In In re Pitts, the parties in a case settled and had a special needs trust drafted. No. 05-22-00542-CV, 2022 Tex. App. LEXIS 4143 (Tex. App.—Dallas June 16, 2022, original proceeding). The trial court entered a different trust. The parties filed a petition for writ of mandamus challenging the trust entered by the trial court. The court of appeals denied the mandamus because the parties never requested that the trial court enter the trust that they drafted:

Here, the record does not show that a demand was made to the trial court to withdraw its version of the trust—the act relators request this Court to compel. The record also does not show that relators raised their argument that the trial court abused its discretion by preparing its own version of the trust. See In re Rowes, No. 05-14-00606-CV, 2014 WL 2452723, at *1 (Tex. App.—Dallas May 30, 2014, orig. proceeding) (mem. op.) (noting that “[a] court cannot grant mandamus relief unless the error was raised in the trial court,” and that a party seeking mandamus “must direct the Court to where the argument was presented to the trial court”). Accordingly, we deny the petition for writ of mandamus based on relators’ failure to satisfy the demand requirement for mandamus relief.

Id.

In In re Guardianship of Margol, a mother named her son as her power of attorney agent and as a trustee of a trust in which she was a beneficiary. No. 05-21-00255-CV, 2022 Tex. App. LEXIS 4119 (Tex. App.—Dallas June 16, 2022, no pet. history). A daughter filed an application to name a guardian of her mother’s person and estate. The son opposed that application and filed one of his own. The trial court granted the guardianship of the mother’s estate, but not person, and also found that the son had an adverse interest and did not have standing. The son appealed. The court of appeals held as follows:

Section 1055.001(a) of the Texas Estates Code, titled “Standing to Commence or Contest Proceeding,” states that, except as provided in subsection (b), any person has the right to commence a guardianship proceeding or appear and contest a guardianship proceeding or the appointment of a particular person as a guardian. See Tex. Est. Code Ann. § 1055.001(a). However, a person who has interests adverse to a proposed ward or incapacitated person may not: “(1) file an application to create a guardianship for the proposed ward or incapacitated person; (2) contest the creation of a guardianship for the proposed ward or incapacitated person; (3) contest the appointment of a person as a guardian of the proposed ward or incapacitated person; or (4) contest an application for complete restoration of a ward’s capacity or modification of a ward’s guardianship.” Id. § 1055.001(b). A court “shall determine by motion in limine the standing of a person who has an interest that is adverse to a proposed ward or incapacitated person.” Id. § 1055.001(c). The estates code does not define what constitutes an interest adverse to the proposed ward; however, Black’s Law Dictionary defines “adverse interest” as “an interest that is opposed or contrary to that of someone else.” Adverse interest, Black’s Law Dictionary (11th ed. 2019)… Evidence sufficient to support a finding that a person is indebted to the proposed ward may not be sufficient to establish an adverse interest… However, evidence that a person engaged in self-dealing to the detriment of the proposed ward may establish an adverse interest.

Id. The trial court cited multiple instances of self-dealing by the son, including using over $300,000 in trust funds to pay off his personal credit cards. The court concluded: “the trial court’s copious unchallenged findings of fact, quoted extensively above, are supported by the record and are sufficient to show Stuart engage in repeated acts of self-dealing. Stuart’s acts of self-dealing are sufficient to establish his interests were adverse to Joyce’s interests. Accordingly, we conclude the probate court did not err by finding Stuart lacks standing pursuant to section 1055.001(b) of the estates code and by granting Marla’s motion in limine.” Id.

In Ackers v. Comerica Bank & Trust, N.A., a life-time beneficiary of a trust filed a claim for a declaration regarding whether certain contingent remainder beneficiaries were beneficiaries. No. 21-0233, 2022 Tex. LEXIS 997 (Tex. October 28, 2022)(Busby, J., Concurring). The trial court ruled that the claim was not ripe because the contingent remainder beneficiary class could not be determined until the life-time beneficiary died, which had not occurred. The court of appeals affirmed. The life-time beneficiary then sought Texas Supreme Court review. After briefing on the merits, the life-time beneficiary died, which then terminated the trust. The Court denied the petition for review after this death. However, one of the justices wrote an opinion concurring with the denial due to the death, but explaining that the lower courts incorrectly ruled on the ripeness issue.

The justice stated that the court of appeals’s conclusion on ripeness was “incorrect because it focuses solely on the Heirs’ contingent future interest in a remainder distribution of the ‘corpus of the trust’ upon Larry’s death, while ignoring their present rights as putative contingent remainder beneficiaries prior to the trust’s termination.” Id. “Because those present rights were also in dispute, the contingent nature of the future interests of Larry’s ‘then-living descendants’ does not render this suit unripe.” Id. The justice stated:

Although a contingent interest, by definition, is conditioned on the occurrence of an event that may or may not take place, this does not mean that every suit involving a contingent interest is unripe. Rather, the Trust Code allows “interested person[s]” to sue concerning a trust, and an interest can be “any interest, whether . . . present or future, vested or contingent.” … [T]he “contingent status” of an interest cannot render it insufficient because that conclusion “would essentially undo the [Trust Code’s] express grant of rights to parties with ‘contingent’ interests.” It would make no sense to hold that the Legislature, in enacting the Trust Code, gave trial courts jurisdiction over suits they can never hear because the nature of a contingent beneficiary’s interest renders them categorically unripe. Rather, chapters 111 and 115 of the Trust Code indicate that the mere involvement of contingent interests does not necessarily render a case unripe.

There are good reasons that the Trust Code authorizes contingent beneficiaries to sue: they have present as well as future rights that may be affected by a particular dispute. Among these are the right to sue for an accounting by the trustee and the right to sue to remove a trustee. By sending account statements to the Heirs, Comerica treated them as beneficiaries with present rights. The declaration Larry sought would resolve a real dispute regarding whether the Heirs are in fact beneficiaries with such rights.

A trustee owes fiduciary duties to the trust. One such duty is the duty of loyalty, which obligates the trustee to preserve the confidentiality of trust information. To facilitate a trustee’s compliance with its duties of disclosure as well as confidentiality, it is important that both trustees and beneficiaries have access to the judicial forum provided by the Legislature for resolving any disputes regarding present rights. A declaratory judgment regarding whether Comerica properly treated the Heirs as contingent beneficiaries would “actually resolve” this dispute.

Id.

 

It is common for wills or trusts to provide that the fiduciary has the right to construe the document. For example, a provision may state that the fiduciary shall resolve any question regarding the construction, interpretation, or operation of the will/trust or any matter involving the administration of the estate/trust or any rights of any beneficiary and that the executor’s/trustee’s decision shall be conclusive on all persons ever interested in the estate/trust. Is this provision enforceable, and if so, under what circumstances and to what extent?

Courts have upheld provisions in a will that authorize the executors to settle disputes among beneficiaries concerning the construction of the will or administration of the estate since at least 1828, when the United States Supreme Court decided Pray v. Belt, 26 U.S. (1 Pet.) 670 (1828).  But, from the beginning, courts have emphasized that the executors’ decisions are subject to judicial review and may be overridden when “an unreasonable use be made of the power, one not foreseen, and which could not be intended by the testator.” Id. at 680 As Chief Justice Marshall explained in Pray:

This power is given in the apprehension that [the testator] may have committed error. It is to be exercised in order to ascertain his intent in such cases. It certainly does not include the power of altering the will. It cannot be contended, that this clause would protect the executors in refusing to pay legacies altogether, or in paying to A, a legacy bequeathed to B, or in any other plain deviation from the will. In such case, what would be the remedy of the injury party? Is he concluded by the decision of the executors, or may he resort to a Court of Justice? But one answer can be given to these questions. So gross a departure from the manifest intent of the testator, cannot be the result of an honest endeavor to find that intent; and must be considered as a fraudulent exercise of a power, given for the purpose of preserving peace, and preserving expensive and frivolous litigation.

Id.

One treatise provides:

In the absence of a provision in a will authorizing the executor or trustee to construe it, beneficiaries are not bound by any construction given by the executor. A will may specifically provide for the submission of questions as to construction to certain designated persons, generally the executors or trustees. Under such provisions, the decision of the designated person as to any doubtful question is said to be binding on all parties in interest, unless it is made arbitrarily or in bad faith, or is clearly contrary to other provisions of the will. The umpire’s decision may be binding in such a case even though he has a personal interest in the result, as where the question for construction relates to executor’s fees. There must be a bona fide question in order to give the executor the right to exercise the power. It is said in some jurisdictions that, since construction is a matter for the courts, a legatee cannot be deprived of his right to judicial review of a clearly erroneous decision, and if such a case comes before the court it must construe the will correctly.

4 Page on Wills § 31.15.

Texas courts have enforced provisions giving the executor or trustee discretion to construe the document. Key v. Metcalf, No. 14-04-00782-CV, 2006 WL 348149, at *2 (Tex. App.—Houston [14th Dist.] Feb. 16, 2006, no pet.) (Will provisions making executors’ decision regarding will construction binding on all interested parties valid.); Grant v. Stephens, 200 S.W. 893, 896 (Tex. Civ. App.—Fort Worth 1917, writ ref d). One way to look at these types of provisions is that they are a dispute-resolution process that is binding on beneficiaries. See Rachal v. Reitz, 403 S.W.3d 840, 844 (Tex. 2013) (holding that “We enforce the settlor’s intent as expressed in an unambiguous trust over the objections of beneficiaries that disagree with a trust’s terms” in enforcing an arbitration clause in a trust dispute even though the trustee and the beneficiary did not sign the trust document: “[T]he settlor determines the conditions attached to her gifts, and we enforce trust restrictions on the basis of the settlor’s intent. The settlor’s intent here was to arbitrate any disputes over the trust.”). “The rule, as we conceive it, is, when an arbiter honestly and in good faith exercises his power and passes upon a doubtful question, either of law or of fact, his decision will not be revised by a court, notwithstanding the court, whose interposition is invoked, may think his decision erroneous.” Counts v. Holland, 107 S.W. 913, 916 (Tex. Civ. App.—1908, writ ref d).

Texas courts have held that the executor’s interpretation is binding on the beneficiaries if (1) “such a decision is fairly and honestly made” and (2) “the will is reasonably susceptible of such construction.” Nations v. Ulmer, 139 S.W.2d 352, 356 (Tex. Civ. App.—El Paso 1940, writ dism’d); see also Key v. Metcalf, No. 14-04-00782-CV, 2006 WL 348149, at *2 (Tex. App.—Houston [14th Dist.] Feb. 16, 2006, no pet.) (stating that the executor’s decision, “if fairly and honestly made and reasonably susceptible to the terms of the will, are binding and final on all interested parties”); Grant v. Stephens, 200 S.W. 893, 896 (Tex. Civ. App.—Fort Worth 1917, writ ref d) (stating that the executor’s decision must be “fairly and honestly made and reasonably to be predicated upon the terms of the will taken as a whole”); Couts v. Holland, 107 S.W. at 916 (“The rule . . . is, when an arbiter honestly and in good faith, exercises his power and passes upon a doubtful question, either of law or in fact, his decision will not be revised by a court.”). In short, regardless of whether executors/trustees act reasonably, honestly, and in good faith, their interpretation of the document must be “reasonably reached and deduced from the language used.” Grant, 200 S.W. at 896.

“[A]n executor acts in good faith when he or she subjectively believes his or her defense is viable, if that belief is reasonable in light of existing law.” Est. of Nunu, 542 S.W.3d 67, 81 (Tex. App.—Houston [14th Dist.] 2017, pet. denied) (quoting Lee v. Lee, 47 S.W.3d 767, 795 (Tex. App.     Houston [14th Dist.] 2001, pet. denied)). Good faith is established as a matter of law if reasonable minds could not differ in concluding from the undisputed facts that the person in question acted in good faith. See Medina Cty. Commit’s’ Court v. Integrity Grp., Inc., 944 S.W.2d 6, 10 (Tex. App.—San Antonio 1996, no writ); see also Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 164-65 (Tex. 2004) (holding that uncontroverted facts established as a matter of law that a litigant acted in good faith); Looper v. Hous. Crnty Coil. Sys., No. 14-07-00040-CV, 2007 WL 4200642, *7 (Tex. App.—Houston [14th Dist.] Nov. 29, 2007, pet. denied) (mem. op.) (same).

Those holdings are consistent with the executors’ fiduciary duty to administer the estate in accordance with the will’s terms.  Executors, who hold the estate’s property for the benefit of the devisees, owe the same fiduciary duties as trustees.  Humane Soc’y of Austin & Travis Cty. v. Austin Nat’l Bank, 531 S.W.3d 574, 577 (Tex. 1975); Geeslin v. McElhenney, 788 S.W.3d 683, 684-85 (Tex. App. Austin 1990, no writ). One of those duties is to “administer the trust in good faith according to its terms . . .” Tex. Prop. Code Ann. § 113.051. Additionally, the terms of a trust cannot limit that duty or “the power of a court, in the interest of justice, to take action or exercise jurisdiction.” See id. § 111.0035. Further, a trustee or executor may never act arbitrarily, and his discretion must be reasonably exercised to accomplish the purposes of the trust according to the settlor’s intent. State v. Rubion, 158 Tex. 43, 51, 308 S.W.2d 4, 9 (1957); In re Estate of Dillard, 98 S.W.3d 386, 395 (Tex. App. Amarillo 2003, pet. denied). The Texas Trust Code provides: “Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of terms such as “absolute,” “sole,” or “uncontrolled,” the trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.” Tex. Prop. Code Ann. § 113.029.

For example, in 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.). 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. 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 sued Bill, alleging breaches of fiduciary duty and seeking to remove him from his roles as executor and trustee.

The court of appeals first addressed the issue of whether the trial court erred in holding that a loan from the parents to Jane should have been accounted for in an 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. Bill noted 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.

Id. Bill noted 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.” He argued that these findings demonstrated that the trial court acknowledged that reasonable minds could differ, and that the trial court then erroneously usurped his authority as trustee to interpret the clause. The court of appeals disagreed:

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. Boyd v. Frost Nat’l Bank, 145 Tex. 206, 196 S.W.2d 497, 504 (Tex. 1946). 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.

Accordingly, in Texas, a clause providing a trustee/executor with discretion to interpret or construe a trust/will is enforceable, but there are limits to the clause and its enforcement. The trustee/executor must act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries and the interpretation or construction must be a reasonable one. But where the trustee/executor has a reasonable construction and acts in good faith, a trial court should not step in and usurp the trustee’s/executor’s decision even if the court disagrees with the trustee/executor.

In In re Estate of Hogan, a father executed a new will, leaving his estate to one of his sons (Harold) and disinheriting his other son (Gary). No. 11-20-00170-CV, 2022 Tex. App. LEXIS 3863 (Tex. App.—Eastland June 9, 2022, no pet. history). Gary filed a will contest, and the trial court heard same in a bench trial. After the court ruled against Gary, he appealed. Continue Reading Appellate Court Affirms Findings That Decedent’s Will Was Not A Product Of Undue Influence And That He Had Mental Capacity

In In re Eisenbise, the parties, a mother and son, argued about a trial court’s order requiring an executrix to produce certain documents pursuant to her duty to provide initial disclosures in a dispute concerning the grandmother’s estate. No. 10-22-00090-CV, 2022 Tex. App. LEXIS 3866 (Tex. App.—Waco June 8, 2022, original proc.). Continue Reading Appellate Court Denies Mandamus Regarding A Trial Court’s Initial Disclosure Order In An Estate Case

David Johnson presented his paper on “The More The Merrier: Issues Arising From Co-Trustees Managing Trusts” to the Tarrant County Probate Bar Association on September 16, 2022. This presentation addressed the benefits and drawbacks to co-trustee management, who can be a co-trustee, fiduciary duties, the duty to participate, the duty to cooperate, decision-making authority, delegation and directed trusts, the duty to disclose, deadlock issues, the duty to police co-trustees, the duty to sue co-trustees, and paying for attorney’s fees in co-trustee disputes.

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David F. Johnson co-authored a paper entitled “Voir Dire (In a Post COVID World)” with Jason Smith of the Law Offices of Jason Smith for the State Bar of Texas’s Business Disputes Course, held in Austin, Texas, on September 15-16, 2022. The paper covered the waterfront of voir dire topics in Texas litigation, including preservation of error, selecting the array, size of the jury, jury shuffle, questions to the venire, comments by venire members, challenges for cause, preemptory challenges, and Batson issues. Most trial attorneys will say that selecting a jury is the most important part of a trial. This paper provides important guidance to trial attorneys on what is allowed or not allowed in the selection process and what is necessary to preserve error.

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David Johnson presented his paper on “Fiduciary Compensation and Forfeiture” to the Southwest Association of Bank Counsel fall legal conference on September 15, 2022, in Fort Worth, Texas. David addressed a fiduciary’s duty of loyalty, statutory and common law precedent for compensation of trustees, factors for evaluating compensation, principal and income act, co-trustee issues, and the entitlement of a fiduciary to other benefits from the relationship.

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In Trench Tech Int’l, Inc. v. Tech Con Trenching, Inc., the son of an owner of a company, who was an employee, downloaded design plans and other information and went to another company who used that information. No. 4:19-cv-00201-O, 2022 U.S. Dist. LEXIS 100280 (N.D. Tex. June 6, 2022). The company and the company that owned it sued the son for trade secret misappropriation and breach of fiduciary duty. The defendant moved for summary judgment, and the federal district court denied the motion. Regarding the breach of fiduciary duty claim, the defendant argued that he was only an employee of the first company and not its owner and therefore did not owe fiduciary duties to the owner. Continue Reading Employee’s Fiduciary Duty May Not Be Limited To His Or Her Employer