Texas Commerce Bank, N.A. v. Grizzle, 96 S.W.3d 240 (Tex. 2002).
The court designated Original Trustee as the trustee of a trust
created under Property Code Chapter 142 to manage settlement proceeds
payable to Beneficiary, a minor, because of the wrongful death of
Beneficiary’s father. Original Trustee invested the proceeds in its own
common stock and taxable fixed income funds as permitted by applicable
law and the trust instrument. Years later, Original Trustee and New
Trustee entered into a bank swap agreement by which the two trustees
exchanged all assets from two of its branches including their trusts. In
compliance with Federal law which prohibits banks from investing in the
common trust funds of other banks, each trustee liquidated the stocks
and income funds in the other trustee and then reinvested those funds in
fixed income and common stock funds managed by itself. Because of market
conditions, these transactions resulted in a capital loss to the trust.
Accordingly, Beneficiary sued Trustees for breach of fiduciary duty
based on self-dealing and improper investment. Trustees defended on the
basis of an exculpatory clause which read, “This instrument shall always
be construed in favor of the validity of any act or omission of any
Trustee, and a Trustee shall not be liable for any act or omission
except in the case of gross negligence, bad faith, or fraud.” The trial
court granted summary judgment in favor of Trustees.
The appellate court in Grizzle v. Texas Commerce Bank, N.A., 38 S.W.3d
265 (Tex. App.—Dallas 2001), reversed. The court reviewed the evidence
and determined that New Trustee’s failure to promptly reinvest trust
funds was evidence of mishandling of trust funds and may have
constituted self-dealing. The exculpatory clause did not expressly
relieve Trustees from liability for self-dealing. The court determined
that because a fact issue existed whether Trustees engaged in
self-dealing, the exculpatory clause did not support a summary judgment
in favor of Trustees. Trustees appealed.
The Texas Supreme Court reversed. The court first addressed
Beneficiary’s argument that the Trust Code was inapplicable to Chapter
142 trusts. The court found no support for this argument in either
Chapter 142 or the Trust Code. Consequently, the court concluded that “a
trust created under Property Code chapter 142 by the court acting as
settlor is an ‘express trust’ to which the Trust Code applies.” Id. at
322.
The court then held that the exculpatory clause was sufficient to
protect Trustees from liability for self-dealing, that is, “the
misapplication or mishandling of trust funds, including the failure to
promptly reinvest trust monies.” Id. The court based its holding on the
clear language of the Trust Code which authorizes exculpatory clauses.
For example, Prop. Code § 111.002 provides that the terms of the trust
control over the Trust Code and that the settlor may relieve the trustee
from the usual duties, restrictions, and liabilities except for certain
acts of corporate self-dealing which Beneficiary did not allege. In
addition, Prop. Code § 113.059 echoes this policy by providing that a
settlor may relieve a trustee of the necessity of complying with any
duty, liability, or restriction imposed by the Trust Code (except for
the non-alleged self-dealing exceptions). The court rejected the lower
court’s conclusion that public policy prevents enforcement of the
provisions of the Trust Code which authorize exculpatory clauses.
The court next examined whether Trustees were within the scope of the
exculpatory clause which did not provide protection from actions
constituting gross negligence, bad faith, or fraud. The court examined
the terms of the trust and the alleged improper conduct of Trustees such
as selling trust assets and delaying reinvesting and concluded that
those actions would constitute at most mere negligence. Accordingly, the
trial court’s rendering of a summary judgment in favor of Trustees was
proper.
Moral: Exculpatory clauses are an effective technique to relieve a
trustee from liability for mere negligent conduct. The Texas Supreme
Court’s unambiguous approval of these provisions should reduce
litigation by disgruntled beneficiaries who claim a trustee acted
negligently if the trust contains an exculpatory provision.
Note: Some practitioners have expressed concerns about the court’s broad
approval of exculpatory clauses which could be interpreted to permit
exculpation of “evil” trustee conduct such as actions taken in bad faith
or with reckless indifference to the potential results. This fear may be
overstated. First, the exculpatory clause in the case was limited to the
exculpation of negligence and thus the issue of evil exculpation was not
before the court. Second, the strong public policy against authorizing
“evil” conduct should trump the settlor’s ability to exculpate this
conduct.