Court Held That Estate Beneficiary Did Not Have Standing To Assert Forfeiture Or Breach Claim Against Executrix’s Attorneys, That An Executrix Had No Authority To Pay Her Attorney’s Fees From The Estate In The Interim In Defending A Removal Action, And That The Trial Court Erred In Refusing A Motion To Compel Distribution Of The Estate

by Winstead PC
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In re Nunu, an estate beneficiary sued the executrix to have her removed due to alleged breaches of fiduciary duty and also sought to have the court refuse to pay her attorneys in representing her in a removal action and/or sought to have those fees forfeited. No. 14-16-00394-CV, 2017 Tex. App. LEXIS 10306 (Tex. App.—Houston [14th Dist.] November 2, 2017, pet. filed). Texas Estates Code section 404.0037 provides: “[a]n independent executor who defends an action for the independent executor’s removal in good faith, whether successful or not, shall be allowed out of the estate the independent executor’s necessary expenses and disbursements, including reasonable attorney’s fees, in the removal proceedings.” Id. (citing Tex. Est. Code Ann. § 404.0037(a)). The executrix used estate funds to pay at least some of the attorneys’ fees incurred in her defense in this suit. The beneficiary challenged the payment of the attorneys’ fees by (a) arguing that the attorneys were professionally negligent and breached fiduciary duties they owed to the executrix and to the estate, or perhaps to the beneficiaries, and that as a result of this misconduct, their fees should be forfeited; (b) seeking declaratory judgment that the fees should be forfeit or disallowed; and (c) arguing that the requirements of section 404.0037 for payment of attorneys’ fees from estate have not been met.

The court of appeals first held that the beneficiary had no standing to assert a fee forfeiture claim against the attorneys in his personal capacity because he had no attorney/client relationship with the attorneys. The court also held that the beneficiary had no standing to assert a breach claim against the executrix’s attorneys. The fact that the attorneys owed fiduciary duties to the executrix and that the executrix owed fiduciary duties to the beneficiary, did not mean that the attorneys owed duties to the beneficiaries. The court held: “These are separate relationships, however, and the distinction between them cannot be ignored.” Id.

The court then addressed the declaratory judgment claims. Texas Civil Practice and Remedies Code Section 37.005(3) allows declaratory relief “to determine any question arising in the administration” of an estate. The court, however, held that “although section 37.005(3) does not limit ‘the types of questions’ that a litigant may ask, it does not remove the limitations on the questions that the trial court can answer.” Id. “A declaratory judgment requires a justiciable controversy as to the rights and status of parties actually before the court for adjudication, and the declaration sought must actually resolve the controversy.” Id. The court held that a declaration that the fees “should be” forfeited would not actually result in fee forfeiture because Section 37.006(a) provides that when declaratory relief is sought, all persons who have or claim any interest that would be affected by the declaration must be made parties and the attorneys were not parties. Further, even though Texas Civil Practice and Remedies Code Section 37.005(4) allows declaratory relief “to determine rights or legal relations of an independent executor . . . regarding fiduciary fees and the settling of accounts,” the court held that this provision dealt with the compensation of the executrix, not her attorneys. Id.

The court next turned to Texas Estate’s Code Section 404.0037, which states that if an independent executor defends a removal action in good faith that the reasonable and necessary attorney’s fees for the defense “shall be allowed out of the estate.” Id. (citing Tex. Est. Code Ann. § 404.037(a)). The court noted that good faith is an issue on which the independent executor bears the burden of proof. The court held:

“[A]n executor acts in good faith when he or she subjectively believes his or her defense is viable, if that belief is reasonable in light of existing law.” Good faith is established as a matter of law if reasonable minds could not differ in concluding from the undisputed facts that the person in question acted in good faith. Because it is an incontrovertible fact that Paul nonsuited his removal action against Nancy with prejudice, whether Nancy defended the action in good faith is a question of law. As a matter of law, “a dismissal or nonsuit with prejudice is ‘tantamount to a judgment on the merits.’” Moreover, a party who voluntarily nonsuits his claims generally cannot obtain reversal of the order on appeal. And where, as here, the party seeking the executor’s removal voluntarily and unilaterally nonsuits all such claims with prejudice on the third day of a jury trial, reasonable minds could not differ in concluding that the executor’s “efforts cause[d] [her] opponents to yield the playing the field.” Thus, when Paul irreversibly conceded his claim for Nancy’s removal, the viability and reasonableness of Nancy’s defense were established as a matter of law. Although Paul points out that the trial court made no finding that Nancy resisted her removal in good faith, a finding is unnecessary if a matter is established as a matter of law. Paul now attempts to resurrect the same grounds on which he sought Nancy’s removal as grounds for challenging Nancy’s good faith in defending the action; in essence, he contends that Nancy could not have resisted her removal in good faith because Paul would have prevailed on the merits. Those arguments must fail because his voluntary nonsuit of his removal claims with prejudice constitutes a judgment against him on the merits, and he does not (and cannot) challenge that portion of the judgment on appeal.

Id.

The court held that the executrix had no authority to pay her attorneys from estate funds in the interim and before the court allowed such an award after the removal issue was resolved:

There is no such order in the record, and the trial court could not properly have approved payments made before the removal action had been decided. See Klein v. Klein, 641 S.W.2d 387, 387 (Tex. App.—Dallas 1982, no writ) (dismissing an executor’s claims for attorneys’ fees and expenses as premature because the removal action was still pending)…. Although Nancy appears to have assumed that she could pay her legal fees without first obtaining findings that the fees were both necessary and reasonable, the statute does not authorize such a procedure.”

Id. The court sustained the beneficiary’s issue in part and remanded to the trial court the determination of the amount to be paid from the estate for the executrix’s “necessary expenses and disbursements, including reasonable attorney’s fees, in the removal proceedings.” Id.

Finally, the beneficiary challenged the trial court’s denial of his two motions to compel the executrix to distribute the estate. “A person interested in an estate may petition the court for an accounting and distribution any time after the expiration of two years from the date the court clerk first issued letters testamentary or letters of administration to any personal representative of the estate.” Id. (citing Tex. Est. Code § 405.001(a)). “Unless the court finds a continued necessity for administration of the estate, the court shall order its distribution by the independent executor to the persons entitled to the property. If the court finds there is a continued necessity for administration of the estate, the court shall order the distribution of any portion of the estate that the court finds should not be subject to further administration by the independent executor.” Id. The court held that the trial court did not abuse its discretion in denying the first motion because it was filed before the removal issue was resolved, and there were still issues continuing for the administration of the estate. However, the court held that the trial court should have granted the second motion, which was filed after the removal action was nonsuited. The court “reverse[d] this portion of the judgment, and remand the cause to the trial court (1) to determine the amount of Nancy’s reasonable and necessary attorneys’ fees and expenses to be paid from the Estate; (2) to authorize Nancy to pay that amount from Estate funds (and, if necessary, to order her to reimburse the Estate for excess legal fees and expenses already paid without authorization); and (3) to order distribution of the Estate.” Id.

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