June 26, 2022

Volume XII, Number 177

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Texas Supreme Court Dismisses Claims By Co-Trustee And Beneficiary Due To Statute Of Limitations And Clarifies That An Unnamed Contingent Beneficiary Can Have Standing To Sue

In Berry v. Berry, one brother sued his other three brothers regarding the leasing of a family ranch. No. 20-0687, 2022 Tex. LEXIS 405 (Tex. May 13, 2022). The family ranch was owned by a limited partnership. The largest limited partner was a trust, and all four brothers were trustees of the trust. A family business, which the plaintiff was no longer an owner of, used the family ranch under an alleged oral lease. The plaintiff alleged that the oral lease was for too long a period and was for inadequate lease payments. The plaintiff filed suit in 2016 and complained about the time period of 2000-2007. The plaintiff sued in his capacity as a co-trustee of the trust and as a beneficiary of the trust. The trial court granted summary judgment for the defendants based on the statute of limitations. The court of appeals reversed. The Texas Supreme Court reversed the court of appeals on the statute of limitations issue.

The Texas Supreme Court discussed the statute of limitations thusly:

Generally, a claim accrues when the defendant’s wrongful conduct causes the claimant to suffer a legal injury. A legal injury occurs—and the statute of limitations begins to run—”when facts come into existence that authorize a party to seek a judicial remedy.” A cause of action accrues when the injury occurs, “even if the fact of injury is not discovered until later, and even if all resulting damages have not yet occurred.”

Id. The plaintiff argued that the discovery rule applied to extend the statute of limitations:

Kenneth seeks to avoid the limitations bar by invoking the discovery rule, under which “the statute of limitations does not begin to run until the claimant knew or should have known of facts that in the exercise of reasonable diligence would have led to the discovery of the wrongful act.” Stated a slightly different way, “[t]he discovery rule exception 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.” The discovery rule is a narrow exception that is only applied in “exceptional cases.” Applications of the rule “should be few and narrowly drawn.” Whether the plaintiff “should have known” of the facts giving rise to the claim is an objective inquiry. The question is whether the injury incurred is “inherently undiscoverable.” “An injury is inherently undiscoverable if it is by nature unlikely to be discovered within the prescribed limitations period despite due diligence.”

Id. The Court then discussed the concept of constructive notice based on the filing of a memorandum of the lease in 2008:

Also applicable here is the principle of constructive notice of property records. Kenneth does not dispute that the Memorandum of Lease, described above, was properly recorded in December 2008. By statute, “[a]n instrument that is properly recorded in the proper county is . . . notice to all persons of the existence of the instrument.” Tex. Prop. Code § 13.002(1). We have often held that accrual of a claim is not delayed when information that would reveal the existence of the injury is publicly available. For example, “when there is actual or constructive notice, or when information is readily accessible and publicly available, then, as a matter of law, the accrual of a fraud claim is not delayed.”

Id. The court cited to its earlier opinion of Archer v. Tregellas, 566 S.W.3d 281, 290-92 (Tex. 2019), wherein the Court “recognized that in general the discovery rule does not apply where publicly available information would reveal the facts giving rise to the plaintiff’s claim. However, we also recognized that this general rule must give way when the plaintiff had no reason to believe or suspect that an injury has occurred and therefore no reason to monitor property records.” Id.

Ultimately, the Court held that the plaintiff had sufficient concerns that he should have monitored the public records, and if he had done so, he would have discovered his claims in 2008:

As the former president of Berry Contracting, Kenneth was aware that Berry Contracting had leased the Ranch for many years before the lease was reduced to writing. Correspondence between Kenneth and his mother in 2000 and 2006 confirms Kenneth’s awareness that Berry Contracting was leasing the Ranch. And on several occasions, beginning in 2006, Kenneth asked Laura and his co-trustee brothers about leases or other agreements regarding use of the Ranch. They did not respond by providing him with the lease, but his inquiries indicate his awareness of the potential problem, and this awareness obligated him to make further inquiry on his own if he wanted to preserve a timely claim. Kenneth also knew or should have known that, despite the existence of leasing arrangements, no payments or insufficient payments were coming to the Partnership. Kenneth was a trustee of the Trust that owned 98% of the Partnership, which in turn owned the Ranch, the Partnership’s only asset. As a trustee, he was legally obligated to familiarize himself with the assets owned by the Trust and to protect those assets….

In concluding that the discovery rule delayed accrual of Kenneth’s claims despite the recorded Memorandum of Lease, the court of appeals relied primarily on our decision in Archer. But unlike Archer, this is not a case in which Kenneth had “no reason to believe” that his legal interests had been impaired and, therefore, no “reason to monitor” the courthouse records. To the contrary, Kenneth had abundant indications that a legal injury may have occurred, which gave him every “reason to monitor” the public records regarding the Ranch as part of a diligent inquiry into the matter.

Id.

The Court also discussed the fact that the plaintiff was a beneficiary of the trust:

Kenneth relies heavily on his status as a trust beneficiary owed fiduciary duties by his trustee brothers. He contends he should not be charged with notice of a lease that should have been provided to him by his fiduciaries. Kenneth is correct that the discovery rule can be invoked when “a person to whom a fiduciary duty is owed is either unable to inquire into the fiduciary’s actions or unaware of the need to do so.” But those owed a fiduciary duty are not altogether absolved of the usual obligation to use reasonable diligence to discover an injury. Although the presence of a fiduciary relationship can affect application of the discovery rule, it remains the case that “a person owed a fiduciary duty has some responsibility to ascertain when an injury occurs.” “[W]hen the fact of misconduct becomes apparent it can no longer be ignored, regardless of the nature of the relationship.”

Under these facts, the fiduciary duties owed to Kenneth by his brothers do not compel application of the discovery rule to save Kenneth’s otherwise time-barred claims. In addition to his beneficiary status, Kenneth was also a trustee with his own obligation to monitor the Trust’s finances, and it is clear he was aware of facts that obligated him to make further inquiry, which would have revealed the Memorandum of Lease.

Moreover, we would have to ignore the true nature of the relationships here to conclude that Kenneth was somehow lulled into inaction by virtue of his status as a trust beneficiary. Again, his relationship with his family can only be described as extremely litigious and hostile. Such hostility alone does not absolve any party of his fiduciary duties, but the question here is not merely whether Kenneth was owed fiduciary duties. The question is whether he was “unable to inquire into the fiduciary’s actions or unaware of the need to do so.” On that score, there is no indication in this record that Kenneth slept on his rights because he justifiably trusted his co-trustee brothers to fairly represent his interests. He knew the Ranch was being leased, and he knew or should have known that lease payments were absent or inadequate. He openly distrusted his brothers and had every reason to make further inquiry. He did not, and the mere fact that his brothers, as fiduciaries, should have better informed him of the lease terms does not absolve him of the obligation to exercise reasonable diligence by inquiring further. Had he done so, the lease terms were by no means inherently undiscoverable. They were recorded in the Memorandum of Lease seven years before Kenneth sued.

Id.

The Court also held that the plaintiff did not have standing to bring claims on behalf of the trust as he was only one of four trustees:

Kenneth first contends that, as a trustee, he can bring claims on behalf of the Trust against third parties. Kenneth is correct that a “trustee” is generally an “interested person” who may “bring an action under Section 115.001.” But the claims at issue seek to vindicate the rights of the Trust, and the Trust has four co-trustees, three of whom oppose Kenneth’s desire to assert the Trust’s rights as he has. The question, then, is how to determine who may bring claims on behalf of a trust when co-trustees disagree. The Legislature has provided an unsurprising default rule: “Cotrustees may act by majority decision.”

Naturally, the other trustee brothers do not want the claims asserted by Kenneth on behalf of the Trust to proceed. In fact, the Consent Agreement they signed after the lawsuit was filed released any such claims and stated that the other trustees believe it is not in the best interests of the Trust for such claims to proceed. Faced with what amounts to a 3-1 vote of the trustees against him, Kenneth has no unilateral power to act for the Trust in court against the wishes of a majority of the trustees.

Kenneth argues that trustees in his situation must have some recourse when, as alleged here, the other trustees have conspired with the non-trustee defendants to injure the Trust. But Kenneth does have recourse. He can seek removal of the other trustees, as he did in this suit. The defendants do not contest his authority to seek such relief. Further, the defendants do not dispute that Kenneth was permitted as a beneficiary to sue his brothers for breach of fiduciary duty. They oppose that claim on limitations grounds, not on the theory that Kenneth lacks the authority to bring it.

Id.

The Court also reversed the court of appeals on another issue. The plaintiff’s daughter had also sued the defendants as she was a contingent beneficiary of the trust. She was entitled to distributions once her father passed. The court of appeals held that as a contingent beneficiary, she did not have standing to assert her claims for removal of the trustees and damages. The Texas Supreme Court discussed standing to bring trust claims:

The Property Code provides detailed definitions of many of the relevant terms, and these definitions control our inquiry. An “interested person” includes a “beneficiary” as well as any other “person who is affected by the administration of the trust.” A “beneficiary” is “a person for whose benefit property is held in trust, regardless of the nature of the interest.” An “interest” includes “any interest, whether legal or equitable or both, present or future, vested or contingent, defeasible or indefeasible.” The Code further instructs that “[w]hether a person, excluding a trustee or named beneficiary, is an interested person may vary from time to time and must be determined according to the particular purposes of and matter involved in any proceeding.”

Id. The Court stated:

As Kenneth’s daughter, Chelsea is a beneficiary of the Trust. In general, this status alone authorizes her to “bring an action under Section 115.001.” Chelsea is not a “named beneficiary,” however. Only the four brothers are named. Because she is not named, Chelsea may or may not be authorized to bring a claim under section 115.011. Whether she can do so “must be determined according to the particular purposes of and matter involved in [the] proceeding.”

Given Chelsea’s interest in the Trust as described in the Trust Agreement, we cannot conclude that she is not “interested” in the matters her claims raise. The Partnership, which Chelsea alleges was owed the payments, is 98% owned by the Trust. Chelsea’s claims are, at bottom, that her uncles have robbed the Trust to enrich themselves. She alleges they did so either by underpaying rents owed to the Partnership, paying no rent at all, or misdirecting rental payments to other family businesses for their own profit. She seeks not only to remedy past financial injury to the Trust but for an accounting to establish the extent of the injury and removal of her uncles as trustees, which she believes will protect the Trust in the future. After examining the Trust Agreement, we conclude Chelsea has two interests in the Trust that are sufficient to make her an “interested person” for purposes of this litigation. First, Chelsea has a present financial interest in the Trust that could be affected by the suit and the relief it seeks. Section 1.3 of the Trust Agreement states that any demand beneficiary is entitled to make withdrawals from the Trust for her proportionate share of any contribution to the Trust… Second, Chelsea also has a contingent interest in distributions under Section 1.2 of the Trust Agreement… Chelsea’s claims allege financial impropriety significantly reducing the funds flowing to the Trust, and the contingent nature of her interest in distributions after her father’s death does not, on its own, make her insufficiently “interested” in such claims. Holding to the contrary would essentially undo the statute’s express grant of rights to parties with “contingent” interests.

Id. The Court held that the plaintiff’s daughter had standing to bring her claims. Regarding the statute of limitations argument that barred the plaintiff’s claims, the Court stated:

We address only whether the Property Code authorizes Chelsea to bring her claims, not whether those claims may succeed or fail for any other reason. When the district court ruled on the family’s statute-of-limitations motion, it had already dismissed Chelsea’s claims, so it did not assess whether Chelsea’s claims, like Kenneth’s, are time-barred. Neither party asks us to address the limitations question as to Chelsea, and that question remains open on remand.

Id. So, the Court reversed the court of appeals and affirmed the trial court’s dismissal of the plaintiff’s claims, but allowed the plaintiff’s daughter’s claims to proceed as she had standing.

Interesting Note: This case involves numerous interesting trust issues. First, the Court discusses the application of the discovery rule in trust disputes. Several courts have held that a trust beneficiary, as a party to whom a fiduciary duty is owed, has no duty of inquiry regarding a breach of fiduciary duty claim. That was premised on the concept that the trustee has a duty of disclosure of all material facts upon which a beneficiary may rely. Other courts applied the statute of limitations analysis to trust beneficiaries in essentially the same way as they would in an arms-length setting. The Texas Supreme Court seems to take a middle road and holds that “the presence of a fiduciary relationship can affect application of the discovery rule,” and therefore implies that the discovery rule should be given a more lenient view in fiduciary cases. But it also holds that a beneficiary cannot rely on the discovery rule “when the fact of misconduct becomes apparent it can no longer be ignored, regardless of the nature of the relationship.” So, when will that be? Maybe the Court will just know it when it sees it.

Moreover, the Court does not address the application of the statute of limitations regarding multiple claimants. If one beneficiary’s claims are barred by the statute of limitations, are all beneficiaries’ claims barred? If a trustee’s claims are barred by limitations, are the beneficiaries’ claims barred? If a beneficiary’s claims are barred due to limitations, does that bar a trustee’s or successor trustee’s claims? When does a successor trustee’s claims accrue, only after it takes office? How does virtual representation apply to limitations, if at all? There are many interesting unanswered limitations questions remaining in this area of the law.

There are two trust standing issues raised in this case. The first is who has standing to assert a claim on behalf of the trust and the second is who has standing to assert a claim as a beneficiary or interested party. Regarding who has standing to assert a claim on behalf of a trust, the Court  holds that only the trust’s majority co-trustees have that standing, and standing cannot be exercised by a dissenting co-trustee. That assumes that the trust document does not provide to the contrary. What does that mean? Well, it means that a dissenting co-trustee cannot sue a third party for claims on behalf of the trust. The Court did hold that the dissenting co-trustee has options, like suing to remove the majority co-trustees. If that is successful, then presumably the new co-trustees will vote to pursue claims. Although not mentioned, under the Texas Trust Code, a trustee can also sue for instructions and for orders to require other trustees to not breach a fiduciary duty. So, potentially, even though a dissenting co-trustee cannot initially sue a third party on behalf of the trust, it can sue to have a court instruct the majority co-trustees to vote to pursue claims or seek an order requiring such action.

The other standing issue is whether an unnamed contingent beneficiary has standing. The court of appeals involved in this case has held in several cases that contingent beneficiaries do not have standing. A simple reading of the Texas Trust Code would show that a beneficiary generally has standing, and a beneficiary is defined as having vested or contingent interests. The Texas Supreme Court analyzes how the claims would impact the contingent beneficiary in this case because she is not named in the trust. So, the opinion leaves room for an argument that an unnamed contingent beneficiary may not have a sufficient interest to be an “interested party” and have standing in a case with different facts.

© 2022 Winstead PC.National Law Review, Volume XII, Number 135
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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...

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