Does an Interested Trustee Have an Enhanced Duty to Monitor and Protect Their Trust Interest?
Tax, trusts and estates updates from around the country
Executive Summary: The statute of limitations time-bars a beneficiary’s claims for breaches of fiduciary duty. This limitations period may not start to run until a beneficiary discovers, or reasonably could have discovered, any such breaches – this is known as the discovery rule. The discovery rule does not, however, absolve a beneficiary of their own obligation to monitor and protect their trust interest. Further, if the beneficiary is also a co-trustee, their enhanced duties to monitor the activities of the other trustees may further restrict reliance on the discovery rule.
Introduction
In order to reduce friction, families often agree to name all of their children as fiduciaries with the assumption that the children will all “get along.” But, this is often idealistic – once one or both parents are deceased, sibling civility can follow one or both parents to the grave.
This issue compounds when family businesses, or farm/ranch operations, are involved. Not only must fiduciary duties be weighed, but there may be questions of how these fiduciary duties interact with the (often) relaxed duties granted to partners in a partnership.
That issue aside, co-fiduciary arrangements often create a “majority consent” requirement. If one sibling is the black sheep, this makes it easier to act without that sibling’s fiduciary consent.
All of these issues and dynamics were at play in the case discussed below, which I found interesting for a variety of reasons (one of which is the Texas Supreme Court’s possible misinterpretation of a Crummey power provision in a trust).
Berry v. Berry, Supreme Court of Texas, May 13, 2022
As alluded to above, this case involved a black sheep brother, facing his other three brothers. At issue were lease payments for the use of ranch land by a family entity from which the black sheep brother had been cast out (for good reason), payable to a family partnership in which the black sheep brother still had an indirect interest through a trust.
The organizational chart, in narrative form, was:
· A dynasty trust, in which all four brothers and their issue were beneficiaries, and over which all four brothers were co-trustees.
· A family partnership, owned 98% by the dynasty trust as limited partner, and 2% by a separate LLC as general partner. The mom of the brothers was still living and owned the LLC, but their father was deceased.
· Ranch land, owned by the family partnership.
· Various family entities, which leased the ranch land for $40,000 per year.
The Texas Supreme Court noted a long history of litigation between the black sheep brother and his other brothers, which ultimately was reduced to a global settlement. That history and global settlement agreement aside, the partnership agreement limited leases of longer than 3 years. The existing lease was an oral lease, dating back to 1989, which the brothers later attempted to reduce to writing as a 25-year lease with an option to extend to 99 years. This written lease was prompted by the (perhaps intentional) misdirection of lease payments from the partnership to another family entity in which the black sheep brother had no interest.
The written lease was executed and recorded in 2007, but dated back to 2000.
Ultimately, the black sheep brother, and his daughter, in their capacities as beneficiaries of the dynasty trust, sued the other brothers for breach of fiduciary duty, claiming (among other things) that the written lease was invalid (as it violated the authority of the partners to enter into leases longer than 3 years) and below-market rent.
The kicker? This suit was initiated in 2015. The statute of limitations for breaches of fiduciary duty in Texas was only 4 years. So, summary judgment was granted to the three brothers based on the running of the statute of limitations, and asserted lack of standing by the black sheep brother and his daughter. The Court of Appeals, however, reversed the grant of summary judgment based on the statute of limitations, and the three brothers appealed.
Analysis
The black sheep brother argued that the statute of limitations on breaches of fiduciary duty is tolled under the “discovery rule,” which starts the 4-year clock at such time that a beneficiary knows, or should have known, of facts leading to the breach that could have been discovered with reasonable diligence.
The Texas Supreme Court, however, held that the discovery rule could not be relied upon in this case, based on some bad facts.
For one, the recording of the lease in 2007 served as constructive notice of the facts giving rise to the claim. While the Court recognized that there may not always be a duty to monitor property records in Texas, this duty is only relaxed when there is no prior reason to believe that rights may have been impaired. But, the black sheep brother had no reason to trust his other brothers, which actually enhanced his duty to monitor both the trustees’ activities and the property records.
Speaking of duty to monitor, the Court also noted that the black sheep brother wore two hats – beneficiary and co-trustee. While the Court did not directly state that one would limit the other, it did state that the fiduciary duties held by the brother as trustee further enhanced his duty as beneficiary to monitor and protect his own interest in the trust.
Given these factors, the Court concluded that summary judgment on the issue of statute of limitations was proper, as the discovery rule could not apply. The brother could have discovered the lease with reasonable diligence much sooner than 2015.
Turning to the issue of standing, the Court first examined the rights of the daughter of the black sheep brother. The trust agreement granted her a contingent interest in the trust, which would be obtained only if she survived her father. Nonetheless, the Court concluded the Texas Property Code granted standing to a beneficiary with a contingent interest.
An Aside: While this did not seem to alter the outcome, I did find it interesting that the Court relied on a provision giving each beneficiary (including the daughter) a right to withdraw their proportionate share of contributions to the trust. This is presumably a Crummey power, although the Court did not state this. However, the Court also stated that a distribution of rents from the partnership to the trust (as limited partner) would be a “contribution” to the trust which would trigger the daughter’s power of withdrawal, this making her a present beneficiary with standing. This would not be the typical interpretation, unless the rent distribution was disproportionate.
As to the standing of the black sheep brother, the Court looked to his standing from two perspectives: (1) the power as a trustee to bring claims against non-trustee defendants (the other family entities), and (2) the power to bring a derivative suit on behalf of the partnership.
However, both claims of standing fail, as the black sheep brother was only one of four trustees, and majority consent is required in both cases. A rogue trustee in such a context cannot represent the trust.
Takeaways
The discovery rule can be an effective counter-defense to the running of the limitations period on breaches of fiduciary duties by trustees. But, like any legal claim or defense, the discovery rule has its own nuances which may vary state-to-state.
As a beneficiary, you cannot sleep on your rights, and this case highlights the risks of doing so. You do have your own duty to monitor your interest in the trust, which counters the trustees’ duties. If it is shown that you could have discovered a breach of fiduciary duty, for example, by exercising reasonable diligence, then the statute of limitations may instead commence at the time of the breach even if you do not discover the breach until a much later time.
This duty to monitor your own trust interest is enhanced if you are also a co-trustee. But, this is a catch-22, because to allege a breach of fiduciary duty by another trustee, this implies that you were not fulfilling your own fiduciary duty to monitor the trust. In this case, the daughter could have had a separate and independent claim against her father (the black sheep brother) because his inaction (even if strategic or spiteful) served as a breach of his own duties as a co-trustee. As the Court noted, he should have known what was going on with the trust and partnership much sooner than he did, and the Court implies that he probably did know.
Ultimately, this outcome shows the risk of using the presumption of trust among family members to create the illusion of checks and balances among fiduciaries. Such an approach is at odds with family dynamics, which may be based more in anxiety, guilt, obligation, and entitlement rather than trust.