Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).
Settlor left the bulk of her estate to testamentary trusts for Son,
Daughter, and Grandchildren. Son was named as the executor of her estate
and the trustee of the trust. Because of valuation, taxation, liquidity,
and related issues, it took about eight years before Son began to fund
the trusts and make distributions. During this time, Son took over $2.8
million in executor fees. Daughter sued alleging that these fees were
excessive. The jury determined that the fees were unreasonable by
approximately $2.2 million but the trial court reduced the award to
about $660,000 after taking into account the tax savings realized by
deducting the excessive fees from Settlor’s federal estate tax return.
(This is an application of the benefits rule.) Daughter appealed.
Daughter asserted that it was unjust to permit Son to retain $1.5
million in excessive fees merely because the fees resulted in a reduced
tax burden. The court first addressed the potential application of
Probate Code § 241 which permits the court to deny the statutory fee if
the executor does not manage the estate prudently. Because Settlor’s
will provided that Son receive just and reasonable compensation, the
court concluded that Probate Code § 241 does not apply.
The court next examined whether the trial court properly applied the
benefits rule to reduce the amount of damages against Son for the
excessive fees. The Texas Supreme Court used the benefits rule in Nelson
v. Krusen, 678 S.W.2d 918 (Tex. 1984), when it refused to recognize a
cause of action for wrongful life and stated that the court must offset
any special benefits the plaintiff receives which results from the
negligence. The court discussed, however, that the collateral source
rule prevents a tortfeasor from obtaining the benefit of payment
conferred upon the injured party from sources other than the tortfeasor.
In this case, the estate tax deduction from the IRS is a different
source than the tortfeasor and thus Son should not have the excessive
fees reduced by the tax savings. The court also examined cases from the
United States Supreme Court, Texas appellate courts, and courts in other
jurisdictions. The court then concluded that the trial court erred in
offsetting the tax savings from the amount of excessive fees. Despite
the fact that the estate will be enriched by an extra $1.5 million, “it
is more appropriate for the estate to obtain the benefit of a windfall
than to let [Son] keep $1.5 million in fees the jury found was
unreasonable.” Lee, at 780. The court further found that there was
sufficient evidence to support the jury’s finding that Son took $2.2
million in unreasonable executor fees.
Moral: Executors should document their fees by keeping detailed time
records and consult with attorneys and other experts as to how to
compute reasonable fees.
Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).
Settlor left the bulk of her estate to testamentary trusts for Son,
Daughter, and Grandchildren. Son was named as the executor of her estate
and the trustee of the trust. The estate consisted primarily of
non-income producing real property. Son either did not sell or delayed
in selling various parcels of property. Daughter sued Son for breach of
his fiduciary duties in failure to timely sell this property. The jury
found that Son breached his duties and provided the date on which the
sale should have occurred and the likely amount of those sales. The
trial court decided to disregard the jury findings. Daughter appealed.
The appellate court agreed that it was permissible to disregard the jury
findings because they were too specific. Instead of merely asking jury
if Son breached various duties (e.g., to diversify, transform
nonproductive assets into productive assets, generate income), Daughter
asked the jury to decide if Son had a duty to accept two specific
offers. The evidence the jury used to determine the value of the
property at these times were the unaccepted offers themselves which the
court considered too uncertain and speculative. There was insufficient
evidence to support the amount of proceeds Son would have received had
he sold the properties.
Moral: Evidence for damages for breaching a duty to sell assets needs to
include proof of the property’s market value at the relevant time
established by reliable methods. Evidence of unaccepted offers will be
deemed too uncertain and speculative to support a jury finding.
Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).
Settlor left the bulk of her estate to testamentary trusts for Son,
Daughter, and Grandchildren. Son was named as the executor of her estate
and the trustee of the trust. Son engaged in a variety of questionable
activities such as charging millions in executor fees, taking an
extremely long time to fund testamentary trusts, and failing to
diversify assets. Daughter asked the trial court to remove Son as
executor and the trial court refused.
The appellate court affirmed. Son breached several duties and the trial
court clearly had the discretion to remove Son under Probate Code §
149C. However, removal is not mandatory; instead, it is discretionary
with the court as demonstrated by the statute’s use of the word “may.”
The court examined Son’s conduct in light of the seven part test for
abuse of discretion set out in Geeslin v. McElhenney, 788 S.W.2d 683,
685 (Tex. App.—Austin 1990, no writ). The court then found that the
trial court did not abuse its discretion in refusing to remove Son
because its decision was not arbitrary, unreasonable, nor without
reference to guiding rules and principles. The appellate court admitted
that it may have reached a different conclusion than the trial court but
that was not relevant to the issue.
Moral: Strong evidence must be presented at trial to remove an
independent executor from office. Appellate courts are extremely
reluctant to reverse a trial court’s decision not to remove an executor
from office.
Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).
Settlor left the bulk of her estate to testamentary trusts for Son,
Daughter, and Grandchildren. Son was named as the executor of her estate
and the trustee of the trust. Son engaged in a variety of questionable
activities such as charging millions in executor fees, taking an
extremely long time to fund testamentary trusts, and failing to
diversify assets. Daughter asked the trial court to remove Son as
trustee and the trial court refused.
The appellate court reversed. The court examined the jury findings and
found them sufficient to support the conclusion that Son breached the
trust in such a way as to permit removal under Trust Code § 113.082.
Although this section uses the discretionary word “may,” the Supreme
Court of Texas held under an earlier version of this statute that
removal is not discretionary if the trustee materially violated the
trust and the violation results in a material financial loss to the
trust. Akin v. Dahl, 661 S.W.2d 911, 913 (Tex. 1983). Although the
appellate court disagreed with the Akin court because it construed the
statutory language contrary to its plain meaning, the court felt
constrained to remove Son as trustee.
Moral: Removal of a trustee for the reasons enumerated in Trust Code §
113.082 is mandatory despite the statute’s discretionary language.
Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).
Settlor left the bulk of her estate to testamentary trusts for Son,
Daughter, and Grandchildren. Son was named as the executor of her estate
and the trustee of the trust. Son engaged in a variety of questionable
activities such as charging millions in executor fees, taking an
extremely long time to fund testamentary trusts, and failing to
diversify assets. Daughter asked the trial court to remove Son as
executor and the trial court refused. Despite a jury finding that Son
defended the lawsuit in bad faith, the court permitted Son to recover
the fees for defending the action from the estate. Daughter appealed.
The court affirmed. Probate Code § 149C permits the executor to recover
necessary expenses, including attorneys’ fees, if the executor defends a
removal action in good faith. Because the statute does not define “good
faith,” the court examined a variety of definitions and adopted a
standard that has both objective and subjective components. The court
determined that “an executor acts in good faith when he or she
subjectively believes his or her defense is viable, if that belief is
reasonable in light of existing law.” Lee, at 795.
The court then examined the evidence and determined that there was no
evidence that Son subjectively believed his defense was in bad faith. In
addition, there was no evidence that Son’s defense had no reasonable or
arguable basis. The court thus agreed with the trial court that it was
appropriate to disregard the jury’s finding that Son made his defense in
bad faith.
Moral: The approach adopted by this court makes it extremely difficult
for a court to deny an executor fees for defending a removal action. The
egregiousness of the executor’s conduct is not relevant to whether the
defense is in good faith. As long as the executor actually believes a
defense is in good faith (regardless of what reality-centered executors
would think) and the defense has an arguable basis (regardless of the
probability of success), the court may award the defense fees.
Note that the court examined Miller v. Anderson, 651 S.W.2d 726 (Tex.
1983) (construing analogous language in Probate Code § 243), which
permitted recovery even without a finding of good faith. However, the
court said that permitting recovery without a finding of good faith is
not the same as permitting a recovery when the jury affirmatively finds
bad faith.
Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).
Settlor left the bulk of her estate to testamentary trusts for Son,
Daughter, and Grandchildren. Son was named as the executor of her estate
and the trustee of the trust. Son engaged in a variety of questionable
activities such as charging millions in executor fees, taking an
extremely long time to fund testamentary trusts, and failing to
diversify assets. Daughter sued Son and requested that her costs and
attorney’s fees be reimbursed to the trust. The trial court declined to
do so.
The appellate court reversed. Although Probate Code § 245 permits
recovery of the costs and attorney’s fees, Son claimed that Daughter did
not carefully separate the claims covered by § 245 from those not
covered (e.g., to remove Son as trustee). The court rejected this
argument because all of Daughter’s claims were inextricably intertwined.
Moral: To enhance the likelihood of an award of fees, the costs
associated with each claim should be accounted for separately.
Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).
Settlor left the bulk of her estate to testamentary trusts for Son,
Daughter, and Grandchildren. Son was named as the executor of her estate
and the trustee of the trust. Son engaged in a variety of questionable
activities such as charging millions in executor fees, taking an
extremely long time to fund testamentary trusts, and failing to
diversify assets. Daughter successfully recovered on some of her claims.
However, the damage awards went to the trust, not directly to Daughter.
Daughter appealed.
The appellate court affirmed. Daughter was entitled to a specified
percentage of the trust’s current net income. Thus, the damage awards
need to “run through” the trust so that they can be allocated between
principal and income. In addition, appropriate trust expenses must be
deducted to determine the amount of income to which Daughter is
entitled.
Moral: Recoveries against a trustee for breach of duty are often payable
to the trust, not the trust beneficiaries.