Trusts: Duties, In Terrorem Clause, and Attorney Fees

Below is a discussion of Lesikar v. Moon, 237 S.W.3d 361 (Tex. App.—Houston [14th Dist.] 2007, pet. filed).

TRUSTS — Trustee’s Exercise of Discretion

Under the terms of the trust, Trustee was instructed to use a designated portion of the property to fund a separate trust for Beneficiary.  Trustee refused to do so and Beneficiary obtained a judgment from the trial court instructing Trustee to fund the trust.  Trustee appealed alleging that the trial court interfered with his discretion as a trustee without a finding of fraud, misconduct, or abuse of discretion.

The appellate court recognized that a court “may not substitute its discretion for that of the trustee, and may interfere with the trustee’s discretionary powers only in the case of fraud, misconduct, or clear abuse of discretion.”  Lesikar at 366.  However, in this case, the trust directly instructed Trustee to fund the trust by using the mandatory term “shall.”  In other words, Trustee had no discretion not to fund the trust and thus it was proper for the court to order the funding.

Moral:  A trustee must follow the mandatory instructions the settlor gives in the trust and does not have the discretion to ignore those instructions.

TRUSTS — In Terrorem Provision

Beneficiary sued Trustee for breach of fiduciary duty.  Trustee then claimed that Beneficiary forfeited her share of the trust because the trust contained an in terrorem clause.  The appellate court determined that the trial court was correct in not reaching the issue because Trustee’s motion for an interlocutory summary judgment was not timely filed.

In what is most likely dicta, the court concluded that even if the Trustee’s motion had been timely filed, Beneficiary’s conduct would not have triggered a forfeiture.  The court explained that the right to challenge a fiduciary’s actions is an inherent part of a trust relationship and thus such conduct is insufficient to trigger a forfeiture.

Moral:  A no contest clause will not prevent a beneficiary from bringing a breach of fiduciary claim against the trustee.  It would be against public policy to permit the settlor to trigger a forfeiture when a beneficiary merely seeks to enforce the trust as written and assure that the trustee obeys the trustee’s fiduciary duties.

TRUSTS — Attorney Fees

Trustee appealed the trial court’s award of attorney fees to Beneficiary under Texas Trust Code § 114.064 and the Texas Declaratory Judgments Act.  The court explained that the grant or denial of attorney fees is within the discretion of the trial court and the court’s judgment will not be reversed unless there is a clear abuse of discretion showing that the decision was so arbitrary and unreasonable as to amount to a clear and prejudicial error of law.

The appellate court carefully reviewed the evidence and found that Beneficiary had failed to segregate the fees due to this cause of action from other causes of action and did not offer evidence that segregation was not necessary.  Accordingly, the court reversed the award of attorney fees and remanded the issue to the trial court for reconsideration.

Moral:  When requesting attorney fees, it is important to segregate the fees associated with the cause of action at bar from other causes (or show that such segregation is not necessary because they are significantly intertwined).