Trust Litigation -- Suing and Defending a Trustee

TRUST LITIGATION --
SUING AND DEFENDING A TRUSTEE
FOR BREACH OF FIDUCIARY DUTY

Presented By:

FRANK N. IKARD, JR.
Ikard & Golden, P.C.
823 Congress Avenue, Suite 910
Austin, Texas 78701
(512) 472-6695
karisch@io.com

TRUST LITIGATION FROM THE PERSPECTIVE OF
BOTH THE PLAINTIFF AND THE DEFENDANT

PART ONE - FIDUCIARY DUTIES

I. TRUSTEES AS FIDUCIARIES

A. A Trustee is a Fiduciary

A trustee, once he has accepted appointment, is in a
fiduciary relation to the beneficiaries of the trust.
See A. Scott & W. Fratcher, The Law of Trusts Sec. 170,
American Law Institute, Restatement (Second) of Trusts,
Sec. 2 (1980).

B. Trustees are Subject to Fiduciary Duties

Trustees are subject to the duties imposed by the common
law, the duties imposed by the Texas Trust Code and the
duties imposed by the instrument creating the Trust.
Tex. Trust Code Ann. Sec. 113.051 (Vernon 1984).

C. Scope of This Paper

Suits against trustees may take several forms. A suit
may be brought as an action for breach of contract, as an
action in tort, as an action in equity, or as an action
for declaratory judgment. Virtually every such action
will seek to impose liability against the trustee for a
breach of fiduciary duty. In order to avoid liability a
trustee must both have a clear understanding of his
fiduciary duties and strictly comply with them. While
causes of action that do not involve breach of fiduciary
duty may be brought against a trustee (such as actions
for breach of the Texas Deceptive Trade Practices Act)
these are so rare that they are dealt with only
tangentially in this paper. The principal thrust of this
paper is directed toward actions against a trustee for
breach of fiduciary duty.

II. GENERAL TYPES OF FIDUCIARY DUTIES

A. Common Law Fiduciary Duties

1. Common law fiduciary duties are duties that have
been created by the courts to apply to fiduciaries.
These duties may apply to all types of fiduciaries
(e.g. executors, trustees, guardians, attorneys,
custodians, agents, donees or powers of attorney,
bank, partners, joint venturers, or corporate
management) or may apply to specific fiduciaries
such as trustees only. The duties described in
this paper apply to trustees. As a general rule,
common law fiduciary duties will be liberally
interpreted by the court once the fiduciary
relationship has been established.

B. Statutory Fiduciary Duties

1. Statutory fiduciary duties are duties that have
been created by the legislature to apply to certain
designated types of fiduciaries. These duties
apply to the type of fiduciary specifically
enumerated by the statute.

2. There may be a considerable overlap between a
common law fiduciary duty and a statutory fiduciary
duty (e.g. the Texas Trust Code contains a "prudent
man rule" that is very similar to the common law
prudent man rule). When such overlap occurs the
statutory duty will take precedence over the common
law duty.

3. A statute may codify a common law fiduciary duty.
With respect to statutory versus common law duties,
Texas Trust Code Sec. 111.005 provides:

If the law codified in this subtitle
repealed a statute that abrogated or
restated a common law rule, that common
law rule is re-established, except as the
contents or the rule are changed by this
subtitle. Tex. Trust Code Ann. Sec.
111.005 (Vernon 1984);

and Trust Code Sec. 113.051 provides:

The trustee shall administer the trust
according to its terms and this subtitle.
In the absence of any contrary terms in
the trust instrument or contrary
provisions of this subtitle, in
administering the trust the trustee shall
perform all of the duties imposed by
trustees by the common law. Tex. Trust
Code Ann. Sec. 113.051 (Vernon 1984)

C. Fiduciary Duties Created by the Instrument

1. The instrument creating the fiduciary relationship
(e.g. the will or the trust) may create specific
fiduciary duties.

2. There is usually an overlap between this type of
fiduciary duty, statutory fiduciary duties, and
common law fiduciary duties (e.g. a trust
instrument may contain a prudent man rule that is
slightly different from both the statutory prudent
man rule contained in the Texas Trust Code and the
common law prudent man rule). Generally when such
overlap occurs the duty specified in the instrument
will take precedence over both the statutory duty
and the common law duty. An instrument may not,
however, relieve a fiduciary from liability for
self dealing, actions taken in bad faith or for
acting intentionally adverse or with reckless
indifference to the interests of a beneficiary.

III. FIDUCIARY DUTIES

A. Duty to Exercise Ordinary Skill and Prudence (the
"Prudent Man Rule")

1. The common law duty.

The common law duty to exercise ordinary skill and
prudence is usually stated as follows:

The fundamental duties of a trustee
include the use of the skill and prudence
which an ordinary capable and careful
person will use in the conduct of his own
affairs . . .

InterFirst Bank Dallas, N.A. v. Risser, 739 S.W.2d
882, 888 (Tex. Civ. App. -- Texarkana 1987, no
writ), citing Tucker v. Dougherty Roofing Company,
137 S.W.2d 884 (Tex. Civ. App. -- Dallas 1940, writ
dism'd judgment cor.); Bogert & Bogert, The Law of
Trusts and Trustees Sec. 12 (2nd ed. 1985) Sec.
541; Scott, supra, Sec. 174; Restatement (Second)
of Trusts, supra, Sec. 174.

2. The statutory duty of a trustee.

Texas Trust Code Sec. 113.056(a) provides:

Unless the terms of the trust instrument
provide otherwise, in acquiring,
investing, reinvesting, exchanging,
retaining, selling, supervising and
managing trust property . . . a trustee
shall exercise the judgment and care
under the then prevailing circumstances
that persons of ordinary prudence,
discretion, and intelligence exercise in
the management of their own affairs, not
in regard to speculation but in regard to
the permanent disposition of their funds,
considering the probable income from as
well as the probable increase in value
and safety of their capital. In
determining whether a trustee has
exercised prudence with respect to an
investment decision, such determination
shall be made taking into consideration
the investment of all the assets of the
trust, or the assets of the collective
investment vehicle, as the case may be,
over which the trustee had management and
control, rather than a consideration as
to the prudence of a single investment of
the trust, or the single investment of
the collective investment vehicle as the
case may be. (emphasis supplied) Tex.
Trust Code Ann. Sec. 113.056(a) (Vernon
Supp. 1991) as amended by Act of June 16,
1991, 72nd. Leg., 1st C.S., Ch. 876, 1991
Tex. Sess. Law Serv. 2987 (Vernon).

In 1991 the Texas Legislature amended Texas Trust
Code Sec. 113.056(a) to provide that in a suit for
breach of the duty of prudence the jury may
consider "the investment of all the assets of the
trust . . . over which the trustee had control,
rather than a consideration . . . of a single
investment." Prior to this amendment Texas
followed the common law "single investment test."
This test provided that the prudence of each
individual investment was judged separately from
each other investment in the portfolio. The single
investment test is probably still the law in Texas
with the exception that the jury must now consider
the investment performance of the entire portfolio
in determining whether a single investment violates
the prudent man rule. The 1991 amendment to the
prudent man rule did not go so far as to impose the
"portfolio investment test." Under this test the
liability of the fiduciary would be determined on
the basis of whether or not the investment of the
entire portfolio were prudent (and the prudence of
an individual investment could not be considered).

3. Speculative Investments.

As a general rule, a trustee may not engage in
speculative investments. Nathan v. Hudson, 376
S.W.2d 856 (Tex.Civ.App -- Dallas 1964, writ ref'd
n.r.e.); Merrill, Lynch, Pierce, Fenner & Smith,
Inc. v. Bocock, 247 F. Supp. 373 (S.D. Tex. 1965).
See also Scott, supra Sec. 612 and Tex. Trust Code
Ann. Sec. 113.056(a) (Vernon Supp. 1991).

Although a testator, grantor, co-trustee,
beneficiary or distributee may legally authorize
the trustee to participate in speculative
investments, the fact remains that any trustee
making speculative investments does so at his own
risk. If the speculative investment results in a
loss, the fiduciary may be confronted with
litigation based on 20/20 hindsight by a jury.
Even if the investment was authorized by a
beneficiary, the trustee may face the argument that
if the trustor had wanted the beneficiary to make
investment decisions then he would have designated
such person as trustee.

4. Diversification.

The Restatement (Second) of Trusts, supra Sec. 228
provides:

Except as otherwise provided by the terms
of the trust, the trustee is under a duty
to the beneficiary to distribute the risk
of loss by a reasonable diversification
of investments, unless under the
circumstances it is prudent not to do so.

B. Duty of Loyalty

1. The common law duty.

The common law duty of loyalty is basically as
follows:

One of the most fundamental duties
of the trustee is that he must
display throughout the
administration of the trust complete
loyalty to the interests of the
beneficiary, and must exclude all
selfish interest and all
consideration of the interests of
third persons.

Bogert, supra, Sec. 543. See also Scott,
supra, Sec. 170; Restatement (Second) of
Trusts, supra, Sec. 170; Loewenstein v. Watts,
119 S.W.2d 176 (Tex. Civ. App.--El Paso),
aff'd. 134 Tex. 660, 137 S.W.2d 2 (1938);
Gaines v. First State Bank, 28 S.W.2d 297,
aff'd., 121 Tex. 559, 50 S.W.2d 774 (Tex.
1930); and Albuquerque National Bank v.
Citizens National Bank, 212 F.2d 943 (5th Cir.
1954).

By way of elaboration, some courts have stated the
duty thus:

The duty of fidelity required of a
trustee forbids the trustee from
placing itself in a situation where
there is or could be a conflict
between its self interest and its
duty to the beneficiaries.

InterFirst Bank Dallas v. Risser, supra, at
899; Slay v. Burnett Trust, 143 Tex. 621, 187
S.W.2d 377, 387 (Tex. 1945); Kinney v.
Shugart, 234 S.W.2d 451, 452 (Tex. Civ. App. -- Eastland 1950, writ ref'd).

Courts have gone to great ends to protect the
object of a fiduciary obligation. As the Slay
court observed:

Trustees cannot make a profit from
the trust funds committed to them,
by using the money in any kind of
trade or speculation, nor in their
own business . . . In all such
cases, the trustees must account for
every dollar received from the use
of the trust-money and they will be
absolutely responsible for it if it
is lost in any such transactions. *
* *

By this rule trustees may be liable
to great losses while they can
receive no profit; and the rule is
made thus stringent . . . (citation
omitted, emphasis added).

Slay v. Burnett Trust, 187 S.W.2d 377, 388 (Tex.
1945)The same court also stated:

These matters, intent to defraud and
conspiracy and injury or damage to
the beneficiary, are immaterial to
the determination of liability in
this case . . . It is well settled
that in a suit of this kind recovery
may be had by the beneficiary even
though he has suffered no damages
and even though the trustee may have
acted in good faith. (emphasis
added).

Slay, supra, at 389.

Justice Cardozo perhaps best expressed the rule
regarding conduct of a fiduciary and the unbending
attitude of the courts in supporting that rule:

Many forms of conduct permissible in
a workaday world for those acting at
arm's length, are forbidden to those
bound by fiduciary ties. A trustee
is held to something stricter than
the morals of the market place. Not
honesty alone, but the punctilio of
an honor the most sensitive, is then
the standard of behavior. As to this
there has developed a tradition that
is unbending and inveterate.
Uncompromising rigidity has been the
attitude of the courts of equity
when petitioned to undermine the
rule of undivided loyalty by the
'disintegrating erosion' of
particular exceptions. * * * Only
thus has the level of conduct for
fiduciaries been kept at a level
higher than that trodden by the
crowd. It will not consciously be
lowered by any judgment of this
court.

Langford v. Shamburger, 417 S.W.2d 438, 443 (Tex.
Civ. App.--Ft. Worth 1967, writ ref'd n.r.e.)
citing Meinhard v. Salmon, 249 N.Y. 458, 164 N.E.
545-546, 62 A.L.R. 1 (1928).

Finally, the constructive fraud doctrine provides
that if a fiduciary takes any discretionary action
as a fiduciary which directly or indirectly
benefits the fiduciary (or the fiduciary's family
or affiliates) then the transaction is presumed
fraudulent. The burden of proof then shifts to the
fiduciary to provide that the transaction is fair.
In any transaction wherein a person benefiting from
it stands in a fiduciary relationship to one or
more of the other parties, the transaction, if
challenged, is presumed by equity to be unfair and,
therefore, a constructive fraud unless the fairness
of the transaction is proven by the benefiting
fiduciary. Stephens County Museum, Inc. v. Swenson,
517 S.W.2d 257, 260 (Tex. 1974). Unlike actual
fraud, constructive fraud does not necessarily
involve dishonesty of purpose or an intent to
deceive and, therefore, proof of such is not
required in order to invoke the doctrine. Archer
v. Griffith, 390 S.W.2d 735, 740 (Tex. 1964). Thus,
once a plaintiff establishes that the transaction
which he wishes to avoid was executed while a
fiduciary relationship existed between him and the
defendant, the burden of presenting evidence and
securing a finding that the transaction was fair to
the plaintiff is put upon the defendant fiduciary
who claims the validity and benefits from the
transaction. Ginther v. Taub, 570 S.W.2d 516, 525
(Tex. Civ. App.--Waco 1975, writ ref'd n.r.e.);
Gaynier v. Ginsberg, 715 S.W.2d 749,754 (Tex. App.--Dallas 1986, writ ref'd n.r.e.). Evidence
introduced by the defendant to meet this burden
simply creates a question of fact. Ginther, 570
S.W.2d at 525. Absent any such proof, the
presumption of unfairness and constructive fraud
stands unrebutted, and the transaction is invalid
as a matter of law. Texas Bank and Trust v. A. E.
Moore, 595 S.W.2d 502 (Tex. 1980). Because the
burden of proof in this cause of action is shifted
to the defendant, it is distinguishable from other
types of "constructive fraud" in which the entire
burden rests on the party asserting it. Miller v.
Miller, 700 S.W.2d 941 (Tex. App.--Dallas 1985,
writ ref'd n.r.e.).

It is clear that under Texas law a plaintiff is not
required to show that he relied upon the defendant
to discharge his fiduciary duties in order to
assert a claim of constructive fraud successfully.
Johnson v. Peckam, 120 S.W.2d 786, at 788 (Tex.
1936). In Johnson, the court held that the trial
court had not erred in refusing to submit a special
issue to the jury which called upon it to determine
whether or not the plaintiff had relied upon his
partner to make certain disclosures to him
concerning negotiations for the sale of partnership
property. As the court noted, a fiduciary is under
an absolute duty to carry out the responsibilities
of his position and, therefore, reliance by the
plaintiff is not necessary to establish
constructive fraud. See Carl David Adams,
Benefitting From Fiduciary Office: A Presumption
of Fraud, 47 Tex. B.J. 648 (1984).

2. The statutory duty of a trustee.

Texas Trust Code Sec. 113.052 provides that:

(a) Except as provided by Subsection (b) of
this section, a trustee may not lend
trust funds to:

(1) the trustee or an affiliate;
(2) a director, officer, or employee of
the trustee or an affiliate;
(3) a relative of the trustee; or
(4) the trustee's employer, employee,
partner, or other business
associate.

(b) This section does not prohibit:

(1) a loan by a trustee to a beneficiary
of the trust if the loan is
expressly authorized or directed by
the instrument or transaction
establishing the trust; or
(2) a deposit by a corporate trustee
with itself under Section 113.057 of
this Act. Tex. Trust Code Ann. Sec.
113.052 (Vernon 1984)

Texas Trust Code Sec. 113.053 provides that:

(a) Except as provided by Subsections (b),
(c), (d), (e), and (f) a trustee shall
not directly or indirectly buy or sell
trust property from or to:

(1) the trustee or an affiliate;
(2) a director, officer, or employee of
the trustee or an affiliate;
(3) a relative of the trustee; or
(4) the trustee's employer, partner, or
other business associate.

(b) A national banking association or a
state-chartered corporation with the
right to exercise trust powers that is
serving as executor, administrator,
guardian, trustee, or receiver may sell
shares of its own capital stock held by
it for an estate to one or more of its
officers or directors if a court:

(1) finds that the sale is in the best
interest of the estate that owns the
shares;
(2) fixes or approves the sales price of
the shares and the other terms of
the sale; and
(3) enters an order authorizing and
directing the sale.

(c) If a corporate trustee, executor,
administrator, or guardian is legally
authorized to retain its own capital
stock in trust, the trustee may exercise
rights to purchase its own stock if
increases in the stock are offered pro
rata to shareholders.

(d) If the exercise of rights or the receipt
of a stock dividend results in a
fractional share holding and the
acquisition meets the investment standard
required by this subchapter, the trustee
may purchase additional fractional shares
to round out the holding to a full share.

(e) A trustee may:

(1) comply with the terms of a written
executory contract signed by the
settlor, including a contract for
deed, earnest money contract,
buy/sell agreement, or stock
purchase or redemption agreement;
and

(2) sell the stock, bonds, obligations,
or other securities of a corporation
to the issuing corporation or to its
corporate affiliate if the sale is
made under an agreement described in
Subdivision 91) or complies with the
duties imposed by Section 113.056.

(f) A national banking association, a state-chartered corporation, including a
state-chartered bank or trust company, a
state or federal savings and loan
association that has the right to
exercise trust powers and that is serving
as trustee, or such an institution that
is serving as custodian with respect to
an individual retirement account, as
defined by Section 408, Internal Revenue
Code, or an employee benefit plan, as
defined by Section 9(3), Employee section
1002(3), regardless of whether the
custodial account is, or would otherwise
be, considered a trust for purposes of
this subtitle, may:

(1) employ an affiliate or division
within a financial institution to
provide brokerage, investment,
administrative, custodial, or other
account services for the trust or
custodial account and charge the
trust or custodial account for the
services, provided, however, nothing
in this section shall allow an
affiliate or division to engage in
the sale or business of insurance if
not otherwise permitted to do so;
and
(2) receive compensation, directly or
indirectly, on account of the
services performed by the affiliate
or division within the financial
institution, whether in the form of
shared commissions, fees, or
otherwise, provided that any amount
charged by the affiliate or division
for the services is disclosed and
does not exceed the customary or
prevailing amount that is charged by
the affiliate or division, or a
comparable entity, for comparable
services rendered to a person other
than the trust. Tex. Trust Code
Ann. Sec. 113.053 (Vernon Supp.
1991).

Texas Trust Code Sec. 113.054 provides that:

A trustee of one trust may not sell
property to another trust of which it is
also trustee unless the property is:

(1) a bond, note, bill, or other
obligation issued or fully
guaranteed as to principal and
interest by the United States; and
(2) sold for its current market price.
Tex. Trust Code Ann. Sec. 113.054
(Vernon 1984).

Texas Trust Code Sec. 113.055 provides that:

(a) Except as provided by Subsection (b)
of this section, a corporate trustee
may not purchase for the trust the
stock, bonds, obligations, or other
securities of the trustee or an
affiliate, and a non-corporate
trustee may not purchase for the
trust the stock, bonds, obligations,
or other securities of a corporation
with which the trustee is connected
as director, owner, manager, or any
other executive capacity.

(b) A trustee may:

(1) retain stock already owned by
the trust if the retention
satisfies Section 113.056 of
this Act; and

(2) exercise stock rights or
purchase fractional shares
under Section 113.053 of this
Act. Tex. Trust Code Ann. Sec.
113.055 (Vernon 1984).

Texas Trust Code Sec. 113.057 provides:

(a) A corporate trustee may deposit
trust funds with itself as a
permanent investment if authorized
by the settlor in the instrument
creating the trust or if authorized
in a writing delivered to the
trustee by a beneficiary currently
eligible to receive distributions
from a trust created before January
1, 1988.

(b) A corporate trustee may deposit with
itself trust funds that are being
held pending investment,
distribution, or payment of debts
if, except as provided by Subsection
(d) of this section:

(1) it maintains under control of
its trust department as
security for the deposit a
separate fund of securities
legal for trust investments;

(2) the total market value of the
security is at all times at
least equal to the amount of
the deposit; and

(3) the separate fund is marked as
such.

(c) The trustee may make periodic
withdrawals from or additions to the
securities fund required by
Subsection (b) of this section as
long as the required value is
maintained. Income from securities
in the fund belongs to the trustee.

(d) Security for a deposit under this
section is not required for a
deposit under Subsection (a) or
under Subsection (b) of this section
to the extent the deposit is insured
or otherwise secured under state or
federal law. Tex. Trust Code Ann.
Sec. 113.057 (Vernon Supp. 1991).

3. Examples of situations where a trustee breaches his
trustee duty of loyalty are:

(a) A trustee buying trust property. Bogert,
supra, Sec. 543, page 221; see also Tex. Prob.
Code Ann. Sec. 352 (Vernon Supp. 1991); Tex.
Trust Code Ann. Sec. 113.053 (Vernon Supp.
1991).

(b) A trustee leasing trust property to himself.
Bogert, supra, Sec. 543, page 241.

(d) A trustee buying for himself outstanding
claims against interests in trust property.
Bogert, supra, Sec. 543, page 256.

(e) A trustee selling his own property to the
trust. Bogert, supra, Sec. 543, page 272; see
also Tex. Trust Code Ann. Sec. 113.053 (Vernon
Supp. 1991).

(f) A corporate trustee buying an earmarked pool
of investments for trusts. Bogert, supra, Sec.
543, page 281; see also Tex. Trust Code Ann.
Sec. 113.171 (Vernon 1984).

(g) A corporate trustee buying its own stock or
holding its own stock for a trust. Bogert,
supra, Sec. 543, page 283; see also Tex. Trust
Code Ann. Sec. 113.055 (Vernon 1984).

(h) A trustee of one trust selling to itself as
trustee of another trust. Bogert, supra, Sec.
543, page 289; see also Tex. Trust Code Ann.
Sec. 113.054 (Vernon 1984).

(I) A trustee under a lease taking renewal or
buying a reversion for himself. Bogert, supra,
Sec. 543, page 293.

(j) A corporate trustee depositing trust assets
with himself. Tex. Trust Code Ann. Sec.
113.057 (Vernon Supp. 1991).

(k) A corporate trustee lending its own funds to a
trust. Bogert, supra, Sec. 543, page 313; see
also Tex. Trust Code Ann. Sec. 113.052 (Vernon
1984); and Tex. Trust Code Ann. Sec. 113.015
(Vernon 1984).

(l) A trustee employing itself to do specialized
work for the trust. Bogert, supra, Sec. 543,
page 319.

(m) A trustee of corporate stock voting for
himself as director or officer of the
corporation. Bogert, supra, Sec. 543, page
330.

(n) A trustee of a business engaging in a
competing business on his own behalf. Bogert,
supra, Sec. 543, page 339.

(o) A trustee accepting a gift from one with whom
he conducts trust business. Bogert, supra,
Sec. 543, page 343.

(p) A trustee securing incidental benefit to self
while engaged in trust business. Bogert,
supra, Sec. 543, page 344.

(q) A trustee with a duty to buy for the trust
purchasing for himself. Bogert, supra, Sec.
543, page 353.

(r) A trustee acting for the trust and also for a
third party who deals with the trust. Bogert,
supra, Sec. 543, page 355.

(s) Indirect disloyalty -- dealings with
relatives, affiliated parties and similar
persons. Bogert, supra, Sec. 543, page 359.

(t) A corporate trustee taking any action which
benefits itself as a creditor, InterFirst Bank
Dallas, N.A. v. Risser, supra. Such a breach
would include, but not be limited to:

(1) directing distributions to a
beneficiary indebted to the
fiduciary,

(2) discretionary allocations of
receipts and disbursements which
increase a creditor-beneficiary's
distributions, and

(3) purchases from or sales to a
business entity indebted to the
fiduciary.

C. Duty of Good Faith and Fair Play

1. The common law duty.

By virtue of the intimate knowledge which the
trustee has with respect to the financial affairs
of the beneficiary, the courts impose a duty of
good faith and fair play in all transactions
between the fiduciary and his beneficiary. Bogert,
supra, Sec. 544; see Geeslin v. McElhenney, 788
S.W.2d 683 (Tex.App.--Austin 1990, no writ.)
[dealing with an executor's duty to protect the
beneficiaries' interest by fair dealing in good
faith with fidelity and integrity]

2. The statutory duty of a trustee.

There are no statutory duties of good faith and
fair play that specifically apply to trustees.

D. Duty of Impartiality

1. The common law duty.

The Restatement (Second) of Trusts, supra, Sec. 183
provides:

When there are two or more beneficiaries
of a trust, the trustee is under a duty
to deal impartially with them.

See also Bogert, supra, Sec. 541, Sec. 612;
Commercial Nat. Bank of Nacogdoches v. Hayter, 473
S.W.2d 561 (Tex. Civ. App. 1968, writ ref'd n.r.e.)

2. The statutory duty of a trustee.

Texas Trust Code Sec. 113.101 provides that:

(a) A trustee shall administer the trust with
due regard for the interests of income
beneficiaries and remainderman with
respect to the allocation of receipts and
expenditures by crediting a receipt or
charging an expenditure to income or
principal or partly to each:

(1) in accordance with the terms of the
trust instrument;

(2) in the absence of any contrary terms
of the trust instrument, in
accordance with this subtitle; or

(3) if neither of the preceding rules of
administration is applicable, in
accordance with what is reasonable
and equitable in view of the
interests of those entitled to
income and to principal.

(b) If the trust instrument gives the trustee
discretion in crediting a receipt or
charging an expenditure to income or
principal or partly to each, no inference
arises from the fact that the trustee
makes an allocation contrary to this
subtitle. Tex. Trust Code Ann. Sec.
113.101 (Vernon 1984).

3. The duty of impartiality frequently applies to the
allocation of receipts and disbursements between
principal and income. The Texas Trust Code
contains specific allocation provisions at Sec.
113.101 - 113.111.

4. Many discretionary decisions involve the fiduciary
duty of impartiality. Some examples:

(a) Investment Decisions. The decision to invest
in assets for the purpose of generating either
income or growth involves the fiduciary duty
of impartibility. Income oriented investments
favor the income beneficiary, growth oriented
investments favor the remainderman. The
prudent person rule contained in Texas Trust
Code Sec.113.056 is a balanced investment
standard "considering the probable income
therefrom as well as the probable increase in
value and safety of their capital."

(b) Allocation of Receipts and Disbursements. Each
allocation of receipts and disbursements
involves the fiduciary duty of impartiality.
If a receipt or disbursement is allocated to
the income account then the allocation will
affect the income beneficiary. If a receipt or
disbursement is allocated to the principal
account then the allocation will affect the
remainderman.

(c) Reserves for Depreciation or Depletion.
Whether to establish a reserve as well as the
amount of the reserve will involve the
fiduciary duty of impartiality.

(d) Accumulation of Income. Whether to accumulate
or distribute income may involve the fiduciary
duty of impartiality. This is especially true
if accumulated income becomes part of the
principal account.

(e) Discretionary Income Distributions. The amount
of income distributed under a discretionary
income distribution standard may involve the
fiduciary duty of impartiality.

(f) Invasion of Corpus. Whether or not to invade
the principal of the trust may involve the
fiduciary duty of impartiality.

E. Duty of Confidentiality

1. The common law duty.

2. The statutory duty of a trustee.

While there is little common law authority and no
statutory authority for this duty, it is the author's
opinion that a fiduciary is under a duty not to divulge
confidential information as a result of the fiduciary
relationship.

F. Duty to Take Possession of the Trust Property

1. The common law duty.

A trustee is under a duty to take reasonable steps
to take and keep possession of and keep control of
trust property, Restatement (Second) of Trusts,
supra Sec. 175; Bogert, supra, Sec. 583; Scott,
supra, Sec. 175.

2. The statutory duty of a trustee.

There is no statutory duty to take possession of
trust property that specifically applies to
trustees.

G. Duty to Segregate Trust Assets and Not to Commingle

1. The common law duty.

A trustee is under a duty to the beneficiary to
keep the trust property separate from his
individual property, and so far as it is reasonable
that he should do so, to keep it separate from
other property not subject to the trust and to see
that the property is designated as property of the
trust, Restatement (Second) of Trusts, supra, Sec.
179; Bogert, supra, Sec. 596-612; Scott, supra,
Sec. 179.

The genesis of the current Texas rule regarding
tracing of commingled trust funds was the case of
Andrews v. Brown, 10 S.W.2d 707 (Com. App. 1928) in
which the Court observed:

"If a man mixes trust funds with his
own," it is said, "the whole will be
treated as trust property, except so far
as he may be able to distinguish what is
his own." Vice Chancellor Sir W. Page
Wood, in Frith v. Cortland, 2 Hem. & M.
417, 420. That principle seems to have
recognition in most, if not all, American
jurisdictions . . . [cites omitted,
emphasis supplied]

Analogous doctrines are part of the law
of accession and specification . . . and
of confusion of goods . . The principle,
we apprehend, is but a part of equity's
declination to extricate the wrongdoer
from self-imposed hard conditions, or to
tax the innocent, where one of two not in
pari delicto must suffer. [cites
omitted]

Id, at 709. This rule was first recognized by the
Texas Supreme Court in Logan v. Logan, 156 S.W.2d
507 (Tex. 1941) in which the court stated:

It is a general rule that where a trustee
wrongfully mixes trust funds of an
indeterminable amount with his own
private funds, the burden is on him to
distinguish his funds and the amount
thereof from those of the cestui que
trust; and if he cannot do so the whole
commingled fund, or the property
purchased therewith, becomes subject to a
trust in favor of the cestui que trust.
42 Tex. Jur. 740; 65 C.J., 972,978; 11
Am. Jur., 529;12 C.J., 491; 15 C.J.S.,
Confusion of Goods, Sec. 4j Bogert,
Trust & Trustees, Sec. 925, p.2677;
Andrews v. Brown Tex. Com. App., 10
S.W.2d 707; Meyers v. Baylor University,
Tex. Com App., 6 S.W.2d 393 writ refused.
[emphasis supplied]

The rule is analogous to that of confusion of
goods. Andrews v. Brown, supra. It is a harsh one,
but is justified by the wrongful conduct of the
trustee. The emphasis is on the injustice of
requiring an innocent beneficiary to distinguish
and trace the trust funds when the commingling was
occasioned by the wrongful act of the trustee. It
is expressed in Andrews v. Brown, supra [10 S.W.2d
709] as follows: "The principle, we apprehend, is
but a part of equity's declination to extricate the
wrongdoer from self-imposed hard conditions, or to
tax the innocent where one of the two not in pari
delicto must suffer."

On the other hand, there are authorities which hold
that if the commingling is done rightfully, and
with the consent of the beneficiary, the basis for
the rule is removed, and no presumption is raised
that the entire fund, or property purchased
therewith, is subject to the trust; and
consequently the burden remains on the plaintiff to
trace the trust funds into the specific property
and to show the amount thereof as one of the
essential elements of his case. [cites omitted]

Perhaps the rule last above announced should be
qualified to the extent that where the proof
necessary to distinguish the fund lies exclusively
within the possession of the trustee and he refuses
to make disclosure of such facts as he has at his
command, the presumption should be indulged in
favor of the cestui que trust.

This doctrine was reiterated by the Texas Supreme
Court in Eaton v. Hasted, 172 S.W.2d 493 (Tex.
1943). In this case a trustee commingled the trust
estate with his own funds. More than twenty-four
years elapsed after he had disposed of the last
known item of the trust estate. The trustee kept
no books, left no evidence of what he owed the
beneficiary. He, in truth, dealt with the trust
estate as his own. In this situation the court
observed:

A great authority has written that "where
there has been no positive loss, but the
whole funds, principal, profits and
proceeds, are in the trustee's hand in
their mingled condition, the burden of
proof rests upon him of showing most
conclusively what portion is his, and
whatever of the mixed fund, including
both profits and principal, he cannot
thus show to be his own, even though it
be the whole mass, will be awarded to the
beneficiary." Pomeroy, E.Q. Jur., Th Ed.,
vol.3, sec. 1076, p. 2471. Another writer
has said that the trustee must not mingle
the trust fund with his own; that, if he
does, the beneficiary may follow the
trust property, and claim every part of
the blended property which the trustee
cannot identify as his own; that if he
fails to keep clear, distinct and
accurate accounts, all presumptions are
against him and all obscurities and
doubts are to be taken adversely to him.
Perry, Trusts and Trustees Th Ed., vol.
1, sec. 447, p. 717, vol. 2, sec. 821, P.
1351; ibid., Th edition, vol. 1, sec.
447, and vol. 2 sacs. 837, 838. In
Andrews v. Brown, Tex. Com. App., 10
S.W.2d 707, it is held that if a trustee
mixes trust funds with his own, the whole
will be treated as trust property, except
so far as he may be able to distinguish
what is his own. [emphasis added]

Since it is undisputed that George Eaton
did have in his possession physical
properties of the estate of Lou Eaton
long after her death, which he liquidated
and commingled with his own, it was the
burden of petitioners, who stand in his
shoes, to distinguish what belonged to
him by reason of any expenditure on
account of Lou Eaton; it was their
obligation to plead and prove what
belonged to them on that score. We think
the justness of the rule placing this
burden on petitioners is obvious. Mrs.
Hasted was an infant when the trust was
created and it was not until thirty years
later that she learned there was any
trust. Opposed by unfriendly claimants,
the heirs of the dead trustee, who had
accorded her no consideration even before
there was any property dispute, she was
in no position to know how the trust had
been administered or to learn what had
become of its properties. "Where facts
lie peculiarly within the knowledge of a
party and cannot, in the nature of the
case, be known to his adversary, the
party having knowledge has the burden of
proving the facts." Spencer v. Petit,
Tex. Civ. App., 17 S.W.2d 1102 @ 1106,
(Affirmed, Tex. Com. App., 34 S.W.2d
798). [emphasis supplied]

Id at 497-498. Even though it was possible to
prove that the trust funds had been commingled, it
was not possible to trace trust funds into one
particular tract of real property acquired by the
trustee after the commingling. In dealing with
this property the Eaton Court stated:

More difficulty attends the question as
to whether trust funds were used to
purchase the Est Tract, but we think the
action of the courts below in fixing a
trust on it may properly be grounded on
the doctrine of commingling. The
quotations which we have already made
from Pomeroy and Perry support this view.
Moreover, "As a general rule the cestui
que trust's equitable right of recovery
is not destroyed by reason of the fact
that the trustee has so commingled the
trust property with his own property that
it is impossible particularly to be
ascertained and separated from the rest,
the entire commingled fund or property
will be treated as subject to the trust .
. . except insofar as the trustee may be
able to distinguish and separated that
which is his own." (Italics ours) 65
C.J., sec. 899, p.972. Otherwise, the
law would be placing a premium rather
than a penalty on the trustee's violation
of his imperative duty to deep regular
and accurate accounts during the whole
course of the trust. Pomeroy, E.Q. Jur.
Th Ed. vol.3, sec. 1063. [emphasis
supplied]

Id, at 498-499 In so holding the Eaton Court
observed that this case presented a much stronger
case for identification and tracing of trust funds
that was shown in Spencer et al v. Petit et al, 34
S.W.2d 798 (Tex. Com. App. 1931). In the Spencer
case the trustee so mixed and mingled the proceeds
of the original personal property on hand that it
lost its identity. The record failed to in any
manner account for what became of the assets. In
fact the trustee himself testified that he was
unable to tell what funds were used to purchase the
tracts of land which he claimed to own or how he
got the money to purchase them. The Eaton Court
observed that in Spencer all assignments of error
that there was no evidence that the funds of the
children had been traced into the cash payments for
the land were overruled.

Finally the Court in Eaton held that the heir,
devisee or donee of a trustee, who commingles trust
funds with his own, stands in the shoes of the
trustee with respect to the burden to trace
commingled trust funds:

It must be remembered that we have in
this case no intervening rights of
creditors of George Eaton, that we have
no innocent purchaser whose rights or
interests will be affected. The
petitioners, claiming as heirs of the
trustee, can assert no rights or equities
which he could not assert were he the
defendant. The principle applied may, in
some respects, seem hard and not free
from difficulty. Nevertheless, "the
principle, we apprehend, is but a part of
equity's declination to extricate the
wrongdoer from self-imposed hard
conditions, or to tax the innocent, where
one or two not in pari delicto must
suffer." Andrews v. Brown, supra.

Eaton, 172 S.W.2d at 499.

If, however, the beneficiary of the trust is
seeking to recover trust property from:

(a) a person who has paid the commingling trustee
fair and adequate consideration for the
property, or
(b) a creditor of the commingling trustee who has
advanced consideration to such trustee for the
debt,

then Texas law would require strict tracing and
other rules would apply.

These rules were again recognized by the Texas
Supreme Court in the case of Lung v. Lung, 259
S.W.2d 253 (Tex.1953). After quoting extensively
from the Logan case the Court held that:

These profits were commingled with
defendant's own funds and used by him in
the purchase of properties in his own
name. For these reasons we think it
cannot be said the commingling was
rightful, for which reasons the burden
was on defendant to trace the funds.
Logan v. Logan, supra; Eaton v. Hasted,
141 Tex. 349, 172 S.W.2d 493. [emphasis
supplied]

Id. at 259. See also General Association of
Davidian Seventh Day Adventists, Inc. v. General
Association of Davidian Seventh Day Adventists, 410
S.W.2d 256 (Tex. Civ. App. - Waco 1966, writ ref'd
n.r.e.), in which the court stated:

Plaintiffs concede in their brief that
"second Tithe" funds were subject to a
trust. While there is evidence that the
assets and properties here involved were
purchased with commingled "First" and
"Second" Tithe funds, the cestui's right
of recovery is not destroyed by reason of
the fact the Trustee commingled the trust
property with its own property. The
entire commingled fund or property will
be treated as subject to the trust . . .
And if the Trustee invests the trust fund
or its proceeds in other property, the
cestui que trust may follow the fund into
the new investment . . . And where the
Trustee mingles the trust money with his
own, whenever he pays out he is presumed
to have paid out with his own money.
[cites omitted]

Id. at 259. These rules were applied by the
Amarillo Court of Civil Appeals in 1979 in the case
of Peirce v. Sheldon Petroleum Co., 589 S.W.2d 849
(Tex.Civ.App.--Amarillo 1979, no writ). The Court
stated:

When, however, tracing to specific
property is impossible because the
trustee has commingled the property, the
right is not defeated if the beneficiary
can trace to the commingled fund. Logan
v. Logan, 138 Tex. 40, 156 S.W.2d 507
(1941). If the commingling was wrongful,
the burden is on the trustee to establish
which property is rightfully the
trustee's. If the trustee is unable to do
so, the entire commingled property is
subject to the trust. [emphasis
supplied]
Id., at 853.

2. The statutory duty of a trustee.

There is no statutory duty to segregate that
specifically applies to trustees.

H. Duty to Carry Out the Directions of the Person Creating
the Fiduciary Relationship

1. The common law duty.

The Restatement (Second) of Trusts, supra, Sec. 169
provides:

Upon acceptance of the trust by the
fiduciary he is under a duty to
administer the trust.

See also Scott, supra, Sec. 169; Bogert, supra,
Sec. 583. This duty includes a duty to strictly
adhere to the terms and provisions of the
instrument creating the fiduciary relationship.

2. The statutory duty of a trustee.

Texas Trust Code Sec. 113.082 provides for removal
of a trustee who has "materially violated or
attempted to violate the terms of a trust and the
violation results in a material financial loss to
the trust."

I. Duty to Keep the Beneficiaries Informed and to Account to
Them

1. The common law duty.

A trustee has a duty to inform the beneficiary of
important matters concerning the trust and the
beneficiary is entitled to demand of the fiduciary
information about the trust. See InterFirst Bank
Dallas, N.A. v. Risser, supra. It follows that a
fiduciary is under a duty to notify the beneficiary
of the existence of the trust so that he may
exercise his rights to secure information about
trust matters and compel an accounting from the
fiduciary. The duty to keep the beneficiaries
informed about non-routine transactions of a
substantial nature can be a considered separate and
distinct duty from the duty to account to them.
This duty exists independently of the rules of
discovery, applying even if no litigious dispute
exists between the trustee and the beneficiaries.
Huie v. DeShazo,___ S.W.2d ____; Opinion No. 95-0873 (Tex. 1996); Montgomery v. Kennedy, 669
S.W.2d 309 (Tex. 1984); Bogert, supra, Sec. 961-974; Scott, supra, Sec. 172-173; Restatement
(Second) of Trusts, supra, Sec. 172-173.

2. The statutory duty of a trustee.

A trustee may be compelled by a beneficiary to
furnish an accounting, Texas Trust Code Sec.
113.151, absent such a demand a trustee has no
statutory obligation to furnish beneficiaries with
periodic accountings unless the instrument creating
the fiduciary relationship mandates periodic
accountings. A Settlor may not totally eliminate
the trustee's duty to provide an accounting to the
court. Hollenbeck v. Hanna, 802 S.W.2d 412 (Tex.
App.--San Antonio, 1991). Hollenbeck contained
dicta wherein the court also questioned whether a
settlor should be able to deprive any significant
beneficiary of the statutory right to seek an
accounting.

J. Duty to Preserve and Protect the Trust Property

1. The common law duty.

A trustee is under the duty to use reasonable care
and skill to preserve the trust property.
Restatement (Second) of Trusts, supra, Sec. 176;
Bogert, supra Sec. 582; Scott, supra, Sec. 176.

2. The statutory duty of a trustee.

There is no statutory duty of preservation that
specifically applies to trustees.

K. Duty Not to Delegate Trust Responsibilities

1. The common law duty.

A trustee is under a duty not to delegate to others
the doing of acts which the fiduciary can
reasonably be required personally to perform.
Restatement (Second) of Trusts, supra, Sec. 171,
184; Scott, supra, Sec. 171, 184; Bogert, supra,
Sec. 584-591. Included in this duty is the duty
not to abdicate or delegate administration to a co-trustee if there are several trustees; each trustee
is under a duty to participate in the
administration of the trust and to use reasonable
care to prevent a co-trustee from committing a
breach of trust or to compel a co-trustee to
redress a breach of trust.

2. The statutory duty of a trustee.

There is no statutory duty not to delegate that
specifically applies to a co-trustee. The Texas
Trust Code, however, specifically allows a trustor
to delegate trust powers and duties among
collective co-trustees. Tex. Trust Code Ann. Sec.
114.003 (Vernon 1984).

L. Duty to Keep Accurate Books and Records

1. The common law duty.

A trustee is under a duty to keep accurate books
and records regarding what constitutes the trust
receipts and disbursements to and from the trust
estate, all receipts and disbursements to and from
the trust estate and, where applicable, records of
all allocations of receipts and disbursements
between the principal account and the income
account. In addition to accounting records, a
fiduciary has a duty to keep accurate legal and
business records regarding the trust estate.
Shannon v. Frost National Bank, 533 S.W.2d 389
(Tex.Civ. App.-San Antonio 1975, writ ref'd
n.r.e.); See Bogert, supra, Sec. 962.

2. The statutory duty of a trustee.

There is no statutory duty that specifically
requires a trustee to keep accurate books and
records.

M. Duty to Make the Trust Property Productive

1. The common law duty.

A trustee is under a duty to use reasonable care
and skill to make the trust property productive.
If a trustee commits a breach of trust by
neglecting, within a reasonable time, to invest
money comprising a portion of the trust estate, he
is chargeable with the amount of income which would
normally accrue from proper trust investments.
Restatement (Second) of Trusts, supra, Sec. 181;
Bogert, supra, Sec. 611; Scott, supra, Sec. 181.
See also Langford v. Shamburger, 417 S.W.2d 438,
444-445 (Tex. Civ. App. -- Fort Worth 1967, writ
ref'd n.r.e.).

2. The statutory duty of a trustee.

Texas Trust Code Sec. 113.110 provides:

(a) Except as provided by Subsection (b) of
this section, if part of the principal
consists of any type of property that has
been under-productive for more than one
year and if the trustee is required to
sell or otherwise dispose of the
property, the trustee shall do so as soon
as possible, and if the sale or other
disposition is made before the principal
is finally distributed, to the extent
that the net proceeds from the sale
exceed the inventory value of the
property, the income beneficiary or the
beneficiary's estate is entitled to a
share of the net proceeds. The
beneficiary's share is an amount equal
to:

(1) the difference between the net
proceeds and the amount which, if
invested at four percent a year
simple interest during the
allocation period, would have
produced the net proceeds, less

(2) the income received by the income
beneficiary from the trust property
or the value of the income
beneficiary's use of the trust
property during the allocation
period.

(b) Property is under productive if it does
not produce an average annual net income,
without considering depreciation or
obsolescence, equal to at least one
percent of its value.

(c) The allocation period begins one year
after the property becomes under
productive or one year after the trustee
receives the property if it was under
productive at the time of receipt.

(d) If there are successive income
beneficiaries, the income beneficiaries'
share of the net proceeds shall be
divided among them according to the time
each was entitled to income.

(e) This section does not require a trustee
to sell or dispose of property. The
determination as to whether the trustee
is required to sell or dispose of
property shall be made in accordance with
the requirements set out in the governing
instructions, other provisions of this
code, and the common law.

(f) For the purposes of this section:

(1) The "value" of property is:

(A) inventory value;
(B) if the property is part of the
original principal and does not
have an inventory value, market
value;
(c) if the property is purchased
after the principal is
established and does not have
an inventory value, its cost;
or
(D) if the property is acquired
through foreclosure of a
mortgage held by the trust, the
net investment in the property
up to the date of resale by the
trust, and not the bid price at
the foreclosure sale.

(2) "Net proceeds" is gross proceeds
received for the property less the
sum of the expenses incurred in
disposing of it and all carrying
charges that were charged to
principal while it was under
productive.

(3) "Net investment" is all money
invested and advanced. Tex. Trust
Code Ann. Sec. 113.110 (Vernon Supp.
1991).

See also Texas Trust Code Sec. 114.001(b) which
provides that;

The trustee is not liable to the
beneficiary for a loss or depreciation in
value to the trust property or for a
failure to make a profit that does not
result from a failure to perform the
duties set forth in Section 113.056 [the
prudent man rule] or from any other
breach of trust. (emphasis supplied)
Tex. Trust Code Ann. Sec. 114.001(b)
(Vernon Supp. 1991).

N. Duty to Review Trust Investments Periodically

1. The common law duty.

A trustee has the duty of examining and checking
the trust investments periodically through the life
of the fiduciary relationship. Jewett v. Capital
National Bank of Austin, 618 S.W.2d. 109 (Tex. Civ.
App.--Waco 1981, writ ref'd n.r.e.); Bogert, supra,
Sec. 684.

2. The statutory duty of a trustee.

Texas Trust Code Sec. 113.056(c) provides:

Within the limitations of Subsection (a)
of this section, a trustee may
indefinitely retain property acquired
under this section without regard to its
suitability for original purchase. Tex.
Trust Code Ann. Sec. 113.056(c) (Vernon
Supp. 1991)

O. Duty to Uphold and Defend the Trust

1. The common law duty.

A trustee has a duty to actively defend any attack
on the validity of the trust or any of its
provisions. See Bogert, supra, Sec. 581; Scott,
supra, Sec. 178; Restatement (Second) of Trusts,
supra, Sec. 178. A trustee cannot by legal action
destroy the trust or subject matter thereof so long
the fiduciary relationship remains in existence.
Brigs v. Brigs, 346 S.W.2d 106 (Tex. 1961); Mason
v. Mason, 366 S.W.2d 552 (Tex. 1963); First
National Bank of Port Arthur v. Sassine, 556 S.W.2d
116 (Tex. Civ. App. 1977, no writ) .

2. The statutory duty of a trustee.

There is no statutory duty to uphold and defend the
trust that applies specifically to trustees. See
Id.

P. Duty to Pay the Income Beneficiary

1. The common law duty.

Where a trustee is directed by the trust instrument
to pay income to a beneficiary for a designated
period, the trustee is under a duty to pay to him
at reasonable intervals the net income from the
trust property. See Restatement (Second) of
Trusts, supra, Sec. 182; Scott, supra, Sec. 182.

2. The statutory duty of a trustee.

There is no statutory duty to pay income to the
income beneficiary that applies specifically to
trustees.

IV. EXERCISE OF DISCRETION

A trust will frequently charge a trustee with the duty to make
discretionary decisions with respect to the administration of
the estate or trust. These decisions may include
discretionary investment decisions, discretionary allocation
of receipts and disbursements between the income and principal
accounts, discretionary reserves for depletion and
depreciation, and most frequently, discretionary income and
principal distribution powers. Frequently the instrument
granting discretionary decisions will provide that the
exercise of discretion is "absolute," "uncontrolled" or in the
"sole" discretion of the trustee.

A. Support Trust If a trust is a support trust then the
beneficiary may compel the trustee to make distribution
in accordance with a specific distribution standard. The
distribution standard of a support trust is generally
referred to as an "ascertainable standard."

The standard is ascertainable because it is specific
enough to be objectively applied. The distribution
standard in a typical support trust permits distribution
for the "health, support, maintenance and education" of
the beneficiary.

Support trusts also often have language requiring the
trustee to consider other sources of "income,"
"resources," "assets" available to the beneficiary at the
time of distribution.

Support trusts also often have language requiring
distribution according to a certain "standard of living"
that the beneficiary enjoys at a prescribed period of
time.

The discretion with which a trustee of a support trust is
clothed in determining how much of the trust property
shall be made available for the support of the
beneficiary and when it shall be used is not an unbridled
discretion. Rubion v. Rubion, 158 Tex. 43, 308 S.W.2d 4
(Tex. 1957); First National Bank of Beaumont v. Howard,
149 Tex. 130, 229 S.W.2d 781 (Tex.__). He may not act
arbitrarily in the matter, however pure his motives. In
Re Browns Appeal, 345 Pa. 373, 29 A.2d 52; Restatements
of Trusts, Sec. 187, p.487; 90 C.J.S. Trusts Sec.261,
p.310. His discretion must be reasonably exercised to
accomplish the purposes of the trust according to the
settlor's intention and his exercise thereof is subject
to judicial review and control.

B. Discretionary Trusts A trust is a discretionary trust
if the trustee is authorized to make distributions in his
sole discretion which is not subject to any objective
standard. If a trust is a discretionary trust then the
beneficiary may not compel the trustee to make
distribution. Distributions from a discretionary trust
are in the sole discretion of the trustee and are not
subject to any specific distribution standard. The
distribution standard of a discretionary trust is
generally referred to as a nonobjective standard. The
standard is nonobjective because it is not specific
enough to be objectively applied. The distribution
standard in a typical discretionary trust permits
distribution "in the sole discretion of the trustee."

A description of discretionary trusts is contained
in Section 228 of Bogert ,supra, which provides
that:

A settlor may provide that his trustee
shall have absolute and uncontrolled
discretion whether to pay or apply trust
income or principal to or for the benefit
of a named beneficiary, without fixing
any standard or guide which the trustee
is to consider and that the income which
the trustee does not elect to use for the
beneficiary shall be accumulated or paid
to another or to a class of other
persons. Such a trust has been called a
"discretionary trust" and this term has a
technical meaning for the purpose of
determining the rights of the beneficiary
and his assignees and creditors. It must
be distinguished from trusts where the
discretion of the trustee pertains only
to the time or manner of the payments, or
to the size of the payments needed to
achieve a certain purpose, for example,
to support the beneficiary. The trustee
must have complete discretion to pay or
apply or to totally exclude the
beneficiary, if the trust is to be called
"discretionary" in a technical sense.

C. Abuse of Discretion In general, a court will not
substitute its own discretion for that of a trustee,
however, the court will not permit him to abuse the
discretion. An abuse of discretion does not usually
occur unless the trustee acts outside the bounds of
"reasonable judgment." Scott, supra, Sec. 187. A court
should look to the following factors in determining
whether a fiduciary has abused his discretion in making
a trustee decision:

1. the extent of discretion conferred;
2. the existence of a definable external standard by
which the reasonableness of the trustee can be
judged;
3. if such a standard exists, the due diligence the
trustee used to obtain the facts necessary to
comply with this standard;
4. the circumstances surrounding the decision;
5. the factors that the trustee considered in making
the decision;
6. the motives of the trustee; and
7. whether or not the trustee had a conflict of
interest when making the decision.

Use of the terms "absolute," "uncontrolled," "sole" and
"exclusive" in granting discretion to a trustee does not
completely absolve the fiduciary from acting reasonably.
First Nat'l. Bank v. Howard, 149 Tex. 130, 229 S.W.2d 781
(Tex. 1950); Thorman v. Carr, 412 S.W.2d 45 (Tex.1967)

D. Failure to Exercise Discretion It is an abuse of
discretion for a trustee to fail to exercise judgment at
all, no matter how broad the standard. Scott, supra,
Sec. 187.3. A trustee can exercise its fiduciary duties
in such a negligent manner that the lack of diligence
will result in a breach of trust. Jewett, supra,.

V. MODIFICATION, LIMITATION AND RELEASE OF FIDUCIARY DUTIES

A. Modification Generally

1. Trustees.

Section 115.001(8) of the Trust Code provides that
the court has original and exclusive jurisdiction
over proceedings concerning trusts to relieve a
trustee from any or all of the duties, limitations,
and restrictions otherwise existing under the terms
of the trust instrument or the Trust Code.

B. Exculpation

1. Trustees.

Texas Trust Code Sec. 113.059 provides:

Except as provided in Subsection (b) of
this section, the settlor by provision in
an instrument creating, modifying,
amending or revoking a trust may relieve
the trustee from a duty, liability or
restriction imposed by this subtitle.

A settlor may not relieve a corporate
trustee from the duties, restrictions, or
liabilities of section 113.052 or 113.053
of this Act. Tex. Trust Code Ann. Sec.
113.059 (Vernon 1984).

Exculpatory clauses will be strictly construed.
Jewett v. Capital National Bank of Austin, 618
S.W.2d 109 (Tex. Civ. App.--Waco 1981, writ ref'd
n.r.e.). Texas courts will, however, recognize the
validity of trust exculpatory clauses--this
recognition is based on the above quoted provisions
of the Texas Trust Code. Gerdes, supra. A trust
exculpatory clause may not, as a matter of public
policy, relieve a trustee of liability for self
dealing, action taken in bad faith, or for acting
intentionally adverse or with reckless indifference
to the interests or the beneficiary. Interfirst
Bank Dallas, N.A. v. Risser, supra.

There is a distinction between modifying the
fiduciary duties that apply to a fiduciary and
exculpating a fiduciary for breach of fiduciary
duty. This distinction was addressed in the case of
Jochec v. Clayburne, 862 S.W.2d 516 (Tex. Civ.
App.-Austin 1993, writ denied)

C. Court Authorization

1. Trustees.

Section 112.054 of the Trust Code provides:

(a) On the petition of a trustee or a
beneficiary, a court may order that the
trustee be changed, that the terms of the
trust be modified, that the trustee be
directed or permitted to do acts that are
not authorized or that are forbidden by
the terms of the trust, that the trustee
be prohibited from performing acts
required by the terms of the trust . . .
(emphasis supplied) Tex. Trust Code Ann.
Sec. 112.054 (Vernon Supp. 1991).

While time consuming and expensive, this provision
allows extra protection for a trustee who seeks
permission of the court to engage in action not
authorized by the trust instrument. For the
corporate fiduciary, it provides the only way to
purchase or sell trust assets or to borrow trust
funds without incurring liability. In addition, it
allows a fiduciary to do prohibited actions when
releases or indemnification by beneficiaries would
be potentially ineffective due to incapacity. Note
that Trust Code Section 115.014 provides for the
appointment of an attorney or guardian ad litem for
unrepresented parties.

D. Actions of Beneficiaries

1. Consent.

a. Trustees.

Texas Trust Code Sec. 114.005 provides:

(a) A beneficiary who has full legal
capacity and is acting on full
information may relieve a trustee
from any duty, responsibility,
restriction, or liability as to the
beneficiary that would otherwise be
imposed on the trustee by this
subtitle, including liability for
past violations, except as to the
duties, restrictions and liabilities
imposed on corporate trustees by
Section 113.052 or 113.053 of this
subtitle. (emphasis supplied)

(b) The release must be in writing and
delivered to the trustee. Tex. Trust
Code Ann. Sec. 114.005 (Vernon
1984).

"Full information" is defined as full knowledge of
all material facts which the trustee himself knows.
Slay v. Burnett Trust, 187 S.W.2d 377 (Tex. 1945).

2. Estoppel.

There are cases in which a beneficiary has been
held estopped from asserting a claim against a
trustee because of the beneficiary's actual or
presumed consent to the fiduciary's actions. Beaty
v. Bales, 677 S.W.2d 750 (Tex.App.--San Antonio
1984, writ ref'd n.r.e.); Langford v. Shamburger,
417 S.W.2d 438 (Tex. Civ. App.--Fort Worth 1967,
writ ref'd n.r.e.). However, the general rule is
that the beneficiary has to have been fully and
fairly informed of the actions constituting the
breach of trust. In the case of self-dealing, the
trustee has to have "affirmatively made a full and
complete disclosure" to the beneficiary before
estoppel will protect the fiduciary. Burnett v.
First Nat. Bank of Waco, Texas, 536 S.W.2d 600
(Tex. Civ. App. --Eastland 1976, writ ref'd
n.r.e.).

3. Releases and Indemnification

Releases and indemnifications present problems in
the fiduciary context. First, releases must be
supported by consideration. Southwestern Fire and
Cas. Co. v. Atkins, 346 S.W.2d 892 (Tex. Civ. App.--Houston 1961, no writ). Consideration in a
fiduciary context would have to involve the trustee
performing or not performing some act which it
would otherwise not do or do. For example, a
trustee might agree to resign or to terminate the
trust. The problem arises when a trustee agrees to
do something he would otherwise be required to do
in carrying out his fiduciary duties.

If there are unknown, contingent or minor
beneficiaries, a trustee needs to obtain
indemnification from primary beneficiaries in order
to be fully protected. The indemnification must
explicitly state that the indemnitor is
indemnifying the trustee for acts of negligence in
order for the contract to be enforceable in
situations involving negligence. Jewett v. Capital
Nat. Bank of Austin, 618 S.W.2d 109 (Tex. Civ.
App.--Waco 1981, writ ref'd n.r.e.).

PART TWO - ACTIONS FOR BREACH OF FIDUCIARY DUTIES

I. TYPES OF ACTIONS INVOLVING BREACH OF FIDUCIARY DUTIES

A. Accounting

1. Texas Trust Code Sec.114.001 provides that "The
trustee is accountable to a beneficiary for the
trust property and for any profit made by the
trustee through or arising out of the
administration of the trust, even though the profit
does not result from a breach of trust; provided,
however, that the trustee is not required to return
to a beneficiary the trustee's compensation as
provided by this subtitle, by the terms of the
trust instrument, or by a writing delivered to the
trustee and signed by all beneficiaries of the
trust who have full legal capacity."

Tex. Trust Code Ann. Sec.113.151 (a) provides that
a beneficiary by written demand request the trustee
to deliver to each beneficiary of the trust a
written statement of accounts covering all
transactions since the last accounting or since the
creation of the trust, whichever is later. The
trustee is not required to account to beneficiaries
more frequently than once every 12 months unless a
more frequent accounting is required by the court.

2. Tex. Trust Code Ann. Sec.113.151 (b) provides that
an "interested person" [as such person is defined
in Tex. Trust Code Ann. Sec.111.004 (7)] may file
suit to compel the trustee to account. Tex. Trust
Code Ann. Sec.113.151 also provides that a
beneficiary may file suit to compel an accounting.
A Settlor may not totally eliminate a trustee's
duty to provide an accounting to the court.
Hollenbeck v. Hanna, 802 S.W.2d 412 (Tex. App.-San
Antonio, 1991)

3. Tex. Trust Code Ann. Sec.113.152 outlines the
contents of a trust Accounting. This section
provides that a trust accounting shall show:

a. all trust property that has come to the
trustee's knowledge or into the trustee's
possession and that has not been previously
listed or inventoried;
b. a complete account of receipts, disbursements,
and other transactions regarding the trust
property for the period covered by the
account, including their source and nature,
with receipts of principal and income shown
separately;
c. a listing of all property being administered
with an adequate description of each asset;
d. the cash balance on hand and the name and
location of the depository where the balance
is kept; and
e. all known liabilities owed by the trust.

4. An accounting demand is often the first step in
litigation against the trustee. In addition to the
accounting, a beneficiary is also entitled to
inspect the books and records of the trustee. This
informal discovery is often invaluable to a
beneficiary seeking information about his or her
trust.

B. Breach of Fiduciary Duty

1. Texas Courts recognize that courts may grant relief
in an equitable proceeding for breach of fiduciary
duty. Risser, supra.

2. The elements of breach of fiduciary duty are:

(a) the existence of a fiduciary duty,
(b) the failure of the trustee to perform it,
(c) and proof that the breach of fiduciary duty
caused the plaintiff a loss. Bogert, supra
Sec. 871

C. Declaratory Judgment

1. Chapter 37 of the Texas Civ. Practice and Remedies
Code Sec. 37.005 provides that:

A person interested as or through a . . .
trustee . . . other fiduciary . . . or
cestui que trust in the administration of
a trust . . . may have a declaration of
rights or legal relations in respect to
the trust. . .
(1) to ascertain any class of
creditors, devisees, legatees,
heirs, next of kin or others;
(2) to direct the . . . trustees to
do or abstain from doing any
particular act in their
fiduciary capacity; or
(3) to determine any question
arising in the administration
of the trust . . . including
the construction of . . . other
writings.

2. Chapter 37 of the Texas Civ. Practice and Remedies
Code contains special provisions relating to
parties, jury trials, costs and attorneys fees.

3. In order to bring a declaratory judgment action
under Chapter 37 of the Texas Civ. Practice and
Remedies Code there must be an "issue in
controversy."

D. Petition for Instruction Under the Texas Trust Code

1. A cause of action may be brought to seek
instruction from the court regarding what fiduciary
duties exist, whether they may be dispensed with,
or whether a fiduciary duty has been breached. The
court would have jurisdiction to determine such
action pursuant to Tex. Trust Code Ann. Sec.
115.001 (see jurisdiction below)

2. In a petition for instruction under Tex. Trust Code
Ann. Sec. 115.001 there is no requirement that
there be an "issue in controversy." Gregory v.
Bank Corpus, 716 S.W.2d 662 (Tex.Civ. App. Corpus
Christi, 1986)

E. Modification or Termination

1. Tex. Trust Code Ann. Sec. 112.054 provides that:

(a) On the petition of a trustee or a
beneficiary, a court may order that the
trustee be changed, that the terms of a
trust be modified, that the trustee be
directed or permitted to do acts that are
not authorized or that are forbidden by
the terms of the trust, that the trustee
be prohibited from performing acts
required by the terms of the trust, or
that the trust be terminated in whole or
in part, if:

(1) the purposes of the trust have been
fulfilled or have become illegal or
impossible to fulfill; or
(2) because of circumstances not known
to or anticipated by the settlor,
compliance with the terms of the
trust would defeat or substantially
impair the accomplishment of the
purposes of the trust.

(b) The court shall exercise its discretion
to order a modification or termination
under Subsection (a) in the manner that
conforms as nearly as possible to the
intention of the settlor. The court shall
consider spendthrift provisions as a
factor in making its decision whether to
modify or terminate, but the court is not
precluded from exercising its discretion
to modify or terminate solely because the
trust is a spendthrift trust.

II. PERSONS ENTITLED TO BRING AN ACTION FOR BREACH OF FIDUCIARY
DUTY

A. Standing

1. Trusts.

Texas Trust Code Sec. 115.001 provides:

(a) Except as provided by Subsection (d) of
this section, a district court has
original and exclusive jurisdiction over
all proceedings concerning trusts,
including proceedings to:

(1) construe a trust instrument;
(2) determine the law applicable to a
trust instrument;
(3) appoint or remove a trustee;
(4) determine the powers,
responsibilities, duties, and
liability of a trustee;
(5) ascertain beneficiaries;
(6) make determinations of fact
affecting the administration,
distribution, or duration of a
trust;
(7) determine a question arising in the
administration or distribution of a
trust;
(8) relieve a trustee from any or all of
the duties, limitations, and
restrictions otherwise existing
under the terms of the trust
instrument or of this subtitle;
(9) require an accounting by a trustee,
review trustee fees, and settle
interim or final accounts; and
(10) surcharge a trustee.

(b) The district court may exercise the
powers of a court of equity in matters
pertaining to trusts.

(c) Unless specifically directed by a written
order of the court, a proceeding does not
result in continuing supervision by the
court over the administration of the
trust.

(d) The jurisdiction of the district court
over proceedings concerning trusts is
exclusive except for jurisdiction
conferred by law on a statutory probate
court. Tex. Trust Code Ann. Sec. 115.001
(Vernon 1984).

The term "interested" person is defined in Texas Trust
Code Sec. 111.004(f).

A beneficiary of a trust may have standing to sue the
trustee but may not have standing to sue an attorney
representing the trust for legal malpractice. There may
be no privity of contract between the beneficiary of a
trust and the law firm representing the trust. Although
a fiduciary relationship may exist between the
beneficiary of a trust and a trustee, no fiduciary
relationship may exist between the beneficiary of a trust
and the attorney representing the trustee. Perry v.
Vinson & Elkins, 859 S.W.2d 617 (Tex. App. Houston, 1st
Dist. 1993, writ denied).

B. Parties

1. Trusts.

Texas Trust Code Sec. 115.011 provides:

(a) Any interested person may bring an action
under Section 115.001 of this Act.

(b) Contingent beneficiaries designated as a
class are not necessary parties to an
action under Section 115.001 of this Act.
The only necessary parties to such an
action are:

(1) a beneficiary on whose act or
obligation the action is predicated;
(2) a person designated by name in the
instrument creating the trust; and
(3) a person who is actually receiving
distributions from the trust estate
at the time the action is filed.

(c) The attorney general shall be made a
party to and given notice of any suit or
judicial proceeding relating to
charitable trusts to the extent and in
the manner provided by Article 4412a,
Revised Statutes, as amended.

(d) A beneficiary of a trust may intervene
and contest the right of the plaintiff to
recover in an action against the trustee
as representative of the trust for a tort
committed in the course of the trustee's
administration or on a contract executed
by the trustee. Tex. Trust Code Ann. Sec.
115.011 (Vernon 1984).

2. Unknown Heirs and Unascertained Beneficiaries.

If there are unknown heirs or unascertained
beneficiaries who would not be otherwise bound by
the judgment by virtue of the doctrine of virtual
representation, see Bradley v. Henry, 239 S.W.2d
404 (Tex. Civ. App. - Fort Worth 1951, no writ) and
Tex. Trust Code Ann. Sec. 115.013 (Vernon 1984),
then the court will appoint a guardian ad litem or
attorney ad litem to represent theses interests.

3. Attorney General.

Texas Trust Code Sec. 123.002 provides:

For and on behalf of the interest of the
general public of this state in
charitable trusts, the attorney general
is a proper party and may intervene in a
proceeding involving a charitable trust.
The attorney general may join and enter
into a compromise, settlement agreement,
contract, or judgment relating to a
proceeding involving a charitable trust.
Tex. Trust Code Ann. Sec. 123.002 (Vernon
Supp. 1991).

C. Capacity

The capacity in which a person brings or defends a
lawsuit for breach of fiduciary duty may have a direct
bearing on:

1. jurisdiction,

2. venue,

3. whether the trust estate or the personal estate of
the person serving as a trustee is liable for the
judgment, and

4. whether the trustee is authorized to fund the
prosecution or defense of the litigation out of the
trust estate.

Special attention must therefore be given to whether the
person bringing or defending the cause of action is doing
so in his individual capacity or in his fiduciary
capacity.

An action for breach of fiduciary duty may be brought by
a beneficiary in his individual capacity against a person
serving as a trustee in such person's fiduciary capacity
(rather than the trustee's individual capacity). One
example of this type of suit would be a suit by a
beneficiary against a trustee for not complying with the
income distribution standard in the trust. In this type
of suit beneficiary is personally seeking to recover from
the trust estate of the trust rather than from the
personal assets of the person serving as trustee.

An action for breach of fiduciary duty may also be
brought by a beneficiary in his individual capacity
against a person serving as a trustee in such persons
individual capacity (rather than the persons fiduciary
capacity). One example of this type of suit would be a
suit by a beneficiary against a trustee to recover
profits that the trustee personally made as a result of
his breach of the fiduciary duty of loyalty. In this
type of suit the beneficiary is seeking to recover from
the personal assets of the person serving as trustee
(rather seeking recovery from the trust estate).

Finally, an action for breach of fiduciary duty may be
brought by a beneficiary in a derivative capacity against
a person serving as a trustee in such persons individual
capacity (rather than the person's fiduciary capacity).

It is only when the trustee cannot or will not
enforce the cause of action that he has
against the third person that the beneficiary
is allowed to enforce it. In such a case, the
beneficiary is not acting on a cause of action
vested in him, but is acting for the trustee,
and the period of the statute of limitations
should be computed from the time the trustee
acquired his right to sue. The situation of
the trustee with regard to competency, and not
that of the beneficiary, is controlling as to
the tolling of the statute of limitations.
Interfirst Bank-Houston, N.A., v. Quintana
Petroleum Corporation, 699 S.W.2d 874 (Tex.
Civ. App.--Houston [1st Dist.] 1985, writ
ref'd n.r.e.); 29 Tex. Jur. 3d Decedents'
Estates Sec. 711 (1983);869 Bogert ,supra 92.

In this type of suit the beneficiary is seeking recovery
to the trust estate (rather than personally) from the
personal assets of the person serving as trustee (rather
than seeking recovery from the fiduciary estate).

III. JURISDICTION IN CASES INVOLVING BREACH OF FIDUCIARY DUTY

A. Suits Against Trustees

Jurisdiction over suits against trustees is usually in
the district court. Texas Trust Code Sec. 115.001(a)
provides that "Except as provided in subsection (d) of
this section, a district court has original and exclusive
jurisdiction over all proceedings concerning trusts . .
." Subsection (d) provides that "the jurisdiction of the
district court over proceedings concerning trusts is
exclusive except for jurisdiction conferred by law on a
statutory probate court. Texas Probate Code Sec. 5A(c)
provides "A statutory probate court has concurrent
jurisdiction with the district court in all actions; . .
. involving an inter vivos trust . . . involving a
charitable trust; and . . . involving a testamentary
trust." Tex. Prob. Code Ann. Sec. 5A(c). The
jurisdiction of a statutory probate court over trusts is
concurrent with that of the district court regardless of
whether or not the suit for breach of fiduciary duty is
appertaining to or incident to an estate under
administration. Tex. Prob. Code Ann. Sec. 5A(d) (Vernon
Supp. 1991).

IV. VENUE IN CASES INVOLVING BREACH OF FIDUCIARY DUTY.

A. Suits Against Trustees

Texas Trust Code Sec. 115.002 provides:

(a) The venue of an action under Section
115.001 of this Act is determined
according to this section.

(b) If there is a single, noncorporate
trustee, venue is in the county in which
the trustee's residence is located.

(c) If any trustee is a corporation, venue is
in the county in which the corporation's
principal office is located, or, if two
or more corporations are trustees of the
trust, venue is in the county in which
the principal office of any of the
corporations is located.

(d) If there are two or more trustee, none of
which is a corporation, venue is in the
county in which the principal office of
the trust is maintained. Tex. Trust Code
Ann. Sec. 115.002 (Vernon 1984).

The venue provisions contained in Section 115.002 apply
only to the specifically enumerated trust actions
contained in Texas Trust Code Sec. 115.001. If the cause
of action is not in this list then this section of the
trust code may not be applicable. Mayflower Trust Co. v.
Howell, 413 S.W.2d 783 (Tex. Civ. App.--Houston 1967,
writ dismissed).

V. LIABILITY FOR ACTS OF CO-TRUSTEES

A. Co-Trustees

Texas Trust Code Sec. 113.085 provides:

Except as otherwise provided by the trust
instrument or by court order:

(1) a power vested in three or more trustees
may be exercised by a majority of the
trustees; and

(2) if two or more trustees are appointed by
a trust instrument and one or more of the
trustees die, resign, or are removed, the
survivor or survivors may administer the
trust and exercise the discretionary
powers given to the trustees jointly.
Tex. Trust Code Ann. Sec. 113.085 (Vernon
1984).

While Sec. 113.085 does not so provide (unless otherwise
provided by the trust instrument or court order) a power
vested in two trustees may be exercised only by both of
the trustees. If there are more than two trustees then,
as indicated above, a majority may exercise a power. If
the action of the majority of the trustees constitutes a
breach of fiduciary duty (rather than a difference of
opinion regarding a discretionary decision) then a non-participating co-trustee has a duty to take action
against participating co-trustees to preserve and protect
the trust estate.

Restatement (Second) of Trusts, supra, Sec. 224 provides
that a trustee is not liable to the beneficiary unless
he:

(a) participates in a breach of trust
committed by his co-trustee; or

(b) improperly delegates the administration
of the trust to his co-trustee; or

(d) by his failure to exercise reasonable
care in the administration of the trust
has enabled his co-trustee to commit a
breach of trust; or

(e) neglects to take proper steps to compel
his co-trustee to redress a breach of
trust.

VI. LIABILITY FOR ACTS OF PREDECESSOR TRUSTEES

A. Trustees

Texas Trust Code Sec. 114.002 provides:

A successor trustee is liable for a breach of
trust of a predecessor only if he knows or
should know of a situation constituting a
breach of trust committed by the predecessor
and the successor trustee:

(a) improperly permits it to continue;

(b) fails to make a reasonable effort to
compel the predecessor trustee to deliver
the trust property; or

(c) fails to make a reasonable effort to
compel a redress of a breach of trust
committed by the predecessor trustee.
Tex. Trust Code Ann. Sec. 114.002 (Vernon
1984).

Restatement (Second) of Trusts, supra, Sec. 223 provides
that a successor trustee is liable for breach of trust if
he:

(a) knows or should know of a situation
constituting a breach of trust committed
by his predecessor and he improperly
permits it to continue; or

(b) neglects to take proper steps or compel
the predecessor to deliver trust property
to him; or

B. Exculpation

Particular attention should be paid to whether or not the
trust contains a provision relieving the successor of
liability to review acts of a predecessor. This type of
exculpatory clause is probably valid in Texas insofar as
it relates to successor trustees. Steph v. Scott, 480
F.2d 267 (5th Cir. 1983).

VII. STATUTE OF LIMITATIONS FOR BREACH OF FIDUCIARY DUTIES

A. When the Statute Begins to Run

In an action against a trustee for breach of fiduciary
duty, statutes of limitations begin to run when a breach
occurs and the beneficiary knows or with due diligence
should have known of the trustee's breach. Many cases
have analyzed whether a beneficiary had either notice of
a breach or notice of facts sufficient to require a duty
to investigate.

1. Notice of breach.

In general, acts which constitute notice of a
trustee's breach involve: a refusal of a
beneficiary's demand for trust funds or property;
knowledge acquired by a beneficiary concerning a
trustee's unauthorized disposal or conversion of
trust funds; declarations by a trustee denying the
trust; or termination of the trust by lapse of
time. For example, one court found that a
beneficiary's claim was barred by limitations where
she filed suit four years and three months after
executors and trustees had refused her demand for
payment under the terms of the will (four-year
limitations period applied). Anderson v. Hunt, 122
S.W.2d 345, 347-348 (Tex. Civ. App.--Fort Worth
1938, writ ref'd). In another case, the court
found that a son's claim that certain property was
held in trust for him by his father was barred by
limitations as a matter of law, where the son's
affidavit stated that the father had repudiated the
trust and used and claimed the property as his own
more than nine years before the suit was filed.
Mueller v. Banks, 300 S.W.2d 762, 764-765 (Tex.
Civ. App.--San Antonio 1957, writ ref'd n.r.e.).
Finally, in another case, a court held that the
statute of limitations began running on the date
that the trust was terminated. Guardian Trust Co. v
Studdert, 36 S.W.2d 578, 584 (Tex. Civ. App.--Beaumont, 1931), aff'd, 55 S.W.2d 550 (1932). In
this case, a buyer of stock was to hold all stock
dividends in trust for five years to give to the
seller as partial payment towards his debt for the
purchase. In addition to the dividends, the buyer
was to make payments on the note from his own
funds. At the end of the five-year period the
parties settled the trust; the buyer handed over
the five years of dividends while still owing about
half of the purchase price. The Texas Supreme
Court held that where the settlement between the
buyer and seller terminated the express trust, a
debtor-creditor relationship was created and the
statute of limitations began to run. Guardian Trust
Co., 36 S.W.2d at 584, 585. These cases give
examples of the types of acts that courts consider
sufficient notice to start the statutes of
limitations running.

2. No Notice of Breach.

In comparison, the courts do not consider the
following sufficient notice of breach: mere
possession of trust property by a trustee; mere
payment of taxes by the trustee in his individual
capacity; actions by the trustee in accordance with
his proscribed authority to control, manage, or
dispose of property; legal title remaining in the
trustee for a considerable period after the
beneficiary was entitled to demand same; and acts
of repudiation by the trustee where the
beneficiaries do not know that a trust exists.
Thus, one court found that where a community
administrator and statutory trustee had broad
managerial powers, in accordance with Texas Probate
Code Sec.167, to control, manage, and dispose of
community property as may seem for the best
interest of the estate, the trustee's sale of the
property did not serve as notice to the beneficiary
sufficient to start limitations running against her
claim. Estate of D.F. Jackson, 613 S.W.2d 80, 83-84
(Tex. Civ. App.--Amarillo 1981, writ ref'd n.r.e)
In another case, the court found that where the
beneficiaries of a trust had no knowledge that the
trust existed, the trustee could not start
limitations running by claiming and using the
property as his own. Rice v. Ward, 51 SW 844, 845
(Tex. 1899). Finally, in a claim against a trustee
for breach in distribution of trust funds, a court
ruled that limitations began to run when the
beneficiary first learned of the payment of funds
and not on the date the check was issued (seven
months earlier). Flowers v. Collins, 357 S.W.2d
179, 181 (Tex. Civ. App.--Austin 1962, writ
dism'd). In sum, for limitations to run, the
beneficiary must know of the existence of the
trust, and he or she must have knowledge of a
breach or of other actions by the trustee that are
adverse to his or her claim.

When determining whether a beneficiary had
knowledge of a breach or of facts sufficient to
excite inquiry, one must take into consideration
the fiduciary relationship of the parties. In
actions against trustees, there is no duty on the
part of the beneficiary to investigate, at least
until he has knowledge of facts sufficient to
excite inquiry. See Courseview v. Phillips, 312
S.W.2d 197, 205 (Tex. 1957). A fiduciary
relationship is one of the circumstances to be
considered in determining whether fraud might have
been discovered by the exercise of reasonable
diligence. Where a relationship of trust and
confidence exists one may not exact as prompt or as
diligent an investigation as might otherwise be
expected. Id.

3. No duty to investigate.

Where a fiduciary relationship exists, courts have
generally found that no duty to investigate exists.
Examples include: where a trustee uses the
property as his own but assures the beneficiaries
that he or she is holding the property in trust for
them; where the beneficiaries know that the trustee
is exercising control over trust funds and property
but do not know that he is using them for his own
gain; and, where the beneficiaries had access to
records that if examined would have uncovered the
breach. For example, in one case, a trustee used
trust funds to make investments, sold the
investments for a profit, and then returned the
principal with legal interest to the trust, keeping
the excess. Slay v. Burnett Trust, 187 S.W.2d, at
393. The Texas Supreme Court held that the fact
that the beneficiaries and co-trustees had
knowledge of the former trustee's involvement with
the investment venture, and the fact of the
existence of records in the office of trust showing
the issuance by the trust of two checks (with
notations indicating that they were used by the
trustee for expenses in litigation concerning the
investment) was not sufficient to put the
beneficiary or the co-trustees on inquiry. Id. at
394. In another case, the court found limitations
did not bar a claim where a trustee had used
property as his own and kept the income received
therefrom, but had made the beneficiaries believe
that his conduct was not adverse to their interest
by giving repeated assurances that he was holding
the property for their benefit. Hatton v. Turner,
622 S.W.2d 450, 459 (Tex. Civ. App.--Tyler 1981, no
writ). Courts believe that it is more reasonable
for a beneficiary to trust one with whom he or she
shares a relationship of trust than if an arms-length relationship were involved.

4. Investigation reasonable.

Where there is a duty to review or oversee trust
transactions, as in the case of co-trustees, or
subsequent trustees and executors, a court may find
that the existence of evidence in the trust records
showing discrepancies or fraud should have been
discovered by due diligence. Moreover, if a
beneficiary gains actual knowledge of facts
sufficient to alert him or her that the trustee is
not holding the property for the beneficiary's
benefit, the beneficiary will then be required to
investigate. In one case, a court found that the
beneficiaries' and subsequent trustees' claims
against two former executrix-trustees were barred
by limitations where, at the time the subsequent
trustees were appointed (about 12 years before this
suit was filed), various information, reflecting
the discrepancies on which the claim was based, was
available and in the possession of the claimants.
Interfirst Bank-Houston, v. Quintana Petroleum, 699
S.W.2d 864, 875 (Tex. App.--Houston [1st Dist.]
1985, writ ref'd n.r.e). This information
included: the inventory, appraisal, and lists of
claims for the estate; the estate tax returns,
financial statements, and audit reports; and an
accounting made in preparation for other
litigation. The court stated:

There is no harshness in holding that the
[subsequent trustees] are charged with:
knowledge of the gifts made to the trusts
that they are administering by the
testator's will; the information
furnished by the inventory and appraisal
filed in the testator's estate; the
various properties transferred from the
estate into the trust that they are
administering; and, the content of the
audits made by previous trustees. The
information furnished from these sources
in this case is sufficient as a matter of
law to require the trustee to begin an
inquiry, and the record shows that a
diligent inquiry would have led to the
discovery of the "self-dealing"
transaction about which [the] complaint
has been made. (punctuation added)

Id. at 876. The court stated that because a
trustee was the proper party to bring an action
against the executrices in this case, the period of
limitations should be computed from the time the
subsequent trustees should have known of the
breach. Id. at 874. Thus, had the subsequent
trustees adequately performed their duties in
administering the trust, they would have examined
documents revealing certain discrepancies. Then,
with this knowledge of facts sufficient to excite
inquiry, they would be under a duty to investigate,
and the statute of limitations would begin to run.

A beneficiary must gain actual or constructive
notice of a breach in order for the statute of
limitations to run. Generally this must include
knowledge of acts that are adverse to the
beneficiary's claim and that exceed the trustee's
authority to control, manage, or dispose of trust
funds or property. The acts must be sufficiently
definite to inform the beneficiary that the trustee
is no longer holding the property for his or her
benefit. Because of the fiduciary relationship
between a trustee and a beneficiary, the
beneficiary is under no duty to investigate the
trustee's actions, at least until he acquires
knowledge of facts sufficient to excite inquiry.
Therefore, the existence of records that may reveal
a breach do not begin the running of limitations
unless the beneficiary is under some other duty to
examine or oversee trust transactions, or if the
beneficiary gains actual knowledge of the
transactions through other means.

B. The Limitations Period

1. While the statute of limitations in Texas for
breach of an express trust is unclear, the
limitations period is probably four years. Courts
have used both the two-year (Tex. Civ. Prac. & Rem.
Code Sec. 16.003, formerly Tex. Rev. Civ. Stat.
Ann. art. 5526) and the four-year (Tex. Civ. Prac.
& Rem. Code Sec. 16.051, formerly Tex. Rev. Civ.
Stat. Ann. art. 5529) statutes of limitations.

2. In 1944, the Texas Supreme Court appeared to adopt
the four-year statute of limitations in Peek v.
Berry, 143 Tex. 294, 184 S.W.2d 272 (Tex. 1944).
In Peek, the court held that the four-year statute
ordinarily applied to suits arising out of breach
of trust. Id. at 275.

(a) The Waco Court of Appeals has held that the
four-year statute applies to the breach of a
fiduciary relationship. Graham v. Turner, 472
S.W.2d 831, 836 (Tex. Civ. App. --Waco 1971,
no writ) (citing Peek).

(b) Prior to Graham, the Waco Court of Appeals had
held that "[i]t is well settled in Texas that
where there is a trust relationship the four-year statute of limitations is applicable from
the time that a party is charged to use
diligence in making an investigation." Blum
v. Elkins, 369 S.W.2d 810, 814 (Tex. Civ. App.
-- Waco 1963, no writ).

3. Although in 1944 the Texas Supreme Court appeared
to have adopted the use of the four-year statute in
Peek, in 1945 the Court implied that the two-year
statute was applicable. See Slay v. Burnett Trust,
1987 S.W.2d 377, 394 (Tex. 1945) (action not barred
because beneficiaries filed suit within two years
of learning of breach of trust). Unlike Peek,
which involved a constructive trust, Slay involved
an express trust. The two-year statute has also
been applied to a former wife's breach of trust in
failing to account for rent collected on property
she owned as a joint tenant with her ex-husband.
Manning v. Benham, 359 S.W.2d 927, 932 (Tex. Civ.
App.-- Houston 1962, writ ref'd n.r.e.).

VIII. REMEDIES FOR BREACH OF FIDUCIARY DUTIES

A. Legal v. Equitable Remedies

Although the law is not well defined in Texas, initial
inquiry should be made regarding whether the remedies
sought for breach of fiduciary duty are legal or
equitable. Bogert, supra, Sec. 870. At common law,
breaches of fiduciary duty were equitable causes of
action and the equitable remedies available were much
broader than the traditional legal remedies.

B. Trustees - Actual Damages

Texas Trust Code Sec. 14.001 provides:

(a) The trustee is accountable to a beneficiary
for the trust property and for any profit made
by the trustee through or arising out of the
administration of the trust, even though the
profit does not result from a breach of trust;
provided, however, that the trustee is not
required to return to a beneficiary the
trustee's compensation as provided by this
subtitle, by the terms of the trust
instrument, or by a writing delivered to the
trustee and signed by all beneficiaries of the
trust who have full legal capacity.

(b) The trustee is not liable to the beneficiary
for a loss or depreciation in value of the
trust property or for a failure to make a
profit that does not result from a failure to
perform the duties set forth in Section
113.056 or from any other breach of trust.

(c) A trustee who commits a breach of trust is
chargeable with any damages resulting from
such breach of trust, including but not
limited to:

(1) Any loss or depreciation in value of the
trust estate as a result of the breach of
trust;

(2) any profit made by the trustee through
the breach of trust; or

(3) any profit that would have accrued to the
trust estate if there had been no breach
of trust. Tex. Trust Code Ann. Sec.
14.001 (Vernon Supp. 1991).

This provision of the Texas Trust Code adopts the
Restatement (Second) of Trusts, supra, Sec. 205.

C. Punitive Damages

Punitive damages are available in Texas for breach of
fiduciary duty. They are available when the fiduciary
commits a willful, malicious, or fraudulent wrong "which
would include either self-dealing or another intentional
breach of fiduciary duty," but would not require actual
malice. The amount of the Plaintiff's attorney's fees and
related expenses may be a component of punitive damages.
Risser, supra, at 907; McLendon v. McLendon, 862 S.W.2d
662 (Tex. App.--Dallas 1993); Villarreal v. Elizondo, 831
S.W.2d 474 (Tex. App.-- Corpus Christi 1992, no writ).

Any attempt to obtain punitive damages should involve a
review of the recent case of Transportation Insurance
Company v. Moriel, 879 S.W.2d 10 (Tex. 1994) This case
sets forth the standards governing the imposition of
punitive damages in the context of bad faith insurance
litigation. Whether its principals will be applied to
fiduciary litigation remains to be seen.

D. Attorneys' Fees

Texas Trust Code Sec. 114.064 provides:

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. Tex. Trust Code Ann. Sec.
114.064 (Vernon Supp. 1991).

If attorneys' fees are not recoverable under the Texas
Trust Code they may be recovered as an element of
punitive damages. Risser, supra,.

The standard for the award of attorneys fees in Texas
Trust Code Sec.114.064 is identical to the standard
contained in Tex. Civ. Prac. & Rem. Code Ann. Sec.37.009
(the Texas Uniform Declaratory Judgments Act). Note that
under this standard (as applied to the Texas Uniform
Declaratory Judgments Act) the court may award attorney's
fees to a nonprevailing party. McLendon v. McLendon, 862
S.W.2d 662 (Tex. App.--Dallas 1993); Hartford Cas. Ins.
v. Budget Rent-A-Car, 796 S.W.2d 763 (Tex. App.--Dallas,
writ denied); District Judges of Collin County v.
Commissioners Court of Collin County, 677 S.W.2d 743
(Tex. App.--Dallas 1984, writ ref'd n.r.e.)

Generally, the party seeking attorney's fees has the duty
to segregate the attorneys' fees incurred for the claims
where attorneys' fees are recoverable from those where
attorneys' fees are not recoverable. McLendon v. McLendon,
supra; Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1
(Tex. 1991); Flint & Assoc. v. Intercon. Pipe & Steel,
739 S.W.2d 622 (Tex.App.--Dallas 1987, writ denied).

An exception to the duty to segregate arises when the
attorney's fees incurred involve claims arising out of
the same transaction and thier interrelation is such that
their prosecution or defense entails proof or denial of
essentially the same facts. McLendon v. McLendon, supra;
Stewart Title Guar. Co., supra. Therefore, when the
causes of action involved in the suit are dependent upon
the same set of facts or circumstances and thus are
"intertwined to the point of being inseparable," the
party suing for attorneys fees may recover the entire
amount covering all claims. McLendon v. McLendon, supra;
Stewart Title Guar. Co., supra (quoting Gill Sav. Ass'n
v. Chair King, Inc. 783 S.W.2d 674, 680 (Tex. App.--Houston [14th Dist.] 1989), modified, 797 S.W.2d 31 (Tex.
1990); Flint & Assoc., supra at 624-625.

If an attorney is representing one beneficiary but
recovers a judgment that benefits either the trust or
other beneficiaries he or she should consider seeking
attorney's fees out of the recovery that benefited the
nonclients under the Texas Common Fund Doctrine. A recent
case outlining this doctrine (in a nontrust situation) is
Lancer Corporation v. Murillo, 909 S.W.2d 122 (Tex. App.--San Antonio, 1995).

E. Removal of the Trustee

Texas Trust Code Sec. 113.082 provides:

(a) A trustee may be removed in accordance
with the terms of the trust instrument,
or, on the petition of an interested
person and after hearing, a court may
remove a trustee and deny part or all of
the trustee's compensation if:

(1) the trustee materially violates or
attempted to violate the terms of
the trust and the violation or
attempted violation results in a
material financial loss to the
trust;

(2) the trustee becomes incompetent or
insolvent; or

(3) in the discretion of the court, for
other cause.

(b) A beneficiary, co-trustee, or successor
trustee may treat a violation resulting
in removal as a breach of trust. Tex.
Trust Code Ann. Sec. 113.082 (Vernon
1984).

As a matter of practice a trustee will usually be removed
under Sec. 113.082(3) if he commits a breach of fiduciary
duty.

F. Damages For Mental Anguish

Texas courts may award damages for mental anguish in a
successful action for breach of fiduciary duty.

G. Deceptive Trade Practices Act

While the issue has not been finally settled in Texas, it
is probable that the Deceptive Trade Practices Act is
applicable to trustees. The Act provides for treble
damages if the defendant is found to have acted
knowingly. Tex. Bus. & Com. Code Ann. Sec. 17.14 et seq.
The Act also requires a demand letter prior to the
institution of suit as a prerequisite to treble damages.
In this author's opinion, if a breach of fiduciary duty
can be proven, the treble damages remedy available under
the Deceptive Trade Practices Act is usually not as
attractive as the punitive damage remedy, traditionally
available for breach of fiduciary duties under the Risser
doctrine.

PART THREE - MISCELLANEOUS CONSIDERATIONS

I. PRIVITY OF CONTRACT BETWEEN THE ATTORNEY DRAFTING THE TRUST
INSTRUMENT AND THE BENEFICIARIES OF THE TRUST.

There is probably no privity of contract in Texas between the
attorney who drafts a trust and the beneficiaries of the
trust. This is true with respect to a pure contract action
and with respect to a third party beneficiary action. There
is no definitive case in Texas on this point. At the time
this paper s wawritten the Texas Supreme Court has heard
argument in the case of Barcelo v. Elliott (No. 95-0341). A
decision is expected very shortly.

This case involves privity of contract between the
distributees under a will and the attorney who drafted the
will. Notwithstanding this distinction, it is anticipated
that the Supreme Court will apply the same privity rule to the
drafter of a trust as it applies to the drafter of a will.

II. PRIVITY OF CONTRACT BETWEEN THE ATTORNEY REPRESENTING THE
TRUSTEE IN THE ADMINISTRATION OF THE TRUST AND THE
BENEFICIARIES OF THE TRUST.

There is no privity of contract between the attorney who
represents a trustee in the administration of a trust and the
beneficiaries of the trust. See Huie v. DeShazo __ S.W.2d __
; Opinion No. 95-8073 (Tex.1996); Thompson v. Vinson & Elkins,
859 S.W.2d 617 (Tex. App.--Houston [1st Dist.] 1993, writ
denied). This means that the beneficiary of a trust may not
maintain a malpractice suit against an attorney who represents
the trustee of his or her trust.

III. ATTORNEY CLIENT PRIVILEGE BETWEEN THE ATTORNEY DRAFTING THE
TRUST INSTRUMENT AND THE BENEFICIARIES OF THE TRUST.

While there is no reported Texas case dealing with this issue,
it is anticipated that the Texas Supreme Court would rule that
a privilege would exist if the Trustor is alive. This is based
on the rationale in the Huie case set forth herein.

If the Trustor is dead then Texas Rule of Evidence 503 (d) (2)
might apply. This rule excepts from the lawyer-cllient
privilege:

a communication relevant on an issue between
parties who claim through the same deceased client,
regardless ow whether the claims are by testate or
intestate succession or by inter vivos
transactions.

IV. ATTORNEY CLIENT PRIVILEGE BETWEEN THE ATTORNEY REPRESENTING
THE TRUSTEE IN THE ADMINISTRATION OF THE TRUST AND THE
BENEFICIARIES OF THE TRUST.

There is an attorney client privilege between the attorney who
represents the trustee in the administration of the trust and
the beneficiaries of the trust. This privilege exists
notwithstanding the trustee's duty of full disclosure to the
trust beneficiaries.

The Texas Supreme Court has held that the attorney-client
privilege protects confidential communications between the
trustee and his or her attorney under Texas Rule of Evidence
503. See, Huie v. DeShazo, __ S.W.2d. __ ; Opinion No. 95-0873 (Tex. 1996) In reaching this decision the Supreme Court
noted that:

The attorney-client privilege serves the same
important purpose in the trustee-attorney
relationship as it does in other attorney-client
relationships. A trustee must be able to consult
freely with his or her attorney to obtain the best
possible legal guidance. Without the privilege,
trustees might be inclined to forsake legal advice,
thus adversely affecting the trust, as disappointed
beneficiaries could later pore over the attorney-client communications in second-guessing the
trustee's actions. Alternatively, trustees might
feel compelled to blindly follow counsel's advice,
ignoring their own judgment and experience.

V. EXPEDITING DISCOVERY IN TRUST LITIGATION

Recall that trustees owe beneficiaries "a fiduciary duty of
full disclosure of all material facts known to them that might
affect [the beneficiaries'] rights." See Huie v. DeShazo,
supra and Montgomery v. Kennedy, 669 S.W.2d. 309, 313 (Tex.
1984). This duty exists independently of the rules of
discovery. Huie, supra. It is a separate breach of fiduciary
duty for a trustee to refuse a beneficiary information to
which he is entitled under the above stated rules. See
Montgomery v. Kennedy, supra; Bogert, supra Sec.961-974;
Scott, supra Sec.172-173; Restatement (Second) of Trusts
Sec.172-173.

These rules can be very helpful to the plaintiff in fiduciary
litigation. Formal discovery is a very expensive and time
consuming process. Gathering information in a case by a
beneficiary against a trustee can be simplified by merely
demanding in writing information from the trustee. If the
trustee fails or refuses to provide the information within a
reasonable time, then an action can be maintained pursuant to
Texas Trust Code Sec.115.001 to require the trustee to furnish
the information (and to pay for the attorneys' fees and costs
of the suit pursuant to Texas Trust Code Sec.114.064).

PART FOUR - STRATEGIES

I. ADVERTISING

A. The Plaintiff's Perspective

If a corporate trustee is the defendant, the Plaintiff
should consider obtaining copies of all advertising done
by the corporate trustee. Corporate trustees often have
pick-up brochures in their offices describing both their
services and the fees charged for their services.
Corporate trustees will sometimes advertise in newspapers
and other magazines. They will sometimes send periodic
newsletters to estate planning attorneys in their
geographic area.

The Plaintiff should consider obtaining copies of both
advertising that was made at the time that the trust was
created (or in the case of a testamentary trust, the time
that the will was drafted), as well as advertising during
the term of the administration of the trust.

The advertising should be reviewed from two perspectives.
First, from the perspective of the description of the
quality of trust services rendered. Second, from the
perspective of the description of the fees charged. The
advertised fee should be compared to the fee actually
charged by the trustee to determine if there are any
"hidden" fees charged. Hidden fees often take the form
of sweep fees, real estate commissions, special charges
for the administration of mineral interests, tax
preparation charges and other nondisclosed transactional
fees.

Texas is not well defined on whether a corporate trustee
is, per se, held to a higher standard of conduct than an
individual trustee. Given an opportunity, a Texas
Apellate Court will probably rule that a corporate
trustee is held to a higher standard than an individual.
See Ertel v. Obrien, 852 S.W.2d 17 (Tex. App.--Waco 1993,
writ dismissed). In Ertel the court held a corporate
executor to a higher standard of conduct than an
individual.

B. The Defendant's Perspective

Attorneys representing corporate trustees should seek to
review all of the institution's trust advertising. It is
much easier to deal with the problem before the
advertising is a factor in a lawsuit. The public
relations persons drafting the advertising do not often
consider the legal implications of their advertising.
The ad should be absolutely accurate, especially in
regard to trustees fees.

If a corporate trustee learns that the institution is
charging a fee in excess of the fee disclosed to the
public, the trustee should consider immediately refunding
the excess fee to the trust estate of the trust. If the
corporation is already involved in litigation, this may
constitute an admission of liability but may reduce the
amount of damages. Many judges and juries can be
influenced by a defendant who admits to a mistake and
immediately corrects it.

II. ATTORNEYS FEES

A. The Plaintiff's Perspective

The plaintiff should consider seeking an injunction
enjoining the defendant trustee from using trust funds to
defend the litigation. Not all courts will grant such an
injunction. If the trustee does not have sufficient net
worth to insure that he will be able to reimburse the
trust estate in the event that he does not prevail, then
some courts will prevent him from using trust assets to
defend the case. This tactic seldom works on a corporate
trustee.

B. The Defendant's Perspective

The defendant should try to use trust funds to defend the
lawsuit. It is sometimes advisable to seek court
instruction on the issue to prevent the plaintiff's
attorney from making an issue of the payment of fees at
trial.

III. BUILD A LITIGATION FILE

A. The Plaintiff's Perspective

All correspondence to the trustee or his attorney
regarding demands (rather than settlement negotiations)
should be drafted with the assumption that the
correspondence will ultimately be an exhibit in the trial
of the case. It is imperative that such correspondence
portray the party that you are representing as reasonable
and fair. Do not send threatening or abusive
correspondence.

B. The Defendant's Perspective

The same rule applies to the defendant. Any response or
correspondence should be drafted with the anticipation
that it will be used against you at trial. Remember that
the trustee is a fiduciary for the beneficiaries of the
trust and must never appear to be hostile or abusive to
them.

IV. CAPACITY

A. The Plaintiff's Perspective

The plaintiff should always give thought to the capacity
in which the lawsuit is brought. Is the plaintiff suing
individually or derivatively on behalf of the trust? The
capacity in which the suit is brought may govern:

1. the type of cause of action that is brought,

2. the ability to recover legal fees from the trust
estate, and, most importantly,

3. the measure of damages that may be recovered.

The plaintiff should also give thought to the capacity in
which the trustee is sued. If the suit is brought
against the trustee individually, then the recovery is
limited to his or her personal funds. If the defendant
is sued individually then he or she is less likely pay
for the costs of defense from the trust estate of the
trust. If the suit is brought against the trustee in a
representative capacity then recovery is limited to the
trust estate of the trust.

B. The Defendant's Perspective

The capacity in which the defendant is sued may govern
his or her ability to defend the suit with trust assets.

V. CO-FIDUCIARIES

A. The Plaintiff's Perspective

A co-fiduciary will often be a co-defendant even if he or
she did not actively participate in the breach of
fiduciary duty. One co-fiduciary may not avoid liability
by merely abrogating his or her fiduciary duties or
delegating them to the other fiduciary. A trustee may
have a fiduciary duty to monitor the competence of a co-fiduciary and to redress a co-fiduciary's breach of
trust.

B. The Defendant's Perspective

A trust will frequently appoint co-trustees. One trustee
is often more involved in the administration of the trust
than the other. The more active trustee should not
preempt the administration of the trust. While it is
true that the passive co-trustee may have liability to
third parties for the acts of the active trustee -- the
passive trustee may have an action against the active
trustee for reimbursement of his liability.

While it is permissible for the active trustee to perform
many trust services unilaterally (such as preparation of
accountings and tax returns of the sale or purchase of
trust assets), the active trustee should supply the
passive with information about the administration of the
trust and should involve the passive trustee in all
material discretionary decisions. The passive trustee
always runs a high risk of liability for the unknown acts
or omissions of his or her co-trustee.

VI. COLLECTIVE INVESTMENT

A. The Plaintiff's Perspective

The plaintiff should understand that corporate trustees
invest trust assets in collective investments. These may
now take the form of either common trust funds or mutual
type funds. Most large corporate trustees have several
of these funds. Most of the liquid assets of the trusts
under administration are invested in one or more of these
funds. In some instances separate transactional fees are
charged within the fund that are never fully disclosed on
the trust accountings. These funds present numerous and
complex opportunity for fiduciary liability. If a large
corporate trustee is the defendant in the litigation then
the decision to invest in the particular fund, the
performance of the fund, and the fees charged within the
fund for administering (and or trading the securities)
should all be carefully examined.

B. The Defendant's Perspective

The defendant's attorney should be careful to
periodically review the performance of all of its
collective investment vehicles as well as the legality of
such investments. The defendant should remember that if
he or she is sued for damages relating to an investment,
then, according to a recent amendment to Tex. Trust Code
Ann. Sec. 113.056 (a), the trier of fact must take into
consideration the investment performance of the entire
trust portfolio rather than a single investment.

VII. COMMUNICATION

A. The Plaintiff's Perspective

The plaintiff's attorney should make sure that the client
is aware of the financial and emotional costs of a
lawsuit for breach of fiduciary duty. Most of my clients
do not realize that fiduciary litigation, especially
against family members, is very similar to divorce
litigation. It is intensely emotional. Families
frequently divide their loyalties between the litigants
with the consequence that there is often the
unanticipated destruction of personal and family
relationships.

The client will often be subjected to intense emotional
pressure to either settle or drop the litigation. The
plaintiff's attorney should inform the client of this
fact in advance and should make an independent evaluation
of whether or not the client has the emotional strength
to withstand this pressure.

Any litigation today is inherently time consuming and
consequently very expensive. Prior to filing the lawsuit
the client should also be fully informed of these facts
and should begin the litigation without any false
expectations regarding the time or expense involved in
the process.

B. The Defendant's Perspective

The genesis of virtually every lawsuit against a trustee
is a breakdown of communication between the trustee and
its beneficiaries. A trustee should provide each
beneficiary with:

1. an accurate and understandable periodic accounting
of the trust;

2. notice of any non-routine transaction of a
substantial nature in advance of the consummation
of the transaction; and

3. access, if requested, to all trust property and
documents pertaining to the administration of the
trust.

It is advisable to schedule periodic meetings with the
beneficiaries to review the administration and
performance of the trust. Contingent beneficiaries named
in the trust instrument should be included in these
meetings. Special meetings should be scheduled to
discuss non-routine transactions of a substantial nature
before they are entered into. At these meetings the
trustee should be alert to any concerns the beneficiary
has about the administration of the trust. If concern is
expressed the trustee should attempt to explain to the
beneficiaries why the decision is being made. If the
decision is material and substantial and if any
beneficiary is unalterably opposed to it, then the
trustee should consider court instruction, or a judicial
determination of liability while the transaction can
still be reversed.

VIII. CONFLICT OF INTEREST

A. The Plaintiff's Perspective

Many conflicts of interest are self-evident. Others are
more difficult to identify and address. Perhaps the most
troublesome and obscure conflicts problems arise with
respect to transactions by a corporate trustee that
affect the commercial bank or an affiliate of the bank.
This is demonstrated vividly in Risser, supra. In this
case a trustee was found to have violated its fiduciary
duty of loyalty by making an investment that indirectly
made it easier for a corporation to repay its debt to the
commercial bank.

Corporate trustees are particularly vulnerable to
allegations of breach of the duty of loyalty when the
commercial bank undertakes any material transaction with
a co-trustee, a beneficiary, or a third party entering
into a commercial transaction with the trust.

If the lawsuit involves a conflict of interest then there
may be an issue of constructive fraud. If the trustee
receives personal benefit from any discretionary decision
in the administration of the trust then the burden of
proof shifts and the trustee must prove that the decision
was fair. If constructive fraud exists then it should
probably be pled in the lawsuit.

Breaches of the fiduciary duty of loyalty (involving a
conflict of interest) often result in the highest damage
awards. These cases are most likely to offend a judge or
jury.

B. The Defendant's Perspective

Before making any discretionary administrative decision
the trustee should consider what effect, if any, the
decision will have on the trustee or anyone related to
the trustee. If the decision benefits a related party in
any way then a legal opinion or declaratory judgment
should be obtained prior to implementing the decision.

IX. CONSENT OF THE TRUST BENEFICIARIES

A. The Plaintiff's Perspective

If a client has consented to a trust transaction then the
plaintiff's attorney should consider whether the client
has been provided all of the relevant information
necessary to reasonably make such a decision. If such
information has not been provided then the consent may
not be valid.

B. The Defendant's Perspective

If a trustee is faced with a particularly difficult
administrative decision it should consider obtaining the
written consent of the beneficiaries of the trust. Such
a consent will only protect the trustee if all relevant
information regarding the decision is disclosed to the
beneficiary. Even if some of the beneficiaries are
unable to consent (because of incapacity or minority) the
trustee should attempt to obtain consents from those
beneficiaries who have capacity to consent -- this will
at least eliminate the beneficiaries who have consented
from the prospective class of plaintiffs who may later
sue the trustee.

X. CORPORATE POLICY MANUALS AND TRUST COMMITTEE MINUTES

A. The Plaintiff's Perspective

If a corporate trustee is the defendant, the Plaintiff's
attorney should obtain copies of all Policy Manuals and
Trust Committee Minutes. These documents are fertile
ground for the establishment of fiduciary liability.

Most corporate trustees have trust policy manuals. A
trust policy manual sets out the institution's procedures
for administering trusts. The policies in these manuals
are sometimes ignored by the officer administering the
trust account. These manuals should be reviewed from two
perspectives. First, are the procedures set forth in the
manual consistent with current fiduciary duties? Second,
has the institution applied the procedures in the manual
to the trust that is subject to the litigation?

Trustees should also be aware of the fact that terms in
the trust instrument may dictate that the trust be
administered in a manner that is inconsistent with the
institution's policy manual. It is very important not to
blindly follow the policies in the manual without
reconciling the policies with the instrument creating the
trust.

Most corporate trustees have directors trust committees
and officers trust committees. These committees either
approve or actually decide material questions in the
administration of each trust administered by the
institution. These are usually separate committees.
Minutes are kept of the committee proceedings. These
minutes should be sought in discovery and reviewed from
two perspectives. First, was a transaction that is
subject to litigation considered by the committee? If it
was, then what criteria were applied in making the
decision to enter into the transaction? Were these
considerations consistent with the institutions fiduciary
duties and the institutions trust policy manual? It is
very difficult to prove by oral testimony that a trustee
applied criteria or considered factors other than those
disclosed in the trust files or trust committee minutes.
Second, if the transaction was not considered, should it
have been? From the plaintiff's perspective the omission
of any consideration of the transaction may be very
important in establishing fiduciary liability.

B. The Defendant's Perspective

Attorneys representing corporate trustees should
recommend that the trust policy manual be reviewed at
least annually. It is imperative that the trust policy
manual be annually updated to reflect changes in trust
law. It is also important that the manual not contain
any language that would constitute a per se breach of
fiduciary duty.

If a policy manual exists it is important that the
policies be followed in the administration of the trust
-- if a policy is not followed then there should be a
written explanation in the trust file explaining the
unique circumstances that necessitated deviation from the
policy.

Corporate trust officers should also be familiar with the
Fiduciary Powers of National Banks and Collective
Investment Funds, 12 CFR 9. While breach of these
regulations is not the basis for liability in a third
party lawsuit, some judges will allow the fact that these
regulations have been breached into evidence.

Attorneys should also periodically review the procedures
and minutes used by the institution's trust committees.
The members of the committee should be encouraged to
carefully document the reasons for material trust
decisions. If the decision is "high risk" the attorney
should recommend that he or she attend the meeting to
insure that the proper considerations are made and that
the considerations are properly reflected in the minutes.
If the decision is particularly "high risk" the members
of the committee should consider obtaining a legal
opinion regarding the decision or at least the criteria
that they should consider in making the decision or
obtaining instruction from the court.

XI. DEFINE THE CAUSES OF ACTION

A. The Plaintiff's Perspective

Most plaintiff's attorneys who are not experienced in
fiduciary litigation file pleadings that give no clue
whatsoever what the defendant has done wrong. Most of
these attorneys simply plead that "the defendant has
breached his fiduciary duties to the defendant" and that
such breach has caused damage to the plaintiff.

Be specific in your pleadings. Specify the fiduciary
duties that have been breached and identify the facts
that support both the breach and the damages sought.
This will save your client the time and expense of
addressing special exceptions and will cause the
defendant to take your case much more seriously than if
you plead general breaches of duty.

B. The Defendant's Perspective

It is imperative that the defendant specifically identify
the cause of the lawsuit as soon as is practically
possible. It may be possible to settle the case on
relatively minor claims before the discovery escalates
the suit into a major cause of action. The defendant
should not go to trial on general pleadings that do not
specify the factual and legal bases of the causes of
action. One of the first pleadings that should be filed
is special exceptions to require the issues to be
narrowed as much as possible.

XII. DISCOVERY

A. The Plaintiff's Perspective

A trustee has a fiduciary duty to keep accurate books and
records and to make them reasonably available for
inspection by the trust beneficiaries. Sometimes
substantial time and money can be saved by asking the
trustee to examine and copy all of the books and records
of the trust. If the trustee refuses to allow
examination of the books and records such refusal may
constitute a separate breach of fiduciary duty.

B. The Defendant's Perspective

A trustee receiving a request for examination of the
books and records of the trust should usually comply with
the request. Failure to comply may result in an
independent breach of fiduciary duty.

XIII. DISCRETIONARY DECISIONS

A. The Plaintiff's Perspective

A typical trust instrument will authorize a trustee to
make numerous discretionary decisions with respect to the
administration of a trust. These will include
discretionary investment decisions, discretionary
allocation of receipts and disbursements between the
principal and income accounts, discretion with respect to
depreciation, depletion and amortization and possibly
discretion in determining what constitutes principal and
what constitutes income. It is important to remember
that almost every discretionary decision involves the
fiduciary duty of impartiality (i.e., a potential
conflict between the interests of the income
beneficiaries and the remaindermen). As a consequence
discretionary decisions are the basis for a substantial
amount of trust litigation.

A trust may also provide that a trustee may make purely
discretionary distributions of income or principal. In
this type of trust a beneficiary may not sue the trustee
to compel a distribution. The plaintiff's attorney should
recognize the difference between "abuse of discretion"
and "failure to exercise discretion" and the incident
liability that flows from both of these breaches of
fiduciary duty.

The plaintiff should recognize that provisions in the
trust instrument specifying that the trustee's discretion
is "absolute" may not relieve the trustee from acting
reasonably.

The fact that a beneficiary cannot sue a trustee of a
purely discretionary trust to compel a distribution does
not mean that the beneficiary may not sue the trustee for
abuse of discretion. In an abuse of discretion case, it
is imperative that the plaintiff's attorney discover the
exact criteria applied by the trustee in making the
discretionary decision and what facts were known to the
trustee at the time that the decision was made. These are
the two factors upon which the reasonableness of the
discretionary decision is weighed.

B. The Defendant's Perspective

In making a discretionary decision a trustee should
consider and document the factors outlined in PART ONE
above.

XIV. DOCUMENTATION OF TRUST DECISIONS

A. The Plaintiff's Perspective

The plaintiff should seek, through discovery, virtually
all of the books and records of the trustee that relate
in any way to the administration of the trust. Corporate
trustees in particular should have records that will to
some extent reflect the criteria used in making decisions
regarding the administration of the trust. Frequently
these criteria will be in conflict with the trust
instrument or their fiduciary duties.

B. The Defendant's Perspective

A trustee should be careful to document the reasons for
material trust decisions. If the decision is within the
discretion of the trustee, a court will not substitute
its discretion for that of the trustee unless there is a
clear abuse of discretion. A log should be kept which
documents the substance of all material conversations
with trust beneficiaries, attorneys, accountants and
other persons the trustee deals with in the
administration of the trust. If a trustee relies on
agents to perform trust services, its files should
reflect the criteria used to hire them as well as any
instructions that are given to them. The trustee should
carefully document all steps taken in acquiring,
retaining, or disposing of material trust investments.

If the trustee is a corporation then the Directors and
Officers Trust Committee should meet and carefully
document both their decisions and the information upon
which these decisions are based. The minutes of these
meetings are usually requested by a plaintiff in a trust
litigation suit.

XV. DO NOT TAKE UNREASONABLE POSITIONS

A. The Plaintiff's Perspective

The party that prevails in a lawsuit for breach of
fiduciary duty is usually the party that convinces a
judge and/or jury that he or she is the most reasonable
in his or her demands. Do not file pleadings that
overstate your case or make allegations that you cannot
prove in court. If you have a winnable cause of action,
go with it! Do not pollute your pleadings with
fictitious allegations that will detract from your
position.

B. The Defendant's Perspective

The defendant is in a very difficult position when sued
for breach of fiduciary duty. If the trustee has clearly
breached the duty, consider admitting the breach and
argue about damages. Avoid the temptation to play "hard
ball" with the trust beneficiaries - this tactic often
backfires. The damage award is almost always lower in
cases where the trustee admits an honest mistake than in
cases where a trustee who has obviously breached his or
her fiduciary duty unreasonably maintains that he or she
did nothing wrong.

XVI. EMPLOY COMPETENT TRUST COUNSEL

A. The Plaintiff's Perspective

There are an increasing number of attorneys in Texas who
specialize in fiduciary litigation. An attorney faced
with a substantial breach of fiduciary duty lawsuit
should consider at least consulting with someone
specializing in the field to identify the specific causes
of action and perhaps serve as co-counsel in the
proceeding.

B. The Defendant's Perspective

If a trustee does not know how to construe a trust
instrument, does not clearly understand the extent of a
trust power or does not know the criteria he should use
in making a discretionary decision, then he should seek
a legal opinion from competent trust counsel. There is
an unwritten policy in Texas that trustees will use the
attorney who drafted the instrument to represent the
trust. While this rule usually works, if the attorney
who drafted the trust is clearly not an expert in trust
law, then a legal opinion regarding the trust should be
sought from a trust specialist. While a legal opinion
will not always protect the trustee from liability it
might, at least, mitigate the damages arising from the
transaction.

The attorney who drafted the instrument appointing the
trustee may not be the person best suited to defend the
trustee if a lawsuit is filed against the trustee. An
estate planning specialist or a trial lawyer who does not
normally handle fiduciary litigation matters may not be
able to represent the trustee as competently as an
attorney who specializes in fiduciary litigation.

XVII. ENVIRONMENTAL PROBLEMS

A. The Plaintiff's Perspective

Toxic tort litigation is very complicated and is frankly
beyond the scope of this paper. If there is a possibly
that such a cause of action exists, a specialist should
probably be consulted.

B. The Defendant's Perspective

Prior to agreeing to administer any trust property that
could possibly be subject to environmental problems the
trustee should, if there is realistic concern, do an
environmental audit to determine the nature and extent of
any liability to the trust. This is especially true if
the trust property is high risk property such as property
with oil and gas production, underground storage tanks,
etc.

XVIII. EXCULPATORY PROVISIONS

A. The Plaintiff's Perspective

The plaintiff's attorney should first realize that, while
exculpatory provisions may sometimes act to protect a
trustee from liability, they offer very limited
protection to the trustee.

Most exculpatory clauses are drafted too broadly. As
noted above in the discussion of exculpatory clauses, the
public policy of this state severely limits the extent to
which a trustee may be exculpated. Many estate planners
draft exculpatory clauses that are vastly broader than
allowed. See Risser, supra. Consequently, the
plaintiff's attorney should not assume that the language
in the instrument is valid, especially if the language
attempts to exculpate the trustee from simple negligence
or breach of fiduciary duty.

An exculpatory clause may be attacked in its entirety if
the attorney who drafted the clause is also the trustee.
While there are no decisions currently on point in Texas,
an exculpatory clause may also be subject to attack if
the attorney who drafted the will also represents the
financial institution serving as trustee.

It is difficult to comprehend why any trustor would want
to exculpate an independent unrelated trustee who is
charging a fee for his or her services. If a trustee
breaches a fiduciary duty, why would a trustor want the
beneficiaries of his or her trust to suffer material
financial loss so that the fiduciary who is being paid to
administer his or her trust can be exculpated from
liability?

The Plaintiff's attorney should always be aware of the
difference between an exculpatory clause and a limitation
or modification of fiduciary duty. Is the clause really
an exculpatory clause?

B. The Defendant's Perspective

A trustee should never rely on an exculpatory clause (or
a clause limiting the trustees fiduciary duties) to
protect him or her from liability for breach of a
fiduciary duty. A trustee should advise never make a
decision in the administration of the trust in reliance
on an exculpatory clause. A trustee should never rely on
requests or representations by a beneficiary or a co-trustee in making trust decisions. The trustee should be
advised that the trustor charged him or her, rather than
the beneficiary, with responsibility for administering
the trust.

XIX. PROBLEM ACCOUNTS

A. The Defendant's Perspective

A trustee should be sensitive to the potential for
litigation prior to accepting any trust. If the
beneficiaries have a history of participating in
litigation, if there is acrimony between beneficiaries,
or if there is acrimony between the beneficiaries and the
trustee, then the trustee should carefully weigh the
benefit of the fees charged against the potential for
liability for administering the trust.

XX. REVIEW OF TRUST INVESTMENTS

A. The Plaintiff's Perspective

If there has been a substantial decline in the value to
the trust estate during the administration of the trust
the cause of the decline might be the trustee's lack of
diligence in monitoring the trust portfolio. If such a
situation exists then the plaintiff's attorney should
discover the frequency that the trustee reviewed the
particular investment.

B. The Defendant's Perspective

Most corporate trustees invest the majority of trust
assets in collective investment funds that are reviewed
periodically. Many trusts, however, contain special
assets such as the family farm, stock in the family
business, or oil and gas properties.

An individual trustee is much less likely to utilize a
collective investment fund. A trustee should
periodically review these assets and document its files
with both the results of such review and its reasons for
retaining the asset.

XXI. THREATS OF LITIGATION

A. The Defendant's Perspective

If a beneficiary of a trust threatens litigation the
trustee should immediately evaluate the merit of the
beneficiary's claim and should try to resolve the dispute
without litigation. Many unnecessary trust lawsuits are
the result of the actions the trustee takes after
learning of the beneficiary's claim. The trustee should
avoid institutional arrogance or an excessively defensive
attitude in dealing with the beneficiary. In many
instances a meeting should be scheduled with the
beneficiaries asserting the claim and an attempt should
be made to resolve the matter. The trustee should
determine if the claim has merit. If the claim has merit
then the trustee should weigh the cost of litigation and
the potential for punitive damages against the costs
involved in an immediate settlement of the dispute.

XXII. TRUST ACCOUNTINGS

A. The Plaintiff's Perspective

Trust accounting is, in essence, the allocation of
receipts and disbursements between the principal and
income accounts. Most corporate trustees are experienced
in preparing and keeping trust accountings. Most
individual trustees are not. Many certified public
accountants have no experience with trust accounting.

A trustee, of course, is required to keep accurate books
and records reflecting the condition of the trust. In
order to calculate the net income of the trust it is
necessary to prepare trust accountings. Each allocation
of receipts and disbursements involves the fiduciary duty
of impartiality. Whether an allocation is made to income
or principal accounts the beneficial interests of both
the income beneficiaries and the remainder beneficiaries
of the trust. If the trust instrument is silent then the
Texas Trust Code controls the allocation. If the trust
instrument grants discretion to the trustee then the
fiduciary duty of impartiality may control the
allocation.

Trust accounting problems also arise with respect to the
creation of reserves for amortization, depletion and
depreciation. Whether or not these reserves are taken
will affect the interests of the income beneficiaries and
remaindermen. Again, if the trust instrument is silent,
the Texas Trust Code will control the allocation. If the
trust instrument grants discretion then the duty of
impartiality may control the allocation.

Trust accounting problems may exist even if there is a
corporate trustee. Most corporate trustees use software
programs to prepare trust accountings. These programs
are often inadequate to handle special situations. Some
software programs are prepared for national use and may
be inconsistent with the Texas Trust Code. If the trustee
is a corporation, discovery should include an analysis of
the method by which trust accountings are prepared. Never
assume that the software used by the bank to prepare the
accountings is correct!

Trust accounting problems are most frequently encountered
when there is an individual trustee. Individual trustees
rarely do it right. In every lawsuit where there is an
individual trustee, trust accounting problems are likely
to exist.

Most breach of fiduciary suits should begin with an
examination of the trust accounting. If the beneficiary
does not possess a current accounting one should be
demanded from the trustee.

B. The Defendant's Perspective

An individual trustee should be particularly sensitive to
trust accounting problems. Even if discretion is granted
with respect to the allocation of receipts and
disbursements, the allocations contained in the Texas
Trust Code usually provide a "safe harbor." A trustee
should not necessarily rely on a certified public
accountant to prepare the trust accountings. Inquiry
should be made regarding the accountant's prior
experience in fiduciary accounting. Particular care
should be given to making and documenting discretionary
allocations.

XXIII. THE TRUST INSTRUMENT

A. The Plaintiff's Perspective

Any attorney representing a client in trust litigation
should carefully review the trust instrument. While
reviewing the instrument the attorney should develop a
clear understanding of the powers, duties and
responsibilities of the trustee. While reviewing the
instrument, the attorney should consider potential causes
of action other than those described in the initial
interview with the client. Clients often have little, if
any, real understanding of the application of fiduciary
duties and consequently often fail to recognize causes of
action.

While reviewing the trust instrument the attorney should
pay particular attention to any clauses that exculpate
the trustee or indirectly limit the trustee's liability.
The existence of such a clause may have a material impact
on the plaintiff's ability to recover for the cause of
action initially described by the client.

In discovery, inquiry should be made into the trustee's
knowledge of the terms of the trust instrument. This
inquiry should begin with specific questions regarding
the terms and provisions of the trust and should conclude
with inquiry about how often the trust instrument has
been read or reviewed by the trustee.

B. The Defendant's Perspective

It is impossible to administer a trust without a complete
understanding of the instrument creating the trust.
While this fact should be self-evident, it is surprising
how many lawsuits arise from a misconstruction or
misapplication of a specific provision in the trust. An
attorney representing the trust should make it clear to
the trustee that if he or she does not understand a
provision in the trust, he or she should not hesitate to
seek a legal opinion or, if necessary, a construction
suit to clarify its meaning. The instrument creating the
trust should be periodically reviewed by the trustee and
outlined if necessary.

XXIV. TRUSTEES FEES

A. The Plaintiff's Perspective

The plaintiff should carefully compare the trustee's fees
actually charged by the trustee to the fee provisions in
the trust and to local standards. The attorney should
inquire in discovery about hidden fees that are not
reflected on the trust accounting.

Several years ago the Texas Legislature passed a statute
providing for the "unbundling" of trust services. See
Tex. Trust Code Ann. Sec.113.053 (f). This allowed
corporate fiduciaries to provide services through
affiliates that were previously provided directly by the
trustee. One example of an "unbundled" trust service
would be stock brokerage firm owned by a corporation
affiliated with the trustee. The broker would charge
separate fees for trading securities. If the trustee is
a corporation, investigation should be made regarding
what activities relating to the trust are performed by
affiliates of the trustee and what is being charged for
these services.

Corporate trustees will often hold cash in trust
accounts. In the early 1980's, computer technology made
it cost-effective to invest small sums of idle cash for
short periods of time. In addition various money market
funds, which were suitable short-term investments became
available. Some corporate trustees began offering a
service known as "sweeping". A sweep looks daily for idle
cash and invests it in a interest-bearing vehicle until
the cash is either invested long-term or distributed to
the beneficiary. Corporate trustees charge a fee for this
service in addition to their normal and customary
trustee's fee. Class Action litigation has been brought
in other states regarding whether the imposition of these
fees violates a trustee's fiduciary duty or are deceptive
trade practices. See Upp v. Mellon Bank, N.A., 994 F. 2d
1039 (U.S. Ct. of App. - 3rd Cir, 1993); Simpson v.
Mellon Bank, Civil Action No. 93-4054, Civil Action No.
93-4722 (U.S. Dist.- E. Dist. of Penn - 1993); and Vogt
v. Seattle-First National Bank, 117 Wash. 2d 541; 817 P.
2d 1364 (Wash. 1991) The issue has not been litigated in
Texas. Texas has a statute governing a trustee's
compensation, Tex. Trust Code Ann. Sec. 114.061. Texas
has no statute specifically allowing "sweep fees". Texas
is ripe for a class action suit determining the validity
of these fees if they are charged. The suit would be
either for breach of fiduciary duty of a violation of the
Texas Deceptive Practices - Consumer Protection Act.

B. The Defendant's Perspective

The trustee should carefully review the instrument and
become familiar with customary local fees for trust
services. The trustee should be particularly concerned
with undisclosed fees that are charged to the trust.

If there is question about the amount of fees that may be
appropriately charged then the trustee may consider
seeking instruction from the court at the time the trust
is accepted.

The defendant's attorney should advise his or her client
that it is imperative that the unbundled trust services
provided by the trustee be comparable in quality and cost
to similar services available to the trustee from non-affiliates and that fees charged for these services be
fully disclosed in trust department advertising and in
representations to both trustors and trust beneficiaries.

XXV. THE JURY

A. Remember Your Audience This valuable advice is taken
without change from Joyce Moore's excellent paper The
Impact of a Fiduciary Relationship In Civil Litigation.

Even though the makeup of jury panels will vary
considerably from one part of the state and country to
the next, there are certain traits in common in the
majority of panels that may be helpful to consider:

1. Expect no more than a high school education; hope
they all speak english fluently;

2. On average, anticipate that they will earn
approximately $15,000 to $25,000 per year;

3. Realize that most jurors will not need or have
sophisticated estate plans or trusts of their own,
and may not like anyone who does;

4. They do not trust lawyers and resent legal
intrusions into the management of their personal
affairs;

5. At least one-half of the women on the panel will
resent any inference or suggestion that the wife or
daughter is not mentally competent (in a business
sense or otherwise) to handle money, the other half
of the women would love to "be taken care of;"

6. Over half of the men would love to tie up the money
so their wife (or daughter) couldn't "waste" it;

7. All of the men will be horrified at any suggestion
that a grown man shouldn't have complete control of
his funds;

8. Either they or someone they know has experienced a
family dispute over an inheritance or a gift;

9. They expect any fiduciary who has been paid "real
money" for his services to be close to perfect;

10. They have all felt cheated at some time or another
by someone they trusted;

11. They have better things to do than to sit in some
courtroom day after day listening to people fight
over large sums of money while they won't even get
enough from their jury service to cover their
parking and lunch costs;

12. Small children are protected, adult children who
are living on parental money are viewed with
distaste and suspicion;

13. If they can't understand what you wrote they will
make up what they think is fair;

14. Most of the time they will do what is right in
spite of the most sophisticated attempts to draft
language exculpating the fiduciary.

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This page was last revised on March 31, 1996.