A recent bill (H.B. 1552) has been submitted that would provide a trustee release relief for transactions described in an accounting where a beneficiary fails to timely object to the accounting and there is no fraud, intentional misrepresentation, or material omission. A similar bill was introduced in 2021, but the Legislature did not pass it. The new bill provides:
Sec. 113.153. BENEFICIARY’S APPROVAL OF ACCOUNTING.
(a) This section does not apply to a trustee that is required to file regular accountings with a court by: (1) the terms of the trust; or (2) a separate court order.
(b) If a beneficiary, or the beneficiary’s guardian if applicable, does not object, in writing to the trustee or a court, to an accounting made under this subchapter before the 180th day after the date a copy of the accounting has been delivered to the last known address of the beneficiary: (1) the beneficiary is considered to have approved the accounting; and (2) absent fraud, intentional misrepresentation, or material omission, the trustee is released from liability relating to all matters in the accounting.
(c) This section may not be construed to require a trustee to deliver an accounting to a beneficiary.
If passed, the bill would take effect on September 1, 2023 and would apply to accountings delivered on or after the effective date. This provision is similar to the Uniform Trust Code Section 1005, which provides:
A beneficiary may not commence a proceeding against a trustee for breach of trust more than one year after the date the beneficiary or a representative of the beneficiary was sent a report that adequately disclosed the existence of a potential claim for breach of trust and informed the beneficiary of the time allowed for commencing a proceeding. A report adequately discloses the existence of a potential claim for breach of trust if it provides sufficient information so that the beneficiary or representative knows of the potential claim or should have inquired into its existence.
Uniform Trust Code Sec. 1005. Several states have adopted statutes similar to this provision. See, e.g., N.M. Stat. § 46A-10-1005; MA Gen L ch 10 § 1005, ORS § 130.820; Tenn. Code § 35-15-1005.
This statute does not address whether a trustee can voluntarily provide accountings and trigger the release relief in this statute or whether the proposed statute would only apply when a beneficiary demands an accounting under the Texas Trust Code. For example, if routine account statements provide the information required by the Texas Trust Code to be an accounting, does this trigger a beneficiary’s duty to review and object? The statute provides that it applies “to an accounting made under this subchapter.” The subchapter (Section 113.151-.152) presumes a demand for an accounting by a beneficiary or other interested party. Tex. Prop. Code § 113.151(a). It would make sense that if a beneficiary demanded an accounting and received one that the beneficiary should use extra care to review that which was demanded and then act upon it. However, many beneficiaries receive routine statements and never review them. Are those beneficiaries barred after six months if they do not object? One can see arguments on both sides of that issue.
The statute also does not address whether the release relief in the statute would apply when the beneficiary does not receive the accounting (lost in mail) or is incompetent to understand it (cannot read, cannot read English, lost sight, is mentally incompetent, etc.). It states that it applies when “the accounting has been delivered to the last known address of the beneficiary.” Who has the duty to prove mailing and receipt? Generally, a presumption of receipt arises when a party presents evidence that a document was placed in the United States mail with the proper address and sufficient postage. Southland Life Ins. v. Greenwade, 138 Tex. 450, 159 S.W.2d 854, 857 (Tex. 1942); Texaco, Inc. v. Phan, 137 S.W.3d 763, 767 (Tex. App.-Houston [1st Dist.] 2004, no pet.). Direct testimony that a letter was properly addressed, stamped, and mailed to the addressee, or a copy of the mailing or return receipt raises a presumption that the letter was received by the addressee in due course. See Phan, 137 S.W.3d at 767. The matters of proper addressing, stamping, and mailing may be proved by circumstantial evidence, such as the customary mailing routine of the sender’s business. Phan, 137 S.W.3d at 767. It is unclear at this point whether the general rules of mailing and receipt apply to this new proposed statute.
The statute would also only provide a qualified release. It states: “absent fraud, intentional misrepresentation, or material omission the trustee is released from liability relating to all matters in the accounting.” The first question that comes to mind is whether the fraud, intentional misrepresentation, or material omission has to relate to the accounting or is contained in the accounting? In other words, if a trustee sends an accounting that contains truthful information but the trustee otherwise commits fraud, intentional misrepresentation, or material omission, is it absolved from liability for those matters in the accounting? The statute is unclear.
Second, what do the terms “fraud, intentional misrepresentation, or material omission” mean? The first two terms seem somewhat redundant as fraud is partially defined as intentional misrepresentation. In re E.P., 185 S.W.3d 908 (Tex. App.-Austin 2006, no pet.) (citing WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 904 (1986)). To establish fraud, a party must prove (1) a material misrepresentation was made, (2) the representation was false, (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion, (4) the speaker made the representation with the intent that the other party should act upon it, (5) the party acted in reliance on the representation, and (6) the party thereby suffered injury. Hall v. Douglas, 380 S.W.3d 860, 870 (Tex. App.-Dallas 2012, no pet.). So, fraud has to be based on a misrepresentation that is either intentionally or recklessly made. Id. In other words, the term fraud is broader than and covers the term intentional misrepresentation. This would mean that if a trustee makes a statement that is false in an accounting either intentionally or recklessly, it is not released. Also, does an affirmative false statement have to be material? The statute provides that omissions must be material, but it does not expressly state that affirmative misrepresentations have to be material. It would seem odd that a trustee would not receive release relief due to an immaterial intentional misrepresentation when it receives release relief for an immaterial omission.
Finally, the term material omission alludes to fraud by nondisclosure or constructive fraud. Fraud by nondisclosure is considered a subcategory of fraud. Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex. 1997). To establish fraud by nondisclosure, a party must prove (1) the defendant failed to disclose facts to the plaintiff, (2) the defendant had a duty to disclose those facts, (3) the facts were material, (4) the defendant knew the plaintiff was ignorant of the facts and the plaintiff did not have an equal opportunity to discover the facts, (5) the defendant was deliberately silent when it had a duty to speak, (6) by failing to disclose the facts, the defendant intended to induce the plaintiff to take some action or refrain from acting, (7) the plaintiff relied on the defendant’s nondisclosure, and (8) the plaintiff was injured as a result of acting without that knowledge. Horizon Shipbuilding, Inc. v. Blyn II Holding, LLC, 324 S.W.3d 840, 850 (Tex. App.-Houston [14th Dist.] 2010, no pet.). A trustee has a duty to disclose all material facts that impacts a beneficiary’s interest in the trust. See Huie v. DeShazo, 922 S.W.2d 920, 923 (Tex. 1995). At least one court has held that a trustee breached a duty to disclose by failing to produce an accounting after demand was made. See Uzzell v. Roe, No. 03-06-00402-CV, 2009 Tex. App. LEXIS 5239, 2009 WL 1981389 (Tex. App.-Austin July 8, 2009, no pet.) (“Counsel for Roe further testified that Uzzell, though asked repeatedly, failed and refused to provide an account of the trust transactions as required by statute. This constituted a breach of Uzzell’s fiduciary duty to Roe to fully disclose all material facts about the trust.”). What is material or not material seems to be a fact question depending on facts of the case. However, that could be a question of law. Further, does this mean that a trustee is not released for any activities regarding the information that is disclosed where it has a material omission in an accounting? In other words, if a trustee provides an accounting that contains correct, but incomplete, information, is the trustee denied any release relief? Or, in that circumstance, is the trustee released for all of the activities around the correct information provided, but it is not released for the activities around omitted material facts? Once again, the statute is not clear.
If passed, there will likely be constitutional challenges to this statute. For example, there are public policy and constitutional limitations on lowering the statute of limitations in Texas (due process, due course of law, open courts, etc.). However, this proposed statute is similar to another Texas Statute that has passed constitutional muster. Texas Business and Commerce Code Section 4.406 creates a statute of repose and addresses a bank customer’s duty to discover and report unauthorized signatures. If a bank sends or makes available a statement of account, “the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized.” Tex. Bus. & Comm. Code §4.406(c). Further, “If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.” Id. If the customer fails to comply with these duties, then the customer is precluded from asserting against the bank that: 1) the customer’s signature or any alteration on the item if the bank also proves that it suffered a loss by reason of the failure, and 2) the customer’s unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank. Id. at §4.406(d). See also Compass Bank v. Calleja-Ahedo, 569 S.W.3d 104 (Tex. 2018). But Texas Business and Commerce Code Section 4.406 generally deals with a non-fiduciary customer/bank relationship. Trust accountings by their very nature deal with a fiduciary relationship and that may impact whether a beneficiary has the same duty of inquiry. Berry v. Berry, No. 20-0687, 2022 Tex. LEXIS 405 (Tex. May 13, 2022) (the presence of a fiduciary relationship can impact the application of the discovery rule on the statute of limitations).