In Bird v. Carl C. Anderson, a trust beneficiary sued a defendant for usurping a trustee’s role and breaching fiduciary duties as a de facto trustee. No. 03-21-00140-CV, 2021 Tex. App. LEXIS 5036 (Tex. App.—Austin June 24, 2021, no pet. history). The plaintiff complained that the defendant “reinvested the proceeds into ‘high-risk and non-diversified investments that exposed the trusts and [their] beneficiaries to inappropriate levels of risk,’ causing the trusts to substantially diminish in value; distributed assets to himself, Jennifer, and perhaps others to the Foundation’s detriment; and had Jennifer sign all of the transactional documents in her role as trustee even though she was and is incapacitated.” Id. The defendant filed a motion to dismiss under Texas Rule of Civil Procedure 91, arguing that there was no de facto trustee status in Texas. The trial court denied the motion, found that “Texas law recognizes the legal capacity of ‘de facto trustee’ in the context of the administration of private trusts,” but certified the issue for permissive appeal.
The court of appeals declined to accept the petition for interlocutory appeal. The court held that resolving that issue would not materially advance the termination of the litigation due to the existence of similar alternative theories:
John does not explain how the termination of this litigation would be materially advanced by a determination that a “de facto” trustee capacity does not exist. Instead, the related alternate theory the Foundation is pursuing against John-knowing participation in Jennifer’s alleged breach of fiduciary duty-is based on the same underlying factual allegations and would require substantially the same proof and impose the same liability as the direct claim against him for breach of fiduciary duty.
Id. Without opining on the merits of whether there is a de facto trustee status in Texas, the court did imply that the defendant may owe fiduciary duties depending on the facts of the case even though he was not formally appointed a trustee:
While the precise legal issue the trial court determined at this stage, per John’s motion, is the viability of the de facto trustee “capacity” in which the Foundation has sued John, the trial court has yet to make the more salient determination of whether John owed the beneficiaries a fiduciary duty-either as a “de facto trustee” or under equitable principles-which is a question of law for the court that turns on the specific facts yet to be developed rather than on the legal capacity in which John was sued, considering that “fiduciary duties are equitable in nature and generally not subject to hard and fast rules,” see National Plan Adm’rs, Inc. v. National Health Ins., 235 S.W.3d 695, 702 (Tex. 2007); see also Ritchie v. Rupe, 443 S.W.3d 856, 868 (Tex. 2014) (noting that “those acting as directors” owe fiduciary duty to corporation even if not formally appointed as such); Strebel v. Wimberly, 371 S.W.3d 267, 281 (Tex. App.-Houston [1st Dist.] 2012, pet. denied) (“Even where no fiduciary duties normally arise, they spring into existence when a limited partner actively engages in control over the operation of the business so as to create duties that otherwise would not exist.” (internal quotations and citations omitted)). Even if this Court were to determine that the “de facto” capacity does not exist, such determination would not materially advance the litigation’s termination because the issue of whether John owed the beneficiaries a fiduciary duty-in his individual capacity by allegedly and informally acting in the role of a trustee-would nonetheless remain a live issue.
Interesting Note: There is no precedent exactly on point in Texas on whether a person or entity that acts like a trustee owes fiduciary duties due to that conduct. “An ‘officer de jure’ is one who is in all respects legally appointed [or elected] and qualified to exercise the office; one who is clothed with the full legal right and title to the office; in other words, one who has been legally elected or appointed to an office and who has qualified himself [or herself] to exercise the duties thereof according to the mode prescribed by law.” Brown v. Anderson, 210 Ark. 970, 198 S.W.2d 188, 190 (Ark. 1946). There is precedent that an individual may become a de facto trustee by acting as same even though not officially named, appointed, or accepted as a trustee. Daniel v. Bailey, 466 P.2d 647 (Ok. Sup. Ct. 1979); see also Rivera v. City of Laredo, 948 S.W.2d 787, 794 (Tex. App.—San Antonio 1997, writ denied); Forwood v City of Taylor, 208 S.W.2d 670, 673 (Tex. Civ. App.—Austin 1948, no writ). For example, in Alpert v. Riley, the court of appeals held that the purported trustee did not properly accept that position under the trust document and was never properly acting as a trustee. 274 S.W.3d 277 (Tex. App.—Houston [1st Dist.] 2008, no pet.). It then later held that because the individual was not the de jure trustee, it was not entitled to any compensation. Id.
Courts in other jurisdictions have given their tacit approval of de facto trustees in various contexts. See, e.g., City of Pueblo v. Grand Carniolian Slovenian Catholic Union of the U.S. of Am., 145 Colo. 6, 358 P.2d 13, 16 (Colo. 1960); In re Woods, 215 B.R. 623, 627 (10th Cir. 1998) (citing In re Holiday Isles, Ltd., 29 B.R. 827, 829 (Bankr. S.D. Fla. 1983) (stating that “[c]ourts faced with a trustee’s failure to technically qualify have long recognized the concept of a ‘de facto’ trustee of a bankrupt estate”); Shackelford v. Lake, No. CIV-15-0218-HE, 2016 U.S. Dist. LEXIS 164199, 2016 WL 6993960, at *5 (W.D. Okla. Nov. 29, 2016) (“As his mother’s attorney-in-fact, as the manager of the LLC, and as de facto trustee of her trust-like device, Mr. Shackleford [sic] clearly owed his mother fiduciary responsibilities.” (internal citation and footnotes omitted)); United States v. Novotny, No. 99-D-2196, 2001 U.S. Dist. LEXIS 21795, 2001 WL 1673628, at *3 (D. Colo. Nov. 8, 2001) (“Novotny and his wife have served as appointed or de facto trustees during the entire existence of the Trusts.”); Yeast v. Pru, 292 F. 598, 603 (D.N.M. 1923) (“Therefore these trustees, if not de jure, were unquestionably de facto, trustees of the respective towns they assumed to represent and act for as such trustees.”); In re Irrevocable Trust of McKean, 144 Wn. App. 333, 183 P.3d 317, 321-22 (Wash. App. 2008); Allen Trust Co. v. Cowlitz Bank, 210 Ore. App. 648 (Ct. App. Ore. 2007); Creel v. Martin, 454 So.2d 1350 (Ala. 1984); In re Estate of Dakin, 58 Misc.2d 736, 296 N.Y.S.2d 742 (1968); In re Trust of Daniel, 1970 OK 34, 466 P.2d 647 (Okla. 1970); In re Bankers Trust, 403 F.2d 16, 20 (7th Cir. 1968).
The Seventh Circuit Federal Court of Appeals has enunciated the standard for becoming a de facto trustee as follows: “Two elements are essential before these trustees can be deemed de facto trustees: 1. The office or position must be assumed under color of right or title. 2. Those claiming de facto status must exercise the duties of the office.” In re Bankers Trust, 403 F.2d 16, 20 (7th Cir. 1968). The Seventh Circuit explained the first element by stating: “Color of right or title merely means ‘authority derived from an election or appointment, however irregular or informal, so that the incumbent be not a mere volunteer.’” Id. If one fails under the first element, then the de facto trustee does not have standing to act as a trustee and have standing to represent the trust. See, e.g., Haynes v. Transamerica Corp., No. 16-cv-02934-KLM, 2018 U.S. Dist. LEXIS 8465 (D.C. Co. January 18, 2018) (trustee who was a mere volunteer did not have standing to represent trust). A de facto trustee has the same fiduciary duties that a de jure trustee has. In re Holiday Isles, Ltd., 29 B.R. 827 (Bankr. S.D. Fla. 1983) (“Likewise, de facto bankruptcy trustees cannot interpose as a defense to a suit brought against them based upon their actions as trustees the fact that they never qualified as de jure trustees.”). In this definition of de facto trustee, the court is really concerned with whether the de facto trustee has standing to make decisions for the trust that are binding and potentially whether the de facto trustee should be compensated. W.J. Services, Inc. v. Commercial State Bank of El Campo, 990 F.2d 233 (5th Cir. 1993); In re Lake Region Operating Corp., 209 B.R. 637 (Bankr. M. D. Pa. 1997); Crocker-Citizens National Bank v. Younger, 4 Cal 3d 202, 93 Cal Rptr 214, 481 P.2d 222 (1971)
Even regarding a “volunteer” trustee, someone who assumes the role of trustee without doing so under color of right or title, the “volunteer” trustee should still owe fiduciary duties. Burton v. Dolph, 89 Va. Cir. 101 (Cir. Ct. Va. 2015) (finding Virginia did have de facto status trustees); Pannill v. Calloway, 78 Va. 387, 395 (1884) (“[I]f a person assume[s] to act as trustee, he shall be treated in equity as a trustee, whether duly appointed as trustee or not.”). Some courts call this position trustee de son tort. Stephan v. Equitable S & L Assn., 268 Ore. 544, 559, 522 P.2d 478 (1974) (“A person may become a trustee by construction by intermeddling with, and assuming the management of, trust property without authority. Such persons are trustees de son tort. During the possession and management by such constructive trustees, they are subject to the same rules and remedies as other trustees; and they cannot avoid their liability by showing that they were not, in fact, trustees * * *.”); Allen Trust Co. v. Cowlitz Bank, 210 Ore. App. 648 (Ct. App. Ore. 2007); Matter of Sakow, 146 Misc 2d 672[Sur Ct, Bronx County 1990]. Derived from French Law, a trustee de son tort is “[s]omeone who, without legal authority, administers a living person’s property to the detriment of the property owner.” Black’s Law Dictionary (10th ed. 2014). Otherwise there is a similar term called “trustee ex maleficio,” which means: “a person treated as a trustee because guilty of wrongdoing and compelled to account as though he were a trustee for property to which he has legal title for the benefit of those injured and equitably entitled to it.” www.merriam-webster.com.
In Texas, there have been a handful of cases that reference “trustee de son tort” and “trustee ex maleficio.” There are also similar concepts in Texas. “A constructive trust is an equitable, court-created remedy designed to prevent unjust enrichment.” KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70, 87 (Tex. 2015) (citing Meadows v. Bierschwale, 516 S.W.2d 125, 131 (Tex. 1974) (“Constructive trusts, being remedial in character, have the very broad function of redressing wrong or unjust enrichment in keeping with basic principles of equity and justice.”)). Though “breach of a special trust or fiduciary relationship or actual or constructive fraud” is “generally” necessary to support a constructive trust, but “[t]he specific instances in which equity impresses a constructive trust are numberless—as numberless as the modes by which property may be obtained through bad faith and unconscientious acts.” Id. See also Kinsel v. Lindsey, 526 S.W.3d 411, 425-26 (Tex. 2017). A constructive trustee is not a de jure trustee and may not even necessarily be a de facto trustee, but he or she is held to a trustee status and has fiduciary duties regardless of his or her will in the matter. Lotus Oil Co. v. Spires, 240 S.W.2d 357 (Tex. Civ. App.—El Paso 1950, writ refused n.r.e.). See also Rodriguez v. Rodriguez, No. 04-07-00252-CV, 2007 Tex. App. LEXIS 8802 (Tex. App.—San Antonio November 7, 2007, no pet.) (constructive trustee owed fiduciary duties and was liable for self-dealing); Rosenthal v. Rosenthal, No. 01-99-00058-CV, 2001 Tex. App. LEXIS 7540 (Tex. App.—Houston [1st Dist.] November 8, 2001, pet. denied) (same). Accordingly, in Texas, if a person takes control over trust property and manages the trust in any material respect, equity should impress upon him or her the fiduciary duties of a de jure trustee.
The issue of de facto trustee status was squarely raised in Clower v. Wells Fargo Bank, N.A., 2010 U.S. Dist. LEXIS 138795 (E.D. Tex. October 18, 2010) (magistrate’s recommendation that was later accepted by the court). In Clower, a trust beneficiary sued the trustee, claiming that the trustee was not the same entity that was named in the trust document, that it was acting as a de facto trustee but was not the de jure or legitimate trustee. Id. The plaintiff claimed that the defendant breached fiduciary duties as a de facto trustee. The district court denied the defendant’s motion to dismiss, holding that the complaint alleged sufficient facts to show that the defendant owed fiduciary duties and breached those duties by failing to disclose the prior allegedly incorrect transactions regarding the trustee appointments. Id. The court also held that the plaintiff had properly pled a claim for fee forfeiture. Id. This federal case clearly supports the position that a party can be a de facto trustee and owe fiduciary duties even though the party is not the de jure or legitimate trustee. Interestingly, in Clower, the plaintiff had sought, and the district court allowed, class certification for a class of beneficiaries from multiple trusts administered by the trustee. That class certification order was later voided by the court of appeals. Later, the trustee/defendant filed a motion for summary judgment proving up the various transfers of the trustee appointment over the decades, proving it was the de jure trustee, and the district court granted that motion, terminating the case for the defendant/trustee. The author was counsel for the trustee/defendant in the Clower federal court case.