Author: LegalEase Solutions
Wells Fargo Bank (the “Bank”) claims to be the successor trustee of an irrevocable trust known as the “Clower Trust” that was created in the 1960’s by Mr. and Mrs. Clower. Mr. and Mrs. Clower named the original trustee, but there has been a series of successor trustees over the years and the Bank claims to be the current trustee. Now, the beneficiaries of the trust have filed suit against the Bank contending that it does not have standing to be trustee of the Clower Trust. The Bank has been paying for its defense of this lawsuit, using the trust assets and income of the Clower Trusts to pay its attorneys who are defending it. The beneficiaries, John and Lawrence Clower, are contending that the Bank as the “putative trustee” is acting wrongfully in making payment of its litigation expenses out of the trust assets and income.
- Can a trustee, whose standing as trustee is being challenged by a beneficiary of the trust, use trust assets and income of that trust to pay for its defense of that suit?
- When the suit is to defend the trust property and the trustee acts reasonably and in good faith, the trustee may get reimbursement for the litigation expenses from the trust assets. However, when defense of the suit does not benefit the trust property, such as expenses related to litigation resulting from the fault of the trustee, the trustee cannot get reimbursement for the litigation expenses from the trust assets.
- When the suit is to defend the trust property and the trustee acts reasonably and in good faith, the trustee may get reimbursement for the litigation expenses from the trust assets.
In a proceeding under the Texas Property Code, the court is empowered to grant reasonable and equitable attorney fees. See Tex. Prop. Code § 114.064 (“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.”). In addition, the Texas Trust Code authorizes the reimbursement of a trustee from trust principal or income and specifically provides for awards of attorney’s fees. Tex. Prop. Code § 114.063 (“[a] trustee may discharge or reimburse himself from trust principal or income or partly from both for . . . advances made for the convenience, benefit or protection of the trust or its property” and for “expenses incurred while administering or protecting the trust or because of the trustee’s holding or owning any of the trust property.”).
Generally, under Texas law, a trustee may charge the trust for attorney’s fees that the trustee, acting reasonably and in good faith, incurs defending charges of breach of trust. Grey v. First Nat’l Bank, 393 F.2d 371, 387 (5th Cir. Tex. 1968); Moody Found. v. Estate of Moody, 1999 Tex. App. LEXIS 8597 (Tex. App. Austin Nov. 18, 1999). In Grey, supra, the court held that the trustee First National could charge the O’Connor Trust for all the fees and expenses of the attorneys representing it in its individual capacity since the bank was exonerated of a charge of breach of trust initiated by the trust beneficiaries. Id. at 388. The court also held that the District Court did not abuse its discretion in granting counsel fees to the trustee. Id.
However, a trustee is not entitled to reimbursement for expenses that do not confer a benefit upon the trust estate, such as expenses related to litigation resulting from the fault of the trustee. Moody Found. v. Estate of Moody, 1999 Tex. App. LEXIS 8597 (Tex. App. Austin Nov. 18, 1999); Stone v. King, 2000 Tex. App. LEXIS 8070 (Tex. App. Corpus Christi Nov. 30, 2000). In Moody, supra, a trustee of a charitable trust was prosecuted for crimes of fraud arising from his duties as trustee and for tax deficiencies resulting from self dealing while he was a trustee. Id. at 2-3. The trustee was convicted but ultimately exonerated after appeal of all charges of defrauding the trust. Id. at 3-4. However, the trustee was found guilty of self dealing by a tax tribunal and assessed a reduced delinquency payment. Id. In defense of these actions, the trustee incurred legal fees of approximately 1.2 million dollars. Id. at 4. After the trustee’s death, his estate sued the trust seeking reimbursement for all legal fees, expenses and accumulated interest. Id. After a bench trial, the probate court awarded the trustee’s estate all of the trustee’s legal expenses plus interest in the amount of 1.9 million. Id. at 4-5.
On appeal by the trust, the trustee’s estate argued that the reversal of the trustee’s criminal conviction and the tax tribunal’s drastic reduction of the delinquency assessment provided sufficient evidence that the trustee acted reasonably and in good faith while incurring the legal expenses. Moody Found, 1999 Tex. App. LEXIS 8597 at 16. The Court of Appeals held that a trustee may charge the trust for attorney’s fees the trustee, acting reasonably and in good faith, incurs defending charges of breach of trust. Id. at 15. However, the Court of Appeals disagreed with the trustee’s estate the probate court and concluded that although it is uncertain whether the trustee’s breach of the trust resulted from “bad faith or merely negligent gullibility,” his conduct fell short of the standard required of trustees. Id. at 23. The court further opined that even if the trustee did not personally benefit from the transactions, he had breached his duty as trustee by failing to use the skill and prudence of a reasonable person in administering the trust. Id. at 28. Therefore, the court reversed the judgment of the probate court and denied reimbursement of the trustee’s attorney’s fees to the trustee’s estate. Id. at 29.
In Stone v. King, 2000 Tex. App. LEXIS 8070 (Tex. App. Corpus Christi Nov. 30, 2000), plaintiff King filed suit against defendant Stone alleging fraud, conversion and breach of fiduciary duties arising from the King-Texas Trust. Id. at 3-6. King also sought to remove Stone from the position of trustee of the King-Texas Trust, which was setup with Stone and King as co-trustees and with all actions to be taken jointly. Id. King contended that Stone breached his fiduciary duties as trustee by adding his fiancé as a signatory to the trustee’s checking account without King’s authorization, by not disbursing monies when demanded and by utilizing trust funds to defend against King’s claims. Id. at 18. Regarding the question of attorney fees, Stone claimed that he was entitled to engage the services of an attorney to represent the interests of the trust and himself in his capacity as trustee, with the attorney fees constituting a trust expense. Id. at 22. Stone further argued that King’s attempt to remove him from trusteeship amounted to an attack on the trust, which he had a duty to defend. Id. The trial court found that Stone had converted the $37,000 in attorney fees for his own use and without King’s consent or authorization. Id. at 23.
On appeal, the Court of Appeals held that a trustee is not entitled to reimbursement for expenses that do not confer a benefit upon the trust estate, such as those expenses related to litigation resulting from the fault of the trustee. Stone, 2000 Tex. App. LEXIS 8070 at 25. The court further noted that Stone breached his fiduciary duties by failing to distribute trust funds after being directed to do so by King’s attorney and by adding his fiancé as a signatory to the trust account. Id. Therefore, the Court of Appeals affirmed the trial court’s finding that the litigation seeking to remove Stone as trustee resulted from Stone’s own improper actions, that Stone did not act reasonably and in good faith in incurring the attorney’s fees and that Stone was not entitled to charge the trust for the fees. Id.
Litigation expenses incurred by the trustee that are related to the maintenance of the trust are reimbursable. See Du Pont v. Southern Nat’l Bank, 771 F.2d 874, 887 (5th Cir. Tex. 1985). In Du Pont, the appellant settlor established an irrevocable trust for the benefit of himself, his wife, and his only son. Id. at 877-878. However, following his divorce and remarriage, the settlor brought suit against the trustees and beneficiaries of the trust in order to rescind the trust and declare that the transfer of two properties to the trust was invalid. Id. at 878. The District Court ruled that the trustees may charge all of their litigation expenses from the action, including their attorney fees, to the trust. Id. at 886.
On appeal, the settlor argued that the Circuit Court should not apply the general rule that a trustee is entitled to reimbursement from the trust estate for expenses which the trustee, acting reasonably and in good faith, incurs in defense of litigation charging him with a breach of trust because the expenses incurred by the trustees in this case were for the benefit of the trustees individually rather than for the benefit of the Trust estate. Du Pont, 771 F.2d at 886. In this regard, the settlor argued that one of the trustees was interested primarily in defending himself against allegations of negligence and breach of fiduciary duty. Id. at 886. Moreover, the settlor argued that the litigation expenses incurred by the trustees were duplicative and excessive, since the trustees had identical interests yet employed separate counsel. Id.
In affirming the District Court, the Circuit Court held that “the district court was in the best position to judge whether the legal fees of the Trustees were incurred reasonably and in good faith, or whether they were duplicative and for the benefit of the Trustees personally.” Du Pont, 771 F.2d at 886. In reaching this decision, the Circuit Court noted that the District Court found that the retention of separate counsel by the trustees was “prudent and reasonable” and found no evidence that the fees were incurred in bad faith or for a purpose other than for the benefit of the Trust. Id.
In the present case, whether Wells Fargo Bank is the trustee will be determined by the court based upon the trust instruments. Wells Fargo Bank, as trustee, can reimburse the litigation expenses from the trust only if the court comes to a conclusion that the bank, having sufficient standing to be the trustee, acted in good faith while defending the suit for the benefit of the trust.