Court Affirmed Award Of Damages And Punitive Damages Against A Trustee Due To A Breach Of The Duty To Disclose, Held That A Trust Was Terminated And A Disclaimer Was Effective, And Affirmed An Award Of Attorney’s Fees Against The Trustee And A Refusal To Allow A Trustee To Reimburse Herself From Trust Assets

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In Mendell v. Scott, a decedent had a trust that named him as primary beneficiary, and upon his death, the trust would continue for a niece provided that she did not commit a prohibited act. No. 01-20-00578-CV, 2023 Tex. App. LEXIS 5382 (Tex. App.—Houston [1st Dist.] July 25, 2023, no pet.). If the niece predeceased him, then the trust would terminate and the assets would pass free and clear of any trust to the niece’s children. After the decedent died, the niece signed a disclaimer. When the trustee refused to terminate the trust, the niece’s children sued for breach of fiduciary duty and declaratory relief. The jury found for the plaintiffs and awarded damages and exemplary damages. The trustee appealed.

The court of appeals first noted the following provision in the Texas Property Code: “(a) A person other than a fiduciary may disclaim, in whole or in part, any interest in or power over property, including a power of appointment. (b) A person other than a fiduciary may disclaim an interest or power under this section even if the creator of the interest or power imposed a spendthrift provision or similar restriction on transfer or a restriction or limitation on the right to disclaim.” Tex. Prop. Code § 240.006. The Court held that Texas law is clear that a beneficiary has an absolute right to disclaim an interest in property and that right cannot be limited by the settlor. Regarding the effect of this disclaimer, the court held:

The effect of Susan’s Disclaimer was that it was to relate back to the time of the decedent’s death (June 8, 2017) and Susan was to be treated as having predeceased Uncle Mutt. Section 240.051(b) of the Property Code provides: “If an interest in property passes because of the death of a decedent . . . a disclaimer of the interest . . . takes effect as of the time of the decedent’s death; and . . . relates back for all purposes to the time of the decedent’s death.” Tex. Prop. Code § 240.051(b). Further, “if the interest is passing because of the death of a decedent, the disclaimed interest passes as if the disclaimant had died immediately before the time as of which the disclaimer takes effect under Subsection (b),” i.e., the decedent’s death. Id. § 240.051(e)(2)(A).2Link to the text of the note Because the effect of the Disclaimer meant that Susan predeceased Uncle Mutt, and the Disclaimer “relates back for all purposes to the time of the decedent’s death,” then Susan could not have committed a Prohibited Act, including by any of her actions surrounding the Disclaimer, after Uncle Mutt’s death on June 8.

Id. The court held that the disclaimer was effective, that the niece was presumed to have predeceased the settlor, and that remaining assets of the trust should have been distributed to the niece’s children as the sole beneficiaries, “outright and free of trust.”

The court then held that the trust had terminated. The court held:

As noted above, Section 112.052 provides that a “trust terminates if by its terms the trust is to continue only until . . . the happening of a certain event and . . . the event has occurred.” Tex. Prop. Code § 112.052. In their third motion for summary judgment, appellees pointed to the following language in Section 6.2 of the Trust as evidence that it terminated upon Uncle Mutt’s death: “If the said Susan Edis Gottlieb Herzfeld does not survive Settlor, and, again, conditioned upon no Prohibited Act . . . having been attributed to the Susan Herzfeld Share . . . then, instead, the Susan Herzfeld Share shall be distributed to her children, Laurence Scott (Herzfeld) and Rachel Chaput, in equal shares, outright and free of trust[.]”

The crux of Mendell’s argument in opposition of finding that the Trust terminated upon Uncle Mutt’s death seems to be that because the Trust provided her with the discretion to determine whether a Prohibited Act occurred, no merger could have happened (and thus, no termination of the Trust), until she made that determination. She further argues that the terms of the Trust obligated her to establish reserves to defend, not only the Trust, but also Uncle Mutt’s estate, and that all costs to defend the estate were to be borne by the Trust if Susan brought a challenge. While Susan disclaimed her interest in the Trust, she never disclaimed her interest in Uncle Mutt’s estate, so the reserves had to be maintained until the applicable limitations period expired for Susan to bring a challenge to the estate. See, e.g., Tex. Est. Code § 256.204(a) (two years for will contest). Mendell further contends that because Section 4.2 of the Trust Agreement mandates that the “primary purposes” for the Trust are to allow Mendell to pay from the Trust assets a one-third share of costs to defend Uncle Mutt’s estate and all other final bills or debts of the estate—before any distribution is made—the Trust could not terminate or be wound up until the applicable limitations period expired.6Link to the text of the note So, according to Mendell, she would have until at least that date to investigate whether a “Prohibited Act” had occurred.

We disagree.

The Trust does not contain the explicit statement that it is to terminate upon Uncle Mutt’s death; however, under the specific facts in this case, that is the effect of the distribution provision that applies in the event Susan “does not survive” Uncle Mutt. Although Susan’s disclaimer occurred after Uncle Mutt’s death, her disclaimer took “effect as of the time of [Uncle Mutt]’s death” and “relates back for all purposes to the time of [Uncle Mutt]’s death,” see Tex. Prop. Code § 240.051(b) (emphasis added), and the disclaimed interest passed as if she “had died immediately before” Uncle Mutt’s death. See id. § 240.051(e)(2)(A). Thus, we must proceed to the portion of Section 6.2 which provides for distribution in the event that Susan predeceased Uncle Mutt. Although Mendell is correct that distribution to appellees was likewise “conditioned upon no Prohibited Act . . . having been attributed to the Susan Herzfeld Share,” Mendell’s arguments related to her ability to exercise discretion to determine whether a Prohibited Act had occurred after Uncle Mutt’s death, thus preventing the termination or winding up of the Trust, all overlook the summary judgment evidence that she had, in fact, already made this determination as of August 17.

Furthermore, we reject Mendell’s argument that the Trust could not terminate until the primary purposes under Section 4.2(a) and (b) were fulfilled. Upon Uncle Mutt’s death, Section 6.1 provides for the payment of final and administrative expenses, i.e., the payment of costs and expenses identified in Sections 4.2(a) and (b). The language of Section 6.2 then provides for the distribution of the “remaining trust assets,” i.e., those “residual assets” identified in Section 4.3(c), to either Susan, in trust, or if Susan predeceased Uncle Mutt, to appellees “outright and free of trust.” Because Mendell had determined that as of August 17 no Prohibited Act had occurred by any party, and that she was prepared to move forward with the distributions pursuant to Section 6.2 of the Trust, albeit to Susan’s trust, this necessarily means that, as of August 17, Mendell had either made “payment or distribution, or provi[ded] for payment or distribution, of all amounts described in Section 4.2(a) and 4.2(b).” Accordingly, Section 6.2 directed that Mendell “shall” distribute “the remaining trust assets” to appellees “outright and free of trust.”

Thus, under the specific facts of this case, where Susan was treated as if she predeceased Uncle Mutt, the Trust was “to continue only until. . . the happening of a certain event,” i.e., Uncle Mutt’s death. See Tex. Prop. Code § 112.052. In other words, Uncle Mutt’s death was the “event of termination.” See id. Accordingly, we conclude that the trial court correctly determined that the trust “has terminated according to its terms.”

Id.

The trustee argued that an exculpatory clause applied to the plaintiffs’ breach of fiduciary duty claims. The trust provided: “This instrument shall always be construed in favor of the validity of any act or omission of any Trustee . . . and a Trustee . . . shall not be liable for any act or omission except in case of bad faith or fraud.” Id. The court noted that generally these types of provisions are enforceable under certain conditions. “The Texas Property Code provides: a) A term of a trust relieving a trustee of liability for breach of trust is unenforceable to the extent that the term relieves a trustee of liability for: (1) a breach of trust committed: (A) in bad faith; (B) intentionally; or (C) with reckless indifference to the interest of a beneficiary; or (2) any profit derived by the trustee from a breach of trust.” Id. (citing Tex. Prop. Code § 114.007(a)).

This court noted that it had previously held that an exculpatory clause is an affirmative defense. Id. (citing Kohlhausen v. Baxendale, No. 01-15-00901-CV, 2018 Tex. App. LEXIS 1828, 2018 WL 1278132, at *3 (Tex. App.—Houston [1st Dist.] Mar. 13, 2018, no pet.)). The court noted that a party asserting an affirmative defense bears the burden to plead, prove, and secure findings on the defense, and the failure to request a jury instruction on an affirmative defense results in waiver unless the issue was conclusively established. The trustee argued that it was the plaintiffs’  burden to request a jury question on the applicability of the exception to the exculpatory clause, i.e., that liability is not excused if actions are done in bad faith or fraud. The court disagreed, and held “as an exculpatory clause is an affirmative defense, it was her burden to prove and secure findings on that affirmative defense.” Id. And the court held that the failure to do so results in waiver unless the issue was conclusively established. The court then reviewed the evidence and did not agree with the trustee that the evidence conclusively established the applicability of the exculpatory clause.

The court then addressed the trustee’s argument that the trial erred in awarding damages against her and punitive damages based on her use of trust assets to pay her attorney’s fees. The trustee argued that the awards were improper because the trust grants her the express right to use trust assets to reimburse herself, or pay for in the first instance, all attorney’s fees and other expenses she incurred. The trust agreement contained certain provisions related to reimbursement for attorney’s fees and expenses, including:

• “Trustee shall also pay from the trust assets of the [Trust], all as the Trustee, in the Trustee’s sole discretion, deems appropriate . . . all other final bills and/or debts . . . of the Trustee relating to the defense of any trust or trusts created under this Trust Agreement or challenging the authority of the Trustee . . .”

• The Trustee “shall be entitled to receive full reimbursement for any and all expenses . . . incurred as a result of service of Trustee under this Trust Agreement . . . out of the assets of [the Trust], including, without limitation, attorney’s . . . fees . . . .”

• “[T]he Susan Herzfeld Share . . . [shall] be used for the payment of . . . as the Trustee shall determine, in the Trustee’s sole discretion, all costs and expenses, including attorney’s fees . . . incurred in reaction to, and/or defense against, problems, troubles, non-cooperation, . . . litigation or other proceedings (civil or criminal), . . . whether or not such activities constitute Prohibited Acts.” 

Id. The court noted that “while the Trust contains the above and other similar provisions, those provisions did not absolve Mendell of the duty to exercise her discretionary powers—even those that authorized her to act in her “sole discretion”—in good faith and in the interest of the beneficiaries.” Id. (citing Tex. Prop. Code § 113.029(a) (“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.”); and § 111.0035(b)(4)(B) (“The terms of a trust prevail over any provision of this subtitle, except that the terms of a trust may not limit . . . a trustee’s duty . . . to act in good faith and in accordance with the purposes of the trust.”)). The court also held:

Furthermore, while Texas law generally allows a trustee to incur expenses that are necessary to carry out the purposes of the trust and allows the trustee to be reimbursed from the trust estate for such expenses properly incurred, where an expense is not properly incurred, the trustee is not entitled to reimbursement from the trust estate. See Moody Found. v. Estate of Moody, No. 03-99-00034-CV, 1999 Tex. App. LEXIS 8597, 1999 WL 1041541, at *3 (Tex. App.—Austin Nov. 18, 1999, pet. denied) (citing Restatement (Second) of Trusts §§ 188, 244, 245). Thus, “[a] trustee is not entitled to reimbursement for expenses that do not confer a benefit upon the trust estate, such as those expenses related to litigation resulting from the fault of the trustee.” Id.; see also Stone v. King, No. 13-98-022-CV, 2000 Tex. App. LEXIS 8070, 2000 WL 35729200, at *8 (Tex. App.—Corpus Christi—Edinburg Nov. 30, 2000, pet. denied) (mem. op.) (holding that, based on earlier conclusion that trustee breached his fiduciary duties by failing to distribute trust funds, trial court could reasonably have concluded that litigation seeking to remove trustee resulted from trustee’s improper actions, that trustee did not act reasonably and in good faith in incurring attorney’s fees, and was, therefore, not entitled to charge trust for fees).

Here, the jury found that Mendell breached her fiduciary duty and that she acted with malice, and we conclude these findings (as detailed below) are supported by sufficient evidence. Therefore, Mendell was not entitled to charge the Trust for fees that did not confer a benefit on the Trust and that she incurred through the fault of her own, i.e., breaches of her fiduciary duties. We therefore hold these provisions of the Trust do not render the actual and exemplary damages awarded in the final judgment and the relief awarded in the Modified Permanent Injunction improper. See Moody Found., 1999 Tex. App. LEXIS 8597, 1999 WL 1041541, at *3; Stone, 2000 Tex. App. LEXIS 8070, 2000 WL 35729200, at *8; cf. In re McIntire, No. 07-22-00249-CV, 2023 Tex. App. LEXIS 60, 2023 WL 113059, at *4 (Tex. App.—Amarillo Jan. 5, 2023, orig. proceeding) (“So, given the rule that ‘a trustee may charge the trust for attorney’s fees the trustee, acting reasonably and in good faith, incurs defending charges of breach of trust,’ a finding of breach would seem a prerequisite to barring a trustee from turning to the trust for payment.” (internal citation omitted)).

Id.

The court then turned to the jury’s finding of breach of fiduciary duty. The jury found that the trustee breached her fiduciary duties in five different ways: she breached her fiduciary duty to administer the trust in good faith according to its terms, she failed to wind up the trust and distribute the trust property within a reasonable amount of time after the trust terminated, she breached her fiduciary duty of full disclosure, she breached her fiduciary duty of loyalty not to self-deal, and she breached her fiduciary duty of impartiality. The court of appeals only analyzed whether she breached her duty of full disclosure. The court noted that “A trustee has ‘a fiduciary duty of full disclosure of all material facts known to [the trustee] that might affect [a beneficiary’s] rights.” Id. (citing Montgomery v. Kennedy, 669 S.W.2d 309, 313 (Tex. 1984)). With respect to the duty of full disclosure, the jury charge stated:

Trustees have a fiduciary duty of full disclosure of all material facts known to them that might affect a beneficiary’s or principal’s right. Put another way, a trustee has much more than the traditional obligation not to make any material misrepresentations. Rather, a trustee also has an affirmative duty to make a full and accurate confession of all her trustee activities, transactions, profits and mistakes.

Id. The court reviewed evidence that it took six months to provide an accounting after a request for same, and that the accounting was not in proper form, that the trustee did not respond to many emails, and that the trustee failed to disclose that she had determined that the plaintiffs’ mother had triggered a prohibited action and that they were not entitled to any assets. The court also noted that “It is clear that there was a history of animosity between these parties and within the extended family; however, ‘[t]he existence of strained relations between the parties d[oes] not lessen the fiduciary’s duty of full and complete disclosure.’” Id. The court affirmed the jury’s finding that the trustee had breached her duty of disclosure.

Regarding damages, the court held that the trustee’s use of funds for her fees and expenses, which was not disclosed to the plaintiffs, was evidence to support the jury’s finding:

In connection with this, and unbeknownst to appellees, Mendell transferred $200,000 out of the Trust’s investment account into a no or low interest checking account and proceeded to pay attorney’s fees and other expenses out of this checking account. Mendell continued to pay her attorney’s fees out of this account until February 2020, when appellees received relief from the trial court in the form of a temporary injunction, which prohibited Mendell from “selling, spending, or otherwise dissipating in any way any assets belonging to the Trust, including further payment of attorney’s fees or trustee compensation during the pendency of this litigation.” In total, the evidence demonstrates that after Mendell transferred $200,000 from the Trust’s investment account to a no or low interest checking account, she paid approximately $200,000 in attorney’s fees and other expenses out of assets of the Trust, improperly and without appellees’ knowledge, which is evidence of a corresponding $200,000 loss in value to the Trust. Accordingly, considering the evidence in a light most favorable to the jury’s findings and indulging every reasonable inference to support them, we conclude there is legally sufficient evidence to support the jury’s finding that $200,000 represented the amount of loss in the value of the Trust as a result of Mendell’s breach.

Id.

The court then addressed the trustee’s argument that there was not sufficient evidence to support the exemplary damages award. Exemplary damages may be awarded if “the claimant proves by clear and convincing evidence that the harm with respect to which the claimant seeks recovery of exemplary damages results from . . . malice.” Id. (citing Tex. Civ. Prac. & Rem. Code § 41.003(a)(2)). Malice is defined as “a specific intent by the defendant to cause substantial injury or harm to the claimant.” Id. (citing Tex. Civ. Prac. & Rem. Code. § 41.001(7)). The court found that the evidence was sufficient to support the jury’s finding. The trustee admitted that even though she thought her five law firms informed the plaintiffs of her decision that their mother did a prohibited act, she admitted she did not present any documentary evidence, including emails or letters, demonstrating that this information was sent by her attorneys. She admitted that she did not disclose her concerns related to the disclaimer until after sued her. She did not communicate this decision despite receiving repeated emails and questions asking for a status report on the distribution of trust assets. “Although Rachel sent Mendell 12 emails over a six-month period in 2018, Mendell either did not respond to these emails or, when she finally did respond, she promised to address Rachel’s concerns soon, but never did. At no time during these email exchanges did Mendell communicate her concerns about any alleged Prohibited Acts or explain why distributions had not been made.” Id. The trustee also never informed plaintiffs that she had opened a separate checking account and transferred $200,000 to that account, or that she had hired and was paying attorneys with those assets. Further, the trustee admitted that she had not provided any invoices describing what work was being performed by the attorneys to whom these payments were made, only that “[i]t was in defending the trust[.]” The jury also heard evidence about the trustee’s distribution of two other trusts and that the trustee and plaintiffs had a history of animosity. The court concluded:

From all the above evidence, a reasonable juror could have formed a firm conviction or belief that Mendell, fueled by a history of animosity against Susan and her children, acted with a specific intent to harm appellees, by delaying the distribution of the assets of the Trust to them, unless or until they agreed to some other “global settlement,” and when they did not, searching for a reason to conclude that they were not entitled to distribution under the Trust at all. Although Mendell argues that there is insufficient evidence of malice because appellees have no direct evidence of malice or of her intent to injure appellees, as discussed above, “it is well-established that a plaintiff required to prove the state of mind of a defendant need not adduce direct evidence; it may instead rely upon circumstantial evidence.” Based on the above detailed circumstantial evidence viewed in favor of the jury’s findings and the reasonable inferences drawn therefrom, combined with the fact that credibility determinations are left up to the jury, we conclude that there is legally sufficient evidence to support the jury’s finding of malice.

Id.

Finally, the court addressed the trustee’s complaint that the trial court ordered her, in her individual capacity, to pay the attorney’s fees incurred by the plaintiffs. She argued that the award was in error because the trust unambiguously provides that she is never to have any liability in her individual capacity, and that plaintiffs themselves are to be responsible for such costs and expenses. Section 6.8 of the Trust provides:

Settlor directs that, in no event, shall any trust of Settlor, Settlor’s probate or nonprobate estate, or any Settlor Designated Representative [i.e., Mendell] . . . be responsible for payment of any costs incurred by any Susan Herzfeld Party [including appellees] . . . , including attorney’s fees. Further, Settlor directs that, in no event, shall any Susan Herzfeld Party . . . be entitled to reimbursement from any trust of Settlor, from Settlor’s probate or [*88]  nonprobate estate, or from any Settlor Designated Representative for any costs of any Susan Herzfeld Party . . . , including attorney’s fees.

Id. The trustee argued that these and similar provisions throughout the trust control over most statutory or common-law obligations. The court of appeals disagreed and cited to Section 111.0035 of the Property Code, which provides: “The terms of a trust prevail over any provision of this subtitle, except that the terms of a trust may not limit . . . a trustee’s duty . . . to act in good faith and in accordance with the purposes of the trust[.]” Id. (citing Tex. Prop. Code § 111.0035(b)(4)(B)). “Section 111.0035 does not prohibit an award of attorney’s fees pursuant to the Declaratory Judgment Act as it is not contained in the Property Code, let alone the same subtitle.” Id.

The court also held that due to the jury’s sustained findings that the trustee breached her fiduciary duties to appellees, and did so with malice, it would decline to hold that provisions of the trust stating that the trustee shall not be responsible for attorney’s fees prevail over either Section 114.064 or Section 37.009. “To do so when there is sufficient evidence that Mendell breached her fiduciary duties with malice, would limit Mendell’s duty to act in good faith by rewarding her failure to do so.” Id.

After considering whether the attorney’s fees were properly awarded under those relevant statutes, the court held that the award was within the discretion of the trial court:

The granting or denying of attorney’s fees under Section 114.064 or Section 37.009 is within the sound discretion of the trial court, and a reviewing court will not reverse the trial court’s judgment absent a clear showing that the trial court abused its discretion by acting without reference to any guiding rules and principles. The Declaratory Judgment Act provides: “In any proceeding under this chapter, the court may award costs and reasonable and necessary attorney’s fees as are equitable and just.” Appellees sought declaratory relief related to the interpretation of the Trust, and the trial court granted three partial summary judgments on appellees’ claims for declaratory relief and incorporated those rulings into its final judgment. These claims for declaratory relief were distinct from appellees’ breach of fiduciary duty claims, and we reject Mendell’s claims to the contrary. Thus, the trial court had discretion to award “reasonable and necessary attorney’s fees as are equitable and just” for appellees’ declaratory judgment claims.

Section 114.064(a) of the Property Code similarly states: “In any proceeding under this code the court may make such award of costs and reasonable and necessary attorney’s fees as may seem equitable and just.” Attorney’s fees are recoverable under this statute for appellees’ claims against Mendell as trustee for breaches of her fiduciary duties. Thus, the trial court had discretion to award “reasonable and necessary attorney’s fees as may seem equitable and just” for appellees’ breach of fiduciary duty claims.

Id. The court then affirmed the award of attorney’s fees against the trustee. The court affirmed the judgment of the trial court every aspect except as to an award of conditional appellate attorney’s fees and certain injunctive relief.

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