July 4, 2022

Volume XII, Number 185

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July 01, 2022

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Court Holds That Trust Was Not Ambiguous and Provided the Trustee Discretion in Making Income Distributions

In Wells Fargo, N.A. v. Clower, a trustee filed suit for declaratory relief regarding its discretion to make income distributions. No. 02-20-00058-CV, 2021 Tex. App. LEXIS 7675 (Tex. App.—Fort Worth September 16, 2021, no pet.). The beneficiaries filed counterclaims for breach of fiduciary duty. The trial court ordered the trustee to pay into the registry of the court over $250,000 for attorney’s fees it had paid out of the trust and ordered the trustee to no longer pay its attorneys from the trust. The beneficiaries challenged the trustee’s standing and capacity as trustee, alleging that the trustee was only a de facto trustee and not a de jure trustee. After a three-day bench trial on the issue of standing, the trial court concluded in 2011 that Wells Fargo had standing as trustee, i.e., was the de jure trustee of the trust. The court noted that the beneficiary had also lost on the standing issue in federal court. Id. (citing Clower v. Wells Fargo Bank, N.A., 2:07-CV-510-TJW-CE, 2011 U.S. Dist. LEXIS 162702, 2011 WL 13196511, at *2 (E.D. Tex. Sept. 30, 2011); Clower v. Wells Fargo Bank, N.A., 259 F.R.D. 253, 254, 261-62 (E.D. Tex. 2009) (order granting class certification), order vacated, appeal dism’d, 381 Fed. Appx. 450 (5th Cir. 2010)).

The beneficiaries then moved for summary judgment, alleging that the trustee had to distribute all of the net income, that it had not done so in the amount of over $288,000, and sought damages, interest, and attorney’s fees. The trial court granted the motion, and the trustee appealed.

The court of appeals reviewed trust construction principals:

"The construction of a trust instrument is a question of law for the trial court, which must construe it to ascertain the settlors’ intent from the language used within the instrument’s four corners. All terms must be harmonized to properly give effect to all parts, and if possible, the court should construe the instrument to give effect to all provisions so that no provision is rendered meaningless. If a trust’s meaning is ambiguous, its interpretation becomes a fact issue for which summary judgment is inappropriate, and whether the meaning is ambiguous is a question of law for the court. We look to the law that was in effect at the time that the trust became effective—here May 23, 1969—but look to the words of the instrument first and then, if necessary, turn to statutory provisions to fill in any gaps."

Id. (internal citation omitted).

The court then reviewed several of the trust’s provisions concerning distributions. It stated that the trustee shall disburse all net income to the grantors. However, after the trust became irrevocable, it provided that:

"[T]hen the Trustee is authorized and empowered to pay the net income of each of said trusts, to or among the beneficiaries of that particular trust, as above named, or to any one of them, in such amounts and proportions as our Trustee in its sole and absolute discretion shall deem advisable, from time to time, without regard to equality of distribution… In exercising its discretion as to the amount (if any) of such net income which is to be paid to any of the aforesaid beneficiaries, our Trustee shall not be required to take into consideration any other income or property which is available to any such beneficiary from any other source."

Id. After the first to die of the grantors, the trust stated:

"[I]t is our desire that all of the balance of net income from the said [JCC Trust] and the [EAB Trust], after distributions are made to the surviving Grantor, be disbursed to all or any one of the beneficiaries of each of said trusts, as the Trustee may deem advisable. It being our intention that our children, [John and Edith], and their issue and descendents [sic], shall share in the benefits of their respective trusts, as soon as possible."

Id.

The court reviewed the trust’s provision wherein the settlors stated that they “desire[d]” for the trustee to distribute all of net income and held that it was precatory and not mandatory:

"Paragraph V states that after one of the grantors dies, the trustee could pay net income to the trust and sub-trust beneficiaries, with one exception, “in such amounts and proportions as [the] Trustee in its sole and absolute discretion shall deem advisable, from time to time, without regard to equality of distribution.” The exception was that an equal amount was to be taken from each of the four sub-trusts for any and all distributions made to the surviving spouse, with any income not so disbursed to be incorporated into the sub-trusts’ corpus, to continue to be held, administered, and distributed under the trust’s terms.

Paragraph VII likewise provides for the trustee, “in its sole and absolute discretion,” to make disbursements from the trust corpus for emergency or extraordinary expenses arising for the four children, their spouses, and their children, and it reiterates that “the Trustee’s discretion shall be conclusive as to the advisability of any such disbursement and the same shall not be subject to review.” Paragraph XIV(7) allows the trustee the final decision with regard to whether to treat “all receipts or other property received” by the trusts as either corpus or income, and (16) allows the trustee “[t]o deal in any manner as between the trusts” as it thought advisable. And Paragraph XXIII gives the trustee the authority to resolve doubts about the trust’s construction “in such manner as [it] shall deem equitable and proper” and provides that such decisions and actions would be final and binding “in the absence of bad faith.”

Paragraph IX provides that once the trust became irrevocable but a surviving spouse remained alive, then after distributions were made to the surviving spouse and payments made for the deceased grantor’s funeral expenses, cemetery lot, gravestone, and death taxes (and funds set aside for the surviving spouse—from all four trusts—and for the beneficiaries from their individual trusts, for funeral expenses, cemetery lots, gravestones, and death taxes), then the balance of net income in the JCC and EAB trusts could—but did not have to—be disbursed “as the Trustee may deem advisable,” i.e., with due consideration not only for John and Edith but also for “their issue and descend[a]nts.”

"In the context of the trustee’s discretion for classifying income and corpus set out elsewhere in the trust agreement, and other terms set out in the trust agreement—specifically Paragraphs III and XI—showing that the grantors knew how to use mandatory language if they wanted to compel the distribution of all net income, Paragraph IX appears to demonstrate nothing more than the grantors’ desire to show the two children from J.C.’s first wife that they would enjoy income from their inheritance sooner rather than later, albeit subject to the trustee’s discretion, distributions for their stepmother until her death, and the cost of various funeral and associated expenses of their father’s death and future funeral and associated expenses of their stepmother’s death.

In short, the trustee was allowed to determine when and how much net income would be paid to each sub-trust beneficiary and was allowed to treat trust income as part of the trust corpus to provide not only for the grantors’ children but also for the grantors’ grandchildren until the trust’s expiration. Within the context of the trust’s four corners, then, Paragraph IX is unambiguous and its “desire” language is precatory rather than mandatory."

Id. Thus, the court reversed the summary judgment and remanded to the trial court for further proceedings, including whether the trustee should be awarded attorney’s fees.

 

© 2022 Winstead PC.National Law Review, Volume XII, Number 63
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About this Author

David Johnson Financial Institution lLtigation Winstead Law Firm Fort Worth Texas
Managing Shareholder - Fort Worth

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...

817.420.8223
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