In Adams v. Regions Bank, beneficiaries sued a trustee for multiple claims, including breach of fiduciary duty, arising from the trustee’s seizure of collateral owned by the trust. 2016 U.S. Dist. LEXIS 1027 (S.D. Miss. January 6, 2016). Adams, the primary beneficiary, borrowed $3 million from the bank before it was trustee and signed an agreement pledging the bank’s stock as collateral. Later, the stock was transferred into a testamentary trust created by Adams’ father for her benefit. Later still, the bank became the trustee of that trust. When Adams defaulted on the loan, the bank/trustee proceeded to seize the stock it held in the trust. Adams and her children sued the bank for breaching its fiduciary duty in having a conflict of interest and in failing to diversify the trust’s assets. The bank/trustee filed a motion for summary judgment, which the district court granted.

The court first addressed whether Adams’ children had standing to pursue their claims. The trust document provided that Adams was the primary beneficiary, and that she had a power of appointment such that she could completely cut her children out of the trust. Adams’ children offered no evidence from which the court could find that they had a present right to the remainder of the trust upon Adams’ death, and the court found that they failed to make a sufficient showing that they had standing.

The court next addressed Adams’ claims, which included the trustee’s failure to: (1) comply with the terms of the spendthrift trust; (2) protect trust assets from creditors, including the trustee; (3) assure no self-dealing at Adams’ expense; (4) avoid an inherent conflict of interest; (5) decline the trustee relationship due to a conflict of interest; (6) follow the trustee’s internal controls; (7) protect trust assets, especially as the trustee’s stock was declining in value; (8) adopt and follow a suitable investment strategy; (9) properly manage trust assets; (10) act in the best interest of the beneficiaries; and (11) comply with statutory obligations.

Regarding the non-diversification claims, the court granted the trustee’s motion for summary judgment due to a limitations defense. Mississippi has a three-year statute of limitations for breach of fiduciary duty claims. The injuries unrelated to diversification stemmed from the trustee’s position as the successor trustee over a spendthrift trust that would later hold the trustee’s own stock. That relationship was established no later than April 2009. So the question the court had to answer was whether Adams had met her burden of showing that she did not know, and could not have reasonably discovered, these injuries in the time that passed from April 2009 to August 7, 2011, the date the statutory window closed. The court noted that Adams signed many of the documents that set up the conflict of interest situation and participated in litigation to clarify some of those transactions. The court held that she did have sufficient information to timely file suit, and that her breach of fiduciary duty claim regarding the non-diversification facts was barred by limitations.

Adams’ diversification claim was that the trustee should have sold its own stock and invested in other, better assets. Adams’ father’s will stated that the trustee was “vested with the [] additional power[] . . . To retain, with no obligation to sell, any property coming into their hands as Trustees under the terms of this instrument, including stock in AmSouth Bancorp. [now the bank], whether or not the same would be treated as legal for the investment of trust funds and regardless of any lack of diversification or risk, without being liable to any person for such retention unless otherwise specifically provided herein . . . .” The will also stated that Adams had the power to order the trustee to sell any assets, but that the power had to be exercised in writing. Adams later signed a retention agreement with the trustee that provided that the trustee could keep the stock in the trust until Adams provided written notice that it should be sold. Even though Adams stated that she told the trustee to sell the stock, she had no evidence that such a directive was done in writing. Adams argued that the retention agreement was void because the trust was a spendthrift trust and she was the beneficiary. The court held that “while the spendthrift provision may have prevented Adams from using trust assets to secure loans, it did not bar her from exercising her authority to direct the trustee to sell assets-the subject matter of the Retention Agreement.” The court held that the will and retention agreement both allowed the trustee to retain the stock and not diversify until Adams gave written notice to sell the stock. As that was never done, the court held that the trustee did not breach its fiduciary duty in keeping the stock in the trust.

The court rejected other claims arising from the trustee’s seizure of the stock. Adams argued that the bank/trustee was in wrongful possession of the stock because of its “inherent conflict of interest” and because “Regions the trustee failed to protect the beneficiaries from Regions the creditor.” The court held that the bank/trustee had a legal right to do so under the loan documents and under a prior judicial proceeding in which Adams participated and that Adams was estopped to argue that the seizure was inappropriate.

Interesting Note: There are a lot of interesting facts and legal issues in this case. The standing issue was important because the court disposed of most of Adams’ claims on the limitations defense as she knew of the conflict issue in time to file her suit in the limitations period. The trustee may not have had similar facts to support limitations as against Adams’ children, who may have been able to timely raise their claims. Under Texas law, there is some doubt regarding the court’s standing holding. Texas Property Code 115.011 provides that any interested person may bring an action under Section 115.001. See Tex. Prop. Code Ann. § 115.011. Section 115.001 provides that a district court has jurisdiction over proceedings to appoint or remove a trustee, determine the duties and liabilities of a trustee, make determinations of fact affecting the administration or distribution of a trust, and determine a question arising from the administration or distribution of a trust, require an accounting by a trustee, review trustee fees, and settle interim or final accounts. Id. at § 115.001. “Interested person” means “a trustee, beneficiary, or any other person having an interest in or a claim against the trust or any person who is affected by the administration of the trust.” Id. at § 111.004(7). “Beneficiary” means “a person for whose benefit property is held in trust, regardless of the nature of the interest.” Id. at § 111.004(2). Section 111.004(6) defines “interest” as “any interest, whether legal or equitable or both, present or future, vested or contingent, defeasible or indefeasible.” Id. at § 111.004(6). Accordingly, under Texas law, Adams’ children may have had standing, and limitations may not have barred their claims if they did not know about any of the facts that supported the fiduciary breach claims. See, e.g., Elliott v. Green, No. 05-94-01019-CV, 1995 Tex. App. LEXIS 3607, *11 1995 WL 437206, *4 (Tex. App.—Dallas 1995, no pet.) (not designated for publication) (remaindermen of a trust “had an interest in ensuring that the trustee committed no acts outside the Trust terms which would damage the Trust property” and had standing to assert a breach of fiduciary duty claim). Further, even if Adams’ claims were barred by limitations, in Texas she would still be able to assert a claim to remove the trustee as there are no limitations for such a claim. See Ditta v. Conte, 298 S.W.3d 187, 191 (Tex. 2009).

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Photo of David Fowler Johnson David Fowler Johnson

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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 The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary…

[email protected]

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 The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. Read More

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 action, RICO actions, usury, various tort causes of action, breach of fiduciary duty claims, and preference and other related claims raised by receivers.

David also has experience in estate and trust disputes including will contests, mental competency issues, undue influence, trust modification/clarification, breach of fiduciary duty and related claims, and accountings. David’s recent trial experience includes:

  • Representing a bank in federal class action suit where trust beneficiaries challenged whether the bank was the authorized trustee of over 220 trusts;
  • Representing a bank in state court regarding claims that it mismanaged oil and gas assets;
  • Representing a bank who filed suit in probate court to modify three trusts to remove a charitable beneficiary that had substantially changed operations;
  • Represented an individual executor of an estate against claims raised by a beneficiary for breach of fiduciary duty and an accounting; and
  • Represented an individual trustee against claims raised by a beneficiary for breach of fiduciary duty, mental competence of the settlor, and undue influence.

David is one of twenty attorneys in the state (of the 84,000 licensed) that has the triple Board Certification in Civil Trial Law, Civil Appellate and Personal Injury Trial Law by the Texas Board of Legal Specialization.

Additionally, David is a member of the Civil Trial Law Commission of the Texas Board of Legal Specialization. This commission writes and grades the exam for new applicants for civil trial law certification.

David maintains an active appellate practice, which includes:

  • Appeals from final judgments after pre-trial orders such as summary judgments or after jury trials;
  • Interlocutory appeals dealing with temporary injunctions, arbitration, special appearances, sealing the record, and receiverships;
  • Original proceedings such as seeking and defending against mandamus relief; and
  • Seeking emergency relief staying trial court’s orders pending appeal or mandamus.

For example, David was the lead appellate lawyer in the Texas Supreme Court in In re Weekley Homes, LP, 295 S.W.3d 309 (Tex. 2009). The Court issued a ground-breaking opinion in favor of David’s client regarding the standards that a trial court should follow in ordering the production of computers in discovery.

David previously taught Appellate Advocacy at Texas Wesleyan University School of Law located in Fort Worth. David is licensed and has practiced in the U.S. Supreme Court; the Fifth, Seventh, and Eleventh Federal Circuits; the Federal District Courts for the Northern, Eastern, and Western Districts of Texas; the Texas Supreme Court and various Texas intermediate appellate courts. David also served as an adjunct professor at Baylor University Law School, where he taught products liability and portions of health law. He has authored many legal articles and spoken at numerous legal education courses on both trial and appellate issues. His articles have been cited as authority by the Texas Supreme Court (twice) and the Texas Courts of Appeals located in Waco, Texarkana, Beaumont, Tyler and Houston (Fourteenth District), and a federal district court in Pennsylvania. David’s articles also have been cited by McDonald and Carlson in their Texas Civil Practice treatise, William v. Dorsaneo in the Texas Litigation Guide, and various authors in the Baylor Law ReviewSt. Mary’s Law JournalSouth Texas Law Review and Tennessee Law Review.

Representative Experience

  • Civil Litigation and Appellate Law