Texas Case Law Update
Gerry W. Beyer
Professor of Law
St. Mary's University School of Law
One Camino Santa Maria
San Antonio, TX 78228-8603
(210) 431-2248
gbeyer@alvin.stmarytx.edu
Copyright 1998 by Gerry W. Beyer
Table of Contents
Texas
Case Law Update
This article discusses judicial developments relating to the Texas law of intestacy, wills, estate administration, trusts, and other estate planning matters. The reader is warned that not all recent cases are presented and not all aspects of each cited case are analyzed. You must read and study the full text of each case before relying on it or using it as precedent. Writ histories were current as of March 30, 1998 (Insta-Cite service as provided on WESTLAW).
The discussion of each case concludes with a moral, i.e., the important lesson to be learned from the case. By recognizing situations which have lead to time consuming and costly litigation in the past, estate planners can reduce the likelihood of the same situations arising with their clients.
II. Intestacy
Despite the fact that most Texans die intestate, no cases dealing with intestacy were reported within the past year.
III. Wills
A. Holographic -- Formalities & Proof
Lopez v. Hansen, 947 S.W.2d 587 (Tex. App.--Houston [1st Dist.] 1997, n.w.h.).
Proponent attempted to probate a document as Decedent's holographic will. At the trial court, conflicting evidence was introduced as to whether the will was in Decedent's handwriting. The trial court concluded that the evidence failed to prove the will's holographic character.
The appellate court affirmed holding that based upon the record, there was sufficient evidence to show that the will was not entirely in Decedent's handwriting. A strong dissent argued that the trial court's conclusion was against the great weight of the evidence and that the only credible evidence in the case proved that Decedent wrote and signed the will.
Moral: A proponent of a holographic will needs to present strong evidence that the will is in the testator's handwriting because the proponent will have a difficult time setting aside a trial court's finding that the will is not holographic.
B. Disclaimers
Leggett v. United States, 120 F.3d 592 (5th Cir. 1997).
Testator bequeathed Beneficiary $19,500. Because Beneficiary owed approximately $20,000 to the IRS, Beneficiary executed a timely disclaimer under Texas law. The IRS claimed that the federal tax lien attached to the property and that the disclaimer was ineffective. The district court agreed.
The Fifth Circuit reversed. The court recognized that unlike some other states, Texas adopts the "acceptance-rejection theory" with regard to testamentary gifts (as well as property passing by intestacy). See Prob. Code § 37A. Under this approach, Beneficiary never had an interest in the bequest because of the disclaimer. Accordingly, "the federal [tax] lien had nothing to which to attach." Leggett at 596. The court concluded its opinion by advising Congress what it could do to expand the coverage of the tax lien such as by defining property more broadly than state law or by simply prohibiting persons subject to the federal tax lien from filing disclaimers.
Moral: A beneficiary or heir subject to a federal tax lien should give serious consideration to executing a disclaimer to prevent the property from being reached by the IRS, especially if the individuals who would take because of the disclaimer are close relatives of the beneficiary.
Parks v. Parker, 957 S.W.2d 666 (Tex. App.--Austin 1997, n.w.h.).
Husband and Wife were divorced resulting in a sizeable judgment against Husband. Husband's mother died and Husband was named independent executor of her estate. Wife applied for and received an order to force Husband to turn over his inheritance to satisfy the judgment. The order was against Husband in both his individual and representative capacities. Husband disclaimed his interest in his mother's real property under Prob. Code § 37A.
The appellate court first held that the turnover order was not binding against Husband in his representative capacity because the turnover statute does not apply to non-judgment debtors. "[T]here is no provision [in Tex. Civ. Prac. & Rem. Code § 31.002] for the issuance of a turnover order against a third party who possesses property belonging to the judgment debtor." Parks at 668-69.
Secondly, the court ruled that Husband had the absolute right under Prob. Code § 37A to disclaim the property within nine months after his mother's death provided he did not exercise control over that property. Thus, Husband did not own the real property against which the turnover order was intended to operate. Whether Husband made the disclaimer before or after the court entered the turnover order was irrelevant.
Moral: Heirs and beneficiaries should carefully evaluate whether to accept or disclaim their windfalls. If the property would be subject to the claims of creditors, a disclaimer may be an excellent choice because the property may then pass to individuals who are not subject to the claims of others.
C. Change in Circumstances -- Lapse
Allen v. Talley, 949 S.W.2d 59 (Tex. App.--Eastland 1997, pet. denied, rehearing filed).
Testatrix's will left her entire estate to her "living brothers and sisters." When Testatrix executed the will, she had five siblings. At the time of her death, only two survived. However, each of the predeceased siblings had descendants who survived Testatrix. These descendants, the nieces and nephews of the Testatrix, claimed that they were entitled to share in the estate under the anti-lapse statute, Prob. Code § 68. The two surviving siblings, on the other hand, insisted that the will imposed a condition on the gift that a sibling outlive Testatrix.
The court affirmed the trial court's summary judgment in favor of the two surviving siblings. The court looked at the unambiguous language of the will in reaching its conclusion. Testatrix used the term "living" for a purpose. Testatrix certainly did not use the term to justify why she was not leaving property to deceased siblings. Thus, the court construed the gift as containing express words of survivorship thereby negating the application of the anti-lapse statute.
Moral: Wills leaving property to descendants or descendants of parents should directly address the ramifications of a beneficiary predeceasing the testator. For example, "I leave all my property to my siblings who are alive at the time of my death. Descendants of any sibling who predeceases me are not entitled to share in my estate."
D. Construction and Interpretation
1. Ambiguity
Skinner v. Moore, 940 S.W.2d 755 (Tex. App.--Eastland 1997, no writ).
Testator's will provided that all stock representing his total ownership interest in two corporations passed to Beneficiary. In the paragraph immediately following, Testator specifically described the stores owned by these corporations but did not state the name of a devisee. Residuary Beneficiaries assert that the stores passed to them. Both the trial and appellate courts rejected this claim.
The drafting attorney testified that Testator intended Beneficiary to have the stores. He stated that the paragraph describing the stores and the paragraph bequeathing the stock in the corporations which owned the stores were inadvertently reversed. The court indicated that the "rule is well established that, under certain circumstances, paragraphs in a will may be transposed." Skinner at 757. The court concluded that there was sufficient evidence for the trial court to conclude that Testator intended Beneficiary to receive the stock and the stores.
Moral: Wills need to be carefully proofread prior to execution.
May v. Walter, 956 S.W.2d 138 (Tex. App.--Amarillo 1997, rev. denied).
Testator's will provided that Beneficiary was to receive a fire proof safe "along with its tangible personal property contents." Beneficiary claimed that she was entitled to a certificate of deposit that was found in the safe. The remainder beneficiaries, on the other hand, argued that they were entitled to the CD. The trial court held that the CD belonged to Beneficiary.
The appellate court reversed. The court determined that Testator's will was unambiguous thus alleviating the necessity of construing the will. Instead, Testator's intent could be "ascertained from, and is disclosed by, the meaning of the words [Testator] actually used within the four corners of the will." May at 141. Referencing Black's Law Dictionary and the Tax Code, the court held that the certificate of deposit was intangible property and thus not included within the specific bequest of the safe. It is interesting to note that the court reached its conclusion without even citing the Texas contents statute, Prob. Code § 58(c), (d).
Moral: A gift of an item and its "tangible personal property contents" will not include intangible property such as certificates of deposit, stocks, bonds, promissory notes, and similar property.
Penland v. Agnich, 940 S.W.2d 324 (Tex. App.--Dallas 1997, writ denied).
Testator executed a will in 1945 which created a testamentary trust including alternate residuary gifts to the "lawful issue" of predeceased beneficiaries. The key issue was whether adopted children of predeceased beneficiaries qualify as "lawful issue." Testator's will did not expressly address the issue of whether adopted individuals were included or excluded.
Both the probate and appellate courts agreed that adopted individuals were included within the class of "lawful issue." At the time Testator executed his will, there was a statutory presumption that excluded adopted persons from class gifts to children in an instrument executed by someone other than the adopted person's parents. However, this presumption could be rebutted by evidence of a contrary intent in the instrument. Testator gave the majority of his estate to family members who were not related by blood such as his wife's siblings and the spouse of his niece. This showed that Testator "considered his family to include not only those who were related to him solely by blood but also persons not related by blood." Penland at 327. In addition, Testator did not use words which clearly exclude adopted individuals such as "born" or "of the body." The court thus concluded that Testator intended "lawful issue" to include both blood and non-blood relatives.
Moral: All class gifts should expressly state whether adopted children are included within their scope.
4. "Savings Account and/or Savings Certificate"
Sammons v. Elder, 940 S.W.2d 276 (Tex. App.--Waco 1997, writ denied).
Testatrix bequeathed all the money in her "savings account and/or savings certificate" to Son and Daughter. Son, Daughter, and Step-Daughter shared the residuary. Step-Daughter objected to the classification of various assets such as money market accounts, certificates of deposit, and individual retirement accounts as being within the scope of the bequest of the "savings account and/or savings certificate." Both the trial and appellate court rejected Step-Daughter's claims.
The court began by determining that the gift was ambiguous because of a lack of case law defining the terms "savings account" and "savings certificate" and because of the broad definitions of these terms found in dictionaries. Because these terms were ambiguous, the trial court properly considered extrinsic evidence of Testatrix's intent. The court determined that "the ordinary, plain meaning of a 'savings' account or certificate is an account or certificate, which usually bears interest, in a financial institution to which monies are deposited so that the monies are protected from loss or destruction." Sammons at 282. The court concluded that this definition comported with Testatrix's intent and encompassed the various money market accounts, IRAs and so forth because the evidence showed Testatrix used them for savings. One factor the court deemed significant was the frequency of transactions in the account, i.e., they were not used regularly for commercial purposes.
Moral: Will drafters must select terminology with care when describing gifts. Definitions or non-exclusive lists of examples may be helpful in determining the testator's intent.
Cobb v. Justice, 954 S.W.2d 162 (Tex. App.--Waco 1997, rev. denied).
The jury found that Beneficiary, Testator's niece, exerted undue influence over Testator. However, the trial court granted Beneficiary a judgment n.o.v. because it found that there was no evidence of undue influence.
The appellate court reversed. The court pointed out a wide array of evidence supporting the jury's verdict such as Testator's poor health, his use of morphine, and the events surrounding the preparation of the will which showed Beneficiary's considerable involvement such as taking Testator to an attorney without his oxygen tank to change a will and other financial plans that had existed for many years.
Moral: A jury verdict that undue influence existed is extremely difficult to set aside.
F. Charitable Gifts -- Attorney General's Right to Intervene
In re Estate of York, 951 S.W.2d 122 (Tex. App.--Corpus Christi 1997, n.w.h.).
Testator gave a life estate to Mother and the remainder to two beneficiaries. These two beneficiaries disclaimed their interests. Thus, the remainder of Testator's estate passed by intestate succession. Mother, as well as an alleged biological child [Child], claimed to be Testator's sole heir. Prior to the resolution of this heirship action, Mother died with a valid will which left her entire estate to a charitable trust. The Texas Attorney General filed an intervention petition in Testator's heirship proceeding. The trial court struck the petition and determined Child to be Testator's sole heir.
The appellate court reversed. The Texas Property Code allows the Attorney General to intervene in a wide variety of proceedings involving charitable gifts. Prop. Code ch. 123. The court reviewed the statutes and concluded that Testator's estate now involves a charitable gift thus providing the Attorney General with standing to intervene to protect the charity's rights. The court subsequently held that it was error for the trial court to strike the Attorney General's intervention regardless of whether the trial court's action is evaluated against the case law standard enunciated in Guaranty Federal Sav. Bank v. Horseshoe Operating Co., 793 S.W.2d 652, 657 (Tex. 1990) or the "interested person" test from Prob. Code § 10.
Moral: The Attorney General may intervene in an action if it will impact a charitable gift even if that impact is derivative of another gift which is not the subject of the action.
A. Jurisdiction
Goodman v. Summit at West Rim, Ltd., 952 S.W.2d 930 (Tex. App.--Austin 1997, n.w.h.).
Executrix sued Purchaser to clear title to estate real property because Purchaser had not complied with certain conditions in the sales contract. Purchaser countersued the estate for specific performance and Third Parties alleging that they hindered Purchaser from complying with the conditions. The probate court chose to exercise ancillary jurisdiction over Third Parties under Prob. Code § 5A(d). After the court dismissed all claims by and against the estate, Third Parties moved to dismiss without prejudice asserting that the probate court lacked subject matter jurisdiction to consider ancillary claims after the underlying claim involving the estate had been resolved. The probate court agreed and ordered that the claims be transferred to the district court.
The appellate court agreed that the probate court lost jurisdiction over the ancillary claims once the underlying claims involving the estate were dismissed. "[T]he probate court may only exercise 'ancillary' or 'pendent' jurisdiction over a claim that bears some relationship to the estate. Once the estate settles, the claim is 'ancillary' or 'pendent' to nothing, and the court is without jurisdiction." Goodman at 933. The court went on to hold that "the estate is an 'indispensable party' to any proceeding in the probate court. The estate's presence is required for the determination of any proceeding that is ancillary or pendent to an estate." Goodman at 933.
The appellate court, however, did not agree that the probate court had the authority to transfer the claims to the district court. The court gave two reasons for its holding: "[f]irst, because the probate court has no statutory authority to transfer a cause to district court, and second, because the probate court cannot transfer a cause that it has dismissed for want of subject matter jurisdiction." Goodman at 934.
Moral: Third parties cannot look to the probate court to resolve their claims if the nexus to a decedent's estate is lost.
Estate of Crawford v. Town of Flower Mound, 933 S.W.2d 727 (Tex. App.--Fort Worth 1996, writ denied).
Decedent's will was probated in Dallas County. Decedent owned land in Denton County. During the estate administration, Executor stopped paying ad valorem taxes on this land. Town brought suit in district court in Denton County and prevailed. Executor subsequently claimed that the Denton County district court lacked jurisdiction over Town's claims because the taxes were incident to the estate under Prob. Code §§ 5 & 5A thus giving the Dallas County probate court exclusive jurisdiction over these matters. However, Town pointed to Property Tax Code § 33.41(a) which requires such actions to be brought in the county in which the tax was imposed.
The appellate court recognized the direct conflict between the Probate Code and the Property Tax Code. The court found that the Tax Code provision prevails and that consequently a suit to collect ad valorem taxes on real property which is brought during the administration of an estate must be brought in the county where the real property is located. "[T]he jurisdiction of statutory probate courts does not extend to judgments and foreclosures for delinquent property taxes on property located outside the county of the probate proceeding." Crawford at 730. The court based its decision on the "insurmountable burden" that would be placed on taxing authorities if they had to determine whether a delinquent property owner was alive and, if deceased, in which county an estate administration was pending. See Crawford at 730. The court distinguished the Texas Supreme Court's decision in Bailey v. Cherokee County Appraisal Dist., 862 S.W.2d 581, 585 (Tex. 1993) (op. on reh'g), which held that jurisdiction for the recovery of ad valorem taxes lies with the county of the pending probate proceeding. In Bailey, the situs of the property was the same county as the probate proceeding. However, in the instant case, the counties were different.
Moral: Personal representatives must be prepared to defend suits for judgments and foreclosures for delinquent property taxes in the county of the property's situs rather than the county in which the probate proceeding is pending.
B. Independent Administration -- Removal Grounds
Sammons v. Elder, 940 S.W.2d 276 (Tex. App.--Waco 1997, writ denied).
One residuary beneficiary asserted that the other two residuary beneficiaries who were also the beneficiaries of specific gifts, should be removed for a variety of grounds such as failure to file a complete inventory, misapplication of property, gross misconduct and mismanagement, and lack of legal capacity. Prob. Code § 149C. The appellate court upheld the trial court's refusal to remove the executors because the complainant failed to prove the executors "willfully omitted to perform a legal duty, intentionally committed a wrong act, and breached a fiduciary duty." Sammons at 283.
The court also refused to hold that the executors lacked legal capacity to serve because they were also beneficiaries under the will. The court found that this situation did not create such a conflict between their personal interests and their fiduciary duties to the estate so as to legally incapacitate them from performing their duties. "To adopt [complainant's] interpretation would paralyze the independent administration of estates in Texas. Family members would no longer be able to serve as independent executors and receive property under the will if mere service created a conflict requiring disqualification." Sammons at 284.
Moral: Testators may continue to name beneficiaries as independent executors without fear that they will be automatically disqualified as being in conflict of interest with other beneficiaries.
Walton v. First Nat'l Bank of Trenton, 956 S.W.2d 647 (Tex. App.--Texarkana 1997, rev. denied).
Intestate had given Creditor a promissory note secured by a vendor's lien and a deed of trust. Intestate died on February 18, 1995. On November 28, 1995, Administratrix gave notice to Creditor. The next day, Creditor presented its claim. Administratrix took no action on the claim and on December 29, 1995, the probate court judge allowed the claim despite no statutory authority granting the judge the authority to do so. On February 1, 1996, the probate court transferred all contested matters to the district court. Creditor refiled the claim on February 28, 1996. On April 1, 1996, Administratrix rejected the claim. On April 4, 1996, Creditor asked the district court to confirm the claim. Creditor filed its original petition for foreclosure on April 23, 1996 and Administratrix rejected it. On May 24, 1996, Creditor filed suit in trespass to try title, alleging that it held a superior lien to the property and was entitled to possess it because of Administratrix's default in making payment. The district court agreed.
The appellate court affirmed for several reasons. First, Administratrix did not appeal the probate court's approval of Creditor's claim. Thus, the fact that the court did not follow the Probate Code's procedure for approving claims did not render the order void but merely voidable. Prob. Code § 312 does not prohibit the court from approving the claim. Because Administratrix did not appeal this order, the judgment became final and not subject to collateral attack.
Second, Administratrix's claim that it did not receive notice of the probate court's approval of Creditor's claim does not merit a reversal because the Probate Code does not require notice. In addition, parties are charged with notice of orders and judgments that are rendered in their proceedings.
Third, Creditor had superior title to the property because of its vendor's lien. The deed provided that Intestate would not receive title to the property until the note was paid in full. The note was not so paid and thus title to the property was not in Intestate's estate. Accordingly, Creditor's claim was one for title to and possession of property, rather than a claim for money, and did not even have to be presented in the first place. This scenario is different from a regular mortgage, where the decedent actually has title to the property subject to a lien, and which is subordinate to the administration of an estate.
Fourth, the court rejected Administratrix's claim that permitting Creditor to prevail would circumvent the Probate Code's system of creditor payment and cause the vendor's lien to take precedence over debts which have statutory priority such as funeral expenses. Creditor's right to possession is superior to Administratrix because Intestate did not have title to the property when Intestate died.
Fifth, the court did not agree with Administratrix that Creditor made an election of remedies when it filed a foreclosure proceeding which would then bar it from bringing a trespass to try title suit. Although it is true that a successful foreclosure proceeding bars a subsequent trespass to try title suit, merely bringing a unsuccessful foreclosure proceeding does not bar the trespass to try title action.
Wittner v. Scanlan, 959 S.W.2d 640 (Tex. App.--Houston [1st Dist.] 1995, writ denied).
Probate court awarded Administrator a substantially lesser amount of attorney's fees than Administrator requested. Administrator appealed.
The court first determined that it had jurisdiction to hear Administrator's appeal because the order awarding attorney's fees was final for appellate purposes. The court then found that there was no evidence that the probate court had abused its discretion in making the award of attorney's fees and thus affirmed.
Moral: To set aside an award of administration expenses such as attorney's fees, strong evidence must be presented to the appellate court which demonstrates that the trial court abused its discretion.
2. Party Seeking to Remove Executor
Sammons v. Elder, 940 S.W.2d 276 (Tex. App.--Waco 1997, writ denied).
The trial court refused to allow an unsuccessful complainant attempting to remove the independent executors from office to recover attorney fees from the estate. The appellate court affirmed. Although the costs and expenses of a party seeking removal of an independent executor may be paid out of the estate under Prob. Code § 149C(d), such an award is within the discretion of the court. Because there was no evidence that the trial court abused its discretion, the judgment denying attorney fees was affirmed.
Moral: A trial court's decision not to award fees in favor of an unsuccessful complainant who attempts to remove an independent executor is extremely difficult to overturn.
V. Trusts
A. Vesting of Remainder Interest
Shearrer v. Holley, 952 S.W.2d 74 (Tex. App.--San Antonio 1997, n.w.h.).
Settlors created an inter vivos trust for the benefit of Settlors and their children. One of these children, Son, died prior to the termination of the trust with a will leaving his entire estate to Wife. The trust later ended according to its terms upon the death of the surviving settlor. The trust provided for the remainder to be distributed to the Settlor's children. A dispute arose regarding the appropriate distribution of the share specified for Son. Wife claimed that Son's remainder interest vested when Settlors created the trust thus entitling her to the property. On the other hand, Son's children from a prior marriage claimed that the remainder was contingent on Son outliving all Settlors. Because Son did not, the gift lapsed and would revert to the estate of the surviving settlor and then pass to the children under the terms of the surviving settlor's will and the anti-lapse statute. The trial court agreed with this latter position and held that the gift was contingent.
The appellate court reversed. The court examined the language of the trust and concluded that it did not condition Son's remainder interest on surviving either or both settlors. Settlors' statement that the property would not be distributed until the death of both Settlors did not delay the time of vesting. Instead, it was merely a trust administration technique to avoid the need for subsequent deeds to transfer legal title from the trustee to the beneficiaries. Settlors did not insert express survivorship language into the trust and the court was unwilling to imply such a condition. "The complete absence of specific language of survival dictates that [Son's] remainder interest vest at the time of the creation of the trust." Shearrer at 78. The court's holding was consistent with a long line of Texas cases which hold that courts will not construe a remainder as contingent when it can reasonably be taken as vested.
Moral: If the settlor of an inter vivos trust wants to limit a remainder interest to only beneficiaries who outlive the settlor, express language which requires survival must be included in the trust.
Burns v. Miller, Hiersche, Martens & Hayward, P.C., 948 S.W.2d 317 (Tex. App.--Dallas 1997, writ denied).
The trial court ordered Beneficiary to turn over property to a receiver for use in paying Creditor. The trial court included all disbursements from spendthrift trusts within the scope of the turnover order.
The appellate court reversed holding that Beneficiary's interest in spendthrift trust assets is exempt property under the turnover statute (Civ. Prac. & Rem. Code § 31.002). Creditor pointed out that once the trustee pays or delivers the trust assets to Beneficiary that they are no longer exempt. Trust Code § 112.035(a). However, the turnover statute provides that a court may not enter or enforce an order that requires the turnover of "the proceeds of, or the disbursement of, property exempt under any statute." Civ. Prac. & Rem. Code § 31.002(f). "Thus, even when property is no longer exempt under any other statute, if it represents proceeds or disbursements of exempt property, it is not subject to a turnover order." Burns at 323.
Moral: Distributions from spendthrift trusts are protected from turnover orders even though the property is no longer exempt.
C. Standard of Care -- Exculpatory Clause
Hoenig v. Texas Commerce Bank, N.A., 939 S.W.2d 656 (Tex. App.--San Antonio 1996, no writ).
Lessee leased certain property from Settlor. Settlor died leaving the leased property to a testamentary trust. However, Original Trustee was unaware that a portion of the leased property was part of the trust corpus. Approximately 14 years later, Successor Trustee took over trust management from Original Trustee. After a few months in office, Successor Trustee discovered that additional leased property belonged to the trust. Accordingly, Successor Trustee sued both the Lessee and Original Trustee alleging that the Lessee converted funds due the trust (rent payments from subtenants) and that Original Trustee was negligent in not preventing and discovering the conversion. The district court held that Lessee and Original Trustee were liable.
Original Trustee claimed protection under an exculpatory clause in the trust which provided that Trustee was not liable for any loss "save culpable negligence or intentional misdeed." The lower court defined "culpable negligence" using an ordinary negligence definition, i.e., the care of a prudent trustee similarly situated. Original Trustee claimed instead that culpable negligence means gross negligence, a lower duty of care which would be harder to prove. Despite authority in other states supporting Original Trustee's view, the appellate court concluded that under Texas law "'culpable negligence' means the same as 'actionable negligence.'" Hoenig at 660.
Moral: Exculpatory clauses are strictly construed. A trustee's conduct must fall squarely within the exculpatory language for it to relieve the trustee of liability.
Maeberry v. Gayle, 955 S.W.2d 875 (Tex. App.--Corpus Christi 1997, n.w.h.).
Settlor created a testamentary trust for Beneficiary. Rather than holding the property in trust, Trustee assumed ownership of the property for himself, never telling Beneficiary about the trust. Trustee also served as Beneficiary's guardian. After Beneficiary reached age eighteen, the termination date of the trust and the guardianship, Trustee convinced Beneficiary to sign documents relating to the transfer of trust property by telling Beneficiary that the documents dealt with other matters. The lower court awarded Beneficiary damages for fraud and breach of fiduciary duty.
The appellate court reversed the award based on breach of fiduciary duty. The court reasoned that Trustee could not have breached any fiduciary duty when the Trustee manipulated the Beneficiary to sign the transfer documents because the trust had already ended. However, the court did affirm the award based on fraud. The court held that there was legally and factually sufficient evidence that Trustee obtained the deed by making a false, material statement to Beneficiary on which Trustee intended Beneficiary to rely and on which Beneficiary actually relied to his detriment.
A strong dissent argued that the court should have upheld the breach of fiduciary duty award. The dissenting justices did not believe that Trustee's obligations to Beneficiary simply "vaporized" the moment the guardianship and trust ended.
Moral: Beneficiaries will have a difficult time recovering for breach of fiduciary duty from trustees who misuse trust property after the trust has terminated.
Farias v. Laredo Nat'l Bank, 955 S.W.2d 328 (Tex. App.--San Antonio 1997, pet. filed).
Trustee sold trust property in 1968. The purchaser resold that property within 28 months making a 300% profit. In 1990, Beneficiary sued Trustee for breach of fiduciary duty for failing to follow Trustee's usual procedures associated with selling trust property and selling it to a friend of Trustee at an inadequate price. In addition, Beneficiary claimed that Trustee fraudulently concealed its actions. The jury awarded Beneficiary over $2 million in damages. Nonetheless, the trial court entered a judgment n.o.v. in favor of Trustee stating that the statute of limitations had run.
The appellate court agreed. The court started its analysis by looking at the Supreme Court of Texas case of S.V. v. R.V., 933 S.W.2d 1 (Tex. 1996). Under the law outlined in this case, Beneficiary's cause of action accrued in 1968 because that is when Trustee's wrongful act caused some legal injury, even though not all of the resulting damages had yet occurred. The court then focused on whether either the discovery rule or fraudulent concealment applied to defer the accrual. The court conducted a careful review of the facts to show that the beneficiary either knew or had the ability to know the essential facts giving rise to the lawsuit at an early enough point in time that the statute of limitations had run prior to the filing of Beneficiary's suit. The court recognized that "[a] fiduciary's duty is inherently undiscoverable because the person to whom a fiduciary duty is owed is either unable to inquire into the fiduciary's actions or unaware of the need to do so." Farias at 335. The court then quoted from S.V.: "While a person to whom a fiduciary duty is owed is relieved of the responsibility of diligent inquiry into the fiduciary's conduct, so long as that relationship exists, when the fact of misconduct becomes apparent it can no longer be ignored, regardless of the nature of the relationship."
Moral: A beneficiary who becomes aware of a trustee's possible misconduct must take prompt action to bring suit. The beneficiary cannot rely on the ongoing fiduciary relationship to prevent the statute of limitations from running.
F. Liability of Successor Trustee for Acts of Predecessor Trustee
Hoenig v. Texas Commerce Bank, N.A., 939 S.W.2d 656 (Tex. App.--San Antonio 1996, no writ).
Lessee leased certain property from Settlor. Settlor died leaving the leased property to a testamentary trust. However, Original Trustee was unaware that a portion of the leased property was part of the trust corpus. Approximately 14 years later, Successor Trustee took over trust management from Original Trustee. After a few months in office, Successor Trustee discovered that additional leased property belonged to the trust. Accordingly, Successor Trustee sued both the Lessee and Original Trustee alleging that the Lessee converted funds due the trust (rent payments from subtenants) and that Original Trustee was negligent in not preventing and discovering the conversion. The district court held that Lessee and Original Trustee were liable.
After rejecting Original Trustee's claim of protection under the trust's exculpatory clause, the court addressed Original Trustee's claim that Successor Trustee was also negligent in not discovering the property sooner. The court rejected this claim indicating that Successor Trustee acted reasonably timely in inspecting the property, comparing the physical site against the documentation, and discovering the rest of the leased property. Prop. Code § 114.002. Successor Trustee did in six months what Original Trustee had not done in 14 years.
Moral: Successor trustees need to act timely when they assume office to make certain they discover and pursue breaches by predecessor trustees.
VI. Other matters
A. Malpractice
1. Will Beneficiaries
Vinson & Elkins v. Moran, 946 S.W.2d 381 (Tex. App.--Houston [14th Dist.] 1997, writ dism'd by agr.).
Beneficiaries of the will sued Law Firm hired by Executors alleging malpractice on various grounds including the failure to reveal conflicts of interest. Law Firm asserted that this lawsuit must fail because there was no privity of contract between Law Firm and Beneficiaries (citing Barcelo v. Elliott, 923 S.W.2d 575 (Tex. 1996)) and because Law Firm represented Executors personally, not Beneficiaries (citing Huie v. DeShazo, 922 S.W.2d 920 (Tex. 1996)). Beneficiaries claimed, however, that the parties acted in such a way to create an attorney-client relationship between Law Firm and Beneficiaries which then served as the basis for the suit.
The jury found that an attorney-client relationship existed between Law Firm and Beneficiaries. After a detailed review of the evidence, the appellate court held that there was sufficient evidence to support the jury's decision. Thus, Law Firm could be subject to liability for malpractice.
Moral: The shield attorneys acquired under Barcelo and Huie does not provide absolute protection. Beneficiaries and attorneys may act with regard to each other to such an extent that an attorney-client relationship actually exists which consequently eliminates the protection extended by these landmark cases.
2. IRA Beneficiaries
Wright v. Gundersen, 956 S.W.2d 43 (Tex. App.--Houston [14th Dist.] 1996, no writ).
Testator's will gave his IRAs to his children. However, this bequest was ineffective because Testator's brother was designated as the beneficiary of the IRAs. Daughter, both individually and as the executrix of Testator's estate, sued Attorney who drafted the will for violations of DTPA, breach of contract, and negligence for not advising Testator to make the appropriate changes to the IRA beneficiary cards. The trial court granted summary judgment in favor of Attorney.
The appellate court affirmed the summary judgment against Daughter individually. There was no attorney-client relationship between Attorney and Daughter at the time of the alleged malpractice. In addition, Daughter could not claim that she had standing to bring the action as a third party beneficiary of the contract between Testator and Attorney. See Barcelo v. Elliott, 923 S.W.2d 575 (Tex. 1996). However, the court reversed the summary judgment on the negligence claim against Daughter in her representative capacity because Attorney failed to ask for it.
Moral: Beneficiaries who lose benefits because of an attorney's negligent estate planning are without legal recourse against that attorney.
B. Deceptive Trade Practices Act
1. Will Beneficiaries
Vinson & Elkins v. Moran, 946 S.W.2d 381 (Tex. App.--Houston [14th Dist.] 1997 writ dism'd by agr.).
Beneficiaries of will sued Law Firm hired by Executors under the Texas Deceptive Trade Practices Act. Law Firm challenged the lower court's finding that Beneficiaries were consumers under the Act. To qualify as consumers, Beneficiaries must first "have sought or acquired the good or services by purchase or lease, and second, the goods or services purchased must form the basis of the complaint." Vinson & Elkins at 406-07.
The court held that Beneficiaries were not consumers. The court was "not persuaded that the Texas Legislature intended the Act to apply to causes of action by will beneficiaries against the attorneys hired by the executors of the estate." Vinson & Elkins at 407. Beneficiaries were merely "incidental beneficiaries" of the contract between Law Firm and Executors. This type of benefit is not enough to give Beneficiaries consumer status. The court supported its holding with public policy arguments. For example,
[i]f consumer status were conferred on estate beneficiaries, the existence of minor beneficiaries, residual beneficiaries, or others similarly situated could extend the period of time in which an action could be brought against attorneys hired by the executors for years after the representation ended and the estate was closed. We find the public interest in the finality of probate proceedings includes actions against attorneys who represent executors in the administration of the estate. A suit against an attorney would necessarily involve revisiting the original administration of the estate, and might very well affect the original distributions. Thus, public policy weighs against conferring consumer status on estate beneficiaries.
Vinson & Elkins at 408-09.
Moral: Attorneys advising fiduciaries, such as executors and trustees, now have less reason to fear a DTPA action by disgruntled beneficiaries.
2. IRA Beneficiaries
Wright v. Gundersen, 956 S.W.2d 43 (Tex. App.--Houston [14th Dist.] 1996, no writ).
Testator's will gave his IRAs to his children. However, this bequest was ineffective because Testator's brother was designated as the beneficiary of the IRAs. Daughter, both individually and as the executrix of Testator's estate, sued Attorney who drafted the will for violations of DTPA, breach of contract, and negligence for not advising Testator to make the appropriate changes to the IRA beneficiary cards. The trial court granted summary judgment in favor of Attorney.
The appellate court affirmed the DTPA claim because Daughter, in her representative capacity, did not present proof to defeat Attorney's summary judgment motion. The court also affirmed against Daughter in her individual capacity because she did not qualify as a "consumer." Daughter did not hire Attorney to draft the documents and did not pay Attorney.
Moral: Will beneficiaries and personal representatives are unlikely to prevail in DTPA actions against the drafting attorney because they do not qualify as consumers.
1. Funded With Community Property
Haas v. Voigt, 940 S.W.2d 198 (Tex. App.--San Antonio 1996, writ denied).
Husband and Wife opened four bank joint accounts with community funds that had rights of survivorship. Three stood in the names of Husband and Wife and one in the names of Husband and Son. Shortly before his death, Husband changed the form of the accounts with Wife by adding Son's name. Upon Husband's death, Son claimed ownership of various portions of the funds in these accounts. Both the trial and appellate courts agreed that these agreements did not create any survivorship rights in Son.
With regard to the one account in the names of Husband and Son, no survivorship rights were created. The funds were community property and there was no evidence of a partition or spousal gift. As non-spouses, Husband and Son lacked the ability to create a joint tenancy with rights of survivorship in community funds. Thus, Husband's share of the account passed under his will.
With regard to three accounts on which Husband added Son's name, the court also concluded that no survivorship rights were created in Son. The survivorship agreement was given full effect as between Husband and Wife because there had been no revocation of that agreement in accordance with Prob. Code § 455 (e.g., (1) a revocation under the terms of the survivorship agreement, (2) both spouses signing a revocation agreement, (3) one spouse signing a revocation agreement and delivering it to the other spouse, or (4) a disposition not inconsistent with the terms of the agreement).
Moral: A spouse who wishes to have the spouse's share of a bank account created with community funds pass outside of the spouse's probate estate, must be certain to comply with the applicable provisions of the Probate Code.
2. Ambiguity
Evans v. First Nat'l Bank of Bellville, 946 S.W.2d 367 (Tex. App.--Houston [14th Dist.] 1997, writ denied).
Aunt opened a certificate of deposit in her name alone. Later that same day, Aunt executed a signature card providing for time deposits to be held with Nephew as joint tenants with rights of survivorship. However, the card did not specifically refer to any CD by number or amount nor did it include a blanket reference to all CDs in Aunt's name. When Aunt died, she had three CDs in her name none of which contained a joint account indication.
Nephew was appointed as the independent executor of Aunt's will. After originally listing the three CDs as estate assets, Nephew closed the CDs and had new ones issued to himself and his family members. The beneficiaries of Aunt's will claimed that these CDs belong to them and that Nephew had converted the money.
Consistent with established law, the court rejected the contention that it could not consider the signature card because it was extrinsic to the account designation. The court examined the card and found that it used the proper language to create the survivorship feature. However, the card did not indicate that it covered the CDs at issue and the CDs did not reference the signature card. The court thus concluded that the card was latently ambiguous and needed to decide whether extrinsic evidence could be used to resolve the ambiguity.
Extrinsic evidence is normally inadmissible to vary, add to, or contradict the terms of the account agreement when it is complete and unambiguous. See Stauffer v. Henderson, 801 S.W.2d 858 (Tex. 1990). Because this agreement was neither complete nor unambiguous, the court held that extrinsic evidence is admissible "to explain an ambiguity where the signature card or other agreement is unclear as to some aspect of the parties' agreement, other than their intent to create a survivorship account." Evans at 375. Thus, extrinsic evidence may be used to determine which CDs, if any, are subject to the survivorship agreement. The case was remanded because the summary judgment proof was conflicting as to whether the CDs were covered by the signature card.
Moral: You must personally inspect your client's signature cards and account contracts (or true copies thereof) to make certain they create the type of accounts which have the rights and obligations your client desires.
D. Gifts -- Vesting of Remainder Interest
Eversole v. Williams, 943 S.W.2d 141 (Tex. App.--Houston [1st Dist.] 1997, no writ).
Grantors of real property created a life estate in favor of Daughter with a remainder to Daughter's children. At the time of the grant, Daughter had three children. However, at the time Daughter died, only one child was still alive. The surviving child's successors in interest claimed the property to the exclusion of the successors in interest of the predeceased children.
The appellate court held that the successors in interest of all of Daughter's children were entitled to the remainder. The remainder vested in interest at the date of the grant because the deed did not expressly impose a condition precedent to vesting that the remainder beneficiaries outlive the life tenant.
Moral: If the grantor of a remainder interest wishes to condition the interest of a remainder beneficiary on surviving the life tenant, the grantor's desires must be clearly stated in the deed.
1. Undue Influence
Cobb v. Justice, 954 S.W.2d 162 (Tex. App.--Waco 1997, rev. denied).
A jury found that Beneficiary exerted undue influence over Insured when Insured designed the beneficiary of his life insurance policy. Nonetheless, the court granted Beneficiary a judgment n.o.v.
The appellate court held that there was sufficient evidence to support the jury's finding of undue influence. In addition, the court rejected Beneficiary's claim that Texas courts do not permit a former beneficiary to challenge the designation of a new beneficiary on the ground that the new beneficiary exerted undue influence on the insured. The court held that "a former beneficiary may bring suit to contest a change of beneficiary on the basis that the change was accomplished as a result of undue influence exerted against the insured." Cobb at 168.
Moral: Undue influence is an appropriate ground to contest the designation of a life insurance beneficiary.
2. Redesignation of Ex-Spouse
Sever v. Massachusetts Mutual Life Ins. Co., 944 S.W.2d 486 (Tex. App.--Amarillo 1997, writ denied).
Husband purchased a life insurance policy naming Wife as the primary beneficiary. Husband did not name an alternate beneficiary. Husband and Wife divorced. The divorce decree awarded the policy to Husband. Husband never changed the beneficiary although there was evidence that he orally stated he desired to make no change.
The court held that under Fam. Code § 3.632 [now § 9.301] Wife could not take the proceeds and that they passed into Husband's estate. The court indicated that Husband's alleged oral statement that he desired no change to the beneficiary would not operate as a redesignation under the Family Code because it was not in writing as required by both the policy and Ins. Code art. 3.48.
Moral: An insured who wishes an ex-spouse to remain as a beneficiary must affirmatively redesignate the ex-spouse in a proper writing.
F. Determination of Time of Divorce
Dearing v. Johnson, 947 S.W.2d 641 (Tex. App.--Texarkana 1997, n.w.h.).
Husband and Wife were married in 1990. Wife filed for divorce in 1993 and a hearing was held on May 28, 1993. Husband died shortly thereafter. Unaware of Husband's death, the trial judge signed the divorce decree on July 30. Later, Wife brought a declaratory judgment action seeking a finding that she was Husband's surviving spouse. The trial court refused holding that the judge had orally pronounced the divorce at the hearing on May 28 while Husband was still alive. The appellate court affirmed.
Moral: If the judge grants a divorce in open court, it will be difficult to overturn the divorce even if one of the spouses dies before the judge signs the divorce decree.
Seymour v. American Engine Co., 956 S.W.2d 49 (Tex. App.--Houston [14th Dist.] 1996, writ denied).
Defendants attempted to introduce evidence of oral statements Decedent made to them. The lower court ruled that Tex. R. Civ. Evid. 601(b) excluded these statements because the lawsuit involved an action by or against the executor of Decedent's estate and these oral statements lacked corroboration.
The appellate court agreed. The court recognized that the Dead Person's Statute is narrowly construed. However, under the facts of this case, the Statute clearly applied and thus Defendants' testimony about Decedent's uncorroborated oral statements was inadmissible.
Moral: Parties to a lawsuit need to remember that the Dead Person's Statute excludes uncorroborated oral statements made by a decedent. If this evidence is necessary, perhaps the party could withdraw from the lawsuit if the party's interests are adequately represented by other parties. Then, the withdrawing party would no longer be disqualified from testifying.
Copyright 1998 by Glenn M. Karisch Last Revised June 8, 1998