. 03-17-00865-CV, 2019 Tex. App. LEXIS 2145 (Tex. App.—Austin March 20, 2019, no pet.). A claimant then asserted a claim that the decedent sexually abused him. The tort claimant and the decedent’s sister filed will contests. The court signed an order appointing the temporary administrator and then signed a subsequent order authorizing the administrator to settle the tort claimant’s claims. The party who would take under the will alleged that the orders appointing the temporary administrator and approving the settlement were void. The court of appeals disagreed, holding that the orders were not void because the decedent’s sister and the tort claimant filed will contests well within the two-year deadline under Texas Estates Code Section 256.204(a), no representative of the estate existed at the time as it was a muniment of title, and the trial court appointed the temporary administrator pursuant to its authority under Texas Estates Code Section 452.051(a). The court noted that the Estates Code provides at least two mechanisms for challenging a probate court’s order: a bill of review and a will contest. “Section 256.204, therefore, allows for the filing of a will contest within two years of the date the will was admitted to probate. It is undisputed that both Chabot and the Tort Claimants filed timely will contests.” Id. The court concluded:

Chabot and the Tort Claimants filed will contests well within the two-year deadline. See Tex. Estates Code § 256.204(a). No representative of Sullivan’s estate existed at the time, and the trial court appointed Deadman as temporary administrator pursuant to its authority under Section 452.051. See id. § 452.051(a). Chabot has not cited any authority prohibiting the trial court’s actions, and we are not aware of any. We therefore hold that the trial court’s order appointing Deadman was not void ab initio and that the court’s subsequent order authorizing Deadman to settle the Tort Claimants’ suits was not void on that ground.

Id.

Breach Of Fiduciary Duty Claim Against Trustee Based On Self-Dealing Real Estate Investment Was Dismissed Due To Limitations, Quasi-Estoppel, And An Exculpatory Clause, But The Attorney’s Fees Award Against The Beneficiary Was Reversed Where The Award Was Not Equitable

Posted in Cases Decided, Texas Court of Appeals

In Goughnour v. Patterson, a beneficiary sued a trustee based on a failed real estate investment. No. 12-17-00234-CV, 2019 Tex. App. LEXIS 1665 (Tex. App.—Tyler March 5, 2019, no pet. history). In 2007, the trustee of four trusts invited his mother, the primary beneficiary, and his siblings, also beneficiaries, to participate in a real estate investment that he created by allowing the use of trust funds. They all agreed, and the trustee transferred a total of $2.1 million from the four trusts to the real estate investment entity. The project failed, and the trusts lost the $2.1 million. In 2011, the trustee filed suit to resign and obtain a judicial discharge. A sister filed a breach of fiduciary duty claim based on this failed investment.

After a bench trial, the court rendered judgment approving the trust accounting, approving the trustee’s administration, and holding that the trustee, individually and in his capacity of trustee, was “completely discharged and relieved of all duties” and was “fully and completely released and discharged from any and all claims, duties, causes of action or liabilities (including taxes of any kind) relating to any and all actions or omissions in connection with his administration of the DPH Trust.” Id. The court ordered that the successor trustee pay all outstanding legal and accounting fees incurred by the trust, appointed a successor trustee, and relieved the successor trustee of any and all duty, responsibility, or authority to investigate the actions or inactions of the trustee as prior trustee. The court further ordered that the sister take nothing on all her claims and ordered her to pay attorney’s fees for the trustee. The sister appealed.

The court of appeals issued a very lengthy and detailed opinion affirming in part and reversing in part the trial court’s judgment. The court of appeals first addressed the trustee’s affirmative defense of the statute of limitations:

A suit for breach of fiduciary duty or fraud must be brought no later than four years from the date the cause of action accrues… A cause of action accrues when facts have come into existence that authorize a claimant to seek a judicial remedy… When applicable, the discovery rule defers accrual of a cause of action until the plaintiff knew or, exercising reasonable diligence, should have known of the facts giving rise to the cause of action… A person to whom a fiduciary duty is owed is relieved of the responsibility of diligent inquiry into the fiduciary’s conduct, so long as the relationship exists. However, once the fact of misconduct becomes apparent it can no longer be ignored, regardless of the nature of the relationship.

Id. (internal citations omitted). The beneficiary claimed that she should not have known about the claim until 2011. The court of appeals disagreed:

The Bighorn transaction occurred on August 30, 2007. To be timely, Deborah’s claims for breach of fiduciary duty and fraud, which are based on that transaction, should have been filed by August 30, 2011. The evidence shows that, by August 30, 2011, Deborah knew that the structure of the transaction that occurred was not the one Robert described in July 2007; the housing market was struggling; one of the Bighorn builders withdrew from the project and the other stopped accepting new lots; by mid-August 2009 they ceased construction, the bank started foreclosure proceedings, and Bighorn filed for bankruptcy; and by March 2011, all of the Trust’s investments were lost with no possibility of recovery of that money. In his March 28, 2011 email, Robert stated that the Trust loaned money to Bighorn for a preferred returns interest. The emails Robert sent contained sufficient facts giving rise to her causes of action. Additionally, by the end of 2008, Deborah was angry with Robert because of the Bighorn project, and she had already asked Robert to resign from her trust before that date. We disagree with Deborah’s assertion that some of her allegations constitute breaches of fiduciary duty separate from the Bighorn transaction. Her allegations that Robert lied about the transaction, failed to provide pertinent information about the transaction, and structured the transaction differently than described in his initial email are all facets of the allegation that Robert breached his fiduciary duty by misusing Trust assets for the Bighorn project. Therefore, these allegations share the same accrual date, August 30, 2007. We conclude that the statute of limitations ran on Deborah’s breach of fiduciary duty and fraud claims on August 30, 2011.

Id. The court of appeals held that the statute of limitations also applied to the beneficiary’s diversification and defalcation claims as those were the same as the her breach of fiduciary duty claim. Id.

The court of appeals also affirmed the application of the trustee’s affirmative defense of quasi-estoppel based on the beneficiary’s prior consent to trust investments in other real estate investments:

The affirmative defense of quasi-estoppel precludes a party from asserting, to another’s disadvantage, a right inconsistent with a position she has previously taken. The doctrine applies when it would be unconscionable to allow a party to maintain a position inconsistent with one in which she acquired or by which that party accepted a benefit. The record shows that Robert initiated approximately fifty real estate transactions in which he invested Trust assets. Deborah agreed to all of these transactions. All transactions except Bighorn were successful and the Trust benefitted from those prior investments. Therefore, Deborah’s claims for breach of fiduciary duty are barred by the affirmative defense of quasi-estoppel.

Id. (internal citations omitted).

The court of appeals also affirmed the trustee’s affirmative defense of an exculpatory clause in the trust, which negated his liability:

Generally, subject to the Trustee’s duty to act in good faith and in accordance with the purposes of the Trust, the terms of the Trust prevail over provisions of the Texas Trust Code. A term of a Trust exculpates a Trustee from liability if the Trustee’s breach of trust is not committed in bad faith, intentionally, or with reckless indifference to the interest of a beneficiary. Paragraph C(5) of the Trust provided that the Trustee shall not “at any time be held liable for any action or default of himself or his agent or of any other person in connection with the administration of the trust estate, unless caused by his own gross negligence or by a willful commission by him of an act in breach of trust.” Such an exculpatory clause has been held effective in exonerating a trustee from liability for losses when no evidence of gross negligence was shown.

To prove gross negligence, a plaintiff must show (1) an act or omission that, when viewed objectively from the defendant’s standpoint at the time it occurred, involved an extreme degree of risk, considering the probability and magnitude of the potential harm to others and (2) that the defendant had an actual, subjective awareness of the risk but proceeded with conscious indifference to the rights, safety, and welfare of others. Under the first element, an “extreme risk is not a remote possibility of injury or even a high probability of minor harm, but rather the likelihood of serious injury to the plaintiff.” To determine if acts or omissions involve extreme risk, we analyze the events and circumstances from the defendant’s perspective at the time the harm occurred, without resorting to hindsight. Under the second element, “actual, subjective awareness” means that “the defendant knew about the peril, but its acts or omissions demonstrated that it did not care.” Circumstantial evidence is sufficient to prove either element.

Id. The court of appeals affirmed the trial court’s summary judgment on this ground due to the trustee’s testimony about his due diligence about the investment, the history of doing successful real estate investments, the consent of the other beneficiaries, his capacity as beneficiary and his loss associated with the investment: “There is no evidence that Robert had an actual, subjective awareness of the risk of a coming financial crisis but nevertheless proceeded with conscious indifference to the rights, safety, and welfare of the Trust, his mother, or his sisters. Thus, there is no evidence of gross negligence or a willful commission by Robert of a breach of trust. We conclude that Robert showed as a matter of law that Deborah’s claims were barred by the Trust instrument’s exculpatory clause.” Id.

The beneficiary also complained that the trial court should not have discharged the trustee from liability. The court of appeals affirmed the trial court’s discharge related to an accounting:

Whether a Trustee’s resignation should be accepted is within the discretion of the trial court. The trust code and the language of the trust instrument determine the Trustee’s powers and duties. The trust code requires that a written statement of accounts shall show (1) all trust property that has come to the trustee’s knowledge or into the trustee’s possession, (2) a complete account of receipts, disbursements, and other transactions regarding the trust property, (3) a listing of all property being administered, with a description of each asset, (4) the cash balance on hand with the name and location of the depository where the balance is kept, and (5) all known liabilities owed by the trust.… The Trust’s accountant testified that the accounting reflects the receipts, disbursements, payment of expenses, distributions, transfers, land sales, and all financial transactions that occurred in the DPH Trust. He stated that the accounting fully and fairly discloses all financial matters relating to the administration of the Trust from 2002 through 2016.

Robert testified regarding the documents that he provided to Deborah showing all financial transactions involved in the administration of the Trust. He presented monthly statements itemizing investment accounts, including their gains, losses, and values, as reported by UBS Financial Services, Inc., for 2002 through 2016 and showing the cash balance on hand. He also presented spreadsheets showing receipts and disbursements from the DPH Trust from 2002 through 2016, documents showing cash available to the DPH Trust, as well as income tax returns for the DPH Trust for 2002 through 2015. The record also contains closing statements relating to the sale of real estate.

Robert testified that each of the four trusts started with $115,000 in 1989. Since 2002, when he became Trustee, till the time of trial, he paid Ruth close to a million dollars. He estimated that the value of the DPH Trust at the time of trial was $1.2 or $1.3 million. The record shows that all investments Robert made on behalf of the Trust, with the exception of the Bighorn investment, were profitable. Additionally, Robert sent emails to Ruth and his siblings describing the current financial picture of the Trust and updating them on Trust activities. Based on the evidence presented at the hearing on Robert’s petition for resignation, we conclude the trial court did not abuse its discretion by determining that Robert properly administered the Trust and properly performed his duties, including providing the beneficiaries with a complete accounting, and the court properly approved Robert’s administration.

Id. The court of appeals also held that the trial court did not give a declaration regarding a trustee’s non-liability for tort causes of action, but rather adjudicated the beneficiary’s failed tort claims:

In the final judgment, the court ordered that Robert is fully and completely released and discharged from any and all claims, duties, causes of action or liabilities relating to any and all actions or omissions in connection with his administration of the DPH Trust. Deborah complains that this order constitutes an abuse of discretion. She states that approving a final accounting does not adjudicate a trustee’s “potential tort liability” and that a trustee cannot use a declaratory judgment action to determine “potential tort liability.” The court’s order does not include this phrase, and she does not explain how the order addresses “potential tort liability.” We conclude that it does not.… In response to Robert’s petition for resignation as Trustee, Deborah filed counterclaims alleging various theories of liability. Those counterclaims were disposed of by partial summary judgments prior to the trial before the court at which the issues of the accounting and Robert’s discharge were heard. The final judgment incorporated the prior summary judgments, specifically ordering that Deborah take nothing on all her claims against Robert. Considering the literal meaning of the language used, we conclude that the final judgment’s reference to a release of liability contemplates the previously determined counterclaims, not “potential tort liability.” As previously explained, the trial court’s rulings on Deborah’s counterclaims were proper. Therefore, the trial court did not abuse its discretion by releasing Robert from liability for his actions or omissions in connection with his administration of the Trust.

Id.

The beneficiary also complained about the trial court ordering her to reimburse the trust in the amount of $587,585 for the trustee’s attorney’s fees. The court of appeals set forth the following standards:

An award of reasonable and necessary attorney’s fees that are “equitable and just” is allowed under the Uniform Declaratory Judgments Act and the Texas Trust Code. Whether an award of attorney’s fees is equitable and just are matters of law addressed to the trial court’s discretion. That determination depends on the concept of fairness in light of all the surrounding circumstances. The party asserting the inequity of an attorney’s fee award is not required to present distinct evidence on that question of law. The court may conclude that it is not equitable or just to award even reasonable and necessary fees. In applying the Declaratory Judgments Act or trust code Section 114.064, the conclusion that an award of fees is equitable and just is not dependent on a finding that a party “substantially prevailed.” The trial court’s determination to award attorney’s fees is reviewed for an abuse of discretion. Under an abuse of discretion standard of review, we review the entire record. If there is some evidence in the record that shows the trial court followed guiding rules and principles, then the reviewing court may not find an abuse of discretion. Trial judges, as well as appellate judges, can draw on their common knowledge and experience as lawyers and judges in considering the testimony, the record, and the amount in controversy in determining attorney’s fees.

Id. The court of appeals held that the trial court abused its discretion in ordering the beneficiary to pay the trustee’s attorney’s fees:

The record shows that there was discord between Robert and Deborah since at least 2007. Deborah asked Robert to resign as Trustee. He offered to resign only if Deborah would provide him with a release of liability which Deborah refused to provide. Robert petitioned the court for approval of his resignation as Trustee in 2011. In that petition, he asked the court to render judgment approving the accounting and “releasing and fully and completely discharging [Robert] from any and all claims, duties and liabilities regarding the Trust and/or his administration of the Trust, . . .” and directing that all costs, expenses and attorney’s fees and accounting fees incurred by Robert in connection with his petition be paid out of the assets of the Trust. In her original answer, Deborah asked only for an accounting. A year after Robert filed his original petition, Deborah filed an amended answer that first included her counterclaims. In November 2015, Robert filed his first amended petition in which he stated that he sought a declaratory judgment approving the Trust accountings and releasing and discharging him, as Trustee and individually, from any liability involving matters relating to his administration of the Trust.

While acknowledging that Deborah was not required to give him a release, Robert testified that there would have been no litigation if she had provided the release. Robert’s attorney testified that Robert would agree to resign if they designated a Successor Trustee and if Deborah agreed to fully release Robert. At the same time, Robert complains that the litigation drained the Trust. His actions show that he deemed it more important to obtain the release than to preserve his mother’s funds. He asked the court to order Deborah to reimburse the Trust with $587,585 that was used to pay his attorneys and accountants for fees for services rendered to defend against the counterclaims. Robert’s attorney testified that Robert was not asking Deborah to pay for amounts predating the lawsuit or for the accounting. In argument to the court, he made it clear that Robert wanted the court to order Deborah to reimburse the Trust for fees that were incurred to defend against her counterclaims…

The record shows that Robert repeatedly engaged in self-dealing. In the summer of 2007, he told the Trust beneficiaries that, with their permission, he would invest approximately $750,000 of Trust money in a project planned by his real estate company. After getting the approval of the beneficiaries, he did not follow through on those terms. Instead, he loaned $2.1 million in Trust funds to an entity he was part owner in and lost all of that money when the deal collapsed. His actions resulted in a material financial loss to the Trust.

It is settled law that a trustee is not entitled to expenses related to litigation resulting from the fault of the trustee. Here, although Deborah asserted that Robert engaged in wrongdoing, there was no trial on Deborah’s breach of fiduciary duty and fraud claims. Robert won on those counterclaims, not after a review of the merits, but based solely on his affirmative defenses presented by way of summary judgment motion. Through affirmative defenses the defendant seeks to establish a reason why the plaintiff should not recover independent from an examination of the merits of her claims. If true, the defendant’s affirmative defense will defeat the plaintiff’s claim, even if all the allegations in the complaint are true. That Deborah’s counterclaims are barred by limitations, quasi-estoppel, and the Trust instrument’s exculpatory clause is a factor we consider in looking at the equities in this case. For purposes of our discussion, a win on affirmative defenses is not on equal footing with a win on the merits. Moreover, neither the Declaratory Judgments Act nor trust code Section 114.064 are prevailing party statutes, and an award of attorney’s fees under those statutes is not dependent on a finding that a party substantially prevailed. It follows that Robert’s win does not require a determination that an award of attorney’s fees is equitable.

We acknowledge that the judgment orders “that the Trustee has properly performed his duties and responsibilities as the Trustee of the DPH Trust.” This language is found in the sentence discharging Robert from the duties of Trustee. This can only refer to Robert’s actions that were proven at trial which did not include his defenses against Deborah’s counterclaims, the rationale for the award of $587,585.

Robert complains that Deborah was the only one to contest his actions and her counterclaims cost the Trust an enormous amount of money, depleting the liquid assets to the point that the Trust cannot pay its share of Ruth’s mandatory distributions. He argues that this causes Ruth to bear the burden of the cost of this litigation. Therefore, he argues, Deborah should reimburse the Trust. We disagree. Robert and Ruth treated the four trusts as belonging to the remainder beneficiaries by naming the trusts after them, getting their permission to use funds for investments, and by making distributions to the remainder beneficiaries during Ruth’s lifetime. Robert engaged in very risky activities and lost a substantial amount of Trust money. Deborah had the right to disagree with and question Robert’s actions, and her claims were against him individually, alleging inappropriate actions. Robert did not have the right to insist on a release from Deborah. Robert was not cleared of any wrongdoing by a review of the merits. Considering all of the circumstances, we conclude that it was inequitable as a matter of law for the trial court to order Deborah to pay Robert’s $587,585 attorney’s fee bill for his defense of her counterclaims.

Id. The court of appeals also held that the trial court erred in ordering the beneficiary to pay the attorney’s fees incurred by their mother, who was brought into the suit by the trustee. Id. However, the court of appeals rejected the beneficiary’s complaint that the trustee should reimburse the trust for funds used to pay for his attorney’s fees. The court of appeals construed that complaint to be that the trial court erred in failing to order the disgorgement of that benefit. Because there was no finding of breach of fiduciary duty, the trial court did not err in failing to order disgorgement, a remedy for a breach of fiduciary duty. Id.

OCC Announces That It Will Consider Rule Changes On Fiduciary Capacity and Non-Fiduciary Custody Activities

Posted in Items of Interest

The OCC recently issued an advance notice of proposed rulemaking  (ANPR) regarding the scope of activities that are fiduciary in nature, as well as the requirements of non-fiduciary custody activities of national banks, federal thrifts and federal branches of foreign banks. In particular, the OCC is considering amending the definition of “fiduciary capacity” to include trust-related roles allowed under state law that do not involve investment discretion—for example the roles of “trust protector,” “trust director” and “distribution trust adviser.” The OCC is also exploring the possibility of issuing explicit regulations governing non-fiduciary custody activities, activities which are currently subject to non-regulatory guidance in OCC handbooks and bulletins. The ANPR has a comment deadline of June 28, 2019. The author gives attribution to the ABA for this announcement.

 

 

Court Found Trial Court Had Jurisdiction To Appoint Temporary Administrator Where A Will Contest Was Filed From A Muniment of Title

Posted in Cases Decided, Texas Court of Appeals

Selected by Texas Bar Today as a “Top 10 Blog Post”

In Chabot v. Estate of Sullivan, the decedent’s attorney probated a holographic will as a muniment of title. No. 03-17-00865-CV, 2019 Tex. App. LEXIS 2145 (Tex. App.—Austin March 20, 2019, no pet.). A claimant then asserted a claim that the decedent sexually abused him. The tort claimant and the decedent’s sister filed will contests. The court signed an order appointing a temporary administrator and then signed a subsequent order authorizing the administrator to settle the tort claimant’s claims. The party who would take under the will alleged that the order appointing the temporary administrator and approving the settlement were void. The court of appeals disagreed, holding that the orders were not void because the decedent’s sister and the tort claimant filed the will contests well within the two-year deadline under Texas Estates Code Section 256.204(a), no representative of the estate existed at the time as it was a muniment of title, and the trial court appointed the temporary administrator pursuant to its authority under Texas Estates Code Ann. Section 452.051(a). The court of appeals noted that the Estates Code provides at least two mechanisms for challenging a probate court’s order: a bill of review and a will contest. “Section 256.204, therefore, allows for the filing of a will contest within two years of the date the will was admitted to probate. It is undisputed that both Chabot and the Tort Claimants filed timely will contests.” Id. The court concluded:

Chabot and the Tort Claimants filed will contests well within the two-year deadline. See Tex. Estates Code § 256.204(a). No representative of Sullivan’s estate existed at the time, and the trial court appointed Deadman as temporary administrator pursuant to its authority under Section 452.051. See id. § 452.051(a). Chabot has not cited any authority prohibiting the trial court’s actions, and we are not aware of any. We therefore hold that the trial court’s order appointing Deadman was not void ab initio and that the court’s subsequent order authorizing Deadman to settle the Tort Claimants’ suits was not void on that ground.

Id.

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