In In re XTO Energy Inc., a beneficiary, on behalf of the trust, sued an oil and gas operator for allegedly not paying sufficient funds to the trust and also sued the trustee for refusing to bring that claim. No. 05-14-01446-CV, 2015 Tex. App. LEXIS 7723 (Tex. App.—Dallas July 27, 2015, original proceeding). The trustee filed a special exception, requesting that the trial court dismiss the beneficiary’s claims as she did not have standing and failed to plead sufficient facts that would allow her to usurp the trustee’s authority to determine what legal actions to pursue on behalf of the trust. After the trial court denied the special exceptions, the trustee and operator filed a mandamus action.
The court of appeals first addressed a trustee’s authority to control litigation. The court noted that under the Texas Trust Code Section 113.019, a trustee is generally authorized to compromise, contest, arbitrate, or settle claims affecting the trust property. Further, the terms of trust document may limit or expand trustee powers supplied by the trust code. The trust document in this case provided that the trustee was “authorized to prosecute or defend . . . any claim of or against the Trustee, the Trust or the Trust Estate, to waive or release rights of any kind and to pay or satisfy any debt, tax or claim upon any evidence by it deemed sufficient, without the joinder or consent of any Unitholder.” The court held that this granted the trustee discretion to determine the course of litigation “upon any evidence by it deemed sufficient” and was exceedingly broad.
The court then discussed prior cases that generally held that a trust beneficiary may enforce a cause of action that the trustee has against a third party “if the trustee cannot or will not do so.” The court countered that: “Despite this broad language, a beneficiary may not bring a cause of action on behalf of the trust merely because the trustee has declined to do so. To allow such an action would render the trustee’s authority to manage litigation on behalf of the trust illusory.” The court found no Texas cases addressing the right of a beneficiary to enforce a cause of action against a third party that the trustee considered and concluded was not in the best interests of the trust to pursue. The court concluded: “Allowing a beneficiary to bring suit on behalf of a trust when the trustee has declined to do so amounts to the type of substitution of judgment that this rule was designed to prevent. Accordingly, the court should not allow such a suit to proceed unless the beneficiary pleads and proves that the trustee’s refusal to pursue litigation constitutes fraud, misconduct, or a clear abuse of discretion.” The court reviewed the underlying claim and held that the trustee’s decision, which was based on advice of counsel, was not the result of fraud, misconduct, or a clear abuse of discretion.
The court then addressed whether mandamus relief was appropriate. Mandamus may be available upon a showing that (1) the trial court clearly abused its discretion by failing to correctly apply the law and (2) the benefits and detriments of mandamus render appeal inadequate. The court already held that the trial court abused its discretion in not granting the special exception. The court also held that there was an important substantive right involved, which was the right of a trustee to determine whether the trust will pursue litigation. Mandamus relief was appropriate regarding the beneficiary’s claims against the oil and gas operator as those claims could not be cured by an amendment.
However, the court held that mandamus relief was not appropriate regarding the beneficiary’s claims against the trustee. The court held that the beneficiary improperly sued the trustee on behalf of the trust because only the trustee can do that. Unlike the beneficiary’s claims against the operator, however, this pleading defect could be cured by amendment. The court held that The Texas Trust Code provides a mechanism by which a beneficiary on his or her own behalf may sue a trustee. So, the beneficiary could sue the trustee on her own behalf regarding the trustee’s decision to not sue the operator.
The court held that the trustee’s request that the court of appeals order the trial court to dismiss the claims against the trustee because there was no likelihood of liability went to the merits of the beneficiary’s claims rather than her standing to bring them. The court concluded that allowing the beneficiary to proceed with her claims on her own behalf does not interfere with the trustee’s authority to control litigation on behalf of the trust. And to the extent the beneficiary’s claims against the trustee lacked merit, the trustee had an adequate remedy in the trial court and by appeal (summary judgment, trial, etc.).
Interesting Note: Beneficiaries often complain about a trustee’s refusal to bring claims. This case addresses three important issues: what control does the trustee have to bring those claims, when can a beneficiary bring claims on behalf of a trust, and what liability does the trustee have regarding its decision to not bring claims. The court correctly determined that, absent extreme circumstances, a trustee should be the sole party in control of the trust’s claims. However, the court also noted that the trustee may be liable to the beneficiaries for this decision if it is done with an abuse of discretion. Certainly, there are many factors that go into whether a trustee should or should not bring a claim. For example, the Restatement (Second) of Trusts Section 177 comment c provides that “It is not the duty of the trustee to bring an action to enforce a claim which is a part of the trust property if it is reasonable not to bring such an action, owing to the probable expense involved in the action or to the probability that the action would be unsuccessful or that if successful the claim would be uncollectible owing to the insolvency of the defendant or otherwise.” A trustee should document its file regarding the factors that it considered in making its decision to file a claim or not file a claim. Also, seeking the advice of counsel, and following that advice, can be a factor that supports a trustee’s decision.