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Court Affirmed Summary Judgment For Successor Trustees Due To A Clause Stating That They Had No Duty To Investigate Former Trustee’s Actions

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). The co-trustees filed a motion for summary judgment based on a clause in the trust that provided: “No successor Trustee shall have, or ever have, any duty, responsibility, obligation, or liability whatever for acts, defaults, or omissions of any predecessor Trustee, but such successor Trustee shall be liable only for its own acts and defaults with respect to the trust funds actually received by it as Trustee.” Id. The beneficiary appealed, and the court of appeals affirmed. The court stated that these types of clauses are generally enforceable: “The Trust Code expressly permits such clauses.” Id. The beneficiary argued that a cause exists for the co-trustees’ removal because they have “actual conflicts of interest” due to their participation with the former trustee. She contended that removal of the co-trustees because of their conflict of interest was a distinct claim from one alleging that they have liability for the former trustee’s alleged breaches of fiduciary duty and, therefore, was not subject to the exculpatory clause.

The court disagreed:

We reject this argument because it directly conflicts with the broad language in the exculpatory clause relieving the co-trustees from any “duty, responsibility, [or] obligation” for the “acts, defaults, or omissions” of Missi. While ordinarily a successor trustee has the duty to “make a reasonable effort to compel a redress” of any breaches by a predecessor, see Tex. Prop. Code § 114.002(3)—which presumably would include impartially evaluating whether to “fight” Benge in the appeal of the Consolidated Matter—the exculpatory clause in the Trust relieves the co-trustees of that duty, as permitted by the Trust Code. See id. §§ 111.0035(b), 114.007(c). The co-trustees cannot as a matter of law have a conflict of interest due to allegedly lacking the ability to be “impartial” about deciding whether or how to redress Missi’s alleged breaches when they have no duty to redress such breaches in the first instance. Accordingly, we hold that the trial court properly granted summary judgment on the basis of the Trust’s exculpatory clause.

Id. The court also held that the construction and application of the exculpatory clause was a question of law that the trial court had to determine:

[T]he trial court did not abuse its discretion in denying the motion because the effect of the exculpatory clause on the facts alleged—that is, whether it relieves the co-trustees of any duties vis à vis Missi’s alleged breaches—is a legal question that we review de novo, and thus the trial court had no discretion but to determine that summary judgment was proper on the basis of the clause. See Nowlin v. Frost Nat’l Bank, 908 S.W.2d 283, 286 (Tex. App.—Houston [1st Dist.] 1995, no writ) (“Construction of a trust instrument is a question of law for the trial court when no ambiguity exists.”); see also Walker v. Packer, 827 S.W.2d 833, 839 (Tex. 1992) (orig. proceeding) (“A trial court has no discretion in determining what the law is or in applying the law to the facts.”); Clifton, 107 S.W.3d at 760-61 (holding that because exculpatory clause was valid, and based on facts alleged, there was no issue of fact about whether trustee was exculpated).

Id. The court affirmed the trial court’s judgment for the co-trustee defendants.

Interesting Note: Normally, a successor trustee has the duty to “make a reasonable effort to compel a redress” of any breaches by a predecessor. Tex. Prop. Code § 114.002(3). So, can a trust abrogate a successor trustee’s liability for prior trustee’s actions? The Texas Trust Code provides that the terms of a trust prevail over the statutory terms except for certain enumerated instances. See id. at 111.0035(b). A trust may not limit Texas Property Code Section 114.007 to an exculpation term of a trust. Id. Section 114.007 provides:

A term of a trust relieving a trustee of liability for breach of trust is unenforceable to the extent that the term relieves a trustee of liability for: (1) a breach of trust committed: (A) in bad faith; (B) intentionally; or (C) with reckless indifference to the interest of a beneficiary; or (2) any profit derived by the trustee from a breach of trust.

Tex. Prop. Code § 114.007(a). So, in Benge, if the co-trustees breached their duties to review the conduct of the prior trustee in bad faith, intentionally, or with reckless indifference to the beneficiary’s interests or where the co-trustees acted with or without negligence where the trustee derived a profit, then the exculpatory clause would not be enforceable regarding the co-trustees’ liability.

The allegations were that the co-trustees acted intentionally, without good faith, and with a conflict of interest in not pursuing claims against the prior trustee because they had actually participated with the prior trustee in some of those breaches. The beneficiary argued that that was sufficient to create a fact issue on whether the application of the exculpatory clause was appropriate and on the underlying claim. However, the analysis does not end there.

Section 114.007(c) provides:

This section applies only to a term of a trust that may otherwise relieve a trustee from liability for a breach of trust. Except as provided in Section 111.0035, this section does not prohibit the settlor, by the terms of the trust, from expressly: (1) relieving the trustee from a duty or restriction imposed by this subtitle or by common law; or (2) directing or permitting the trustee to do or not to do an action that would otherwise violate a duty or restriction imposed by this subtitle or by common law.

Tex. Prop. Code § 114.007(c). This provision states that a settlor can relieve a trustee of a duty imposed by the Texas Trust Code, such as the duty to review prior a trustee’s conduct. So, under this provision, the co-trustees would be relieved of a duty to review the prior trustee’s actions, but the co-trustees’ liability may not be waived if they acted in bad faith, with intent, or with gross negligence. When could the co-trustees be liable when they have no duty? This is the issue that the court wrestled with in Benge and found for the co-trustees.

But the analysis should not have ended with Section 114.007(c). There is another important statutory provision that the court did not address. It provides that a trust term may not limit a trustee’s “duty to act in good faith and in accordance with the purposes of the trust.” Tex. Prop. Code § 111.0035(b)(4)(B); Martin v. Martin, 363 S.W.3d 221, 2012 Tex. App. LEXIS 2146 (Tex. App.—Texarkana Mar. 20, 2012, no pet.) (even though a trust provision allowed the trustee to have conflicts of interest, the provision was not enforceable as a jury found that the trustee did not act in good faith). There is no statutory exception to this duty of good faith. In Benge, if the co-trustees acted in bad faith, as alleged, in not pursuing claims against the former trustee then under this statutory provision the exculpatory clause may not be enforceable. In that circumstance, the trial court would have erred in enforcing the exculpatory clause and granting summary judgment for the co-trustees. There has been no authority on the interplay between Section 114.007(c) and Section 111.0035(b)(4)(B).

It is also troubling that the court in this case cited to Texas Commerce Bank v. Grizzle, 96 S.W.3d 240, 249 (Tex. 2002) in support of the application of the exculpatory clause. The Texas Legislature subsequently overruled the Grizzle opinion in 2005 by repealing Texas Property Code Section 113.059 and adding Sections 111.0035 and 114.007. See Act of May 12, 2005, 79th Leg., R.S., ch. 148, § 21, 2005 Tex. Gen. Laws 287, 293-94.

© 2020 Winstead PC.National Law Review, Volume X, Number 274
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About this Author

David Johnson Financial Litigator Winstead Law Firm

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the Texas Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. 

David's financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class...

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