Breach Of Fiduciary Duty Claim Against Trustee Based On Self-Dealing Real Estate Investment Was Dismissed Due To Limitations, Quasi-Estoppel, And An Exculpatory Clause, But The Attorney’s Fees Award Against The Beneficiary Was Reversed Where The Award Was Not Equitable

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In Goughnour v. Patterson, a beneficiary sued a trustee based on a failed real estate investment. No. 12-17-00234-CV, 2019 Tex. App. LEXIS 1665 (Tex. App.—Tyler March 5, 2019, no pet. history). In 2007, the trustee of four trusts invited his mother, the primary beneficiary, and his siblings, also beneficiaries, to participate in a real estate investment that he created by allowing the use of trust funds. They all agreed, and the trustee transferred a total of $2.1 million from the four trusts to the real estate investment entity. The project failed, and the trusts lost the $2.1 million. In 2011, the trustee filed suit to resign and obtain a judicial discharge. A sister filed a breach of fiduciary duty claim based on this failed investment.

After a bench trial, the court rendered judgment approving the trust accounting, approving the trustee’s administration, and holding that the trustee, individually and in his capacity of trustee, was “completely discharged and relieved of all duties” and was “fully and completely released and discharged from any and all claims, duties, causes of action or liabilities (including taxes of any kind) relating to any and all actions or omissions in connection with his administration of the DPH Trust.” Id. The court ordered that the successor trustee pay all outstanding legal and accounting fees incurred by the trust, appointed a successor trustee, and relieved the successor trustee of any and all duty, responsibility, or authority to investigate the actions or inactions of the trustee as prior trustee. The court further ordered that the sister take nothing on all her claims and ordered her to pay attorney’s fees for the trustee. The sister appealed.

The court of appeals issued a very lengthy and detailed opinion affirming in part and reversing in part the trial court’s judgment. The court of appeals first addressed the trustee’s affirmative defense of the statute of limitations:

A suit for breach of fiduciary duty or fraud must be brought no later than four years from the date the cause of action accrues… A cause of action accrues when facts have come into existence that authorize a claimant to seek a judicial remedy… When applicable, the discovery rule 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… A person to whom a fiduciary duty is owed is relieved of the responsibility of diligent inquiry into the fiduciary’s conduct, so long as the relationship exists. However, once the fact of misconduct becomes apparent it can no longer be ignored, regardless of the nature of the relationship.

Id. (internal citations omitted). The beneficiary claimed that she should not have known about the claim until 2011. The court of appeals disagreed:

The Bighorn transaction occurred on August 30, 2007. To be timely, Deborah’s claims for breach of fiduciary duty and fraud, which are based on that transaction, should have been filed by August 30, 2011. The evidence shows that, by August 30, 2011, Deborah knew that the structure of the transaction that occurred was not the one Robert described in July 2007; the housing market was struggling; one of the Bighorn builders withdrew from the project and the other stopped accepting new lots; by mid-August 2009 they ceased construction, the bank started foreclosure proceedings, and Bighorn filed for bankruptcy; and by March 2011, all of the Trust’s investments were lost with no possibility of recovery of that money. In his March 28, 2011 email, Robert stated that the Trust loaned money to Bighorn for a preferred returns interest. The emails Robert sent contained sufficient facts giving rise to her causes of action. Additionally, by the end of 2008, Deborah was angry with Robert because of the Bighorn project, and she had already asked Robert to resign from her trust before that date. We disagree with Deborah’s assertion that some of her allegations constitute breaches of fiduciary duty separate from the Bighorn transaction. Her allegations that Robert lied about the transaction, failed to provide pertinent information about the transaction, and structured the transaction differently than described in his initial email are all facets of the allegation that Robert breached his fiduciary duty by misusing Trust assets for the Bighorn project. Therefore, these allegations share the same accrual date, August 30, 2007. We conclude that the statute of limitations ran on Deborah’s breach of fiduciary duty and fraud claims on August 30, 2011.

Id. The court of appeals held that the statute of limitations also applied to the beneficiary’s diversification and defalcation claims as those were the same as the her breach of fiduciary duty claim. Id.

The court of appeals also affirmed the application of the trustee’s affirmative defense of quasi-estoppel based on the beneficiary’s prior consent to trust investments in other real estate investments:

The affirmative defense of quasi-estoppel precludes a party from asserting, to another’s disadvantage, a right inconsistent with a position she has previously taken. The doctrine applies when it would be unconscionable to allow a party to maintain a position inconsistent with one in which she acquired or by which that party accepted a benefit. The record shows that Robert initiated approximately fifty real estate transactions in which he invested Trust assets. Deborah agreed to all of these transactions. All transactions except Bighorn were successful and the Trust benefitted from those prior investments. Therefore, Deborah’s claims for breach of fiduciary duty are barred by the affirmative defense of quasi-estoppel.

Id. (internal citations omitted).

The court of appeals also affirmed the trustee’s affirmative defense of an exculpatory clause in the trust, which negated his liability:

Generally, subject to the Trustee’s duty to act in good faith and in accordance with the purposes of the Trust, the terms of the Trust prevail over provisions of the Texas Trust Code. A term of a Trust exculpates a Trustee from liability if the Trustee’s breach of trust is not committed in bad faith, intentionally, or with reckless indifference to the interest of a beneficiary. Paragraph C(5) of the Trust provided that the Trustee shall not “at any time be held liable for any action or default of himself or his agent or of any other person in connection with the administration of the trust estate, unless caused by his own gross negligence or by a willful commission by him of an act in breach of trust.” Such an exculpatory clause has been held effective in exonerating a trustee from liability for losses when no evidence of gross negligence was shown.

To prove gross negligence, a plaintiff must show (1) an act or omission that, when viewed objectively from the defendant’s standpoint at the time it occurred, involved an extreme degree of risk, considering the probability and magnitude of the potential harm to others and (2) that the defendant had an actual, subjective awareness of the risk but proceeded with conscious indifference to the rights, safety, and welfare of others. Under the first element, an “extreme risk is not a remote possibility of injury or even a high probability of minor harm, but rather the likelihood of serious injury to the plaintiff.” To determine if acts or omissions involve extreme risk, we analyze the events and circumstances from the defendant’s perspective at the time the harm occurred, without resorting to hindsight. Under the second element, “actual, subjective awareness” means that “the defendant knew about the peril, but its acts or omissions demonstrated that it did not care.” Circumstantial evidence is sufficient to prove either element.

Id. The court of appeals affirmed the trial court’s summary judgment on this ground due to the trustee’s testimony about his due diligence about the investment, the history of doing successful real estate investments, the consent of the other beneficiaries, his capacity as beneficiary and his loss associated with the investment: “There is no evidence that Robert had an actual, subjective awareness of the risk of a coming financial crisis but nevertheless proceeded with conscious indifference to the rights, safety, and welfare of the Trust, his mother, or his sisters. Thus, there is no evidence of gross negligence or a willful commission by Robert of a breach of trust. We conclude that Robert showed as a matter of law that Deborah’s claims were barred by the Trust instrument’s exculpatory clause.” Id.

The beneficiary also complained that the trial court should not have discharged the trustee from liability. The court of appeals affirmed the trial court’s discharge related to an accounting:

Whether a Trustee’s resignation should be accepted is within the discretion of the trial court. The trust code and the language of the trust instrument determine the Trustee’s powers and duties. The trust code requires that a written statement of accounts shall show (1) all trust property that has come to the trustee’s knowledge or into the trustee’s possession, (2) a complete account of receipts, disbursements, and other transactions regarding the trust property, (3) a listing of all property being administered, with a description of each asset, (4) the cash balance on hand with the name and location of the depository where the balance is kept, and (5) all known liabilities owed by the trust.… The Trust’s accountant testified that the accounting reflects the receipts, disbursements, payment of expenses, distributions, transfers, land sales, and all financial transactions that occurred in the DPH Trust. He stated that the accounting fully and fairly discloses all financial matters relating to the administration of the Trust from 2002 through 2016.

Robert testified regarding the documents that he provided to Deborah showing all financial transactions involved in the administration of the Trust. He presented monthly statements itemizing investment accounts, including their gains, losses, and values, as reported by UBS Financial Services, Inc., for 2002 through 2016 and showing the cash balance on hand. He also presented spreadsheets showing receipts and disbursements from the DPH Trust from 2002 through 2016, documents showing cash available to the DPH Trust, as well as income tax returns for the DPH Trust for 2002 through 2015. The record also contains closing statements relating to the sale of real estate.

Robert testified that each of the four trusts started with $115,000 in 1989. Since 2002, when he became Trustee, till the time of trial, he paid Ruth close to a million dollars. He estimated that the value of the DPH Trust at the time of trial was $1.2 or $1.3 million. The record shows that all investments Robert made on behalf of the Trust, with the exception of the Bighorn investment, were profitable. Additionally, Robert sent emails to Ruth and his siblings describing the current financial picture of the Trust and updating them on Trust activities. Based on the evidence presented at the hearing on Robert’s petition for resignation, we conclude the trial court did not abuse its discretion by determining that Robert properly administered the Trust and properly performed his duties, including providing the beneficiaries with a complete accounting, and the court properly approved Robert’s administration.

Id. The court of appeals also held that the trial court did not give a declaration regarding a trustee’s non-liability for tort causes of action, but rather adjudicated the beneficiary’s failed tort claims:

In the final judgment, the court ordered that Robert is fully and completely released and discharged from any and all claims, duties, causes of action or liabilities relating to any and all actions or omissions in connection with his administration of the DPH Trust. Deborah complains that this order constitutes an abuse of discretion. She states that approving a final accounting does not adjudicate a trustee’s “potential tort liability” and that a trustee cannot use a declaratory judgment action to determine “potential tort liability.” The court’s order does not include this phrase, and she does not explain how the order addresses “potential tort liability.” We conclude that it does not.… In response to Robert’s petition for resignation as Trustee, Deborah filed counterclaims alleging various theories of liability. Those counterclaims were disposed of by partial summary judgments prior to the trial before the court at which the issues of the accounting and Robert’s discharge were heard. The final judgment incorporated the prior summary judgments, specifically ordering that Deborah take nothing on all her claims against Robert. Considering the literal meaning of the language used, we conclude that the final judgment’s reference to a release of liability contemplates the previously determined counterclaims, not “potential tort liability.” As previously explained, the trial court’s rulings on Deborah’s counterclaims were proper. Therefore, the trial court did not abuse its discretion by releasing Robert from liability for his actions or omissions in connection with his administration of the Trust.

Id.

The beneficiary also complained about the trial court ordering her to reimburse the trust in the amount of $587,585 for the trustee’s attorney’s fees. The court of appeals set forth the following standards:

An award of reasonable and necessary attorney’s fees that are “equitable and just” is allowed under the Uniform Declaratory Judgments Act and the Texas Trust Code. Whether an award of attorney’s fees is equitable and just are matters of law addressed to the trial court’s discretion. That determination depends on the concept of fairness in light of all the surrounding circumstances. The party asserting the inequity of an attorney’s fee award is not required to present distinct evidence on that question of law. The court may conclude that it is not equitable or just to award even reasonable and necessary fees. In applying the Declaratory Judgments Act or trust code Section 114.064, the conclusion that an award of fees is equitable and just is not dependent on a finding that a party “substantially prevailed.” The trial court’s determination to award attorney’s fees is reviewed for an abuse of discretion. Under an abuse of discretion standard of review, we review the entire record. If there is some evidence in the record that shows the trial court followed guiding rules and principles, then the reviewing court may not find an abuse of discretion. Trial judges, as well as appellate judges, can draw on their common knowledge and experience as lawyers and judges in considering the testimony, the record, and the amount in controversy in determining attorney’s fees.

Id. The court of appeals held that the trial court abused its discretion in ordering the beneficiary to pay the trustee’s attorney’s fees:

The record shows that there was discord between Robert and Deborah since at least 2007. Deborah asked Robert to resign as Trustee. He offered to resign only if Deborah would provide him with a release of liability which Deborah refused to provide. Robert petitioned the court for approval of his resignation as Trustee in 2011. In that petition, he asked the court to render judgment approving the accounting and “releasing and fully and completely discharging [Robert] from any and all claims, duties and liabilities regarding the Trust and/or his administration of the Trust, . . .” and directing that all costs, expenses and attorney’s fees and accounting fees incurred by Robert in connection with his petition be paid out of the assets of the Trust. In her original answer, Deborah asked only for an accounting. A year after Robert filed his original petition, Deborah filed an amended answer that first included her counterclaims. In November 2015, Robert filed his first amended petition in which he stated that he sought a declaratory judgment approving the Trust accountings and releasing and discharging him, as Trustee and individually, from any liability involving matters relating to his administration of the Trust.

While acknowledging that Deborah was not required to give him a release, Robert testified that there would have been no litigation if she had provided the release. Robert’s attorney testified that Robert would agree to resign if they designated a Successor Trustee and if Deborah agreed to fully release Robert. At the same time, Robert complains that the litigation drained the Trust. His actions show that he deemed it more important to obtain the release than to preserve his mother’s funds. He asked the court to order Deborah to reimburse the Trust with $587,585 that was used to pay his attorneys and accountants for fees for services rendered to defend against the counterclaims. Robert’s attorney testified that Robert was not asking Deborah to pay for amounts predating the lawsuit or for the accounting. In argument to the court, he made it clear that Robert wanted the court to order Deborah to reimburse the Trust for fees that were incurred to defend against her counterclaims…

The record shows that Robert repeatedly engaged in self-dealing. In the summer of 2007, he told the Trust beneficiaries that, with their permission, he would invest approximately $750,000 of Trust money in a project planned by his real estate company. After getting the approval of the beneficiaries, he did not follow through on those terms. Instead, he loaned $2.1 million in Trust funds to an entity he was part owner in and lost all of that money when the deal collapsed. His actions resulted in a material financial loss to the Trust.

It is settled law that a trustee is not entitled to expenses related to litigation resulting from the fault of the trustee. Here, although Deborah asserted that Robert engaged in wrongdoing, there was no trial on Deborah’s breach of fiduciary duty and fraud claims. Robert won on those counterclaims, not after a review of the merits, but based solely on his affirmative defenses presented by way of summary judgment motion. Through affirmative defenses the defendant seeks to establish a reason why the plaintiff should not recover independent from an examination of the merits of her claims. If true, the defendant’s affirmative defense will defeat the plaintiff’s claim, even if all the allegations in the complaint are true. That Deborah’s counterclaims are barred by limitations, quasi-estoppel, and the Trust instrument’s exculpatory clause is a factor we consider in looking at the equities in this case. For purposes of our discussion, a win on affirmative defenses is not on equal footing with a win on the merits. Moreover, neither the Declaratory Judgments Act nor trust code Section 114.064 are prevailing party statutes, and an award of attorney’s fees under those statutes is not dependent on a finding that a party substantially prevailed. It follows that Robert’s win does not require a determination that an award of attorney’s fees is equitable.

We acknowledge that the judgment orders “that the Trustee has properly performed his duties and responsibilities as the Trustee of the DPH Trust.” This language is found in the sentence discharging Robert from the duties of Trustee. This can only refer to Robert’s actions that were proven at trial which did not include his defenses against Deborah’s counterclaims, the rationale for the award of $587,585.

Robert complains that Deborah was the only one to contest his actions and her counterclaims cost the Trust an enormous amount of money, depleting the liquid assets to the point that the Trust cannot pay its share of Ruth’s mandatory distributions. He argues that this causes Ruth to bear the burden of the cost of this litigation. Therefore, he argues, Deborah should reimburse the Trust. We disagree. Robert and Ruth treated the four trusts as belonging to the remainder beneficiaries by naming the trusts after them, getting their permission to use funds for investments, and by making distributions to the remainder beneficiaries during Ruth’s lifetime. Robert engaged in very risky activities and lost a substantial amount of Trust money. Deborah had the right to disagree with and question Robert’s actions, and her claims were against him individually, alleging inappropriate actions. Robert did not have the right to insist on a release from Deborah. Robert was not cleared of any wrongdoing by a review of the merits. Considering all of the circumstances, we conclude that it was inequitable as a matter of law for the trial court to order Deborah to pay Robert’s $587,585 attorney’s fee bill for his defense of her counterclaims.

Id. The court of appeals also held that the trial court erred in ordering the beneficiary to pay the attorney’s fees incurred by their mother, who was brought into the suit by the trustee. Id. However, the court of appeals rejected the beneficiary’s complaint that the trustee should reimburse the trust for funds used to pay for his attorney’s fees. The court of appeals construed that complaint to be that the trial court erred in failing to order the disgorgement of that benefit. Because there was no finding of breach of fiduciary duty, the trial court did not err in failing to order disgorgement, a remedy for a breach of fiduciary duty. Id.

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  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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