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Court Affirmed A Trial Court’s Holdings On The Removal Of A Trustee, The Trustee’s Discretion To Construe A Trust, A Trustee’s Advice Of Counsel And In Terrorem Defenses, And The Termination Of A Trust

In re Estate of Bryant, a couple set up three trusts for their three children, Bill, Leslie, and Jane. No. 07-18-00429-CV, 2020 Tex. App. LEXIS 2131 (Tex. App.—Amarillo March 11, 2020, no pet. history). After the couple had both passed away, their son Bill assumed the role of trustee of three trusts: Irrevocable Trust, the Children’s Trust, and the Family Trust. Under the terms of the three trusts, following the couple’s deaths, trust assets were to be distributed to the three siblings equally, with the partial exception of the Family Trust assets. Under the Family Trust, Bill and his sister Leslie were to each receive one million dollars, after which any remaining assets would be distributed equally among all three children. This provision of the Family Trust, known to the parties as the “Advancement Clause,” stated:

During Settlors’ lifetimes, Settlors have made numerous gifts to their daughter, Jane A. Bryant, totaling at least One Million Dollars ($1,000,000). Settlors consider these gifts to be advancements on any property Jane would have received upon Settlors’ deaths from any trust created herein. Therefore, notwithstanding any previous provision herein, my Trustee shall consider and account for the advancements made to Jane in the amount of One Million Dollars ($1,000,000) before making any further distribution to Jane from any trust created herein.

Id. Bill then received three checks from life insurance companies: one, for $500,041.00, was payable to the Children’s Trust and two, totaling $510,938.82, were payable to the Family Trust. The insurance proceeds ended up in the Family Trust and Bill distributed $500,000 in Family Trust funds to himself and $500,000 in Family Trust funds to his sister Leslie.

Jane made a written demand that no further distributions be made until she was provided with documentation of her parents’ and the Family Trust’s assets, liabilities, income, and distributions. Jane then sued Bill, alleging breaches of fiduciary duty and seeking to remove him from his roles as executor of Harvey’s estate, trustee of the Family Trust, and co-trustee of the Jane A. Bryant Trust. Jane also sued Leslie and sought to remove her as successor trustee. Bill and Leslie filed counterclaims against Jane. Following a bench trial, the trial court entered its final judgment, from which all of the parties appealed.

The court of appeals first addressed an issue of whether the trial court erred in holding that a loan from the parents to Jane should have been accounted for in the Advancement Clause or whether it was still an asset of the Family Trust, as argued by Bill. The court addressed Bill’s argument that the trial court improperly invaded his discretionary authority provided under the trust document to construe the trust. The court disagreed:

Bill points out that the Family Trust gave him authority to interpret and manage the trust, specifically providing: “If and when in good faith any doubt arises as to the proper construction, interpretation, or operation of a trust established hereunder . . . or as to any other or additional matter involving the administration of a trust established hereunder or the rights of any beneficiary thereof . . . the Trustee is authorized to resolve those doubts as it deems equitable and proper, it being the Settlors’ intention to avoid suits for construction or instruction to the fullest extent possible.” Bill notes that the trial court found that the dispute arising from the parties’ conflicting viewpoints as to the meaning and scope of the Advancement Clause was “a legitimate one” and “brought in good faith.” According to Bill, this finding demonstrates that the trial court acknowledged that reasonable minds could differ. He argues that the trial court then erroneously usurped his authority as trustee to interpret the clause…

While Bill suggests that his exercise of discretion in determining the status of the Elsbeth loan under the Advancement Clause could not be disturbed by the trial court, Jane counters that the trial court had authority to ensure that Bill effectuated the purpose of the Advancement Clause. We agree with Jane. Even where a trustee is vested with broad discretion, courts may assert control over the trustee’s exercise of power “to prevent the frustration of the fundamental intent of the settlor” and compel the trustee’s performance of his duty. The Advancement Clause provides that the trustee “shall consider and account for the advancements made to Jane in the amount of One Million Dollars ($1,000,000) before making any further distribution to Jane from any trust created herein.” The language of the clause is mandatory, not discretionary. The trial court was vested with, and properly exercised, the authority to construe the trust to determine whether Bill complied with the Advancement Clause.

Id. Bill then argued that the trial court erred in including the debt as part of the Advancement Clause, but the court of appeals held that based on the drafting attorney’s testimony, that the trial court had discretion to so hold.

The court then addressed Bill’s issue concerning the trial court’s holding that he breached his fiduciary duties as trustee to the Children’s Trust and Irrevocable Trust when he distributed $500,000 each to himself and to Leslie from the Family Trust. The trial court held that Bill acted with reckless indifference in doing so, rather than distributing them under the terms of the Children’s Trust and Irrevocable Trust. Bill argued that his conduct was protected by an advice of counsel defense:

Bill contends that there was no “reckless distribution” because he was relying on advice of counsel… As the trustee of the three trusts, Bill had a fiduciary duty to Jane, a trust beneficiary. A fiduciary has the duty to avoid self-dealing, bad faith, intentional adverse acts, and reckless indifference about the beneficiary and her best interest, and cannot be relieved of liability for such conduct, even in cases where a trust instrument includes exculpatory language. Moreover, “[a] trustee commits breach of trust not only where he violates a duty in bad faith, or intentionally although in good faith, or negligently[,] but also where he violates a duty because of a mistake.” The trial court found that Bill’s purported reliance on the advice of counsel did not excuse his conduct, because of Bill’s “abject failure to provide appropriate information to counsel.” … The evidence at trial showed that when Bill received the insurance checks, he called Nelson, who represented Bill in the probate of Harvey’s will, for instructions on distributing the funds… Nelson testified that she did not know that the Children’s Trust and Irrevocable Trust existed and, if she had, she would have instructed Bill to deposit the checks into the trusts to which they were made payable…This evidence shows that, although Bill sought the advice of counsel in determining how to handle the insurance proceeds, he did so knowing that the attorney did not have critical information that could influence her instruction. Despite his knowledge that Nelson was unaware of the existence of the two other trusts, which had terms of distribution that differed from the Family Trust, Bill chose not to reveal those trusts to Nelson. “[G]ood faith is no defense where the trustee has arbitrarily overstepped the bounds of his authority, or where he has not exercised diligence or has acted unreasonably, or has been guilty of such gross neglect as no reasonably intelligent person would consider proper.” On this record, the trial court, as factfinder, could reasonably conclude that Bill did not exercise the care and diligence required of him as a fiduciary and that his claim of alleged good faith reliance on counsel was not reasonable. We therefore conclude that Jane adduced sufficient evidence to prevail on her claim that Bill failed to comply with his fiduciary duty to her in his handling of the insurance proceeds.

Id. (internal citations omitted).

Bill also argued that a provision of the Children’s Trust allowed him to make the transfers. The court stated:

Even if we were to assume that this provision authorized Bill to transfer funds from the Children’s Trust or Irrevocable Trust to the Family Trust, the provision does not relieve Bill of his fiduciary duty to Jane. As a fiduciary, Bill was obligated to act with integrity and fidelity, and to deal fairly and in good faith. Even a transaction that is legally permissible can give rise to a breach of fiduciary claim, as such a transaction may not be in the beneficiary’s best interest. As Justice Cardozo put it, “A trustee is held to something stricter than the morals of the market place [sic].”

Id. (internal citations omitted).

The court next reviewed whether the trial court erred in removing Bill as trustee of the trust created for Jane and then terminating that trust and distributing all of the proceeds to Jane. Section 113.082 of the Texas Property Code lists circumstances under which a trial court may remove a trustee, and Section 113.082(a)(4) provides that a trustee may be removed if “the court finds other cause for removal.” Id. The court found that the discord between the trustee and the beneficiary was sufficient ground to support the trial court’s removal of Bill:

Here, the trial court found that “other cause” existed for the removal of Bill as co-trustee of Jane’s trust. The trial court’s findings of fact, supported by the record, reflect that Bill and Jane were “battling siblings” with a “caustic relationship,” operating in an atmosphere of acrimony and mutual distrust. Rather than reiterate that evidence in detail here, suffice it to say that it supports the trial court’s determination that “other cause” exists to remove Bill as co-trustee.

Id. Regarding terminating the trust, the court also affirmed the trial court’s action:

Section 112.054 of the Texas Trust Code authorizes a court to terminate a trust on the petition of a trustee or beneficiary. Among other reasons, a trust may be terminated when (1) the purposes of the trust have been fulfilled or have become illegal or impossible to fulfill, or (2) because of circumstances not known to or anticipated by the settlor, the order will further the purposes of the trust. The purpose of the Jane A. Bryant Trust is to provide for Jane’s “health, education and maintenance needs.” The terms of the trust direct the trustee to “give primary consideration” to Jane when administering the trust. In addition, the trust gives the trustee discretion to distribute all of the income and/or principal of the trust when necessary or appropriate to provide for the beneficiary’s health, education, maintenance, and support. The trial court heard evidence that Jane has significant medical expenses totaling over $100,000, is unemployed, and has a terminal illness that prohibits her from working. Jane testified that she doesn’t have any retirement savings and that she has outstanding legal bills incurred in this litigation. Having sold her home, she now pays monthly rent. Jane testified that she sought a distribution from her trust to assist with these obligations. Bill maintains that Jane has “current, and significant, cash resources.” Jane testified that she had “about $350,000 worth of cash left.” The trial court found that “Jane’s circumstances justify the distribution of the entirety of her part of the Children[’]s Trust to her.” The trial court made this finding in light of evidence of the stated purposes of the trust; Jane’s health, maintenance, and support needs; the antagonistic relationship between Bill and Jane; Bill’s improper distribution of trust funds to himself and Leslie; and Bill’s reluctance to make distributions to Jane from her trust. Under these facts, we find no abuse of discretion in the trial court’s decision.

Id.

The court next addressed Bill’s argument that Jane violated the in terrorem clause of the Family Trust by filing this lawsuit and, therefore, she forfeited her interest under the trust. The court disagreed, stating that Jane did not contest or attack the validity of the trust and merely brought a declaratory judgment claim seeking the proper construction of the terms of the trust and a breach of fiduciary duty claim to determine whether Bill had administered the trust in accordance with those terms. “We do not construe the language of the in terrorem clause as prohibiting a beneficiary from instituting legal action against a trustee for breach of his fiduciary duties.” Id. “Because the nature of Jane’s suit was not to set the trust aside, but rather to compel the trustee to carry out the trust’s terms, we agree with the trial court that the in terrorem clause was not violated in this case.” Id.

The court also addressed Jane’s argument that the trial court abused its discretion in refusing to remove Bill as trustee of the other trusts. Jane sought Bill’s removal as trustee of all three trusts on the basis that he materially violated the terms of the trusts and/or his fiduciary duties as trustee. The trial court removed Bill as co-trustee of the Jane A. Bryant Trust, but declined Jane’s request to remove Bill as trustee of the Family Trust. The court stated:

Under the Texas Trust Code, a court may, in its discretion, remove a trustee under certain circumstances, including where “the trustee materially violated or attempted to violate the terms of the trust and the violation or attempted violation results in a material financial loss to the trust,” or where “the court finds other cause for removal.” … [T]he trial court found that Bill acted with reckless indifference in distributing the insurance proceeds to Leslie and himself, thereby breaching his fiduciary duties as trustee of the Children’s Trust and Irrevocable Trust. However, the trial court did “not find any other alleged act or alleged omission on the part of Bill in the management of the Family Trust to constitute a wrongful act or omission sufficient to justify his removal as Trustee of the Family Trust.” Based on the text of the statute authorizing removal of a trustee, it is clear that not every breach by a trustee requires the trustee’s removal. In this case, the trial court considered Bill’s mishandling of the insurance proceeds, which did not result in any financial loss to the trusts, and determined that this failure was insufficient to justify removal. Although Jane lodges multiple complaints about Bill’s performance as trustee, the trial court did not find, and the record does not support, any other breach. Under these circumstances, we cannot say that the decision not to remove Bill as trustee was an abuse of discretion.

Id.

The court also addressed several attorney’s fees and interest issues for both sides and affirmed the trial court on those issues as well. The court of appeals affirmed the trial court’s judgment in all respects.

Interesting Note: There are many interesting issues raised in this case, as is evidenced by the length of the blog post. One interesting issue is the ability to remove a trustee due to hostility with a beneficiary. The court did not adequately address this issue as mere hostility is not sufficient to justify removing a trustee. Not every conceivable conflict justifies removal. See, e.g., Kappus v. Kappus, 284 S.W.3d 831, 836, 838 (Tex. 2009) (good faith dispute between trustee/beneficiary and another beneficiary concerning the distribution of funds did not justify trustee’s removal even though he had a personal interest in and would gain from the distribution). Removal for a trustee having a tenuous relationship with the beneficiaries is not appropriate until the trustee is not able to properly serve. See, e.g., Ditta v. Conte, 298 S.W.3d 187, 190-91 (Tex. 2009). See also Akin v. Dahl, 661 S.W.2d 911, 914 (Tex. 1983); Moore v. Sanders, 106 S.W.2d 337, 339 (Tex. Civ. App.—San Antonio 1937, no writ). “Ill will or hostility between a trustee and the beneficiaries of the trust, is, standing alone, insufficient grounds for removal of the trustee from office.” Akin, 661 S.W.2d at 913. To remove the trustee for this reason, the trustee’s hostility to the beneficiaries must actually impede its ability to properly serve and administer the trust. See id. at  914. However, if it is the beneficiaries who create the hostility, the court should not remove the trustee: “Preservation of the trust and assurance that its purpose be served is of paramount importance in the law and this Court will not sanction the creation of hostility by a beneficiary in order to effectuate the removal of a trustee.” Id.

© 2020 Winstead PC.National Law Review, Volume X, Number 152

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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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