Exculpatory Clauses In Trust Documents Are “Somewhat” Enforceable In Texas

It is common for settlors to execute trust documents that contain exculpatory clauses. An exculpatory clause is one that forgives the trustee for some action or inaction. For example, a common exculpatory clause may state “The trustee may rely upon the written opinion of any attorney” or “The trustee shall be saved harmless from any liability for any action he or she may take, or for the failure of such trustee to take any action, if done in good faith and without gross negligence.” Generally, these types of clauses can be enforceable in Texas and can limit a trustee’s duty and liability. See Dolan v. Dolan, No. 01-07-00694-CV, 2009 Tex. App. LEXIS 4487 (Tex. App.—Houston [1st Dist.] June 18, 2009, pet. denied). In Texas, exculpatory clauses are strictly construed, and a person is relieved of liability only to the extent to which it is clearly provided that he shall be excused. See Jewett v. Capital Nat. Bank of Austin, 618 S.W.2d 109, 112 (Tex. App.—Waco 1981, writ ref’d n.r.e.); Martin v. Martin, 363 S.W.3d 221, 230 (Tex. App.—Texarkana 2012, pet. dism’d by agr.).

In Texas Commerce Bank v. Grizzle, the Texas Supreme Court held that public policy as expressed by the legislature in the Trust Code allowed relieving a corporate trustee from liability for self-dealing except for what was specified in sections 113.052 and 113.053. 96 S.W.3d 240, 249 (Tex. 2002). In Grizzle, a case involving alleged self-dealing by the trustee, the Court held that “the trust Code authorizes a settlor to exonerate a corporate trustee from almost all liability for self-dealing,” such as misapplying or mishandling trust funds, including failing to promptly reinvest trust monies. Id. at 250; see also Clifton v. Hopkins, 107 S.W.3d 755 (Tex. App.—Waco 2003, no pet.).

In response to Grizzle, the Texas Legislature amended the Texas Property Code, and it now limits a settlor’s ability to exculpate a trustee. Section 111.0035 provides that the terms of a trust may not limit a trustee’s duty to respond to a demand for an accounting or to act in good faith. Tex. Prop. Code Ann. §111.035(b)(4). Additionally, Texas Property Code section 114.007 provides: “(a) A term of a trust relieving a trustee of liability for breach of trust is unenforceable to the extent that the term relieves a trustee of liability for: (1) a breach of trust committed: (A) in bad faith; (B) intentionally; or (C) with reckless indifference to the interest of a beneficiary; or (2) any profit derived by the trustee from a breach of trust.” Tex. Prop. Code Ann. §114.007.

So, the statute now provides that a settlor cannot relieve a trustee from a duty: 1) to respond to a demand for an accounting, 2) to act in good faith, 3) to not act in bad faith, 4) to not act intentionally regarding a breach, 5) to not act recklessly regarding a breach, and 6) to not act in an fashion where the trustee derives a profit from a breach.  The statute does not prohibit a settlor from relieving a trustee of other duties, such as not making certain disclosures or from acting with negligence (so long that the negligence does result in a profit to the trustee).

One court of appeals has discussed the new statutory provisions and their impact on Grizzle and found that an exculpatory clause in the trust document at issue was not enforceable. Martin v. Martin, 363 S.W.3d 221 (Tex. App.—Texarkana 2012, pet. denied). In Martin, a company was jointly managed for over twenty years by Ruben Martin and Scott Martin. They each created an irrevocable trust for the health, education, and welfare of their children and grandchildren. The brothers were the trustees of each other’s trust. Thereafter, a power struggle over the control of the company arose between Ruben and Scott.

Ruben’s children filed a lawsuit to remove Scott as the trustee of their trust and alleged breaches of fiduciary duty. Ultimately, the jury found for Ruben’s children and ordered over a million dollars in damages to each of them as against Scott. Scott appealed and argued that he had no fiduciary duty of loyalty based on a provision of the trust releasing Scott of fiduciary duties except those imposed by a statute.

The court of appeals held that under the common law, a trustee has the fiduciary duties to hold and manage the property for the benefit of the beneficiaries and owes a trust beneficiary an unwavering duty of good faith, fair dealing, loyalty, and fidelity over the trust affairs and its corpus. Scott argued that the trust document excused him from the obligation to perform such duties.

The court of appeals held that the general rule from the Texas Trust Code is that the terms of the trust prevail over any provision of the code subject to a few statutory exceptions not applicable to the case. The trust document granted the trustee the right to operate to the same extent and manner as if he were a disinterested person. Further, it recognized that no principle or rule relating to “self-dealing or divided loyalty shall be applied to any act of the trustee but that the trustee shall be held to the same standard of liability” as in transactions with disinterested persons.

The court held that Scott would be accountable for fiduciary responsibility only if the Texas Trust Code expressly prohibited the exculpation clause contained in the trust. Scott argued that pursuant to the Texas Supreme Court’s Grizzle opinion, that the trust agreement waived all fiduciary duties. The court of appeals disagreed and found Scott’s argument ignored the statutory changes that had occurred after Grizzle was decided.

 The court noted that in response to Grizzle the Texas Legislature repealed section 113.059, added section 111.0035, and added section 114.007. Section 111.0035(b) provides as follows:

 The terms of a trust prevail over any provision of this subtitle, except that the terms of a trust may not limit:

      (1) the requirements imposed under § 112.031;

(2) the applicability of § 114.007 to an exculpation term of a trust;

(3) the periods of limitation for commencing a judicial proceeding regarding a trust;

      (4) a trustee’s duty: (A) with regard to an irrevocable trust, to respond to a demand for accounting made under § 113.151 if the demand is from a beneficiary who, at the time of the demand: (i) is entitled or permitted to received distributions from the trust; or (ii) would receive a distribution from the trust if the trust terminated at the time of the demand; and (B) to act in good faith and in accordance with the purposes of the trust.

 Tex. Prop. Code Ann. § 111.0035.  Section 114.007 provides:

(a) a term of a trust relieving a trustee of liability for breach of trust is unenforceable to the extent that the term relieves a trustee for liability: (1) a breach of trust committed: (A) in bad faith; (B) intentionally; or (C) with reckless indifference to the interest of the beneficiary; or (2) any profit derived by the trustee from a breach of trust.

 Id. at § 114.007.

The court of appeals held that Scott owed Ruben’s children the fiduciary duties which, pursuant to section 111.0035 and section 114.007, cannot be waived. The statutory changes modified the holding of Grizzle.

 Scott also argued that the duty to act in good faith and in accordance with the purposes of the trust of section 111.0035(b)(4)(B) only applied in the context of a demand for an accounting. The court of appeals disagreed and found that the two subsections are separate and distinct duties and also found that “in accordance with the purposes of the trust” was a separate duty from the duty of good faith.

Scott also argued that another provision of the trust document required reversal: “no individual trustee shall be liable for negligence or error of judgment, but shall be liable only for such trustee’s willful misconduct or personal dishonesty.” The court held that section 114.007 prohibits liability from being waived if the breach was committed in bad faith, intentionally, or with reckless indifference to the interest of the beneficiaries. The court noted that the jury found that the breach was committed in “an absence of good faith, intentionally or with reckless indifference to the interest of the beneficiaries.” The court found that section 114.007 would prohibit any waiver of liability.

The court of appeals held that the exculpatory clauses at issue did not excuse Scott from his actions, and that there was sufficient evidence to support the jury’s liability finding that Scott had breached his fiduciary duties.